<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[ # ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996.
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO __________.
Commission file number 1-11900
Integrated Security Systems, Inc.
(Exact name of small business issuer as specified in its charter)
DELAWARE 75-2422983
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) No.)
8200 SPRINGWOOD, SUITE 230, IRVING, TEXAS 75063
(Address of principal executive offices) (Zip Code)
(214) 444-8280
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No
As of April 23, 1996, 4,639,693 shares of Registrant's common stock were
outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index to Integrated Security Systems, Inc. Consolidated Financial Statements:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Balance Sheets 3
Statement of Operations 4
Statement of Cash Flows 5
Notes to Financial Statements 6
</TABLE>
Page 2 of 11
<PAGE> 3
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 775,897 $ 209,655
Accounts receivable, net of allowance for doubtful
accounts of $49,254 and $54,558, respectively 1,337,755 1,761,701
Inventories 963,436 854,888
Restricted cash 62,410 157,851
Other current assets 115,196 38,221
Net assets from discontinued operations 24,671 76,807
-------------- --------------
Total current assets 3,279,365 3,099,123
Property and equipment, net 1,035,326 1,068,123
Intangible assets, net 287,356 136,116
Capitalized software development costs 738,739 787,816
Deferred income taxes 205,384 205,384
Other assets 55,332 10,943
-------------- --------------
Total assets $ 5,601,502 $ 5,307,505
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 908,358 $ 1,484,152
Accrued liabilities 761,975 1,044,450
Notes payable 1,112,929 950,947
Notes payable to related parties 241,626 4,000
Current portion of long-term debt 85,540 96,451
Net liabilities of discontinued operations 117,386 332,866
-------------- --------------
Total current liabilities 3,227,814 3,912,866
-------------- --------------
Long-term debt 205,051 213,899
Stockholders' equity:
Preferred stock, $.01 par value, 750,000 shares
authorized, 45,165 and 34,165, respectively, shares
issued and outstanding 452 342
Common stock, $.01 par value, 11,000,000 shares
authorized, 4,674,738 and 3,730,738, respectively,
shares issued and 4,624,738 and 3,680,738,
respectively, shares outstanding 46,747 37,307
Additional paid-in-capital 8,355,886 7,191,575
Accumulated deficit (6,115,698) (5,929,734)
Treasury stock (118,750) (118,750)
-------------- --------------
Total stockholders' equity 2,168,637 1,180,740
-------------- --------------
Total liabilities and stockholders' equity $ 5,601,502 $ 5,307,505
============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3 of 11
<PAGE> 4
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Sales $ 1,809,059 $ 1,388,235
Cost of sales 1,155,881 801,767
-------------- --------------
Gross margin 653,178 586,468
-------------- --------------
Operating expenses:
Selling, general and administrative 782,395 752,181
Research and product development 2,389 5,828
-------------- --------------
784,784 758,009
-------------- --------------
Loss from operations (131,606) (171,541)
Other income (expense):
Interest income 2,317 12,044
Interest expense (108,464) (105,556)
Other 6,000 (32)
-------------- --------------
Loss from continuing
operations before income tax (231,753) (265,085)
Income tax benefit 23,000 --
-------------- --------------
Loss from continuing operations (208,753) (265,085)
Discontinued operations:
Loss from discontinued operations -- (252,392)
Gain on disposal of discontinued operations 22,789 --
-------------- --------------
Gain (loss) from discontinued operations 22,789 (252,392)
-------------- --------------
Net loss $ (185,964) $ (517,477)
============== ==============
Weighted average common and common
equivalent shares outstanding 5,401,848 3,919,705
============== ==============
Net loss per share:
Continuing operations (.03) (.07)
Discontinued operations (.00) (.06)
-------------- --------------
Total (.03) (.13)
============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4 of 11
<PAGE> 5
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
-----------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss from operations $ (185,964) $ (517,477)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation 47,078 38,448
Amortization 114,495 102,118
Bad debt expense (5,304) 6,000
Non-cash income (263,586) (15,872)
Provision for inventory reserve 5,566 9,000
