Filed Pursuant to Rule 424(b)(3)
Registration No. 333-118040
PROSPECTUS
ELECTRONIC CONTROL SECURITY INC.
4,200,000 Shares of Common Stock
This prospectus is part of registration statement filed by Electronic
Control Security Inc. with the Securities and Exchange Commission relating to
the resale of up to 4,200,000 shares of common stock, which includes (i)
2,000,000 shares issuable upon the conversion of our 10% Series B Convertible
Preferred Stock and (ii) 2,200,000 shares issuable upon the exercise of warrants
of Electronic Control Security Inc. by certain selling stockholders identified
in this prospectus. All of the shares, when sold, will be sold by these selling
stockholders. We will not receive any proceeds from the sale of the shares of
common stock by the selling stockholders.
The selling stockholders may sell common stock from time to time in the
principal market on which the stock is traded at the prevailing market price or
in negotiated transactions. The selling stockholders may include pledgees,
donees, transferees, or other successors in interest. The selling stockholders
may be deemed underwriters of the shares of common stock which they are
offering. We will pay the expenses of registering these shares. The selling
stockholders will pay any sales commissions incurred in connection with the sale
of shares through this prospectus.
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934 and is quoted on the Nasdaq Over-the-Counter Bulletin Board
under the symbol "EKCS." On September 15, 2004, the last reported sale price for
our common stock as reported on the Nasdaq Over-the-Counter Bulletin Board was
$1.80 per share.
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The Securities Offered In This Prospectus Involve A High Degree Of Risk.
You Should Consider The "Risk Factors" Beginning On Page 5 Before Purchasing Our
Common Stock.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is October 12, 2004
We have not registered the sale of the shares under the securities laws of
any state. Brokers or dealers effecting transactions in the shares of common
stock offered hereby should confirm that the shares have been registered under
the securities laws of the state or states in which sales of the shares occur as
of the time of such sales, or that there is an available exemption from the
registration requirements of the securities laws of such states.
This prospectus is not an offer to sell any securities other than the
shares of common stock offered hereby. This prospectus is not an offer to sell
securities in any circumstances in which such an offer is unlawful.
We have not authorized anyone, including any salesperson or broker, to
give oral or written information about this offering, Electronic Control
Security Inc., or the shares of common stock offered hereby that is different
from the information included in this prospectus. You should not assume that the
information in this prospectus, or any supplement to this prospectus, is
accurate at any date other than the date indicated on the cover page of this
prospectus or any supplement to it.
Table of Contents
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Prospectus Summary.............................................................3
Risk Factors...................................................................5
Use of Proceeds...............................................................11
Dividend Policy...............................................................11
Market for Common Equity and Related Stockholder Matters......................12
Cautionary Notice Regarding Forward-Looking Statements........................12
Management's Discussion and Analysis or Plan of Operation.....................13
Our Business..................................................................21
Our Management................................................................31
Security Ownership of Certain Beneficial Owners and Management................36
Description of Securities.....................................................37
Related Party Transactions....................................................41
Selling Stockholders..........................................................41
Plan of Distribution..........................................................43
Legal Proceedings.............................................................44
Commission Position on Indemnification for Securities Act Liabilities.........44
Legal Matters.................................................................45
Experts.......................................................................45
Where You Can Find More Information...........................................45
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PROSPECTUS SUMMARY
The following summary highlights selected information from this prospectus
and may not contain all the information that is important to you. To understand
our business and this offering fully, you should read this entire prospectus
carefully, including the financial statements and the related notes beginning on
page F-1. When we refer in this prospectus to the "Company," "we," "us," and
"our," we mean Electronic Control Security Inc., a New Jersey corporation,
together with our subsidiaries. This prospectus contains forward-looking
statements and information relating to Electronic Control Security Inc. See
"Cautionary Note Regarding Forward Looking Statements" on page 12.
Our Company
We provide technology based security solutions and consulting services for
government and commercial facilities worldwide. We:
o prepare threat and vulnerability studies to ascertain a clients'
security requirements;
o devise solutions to satisfy these security requirements;
o engineer and design the equipment and systems required to achieve a
security solution;
o manufacture and assemble each system within the context of an
integrated security program;
o provide technology support and integrated systems platforms to
security systems integrators;
o manage the construction and implementation of security systems; and
o train our clients' personnel to use and maintain the security
systems we market.
We ascertain the security challenges confronting a client and apply the
proper technology and equipment to address the security threat. We seamlessly
coordinate our risk management and analysis expertise with our extensive design
and engineering skills to develop, manufacture and supervise the installation of
systems and components that create a normal yet secure environment for
employees, visitors and service personnel. Our security programs incorporate
various systems from our portfolio of proprietary and licensed technologies and
equipment. We select systems that we have designed to meet conventional security
requirements facing clients or, as necessary, design, develop and manufacture
systems customized for clients' specific needs. We provide a range of programs
and systems that include fully integrated, turn-key security solutions or
individual systems.
Our corporate headquarters are located at 790 Bloomfield Avenue, Building
C, Suite 1, Clifton, New Jersey 07012, our telephone number is (973) 574-8555
and our facsimile number is (973) 574-8562. Our web address is
www.ecsi@anti-terrorism.com. We maintain manufacturing and administrative
facilities in Madison, Alabama.
About This Offering
This prospectus relates to the resale of up to 4,200,000 shares of common
stock, including 2,000,000 shares which are issuable upon the conversion of
shares of preferred stock and 2,200,000 shares which are issuable upon the
exercise of warrants of Electronic Control Security Inc. by certain selling
stockholders identified in this prospectus. All of the shares, when sold, will
be sold by these selling stockholders. The selling stockholders may sell their
common stock from time to time at prevailing market prices. We will not receive
any proceeds from the sale of the shares of common stock by the selling
stockholders.
The common stock being offered through this prospectus underlie securities
we issued in a transaction we consummated on June 30, 2004, wherein we sold
2,000,000 newly-issued shares ("Preferred Shares") of our 10% Series B
Convertible Preferred Stock ("Series B Preferred Stock") and warrants ("Unit
Warrants") to purchase 2,000,000 newly-issued shares of our common stock. We
also issued warrants ("Finders' Warrants," together with the Unit Warrants, the
"Warrants") to purchase 200,000 newly-issued shares of our common stock to
persons who introduced us to investors in the Preferred Shares. The sale of the
Preferred Shares resulted in $2,000,000 of gross proceeds, prior to the
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exercise of the Warrants. For a more detailed discussion regarding such
transaction, see the discussion under the heading "Plan of Distribution"
beginning on page 43.
The number of shares subject to this Prospectus represents approximately
43.11% of our issued and outstanding common stock as of September 15, 2004.
Common Stock Outstanding
As of September 15, 2004, there were 5,541,874 shares of common stock
issued and outstanding. For a more detailed discussion about our common stock,
see the discussion under the heading "Description of Securities" beginning on
page 37.
Use of Proceeds
We will not receive any proceeds from the resale of any of the shares
being registered on behalf of the selling stockholders. We will receive the
exercise price upon exercise of the Warrants included in this prospectus.
Of the $2,000,000 of proceeds we received from the sale of the Series B
Preferred Stock, we used $251,458 to repay a loan to a third party in the
principal amount of $250,000 plus accrued interest, and we are using the balance
for general corporate purposes. We expect to use any proceeds from the exercise
of the Warrants, also for general corporate purposes.
Risk Factors
Purchase of our common stock involves a high degree of risk. You should
read and carefully consider the information set forth under "Risk Factors"
beginning on page 5 and the information contained elsewhere in this Prospectus.
Forward Looking Statements
The discussion in this prospectus contains forward-looking statements that
involve risks and uncertainties. Actual results could differ materially from
those discussed in this prospectus. See "Cautionary Notice Regarding
Forward-Looking Statements" beginning on page 12.
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RISK FACTORS
You should carefully consider the risks described below before buying
shares in this offering. The risks and uncertainties described below are not the
only risks we face. These risks are the ones we consider to be significant to
your decision as to whether to invest in our common stock at this time. There
may be risks that you in particular view differently than we do, and there are
other risks and uncertainties that are not presently known to us or that we
currently deem immaterial, but that may in fact impair our business operations.
If any of the following risks actually occur, our business, results of
operations and financial condition could be seriously harmed, the trading price
of our common stock could decline and you may lose all or part of your
investment.
Forward-Looking Statements
This prospectus contains forward-looking statements and information that
are based on management's belief and assumptions, as well as information
currently available to management. When used in this document, the words
"anticipate," "assume," "estimate," "expect," and similar expressions are
intended to identify forward-looking statements. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, we
cannot give you any assurance that such expectations will prove to be correct.
These statements are subject to certain risks, uncertainties, and assumptions.
Should one or more of these risks or uncertainties materialize, or should the
underlying assumptions prove incorrect, actual results will vary materially from
those anticipated, estimated, or expected. Among the key factors that may have a
direct bearing on our operating results are the risks associated with doing
business in foreign countries; our reliance on our relationships with our
strategic partners; our ability to compete against companies that have
significantly greater name recognition and resources than we do; and risks
associated with potential acquisitions.
RISKS RELATING TO OUR BUSINESS
Some of our orders and contracts may be cancelled on short notice with little or
no penalty.
Some of our contracts are subject to cancellation by clients upon short
notice with little or no penalty so we cannot be certain that our backlog will
be filled. The contracts we enter into with government entities are often
awarded prior to legislative approval of the funding to support those contracts.
Consequently, the entire amount of orders and contracts received from these
entities may never be funded. If a substantial portion of our backlog for orders
is cancelled, our business, operating results and financial condition could be
materially and adversely affected. In addition, the cancellation of a
substantial portion of booked orders would negatively impact other areas of our
business. For example, if we have booked orders from a large customer and that
customer cancels its order, it would greatly affect our operating results for
the period during which we would have recognized revenues from that customer,
which could cause our stock price to fluctuate and make it difficult for you to
evaluate our company. Moreover, cancellation of a booked order after we have
ordered components and materials to manufacture systems for that customer could
result in our having excess inventory and no corresponding income.
During the fiscal year ended June 30, 2004, we generated approximately 32% of
our revenues from goods sold and services rendered to 4 customers. A substantial
decrease in revenues generated from contracts performed for these customers
could have a negative adverse effect on our business if we are unable to
identify other customers.
During the fiscal year ended June 30, 2004, 3 customers accounted for
approximately 32% of our revenues. One of these customers accounted for
approximately 25% of our revenues during fiscal 2003. A significant decrease in
business from these customers and the revenues lost, if we are unable to replace
them, would have a material adverse effect on our business, financial condition
and results of operations.
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Because our sales tend to be concentrated among a small number of customers
during any period, our operating results may be subject to substantial
fluctuations. Accordingly, our revenues and operating results for any particular
quarter may not be indicative of our performance in future quarters, making it
difficult for investors to evaluate our future prospects based on the results of
any one quarter.
Given the nature of our customers and products, we receive relatively
large orders for products from a relatively small number of customers.
Consequently, a single order from one customer may represent a substantial
portion of our sales in any one period and significant orders by any customer
during one period may not be followed by further orders from the same customer
in subsequent periods. Our sales and operating results are subject to very
substantial periodic variations. Since quarterly performance is likely to vary
significantly, our results of operations for any quarter are not necessarily
indicative of the results that we might achieve for any subsequent period.
Accordingly, quarter-to-quarter comparisons of our operating results may not be
meaningful.
We rely on rolling forecasts when ordering components and materials from which
we manufactures products which could cause us to overestimate or underestimate
our actual requirements. This could cause an increase in our costs or prevent us
from meeting customer demand.
We use rolling forecasts based on anticipated product orders to determine
our component requirements. Lead times for materials and components that we
order vary significantly and depend on factors such as specific supplier
requirements, contract terms and current market demand for such components. As a
result, our component requirement forecasts may not be accurate. If management
overestimates our component requirements, we may have excess inventory, which
would increase our costs. If management underestimates component requirements,
we may have inadequate inventory, which could interrupt manufacturing and delay
delivery of products to customers. Any of these occurrences would negatively
impact our business and results of operations.
Our product offerings involve a lengthy sales cycle and management may not
anticipate sales levels appropriately, which could impair profitability.
Our products and services are designed for medium to large commercial,
industrial and government facilities, such as military installations, office
buildings, nuclear power stations, airports, correctional institutions, energy
facilities and high technology companies desiring to protect valuable assets
and/or prevent intrusion into high security facilities in the United States and
abroad. Given the nature of our products and the customers that purchase them,
sales cycles can be lengthy as customers conduct intensive investigations of,
and internally deliberate with respect to, specific competing technologies and
providers. Moreover, orders received from governments may be subject to funding
legislation which may not be enacted. For these and other reasons, the sales
cycle associated with our products is typically lengthy and subject to a number
of significant risks over which we have little or no control.
If sales in any period fall significantly below anticipated levels, our
financial condition and results of operations could suffer. In addition, our
operating expenses are based on anticipated sales levels, and a high percentage
of our expenses are generally fixed in the short term. As a result of these
factors, a small fluctuation in timing of sales can cause operating results to
vary from period to period. Moreover, operating results from quarter to quarter
which are tied to the marketing and sale of our products could fluctuate widely.
We face risks of doing business in foreign countries.
During the years ended June 30, 2004 and 2003, we generated approximately
11% and 30% respectively, of our business from projects which were performed
outside the United States. Our
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international business operations are subject, generally, to the financial and
operating risks of conducting business internationally, including, but not
limited to:
o unexpected changes in, or impositions of, legislative or regulatory
requirements;
o potential hostilities and changes in diplomatic and trade
relationships; and
o political instability.
One or more of such factors could materially impact our business and
results of operations could suffer.
We depend on our relationships with strategic partners as a source of business
and our business and results of operations could suffer if these relationships
are terminated.
We have entered into strategic partnerships or teaming arrangements with
several large multinational corporations that promote our products and services
and incorporate our products into their projects. In the event that we are
unable to maintain these strategic relationships for any reason, our business,
operating results and financial condition could be materially adversely
affected.
We compete against entities that have significantly greater name recognition and
resources than we do, that may be able to respond to changes in customer
requirements more quickly than we can and that are able to allocate greater
resources to the marketing of their products.
The security industry is highly competitive and has become more so over
the last several years as security issues and concerns have become a primary
consideration at both government and private facilities worldwide. Competition
is intense among a wide ranging and fragmented group of product and service
providers, including security equipment manufacturers, providers of integrated
security systems, systems integrators, consulting firms and engineering and
design firms and others that provide individual elements of a system, some of
which are larger than us and possess significantly greater name recognition,
assets, personnel, sales and financial resources. These entities may be able to
respond more quickly to changing market conditions by developing new products
that meet customer requirements or are otherwise superior to our products and
may be able to more effectively market their products than we can because of the
financial and personnel resources they possess. We can not assure investors that
we will be able to distinguish our self in a competitive market. To the extent
that we are unable to successfully compete against existing and future
competitors, our business, operating results and financial condition would be
materially and adversely affected.
We are dependent on third party suppliers for principal components used in our
products, and disruptions in supply or significant increases in component costs
could materially harm our business.
We rely on third parties to supply several key components utilized in the
manufacture of our products. Our reliance on suppliers involves certain risks,
including a potential inability to obtain an adequate supply of required
components, price increases, timely delivery and component quality. Although to
date, we have not experienced any disruption in supplies of components, we can
not assure you that there will not be a disruption of our supplies in the
future. Disruption or termination of the supply of these components could delay
shipments of products and could have a material adverse affect on our business,
operating results and financial condition.
Our services and reputation may be adversely affected by product defects or
inadequate performance.
Management believes that we offer state-of-the art products that are
reliable and competitively priced. In the event that our products do not perform
to specifications or are defective in any way, our
7
reputation may be materially adversely affected and we may suffer a loss of
business and a corresponding loss in revenues.
If we are unable to retain key executives or hire new qualified personnel, our
business will be adversely affected.
Our success greatly depends on our ability to retain existing management
and attract key technical, sales, marketing, information systems, and financial
and executive personnel. We are especially dependent on the continued services
of our senior management team, particularly Arthur Barchenko and Joseph
McAndrew, the President and Vice President, respectively, and our key marketing
personnel. The loss of any of these people could have a materially detrimental
effect on our business. We have not entered into employment agreements with any
of these people. We do not maintain key person life insurance on any of our
personnel. In addition, we are seeking to engage senior sales staff and if we
fail to attract, hire or retain the necessary personnel, or if we lose the
services of any member of our senior management team, our business could be
adversely affected.
We may face risks associated with potential acquisitions, investments, strategic
partnerships or other ventures.
As part of our long-term growth strategy, we may seek to acquire or make
investments in complementary businesses, technologies, services or products or
enter into strategic relationships with parties who can provide access to those
assets, if appropriate opportunities arise. From time to time, we may enter into
discussions and negotiations with companies regarding acquiring, investing in,
or partnering with their businesses, products, services or technologies. We may
not identify suitable acquisition, investment or strategic partnership
candidates, or if we do identify suitable candidates, we may not complete those
transactions on commercially acceptable terms or at all. Acquisitions often
involve a number of special risks, including, but not limited to, the following:
o we may experience difficulty integrating acquired operations,
products, services and personnel;
o the acquisition may disrupt our ongoing business;
o we may not be able to successfully incorporate acquired technology
and rights into our product offerings and maintain uniform
standards, controls, procedures, and policies;
o we may not be able to retain the key personnel of the acquired
Company;
o the businesses we acquire may fail to achieve the revenues and
earnings anticipated; and
o we may ultimately be liable for contingent and other liabilities,
not previously disclosed to us, of the companies that we acquire.
We may not successfully overcome problems encountered in connection with
potential future acquisitions. In addition, an acquisition could materially
adversely affect our operating results by:
o diluting current shareholders' ownership interest;
o causing us to incur additional debt; and
o forcing us to expense the cost of certain acquired assets.
Any of these factors could have a material adverse effect on our business.
These difficulties could disrupt our ongoing business, distract management and
employees and increase expenses. Furthermore, we may incur indebtedness or issue
equity securities to pay for any future acquisitions.
Limitations on liability and indemnification matters.
As permitted by the corporate laws of the State of New Jersey, our
Certificate of Incorporation includes a provision which eliminates the personal
liability of our directors for monetary damages for
8
breach or alleged breach of their fiduciary duties as directors, subject to
certain exceptions. In addition, our By-Laws provide that we are required to
indemnify our officers and directors under certain circumstances, including
those circumstances in which indemnification would otherwise be discretionary,
and we are required to advance expenses to our officers and directors as
incurred in connection with proceedings against them for which they may be
indemnified.
RISKS RELATING TO OUR COMMON STOCK
As we issue additional equity securities in the future, including upon
conversion of any of our preferred stock, your share ownership will be diluted.
In particular, one of our outstanding classes of preferred stock has a full
ratchet anti-dilution provision that could significantly dilute our
stockholders.
Our Certificate of Incorporation authorizes the issuance of 15,000,000
shares of common stock. The future issuance of all or part of our remaining
authorized common stock may result in substantial dilution in the percentage of
our common stock held by our then existing shareholders.
In connection with a recent financing, we issued 10% Series B Convertible
Preferred Stock (Series B Preferred Stock) and warrants entitling the holders to
purchase shares of common stock. The Series B Preferred Stock is convertible
initially into 2 million shares of common stock, an initial conversion price of
$1.00 per share, and the warrants entitle the holders to purchase 2.2 million
shares of common stock at a price of $1.00 per share. The Series B Preferred
Stock carries a full ratchet anti-dilution provision, such that if we issue
convertible or equity securities (subject to certain exceptions, including stock
option grants and issuances in connection with certain acquisition transactions)
at a price less than the initial $1.00 conversion price until June 30, 2007, the
Series B Preferred Stock conversion price will be automatically adjusted down to
that lesser price. For example, if we had a non-exempted issuance at $0.50 per
share, the Series B Preferred Stock conversion price would become $0.50, and
upon conversion, we would have to issue 4,000,000 shares. In addition to the
conversion rights of the preferred stock, as we issue stock or convertible
securities in the future, including for any future equity financing or upon
exercise of any of the outstanding stock purchase warrants and stock options,
those issuances would also dilute our stockholders. If any of these additional
shares are issued and are sold into the market, it could decrease the market
price of our common stock and could also encourage short sales. Short sales and
other hedging transactions could place further downward pressure on the price of
our common stock.
We have outstanding two classes of preferred stock which have preferences over
the common stock as to dividends and liquidation distributions, among other
rights.
