As filed with the Securities and Exchange Commission on April 8, 2005
Registration No. 333-122849
________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
TO
Form SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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INTEGRATED SECURITY SYSTEMS, INC.
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(Name of small business issuer as specified in its charter)
Delaware 3669 75-2422983
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(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
8200 Springwood Drive, Suite 230
Irving, Texas 75063
(972) 444-8280
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(Address and telephone number of principal executive offices)
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Copies of communications to:
C.A. Rundell, Jr. David H. Oden, Esq.
Chief Executive Officer Haynes and Boone, LLP
8200 Springwood Drive, Suite 230 2505 N. Plano Road, Suite 4000
Irving, Texas 75063 Richardson, Texas 75082
(972) 444-8280 (972) 739-6929
Telecopy: (972) 401-2500 Telecopy: (972) 692-9029
--------------------------------------
(Name, address and telephone number of
agent for service)
----------------
Approximate date of commencement of proposed sale to public: From time
to time after the effectiveness of this registration statement, as determined by
the selling stockholder.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. | | ___________________________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. | | ___________________________
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. | | ___________________________
Pursuant to Rule 416 of the Securities Act, this registration statement
shall cover shares of common stock issued as a result of, among other events,
stock splits, stock dividends and similar events which result in such selling
stockholder holding additional shares of common stock or having the right to
receive additional shares of common stock.
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. | |
PROSPECTUS
85,307,479 Shares
INTEGRATED SECURITY SERVICES, INC.
Common Stock
This prospectus covers the resale of a total of 85,307,479 shares of
our common stock, par value $0.01 per share, being offered solely by the selling
stockholders. Of the shares covered by this prospectus:
o up to 12,086,821 shares are issuable to certain of the selling
stockholders upon the conversion of convertible promissory
notes;
o up to 1,522,154 shares are issuable to certain of the selling
stockholders upon exercise of warrants;
o up to 190,000 shares are issuable to certain of the selling
stockholders upon the conversion of our Series A preferred
stock;
o up to 706,250 shares are issuable to certain of the selling
stockholders upon the conversion of our Series D preferred
stock; and
o up to 70,802,254 shares are currently held by the selling
stockholders.
We will not receive any proceeds from sales of shares by the selling
stockholders. However, assuming that all of the warrants held by the selling
stockholders are exercised for cash, we will realize proceeds of approximately
$575,838.
Our common stock is quoted on the OTC Bulletin Board, under the symbol
"IZZI.OB". There is currently only a limited trading market in our common stock,
and we do not know whether an active trading market will develop. On April 7,
2005, the last reported sale price for the common stock was $0.34 per share.
---------------------------------
Investing in our common stock involves a high degree of risk.
See the section entitled "Risk Factors," beginning on page 6.
---------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is April 11, 2005.
TABLE OF CONTENTS
PAGE
Forward Looking Statements................................................1
Prospectus Summary........................................................2
Risk Factors..............................................................6
Use of Proceeds..........................................................13
Price Range of Common Stock..............................................13
Management's Discussion and Analysis or Plan of Operation................15
Business.................................................................24
Description of Property..................................................28
Legal Proceedings........................................................28
Management...............................................................29
Executive Compensation...................................................32
Certain Relationships and Related Transactions...........................34
Principal Stockholders...................................................36
Description of Securities................................................38
Selling Stockholders.....................................................42
Plan of Distribution.....................................................47
Shares Eligible for Future Sale..........................................49
Changes in Registrant's Certifying Accountant............................51
Experts..................................................................52
Legal Matters............................................................52
Additional Information...................................................52
Index to Financial Statements.......................................F Pages
------------------------------------------------------------------------
You should rely only on information contained in this document or to
which we have referred you. Neither we nor the selling stockholders have
authorized anyone to provide you with different or additional information. This
document may only be used where it is legal to sell these securities. The
information in this document may only be accurate on the date of this document.
You should not assume that the information in the prospectus, or incorporated
herein by reference, or in any prospectus supplement is accurate as of any date
other than the date on the front of those documents.
------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
We caution readers that certain important factors may affect our actual
results and could cause these results to differ materially from any
forward-looking statements that we make in this prospectus. For this purpose,
any statements that are not statements of historical fact may be deemed to be
forward-looking statements. This prospectus contains statements that constitute
"forward-looking statements." These forward-looking statements can be identified
by the use of predictive, future-tense or forward-looking terminology, such as
"believes," "anticipates," "expects," "estimates," "plans," "may," "will," or
similar terms. These statements appear in a number of places in this prospectus
and include statements regarding our intent, belief or current expectations with
respect to many things. Some of these things are:
o trends affecting our financial condition or results of operations;
o our business and growth strategies;
o our technology; and
o our financing plans.
We caution readers that any such forward-looking statements are not
guarantees of future performance and involve significant risks and
uncertainties. In fact, actual results most likely will differ materially from
those projected in the forward-looking statements as a result of various
factors. Some factors that could adversely affect actual results and performance
include:
o meeting anticipated development schedules of our new products;
o future national or regional economic and competitive conditions;
o changes in relationships with our customers;
o casualty to or other disruption of our production facility and
equipment;
o delays and disruptions in the shipment of our products;
o ability to meet our stated business goals;
o our future requirements for additional capital funding;
o the failure of our technology and products to perform as
specified;
o the discontinuation of growth in the use of our products and
services;
o the enactment of new adverse government regulations; and
o the development of better technology and products by others.
You should carefully consider and evaluate all of these factors. In
addition, we do not undertake to update forward-looking statements after we file
this report with the Securities and Exchange Commission, which we will sometimes
refer to in this prospectus as the "SEC," even if new information, future events
or other circumstances have made them incorrect or misleading.
1
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in
this prospectus. We urge you to read this entire prospectus carefully, including
"Risk Factors" on page 6 and our financial statements and the notes to those
financial statements contained elsewhere in this prospectus.
The Company
We were formed in December 1991 as a Delaware corporation and became a
publicly traded company in April 1993. We design, develop, manufacture,
distribute and service security and traffic control products used in the
commercial, industrial and government sectors. We conduct our operations through
three wholly-owned subsidiaries: B&B ARMR Corporation, DoorTek Corporation and
Intelli-Site, Inc.
On September 5, 2003, we acquired all of the issued and outstanding
shares of common stock of ARMR Services Corporation (which was later renamed B&B
ARMR Corporation) in a merger transaction involving one of our wholly-owned
subsidiaries. ARMR Services Corporation is a manufacturing company that
engineers and manufactures high security anti-terrorist crash rated barriers,
parking control equipment and other security systems for business and government
use. By acquiring ARMR Services Corporation, we have significantly enhanced our
services, product offerings and growth opportunities.
On December 15, 2004, we acquired all of the issued and outstanding
shares of common stock of DoorTek Corporation. DoorTek is a manufacturer of
access control systems and other physical security system products. By acquiring
DoorTek, we have significantly enhanced our services, product offerings and
growth opportunities.
We maintain our principal executive offices at 8200 Springwood Drive,
Suite 230, Irving, Texas 75063; telephone (972) 444-8280.
B&B ARMR Corporation
B&B ARMR Corporation, one of our manufacturing subsidiaries, designs,
manufactures and sells anti-terrorist crash barriers, warning and crash gates,
HOV lane changers, navigational lighting, and perimeter security gates and
operators. B&B ARMR Corporation has a customer network that includes
distributors, engineering and architectural firms and local, state and federal
government agencies, military, institutional and other critical infrastructure
clients.
DoorTek Corporation
DoorTek Corporation, another of our manufacturing subsidiaries,
manufactures and sells card access control and corrections security hardware and
software products. DoorTek's sales and distribution channels are categorized as
either dealer/distributor or direct sales to end-users. DoorTek also sells card
access control cards, readers and ancillary devices.
Intelli-Site, Inc.
Intelli-Site, Inc., our software development subsidiary, designs and
develops our Intelli-Site(R) computer software which is used for automated
security systems and facility controls systems integration. This software allows
a customer to decouple the selection of software from hardware so that a
customer can mix and match different hardware from various manufacturers, into a
single, integrated system. More specifically, Intelli-Site(R) allows customers
to integrate a wide variety of devices such as access control, closed circuit
television, badge systems, fire alarm systems, lighting control and heating,
ventilation and air conditioning systems. The open system design provided by
Intelli-Site(R) provides a solution and a control interface that is tailored to
unique customer requirements.
2
Current Status
We have incurred significant nonrecurring expenses concerning the
integration of B&B ARMR Corporation. In addition, we have experienced
unanticipated delays in the sale of our Intelli-Site(R) software product and
have not met the anticipated sales levels for this product. During fiscal 2003
and 2004, and in each fiscal year since our inception, we have experienced
significant losses from operations. In fact, the audit report of Grant Thornton
LLP, our independent registered public accounting firm for our consolidated
financial statements for the year ended June 30, 2004, has stated that losses
from our operations raise substantial doubt about our ability to continue as a
going concern.
3
The Offering
Common Stock Offered by the Company.... None.
Common Stock Offered by the Selling
Stockholders........................ 85,307,479 shares, including up to
12,086,821 shares issuable upon the
conversion of convertible promissory
notes, up to 1,522,154 shares issuable
upon exercise of warrants, up to
190,000 shares issuable upon the
conversion of our Series A preferred
stock, up to 706,250 shares issuable
upon the conversion of our Series D
preferred stock and up to 70,802,254
shares currently held by certain of the
selling stockholders.
Common Stock
Outstanding Prior to this Offering.. 85,056,612 shares.
Outstanding After this Offering..... 99,561,837 shares, including up to
85,307,479 shares of common stock
covered by this prospectus.
Common Stock Reserved in
Connection with this Offering....... 14,505,225 shares, including 12,086,821
shares issuable upon the conversion of
convertible promissory notes, 1,522,154
shares issuable upon exercise of
warrants, 190,000 shares issuable upon
the conversion of our Series A
preferred stock and 706,250 shares
issuable upon the conversion of our
Series D preferred stock.
Risk Factors
We urge you to read the "Risk Factors" section beginning on page 6 of
this prospectus so that you understand the risks associated with an investment
in our common stock.
4
Summary Financial Data
The summary financial data set forth below with respect to our
consolidated statements of operations and cash flows for the six month periods
ended December 31, 2003 and 2004 and each of the two fiscal years for the
periods ended June 30, 2003 and 2004, are derived from, and should be read in
conjunction with, our audited and unaudited consolidated financial statements
and the notes thereto included elsewhere in this prospectus.
Six Months Ended
December 31, Years Ended June 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Operations Data
Selling, general and administrative $ 2,354,182 $ 1,617,306 $ 4,012,615 $ 2,458,407
Impairment of software development costs -- -- -- 224,900
Research and development 251,748 326,513 653,591 401,104
Interest and financing costs 360,505 664,272 1,431,126 541,324
Depreciation of property and equipment 109,694 79,665 166,038 134,954
Net loss $(1,111,623) $ (922,027) $(3,671,462) $(1,952,038)
=========== =========== =========== ===========
Six Months Ended
December 31, Years Ended June 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Cash Flows Data
Net cash used in operations $(2,799,190) $ (300,381) $(2,442,069) $ (889,974)
Net cash used in investing activities (292,653) (844,481) (898,850) (64,627)
Net cash from financing activities 4,341,971 1,268,269 3,336,529 1,102,721
Net increase (decrease) in cash and equivalents $ 1,250,128 $ 123,407 $ (4,390) $ 148,120
=========== =========== =========== ===========
At December 31, At June 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Balance Sheet Data
Cash and cash equivalents $ 1,422,816 $ 300,485 $ 172,688 $ 177,078
Total current assets 6,233,874 3,630,066 3,424,525 1,423,481
Property and equipment, net 608,597 629,719 681,168 481,608
Total assets 10,972,348 8,734,403 7,712,811 1,920,100
Total current liabilities 6,504,788 6,295,009 4,584,522 1,422,520
Total long-term liabilities 5,090,690 599,281 2,956,341 1,919,409
Preferred stock subject to redemption -- -- -- 7,945,052
Stockholders' equity (deficiency) $ (623,130) $ 1,840,113 $ 171,948 $(8,916,881)
5
RISK FACTORS
There are many risks that may affect your investment in our common
stock, including those described below. You should carefully consider these risk
factors together with all of the other information. If any of these or other
risks actually occur, our business, financial condition and operating results,
as well as the trading price or value of our securities could be materially
adversely affected and you may lose all or part of your investment.
Risks Relating to Our Business
We have a history of operating losses and we anticipate losses and
negative cash flow for the foreseeable future. Unless we are able to generate
profits and positive cash flow, we may not be able to continue our business.
We incurred a net loss of $1,111,623 and negative cash flow from
operations of $2,799,190 during the six months ended December 31, 2004, and a
net loss of $922,027 and negative cash flow from operations of $300,381 during
the six months ended December 31, 2003. We incurred a net loss of $3,671,462 and
negative cash flow from operations of $2,442,069 during the year ended June 30,
2004, and a net loss of $1,952,038 and negative cash flow from operations of
$889,974 during the year ended June 30, 2003. We expect net losses and negative
cash flow from operations to continue for the foreseeable future and to increase
significantly from current levels as we increase expenditures for:
o sales and marketing;
o technology;
o infrastructure research and development;
o the interest charges and expenses related to previous equity and
debt financings; and
o general business enhancement.
With increased on-going operating expenses, we will need to generate
significant revenues to achieve profitability. Consequently, we may never
achieve profitability. Even if we do achieve profitability, we may not sustain
or increase profitability on a quarterly or annual basis in the future. If we
are unable to achieve or sustain profitability in the future, we may be unable
to continue our operations.
Our independent registered public accounting firm has expressed
substantial doubt about our ability to continue operating as a going concern.
Our independent registered public accounting firm included an
explanatory paragraph in their audit opinion for our consolidated financial
statements for the year ended June 30, 2004. The paragraph states that our
recurring losses from operations and resulting continued dependence on access to
external financing raise substantial doubts about our ability to continue as a
going concern. In addition, the factors leading to and the existence of the
explanatory paragraph may adversely affect our relationship with our customers
and suppliers and have an adverse effect on our ability to obtain financing.
6
Our independent registered public accounting firm has communicated a
reportable condition regarding our system of internal controls.
Our independent registered public accounting firm has communicated to
our audit committee a reportable condition regarding our system of internal
controls. They noted a reportable condition with respect to the inadequacy of
staffing levels in our financial reporting function that could result in our
inability to meet our financial reporting objectives.
We will require additional capital to proceed with our long-term
business plan. If we are unable to obtain additional capital in future years, we
may be unable to proceed with our long-term business plan and we may be forced
to limit or curtail our future operations.
We will require additional working capital to proceed with our
long-term business plan. Our working capital requirements and the cash flow
provided by future operating activities, if any, will vary greatly from quarter
to quarter, depending on the volume of business during the period and payment
terms with our customers. There can be no assurance that adequate levels of
additional financing, whether through equity financing, debt financing or other
sources, will be available, or will be available when needed or on terms
favorable to us. Additional financings could result in significant dilution to
our existing stockholders or the issuance of securities with superior rights to
our current outstanding securities. In addition, we may grant registration
rights to investors purchasing future equity or debt securities. If we are
unable to raise additional financing, we may be unable to grow or to implement
our long-term business plan, develop or enhance our products and services, take
advantage of future opportunities or respond to competitive pressures on a
timely basis, if at all. In addition, a lack of additional financing could force
us to substantially curtail or cease operations.
The loss of any of our key personnel or our failure to attract
qualified management would likely have an adverse effect on our business.
Our future success depends, to a significant extent, on the continued
services of our key personnel. Our loss of any of these key personnel most
likely would have an adverse effect on our business. At present, we have written
employment agreements with these personnel but we do not have key man life
insurance on them. In addition, competition for personnel throughout the
industry is intense and we may be unable to retain our current key employees or
attract, integrate or retain other highly qualified personnel in the future. If
we do not succeed in retaining our current key employees or in attracting and
motivating new personnel, our business could be materially adversely affected.
The demand for our Intelli-Site(R) software product will be a
significant determinant in our ability to increase sales and meet our business
projections.
Our marketing strategy includes the sale Intelli-Site(R), a
sophisticated integrated security systems software product. We believe that the
sale of our Intelli-Site(R) software product will result in higher sales and
gross margins. To date, sales of this software have been limited and there can
be no assurance that the market will accept the Intelli-Site(R) software
product, or that we will be able to successfully market our integrated security
system.
Our limited ability to protect our intellectual property may adversely
affect our ability to compete.
We rely on a combination of patents, trademarks, copyrights, trade
secret laws, confidentiality procedures and licensing arrangements to protect
our intellectual property rights. A successful challenge to our ownership of our
technology could materially damage our business prospects. Our technologies may
infringe upon the proprietary rights of others. Licenses required by us from
others may not be available on commercially reasonable terms, if at all. Any
issued patent may be challenged and invalidated. Patents may not issue from any
of our pending applications. Any claims allowed from existing or pending patents
may not be of sufficient scope or strength to provide significant protection for
our products. Patents may not be issued in all countries where our products can
be sold so as to provide meaningful protection or any commercial advantage to
us. Our competitors may also be able to design around our patents. Our
competitors may assert that our technologies or products infringe on their
patents or proprietary rights. Problems with patents or other rights could
increase the cost of our products or delay or preclude our new product
development and commercialization. If infringement claims against us are deemed
valid, we may not be able to obtain appropriate licenses on acceptable terms or
at all. Litigation could be costly and time-consuming but may be necessary to
protect our current or future patent and/or technology license positions or to
defend against infringement claims.
7
The business environment is highly competitive and, if we do not
compete effectively, we may experience material adverse effects on our
operations.
The market for our products and services is intensely competitive and
we expect competition to increase in the future. We compete with large and small
companies that provide products and services that are similar to many of our
products and services. Our competitors may develop new products and services in
the future that are perceived as more effective and/or cost efficient than our
products and services.
Some of our competitors have longer operating histories, greater name
recognition, access to larger customer bases and significantly greater
financial, technical and marketing resources than we do. As a result, they may
be able to adapt more quickly to new or emerging technologies and changes in
customer requirements or to devote greater resources to the promotion and sale
of their products than we will. In addition, our competitors may have
established or may establish financial or strategic relationships among
themselves, with existing or potential customers, resellers or other third
parties and rapidly acquire significant market share. If we cannot compete
effectively, we may experience future price reductions, reduced gross margins
and loss of market share, any of which will materially adversely affect our
business, operating results and financial condition.
Our operating results may prove unpredictable and may fluctuate
significantly.
Our operating results are likely to fluctuate significantly in the
future due to a variety of factors, many of which are outside of our control.
Factors which may cause operating results to fluctuate significantly include the
following:
o new technology or products introduced by us or by our competitors;
o the timing and uncertainty of sales cycles;
o our success in marketing and market acceptance of our products and
services by our existing customers and by new customers;
o a decrease in the level of spending for security-related products
and services by our existing and potential customers; and
o general economic conditions, as well as economic conditions
specific to users of our products and services.
Our operating results may be volatile and difficult to predict. As
such, future operating results may fall below the expectations of securities
analysts and investors. In this event, the trading price of our common stock may
fall significantly.
8
Undetected software errors or failures found in our Intelli-Site(R)
Software product may result in a loss of or a delay in market acceptance of
Intelli-Site(R) which could materially adversely affect our operating results.
Errors or defects in our Intelli-Site(R) software product may result in
loss of revenues or delay in market acceptance and could materially adversely
affect our business, operating results and financial condition. Applications
such as ours may contain errors or defects, sometimes called "bugs,"
particularly when first introduced or when new versions or enhancements are
released. Despite our testing, current versions, new versions or enhancements of
Intelli-Site(R) may still have defects and errors after commencement of
commercial operation. As a result of "bugs" in our software, customers may
experience data loss, data corruption or other business disruption, which could
subject us to potential liability.
Seasonality affects our operating results.
The vast majority of our revenues comes from products used primarily in
outdoor construction, which is negatively affected by cold weather. We typically
experience a decline in sales and operating results during the quarter ended
March 31 due to weather conditions.
Risks Relating to Our Common Stock and This Offering
----------------------------------------------------
Our common stock price may be volatile.
The trading prices for equity securities in the stock market in general
have been subject to wide fluctuations that may be unrelated to the operating
performance of the particular company affected by such fluctuations.
Consequently, broad market fluctuations may have an adverse effect on the
trading price of our common stock. Other factors that may contribute to the
volatility of the trading price of our common stock include, among others:
o our quarterly results of operations;
o financial predictions concerning security products companies and
companies competing in our market in general, and concerning us in
particular;
o public announcements of technical innovations relating to our
business, new products or technology by us or our competitors, or
acquisitions or strategic alliances by us or our competitors;
o public reports concerning our products or technology or those of
our competitors; and
o the operating and stock price performance of other companies that
investors may deem comparable to us.
There is a limited market for our common stock. If a substantial and
sustained market for our common stock does not develop, our stockholders'
ability to sell their shares may be materially and adversely affected.
Our common stock is tradable in the over-the-counter market and is
quoted on the OTC Bulletin Board. Many institutional and other investors refuse
to invest in stocks that are traded at levels below the Nasdaq Small Cap Market
which could make our efforts to raise capital more difficult. OTC Bulletin Board
stocks are often lightly traded or not traded at all on any given day. We cannot
predict whether a more active market for our common stock will develop in the
future. In the absence of an active trading market:
9
o investors may have difficulty buying and selling our common stock
or obtaining market quotations;
o market visibility for our common stock may be limited; and
o a lack of visibility for our common stock may have a depressive
effect on the market price for our common stock.
Shares issuable upon the exercise of options, warrants and convertible
promissory notes or under anti-dilution provisions in certain agreements could
dilute stock holdings and adversely affect our stock price.
We have issued options and warrants to acquire common stock to our
employees and certain other persons at various prices, some of which are, or may
in the future have, exercise prices at or below the market price of our stock.
As of February 11, 2005, we have outstanding options and warrants to purchase a
total of 11,679,720 shares of our common stock. Of these options and warrants,
8,207,945 have exercise prices above the recent market price of $0.39 per share
(as of February 11, 2005), and 3,471,775 have exercise prices at or below this
recent market price. If exercised, these options and warrants will cause
immediate and possibly substantial dilution to our stockholders.
Our existing stock option plans have an aggregate of 1,044,398 shares
remaining for issuance as of February 11, 2005. Future options issued under the
plans may have further dilutive effects.
The conversion of our convertible promissory notes will cause
substantial dilution to our stockholders.
The holders of our convertible promissory notes have the option of
converting outstanding principal, plus accrued interest thereon, into shares of
our common stock, some of which are, or may in the future, have exercise prices
at or below the market price of our stock. As of February 11, 2005, we have
outstanding convertible promissory notes totaling $4,618,000 to purchase a total
of 12,086,842 shares of our common stock. Of these convertible promissory notes,
$500,000 to purchase a total of 1,250,000 shares of our common stock, have
exercise prices above the recent market price of $0.39 per share (as of February
11, 2005), and $4,118,000 to purchase a total of 10,836,742 shares of our common
stock, have exercise pries at or below this recent market price. If converted,
these convertible promissory notes will cause immediate and possibly substantial
dilution to our stockholders.
Issuance of shares pursuant to the exercise of options, warrants,
anti-dilution provisions, or the conversion of promissory notes, could lead to
subsequent sales of the shares in the public market, which could depress the
market price of our stock by creating an excess in supply of shares for sale.
Issuance of these shares and sale of these shares in the public market could
also impair our ability to raise capital by selling equity securities.
A large number of shares will be eligible for future sale and may
depress our stock price.
As of February 11, 2005, we had outstanding 85,056,612 shares of common
stock. A large number of these shares are restricted securities that are
eligible for sale under Rule 144 at various times. No prediction can be made as
to the effect, if any, that sales of shares of common stock or the availability
of such shares for sale will have on the market prices prevailing from time to
time. Nevertheless, the possibility that substantial amounts of our common stock
may be sold in the public market may adversely affect prevailing market prices
for the common stock and could impair our ability to raise capital through the
sale of our equity securities.
We do not intend to pay dividends in the near future.
Our board of directors determines whether to pay dividends on our
issued and outstanding shares. The declaration of dividends will depend upon our
future earnings, our capital requirements, our financial condition and other
relevant factors. Our board does not intend to declare any dividends on our
shares for the foreseeable future.
10
Our common stock is currently deemed to be a "penny stock." As a
result, trading of our shares may be subject to special requirements that could
impede our stockholders' ability to resell their shares.
Our common stock is a "penny stock" as that term is defined in Rule
3a51-1 of the Securities and Exchange Commission because it is selling at a
price below five dollars per share. In the future, if we are unable to list our
common stock on NASDAQ or a national securities exchange, or the per share sale
price is not at least $5.00, our common stock may continue to be deemed to be a
"penny stock". Penny stocks are stocks:
o with a price of less than five dollars per share;
o that are not traded on a recognized national exchange;
o whose prices are not quoted on the NASDAQ automated quotation
system; or
o of issuers with net tangible assets less than
o $2,000,000 if the issuer has been in continuous operation for
at least three years; or
o $5,000,000 if in continuous operation for less than three
years; or
o of issuers with average revenues of less than $6,000,000 for
the last three years.
Section 15(g) of the Securities Exchange Act of 1934, as amended, and
SEC Rule 15g-2, require broker-dealers dealing in penny stocks to provide
potential investors with a document disclosing the risks of penny stocks and to
obtain a manually signed and dated written receipt of the document before
effecting any transaction in a penny stock for the investor's account. Moreover,
SEC Rule 15g-9 requires broker-dealers in penny stocks to approve the account of
any investor for transactions in such stocks before selling any penny stock to
that investor. This procedure requires the broker-dealer:
o to obtain from the investor information concerning his or her
financial situation, investment experience and investment
objectives;
o to determine reasonably, based on that information, that
transactions in penny stocks are suitable for the investor and
that the investor has sufficient knowledge and experience as to be
reasonably capable of evaluating the risks of penny stock
transactions;
o to provide the investor with a written statement setting forth the
basis on which the broker-dealer made the determination under the
previous bullet point; and
o to receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's
financial situation, investment experience and investment
objectives.
Compliance with these requirements may make it more difficult for
holders of our common stock to resell their shares to third parties or to
otherwise dispose of them.
Our current and former executive officers, directors and major
stockholders own a significant percentage of our voting stock. As a result, they
exercise significant control over our business affairs and policy.
As of February 11, 2005, our current and former executive officers,
directors and holders of 5% or more of our outstanding common stock together
beneficially owned approximately 84.1% of the outstanding common stock if they
exercised all of the warrants and convertible promissory notes held by them.
