U.S. 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 March 31, 1998
/ / 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 or organization (I.R.S.
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 May 1, 1998, 8,155,158 shares of Registrant's common stock were
outstanding.
Page 1 of 12
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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
Statements of Operations 4
Statements of Cash Flows 5
Notes to Financial Statements 6
</TABLE>
Page 2 of 12
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INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 613,920 $ 1,581,191
Accounts receivable, net of allowance for
doubtfulaccounts of $61,963 and $54,733, 1,559,415 2,457,596
respectively
Inventories 1,055,344 867,898
Restricted cash 58,121 54,928
Other current assets 339,686 312,234
---------------- ----------------
Total current assets 3,626,486 5,273,847
Property and equipment, net 5,696,647 5,278,689
Intangible assets, net 2,111,642 2,283,970
Capitalized software development costs, 350,298 493,350
net
Deferred income taxes 205,384 205,384
Other assets 19,893 18,295
---------------- ----------------
Total assets $ 12,010,350 $ 13,553,535
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 821,318 $ 690,712
Accrued liabilities 395,278 672,340
Deferred revenue 249,179 116,028
Current portion of long-term debt and 507,243 495,737
other liabilities
---------------- ----------------
Total current liabilities $ 1,973,018 $ 1,974,817
---------------- ----------------
Long-term debt and other liabilities 7,972,845 7,630,956
Stockholders' equity:
Preferred stock, $.01 par value, 750,000
shares authorized;15,750 and 17,250 shares
issued and outstanding 157 172
Common stock, $.01 par value, 30,000,000
shares
Authorized; 8,205,158 and 7,955,212
shares, respectively,
Issued; and 8,155,158 and 7,905,212
shares, respectively,
Outstanding 82,052 79,552
Additional paid in capital 10,766,050 10,523,546
Accumulated deficit (8,665,022) (6,536,758)
Treasury stock, 50,000 shares (118,750) (118,750)
---------------- ----------------
Total stockholders' equity 2,064,487 3,947,762
---------------- ----------------
Total liabilities and stockholders' $ 12,010,350 $ 13,553,535
equity ================ ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
Page 3 of 12
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INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $2,350,663 $3,572,822 $8,061,015 $8,401,548
Cost of sales 1,532,527 2,164,316 4,937,235 4,731,204
------------ ----------- ------------ ------------
Gross margin 818,136 1,408,506 3,123,780 3,670,344
------------ ------------ ------------ ------------
Operating expenses:
Selling,general and administrataive 1,462,805 1,212,828 4,370,475 3,080,755
Research and product development 58,343 13,558 276,992 156,786
------------ ------------ ------------ ------------
1,521,148 1,226,386 4,647,467 3,237,541
------------ ------------ ------------ ------------
Income (loss) from operations (703,012) 182,120 (1,523,687) 432,803
Other income (expense):
Interest income 7,705 3,399 33,337 5,342
Interest expense (216,926) (159,162) (628,294) (245,418)
Gain on sale of assets (2,499) 23,446 36,786 23,446
Other (19,604) 165 (41,433) (5,132)
------------ ------------ ------------ ------------
Income (loss) before income taxes (934,336) 49,968 (2,123,291) 211,041
Benefit (provision) for income taxes (249) (3,663) (4,974) (5,998)
------------ ------------ ------------ ------------
Net income (loss) $(934,585) $ 46,305 $(2,128,265) $ 205,043
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding 8,204,386 6,961,398 8,148,285 6,326,630
Potential common shares outstanding 69,968 2,244,054 609,384 2,343,675
----------- ------------ ------------ ------------
Weighted average common and potential
common shares outstanding 8,274,354 9,205,452 8,757,669 8,670,305
============ ============ ============ ============
Net income (loss) per share:
Basic $ (0.11) $ 0.01 $ (0.26) $ 0.03
============ ============ ============ ============
Diluted $ (0.11) $ 0.01 $ (0.24) $ 0.02
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
Page 4 of 12
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INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,128,265) $ 205,043
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Depreciation 437,955 258,998
Amortization 311,270 213,669
Bad debt expense 12,825 16,900
Provision for warranty reserve 66,785 154,500
Provision (benefit) for inventory reserve 9,000 (12,999)
Deferred revenue 133,151 (5,398)
Gain on sale of assets (36,786) (23,446)
Other non-cash expenses (income) 18,228 (93,247)
Net change in assets and liabilities of discontinued operations -- (49,463)
Changes in operating assets and liabilities,
net of effects from acquisition of Golston Company:
Accounts receivable 885,356 (675,239)
