SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the transition period from __________to__________
Commission File No. 05-62411
Diversified Security Solutions, Inc.
(Name of small business issuer as specified in its charter)
Delaware 22-3690168
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
280 Midland Avenue
Saddle Brook, New Jersey 07663
(address of principal executive offices) (Zip Code)
Issuer's Telephone number, including area code: (201) 794-6500
Check whether Issuer (1) filed all reports required to be filed by Section 13 or
15 (d) of the Exchange Act during the past 12 months (or for such shorter period
that the issuer was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
Number of shares outstanding of the issuer's Common Stock:
Class: Outstanding as of August 13, 2004,
------ ----------------------------------
Common stock, $.01 par value 5,740,398
Diversified Security Solutions, Inc. and Subsidiaries
INDEX
Page
----
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and
December 31, 2003 (Audited) ........................................... 2
Consolidated Statements of Operations for the six months ended and
three ended June 30, 2004 (Unaudited) and June 30, 2003 (Unaudited) ... 3
Consolidated Statements of Cash Flows for the six months ended
June 30, 2004 (Unaudited) and June 30, 2003 (Unaudited) ............... 4
Notes to Financial Statements ......................................... 5-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................. 9-10
Item 3. Controls and Procedures ............................................... 10-11
Part II Other Information
Item 1. Legal Proceedings ..................................................... 12
Item 2. Change in Securities .................................................. 12
Item 3. Defaults Upon Senior Securities ....................................... 12
Item 4. Submission of Matters to a Vote of Security Holders ................... 12
Item 5. Other Information ..................................................... 12
Item 6. Exhibits and Reports on Form 8-K ...................................... 12-13
SIGNATURES ...................................................................... 14
CERTIFICATIONS .................................................................. 15-21
1
Item 1. Financial Statements
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2004
(Unaudited) December 31, 2003
------------- -----------------
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENT $ 1,571,691 $ 1,927,416
ACCOUNTS RECEIVABLE - NET OF ALLOWANCES OF $225,000 AND $135,000 7,496,008 6,586,674
INVENTORIES 1,214,524 837,855
COSTS IN EXCESS OF BILLINGS AND ESTIMATED PROFITS 950,237 765,905
DEFERRED TAX ASSETS 2,310,375 2,202,000
PREPAID AND INCOME TAXES RECEIVABLE 324,434 185,627
OTHER ASSETS 243,942 252,179
----------- -----------
TOTAL CURRENT ASSETS 14,111,211 12,757,656
PROPERTY AND EQUIPMENT - net of accumulated depreciation of $1,418,962
and $1,406,824 1,146,943 1,161,278
GOODWILL 2,221,955 1,930,694
INTANGIBLE ASSETS - net of accumulated amortization of $241,741 and $179,809 1,233,547 1,303,480
OTHER ASSETS 641,635 410,776
----------- -----------
TOTAL CURRENT ASSETS $19,355,290 $17,563,884
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 2,862,195 $ 2,119,833
ACCRUED TAXES & EXPENSES 1,019,626 923,464
BILLING IN EXCESS OF COST AND ESTIMATED PROFITS 1,380,495 477,515
DEFERRED INCOME 151,566 155,277
LONG-TERM DEBT, CURRENT PORTION 2,033,158 463,633
CUSTOMER DEPOSITS 77,863 24,425
DEFERRED TAX LIABILITY 64,000 64,000
----------- -----------
TOTAL CURRENT 7,588,903 4,228,147
LONG-TERM DEBT, LESS CURRENT PORTION 160,295 1,922,597
DEFERRED TAX LIABILITY 134,000 134,000
----------- -----------
TOTAL LONG-TERM LIABILITIES 7,883,198 6,284,744
----------- -----------
STOCK HOLDERS' EQUITY:
PERFERRED STOCK, $.01PAR VALUE: 2,000,000 SHARES AUTHORIZED;
NO SHARES ISSUED -- --
COMMON STOCK, $.01PAR VALUE: 10,000,000 SHARES AUTHORIZED;
5,248,531 and 5,201,431 SHARES OUTSTANDING 52,485 52,014
ADDITIONAL PAID-IN-CAPITAL 14,062,565 13,512,939
TREASURY STOCK, AT COST 70,891 SHARES (500,000) (500,000)
DEFERRED COMPENSATION (201,191) --
ACCUMULATED DEFICIT (1,941,767) (1,785,813)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 11,472,092 11,279,140
----------- -----------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $19,355,290 $17,563,884
=========== ===========
The accompanying notes are an intergral part of these financial statements.
