FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _____________ to __________________
Commission File No. 005-62411
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
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 [_]
Check if disclosure of delinquent filers pursuant to item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of the
Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this form 10-KSB or any amendment to
this Form 10-KSB. [_]
State the aggregate market value of the voting stock held by non-affiliates of
the Issuer: $12,023,500 (based upon the closing price of Issuer's Common Stock,
$.01 par value, as of March 18, 2002).
The Registrant's sales for the year ended December 31, 2001 were $11,928,613.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value
---------------------------- 4,725,000
(Title of Class) (No. of Shares Outstanding
at March 20, 2002)
DOCUMENTS INCORPORATED BY REFERENCE: NONE
-----------------------------------------
-2-
PART I
Item 1. Business
(a) General Development of Business. We were incorporated in Delaware on
November 18, 1999 as InTegCom Corp. That month, James E. Henry, our Chairman and
Chief Executive Officer and Irvin Witcosky, our Chief Operating Officer and
President, received shares of our common stock in exchange for all of their
shares of three corporations they owned, HBE Acquisition Corp. (HAC), Viscom
Products, Inc. (Viscom Products), and HBE Central Management, Inc. These
entities became our wholly-owned operating subsidiaries. Messrs. Henry and
Witcosky had formed HAC in 1989, Viscom Products in 1990, and HCM in 1991. We
changed our name to Diversified Security Solutions, Inc. on July 5, 2001.
(b) Business of Issuer
General
We are a single-source/turn-key provider of technology-based security
solutions for medium and large commercial and governmental facilities in the
United States. Through our subsidiary, Viscom Products, we manufacture, develop
and assemble various security related products, which we use in our own
installations and for sales to other integrators. Our design, engineering,
manufacturing and assembly facilities are located in our Saddle Brook, New
Jersey headquarters.
The security industry is highly fragmented and consists of a broad
array of equipment manufacturers and distributors, consultants, engineers and
systems integrators, most of which provide only a portion of the services
required to deliver an integrated security solution. Due to the limited number
of single-source/turn-key providers, the implementation of a medium or
large-scale security project has traditionally been performed by a number of
different parties. A company interested in establishing or enhancing a security
system typically retains a consulting firm to define objectives, analyze
requirements, and prepare engineering and design specifications. The security
specifications are then distributed to systems integrators to obtain proposals
to implement the project. The systems integrators in turn, engage software and
hardware manufacturers and installation contractors to perform the various tasks
required for the project. In addition, companies seeking to implement security
systems at multiple locations may have to purchase separate systems for each
location from different vendors. This approach often causes client frustration
with project delays, cost inefficiencies, lack of vendor accountability and
incompatible subsystems. In addition, as security systems are becoming more
technologically advanced, clients are recognizing that their in-house personnel
lack the skills and time necessary to coordinate their security projects and
that outsourcing such responsibilities offers significant cost and efficiency
advantages.
Security Distributing and Marketing magazine (SDM) ranks the top 100
largest firms selling Closed Circuit TV (CCTV), access control and integrated
security systems. We were ranked No. 25 in the 6th annual Top Systems
Integrators Report published by SDM in July 2001. We were ranked No. 40
in SDM's 5th annual Top Systems Integrators Report published in July 2000.
Our Integration Solution
As a single-source/turn-key provider of diversified technology-based
integrated security solutions, we can expedite project completion and reduce our
clients' manpower requirements and manpower costs. The continually evolving
security requirements of commercial
-3-
and government entities, together with rapidly advancing technology, provide
numerous opportunities for us to assist our clients with their security needs.
We offer a full range of security integration services, consisting of:
o consulting and planning;
o engineering and design;
o systems installation and management;
o systems training; and
o maintenance and technical support.
We believe that the following key attributes provide us with a sustainable
competitive advantage:
o experience and expertise;
o technological sophistication;
o quality control; and
o strong list of references.
Our strategy consists of the following components:
o expand our network of distributors and regional offices;
o maintain and develop long-term relationships with clients;
o focus on high value added services;
o capitalize on our position as a single source/turn key provider
of security solutions;
o continue to expand our client base in targeted industries;
o enhance our ability to pursue bidding opportunities; and
o maintain a high level of technological sophistication.
At the beginning of each new client relationship, we designate one
member of our professional staff as the client service contact. This individual
is the point person for communications between us and the client and often acts
as the client's project manager for all of its security needs. Our engagement
may include one or more of the elements described below.
-4-
Consulting and Planning. Security consulting and planning are the
initial phases of determining a security solution for a project. We have
developed a planning process that identifies all systems, policies and
procedures that are required for the successful operation of a security system
that will both meet a client's current needs and accommodate its projected
future requirements. Our consulting and planning process includes the following
steps:
o identify the client's objectives and security system
requirements;
o survey the site, including inventory of physical components and
software and evaluation of client's existing infrastructure and
security system;
o identify and prioritize the client's vulnerabilities;
o develop and evaluate system alternatives;
o recommend a conceptual security plan design;
o estimate the cost of implementing the conceptual plan; and
o develop a preliminary implementation schedule.
As a result of this process, we provide the client with a master plan
for an effective security solution that addresses routine operating needs as
well as emergency situations.
We believe that our comprehensive planning process enables our clients
to budget for their security requirements on a long-term basis, identify
opportunities for cost reduction and prepare for future risks.
Engineering and Design. The engineering and design process involves
preparation of detailed project specifications and working drawings by a team of
our engineers, systems designers and computer-aided design system operators.
These specifications and drawings detail the camera sensitivity requirements,
layout of the control center, placement of cameras, card readers and other
equipment and electrical requirements. Throughout our engineering and design
process, our goal is understanding our client's operational preferences in order
to design a system that is functional, cost-effective and accommodates the
client's present and future requirements. In addition, we attempt to incorporate
our clients' existing personnel, equipment and other physical resources into the
system design.
When retained as a single-source provider for turnkey security
solutions, we also select the system components required under the
specifications and drawings we have prepared. To minimize development costs, to
the extent possible, we recommend that our customers buy off-the-shelf devices
and software purchased from other vendors as well as those manufactured by us
and only recommend custom equipment when absolutely necessary. If off-the-shelf
equipment and software are not available or applicable, we manufacturer the
missing product and incorporate it into the system.
-5-
We have made a strategic decision not to represent any equipment
manufacturer exclusively, thereby maintaining objectivity and flexibility in
equipment selection. We believe that our technical proficiency with the products
of a wide range of manufacturers enables us to select components that will best
meet a project's requirements.
The systems installation process involves:
o work scope planning and scheduling;
o equipment procurement;
o construction plans and drawings;
o custom systems modeling and fabrication;
o facility installation;
o project progress billings;
o hardware, software and network integration and programming; and
o system validation and testing.
In addition to these basic services, we provide engineering services
to enhance the compatibility and optimization of the clients' subsystems. We
prepare technical documentation of the system and operations manuals and provide
on-site training to client personnel.
Under the supervision of our project manager, our technicians install
hardware, integrate hardware and software, and validate and test the system. The
aspects of systems integration that do not require a high level of technical
expertise, such as wire installation and basic construction, are typically
performed by subcontractors.
Subsystems or components that may be integrated in a security system
include the following:
o access control systems, which are designed to exclude unauthorized
personnel from specified areas;
o intrusion detection systems, which detect unauthorized door and
window openings, glass breakage, vibration, motion, noise and alarms and other
peripheral equipment;
o closed circuit television systems, which monitor and record entry
and exit activity or provide surveillance of designated areas;
o critical condition monitoring systems, which provide alarm
monitoring and supervision of various systems and facilities; and
-6-
o fire detection systems, intercoms, public address and network
connectivity which can expand a local security system into a closely controlled
worldwide system.
We employ a variety of pricing strategies for our services. Proposals
for consulting services are priced based on an estimate of hours multiplied by
standard rates. Systems integration projects are based upon the estimated cost
of the equipment for the project, plus the estimated hours for each skill set
multiplied by the rate quoted, plus a profit margin.
Maintenance and Technical Support.
