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, 2005
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 11, 2005
Common stock, $.01 par value 5,739,398
Diversified Security Solutions, Inc. and Subsidiaries
INDEX
Part I Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and
December 31, 2004 2
Consolidated Statements of Operations for the three months ended
March 31, 2005 (Unaudited) and March 31, 2004 (Unaudited) 3
Consolidated Statements of Cash Flows for the three months ended
March 31, 2005 (Unaudited) and March 31, 2004 (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 11
Item 2. Change in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
1
Part 1. Financial Statements
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Unaudited
March 31, December 31,
ASSETS 2005 2004
---- ----
CURRENT ASSETS
Cash and cash equivalents $2,636,208 $3,154,972
Accounts receivable-net of allowance for doubtful accounts- $426,000 in 2005
and $357,500 in 2004 9,422,521 9,035,460
Inventory 923,818 874,575
Costs in excess of billings and estimated profits 3,362,924 2,584,922
Deferred tax asset 735,859 1,011,263
Prepaid expenses and income tax receivable 402,302 470,397
Other assets 60,988 47,830
----------------- -----------------
Total current assets 17,544,620 17,179,419
PROPERTY AND EQUIPMENT - net of accumulated depreciation of $1,503,472
in 2005 and $1,383,703 in 2004 1,238,279 1,301,428
GOODWILL 2,134,344 2,134,344
INTANGIBLE ASSETS - net of accumulated amortization of $346,285 in 2005
and $310,491 in 2004 1,156,058 1,191,852
DEFERRED TAX ASSET 1,007,965 742,070
OTHER ASSETS 753,334 539,307
------------------ -----------------
TOTAL ASSETS $23,834,600 $23,088,419
================== =================
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $4,111,824 $3,337,310
Accrued taxes and expenses 1,527,809 1,833,934
Billings in excess of costs and estimated profits 1,545,616 1,351,298
Deferred income 42,494 42,494
Current portion of long term debt 1,345,761 1,394,809
Deferred tax liability 24,298 32,398
------------------- ------------------
Total current liabilities 8,597,802 7,992,243
LONG-TERM DEBT, LESS CURRENT PORTION 168,989 168,989
DEFERRED TAX LIABILITY 230,602 188,163
------------------- ------------------
TOTAL LIABILITIES 8,997,393 8,349,395
------------------- ------------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued -- --
Common stock, $.01 par value; 10,000,000 shares authorized;
5,739,398 shares issued and outstanding in 2005 and 2004 57,394 57,394
Additional paid in capital 16,906,029 16,602,366
Deferred compensation (446,719) (178,942)
Accumulated deficit (1,679,497) (1,741,794)
------------------- ------------------
TOTAL EQUITY 14,837,207 14,739,024
------------------- ------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $23,834,600 $23,088,419
------------------- ------------------
The accompanying notes are an integral part of these statements
2
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
For the three months ended
March 31,
2005 2004
---- ----
Revenue $8,613,074 $5,667,493
Cost of revenue 6,429,293 4,388,786
---------------- ----------------
Gross profit 2,183,781 1,278,707
---------------- ----------------
Operating Expenses:
Selling general & administrative expenses 2,050,750 1,426,834
---------------- ----------------
Operating profit (loss) 133,031 (148,127)
---------------- ----------------
Interest income 3,753 1,525
Interest (expense) (19,821) (24,808)
---------------- ----------------
Net income (loss) before tax expense (benefit) 116,963 (171,410)
Tax expense (benefit) 54,666 (70,278)
---------------- ----------------
Net income (loss) after taxes $62,297 ($101,132)
================ ================
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Basic Profit (Loss) Per Common Share $0.01 ($0.02)
================ ================
Weighted Average Common Shares 5,739,398 5,130,540
================ ================
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Diluted Profit (Loss) Per Common Share: $0.01 ($0.02)
================ ================
Weighted Average Diluted Common Shares 5,739,398 5,130,540
================ ================
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 three months ended
March 31,
2005 2004
---- ----
Cash flows from operating activities:
Net income (loss) $62,297 ($101,132)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 155,563 137,404
Bad debt expense 68,500 --
Stock option expense 35,886 --
Deferred income taxes 43,848 (70,278)
Changes in operating assets and liabilities:
Accounts receivable (455,561) (81,008)
Inventories (49,243) (15,957)
Costs in excess of billings and estimated profits (778,002) 143,606
Other assets (219,720) (204,031)
Prepaid Expenses and income tax receivable 68,095 (1,302)
Accounts payable 774,514 118,020
Accrued expenses (306,126) 82,943
Billings in excess of cost and estimated profits 194,318 544,147
Customers deposits (7,465) 61,849
