<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-KSB
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[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, 1999
Commission File Number: 1-11900
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INTEGRATED SECURITY SYSTEMS, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 75-2422983
(State of Incorporation) (I.R.S. Employer Identification No.)
8200 SPRINGWOOD DRIVE, SUITE 230, IRVING, TX 75063 (972) 444-8280
(Address including zip code, area code and telephone
number of Registrant's executive offices.)
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common stock, $.01 par value OTC Bulletin Broad
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: $5,828,247
As of September 23, 1999, 10,549,145 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, 1999, $2,912,290. This amount was computed by
reference to the average close price of Registrant's common stock.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item No. Page
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PART I
1. Description of Business...................................................................3
2. Description of Properties.................................................................6
3. Legal Proceedings.........................................................................6
PART II
5. Market for Company's Common Equity and Related Stockholder Matters........................7
6. Management's Discussion and Analysis of Financial Condition and Results of Operations.....8
7. Financial Statements.....................................................................11
8. Disagreements with Accountants on Accounting and Financial Disclosure....................29
PART III
9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act...................................................29
10. Executive Compensation...................................................................29
11. Security Ownership of Certain Beneficial Owners and Management...........................29
12. Certain Relationships and Related Transactions...........................................29
PART IV
13. Exhibits, Lists and Reports on Form 8-K..................................................29
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Company designs, develops, manufactures, distributes and services security
and traffic control products used in the commercial, industrial and government
sectors through two wholly owned subsidiaries, B&B Electromatic, Inc. ("B&B")
and Intelli-Site, Inc. ("ISI"). The Company, through its B&B subsidiary, has
been in business since 1925 and its products are used in thousands of locations
across the country.
The following information contains certain forward-looking statements. It is
important to note that ISSI'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.
INTELLI-SITE, INC.
Within the security industry, it is generally accepted that automated
integration improves productivity, reduces loss (which reduces insurance
premiums) and improves response time and accuracy. With respect to integrated
systems, Intelli-Site(R) is designed as a standard product that will break the
stranglehold proprietary system providers have on customers. By providing the
industry with an open system, Intelli-Site can integrate products
(hardware/devices) across the industry from different vendors, and be tailored
to unique customer requirements. As a hardware-independent software supplier,
Intelli-Site, Inc. is able to decouple the selection of software from hardware,
providing customers the ability to mix-and-match different hardware (from
various manufacturers) into a single, integrated security system platform.
With Intelli-Site NT, customers can integrate a wide variety of devices from
various manufacturers such as access control, closed circuit television
("CCTV"), badge systems, fire alarm systems, lighting control and HVAC systems.
In addition to providing centralized control, users can tailor the interface for
ease of operation based on their unique functional requirements.
Since Intelli-Site NT is device non-specific, customers can integrate currently
installed equipment, even if purchased from different manufacturers. For
example, an access control system and a CCTV system from different hardware
manufacturers may already exist within a facility, but due to the proprietary
nature of both systems, they cannot communicate with each other. Unless the two
systems can communicate, a "forced door" alarm on the access control system
cannot initiate a video recording of the event. A proprietary integrated system
would require replacement of one or both of the existing systems with equipment
compatible to that of the proprietary system. However, assuming device drivers
are available, Intelli-Site NT can integrate existing systems thereby avoiding
expensive equipment retrofits, time delays and single vendor dependencies.
No two companies, facilities or workgroups are identical; each has different
security requirements. Intelli-Site NT, while a standard product, allows users
to define its configuration (what is to be integrated), its Graphical User
Interface -- GUI (how the operator controls the system), its functionality (what
the system does) and its databases (what/how data is stored). In the past, only
a custom designed system could provide this level of user-specific features.
Other standard software products either cannot be tailored or attempt to provide
some limited "customization" through a fixed set of user options. With
Intelli-Site NT, user-defined restrictions are limited to the capabilities of
the integrated devices.
A simple example of user-defined functionality is evaluating the desired
response, for different situations, given an identical alarm. In a warehouse,
the user may wish to respond to a "forced door" alarm by having Intelli-Site NT
sound an alarm, turn on the warehouse lights, lock all surrounding doors, page a
guard, notify the police, and turn on a camera and record the alarm site and
surrounding areas -- all automatically.
Users can also change Intelli-Site's functions at any time. For instance, if the
alarm in the warehouse example occurred during a public open-house event, the
"high security" response cited above could be changed to a notification only
during the open house, and reset back to the series of "high security" responses
once the open-
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house has ended. With Intelli-Site NT, changing the system's function can be
done in seconds with a few mouse "clicks", while the system continues to monitor
the rest of the facility.
B&B ELECTROMATIC, INC.
B&B, the Company's manufacturing subsidiary, designs, manufactures and
distributes warning gates, crash barriers (railroad, anti-terrorist and traffic
control barriers), lane changers, airport and navigational lighting, and
perimeter security gates and operators. In operation since 1925, B&B enjoys a
long-term reputation of high quality designs with its broad customer network of
engineering and architectural firms.
Core Business
B&B's core products (gates and barriers, perimeter security, navigational
lighting) compete primarily in the road and bridge construction/refurbishment
and perimeter security markets. Their products are used for gating/barricading
movable bridges, locking down sections of road under construction, gates for
reversible lane changer systems, gates to secure railroad crossings, operators
and gates used in perimeter security and navigational lights used primarily with
waterways. B&B typically sells through electrical sub-contractors or through
distributors.
Fewer movable bridges are being constructed and as a result, B&B is seeking
broader applications of their movable gates and barriers. Highway lane changers,
road construction gates and barriers, seismic gates and perimeter security gates
are all growing market opportunities for B&B.
New Business
After two years of development and testing, B&B's railroad safety barrier gate
was accepted by the Federal Highway Administration in November 1999. The safety
gate was designed to improve safety at highway railroad crossings (HRC's)
without the necessity of grade separations (bridges or underpasses). Federal
funding of $160 million per year is available for upgrading the safety of the
more than 262,000 existing HRC's. Additional federal and state funding is
available for HRC's on high-speed rail corridors which have mandated upgrade
requirements.
The B&B railroad safety barrier gate is targeted for HRC's with high accident
incident rates, blind curves, high frequency of hazardous rail transport,
whistle-ban zones, multiple track crossings and high-speed rail corridors. By
entering into the national HRC market, it is expected that B&B's served
available market will increase by tenfold. Penetration into the market, however,
may require a relatively long sales cycle due to Federal funding approvals.
WARRANTY
The Company has one-year, 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 software
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 $2.7 million
at September 23, 1999. The Company expects that the majority of this backlog
will be filled during fiscal 2000 and the first quarter of fiscal 2001.
PRODUCT DESIGN AND DEVELOPMENT
There are currently four employees of the Company dedicated to research,
development and product engineering. During fiscal 1998 and 1999, the Company
spent approximately $246,433 and $378,365 respectively, on research and
development, primarily related to the development and enhancement of
Intelli-Site.
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COMPETITION
Intelli-Site, Inc.
Many companies across the industry use the term "integrated security system" to
describe their products and services. In fact, an integrated security system can
range to feature-rich, real-time sophisticated software systems (including
custom coded integrated solutions) from very limited fixed function systems
"integrating" as few as two sub-systems. Differences in functionality,
performance, and price vary greatly. Intelli-Site NT has the capability to
compete across the entire spectrum and consequently has a diverse set of
competitors, depending on the complexity of the integration effort. Intelli-Site
NT competitors will generally fall into one of three categories: Access Control
Manufacturers, "Pure" Integrated Systems Platforms and Custom Software
Developers.
B&B Electromatic, Inc.
B&B's road and bridge product line competitors are relatively the same size as
B&B with regionally concentrated customer bases versus B&B's national coverage.
B&B has an excellent reputation and a far more extensive design specification
network, having been in this market niche since 1925. Only one other hydraulic
operator competes with B&B's high-end perimeter security products. One other
road and bridge company has a Federal Highway Administration accepted railroad
crossing restraining system which costs three to five times B&B's railroad
safety barrier gate. The competition for this emerging market is as yet
unidentifiable.
Access Control Manufacturers
The access control-based integrated systems products range in capability from
the control of panel inputs/outputs to the integration of access control systems
with other security sub-systems, most commonly CCTV. Access Control and Security
Systems Integration magazine, in its annual Buyers Guide, lists approximately
200 companies providing software for access control integration (integration of
access control systems with other security devices and sub-systems). Access
control manufactures provide closed, proprietary systems for integration of
their respective hardware. Only a few manufacturers offer complete integrated
systems. Vendor-proprietary systems tend to be expensive and lock the customer
into one supplier. The end-user cannot add new features or integrate new
technologies unless the access control manufacturer supplies them. Access
control manufactures' integrated product solutions therefore prevent systems
integrators and end-users from integrating the best products and/or technologies
that best meet the end-user requirements.
"Pure" Integrated Systems Platforms
"Pure" integrated system providers ("ISP") offer integration platforms that are
open -- non-proprietary and able to integrate across any device or sub-system.
ISP's can integrate products (hardware/devices) across the industry from
different vendors. The Company has identified four third party providers that
supply software that competes with Intelli-Site NT: LARES Technology, Lenel,
Orion Automation Incorporated (Oasis), and Security Application Incorporated
(SAI). It is estimated that in 1998 the "Pure" Integrated Systems Platform
products accounted for less than 2% of the $170 MM software sub-segment of the
$3.4 billion systems integration segment. None of the identified competitors
have established themselves as a clear market leader.
Custom Software Developers
Custom software solutions for integrated security typically target large systems
with complex user integration requirements between multiple sub-systems. A
number of system developers and large systems integrators provide custom
solutions. An estimated 17% (and declining) of end users use custom developed
solutions. However, the Company believes many of these end users would consider
using a non-proprietary tailored, user-definable standard platform if one were
available. Today, of the estimated 1,000 system integrators in the market, only
a small fraction is capable of developing custom software applications. Open,
user-definable systems such as Intelli-Site NT would allow many of these
integrators to bid competitively on large, integrated security system jobs that
have traditionally required custom developed software solutions.
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
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<PAGE> 6
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, 1999, the Company employed 69 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. 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.
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
The Company is a defendant in a lawsuit filed in the Division A, 20th Judicial
District Court, East Feliciana Parish, State of Louisiana, entitled Robert I.