We provide maintenance and technical support services on a scheduled,
on-call, or emergency basis. These services include developing and implementing
maintenance programs both for security systems designed, engineered, or
integrated by us and for existing systems. Pricing for engineering and
maintenance services vary widely depending on the scope of the specific project
and the length of our engagement.
Manufacture and Supply.
In our manufacturing and assembly operations, we produce equipment
primarily for CCTV installations. These products are marketed through dealers
under the trade name Viscom Products. We design and engineer all of these
devices, purchase the necessary components from third parties and assemble
and test the final products.
Certain equipment and software used in our systems are obtained from a
single source. We have occasionally experienced delays in deliveries of
equipment and may experience similar problems in the future. In an attempt to
minimize these problems, we continually monitor our inventory, particularly with
respect to equipment that is generally more difficult to obtain. However, any
interruption, suspension or termination of component deliveries from our
suppliers could have a material adverse effect on our business. Although we
believe that there will be alternate sources or alternate designs available,
additional time would be required to find substitutes or redesign the system.
At present, we have not secured Underwriters' Laboratory approval of
our manufactured products or met the quality management and assurance standards
of an international rating organization (ISO 9000) due to our low production
volume. As volumes increase and our customers' needs require it, we may seek UL
approval as well as qualify under ISO 9000. However, meeting such criteria
involves a long, complicated process of new planning, documentation and other
factors. We may not achieve these standards or may not increase the sales of our
products in the future even if they are met.
-7-
Marketing
Our marketing activities are conducted on both national and regional
levels. We obtain engagements through direct negotiation with clients,
competitive bid processes and referrals. At the national level, we conduct
analyses of various industries and target those with significant potential
demand for security solutions. At a regional level, we have developed and
implemented a marketing plan that targets specific regions of the country. The
plan identifies prospective clients within the specific regions of the country
and sets forth a strategy for developing relationships with them.
We have identified several key industries or facility types that we
believe have substantial and increasing requirements for security services,
including telecommunication and technology companies, corporate complexes and
industries and facilities for which security systems are required by regulation.
We have developed expertise in the security regulations applicable to airports,
high-rise buildings, public transportation systems, prisons and nuclear
utilities.
We are in the process of extending our security expertise and
equipment sales for CCTV to mobile transit operations -- including buses,
trains, armored and police cars.
Our marketing strategy emphasizes developing and maintaining long-term
relationships with clients so that we can provide additional services as the
client's security requirements evolve. A long-term relationship typically begins
with an engagement to provide consulting and planning or maintenance and
technical support services. Consulting and planning assignments place us in an
advantageous position because we are often engaged as the client's project
manager to implement the plan ultimately adopted by the client. Engagements for
maintenance and technical support enable us to identify new requirements as they
arise.
Customers
We provide our products and services to customers in the public and
private sectors through direct sales to end-users and through subcontracting
agreements. We have provided services to transit authorities, airports,
universities, high-rise office-buildings, hospitals and airlines. The table
below sets forth the approximate percentage of aggregate revenues from each
of our largest customers/end-users for the year ended December 31, 2001.
REVENUE
2001
-------
o Silverstein Properties 19%
o NYC MTA/NYC Transit 13%
o Port Authority of NY/NJ 12%
o San Francisco Muni/Denver Rapid Transit 10%
-8-
o Equinix 6%
o Mt. Vernon City 5%
o Army and Airforce Exchange Services 4%
o Avaya 4%
o Westchester County Correctional 4%
o Univ. Texas S/W Medical 3%
o Vario 2%
o Motorola 1%
Engineering, Research and Development
We maintain an engineering staff consisting of individuals whose
functions include the improvement of existing products, modification of products
to meet customer needs and the engineering and development of new products and
applications. We typically retain all rights to the products developed for a
specific customer and may use them again in other applications. Currently, we
are working to complete customized camera housings. The customized camera
housings are designed to match architecturally the up-scale lobbies and spaces
they are installed in.
Competition
The security industry is highly competitive. We compete on a local,
regional and national basis with systems integrators, consulting firms and
engineering and design firms. We will compete with different companies depending
upon the nature of the project and the services being offered. For example, we
have competed with ADT and Siemens for systems integration work. Many of our
competitors have greater name recognition and financial resources than we do.
Our competitors also include equipment manufacturers and vendors that also
provide security services. For our MDVR products for buses, our principal
competitors are Prima Facie, Inc. and Loronix, Inc. We may face future
competition from new entrants into the security industry and increased
competition from existing competitors that may attempt to develop the ability to
offer the full range of services offered by us. We believe that we compete
primarily on our ability to deliver solutions that effectively meet a clients'
requirements and, to a lesser extent and primarily in competitive bid
situations, on price. Since completing our initial public offering in November
2001, we are able to get larger bonds, and, therefore, we can compete for larger
projects as a primary contractor.
Employees
As of March 20, 2002, we had 73 full time employees, of whom 55 were
engaged in manufacturing, engineering, research and development or in systems
installation and repair services, 10 in administration and financial control
and 8 in marketing and sales. None of our
-9-
employees are covered by a collective bargaining agreement or are represented by
a labor union. We consider our relationship with our employees to be
satisfactory.
The design and manufacture of our equipment and the installation of
our systems require substantial technical capabilities in many disparate
disciplines from mechanics and computer science to electronics and advanced
software. We emphasize continued training for new and existing technical
personnel. Accordingly, we conduct training classes and seminars in-house, send
select employees to technical schools and avail ourselves of training
opportunities offered by equipment manufacturers and other specialists on a
regular basis.
Item 2. Description of Property
We lease a 17,055 square foot facility in Saddle Brook, New Jersey for
our corporate headquarters, integration operations and our manufacturing plant.
This facility is a one-story, modern brick building in a commercial-industrial
area. The lease on this space terminates on June 30, 2006, and provides for a
fixed annual rent of $98,400 until that date, payable in equal monthly
installments of $8,200. We are also responsible for the cost of property taxes,
utilities, repairs, maintenance, alterations, cleaning and insurance. These
facilities should meet our operational needs for the foreseeable future.
We also lease a 4,200 square foot office facility, in Grand Prairie,
Texas, near the Dallas -- Ft. Worth Airport. A single-story, cinder block
building in an office complex, this space is leased until January 31, 2004 at a
fixed annual rental of $41,300, payable in equal monthly installments of $3,442
with additional costs to us for insurance, repairs and alterations, utilities,
taxes and cleaning.
Item 3. Legal Proceedings
We know of no material litigation or proceeding, pending or
threatened, to which we are or may become a party.
Item 4. Submission of Matters to a Vote of Security Holders
During the Company's fourth quarter ended December 31, 2001 there were
no matters submitted to a vote of the security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our Common Stock is traded on the American Stock Exchange under the
Symbol "DVS". During the year ended December 31, 2001, all sales of equity
securities by us were registered under the Securities Act of 1933, as amended.
On November 15, 2001, the Securities and Exchange Commission declared
effective our registration statement pertaining to our initial public offering
of 1,500,000 shares of
-10-
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, including the
underwriter's discount of $1,050,000 and offering expenses of $836,986.
In December, 2001, GunnAllen 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.
We have spent $452,932 of the proceeds from our initial public
offering on the purchase of equipment and software development related to the
expansion of our business. Additionally, we paid off $1,000,000 of our bank
debt, invested, 802,235 in bank certificates of deposits maturing in six to nine
months and deposited 7,728,097 in cash and cash equivalent accounts.
Item 6. 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 segment 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 CCTV 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 also install, maintain and monitor intrusion
alarms and monitor alarms for building maintenance systems and fire alarm
systems.
-11-
We also manufacture, develop and assemble various security related
products, which we use in our own installations and for sales to other
integrators under the trade name Viscom Products.
Our largest customer, Silverstein Properties, accounted for 19%, 5%,
and 8%, of our revenues in each of the fiscal years ended December 31, 2001,
2000 and 1999 respectively. We anticipate that Silverstein Properties will
account for a significant portion of our future revenues.
