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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (Fee Paid).
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required).
For Fiscal Year Ended June 30, 1998
Commission File Number: 1-11900
INTEGRATED SECURITY SYSTEMS, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 75-2422983
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(State of Incorporation) (I.R.S. Employer Identification No.)
8200 SPRINGWOOD DRIVE, SUITE 230, IRVING, TEXAS 75063 (972) 444-8280
(Address including zip code, area code and telephone number of
Registrant's executive offices.)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class Name of Each Exchange on Which Registered
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Common stock, $.01 par value Boston Stock Exchange
Nasdaq
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Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes /X/
No / /
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. / /
Issuer's revenues for its most recent fiscal year: $11,092,307
As of September 23, 1998, 8,475,808 shares of the Registrant's common stock were
outstanding and 1,450,000 warrants were outstanding.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: as of September 23, 1998, $7,950,308. This amount was computed by
reference to the average close price of Registrant's common stock.
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TABLE OF CONTENTS
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Item No. Page
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Part I
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1. Description of Business 3-6
2. Description of Properties 6-7
3. Legal Proceedings 7
Part II
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5. Market for Company's Common Equity and Related Stockholder Matters 7-9
6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-14
7. Financial Statements 15-40
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 41
Part III
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9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 41
10. Executive Compensation 41
11. Security Ownership of Certain Beneficial Owners and Management 41
12. Certain Relationships and Related Transactions 41
Part IV
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13. Exhibits, Lists and Reports on Form 8-K 41-46
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Integrated Security Systems, Inc. ('ISSI' or the 'Company') designs, develops,
manufactures, sells and services commercial and industrial security and traffic
control products including warning gates, crash barriers, lane changers,
navigational and airport lighting, and electronically-controlled security gates.
The Company manufactures pneumatic tube carriers for financial and healthcare
transport systems and fabricates modular buildings for financial institutions.
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.
Because of increasing crime rates, increased emphasis on corporate security, and
end user demands for more automated security products, the Company believes that
the industry trend will continue toward more sophisticated, outsourced systems
that offer the ability to automate several security functions simultaneously. As
a result, the Company has developed a PC-based facility management system called
Intelli-Site that integrates all security functions across an entire enterprise
including remote sites.
The Company distributes its products and services through direct sales,
dealer/distributor factory-direct purchasing networks, consultants and other
system integrators.
Effective January 1, 1997, the Company changed its fiscal year end from December
31 to June 30. References to fiscal years 1996 and earlier refer to the twelve
months ended December 31 of such year. References to fiscal 1997 refer to the
six month transition period ended June 30, 1997. References to fiscal 1998 refer
to the twelve months ended June 30, 1998.
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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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 hydraulic gate operators and aluminum gate panels which it
sells to distributors and directly to national accounts. 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 orders range from $1,000
to $12,000 with delivery times ranging from less than a week to several weeks
depending upon whether the order is for standard products or requires custom
design work. Perimeter security products are also integrated into Intelli-Site
systems and resold as a subsystem by Innovative Security Technologies, Inc.
('IST') to its clients.
RAILROAD: B&B ELECTROMATIC, INC. ('B&B')
B&B manufactures railroad crossing safety barriers and warning gates. The
warning gates are similar to those commonly seen at railroad grade crossings.
The model VT-6802 safety barrier is a recently developed and tested product. It
is a moveable positive-resistance barrier gate which eliminates collisions at
highway-railroad crossings by preventing intrusions onto the railroad
right-of-way. The premiere installation of the new safety barrier is scheduled
for completion in early November 1998 at a Wisconsin and Southern Railroad
Company grade crossing in Madison, Wisconsin.
ELECTRONIC SECURITY SYSTEMS: TRI-COASTAL SYSTEMS, INC. ('TCSI')
TCSI designs, sells, installs and services electronic security systems primarily
for commercial and industrial buildings using standard 'off-the-shelf'
subsystems from various manufacturers. TCSI will often provide the subsystem
components for an IST integrated system sale. In addition, TCSI provides
maintenance services and monitoring services for both its own and IST's end
users.
INTEGRATED SYSTEMS: INNOVATIVE SECURITY TECHNOLOGIES, INC. ('IST')
IST designs, develops and markets fully integrated turnkey facility management
systems. IST continues to expand its sales activities to include leveraged
channel distribution as well as its own direct sales force. IST's strategy is to
exploit industry outsourcing trends by promoting sales of its proprietary
Intelli-Site integrated turnkey system to end users through multiple
distribution channels.
In 1993, IST began developing and testing a proprietary hardware and software
product called Intelli-Site, a user-defined, PC-based systems integration
platform. The two industry-unique features of Intelli-Site are its ability to
integrate any vendor's security devices or subsystem (vendor independency) and
its ability to have the system's automated functionality be defined by the end
user at any time, within minutes, without programming (dynamic functionality).
The Company knows of no other product within its industry with these features.
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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. Costs for custom-designed systems may
be $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.
On October 2, 1998, Innovative Security Technologies, Inc. was renamed
Intelli-Site, Inc.
PNEUMATIC CARRIERS: GOLSTON COMPANY, INC. ('GCI')
GCI's primary business is the design, manufacture and marketing of pneumatic
tube carriers for use in financial institutions and hospitals through its
plastic injection molding operations.
GCI also manufactures and markets modular buildings for financial institutions
for use during new branch construction or existing facility remodeling.
WARRANTY
The Company has two-year and 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 $2.6 million
at September 30, 1998. The Company expects that the majority of this backlog
will be filled during fiscal 1999 and the first quarter of fiscal 2000.
INTELLECTUAL PROPERTY
On March 16, 1993, the Company entered into an agreement with COMTRAC
Corporation ('CTC') that granted the Company a non-exclusive, worldwide,
irrevocable, paid-up license to use CTC's proprietary transaction processing
systems, applications and communications software and related hardware for use
in security-related systems and systems integrating security and EFT functions,
all of which are components of the Intelli-Site integration platform. The
license was exclusive until March 16, 1996. The Company paid $250,000 for this
license.
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Also on March 16, 1993, the Company entered into an agreement with DesignTech,
Inc. ('DTI') that granted 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
was to pay DTI a royalty of 1% of the Company's total gross revenues derived
from products using the licensed technology. The royalty was to decline to 0.25%
for cumulative gross revenues exceeding $20,000,000. No royalties were paid
under this agreement that terminated March 16, 1998.
PRODUCT DESIGN AND DEVELOPMENT
There are currently two employees of the Company and one contracted consultant
dedicated to research, development and product engineering. During fiscal 1996,
1997 and 1998, the Company spent approximately $152,239, $34,138 and $246,443
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 a standard product system, the design of a custom system, or
multiple side-by-side systems, to meet their requirements. System integrators
bid these design contracts not only for the design effort but also to place
themselves in a most favored position to become the prime contractor during the
implementation phase. During the design phase, system integrators survey the
market for components of the specified system and define how they can be
integrated together. Finally, if awarded the implementation phase, the system
integrator acts as a prime contractor and subcontracts the component suppliers,
and supervises the integration.
Depending on the contract, the Company will either become a subcontractor for
the majority of the systems or bid the project as a vertically integrated system
integrator and prime contractor. By combining both the first and second phase
into a proposal from a single vendor, the Company eliminates several third party
profit tiers and can reduce the time and overall costs to the customer.
The Company faces intense competition in the security industry. Certain of the
Company's competitors are large, well-financed and established companies that
have greater name recognition and resources for research and development,
manufacturing and marketing than the Company has and, therefore, may be better
able than the Company to compete for a share of the market.
EMPLOYEES
As of June 30, 1998, the Company employed 106 people, all in full-time
positions. None of the Company's employees are subject to collective bargaining
agreements. The Company believes that relations with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTIES
B&B owns its manufacturing and office facility in Norwood, Louisiana. This
facility consists of approximately 26,000 square feet of manufacturing and
office space on five acres of land. GCI owns its manufacturing and office
facility in Sanger, Texas. This facility consists of approximately 36,000 square
feet of manufacturing and office space on 6.4 acres of land. The Company
occupies 13,038 square feet of office and warehouse space in Irving, Texas,
under a lease expiring on December 31, 2000, with monthly rent of $9,561, plus
the costs of utilities, property taxes, insurance, repair/maintenance expenses
and common area utilities.
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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.
ITEM 3. LEGAL PROCEEDINGS
GCI, a wholly owned subsidiary of the Company, is a party to a lawsuit filed in
the 211th Judicial District Court of Denton County, Texas on September 13,
1996, entitled S. WEBB GOLSTON AND GOLSTON COMPANY V. EVELYN SHAW, CAUSE NO.
96-30642-211. In this suit, a former employee of GCI has alleged sexual
harassment, sexual discrimination, wrongful discharge, and intentional
infliction of emotional distress, breach of contract, and violations of the
Equal Pay Act against GCI and the former owner of GCI. Plaintiff sought
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. Pursuant to
the terms of the acquisition agreement, the former owner has elected 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. In September 1998, summary judgement
was granted for defendants with regard to the sexual harassment, intentional
infliction of emotional distress, and breach of contract claims. As a result,
all potential claims for punitive damages have been dismissed. To date, no
information has become available that causes the Company to believe there is
any potential liability which is not fully covered by the indemnification
agreement with the former owner.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK
The Company's Common Stock is traded on the Automated Quotation System of the
National Association of Securities Dealers, Inc. ('Nasdaq') under the symbol
'IZZI' and on the Boston Stock Exchange under the symbol 'ISI.' As of June 30,
1998, there were 8,475,808 shares of Common Stock outstanding and 1,450,000
warrants outstanding entitling holders to purchase 3,842,500 shares of Common
Stock. The shares of Common Stock are held of record by approximately 87 holders
and the warrants are held of record by approximately 50 holders. The following
table sets forth, for the periods indicated, the high and low bid quotations for
the Common Stock on the Nasdaq Small Cap Market. Trading prices for the Common
Stock on the Boston Stock Exchange are substantially similar to the prices set
forth below for the Nasdaq Small Cap Market. These over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions. The trading market in the
Company's securities may at times be relatively illiquid due to low volume.
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Common Stock
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$ High $ Low
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Fiscal 1998
First Quarter 3 1 1/4
Second Quarter 2 1/4 1
Third Quarter 1 5/16 19/32
Fourth Quarter 1 25/32 9/16
Fiscal 1997
First Quarter 3 1/2 1 3/16
Second Quarter 2 3/16 1 1/4
Fiscal 1996
First Quarter 2 13/16 5/8
Second Quarter 5 7/8 2 1/16
Third Quarter 3 1/2 1 13/16
Fourth Quarter 3 5/8 2 3/8
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On October 1, 1998, the last reported sales prices for the Common Stock as
reported on the Nasdaq Small Cap Market was $.94.
The following table specifies securities sold by the Registrant within the past
three years and not registered under the Securities Act of 1933. All such sales
were carried out in reliance on the exemption from registration contained in
Section 4(2) of the Securities Act of 1933. In relying on such exemption, the
Registrant relied upon written representations of the persons acquiring the
Registrant's shares that they were acquiring the shares for investment purposes
only and not for resale, and that they had received adequate opportunity to
obtain information, and had reviewed such information, regarding the Registrant.
Certificates representing the shares issued to these persons contained a legend
restricting transfer thereof absent registration under the Securities Act or the
availability of an exemption therefrom.
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UNDERWRITING
TITLE AND AMOUNT OF CONSIDERATION DISCOUNTS OR
DATE SOLD SECURITIES PURCHASER RECEIVED COMMISSIONS PAID
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September-November Promissory Notes and warrants Accredited bridge An aggregate of
1994 to purchase 211,800 shares of financial investors $1,059,000
Common Stock
October 1995- Warrants to purchase 105,677 A group of 9 investors Extension of loan
March 1996 shares of Common Stock terms
December 1995 45,000 shares of Common Stock Managerial Resources, Financial advisory
and warrants to purchase 28,000 Inc. and Steffany Lea services
shares of Common Stock Martin
January 1996 34,168 Series B Convertible A group of 11 Conversion of an
Preferred Stock and warrants to accredited investors aggregate of $683,000
purchase 136,669 shares of primarily consisting of owed by the Company
Common Stock officers and directors
January 1996 Warrants to purchase 13,201 Philip R. Thomas Consulting services
shares of Common Stock
March 1996 Warrants to purchase 326,000 Bathgate McColley Investment banking
shares of Common Stock Capital Group LLC fees
March 1996 Warrant to purchase 100,000 ComVest Partners Placement Agent fee
shares of Common Stock
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March 1996 15,000 shares of Common Stock Louis A. Davis Shares of TCSI
March 1996 15,000 shares of Common Stock Henry E. McGuffee Shares of TCSI
March 1996 15,000 shares of Common Stock Michael A. Richmond Shares of TCSI
March 1996 800,000 Shares of Common Stock Seabeach & Co. $800,000 $40,000
and warrants to purchase
320,000 shares of Common Stock
March-May 1996 47,968 Series A Convertible A group of 38 $640,000 $78,000
Preferred Stock and warrants to accredited investors
purchase 381,344 shares of
Common Stock
June 1996 12,500 Series C Convertible A group of 5 investors $250,000
Preferred Stock and warrants to including an officer
purchase 187,500 shares of and director
Common Stock
July-September 1996 Warrant to purchase 70,000 I.S.T. Partners, Ltd. R&D Partnership
shares of Common Stock
December 31, 1996 Convertible Debentures (9%) Renaissance Capital Fund $4,600,000
December 31, 1996 600,000 shares of Common Stock ProFutures Special $600,000 $60,000
Equity Fund
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DIVIDEND POLICY
Dividends have not been declared on the Common Stock and it is not anticipated
that dividends will be paid in the near future because any funds available will
most likely be reinvested in the Company's business and used to repay
outstanding debt.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
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
fabricates 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 Group, a private
investment fund. During fiscal 1997, the Company recorded additional acquisition
costs and non-compete agreements of $691,745. In October 1998, the Company sold
the modular building portion of this business for $2.8 million, comprised of
cash and $680,000 in notes. A portion of the cash proceeds will be used to
retire debt.