Abbott v. B&B Electromatic, Inc. and Integrated Security Systems, Inc. (Case No.
031904) In July 1999, Mr. Abbott filed a complaint against the Company claiming
a verbal employment contract existed and was broken. Mr. Abbott seeks to recover
compensation pursuant to an alleged verbal employment contract, including wages
and stock options, together with attorney fees and court costs. Abbott, who
formerly served as President of B&B, was terminated by the Company on January 8,
1998. The Company intends to vigorously defend against Abbott's claim.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Over-the-Counter Bulletin Board,
effective March 23, 1999. Prior to that date, the Company's Common Stock was
traded on the National Association of Securities Dealers, Inc. ("Nasdaq") under
the symbol "IZZI." As of June 30, 1999, there were 10,463,993 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 118 holders and the warrants are held of record by
approximately 4 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 and the Nasdaq Over-the-Counter Bulletin Board 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 moderately illiquid
due to low volume.
<TABLE>
<CAPTION>
Common Stock
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$ High $ Low
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<S> <C> <C> <C>
Fiscal 1999
First Quarter 1 9/32 21/32
Second Quarter 1 17/32
Third Quarter 1 1/2 15/32
Fourth Quarter 1 5/32 9/16
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
</TABLE>
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On September 23, 1999, the last reported sales prices for the Common Stock as
reported on the Over-the-Counter Bulletin Board was $0.45.
The following table specifies securities sold by the Registrant within the past
year and not registered under the Securities Act of 1933. All such sales were
carried out in reliance on the exemption from registration contained in Section
4(2) of the Securities Act of 1933. In relying on such exemption, the Registrant
relied upon written representations of the persons acquiring the Registrant's
shares that they were acquiring the shares for investment purposes only and not
for resale, and that they had received adequate opportunity to obtain
information, and had reviewed such information, regarding the Registrant.
Certificates representing the shares issued to these persons contained a legend
restricting transfer thereof absent registration under the Securities Act or the
availability of an exemption therefrom.
<TABLE>
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UNDERWRITING
DISCOUNTS OR
DATE TITLE AND AMOUNT CONSIDERATION COMMISSIONS
SOLD OF SECURITIES PURCHASER RECEIVED PAID
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May 21, 1999 1,200,000 shares of Common Stock I.S.T. Partners, Ltd. Repurchase of revenue --
and Warrants to purchase 450,000 royalty agreement with
shares of Common Stock research and development
partnership
</TABLE>
DIVIDEND POLICY
Dividends have not been declared on the Common Stock and it is not anticipated
that dividends will be paid in the near future because any funds available will
most likely be reinvested in the Company's business and used to repay
outstanding debt.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
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.
During fiscal 1999, the Company disposed of its two non-core subsidiaries,
Golston Company, Inc. ("Golston") and Tri-Coastal Systems, Inc. ("TCSI"). ISSI
sold Golston in May 1999 and TCSI in August 1999. These dispositions are
consistent with ISSI's previously announced repositioning strategy to focus on
its Intelli-Site subsidiary that manufactures the Intelli-Site software product,
and its B&B subsidiary that manufactures traffic control and safety systems as
well as safety barriers for highway railroad crossings.
The following information contains certain forward-looking statements. It is
important to note that ISSI'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.
RESULTS OF OPERATIONS
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998
Sales. The Company's sales increased by $1 million (20%) during the fiscal year
ended June 30, 1999 from $4 million in fiscal 1998. This increase is
attributable to additional sales of perimeter security and railroad products at
B&B of $864,000 and sales at the Intelli-Site subsidiary of $289,000.
Cost of Sales and Gross Margin. Gross margin as a percent of sales remained
comparable for the fiscal years ended June 30, 1999 and 1998.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 38% or by $1.7 million during the fiscal 1999 period. This
is primarily due to increased expenditures at the Intelli-Site subsidiary as
well as the dissolution of an unaffiliated partnership (Note 6 of Notes to
Financial Statements). In addition, the company also issued warrants to purchase
common stock as a result of the conversion of debt to equity.
Research and Development. Research and product development expenses increased by
approximately $132,000 during the fiscal 1999 period. This is a result of
expenses at the Intelli-Site subsidiary due to the continuing development of the
Intelli-Site software product.
Interest Expense. Interest expense increased by approximately $523,000 primarily
to secure additional financing during the fiscal 1999 period.
Loss on disposal of discontinued operations. The loss on disposal of
discontinued operations relates to the sale of Golston and TCSI.
Year Ended June 30, 1998 Compared to Year Ended December 31, 1996
Effective January 1, 1997, the Company changed its fiscal year end from December
31 to June 30.
The years ended June 30, 1998 and December 31, 1996 are included here in order
to compare comparable fiscal periods.
Sales. The Company's sales decreased by $2 million (29%) from $7 million during
the twelve months ended December 31, 1996 to $5 million during the twelve months
ended June 30, 1998. The decrease was primarily attributable to decreased sales
at the B&B subsidiary.
Cost of Sales and Gross Margin. Gross margin as a percent of sales decreased to
33% from 46% 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.
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Selling, General and Administrative. Selling, general and administrative
expenses increased to $4.3 million during the twelve months ended June 30, 1998
from $3.4 million during the comparable 1996 period. This increase was
attributable to the Company absorbing all of the sales and marketing expenses of
ISI during the 1998 period.
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 decreased to $181,872 during the twelve
months ended June 30, 1998 from $257,693 during the comparable 1996 period due
to reduced short-term financing at ISSI.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position increased by $201,366 during the fiscal year ended
June 30, 1999. The Company used $60,000 of cash for operations net of $1.5
million of non-cash expenses during this period. Also, during the fiscal year
ended June 30, 1999, the Company financed its continuing operations from
long-term borrowings of $2,561,260. The Company used $1,833,671 to pay principal
on indebtedness.
During 1998, the Company received $600,000 in cash in exchange for promissory
notes at 9% interest due and payable February 1999. These notes were refinanced
as demand notes on February 22, 1999 with all other terms and conditions the
same as the original notes.
On January 14, 1999, the Company received $100,000 in cash in exchange for a
promissory note at 12% interest due and payable on January 24, 1999. The Company
paid the note in full on February 2, 1999. In connection with this transaction,
the Company issued warrants to purchase 181,818 shares of common stock at an
exercise price of $0.549 which expire in 2004.
On January 22, 1999, the Company entered into lending agreements with a bank
primarily to replace an existing revolving lending facility and refinance
previously retired facilities. The initial funding consisted of a $150,000 term
loan payable over 24 months at prime interest rate plus 3%, a $300,000 inventory
loan payable on demand at prime interest rate plus 3%, and a $1.8 million
maximum revolving credit facility at prime interest rate plus 3%. The maximum
credit eligibility of the new financing, secured by accounts receivable,
inventory and equipment of $3 million is structured to increase to $5 million
with Company growth. The outstanding balance at June 30, 1999 was $325,480 on
the revolving credit facility.
On March 8, 1999, the Company received $600,000 in cash in exchange for a
promissory note at 9% interest due and payable upon demand or upon the sale of
its Golston subsidiary. In connection with this transaction, the Company issued
warrants to purchase 1,092,897 shares of common stock at an exercise price of
$0.549 which expire in 2004. This loan was repaid on May 31, 1999.
Effective October 1, 1998, the Company disposed of a portion of its Golston
subsidiary, and effective May 31, 1999, the Company disposed of the remaining
portion of its Golston subsidiary. The remaining portion of Golston was sold to
Days Molding & Machinery, LLP for $3.2 million in cash and $100,000 in notes.
Proceeds from the sale were used to reduce the cash accelerator agreement
balance by $900,000, fees of approximately $300,000, note repayments of
$600,000, and the remainder for operations.
The Company's backlog, calculated as the aggregate sales prices of firm orders
received from customers less revenue recognized, was approximately $2.7 million
at September 23, 1999. The Company expects that the majority of this backlog
will be filled during fiscal 2000 and the first quarter of fiscal 2001.
Development of distribution channels for Intelli-Site will continue, with a
significant portion of future investments being utilized to launch Intelli-Site
through system integrators, equipment manufacturers, and national security
networks. To finance these activities, the Company will need to raise additional
funds. To accomplish this, in August 1999, the Company issued a Private
Placement Memorandum ("PPM") offering 150,000 shares of Convertible Preferred
Stock at $20 per share with two $1 warrants for every three shares of common
stock into
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<PAGE> 10
which the preferred is convertible. The Company has raised the minimum proceeds
of $1.5 million and is seeking subscription agreements from accredited investors
up to a maximum of $3 million.
CAPITAL EXPENDITURES
During the year ended June 30, 1999, the Company acquired $266,192 of property
and equipment and $200,090 of software technology with both short-term and
long-term borrowings. The Company does not anticipate any significant capital
expenditures during fiscal 2000.
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.
YEAR 2000 ISSUE
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.
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 continues to address
its critical business information and production systems regarding the Year 2000
issue for both Information Technology ("IT") and non-IT systems. The reporting
process used by the Company to assess its Year 2000 readiness has identified
some systems where potential problems may exist. The Company is currently
implementing solutions for these areas. Regardless of the resolution selected,
the Company believes that the associated financial impact will not be material.
There can be no assurance that there will be no disruptions or that the Company
will not incur significant costs to avoid such disruptions.
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INTEGRATED SECURITY SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
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Page
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Reports of Independent Accountants.................................................................12-13
Consolidated Balance Sheets as of June 30, 1999 and 1998..............................................14
Consolidated Statements of Operations for the years ended June 30, 1999 and 1998......................15
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1999 and 1998............16
Consolidated Statements of Cash Flows for the years ended June 30, 1999 and 1998......................17
Notes to Consolidated Financial Statements.........................................................18-28
</TABLE>
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<PAGE> 12
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the Stockholders
of Integrated Security Systems, Inc.
