SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _______.
Commission File No. 0-12141
MICRO SECURITY SYSTEMS, INC.
(Exact name of Registrant as specified in its Charter)
Utah 87-0401894
(State or other jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
150 Wright Brothers Drive, Suite 560
Salt Lake City, Utah 84116
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (801)575-6600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 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:
Number of Shares Outstanding of the Registrant's Common Stock as of
March 31, 1994 was 6,084,638
PAGE 1 OF 14 CONSECUTIVELY NUMBERED PAGES.
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Micro Security Systems, Inc.
INDEX
PART I Financial Information Page
Number
ITEM 1 Financial Statements
Consolidated Condensed Balance Sheets as of
March 31, 1994 and June 30, 1993 . . . . . . . . . . .4
Consolidated Condensed Statements of Operations
for the Three Months and Nine Months Ended
March 31, 1993 and 1992 . . . . . . . . . . . . . . .6
Consolidated Condensed Statements of
Cash Flows for the Three Months and
Six Months Ended December 31, 1993 and 1992 . . . . . .7
Notes to Consolidated Condensed Financial Statements . . . 9
ITEM 2 Management's Discussion and Analysis
Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . .11
PART II Other Information
Item 1 Legal Proceeding . . . . . . . . . . . 13
Item 5 Other Information . . . . . . . . . . . 13
Item 6 Exhibits and Reports on Form 8-K . . . .13
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . 14
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS REQUIRED BY FORM 10-Q
Micro Security Systems, Inc. ("Registrant" or "Company") files herewith
an unaudited balance sheet of the Registrant as of March 31, 1994, and the
related statements of income and changes in financial position for the nine
months ended March 31, 1994, and March 31, 1993. The unaudited financial
statements included in this report on Form 10-Q have been prepared by the
Company and have not been the subject of independent review. In the opinion
of management of the Company, the financial statements fairly present the
financial condition of the Company.
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MICRO SECURITY SYSTEMS, INC.
Consolidated Balance Sheets
ASSETS
March 31, June 30,
1994 1993
(Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents $ 2,185 $ 71,606
Trade accounts receivable, less
allowance for doubtful accounts of
$8,025 and $8,025 356,426 267,484
Inventories 449,154 274,555
Prepaid Expenses 2,500 -
Total Current Assets 810,265 613,645
OTHER ASSETS
Property and equipment, at cost, less
accumulated depreciation of $340,530
and $191,197, respectively 815,356 506,765
Deposits 11,094 30,660
Employee advances 15,188 -
Total Other Assets 841,638 537,425
TOTAL ASSETS $1,651,903 $ 1,151,070
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MICRO SECURITY SYSTEMS, INC.
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30,
1994 1993
(Unaudited) (Audited)
CURRENT LIABILITIES
Bank overdraft $ 100,415 $ -
Trade accounts payable 231,260 74,452
Accrued expenses 41,720 37,775
Line-of-credit 436,290 -
Notes payable - current portion 13,799 18,836
Capital lease payable - current portion 57,718 5,557
Total Current Liabilities 881,202 136,620
OTHER LIABILITIES
Notes payable - long-term 52,545 65,216
Capital lease payable - long-term 234,886 12,927
Total Other Liabilities 287,431 78,143
Total Liabilities 1,168,633 214,763
STOCKHOLDERS' EQUITY
Common stock; par value, $.001; authorized
50,000,000 shares; 6,084,638 shares issued
and outstanding 6,084 6,084
Capital paid in excess of par value 1,648,985 1,648,985
Retained earnings (deficit) (1,171,799) (718,762)
Total Stockholders' Equity 483,270 936,307
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,651,903 $1,151,070
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MICRO SECURITY SYSTEMS, INC.
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
March 31, March 31, March 31, March 31,
1994 1993 1994 1993
SALES $ 490,870 $443,862 $1,237,729 $1,357,667
COST OF SALES 139,743 196,160 287,172 454,237
GROSS PROFIT 351,127 247,702 950,557 903,430
OPERATING EXPENSES
Salaries and wages 201,960 131,824 536,559 333,075
General and administrative 331,261 232,196 691,624 482,058
Research and development 2,094 2,764 9,961 3,192
Depreciation 51,845 12,500 149,333 36,841
Total Operating Expenses 587,160 379,284 1,387,477 855,166
NET OPERATING INCOME (LOSS) (236,033) (131,582) (436,920) 48,264
OTHER INCOME (EXPENSE)
Interest income 513 17 939 589
Interest expense (11,312) (2,525) (17,056) (7,304 )
Miscellaneous - 355 - 402
Total Other Income (Expense) (10,799) (2,153) (16,117) (6,313)
Income (loss) before income taxes(246,832) (133,735) (453,037) 41,951
Provision for income taxes - - - -
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (246,832) (133,735) (453,037) 41,951
EXTRAORDINARY ITEM - NET PROCEEDS
FROM FIRE INSURANCE POLICY $ - $882,993 $ - $ 882,993
NET INCOME (LOSS) $(246,832) $749,258 $(453,037) $ 924,944
EARNINGS PER SHARE BEFORE
EXTRAORDINARY ITEM $ (0.041) $ (0.022) $ (0.074) $ 0.007
EARNINGS PER SHARE AFTER
EXTRAORDINARY ITEM $ (0.041) $ 0.123 $ (0.074) $ 0.152
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MICRO SECURITY SYSTEMS, INC.
