<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 15, 1997
REGISTRATION NO. 333-__________
--------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------------------------------------------------
INTEGRATED SECURITY SYSTEMS, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
Delaware 3499 75-2422983
(State of incorporation (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
--------------------------------------------------------------
Gerald K. Beckmann
President & CEO
8200 Springwood Drive, Suite 230 8200 Springwood Drive, Suite 230
Irving, Texas 75063 Irving, Texas 75063
(972) 444-8280 (972) 444-8280
(Address and telephone number (Name, address and telephone number
of principal executive offices of agent for service)
and principle place of business)
--------------------------------------------------------------
Copies to:
DAVID H. ODEN
Haynes and Boone, L.L.P.
901 Main Street, Suite 3100
Dallas, TX 75202
(214) 651-5000
Approximate date of commencement of proposed sale to public: From time to time
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [X]
Pursuant to Rule 416, there are hereby registered such additional indeterminate
number of shares of the Registrant's Common Stock as may become issuable to
prevent dilution by reason of stock splits, stock dividends, or similar
transactions.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================
Amount to be Proposed maximum Proposed maximum Amount of
Title of each class of registered (1) offering price per aggregate offering registration fee
securities to be registered unit (1) price (1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 600,000 shares $1 33/64 $ 909,375 $ 276
- ---------------------------------------------------------------------------------------------------------------
Common Stock issuable upon
conversion of debentures 4,380,952 shares $1.05 $4,600,000 $ 1,394
- ---------------------------------------------------------------------------------------------------------------
Total Registration Fee $ 1,670
===============================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
--------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE> 2
INTEGRATED SECURITY SYSTEMS, INC.
CROSS REFERENCE SHEET
BETWEEN ITEMS OF FORM SB-2
AND PROSPECTUS
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEMS AND HEADINGS PROSPECTUS CAPTIONS
- ---------------------------------------------------------------------- ---------------------------------------------
<S> <C> <C>
1. Front of Registration Statement and Outside Front Cover Page of Registration Statement and
Cover Page of Prospectus...................................... Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................................... Inside Front Cover Page of Prospectus
3. Summary Information and Risk Factors.......................... Prospectus Summary; Risk Factors
4. Use of Proceeds............................................... Not applicable
5. Determination of Offering Price............................... Not Applicable
6. Dilution...................................................... Not Applicable
7. Selling Security Holders...................................... Principal and Selling Stockholders
8. Plan of Distribution.......................................... Plan of Distribution
9. Legal Proceedings............................................. Business - Legal Proceedings
10. Directors, Executive Officers, Promoters and Control Management - Directors, Executive Officers
Persons....................................................... and Key Employees
11. Security Ownership of Certain Beneficial Owners and
Management.................................................... Principal and Selling Stockholders
12. Description of Securities..................................... Description of Securities
13. Interest of Named Experts and Counsel......................... Legal Matters; Experts
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities................................ Description of Securities; Part II
Management's Discussion and Analysis of
15. Organization Within Last Five Years........................... Financial Condition and Results of Operations
16. Description of Business....................................... Business
17. Management's Discussion and Analysis or Plan of Management's Discussion and Analysis of
Operation..................................................... Financial Condition and Results of Operations
18. Description of Property....................................... Business - Property
19. Certain Relationships and Related Transactions................ Certain Transactions
20. Market for Common Equity and Related Stockholder
Matters....................................................... Market for Company's Common Stock
21. Executive Compensation........................................ Management - Executive Compensation
Index to Financial Statements; Financial
22. Financial Statements.......................................... Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................... Not Applicable
</TABLE>
<PAGE> 3
4,980,952 SHARES
INTEGRATED SECURITY
==============================
ISSI
==============================
SYSTEMS, INC.
COMMON STOCK
This Prospectus relates to the sale of 4,980,952 shares of Common Stock, $.01
par value (the "Common Stock"), of Integrated Security Systems, Inc. (the
"Company"), all of which are being sold by certain selling stockholders (the
"Selling Stockholders"). The Company will not receive any proceeds from the
sale of the shares offered hereby. See "Principal and Selling Stockholders,"
"Plan of Distribution," and "Description of Securities."
The Common Stock and warrants to purchase Common Stock (the "IPO Warrants") are
quoted on the Nasdaq Small Cap Market under the symbol "IZZI" and "IZZW,"
respectively, and on the Boston Stock Exchange under the symbol "ISI" and
"ISIW," respectively. On August 14, 1997, the last reported sale prices for the
Common Stock and IPO Warrants as reported on the Nasdaq Small Cap Market were
$1.84 and $.69, respectively.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY
PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS"
ON PAGE 4.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS __________ _____, 1997.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................3
The Offering............................................................3
Risk Factors............................................................4
Capitalization..........................................................6
Pro Forma Consolidated Statement of Operations..........................7
Market for Company's Common Stock.......................................8
Dividend Policy.........................................................8
Principal and Selling Stockholders......................................9
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................10
Business...............................................................14
Management.............................................................18
Certain Transactions...................................................21
Description of Securities..............................................21
Plan of Distribution...................................................23
Legal Matters..........................................................24
Experts................................................................24
Additional Information.................................................24
Index to Financial Statements.........................................F-1
</TABLE>
2
<PAGE> 5
PROSPECTUS SUMMARY
THE COMPANY
The Company designs, develops, manufactures, sells and services
commercial and industrial security and traffic control products including
warning gates, crash barriers, lane changers, navigational and airport
lighting, and electronically-controlled security gates. The Company also
develops and markets "intelligent" or programmable security systems that
integrate multiple security devices and subsystems for governmental, commercial
and industrial facilities. Applications for these systems include perimeter
security for airports, access control for commercial office buildings, and
video surveillance for warehouses. By integrating different commercially
available security products such as automatic gates, access control panels,
video cameras, switchers, recorders, and badge identification systems, the
Company provides turnkey security solutions that perform automated user-defined
security functions. The Company's executive offices are located at 8200
Springwood Drive, Suite 230, Irving, Texas 75063. The Company's telephone
number is (972) 444-8280.
THE OFFERING
Common Stock offered by
the Selling Stockholders:.............. 4,980,952 shares of Common Stock (2)
Common Stock Outstanding:
Prior to this Offering........ 7,905,212 shares (1)
After this Offering........... 12,286,164 shares (1)(2)
<TABLE>
<CAPTION>
Boston
Symbols Nasdaq Symbols Exchange
- ------- -------------- --------
<S> <C> <C>
Common Stock IZZI ISI
IPO Warrants IZZIW ISIW
</TABLE>
- --------------------
(1) Does not include 500,000 shares of Common Stock reserved for issuance
pursuant to the Company's Stock Option Plan.
(2) Of the shares of Common Stock being offered by the Selling Stockholders,
600,000 shares are currently outstanding. The remaining 4,380,952 shares
are issuable upon the conversion of currently outstanding convertible
debentures.
3
<PAGE> 6
RISK FACTORS
An investment in the Common Stock involves a high degree of risk and
should not be made by persons who cannot afford the loss of their entire
investment. Accordingly, prospective investors should carefully consider the
following factors, in addition to the other information concerning the Company
and its business contained in this Prospectus before purchasing the securities
offered hereby.
Note: 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.
CONTINUING LOSSES
Certain of the Company's subsidiaries have reported consolidated
losses of $276,767 in 1996, $2,864,219 in 1995, $372,568 in 1994, $1,670,059 in
1993 and $1,352,133 in 1992. For fiscal 1997, the Company had a consolidated
net loss of $330,257. The Company did not experience a negative cash flow in
fiscal 1997, and in the fiscal years 1996 and 1993, but experienced negative
cash flow of $155,850 in 1995, $298,713 in 1994, and $50,916 in 1992. The
subsidiary which contributed the majority of losses in past years was
discontinued in 1995. However, the Company's Innovative Security Technologies,
Inc. ("IST") subsidiary continues to operate at a loss and, under existing loan
covenants, the other subsidiaries of the Company are limited in the amount of
financial support they can provide IST. Therefore, in order to continue
operations of this subsidiary, its losses will have to be reduced or eliminated
or the Company will be required to raise additional working capital that is
available to IST. If neither of these can be accomplished, the operations of
IST may have to be discontinued or sold. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
FUTURE CAPITAL NEEDS
The Company believes additional working capital and term financing
will be required to fund growth plans at all of the Company's major business
units. The amount required will depend on many factors, including cash flow
from operations and the ability to market its products successfully. There can
be no assurance that the Company will be able to obtain additional financing,
or that financing will be available on terms that will be acceptable to the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
LACK OF MARKET ACCEPTANCE OF INTELLI-SITE
The Company's marketing strategy includes the sale of sophisticated
integrated security systems, such as the Company's Intelli-Site(R), which the
Company believes will result in higher sales and gross margins. To date, sales
of these systems have been limited and there can be no assurance that the
market will accept the Company's Intelli-Site products, or that the Company
will be able to successfully market its integrated security systems.
ACQUISITION RISKS
The Company's strategy includes increasing its market penetration by
starting new, or acquiring existing, businesses to develop, manufacture or sell
products that enhance the safety and security of people and assets. The Company
has not reached any agreement or understanding with any acquisition candidate,
nor have any acquisition discussions reached the point where an acquisition is
probable. There can be no assurance that any new businesses can be acquired or
operated profitably. In addition, the Company's ability to execute this
strategy will depend on a number of factors, including its ability to hire,
train and retain an adequate number of experienced management and sales
employees, and to secure adequate financing, none of which are assured.
4
<PAGE> 7
SEASONALITY -- IMPACT ON QUARTERLY RESULTS
Because the Company sells some products which are used primarily in
outdoor construction, which is affected by weather, the Company's revenues
during the quarters ending September and December have historically represented
approximately 61% of the annual revenues of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Seasonality."
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends, to a significant extent, upon the
efforts and abilities of a number of key employees. The loss of services of one
or more of these employees, especially the Company's Chairman of the Board,
President and Chief Executive Officer, Gerald K. Beckmann, could have a
material adverse effect on the business of the Company. The Company believes
that its future success will also depend in part upon its ability to attract,
retain, and motivate qualified personnel. Competition for such personnel is
intense. There can be no assurance that the Company will be successful in
attracting and retaining such personnel. See "Management."
DEPENDENCE UPON COMPLETION OF PRODUCT DEVELOPMENT
The Company's ability to compete successfully in the integrated
security systems market is dependent upon its ability to develop and produce
products that are technologically comparable to those of its competitors.