We have audited the accompanying consolidated balance sheet of Integrated
Security Systems, Inc. and subsidiaries as of June 30, 1999 and the related
consolidated statement of operations, stockholders' equity and cash flows for
the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Integrated
Security Systems, Inc. as of June 30, 1999, and the consolidated results of
their operations and their consolidated cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Dallas, Texas
August 10, 1999, except for the first paragraph of Note 12, as to which the date
is October 13, 1999
- --------------------------------------------------------------------------------
Page 12 of 32
<PAGE> 13
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the Stockholders
of Integrated Security Systems, Inc.:
In our opinion, the accompanying consolidated balance sheet 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 the results of their operations and their cash flows for the year
ended June 30, 1998, 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of the Company
for any period subsequent to June 30, 1998.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 12 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 12. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in the last paragraph of Note 11 to the financial statements, the
accompanying balance sheet at June 30, 1998, and the related consolidated
statements of operations and of cash flows for the year ended June 30, 1998 have
been restated to reflect discontinued operations.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
August 26, 1998, except as to the last sentence in Note 4 and the first sentence
in Note 11 which are as of October 12, 1998, and as to the last paragraph of
Note 11 which is as of October 13, 1999.
- --------------------------------------------------------------------------------
Page 13 of 32
<PAGE> 14
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 251,113 $ 49,747
Accounts receivable, net of allowance for
doubtful accounts of $54,383 and $45,159, respectively ................... 1,381,879 1,293,381
Inventories ................................................................ 529,198 447,367
Notes receivable, net of $60,000 discount in 1999 .......................... 340,000 1,456
Other current assets ....................................................... 156,165 152,240
Assets of discontinued operations .......................................... 626,220 8,466,127
------------ ------------
Total current assets ..................................................... 3,284,575 10,410,318
Property and equipment, net ................................................ 1,019,993 956,673
Intangible assets, net ..................................................... -- 41,897
Capitalized software development costs, net ................................ 332,802 318,453
Deferred income taxes ...................................................... 205,384 205,384
Other assets ............................................................... 74,653 18,083
============ ============
Total assets ............................................................. $ 4,917,407 $ 11,950,808
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 625,964 $ 445,129
Accrued liabilities ........................................................ 1,004,253 445,631
Deferred revenue ........................................................... -- 7,500
Current portion of long-term debt and other liabilities .................... 1,330,566 985,494
Liabilities of discontinued operations ..................................... 249,654 2,848,127
------------ ------------
Total current liabilities ................................................ 3,210,437 4,731,881
Long-term debt and other liabilities .......................................... 4,608,003 6,161,425
Stockholders' equity:
Convertible preferred stock, $.01 par value, 750,000 shares authorized;
10,250 shares issued and outstanding
(liquidation value of $205,000) .......................................... 102 102
Common stock, $.01 par value, 30,000,000 shares authorized;
10,513,993 and 8,525,808 shares, respectively, issued .................... 105,140 85,258
Additional paid in capital ................................................. 12,704,653 10,822,802
Accumulated deficit ........................................................ (15,592,178) (9,731,910)
Treasury stock, 50,000 shares .............................................. (118,750) (118,750)
------------ ------------
Total stockholders' equity ................................................. (2,901,033) 1,057,502
============ ============
Total liabilities and stockholders' equity ............................... $ 4,917,407 $ 11,950,808
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- --------------------------------------------------------------------------------
Page 14 of 32
<PAGE> 15
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
June 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Sales .................................................. $ 5,828,247 $ 4,879,026
Cost of sales .......................................... 3,836,319 3,287,662
----------- -----------
Gross margin ........................................... 1,991,928 1,591,364
Operating expenses:
Selling, general and administrative ................. 6,038,120 4,360,332
Research and product development .................... 378,365 246,433
----------- -----------
6,416,485 4,606,765
----------- -----------
Loss from operations ................................... (4,424,557) (3,015,401)
Other income (expense):
Interest income ..................................... 45,448 32,843
Interest expense .................................... (705,352) (181,872)
Gain (loss) on sale of assets ....................... 1,500 (3,528)
Other ............................................... (60,982) (59)
----------- -----------
Loss from continuing operations before income taxes .... (5,143,943) (3,168,017)
Income tax expense ..................................... -- 2,382
----------- -----------
Loss from continuing operations after income taxes ..... (5,143,943) (3,170,399)
Discontinued operations:
Gain (loss) from operations ......................... 21,837 (24,753)
Loss on disposal .................................... (738,170) --
----------- -----------
Loss from discontinued operations ...................... (716,333) (24,753)
----------- -----------
Net loss ............................................... $(5,860,276) $(3,195,152)
=========== ===========
Weighted average common shares outstanding ............. 9,168,124 8,197,392
Basic and diluted loss per share:
Continuing operations ............................... $ (0.56) $ (0.39)
Discontinued operations ............................. (0.08) --
----------- -----------
Total .................................................. $ (0.64) $ (0.39)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- --------------------------------------------------------------------------------
Page 15 of 32
<PAGE> 16
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional
---------------------- ------------------------ Paid In Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock
---------- ---------- ------------ ---------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1997 17,250 $ 172 7,955,202 $ 79,552 $ 10,523,546 $ (6,536,749) $ (118,750)
Preferred stock conversion (7,000) (70) 175,000 1,750 (1,680)
Common stock issuance 28,333 284 42,500
Warrant issuance 13,333
Warrant exercise 367,273 3,672 245,103
Net loss (3,195,153)
---------- ---------- ------------ ---------- -------------- -------------- ------------
Balance at June 30, 1998 10,250 $ 102 8,525,808 $ 85,258 $ 10,822,802 $ (9,731,902) $ (118,750)
Common stock issuance 1,200,000 12,000 768,000
Warrant issuance 689,929
Warrant exercise 1,668 17
Debenture conversion 786,517 7,865 423,933
Net loss (5,860,276)
---------- ---------- ------------ ---------- -------------- -------------- ------------
Balance at June 30, 1999 10,250 $ 102 10,513,993 $ 105,140 $ 12,704,663 $ (15,592,178) $ (118,750)
========== ========== ============ ========== ============== ============== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- --------------------------------------------------------------------------------
Page 16 of 32
<PAGE> 17
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
June 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................. $(5,860,276) $(3,195,152)
Adjustments to reconcile net loss to net cash
(used) provided by operating activities:
Loss from discontinued operations .................. 716,333 24,753
Depreciation ....................................... 202,872 184,388
Amortization ....................................... 227,638 186,069
Bad debt ........................................... 20,060 12,825
Provision for warranty reserve ..................... 113,352 184,785
Provision for inventory reserve .................... -- 10,181
Deferred revenue ................................... (70,091) 7,500
Loss on sale of assets ............................. -- 3,528
Other non-cash expenses paid with common stock
and warrants ..................................... 1,469,922 23,397
Changes in operating assets and liabilities:
Accounts receivable .............................. (108,558) 83,031
Inventories ...................................... (81,831) (11,226)
Notes receivable ................................. (338,544) --
Restricted cash .................................. -- 54,928
Other assets ..................................... 51,990 52,344
Accounts payable ................................. 180,835 118,741
Accrued liabilities .............................. (29,624) (100,825)
----------- -----------
Cash used in continuing operations ............. (3,505,922) (2,360,733)
Cash provided by discontinued operations ....... 3,445,964 900,474
----------- -----------
Net cash used by operating activities ........ (59,958) (1,460,259)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment ................... (266,192) (146,142)
Purchase of software technology ...................... (200,090) --
Proceeds from the sales of property and equipment .... -- 4,188
Investing activities of discontinued operations ...... -- (773,292)
----------- -----------
Net cash used by investing activities ........ (466,282) (915,246)
----------- -----------
Cash flows from financing activities:
Issuances of common stock ............................ 17 248,775
Payments of long-term debt and other liabilities ..... (1,833,671) (229,254)
Proceeds from notes payable and long-term debt ....... 2,561,260 1,125,026
Financing activities of discontinued operations ...... -- 32,906
----------- -----------
Net cash provided by financing activities .... 727,606 1,177,453
----------- -----------
Increase (decrease) in cash and cash equivalents ........ 201,366 (1,198,052)
Cash and cash equivalents at beginning of period ........ 49,747 1,247,799
----------- -----------
Cash and cash equivalents at end of period .............. $ 251,113 $ 49,747
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- --------------------------------------------------------------------------------
Page 17 of 32
<PAGE> 18
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Integrated Security Systems, Inc. ("ISSI" or the "Company") was formed in
December 1991. ISSI consists of two wholly-owned subsidiaries: Intelli-Site,
Inc. ("ISI"), a developer and retail seller of PC-based control systems which
integrate discrete security devices; and B&B Electromatic, Inc. ("B&B"), a gate
and barrier engineering and manufacturing facility. Golston Company, Inc.
("Golston") and Tri-Coastal Systems, Inc. ("TCSI") are reflected as discontinued
operations in the financial statements as a result of the sale of Golston in May
1999 and the sale of TCSI in August 1999.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the Company and its subsidiaries:
B&B and ISI. All significant intercompany transactions and balances have been
eliminated. TCSI and Golston are reflected as discontinued operations.
CASH AND CASH EQUIVALENTS
Cash is comprised of highly liquid instruments with maturities of three months
or less. Restricted cash of $107,039 related to a factoring arrangement was
outstanding at June 30, 1998.
INVENTORIES
Inventories are 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 provided over the
estimated useful lives of the assets using straight-line and accelerated
methods. Leased property and equipment under capital leases are amortized on the
straight-line method over the lesser of the life of the asset or the remaining
term of the lease. Estimated useful lives range from 3 to 31 years.
INTANGIBLE ASSETS AND AMORTIZATION
Goodwill of $1,818,385 at June 30, 1998, resulted from the acquisitions of TCSI
and Golston and was 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. Due to the disposition of both TCSI and
Golston, amortization expense has been accounted for as discontinued operations
for the year ended June 30, 1999.
Loan origination fees of $107,615 at June 30, 1998, were incurred to secure
financing. These fees were being amortized using the straight-line method over a
period of five years. Amortization expense for the year ended June 30, 1998 was
$20,817. During the year ended June 30, 1999, this financing agreement was
refinanced and these loan origination fees were expensed.
Non-compete agreements were executed in conjunction with the Golston
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. Due to the
disposition of Golston, the related amortization and interest expense has been
accounted for as discontinued operations for the year ended June 30, 1999.
- --------------------------------------------------------------------------------
Page 18 of 32
<PAGE> 19
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
It is the Company's policy to periodically review the net realizable value of
its intangible assets, including goodwill, through an assessment of the
estimated future cash flows related to such assets. Each business unit to which
these intangible assets relate is reviewed to determine whether future cash
flows over the remaining estimated useful life of the assets provide for
recovery of the carrying value of the assets. If assets are being carried 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 years ended June 30, 1999 or 1998.