Inventories (196,446) 201,270
Restricted cash (3,0193) 74,605
Other assets (29,050) (232,229)
Accounts payable 130,606 107,137
Accrued liabilities (301,847) (14,719)
----------- --------
Net cash provided (used) by operating activities (690,411) 125,382
----------- --------
Cash flows from investing activities:
Purchase of property and equipment (907,287) (44,584)
Sale of property and equipment 88,160 112,256
Acquisition of Golston Company -- (4,851,406)
------------ --------
Net cash used by investing activities (819,127) (4,783,734)
------------- --------
Cash flows from financing activities:
Issuance of common stock 188,871 1,082,895
Payments on debt and other liabilities (380,408) (288,211)
Proceeds from notes payable and long-term debt 733,804 4,777,500
Acquisition costs -- (9,950)
----------- ---------
Net cash provided by financing activities 542,267 5,562,234
------------ ----------
Increase (decrease) in cash and cash equivalents (967,271) 903,882
Cash and cash equivalents at beginning of period 1,581,191 130,305
------------- ---------
Cash and cash equivalents at end of period $ 613,920 $1,034,187
============== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5 of 12
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INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
QUARTERS ENDED MARCH 31, 1998 AND 1997
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 (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, 1998.
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 fiscal 1997 Annual
Report on Form 10-KSB filed September 25, 1997.
NOTE 2 - RECLASSIFICATION
Certain reclassification of prior year amounts have been made to conform to
the current period presentation.
NOTE 3 - WARRANT EXCHANGE
On April 17, 1998 the Company completed an offer to exchange the Company's
previously outstanding redeemable common stock purchase warrants (the `Public
Warrants') for new redeemable common stock purchase warrants (the `Exchange
Warrants'). Pursuant to the terms of the exchange offer, the Company accepted
all Public Warrants tendered of 1,335,005 and issued the comparable number of
exchange warrants.
NOTE 4 - EARNINGS PER SHARE
In February 1997, the Financial Accounting and Standards Board issued the
Statement of Financial Accounting Standards No. 128, `Earnings Per Share.' This
statement establishes a new methodology for reporting earnings per share for
interim financial information and annual financial statements issued with
periods ending after December 15, 1997. Accordingly, basic and diluted income
(loss) per share amounts are reported for all periods presented.
Page 6 of 12
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The following table sets forth the basic and diluted net income (loss) per
share computation for the periods ending March 31, 1997 and 1998:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
-------------------------- -------------------------
1998 1997 1998 1997
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Net Income (loss) $(934,585) $ 46,305 $(2,128,265) $ 205,043
Net Income available to common shareholders $(934,585) $ 46,305 $(2,128,265) 205,043
========== ============= ============ ============
Basic:
Weighted average number of common shares outstanding 8,204,386 6,961,398 8,148,285 6,326,630
========== ============= ============ ============
Net Income (loss) per share $ (0.11) $ 0.01 $ (.26) $ 0.03
========== ============= ============ ============
Dilutive:
Weighted average number of common shares outstanding 8,204,386 6,961,398 8,148,285 6,326,630
Potential common shares from assumed exercises of dilutive
stock options, warrants and conversion of preferred stock 69,968 2,244,054 609,384 2,343,675
--------- ------------- ------------ ------------
Weighted average number of common shares and potential
commmon shares used to calculate diluted net income
loss per share 8,274,354 9,205,452 8,757,669 8,670,305
========== ============ ============ ===========
Net Income (loss) per share $ (0.11) $ 0.01 $ (0.24) $ 0.02
=========== ============ ============ ===========
</TABLE>
There were 2,474,977 potential common shares which were not included in
average weighted shares and potential common shares outstanding at March 31,
1998 because to do so would have been antidilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
The following information contains certain forward-looking statements. It
is important to note that ISSI's actual results could differ materially from
those projected by such forward-looking statements. Important factors that
could cause actual results to differ materially from those projected in the
forward-looking statements include, but are not limited to, the following:
operations may not improve as projected, new products may not be accepted by
the marketplace as anticipated, or new products may take longer to develop
than anticipated.
