UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OF 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to _________
Commission file number 000-28335
Federal Security Protection Services, Inc.
____________________________________________________________
(Exact name of small business issuer as specified in its charter)
Delaware
____________________________________________________________
(State or other jurisdiction of incorporation or organization)
84-1080043IRS
____________________________________________________________
(Employer Identification No.)
400 Poydras Street, Suite 1510
New Orleans, LA 70130
(Address of principal executive offices)
(866) 932-2628
____________________________________________________________
(Issuer's telephone number)
(Former name, former address, and former fiscal year, if changed since last
report)
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date:
February 14, 2003, 6,175,210 shares.
Transitional Small Business Format (Check one): Yes [ ] No [x]
Pg. 1
FEDERAL SECURITY PROTECTION SERVICES, INC.
FORM 10-QSB
TABLE OF CONTENTS
Page PART I--FINANCIAL INFORMATION
Item 1. Financial Statements------------------------------------------ 3
Independent Accountant's Review Report--------------------------------- 3
Balance Sheets--------------------------------------------------------- 4
Statements of Operations----------------------------------------------- 6
Statements of Cash Flows----------------------------------------------- 8
Notes to Financial Statements------------------------------------------ 9
Item 2. Management's Discussion and Analysis or Plan of Operation----- 14
PART II OTHER INFORMATION--------------------------------------------- 21
Item 1. Legal Proceedings------------------------------------------ 21
Item 2. Changes in Securities-------------------------------------- 21
Item 3. Defaults Upon Senior Securities---------------------------- 21
Item 4. Submission of Matters to a Vote of Security Holders-------- 21
Item 5. Other Information------------------------------------------ 22
Item 6. Exhibits and Reports--------------------------------------- 22
Signatures------------------------------------------------------------- 22
Pg. 2
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
Independent Accountant's Review Report
February 11, 2003
To the Board of Directors and Shareholders
of Federal Security Protection Services, Inc.:
I have reviewed the accompanying consolidated balance sheets of Federal
Security Protection Services, Inc. as of December 31, 2002 and 2001, and
the related consolidated statements of operations for each of the three
months and nine months then ended, and the related consolidated statements
of cash flows for each of the nine months then ended, in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. All information included
in these consolidated financial statements is the representation of the
management of Federal Security Protection Services, Inc.
A review consists principally of inquiries of Company personnel and
analytical procedures applied to financial data. It is substantially
less in scope than an audit in accordance with generally accepted accounting
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, I do not express
such an opinion.
Based on my review, I am not aware of any material modifications that should
be made to the accompanying consolidated financial statements in order for
them to be in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Federal Security Protection Services, Inc. will continue as a going
concern. As discussed in Note 8 to the financial statements, the Company has
suffered recurring losses from operations and has a net capital deficiency
that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. These consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Carl S. Sanko
Topanga, California
Pg. 3
Federal Security Protection Services, Inc.
Balance Sheets
December 31, 2002 and 2001
December 31, December 31,
2002 2001
Assets
Current assets
Cash $ 25,002 $ 692
Accounts receivable 28,173 0
Officer advances 429,003 1,000
Prepaid expenses 40,867 27,500
Total current assets 523,045 29,192
Property and equipment
Equipment 66,021 2,444
Accumulated depreciation (15,412) ( 1,098)
Property and equipment, net 50,609 1,346
Other assets
Deferred IRU costs 502,041 0
Goodwill 157,391 0
Deposits 1,388 0
Trademarks, net 0 5,837
Total other assets 660,820 5,837
Total assets $ 1,234,474 $ 36,375
See accompanying notes to financial statements
- Unaudited -
Pg. 4
Federal Security Protection Services, Inc.
Balance Sheets
December 31, 2002 and 2001
December 31, December 31,
2002 2001
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 196,176 $ 13,681
Accrued expenses 161,000 22,539
Current portion of long term debt 9,658 0
Income taxes payable 13,574 0
Deferred IRU income 136,112 0
Accrued litigation settlement 42,500 42,500
Short-term borrowings 156,782 155,281
Total current liabilities 715,802 234,001
Long term liabilities
Deferred IRU income 858,229 0
Note payable 24,726 0
Total long term liabilities 882,955 0
Shareholders' equity (deficit)
Convertible preferred stock, par value of
$.001, 20,000,000 shares authorized.
70,000 shares designated as Series A and
issued and outstanding at December 31, 2002
and none at December 31, 2001. Aggregate
liquidation preference of $7,000,000 at
December 31, 2002. 70 70
70,000 shares designated as Series B and
issued and outstanding at December 31, 2002
and none at December 31, 2001. Aggregate
liquidation preference of $7,000,000 at
December 31, 2002. 70 0
Common stock, par value $.001, 100,000,000
shares authorized, 6,065,209 and 2,708,209
issued and outstanding at December 31, 2002
and 2001, respectively 6,065 27,082
Paid in capital 4,859,723 4,216,381
Accumulated deficit (5,230,211) (4,441,159)
Total shareholders' equity ( 364,283) ( 197,626)
Total liabilities and shareholders' equity $ 1,234,474 $ 36,375
See accompanying notes to financial statements
- Unaudited -
Pg. 5
Federal Security Protection Services, Inc.
Statements of Operations
For the Nine months Ended December 31, 2002 and 2001
9 Months Ended 9 Months Ended
December 31, December 31,
2002 2001
Revenues $ 94,626 $ 638
Cost of sales:
Network costs 80,881 0
IRU costs 7,345 0
Total cost of sales 88,226 0
Operating expenses:
Salaries 123,750 0
General and administrative 551,501 259,032
Total operating expenses 675,251 259,032
Loss from operations (668,851) (258,394)
Other income 0 0
Net income (loss) $ (668,851) $ (258,394)
Basic and dilutive income (loss) per share $ (.121) $ (.125)
See accompanying notes to financial statements
- Unaudited -
Pg. 6
Federal Security Protection Services, Inc.
Statements of Operations
For the Three Months Ended December 31, 2002 and 2001
3 Months Ended 3 Months Ended
December 31, December 31,
2002 2001
Revenues $ 72,916 $ 29
Cost of sales:
Network costs 66,106 0
IRU costs 3,378 0
Total cost of sales 69,484 0
Operating expenses:
Salaries 75,750 0
General and administrative 96,736 87,377
Total operating expenses 172,486 87,377
Loss from operations (169,054) ( 87,348)
Other income 0 0
Net income (loss) $ (169,054) $ ( 87,348)
Basic and dilutive income (loss) per share $ (.028) $ (.037)
See accompanying notes to financial statements
- Unaudited -
pg. 7
Federal Security Protection Services, Inc.
Statements of Cash Flows
For the Nine months Ended December 31, 2002 and 2001
9 Months Ended 9 Months Ended
December 31, December 31,
2002 2001
Cash flows from operating activities
Net income (loss) $ (668,851) $ (258,394)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 3,640 2,004
Common stock issued for services 413,895 182,700
Changes in operating assets and
liabilities
Accounts receivable (28,173) 0
Officer advances (429,003) (1,000)
Prepaid expenses 13,000 4,750
Deferred IRU costs (40,867) 0
Accounts payable 95,229 (9,389)
Accrued expenses 134,090 12,370
Current portion long term debt 9,658 0
Income taxes payable 13,574 0
Deferred IRU income 136,112 0
Short-term borrowings 500 4,400
Net cash provided by (used in) operating
activities (347,196) (62,559)
Cash flows from investing activities
Business acquisition 203,000 0
Purchase of fixed assets (53,024) 0
Long term deferred costs (503,430) 0
Purchase of goodwill (157,391) 0
Net cash provided by (used in) investing
activities (510,845) 0
Cash flows from financing activities
Proceeds from issuance of common stock 0 56,000
Note payable for purchase of fixed assets 24,726 0
Deferred IRU income 858,229 0
Issuance of preferred stock in payment of
interest payable 0 7,000
Net cash provided by (used in) financing
activities 882,955 63,000
Net increase (decrease) in cash 24,914 441
Cash, beginning of period 88 251
Cash, end of period $ 25,002 $ 692
See accompanying notes to financial statements
- Unaudited -
Pg. 8
NOTES TO FINANCIAL STATEMENTS
NOTE 1 Summary of significant accounting policies
Organization and business
Federal Security Protection Services, Inc. ("the Company"), a Delaware
Corporation, was incorporated on January 19, 1988 as Windom, Inc. On August
22, 1997, Windom, Inc., as a non-operating public shell, merged with New York
Bagel Exchange, Inc. with each then outstanding share of New York Bagel
Exchange, Inc. common stock being, by virtue of the merger, cancelled. The
then outstanding shares of Windom, Inc. common stock continued unchanged as
the outstanding shares of the surviving corporation. The surviving
corporation continued the business of wholesale and retail sale of bagels and
related items. On January 26, 1999, New York Bagel Exchange, Inc. changed its
name to Webboat.com, Inc. On March 22, 1999, the Board of Directors approved
the sale of the Company's inventory and fixed assets for $120,000. The
Company ceased its bagel business operations on March 25, 1999. The actual
disposal date of assets subject to the sale was on April 19, 1999. A gain of
approximately $72,000 resulted upon the disposition for the year ended
December 31, 1999. On April 2, 1999, Webboat.com, Inc. changed its name to
Windom.com, Inc., on April 20, 1999, Windom.com, Inc. changed its name to
Web4boats.com, Inc., and during fiscal year 1999, the Company began making
plans to develop a commercial internet site in which boat builders,
manufacturers, dealers, marinas, individual buyers and sellers would come to
advertise sales and services related to the boating industry. Subsequently,
through November 30, 1999 the Company continued to invest substantially in
website development and related costs. While all such development costs were
expensed as incurred, the Company expected, as a going concern, to realize
future benefits from these costs.