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." Capitalized costs are amortized over the greater of the revenue
method or the straight-line method over five years. Amortization expense for
each of the years ended June 30, 1999 and 1998 was $127,381. Accumulated
amortization at June 30, 1999 was $445,834 and at June 30, 1998 was $318,453.
On January 29, 1999, the Company completed the acquisition of software
technology for $200,000 cash and options to purchase 100,000 shares of the
Company's common stock. This technology is synergistic to Intelli-Site's core
business as it broadens the platform capabilities of the Intelli-Site security
integration software by enhancing features and functionality. This technology is
being amortized over a period of two years. At June 30, 1999, accumulated
amortization and amortization expense were $58,360.
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
The Company computes basic net loss per common share using the weighted average
number of common shares. Dilutive net loss per common share is not presented as
all common equivalent shares would have been antidilutive. At June 30, 1999 and
1998, there were 9,664,010 and 8,609,538 potentially dilutive common shares
which were not included in weighted average shares outstanding because to do so
would have been antidilutive.
- --------------------------------------------------------------------------------
Page 19 of 32
<PAGE> 20
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual amounts
could differ from these estimates.
STATEMENTS OF CASH FLOWS
Supplemental cash flow information for the years ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Interest paid $ 284,805 $ 863,769
Income taxes paid $ -- $ 42,473
</TABLE>
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.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation to employees using the
intrinsic value method. Accordingly, compensation cost for stock options to
employees is measured as the excess, if any, of the quoted market price of the
Company's common stock at the date of the grant over the amount an employee must
pay to acquire the stock.
3. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of certain balance sheet accounts is as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Inventories:
Raw materials ..................... $ 422,770 $ 296,453
Work-in-process ................... 105,763 150,914
Finished goods .................... 665 --
----------- -----------
$ 529,198 $ 447,367
=========== ===========
Property and equipment:
Land .............................. $ 40,164 $ 40,164
Building .......................... 586,449 577,168
Leasehold improvements ............ 48,769 48,769
Office furniture and equipment .... 990,088 722,559
Manufacturing equipment ........... 595,994 639,398
Vehicles .......................... 63,875 34,442
Construction ...................... 153,425 153,425
----------- -----------
2,478,764 2,215,925
Less: accumulated depreciation ........ (1,458,771) (1,259,252)
----------- -----------
$ 1,019,993 $ 956,673
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
Page 20 of 32
<PAGE> 21
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. LONG-TERM DEBT AND OTHER LIABILITIES
Long-term debt and other liabilities consists of the following:
<TABLE>
<CAPTION>
June 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Convertible note payable to venture capital funds; interest at 9% of outstanding
principal balance due in monthly installments through December 2003; monthly
principal installments of $10 per $1,000 of the then remaining principal amount
of the debenture beginning in December 1999 through maturity; secured by equity,
assets and future contracts. The outstanding balance of the note can be
converted into ISSI's common stock based at $0.549 per share. At June 30, 1998
and 1999, the Company was 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 events
of non-compliance ................................................................... $ 4,168,202 $ 4,600,000
Term note payable to a bank; due in monthly principal and interest installments
of $12,000 through November 2000; interest at the lender's prime rate less 1%
(10% at June 30, 1998 and 1999); secured by first mortgage on real estate and
equipment; personally guaranteed by an officer ...................................... 704,258 774,117
Convertible note payable to venture capital funds; interest at 9% due in monthly
installments of $4,438 principal and accrued unpaid interest due upon demand.
The outstanding balance of the note can be converted into ISSI's common stock at
$0.549 per share .................................................................... 600,000 --
Cash accelerator agreement with a bank; interest at prime plus 3% (10.75% at
June 30, 1999); account management fee of $1,000 per month; quarterly fee of
1% of the sum of the aggregate daily average outstanding unpaid balance. At
June 30, 1999, the Company was not in compliance with the Tangible Net Worth and
Fixed Charge Coverage Ratio financial standards under this agreement. The
Company has obtained waivers related to these events of non-compliance............... 325,480 --
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
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
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
Other term notes payable to unrelated third parties ................................. 140,649 268,665
----------- -----------
5,938,569 7,146,919
Less current portion ................................................................ (1,330,566) (985,494)
----------- -----------
$ 4,608,003 $ 6,161,425
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
Page 21 of 32
<PAGE> 22
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Payments required under long-term debt and other liabilities outstanding at June
30, 1999 are as follows:
<TABLE>
<S> <C>
2000 $ 1,330,566
2001 582,641
2002 523,344
2003 479,105
2004 2,793,172
Thereafter 229,741
-----------
$ 5,938,569
===========
</TABLE>
The Company obtained waivers related to non-compliance with certain debt
covenants as of June 30, 1998.
5. INCOME TAXES
The income tax provision is comprised of the following:
<TABLE>
<CAPTION>
For the Years Ended June 30,
------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Current $ -- $ 2,382
Deferred -- --
--------- ---------
$ -- $ 2,382
========= =========
</TABLE>
A reconciliation of the income tax provision and the amount computed by applying
the federal statutory benefit rate to loss before income taxes are as follows:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
--------------- ---------------
<S> <C> <C>
Federal statutory benefit rate (34.0%) (34.0%)
Increase in valuation allowance 34.0% 33.0%
Non-deductible amortization and other --% 1.0%
--------------- ---------------
--% --%
=============== ===============
</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, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Deferred tax assets
Amortization 69,000 $ 75,525
Non-compete covenant -- 33,315
Property and equipment -- 24,164
Warranty reserve 29,000 27,925
Accounts receivable 17,000 15,354
Net operating loss carryforward 4,930,000 3,071,981
------------- -------------
Gross deferred tax asset 5,045,000 3,248,264
Deferred tax liabilities
Property and equipment 122,000 --
------------- -------------
Net deferred tax asset 4,923,000 3,248,264
Valuation allowance (4,717,616) (3,042,880)
------------- -------------
Net deferred tax asset $ 205,384 $ 205,384
============= =============
</TABLE>
- --------------------------------------------------------------------------------
Page 22 of 32
<PAGE> 23
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company has unused net operating loss carryforwards of approximately $14.5
million at June 30, 1999. 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.
6. COMMITMENTS AND CONTINGENCIES
The Company leases facilities and equipment under leases accounted for as
operating leases. Future minimum payments for fiscal years subsequent to June
30, 1999 under non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
Operating Leases
------------------
<S> <C>
2000 $ 174,266
2001 85,682
2002 0
2003 0
2004 0
-------------
Total minimum payment $ 259,948
=============
</TABLE>
Rent expense for operating leases was $146,269 and $163,972 for the fiscal years
ended June 30, 1999 and 1998, respectively.
CONTINGENCIES
In 1997, the Company entered into an agreement with an unaffiliated partnership,
whereby the partnership funded certain expenses of ISI. In exchange, the
partnership received the rights to 85% of the revenue generated from the ISI's
Intelli-Site software sales up to the earlier of the time the partnership
achieved a 150% return on its investment or July 2001.
In 1999, the Company repurchased the aforementioned arrangement in exchange for
1.2 million shares of its common stock and warrants to purchase 450,000 shares
of common stock. The Company recognized expense related to this transaction of
$.9 million during 1999.
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, results of operations or cash flows.
7. 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
and the Company may at its option make discretionary contributions. Vesting on
the Company's contribution occurs over a five-year period. The Company made no
contributions during the years ended June 30, 1999 and 1998.
8. STOCK OPTIONS AND WARRANTS
The Company's 1993 Stock Option Plan provides for grants of options for up to
500,000 shares of common stock. Under the plan, options must be granted with an
exercise price not less than the fair market value on the date of grant.
- --------------------------------------------------------------------------------
Page 23 of 32
<PAGE> 24
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company's 1997 Omnibus Stock Plan provides for the granting of incentive
stock options, non-statutory stock options, stock appreciation rights, awards of
stock and stock purchase opportunities to its directors, employees and
consultants. Under the plan, incentive stock options may only be granted to
employees or directors of the Company.
Option exercise prices are equal to the market price at date of grant. Shares
under grant generally become exercisable over three years and expire after ten
years.
If the Company recognized compensation expense as permitted under Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), based on the fair value at
the grant dates, the Company's pro forma net loss and net loss per share would
have been as follows (net loss amounts in thousands):
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
June 30, 1999 June 30, 1998
-------------------------------------- --------------------------------------
As reported Pro forma As reported Pro forma
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Loss $ (5,860) $ (5,979) $ (3,195) $ (3,259)
Loss per Common Share $ (.64) $ (.65) $ (.39) $ (.40)
</TABLE>
The fair value of these options was estimated at the date of grant using the
Black-Sholes option pricing model with the following weighted average
assumptions: For the period ending June 30, 1999, expected volatility of 37-45%;
risk-free interest rates of 4.5-5.4%; no dividend yield; and expected lives of
five years. For the period ending June 30, 1998, expected volatility of 87%;
risk-free interest rates of approximately 5.9%; no dividend yield; and expected
lives of approximately five years. The pro forma net loss and net loss per share
may not be indicative of future amounts because the disclosures do not reflect
compensation expense for options granted prior to fiscal 1995.
Additional information with respect to options outstanding at June 30, 1999 and
changes for the two years then ended is as follows (share amounts in thousands):
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
June 30, 1999 June 30, 1998
------------------------------------- -------------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
----------- ---------------------- ------------ ---------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 1,336 $1.78 928 $1.98
Granted 933 .86 478 1.32
Forfeited (107) 1.42 (59) 1.28
----------- ---------------------- ------------ ---------------------
Outstanding at end of period 2,162 $1.40 1,336 $1.78
=========== ====================== ============ =====================
Exercisable at end of period 1,242 1.71 884 $2.00
Weighted-average fair value of options
granted during the period $ .54 $1.00
</TABLE>
- --------------------------------------------------------------------------------
Page 24 of 32
<PAGE> 25
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Information about stock options outstanding at June 30, 1999 is summarized as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ----------------------------------
Range of Shares Weighted Average Weighted Shares Weighted
Exercise Prices Outstanding Remaining Average Exercisable Average
at 6/30/99 Contractual Life Exercise Price at 6/30/99 Exercise Price
- ----------------- ------------- ------------------ --------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.687-1.50 1,389 8.8 Years $ .98 533 $1.05
$1.563-2.50 763 4.6 Years 2.16 699 2.21
$2.719-3.53 10 6.1 Years 2.71 10 2.72
------------- --------------- ------------- ----------------
2,162 $1.40 1,242 $1.71
</TABLE>
WARRANTS
During fiscal 1998, the Company issued warrants as consideration for obtaining a
debt covenant waiver. These warrants permit the holder to purchase 25,000 shares
of the Company's common stock at $1.75 per share and expire in 2002. During the
same period, the Company issued warrants to purchase 22,222 shares of the
Company's common stock for $1.65 per share as consideration for legal services.
