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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, 2000
Commission File Number: 1-11900
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INTEGRATED SECURITY SYSTEMS, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 75-2422983
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(State of Incorporation) (I.R.S. Employer Identification No.)
8200 SPRINGWOOD DRIVE, SUITE 230, IRVING, 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: $6,561,359
As of September 30, 2000, 10,572,545 shares of the Registrant's common stock
were outstanding and 1,340,505 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 30, 2000, $5,150,521. This amount was computed by
reference to the average close price of Registrant's common stock.
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TABLE OF CONTENTS
<TABLE>
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Item No. Page
<S> <C> <C>
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........................7
7. Financial Statements........................................................................................10
8. Disagreements with Accountants on Accounting and Financial Disclosure.......................................26
PART III
9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act......................................................................26
10. Executive Compensation......................................................................................28
11. Security Ownership of Certain Beneficial Owners and Management..............................................29
12. Certain Relationships and Related Transactions..............................................................30
PART IV
13. Exhibits, Lists and Reports on Form 8-K.....................................................................31
</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(R) can integrate products
(hardware/devices) across the industry from different vendors, 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.
Intelli-Site NT can also be tailored to a manufacturer's proprietary
specifications to be marketed as an added feature to their existing product
line.
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.
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.
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Core Business
B&B's core products (gates and barriers, perimeter security and navigational
lighting) compete primarily in the road and bridge construction/refurbishment
and perimeter security markets. These 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.
B&B's XL automatic gate operator product line has been successfully tested and
is in compliance with the Underwriter's Laboratory's new safety standard UL325
and is now NRTL listed (listed by a Nationally Recognized Testing Laboratory).
Meeting the new UL325 safety standard, like all UL standards, is voluntary.
However, many governmental and private sector corporations specify and require
that all products purchased meet UL standards and be NRTL listed. B&B's XL
Series of hydraulic sliding gate operators are the first operators of its kind
to meet the new UL325 safety standards. The XL Series is listed by Intertek
Testing Services with the ETL (Electronic Testing Laboratory) Mark. The XL
Series of gate operators meets the primary and secondary entrapment protection
requirements of UL325 with two pair of infrared beams and an audible alarm. In
addition, the XL Series incorporates a new solid-state controller, the PK2K,
which monitors and controls the correct installation and functioning of safety
devices. The PK2K will not allow the operator to function if there is incorrect
wiring or a malfunction that could cause injury or property damage.
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 patented safety barrier gate
was accepted by the Federal Highway Administration ("FHWA") in November 1998. In
addition, the Federal Railroad Administration ("FRA") determined in August 2000
that the safety barrier gate is in compliance with their fail-safe requirement.
The FHWA-accepted safety barrier gate was designed to improve safety at highway
railroad crossings (HRC's) without the necessity of grade separations (bridges
or underpasses). Federal funding of approximately $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 $1.6 million
at September 30, 2000. The Company expects that the majority of this backlog
will be filled during fiscal 2001.
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PRODUCT DESIGN AND DEVELOPMENT
There are currently six employees of the Company dedicated to research,
development and product engineering. During fiscal 1999 and 2000, the Company
spent approximately $378,365 and $386,899 respectively, on research and
development, primarily related to the development and enhancement of
Intelli-Site(R).
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.
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 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.
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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. The
competition for the railroad barrier market appears to be non-existent.
EMPLOYEES
As of June 30, 2000, the Company employed 65 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 $13,728, 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 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.
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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, 2000, there were 10,514,145 shares of Common
Stock outstanding and 1,340,505 warrants outstanding entitling holders to
purchase 3,552,338 shares of Common Stock. The shares of Common Stock are held
of record by approximately 139 holders and the warrants are held of record by
approximately 5 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>
Fiscal 2000
First Quarter 11/16 19/32
Second Quarter 3/4 7/16
Third Quarter 9/16 15/32
Fourth Quarter 23/32 13/32
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
</TABLE>
On September 15, 2000, the last reported sales prices for the Common Stock as
reported on the Over-the-Counter Bulletin Board was $ 0.53.
DIVIDEND POLICY
Dividends have not been declared on the Common Stock and it is not anticipated
that dividends will be paid in the near future because any funds available will
most likely be reinvested in the Company's business and used to repay
outstanding debt.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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 were
consistent with ISSI's previously announced repositioning strategy to focus on
its Intelli-Site subsidiary that manufactures the Intelli-Site(R) 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.
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RESULTS OF OPERATIONS
Year Ended June 30, 2000 Compared to Year Ended June 30, 1999
Sales. The Company's sales increased by $0.7 million (12.6%) during the fiscal
year ended June 30, 2000 from $5.8 million in fiscal 1999. This increase is the
result of increased Intelli-Site(R) software sales and end-user system
installations.
Cost of Sales and Gross Margin. Gross margin as a percent of sales remained
comparable for the fiscal years ended June 30, 2000 and 1999.
Selling, General and Administrative. Selling, general and administrative
expenses decreased by 24% or by $1.4 million during the fiscal 2000 period.
Approximately $0.5 million of the decrease during the current year is due to
decreases in recruiting and relocation expenses at the Intelli-Site, Inc.
subsidiary. The additional decrease is attributable to a one-time charge in
fiscal 1999 of $0.9 million for the dissolution of the partnership that was
originally formed to fund marketing and sales of the Intelli-Site(R) software
product.
Research and Development. Research and product development expenses remained
comparable for the fiscal years ended June 30, 2000 and 1999.
Interest Expense. During fiscal 2000, interest expense decreased by
approximately $60,000. This decrease is primarily due to securing additional
financing during the fiscal 1999 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position decreased $151,477 during the fiscal year 2000. At
June 30, 2000, the Company had $99,636 in cash and cash equivalents and $408,166
outstanding under its factoring facility. The factoring facility, which is
secured by accounts receivable, and inventory, permits the Company to borrow up
to $0.8 million, subject to availability under its borrowing base.
For the fiscal year ended June 30, 2000, the Company's continuing operating
activities used $2,546,753 of cash compared to $3,505,922 of cash used during
the previous fiscal year period. This decrease in cash used is primarily due to
the reduced losses in fiscal 2000, offset in part by the payment in fiscal 1999
of expense with common stock and warrants in the amount of $1,469,922.