Statement of Cash Flows
(Unaudited)
For the Three Months Ended For the Nine Months Ended
March 31, March 31, March 31, March 31,
1994 1993 1994 1993
Cash Flows From Operating Activities:
Net Income (Loss) $(246,832) $749,258 $(453,037) $ 924,944
Adjustments:
Depreciation 51,845 12,500 149,333 36,844
Changes in Operating Assets
and Liabilities:
(Increase) decrease in Accounts
receivable (211,369) (714,410) (88,942) (786,316)
(Increase) decrease in inventories,
prepaid expenses and other
assets (28,795) (31,741) (172,721) (92,169)
Increase (decrease) in
cash overdraft (35,358) - 100,415 (10,012)
Increase (decrease) in accounts payable
and accrued expenses 106,049 (20,290) 160,753 52,049
Loss on abandonment of property and
equipment - 9,142 - -
Net Cash Provided (Used) by
Operating Activities (364,460) 4,459 (304,199) 125,340
Cash Flow from Investing Activities:
Investment in subsidiary - 38,001 - (191,206)
Purchases of property and
equipment (104,164) - (457,924) (53,915)
Net Cash (Used) by
Investing Activities: $ (104,164) $ 38,001 $(457,924) $(245,121)
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MICRO SECURITY SYSTEMS, INC.
Statement of Cash Flows
(Unaudited)
For the Three Months Ended For the Nine Months Ended
March 31, March 31, March 31, March 31,
1994 1993 1994 1993
Cash Flows from Financing Activities:
Proceeds from line of credit $ 436,290 $ - $ 436,290 $ -
Proceeds from capital lease - - - -
Increase (decrease)
in notes payable (5,267) 18,278 (17,708) 185,382
Increase (decrease)
in capital lease 37,613 - 274,120 -
Net Cash Provided (Used)
by Financing Activities: 468,636 18,278 692,702 185,382
Increase (decrease) in cash
and cash equivalents 12 60,738 (69,421) 65,601
Cash and cash equivalents at
beginning of period 2,173 4,863 71,606 -
Cash and cash equivalents at
end of period $ 2,185 $ 65,601 $ 2,185 $ 65,601
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest $ 11,312 $ - $ 17,056 $ -
Income taxes $ - $ - $ 100 $ 100
Non Cash Financing Activities:
Equipment lease $ - $ - $ 245,649 $ -
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MICRO SECURITY SYSTEMS, INC.
Notes to the Consolidated Financial Statements
March 31, 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Footnote disclosures, including significant accounting policies,
required by generally accepted accounting principles have been
omitted when they substantially duplicate disclosures presented in
the audited financial statements, form 10-K. Refer to the form
10-K at June 30, 1993 for additional information.
The financial statements and information included herein are
unaudited; however, such information reflects all adjustments which,
in the opinion of management, are necessary for a fair presentation
of financial position for the interim period.
NOTE 2 - INCOME TAXES
Federal income tax (expense) benefit per books differs from the
statutory tax (expense) benefit, determined from the federal
statutory rate of 34%, for the following reasons:
For the years ended June 30,
1993 1992 1991
Pre-tax income (loss) per books $ 477,802 $301,998 $ (192,485)
Inventory write up (write down) - - 7,306
Unpaid vacation accrual 16,323 15,893 15,069
State tax provision - - (100)
Non-deductible entertainment expense 405 1,868 3,688
Total $494,530 $ 319,759 $(166,522)
Net operating loss carryforwards for income tax purposes expire
as follows:
For the year ended June 30, Amount
2005 $178,575
2006 144,547
Total $323,122
Differences between financial and income tax operating losses
result primarily from the timing of recognition of doubtful
collection of notes receivable, stock sales, inventory
adjustments, and inventory capitalization rules.
