<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-QSB
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[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2000.
[ ] 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.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 75-2422983
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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] No [ ]
As of November 1, 2000, 10,572,545 shares of Registrant's common stock were
outstanding.
Page 1 of 9
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Index to Integrated Security Systems, Inc. Consolidated Financial Statements:
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Page
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Balance Sheets......................................................................3
Statements of Operations............................................................4
Statements of Cash Flows............................................................5
Notes to Financial Statements.......................................................6
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Page 2 of 9
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INTEGRATED SECURITY SYSTEMS, INC.
Consolidated Balance Sheets
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<CAPTION>
September 30, June 30,
2000 2000
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(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 103,195 $ 99,636
Accounts receivable, net of allowance for doubtful
accounts of $64,847 and $58,847, respectively 1,002,626 1,201,491
Inventories 596,725 585,486
Notes receivable 28,546 28,546
Unbilled receivables 180,079 252,567
Other current assets 113,347 112,718
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Total current assets 2,024,518 2,280,444
Property and equipment, net 893,736 921,695
Capitalized software development costs, net 56,856 113,713
Other assets 21,418 16,898
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Total assets $ 2,996,528 $ 3,332,750
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 957,324 $ 582,717
Accrued liabilities 383,967 440,072
Current portion of long-term debt 6,643,925 6,135,260
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Total current liabilities $ 7,985,216 $ 7,158,049
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Long-term debt 705,554 728,331
Stockholders' deficit:
Preferred stock, $.01 par value, 750,000 shares authorized;
102,250 shares issued and outstanding (liquidation value
of $2,045,000) 1,023 1,023
Common stock, $.01 par value, 35,000,000 shares
authorized; 10,572,545 and 10,564,145 shares,
respectively, issued; and 10,522,545 and 10,514,145
shares, respectively, outstanding 105,725 105,641
Additional paid in capital 14,502,963 14,502,963
Accumulated deficit (20,185,203) (19,044,507)
Treasury stock, 50,000 shares (118,750) (118,750)
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Total stockholders' deficit (5,694,242) (4,553,630)
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Total liabilities and stockholders' deficit $ 2,996,528 $ 3,332,750
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</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
Page 3 of 9
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INTEGRATED SECURITY SYSTEMS, INC.
Consolidated Statements of Operations
(Unaudited)
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<CAPTION>
For the Three Months Ended
September 30,
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2000 1999
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<S> <C> <C>
Sales $ 1,223,507 $ 1,902,141
Cost of sales 921,108 1,175,094
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Gross margin 302,399 727,047
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Operating expenses:
Selling, general and administrative 1,083,385 1,147,968
Research and product development 145,475 91,663
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1,228,860 1,239,631
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Loss from operations (926,461) (512,584)
Other income (expense):
Interest income 139 10,167
Interest expense (172,292) (148,750)
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Net loss (1,098,614) (651,167)
Preferred dividends (42,081) --
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Net loss allocable to common stockholders $ (1,140,695) $ (651,167)
============ ============
Weighted average common and
common equivalent shares
outstanding - basic and diluted 10,518,345 10,491,773
============ ============
Net loss per share $ (0.11) $ (0.06)
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
Page 4 of 9
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INTEGRATED SECURITY SYSTEMS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
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<CAPTION>
For the Three Months Ended
September 30,
-----------------------------
2000 1999
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Cash flows from operating activities:
Net loss $(1,098,614) $ (651,168)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 42,001 59,372
Amortization 56,857 56,857
Provision for bad debt 6,000 5,400
Provision for warranty reserve 16,500 12,000
Provision for inventory reserve (14,239) --
Deferred revenue 72,488 (9,542)
Expenses paid with common stock -- 19,773
Changes in operating assets and liabilities:
Accounts receivable 192,866 (196,786)
Inventories 3,000 43,246
Notes receivable -- (66,000)
Other assets (5,150) (30,601)
Accounts payable 374,605 127,517
Accrued liabilities (72,607) (82,380)
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Net cash used in operating activities (426,293) (712,312)
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Cash flows from investing activities:
Purchase of property and equipment (14,042) (17,436)
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Net cash used in investing activities (14,042) (17,436)
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Cash flows from financing activities:
Issuance of preferred stock -- 250,000
Issuance of common stock 84 --
Dividends on preferred stock (42,080) --
Payments on debt and other liabilities (51,945) (12,636)
Proceeds from notes payable and long-term debt 537,835 390,763
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Net cash provided by financing activities 443,894 628,127
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Increase (decrease) in cash and cash equivalents 3,559 (101,621)
Cash and cash equivalents at beginning of period 99,636 251,113
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Cash and cash equivalents at end of period $ 103,195 $ 149,492
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</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
Page 5 of 9
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INTEGRATED SECURITY SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
Quarters Ended September 30, 2000 and 1999
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, 2001.
