-----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, N9k+DtHxg6TraRAN+wp+rpfBX2mBjDgbeddFMpEp1K4pVV5u3pX3F0e0Gf7Zjyam OyqhcRfWqeYnsGLighV7TQ== 0001158957-04-000234.txt : 20041119 0001158957-04-000234.hdr.sgml : 20041119 20041119135051 ACCESSION NUMBER: 0001158957-04-000234 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041119 DATE AS OF CHANGE: 20041119 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: 041157348 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 form10qsb093004.txt INTEGRATED SECURITY SYSTEMS 10QSB UNITED STATES 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, 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 October 31, 2004, 84,346,536 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 September 30, 2004 (unaudited) and June 30, 2004 3 Consolidated Statements of Operations (unaudited) for the three months ended September 30, 2004 and 2003 4 Consolidated Statements of Cash Flows (unaudited) for the three months ended September 30, 2004 and 2003 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis or Plan of Operation 11 Item 3. Controls and Procedures 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits 14 SIGNATURES 16 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements.
INTEGRATED SECURITY SYSTEMS, INC. Consolidated Balance Sheets September 30, June 30, 2004 2004 ------------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 89,325 $ 172,688 Accounts receivable, net of allowance for doubtful accounts of $98,426 and $109,527, respectively 2,560,913 1,904,285 Inventories 1,578,975 1,272,532 Other current assets 23,282 75,020 ------------- ------------- Total current assets 4,252,495 3,424,525 Property and equipment, net 658,722 681,168 Goodwill 3,626,759 3,547,162 Other assets 65,961 59,956 ------------- ------------- Total assets $ 8,603,937 $ 7,712,811 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,635,441 $ 2,029,963 Accrued liabilities 821,907 708,610 Current portion of long-term debt 4,571,736 1,845,949 ------------- ------------- Total current liabilities $ 7,029,084 $ 1,584,522 ------------- ------------- Long-term debt 1,553,781 2,956,341 Stockholders' equity: 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; 84,298,984 shares issued 842,990 842,990 Additional paid in capital 31,627,086 31,627,086 Accumulated deficit (32,331,262) (32,180,386) Treasury stock, at cost - 50,000 common shares (118,750) (118,750) ------------- ------------- Total stockholders' equity 21,072 171,948 ------------- ------------- Total liabilities and stockholders' equity $ 8,603,937 $ 7,712,811 ============= =============
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 September 30, ---------------------------- 2004 2003 ------------ ------------ Sales $ 3,396,714 $ 1,719,896 Cost of sales 2,098,273 1,068,280 ------------ ------------ Gross profit 1,298,441 651,616 ------------ ------------ Operating expenses: Selling, general and administrative 1,177,511 675,700 Research and product development 123,303 138,957 ------------ ------------ 1,300,814 814,657 ------------ ------------ Loss from operations (2,373) (163,041) Other expense: Interest expense (148,503) (252,686) ------------ ------------ Net loss (150,876) (415,727) Preferred dividends (41,400) (41,400) ------------ ------------ Net loss allocable to common stockholders $ (192,276) $ (457,127) ============ ============ Weighted average common and common equivalent shares Outstanding - basic and diluted 84,298,984 30,659,213 ============ ============ Net loss per share - basic and diluted $ -- $ (0.02) ============ ============ 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 Three Months Ended September 30, ---------------------------- 2004 2003 ----------- ----------- Cash flows from operating activities: Net loss $ (150,876) $ (415,727) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 48,950 32,806 Provision for bad debt 4,749 5,500 Provision for warranty reserve 80,000 10,000 Provision for inventory reserve -- 2,000 Amortization of debt discount -- 166,888 Expenses paid with stock, warrants and options -- 48,847 Changes in operating assets and liabilities, net of effects of acquisition: Accounts receivable (661,377) (244,651) Inventories (306,443) (82,659) Other assets 45,733 11,331 Accounts payable (394,522) 235,675 Accrued liabilities 33,297 199,400 ----------- ----------- Net cash used in operating activities (1,300,489) (30,590) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (26,504) (13,793) Purchase of business (79,597) (586,915) ----------- ----------- Net cash used in investing activities (106,101) (600,708) ----------- ----------- Cash flows from financing activities: Employee stock option exercise -- 9,375 Payments on debt and other liabilities (33,061) (266,597) Proceeds from notes payable and long-term debt 1,356,288 958,400 ----------- ----------- Net cash provided by financing activities 1,323,227 701,178 ----------- ----------- Increase (decrease) in cash and cash equivalents (83,363) 69,880 Cash and cash equivalents at beginning of period 172,688 177,078 ----------- ----------- Cash and cash equivalents at end of period $ 89,325 $ 246,958 =========== =========== Supplemental disclosure of noncash financing activities Conversion preferred stock -- $ 7,495,052 Issuance of company common stock in payment of preferred stock dividends -- $ 1,043,829
