SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 05-62411
Diversified Security Solutions, Inc.
(Name of small business issuer as specified in its charter)
Delaware 22-3690168
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
280 Midland Avenue
Saddle Brook, New Jersey 07663
(address of principal executive offices) (Zip Code)
Issuer's Telephone number, including area code: (201) 794-6500
Check whether 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 issuer was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of the issuer's Common Stock:
Class: Outstanding as of May 13, 2004,
------ -------------------------------
(a) Common stock, $.01 par value 5,168,540
Diversified Security Solutions, Inc. and Subsidiaries
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2004 (Unaudited)
and December 31, 2003 .............................................2
Consolidated Statements of Operations for the three months
ended March 31, 2004 (Unaudited) and March 31, 2003
(Unaudited) .......................................................3
Consolidated Statements of Cash Flows for the three months
ended March 31, 2004 (Unaudited) and March 31, 2003
(Unaudited) .......................................................4
Notes to Financial Statements ......................................5-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..........................................8-9
Item 3. Controls and Procedures ..............................................9
Part II. Other Information
Item 1. Legal Proceedings ....................................................9
Item 2. Change in Securities .................................................9
Item 3. Defaults Upon Senior Securities ......................................9
Item 4. Submission of Matters to a Vote of Security Holders ..................9
Item 5. Other Information ...................................................10
Item 6. Exhibits and Reports on Form 8-K ....................................10
SIGNATURES....................................................................10
1
Part I. Financial Information
Item 1. Financial Statements
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 2004 December 31, 2003
-------------- -----------------
Current assets:
Cash and cash equivalents $ 1,960,886 $ 1,927,416
Accounts receivable - net of allowance for doubtful
accounts of $135,000 6,667,682 6,586,674
Inventories 853,812 837,855
Costs and estimated profits in excess of billings 622,299 765,905
Prepaid and income tax receivable 186,929 185,627
Other current assets 254,553 252,179
Deferred tax asset 2,272,278 2,202,000
----------- -----------
Total current assets 12,818,439 12,757,656
Property and equipment, net of accumulated depreciation
of $1,412,880 and $1,406,824 1,095,304 1,161,278
Goodwill 1,930,694 1,930,694
Intangible assets, net of accumulated amortization of
$220,994 and $179,809 1,262,295 1,303,480
Other assets 612,433 410,776
----------- -----------
$17,719,165 $17,563,884
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,237,853 $ 2,119,833
Accrued expenses 1,006,408 923,465
Billings in excess of costs and estimated profits 1,021,662 477,513
Deferred income 0 155,277
Long-term debt current portion 375,691 463,633
Customer deposits held 86,274 24,425
Deferred income taxes 64,000 64,000
----------- -----------
Total current liabilities 4,791,888 4,228,146
----------- -----------
Long-term debt, less current portion 1,615,270 1,922,597
Deferred tax liability 134,000 134,000
----------- -----------
Total liabilities 6,541,158 6,284,743
----------- -----------
Stockholders' equity:
Preferred stock,$.01 par value; 2,000,000 shares
authorized; no shares issued
Common stock, $.01 par value; 10,000,000 shares
authorized; 5,201,431 shares outstanding 52,014 52,014
Additional paid-in capital 13,512,940 13,512,940
Treasury stock, at cost, 70,891 shares (500,000) (500,000)
Accumulated deficit (1,886,947) (1,785,813)
----------- -----------
Total stockholders' equity 11,178,007 11,279,141
----------- -----------
$17,719,165 $17,563,884
=========== ===========
The accompanying notes are an integral part of these statements
2
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2004 2003
---------- -----------
Sales $5,667,493 $ 3,705,703
Cost of sales 4,388,786 2,654,536
---------- -----------
Gross profit 1,278,707 1,051,167
Operating expenses
Selling, general and administrative 1,426,834 2,173,140
---------- -----------
Operating loss (148,127) (1,121,973)
---------- -----------
Interest income 1,525 5,540
Interest expense (24,808) (26,723)
---------- -----------
Loss from before income taxes (171,410) (1,143,156)
Benefit for income taxes 70,278 480,000
---------- -----------
Net loss $ (101,132) $ (663,156)
========== ===========
Basic and diluted loss per common share $ (0.02) $ (0.13)
========== ===========
Weighted average common shares outstanding - basic and diluted 5,130,540 5,138,357
========== ===========
The accompanying notes are an integral part of these statements
3
DIVERSIFIED SECURITY SOLUTION, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended
March 31,
--------------------------
2004 2003
---------- ----------
Cash flows from operating activities:
Net loss $ (101,132) $ (663,156)
Adjustments to reconcile net loss from operations
to net cash provide by (used in) operating activities:
Depreciation and amortization 137,404 129,559
