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, 2003
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 at March 31, 2003
------ -----------------------------
Common stock, $.01 par value 5,138,357
Diversified Security Solutions, Inc. and Subsidiaries
INDEX
Page
----
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance sheets as of March 31, 2003 (Unaudited) and
December 31, 2002 1
Consolidated Statements of Operations for the three months ended
March 31, 2003 (Unaudited) and March 31, 2002 (Unaudited) 2
Consolidated Statements of Cash Flows for the three months ended
March 31, 2003 (Unaudited) and March 31, 2002 (Unaudited) 3
Notes to Financial Statements 4-5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
Item 3. Controls and Procedures 7
Part II Other Information
Item 1. Legal Proceedings 8
Item 2. Change in Securities 8
Item 3. Defaults Upon Senior Securities 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURES 9
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
----------- ------------
Unaudited Audited
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,972,018 $ 4,472,271
Accounts receivable - net of allowance for doubtful accounts of $100,000
and $100,000 4,891,869 6,263,995
Note receivable 500,000 500,000
Inventory 1,996,055 2,169,999
Costs and profit in excess of billings 674,645 710,325
Deferred tax asset 510,000 161,000
Other current assets 369,026 339,403
----------- -----------
Total current assets 12,913,613 14,616,993
Property and equipment, net of accumulated depreciation of $1,151,166 and
$1,070,718 1,269,375 1,167,680
Computer software product cost - net of accumulated amortization of $499,472
and $479,472 194,620 214,620
Goodwill 1,790,357 1,790,357
Intangible assets - net of accumulated amortization of $92,467 and $63,356 1,476,349 1,505,460
Other assets 366,242 366,654
----------- -----------
$18,010,556 $19,661,764
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 776,O72 $ 1,467,436
Accrued expenses 901,714 1,015,198
Billings in excess of cost 108,500 123,870
Deferred tax liability 97,000 97,000
Long-term debt, current portion 187,095 217,426
Capitalized lease obligations, current portion 3,180 3,938
Customer deposits held 19,991 155,065
----------- -----------
Total current liabilities 2,093,552 3,079,933
----------- -----------
Capitalized lease ob1igations, less current portion 9,219 9,074
Long-term debt, less current portion 2,015,587 2,017,403
Deferred tax liability 182,000 182,000
----------- -----------
Total liabilities 4,300,358 5,288,410
----------- -----------
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; 5,138,357 shares
outstanding 51,384 51,384
Additional paid-in capital 13,150,681 13,150,681
Retained earnings 508,133 1,171,289
----------- -----------
Total stockholders' equity 13,710,198 14,373,354
----------- -----------
$18,010,556 $19,661,764
=========== ===========
The accompanying notes are an integral part of these statements
1
DIVERSIFIED SECURITY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
---------------------------
2003 2002
----------- ----------
Sales $ 3,705,703 $3,179,384
Cost of sales 2,654,536 1,891,344
----------- ----------
Gross profit 1,051,167 1,288,040
Operating expenses
Selling, general and administrative 2,173,140 1,212,966
----------- ----------
Operating (loss) income (1,121,973) 75,074
Interest income 5,540 28,996
Interest expense (26,723) (38,847)
----------- ----------
(Loss) income before income taxes (1,143,156) 65,223
(Provision) benefit for income taxes 480,000 (26,000)
----------- ----------
Net (loss) income $ (663,156) $ 39,223
=========== ==========
Basic and diluted (loss) earnings per common share:
Basic (loss) earnings per common share $ (0.13) $ 0.01
=========== ==========
Weighted average common shares 5,138,357 4,725,000
=========== ==========
Diluted (loss) earnings per common share $ (0.13) $ 0.01
=========== ==========
Weighted average diluted shares 5,138,357 4,800,000
=========== ==========
The accompanying notes are an integral part of these statements
2
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
------------------------
2003 2002
---------- -----------
Cash flows from operating activities:
Net (loss) income $ (663,156) $ 39,223
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Amortization of stock based compensation 5,208
Depreciation and amortization 129,559 81,500
Deferred taxes (349,000)
Changes in operating assets and liabilities:
Accounts receivable 1,372,126 (393,723)
Inventory 173,944 (82,175)
Costs and profits in excess of cost 35,680 141,999
Other assets (29,211) (416,766)
Accounts payable (691,363) (897,988)
Accrued expenses (113,484) (48,280)
Billings in excess of cost (15,370) (54,464)
Other 1iabilities (2,889)
Customer deposits held (135,074) 578,628
---------- -----------
Cash used in operating activities (285,349) (1,049,727)
---------- -----------
Cash flows from Investing activities:
Proceeds of securities held to maturity 802,235
Purchase of property and equipment (143,512) (47,127)
---------- -----------
Cash (used in) provided by investing activities (143,512) 755,108
---------- -----------
Cash flows from financing activities:
Net payments of revolving bank line (40,448) (13,091)
Discontinued operations 12,797
Capitalized lease obligation payments (613)
Repayment of other notes (30,331)
---------- -----------
Cash (used in) provided by financing activities (71,392) (294)
---------- -----------
(Decrease) in cash and cash equivalents (500,253) (294,913)
Cash and each equivalents - beginning of period 4,472,271 8,914,473
---------- -----------
Cash and cash equivalents - end of period $3,972,018 $ 8,619,560
========== ===========
Supplemental Cash Flow Information:
Cash paid during the period for:
Income taxes $ 8,150 $ 149,000
Interest $ 26,436 $ 38,847
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
During 2003, the Company financed equipment for
$38,632
The accompanying notes are an integral part of these statements
3
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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. In addition,
we manufacture and assemble CCTV equipment and provide security-consulting
services to our clients. The Company markets nationwide with an emphasis in
the New York, Dallas, Phoenix and Southern California metropolitan areas.
