SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
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ELECTRONIC CONTROL SECURITY INC.
(Name of Registrant as Specified in its Charter)
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ELECTRONIC CONTROL SECURITY, INC.
Security and Anti-Terrorist Systems
- --------------------------------------------------------------------------------
790 Bloomfield Avenue, Bldg. C-1, Clifton, NJ 07012 Tel: (973) 574-8555
Fax: (973) 574-8562
E-mail: ecsi@anti-terrorism.com o Website: http://www.anti-terrorism.com
October 20, 2005
Dear Stockholder:
You are cordially invited to attend our 2005 Annual Shareholders' Meeting,
or the Annual Meeting, which will be held at 8:30 a.m. Eastern Time, on December
9, 2005 at the principal corporate offices of Electronic Control Security Inc.,
790 Bloomfield Avenue, Clifton, New Jersey. Driving directions are on the back
cover of this proxy statement. For further details, see "About the Annual
Meeting."
We are holding the Annual Meeting for the following purposes:
1. To elect seven persons to serve on the board of directors to hold office
until the next annual shareholders' meeting or until their respective successors
have been elected or appointed.
2. To ratify the selection of Demetrius & Company, L.L.C. as our independent
registered public accounting firm for the fiscal year ending June 30, 2006.
3. To transact such other business that may properly come before the Annual
Meeting or any adjournment or postponement of the meeting.
The proxy statement, which follows this notice, fully describes these
items. We have not received notice of other matters that may be properly
presented at the Annual Meeting.
Only shareholders of record at the close of business on October 21, 2005
will be entitled to vote at the Annual Meeting and any postponements or
adjournments of the meeting. For 10 days prior to the Annual Meeting, a list of
shareholders will be available for inspection at our principal executive
offices. If you would like to view the stockholder list, please call our
Investor Relations department at 973-574-8559 to schedule an appointment.
Your vote is important. Each share of our stock that you own represents
one vote. If you do not vote your shares, you will not have a say in the
important issues to be voted on at the Annual Meeting. Directors will be elected
by the affirmative vote of the holders of a majority of our common stock
present, or represented, at the Annual Meeting, as long as a quorum is present;
and to pass the other proposal included in this year's proxy statement will
require a majority of votes present or represented at the Annual Meeting. Many
of our shareholders do not vote, so the shareholders who do vote influence the
outcome of the election in greater proportion than their percentage ownership of
the company.
To ensure that your vote is recorded promptly, please vote as soon as
possible, even if you plan to attend the Annual Meeting. Shareholders have two
options for submitting their vote: (1) by mail or (2) by casting a ballot at the
Annual Meeting. For further details see "Submitting and Revoking Your Proxy" on
page 3.
The Board of Directors
Natalie Barchenko
Corporate Secretary
TABLE OF CONTENTS
ABOUT THE ANNUAL MEETING..............................................................................2
PROPOSAL NO. 1........................................................................................5
Information Concerning the Board of Directors and Executive Officers...............................7
Board Meetings..................................................................................7
Compensation of Non-Employee Directors..........................................................7
Board of Directors Committees...................................................................7
Audit Committee.................................................................................8
EXECUTIVE OFFICERS....................................................................................9
SECURITY OWNERSHIP OF CERTAIN........................................................................11
BENEFICIAL OWNERS AND MANAGEMENT.....................................................................11
Security Ownership of Principal Stockholders, Directors, Nominees and Executive Officers and
Related Stockholder Matters.......................................................................11
EXECUTIVE COMPENSATION...............................................................................12
Compensation Pursuant to Management Contracts.....................................................12
Option Grants in the Last Fiscal Year.............................................................12
Fiscal Year-End Option Numbers and Values.........................................................13
Stock Option Plan.................................................................................13
Equity Compensation Plan Information..............................................................13
Other Compensation................................................................................14
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE..............................................14
CODE OF CONDUCT AND ETHICS...........................................................................14
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.................................................14
PROPOSAL NO. 2.......................................................................................15
REPORT OF AUDIT COMMITTEE OF THE BOARD OF DIRECTORS..................................................15
INDEPENDENT ACCOUNTANTS..............................................................................16
FEES OF THE INDEPENDENT PUBLIC ACCOUNTANTS FOR FISCAL 2005...........................................16
COST OF SOLICITATION OF PROXIES......................................................................17
SHAREHOLDER PROPOSALS................................................................................17
OTHER BUSINESS.......................................................................................17
ELECTRONIC CONTROL SECURITY INC......................................................................18
Audit Committee Charter...........................................................................18
ELECTRONIC CONTROL SECURITY, INC.