Development by others of new or improved products or technologies may make the
Company's products or proposed products obsolete or less competitive. In order
to fulfill its marketing strategy, the Company will be required to devote
substantial effort and financial resources to enhance its existing products and
to develop new products which meet a wide range of evolving user needs and
achieve market acceptance. There can be no assurance that the Company will
succeed in developing and marketing such products or that the Company will be
able to respond effectively to technological changes, emerging industry
standards, or new product introductions by others.
COMPETITION
The markets for the Company's products are extremely competitive. Many
of the Company's competitors have greater market recognition and greater
financial, technical, marketing and human resources than the Company. There can
be no assurance that the Company will be able to compete successfully against
existing companies or new entrants to the marketplace. Furthermore, the
development by competitors of new or improved products or technologies may
render the Company's products or proposed products obsolete or less
competitive. See "Business-Competition."
5
<PAGE> 8
CAPITALIZATION
The following table sets forth the capitalization of the Company on
June 30, 1997.
<TABLE>
<CAPTION>
<S> <C>
Current Portion of Long-Term Debt $ 522,550
Long-Term Debt and Other Liabilities 7,723,558
------------
Total Debt 8,246,108
Stockholders' Equity
Convertible Preferred Stock, $.01 par value, 750,000 shares
authorized; 17,250 shares issued and outstanding at
June 30, 1997 172
Common Stock, $.01 par value, 30,000,000 shares
authorized; 7,955,212 and 7,905,212 shares, respectively,
issued and outstanding at June 30, 1997 79,552
Additional Paid In Capital 10,523,546
Treasury Stock; 50,000 shares (118,750)
Accumulated Deficit (6,536,758)
------------
Total Stockholders' Equity 3,947,762
------------
Total Capitalization $ 12,193,870
============
</TABLE>
6
<PAGE> 9
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On December 31, 1996, the Company acquired all the outstanding capital
stock of Golston Company, Inc. ("GCI"). The pro forma consolidated statement of
operations for the year ended December 31, 1996 is presented as if the Company
had acquired GCI on January 1, 1996, and gives effect to the related financing.
The pro forma consolidated statement of operations should be read in
conjunction with the financial statements of the Company and GCI, including the
related footnotes thereto, appearing elsewhere in this Prospectus. The pro
forma information is not necessarily indicative of the results that would have
been reported had such events actually occurred on January 1, 1996, nor is it
indicative of the Company's future results. The pro forma information also does
not reflect either the issuance of shares in connection with the conversion or
exercise of any of the Company's outstanding convertible preferred stock,
warrants, or convertible debentures.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMPANY GCI ADJUSTMENTS CONSOLIDATED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 9,054 $ 4,294 $ 13,348
Cost of Sales 5,184 1,535 432(1) 7,151
------------ ------------ ------------ ------------
Gross Margin 3,870 2,759 (432) 6,197
Operating Expenses 3,929 2,077 (890)(2) 5,116
Income (Loss) from Operations (59) 682 458 1,081
Other Expense (252) (37) (552)(3) (841)
------------ ------------ ------------ ------------
Income (Loss) from Continuing
Operations Before Tax (311) 645 (94) 240
Income Tax 12 (234) 234(4) 12
Discontinued Operations 23 -- -- 23
------------ ------------ ------------ ------------
Net Income (Loss) $ (276) $ 411 $ 140 $ 275
============ ============ ============ ============
Weighted Average Shares of
Common Stock Outstanding 5,122,878 5,847,191
Net Income (Loss) Per Share
Continued Operations $ (0.05) $ 0.05
Discontinued Operations 0.00 0.00
------------ ------------
Total $ (0.05) $ 0.05
============ ============
</TABLE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following describes the assumptions used in determining the pro
forma adjustments set forth above:
(1) Adjustment to depreciation of manufacturing fixed assets arising from
the GCI acquisition is based on useful lives varying from 3-7 years.
(2) Adjustment to depreciation of fixed assets arising from the GCI
acquisition is based on useful lives of 5 years, plus goodwill
amortization; net of the effect of employees terminated as of December
31, 1996 with consolidation of the businesses.
(3) Interest related to $6.1 million of indebtedness incurred by the
Company in connection with the acquisition, with an interest rate of
9% per annum.
(4) Adjustment from utilization of parent company losses to offset federal
income taxes.
7
<PAGE> 10
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.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
-------------------------------------------------------
$ 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 1 1/4 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
</TABLE>
On August 14, 1997, the last reported sales prices for the Common
Stock and the IPO Warrants as reported on the Nasdaq Small Cap Market were
$1.84 and $.69, respectively.
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.
8
<PAGE> 11
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the number and percentage of outstanding
shares of each class of the Company's capital stock beneficially owned as of
June 30, 1997 by (i) each director and named executive officer of the Company,
(ii) all officers and directors of the Company as a group, (iii) all persons
who are known by the Company to be beneficial owners of 5% or more of any class
of capital stock of the Company, and (iv) each Selling Stockholder. Unless
otherwise noted, each of the persons listed below has sole voting and
investment power with respect to the shares indicated as beneficially owned by
such person. With regard to shares of Common Stock, this table assumes that the
persons set forth below have fully converted all their shares of convertible
preferred stock into shares of Common Stock and fully exercised all their
warrants to purchase Common Stock and converted their convertible debentures.
For a description of the Company's convertible preferred stock, see
"Description of Securities."
<TABLE>
<CAPTION>
SHARES OF STOCK OWNED PRIOR TO OFFERING
-----------------------------------------------------------------------------
NO. OF SHARES NO. OF SHARES OF NO OF SHARES OF
OF COMMON % OF SERIES A % OF SERIES C % OF
NAME OF BENEFICIAL OWNER STOCK CLASS PREFERRED STOCK CLASS PREFERRED STOCK CLASS
- ------------------------------------ ------------- ------ ---------------- ----- --------------- -----
<S> <C> <C> <C> <C> <C> <C>
Frank R. Marlow(1) 73,856 * -- -- -- --
Gerald K. Beckmann(1) 868,929 11% -- -- 3,500 100%
H.J. Meyers, Inc.(2) 609,000 8% -- -- -- --
Holly J. Burlage(1) 13,128 * -- -- -- --
James E. Jack (1) -- -- -- -- -- --
James W. Casey(1) 157,873 2% -- -- -- --
Philip J. Hempleman 224,000 3% 8,000 58% -- --
Philip R. Thomas(1) 1,625,126 20% -- -- -- --
ProFutures Bridge Capital Fund LP 475,000 6% -- -- -- --
ProFutures Special Equities Fund LP 125,000 2% -- -- -- --
Renaissance Capital Growth & Income 2,190,476 27% -- -- -- --
Fund, III, Inc.
Renaissance US Growth & Income Trust 2,190,476 27% -- -- -- --
PLC
Robert M. Galecke(1) -- -- -- -- -- --
Seabeach & Co. 1,120,000 8% -- -- -- --
All Officers and Directors as a Group 1,113,786 14% -- -- 3,500 100%
(7 Persons)
</TABLE>
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED AFTER OFFERING
------------------------------
SHARES OF COMMON NO. OF SHARES OF
NAME OF BENEFICIAL OWNER STOCK TO BE SOLD COMMON STOCK % OF CLASS
- ------------------------------------ ---------------- ------------------ ----------
<S> <C> <C> <C>
Frank R. Marlow(1) -- 73,856 *
Gerald K. Beckmann(1) -- 973,929 11%
H.J. Meyers, Inc.(2) -- 609,000 8%
Holly J. Burlage(1) -- 13,128 *
James E. Jack (1) -- -- --
James W. Casey(1) -- 157,873 2%
Philip J. Hempleman -- 224,000 3%
Philip R. Thomas(1) -- 1,625,126 20%
ProFutures Bridge Capital Fund LP 475,000 -- --
ProFutures Special Equities Fund LP 125,000 -- --
Renaissance Capital Growth & Income 2,190,476 -- --
Fund, III, Inc.
Renaissance US Growth & Income Trust 2,190,476 -- --
PLC
Robert M. Galecke(1) -- -- --
Seabeach & Co. -- 1,120,000 8%
All Officers and Directors as a Group -- 1,218,786 14%
(7 Persons)
</TABLE>
- ------------
* Less than 1%.
(1) The address for this person is 8200 Springwood Drive, Suite 230, Irving,
Texas 75063.
(2) This amount includes warrants to purchase Common Stock. Such warrants may
be held in the name of officers and directors of H.J. Meyers, Inc.
9
<PAGE> 12
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").
On January 1, 1992, the Company acquired B&B from an affiliate in a
transaction which was accounted for similar to a pooling of interests. B&B
designs, manufactures, and distributes commercial and industrial security
products, and traffic control gates, barriers and lighting for the road and
bridge industry. B&B has been in operation since 1925. On March 16, 1993, the
Company organized IST, which is a retail seller of security products and
microprocessor-based systems to large customers. On August 23, 1993, the
Company announced the development of its PC-based security network,
Intelli-Site(R), that integrates multiple security functions into a centralized
management system for single and/or multiple site locations. IST is responsible
for the sales and marketing of this product. 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.
10
<PAGE> 13
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
twelve months ended December 31, 1996, 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.
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 1998 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 IntelliSite, 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.
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<PAGE> 14
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 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. The income tax benefit for 1996
consists of state income taxes for the Company's subsidiary, B&B.
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.
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
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<PAGE> 15
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 operating cash flow, long-term borrowings of
$816,291, and the private placement of its securities in the amount of $70,875.
The Company used a total of $193,277 to pay principal and interest on
indebtedness and to secure financing.
The Company has a factoring facility with Union Planters Bank, Baton
Rouge, Louisiana, pursuant to which it may factor accounts receivable (with
recourse) and receive a total of up to $1.4 million in credit. This factoring
facility expires August 15, 1997 and has an adjustable factoring fee of 3% of
the total amount borrowed. As of June 30, 1997, the Company had no outstanding
balance under this factoring facility.
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 no commitments for capital expenditures during 1998.
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.
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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.
BUSINESS
GENERAL
The Company designs, develops, manufactures, sells and services commercial
and industrial security and traffic control products including warning gates,
crash barriers, lane changers, navigational and airport lighting, and
electronically-controlled security gates. The Company also develops and markets
"intelligent" or programmable security systems that integrate multiple security
devices and subsystems for governmental, commercial and industrial facilities.