Deferred Income -- (155,277)
-------------- --------------
Net cash provided by (used in) operating activities (413,096) 458,984
-------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (56,620) (30,245)
-------------- --------------
Net cash used in investing activities (56,620) (30,245)
-------------- --------------
Cash flows from financing activities:
Payments on revolving bank line -- (352,238)
Payments of bank loans (40,477) (43,031)
Capitalized lease payments (8,571) --
-------------- --------------
Net cash used in financing activities (49,048) (395,269)
-------------- --------------
Increase (decrease) in cash and cash equivalents (518,764) 33,470
Cash and cash equivalents - beginning of period 3,154,972 1,927,416
-------------- --------------
Cash and cash equivalents - end of period $2,636,208 $1,960,886
============== ==============
Supplemental disclosure of cash flow information: Amount paid for the period
for:
Interest $19,821 $24,108
Taxes $54,666 --
Non-cash investing and financing activities:
Value of stock options issued to employees $303,663 --
The accompanying notes are an integral part of these statements
4
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. The Company markets nationwide with an emphasis in the New York,
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,
maintenance service revenue. In April 2004, the Company completed its
acquisition of Airorlite Communications, Inc. ("Airorlite"). Airorlite
specializes in designing, manufacturing and maintaining wireless communications
equipment used to enhance and extend emergency radio frequency services and
cellular communications for both fixed and mobile applications. The table below
shows the sales percentages by geographic location for the three months ended
March 31, 2005 and 2004 as follows:
Three Months
Ended March 31,
---------------
2005 2004
---- ----
New Jersey/ New York 60% 46%
California 22 36
Texas 12 12
Arizona 5 6
---- ----
Total integration 99 100
Specialty products and services 1 -
---- ----
Total revenue 100% 100%
=== ===
The Company's headquarters are located in Saddle Brook, New Jersey.
Sales and service facilities are located near Dallas Fort Worth Airport, Phoenix
Arizona Airport, Fullerton, California and three facilities in the New York City
metropolitan area (two in Saddle Brook, New Jersey)., 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 sell and maintain product installations.
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, 2005, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2005. 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, 2004.
5
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 including stock
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 follows:
2005 2004
---- ----
Net Income (Loss) as reported $62,297 ($101,132)
======= =========
Stock based- employee compensation
expense included in reported net income
(loss), net of related tax expense 19,127 --
Total stock-based employee compensation
expense determined under fair valued based,
net of related tax effects (20,760) (3,419)
------- -------
Pro forma net Income/(Loss) $60,664 ($104,551)
======= =========
Loss per share:
Basic and diluted - as reported $0.01 ($0.02)
===== =======
Basic and diluted - proforma $0.01 ($0.02)
===== =======
6
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENT (CON'T)
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
$5,500 for the three months ended March 31, 2004.
5. Segment Data
Selected information by business segment is presented in the following
tables for the quarters ended March 31:
Percentage Percentage
Revenue 2005 of Total 2004 of Total
-------------------- ---------------- -------------------- -----------------
Total Integration $8,428,267 98% $5,528,165 98%
Specialty Products
and Services 184,807 2% 139,328 2%
-------------------- ---------------- -------------------- -----------------
Total Revenue $8,613,074 100% $5,667,493 100%
==================== ================ ==================== =================
Operating Profit (Loss) 2005 2004
------------------- -------------------
Total Integration $732,945 $127,923
Specialty Products
and Services (283,100) (16,704)
Corporate (316,814) (259,346)
------------------- -------------------
Total Operating Profit (Loss) $133,031 $(148,127)
=================== ===================
Selected balance sheet data by business segment is presented at March 31:
Total Assets 2005
---------------------
Total Integration $18,390,824
Specialty Products
and Services 2,582,629
Corporate 2,861,147
---------------------
Total Assets $23,834,600
=====================
7
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENT (CON'T)
5. 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 effect 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, 2004. Some of these
policies require management to make estimates and assumptions that may affect
the reported amounts in the Company's financial statement.