As of the date hereof, we have issued and outstanding 362,500 shares of
Series A Convertible Preferred Stock ("Series A Preferred Stock") and 2,000
shares of 10% Series B Convertible Preferred Stock ("Series B Preferred Stock"
and together with the Series A Preferred Stock, the "Preferred Stock"). The
Preferred Stock affords holders a preference to assets upon liquidation, a
cumulative annual dividend and is convertible into shares of common stock, all
of which rights impact the outstanding shares of common stock. The Preferred
Stock's right to annual dividends make less likely the possibility that we will
declare dividends on the common stock. In the event of a liquidation of the
Company's assets, holders of Preferred Stock will have a right to receive as a
liquidation payment any remaining assets of the Company prior to any
distributions to holders of the common stock and the holders of the Preferred
Stock may be able to block actions otherwise approved by the holders of the
common stock if such action is adverse to their rights. In addition, holders of
common stock will suffer dilution upon any conversion of the Preferred Stock
which could reduce the market value of the common stock.
9
We are authorized to issue 3,898,000 additional shares of non-designated
preferred stock which we may issue from time to time by action of the board of
directors.
Our Certificate of Incorporation authorizes the issuance of 3,898,000
additional shares of preferred stock. The board of directors has the authority,
without further approval of our stockholders, to issue preferred stock having
such rights, preferences and privileges as it may determine. The board of
directors may designate any or all of these shares without shareholder consent
and may afford such voting and other preferences which designations may give the
holders of the preferred stock voting control and other preferred rights such as
to liquidation and dividends. The authority of the board of directors to issue
stock without shareholder consent may have a depressive effect on the market
price of our common stock even prior to any designation or issuance of the
preferred stock.
The terms of any series of preferred stock, which may include priority
claims to assets and dividends and special voting rights, could adversely affect
the rights of holders of the common stock and thereby reduce the value of the
common stock. The designation and issuance of preferred stock favorable to
current management or shareholders could make the possible takeover of us or the
removal of our management more difficult and discourage hostile bids for control
of us which bids might have provided shareholders with premiums for their
shares.
The market price of our common stock is influenced by many factors and may
fluctuate widely as a result of factors beyond our control.
Prices for our common stock could fluctuate widely and will be influenced
by many factors, including the depth and liquidity of the market for the common
stock, investor perception of the industry in which we operate and our products,
and general economic and market conditions. Factors which could cause
fluctuation in the price of our common stock include:
o conditions or trends in the industry;
o failure to keep pace with changing technology;
o costs associated with developing new products and services;
o cost associated with marketing products and services may increase
significantly;
o the timing of sales and the recognition of revenues therefrom;
o government regulations may be enacted which effect how we do
business and the products which may be used at government
facilities;
o downward pressure on prices due to increased competition;
o changes in our operating expenses;
o sales of common stock;
o actual or anticipated variations in quarterly results; and
o changes in financial estimates by securities analysts.
Extreme fluctuations caused by these and other factors could cause our business
to suffer.
Additional shares of common stock entering the market pursuant to Rule 144
without additional capital contribution could decrease the public trading price
of the common stock.
An increase in the number of shares of common stock available for public
sale without any increase to our capitalization could decrease the market price
of our common stock. After a one-year holding period restricted shares of common
stock will become eligible for trading pursuant to Rule 144 of the General Rules
and Regulations of the Securities and Exchange Commission without any additional
payment to the Company or any increase to our capitalization.
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Our common stock is traded over the counter, which may deprive stockholders of
the full value of their shares.
Our common stock is quoted via the Over the Counter Bulletin Board
(OTCBB). As such, our common stock may have fewer market makers, lower trading
volumes and larger spreads between bid and asked prices than securities listed
on an exchange such as the New York Stock Exchange or the NASDAQ. These factors
may result in higher price volatility and less market liquidity for the common
stock.
A low market price may severely limit the potential market for the common stock.
Our common stock is currently trading at a price substantially below $5.00
per share, subjecting trading in the stock to certain SEC rules requiring
additional disclosures by broker-dealers. These rules generally apply to any
non-NASDAQ equity security that has a market price share of less than $5.00 per
share, subject to certain exceptions (a "penny stock"). Such rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and institutional or wealthy investors.
For these types of transactions, the broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to the sale. The broker-dealer also
must disclose the commissions payable to the broker-dealer, current bid and
offer quotations for the penny stock and, if the broker-dealer is the sole
market maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Such information must be provided to the
customer orally or in writing before or with the written confirmation of trade
sent to the customer. Monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. The additional burdens imposed upon
broker-dealers by such requirements could discourage broker-dealers from
effecting transactions in our common stock.
We do not expect to pay cash dividends in the future, so stockholders will only
benefit from owning common stock if it appreciates.
We do not expect to pay cash dividends for the foreseeable future. For the
foreseeable future, it is anticipated that earnings, if any, that may be
generated from our operations will be used to finance our operations and that
cash dividends will not be paid to holders of our common stock. Accordingly, any
potential investor who anticipates the need for current dividends from his
investment should not purchase our common stock.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
could receive up to $2,200,000 upon exercise of warrants held by the selling
stockholders. We expect to use the proceeds received from the exercise of the
warrants, if any, for general working capital purposes.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
anticipate that any earnings will be retained for development and expansion of
our business and do not anticipate paying any cash dividends in the near future.
Our Board of Directors has sole discretion to pay cash dividends based on our
financial condition, results of operation, capital requirements, contractual
obligations and other relevant factors.
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MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Quotation of our common stock on the OTC Bulletin Board commenced in June
2001 and is quoted on the OTC Bulletin Board under the symbol "EKCS.OB." The
following table sets forth, for the periods indicated, quotations for the high
and low closing bid prices for our common stock for each quarter within the last
two fiscal years, as reported by the OTC Bulletin Board. These quotations
reflect inter-dealer prices, without retail mark-up, markdown, or commission and
may not represent actual transactions.
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Closing Bid
High Low
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Fiscal 2004
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April 1 - June 30 2.24 .60
January 1 - March 31 1.30 .59
Oct. 1 - December 31, 2003 1.80 .96
July 1 - September 30, 2003 1.75 .26
-------------------------------------------------------------
Fiscal 2003
-------------------------------------------------------------
April 1 - June 30 1.00 .54
January 1 - March 31 1.60 1.00
Oct. 1 - December 31, 2002 1.10 .42
July 1 - September 30, 2002 1.01 .61
-------------------------------------------------------------
Stockholders.
As of September 15, 2004, there were approximately 179 holders of record
of the Company's common stock. This number of holders of record does not include
beneficial owners of the Company's common stock whose shares are held in the
names of various security holders, dealers, and clearing agencies.
Dividends.
We have not paid any cash dividends since our inception and do not
contemplate paying dividends in the foreseeable future. It is anticipated that
earnings, if any, will be retained for the operation of our business.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. Actual results and
events could differ materially from those projected, anticipated, or implicit,
in the forward-looking statements as a result of the risk factors set forth
below and elsewhere herein.
The Private Securities Litigation Reform Act of 1995 (the "Reform Act")
provides a safe harbor for forward-looking statements made by or on behalf of
the Company. We and our representatives may from time to time make written or
oral forward-looking statements, including statements contained in this
prospectus and other filings with the Commission and in reports to stockholders
and announcements. Certain statements made in this prospectus may constitute
forward-looking statements (within the meaning of Section 27.A of the Securities
Act of 1933, as amended ("Securities Act"), and Section 21.E of the Securities
Exchange Act of 1934, as amended ("Exchange Act")) regarding the expectations of
management with respect to revenues, profitability, adequacy of funds from
operations and our existing credit facility, among other things. All statements
that address operating performance, events or developments that our management
expects or anticipates will or may occur in the future including
12
statements related to new products, volume growth, revenues, profitability,
adequacy of funds from operations, and/or our existing credit facilities,
earnings per share growth, statements expressing general optimism about future
operating results and non-historical information, are forward-looking statements
within the meaning of the Reform Act.
These statements are qualified by their terms and/or important factors,
many of which are outside our control, involve a number of risks, uncertainties
and other factors, that could cause actual results and events to differ
materially from the statements made including, but not limited to, the
following:
o all orders and contracts placed by government entities may be cancelled,
so there is a risk that our backlog may not be fulfilled;
o because our sales tend to be concentrated among a small number of
customers in any period, our operating results may be subject to substantial
fluctuations;
o we rely on rolling forecasts when ordering components and materials from
which we manufactures products which could cause us to overestimate or
underestimate our actual requirements which could cause an increase in our costs
or prevent us from meeting customer demand;
o our product offerings involve a lengthy sales cycle and management may
not anticipate sales levels appropriately, which could impair profitability; and
o we are subject to the risks of doing business in foreign countries.
We are not obligated nor do we undertake to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise, except as otherwise required by law. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
prospectus and other statements made from time to time from us or our
representatives might not occur.
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes thereto appearing elsewhere herein. All references to 2004
represent the year ended June 30, 2004. All references to 2003 represent the
year ended June 30, 2003.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
You should read the following discussion and analysis in conjunction with
our consolidated audited financial statements and related notes for the years
ended June 30, 2003 and 2004, included elsewhere in this prospectus. Except for
historical information, the following discussion contains forward-looking
statements. See "CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS" and
"RISK FACTORS."
13
Overview
We design, develop, manufacture and market technology-based integrated
security systems. We also provide consulting services consisting of risk
assessment and vulnerability studies to ascertain a client's security
requirements to develop a comprehensive risk management and mitigation program
and product design and engineering services.
We market our products domestically and internationally to:
o national and local government entities;
o large industrial facilities and major office complexes;
o energy facilities, including nuclear plants, power utilities and
pipelines; and
o commercial transportation centers, such as airports and seaports.
We believe that we are one of the few true comprehensive security solution
providers in the industry. We are able to analyze a security risk and develop
security solutions specifically tailored to mitigate that risk, including
designing, engineering and manufacturing individual components of a system as
may be necessary to deliver a fully integrated security system customized to a
client's requirements. We are frequently engaged by security system integrators,
security system dealers/installers, and commercial architects and engineers
because we are able to deliver the integrated platform of design, engineering
services and fully integrated security solutions that support their requirements
for the completion of a given project.
We believe that we have developed a superior reputation as a provider of
integrated security systems since our inception in 1976 because we:
o offer the complete range of solutions-driven responses to accommodate our
customer's needs;
o offer technologically superior products;
o are able to design, engineer and manufacture systems customized to our
client's specific requirements;
o deliver systems that are easy to operate and maintain while providing
superior life cycle cost performance compared to systems offered by our
competitors;
o have established solid credentials in protecting high value targets; and
o offer our customers perhaps the best warranty in the industry.
Fiscal 2004 Accomplishments
Fiscal 2004 was an important year for us because we:
o Were awarded a task order by the Department of Defense of the United
States in August 2004 to secure Tinker Air Force Base, a highly
strategic North American military facility, as a supplier selected
by the US Air Force under the indefinite delivery/indefinite supply
contract noted below. The task order has an estimated value of in
excess of $4,300,000.
o Completed a private placement of $2 million of shares of 10% Series
B Convertible Preferred Stock and warrants to purchase up to
2,000,000 shares of common stock on June 30, 2004. The Series B
Preferred Stock carries a 10% cumulative dividend payable quarterly
in cash or by adding the amount of the dividend to the stated value
of each share of Series B Preferred Stock and is convertible
initially into an aggregate of 2,000,000 shares of common stock,
subject to anti-dilution adjustments. The Warrants are exercisable
at a price of $1.00 per share through June 29, 2008.
14
o Were selected by the United States Air Force, Force Protection
Office, as one of four companies, among two multinational and two
small business organizations, permitted to submit proposals to
obtain contracts to supply and install security system upgrades for
thirty-four military facilities worldwide over a five year period
with a total value in excess of $500 million, which, since the date
of such award, has increased to 108 bases and may reach over $1
billion in total value.
o Entered into a Cooperative Research & Development Agreement with the
Naval Surface Warfare Center, Panama City, for the integration and
marketing of technologies for military and commercial applications;
o Received a number of orders to complete jobs at high-profile
facilities around the world, including a border security project in
Eastern Europe now awaiting release and orders for nuclear power
station security upgrades amounting to over $1,500,000;
o Entered into strategic alliances or marketing relationships with
companies that we believe will provide us access to markets in which
we heretofore have had only a limited presence, including alliances
with:
(i) Radio Holland Greece (SRH Marine) Division of the Radio
Holland Group, an international organization specializing in
communication, satellite navigational safety-distress and ship
automation equipment, installation, integration and support
services worldwide, which will allow us to offer our security
solutions to government and corporate clients in Greece and
Cyprus to protect their airports, ports, cargo, and military
vessels. This alliance will enable us to effectively address
many government and industrial projects in those nations
without adding a layer of cost; and
(ii) M.A. Kharafi National, an international organization that
provides security systems installation, integration and
support services in the Middle East. This alliance allows us
to expand sales and service capability to include virtually
all areas of the Middle East including the most active and
demanding areas of Kuwait and Iraq. Kharafi National members
will partner with us when additional resources are needed to
effectively complete sophisticated system integration projects
in Iraq to meet particularly aggressive timetables or
specialized requirements. It also allows us to offer our
clients in Kuwait and Iraq expert logistical support with
minimal geographic or resource constraints. This alliance will
enable us to effectively address the many government and
industrial projects in Iraq and help us meet one of its major
strategic objectives for fiscal 2005 and beyond with two
entities that will allow us to bid on jobs in fields in which
we heretofore have had only limited access and which we
consider important, including the geographic regions of Iraq
and Kuwait and the area of maritime security.
o Entered into Revolving Line of Credit with Fairchild in the amount
of $250,000, the entire principal amount of which has been drawn
down and since repaid. We used the proceeds of this loan for working
capital. We continue to discuss the nature of our relationship with
Fairchild and the possibility of a future investment by Fairchild in
the Company. We believe that our future relationship with Fairchild
will remain intact and afford us the opportunity to develop business
contacts with major global organizations.
o Established a strategic marketing relationship with a security
company with offices in Washington, D.C. to address Homeland
Security opportunities. This company is a fully integrated single
source for experienced management services focused in the Government
Security, Homeland Security and Defense Industry. It provides
consulting and planning services in the area of management,
marketing and sales development.
15
Results of Operations
Results of Operations
Year Ended June 30, 2004 ("fiscal 2004 period") Compared to Year Ended June 30,
2003 ("fiscal 2003 period").
REVENUES. We had net revenues of $2,061,412 for the fiscal 2004 period, as
compared to revenues of $4,346,816 for the fiscal 2003 period, a decrease of
about 53%. Of the revenues reported in the fiscal 2004 period, approximately 89%
was domestic and 11% was related to international projects. The decrease in
sales in the fiscal 2004 period is primarily attributable to an indefinite hold
put on certain projects that were waiting for funding and/or the approval of
submitted documents. The funding and/or submitted documents are related to
projects for both domestic and foreign governments as well as private industrial
concerns in the Middle East.
GROSS MARGINS. Gross margins for the fiscal 2004 period were 55% of revenue as
compared to 47% of revenue for the fiscal 2003 period. The increase in the
fiscal 2004 period is primarily due to an increase in the order mix for higher
gross margin engineering and design services, as compared to the fiscal 2003
period, where the fulfillment of orders mostly entailed the shipment of lower
gross margin product.
RESEARCH AND DEVELOPMENT (R&D). R&D expenses increased 26% in the fiscal 2004
period to $322,912 from $257,123 in the fiscal 2003 period. R&D in the fiscal
2004 period was for upgrades to existing products and systems and for new
product development work on the UAV technologies.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expenses decreased about 8% in
the fiscal 2004 period to $1,782,534 from $1,933,540 in the fiscal 2003 period.
The decrease in fiscal 2004 is primarily the result of management's aggressive
action to reduce fixed overhead and payroll costs commencing January 1, 2004
based on lower projected revenue. The decrease however was partially offset by a
legal settlement in the amount of $101,000 and the write-off of certain accounts
receivable totaling $191,000.
STOCK BASED COMPENSATION. In the fiscal 2004 period, we issued immediately
vested stock and stock options to various employees, consultants and to the
directors valued at $117,200. In fiscal 2002, we issued stock and stock options
to various consultants which were being amortized over the related service
periods resulting in a charge of $503,814 in the fiscal 2003 period. Stock-based
compensation is non-cash and, therefore, has no impact on our net worth, cash
flow or liquidity.
INTEREST EXPENSE. Interest expense in the fiscal 2004 period was $105,916 as
compared to $68,179 for the fiscal 2003 period. The increase was attributable to
the higher average amount of outstanding debt balances.
INTEREST INCOME. Interest income in the fiscal 2004 period was $3,128 as
compared to $11,449 in the fiscal 2003 period. The decrease was due to the
redemption of a $300,000 certificate of deposit.
MINORITY INTEREST IN SUBSIDIARY LOSS. The minority interest in the loss from the
foreign subsidiaries was $42,633 for the fiscal 2004 period and $50,938 for the
fiscal 2003 period. The first foreign subsidiary was formed in January 2002 and
commenced operations in May 2002. In January 2003, it ceased to exist as an
operating subsidiary and the assets were transferred to a newly created foreign
subsidiary. We established the new foreign operating subsidiary, in which we own
a 70% interest, to conduct our business in the Middle East.
INCOME TAX BENEFIT. In the fiscal 2004 period, we recognized $31,300 of tax
benefits from the current year net operating loss, which will be used to offset
taxable income in a future year as compared to $89,000 in fiscal 2003.
16
NET LOSS. Net loss before dividends for the fiscal 2004 and fiscal 2003 periods
was $(1,118,656) and $(559,832), respectively.
Dividends Related to 10% Series B Convertible Preferred Stock.
We recorded a deemed dividend totaling $1,044,147 in June 2004 to reflect
the beneficial conversion price of our Series B Convertible Preferred Stock as
compared to the prevailing market price of the common stock on the date of
commitment. This adjustment has no impact on our net equity since the offset to
the deemed dividend is an offsetting increase in additional paid-in capital.
Similarly, in 2003 we recorded amortization of $100,886 resulting from a deemed
dividend totaling $1,008,861 which reflected the beneficial conversion price of
our Series A Convertible Preferred Stock issued in fiscal 2002. In addition we
declared dividends totaling $123,000 and $196,250 on our Series A Convertible
Preferred Stock in fiscal 2004 and 2003, respectively. These dividends were paid
via the issuance of additional shares of our Common Stock.
Liquidity and Capital Resources
At June 30, 2004, we had working capital of $3.09 million compared to
$1.89 million at June 30, 2003. Net cash used by operating activities for fiscal
2004 was $1,411,859 as compared to net cash provided by operating activities of
$265,252 for fiscal 2003.
Inventory has increased by $264,186 since the beginning of fiscal 2004 in
anticipation of shipments for committed projects that were supposed to have been
released and on new proposals that have not materialized thus far. Accounts
receivable relative to sales volume has deteriorated somewhat on a quarter to
quarter basis. Day's sales outstanding (DSO) were 139 days at June 30, 2004 as
compared with 71 days at June 30, 2003. This is due to certain payments being
held until final completion of projects. We expect the DSO to significantly
improve during fiscal 2005.
Accounts payable and accrued expenses have increased $197,702 in the
fiscal 2004 period as payments to vendors has been slowed in an attempt to match
the slower collection of receivables and to preserve the cash available for
daily operations.
Investing activities for fiscal 2004 included purchases of $132,745 for
equipment and software required to upgrade two major product lines. We do not
have any material commitments for capital expenditures going forward.
Financing activities in the fiscal 2004 period included the redemption of
a certificate of deposit in the amount of $300,000 which was used to repay an
expiring credit line and gain an additional $15,000 of available funds.
Currently, we are fully drawn on our revolving line of credit of $500,000,
which is due to expire November 15, 2004. The line bears interest at the rate of
1% above prime and is secured by substantially all of our assets and the
personal guaranty of Arthur Barchenko.
With the revolving line of credit fully drawn and business results for the
fiscal 2004 period being materially weaker than expected, officers have loaned
the Company $700,044 as working capital. Of this amount, $250,000 was converted
into 735,294 of additional shares of common stock in April 2004. The remaining
officer loans have no specified maturity date and bear interest at a rate of 10%
per annum. The Company is restricted from repaying the principal amount of the
loans by the Purchase Agreement dated June 30, 2004 by which we sold the shares
of Series B Preferred Stock. Under the Purchase Agreement, we may not repay the
loans to officers until December 31, 2005, at the earliest, and only if certain
other conditions have been satisfied.
In addition, we have a five-year $500,000 term loan which is payable in
monthly installments of $8,333 plus interest at the rate of 7.5% per annum. All
payments have been made on time leaving a
17
balance due as of June 30, 2004 in the amount of $241,667. The term loan is due
to be paid in full by November 2006.