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MICRO SECURITY SYSTEMS, INC.
Notes to the Consolidated Financial Statements
March 31, 1994
NOTE 2 - INCOME TAXES (Continued)
In addition, the Company has an investment tax credit carryforward
of $5,008 which expires as follows:
$ 2,591 in 1999 $ 1,861 in 2000 $ 556 in 2001
NOTE 3 - COMMITMENTS UNDER LONG-TERM LEASES
Capital Leases:
Future minimum lease payments under leases capitalized at June 30,
1993 together with the present value of the minimum lease
payments are as follows:
Total
Minimum
Present Lease
Value Payments
Twelve months ended June 30,
1994 $34,748 $41,800
1995 50,480 69,004
1996 52,647 66,558
1997 55,970 64,821
1998 58,035 61,792
Later years 9,836 9,948
261,716 313,923
Total minimum payments
less current portion (34,748) (41,800)
Total long-term leases payable $ 226,968 $272,123
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MATERIAL CHANGES IN FINANCIAL CONDITION
At March 31, 1994, the Company had current assets of $810,265 as
compared to $613,645 at June 30, 1993. Trade accounts receivable increased
by $88,942 during the period from $267,484 as of June 30, 1993, to $356,426
as of March 31, 1994. Inventories increased by $174,599 from $274,555 as of
June 30, 1993, to $449,154 as of March 31, 1994. Property and equipment
increased by $308,591 from $506,765 as of June 30, 1993, to $815,356 as of
March 31, 1994. Current liabilities increased by $744,582 from $136,620 as of
June 30, 1993, to $881,202 as of March 31, 1994. The Company has available
to it,a line of credit. Overdraft amounts shown on the financial statements
shown herein are amounts utilized in association with the credit line.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Net sales for the three month period ending March 31, 1994, were
$490,870 compared to sales of $443,862 for the same period in the prior year.
This represents an increase of $47,008, or eleven per cent (11%). Net sales
for the nine months ended March 31, 1994, were $1,237,729 compared to
$1,357,667 for the first nine months of fiscal 1993 for a decrease of $119,938
or approximately nine per cent (9%) during the period compared to the same
period a year earlier. The decrease in sales is primarily attributable
to the loss of a major customer that no longer uses hardware security
devices. The balance of the decrease is attributable to a downturn in
business for our normal customer base.
During the nine month period ending March 31, 1994, salaries and
wages increased by $203,484 from $333,075 to $536,559 for the same period
a year earlier. General and administrative expenses increased by $209,566
during the nine month period ended March 31, 1994, from $482,058 to $691,624
for the same period a year earlier. Research and development expenses during
the nine month period ended March 31, 1994, increased by $6,769 from $3,192 to
$9,961 for the same period a year earlier. Total operating expenses for
the period ended March 31, 1994, increased by $532,311 from $855,166 to
$1,387,477 for the same period a year earlier. This represents an increase
of approximately sixty-two per cent (62%). The increase in salaries and
wages and general and administrative expenses is due to an increase in
the number of employees created by the addition and expansion of the
Company's subsidiary Maxwell Systems. Research and development costs may
be understated because some of these expenses are included in either salaries
and wages or general and administrative expenses.
For the three month period ended March 31, 1994, the Company had a
net operating loss of ($236,033) compared to a net operating loss of
($131,582) for the three month period ended March 31, 1993. Net operating
loss increased by $104,451. Net loss for the nine month period ended March
31, 1994, was $436,920 compared to a net income of $41,951 for the same period
a year earlier. Net loss per share for the nine month period ended March 31,
1994, was ($0.074) compared to net income per share of $0.007 before
extraordinary items for the same period a year earlier.
The Company's sales increased during the quarter ended March 31,
1994. Even though there was an increase in sales, there was an increase in
salaries and wages and an increase in general and administrative expenses
during the quarter which resulted in a significant loss. The Company has
spent funds to provide various administrative and support services for the
startup of its subsidiary, Maxwell Systems, Inc.
The Company's sales for the third quarter of fiscal 1994 ended March
31, 1994, were eleven per cent higher than the sales for the third quarter of
fiscal 1993. The current ratio as of March 31, 1994, was .91 compared to a
current ratio of 4.49 as of June 30, 1993.
As of March 31, 1994, the Company has long-term debt for a capital
lease in the amount of $234,886. Management believes that the increase
in inventories is due to a demand by customers for a shorter lead time on
deliveries and including work in process value in inventory valuation.