(b) Results of Operations
Comparison of the year ended December 31, 2001 to year ended December 31,
2000
Sales. Sales decreased to $11,928,613 for the year ended December 31,
2001 from $14,311,835 for the year ended December 31, 2000. The decrease of
$2,383,222, or 16.7%, was affected by a slowing economy and by the delay in the
execution of certain public contracts primarily due to the events of
September 11. Our sales to our existing customers comprised approximately
60% of our revenues for the year ended December 31, 2001, and our sales to
our new customers accounted for approximately 40% of our revenues for the
year ended December 31, 2001. Our five largest customers accounted for 60% of
revenues for the year ended December 31, 2001 compared with 66% of revenues for
the year ended December 31, 2000.
Cost of Goods Sold. Cost of goods sold decreased to $7,733,114, or
64.8% of revenues, for the year ended December 31, 2001 from $9,869,566, or
69.0% of revenues, for the year ended December 31, 2000. This reduction was
attributed to a combination of a reduction in sales and efficient labor
utilization.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $3,462,151, or 29.0% of sales, for the year
ended December 31, 2001, from $3,729,916, or 26.1% of sales, for the year ended
December 31, 2000. This percentage increase was due to decreased sales and an
increase in expenses due to the hiring of additional employees in anticipation
of an expected increase in the demand for our services.
Operating Income. Operating Income for the year ended December 31,
2001 increased to $733,348 from $712,353 for the twelve months ended December
31, 2000. As a percentage of sales, operating income increased by 1.1% from 5.0%
for the twelve months ended December 31, 2000 to 6.1% for the comparable period
in 2001.
-12-
Interest Expense. Interest expense decreased to $217,858 for the year
ended December 31, 2001 from $267,455 for the prior year. Although our average
outstanding debt during 2001 was higher than the year 2000, the substantial
decrease in interest rates during 2001 accounted for the major portion of the
decrease in interest cost of $49,597.
Nonrecurring IPO Costs. Nonrecurring IPO costs from our previous
attempt to go public in the amount of $556,740 were charged to income in the
twelve months ended December 31, 2000.
Net Income. For the year ended December 31, 2001, our net income
totaled $289,731, or 2.4% of sales, as compared to net loss of ($60,797), or
(0.4%) of sales, for the year ended December 31, 2000. The principal cause of
the loss for the year ended December 31, 2000 was the $556,740 one-time,
nonrecurring IPO costs charged to operations related to a previous aborted
initial public offering that was postponed due to unfavorable market conditions.
This resulted in basic earnings per share of $0.09 on 3,175,274 basic weighted
average common share outstanding for the year ended December 31, 2001 compared
with a loss of ($0.02) per share on 3,000,000 basic weighted average common
shares outstanding for the year ended December 31, 2000.
(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, the Securities and Exchange
Commission declared effective our registration statement pertaining to our
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, GunnAllen 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 December 31, 2001, we had $8,914,473 in cash and cash
equivalents and $802,235 in certificates of deposits maturing in less than
a year.
Net Cash Used in Operating Activities. Net cash used in operating
activities amounted to $1,426,726 for the twelve months ended December 31, 2001
as compared to generating a cash flow from operations of $338,306 during the
prior year. The increased use of cash in operations was primarily caused by a
substantial increase in billings in the fourth quarter of 2001, especially
during the month of December. This resulted in an increase in accounts
receivable of $1,956,098 and of costs and profits in excess of cost of
$298,879 a reduction of $233,096 in accounts payable and accrued expenses,
offset by an increase of customer deposits and billing in excess of cost
of $439,145.
-13-
Net Cash Used in Investing Activities. Net cash used in investing
activities increased to $1,255,167 for the year ended December 31, 2001 compared
to net cash used in the amount of $199,861 for the year ended December 31, 2000.
This use in 2001 is attributed to $802,235 from the proceeds of our initial
public offering invested in bank certificates of deposits maturing in six to
nine months and $452,932 on the purchases of equipment and software
development related to the expansion of our business.
Net Cash Provided From Financing Activities. Net cash provided from
financing activities increased to $11,028,798 for the year ended December 31,
2001 compared to $289,059 for the year ended December 31, 2000. The increase was
principally caused by the sale of 1,725,000 shares of our common stock for
net proceeds of $9,983,264, additional bank borrowings of $1,056,135 net of a
repayment of bank loan in the amount of $1,000,000.
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) 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.
Forward Looking Statements
The foregoing contains certain forward-looking statements. Due to the
fact that we face intense competition in a business characterized by changing
technology and high capital requirements, actual results and outcommes may
differ materially from any such forward looking statements and, in general,
are difficult to forecast.
Item 7. Financial Statements
Financial Statements Data are attached hereto following page F-2.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
During the year ended December 31, 2001, there were no changes in or
disagreements with the Company's principal independent accountant on accounting
or financial disclosure.
-14-
PART III
Item 9. Directors and Executive Officers of the Company
As of March 24, 2001, the Company's directors and executive officers
were as follows:
Name Age Position
---- ---- --------
James E. Henry..................... 48 Chairman, Chief Executive Officer and Director
Irvin F. Witcosky.................. 63 Chief Operating Officer, President, Secretary and Director
Louis Massad....................... 64 Vice President, Treasurer, Chief Financial Officer and
Director
Leroy Kirchner..................... 59 Director
Robert S. Benou.................... 67 Director
Joseph P. Ritorto.................. 70 Director
James E. Henry co-founded our first predecessor company in 1989 and
served as our President, and Chief Executive Officer until December 2001 when he
was elected Chairman of the Board. Mr. Henry continues to be our Chief Executive
Officer. Mr. Henry graduated from the University of New Hampshire with a
bachelor of science degree in electrical engineering. In addition to his other
responsibilities, Mr. Henry has continued to design, install, integrate and
market security and communications systems as well as manage our research and
development.
Irvin F. Witcosky co-founded our first predecessor company in 1989 and
served as our Executive Vice President and Secretary until December 2001 when he
was elected our Chief Operating Officer and President. Mr. Witcosky continues to
be our Secretary and is on our Board of Directors. Mr. Witcosky graduated from
California Polytechnic University with a bachelor of science degree in
aeronautical engineering. In addition to his other responsibilities,
Mr. Witcosky has continued to design, integrate and market security and
communication systems as well as manage our operations and administration.
Louis Massad became our Vice President, Treasurer and Chief Financial
Officer in 1999. Mr. Massad is also on our Board of Directors. From 1996 to
1999, he functioned as an independent accountant and financial advisor to
several companies, including us. Since 1995, Mr. Massad has been a director of
Conolog Corporation, a publicly-held company that manufactures electronic
components and subassemblies for communication equipment. He holds bachelor of
science and masters degrees in accounting from Cairo University in Egypt and a
masters in business administration in finance from Long Island University.
Leroy Kirchner was elected to our board of directors in December,
1999. Since 1999, Mr. Kirchner has acted as an independent consultant to the
communications industry and
-15-
from May 1999 to December 31, 2001, he also served as the Director of Indirect
Distribution for NeoWorld, Inc. From 1996 through 1998, he worked in various
capacities for Motorola Inc., primarily in sales and marketing. From 1966
through 1998, he also functioned as vice president and strategist for a Motorola
subsidiary engaged in sales of related radio equipment and systems. Mr. Kirchner
holds a bachelor of science degree and a masters in business administration
degree from Fairleigh Dickinson University.
Robert S. Benou was elected to our board of directors in June, 2001.
He has been a director of Conolog Corporation since 1968 and served as its
President from 1968 until May, 2001 when he was elected Conolog's Chairman and
Chief Executive Officer. Mr. Benou is a graduate of Victoria College and holds a
BS degree from Kingston College, England and a BSEE from Newark College of
Engineering, in addition to industrial management courses at Newark College of
Engineering.
Joseph P. Ritorto was elected to our board of directors in January
2002. Mr. Ritorto is the co-founder of First Aviation Services, Inc., which is
located on Teterboro Airport, Teterboro, New Jersey and provides a variety of
aviation support services. Mr. Ritorto has been an officer, in various
capacities, of First Aviation Services since 1986. From 1991, until he retired
in May 2001, Mr. Ritorto served as Senior Executive Vice Present and Chief
Operating Officer of Silversteen Properties, Inc. and was responsible for
leasing, operations and directing the lease administration of Silverstein owned
and managed properties.