The accompanying notes are an integral part of the consolidated financial statements. 5 INTEGRATED SECURITY SYSTEMS, INC. Notes to Consolidated Financial Statements (Unaudited) Quarters Ended September 30, 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. If the Company recognized compensation expense as recommended 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 Three Months Ended September 30, -------------------------- 2004 2003 ---------- ---------- Net loss, as reported $ (150,876) $ (531,874) 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 (42,700) (252,454) ---------- ---------- Pro forma net loss $ (193,576) $ (784,328) ========== ========== Earnings per share: Basic and Diluted - as reported $ -- $ (0.02) ========== ========== Basic and Diluted - pro forma $ -- $ (0.03) ========== ==========
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: no dividend yield, expected volatility of 108.3%; risk-free interest rates of approximately 3.31% and expected lives of three and five years. 6 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 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. September 30, ------------------------- 2004 2003 ----------- ----------- Accounts receivable: Trade receivables $ 2,659,339 $ 1,968,942 Less: allowance for doubtful receivables (98,426) (96,210) ----------- ----------- $ 2,560,913 $ 1,872,732 =========== =========== Allowance for doubtful receivables: Beginning Balance $ 109,527 $ 64,183 Bad debt expense 4,749 5,500 Accounts written-off (15,850) (27,034) ARMR Services Corporation merger -- 53,561 ---------- ---------- Ending Balance $ 98,426 $ 96,210 =========== =========== 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: September 30, ----------------------- 2004 2003 --------- --------- Liability, beginning of year $ 94,157 $ 135,471 Expense for new warranties issued 80,000 10,000 Warranty claims (99,579) (25,119) --------- --------- Liability, end of period $ 74,578 $ 120,352 ========= ========= 7 Note 6 - Preferred Stock Dividend Arrearage At September 30, 2004, the Company had dividends in arrears in the amount of $287,513 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 91,250 287,513 ----------- ----------- 100,750 $ 287,513 =========== =========== Note 7 - Net Loss Per Share The Company computes basic loss per common share using the weighted average number of common shares. At September 30, 2004 and 2003, there were 10,601,897 and 15,044,356 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 September 30, 2004 and 2003, the Company had approximately 102,551,045 and 98,808,353 shares, respectively, of common stock and common stock equivalents outstanding, which comprises all of the Company's outstanding equity instruments. Note 8 - Financing 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, 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 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 common stock of the Company is above $0.60 per share for a 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 and Renaissance Capital Group, Inc. In exchange for an aggregate of $150,000 cash, the Company issued a promissory note to C. A. Rundell, Jr., Chairman and Chief Executive Officer of the Company, on July 28, 2004. The promissory note is in the original principal amount of $150,000, has an annual interest rate of 9% which is due at maturity and is secured by a specific invoice of B&B ARMR issued to Horne Engineering. The promissory note, plus accrued interest, was due on October 28, 2004. B&B ARMR will pay this note plus all accrued and unpaid interest in full by the end of the December 2005. 