These stockholders are able to significantly influence all matters requiring
approval by stockholders, including the election of directors and the approval
of significant corporate transactions. This concentration of ownership may also
have the effect of delaying, deterring or preventing a change in control and may
make some transactions more difficult or impossible to complete without the
support of these stockholders.
11
Provisions in our charter documents and Delaware law could prevent,
delay or impede a change in control of us and may reduce the market price of our
common stock.
Provisions of our certificate of incorporation and bylaws, including
those allowing our board of directors to offer preferred stock without
stockholder approval and to issue preferred stock with rights more favorable
than our common stock, could have the effect of discouraging, delaying or
preventing a merger or acquisition that a stockholder may consider favorable. We
are also subject to the anti-takeover laws of Delaware which may discourage,
delay or prevent someone from acquiring or merging with us, and which may
adversely affect the market price of our common stock. Please see "Description
of Securities--Anti-Takeover Provisions" for more information concerning
anti-takeover provisions.
12
USE OF PROCEEDS
The selling stockholders will receive all of the proceeds of the sale
of shares of our common stock pursuant to this prospectus. We will not receive
any proceeds from the sale of shares by the selling stockholders. We will,
however, receive approximately $575,838 if all of the warrants issued to the
selling stockholders are exercised for cash, and we intend to use any such
proceeds for general working capital purposes.
PRICE RANGE OF COMMON STOCK
The principal U.S. market in which our common stock is traded is the
over-the-counter market. There is only one class of shares of our common stock.
Our common stock is quoted on the OTC Bulletin Board under the symbol "IZZI.OB".
The following table sets forth the range of high and low bid quotes of
our common stock per quarter for the past two fiscal years as reported by the
OTC Bulletin Board. These quotes reflect inter-dealer prices without retail
mark-up, markdown or commission and may not necessarily represent actual
transactions. The trading market in our common stock may at times be illiquid
due to exceedingly low volume.
BID
------------------
Quarter Ending High Low
-------------------------------------- ------- -------
Fiscal 2005
Second Quarter........................ $ 0.46 $ 0.31
First Quarter......................... 0.51 0.36
Fiscal 2004
Fourth Quarter........................ $ 0.81 $ 0.43
Third Quarter......................... 0.68 0.34
Second Quarter........................ 0.37 0.26
First Quarter......................... 0.45 0.15
Fiscal 2003
Fourth Quarter........................ 0.23 0.14
Third Quarter......................... 0.24 0.13
Second Quarter........................ 0.27 0.19
First Quarter......................... 0.41 0.28
On April 7, 2005, the closing price of our common stock was $0.34 per
share.
13
Holders
As of February 11, 2005, there were
o 85,056,612 shares of our common stock outstanding,
o 3,650,043 warrants outstanding entitling holders thereof to
purchaser 6,031,118 shares of common stock, and
o 5,648,602 stock options outstanding entitling the holders thereof
to purchase 5,648,602 shares of common stock.
The shares of common stock are held of record by approximately 179
holders, the warrants are held of record by approximately 51 holders and the
options are held of record by approximately 45 holders, including those
brokerage firms and/or clearing houses holding our common stock for their
clientele, with each such brokerage house and/or clearing house being considered
as one holder.
Dividend Policy
We have never declared or paid any dividends on our common stock and
currently intend to retain all future earnings, if any, for the operation and
development of our business and to repay our outstanding debt. We do not intend
to pay any dividends on the common stock in the foreseeable future.
Equity Compensation Plan Information
The following table provides information about securities that have
been issued or are issuable under equity compensation plans as of June 30, 2004:
----------------------------------------------------------------------------------------------------------------
| Number of Securities | Weighted Average | Number of Securities
| to be Issued upon | Exercise Price of | Remaining Available
Plan Category | Exercise of | Outstanding | For Future Issuance
| Outstanding Options, | Options, Warrants | Under Equity
| Warrants and Rights | And Rights | Compensation Plans
-----------------------------------|--------------------------|-----------------------|-------------------------
Equity compensation plans | | |
approved by security holders | | |
-----------------------------------|--------------------------|-----------------------|-------------------------
1993 Stock Option Plan | 52,562 | $ 2.03 | 447,437
-----------------------------------|--------------------------|-----------------------|-------------------------
1997 Omnibus Stock Plan | 4,496,040 | $ 0.44 | 2,196,961
-----------------------------------|--------------------------|-----------------------|-------------------------
Equity compensation plans not | | |
approved by security holders (1) | 50,000 | $ 0.80 | None
-----------------------------------|--------------------------|-----------------------|-------------------------
TOTAL | 4,598,602 | $ 0.46 | 2,644,128
----------------------------------------------------------------------------------------------------------------
(1) These options are vested or will vest in two years and have a ten year life.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Selected Financial Data
The selected financial data set forth below with respect to our
consolidated statements of operations and cash flows for the six month periods
ended December 31, 2004 and 2003 and each of the two fiscal years in the periods
ended June 30, 2004 and 2003, are derived from our audited and unaudited
consolidated financial statements included in this prospectus. The following
selected financial data should be read in conjunction with our consolidated
financial statements and the notes thereto.
Six Months Ended
December 31, Years Ended June 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Operations Data
Selling, general and administrative $ 2,354,182 $ 1,617,306 $ 4,012,615 $ 2,458,407
Impairment of software development costs -- -- -- 224,900
Research and development 251,748 326,513 653,591 401,104
Interest and financing costs 360,505 664,272 1,431,126 541,324
Depreciation of property and equipment 109,694 79,665 166,038 134,954
Net loss $(1,111,623) $ (922,027) $(3,671,462) $(1,952,038)
=========== =========== =========== ===========
Six Months Ended
December 31, Years Ended June 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Cash Flows Data
Net cash used in operations $(2,799,190) $ (300,381) $(2,442,069) $ (889,974)
Net cash used in investing activities (292,653) (844,481) (898,850) (64,627)
Net cash from financing activities 4,341,971 1,268,269 3,336,529 1,102,721
Net increase (decrease) in cash and equivalents $ 1,250,128 $ 123,407 $ (4,390) $ 148,120
=========== =========== =========== ===========
At December 31, At June 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Balance Sheet Data
Cash and cash equivalents $ 1,422,816 $ 300,485 $ 172,688 $ 177,078
Total current assets 6,233,874 3,630,066 3,424,525 1,423,481
Property and equipment, net 608,597 629,719 681,168 481,608
Total assets 10,972,348 8,734,403 7,712,811 1,920,100
Total current liabilities 6,504,788 6,295,009 4,584,522 1,422,520
Total long-term liabilities 5,090,690 599,281 2,956,341 1,919,409
Preferred stock subject to redemption -- -- -- 7,945,052
Stockholders' equity (deficiency) $ (623,130) $ 1,840,113 $ 171,948 $(8,916,881)
15
General
The audit report of Grant Thornton LLP, our independent registered
public accounting firm for our consolidated financial statements for the fiscal
year ended June 30, 2004, states that in fiscal 2004 and 2003, we suffered
significant losses from our operations. The audit report further states that
these matters raise substantial doubt about our ability to continue as a going
concern.
Critical Accounting Policies
The preparation of our financial statements in conformity with
generally accepted accounting principles in the United States requires us to:
o make estimates and assumptions that affect the reported amounts of
assets and liabilities; and
o disclose contingent assets and liabilities
We must report this information as of the date of the financial
statements and we must report the amounts of revenues and expenses during the
reporting period. In applying these accounting principles, we must often make
individual estimates and assumptions regarding expected outcomes or
uncertainties. Generally, the actual results or outcomes are different than the
estimated or assumed amounts. These differences are usually minor and are
included in our consolidated financial statements as soon as they are known. Our
estimates, judgments and assumptions are continually evaluated based on
available information and experience. Because of the use of estimates inherent
in the financial reporting process, actual results may differ materially from
those estimates.
Based on an assessment of our accounting policies, and the underlying
judgments and uncertainties affecting the application of those policies, we
believe that our consolidated financial statements fairly present in all
material respects the financial condition, results of operations and cash flows
of our company as of, and for, the periods presented in this prospectus.
However, we do not suggest that other general risk factors, such as those
discussed elsewhere in this prospectus as well as changes in our growth
objectives or performance could not adversely impact our consolidated financial
position, results of operations and cash flows in future periods.
Significant Accounting Policies
Software Development Costs
Software development costs that are deemed to be recoverable are
capitalized and amortized over the greater of the revenue method or the
straight-line method over five years. At December 31, 2004 and 2003, software
development costs had not been capitalized because of uncertainty regarding
their recoverability.
Accounts Receivable
The majority of our accounts receivable are due from customers in the
anti-terrorist crash barrier, perimeter security and road and bridge industries.
Credit is extended based on evaluation of a customers' financial condition and
credit history and, generally, collateral is not required. Accounts receivable
are due within 30 days and are stated at amounts due from customers net of an
allowance for doubtful accounts. Accounts outstanding longer than the
contractual payment terms are considered past due. We determine our allowances
by considering a number of factors, including the length of time trade accounts
receivable are past due, our previous loss history with the customer, the
customer's current ability to pay its obligations, and the condition of the
general economy and the industry as a whole. We will write-off accounts
receivable when they become uncollectible, and payments subsequently received on
such receivables are credited to the allowance for doubtful accounts.
16
Inventories
Inventories are carried at the lower of average cost or market.
Inventory reserves are specifically identified by both item usage and overall
management estimation.
Income Taxes
We account for income taxes using the liability method. 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.
Goodwill
Goodwill represents the excess of the purchase price over the fair
value of net assets acquired. On an annual basis, we compare the fair value of
our reporting units with their carrying values. If the carrying value of a
reporting unit exceeds its fair value, we would recognize an impairment equal to
the excess of the carrying value of the operating unit's goodwill over the fair
value of its goodwill. The fair value of reporting units is estimated using the
discounted present value of estimated future cash flows.
Product Warranties
We have one-year, two-year and five-year limited warranties on products
that we manufacture. We provide for repair or replacement of components and/or
products that contain defects of material or workmanship. When we use other
manufacturers' components, the warranties of the other manufacturers are passed
to the dealers and end users. To date, the cost of servicing and replacement of
defective products has not been material.
We record a liability for an estimate of costs that it expects to incur
under its warranties when product revenue is recognized. Factors affecting our
warranty liability include the number of units sold and historical and
anticipated rates of claims and costs per claim. We periodically assesses the
adequacy of our warranty liability based on changes in these factors.
Results of Operations
Three Months Ended December 31, 2004 Compared to
Three Months Ended December 31, 2003
Sales. Our total sales decreased by $0.2 million, or 7%, to $3.1 million during
the quarter ended December 31, 2004 from $3.3 million during the quarter ended
December 31, 2003. This decrease is due to an overall reduction in sales volume
at our B&B ARMR subsidiary.
Gross Margin. Gross profit decreased by approximately $0.4 million during the
quarter ended December 31, 2004, or 40%, compared to with the same the same
quarter a year ago due to a less favorable product mix at our B&B ARMR
subsidiary.
17
Selling, General and Administrative. Selling, general and administrative
expenses increased by approximately $0.3 million or 27% during the quarter ended
December 31, 2004 compared to the quarter ended December 31, 2003. This increase
is primarily due to an increase in the professional staffing levels at our B&B
ARMR subsidiary.
Research and Product Development. Research and product development expenses
decreased by approximately 2% during the quarter ended December 31, 2004
compared to the quarter ended December 31, 2003. This decrease is primarily due
to a reduction in research and product development expenditures company-wide,
which we expect will continue at these lower levels through fiscal 2005.
Interest Expense. Interest expense decreased by approximately $0.2 million
during the quarter ended December 31, 2004 compared to the quarter ended
December 31, 2003. This decrease is due to the company no longer accreting to
interest expense the value of warrants issued in conjunction with securing
additional debt during the quarter ended December 31, 2003. This approximately
$0.3 million decrease was offset by an increase of approximately $0.1 million of
interest on additional debt that was obtained to meet working capital needs
during the quarter ended December 31, 2004, coupled with our placement of $3.8
million in subordinated 10% convertible promissory notes (see Note 10 to the
Company's Consolidated Financial Statements in Item 1 above).
Six Months Ended December 31, 2004 Compared to
Six Months Ended December 31, 2003
Sales. Our total sales increased by $1.4 million, or 28%, to $6.5 million during
the six months ended December 31, 2004 from $5.1 million during the six months
ended December 31, 2003. This increase is due to the inclusion of the sales of
ARMR Services Corporation as a result of the merger of ARMR Services Corporation
with the Company's B&B Electromatic, Inc. subsidiary into B&B ARMR Corporation
in September 2003.
Gross Margin. Gross profit increased by $0.2 million, or 11%, to $1.9 million
during the six months ending December 31, 2004 from $1.7 million during the six
months ending December 31, 2003 due to higher sales volume at our B&B ARMR
subsidiary. Gross margin decreased to 30% from 35% for the same period due to a
less favorable product mix at our B&B ARMR subsidiary.
Selling, General and Administrative. Selling, general and administrative
expenses increased by approximately $0.8 million or 12% during the six months
ended December 31, 2004 compared to the six months ended December 31, 2003. This
increase is primarily due to the inclusion of ARMR Services Corporation as a
result of the merger with B&B Electromatic, Inc., as well as an increase in
warranty costs at our B&B ARMR subsidiary due to the increased level of sales.
Research and Product Development. Research and product development expenses
decreased by approximately 1% during the six months ended December 31, 2004
compared to the six months ended December 31, 2003. This decrease is primarily
due to a reduction in research and product development expenditures
company-wide, which we expect will continue at these lower levels through fiscal
2005.
Interest Expense. Interest expense decreased by $0.3 million during the six
months ended December 31, 2004 compared to the six months ended December 31,
2003. This decrease is due to the company no longer accreting to interest
expense the value of warrants issued in conjunction with securing additional
debt during the quarter ended December 31, 2003. This approximately $0.5 million
decrease was offset by an increase of approximately $0.2 million of interest on
additional debt that was obtained to meet working capital needs during the
quarter ending December 31, 2004, coupled with our placement of $4,118,000 in
subordinated 10% convertible promissory notes (see Note 10 to the Company's
Consolidated Financial Statements in Item 1 above).
18
Liquidity and Capital Resources
Our cash position increased by $1.2 million during the six months ended
December 31, 2004. At December 31, 2004, we had $1.4 million in cash and cash
equivalents and had approximately $1.2 million outstanding under its asset based
lending facility. The asset based lending facility, which is secured by accounts
receivable and inventory, permits us to borrow up to $3.0 million, subject to
availability under its borrowing base. This facility is discussed further in
Note 9 to the Company's Consolidated Financial Statements in Item 1 above.
For the six months ended December 31, 2004, our operating activities
used $2.8 million of cash compared to $0.3 million of cash used in operations
during the six months ended December 31, 2003, primarily due to our net loss and
the increased levels of accounts receivable and inventories.
We used $37,125 for the purchase of property and equipment during the
six months ended December 31, 2004, compared to $0.1 million for the six months
ended December 31, 2003. We anticipate capital expenditures to increase through
the remainder of fiscal 2005, commensurate with increased sales. We also used
$0.3 million in cash related to the acquisition of two businesses, consisting of
$146,000 related to earn-out agreements executed as a part of the B&B ARMR
merger transaction and $139,000 related to the purchase of DoorTek Corporation.
During the six months ended December 31, 2004, we financed our
operations with cash flows from borrowings of $4.5 million compared to $1.6
million during the six months ended December 31, 2003. The borrowings during the
first six months of fiscal 2005 consisted of an additional $4.2 million from the
issuance of subordinated 10% convertible promissory notes. See Note 10 to the
Company's consolidated financial statements for a detail description of this
transaction. We also borrowed an additional $0.2 million under our asset based
credit facility. We made payments of $156,708 on debt and other liabilities
during the six months ended December 31, 2004, compared to payments of $371,354
on debt and other liabilities during the six months ended December 31, 2003.
The cash that we received from the placement of $4.2 million in
subordinated 10% convertible promissory notes and availability under our asset
based credit facility will be utilized to support Company-wide operations. Our
working capital requirements will depend upon many factors, including future
sales of our products, our operating results, the status of competitive
products, and actual profits compared to our business plan. We are currently
experiencing declining liquidity, which makes it difficult for us to meet our
current cash requirements and may jeopardize our ability to continue as a going
concern. Our auditor issued a going concern modification in their auditors'
report for the fiscal year ended June 30, 2004. We intend to address our
liquidity problems by controlling costs, seeking additional funding and
maintaining focus on revenues and collections. In the foreseeable future, we
will need to obtain additional financing either through equity placement or
additional debt. There can be no assurance that we will be able to secure such
financing. If our liquidity does not improve by the end of fiscal 2005, we may
have to seek a merger partner, limit our operations or seek protection under the
federal bankruptcy laws. Any of the foregoing options may be on terms that are
unfavorable to us or disadvantageous to the our stockholders.
19
Principal payments required under long-term debt outstanding at
December 31, 2004 are as follows:
Year Ending June 30,
------------------------
2005 $ 1,662,963
2006 2,869,072
2007 20,810
2008 2,477
2009 4,618,000
-----------
$ 9,173,322
Our backlog is calculated as the aggregate sales prices of firm orders
received from customers less revenue recognized. At January 31, 2005, the
Company's backlog was approximately $4.9 million. The Company expects that it
will fill the majority of this backlog by March 31, 2006.
Briar Capital Credit Facility
On November 10, 2004, B&B ARMR Corporation entered into a loan
agreement with Briar Capital, L.P. for a $3,000,000 discretionary demand asset
based lending credit facility. Under the terms of the loan agreement, working
capital advances are made available to the B&B ARMR Corporation based on the
value of its accounts receivable and inventory. Although payable on demand, the
loan agreement has a stated 3-year term. In connection with the loan agreement,
B&B ARMR Corporation issued a revolving promissory note, dated November 10, 2004
to Briar Capital, L.P. in the principal amount of $3,000,000. The note has an
annual interest rate of two percent above the prime rate but in no event will
interest exceed the maximum nonusurious interest rate allowable under applicable
law.
Year Ended June 30, 2004 Compared to Year Ended June 30, 2003
Sales. Sales for the current fiscal year increased by approximately 96% or $4.8
million to $9.8 million in fiscal year 2004 from $5.0 million in fiscal 2003.
This increase is primarily due to the acquisition of ARMR Services Corporation
in September 2003.
Gross Margin. Gross margin increased by $0.8 million; however, gross margin as a
percentage of sales decreased to 26% in fiscal year 2004 from 36% for fiscal
year 2003. The decrease in gross margin as a percentage of sales is principally
due to the introduction of several new products and the related inherent
manufacturing issues regarding new product introduction, as well as the
consolidation of the manufacturing facilities in Norwood, Louisiana.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 61% or $1.6 million during fiscal 2004 to $4.2 million
from $2.6 million for fiscal year 2003 due primarily to the acquisition of ARMR
Services Corporation and the relocation and consolidation of our manufacturing
operations related to the B&B ARMR Corporation subsidiary.
Software Development Costs. Software development costs of approximately $225,000
were determined to be impaired during fiscal 2003. This adjustment was due to
the uncertainty of the recoverability of the costs related to the earlier
version 3.5 of Intelli-Site(R), which became impaired when reasonable assurance
concerning the recovery of these costs could not be ascertained.
Research and Product Development. Research and development expenses increased
63% or approximately $250,000 during fiscal period 2004 due to the development
and testing of several new products at the B&B ARMR Corporation subsidiary.
Interest Expense. Interest expense increased by approximately $0.9 million to
$1.4 million during fiscal 2004 as compared to $0.5 million during fiscal 2003.
This increase is primarily due to nonrecurring and non-cash interest charges
incurred that were associated with securing additional financing during fiscal
year 2004.
20
Liquidity and Capital Resources
Our cash position decreased $4,390 during fiscal year 2004. At June 30,
2004, we had $172,688 in cash and cash equivalents and $850,622 outstanding
under our accounts receivable factoring facility, which was in place at such
time. This accounts receivable factoring facility is explained in greater detail
below in this section.
For the fiscal year ended June 30, 2004, our operating activities used
$2,267,652 of cash compared to $889,974 cash used during the fiscal year ended
June 30, 2003, an increase of $1,377,678. This $1,377,678 increase in cash used
in operating activities in fiscal 2004 is primarily due to the increase in net
loss offset in part by the effect of the level of investment in working capital
and the effects of the ARMR Services Corporation acquisition.
We used $266,626 for the purchase of property and equipment during
fiscal 2004 compared to $64,627 for the previous fiscal 2003 period. This
increase is due to an increase in the amount of overall capital expenditures at
B&B ARMR Corporation.
We do not have any material commitments to purchase property and
equipment in fiscal 2005. We do not have any material funding requirements for
software and other products under development.
Maturities and Commitments
The following table presents certain of our obligations and commitments
to make future payments, excluding interest payments, under contracts and
contingent commitments as of June 30, 2004.
Debt Leases Total
----------- ----------- -----------
2005 $ 1,845,949 $ 233,429 $ 2,079,378
2006 2,437,137 59,135 2,496,272
2007 16,727 27,134 43,861
2008 2,477 -- 2,477
2009 500,000 -- 500,000
----------- ----------- -----------
$ 4,802,290 $ 319,698 $ 5,121,988
=========== =========== ===========
Issuances of Convertible Promissory Notes and Promissory Notes in Fiscal 2004
In exchange for a $500,000 cash investment, on September 5, 2003, we
issued a convertible promissory note to BFS US Special Opportunities Trust PLC,
which we will sometimes refer to as "BFS," a public limited company registered
in England and Wales. The convertible promissory note is in the original
principal amount of $500,000 and has an annual interest rate of 7% and is
payable in monthly installments on the first day of each month. The convertible
promissory note, plus interest, is due on September 5, 2008. The convertible
promissory note is convertible at the option of BFS into our common stock at a
conversion price of $0.40 per share. We have the right to call the convertible
promissory note if the market price of our common stock rises above $0.60 per
share for a period of 60 days.
21
In exchange for a $100,000 cash investment, on September 26, 2003, we
issued a promissory note to C. A. Rundell, Jr., Chairman and Chief Executive
Officer of the Company. The promissory note is in the original principal amount
of $100,000 and has an annual interest rate of 7%. The promissory note, plus
accrued interest, was due on April 1, 2004. The due date of this note was
extended until October 1, 2005. Interest is payable in monthly installments on
the first day of each month.
In exchange for a total $400,000 cash investment, on October 1, 2003,
we issued a promissory note to each of Renaissance Capital Growth & Income Fund
III, Inc. and Renaissance US Growth Investment Trust PLC. Each of the two
promissory notes is in the original principal amount of $200,000 and has an
annual interest rate of 7%. The promissory notes, plus accrued interest, were
due on April 1, 2004. The due date of these notes was extended until October 1,
2005. Interest is payable in monthly installments on the first day of each
month.
Issuances of Convertible Promissory Notes in Fiscal 2005
On November 30, 2004, we entered into a loan agreement with several
investors of the company's subordinated 10% convertible promissory notes. Each
of the investors purchasing these notes was an accredited investor. Pursuant to
the terms of the loan agreement: (1) the company was authorized to sell to the
investors an aggregate principal amount of up to $6,000,000 in notes and (2) the
notes may be sold by the company to the investors in multiple closing so long as
the final closing is consummated no later than the fifteenth day following the
initial closing. As of the close of the sale, we sold an aggregate principal
amount of $4,118,000 of the notes. Each note sold by the company to each
investor:
o is subordinated to certain other indebtedness of the company;
o is due and payable on November 30, 2009;
o provides interest to the holder thereof at a rate of 10% per
annum; and
o is convertible into the company's common stock, par value $0.01
per share, at the conversion rate of $0.38 per share of common
stock.
In exchange for an aggregate of $150,000 cash, on July 28, 2004, we
issued a promissory note to C. A. Rundell, Jr. The original promissory note was
in the principal amount of $150,000, had an annual interest rate of 9% which was
due at maturity and was secured by a specific invoice of B&B ARMR Corporation
issued to Horne Engineering. The promissory note, plus accrued interest, was due
on October 28, 2004. In November of 2004, this note was exchanged for a $150,000
subordinated 10% convertible promissory note as a part of our placement of
$4,118,000 of subordinated 10% subordinated convertible promissory notes.
In exchange for a $1,000,000 cash investment, on August 5, 2004, we
issued a convertible promissory note to BFS. The original convertible promissory
note was in the principal amount of $1,000,000 and had an annual interest rate
of 10% and was payable in monthly installments on the first day of each month.
The original convertible promissory note, plus interest, was due on August 5,
2009. The convertible promissory note was convertible at the option of BFS into
our common stock at a conversion price of $0.38 per share. We had the right to
call the convertible promissory note if the market price of our common stock
rose above $0.60 per share for a period of 60 days. This convertible promissory
note was subsequently refinanced as a part of our placement of placement of
$4,118,000 of subordinated 10% subordinated convertible promissory notes in
November 2004.
22
Effects of Inflation
We believe that the relatively moderate rate of inflation over the past
few years has not had a significant impact on our sales or operating results.
Seasonality
Historically we have experienced seasonality in our business due to
fluctuations in the weather. We typically experiences a decline in sales and
operating results during the quarter ended March 31 due to winter weather
conditions.
Environmental Matters
We believe that we are currently in material 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.
Additional Debt Service Obligations
During the fiscal year ended June 30, 2004, we financed our operations
with long-term borrowings of $2,338,117. We made payments of $938,153 on debt in
the fiscal year ended June 30, 2004.
As discussed in this prospectus in the section entitled "Description of
Property," we have a mortgage on B&B ARMR Corporation's facility. At December
31, 2004, the principal amount of the mortgage was $503,943. The interest rate
is 10.5% and the amortization provisions are standard. The mortgage matured on
February 8, 2004 and was refinanced with a new maturity date of February 26,
2006. All other terms and conditions of the original mortgage remained the same.
23
BUSINESS
General
We were formed in December 1991 as a Delaware corporation and became
publicly traded in April 1993. We design, develop, manufacture, distribute and
service security and traffic control products used in the commercial, industrial
and government sectors through three wholly-owned subsidiaries, B&B ARMR
Corporation, DoorTek Corporation and Intelli-Site, Inc.
On September 5, 2003, we acquired all of the issued and outstanding
shares of common stock of ARMR Services Corporation. ARMR Services Corporation,
which has been renamed B&B ARMR Corporation, is a manufacturing company that
engineers and manufactures high security anti-terrorist crash rated barriers,
parking control equipment and other security systems for business and government
use. By acquiring B&B ARMR, we have significantly enhanced our service, product
offerings and growth opportunities. As a part of the consideration that we paid
for ARMR Services Corporation, we issued 10,000,000 shares of our common stock
to B&B ARMR's former stockholders.