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 2000 Annual Report on Form
10-KSB filed October 13, 2000.
NOTE 2 - RECLASSIFICATION
Certain reclassification of prior year amounts have been made to conform to the
current period presentation.
NOTE 3 - SUBSEQUENT EVENT - FINANCING
In October 2000, the Company entered into an agreement for a financial
restructuring plan with its two largest stockholders, Renaissance Capital Growth
& Income Fund III, Inc. and Renaissance US Growth and Income Trust PLC (both
managed by Renaissance Capital Group, Inc. ("Renaissance") in which Renaissance
will exchange all their convertible debentures, convertible notes, notes, and
accrued interest into a new class of preferred stock.
The new preferred stock (Class G) would have approximately $6 million principal
amount, a 5% dividend that accrues but is not paid until redemption and would be
convertible into shares of ISSI common stock at $.20 per share. This preferred
series would be redeemable in years three through five, or earlier from the
proceeds of the sale of certain assets.
These same stockholders have agreed to advance a combined $1 million in notes to
ISSI in a private placement. In the event ISSI receives at least $100,000 in
additional subscriptions under this placement, the aforementioned $1 million in
notes will be exchangeable into ISSI's Class F convertible preferred stock. The
Class F convertible preferred stock will have a 5% dividend, which accrues for
two years, and is convertible into common shares at $.20 per share. The notes
will mature in 120 days unless exchanged for the preferred stock.
This transaction is subject to shareholder approval at the annual meeting of the
stockholders. The Company currently does not have a sufficient number of shares
authorized to accommodate these transactions. To remedy this condition, the
Company needs and will seek shareholder approval.
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NOTE 4 - BUSINESS SEGMENTS
Information for the Company's reportable segments for the three months ended
September 30, 2000 and 1999 is as follows:
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For the Three Months Ended
September 30,
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2000 1999
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Sales
B&B $ 1,098,004 $ 1,508,998
ISI 125,503 393,143
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$ 1,223,507 $ 1,902,141
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Income (loss) from operations
B&B $ (40,610) $ 182,608
ISI (593,536) (353,590)
Corporate (292,315) (341,602)
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$ (926,461) $ (512,584)
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</TABLE>
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
Sales. The Company's sales decreased by $0.7 million (36%) to $1.2 million
during the quarter ended September 30, 2000 from $1.9 million during the
comparable 1999 period. Sales at the Company's Intelli-Site, Inc. ("ISI")
subsidiary decreased from $0.4 million to $0.1 million primarily due to a large
end-user system installation project in the previous period. In addition, sales
at the Company's B&B Electromatic, Inc. ("B&B") subsidiary decreased from $1.5
million to $1.1 million due to a decline in road and bridge sales volume.
For the quarter ended September 30, 2000, approximately 90% of the Company's
revenues were generated from the sale of products manufactured by the Company
compared to 79% for the same 1999 period.
