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 September 30, 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 November 12, 2004,
Common stock, $.01 par value 5,811,289
Diversified Security Solutions, Inc. and Subsidiaries
INDEX
Part I Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2004 (Unaudited) and
December 31, 2003 (Audited).........................................................................2
Consolidated Statements of Operations for the nine and three months
ended September 30, 2004 (Unaudited) and September 30, 2003 (Unaudited) ............................3
Consolidated Statements of Cash Flow for the nine months ended
September 30, 2004 (Unaudited) and September 30, 2003 (Unaudited)...................................4
Notes to Financial Statements.....................................................................5-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...........................................................................9-10
Item 3. Controls and Procedures ........................................................................10-11
Part II Other Information
Item 1. Legal Proceedings .................................................................................12
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds ........................................12
Item 3. Defaults Upon Senior Securities ...................................................................12
Item 4. Submission of Matters to a Vote of Security Holders ...............................................12
Item 5. Other Information .................................................................................12
Item 6. Exhibits and Reports on Form 8-K ..................................................................13
SIGNATURES ......................................................................................................14
CERTIFICATIONS ...............................................................................................15-21
Item 1. Financial Statements
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2004 December 31,2003
ASSETS (Unaudited) (Audited)
----------- -----------
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 4,475,123 $ 1,927,416
ACCOUNTS RECEIVABLE - NET OF ALLOWANCES OF $280,500 AND $135,000 6,972,673 6,586,674
INVENTORY 1,300,538 837,855
COSTS IN EXCESS OF BILLINGS AND ESTIMATED PROFITS 1,810,820 765,905
DEFERRED TAX ASSETS 2,231,755 2,202,000
PREPAID AND INCOME TAXES RECEIVABLE 222,793 185,627
OTHER ASSETS 26,504 252,179
----------- -----------
TOTAL CURRENT ASSETS 17,040,206 12,757,656
PROPERTY AND EQUIPMENT - net of accumulated depreciation of $1,520,807 in 2004
and $1,406,824 in 2003. 1,185,159 1,161,278
GOODWILL 2,226,304 1,930,694
INTANGIBLE ASSETS - net of accumulated amortization of $ 276,347 in 2004 and
$179,809 in 2003. 1,230,942 1,303,480
OTHER ASSETS 441,703 410,776
----------- -----------
TOTAL ASSETS $22,124,314 $17,563,884
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 2,976,650 $ 2,119,833
ACCRUED TAXES & EXPENSES 1,543,305 923,464
BILLING IN EXCESS OF COST AND ESTIMATED PROFITS 797,604 477,515
DEFERRED INCOME 188,064 155,277
LONG-TERM DEBT, CURRENT PORTION OF 1,241,669 463,633
CUSTOMER DEPOSITS 41,879 24,425
DEFERRED TAX LIABILITY 64,000 64,000
----------- -----------
TOTAL CURRENT LIABILITIES 6,853,171 4,228,146
----------- -----------
LONG-TERM DEBT, LESS CURRENT PORTION 505,749 1,922,597
DEFERRED TAX LIABILITY 134,000 134,000
----------- -----------
TOTAL LIABILITIES 7,492,920 6,284,743
----------- -----------
STOCKHOLDERS' EQUITY
PREFERRED STOCK, $.01 PAR VALUE: 2,000,000 SHARES AUTHORIZED;
NO SHARES ISSUED - -
COMMON, $.01 PAR VALUE: 10,000,000 SHARES AUTHORIZED;
5,811,289 IN 2004 AND 5,201,431 IN 2003 SHARES OUTSTANDING 58,112 52,014
ADDITIONAL PAID IN CAPITAL 17,080,114 13,512,940
TREASURY STOCK, 70,891 SHARES (500,000) (500,000)
DEFERRED COMPENSATION (178,073) -
ACCUMULATED DEFICIT (1,828,759) (1,785,813)
----------- -----------
TOTAL EQUITY 14,631,394 11,279,141
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $22,124,314 $17,563,884
=========== ===========
The accompanying notes are an intergral part of these financial statements.
