10-Q 1 d82012e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2000 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 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. ----------------------------------------------------------------- (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 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Index to Integrated Security Systems, Inc. Consolidated Financial Statements:
Page ---- Balance Sheets......................................................................3 Statements of Operations............................................................4 Statements of Cash Flows............................................................5 Notes to Financial Statements.......................................................6
Page 2 of 9 3 INTEGRATED SECURITY SYSTEMS, INC. Consolidated Balance Sheets
September 30, June 30, 2000 2000 ------------ ------------ (Unaudited) 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 ------------ ------------ 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 ------------ ------------ Total assets $ 2,996,528 $ 3,332,750 ============ ============ 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 ------------ ------------ Total current liabilities $ 7,985,216 $ 7,158,049 ------------ ------------ 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) ------------ ------------ Total stockholders' deficit (5,694,242) (4,553,630) ------------ ------------ Total liabilities and stockholders' deficit $ 2,996,528 $ 3,332,750 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. Page 3 of 9 4 INTEGRATED SECURITY SYSTEMS, INC. Consolidated Statements of Operations (Unaudited)
For the Three Months Ended September 30, ------------------------------- 2000 1999 ------------ ------------ Sales $ 1,223,507 $ 1,902,141 Cost of sales 921,108 1,175,094 ------------ ------------ Gross margin 302,399 727,047 ------------ ------------ Operating expenses: Selling, general and administrative 1,083,385 1,147,968 Research and product development 145,475 91,663 ------------ ------------ 1,228,860 1,239,631 ------------ ------------ Loss from operations (926,461) (512,584) Other income (expense): Interest income 139 10,167 Interest expense (172,292) (148,750) ------------ ------------ Net loss (1,098,614) (651,167) Preferred dividends (42,081) -- ------------ ------------ 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) ============ ============
The accompanying notes are an integral part of the consolidated financial statements. Page 4 of 9 5 INTEGRATED SECURITY SYSTEMS, INC. Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended September 30, ----------------------------- 2000 1999 ----------- ----------- 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) ----------- ----------- Net cash used in operating activities (426,293) (712,312) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (14,042) (17,436) ----------- ----------- Net cash used in investing activities (14,042) (17,436) ----------- ----------- 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 ----------- ----------- Net cash provided by financing activities 443,894 628,127 ----------- ----------- Increase (decrease) in cash and cash equivalents 3,559 (101,621) Cash and cash equivalents at beginning of period 99,636 251,113 ----------- ----------- Cash and cash equivalents at end of period $ 103,195 $ 149,492 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. Page 5 of 9 6 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. Page 6 of 9 7 NOTE 4 - BUSINESS SEGMENTS Information for the Company's reportable segments for the three months ended September 30, 2000 and 1999 is as follows:
For the Three Months Ended September 30, ----------------------------- 2000 1999 ----------- ----------- Sales B&B $ 1,098,004 $ 1,508,998 ISI 125,503 393,143 ----------- ----------- $ 1,223,507 $ 1,902,141 =========== =========== Income (loss) from operations B&B $ (40,610) $ 182,608 ISI (593,536) (353,590) Corporate (292,315) (341,602) ----------- ----------- $ (926,461) $ (512,584) =========== ===========
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 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 9 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 10 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 27 Financial Data Schedule