UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
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:
--------------------------------------------------------------
(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))
Electronic Control Security Inc. (the "Company") hereby amends its Current
Report on Form 8-K filed March 7, 2005 to provide the financial statements of
the Company relating to the acquisition by the Company of Clarion Sensing
Systems, Inc.
Item 9.01 Financial Statements and Exhibits.
(a) Financial statements of business acquired.
The following financial statements of Clarion Sensing Systems, Inc., the
acquired business, are submitted at the end of this Amendment to Current Report
on Form 8-K/A, and are filed herewith and incorporated herein by reference:
(a) Financial statements of businesses acquired.
Financial Statements Page
-------------------- ----
Audited Financial Statements of Clarion
Sensing Systems, Inc. for the Year ended December 31, 2003 F-1 - F-10
Unaudited Financial Statements of Clarion
Sensing Systems, Inc. for the Nine Months Ended September 30, 2004 F-11 - F-20
(b) Pro forma financial information.
The following pro forma financial information of Clarion Sensing Systems,
Inc., the acquired business, and the Company is submitted at the end of this
Amendment to Current Report on Form 8-K/A, and is filed herewith and
incorporated herein by reference:
Pro Forma Financial Information Page
------------------------------- ----
Electronic Control Security Inc. and Clarion
Sensing Systems, Inc. Unaudited Pro Forma
Consolidated Condensed Financial Statements F-21 - F-26
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: May 6, 2005 By: /s/ Arthur Barchenko
-------------------------------------
Arthur Barchenko, President
2
INDEX TO FINANCIAL STATEMENTS
Audited Financial Statements of Clarion Systems Sensing, Inc.
Report of Independent Registered Public Accounting Firm F-1
Balance Sheets as of December 31, 2003 F-2
Statements of Operations for the year December 31, 2003 F-3
Statements of Stockholders' Equity
for the year ended December 31, 2003 F-4
Statements of Cash Flows for
the year ended December 31, 2003 F-5
Notes to the Financial Statements F-6 - F-10
Unaudited Financial Statements of Clarion Systems Sensing, Inc.
Report of Independent Registered Public Accounting Firm F-11
Balance Sheets as of September 30, 2004 F-12
Statements of Operations for the
nine months ended September 30, 2004 F-13
Statements of Stockholders Equity
For the nine months ended September 30, 2004 F-14
Statements of Cash Flows for the
nine months ended September 30, 2004 F-15
Notes to the Financial Statements F-16 - F-20
Unaudited Pro Forma Consolidated Condensed Financial Statements F-21 - F-22
Pro Forma Consolidated Condensed Balance Sheet
December 31, 2004 F-23
Pro Forma Combined Consolidated Statements of
Operations for the Six Months Ended June 30, 2004 F-24
Pro Forma Combined Consolidated Statements of
Operations for the Year Ended June 30, 2004 F-25
Notes to the Pro Forma Consolidated
Condensed Financial Statements F-26
Independent Auditors' Report
To the Board of Directors
Clarion Sensing Systems, Inc.
Indianapolis, Indiana
We have audited the accompanying balance sheet of Clarion Sensing Systems, Inc.,
as of December 31, 2003, and the related statements of operations, stockholders'
equity (deficit), and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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
audit provides a reasonable basis for our opinion.
In our opinion, the 2003 financial statements referred to above present fairly,
in all material respects, the financial position of Clarion Sensing Systems,
Inc., as of December 31, 2003, and the results of its operations and its cash
flows for the year then ended in conformity with U.S. generally accepted
auditing principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 8. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Somerset CPAs, P.C.
Indianapolis, Indiana
January 21, 2005
F-1
CLARION SENSING SYSTEMS, INC.
Balance Sheet
December 31,2003
Assets
Current Assets
Cash $ 21,793
Accounts receivable 2,773
Inventories 1,000
-----------
25,566
-----------
Total Current Assets
Property and Equipment
Property and equipment $ 23,342
Less allowances for depreciation (10,096)
-----------
Total Property and Equipment
13,246
-----------
Total Assets
$ 38,812
===========
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Current maturities of note payable $ 99,502
Current maturities of capital lease obligations 5,232
Accounts payable 96,860
Accrued compensation and taxes 448,043
Accrued rent 43,015
-----------
Total Current Liabilities 692,652
-----------
Long-term Liabilities
Notes payable 73,998
Capital lease obligations 4,311
-----------
Total Long-term Liabilities 78,309
-----------
Total Liabilities 770,961
-----------
Stockholders' Equity (Deficit)
Common stock 50,000
Additional paid-in capital 432,558
Retained deficit (1,214,707)
-----------
Total Stockholders' Equity (Deficit) (732,149)
Total Liabilities and Stockholders' Equity (Deficit) $ 38,812
===========
See accompanying notes.