On December 1, 2001, the Company ended its pursuit of developing an Internet
boating site. The much slower than anticipated growth in popularity of its
website, with correspondingly minimal revenues, rendered putting further
resources into Internet boating unviable. Accordingly, the boating website
was closed in January, 2002. On March 12, 2002 Web4Boats.com, Inc. changed its
name to Federal Security Protection Services, Inc. The acquisition of Iris
Broadband, Inc. (see note 2) on September 6, 2002, allowed the Company to
become a full-service managed security services company and a secure Internet
Protocol ("IP") network services provider. The Company provides its products
and services to customers (carriers, other IP-based service providers, systems
integrators, business enterprises) on a turnkey or per-requirement basis. It
develops custom solutions for securing virtual private networks,
email/document security management, digital rights management, content
delivery networks, IP-based video products suite and others requiring IP
based network security solutions. These integrated solutions can be deployed
on a secure network which provides integrated access to 85% of the United
States and in 115 countries. The Company also provides desktop-to-desktop
managed security network solutions and other policy-based services. The
Company expects to fulfill its plans and, as a going concern to derive
revenues during fiscal year 2002, by its acquisition of Iris Broadband, Inc.
and other existing security related companies.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
pg. 9
transactions have been eliminated upon consolidation.
Property and equipment
Equipment is recorded at cost and depreciated over estimated useful lives of
five years using the straight-line method. Trademarks are recorded at cost
and amortized over estimated useful lives of five years using the straight-
line method. For the year ended March 31, 2002, all trademarks related to
Web4Boats.com, Inc. were written down to zero. Goodwill and indefinite-lived
intangible assets acquired after June 30, 2001 are not amortized but are
reviewed annually for impairment according to the provisions of SFAS No. 142
"Goodwill and Other Intangible Assets." There was no impairment of such
assets for the nine months ended December 31, 2001 or 2002.
Income taxes
The Company has total net operating loss carryforwards at December 31, 2002 of
approximately $2,687,000 and $2,274,000 for federal and California state tax
purposes, respectively. A deferred asset for these amounts has not been
accrued due to the uncertain nature of its being realized. Net operating
loss carryforwards begin to expire in fiscal year 2011 and 2004 for federal
and California state tax purposes, respectively.
Revenue recognition
With the acquisition of Iris Broadband, Inc. (see Note 2), the Company has
obtained "Indefeasible Rights of Use" (IRU) agreements with telecommunication
and data network carriers that grant and convey to the user the exclusive,
indefeasible right of access to and use of conduit or fiber optic fibers
leased by Iris. The terms of the agreements are from seventeen to twenty-
five years. Agreements can be for one-time up-front payments or for a down
payment with subsequent monthly or annual payments for the rights of use
during the term of the agreement. When an up-front payment is made, it is
recorded as deferred income in a liability account. Income is then realized
each reporting period according to the straight line amortization over the
term of the agreement. Any related costs incurred under the contract by Iris
are capitalized and also amortized on a straight line basis over the life of
the contract.
Earnings per share
On March 12, 2002, the Company effected a ten for one reverse split of its
common stock. The computation of loss per share of common stock is based on
the weighted average number of shares outstanding during each three month
period with the reverse stock split retroactively applied to the three months
ended December 31, 2001.
NOTE 2 Acquisition
Iris Broadband, Inc.
On September 6, 2002, the Company acquired all of the outstanding capital
stock of Iris Broadband, Inc. ("Iris") in exchange for 70,000 shares of the
Company's Series B preferred stock valued at $203,000. The plan of
reorganization was made pursuant to the provisions of Internal Revenue
Code Section 368 (a)(1)(B). In keeping with the provisions of SFAS No.
141 "Business Combinations" for such transactions completed after June 30,
2001, the acquisition was accounted for by the purchase method. The results
of operations of Iris have been included in the consolidated results of the
Company since the date of acquisition. The excess of the purchase price over
Pg. 10
the fair value of net assets acquired resulted in the recording of $157,391
of goodwill. Within six months of the acquisition, should the Company be
unsuccessful in raising a minimum of $750,000 in capital and maintaining a
minimum average stock price of twenty-five cents per share for a consecutive
ten day period, Iris, at its sole discretion, has the option of disengaging
from the Company by reversing and nullifying the acquisition transaction.
The unaudited proforma financial information for the acquisition of Iris as
if the business had been acquired at the beginning of each respective fiscal
period, is presented as follows:
For the nine months ended,
2001 2002
Revenues $ 32,924 $ 119,252
Net loss $ (286,203) $ (734,976)
Net loss per common share:
Basic & diluted $ (.032) $ (.059)
The unaudited proforma financial information is presented for information
purposes only and may not be indicative of results of operations as they
would have been if the acquisition occurred on April 1, 2001, nor is it
indicative of the results of operations which may occur in the future.
Anticipated efficiencies from the combination have been excluded from the
amounts included in the proforma information.
NOTE 3 Shareholders' equity
Stock options
During fiscal year 1998, the Company recorded a charge to operations of
$687,500 for marketing and other services in exchange for issuance of stock
options. The value for such services was computed as the difference between
the quoted market price at the option's measurement date and the option
price. All options were exercisable at time of grant and no options had been
exercised as of March 31, 2002. On April 24, 2002, all previously issued
stock options that had not already expired totalling 3,525,000 shares with an
option price of $.07 to $1.00 per share, and $1,487,500 in total were
cancelled and the Company's Board of Directors took the action of reissuing
3,525,000 shares with an option price of $.15 per share. Additionally, the
Board of Directors granted 2,700,000 in stock options with an option price of
$.15 per share to three related parties to be earned during the period April
25, 2002 to October 25, 2002. These 6,225,000 in stock options were valued
as of the date of grant using the Black-Scholes option pricing model and
determined to have a fair value per option of $.0142 with the following
assumptions: expected price volatility of 32.8%, expected option lives of
five years, risk free interest rate of 6.0%. On September 1, 2002, the Board
of Directors also granted 3,000,000 in stock options with an option price of
$.07 per share to three Company officers. These 3,000,000 in stock options
were valued as of the date of grant using the Black-Scholes option pricing
model and determined to have a fair value per option of $.0525 with the
following assumptions: expected price volatility of 135%, expected option
lives of five years, risk free interest rate of 5.0%. The number of shares
represented by stock options outstanding at December 31, 2002 is 9,275,000
shares with an option price of $.07-.16 per share, and $1,151,750 in total,
and with a market price at date of grant of $.06-.11 per share, and $683,500
in total. Outstanding options expire from April to December, 2007.
Pg. 11
Issuance of preferred stock
In September, 1999, the Company authorized the issuance of 20,000,000 shares
of $.001 par value, preferred stock. In August, 1999, 10,000 shares of
preferred stock was designated as Series A preferred stock with conversion
and voting rights of one share of Series A preferred to 100 shares of common
stock. Subsequently, the 10,000 shares of Series A preferred was sold for
$100,000 to a related party. A beneficial conversion feature of $100,000 was
present in the transaction and is reflected in stockholders' equity at
December 31, 2002.
In August, 2000, the outstanding 10,000 shares of Series A preferred stock
were converted to 1,000,000 shares of common stock. The Series A preferred
shares were then cancelled and returned to the status of authorized and
unissued.
In November, 2001, 70,000 shares of Series A preferred stock were issued as
incentive to four related parties for providing the Company with operating
capital from loans totaling $20,000 and from purchase of common stock for
$50,000.
As discussed in Note 2, in September, 2002, 70,000 shares of preferred stock
was designated as Series B preferred stock and issued to the shareholders of
Iris Broadband, Inc. in exchange for all the capital stock of Iris. Series B
preferred stock has conversion and voting rights of one share of Series B
preferred to 100 shares of common stock.
NOTE 4 Related parties
Short term borrowings
During the year ended March 31, 2001, the Company received $140,000 from eight
lenders, two of which were related parties, in exchange for promissory notes
with interest at 12% per year and terms ranging from seven days to nine
months. As inducement to obtain the unsecured loans, the Company issued a
total of 560,000 shares of common stock, valued at $123,800, which was
recorded as interest expense during the year ended March 31, 2001.
At December 31, 2001, the Company had unsecured promissory notes, inclusive of
accrued interest, of $153,571, payable to nine shareholders, and that bear
annual interest at rates of 10% to 12%.
At December 31, 2002, the Company had unsecured promissory notes, inclusive
of accrued interest, of $196,899, payable to nine shareholders, and that bear
annual interest at rates of 10% to 12%.
Stock options
Represented in outstanding stock options are 9,250,000 shares at December 31,
2002, to related parties.
NOTE 5 Statements of Cash Flows
Financial instruments
The Company considers all liquid interest-earning investments with a maturity
of three months or less at the date of purchase to be cash equivalents.
Noncash transactions
During the nine months ended December 31, 2002, the Company issued 3,357,000
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shares of its common stock, of which 2,950,000 shares were to related parties.
The shares were compensation in exchange for $169,000 in services, of which
$101,100 had been accrued at March 31, 2002.
Interest paid
During the nine months ended December 31, 2001, the Company charged to
operations interest expense of $9,119 and paid no interest. During the
nine months ended December 31, 2002, the Company charged to operations
interest expense of $19,526 and paid interest of $919.
NOTE 6 Capital lease
In September, 2002, the Company acquired data network equipment in a
transaction classified as a capital lease in accordance with SFAS No. 13,
"Accounting for Leases." The gross carrying amount of the computer equipment
was $40,860 at December 31, 2002. Amortization expense related to the
equipment is included as part of the Company's total depreciation expense.
The following table presents the future minimum lease payments under the
capital lease together with the present value of the minimum lease payments
as of December 31, 2002.
Years Ended March 31,
2003 $ 6,898
2004 20,695
2005 20,695
2006 8,623
Total minimum lease payments 56,911
Less: amount representing interest 19,184
Present value of minimum lease payments $37,727
NOTE 7 Commitments and Contingencies
Contract commitments
On April 5, 1999, the Company entered into a one year consulting agreement,
with a related party, under which the Company agreed to pay $10,000 per month,
payable in cash or stock, for management and advisory services. The contract
was renewed through March 31, 2002. For the year ended March 31, 2002, $4,500
in cash and 2,790,000 shares of common stock, valued at $83,700 were issued as
payment for services received from April through December, 2001. A balance of
$30,000 under the contract that was accrued as of March 31, 2002 was paid in
the quarter ended December 31, 2002 with the issuance of 600,000 shares of
common stock.