Deferred income taxes (70,278) (349,000)
Changes in operating assets and liabilities:
Accounts receivable (81,008) 1,372,126
Inventories (15,957) 173,944
Costs and estimated profits in excess of billings 143,606 35,680
Other assets (204,031) (29,211)
Prepaid and Income tax receivable (1,302)
Accounts payable 118,020 (691,363)
Accrued expenses 82,943 (113,484)
Billings in excess of cost and estimated profits 544,147 (15,370)
Deferred Income (155,277)
Customer deposits held 61,849 (135,074)
---------- ----------
Net cash provided by (used in) operating activities 458,984 (285,349)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (30,245) (143,512)
---------- ----------
Cash used in investing activities (30,245) (143,512)
---------- ----------
Cash flows from financing activities:
Net payments of revolving bank line (352,238) (41,061)
Payments of loan payable (43,031) (30,331)
---------- ----------
Cash used in financing activities (395,269) (71,392)
---------- ----------
Increase (decrease) in cash and cash equivalents 33,470 (500,253)
Cash and cash equivalents - beginning of period 1,927,416 4,472,271
---------- ----------
Cash and cash equivalents - end of period $1,960,886 $3,972,018
========== ==========
Supplemental disclosure of cash flow information:
Amount paid for the period for:
Interest $ 24,108 $ 26,436
Taxes $ -- $ 8,150
Non-cash investing and financing activities:
Equipment financed $ -- $ 38,631
The accompanying notes are an integral part of these statements
4
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENT
1. Basis of Presentation
Diversified Security Solutions, Inc., the ("Company") and its subsidiaries,
are systems integrators providing design, installation and support services for
a wide variety of security, communications and control systems. The Company
specializes in turnkey systems that integrate many different technologies.
Systems are customized to meet the specific needs of its customers. The Company
markets nationwide with an emphasis in New York City, Dallas, Phoenix and
Southern California metropolitan areas. Customers are primarily medium and large
businesses and governmental agencies. The Company derives most of its sales from
project installations and to a smaller extent, and service sales (maintenance).
Primarily due to the Company's acquisitions in 2002, there has been a shift in
sales by the Company's subsidiaries and therefore, the information below shows
the sales percentages by geographic location for the three months ended March
31, 2004 and 2003 as follows:
Three Months
Ended March 31,
----------------
2004 2003
---- ----
New Jersey/New York 46% 59%
California 36 20
Texas 12 11
Arizona 6 7
--- --
Total integration 100 97
Viscom - manufacturing 0 3
--- --
Total sales 100% 100%
=== ===
The Company's headquarters are located in Saddle Brook, New Jersey. Sales
and service facilities are located near Dallas Fort worth Airport, Arizona
Airport, Arizona; New York City, Metro, Saddle Brook, New Jersey, and Fullerton,
California. During the third quarter of 2003, the Company's subsidiary, Viscom
Products ("Viscom"), restructured it operations to begin outsourcing the
manufacturing of it products to a third party. Viscom will continue to support
existing warranties.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles in the United States of America for full year financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included and are of a normal, recurring
nature. Operating results for the three-month period ended March 31, 2004, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2004. These consolidated financial statements should be read
in conjunction with the consolidated financial statements and the notes thereto
that are included in the Company's Annual Report on Form 10-KSB for the fiscal
period ended December 31, 2003.
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DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENT (CON'T)
2. Net Income (Loss) Per Share - The computation of basic earnings (loss) per
share is based upon the weighted average number of shares of common stock
outstanding during the period. The computation of diluted earnings per share
includes the dilutive effects of common stock equivalents of options and
warrants.
3. Stock Based Compensation - In December 2002, the FASB issued SFAS No. 148
"Accounting for Stock Based Compensation - Transition and Disclosure". SFAS No.
148 provides alternative methods of transitions to SFAS No 123's fair value
method of accounting for stock based employee compensation, but does not require
companies to use fair value method. It also amends the disclosure provisions of
SFAS No. 123 and APB No.25 to require, in the summary of significant policies,
the effect of an entity's accounting policy with respect to stock based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. The provision of this statement is effective for fiscal
years ending after December 15, 2002, and interim reporting periods beginning
after December 15, 2002. Accordingly, the fair value of all options granted on
and after January 1, 2003 is to be charged against income over the vesting
period. Those issued prior to adoption are accounted for under the intrinsic
value method in accordance with APB No. 25. The Company adopted the perspective
method as permitted by SFAS No. 148 on January 1, 2003.