2
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Unaudited
Nine Months Ended Three Months Ended
------------------------------- ------------------------------
SEPT. 30, 2004 SEPT. 30, 2003 SEPT. 30, 2004 SEPT. 30, 2003
--------------- -------------- -------------- --------------
Revenue $19,977,273 $12,320,260 $7,785,290 $ 5,093,838
Cost of Sales 15,165,515 10,106,772 5,781,040 4,502,072
----------- ----------- ---------- -----------
Gross Profit 4,811,758 2,213,488 2,004,250 591,766
----------- ----------- ---------- -----------
Operating Expenses:
Selling General & Administrative Expenses 4,817,478 6,132,358 1,791,255 1,746,781
----------- ----------- ---------- -----------
Operating Profit (Loss) (5,720) (3,918,870) 212,995 (1,155,015)
----------- ----------- ---------- -----------
Interest Income 6,035 8,992 2,631 2,259
Interest Expense (72,887) (80,837) (23,868) (29,723)
----------- ----------- ---------- -----------
Net Income (Loss) Before Tax Benefit (72,572) (3,990,715) 191,758 (1,182,479)
Tax Provision (Benefit) For Income Tax (29,628) (335,090) 78,748 843,910
----------- ----------- ---------- -----------
Net Income (Loss) After Tax $ (42,944) $(3,655,625) $ 113,010 $(2,026,389)
=========== =========== ========== ===========
Basic and Diluted Income (Loss) Per Common Share:
Basic Income (Loss) Per Common Share $ (0.01) $ (0.71) $ 0.02 $ (0.39)
=========== =========== ========== ===========
Weighted Average Common Shares 5,613,187 5,137,046 5,301,287 5,133,470
=========== =========== ========== ===========
Diluted Income (Loss) Per Common Share: $ (0.01) $ (0.71) $ 0.02 $ (0.39)
=========== =========== ========== ===========
Weighted Average Diluted Common Shares 5,613,187 5,137,046 5,315,586 5,133,470
=========== =========== ========== ===========
The accompanying notes are an integral part of these statements.
3
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Nine Months Ended
------------------------------------
September 30,
------------------------------------
2004 2003
------------------------------------
Cash flows from operating activities:
Net loss $ (42,944) $(3,655,625)
Adjustments to reconcile net loss from operations
to net cash provide by (used in) operating activities:
Depreciation and amortization 396,123 386,898
Bad debt expense 145,500 5,000
Stock option expense 41,825 -
Deferred income taxes (29,755) (318,000)
Changes in operating assets and liabilities:
Accounts receivable (405,180) 1,157,050
Inventories (211,299) 421,618
Costs in excess of billings and estimated profits (1,044,915) (249,184)
Other assets 170,748 170,281
Prepaid and income tax receivable (37,166) (187,001)
Accounts payable 760,947 348,268
Accrued expenses 573,040 (208,425)
Billings in excess of cost and estimated profits 320,089 534,315
Deferred income 32,787 -
Customer deposits held 17,454 (134,558)
------------------------------------
Net cash provided by (used in) operating activities 687,254 (1,729,363)
------------------------------------
Cash flows from investing activities:
Purchase of business, net of cash acquired (171,225) -
Purchase of property and equipment (85,838) (209,437)
Increase in Goodwill - (71,729)
------------------------------------
Cash used in investing activities (257,063) (281,166)
------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock - net of fees 3,086,976 -
Net (payments) and proceeds of revolving bank lines (600,000) 28,657
Net (payments) and proceeds of other debt (269,460) (58,190)
Payments of loan payable to owner of acquired company (100,000) -
------------------------------------
Cash provided by (used in) proceeds financing activities 2,117,516 (29,533)
------------------------------------
Increase (decrease) in cash and cash equivalents 2,547,707 (2,040,062)
Cash and cash equivalents - beginning of period 1,927,416 4,472,271
------------------------------------
Cash and cash equivalents - end of period $ 4,475,123 $ 2,432,209
------------------------------------
Supplemental disclosure of cash flow information:
Amount paid for the period for:
Interest $ 72,887 $ 80,695
Taxes $ 1,727 $ 183,875
Non-cash investing and financing activities:
Equipment financed $ 246,613 $ 38,632
Stock issued to acquire businesses $ 266,400 $ -
Receipt of 70,891 shares of its stock from a loan holder due to default $ - $ 500,000
Issuance of stock in connection with National Safe acquisition $ - $ 3,498
The accompanying notes are an intergral part of the financial statements.
4
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 the New York City,
Dallas, Phoenix and Southern California metropolitan areas. Customers are
primarily medium and large businesses and governmental agencies. The Company
derives a majority of its sales from project installations and to a smaller
extent, service sales (maintenance). In April of 2004, the Company completed its
acquisition of Airorlite Communications, Inc. ("Airorlite"). Airorlite
specializes in the 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. There has been a
shift in sales by geographic region and therefore, the information below shows
the sales percentages by geographic location for the nine months ended September
30, 2004 and 2003 as follows:
Nine Months
Ended September 30,
------------------
2004 2003
---- ----
New Jersey/ New York 35% 55%
California 33 26
Texas 14 12
Arizona 8 5
---- ----
Total integration 90 98
Airorlite 9 0
Viscom 1 2
---- ----
Total sales 100% 100%
==== ====
The Company's headquarters are located in Saddle Brook, New Jersey.