F-2
CLARION SENSING SYSTEMS, INC.
Statement of Operations
For the Year Ended December 31,2003
Revenues $ 92,390
Cost of Revenues 41,460
---------
Gross Profit 50,930
---------
General and Administrative Expense 357,941
---------
Loss from Operations (307,011)
---------
Other Income (Expense)
Other income 5,487
Interest expense (17,592)
---------
Total Other Income (Expense)
(12,105)
---------
Net Loss $(319,116)
=========
See accompanying notes.
F-3
CLARION SENSING SYSTEMS, INC
Statement of Stockholders' Equity (Deficit)
For the Year Ended December 31, 2003
Total
Common Stock Additional Retained Shareholders'
Shares Amount Paid in Capital Deficit Equity (Deficit)
----------- ----------- --------------- ----------- ----------------
Balance at December 31, 2002 100 $ 50,000 $ 379,758 $ (895,591) $ (465,833)
Issuance of common stock 16 0 600 0 600
Capital contributions from stockholders 0 0 52,200 0 52,200
Net loss 0 0 0 (319,116) (319,116)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2003 116 $ 50,000 $ 432,558 $(1,214,707) $ (732,149)
=========== =========== =========== =========== ===========
See accompanying notes.
F-4
CLARION SENSING SYSTEMS, INC.
Statement of Cash Flows
For the Year Ended December 31, 2003
Cash Flows from Operating Activities
Net loss $(319,116)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 4,933
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (2,773)
Increase (decrease) in accounts payable 57,204
Increase (decrease) in accrued expenses 167,891
---------
Net cash used in operating activities (91,861)
---------
Cash Flows from Investing Activities
Payments for the purchase of property and equipment (1,673)
---------
Net cash used in investing activities (1,673)
---------
Cash Flows from Financing Activities
Capital contributions from stockholders 52,800
Proceeds from issuance of long-term debt 68,282
Principal payments on long-term debt (2,500)
Principal payments under capital lease obligations (4,744)
---------
Net cash provided by financing activities 113,838
---------
Net Increase in Cash and Cash Equivalents 20,304
Cash and Cash Equivalents, Beginning of Year 1 ,489
---------
Cash and Cash Equivalents, End of Year $ 21,793
---------
Supplemental Cash Flow Disclosures
Interest paid $ 9,953
=========
See accompanying notes.
F-5
CLARION SENSING SYSTEMS, INC.
Notes to Financial Statements
December 31, 2003
Note 1 - Nature of Operations and Summary of Significant Accounting Policies:
Nature of Operations
Clarion Sensing Systems, Inc. (the Company), is an Indianapolis based provider
of proprietary monitoring sensor systems, designed for air and water sensing
applications. The sensor system is able to remotely monitor, analyze, detect and
communicate the presence of nuclear, biological, chemical and radiological
contamination and operational problems, allowing for immediate notification and
action. The Company provides its services to various industries, including
municipalities, manufacturing, and military and defense operations.
Revenue Recognition
The Company generally recognizes revenue for contracts utilizing output measures
such as when services are performed, units are delivered or when contract
milestones are met.
Accounts Receivable
The Company carries its accounts receivable at invoiced amounts. On a periodic
basis, the Company evaluates its accounts receivable and writes off
uncollectible accounts, based on history of past write-offs and collections and
current credit conditions. The Company considers accounts receivable to be fully
collectible; accordingly, no allowance for doubtful accounts is provided. The
Company's policy is not to accrue interest on past due trade receivables.
Inventories
Inventories are stated at the lower of cost or market. Costs are determined
under the first-in, first-out method (FIFO) method of accounting.
Property, Equipment, and Depreciation
Property and equipment are carried at cost and includes expenditures for new
additions and those, which substantially increase the useful lives of existing
assets. Depreciation is computed at various rates by use of the straight-line
method and certain accelerated methods. Depreciable lives are generally as
follows:
Office furniture 5 to 7 years
Equipment 5 to 10 years
Expenditures for normal repairs and maintenance are charged to operations as
incurred. The cost of property or equipment retired or otherwise disposed of and
the related accumulated depreciation are removed from the accounts in the year
of disposal with the resulting gain or loss reflected in earnings or in the cost
of the replacement asset.
The provision for depreciation amounted to $4,933 for the year ended December
31, 2003.