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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. References to fiscal 1998 refer
to the twelve months ended June 30, 1998.
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.
GOING CONCERN MATTERS
The Company has suffered recurring losses from operations and its dependence on
obtaining financing or additional equity capital raises substantial doubt about
its ability to continue as a going concern. The financial statements have been
prepared assuming that the Company will continue as a going concern and do not
include any adjustment that might result from the outcome of this uncertainty.
Historically the Company's manufacturing subsidiaries have generated positive
returns. During fiscal 1998, one of the manufacturing facilities experienced a
business downturn, resulting in a loss for fiscal 1998 that is not expected to
be repeated in future periods. The Company anticipates that it will continue to
experience losses from the launching of the Intelli-Site product, but these
losses should begin to lessen as revenues are recognized from sales.
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
funded the sales, engineering and order fulfillment expenses of IST to the
extent of available funds. 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, 1998, 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.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1996
SALES. The Company's sales increased by $2 million (23%) from $9 million during
the twelve months ended December 31, 1996 to $11 million during the twelve
months ended June 30, 1998. The increase was primarily attributable to the
inclusion of GCI, acquired on December 31, 1996, for the twelve months ended
June 30, 1998, with no equivalent revenue during the comparable 1996 period.
Also contributing to the increase were sales at TCSI and IST during the twelve
months ended June 30, 1998, resulting from contracts and increased business.
For the twelve months ended June 30, 1998, approximately 83% of the Company's
revenues were generated from the sale of products manufactured by the Company
compared to 78% for the comparable twelve month period during 1996.
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COST OF SALES AND GROSS MARGIN. Gross margin as a percent of sales decreased to
39% from 43% for the twelve months ended June 30, 1998 and December 31, 1996,
respectively. The majority of the decrease was due to a less favorable product
mix at B&B compared to the 1996 year. The TCSI subsidiary also contributed to
the lower gross margin due to the completion of a large job with lower than
normal margins.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased to $6.4 million during the twelve months ended June 30, 1998
from $3.8 million during the comparable 1996 period. The increase was
attributable to the Company absorbing all of the sales and marketing expenses of
IST during the 1998 period and the inclusion of GCI expenses during the twelve
months ended June 30, 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$152,239 in fiscal 1996 to $246,433 in fiscal 1998. This increase was due to
additional development of the Company's Intelli-Site products and increased
testing and design of new products at B&B.
INTEREST EXPENSE. Interest expense increased to $863,768 during the twelve
months ended June 30, 1998 from $260,471 during the comparable 1996 period due
to the financing related to the acquisition of GCI and the addition of a
revolving credit facility put into place at GCI.
GAIN ON SALE OF ASSETS. The Company recorded a $20,677 gain on the sale of
assets during the twelve months ended June 30, 1998, 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 an anticipated trend toward Company
operating results of 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 and railroad products; (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. The Company
also anticipates a gain on the October, 1998 sale of a business unit of GCI (MPA
Systems). This, 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
profitability.
Notwithstanding the above positive factors, the Company has adopted a
conservative posture by providing a valuation reserve of 94% of the deferred tax
asset as of June 30, 1998. 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.
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.
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For the six months ended June 30, 1997, approximately 74% of the Company's
revenues were generated from the sale of products manufactured by the Company
compared to 78% for the comparable six month period during 1996.
COST OF SALES AND GROSS MARGIN. Gross margin as a percent of sales increased to
42% from 38% for the six months ended June 30, 1997 and 1996, respectively. This
increase was primarily due to a favorable change in the Company's product mix
compared to the prior year. With the inclusion of GCI results during the six
months ended June 30, 1997, the Company experienced higher sales of products
manufactured by the Company, which have higher gross margins. The Company also
incurred $63,691 in software cost amortization during each of the 1997 and 1996
periods.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased to $2.7 million during the six months ended June 30, 1997
from $1.8 million during the comparable 1996 period. The increase was primarily
attributable to the inclusion of GCI expenses during the six months ended June
30, 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased from
$108,611 in fiscal 1996 to $34,138 in fiscal 1997. This decrease was due
primarily to the completion of the initial development of Intelli-Site.
INTEREST EXPENSE. Interest expense increased to $389,540 during the six months
ended June 30, 1997 from $174,215 during the comparable 1996 period due to the
financing related to the acquisition of GCI.
GAIN ON SALE OF ASSETS. The Company recorded a $23,408 gain on the sale of
assets during the six months ended June 30, 1997, primarily from the sale of
modular buildings at GCI.
INCOME TAXES. In assessing the likelihood of realization of the deferred tax
asset, the Company primarily considered the trend of the Company's operating
results toward profitability. The Company anticipates a positive trend to
continue. This positive trend will continue to be boosted by the sales of
Intelli-Site, as well as the addition of GCI. These factors, coupled with the
current growth of the security industry, were considered positive factors in
this assessment. Since the net operating loss carry forward does not begin to
expire until 2007, the Company anticipates that all recognized carry forward
benefits will be fully utilized before this expiration date arrives. As there
are no significant temporary differences in the Company's tax calculation,
realization will be primarily achieved by increased profitability. The Company
anticipates that its move to profitability will be dependent on its success in
three areas: (i) sales - continued increases in sales at all subsidiaries plus a
positive response to the Intelli-Site product; (ii) profit margins - continued
focus on increasing margins at IST, while maintaining the current margins at B&B
and GCI; and (iii) cost control - continued cost control at all subsidiaries.
Notwithstanding the above positive factors, the Company has adopted a
conservative posture by providing a valuation reserve of 91% of the deferred tax
asset as of June 30, 1997. Further recognition of the asset will be dependent on
the Company attaining profitability targets that have been established. The
realizability of the net deferred tax asset has been (and will continue to be)
reviewed on a quarterly basis.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position decreased by $1,270,074 during the fiscal year ended
June 30, 1998. The Company used $1,531,971 of cash for operations during this
period. Also, during the fiscal year ended June 30, 1998, the Company financed
its continuing operations from long-term borrowings of $1,423,197, warrant
exercises of $248,775 and operations. The Company used $494,519 to pay principal
on indebtedness.
Historically, the Company's manufacturing subsidiaries have generated positive
cash flow from operations. This positive cash flow, in conjunction with the
existing financing facilities, should position the Company to cover its working
capital needs for all subsidiaries except IST. Development of distribution
channels for Intelli-Site will continue, with a significant portion of future
investments being utilized to launch Intelli-Site through the PSA Security
Network. PSA, formed in 1974, is a member-owned cooperative of independent
security and communications systems integrators and dealers, with over 114
member companies throughout the United States, Canada, Mexico, Latin America and
England, that design, install and service electronic security systems and
products. PSA members provide products from over 200 manufacturers, selecting
the equipment that best meets a specific client's needs. PSA's products and
services are marketed by over 475 salesmen, supported by over 1,200 technicians,
from over 175 office locations. Training and pre-sales support of the PSA
channel and other channels will require sizable expenditures by the Company in
time and dollars before significant revenues are realized. To finance these
activities, the Company anticipates that it will need to raise additional funds
in the upcoming fiscal year through debt, equity or the divestiture of certain
assets or a combination of such.
CAPITAL EXPENDITURES
During the year ended June 30, 1998, the Company acquired $1,004,459 of property
and equipment from long-term borrowings and operations and received proceeds of
$88,903 from the sale of property during the period. The Company does not
anticipate any significant capital expenditures during fiscal 1999.
EFFECTS OF INFLATION
The Company believes that the relatively moderate rate of inflation over the
past few years has not had a significant impact on the Company's sales or
operating results.
SEASONALITY
Historically the Company has experienced seasonality in its business due to
fluctuations in the weather. The Company typically experiences a decline in
sales and operating results during the quarter ended March 31 due to winter
weather conditions.
ENVIRONMENTAL MATTERS
The Company believes that it is currently 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.
13
<PAGE> 14
YEAR 2000
The Year 2000 issue concerns the ability of computer software programs,
including the logic contained within embedded chips, to correctly identify and
process date-sensitive calculations across and beyond the Year 2000 dateline.
This concern is largely a result of programming practices that use a two-digit
field to represent the year without other program logic to identify the century.
Accordingly, such software may process a year field of '00' as the year 1900
instead of the year 2000. If not identified and replaced or corrected, systems
using such software, including systems used by the Company's major customers and
supplies, could fail or produce erroneous results such that materially adverse
financial results and/or results of operations could occur.
The Company believes the products and systems it manufactures to be unaffected
by the Year 2000 issue. The Company currently utilizes third-party equipment and
software that may be affected by the Year 2000 issue and has begun to assess and
address its critical business information and production system regarding the
Year 2000 issue for both Information Technology ('IT') and non-IT systems. For
IT systems, the Company is continuing the normal replacement of its financial
business systems which it expects to complete by June 30, 1999. The replacement
projects were scheduled without regard to Year 2000 concerns, but will also
address the Year 2000 issue. The implementation of the new business systems,
through planned normal business upgrades, is not expected to have a material
impact on the Company's financial statements arising from the Year 2000 issue.
Based upon the information currently available from the Company's assessment of
non-IT systems, the Company does not believe that the costs associated with
these Year 2000 activities will have a material adverse effect on the Company's
consolidated results of operations or financial position. Internal and external
costs specifically associated with Year 2000 issues will be charged to expense
as incurred. All such costs are, and will be, funded through cash flows from
operations.
The Company plans to contact its critical suppliers, major customers and
governmental agencies to assess their status for Year 2000 readiness. The
ability of such third parties to effectively address Year 2000 issues is outside
of the Company's control, and there can be no assurance that the failure of any
third party with which the Company transacts business to adequately address the
Year 2000 issue will not have a material adverse effect on the Company's
financial results and/or results of operation.
The Company is in the process of developing contingency plans to allow
continuation of mission-critical business processes to moderate the impact of
any Year 2000 issues not adequately addressed by the Company or any material
third-party to the Company. These efforts, when completed, are expected to allow
the Company to define the most reasonably likely worst case scenario, currently
uncertain, resulting from Year 2000 issues.
Although the Company does not expect Year 2000 issues to have a material impact
on its financial results or operations, there can be no assurance that there
will be no disruptions or that the Company will not incur significant costs to
avoid such disruptions.
This information contains 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: operations may not
improve as projected, new products may not be accepted by the marketplace as
anticipated, or new products may take longer to develop than anticipated.