On December 15, 2004, we acquired all of the issued and outstanding
shares of common stock of DoorTek Corporation. DoorTek is a manufacturer of
access control systems and other physical security system products. By acquiring
DoorTek, we have significantly enhanced our services, product offerings and
growth opportunities.
B&B ARMR Corporation
B&B ARMR designs, manufactures and sells anti-terrorist crash barriers,
bollards, wedges and gates, warning and crash gates, gate panels, soft-stop
gates, high occupancy vehicle lane changers, navigational lighting, and
perimeter security gates and operators. A 24/7 service and maintenance group is
based in Washington, DC, servicing and maintaining a wide range of internally
and competitor's manufactured products for federal and government organizations.
These products compete primarily in the homeland security, perimeter security
and road and bridge construction and refurbishment markets. These products are
used for:
o anti-terrorist crash barriers used to prevent malevolent use of
vehicles;
o 24/7 service and maintenance for competitors and internally
manufactured products;
o operators and gates used in perimeter security;
o navigational lights used primarily with waterways;
o tow-able barriers for event and temporary closures;
o gating and barricading movable bridges;
o locking down sections of roads under construction;
o gates for reversible lane changer systems; and
o HOV control gates, typically soft-stop.
B&B ARMR sells its products through integrators, contractors,
electrical sub-contractors and distributors. B&B ARMR maintains Governmental
Services Administration, or GSA, schedule agreements for three product families,
and license agreements both in North America and internationally. In certain
instances, sales are made directly to end-users.
New Business
In the last two fiscal years, B&B ARMR has experienced a substantial
increase in the sales of its anti-terrorism and crash-rated products not only
with the new product range from ARMR, but also with the established products of
B&B Electromatic, Inc. Sales also have increased within the fairly stable road
and bridge sector. New and increased interest in soft-stop technology has
developed, as well as an increase in the overseas business.
24
During fiscal year 2004, several new products were designed, tested and
released by B&B ARMR, such as:
o A portable/tow-able anti-terrorist crash barrier, Model 850 (a
number of these products have been manufactured and shipped);
o A new anti-terrorist bollard product, Model B-40; and
o Two new products in the XL product line of hydraulic gate
operators, LXL and PXL, both tested to UL325 class 1, 2, 3 and 4
specifications. These new operators offer a wider range of
products, enabling us to be more competitive. The LXL has seen
high volume sales in part due to reduced need for technical
assistance.
The 24/7 service and maintenance group has seen an increasing volume of
requests for its services, operating in and around Washington, DC, where there
is a large concentration of customers. This group offers front line maintenance
of our own and our competitor's products as well as third party products,
frequently on an annual contract basis.
DoorTek Corporation
DoorTek Corporation is a manufacturer of card access control and
corrections security hardware and software products. DoorTek's product offerings
fall into two broad categories: The DT2001 access control product line, and the
DoorTek Corrections Electronics product line. These two product lines may be
sold separately or as part of a complete, integrated, corrections electronics
control package. Additionally, DoorTek supports a thriving business in card
access control devices, readers, and ancillary devices.
The DT2001 access control system was designed from the ground up to
provide a powerful, user friendly operations and administration platform within
an advanced, networked environment. A key component of the DT2001 system is the
advanced NP200 node processor that provides high-speed distributed processing
for all user transactions and can operate independent of the host control
network without degradation in performance. The system is completely scalable,
supporting anywhere from two access control portals up to thousands of portals,
input/output points and other security-related devices. DoorTek has also adopted
a specially-branded and enhanced version of the Intelli-Site(R) software product
that provides the DT2001 system with the ability to integrate with a broad range
of security products, including closed circuit television, badge systems, fire
alarm systems, lighting control and heating, ventilation and air conditioning
systems.
DoorTek Corrections Electronics products include stand-alone door
control with optional interlock capabilities, a line of net-workable door/gate
controllers that can be integrated into any cell control system, a similar line
of corrections audio control products that can route intercom audio throughout a
facility, and a complete line of cable interface devices that facilitate
interconnection wiring in the field.
DoorTek enjoys a strong existing installation base from which a regular
flow of retrofit and upgrade business is derived. Many DoorTek systems have been
installed and have been online continuously for more than 10 years. An example
is the DoorTek access control system installed, and still in full operation
after 14 years, at the CARA laboratory at the USNSF station at McMurdo Sound,
Antarctica.
25
Intelli-Site, Inc.
Our Intelli-Site(R) software product, designed and developed by
Intelli-Site, Inc., allows automated security and facility controls system
integration. This software allows a customer to decouple the selection of
software from hardware, so that a customer can mix and match different hardware,
from various manufacturers, into a single, integrated system. The open system
design provided by Intelli-Site(R) provides a solution that is tailored to
unique customer requirements.
More specifically, Intelli-Site(R) allows customers to integrate a wide
variety of devices from various manufacturers, such as access control, closed
circuit television, badge systems, fire alarm systems, lighting control and
heating, ventilation and air conditioning systems. In addition to providing
centralized control, Intelli-Site(R) users can tailor the interface for ease of
operation based on their unique functional requirements.
No two companies, facilities or workgroups are identical, so each has
different security requirements. Intelli-Site(R), while a standard product,
allows users to define the following aspects of a security system:
o Configuration - what is to be integrated;
o Graphical User Interface (GUI) - how the operator controls the
system;
o Functionality - what the system does; and
o Databases - what and 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 limited "customization" through a fixed set of
user options. With Intelli-Site(R), user-defined restrictions are limited only
by the capabilities of the integrated devices.
Product Design and Development
As of December 31, 2004, we have four employees dedicated to research,
development and product engineering. We spent $653,591 and $626,004 during
fiscal 2004 and 2003, respectively, related to the continual development and
enhancement of the Intelli-Site(R) software product as well as the development
of several new product lines in the anti-terrorist crash barrier and perimeter
security divisions at B&B ARMR.
Competition
B&B ARMR Corporation
B&B ARMR's competition can be divided into four categories:
Anti-terrorism, hydraulic gate operators, road and bridge and 24/7 service and
maintenance. Anti-terrorism competition has, we believe, increased over fiscal
year 2004 as the market has grown worldwide. B&B ARMR is not as large as the two
main competitors (Delta Scientific and Nasatka Barriers) in the marketplace, but
B&B ARMR is growing in this market sector and is using its years of engineering
experience in this area to help secure that growth. In the hydraulic gate
operator business, B&B ARMR has one main competitor (Hy Security) and its new
product lines offer a growth platform to increase market share in the future.
B&B ARMR has one principle competitor (Roadyway) in the road and bridge
business, and has continually maintained its market share. B&B ARMR has a unique
position within the 24/7 service and maintenance business; however, we believe
others may enter this market.
26
DoorTek Corporation
DoorTek's competitors include manufacturers of card access control and
detention control equipment. Card access control manufacturers tend to compete
on terms of scalability and within vertical markets. In terms of scalability,
most manufacturers concentrate on the small to mid sized installation (up to 32
doors). There are relatively few players in the large installation market (32 to
256 doors) and even fewer in the "enterprise" market (more than 256 doors).
DoorTek's technology allows it to participate at any level, but its offerings
are largely concentrated in the small to mid range. Increasingly, DoorTek has
been successful in the corrections and detention markets at the mid range.
DoorTek's longevity of more than 25 years in the business and its large existing
installation base provides it with some advantage in the retrofit and upgrade
markets.
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 from very limited fixed function systems "integrating" as few
as two sub-systems to feature-rich, real-time sophisticated software systems,
including custom coded integrated solutions. Differences in functionality,
performance, and price among integrated security systems vary greatly.
Intelli-Site(R) has the capability to compete across the entire spectrum of
integrated security systems, but currently has less than a 1% share of this
market. Consequently, Intelli-Site(R) has a diverse set of competitors,
depending on the complexity of the integration effort. Intelli-Site(R)'s
competitors generally fall into one of three categories: Access control
manufacturers, "pure" integrated systems platforms and custom software
developers.
Through our three subsidiaries, we face intense competition in the
security industry. Some of our competitors are large, well-financed and
established companies that have greater name recognition and resources for
research and development, manufacturing and marketing than us. These competitors
may be better able to compete for market share.
Employees
As of December 31, 2004, the Company employed 101 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.
27
DESCRIPTION OF PROPERTY
Our principal executive offices are located at 8200 Springwood, Suite
230, Irving, Texas 75063, where we occupy 5,566 square feet of office space. The
lease for the Irving facility expires on December 31, 2006. The monthly rent of
this lease is $4,406, plus the costs of utilities, property taxes, insurance,
repair and maintenance expenses and common area utilities.
B&B ARMR Corporation maintains its principal location at 14113 Main
Street, Norwood, Louisiana 70761, where it occupies approximately 26,000 square
feet of manufacturing and office space on five acres of land. We have purchased
this property subject to a mortgage agreement with the Highlands Bank. At
December 31, 2004, the principal amount of the mortgage was $503,943 and we make
a monthly payment in the amount of $10,561 on the mortgage. The interest rate
payable on the mortgage is 10.5% per year and the amortization provisions are
standard for a property of this nature. The mortgage matured on February 8, 2004
and was refinanced with a new maturity date of February 26, 2006. All other
terms and conditions of the original mortgage remained the same. B&B ARMR
Corporation also occupies manufacturing and office space located at 9045, 9047
and 9063 Jerry's Circle, Manassas, Virginia 20110, having an aggregate office
space of 16,650 square feet. The monthly amount of rent for these properties is
$12,080 and the lease for these properties expires in May 2005.
DoorTek Corporation maintains its principal location at 9107 Marbach
Road, Suite 230, San Antonio, Texas 78245, where it occupies 2,105 square feet
of office space. The monthly amount of rent for this property is $1,717 and the
lease is on a month-to-month basis.
We believe that the Texas, Louisiana and Virginia properties are in
good condition and that the properties, equipment, fixtures and other assets
located within each of our facilities are in good condition, are adequately
insured against loss and that suitable alternative facilities are readily
available if the lease and mortgage agreements described above are not renewed.
Additionally, we believe that our existing facilities are suitable and adequate
to meet our current requirements.
We do not make investments in:
o real estate
o interests in real estate
o real estate mortgages; or
o securities of or interests in entities engaged in real estate
investment activities.
LEGAL PROCEEDINGS
We are subject to certain legal actions and claims arising in the
ordinary course of our business and which we consider to be routine litigation
incidental to our business. Although our management recognizes the uncertainties
of litigation, based upon the dollar amounts involved, the nature and our
management's understanding of the facts and circumstances which give rise to
such actions and claims, our management believes that such litigation and claims
will be resolved without material effect on our financial position, results of
operations or cash flows.
28
MANAGEMENT
The following table sets forth information regarding our directors and
executive officers as of December 31, 2004:
Company Officers and Directors
Name Age Position
------------------------ --- --------------------------------------------
C.A. Rundell, Jr. 72 Director, Chairman of the Board of Directors
and Chief Executive Officer
Peter Beare 47 Director and President
William D. Breedlove 64 Director
Russell Cleveland 65 Director
Robert M. Galecke 62 Director
Frank R. Marlow 66 Director
Paul Roland 47 Director
Richard B. Powell 40 Vice President, Chief Accounting Officer,
and Secretary
C. A. RUNDELL, JR. has been a Director since March 1999 and has served
as Chief Executive Officer since August 2000. Mr. Rundell is also Chairman of
the Board of Directors of both Intelli-Site, Inc. and DoorTek Corporation. Since
1988, Mr. Rundell has owned and operated Rundell Enterprises, a sole
proprietorship engaged in providing acquisition and financial services to
business enterprises. From October 1996 until December 1998, Mr. Rundell served
as the Chief Executive Officer of Tyler Corporation. From April 1989 until July
2000, Mr. Rundell served as a director and the Chairman of the Board of NCI
Building Systems, Inc. Mr. Rundell currently serves as a director of Renaissance
US Growth Investment Trust, PLC. He is also a director of Tandy Brands
Accessories, Inc., a designer, manufacturer and marketer of men's, women's and
children's fashion accessories. 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.
PETER BEARE has been a Director since June 2002. Mr. Beare is currently
the Chairman of the Board of Directors of B&B ARMR Corporation. Mr. Beare was
the President and Chief Operating Officer of Ultrak, Inc. from July 2000 until
March 2002 and was the Vice President - Technology of Ultrak from May 2000 to
July 2000. From April 1994 to May 2000, he was employed by Baxall Ltd. in the
United Kingdom (UK), a subsidiary of Upperpoint, in various capacities,
including Managing Director, and later joined the main board of Upperpoint as
Technology Director. Prior to Baxall, Ltd., Mr. Beare was a consultant to
various companies in the communications and audio industries. From 1986 to 1990,
Mr. Beare was the founder and Director of Camteq, Ltd. in the UK.
WILLIAM D. BREEDLOVE has been a Director since May 2001. Mr. Breedlove
has served as President of HBW Investments, Inc., a private investment firm,
since August 1996. Mr. Breedlove has held senior management positions in
commercial and merchant banking for over 30 years. Prior to HBW's formation in
1996, Mr. Breedlove was chairman, managing director and co-founder of Breedlove
Wesneski & Co., a private merchant banking firm. From 1984 to 1989, Mr.
Breedlove also served as president and director of Equus Capital Corporation,
the corporate general partner of three public and private limited partnerships
operating as management leveraged buyout funds. Mr. Breedlove's experience also
includes 22 years at First National Bank in Dallas, the last three years of
which he served as chairman and chief executive officer of the lead bank and
vice chairman of InterFirst Corporation. Mr. Breedlove currently serves as a
director of NCI Building Systems, Inc., and five private companies. He has
previously served as director of several other publicly-held companies,
including InterFirst Corporation, Texas Oil and Gas Corporation, Dillard's
Department Stores, Local Financial Corporation, and Cronus Industries, Inc. Mr.
Breedlove received his B.B.A. degree in finance and banking from the University
of Texas at Austin.
29
RUSSELL CLEVELAND has been a Director since February 2001. Mr.
Cleveland is the President, Chief Executive Officer, sole Director and the
majority shareholder of Renn Capital Group, Inc. He has served as President,
Chief Executive Officer and director of Renaissance Capital Growth & Income Fund
III, Inc. since its inception in 1994. Mr. Cleveland is a Chartered Financial
Analyst with more than 41 years experience as a specialist in investments for
smaller capitalization companies. Mr. Cleveland has also served as President of
the Dallas Association of Investment Analysts. He serves on the Boards of
Directors of Renaissance US Investment Trust PLC, BFS US Special Opportunities
Trust PLC, CaminoSoft Corp., Cover-All Technologies, Inc. and Digital Recorders,
Inc., and is the chairman of Tutogen Medical, Inc. Mr. Cleveland is a graduate
of the Wharton School of Commerce and Finance of the University of Pennsylvania.
ROBERT M. GALECKE has been a Director since May 1996. Mr. Galecke is
currently Senior Vice President of Finance and Administration for the University
of Dallas. Prior to that, from 1993 to May 1996, he was a principal in the
corporate consulting firm of Pate, Winters & Stone, Inc. From 1986 until 1992,
he 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 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 B.S. in Economics from the University of
Wisconsin at Stevens Point.
FRANK R. MARLOW has been a Director since May 1995. Mr. Marlow served
as Vice President, Sales and Marketing from October 1993 to February 1995. Mr.
Marlow has been Vice President of Sales, Western Region, for ACI, a publicly
traded company headquartered in Omaha, Nebraska since March 2003. ACI sells
electronic payments engines to banks, credit card companies, large payment
processors and merchant processors with over 600 customers around the world. In
addition, Mr. Marlow is currently a Senior Partner with SMI Consulting, a sales
and marketing consulting firm. Mr. Marlow was Vice President of Sales for
Cofiniti, formerly Money Star, a technology company based in Austin, Texas from
1998 until 2001. 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 served in various executive sales and training
positions at IBM, Docutel Corporation, UCCEL Corporation and Syntelligence
Corporation.
PAUL ROLAND has been a Director since September 2003. Mr. Roland was
appointed President of B&B ARMR Corporation in September 2003 and was Vice
President of ARMR Services Corporation until September 2003. Mr. Roland was a
founder of ARMR Services Corporation in 1998 and prior to that time served as a
Vice President of a competitor in the vehicle barrier business. From 1986 until
1998, Mr. Roland was responsible for the formation of the federal sales and
service office in Washington, DC. Mr. Roland worked as an engineer supporting
the missions of the United States Department of State from 1984 through 1986.
RICHARD B. POWELL, is currently the Vice President, Chief Accounting
Officer and Secretary. Mr. Powell joined our company in April 1998 as Corporate
Controller, became Vice President, Chief Accounting Officer in April 2001, and
Secretary in May 2001. Prior to joining our company, Mr. Powell was the
Accounting Manager at Medical City Dallas Hospital from 1995 to 1998, Accounting
Manager of HealthCor, Inc., a home health care company, from 1993 to 1995 and
Accounting Supervisor of Signature Home Care Group, Inc., a home health care
company, from 1989 to 1993. Mr. Powell holds a B.S. in Accounting from McNeese
State University.
30
Company's Subsidiaries Officers
Name Age Position
-------------------------- --- -------------------------------------------
Theodore "Ted" Wlasowski 50 Chief Executive Officer of B&B ARMR
Corporation
Robert "Kent" Mansfield 42 Vice President, Chief Operating Officer and
Chief Financial Officer of B&B ARMR
Corporation
Robert "Bob" Gardner 70 President of DoorTek Corporation
G.M. "John" Ulibarri 46 President and Chief Executive Officer of
Intelli-Site, Inc.
THEODORE "TED" WLASOWSKI is the Chief Executive Officer of B&B ARMR
Corporation. Mr. Wlasowski joined the company in January 2004 and became the
chief executive officer of B&B ARMR in October 2004. Prior to joining our
company, from 2001 to 2004, Mr. Wlasowski served as Chief Executive Officer,
President and Chief Operating Officer of Isotag. From 1998 to 2000, Mr.
Wlasowski served as Executive Vice President and COO of Ultrak, Inc. Mr.
Wlasowski graduated Magna Cum Lade from Seton Hall University in 1976 with a
B.S. in Business Administration.
ROBERT "KENT" MANSFIELD is the Vice President, Chief Operating Officer
and Chief Financial Officer of B&B ARMR Corporation. Mr. Mansfield joined our
company in January 2005. Prior to joining our company, from 1995 to 2004 Mr.
Mansfield has held various other positions as CFO, COO and other executive level
positions in both private and public companies. Mr. Mansfield received a B.B.A.
in Finance from Texas Tech University in 1994.
ROBERT "BOB" GARDNER is the President of DoorTek Corporation. Mr.
Gardner joined our company in December 2004, when we acquire DoorTek. Mr.
Gardner has served as the President of DoorTek since 1998. Prior to his
employment at DoorTek, Mr. Gardner held senior management and sales positions
with EO-Integrated Systems, Xetron Corporation, Kidde Automated Systems and
Dukane Automated Systems, Inc.
G.M. "JOHN" ULIBARRI, is the President and Chief Executive Officer of
Intelli-Site, Inc. Mr. Ulibarri joined our company in April 2001 as Vice
President of Engineering and Operations, was promoted to Executive Vice
President in December of 2002, and President in January of 2004. Prior to
joining our company, Mr. Ulibarri served in various senior management and
engineering positions with major security and communications systems integration
concerns throughout the US. Mr. Ulibarri holds a B.S. in Computer Engineering
from the University of New Mexico.
The SEC has adopted rules to implement certain requirements of the
Sarbanes-Oxley Act of 2002 pertaining to audit committees. One of the rules
adopted by the SEC requires a company to disclose whether it has an "audit
committee financial expert" serving on its audit committee. Based on its review
of the criteria of an audit committee financial expert under the rules adopted
by the SEC, our board of directors has determined that Mr. Galecke is an "audit
committee financial expert," as that term is defined in Item 401(e) of
Regulation S-B promulgated by the Securities and Exchange Commission.
31
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows the compensation of the Chief Executive
Officers and the executive officers of the company and its subsidiaries whose
compensation exceeded $100,000 for the fiscal years ended June 30, 2004, 2003
and 2002.
Long-Term
Annual Compensation Compensation Award
----------------------------------------- ------------------------
Securities
Other Restricted Underlying
Annual Stock Options/
Name and Principal Position Year Salary Bonus Compensation Awards SARs
----------------------------- ---- -------- ----- ------------ ---------- ----------
C. A. Rundell, Jr. 2004 $ 50,000 -- -- 28,433 300,000
Chairman of the Board and 2003 50,000 -- -- 41,753 23,298
Chief Executive Officer 2002 24,000 -- -- -- 596,518
Peter Beare 2004 $185,500 -- -- -- 450,000
Chief Executive Officer 2003 22,250 -- -- -- 100,000
B&B ARMR Corporation (1)
Paul Roland 2004 $104,500 -- -- -- --
President
B&B ARMR Corporation (2)
Scott Rosenbloom 2004 $104,500 -- -- -- --
Executive Vice-President
B&B ARMR Corporation (2)
Jack G. Caldwell 2004 $ 13,375 -- -- -- --
President 2003 160,500 -- -- -- --
B&B Electromatic, Inc. (3) 2002 160,000 -- -- -- --
Lars H. Halverson 2004 $ -- -- -- -- --
President 2003 -- -- -- -- --
Intelli-Site, Inc. (4) 2002 70,417 -- -- -- 100,000
--------------------
(1) Began employment on May 19, 2003.
(2) Began employment on September 5, 2003.
(3) Resigned as of July 31, 2003.
(4) Began employment on January 16, 2001 and resigned as of January 15, 2002.
No other executive officer's salary and bonus exceeded $100,000 annually and no
executive had any form of long-term incentive plan compensation arrangement with
the company during the fiscal years ended June 30, 2004, 2003 and 2002.
32
Stock Option Grants
The following table provides information concerning the grant of stock
options during the twelve months ended June 30, 2004 to the named executive
officers:
Number of % of Total Options/SARs
Securities Underlying Granted To Employees Exercise Expiration
Name Options/SARs Granted In Fiscal Year Price Date
---------------------- --------------------- ----------------------- ----------- ----------
C. A. Rundell, Jr. (1) 300,000 18.83% $ 0.45 09/05/13
Peter Beare (1) 250,000 15.69% $ 0.45 09/05/13
Peter Beare (1) 200,000 12.55% $ 0.30 12/05/13
----------------------
(1) The vesting schedule for these options is: 25% six months from the grant
date and 25% each year thereafter.
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, 2004.
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options/SARs
Options/SARs At At Fiscal Year End
Fiscal Year End ----------------------------
----------------------------
For the 12 Months Ended 06/30/04 Exercisable Unexercisable Exercisable Unexercisable
-------------------------------- ----------- ------------- ----------- -------------
C. A. Rundell, Jr. 870,927 362,500 $ 232,232 $ 59,125
Peter Beare 162,500 387,500 43,000 86,000
Gerald K. Beckmann 314,473 -- -- --
Employment Agreements
As a part of the acquisition of ARMR Services Corporation on September
5, 2003, we entered into employment agreements with Paul Roland and Scott
Rosenbloom, the former executive officers of ARMR Services Corporation. The
employee agreements are for a period of three (3) years at a base salary of
$125,000 per year. As a part of Mr. Roland's employment agreement, Mr. Roland
was granted a seat on our board of directors.
Director Compensation
Currently, directors are compensated by either restricted stock awards
or incentive stock options, at the choice of the individual director, in an
amount equivalent to $10,500 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.
33
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following table summarizes the promissory notes that we issued
during fiscal year ended 2003. Each of the recipients of these notes were, and
continue to be, holders of greater than five percent of our common stock. These
notes are not convertible and accrue interest at a rate of 8% per year. The form
of each of these non-convertible promissory notes is filed with the SEC as an
exhibit to our Form 10-KSB for the year ended June 30, 2003. As a part of each
of the transactions detailed in the table below, we issued stock purchase
warrants. Each of the stock purchase warrants entitles the holder to purchase
from the us, at any time, and in whole or in part, shares of our common stock,
as indicated in the table below, for $0.20 per share. The number of shares of
common stock purchasable upon exercise of a warrant is subject to adjustment in
the event of any dividends, distributions, reclassifications, or capital
reorganizations. The holder of the warrant is also entitled to certain
registration rights.
----------------------------------------------------------------------------------------------------------------
| | | | Number of
| Date of | Amount of | Maturity | Stock
Entity | Promissory | Promissory | Date (1) | Purchase
| Note | Note | | Warrants
------------------------------------------------|------------------|------------|------------------|------------
Renaissance Capital Growth & Income Fund, III |September 5, 2002 | $ 75,000 |September 5, 2003 | 375,000
------------------------------------------------|------------------|------------|------------------|------------
Renaissance US Growth Investment Trust PLC |September 5, 2002 | 75,000 |September 5, 2003 | 375,000
------------------------------------------------|------------------|------------|------------------|------------
BFS US Special Opportunities Trust PLC |March 11, 2003 | 250,000 |March 11, 2004 | 1,250,000
------------------------------------------------|------------------|------------|------------------|------------
Renaissance Capital Growth & Income Fund, III |April 23, 2003 | 100,000 |April 23, 2004 | 500,000
------------------------------------------------|------------------|------------|------------------|------------
Renaissance US Growth Investment Trust PLC |April 23, 2003 | 100,000 |April 23, 2004 | 500,000
------------------------------------------------|------------------|------------|------------------|------------
BFS US Special Opportunities Trust PLC |April 23, 2003 | 100,000 |April 23, 2004 | 500,000
------------------------------------------------|------------------|------------|------------------|------------
Renaissance US Growth Investment Trust PLC |May 30, 2003 | 200,000 |May 30, 2004 | 1,000,000
------------------------------------------------|------------------|------------|------------------|------------
BFS US Special Opportunities Trust PLC |May 30, 2003 | 200,000 |May 30, 2004 | 1,000,000
------------------------------------------------|------------------|------------|------------------|------------
Renaissance Capital Growth & Income Fund, III |June 18, 2003 | 100,000 |June 18, 2004 | 500,000
----------------------------------------------------------------------------------------------------------------
-------------------
(1) The maturity date on all these promissory notes was extended until
September 30, 2004.
In exchange for an aggregate of $100,000 cash investment received on
January 13, 2003, we issued a promissory note to The Rundell Foundation. C. A.