To achieve all the elements of our growth strategy and the desired outcome
of a sustainable and continuous growth rate through these relationships, we must
devote additional capital resources to our sales and marketing efforts and
product development. We expect to use a portion of the proceeds derived from the
$2,000,000 private placement we completed at the end of June 2004 toward this
end.
We plan to invest in or acquire other entities in the security technology
industry to expand our product offerings to meet all possible security threats,
including emerging security risks. We have identified a specific area in which
we intend to pursue the acquisition of either a particular technology or company
that possesses such technology. We will remain attentive to other opportunities
as they arise. We may pay for any such investments or acquisitions using cash,
equity or a combination thereof. To the extent we require cash in connection
with such activities, we likely will have to obtain third party financing.
Therefore, we are continuing to pursue additional capital through selected
investment banking firms.
We believe that our financial condition continues to remain dependent upon
our ability to:
o collect invoices in a consistent timely fashion;
o continually generate new business; and
o obtain sources of financing to take advantage of business and
acquisition opportunities as they arise.
We have shipped orders to clients as required by our agreements and the
more timely receipt of payment for such orders over the last year, other than
the last quarter, has improved our ongoing cash flow. We currently have
sufficient orders and business to ensure our financial stability for the
foreseeable future. We expect that cash on hand together with cash generated
from operations, and cash generated from sale of equity in June 2004 will be
sufficient to provide for our working capital needs. We remain committed to
pursuing acquisitions that may add to our revenues and enhance both our product
line and, ultimately, our ability to compete in our industry. It is likely that
we will require additional financing or other sources of capital to complete any
acquisitions, as well as take advantage of any major business opportunities that
arise. We also may seek other sources of funding, though we can not be certain
that any such funding will become available on favorable terms.
Discussion of Results, Business Outlook and Identifiable Industry Trends
Discussion of Results
Revenue and earnings results over the last two fiscal years have been
disappointing although the level of new proposals continues to increase. Early
in this period, we did not see the acceleration of spending in our segment of
the security industry that we expected as a result of the continuing terrorist
threat both domestically and abroad. The Homeland Security initiatives proposed
by the United States Congress during the last two years have not had nearly as
positive an impact on our committed and released business as we expected.
We believe the global economic recession during 2002 and the first half of
2003 negatively affected most of our customers and potential customers,
including various government agencies worldwide. Generally, we believe many
private entities experienced level or weaker operating results during this
period and, consequently, chose not to invest in our security equipment.
As global economic prospects began to change during 2003, orders and
commitments increased. Currently, purchase order commitments are the largest in
Company history. However, our historical results have taught us that the release
of funds that support contracts and orders may never be forthcoming.
Furthermore, as is customary in the security industry, our contracts are subject
to cancellation or delay at any time with little notice or penalty. Government
based orders which are subject
18
to legislative funding approval are particularly sensitive to economic and
political conditions. Thus we cannot be certain as to the total realized value
and revenue which we will generate from committed orders. We expect to receive
releases and task orders for a significant portion of our contract commitments
sometime within the next 12 to 18 months, although we cannot be certain that we
will complete any or all of such orders within the anticipated time frame.
The Security Industry
The security market historically has been a product oriented opportunity
for manufacturers, both within the United States and internationally. The
difficulty the industry traditionally has faced has been the ability to develop
a standard security platform that would permit systems integrators to design a
seamless interface between the multiple products and subsystems required to
address threats in high-security environments. A number of companies are
attempting to develop platforms that address seamless integration of multiple
technologies. We expect this trend continuing for the foreseeable future, since
the demand for integrated platforms will continue.
We recognized this trend early in our existence and to that end, we have
developed, marketed and installed integrated platforms which encompass multiple
technologies. We continue to seek to improve our integrated systems and have
retained a highly-competent system oriented software programmer and two
computer-oriented electronic engineers to further develop and enhance the
integrated platform for current and future projects.
Further, the security industry, which has been characterized by a
fragmented and wide ranging group of single-product manufacturers and small
service providers, has begun to consolidate as multi-national corporations
acquire smaller market and single product entities to form multi-technology
corporations. We believe this trend will continue. Therefore, teaming
relationships will be important for independent entities in the security field
to thrive and grow in the years ahead. To address this consolidation, we have
implemented a corporate account development department both to work with and
support the large corporate integrators and to establish teaming agreements
going forward. We believe that our technologies and capabilities compliment
those of the large conglomerates in the security industry and this allows us to
work together on major projects.
Business Approach and Outlook
Over the last several years we have sought to exploit the contacts and
relationships enjoyed by our directors by obtaining introductions to potential
strategic partners. The strategic relationship framework provides a
comprehensive and thorough mechanism for developing and implementing corporate
strategy. Our board of directors determined early in our existence that given
our size and the criticality of our business situation that the strategic
relationship framework would provide us with a non-resource exhaustive and more
expedient and efficient means of entering new markets. This approach has met
with considerable success and we continue to seek strategic alliances.
Our strategic relationships with multi-national firms also have afforded
us direct and indirect access to sophisticated market analysis and research that
we otherwise would not have the resources to undertake on our own. This
information has allowed us to frame the overall growth and size of the
technology markets within which we operate and provide us with a sense not only
of the strength of our technology base but also of our relative market share
within the industry. This approach has allowed us to analyze customer and market
segmentation and develop a value proposition for the security solutions we offer
which has been and will be an invaluable source of information as a means of
generating income.
During April 2004 we retained a new financial public relations firm to
disseminate information about our Company to the investment community and
increase public awareness of and interest in our stock. We hope that the efforts
of this entity will broaden the appeal of our stock and facilitate our ability
to raise funds for expansion activities as required.
19
Sales continue to be materially dependent upon the ability of Arthur
Barchenko, our President to generate orders and sales to meet our revenue
objectives. In the past, Arthur Barchenko has been responsible for the majority
of our sales.
We believe we are well positioned for economic success during fiscal 2005
and beyond. A number of factors contribute to this outlook.
o The influx of cash from the private placement we completed in June 2004
will allow us to invest in revenue generating activities such as sales and
marketing efforts, the maintenance and growth of existing strategic
alliances and the identification of new strategic partners, the
development of new products and software to enhance our product offerings
and the retention of critical new personnel.
o Our selection by the United States Air Force, Force Protection Office, as
one of four companies, among two multinational and two small business
organizations, entitling us to submit proposals to obtain contracts to
supply and install security system upgrades for thirty-four military
facilities worldwide over a five year period with a total value in excess
of $500 million, which, since the date of such award, has increased to 108
bases and over $1 billion in total value.
o Various orders we have received recently, including a multi-million dollar
classified border security project in Eastern Europe awaiting release,
orders for nuclear power station security upgrades amounting to over
$1,500,000, and various other orders which we expect over the next several
months.
o The conclusion of agreements with new strategic partners that we
anticipate will be a source for material orders in the years ahead.
Critical Accounting Policies
The Company prepares its financial statements in conformity with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses. On an ongoing basis, management evaluates its estimates, including
those related to inventory reserves, allowance for doubtful accounts and
deferred taxes. Actual results may differ from these estimates under different
assumptions or conditions. Management believes the following critical accounting
policies and the related judgments and estimates affect the preparation of our
financial statements.
Inventory Valuation - Inventories are valued at lower of cost or market. The
Company routinely evaluates the composition of its inventory to identify
obsolete or otherwise impaired inventories. Inventories identified as impaired
are evaluated to determine if reserves are required. The Company does not
currently have any reserves against inventory.
Allowance for Doubtful Accounts - The allowance for doubtful accounts is
comprised of two parts, a specific account analysis and a general reserve.
Accounts where specific information indicates a potential loss may exist are
reviewed and a specific reserve against amounts due is recorded. As additional
information becomes available such specific account reserves are updated.
Additionally, a general reserve is applied to the aging categories based on
historical collection and write-off experience.
Accounting for Income Taxes - The Company records a valuation allowance to its
deferred tax assets to the amount that is more likely than not to be realized.
While we consider historical levels of income, expectations and risks associated
with estimates of future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in the
event that we determine that we would be able to realize deferred tax assets in
the future in excess of the net amount recorded, an adjustment to the deferred
tax asset would increase income in the period such determination has been made.
Likewise, should we determine that we would not be able to realize all or
20
part of the net deferred tax asset in the future, an adjustment to the deferred
tax asset would be charged against income in the period such determination was
made. A valuation allowance in the amount of $631,968 has been recorded against
our deferred tax asset at June 30, 2004.
Recently Issued Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN
46 requires unconsolidated variable interest entities to be consolidated by
their primary beneficiaries if the entities do not effectively disperse the
risks and rewards of ownership among their owners and other parties involved.
The consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003, and to variable interest entities or
arrangements existing before February 1, 2003, in the fourth quarter of calendar
2003. The adoption of FIN 46 did no have a material impact on the Company's
results of operation or financial position.
OUR BUSINESS
Overview.
We design, develop, manufacture and market technology-based security
systems for government and commercial facilities worldwide. We provide a range
of programs and systems that include turn-key integrated security systems or
individual components of a comprehensive security system. Integrated security
systems are comprised of one or more subsystems and components that perform a
variety of security functions for a facility or group of facilities under the
direction of a single command center and communications network. We also provide
consulting services consisting of (i) risk assessment, vulnerability and
criticality analyses to ascertain a client's security requirements to develop a
comprehensive risk management and mitigation program and (ii) product design and
engineering services.
Our security programs incorporate various systems from our portfolio of
proprietary and licensed technologies and equipment. We select systems that we
have designed to meet conventional security requirements facing clients or, as
necessary, design, develop and manufacture systems customized for clients'
specific needs. When we are engaged to provide a comprehensive turnkey security
program, we retain subcontractors to install our systems and products under the
supervision of our project managers. When we provide products and services as a
subcontractor to a systems integrator, dealer, installer, engineer or other
entity that is implementing a security project, we may use their employees or
contractors to complete our portion of the job under the direction of one of our
project managers. Our project managers train clients with respect to the use of
our systems.
We differentiate ourselves from security systems integrators and others in
the industry on the basis of our ability to analyze a security risk and develop
security solutions specifically tailored to mitigate that risk, including
designing, engineering and manufacturing the individual technologies comprising
a fully integrated security system. The preponderance of companies designated as
integrated security
21
systems providers are essentially security systems architects. These entities
examine a client's security needs and then select products from an existing
array of security product offerings designed and manufactured by third parties
to create a security system which they integrate into the master blueprint of a
site or structure. These entities are constrained by and limited to the product
offerings of others. In some cases, they rely on security systems manufacturers
to select the proper equipment for a given project. We are frequently engaged by
security system integrators, security system dealers/installers, and commercial
architects and engineers because we are able to deliver the integrated platform
of design, engineering services and fully integrated security systems that
support them in the completion of a project.
We are ISO 9001 registered and expect to re-register to maintain ISO 9001
status.
Security Industry Overview.
The Security Institute of America estimates that the worldwide market for
security products and services exceeds $130 billion annually. The industry
encompasses a wide ranging, highly fragmented group of product and service
providers which includes entities that market comprehensive security systems and
offer security consulting services, dealers/installers, small single product
companies, equipment manufacturers, consultants and systems integrators.
We believe that the security industry has experienced significant growth
over the last decade, both in terms of the total dollar amount generated from
sales and the number of entrants offering security related products, and
continues to grow rapidly because:
o Western nations have been the target of high profile terrorist
attacks over the last several years that have squarely focused
attention on security issues and threat mitigation.
o Homeland Security has mandated perimeter security for airports,
maritime, chemical, transportation, energy and pharmaceutical
facilities.
o Newer, more effective and efficient security equipment incorporating
advancements in security technology is replacing obsolete equipment.
o The proliferation of computers and advanced communications systems
has created a new and growing need for information technology
security to prevent the misuse of proprietary information and other
intellectual property.
o Private industry is operating in high risk and remote environments
and geographic locations.
Products and Services.
The services and technologies required to create a secure environment must
address the entire range of security concerns that challenge public and
commercial institutions, including the protection of:
o life;
o tangible assets, such as buildings, vessels and personal
possessions;
o intangible assets, such as intellectual property, sensitive research
and other confidential information; and
o electronic data and information technology.
Systems and Technologies
Integrated security systems are comprised of one or more subsystems and
components that perform a variety of security functions for a facility or group
of facilities under the direction of a single command center and communications
network. We offer both integrated, turn-key security programs that
22
incorporate any or all of our systems and stand-alone systems that comprise an
individual component of a security program.
The integrated security systems and/or stand alone products we market
include:
o Computer Based Command, Control and Communications Networks. The
command network consists of a central processor, a common database
and software that link various subsystems and components, allows
them to communicate with each other and integrates the subsystems
and components into a single system.
o Intrusion Detection Systems. We offer fixed location and rapid
deployable infrared and fiber optic perimeter intrusion detection
systems that consist of sensors which detect an intruder passing
through the system's sensors.
o Video Motion Detection and Assessment Systems. As an adjunct to our
perimeter intrusion detection systems, we offer video surveillance
equipment using closed circuit television cameras, digital
processing and fiber optic links to ascertain the nature of, and
monitor, an announced threat.
o Electronic Surveillance System. This system creates a detection and
verification band outside and parallel to a secured perimeter and is
geared toward high-level security demands such as border control,
military bases, power stations, oil and gas storage facilities,
nuclear power plants, industrial sites, prisons and airports or
other situations with high-level security demands.
o Facial Recognition Systems. These systems are based on biometric
technology that identifies humans by the unique characteristics of
their faces. This technology can be utilized for virtually any
application that requires real-time identification or verification
of an individual.
o Architectural Security Lighting Systems. As a complement to our
security systems, we offer interior and exterior lighting systems
which can enhance a facility's security by illuminating areas which
otherwise may be subject to infiltration because of darkness or
remote location from a facility's main security center.
o Computer Intrusion Detection Equipment. We offer an information
technology security system designed to protect computer local area
networks (LAN's) from illegal external access via the Internet or by
persons seeking to splice into the LAN's hard wiring.
o Asset and Personal Protection Systems. Our global positioning
system, radio frequency and personal alarm systems are designed to
protect people, vehicles, vessels and other assets in real time.
o Access control systems: The access control systems we offer are
designed to exclude unauthorized personnel from specified areas and
provide access control that is typically card-activated.
In order to provide our clients with the highest quality and most advanced
systems, we incorporate into our security systems technologies and products both
developed by us or which we license from other entities. We frequently enter
into technology transfer agreements covering the technologies or products to be
used so that we can design and execute the best possible security program for a
client within the confines of their security budget. Our products incorporate
state of the art components that can be configured to develop flexible systems
tailored specifically to meet the needs of risk mitigation in high threat
environments.
23
We believe that the products we offer are qualitatively comparable to or
more effective than those offered by our competitors because our products:
o provide low nuisance and false alarm rates;
o are reliable in virtually any environmental conditions;
o in many cases, can be user specified and adapted to their
environment; and
o are subject to low installation and maintenance costs.
We believe that we have built a reputation as a leading-edge provider of
high technology security solutions and services. We believe our view is shared
and supported by the many international public sector and commercial clients
that engage our services and purchase our products on a continuing basis.
Consulting Services
The consulting services we provide are an integral component of the
security solutions we devise and offer to our clients. Effective and efficient
use of technology can be achieved only if the technology is used intelligently.
Toward that end, we:
o conduct risk assessment, vulnerability and criticality studies to
ascertain a client's security requirements and develop a
comprehensive risk management and mitigation program; and
o provide security system design services.
Our consulting and advisory services generally represent the first step in
the development of a security program. The risk assessment, threat,
vulnerability and criticality analyses we utilize allow us to undertake a
detailed risk management investigation of our clients' operations to determine
realistic threats, develop effective responses and programs necessary to address
and mitigate the range of threats, and to implement the appropriate solutions.
We utilize "adversary perspective" penetration analysis, Department of Energy
and military-developed threat modeling systems, and interactive, integrated
systems performance testing of total protection strategies to formulate a
comprehensive security system. The testing involves not only systems, but the
human operators who must assess intrusions and generate responses, and the
security forces that must successfully interrupt adversary actions and prevent
theft or sabotage.
Our customers benefit from an integrated, interactive process by which our
vulnerability/threat/penetration analysts examine existing and/or candidate
systems, and determine levels of risk. These analysts consult with our systems
design experts to determine systems configurations and human operation
requirements that will provide the most cost-effective options for mitigating
the risk. Our security advisors are technically accomplished and fully familiar
with the latest trends in planning, programming, and designing systems utilizing
standard peripheral components, mini/micro architecture, "user friendly"
software/firmware selection and application. Many of our security advisors have
the government's highest security clearances.
We also provide security system design services which comprise the
evaluation, design and specification of security systems and components that
meet a client's operating and budgetary requirements. Typically, we provide
these services within the context of a comprehensive security evaluation and
implementation program in conjunction with risk management analysis. However, we
may be asked to evaluate and design a single element of a security system. We
work closely with the client and the facility's owner, architect, engineer,
system integrators and construction manager to develop and design security
monitoring and control systems that afford a normative but secure environment
for management, staff and visitors. Our design experts have unequalled knowledge
of the various technologies (both mature and emerging) being applied to security
challenges, both in the U.S. and around the world, because they have been, and
continue to be, intimately involved in developing security systems for
government facilities around the world.
24
Product Design.
We design and develop new products based upon market requirements and as
necessary to meet our clients' specific needs. We research and assess threat and
vulnerability issues at selected facilities within our target markets and we
design and engineer our products in-house, with outside consultants as
necessary, and in conjunction with joint venture partners to meet the needs of
clients within the target markets based upon the results of such research. We
investigate new and emerging technologies that have application in the security
industry and seek to license these technologies which we then incorporate into
our products.
Markets for Our Products.
We have identified a number of markets for our products and have developed
specific marketing programs to gain access to those markets. Generally, private
industry and public and government facilities possessing sensitive information,
valuable assets or which otherwise may be subject to terrorist threats by virtue
of the nature of their business have recognized the need to implement security
measures to protect personnel and property. In many instances, laws have been
enacted and judicial mandates have decreed compliance with some minimum-security
standards. Airport security is a prime example. We target these entities as well
as entities to which we can demonstrate the need for security measures.
The following represent the primary markets which we target:
o the United States Government and its agencies and departments,
including the Department of Defense and the Department of Energy;
o large industrial facilities, including pharmaceutical companies, and
major office complexes;
o energy facilities, including nuclear plants, power utilities and
petrochemical pipelines;
o commercial airports and seaports;
o campus security; and
o foreign/export opportunities in all of the above-mentioned areas.
The United States Government and many of its agencies and departments
represent a significant market for our products and have been a major customer
in the past. U.S. Government and agencies which have purchased our products in
the past and to which we currently actively market our products include:
o The United States Department of Defense and a number of its
subdivisions have been using our products for force and asset
protection at numerous military bases and air force installations
around the world. Certain of our products have been certified and
included as part of the government's tested and approved
technologies.
o The United States Department of Energy, in connection with the
clean-up and operation of military bases and government-owned
nuclear processing facilities, offer an expansive and varied market
for our products. We presently are involved with the supply and
support services at 9 sites on an ongoing basis.
o The Department of Transportation, including airports, trucking and
distribution centers and marine terminals, are current target
marketing objectives and our products and systems directly apply to
the security needs of this multi-billion dollar market opportunity.
Our open-ended contract with the General Services Administration (GSA),
which has been extended through July 31, 2009, allows the US government to
purchase materials and services from us without having to go through a full
competition. In September, 2003, we announced the finalization of a 5-year
indefinite delivery/indefinite quantity contract with the United States
Department of the Air Force to secure highly strategic military facilities
throughout the world.
25
We also target state and local governments and governmental authorities
and agencies fulfilling the roles described above.
Large Industrial Facilities and Major Office Complexes. These types of
facilities, such as pharmaceutical companies, frequently house sensitive data
and are the primary locations where research and product development occur.
Facilities such as these are likely to acquire integrated security packages to
create a "smart building." The technologies required to create a smart building
in today's environment must address life, safety, power, lighting, information
technology protection and other security systems to create a normal yet secure
environment for employees, visitors and service personnel.
Energy Facilities, including Nuclear Plants, Power Utilities and Petrochemical
Pipelines. Nuclear and utility power stations which house sensitive information
and dangerous materials represent a large and lucrative market for our products.
Petrochemical, natural gas and pipeline companies, many of which operate in high
risk and remote environments and geographic locations, invest huge sums in the
assets necessary to operate those businesses and adopt appropriate measures to
protect these investments through the acquisition of security equipment and
systems.