8 Note 9 - Subsequent Event - Financing The Company received a $500,000 cash investment on October 27, 2004 from BFS. The final terms and conditions of this investment in the Company are currently being negotiated. The contemplated security to be sold is a 10% subordinated convertible promissory note, convertible at $0.38 per share, callable after the second year at the equivalent of $0.60 per share and with a five-year term. The Company anticipates the completion of this transaction by November 30, 2004. Note 10 - Subsequent Event - Financing Arrangement 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 credit 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 11 - Business Segments Information for the Company's reportable segments for the three months ended September 30, 2004 and 2003 is as follows: For the Three Months Ended September 30, -------------------------- 2004 2003 ----------- ----------- Sales B&B ARMR Corporation $ 3,180,485 $ 1,627,895 Intelli-Site, Inc. 216,229 91,911 ----------- ----------- $ 3,396,714 $ 1,719,896 =========== =========== Income (loss) from operations B&B ARMR Corporation $ 62,918 $ 10,635 Intelli-Site, Inc. 11,176 (94,703) Corporate (76,467) (78,973) ----------- ----------- $ (2,373) $ (163,041) =========== =========== 9 Note 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 following unaudited pro forma consolidated statements of operations have been prepared as if the acquisition discussed above had occurred at July 1, 2003. For the Three Months Ended September 30, 2003 --------------------------- Sales $ 2,405,823 Net loss allocable to common stockholders $ (634,907) Net loss per share allocable to common stockholders, basic and diluted $ (0.02) Weighted average shares outstanding, basic and diluted 30,659,213 10 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 September 30, 2004 Compared to Three Months Ended September 30, 2003 Sales. The Company's total sales increased by $1.7 million, or 97%, to $3.4 million during the quarter ended September 30, 2004 from $1.7 million during the quarter ended September 30, 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 approximately $0.6 million during the quarter ended September 30, 2004 due to the inclusion of ARMR Services Corporation, but as a percentage of sales remained comparable at 38% during the same quarter a year ago. Selling, General and Administrative. Selling, general and administrative expenses increased by approximately $0.5 million or 74% during the quarter ended September 30, 2004 compared to the quarter ended September 30, 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 in increase in the warranty reserve at the Company's B&B ARMR subsidiary due to the increased level of sales. 11 Research and Product Development. Research and product development expenses decreased by approximately 12% during the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003. This increase is primarily due a reduction in research and development expenditures company-wide which the Company expects will continue at these lower levels through the first part of fiscal 2005. Interest Expense. Interest expense decreased by approximately $0.1 million during the quarter ended September 30, 2004 compared to the quarter ended September 30, 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 end September 30, 2003. This approximately $0.2 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 ending September 30, 2004. Liquidity and Capital Resources The Company's cash position decreased by $83,363 during the quarter ended September 30, 2004. At September 30, 2004, the Company had $89,325 in cash and cash equivalents and had approximately $1.0 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 $3.0 million, subject to availability under its borrowing base. This factoring facility was replaced by a discretionary demand asset based lending credit facility on November 10, 2004. Please see Note 10 to the Company's Consolidated Financial Statements included under Item 1 above for a detailed description of this transaction. For the three months ended September 30, 2004, the Company's operating activities used $1,300,489 of cash compared to $30,590 of cash provided in operations during the three months ended September 30, 2003, primarily due to increased levels of accounts receivable, inventories and accounts payable. The Company used $26,504 for the purchase of property and equipment during the quarter ended September 30, 2004, compared to $13,793 for the quarter ended September 30, 2003. The Company anticipates capital expenditures to increase through the remainder of fiscal 2005, commensurate with increased sales. The Company also incurred an additional $72,000 during the quarter ending September 30, 2004 related to earn-out agreements executed as a part of the ARMR merger transaction. During the quarter ended September 30, 2004, the Company financed its operations with cash flows from borrowings of $1,356,288 compared to $958,400 during the quarter ended September 30, 2003. The borrowings during the first quarter of fiscal 2004 consisted of an additional $1.0 million