Cost of Sales and Gross Margin. Gross margin as a percent of sales decreased to
25% for the quarter ended September 30, 2000 from 38% during the same 1999
period due to a less favorable product mix at B&B, coupled with a decrease in
end-user system installations and software sales at Intelli-Site, which
generally have higher gross margins.
Selling, General and Administrative. Selling, general and administrative
expenses decreased by approximately $64,000 during the quarter ended September
30, 2000 compared to the equivalent 1999 period primarily due to the
reallocation of programming personnel to the research and product development
department at the Company's Intelli-Site subsidiary.
Research and Product Development. Research and product development expenses
increased by approximately $54,000 during the quarter ended September 30, 2000
compared to the same 1999 period due to increased expenditures at the Company's
Intelli-Site subsidiary.
Interest Expense. Interest expense increased by approximately $24,000 during the
quarter ended September 30, 2000 due to incurring additional debt required to
meet working capital needs.
Page 7 of 9
<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position increased by $3,559 during the first quarter of
fiscal 2001. At September 30, 2000, the Company had $103,195 in cash and cash
equivalents and had $426,000 outstanding under its factoring facility. The
factoring facility, which is secured by accounts receivable and inventory,
permits the Company to borrow up to $0.8 million, subject to availability under
its borrowing base.
For the three months ended September 30, 2000, the Company's operating
activities used $426,293 of cash compared to $712,312 of cash used in operations
during the three months ended September 30, 1999. The decrease in cash used in
operations is primarily due to the collections of accounts receivable at the
Company's B&B subsidiary coupled with the timing of payments to vendors.
The Company used $14,042 for the purchase of property and equipment during the
first three months of fiscal 2001 compared to $17,436 for the previous three
month fiscal 2000 period.
During the first three months of fiscal 2001, the Company financed its
operations with cash flows from long-term borrowings of $537,835 compared to
$390,763 from the previous three month fiscal 2000 period. The company made
payments of $51,945 on debt and other liabilities compared to $112,636 during
the previous three month fiscal 2000 period.
In October 2000, the Company entered into an agreement for a financial
restructuring plan with its two largest stockholders, Renaissance Capital Growth
& Income Fund III, Inc. and Renaissance US Growth and Income Trust PLC (both
managed by Renaissance Capital Group, Inc.) ("Renaissance") in which Renaissance
will exchange all their convertible debentures, convertible notes, notes, and
accrued interest into a new class of preferred stock.
The new preferred stock (Class G) would have approximately $6 million principal
amount, a 5% dividend that accrues but is not paid until redemption and would be
convertible into shares of ISSI common stock at $.20 per share. This preferred
series would be redeemable in years three through five, or earlier from the
proceeds of the sale of certain assets.
These same stockholders have agreed to advance a combined $1 million in notes to
ISSI in a private placement. In the event ISSI receives at least $100,000 in
additional subscriptions under this placement, the aforementioned $1 million in
notes will be exchangeable into ISSI's Class F convertible preferred stock. The
Class F convertible preferred stock will have a 5% dividend, which accrues for
two years, and is convertible into common shares at $.20 per share. The notes
will mature in 120 days unless exchanged for the preferred stock.
This transaction is subject to shareholder approval at the annual meeting of the
stockholders. The Company currently does not have a sufficient number of shares
authorized to accommodate these transactions. To remedy this condition, the
Company needs and will seek shareholder approval.
The Company's backlog, calculated as the aggregate sales price of firm orders
received from customers less revenue recognized, was approximately $1.4 million
at November 1, 2000. The Company expects that the majority of this backlog will
be filled during fiscal 2001 and the first quarter of fiscal 2002.
Page 8 of 9
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Form 8-K, filed August 25, 2000 for changes in registrant's management.
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: November 14, 2000 /s/ C. A. RUNDELL, JR.
---------------------------------
C. A. Rundell, Jr.
Director, Chairman of the Board, and
Chief Executive Officer
Page 9 of 9
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INDEX TO EXHIBITS
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EXHIBIT
NUMBER DESCRIPTION
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27 Financial Data Schedule
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