Commercial Airports and Seaports. Transportation infrastructure security has
been at the forefront of security consciousness for many years. The Federal
government has appropriated significant funds for the acquisition and
installation of new, high-technology security systems at these facilities. There
are approximately 1,200 facilities in the United States which the Federal
Aviation Agency has identified and mandated for security systems upgrades to be
completed over the next several years and we will bid to provide products and
services to many of these sites.
Foreign/Export Opportunities. Government operations and private industries in
foreign countries are all subject to the same security issues that challenge
similar entities in the United States. We, along with our strategic teaming
partners and international sales representatives, continue to seek to penetrate
these markets. During 2003 and 2002, we generated approximately 30% and 26%,
respectively, of our revenues from projects performed outside the United States.
Marketing.
We obtain engagements through existing contract vehicles with commercial
and government organizations, direct negotiation with clients, competitive bid
processes and referrals.
We have developed a multi-tiered marketing plan which allows us to
effectively market our products to each of the separate government and industry
segments we have identified as target markets both in the United States and
internationally. Our marketing strategy highlights products strengths as they
apply to that particular industry.
The primary goals of our marketing strategy are to:
o broaden the base of potential clients to which we can market
our products, and
o demonstrate the efficacy of our products.
To that end, we have entered into strategic partnerships, teaming,
representative and joint venture relationships with major multi-national
corporations in each of the industries which comprise our target markets. These
companies generally enjoy a strong market presence in their respective
industries and we believe that our association with these entities affords the
Company and our products added credibility. These entities frequently
subcontract our services and purchase our products for use in connection with
larger projects they are performing for their clients. In September 2002, we
entered into an agreement with a security industry dealer-installer network that
has over 200 members located throughout the United States.
The strategic relationship framework depicts a comprehensive and thorough
mechanism for developing and implementing corporate strategy. Our board of
directors determined early in the process
26
that given our size and the criticality of our business situation that the
framework would be followed in a non resource exhaustive manner to permit more
expedient and efficient access to lucrative markets as the industry evolves.
Members of our management team have many years of experience in the
security industry. Each member of the management team is assigned an industry
area and makes direct contact with, and sales proposals to, government and
commercial organizations in that area. We attempt to cultivate and maintain
relationships and contacts with employees of each of the major government
agencies encompassing our target markets. In addition, we rely on our teaming
and strategic partners for introductions to appropriate personnel at these
agencies.
We generate a significant portion of our international business through
our network of independent sales representatives. We have entered into
agreements with various entities that allow us to maintain a presence in twenty
five countries worldwide. Our agreements generally extend for a period of two
years and provide the dealer/installer with discounts from current product
prices as an incentive to market our products in their geographic area. We rely
on our dealer/installer base to represent us and our product line throughout the
world and to apprise us of potential projects which can incorporate our
products. In addition, we rely on our dealers/installers to introduce our
company and our products to key government and private enterprise personnel in
their respective geographic regions.
We also market directly to providers of integrated security systems,
security systems dealers/installers, engineers and other entities that may be
engaged to implement a security system in behalf of a client.
We also attend the major trade shows for each industry and advertise in
relevant industry publications.
We employ a variety of pricing strategies for our services. Proposals for
consulting services are priced based on an estimate of hours multiplied by
standard rates. Systems integration engagements are priced based upon the
estimated cost of the components of the engagement, including subcontractors and
equipment, plus a profit margin. Pricing for engineering and maintenance
services vary widely depending on the scope of the specific project and the
length of engagement.
Growth Strategy.
In order to achieve a sustainable and continuous growth rate, we believe
that we must devote additional resources to marketing and product development.
Specifically, we have or intend to:
o Increase our sales and marketing personnel. We have added one more
person to our sales team who has extensive sales and marketing
experience in the middle Atlantic states. We believe this additional
sales and marketing person will allow us to access wider markets and
focus sales efforts required to develop business in our target
markets. We will seek to add further sales and marketing personnel
as necessary.
o Expand our base of dealers/installers/integrators worldwide. We
believe that an effective and cost efficient means of increasing
sales is to expand our base of independent dealers/sales
representatives worldwide. These entities serve as our local agents
to market products and provide customer support. Furthermore, these
entities are familiar with local laws and frequently have local
contacts in government and business at decision-making levels. We
will seek to expand our international base of sales representatives
by advertising in trade publications through our Company web site
and through international customer referrals.
o Expand our global presence. The Company formed a subsidiary in the
Middle East to represent and support our product sales. We have
entered into sales agreements with a number of multi-national
companies to represent and support their products as well.
27
Management believes the Mid-East operation will provide us with
access to potential projects in Africa, India and Eastern Europe.
o Design and develop new systems. We will continue to develop new
security systems to expand our portfolio of proprietary products.
This will allow us to open up new markets and retain our position as
a leading edge provider of technology based security equipment and
increase interest in the Company.
o License new and emerging technologies. We will continue to identify,
analyze and acquire new and emerging technologies that may have
application in the security industry. We will seek to acquire
technologies that will allow us to enhance our existing systems and
develop new products.
o Upgrade existing products. We have and will continue to upgrade our
existing products to take advantage of technological advancements so
that they remain state-of-the-art.
o Purchase laboratory and testing equipment. We will seek to purchase
certain laboratory and testing equipment which will allow us to
enhance and maintain product quality standards and support our
extended warranty program.
o Strengthen our management team. We have added a Vice President &
General Manager of Operations to support the projected increase in
manufacturing, production engineering and purchasing required to
meet the Company's delivery requirements.
o Improve our telecommunications infrastructure. We expect to install
a DSL TI line for network connectivity between our various US
facilities. This will permit an integrated method of communication
between and among the company's management and key employees.
Clients.
We provide our products and services to customers through direct sales to
end-users and through subcontracting agreements. During the past five years we
have provided products to approximately 50 clients on over 220 projects.
Competition.
As the public and private sectors become increasingly concerned with
security issues, the security and anti-terrorism industry has experienced
substantial growth. Competition is intense among a fragmented and wide ranging
group of product and service providers, including security equipment
manufacturers, providers of integrated security systems, systems integrators,
consulting firms and engineering and design firms and others that provide
individual elements of a system. Many of our current and potential competitors
have significantly greater name recognition and financial, technical, marketing
and other resources than we do. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the development, promotion, sale and support of
their products than we can. Because of growth in the marketplace, we anticipate
increased competition from other sources, ranging from emerging to established
companies. We believe that the principal factors affecting competition in the
industry include applied technology, product performance, price and customer
service. We cannot be certain that we will be able to compete successfully in
the future against existing or potential competitors.
We believe that we are able to sustain our competitive position in the industry
because:
o principal officers, security analysts, design personnel and
sales persons have over 170 years of combined experience in
the security industry;
28
o we have the ability to analyze security risks and design,
engineer and manufacture products customized to a client's
requirements;
o our products address a wide range of security requirements;
o our products are among the most technologically advanced,
highest quality available;
o our products are flexible in that many of our products can be
configured and customized to meet a client's specific needs
and can be integrated with each other and with and into
existing security systems;
o our products are reliable, and are relatively easy and
inexpensive to install and maintain;
o we have been successful in teaming with large multinational
companies which market and incorporate our products in their
product offerings, thereby contributing to the credibility and
efficacy of our products.
Manufacturing.
We conduct our manufacturing operations at our facilities in New Jersey
and Alabama. These activities consist of procurement of materials, product
assembly and component integration, product assurance, quality control and final
testing. We believe that our manufacturing facilities will not be adequate to
satisfy the anticipated demand for our products under the USAF contract award.
We have completed negotiations with our landlord at our headquarters in New
Jersey to add 2,600 square feet of manufacturing space which will afford us the
flexibility to enlarge our manufacturing facilities, and increase equipment and
personnel as required to fill orders for product without undue delay. Further,
we are planning to open a logistical engineering and sales support facility in
Virginia to support the USAF contract and expand our government base to cover
the expected market for our products which may result from The Homeland Security
Act.
Compliance with environmental laws has no impact on our manufacturing or other
operations.
Sources and Availability of Components and Manufacturing Materials.
We depend heavily on our suppliers to provide high-quality materials on a
timely basis and at reasonable prices. We purchase the individual components
comprising our products from third party suppliers, or subcontract to third
parties the manufacture of specific subsystems necessary for a particular
product. We are not dependent on any major suppliers for the components of our
products and we believe, should it become necessary in the event of any
disruption in supply or discontinuation of production by any of our present
suppliers, that all of the components used in our products are available from
numerous sources at competitive prices. Various aspects of the software
programming required in connection with our computer products are designed and
written by in-house personnel or are subcontracted to third parties.
We have not entered into any long-term contracts for the purchase of
components but rather rely on rolling forecasts to determine the number of units
we will sell and the components required therefore. To date, we have been able
to obtain supplies of these components and we believe that adequate quantities
are available to meet our needs.
Intellectual Property and Other Proprietary Rights.
Proprietary protection for our technological know-how, products and
product candidates is important to our business. Currently, we rely upon trade
secrets, know-how and continuing technological innovation to develop and
maintain our competitive position. We also rely on a combination of trade secret
protection and non-disclosure agreements to establish and protect our
proprietary rights.
29
Our success is dependent to a great extent on our proprietary knowledge,
innovative skills, technical expertise and marketing ability. Our present
intention is not to rely primarily on patents or other intellectual property
rights to protect or establish our market position.
We have obtained trademarks in the United States, South Korea, United
Kingdom and Saudi Arabia for the terms "FOIDs(R)" (Fiber Optic Intelligent
Detection System), "IPIDS(R)" (Infrared Perimeter Intrusion Detection System),
"RDIDS(R)" (Rapid Deployment Infrared Detection System), "IDMS(R)" (Intrusion
Detection & Monitoring System) and "APIDS(R)" (Acoustic Perimeter Intrusion
Detection System). We have also filed in other countries.
We require all employees, consultants and contractors to execute
non-disclosure agreements as a condition of employment or engagement by us. We
cannot be certain, however, that we can limit unauthorized or wrongful
disclosures of unpatented trade secret information.
Although we continue to implement protective measures and intend to defend
our proprietary rights, policing unauthorized use of our technology or products
is difficult and we cannot be certain that these measures will be effective or
successful.
Research and Development.
We design and develop new products based upon market requirements. The
forces which drive the design and development of new products include developing
products to meet new security threats, incorporate new technologies or to
satisfy a client's security requirements. We research and assess threat and
vulnerability issues at selected facilities within our target markets and we
design and engineer our products in-house, with outside consultants as
necessary, and in conjunction with joint venture partners to meet the needs of
clients within the target markets based upon the results of such research. We
investigate new and emerging technologies that have application in the security
industry and seek to license these technologies which we then incorporate into
our products.
During the years ended June 30, 2004 and 2003, we expended $322,912 and
$257,123, respectively, on research and development activities.
Product Warranty.
We offer warranties on all our products, including parts and labor. For
the years ended June 30, 2004 and 2003, net expenses attributable to warranties
were not material.
Technology Licensing Arrangements.
As we endeavor to design and manufacture the most effective and efficient
technology based security solutions, we review and investigate new and emerging
technologies that have application in the security industry. We frequently seek
to incorporate these technologies into our systems. We are party to agreements
to use certain technologies including licenses with Lucent Technologies, Rafael
Armament Development Authority, Visage, Inc., Penn State University, Textron
Corp. and Hyperdyne, Inc.
Employees.
As of September 15, 2004, we employed eighteen (18) individuals on a
full-time basis including four (4) design and engineering staff, five (5)
manufacturing and assembly employees, four (4) marketing employees and five (5)
administrative employees. A number of the employees serve in multiple
capacities, for example, Arthur Barchenko serves as our President but also is an
integral member of the
30
Company's marketing team and our manufacturing staff may oversee site
installation of the products which they are responsible for manufacturing.
We have relationships with twelve (12) independent sales representative
organizations covering specific regions in the U.S.A., Central America, South
America, United Kingdom, India, the Middle East, and Southeast Asia.
None of our employees are covered by a collective bargaining agreement or
are represented by a labor union. We consider our relationship with our
employees to be satisfactory.
Properties
Our corporate headquarters are located at 790 Bloomfield Avenue, Clifton,
New Jersey where we lease approximately 12,600 square feet of space divided
among administrative (3,000 sq. feet) and manufacturing (9,600 sq. feet) space.
We have leased this space through May 1, 2008 at a rent of $5,153 per month
increasing to $5,468 per month by the end the lease term. We also lease
approximately 2,500 square feet of manufacturing space at 102 Commerce Circle,
Madison, Alabama. We have leased this space through February, 2007 at a cost of
$2,000 per month. Our newly formed foreign subsidiary in the Middle East has
leased approximately 2000 square feet of office space through December, 2006 at
a cost of $1,363 per month.
We believe that our manufacturing facilities are inadequate to meet demand
for our products based on the USAF contract award. We have started negotiations
with our landlord for additional space within our existing industrial complex
thereby being in a position to add manufacturing facilities, equipment and
personnel as required to fill orders for product without undue delay. We are
planning to open a logistical engineering and sales support facility in Virginia
to support our contract with the US Air Force and expand our government base for
The Homeland Security market.
31
OUR MANAGEMENT
Directors and Executive Officers.
The following table sets forth certain information about our directors and
executive officers as of October 8, 2004:
- --------------------------------------------------------------------------------
Year First
Name Position Age Became A Director
---- -------- --- -----------------
- --------------------------------------------------------------------------------
Arthur Barchenko President and Director 71 1976
- --------------------------------------------------------------------------------
Richard Stern Vice President 55
- --------------------------------------------------------------------------------
Eldon Moberg Vice President 52
- --------------------------------------------------------------------------------
Thomas Isdanavich Vice President 56
- --------------------------------------------------------------------------------
Joseph McAndrew Vice President 50
- --------------------------------------------------------------------------------
Natalie Barchenko Treasurer and Director 70 2001
- --------------------------------------------------------------------------------
James R. Janis Director 60 2001
- --------------------------------------------------------------------------------
Gene Rabois Director 59 1989
- --------------------------------------------------------------------------------
Robert F. Reiter Director 54 2001
- --------------------------------------------------------------------------------
Edward Snow Director 65 2000
- --------------------------------------------------------------------------------
Arthur and Natalie Barchenko are married.
The Company's directors are elected to hold office until the next annual
meeting of shareholders and until their respective successors have been elected
and qualified. The Company's officers serve at the pleasure of the Board of
Directors.
Set forth below is biographical information concerning our directors and
executive officers for at least the past five years. All of the following
persons who are executive officers are also full-time employees.
Arthur Barchenko has been our President since December 1976. Mr.
Barchencko also participates in the management of our subsidiaries. From June
1952 to May 1972, he held various sales and marketing positions at Lightolier,
Inc., a company engaged in the manufacturing and marketing of lighting fixtures.
During his tenure at Lightolier, Inc., Mr. Barchenko served as the vice
president of sales and was responsible for directing a sales force of
approximately 150 persons and a support staff of approximately 50 persons. Mr.
Barchenko also served as a member of the board of directors and on the executive
committee Lightolier, Inc. Prior to organizing Electronic Control Security Inc.,
Mr. Barchenko co-founded and directed the operations of Bajer Industries, a
lighting manufacturing company that was subsequently sold to the Charter Group.
Mr. Barchenko is active with American Defense Preparedness Association, and
American Society of Industrial Society. He served on the Radio Technical
Commission
32
for Aeronautics Committee 183 for upgrade of FAR 107.14(a) and (b) as a member
of the special access control security task force for the Federal Aviation
Administration. Federal Aviation Regulation 107.14 (FAR 107.14a and b) is the
document produced by RTCA committee 183 for the security upgrade of the access
control system and universal access control system requirements for civilian
commercial and shared civilian/military airports under U.S. jurisdiction.
Richard Stern has served as our Vice-President-Manufacturing since
December 1, 1997. He is responsible for the overall management of our
manufacturing department, which includes supervising all manufacturing,
maintenance and test personnel; manufacturing engineering, including the review
and evaluation of new and existing product design in a manufacturing
environment; oversight of maintenance of plant equipment and facilities;
mechanical package design of new product development; quality control, including
the development of test equipment and procedures; production scheduling;
shipping and receiving and inventory of all materials and finished products,
purchasing and expediting of materials and supplies, and oversight of
manufacturing personnel, labor reports. Prior to joining us, Mr. Stern spent 25
years in the data communication and temperature processing fields. He has held
managerial positions in manufacturing, engineering, quality control, service, as
well as being involved in the design and development of the product lines within
these fields.
Eldon Moberg joined us in 1996 as the Vice President of the FOIDS product
division and has served as our Vice-President since July 1, 1999. Mr. Moberg is
responsible for establishing the FOIDS manufacturing and test facility in
Madison, Alabama. His duties include planning and coordinating manufacturing
schedules and resources and the provision of technical data for security system
design and project cost analysis. Prior to joining us, Mr. Moberg was the
Production Supervisor for Mason & Hanger National, Inc. a company engaged in the
manufacture and marketing of our FOIDS product line where he initially was a
production support technician and performed optical / electronic fabrication and
testing of a fiber optic based security system and components. Thereafter, as
Production Supervisor, he was responsible for planning and scheduling personnel,
materials and equipment to support product manufacture. Other duties included
procurement, product acceptance testing QA / QC, inventory control and MRP
system operation. Before entering private industry, Mr. Moberg served for twenty
years in the United States Army where he gained experience as senior radar
repair technician for several Army Air Defense systems, team leader for missile
system direct support maintenance and training developer for newly acquired Army
missile systems.
Thomas Isdanavich has been Vice President of Product Management at ECSI
since July 1997. He determines installation and service support requirements for
in-house and field applications. His responsibilities include field labor
analysis and the planning and coordination of all administrative phases of sales
and customer support services. Mr. Isdanavich was employed by Beall
Technologies, Inc. a manufacturer of matrix switching equipment for IBM
compatible mainframe computers, from 1973 to 1997. Prior to entering private
industry, Mr. Isdanovich served in the U.S. Navy for four years.
33
Joseph McAndrew joined us in June, 2003 as Vice President of Operations.
Prior to that Mr. McAndrew spent 20 years as an innovative, hands-on
manufacturing operations executive with experience in controlling all of the
elements inherent in producing superior products at the lowest possible costs.
He has headed global manufacturing operations for multi-layer radio frequency
signal processing components used in the military, satellite and commercial
markets with annual sales of $25 million. Mr. McAndrew has developed new and
unique process techniques, allowing entry into the commercial market and
resulting in the issuance of two U.S. Patents. His experience is multi-national
with important technology operation transfers in Canada and production build
outs in Central America. Mr. McAndrew has a master's degree in Engineering
Management from the New Jersey Institute of Technology.
Gene Rabois has served as a member of our Board of Directors since October
1, 1989. He previously had served as our Chief Financial Officer. He has more
that thirty years of progressive experience in accounting and finance,
Securities and Exchange Commission financial reporting, installation and
management of computer systems and control and administration of corporate
financial affairs. Mr. Rabois currently serves as the Controller for SJT
Imaging, Inc., a printing concern.
Natalie Barchenko has been a director and the Treasurer of ECSI since
2001. Over the last ten years, she has been actively involved with the day to
day operations of the Company in the areas of human resources, accounting,
advertising and sales functions. She works on a voluntary basis for the Library
of Congress preparing Braille translations for the blind. Ms. Barchenko is
married to Arthur Barchenko, our President and a Director.
Edward Snow has been a director of ECSI since June 2000. From October 1996
to October 1999 he was the co-owner and operated Phoenix Fiber Optics Inc., a
manufacturer and marketer of fiber optic products. From October 1999 to October
2000, he has served as the Assistant to the President of Space America Corp.
Since 1996, he has acted as a private consultant to the government and industry.
Robert F. Reiter has been a Director of ECSI since November 2001. Since
November 1997, he has served as the President of R.F. Reiter & Associates, an
engineering consulting firm. Since January 2002, he has been the President of
HAZ-X Holdings, Ltd., which engages in non-intrusive inspection engineering and
operations From 1977 through 1997, he was the Vice President of Analytical
Systems Engineering Corp. an engineering consulting company.
James R. Janis has been a Director since November 2001. Mr. Janis has been
the President of the Janis Group, a management consulting company, since 1996.
From December 1992 through May 1996, he serves as the Executive Vice President
of BNFL, Inc. which engages in nuclear waste management. From February 1980
through 1992, he was the Executive Vice President of ICF Kaiser International,
an environmental consulting firm. Prior thereto, he was Deputy Assistant
Secretary for Planning and Evaluation of the US Department of Energy.
Committees of Board of Directors.
The board does not have a nominating or a compensation committee. The
selection of nominees for the Board of Directors is made by the entire Board of
Directors. Compensation of management is determined by the entire Board of
Directors.
Audit Committee.