Rundell, Jr., our Chairman and Chief Executive Officer, is a Trustee of The
Rundell Foundation. The promissory note is in the original principal amount of
$100,000 and has an annual interest rate of 9% that is due on the first day of
each month. The promissory note, plus interest, was originally due on January
13, 2004. This maturity date was extended until September 30, 2004. The form of
this non-convertible promissory note is filed with the SEC as an exhibit to our
Form 10-KSB for the year ended June 30, 2004. As a part of the cash investment,
on January 13, 2003, we issued a stock purchase warrant to The Rundell
Foundation. The stock purchase warrant entitles The Rundell Foundation to
purchase from us, at any time, and in whole or in part, 500,000 fully paid and
non-assessable shares of our common stock for $0.20 per share. The number of
shares of common stock purchasable upon exercise of a warrant is subject to
adjustment in the event of any dividends, distributions, reclassifications, or
capital reorganizations. The holder of the warrant is also entitled to certain
registration rights.
In exchange for a $500,000 cash investment, on September 5, 2003, we
issued a convertible promissory note to BFS, which owns greater than five
percent of our common stock. The convertible promissory note is in the original
principal amount of $500,000 and has an annual interest rate of 7% and is
payable in monthly installments on the first day of each month. The convertible
promissory note, plus interest, is due on September 5, 2008. The convertible
promissory note is convertible at the option of BFS into shares of our common
stock at a conversion price of $0.40 per share. We have the right to call the
convertible promissory note if the market price of our common stock rises above
$0.60 per share for a period of 60 days.
34
In exchange for a $100,000 cash investment, on September 26, 2003, we
issued a promissory note to C. A. Rundell, Jr., our Chairman and Chief Executive
Officer. The promissory note is in the original principal amount of $100,000 and
has an annual interest rate of 7%. The promissory note, plus accrued interest,
was due on April 1, 2004. The due date of this note was extended until October
1, 2005. Interest is payable in monthly installments on the first day of each
month. As a part of this financing, we also issued a stock purchase warrant to
Mr. Rundell, Jr. The stock purchase warrant entitles Mr. Rundell to purchase
125,000 fully paid and non-assessable shares of our common stock for $0.40 per
share.
In exchange for a total $400,000 cash investment, on October 1, 2003,
we issued a promissory note to each of Renaissance Capital Growth & Income Fund
III, Inc. and Renaissance US Growth Investment Trust PLC, which collectively own
greater than five percent of our common stock. Each of the two promissory notes
is in the original principal amount of $200,000 and has an annual interest rate
of 7%. The promissory notes, plus accrued interest, were due on April 1, 2004.
The due date of these notes was extended until October 1, 2005. Interest is
payable in monthly installments on the first day of each month. As a part of
this financing, we issued a stock purchase warrant to each of Renaissance
Capital Growth & Income Fund III, Inc. and Renaissance US Growth Investment
Trust PLC. Each of the two stock purchase warrants entitles each of the
Renaissance entities to purchase 250,000 fully paid and non-assessable shares of
our common stock for $0.40 per share.
During the fiscal year ended June 30, 2004, Mr. Rundell, our Chairman
and Chief Executive Officer, issued a personal letter of credit, supported by a
certificate of deposit, in the amount of $70,000 in order to meet the bonding
requirements of a specific construction project of B&B ARMR Corporation. The
interest rate on this transaction was 6% per year. The letter of credit and
related certificate of deposit was subsequently refinanced and restructured as a
line of credit in the amount of $450,000 supported by municipal bonds held
individually by Mr. Rundell. We agreed to compensate Mr. Rundell at the rate of
2.5% per annum for the amount of the line of credit used by us to service
bonding and meet working capital needs. As of December 31, 2004, the amount of
credit extended by Mr. Rundell to service the Company's bonding needs is
$95,000. Through December 31, 2004, we received an additional $330,000 under
this line of credit to support working capital needs. These arrangements were
approved by our board of directors.
In exchange for an aggregate of $150,000 cash, on July 28, 2004, we
issued a promissory note to C. A. Rundell, Jr. The original promissory note was
in the principal amount of $150,000, had an annual interest rate of 9% which was
due at maturity and was secured by a specific invoice of B&B ARMR Corporation
issued to Horne Engineering. The promissory note, plus accrued interest, was due
on October 28, 2004. In November of 2004, this note was exchanged for a $150,000
subordinated 10% convertible promissory note as a part of our placement of
$4,118,000 of subordinated 10% subordinated convertible promissory notes.
In exchange for a $1,000,000 cash investment, on August 5, 2004, we
issued a convertible promissory note to BFS. The original convertible promissory
note was in the principal amount of $1,000,000 and had an annual interest rate
of 10% and was payable in monthly installments on the first day of each month.
The original convertible promissory note, plus interest, was due on August 5,
2009. The convertible promissory note was convertible at the option of BFS into
our common stock at a conversion price of $0.38 per share. We had the right to
call the convertible promissory note if the market price of our common stock
rose above $0.60 per share for a period of 60 days. This convertible promissory
note was subsequently refinanced as a part of our placement of placement of
$4,118,000 of subordinated 10% subordinated convertible promissory notes in
November 2004.
35
PRINCIPAL STOCKHOLDERS
The following table sets forth the number and percentage of outstanding
shares of common stock and other classes of our equity securities entitled to
vote on all matters submitted to a vote by holders of common stock, beneficially
owned as of February 11, 2005 by (a) each director and named executive officer
of the company, (b) all persons who are known by the company to be beneficial
owners of 5% or more of the company's outstanding common stock and (c) all
officers and directors of the company as a group. 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. The company's common
stock and Series D preferred stock are its only classes of voting securities.
All of the Series D preferred stock is convertible into shares of common stock
at any time. The holder of each share of Series D preferred stock is entitled to
one vote for each share of common stock into which such share of Series D
preferred stock could then be converted. Presently, the holder of each share of
Series D preferred stock is entitled to 25 votes. For purposes of the beneficial
ownership calculations below, the Series D preferred stock is included in this
table on an "as converted" basis.
Number of Shares
Beneficially Percent
Name of Beneficial Owner Owned (1) of Class (1)
------------------------------------------------------------------- ---------------- ------------
Renaissance Capital Growth & Income Fund III, Inc. (2) 27,631,591 32.7%
Renaissance US Growth Investment Trust PLC (3) 27,204,166 32.2%
BFS US Special Opportunities Trust PLC (4) 8,225,460 9.7%
Russell Cleveland (5)(6)(7) 63,147,590 74.6%
C. A. Rundell, Jr. (5)(6)(8) 5,893,163 7.0%
Mary Roland (5)(6) 5,000,000 5.9%
The Rosenbloom Trust (5) 5,000,000 5.9%
William D. Breedlove (5)(6)(9) 570,927 0.7%
Peter Beare (5)(6)(10) 375,000 0.4%
Frank R. Marlow (5)(6)(11) 362,213 0.4%
Robert M. Galecke (5)(6)(12) 287,038 0.3%
Richard B. Powell (5)(6)(13) 203,200 0.2%
G.M. "John" Ulibarri (5)(6)(14) 175,000 0.2%
Theodore Wlazowski (5)(6)(15) 57,500 0.1%
Robert "Bob" Gardner (5)(6) 114,286 0.1%
All current directors and executive officers as a group (10 persons) 71,185,917 84.1%
---------------------
(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) Includes 19,648 shares of common stock issuable upon the exercise of
outstanding options excercisable within 60 days; 375,000 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 Series D preferred
stock within 60 days. The address for this company is 8080 N. Central
Expressway, Suite 210, Dallas, TX 75206.
(3) Includes 19,229 shares of common stock issuable upon the exercise of
outstanding options excercisable within 60 days; 375,000 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 Series D preferred
stock within 60 days. The address for this company is 8080 N. Central
Expressway, Suite 210, Dallas, TX 75206.
36
(4) Includes 5,197,368 shares of common stock issuable upon the exercise of
outstanding convertible promissory notes within 60 days. The address for
this company is 8080 N. Central Expressway, Suite 210, Dallas, TX 75206.
(5) The address for this person is 8200 Springwood Drive, Suite 230, Irving, TX
75063.
(6) Mr. Rundell is a director, chairman of the board and chief executive
officer of the company. Messrs. Beare, Breedlove, Cleveland, Marlow, and
Galecke are directors of the company. Mr. Beare became the president of the
company effective October 22, 2004. Ms. Roland is the spouse of Mr. Paul
Roland, who became director of the company on September 5, 2003. Mr.
Ulibarri became the president and chief executive officer of Intelli-Site,
Inc., effective January 1, 2004. Mr. Powell is vice president, chief
accounting officer and secretary of the company. Mr. Wlazowski became chief
executive officer of B&B ARMR Corporation, effective October 22, 2004. Mr.
Gardner retained his position as President of DoorTek Corporation upon the
company's acquisition of DoorTek on December 15, 2004.
(7) Includes 80,616 shares of common stock issuable upon the exercise of
outstanding options excercisable within 60 days; 750,000 shares of common
stock issuable upon the exercise of warrants within 60 days; and 375,000
shares of common stock issuable upon the conversion of Series D preferred
stock within 60 days. The address for this person is 8080 N. Central
Expressway, Suite 210, Dallas, TX 75206.
(8) Includes 1,008,427 shares of common stock issuable upon the exercise of
outstanding options exercisable within 60 days; 966,672 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 Series D preferred
stock within 60 days.
(9) Includes 184,872 shares of common stock issuable upon the exercise of
outstanding options exercisable within 60 days and 45,677 shares of common
stock issuable upon the exercise of warrants within 60 days.
(10) Includes 275,000 shares of common stock issuable upon the exercise of
outstanding options exercisable within 60 days.
(11) Includes 182,296 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 Series D preferred
stock within 60 days.
(12) Includes 182,296 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 Series D preferred
stock within 60 days.
(13) Includes 203,200 shares of common stock issuable upon the exercise of
outstanding options exercisable within 60 days.
(14) Includes 175,000 shares of common stock issuable upon the exercise of
outstanding options exercisable within 60 days.
(15) Includes 57,500 shares of common stock issuable upon the exercise of
outstanding options exercisable within 60 days.
37
DESCRIPTION OF SECURITIES
General
The following discussion summarizes our capital stock and describes
certain provisions of our certificate of incorporation and bylaws. The
information in this section is a summary only and is qualified by reference to
our certificate of incorporation and our bylaws, which have been filed as
exhibits to this registration statement, of which this prospectus forms a part.
Our authorized capital stock consists of 150,750,000 shares of common stock, par
value $.01 per share, and 750,000 shares of preferred stock, par value $.01 per
share. As of February 11, 2005, we had 85,056,612 shares of common stock and
100,750 shares of preferred stock issued and outstanding.
Common Stock
The holders of our common stock are entitled to dividends, if any, as
our board of directors may declare from time to time from legally available
funds, subject to the preferential rights of the holders of any shares of our
preferred stock currently issued and outstanding or that we may issue in the
future. Except as otherwise required by law, the holders of our common stock are
entitled to one vote per share on any matter to be voted upon by stockholders.
Our bylaws require that a majority of our issued and outstanding shares need be
represented, in person or by proxy, to constitute a quorum and to transact
business at a stockholders' meeting.
Under the Delaware General Corporation Law, cumulative voting for
directors will be denied unless such provision is specifically set forth in a
corporation's certificate of incorporation. We have not included a provision in
our certificate of incorporation providing for cumulative voting for the
election of directors. Accordingly, directors will be elected by a plurality of
the shares voting once a quorum is present. No holder of any shares of common
stock has a preemptive right to subscribe for any of our securities, nor are any
common shares subject to redemption or convertible into other securities.
Upon our voluntary or involuntary liquidation, distribution or sale of
assets, dissolution or winding up of our affairs, the holders of our common
stock are entitled to share, on a pro rata basis, all assets remaining after
payment to creditors and subject to prior distribution rights, if any, on shares
of preferred stock currently issued and outstanding or that we may issue in the
future. All of the outstanding shares of common stock are fully paid and
non-assessable.
Common Stock Purchase Warrants
There are currently outstanding warrants to purchase an aggregate of
6,031,118 shares of common stock at exercise prices ranging from $0.20 to $1.00
per share. We issued these warrants in connection with previous equity private
placements and also in consideration for services rendered. Additionally, in
connection with our initial public offering in 1993, we issued warrants to
purchase shares of our common stock. As of February 11, 2004, warrants to
purchase 6,031,118 shares of our common stock remain outstanding.
Common Stock Options
There are currently outstanding options to purchase an aggregate of
5,648,602 shares of common stock, at exercise prices ranging from $0.125 to
$2.375 per share. Our 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 issue.
Our 1997 Omnibus Stock Plan provides for the granting of 7,500,000 incentive
stock options, non-statutory stock options, stock appreciation rights, awards of
stock and stock purchase opportunities to its our directors, employees and
consultants. Under the 1997 Omnibus Stock Plan, incentive stock options may only
be granted to our employees or directors. Option exercise prices, in general,
are equal to the market price at date of grant. Shares under grant generally
become exercisable over three years and expire after ten years.
38
Preferred Stock
Our certificate of incorporation and bylaws authorize the issuance of
up to 750,000 shares of "blank check" preferred stock with such rights and
preferences as our board of directors, without further shareholder approval, may
determine from time to time. Of these authorized preferred shares, we have
designated:
o 9,500 shares as Series A $20 Convertible Preferred Stock,
o 40,000 shares as Series B $20 Convertible Preferred Stock,
o 12,500 as Series C $20 Convertible Preferred Stock,
o 150,000 shares as Series D $20 Convertible Preferred Stock,
o 150,000 shares as Series E $20 Convertible Preferred Stock,
o 80,000 shares as Series F Cumulative Convertible Preferred Stock,
and
o 300,000 shares of Series G Cumulative Convertible Preferred Stock.
As of February 11, 2005, there were no shares of Series B, Series C,
Series E, Series F or Series G preferred stock outstanding and we have no
intention of issuing any shares of any of these classes of preferred stock now
or in the future. With respect to the Series B preferred stock and Series C
preferred stock, we have filed certificates of elimination for each of such
series and, as a result, these series no longer exist. All preferred stock ranks
senior to common stock as to payment of dividends and distributions of assets.
As of February 11, 2004, we had 9,500 shares of Series A preferred
stock outstanding. Holders of the Series A preferred stock 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 stock may, at the
company's option, be converted into 20 shares of common stock at any time after
(1) 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 (2) 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
stock 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 stock are entitled to receive $20 per share
before the holders of common stock are entitled to receive any distribution.
As of February 11, 2004, we had 91,250 shares of Series D preferred
stock outstanding. Holders of the Series D preferred stock are entitled to
receive dividends at the annual rate of 9% per share paid quarterly in cash.
Since June 30, 2001, the holders of the Series D preferred stock have been
offered the option to receive the quarterly dividend in the common stock of the
company. The holders who elected this option have received the restricted stock
based on a 25% discount from the market price on a 20 day average based on the
10 days before and the 10 days after the dividend due date. The holders of the
Series D preferred stock have voting rights of one vote for each share of common
stock into which the preferred stock is convertible. Beginning on November 15,
2004 we may redeem the Series D preferred stock 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 D
preferred stock will have the option to convert the Series D preferred stock
into common stock prior to the redemption. Each share of the Series D preferred
stock may, at the company's option beginning on November 15, 2000, be converted
into 25 shares of common stock at any time after (1) the closing bid price of
the common stock exceeds $2.00 for at least 20 trading days during any 30
trading day period, and (2) the company has sustained positive earnings per
share of common stock for the two previous quarters. The holders of the Series D
preferred stock have the right to convert each share into 25 shares of common
stock at any time. The holders of the Series D preferred stock are entitled to
receive $20 per share before the holders of common stock are entitled to receive
any distribution.
39
Anti-Takeover Provisions
A number of provisions of the Delaware General Corporation Law and our
certificate of incorporation and bylaws may have the effect of discouraging,
delaying or preventing takeovers or changes of control or management of our
company. For example, under our certificate of incorporation, our board of
directors may issue preferred stock and set the voting rights, conversion
rights, preferences, and other terms of the preferred stock. Such a provision
could be used by our board of directors to discourage takeover attempts not
first approved by our board of directors, including takeovers which may be
considered by some stockholders to be in their best interests.
Also, our certificate of incorporation and bylaws provide that whenever
a vote of our stockholders is required or permitted to be taken to authorize or
approve any action, such action may be taken without a stockholders' meeting,
without prior notice, and without a vote, only if a consent in writing, setting
forth the action to be taken, is signed by all of the holders of our voting
shares. No action may be taken without a meeting unless such action is
unanimously approved by our stockholders.
We are subject to Section 203 of the Delaware General Corporation Law,
which we refer to as Section 203. In general, Section 203 prevents a person who
owns 15% or more of our outstanding voting stock, an "interested stockholder,"
from engaging in some business combinations with us for three years following
the time that that person becomes an interested stockholder unless one of the
following occurs:
o the board of directors either approves the business combination or
the transaction in which the person became an interested
stockholder before that person became an interested stockholder;
o upon consummation of the transaction which resulted in the person
becoming an interested stockholder, the interested stockholder
owned at least 85% of our voting stock outstanding at the time the
transaction commenced, excluding stock held by:
o directors who are also officers of our company; and
o employee stock plans that do not provide employees with the
right to determine confidentiality whether shares held
subject to the plan will be tendered in a tender or exchange
offer; or
o at or subsequent to the time that the transaction in which the
person became an interested stockholder, the business combination
is:
o approved by the board of directors; and
o authorized at a meeting of stockholders by the affirmative
vote of the holders of at least two-thirds of our outstanding
voting stock which is not owned by the interest stockholder.
For purposes of Section 203, the term "business combinations" includes
mergers, consolidations, asset sales or other transactions that result in a
financial benefit to the interested stockholder and transactions that would
increase the interested stockholder's proportionate share ownership of our
company.
Under some circumstances, Section 203 makes it more difficult for an
interested stockholder to effect various business combinations with us for a
period of three years after the stockholder becomes an interested stockholder.
Although our stockholders have the right to exclude us from the restrictions
imposed by Section 203, they have not done so. Section 203 may encourage
companies interested in acquiring us to negotiate in advance with the board of
directors, because the requirement stated above regarding stockholder approval
would be avoided if a majority of the directors approves, prior to the time the
party became an interested stockholder, either the business combination or the
transaction which results in the stockholder becoming an interested stockholder.
40
These types of provisions and restrictions could likely discourage or
make more difficult a merger, tender offer, proxy contest or other takeover
attempt, even if they might be favorable to the interests of our stockholders,
and could potentially depress the market price of our common stock.
Limitation of Liability and Indemnification of Officers and Directors
Section 145 of the Delaware General Corporation Law provides, in
summary, that directors and officers of Delaware corporations are entitled,
under certain circumstances, to be indemnified against all expenses and
liabilities (including attorneys' fees) incurred by them as a result of suits
brought against them in their capacity as a director or officer, if they acted
in good faith and in a manner they reasonably believed to be in or not opposed
to our best interests, and, with respect to any criminal action or proceeding,
if they had no reasonable cause to believe their conduct was unlawful; provided
that no indemnification may be made against expenses in respect of any claim,
issue or matter as to which they shall have been adjudged to be liable to us,
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, they are fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper. Any such indemnification may be made by us only as authorized in each
specific case upon a determination by the stockholders, disinterested directors
or independent legal counsel that indemnification is proper because the
indemnitee has met the applicable standard of conduct.
Our certificate of incorporation and by-laws provide that we will
indemnify our directors and officers to the fullest extent permitted by law and
that no director shall be liable for monetary damages to us or our stockholders
for any breach of fiduciary duty, except for liability:
o for any breach of the director's duty of loyalty to us or our
stockholders,
o for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law,
o under Section 174 of the Delaware General Corporation Law, or
o for any transaction from which the director derived an improper
personal benefit.
Insofar as indemnification for the liabilities arising under Securities
Act of 1933 may be permitted to our directors, officers or persons controlling
our company pursuant to the provisions described above, we have been informed
that in the opinion of SEC, such indemnification is against public policy as
expressed in the Securities Act of 1933 and is therefore unenforceable.
Transfer Agent
The name of our transfer agent is American Stock Transfer & Trust
Company and its offices are located at 6201 15th Avenue, Brooklyn, NY 11219.
41
SELLING STOCKHOLDERS
This prospectus covers offers and sales of our common stock from time
to time by each of the selling stockholders set forth below. Each of the selling
stockholders acquired, or will acquire upon the exercise or conversion of our
debt or equity securities, their shares of common stock pursuant to a private
placement by us of our equity securities, warrants or convertible promissory
notes. Each of the selling stockholders currently holds or has the right to
acquire one or more of the following:
o shares of our common stock,
o shares of our common stock issuable upon the conversion of
convertible promissory notes,
o shares of our common stock issuable upon the conversion of our
Series A preferred stock or Series D preferred stock, and
o shares of our common stock issuable upon the exercise of warrants.
Pursuant to Rule 416 of the Securities Act, the selling stockholders
may also offer and sell shares of common stock issued as a result of, among
other events, stock splits, stock dividends and similar events which result in
such selling stockholder holding additional shares of common stock or having the
right to receive additional shares of common stock.
Shares of Common Stock Issuable Upon the Conversion of Convertible Promissory
Notes
On November 30, 2004, we entered into a Loan Agreement with several
purchasers of our Subordinated 10% Convertible Promissory Notes. Pursuant to the
terms of the Loan Agreement, we were authorized to sell an aggregate principal
amount of up to $6,000,000 in convertible promissory notes. The Loan Agreement
contains various representations, warranties and covenants of the parties
customary for such a transaction. We have agreed to indemnify the purchasers of
the notes against various liabilities, including certain liabilities that may
arise under the Securities Act of 1933.
Each note sold that we sold:
o is subordinated to certain of other of our indebtedness,
o is due and payable on November 30, 2009,
o provides interest to the holder of the note at a rate of 10% per
annum, and
o is convertible into our common stock at the conversion rate of
$0.38 per share of common stock.
On December 15, 2004, pursuant to the terms of the Loan Agreement, we
completed the private placement of an aggregate principal amount of $4,118,000
of convertible promissory notes to 40 accredited investors. Since each note is
convertible into the shares of our common stock at the conversion rate of $0.38
per share, in the aggregate, the notes are convertible into a total of
10,836,842 shares of our common stock.
We agreed with each purchaser of the notes that we would register the
shares common stock that may be issued to such purchaser upon the conversion of
the notes. We agreed to register the shares of common stock pursuant to the
terms and provisions of a Registration Rights Agreement, dated November 30,
2004, that we entered into with each of the purchasers of the notes. This
prospectus covers each of the shares of common stock that may issued to a
purchaser of the notes upon conversion of the notes.
42
Pursuant to the terms of the Registration Rights Agreement and subject
to certain other provisions contained therein, if we fail to timely meet certain
of our obligations under the Registration Rights Agreement, then, in addition to
any other rights the holder or holders of the notes may have pursuant to the
Registration Rights Agreement or under applicable law: (i) on each such date
when we have failed to timely perform, we will have to pay to each holder an
amount in cash, as partial liquidated damages and not as a penalty, equal to
1.0% of the aggregate purchase price paid by such holder pursuant to the Loan
Agreement for any registrable securities then held by such holder; and (ii) on
each monthly anniversary of each such event date (if the applicable event shall
not have been cured by such date) until the applicable event is cured, we will
pay to each holder an amount in cash, as partial liquidated damages and not as a
penalty, equal to 1.0% of the aggregate purchase price paid by such holder
pursuant to the Loan Agreement for any registrable securities then held by such
holder.
Our sales of the notes described above and our issuance of the shares
of common stock issuable upon the conversion of such notes were (and will be
upon conversion) exempt from the registration requirements of Section 5 of the
Securities Act of 1933 pursuant to Section 4(2) of the Securities Act of 1933,
and pursuant to Rule 506 of Regulation D of the Securities Act of 1933. A Rule
506 exemption was available (and will be available) for these sales because we
sold notes and issued common stock only to accredited investors; we did not
solicit or advertise the sales; a restrictive legend was placed on each
certificate issued describing the restrictions against resale; and a Form D was
filed with the SEC and in each state where the purchasers of the notes reside.
In connection with this transaction, we agreed to pay to the finder, Roth
Capital Group, a convertible promissory note in the principal amount of $168,000
and warrants exercisable at $0.38 per share, to purchase 276,316 shares of
common stock, which are covered by this prospectus.
Additional Registration Rights
On several occasions during the last six years, we have issued and sold
to various purchasers:
o shares of our common stock,
o shares of our common stock issuable upon the conversion of
convertible promissory notes,
o shares of our common stock issuable upon the conversion of our
Series A Preferred Stock or Series D Preferred Stock, and
o shares of our common stock issuable upon the exercise of warrants.
Each of such sales were exempt from the registration requirements of
Section 5 of the Securities Act of 1933 pursuant to Section 4(2) of the
Securities Act, and pursuant to Rule 506 of Regulation D of the Securities Act
of 1933. A Rule 506 exemption was available for these sales because we sold or
issued such securities only to accredited investors; we did not solicit or
advertise the sales; a restrictive legend was placed on each certificate or
instrument issued describing the restrictions against resale; and a Form D was
filed with the SEC and in each state where the purchasers of such securities
reside. In connection with certain of these sales and issuances of our
securities, we agreed to register such the shares of common stock that we sold,
the shares of common stock that may be issued upon the conversion of convertible
promissory notes or preferred securities that we sold or the shares of common
stock that may be issued upon the exercise of the warrants that we sold. We
agreed to register such shares of common stock pursuant to the terms and
provisions of the registration rights agreements set forth below.
o Registration Rights Agreement, dated as of February 22, 1999,
among the Company and Renaissance Capital Growth & Income Fund
III, Inc. and Renaissance US Growth Investment Trust PLC.
43
o Registration Rights Agreement, dated as of October 20, 2000, among
the Company and Renaissance Capital Growth & Income Fund III, Inc.
and Renaissance US Growth Investment Trust PLC.
o Registration Rights Agreement, dated as of September 27, 2001,
among the Company and Renaissance Capital Growth & Income Fund
III, Inc. and Renaissance US Growth Investment Trust PLC.
o Registration Rights Agreement, dated as of November 9, 2001, among
the Company and C.A. Rundell, Jr.
o Registration Rights Agreement, dated as of March 11, 2003, among
the Company and BFS US Special Opportunities Trust PLC a public
limited company registered in England and Wales.
o Registration Rights Agreement, dated as of September 5, 2003,
among the Company, Mary Roland and Ann Rosenbloom.
o Registration Rights provided to holders of the Company's Series A
Preferred Stock, as set forth in the Certificate of Designation,
Preferences and Rights of Series A $20 Convertible Preferred
Stock.
This prospectus covers each of the shares of common stock that we have
sold and each of the shares of common stock that may issued to a holder of
warrants, a purchaser of our promissory notes or a purchaser of our preferred
securities upon the conversion or exercise of the warrants, promissory notes or
preferred securities, respectively.