Sales and service facilities are located near the Dallas Fort Worth Airport,
Phoenix Arizona Airport, two facilities in the New York City metro area (Saddle
Brook, New Jersey), and Fullerton, California. During the third quarter of 2003,
the Company's subsidiary, Viscom Products ("Viscom"), restructured its
operations to begin outsourcing the manufacturing of its products to a third
party. Viscom will continue to sell product and support existing warranties.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States 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 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 and nine month periods ended September 30, 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.
5
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. For the nine months ended September 30, 2004, the Company charged
Selling, general and administrative expenses $41,825 for options granted
subsequent to January 1, 2003. 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 reflects for the three and six months ended September 30, 2004 and 2003
is as follows:
Nine Months Ended Three Months Ended
September 30 September 30
Unaudited Unaudited
------------------------- --------------------------
2004 2003 2004 2003
---------- ----------- --------- -----------
Net Profit (Loss) per Financial Statements ($42,944) ($3,635,625) $113,010 $ 2,026,389)
======== =========== ======== ===========
Stock based-employee compensation
expense included in reported net loss, 24,677 - 13,640 -
net of related tax expense
Total stock-based employee compensation
expense determined under fair valued based,
net of related tax effects (29,567) (8,489) (18,351) -
-------- ----------- -------- -----------
Pro Forma Net Profit (Loss) ($47,834) ($3,644,114) $108,299 $(2,026,389)
======== =========== ======== ===========
Profit (Loss) per share:
Basis and diluted shares as reported ($0.01) ($0.71) $0.02 ($0.39)
======== =========== ======== ===========
Basis and diluted shares as proforma ($0.01) ($0.71) $0.02 ($0.39)
======== =========== ======== ===========
6
4. 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
$15,877 for the nine months ended September 30, 2004 and $37,946 for the nine
months ended September 30, 2003.
The Company also paid another Director consulting fees in the amount of
$2,400 for the nine months ended September 30, 2003.
5. Acquisition
Effective 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, 37,000 shares of the Company's common stock, valued at $266,400,
concurrently with the closing, an officer's loan of $100,000 was repaid and an
amount equal to the income tax on the undistributed earnings for the period
January 1, 2004 to the acquisition of the Company. 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. The Company accounted for the acquisition under
the purchase accounting method. Accordingly, assets and liabilities were
recorded at their fair value. As a result of the acquisition, the Company
recorded goodwill of $295,610. The following summarized the net assets acquired
from Airorlite Communications (prior to acquisition accounting adjustments) as
of April 1, 2004:
Balance
-------
Current assets $410,829
Long term assets 16,003
Current liabilities 208,970
--------
Net assets $217,862
========
Airorlite Communications had sales of $1,840,051 (unaudited) for the
nine months ended September 30, 2004 with an operating profit of approximately
$691,807. The unaudited assets (excluding goodwill) as of September 30, 2004
were $1,428,197.
6. Common Stock Private Placement
On July 28 2004 the Company completed a $3,319,998 private placement of
its common stock to certain qualified institutional investors. Under the terms
of the agreement, the Company sold an aggregate of 553,333 shares of common
stock to Lakeshore International, Ltd, Global Bermuda Limited Partnership,
Merced Partners Limited Partnership, Tamarack International, Ltd., SRG Capital
LLC, TCMP Partners and Bristol Investment Fund, Ltd., each a qualified
institutional investor for $6.00 per share. The Company also has granted the
investors a warrant to acquire 138,333 shares of common stock at an exercise
price of $7.60 per share, exercisable for a period commencing six months after
the date of issuance through the fifth anniversary of the issuance. In addition,
the Placement Agent received a commission of 8% of the proceeds plus expenses
and was issued a warrant to acquire 55,333 shares of common stock with the same
terms as those issued to the institutional investors. After expenses, the net
proceeds of the transaction
7
were $2,958,058. The Company intends to use the net proceeds of the private
placement for general corporate purposes.
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. In management's
opinion, none of these claims are likely to have a material affect on the
Company's financial statements.
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.
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.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Nine Months Ended September 30, 2004 and September 30, 2003
Sales - Sales for the nine months ended September 30, 2004 were
$19,977,273 representing an increase of $7,657,013 or 62.1% as compared to
$12,320,260 for the nine months ended September 30, 2003. This sales increase is
believed to be due, in part, to improved general economic conditions and an
enhanced emphasis on security as all of the Company's regions experienced
increased sales. The Airorlite acquisition accounted for an increase in the
Company's sales of $1,840,051. The New Jersey region experienced sales growth of
5%. The Company's other integration regions (Arizona, California and Texas)
experienced significant sales growth of between 88% to plus 100% during the nine
months ended September 30, 2004 as compared to the September 30, 2003 period.