2
DIVERSIFIED SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended Three Months Ended
----------------------------- -----------------------------
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
------------- ------------- ------------- -------------
Sales $12,191,983 $ 7,226,421 $ 6,524,490 $ 3,520,718
Cost of Sales 9,384,475 5,604,699 4,995,689 2,950,163
----------- ----------- ----------- -----------
Gross Profit 2,807,508 1,621,722 1,528,801 570,555
----------- ----------- ----------- -----------
Operating Expenses:
Selling General & Administrative Expenses 3,026,223 4,385,578 1,599,389 2,212,438
----------- ----------- ----------- -----------
Operating Loss (218,715) (2,763,856) (70,588) (1,641,883)
----------- ----------- ----------- -----------
Interest Income 3,404 6,733 1,879 1,193
Interest Expense (49,019) (51,114) (24,211) (24,391)
----------- ----------- ----------- -----------
Net (Loss) Before Tax Benefit (264,330) (2,808,237) (92,920) (1,665,081)
Tax Benefit For Income Tax 108,375 1,179,000 38,097 699,000
----------- ----------- ----------- -----------
Net (Loss) After Tax Benefit $ (155,955) $(1,629,237) $ (54,823) $ (966,081)
=========== =========== =========== ===========
Basic and Diluted (Loss) Per Common Share:
Basic (Loss) Per Common Share $ (0.03) $ (0.32) $ (0.01) $ (0.19)
=========== =========== =========== ===========
Weighted Average Common Shares 5,143,908 5,138,357 5,157,129 5,138,357
=========== =========== =========== ===========
Diluted (Loss) Per Common Share: $ (0.03) $ (0.32) $ (0.01) $ (0.19)
=========== =========== =========== ===========
Weighted Average Diluted Common Shares 5,143,908 5,138,357 5,157,129 5,138,357
=========== =========== =========== ===========
The accompanying notes are an intergral part of the financial statements.
3
DIVERSIFIED SECURITY SOLUTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Six Months Ended
------------------------
June 2004 June 2003
---------- -----------
Cash flows from operating activities:
Net loss $ (155,955) $(1,629,235)
Adjustments to reconcile net loss from operations
to net cash provide by (used in) operating activities:
Depreciation and amortization 259,672 238,830
Bad debt expense 90,000 --
Stock option expense 18,707 --
Deferred income taxes (108,375) (349,000)
Changes in operating assets and liabilities:
Accounts receivable (873,015) 974,575
Inventories (125,285) 375,178
Costs and estimated profits in excess of billings (184,332) 539,418
Other assets (214,620) 247,297
Prepaid and income taxes receivable (138,807) (1,075,034)
Accounts payable 646,494 (266,897)
Accrued expenses 49,362 (65,922)
Billings in excess of cost and estimated profits 902,980 170,289
Deferred income (3,711) --
Customer deposits held 53,438 (147,577)
---------- -----------
Net cash provided by (used in) operating activities $ 216,552 $ (988,078)
---------- -----------
Cash flows from investing activities:
Proceeds from issuance of common stock 63,799 --
Purchase of business, net of cash acquired (166,875) --
Purchase of property and equipment (49,053) (185,369)
Increase in Goodwill for guarantee of stock price -- (56,376)
---------- -----------
Cash used in investing activities $ (152,129) $ (241,745)
---------- -----------
Cash flows from financing activities:
Net (payments) and proceeds of revolving bank line and other debt (320,148) 324,733
Payment of loan payable to owner of acquired company (100,000) --
---------- -----------
Cash (used in) proceeds financing activities $ (420,148) $ 324,733
---------- -----------
Decrease in cash and cash equivalents (355,725) (905,090)
Cash and cash equivalents - beginning of period 1,927,416 4,472,271
---------- -----------
Cash and cash equivalents - end of period $1,571,691 $ 3,567,181
---------- -----------
Supplemental disclosure of cash flow information:
Amount paid for the period for:
Interest $ 49,562 $ 50,827
Taxes $ 1,600 $ 183,875
Non-cash investing and financing activities:
Equipment financed $ 127,371 $ 38,632
Stock issued to acquire business $ 266,400 $ --
Value of stock options issued $ 219,898 $ --
The accompanying notes are an intergral part of the financial 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 City, Dallas, Phoenix and
Southern California metropolitan areas. Customers are primarily medium and large
businesses and governmental agencies. The Company derives a majority of its
sales from project installations and to a smaller extent, service sales
(maintenance). In April of 2004, the Company completed its acquisition of
Airorlite Communication's, Inc. ("Airorlite"). Airorlite specializes in the