On September 1, 2002, the Company entered into a seven year employment
agreement with three officers under which the Company agreed to pay $480,000
in annual salary, 3,000,000 of its common shares in stock options (see Note
3), various employment benefits, and an annual bonus based on meeting certain
performance criteria. Additionally, the Company has committed to pay the
three officers up to $8,250,000 in total for early termination for other than
death, disability, or breach of conduct.
On July 26, 2002, the Company entered into a six month contract with
GlobalEquitywatchers.coms, a wholly owned subsidiary of Round II Inc., under
which terms the Company will receive various services related to promoting the
Pg. 13
Company's website in exchange for 15,000 shares of the Company's common stock
which had a value of $900 ($.06 per share) on the contract date.
Additionally, the Company signed a 60 day agreement (with options for
renewal) with Round II Inc. on July 26, 2002 for the express purpose of
having Round II Inc. endeavor to use its professional expertise towards
presenting the Company with potential business entities for acquisition by
the Company or for the purpose of locating appropriate funding sources for
the Company. As a result of successfully completed transactions through its
efforts, Round II Inc. will be paid a fee of 10% of the stock and/or cash
received by the Company.
Lease commitments
The Company leases its Iris facility under a long-term operating lease
expiring in June 2004. Future minimum lease payments total $8,352 for fiscal
2002, $33,408 for fiscal 2003, and $8,352 for fiscal 2004. Rent expense was
incurred only in September, 2002 with the acquisition of Iris and totaled
$11,836.
Litigation
During fiscal 1999, a lawsuit was filed against the Company in which the
plaintiff, a former officer, claimed breach of employment contract related to
fiscal year 1998. In May, 1999, the dispute was settled for $42,500. The
unpaid settlement amount is accrued as of December 31, 2002 and 2001.
NOTE 8 Going concern
The Company has suffered recurring losses from operations and has a net
capital deficiency that raise substantial doubt about its ability to continue
as a going concern. During the year ended March 31, 2002, as a result of
considering the unviability of remaining in the Internet boating industry,
and as described in Note 1 above, the Company saw no alternative but to cease
activities in that industry and look for a new economic model and opportunity.
Note 1 also describes management's plans in regard to perpetuating its
existence through this new opportunity related to the managed security and
IP secured services industry. The Company has the ability to raise funds
through the public equity market and, as stated in Notes 3 and 4, has paid
significant liabilities to related and other parties with common stock and
raised substantial funds from a related party in the private sector as well.
While such plans and fundraising ability seem to mitigate the effect of prior
years' losses and deficits, the Company is essentially only beginning to
operate in a new industry. The inability to assess the likelihood of the
effective implementation of management's plans in this new environment also
raises substantial doubt about its ability to continue as a going concern.
Item 2. Management's Discussion and Analysis or Plan of Operation.
You should read the following discussion of our results of operations and
financial condition in conjunction with our consolidated financial statements
and related notes included elsewhere in this Form 10-QSB. Unless specified
otherwise as used herein, the terms "we", "us" or "our" refers to Federal
Security Protection Services, Inc.
The following Management's Discussion and Analysis or Plan of Operation
contains certain forward-looking statements regarding future financial
condition and results of operations and the company's business operations.
We have based these statements on our expectations about future events. The
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words "may," "intend," "will," "expect," "anticipate," "objective,"
"projection," "forecast," "position" or negatives of those terms or other
variations of them or comparable terminology are intended to identify forward-
looking statements. We have based these statements on our current expectations
about future events. Although we believe that our expectations
reflected in or suggested by our forward-looking statements are reasonable, we
cannot assure you that these expectations will be achieved. Our actual results
may differ materially from what we currently expect. Important factors which
could cause our actual results to differ materially from the forward-looking
statements include, without limitation: (1)general economic and business
conditions, (2) effect of future competition, and (3) failure to raise needed
capital.
OVERVIEW
The Company was organized under and pursuant to the laws of the State of
Delaware on January 19, 1988. Refer to Note 1 of the Financial Statements for
a description of the organizational history of the Company.
The Company's corporate headquarters and its operating office are located at
400 Poydras Street, Suite 1510, New Orleans, LA 70130.
In March 2002, The Company's then General Manager was authorized by
the Directors of the Company to seek suitable candidates in the field of
security, for acquisition by the Company. In furtherance of this aim the
Company executed an agreement with Iris Broadband, Inc., a corporation
organized and existing under and pursuant to the laws of the State of
Louisiana, (hereinafter "Iris") pursuant to which it was agreed that the
Company would acquire all of the issued and outstanding stock of Iris. Iris
and the Company executed a letter of intent on April 25, 2002 to negotiate,
execute and consummate a tax-free stock exchange acquisition of Iris by
September 30, 2002 in which Iris would become a wholly-owned subsidiary of
the Company whereby the stockholders of Iris would receive 120,000 shares of
the Company's $.001 par value Series A preferred stock. On April 25, 2002,
the Company also entered into an agreement with Iris whereby Iris agreed to
render certain services to the Company that are designed to accelerate the
Company's business realignment.
In contemplation of the consummation of the acquisition, on May 23, 2002, Mr.
Dennis Schlagel, the Company's then President and Mr. Blair Merriam, the
Company's then General Manager, resigned their offices (both, however,
remained as Directors of the Company) and Mr. Gary O'Neal, and Mr. Michael
Landers (respectively Chief Executive Officer and President of Iris)
became respectively President and Vice President of Finance of the Company.
Messrs. O'Neal and Landers were also appointed Directors of the Company.
On the same date, Mr. Daniel Thornton (Secretary and a Director of the Company)
was appointed Vice President - Business Development of the Company. (See
"Directors and Executive Officers".)
On September 6, 2002 the Company acquired all of the outstanding stock of Iris
and thus acquired the business of Iris. On September 19, 2002, Form Type 8-K
was submitted, explaining that control of the Company potentially shifted to
the former shareholders of Iris. The earliest date of conversion of the
pg. 15
Series B preferred stock to common stock is March 6, 2003, six months as and
from the date of its issuance. Total Common Stock outstanding at the
effective date of the merger was unchanged at 6,065,209 shares. Total voting
rights of Series A Preferred Stock was unchanged at 700,000. Total voting
rights of Series B Preferred Stock is 7,000,000.
On November 20, 2002 an amended 8-K was submitted with unaudited financial
statements of Iris Broadband as of the effective date of the merger, September
6, 2002. Unaudited statements were included in the filing as the audit of
Iris Broadband's financial statements were not complete by the November
20 submission deadline.
On November 25, 2002 a second amended 8-K was submitted. Per the direction of
the Division of Corporate Finance of the Security and Exchange Commission the
filing did not include the unaudited financials of Iris Broadband.
On December 6, 2002 Mr. Thomas A. Polich, Esq. was appointed to the Board of
Directors. Mr. Polich has fifteen years of experience representing emerging
and developing businesses in the United States, Europe, Latin and South
America and Japan. His legal practice emphasizes regulatory matters and
transactions in new technologies, intellectual property and most recently,
an academic interest in the myriad issues associated with the Insurance
Industry's compliance with the Medicare Secondary Payer Statute including
contracts, computer software to accommodate such compliance, communications
technology, settlement issues, services and business development, marketing
and strategic alliances for closely held, mezzanine and Fortune 500
corporations' compliance with these issues.
His primary practice in the past twelve years has been in corporate and
regulatory law, representing small to mid-size businesses, including their
creation, purchase and sale, expansion, and strategic alliances including
transactions in international and domestic commercial, corporate,
communications and intellectual property law. Responsibilities include
drafting and preparing: corporate organization documents, asset and stock
purchase agreements, shareholder agreements, merger and acquisition
agreements, distribution and sub-agent agreements, joint ventures, secured
transactions, software licensing agreements, web development, e-commerce and
multi-media licensing, domain name and cyber squatting conflict resolution,
domestic and international copyright and trademark filings, clearance,
enforcement and registration, trade secret protection programs and
intellectual property licensing, employment, independent contractor and
consulting agreements, non-disclosure, non-circumvent and non-compete
agreements, IT systems and intellectual capital protection, federal and state
certification and compliance in Medicare and other regulatory matters and
production/distribution agreements with distributors.
Mr. Polich is licensed to practice law in Colorado and is a Member of the
American, Colorado, Denver and Federal Communications Bar Associations and
carries Advanced Professional Credentials from the Association of Professional
Consultants. He holds a Juris Doctorate from the University of Denver,
College of Law with special training at the National University of Singapore
and a BA University of Colorado, Boulder in Environmental Conservation with
special training at Lancaster University, England. Mr. Polich was from
January 1990 - 1993 a Lecturer in Law/Adjunct Professor, University of Denver,
College of Law in European Community Law. Mr. Polich is the Editor-in-chief
Pg. 16
of an Interactive CD-Rom entitled "Multi-state Guide to Telecommunications
Resources - West Region" published by Commerce Clearing House in 1999.
Also on December 6, 2002 the Board of Directors approved a resolution
providing each of the two most recently appointed Directors, Messrs. Fentum
and Polich, an option to purchase 25,000 shares of common stock at an exercise
price of $.16. (Refer to Exhibits A and B.)
On December 12, 2002 the Board of Directors approved a resolution to offer
compensation to non-employee Directors in 2003 as follows: (1) an annual
retainer of $2,500, paid in December 2003 for having served on the Board for
all of 2003; $250 for each board or committee meeting for participation
in person. If participation was via telephone, the fee is $50; (3) an annual
retainer of $250 to committee chairpersons; (4) reimbursement of expenses in
connection with attending Board and committee meetings; (5) a non-
discretionary stock option grant of 10,000 shares at an exercise price of
1.25 times the average of ask prices for December 2003 for having served on
the Board for all of 2003.
