-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LeABF+xL9TZMv54zIUtF50qmpCZiWp4WzUgdPDMtu3GjzA7qbiPzWg1hPzGRF6/C R3Vh5eGhMFc0DQ+X6Wc0IA== 0000950134-96-006217.txt : 19961118 0000950134-96-006217.hdr.sgml : 19961118 ACCESSION NUMBER: 0000950134-96-006217 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRATED SECURITY SYSTEMS INC CENTRAL INDEX KEY: 0000741114 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 752422983 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11900 FILM NUMBER: 96664444 BUSINESS ADDRESS: STREET 1: 8200 SPRINGWOOD DR STE 230 CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: 2144448280 MAIL ADDRESS: STREET 2: 8200 SPRINGWOOD DR SUITE 230 CITY: IRVING STATE: TX ZIP: 75063 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1996 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1996. OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________TO_________. Commission file number 1-11900 Integrated Security Systems, Inc. (Exact name of small business issuer as specified in its charter) DELAWARE 75-2422983 (State or other jurisdiction of incorporation or organization (I.R.S. Employer Identification No.) 8200 SPRINGWOOD, SUITE 230, IRVING, TEXAS 75063 (Address of principal executive offices) (Zip Code)
(214) 444-8280 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] As of November 8, 1996, 5,924,842 shares of Registrant's common stock were outstanding. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Index to Integrated Security Systems, Inc. Consolidated Financial Statements: Page ---- Balance Sheets 3 Statement of Operations 4 Statement of Cash Flows 5 Notes to Financial Statements 6 Page 2 of 11 3 INTEGRATED SECURITY SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1996 1995 --------------- --------------- ASSETS Current assets: Cash $ 183,767 $ 209,655 Accounts receivable, net of allowance for doubtful accounts of $59,680 and $54,558, respectively 1,922,718 1,761,701 Restricted cash 24,956 157,851 Inventories 852,946 854,888 Other current assets 80,649 15,831 Net assets from discontinued operations 33,327 76,807 -------------- -------------- Total current assets 3,098,363 3,076,733 Property and equipment, net 1,068,911 1,068,123 Intangible assets, net 291,341 136,116 Capitalized software development costs, net 640,583 787,816 Deferred income taxes 205,384 205,384 Other assets 58,687 33,333 -------------- ------------- Total assets $ 5,363,269 $ 5,307,505 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 972,729 $ 1,288,650 Accrued liabilities 283,957 1,194,515 Notes payable 8,080 970,947 Notes payable to related parties 94,036 29,437 Current portion of long-term debt 62,938 96,451 Net liabilities of discontinued operations 48,807 332,866 -------------- ------------- Total current liabilities 1,470,547 3,912,866 ============== ============= Long-term debt 844,133 213,899 Stockholders' equity: Preferred stock, $.01 par value, 750,000 shares authorized, 59,168 and 34,166, respectively, shares issued and outstanding 591 342 Common stock, $.01 par value, 18,000,000 shares authorized, 5,974,842 and 3,730,738, respectively, shares issued and 5,924,842 and 3,680,738, respectively, shares outstanding 59,748 37,307 Additional paid-in-capital 9,424,055 7,191,575 Accumulated deficit (6,317,055) (5,929,734) Treasury stock (118,750) (118,750) ------------- ------------- Total stockholders' equity 3,048,589 1,180,740 ------------- ------------- Total liabilities and stockholders' equity $ 5,363,269 $ 5,307,505 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. Page 3 of 11 4 INTEGRATED SECURITY SYSTEMS, INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- --------------------------- 1996 1995 1996 1995 ---------- ---------- ---------- ----------- Sales $2,488,299 $1,848,525 $6,713,718 $4,135,292 Cost of sales 1,233,921 1,352,386 3,851,354 2,641,290 ---------- ---------- ---------- ----------- Gross margin 1,254,378 496,139 2,862,364 1,494,002 ---------- ---------- ---------- ----------- Operating expenses: Selling, general and administrative 1,083,494 1,249,599 2,892,765 3,479,433 Research and product development 39,632 4,881 148,243 40,578 ---------- ---------- ---------- ----------- 1,123,126 1,254,480 3,041,008 3,520,011 ---------- ---------- ---------- ----------- Income (loss) from operations 131,252 (758,341) (178,644) (2,026,009) Other income (expense): Interest income 1,043 419 6,848 13,611 Interest expense (59,491) (73,515) (233,706) (270,186) Other (4,242) (76) 1,444 (548) ---------- ---------- ---------- ----------- Income (loss) from continuing operations before income tax 68,562 (831,513) (404,058) (2,283,132) Benefit (provision) for income taxes (20,378) 36,429 (6,052) 36,429 ---------- ---------- ---------- ----------- Income (loss) from continuing operations 48,184 (795,084) (410,110) (2,246,703) Discontinued operations: Loss from discontinued operations -- -- -- (470,043) Gain (loss) on disposal of discontinued operations -- 25,000 22,789 (534,562) ---------- ---------- ---------- ----------- Gain (loss) from discontinued operations -- 25,000 22,789 (1,004,605) ---------- ---------- ---------- ----------- Net income (loss) $ 48,184 $ (770,084) $ (387,321) $(3,251,308) ========== ========== =========== =========== Weighted average common and common equivalent shares outstanding 8,270,377 4,154,686 6,905,495 3,971,281 ========== ========== =========== =========== Net income (loss) per share: Continuing operations $ 0.01 $ (0.19) $ (0.05) $ (0.57) Discontinued operations 0.00 0.00 0.00 (0.25) ---------- ---------- ----------- ----------- Total $ 0.01 $ (0.19) $ (0.05) $ (0.82) ========== ========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. Page 4 of 11 5 INTEGRATED SECURITY SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------- Cash flows from operating activities: Net loss $ (387,321) $ (3,251,308) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation 140,351 122,403 Amortization 301,793 313,158 Bad debt expense 12,976 40,865 Non-cash expense (income) (108,051) 2,379 Provision for inventory reserve 27,000 101,864 Restricted cash 132,895 225,868 Net change in assets and liabilities from discontinued operations (190,250) 955,162 Changes in operating assets and liabilities: Accounts receivable (222,120) 1,614,409 Inventories (3,225) (126,102) Other assets (60,311) 200,579 Accounts payable (235,921) 415,903 Accrued liabilities (875,406) 510,307 -------------- ------------- Net cash provided (used) by operating activities (1,467,590) 1,125,487 -------------- ------------- Cash flows from investing activities: Purchase of property and equipment (146,427) (23,626) Sale of property and equipment 5,000 -- Intangible assets (71,578) -- Capitalized software costs -- (198,660) -------------- ------------- Net cash used by investing activities (213,005) (222,286) -------------- ------------- Cash flows from financing activities: Issuance of preferred stock, net 687,406 -- Issuance of common stock, net 895,489 138,938 Payments on line of credit -- (847,317) Payments on notes payable and long-term debt (1,266,110) (107,874) Proceeds from notes payable and long-term debt 1,352,785 162,400 Other (14,863) (1,946) -------------- ------------- Net cash provided (used) by financing activities 1,654,707 (655,799) -------------- ------------- Increase (decrease) in cash (25,888) 247,402 Cash at beginning of period 209,655 10,523 -------------- ------------- Cash at end of period $ 183,767 $ 257,925 ============== =============
The accompanying notes are an integral part of the consolidated financial statements. Page 5 of 11 6 INTEGRATED SECURITY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995 NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. The accompanying financial statements include the accounts of Integrated Security Systems, Inc. ("ISSI") and all of its subsidiaries (collectively, the "Company"), 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 1995 Annual Report on Form 10- KSB filed March 14, 1996. NOTE 2 - RECLASSIFICATION Certain reclassification of prior year amounts have been made to conform to the current period presentation. NOTE 3 - EARNINGS PER SHARE The Company has begun to utilize the treasury stock method for calculating weighted average shares outstanding. This change impacted the weighted average number of shares, but did not impact net income (loss) per common share. NOTE 4 - RECENT DEVELOPMENTS The Company has entered into an arrangement with an unaffiliated third party whereby the third party would provide funding for sales, engineering and order fulfillment expenses of the Company's IST subsidiary, which markets Intelli-Site(R), a security systems integration software product. In exchange, the third party would receive, as compensation from IST, a majority of the revenue arising from Intelli-Site sales that occur after the agreement commences and continues until a specified investor return has been accumulated. The Company retains full ownership of the product during the agreement period and retains responsibility for managing IST's business activities including customer relationships. As of October 31, 1996, $250,000 has been received by the Company and recorded as income in the quarter ended September 1996 for the initial sale of the sales leads and prospects. The Company has entered into an agreement to acquire a company