Applications for these systems include perimeter security for airports, access
control for commercial office buildings, and video surveillance for warehouses.
By integrating different commercially available security products such as
automatic gates, access control panels, video cameras, switchers, recorders,
and badge identification systems, the Company provides turnkey security
solutions that perform automated user-defined security functions.
At present, a customer with multiple security needs such as perimeter
security, access control or video surveillance typically must design, develop
and integrate each security function internally or utilize several outside
vendors. By combining multiple security functions into an integrated system or
network, the Company allows customers to reduce costs and human error while
increasing the level of security for asset protection and personnel safety. The
Company also has exclusive licenses for certain video and electronic funds
transfer ("EFT") technologies. The licensed video technology can be used in
CCTV security applications and the licensed EFT software can be used in systems
which integrate, for example, parking garages and retail operations. By
integrating EFT (credit cards, debit cards, check verification, etc.) into
security systems, the Company can provide users, such as universities, with a
single card solution to students and faculty for identification, dormitory and
parking access, cafeteria purchases and automatic teller machine withdrawals.
Because of increasing crime rates, increased emphasis on corporate
security, and end user demands for more automated security products, the
Company believes that the industry trend will continue toward more
sophisticated, outsourced systems that offer the ability to automate several
security functions simultaneously. As a result, the Company has developed a
PC-based facility management system called Intelli-Site(R) that integrates all
security functions across an entire enterprise including remote sites.
The Company distributes its products and services through direct sales,
dealer/distributor factory-direct purchasing networks, consultants and other
system integrators.
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.
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<PAGE> 17
B&B plans to continue to leverage its long term reputation of high quality
designs and its broad network of architectural firms that prefer and specify
B&B products on new projects into increased revenues during the rebuilding of
the federal and state road and bridge infrastructures. In addition, the Company
will continue to incorporate B&B's road and bridge reputation into its more
recently established perimeter security core business.
Perimeter Security: B&B Electromatic, Inc. ("B&B")
B&B manufactures gate operators and aluminum gate panels which it sells to
dealers and distributors. Gate panels are movable portions of an enclosure used
for pedestrian and vehicular site access and egress. Gate operators are
automated mechanisms designed to open and close gate panels under electronic
control. B&B perimeter security products average between $1,000 and $8,000 per
order with delivery times ranging from less than a week to several weeks
depending upon whether the item is custom-built or a standard product.
Perimeter security products are also integrated into Intelli-Site systems and
resold as a subsystem by IST to its clients.
Electronic Security Systems: Tri-Coastal Systems, Inc. ("TCSI")
TCSI designs, sells, installs and services electronic security systems
primarily for commercial and industrial buildings using standard
"off-the-shelf" subsystems from various manufacturers. TCSI will often provide
the subsystem components for an IST integrated system sale. In addition, TCSI
provides maintenance services and monitoring services for both its own and
IST's end users.
Integrated Systems: Innovative Security Technologies, Inc. ("IST")
IST designs, develops and markets fully integrated turnkey facility
management systems. IST continues to develop a direct sales channel to provide
total security and other facility management functions (i.e., HVAC, EFT payment
systems, parking systems, etc.) to customers not serviced by dealers or, for
various reasons including the unavailability of turnkey products and services,
choose not to use dealers. IST's strategy is to exploit industry outsourcing
trends by directly marketing and servicing its proprietary Intelli-Site
integrated turnkey system to end users and to other system integrators.
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 sub-system (vendor
independency) and its ability to have the system's automated functionality be
defined by the end user at any time, within minutes, without programming
(dynamic functionality). The Company knows of no other product with these
features.
Intelli-Site is a standard product that competes against custom-designed
systems. Since Intelli-Site is a standard product, it offers a significant
price advantage over custom-developed systems by eliminating software
development costs and reducing the time to delivery. Custom-designed systems
may cost $500,000 and can run as high as $10 million or more. Intelli-Site
systems cost much less than a custom-designed system with approximately the
same level of integration. However, custom system functions cannot be changed
by the user without paying for, and waiting for, another custom development
cycle. Intelli-Site systems, depending on the configuration and number of
integrated devices, can be sold for as little as $50,000 to over $1 million and
are user definable. The Company believes that 137,000 U.S. companies have
budgeted between $50,000 and $600,000 for security purposes. Intelli-Site,
because of the price discontinuity between standard products and custom
products, can penetrate these companies with little or no competition from
custom-design system integrators.
Pneumatic Carriers: Golston Company, Inc. ("GCI")
GCI manufactures and sells a variety of products, primarily to the retail
banking and health care industries and, through its plastic injection molding
operations, is a provider of carriers used in pneumatic tube systems in both
drive-up banking and hospital environments. GCI also manufactures and markets
modular buildings for financial institutions for use during new branch
construction or existing facility remodeling.
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WARRANTY
The Company has two-year or five-year warranties on products it
manufactures. The Company provides for replacement of components and products
that contain manufacturing defects. When the Company uses other manufacturer's
components, the warranties of the other manufacturers are passed to the dealers
and end users. To date, the servicing and replacement of defective components
and products have not been material.
BACKLOG
The Company's backlog, calculated as the aggregate sales prices of firm
orders received from customers less revenue recognized, was approximately $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."
On March 16, 1993, the Company entered into an agreement with COMTRAC
Corporation ("CTC") that grants to the Company a non-exclusive, worldwide,
irrevocable, paid-up license to use CTC's proprietary transaction processing
systems, applications and communications software and related hardware for use
in security-related systems and systems integrating security and electronic
funds transfer functions, all of which are components of the Intelli-Site
integration platform. The license was exclusive until March 16, 1996. The
Company paid $250,000 for this license.
Also on March 16, 1993, the Company entered into an agreement with
DesignTech, Inc. ("DTI") that grants the Company a non-exclusive, worldwide
license to use DTI's proprietary interactive Digital Video Interface system
technology for security-related functions, which may constitute a part of the
Intelli-Site system platform. Under the agreement, for a period of five years,
the Company pays DTI a royalty of 1% of the Company's total gross revenues
derived from products using the licensed technology. The royalty declines to
0.25% for cumulative gross revenues exceeding $20,000,000. To date, no
royalties have been paid.
PRODUCT DESIGN AND DEVELOPMENT
There are currently three employees of the Company 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
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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.
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.
LEGAL PROCEEDINGS
GCI, a wholly owned subsidiary of the Company, is a party to a lawsuit
filed in the 211th Judicial District Court of Denton County, Texas on September
13, 1996, entitled S. Webb Golston and Golston Company v. Evelyn Shaw, cause
no. 96-30642-211. In this suit, a former employee of GCI has alleged sexual
harassment, wrongful discharge and intentional infliction of emotional distress
against GCI and the former owner of GCI, requesting unspecified actual and
punitive damages. The alleged events giving rise to these claims occurred prior
to the Company's acquisition of GCI on December 31, 1996. Under the acquisition
agreement, the former owner agreed to indemnify GCI against any damages that
GCI may incur as a result of these claims. The former owner has elected,
pursuant to the terms of the acquisition agreement, to undertake the defense of
these claims and has retained counsel to defend both himself and GCI. GCI has
retained separate counsel in this matter to oversee prosecution of the defense
of the claims. The lawsuit is in the early stages of discovery. To date, no
information has become available that causes the Company to believe there is
any potential liability which is not fully covered by the indemnification
agreement with the former owner.
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MANAGEMENT
DIRECTORS, OFFICERS AND KEY EMPLOYEES
The directors, officers and key employees of the Company are as follows:
<TABLE>
<CAPTION>
Name Position
---- --------
<S> <C>
Gerald K. Beckmann............... Director, Chairman of the Board, President and Chief
Executive Officer
Holly J. Burlage................. Vice President, Secretary and Treasurer
James W. Casey................... Director, Vice President and Assistant Secretary
Richard P. Shortz................ Vice President of IST
Robert M. Galecke (1)............ Director
Tony C. Lisotta.................. Vice President of IST
Frank R. Marlow (1)(2)........... Director
James E. Jack (1) (2)............ Director
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation and Stock Option Committee
Each director is elected for a period of one year and serves until his
successor is duly elected by the stockholders. Officers are elected by and
serve at the discretion of the Board of Directors.
Set forth below are descriptions of the backgrounds of the directors,
officers and key employees of the Company.
GERALD K. BECKMANN, 54, Director, Chairman, President and Chief Executive
Officer, has served as a director and Chief Technical Officer of the Company
since its inception in 1991 and Chairman of the Board of Directors since
February 1993. On May 1, 1995, Mr. Beckmann became President and Chief
Executive Officer of the Company. From 1991 to 1994 Mr. Beckmann was President
and Chief Operating Officer of Thomas Group Holding Company, a private
investment company. In 1985, Mr. Beckmann joined Thomas Group, Inc., a
publicly-held management consulting firm, and currently serves as a director.
Mr. Beckmann also serves as a director on the board of CTC Holdings, an
electronic funds transfer systems supplier. Mr. Beckmann is also an advisor to
the board of directors of Financial Data Systems, Inc., a banking software
developer. Mr. Beckmann is also a manager in Celerity Partners, L.L.C., the
general partner of Celerity Partners I, L.P., an acquisition limited
partnership. From 1981 to 1984 Mr. Beckmann served as Chairman and Chief
Executive Officer of Threshold Technology, Inc., a publicly-held voice
recognition company. From 1989 to 1992, Mr. Beckmann was director of PROTECH,
Inc., a publicly-held automatic test equipment supplier and a director of
DesignTech, Inc., a digital video system designer. Mr. Beckmann has also served
as past President of COMTRAC Corporation and BehaviorTech, Inc., a
computer-based training company as well as past Chairman of Integrated
Multimedia Solutions, Inc., BehaviorTech's parent company. Mr. Beckmann also
held various other management positions in sales, marketing, engineering and
general management at Exxon, RCA, IBM and Honeywell. Mr. Beckmann holds a
B.S.E.E. from Virginia Polytechnic Institute and University.
HOLLY J. BURLAGE, 33, Vice President, Secretary and Treasurer, joined the
Company in February 1994 as Accounting Manager, became Controller in 1995, and
became Vice President, Secretary and Treasurer in May 1997. Prior to joining
the Company, Ms. Burlage was Controller of Signature Home Care Group, Inc., a
home health care company, from 1993 to 1994, and Controller and Chief
Accounting Officer of National Heritage, Inc., a publicly-traded long-term care
company, from 1989 to 1993. Ms. Burlage holds a B.B.A. from Baylor University.