Effective January 1, 1997, the Company changed its fiscal year end from
December 31 to June 30. References to fiscal 1996 refer to the twelve months
ended December31, 1996, references to fiscal 1997 refer to the six months ended
June 30, 1997, and references to fiscal 1998 refer to the twelve months ending
June 30, 1998.
Page 7 of 12
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RESULTS OF OPERATIONS
Quarter Ended March 31, 1998 Compared to Quarter Ended March 31, 1997
SALES. The Company's sales decreased by $1.2 million (34%) to $2.4 million
during the quarter ended March 31, 1998 from $3.6 million during the comparable
1997 period. The Company's Security Systems Group experienced a 64% decline in
sales compared to the prior year period due primarily to Tri-Coastal Systems,
Inc. (`TCSI') client construction delays and decreased sales at the Innovative
Security Technologies, Inc. (`IST') subsidiary. Sales at the Company's
manufacturing subsidiaries decreased 27% due to decreased sales at B&B
Electromatic, Inc. (`B&B').
For the quarter ended March 31, 1998, approximately 72% of the Company's
revenues were generated from the sale of products manufactured by the Company
compared to 70% for the same 1997 period.
COST OF SALES AND GROSS MARGIN. Gross margin as a percent of sales
decreased to 35% from 39% for the quarters ended March 31, 1998 and 1997,
respectively. The majority of the decrease was due to a less favorable product
mix at B&B compared to the prior year period. During the 1997 period,
B&B experienced a higher percentage of sales of road and bridge products, which
have higher gross margins. The TCSI subsidiary also contributed to the lower
gross margin due to the completion of a large job with lower than normal
margins.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased to $1.5 million during the quarter ended March 31, 1998 from
$1.2 million during the comparable 1997 period. Most of the increase was
attributable to the Company absorbing all of the sales and marketing expenses
of IST during the 1998 period.
RESEARCH AND PRODUCT DEVELOPMENT. Research and product development
expenses increased by approximately $45,000 during the quarter ended March 31,
1998 compared to the comparable 1997 period due to additional development of the
Company's Intelli-Site -Registered Trademark- products and increased testing and
design of new products at B&B. (These costs were partially offset by the IST
partnership during the 1997 period.)
INTEREST EXPENSE. Interest expense increased by approximately $58,000
during the quarter ended March 31, 1998, compared to the comparable 1997 period
due to financing at the Golston subsidiary.
OTHER. The $19,439 increase in other expenses was almost entirely related
to the factoring facility at TCSI.
Nine Months Ended March 31, 1998 Compared to nine Months Ended March 31, 1997.
SALES. The Company's sales decreased by $340,000 (4%) to $8.1 million
during the first nine months of fiscal 1998 from $8.4 million during the
comparable 1997 period. The Company's
<Page 8 of 12>
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Security Systems Group experienced a 33% decline in sales compared to the prior
year period. Sales at the Company's manufacturing subsidiaries increased 8.4%
with the inclusion of Golston, acquired on December 31, 1996, offset in part by
decreased business at B&B.
For the first nine months of fiscal 1998, approximately 75% of the
Company's revenues were generated from the sale of products manufactured by the
Company compared to 71% for the same 1997 period.