The Company used $110,298 for the purchase of property and equipment during
fiscal 2000 compared to $266,192 for the previous fiscal 1999 period. The
purchases in fiscal 1999 of a new computer system and a trade show booth at ISI
accounted for the majority of this variance.
During fiscal 2000, the Company financed its operations with cash flows from
long-term borrowings of $1,538,806 and received $1,688,021 from the sale of
preferred stock. The Company made payments of $613,786 on debt and other
liabilities.
In October and November 1999, the Company raised $1.855 million through a
private placement of 92,750 shares of preferred stock. The preferred stock
provides for dividends of 9% per annum and is convertible into common stock at a
rate of 25 common shares for each preferred share. Each investor in the private
placement also received a warrant to purchase 16 2/3 shares of common stock for
each share of preferred stock purchased. The warrant exercise price is $1.00 per
share and the warrants expire in October 2004.
On March 3, 2000, the Company replaced all lending agreements with Frost Capital
Group by entering into an Account Transfer Agreement with Evergreen Funding
Corporation to factor accounts receivable with recourse. This factoring facility
expires September 3, 2001, and is extendable at the discretion of the Company.
The Agreement has an advance rate of 80%, a factoring fee of 1.5%, and an
interest rate equal to the prime rate charged by Chase Bank of Texas, N.A. plus
2% per annum and a maximum borrowing amount of $800,000. This facility is
secured by the accounts receivable and inventory of the Company's B&B
Electromatic, Inc. ("B&B") subsidiary and is guaranteed by ISSI and the
Company's Intelli-Site, Inc. ("ISI") subsidiary. At June 30, 2000, the Company
had received advances of $408,166 under this Agreement. The Company believes
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borrowing under the new factoring facility combined with results from operations
will be sufficient to finance future cash requirements at its manufacturing
subsidiary.
The Company is in default of the covenants for the convertible debentures issued
to Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth
& Income Trust PLC. The Company has not received notice of default and is
currently in negotiations to restructure this debt, but no agreement has yet
been reached. The Company currently has no other source of repayment and there
can be no assurance that these renegotiations will be successful. Accordingly,
the debentures are classified as short-term debt on the financial statements.
The Company's liabilities are currently in excess of its assets and ISSI has
experienced significant losses during fiscal 1999 and 2000. Management expects
losses to continue through the majority of fiscal 2001. In order to meet working
capital needs, the Company will need to receive additional financing either
through sale of assets, equity placement and/or additional debt. Failure to
receive financing could jeopardize the Company's ability to continue to operate.
The Company's backlog, calculated as the aggregate sales prices of firm orders
received from customers less revenue recognized, was approximately $1.6 million
at September 30, 2000. The Company expects that the majority of this backlog
will be filled during fiscal 2001.
CAPITAL EXPENDITURES
During the year ended June 30, 1999, the Company acquired $110,298 of property
and equipment with both short-term and long-term borrowings. The Company does
not anticipate any significant capital expenditures during fiscal 2001.
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.
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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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Report of Independent Accountants..................................................................................11
Consolidated Balance Sheets as of June 30, 2000 and 1999...........................................................12
Consolidated Statements of Operations for the years ended June 30, 2000 and 1999...................................13
Consolidated Statements of Stockholders' Equity for the years ended June 30, 2000 and 1999.........................14
Consolidated Statements of Cash Flows for the years ended June 30, 2000 and 1999...................................15
Notes to Consolidated Financial Statements......................................................................16-25
</TABLE>
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the Stockholders
of Integrated Security Systems, Inc.
We have audited the accompanying consolidated balance sheets of Integrated
Security Systems, Inc. as of June 30, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 audits provide 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, 2000 and 1999, and the consolidated
results of their operations and their consolidated cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations,
has an excess of liabilities over assets, and is in default of certain debt
covenants. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
Dallas, Texas
August 4, 2000
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INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 99,636 $ 251,113
Accounts receivable, net of allowance for
doubtful accounts of $58,847 and $54,383, respectively ......................... 1,201,491 1,381,879
Inventories ...................................................................... 585,486 529,198
Notes receivable, net of $60,000 discount in 1999 ................................ 28,546 340,000
Unbilled revenue ................................................................. 252,567 --
Other current assets ............................................................. 112,718 156,165
Assets of discontinued operations ................................................ -- 626,220
--------------- ---------------
Total current assets ........................................................... 2,280,444 3,284,575
Property and equipment, net ...................................................... 921,695 1,019,993
Capitalized software development costs, net ...................................... 113,713 332,802
Deferred income taxes ............................................................ -- 205,384
Other assets ..................................................................... 16,898 74,653
--------------- ---------------
Total assets ................................................................... $ 3,332,750 $ 4,917,407
=============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable - trade ......................................................... $ 582,717 $ 625,964
Accrued liabilities .............................................................. 440,072 1,004,253
Current portion of long-term debt ................................................ 6,135,260 1,330,566
Liabilities of discontinued operations ........................................... -- 249,654
--------------- ---------------
Total current liabilities ...................................................... 7,158,049 3,210,437
Long-term debt ...................................................................... 728,331 4,608,003
Stockholders' deficit:
Convertible preferred stock, $.01 par value, 750,000 shares authorized;
102,250 and 10,250, shares respectively issued and outstanding (liquidation
value of $2,045,000 and $205,000, respectively) ................................ 1,023 102
Common stock, $.01 par value, 35,000,000 shares authorized; 10,564,145 and
10,513,993 shares, respectively, issued; and 10,514,145 and 10,463,993 shares,
respectively, outstanding ...................................................... 105,641 105,140
Additional paid in capital ....................................................... 14,502,963 12,704,653
Accumulated deficit .............................................................. (19,044,507) (15,592,178)
