UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 4, 2005
ELECTRONIC CONTROL SECURITY INC.
(Exact name of registrant as specified in its charter)
New Jersey 0-30810 22-2138196
(State or other jurisdiction (Commission IRS Employer
of incorporation) File Number) Identification No.)
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
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(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 1.01. Entry into a Material Definitive Agreement.
Acquisition of Assets.
On March 4, 2005, Electronic Control Security Inc. ("ECSI") and its wholly
owned subsidiary Clarion Sensing Systems Acquisition Corp. (the "Subsidiary,"
which together with ECSI is herein referred to as the "Company"), entered into a
series of agreements with Clarion Sensing Systems, Inc., an Indiana corporation
("Clarion"), and its stockholders (the "Clarion Stockholders") to acquire all of
Clarion's assets (the "Clarion Assets") and assume certain of its liabilities.
Clarion has developed and markets proprietary remote environmental monitoring
sensor systems to detect nuclear, biological, chemical and radiological (NBCR)
contaminants in air and water ("NBCR Devices"). The NBCR Devices have
application in the monitoring of public and private water distribution and
related systems and atmospheric environmental status monitoring.
Pursuant to an Asset Purchase Agreement, the Company acquired the tangible
and intangible assets described below for a purchase price of approximately $1.3
million (collectively, the "Consideration") consisting of (i) the issuance of
394,682 shares of common stock of ECSI ("Shares") and (ii) the assumption of
$646,206 of certain liabilities of Clarion, of which ECSI already has paid
approximately $350,000 as of the date hereof. The Company also has agreed to
assume $438,959 of certain liabilities of Clarion on a contingent basis, as
described below ("Contingent Liabilities"), and to pay certain professional and
other fees incurred in connection with the transaction.
Description of Clarion Assets.
The Company acquired both intangible and tangible assets of Clarion, as
follows:
o Intangible Assets - The Company acquired intangible assets which relate to
the proprietary NBCR Devices developed by Clarion. These consist of all of
Clarion's right, title and interest in and to (i) the patent pending
relating to the Vacusonic(TM) technology filed with the US Patent and
Trademark Office ("PTO"), (ii) the name Vacusonic(TM), as registered with
the PTO, (iii) the name "Sentinal," an unregistered trademark, (iv) two
Web domain names, "clarionsensing.com" and "clarionsentinal.com" and (v)
proprietary software utilized in connection with the NBCR Devices. A more
complete description of these assets, the use to which they will be put
and their importance to the Company is set forth under Item 2.02 Results
of Operations and Financial Condition, below. In addition, the Company
acquired proprietary information relating to Clarion's environmental
monitoring products.
o Agreements - Clarion also assigned to the Subsidiary all of its rights
under outstanding and pending agreements to provide products and services.
o Tangible Assets - The Company also acquired tangible assets including
parts and supplies utilized in connection with the manufacture of the NBCR
devices as well as certain office equipment and other personal property of
Clarion.
Consideration.
Delivery of the Shares.
The Shares are being held in escrow pursuant to the terms of an escrow
agreement among ECSI, the Subsidiary, Clarion and the Clarion Stockholders in
order to indemnify the Company and the Subsidiary from and against, any "Adverse
Consequences" which may result from an inaccuracy in or breach of any
representation, warranty, covenant or other provision set forth in any of the
Asset Purchase Agreement or related agreements (collectively, the "Transaction
Documents"). The term "Adverse Consequences" is defined in the escrow agreement
to include, generally, any costs and expenses incurred by the Company in
connection with, among other things, all legal actions, damages, penalties,
fines, costs, amounts paid in settlement, liabilities, obligations, taxes,
liens, losses, expenses, and fees, including court costs and reasonable
attorneys' fees and expenses incurred as a result of any inaccuracy in or breach
of any representation, warranty, covenant or other provision set forth in the
Transaction Documents. During such time as the Shares are held in escrow, they
shall be entitled to participate in any dividends or other distributions upon
the common stock and to vote (as directed by a representative of the Clarion
Stockholders) in all matters presented to holders of common stock but shall not
be assignable or transferable, other than by operation of law.