Restricted cash 95,441 (4,170)
Net change in assets and liabilities from
discontinued operations (113,015) 457,837
Changes in operating assets and liabilities:
Accounts receivable 429,250 240,465
Inventories (96,043) (62,796)
Other assets 3,296 (84,627)
Accounts payable (308,708) (74,369)
Accrued liabilities (320,911) 80,163
----------- -----------
Net cash provided (used) by operating activities (598,405) 174,720
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (19,402) (13,337)
Intangible assets (66,178) --
Capitalized software costs -- (68,358)
----------- -----------
Net cash used by investing activities (85,580) (81,695)
----------- -----------
Cash flows from financing activities:
Issuance of preferred stock, net 190,000 --
Issuance of common stock, net 760,000 --
Payments on line of credit -- (89,595)
Payments on notes payable and long-term debt (34,773) (8,747)
Proceeds from notes payable and long-term debt 335,000 8,000
Other -- (1,946)
----------- -----------
Net cash provided (used) by financing activities 1,250,227 (92,288)
----------- -----------
Increase in cash 566,242 737
Cash at beginning of period 209,655 10,523
----------- -----------
Cash at end of period $ 775,897 $ 11,260
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5 of 11
<PAGE> 6
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
QUARTERS ENDED MARCH 31, 1996 AND 1995
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three months
ended March 31, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. The accompanying financial
statements include the accounts of Integrated Security Systems, Inc. ("ISSI")
and all of its subsidiaries (collectively, the "Company"), with all significant
intercompany accounts and transactions eliminated. For further information,
refer to the consolidated financial statements and footnotes thereto included
in the Company's 1995 Annual Report on Form 10- KSB filed March 14, 1996.
NOTE 2 - RECLASSIFICATION
Certain reclassification of prior year amounts have been made to
conform to the current period presentation.
NOTE 3 - FINANCING
The Company has not yet been successful at obtaining permanent
financing. The factors which led to the independent auditor's report that
substantial doubt existed about the Company's ability to continue as a going
concern still exist. The Company is actively seeking to remedy this situation,
as detailed below, but as of this time no permanent solution has been
established.
On January 24, 1996, the Company converted related party accounts
payable into notes payable to related parties of $13,080. On March 31, 1996,
$5,000 of this note was paid, with the remainder plus interest at a rate of
prime plus 2% per annum due on August 1, 1996.
On February 8, 1996, the Company borrowed $85,000 from a principal
stockholder. Attached to this note is a warrant to purchase 13,201 shares of
the Company's common stock at a price of $1.176 per share. This note is non-
interest bearing and payable upon demand of the holder.
On March 1, 1996, the Company converted related party accounts payable
into notes payable to related parties of $48,546. These notes are due on
September 1, 1996 and March 1, 1997 and bear interest at 10.53% per annum.
On March 6, 1996, the Company announced the retention of Bathgate
McColley Capital Group LLC as its investment banker. Bathgate McColley Capital
Group LLC will provide ISSI with a full range of investment banking services,
including capital formation and merger and acquisition support, and will assist
ISSI in enhancing and expanding the public market for its common stock and
warrants.
On March 11, 1996, the Company received short term advances totaling
$250,000 from affiliated and unaffiliated investors. These advances are due
six months from origination and pay interest at 8% per annum. $150,000 of
these advances are personally guaranteed by Gerald K. Beckmann, ISSI's Chief
Executive Officer. These advances are convertible into $20 Series C preferred
stock convertible to 30 common shares and a warrant to purchase 15 shares of
the Company's common stock at a price of $1 per share. These warrants expire
five years from the date of issue.
Page 6 of 11
<PAGE> 7
On March 27, 1996, the Company sold 10,000 Units, with each Unit
consisting of one share of $20 Series A convertible preferred stock and
warrants to purchase eight shares of the Company's common stock at a price of
$1 per share, to outside investors for $190,000 in cash, net of offering
expenses. The warrants expire on March 31, 2001.