JAMES W. CASEY, 55, Director, Vice President and Assistant Secretary, is
currently President of GCI and CEO of B&B. Mr. Casey served as General Manager
of B&B, the Company's manufacturing subsidiary, from April 1994 to May 1995,
and became Director and Vice President of the Company on May 1, 1995. From May
1995 to May 1997 Mr. Casey also served as the Company's Chief Financial
Officer. Prior to joining the Company, Mr. Casey was President and Chief
Executive Officer of PROTECH, Inc., a publicly-held automatic test equipment
manufacturer from 1990 to 1993 and President and Chief Operating
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<PAGE> 21
Officer of CJC Holdings, Inc., a custom jewelry manufacturer from 1989 to 1990.
Mr. Casey holds a B.B.A. from Iona College and an M.S. from the State
University of New York.
ROBERT M. GALECKE, 55, Director, is Vice President for Finance and
Administration for the University of Dallas. Prior to that he was a principal
in the corporate consulting firm of Pate, Winters & Stone, Inc. from 1993 to
May 1996. He also served as Executive Vice President, Chief Operating Officer
and Chief Financial Officer of Southmark Corporation, a financial services
insurance and real estate holding company, from 1986 to 1992. From 1989 to
1995, Mr. Galecke served as Chairman of the Board, President and Chief
Executive Officer of National Heritage, Inc., one of the nation's largest
nursing home management companies with annual revenues exceeding $50 million.
Mr. Galecke was also Chairman of the Board, President and Chief Executive
Officer of USTrails, Inc., which owns and operates 66 campground and full
service resorts with total assets of $160 million and annual revenues exceeding
$80 million. Mr. Galecke continues to serve as a director of USTrails Inc. and
Thousand Trails Inc. Mr. Galecke received a graduate degree from the School of
Banking at the University of Wisconsin, Madison, Wisconsin, and a BS in
Economics from the University of Wisconsin Stevens Point.
TONY C. LISOTTA, 55, Vice President and General Manager of IST, a
subsidiary of the Company, joined the Company in October 1993. Mr. Lisotta has
over 14 years of sales and management experience with IBM. Mr. Lisotta
previously served as Senior Vice President for Fults Associates, Inc., a
commercial real estate firm from 1988 to 1992, and Executive Vice President for
The Consolidated Companies, a surety bond company from 1992 to 1993. Mr.
Lisotta holds a B.B.A. from Lamar University.
FRANK R. MARLOW, 57, Director, has been a director of the Company since
May 1995. Mr. Marlow served as Vice President, Sales and Marketing for the
Company from October 1993 to February 1995. Mr. Marlow has been a vice
president of Hogan Systems, a publicly-traded company, since March of 1995.
Previously, Mr. Marlow was with IBM, Docutel Corporation, UCCEL Corporation and
Syntelligence Corporation in executive sales and training positions.
RICHARD P. SHORTZ, 42, Vice President, Engineering, IST, joined the
Company in May 1994 and is responsible for Intelli-Site software development.
Prior to IST, Mr. Shortz was a Software Developer for Thomas Group, Inc. from
1988 to 1994. Mr. Shortz holds a B.S.C.S. from the University of Maryland.
JAMES E. JACK, 55, Director, is currently retired. From 1991 to 1996 Mr.
Jack was Director, Senior Executive Vice President and Chief Financial Officer
of Associates First Capital Corporation, a publicly traded consumer and
commercial finance organization. Prior to that, Mr. Jack was Director,
Executive Vice President and Chief Financial Officer from 1981 to 1993 of the
same company. Mr. Jack received a graduate degree from the Southern Methodist
University School of Business and a BBA from the University of Notre Dame.
SUMMARY COMPENSATION TABLE
The following table sets forth the total compensation paid or accrued by
the Company for services rendered during the fiscal years ended December 31,
1996, 1995, and 1994 to the Company's Chief Executive Officer and the four
other most highly compensated executive officers whose total cash compensation
for the fiscal year ended December 31, 1996 exceed $100,000 (the "named
executive officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
---------------------------------- -----------------------------------------------
OTHER ANNUAL RESTRICTED STOCK OPTION/
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS SARS
- ----------------------------- ---- --------- --------- ------------ ---------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gerald K. Beckmann 1996 $ 281,875 --- --- --- ---
Chairman, CEO & President 1995 $ 114,583 --- --- $ 68,750(4) $ 14,473
1994 --- --- --- --- ---
James W. Casey 1996 $ 94,163 $ 6,812 --- --- $ 50,000
Vice President & CFO 1995 $ 115,145 $ 7,750 --- $ 33,333(4) $ 23,395
1994 $ 94,125 $ 17,125 --- --- $ 34,333
Ferdinand A. Hauslein, Jr.(1) 1996 $ 228,471 --- --- --- ---
former CEO & President 1995 $ 233,333 --- $ 32,845(3) --- $ 20,000
1994 $ 154,167 $ 56,250 --- $ 4,284(2) $ 16,271
Tony C. Lisotta 1996 $ 120,892 --- --- --- ---
Vice President, IST 1995 $ 116,000 $ 2,850 --- $ 3,550(4) $ 10,150
1994 $ 111,500 $ 16,900 --- --- $ 8,627
Richard P. Shortz 1996 $ 123,166 $ 8,400 --- --- $ 15,120
Vice President, IST 1995 $ 96,000 $ 3,000 --- $ 18,600(4) $ 2,880
1994 $ 64,000 --- --- --- $ 12,000
</TABLE>
- --------------------
(1) No longer employed by the Company.
(2) Mr. Hauslein holds 2,448 shares of restricted common stock valued at
$8,874 at December 31, 1996.
(3) Outplacement services.
(4) Convertible preferred stock issued for forgiveness of deferred salary
amounts.
19
<PAGE> 22
No other executive officer's salary and bonus exceed $100,000 during any
of the indicated periods.
No other executive had any form of long-term incentive plan compensation
arrangement with the Company during any of the indicated periods.
STOCK OPTION GRANTS
The following table provides information concerning the grant of stock
options during the year ended December 31, 1996 to the named executive
officers:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE EXPIRATION
GRANTED(1) IN FISCAL YEAR PRICE DATE
-------------------- -------------------- -------- ----------
<S> <C> <C> <C> <C>
Gerald K. Beckmann -- -- -- --
James W. Casey 50,000 27% $ .81 11/3/03
Tony C. Lisotta -- -- -- --
Richard P. Shortz 15,120 8% $1.96 8/1/06
</TABLE>
- --------------------
(1) The options for all listed vest with respect to 25% of the shares issuable
thereunder six months after the date of grant and with respect to
cumulative increments of 25% of the shares issuable thereunder on each
anniversary of the date of grant.
OPTION EXERCISES AND HOLDINGS
The following table provides information related to the number of shares
received upon exercise of options, the aggregate dollar value realized upon
exercise, and the number and value of options held by the named executive
officers of the Company at December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
AT FISCAL YEAR END AT FISCAL YEAR END
---------------------------------- -------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Gerald K. Beckmann 177,237 -- $ 200,296 $ 9,046
James W. Casey 63,281 44,448 135,903 121,141
Ferdinand A. Hauslein, Jr. 184,212 -- 230,890 --
Tony C. Lisotta 46,545 7,232 69,509 12,626
Richard P. Shortz 10,440 19,560 $ 19,845 $ 34,383
</TABLE>
20
<PAGE> 23
DIRECTOR COMPENSATION
Directors who have served as directors for at least six months prior to
the calculation of an award are eligible to receive grants of options under the
Stock Option Plan. Awards are made pursuant to a formula that is based on the
Company's net income per share. All directors are reimbursed for their
out-of-pocket expenses incurred in connection with their attendance at Board
meetings.
The Company entered into a five-year employment agreement (January 1994
through October 1999) with Mr. Ferdinand A. Hauslein, Jr. that provided him
with an annual salary of $200,000. Mr. Hauslein resigned on May 1, 1995. Mr.
Hauslein's employment agreement provided that he was eligible for an annual
cash bonus of up to 50% of his base salary. Pursuant to the terms of that
employment agreement, upon the termination of his employment, the Company was
obligated to pay Mr. Hauslein $100,000, 12 months of severance pay at his
then-current salary, a $50,000 allowance for outplacement services, a
three-month consulting agreement and accelerated vesting of all outstanding
options granted to Mr. Hauslein. In addition, the Company changed the
beneficiary of the key-man life insurance from the Company to Mr. Hauslein.
CERTAIN TRANSACTIONS
During 1995, Mr. Philip R. Thomas, the Company's founder and principal
stockholder, loaned the Company $40,000 which was secured by certain
receivables. On December 29, 1995, Mr. Thomas converted this loan into 2,000
Series B $20 Convertible Preferred Stock. Also on December 29, 1995, Mr.
Beckmann, Mr. James W. Casey (a director and executive officer of the Company),
Mr. Tony C. Lisotta (Vice President of IST), Mr. Richard P. Shortz (Vice
President of IST), Ms. Holly J. Burlage (Vice President of the Company), and
Mr. Frank R. Marlow (a director of the Company), converted unpaid compensation
totaling $138,451 into 6,922 Series B $20 Convertible Preferred Stock.
During 1995 and 1996, Mr. Beckmann loaned the Company approximately
$400,000. As of December 31, 1996, no loans were outstanding. On March 11,
1996, Mr. Beckmann loaned the Company $100,000 as part of a $250,000 bridge
loan. These bridge loans were converted in June 1996 into $20 Series C
Preferred Stock convertible to 30 shares of Common Stock and Warrants to
purchase 15 shares of Common Stock at $1.00 per share. These warrants expire
five years from date of issue. During the second and third quarters of 1996,
Mr. Beckmann loaned the Company $90,000 and Mr. Casey loaned the Company
$75,000. Both of these loans have been repaid. In 1996, Mr. Beckmann guaranteed
loans to the Company in the aggregate amount of $1,050,000.