Customers are primarily medium and large commercial and government agencies.
The Company's headquarters and manufacturing facility is located in Saddle
Brook, New Jersey. Sales and service facilities are located near Dallas, Texas,
Phoenix, Arizona and Fullerton, California.
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, 2003, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2003. 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, 2002
2. Net (Loss) Income Per Common Share
Basic net (loss) income per share of common stock is calculated by dividing
net (loss) income by the weighted average number of shares of common stock
outstanding during the period. For the periods ended March 31, 2003 and 2002,
the weighted average number of shares of common stock outstanding were 5,138,357
and 4,725,000, respectively. Diluted earnings per share reflects additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would result
from the assumed issuance or potential common shares that may be issued by the
Company relating to outstanding stock options and warrants. This amounted to
5,138,357 and 4,800,000 for the periods ending March 31, 2003 and 2002,
respectively.
3. Stock Based Compensation
On January 1, 2003, the Company adopted the fair recognition value
provisions of FASB No. 123, "Accounting for Stock Based Compensation," which was
amended by FASB No. 148. Under the prospective method of adoption selected by
the Company, stock based compensation cost will be recognized using the fair
value method for all awards, granted, modified or settled on or after the
effective date. For the quarter ended March 31,2003 and 2002, there were
no stock
4
based awards, grants, modifications or settlements. Accordingly adoption of this
method had no affect on net (loss) income or proforma (loss) income.
4. Employee Benefit Plan
Effective January 1, 2003, the Company sponsored a 401-K and a
discretionary profit sharing plan (the "Plan".) The Company matches up to three
percent of qualifying employees' compensation contribution to the Plan. The
Company's contributions to the employees' account vests equally over three
years and the employee contribution to their own account vests immediately.
5. Commitments
On May 17, 2002, we purchased all of the issued and outstanding shares of
PhotoScan Systems, Inc. ("PhotoScan") from Secure Alarm Systems, Inc. ("Secure
Alarm"). The purchase price for the issued and outstanding, shares of PhotoScan
was $600,000 of which $200,000 was paid in cash and balance was paid by issuing
51,249 shares of our restricted common stock. The purchase agreement provides
that in the event that the average closing price of our common stock for the
ten trading days immediately prior to May 16, 2003 is less than approximately
$7.805 per share, we will pay in cash Secure Alarm an amount equal to the
difference between $400,000 and the 51,249 shares multiplied by such average
closing price.
On August 13, 2002 we acquired all of the issues and outstanding common
stock of National Safe of California, Inc. ("National Safe"). The purchase price
of the acquisition was $2,000,000, which was paid by issuing an aggregate of
283,566 shares. The Stock Purchase Agreement provides that in the event that the
average closing price of our common stock for the ten trading days immediately
prior to August 13, 2003 is less than $7.053 per share, we can within 10 days of
the Reference Date, either purchase 212,675 of the Shares of $1,500,000 (subject
to certain adjustments detailed in the Stock Purchase Agreement) or pay the
seller an amount equal to the difference between (i) $1,500,000 and (ii) 212,675
(subject to certain adjustments detailed in the Stock Purchase Agreement)
multiplied by such average closing price.
Any adjustment resulting from the above transaction(s) is a purchase price
adjustment and will be recorded as goodwill.
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, 2002. Some of these policies
require management to make estimates and assumptions that may affect the
reported amounts in the Company's financial statement.
Recent Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure," which amends SFAS No. 123, "Accounting
for Stock-Based Compensation." SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent and more
frequent disclosures in financial statements about the effects of stock-based
5
compensation. In addition, SFAS No. 148 improves the timeliness of those
disclosures by requiring that this information be included in interim as well as
annual financial statements. SFAS No. 148 is effective for fiscal years ending
after December 15, 2002. The effects of adopting SFAS No. 148 did not impact on
the Company's financial position or results of operations.
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 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, 2003 and March 31, 2002
Sales. Sales for the three-month ended March 31, 2003 was $3,705,703
representing an increase of 16.6% or $526,319 from $3,179,384 for the same
quarter a year ago. Sales increased during the quarter ended March 31, 2003
primarily as a result of $1,008,230 in sales from three acquisitions made by the
Company offset by a decrease in our existing core business due to customer
delays in releasing orders from existing backlog.
