<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 1999.
[ ] 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 (I.R.S. Employer
incorporation or organization) Identification No.)
8200 SPRINGWOOD, 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] [ ]
As of April 30, 1999, 9,313,993 shares of Registrant's common stock were
outstanding.
Page 1 of 10
<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
Statements of Operations............................................................4
Statements of Cash Flows............................................................5
Notes to Financial Statements.......................................................6
</TABLE>
Page 2 of 10
<PAGE> 3
INTEGRATED SECURITY SYSTEMS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 259,453 $ 311,117
Accounts receivable, net of allowance for doubtful
accounts of $58,327 and $45,159, respectively 2,499,412 2,204,005
Inventories 939,749 926,442
Restricted cash -- 107,039
Notes receivable, net of $90,000 discount 360,000 --
Costs and estimated earnings in excess of billings
on uncompleted contracts 121,297 --
Other current assets 222,326 192,987
------------ ------------
Total current assets 4,402,237 3,741,590
Property and equipment, net 3,932,500 5,610,622
Intangible assets, net 1,408,852 2,055,117
Capitalized software development costs, net 389,585 318,453
Deferred income taxes 205,384 205,384
Other assets 23,107 19,642
------------ ------------
Total assets $ 10,361,665 $ 11,950,808
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,388,153 $ 1,002,375
Accrued liabilities 877,666 675,616
Billings in excess of costs and estimated earnings
on uncompleted contracts 105,465 159,945
Current portion of long-term debt and other liabilities 2,976,082 1,564,617
------------ ------------
Total current liabilities $ 5,347,366 $ 3,402,553
------------ ------------
Long-term debt and other liabilities 6,048,202 7,490,753
Stockholders' equity:
Preferred stock, $.01 par value, 750,000 shares authorized;
10,250 shares issued and outstanding 102 102
Common stock, $.01 par value, 30,000,000 shares
authorized; 9,313,993 and 8,525,808 shares, respectively,
issued; and 9,263,993 and 8,475,808 shares,
respectively, outstanding 93,140 85,258
Additional paid in capital 11,889,564 10,822,802
Deferred financing costs (128,415) --
Accumulated deficit (12,769,544) (9,731,910)
Treasury stock, 50,000 shares (118,750) (118,750)
------------ ------------
Total stockholders' equity (1,033,903) 1,057,502
------------ ------------
Total liabilities and stockholders' equity $ 10,361,665 $ 11,950,808
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
Page 3 of 10
<PAGE> 4
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,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 2,983,720 $ 2,350,663 $ 8,523,571 $ 8,061,015
Cost of sales 1,783,390 1,532,527 5,169,668 4,937,235
----------- ----------- ----------- -----------
Gross margin 1,200,330 818,136 3,353,903 3,123,780
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative 2,074,755 1,462,805 5,270,422 4,370,475
Research and product development 93,742 58,343 283,274 276,992
----------- ----------- ----------- -----------
2,168,497 1,521,148 5,553,696 4,647,467
----------- ----------- ----------- -----------
Income (loss) from operations (968,167) (703,012) (2,199,793) (1,523,687)
Other income (expense):
Interest income 15,727 7,705 37,799 33,337
Interest expense (474,944) (216,926) (905,429) (628,294)
Gain (loss) on sale of assets -- (2,499) 102,220 36,786
Other (9,110) (19,604) (60,981) (41,433)
----------- ----------- ----------- -----------
Income (loss) before income taxes (1,436,494) (934,336) (3,026,184) (2,123,291)
Benefit (provision) for income taxes (3,150) (249) (11,450) (4,974)
----------- ----------- ----------- -----------
Net income (loss) $(1,439,644) $ (934,585) $(3,037,634) $(2,128,265)
=========== =========== =========== ===========
Weighted average common and
potential common shares
outstanding 9,263,993 8,204,386 8,956,722 8,148,285
=========== =========== =========== ===========
Basic and diluted loss per
common share: $ (0.16) $ (0.11) $ (0.34) $ (0.26)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
Page 4 of 10
<PAGE> 5
INTEGRATED SECURITY SYSTEMS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
March 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,037,634) $(2,128,265)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation 378,049 437,955
Amortization 344,146 311,270
Bad debt expense 15,810 12,825
Provision for warranty reserve 92,650 66,785
Provision for inventory reserve 20,681 9,000
Gain on sale of assets (102,220) (36,786)
Stock purchase warrant issuance 514,414 --
Other noncash expenses -- 18,228
Changes in operating assets and liabilities:
Accounts receivable (311,217) 885,356
Inventories (33,988) (196,446)
Restricted cash 107,039 (3,193)
Costs and estimated earnings in excess of billings
on uncompleted contracts (121,297) --
Other assets (57,716) (29,050)
Accounts payable 385,778 130,606
Accrued liabilities (35,600) (301,847)
Billings in excess of costs and estimated earnings
on uncompleted contracts (54,480) 133,151
----------- -----------
Net cash used by operating activities (1,895,585) (690,411)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (429,902) (907,287)
Purchase of software technology (55,000) --
Proceeds from sale of MPA 1,859,129 --
Sale of property and equipment 1,212 88,160
----------- -----------
Net cash provided (used) by investing activities 1,375,439 (819,127)
----------- -----------
Cash flows from financing activities:
Issuance of common stock 7,882 188,871
Proceeds from sale of notes receivable 200,000 --
Payments on debt and other liabilities (3,738,934) (380,408)
Proceeds from notes payable and long-term debt 3,999,534 733,804
----------- -----------
Net cash provided by financing activities 468,482 542,267
----------- -----------
Increase (decrease) in cash and cash equivalents (51,664) (967,271)
Cash and cash equivalents at beginning of period 311,117 1,581,191
----------- -----------
Cash and cash equivalents at end of period $ 259,453 $ 613,920
=========== ===========
Noncash investing and financing activities:
Notes payable converted to common stock $ 423,933 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
Page 5 of 10
<PAGE> 6
INTEGRATED SECURITY SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
Nine Months Ended March 31, 1999 and 1998
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, 1999.