The Company believes that the terms of the foregoing transactions were on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, $.01 par value per share, 7,905,212 of which are outstanding,
and 750,000 shares of Convertible Preferred Stock, $.01 par value per share,
issuable in series. As of the date hereof, there are 13,750 shares of Series A
$20 Convertible Preferred Stock outstanding, and 3,500 shares of Series C $20
Convertible Preferred Stock Outstanding. The following statements are brief
summaries of certain provisions relating to the Company's capital stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders. There is no cumulative voting
with respect to the election of Directors, with the result that the holders of
more than 50% of the shares voted in the election of Directors can elect all of
the Directors. Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors of the Company
out of funds legally available therefor. Upon the liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to receive
ratably the net assets of the Company after payment of all debts and
liabilities and liquidation preferences
21
<PAGE> 24
of outstanding shares of Preferred Stock. Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights.
PREFERRED STOCK
General. The Company's Board of Directors may, without further action by
the Company's stockholders, from time to time issue preferred stock in series
and may, at the time of issuance, determine the rights, preferences and
limitations of each series. Satisfaction of any dividend preferences of
outstanding Preferred Stock would reduce the amount of funds available for the
payment of dividends on Common Stock. Also, holders of Preferred Stock would
normally be entitled to receive a preference payment in the event of any
liquidation, dissolution, or winding-up of the Company before any payment is
made to the holders of Common Stock. In addition, under certain circumstances,
the issuance of Preferred Stock may render more difficult or tend to discourage
a merger, tender offer or proxy contest, or the removal of incumbent
management.
Series A $20 Convertible Preferred Stock. The Company currently has
outstanding 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 receive $20 per share before the holders of
Common Stock are entitled to receive any distribution and the Series A
Preferred ranks pari passu with the Series C Preferred Stock.
Series C $20 Convertible Preferred Stock. The Company has issued 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.
WARRANTS AND OPTIONS
The IPO Warrants. In connection with the Company's initial public offering
("IPO"), the Company issued warrants which currently permit the holders to
purchase 3,045,000 shares of Common Stock (the "IPO Warrants"). Each IPO
Warrant entitles the holder to purchase 2.1 shares of Common Stock at $3.17 per
share. The IPO Warrants may be exercised at any time prior to April 20, 1998.
The Warrants are subject to redemption at $.25 per Warrant on 30 days' written
notice with the prior written consent of the underwriter for the IPO. The
exercise price and the number of shares of Common Stock purchasable upon the
exercise of the IPO Warrants are subject to adjustment upon the occurrence of
certain events, including stock dividends, stock splits, combinations or
reclassifications of the Common Stock, or sale by the Company of shares of its
Common Stock at a price below the then-applicable exercise price of the IPO
Warrants.
Underwriter's Warrant. In connection with the IPO, the Company issued to
H.J. Meyers, Inc. (successor to Thomas James Associates Inc.) the Underwriter's
Warrant to purchase 304,500 Units, each Unit consisting of one share of Common
Stock and one Warrant. The Underwriter's Warrant is exercisable until April 20,
1998, at an exercise price of $3.00 per Unit. The Underwriter's Warrant
contains anti-dilution provisions providing for appropriate adjustment upon
certain events, including any combination, recapitalization, reclassification,
stock dividend, stock split or sale by the Company or shares of its Common
Stock at a price below the then applicable exercise price of the Underwriter's
Warrant.
22
<PAGE> 25
Other Warrants. The Company has issued additional warrants to purchase
1,771,500 shares of Common Stock in connection with certain other financings
and to certain other persons who provided services to the Company. The exercise
prices of these warrants range from $.01 to $4.15.
Stock Options. The Company has issued options to employees and consultants
to purchase an aggregate of 928,530 shares of Common Stock under the Company's
1993 Stock Option Plan and outside of such Plan.
DELAWARE LAW; CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Certain provisions of Delaware law and the Company's Certificate of
Incorporation and Bylaws could make more difficult the acquisition of the
Company by means of a tender offer, a proxy contest or otherwise and the
removal of incumbent officers and directors. The Company's Certificate of
Incorporation contains a provision prohibiting stockholder action by less than
unanimous written consent, which would otherwise be permitted by Delaware law.
The Company's Bylaws contain a provision which requires that a stockholder may
nominate a person for election as a director only if written notice of such
stockholder's intent to make such nomination has been given to the Secretary of
the Company not later than 60 days prior to an annual meeting and not later
than ten days after the date on which notice of a special meeting was first
sent to stockholders. The notice must set forth, among other things, a
description of all arrangements or understandings between the nominating
stockholder and the nominee and such other information regarding the nominee as
would be required to be included in a proxy statement filed pursuant to the
proxy rules of the Securities and Exchange Commission had the nominee been
nominated by the Board of Directors of the Company. These provisions are
expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
the Company to first negotiate with the Company. The Company believes that the
benefits of increased protection of the Company's potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure the Company outweigh the disadvantages of discouraging
such proposals because, among other things, negotiation of such proposals could
results in an improvement of their terms.
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, this statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date that the
person became an interested stockholder unless (with certain exceptions) the
business combination or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
The Company's Certificate of Incorporation and Bylaws provide broadly for
indemnification of the officers and directors of the Company. In addition, the
Certificate of Incorporation provides that, to the fullest extent permitted by
Delaware law, no director shall be personally liable to the Company or its
stockholders for monetary damages for any breach of fiduciary duty by such
director in his or her capacity as a director.
PLAN OF DISTRIBUTION
The Common Stock offered hereby may be sold directly by each Selling
Stockholder or indirectly through agents, dealers or underwriters from time to
time in one or more transactions on the Nasdaq Small Cap Market, the Boston
Stock Exchange or such exchanges on which the Common Stock is then listed, or
in privately negotiated transactions at prices related to such market prices,
at negotiated prices or at fixed prices. The Selling Stockholders will bear all
discounts and commissions paid to broker-dealers in connection with the sale of
their Common Stock. Other offering expenses will be borne by the Company. The
Company will not receive any proceeds from the sales of Common Stock by the
Selling Stockholders.
23
<PAGE> 26
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Haynes and Boone, L.L.P., Dallas, Texas.
EXPERTS
The Company's financial statements as of June 30, 1997 and December 31,
1996 and 1995 and for the six month period ended June 30, 1997 and for each of
the two years in the period ended December 31, 1996 included in this
Prospectus, and GCI's financial statements as of June 30, 1996 and 1995 and for
each of the two years in the period ended June 30, 1996 included in this
Prospectus, have been so included in reliance on the reports of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"), Nasdaq and the Boston
Stock Exchange. The Registration Statement, the exhibits and schedules forming
a part thereof, and the reports, proxy statements, and other information filed
with the Commission in accordance with the Exchange Act can be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the regional offices of the Commission at 7 World Trade Center, New York,
New York 10048 and at Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material also may be
obtained at prescribed rates from the Public Reference Section of the
Commission, 450 fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
Such material may also be accessed electronically by means of the Commission's
World Wide Web site on the Internet at http://www.sec.gov. The address for
Nasdaq is 1735 K Street NW., Washington, D.C. 20006-1500, and the address for
the Boston Stock Exchange is One Boston Place, Boston, Massachusetts 02108.
The Company has filed with the Commission a Registration Statement on Form
SB-2 (herein, together with all amendments and exhibits, referred to as the
Registration Statement) under the Securities Act of 1933 with respect to the
securities offered hereby. As permitted by the rules and regulations of the
Commission, this Prospectus omits certain information, exhibits and
undertakings contained in the Registration Statement. For further information
with respect to the Company and the securities offered hereby, reference is
made to the Registration Statement, each such statement being qualified in all
respects by such reference. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
24
<PAGE> 27
INTEGRATED SECURITY SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Integrated Security Systems, Inc. Report of Independent Accountants.............................................F-2
Integrated Security Systems, Inc.
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 and 1995..................................F-3
Integrated Security Systems, Inc.
Consolidated Statements of Operations for the six months ended June 30, 1997
and for the years ended December 31, 1996 and 1995..............................................................F-4
Integrated Security Systems, Inc.
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 1997 and for the years ended December 31, 1996 and 1995.......................F-5
Integrated Security Systems, Inc.
Consolidated Statements of Cash Flows
for the six months ended June 30, 1997 and for the years ended December 31, 1996 and 1995.......................F-6
Integrated Security Systems, Inc.
Notes to Consolidated Financial Statements...............................................................F-7 - F-22
Golston Company, Inc. Report of Independent Accountants........................................................F-23
Golston Company, Inc. Balance Sheets as of June 30, 1996 and 1995..............................................F-24
Golston Company, Inc. Statements of Operations
for the years ended June 30, 1996 and 1995.....................................................................F-25
Golston Company, Inc. Statements of Stockholders' Equity
for the years ended June 30, 1996 and 1995.....................................................................F-26
Golston Company, Inc. Statements of Cash Flows
for the years ended June 30, 1996 and 1995.....................................................................F-27
Golston Company, Inc. Notes to Financial Statements.....................................................F-28 - F-33
Golston Company, Inc. Consolidated Statement of Operations
for the six months ended December 31, 1996.....................................................................F-34
</TABLE>
F-1
<PAGE> 28
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
F-2
<PAGE> 29
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
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.
F-3
<PAGE> 30
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) $ (0.06) $ (0.05) $ (.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.
F-4
<PAGE> 31
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Stockholder
Preferred Common Paid In Accumulated Receivable, Treasury
Shares Amount Shares Amount Capital Deficit Net Stock
---------- ----------- ----------- ---------- ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1994 -- -- $ 3,519,290 $ 35,192 $6,047,883 $(3,065,515) $ (144,062) $ --
Preferred stock issuance 34,166 342 683,011
Shares issued to officer 2,448 25 4,259
Warrant issuance 102,557
Warrant exercise 138,000 1,380 112,808
Common stock issuance 71,000 710 179,165
Stockholder settlement 61,892 144,062 (118,750)
Net loss (2,864,219)
---------- ----------- ----------- ---------- ------------ ----------- ----------- ---------
Balance at
December 31, 1995 34,166 $ 342 3,730,738 $ 37,307 $7,191,575 $(5,929,734) $ -- $(118,750)
Preferred stock issuance 60,168 601 1,050,169
Preferred stock conversion (35,166) (352) 1,039,919 10,399 (10,047)
Warrant issuance 82,471
Warrant exercise 599,230 5,992 513,497
Common stock issuance 1,588,955 15,890 1,554,550
Net loss (276,767)
---------- ----------- ----------- ---------- ------------ ----------- ----------- ---------
Balance at
December 31, 1996 59,168 $ 591 6,958,842 $ 69,588 $10,382,215 $(6,206,501) $ -- $(118,750)
Preferred stock conversion (41,918) (419) 928,370 9,284 (8,864)
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.