F-6
CLARION SENSING SYSTEMS, INC.
Notes to Financial Statements
December 31, 2003
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
(Continued):
Cash Flows
For purposes of the Statements of Cash Flows, the Company considers all highly
liquid instruments that are purchased within three months or less of an
instruments maturity date to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Note 2 - Note Payable:
The Company has a promissory note payable due to a bank at December 31, 2003, in
the amount of $99,502 with a fixed interest rate of 7%, later amended to 8.75%
due to loan default as discussed in the following paragraph. The note is secured
by substantially all assets of the Company and is personally guaranteed by
certain stockholders of the Company.
The note payable contains various affirmative covenants. At December 31, 2003,
the Company was in breach with many of these covenants and the loan was
considered in default. As a result the Company entered into an agreement with
the bank to pay interest only on the note up through sale of the Company's
assets as described in Note 9. Under terms of the agreement, the prospective
buyer has entered into a contract with the bank to pay the obligation and will
assume the liability at closing. Management of the Company believes it is likely
the bank will call the note in the event the acquisition does not consummate
within a reasonable period after the date of this report.
Note 3 - Long-term Debt:
The Company has outstanding long-term debt in the amount of $73,998 due to
prospective investors, as of December 31, 2003, including imputed interest at
15%. The obligations are due on demand; however remains unsecured and
outstanding as of December 31, 2004, and are classified as long-term liabilities
on the Company's balance sheet at December 31, 2003.
Contingent on the sale of the Company's assets as described in Note 9, the debt
shall be converted to stock of the prospective buyers as defined in the
agreement.
F-7
CLARION SENSING SYSTEMS, INC.
Notes to Financial Statements
December 31, 2003
Note 4 - Capital Leases:
Long-term leases relating to the financing of fixed assets are accounted for as
installment purchases. The capital lease obligations reflect the present value
of future rental payments, discounted at the interest rate implicit in the
lease, and a corresponding amount is capitalized as the cost of the fixed
assets. The fixed assets are being depreciated over periods ranging from five to
ten years.
The following is an analysis of fixed assets under capital lease at December 31,
2003:
Equipment $16,917
Less allowances for depreciation 6,433
-------
$10,484
=======
Following is a schedule of future minimum lease payments due under the capital
lease obligations together with the present value of net minimum lease payments
as of December 31, 2003:
Year Ending December 31,
------------------------
2004 $ 6,014
2005 4,511
2006 0
2007 0
2008 0
Later Years 0
--------
Total minimal lease payments 10,525
Less amounts representing interest 982
--------
Present value of net minimum lease payments 9,543
Less current portion (4,311)
--------
Long-term portion $ 5,232
========
Note 5 - Related Party Transactions:
The Company leases its office facilities from a stockholder. The lease is on a
month-to-month basis and currently provides for monthly payments of $1,227. Rent
expense under this arrangement amounted to $18,754 for the year ended December
31, 2003.
F-8
CLARION SENSING SYSTEMS, INC.
Notes to Financial Statements
December 31, 2003
Note 6 - Common Stock:
The Company has stock with equal voting rights and no par value.
The following summarizes the Company's shares of common stock as of December 31,
2003:
Authorized 1,000
Issued 116
Outstanding 116
Note 7 - Income Taxes:
The Company, with the consent of its stockholders, has elected under the
Internal Revenue Code to be an S corporation. In lieu of corporation income
taxes, the stockholders of an S corporation are taxed on their proportionate
share of the Company's taxable income. Therefore, no provision for income taxes
has been included in the financial statements.
Note 8 - Going Concern:
The accompanying financial statements have been prepared in conformity with U.S.
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, the Company has sustained substantial
operating losses since inception. In addition, the Company has used substantial
amounts of working capital in its operations. Further, at December 31, 2003,
current liabilities exceed current assets by $667,086 and the Company reported a
retained deficit of $1,214,707. As described in Note 9, the Company entered into
a letter of intent in 2004 to sell its business assets contingent on the results
of an independent valuation of certain intangible assets.
In view of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon either a) the Company's ability to
successfully sell the Company as discussed in Note 9, or b) obtain financing
from other investors or creditors to provide sufficient cash flow to meet
financing requirements and continue future operations. Management believes that
actions presently being taken, including but not limited to, the letter of
intent to sell the Company's assets as discussed in Note 9, provide the
opportunity for the Company to continue as a going concern.