Treasury stock, at cost - 50,000 shares .......................................... (118,750) (118,750)
--------------- ---------------
Total stockholders' deficit ...................................................... (4,553,630) (2,901,033)
--------------- ---------------
Total liabilities and stockholders' deficit .................................... $ 3,332,750 $ 4,917,407
=============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
June 30,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Sales ...................................................... $ 6,561,359 $ 5,828,247
Cost of sales .............................................. 4,369,262 3,836,319
--------------- ---------------
Gross margin ............................................... 2,192,097 1,991,928
Operating expenses:
Selling, general and administrative ..................... 4,589,922 6,038,120
Research and product development ........................ 386,899 378,365
--------------- ---------------
4,976,821 6,416,485
--------------- ---------------
Loss from operations ....................................... (2,784,724) (4,424,557)
Other income (expense):
Interest income ......................................... 33,690 45,448
Interest expense ........................................ (645,684) (705,352)
Other ................................................... -- (59,482)
--------------- ---------------
Loss from continuing operations before income taxes ........ (3,396,718) (5,143,943)
Deferred income tax benefit ................................ 51,856 --
--------------- ---------------
Net loss from continuing operations after income taxes ..... (3,344,862) (5,143,943)
Discontinued operations:
Gain from operations .................................... -- 21,837
Loss on disposal ........................................ -- (738,170)
--------------- ---------------
Loss from discontinued operations .......................... -- (716,333)
--------------- ---------------
Net loss ................................................... (3,344,862) (5,860,276)
Preferred dividends ........................................ (107,467) --
--------------- ---------------
Net loss allocable to common stockholders .................. $ (3,452,329) $ (5,860,276)
=============== ===============
Weighted average common shares outstanding ................. 10,508,510 9,168,124
Basic and diluted loss per share:
Continuing operations ................................... $ (0.33) $ (0.56)
Discontinued operations ................................. $ -- $ (0.08)
--------------- ---------------
Total ...................................................... $ (0.33) $ (0.64)
=============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
--------------------------------------------------------------------------------
Page 13
<PAGE> 14
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, 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 12,704,653 (15,592,178) (118,750)
Preferred stock issuance 92,750 928 1,774,638
Preferred stock conversion (750) (7) 15,000 150 (143)
Preferred dividends paid (107,467)
Common stock issuance 35,152 352 23,815
Net loss (3,344,862)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Balance at June 30, 2000 102,250 $ 1,023 10,564,145 $ 105,641 $ 14,502,963 $(19,044,507) $ (118,750)
=========== =========== =========== =========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
--------------------------------------------------------------------------------
Page 14
<PAGE> 15
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
June 30,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,344,862) $ (5,860,276)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss from discontinued operations -- 716,333
Depreciation 208,596 202,872
Amortization 219,089 227,638
Provision for bad debt 36,946 20,060
Provision for warranty reserve 55,000 113,352
Provision for inventory reserve 1,359 --
Unbilled revenue (189,976) (70,091)
Expenses paid with common stock and warrants 111,712 1,469,922
Changes in operating assets and liabilities:
Accounts receivable 171,988 (108,558)
Inventories (57,647) (81,831)
Notes receivable 311,454 (338,544)
Deferred income taxes 205,384 --
Other assets 38,612 51,990
Accounts payable (43,247) 180,835
Accrued liabilities (271,161) (29,624)
--------------- ---------------
Cash used in continuing operations (2,546,753) (3,505,922)
Cash provided by discontinued operations -- 3,445,964
--------------- ---------------
Net cash used in operating activities (2,546,753) (59,958)
--------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment (110,298) (266,192)
Purchase of software technology -- (200,090)
--------------- ---------------
Net cash used in investing activities (110,298) (466,282)
--------------- ---------------
Cash flows from financing activities:
Issuance of preferred stock 1,688,021 --
Dividends on preferred stock (107,467) --
Issuance of common stock -- 17
Payments of long-term debt and other liabilities (613,786) (1,833,671)
Proceeds from notes payable and long-term debt 1,538,806 2,561,260
--------------- ---------------
Net cash provided by financing activities 2,505,574 727,606
--------------- ---------------
Increase (decrease) in cash and cash equivalents (151,477) 201,366
Cash and cash equivalents at beginning of period 251,113 49,747
--------------- ---------------
Cash and cash equivalents at end of period $ 99,636 $ 251,113
=============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
--------------------------------------------------------------------------------
Page 15
<PAGE> 16
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.
CASH AND CASH EQUIVALENTS
Cash is comprised of highly liquid instruments with original maturities of three
months or less.
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.
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, 2000 or 1999.
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 the
years ended June 30, 2000 and 1999 was $219,089 and $227,638, respectively.
Accumulated amortization at June 30, 2000 was $723,283 and at June 30, 1999 was
$504,194.
The Company expenses all other research and product development costs as they
are incurred.
--------------------------------------------------------------------------------
Page 16
<PAGE> 17
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 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, 2000 and
1999, there were 12,503,022 and 9,664,010 potentially dilutive common shares,
which were not included in weighted average shares outstanding because their
effect is antidilutive.
ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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>
2000 1999
----------- -----------
<S> <C> <C>
Interest paid $ 411,421 $ 284,805
Income tax refunds received $ 257,240 $ --
</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.
--------------------------------------------------------------------------------
Page 17
<PAGE> 18
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
3. LIQUIDITY
The Company is in default of the covenants for the convertible debentures issued
to Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth
& Income Trust PLC. The Company has not received notice of default and is
currently in negotiations to restructure this debt, but no agreement has yet
been reached. The Company currently has no other source of repayment and there
can be no assurance that these renegotiations will be successful. Accordingly,
the debentures are classified as short-term debt on the financial statements.
The Company's liabilities are currently in excess of its assets and ISSI has
experienced significant losses during fiscal 1999 and 2000. Management expects
losses to continue through the majority of fiscal 2001. In order to meet working
capital needs, the Company will need to receive additional financing either
through sale of assets, equity placement and/or additional debt. Failure to
receive such financing could jeopardize the Company's ability to continue to
operate.
4. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of certain balance sheet accounts is as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Inventories:
Raw materials $ 383,092 $ 422,770
Work-in-process 188,391 105,763
Finished goods 14,003 665
------------ ------------
$ 585,486 $ 529,198
============ ============
Property and equipment:
Land $ 40,164 $ 40,164
Building 586,449 586,449
Leasehold improvements 48,769 48,769
Office furniture and equipment 1,070,258 990,088
Manufacturing equipment 626,122 595,994
Vehicles 63,875 63,875
Construction 153,425 153,425
------------ ------------
2,589,062 2,478,764
Less: accumulated depreciation (1,667,367) (1,458,771)
------------ ------------
$ 921,695 $ 1,019,993
============ ============
</TABLE>
--------------------------------------------------------------------------------
Page 18
<PAGE> 19
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
5. DEBT
Debt:
<TABLE>
<CAPTION>
June 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Convertible debentures 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 at $0.549 per share. At June 30, 1999 and
2000, 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 ...................................................................... $ 4,168,202 $ 4,168,202
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, 1999 and 2000); this note was refinanced in September 1999;
secured by first mortgage on real estate and equipment;
personally guaranteed by a former officer ........................................... 752,084 704,258
Convertible notes 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 .................................................... 600,000 600,000
Accounts receivable factoring facility with a finance company to factor accounts
receivable with recourse. This factoring facility has an adjustable factoring
fee of 1.5%-2.0%, a minimum and maximum borrowing of $200,000 and $800,000,
respectively, per month; interest at the prime rate of Chase Bank of
Texas, N. A. plus 2% and expires on September 3, 2001................................ 408,166 --
Notes payable to venture capital funds; interest at 9% due in monthly
installments of $3,975; principal and accrued unpaid interest due upon demand ....... 530,000 --
Notes payable to individual and foundation; interest at 9% due in monthly
installments of $2,250; secured by accounts receivable; principal and accrued
unpaid interest due upon demand ..................................................... 300,000 --
Cash accelerator agreement with a bank; interest at prime plus 3%; paid in
full in fiscal 2000 ................................................................. -- 325,460
Other term notes payable to unrelated third parties ................................. 105,139 140,649
----------- -----------
6,863,591 5,938,569
Less current portion ................................................................ (6,135,260) (1,330,566)
----------- -----------
$ 728,331 $ 4,608,003
=========== ===========
</TABLE>
Due to financial covenant defaults, the entire balance of the convertible
debentures has been included in current maturities. Payments required under
long-term debt and other liabilities outstanding at June 30, 2000 are as
follows:
<TABLE>
<S> <C>
2001 $ 6,135,260
2002 724,805
2003 3,526
2004 --
2005 --
Thereafter --
-------------
$ 6,863,591
=============
</TABLE>
--------------------------------------------------------------------------------
Page 19
<PAGE> 20
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. INCOME TAXES
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>
For the Years Ended
-----------------------------------
June 30, 2000 June 30, 1999
--------------- ---------------
<S> <C> <C>
Federal statutory benefit rate (34.0%) (34.0%)
Tax gain on sale of Golston --- % 22.6%
Net operating carryforwards lost on sale of Golston --- % 5.3%
Increase in valuation allowance 38.6% 4.5%
Other (2.6%) 1.6%
--------------- ---------------
2.0% --%
=============== ===============
Deferred tax assets (liabilities) are comprised of the following at:
June 30, 2000 June 30, 1999
--------------- ---------------
Deferred tax assets
Amortization -- 69,000
Warranty reserve 25,000 29,000
Accounts receivable 20,000 17,000
Net operating loss carryforward 4,640,000 3,489,000
--------------- ---------------
Gross deferred tax asset 4,685,000 3,604,000
Deferred tax liabilities
Property and equipment (96,000) (122,000)
--------------- ---------------
Net deferred tax asset 4,589,000 3,482,000
Valuation allowance (4,589,000) (3,276,616)
--------------- ---------------
Net deferred tax asset $ -- $ 205,384
=============== ===============
</TABLE>
The tax benefit of net operating loss carryforwards at June 30, 1999 has been
reduced by $1,441,000 from the amount previously reported, upon final
determination of the tax effect of the sale of Golston in fiscal 1999.
The Company has unused net operating loss carryforwards of approximately $13.6
million at June 30, 2000. These carryforwards expire beginning in 2007 through
2020. The Company has recorded a valuation allowance each year to the extent it
is more likely than not that a tax benefit will not be realized prior to
expiration of the carryforward periods.
--------------------------------------------------------------------------------
Page 20
<PAGE> 21
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. 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, 2000 under these leases, which expire in 2001, are approximately $96,073.
Rent expense for operating leases was $163,959 and $146,269 for the years ended
June 30, 2000 and 1999, respectively.
CONTINGENCIES
The Company is subject to certain legal actions and claims arising in the
ordinary course of business. Management recognizes the uncertainties of
litigation; however, based upon the nature and management's understanding of the
facts and circumstances which give rise to such actions and claims, management
believes that such litigation and claims will be resolved without material
effect on the Company's financial position, results of operations or cash flows.
8. 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, 2000 and 1999.
9. 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.
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, 2000 June 30, 1999
--------------------------------- ---------------------------------
As reported Pro forma As reported Pro forma
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net Loss $ (3,345) $ (3,521) $ (5,860) $ (5,979)
Loss per Common Share $ (.33) $ (.35) $ (.64) $ (.65)
</TABLE>
--------------------------------------------------------------------------------
Page 21
<PAGE> 22
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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, 2000, expected volatility of
100-110%; risk-free interest rates of approximately 6.2-6.9%; no dividend yield;
and expected lives of five years. 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. 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, 2000 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, 2000 June 30, 1999
------------------------------------ ------------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 2,162 $ 1.40 1,336 $ 1.78
Granted 452 .58 933 .86
Forfeited (397) 1.12 (107) 1.42
---------------- ---------------- ---------------- ----------------
Outstanding at end of period 2,217 $ 1.29 2,162 $ 1.40
================ ================ ================ ================
Exercisable at end of period 1,499 $ 1.54 1,242 $ 1.71
================ ================ ================ ================
Weighted-average fair value of options
granted during the period $ .51 $ .54
</TABLE>
Information about stock options outstanding at June 30, 2000 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 6/30/00 Contractual Life Exercise Price at 6/30/00 Exercise Price
----------------- ------------- ------------------ --------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.01-1.00 1,194 8.4 Years $ .73 564 $.80
$1.1875-2.00 573 6.3 Years 1.55 485 1.58
$2.0938-2.50 450 2.9 Years 2.43 450 2.43
------------- --------------- ------------- ----------------
2,217 $1.29 1,499 $1.54
</TABLE>
--------------------------------------------------------------------------------
Page 22
<PAGE> 23
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
WARRANTS
During fiscal 1999, the Company issued warrants to purchase 100,000 shares of
its common stock at $0.01 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 $0.80 per share and warrants to
purchase 1,274,715 shares of its common stock for $0.549 per share, both of
which expire in 2004, and, in association with the acquisition of the royalty
arrangements, warrants to purchase 480,000 shares of its common stock for $2.00
per share which expire in 2009.