The audit committee consists of Messrs. Rabois and Snow, both of whom are
independent directors. The audit committee meets at least quarterly with our
management and our independent registered public accounting firm to review and
help ensure the adequacy of our internal controls and to review the results and
scope of the auditors' engagement and other financial reporting and control
34
matters. Mr. Rabois and Mr. Snow are financially literate, and Mr. Rabois is a
financial expert, as such term is defined under the Sarbanes-Oxley Act of 2002.
The audit committee has adopted a formal written charter specifying: (i)
the scope of the audit committee's responsibilities and how it is to carry out
those responsibilities, including structure, processes and membership
requirements; (ii) the audit committee's responsibility for ensuring its receipt
from the outside auditor of a formal written statement delineating all
relationships between the auditor and the company, consistent with Independence
Standards Board Standard 1, adopted in January 1999 by the Independence
Standards Board (the private sector standard-setting body governing the
independence of auditors from their public company clients) and the committee's
responsibility for actively engaging in communications with the auditor with
respect to any relationships or services that may impact the objectivity and
independence of the auditor and for taking, or recommending that the entire
board of directors take, appropriate action to oversee the independence of the
outside auditor; and (iii) the outside auditor's ultimate accountability to the
board of directors and the audit committee, as representatives of our company's
stockholders, and these stockholder representatives' ultimate authority and
responsibility to select, evaluate and, where appropriate, replace the outside
auditor (or to nominate the outside auditor for stockholder approval). Our audit
committee will review and reassess the adequacy of our written charter on an
annual basis.
The audit committee has adopted guidelines and procedures: (i) making it
directly responsible for the appointment, compensation and oversight of the work
of any public accounting firm engaged by it (including resolution of any
disagreements between management and the firm regarding financial reporting) for
the purpose of preparing or issuing an audit report or related work, and each
such public accounting firm will report directly to the audit committee; (ii)
providing for the (a) receipt, retention and treatment of complaints received by
our Company regarding accounting, internal accounting controls or auditing
matters and (b) confidential, anonymous submission by Company employees of
concerns regarding questionable accounting or auditing matters; (iii) affording
it the authority to engage independent counsel and other advisers, as it may
determine to be necessary to carry out its duties; and (iv) providing for
appropriate funding for payment of: (a) the public accounting firm engaged by
our Company for the purpose of rendering or issuing an audit report and (b) any
advisers engaged by the audit committee as described under clause (iii) above.
Code of Ethics.
We have adopted a code of ethics, as contemplated by Section 406 of the
Sarbanes-Oxley Act of 2002. Such code of ethics is posted on our website,
www.ecsi@anti-terrorism.com. Our Code of Ethics is designed to deter wrongdoing
and to promote:
o Honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships;
o Full, fair, accurate, timely, and understandable disclosure in reports
and documents that we file with, or submit to, the Commission and in other
public communications we make;
o Compliance with applicable governmental laws, rules and regulations;
o The prompt internal reporting of violations of the Code of Ethics to an
appropriate person or persons identified in the Code of Ethics; and
o Accountability for adherence to the Code of Ethics.
We will disclose any amendment to, or waiver of, a provision of our Code
of Ethics on a Form 8-K filed with the SEC and post such information and
intention on our Internet website.
35
Compensation.
Directors' Compensation.
In addition to reimbursing directors for expenses they incur in attending
meetings of the Board or Committees of the Board, we pay our directors a fee of
$500 for each meeting attended. It is expected that our outside directors will
receive an annual award of stock options under our equity incentive plan.
Executive Compensation.
The following table sets forth certain information concerning the annual
and long-term compensation of the person serving as our chief executive officer
(the "Named Executive") during the last three years. No other executive officers
received annual compensation in excess of $100,000 during the last three fiscal
years.
- --------------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
- --------------------------------------------------------------------------------------------------------------------------
Annual Compensation Awards Payouts
- --------------------------------------------------------------------------------------------------------------------------
Restricted Securities
Name and Other Annual Stock Underlying
Principle Salary Bonus Compensation Award(s) Options/SARs LTIP All Other
Position Year ($) ($) ($) ($) (#) Payouts ($) Compensation ($)
- --------------------------------------------------------------------------------------------------------------------------
Arthur
Barchenko, 2004 $ 96,000 50,000
President
2003 $101,700
2002 $ 98,800 100,000
- --------------------------------------------------------------------------------------------------------------------------
Option Grants in the Last Fiscal Year
The following table presents certain information concerning stock options
granted to the Named Executive under our various stock option plans during the
2004 fiscal year.
- --------------------------------------------------------------------------------------------------------------------------
Option/SAR Grants in Last Fiscal Year
- --------------------------------------------------------------------------------------------------------------------------
Individual Grants
- --------------------------------------------------------------------------------------------------------------------------
Number of Securities % of Total Options/SARs Exercise or
Underlying Options/SARs Granted to Employees in Base Price
Name Granted (#) Fiscal Year ($/Sh) Expiration Date
---- ----------- ----------- ------ ---------------
- --------------------------------------------------------------------------------------------------------------------------
Arthur Barchenko 50,000 22.73% 1.00 January 2, 2014
- --------------------------------------------------------------------------------------------------------------------------
36
Fiscal Year-End Option N umbers and Values
The following table sets forth additional information as of June 30, 2004,
concerning shares of our common stock that may be issued upon the exercise of
options under our existing equity compensation plans, divided between plans
approved by our stockholders and plans or arrangements not submitted to our
stockholders for approval. The information includes the number of shares covered
by, and the weighted average exercise price of, outstanding options and the
number of shares remaining available for future grants excluding the shares to
be issued upon exercise of outstanding options, warrants, and other rights.
- --------------------------------------------------------------------------------------------------------------------------------
Aggregate Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
- --------------------------------------------------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised In-the
Shares Unexercised Options/SARs Money Options/SARs at
Acquired on Value at FY-End (#) FY-End ($)
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------ ------------ ------------------------- -------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Arthur Barchenko -0- -0- 150,000/150,000 $0/$0
- --------------------------------------------------------------------------------------------------------------------------------
Stock Option Plan.
Incentive Stock Option Plan. In 1986, the Company adopted an Incentive
Stock Option Plan which it renewed in 1996 for a second ten-year term. The
Company has reserved 1,000,000 shares of common stock for issuance under the
Stock Option Plan. The Board of Directors administers the Stock Option Plan but
may delegate such administration to a committee of three persons, one of whom
must be a member of the Board. The Board or the Committee has the authority to
determine the number of options to be granted, when the options may be exercised
and the exercise price of the options, provided that the exercise price may
never be less than the fair market value of the shares of the Common Stock on
the date the option is granted (110% in the case of any employee who owns more
than 10% of the combined voting power or value of all classes of stock). Options
may be granted for terms not exceeding ten years from the date of the grant,
except for options granted to person holding in excess of 5% of the common
stock, in which case the options may not be granted for a term not to exceed
five years from the date of the grant.
Non-statutory Stock Option Plan. The Company also has adopted a
non-statutory stock option plan and has reserved 250,000 shares of common stock
for issuance to Directors, employees and non-employees. Options granted pursuant
to this plan will be non-transferable and expire, if not exercised within five
years from the date of the grant. Options will be granted in such amounts and at
such exercise prices as the Board of Directors may determine.
Equity Compensation Plan Information
The following table sets forth additional information as of June 30, 2004,
concerning shares of our common stock that may be issued upon the exercise of
options and other rights under our existing equity compensation plans and
arrangements, divided between plans approved by our stockholders and plans or
arrangements not submitted to our stockholders for approval. The information
includes the number of shares covered by and the weighted average exercise price
of, outstanding options and other rights and the number of shares remaining
available for future grants excluding the shares to be issued upon exercise of
outstanding options, warrants, and other rights.
37
Equity Compensation Plan Information
- ----------------------------------------------------------------------------------------------------------------------------
Weighted-average Number of securities available
Number of securities to be exercise price of for future issuance under equity
issued upon exercise of outstanding compensation plans (excluding
outstanding options, warrants options, warrants securities reflected
Plan Category and rights and rights in column (a))
- ----------------------------------------------------------------------------------------------------------------------------
Equity compensation 590,00 $1.53 410,000
plans approved
by security holders
- ----------------------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders
- ----------------------------------------------------------------------------------------------------------------------------
Total 590,000 $1.53 410,000
- ----------------------------------------------------------------------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of September 15, 2004 with
respect to the beneficial ownership of our common stock by each person known by
us to be the beneficial owner of more than 5% of the outstanding common stock,
by each of our officers and directors, and by all of our officers and directors
as a group.
For the purpose of this table, the beneficial ownership of a person
includes shares as to which that person has sole or shared voting or investment
power as well as shares that the person has the right to acquire within 60 days
(such as upon conversion of convertible securities or exercise of warrants or
options) as of September 15, 2004. For the purpose of calculating the ownership
percentages for each person listed, we have considered to be outstanding both
the total number shares actually outstanding on September 15, 2004 and the total
number of shares that various people then had the right to acquire within 60
days.
- --------------------------------------------------------------------------------
Name Beneficial Owner (1) Number of Shares Percent of Class (2)
- ------------------------- ---------------- --------------------
- --------------------------------------------------------------------------------
Arthur Barchenko (3) 1,154,963 20.18%
- --------------------------------------------------------------------------------
Richard Stern (4) 35,000 *
- --------------------------------------------------------------------------------
Eldon Moberg (5) 65,000 *
- --------------------------------------------------------------------------------
Thomas Isdanavich (6) 30,000 *
- --------------------------------------------------------------------------------
Joseph McAndrew (7) 20,000 *
- --------------------------------------------------------------------------------
Natalie Barchenko (8) 1,579,079 27.59%
- --------------------------------------------------------------------------------
James R. Janis (7) 35,000 *
- --------------------------------------------------------------------------------
Gene Rabois 62,115 1.12%
- --------------------------------------------------------------------------------
Robert F. Reiter (9) 40,000 *
- --------------------------------------------------------------------------------
Edward Snow (10) 30,000 *
- --------------------------------------------------------------------------------
Directors and officers
as a group (11 persons) (11) 2,891,157 49.11%
- --------------------------------------------------------------------------------
* Less than 1%.
(1) As used in this table, "beneficial ownership" means the sole or shared
power to vote, or to direct the voting of, a security, or the sole or
shared investment power with respect to common stock (i.e., the power to
dispose of, or to direct the disposition of, a security). The address of
each person is in care of the Company.
(2) Based on 5,541,874 shares outstanding and issuable as of September 15,
2004.
(3) Consists of 964,963 shares of common stock, including 193,496 shares not
registered in Mr. Barchenko's name but over which he has dispository power
and control, and options to purchase 150,000 shares of common stock.
(4) Consists of 30,000 shares of common stock and options to purchase 5,000
shares of common stock.
(5) Consists of 20,000 shares of common stock and options to purchase 45,000
shares of common stock.
(6) Consists of 20,000 shares of common stock and options to purchase 10,000
shares of common stock.
(7) Consists solely of options to purchase shares of common stock.
(8) Consists 1,429,079 shares of common stock and options to purchase 150,000
shares of common stock.
(9) Consists of 10,000 shares of common stock and options to purchase 30,000
shares of common stock.
(10) Consists of 10,000 shares of common stock and options to purchase 20,000
shares of common stock.
(11) Includes options to purchase 345,000 shares of common stock which are held
by all directors in the aggregate.
38
DESCRIPTION OF SECURITIES
General.
Our authorized capital consists of 15,000,000 shares of common stock, par
value $0.001 per share, and 5,000,000 shares of preferred stock, par value $0.01
per share, of which 1,100,000 shares are designated as Series A Convertible
Preferred Stock ("Series A Preferred Stock") and 2,000 shares are designated as
10% Series B Convertible Preferred Stock ("Series B Preferred Stock"). The
balance of the authorized but unissued preferred stock has not been designated
at the date hereof. At September 15, 2004, we had the following securities
outstanding:
Common Stock: 5,541,874 shares.
Series A Preferred Stock: 362,500 shares convertible into 414,286
shares of common stock.
Series B Preferred Stock: 2,000 shares convertible into 2,000,000
shares of common stock.
Unit Warrants: 2,200,000 exercisable for a like number
of shares of common stock which expire
June 29, 2008.
Warrants: 500,000 exercisable for a like number of
shares of shares of common stock which
expire on March 14, 2005.
350,000 shares of common stock are
issuable upon exercise of outstanding
warrants which expire in November 2004.
Options: 520,000 exercisable for a like number of
shares of common stock.
Other Securities: There are additional outstanding
securities (all of which expire on March
14, 2005) entitling the holders to
purchase up to (i) 93,797 shares of
Series A Preferred Stock (convertible
into an aggregate of 107,197 shares of
common stock), and (ii) warrants to
purchase up to 46,828 shares of common
stock.
39
Common Stock.
Each outstanding share of common stock has one vote on all matters
requiring a vote of the stockholders. There is no right to cumulative voting;
thus, the holders of fifty percent or more of the shares outstanding (including
the shares of Series A Preferred Stock voting with the common stock on an as
converted basis) can, if they choose to do so, elect all of the directors. In
the event of a voluntary or involuntary liquidation, all stockholders are
entitled to a pro rata distribution after payment of liabilities and after
provision has been made for each class of stock, if any, having preference over
the common stock. The holders of the common stock have no preemptive rights with
respect to offerings of the Company's securities. Holders of common stock are
entitled to dividends if, as and when declared by the Board out of the funds
legally available therefore, subject to the rights of holders of the Series A
Preferred Stock. It is the Company's present intention to retain earnings, if
any, for use in its business. Cash dividends are, therefore, unlikely in the
foreseeable future.
Series A Convertible Preferred Stock.
Dividends. We pay a cumulative dividend on the Series A Convertible Preferred
Stock ("Series A Preferred Stock"), prior and in preference to any declaration
or payment of any cash dividend on the common stock, at the rate of $.20 per
share per annum payable quarterly (payable in cash or shares of common stock
valued at a price of $2.00 per share), when, as and if declared by the Board of
Directors.
Unless we pay the full amount of dividends on the Series A Preferred Stock
for the then current dividend period, we shall not (A) pay any cash dividend on
any common stock, or (B) purchase, redeem, or acquire any shares of common stock
nor shall we pay into or set aside or make available any funds for a sinking
fund for the purchase, redemption, or acquisition of the common stock.
Conversion. Holders of Series A Preferred Stock are entitled to convert each
share into shares of common stock at any time at the option of the holder. Each
share of Series A Preferred Stock is convertible into one share of common stock,
subject to certain adjustments as the result of the payment of dividends (and
other distributions) in common stock on the outstanding shares of common stock
and subdivisions, combinations and reclassifications of common stock.
Voting Rights. Except as provided by law, the holders of the Series A Preferred
Stock will vote on an as-if converted basis with the holders of common stock
(and any other class or series which may be similarly entitled to vote with the
common stock) as one class on all corporate matters requiring stockholder
approval. The holders of the Series A Preferred Stock will be entitled to vote
as a separate class with respect to matters directly affecting the Series A
Preferred Stock.
Liquidation Payment. In the event of any liquidation, dissolution or winding up
of the Company, or in the event of a consolidation or merger of the Company with
or into any other corporation, or a sale, conveyance or disposition of all or
substantially all of the assets of the Company or the effectuation by the
Company of a transaction or series of related transactions in which more than
50% of the voting power of the Company is disposed of, the holders of Series A
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets of the Company to the holders of common stock,
(x) an amount per share equal to $2.00 and (y) an amount equal to declared but
unpaid dividends on each such share. In addition, (1) in the case of a
dissolution or winding up of the Company, the remaining assets of the Company
available for distribution to stockholders shall be distributed among the
holders of the Series A Preferred Stock and the common stock pro rata based on
the number of shares of common stock held by each (assuming conversion of all
shares of Series A Preferred Stock), or (2) in the case of a merger or sale of
the Company, the remaining consideration to be paid by the acquiring corporation
in such transaction shall be distributed among the holders of the Series A
Preferred Stock and the common stock pro rata based on the number of shares of
common stock held by each (assuming conversion of all shares of Series A
Preferred Stock).
40
Redemption Rights. We have the right to redeem the Series A Preferred Stock at
any time provided that the average closing bid price per share of common stock
for the twenty (20) trading days prior to the redemption notice is $4.00.
Protective Provisions. During such time as shares of Series A Preferred Stock
are outstanding, we will not, without first obtaining the approval of the
holders of at least a majority of the then outstanding shares of Series A
Preferred Stock, voting separately, undertake certain acts that would directly
affect the Series A Preferred Stock, such as, (a) selling or otherwise disposing
of or encumbering all or substantially all of our property or business, except
in connection with liens granted to any lender providing the Company with a
revolving line of credit; (b) altering or changing the rights, preferences or
privileges of the shares of Series A Preferred Stock so as to adversely effect
the shares; (c) increasing the authorized number of shares of Series A Preferred
Stock; or (d) undertaking any proposed capital reorganization or
reclassification with respect to equity securities (or securities convertible
into other securities) into equity securities ranking senior to the Preferred
Stock with respect to dividends, distributions or rights upon liquidation.
10% Series B Convertible Preferred Stock.
Dividends. We pay a cumulative dividend on the Series B Convertible Preferred
Stock ("Series B Preferred Stock"), prior and in preference to any declaration
or payment of any cash dividend on the Series A Preferred Stock and the common
stock, at the rate of 10% per share per annum payable quarterly (payable in cash
or shares of common stock, at our option), when, as and if declared by the Board
of Directors. To the extent we elect to pay the dividend on this class of shares
in common stock, the dollar amount of the dividend is added to the stated value
of each share of Series B Preferred Stock and such shares are issued upon
conversion of the Series B Preferred Stock into shares of common stock.
Unless we pay the full amount of dividends on the Series B Preferred Stock
for the then current dividend period, we shall not (A) pay any cash dividend on
any common stock or Series A Preferred Stock, or (B) purchase, redeem, or
acquire any shares of common stock or Series A Preferred Stock nor shall we pay
into or set aside or make available any funds for a sinking fund for the
purchase, redemption, or acquisition of the common stock.
Voting Rights. Except as provided by law, the holders of the Series B Preferred
Stock are not entitled to vote their shares. The holders of the Series B
Preferred Stock will be entitled to vote as a separate class with respect to
matters directly affecting the Series B Preferred Stock.
Liquidation. Upon any liquidation of the company, holders of Series B Preferred
Stock shall be entitled to receive out of the assets of the company, for each
share of Series B Preferred Stock an amount equal to the stated value per share
(calculated by adding the purchase price per share of $1,000 plus the amount of
any dividends added thereto) before any distribution or payment shall be made to
the holders of any securities ranking below the Series B Preferred Stock, and if
the assets of the Company shall be insufficient to pay in full such amounts to
all holders of Series B Preferred Stock, then the entire assets to be
distributed to the holders of such shares shall be distributed among these
holders ratably in accordance with the respective stated values represented by
the Series B Preferred Stock then held by them.
Conversion.
Conversion at Option of a Holder. Each share of Series B Preferred Stock
initially is convertible into 1,000 shares of common stock, at the option of the
applicable holder, at any time.
Conversion at Option of the Company. The Company may require the
conversion of all (but not less than all) of the then outstanding shares of
Series B Preferred Stock, if at any time: (i) the volume weighted average
trading price per share of common stock for each of 20 consecutive trading days
prior to a conversion notice is greater than $2.50 (subject to adjustment), (ii)
the daily trading volume of the
41
common stock is at least 100,000 shares for each of the 20 trading days prior to
a conversion notice (subject to equitable adjustment in the event of stock
splits and reverse splits), and (iii) all shares of common stock underlying the
Series B Preferred Stock are the subject of an effective registration statement.
We are restricted from converting any shares of Series B Preferred Stock that
would cause a holder to own, upon any conversion, (i) when added to shares of
common stock already owned by such holder a number of shares of common stock
that does not exceed 4.999% of the total number of issued and outstanding shares
of Common Stock (including for such purpose the shares of Common Stock issuable
upon such conversion) or (ii) when added to shares of common stock already owned
by such holder and its affiliates and any other persons whose beneficial
ownership of common stock would be aggregated with the holder's as provided
under the Securities Exchange Act of 1934, would exceed 9.999% of the total
number of issued and outstanding shares of common stock (including for such
purpose the shares of common stock issuable upon such conversion).
The number of shares issuable upon conversion of Series B Preferred Stock
is subject to adjustment in certain cases including, if at any time prior to
July 1, 2007, at any time while shares of Series B Preferred Stock are
outstanding, we issue any common stock or any common stock equivalents entitling
any person to acquire shares of common stock at a price per share less than the
$1 per share (or as otherwise adjusted) then the conversion price shall be
automatically adjusted to the lowest conversion, exchange or purchase price for
such common stock or common stock equivalents at issue.