These warrants expire in 2001.
During fiscal 1999, the Company issued warrants to purchase 100,000 shares of
its common stock for $.01 per share. These warrants were issued as compensation
for certain investor relations representation and expire in 2003. Also in fiscal
1999, in conjunction with financing transactions, the Company issued warrants to
purchase 437,500 shares of its common stock for $.80 per share and warrants to
purchase 1,274,715 shares of its common stock for $.549 per share, both of which
expire in 2004, and, in association with the acquisition of the royalty
arrangements (See Note 6), warrants to purchase 480,000 shares of its common
stock for $2.00 per share, which expire in 2009.
Additional information with respect to warrants outstanding at June 30, 1999 and
changes for the two years then ended are as follows (share amounts in
thousands):
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
June 30, 1999 June 30, 1998
----------------------------------- ----------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------ ------------------- ----------- ------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 4,793 $3.30 5,107 $3.07
Granted 2,292 .86 47 1.70
Exercised (2) .01 (517) .96
Forfeited (106) 1.00 (642) 1.00
Repriced -- 0.00 798 2.55
------------ ------------------- ----------- ------------------
Outstanding at end of period 6,977 $1.84 4,793 $3.30
============ =================== =========== ==================
Exercisable at end of period 6,977 $1.84 4,660 $2.30
Weighted-average fair value of warrants
granted during the period $ .36 $1.05
</TABLE>
- --------------------------------------------------------------------------------
Page 25 of 32
<PAGE> 26
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Information about warrants outstanding at June 30, 1999 is summarized as
follows:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
------------------------------------------------------- --------------------------------
Shares Weighted Average Weighted Shares Weighted
Range Outstanding Remaining Average Exercisable Average
of Exercise Prices at 6/30/99 Contractual Life Exercise Price at 6/30/99 Exercise Price
- --------------------- ------------- ------------------ --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$.01-1.00 2,419 3.9 Years $ .67 2,419 $ .67
$1.06-2.00 610 7.7 Years 1.96 610 1.96
$2.40-2.55 3,947 .8 Years 2.55 3,947 2.55
------------- --------------- ------------- ---------------
6,977 $ 1.84 6,977 $ 1.84
</TABLE>
9. CONVERTIBLE PREFERRED STOCK
The Company's outstanding 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. The holders of the Series A Preferred have the
right to convert each share into 20 shares of Common Stock at any time. 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.
10. SEGMENT REPORTING
Effective July 1, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which changes the way the
company reports information about its operating segments.
The Company has two business segments: B&B Electromatic, Inc. ("B&B") and
Intelli-Site, Inc. ("ISI"). These segments are differentiated by the products
they produce and the customers they service as follows:
B&B. This segment consists of road and bridge perimeter security and railroad
physical security products such as warning gates, crash barriers, lane changers,
navigational lighting, airport lighting and hydraulic gates and operators, and
aluminum gate panels.
ISI. This segment consists of the development and marketing of programmable
security systems that integrate multiple security devices and subsystems for
governmental, commercial and industrial facilities utilizing the Intelli-Site(R)
software product through systems integrators and original equipment
manufacturers to end users.
The Company's underlying accounting records are maintained on a legal entity
basis for government and public reporting requirements. Segment disclosures are
on a performance basis consistent with internal management reporting. The
Company evaluates performance based on earnings from operations before income
tax and other income and expense. The corporate column includes corporate
overhead-related items. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies (Note 2).
- --------------------------------------------------------------------------------
Page 26 of 32
<PAGE> 27
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table provides financial data by segment for the fiscal years
ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
B&B ISI Corporate Total
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
1999
Sales $ 5,538,930 $ 289,318 $ -- $ 5,828,247
Loss from operations (71,385) (2,799,885) (1,553,287) (4,424,557)
Total assets 2,720,489 727,227 1,469,691 4,917,407
Depreciation and amortization expense 143,503 236,269 50,738 430,510
Capital additions 108,690 144,039 13,463 266,192
1998
Sales $ 4,874,248 $ 4,778 $ -- $ 4,879,026
Loss from operations (635,231) (1,311,698) (1,068,472) (3,015,401)
Total assets 2,675,264 476,405 8,799,136 11,950,805
Depreciation and amortization expense 136,733 205,859 27,865 370,457
Capital additions 96,392 39,039 10,711 146,142
</TABLE>
11. DISCONTINUED OPERATIONS
Effective October 1, 1998, the Company disposed of a portion of its Golston
subsidiary. In May 1999, the Company sold the remainder of Golston, which
designs, manufactures and markets pneumatic tube carriers for use in financial
institutions and hospitals through its plastic injection molding operations.
Summarized financial information for Golston is as follows:
<TABLE>
<CAPTION>
For the Year Ended
June 30,
--------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Revenues $ 3,794,575 $ 4,421,938
Income from discontinued operations 344,747 175,176
Loss on disposal (313,170) --
</TABLE>
In June 1999, the Company discontinued operations of its TCSI subsidiary, which
designs, sells, installs and services electronic security systems. The Company
sold TCSI on August 13, 1999.
Summarized financial information for TCSI is as follows:
<TABLE>
<CAPTION>
For the Year Ended
June 30,
--------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Revenues $ 1,423,095 $ 1,824,052
Loss from discontinued operations (322,910) (199,929)
Loss on disposal (425,000) --
</TABLE>
The net assets of discontinued operations of TCSI at June 30, 1999 of $626,220
consist of $29,495 of cash, $159,741 of accounts receivable, $51,949 of
inventories, $179,669 of other current assets, $10,601 of equipment, and
$194,768 of goodwill, net of accumulated amortization.
As discussed above, the Company has reflected both Golston and TCSI as
discontinued operations in the accompanying financial statements. Accordingly,
the balance sheet at June 30, 1998 and the related consolidated statements of
operations, and of cash flows for the year ended June 30, 1998 and the 1998
amounts in the related footnotes have been restated.
- --------------------------------------------------------------------------------
Page 27 of 32
<PAGE> 28
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. LIQUIDITY
The Company's liabilities are currently in excess of its assets and ISSI has
experienced significant losses during fiscal 1998 and 1999. During this period,
ISSI has shifted its business focus to the B&B and ISI subsidiaries and divested
of its other subsidiaries. Management expects losses to continue through the
first half of fiscal 2000. In order to meet working capital needs, the Company
raised $1.5 million through the sale of convertible preferred stock through a
private placement in October 1999. The Company believes proceeds from this
funding combined with results from operations will be sufficient to finance its
future cash requirements through fiscal 2000.
At June 30, 1998, the Company's auditors felt there was substantial doubt about
the Company's ability to continue as a going concern. The June 30, 1998
financial statements were prepared assuming that the Company would continue as a
going concern and did not include any adjustments that could have resulted from
the outcome of that uncertainty.
- --------------------------------------------------------------------------------
Page 28 of 32
<PAGE> 29
ITEM 8. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
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.
**4.5 Certificate of Designation for Series A $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.
- --------------------------------------------------------------------------------
Page 29 of 32
<PAGE> 30
*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.
*10.37 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.
*10.49 Amendment to Integrated Security System, Inc. 1993 Stock
Option Plan.
***10.58 Form of Subscription Agreement for Series A Convertible
Preferred Stock executed on March 27, 1996.
***10.59 Subscription Agreement for Common Stock executed March 28,
1996.
***10.60 Form of Warrant Agreement for purchase of common stock
executed March 29, 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, ISI, and I.S.T. Partners, Ltd.
**10.68 Employment Agreement, dated January 2, 1997, between Gerald K.
Beckmann 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.
****10.73 Asset Purchase Agreement, dated May 29, 1999 between the
Company and Day's Molding & Machinery, LLC
*****10.74 Purchase Agreement dated May 21, 1999 between the Company and
I.S.T. Partners, Ltd.
*****10.75 Stock Purchase Agreement dated August 13, 1999 between the
Company and Notifications Systems of America, Inc.
*****11.1 Computation of earnings per share.
*****21.1 Subsidiaries of the Company.
*****23.1 Consent of Grant Thornton LLP
*****23.2 Consent of PricewaterhouseCoopers LLP
- --------------------------------------------------------------------------------
Page 30 of 32
<PAGE> 31
- -----------
* 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 as the similarly numbered exhibit to the Company's Form
10-QSB for the quarter ended March 31, 1996.
**** Filed as the similarly numbered exhibit to the Company's Form
8-K filed June 14, 1999.
***** Filed herewith.
(b) Reports filed on Form 8-K.
Report filed June 14, 1999 for sale of Golston Company, Inc.
- --------------------------------------------------------------------------------
Page 31 of 32
<PAGE> 32
SIGNATURES
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Integrated Security Systems, Inc.
--------------------------------------------
(Registrant)
Date: October 13, 1999 /s/ C. A. RUNDELL, JR.
------------------------ --------------------------------------------
C. A. Rundell, Jr.
Director and Chairman of the Board
Date: October 13, 1999 /s/ GERALD K. BECKMANN
------------------------ --------------------------------------------
Gerald K. Beckmann
Director, President and Chief Executive
Officer
Date: October 13, 1999 /s/ HOLLY J. BURLAGE
------------------------ --------------------------------------------
Holly J. Burlage
Vice President, Principal Financial
Officer, Principal Accounting Officer,
Secretary and Treasurer
Date: October 13, 1999 /s/ ROBERT M. GALECKE
------------------------ --------------------------------------------
Robert M. Galecke
Director
Date: October 13, 1999 /s/ JAMES E. JACK
------------------------ --------------------------------------------
James E. Jack
Director
Date: October 13, 1999 /s/ FRANK R. MARLOW
------------------------ --------------------------------------------
Frank R. Marlow
Director
- --------------------------------------------------------------------------------
Page 32 of 32
<PAGE> 33
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.