SUBSEQUENT EVENTS
On January 15, 2003 the Board of Directors approved the designation of 10,000
shares of the authorized Preferred Shares as Series C. The Series C Preferred
Stock, at the option of the holder thereof may, no sooner than twelve moths
after the purchase date, be converted into the common stock of the Company.
The conversion rate is one share of Series C Preferred Stock into one hundred
shares of common stock. Each share of Series C Preferred Stock has one
hundred votes. The Designation of Rights and Preferences of Series C
Preferred Stock was filed with the State of Delaware.
On January 15, 2003 the Board of Directors approved the issuance of three
thousand eight hundred (3,800) shares of Series C Preferred Stock as part of
the Receipt and Release Agreement between Iris Broadband, Inc., the wholly-
owned subsidiary of the Company, and a company that did sub-contracting work
for Iris Broadband. The voting rights were assigned to Mr. Gary O'Neal, CEO
of the Company.
On January 22, 2003 an S-8 filing was made, advising of the issuance of
110,000 restricted common shares as follows to: (1) Mr. Sidney Bradpiece,
60,000 shares; (2) Mr. John Fentum, Director, 25,000 shares and (3) Mr. Thomas
A. Polich, Director, 25,000 shares. The issuance of these common shares
brings the total number of common shares outstanding as of the date of filing
of this report to 6,175,210.
On January 27, 2003 an amended 8-K was submitted with audited financial
statements of Iris Broadband as of the effective date of the merger, September
6, 2002.
BUSINESS
The Company is a full-service managed security services company and a secure
Internet Protocol ("IP") network services provider. The Company provides its
products and services to its customers (carriers, other IP-based service
providers, systems integrators, business enterprises) on a turnkey or per-
requirement basis. The Company also intends to develop custom solutions for
Pg. 17
securing virtual private networks, email/document security management, digital
rights management, content delivery networks, IP-based video products suite
and others requiring IP based network security solutions. The Company deploys
these integrated solutions on a secure network which is currently deployed on
a Tier 1 Backbone, and can provide integrated access to Tier 2 - 4 and rural
access to cover 85% of the United States and international in 115 countries.
The Company can provide desktop-to-desktop managed security network solutions
and other policy-based services.
An integrated broadband network utilizing wireless technology as well as fiber
optic infrastructure is being planned. Wireless network development is
concentrated initially in the Southeastern United States, particularly in Tier
2 - 4 cities and rural areas. Iris executed a joint venture agreement to
implement the first wireless network in a city in Louisiana and is interested
in implementation of wireless networks in other states. Expansion to other
cities is expected to occur as quickly as capital can be secured. No
assurance can be given that such capital can be secured on terms acceptable
to the Company, or upon any terms.
Services can also be provided in major metropolitan areas of Denver, Houston,
Dallas, Atlanta, Miami, Austin, Orlando, Tampa and New Orleans via DSL and
fiber optic networks with which Iris has contracted for access and transport
services.
Services Offered by the Company
The Company is a secure Internet Protocol ("IP") network services provider
and full-service Managed Security Services Provider.
* Products and services to carriers, other IP-based service providers,
systems integrators and business enterprises on a turnkey or per-requirement
basis, including customers critically needing HIPPA-compliant services.
* Custom solutions utilizing virtual Network Services for:
--Layer2 security (Layer 2 customer separation)
--Virtual Private Networks (Secure and Proprietary)
--Transaction security (e-Commerce and Financial)
--IPVideo surveillance networks
--Authentication service (Document and Network)
--Vulnerability scanning and Network Monitoring
--Data back-up and recovery (Individual and Enterprise)
--Anti-virus Scanning (Individual and Enterprise)
--Content filtering (Spam and E-Mail)
--Firewalls. (Remote and Enterprise)
* Desktop-to-desktop managed security network solutions and other policy-based
services.
* Integrated solutions deployed on a secure network. The network, provided by
Iris Broadband, a wholly owned subsidiary of the Company, covers nearly all of
the United States and 115 countries.
* Custom solutions utilizing FSPS Network Technologies for:
--Access Control and Physical Security Systems
--CCTV Employment and Integration
--Physical facilities construction and installation
--Wireless networks deployment
--Cable and fiber optic networks deployment.
FSPS Network Services
Pg. 18
Security Applications and Services
--Layer2 security
--Virtual Private Networks (Secure and Proprietary)
--Transaction security (e-Commerce and Financial)
--IPVideo surveillance networks
--Authentication service (Document and Network)
--Vulnerability scanning and Network Monitoring
--Data back-up and recovery (Individual and Enterprise)
--Anti-virus Scanning (Individual and Enterprise)
--Content filtering (Spam and E-Mail)
--Firewalls. (Remote and Enterprise)
FSPS Network Technologies
FSPS Network Technologies provides the in-house capability of meeting
immediate customer requirements desiring a specific supporting physical
infrastructure to integrate with the services delivered by FSPS Network
services. These capabilities are:
* Access Control and Physical Security Systems integrated into a
comprehensive security plan for enterprise, office building or office park
environments
* Communications Installation and Construction Services, includes:
Physical Facility Construction
FSPS affiliates are fully licensed and bonded and provide a range of planning,
design, construction and installation services. These include physical
facilities, e.g., collocation facilities, building huts and regeneration
sites.
Site planning and design
Site preparation
Equipment install and de-install
Tower and Antenna Erection
Install generators and emergency backup systems
Engineering
CAD drawings
Asset management and logistics control
Wireless Deployment
Wireless Internet access networks in the 2.4 and 5.8 GHz range, as well as
Free Space Optics (FSO) and 60mm Wave (MMW), are proliferating throughout the
U.S. FSPS affiliates are experienced in the design and deployment of these
networks (including Terabeam, Lucent, Motorola and Nortel), and in the
supporting tower erection and antenna installation.
Merger and Acquisition Strategy
The Company intends to seek out privately held companies which are engaged
in the Internet and data security and related industries and to acquire
suitable companies, and by this means grow quickly through acquisition as
well as internally. The Company's principals believe that significant
growth must also be accomplished through a merger and acquisition
strategy. There are opportunities to create a roll-up of small and
medium-sized privately held companies looking for expansion funding and
the ability to create an exit opportunity. The Company offers a public
vehicle with a relatively small number of shares outstanding and low
share price, however there is no guarantee that this strategy will be
successful.
Pg. 19
RESULTS OF OPERATIONS
The results of operations of Iris have been included in the consolidated
results of the Company since the date of acquisition effective September 6,
2002. Revenue for the nine months ended December 31, 2002 was $94,626 and
$638 for the nine months ended December 31, 2001. For the three months ended
December 31, 2002 revenue was $72,916 and for the three months ended December
31, 2001 it was $29. Revenue came from two primary sources. The first being
the resale of dedicated private line data circuits, and the second being the
realization of income from Deferred IRU Income amortized over the term of the
original amounts. Operating expenses consist of salaries and general and
administrative expenses.
Salary expense for the nine months ended December 31, 2002 was $123,750 and
$-0-for the nine months ended December 31, 2001. Salary expense for the three
months ended December 31, 2002 was $75,750 and $-0- for the three months ended
December 31, 2001. Salaries are for three officers of the Company (Gary
O'Neal, Michael Landers and Edward Reynolds) established through employment
agreements effective September 1, 2002.
General and administrative expense for the nine months ended December 31,
2002 was $551,501 and $259,032 for the nine months ended December 31, 2001.
General and administrative expense for the three months ended December 31,
2002 was $96,736 and $87,377 for the three months ended December 31, 2001.
Approximately 44 percent of general and administrative expense for the quarter
was due to the write-off of a portion of Iris Broadband's accounts receivable.
A company for which Iris did work more than a year ago filed for bankruptcy
protection and there were no remaining assets to pay these debts.
Approximately 18 percent of general and administrative expense for the
quarter was payment of professional fees, primarily for accounting services
in connection with the audit of Iris Broadband's financial records and for
ongoing services.
The Company does not have any non-officer employees.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, the Company had current assets of $523,045. At
December 31, 2001 the current asset balance was $29,192. Total assets for
the same respective periods were $1,234,474 and $36,375.
As of December 31, 2002, the Company had current liabilities of $715,802.
At December 31, 2001 the current liability balance was $234,001. Long term
liabilities at December 31, 2002 were $882,995. There were no long term
liabilities at December 31, 2001. Total Liabilities as of December 31, 2002
were $1,598,757 and were $234,001 as of December 31, 2001.
Total shareholders' equity was ($364,283) and ($197,626)as of December 31,
2002 and December 31, 2001, respectively.
The significant changes in the accounts from 2001 to 2002 were due solely to
the acquisition of Iris Broadband by the Company effective September 6, 2002.
Iris has executed Indefeasible Rights of Use (IRU) agreements with
telecommunication and data network carriers that grant and convey to the user
the exclusive, indefeasible right of access to and use of conduit or fiber
Pg. 20
optic fibers owned by Iris. The terms of the agreements are from seventeen
to twenty-five years. Agreements can be for one- time up-front payments or
for a down payment and subsequent monthly or annual payments for the rights
of use during the entire term of the agreement. The costs of acquisition
and construction are recorded as an asset account, Deferred Costs. The costs
are expensed each reporting period according to the straight line amortization
over the term of the original amount. When an up-front payment is made,
it is recorded as a liability account, Deferred Income. Income is then
realized each reporting period according to the straight line amortization
over the term of the original amount.
The Company's auditor has issued an opinion questioning the Company's ability
to continue as a going concern, and we believe our current cash and cash
equivalents are, in fact, not sufficient to meet our anticipated cash needs
for working capital and capital expenditures. The Company intends to meet its
needs through borrowing or through the issuance of equity.
PLAN OF OPERATION
The Company is operating as a secure Internet Protocol ("IP") network
services provider and full-service Managed Security Services Provider.
It offers products and services to carriers, other IP-based service providers,
systems integrators and business enterprises on a turnkey or per-requirement
basis, including customers critically needing HIPPA-compliant services. FSPS
Network Technologies provides the in-house capability of meeting immediate
customer requirements desiring a specific supporting physical infrastructure to
integrate with the services delivered by FSPS Network services.