790 Bloomfield Avenue
Clifton, New Jersey 07012
PROXY STATEMENT
October 20, 2005
This proxy statement is being furnished to our shareholders beginning on
or about November 4, 2005, in connection with the solicitation of proxies by
Electronic Control Security Inc.'s ("ECSI" or the "Company") Board of Directors
to be used at our Annual Meeting of Shareholders, or the Annual Meeting, to be
held on December 9, 2005, at the Company's principal offices located at 790
Bloomfield Ave, Bldg. C-1, Clifton, New Jersey 07012, at 8:30 a.m., local time,
and at any postponements or adjournments thereof.
ABOUT THE ANNUAL MEETING
What am I voting on?
Proposal 1: The election of seven directors for terms expiring in 2006; and
Proposal 2: The ratification of the selection by the Audit Committee of the
Board of Directors of Demetrius & Company, L.L.C. as our independent auditors
for the fiscal year ending June 30, 2006.
We are not aware of any other matters that will be voted on. If a matter does
properly come before the Annual Meeting, the persons named as the proxy in the
accompanying form of proxy will vote the proxy at their discretion.
What are the board's voting recommendations?
Our board of directors recommends a vote:
o FOR each of the seven nominated directors; and
o FOR the ratification of the selection of Demetrius & Company, L.L.C.
as our independent auditors for the fiscal year ending June 30,
2006.
What is the vote required for each proposal?
Proposal 1: The election of the seven nominated directors requires the
affirmative vote of the holders of a majority of our common stock present, or
represented, at the Annual Meeting.
Proposal 2: The ratification of the selection of Demetrius & Company, L.L.C. as
our independent auditors for the fiscal year ending June 30, 2006 requires the
affirmative vote of the holders of a majority of our common stock present, or
represented, at the Annual Meeting.
Who can vote?
The record holders of our common stock and Series A Convertible Preferred
Stock, or Series A Preferred Stock, on the close of business as of October 21,
2005, the record date, are entitled to notice of and to vote at the Annual
Meeting or any adjournments thereof. Each outstanding share of common stock is
entitled to one vote at the meeting on each matter to be voted upon at the
meeting and each outstanding
2
share of Series A Preferred Stock is entitled to 1.14 votes at the meeting on
each matter to be voted upon at the Annual Meeting. The holders of common stock
and the Series A Preferred Stock vote together as a single class. As of the
record date, there were 8,172,822 shares of common stock outstanding and shares
of Series A Preferred Stock outstanding entitling the holders to vote the
equivalent of 370,500 shares of common stock. As of the record date, we had
approximately 200 shareholders of record. A list of shareholders entitled to
vote will be available for inspection by any record shareholder at our corporate
headquarters at 790 Bloomfield Ave, Bldg. C-1, Clifton, New Jersey during the
ten days prior to and at our Annual Meeting.
What constitutes a quorum?
In order to conduct our Annual Meeting, a majority of the outstanding shares
entitled to vote must be represented in person or by proxy. This is known as a
"quorum." Abstentions and shares held in "street name" by brokers or nominees
who indicate on their proxies that they do not have discretionary authority to
vote such shares as to a particular matter, referred to as broker non-votes,
will count toward establishing a quorum.
How do I vote?
There are two ways to vote:
o By completing and mailing the enclosed proxy card; or
o By written ballot at our Annual Meeting.
If you are a beneficial owner and your broker holds your shares in its name, the
broker is permitted to vote your shares on each of the proposals even if the
broker does not receive voting instructions from you.
If your shares are held in the name of a broker, bank or other holder of record,
you are invited to attend our Annual Meeting, but may not vote at our Annual
Meeting unless you have first obtained a proxy, executed in the shareholders'
favor, from the holder of record.
What does it mean if I get more than one proxy?
It means your shares are held in more than one account. Please vote all proxies
to ensure all your shares are counted. Can I change my vote or revoke my proxy?
You can change your vote or revoke your proxy at any time prior to the closing
of the polls, by:
o Returning a later-dated proxy card;
o Voting in person at our Annual Meeting; or
o Notifying our Secretary by written revocation letter.
Our Secretary is Natalie Barchenko. Any revocation of your proxy should be filed
with her at our corporate headquarters at 790 Bloomfield Ave, Bldg. C-1,
Clifton, New Jersey.
3
Attendance at our Annual Meeting will not in itself constitute revocation of a
proxy. All shares entitled to vote and represented by properly completed proxies
timely received and not revoked will be voted as you direct. If no direction is
given, the proxies will be voted as our board recommends.
Who conducts the proxy solicitation?