Management anticipates for fiscal 1994 is that sales for the
Company's SecuriKey line of products will increase as the customer
base expands and becomes more diversified. It is management's goal for
Registrant's sales to become more stable and experience smaller fluctuations
from quarter to quarter. The Company has several customers which tend
to dominate sales. Changes in orders of these customers has significantly
impacted sales during this quarter and could, in the future either
positively or negatively impact sales.
LIQUIDITY
Due to the losses the Company has sustained during the current fiscal
year, the Company is experiencing severe liquidity difficulties. With the
Company's expansion and changing business environment, there are substantial
concerns of the Company's ability to resolve its short and medium term
liquidity problems. Due to the losses incurred during the second and third
quarters of fiscal 1994, the bank has called the outstanding notes,
lines of credit and leases. Management is negotiating with the bank to
secure acceptable terms for both parties. There are no assurances that the
Company will be successful in these negotiations. If these negotiations
are not successful, the notes loans and leases are in a default condition,
and the Company will be forced to consider a reorganization. Subsequent to
the reporting period, the Company has reduced its manufacturing work force
due to unrealized anticipation of manufacturing contracts.
Subsequent to the reporting period, the Registrant and its wholly-
owned subsidiary Maxwell Systems, Inc. filed for relief under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court
for the District of Utah, Central Division. The case filed by the Registrant
will be administered under Bankruptcy Case No. 94B-23643 and the case filed
by Maxwell Systems, Inc. will be administered under Case No. 94B-23642.
The officers and directors of the Registrant and Maxwell Systems, Inc.
are in control of the respective companies and shall operate as debtors-in-
possession pursuant to Bankruptcy Code provisions.
EQUIPMENT LEASE
The Company has leased automatic component placement equipment to
be used in the manufacturing of the Company's products. Management believes
the new equipment will increase the automation and efficiency of its
manufacturing. The Company anticipates manufacturing electronic products
on a contract basis for other entities to utilize any excess capacity.
Manufacturing on a contract basis represents a new line of business
for the Company. The Company has incurred "start-up" costs to bring
the new equipment on line and to adapt its manufacturing procedures to the
automated equipment.
Generally, management believes that the financial stability and
future of the Company is dependent on increasing sales and income from the
SecuriKey products, and its ability to operate its manufacturing operation
in a profitable manner. In the past, net profits and net losses from
operations significantly varied from quarter to quarter.
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDING
During the reporting period the Company was a party to the
following material legal proceedings:
In August 1993, the Company filed a Complaint in Third District
Court of Salt Lake County, State of Utah, against Interstate Trucking Service,
Interstate Commerce Tax Advisory Service, and certain of the officers of
the companies. The complaint alleges breach of contract and misrepresentation
in relation to previous transactions and seeks damages of approximately
$130,000.
In October 1993, a complaint was filed by S & D Limited in Third
District Court of Salt Lake County, State of Utah, against the Company
and other individuals including the former owners of Quick Circuits,
Inc. alleging a breach of the lease covering certain facilities previously
occupied by Quick Circuits. The action seeks monetary damages in an
unspecified amount for the breach of the lease. The Company has referred
this action to counsel and has not yet had the opportunity to fully evaluate
the merits of the claim. The Company will investigate the matter fully
and intends vigorously pursue all defenses available to it in regard to this
action.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Registrant has no securities which are reportable under this item.
ITEM 4. MATTERS SUBMITTED TO A VOTE OF THE
COMPANY'S SHAREHOLDERS
No matters were submitted to a vote of the Company's shareholders
during the quarter.
ITEM 5. OTHER INFORMATION
In June 1994, a complaint was filed by First Security Bank in Third
District Court of Salt Lake County, State of Utah against the Company and
other individuals alleging a breach of contract in matters relating to
loans and leases with First Security Bank of Utah. The Company will
investigate the matter fully and intends vigorously pursue all defenses
available to it in regard to this action.
On July 21, 1994 the Registrant and its wholly-owned subsidiary
Maxwell Systems, Inc. filed for relief under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the District of
Utah, Central Division. The case filed by the Registrant will be
administered under Bankruptcy Case No. 94B-23643 and the case filed by Maxwell
Systems, Inc. will be administered under Case No. 94B-23642. The officers and
directors of the Registrant and Maxwell Systems, Inc. are in control of the
respective companies and shall operate as debtors-in-possession pursuant to
Bankruptcy Code provisions.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
Subsequent to the reporting period, the Company filed a report on
Form 8-K disclosing the events of July 21, 1994, in which the Company filed
for protection under Chapter 11 USC.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MICRO SECURITY SYSTEMS, INC.
BY:
Daniel C. Maxwell, Chief
Executive and Financial Officer
DATED: August 16, 1994