KNOWN RISKS AND TRENDS
The Company's business plan for its own operations is presently reliant on
the success of the acquisition of Iris Broadband, Inc. There is no means of
judging the success of the venture. There is significant competition in the
IP and data security fields, and certainly much better funded companies
competing in the marketplace.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
-Shares Outstanding-
Type of Security 9/30/02 12/31/02 Increase
Common Stock 6,065,209 6,065,210 1
Series A Preferred Stock 70,000 70,000 none
Series B Preferred Stock 70,000 70,000 none
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Pg. 21
Item 5. Other Information.
None.
Item 6. Exhibits and Reports.
EXHIBITS
Exhibit A. Option for John Fentum to Purchase Common Stock
Exhibit B. Option for Thomas A. Polich to Purchase Common Stock
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed in its behalf by the undersigned, thereunto
duly authorized.
Federal Security Protection Services, Inc.
Date: February 13, 2003 /s/ Gary S. O'Neal
________________ __________________________
Gary S. O'Neal, President
EXHIBIT A
THE OPTION REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS, NOR HAS THE STOCK
UNDERLYING THIS OPTION. SAID OPTION WAS ACQUIRED FOR INVESTMENT AND MAY NOT
BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH OPTION UNDER THE SECURITIES ACT OF 1933 AND
APPLICABLE STATE SECURITIES LAWS, UNLESS IN THE OPINION OF COUNSEL (WHICH
SHALL BE REASONABLY SATISFACTORY TO THE COMPANY) THE TRANSFER WILL VIOLATE
THE REGISTRATION REQUIREMENTS OF FEDERAL OR APPLICABLE STATE SECURITIES LAWS.
FEDERAL SECURITY PROTECTION SERVICES, INC.
OPTION TO PURCHASE COMMON STOCK
Option to Purchase
25,000 Shares
of
Common Stock, par value $.001 per share
This is to certify that Mr. John Fentum is entitled subject to the terms and
conditions hereinafter set forth, to purchase 25,000 shares of the $.001
Common Stock of Federal Security Protection Services, Inc., a corporation
organized and existing under and by virtue of the laws of the State of
Delaware (the "Company") from the Company at a price per share and on the
terms set forth herein and to receive a certificate or certificates
representing said shares of Common stock so purchased on presentation and
surrender of Notice of Exercise attached hereto, together with the payment
of the purchase price of each share purchased either in cash or by way of a
certified check, or other check made payable to the order of the Company.
Pg. 22
The purchase rights represented by this Option are exercisable at a price per
share of Common Stock of sixteen cents ($0.16) per share. This Option shall
be valid and binding upon the Company for a period of sixty (60) months
commencing the date of the issuance of this Option.
Subject to the terms and conditions herein contained this purchase rights
represented by this Option are exercisable at the option of the registered
owner hereof, in whole or in part, at any time, or in part from time to time,
within the life of this Option, provided, however, that these option rights
shall not be exercisable with respect to a fraction of a share of Common
Stock. If the registered owner hereof shall exercise this Option as to less
than all of the shares of Common Stock covered hereby, at any time, or from
time, during the life of this Option, this Option shall be surrendered to the
Company along with the Notice of Exercise and payment, as above stated, and
1.1 shall be canceled. The Company shall execute and deliver a new Option of
like tenor for the balance of the shares purchasable hereunder. The Option
issued for said balance, in place of this Option, shall expire on the same
date as this Option and the issuance of a new Option for the balance of said
shares of Common Stock shall in no way extend the life of this Option.
Certain Definitions: For all purposes of this Option, unless the context
otherwise requires, the following terms shall have the following respective
meanings:
* "Additional Shares" shall mean all shares, of whatever class, issued by the
Company after the date of this Option.
* "Share Equivalent" shall mean any Convertible Security or any warrant, option
or other right to subscribe for or purchase any Additional Shares or any
Convertible Security.
* "Convertible Security" shall mean any security of the Company convertible
into or by its terms exchangeable for Additional Shares.
ARTICLE 1. Exercise of Option
1.1 Manner of Exercise: Prior to the Expiration Date, this Option may be
exercised, in whole or in part, at any time or from time to time. To
exercise, the Holder shall deliver to the Company, (a) a written notice, in
substantially the form of the Exercise of Notice, attached as Exhibit A, of
such Holder's election to exercise this Option which shall be duly executed
by the Holder, his duly authorized agent or attorney, (b) a certified or bank
cashier's check payable to the order of the Company in an amount equal to the
aggregate Exercise Price for the number of Option Shares being purchased and
(c) this Option. The Company shall, as promptly as practicable, execute and
deliver or cause to be executed and delivered in accordance with such notice,
a certificate or certificates evidencing the aggregate number of Option Shares
specified in such Notice. Such certificate or certificates shall be deemed
to have been issued, and such Holder or other person so designated shall be
deemed for all purposes to have become a holder of record of such shares, as
of the date the Notice is received by the Company. If this Option is
exercised only in part, the Company shall, at the time of delivery of the
certificate or certificates evidencing the Shares specified in such Notice,
deliver to the Holder a new Option evidencing the right to purchase the
remaining Option Shares called for by this Option, which new Option shall in
pg. 23
all other respects be identical to this Option. The Company shall pay all
expenses, taxes and other charges payable in connection with the issuance and
delivery of stock certificates and new Options.
1.2 Fractional Shares: No fractional Shares will be issued in connection with
any purchase in the exercise of this Option. In lieu of such fractional
shares the Company shall make a cash refund equal to the product of the
applicable fraction multiplied by the Exercise Price paid by the Holder for
one Option Share upon such exercise.
ARTICLE 2. Transfer
Subject to Compliance with the Securities Act of 1933, as amended
(the "Securities Act") this Option is transferable, in whole or in part,
at the offices of the Company by the Holder in person or by duly authorized
attorney, upon presentation of this Option certificate and an Assignment,
substantially in the form of Exhibit B hereto, properly completed and executed.
ARTICLE 3. Adjustment of Exercise Price and Number of Option Shares
The number and kind of securities purchasable upon the exercise of this
Option and the Exercise Price shall be subject to adjustment from time to
time upon the happening of certain events as follows:
3.1 Reclassification, Consolidation or Merger:
If (a) the outstanding securities of the class issuable upon exercised of this
Option are changed or reclassified (other than as a result of a division,
combination, increase or decrease in the number of such securities
outstanding) or, (b) if the Company is consolidated or merged with or into
another corporation (other than a merger with another corporation in which the
Company is the surviving corporation and which does not result in any
reclassification or change other than a division or combination of outstanding
securities issuable upon the exercise of this Option or an increase or
decrease in the number such securities outstanding) or (c) if all or
substantially all of the assets of the Company are sold or transferred, the
Company or such successor or purchasing corporation, as the case may be,
shall, without requiring any additional consideration therefore, issue a new
Option in exchange for this Option, providing that the Holder of this Option
shall have the right to exercise such new Option upon terms not less favorable
to the Holder than those then applicable to this Option and to receive upon
exercise, in lieu of each Share issuable upon exercise of this Option, the
kind and amount of shares of stock, other securities, money or property
receivable upon such reclassification, change, consolidation, merger, sale or
transfer by the Holder of one share of Common Stock issuable upon exercise of
this Option had this Option been exercised immediately prior to such
reclassification, change, consolidation, merger, sale or transfer. Such new
Option shall provide for adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Article 3. The
Holder shall be entitled to the benefits of the new option immediately upon
any such reclassification, change, consolidation, merger, sale or transfer,
whether or not a certificate evidencing such new Option has been issued. The
provisions of this Section 3.1 shall similarly apply to successive
pg. 24
reclassifications, changes, consolidations, changes, consolidations, mergers,
sales and exchanges.
3.2 Subdivision or Combination: If, while this Option remains outstanding and
unexpired, the Company subdivides or combines it outstanding securities of the
class issuable upon exercise of this Option, the Exercise Price shall, in case
of subdivision, be proportionately reduced as of the effective date of such
subdivision, or shall be, in the case of combination, proportionately
increased as of the effective date of such combination.
3.3. Stock Dividends: If the Company at any time while this Option is
outstanding and unexpired pays a dividend or makes any other distribution on
its shares payable in shares, then the Exercise Price shall be adjusted, as of
the date of such payment or other distribution to that price determined by
multiplying the Exercise Price in effect immediately prior to such payment or
other distribution by a fraction (a) the numerator of such shall be the total
number of Shares outstanding immediately prior to such dividend or
distribution and (b) the denominator of which shall be the total number of
shares outstanding immediately after such dividend or distribution.
3.4 Liquidating Dividends, Etc. If the Company at any time while this Option
is outstanding and unexpired distributes its assets to the holders of its
shares as a dividend in liquidation or partial liquidation or as a return of
capital other than as a dividend payable out of funds legally available for
dividends under the laws of the State of Delaware, the Holder of this Option
shall, upon exercise, be entitled to receive, in addition to the number of
Shares receivable, and without payment of any additional consideration, a sum
equal to the amount of such assets as would have been payable to such Holder
as owner of that number of Shares had such Holder been the holder of record of
such Common Stock on the record date for such distribution and an appropriate
provision therefore shall be made a part of any such distribution.
3.5 Issuance of Additional Shares of Common Stock: If, while this Option is
outstanding and unexpired, the Company issues any Additional Shares (other
than as provided in Section 3.1 through 3.4) at a price per share less than
the Exercise Price, or without consideration, then the Exercise Price upon
each such issuance shall be adjusted to that price determined by multiplying
the Exercise Price by a fraction:
(a) the numerator of which shall be the number of Shares outstanding
immediately prior to issuance of such Additional Shares plus the number of
Shares which the aggregate consideration received by the Company for the total
number of Additional Shares so issued would purchase at the Exercise Price,
and
(b) the denominator of which shall be the number of shares outstanding
immediately after issuance of such Additional Shares.