Selling Stockholders Table
The following table sets forth:
o the name of each selling stockholder;
o the number or shares of common stock beneficially owned by each
selling stockholder as of the date of this prospectus, giving
effect to the conversion of the selling stockholders' convertible
securities and exercise of warrants into shares of common stock;
o the number of shares of common stock being offered by each selling
stockholder;
o the number of shares of common stock represented by convertible
promissory notes;
o the number of shares of common stock represented by preferred
stock;
o the number of shares of common stock represented by exercisable
warrants;
o the number of shares of common stock to be owned by the selling
stockholder after the offering; and
o the percent of the class of common stock to be owned after the
offering.
Beneficial ownership is determined in accordance with the rules of the
SEC and generally includes voting or investment power with respect to securities
and includes any securities which the person has the right to acquire within 60
days of the date of this prospectus through the conversion or exercise of
options, warrants, promissory notes and any other security or other right.
Solely for purposes of the selling stockholder table below, we have disregarded
the restriction described above and determined beneficial ownership based on the
rules of the SEC. The information below is as of February 11, 2005 and has been
furnished by the respective selling stockholders.
44
The table below was prepared based on information supplied to us by the
selling stockholders. We may amend or supplement this prospectus from time to
time to update the disclosure set forth in the table. Because the selling
stockholders identified in the table may sell some or all of the shares owned by
them which are included in this prospectus, and because there are currently no
agreements, arrangements or understandings with respect to the sale of any of
the shares, no estimate can be given as to the number of shares available for
resale hereby that will be held by the selling stockholders upon termination of
the offering made hereby. We have therefore assumed, for the purposes of the
following table, that the selling stockholders will sell all of the shares owned
by them that are being offered hereby. None of the selling stockholders has held
any position or office or had any material relationship with us or any of our
affiliates in the last three years, other than as described in this prospectus.
----------------------------------------------------------------------------------------------------------------------
| | | |Shares |Shares | |
| | |Shares |Offered |Offered | |
| | |Offered |from |from | |
| | |from |Conversion |Conversion | |
| | |Exercise |of |of | | Percent
|Shares |Shares |of |Promissory |Preferred |Shares | of Common
|Beneficially |Offered |Warrants |Notes |Stock |Beneficially| State
|Owned |Pursuant |Pursuant |Pursuant |Pursuant |Owned | Owned
|Before the |to this |to this |to this |to this |After | After
Selling Stockholder |Offering |Prospectus |Prospectus |Prospectus |Prospectus |Offering | Offering
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Renaissance US Growth & |27,631,591 |27,611,943 |250,000 | |187,500 |27,631,591 | 27.8%
Income Trust, III | | | | | | |
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Renaissance US Growth |27,204,166 |27,184,937 |250,000 | |187,500 |27,204,166 | 27.3%
Investment Trust PLC | | | | | | |
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
BFS US Special |8,225,460 |8,225,460 | |5,197,368 | |8,225,460 | 8.3%
Opportunities Trust PLC | | | | | | |
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Mary Roland |5,000,000 |5,000,000 | | | |5,000,000 | 5.0%
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Rosenbloom Trust |5,000,000 |5,000,000 | | | |5,000,000 | 5.0%
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
C.A. Rundell, Jr. |5,893,163 |3,469,190 |745,838 |394,736 |81,250 |5,893,163 | 5.9%
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
The Rundell Foundation |3,120,564 |1,560,282 | | |250,000 |3,120,564 | 3.1%
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Lagunitas Partners, LP |921,052 |921,052 | |921,052 | |921,052 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Roth Capital Partners |718,421 |718,421 |276,316 |442,105 | |718,421 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Cordillera Fund, LP |526,315 |526,315 | |526,315 | |526,315 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Katharine Bard Dickson & |394,736 |394,736 | |394,736 | |394,736 | *
Mark A. Dickson, Joint | | | | | | |
Tenants | | | | | | |
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Ralph A. Bard, Sr. Trust |315,789 |315,789 | |315,789 | |315,789 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Leonard M. Herman Trust |263,157 |263,157 | |263,157 | |263,157 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Dale F. Snavely |263,157 |263,157 | |263,157 | |263,157 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Gruber & McBaine |263,157 |263,157 | |263,157 | |263,157 | *
International | | | | | | |
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Jon D. and Linda W. Gruber |263,157 |263,157 | |263,157 | |263,157 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
The Rundell Family |500,000 |250,000 | | | |500,000 | *
Limited Partnership | | | | | | |
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Bourquin Family Trust |210,526 |210,526 | |210,526 | |210,526 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Philip J. Hempleman |160,000 |160,000 | | |160,000 |160,000 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Ralph A. L. Bogan, Jr. |157,894 |157,894 | |157,894 | |157,894 | *
Trust | | | | | | |
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Sidney N. Herman |157,894 |157,894 | |157,894 | |157,894 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Susan W. McMillan Trust |157,894 |157,894 | |157,894 | |157,894 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Anne R. Brown Irrevocable |131,578 |131,578 | |131,578 | |131,578 | *
Trust | | | | | | |
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Timothy B. Johnson |131,578 |131,578 | |131,578 | |131,578 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Gary R. Fairhead |131,578 |131,578 | |131,578 | |131,578 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
J. Patterson McBaine |131,578 |131,578 | |131,578 | |131,578 | *
----------------------------------------------------------------------------------------------------------------------
45
----------------------------------------------------------------------------------------------------------------------
| | | |Shares |Shares | |
| | |Shares |Offered |Offered | |
| | |Offered |from |from | |
| | |from |Conversion |Conversion | |
| | |Exercise |of |of | | Percent
|Shares |Shares |of |Promissory |Preferred |Shares | of Common
|Beneficially |Offered |Warrants |Notes |Stock |Beneficially| State
|Owned |Pursuant |Pursuant |Pursuant |Pursuant |Owned | Owned
|Before the |to this |to this |to this |to this |After | After
Selling Stockholder |Offering(1) |Prospectus |Prospectus |Prospectus |Prospectus |Offering | Offering
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
John Bard Manulis |105,263 |105,263 | |105,263 | |105,263 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Anne H. Ross |105,263 |105,263 | |105,263 | |105,263 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Robert S. Steinbaum |105,263 |105,263 | |105,263 | |105,263 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Laurie Manulis Harmon |105,263 |105,263 | |105,263 | |105,263 | *
Trust of 1996 | | | | | | |
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Carol Clark Coolidge 1997 |78,947 |78,947 | |78,947 | |78,947 | *
Trust | | | | | | |
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
William G. Escamilla |78,947 |78,947 | |78,947 | |78,947 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Suzanne R. Davis |78,947 |78,947 | |78,947 | |78,947 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Laura K. Reibling Trust |78,947 |78,947 | |78,947 | |78,947 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Balie M. Ross |78,947 |78,947 | |78,947 | |78,947 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
M. Edward Sellers and |78,947 |78,947 | |78,947 | |78,947 | *
Suzan D. Boyd, Joint | | | | | | |
Tenants | | | | | | |
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Timothy B. Johnson C/F |78,947 |78,947 | |78,947 | |78,947 | *
Alexis B. Johnson | | | | | | |
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Henry J. Underwood |78,947 |78,947 | |78,947 | |78,947 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Joseph H. Ballway, Jr. |78,947 |78,947 | |78,947 | |78,947 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Joanne G. Bloom |78,947 |78,947 | |78,947 | |78,947 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Leland D. Boddy |78,947 |78,947 | |78,947 | |78,947 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Henry O. Flynn |78,947 |78,947 | |78,947 | |78,947 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Henry J. Underwood |65,789 |65,789 | |65,789 | |65,789 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Patrick T. Underwood |65,789 |65,789 | |65,789 | |65,789 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Henry J. Underwood C/F |65,789 |65,789 | |65,789 | |65,789 | *
Lucy H. Underwood | | | | | | |
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Bard Micro-Cap Value |65,789 |65,789 | |65,789 | |65,789 | *
Fund, L.P. | | | | | | |
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Renaissance Capital |44,634 |44,634 | | | |44,634 | *
Group, Inc. | | | | | | |
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Wayne Hamersly |20,000 |20,000 | | |20,000 |20,000 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Donald A. Dole |10,000 |10,000 | | |10,000 |10,000 | *
---------------------------|-------------|------------|------------|------------|------------|------------|-----------
Total |89,580,611 |85,307,479 |1,522,154 |12,086,821 |896,250 |89,580,611 |
----------------------------------------------------------------------------------------------------------------------
* designates < 1%
46
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, donees,
transferees, assignees and successors-in-interest may, from time to time, sell
any or all of their shares of common stock on any stock exchange, market or
trading facility on which the shares are traded or in private transactions.
These sales may be at fixed or negotiated prices. The selling stockholders may
use any one or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits investors;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o to cover short sales made after the date that this registration
statement is declared effective by the SEC;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, if available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling stockholders (or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholders may from time to time pledge or grant a
security interest in some or all of the shares owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell shares of common stock from time to time under this
prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act of 1933 amending the list of
selling stockholders to include the pledgee, transferee or other successors in
interest as selling stockholders under this prospectus.
Upon our receiving notification in writing by a selling stockholder
that any material arrangement has been entered into with a broker-dealer for the
sale of common stock through a block trade, special offering, exchange
distribution or secondary distribution or a purchase by a broker or dealer, a
supplement to this prospectus will be filed, if required, pursuant to Rule
424(b) under the Securities Act of 1933, disclosing (i) the name of each such
selling stockholder and of the participating broker-dealer(s), (ii) the number
of shares involved, (iii) the price at which such the shares of common stock
were sold, (iv) the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not
conduct any investigation to verify the information set out or incorporated by
reference in this prospectus, and (vi) other facts material to the transaction.
In addition, upon our receiving notification in writing by a selling stockholder
that a donee or pledgee intends to sell more than 500 shares of common stock, a
supplement to this prospectus will be filed if then required in accordance with
applicable securities law.
47
The selling stockholders also may transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933 in connection with such sales. In such
event, any commissions received by such broker-dealers or agents and any profit
on the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act of 1933. Discounts,
concessions, commissions and similar selling expenses, if any, that can be
attributed to the sale of shares will be paid by the selling stockholder and/or
the purchasers. Each selling stockholder has represented and warranted to us
that it acquired the shares subject to this registration statement in the
ordinary course of such selling stockholder's business and, at the time of its
purchase of such securities such selling stockholder had no agreements or
understandings, directly or indirectly, with any person to distribute any such
shares of common stock.
We have advised each selling stockholder that it may not use shares
registered under this registration statement to cover short sales of common
stock made prior to the date on which this registration statement shall have
been declared effective by the SEC. If a selling stockholder uses this
prospectus for any sale of the common stock, it will be subject to the
prospectus delivery requirements of the Securities Act of 1933. The selling
stockholders will be responsible to comply with the applicable provisions of the
Securities Act of 1933 and the Securities Exchange Act of 1934, and the rules
and regulations thereunder promulgated, including, without limitation,
Regulation M, as applicable to such selling stockholders in connection with
resales of their respective shares under this registration statement.
We are required to pay all fees and expenses incident to the
registration of the shares, but we will not receive any proceeds from the sale
of the common stock. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act of 1933.
48
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock (including shares issued
upon the exercise of outstanding warrants and options) in the public market
after this offering could cause the market price of our common stock to decline.
Those sales also might make it more difficult for us to sell equity-related
securities in the future or might reduce the price at which we could sell any
equity-related securities.
At the date of this prospectus, we have outstanding approximately
85,056,612 shares of common stock. Of the shares of common stock outstanding at
the date of this prospectus, a large majority of such shares will be freely
tradable without restriction or further registration under the Securities Act of
1933, except that any shares held by our "affiliates," as that term is defined
in Rule 144 under the Securities Act of 1933, generally may be sold only in
compliance with the limitations of Rule 144 described below. Except as set forth
below, a much smaller portion of our outstanding shares of common stock will be
"restricted" securities as that term is defined in Rule 144. The "restricted"
securities may not be resold unless they are registered under the Securities Act
of 1933 or are sold pursuant to an available exemption from registration,
including Rule 144 under the Securities Act. The restricted shares will be
eligible for resale at various times upon the expiration of applicable holding
periods. Restricted securities may be sold in the public market only if they
qualify for an exemption from registration under Rule 144, including Rule
144(k), or Rule 701 under the Securities Act of 1933. In addition, up to
14,505,225 shares covered by this prospectus, when issued, will be freely
tradable upon the effectiveness of the Registration Statement of which this
prospectus forms a part, and up to 85,307,479 shares, including 70,802,254
shares that are currently outstanding will be freely tradable upon the
effectiveness of the Registration Statement.
Rule 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of:
o 1% of the number of shares of common stock then outstanding, which
is approximately 850,561 shares at the time of this prospectus, or
o the average weekly trading volume of our common stock during the
four calendar weeks preceding the date on which notice of the sale
is filed with the SEC.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and to the availability of current public information about us.
Rule 144(k)
UnderRule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years is entitled to sell the shares
under Rule 144(k) without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
Outstanding Options, Warrants and Convertible Debentures
49
Shares of common stock issuable upon the exercise or conversion of the
following options, warrants, preferred stock and convertible promissory notes
will be restricted securities and may be resold by their holders only when
covered by an effective registration under the Securities Act of 1933, or under
an available exemption from registration:
o up to 12,086,821 shares are issuable to the selling stockholders
upon the conversion of convertible promissory notes;
o up to 1,522,154 shares are issuable to the selling stockholders
upon exercise of warrants;
o up to 190,000 shares are issuable to the selling stockholders upon
the conversion of our Series A preferred stock; and
o up to 706,250 shares are issuable to the selling stockholders upon
the conversion of our Series D preferred stock.
50
CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
On January 12, 2005, Grant Thornton LLP notified us that it will
decline to stand for re-election as our independent registered public accounting
firm. Effective at the earlier of February 15, 2005, the date we anticipate
filing our Form 10-QSB for the quarter ended December 31, 2004 with the SEC, or
the appointment of a new independent registered public accounting firm by the
audit committee of our board of directors, Grant Thornton will no longer be our
independent registered public accounting firm of record.
Our audit committee has commenced an immediate search for a new
independent registered public accountant, including requesting proposals from
other accounting firms.
Grant Thornton performed audits of our consolidated financial
statements for the fiscal years ended June 30, 2004 and 2003. Grant Thornton's
reports did not contain an adverse opinion or disclaimer of opinion, but were
modified to include an explanatory paragraph related to uncertainties about our
ability to continue as a going concern.
During the fiscal years ended June 30, 2004 and 2003 and through
December 31, 2004 (i) there have been no disagreements with Grant Thornton on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure, which disagreement(s), if not resolved to Grant
Thornton's satisfaction, would have caused Grant Thornton to make reference to
the subject matter of the disagreement(s) in connection with its reports for
such year, and (ii) there were no "reportable events" as such term is defined in
Item 304(a)(1)(v) of Regulation S-K. However, as reported in our Form 10-KSB for
the fiscal year ended June 30, 2004, Grant Thornton has communicated to our
audit committee a reportable condition regarding our system of internal
controls. They noted a reportable condition with respect to the inadequacy of
staffing levels in our financial reporting function that could result in our
inability to meet financial reporting objectives. We and the audit committee are
in the process of taking the steps necessary to correct this identified
reportable condition.
51
EXPERTS
Our consolidated financial statements as of June 30, 2004 and 2003, and
for the fiscal years then ended, have been audited by Grant Thornton LLP,
independent registered public accountants, and are given upon such firm's
authority as an expert in auditing and accounting.
LEGAL MATTERS
Our legal counsel, Haynes and Boone, LLP, will pass upon the validity
of the common stock being offered by this prospectus and will provide counsel
with respect to other legal matters concerning the registration and offering of
the common stock.
ADDITIONAL INFORMATION
We have filed a registration statement on Form SB-2 with the SEC. This
prospectus, which forms a part of that registration statement, does not contain
all of the information included in the registration statement and the exhibits
and schedules thereto as permitted by the rules and regulations of the SEC. For
further information with respect to us and the shares of our common stock
offered hereby, please refer to the registration statement, including its
exhibits and schedules. Statements contained in this prospectus as to the
contents of any contract or other document referred to herein are not
necessarily complete and, where the contract or other document is an exhibit to
the registration statement, each such statement is qualified in all respects by
the provisions of such exhibit, to which reference is hereby made.
We file annual, quarterly and current reports and other information
with the SEC. You may read and review a copy of any document we file at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the Public
Reference Room. Our SEC filings are also available to the public from the SEC's
web site at www.sec.gov. If you would like a copy of this registration
statement, our annual report including audited financial statements or any of
our other SEC filings, please submit your request to Integrated Security
Systems, Inc., 8200 Springwood Drive, Suite 230, Irving, Texas 75063, or call
(972) 444-8280.
52
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm................F-1
Consolidated Balance Sheets as at June 30, 2003 and 2004...............F-2
Consolidated Statements of Operations for the years ended
June 30, 2004 and 2003.................................................F-3
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) and Comprehensive Loss for the years ended
June 30, 2004 and 2003.................................................F-4
Consolidated Statements of Cash Flows for the years ended
June 30, 2004 and 2003.................................................F-5
Notes to Consolidated Financial Statements.............................F-6
Consolidated Condensed Balance Sheets (unaudited) as at
December 31, 2004 and December 31, 2003...............................F-21
Consolidated Condensed Statements of Operations (unaudited)
for the six months ended December 31, 2004 and 2003...................F-22
Consolidated Condensed Statements of Cash Flows (unaudited)
for the six months ended December 31, 2004 and 2003...................F-23
Notes to Consolidated Condensed Financial Statements (unaudited)......F-24
F
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Stockholders of Integrated Security Systems, Inc.
We have audited the accompanying consolidated balance sheets of Integrated
Security Systems, Inc. as of June 30, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity (deficit), 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the
consolidated results of its operations and its 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, in fiscal 2004 and 2003, the Company suffered significant
losses from operations. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ GRANT THORNTON LLP
Dallas, Texas
September 24, 2004
F-1
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
----------------------------
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 172,688 $ 177,078
Accounts receivable, net of allowance
for doubtful accounts of $109,527
and $64,183, respectively............................ 1,904,285 545,337
Inventories............................................ 1,272,532 630,995
Other current assets................................... 75,020 70,071
------------ ------------
Total current assets................................. 3,424,525 1,423,481
Property and equipment, net............................ 681,168 481,608
Goodwill............................................... 3,547,162 --
Other assets........................................... 59,956 15,011
------------ ------------
Total assets......................................... $ 7,712,811 $ 1,920,100
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable - trade............................... $ 2,029,963 $ 538,190
Accrued liabilities.................................... 708,610 510,000
Current portion of long-term debt...................... 1,845,949 374,330
------------ ------------
Total current liabilities............................ 4,584,522 1,422,520
Long-term debt............................................ 2,956,341 1,919,409
Preferred stock subject to redemption..................... -- 7,495,052
Stockholders' deficit:
Convertible preferred stock, $.01 par value,
750,000 shares authorized; 100,750 issued and
outstanding (liquidation value of $2,015,000)........ 1,008 1,613
Common stock, $.01 par value, 150,000,000
shares authorized; 84,298,984 and 12,881,110
shares, respectively, issued......................... 842,990 128,811
Additional paid in capital............................. 31,627,086 18,434,838
Accumulated deficit.................................... (32,180,386) (27,363,393)
Treasury stock, at cost - 50,000 common shares......... (118,750) (118,750)
------------ ------------
Total stockholders' equity (deficit)................... 171,948 (8,916,881)
------------ ------------
Total liabilities and stockholders' equity (deficit). $ 7,712,811 $ 1,920,100
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
F-2
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
June 30,
----------------------------
2004 2003
------------ ------------
Sales ........................................... $ 9,827,461 $ 5,029,147
Cost of sales ................................... 7,235,553 3,220,496
------------ ------------
Gross margin .................................... 2,591,908 1,808,651
Operating expenses:
Selling, general and administrative .......... 4,178,653 2,593,361
Impairment of software development costs ..... -- 224,900
Research and product development ............. 653,591 401,104
------------ ------------
4,832,244 3,219,365
------------ ------------
Loss from operations ............................ (2,240,336) (1,410,714)
Other income (expense):
Interest expense ............................. (1,431,126) (541,324)
------------ ------------
Net loss ........................................ (3,671,462) (1,952,038)
Preferred dividend requirement .................. (164,250) (614,034)
------------ ------------
Net loss allocable to common stockholders ....... $ (3,835,712) $ (2,566,072)
============ ============
Weighted average common shares outstanding ...... 64,340,010 12,310,903
============ ============
Basic and diluted loss per share ................ $ (0.06) $ (0.21)
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Convertible
Preferred Stock Common Stock Additional
------------------- ----------------------- Paid In Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock Total
-------- -------- ---------- ---------- ------------ ------------ --------- -----------
Balance at July 1, 2003.. 161,345 $ 1,613 11,834,589 $ 118,346 $ 17,234,734 $(25,335,103) $(118,750) $(8,099,160)
Common stock issuance.... 666,918 6,669 158,466 165,135
Warrant issuance......... 172,494 172,494
Stock option exercise.... 33,000 330 3,795 4,125
Preferred stock dividends 346,603 3,466 72,786 (76,252) --
Debt discount............ 792,563 792,563
Net loss................. (1,952,038) (1,952,038)
-------- -------- ---------- ---------- ------------ ------------ --------- -----------
Balance at June 30, 2003. 161,345 1,613 12,881,110 128,811 18,434,838 (27,363,393) (118,750) (8,916,881)
Preferred stock
conversion.............. (60,595) (605) 45,049,751 450,497 7,045,161 7,495,053
Preferred stock dividend
conversion.............. 5,219,149 52,192 991,639 (1,043,831) --
Common stock issuance.... 760,812 7,608 226,815 234,423
Warrant exercise......... 9,250,000 92,500 1,757,500 1,850,000
Stock option exercise.... 509,000 5,090 81,475 86,565
Preferred stock dividends 629,162 6,292 95,408 (101,700) --
Debt discount............ 244,250 244,250
Purchase of business..... 10,000,000 100,000 2,750,000 2,850,000
Net loss................. (3,671,462) (3,671,462)
-------- -------- ---------- ---------- ------------ ------------ --------- -----------
Balance at June 30, 2004. 100,750 $ 1,008 84,298,984 $ 842,990 $ 31,627,086 $(32,180,386) $(118,750) $ 171,948
======== ======== ========== ========== ============ ============= ========= ===========
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
June 30,
--------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss ............................................. $(3,671,462) $(1,952,038)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation ....................................... 166,308 134,954
Provision/(credit) for bad debt .................... 61,726 (30,000)
Provision for warranty reserve ..................... 185,270 182,500
Provision for inventory reserve .................... 163,333 --
Amortization of debt discount and beneficial
conversion feature ............................... 911,802 297,505
Expenses paid with stock, warrants and options ..... 234,423 165,136
Changes in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable ............................. (543,204) 520,496
Inventories ..................................... (457,189) 79,705
Other assets .................................... (30,794) 8,098
Accounts payable - trade ........................ 1,086,418 (145,956)
Accrued liabilities ............................. (548,700) (150,374)
----------- -----------
Net cash used in operating activities ....... (2,442,069) (889,974)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment ................... (266,626) (64,627)
Purchase of business, net of cash acquired ........... (632,224) --
----------- -----------
Net cash used in investing activities ....... (898,850) (64,627)
----------- -----------
Cash flows from financing activities:
Employee stock option exercise ....................... 86,565 4,125
Warrant exercise ..................................... 1,850,000 --
Payments of debt ..................................... (938,153) (328,684)
Proceeds from debt ................................... 2,338,117 1,427,280
----------- -----------
Net cash provided by financing activities ... 3,336,529 1,102,721
----------- -----------
Increase (decrease) in cash and cash equivalents ........ (4,390) 148,120
Cash and cash equivalents at beginning of year .......... 177,078 28,958
----------- -----------
Cash and cash equivalents at end of year ................ $ 172,688 $ 177,078
=========== ===========
Supplemental disclosure:
Noncash activities
Issuance of common stock in payment of preferred
stock dividends .................................... $ 101,700 $ 76,252
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Integrated Security Systems, Inc. was formed in December 1991. The Company has
two wholly-owned subsidiaries: B&B ARMR Corporation, an anti-terrorist crash
barrier and gate engineering and manufacturing facility; and Intelli-Site,
Inc., a developer and retail seller of PC-based control systems which integrate
discrete security devices. Both of the Company's subsidiaries have domestic and
international installations and customers.
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the Company and its subsidiaries:
B&B ARMR Corporation and Intelli-Site, Inc. All significant intercompany
transactions and balances have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of highly-liquid instruments with
original maturities of three months or less.
Accounts Receivable
The majority of the Company's accounts receivable are due from companies in the
anti-terrorist crash barrier, perimeter security and road and bridge
industries. Credit is extended based on evaluation of a customers' financial
condition and credit history and, generally, collateral is not required.
Accounts receivable are due within 30 days and are stated at amounts due from
customers net of an allowance for doubtful accounts. Accounts outstanding
longer than the contractual payment terms are considered past due. The Company
determines its allowance by considering a number of factors, including the
length of time trade accounts receivable are past due, the Company's previous
loss history, the customer's current ability to pay its obligation to the
Company, and the condition of the general economy and the industry as a whole.
The Company writes-off accounts receivable when they become uncollectible, and
payments subsequently received on such receivables are credited to the
allowance for doubtful accounts.
Inventories
Inventories are carried at the lower of average cost or market. Inventory
reserves are specifically identified by both item usage and overall management
estimation.
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 7 years.
F-6
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
Income Taxes
The Company accounts for income taxes using the liability method. 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.
Revenue Recognition
The Company recognizes revenue from sales at the time of shipment. The
Company's accounts receivable are generated from a large number of customers in
the security integration, construction contractor and electrical subcontractor
and governmental markets. No single customer accounted for 10% or more of
revenues during the years ended June 30, 2004 or 2003.
Software Development Costs
Software development costs that are deemed to be recoverable are capitalized
and amortized over the greater of the revenue method or the straight-line
method over five years. At June 30, 2004 and 2003, software development costs
had not been capitalized because of uncertainty regarding their recoverability.
Fair Value of Financial Instruments
The carrying values of the Company's cash and cash equivalents, accounts
receivable and current portion of term notes payable approximate fair value due
to their relatively short-term maturity. The carrying value of the accounts
receivable factoring facility and long-term debt approximates fair value
because it bears a prevailing market rate of interest. The fair value of the
remaining debt instruments is undeterminable due to their related party nature.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired. On an annual basis, the Company compares the fair value of its
reporting units with their carrying values. If the carrying value of a
reporting unit exceeds its fair value, the Company would recognize an
impairment equal to the excess of the carrying value of the operating unit's
goodwill over the fair value of its goodwill. The fair value of reporting units
is estimated using the discounted present value of estimated future cash flows.
