-----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, EE3eiasTJnVkDNMOIXVBxXRO2n0pxa2zQQikKpGDT3xePaqbCiJzhumLdPhjVkpV mLyD3KQTMnkKiclR3B20Lw== 0001158957-04-000103.txt : 20040512 0001158957-04-000103.hdr.sgml : 20040512 20040512154651 ACCESSION NUMBER: 0001158957-04-000103 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040512 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: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-11900 FILM NUMBER: 04799406 BUSINESS ADDRESS: STREET 1: 8200 SPRINGWOOD DR STE 230 CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: 9724448280 MAIL ADDRESS: STREET 1: 8200 SPRINGWOOD DR SUITE 230 CITY: IRVING STATE: TX ZIP: 75063 10QSB 1 form10qsb033104.txt INTEGRATED SECURITY SYSTEMS, INC. 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 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 March 31, 2004. | | 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 of incorporation) (IRS Employer Identification No.) 8200 Springwood Drive, Suite 230, Irving, Texas 75063 ----------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (972) 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 April 30, 2004, 74,986,491 shares of the Registrant's common stock were outstanding. Transitional Small Business Disclosure Format: Yes [ ] No [X] INTEGRATED SECURITY SYSTEMS, INC. INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets at and March 31, 2004 (unaudited) June 30, 2003 3 Consolidated Statements of Operations (unaudited) for the three and nine months ended March 31, 2004 and 2003 4 Consolidated Statements of Cash Flows (unaudited) for the nine months ended March 31, 2004 and 2003 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis or Plan of Operation 12 Item 3. Controls and Procedures 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements.
INTEGRATED SECURITY SYSTEMS, INC. Consolidated Balance Sheets March 31, June 30, 2004 2003 ------------ ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 89,281 $ 177,078 Accounts receivable, net of allowance for doubtful accounts of $117,814 and $64,183, respectively 2,333,206 545,337 Inventories 1,176,262 630,995 Other current assets 55,783 70,071 ------------ ------------ Total current assets 3,654,532 1,423,481 Property and equipment, net 648,741 481,608 Goodwill 4,444,278 -- Other assets 32,171 15,011 ------------ ------------ Total assets $ 8,779,722 $ 1,920,100 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 2,066,428 $ 538,190 Accrued liabilities 994,101 510,000 Current portion of long-term debt - net of discount 4,164,155 374,330 ------------ ------------ Total current liabilities $ 7,224,684 $ 1,422,520 ------------ ------------ Long-term debt 600,649 1,919,409 Preferred stock subject to redemption -- 7,495,052 Stockholders' equity (deficit): Preferred stock, $.01 par value, 750,000 shares authorized; 100,750 and 161,345 shares, respectively, issued and outstanding (liquidation value of $2,015,000 and $3,529,875, respectively) 1,008 1,613 Common stock, $.01 par value, 75,000,000 shares authorized; 74,862,491 and 12,881,110 shares issued, respectively 748,625 128,811 Additional paid in capital 30,722,122 18,434,838 Accumulated deficit (30,398,616) (27,363,393) Treasury stock, at cost - 50,000 common shares (118,750) (118,750) ------------ ------------ Total stockholders' equity (deficit) 954,389 (8,916,881) ------------ ------------ Total liabilities and stockholders' equity (deficit) $ 8,779,722 $ 1,920,100 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 3
INTEGRATED SECURITY SYSTEMS, INC. Consolidated Statements of Operations (Unaudited) For the Three Months Ended For the Nine Months Ended March 31, March 31, ----------------------------- ----------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Sales $ 2,779,102 $ 1,231,468 $ 7,866,881 $ 4,170,101 Cost of sales 1,885,019 821,149 5,233,121 2,671,771 ------------ ------------ ------------ ------------ Gross margin 894,083 410,319 2,633,760 1,498,330 ------------ ------------ ------------ ------------ Operating expenses: Selling, general and administrative 1,353,553 611,993 3,025,194 1,739,132 Research and product development 138,193 153,082 463,986 246,255 ------------ ------------ ------------ ------------ 1,491,746 765,075 3,489,180 1,985,387 ------------ ------------ ------------ ------------ Loss from operations (597,663) (354,756) (855,420) (487,057) Other income (expense): Interest expense (420,847) (99,439) (1,085,122) (227,121) ------------ ------------ ------------ ------------ Net loss (1,018,510) (454,195) (1,940,542) (714,178) Preferred dividends (40,950) (151,581) (123,750) (461,481) ------------ ------------ ------------ ------------ Net loss allocable to common stockholders $ (1,059,460) $ (605,776) $ (2,064,292) $ (1,175,659) ============ ============ ============ ============ Weighted average common shares outstanding - basic and diluted 74,440,513 12,455,837 59,511,069 12,155,232 ============ ============ ============ ============ Net loss per share - basic and diluted $ (0.01) $ (0.05) $ (0.03) $ (0.10) ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 4