**4.5 Certificate of Designation for Series A $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.
*10.20 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.
*10.37 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.
*10.49 Amendment to Integrated Security System, Inc. 1993 Stock
Option Plan.
***10.58 Form of Subscription Agreement for Series A Convertible
Preferred Stock executed on March 27, 1996.
***10.59 Subscription Agreement for Common Stock executed March 28,
1996.
***10.60 Form of Warrant Agreement for purchase of common stock
executed March 29, 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, ISI, and I.S.T. Partners, Ltd.
**10.68 Employment Agreement, dated January 2, 1997, between Gerald K.
Beckmann 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.
****10.73 Asset Purchase Agreement, dated May 29, 1999 between the
Company and Day's Molding & Machinery, LLC
*****10.74 Purchase Agreement dated May 21, 1999 between the Company and
I.S.T. Partners, Ltd.
*****10.75 Stock Purchase Agreement dated August 13, 1999 between the
Company and Notifications Systems of America, Inc.
*****11.1 Computation of earnings per share.
*****21.1 Subsidiaries of the Company.
*****23.1 Consent of Grant Thornton LLP
*****23.2 Consent of PricewaterhouseCoopers LLP
</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 as the similarly numbered exhibit to the Company's Form
10-QSB for the quarter ended March 31, 1996.
**** Filed as the similarly numbered exhibit to the Company's Form
8-K filed June 14, 1999.
***** Filed herewith.
<PAGE> 1
EXHIBIT 10.74
PURCHASE AGREEMENT
This PURCHASE AGREEMENT (the "Agreement") is made as of May 21, 1999,
by and between I.S.T. Partners, Ltd., a Texas Limited Partnership ("IST
Partners") and Integrated Security Systems, Inc., a publicly held Delaware
corporation ("ISSI").
WHEREAS, ISSI is a public company which owns Intelli-Site(R), a
PC-based security system integration platform; and
WHEREAS, IST Partners and ISSI entered into a Marketing and
Development Agreement, dated July 29, 1996 (the "Marketing Agreement"); and
WHEREAS, ISSI and IST Partners entered into a Management Agreement,
dated July 29, 1996 (the "Management Agreement"); and
WHEREAS, ISSI desires to purchase from IST Partners any and all rights
under the Marketing Agreement, Management Agreement, and any other documents
executed by and between ISSI and IST Partners on July 29, 1996 (collectively,
the "Related Agreements") on the terms set forth herein;
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises, covenants, representations, and warranties herein contained, and
intending to be legally bound, the parties hereby agree as follows:
1. Purchase and Sale. In reliance upon the representations and
warranties contained herein, and subject to the terms and conditions hereof, at
the Closing (as hereinafter defined), the following shall occur:
(a) IST Partners shall assign to ISSI all rights, title, and
interest of IST Partners in and to the Related Agreements.
(b) IST Partners shall release ISSI from all amounts payable
to IST Partners under the Related Agreements.
(c) ISSI shall issue to IST Partners 1,200,000 shares of
common stock of ISSI, par value $.01 (the "Common Stock").
(d) ISSI shall issue to IST Partners a warrant to purchase
450,000 shares of Common Stock at a price of $2 per share, such
warrant to be substantially in the form attached hereto as Exhibit A
(the "Warrant").
2. Closing. The purchase and sale of the assets described above in
paragraph 1, and the delivery of the documents and the performance of the other
matters described herein, shall take place at the offices of Founders Equity
Group, Inc., 2602 McKinney Ave., Suite 220, Dallas, Texas 75204 on May 21,
1999, or at any later date mutually agreed upon by IST Partners and ISSI. The
closing of such purchase and sale is referred to in this Agreement as the
"Closing." The agreed upon date of the Closing is referred to in this Agreement
as the "Closing Date."
<PAGE> 2
3. Documents to be delivered by IST Partners. At the Closing, IST
Partners shall deliver to ISSI the following documents:
(a) An assignment agreement, in form and substance
satisfactory to ISSI, which assigns to ISSI all of IST Partners'
right, title, and interest in and to the Related Agreements. Such
assignment agreement shall not relate to any other assets of IST
Partners other than the Related Agreements.
(b) A release by IST Partners to ISSI, in form and substance
satisfactory to ISSI, which releases ISSI from all amounts payable to
IST Partners pursuant to the Related Agreements.
(c) A termination agreement, in form and substance
satisfactory to ISSI, which terminates all Related Agreements.
4. Documents to be delivered by ISSI. At the Closing, ISSI shall
deliver to IST Partners the following:
(a) Stock certificates for 1,200,000 shares of Common Stock.
(b) The Warrant.
5. Representations and Warranties by IST Partners. IST Partners
represents and warrants to ISSI as follows:
(a) Partnership Status. IST Partners is a partnership duly
organized, validly existing, and in good standing under the laws of
the State of Texas with full power and authority to carry on their
businesses, as now conducted at 2602 McKinney Ave., Suite 220, Dallas,
Texas 75204.
(b) Authority of the Agreement. The partners of IST Partners
have approved this Agreement and the transfer of IST Partners' rights,
title, and interest under the Related Agreements. IST Partners has the
power and authority to execute and deliver this Agreement and to carry
out its obligations hereunder. This Agreement constitutes a valid and
legally binding obligation of IST Partners, enforceable against IST
Partners in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, reorganization, or other laws
affecting the enforcement of creditors' rights generally now or
hereafter in effect and subject to the application of equitable
principles and the availability of equitable remedies.
(c) Confidentiality. IST Partners acknowledges that it is in
possession of information relating to ISSI that ISSI considers
confidential and proprietary. For a period of three (3) years after
the Closing, IST Partners shall not disclose any such information to
third parties or to use such information in any manner.
(d) Restricted Securities. IST Partners understands that the
securities to be issued to IST Partners hereunder (and the Common
Stock to be issued on exercise of the Warrant) (collectively, the
"Securities") have not been registered under the Securities Act of
1933, as amended (the "Securities Act") on the grounds that the sale
provided for in this Agreement is exempt from registration under the
Securities Act, pursuant to Section 4.2 thereof. The
<PAGE> 3
Securities are and will be "restricted securities," as that term is
defined in Rule 144 promulgated under the Securities Act. The
Securities may not be sold or otherwise transferred unless they first
have been registered under the Securities Act and all applicable state
securities laws, or unless exemptions from such registration
provisions are available with respect to said resale or transfer.
(e) Investment Purposes. IST Partners will be acquiring the
Securities for its own account, and not as nominee or agent for any
other persons, and for investment and not with a view to distribution
or resale thereof.
6. Representation and Warranties of ISSI. ISSI represents and warrants
to IST Partners as follows:
(a) Corporate Status. ISSI is a publicly held Delaware
corporation ("ISSI") doing business at 8200 Springwood Drive, Suite
230, Irving, Texas.
(b) Individual Status. C.A. Rundell, Jr. and Gerald K.
Beckmann are authorized to execute and deliver this Agreement on
behalf of ISSI.
(c) Authority for Agreement. ISSI has the power and authority
to execute and deliver this Agreement and to carry out its obligations
hereunder. ISSI has the power and authority to issue to IST Partners
the Securities. This Agreement constitutes a valid and legally binding
obligation of ISSI, enforceable against ISSI in accordance with its
terms, except as the same may be limited by bankruptcy, insolvency,
reorganization, or other laws affecting the enforcement of creditors'
rights generally now or hereafter in effect and subject to the
application of equitable principles and the availability of equitable
remedies.
(d) Confidentiality. ISSI acknowledges that it is in
possession of information relating to IST Partners that IST Partners
considers confidential and proprietary. For a period of three (3)
years after the Closing, ISSI shall not disclose any such information
to third parties or to use such information in any manner.
7. Release by ISSI. Effective as of the Closing:
ISSI does hereby, and for anyone claiming by or through ISSI, fully
remise, release, acquit, and forever discharge IST Partners and any subsidiary
or affiliated corporation, their partners, agents, lenders, employees,
stockholders, directors, officers, successors and assigns (collectively,
"Released Parties"), of any from any and all rights, claims, demands, actions,
and causes of action, of any nature whatsoever, whether arising at law or in
equity, which ISSI may have had, may now have, or may hereafter have, against
the Released Parties by reason of any matter, cause, happening or thing
occurring prior to and including the Closing Date. It is intended by ISSI by
this Agreement to forever remise, acquit, waiver, release and forever discharge
the Released Parties from all claims, demands for losses, injuries, and
damages, rights known or unknown, direct or indirect, arising from the
aforementioned described matters, and from any other matter occurring prior to
the Closing Date, it being understood that all rights which ISSI or any person
who claims by, through, or under ISSI may have against Released Parties shall
be forever barred. In addition, ISSI hereby agrees to refrain at all times from
any defamation, libel, or slander of IST Partners and any of its officers or
directors. Such release shall not affect the obligations of IST Partners under
this Agreement, which are intended to survive the Closing.
<PAGE> 4
8. Release by IST Partners. Effective as the Closing:
IST Partners does hereby, and for anyone claiming by or through IST
Partners, fully remise, release, acquit, and forever discharge ISSI and any
subsidiary or affiliated corporation, their partners, agents, lenders,
employees, stockholders, directors, officers, successors and assigns
(collectively, "ISSI Released Parties"), of any from any and all rights,
claims, demands, actions, and causes of action, of any nature whatsoever,
whether arising at law or in equity, which IST Partners may have had, may now
have, or may hereafter have, against the ISSI Released Parties by reason of any
matter, cause, happening or thing occurring prior to and including the Closing
Date. It is intended by IST Partners by this Agreement to forever remise,
acquit, waiver, release and forever discharge the ISSI Released Parties from
all claims, demands for losses, injuries, and damages, rights known or unknown,
direct or indirect, arising from the aforementioned described matters, and from
any other matter occurring prior to the Closing Date, it being understood that
all rights which IST Partners or any person who claims by, through, or under
IST Partners may have against ISSI Released Parties shall be forever barred. In
addition, IST Partners hereby agrees to refrain at all times from any
defamation, libel, or slander of the ISSI Released Parties and any of their
officers or directors. Such release shall not affect (i) the obligations of
ISSI under this Agreement, which are intended to survive the Closing, or (ii)
any capital stock of ISSI, or warrants exercisable for capital stock of ISSI,
which are currently owned by IST Partners.