from BFS, an additional $0.2 million from the Company's factoring facility and a promissory note in the amount of $150,000 issued to C. A. Rundell, Jr., Chairman and Chief Executive Officer of the Company (see Note 8 to the Company's Consolidated Financial Statements included under Item 1 above for a detailed description of this transaction), The Company made payments of $33,061 on debt and other liabilities during the quarter ended September 30, 2004, compared to payments of $266,597 on debt and other liabilities during the quarter ended September 30, 2003. The cash that the Company received from the accounts receivable factoring facility and will receive from its recent discretionary demand asset based lending credit facility 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. The Company's auditor issued a going concern modification in their auditors' report for the fiscal year ended June 30, 2004. The Company intends to address its liquidity problems by controlling costs, seeking additional funding and maintaining focus on revenues and collections. 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 by the end of fiscal 2005, 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. 12 Principal payments required under long-term debt outstanding at September 30, 2004 are as follows: Year Ending June 30, ---------------------- 2005 $ 2,161,010 2006 2,441,220 2007 20,810 2008 2,477 2009 1,500,000 ----------- $ 6,125,517 =========== The Company's backlog is calculated as the aggregate sales prices of firm orders received from customers less revenue recognized. At October 31, 2004, the Company's backlog was approximately $6.3 million. The Company expects that it will fill the majority of this backlog by December 31, 2005. Item 3. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures. Based on his evaluation as of the end of the period covered by this Quarterly Report on Form 10-QSB, the Company's principal executive and principal financial officer has concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) 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. We strive to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the requirements specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for appropriate decisions regarding required disclosure. 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 financial reporting objectives. We believe the Company and audit committee are in the process of taking the steps necessary to correct this identified reportable condition. (b) Changes in Internal Controls. There were no significant changes in the Company's internal control over financial reporting that occurred during the company's last completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. During the three months ended September 30, 2004, the Company issued unregistered securities in connection with the transaction described below. The issuances of the convertible promissory note 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. 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 common stock of the Company is above $0.60 per share for a period of 60 days. The Company's board of directors ratified this transaction on August 20, 2004. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. In exchange for an aggregate of $150,000 cash, the Company issued a promissory note to C. A. Rundell, Jr., Chairman and Chief Executive Officer of the Company, on July 28, 2004. The promissory note is in the original principal amount of $150,000, has an annual interest rate of 9% which is due at maturity and is secured by a specific invoice of B&B ARMR issued to Horne Engineering. The promissory note, plus accrued interest, was due on October 28, 2004. B&B ARMR will pay this note plus all accrued and unpaid interest in full by the end of the December 2005. The Company believes that the terms of this transaction was on terms no less favorable to the Company than could be obtained from unaffiliated third parties. Item 6. Exhibits. 10.1+ Promissory Note, dated July 28, 2004, payable to C. A. Rundell, Jr. in the amount of $150,000. 