The Shares will be released from escrow to the Company or Clarion as
follows:
o To the Company - Shares will be returned to the Company for cancellation
if, during the three-year period ending March 3, 2008, there is an
inaccuracy in or breach of any representation, warranty, covenant or other
provision set forth in the Transaction Documents which results in Adverse
Consequences to the Company or and such entity makes a claim against the
Clarion Stockholders for the return of the Shares in accordance with the
procedures set forth in the escrow agreement, in which case there will be
returned to the Company upon the expiration of the term of the escrow
agreement (March 3, 2008) a number of Shares calculated by dividing the
dollar amount of the claim by the closing ask price of a share of common
stock on such date.
o Any Shares remaining in escrow after giving effect to Shares which are
subject to return to the Company, as described above, if any, will be
released to Clarion for distribution to the Clarion Stockholders upon the
earlier of (i) March 3, 2008 or (ii) after the fiscal year in which the
Subsidiary achieves sales in excess of $3,000,000 and net earnings before
taxes in excess of $600,000.
Payment of the Contingent Liabilities.
The Subsidiary will be obligated to pay the Contingent Liabilities, if at
all, only if the Subsidiary achieves (A) sales in excess of $3,000,000
("$3,000,000 in Sales") and/or (B) net earnings before taxes in excess of
$600,000 ("$600,000 in Net Earnings") in one of its fiscal years beginning
within three (3) years of March 4, 2005. In the event $3,000,000 in Sales are
achieved but $600,000 in Net Earnings are not achieved, then 10% of the
Subsidiary's net earnings before taxes earned during such fiscal year shall be
utilized to pay the Contingent Liabilities. In the event $600,000 in Net
Earnings are achieved (whether or not $3,000,000 in Sales are achieved), then
(I) all net earnings before taxes in excess of $600,000 earned during such
fiscal year plus (II) 10% of the Subsidiary's net earnings before taxes earned
during such fiscal year, shall be utilized to pay the Contingent Liabilities. If
the Contingent Liabilities are not paid in full and $3,000,000 in Sales or
$600,000 in Net Earnings occurs in one or more subsequent fiscal years, then net
earnings before taxes with respect to such fiscal years shall be utilized to pay
the Contingent Liabilities in the manner set forth in the preceding two
sentences until such time, if ever, the Contingent Liabilities are paid in full.
Any amounts shall be payable in cash or shares of common stock (valued as of the
closing ask price on the date of issuance) as the recipient shall direct.
Other Agreements
Each of H. Martin Harmless, III, Brian O'Dell, Robert Plummer, and William
Eby has executed a Confidentiality and Non-Competition Agreement in favor of the
Company pursuant to which such person has agreed not use or disclose any
confidential information, trade secrets or know-how ("Confidential Information")
at any time during or after their association with the Company. In addition, all
inventions, discoveries and improvements developed by said persons while
associated with the Company shall be the exclusive property of the Company. Each
of these persons have further agreed that in the event they are terminated by
the Company for any reason (or otherwise retire), with or without cause, for a
period of one (1) year following the date of termination, the undersigned will
not anywhere in the United States or any other country where the Company
conducts business or sells products, directly or indirectly, in any capacity
have an interest in, be associated with, or otherwise engage in, any business
conducted by the Company.
Each of the Clarion Stockholders has executed an agreement in favor of the
Company pursuant to which such person has agreed if, at any time after March 4,
2005 ("Closing Date"), each party to the Asset Purchase Agreement (a "Party")
will (i) take any further action necessary in connection with the Asset Purchase
Agreement, (ii) cooperate with a contesting or defending Party in any action
relating to the business or operations of Clarion or the Company as shall be
necessary in connection with the contest or defense, (iii) not, for three years
following the Closing Date, take any action which might discourage any person
from maintaining the same business relationships with the Company as it
maintained with Clarion prior to the Closing Date; (iv) refer all customer
inquiries relating to the businesses of Clarion to the Company, (iv) not use any
Confidential Information (as defined in the foregoing paragraph).
Item 2.01. Completion of Acquisition or Disposition of Assets.
The information required to be disclosed by this item is included in item
1.01, above.
Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an
Off-Balance Sheet Arrangement of a Registrant.