Background Information About Certain Key Employees
Theodore Gjini serves as our Operations Manager and supervises the
coordination of our personnel and their activities in sales and marketing,
project installations and maintenance. He has acted in that capacity as well
as sales engineer and project manager for us since 1988. Mr. Gjini graduated
New Jersey Institute of Technology with a bachelor of science degree in
electrical engineering and William Paterson College with a masters in
business administration.
Emil J. Marone has worked continuously for us since 1965 as a hospital
communication system specialist, security systems supervisor, systems engineer,
and quality control specialist and currently serves as our Corporate Technology
Officer. In his current position, he is responsible for the development of
special products and testing procedures as well as quality assurance and
management. He holds an associate science degree from Bergen County Community
College.
Board Committees
We have established both a compensation committee and an audit
committee. A majority of the members of each committee are independent, outside
directors. The audit committee reviews with our independent public accountants
the scope and adequacy of the audit to be performed by the independent public
accountants, the accounting practices, our procedures and policies, and all
related party transactions. The compensation committee recommends to our board
of directors the compensation to be paid to our officers and directors,
administers our
-16-
incentive stock option plan and approves the grant of options under the plan. We
have appointed Messrs. Benou, Witcosky and Kirchner as the members of both
committees.
Directors' Compensation
Directors who are also our employees receive no additional
compensation for attendance at board meetings. Until December, 2001,
non-employee directors were entitled to receive $500 for attendance at each
board meeting or any committee meeting they attended unless the board and
committee meetings were held on the same day, in which case they were considered
as one and paid accordingly. Directors are no longer entitled to cash
remuneration for attendance at board meetings.
Non-employee directors are entitled to be reimbursed for their travel,
lodging and other out-of-pocket expenses related to their attendance at board
and committee meetings. Additional compensation for non-employee directors may
be arranged for special projects. No directors' fees have been paid to date. We
anticipate that our board of directors will hold regularly scheduled meetings on
a quarterly basis.
Compliance with Section 16(a) of the Exchange Act
The Securities and Exchange Commission has adopted rules relating to
the filing of ownership reports under Section 16 (a) of the Securities Exchange
Act of 1934. One such rule requires disclosure of filings which under the
Commission's rules, are not deemed to be timely. During its review, the Company
discovered that Messrs. Henry, Witcosky, Massad, Benou and Kirchner failed to
timely file Forms 3 reporting their status as directors of the Company. Such
reports were subsequently filed.
Item 10 Executive Compensation
The following table sets forth the total compensation paid to each
executive officer whose 2001 compensation equaled or exceeded $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------
Salary and
Name and Principal Position Year(s) Bonus($)
--------------------------- ------- ----------
James E. Henry ............................................... 2001 135,000
Chairman and Chief Executive Officer 2000 148,500
1999 60,000
Irvin F. Witcosky ............................................ 2001 135,000
President, Chief Operating Officer and Secretary 2000 148,500
1999 60,000
Louis Massad ................................................. 2001 110,000
Vice President, Treasurer and Chief Financial 2000 121,000
Officer
-17-
Employment Agreements
Messrs. Henry and Witcosky are serving as our Chairman and Chief
Executive Officer and President, Chief Operating Officer and Secretary,
respectively, under written employment contracts for five years which commenced
January 1, 2000. These agreements provide for an initial annual compensation of
$135,000, unspecified bonuses approved by the board of directors and the
compensation committee, an increase of 10% in compensation as of January 2002
and in each subsequent year of the agreements and a one-year non-competition
covenant covering the security business that commences after termination of
employment.
Mr. Massad has entered into a five year written employment contract
with us which commenced January 1, 2000. His initial annual compensation under
such contract is $110,000, and it also provides for unspecified bonuses and a
10% increase per annum as of January 2002 and in each subsequent year of the
agreement.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 24, 2002 certain
information regarding beneficial ownership of our common stock by each person
who is known by us to beneficially own more than 5% of our common stock. The
table also identifies the stock ownership of each of our directors, each of our
officers, and all directors and officers as a group. Except as otherwise
indicated, the stockholders listed in the table have sole voting and investment
powers with respect to the shares indicated.
Unless otherwise indicated, the address for each of the named
individuals is Diversified Security Solutions, Inc., 280 Midland Avenue, Saddle
Brook, New Jersey 07663.
Shares of common stock which an individual or group has a right to
acquire within 60 days pursuant to the exercise or conversion of options,
warrants or other similar convertible or derivative securities are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person shown in the table.
The applicable percentage of ownership is based on 4,725,000 shares
outstanding as of March 24, 2002.
-18-
Number of Percentage of
Shares Common Stock
Name, Address and Title Beneficially Beneficially
of Beneficial Owner Owned Owned
----------------------- ------------ -------------
James E. Henry, Chairman, Chief Executive Officer
and Director(1)................................................. 1,425,000 30.2%
Irvin F. Witcosky, Chief Operating Officer, President,
Secretary and Director.......................................... 1,425,000 30.2%
Louis Massad, Chief Financial Officer, Treasurer and Director... 120,000 2.5%
Leroy Kirchner, Director........................................ 0 0%
Robert S. Benou, Director....................................... 0 0%
Joseph Ritorto, Director........................................ 25,000 .5%
All executive officers and directors as a group (6
persons)........................................................ 2,995,000 63.4%
----------
(1) The amounts shown for Mr. Henry do not include 30,000 shares held by John,
Ray and Hartford Henry, his father and uncles for which Mr. Henry disclaims
beneficial ownership.
Item 12. Certain Relationships and Related Transactions
In 1999, Messrs. Henry and Witcosky exchanged the shares of common
stock they held in HAC, Viscom Products and HCM for shares of our common stock.
The exchanged shares represented all the outstanding stock of HAC, Viscom
Products and HCM. Before the exchange, Mr. Henry and Mr. Witcosky each owned 50%
of the shares of HAC, Viscom Products and HCM and immediately after the exchange
they each owned 50% of our outstanding shares of common stock. The value of the
underlying assets did not change as a result of the exchange, and only the form,
not the substance, of the principals' corporate ownership changed. The
transaction was accounted for as a transfer between enterprises under common
control and, as a result, the assets and liabilities transferred were accounted
for at historical cost in a manner similar to a pooling of interests.
In the early 1990's, Messrs. Henry and Witcosky and HAC had orally
agreed with Alfred Albrecht, to settle a variety of disputes to extinguish any
equity claims. The settlement agreement was memorialized in writing in December,
1999. Under these arrangements, we are
-19-
obligated to pay an aggregate of $128,685, plus accrued interest to Mr. Albrecht
at the rate of 10% per annum until December 1, 2003 in monthly installments
under two promissory notes. Mr. Henry and Mr. Witcosky are also obligors under
these notes.
On December 30, 1999, Messrs. Henry and Witcosky each sold 60,000
shares of our common stock (a total of 120,000 shares) to Mr. Massad for an
aggregate of $24,000. On or about the same date, Messrs. Henry and Witcosky each
also transferred 15,000 shares of our common stock, totaling 30,000 shares, to
John, Ray and Hartford Henry, Mr. Henry's father and uncles, as a gift to
Messrs. in appreciation of a long-standing loan on extremely favorable terms to
Messrs. Henry and Witcosky, which enabled them to buy the original predecessor
business.
Under a bank loan agreement between us and Hudson United Bank dated
September 1, 1999, Messrs. Henry and Witcosky personally guaranteed up to
$4,000,000 of our potential indebtedness to the bank, plus accrued interest. In
December 2001, these guarantees were terminated.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits. See index of exhibits annexed hereto.
(b) Reports on Form 8-K.
None.
-20-
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant had duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2002 DIVERSIFIED SECURITY SOLUTIONS, INC.