Based upon the fair value method to measure compensation expense, the
Company's proforma effects for the three months ended March 31, 2004 and 2003 is
as follows:
For The Three
Months Ended March 31,
2004 2003
--------- ---------
Net loss as reported $(101,132) $(663,156)
========= =========
Stock based- employee compensation
expense included in reported net loss,
net of related tax expense 0 0
Total stock-based employee compensation
expense determined under fair valued based,
net of related tax effects (3,419) (4,085)
--------- ---------
Pro forma net loss $(104,551) $(667,241)
========= =========
Loss per share:
Basic and diluted - as reported $(0.02) $(0.13)
========= =========
Basic and diluted - proforma $(0.02) $(0.13)
========= =========
6
4. Employee Benefit Plan
As of January 1, 2003, the Company sponsored a 401-K with a discretionary
profit sharing (the "401-K Plan".) The Company matches up to three percent of
qualifying employees' compensation contribution to the 401-K Plan. As of March
1, 2003, the Company temporarily stopped matching qualifying compensation to the
401-K Plan and may make a discretionary match in the future. The Company's
contributions to the employees' account vests equally over three years and the
employee contribution to their own account vests immediately.
5. Related Party Transaction
A corporation of which a director of the Company was an officer was paid
consulting fees and reimbursement of expenses in amount of approximately $5,500
and $10,000 for the three months ended March 31, 2004 and 2003, respectively.
6. Subsequent Event
As of April 1, 2004, ACI Acquisition Corporation, a wholly-owned subsidiary
of the Company, purchased all of the issued and outstanding stock of Airorlite
Communications, Inc ("Airorlite"). Airorlite was purchased for $200,000 cash and
37,000 shares of the Company's common stock, valued at $266,000, the repayment
of an officer loan of $100,000, and the cost of the sellers' personal income
taxes. Airorlite is located in Saddle Brook, New Jersey and specializes in
design, manufacturing and maintaining wireless communications equipment used to
enhance and extend emergency radio frequency services and cellular communication
for both fixed and mobile applications. Airorlite has been merged into ACI and
ACI has been renamed Airorlite Communications, Inc.
Airorlite had sales of approximately $1,728,000 (unaudited) for the year
ended December 31, 2003 and assets of approximately $586,000 (unaudited) as of
December 31, 2003.
7. Contingent Liabilities
From time to time, the Company is subject to various claims with respect to
matters arising out of the normal course of business.
8. Critical Accounting Policies
Disclosure of the Company's significant accounting policies is included in
Note 1 to the consolidated financial statements of the Company's Annual Report
on Form 10-KSB for the year ended December 31, 2003. Some of these policies
require management to make estimates and assumptions that may affect the
reported amounts in the Company's financial statement.
9. Forward Looking Statements
When used in this discussion, the words "believes", "anticipates",
"contemplated", "expects", or similar expressions are intended to identify
forward looking statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Those risks and uncertainties include changes in interest rates, the
ability to control costs and expenses, significant variations in recognized
revenue due to customer caused delays in installations, cancellations of
contracts by our customers, and general economic
7
conditions which could cause actual results to differ materially from historical
earnings and those presently anticipated or projected. The Company undertakes no
obligation to publicly release the results of any revisions to those forward
looking statements that may be made to reflect events or circumstances after
this date or to reflect the occurrence of unanticipated events.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months Ended March 31, 2004 and March 31, 2003
Sales - Sales for the three months ended March 31, 2004 were $5,667,493
representing an increase of $1,961,790 or 52.9 % as compared to $3,705,703 for
the three months ended March 31, 2003. Each of the Company's four regions
experienced sales growth during the quarter ended March 31, 2004 as compared to
the March 31, 2003 quarter with the California region having the greatest growth
over the prior year.
Cost of Sales - Cost of sales for the three months ended March 31, 2004 was
$4,388,786 as compared to $2,654,536 for the three months ended March 31, 2003.
The gross profit margin for the three months ended March 31, 2004 was 22.6 % as
compared to 28.4% for the three months ended March 31, 2003. We attribute this
5.8% decrease in the gross profit margin to projects having a higher percentage
of subcontracted labor. Based upon our backlog at March 31, 2004, we expect
improved margins in the second quarter of 2004.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses was $1,426,834 for the three months ended March 31, 2004
as compared to $2,173,140 for the three months ended March 31, 2003. This
decease of 34.3% or $746,306 was primarily attributed savings from head count
reductions of 14%, selective payroll reductions and the implementation of other
cost reductions during the second half of 2003.
