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 June 30, 2002
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 June 30, 2002
Common stock, $.01 par value 4,776,200
Diversified Security Solutions, Inc. and Subsidiaries
INDEX
Part I Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2001 (Audited) and
June 30, 2002 (Unaudited) 3
Consolidated Statements of Operations for the six and three months ended
June 30, 2002 (Unaudited) and June 30, 2001 (Unaudited) 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 2002 (Unaudited) and
June 30, 2001 (Unaudited) 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 7
Part II Other Information 10
2
Diversified Security Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
As of
June 30, December 31,
2002 2001
ASSETS (Unaudited) (Audited)
Current assets
Cash and cash equivalents $ 6,214,953 $ 8,914,473
Accounts receivable - net 4,978,589 4,142,335
Securities held to maturity 403,028 802,235
Inventory 2,099,006 1,239,362
Costs in excess of billings 306,500 298,879
Deferred tax asset 88,400 88,000
Other assets 351,547 102,671
Total current assets 14,442,023 15,587,955
Property and equipment 1,815,577 1,355,184
Accumulated depreciation (1,019,197) (882,222)
Computer software product costs 613,812 613,812
Accumulated amortization (469,374) (429,374)
Customer retainages 94,430
Other assets 480,521 56,163
$15,957,792 $16,301,518
Current liabilities
Accounts payable $ $677,629 $ 1,192,882
Accrued taxes and expenses 315,588 456,374
Income taxes payable 35,800 16,000
Billing in excess of cost 112,400 191,254
Long-term debt current 38,605
Capitalized leases current 8,159 10,642
Customer deposits 697,320 293,289
Total current liabilities 1,846,896 2,199,046
Long-term debt, less current 2,408,683 2,897,005
Deferred tax liability 103,000 103,000
4,358,579 5,199,051
Stockholders' equity:
Preferred stock - par value $.01
Common stock 47,762 47,250
Additional paid in capital 10,609,302 10,209,814
Deferred compensation (10,417) (20,834)
Retained earnings 952,566 866,237
Total stockholders' equity 11,599,213 11,102,467
$15,957,792 $16,301,518
3
Diversified Security Solutions, Inc. and Subsidiaries
Consolidated Statements of Operations
Six months ended
June 30,
2002 2001
(UNAUDITED)
Sales $7,394,016 $6,209,405
Cost of goods sold 4,266,639 3,821,299
Gross profit 3,127,377 2,388,106
Operating expenses 2,935,706 2,016,338
Operating income 191,671 371,768
Interest:
Income (38,467) 0
Expense 78,809 93,203
Income before income taxes 151,329 278,565
Provision for income taxes 65,000 119,800
Net income $86,329 $158,765
Basic and diluted earnings per share:
Basic earnings per common share $0.02 $0.05
Weighted average common share 4,725,000 3,000,000
Diluted earnings per common share $0.02 $0.05
Weighted average diluted shares outstanding 4,800,000 3,075,000
4
Diversified Security Solutions, Inc. and Subsidiaries
Consolidated Statements of Operations
Three months ended
June 30,
2002 2001
(UNAUDITED)
Sales $4,214,632 $2,494,029
Cost of goods sold 2,375,295 1,517,859
Gross profit 1,839,337 976,170
Operating expenses 1,722,740 933,724
Operating income 116,597 42,446
Interest:
Income (9,471) 0
Expense 39,962 52,550
Income (loss) before income taxes 86,106 (10,104)
Provision for income taxes 39,000 4,800
Net income (loss) $47,106 ($14,904)
Basic and diluted earnings per share:
Basic earnings (loss) per common share $0.01 ($0.00)
Weighted average common share 4,725,000 3,000,000
Diluted earnings (loss) per common share $0.01 ($0.00)
Weighted average diluted shares outstanding 4,800,000 3,075,000
5
Diversified Security Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For Six Months Ended
June 30,
2002 2001
Cash Flows from Operating Activities:
Net income (loss) for the quarter $86,329 $158,765
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Amortization of stock based compensation 10,417 10,416
Depreciation and amortization 176,975 110,000
Doubtful accounts expense 14,500
Changes in operating assets and liabilities:
Accounts receivable (836,254) (1,516,761)
Inventory (859,644) 532,275
Costs in excess of billings (7,621)
Prepaid Corp tax (249,276)
Other assets (115,767) (250,579)
Accounts payable (515,253) (333,277)
Accrued taxes and expenses (120,987) (287,862)