The Company backlog as of September 30, 2004 is $19,500,000.
Cost of Sales - Cost of sales for the nine months ended September 30,
2004 was $15,165,515 as compared to $10,106,772 for the nine months ended
September 30, 2003. The gross profit margin for the nine months ended September
30, 2004 was 24.1% as compared to 18.0% for the nine months ended September
30, 2003. The improved gross profit percentage is due to higher margins reported
in Arizona and New Jersey regions and the addition of the higher margin
Airorlite sales. This was partially offset by decreased margins in California
due to higher labor costs to complete projects.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses was $4,817,478 for the nine months ended September 30,
2004 as compared to $6,132,358 for the nine months ended September 30, 2003.
This decease of 21.4% or $1,314,880 was primarily attributed to the
restructuring of the Viscom operations and savings from employee reductions,
salary reductions for key employees, employee benefit reductions (health
insurance, 401k, etc).
Interest Income - Interest income for the nine months ended September
30, 2004 was $6,035 as compared to $8,992 for nine months ended September 30,
2003.
Interest Expense - Interest expense for the nine months ended September
30, 2004 was $72,887 as compared to $80,837 for the nine months ended September
30, 2003. The decrease of $7,950 and is due to having a lower average debt
balance for the nine months ended September 30, 2004 of $2,079,515 versus
$2,320,938 for the nine months ended September 30, 2003.
Three Months Ended September 30, 2004 and September 30, 2003
Sales - Sales for the three months ended September 30, 2004 were
$7,785,290 representing an increase of $2,691,452 or 52.8% as compared to
$5,093,838 for the three months ended September 30, 2003. The Airorlite
acquisition accounted for an increase in sales of $1,316,665. The Arizona,
California and Texas regions experienced sales growth in excess of 88% during
the three months ended September 30, 2004 as compared to the September 30, 2003
period. This increase was partially offset by lower sales in the New Jersey
region of 18.6%.
Cost of Sales - Cost of sales for the three months ended September 30,
2004 was $5,781,040 as compared to $4,502,072 for the three months ended
September 30, 2003. The gross profit margin for the three months ended September
30, 2004 was 25.7% as compared to 11.6% for the three months ended September
30, 2003. The Airorlite acquisition accounted for 2.8% of
9
the improved gross profit margin. We attribute the 8.4% increase in the gross
profit margin for the integration business to improved cost control in the New
Jersey, Arizona and Texas regions.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses was $1,791,255 for the three months ended September 30,
2004 as compared to $1,746,781 for the three months ended September 30, 2003.
Included in the September 30, 2004 quarterly selling general & administrative
expenses are one time charges related to severance of approximately $82,000. As
a percentage of sales, selling general and administrative expenses were 23.0%
for the three months ended September 30, 2004 versus 34.3% for the three months
ended September 30, 2003. The Company has effectively maintained its spending
levels as sales have increased.
Interest Income - Interest income for the three months ended September
30, 2004 was $2,631 as compared to $2,259 for three months ended September 30,
2003 reflecting the increased cash level.
Interest Expense - Interest expense for the three months ended
September 30, 2004 was $23,868 as compared to $29,723 for the three months ended
September 30, 2003. The average debt balance for the three months ended
September 30, 2004 was $1,970,436 as compared to $2,423,121 for the three months
ended September 30, 2003.
Liquidity and Capital Resources - As of September 30, 2004, our cash
and cash equivalents increased to $4,475,123 versus $1,927,416 at December 31,
2003. This increase is the result of the equity private placement in July 2004
in the amount of $2,958,058, net of associated costs. In addition, we have a
revolving credit facility of $3,500,000 with Hudson United Bank ("HUB") with
debt maturing in May, 2005, which we anticipate extending. The total outstanding
balance on this revolving line of credit is $1,117,000. The Company also has
other outstanding bank debt in the amount of $332,175. Our working capital was
$10,187,035 as of September 30, 2004. The Company was in compliance of the
various loan covenants within its debt agreement with HUB as of September 30,
2004.
During the nine months ended September 30, 2004, net cash provided by
operating activities was $687,254. We purchased property and equipment of
$85,838. In addition, due to positive cash flows from operations, the Company
paid HUB $600,000 of the revolving line of credit. The total debt service
payments were $68,839 for the nine months ended September 30, 2004.