design, manufacturing and maintaining wireless communications equipment used to
enhance and extend emergency radio frequency services and cellular communication
for both fixed and mobile applications. There has been a shift in sales by
geographic region and therefore, the information below shows the sales
percentages by geographic location for the six months ended June 30, 2004 and
2003 as follows:
Six Months
Ended June 30,
--------------
2004 2003
---- ----
New Jersey/ New York 38% 52%
California 35 26
Texas 14 13
Arizona 7 5
--- ---
Total integration 94 96
Airorlite 4 0
Viscom 2 4
--- ---
Total sales 100% 100%
=== ===
The Company's headquarters are located in Saddle Brook, New Jersey. Sales
and service facilities are located near the Dallas Fort Worth Airport, Phoenix
Arizona Airport, two facilities in the New York City metro area ( Saddle Brook,
New Jersey), and Fullerton, California. During the third quarter of 2003, the
Company's subsidiary, Viscom Products ("Viscom"), restructured it operations to
begin outsourcing the manufacturing of it products to a third party. Viscom will
continue to sell product and support existing warranties.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States for interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles in the United States for full year financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included and are of a normal, recurring nature. Operating
results for the three month and six month period ended June 30, 2004, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2004. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
that are included in the Company's Annual Report on Form 10-KSB for the fiscal
period ended December 31, 2003.
5
DIVERSIFIED SECURITY SOLUTIONS, INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
2. Net Income (Loss) Per Share
The computation of basic earnings (loss) per share is based upon the
weighted average number of shares of common stock outstanding during the period.
The computation of diluted earnings per share includes the dilutive effects of
common stock equivalents of options and warrants.
3. Stock Based Compensation
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation- Transition and Disclosure". SFAS No. 148 provides alternative
methods of transitions to SFAS No 123's fair value method of accounting for
stock based employee compensation, but does not require companies to use fair
value method. It also amends the disclosure provisions of SFAS No. 123 and APB
No.25 to require, in the summary of significant policies, the effect of an
entity's accounting policy with respect to stock based employee compensation on
reported net income and earnings per share in annual and interim financial
statements. The provision of this statement is effective for fiscal years ending
after December 15, 2002, and interim reporting periods beginning after December
15, 2002. Accordingly, the fair value of all options granted on and after
January 1, 2003 is to be charged against income over the vesting period. For the
six months ended June 30, 2004, the Company charged $18,707 of options granted
subsequent to January 1, 2003 against 2004 earnings. 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 and six months ended June 30, 2004 and
2003 is as follows:
Six Monthd Ended Three Monthd Ended
June 30 June 30
(Unaudited) (Unaudited)
----------------------- --------------------
2004 2003 2004 2003
--------- ----------- -------- ---------
Net loss per Financial Statements ($155,955) ($1,629,237) ($54,823) ($966,081)
========= =========== ======== =========
Stock based-employee compensation
expense included in reported net loss,
net of related tax expense 7,670 -- 7,670 --
Total stock-based employee compensation
expense determined under fair valued based,
net of related tax effects (11,216) (8,489) (7,797) (4,404)
--------- ----------- -------- ---------
Pro forma net loss ($159,501) ($1,637,726) ($54,950) ($970,485)
========= =========== ======== =========
Loss per share:
Basis and diluted shares as reported ($0.03) ($0.32) ($0.01) ($0.19)
========= =========== ======== =========
Basis and diluted shares as proforma ($0.03) ($0.32) ($0.01) ($0.19)
========= =========== ======== =========
6
DIVERSIFIED SECURITY SOLUTIONS, INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
4. Related Party Transaction
A corporation of which a director of the Company was an officer was paid
consulting fees and reimbursement of expenses in amount of approximately $15,877
for the six months ended June 30,2004 and $30,900 for the six months ended
June 30, 2003.
