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 December 31, 1993
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 December 31, 1993 was 6,084,638
PAGE 1 OF 14 CONSECUTIVELY NUMBERED PAGES.
<PAGE>
Micro Security Systems, Inc.
INDEX
PART I Financial Information
Page
Number
ITEM 1 Financial Statements
Consolidated Condensed Balance Sheets as of
December 31, 1993 and June 30, 1993 . . . . . . . . . . .5
Consolidated Condensed Statements of Operations
for the Three Months and Six Months Ended
December 31, 1993 and 1992 . . . . . . . . . . . . . . .7
Consolidated Condensed Statements of
Cash Flows for the Three Months and
Six Months Ended December 31, 1993 and 1992 . . . . . . 8
Notes to Consolidated Condensed Financial Statements . . . 9
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . 12
PART II Other Information
Item 1 Legal Proceeding . . . . . . . . . . . . . 14
Item 5 Other Information. . . . . . . . . . . . . 14
Item 6 Exhibits and Reports on Form 8-K. . . . . . 14
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . 15
<PAGE>
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 December 31, 1993, and the
related statements of income and changes in financial position for the six
months ended December 31, 1993, and December 31, 1992. 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.
<PAGE>
MICRO SECURITY SYSTEMS, INC.
Consolidated Balance Sheets
ASSETS
December 31, June 30,
1993 1993
(Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents $ 2,173 $ 71,606
Trade accounts receivable, less
allowance for doubtful accounts of
$8,025 and $8,025 145,057 267,484
Inventories 559,925 274,555
Prepaid Expenses 2,500 -
Total Current Assets 709,655 613,645
OTHER ASSETS
Property and equipment, at cost, less accumulated depreciation
of $243,042 and $191,197, respectively 808,680 506,765
Deposits 11,094 30,660
Total Other Assets 819,774 537,425
TOTAL ASSETS $1,529,429 $1,151,070
<PAGE>
MICRO SECURITY SYSTEMS, INC.
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
1993 1993
(Unaudited) (Audited)
CURRENT LIABILITIES
Bank overdraft $ 345,847 $ -
Trade accounts payable 128,155 74,452
Accrued expenses 38,776 37,775
Notes payable - current portion 6,395 18,836
Capital lease payable - current portion 28,023 5,557
Total Current Liabilities 547,196 136,620
OTHER LIABILITIES
Notes payable - long-term 65,216 65,216
Capital lease payable - long-term 226,968 12,927
Total Other Liabilities 292,184 78,143
Total Liabilities 839,380 214,763
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) (965,020) (718,762)
Total Stockholders' Equity 690,049 936,307
TOTAL LIABILITIES & STOCKHOLDERS EQUITY$1,529,429 $1,151,070
<PAGE>
MICRO SECURITY SYSTEMS, INC.
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Six Months Ended
December 31 December 31 December 31 December 31
1993 1992 1993 1992
SALES $ 210,024 $ 488,243 $ 746,860 $ 913,805
COST OF SALES 14,419 131,357 55,613 258,077
GROSS PROFIT 195,605 356,886 691,247 655,728
OPERATING EXPENSES
Salaries and wages 169,255 103,699 331,177 201,251
General and admintrative 283,490 147,076 541,301 249,862
Research and development 5,004 - 7,866 428
Depreciation 6,201 12,564 51,845 24,341
Total Operating Expense 463,950 263,339 932,189 475,882
NET OPERATING INCOME
(LOSS) (268,345) 93,547 (240,942) 179,846
OTHER INCOME (EXPENSE)
Interest income 90 314 427 619
Interest expense (963) (2,742) (5,743) (4,779)
Total Other Income
(Expense) (873) (2,428) (5,316) (4,160)
Income (loss) before
income taxes (269,218) 91,119 (246,258) 175,686
Provision for income taxes - - - -
NET INCOME (LOSS) $(269,218 $91,119 $(246,258) $ 175,686
EARNINGS PER SHARE $ (0.044) $ 0.015 $ (0.040) $ 0.029
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 6,084,638 6,084,638 6,084,638 6,084,638
<PAGE>
MICRO SECURITY SYSTEMS, INC
Statement of Cash Flows
(Unaudited)
For The Three Months Ended For The Six Months Ended
December 31 December 31 December 31 December 31
1993 1992 1993 1992
Cash Flows From Operating
Activities:
Net Income (Loss) $(269,218) $ 91,119 $(246,258) $175,686
Adjustments:
Depreciation 6,201 12,563 51,845 24,340
Changes in Operating Assets
and Liabilities:
(Increase) decrease in
Accounts receivable 202,899 (49,201) 122,427 (71,907)
(Increase) decrease in
inventories, prepaid expenses
and other assets (175,000) (53,176) (268,304) (60,988)
Increase (decrease) in cash
overdraft 331,346 (10,012) 345,847 (10,012)
Increase (decrease) in accounts
payable and accrued
expenses (17,080) 103,072 54,704 72,342
Net Cash Provided (Used) by
Operating Activities 79,148 94,365 60,261 129,461
Cash Flow from Investing
Activities:
Investment in subsidiary - (237,864) - (237,864)
Purchases of property
and equipment (73,660) (37,789) (126,395) (53,914)
Net Cash (Used)
by Investing
Activities: $ (73,660) $(275,653) $ (126,395) $ (291,778)
<PAGE>
MICRO SECURITY SYSTEMS, INC.