By: /s/ James E. Henry
-----------------------------------
James E. Henry
Chairman, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ James E. Henry Chairman, Chief Executive March 29, 2002
---------------------------- Officer and Director
James E. Henry
/s/ Irvin F. Witcosky Chief Operating Officer, March 29, 2002
---------------------------- President, Secretary and Director
Irvin F. Witcosky
/s/ Louis Massad Vice President, Treasurer, March 29, 2002
---------------------------- Chief Financial Officer and Director
Louis Massad
/s/ Leroy Kirchner Director March 29, 2002
----------------------------
Leroy Kirchner
/s/ Robert S. Benou Director March 29, 2002
----------------------------
Robert S. Benou
/s/ Joseph P. Ritorto Director March 29, 2002
----------------------------
Joseph P. Ritorto
-21-
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Independent Auditors' Report F - 2
Consolidated Balance Sheets as of December 31, 2001 and 2000 F - 3
Consolidated Statement of Operations and Retained Earnings
for the Years Ended December 31, 2001 and 2000 F - 4
Consolidated Statement of Changes in Stockholders' Equity F - 5
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2001 and 2000 F - 6
Notes to Financial Statements F - 7 - F - 21
F - 1
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors and Stockholders
Diversified Security Solutions, Inc.
We have audited the accompanying consolidated balance sheets of Diversified
Security Solutions, Inc. and Subsidiaries at December 31, 2001 and 2000, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the two year period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all
material respects the consolidated financial position of Diversified Security
Solutions, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
two years ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
DEMETRIUS & COMPANY, L.L.C.
Wayne, New Jersey
February 27, 2002
F - 2
DIVERSIFIED SECURITY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
------------ ------------
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,914,473 $ 567,567
Accounts receivable - net of allowance for doubtful account of $65,600 4,142,335 2,186,237
Securities held to maturity 802,235
Inventory 1,239,362 1,261,245
Costs and profit in excess of billings 298,879
Deferred tax asset 88,000 153,000
Other current assets 102,671 43,550
------------ -----------
Total Current Assets 15,587,955 4,211,599
Property and equipment, net of depreciation
of $882,222 and $701,100 472,962 287,402
Computer software product cost - net of amortization
of $429,374 and $312,466 184,438 215,096
Other assets 56,163 69,683
------------ -----------
$ 16,301,518 $ 4,783,780
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,192,882 $ 1,345,930
Accrued expenses 456,374 536,422
Income taxes payable 16,000 16,674
Billings in excess of cost 191,254 --
Long-term debt current portion 38,605 30,420
Capitalized lease obligations, current portion 10,642 16,126
Customer deposits held 293,289 45,398
------------ -----------
Total Current Liabilities 2,199,046 1,990,970
Capitalized lease obligations, less current portion -- 10,117
Long-term debt, less current portion 2,897,005 1,844,054
Deferred tax liability 103,000 130,000
Stockholders' Equity:
Preferred stock - par value $.01
Common stock 47,250 30,000
Additional paid-in capital 10,209,814 243,800
Deferred compensation (20,834) (41,667)
Retained earnings 866,237 576,506
------------ -----------
Total Shareholders' Equity 11,102,467 808,639
------------ -----------
$ 16,301,518 $ 4,783,780
============ ===========
The accompanying notes are an integral part of the statements
F-3
DIVERSIFIED SECURITY SOLUTIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
Year Ended December 31,
--------------------------
2001 2000
----------- ------------
Sales $11,928,613 $ 14,311,835
Cost of Sales 7,733,114 9,869,566
----------- ------------
Gross Profit 4,195,499 4,442,269
Operating Expenses
Selling, general and administrative 3,462,151 3,729,916
----------- ------------
Operating Income 733,348 712,353
Interest expense 217,858 267,455
Postponed IPO costs -- 556,740
----------- ------------
Income (Loss) Before Income Taxes 515,490 (111,842)
Provision (Credit) for income taxes 225,759 (51,045)
----------- ------------
Net Income (Loss) $ 289,731 $ (60,797)
=========== ============
Basic and diluted earnings (loss) per common share:
Basic earnings (loss) per common share $ 0.09 $ (0.02)
=========== ============
Weighted average common shares 3,175,274 3,000,000
Diluted earnings (loss) per common share $ 0.09 $ (0.02)
=========== ============
Weighted average diluted shares outstanding 3,268,767 3,075,000
The accompanying notes are an integral part of the statements
F-4
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Additional
par value $.01 par value $.01 Paid-in Deferred
2,000,000 Authorized 10,000,000 Authorized Capital Compensation
-------------------- --------------------- ----------- ------------
Shares Amount Shares Amount
-------------------- ---------------------
Balance January 1, 2000 none none 3,000,000 $30,000 $ 243,800 $(62,500)
Net loss for the year 2000
Amortization of deferred compensation 20,833
--------- -------- ---------- -------- ----------- ------------
Balance December 31, 2000 3,000,000 30,000 243,800 (41,667)
Net income for the year 2001
Amortization of deferred compensation 20,833
Issuance of shares in initial public
offering 1,500,000 15,000 8,598,014
Issuance of shares under underwriter's
exercise of over allotment 225,000 2,250 1,368,000
--------- -------- ---------- -------- ----------- ------------
Balance December 31, 2001 none none 4,725,000 $47,250 $10,209,814 $(20,834)
========= ======== ========== ======== =========== ============
Retained
Earnings Total
--------- -----------
Balance January 1, 2000 $ 637,303 $ 848,603
Net loss for the year 2000 (60,797) (60,797)
Amortization of deferred compensation 20,833
--------- -----------
Balance December 31, 2000 576,506 808,639
Net income for the year 2001 289,731 289,731
Amortization of deferred compensation 20,833
Issuance of shares in initial public
offering 8,613,014
Issuance of shares under underwriter's
exercise of over allotment 1,370,250
--------- -----------
Balance December 31, 2001 $ 866,237 $11,102,467
========= ===========
The accompany notes are an integral part of the statements.
F-5
DIVERSIFIED SECURITY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------
2001 2000
------------ ---------
Cash Flows From Operating Activities:
Net Income (Loss) For the Year $ 289,731 $ (60,797)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by (Applied to) Operating Activities:
Amortization of stock based compensation 20,833 20,833
Depreciation and amortization 298,030 190,986
Deferred income taxes 65,000 (36,309)
Changes in operating assets and liabilities:
Accounts receivable (1,956,098) (42,719)
Inventory 21,883 (558,977)
Costs and profits in excess of cost (298,879) --
Other assets (45,601) 47,153
Accounts payable (153,048) 515,349
Accrued expenses (80,048) 323,178
Income taxes payable (674) (85,021)
Billings in excess of cost 191,254 --
Other liabilities (27,000) --
Customer deposits held 247,891 24,630
------------ ---------
Net Cash Used in Operating Activities (1,426,726) 338,306
------------ ---------
Cash Flows From Investing Activities:
Securities held to maturity (802,235) --
Computer software development costs (86,250) (91,391)
Purchase of property and equipment
and leasehold improvements (366,682) (108,470)
------------ ---------
Cash Used in Investing Activities (1,255,167) (199,861)
------------ ---------
Cash Flows From Financing Activities
Net proceeds (payments) of revolving bank line 1,531,993 (705,742)
Proceeds of bank equipment loan facility 272,963 50,755
Proceeds of special projects bank loan 281,600 998,400
Scheduled payments on special projects other notes payable (30,421) (27,536)
Repayment of special projects bank loan (1,000,000) --
Proceeds of sale of common stock 9,983,264 --
Proceeds of other notes 5,000 --
Capitalized lease obligation payments (15,601) (26,818)
------------ ---------
Cash Provided by Financing Activities 11,028,798 289,059
Net Cash Increase 8,346,905 427,504
Cash and Cash Equivalents - Beginning 567,567 140,063
------------ ---------
Cash and Cash Equivalents - Ending $ 8,914,472 $ 567,567
============ =========
The accompany notes are an integral part of the statements.
F-6
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NATURE OF OPERATIONS
(A) Diversified Security Solutions, Inc., formerly known as InTegCom Corp., was
incorporated under the laws of the State of Delaware on November 18, 1999. Also,
on November 30, 1999, Diversified Security Solutions, Inc. acquired all the
outstanding shares of HBE Acquisition Corp. ("HAC") (T/A Henry Bros.
Electronics) Viscom Products, Inc. ("VPI") and HBE Central Management, Inc.