INTEGRATED SECURITY SYSTEMS, INC. Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended March 31, --------------------------- 2004 2003 ----------- ----------- Cash flows from operating activities: Net loss $(1,940,542) $ (714,178) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 142,399 96,072 Provision for bad debt 39,500 (30,000) Provision for warranty reserve 105,000 74,000 Provision for inventory reserve 1,000 41,000 Amortization of debt discount 578,627 96,333 Expenses paid with stock, warrants and options 249,834 53,721 Changes in operating assets and liabilities, net of effects of acquisition: Accounts receivable (739,125) 264,326 Inventories (198,586) 23,496 Other assets 16,228 8,365 Accounts payable 588,623 (60,462) Accrued liabilities 240,113 (37,173) ----------- ----------- Net cash used in operating activities (916,929) (184,500) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (193,102) (61,428) Purchase of business, net of cash acquired (737,130) -- Capitalized software development costs -- (224,900) ----------- ----------- Net cash used in investing activities (930,232) (286,328) ----------- ----------- Cash flows from financing activities: Employee stock option exercise 48,125 4,125 Warrant exercise 120,000 -- Payments on debt and other liabilities (411,838) (136,776) Proceeds from notes payable and long-term debt 2,003,077 627,277 ----------- ----------- Net cash provided by financing activities 1,759,364 494,626 ----------- ----------- Increase (decrease) in cash and cash equivalents (87,797) 23,798 Cash and cash equivalents at beginning of period 177,078 28,958 ----------- ----------- Cash and cash equivalents at end of period $ 89,281 $ 52,756 =========== =========== Supplemental disclosure of noncash financing activities Conversion preferred stock $ 7,495,052 $ -- Issuance of company common stock in payment of preferred stock dividends $ 1,094,680 $ 92,558
The accompanying notes are an integral part of the consolidated financial statements. 5 INTEGRATED SECURITY SYSTEMS, INC. Notes to Consolidated Financial Statements (Unaudited) Nine Months Ended March 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, 2004. The accompanying financial statements include the accounts of Integrated Security Systems, Inc. and both of its subsidiaries, B&B ARMR Corporation and Intelli-Site, Inc. (collectively, the "Company"), with all intercompany accounts and transactions eliminated. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's fiscal 2003 Annual Report on Form 10-KSB filed on October 14, 2003 with the Securities and Exchange Commission. Note 2 - Reclassification Certain reclassifications of prior year amounts have been made to conform to the current period presentation. Note 3 - 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 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. March 31, -------------------------- 2004 2003 ----------- ----------- Accounts receivable: Trade receivables $ 2,451,020 $ 865,689 Less: allowance for doubtful receivables (117,814) (64,183) ----------- ----------- $ 2,333,206 $ 801,586 =========== =========== Allowance for doubtful receivables: Beginning Balance $ 64,183 $ 100,692 Bad debt expense (credit) 39,500 (30,000) Accounts written-off (39,430) (6,509) ARMR Services Corporation merger 53,561 -- ----------- ----------- Ending Balance $ 117,814 $ 64,183 =========== =========== 6 Note 4 - Software Development Costs Qualifying software development costs that are deemed to be recoverable are capitalized and amortized using the greater of the revenue method or the straight-line method over five years. At March 31, 2004 and June 30, 2003, software development costs had not been capitalized because of uncertainty regarding their recoverability. Capitalized software development costs of $224,900 at March 31, 2003 were expensed during the fourth quarter of fiscal 2003 due to the unrecoverability and resulting impairment of these costs. 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: March 31, ----------------------- 2004 2003 --------- --------- Liability, beginning of year $ 135,471 $ 97,095 Expense for new warranties issued 105,000 74,000 Warranty Claims (118,346) (99,873) --------- --------- Liability, end of period $ 122,125 $ 71,222 ========= ========= 7 Note 6 - 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. If the Company recognized compensation expense as recommended under Statement of Financial Accounting Standards No. 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 Three Months Ended For the Nine Months Ended March 31, March 31, --------------------------- --------------------------- 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Net loss, as reported $(1,018,510) $ (454,195) $(1,940,542) $ (714,178) Deduct: Total stock-based employee compensation expense determined under fair value based method (60,015) (2,718) (395,629) (47,083) ----------- ----------- ----------- ----------- Pro forma net loss $(1,078,525) $ (456,913) $(2,336,171) $ (761,261) =========== =========== =========== =========== Earnings per share: Basic and Diluted-as reported $ (0.01) $ (0.05) $ (0.03) $ (0.10) =========== =========== =========== =========== Basic and Diluted-pro forma $ (0.02) $ (0.05) $ (0.04) $ (0.10) =========== =========== =========== ===========
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 with expected volatility and risk-free interest rates as outlined in the following table:
For the Three Months Ended For the Nine Months Ended March 31, March 31, --------------------------- --------------------------- 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Expected volatility 108.04% 106.38% 108.28% 108.19% Risk-free interest rate 3.20% 1.88% 3.29% 2.50%
8 Note 7 - Preferred Stock Conversion During the first quarter of fiscal 2004, 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 7,574,375 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 $ 175,350 876,750 Series G 868,480 4,342,400 Note 8 - Preferred Stock Dividend Arrearage At March 31, 2004, the Company had dividends in arrears in the amount of $256,013 related to its outstanding Series A and D Preferred Stock, which consists of the following: --------------------------- Shares Dividends Outstanding In Arrears ----------- ----------- Series A $20 9,500 $ -- Series D $20 91,250 256,013 ----------- ----------- 100,750 $ 256,013 =========== =========== Note 9 - Acquisition of Assets On September 5, 2003, the Company acquired 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, in a merger transaction. In exchange for all the outstanding shares of ARMR, the Company paid the selling stockholders approximately $3.8 million in common stock (10 million shares) of the Company and $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 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. 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. The purchase price in excess of the book value of the net assets acquired has been allocated to goodwill. The Company is in the process of allocating the purchase price to the assets acquired. Any adjustment resulting from this allocation will reduce the amount of goodwill and any required amortization will be recorded. 9 It is expected this allocation will be completed by the end of fiscal 2004. 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 $ 29,000 Accounts receivable 1,088,000 Inventory 348,000 Property and equipment 116,000 Other assets 19,000 Accounts payable (940,000) Accrued liabilities (404,000) Current debt (337,000) Long-term debt (63,000) Goodwill 4,444,000 ---------------- Purchase price $ 4,300,000 ================ 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 Three Months Ended For the Nine Months Ended March 31, March 31, ------------------ ----------------------------- 2003 2004 2003 ------------------ ------------ ------------ Sales $ 2,248,986 $ 8,552,808 $ 8,772,195 Net loss allocable to common stockholders $ (738,046) $ (2,201,122) $ (1,055,771) Net loss per share allocable to common stockholders, basic and diluted $ (0.03) $ (0.04) $ (0.05) Weighted average shares outstanding, basic and diluted 22,455,837 61,911,069 22,155,232
Note 10 - Net Loss Per Share The Company computes basic loss per common share using the weighted average number of common shares outstanding during the period. At March 31, 2004 and 2003, 26,598,622 and 66,019,423 potentially dilutive common shares outstanding were not included in the computation of diluted loss per share because their effect is antidilutive due to the net loss for the period. At April 30, 2004, the Company had approximately 101,103,941 shares of common and common stock equivalents outstanding, which is in excess of the authorized shares of 75,000,000. The Company will be seeking shareholder approval for an increase in the number of authorized shares, in order to accommodate for this excess, at the next annual shareholders' meeting. Note 11 - Subsequent Events - Financing In exchange for an aggregate of $240,000 cash investment, the Company issued a promissory note to C. A. Rundell, Jr., Chairman and Chief Executive Officer of the Company on April 14, 2004. The promissory note is in the original principal amount of $240,000 and has an annual interest rate of 6 1/2%. The promissory note, plus interest, is due on August 14, 2004. Interest is payable in monthly installments on the first day of each month. This promissory note was paid in full, including unpaid and accrued interest, on May 7, 2004. 10 In exchange for an aggregate of $100,000 cash investment, the Company issued a promissory note to C. A. Rundell, Jr., Chairman and Chief Executive Officer of the Company on April 28, 2004. The promissory note is in the original principal amount of $100,000 and has an annual interest rate of 6 1/2%. The promissory note, plus interest, is due on August 28, 2004. Interest is payable in monthly installments on the first day of each month. Note 12 - Business Segments Information for the Company's reportable segments at March 31, 2004 and June 30, 2003 is as follows: March 31, June 30, 2004 2003 ----------- ----------- Assets/(liabilities) B&B ARMR Corporation $ 8,732,075 $ 1,720,137 Intelli-Site, Inc. 60,779 51,754 Corporate (13,132) 148,209 ----------- ----------- $ 8,779,722 $ 1,920,100 =========== =========== Information for the Company's reportable segments for the three and nine months ended March 31, 2004 and 2003 is as follows:
For the Three Months Ended For the Nine Months Ended March 31, March 31, --------------------------- --------------------------- 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Sales B&B ARMR Corporation $ 2,730,605 $ 1,210,611 $ 7,652,138 $ 4,033,042 Intelli-Site, Inc. 48,497 20,857 214,743 136,699 ----------- ----------- ----------- ----------- $ 2,779,102 $ 1,231,468 $ 7,866,881 $ 4,170,101 =========== =========== =========== =========== Income (loss) from operations B&B ARMR Corporation $ (392,537) $ (96,460) $ (307,793) $ 41,294 Intelli-Site, Inc. (107,205) (183,701) (291,232) (305,043) Corporate (97,921) (74,595) (256,395) (223,308) ----------- ----------- ----------- ----------- $ (597,663) $ (354,756) $ (855,420) $ (487,057) =========== =========== =========== ===========
11 Item 2. Management's Discussion and Analysis or Plan of Operation. Forward Looking Statements This quarterly report on Form 10-QSB includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements can be identified by the use of forward-looking terminology such as "may," "believe," "expect," "intend," "plan," "seek," "anticipate," "estimate," or "continue" or the negative of those words or other variations or comparable terminology. All statements other than statements of historical fact included in this quarterly report on Form 10-QSB, including the statements under "Part I. --Item 2. Management's Discussion and Analysis or Plan of Operation" and located elsewhere in this quarterly report on Form 10-QSB regarding the financial position and liquidity of the Company are forward-looking statements. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors regarding forward-looking statements, including certain risks and uncertainties that could cause actual results to differ materially from the Company's expectations, are disclosed in this quarterly report on Form 10-QSB. The Company does not undertake any obligation to publicly revise its forward-looking statements to reflect events or circumstances that arise after the date of this quarterly report on Form 10-QSB. Important factors that could cause actual results to differ materially from those in the forward-looking statements in this quarterly report on Form 10-QSB include changes from anticipated levels of operations, customer acceptance of existing and new products, anticipated development schedules of new products, anticipated levels of sales, future national or regional economic and competitive conditions, changes in relationships with customers, access to capital, casualty to or other disruption of the Company's production facility and equipment, delays and disruptions in the shipment of the Company's products, government regulations and the ability of the Company to meet its stated business goals. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Company's cautionary statements. Results of Operations Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 Sales. The Company's total sales increased by $1.5 million, or 126%, to $2.7 million during the quarter ended March 31, 2004 from $1.2 million during the quarter ended March 31, 2003. This increase is due to the inclusion of the sales of ARMR Services Corporation, as a result of the merger of ARMR with the Company's B&B Electromatic, Inc. subsidiary into B&B ARMR Corporation on September 5, 2003. Gross Margin. Gross margin increased by $0.5 million, or 118%, to $0.9 million during the quarter ended March 31, 2004 from $0.4 million during the quarter ended March 31, 2003. This increase is due to inclusion of ARMR Services Corporation as a result of the merger of B&B Electromatic, Inc. and ARMR Services Corporation. Gross margin as a percentage of sales remained comparable for the three months ended March 31, 2004 and 2003. Selling, General and Administrative. Selling, general and administrative expenses increased by approximately $742,000 or 121% during the quarter ended March 31, 2004 compared to the quarter ended March 31, 2003. This increase is primarily due to the inclusion of ARMR Services Corporation as a result of the merger of B&B Electromatic, Inc. and ARMR Services Corporation, as well as approximately $190,000 incurred in connection with the relocation of the manufacturing operations of B&B ARMR Corporation from Manassas, Virginia to Norwood, Louisiana. 12 Research and Product Development. Research and product development expenses remained comparable, with a slight decrease of approximately $15,000 or 10% during the quarter ended March 31, 2004 compared to the quarter ended March 31, 2003. Interest Expense. Interest expense increased by approximately $320,000 during the quarter ended March 31, 2004 compared to the quarter ended March 31, 2003 due to the amortization of the value of warrants issued in conjunction with securing additional debt and the interest on debt that was obtained to meet working capital needs coupled with additional debt financing subsequent to the quarter ending March 31, 2003. Nine Months Ended March 31, 2004 Compared to Nine months Ended March 31, 2003 Sales. The Company's total sales increased by $3.7 million, or 89%, to $7.9 million during the nine months ended March 31, 2004 from $4.2 million during the nine months ended March 31, 2003. This increase is due to the inclusion of the sales of ARMR Services Corporation, as a result of the merger of ARMR with the Company's B&B Electromatic, Inc. subsidiary into B&B ARMR Corporation on September 5, 2003. Gross Margin. Gross margin increased by $1.1 million, or 76%, to $2.6 million