Interest Income - Interest income for the three months ended March 31, 2003
was $1,525 as compared to $5,540 for three months ended March 31, 2003. This
decrease of $4,015 was due to having less cash to invest and lower interest
rates.
Interest Expense - Interest expense for the three months ended March 31,
2004 was $24,808 as compared to $26,723 for the three months ended March 31,
2003. The decrease of $1,915 and is due to having a lower average debt balance
for the three Months ended March 31, 2004 of $2,192,489 as compared to
$2,222,355 for the three months ended March 31, 2003.
Net Loss - As a result of the factors noted above, for the three months
ended March 31, 2004 and 2003, our net loss was $101,132 and $663,156,
respectively. This resulted in basic and diluted loss per share of $0.02 on
weighted average common shares outstanding of 5,130,540 for the three months
ended March 31, 2004 as compared to basic and diluted loss per share of $0.13 on
weighted average common shares outstanding of 5,138,357 for the three months
ended March 31, 2003.
Liquidity and Capital Resources -
As of March 31, 2004, we had cash and cash equivalents $1,960,886. We have
a loan facility of $4,500,000 with Hudson United Bank ("HUB") and have certain
debt maturing from
8
November 2004 through May 2005. Approximately $2,387,000 was available under
HUB's credit facility as of March 31, 2004. Our working capital was $8,026,551
as of March 31, 2004. HUB has waived its requirement that the Company have a
tangible net worth of $8,000,000. In April 2004, the Company borrowed an
additional $200,000 from HUB to fund the acquisition of Airorlite.
During the three months ended March 31, 2004, net cash provided by
operations activities was $458,984. We purchased property and equipment of
$30,245. In addition, due to positive cash flows from operations, the Company
was able to pay $300,000 to HUB that was not a required payment under the
credit facility. The total debt service payments were $395,269.
Our capital requirements have grown substantially as a result of the growth
of our operations and staffing since. As a result, our cash and cash equivalents
have significantly decreased over the last few years. We believe that our
current cash and available lines of credit should be sufficient to meet our
capital requirements for the next twelve months. However, we may seek additional
equity and or debt financing to enable us to grow our operations.
Item 3. Controls and Procedures
As required by Rule 13a-15(b), Company's executive management, including
the Chief Executive Officer, Chief Operating Officer and Chief Financial
Officer, conducted an evaluation as of the end of the period covered by this
report, of the effectiveness of the Company's disclosure controls and procedures
as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief
Executive Officer, Chief Operating Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective as of the
end of the period covered by this report. As required by Rule 13a-15(d), the
Company's executive management, including the Chief Executive Officer, Chief
Operating Officer and Chief Financial Officer, also conducted an evaluation of
the Company's internal control over financial reporting to determine whether any
changes occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting. Based on that evaluation, there has been no
such change during the period covered by this report.
Part II - Other Information
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
As of April 1, 2004, ACI Acquisition Corporation, a wholly-owned subsidiary
of the Company, purchased all of the issued and outstanding stock of Airorlite
Communications, Inc. The Company paid part of the purchase price for all of
Airorlite's shares by issuing 37,000 shares of the Company's common stock,
valued at $266,000. These shares were issued in reliance on the exemption
provided by Section 4(2) of the Securities Act of 1933, as amended, as
transactions not involving a public offering.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
9
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
Number Description
31(1) Rule 13a-14(a) 15d-14(a) Certification of Chief Executive Officer
31(2) Rule 13a-14(a) 15d-14(a) Certification of Chief Operating Officer
31(3) Rule 13a-14(a) 15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certifications
99(1) Stock Purchase Agreement by and among ACI Acquisition, Inc.,
Diversified Solutions, Inc., Airorlite Communications, Robert Delia
And Lee Mason
(b) Reports on Form 8-K
On May 24, 2004, the Company filed an 8-K reporting an Item 12 event
announcing that the Company issued a press release announcing its
financial results for the three months ended March 31, 2004.
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
SIGNATURES
Date: May 17, 2004 /s/ JAMES E. HENRY
---------------------------------------
James E. Henry
Chairman, Chief Executive Officer,
Treasurer and Director
Date: May 17, 2004 /s/ IRVIN F. WITCOSKY
---------------------------------------
Irvin F. Witcosky
Chief Operating Officer, President,
Secretary and Director
Date: May 17, 2004 /s/ DOUGLAS BECK
---------------------------------------
Douglas Beck
Chief Financial Officer
10