14
<PAGE> 15
INTEGRATED SECURITY SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
ITEM 7. FINANCIAL STATEMENTS
<S> <C>
Report of Independent Accountants 16
Consolidated Balance Sheets as of June 30, 1998 and 1997 17
Consolidated Statements of Operations for the years ended June 30, 1998 and
December 31, 1996 and for the six months ended June 30, 1997
and 1996 18
Consolidated Statements of Stockholders' Equity for the years ended June 30,
1998 and December 31, 1996 and for the six months ended
June 30, 1997 19
Consolidated Statements of Cash Flows for the year ended June 30, 1998
and December 31, 1996 and for the six months ended June 30, 1997 20
Notes to Consolidated Financial Statements 21-40
</TABLE>
15
<PAGE> 16
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 cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of Integrated Security Systems, Inc. and its subsidiaries at June 30,
1998 and 1997, and the results of their operations and their cash flows for the
twelve months ended June 30, 1998 and December 31, 1996 and the six months ended
June 30, 1997, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company has suffered recurring losses from operations
and the Company's dependence on obtaining debt financing or additional equity
capital raises substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 13. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
August 26, 1998, except as to Notes 6 and 14 which are as of October 12, 1998
16
<PAGE> 17
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
--------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 311,117 $ 1,581,191
Accounts receivable, net of allowance for
doubtful accounts of $45,159, and $54,733, respectively 2,204,005 2,457,596
Inventories 926,442 867,898
Restricted cash 107,039 54,928
Other current assets 192,987 312,234
---------- -----------
Total current assets 3,741,590 5,273,847
Property and equipment, net 5,610,622 5,278,689
Intangible assets, net 2,055,117 2,283,970
Capitalized software development costs, net 318,453 493,350
Deferred income taxes 205,384 205,384
Other assets 19,642 18,295
----------- -----------
Total assets $11,950,808 $13,553,535
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,002,375 $ 690,712
Accrued liabilities 675,616 672,340
Deferred revenue 159,945 116,028
Current portion of long-term debt and other liabilities 1,564,617 495,737
----------- -----------
Total current liabilities 3,402,553 1,974,817
Long-term debt and other liabilities 7,490,753 7,630,956
Commitments and contingencies -- --
Stockholders' equity:
Convertible preferred stock, $.01 par value, 750,000 shares authorized;
10,250 and 17,250 shares, respectively, issued and outstanding
(liquidation preference of $205,000) 102 172
Common stock, $.01 par value, 30,000,000 shares authorized;
8,525,808 and 7,955,212 shares, respectively, issued; and
8,475,808 and 7,905,212 shares, respectively, outstanding 85,258 79,552
Additional paid in capital 10,822,802 10,523,546
Accumulated deficit (9,731,910) (6,536,758)
Treasury stock, 50,000 shares (118,750) (118,750)
----------- -----------
Total stockholders' equity 1,057,502 3,947,762
----------- -----------
Total liabilities and stockholders' equity $11,950,808 $13,553,535
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
17
<PAGE> 18
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended
For the Year Ended June 30,
------------------ ------------------------------
June 30, 1998 December 31, 1996 1997 1996
------------- ----------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Sales $ 11,092,307 $ 9,054,145 $ 6,470,842 $ 4,225,419
Cost of sales 6,765,462 5,184,321 3,772,714 2,617,433
------------ ------------ ------------ ------------
Gross margin 4,326,845 3,869,824 2,698,128 1,607,986
Operating expenses:
Selling, general and administrative 6,407,039 3,776,798 2,643,134 1,809,271
Research and product development 246,433 152,239 34,138 108,611
------------ ------------ ------------ ------------
6,653,472 3,929,037 2,677,272 1,917,882
------------ ------------ ------------ ------------
Income (loss) from operations (2,326,627) (59,213) 20,856 (309,896)
Other income (expense):
Interest income 35,321 7,748 15,900 5,805
Interest expense (863,768) (260,471) (389,540) (174,215)
Gain on sale of assets 20,677 -- 23,408 --
Other (54,113) 389 6,132 5,686
------------ ------------ ------------ ------------
Loss from continuing operations (3,188,510) (311,547) (323,244) (472,620)
(Provision) benefit for income taxes (6,642) 11,991 (7,013) 14,326
------------ ------------ ------------ ------------
Loss from continuing operations (3,195,152) (299,556) (330,257) (458,294)
Discontinued operations:
Loss from discontinued operations -- -- -- --
Gain on disposal of discontinued operations -- 22,789 -- 22,789
------------ ------------ ------------ ------------
Income from discontinued operations -- 22,789 -- 22,789
------------ ------------ ------------ ------------
Net loss $ (3,195,152) $ (276,767) $ (330,257) $ (435,505)
============ ============ ============ ============
Weighted average common shares outstanding 8,197,392 5,122,878 7,188,764 7,615,087
------------ ------------ ------------ ------------
Basic and diluted net loss per share:
Continuing operations $ (0.39) $ (0.05) $ (0.05) $ (0.06)
============ ============ ============ ============
Discontinued operations -- -- -- --
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE> 19
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible Additional
Preferred Stock Common Stock Paid In Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
Preferred stock
conversion (7,000) (70) 175,000 1,750 (1,680)
Warrant issuance 13,333
Warrant exercise 367,263 3,672 245,103
Common stock
issuance 28,333 284 42,500
Net loss (3,195,152)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
June 30, 1998 10,250 $ 102 8,525,808 $ 85,258 $ 10,822,802 $ (9,731,910) $ (118,750)
============ ============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE> 20
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year For the Six Months For the Year
Ended Ended Ended
June 30, June 30, December 31,
------------ --------------- -----------------
1998 1997 1996
------------ --------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,195,152) $ (330,257) $ (276,767)
Adjustments to reconcile net loss to net cash (used)
provided by operating activities:
Depreciation 599,370 277,476 189,042
Amortization 399,640 206,360 358,295
Bad debt expense 15,801 -- 18,976
Provision for warranty reserve 184,785 69,300 188,344
Provision for inventory reserve 22,681 -- 4,601
Deferred revenue 43,917 (93,268) 56,348
Gain on sale of assets (20,919) (23,408) --
Other non-cash expenses (income) 23,397 163,610 (173,281)
Net change in assets and liabilities from
discontinued operations -- (29,821) (184,100)
Changes in operating assets and liabilities, net
of effects from acquisition of Golston Company, Inc.:
Accounts receivable 237,790 153,567 (543,992)
Inventories (81,224) 214,586 81,006
Restricted cash (52,111) (46,696) 149,619
Other assets 117,900 (189,744) (109,045)
Accounts payable 311,663 (190,509) (344,141)
Accrued liabilities (139,509) (276,391) (605,766)
------------ ----------- -----------
Net cash used by operating activities (1,531,971) (95,195) (1,190,861)
------------ ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (1,004,459) (149,549) (96,983)
Sale of property and equipment 88,903 135,953 5,000
Intangible assets -- -- (71,951)
Acquisition of Golston Company, Inc. -- -- (4,851,406)
------------ ----------- -----------
Net cash used by investing activities (915,556) (13,596) (5,015,340)
------------ ----------- -----------
Cash flows from financing activities:
Issuance of convertible preferred stock, net -- -- 687,406
Issuance of common stock and warrant exercises, net 248,775 70,875 1,863,487
Payments of debt and other liabilities (494,519) (193,277) (1,459,051)
Proceeds from debt and other liabilities 1,423,197 816,291 6,012,545
Loan origination fees -- (101,798) (9,950)
------------ ----------- -----------
Net cash provided by financing activities 1,177,453 592,091 7,094,437
------------ ----------- -----------
Increase (decrease) in cash and cash equivalents (1,270,074) 483,300 888,236
Cash and cash equivalents at beginning of period 1,581,191 1,097,891 209,655
------------ ----------- -----------
Cash and cash equivalents at end of period $ 311,117 $ 1,581,191 $ 1,097,891
====+======= =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE> 21
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 integrates
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').
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the Company and its wholly owned
subsidiaries, B&B, IST, TCSI and GCI. 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. References to fiscal 1998 refer
to the twelve months ended June 30, 1998.
Cash and Cash Equivalents
Cash is comprised of highly liquid instruments with maturities of three months
or less. At June 30, 1998, restricted cash of $107,039 was related to a
factoring arrangement (see Note 6). At June 30, 1997, restricted cash of $54,928
was related to a letter of credit obtained to secure a surety bond.
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 straight-line and accelerated
methods.
Estimated useful lives range from 3 to 31 years. Depreciation expense includes
amortization of assets recorded as capital leases.
21
<PAGE> 22
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Property and equipment at June 30, 1998 includes $28,662 of manufacturing
equipment subject to capital leases.
Intangible Assets and Amortization
Goodwill, of $1,818,385 at June 30, 1998, 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 year ended
June 30, 1998 was $126,588. Amortization expense for goodwill for the six months
ended June 30, 1997 was $52,883 and for the year ended December 31, 1996 was
$26,797.
Loan origination fees, of $107,615 at June 30, 1998, 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 year ended June 30, 1998 was
$20,917. Amortization expense for the six months ended June 30, 1997 was $6,329
and for the year ended December 31, 1996 was $0.
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 year ended June 30,
1998 was $81,656 and $26,803, respectively. 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.
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 ('SFAS') 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. Valuation allowances are recorded when it is more
likely than not that a tax benefit will not be realized prior to the expiration
of the carryforward periods.
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 markets. No single customer accounted for 10% or
more of revenues during the year ended June 30, 1998, the six months ended June
30, 1997 or the year ended December 31, 1996.
22
<PAGE> 23
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Software Development Costs
The Company accounts for software development costs pursuant to SFAS 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 year ended June 30, 1998 was $127,381. 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, 1998 was $318,453.
Accumulated amortization at June 30, 1997 and December 31, 1996 was $191,072 and
$127,381, respectively.
During 1993, the Company entered into a license and distribution agreement for
certain proprietary technology. In connection with this agreement (see Note 9),
the Company paid $250,000 to an affiliate controlled by the Company's former
parent for the right to use the technology, which was being amortized over a
period of five years from the acquisition date. Amortization expense for the
year ended June 30, 1998 was $47,516. For the six months ended June 30, 1997 and
for the year ended December 31, 1996, $34,464 and $68,930 was recorded as
amortization expense, respectively. At June 30, 1998, this license and
distribution agreement was fully amortized. Accumulated amortization was
$202,484 at June 30, 1997 and $168,020 at December 31, 1996.
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, long-term debt and other liabilities approximate the fair
values of such financial instruments.
Net Loss Per Share
In February 1997, the Financial Accounting Standards Board ('FASB')issued SFAS
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. 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. At June 30, 1998, there were 8,609,538 potentially dilutive common
shares which were not included in weighted average shares outstanding because to
do so would have been antidilutive.
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.
23
<PAGE> 24
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Statements of Cash Flows
Supplemental cash flow information for the year ended June 30, 1998, the six
months ended June 30, 1997 and the year ended December 31, 1996:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C> <C>
Cash paid for interest expense $863,769 $344,540 $153,428
Cash paid for income taxes $ 42,473 $ 10,000 $ 51,866
</TABLE>
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.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable. The Company
follows the practice of filing statutory liens on construction projects where
collection problems are anticipated. The liens serve as collateral for trade
receivables. The Company does not believe that it is subject to any unusual
credit risk beyond the normal credit risk attendant in its business.
New Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities.
In June 1998, the Financial Accounting Standards Board ('FASB') issued SFAS No.
133, 'Accounting for Derivative Instruments and Hedging Activities.' SFAS No.
133 establishes a new model for accounting for derivatives and hedging
activities and supercedes and amends a number of existing standards. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999, but earlier
adoption is permitted. Upon initial application, all derivatives are required to
be recognized in the statement of financial position as either assets or
liabilities and measured at fair value. Recognition of changes in fair value
depends on whether the derivative is designated and qualifies as a hedge, and
the type of hedging relationship that exists. The Company does not currently,
nor does it expect to, hold any derivative instruments or participate in any
hedging activities.
24
<PAGE> 25
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Comprehensive Income.
In June 1997, the FASB issued SFAS No. 130, 'Reporting Comprehensive Income.'
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. The Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. The
Statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company adopted SFAS No. 130 in 1998 and
it had no impact on the Company's financial position or results of operations.
Segment Reporting.
In June 1997, the FASB issued SFAS No. 131, 'Disclosures About Segments of an
Enterprise and Related Information.' SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and in interim financial reports issued to stockholders. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. In general, such information must be reported for
externally in the same manner used for internal management purposes. SFAS No.
131 is effective for financial statements issued for periods beginning after
December 15, 1997,. In the initial year of adoption, comparative information for
earlier years must be restated. Since SFAS No. 131 only requires disclosure of
certain information, its adoption will not affect the Company's financial
position or results of operations.
Unaudited Interim Financial Information
The interim financial information for the six months ended June 30, 1996 has
been prepared from the unaudited financial records of the Company and in the
opinion of management reflects all adjustments, consisting only of normal
recurring items, necessary for a fair presentation of the financial position and
results of operations and of cash flows for the interim period.
Reclassification
Certain reclassifications of prior year amounts have been made to conform to the
fiscal 1998 presentation.
25
<PAGE> 26
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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
funded the sales, engineering and order fulfillment expenses of IST to the
extent of available funds. 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, 1998, the partnership had not received any return
on its investment. 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, a vertically integrated
manufacturer of specialty products for the financial and health care industries
with approximate revenues of $3.9 million. 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 and had an original conversion
price of $1.05 per share. On April 15, 1998, these debentures were repriced at
$.55 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, for the
year ended December 31, 1996 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.
26
<PAGE> 27
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,
---------------------------------
1998 1997
---------- -----------
<S> <C> <C>
Inventories:
Raw materials $ 356,468 $ 506,539
Work-in-process 404,517 313,940
Finished goods 165,457 47,419
---------- -----------
$ 926,442 $ 867,898
========== ===========
Property and equipment:
Land $ 944,689 $ 939,264
Building 1,242,250 1,177,168
Rental units 2,604,694 2,234,089
Leasehold improvements 48,768 48,769
Office furniture and equipment 905,303 767,416
Manufacturing equipment 3,298,850 3,048,288
Vehicles 39,919 39,919
Construction 153,425 153,425
---------- -----------
9,237,898 8,408,338
Less: accumulated depreciation (3,627,276) (3,129,649)
---------- -----------
$5,610,622 $ 5,278,689
========== ===========
</TABLE>
27
<PAGE> 28
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. LONG-TERM DEBT AND OTHER LIABILITIES
Long-term debt and other liabilities consists of the following:
<TABLE>
<CAPTION>
June 30,
-------
1998 1997
---- ----
<S> <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 was
convertible into ISSI's common stock based upon $1.05 per share. As of April 15,
1998, the outstanding balance of the note can be converted into ISSI's common
stock based upon $0.55 per share. At June 30, 1997, the Company was not in
compliance with the Debt Service Coverage financial standard under this
agreement. At June 30, 1998, the Company is not in compliance with the Current
Ratio, Minimum Tangible Net Worth, Debt to Equity and Debt Service Coverage
financial standards under this agreement. The Company has obtained waivers
related to these non-compliances. $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. 1,267,331 1,434,609
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 1998); secured by first mortgage on real estate and
equipment; personally guaranteed by an officer. 774,117 834,904
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, 1998 and 1997); secured by certain assets
of the Company; guaranteed by ISSI. At June 30, 1998, the Company is not in
compliance with the Net Worth financial standard under this agreement. The
Company has obtained a waiver related to this non-compliance. This note was paid
in full in October 1998. 589,767 744,767
Term note payable to an unrelated third party; interest at Citibank's Base Rate
plus 2% (10.5% at June 30, 1998 and 1997) due in monthly installments through
April 2002; no principal installments were due until May 1998; secured by
equipment. At June 30, 1998, the Company is not in compliance with the Net Worth
financial standard under this agreement. The Company has obtained a waiver
related to this non-compliance. This note was paid in full in October 1998. 569,835 30,422
Revolving credit facility in the amount of $500,000 with an unrelated third
party; no principal payment requirements and interest due monthly at Citibank's
Base Rate plus 1.75% based on the average daily borrowings during the prior
month (10.25% at June 30, 1998); a fee equal to 1/2% of the line of credit
facility is due annually; secured by eligible accounts receivable and limited by
85% of eligible accounts receivable. At June 30, 1998, the Company is not in
compliance with the Net Worth financial standard under this agreement. The
Company has obtained a waiver related to this non-compliance. This note was paid
in full in October 1998. 344,535 --
Non-compete agreements to prior owners of GCI; due in equal monthly installments
of $8,166 plus interest at 10% through January 2002.
342,953 440,940
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C> <C>
Business Manager factoring facility with a bank to factor accounts receivable
with recourse. This factoring facility, which expired on June 30, 1998, had an
adjustable factoring fee of 3.4%, and had a maximum borrowing amount of
$400,000. 298,170 --
Borrowings on line of credit with a bank; interest payable monthly is at Wall
Street prime plus 1% (9.5% at June 30, 1998); secured by accounts receivable,
inventories, furniture, fixtures, equipment. 240,000 --
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.