During fiscal 2000, the company issued warrants to purchase 1,545,833 shares of
its common stock at $1.00 per share. These warrants were issued in connection
with the Company's Series D Convertible Preferred Stock placement completed in
October and November 1999.
Additional information with respect to warrants outstanding at June 30, 2000 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, 2000 June 30, 1999
---------------------------------- ----------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 6,977 $ 1.84 4,793 $ 3.30
Granted 1,546 1.00 2,292 .86
Exercised -- -- (2) .01
Forfeited (18) 2.40 (106) 1.00
--------------- --------------- --------------- ---------------
Outstanding at end of period 8,505 $ 1.69 6,977 $ 1.84
=============== =============== =============== ===============
Exercisable at end of period 8,505 $ 1.69 6,977 $ 1.84
=============== =============== =============== ===============
Weighted-average fair value of warrants
granted during the period $ .28 $ .36
</TABLE>
Information about warrants outstanding at June 30, 2000 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 6/30/00 Contractual Life Exercise Price at 6/30/00 Exercise Price
--------------------- ------------- ------------------ --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$.01-1.00 3,965 4.4 Years $ .80 3,965 $ .80
$1.06-2.00 610 7.7 Years 1.96 610 1.96
$2.40-2.55 3,930 .8 Years 2.55 3,930 2.55
------------- ------------------ --------------- ------------- ---------------
8,505 $1.69 8,505 $1.69
</TABLE>
--------------------------------------------------------------------------------
Page 23
<PAGE> 24
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. 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. At June 30, 2000, the Company had
9,500 shares of its Series A $20 Convertible Preferred Stock (the "Series A
Preferred") outstanding. 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.
Series D $20 Convertible Preferred Stock. At June 30, 2000 the Company had
92,750 shares of its Series D $20 Convertible Preferred Stock (the "Series D
Preferred") outstanding. Holders of the Series D Preferred are entitled to
receive dividends at the annual rate of 9% per share paid quarterly in cash, and
have voting rights of one vote for each share of Common Stock into which the
Preferred Stock is convertible. Beginning on November 15, 2004 the Company may
redeem the Series D Preferred upon not less than 30 days' notice, in whole or in
part, plus all accrued but unpaid dividends. After notice and prior to the
expiration of the 30-day notice period, holders of the Series E Preferred will
have the option to convert the Series D Preferred into Common Stock prior to the
redemption. Each share of the Series D Preferred may, at the option of the
Company beginning on November 15, 2000, be converted into 25 shares of Common
Stock at any time after (i) the closing bid price of the Common Stock exceeds
$2.00 for at least 20 trading days during any 30 trading day period, and (ii)
the Company has sustained positive earnings per share of Common Stock for the
two previous quarters. The holders of the Series D Preferred have the right to
convert each share into 25 shares of Common Stock at any time. Upon any
liquidation, dissolution, or winding up of the Company, the holders of the
Series D Preferred are entitled to receive $20 per share before the holders of
Common Stock are entitled to receive any distribution. Each holder also received
a stock purchase warrant to purchase 16.67 shares of common stock at $1.00 per
share for each share of Series D Preferred purchased. These warrants expire on
October 10, 2004.
11. SEGMENT REPORTING
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 24
<PAGE> 25
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The following table provides financial data by segment for the fiscal years
ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
B&B ISI Corporate Total
--------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
2000
Sales $ 5,363,239 $ 1,198,120 -- $ 6,561,359
Income/(loss) from operations 510,083 (1,900,298) (1,394,509) (2,784,724)
Total assets 2,356,082 748,892 227,776 3,332,750
Depreciation and amortization expense 140,176 280,445 7,064 427,685
Capital additions 51,332 57,656 1,310 110,298
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
</TABLE>
12. 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
--------------------
<S> <C>
Revenues $ 3,794,575
Income from discontinued operations 344,747
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
--------------------
<S> <C>
Revenues $ 1,423,095
Loss from discontinued operations (332,910)
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.
--------------------------------------------------------------------------------
Page 25
<PAGE> 26
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
C. A. RUNDELL, 67, Director and Chairman of the Board, has been a
director of the Company since March 1999. Mr. Rundell is also a director and
Chairman of the Board of NCI Building Systems, since 1988. Also since 1989, Mr.
Rundell has owned and operated Rundell Enterprises, a sole proprietorship
engaged in providing acquisitions and financial consulting services to various
business enterprises. Mr. Rundell is a director and member of the executive
committee of Tyler Technologies, Inc., a provider of information management
systems and services for county governments and other enterprises. Mr. Rundell
was the President and Chief Executive Officer of Tyler from 1997 to 1998,
Chairman of the Board from 1996 to 1997, and temporary Chief Executive Officer
from 1996 to 1997. Mr. Rundell is also a director of Dain Rauscher Corporation,
a holding company for a full-service regional brokerage and investment banking
company; Tandy Brands Accessories, Inc., a manufacturer of accessories for men,
women and boys; and Renaissance Capital Growth and Income Fund III, Inc. and
Renaissance U.S. Growth and Income Trust PLC. Mr. Rundell earned an M.B.A. with
Distinction from Harvard University and a B.S. in Chemical Engineering from The
University of Texas at Austin.