during the nine months ended March 31, 2004 from $1.5 million during the nine months ended March 31, 2003. This increase is due to inclusion of ARMR Services Corporation as a result of the merger of B&B Electromatic, Inc. and ARMR Services Corporation. Gross margin as a percentage of sales decreased slightly, but remained comparable at 33% and 36% for the nine months ended March 31, 2004 and 2003. Selling, General and Administrative. Selling, general and administrative expenses increased by approximately $1.3 million or 74% during the nine months ended March 31, 2004 compared to the nine months ended March 31, 2003. This increase is primarily due to the inclusion of ARMR Services Corporation as a result of the merger of B&B Electromatic, Inc. and ARMR Services Corporation, as well as approximately $190,000 incurred in connection with the relocation of the manufacturing operations of B&B ARMR Corporation from Manassas, Virginia to Norwood, Louisiana. Research and Product Development. Research and product development expenses increased by approximately $218,000 or 88% during the nine months ended March 31, 2004 compared to the nine months ended March 31, 2003. This increase is primarily due to approximately $263,000 in software development costs in the current nine month period compared to approximately $95,000 in software development costs at the Company's Intelli-Site, Inc. subsidiary during the same nine month period a year ago. Research and development expenditures increased approximately $50,000 related to the Company's B&B ARMR subsidiary. Interest Expense. Interest expense increased by $858,000 during the nine months ended March 31, 2004 compared to the nine months ended March 31, 2003 due to the amortization of the value of warrants issued in conjunction with securing additional debt and the interest on debt that was obtained to meet working capital needs coupled with additional debt financing subsequent to the nine months ended March 31, 2003. Liquidity and Capital Resources The Company's cash position decreased by $87,797 during the nine months ended March 31, 2004. At March 31, 2004, the Company had $89,281 in cash and cash equivalents and had approximately $1.2 million outstanding under its accounts receivable factoring facility. The factoring facility, which is secured by accounts receivable and inventory, permits the Company to borrow up to a combined $3.0 million, subject to availability under its borrowing base. For the nine months ended March 31, 2004, the Company's operating activities used $916,929 of cash compared to $184,500 of cash used in operations during the nine months ended March 31, 2003. 13 The Company used $193,102 for the purchase of property and equipment during the nine months ended March 31, 2004, compared to $61,428 for the nine months ended March 31, 2003. In addition, the Company used cash of $737,130 in connection with the asset purchase and merger with ARMR Services Corporation. Please see Note 9 (Acquisition of Assets) to the financial statements above for details regarding this transaction. During the nine months ending March 31, 2004, the Company issued approximately $3.8 million (10 million shares) of its $0.01 par value common stock in the asset purchase and merger with ARMR Services Corporation. Please see Note 9 (Acquisition of Assets) to the consolidated financial statements for details regarding this transaction. During the nine months ended March 31, 2004, the Company financed its operations with cash flows from borrowings of $2,003,007 compared to $627,277 during the nine months ended March 31, 2003. The Company made payments of $411,838 on debt and other liabilities during the nine months ended March 31, 2004, compared to payments of $136,776 on debt and other liabilities during the nine months ended March 31, 2003. During the nine months ended March 31, 2004, the holders of the Company's Series F and Series G preferred stock converted all the Series F and G preferred stock and related accrued dividends into approximately 50 million shares of the Company's $0.01 par value common stock. Please see Note 7 (Preferred Stock Conversion) to the consolidated financial statements for details regarding this transaction. During the nine months ended March 31, 2004, the Company received $500,000 in cash from BFS US Special Opportunities Trust PLC in exchange for a convertible promissory note in order to finance the purchase/merger of ARMR Services Corporation. The cash that the Company receives from the accounts receivable factoring facilities is utilized to support Company-wide operations. The Company's working capital requirements will depend upon many factors, including future sales of the Company's products, the Company's operating results, the status of competitive products, and actual profits compared to the Company's business plan. The Company is currently experiencing declining liquidity, which makes it difficult for the Company to meet its current cash requirements and may jeopardize the Company's ability to continue as a going concern and the Company's auditor issued a going concern modification in their auditors' report for our year ended June 30, 2003. The Company intends to address its liquidity problems by controlling costs, seeking additional