23,905 30,598
Term note payable to a bank; due in monthly principal and interest installments
of $497 through April 1999; interest at 9%; secured by equipment.
4,757 10,453
---------- ----------
9,055,370 8,126,693
Less current portion (1,564,617) (495,737)
---------- ----------
$7,490,753 $7,630,956
========== ==========
</TABLE>
29
<PAGE> 30
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Payments required under long-term debt and other liabilities outstanding at June
30, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $1,564,617
2000 1,002,786
2001 1,259,705
2002 1,179,990
2003 917,709
Thereafter 3,130,563
----------
$9,055,370
==========
</TABLE>
7. INCOME TAXES
The income tax provision (benefit) is comprised of the following:
<TABLE>
<CAPTION>
For the For the For the
Year Ended Six Months Ended Year Ended
June 30, June 30, December 31,
---------- ---------------- -----------
1998 1997 1996
---------- ---------------- ------------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
State 6,642 7,013 (11,991)
---------- ------ --------
$ 6,642 $7,013 $(11,991)
---------- ------ --------
Deferred:
Federal $ -- $ -- $ --
State -- -- --
---------- ------ --------
-- $ -- $ --
========== ====== ========
Tax expense (benefit) $ 6,642 $7,013 $(11,991)
========== ====== ========
</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:
30
<PAGE> 31
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1998 1997 1996
-------- -------- -----------
<S> <C> <C> <C>
Federal statutory benefit rate (34.0%) (34.0%) (34.0%)
State income tax provision,
net of federal tax benefit 0.2% 2.0% (4.0%)
Net operating loss not benefited 33.0% 32.0% 24.0%
Non-deductible amortization and other 1.0% 2.0% 10.0%
------ ----- -----
0.2% 2.0% (4.0%)
====== ===== =====
</TABLE>
Deferred tax assets are subject to a valuation allowance if their realization is
less likely than not. Deferred tax assets (liabilities) are comprised of the
following at:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
------------ ----------
<S> <C> <C>
Amortization -- $ (188,372)
Depreciation -- (1,994)
------------ ----------
Gross deferred tax liability -- (190,366)
------------ ----------
Amortization $ 75,525 --
Non-compete covenant 33,315 14,711
Depreciation 24,164 --
Warranty reserve 27,925 37,830
Bad debt reserve 15,354 40,131
Net operating loss carryforward 3,071,981 2,278,571
------------ ----------
Gross deferred tax asset 3,248,264 2,371,243
------------ ----------
Net deferred tax asset 3,248,264 2,180,877
Valuation allowance (3,042,880) (1,975,493)
------------ ----------
Net deferred tax asset $ 205,384 $ 205,384
============ ==========
</TABLE>
31
<PAGE> 32
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Should a cumulative change in ownership of more than 50% occur within a
three-year period, there could be an annual limitation on the use of the net
operating loss carryforward. The Company has unused net operating loss
carryforwards of $9 million at June 30, 1998. These carryforwards begin to
expire in the year 2007. The Company increased the valuation allowance each year
because presently it is more likely than not that a tax benefit will not be
realized prior to expiration of the carryforward periods, 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 has two capital leases. Future minimum
payments for fiscal years subsequent to June 30, 1998 under capital leases and
non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
1999 $ 12,165 $ 163,653
2000 8,204 158,934
2001 8,293 87,044
2002 0 15,002
2003 0 2,887
---------- -----------
Total minimum payment $ 28,662 $ 427,520
========== ===========
</TABLE>
Rent expense for operating leases was $163,972 for the year ended June 30, 1998.
For the fiscal years ended June 30, 1997 and December 31, 1996, rent expense for
operating leases was $46,360 and $103,253, respectively.
Contingencies
The Company is subject to certain legal actions and claims arising in the
ordinary course of business. Management recognizes the uncertainties of
litigation; however, based upon the nature 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.
32
<PAGE> 33
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 was
amortized over five years from the acquisition date. The balance was fully
amortized at June 30, 1998. At June 30, 1997, the unamortized balance was
$47,516.
10. 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 years ended June 30, 1998
and December 31, 1996, or during the six months ended June 30, 1997 and 1996.
11. STOCK OPTIONS AND WARRANTS
Stock Options
SFAS No. 123 'Accounting for Stock-Based Compensation' ('SFAS 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 as of on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the periods ended June 30, 1998 and 1997: no
dividend yield, expected volatility of approximately 87% and 84%, respectively,
risk-free interest rates of approximately 5.9% and 6.5% respectively, and
expected lives of approximately five 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):
33
<PAGE> 34
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the Six Months For the
Year Ended Ended Year Ended
June 30, 1998 June 30, 1997 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
As Pro As Pro As Pro
reported forma reported forma reported forma
-------- ------- -------- ------ -------- -----
Net Loss $ (3,195) $(3,259) $ (330) $ (368) $ (277) $(308)
Loss per
Common Share $ (.39) $ (.40) $ (.05) $ (.05) $ (.05) $(.05)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts as SFAS 123 does not apply to awards prior to 1995 and because
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.
34
<PAGE> 35
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
For the Year Ended Ended For the Year Ended
June 30, 1998 June 30, 1997 December 31, 1996
--------------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at beginning
of period 928 $ 1.98 874 $ 2.01 738 $ 2.21
Granted 467 1.32 75 1.63 188 1.22
Forfeited (59) 1.28 (21) 2.02 (52) 1.95
------ -------- ------ -------- ------ --------
Outstanding at end
of period 1,336 $ 1.78 928 $ 1.98 874 $ 2.01
====== ======== ====== ======== ====== ========
Exercisable at end of period 884 $ 2.00 721 $ 2.11 663 $ 2.18
Weighted-average fair value
of options granted during
the period $ 1.00 $ 1.14 $ 1.06
</TABLE>
The following table summarizes information about the fixed-price stock options
outstanding at June 30, 1998 (share amounts in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted
Range of Shares Average Weighted Shares Weighted
Exercise Outstanding Remaining Average Exercisable Average
Prices at 6/30/98 Contractual Life Exercise Price at 6/30/98 Exercise Price
- -------- ----------- ---------------- -------------- ----------- ---------------
$0.687-1.50 514 8.6 Years $1.19 189 $1.20
$1.563-2.50 811 6.7 Years 2.14 687 2.21
$2.719-3.53 11 8.1 Years 2.74 8 2.73
------- ------- ----- -------
1,336 $1.78 884 $2.00
</TABLE>
35
<PAGE> 36
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Warrants
On April 20, 1993, in connection with the Company's initial public offering, the
Company issued 1,450,000 Redeemable Common Stock Purchase Warrants. Each warrant
entitles the holder to purchase one share of common stock at a price of $5.40
per share during the first 30 months, and $6.75 per share during the second 30
months. The warrants are subject to redemption by the Company at $0.25 per
warrant upon 30 days prior written notice with the consent of the underwriter,
Thomas James Associates, Inc. ('Underwriter'). 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 were then 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 were entitled to purchase 2.1 shares of
common stock per warrant held. On April 15, 1998, these warrants were repriced
again to $2.55 under the same obligation and the holders are entitled to
purchase 2.65 shares of common stock per warrant held. These warrants expired
April 19, 1998, but were exchanged for warrants expiring April 19, 1999 (the
'Exchange Warrants'). The Company may delay the issuance of shares of Common
Stock issuable upon exercise of the Exchange Warrants because the registration
of the Common Stock has not been amended and updated by the Company. If any
shares of Common Stock were issued, those shares would not be eligible for
public trading until such time as the Company amends and updates the
registration.
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 consisted of a share of common stock and a warrant to
purchase an additional share of common stock. Management believed that the
exercise price of the warrant at the date of grant approximated market value of
the underlying common stock. This warrant was exercisable over a period of four
years commencing April 20, 1994. By the time these warrants expired on April 20,
1998, these warrants had been reprised to $3.17 for the purchase of 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. No value was assigned to these warrants as management
believed such value to be insignificant at the time of issuance. As of June 30,
1997, 33,000 warrants issued remained outstanding. These warrants expired on
April 19, 1998.
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 and 1998, 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.
36
<PAGE> 37
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 assigned to these warrants of $40,000
was expensed in 1996 and $45,000 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.
During fiscal year ended June 30, 1998, the Company issued warrants in
consideration for obtaining a debt covenant waiver for a period of one year.
These warrants permit the holder to purchase 25,000 shares of common stock at an
exercise price of $1.75 and expire in 2002. During the same period, the Company
issued warrants for legal fees to purchase 22,222 shares of common stock at an
exercise price of $1.65. These warrants expire in 2001.
37
<PAGE> 38
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
For the Year Ended Ended For the Year Ended
June 30, 1998 June 30, 1997 December 31, 1996
------------------ ------------------ ------------------
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 5,107 $ 3.07 4,253 $ 3.03 2,218 $ 3.38
Granted 47 1.70 66 1.63 1,590 1.05
Exercised (517) .96 (82) .60 (599) .87
Forfeited (642) 1.00 0 0.00 0 0.00
Repriced 798 2.55 870 3.14 1,044 4.04
------- ------ ------- ------ ------- ------
Outstanding at end of period 4,793 $ 2.30 5,107 $ 3.07 4,253 $ 3.03
======= ====== ======= ====== ======= ======
Exercisable at end of period 4,660 $ 2.30 5,008 $ 3.08 4,199 $ 3.03
------ ------ ------
Weighted-average fair value of warrants
granted during the period $ 1.05 $ .93 $ 1.57
</TABLE>
The following table summarizes information about the warrants outstanding at
June 30, 1998 (share amounts in thousands):
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
-------------------------------------------------- ------------------------------
Weighted
Range of Shares Average Weighted Shares Weighted
Exercise Outstanding Remaining Average Exercisable Average
Prices at 6/30/98 Contractual Life Exercise Price at 6/30/98 Exercise Price
-------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$.01-1.00 565 1.8 Years $ .94 565 $ .94
$1.06-2.00 269 2.6 Years 1.53 235 1.51
$2.40-2.55 3,959 1.6 Years 2.55 3,860 2.55
----- ----- -----
4,793 $2.30 4,660 $2.30
</TABLE>
38
<PAGE> 39
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. 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
10,250 shares of its Series A $20 Convertible Preferred Stock (the 'Series A
Preferred'). Holders of the Series A Preferred are not entitled to receive any
dividends, and have no voting rights, unless otherwise required pursuant to
Delaware law. Each share of the Series A Preferred may, at the option of the
Company, be converted into 20 shares of Common Stock at any time after (i) the
closing bid price of the Common Stock is at least $2.00 for at least 20 trading
days during any 30 trading day period, and (ii) the shares of Common Stock to be
received on conversion have been registered or otherwise qualified for sale
under applicable securities laws. In addition, the holders of the Series A
Preferred have the right to convert each share into 20 shares of Common Stock at
any time. The number of shares of Common Stock into which the Series A Preferred
is convertible will be proportionately adjusted in the event of a stock
dividend, stock split, or reverse stock split. Upon any liquidation,
dissolution, or winding up of the Company, the holders of the Series A Preferred
are entitled to receive $20 per share before the holders of Common Stock are
entitled to receive any distribution and the Series A Preferred ranks pari passu
with Series B and Series C Preferred except with respect to the security
interest granted to Series B Preferred (see Series B description below).
SERIES B $20 CONVERTIBLE PREFERRED STOCK. The Company has issued 34,166 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 has issued 12,500 shares
of its Series C $20 Convertible Preferred Stock (the 'Series C Preferred').
Holders of the Series C Preferred have no voting rights, unless otherwise
required by Delaware law. Each share of the Series C Preferred may, at the
option of the Company or the holder, be converted into 30 shares of Common
Stock. The Company has no right to redeem the Series C Preferred. The Series C
Preferred is also subject to the conversion adjustments, and is entitled to
receive a liquidation preference, identical to the Series A Preferred.
As of June 30, 1998, all Series C have been converted to Common Stock.
39
<PAGE> 40
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. GOING CONCERN MATTERS
The Company has suffered recurring losses from operations and its dependence on
obtaining financing or additional equity capital raises substantial doubt about
its ability to continue as a going concern. The financial statements have been
prepared assuming that the Company will continue as a going concern and do not
include any adjustment that might result from the outcome of this uncertainty.
Historically the Company's manufacturing subsidiaries have generated positive
returns. During fiscal 1998, one of the manufacturing facilities experienced a
business downturn, resulting in a loss for fiscal 1998 that is not expected to
be repeated in future periods. The Company anticipates that it will continue to
experience losses from the launching of the Intelli-Site product, but these
losses should begin to lessen as revenues are recognized from sales.
14. SUBSEQUENT EVENTS
On October 1, 1998, the Company sold a business unit of GCI (MPA Systems) to a
private investment group for $2.8 million comprised of cash and $680,000 in
notes. The sale of the MPA Systems business unit of GCI involves the divestiture
of a fleet of 52 modular buildings leased primarily to banks and financial
institutions for short-term facility requirements and disaster recovery
performance contracts to provide temporary banking facilities in the event of a
natural disaster. Approximately $1.5 million of the cash proceeds will be used
to retire a secured credit facility.
40
<PAGE> 41
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements concerning any matter of accounting principle
or financial statements disclosure between the Company and its independent
accountants.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by this item is incorporated by reference to disclosure
in the Company's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the end of the
fiscal year covered by this report ('Proxy Statement').
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the Proxy
Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the Proxy
Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the Proxy
Statement.
PART IV
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits.
*3.1 Amended and Restated Certificate of Incorporation of the Company.
3.11 Amendment to Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.11 to the Company's Form 10-KSB for the
year ended December 31, 1994).
*3.2 Amended and Restated Bylaws of the Company.
*4.1 Specimen certificate for common stock of the Company.