9. Indemnification.
(a) From and after the date hereof, IST Partners will
indemnify and hold harmless ISSI against any and all liability,
damage, deficiency, loss, cost, or expense (including reasonable
attorneys' fees and expenses) that are based upon or that arise out of
any misrepresentation or breach of any warranty or agreement made by
IST Partners herein.
(b) From and after the date hereof, ISSI will indemnify and
hold harmless IST Partners against any and all liability, damage,
deficiency, loss, cost, or expense (including reasonable attorneys'
fees and expenses) that are based upon or that arise out of any
misrepresentation or breach of any warranty or agreement made by ISSI
herein.
(c) Each party entitled to indemnification under this
Agreement (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party")
promptly after each Indemnified Party has actual knowledge of any
third-party claim as to which indemnity may be sought, and shall
permit the Indemnifying Party (at its expense) to assume the defense
of any claim or any litigation resulting therefrom; provided that
counsel for the Indemnifying Party who shall conduct the defense of
such claim or litigation, shall be reasonably satisfactory to the
Indemnified Party, and the Indemnified Party may participate in such
defense, but only at such Indemnified Party's expense; and provided,
further that the failure by any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its
indemnification obligations under this Agreement unless the
Indemnifying Party is materially prejudiced as a result of the failure
to give such notice. No Indemnifying Party, in the defense of such
claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability with respect to such claim or litigation.
In the event that the Indemnifying Party does not accept the defense
of any matter as above provided,
<PAGE> 5
the Indemnified Party shall have the full right to defend against any
such claim or demand, and shall be entitled to settle or agree to pay
in full such claim or demand in its sole discretion. In any event (and
subject to all of the foregoing), IST Partners and ISSI shall
cooperate in the defense of such action and the records of each shall
be available to the other with respect to such defense.
10. Further Assurances. At any time, and from time to time after the
Closing, each party shall, without further consideration, execute and deliver
to the other party such other instrument of transfer and assumption, and shall
take such other actions as the other party may reasonably request to carry out
the transfers contemplated by this Agreement.
11. Legends. The Warrant and the stock certificates representing the
Securities shall be endorsed with the legends set forth below:
(a) The following legend under the Securities Act:
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND
UNTIL REGISTERED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS
RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE,
SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH
REGISTRATION IS NOT REQUIRED."
(b) Any legend imposed or required by ISSI's Bylaws or
applicable state securities laws.
12. Internal Governance of IST Partners. Nothing in this Agreement is
intended to affect internal organizational matters of IST Partners, or the
internal governance of IST Partners.
13. Miscellaneous.
(a) Headings. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
(b) Entire Agreement. This Agreement constitutes the entire
agreement of the parties and supersedes all prior agreements and
understanding, both written and oral, among the parties with respect
of the subject matter hereof and may not be modified or amended except
in writing signed by both parties hereto.
(c) Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, and all of
which shall constitute one and the same instrument.
(d) Governing Law. This Agreement shall be governed in all
respects, including validity, interpretation, and effect, by the laws
of the State of Texas, applicable to contracts made and to be
performed in Texas.
<PAGE> 6
(3) Severability. If any provision of this Agreement shall be
held or deemed to be or shall, in fact, be inoperative or
unenforceable as applied to any particular case because it conflicts
with any other provision or provisions hereof or any constitution or
statute or rule of public policy, or for any other reason, such
circumstances shall not have the effect of rendering the provision in
question inoperative or unenforceable in any other case or
circumstance, or of rendering any other provision or provisions herein
contained invalid, inoperative, or unenforceable to any extent
whatever. The invalidity of any one or more phrases, sentences,
clauses, sections, or subsections of this Agreement shall not affect
the remaining portions of this Agreement.
(f) Binding Effect and Assignment. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the
successors and assigns of the parties hereto. This Agreement shall not
be assignable by either party without the prior written consent of the
other, such consent not to be unreasonably withheld.
(g) Third Party Rights. The rights and obligations contained
in this Agreement are solely for the benefit of the parties hereto and
are not intended to benefit or be enforceable by any other party,
under the third party beneficiary doctrine or otherwise.
(h) Survival. All representations and warranties made by ISSI
and IST Partners herein shall survive delivery of the securities and
the execution of this Agreement.
(i) Venue. All matters affecting the interpretation, form,
validity, enforcement and performance of this Agreement shall be
decided under the laws of the State of Texas in a forum located in
Dallas County, Texas. Both parties consent to the jurisdiction of the
Federal Court for the Northern District of Texas with respect to any
claims or litigation arising out of this Agreement.
(j) Arbitration. Any and all disputes concerning the rights
and obligation of the parties hereto shall be resolved by binding
arbitration under the supervision of three (3) arbitrators appointed
under and pursuant to the rules of the American Arbitration
Association.
The parties have duly executed this Agreement as of the date above written.
IST PARTNERS, LTD.
By: FOUNDERS EQUITY GROUP, INC.
General Partner
By:
----------------------------------
Thomas Spackman, Jr.
President
INTEGRATED SECURITY SYSTEMS, INC.
By:
----------------------------------
C.A. Rundell, Jr.
Chairman of the Board of Directors
<PAGE> 7
the Company, if lost, stolen or destroyed, and upon surrender and
cancellation of this Warrant, if mutilated, the Company shall execute and
deliver to the Holder a new Warrant of like date, tenor and denomination.
10. Warrant Holder Not Shareholder. Except as otherwise provided
herein, this Warrant does not confer upon the Holder any right to vote or to
consent to or receive notice as a shareholder of the Company, as such, in
respect of any matters whatsoever, or any other rights or liabilities as a
shareholder, prior to the exercise hereof.
11. Communication. No notice or other communication under this Warrant
shall be effective unless the same is in writing and is mailed by first-class
mail, postage prepaid, addressed to:
(a) the Company at 8200 Springwood Drive, Suite 230, Irving,
Texas 75063, or such other address as the Company has designated in writing to
the Holder, or
(b) the Holder at 2602 McKinney Ave., Suite 220, Dallas,
Texas 75204, or such other address as the Holder has designated in writing to
the Company.
12. Headings. The headings of this Warrant have been inserted as a
matter of convenience and shall not affect the construction hereof.
13. Applicable Law. This Warrant is made pursuant to, will be
construed under, and will be conclusively deemed for all purposes to have been
executed and delivered under, the substantive laws of the state of Texas,
without regard to its principles of conflict of laws.
14. Assignment. This Warrant is assignable by Holder to any other
party, including (without limitation) the partners of I.S.T. Partners, Ltd.
IN WITNESS WHEREOF, INTEGRATED SECURITY SYSTEMS, INC., has caused this
Warrant to be executed as of May 21, 1999.
Integrated Security Systems, Inc.
By:
----------------------------------
C. A. Rundell, Jr.
Chairman of the Board of Directors
<PAGE> 1
EXHIBIT 10.75
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement") is dated as of August
13, 1999, and is entered into by and between Integrated Security Systems, Inc.,
a Delaware corporation (the "Seller"), Notification Systems of America, Inc., a
Texas corporation (the "Purchaser"), and Tri-Coastal Systems, Inc., a Texas
corporation (the "Company").
WHEREAS, Seller owns all of the issued and outstanding shares of
capital stock of Company; and
WHEREAS, Seller desires to sell to Purchaser and Purchaser desires to
purchase from Seller all shares of common stock of the Company, $.01 par value
(the "Shares") on the basis set forth more fully herein;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the sufficiency of which are
hereby acknowledged, the parties to this Agreement agree as follows:
ARTICLE 1
SALE OF STOCK
1.1. Purchase and Sale of Stock. Subject to the terms and conditions
stated in this Agreement, and on the basis of the representations, warranties,
covenants and agreements set forth herein, at the Closing (defined below) the
Seller shall sell, convey, assign, transfer and deliver to Purchaser, and
Purchaser shall purchase from the Seller, the Shares.
1.2. Purchase Price. The purchase price to be paid by the Purchaser to
the Seller for the Shares at the Closing is $76,058.00 (the "Purchase Price").
Purchaser shall pay the Purchase Price by delivery to Seller, at Closing, of
Purchaser's promissory note, in substantially the form attached hereto as
Exhibit A.
1.3. Closing. The Closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of the Seller, 8200
Springwood Drive, Suite 230, Irving, Texas 75063 on August 13, 1999, at 3:00
central time. The time and date of the Closing are referred to herein as the
Closing Date.
ARTICLE 2
OTHER AGREEMENTS
2.1. Guarantee of PSA Contract by Seller. The Seller hereby guarantees
the full and timely payment of the Company's account payable to PSA (the "PSA
Payable"), in the amount set forth on Exhibit B attached hereto.
2.2. Assignment of Accounts Receivable by Purchaser. The Company
hereby assigns to the Seller all of the Company's right, title and interest in
the accounts receivable of the Company, as such accounts receivable exists on
the date hereof. Such accounts receivable (the "Accounts Receivable"), are set
forth on Exhibit C attached hereto.
<PAGE> 2
2.3. Authority. The Purchaser and the Company authorize the Seller to
endorse any Accounts Receivable payments that are received after the Closing
Date, and to apply the proceeds therefrom against the PSA Payable. At such time
as the PSA Payable has been paid in full by Seller from the proceeds of the
Accounts Receivable, the Seller shall promptly thereafter assign to the Company
all remaining Accounts Receivable, if any.
2.4. Transfer to Seller. Prior to the Closing Date, Purchaser
acknowledges and approves the transfer of the following items from the Company
to the Seller: (i) the inventory of the Company, as set forth on the Company
financial statements as of July 31, 1999; (ii) property and equipment of the
Company, as set forth on the Company financial statements as of July 31, 1999,
excluding three computers, two printers, and one plotter; (iii) the contract
between the Company and Taylor County Jail and Courthouse, Abilene, Texas, dated
October 21, 1997; (iv) the contract between the Company and the United States
Postal Service, P&DC, Coppell, Texas, dated March 12, 1998; (v) the contract
between the Company and the United States Postal Service, Rosemead location,
Carrollton, Texas, dated January 6, 1998; (vi) the contract between the Company
and the United States Postal Service, AMC, Dallas, Texas, dated April 16, 1998;
(vii) the contract between the Company and the United States Postal Service,
AMC, Dallas, Texas, dated April 21, 1998; and (viii) the contract between the
Company and BancTec-Midway, Dallas, Texas, dated June 3, 1999. The Purchaser
retains and assumes all remaining contracts of the Company.