F-5
<PAGE> 32
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.
F-6
<PAGE> 33
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Integrated Security Systems, Inc. ("ISSI" or the "Company") was formed in
December 1991 to leverage highway traffic control and security core
businesses into turnkey security solutions for "middle market" commercial
and industrial businesses. The middle market is defined as commercial,
industrial and institutional companies or government agencies which budget
$50,000 to $600,000 annually to meet their security needs. The two types
of security targeted by ISSI are asset protection and personal safety.
In order to provide turnkey security solutions to the middle market,
several key operating components and technologies have been vertically
integrated into the Company. To date, ISSI created internally, or
acquired, a gate and barrier engineering and manufacturing facility, B&B
Electromatic, Inc. ("B&B"), a developer and retail seller of PC-based
control systems which integrate discrete security devices, Innovative
Security Technologies, Inc. ("IST"), an installation and service company,
Tri-Coastal Systems, Inc. ("TCSI"), and a manufacturer of specialty
products for the financial and health care industries, Golston Company,
Inc. ("GCI"). 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.
F-7
<PAGE> 34
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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.
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.
F-8
<PAGE> 35
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.
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.
F-9
<PAGE> 36
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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.
4. ACQUISITIONS
On December 31, 1996, the Company acquired GCI with approximate revenues
of $3.9 million, a vertically integrated manufacturer of specialty
products for the financial and health care industries. This acquisition
has been accounted for as a purchase. ISSI purchased 100% of GCI stock for
approximately $4.8 million of combined cash and seller notes and assumed
approximately $650,000 in debt. The real estate and facilities occupied by
GCI were also acquired for an additional $1.5 million in cash. To fund the
transactions, $4.6 million of convertible debentures were placed. The
debentures have a maturity of seven years, and, until converted, carry an
annual interest rate of nine percent. No principal payments are due on the
debentures during the first three years. The debentures may be exchanged
for ISSI Common Stock at a conversion price of $1.05 per share. To
complete the funding, an additional $660,000 of ISSI Common Stock was
privately placed on December 31, 1996 at $1.10 per share. The excess of
the purchase price over the fair value of the assets acquired of
$1,319,628 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.
F-10
<PAGE> 37
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
5. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of certain balance sheet accounts is as follows:
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1997 1996 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 expires August 15, 1997, has an adjustable factoring
fee of 3%, and has 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, $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.
F-11
<PAGE> 38
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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
====== ======== ========
</TABLE>
NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consists of the following:
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1997 1996 1995
--------- ------- -------
<S> <C> <C> <C>
Notes payable to an employee; due in
monthly principal and interest
installments of $2,412 through March 1997; $ -- $ 7,110 $25,437
interest at 10.53%
Note payable to an officer; due upon
demand; no interest -- -- 4,000
--------- ------- -------
=======
$ -- $ 7,110 $29,437
========= ======= =======
</TABLE>
F-12
<PAGE> 39
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, 1997 December 31, 1996 December 31, 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>
F-13
<PAGE> 40
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996 December 31, 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>
F-14
<PAGE> 41
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 For the For the
Six Months Ended Year Ended Year Ended
June 30, December 31, December 31,
1997 1996 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, December 31, December 31,
1997 1996 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>
F-15
<PAGE> 42
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>
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.
F-16
<PAGE> 43
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 products. This license was purchased for $250,000 from
COMTRAC, a company controlled at that time by ISSI's largest stockholder.
This license is being amortized over five years from the acquisition date.
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 $332,866, respectively, at December
31, 1995.
Where appropriate, the financial statements reflect the operating results
and balance sheet items of the discontinued operations separately from
continuing operations. Prior years have been restated. Operating results
for the discontinued operations were:
<TABLE>
<CAPTION>
For the For the
Six Months Ended Year Ended
June 30, December 31,
-------- ----------------
1997 1996 1995
-------- ----- ------
($ in thousands)
<S> <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.
F-17
<PAGE> 44
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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) 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 As Pro
reported forma reported forma reported forma
---------- -------- ------- -------- --------- ---------
<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.
F-18
<PAGE> 45
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.
F-19
<PAGE> 46
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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 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.
F-20
<PAGE> 47
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>
$ .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
F-21
<PAGE> 48
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Common Stock at any time. The number of shares of Common Stock into which
the Series A Preferred is convertible will be proportionately adjusted in
the event of a stock dividend, stock split, or reverse stock split. Upon
any liquidation, dissolution, or winding up of the Company, the holders of
the Series A Preferred are entitled to receive $20 per share before the
holders of Common Stock are entitled to receive any distribution and the
Series A Preferred ranks pari passu with Series B and Series C Preferred
except with respect to the security interest granted to Series B Preferred
(see Series B description below).
Series B $20 Convertible Preferred Stock. The Company has issued 34,166
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.
F-22
<PAGE> 49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Golston Company, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations and stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Golston Company, Inc. at June 30,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
September 30, 1996
F-23
<PAGE> 50
GOLSTON COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
---------------------------
1996 1995
------------ ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 124,901 $ 255,302
Accounts receivable 481,045 357,070
Interest receivable from related party 42,329 --
Inventories 409,839 508,724
Other current assets 61,216 36,306
---------- ----------
Total current assets 1,119,330 1,157,402
Property and equipment, net 2,048,720 1,836,652
Intangible assets, net 3,833 4,500
Note receivable from related party 671,824 --
Other assets 150 1,560
---------- ----------
Total assets $3,843,857 $3,000,114
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 45,090 $ 8,908
Accrued liabilities 169,576 208,630
Deferred revenue 135,515 144,267
Current portion of long-term debt 170,624 120,084
---------- ----------
Total current liabilities 520,805 481,889
---------- ----------
Long term liabilities:
Deferred tax liability 148,504 112,923
Long-term debt 594,857 464,965
---------- ----------
Total long term liabilities 743,361 577,888
---------- ----------
Stockholders' equity:
Common stock, $1.00 par value, 100,000 shares authorized,
1,000 shares issued and outstanding 1,000 1,000
Retained earnings 2,578,691 1,939,337
---------- ----------
Total stockholders' equity 2,579,691 1,940,337
---------- ----------
Total liabilities and stockholders' equity $3,843,857 $3,000,114
========== ==========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-24
<PAGE> 51
GOLSTON COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended
June 30,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Sales and revenues:
Product sales $ 2,203,029 $ 2,074,110
Service revenues 1,688,313 1,492,776
----------- -----------
3,891,342 3,566,886
----------- -----------
Cost of sales and revenues:
Product sales 879,572 793,752
Service revenues 666,618 559,161
----------- -----------
1,546,190 1,352,913
----------- -----------
Gross margin 2,345,152 2,213,973
----------- -----------
Operating expenses:
Selling, general and administrative 1,290,244 1,254,421
----------- -----------
1,290,244 1,254,421
----------- -----------
Income from operations 1,054,908 959,552
Other income (expense):
Interest income from related party 42,329 --
Interest income 1,997 1,506
Interest expense (86,922) (79,635)
Other (23,765) (46,559)
----------- -----------
Income before income taxes 988,547 834,864
Provision for income taxes (349,193) (298,120)
----------- -----------
Net income $ 639,354 $ 536,744
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-25
<PAGE> 52
GOLSTON COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balances at June 30, 1994 1,000 $ 1,000 $1,402,593 $1,403,593
Net income 536,744 536,744
------- -------- ---------- ----------
Balances at June 30, 1995 1,000 $ 1,000 $1,939,337 $1,940,337
Net income 639,354 639,354
------- -------- ---------- ----------
Balances at June 30, 1996 1,000 $ 1,000 $2,578,691 $2,579,691
======= ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-26
<PAGE> 53
GOLSTON COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
June 30,
--------------------------
1996 1995
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 639,354 $ 536,744
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 214,047 175,130
Amortization 667 667
Deferred income taxes 35,581 7,445
Changes in operating assets and liabilities:
Accounts receivable (123,975) (32,638)
Inventories 98,885 (45,470)
Other assets (23,500) (3,855)
Accounts payable 36,182 (54,687)
Accrued liabilities (39,054) (86,651)
Deferred revenue (8,752) 37,430
----------- ---------
Net cash provided by operating activities 829,435 534,115
----------- ---------
Cash flows from investing activities:
Purchase of property and equipment (426,115) (206,941)
Loan to related party (671,824) --
Interest receivable from related party (42,329) --
----------- ---------
Net cash used by investing activities (1,140,268) (206,941)
----------- ---------
Cash flows from financing activities:
Payments on notes payable and long-term debt (169,608) --
Proceeds from notes payable and long-term debt 350,040 (201,423)
----------- ---------
Net cash provided (used) by financing activities 180,432 (201,423)
----------- ---------
Increase (decrease) in cash and cash equivalents (130,401) 125,751
Cash and cash equivalents at beginning of year 255,302 129,551
----------- ---------
Cash and cash equivalents at end of year $ 124,901 $ 255,302
=========== =========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-27
<PAGE> 54
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Golston Company, Inc. ("Golston" or the "Company") was founded in 1976 and
incorporated as a Texas corporation in 1979. Its primary business has been
to design, manufacture, and supply pneumatic tube carriers to the
financial industry for use in the retail drive-up banking centers for
commercial banks, savings and loans, and credit unions. More recently, the
Company has expanded its pneumatic tube carrier business to the medical
services industry, supplying a proprietary line of carriers to hospitals
and other medical facilities. The Company distributes its products through
sales to original equipment manufacturers of pneumatic carrier systems, to
dealers and distributors, and, through telemarketing, directly to
end-users.
The Company's sales are primarily to the banking and hospital industries.
Sales are dependent on customer orders and requests.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents is comprised of highly liquid instruments with
maturities of three months or less.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
The Company recognizes revenue from sales at the time of shipment. The
Company's accounts receivable are generated from a large number of
customers in the financial and medical services industries. Based on
management's analysis of accounts receivable, including consideration of
the Company's historical collection experience, no allowance for doubtful
accounts is necessary at June 30, 1996 or 1995. During 1996 and 1995,
respectively, a single customer accounted for greater than 10% of the
Company's revenues ($600,000 and $650,000).
The Company records deferred revenue related to a service to provide the
use of temporary facilities in the event of a disaster by the retail
banking industry. Revenues related to these services is recognized ratably
over the term of the agreement.