*4.2 Specimen certificate for Redeemable Common Stock Purchase Warrant.
*4.3 Warrant Agreement among the Company, American Stock Transfer & Trust
Company, and Thomas James Associates, Inc.
*4.4 Underwriter's Warrant.
**4.5 Certificate of Designation for Series A $20 Convertible Preferred
Stock.
41
<PAGE> 42
**4.6 Certificate of Designation for Series B $20 Convertible Preferred
Stock.
**4.7 Certificate of Designation for Series C $20 Convertible Preferred
Stock.
**10.1 Integrated Security Systems, Inc. 1993 Stock Option Plan dated
September 7, 1993, as amended on December 30, 1994.
*10.2 Form of Integrated Security Systems, Inc. 1993 Incentive Stock Option
Agreement.
*10.3 Form of Integrated Security Systems, Inc. 1993 Non-Qualified Stock
Option Agreement.
*10.13 Form of Indemnification Agreement by and between the Company and the
Company's officers and directors.
*10.14 Commercial Lease dated August 6, 1984, by and among Philip R. Thomas,
Wayne L. Thomas and Thomas Group Service Company, predecessor to B&B, for land,
building and equipment.
*10.20 Lease Agreement dated March 25, 1992 and April 6, 1992, by and among
the Company, Trammell Crow Company No. 90 and Petula Associates Limited for
property located in Dallas, Texas.
*10.23 Lease Agreement commencing June 1, 1992 by and between Kelso Joint
Venture and AAC, for property located in Baltimore, Maryland.
*10.37 License and Distribution Agreement dated March 16, 1993, by and among
COMTRAC Corporation, Thomas Group Holding Company and the Company relating to
analog technology for transaction processing systems.
*10.38 License and Distribution Agreement dated March 16, 1993, by and
between DesignTech Incorporated and the Company relating to interactive digital
video interface system technology.
*10.49 Amendment to Integrated Security System, Inc. 1993 Stock Option Plan.
*10.51 Note relating to the $900,000 Bridge Financing (incorporated by
reference from similarly numbered exhibits filed with the Company's Form 10-KSB
for the year ended December 31, 1995).
*10.52 Standard Form of Common Stock Purchase Warrant (incorporated by
reference from the similarly numbered exhibit filed with the Company's Form
10-KSB for the year ended December 31, 1995).
10.53 Subscription Agreement dated December 28, 1995 (incorporated by
reference from the similarly numbered exhibit filed with the Company's Form
10-KSB for the year ended December 31, 1995).
10.54 Factoring Agreement from Sunburst Bank for B&B receivables
(incorporated by reference from the similarly numbered exhibit filed with the
Company's Form 10-KSB for the year ended December 31, 1995).
10.55 Corporate Consulting Agreement, dated March 3, 1986, by and between
the Company and Bathgate McColley Capital Group LLC for consulting services
(incorporated by reference from the similarly numbered exhibit filed with the
Company's Form 10-QSB for the quarter ended March 31, 1996).
42
<PAGE> 43
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.
**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.
***10.71 Asset Purchase Agreement, dated October 1, 1998, between the
Company and MPA Systems, Inc.
***11.1 Computation of earnings per share.
***21.1 Subsidiaries of the Company.
43
<PAGE> 44
***23.1 Consent of PricewaterhouseCoopers LLP.
***27.1 Financial Data Schedule
- -----------
* Filed as the similarly numbered exhibit to the Company's Registration
Statement on Form SB-2 (No. 33-59870-FW) and incorporated herein by reference.
** Filed as the similarly numbered exhibit to the Company's Registration
Statement on Form SB-2 (No. 333-5023) and incorporated herein by reference.
*** Filed herewith.
(b) Reports filed on Form 8-K.
None.
44
<PAGE> 45
SIGNATURES
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
Integrated Security Systems, Inc.
---------------------------------
(Registrant)
Date: October 13, 1998 /s/ GERALD K. BECKMANN
---------------- ---------------------------------
Gerald K. Beckmann
Director, Chairman of the Board, President
and Chief Executive Officer
</TABLE>
45
<PAGE> 46
SIGNATURES
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<S> <C>
Integrated Security Systems, Inc.
---------------------------------
(Registrant)
Date: October 13, 1998 /s/ GERALD K. BECKMANN
---------------- ---------------------------------
Gerald K. Beckmann
Director, Chairman of the Board, President
and Chief Executive Officer
Date: October 13, 1998 /s/ HOLLY J. BURLAGE
---------------- ---------------------------------
Holly J. Burlage
Vice President, Principal Financial
Officer, Principal Accounting Officer,
Secretary and Treasurer
Date: October 13, 1998 /s/ ROBERT M. GALECKE
---------------- ---------------------------------
Robert M. Galecke
Director
Date: October 13, 1998 /s/ JAMES E. JACK
---------------- ---------------------------------
James E. Jack
Director
Date: October 13, 1998 /s/ FRANK R. MARLOW
---------------- ---------------------------------
Frank R. Marlow
Director
</TABLE>
46
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
*3.1 Amended and Restated Certificate of Incorporation of the Company.
3.11 Amendment to Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.11 to the Company's Form 10-KSB
for the year ended December 31, 1994).
*3.2 Amended and Restated Bylaws of the Company.
*4.1 Specimen certificate for common stock of the Company.
*4.2 Specimen certificate for Redeemable Common Stock Purchase Warrant.
*4.3 Warrant Agreement among the Company, American Stock Transfer & Trust
Company, and Thomas James Associates, Inc.
*4.4 Underwriter's Warrant.
**4.5 Certificate of Designation for Series A $20 Convertible Preferred
Stock.
</TABLE>
<PAGE> 48
<TABLE>
<S> <C>
**4.6 Certificate of Designation for Series B $20 Convertible Preferred
Stock.
**4.7 Certificate of Designation for Series C $20 Convertible Preferred
Stock.
**10.1 Integrated Security Systems, Inc. 1993 Stock Option Plan dated
September 7, 1993, as amended on December 30, 1994.
*10.2 Form of Integrated Security Systems, Inc. 1993 Incentive Stock
Option Agreement.
*10.3 Form of Integrated Security Systems, Inc. 1993 Non-Qualified
Stock Option Agreement.
*10.13 Form of Indemnification Agreement by and between the Company and
the Company's officers and directors.
*10.14 Commercial Lease dated August 6, 1984, by and among Philip R.
Thomas, Wayne L. Thomas and Thomas Group Service Company,
predecessor to B&B, for land, building and equipment.
*10.20 Lease Agreement dated March 25, 1992 and April 6, 1992, by and
among the Company, Trammell Crow Company No. 90 and Petula
Associates Limited for property located in Dallas, Texas.
*10.23 Lease Agreement commencing June 1, 1992 by and between Kelso
Joint Venture and AAC, for property located in Baltimore,
Maryland.
*10.37 License and Distribution Agreement dated March 16, 1993, by and
among COMTRAC Corporation, Thomas Group Holding Company and the
Company relating to analog technology for transaction processing
systems.
*10.38 License and Distribution Agreement dated March 16, 1993, by and
between DesignTech Incorporated and the Company relating to
interactive digital video interface system technology.
*10.49 Amendment to Integrated Security System, Inc. 1993 Stock Option
Plan.
*10.51 Note relating to the $900,000 Bridge Financing (incorporated by
reference from similarly numbered exhibits filed with the
Company's Form 10-KSB for the year ended December 31, 1995).
*10.52 Standard Form of Common Stock Purchase Warrant (incorporated by
reference from the similarly numbered exhibit filed with the
Company's Form 10-KSB for the year ended December 31, 1995).
10.53 Subscription Agreement dated December 28, 1995 (incorporated by
reference from the similarly numbered exhibit filed with the
Company's Form 10-KSB for the year ended December 31, 1995).
10.54 Factoring Agreement from Sunburst Bank for B&B receivables
(incorporated by reference from the similarly numbered exhibit
filed with the Company's Form 10-KSB for the year ended December
31, 1995).
10.55 Corporate Consulting Agreement, dated March 3, 1986, by and
between the Company and Bathgate McColley Capital Group LLC for
consulting services (incorporated by reference from the similarly
numbered exhibit filed with the Company's Form 10-QSB for the
quarter ended March 31, 1996).
</TABLE>
<PAGE> 49
<TABLE>
<S> <C>
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.
**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.
***10.71 Asset Purchase Agreement, dated October 1, 1998, between the
Company and MPA Systems, Inc.
***11.1 Computation of earnings per share.
***21.1 Subsidiaries of the Company.
</TABLE>
<PAGE> 50
<TABLE>
<S> <C>
***23.1 Consent of PricewaterhouseCoopers LLP.
***27.1 Financial Data Schedule
</TABLE>
- -----------
* Filed as the similarly numbered exhibit to the Company's Registration
Statement on Form SB-2 (No. 33-59870-FW) and incorporated herein by
reference.
** Filed as the similarly numbered exhibit to the Company's Registration
Statement on Form SB-2 (No. 333-5023) and incorporated herein by
reference.
*** Filed herewith.
(b) Reports filed on Form 8-K.
None.
<PAGE> 1
Exhibit 10.71
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (the 'Agreement') is made as of September 30,
1998, by and among MPA SYSTEMS, INC., a Texas corporation ('Purchaser'), GOLSTON
COMPANY D/B/A MPA SYSTEMS, a Texas corporation (the 'Company'), and INTEGRATED
SECURITY SYSTEMS, INC., a Delaware corporation, the sole shareholder of the
Company (the 'Parent').
WHEREAS, the Company desires to sell to Purchaser, and Purchaser desires to
purchase from the Company, certain of the assets of the Company which it uses in
the business known as 'MPA Systems' (hereinafter referred to as the 'Business')
on the terms and conditions herein set forth;
NOW, THEREFORE, Purchaser, the Company and the Parent covenant and agree as
follows:
1. TRANSFER OF ASSETS
(a) On the terms and subject to the conditions stated in this
Agreement, the Company agrees to sell, convey, transfer, assign and deliver to
Purchaser at the Closing (as hereinafter defined), and Purchaser agrees to
purchase, good and marketable title to all of the assets used directly and
predominantly in the Company's Business, whether tangible or intangible, real,
personal or mixed, including, without limitation the following:
(i) the modular units more fully described in SCHEDULE 1(a)(i)
attached hereto;
(ii) the furniture and fixtures more fully described in
SCHEDULE 1(a)(ii) attached hereto;
(iii) the equipment as more fully described in SCHEDULE
1(a)(iii) attached hereto;
(iv) the contractual rights in all leases of modular units in
effect on the date of Closing (the 'Leases') as more fully described in SCHEDULE
1(a)(iv) attached hereto (but only to the extent such rights are assignable by
the Company);
(v) all other assets used predominantly in the Business
including any trademarks, patents, patent applications, trade secrets,
inventions, copyrights, service marks, trade names ('MPA Systems' and 'MPA' and
all others associated with the Business), associated goodwill, supplies,
customer and supplier lists, sales data, telephone numbers, contracts, service
contracts, warranties, computer hardware and software, promotional materials,
market studies, licenses and permits, copies of accounts and records, and all
goodwill, proprietary rights and interests and all intangible property of the
Business wherever located, as the same shall exist on the Closing Date (as
hereinafter defined);
(such assets are collectively hereinafter referred to as
the 'Transferred Assets'); provided, however, that the Transferred Assets shall
not include any accounts or notes receivable or any cash or cash equivalents on
hand on the Closing Date (as hereinafter defined), or deposits on the Leases,
all assets of the Company used predominantly in the Company's plastic inspection
business, the existing non-compete agreements between the Company and S. Webb
Golston and affiliates, and insurance policies (all such assets are collectively
referred to as 'Excluded Assets').
<PAGE> 2
(b) Purchaser shall not assume or be responsible for any liabilities,
liens, claims, obligations or encumbrances, contingent or otherwise, except for
those specifically set forth on SCHEDULE 1(b) hereto (the 'Assumed
Liabilities'), and the Transferred Assets shall be sold and conveyed to
Purchaser free and clear of all liabilities, liens, claims, obligations and
encumbrances except for the liens created by this transaction. Without limiting
the generality of the foregoing, in no event shall Purchaser assume or be
responsible for:
(i) any federal, state or local income, sales, property,
franchise, use or other tax relating to the Transferred Assets and arising prior
to the Closing (as hereinafter defined) or resulting from the ownership or
operation of the Transferred Assets by the Company prior to the Closing Date (as
hereafter defined);
(ii) any liabilities, obligations or costs (including, without
limitation, attorneys' fees) resulting from any claim or lawsuit or other
proceeding relating to the Transferred Assets and (i) pending at the Closing
Date (as hereinafter defined) or (ii) based upon events, transactions or
circumstances occurring or existing prior to the Closing Date (as hereinafter
defined); or
(iii) except as contemplated by SECTIONS 7 or 11 of this
Agreement, any attorneys', accountants', brokers' or finders' fees or other
expenses of the Company or the Parent incurred in connection with this Agreement
or any transaction contemplated herein.
(c) In furtherance of the foregoing, the Company and the Parent
expressly release, and agree to cause any affiliate or related party or any
corporation, partnership or other entity controlled by them or any of their
affiliates or related parties to release any claims relating to any of the
foregoing liabilities, liens, claims, obligations or encumbrances that they or
such persons might have against Purchaser or the Transferred Assets, other than
pursuant to this Agreement or the transactions contemplated hereby.
(d) The Company and the Parent covenant and agree that, at the time of
the Closing, the Company will be current in all payments and other obligations
required to be made or performed by the Company under the contracts, purchase
orders and other agreements which are included in the Transferred Assets or the
Assumed Liabilities or which are otherwise transferred to and/or assumed by
Purchaser hereunder or pursuant hereto.