Billings in excess of cost (78,854)
Other liabilities (11,000)
Customer deposits held 404,031 (39,459)
Customer retainages (94,430)
Net cash used in operating activities (2,200,334) (1,612,982)
Cash Flows from Investing Activities:
Securities held to maturity 399,207
Computer software development costs (43,000)
Purchase of property and equipment and leasehold improv. (368,984) (132,850)
Cash provided by (used in) investing activities 30,223 (175,850)
Cash Flows from Financing activities:
Proceeds of bank credit lines 1,300,000
Proceeds of equipment loan facility 41,679 54,854
Repayments against bank credit lines (530,000)
Repayments of loans from others (38,605) (14,832)
Capitalized lease obligation payments (2,483) (10,693)
Deferred IPO costs 0 (60,718)
Cash provided by financing (used in) activities (529,409) 1,268,611
Net cash decrease (2,699,520) (520,221)
Cash-beginning $8,914,473 $567,567
Cash-ending $6,214,953 $47,346
6
Notes to Financial Statements
Basis of Presentation
The financial information provided herein was prepared from the books
and records of the Company without audit. The information furnished reflects all
normal recurring adjustments, which, in the opinion of the Company, are
necessary for a fair statement of the balance sheets, statement of operations,
and statement of cash flows, as of the dates and for the Diversified Security
Solutions, Inc. periods presented. The Notes to Financial Statements included in
the Company's 2001 Annual Reports on Form 10-KSB should be read in conjunction
with these financial statements.
The financial statements include operations of Photo Scan Systems,
Inc. from April 1, 2002, which was acquired at May 17, 2002. See Item 2(d).
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(a) Overview
We are a single source/turn-key provider of technology-based integrated
security solutions for commercial enterprises and governmental agencies. Our two
operating divisions are integration and manufacturing which focus on the
electronic security of the security industry. We provide services, which
include:
o consulting and planning;
o engineering and design;
o systems integration; and
o maintenance and technical support.
As a security integrator, we design, customize, install, connect and
maintain Closed Circuit TV and access control systems for customers in the
private and public sectors under the trade names, HBE and Henry Bros.
Electronics. As part of an access control system, we may install, maintain and
monitor intrusion alarms and sometimes monitor building system alarm for
building maintenance systems and fire alarm systems.
We also manufacture, develop and assemble various related products,
which we use in our own installations and for sales to other integrators under
the trade name Viscom Products.
(b) Results of Operations
Comparison of three and six months ended June 30, 2002 to the three and
six months ended June 30, 2001.
Revenues. Revenues for the quarter ended June 30, 2002 totaled
$4,214,632 representing an increase of 69.0% or $1,720,603 from $2,494,029
reported for the same quarter a year ago. Revenues for the six months ended June
30, 2002 totaled $7,394,016 representing an increase of 19.1% or $1,184,611
from $6,209,405 reported for the same six months a year ago.
Revenues increased primarily due to customers releasing orders from existing
backlog and new orders.
Cost of Goods Sold. Cost of Goods Sold for the quarter ended June 30,
2002 decreased by 4.5% to 56.4% of revenues for the quarter ended June 30, 2002,
from 60.9% of revenues for the quarter ended June 30, 2001.
7
Cost of Goods Sold for the six months ended June 30, 2002 decreased by 3.8% to
57.7% of revenues for the six months ended June 30, 2002, from 61.5% of revenues
for the six months ended June 30, 2001.
This reduction in cost was attributed to efficiency in both material purchase
and labor utilization.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses increased to $1,722,740 or 40.9% for the quarter ended
June 30, 2002 from $933,724 or 37.4% for the same quarter a year ago. For the
six months ended June 30, 2002 Selling, General and Administrative Expenses
increased to $2,935,706 or 39.7% compared to $2,016,338 or 32.5% for the six
months ended June 30, 2001.