Note 9 - Subsequent Event:
Effective September 1, 2004, the Company entered into a letter of intent with
ECSI International, Inc. ("ECSI") to acquire substantially all of the assets of
the Company and assume certain liabilities in exchange for 381,250 shares of
ECSI common stock. Under terms of the agreement ECSI will also convert the
majority of accrued compensation and accrued rent, included in the Company's
December 31, 2003 balance sheet to cash or stock if certain future operating
performance targets are met. If those operating targets are met, the value of
the consideration ultimately paid to the Company's current stockholders will be
added to the cost of the acquisition, which will increase the amount of goodwill
arising in the transaction.
F-9
CLARION SENSING SYSTEMS, INC.
Notes to Financial Statements
December 31, 2003
Note 9 - Subsequent Event (Continued):
The Company is in process of obtaining a third party valuation of certain
intangible assets and in negotiations regarding certain assumed liabilities;
accordingly the acquisition has not consummated and the allocation of the
prospective purchase price is not available on the date of this report.
F-10
Report of Independent Registered Public Accounting Firm
To the Board of Directors
CLARION SENSING SYSTEMS, INC.
Indianapolis, Indiana
We have reviewed the condensed balance sheet of Clarion Sensing Systems, Inc. as
of September 30, 2004, and the related condensed statements of operations,
stockholders' equity (deficit), and cash flows for the nine-month period ended
September 30, 2004 included in the accompanying Securities and Exchange
Commission Form 8-K. These interim financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed financial statements referred to above for them to be
in conformity with accounting principles generally accepted in the United States
of America.
The accompanying condensed financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 8 to the
condensed financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 8. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board, the balance sheet of Clarion Sensing Systems
as of December 31, 2003, and the related statements of operations, stockholders'
equity (deficit), and cash flows for the year then ended (not presented herein);
and in our report dated January 21, 2005, we expressed an unqualified opinion on
those financial statements.
/s/ Somerset CPAs, P.C.
Indianapolis, Indiana
January 21, 2005
F-11
CLARION SENSING SYSTEMS, INC.
Balance Sheet
September 30, 2004
Assets
2004
-----------
Current Assets
Cash $ 8,493
Inventories 1,000
-----------
Total Current Assets 9,493
-----------
Property and Equipment
Property and equipment 23,428
Less allowances for depreciation (13,221)
-----------
Total Property and Equipment 10,207
-----------
Total Assets $ 19,700
===========
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities
Accounts payable $ 105,962
Short-term debt 227,200
Note payable to bank 104,000
Current portion of capital lease obligations 5,673
Accrued wages and withholdings 482,919
Accrued rent 56,696
-----------
Total Current Liabilities 982,450
-----------
Shareholders' Equity (Deficit)
Common stock 50,000
Additional paid-in capital 458,658
Retained earnings (deficit) (1,471,408)
-----------
Total Shareholders' Equity (Deficit) (962,750)
-----------
Total Liabilities and Shareholders' Equity (Deficit) $ 19,700
===========
See accompanying notes and accountants' review report.
F-12
CLARION SENSING SYSTEMS, INC.
Statement of Operations
For the Nine Months Ended September 30, 2004
Revenues $ 45,623
Cost of Revenues 11,909
---------
Gross Profit 33,714
---------
General and Administrative Expense 275,775
---------
Loss from Operations (242,061
---------
Other Income (Expense)
Interest expense (14,640)
---------
Total Other Income (Expense) (14,640)
---------
Net Loss $(256,701)
=========
See accompanying notes and accountants' review report.
F-13
CLARION SENSING SYSTEMS, INC
Statement of Stockholders' Equity (deficit)
September 30, 2004
Total
Common Stock Additional Retained Shareholders'
Shares Amount Paid in Capital Deficit Equity (Deficit)
----------- ----------- --------------- ----------- ----------------
Balance at December 31, 2003 116 $ 50,000 $ 432,558 $(1,214,707) $ (732,139)
Issuance of common stock 1 0 7,500 0 7,500
Capital contributions from stockholders 0 0 18,600 0 18,600
Net loss 0 0 0 (256,701) (256,701)
----------- ----------- ----------- ----------- -----------
Balance at September 30, 2004 117 $ 50,000 $ 458,658 $(1,471,408) $ (962,750)
=========== =========== =========== =========== ===========
See accompanying notes and accountants' review report.
F-14
CLARION SENSING SYSTEMS, INC.