Valuation of Long-Lived Assets
The Company periodically reviews the net realizable value of its long-lived
assets whenever events and circumstances indicate an impairment may have
occurred. In the event the Company determines that the carrying value of
long-lived assets is in excess of estimated gross future cash flows for those
assets, the Company will write-down the value of the assets to a level
commensurate with a discounted cash flow analysis of the estimated future cash
flows.
F-7
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
Product Warranties
The Company has one-year, two-year and five-year limited warranties on products
it manufactures. The Company provides for repair or replacement of components
and/or products that contain defects of material or workmanship. When the
Company uses other manufacturers' 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.
The Company records a liability for an estimate of costs that it expects to
incur under its warranties when product revenue is recognized. Factors
affecting the Company's warranty liability include the number of units sold and
historical and anticipated rates of claims and costs per claim. The Company
periodically assesses the adequacy of its warranty liability based on changes
in these factors.
The changes in the Company's product warranty liability are as follows:
June 30,
-----------------------
2004 2003
--------- ---------
Liability, beginning of year $ 135,471 $ 97,095
Expense for new warranties issued 185,270 182,500
Warranty claims (226,584) (144,124)
--------- ---------
Liability, end of period $ 94,157 $ 135,471
========= =========
Net Loss Per Share
The Company computes basic loss per common share using the weighted average
number of common shares outstanding. At June 30, 2004 and 2003, there were
7,970,318 and 3,606,252 shares of in-the-money potentially dilutive common
shares, respectively, outstanding, which were not included in weighted average
shares outstanding because their effect is antidilutive due to the Company's
reported net loss.
At June 30, 2004 and 2003, the Company had approximately 99,919,466 and
82,066,333 shares of common stock and common stock equivalents outstanding,
which comprises all of the Company's outstanding equity instruments.
As discussed in Note 10, all outstanding shares of the Series F and Series G
Preferred Stock, along with all accrued and unpaid dividends, were converted
into common shares during the first quarter of fiscal 2004. These conversions
increased to number of common shares outstanding by 50,268,900 shares. Also, as
discussed in Note 12, 10,000,000 common shares were issued in September 2003 in
a merger transaction. Per share amounts for fiscal 2004 reflect these
additional common shares outstanding.
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.
F-8
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
Statements of Cash Flows
Supplemental cash flow information for fiscal years 2004 and 2003:
June 30,
------------------------
2004 2003
---------- ----------
Interest paid $ 284,907 $ 113,312
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 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. 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:
For the Year Ended
---------------------------
2004 2003
----------- -----------
Net loss, as reported $(3,671,462) $(1,952,038)
Add: Stock-based employee compensation
expense determined under the intrinsic
value method included in reported
net loss -- --
Deduct: Stock-based employee compensation
expense determined under the fair
value method (222,415) (177,217)
----------- -----------
Pro forma net loss $(3,893,877) $(2,129,255)
=========== ===========
Earnings per share:
Basic and Diluted - as reported $ (0.06) $ (0.21)
=========== ===========
Basic and Diluted - pro forma $ (0.06) $ (0.22)
=========== ===========
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 used for grants in fiscal 2004 and 2003, respectively: no dividend
yield, expected volatility of 108% and 105%; risk-free interest rates of 3.31%
and 2.58% and expected lives of five years.
F-9
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
3. LIQUIDITY
The Company has experienced significant losses during fiscal 2004 and 2003.
Management anticipates positive performance in the first part of fiscal 2005.
However, in order to meet working capital needs, the Company will need to
receive additional financing either through the sale of assets, equity
placement and/or additional debt. Failure to receive such financing could
jeopardize the Company's ability to continue as a going concern.
Subsequent to June 30, 2004, the Company generated additional capital of
$1,000,000 (as more fully described in Note 13) from the issuance of a
convertible promissory note. In addition, the Company is involved in continuing
discussions regarding additional sources of capital. The Company believes that
it will be able to fund any further operating losses through the issuance of
new equity securities or debt instruments.
4. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of certain balance sheet accounts is as follows:
June 30,
--------------------------
2004 2003
----------- -----------
Accounts receivable:
Trade receivables $ 2,013,812 $ 609,520
Less: allowance for doubtful receivables (109,527) (64,183)
---------- -----------
$ 1,904,285 $ 545,337
=========== ===========
Allowance for doubtful receivables:
Beginning Balance $ 64,183 $ 100,692
Bad debt expense (reversal) 61,726 (30,000)
Accounts written-off (16,382) (6,509)
----------- -----------
Ending Balance $ 109,527 $ 64,183
=========== ===========
Inventories:
Raw materials $ 785,782 $ 444,718
Work-in-process 393,420 186,277
Finished goods 93,330 --
----------- -----------
$ 1,272,532 $ 630,995
=========== ===========
Property and equipment:
Land $ 40,164 $ 40,164
Building 613,469 586,449
Leasehold improvements 86,766 48,769
Office furniture and equipment 608,247 485,634
Manufacturing equipment 676,637 545,043
Vehicles 76,844 51,164
----------- -----------
2,102,127 1,757,223
Less: accumulated depreciation (1,420,959) (1,275,615)
----------- -----------
$ 681,168 $ 481,608
=========== ===========
F-10
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
5. DEBT
June 30,
-------------------------
2004 2003
----------- -----------
Accounts receivable factoring facility with a
finance company to factor accounts receivable
with recourse. This accounts receivable factoring
facility has an adjustable factoring fee of
1.5%-2.0%, a minimum and maximum borrowing of
$400,000 and $1,800,000, respectively, per month;
interest at the prime rate of Chase Bank of
Texas, N. A. (4.25% as of June 30, 2004) plus 2%;
agreement expires March 2005 and may be
terminated by either party with 30 days written
notice after expiration.......................... $ 850,622 $ 307,008
Term note payable to a bank; due in monthly
principal and interest installments of $10,500;
interest at 10.5% and 10% at June 30, 2004 and
2003, respectively; secured by first mortgage on
real estate and equipment; maturity date of
February 26, 2006................................... 540,660 614,975
Notes payable to stockholders; interest at 8% due
in monthly installments of $11,333; principal and
accrued unpaid interest due September 30,
2005................................................ 1,700,000 1,700,000
Convertible note payable to stockholder; interest
at 7% due in monthly installments of $2,917;
principal and accrued unpaid interest due
September 5, 2008; convertible at the option of
the shareholder at $0.40 per share; Company may
call the note at $0.60 per share (based on
certain restrictions)............................... 500,000 --
Notes payable to stockholders; interest at 7% due
in monthly installments of $2,333; principal and
accrued unpaid interest due October 1, 2005......... 400,000 --
Note payable to bank and secured by a letter of
credit in the amount of $500,000 from Chief
Executive Officer; interest at the prime rate of
Bank One, N.A. (4.25% as of June 30, 2004);
principal and accrued unpaid interest due January
26, 2005............................................ 310,000 --
Note payable to stockholder; interest at 9% due
in monthly installments of $750; principal and
accrued unpaid interest due September 30, 2005...... 100,000 100,000
Notes payable to Chief Executive Officer;
interest at 8% due in monthly installments of
$667; principal and accrued unpaid interest due
September 30, 2005.................................. 100,000 100,000
Note payable to Chief Executive Officer; interest
at 7% due in monthly installments of $583;
principal and accrued unpaid interest due October
1, 2005............................................. 100,000 --
Note payable to bank; interest at 8% due in
quarterly installments of $2,000; principal and
accrued unpaid interest was due August 28,2003...... 90,073 100,073
Discount related to stock purchase warrants......... -- (667,552)
Other............................................... 110,935 39,235
----------- -----------
4,802,290 2,293,739
Less current portion................................ (1,845,949) (374,330)
----------- -----------
$ 2,956,341 $ 1,919,409
=========== ===========
F-11
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
Principal payments required under long-term debt outstanding at June 30, 2004
are as follows:
Year Ending June 30,
-------------------------
2005 $ 1,845,949
2006 2,437,137
2007 16,727
2008 2,477
2009 500,000
-----------
$ 4,802,290
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
follows:
For the Years Ended
------------------------------
June 30, 2004 June 30, 2003
------------- -------------
Federal statutory benefit rate (34.0)% (34.0)%
Valuation allowance 34.0% 34.0%
------------- -------------
--% --%
============= =============
Deferred tax assets (liabilities) are comprised of the following at:
June 30, 2004 June 30, 2003
------------- -------------
Deferred tax assets
Inventory reserve $ 38,000 $ 29,000
Accounts receivable 37,000 22,000
Net operating loss carryforward 7,585,000 7,105,000
Contributions carryover 2,000 2,000
Other 76,000 57,000
------------- -------------
Gross deferred tax asset 7,738,000 7,215,000
Deferred tax liabilities
Property and equipment (5,000) (12,000)
------------- -------------
Net deferred tax asset 7,733,000 7,203,000
Valuation allowance (7,733,000) (7,203,000)
------------- -------------
Net deferred tax asset $ -- $ --
============= =============
The Company has unused net operating loss carryforwards of approximately $22.3
million at June 30, 2004. The carryforwards expire from 2007 through 2021. The
annual use of these carryforwards is substantially limited as a result of
changes in ownership of the Company's common stock. The Company has recorded a
valuation allowance to the extent it is more likely than not that a tax benefit
will not be realized prior to expiration of the carryforward periods.
F-12
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
7. COMMITMENTS AND 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.
Operating Leases
The Company leases facilities under leases accounted for as operating leases.
Rent expense for operating leases was $251,741 and $121,936 for the years ended
June 30, 2004 and 2003, respectively. Future minimum payments for fiscal years
subsequent to June 30, 2004 under these leases are as follows:
2005 $ 233,429
2006 59,135
2007 27,134
-----------
$ 319,698
Capital Leases
The Company leases certain equipment under leases accounted for as capital
leases, with the resulting liability recorded as a component of both current
and long-term debt, in the accompanying consolidated balance sheet. Future
minimum payments for fiscal years subsequent to June 30, 2004 under these
leases are as follows:
2005 $ 51,930
2006 31,803
2007 8,537
2008 2,608
----------
94,878
Less amount
representing interest (12,172)
----------
$ 82,706
==========
The following is a summary of the assets under capital leases at June 30, 2004:
Production and office equipment $ 144,648
Less accumulated depreciation (58,850)
----------
$ 85,798
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 contributions occurs over a five-year
period. The Company made contributions of $11,773 and $14,105 during fiscal
2004 and 2003, respectively.
F-13
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
9. STOCK OPTIONS, WARRANTS AND COMMON STOCK ISSUANCES
Stock Options
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 7,500,000
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, in general, are equal to the market price at date of
grant. Shares under grant generally become exercisable over three years and
expire after ten years.
Changes for the two years ending June 30, 2004, with respect to options
outstanding, is detailed in the following table:
For the Year Ended For the Year Ended
June 30, 2004 June 30, 2003
---------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- --------- --------- ---------
Outstanding at beginning of period 4,026,378 $ 0.53 4,117,393 $ 0.59
Issued 1,593,149 0.37 412,703 0.23
Exercised (509,000) 0.17 (33,000) 0.13
Expired (511,925) 1.00 (470,718) 0.89
--------- --------- --------- ---------
Outstanding at end of period 4,598,602 $ 0.46 4,026,378 $ 0.53
========= ========= ========= =========
Exercisable at end of period 3,133,602 $ 0.51 3,232,552 $ 0.59
========= ========= ========= =========
Weighted-average fair value of options
granted during the period $ 0.37 $ 0.16
Information about stock options outstanding at June 30, 2004 is summarized as
follows:
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Of Shares Life Price Of Shares Price
----------- --------- --------- --------- --------- ---------
$0.125-0.21 832,977 5.6 Years $ 0.15 782,977 $ 0.14
$ 0.27-0.39 1,838,799 7.0 Years 0.32 1,148,798 0.33
$ 0.40-0.49 1,047,636 8.3 Years 0.44 322,636 0.45
$0.531-1.00 529,136 4.0 Years 0.77 529,136 0.77
$ 1.38-1.96 316,396 3.0 Years 1.48 316,396 1.48
$ 2.00-2.37 33,659 0.9 Years 2.16 33,659 2.16
--------- --------- --------- --------- ---------
4,598,602 6.4 Years $ 0.46 3,133,602 $ 0.51
========= =========
F-14
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
Warrants
In connection with short-term debt financings, the Company issued warrants to
purchase 625,000 shares of common stock in fiscal 2004 and warrants to purchase
6,500,000 shares of common stock in fiscal 2003. The warrants provide for the
purchase of common stock at $0.40 and $0.20 per share, respectively, are
exercisable at date of issuance and expire five years from date of issuance.
The Company valued the warrants using the Black-Scholes model, which resulted
in a cumulative total fair value of $1,146,807 for both fiscal years 2004 and
2003. The Company amortized $849,302 and $297,505 of this amount as interest
expense in fiscal 2004 and fiscal 2003, respectively.
Additional information with respect to warrants outstanding at June 30, 2004
and changes for the two years then ended are as follows:
For the Year Ended For the Year Ended
June 30, 2004 June 30, 2003
------------------------ ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ---------- ---------- ----------
Outstanding at beginning of period 17,637,845 $ 0.85 11,162,845 $ 1.22
Issued 625,000 0.40 6,500,000 0.20
Exercised (9,250,000) 0.20 -- --
Expired (1,712,215) 0.61 (25,000) 1.75
---------- ---------- ---------- ----------
Outstanding at end of period 7,300,630 $ 0.85 17,637,845 $ 0.85
========== ========== ========== ==========
Exercisable at end of period 7,300,630 $ 0.85 17,637,845 $ 0.85
========== ========== ========== ==========
Common Stock Issuances
The Company issued common stock in the following non-cash transactions:
For the Year Ended For the Year Ended
June 30, 2004 June 30, 2003
----------------------- -----------------------
Number Number
of shares Fair value of shares Fair value
--------- ---------- --------- ----------
Payment of interest 612,149 $ 169,065 378,512 $ 116,898
Employee and director bonuses 140,118 61,398 288,406 48,238
Consultants 8,545 3,960
--------- ---------- --------- ----------
-- --
760,812 234,423 666,918 165,136
Payment of dividends on Series D
Preferred Stock 629,162 101,700 346,603 76,252
--------- ---------- --------- ----------
1,389,974 $ 336,123 1,013,521 $ 241,388
========= ========== ========= ==========
The shares issued in these transactions are subject to restrictions on sale.
F-15
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
10. CONVERTIBLE PREFERRED STOCK
At June 30, 2004 and 2003, convertible preferred stock, $0.01 par value per
share, consisted of the following:
For the Year Ended June 30, 2004 For the Year Ended June 30, 2003
----------------------------------------- -----------------------------------------
Shares Liquidation Shares Liquidation
Outstanding Par Value Value Outstanding Par Value Value
----------- ----------- ----------- ----------- ----------- -----------
Series A $20 9,500 $ 95 $ 190,000 9,500 $ 95 $ 190,000
Series D $20 91,250 913 1,825,000 91,250 913 1,825,000
Series F $25 -- -- -- 60,595 605 1,514,875
----------- ----------- ----------- ----------- ----------- -----------
100,750 $ 1,008 $ 2,015,000 161,345 $ 1,613 $ 3,529,875
=========== =========== =========== =========== =========== ===========
Convertible Preferred Stock Subject to redemption
Series G $25 -- $ -- $ -- 299,802 $ 2,998 $ 7,495,052
=========== =========== =========== =========== =========== ===========
Series A $20 Convertible Preferred Stock. At June 30, 2004, 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, 2004 the Company had
91,250 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.
Since June 30, 2001, the holders of the Series D Preferred have been offered
the option to receive the quarterly dividend in the common stock of the
Company. The holders who elected this option have received the restricted stock
based on a 25% discount from the market price on a 20 day average based on the
10 days before and the 10 days after the dividend due date. The holders of the
Series D Preferred 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 D 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. 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. At June 30,
2004, dividends in arrears on the Series D preferred stock totaled
approximately $246,113.
F-16
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
During August and September 2003, all of the holders of the Company's Series F
and Series G preferred stock converted all of these shares at a rate of 125
shares of common stock for each share of the preferred stock and all of the
related accrued dividends at a rate of $0.20 into the Company's $0.01 par value
common stock. These conversions are detailed in the following tables.
Convertible Preferred Stock
--------------------------------------------------------------
Preferred Stock Number of Number of
Series Preferred Shares Common Shares
------------------- ------------------ -----------------
Series F 60,595 7,574,501
Series G 299,802 37,475,250
Convertible Preferred Stock Accrued Dividends
--------------------------------------------------------------
Preferred Stock Amount of Number of
Series Accrued Dividends Common Shares
------------------- ------------------ -----------------
Series F $ 175,350 876,748
Series G 868,480 4,342,401
F-17
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
11. SEGMENT REPORTING
The Company has two business segments: B&B ARMR Corporation and Intelli-Site,
Inc. These segments are differentiated by the products they produce and the
customers they service as follows:
B&B ARMR Corporation. 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.
Intelli-Site, Inc. 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 income (loss) 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).
The following table provides financial data by segment for the fiscal years
ended June 30, 2004 and 2003.
B&B ARMR Intelli-Site,
Corporation Inc. Corporate Total
------------ ------------ ------------ ------------
2004
Sales $ 9,540,703 $ 286,758 $ -- $ 9,827,461
Loss from operations (1,479,540) (382,332) (378,464) (2,240,336)
Interest expense 284,906 -- 1,146,220 1,431,126
Total assets 7,566,077 75,477 71,257 7,712,811
Depreciation and amortization expense 144,384 19,197 2,727 166,308
Capital additions 256,417 10,209 -- 266,626
2003
Sales $ 4,859,601 $ 169,546 $ -- $ 5,029,147
Loss from operations (379,445) (695,764) (335,505) (1,410,714)
Interest expense 76,414 -- 464,910 541,324
Total assets 1,720,138 51,754 148,208 1,920,100
Depreciation and amortization expense 96,019 36,178 2,757 134,954
Capital additions 64,627 -- -- 64,627
F-18
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
12. MERGER
On September 5, 2003, the Company acquired, in a merger transaction, all of the
issued and outstanding shares of common stock of ARMR Services Corporation
("ARMR"), a manufacturing company that engineers and manufactures high security
crash rated barriers, parking control equipment and other security systems for
business and government use. The Company entered into this merger transaction
seeing it as an opportunistic acquisition that would allow it to expand its
product offering and customer base in conjunction with the Company's strategic
growth plans. In exchange for all the outstanding shares of ARMR, the Company
issued 10 million shares of the Company's $0.01 par value common stock. The
common stock issued in this transaction was valued at approximately $2.85
million. The Company also paid the sellers $500,000 in cash, which had been
obtained in September 2003 through the issuance of a $500,000 convertible
promissory note. In addition, the Company and the sellers executed an earn-out
agreement for maximum additional payments of approximately $2.2 million based
on sales over the next three years. Any additional consideration will increase
the recorded goodwill. The acquisition and merger of ARMR was accounted for
using the purchase method of accounting. As such, the assets and liabilities of
ARMR were recorded at their estimated fair value and the results of operations
have been included in the Company's consolidated results of operations from the
date of acquisition. An assessment of the other identifiable intangible assets
related to this acquisition transaction yielded no assignment of value thereto.
Therefore, the purchase price in excess of the estimated fair value of the net
assets acquired has been allocated to goodwill, which is not deductible for
federal income tax purposes. The table below summarizes the current allocation
of the purchase price based on the estimated fair values of the assets
acquired:
Estimated Values
----------------
Cash and cash equivalents $ 93,000
Accounts receivable 877,000
Inventory 348,000
Property and equipment 99,000
Other assets 19,000
Accounts payable (630,000)
Accrued liabilities (562,000)
Current and long-term debt (441,000)
Goodwill 3,547,000
----------------
Purchase price $ 3,350,000
================
The following unaudited pro forma consolidated statements of operations have
been prepared as if the acquisition discussed above had occurred at the
beginning of each period presented.
For the Years Ended June 30,
----------------------------
2004 2003
------------ ------------
Sales $ 10,513,388 $ 10,657,049
Net loss allocable to common stockholders $ (4,013,492) $ (2,490,064)
Net loss per share allocable to common
Stockholders, basic and diluted $ (0.06) $ (0.11)
Weighted average shares outstanding,
basic and diluted 66,143,288 22,310,903
F-19
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
13. SUBSEQUENT EVENTS
In exchange for an aggregate of $1,000,000 cash investment, the Company issued
a convertible promissory note to BFS US Special Opportunities Trust PLC
("BFS"), a public limited company registered in England and Wales, on August 5,
2004. The convertible promissory note is in the original principal amount of
$1,000,000 and has an annual interest rate of 10% and is payable in monthly
installments on the first day of each month. The convertible promissory note,
plus interest, is due on August 5, 2009. The convertible promissory note is
convertible at the option of BFS into the common stock of the Company at a
conversion price of $0.38 per share. The Company has the right to call the
convertible promissory note if the market price of the commons stock of the
Company is above $0.60 per share for period of 60 days. The Company's board of
directors ratified this transaction on August 20, 2004.
In addition to the above transaction, the board of directors of the Company
also ratified an Amended and Restated Pledge Agreement and an Amended and
Restated Security Agreement, both of which are between the Company and
Renaissance Capital Growth & Income Fund III, Renaissance US Growth Investment
Trust PLC, BFS US Special Opportunities Trust PLC, and Renaissance Capital
Group, Inc.
F-20
INTEGRATED SECURITY SYSTEMS, INC.
Consolidated Balance Sheets
December 31, June 30,
2004 2004
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,422,816 $ 172,688
Accounts receivable, net of allowance for doubtful
accounts of $98,964 and $109,527, respectively 2,531,081 1,904,285
Inventories 2,130,352 1,272,532
Other current assets 149,625 75,020
------------ ------------
Total current assets 6,233,874 3,424,525
Property and equipment, net 608,597 681,168
Goodwill 3,714,491 3,547,162
Other assets 415,386 59,956
------------ ------------
Total assets $ 10,972,348 $ 7,712,811
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,890,778 $ 2,029,963
Accrued liabilities 531,378 708,610
Current portion of long-term debt 4,082,632 1,845,949
------------ ------------
Total current liabilities 6,504,788 $ 4,584,522
------------ ------------
Long-term debt 5,090,690 2,956,341
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 750,000 shares
authorized; 100,750 shares issued and
outstanding (liquidation value of $2,015,000) 1,008 1,008
Common stock, $.01 par value, 150,000,000 shares
authorized; 84,906,612 and 84,298,984 shares issued, 849,066 842,990
respectively
Additional paid in capital 31,938,512 31,627,086
Accumulated deficit (33,292,966) (32,180,386)
Treasury stock, at cost - 50,000 common shares (118,750) (118,750)
------------ ------------
Total stockholders' equity (deficit) (623,130) 171,948
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 10,972,348 $ 7,712,811
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
F-21
INTEGRATED SECURITY SYSTEMS, INC.
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Sales $ 3,134,131 $ 3,367,883 $ 6,530,845 $ 5,087,780
Cost of sales 2,468,066 2,263,003 4,566,339 3,322,051
------------ ------------ ------------ ------------
Gross profit 666,065 1,104,880 1,964,506 1,765,729
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and
administrative 1,286,365 1,012,037 2,463,876 1,696,971
Research and product
development 128,445 187,557 251,748 326,513
------------ ------------ ------------ ------------
1,414,810 1,199,594 2,715,624 2,023,484
------------ ------------ ------------ ------------
Loss from operations (748,745) (94,714) (751,118) (257,755)
Interest expense (212,004) (411,587) (360,505) (664,272)
------------ ------------ ------------ ------------
Net loss (960,749) (506,301) (1,111,623) (922,027)
Preferred dividends (41,400) (41,400) (82,800) (82,800)
------------ ------------ ------------ ------------
Net loss allocable to common
stockholders $ (1,002,149) $ (547,701) $ (1,194,423) $ (1,004,827)
============ ============ ============ ============
Weighted average common shares
outstanding - basic
and diluted 84,663,078 73,595,757 84,481,031 52,127,485
============ ============ ============ ============
Net loss per share - basic and
diluted $ (0.01) $ (0.01) $ (0.01) $ (0.02)
============ ============ ============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
F-22
INTEGRATED SECURITY SYSTEMS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
December 31,
---------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $(1,111,623) $ (922,027)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 109,694 79,665
Amortization 11,266 --
Provision for bad debt 4,749 15,500
Provision for warranty reserve 160,000 30,000
Provision for inventory reserve -- 1,000
Amortization of debt discount -- 300,032
Expenses paid with stock, warrants and options 229,690 237,047
Changes in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable (490,380) (808,874)
Inventories (734,058) 115,568
Other assets (441,301) 29,329
Accounts payable (198,870) 582,590
Accrued liabilities (337,357) 39,789
----------- -----------
Net cash used in operating activities (2,799,190) (300,381)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (37,125) (111,347)
Purchase of businesses, net of cash acquired (255,528) (733,134)
----------- -----------
Net cash used in investing activities (292,653) (844,481)
----------- -----------
Cash flows from financing activities:
Employee stock option exercise -- 48,125
Payments on debt and other liabilities (156,708) (371,354)
Proceeds from notes payable and long-term debt 4,498,679 1,591,498
----------- -----------
Net cash provided by financing activities 4,341,971 1,268,269
----------- -----------
Increase in cash and cash equivalents 1,250,128 123,407
Cash and cash equivalents at beginning of period 172,688 177,078
----------- -----------
Cash and cash equivalents at end of period $ 1,422,816 $ 300,485
=========== ===========
Supplemental disclosure of noncash financing activities:
Conversion preferred stock $ -- $ 7,495,052
Issuance of company common stock in payment of
preferred stock dividends $ -- $ 1,043,830
The accompanying notes are an integral part of the
consolidated financial statements.
F-23
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended December 31, 2004 and 2003
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America for interim financial information. Accordingly, they do not
include all of the information and footnotes required for complete financial
statements. In the opinion of management, all adjustments (all of which are
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the interim period are not necessarily
indicative of the results that may be expected for the fiscal year ending June
30, 2005.
The accompanying financial statements include the accounts of Integrated
Security Systems, Inc. (the "Company") and all of its subsidiaries, with all
significant intercompany accounts and transactions eliminated. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's fiscal 2004 Annual Report on Form 10-KSB
filed on October 13, 2004 with the Securities and Exchange Commission.
Note 2 - Stock Options
The Company accounts for stock-based compensation to employees using the
intrinsic value method. Accordingly, compensation cost for stock options
granted 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.