This Section shall not apply under any circumstances for which adjustment is
provided in Sections 3.1, 3.2, 3.3, or 3.4. No adjustment of the Exercise
Price shall be made under this Section 3.5 upon issuance of any additional
shares which are issued pursuant to any Common Stock Equivalent if upon the
issuance of any such Common Stock Equivalent (i) any such adjustment shall
previously have been made pursuant to Section or (ii) no adjustment was
Pg. 25
required by Section 3.6.
3.6. Issuance of Common Stock Equivalents: If, at any time while this Option
is outstanding and unexpired, the Company issues any Common Stock Equivalent
and the price per share for which Additional Shares may be issuable thereafter
pursuant to such Common Stock Equivalent shall be less than the Exercise Price,
or, if after any such issuance, the price per share for which Additional
Shares may be issuable thereafter pursuant to such Common Stock Equivalent
shall be less than the Exercise Price, or, if after any such issuance, the
price per share for which Additional Shares may be issuable thereafter is
amended, and such price as so amended shall be less than the Exercise Price at
the time of such amendment, then the Exercise Price upon each such issuance or
amendment shall be adjusted as provided in Section 3.5 on the basis that (a)
the maximum number of Additional Shares issuable pursuant to all such Common
Stock Equivalents shall be deemed to have been issued as of the earlier of
(i) the date on which the Company shall enter into a firm contract for the
issuance of such Common Stock Equivalents or (ii) the date of actual issuance
of such Common Stock Equivalent, and (b) the aggregate consideration for such
maximum of Additional Shares shall be deemed to be the minimum consideration
received and receivable by the Company for the issuance of such Additional
Shares pursuant to such Common Stock Equivalent. No adjustment of the
Exercise Price shall be made under this Section 3.6 upon the issuance of any
convertible security which is issued pursuant to the exercise of any Options
or other subscription or purchase rights thereunder, if any adjustment shall
previously have been made in the Exercise Price then in effect upon the
issuance of such Options or other rights pursuant to this Section 3.6.
3.7 Other Provisions Applicable to Adjustments Under this Article 3. The
following provisions shall be applicable to adjustments in the Exercise Price
provided in this Article 3:
(a) Computation of Consideration. The consideration received by the Company
shall be deemed to be the following: To the extent that any Additional Shares
or any Common Stock Equivalents shall be issued for a cash consideration, the
consideration received by the Company, if such Additional Shares or Common
Stock Equivalents are offered by are sold to underwriters or dealers for
public offering without a subscription offering, the initial public offering
price, in any case excluding any amounts paid or receivable for accrued
interest or accrued dividends and without deduction of any compensation,
discounts, commissions or expenses paid or incurred by the Company for and in
the underwriting of, or otherwise in connection with, the issue of the shares;
to the extent that such issuance shall be for a consideration other than cash,
then except as herein otherwise expressly provided, the fair market value of
such consideration at the time of such issuance as determined in good faith by
the Board of Directors of the Company. The consideration for any Additional
Shares of Common Stock issuable pursuant to any Common Stock Equivalents shall
be the consideration received by the Company for issuing such Common Stock
Equivalents, plus the additional consideration payable to the Company upon the
exercise, conversion or exchange of such Common Stock Equivalents. In case of
the issuance of any Additional Shares or Common Stock Equivalents in payment
or satisfaction of any dividend upon any class of stock other than the Shares,
the Company shall be deemed to have received for such Additional Shares or
Common Stock Equivalents a consideration equal to the amount of such dividend
so paid or satisfied.
(b) Readjustment of Exercise Price. Upon the expiration of the right to
Pg. 26
convert, exchange or exercise any Common Stock Equivalent the issuance of
which effected an adjustment in the Exercise Price, if any such Common Stock
Equivalent shall not have been converted, exercised or exchanged, the number
of shares of Common Stock deemed to be issued and outstanding by reason of the
fact that they were issuable upon conversion, exchange or exercise of any such
Common Stock Equivalent, shall no longer be computed as set forth above and
the Exercise Price shall forthwith be readjusted and thereafter be the price
which it would have been (but reflecting any other adjustments in the Exercise
Price made pursuant to the provisions of this Article 3 after the issuance of
such Common Stock Equivalent) had the adjustment of the Exercise Price been
made in accordance with the issuance or sale of the number of Additional
Shares actually issued upon conversion, exchange or issuance of such Common
Stock Equivalent and thereupon only the number of Additional Shares actually
so issued shall be deemed to have been issued and only the consideration
actually received by the Company (computed as in clause (a) of this section
3.7) shall be deemed to have been received by the Company.
(c) Treasury Shares: The number of shares at any time outstanding shall not
include any shares directly or indirectly owned or held by for the account of
the Company or any of its subsidiaries.
3.8 Other Action Affecting Common Stock. If the Company shall take any
action affecting its shares, other than an action described Sections 3.1
through 3.7, inclusive, which, in the opinion of the Board of Directors
would have a materially adverse affect upon the rights or the holder of this
Option, the Exercise Price shall be adjusted in such manner and at such time
as the Board of Directors may in good faith determine to equitable in the
circumstances.
3.9 Adjustment of Number of Shares. Upon each adjustment in the Exercise
Price pursuant to any provision of this Article 3, the number of shares
purchasable shall be adjusted, to the nearest whole share, to the product
obtained by multiplying such number of shares purchasable immediately prior to
such adjustment in the Exercise Price by a fraction, the numerator of which
shall the Exercise Price immediately prior to such adjustment and the
denominator of which shall be the Exercise Price immediately thereafter.
3.10. Notice of Adjustments. Whenever the Exercise Price shall be adjusted,
the Company shall make a certificate signed by its President or Vice President
and by its Treasurer, Assistant Treasurer, Secretary or Assistant Secretary,
(if not referred to be said titles said certificate shall be signed by the
Company's Chief Executive Officer and its Chief Financial Officer or the
deputy to each such person) setting forth in detail, the event requiring
adjustment, the amount of adjustment, the method of calculating such
adjustment (including describing the basis on which the Board of Directors
made its determination) and the Exercise Price after giving effect to such
adjustment and, promptly after each such adjustment, shall cause copies of
such certificate to be mailed (by first class mail postage prepaid) to the
Holder. A determination of any adjustment to the Exercise Price or the number
or kind of shares or other securities issuable upon exercise of this Option,
made by independent certified public accountants selected by the Company,
shall be final and binding upon all parties.
ARTICLE 4. Further Covenants of the Company
Pg. 27
4.1 Option Share. The Company covenants and agrees that all shares which may
be issued upon exercise of this Option, will, upon issuance, be duly and
validly issued, fully paid, non-assessable and free from all taxes, liens and
charges. The Company further covenants and agrees that during the period
within which the rights represented by this Option may be exercised, the
Company shall at all times have authorized and reserved for the purpose of
issuance upon exercise of the purchase rights evidenced by this Option, a
sufficient number of shares of its capital stock to provide for the exercise
of the rights represented by this Option and of Common Shares into which the
Common Shares are convertible.
4.2 Exchange of Options. Upon surrender for exchange or transfer of any
Option Certificate, properly endorsed to the Company, the Company at the
Holder's expense will promptly issue and deliver to or upon the order of
the Holder a new Option Certificate or certificates of like tenor, in the
name of such Holder or as such holder as Holder may direct. Until transfer
of this Option Certificate on the books of the Company, the Company may
treat the registered Holder hereof as the owner for all purposes.
ARTICLE 5. Negation of Voting and Dividend Rights
This Option shall not entitle Holder to any voting rights or other rights as a
holder of stock of the Company, or to any other rights whatsoever, except the
rights herein expressed. No dividends of any kind or character, shall be
payable or accrue in respect to this Option or the interest represented hereby
or the Common Stock purchasable hereunder or the Common Stock into which said
Common Stock shall be convertible, unless and until this Option is exercised
and if exercised, then only to the extent that it is exercised.
ARTICLE 5. Governing Law.
This Option shall be governed and construed in accordance with the laws of the
State of Delaware without giving effect to the principles of conflicts of law.
IN WITNESS WHEREOF, the Company has caused this Option Certificate to be
executed on this 9th day of December 2002, by its proper corporate officers
thereunto duly authorized.
FEDERAL SECURITY PROTECTION SERVICES, INC.
By /s/ Gary S. O'Neal by /s/ Daniel Thornton
President Secretary
EXHIBIT A
EXERCISE NOTICE
(To be signed only upon exercise of the Option)
To: Federal Security Protection Services, Inc.
The undersigned, the Holder of the enclosed Option Certificate, hereby
irrevocably elects to exercise the purchase right represented by such Option
Certificate to purchase hereunder _____________________________________shares
Pg. 28
of the Common Stock of Federal Security Protection Services, Inc. and herewith
makes payment to Federal Security Protection Services, Inc.
of $_________________, therefore and requests that the certificate or
certificates for such shares be issued in the name of, and delivered to the
undersigned.
Date:_______________ ___________________________________
___________________________________
Print Name
(Signature must conform
in all respects to name
of Holder as specified
on the face of the
Option Certificate.)
Address:
___________________________________
___________________________________
Taxpayer Identification Number:
___________________________________
*/Insert the number of shares called for on the face of the Option Certificate
or, in the case of a partial exercise, the portion thereof as to which the
Option is being exercised, in either case without making any adjustment for
any stock or other securities or property or cash which, pursuant to the
adjustment provisions of the Option, may be deliverable upon exercise.
EXHIBIT B
FORM OF ASSIGNMENT
(To be signed only upon transfer of Option*)
For value received, the undersigned hereby sells, assigns and
transfers to ___________________ the right represented by the
attached Option Certificate to purchase _______________________
Option Shares of Federal Security Protection Services, Inc., as defined
in the Option Certificate, with full power of substitution.
Dated:_______________________
_________________________________________
_________________________________________
(Print Name)
Pg. 29
(Signature must conform in all respects to
name of Holder as specified on the face
of the Option Certificate)
Address:
_________________________________________
_________________________________________
Taxpayer Identification Number
_________________________________________
*/ The Option Certificate and the rights embodied therein may not be
transferable and can only be transferred in a manner which will not constitute
a violation of the Securities Act of 1933 (the "Act") and which will not cause
the original issuance of the Option Certificate to be a violation of the Act.