On March 28, 1996, the Company sold 800,000 shares of common stock and
320,000 warrants to purchase common stock to an institutional investor for
$760,000 in cash, net of offering expenses. The warrants have an exercise
price of $1 per share and expire on March 31, 2001.
NOTE 4 - LITIGATION SETTLEMENT
On February 6, 1996, the Company and Philip R. Thomas, a principal
stockholder, reached a settlement in a lawsuit filed in the U.S. District Court
of Dallas County, Texas entitled Charles W. Martin, Jr. v. Integrated Security
Systems, Inc., Automatic Access Controls, Inc. and Philip R. Thomas (Case No.
94-06750). According to the terms of the settlement, (i) the Company agreed to
pay Mr. Martin $175,000 cash over the next year, (ii) the Company released
contractual restrictions on 99,000 shares of the Company's common stock held by
Martin prior to the settlement, and (iii) Philip R. Thomas agreed to transfer
85,000 shares of the Company's common stock owned by him to Martin.
NOTE 5 - ACQUISITION OF TRI-COASTAL SYSTEMS, INC.
On September 18, 1995, the Company purchased substantially all of the
assets and liabilities of Tri-Coastal Systems, Inc. ("TCSI") by issuing 21,000
shares of the Company's common stock with an aggregate market value of $55,125.
This transaction was accounted for as a purchase with the excess of the
purchase price over the fair market value of the net assets purchased of
$125,201 recorded as goodwill. On March 31, 1996, the Company issued 45,000
additional shares of common stock with an aggregate market value of $101,250
and paid $66,178 in cash to the former owners of TCSI in exchange for the
surrender by the former owners of a right granted to them at the time of the
purchase of TCSI in September 1995, to demand that the original purchase be
reversed under certain circumstances. Goodwill in the amount of $162,155 was
recorded as a result of these transactions. Through March 31, 1996, $5,273 of
amortization expense has been recorded.
NOTE 6 - SUBSEQUENT EVENTS
On April 10, 1996, the Company repaid a loan of $85,000 from a
principal stockholder. Related party accounts receivables of $48,127 were
offset as part of the transaction, resulting in a net cash payment of $36,873.
On April 25, 1996, the Company closed on a $900,000 term loan facility
with a lending institution. The loan is due in eleven monthly payments of
$12,000 beginning June 1, 1996, and one payment sufficient to pay the balance.
Interest on the loan is floating at the lending institution's Base Lending Rate
minus 1%, which is currently 10% APR. The loan is secured by all real estate
and equipment at B&B Electromatic, Inc. and guaranteed by Gerald K. Beckmann,
ISSI's Chief Executive Officer, with certain of his personal assets pledged as
collateral. Approximately $450,000 of the proceeds of this loan were used to
repay existing mortgages and notes payable at B&B, and the remaining proceeds
were used to repay a portion of ISSI notes payable due April 29, 1996.
During the quarter ended December 31, 1995, the Company secured an
extension of the due dates of certain outstanding loans. These loans are in
the principal amount of $789,000 and are secured by certain of the Company's
accounts receivable, equipment and inventory. These loans were extended until
April 29, 1996 in exchange for warrants to purchase the Company's common stock
and an increase in the interest rate from 14% to 16% per annum. On April 29,
1996, $680,000 of the aforementioned loans were paid along with accrued
interest. The remaining $109,000 in principal balance was converted by the
holder into 5,453 Units consisting of one share of $20 Series A convertible
preferred stock and warrants to purchase eight shares of the Company's common
stock at a price of $1 per share through March 31, 2001.
Page 7 of 11
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
Integrated Security Systems, Inc. ("ISSI") designs, develops,
manufactures, sells and services commercial and industrial security and traffic
control products including warning gates, crash barriers, lane changers,
navigational and airport lighting, and electronically-controlled security
gates. The Company also develops and markets "intelligent" or programmable
security systems that integrate multiple security devices and subsystems for
governmental, commercial and industrial facilities. Applications for these
systems include perimeter security for airports, access control for commercial
office buildings, and video surveillance for warehouses.