Our working capital requirements have grown and as a result, our cash
and cash equivalents have significantly decreased over the last few years. On
July 28, 2004, the Company completed a $3,319,998 private placement of its
common stock to certain qualified institutional investors, which netted the
Company $2,958,058 after expenses. (See Note 6 for additional details). 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 as our operations continue to grow.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Pursuant to Rule 13a-15 under the Securities and Exchange Act of 1943
as amended, 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, Chief Operating Officer and Chief Financial Officer, of
the design and operation of the Company's disclosure
10
controls and procedures as defined under Rule 13a-15(e) under the Securities
Exchange Act of 1934 as of the end of the period covered by this report. Based
upon that evaluation, the Company's Chief Executive Officer, Chief Operating
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures
(i) 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;
(ii) are designed to ensure that information required to be
disclosed by the Company in the reports that it files or
submits under the Securities and Exchange Act is recorded,
processed, summarized and reported, within the time periods
specified in the Commission's rules and forms; and
(iii) include, without limitations, controls and procedures
designed to ensure that information required to be disclosed
by the Company in the reports that it files or submits under
the Security Exchange Act is accumulated and communicated to
the Company's management, including its principal executive
and principal financial officers or persons performing
similar functions, as appropriate to allow timely decisions
regarding required disclosure.
(b) Change in Internal Controls over Financial Reporting
As required by Rule 13a-15(d), the company's executive management
including the Chief Executive Officer, the Chief Operating officer and the Chief
Financial Officer, also conducted an evaluation of the Company's internal
control over financial reporting to determine whether any change occurred during
the Company's last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting. Based on that evaluation, there have been no changes in the Company's
internal control over financial reporting during the fiscal quarter covered by
this report that have materially affected, or are reasonably likely to
materially affect our internal controls over financial reporting.
11
Part II - Other Information
Item 1. Legal Proceedings
Not applicable
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
On July 28, 2004 the Company completed the $3,319,998 private placement
of its common stock to Lakeshore International, Ltd, Global Bermuda Limited
Partnership, Merced Partners Limited Partnership, Tamarack International, Ltd.,
SRG Capital LLC, TCMP Partners and Bristol Investment Fund, Ltd., each a
qualified institutional investor. Under the terms of the agreement, the Company
sold an aggregate of 553,333 shares of common stock to the investors for $6.00
per share. The Company also has granted the investors a warrant to acquire
138,333 shares of common stock at an exercise price of $7.60 per share,
exercisable for a period commencing six months after the date of issuance
through the fifth anniversary of the issuance. In addition, Roth Capital
Partners, LLC, the placement agent, received a commission of 8% of the proceeds
plus expenses and was issued a warrant to acquire 55,333 shares of common stock
with the same terms as those issued to the institutional investors. After
expenses, the net proceeds were $2,958,058. The Company intends to use the net
proceeds for general corporate purposes.
The securities issued in the private placement were offered and sold to
the investors without registration under the Securities Act of 1933 in reliance
upon the exemption provided by Regulation D and Section 4(2) of the Securities
Act. Such securities may not be offered or sold in the United States in the
absence of an effective registration statement or an exemption from registration
requirements under the Securities Act. We filed a registration statement
covering the resale of the shares and the shares issuable upon the exercise of
the warrants on August 29, 2004 which was declared effective by the SEC on
September 7, 2004.
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
12
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 Section 1350 Certification
(b) Reports on Form 8-K
On July 21, 2004, the Company filed an 8-K reporting on Item 2 event
announcing that the Company issued a press release announcing a $3,319,998
private placement.
On July 28, 2004, the Company filed an 8-K reporting on Item 2 event
announcing that the Company issued a press release announcing completion of the
$3,319,998 private placement.
On August 24, 2004, the Company filed an 8-K reporting on Item 12 event
announcing that the Company issued a press release announcing its financial
results for the three and six months ended June 30, 2004.
On September 10, 2004, the Company filed an 8-K reporting that the
Company's Registration Statement on From S-3 was declared effective by the SEC
on September 7, 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
13
SIGNATURES
Date: November 12, 2004 /s/ JAMES E. HENRY
-------------------------------------------
James E. Henry
Chairman, Chief Executive Officer,
Treasurer and Director
Date: November 12, 2004 /s/ IRVIN F. WITCOSKY
------------------------------------------
Irvin F. Witcosky
Chief Operating Officer, President,
Secretary and Director
Date: November 12, 2004 /s/ DOUGLAS WEST
------------------------------------------
Douglas West
Chief Financial Officer
14
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as............................... 'SS'