In December 2004, the Financial Accounting Standards Board issued a revision of
FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123R"). SFAS No. 123R supercedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award, and recognize that cost over the
vesting period. SFAS No. 123R is effective for the first interim or annual
period beginning after June 15, 2005 and the Company will begin recognizing
option expense July 1, 2005.
The following table illustrates the effect on net loss and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No.
123R to stock-based employee compensation:
For the Three Months Ended For the Six Months Ended
December 31, December 31,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss, as reported $ (960,749) $ (506,301) $(1,111,623) $ (922,027)
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method (56,135) (144,638) (112,271) (335,614)
----------- ----------- ----------- -----------
Pro forma net loss $(1,016,884) $ (650,939) $(1,223,894) $(1,257,641)
=========== =========== =========== ===========
Earnings per share:
Basic and Diluted-as reported $ (0.01) $ (0.01) $ (0.01) $ (0.02)
=========== =========== =========== ===========
Basic and Diluted-pro forma $ (0.01) $ (0.01) $ (0.01) $ (0.03)
=========== =========== =========== ===========
F-24
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 used for grants in fiscal 2004 and 2003, respectively: no dividend
yield, expected lives of three and five years, respectively, with expected
volatility and risk-free interest rates as outlined in the following table:
For the Three Months Ended For the Six Months Ended
December 31, December 31,
-------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Expected volatility 107.85% 108.34% 107.85% 108.31%
Risk-free interest rate 3.33% 3.31% 3.33% 3.30%
Note 3 - Reclassifications
Certain reclassifications of prior year amounts have been made to conform to
the current period presentation.
Note 4 - Accounts Receivable
The majority of the Company's accounts receivable are due from companies in the
perimeter security and road and bridge industries. Credit is extended based on
evaluation of a customer's financial condition and credit history and,
generally, collateral is not required. Accounts receivable are due within 30
days and are stated at amounts due from customers net of an allowance for
doubtful accounts. Accounts outstanding longer than the contractual payment
terms are considered past due. The Company determines its allowance by
considering a number of factors, including the length of time trade accounts
receivable are past due, the Company's previous loss history, the customer's
current ability to pay its obligation to the Company, and the condition of the
general economy and the industry as a whole. The Company writes-off accounts
receivable when they become uncollectible, and payments subsequently received
on such receivables are credited to the allowance for doubtful accounts.
December 31,
---------------------------
2004 2003
----------- -----------
Accounts receivable:
Trade receivables $ 2,630,045 $ 2,531,372
Less: allowance for doubtful receivables (98,964) (104,417)
----------- -----------
$ 2,531,081 $ 2,426,955
=========== ===========
For the Six Months Ended
December 31,
---------------------------
2004 2003
----------- -----------
Allowance for doubtful receivables:
Beginning Balance $ 109,527 $ 64,183
Bad debt expense 4,749 15,500
Accounts written-off (15,312) (28,827)
ARMR Services Corporation merger -- 53,561
----------- -----------
Ending Balance $ 98,964 $ 104,417
=========== ===========
F-25
Note 5 - Product Warranties
The Company offers one-year, two-year and five-year warranties on products it
manufactures. The length of the warranty is dictated by competition. The
Company provides for repair or replacement of components and/or products that
contain defects of material or workmanship. When the Company uses other
manufacturers' components, the warranties of the other manufacturers are passed
to the dealers and end users.
The Company records a liability for an estimate of costs that it expects to
incur under its basic limited warranty when product revenue is recognized.
Factors affecting the Company's warranty liability include the number of units
sold and historical and anticipated rates of claims and costs per claim. The
Company periodically assesses the adequacy of its warranty liability based on
changes in these factors.
The changes in the Company's product warranty liability are as follows:
December 31,
-----------------------
2004 2003
--------- ---------
Liability, beginning of year $ 94,157 $ 135,471
Expense for new warranties issued 160,000 30,000
Warranty Claims (218,291) (55,853)
--------- ---------
Liability, end of period $ 35,866 $ 109,618
========= =========
Note 6 - Preferred Stock Dividend Arrearage
At December 31, 2004, the Company had dividends in arrears in the amount of
$328,913 related to its outstanding Series A and Series D preferred stock,
which consists of the following:
------------------------------
Shares Dividends
Outstanding In Arrears
------------------------------
Series A $20 9,500 $ --
Series D $20 91,250 328,513
------------------------------
100,750 $ 328,513
==============================
Note 7 - Net Loss Per Share
The Company computes basic loss per common share using the weighted average
number of common shares. At December 31, 2004 and 2003, there were 18,915,450
and 15,094,125 shares, respectively, of in-the-money potentially dilutive
common shares outstanding, which were not included in weighted average shares
outstanding because their effect is antidilutive due to the Company's reported
net loss.
At December 31, 2004 and 2003, the Company had approximately 110,294,424 and
100,288,021 shares, respectively, of common stock and common stock equivalents
outstanding, which comprises all of the Company's outstanding equity
instruments.
Note 8 - Financing
The Company received a $500,000 cash investment on October 27, 2004 from BFS US
Special Opportunities Trust PLC ("BFS"). This investment by BFS was included as
a part of the Company's placement of subordinated 10% convertible promissory
notes on November 30, 2004 (see Note 10 - Financing Agreement - Placement of
Subordinated 10% Convertible Promissory Notes).
F-26
Note 9 - Financing Arrangement - Asset Based Lending Facility
On November 10, 2004, the Company's wholly-owned subsidiary, B&B ARMR
Corporation ("B&B ARMR"), entered into a loan agreement with Briar Capital L.P.
("Briar") to provide a $3,000,000 discretionary demand asset based lending
facility. Under the terms of the loan agreement, working capital advances are
made available to B&B ARMR based on the value of its accounts receivable and
inventory. Although payable on demand, the loan agreement has a stated three
(3) year term. In connection with the loan agreement, B&B ARMR issued a
revolving promissory note dated November 10, 2004 to Briar in the principal
amount of $3,000,000. The note has an annual interest rate of two percent above
the prime rate, but in no event will interest exceed the maximum nonusurious
interest rate allowable under applicable law.
In connection with the loan agreement between B&B ARMR and Briar, the Company,
B&B ARMR, and Intelli-Site, Inc. ("Intelli-Site"), another wholly-owned
subsidiary of the Company, also entered into a subordination agreement, dated
November 10, 2004, with Briar, Renaissance Capital Growth & Income Fund III,
Inc. ("RENN III"), Renaissance US Growth Investment Trust PLC ("RUSGIT"), and
BFS (together with RENN III and RUSGIT, collectively, the "Subordinated
Lenders"). Pursuant to the terms of the subordination agreement, the
Subordinated Lenders agreed to subordinate their indebtedness, liens and other
obligations to Briar's indebtedness, liens and other obligations.
Also in connection with the loan agreement between B&B ARMR and Briar, the
Company and Intelli-Site unconditionally guaranteed the obligations of B&B ARMR
pursuant to the terms of separately executed guaranty agreements, dated
November 10, 2004. The Company's and Intelli-Site's guaranty obligations to
Briar are secured by a first priority security interest in the Company's and
Intelli-Site's personal property pursuant to the terms of a guarantor security
agreement, dated November 10, 2004.
Note 10 - Financing Agreement - Placement of Subordinated 10% Convertible
Promissory Notes
On November 30, 2004, the Company entered into a Loan Agreement ("Loan
Agreement") with several purchasers (the "Investors") of the Company's
Subordinated 10% Convertible Promissory Notes (individually, a "Note" and
collectively the "Notes"). The Company issued $4,118,000 in Notes to the
Investors and others (as payment of fees) who effected the placement of the
Notes. Each of the Investors is an accredited investor. Pursuant to the terms
of the Loan Agreement: (i) the Company was authorized to sell to the Investors
an aggregate principal amount of up to $6,000,000 in Notes and (ii) the Notes
could have been sold by the Company to the Investors in multiple closings so
long as the final closing was consummated no later than the fifteenth day
following the initial closing.
Each Note sold by the Company to each Investor: (i) is subordinated to certain
other indebtedness of the Company, (ii) is due and payable on November 30,
2009, (iii) provides interest to the holder thereof at a rate of 10% per annum
and (iv) is convertible into the Company's Common Stock, par value $0.01 per
share, at the conversion rate of $0.38 per share of Common Stock. Each share of
Common Stock that the Investor receives as a result of the conversion of the
Notes shall be registered with the Securities and Exchange Commission.
As a part of this transaction, BFS exchanged a promissory note in the amount of
$1,000,000, originally issued on August 5, 2004, as a part of the placement of
the Notes. In addition, BFS included an investment made in the Company on
October 27, 2004 (see Note 8 - Financing) as a part of this placement.
F-27
Also included with this placement of the Notes, C. A. Rundell, Jr., Chairman
and Chief Executive Officer of the Company, exchanged a $150,000 promissory
note with an annual interest rate of 9%, originally issued on July 28, 2004 to
B&B ARMR for a $150,000 Note.
The Company paid fees in this transaction to Roth Capital Partners, LLC
("Roth") in the form of a Note in the amount of $168,000 with the same general
terms and conditions as the other participants in the transaction discussed
above. As further consideration, the Company also issued a stock purchase
warrant dated November 30, 2004 with a five year life and an exercise price of
$0.38 per share to Roth for the purchase of 276,316 common shares of the
Company's $0.01 par value common stock.
Note 11 - Debt
As of December 31, 2004, the Company's current and long-term debt consisted of
the following:
Current Long-term Total
---------- ---------- ----------
Notes payable to stockholders; interest at 8% due in
monthly installments of $11,333; principal and accrued
unpaid interest due September 30, 2005................. $2,400,000 $ -- $2,400,000
Asset based lending facility with a financing company.
The loan with the asset based lending facility is a
demand loan, but has a three-year term expiring
November 10, 2007; interest at 2% above the prime rate;
secured by accounts receivable and inventory of B&B
ARMR Corporation....................................... 1,201,330 -- 1,201,330
Convertible note payable to stockholder; interest at 7%
due in monthly installments of $2,917; principal and
accrued unpaid interest due September 5, 2008;
convertible at the option of the shareholder at $0.40
per share; Company may call the note at $0.60 per share
(based on certain restrictions)........................ -- 500,000 500,000
Note payable to bank and secured by a letter of credit
in the amount of $500,000 from Chief Executive Officer;
interest at the prime rate of Bank One, N.A. (4.25% as
of June 30, 2004); principal and accrued unpaid
interest due January 26, 2005........................ 330,000 -- 330,000
Term note payable to a bank; due in monthly principal
and interest installments of $10,500; interest at 10.5%
and 10% at June 30, 2004 and 2003, respectively;
secured by first mortgage on real estate and equipment;
maturity date of February 26, 2006................... 76,091 427,852 503,943
Convertible notes payable; interest at 10% due in
semi-annual installments of $205,900; principal and
accrued unpaid interest due November 30, 2009;
convertible at the option of the shareholder at $0.38
per share; Company may call the note at $0.60 per share
(based on certain restrictions)........................ -- 4,118,000 4,118,000
Other.................................................. 75,211 44,838 120,049
---------- ---------- ----------
$4,082,632 $5,090,690 $9,173,322
========== ========== ==========
F-28
Note 12 - Acquisition
On December 15, 2004, the Company acquired all of the issued and outstanding
shares of Common Stock of DoorTek Corporation ("DoorTek"), a manufacturer of
access control systems and other physical security system products. In exchange
for all of the outstanding shares of DoorTek, the Company issued 228,572 shares
of its $0.01 par value Common Stock, which has been preliminarily valued at
approximately $87,000. The Company also paid $120,000 in cash to DoorTek's
former stockholders. In addition, the Company and the sellers executed an
earn-out agreement for maximum additional payments of approximately $100,000
based on net profits over the next two years. Any additional consideration will
increase the recorded goodwill. The Company entered into this acquisition
seeing it as an opportunity to significantly enhance its services, allow it to
expand its product offering and customer base in conjunction with the Company's
strategic growth plans. The acquisition of DoorTek was accounted for using the
purchase method of accounting. As such, the assets and liabilities of DoorTek
were recorded at their estimated fair value and the results of operations have
been included in the Company's consolidated results of operations from the date
of acquisition. To date, the purchase price paid in excess of the estimated
fair value of the net assets acquired has been allocated to goodwill, which is
not deductible for federal income tax purposes. A preliminary assessment of the
other identifiable intangible assets related to this acquisition transaction
yielded no assignment of value thereto. The Company is in the process of
finalizing the allocation of the purchase price to the assets acquired. Any
adjustment resulting form this allocation will reduce the amount of goodwill
and any required amortization will be recorded. It is expected this allocation
will be competed by the end of fiscal 2005. The table below summarizes the
current allocation of the purchase price based on the estimated fair values of
the assets acquired and liabilities assumed:
Estimated
Values
---------
Cash and cash equivalents $ 29,000
Accounts receivable 141,000
Inventories 124,000
Accounts payable (60,000)
Accrued liabilities (1,000)
Long-term debt (29,000)
Goodwill 22,000
---------
Purchase price $ 226,000
=========
The following unaudited pro forma consolidated statement of operations
information has been prepared as if the acquisition discussed above had
occurred at the beginning of each period presented.
F-29
For the Three Months Ended For the Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Sales $ 3,281,491 $ 3,547,083 $ 6,955,808 $ 5,400,948
Net loss allocable to
common stockholders $ (993,591) $ (565,246) $ (1,164,861) $ (1,029,348)
Net loss per share allocable
To common stockholders,
basic and diluted $ (0.01) $ (0.01) $ (0.01) $ (0.02)
Weighted average shares
outstanding,
basic and diluted 84,849,414 73,824,329 84,574,199 52,356,057
Note 13 - Business Segments
Information for the Company's reportable segments for the three and six months
ended December 31, 2004 and 2003 is as follows:
For the Three Months Ended For the Six Months Ended
December 31, December 31,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Sales
B&B ARMR Corporation $ 2,942,566 $ 3,293,548 $ 6,123,051 $ 4,921,534
Intelli-Site, Inc. 160,111 74,335 376,340 166,246
DoorTek Corporation (1) 31,454 -- 31,454 --
----------- ----------- ----------- -----------
$ 3,134,131 $ 3,367,883 $ 6,530,845 $ 5,087,780
=========== =========== =========== ===========
Income (loss) from operations
B&B ARMR Corporation $ (590,214) $ 74,113 $ (598,244) $ 84,747
Intelli-Site, Inc. (46,644) (89,325) (35,467) (184,027)
DoorTek Corporation (1) 1,010 -- 1,010 --
Corporate (112,897) (79,502) (118,417) (158,475)
----------- ----------- ----------- -----------
$ (748,745) $ (94,714) $ (751,118) $ (257,755)
=========== =========== =========== ===========
(1) Includes only data since acquisition date.
F-30
85,307,479 Shares
Common Stock
INTEGRATED SECURITY SYSTEMS, INC.
-----------------------
Prospectus
-----------------------
April 11, 2005
PART II
Item 24. Indemnification of Directors and Officers
Our certificate of incorporation and by-laws provide that we will
indemnify our directors and officers to the fullest extent permitted by Delaware
law and that no director shall be liable for monetary damages to us or our
stockholders for any breach of fiduciary duty, except for liability:
o for any breach of the director's duty of loyalty to us or our
stockholders,
o for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law,
o under Section 174 of the Delaware General Corporation Law, or
o for any transaction from which the director derived an improper
personal benefit.
Our authority to indemnify our directors and officers is governed by
the provisions of Section 145 of the Delaware General Corporation Law, as
follows:
(a) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or
in the right of the corporation) by reason of the fact that the person
is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by the person in connection with such
action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe the person's
conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that the person's
conduct was unlawful.
(b) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact
that the person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by the
person in connection with the defense or settlement of such action or
suit if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of
the corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to
the extent that the Court of Chancery or the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for
such expenses which the Court of Chancery or such other court shall
deem proper.
II-1
(c) To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense
of any action, suit or proceeding referred to in subsections (a) and
(b) of this section, or in defense of any claim, issue or matter
therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in
connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or
agent is proper in the circumstances because the person has met the
applicable standard of conduct set forth in subsections (a) and (b) of
this section. Such determination shall be made, with respect to a
person who is a director or officer at the time of such determination,
(1) by a majority vote of the directors who are not parties to such
action, suit or proceeding, even though less than a quorum, or (2) by a
committee of such directors designated by majority vote of such
directors, even though less than a quorum, or (3) if there are no such
directors, or if such directors so direct, by independent legal counsel
in a written opinion, or (4) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the corporation
in advance of the final disposition of such action, suit or proceeding
upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that
such person is not entitled to be indemnified by the corporation as
authorized in this section. Such expenses (including attorneys' fees)
incurred by former directors and officers or other employees and agents
may be so paid upon such terms and conditions, if any, as the
corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in such person's official capacity and as
to action in another capacity while holding such office.
(g) A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against such person and incurred by such
person in any such capacity, or arising out of such person's status as
such, whether or not the corporation would have the power to indemnify
such person against such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors,
officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation,
or is or was serving at the request of such constituent corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in
the same position under this section with respect to the resulting or
surviving corporation as such person would have with respect to such
constituent corporation if its separate existence had continued.
II-2
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to any
employee benefit plan; and references to "serving at the request of the
corporation" shall include any service as a director, officer, employee
or agent of the corporation which imposes duties on, or involves
services by, such director, officer, employee or agent with respect to
an employee benefit plan, its participants or beneficiaries; and a
person who acted in good faith and in a manner such person reasonably
believed to be in the interest of the participants and beneficiaries of
an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in
this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of
the heirs, executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction
to hear and determine all actions for advancement of expenses or
indemnification brought under this section or under any bylaw,
agreement, vote of the stockholders or disinterested directors, or
otherwise. The Court of Chancery may summarily determine a
corporation's obligation to advance expenses (including attorneys'
fees).
II-3
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses payable by the Company in the connection with
the distribution of the securities being registered are as follows:
SEC Registration and Filing Fees................................. $ 3,888
Federal Taxes.................................................... $ 0
State Taxes and Registration Fees................................ $ 0
Legal Fees and Expenses.......................................... $100,000
Accounting Fees and Expenses..................................... $ 20,000
Financial Printing............................................... $ 500
Trustee and Transfer Agent Fees.................................. $ 500
Miscellaneous.................................................... $ 500
--------
TOTAL.................................................. $125,388
All of these expenses, except for the SEC registration and filing fees
and the federal and state taxes, represent estimates only. We will pay all of
the expenses of the offering.
II-4
Item 26. Recent Sales of Unregistered Securities
During fiscal years 2002, 2003, 2004 and the first part of fiscal 2005,
we issued unregistered convertible promissory notes, stock purchase warrants,
preferred stock and common stock in connection with the transactions described
below. The issuances of the promissory notes, stock purchase warrants, preferred
stock and common stock were exempt from the registration requirements of the
Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as
transactions not involving a public offering, and an appropriate restrictive
legend was affixed to the securities.
Issuances of Convertible Promissory Notes and Promissory Notes in Fiscal 2005
In exchange for an aggregate of $150,000 cash, on July 28, 2004, we
issued a promissory note to C. A. Rundell, Jr. The original promissory note was
in the principal amount of $150,000, had an annual interest rate of 9% which was
due at maturity and was secured by a specific invoice of B&B ARMR Corporation
issued to Horne Engineering. The promissory note, plus accrued interest, was due
on October 28, 2004. In November of 2004, this note was exchanged for a $150,000
subordinated 10% convertible promissory note as a part of our placement of
$4,118,000 of subordinated 10% subordinated convertible promissory notes.
In exchange for a $1,000,000 cash investment, on August 5, 2004, we
issued a convertible promissory note to BFS. The original convertible promissory
note was in the principal amount of $1,000,000 and had an annual interest rate
of 10% and was payable in monthly installments on the first day of each month.
The original convertible promissory note, plus interest, was due on August 5,
2009. The convertible promissory note was convertible at the option of BFS into
our common stock at a conversion price of $0.38 per share. We had the right to
call the convertible promissory note if the market price of our common stock
rose above $0.60 per share for a period of 60 days. This convertible promissory
note was subsequently refinanced as a part of our placement of placement of
$4,118,000 of subordinated 10% subordinated convertible promissory notes in
November 2004.
On November 30, 2004, we entered into a loan agreement with several
investors of the company's subordinated 10% convertible promissory notes. Each
of the investors purchasing these notes was an accredited investor. Pursuant to
the terms of the loan agreement: (1) the company was authorized to sell to the
investors an aggregate principal amount of up to $6,000,000 in notes and (2) the
notes may be sold by the company to the investors in multiple closing so long as
the final closing is consummated no later than the fifteenth day following the
initial closing. As of the close of the sale, we sold an aggregate principal
amount of $4,118,000 of the notes. Each note sold by the company to each
investor:
o is subordinated to certain other indebtedness of the company;
o is due and payable on November 30, 2009;
o provides interest to the holder thereof at a rate of 10% per
annum; and
o is convertible into the company's common stock, par value $0.01
per share, at the conversion rate of $0.38 per share of common
stock.
Asset Based Credit Facility
On November 10, 2004, B&B ARMR Corporation entered into a loan
agreement with Briar Capital, L.P. for a $3,000,000 discretionary demand asset
based lending credit facility. Under the terms of the loan agreement, working
capital advances are made available to the B&B ARMR Corporation based on the
value of its accounts receivable and inventory. Although payable on demand, the
loan agreement has a stated 3-year term. In connection with the loan agreement,
the B&B ARMR Corporation issued a revolving promissory note, dated November 10,
2004 to Briar Capital, L.P. in the principal amount of $3,000,000. The note has
an annual interest rate of two percent above the prime rate but in no event will
interest exceed the maximum nonusurious interest rate allowable under applicable
law.
II-5
Issuances of Convertible Promissory Notes and Promissory Notes in Fiscal 2004
In exchange for a $500,000 cash investment, on September 5, 2003, we
issued a convertible promissory note to BFS. The convertible promissory note is
in the original principal amount of $500,000, has an annual interest rate of 7%,
and is payable in monthly installments on the first day of each month. The
convertible promissory note, plus interest, is due on September 5, 2008. The
convertible promissory note is convertible at the option of BFS into the common
stock of the company at a conversion price of $0.40 per share. We have the right
to call the convertible promissory note if the market price of our common stock
rises above $0.60 per share for a period of 60 days.
In exchange for a $100,000 cash investment, on September 26, 2003, we
issued a promissory note to C. A. Rundell, Jr., Chairman and Chief Executive
Officer. The promissory note is in the original principal amount of $100,000 and
has an annual interest rate of 7%. The promissory note, plus accrued interest,
was due on April 1, 2004. The due date of this note was extended until October
1, 2005. Interest is payable in monthly installments on the first day of each
month. The note is not convertible into capital stock of the company. As a part
of this financing, on September 26, 2003, we issued a stock purchase warrant to
C. A. Rundell, Jr., Chairman and Chief Executive Officer. The stock purchase
warrant entitles Mr. Rundell to purchase from the company 125,000 fully paid and
non-assessable shares of our common stock for $0.40 per share.
In exchange for a $400,000 cash investment, on October 1, 2003, we
issued a promissory note to each of Renaissance Capital Growth & Income Fund
III, Inc. and Renaissance US Growth Investment Trust PLC. Each of the two
promissory notes is in the original principal amount of $200,000 and has an
annual interest rate of 7%. The promissory notes, plus accrued interest, were
due on April 1, 2004. The due date of these notes were extended until October 1,
2005. Interest is payable in monthly installments on the first day of each
month. The notes are not convertible into our capital stock. As a part of this
financing, on October 1, 2003, we issued a stock purchase warrant to each of
Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth
Investment Trust PLC. Each of the two stock purchase warrants entitles the
Renaissance entities to purchase from the company 250,000 fully paid and
non-assessable shares of our common stock for $0.40 per share.
ARMR Services Corporation Acquisition
On September 5, 2003, we acquired all of the issued and outstanding
shares of common stock of ARMR Services Corporation. As a part of the
consideration paid by the company, we issued 10,000,000 shares of this $0.01 par
value common stock. The issuance of the 10,000,000 shares of the company's
common stock made in connection with the acquisition of ARMR was exempt from the
registration requirements of the Securities Act of 1933, as amended, by virtue
of Section 4(2) thereof, as a transaction not involving a public offering, and
an appropriate restrictive legend was affixed to the securities.
Issuances of Promissory Notes in Fiscal 2003
The following table summarizes the promissory notes that we issued
during fiscal year ended 2003. These notes are not convertible and accrue
interest at a rate of 8% per year. The form of each of these non-convertible
promissory notes is filed with the SEC as an exhibit to our Form 10-KSB for the
year ended June 30, 2003. As a part of each of the transactions detailed in the
table below, we issued stock purchase warrants. Each of the stock purchase
warrants entitles the holder to purchase from the us, at any time, and in whole
or in part, shares of our common stock, as indicated in the table below, for
$0.20 per share. The number of shares of common stock purchasable upon exercise
of a warrant is subject to adjustment in the event of any dividends,
distributions, reclassifications, or capital reorganizations. The holder of the
warrant is also entitled to certain registration rights.
II-6
-------------------------------------------------------------------------------------------------------------------
| | | | Number of
| Date of | Amount of | Maturity | Stock
Entity | Promissory | Promissory | Date (1) | Purchase
| Note | Note | | Warrants
------------------------------------------------|-------------------|-------------|-------------------|------------
Renaissance Capital Growth & Income Fund, III |September 5, 2002 | $ 75,000 |September 5, 2003 | 375,000
------------------------------------------------|-------------------|-------------|-------------------|------------
Renaissance US Growth Investment Trust PLC |September 5, 2002 | 75,000 |September 5, 2003 | 375,000
------------------------------------------------|-------------------|-------------|-------------------|------------
BFS US Special Opportunities Trust PLC |March 11, 2003 | 250,000 |March 11, 2004 | 1,250,000
------------------------------------------------|-------------------|-------------|-------------------|------------
Renaissance Capital Growth & Income Fund, III |April 23, 2003 | 100,000 |April 23, 2004 | 500,000
------------------------------------------------|-------------------|-------------|-------------------|------------
Renaissance US Growth Investment Trust PLC |April 23, 2003 | 100,000 |April 23, 2004 | 500,000
------------------------------------------------|-------------------|-------------|-------------------|------------
BFS US Special Opportunities Trust PLC |April 23, 2003 | 100,000 |April 23, 2004 | 500,000
------------------------------------------------|-------------------|-------------|-------------------|------------
Renaissance US Growth Investment Trust PLC |May 30, 2003 | 200,000 |May 30, 2004 | 1,000,000
------------------------------------------------|-------------------|-------------|-------------------|------------
BFS US Special Opportunities Trust PLC |May 30, 2003 | 200,000 |May 30, 2004 | 1,000,000
------------------------------------------------|-------------------|-------------|-------------------|------------
Renaissance Capital Growth & Income Fund, III |June 18, 2003 | 100,000 |June 18, 2004 | 500,000
-------------------------------------------------------------------------------------------------------------------
-------------------
(1) The maturity date on all these promissory notes was extended until September
30, 2004.