ALAN M. ARSHT, 57, Director, is President of Arsht & Company, Inc., a
New York based investment banking firm established in 1986. From 1977 to 1986,
Mr. Arsht was Senior Vice President and Managing Director of Thomson McKinnon
Securities, Inc. He also serves as Vice President, Corporate Finance at Wertheim
& Company, Inc. and was Special Assistant to the Deputy Secretary of the US
Treasury Department. Mr. Arsht also held positions at the United States
Securities and Exchange Commission. Mr. Arsht earned a BA in History from East
Texas State University and an MBA in Finance from American University.
HOLLY J. BURLAGE, 37, Vice President, Chief Financial Officer,
Secretary and Treasurer, joined the Company in February 1994 as Accounting
Manager, became Controller in 1995, became Vice President, Secretary and
Treasurer in May 1997, and became Chief Financial Officer in July 1999. Prior to
joining the Company, Ms. Burlage was Controller of Signature Home Care Group,
Inc., a home health care company, from 1993 to 1994, and Controller and Chief
Accounting Officer of National Heritage, Inc., a publicly-traded long-term care
company, from 1989 to 1993. Ms. Burlage holds a B.B.A. from Baylor University.
JACK G. CALDWELL, 63, President, B&B Electromatic, Inc., joined the
Company in January 1998. Prior to joining the Company, Mr. Caldwell was a
Results Manager for Thomas Group, Inc. from 1992 to 1998. From 1986 to 1992, Mr.
Caldwell served as the European Operations Manager for E-Systems and was
Director of Sales and Marketing from 1978 to 1986 for Cooper Industries. Mr.
Caldwell earned an M.B.A. and B.S. degrees from East Texas State University.
ROBERT M. GALECKE, 59, Director, has been a director of the Company
since May 1996. Mr. Galecke is currently Vice President of Finance and
Administration for the University of Dallas. Prior to that he was a principal in
the corporate consulting firm of Pate, Winters & Stone, Inc. from 1993 to May
1996. He also served as Executive Vice President, Chief Operating Officer and
Chief Financial Officer of Southmark Corporation, a financial services insurance
and real estate holding company, from 1986 to 1992. From 1989 to 1995, Mr.
Galecke served as Chairman of the Board, President and Chief Executive Officer
of National Heritage, Inc. Mr. Galecke received a graduate degree from the
School of Banking at the University of Wisconsin, Madison, and a BS in Economics
from the University of Wisconsin Stevens Point.
JAMES E. JACK, 60, Director, has been a director of the Company since
1997. Mr. Jack is currently Executive Vice President and Chief Financial Officer
of Coachmen Industries, Inc. From 1996 to 1999, Mr. Jack was Director, Global
Financial Services Product for TowersPerrin. From 1991 to 1996 Mr. Jack was
Senior Executive Vice President and Chief Financial Officer of Associates First
Capital Corporation, a publicly traded consumer and commercial finance
organization. Prior to that, Mr. Jack was Director, Executive Vice President and
Chief Financial Officer from 1981 to 1993 of the same company. Mr. Jack received
a graduate degree from the Southern Methodist University School of Business and
a B.B.A. from the University of Notre Dame.
--------------------------------------------------------------------------------
Page 26
<PAGE> 27
JOHN P. JENKINS, 50, Director, has been a director of the Company since
September 2000. Mr. Jenkins served as Chairman, Chief Executive Officer and
President of TAVA Technologies, Inc., a systems integrator providing
sophisticated IT solutions to manufacturing and process industries from 16
locations across the U.S. In July 1999, Real Software, a Belgian IT service and
software provider, acquired TAVA. Mr. Jenkins continued as CEO and President of
the U.S. operations, Real Enterprise Solutions, until June 2000. Prior to TAVA,
Mr. Jenkins was President of Morgan Technical Ceramics, Inc., and Vice President
and General Manager of the Structural Ceramic Division of Coors Ceramic Company,
a subsidiary of Adolph Coors Company. Mr. Jenkins holds a BS degree in
Mechanical Engineering from the University of Washington and a Juris Doctor
degree from the University of Denver, Denver, Colorado.
FRANK R. MARLOW, 62, Director, has been a director of the Company since
May 1995. Mr. Marlow served as Vice President, Sales and Marketing for the
Company from October 1993 to February 1995. Mr. Marlow is currently Vice
President of Sales for Conformity, formerly Money Star, a technology company
based in Austin, Texas. From 1995 until 1998, Mr. Marlow was Vice President of
Hogan Systems, a publicly-traded company subsequently purchased by Computer
Sciences Corp. Previously, Mr. Marlow was with IBM, Docutel Corporation, UCCEL
Corporation and Syntelligence Corporation in executive sales and training
positions.
ROBERT C. PEARSON, 65, Director, has been affiliated with the Company
in a non-voting capacity since January 1997 and became a director in April 1999.
Mr. Pearson is currently Senior Vice President of Renaissance Capital Group,
Inc. From 1994 to 1997, Mr. Pearson was an independent financial management
consultant. From 1990 to 1994, Mr. Pearson served as Chief Financial Officer and
Executive Vice President of Thomas Group, Inc., a management consulting firm,
where he was instrumental in moving the company from a small privately held
company to a public company with over $40 million in revenue. Prior to 1990, Mr.
Pearson was responsible for all administrative activities for the
Superconducting Super Collider Laboratory. In addition, from 1960 to 1985, Mr.
Pearson served in a variety of positions at Texas Instruments in financial
planning and analysis. Mr. Pearson earned an M.B.A. from the University of
Michigan and a B.S. in Business from the University of Maryland, where he was a
W. A. Paton Scholar. Mr. Pearson resigned from the board in August 2000.
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act") requires
the Company's directors, executive officers and persons who own more than ten
percent of the Company's Common Stock, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Such
persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) reports they file. Based solely upon a review of Forms 3, 4
and 5 and amendments thereto provided to the Company pursuant to Rule 16a-3(e),
Messrs. Rundell, Arsht, Caldwell, Galecke, Jack, and Marlow and Ms. Burlage had
late filings during the fiscal year ending June 30, 2000.