COST OF SALES AND GROSS MARGIN. Gross margin as a percent of sales
decreased to 39% from 44% for the nine months ended March 31, 1998 and 1997,
respectively. The majority of the decrease was due to lower sales and a less
favorable product mix at B&B compared to the prior year period. During the 1997
period, B&B experienced a higher percentage of sales of road and bridge
products, which have higher gross margins.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased to $4.4 million during the first nine months of fiscal 1998
from $3.1 million during the comparable 1997 period. Most of the increase was
attributable to the Company absorbing all of the sales and marketing expenses of
IST during the 1998 period. (These costs were partially offset by the IST
partnership during the 1997 period) and the inclusion of Golston for the entire
nine months of fiscal 1998 versus three months of fiscal 1997.
RESEARCH AND PRODUCT DEVELOPMENT. Research and product development
expenses increased by approximately $120,000 during the first nine months of
fiscal 1998 compared to the comparable 1997 period due to additional development
of the Company's Intelli-Site products and increased testing and design of new
products at B&B (these costs were partially offset by the partnership during the
1997 period.)
GAIN ON SALE OF ASSETS. The Company recorded a $37,000 gain on the sale of
assets during the first nine months of fiscal 1998, principally from the sale of
assets at Golston.
OTHER. The $22,000 increase in other expenses was almost entirely related
to the factoring facility at TCSI established during fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position decreased by $967,271 during the first nine
months of fiscal 1998, using $690,411 for operations during the period and
$819,127 for purchasing property and equipment as compared to $125,382 generated
from operations and $67,672 generated from property and equipment in the 1997
period.
During the first nine months of fiscal 1998, the Company financed its operations
from cash generated from operations and through the exercise of outstanding
warrants to purchase the Company's common stock. The Company also received
$733,804 in proceeds from long-term debt used for capital expenditures at
Golston and made payments of $380,408 on debt and other liabilities.
Page 9 of 12
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Historically, the Company's manufacturing subsidiaries have generated
positive cash flow from operations. This positive cash flow, in conjunction
with the existing financing facilities should position the Company to cover its
working capital needs for all subsidiaries except IST. Development of
distribution channels for Intelli-Site will continue, with a significant portion
of future investments being utilized to launch Intelli-Site through the PSA
Security Network. Training and pre-sales support of the PSA channel and other
channels will require sizable expenditures by the Company in time and dollars
before significant revenues are realized. To finance these activities, the
Company anticipates that it will need to raise additional funds through debt,
equity or the divestiture of certain assets or a combination of such.
The Company is currently in violation of certain debt covenants relating to the
convertible debentures issued in December 1996. The Company anticipates these
violations will be remedied, or a waiver issued by the lender, before the end of
the Company's fiscal year.
Page 10 of 12
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None.
Page 11 of 12
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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.
<TABLE>
<S> <C> <C>
Integrated Security Systems, Inc.
----------------------------------
(Registrant)
Date: May 12, 1998 /s/ GERALD K. BECKMANN
-------------- ------------------------------------
Gerald K. Beckmann
Director, Chairman of the
Board,
President and Chief
Executive Officer
</TABLE>
Page 12 of 12
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 613,920
<SECURITIES> 0
<RECEIVABLES> 1,559,415
<ALLOWANCES> 0
<INVENTORY> 1,055,344
<CURRENT-ASSETS> 3,626,486
<PP&E> 5,696,647
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,010,350
<CURRENT-LIABILITIES> 1,973,018
<BONDS> 0
0
157
<COMMON> 82,052
<OTHER-SE> 1,982,277
<TOTAL-LIABILITY-AND-EQUITY> 12,010,350
<SALES> 8,061,015
<TOTAL-REVENUES> 8,061,015
<CGS> 4,937,235
<TOTAL-COSTS> 4,937,235
<OTHER-EXPENSES> 4,647,467
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 628,294
<INCOME-PRETAX> (2,123,291)
<INCOME-TAX> 4,974
<INCOME-CONTINUING> (2,128,265)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,128,265)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