10.2 Promissory Note, dated August 5, 2004, payable to BFS US Special Opportunities Trust PLC in the amount of $1,000,000. (1) 10.3 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. (1) 14 10.4 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. (1) 10.5 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. (1) 10.6 Loan Agreement, dated November 10, 2004, among B&B ARMR Corporation, Integrated Security Systems, Inc., Intelli-Site, Inc. and Briar Capital, L.P. (2) 10.7 Revolving Promissory Note, dated November 10, 2004, issued by B&B ARMR Corporation to Briar Capital, L.P. (2) 10.8 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. (2) 10.9 Subordination Agreement, dated November 10, 2004, among B&B ARMR Corporation, C. A. Rundell, Jr. and Briar Capital, L.P. (2) 10.10 Guaranty Agreement, dated November 10, 2004, by Integrated Security Systems, Inc. in favor of Briar Capital, L.P. (2) 10.11 Guarantor Security Agreement, dated November 10, 2004, by Integrated Security Systems, Inc. in favor of Briar Capital, L.P. (2) 10.12 Guaranty Agreement, dated November 10, 2004, by Inteli-Site, Inc. in favor of Briar Capital, L.P. (2) 10.13 Guarantor Security Agreement, dated November 10, 2004, by Inteli-Site, Inc. in favor of Briar Capital, L.P. (2) 31.1+ Officer's Certificate Pursuant to Section 302 32.1+ Officer's Certificate Pursuant to Section 906 ______________ + Filed herewith. (1) Incorporated by reference to the Company's Form 8-K filed on August 31, 2004. (2) Incorporated by reference to the Company's Form 8-K filed on November 16, 2004. 15 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 19, 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: November 19, 2004 /s/ RICHARD B. POWELL --------------------- Richard B. Powell Vice President, Chief Accounting Officer, Secretary (Principal Accounting Officer) 16 EXHIBIT INDEX 10.1+ Promissory Note, dated July 28, 2004, payable to C. A. Rundell, Jr. in the amount of $150,000. 10.2 Promissory Note, dated August 5, 2004, payable to BFS US Special Opportunities Trust PLC in the amount of $1,000,000. (1) 10.3 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. (1) 10.4 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. (1) 10.5 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. (1) 10.6 Loan Agreement, dated November 10, 2004, among B&B ARMR Corporation, Integrated Security Systems, Inc., Intelli-Site, Inc. and Briar Capital, L.P. (2) 10.7 Revolving Promissory Note, dated November 10, 2004, issued by B&B ARMR Corporation to Briar Capital, L.P. (2) 10.8 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. (2) 10.9 Subordination Agreement, dated November 10, 2004, among B&B ARMR Corporation, C. A. Rundell, Jr. and Briar Capital, L.P. (2) 10.10 Guaranty Agreement, dated November 10, 2004, by Integrated Security Systems, Inc. in favor of Briar Capital, L.P. (2) 10.11 Guarantor Security Agreement, dated November 10, 2004, by Integrated Security Systems, Inc. in favor of Briar Capital, L.P. (2) 10.12 Guaranty Agreement, dated November 10, 2004, by Inteli-Site, Inc. in favor of Briar Capital, L.P. (2) 10.13 Guarantor Security Agreement, dated November 10, 2004, by Inteli-Site, Inc. in favor of Briar Capital, L.P. (2) 31.1+ Officer's Certificate Pursuant to Section 302 32.1+ Officer's Certificate Pursuant to Section 906 ______________ + Filed herewith. (1) Incorporated by reference to the Company's Form 8-K filed on August 31, 2004. (2) Incorporated by reference to the Company's Form 8-K filed on November 16, 2004. 17 EX-10 2 exhibit10-110qsb093004.txt EXHIBIT 10.1 PROMISSORY NOTE Exhibit 10.1 PROMISSORY NOTE $150,000.00 July 28, 2004 For value received, B&B ARMR Corporation, a Delaware corporation (hereinafter referred to as "Maker"), promises to pay to the order of C.A. Rundell (hereinafter referred to as "Payee"), the principal sum of One Hundred Fifty Thousand Dollars ($150,000.00). The principal of and interest on this Note shall be due and payable in lawful money of the United States of America, to C.A. Rundell, Chase Bank Tower, 2200 Ross Avenue, Suite 4660 W, Dallas, Texas 75201. All correspondence and notices should be mailed to the above address, or at such other place as the holder hereof may from time to time designate by written notice to Maker. 1. Interest. Interest shall accrue on the unpaid principal balance due under this Note at an annual rate equal to eight percent (9%). Interest shall accrue from and including the date of this Note until, but not including, the day on which it is paid in full. In no event shall the interest charged hereunder exceed the maximum rate of interest allowed from time to time by law. Interest shall be due at maturity. 2. Payment of Note. The principal balance of, and all accrued unpaid interest on, this Note shall be due and payable one hundred twenty (120) days from the date hereof or upon the receipt of payment in full from Horne Engineering on B&B invoice # 52925, whichever comes first, except as otherwise provided herein. ("Maturity Date"). 3. Prepayment. This Note may be prepaid in whole or in part at any time, at the option of Maker, without premium or penalty. 