INVENTORIES
Inventories consist of the costs of raw materials, work-in-process and
finished goods and are carried at the lower of cost using the first-in,
first-out method or market. Labor and overhead costs are allocated to
work-in-process and finished goods inventories based on total labor and
overhead costs divided by the number of units produced.
OTHER ASSETS
Other assets consist of certain prepaid expenses and the cash value of a
life insurance policy for an officer of the Company. The cash value of the
policy was $35,822 and $32,618 at June 30, 1996 and 1995, respectively.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at cost. Depreciation is computed over
the estimated useful lives of the assets using the straight-line method.
Estimated useful lives range from 3 to 20 years.
F-28
<PAGE> 55
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
INTANGIBLE ASSETS AND AMORTIZATION
Goodwill resulting from the acquisition of MPA Systems ("MPA") in 1987 is
amortized using the straight-line method over a period of fifteen years.
Goodwill amortization for the years ended June 30, 1996 and 1995, was $667
and $667, respectively. Accumulated amortization at June 30, 1996 and 1995
was $6,167 and $5,500, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Company's accounts receivable, notes
receivable, accounts payable, and long-term debt approximate the fair
values of such financial instruments.
ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the period. Actual amounts could differ from these estimates.
STATEMENT OF CASH FLOWS
Supplemental cash flow information for the year ended June 30:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash paid for interest expense $ 86,922 $ 70,728
Cash paid for income taxes $391,013 $311,904
</TABLE>
F-29
<PAGE> 56
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> 57
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. LONG-TERM DEBT
Long-term debt consists of the following at June 30:
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Term note payable to a bank; due in monthly principal and
interest installments of $7,397 through February 2000;
interest at 10.24% at June 30, 1996 and 1995; secured by
equipment; guaranteed by principal stockholder $ 207,364 $ 269,429
Term note payable to a bank; due in monthly principal and
interest installments of $1,945 through April 1999; interest
at 11.31% at June 30, 1996 and 1995; secured by equipment;
guaranteed by principal stockholder 58,301 74,066
Term note payable to a bank; due in monthly principal and
interest installments of $1,673 through October 2002;
interest at the lender's prime rate plus 1% (10.25% at June
30, 1996); secured by buildings; guaranteed by principal
stockholder 93,259 --
Term note payable to a bank; due in monthly principal and
interest installments of $1,673 through October 2002;
interest at the lender's prime rate plus 1% (10.25% at June
30, 1996); secured by buildings; guaranteed by principal
stockholder 93,259 --
Term note payable to a bank; due in monthly principal and
interest installments of $1,669 through November 2002;
interest at the lender's prime rate plus 1% (10.25% at June
30, 1996); secured by buildings and accounts receivables;
guaranteed by principal stockholder 92,843 --
Term note payable to a bank; due in monthly principal and
interest installments of $7,448 through July 1998; interest
at the lender's prime rate plus .5% (10.5% at June 30, 1996
and 9.87 % at June 30, 1995); secured by buildings;
guaranteed by principal stockholder 171,204 241,554
Term note payable to a bank; due in monthly principal and
interest installments of $825 through April 2003; interest
at the lender's prime rate plus 1% (10.25% at June 30,
1996); secured by buildings; guaranteed by principal stockholder 49,251 --
--------------- ---------------
765,481 589,049
Less current portion (170,624) (120,084)
--------------- ---------------
Long-term portion $ 594,857 $ 464,965
=============== ===============
</TABLE>
F-31
<PAGE> 58
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>
1997 $ 170,624
1998 209,206
1999 141,279
2000 101,213
2001 57,478
Thereafter 85,681
--------------
$ 765,481
==============
</TABLE>
5. INCOME TAXES
The income tax provision is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current:
Federal $295,218 $290,675
State 18,394 --
-------- --------
$313,612 $290,675
-------- --------
Deferred:
Federal $ 35,581 $
7,445
State -- --
-------- --------
35,581 7,445
-------- --------
Tax expense $349,193 $298,120
======== ========
</TABLE>
A reconciliation of the income tax provision and the amount computed by
applying the federal statutory tax rate to income before income taxes is
as follows:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Tax expense at federal statutory rate $ 345,991 $292,202
State income tax provision, net of federal tax benefit 12,140 --
Permanent differences 4,037 1,380
Other (12,975) 4,538
--------- --------
$ 349,193 $298,120
========= ========
</TABLE>
F-32
<PAGE> 59
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Deferred tax assets are subject to a valuation allowance if their
realization is less likely than not. Deferred tax assets (liabilities) are
comprised of the following at June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Gross deferred tax liability - Depreciation $(226,472) $(173,166)
--------- ---------
Inventory 21,693 11,193
Deferred income 46,075 49,050
Bonus Accrual 10,200 --
--------- ---------
Gross deferred tax asset 77,968 60,243
Valuation allowance -- --
--------- ---------
Net deferred tax liability $(148,504) $(112,923)
========= =========
</TABLE>
6. CONTINGENCIES
An officer of the Company has alleged that the Company has breached an
oral agreement to sell the Company to the officer and has asserted a claim
for emotional distress. The Company is disputing these claims. Management
believes that the maximum loss contingency is immaterial.
7. RELATED PARTY TRANSACTIONS
During the fiscal year ended June 30, 1996, a note receivable in the
amount of $671,824 resulted from a transaction between the Company and
Golston Family Partners Ltd. for the purpose of Golston Family Partners
Ltd. purchasing the MPA Modular, L.L.C. manufacturing business. The
Company's shareholder and President owns an interest in Golston Family
Partners Ltd. and MPA Modular, L.L.C. Accrued interest receivable of
$42,329 is recorded at June 30, 1996. The note bears interest at 10.25%
and is scheduled for repayment, including accrued interest, upon the sale
of Golston. The note is unsecured.
8. PENDING SALE OF COMPANY
The Company's Board of Directors has approved the sale of the Company to
Integrated Security Systems, Inc. ("ISSI") effective October 24, 1996.
ISSI is purchasing all of the stock of the Company and the real estate and
property currently leased by the Company from Golston Family Partners Ltd.
These financial statements do not reflect any adjustments arising from
this pending acquisition.
F-33
<PAGE> 60
GOLSTON COMPANY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C>
Sales $ 2,084
Cost of sales 902
------------
Gross margin 1,181
Operating expenses:
Selling, general and administrative 726
------------
Income from operations 455
Other income (expense) (2)
------------
Income before income taxes 453
Income tax provision (150)
------------
Net income $ 303
============
</TABLE>
Note: These financial statements have been prepared on a consistent basis with
the June 30, 1996 and June 30, 1995 financial statements.
F-34
<PAGE> 61
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
authorizes indemnification of certain officers, directors, employees and agents
of the Company; allows the advancement of costs of defending against
litigation; and permits companies incorporated in Delaware to purchase
insurance on behalf of directors, officers, employees and agents against
liabilities whether or not in the circumstances such companies would have the
power to indemnify against such liabilities under the provisions of the
statute.
The Company's Amended and Restated Certificate of Incorporation and its
By-Laws provide for indemnification of its officers and directors to the
fullest extent permitted by Section 145 of the General Corporation Law of the
State of Delaware.
The Company's Amended and Restated Certificate of Incorporation
eliminates, to the fullest extent permitted by Delaware law, liability of a
director to the Company or its stockholders for monetary damages for a breach
of such director's fiduciary duty of care except for liability where a director
(a) breaches his or her duty of loyalty to the Company or its stockholders, (b)
fails to act in good faith or engages in intentional misconduct or knowing
violation of law, (c) authorizes payment of an illegal dividend or a stock
repurchase or (d) obtains an improper personal benefit. While liability for
monetary damages has been eliminated, equitable remedies such as injunctive
relief or rescission remain available. In addition, a director is not relieved
of his or her responsibilities under any other law, including the federal
securities laws.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be borne by the
Company in connection with the registration, issuance and distribution of the
securities being registered hereby. None of the estimated expenses will be
borne by the Selling Stockholders.
<TABLE>
<S> <C>
SEC Registration Fees............................... $ 1,670
Nasdaq Exchange Listing Fee......................... 2,000
The Boston Stock Exchange Listing Fee............... 2,000
Legal Fees and Expenses............................. 10,000
Accounting Fees and Expenses........................ 4,500
Blue Sky Fees and Expenses.......................... 2,000
Printing and Engraving Expenses..................... 100
------------
Total...................................... $ 22,270*
============
</TABLE>
- ----------
* Estimated.
II-1
<PAGE> 62
Item 26. Recent Sales of Unregistered Securities
The following table specifies securities sold by the Registrant within
the past three years and not registered under the Securities Act of 1933. All
such sales were carried out in reliance on the exemption from registration
contained in Section 4(2) of the Securities Act of 1933. In relying on such
exemption, the Registrant relied upon written representations of the persons
acquiring the Registrant's shares that they were acquiring the shares for
investment purposes only and not for resale, and that they had received
adequate opportunity to obtain information, and had reviewed such information,
regarding the Registrant. Certificates representing the shares issued to these
persons contained a legend restricting transfer thereof absent registration
under the Securities Act or the availability of an exemption therefrom.
<TABLE>
<CAPTION>
TITLE AND AMOUNT OF PURCHASER CONSIDERATION UNDERWRITING
DATE SOLD SECURITIES RECEIVED DISCOUNTS OR
- -------------------- ---------------------------- ----------------------- ------------------ ------------
<S> <C> <C> <C> <C>
September- Promissory Notes and Accredited bridge An aggregate of
November 1994 warrants to purchase 211,800 financial investors $1,059,000
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 accredited Conversion of an
Preferred Stock and warrants investors primarily aggregate of $683,000
to purchase 136,669 shares consisting of officers and owed by the Company
of Common Stock directors
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 accredited $640,000 $78,000
Preferred Stock and warrants investors
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 warrants including an officer and
to purchase 187,500 shares director
of Common Stock
July-September Warrant to purchase 70,000 I.S.T. Partners, Ltd. R&D Partnership
1996 shares of Common Stock
December 31,
1996 Convertible Debentures (9%) Renaissance Capital $4,600,000
Fund
December 31, 600,000 shares of Common ProFutures Special Equity $600,000 $60,000
1996 Stock Fund
</TABLE>
II-2
<PAGE> 63
Item 27. Exhibits
--------
(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.