Statement of Cash Flows
For the Nine Months Ended September 30, 2004
Cash Flows from Operating Activities
Net loss $(256,701)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,124
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 2,773
Increase (decrease) in accounts payable 9,102
Increase (decrease) in accrued expenses 48,557
---------
Net cash used in operating activities (193,145)
---------
Cash Flows from Financing Activities
Capital contributions from stockholders 26,100
Proceeds from issuance of debt 157,700
Principal payments under capital lease obligations (3,955)
---------
Net cash provided by financing activities 179,845
---------
Net Decrease in Cash and Cash Equivalents (13,300)
Cash and Cash Equivalents, Beginning of Year 21,793
---------
Cash and Cash Equivalents, End of Year $ 8,493
=========
Supplemental Cash Flow Disclosures
Interest paid $ 7,100
=========
See accompanying notes and accountants' review report.
F-15
CLARION SENSING SYSTEMS, INC.
Notes to Financial Statements
September 30, 2004
Note 1 - Nature of Operations and Summary of Significant Accounting Policies:
Nature of Operations
Clarion Sensing Systems, Inc. (the Company), is an Indianapolis based provider
of proprietary monitoring sensor systems, designed for air and water sensing
applications. The sensor system is able to remotely monitor, analyze, detect and
communicate the presence of nuclear, biological, chemical and radiological
contamination and operational problems, allowing for immediate notification and
action. The Company provides its services to various industries, including
municipalities, manufacturing, and military and defense operations.
Revenue Recognition
The Company generally recognizes revenue for contracts utilizing output measures
such as when services are performed, units are delivered or when contract
milestones are met.
Accounts Receivable
The Company carries its accounts receivable at invoiced amounts. On a periodic
basis, the Company evaluates its accounts receivable and writes off
uncollectible accounts, based on history of past write-offs and collections and
current credit conditions. The Company considers accounts receivable to be fully
collectible; accordingly, no allowance for doubtful accounts is provided. The
Company's policy is not to accrue interest on past due trade receivables.
Inventories
Inventories are stated at the lower of cost or market. Costs are determined
under the first-in, first-out method (FIFO) method of accounting.
Property, Equipment, and Depreciation
Property and equipment are carried at cost and includes expenditures for new
additions and those, which substantially increase the useful lives of existing
assets. Depreciation is computed at various rates by use of the straight-line
method and certain accelerated methods. Depreciable lives are generally as
follows:
Office furniture 5 to 7 years
Equipment 5 to 10 years
Expenditures for normal repairs and maintenance are charged to operations as
incurred. The cost of property or equipment retired or otherwise disposed of and
the related accumulated depreciation are removed from the accounts in the year
of disposal with the resulting gain or loss reflected in earnings or in the cost
of the replacement asset.
The provision for depreciation amounted to $3,124 for the nine months ended
September 30, 2004.
F-16
CLARION SENSING SYSTEMS, INC.
Notes to Financial Statements
September 30, 2004
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
(Continued):
Cash Flows
For purposes of the Statements of Cash Flows, the Company considers all highly
liquid instruments that are purchased within three months or less of an
instruments maturity date to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Note 2 - Note Payable:
The Company has a promissory note payable due to a bank at September 30, 2004,
in the amount of $104,000 with a fixed interest rate of 7%, later amended to
8.75% due to loan default as discussed in the following paragraph. The note is
secured by substantially all assets of the Company and is personally guaranteed
by certain stockholders of the Company.
The note payable contains various affirmative covenants. At September 30, 2004,
the Company was in breach with many of these covenants and the loan was
considered in default. As a result the Company entered into an agreement with
the bank to pay interest only on the note up through sale of the Company's
assets as described in Note 9. Under terms of the agreement, the prospective
buyer has entered into a contract with the bank to pay the obligation and will
assume the liability at closing. Management of the Company believes it is likely
the bank will call the note in the event the acquisition does not consummate
within a reasonable period after the date of this report.
Note 3 - Short-term Debt:
The Company has outstanding debt due on demand in the amount of $94,200 due to
prospective investors, as of September 30, 2004, including imputed interest
ranging from 10% - 15%. Contingent on the sale of the Company's assets as
described in Note 9, the debt shall be converted to stock of the prospective
buyers as defined in the agreement.
The Company also has outstanding debt in the amount of $133,000, with interest
fixed at 7.5% due to ECSI International, Inc. (ECSI) as of September 30, 2004.
The note is secured by certain stockholders of the Company and contains certain
covenants as defined. Pursuant to the agreement, ECSI agrees to fund operations
of the Company during the period a business combination between the parties
remains under negotiation. Additionally, if the business combination takes place
ECSI shall forgive all accrued interest and outstanding principal owed by the
Company. However, in the event the business combination is not completed between
the parties; the Company shall pay on demand outstanding accrued interest and
principal. As described further in Note 9, closing of the business combination
is considered likely by management of the Company.