The Company may require an opinion of counsel acceptable to the Company that
any such transfer would not bring about the results stated and, in the event
the Company determines that it can honor the request for transfer, the Company
may impose such requirements and restrictions upon the recipient as the
Company deems reasonable. This may include, but may not be limited to, the
requirement that the proposed recipient execute an investment letter in a form
acceptable to the Company, as a condition precedent to the transfer.
EXHIBIT B
THE OPTION REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS, NOR HAS THE STOCK
UNDERLYING THIS OPTION. SAID OPTION WAS ACQUIRED FOR INVESTMENT AND MAY NOT
BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH OPTION UNDER THE SECURITIES ACT OF 1933 AND
APPLICABLE STATE SECURITIES LAWS, UNLESS IN THE OPINION OF COUNSEL (WHICH
SHALL BE REASONABLY SATISFACTORY TO THE COMPANY) THE TRANSFER WILL VIOLATE
THE REGISTRATION REQUIREMENTS OF FEDERAL OR APPLICABLE STATE SECURITIES LAWS.
FEDERAL SECURITY PROTECTION SERVICES, INC.
OPTION TO PURCHASE COMMON STOCK
Option to Purchase
25,000 Shares
of
Common Stock, par value $.001 per share
This is to certify that Mr. Thomas A. Polich is entitled subject to the terms
and conditions hereinafter set forth, to purchase 25,000 shares of the $.001
Common Stock of Federal Security Protection Services, Inc., a corporation
organized and existing under and by virtue of the laws of the State of Delaware
(the "Company") from the Company at a price per share and on the terms set
forth herein and to receive a certificate or certificates representing said
shares of Common stock so purchased on presentation and surrender of Notice of
Exercise attached hereto, together with the payment of the purchase price of
Pg. 30
each share purchased either in cash or by way of a certified check, or other
check made payable to the order of the Company.
The purchase rights represented by this Option are exercisable at a price per
share of Common Stock of sixteen cents ($0.16) per share. This Option shall
be valid and binding upon the Company for a period of sixty (60) months
commencing the date of the issuance of this Option.
Subject to the terms and conditions herein contained this purchase rights
represented by this Option are exercisable at the option of the registered
owner hereof, in whole or in part, at any time, or in part from time to time,
within the life of this Option, provided, however, that these option rights
shall not be exercisable with respect to a fraction of a share of Common Stock.
If the registered owner hereof shall exercise this Option as to less than all
of the shares of Common Stock covered hereby, at any time, or from time,
during the life of this Option, this Option shall be surrendered to the
Company along with the Notice of Exercise and payment, as above stated, and
1.1 shall be canceled. The Company shall execute and deliver a new Option of
like tenor for the balance of the shares purchasable hereunder. The Option
issued for said balance, in place of this Option, shall expire on the same
date as this Option and the issuance of a new Option for the balance of said
shares of Common Stock shall in no way extend the life of this Option.
Certain Definitions: For all purposes of this Option, unless the context
otherwise requires, the following terms shall have the following respective
meanings:
* "Additional Shares" shall mean all shares, of whatever class, issued by the
Company after the date of this Option.
* "Share Equivalent" shall mean any Convertible Security or any warrant,
option or other right to subscribe for or purchase any Additional Shares or
any Convertible Security.
* "Convertible Security" shall mean any security of the Company convertible
into or by its terms exchangeable for Additional Shares.
ARTICLE 1. Exercise of Option
1.1 Manner of Exercise: Prior to the Expiration Date, this Option may be
exercised, in whole or in part, at any time or from time to time. To exercise,
the Holder shall deliver to the Company, (a) a written notice, in
substantially the form of the Exercise of Notice, attached as Exhibit A, of
such Holder's election to exercise this Option which shall be duly executed by
the Holder, his duly authorized agent or attorney, (b) a certified or bank
cashier's check payable to the order of the Company in an amount equal to the
aggregate Exercise Price for the number of Option Shares being purchased and
(c) this Option. The Company shall, as promptly as practicable, execute and
deliver or cause to be executed and delivered in accordance with such notice,
a certificate or certificates evidencing the aggregate number of Option Shares
specified in such Notice. Such certificate or certificates shall be deemed to
have been issued, and such Holder or other person so designated shall be
deemed for all purposes to have become a holder of record of such shares, as
of the date the Notice is received by the Company. If this Option is
exercised only in part, the Company shall, at the time of delivery of the
pg. 31
certificate or certificates evidencing the Shares specified in such Notice,
deliver to the Holder a new Option evidencing the right to purchase the
remaining Option Shares called for by this Option, which new Option shall in
all other respects be identical to this Option. The Company shall pay all
expenses, taxes and other charges payable in connection with the issuance and
delivery of stock certificates and new Options.
1.2 Fractional Shares: No fractional Shares will be issued in connection
with any purchase in the exercise of this Option. In lieu of such fractional
shares the Company shall make a cash refund equal to the product of the
applicable fraction multiplied by the Exercise Price paid by the Holder for
one Option Share upon such exercise.
ARTICLE 2. Transfer
Subject to Compliance with the Securities Act of 1933, as amended (the
"Securities Act") this Option is transferable, in whole or in part, at the
offices of the Company by the Holder in person or by duly authorized
attorney, upon presentation of this Option certificate and an Assignment,
substantially in the form of Exhibit B hereto, properly completed and executed.
ARTICLE 3. Adjustment of Exercise Price and Number of Option Shares
The number and kind of securities purchasable upon the exercise of this Option
and the Exercise Price shall be subject to adjustment from time to time upon
the happening of certain events as follows:
3.1 Reclassification, Consolidation or Merger:
If (a) the outstanding securities of the class issuable upon exercised of
this Option are changed or reclassified (other than as a result of a
division, combination, increase or decrease in the number of such securities
outstanding) or, (b) if the Company is consolidated or merged with or into
another corporation (other than a merger with another corporation in which
the Company is the surviving corporation and which does not result in any
reclassification or change other than a division or combination of outstanding
securities issuable upon the exercise of this Option or an increase or
decrease in the number such securities outstanding) or (c) if all or
substantially all of the assets of the Company are sold or transferred, the
Company or such successor or purchasing corporation, as the case may be,
shall, without requiring any additional consideration therefore, issue a new
Option in exchange for this Option, providing that the Holder of this Option
shall have the right to exercise such new Option upon terms not less favorable
to the Holder than those then applicable to this Option and to receive upon
exercise, in lieu of each Share issuable upon exercise of this Option, the
kind and amount of shares of stock, other securities, money or property
receivable upon such reclassification, change, consolidation, merger, sale or
transfer by the Holder of one share of Common Stock issuable upon exercise of
this Option had this Option been exercised immediately prior to such
reclassification, change, consolidation, merger, sale or transfer. Such new
Option shall provide for adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Article 3. The
Holder shall be entitled to the benefits of the new option immediately upon
Pg. 32
any such reclassification, change, consolidation, merger, sale or transfer,
whether or not a certificate evidencing such new Option has been issued.
The provisions of this Section 3.1 shall similarly apply to successive
reclassifications, changes, consolidations, changes, consolidations, mergers,
sales and exchanges.
3.2 Subdivision or Combination: If, while this Option remains outstanding and
unexpired, the Company subdivides or combines it outstanding securities of
the class issuable upon exercise of this Option, the Exercise Price shall, in
case of subdivision, be proportionately reduced as of the effective date of
such subdivision, or shall be, in the case of combination, proportionately
increased as of the effective date of such combination.
3.3. Stock Dividends: If the Company at any time while this Option is
outstanding and unexpired pays a dividend or makes any other distribution on
its shares payable in shares, then the Exercise Price shall be adjusted, as of
the date of such payment or other distribution to that price determined by
multiplying the Exercise Price in effect immediately prior to such payment or
other distribution by a fraction (a) the numerator of such shall be the total
number of Shares outstanding immediately prior to such dividend or
distribution and (b) the denominator of which shall be the total number of
shares outstanding immediately after such dividend or distribution.
3.4 Liquidating Dividends, Etc. If the Company at any time while this Option
is outstanding and unexpired distributes its assets to the holders of its
shares as a dividend in liquidation or partial liquidation or as a return of
capital other than as a dividend payable out of funds legally available for
dividends under the laws of the State of Delaware, the Holder of this Option
shall, upon exercise, be entitled to receive, in addition to the number of
Shares receivable, and without payment of any additional consideration, a sum
equal to the amount of such assets as would have been payable to such Holder
as owner of that number of Shares had such Holder been the holder of record
of such Common Stock on the record date for such distribution and an
appropriate provision therefore shall be made a part of any such
distribution.
3.5 Issuance of Additional Shares of Common Stock: If, while this Option is
outstanding and unexpired, the Company issues any Additional Shares (other
than as provided in Section 3.1 through 3.4) at a price per share less than
the Exercise Price, or without consideration, then the Exercise Price upon
each such issuance shall be adjusted to that price determined by multiplying
the Exercise Price by a fraction:
(a) the numerator of which shall be the number of Shares outstanding
immediately prior to issuance of such Additional Shares plus the number of
Shares which the aggregate consideration received by the Company for the total
number of Additional Shares so issued would purchase at the Exercise Price,
and
(b) the denominator of which shall be the number of shares outstanding
immediately after issuance of such Additional Shares.
This Section shall not apply under any circumstances for which adjustment
is provided in Sections 3.1, 3.2, 3.3, or 3.4. No adjustment of the Exercise
Price shall be made under this Section 3.5 upon issuance of any additional
Pg. 33
shares which are issued pursuant to any Common Stock Equivalent if upon the
issuance of any such Common Stock Equivalent (i) any such adjustment shall
previously have been made pursuant to Section or (ii) no adjustment was
required by Section 3.6.