The increase in expenses was due mostly to the mobilization of the Company for
growth. This includes new expenses for marketing and trade show attendance that
was a nominal cost to the Company prior to January 1, 2002. In addition, new
staffing and training for positions in sales project management and technical
service has dramatically accelerated through the 2nd Quarter. This preparation
in staffing and training will intended to enable the Company to meet the
obvious challenge that an increase in business from the new proactive sales
and marketing program may bring.
Operating Income. Operating Income for the quarter ended June 30, 2002
totaled $116,597 or 2.8%, an increase of 1.1% or $74,151 compared to $42,446 or
1.7% for the same quarter a year ago. For the six months ended June 30, 2002,
operating income decreased to $191,671 or 2.6% compared to $371,768 or 6.0% for
the six months ended June 30, 2001.
The decrease in Operating Income was caused by the increased operating expenses
due to additional sales, marketing, and project administrative hiring for the
anticipated internal growth and acquisitions.
Interest Expense-net. Interest Expenses net of Interest Income for
the three months ended June 30, 2002 was $30,491 compared to $52,550 for the
comparable period a year ago. For the six months ended June 30, 2002 Interest
expense-net decreased to $40,342 compared to $93,203 for the six months ended
June 30, 2001. The savings were caused by no additional bank borrowing and
$9,471 in interest income for the quarter ended June 30, 2002, and no bank
borrowing and $38,467 in interest income for the six months ended June 30, 2002.
Interest income was generated by short-term investment of the balance of the
proceeds of the initial public offering on November 15, 2001.
Net Income. For the quarter ended June 30, 2002 our net income totaled
$47,106 or 1.1% of revenues, as compared to net loss of $(14,904), or (0.6%) of
revenues for the same period a year ago. For the six months ended June 30, 2001
our net income totaled $86,329 or 1.2% of revenues compared to $158,765 or 2.6%
of revenues for the same period a year ago. This resulted in basic earnings
per share of $0.02 on 4,725,000 basic weighted average common share outstanding
for the six months ended June 30, 2002 compared with $0.05 per share on
3,000,000 basic weighted average common shares outstanding for the six months
ended June 30, 2001.
(c) Liquidity and Capital Resources
Since our inception, we have financed our operations through bank debt,
loans and equity from our principals, loans from third parties and funds
generated by our business. On November 15, 2001, we successfully completed an
initial public offering of 1,500,000 shares of our common stock. The public
offering price of this offering was $7.00 per share, and we received net
proceeds of approximately $8,613,014, after deducting the underwriter's discount
of $1,050,000 and offering expenses of $836,986. In December, 2001, Gunn Allen
Financial, Inc., the managing underwriter of our initial public offering,
exercised its over-allotment option to purchase an additional 225,000 shares of
common stock and we received net proceeds of $1,370,250. As of June 30, 2002, we
had $6,214,953 in cash and cash equivalents and $403,028 in short term bank
certificate of deposit held to maturity.
8
Cash flows from Operating Activities. Net cash used in operating
activities amounted to $2,200,334 for the six months ended June 30, 2002 as
compared to $1,612,982 during the same period a year ago.
Cash flows from investing activities. Net cash provided by investing
activities amounted to $30,223 for the six months ended June 30, 2002 as
compared to net cash used in investing activities of $175,850 for the same
period a year ago.
Cash flows from financing activities. Net cash used in financing
activities amounted to $529,409 for the six months ended June 30, 2002 as
compared to net cash provided by financing activities amounted to $1,268,611 for
the same period a year ago.
Our capital requirements have grown substantially since our inception
with the growth of our operations and staffing. We expect our capital
requirements to continue to increase in the future as we seek to expand our
operations. We believe that our current cash and available lines of credit
should be sufficient to meet our capital requirements.
(d) Acquisition
On May 17, 2002, we purchased all of the issued and outstanding shares
of Photo Scan Systems, Inc. ("Photo Scan") from Secure Alarm Systems Inc.