--------------------------------------------------------------------------------
Page 27
<PAGE> 28
ITEM 10. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
------------------------ -----------------------------------
Restricted
Name and Principal Other Annual Stock Option/
Position Year Salary Bonus Compensation Awards SARS
------------------- ---- ------ ----- ------------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Holly J. Burlage 2000 $125,650 -- -- -- 40,000
Vice President and CFO 1999 $105,011 -- -- -- 60,000
1998 $ 90,368 $15,000 -- -- 17,500
Jack G. Caldwell 2000 $149,213
President 1999 $140,510 -- -- -- 100,000
B&B Electromatic, Inc. 1998 $ 58,333 -- -- -- 61,790
</TABLE>
No other executive officer's salary and bonus exceed $100,000 annually
and no executive had any form of long-term incentive plan compensation
arrangement with the company during any of the indicated periods.
STOCK OPTION GRANTS
The following table provides information concerning the grant of stock options
during the twelve months ended June 30, 2000 to the named executive officers:
<TABLE>
<CAPTION>
Number of % of Total
Securities Granted Options
Underlying Options to Employees Exercise Expiration
Granted(1) in Fiscal Year Price Date
------------------ --------------- -------- ----------
<S> <C> <C> <C> <C>
For the twelve months ended 6/30/99
Holly J. Burlage 20,000 4.4% $0.563 08/23/09
Holly J. Burlage 20,000 4.4% $0.625 06/26/10
Jack G. Caldwell 10,000 2.2% $0.563 08/23/09
Jack G. Caldwell 20,000 4.4% $0.625 06/26/10
</TABLE>
---------------
(1) The options for all listed vest with respect to 25% of the shares issuable
thereunder six months after the date of grant and with respect to cumulative
increments of 25% of the shares issuable thereunder on each anniversary of the
date of grant.
OPTION EXERCISES AND HOLDINGS
The following table provides information related to the number of shares
received upon exercise of options, the aggregate dollar value realized upon
exercise, and the number and value of options held by the named executive
officers of the Company at June 30, 2000.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options/ SARS at In-The-Money Options/SARS
Fiscal Year End at Fiscal Year End
---------------------------- -----------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
For the twelve months ended 6/30/00
Holly J. Burlage 90,625 69,375 $2,813 $8,437
Jack G. Caldwell 98,843 92,947 $1,406 $4,219
</TABLE>
--------------------------------------------------------------------------------
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<PAGE> 29
DIRECTOR COMPENSATION
Currently, directors are compensated in incentive stock options in an amount
equivalent to $7,500 annually for serving on the Board in addition to $1,250 for
each committee on which they serve. All directors are reimbursed for their
out-of-pocket expenses incurred in connection with their attendance at Board
meetings.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of outstanding shares
of Common Stock beneficially owned as of September 30, 2000, by (i) each
director and named executive officer of the Company, (ii) all officers and
directors of the Company as a group, and (iii) all persons who are known by the
Company to be beneficial owners of 5% or more of the Company's outstanding
Common Stock. Unless otherwise noted, each of the persons listed below has sole
voting and investment power with respect to the shares indicated as beneficially
owned by such person.
<TABLE>
<CAPTION>
Number of Shares
Beneficially
Name of Beneficial Owner Owned (1) Percent (1)
-------------------------------------------------------------------- --------------- -----------
<S> <C> <C>
Renaissance Capital Growth & Income Fund III, Inc. (4) 5,874,295 36.7%
Renaissance US Growth & Income Trust PLC (5) 5,595,388 35.8%
C. A. Rundell, Jr. (2) (3) (6) 1,764,190 15.0%
Phillip R. Thomas (7) 1,490,942 14.0%
Gerald K. Beckmann (8) 1,063,166 9.6%
Profutures Bridge Capital Fund LP (9) 585,000 5.5%
Alan M. Arsht (2) (3) (10) 316,955 2.9%
Frank R. Marlow (2) (3) (11) 188,911 1.8%
Holly J. Burlage (2) (3) (12) 168,619 1.6%
Jack Caldwell (2) (3) (13) 101,343 0.9%
James E. Jack (2) (3) (14) 93,575 0.9%
Robert M. Galecke (2) (3) (15) 46,081 0.4%
John P. Jenkins (2) (3) -- --%
All current directors and executive officers as a group (8 person) 1,500,484 14.0%
</TABLE>
(1) Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock which an individual or group has a right to acquire within 60
days pursuant to the exercise of options or warrants are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person shown in the
table.
(2) The address for this person is 8200 Springwood Drive, Suite 230, Irving, TX
75063.
(3) Mr. Rundell is a Director, Chairman of the Board and Chief Executive
Officer of the Company. Mr. Arsht, Mr. Marlow, Mr. Jack, Mr. Galecke, and
Mr. Jenkins are Directors of the Company. Mr. Caldwell is President of a
subsidiary of the Company. Ms. Burlage is Vice President, Chief Financial
Officer and Secretary of the Company.
(4) Based on a 13(g) filing dated November 10, 1999, Renaissance Capital Growth
& Income Fund III, Inc. is deemed the beneficial owner of 5,874,295 shares
of Common Stock. The address for this company is 8080 N. Central
Expressway, Suite 210, Dallas, TX 75206.
(5) Based on a 13(g) filing dated November 12, 1999, Renaissance US Growth &
Income Trust PLC is deemed the beneficial owner of 5,595,388 shares of
Common Stock. The address for this company is 8080 N. Central Expressway,
Suite 210, Dallas, TX 75206.
(6) Includes 164,126 shares of Common Stock issuable upon the exercise of
outstanding options exercisable within 60 days; 705,971 shares of Common
Stock issuable upon the exercise of warrants within 60 days; and 331,250
shares of Common Stock issuable upon the conversion of preferred stock
within 60 days.
--------------------------------------------------------------------------------
Page 29
<PAGE> 30
(7) Includes 108,418 shares of Common Stock issuable upon the exercise of
warrants within 60 days. The address for Mr. Thomas is 3510 Turtle Creek
Boulevard, Ph-A, Dallas, TX 75219-5542.
(8) Includes 409,473 shares of Common Stock issuable upon the exercise of
outstanding options exercisable within 60 days; and 128,021 shares of
Common Stock issuable upon the exercise of warrants within 60 days. The
address for Mr. Beckmann is 1017 Diamond Boulevard, Southlake, TX 76092.