Protective Provisions. While any shares of Series B Preferred Stock are
outstanding, we have agreed, without first obtaining the affirmative vote of the
holders of at least a majority of the shares of Series B Preferred Stock then
outstanding:
o alter or change the powers, preferences or rights given to the Series B
Preferred Stock;
o increase or decrease the number of shares of Series B Preferred Stock or
increase or decrease the number of authorized shares of common stock;
o authorize or create (by reclassification or otherwise) any class of equity
security ranking as to dividends or distribution of assets upon a
liquidation senior to or on a par with the Series B Preferred Stock;
o redeem, purchase or otherwise acquire directly or indirectly any of our
other securities;
o directly or indirectly pay or declare any dividend or make any
distribution (other than dividends due and paid in the ordinary course on
outstanding preferred stock at such times when the company is in
compliance with its payment obligations to the Series B Preferred Stock)
upon, nor shall any distribution be made in respect of, any junior
securities, nor shall any monies be set aside for or applied to the
purchase or redemption (through a sinking fund or otherwise) of any junior
securities or securities on a par with the Series B Preferred Stock;
o enter into any agreement with respect to a change of control transaction
unless on the date of such agreement certain conditions, including the
effectiveness of a registration statement covering the common stock
underlying the Series B Preferred Stock and the Unit Warrants, are
satisfied;
o amend or waive any provision in its Articles of Incorporation in a manner
adverse to the Preferred Stock; or
o enter into any agreement with respect to the foregoing clauses.
Options and Warrants.
As of September 15, 2004, options and warrants for 3,570,000 shares of our
common stock were outstanding. Holders of options and warrants do not have any
of the rights or privileges of our stockholders, including voting rights, prior
to exercise of the options and warrants. We have reserved sufficient shares of
authorized common stock to cover the issuance of common stock subject to the
options and warrants.
42
RELATED PARTY TRANSACTIONS
In March 2004, we issued 735,294 shares of common stock to Natalie
Barchenko, the Treasurer and a director of the Company and the wife of Arthur
Barchenko, the Company's president and a director, upon the conversion of loans
made by Ms. Barchenko to the Company in the aggregate amount of $250,000. The
offering price of the shares was based upon a then outstanding offer by a third
party to purchase shares of common stock at such price.
Until the Company achieved profitability, we relied on loans from
officers, directors, shareholders and their affiliates to assist in the funding
of our operations.
At June 30, 2004 and 2003, related party debt consisted of $464,487 and
$14,443, respectively. The loans are repayable with interest at rates varying
from no interest through 12% interest per annum. All interest for the fiscal
year 2004 and 2003 has been paid. The Company is restricted from repaying the
principal amount of the loans except as permitted under the Purchase Agreement
dated June 30, 2004 by which we sold the shares of Series B Preferred Stock
which provides that (i) repayment shall be later than December 31, 2005, (ii)
for the six month period ended June 30, 2005 (x) the reported revenues of the
Company shall not be less than $11 million and (y) the reported earnings per
share of Common Stock shall be not less than $0.23 based upon 7,250,000 shares
of Common Stock outstanding, and (iii) both at December 31, 2005 and at the time
of any such repayment, the Selling Stockholders are entitled to sell their
shares under an effective registration statement.
SELLING STOCKHOLDERS
For ease of reference, the term "selling stockholder" also includes any
transferees, pledgees, donees, or successors to the selling stockholders named
in the table below. Pledgees could include banks, brokers, financial
institutions, or other lenders. To the extent required, we will name any
additional selling stockholder in a supplement to this prospectus.
The following table sets forth information with respect to the maximum
number of shares of common stock beneficially owned by the selling stockholders
named below. The shares beneficially owned have been determined in accordance
with rules promulgated by the SEC, and the information is not necessarily
indicative of beneficial ownership for any other purpose. The information in the
table below is current as of July 23, 2004.
All information contained in the table below is based upon information
provided to us by the selling stockholders and we have not independently
verified this information. The shares being registered by this prospectus may be
offered from time to time by the selling stockholders named below. No estimate
can be given as to the amount of shares that will be held by the selling
stockholders after completion of this offering because the selling stockholders
may offer some or all of the shares and because there are currently no
agreements, arrangements or understandings with respect to the sale of any of
the shares.
Except as otherwise indicated, none of the selling stockholders has had
any position, office, or material relationship with us or any of our affiliates
within the past three years, other than as a result of the acquisition, or
current ownership, of the shares being registered for sale hereby or our other
securities.
As explained below under "Plan of Distribution," we have agreed with the
selling stockholders to bear certain expenses (other than broker discounts and
commissions, if any) in connection with the registration statement, which
includes this prospectus.
43
-------------------------------------------------------------------
Number
of Shares
Name Beneficially Owned(1)
-------------------------------------------------------------------
Corsair Capital Partners, L.P.(3) 1,680,000
-------------------------------------------------------------------
Corsair Select, L.P.(3) 900,000
-------------------------------------------------------------------
Corsair Capital Investors, Ltd.(3) 240,000
-------------------------------------------------------------------
Corsair Long Short International, Ltd.(3) 100,000
-------------------------------------------------------------------
Corsair Capital Partners 100, L.P.(3) 80,000
-------------------------------------------------------------------
Endeavor Asset Management L.P.(3) 500,000
-------------------------------------------------------------------
John Pappajohn(3) 400,000
-------------------------------------------------------------------
Mary Pappajohn(3) 100,000
-------------------------------------------------------------------
Lipman Capital Group Inc.(4) 100,000
-------------------------------------------------------------------
Millennium Capital Corporation(5) 50,000
-------------------------------------------------------------------
Jodi Kirsch(5) 25,000
-------------------------------------------------------------------
Virginia Casadante(5) 25,000
-------------------------------------------------------------------
(1) Unless otherwise indicated, the selling stockholders have sole voting and
investment power with respect to its shares of common stock. The inclusion
of any shares in this table does not constitute an admission of beneficial
ownership for the selling stockholders.
(2) The actual number of shares of our common stock offered hereby, and
included in the registration statement of which this prospectus is a part,
includes such additional number of shares of common stock as may be issued
or issuable upon exercise of any warrant by reason of adjustment
mechanisms described therein, by reason of penalty provisions described
therein, or by reason of any future stock splits, stock dividends or
similar transactions involving our common stock, in order to prevent
dilution, in accordance with Rule 416 under the Securities Act of 1933.
(3) As more fully described under heading "Plan of Distribution," below,
notwithstanding the "Number of Shares Beneficially Owned" shown for the
person listed, such person is not entitled to convert shares of Series B
Preferred Stock into common stock or exercise Unit Warrants if, on the
date of exercise, the number of shares of our common stock beneficially
owned by such person (when added to the number of shares of our common
stock issuable to such person upon the conversion of Series B Preferred
Stock and the exercise of such Unit Warrants), would result in beneficial
ownership by such person exceeding 4.99% of the outstanding shares of our
common stock on such date, provided that such person may revoke this
restriction upon 61 days prior notice to us, or if it would result in the
beneficial ownership by such person and its affiliates exceeding 9.99% of
the outstanding shares of our common stock on such date, which restriction
may not be waived.
Of the shares held by these persons, one half represent shares of common
stock issuable upon conversion of Series B Preferred Stock and one half
represent shares of common stock issuable upon the exercise of Unit
Warrants.
(4) Consists solely of common stock underlying warrants held by this entity.
This entity performs financial public relations services for us.
(5) Consists solely of common stock underlying warrants held by these
individuals.
PLAN OF DISTRIBUTION
The common stock being offered through this prospectus underlies
securities we issued in a transaction we consummated on June 30, 2004, wherein
we sold 2,000,000 shares ("Preferred Shares") of our 10% Series B Convertible
Preferred Stock ("Series B Preferred Stock") and warrants ("Unit Warrants") to
purchase 2,000,000 shares of our common stock. We also issued warrants
("Finders' Warrants"; together with the Unit Warrants, the "Warrants") to
purchase 200,000 shares of our common stock to persons who introduced us to
investors in the Preferred Shares. The sale of the Preferred Shares resulted in
$2,000,000 of gross proceeds, prior to the exercise of the Warrants. The Unit
44
Warrants and the Finders' Warrants represent a potential $2 million and
$200,000, respectively, in additional proceeds, although we cannot provide any
assurance that any of such securities will be exercised and, if exercised, the
amount of dilution, if any, to our stockholders as of such date.
Under the terms of the agreements governing the sale of the Preferred
Shares, (i) our officers and directors have agreed to refrain from selling any
shares of common stock owned by them until 90 trading days after the date that
the registration statement covering the securities issued in behalf of the
purchasers has been declared effective by the Securities and Exchange
Commission, (ii) we agreed to register the shares of common stock underlying the
Preferred Shares and Unit Warrants purchased by the selling stockholders and to
bear certain expenses (other than broker discounts and commissions, if any) in
connection with the registration statement, which includes this prospectus, and
(iii) to indemnify the Selling Stockholders against certain liabilities under
federal and state securities laws. We also agreed to register any shares of
common stock issued to the Selling Stockholder as dividends.
The Selling Stockholders and any of their pledgees, donees, transferees,
assignees and successors-in-interest may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The Selling Stockholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits investors;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o to cover short sales made after the date that this registration
statement is declared effective by the Commission;
o broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The Selling Stockholders may from time to time pledge or grant a security
interest in some or all of the Shares owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell shares of common stock from time to time under this prospectus,
or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933 amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
Upon the Company being notified in writing by a Selling Stockholder that
any material arrangement has been entered into with a broker-dealer for the sale
of common stock through a block trade, special offering, exchange distribution
or secondary distribution or a purchase by a broker or dealer, a supplement to
this prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing (i) the name of each such Selling Stockholder and of
the participating broker-dealer(s), (ii) the number of shares involved, (iii)
the price at which such the shares of Common Stock
45
were sold, (iv)the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not
conduct any investigation to verify the information set out or incorporated by
reference in this prospectus, and (vi) other facts material to the transaction.
In addition, upon the Company being notified in writing by a Selling Stockholder
that a donee or pledge intends to sell more than 500 shares of common stock, a
supplement to this prospectus will be filed if then required in accordance with
applicable securities law.
The Selling Stockholders also may transfer the shares of common stock in
other circumstances, in which case the transferees, pledgees or other successors
in interest will be the selling beneficial owners for purposes of this
prospectus.
The Selling Stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Discounts, concessions,
commissions and similar selling expenses, if any, that can be attributed to the
sale of Securities will be paid by the Selling Stockholder and/or the
purchasers. Each Selling Stockholder has represented and warranted to the
Company that it acquired the securities subject to this registration statement
in the ordinary course of such Selling Stockholder's business and, at the time
of its purchase of such securities such Selling Stockholder had no agreements or
understandings, directly or indirectly, with any person to distribute any such
securities.
The Company has advised each Selling Stockholder that it may not use
shares registered on this Registration Statement to cover short sales of common
stock made prior to the date on which this Registration Statement shall have
been declared effective by the Commission. If a Selling Stockholder uses this
prospectus for any sale of the common stock, it will be subject to the
prospectus delivery requirements of the Securities Act. The Selling Stockholders
will be responsible to comply with the applicable provisions of the Securities
Act and Exchange Act, and the rules and regulations thereunder promulgated,
including, without limitation, Regulation M, as applicable to such Selling
Stockholders in connection with resales of their respective shares under this
Registration Statement.
The Company is required to pay all fees and expenses incident to the
registration of the shares, but the Company will not receive any proceeds from
the sale of the common stock. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
LEGAL PROCEEDINGS
We are not currently party to any material litigation.
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
As permitted by Section 14A:3-5 of the New Jersey Business Corporation
Act, our Certificate of Incorporation provides for the indemnification by us of
each of our directors and officers to the fullest extent permitted by New Jersey
law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers or controlling persons, we have
been informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
46
LEGAL MATTERS
The validity of the shares of common stock offered in this prospectus will
be passed upon by Ruffa & Ruffa, P.C., New York, New York. Members of Ruffa &
Ruffa, P.C. own an aggregate of 51,450 shares of common stock and options
entitling them to purchase 20,000 shares of common stock.
EXPERTS
The financial statements for the years ended June 30, 2004 and 2003
included in this prospectus have been audited by Demetrius & Company, L.L.C.
independent accountants, as set forth in their report contained herein. These
financial statements have been included in reliance upon the report of Demetrius
& Company, L.L.C., given upon the authority of such firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act. As a
result, we file annual, quarterly and current reports, proxy statements and
other information with the Commission. Here are ways you can reach and obtain
copies of this information:
- ---------------------------------------------------------------------------------------------
WHAT IS AVAILABLE WHERE TO GET IT
----------------- ---------------
- ---------------------------------------------------------------------------------------------
Paper copies of information SEC's Public Reference Room
Judiciary Plaza Building
450 Fifth Street, N.W., Room 1024
Washington, D.C. 20549
- ---------------------------------------------------------------------------------------------
On-line information, free of charge SEC's Internet website at
http://www.sec.gov
- ---------------------------------------------------------------------------------------------
Information about the SEC's Public Reference Rooms Call the SEC at 1-800-SEC-0330
- ---------------------------------------------------------------------------------------------
This prospectus is part of a registration statement on Form SB-2 we filed
with the SEC. This prospectus does not contain all of the information set forth
in the registration statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. You can get a copy of the
registration statement from the sources listed above.
47
ELECTRONIC CONTROL SECURITY INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
With Independent Auditors' Report
JUNE 30, 2003 AND 2004
Independent Auditors' Report F1
Balance Sheets as of June 30, 2004 and 2003 F2
Statements of Income and Deficit for the Years Ended
June 30, 2004 and 2003 F3
Statement of Changes in Shareholders' Equity
for the Years Ended June 30, 2004 and 2003 F4
Statements of Cash Flows for the Years Ended
June 30, 2004 and 2003 F5
Notes to Financial Statements F6 - F-17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Electronic Control Security Inc.
and Subsidiaries
We have audited the accompanying consolidated balance sheets of Electronic
Control Security, Inc. and Subsidiaries as of June 30, 2004 and 2003, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Electronic Control Security, Inc. and its subsidiaries as of June 30, 2004 and
2003, and the consolidated results of their operations and cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
DEMETRIUS & COMPANY, L.L.C.
Wayne, New Jersey
September 13, 2004
F-1
Electronic Control Security Inc.
Consolidated Balance Sheets
June 30,
2004 2003
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 1,552,575 $ 75,081
Certificates of deposit 101,723 300,000
Accounts receivable, net of allowance of $100,000 and $50,000 729,070 702,016
Inventories 1,635,305 1,371,119
Deferred income taxes -- 405,000
Other current assets 318,795 325,199
----------- -----------
Total current assets 4,337,468 3,178,415
Property, equipment and software development costs - net 549,727 575,136
Intangible assets - net 40,733 46,467
Goodwill 50,000 50,000
Deferred income taxes 441,800 4,000
Other assets 84,709 126,914
----------- -----------
$ 5,504,437 $ 3,980,932
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 387,641 $ 585,343
Bank line of credit 500,000 560,000
Short-term loan 250,000 --
Current maturities of long-term debt 99,996 99,996
Obligations under capital leases 4,396 10,826
Payroll taxes payable 3,012 12,859
Income taxes payable 2,500 6,000
Due to officers and shareholders -- 14,443
----------- -----------
Total current liabilities 1,247,545 1,289,467
Noncurrent liabilities
Obligations under capital leases -- 4,986
Long-term debt 141,671 241,671
Due to officers and shareholders 464,487 --
Deferred income taxes 48,000 49,000
----------- -----------
Total liabilities 1,901,703 1,585,124
COMMITMENTS AND CONTINGENCIES - see notes
Shareholders' equity
Series A Convertible Preferred stock, cumulative, $.01 par value;
$2.00 liquidation preference; 5,000,000 shares authorized,
587,500 and 637,500 shares issued and outstanding, respectively 5,875 6,375
Series B 10% Convertible Preferred stock, cumulative, $.001 par value;
$1,000 per share liquidation preference; 2,000 shares authorized,
2,000 and -0- shares issued and outstanding, respectively 2
Common Stock, $.001 par value; 15,000,000 shares authorized;
5,555,707 and 4,494,753 shares issued; 5,382,957 and 4,394,753
shares outstanding, respectively 5,556 4,495
Additional paid-in capital 8,577,764 5,098,787
Accumulated deficit (4,990,305) (2,704,502)
Accumulated other comprehensive income 13,842 653
Treasury stock, at cost, 100,000 shares (10,000) (10,000)
----------- -----------
Total shareholders' equity 3,602,734 2,395,808
----------- -----------
$ 5,504,437 $ 3,980,932
=========== ===========
See Notes to Consolidated Financial Statements.
F-2
Electronic Control Security Inc.
Consolidated Statements of Operations
Year
Ended
June 30,
2004 2003
---- ----
Revenues $ 2,061,412 $ 4,346,816
Cost of revenues 928,567 2,290,953
----------- -----------
Gross profit 1,132,845 2,055,863
----------- -----------
Research and development 322,912 257,123
Selling, general and administrative expenses 1,782,534 1,933,540
Stock based compensation 117,200 503,814
----------- -----------
Loss from operations (1,089,801) (638,614)
Other (income) expense
Interest expense 105,916 68,179
Interest income (3,128) (11,449)
Minority interest in subsidiary loss (42,633) (50,938)
Loss on sale of marketable securities -- 3,916
----------- -----------
Total other (income) expense 60,155 9,708
----------- -----------
Loss before tax benefit (1,149,956) (648,322)
Income tax benefit (31,300) (89,000)
----------- -----------
Net loss before dividends (1,118,656) (559,322)
Dividends related to convertible preferred stock 1,167,147 297,136
----------- -----------
Net loss attributable to common shareholders $(2,285,803) $ (856,458)
=========== ===========
Net loss per share:
Basic $ (0.49) $ (0.21)
=========== ===========
Diluted $ (0.49) $ (0.21)
=========== ===========
Weighted average number of
common shares and equivalents:
Basic 4,705,027 4,076,366
=========== ===========
Diluted 4,705,027 4,076,366
=========== ===========
See Notes to Consolidated Financial Statements.
F-3
Electronic Control Security Inc.
Consolidated Statements of Changes in Shareholders Equity
Series A Convertible Series B 10% Convertible Additional
Preferred Stock Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Shares Amount Capital
--------- -------- ------- ------- --------- ------- ----------
Balances at July 1, 2002 1,000,000 $10,000 -- $ -- 4,034,128 $ 4,034 $4,790,361
Conversion of preferred stock (362,500) (3,625) 362,500 363 3,263
Common stock dividend on preferred stock 98,125 98 196,152
Minority interest contribution 8,126
Amortization of deferred compensation
Amortization of deemed dividend on convertible 100,886
Realized loss on marketable securities
Foreign currency translation adjustments
Net loss
--------- ------- ------- ------- --------- ------- ----------
Balances at June 30, 2003 637,500 6,375 -- -- 4,494,753 4,495 5,098,787
Conversion of preferred stock (50,000) (500) 50,000 50 450
Common stock dividend on preferred stock 61,500 62 122,939
Issuance of Common Stock for services 85,000 85 96,815
Issuance of Common Stock Options for services 20,300
Private placement of convertible preferred stock
and common stock warrants, net of
offering costs of $56,307 2,000 2 1,943,691
Beneficial conversion feature of prefered stock 1,044,147
Conversion of stockholder loan 735,294 735 249,265
Exercise of stock option 129,160 129 1,371
Foreign currency translation adjustments
Net loss
--------- ------- ------- ------- --------- ------- ----------
Balances at June 30, 2004 587,500 $ 5,875 2,000 $ 2 5,555,707 $ 5,556 $8,577,764
========= ======= ======= ======= ========= ======= ==========
Accumulated
Other
Accumulated Comprehensive Deferred Treasury
Deficit Income Compensation Stock Total
----------- ------------- ------------- ----------- -----------
Balances at July 1, 2002 $(1,848,044) $ (2,297) $ (503,814) $ (10,000) $ 2,440,240
Conversion of preferred stock --
Common stock dividend on preferred stock (196,250) --
Minority interest contribution 8,126
Amortization of deferred compensation 503,814 503,814
Amortization of deemed dividend on convertible (100,886) --
Realized loss on marketable securities 2,297 2,297
Foreign currency translation adjustments 653 653
Net loss (559,322) (559,322)
----------- ----------- ------------- ----------- -----------
Balances at June 30, 2003 (2,704,502) 653 -- (10,000) 2,395,808
Conversion of preferred stock --
Common stock dividend on preferred stock (123,000) --
Issuance of Common Stock for services 96,900
Issuance of Common Stock Options for services 20,300
Private placement of convertible preferred stock
and common stock warrants, net of
offering costs of $56,307 1,943,693
Beneficial conversion feature of prefered stock (1,044,147) --
Conversion of stockholder loan 250,000
Exercise of stock option 1,500
Foreign currency translation adjustments 13,189 13,189
Net loss (1,118,656) (1,118,656)
----------- ----------- ------------- ----------- -----------
Balances at June 30, 2004 $(4,990,305) $ 13,842 $ -- $ (10,000) $ 3,602,734
=========== =========== ============= =========== ===========
See Notes to Consolidated Financial Statements.