8
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, 2005 and March 31, 2004
Sales - Sales for the three months ended March 31, 2005 were $8,613,074
representing an increase of $2,945,581 or 52.0 % as compared to $5,667,493 for
the three months ended March 31, 2004. This increase was related to the
Company's integration business which was partially offset by an $87,000 decrease
in the specialty products and services business. Three of the four regions
within the integration business experienced double digit revenue growth in the
2005 quarter versus the prior year while the California region revenue declined
4% in the 2005 quarter versus the same quarter in 2004.
Cost of Sales - Cost of sales for the three months ended March 31, 2005 was
$6,429,293 as compared to $4,388,786 for the three months ended March 31, 2004.
The gross profit margin for the three months ended March 31, 2005 was 25.4 % as
compared to 22.6 % for the three months ended March 31, 2004. This improvement
was attributed to lower material and direct labor in the 2005 quarter as
compared with the same quarter of the prior year.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses were $2,050,750 for the three months ended March 31,
2005 as compared to $1,426,834 for the three months ended March 31, 2004. This
increase of 43.7% or $623,916 was primarily attributed to the increased costs
associated with headcount of approximately $500 thousand related to revenue
growth.
Interest Income - Interest income for the three months ended March 31, 2005 was
$3,753 as compared to $1,525 for three months ended March 31, 2004. This
increase was due to having a higher average cash balance to invest in the 2005
period versus the same period of the 2004.
Interest Expense - Interest expense for the three months ended March 31, 2005
was $19,821 as compared to $24,808 for the three months ended March 31, 2004.
The decrease is due to having a lower average debt balance for the three Months
ended March 31, 2005 as compared to the three months ended March 31, 2004.
Net Loss - As a result of the factors noted above, for the three months ended
March 31, 2005 and 2004, our net income was $62,297 and a net loss of $101,132,
respectively. This resulted in basic and diluted net income per share of $0.01
on weighted average common shares outstanding of 5,739,398 for the three months
ended March 31, 2005 as compared to basic and diluted loss per
9
share of $0.02 on weighted average common shares outstanding of 5,130,540 for
the three- months ended March 31, 2004.
Liquidity and Capital Resources
As of March 31, 2005, we had cash and cash equivalents $2,636,208. We
have a revolving line of credit in the amount of $3,500,000 with Hudson United
Bank ("HUB") of which $1,170,000 is outstanding as of March 31, 2005. This
revolving line of credit became due on May1, 2005 but has been extended by HUB
to July 1, 2005 during which period the Company anticipates completing the
negotiation of new line of credit that will meet its needs. The Company also has
a term loan with HUB which is being repaid monthly at the rate of $13,483 and
matures November 1, 2005. Our working capital was $8,946,818 as of March 31,
2005.
During the three months ended March 31, 2005, net cash used in
operating activities was $413,096. We purchased property and equipment of
$56,620. The total debt service payments for the quarter ended March 31, 2005
were $49,048.
Our capital requirements have grown substantially as a result of the
growth of our business. As a result, we sold 553,333 shares of our common stock
in July 2004 receiving net proceeds of $3,081,350. We are also in discussions
with HUB regarding additional financing commitments that we believe if agreed to
by HUB, 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
(a) Evaluation of Disclosure Controls and Procedures
Pursuant to Rule 13a-15 under the Securities and Exchange Act of 1934
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 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 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.
10
(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.
Part II - Other Information
Item 1. Legal Proceedings
Not applicable
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
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 February 25, 2005, the Company filed an 8-K reporting an Item 2.02 event in a
press release dated February 22, 2005, announcing the Company's financial
results for the fourth quarter of its 2004 fiscal year and for the full 2004
fiscal year.
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.
11
SIGNATURE
Date: May 11, 2005 /s/ JAMES E. HENRY
---------------------------------------------------------
James E. Henry
Chairman, Chief Executive Officer, Treasurer and Director
Date: May 11, 2005 /s/ IRVIN F. WITCOSKY
---------------------------------------------------------
Irvin F. Witcosky
Chief Operating Officer, President and Director
Date: May 11, 2005 /s/ PHILIP A. TIMPANARO
---------------------------------------------------------
Philip A. Timpanaro
Chief Financial Officer
12