F-17
CLARION SENSING SYSTEMS, INC.
Notes to Financial Statements
September 30, 2004
Note 4 - Capital Leases:
Long-term leases relating to the financing of fixed assets are accounted for as
installment purchases. The capital lease obligations reflect the present value
of future rental payments, discounted at the interest rate implicit in the
lease, and a corresponding amount is capitalized as the cost of the fixed
assets. The fixed assets are being depreciated over periods ranging from five to
ten years.
The following is an analysis of fixed assets under capital lease at September
30, 2004:
Equipment $16,917
Less allowances for depreciation 9,578
-------
$ 7,339
=======
Following is a schedule of future minimum lease payments due under the capital
lease obligations together with the present value of net minimum lease payments
as of September 30, 2004:
Year Ending December 31,
------------------------
2005 $ 6,014
Later Years 0
-------
Total minimal lease payments 6,014
Less amounts representing interest 341
-------
Present value of net minimum lease payments 5,673
Less current portion (5,673)
-------
Long-term portion $ 0
=======
Note 5 - Related Party Transactions:
The Company leases its office facilities from a stockholder. The lease is on a
month-to-month basis and currently provides for monthly payments of $1,288. Rent
expense under this arrangement amounted to $13,681 for the nine months ended
September 30, 2004.
Effective November 1, 2004, the lease was restructured and a new agreement was
signed. The new agreement provides for monthly payments of $1,300, expiring
November 30, 2005.
F-18
CLARION SENSING SYSTEMS, INC.
Notes to Financial Statements
September 30, 2004
Note 6 - Common Stock:
The Company has stock with equal voting rights and no par value.
The following summarizes the Company's shares of common stock as of September
30, 2004:
Authorized 1,000
Issued 117
Outstanding 117
Note 7 - Income Taxes:
The Company, with the consent of its stockholders, has elected under the
Internal Revenue Code to be an S corporation. In lieu of corporation income
taxes, the stockholders of an S corporation are taxed on their proportionate
share of the Company's taxable income. Therefore, no provision for income taxes
has been included in the financial statements.
Note 8 - Going Concern:
The accompanying financial statements have been prepared in conformity with U.S.
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, the Company has sustained substantial
operating losses since inception. In addition, the Company has used substantial
amounts of working capital in its operations. Further, at September 30, 2004,
current liabilities exceed current assets by $972,957 and the Company reported a
retained deficit of $1,471,408. As described in Note 9, the Company entered into
a letter of intent in 2004 to sell its business assets contingent on the results
of an independent valuation of certain intangible assets.
In view of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon either a) the Company's ability to
successfully sell the Company as discussed in Note 9, or b) obtain financing
from other investors or creditors to provide sufficient cash flow to meet
financing requirements and continue future operations. Management believes that
actions presently being taken, including but not limited to, the letter of
intent to sell the Company's assets as discussed in Note 9, provide the
opportunity for the Company to continue as a going concern.
Note 9 - Subsequent Event:
Effective September 1, 2004, the Company entered into a letter of intent with
ECSI International, Inc. ("ECSI") to acquire substantially all of the assets of
the Company and assume certain liabilities in exchange for 381,250 shares of
ECSI common stock. Under terms of the agreement ECSI will also convert the
majority of accrued compensation and accrued rent, included in the Company's
September 30, 2004 balance sheet to cash or stock if certain future operating
performance targets are met. If those operating targets are met, the value of
the consideration ultimately paid to the Company's current stockholders will be
added to the cost of the acquisition, which will increase the amount of goodwill
arising in the transaction.
F-19
CLARION SENSING SYSTEMS, INC.
Notes to Financial Statements
September 30, 2004
Note 9 - Subsequent Event (Continued):
The Company is in process of obtaining a third party valuation of certain
intangible assets and in negotiations regarding certain assumed liabilities;
accordingly the acquisition has not consummated and the allocation of the
prospective purchase price is not available on the date of this report.
F-20
ELECTRONIC CONTROL SECURITY INC.
UNAUDITED PRO FORMA
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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.
Pursuant to an Asset Purchase Agreement, the Company acquired the tangible and
intangible assets described below for a purchase price of approximately $1.4
million (collectively, the "Consideration") consisting of (i) the issuance of
394,682 shares of common stock of ECSI ("Shares") (ii) the assumption of
$655,587 of certain liabilities of Clarion, of which ECSI already has paid
approximately $413,144 as of the date hereof and (iii) transaction costs
totaling $116,750. The Company also has agreed to assume $438,959 of certain
liabilities of Clarion on a contingent basis, as described in Items 1.01 and
2.03 to Amendment No. 1 to Current Form 8-K to which these financial statements
are attached ("Contingent Liabilities"), and to pay certain professional and
other fees incurred in connection with the transaction.