5. Acquisition
Effective April 1, 2004, ACI Acquisition Corporation, a wholly-owned
subsidiary of the Company, purchased all of the issued and outstanding stock of
Airorlite Communications, Inc ("Airorlite"). Airorlite was purchased for
$200,000 cash, 37,000 shares of the Company's common stock, valued at $266,400,
concurrently with the closing, an officer's loan of $100,000 was repaid and an
amount equal to the income tax on the undistributed earnings for the period
January 1, 2004 to the acquisition of the Company. Airorlite is located in
Saddle Brook, New Jersey and specializes in design, manufacturing and
maintaining wireless communications equipment used to enhance and extend
emergency radio frequency services and cellular communication for both fixed and
mobile applications. Airorlite has been merged into ACI and ACI has been renamed
Airorlite Communications, Inc. The Company accounted for the acquisition under
the purchase accounting method. Accordingly, assets and liabilities were
recorded at their fair value. As a result of the acquisition, the Company
recorded goodwill of $291,260. The following summarized the net assets acquired
from Airorlite Communications (prior to acquisition accounting adjustments) as
of April 1, 2004:
Balance
--------
Current assets $410,829
Long term assets 16,003
Current liabilities 208,970
--------
Net assets $217,862
========
Airorlite Communications had sales of $523,386 (unaudited) for the three
months ended June 30, 2004 with an operating profit of approximately $183,556.
The unaudited net assets (excluding goodwill) as of June 30, 2004 were $558,696.
6. Subsequent Event
On July 28 2004 the Company completed a $3,300,000 private placement of its
common stock to certain qualified institutional investors. Under the terms of
the agreement, the Company sold 553,333 shares of common stock to qualified
investors for $6.00 per share. The Company also has granted the investors a
warrant to acquire 138,333 shares of common stock at an exercise price of $7.60
per share, exercisable for a period commencing six months after the date of
issuance through the fifth anniversary of the issuance. In addition, the
Placement Agent received a commission of 8% of the proceeds plus expenses and
was issued a warrant to acquire 55,333 shares of common stock with the same
terms as those issued to the institutional investors. After expenses, the net
proceeds of the transaction were approximately $3,000,000. The Company intends
to use the net proceeds of the private placement for general corporate purposes.
7
DIVERSIFIED SECURITY SOLUTIONS, INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
7. Contingent Liabilities
From time to time, the Company is subject to various claims with respect to
matters arising out of the normal course of business. In management's opinion,
none of these claims is likely to have a material affect on the Company's
financial statements.
Critical Accounting Policies
Disclosure of the Company's significant accounting policies is included in
Note 1 to the consolidated financial statements of the Company's Annual Report
on Form 10-KSB for the year ended December 31, 2003. Some of these policies
require management to make estimates and assumptions that may affect the
reported amounts in the Company's financial statement.
Forward Looking Statements
When used in this discussion, the words "believes", "anticipates",
"contemplated", "expects", or similar expressions are intended to identify
forward looking statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Those risks and uncertainties include changes in interest rates, the
ability to control costs and expenses, significant variations in recognized
revenue due to customer caused delays in installations, cancellations of
contracts by our customers, and general economic conditions which could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company undertakes no obligation to publicly
release the results of any revisions to those forward looking statements that
may be made to reflect events or circumstances after this date or to reflect the
occurrence of unanticipated events.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Six Months Ended June 30, 2004 and June 30, 2003
Sales - Sales for the six months ended June 30, 2004 were $12,191,983
representing an increase of $4,965,562 or 69% as compared to $7,226,421 for the
six months ended June 30, 2003. This sales increase is believed to be due to
improved general economic conditions and an enhanced emphasis on security. The
Airorlite acquisition accounted for an increase in the Company's sales of
$523,386. Each of the Company's four regions experienced significant sales
growth during the six months ended June 30, 2004 as compared to the June 30,
2003 period. The Company backlog as of June 30, 2004 is $22,500,000,
representing a historical high for the Company.