ARTICLE 3
SELLER REPRESENTATIONS
Seller represents and warrants to Purchaser as of the date hereof as
follows:
3.1. Authority. The Seller has full power, right and authority to enter
into and preform its obligations under this Agreement. The Agreement has been
duly executed and delivered by the Seller and constitutes the valid and binding
obligations of the Seller and is enforceable against Seller in accordance with
its terms. Seller shall deliver to Purchaser a corporate resolution approving
the consummation of this sale and authorizing its officers to execute whatever
documents are necessary pertaining to the sale of stock as set forth herein.
3.2. Qualification. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the state of its
incorporation.
3.3. Financial Statements. The financial statements of the Company
(attached as Exhibit D) fairly present the financial position of the Company as
of July 31, 1999. Except as set forth in this Agreement, since the date of such
financial statements, the financial position of the Company has not changed in a
any materially adverse manner.
3.4. Capitalization. The Shares constitute all of the issued and
outstanding shares of capital stock of the Company. There are no outstanding
rights, options, warrants, conversion rights or agreements for the purchase or
acquisition from the Company of any shares of its capital stock.
3.5. Taxes. Seller represents that all taxes, whether federal, state,
or local, have been paid or adequately provided for, and that there are no
unpaid taxes that could adversely affect the transfer of stock contemplated by
this Agreement.
<PAGE> 3
3.6. Absence of Litigation. There are no suits, governmental
proceedings, or litigation pending, or (to the knowledge of Seller) threatened
against Seller that might materially affect the financial condition, business,
or property of Seller that would adversely affect the transfer of stock
contemplated by this Agreement.
3.7. Insurance. Any inventories or other fixed assets, if any, to be
transferred by Seller to Purchaser, will be adequately insured by Seller against
any casualty loss prior to the date of closing.
3.8. Access to Records. Seller shall give to Purchaser, during normal
business hours, reasonable access to all relevant books and records pertinent to
the transfer contemplated herein, including the right to make copies of said
records.
3.9. Resignations. At closing, Seller will deliver resignations of
officers and directors, pertaining to the corporation of the stock being
transferred herein.
3.10. No Violation. Neither the execution, delivery and performance by
the Seller of this Agreement or the other agreements, documents and instruments
contemplated by this Agreement, nor the consummation of the transactions
contemplated by this Agreement, will (i) breach or cause any default in any
document, instrument, agreement, or other contract to which Seller is a party or
to which any of its property is subject, and none of such actions will result in
acceleration, or any similar right of any party, under any loan or other
agreement to which it is a party or (ii) violate any judgment, decree, order,
regulation, or rule of any court or of any statute, law or regulation of any
governmental authority applicable to Seller or any of its property.
ARTICLE 4
PURCHASER REPRESENTATIONS
Purchaser represents and warrants to Seller as of the date hereof as
follows:
4.1. Purchase for Investment. Purchaser will acquire the Shares for its
own account for investment and not with a view toward any resale or distribution
thereof.
4.2. No Violation. Neither the execution, delivery and performance by
the Purchaser of this Agreement or the other agreements, documents and
instruments contemplated by this Agreement, nor the consummation of the
transactions contemplated by this Agreement, will (i) breach or cause any
default in any document, instrument, agreement, or other contract to which
Purchaser is a party or to which any of its property is subject, and none of
such actions will result in acceleration, or any similar right of any party,
under any loan or other agreement to which it is a party or (ii) violate any
judgment, decree, order, regulation, or rule of any court or of any statute, law
or regulation of any governmental authority applicable to Purchaser or any of
its property.
<PAGE> 4
ARTICLE 5
INDEMNIFICATION
5.1. Breach. The representations, warranties, covenants and agreements
made in any exhibit shall be deemed representations, warranties, covenants and
agreements made herein. None of (i) the consummation of the transactions
contemplated by this Agreement, (ii) the delay or omission of any party to
exercise any of its rights under this Agreement or (iii) any investigation or
disclosure that any party makes, any notice that any party gives, or any
knowledge that any party obtains as a result thereof, or otherwise, shall (A)
affect the liability of the parties to one another for Breaches (defined below)
of this Agreement or (B) prevent any party from relying on the representations
or warranties contained in this Agreement. As used herein, a party's "Breach"
shall mean any representation or warranty being untrue when made by such party,
any breach of any of such party's covenants or agreements or any other claim
that may be asserted against such party arising from the document in question or
the transactions contemplated thereby.
5.2. Indemnity by Seller. The Seller agrees to indemnify Purchaser
against all claims, losses, damages and liabilities, including legal and other
expenses reasonably incurred in investigating or defending against the same,
arising out of any (a) Breach by any Seller of this Agreement, (b) any claim
asserted by a third party that, assuming the truth thereof, would constitute a
Breach by any Seller of this Agreement.
5.3. Indemnity by Purchaser. The Purchaser agrees to indemnify the
Seller against all claims, losses, damages and liabilities, including legal and
other expenses reasonably incurred in investigating or defending against the
same, arising out of any (a) Breach by the Purchaser of this Agreement, (b) any
claim asserted by a third party that, assuming the truth thereof, would
constitute a Breach by Purchaser of this Agreement, and (c) any liabilities or
obligations of the Company that arise after the date hereof, other than with
respect to the PSA Payable and the contracts assigned to Seller pursuant to
Section 2.4 of this Agreement.
5.4. Procedure. In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Article 4, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. In case any such
proceeding shall be brought against any indemnified party, it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party and shall pay as
incurred the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel at its own expense. Notwithstanding the foregoing, the indemnifying
party shall pay as incurred the fees and expenses of the counsel retained by the
indemnified party in the event (a) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (b) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. The indemnifying party shall not be liable for
any settlement of any proceeding effected without its written consent but if
settled with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment.
<PAGE> 5
5.5. Survival. After Closing, any claim for indemnification hereunder
that is not made in writing to the party against whom indemnification is sought
within twelve (12) months of the Closing Date shall be deemed waived, and no
person shall have any remedy under this Article 5 against any party for
indemnification.
ARTICLE 6
MISCELLANEOUS
6.1. Entire Agreement. This Agreement and the other documents delivered
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof and they
supersede, merge and render void every other prior written and/or oral
understanding or agreement among or between the parties hereto.
6.2. Waivers and Amendments. This Agreement or any provision hereof may
be amended, waived, discharged or terminated only by a statement in writing
signed by the party against which enforcement of the amendment, waiver,
discharge or termination is sought.
6.3. Governing Law. This Agreement is made pursuant to, will be
construed under, and will be conclusively deemed for all purposes to have been
executed and delivered under, the substantive laws of the state of Texas,
without regard to its principles of conflict of laws.
6.4 Severability. In case any provision of this Agreement shall be
found by a court of law to be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions of this Agreement shall
not in any way be affected or impaired thereby.
6.5. Further Assurances. Each of the parties to this Agreement agrees
that it will perform all such further acts and execute and deliver all such
further documents as may be reasonably required in connection with the
consummation of the transactions contemplated hereby in accordance with the
terms of this Agreement.
6.6. Expenses. The Seller and the Purchaser shall each bear their own
expenses and legal fees in connection with the consummation of this transaction.
6.7. Broker. Each party represents that no other person, firm,
corporation, or entity is entitled to any compensation pertaining to the
purchase and sale of said stock and/or assets set forth herein, and that there
are no brokers representing either party to this transaction.
6.8. Notices. Any notice, consent, request, claim, or other
communication hereunder shall be in writing, and shall be deemed to have been
duly given if delivered or mailed by registered or certified mail, return
receipt requested, to the address for the respective party. Such addresses may
be changed by any party by notice given to the other party.
6.9. Attorney Fees. In the event either party to this Agreement shall
employ legal counsel to protect its rights under this Agreement or to enforce
any term or provision of this Agreement, then the party prevailing in any such
legal action shall have the right to recover from the other party all of its
reasonable attorney's fees costs, and expenses incurred in relation to such
claim.
6.10. Time of Essence. Time is of the essence of this Agreement.
<PAGE> 6
6.11. Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date hereof.
INTEGRATED SECURITY SYSTEMS, INC.
By:
-----------------------------------
Gerald K. Beckmann, President
NOTIFICATION SYSTEMS OF AMERICA, INC.
By:
-----------------------------------
Michael Richmond, President
TRI-COASTAL SYSTEMS, INC.
By:
-----------------------------------
Gerald K. Beckmann, Chairman
<PAGE> 1
Exhibit 11.1
Statement related to the computation of per common share earnings.
<TABLE>
<CAPTION>
June 30,
----------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
BASIC:
Shares and share equivalents:
Weighted average common and
common equivalent shares outstanding 9,168,124 8,197,392
Net loss $ (5,860,276) $ (3,195,152)
Basic and diluted net loss per share:
Continuing operations $ (0.56) $ (0.39)
=============== ==============
Discontinued operations $ (0.08) --
=============== ==============
</TABLE>
<PAGE> 1
Exhibit 21.1
Subsidiaries of the Company.
B&B Electromatic, Inc.
Intelli-Site, Inc.
Golston Company, Inc. (sold May 29, 1999)
Tri-Coastal Systems, inc. (sold August 13, 1999)
<PAGE> 1
Exhibit 23.1
Consent of Grant Thornton LLP
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated August 10, 1999, except for the
first paragraph of Note 12 as to which the date is October 13, 1999,
accompanying the consolidated financial statements included in the Annual
Report of Integrated Security Systems, Inc. on Form 10-KSB for the year ended
June 30, 1999. We hereby consent to the incorporation by reference of said
report in the Registration Statements of Integrated Security Systems, Inc. on
Form S-3 (File No. 33-89218) and on Form S-8 (File No. 33-59870-S).
/s/ GRANT THORNTON LLP
Dallas, Texas
October 13, 1999
<PAGE> 1
Exhibit 23.2
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 the
last sentence in Note 4 and the first sentence in Note 11 which are as of
October 12, 1998, and as to the last paragraph of Note 11 which is as of October
13, 1999, appearing on page 13 in this Form 10-KSB.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
October 13, 1999