Cost of Sales. Cost of sales was $2,654,536 for the three-months ended March 31,
2003 as compared to $1,891,344 for the three-months ended March 31, 2002. This
was an increase of $763,192 or 40.4%. For the three-months ended March 31, 2003,
cost of sales as a percentage of sales were 71.6% as compared to 59.5% for the
three-month ended March 31, 2002. We attribute the increase in our cost of
sales to our having to charge less for our services due to increased
competition.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $2,173,140 for the quarter ended March 31,
2003 as compared to $1,212,966 for the same quarter a year ago. This increase of
79.2% or $960,174 is primarily attributed to the costs incurred in hiring
additional personnel and the additional cost associated with our West Coast
offices. Additionally, we incurred startup cost in connection with our security
consulting division, which began operating in the third quarter of 2002.
Interest Income. Interest income for the three months ended March 31, 2003 was
$5,540 for the quarter ended March 31, 2003 as compared to $28,996 for the
quarter end March 31, 2002. The decrease of $23,456 was due to having less cash
to invest.
Interest Expense. Interest expense for the three months ended March 31, 2003 was
$26,723 as compared to $38,847 for the quarter ended March 31, 2002. The
decrease of $12,124 is attributed
6
to having average lower debt balance of $2,222,355 for the three-months ended
March 31, 2003 as compared to $2,938,262 for the three-months ended March 31,
2002.
Net (Loss) Income. As a result of the factors noted above, for the quarter ended
March 31, 2003 our net loss was $663,156, as compared to net income of $39,223,
for the quarter ended March 31, 2002. This resulted in basic loss per share of
$.13 on weighted average common shares outstanding of 5,138,357 for the quarter
ended March 31, 2003 compared with $.01 on weighted average common shares
outstanding of 4,725,000 for the quarter ended March 31, 2002.
Liquidity and Capital Resources
As of March 31, 2003, we had cash and cash equivalents of $3,972,018. We
have a loan facility of $4,500,000 with Hudson United Bank and have certain debt
maturing from November 2004 through May 2005. The amount available under the
credit facility was $2,322,622 as of March 31, 2003. Our working capital was
$10,820,061 as of March 31, 2003.
During the three months ended March 31, 2003, net cash used in operations
was $285,349 and we purchased property and equipment of $143,512.
Our capital requirements have grown substantially as a result of the growth
of our operations and staffing. We expect our capital requirements to continue
to increase in the future as we may seek to expand our operations internally and
thorough acquisitions. We believe that our current cash and available lines of
credit should be sufficient to meet our capital requirements for the next twelve
months.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings.
The Company's management, including its Chief Executive Officer and
Chief Financial Officer, does not expect that its disclosure controls and
procedures or its internal controls will prevent all error and all fraud.
A control system, no matter how well conceived and operated, provides
reasonable, not absolute, assurance that the objectives of the control
system are met. Because there are inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
or will be detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns occur because of
simple error or mistake. Controls can be circumvented by the individual acts of
some persons or by collusion of two or more people. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events. There can be no assurance that any design will succeed in
achieving its stated goals under all potential
7
future conditions; over time, controls may become inadequate because of changes
in conditions or deterioration in the degree of compliance with the policies or
procedures. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
(b) Changes in internal controls.
There have been no significant changes in the Company's internal controls
or, to its knowledge, in other factors that could significantly affect internal
controls subsequent to the date the Company carried out its evaluation.
Part II - Other Information
Item 1. Legal Proceedings
In May, 2003, Henry Bros. Electronics. Inc., a subsidiary of ours,
commenced an action in the Superior Court located in Orange County, California,
seeking a preliminary injunction against National Systems Integration, Inc.
(formerly known as Intellisec). This action asserts that National Systems has
engaged in unfair competitive practices in violation of California Business and
Professions Code Section 17200 because it is intentionally interfering with
Henry Bros.' business practices. Henry Bros. has been granted a temporary
restraining order and its motion for a preliminary injunction is pending.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
Number Description
------ -----------
99 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
None
8
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 15, 2003 /s/ JAMES E. HENRY
----------------------------------------------
James E. Henry
Chairman, Chief Executive Officer and Director
Date: May 15, 2003 /s/ LOUIS MASSAD
----------------------------------------------
Louis Massad
Vice President, Treasurer, Chief Financial
Officer and Director
9
CERTIFICATIONS
CHIEF FINANCIAL OFFICER
I, Louis Massad, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Diversified
Security Solutions, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in is
quarterly report whether or not there were significant changes in internal
controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
valuation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003
By: /s/ LOUIS MASSAD
--------------------------------------
Louis Massad
Chief Financial Officer, Vice President
and Treasurer
CHIEF EXECUTIVE OFFICER
I, James E. Henry, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Diversified
Security Solutions, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
c) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material.
Date: May 15, 2003
By: /s/ JAMES E. HENRY
---------------------------------
James E. Henry
Chairman, Chief Executive Officer
and Director