The transaction will be accounted for under the purchase method of accounting,
and as such the cost of the acquisition will be allocated to Clarion's
underlying net assets in proportion to their respective fair values.
This unaudited combined consolidated pro forma information should be read in
conjunction with the consolidated financial statements of the Company included
in our Annual Report filed on Form 10-KSB for the year ended June 30, 2004 and
our Quarterly Report filed on Form 10-QSB for the six months ended December 31,
2004 filed on February 9, 2005. In addition, this pro forma information should
be read in conjunction with the financial statements for Clarion for the year
ended December 31, 2003 and the nine months ended September 30, 2004 included
within this Amendment to Current Report on Form 8-K/A.
The following unaudited pro forma combined consolidated statement of operations
for the year ended June 30, 2004 has been prepared in accordance with accounting
principles generally accepted in the United States to give effect to the March
4, 2005 acquisition of the Clarion net assets and are based on the historical
statement of operations for those periods as if the transaction occurred on July
1, 2003. The pro forma consolidated combined statement of operations combines
the results of operations of the Company for the year ended June 30, 2004 with
the results of operations of Clarion for the year ended June 30, 2004.
The following unaudited pro forma combined consolidated statement of operations
for the six months ended December 31, 2004 has been prepared in accordance with
accounting principles generally accepted in the United States to give effect to
the March
F-21
4, 2005 acquisition of the Clarion net assets and are based on the historical
statement of operations for those periods as if the transaction occurred on July
1, 2004. Such pro forma statement of operations combines the results of
operations of the Company for the six months ended December 31, 2004 with the
results of operations of Clarion for the six months ended December 31, 2004.
The following unaudited pro forma combined consolidated balance sheet has been
prepared in accordance with accounting principals generally accepted in the
United States, gives effect to the March 4, 2005 acquisition of the Clarion
Assets and liabilities as of December 31, 2004, and assumes the acquisition took
place on that date.
These unaudited pro forma financial statements are prepared for informational
purposes only and are not necessarily indicative of future results or of actual
results that would have been achieved had the acquisition of the Clarion Assets
been consummated as of the dates specified above.
F-22
Electronic Control Security Inc.
Pro Forma Consolidated Condensed Balance Sheet (UNAUDITED)
December 31, 2004
ECSI
ECSI (A) Proforma Proforma
----------- ----------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 162,898 $ $ 162,898
Marketable securities, available for sale 751,099 751,099
Certificates of deposit 102,183 102,183
Accounts receivable 1,062,530 1,062,530
Loan receivable 295,485 (295,485)(B) --
Inventories 1,574,311 1,574,311
Other current assets 438,971 438,971
----------- -----------
Total current assets 4,387,477 (295,485) 4,091,992
Property and equipment - net 502,900 48,000(B) 550,900
Intangible assets - net 37,867 1,387,402(B) 1,425,269
Certificate of deposit, pledged 250,000 250,000
Goodwill 50,000 50,000
Deferred income taxes 441,800 441,800
Other assets 78,825 78,825
----------- -----------
$ 5,748,869 $ 1,139,917 $ 6,888,786
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 642,685 $ 476,851(B) $ 1,119,536
Current maturities of long-term debt 199,992 199,992
Obligations under capital leases 1,302 1,302
Other current liabilities 10,828 10,828
----------- -----------
Total current liabilities 854,807 476,851 1,331,658
Noncurrent liabilities
Long-term debt 483,341 483,341
Due to officers and shareholders 354,795 354,795
Deferred income taxes 48,000 48,000
----------- -----------
Total liabilities 1,740,943 476,851 2,217,794
Shareholders' equity
Series A Convertible Preferred stock 3,625 3,625
Series B 10% Convertible Preferred stock 2 2
Common Stock 6,610 395(B) 7,005
Additional paid-in capital 9,443,910 662,671(B) 10,106,581
Accumulated deficit (5,454,403) (5,454,403)
Accumulated other comprehensive income 18,182 18,182
Treasury stock, at cost, 100,000 shares (10,000) (10,000)
----------- -----------
Total shareholders' equity 4,007,926 663,066 4,670,992
----------- ----------- -----------
$ 5,748,869 $ 1,139,917 $ 6,888,786
=========== =========== ===========
See Notes to Pro Forma Consolidated Condensed financial statements (UNAUDITED)
F-23
Electronic Control Security Inc.