Cost of Sales - Cost of sales for the six months ended June 30, 2004 was
$9,384,475 as compared to $5,604,699 for the six months ended June 30, 2003. The
gross profit margin for the six months ended June 30, 2004 was 23.0% as compared
to 22.4% for the six months ended June 30, 2003. The improved gross profit
percentage is due to higher margins reported in Arizona and New Jersey and the
addition of the higher margin Airorlite sales. This was partially offset by
decreased margins in California due to higher labor costs to complete projects
on the West coast.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses was $3,026,223 for the six months ended June 30, 2004 as
compared to $4,385,578 for the six months ended June 30, 2003. This decease of
31.0% or $1,359,355 was primarily attributed to savings from employee
reductions, salary reductions for key employees, employee benefit reductions
(health insurance, 401k, etc) and the implementation of other general cost
reductions during the six months of 2004.
Interest Income - Interest income for the six months ended June 30, 2004
was $3,404 as compared to $6,733 for six months ended June 30, 2003. This
decrease of $3,329 was due to having less cash to invest and lower interest
rates.
Interest Expense - Interest expense for the six months ended June 30, 2004
was $49,019 as compared to $51,114 for the six months ended June 30, 2003. The
decrease of $2,095 and is due to having a lower average debt balance for the six
months ended June 30, 2004 of $2,076,333 versus $2,325,650 for the three months
ended June 30, 2003.
Three Months Ended June 30, 2004 and June 30, 2003
Sales - Sales for the three months ended June 30, 2004 were $6,524,490
representing an increase of $3,003,772 or 85.3% as compared to $3,520,718 for
the three months ended June 30, 2003. The Airorlite acquisition accounted for an
increase in sales of $523,386. Each of the Company's four regions experienced
significant sales growth during the three months ended June 30, 2004 as compared
to the June 30, 2003 period due to would what is believed to be improving
economic conditions and increased emphasis on security.
Cost of Sales - Cost of sales for the three months ended June 30, 2004 was
$4,995,689 as compared to $2,950,163 for the three months ended June 30, 2003.
The gross profit margin for the three months ended June 30, 2004 was 23.4% as
compared to 16.2% for the three months ended June 30, 2003. We attribute this
7.2% increase in the gross profit margin to improved cost control
9
in all of the Company`s regions and the addition of the Airorlite sales, which
have a higher gross profit percentage.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses was $1,599,389 for the three months ended June 30, 2004
as compared to $2,212,438 for the three months ended June 30, 2003. This decease
of 27.7% or $613,049 was primarily attributed to savings from head count
reductions, salary reductions for key employees, selective payroll reductions
(health insurance, 401k, etc) and the implementation of other general cost
reductions for the three months ended June 2004.
Interest Income - Interest income for the three months ended June 30, 2004
was $1,879 as compared to $1,193 for three months ended June 30, 2003. This was
an increase of $686.
Interest Expense - Interest expense for the three months ended June 30,
2004 was $24,211 as compared to $24,391 for the three months ended June 30,
2003. The average debt balance for the three Months ended June 30, 2004 was
$2,192,489 as compared to $2,222,355 for the three months ended June 30, 2003.
Liquidity and Capital Resources - As of June 30, 2004, we had cash and cash
equivalents $1,571,691. We have a loan facility of $4,500,000 with Hudson United
Bank ("HUB") and have certain debt maturing from November 2004 through May 2005.
The Company's outstanding loan balance with Hudson United Bank was $2,042,628
($1,975,215 was current portion) and approximately $2,186,575 was available
under HUB credit facility as of June 30, 2004. Our working capital was
$6,522,308 as of June 30, 2004. The Company was in violation of various loan
covenants within its debt agreement with HUB as of June 30, 2004. HUB waived
these covenants.