funding and maintaining focus on revenues and collections. At the present time and in the foreseeable future, the Company will need to obtain additional financing either through equity placement or additional debt. There can be no assurance that the Company will be able to secure such financing. If the Company's liquidity does not improve, it may have to seek a merger partner, limit its operations or seek protection under the federal bankruptcy laws. Any of the foregoing options may be on terms that are unfavorable to the Company or disadvantageous to the Company's stockholders. The Company's backlog is calculated as the aggregate sales prices of firm orders received from customers less revenue recognized. At April 30, 2004, the Company's backlog was approximately $6.0 million. The Company expects that it will fill the majority of this backlog by June 30, 2005. 14 Item 3. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. Based on his evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-QSB, the Company's principal executive and financial officer has concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. (b) Changes in Internal Controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of his evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. The Company is continuing to integrate the operations of the newly acquired operations of ARMR Services Corporation into its current internal control program and procedures that are currently in place at the Company and anticipates this integration to be completed by the end of fiscal 2004. This integration is resulting in changes to virtually all areas of the Company's internal controls in order to provide effective monitoring and control of the newly integrated operations. 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in Securities. During the nine months ended March 31, 2004, the Company issued unregistered securities in connection with financing received during the six months ended December 31, 2003. The issuances of convertible promissory notes, promissory notes and convertible warrants were exempt from the registration requirements of the Securities Act, 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 warrants. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 31.1 Officer's Certificate Pursuant to Section 302 32.1 Officer's Certificate Pursuant to Section 906 (b) Reports filed on Form 8-K. The Company filed a current Report on Form 8-K on April 21, 2004 to report the approval by the Company's board of directors of a one-year extension of the warrants initially issued with the Company's April 1993 Initial Public Offering, which warrants were subsequently repriced and swapped for the current outstanding warrants. The Company filed a Current Report on Form 8-K on April 21, 2004 to report an additional investment of $240,000 in cash from C. A. Rundell, Jr., who is Chairman and Chief Executive Officer of the Company in exchange for a promissory note issued to Mr. Rundell. The Company filed a Current Report on Form 8-K on May 6, 2004 to report an additional investment of $100,000 in cash from C. A. Rundell, Jr., who is Chairman and Chief Executive Officer of the Company in exchange for a promissory note issued to Mr. Rundell. 16 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: May 12, 2004 /s/ C. A. RUNDELL, JR. ------------------------------------ C. A. Rundell, Jr. Director, Chairman of the Board, and Chief Executive Officer (Principal Executive and Financial Officer) Date: May 12, 2004 /s/ RICHARD B. POWELL ------------------------------------ Richard B. Powell Vice President, Chief Accounting Officer, Secretary (Principal Accounting Officer) 17 EX-31 2 exhibit31-110qsb033104.txt EXHIBIT 31.1 OFFICER'S CERTIFICATION Exhibit 31.1 CERTIFICATION I, C. A. Rundell, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Integrated Security Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (and persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: May 12, 2004 /s/ C. A. RUNDELL, JR. ------------------------------------- C. A. Rundell, Jr. Chief Executive Officer and Principal Executive and Financial Officer EX-32 3 exhibit32-110qsb033104.txt EXHIBIT 32.1 OFFICER'S CERTIFICATION Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Integrated Security Systems, Inc. (the "Company"), does hereby certify, to such officer's knowledge, that: The Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (the "Form 10-Q") of the Company fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Form 10-Q. Date: May 12, 2004 /s/ C. A. RUNDELL, JR. ------------------------------------- C. A. Rundell, Jr. Chief Executive Officer and Principal Executive and Financial Officer Date: May 12, 2004 /s/ RICHARD B. POWELL ------------------------------------- Richard B. Powell Principal Accounting Officer A signed original of this written statement required by section 906 has been provided to Integrated Security Systems, Inc. and will be retained by Integrated Security Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished as an exhibit to Form 10-QSB pursuant to Item 601(b)(32) of Regulation S-B and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-QSB for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. -----END PRIVACY-ENHANCED MESSAGE-----