("HCM"). Also, VPI owned all the outstanding shares of HBE Communications, Inc.,
an inactive company at December 31, 1999. Diversified Security Solutions, Inc.,
and its subsidiaries, are systems integrators providing design, installation and
support services for a wide variety of security, communications and control
systems. Diversified Security Solutions, Inc. specializes in turnkey systems
that integrate many different technologies. Systems are customized to meet the
specific needs of the client. Diversified Security Solutions, Inc. markets
nationwide with an emphasis on the New York and Dallas metropolitan areas.
Customers are primarily Fortune 500 companies and government agencies. HAC owns
and operates the systems integration business, providing overall administration
for all subsidiaries and holds the related assets. VPI, on the other hand,
supervises and controls the manufacturing and assembly of the CCTV equipment and
the assets concerned. HCM handles the alarm monitoring which represents less
than 1% of the business.
(B) On July 5, 2001, InTegCom Corp. changed its name to Diversified Security
Solutions, Inc. (the "Company").
The Company's headquarters and manufacturing facility is located in Saddle
Brook, New Jersey. A sales and service facility is located near Dallas, Texas.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The Company acquired HBE Acquisition Corp.,
Viscom Products, Inc. and HBE Central Management, Inc. through an exchange
of 3,000,000 shares of common stock after adjustment reflect the reverse
stock split referred to in Note 6. The transaction was accounted for as a
transfer between enterprises under common control, and as a result, the
assets and liabilities transferred were accounted for at historical cost,
in a manner similar to a pooling of interests.
Income Recognition - Sales revenues from systems installations are
generally recognized on the completed-contract method, in which revenue is
recognized when the contract is substantially complete. Most contracts are
completed in less than a year. The completed method applies to those
contracts completed within the fiscal year. Contracts that are expected to
be completed in more than a year are accounted for on the percentage of
completion method.
F - 7
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
This method recognizes revenue earned based on the percentage of total estimated
contract costs incurred to date. Mobilization charges are accounted for as a
direct contract cost and included in the estimated cost to complete for
determination of revenue recognition on the percentage of completion method. The
excess of costs and estimated earnings over billings and excess of accumulated
billings over costs are not presented in periods which management has determined
that the amounts are not material. Provision for estimated earnings and losses,
if any, on uncompleted contracts are made in period in which such losses are
determined.
Service contracts are billed either monthly or quarterly on the last day of the
month covered by the contract. Accordingly, revenue from service contracts is
recognized monthly on the straight line method.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents includes cash on hand,
demand deposits and short term investments with initial maturities of three
months or less.
Inventories - Inventories are stated at the lower of cost or market. Cost has
been determined using the first-in, first-out method.
Property and Equipment - Property and equipment are stated at cost, net of
accumulated depreciation. Depreciation is computed on a straight-line basis over
estimated useful lives of five to ten years. Leasehold improvements are
depreciated over the shorter of related lease terms or the estimated useful
lives. Upon retirement or sale, the costs of the assets disposed and the related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the determination of income. Repairs and maintenance costs
are expensed as incurred.
F - 8
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Computer Software Product Cost - The Company accounts for software
development costs in accordance with Statement of Financial Accounting
Standards No. 86 "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed" ("SFAS 86") under which certain software
development costs incurred subsequent to the establishment of technological
feasibility are capitalized and amortized over the estimated lives of the
related products.
Technological feasibility is established upon completion of a working
model. All costs incurred prior to demonstrating technical feasibility have
been charged to cost of sales. These capitalized costs are subject to an
ongoing assessment of recoverability based on anticipated future revenues
and changes in hardware and software technologies. To date, costs incurred
subsequent to the establishment of technological feasibility were $613,812
at December 31, 2001 and $527,562 at December 31, 2000.
These costs are amortized over the estimated product life using the
straight line method. Included in operations is amortization expense of
$116,908 and $99,144 for the years ended December 31, 2001 and 2000,
respectively. Accumulated amortization amounted to $429,374 and $312,466 at
December 31, 2001 and December 31, 2000, respectively.
Impairment of Long Lived Assets - In accordance with the provisions of SFAS
121, "Accounting for the impairment of long-lived assets and for long-lived
assets to be disposed of", the company reviews long-lived assets, such as
property and equipment, for impairment whenever events changes in
circumstances indicate that the carrying amount of the assets may not be
fully recoverable. Under SFAS 121, an impairment loss would be recognized
for assets to be held and used when estimated undiscounted future cash
flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. Impairment, if any, is
measured by the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less cost to sell. There have
been no impairment losses through December 31, 2001.
Concentrations of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of
cash, cash equivalents and accounts receivable. At December 31, 2001, the
Company had cash balances at certain financial institutions in excess of
federally insured limits. However, the Company does not believe that it is
subject to unusual credit risk beyond the normal credit risk associated
with commercial banking relationships.
F - 9
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
At December 31, 2001 and December 31, 2000, 59% and 19%, respectively, of
accounts receivable were due from Federal and local governmental agencies.
Also, at December 31, 2001 and December 31, 2000, approximately 60% and 63%
of accounts receivable were concentrated in customers located in the
Dallas, Texas and New York City metropolitan areas.
Income Taxes - The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes". Under the liability method of
SFAS No. 109, deferred income tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred income tax assets and liabilities are
measured using statutory tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered
or settled.
Fair Value of Financial Instruments - The carrying amounts of the Company's
financial instruments, which include cash equivalents, accounts receivable,
notes receivable, accounts payable, accrued expenses and notes payable
approximate their fair values at December 31, 2001 and 2000.
Advertising Costs - The Company expenses advertising costs when the
advertisement occurs. Total advertising expense amounted to approximately
$39,500 and $25,000 for the years ended December 31, 2001 and 2000,
respectively.
Comprehensive Income - The Company adopted SFAS No. 130, "Reporting
Comprehensive Income" (SFAS 130), effective January 1, 1998. SFAS 130
establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements.
Comprehensive income is the change in equity of a business enterprise
during a period from certain transactions and the events and circumstances
from non-owner sources. For the periods presented in the accompanying
combined statements of operations, comprehensive income equals the amounts
of net income reported on the accompanying combined statements of
operations.
Stock Based Compensation - Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), encourages,
but does not require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has elected to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock
F - 10
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Issued to Employees", and related Interpretations. Accordingly,
compensation cost for stock options issued to employees is measured as the
excess, if any, of the fair market value of the Company's Common Stock at
the date of grant over the amount the employee must pay to acquire the
stock. Pro forma disclosure of net income based on the provisions of SFAS
123 is discussed in Note 7.
Research and Development Costs - Costs of research and development for new
products are charged to operations as incurred and amounted to
approximately $174,000 and $160,000 for the years ended December 31, 2001
and 2000, respectively.
Warranty - The Company offers warranties on all products, including parts
and labor, that range from one year to four years depending upon the type
of product concerned. For products made by others, the Company passes along
the manufacturer's warranty to the end user. The Company charges operations
with warranty expenses as incurred. For the years ended December 31, 2001
and 2000, net warranty expense was $ 71,430 and $64,068, respectively.
Historical Net Income Per Share - The Company computes net income per
common share in accordance with SFAS No. 128, "Earnings Per Share" and SEC
Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS
No. 128 and SAB 98, basic and diluted net loss per common share are
computed by dividing the net income available to common shareholders for
the period by the weighted average number of shares of common stock
outstanding during the period. Accordingly, the number of weighted average
shares outstanding as well as the amount of net income per share are
presented for basic and diluted per share calculations for all periods
reflected in the accompanying financial statements.
Reclassifications - Certain reclassifications to the 2000 financial
statements have been made to conform to the 2001 presentation.
Segment Information - In June 1997, Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related Information"
("Statement 131"), effective for financial statements for fiscal years
beginning after December 15, 1997. Statement 131 establishes standards for
the reporting by public business enterprises of financial and descriptive
information about reportable operating segments in annual financial
statements and interim financial reports issued to shareholders. The
Company primarily provides installation services for companies in need of
closed-circuit access control systems that are located throughout the
United States and
F - 11
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
considers all of its operations as one segment because expenses support
multiple products and services. Management uses one measurement of
profitability and does not disaggregate its business for internal
reporting.