F-4
Electronic Control Security Inc.
Consolidated Statements of Cash Flows
Year
Ended
June 30,
2004 2003
---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net loss before deemed dividends $(1,118,656) $(559,322)
Adjustments to reconcile loss
to net cash used by operating activities:
Depreciation and amortization 163,888 128,520
Increase in allowance for bad debts 50,000 25,000
Stock based compensation 117,200 503,814
Minority interest in subsidiary loss (42,633) (50,938)
Deferred income taxes (33,800) (95,000)
Foreign currency translation adjustments 13,189 653
Increase (decrease) in cash attributable
to changes in assets and liabilities
Accounts receivable (77,054) 237,108
Inventory (264,186) 246,377
Other current assets 49,037 (185,606)
Other assets (57,795) (100,685)
Accounts payable and accrued expenses (197,702) 139,889
Customer deposits -- (24,258)
Income taxes payable (3,500) 678
Payroll taxes payable (9,847) (978)
----------- ---------
Net cash provided by (used in) operating activities (1,411,859) 265,252
Cash flows from investing activities:
Investment in marketable securities -- 34,782
Acquisition of property, equipment and software development (132,745) (320,103)
----------- ---------
Net cash used in investing activities (132,745) (285,321)
Cash flows from financing activities:
Proceeds from issuance of preferred stock 1,943,693 --
Proceeds from exercise of stock options 1,500 --
Proceeds (payments) on bank loan and line of credit (60,000) 285,000
Proceeds from short-term borrowing 250,000 --
Certificate of deposit (purchased) redeemed 298,277 (300,000)
Payments on long-term debt (100,000) (150,000)
Payments on lease obligations (11,416) (17,226)
Loan officers and shareholders - net 700,044 (4,910)
----------- ---------
Net cash provided by (used in) financing activities 3,022,098 (187,136)
----------- ---------
Net decrease in cash and cash equivalents 1,477,494 (207,205)
Cash and cash equivalents at beginning of period 75,081 282,286
----------- ---------
Cash and cash equivalents at end of period $ 1,552,575 $ 75,081
=========== =========
Non-cash transaction:
Issuance of common stock to pay preferred stock dividends
In March 2004, $250,000 of officers and shareholders loans was converted into 735,294
shares of common stock.
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 105,916 $ 68,179
=========== =========
Taxes $ 5,224 $ 1,000
=========== =========
See Notes to Consolidated Financial Statements.
F-5
ELECTRONIC CONTROL SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Nature of Operations
Electronic Control Security, Inc. (The "Company") is engaged in the
design, manufacture and marketing of electronic security and lighting
systems for high threat environments. The Company also performs consulting
services, which consists principally of designing security system
solutions in support of their technologies to system integrators, for
medium to large government and commercial facilities worldwide.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The financial statements include the accounts of the Company, its wholly
owned subsidiaries, and its majority owned subsidiaries. The Company's
majority owned subsidiary was formed in the Middle East in January 2002
and commenced business in May 2002. In January 2003, it ceased to exist as
an operating entity at which time a new majority owned subsidiary was
formed to conduct the Company's business in the Middle East. All
significant intercompany accounts and transactions have been eliminated.
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
Accounts Receivable
Trade accounts receivable is recorded net of an allowance for expected
losses. The allowance is estimated from historical performance and
projections of trends.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property and Equipment and Depreciation
Depreciation is provided for by straight-line and accelerated methods over
the estimated useful lives of the assets, which vary from three to ten
years. Cost of repairs and maintenance are charged to operations in the
period incurred.
Software Development Costs
Software development costs are expensed as incurred until technological
feasibility is established. Software development costs incurred subsequent
to establishing technological feasibility are capitalized and amortized.
Amortization is provided based on the greater of the ratios that current
gross revenues for a product bear to the total of current and anticipated
future gross revenues for that product, or the straight-line method over
the estimated useful life of the product. The estimated useful life for
the straight-line method is determined to be 5 years. Approximately
$93,000 and $248,000 of software development costs have been capitalized
for the years ended June 30, 2004 and 2003, respectively.
Earnings per Share
In determining basic or diluted earnings per share (EPS), the effects of
dividends related to the Company's convertible preferred stock is added to
the net loss.
F-6
ELECTRONIC CONTROL SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Cont)
Earnings per Share (Cont)
Basic EPS is computed by dividing net income or net loss by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution from the exercise or conversion of other
securities into common stock, but only if dilutive. The following
securities have been excluded from the dilutive per share computation as
they are antidilutive.
2004 2003
---- ----
Stock options 590,000 620,000
Warrants 1,096,875 896,875
Convertible Preferred Stock 2,667,614 637,500
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the local
currency. Accordingly, the Company translates all assets and liabilities
into U.S. dollars at current rates. Revenues, costs, and expenses are
translated at average rates during each reporting period. Gains and losses
resulting from the translation of the consolidated financial statements
are excluded from results of operations and are reflected as a translation
adjustment and a separate component of stockholders' deficit.
Gains and losses resulting from foreign currency transactions are
recognized in the consolidated statement of operations in the period they
occur.
Cash and Cash Equivalents
The Company considers all short-term deposits with a maturity of three
months or less to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Long-lived assets
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amounts of those assets
Revenue Recognition
The Company recognizes product revenue at the time of shipment. Revenues
from consulting and design services are recognized at the time the
services are rendered.
F-7
ELECTRONIC CONTROL SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Cont)
Research and Development
Research and development expenditures are expensed as incurred. Research
and development costs for the years ended June 30, 2004 and 2003 amounted
to $322,912 and $257,123, respectively.
Income Taxes
The Company uses the liability method to determine its income tax expense
as required under Statement of Financial Accounting Standards No. 109
(SFAS 109). Under SFAS 109, deferred tax assets and liabilities are
computed based on differences between financial reporting and tax basis of
assets and liabilities, and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets, if it is more likely than not that all or a portion of it will not
be realized.
Fair Value of Financial Instruments
The carrying values of cash, accounts receivable, accounts payable,
accrued expenses and other current liabilities are representative of their
fair value due to the short-term maturity of these instruments. The
carrying value of the Company's long-term debt is considered to
approximate its fair value, based on current market rates and conditions.
Intangible Assets
The cost of licenses and trademarks are being amortized on the
straight-line method over their useful lives, ranging from 5 to 15 years.
Amortization expense charged to operations was $5,734 for the years ended
June 30, 2004 and 2003, respectively.
Advertising Costs
Advertising costs are reported in selling, general and administrative
expenses, and include advertising, marketing and promotional programs.
These costs are charged to expense in the year in which they are incurred.
Advertising costs for the years ended June 30, 2004 and 2003 were
approximately $49,000 and $67,000, respectively.
Stock Based Compensation
The Company accounts for stock-based employee and outside directors
compensation under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", which was released in December
2002 as an amendment of SFAS No. 123. Stock options and warrants granted
to non-employees are recorded at their fair value, as determined in
accordance with SFAS No. 123 and Emerging Issues Task Force Consensus No.
96-18, and recognized over the related service period.
F-8
ELECTRONIC CONTROL SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Cont)
Stock Based Compensation (cont)
The following table illustrates the effect on net income and earnings per
share if the fair value based method had been applied to all awards
Year Ended
June 30,
2004 2003
---- ----
Net loss, as reported $(2,285,803) $(856,458)
Add: Stock based compensation
expense, as reported, net of related tax effects 20,300 --
Deduct: Total stock-based compensation
expense determined under the fair value based
method for all awards, net of related tax effects (206,501) (3,742)
----------- ---------
Pro forma net loss $(2,472,004) $(860,200)
=========== =========
Basic and diluted loss per share, as reported $ (.49) $ (0.21)
Basic and diluted loss per share, pro forma $ (.53) $ (0.21)
The weighted average per share fair value of options granted during fiscal
2004 was $.93. No options were granted in fiscal 2003. The fair value of
each option granted in 2004 was estimated using the Black-Scholes
option-pricing model with a volatility of 156.88%, expected life of
options of 8 years, risk free interest rate of approximately 3.79% and a
dividend yield of 0%.
Recent Pronouncements
In December 2003, the Financial Accounting Standards Board (FASB) issued a
revised Interpretation No. 46, "Consolidation of Variable Interest
Entities" (FIN 46R). FIN 46R addresses consolidation by business
enterprises of variable interest entities and significantly changes the
consolidation application of consolidation policies to variable interest
entities and, thus improves comparability between enterprises engaged in
similar activities when those activities are conducted through variable
interest entities. The Company does not hold any variable interest
entities.
Note 3 - Inventories
Inventories at June 30, 2004 and 2003 consist of the following:
2004 2003
---- ----
Raw materials $ 203,765 $ 246,923
Work-in-process 240,093 229,632
Finished goods 1,191,447 894,564
---------- ----------
$1,635,305 $1,371,119
========== ==========
F-9
ELECTRONIC CONTROL SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Property, Equipment and Software Development Costs
Property, equipment and software development costs consist of the
following:
2004 2003
---- ----
Furniture and fixtures $ 37,074 $ 35,600
Machinery and equipment 549,140 511,299
Improvements 9,296 9,296
Software 96,512 95,978
Software development costs 432,228 339,332
---------- --------
1,124,250 991,505
Less: accumulated depreciation and amortization 574,523 416,369
---------- --------
$ 549,727 $575,136
========== ========
Equipment under capital leases included in
property, equipment and purchased software are as follows:
Machinery and equipment $ 25,694 $ 61,444
Less: accumulated depreciation 22,696 33,644
---------- --------
$ 2,998 $ 27,800
========== ========
Depreciation expense was $ 158,154 and $ 122,786 for the years ended June
30, 2004 and 2003, respectively.
Note 5 - Bank Line Of Credit
The Company's $500,000 revolving credit line was extended an additional
year to November 2004. Substantially all of the Company's assets and the
personal guarantee of an officer/shareholder collateralize the outstanding
balances. The credit line requires the maintenance of a minimum tangible
net worth, as defined. Interest is payable monthly at 1.0% plus the prime
rate for a total of 5.00% at June 30, 2004. In August 2002, the Company
obtained an additional $285,000 revolving credit line, secured by a
Company certificate of deposit in the amount of $300,000 plus accrued
interest. In September 2003, the additional line was repaid with the
proceeds of the released certificate of deposit.
Note 6 - Short-Term Borrowing
On April 1, 2004, the company entered into a strategic investment
relationship with the Fairchild Corporation. The investment relationship
began with a six-month revolving line of credit in the amount of $250,000
at 7% interest per annum. The parties continue to discuss their on-going
relationship and further investment by Fairchild in the company. This loan
was repaid in July 2004.
Note 7 - Long-Term Debt
In November 2001, an existing $500,000 revolving line of credit was
converted into a term loan to be repaid over five years in monthly
installments of $8,333 plus interest at the rate of 7.5% per annum
F-10
ELECTRONIC CONTROL SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Long-Term Debt - continued
The annual maturities of long-term debt as of June 30, 2004 are as
follows:
2005 $ 99,996
2006 99,996
2007 41,675
--------
$241,667
========
Note 8 - Due to Officers and Shareholders
These amounts represent interest bearing advances and are due on demand.
The Company is restricted from repaying the principal amount of the loans
except as permitted under the Purchase Agreement, in connection with the
sale of shares of Series B Preferred Stock. The agreement provides that
the repayment shall be later than December 31, 2005, for the six month
period ended June 30, 2005 the reported revenues of the Company shall not
be less than $11 million and the reported earnings per share of Common
Stock shall be not less than $0.23 based upon 7,250,000 shares of Common
Stock outstanding. In addition, both at December 31, 2005 and at the time
of any such repayment, the Selling Stockholders are entitled to sell their
shares under an effective registration statement
In March 2004, in order to be in compliance with bank loan covenants by
the year ended June 30, 2004, Company's Board of Directors voted to
convert $250,000 principal amount of Officer/shareholder loans into
735,294 shares of Common Stock.
Note 9 - Income Taxes
The provision for taxes for the year ended June 30, 2004 and 2003 includes
the following components:
2004 2003
---- ----
Current
Federal $ -- $ --
State 2,500 6,000
Foreign -- --
-------- --------
2,500 6,000
Deferred
Federal (31,300) (5,000)
State (2,500) (38,000)
Foreign -- (52,000)
-------- --------
(33,800) (95,000)
-------- --------
$(31,300) $(89,000)
======== ========
F-11
ELECTRONIC CONTROL SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Income Taxes - continued
The components of the deferred tax accounts as of June 30, 2004 and 2003
are as follows:
2004 2003
---- ----
Deferred tax assets
Net operating loss carryforward $ 751,939 $ 361,834
Stock based compensation 240,283 232,163
Other 80,669 28,962
----------- ---------
1,072,891 622,959
Deferred tax liabilities
Depreciation and amortization 47,123 46,142
----------- ---------
Subtotal 1,025,768 576,817
Valuation allowance (631,968) (216,817)
----------- ---------
Net deferred tax assets $ 393,800 $ 360,000
=========== =========
The net change in the valuation allowance was an increase of $415,151 in
fiscal 2004. The valuation allowance at June 30, 2002 was -0-.
Note 9 - Income Taxes (cont)
The reconciliation of estimated income taxes attributed to operations at
the statutory tax rates to the reported income tax benefit is as follows:
2004 2003
---- ----
Expected federal tax at statutory rate $(781,026) $(311,204)
State taxes, net of federal tax effect (129,302) (37,144)
Foreign rate differential (8,527) (7,729)
Non deductible expenses 475,682 50,712
Change in valuation allowance 415,151 216,817
Other (3,278) (452)
--------- ---------
$ (31,300) $ (89,000)
========= =========
At June 30, 2004 the Company had net operating loss carryforwards for
federal and state income tax purposes of $1,523,000 and $1,397,000
respectively, expiring through 2024. The Company has foreign net operating
loss carryforwards of $271,000 with no expiration date.
Note 10- Shareholders' Equity
Series A Convertible Preferred Stock
In January to March 2002, the Company realized gross proceeds of $2,000,000 from
the private placement of 40 Units, each Unit consisting of 25,000 shares of
Series A Convertible Preferred Stock ("Series A Preferred") and 12,500 common
stock purchase Warrants. The Series A Preferred provides for an annual
dividend of $.20 per share, payable quarterly, (payable in cash or shares of
common stock valued at $2.00 per share), when, as and if declared by the Board
of Directors.
F-12
ELECTRONIC CONTROL SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10- Shareholders' Equity - continued
Series A Convertible Preferred Stock - continued
Dividends will be paid on a cumulative basis. Each Series A Preferred
share was initially convertible at the option of the holder into one
common share, commencing 120 days after closing. The conversion ratio is
subject to certain adjustments, as defined and has since been adjusted to
.88 Series A Preferred shares for one common share. The Series A Preferred
shares have a liquidation preference in the amount of $2.00 per share and
the Company may redeem them commencing one year from date of issuance if
the common shares have traded at or above $4.00 for a period of twenty
consecutive trading days. The Warrants are exercisable for a period of
three years from the date of issuance at an exercise price per share of
$3.00 per share and the Company may redeem them for $.05 per Warrant, once
the underlying shares are registered, if the common shares have traded at
or above $5.00 for a period of twenty consecutive trading days. The
Company has valued the warrants issued at $792,482 using the Black-Scholes
pricing model. In connection with the private placement, the Company
issued unit warrants to a placement agent to purchase up 3.75 Units
identical to the Units in the offering. The unit warrants are exercisable
at a price of $50,000 per unit for up to three years.
The Company has recorded a deemed dividend and an offsetting increase in
additional paid-in capital totaling $1,008,861 to reflect the beneficial
conversion price of the Series A Preferred as compared to the prevailing
market price of the common stock. The deemed dividend was amortized over
120 days, commencing from the date of closing to the date the Series A
Preferred first become convertible.
As of June 30, 2004, 412,500 shares of Series A Preferred were converted
into a like amount of common stock.
On March 5, 2003, and again on April 26, 2004, the Company's board of
Directors declared dividends on the Series A Convertible Preferred Stock.
The dividend was paid by the issuance of 98,125 and 61,500, additional
shares of the Company's common stock, respectively. Cumulative but
undeclared dividends at June 30, 2004 totaled approximately $29,000
Series B Convertible Preferred Stock
On June 30, 2004, the Company completed a private placement of 2,000
shares of its 10% Series B Convertible Preferred Stock ("Series B
Preferred") and warrants to purchase up to 2,000,000 shares of common
stock for an aggregate purchase price of $2,000,000. The Preferred Stock
provides for a dividend at the rate of 10% per annum, payable quarterly,
(payable in cash or by adding the dollar amount of such dividends to the
Stated Value), Dividends will be paid on a cumulative basis. The preferred
shares have a liquidation preference in the amount of $1,000 per share and
has preference to any payments to the Preferred A shareholders. Each
preferred share is convertible at the option of the holder into 1,000
shares of common stock. The conversion price is subject to anti-dilution
adjustments, including, among other things, in the event that the Company
sells common stock during the next three years for a price of less than
one dollar per share. The Company may require the conversion of all (but
not less than all) of the then outstanding shares of Series B Preferred
Stock, if at any time the volume weighted average trading price per share
of common stock for each of 20 consecutive trading days prior to a
conversion notice is greater than $2.50 (subject to adjustment), and the
daily trading volume of the common stock is at least 100,000 shares. In
addition all shares of common stock underlying the Series B Preferred
Stock must be covered by an effective registration statement.
The Warrants are exercisable for a period of four years from the date of
issuance at an exercise price per share of $1.00 per share and have
similar anti-dilution privileges as the Series B Preferred Stock.
F-13
ELECTRONIC CONTROL SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10- Shareholders' Equity - continued
Series B Convertible Preferred Stock - continued
The Company may call the Warrants if the volume weighted average trading
price per share of common stock for each of 20 consecutive trading days is
greater than 200% of the exercise price, and the daily trading volume of
the common stock is at least 100,000 shares. In addition all shares of
common stock underlying Warrants must be covered by an effective
registration. The Company has valued the warrants issued at $955,853 using
the Black-Scholes pricing model.
In connection with the private placement, the Company issued 200,000
warrants with identical terms to a placement agent.
The Company has recorded a deemed dividend and an offsetting increase in
additional paid-in capital totaling $1,044,147 to reflect the beneficial
conversion price of the preferred stock as compared to the prevailing
market price of the common stock.
Stock Option Plans
Incentive Stock Option Plan
During September 1986, the Company adopted an incentive stock option plan
for which 750,000 shares of common stock have been reserved. The plan has
since been extended until September 2006.
Under the plan, incentive stock options were granted to certain employees
of the Company. The exercise price may not be less than 100% of the fair
market value of the stock at the date of the grant (110% in the case of
any employee who owns more than 10% of the combined voting power or value
of all classes of stock). Options may be granted for terms not exceeding
ten years from the date of the grant, except for options granted to person
holding in excess of 5% of the common stock, in which case the options may
not be granted for a term not to exceed five years from the date of the
grant.
Non-statutory Stock Option Plan
The Company also has adopted a non-statutory stock option plan and has
reserved 250,000 shares of common stock for issuance to Directors,
employees and non-employees. Options granted pursuant to this plan will be
non-transferable and expire, if not exercised within five years from the
date of the grant.
Other Option Grants
In addition to the options granted under the Stock Option Plans, the
Company has issued options outside of the plans, pursuant to various
consulting agreements.
F-14
ELECTRONIC CONTROL SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10- Shareholders' Equity (cont)
Stock Option Plans (cont)
Option activity for 2003 and 2004 is summarized as follows:
Weighted
Average
Options Exercise
Plan Nonplan Total Price
---- ------- ----- -----
Options outstanding, July 1, 2002 585,000 45,000 630,000 $ 2.18
Granted -- -- -- --
Exercised -- -- -- --
Forfeited (10,000) -- (10,000) 2.70
-------- -------- --------
Options outstanding, June 30, 2003 575,000 45,000 620,000 $ 1.45
Granted 220,000 -- 220,000 $ .87
Exercised (180,000) -- (180,000) .20
Forfeited (25,000) (45,000) (70,000) 2.00
-------- -------- --------
Options outstanding, June 30, 2004 590,000 -- 590,000 $ 1.53
======== ======== ======== ========
Shares of common stock available
for future grant under the plans 410,000
========
The following table summarizes information about stock options outstanding
at June 30, 2004.