(e) Purchaser and the Company have agreed upon the allocation of the
consideration paid by Purchaser to the Company (including the assumption of the
Liabilities) among the Transferred Assets and have set forth the allocation of
such consideration and the tax basis of the Transferred Assets for federal
income tax purposes in writing, and such allocation is presented on SCHEDULES
1(a)(i)-(iv). Such allocation was made in accordance with the applicable rules
under SECTION 1060 of the Internal Revenue Code of 1986, as amended ('Code') and
is binding upon Purchaser and the Company for all purposes (including financial
accounting purposes, financial and regulatory reporting purposes and tax
purposes). Purchaser and the Company also each agree to file appropriate
documents with the IRS under Treasury Regulation SECTION 1.1060-1T(h)(3)
reflecting the foregoing.
2. PURCHASE PRICE
(a) The Total Purchase Price (herein so called) payable to the Company
for the Transferred Assets shall be $2,800,000.
(b) The Purchase Price shall be payable on the closing date as follows:
<PAGE> 3
(i) the delivery of an unsecured promissory note made by
Purchaser and payable to Company in the amount of $300,000 bearing interest on
the unpaid balance at the rate of 10% per annum (the '$300,000 Promissory Note')
with payment terms and form substantially similar to the form attached hereto as
EXHIBIT 2(b)(i).
(ii) the Purchaser's assumption of the Assumed Liabilities on
SCHEDULE 1(b).
(iii) the delivery of an unsecured promissory note made by
Purchaser and payable to Company in the amount of no more than $400,000, bearing
interest on the unpaid balance at the rate of 12.5% per annum (the '$400,000
Promissory Note') with payment terms and form substantially similar to the form
attached hereto as EXHIBIT 2(b)(ii).
(iv) cash, delivered by wire transfer, in an amount equal to
the Total Purchase Price less the amount of the Assumed Liabilities, less the
amount of the $300,000 Promissory Note and less 95% of the $400,000 Promissory
Note.
3. THE CLOSING
(a) The Closing of the transactions contemplated by this Agreement
shall be deemed effective as of 12:01 a.m., October 1, 1998. The closing shall
occur at the offices of Haynes and Boone, LLP, Attorneys at Law, Dallas, TX (the
'Closing') The term 'Closing Date' refers to September 30, 1998.
(b) At Closing, the Company and the Parent will deliver to Purchaser:
(i) the Bill of Sale, Assignment of Leases and Assignment of
Contracts (substantially in the forms attached hereto as EXHIBITS 3(b)(i)-l,
3(b)(i)-2 and 3(b)(i)-3, respectively) and such other good and sufficient
instruments of conveyance, assignment and transfer, in form and substance
satisfactory to Purchaser's counsel, as shall be effective to vest in Purchaser
good and marketable title to the Transferred Assets and take such actions as
shall be effective to put Purchaser in possession of such Transferred Assets;
(ii) evidence of any approvals of applications to public
authorities, and any approvals of any private persons the granting of which is
necessary for the consummation of the transactions contemplated hereby, or for
the preventing of any termination of any material right, privilege, license or
agreement of, or any material loss or disadvantage to, Purchaser upon
consummation of the transactions contemplated hereby;
(iii) evidence of the release of all liens and encumbrances
with respect to the Transferred Assets;
(iv) the records of the Company concerning the Business
(excluding Company financial statements and reports and corporate minute books
and stock records);
(v) a certificate of good standing from the Texas Comptroller
of Public Accounts;
(vi) certified resolutions of the Board of Directors and
Shareholders of the Company authorizing the transactions contemplated by this
Agreement;
(vii) such other documents, undertakings, agreements and
instruments, in form and substance acceptable to Purchaser's counsel, as may
otherwise be required by Purchaser to consummate the transactions contemplated
hereby.
<PAGE> 4
(c) At Closing, Purchaser will deliver, or cause to be delivered, to
the Company:
(i) the cash portion of the Total Purchase Price in
wire-transferred funds;
(ii) the $300,000 Promissory Note and the $400,000 Promissory
Note;
(iii) the Stock Option Agreement, an option agreement granted
by Purchaser to the Company for the purchase of 4,633 shares of the Company's
Common Stock at an exercise price equal to $7.78 per share, expiring on December
31, 2003;
(iv) certified resolutions of Purchaser's Board of Directors
authorizing the transactions contemplated by this Agreement;
(v) a release by James W. Casey; and
(vi) such other documents, undertakings, agreements and
instruments, in form and substance acceptable to the Company's counsel as may
otherwise be required by the Company and the Parent to consummate the
transactions contemplated hereby.
(d) At Closing, Purchaser and the Company shall execute a lease
agreement between them in a form substantially similar to Exhibit 3(d).
4. REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to the Company and the Parent as follows:
(a) Purchaser is a corporation duly organized, validly existing and in
good standing under the laws of the State of Texas.
(b) Purchaser has all requisite corporate power and authority to enter
into this Agreement and all other agreements and documents required to be
executed and delivered by Purchaser. The execution, delivery and performance of
this Agreement and all other agreements and documents required to be delivered
by Purchaser pursuant to this Agreement have been duly authorized by all
necessary action (corporate or otherwise) by Purchaser, and this Agreement and
the other agreements and documents required to be delivered by the Company
pursuant to this Agreement, have been duly executed and delivered and are legal,
valid and binding agreements of Purchaser, enforceable in accordance with their
respective terms.
(c) Neither the execution or delivery of this Agreement, nor the
consummation of any of the transactions contemplated hereby or thereby, will
result in the breach or violation of any term or provision, or constitute a
default under, any charter provision, bylaw, agreement, mortgage, deed of trust,
note, bond, license, lease, indenture, instrument, order, writ, injunction,
decree, statute, rule or regulation to which Purchaser is a party or which is
otherwise applicable to Purchaser.
(d) No court decision restrains or prohibits the consummation of the
transactions contemplated hereby, and no litigation is pending seeking to
restrain or prohibit or seeking damages with respect to the consummation of the
transactions contemplated hereby.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PARENT
The Company and the Parent, jointly and severally, represent and warrant to
Purchaser as follows:
<PAGE> 5
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Texas. The Parent is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company and the Parent each has full corporate
power to own its properties and conduct its business. The Company is a
wholly-owned subsidiary of the Parent.
(b) The Company and the Parent each have all the requisite corporate
power and authority, and the legal right, to enter into this Agreement and all
other agreements and documents required to be executed and delivered by them.
The execution, delivery and performance of this Agreement, and all other
agreements and documents required to be delivered by the Company or the Parent
pursuant to this Agreement, have been duly authorized by all necessary action
(corporate or otherwise) by the Company and the Parent, and this Agreement and
the other agreements and documents required to be delivered by the Company and
the Parent pursuant to this Agreement, have been duly executed and delivered and
are legal, valid and binding agreements of the Company and the Parent,
enforceable in accordance with their respective terms.
(c) Upon execution and delivery, the Bill of Sale, Assignment of Leases
and the Assignment of Contracts (upon receipt of all applicable lessee and other
third party consents) will be sufficient to and will convey to Purchaser good
and marketable title to all of the Transferred Assets free and clear of all
liens, claims and encumbrances of any kind (including liens, claims and
encumbrances relating to income, franchise, use, sales, employee income tax
withholding, social security, unemployment and sales taxes), except as set forth
on SCHEDULE 5(c).
(d) Upon receipt of all applicable lessee and other third party
consents, neither the execution or delivery of this Agreement, the Bill of Sale
or the Assignment of Leases or other instruments or conveyance, assignment and
transfer, nor the consummation of any of the transactions contemplated hereby or
thereby, will result in the breach or violation of any term or provision of, or
constitute a default under, or result in any loss to, or the creation of a lien
on, any of the Transferred Assets, under any charter provision, bylaw,
agreement, mortgage, deed of trust, note, bond, license, statute, law, rule or
regulation, to which the Company or the Parent is a party or which is otherwise
applicable to either of them or any of the Transferred Assets.
(e) All financial statements concerning the Business previously
provided to Purchaser have been prepared from the books and records of the
Company, which accurately and fairly reflect the transactions and dispositions
of the assets and the incurrence of liabilities of the Company, are complete and
correct and reasonably present the financial position of the Business at the
respective dates indicated.
(f) Since the date of the last financial statements provided to
Purchaser, and except as set forth on SCHEDULE 5(f), the Company has operated
its businesses in the ordinary course, and there has not been:
(i) any material adverse change in the condition (financial or
otherwise), results of operations, business, prospects, assets or liabilities
(contingent or otherwise) of the Company;
(ii) any material theft, damage, or material operating or
other loss (whether or not covered by insurance) suffered by the Company;
(iii) any material change in the promotion, marketing,
standard terms in the Leases, sales or other policies relating to or affecting
the business of the Company or any changes in management, accounting or
operations;
<PAGE> 6
(iv) any sale of material assets used in the business which
have not been replaced with assets of substantially similar utility and
remaining life.
(g) As of the date hereof, proper and accurate reports to taxing
authorities have been timely filed by the Company (or extensions for filing
granted) with respect to the Transferred Assets and Business for all periods in
which such were due. Except as noted in paragraph 12(a), all taxes have been
paid or adequate provisions made therefor. Except as noted in paragraph 12(a),
there is not in force any extension of the date on which any tax return was or
is due to be filed by or with respect to the Transferred Assets or Business or
any waiver or agreement for the extension of time for the payment of any tax
which would result in the delay of payment of taxes due in the periods up to
Closing to periods after Closing. There are no tax liens upon any of the
Transferred Assets, other than for current taxes not yet due.
(h) Other than as set forth on SCHEDULE 5(h) hereto, neither the
Company nor the Parent beneficially owns, directly or indirectly, a controlling
interest in any corporation, partnership firm or association which is a
competitor, customer, supplier or lessor of the Business. For purposes of this
SECTION 5(h), the term 'control' shall mean the ownership of not less than five
percent of the voting stock, in the case of a corporation, or not less than five
percent of the voting interest, in the case of a partnership, firm or
association, or otherwise the power or authority to manage, direct, service or
administer the affairs of any person.
(i) Except as set forth in SCHEDULE 5(i) hereto, the Company has good
and marketable title to the Transferred Assets (including any patents, patent
rights, copyrights, trade names, trademarks, service marks and other names and
marks used in connection with the Company's operations), which assets are free
and clear of all liens, pledges, charges, claims, encumbrances, proscriptions,
restrictions, conditions, covenants and easements of any kind. Except as set
forth on SCHEDULE 5(i), no liens, mortgages or financing statements have been
filed under the Uniform Commercial Code or other similar statute on the
Transferred Assets, nor has the Company signed any security agreement or similar
agreement authorizing any secured party thereunder to file any such lien,
mortgage or financing statement regarding the Transferred Assets.
(j) Except as disclosed on SCHEDULE 5(j), substantially all modular
units subject to Leases or in the Company's inventory are merchantable for lease
in the ordinary course of the Company's business. The Transferred Assets include
all of the Company's modular units relating to the Company's business.
(k) Except as set forth on SCHEDULE 5(k):
(i) except with respect to the Evelyn Shaw matter, there are
currently no pending, and neither the Company nor the Parent is aware of any
threatened lawsuits, mediations, arbitrations, or administrative proceedings
against the Company to which the Business or any of the Transferred Assets may
be or are subject;
(ii) except with respect to a threatened IRS audit, neither
the Company nor the Parent is aware of any investigation or review threatened by
any governmental entity with respect to the Business or relating to the
Transferred Assets;
(iii) the Company is in compliance in all material respects
with all laws and regulations with respect to, and is not subject to any
currently existing order, writ, injunction or decree relating to the operations
of the Business or the Transferred Assets; and
<PAGE> 7
(iv) no court decision restrains or prohibits the consummation
of the transactions contemplated hereby, and no litigation is pending seeking to
restrain or prohibit or seek damages with respect to the consummation of the
transactions contemplated hereby.
(l) SCHEDULE 5(l) hereto contains a true and correct list or brief
description of:
(i) all current or pending contracts, commitments and leases
(of real or personal property) written or otherwise, between the Company and any
party related to the Business, and all trade names, trademarks, assumed name
(fictitious name) filings and service marks used by the Company and related to
the Business;
(ii) all agreements related to the Business (other than those
relating to trade accounts payable or receivable) pursuant to which the Company
is obligated to pay or will receive in the future more than $5,000.00 annually;
and
(iii) all agreements or arrangements with competitors of the
Company or which restrict the Company's ability to compete in the Business.
The Company has delivered or made available to Purchaser, complete and current
copies of all written agreements, documents, arrangements, commitments and
Leases (together with all amendments thereto) referred to above or listed on
SCHEDULE 5(l), indicating by notation whether, to the Company's best knowledge
and belief, the consent of any person is required for the consummation of
transactions contemplated hereby, or for the preventing of the termination of
any material right, privilege, license or agreement of, or any loss to Purchaser
upon consummation of the transactions contemplated hereby. All such written
agreements, documents and Leases and, to the knowledge of the Company and the
Parent, all other arrangements and commitments are in full force and effect.
(m) The Company has in all material respects (except as set forth on
SCHEDULE 5(m)) performed all obligations to be performed by it under all
contracts, Leases, agreements and commitments to which it is a party, and, to
the best knowledge of the Company and Parent, there is not under any such
contract, Lease, agreement or commitment any existing default or event of
default or event which, with notice or lapse of time or both, would constitute a
default.
(n) Neither the Company nor the Parent makes any representation with
regard to the operating condition or repair of the Transferred Assets, and
understands that Purchaser is purchasing the Transferred Assets based upon
Purchaser's previous inspection of the Transferred Assets, and the Transferred
Assets are being sold to Purchaser 'as is.'
(o) To the best knowledge and belief of the Company and Parent, no
toxic chemicals, hazardous wastes, radioactive wastes, hazardous constituents,
non-hazardous industrial solid waste, or wastes classified by the Texas Natural
Resources Conservation Commission in 30 Tex. Admin. Code 335.505-335.507 as
Class 1, Class 2, or Class 3 wastes, have been deposited or disposed of in or on
the modular units. To the best knowledge and belief of the Company and Parent,
asbestos or similar materials which may create a potential health hazard have
not been used in the construction of, or in the manufacture of the modular
units.