("Secure Alarm"). Photo Scan is located in California, specializes in security
systems for medical facilities and provides sales, system design, installation,
service and maintenance of integrated security systems which include access
control, closed circuit television, intercom, audio alarm and property intrusion
detection. The purchase price for the issued and outstanding, shares of Photo
Scan 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. Pursuant to the stock
purchase agreement, we also paid off a $200,000 note made by Photo Scan in favor
of Secure Alarm. The stock purchase agreement provides that in the event that
one year from May 17, 2002 (the "Reference Date"), the average closing sale
price of our common stock for the ten trading days immediately prior to the
Reference Date (the "Current Market Price") is less than approximately $7.81 per
share we will pay Secure Alarm an amount equal to the difference between
$400,000 and the 51,249 shares multiplied by the Current Market Price.
(e) Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141 Business Combinations and Statement No.142 Goodwill and other
Intangible Assets. These statements are effective July 1, 2001 for business
combinations completed on or after that date. These statements became effective
for us on January 1, 2002 with respect to business combinations completed on or
before June 30, 2001.
(f) Forward Looking Statements
This quarterly report contains certain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, doing business with governmental entities and the release of
backlog orders, the fact that we face intense competition in a business
characterized by rapid growth, changing technology and high capital requirements
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The Company wishes to advice readers that
the factors listed above could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in any
current statements. The Company does not undertake, and specifically declines
any obligation, to publicly release the results of any revisions which may be
made to any forward-looking statements to reflect events or circumstances after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
9
Part II Other Information-
Item 1. Legal Proceedings.
On or about April 18, 2002, Plaintiff Alan Carden commenced an action
against, La Rossa ElectInc. Inc. and Henry Brothers., Inc. ("Henry Brothers"),
our wholly-owned subsidiary, in Supreme Court of the State of New York, County
of Westchester. The Complaint alleges that plaintiff was injured while working
on the Westchester County Department of Correction while Henry Brothers was
working on a job at the facility and as a result plaintiff is seeking $6,000,000
together with costs and disbursements. We have submitted this matter to our
insurance carrier.
Item 2. Changes in Securities
As stated above, on May 17, 2002, we purchased all of the issued and
outstanding shares of Photo Scan Systems, Inc. ("Photo Scan"). The purchase
price of the issued and outstanding shares of Photo Scan was $600,000 of which
$200,000 was paid in cash and the balance was paid by issuing 51,259 shares of
our restricted common stock to Secure Alarm. The issuance of the securities to
Secure Alarm was in reliance on the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended as a transaction not involving a public
offering.
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned.
Diversified Security Solutions, Inc.
By: /s/ James E. Henry
------------------------------------
James E. Henry
Chairman and Chief Executive Officer
10
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, James E. Henry, Chairman and Chief Executive Officer of Diversified
Security Solutions, Inc. (the "Company"), do hereby certify in accordance
with 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act
of 2002, that to my knowledge the foregoing Quarterly Report of the
Company:
1. fully complies with the requirements of section 13(a) or 15(d) of the
Security Exchange Act of 1934, 15 U.S.C. 78 m or 78 o(d), and,
2. the information contained in the periodic report fairly present, in
all material respects, the final condition and results of operations
of the Company
Dated: August 13, 2002
James E. Henry
---------------------------
James E. Henry
Chairman and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Louis Massad, Vice President and Chief Financial Officer of
Diversified Security Solutions, Inc. (the "Company"), do hereby certify in
accordance with 18 U.S.C. 1350, as adopted pursuant to 906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge the foregoing Quarterly
Report of the Company:
1. fully complies with the requirements of section 13(a) or 15(d) of the
Security Exchange Act of 1934, 15 U.S.C. 78 m or 78 o(d), and,
2. the information contained in the periodic report fairly present, in
all material respects, the final condition and results of operations
of the Company
Dated: August 13, 2002
Louis Massad
-----------------------------------
Louis Massad
Vice President and Chief Financial Officer
11