Pro Forma Combined Consolidated Statements of Operations (UNAUDITED)
Year Ended June 30, 2004
ECSI
ECSI Clarion Proforma Proforma
----------- ----------- ----------- -----------
Revenues $ 2,061,412 $ 125,305 $ $ 2,186,717
Cost of revenues 928,567 42,094 970,661
----------- ----------- ----------- -----------
Gross profit 1,132,845 83,211 1,216,056
----------- ----------- ----------- -----------
Research and development 322,912 322,912
Selling, general and administrative expenses 1,782,534 243,222 84,811[C] 2,110,567
Stock based compensation 117,200 -- 117,200
----------- ----------- ----------- -----------
Loss from operations (1,089,801) (160,011) (84,811) (1,334,623)
Other (income) expense
Interest expense 105,916 7,209 113,125
Interest income (3,128) (3,128)
Minority interest in subsidiary loss (42,633) (42,633)
----------- ----------- ----------- -----------
Total other (income) expense 60,155 7,209 -- 67,364
----------- ----------- ----------- -----------
Loss before tax benefit (1,149,956) (167,220) (84,811) (1,401,987)
Income tax benefit (31,300) -- -- (31,300)
----------- ----------- ----------- -----------
Net loss before dividends (1,118,656) (167,220) (84,811) (1,370,687)
Dividends related to convertible preferred stock 1,167,147 -- -- 1,167,147
----------- ----------- ----------- -----------
Net loss attributable to common shareholders $(2,285,803) $ (167,220) $ (84,811) $(2,537,834)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.50)
===========
Weighted average shares outstanding - Proforma 5,099,709
===========
See Notes to Pro Forma Consolidated Condensed financial statements (UNAUDITED)
F-24
Electronic Control Security Inc.
Pro Forma Combined Consolidated Statements of Operations (UNAUDITED)
Six months ended December 31, 2004
ECSI
ECSI Clarion Proforma Proforma
----------- ----------- -----------
Revenues $ 1,957,592 $ 8,445 $ $ 1,966,037
Cost of revenues 1,218,469 2,204 1,220,673
----------- ----------- -----------
Gross profit 739,123 6,241 745,364
----------- ----------- -----------
Research and development 161,829 161,829
Selling, general and administrative expenses 806,299 232,780 42,405[D] 1,081,484
Stock based compensation 120,000 -- 120,000
----------- -----------
Loss from operations (349,005) (226,539) (42,405) (617,949)
Other (income) expense
Interest expense 56,885 140 57,025
Interest income (7,107) (7,107)
Minority interest in subsidiary loss (27,166) (27,166)
Gain on sale of marketable securities (7,519) (7,519)
----------- ----------- ----------- -----------
Total other (income) expense 15,093 140 0 15,233
----------- ----------- ----------- -----------
Loss before tax benefit (364,098) (226,679) (42,405) (633,182)
Income tax benefit -- -- -- --
----------- ----------- ----------- -----------
Net loss before dividends (364,098) (226,679) (42,405) (633,182)
Dividends related to convertible preferred stock 100,000 -- 100,000
----------- ----------- -----------
Net loss attributable to common shareholders $ (464,098) $ (226,679) $ (42,405) $ (733,182)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.12)
===========
Weighted average shares outstanding - Proforma 6,347,002
===========
See Notes to Pro Forma Consolidated Condensed financial statements (UNAUDITED)
F-25
ELECTRONIC CONTROL SECURITY INC.
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED
(UNAUDITED)
(A) Reflects the historical financial position of ECSI at December 31, 2004
(B) The following represents the acquisition of Clarion and the allocation of
the purchase price.
Calculation of purchase price
Advances to Clarion made prior to December 31, 2004 $ 295,485
Assumption of certain Clarion liabilities 360,101
Issuance of 394,682 shares of ESCI common Stock 663,066
Transaction costs - accrued 116,750
----------
$1,435,402
==========
Allocation of purchase price
Tangible Assets - Furniture Fixtures & Equipment $ 48,000
Intangible assets consisting of
Vacusonic Patent Pending and Trademarks 818,653
Sentinal Trademark and Proposed Patent 560,131
Intenet Domain Names and URL 8,617
----------
$1,435,402
==========
(C) To record the increased depreciation and amortization of acquired tangible
and intangible assets for the year ended June 30, 2004.
(D) To record the increased depreciation and amortization of acquired tangible
and intangible assets for the six months ended December 31, 2004.
F-26