The accompanying financial statements include the accounts of Integrated
Security Systems, Inc. ("ISSI" or 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 1998 Annual Report on Form
10-KSB filed October 13, 1998.
NOTE 2 - RECLASSIFICATION
Certain reclassification of prior year amounts have been made to conform to the
current period presentation.
NOTE 3 - FINANCING
On January 14, 1999, the Company received $100,000 in cash in exchange for a
promissory note at 12% interest due and payable on January 24, 1999. The Company
paid the note in full on February 2, 1999. In connection with this transaction,
the Company issued warrants to purchase 181,818 shares of common stock at an
exercise price of $0.7188 which expire in 2004.
On January 22, 1999, the Company entered into lending agreements with a bank
primarily to replace an existing revolving lending facility and refinance
previously retired facilities. The initial funding consisted of a $150,000 term
loan payable over twenty-four months at prime interest rate plus 3%, a $300,000
inventory loan payable on demand at prime interest rate plus 3%, and a $1.8
million maximum revolving credit facility at prime interest rate plus 3%. The
maximum credit eligibility of the new financing, secured by accounts receivable,
inventory and equipment of $3 million is structured to increase to $5 million
with Company growth. The current balance is $760,552.
On March 8, 1999, the Company received $600,000 in cash in exchange for a
promissory note at 9% interest due and payable upon demand or upon the sale of
its subsidiary Golston Company, Inc. ("Golston"). In connection with this
transaction, the Company issued warrants to purchase 1,092,897 shares of common
stock at an exercise price of $0.549 which expire in 2004.
NOTE 4 - NET LOSS PER SHARE
Net loss per common share for each period is computed using the weighted average
number of common and common equivalent shares outstanding during the respective
periods. At March 31, 1999, there were 12,710,766 potentially dilutive common
shares which were not included in weighted average shares outstanding because to
do so would have been anti-dilutive.
Page 6 of 10
<PAGE> 7
NOTE 5 - NASDAQ DELISTING
On March 23, 1999, the Company's securities were delisted from the Nasdaq Stock
Market due to non-compliance with the net tangible assets, market
capitalization, net income and bid price requirements as set forth in Nasdaq
Marketplace Rules 4310(c)(2) and 4310(c)(4), respectively. Accordingly, the
Company's securities began trading on the OTC Bulletin Board effective March 24,
1999.
NOTE 6 - POTENTIAL DISPOSITION OF ASSETS
Effective October 1, 1998, the Company disposed of the MPA portion ("MPA") of
its Golston subsidiary. On March 24, 1999, the Company executed a nonbinding
Letter of Intent regarding the sale of the remaining operations of Golston. For
the nine months ending March 31, 1999, Golston had sales of $3,181,062 and total
assets of $5,129,100. For the three months ending March 31, 1999, sales were
$1,079,597. Specific terms and conditions regarding the potential disposition of
the Company's subsidiary are currently under negotiation. There can be no
assurance that a binding agreement for the sale of Golston will be entered into
by the Company.
NOTE 7 - SALE OF NOTES RECEIVABLE
On February 19, 1999, the Company sold $250,000 of the notes receivable
established at the sale of MPA in October 1998. The Company received $200,000,
plus $4,281 for accrued interest, in cash for the sale.
NOTE 8 - SUBSEQUENT EVENT - SALE OF NOTES RECEIVABLE
On April 1, 1999, the Company sold $150,000 of the notes receivable established
at the sale of MPA in October 1998. The Company received $120,000 cash for the
sale.