In connection with the acquisition of the Clarion Assets described in Item
1.01, above, the Subsidiary undertook certain direct financial obligations, all
of which have been guaranteed by the Company. Pursuant to the Asset Purchase
Agreement, the Subsidiary paid a purchase price of approximately $1.3 million
(collectively, the "Consideration") consisting of (i) the issuance of 394,682
shares of common stock of ECSI and (ii) the assumption of $646,206 of certain
liabilities of Clarion, of which ECSI already has paid approximately $350,000 as
of the date hereof. The Company also has agreed to assume $438,959 of certain
liabilities of Clarion on a contingent basis, as described below ("Contingent
Liabilities"), and to pay certain professional and other fees incurred in
connection with the transaction.
The Subsidiary will be obligated to pay the Contingent Liabilities, if at
all, only in the event the Subsidiary achieves (A) sales in excess of $3,000,000
("$3,000,000 in Sales") and/or (B) net earnings before taxes in excess of
$600,000 ("$600,000 in Net Earnings") in one of its fiscal years beginning
within three (3) years of March 4, 2005. In the event $3,000,000 in Sales are
achieved but $600,000 in Net Earnings are not achieved, then 10% of Buyer's net
earnings before taxes earned during such fiscal year shall be utilized to pay
the Contingent Liabilities. In the event $600,000 in Net Earnings are achieved
(whether or not $3,000,000 in Sales are achieved), then (I) all net earnings
before taxes in excess of $600,000 earned during such fiscal year plus (II) 10%
of the Subsidiary's net earnings before taxes earned during such fiscal year,
shall be utilized to pay the Contingent Liabilities. If the Contingent
Liabilities are not paid in full and $3,000,000 in Sales or $600,000 in Net
Earnings occurs in one or more subsequent fiscal years, then net earnings before
taxes with respect to such fiscal years shall be utilized to pay the Contingent
Liabilities in the manner set forth in the preceding two sentences until such
time, if ever, the Contingent Liabilities are paid in full. Any amounts paid
hereunder shall be paid in cash or shares of common stock (valued as of the
closing ask price on the date of issuance) as the recipient shall direct.
Item 3.02. Unregistered Sales of Equity Securities.
In connection with the acquisition of the Clarion Assets described in Item
1.01, above, the Company issued 394,682 shares of common stock ("Shares") to
Clarion pursuant to the exemption from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"), afforded by Section
4(2) thereof. The Shares are being held in escrow pursuant to the terms of an
escrow agreement among the Company, Clarion and the Clarion Stockholders in
order to indemnify the Company and the Subsidiary from and against, any "Adverse
Consequences" (as defined in Item 1.01) which result from an inaccuracy in or
breach of any representation, warranty, covenant or other provision set forth in
any of the Transaction Documents.
The Shares will be released from escrow to the Company or Clarion as
follows:
o Shares will be returned to the Company for cancellation if, during the
three-year period ending March 3, 2008, there is an inaccuracy in or
breach of any representation, warranty, covenant or other provision set
forth in the Transaction Documents, which results in Adverse Consequences
to the Company or the Subsidiary and such entity makes a claim against for
the return of the Shares in accordance with the procedures set forth in
the escrow agreement, in which case there will be returned to the Company
upon the expiration of the term of the escrow agreement (March 3, 2008) a
number of Shares calculated by dividing the dollar of the claim by the
closing ask price of a share of common stock on such date.
o Any Shares remaining escrow after giving effect to Shares which are
subject to return to the Company, as described above, if any, will be
released to Clarion for distribution to the Clarion Stockholders upon the
earlier of (i) March 8, 2008 or (ii) after the fiscal year in which the
Subsidiary achieves sales in excess of $3,000,000 and net earnings before
taxes in excess of $600,000.
Item 8.01. Other Events.
(a) Discussion of Acquisition and Subsidiary Operations.
Subsidiary Operations.
Cautionary Note Regarding Forward Looking Statements
The information contained in this report regarding our acquisition of the
Clarion Assets and the business of Clarion Sensor Systems Acquisition Corp.
after the Closing Date contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. We have
based these forward-looking statements largely on our current expectations and
projections about future events and industry financial trends affecting the
condition of our business. Our acquisition of Clarion involves a number of
special risks, including, but not limited to, the following:
o we may experience difficulty integrating the acquired assets and
personnel;
o the acquisition may disrupt our ongoing business;
o we may not be able to successfully incorporate the acquired technologies
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 who joined our Company upon
the acquisition;
o our Subsidiary which acquired the Clarion Assets may fail to achieve the
revenues and earnings anticipated;
o a patent may never be issued in favor of the patent pending relating to
the technology acquired by the Company; and
o we may ultimately be liable for contingent and other liabilities of
Clarion not previously disclosed to us.