which develops, manufactures and markets products primarily to the banking and hospital industries. The consummation of such acquisition is contingent upon obtaining funding. If the acquisition occurs, it would require the issuance of additional debt and securities totaling approximately $6.5 million, the terms of which may cause dilution to existing shareholders. The Company is unable to determine at this time to what extent dilution may occur. Page 6 of 11 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL Integrated Security Systems, Inc. ("ISSI") designs, develops, manufactures, sells and services commercial and industrial security and traffic control products including warning gates, crash barriers, lane changers, navigational and airport lighting, and electronically-controlled security gates. The Company also develops and markets "intelligent" or programmable security systems that integrate multiple security devices and subsystems for governmental, commercial and industrial facilities. Applications for these systems include perimeter security for airports, access control for commercial office buildings, and video surveillance for warehouses. The Company was incorporated on December 19, 1991. Effective as of January 1, 1992, the Company acquired B&B Electromatic, Inc. ("B&B") in a transaction which was accounted for similar to a pooling of interests. B&B designs, manufactures and distributes commercial and industrial security products, and traffic control barriers and lighting for the road and bridge industry. B&B has been in operation since 1925. On March 16, 1993, the Company organized Innovative Security Technologies, Inc. ("IST"), which is a retail seller of security products and microprocessor-based systems to large customers. IST sells and markets the PC-based security network, Intelli-Site, that integrates multiple security functions into a centralized management system for single and/or multiple site locations. On September 18, 1995, the Company purchased substantially all of the assets and liabilities of Tri-Coastal Systems, Inc. ("TCSI"). TCSI sells and installs security and safety systems to end users. During the second quarter of 1995, the Company discontinued the operations of Automatic Access Controls, Inc. ("AAC"), a distributor of commercial and industrial security products, and merged certain functions of AAC with two other existing subsidiaries (B&B and IST). This merger was implemented during the second and third quarters of 1995. The results of operations for AAC are reflected on the consolidated financial statements as discontinued operations for all periods reported. RESULTS OF OPERATIONS Quarter Ended September 30, 1996 Compared to Quarter Ended September 30, 1995 Sales. The Company's sales increased by 34.61% from $1,848,525 in the third quarter of 1995 to $2,488,299 in the third quarter of 1996. This increase was primarily attributable to the inclusion of TCSI, acquired in September 1995, for the entire quarter ended September 30, 1996, and the sale of the Company's Intelli-Site software sales leads and prospects for $250,000 to a limited partnership chartered to fund the acceleration of marketing and sales efforts in exchange for a shared interest in future revenue. Cost of Sales and Gross Profit. Gross profit as a percent of sales increased to 50.41% from 26.84% for the third quarters of 1996 and 1995, respectively. This increase was primarily due to a more favorable product mix from the prior year. During the third quarter of 1996, the Company experienced higher sales of certain road and bridge products that have relatively high gross margins. Also, inventory acquired in prior years totaling $125,000 was written off during the third quarter of 1995, with no similar write off during the 1996 period. Page 7 of 11 8 Selling, General and Administrative. Selling, general and administrative expenses decreased during the third quarter of 1996 compared to the same period in 1995 by approximately $166,000. During the third quarter of 1995, the Company wrote off $511,000 of costs and fees related to an acquisition and related funding that was never consummated. The absence of such expenses in 1996 was offset by an increase in expenses at B&B related to the increase in sales and the inclusion of expenses at TCSI, acquired in September 1995, for the entire quarter ended September 30, 1996. Research and Development. Research and development expenses increased from $4,881 for the third quarter of 1995 to $39,632 for the comparable 1996 period. This increase is primarily attributable to the inclusion of expenses related to the development of Intelli-Site. Prior to 1996, the Company capitalized software development costs related to Intelli-Site. Interest Expense. The decrease of $14,024 in interest expense during the third quarter of 1996, compared to the same period in 1995, is attributable to the repayment of certain short-term notes. Income Taxes. The Company recorded income tax expense of $20,378 during the third quarter of 1996 for state income taxes. Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30, 1995. Sales. The Company's sales for the first nine months of 1996 increased 62.35% from $4,135,292 in 1995 to $6,713,718 in 1996. This increase was primarily attributable to increased sales at B&B and the inclusion of TCSI, acquired in September 1995, for the entire nine months of 1996. Also contributing to the increase was the sale of the Company's Intelli-Site software sales leads and prospects for $250,000 to a limited partnership chartered to fund the acceleration of marketing and sales efforts in exchange for a shared interest in future revenue. Cost of Sales and Gross Profit. Gross profit as a percent of sales increased to 42.63% from 36.13% for the first nine months of 1996 and 1995, respectively. This increase was primarily due to a more favorable product mix from the prior year. Also, inventory acquired in prior years totaling $125,000 was written off during 1995, with no equivalent write off during 1996. Selling, General and Administrative. Selling, general and administrative expenses decreased during the first nine months of 1996 compared to the same period in 1995 by approximately $587,000. During the first nine months of 1995, the Company incurred one-time expenses of approximately $1 million for severance obligations to a former officer and the write-off of acquisition fees. These decreased expenses were partially offset in 1996 by an increase in expenses at B&B related to the increase in sales and the inclusion of expenses at TCSI for the entire nine months of 1996 compared to the one month of September in 1995. Research and Development. Research and development expenses increased from $40,578 for the first nine months of 1995 to $148,243 for the comparable 1996 period. This increase is due to the inclusion of expenses at IST related to the development of Intelli-Site. Prior to 1996, the Company capitalized software development costs related to Intelli-Site. Interest Income. Interest income for the first nine months of 1996 decreased to $6,848 from $13,611 in the comparable 1995 period. During the first quarter of 1995, the Company earned interest on a $350,000 certificate of deposit placed with a bank as collateral to secure a line of credit. The certificate of deposit and accumulated interest were released on April 11, 1995. Page 8 of 11 9 Interest Expense. The decrease of $36,480 in interest expense during the first nine months of 1996, compared to the same period in 1995, is primarily due to the repayment of certain short-term notes. Income Taxes. The Company recorded income tax expense of $6,052 during the first nine months of 1996 for state income taxes. Discontinued Operations. The discontinued operations reflect the operations of Automatic Access Controls, Inc. ("AAC"). AAC's operations were discontinued in the second quarter of 1995. During the first nine months of 1996, the Company has recorded a gain on disposal of discontinued operations in the amount of $22,789 related to the settlement of certain liabilities. LIQUIDITY AND CAPITAL RESOURCES The business and financial conditions that lead to the going concern emphasis paragraph in the independent accountants' report for December 31, 1995 Form 10-KSB still exist as of the date of this report, but to a lesser extent. Although the Company has reported improved results of operations and raised $2.7 million through additional equity sales or debt through September 30, 1996, and has improved its consolidated working capital position during that time, there is continuing concern regarding the Company's ability to meet all of its cash obligations as they become due. This concern arises primarily from limitations on the Company's ability to transfer cash surpluses from one subsidiary to cover cash needs of another as a result of agreements with subsidiary lenders. Therefore, the Company believes that additional funding, through sales of either equity or debt securities, will be necessary in the short term. These sales, together with a continuation of improving results of operations and the renegotiation of existing lender limitations on cash transfers between subsidiaries, would reduce these concerns. A successful completion of the acquisition of the Company described below, and related funding, would also contribute to the mitigation