In addition, in exchange for an aggregate of $100,000 cash investment
received on January 13, 2003, we issued a promissory note to The Rundell
Foundation. C. A. Rundell, Jr., is a Trustee of The Rundell Foundation. The
promissory note is in the original principal amount of $100,000 and has an
annual interest rate of 9% that is due on the first day of each month. The
promissory note, plus interest, was originally due on January 13, 2004. This
maturity date was extended until September 30, 2004. The form of this
non-convertible promissory note is filed with the SEC as an exhibit to our Form
10-KSB for the year ended June 30, 2004. As a part of the cash investment, on
January 13, 2003, we issued a stock purchase warrant to The Rundell Foundation.
The stock purchase warrant entitles The Rundell Foundation to purchase from us,
at any time, and in whole or in part, 500,000 fully paid and non-assessable
shares of our common stock for $0.20 per share. The number of shares of common
stock purchasable upon exercise of a warrant is subject to adjustment in the
event of any dividends, distributions, reclassifications, or capital
reorganizations. The holder of the warrant is also entitled to certain
registration rights.
Issuances of Promissory Notes in Fiscal 2002
The following table summarizes the promissory notes that we issued to
Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth
Investment Trust PLC (known together as "Renaissance") from September 2001
through January 2002. These notes are not convertible and accrue interest at a
rate of 8% per year. The form of each of these non-convertible promissory notes
is filed with the SEC as an exhibit to our Form 10-KSB for the year ended June
30, 2002. As a part of each of the transactions detailed in the table below, we
issued stock purchase warrants to each of the Renaissance entities. Each of the
stock purchase warrants entitles each of the Renaissance entities to purchase
from us, at any time, and in whole or in part, shares of our common stock, as
indicated in the table below, for $0.20 per share. The number of shares of
common stock purchasable upon exercise of a warrant is subject to adjustment in
the event of any dividends, distributions, reclassifications, or capital
reorganizations. The holder of the warrant is also entitled to certain
registration rights.
II-7
Number of Stock
Amount of Promissory Purchase Warrants
Notes Issued to Each of the Issued to Each of the
Date Renaissance Entities ($) Maturity Date (1) Renaissance Entities
------------------ --------------------------- ----------------- ---------------------
September 28, 2001 75,000 January 26, 2002 375,000
October 12, 2001 25,000 February 9, 2002 125,000
October 29, 2001 25,000 February 23, 2002 125,000
November 9, 2001 25,000 March 9, 2002 125,000
November 16, 2001 25,000 March 16, 2002 125,000
December 29, 2001 25,000 April 26, 2002 125,000
January 14, 2002 50,000 May 13, 2002 250,000
------------------
(1) The maturity date was extended until September 5, 2003.
The following table summarizes the promissory notes that we issued to
C. A. Rundell, Jr., in November 2001. These notes are not convertible and accrue
interest at a rate of 8% per year. The form of each of these non-convertible
promissory notes is filed with the SEC as an exhibit to our Form 10-KSB for the
year ended June 30, 2002. As a part of each of the transactions detailed in the
table below, we issued stock purchase warrants to Mr. Rundell. Each of the stock
purchase warrants entitles Mr. Rundell to purchase from us, at any time, and in
whole or in part, shares of our common stock, as indicated in the table below,
for $0.20 per share. The number of shares of common stock purchasable upon
exercise of a warrant is subject to adjustment in the event of any dividends,
distributions, reclassifications, or capital reorganizations. The holder of the
warrant is also entitled to certain registration rights.
Number of Stock
Date Amount of Promissory Notes ($) Maturity Date (1) Purchase Warrants
----------------- ------------------------------ ----------------- -----------------
November 9, 2001 50,000 March 9, 2002 125,000
November 16, 1001 50,000 March 16, 2002 250,000
-----------------
(1) The maturity date was extended until September 5, 2003.
In addition, in exchange for an aggregate of $50,000 cash investment
received on February 27, 2002, we issued a promissory note to The Rundell Family
Partnership. C. A. Rundell, Jr., is the Managing Partner of The Rundell Family
Partnership. The promissory note is in the original principal amount of $50,000
and has an annual interest rate of 8% that is due on the first day of each
month. The promissory note, plus interest, was due on June 26, 2002 or upon the
sale of the VT 6802 railroad barrier technology, whichever occurred first. This
note, plus all accrued interest, was paid in full on March 21, 2002, the
approximate date of the sale of the Company's VT 6802 railroad barrier
technology. The form of each of these non-convertible promissory notes is filed
with the SEC as an exhibit to our Form 10-KSB for the year ended June 30, 2002.
As a part of the cash investment, on February 27, 2002, we issued a stock
purchase warrant to The Rundell Family Partnership. The stock purchase warrant
entitles The Rundell Family Partnership to purchase from us, at any time, and in
whole or in part, 250,000 fully paid and non-assessable shares of common stock
for $0.20 per share. The number of shares of common stock purchasable upon
exercise of a warrant is subject to adjustment in the event of any dividends,
distributions, reclassifications, or capital reorganizations. The holder of the
warrant is also entitled to certain registration rights.
II-8
Issuances of Preferred Stock in Fiscal 2002
On July 27, 2001, we received $100,000 in cash from each of the
Renaissance entities in exchange for 3,000 shares of the Company's Series G
cumulative convertible preferred stock and 1,000 shares of its Series F
cumulative convertible preferred stock to each of the Renaissance entities.
These shares of Series F and Series G cumulative convertible preferred stock
have since been fully converted into shares of our common stock.
II-9
Item 27. Exhibits
2.1 Agreement and Plan of Merger, by and among the Company, ARMR
Services Corporation, ISSI Merger Sub, Inc. and the Officers
and Shareholders of ARMR Corporation, dated September 5,
2003. (14)
3.1+ Amended and Restated Certificate of Incorporation of the
Company, as amended to date.
3.2 Amended and Restated Bylaws of the Company. (1)
4.1 Specimen certificate for Common Stock of the Company. (1)
4.2 Registration Rights Agreement, dated as of February 22, 1999,
among the Company and Renaissance Capital Growth & Income
Fund III, Inc. and Renaissance US Growth Investment Trust
PLC. (6)
4.3 Registration Rights Agreement, dated as of October 20, 2000,
among the Company and Renaissance Capital Growth & Income
Fund III, Inc. and Renaissance US Growth Investment Trust
PLC. (6)
4.4 Registration Rights Agreement, dated as of September 27,
2001, among the Company and Renaissance Capital Growth &
Income Fund III, Inc. and Renaissance US Growth Investment
Trust PLC. (11)
4.5 Registration Rights Agreement, dates as of November 9, 2001,
by and between the Company and C.A. Rundell, Jr. (9)
4.6 Registration Rights Agreement, dated as of March 11, 2003,
among the Company and BFS US Special Opportunities Trust PLC,
a public limited company registered in England and Wales.
(13)
4.7+ Registration Rights Agreement, dated as of September 5, 2003,
by and among the Company and Mary Roland and Ann Rosenbloom.
4.8 Certificate of Designation, Preferences and Rights of Series
A $20 Convertible Preferred Stock. (2)
4.9 Registration Rights Agreement, dated November 30, 2004, by
and among Integrated Security Systems, Inc. and those certain
Investors set forth on the signature page to the registration
Rights Agreement. (21)
5.1+ Opinion of Haynes and Boone, LLP.
10.1* Integrated Security Systems, Inc. 1993 Stock Option Plan,
dated September 7, 1993, as amended on December 30, 1994. (1)
10.2* Form of Integrated Security Systems, Inc. 1993 Incentive
Stock Option Agreement. (1)
II-10
10.3* Form of Integrated Security Systems, Inc. 1993 Non-Qualified
Stock Option Agreement. (1)
10.4* Integrated Security Systems, Inc. 1997 Long-Term Incentive
Plan. (10)
10.5* Form of Indemnification Agreement by and between the Company
and the Company's officers and directors. (1)
10.6+ Lease Agreement, dated November 7, 2003, between TPLP Office
Park Properties and the Company for property located in
Irving, TX.
10.7 Form of Warrant Agreement for purchase of Common Stock,
executed March 29, 1996. (3)
10.8 Form of Convertible Promissory Note. (8)
10.9 Form of Non-Convertible Promissory Note. (8)
10.10 Form of Stock Purchase Warrant. (12)
10.11 Promissory Note, dated October 1, 2003, payable to Frost
National Bank FBO Renaissance Capital Growth & Income Fund
III, Inc. in the amount of $200,000. (15)
10.12 Promissory Note, dated October 1, 2003, payable to Frost
National Bank FBO Renaissance US Growth Investment Trust PLC
in the amount of $200,000. (15)
10.13 Stock Purchase Warrant, dated October 1, 2003, issued to
Frost National Bank FBO Renaissance Capital Growth & Income
Fund III, Inc. (15)
10.14 Stock Purchase Warrant, dated October 1, 2003, issued to
Frost National Bank FBO Renaissance US Growth Investment
Trust PLC. (15)
10.15 Convertible Promissory Note, dated September 5, 2003, payable
to BFS US Special Opportunities Trust PLC in the amount of
$500,000. (16)
10.16 Promissory Note, dated September 26, 2003, payable to C. A.
Rundell, Jr. in the amount of $100,000. (17)
10.17 Stock Purchase Warrant, dated September 26, 2003, issued to
C. A. Rundell, Jr. (17)
10.18 Promissory Note, dated July 28, 2004, payable to C. A.
Rundell, Jr. in the amount of $150,000. (20)
10.19 Promissory Note, dated August 5, 2004, payable to BFS US
Special Opportunities Trust PLC in the amount of $1,000,000.
(18)
10.20 Amended and Restated Pledge Agreement, dated August 5, 2004,
between the Company, Renaissance US Growth Investment Trust
PLC, Renaissance Capital Growth & Income Fund III, Inc., BFS
US Special Opportunities Trust PLC and Renaissance Capital
Group, Inc. (18)
II-11
10.21 Amended and Restated Security Agreement, dated August 5,
2004, between the Company, B&B ARMR Corporation,
Intelli-Site, Inc., Renaissance US Growth Investment Trust
PLC, Renaissance Capital Growth & Income Fund III, Inc., BFS
US Special Opportunities Trust PLC and Renaissance Capital
Group, Inc. (18)
10.22 Letter Agreement by the Company, B&B ARMR Corporation and
Intelli-Site, Inc. in favor of, and agreed to and accepted on
August 20, 2004 by, Renaissance US Growth Investment Trust
PLC, Renaissance Capital Growth & Income Fund III, Inc., BFS
US Special Opportunities Trust PLC and Renaissance Capital
Group, Inc. (18)
10.23 Loan Agreement, dated November 10, 2004, among B&B ARMR
Corporation, Integrated Security Systems, Inc., Intelli-Site,
Inc. and Briar Capital, L.P. (19)
10.24 Revolving Promissory Note, dated November 10, 2004, issued by
B&B ARMR Corporation to Briar Capital, L.P. (19)
10.25 Subordination Agreement, dated November 10, 2004, among B&B
ARMR Corporation, Integrated Security Systems, Inc.,
Intelli-Site, Inc., Briar Capital, L.P., Renaissance US
Growth Investment Trust PLC, Renaissance Capital Growth &
Income Fund III, Inc., and BFS US Special Opportunities Trust
PLC. (20)
10.26 Subordination Agreement, dated November 10, 2004, among B&B
ARMR Corporation, C. A. Rundell, Jr. and Briar Capital, L.P.
(19)
10.27 Guaranty Agreement, dated November 10, 2004, by Integrated
Security Systems, Inc. in favor of Briar Capital, L.P. (19)
10.28 Guarantor Security Agreement, dated November 10, 2004, by
Integrated Security Systems, Inc. in favor of Briar Capital,
L.P. (19)
10.29 Guaranty Agreement, dated November 10, 2004, by Intelli-Site,
Inc. in favor of Briar Capital, L.P. (19)
10.30 Guarantor Security Agreement, dated November 10, 2004, by
Intelli-Site, Inc. in favor of Briar Capital, L.P. (19)
10.31 Loan Agreement, dated November 30, 2004, by and among
Integrated Security Systems, Inc. and those certain Investors
set forth on the signature page to the Loan Agreement. (21)
10.32 Form of Subordinated 10% Convertible Promissory Note due
November 30, 2009, issued by the Company to each of the
Investors set forth on the signature page to the Loan
Agreement. (21)
16.1 Letter of Grant Thornton LLP on Change in Certifying
Accountant. (22)
21.1+ Subsidiaries of the Company.
23.1+ Consent of Grant Thornton LLP.
II-12
__________
(1) Incorporated by reference to the Company's Registration
Statement on Form SB-2 (No. 33-59870-FW).
(2) Incorporated by reference to the Company's Registration
Statement on Form SB-2 (No. 333-5023).
(3) Incorporated by reference to the Company's Form 10-QSB for
the quarter ended March 31, 1996, accession number
0000950134-96-002226, SEC file number 001-11900, film number
96567733.
(4) Incorporated by reference to the Company's Form 8-K filed on
June 14, 1999, accession number 0000950134-99-005489, SEC
file number 001-11900, film number 99646148.
(5) Incorporated by reference to the Company's Form 10-KSB for
the year ended June 30, 1999, accession number
0000950134-99-010485, SEC file number 001-11900, film number
99761099.
(6) Incorporated by reference to the Company's Form 10-KSB/A
(Amendment No. 2) for the year ended June 30, 2000.
(7) Incorporated by reference to the Company's proxy statement on
Schedule 14A filed March 16, 2001.
(8) Incorporated by reference to the Company's Form 10-KSB for
the year ended June 30, 2001.
(9) Incorporated by reference to the Company's Form 8-K filed on
November 13, 2001.
(10) Incorporated by reference to the Company's Registration
Statement on Form S-8 (No. 333-76558).
(11) Incorporated by reference to the Company's Form 8-K filed on
October 15, 2002.
(12) Incorporated by reference to the Company's Form 10-KSB for
the year ended June 30, 2002.
(13) Incorporated by reference to the Company's Form 8-K filed on
March 25, 2003.
(14) Incorporated by reference to the Company's Form 8-K filed on
September 22, 2003.
(15) Incorporated by reference to the Company's Form 8-K filed on
October 3, 2003, accession number 0001158957-03-000198.
(16) Incorporated by reference to the Company's Form 8-K filed on
October 3, 2003, accession number 0001158957-03-000194.
(17) Incorporated by reference to the Company's Form 8-K filed on
October 3, 2003, accession number 0001158957-03-000196.
(18) Incorporated by reference to the Company's Form 8-K filed on
August 31, 2004.
(19) Incorporated by reference to the Company's Form 8-K filed on
November 16, 2004.
(20) Incorporated by reference to the Company's Form 10-QSB for
the quarter ended September 30, 2004.
(21) Incorporated by reference to the Company's Form 8-K filed on
December 3, 2004.
(22) Incorporated by reference to the Company's Form 8-K filed on
January 18, 2005.
+ Filed herewith.
* Indicates management contract or compensatory plan or
arrangement.
II-13
Item 28. Undertakings
The undersigned hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the company pursuant to the foregoing provisions, or otherwise, the company has
been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the company of expenses incurred or paid
by a director, officer or controlling person of the company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-14
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the city of Irving,
Texas, on this 8th day of April, 2005.
INTEGRATED SECURITY SYSTEMS, INC.
By: /s/ C.A. Rundell, Jr.
----------------------------------
C.A. Rundell, Jr.
Director, Chairman of the Board,
and Chief Executive Officer
(Principal Executive and Financial
Officer)
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates indicated:
Date: April 8, 2005 /s/ C. A. RUNDELL, JR.
----------------------------------
C. A. Rundell, Jr.
Director, Chairman of the Board,
and Chief Executive Officer
(Principal Executive and Financial
Officer)
Date: April 8, 2005 /s/ RICHARD B. POWELL
----------------------------------
Richard B. Powell
Vice President, Chief Accounting
Officer, Secretary (Principal
Accounting Officer)
Date: April 8, 2005 /s/ PETER BEARE
----------------------------------
Peter Beare, Director
Date: April 8, 2005 /s/ WILLIAM D. BREEDLOVE
----------------------------------
William D. Breedlove
Director
Date: April 8, 2005 /s/ RUSSELL CLEVELAND
----------------------------------
Russell Cleveland
Director
Date: April 8, 2005 /s/ ROBERT M. GALECKE
----------------------------------
Robert M. Galecke
Director
Date: April 8, 2005 /s/ FRANK R. MARLOW
----------------------------------
Frank R. Marlow
Director
Date: April 8, 2005 /s/ PAUL ROLAND
----------------------------------
Paul Roland
Director
II-15
EXHIBIT INDEX
Exhibit No. Document Description
------------- -------------------------------------------------------------
2.1 Agreement and Plan of Merger, by and among the Company, ARMR
Services Corporation, ISSI Merger Sub, Inc. and the Officers
and Shareholders of ARMR Corporation, dated September 5,
2003. (14)
3.1+ Amended and Restated Certificate of Incorporation of the
Company, as amended to date.
3.2 Amended and Restated Bylaws of the Company. (1)
4.1 Specimen certificate for Common Stock of the Company. (1)
4.2 Registration Rights Agreement, dated as of February 22, 1999,
among the Company and Renaissance Capital Growth & Income
Fund III, Inc. and Renaissance US Growth Investment Trust
PLC. (6)
4.3 Registration Rights Agreement, dated as of October 20, 2000,
among the Company and Renaissance Capital Growth & Income
Fund III, Inc. and Renaissance US Growth Investment Trust
PLC. (6)
4.4 Registration Rights Agreement, dated as of September 27,
2001, among the Company and Renaissance Capital Growth &
Income Fund III, Inc. and Renaissance US Growth Investment
Trust PLC. (11)
4.5 Registration Rights Agreement, dates as of November 9, 2001,
by and between the Company and C.A. Rundell, Jr. (9)
4.6 Registration Rights Agreement, dated as of March 11, 2003,
among the Company and BFS US Special Opportunities Trust PLC,
a public limited company registered in England and Wales.
(13)
4.7+ Registration Rights Agreement, dated as of September 5, 2003,
by and among the Company and Mary Roland and Ann Rosenbloom.
4.8 Certificate of Designation, Preferences and Rights of Series
A $20 Convertible Preferred Stock. (2)
4.9 Registration Rights Agreement, dated November 30, 2004, by
and among Integrated Security Systems, Inc. and those certain
Investors set forth on the signature page to the registration
Rights Agreement. (21)
5.1+ Opinion of Haynes and Boone, LLP.
10.1* Integrated Security Systems, Inc. 1993 Stock Option Plan,
dated September 7, 1993, as amended on December 30, 1994. (1)
10.2* Form of Integrated Security Systems, Inc. 1993 Incentive
Stock Option Agreement. (1)
II-16
10.3* Form of Integrated Security Systems, Inc. 1993 Non-Qualified
Stock Option Agreement. (1)
10.4* Integrated Security Systems, Inc. 1997 Long-Term Incentive
Plan. (10)
10.5* Form of Indemnification Agreement by and between the Company
and the Company's officers and directors. (1)
10.6+ Lease Agreement, dated November 7, 2003, between TPLP Office
Park Properties and the Company for property located in
Irving, TX.
10.7 Form of Warrant Agreement for purchase of Common Stock,
executed March 29, 1996. (3)
10.8 Form of Convertible Promissory Note. (8)
10.9 Form of Non-Convertible Promissory Note. (8)
10.10 Form of Stock Purchase Warrant. (12)
10.11 Promissory Note, dated October 1, 2003, payable to Frost
National Bank FBO Renaissance Capital Growth & Income Fund
III, Inc. in the amount of $200,000. (15)
10.12 Promissory Note, dated October 1, 2003, payable to Frost
National Bank FBO Renaissance US Growth Investment Trust PLC
in the amount of $200,000. (15)
10.13 Stock Purchase Warrant, dated October 1, 2003, issued to
Frost National Bank FBO Renaissance Capital Growth & Income
Fund III, Inc. (15)
10.14 Stock Purchase Warrant, dated October 1, 2003, issued to
Frost National Bank FBO Renaissance US Growth Investment
Trust PLC. (15)
10.15 Convertible Promissory Note, dated September 5, 2003, payable
to BFS US Special Opportunities Trust PLC in the amount of
$500,000. (16)
10.16 Promissory Note, dated September 26, 2003, payable to C. A.
Rundell, Jr. in the amount of $100,000. (17)
10.17 Stock Purchase Warrant, dated September 26, 2003, issued to
C. A. Rundell, Jr. (17)
10.18 Promissory Note, dated July 28, 2004, payable to C. A.
Rundell, Jr. in the amount of $150,000. (20)
10.19 Promissory Note, dated August 5, 2004, payable to BFS US
Special Opportunities Trust PLC in the amount of $1,000,000.
(18)
10.20 Amended and Restated Pledge Agreement, dated August 5, 2004,
between the Company, Renaissance US Growth Investment Trust
PLC, Renaissance Capital Growth & Income Fund III, Inc., BFS
US Special Opportunities Trust PLC and Renaissance Capital
Group, Inc. (18)
II-17
10.21 Amended and Restated Security Agreement, dated August 5,
2004, between the Company, B&B ARMR Corporation,
Intelli-Site, Inc., Renaissance US Growth Investment Trust
PLC, Renaissance Capital Growth & Income Fund III, Inc., BFS
US Special Opportunities Trust PLC and Renaissance Capital
Group, Inc. (18)
10.22 Letter Agreement by the Company, B&B ARMR Corporation and
Intelli-Site, Inc. in favor of, and agreed to and accepted on
August 20, 2004 by, Renaissance US Growth Investment Trust
PLC, Renaissance Capital Growth & Income Fund III, Inc., BFS
US Special Opportunities Trust PLC and Renaissance Capital
Group, Inc. (18)
10.23 Loan Agreement, dated November 10, 2004, among B&B ARMR
Corporation, Integrated Security Systems, Inc., Intelli-Site,
Inc. and Briar Capital, L.P. (19)
10.24 Revolving Promissory Note, dated November 10, 2004, issued by
B&B ARMR Corporation to Briar Capital, L.P. (19)
10.25 Subordination Agreement, dated November 10, 2004, among B&B
ARMR Corporation, Integrated Security Systems, Inc.,
Intelli-Site, Inc., Briar Capital, L.P., Renaissance US
Growth Investment Trust PLC, Renaissance Capital Growth &
Income Fund III, Inc., and BFS US Special Opportunities Trust
PLC. (20)
10.26 Subordination Agreement, dated November 10, 2004, among B&B
ARMR Corporation, C. A. Rundell, Jr. and Briar Capital, L.P.
(19)
10.27 Guaranty Agreement, dated November 10, 2004, by Integrated
Security Systems, Inc. in favor of Briar Capital, L.P. (19)
10.28 Guarantor Security Agreement, dated November 10, 2004, by
Integrated Security Systems, Inc. in favor of Briar Capital,
L.P. (19)
10.29 Guaranty Agreement, dated November 10, 2004, by Intelli-Site,
Inc. in favor of Briar Capital, L.P. (19)
10.30 Guarantor Security Agreement, dated November 10, 2004, by
Intelli-Site, Inc. in favor of Briar Capital, L.P. (19)
10.31 Loan Agreement, dated November 30, 2004, by and among
Integrated Security Systems, Inc. and those certain Investors
set forth on the signature page to the Loan Agreement. (21)
10.32 Form of Subordinated 10% Convertible Promissory Note due
November 30, 2009, issued by the Company to each of the
Investors set forth on the signature page to the Loan
Agreement. (21)
16.1 Letter of Grant Thornton LLP on Change in Certifying
Accountant. (22)
21.1+ Subsidiaries of the Company.
23.1+ Consent of Grant Thornton LLP.
II-18
__________
(1) Incorporated by reference to the Company's Registration
Statement on Form SB-2 (No. 33-59870-FW).
(2) Incorporated by reference to the Company's Registration
Statement on Form SB-2 (No. 333-5023).
(3) Incorporated by reference to the Company's Form 10-QSB for
the quarter ended March 31, 1996, accession number
0000950134-96-002226, SEC file number 001-11900, film number
96567733.
(4) Incorporated by reference to the Company's Form 8-K filed on
June 14, 1999, accession number 0000950134-99-005489, SEC
file number 001-11900, film number 99646148.
(5) Incorporated by reference to the Company's Form 10-KSB for
the year ended June 30, 1999, accession number
0000950134-99-010485, SEC file number 001-11900, film number
99761099.
(6) Incorporated by reference to the Company's Form 10-KSB/A
(Amendment No. 2) for the year ended June 30, 2000.
(7) Incorporated by reference to the Company's proxy statement on
Schedule 14A filed March 16, 2001.
(8) Incorporated by reference to the Company's Form 10-KSB for
the year ended June 30, 2001.
(9) Incorporated by reference to the Company's Form 8-K filed on
November 13, 2001.
(10) Incorporated by reference to the Company's Registration
Statement on Form S-8 (No. 333-76558).
(11) Incorporated by reference to the Company's Form 8-K filed on
October 15, 2002.
(12) Incorporated by reference to the Company's Form 10-KSB for
the year ended June 30, 2002.
(13) Incorporated by reference to the Company's Form 8-K filed on
March 25, 2003.
(14) Incorporated by reference to the Company's Form 8-K filed on
September 22, 2003.
(15) Incorporated by reference to the Company's Form 8-K filed on
October 3, 2003, accession number 0001158957-03-000198.
(16) Incorporated by reference to the Company's Form 8-K filed on
October 3, 2003, accession number 0001158957-03-000194.
(17) Incorporated by reference to the Company's Form 8-K filed on
October 3, 2003, accession number 0001158957-03-000196.
(18) Incorporated by reference to the Company's Form 8-K filed on
August 31, 2004.
(19) Incorporated by reference to the Company's Form 8-K filed on
November 16, 2004.
(20) Incorporated by reference to the Company's Form 10-QSB for
the quarter ended September 30, 2004.
(21) Incorporated by reference to the Company's Form 8-K filed on
December 3, 2004.
(22) Incorporated by reference to the Company's Form 8-K filed on
January 18, 2005.
+ Filed herewith.
* Indicates management contract or compensatory plan or
arrangement.
II-19