(p) The Transferred Assets are all of the properties, assets and rights
(except for the Company's accounts receivable, cash and Excluded Assets) which
are currently being used by the Company in the conduct of the Business.
(q) The records of the Business for all periods, fairly set forth the
transactions to which the Company is a party or by which its properties are
bound, are accurate and complete and have been maintained consistent with good
business practices.
<PAGE> 8
(r) SCHEDULE 5(r) lists all licenses, franchises, permits and other
governmental authorizations which, to the best knowledge and belief of the
Company, are necessary or are legally required to conduct the Business as
conducted on the date hereof, the failure of which to obtain would have a
material adverse effect on the Company's business.
(s) SCHEDULE 5(s) sets forth a complete and correct list of each
patent, patent application, trademark (whether or not registered), trademark
application, trade name, service mark, copyright and proprietary intellectual
property (including without limitation, proprietary computer software, whether
in object or source form) (collectively, 'Intellectual Property') owned, used or
licensed by the Company which are used in the Business and a description of
whether such Intellectual Property is owned or licensed by the Company. The
Company is the owner of all right, title and interest in and to the Intellectual
Property, has the exclusive right to use such Intellectual Property and its
current use of such Intellectual Property does not infringe the rights of any
other person. Neither the Company nor the Parent is aware of any facts which
would render any of the patents, trademarks or trade names listed on SCHEDULE
5(s) invalid. To the best knowledge of the Company and the Parent, no person is
materially infringing the rights of the Company in any such Intellectual
Property.
(t) All of the schedules provided by the Company or the Parent pursuant
to this Agreement are true, correct and complete in all respects, and no
representation, warranty or statement made by the Company and/or the Parent in
or pursuant to this Agreement (including the schedules hereto) contains or will
contain any untrue statement of a material fact.
6. COVENANTS
The Company and the Parent, jointly and severally, covenant and agree, from and
after the Closing Date:
(a) to cooperate and work in good faith with Purchaser for the orderly
transfer of the Transferred Assets and the Business to Purchaser; and
(b) to change and, not at any time in the future, use the corporate
name 'MPA Systems, Inc. ' or any name similar thereto except in the orderly
transfer of the Business to Purchase.
7. INDEMNIFICATION
(a) Subject to the further terms and conditions of this SECTION 7, the
Company and the Parent agree, jointly and severally, to indemnify and hold
Purchaser, its directors, officers, employees, agents, affiliates, attorneys,
successors and assigns (each, a 'Purchaser Party') harmless from any and all
losses, damages, claims, costs (excluding incidental and consequential damages
and punitive damages, or expenses (including all court costs and reasonable
attorneys' fees) incurred by any Purchaser Party arising from or in connection
with:
(i) the material breach or inaccuracy of any representations,
warranties, covenants or agreements by the Company or the Parent set forth in
this Agreement or in any exhibit, schedule or document delivered pursuant
hereto;
(ii) any obligation or liability of the Company not expressly
assumed by the Purchaser pursuant to SECTION 1(b) hereof;
<PAGE> 9
(iii) any claims by employees of the Company (whether or not
employed by the Purchaser after Closing) for severance, sick leave, medical
benefits (including, without limitation, any claims arising out of or relating
to the Company's violation of or failure to comply with, the provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1985), or other employee
benefits arising out of or relating to any period prior to Closing;
(iv) any fact or occurrence causing any Purchaser Party to be
or become liable for any losses, damages, claims, costs or expenses, whether
fixed or contingent, matured or unmatured, known or unknown, other than the
Assumed Liabilities, arising out of or relating to the Company's ownership or
operation of the Transferred Assets or Business in the period prior to Closing;
or
(v) any claim for brokerage or finder's fees or commissions or
similar payments based upon any agreement or understanding alleged to have been
made by any person with Company or Parent (or any person acting on their behalf)
in connection with any of the transactions contemplated by this agreement.
(b) Subject to the further terms and conditions of this SECTION 7,
Purchaser agrees to indemnify and hold the Company and the Parent, their
directors, officers, employees, agents, affiliates, attorneys, successors and
assigns (each, a 'Company Party') harmless from any and all losses, damages,
claims, costs (excluding incidental and consequential damages and punitive
damages or expenses (including all court costs and reasonable attorneys' fees)
incurred by any Purchaser Party arising from or in connection with:
(i) the material breach or inaccuracy of any representations,
warranties, covenants or agreements by Purchaser set forth in this Agreement or
in any exhibit, schedule or document delivered pursuant hereto (subject to the
period of limitations provided in SECTION 7(e));
(ii) the Assumed Liabilities; or
(iii) any claim for brokerage or finder's fees or commissions
or similar payments based upon any agreement or understanding alleged to have
been made by any person with the Purchaser (or any person acting on Purchaser's
behalf) in connection with any of the transactions contemplated by this
agreement.
(c) In the event of any claim for which indemnification will be sought
pursuant to subsections (a) or (b) above, the party claiming the right to
indemnity (the 'Claimant') shall promptly notify (but in no case later than 30
days) the indemnifying party (the 'Indemnitor') in writing of such claim, which
notice shall set forth the basis of the claim for indemnity (including, without
limitation, reference to the specific representation, warranty, covenant or
obligation alleged to have been breached) and a reasonable estimate of the
amount thereof; provided that failure to give such notice shall not affect the
Indemnitor's obligations hereunder unless such failure materially prejudices the
rights of the Indemnitor with respect to any third party claim. The obligations
and liabilities of the parties with respect to such claims resulting from the
assertion of liability by third parties ('Claims'), shall be subject to
compliance by Claimant with each of the following terms and conditions:
(i) Claimant will give Indemnitor notice of any Claim asserted
against or imposed upon or incurred by Claimant, and Indemnitor will undertake
the defense thereof by attorneys of Indemnitor's own choosing reasonably
satisfactory to Claimant, and Claimant may elect to participate in such defense;
(ii) in the event that Indemnitor, within 10 days after notice
of any such Claim, fails to defend, Claimant will (upon further notice to
Indemnitor) have the right to undertake the defense, compromise or settlement of
such Claim for the account of Indemnitor; and
<PAGE> 10
(iii) anything in this subsection (c) notwithstanding,
Indemnitor shall not, without Claimant's prior written consent, settle or
compromise any Claim or consent to entry of any judgment with respect to any
Claim for anything other than money and damages paid by Indemnitor. Indemnitor
may, without Claimant's prior written consent, settle or compromise any Claim or
consent to entry of any judgment with respect to any Claim which requires solely
money damages paid by Indemnitor and which includes as an unconditional term
thereof the release of Claimant and all related parties and affiliates from all
liability in respect to such Claim.
(d) Indemnification pursuant to this SECTION 7 shall not be the sole
remedy of the Claimant, and the Claimant shall in such cases be entitled to any
and all remedies, whether at law or in equity, that it would otherwise have
under applicable law.
(e) After Closing, any claim for indemnification hereunder that is not
made in writing to the party against whom indemnification is sought within
twenty-four (24) months of the Closing Date shall be deemed waived, and no
person shall have any remedy under this SECTION 7 against any party for
indemnification; provided, however, that such actions by Purchaser against the
Company and the Parent for misrepresentations in SECTION 5(c) and 5(i) may be
commenced at any time that Purchaser or the Company or the Parent (as the case
may be) is subject to damages with respect thereto.
(f) In computing the amount of any damages to which a party shall be
entitled to indemnification hereunder, the Indemnitor shall be given the benefit
of any insurance proceeds which may become available to the Claimant (net of any
applicable costs in collecting such insurance and additional premiums resulting
from such loss).
(g) The Company and the Parent shall have no liability (for
indemnification or otherwise) with respect to the matters described in SECTION 7
until the total of all damages with respect to such matters exceeds $50,000 and
then only for the amount by which such damages exceed $30,000. The Company and
the Parent's total liability (for indemnification or otherwise) with respect to
the matters described in SECTION 7 shall not exceed $500,000. However, these
limitations on liability will not apply to any breach of SECTIONS 5(c) and (i),
and the Company and the Parent shall be liable for all damages with respect to
such breach.
8. SELLER'S COVENANT NOT TO COMPETE
(a) For a period of three (3) years following the Closing Date (the 'Effective
Time'), the Company and the Parent, jointly and severally, covenant and agree
that they, and each of their subsidiaries (each a 'Covenantor' and jointly, the
Covenantors in this SECTION 8):
(i) will not directly or indirectly, own, manage, operate,
join, advise, control or otherwise engage or participate in or be connected as
an officer, employee, shareholder, creditor, guarantor, partner, advisor,
consultant or otherwise, with any business of the type presently or historically
conducted by the Company with respect to the Business (specifically including,
without limitation, any activity concerning the leasing or selling of the
Transferred Assets;
(ii) will keep confidential all, and will not divulge to any
other party (except as required by law) any, of the private, secret or
confidential information of the Business or Purchaser, including, but not
limited to, private, secret and confidential information relating to such
matters as the Business' or Purchaser's finances, trade secrets, proprietary
rights, intellectual property, methods of operation and competition, marketing
plans and strategies, equipment and operational requirements and information
concerning personnel, customers and suppliers;
<PAGE> 11
(iii) will not, either for any Covenantor's own account or for any person, firm
or company, solicit, interfere with or endeavor to cause any present or future
employee of Purchaser to leave his employment or induce or attempt to induce any
such employee to terminate or breach his employment agreement or terminate his
employment with the Purchaser; or
(iv) will not influence or attempt to influence any
franchisee, customer or potential customer of the Purchaser to engage in
activities similar to the Business.
The provisions of this SECTION 8(a) are intended to
benefit and be enforceable by Purchaser, its present and future affiliates and
any of their assignees.
(b) In the event any Covenantor violates the provisions of this SECTION
8, the running of the time period of such provisions so violated shall be
automatically suspended upon the date of such violation and shall resume on the
date any such Covenantor permanently ceases such violation.
(c) Notwithstanding anything set forth herein to the contrary, the
remedy at law for any breach of this SECTION 8 is and will be inadequate, and in
the event of a breach or threatened breach by any Covenantor of any of the
provisions of this SECTION 8, Purchaser shall be entitled to an injunction
restraining any such Covenantor from violating any of the provisions of this
SECTION 8. Nothing herein contained shall be construed as prohibiting Purchaser
from pursuing any other remedies (at law or in equity) available to it for any
such breach or threatened breach, including, without limitation, the recovery of
damages from any such Covenantor.
(d) The agreements described in this SECTION 8 shall be deemed to
consist of a series of separate covenants. Each Covenantor expressly agrees that
the character, duration and geographical scope of the agreements described in
this SECTION 8 are reasonable in light of the circumstances as they exist on the
date upon which this Agreement is executed. However, should a determination
nonetheless be made by a court of competent jurisdiction at a later date that
the character, duration or geographical scope of any of the agreements described
in this SECTION 8 is unreasonable in light of the circumstances as they then
exist, then it is the intention and the agreement of each Covenantor and
Purchaser that this Agreement shall be construed by the court in such a manner
as to impose only those restrictions on the conduct of each Covenantor which are
reasonable in light of the circumstances as they then exist and as are necessary
to assure Purchaser of the intended benefit of this SECTION 8. If, in any
judicial proceeding, a court shall refuse to enforce all of the separate
covenants deemed included herein because, taken together they are more extensive
than necessary to assure Purchaser of the intended benefit of this SECTION 8, it
is expressly understood and agreed among the parties that those of such
covenants which, if eliminated, would permit the remaining separate covenants to
be enforced in such proceeding shall, for the purpose of such proceeding, be
deemed eliminated from the provisions hereof.
(e) Purchaser's need for the protections afforded by the foregoing
provisions of this SECTION 8 outweighs the burdens and any potential hardship to
each Covenantor and outweighs any injury likely to the public, and such burdens
do not impose any undue hardship on any Covenantor.
9. PURCHASER'S COVENANT NOT TO COMPETE
(a) For a period of three (3) years following the Closing Date (the
'Effective Time'), the Purchaser covenants and agrees that it and each of its,
officers and directors, (whoever they may be during said three year period and
individually, each a 'Covenantor' and jointly, the 'Covenantors' in this SECTION
9):
<PAGE> 12
(i) will not directly or indirectly, own, manage, operate,
join, advise, control or otherwise engage or participate in or be connected as
an officer, employee, shareholder, creditor, guarantor, partner, advisor,
consultant or otherwise, with any business (not including the Business subject
to this Agreement) of the type presently or historically conducted by the
Company specifically including, without limitation, any activity concerning the
production and sale of carriers for pneumatic transport systems or the
production and sale of injection molding tools (the 'Retained Business');
(ii) will keep confidential all, and will not divulge to any
other party (except as required by law) any, of the private, secret or
confidential information of the Company, including, but not limited to, private,
secret and confidential information relating to the Retained Business such as
the Retained Business' finances, trade secrets, proprietary rights, intellectual
property, methods of operation and competition, marketing plans and strategies,
equipment and operational requirements and information concerning personnel,
customers and suppliers;
(iii) will not, either for any Covenantor's own account or for
any person, firm or company, solicit, interfere with or endeavor to cause any
present or future employee of Company engaged in the Retained Business to leave
his employment or induce or attempt to induce any such employee to terminate or
breach his employment agreement or terminate his employment with the Company; or
(iv) will not influence or attempt to influence any
franchisee, customer or potential customer of the Company's Retained Business to
engage in activities similar to the Business.
The provisions of this SECTION 9(a) are intended to benefit and be enforceable
by Company, its present and future affiliates and any of their assignees.