Sales to local government agencies were 59% and 34% of sales for the years
ended December 31, 2001 and 2000, respectively.
Recent 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 the Company on
January 1, 2002 with respect to business combinations completed on or
before June 30, 2001. The Company has not completed any business
combinations since the statement became effective and, management cannot
currently assess what the future adoption of these pronouncements will have
on the Company's financial statements.
In addition, in June 2001, the FASB issued Statement No. 143 "Accounting
for Asset Retirement Obligations effective for years beginning after June
15, 2002, and in August 2001 Statement No. 144 "Accounting for Impairment
or Disposal of Long-Lived Assets" effective for years beginning after
December 15, 2001. Management has reviewed the conclusions of Statements
143 and 144 in connection with the Company's current business plan and
cannot currently assess what effect the future adoption of these
pronouncements will have on the Company's financial statements.
2. INVENTORIES
Inventories at December 31, 2001 and December 31, 2000 consist of the
following:
December 31, 2001 December 31, 2000
----------------- -----------------
Parts $ 698,422 $ 263,049
Work-in-Process 540,940 788,598
Finished Goods 209,598
---------- ----------
$1,239,362 $1,261,245
========== ==========
F - 12
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
3. PROPERTY AND EQUIPMENT
Property, plant and equipment at December 31, 2001 and December 31, 2000
consisted of the following:
December 31, 2001 December 31, 2000
----------------- -----------------
Office equipment $ 163,934 $ 139,539
Demo and testing equipment 263,979 259,834
Vehicles 584,150 260,309
Computer equipment 322,121 307,820
Leasehold improvements 21,000 21,000
----------- ---------
1,355,184 988,502
Less Accumulated Depreciation (882,222) (701,100)
----------- ---------
$ 472,962 $ 287,402
=========== =========
Depreciation expense amounted to $181,122 and $91,842 for the years ended
December 31, 2001 and 2000, respectively.
4. LONG-TERM DEBT
On September 8, 1999, the Company refinanced its bank debt by obtaining
several lines of credit from the Hudson United Bank (HUB). Under the terms
of the HUB revolving line of credit amended January 2, 2002, the Company
may borrow up to $3,500,000 at 1/2% above the bank's prime interest rate
through May 1, 2003.
Also on September 8, 1999, as amended, HUB granted the Company an equipment
line of credit in the amount of $500,000, until April 30, 2003. This is not
a revolving line. Advances under the line will be converted into monthly
installments payable until May 1, 2006. Interest is at the prime rate of
the bank plus 1/2%.
HUB had granted the Company a special projects revolving line of credit of
$1,500,000 at 1 1/2% of the bank's prime rate through October 1, 2002. This
line was discontinued as of January 2, 2002, and the balance due at
December 31, 2001 was transferred to the revolving line of credit. The
transfer has been reflected in the tables that follow.
F - 13
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
4. LONG-TERM DEBT (Continued)
As of December 31, 2001 these lines are summarized as follows:
Amount of Facility Balance Due Unused Line
------------------ ----------- ------------
Revolving line $3,500,000 $2,530,000 $ 970,000
Equipment line 500,000 329,881 170,119
---------- ---------- ----------
$4,000,000 $2,859,881 $1,140,119
========== ========== ==========
As of December 31, 2000 the lines are summarized as follows:
Amount of Facility Balance Due Unused Line
------------------ ----------- ------------
Revolving line $2,250,000 $ 718,007 $1,531,993
Equipment line 250,000 56,918 193,082
Special projects line 1,500,000 998,400 501,600
---------- ---------- ----------
$4,000,000 $1,773,325 $2,226,675
========== ========== ==========
Among other provisions, the loan agreement requires the Company to maintain net
tangible networth, as defined, and maintain appropriate insurance coverage on
tangible and intangible assets. In addition, the agreement prohibits selling,
assigning, transferring or disposing of any fixed assets without obtaining the
bank's consent in writing. The equipment line of credit is collateralized by all
the Company's equipment. These loans are cross-guaranteed by the parent company
and the various subsidiary companies. As of December 31, 2001, the Company was
in compliance with its loan covenants.
F - 14
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
4. LONG-TERM DEBT (Continued)
December 31, 2001 December 31, 2000
----------------- -----------------
Long-term debt consisted of the following:
Credit facility with Hudson United Bank dated
September 8, 1999, at 1/2%
above banks' prime rate
All borrowings under this line are due May 1, 2003 $ 2,530,000 $ 718,007
Equipment loan facility with Hudson United Bank dated September 8, 1999,
at 1/2% above bank's prime rate. All borrowings under this line are due
July 1, 2006 329,881 56,918
HUB Special Projects line at 1 1/2%
above banks prime rate 998,400
----------- -----------
2,859,881 1,773,325
Notes payable, due in monthly installments of
$3,264 a month, including interest at 10% per annum
with final payment to be made on December 1, 2003 75,729 101,149
Less: current portion (38,605) (30,420)
----------- -----------
$ 2,897,005 $ 1,844,054
=========== ===========
Annual maturities over the next five years for long-term debt as of December 31,
2001:
Year ending December 31:
2002 $ 38,605
2003 2,631,268
2004 109,960
2005 109,960
2006 45,817
F - 15
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
5. COMMITMENTS AND CONTINGENCIES
(a) Leases - The Company leases its facilities equipment and vehicles under
operating leases expiring through 2006. The Company also leases certain
equipment under capital lease. The future minimum rental payments under
non-cancelable leases and equipment loans as of December 31, 2001 were as
follows:
Operating Capital
--------- -------
2002 139,700 11,434
2003 139,700
2004 101,842
2005 98,400
2006 49,200
--------- -------
Total Minimum Lease Payments $528,842 $11,434
========
Amount representing interest 792
-------
Net present value of future payments 10,642
Current portion of capital lease obligations 10,642
-------
$ --
=======
Rent expense under operating leases was approximately $141,000 and $125,000
and for the years ended December 31, 2001 and 2000, respectively.
(b) Employment Agreements - In December 1999, the Company entered into
five-year employment agreements with three of its officers. The employment
agreements provide for minimum aggregate annual compensation of $380,000
for the years 2000 through 2004, as well as unspecified annual bonuses. The
compensation under the contracts increases 10% in each of the third, fourth
and fifth years. Also, there is a one-year non-competition covenant that
commences after termination of employment.
(c) Share Offering and Reverse Stock Split - In December 1999, the Board of
Directors authorized management to file a registration statement with the
Securities and Exchange Commission, which was amended on July 10, 2001, to
permit the Company to offer 1,500,000 shares of common stock (the
"offering").
In connection with the proposed offering, the Company authorized a
three-for-four reverse stock split which became effective August 30, 2001.
All share and per share amounts in the accompanying financial statements
have been retroactively adjusted to reflect the reverse stock split.
F -16
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
6. INCOME TAXES
Income taxes for the years ended December 31, 2001 and 2000 include the
following components:
Years Ended December 31
2001 2000
--------- --------
Federal
Current $ 164,000 $(53,683)
Deferred 45,050 (24,838)
State
Current 8,759 38,947
Deferred 7,950 (11,471)
--------- --------
$ 225,759 $(51,045)
========= ========
The components of the deferred tax asset (liability) as of December 31,
2001 and December 31, 2000 are as follows:
December 31, 2001 December 31, 2000
------------------ -----------------
Total deferred tax assets:
Allowance for uncollectible accounts $ 26,000 $ 26,200
Accrued absences 21,000 22,400
Accrued warranty 29,000 28,400
Inventory 12,000
Net operating loss carryforward -- 76,000
--------- ---------
Net Deferred Tax Assets 88,000 153,000
--------- ---------
Deferred tax liability
Capitalized software development (87,000) (96,000)
Fixed assets (16,000) (34,000)
--------- ---------
Net Deferred Tax Liability (103,000) (130,000)
--------- ---------
Net Deferred Tax Asset (Liability) $ (15,000) $ 23,000
========= =========
F - 17
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
6. INCOME TAXES (Continued)
The reconciliation of estimated income taxes attributed to operations at
the United States statutory tax rate to reported provision for income taxes
is as follows:
Year Ended December 31
----------------------
2001 2000
--------- --------
Provision (credit) for taxes computed using
statutory rate $ 175,300 $(38,000)
State taxes (credit) net of Federal benefit (tax) 36,000 (7,000)
Depreciation and amortization 29,700 4,000
Utilization of state net operating losses (13,300)
Other (1,941) (10,045)
--------- --------
Provision (credit) for Income Taxes $ 225,759 $(51,045)
========= ========
7. INCENTIVE STOCK OPTION PLAN
On December 23, 1999, the directors and shareholders approved the adoption
of an Incentive Stock Option Plan (the "Plan"). Under the Plan, options to
purchase a maximum of 500,000 shares of its common stock may be granted to
officers and other key employees of the Company.