We may not successfully overcome problems encountered in connection with
potential future acquisitions. In addition, the acquisition of the Clarion
Assets has:
o diluted current shareholders' ownership interest; and
o caused us to assume a material amount of liabilities.
In addition, in this report, we use words such as "anticipates,"
"believes," "plans," "expects," "future," "intends," and similar expressions to
identify forward-looking statements.
We undertake no obligation to update publicly or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise after the date of this report. In light of these risks and
uncertainties, the forward-looking events and circumstances discussed in this
report may not occur and actual results could differ materially from those
anticipated or implied in the forward-looking statements.
Overview of ECSI's Operations.
ECSI designs, develops, manufactures and markets technology-based
integrated security systems. We also provide consulting services to security
system integrators 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 support
services.
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 offer the complete range of solutions-driven responses
to accommodate our customer's needs. We continuously seek to augment our
portfolio of technologies by acquiring new technologies to respond to new
security challenges as they arise.
Discussion of the Acquisition and Business of the Subsidiary.
Clarion has developed and markets proprietary remote monitoring sensor
systems to detect nuclear, biological, chemical and radiological (NBCR)
contaminants in water and air ("NBCR Devices").
Over the last few years, the federal government has acknowledged the
prospect of security threats to the country's environment, particularly, the
introduction of contaminants into the air and the country's water supply.
Management of the Company believes that systems that monitor and detect the
existence of nuclear, biological, chemical and radiological contaminants in air
and water represent an integral part of the US Department of Homeland Security's
initiatives over the foreseeable future. In addition, the Environmental
Protection Agency has promoted the use of water monitoring systems and has
estimated that approximately $138
million is required for upgrading and replacing water infrastructure systems to
comply with the Safe Drinking Water Act by 2016.
We moved rapidly to identify and acquire technologies to address these new
security concerns because we believe our clients will require water and air
contamination monitoring and detection devices as a part of a fully integrated
security system.
The technologies and intellectual property we acquired are utilized in
connection with the manufacture of two key products, the Sentinal monitoring
system ("Sentinal") and the Vacusonic water filtration and purification system
("Vacusonic").
The Sentinal(TM) is a data management device that is the key component of
an intelligent, real-time network of sensors and actuators. It monitors such
factors as liquid levels, temperature, conductance, turbidity and pressures. In
addition, it can detect the presence of specific ions such as ammonium, copper,
lead and nitrate and use data collected from analyzers to measure such
parameters as total organic carbon, volatile organic chemicals, manganese and
mercury.
The Sentinal(TM) gathers data from remote monitoring sensors and analyzers
and allows users to protect stored assets such as water, oil and chemicals and
as a consequence, protect equipment, such as supply systems, pipelines, power
systems and waste water systems, as well as processes and the environment from
contamination. The Sentinal(TM) can be integrated into existing comprehensive
security systems.
The Sentinal(TM) continuously evaluates water quality and compares the
results with a previously established analytical baseline. The system then both
takes the appropriate, pre-preprogrammed action to correct the problem,
including shutting off the supply valve, if necessary, and notifies the
designated authority of the problem. The information is reported both locally
and remotely to trained building security and operations personnel and first
responders are alerted to the validation of a contamination event. The system
utilizes two-way communications which allows it to transmit data to a remote
site and receive commands from a command and control center, including
maintenance and diagnostic updates. The system is capable of communicating via
wireless modalities such as radios, cellular networks, satellites, and by way of
wired links to a local area network and telephone lines.
The Sentinal(TM) can be fitted with sensors selected by the manufacturer
but also functions utilizing existing sensors. Some sensors are equipped with
communications device which allow for remote maintenance inspections.
Information from the Sentinal(TM) is presented through the Internet,
through a local area network of computers or on a local terminal. The data is
presented in a Web page format that has analytical and historical storage
capability. Each monitoring site will have its own Web page to allow for
specific site monitoring and remote configuration of the water quality profile
at the site.
The Sentinal(TM) has been tested and management believes that its efficacy
has been verified for the EPA by Battelle Science and Technology International.
Clarion has sold approximately 10 Sentinal(TM) systems to date.