of these concerns. However, neither additional funding nor the acquisition is assured and therefore the ability of the Company to meet all of its obligations as they come due remains in question. The Company has entered into an arrangement with an unaffiliated third party whereby the third party would provide funding for sales, engineering and order fulfillment expenses of the Company's IST subsidiary, which markets Intelli-Site(R), a security systems integration software product. In exchange, the third party would receive, as compensation from IST, a majority of the revenue arising from Intelli-Site sales that occur after the agreement commences and continues until a specified investor return has been accumulated. The Company retains full ownership of the product during the agreement period and retains responsibility for managing IST's business activities including customer relationships. As of October 31, 1996, $250,000 has been received by the Company and recorded as income in the quarter ended September 1996 for the initial sale of the sales leads and prospects. The Company has entered into an agreement to acquire a company which develops, manufactures and markets products primarily to the banking and hospital industries. The consummation of such acquisition is contingent upon obtaining funding. If the acquisition occurs, it would require the issuance of additional debt and securities totaling approximately $6.5 million, the terms of which may cause dilution to existing shareholders. The Company is unable to determine at this time to what extent dilution may occur. Page 9 of 11 10 The Company's cash position decreased by $25,888 during the first nine months of 1996. The Company used $1,467,590 for operations during this period as compared with $1,125,487 generated from operations during the same period last year. This decrease was primarily attributable to the payment of certain 1995 accounts payable and accrued liabilities, for which extended payment terms were negotiated. These uses of cash were partially offset by increased collections of accounts receivable, either directly or through a factoring agreement. Discontinued operations used $190,250 of cash during the first nine months of 1996 by paying off liabilities compared to providing $955,162 in the same 1995 period (although incurring a net loss of $1 million during that period). During the first nine months of 1996, the Company generated $1,654,707 from financing activities. Payments of $1,266,110 were made on notes payable and long-term debt. The Company borrowed $937,785 from lending institutions and received short term advances totaling $415,000 from affiliated and unaffiliated investors. The Company also received $1,582,895 through the sale of common and preferred stock, warrants and convertible debt, net of related expenses. SEASONALITY Because the Company sells products which are used primarily in outdoor construction, which is affected by weather, the Company's sales have historically been greater during the third and fourth quarters of the year than during the first two quarters. Consequently, the Company's sales during the two quarters ending in March and June of each year are generally not expected to reach the levels of the two quarters ending in September and December of each year. The Company has historically performed 61% of its total sales during the second half of the fiscal year, and expects that this seasonal fluctuation will continue. This Management's Discussion and Analysis contains certain forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected by such forward-looking statements. Important factors that could cause actual results to differ materially from those projected in the forward-looking statements include, but are not limited to, the following: anticipated seasonal changes may not occur or operations may not improve as projected. Page 10 of 11 11 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Integrated Security Systems, Inc. --------------------------------- (Registrant) Date: November 14, 1996 /s/ JAMES W. CASEY --------------------------------- James W. Casey Director, Vice President, Chief Financial Officer, Secretary and Treasurer Page 11 of 11 12 EXHIBIT INDEX EXHIBIT NUMBERS DESCRIPTIONS - ------- ----------------------- 27 - Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 1 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 183,767 0 1,922,718 0 852,946 3,098,363 1,068,911 0 5,363,269 1,470,547 0 0 591 59,748 2,988,250 5,363,269 6,713,718 6,713,718 3,851,354 3,851,354 3,041,008 0 233,706 (404,058) (6,052) (410,110) 22,789 0 0 (387,321) (.05) (.05)
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