(b) In the event any Covenantor violates the provisions of this SECTION
9, the running of the time period of such provisions so violated shall be
automatically suspended upon the date of such violation and shall resume on the
date any such Covenantor permanently ceases such violation.
(c) Notwithstanding anything set forth herein to the contrary, the
remedy at law for any breach of this SECTION 9 is and will be inadequate, and in
the event of a breach or threatened breach by any Covenantor of any of the
provisions of this SECTION 9, Company shall be entitled to an injunction
restraining any such Covenantor from violating any of the provisions of this
SECTION 9. Nothing herein contained shall be construed as prohibiting Company
from pursuing any other remedies (at law or in equity) available to it for any
such breach or threatened breach, including, without limitation, the recovery of
damages from any such Covenantor.
<PAGE> 13
(d) The agreements described in this SECTION 9 shall be deemed to
consist of a series of separate covenants. Each Covenantor expressly agrees that
the character, duration and geographical scope of the agreements described in
this SECTION 9 are reasonable in light of the circumstances as they exist on the
date upon which this Agreement is executed. However, should a determination
nonetheless be made by a court of competent jurisdiction at a later date that
the character, duration or geographical scope of any of the agreements described
in this SECTION 9 is unreasonable in light of the circumstances as they then
exist, then it is the intention and the agreement of each Covenantor and Company
that this Agreement shall be construed by the court in such a manner as to
impose only those restrictions on the conduct of each Covenantor which are
reasonable in light of the circumstances as they then exist and as are necessary
to assure Company of the intended benefit of this SECTION 9. If, in any judicial
proceeding, a court shall refuse to enforce all of the separate covenants deemed
included herein because, taken together they are more extensive than necessary
to assure Company of the intended benefit of this SECTION 9, it is expressly
understood and agreed among the parties that those of such covenants which, if
eliminated, would permit the remaining separate covenants to be enforced in such
proceeding shall, for the purpose of such proceeding, be deemed eliminated from
the provisions hereof.
(e) Company's need for the protections afforded by the foregoing
provisions of this SECTION 9 outweighs the burdens and any potential hardship to
each Covenantor and outweighs any injury likely to the public, and such burdens
do not impose any undue hardship on any Covenantor.
10. OFFSET
In addition to any rights or remedies which Purchaser may have to assert, pursue
or enforce any claim against the Company or the Parent hereunder or with respect
to which the Purchaser shall be entitled to indemnification under SECTION 7
hereof or which Purchaser may otherwise possess by virtue of this Agreement or
at law or in equity, Purchaser shall have the absolute right, but not the
obligation, to offset any amount payable to the Company by an amount equal to
any and all of such claims; provided, however, that the Purchaser shall give the
Company and the Parent not less than ten (10) days written notice (the 'Offset
Notice') prior to effecting any offset contemplated hereby. The Company or
Parent shall notify the Purchaser in writing (the 'Dispute Notice') if the
Company or Seller disputes the amount or validity of such claim (such Dispute
Notice shall specify each disputed item, the amount thereof and the basis on
which such dispute is asserted by the Company or Parent) within 10 days after
receipt of the Offset Notice. If the Company or Parent fails to so timely
deliver the Dispute Notice, the Company or Parent shall be deemed to have agreed
to the offset or deduction of the amount claimed by the Purchaser as a Purchaser
claim and such amount may be offset and deducted by the Purchaser without being
in breach of or default under this Agreement. In the event the Company or Parent
timely and properly delivers the Dispute Notice, the Purchaser agrees to deposit
into the registry of a court having jurisdiction over the matter or with a
suitable escrow agent the amount offset that has been disputed by the Company or
Parent in such Dispute Notice until such matter has been resolved by the
agreement of the Parties.
<PAGE> 14
11. MISCELLANEOUS
(a) The Company, Parent and Purchaser agree to cooperate with each of
the other parties to this Agreement after Closing as may be necessary to
determine if any party has received income or incurred expense which is
inconsistent with the goal of the Purchaser having the costs and benefits of
ownership of the Transferred Assets and Business after the Closing and the
Company having the costs and benefits of ownership up to and including the
Closing. Should any items be identified by any party which are inconsistent
therewith, the party receiving the benefit shall promptly reimburse the other
party. For purposes of determining into which time period an item of income or
expense properly belongs to achieve the purpose herein stated, generally
accepted accounting principles shall apply. Without limiting the number or types
of reimbursements which may occur under this paragraph, the Company acknowledges
that ad valorem taxes applicable to the Transferred Assets for the calendar year
1998 have partially accrued but have not yet been paid and are not due until
January 31, 1999. Company will reimburse Purchaser for a portion of such taxes
(prorated based on the number of days in 1998 prior to and after Closing) at the
time they are due.
(b) This Agreement and the related documents referenced as Exhibits or
SCHEDULES hereto or otherwise expressly contemplated hereby contain the entire
understanding of the parties relating to the sale of the Transferred Assets by
the Company to Purchaser and supersede all prior agreements and understandings,
written or oral, relating to the subject matter thereof. This Agreement cannot
be modified, amended except in writing signed by the party against whom
enforcement is sought.
(c) Each party agrees to keep confidential the specific terms hereof,
except as shall be mutually agreed on or required by law but nothing in this
paragraph shall prevent either party from communicating to all interested
parties that a purchase of the Business has occurred. Purchaser shall not make
any announcement to the public at large without the prior written consent of the
Company or the Parent.
(d) The Parent, the Company and Purchaser shall each bear the
attorneys', accountants', finders' or other fees, costs and expenses separately
incurred by the Parent and the Company on the one hand, and the Purchaser on the
other, in connection with the negotiation, execution and performance of this
Agreement or any of the transactions contemplated hereunder. Notwithstanding the
foregoing, the Purchaser shall bear the transfer fees, sales taxes and expenses
related to such fees and taxes incurred in connection with the consummation of
the transactions contemplated hereby.
(e) Each of the parties to this Agreement represents to the other party
that it has not incurred and will not incur any liability for brokerage or
finder's fees or agents' commissions in connection with this Agreement and any
of the transactions contemplated hereby, or if any party has incurred any such
liability, that the party incurring such liability shall be responsible for such
fees and commissions.
(f) In the event attorneys' fees or other costs are incurred to require
performance of any of the obligations herein provided for, or to establish
damages for the breach thereof, or to obtain any other appropriate relief,
whether by way of prosecution or defense, the prevailing party shall be entitled
to recover reasonable attorneys' fees and costs incurred therein.
(g) Each party hereto agrees to execute any and all documents, and to
perform such other acts, which may be necessary or expedient to further the
purposes of this Agreement or in order to more effectively convey and transfer
to Purchaser any of the Transferred Assets or for aiding and assisting Purchaser
in collecting and reducing to possession the Transferred Assets or exercising
rights with respect hereto.
<PAGE> 15
(h) In the period after Closing, Company and Parent shall promptly
refer to the Purchaser any inquiries or requests for information from past or
potential customers of the Business of which they may become aware. Purchaser
shall promptly refer to the Company any inquiries or requests for information
from past or potential customers of the Company of which they may become aware.
(i) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF TEXAS (WITHOUT GIVING EFFECT TO THE CHOICE OF LAW
PROVISIONS THEREOF). ANY SUIT, ACTION OR PROCEEDING WITH RESPECT TO THIS
AGREEMENT, OR ANY JUDGMENT ENTERED BY ANY COURT IN RESPECT HEREOF MAY BE BROUGHT
IN THE COURTS OF THE STATE OF TEXAS, DALLAS COUNTY, OR IN THE UNITED STATES
COURTS LOCATED IN THE STATE OF TEXAS, AS THE PARTY BRINGING SUCH ACTION IN ITS
SOLE DISCRETION MAY ELECT AND THE PARTIES HERETO SUBMIT TO THE EXCLUSIVE
JURISDICTION OF THE COURTS OF THE STATE OF TEXAS, COUNTY OF DALLAS, OR IN THE
UNITED STATES COURTS LOCATED IN THE STATE OF TEXAS, FOR THE PURPOSE OF ANY SUCH
SUIT, ACTION OR PROCEEDING. EACH PARTY WILL ADVISE THE OTHER PROMPTLY OF ANY
CHANGE OF ADDRESS. EACH PARTY HERETO HEREBY FURTHER IRREVOCABLY CONSENTS TO THE
SERVICE OF PROCESS IN ANY SUIT, ACTION OR PROCEEDING IN SAID COURTS BY THE
MAILING THEREOF BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, POSTAGE PREPAID, TO
IT AT THE ADDRESSES SET FORTH ON THE SIGNATURE PAGE HERETO. EACH PARTY HERETO
HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO
THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO THIS AGREEMENT BROUGHT IN THE COURTS LOCATED IN THE STATE OF TEXAS, DALLAS
COUNTY, OR IN THE UNITED STATES COURTS LOCATED IN THE STATE OF TEXAS, AND HEREBY
FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING
BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
(j) This Agreement shall be binding on, and inure to the benefit of the
parties hereto and on their respective heirs, legal representatives, successors
and assigns.
(k) In the event any provision contained herein shall be held to be
invalid, illegal or unenforceable, it shall not affect any other provision
hereof, and this Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein, unless to do so would
cause this Agreement to fail of its essential purpose.
(l) After the Closing Date, for a reasonable period of time, the
Company and the Parent shall furnish to Purchaser copies of any books, records
and other documents of the Company which may have been retained by the Company
or the Parent following the Closing which may reasonably be required by
Purchaser for tax purposes or other similar valid business purposes of Purchaser
and otherwise reasonably cooperate with Purchaser, to permit Purchaser to
interpret and evaluate the information so furnished. Without limiting the
foregoing, the Company and the Parent covenant and agree not to destroy or
otherwise dispose of any books or records of the Company, including records
relating to tax information and customer files, for a period of six years
following the Closing Date.
(m) All notices which are required or may be given pursuant to the
terms of this Agreement shall be in writing and shall be sufficient in all
respects if given in writing and delivered personally or sent by registered or
certified mail, postage prepaid, to the addresses set forth under the signatures
of the parties hereto on the last page of this Agreement, or to such other
address as any party shall request of the others in writing. All notices shall
be deemed to be effective upon delivery to an agent for personal delivery or
upon mailing.
(n) All exhibits and schedules attached hereto are incorporated herein
by reference.
(o) Time is of the essence.
<PAGE> 16
(p) This Agreement may be executed in one or more counterparts for the
convenience of the parties hereto, all of which together shall constitute one
and the same instrument.
(q) The parties hereto will hold this Agreement and the transactions
contemplated hereby in strict confidence, and will not disclose this Agreement
or its contents without the prior written authorization of the other party,
subject to the requirements of applicable law.
All covenant and agreements in this Agreement which are intended by their terms
to continue after the Closing Date, shall survive the closing of this
transaction.
IN WITNESS WHEREOF the parties hereto have executed this Agreement on the date
first stated above.
Purchaser:
MPA SYSTEMS, INC.
By:
----------------------------
James W. Casey, President
P.O. Box 838
Sanger, Texas 76266
with a copy to:
Goodall, Davison & Goldsmith, L.L.P.
1250 Capital of Texas Hwy. S., Suite 2-400
Austin, TX 78746
Attn: Anthony C. Goodall
the Company:
GOLSTON COMPANY D/B/A MPA SYSTEMS
By:
----------------------------
Gerald K. Beckmann
c/o Integrated Security Systems, Inc.
8200 Springwood Drive
Suite 230
Irving, Texas 75063
with a copy to:
Haynes and Boone, LLP
901 Main Street, Suite 3100
Dallas, Texas 75202
Attn: David H. Oden
Parent:
INTEGRATED SECURITY SYSTEMS, INC.
By:
-----------------------------
Gerald K. Beckmann
c/o Integrated Security Systems, Inc.
8200 Springwood Drive
Suite 230
Irving, Texas 75063
<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 Ended
For the Year Ended June 30,
----------------------------- ------------------------
June 30, December 31,
1998 1996 1997 1996
----------- ------------ ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
BASIC:
Shares and share equivalents:
Weighted average common and
common equivalent shares
outstanding 8,197,392 5,122,878 7,188,764 7,615,087
Net loss $ (3,195) $ (277) $ (330) $ (436)
Basic and diluted net loss
per share:
Continuing operations $ (0.39) $ (0.05) $ (0.05) $ (0.06)
=========== ============ ========== ===========
Discontinued operations -- -- -- --
=========== ============ ========== ===========
</TABLE>
<PAGE> 1
Exhibit 21.1
Subsidiaries of the Company.
B&B Electromatic, Inc.
Golston Company, Inc.
Tri-Coastal Systems, Inc.
Innovative Security Technologies, Inc., name changed to Intelli-Site, Inc. on
October 2, 1998.
<PAGE> 1
Exhibit 23.1
Consent of PricewaterhouseCoopers LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-89218) and
in the Registration Statement on Form S-8 (No. 33-59870-S) of Integrated
Security Systems, Inc. of our report dated August 26, 1998, except as to Notes 6
and 14, which are as of October 12, 1998 appearing on page 16 of this Form
10-KSB.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
October 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 311,117
<SECURITIES> 0
<RECEIVABLES> 2,204,005
<ALLOWANCES> 0
<INVENTORY> 926,442
<CURRENT-ASSETS> 3,741,590
<PP&E> 5,610,622
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,950,808
<CURRENT-LIABILITIES> 3,402,553
<BONDS> 0
0
102
<COMMON> 85,258
<OTHER-SE> 972,142
<TOTAL-LIABILITY-AND-EQUITY> 11,950,808
<SALES> 11,092,307
<TOTAL-REVENUES> 11,092,307
<CGS> 6,765,462
<TOTAL-COSTS> 6,765,462
<OTHER-EXPENSES> 6,653,472
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 863,768
<INCOME-PRETAX> (3,188,510)
<INCOME-TAX> 6,642
<INCOME-CONTINUING> (3,195,152)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,195,152)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