4. Default, Enforcement. Upon default in payment of this Note, Payee may pursue any and all rights and remedies to which Payee may be entitled under applicable law. 5. Limitation of Interest. All agreements between Maker and Payee, whether now existing or hereafter arising and whether written or oral, are expressly limited so that in no contingency or event whatsoever, whether by reason of advancement of the proceeds hereof, acceleration of the maturity of the unpaid principal balance hereof, or otherwise, shall the amount contracted for, charged, received, paid or agreed to be paid to the holder hereof for the use, forbearance, or detention of the money evidenced by this Note or for the payment or performance of any covenant or obligation contained herein or in any other document pertaining to the indebtedness evidenced by this Note exceed the maximum amount permissible under applicable usury laws. If, from any circumstance whatsoever, fulfillment of any provision hereof or of any other agreement shall, at the time fulfillment of such provision be due, involve transcending the limit of validity prescribed by law which a court of competent jurisdiction may deem applicable hereto, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity; and if from any circumstance the holder hereof shall ever receive as interest an amount which would exceed the maximum lawful rate, any amount equal to any excessive interest shall (a) be applied to the reduction of the unpaid principal balance due hereunder and not to the payment of interest, or (b) if such excess interest exceeds the unpaid principal balance of this Note, such excess shall be refunded to Maker. All sums contracted for, charged or received hereunder for the use, forbearance or detention of the indebtedness evidenced hereby shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of this Note until payment in full so that the rate of interest on account of such indebtedness is uniform throughout the term hereof. The terms and provisions of this paragraph shall control and supersede every other provision of all agreements between Maker and the holder hereof. 6. Waiver. Except as otherwise expressly provided herein, Maker waives demand, presentment for payment, notice of intent to accelerate, notice of acceleration, notice of nonpayment or dishonor, grace, protest, notice of protest, all other notices, and any and all diligence or delay in collection or the filing of suit hereon. 7. Governing Law and Venue. This Note shall be construed according to and governed by the laws of the State of Texas. The obligations of Maker under this Note are performable in Dallas County, Texas. 8. Security. This Note is secured by one certain B&B ARMR Receivable Invoice #0052925 to Horne Engineering Services, dated July 26, 2004, in the amount of $171,500.00. 9. Stock Pledge Agreement. n/a 10. Successors and Assign. This Note shall bind Maker's successors and assigns. 11. Collection Costs. If this Note is collected by legal proceeding or through a probate or bankruptcy court, or is placed in the hands of an attorney for collection after default (whether or not suit is filed), Maker agrees to pay all costs of collection and/or suit, including but not limited to reasonable attorneys' fees and expenses incurred by Payee. 12. Unenforceability. The invalidity, or unenforceability in particular circumstances, of any provision of this Note shall not extend beyond such provision or such circumstances, and no other provision of this Note shall be affected thereby. 13. Headings. The paragraph headings of the sections of this Note are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Note. IN WITNESS WHEREOF, Maker has duly executed this Note as of the day and year first above written. B&B ARMR Corporation /s/ PETER BEARE ----------------------- Peter Beare Chief Executive Officer 2 EX-31 3 exhibit31-110qsb093004.txt EXHIBIT 31.1 CEO AND CFO 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 my supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to me 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 my 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 (or 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: November 19, 2004 /s/ C. A. RUNDELL, JR. --------------------------------- C. A. Rundell, Jr., Chief Executive Officer and Principal Executive and Financial Officer EX-32 4 exhibit32-110qsb093004.txt EXHIBIT 32.1 CEO AND CFO CERTIFICATIN 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-QSB for the quarter ended September 30, 2004 (the "Form 10-QSB") 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-QSB 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-QSB. November 19, 2004 /s/ C. A. RUNDELL, JR. --------------------------------- C. A. Rundell, Jr., Chief Executive Officer and Principal Executive and Financial Officer November 19, 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-----