The Vacusonic is a mobile, modular system that yields purified, filtered
potable water in emergency situations. The system is designed to function
without excessive logistical support an can provide potable water from sources
of varying quality without using chemicals. The system is easily transportable
by flatbed truck or helicopter to areas requiring an emergency water supply. The
Vacusonic can provide throughput of 2,100 gallons an hour and is scalable from
10,000 to 50,000 gallons per day.
The Vacusonic filters water without chemicals. Filters remove particulate
matter by means of a process that maximizes disinfection and chemical
destruction. The various processes employed by the system are used to destroy
pathogens and volatile organic matter and remove heavy metals. In addition,
sensors measuring water quality and process performance throughout the system's
operation maximize efficiency and permit remote monitoring and control of
operations. Two-way communications allow the system to make adjustments as
required.
Air monitoring capabilities are based on the same principles as the
Sentinal(TM) system. Air contamination detection sensors and analyzers are
incorporated into the device to monitor for toxic air contamination. The system
comprises an integrated configuration of air contamination detection equipment,
communication systems, data acquisition and management devices, automated HVAC
system controls, and information. The system will detect and validate the
presence of a chemical, biological, or radiological contaminant, actuate the
HVAC system in the appropriate manner to mitigate the problem, and report its
actions and the current status of air quality in the building. The information
is reported both locally and remotely to trained building security and
operations personnel and first responders who are alerted to the validation of a
contamination event.
The Subsidiary has retained the services of four of Clarion's employees
who will continue further research and development with respect to of the
development of the Sentinal and Vacusonic technologies and assist in marketing
them to the target audience. The Company also will market these devices through
its existing distribution channels.
The Company expects to manufacture Sentinal(TM) and Vacusonic devices and
related products at its manufacturing facility in Alabama. The devices are
assembled from parts and equipment which are readily available from multiple
sources.
Upon the closing of the acquisition of the Clarion Assets, the Subsidiary
retained the services of four employees of Clarion to continue further research
and development of products based upon the technologies and who are primarily
responsible for marketing and sales of the NCBR Devices.
The following table sets forth certain information about the Subsidiary's
directors and executive officers after the Closing Date of the acquisition of
the Clarion Assets:
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Name Position Age
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H. Martin Harmless, II President and Director 60
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Arthur Barchenko Vice President and Director 72
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Natalie Barchenko Treasurer and Director 72
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We believe that our acquisition of the Clarion Assets demonstrates our
continuing commitment to up-grade our product offerings and allow us to provide
our clients with innovative solutions to new security threats as they develop.
(b) On March 7, 2005, the Company issued a press release announcing that
it had acquired the Clarion Assets as more fully described elsewhere herein.
Item 9.01 Financial Statements And Exhibits.
(a) Financial statements of businesses acquired.
Audited financial statements of Clarion Sensing Systems, Inc. and pro
forma financial statements for the Company giving effect to the acquisition of
the Clarion Assets will be filed by the Company within sixty days of the date
hereof.
(c) Exhibits.
Exhibit
Number Exhibit Description
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10.14 Asset Purchase Agreement dated March 4, 2005 among the
Registrant, Clarion Sensing Systems Acquisition Corp., a New
Jersey corporation, and Clarion Sensing Systems, Inc., and
Indiana corporation.
10.15 Assumption Agreement, dated March 4, 2005, among Clarion
Sensing Systems Acquisition Corp. Clarion Sensing Systems,
Inc.
10.16 Escrow Agreement dated March 4, 2005, among the Registrant,
Clarion Sensing Systems, Inc., the shareholders of Clarion
Sensing Systems, Inc. and Lasser Hochman, L.L.C., as escrow
agent.
10.17 Form of Target Stockholders Agreement dated March 4, 2005,
among the Registrant, Clarion Sensing Systems Acquisition
Corp. and each shareholder of Clarion Sensing Systems, Inc.
10.18 Form of Confidentiality and Non-Compete Agreement among the
Registrant, Clarion Sensing Systems Acquisition Corp. and each
shareholder of Clarion Sensing Systems, Inc.
99.1 Press Release dated March 7, 2005, entitled "ECSI Acquires
Remote Air and Water Monitoring Technologies."
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ELECTRONIC CONTROL SECURITY INC.
Date: March 7, 2005 By: /s/ Arthur Barchenko
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Arthur Barchenko, President