Statement of Cash Flows
(Unaudited)
For The Three Months Ended For The Six Months Ended
December 31 December 31 December 31 December 31
1993 1992 1993 1992
Cash Flows from Financing
Activities:
Proceeds from
capital lease $ - $ 6,923 $ - $ 6,923
Increase (decrease) in notes
payable (8,208) 182,477 (12,441) 167,487
Increase (decrease) in capital
lease (6,725) (3,249) 9,142 (7,230)
Net Cash Provided (Used)
by Financing
Activities: (14,933) 186,151 (3,299) 167,180
Increase (decrease) in cash
and cash equivalents (9,445) 4,863 (69,443) 4,863
Cash and cash equivalents at
beginning of period 11,618 - 71,606 -
Cash and cash equivalents at
end of period $ 2,173 $ 4,863 $ 2,173 $ 4,863
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest $ 963 $ 1,555 $ 5,743 $ 2,842
Income taxes $ - $ - $ 100 $ 100
Non Cash Financing Activities:
Equipment lease $ - $ - $ 245,649 $ -
<PAGE>
MICRO SECURITY SYSTEMS, INC.
Notes to the Consolidated Financial Statements
December 31, 1993
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
The unaudited, consolidated, condesed financial statements of
Micro Security Systems, Inc. (the "Company") included herin have
been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and
footnote disclosures normally required in financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules adequate to
make the information presented not misleading.
These interim unaudited, consolidated, condensed financial
statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended June 30, 1993 as filed with
the Securities and Exchange Commission. In the opinion of
Management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Opering results for the three month period and the Six
month period ended December 31, 1993 are not necessarily indicative
of the results that may be expected for the year ending June 30,
1994.
Cash and Cash Equivalenants and Short-Term Investments
For the purposes of the consolidated balance sheets and statements
of cash flows, the Company considers all investments with an
original maturity of three months or less to be cash equivalents.
Loss per share is based on the weighted-average number of shares
actually outstanding. No common stock equivalents are included in
this computation because they would be anti-dilutive.
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.
<PAGE>
MICRO SECURITY SYSTEMS, INC.
Notes to the Consolidated Financial Statements
December 31, 1993
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
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MATERIAL CHANGES IN FINANCIAL CONDITION
At December 31, 1993, the Company had current assets of $709,655 as
compared to $613,645 at June 30, 1993. Trade accounts receivable decreased by
$122,427 during the quarter from $267,484 as of June 30, 1993, to $145,057 as
of December 31, 1993. Inventories increased by $285,940 from $274,555 as of
June 30, 1993, to $559,925 as of December 31, 1993. Property and equipment
increased by $301,915 from $506,765 as of June 30, 1993, to $808,680 as of
December 31, 1993. Current liabilities increased by $410,576 from $136,620
as of June 30, 1993, to $547,196 as of December 31, 1993. 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 December 31, 1993, were
$210,024 compared to sales of $488,243 for the same period in the prior year.
This represents a decrease of $278,219, a decrease of fifty seven per cent
(57%). Net sales for the six months ended December 31, 1993, were $746,860
compared to $913,805 for the first six months of fiscal 1993 for a decrease
of $166,945. Sales decreased by eighteen per cent (18%) 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 the Company's normal customer base.
During the six month period ending December 31, 1993, salaries and
wages increased by $129,926 from $201,251 to $331,177 for the same period a
year earlier. General and administrative expenses increased by $291,439 during
the six month period ended December 31, 1993, from $249,862 to $541,301 for
the same period a year earlier. Research and development expenses during the
six month period ended December 31, 1993, increased by $7,442 from $428 to
$7,866 for the same period a year earlier. Total operating expenses for the
period ended December 31, 1993, increased by $456,307 from $475,882 to
$932,189 for the same period a year earlier. This represents an increase of
approximately ninety six per cent (96%). 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 December 31, 1993, the Company
had net operating loss of $268,345 compared to a net operating income of
$93,547 for the three month period ended December 31, 1992. Net operating
income decreased by $361,892. Net loss for the six month period ended
December 31, 1993, was $240,942 compared to a net income of $179,846 for the
same period a year earlier. Net loss per share for the six month period
ended December 31, 1993, was $(0.040) compared to net income of $0.029 per
share for the same period a year earlier.
The Company's sales decreased significantly during the quarter
ended December 31, 1993. The decrease in sales associated with an increase
in salaries and wages and increased general and administrative expenses
during the quarter 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 second quarter of fiscal 1994 ended
December 31, 1993, were significantly lower than the sales for the first
quarter of fiscal 1993. The current ratio as of December 31, 1993, was 1.29
compared to a current ratio of 4.49 as of June 30, 1993.
As of December 31, 1993, the Company has long-term debt for a
capital lease in the amount of $226,968.
Management believes that the increase in inventories is due to a
demand by customers for a shorter lead time on deliveries.
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
The Company has secured a line of credit to resolve short term
liquidity issues. With the Company's expansion and changing business
environment, it is managements belief that this line of credit will be
sufficient to meet the Company's need for the near future.
EQUIPMENT PURCHASE
The Company has purchased 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
components and 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. 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 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
The Company's SecuriKey products comprised approximately 90% of
sales for the quarter ending December 31, 1993.
The Company will emphasize expanding the sales of its SecuriKey
product line including the ADB products for the Apple computer market and the
SecuriKey product for the Unix market. In addition the Company will continue
its limited marketing of the SecuriData products. SecuriData encrypts and
decrypts data as it is processed and flows from storage to processing and
back to storage. The acceptance of the SecuriData product is slowly building
and increasing as customers understand the capabilities and features of
SecuriData. During the period, the Company has completed development of a
new model of SecuriKey and anticipates increased sales as a result of the
introduction of this new series.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
During the quarter the Registrant filed no report on Form 8-K.<PAGE>
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: February 22, 1994