The maximum term of any option is ten years, and the option price per share
may not be less than the fair market value of the Company's shares at the
date the option is granted. However, options granted to persons owning more
than 10% of the voting shares will have a term not in excess of five years,
and the option price will not be less than 110% of fair market value.
Options granted to an optionee will usually vest 33 1/3% of each full year
beginning on the first anniversary of the options grant subject to the
discretion of the Compensation Committee of the Board of Directors.
The plan will terminate at December 23, 2009 or on such earlier date as the
board of directors may determine. Any option outstanding at the termination
date will remain outstanding until it expires or is exercised in full,
which ever occurs first.
As of December 23, 1999, options to acquire an aggregate of 75,000 shares
of common stock, all at an exercise price of $5.625, had been granted under
the Plan to key employees of the Company.
F - 18
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
7. INCENTIVE STOCK OPTION PLAN (Continued)
None have been granted to Messrs. Henry, Witcosky and Massad, the three top
executive officers. An optionee may exercise these options only if and to
the extent that these options are vested at that time. At December 31,
1999, deferred compensation cost was recorded in the amount of $62,500,
being the difference between the expected public offering price of $6.25 a
share (See Note 6 (c)) and $5.625, which was the expected exercise price,
or $0.625 per share times the number of options granted. This deferred
compensation cost is being amortized over three years, the period of
vesting.
A summary of stock option activity is set forth below:
Options Outstanding
--------------------------
Weighted-Average
Exercise Price
Shares Per Share
------ ----------------
Granted 75,000 $5.625
------ ------
Outstanding at December 31, 2001 and 2000 75,000 $5.625
====== ======
Vested and exercisable at December 31, 2001 50,000 $5.625
====== ======
Vested and exercisable at December 31, 2000 25,000 $5.625
====== ======
During the periods shown above, no additional grants have been made, none
exercised and none cancelled.
The weighted-average remaining contractual life of options outstanding at
December 31, 2001 was 8 years.
F - 19
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
7. INCENTIVE STOCK OPTION PLAN (Continued)
Had deferred compensation cost for the stock option plan been determined
based on the fair value at the grant date for the awards made in 1999,
consistent with the provisions of SFAS No. 123, the Company's net earnings
per share in the years 2001 and 2000 would have been reduced to the
proforma amounts indicated below:
2001 2000
----------- ----------
Net income (loss)
As reported $ 289,931 $ (60,797)
Proforma 229,439 (91,684)
Earnings (loss) per share
As reported
Basic .09 (.02)
Diluted .09 (.02)
Proforma
Basic .09 (.03)
Diluted .08 (.03)
8. EMPLOYEE BENEFIT PLAN
As of October 1, 1999, the Company began a "Simple IRA" plan for all
eligible employees wishing to contribute. An eligible employee is one that
has $1,000 or more in compensation. The Company will match the employees
contribution up to 2% of salary to a maximum of $6,000. The employee's
contribution cannot exceed $6,000 in any one year. Diversified Security
Solutions, Inc.'s contributions were $36,786 in 2001 and $35,570 in 2000,
respectively.
F - 20
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
9. STOCKHOLDER'S EQUITY
Common Stock - Holders of common stock are entitled to one vote for each
share held on all matters submitted to a vote of stockholders and do not
have cumulative voting rights. Apart from preferences that may be
applicable to any shares of preferred stock outstanding at the time,
holders of our common stock are entitled to receive dividends ratably, if
any, as may be declared from time to time by our board of directors out of
funds legally available therefor. Upon the liquidation, dissolution or
winding up of the Company, the holders of common stock are entitled to
receive ratably, the net assets available after the payment of all
liabilities and liquidation preferences on any outstanding preferred stock.
Holders of common stock have no preemptive, subscription, redemption or
conversion rights, and there are no redemption or sinking fund provisions
applicable to the common stock.
In connection with the November 2001 IPO, the Company granted the
underwriter warrants to purchase up to 150,000 shares of common stock. The
exercise price of the warrants is 165% of the public offering price of
$7.00 a share or $11.55 a share. The warrants contain provisions that
protect their holders against dilution by adjustment of the exercise price
and number of shares issuable upon exercise on the occurrence of specific
events such as stock dividends or other changes in the number of
outstanding except for shares issued under certain circumstances, including
shares issued under the incentive stock option plan and any equity
securities which adequate consideration is received. The holder of warrant
does not possess any rights as a stockholder unless the warrant is
exercised.
10. SUPPLEMENTAL CASH FLOW DISCLOSURE
Years Ended December 31,
2001 2000
---- ----
Cash paid for:
Taxes paid $173,433 $ 80,562
Interest paid $217,858 $263,572
11. 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. Currently, there
is a sales tax claim against the Company and a claim that was filed with
the Equal Employment Opportunity Commission by a former employee. While
considerable uncertainties exist, in the opinion of management, the
ultimate unrecorded liabilities resulting from such claims will not
materially effect the Company's financial statements.
F - 21
EXHIBIT INDEX
The following exhibits are filed herewith as part of this 10-KSB:
Exhibit Method
Number Description of Document of Filing
3.1 -- Certificate of Incorporation of the Company................................................. (1)
3.2 -- By-laws of the Company...................................................................... (1)
3.3 -- Certificate of Amendment of the Certificate of Incorporation of the Company,
filed on July 5, 2001....................................................................... (3)
3.4 -- Certificate of Amendment of the Certificate of Incorporation of the Company,
filed on August 28, 2001.................................................................... (3)
4.1 -- Specimen Common Stock Certificate of the Company............................................ (4)
4.2 -- Underwriter's Warrant Agreement ............................................................ (5)
10.1 -- Employment Agreement between the Company and James E. Henry................................. (1)
10.2 -- Employment Agreement between the Company and Irvin F. Witcosky.............................. (1)
10.3 -- Employment Agreement between the Company and Louis Massad................................... (1)
10.4 -- 1999 Incentive Stock Option Plan and form of Stock Option Agreement......................... (1)
10.5 -- Amendment to Employment Agreement between the Company and
James E. Henry.............................................................................. (3)
10.6 -- Amendment to Employment Agreement between the Company
and Irvin F. Witcosky....................................................................... (3)
10.7 -- Amendment to Employment Agreement between the Company and
Louis Massad................................................................................ (3)
10.8 -- Office Lease between the Company and Midland
Holding Co., Inc............................................................................ (5)
10.9 -- Office Lease between the Company and Eagle-DFW, Inc......................................... (5)
10.10 -- Form of OEM Agreement between the Company and Sungjin C&C, Ltd.............................. (2)
10.11 -- NYC Transit Agreement....................................................................... (2)
10.12 -- Underwriting Agreement between the Company
and GunnAllen Financial, Inc................................................................ (5)
21.1 -- List of Subsidiaries........................................................................ (6)
23.1 -- Consent of Independent Certified Public Accountants......................................... (6)
---------
1 Incorporated by reference to the Registration Statement on Form SB-2 File
No. 333-94477, filed January 12, 2002.
2 Incorporated by reference to Amendment No. 1 to the Registration Statement
filed on April 12, 2000.
3 Incorporated by reference to Amendment No. 4 to the Registration Statement
filed on September 25, 2001.
4 Incorporated by reference to Amendment No. 6 to the Registration Statement
filed on November 13, 2001.
5 Incorporated by reference to Post-Effective Amendment No. 1 to the
Registration Statement filed on February 8, 2001.
6 Filed herewith.