Options Exercisable
Weighted Average Weighted
Remaining Average
Number Contractual Exercise Number Exercise
Ranges of price Outstanding Life Price Exercisable Price
--------------- ----------- ---- ----- ----------- -----
$.05 -.10 40,000 3.63 $0.08 40,000 $0.08
$.25-.39 65,000 7.15 $0.31 65,000 $0.31
$.50-.88 110,000 5.49 $0.66 110,000 $0.66
$1.00-1.10 155,000 9.51 $1.01 155,000 $1.01
$2.70-2.97 220,000 2.62 $2.95 220,000 $2.95
------- ---- ----- ------- -----
$.05-$2.97 590,000 5.53 $1.53 590,000 $1.53
======= ==== ===== ======= =====
F-15
ELECTRONIC CONTROL SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Concentrations and Economic Dependency
The Company had three customers that accounted for 11%, 11% and 10%,
respectively of net revenues for year ended June 30, 2004 and three
customers that accounted for 17%, 25% and 29% of net revenues for year
ended June 30, 2003. Two customers accounted for 45% of the accounts
receivables as of June 30, 2004. At June 30, 2004 approximately 15% of
accounts receivable were from foreign customers. The Company performs
ongoing credit evaluations of its customers' financial condition and
generally requires no collateral from its customers.
During the year and at year end, the Company had cash deposits in a bank
in excess of FDIC limits. The Company periodically reviews the financial
condition of the bank to minimize its exposure
Note 12 - Commitments and Contingencies
Lease Agreements
Future minimum annual rental payments required under non-cancelable
operating leases for years after June 30, 2004 are as follows:
2005 $121,000
2006 104,000
2007 90,000
2008 55,000
--------
$370,000
========
Rent expense under all operating leases was $84,249 and $89,316 for the
years ended June 30, 2004 and 2003.
License Agreement
The Company has acquired intellectual property, equipment and a tooling
license from Mason & Hanger National, Inc. and a patent license from
Lucent Technologies, Inc. for the Fiber Optic Intelligence Detection
Systems (FOIDS(R)). In conjunction with these two license agreements
whereby royalties totaling 5.4% are due on revenues from the Fiber Optic
Intelligence Detection System (FOIDS(R)).
Note 13 - Geographic Data
The Company currently operates in the United States and the Middle East.
The following is a summary of local operations by geographic area:
U.S. % of total Middle East % of total
---- ---------- ----------- ----------
For the year ended
June 30, 2004
Revenue $ 2,009,856 97.50% $ 51,556 2.50%
Operating loss (949,840) 87.16% (139,961) 12.84%
Identifiable assets 5,212,101 94.71% 290,836 5.29%
For the year ended
June 30, 2003
Revenue $ 4,317,953 99.34% $ 28,863 0.66%
Operating loss (456,251) 71.44% (182,363) 28.56%
Identifiable assets 3,760,378 94.46% 220,554 5.54%
F-16
ELECTRONIC CONTROL SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Related Party Transactions
The Company earned revenues totaling $234,225 from a Company in which one
of the Company's Directors is the president and CEO. This amount is
included in accounts receivable at June 30, 2004.
The Company made non-interest bearing advances that are due on demand to
an officer and director of the Company. The balances outstanding at June
30, 2004 and 2003 were $37,655 and $35,566, respectively.
F-17
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Under the New Jersey Business Corporations Act ("NJBCA"), any corporation
in the State of New Jersey has the power to indemnify a corporate agent,
including an officer and director, against his expenses and liabilities in
connection with any proceeding involving the corporate agent if; (a) such
corporate agent acted in good faith and in manner reasonably believed to be in
the best interests of the corporation, and (b) with respect to any criminal
proceeding, such corporate agent had no reasonable cause to believe his conduct
was unlawful. The termination of any proceeding by judgment, order, settlement,
conviction or plea of nolo contendre or its equivalent, shall not itself create
a presumption that such corporate agent did not meet the applicable standards of
conduct.
Our Certificate of Incorporation provides that none of our directors or
officers shall be personally liable to the company or any stockholder to the
full extent permitted under the corporate laws of the State of New Jersey.
Additionally, our By-Laws provide for the indemnification of any of our
directors, officers and employees by reason of their serving in such capacity
against expenses and liabilities in connection with any proceeding involving
him/her by reason of his/her being or having been a corporate agent, other than
a proceeding by or in the right of the corporation, if (a) such person acted in
good faith and in a manner he/she reasonably believed to be or not opposed to
the best interest of the corporation, or (b) in a criminal proceeding, if such
person had no reasonable cause to believe that his/her conduct was unlawful. In
addition, the company may indemnify a corporate agent against expenses and
liabilities in connection with any proceeding by or in right of the corporation
if he acted in good faith and in a manner he/she reasonably believed to be in or
not opposed to the best interest of the corporation. Such indemnification is not
deemed to be exclusive of any other rights to which those indemnified may be
entitled, under any by-law, agreement, vote of stockholders or otherwise. The
foregoing provisions of our Certificate of Incorporation may reduce the
likelihood of derivative litigation against our directors and officers for
breach of their fiduciary duties, even though such action, if successful, might
otherwise benefit us and our stockholders.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth Electronic Control Security Inc.'s expenses
in connection with this registration statement. All of such expenses are
estimates, other than the filing fees payable to the Securities and Exchange
Commission.
Filing Fee--Securities and Exchange Commission .................. $ 1,032.33
Fees and Expenses of accountants and legal counsel .............. $20,000.00*
Blue Sky Fees and Expenses ...................................... $ 5,000.00*
Printing and Engraving Expenses ................................. $ 1,500.00*
Miscellaneous Expenses .......................................... $ 1,500.00*
----------
Total ........................................................... $29,032.33*
==========
* Estimated
Item 26. Recent Sales of Unregistered Securities
Section 4(2) Offerings
On September 15, 2004, the Company issued an aggregate of 82,192 shares of
common stock to InteSec Group LLC pursuant to the provisions of a consulting
agreement between the Company and said consultant. The shares were issued in
reliance on the exemption from the registration requirements of the Securities
Act of 1933 afforded by Section 4(2) thereof.
On April 7, 2004, the Company issued 735,294 shares of common stock to
Natalie Barchenko, the Treasurer and a director of the Company and the wife of
Arthur Barchenko, the Company's president and a director, upon the conversion of
loans made by Ms. Barchenko to the Company in the aggregate amount of $250,000.
The shares were issued at a price of $0.39 per share in reliance on the
exemption from the registration requirements of the Securities Act of 1933
afforded by Section 4(2) thereof. The
offering price of the shares was based upon a then outstanding offer from a
third party to purchase shares of common stock at such price.
Rule 506 Offerings
2004
On June 30, 2004, the Company consummated the issuance of (i) 2,000 shares
("Preferred Shares") of 10% Series B Convertible Preferred Stock, and (ii) Unit
Warrants to purchase 2,000,000 shares of the Company's common stock to eight
institutional and other accredited investors. In addition, the Company issued to
certain persons who identified the investors in the Preferred Shares Finders'
Warrants to purchase 200,000 shares of the Company's common stock. The sale of
the Preferred Shares and Unit Warrants resulted in $2 million in gross proceeds
to the Company prior to the exercise of the Warrants. The Preferred Shares are
initially convertible into an aggregate of 2 million shares of common stock. The
Company agreed to file a registration statement in respect of the common stock
issuable upon conversion of the Preferred Shares and the shares of common stock
underlying the Warrants. The effective price in the private placement was $1,000
for each unit. Each unit consists of one Preferred Share and a Unit Warrant to
purchase 1,000 shares of common stock. The unit purchase price was determined
based on negotiation between the company and the purchasers of the units. The
Unit Warrants have an exercise period of five years and an exercise price of
$1.00 per share. The Unit Warrants are exercisable in cash, and, under certain
circumstances, allow for cashless exercise, representing a potential $2 million
in additional proceeds. The company could realize and additional $200,000 in
proceeds from the sale of the Finders' Warrants.
2002
On March 14, 2002, ECSI completed a private placement of 40 units of its
securities, each consisting of 25,000 shares of Series A Convertible Preferred
Stock and Redeemable Warrants entitling the holders to purchase 12,500 shares of
common stock at an exercise price of $3.00 per share until March 14, 2005. The
offering was made and sold to 25 accredited investors. The Company received
gross proceeds of $2 million from the sale of the units. The Company paid
aggregate cash commissions of $187,500 in connection with the placement of the
units, including $50,000 to DC Capital Corp., a broker dealer registered with
the Securities and Exchange Commission and the National Association of
Securities Dealers, and $137,500 to certain finders where the payment of such
commissions was permissible under local law. In addition, the Company issued to
the finders warrants to purchase up to an aggregate of four units identical to
those offered in the offering, the underlying shares of common stock of which
are being registered in this registration statement.
The above sales were made in reliance upon the private offering exemptions
contained in Rule 506 of Regulation D of the Securities Act of 1933. Each
investor represented that he/she/it was acquiring the securities for investment
purposes only and not with a view to distribute. Each investor further
represented that he/she/it (a) had such knowledge and experience in financial
and business matters and was capable of evaluating the merits and risks of the
investment, (b) was able to bear the complete loss of the investment, and (c)
had the opportunity to ask questions of, and receive answers from, the Company
and its management concerning the terms and conditions of the offering and to
obtain additional information. Each investor further represented to the Company
that he/she/it was an "accredited investor" as such term is defined in Rule 501
of the Securities Act of 1933.
Exercises of Options
The transactions described below represent shares of common stock that
were issued upon the exercise of statutory stock options in reliance on the
exemption from registration afforded by Section 4(2).
On August 16, 2004, Thomas Isdanovich and Eldon Moberg, officers of the
Company, exercised options for an aggregate of 40,000 shares of common stock.
Mr. Isdanovich exercised 20,000 options at a price of $0.10 per share and Mr.
Moberg exercised 20,000 options at a price of $0.30 per share.
On July 8, 2004, Mark Barchenko, an officer and director of the Company,
exercised options for 100,000 shares of Common Stock. He paid an exercise price
of $0.20 per share.
On May 27, 2004, Richard Stern, a director of the Company, exercised
options for 100,000 shares of Common Stock. He paid an exercise price of $0.015
per share.
Preferred Stock Conversion
The transactions described below represent shares of common stock issued
upon conversion of shares of Series A Preferred Stock by the holders thereof,
all of whom acquired their shares in the March 2002 506 offering, in accordance
with the terms of said class of stock and in reliance on Section 3(b) of the
Securities Act of 1933.
2004
On August 16, 2004, five persons converted an aggregate of 150,000 shares
of Series A Preferred Stock into an aggregate of 171,426 shares of common stock.
On July 6, 2004, the Company issued an aggregate of 85,712 shares to
Charles Gargano; Carol Berardino, Robert Baumeister, and Linda Ravella, as
Tenants in Common; and JCM Capital Corp.
On January 9, 2004, the Company issued 12,500 shares of common stock to
Mark Goodman, M.D.
2003
On December 12, 2003, the Company issued 12,500 shares of common stock to
Mitchell Finesod.
On January 17, 2003, the Company issued 50,000 shares of common stock to
Dominic Bassani.
On July 15, 2003, the Company issued 25,000 shares of common stock to Fred
Franks.
On March 20, 2003, the Company issued an aggregate of 287,500 shares to
Angela Sabella, Douglas J. Bowen and Jeffrey Kessler.
On February 10, 2003, the Company issued 25,000 shares of common stock to
TCMP 3 Partners.
Securities Authorized For Issuance Under Stock Option Plan
The transactions described below represent options issued by the Company
under and subject to the provisions of the 1986 Stock Option Plan (as extended)
and were issued in reliance on the exemption from registration afforded by
Section 4(2) of the Securities Act of 1933.
2004
On June 18, 2004, the Company granted options to an employee entitling him
to purchase 10,000 shares of common stock at a price of $0.55 per share,
exercisable for a period ten years from the date of the grant.
On March 5, 2004, the Company granted options to an employee entitling him
to purchase 30,000 shares of common stock at a price of $0.60 per share (10%
above closing bid price on the date of the grant) for a period of 10 years from
the date of the grant.
On January 2, 2004, the Company granted options to purchase an aggregate
of 145,000 shares of common stock to the persons named below, all of whom are
officers and or directors of the company, in the amounts specified opposite
their respective names. The options are exercisable for a period of ten years at
a price of $1.00 per share, except as otherwise noted.
Arthur Barchenko 50,000
Natalie Barchenko 50,000
Mark Barchenko 10,000
Joseph McAndrew 10,000
Jake Muller 5,000
Thomas Isdanavich 10,000
Eldon Moberg 5,000
Richard Stern 5,000
Lil Tsipouras 10,000 @$1.10
2003
On August 25, 2003, the Company granted options to Joseph McAndrew, an
officer, entitling him to purchase 10,000 shares of common stock at a price of
$0.60 per share (10% above closing bid price on the date of the grant) for a
period of ten years from the date of the grant.
On August 22, 2003, the Company granted options to two employees entitling
them to purchase up to an aggregate of 15,000 shares each of common stock at a
price of $0.39 per share (10% above closing bid price on the date of the grant)
for a period of five years from the date of the grant.
2002
On February 15, 2002, the Company granted options to Arthur Barchenko and
Natalie Barchenko entitling them to purchase 100,000 shares each of common stock
at a price of $2.97 per share (10% above closing bid price on the date of the
grant) for a period of five years from the date of the grant.
On February 15, 2002, the Company granted options to seven persons
entitling them to purchase an aggregate of 60,000 shares of common stock at
$2.70 per share (the closing bid price per share on the date of the grant) for a
period of ten years from the date of the grant.
2001
On August 10, 2001, the Company granted options to Eldon Moberg, an
director, entitling him to purchase 40,000 shares of common stock at a price of
$0.30 per share for a period of ten years from the date of the grant.
On August 1, 2001, the Company granted options to Andrzej Mchocki, an
employee, entitling him to purchase 5,000 shares of common stock at a price of
$0.25 per share for a period of ten years from the date of the grant.
Issuance of Securities for Services or in Satisfaction of
Obligations
In February 2004, the Company issued an aggregate of 85,000 shares of its
common stock, including 30,000 shares to directors and 35,000 to consultants for
services rendered in the aggregate amount of $96,900, or a price of $1.14 per
share, pursuant to the exemption from the registration requirements of the
Securities Act of 1933 afforded by Section 4(2) thereof..
In March 2002, the Company issued 20,000 shares of common stock and
warrants to purchase 10,000 shares of common stock at a price of $2.00 per share
to CFG Media Inc. in accordance with the terms of an agreement whereby CFG Media
provided financial public relations services to the Company. In addition, the
Company issues to CFG Media 2,500 warrants per month as continuing payment for
services rendered (including 5,000 additional warrants as the date hereof). The
Company issued the shares pursuant to the exemption from registration provisions
of the Securities Act of 1933 afforded by section 4(2) thereof. The Company
valued the shares at an aggregate price of $13.333, or $0.67 per share.
Item 27. Exhibits and Financial Statement Schedule
(a) Exhibits
Exhibit No.
Reference Description Location
- --------- ----------- --------
3.1 Certificate of Incorporation of Electronic Control Security Inc. 1
3.1(a) Certificate of Amendment to Certificate of Incorporation of
Electronic Control Security Inc. 2
3.1(b) Certificate of Amendment to Certificate of Incorporation 3
3.2 By-Laws of Electronic Control Security Inc. 1
3.3 Certificate of Incorporation of SEM Consultants III, Inc. 1
3.4 By-Laws of SEM Consultants III, Inc. 1
3.5 Certificate of Incorporation of ECSI International, Inc. 1
3.6 By-Laws of ECSI International, Inc. 1
3.7 Certificate of Incorporation of ECSI FOIDS, Inc. 1
3.8 By-Laws of ECSI FOIDS, Inc. 1
3.9 Certificate of Incorporation of ECSI-DSA, Inc. 1
3.10 By-Laws of ECSI-DSA, Inc. 1
3.11 Memorandum of Association of ECSI Security Communications, Inc.,
an Israeli Corporation 2
3.12 Articles of Association of ECSI Security Communications, Inc., an
Israeli Corporation 2
4.1 Specimen Form of Common Stock Certificate. 1
4.2 Form of Redeemable Common Stock Purchase Warrant issued to
public in 1987. 1
4.3 Form of Qualified Stock Option Certificate. 1
4.4 Form of Non-Qualified Stock Option Certificate. 1
4.5 Form of Series A Convertible Preferred Stock Certificate 2
5.1 Opinion of Ruffa & Ruffa, P.C. 4
10.1 Patent License and Technical Information Agreement Relating to
Fiber Optic Sensing Systems dated as of January 15, 1997 between
Lucent Technologies Inc. and Electronic Control Security Inc. 1
10.2 Agreement dated March 5, 1997 between Mason Hanger National, Inc.
and Electronic Control Security Inc. relating to the purchase of certain
assets relating to the FOIDS Product Line. 1
10.3 License dated March 5, 1997 between Mason Hanger National, Inc.
and Electronic Control Security Inc. relating to the license of certain
intellectual property used in connection with the manufacture of the
FOIDS Product Line. 1
10.4 Lease Agreement with 580 Brighton Road Associates for space in
Clifton New Jersey. 1
10.5 Lease Agreement with The Theta Group for space in Huntsville,
Alabama. 1
10.6 Teaming agreement with Rafael Armament Development Authority. 1
10.7 Lease Agreement with Dewey Brazelton dated March 1, 2001 for
the space in Madison, Alabama. 2
10.8 Agreement with LAU Technologies dated September 13, 1999
relating to facial recognition technology. 2
10.9 License Agreement with Hyperdyne, Inc. dated June 13, 2001 2
10.10 Investment Banking Agreement dated as of November 18, 2001,
between Diversified Investors Capital Services of NA, Inc. and
Electronic Control Security Inc. 2
10.11 Marketing Agreement dated February 1, 2002 between 3 Media
Consultants, Inc. and ECSI International, Inc. 2
10.12 Securities Purchase Agreement dated June 30, 2004. 3
10.13 Registration Rights Agreement dated June 30, 2004. 3
14.1 Code of Ethics and Business Conduct 4
23.1 Consent of Demetrius & Company, L.L.C. 5
23.2 Consent of Ruffa & Ruffa, P.C. (included in Exhibit 5.1). 4
Legend
1. Incorporated by reference to such exhibit filed with Electronic Control
Security Inc.'s Registration Statement on Form 10-SB filed with the
Commission on February 16, 2001.
2. Incorporated by reference to such exhibit filed with Electronic Control
Security Inc.'s Registration Statement on Form SB-2 filed with the
Commission on June 6, 2002.
3. Incorporated by reference to such exhibit filed with Electronic Control
Security Inc.'s Current Report on Form 8-K filed with the Commission on
July 1, 2004.
4. Previously filed as an exhibit to this registration statement.
5. Filed as an Exhibit to the current filing.
Item 28. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the forgoing,
any increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation From the low or high end of the estimated
maximum offering range may be reflected in the form of prospects filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in the volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any additional or changed material information on
the plan of distribution.
(2) that, for determining liability under the Securities Act, each
post-effective amendment shall be treated as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
(3) to remove from registration by means of a post-effective amendment any
of the securities that remain unsold at the termination of the offering.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements of filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned in the City
of Clifton, New Jersey, on October 12, 2004.
ELECTRONIC CONTROL SECURITY INC.
By: /s/ Arthur Barchenko
-----------------------------------------
Arthur Barchenko, President,
Chief Executive Officer,
Chief Financial Officer and
Principal Accounting Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Arthur Barchenko* President, Chief Executive October 12, 2004
- ----------------------- Officer, Chief Financial
Arthur Barchenko Officer, Principal Accounting
Officer and Director
/s/ Natalie Barchenko* Treasurer and Director October 12, 2004
- -----------------------
Natalie Barchenko
/s/ James R. Janis* Director October 12, 2004
- -----------------------
James R. Janis
/s/ Gene Rabois* Director October 12, 2004
- -----------------------
Gene Rabois
/s/ Robert F. Reiter* Director October 12, 2004
- -----------------------
Robert F. Reiter
/s/ Edward Snow* Director October 12, 2004
- -----------------------
Edward Snow
*By: /s/ Arthur Barchenko
--------------------------------------
Arthur Barchenko, Attorney-in-Fact