3.6. Issuance of Common Stock Equivalents: If, at any time while this Option
is outstanding and and unexpired, the Company issues any Common Stock
Equivalent and the price per share for which Additional Shares may be issuable
thereafter pursuant to such Common Stock Equivalent shall be less than the
Exercise Price, or, if after any such issuance, the price per share for which
Additional Shares may be issuable thereafter pursuant to such Common Stock
Equivalent shall be less than the Exercise Price, or, if after any such
issuance, the price per share for which Additional Shares may be issuable
thereafter is amended, and such price as so amended shall be less than the
Exercise Price at the time of such amendment, then the Exercise Price upon
each such issuance or amendment shall be adjusted as provided in Section 3.5
on the basis that (a) the maximum number of Additional Shares issuable
pursuant to all such Common Stock Equivalents shall be deemed to have been
issued as of the earlier of (i) the date on which the Company shall enter into
a firm contract for the issuance of such Common Stock Equivalents or (ii) the
date of actual issuance of such Common Stock Equivalent, and (b) the aggregate
consideration for such maximum of Additional Shares shall be deemed to be the
minimum consideration received and receivable by the Company for the issuance
of such Additional Shares pursuant to such Common Stock Equivalent. No
adjustment of the Exercise Price shall be made under this Section 3.6 upon the
issuance of any convertible security which is issued pursuant to the exercise
of any Options or other subscription or purchase rights thereunder, if any
adjustment shall previously have been made in the Exercise Price then in
effect upon the issuance of such Options or other rights pursuant to this
Section 3.6.
3.7 Other Provisions Applicable to Adjustments Under this Article 3. The
following provisions shall be applicable to adjustments in the Exercise Price
provided in this Article 3:
(a) Computation of Consideration. The consideration received by the Company
shall be deemed to be the following: To the extent that any Additional Shares
or any Common Stock Equivalents shall be issued for a cash consideration, the
consideration received by the Company, if such Additional Shares or Common
Stock Equivalents are offered by are sold to underwriters or dealers for
public offering without a subscription offering, the initial public offering
price, in any case excluding any amounts paid or receivable for accrued
interest or accrued dividends and without deduction of any compensation,
discounts, commissions or expenses paid or incurred by the Company for and in
the underwriting of, or otherwise in connection with, the issue of the shares;
to the extent that such issuance shall be for a consideration other than cash,
then except as herein otherwise expressly provided, the fair market value of
such consideration at the time of such issuance as determined in good faith by
the Board of Directors of the Company. The consideration for any Additional
Shares of Common Stock issuable pursuant to any Common Stock Equivalents shall
be the consideration received by the Company for issuing such Common Stock
Equivalents, plus the additional consideration payable to the Company upon
the exercise, conversion or exchange of such Common Stock Equivalents. In
case of the issuance of any Additional Shares or Common Stock Equivalents in
payment or satisfaction of any dividend upon any class of stock other than the
pg. 34
Shares, the Company shall be deemed to have received for such Additional
Shares or Common Stock Equivalents a consideration equal to the amount of such
dividend so paid or satisfied.
(b) Readjustment of Exercise Price. Upon the expiration of the right to
convert, exchange or exercise any Common Stock Equivalent the issuance of
which effected an adjustment in the Exercise Price, if any such Common Stock
Equivalent shall not have been converted, exercised or exchanged, the number
of shares of Common Stock deemed to be issued and outstanding by reason of the
fact that they were issuable upon conversion, exchange or exercise of any such
Common Stock Equivalent, shall no longer be computed as set forth above and
the Exercise Price shall forthwith be readjusted and thereafter be the price
which it would have been (but reflecting any other adjustments in the Exercise
Price made pursuant to the provisions of this Article 3 after the issuance of
such Common Stock Equivalent) had the adjustment of the Exercise Price been
made in accordance with the issuance or sale of the number of Additional
Shares actually issued upon conversion, exchange or issuance of such Common
Stock Equivalent and thereupon only the number of Additional Shares actually
so issued shall be deemed to have been issued and only the consideration
actually received by the Company (computed as in clause (a) of this section
3.7) shall be deemed to have been received by the Company.
(c) Treasury Shares: The number of shares at any time outstanding shall not
include any shares directly or indirectly owned or held by for the account of
the Company or any of its subsidiaries.
3.8 Other Action Affecting Common Stock. If the Company shall take any
action affecting its shares, other than an action described Sections 3.1
through 3.7, inclusive, which, in the opinion of the Board of Directors would
have a materially adverse affect upon the rights or the holder of this Option,
the Exercise Price shall be adjusted in such manner and at such time as the
Board of Directors may in good faith determine to equitable in the
circumstances.
3.9 Adjustment of Number of Shares. Upon each adjustment in the Exercise
Price pursuant to any provision of this Article 3, the number of shares
purchasable shall be adjusted, to the nearest whole share, to the product
obtained by multiplying such number of shares purchasable immediately prior to
such adjustment in the Exercise Price by a fraction, the numerator of which
shall the Exercise Price immediately prior to such adjustment and the
denominator of which shall be the Exercise Price immediately thereafter.
3.10. Notice of Adjustments. Whenever the Exercise Price shall be adjusted,
the Company shall make a certificate signed by its President or Vice President
and by its Treasurer, Assistant Treasurer, Secretary or Assistant Secretary,
(if not referred to be said titles said certificate shall be signed by the
Company's Chief Executive Officer and its Chief Financial Officer or the
deputy to each such person) setting forth in detail, the event requiring
adjustment, the amount of adjustment, the method of calculating such adjustment
(including describing the basis on which the Board of Directors made its
determination) and the Exercise Price after giving effect to such adjustment
and, promptly after each such adjustment, shall cause copies of such
certificate to be mailed (by first class mail postage prepaid) to the Holder.
A determination of any adjustment to the Exercise Price or the number or kind
of shares or other securities issuable upon exercise of this Option, made by
pg. 35
independent certified public accountants selected by the Company, shall be
final and binding upon all parties.
ARTICLE 4. Further Covenants of the Company
4.1 Option Share. The Company covenants and agrees that all shares which may
be issued upon exercise of this Option, will, upon issuance, be duly and
validly issued, fully paid, non-assessable and free from all taxes, liens and
charges. The Company further covenants and agrees that during the period
within which the rights represented by this Option may be exercised, the
Company shall at all times have authorized and reserved for the purpose of
issuance upon exercise of the purchase rights evidenced by this Option, a
sufficient number of shares of its capital stock to provide for the exercise
of the rights represented by this Option and of Common Shares into which
the Common Shares are convertible.
4.2 Exchange of Options. Upon surrender for exchange or transfer of any
Option Certificate, properly endorsed to the Company, the Company at the
Holder's expense will promptly issue and deliver to or upon the order of
the Holder a new Option Certificate or certificates of like tenor, in the
name of such Holder or as such holder as Holder may direct. Until transfer
of this Option Certificate on the books of the Company, the Company may treat
the registered Holder hereof as the owner for all purposes.
ARTICLE 5. Negation of Voting and Dividend Rights
This Option shall not entitle Holder to any voting rights or other rights as
a holder of stock of the Company, or to any other rights whatsoever, except
the rights herein expressed. No dividends of any kind or character, shall
be payable or accrue in respect to this Option or the interest represented
hereby or the Common Stock purchasable hereunder or the Common Stock into
which said Common Stock shall be convertible, unless and until this Option
is exercised and if exercised, then only to the extent that it is exercised.
ARTICLE 5. Governing Law.
This Option shall be governed and construed in accordance with the laws of the
State of Delaware without giving effect to the principles of conflicts of law.
IN WITNESS WHEREOF, the Company has caused this Option Certificate to be
executed on this 9th day of December 2002, by its proper corporate
officers thereunto duly authorized.
FEDERAL SECURITY PROTECTION SERVICES, INC.
By /s/ Gary S. O'Neal by /s/ Daniel Thornton
President Secretary
Pg. 36
EXHIBIT A
EXERCISE NOTICE
(To be signed only upon exercise of the Option)
To: Federal Security Protection Services, Inc.
The undersigned, the Holder of the enclosed Option Certificate, hereby
irrevocably elects to exercise the purchase right represented by such Option
Certificate to purchase hereunder _____________________________________shares
of the Common Stock of Federal Security Protection Services, Inc. and herewith
makes payment to Federal Security Protection Services, Inc. of
$_________________, therefore and requests that the certificate or
certificates for such shares be issued in the name of, and delivered to the
undersigned.
Date:_______________ ___________________________________
___________________________________
Print Name
(Signature must conform in all respects to
name of Holder as specified on the face
of the Option Certificate.)
Address:
___________________________________
___________________________________
Taxpayer Identification Number:
___________________________________
*/Insert the number of shares called for on the face of the Option
Certificate or, in the case of a partial exercise, the portion thereof
as to which the Option is being exercised, in either case without making
any adjustment for any stock or other securities or property or cash which,
pursuant to the adjustment provisions of the Option, may be deliverable upon
exercise.
EXHIBIT B
FORM OF ASSIGNMENT
(To be signed only upon transfer of Option*)
For value received, the undersigned hereby sells, assigns and transfers
to ___________________ the right represented by the attached Option
Pg. 37
Certificate to purchase _______________________ Option Shares of Federal
Security Protection Services, Inc., as defined in the Option Certificate,
with full power of substitution.
Dated:_______________________
_________________________________________
_________________________________________
(Print Name)
(Signature must conform in all respects to name of
Holder as specified on the face of the Option
Certificate)
Address:
_________________________________________
_________________________________________
Taxpayer Identification Number
_________________________________________
*/ The Option Certificate and the rights embodied therein may not be
transferable and can only be transferred in a manner which will not constitute
a violation of the Securities Act of 1933 (the "Act") and which will not
cause the original issuance of the Option Certificate to be a violation of the
Act. The Company may require an opinion of counsel acceptable to the Company
that any such transfer would not bring about the results stated and, in the
event the Company determines that it can honor the request for transfer, the
Company may impose such requirements and restrictions upon the recipient as
the Company deems reasonable. This may include, but may not be limited to,
the requirement that the proposed recipient execute an investment letter in a
form acceptable to the Company, as a condition precedent to the transfer.
pg. 38