NOTE 9 - SUBSEQUENT EVENT - LEGAL PROCEEDINGS
In April 1999, the Company and its subsidiary, B&B Electromatic, Inc. ("B&B")
were sued by Robert I. Abbott in the 20th Judicial District Court, East
Feliciana Parish, Louisiana. Mr. Abbott claims breach of an oral employment
agreement, and claims damages of approximately $750,000. The Company believes
the case is without merit and intends to vigorously defend itself in this
matter.
Page 7 of 10
<PAGE> 8
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.
RESULTS OF OPERATIONS
Quarter Ended March 31, 1999 Compared to Quarter Ended March 31, 1998.
Sales. The Company's sales increased by $.6 million (27%) to $3.0 million during
the quarter ended March 31, 1999 from $2.4 million during the 1998 period. This
increase occurred without the benefit of revenue from the Company's MPA portion
("MPA") of operations which was sold on October 1, 1998. The majority of this
increase is attributable to increased sales at the Company's B&B Electromatic,
Inc. ("B&B") and Intelli-Site, Inc. subsidiaries.
For the quarter ended March 31, 1999, approximately 75% of the Company's
revenues were generated from the sale of products manufactured by the Company
compared to 67% for the same 1998 period. The majority of the product
manufacturing percentage increase is due to increased sales at B&B.
Cost of Sales and Gross Margin. Gross margin as a percent of sales increased by
5.4%, or by $.4 million to $1.2 million during the quarter ended March 31, 1999
from $.8 million during the 1998 period.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $2.1 million during the quarter ended March 31, 1999 from
$1.5 million during the 1998 period. This increase included $.3 million related
to the issuance of warrants to purchase common stock as a result of the
conversion of debt to equity and to the additional relocation of staff to
support Intelli-Site.
Research and Product Development. Research and product development expenses
increased by approximately $35,000 during the quarter ended March 31, 1999
compared to the 1998 period due to the continuing development of the
Intelli-Site(R) software.
Interest Expense. Interest expense increased for the quarter ended March 31,
1999, compared to the comparable 1998 period primarily due to the issuance of
stock purchase warrants to secure additional financing.
Nine Months Ended March 31, 1999 Compared to Nine Months Ended March 31, 1998.
Sales. The Company's sales increased by $460,000 (6%) to $8.5 million during the
nine months ended March 31, 1999 from $8.1 million during the 1998 period. The
Company's installation division of the Security Systems Group ("SSG")
experienced a $290,000 decline in sales compared to the prior year period due to
installation timing issues on several projects. This decline was offset by
increased sales at the B&B and Intelli-Site subsidiaries of $540,000 and
$235,000, respectively.
For the nine months ended March 31, 1999, approximately 76% of the Company's
revenues were generated from the sale of products manufactured by the Company
compared to 71% for the same 1998 period.
Cost of Sales and Gross Margin. Gross margin as a percent of sales increased by
9.7%, or by $.3 million to $3.4 million from $3.1 million during the comparable
1998 period.
Page 8 of 10
<PAGE> 9
Selling, General and Administrative. Selling, general and administrative
expenses increased to $5.3 million during the nine months ended March 31, 1999
from $4.4 million during the comparable 1998 period. Most of the increase was
attributable to an increase in sales and marketing expenses at the Intelli-Site
subsidiary, the addition and relocation of newly hired staff. and the issuance
of common stock purchase warrants related to the conversion of debt to equity.
Research and Product Development. Research and product development expenses
remained comparable for the nine months ended March 31, 1999 and 1998.
Interest Expense. Interest expense increased to $.9 million during the nine
months ended March 31, 1999 from $.6 million during the comparable 1998 period.
Most of the increase was due to the issuance of stock purchase warrants to
secure additional financing.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position decreased by $51,664 during the first nine months of
fiscal 1999, using $429,902 for property and equipment net of $1,859,129 from
the sale of MPA and using $1,895,585 for operations. During the 1998 period, the
Company used $907,287 for property and equipment purchases and $690,411 for
operations. During the first nine months of fiscal 1999, the Company financed
its operations from cash flow from long-term and short-term borrowings of
$3,999,534 and the sale of notes receivables of $200,000 and made payments of
$3,738,934 on debt and other liabilities. Payments on debt and other liabilities
consisted primarily of retiring a credit facility of $838,275 and retiring a
revolving credit facility of $1,568,688. Borrowings consisted primarily of
proceeds from the new factoring facility of $1,400,689 and additional short-term
financing of $600,000.
The Company has experienced a significant increase in orders received. The
Company's backlog, calculated as the aggregate sales prices of firm orders
received from customers less revenue recognized, was approximately $4,540,331 at
April 30, 1999. The Company expects that the majority of this backlog will be
filled during fiscal 1999 and fiscal 2000.