Warrant Agreement among the Company, American Stock Transfer
& Trust Company, and Thomas James Associates, Inc.
*4.4 Underwriter's Warrant.
**4.5 Certificate of Designation for Series A $20 Convertible Preferred
Stock.
**4.6 Certificate of Designation for Series B $20 Convertible Preferred
Stock.
**4.7 Certificate of Designation for Series C $20 Convertible Preferred
Stock.
***5.1 Opinion of Haynes and Boone, L.L.P.
**10.1 Integrated Security Systems, Inc. 1993 Stock Option Plan dated
September 7, 1993, as amended on December 30, 1994.
*10.2 Form of Integrated Security Systems, Inc. 1993 Incentive Stock
Option Agreement.
*10.3 Form of Integrated Security Systems, Inc. 1993 Non-Qualified
Stock Option Agreement.
*10.13 Form of Indemnification Agreement by and between the Company and
the Company's officers and directors.
*10.14 Commercial Lease dated August 6, 1984, by and among Philip R.
Thomas, Wayne L. Thomas and Thomas Group Service Company,
predecessor to B&B, for land, building and equipment.
*10.20 Lease Agreement dated March 25, 1992 and April 6, 1992, by
and among the Company, Trammell Crow Company No. 90 and
Petula Associates Limited for property located in Dallas,
Texas.
*10.23 Lease Agreement commencing June 1, 1992 by and between Kelso
Joint Venture and AAC, for property located in Baltimore,
Maryland.
*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.
II-3
<PAGE> 64
*10.51 Note relating to the $900,000 Bridge Financing (incorporated
by reference from similarly numbered exhibits filed with the
Company's Form 10-KSB for the year ended December 31, 1995).
*10.52 Standard Form of Common Stock Purchase Warrant (incorporated
by reference from the similarly numbered exhibit filed with
the Company's Form 10-KSB for the year ended December 31,
1995).
10.53 Subscription Agreement dated December 28, 1995 (incorporated
by reference from the similarly numbered exhibit filed with
the Company's Form 10-KSB for the year ended December 31,
1995).
10.54 Factoring Agreement from Sunburst Bank for B&B receivables
(incorporated by reference from the similarly numbered
exhibit filed with the Company's Form 10-KSB for the year
ended December 31, 1995).
10.55 Corporate Consulting Agreement, dated March 3, 1986, by and
between the Company and Bathgate McColley Capital Group LLC
for consulting services (incorporated by reference from the
similarly numbered exhibit filed with the Company's Form
10-QSB for the quarter ended March 31, 1996).
10.56 Form of Promissory Notes dated March 11, 1996 (incorporated
by reference from the similarly numbered exhibit filed with
the Company's Form 10-QSB for the quarter ended March 31,
1996).
10.57 Engagement letter dated March 26, 1996, from Bathgate
McColley Capital Group LLC to the Company proposing private
placement offering (incorporated by reference from the
similarly numbered exhibit filed with the Company's Form
10-QSB for the quarter ended March 31, 1996).
10.58 Form of Subscription Agreement for Series A Convertible
Preferred Stock executed on March 27, 1996 (incorporated by
reference from the similarly numbered exhibit filed with the
Company's Form 10-QSB for the quarter ended March 31, 1996).
10.59 Subscription Agreement for Common Stock executed March 28,
1996 (incorporated by reference from the similarly numbered
exhibit filed with the Company's Form 10-QSB for the quarter
ended March 31, 1996).
10.60 Form of Warrant Agreement for purchase of common stock
executed March 29, 1996 (incorporated by reference from the
similarly numbered exhibit filed with the Company's Form
10-QSB for the quarter ended March 31, 1996).
10.61 Placement Agent Agreement dated April 16, 1996, by and
between the Company and Bathgate McColley Capital Group LLC
confirming private placement offering (incorporated by
reference from the similarly numbered exhibit filed with the
Company's Form 10-QSB for the quarter ended March 31, 1996).
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.
II-4
<PAGE> 65
**10.66 Management Agreement, dated August 29, 1996, between the Company
and I.S.T. Partners, Ltd.
**10.67 Marketing and Development Agreement, dated July 29, 1996, between
the Company, IST, and I.S.T. Partners, Ltd.
**10.68 Employment Agreement, dated January 2, 1997, between Gerald K.
Beckmann and the Company.
**10.69 Employment Agreement, dated January 2, 1997, between James W.
Casey and the Company.
**10.70 Real Estate Purchase Agreement, dated September 5, 1996, between
the Company and Golston Family Partners, Ltd.
***11.1 Computation of earnings per share.
21.1 Subsidiaries of the Company (incorporated by reference from
the similarly numbered exhibit filed with the Company's Form
10-KSB for the year ended December 31, 1995).
***23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Haynes and Boone, L.L.P. (included in their opinion
filed as Exhibit 5.1).
***24.1 Power of Attorney (included on the signature page hereto).
- ---------------
* Filed 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 January 10, 1997, reporting the acquisition of
GCI.
Form 8-K/A filed March 11, 1997, reporting the acquisition of
GCI, together with financial statements.
Form 8-K, filed May 15, 1997, reporting a change in the Company's
fiscal year.
Item 28. Undertakings
The Registrant will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and
(iii)Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
II-5
<PAGE> 66
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The Registrant will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 424(b)(1), or (4) or 497(h) under
the Securities Act (ss.ss. 230.424(b)(1), (4) or 230.497(h)) as part of this
registration statement as of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial bona
fide offering of those securities.
II-6
<PAGE> 67
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Irving, State of Texas, on August 15, 1997.
INTEGRATED SECURITY SYSTEMS, INC.
By: /s/ GERALD K. BECKMANN
-----------------------------------
Gerald K. Beckmann
President and
Chief Executive Officer
II-7
<PAGE> 68
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned Officers and
Directors of Integrated Security Systems, Inc. (the "Company") hereby
constitutes and appoints Gerald K. Beckmann (with full power to act alone), his
true and lawful attorney-in-fact and agent, with full power of substitution,
for him and on his behalf and in his name, place and stead, in any and all
capacities, to sign, execute, and file any and all documents relating to this
Registration Statement, including any and all amendments, exhibits and
supplements thereto, with any regulatory authority, granting unto said attorney
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as he himself might or
could do if personally present, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute or substitutes, may lawfully do or
cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on August 15, 1997.
INTEGRATED SECURITY SYSTEMS, INC.
By: /s/ GERALD K. BECKMANN
-----------------------------------
Gerald K. Beckmann
Director, Chairman of the Board,
Chief Executive Officer
and President
By: /s/ HOLLY J. BURLAGE
-----------------------------------
Holly J. Burlage
Vice President
(Principal Financial Officer and
Principal Accounting Officer)
By: /s/ JAMES W. CASEY
-----------------------------------
James W. Casey
Director
By: /s/ ROBERT M. GALECKE
-----------------------------------
Robert M. Galecke
Director
By: /s/ JAMES E. JACK
-----------------------------------
James E. Jack
Director
By: /s/ FRANK R. MARLOW
-----------------------------------
Frank R. Marlow
Director
II-8
<PAGE> 69
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
5.1 Opinion of Haynes and Boone, L.L.P.
11.1 Computation of earnings per share.
23.1 Consent of Price Waterhouse LLP.
<PAGE> 1
EXHIBIT 5.1
[HAYNES AND BOONE, LLP LETTERHEAD]
August 11, 1997
Integrated Security Systems, Inc.
8200 Springwood Drive, Suite 230
Irving, Texas 75063
Gentlemen:
We have acted as counsel to Integrated Security Systems, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of the
Company's Registration Statement on Form SB-2, relating to the registration of
an aggregate of 4,980,952 shares (the "Shares") of the Company's common stock,
par value $.01. Such Registration Statement (the "Registration Statement") is
to be filed with the Securities and Exchange Commission under the Securities
Act of 1933, as amended.
As described in the Registration Statement, 600,000 of the Shares are currently
outstanding, and of the 4,380,952 Shares are to be issued upon the conversion
of currently outstanding convertible debentures of the Company.
For the purposes of the opinions below, we have assumed that the Shares to be
issued upon conversion of the debentures referred to above will be issued in
accordance with the terms of such debentures and that the consideration
received by the Company will be at least equal to the par value of the Shares
issued thereupon.
In connection with the preparation of the Registration Statement, we have
examined (i) the Certificate of Incorporation and the Bylaws of the Company,
both as amended to date; (ii) minutes and records of the corporate proceedings
of the Company with respect to issuance of the Shares; (iii) the Registration
Statement and any and all exhibits thereto; and (iv) such other documents as we
have deemed necessary for the expression of the opinions contained herein.
In making the foregoing examinations, we have assumed the genuineness of all
signatures and the authenticity of all documents submitted to us as originals,
and the conformity to original documents of all documents submitted to us as
certified or photostatic copies. As to questions of fact material to this
opinion, where such facts have not been independently established, and as to
the content and form of the Certificate of Incorporation, Bylaws, minutes and
resolutions and other documents we have relied, to the extent we deemed
reasonably appropriate, upon representations or certificates of officers and
directors of the Company, and certificates of governmental officials, without
independent check or verification of their accuracy.
Based upon the foregoing, and having due regard for such legal considerations
as we deem relevant, we are of the opinion that (i) the currently outstanding
Shares are duly authorized, fully paid and nonassessable, and (ii) upon the
issuance of the Shares which will be issued upon conversion of the convertible
debentures referred to in the Registration Statement, such Shares will be duly
authorized, fully paid, and nonassessable.
<PAGE> 2
[HAYNES AND BOONE, LLP LETTERHEAD]
Integrated Security Systems, Inc.
August 11, 1997
Page 2
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the
reference to our firm under the caption "Legal Matters" in the Prospectus
forming part of such Registration Statement, and any amendment thereto.
Very truly yours,
/s/ HAYNES AND BOONE LLP
Haynes and Boone, L.L.P.
<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) $ (0.41)
Per share discontinued operations -- -- $ (0.30)
------------------ --------- ---------
Per share $ (.05) $ (.05) $ (0.71)
================== ========= =========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form SB-2 of our report dated August 8, 1997
relating to the consolidated financial statements of Integrated Security
Systems, Inc., and our report dated September 30, 1996 relating to the
financial statements of Golston Company, Inc., which appear in such Prospectus.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
PRICE WATERHOUSE LLP
Dallas, Texas
August 15, 1997