The Company was incorporated on December 19, 1991. Effective as of
January 1, 1992, the Company acquired B&B Electromatic, Inc. ("B&B") in a
transaction which was accounted for similar to a pooling of interests. B&B
designs, manufactures and distributes commercial and industrial security
products, and traffic control barriers and lighting for the road and bridge
industry. B&B has been in operation since 1925.
On March 16, 1993, the Company organized Innovative Security
Technologies, Inc. ("IST"), which is a retail seller of security products and
microprocessor-based systems to large customers. On August 23, 1993, the
Company announced the development of its PC-based security network, the
Intelli-Site(R), that integrates multiple security functions into a centralized
management system for single and/or multiple site locations. IST is
responsible for the sales and marketing of this product.
On September 18, 1995, the Company purchased substantially all of the
assets and liabilities of Tri-Coastal Systems, Inc. ("TCSI") by issuing 21,000
shares of the Company's common stock with an aggregate market value of $55,125.
This transaction was accounted for as a purchase. On March 31, 1996, the
Company issued 45,000 additional shares of common stock with an aggregate
market value of $101,250 and paid $66,178 in cash to the former owners of TCSI
in exchange for the surrender by the former owners of a right granted to them
at the time of the purchase of TCSI in September 1995, to demand that the
original purchase be reversed under certain circumstances. TCSI sells and
installs security and safety systems to end users.
During the second quarter of 1995, the Company discontinued the
operations of Automatic Access Controls, Inc. ("AAC"), a distributor of
commercial and industrial security products, and merged certain functions of
AAC with two other existing subsidiaries (B&B and IST). This merger was
implemented during the second and third quarters of 1995. The results of
operations for AAC are reflected on the consolidated financial statements as
discontinued operations for all periods reported.
RESULTS OF OPERATIONS
Quarter Ended March 31, 1996 Compared to Quarter Ended March 31, 1995
Sales. The Company's sales increased by 30.3% from $1,388,235 in the
first quarter of 1995 to $1,809,059 in the first quarter of 1996. This
increase is primarily attributable to the inclusion of TCSI revenue in the
quarter ended March 31, 1996, with no equivalent revenue last year. B&B
accounted for 87% of the first quarter 1995 revenues versus 73% of the first
quarter 1996 revenues.
Cost of Sales and Gross Profit. Gross profit as a percent of sales
decreased to 36.1% from 42.2% for the first quarters of 1996 and 1995,
respectively. This decrease was primarily due to inclusion of TCSI results in
the quarter ended March 31, 1996, which generally has lower gross margins than
B&B, the other material operating subsidiary. Historically, gross margins have
averaged 43% and 25% for B&B and TCSI, respectively. The Company also began
amortizing software development costs related to the Intelli-Site software,
which amounted to $31,845.
Page 8 of 11
<PAGE> 9
Selling, General and Administrative. Selling, general and
administrative expenses increased during the first three months of 1996
compared to the same period in 1995 by approximately $30,000. The increase is
attributable to increased marketing and personnel expenses.
Interest Income. Interest income for the first three months of 1996
decreased to $2,317 from $12,044 in the first quarter of 1995. During the
first quarter of 1995, the Company earned interest on a $350,000 certificate of
deposit placed with a bank as collateral to secure a line of credit. On April
11, 1995, the certificate of deposit and accumulated interest were released
when the line of credit was repaid in its entirety.
Interest Expense. The increase of $2,908 in interest expense during
the first three months of 1996, compared to the same period in 1995, is
attributable to increased interest rates and amortization of warrant costs
pertaining to extensions of certain short term notes.
Income Taxes. The Company recorded an income tax benefit of $23,000
during the first quarter of 1996, due to the reversal of state income tax
estimates.
Discontinued Operations. The discontinued operations reflect the
operations of AAC. AAC's operations were discontinued in the second quarter of
1995. During the first quarter of 1996, the Company recorded a gain on
disposal of discontinued operations in the amount of $22,789 related to the
settlement of liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company has not yet been successful at obtaining permanent
financing. As a result, the going concern that existed at December 31, 1996
still exists. The Company is actively seeking to remedy this situation, as
detailed below, but as of this time no permanent solution has been established.