(9) Based on a 13(d) filing dated July 17, 1997, ProFutures Bridge Capital
Fund, LP is deemed the beneficial owner of 585,000 shares of Common Stock.
The address for this company is 1720 South Bellaire Street, Suite 500,
Denver, CO 80222.
(10) Includes 4,455 shares of Common Stock issuable upon the exercise of
outstanding options exercisable within 60 days; 125,000 shares of Common
Stock issuable upon the exercise of warrants within 60 days; and 187,500
shares of Common Stock issuable upon the conversion of preferred stock
within 60 days.
(11) Includes 79,879 shares of Common Stock issuable upon the exercise of
outstanding options exercisable within 60 days; 35,167 shares of Common
Stock issuable upon the exercise of warrants within 60 days; and 31,250
shares of Common Stock issuable upon the conversion of preferred stock
within 60 days.
(12) Includes 95,625 shares of Common Stock issuable upon the exercise of
outstanding options exercisable within 60 days; 26,240 shares of Common
Stock issuable upon the exercise of warrants within 60 days; and 37,500
shares of Common Stock issuable upon the conversion of preferred stock
within 60 days.
(13) Includes 101,343 shares of Common Stock issuable upon the exercise of
outstanding options exercisable within 60 days.
(14) Includes 21,492 shares of Common Stock issuable upon the exercise of
outstanding options exercisable within 60 days; 20,833 shares of Common
Stock issuable upon the exercise of warrants within 60 days; and 31,250
shares of Common Stock issuable upon the conversion of preferred stock
within 60 days.
(15) Includes 25,248 shares of Common Stock issuable upon the exercise of
outstanding options exercisable within 60 days; 8,333 shares of Common
Stock issuable upon the exercise of warrants within 60 days; and 12,500
shares of Common Stock issuable upon the conversion of preferred stock
within 60 days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2000, Mr. Rundell loaned the Company approximately $200,000 at 9%
interest. An affiliated foundation of Mr. Rundell's loaned the Company
approximately $100,000 at 9% interest. To date, both of the loans remain
outstanding.
Mr. Jenkins joined the board in September 2000. In addition to his board duties,
Mr. Jenkins is serving as a consultant to the Company at its Intelli-Site, Inc.
subsidiary.
The Company believes that the terms of the foregoing transactions were on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties.
--------------------------------------------------------------------------------
Page 30
<PAGE> 31
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.
*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.
**10.64 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.
**10.71 Asset Purchase Agreement, dated October 1, 1998, between the
Company and MPA Systems, Inc.
--------------------------------------------------------------------------------
Page 31
<PAGE> 32
****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 Notification Systems of America, Inc.
******10.76 Form of Subscription Agreement for Series D Convertible
Preferred Stock.
******10.77 Amended and Restated Certificate of Incorporation of the
Company.
*******21.1 Subsidiaries of the Company.
*******23.1 Consent of Grant Thornton LLP
*******27 Financial Data Schedule
-----------
* Filed as the similarly numbered exhibit to the Company's
Registration Statement on Form SB-2 (No. 33-59870-FW) and
incorporated herein by reference.
** Filed as the similarly numbered exhibit to the Company's
Registration Statement on Form SB-2 (No. 333-5023) and
incorporated herein by reference.
*** Filed 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 as the similarly numbered exhibit to the Company's Form
10-KSB for the fiscal year ended June 30, 1999.
****** Filed as the similarly numbered exhibit to the Company's Form
10-QSB for the quarter ended December 31, 1999.
******* Filed herewith.
(b) Reports filed on Form 8-K.
Report filed August 25, 2000 for changes in registrant's
management.
--------------------------------------------------------------------------------
Page 32
<PAGE> 33
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, 2000 /s/ C. A. RUNDELL, JR.
---------------- -----------------------------------
C. A. Rundell, Jr.
Director, Chairman of the Board,
and Chief Executive Officer
--------------------------------------------------------------------------------
Page 33
<PAGE> 34
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, 2000 /s/ C. A. RUNDELL, JR.
---------------- -------------------------------------
C. A. Rundell, Jr.
Director, Chairman of the Board,
and Chief Executive Officer
Date: October 13, 2000 /s/ HOLLY J. BURLAGE
---------------- -------------------------------------
Holly J. Burlage
Vice President, Chief Financial
Officer, Secretary and Treasurer
(Principal Financial and
Accounting Officer)
Date: October 13, 2000 /s/ ALAN M. ARSHT
---------------- -------------------------------------
Alan M. Arsht
Director
Date: October 13, 2000 /s/ ROBERT M. GALECKE
---------------- -------------------------------------
Robert M. Galecke
Director
Date: October 13, 2000 /s/ JAMES E. JACK
---------------- -------------------------------------
James E. Jack
Director
Date: October 13, 2000 /s/ JOHN P. JENKINS
---------------- -------------------------------------
John P. Jenkins
Director
Date: October 13, 2000 /s/ FRANK R. MARLOW
---------------- -------------------------------------
Frank R. Marlowe
Director
--------------------------------------------------------------------------------
Page 34
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<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.
**10.64 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.
**10.71 Asset Purchase Agreement, dated October 1, 1998, between the
Company and MPA Systems, Inc.
</TABLE>
<PAGE> 36
<TABLE>
<S> <C>
****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 Notification Systems of America, Inc.
******10.76 Form of Subscription Agreement for Series D Convertible
Preferred Stock.
******10.77 Amended and Restated Certificate of Incorporation of the
Company.
*******21.1 Subsidiaries of the Company.
*******23.1 Consent of Grant Thornton LLP
*******27 Financial Data Schedule
</TABLE>
----------
* Filed as the similarity numbered exhibit to the Company's
Registration Statement on Form SB-2 (No. 33-59870-FW) and
incorporated herein by reference.
** Filed as the similarity numbered exhibit to the Company's
Registration Statement on Form SB-2 (No. 33-5023) and
incorporated herein by reference.
*** Filed as the similarity 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 as the similarly numbered exhibit to the Company's
Form 10-KSB for the fiscal year ended June 30, 1999.
****** Filed as the similarity numbered exhibit to the Company's
Form 10-QSB for the quarter ended December 31, 1999.
******* Filed herewith.