During the six months ended June 30, 2004, net cash provided by operating
activities was $216,552. We purchased property and equipment of $49,053. In
addition, due to positive cash flows from operations, the Company was to pay HUB
more then the required minimum payments of its credit facility of $320,148. The
total debt service payments were $49,562 for the six months ended June 30, 2004.
Our working capital requirements have grown and as a result, our cash and
cash equivalents have significantly decreased over the last few years. On
July 28, 2004, the Company completed a $3,300,000 private placement of its
common stock to certain qualified institutional investors, which netted the
Company approximately $3,000,000 after expenses. (See Note 6 for additional
details). We believe that our current cash and available lines of credit should
be sufficient to meet our capital requirements for the next twelve months.
However, we may seek additional equity and or debt financing as our operations
continue to grow.
Item 3. Controls and Procedures
The Company's executive management, including the Chief Executive Officer,
Chief Operating Officer and Chief Financial Officer, conducted an evaluation as
of the end of the period covered by this report, of the effectiveness of the
Company's disclosure controls and procedures as defined in Exchange Act Rule
13a-15(e). Based on that evaluation, the Chief Executive Officer, Chief
Operating Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of the end of the period
covered by this report. As required by Rule 13a-15(d), the Company's executive
management, including the Chief Executive Officer, Chief Operating Officer and
Chief Financial Officer, also conducted an evaluation of the Company's internal
control over financial reporting to determine whether any changes occurred
10
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting. Based on that evaluation, there have been no such changes
during the period covered by this report.
11
Part II - Other Information
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Effective April 1, 2004, ACI Acquisition Corporation, a wholly-owned
subsidiary of the Company, purchased all of the issued and outstanding stock of
Airorlite Communications, Inc. The Company paid part of the purchase of
Airorlite by issuing 37,000 shares of the Company's common stock valued at
$266,400. These shares were issued in reliance on the exemption provided by
Section 4(2) of the Securities Act of 1933, as amended, as transactions not
involving a public offering.
On July 28, 2004 the Company completed the $3,300,000 private placement of
its common stock to certain qualified institutional investors. Under the terms
of the agreement, the Company sold 553,333 shares of common stock to the
investors for $6.00 per share. The Company also has granted the investors a
warrant to acquire 138,333 shares of common stock at an exercise price of $7.60
per share, exercisable for a period commencing six months after the date of
issuance through the fifth anniversary of the issuance. In addition, the
Placement Agent received a commission of 8% of the proceeds plus expenses and
was issued a warrant to acquire 55,333 shares of common stock with the same
terms as those issued to the institutional investors. After expenses, the net
proceeds were approximately $3,000,000.
During the three months ended June 30, 2004, several individuals exercised
their employee incentive stock options. Through June 30, 2004, options to
exercise 10,100 shares of the Company's common stock have been issued.
Subsequent to June 30, 2004, several individuals exercised their employee
incentive stock options. Through August 13, 2004, options to exercise 9,425
shares of the Company's common stock have been issued.
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
12
Number Description
------ -----------
10.1 Securities Purchase Agreement*
10.2 Registration Rights Agreement*
10.3 Form of Warrant *
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
* Incorporated by reference to the 8K filed by the Company with the Securities
and Exchange Commission on July 21, 2004
(b) Reports on Form 8-K
On July 21, 2004, the Company filed an 8-K reporting on Item 2event
announcing that the Company issued a press release announcing a $3,300,000
private placement.
On July 28, 2004, the Company filed an 8-K reporting on Item 2 event
announcing that the Company issued a press release announcing completion of the
$3,300,000 private placement.
On August 11, 2004, the Company filed an 8-K reporting on Item 12 event
announcing that the Company issued a press release announcing its financial
results for the three and six months ended June 30, 2004.
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
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SIGNATURES
Date: August 13, 2004 /s/ JAMES E. HENRY
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James E. Henry
Chairman, Chief Executive Officer,
Treasurer and Director
Date: August 13, 2004 /s/ IRVIN F. WITCOSKY
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Irvin F. Witcosky
Chief Operating Officer, President,
Secretary and Director
Date: August 13, 2004 /s/ DOUGLAS WEST
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Douglas West
Chief Financial Officer
14