The Company's cash position increased by $566,242 during the first
quarter of 1996. The Company used $598,405 for operations during this period
as compared with $174,720 generated from operations during the same period last
year. This was primarily attributable to the payment of certain 1995 accounts
payable and accrued liabilities, for which extended payment terms were
negotiated. These uses of cash were partially offset by increased collections
of accounts receivable, either directly or through a factoring agreement.
Discontinued operations used $113,015 of cash during the first three months of
1996 to pay liabilities compared to providing $457,837 in the same 1995 period.
During the first three months of 1996, the Company generated $1,250,227 from
financing activities. Payments of $34,773 were made on notes payable and
long-term debt. The Company borrowed $85,000 from a principal stockholder and
received short term advances totaling $250,000 from affiliated and unaffiliated
investors. The Company also received $950,000 through the sale of common and
preferred stock, warrants and convertible debt, net of related expenses.
On March 11, 1996, the Company received short term advances totaling
$250,000 from affiliated and unaffiliated investors. These advances are due
six months from origination and pay interest at 8% per annum. $150,000 of
these advances are personally guaranteed by Gerald K. Beckmann, ISSI's Chief
Executive Officer. These advances are convertible into $20 Series C preferred
stock convertible to 30 common shares and a warrant to purchase 15 shares of
the Company's common stock at a price of $1 per share. These warrants expire
five years from the date of issue.
On March 27, the Company sold 10,000 Units, with each Unit consisting
of one share of $20 Series A convertible preferred stock and warrants to
purchase eight shares of the Company's common stock at a price of $1 per share
until March 31, 2001, to outside investors for $190,000 in cash, net of
offering expenses. On March 28, 1996, the Company sold 800,000 shares of
common stock and 320,000 warrants to purchase common stock to an institutional
investor for $760,000 in cash, net of offering expenses. The warrants have an
exercise price of $1 per share and expire on March 31, 2001. The Company used
the proceeds of these sales to make payments on short-term notes payable and
past due trade debt.
Page 9 of 11
<PAGE> 10
On April 25, 1996, the Company closed on a $900,000 term loan facility
with a lending institution. The loan is due in eleven monthly payments of
$12,000 beginning June 1, 1996, and one payment sufficient to pay the balance.
Interest on the loan is floating at the lending institution's Base Lending Rate
minus 1%, which is currently 10% APR. The loan is secured by all real estate
and equipment at B&B and guaranteed by Gerald K. Beckmann, ISSI's Chief
Executive Officer, with certain of his personal assets pledged as collateral.
Approximately $450,000 of the proceeds of this loan were used to repay existing
mortgages and notes payable at B&B, and the remaining proceeds were used to
repay a portion of ISSI notes payable due April 29, 1996.
The Company raised $2,100,000 through equity placements and new or
refinanced debt during the first four months of 1996. However, the Company
will likely be required to raise additional cash through debt and/or equity
placements, or other arrangements, in order to fund operations as presently
structured and/or to acquire other businesses during the next year. The exact
amount, type and timing of such funding activities, and their impact on current
shareholder interests, cannot be determined at this time.
SEASONALITY
Because the Company sells products which are used primarily in outdoor
construction, which is affected by weather, the Company's sales have
historically been greater during the third and fourth quarters of the year than
during the first two quarters. Consequently, the Company's sales during the
two quarters ending in March and June of each year are generally not expected
to reach the levels of the two quarters ending in September and December of
each year. The Company expects that this seasonal fluctuation will continue.
Page 10 of 11
<PAGE> 11
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Integrated Security Systems, Inc.
----------------------------------------
(Registrant)
Date: August 13, 1996
--------------------
/s/ GERALD K. BECKMANN
----------------------------------------
Gerald K. Beckmann
Director, Chairman of the Board,
President and Chief Executive Officer
Page 11 of 11