On January 14, 1999, the Company received $100,000 in cash in exchange for a
promissory note at 12% interest due and payable on January 24, 1999. The Company
paid the note in full on February 2, 1999. In connection with this transaction,
the Company issued warrants to purchase 181,818 shares of common stock at an
exercise price of $0.7188 which expire in 2004.
On January 22, 1999, the Company entered into lending agreements with a bank
primarily to replace an existing revolving lending facility and refinance
previously retired facilities. The initial funding consisted of a $150,000 term
loan payable over twenty-four months at prime interest rate plus 3%, a $300,000
inventory loan payable on demand at prime interest rate plus 3%, and a $1.8
million maximum revolving credit facility at prime interest rate plus 3%. The
maximum credit eligibility of the new financing, secured by accounts receivable,
inventory and equipment of $3 million is structured to increase to $5 million
with Company growth. The current balance is $760,552.
On March 8, 1999, the Company received $600,000 in cash in exchange for a
promissory note at 9% interest due and payable upon demand or upon the sale of
Golston Company, Inc. ("Golston"). In connection with this transaction, the
Company issued warrants to purchase 1,092,897 shares of common stock at an
exercise price of $0.549 which expire in 2004.
Effective October 1, 1998, the Company disposed of the MPA portion of its
Golston subsidiary. On March 24, 1999, the Company executed a nonbinding Letter
of Intent regarding the sale of the remaining operations of Golston. For the
nine months ending March 31, 1999, Golston had sales of $3,181,062 and total
assets of $5,129,100. For the three months ending March 31, 1999, sales were
$1,079,597. Specific terms and conditions regarding the potential disposition of
the Company's subsidiary are currently under negotiation. There can be no
assurance that a binding agreement for the sale of Golston will be entered into
by the Company.
Page 9 of 10
<PAGE> 10
Development of distribution channels for Intelli-Site will continue, with a
significant portion of future investments being utilized to launch Intelli-Site
through direct sales, equipment manufacturers, and national security networks.
To finance these activities, the Company will need to raise additional funds
through one or more of the following: consolidating debt, additional equity, and
sales of assets. The Company has an investment banker assisting with this
process and is currently evaluating several options.
YEAR 2000 ISSUE
The Year 2000 issue concerns the ability of computer software programs,
including the logic contained within embedded chips, to correctly identify and
process date-sensitive calculations across and beyond the Year 2000 dateline.
The Company believes the products and systems it manufactures to be unaffected
by the Year 2000 issue. The Company currently utilizes third-party equipment and
software that may be affected by the Year 2000 issue and continues to assess and
address its critical business information and production systems regarding the
Year 2000 issue for both Information Technology ("IT") and non-IT systems. The
reporting process used by the Company to assess its Year 2000 readiness has
identified some systems where potential problems may exist. The Company is
currently evaluating alternative solutions to determine the most feasible
approach for resolution. Regardless of the resolution selected, the Company
believes that the associated financial impact will not be material. There can be
no assurance that there will be no disruptions or that the Company will not
incur significant costs to avoid such disruptions.
POTENTIAL DISPOSITION OF ASSETS
Effective October 1, 1998, the Company disposed of the MPA portion ("MPA") of
its subsidiary, Golston Company, Inc. ("Golston"). On March 24, 1999, the
Company executed a nonbinding Letter of Intent regarding the sale of the
remaining operations of Golston. For the nine months ending March 31, 1999,
Golston had sales of $3,181,062 and total assets of $5,129,100. For the three
months ending March 31, 1999, sales were $1,079,597. Specific terms and
conditions regarding the potential disposition of the Company's subsidiary are
currently under negotiation. There can be no assurance that a binding agreement
for the sale of Golston will be entered into by the Company.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Ex. 27 Financial Data Schedule
(a) Reports filed on Form 8-K.
None.
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: May 17, 1999 /s/ GERALD K. BECKMANN
---------------- -----------------------------------------------
Gerald K. Beckmann
Director, President and Chief Executive Officer
Page 10 of 10
<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 259,453
<SECURITIES> 0
<RECEIVABLES> 2,499,412
<ALLOWANCES> 0
<INVENTORY> 939,749
<CURRENT-ASSETS> 4,402,237
<PP&E> 3,932,500
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,361,665
<CURRENT-LIABILITIES> 5,347,366
<BONDS> 0
0
102
<COMMON> 93,140
<OTHER-SE> (1,127,145)
<TOTAL-LIABILITY-AND-EQUITY> 10,361,665
<SALES> 8,523,571
<TOTAL-REVENUES> 8,523,571
<CGS> 5,169,668
<TOTAL-COSTS> 5,169,668
<OTHER-EXPENSES> 5,553,696
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 905,429
<INCOME-PRETAX> (3,026,184)
<INCOME-TAX> 11,450
<INCOME-CONTINUING> (3,037,634)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,037,634)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