Our board of directors is soliciting these proxies. We will bear the cost of the
solicitation of proxies. Our regular employees may solicit proxies by mail, by
telephone, personally or by other communications, without compensation apart
from their normal salaries.
What if I do not specify how my shares are to be voted?
If you submit a proxy but do not indicate any voting instructions, then
your shares will be voted in accordance with the Board's recommendations.
Broker/dealers, who hold their customers' shares in street name, may,
under the applicable rules of the exchanges and other self-regulatory
organizations of which such broker/dealers are members, sign and submit proxies
for such shares and may vote such shares on routine matters, which, under such
rules, typically include the election of directors, but broker/dealers may not
vote such shares on other matters without specific instructions from the
customer who owns such shares.
Who will count the votes?
Our board of directors will appoint one or more persons to serve as the
inspector(s) of elections to tabulate the votes cast by proxy or in person at
the Annual Meeting. The inspector(s) of elections will also determine whether or
not a quorum is present.
Do I have any appraisal rights in connection with any matter to be acted upon?
No. Our shareholders do not have appraisal rights in connection with any matter
to be acted upon.
Is cumulative voting allowed in the election of directors?
No. Each share is entitled to one vote in the election of directors as on every
other matter.
Where can I find the voting results of the Annual Meeting?
The Chairman will announce the results at the Annual Meeting. In addition, we
will publish them in our quarterly report on Form 10-QSB for the second quarter
of fiscal 2006 that we will file with the SEC by February 14, 2006.
Who can help answer my questions?
If you have any questions about the Annual Meeting or the proposals to be voted
on at the Annual Meeting, or if you need additional copies of this proxy
statement or copies of any of our public filings referred to in this proxy
statement, you should contact our Secretary, Natalie Barchenko, at (973)
574-8559. Our public filings can also be accessed at the Securities and Exchange
Commission's website at www.sec.gov.
4
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Board of Directors of the Company is comprised of seven members. Each
director holds office until the annual meeting of shareholders following their
election or appointment and until their respective successors have been duly
elected and qualified. Directors are elected by the affirmative vote of the
holders of a majority of our common stock present, or represented, at the Annual
Meeting, as long as a quorum is present.
All of the persons standing for election as directors currently serve on
the Board of Directors. It is intended that, unless otherwise directed, the
shares represented by the enclosed proxy will be voted FOR the election of the
directors nominated and named below. Each nominee has consented to being
nominated and to serve if elected. In the unlikely event that any nominee
becomes unable to serve for any reason, the proxies will be voted for a
substitute nominee selected by our board of directors.
Nominees for Election of Directors
The table below sets forth the names of each of the persons nominated to
serves as directors of the Company, the year such person first became a director
and each person's current position(s) with the Company, if applicable:
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Year First
Name Age Became A Director Position
---- --- ----------------- --------
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Arthur Barchenko 72 1976 President, CEO and Director
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Natalie Barchenko 71 2001 Secretary, Treasurer and
Director
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Gene Rabois 60 1989 Director
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Robert F. Reiter 55 2001 Director
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Edward Snow 66 2000 Director
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Stephen Rossetti 55 2004 Director
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Thomas Donahue 55 2005 Director
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OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
"FOR" THE ELECTION OF EACH OF THE NOMINEES FOR DIRECTORS
Arthur Barchenko has been our President since December 1976. Mr. Barchenko
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
manufacturer of lighting fixtures, and served both as its vice president of
sales where he was responsible for a sales and support staff of approximately
200 persons, and as a member of the board of directors and a member of the
executive committee. 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.
5
Barchenko is active with American Defense Preparedness Association, and American
Society of Industrial Society. He served on the Radio Technical Commission for
Aeronautics Committee 183 as a member of the special access control security
task force for the Federal Aviation Administration. He is married to Natalie
Barchenko, a director and the Secretary of ECSI, and is the father of Mark
Barchenko, a Vice President of the Company.
Gene Rabois has served as a member of our Board of Directors since October
1, 1989 and as member of the Audit Committee since 2002. Previously, he had
served as the Chief Financial Officer of ECSI. Mr. Rabois has more than thirty
years' 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. Through May 2004, Mr. Rabois
was the Controller for SJT Imaging, Inc., a printing concern. He now serves as
the Controller of e.comm Technologies.
Natalie Barchenko has been a director and the Secretary and Treasurer of
ECSI since 2001. Over the last twelve years, she has been actively responsible
for the day to day operations of the Company in the areas of human resources,
order entry, invoicing, advertising and sales materials. Natalie is a member of
the Sarbanes Oxley 404 Audit Committee. She is married to Arthur Barchenko, a
director and the President and CEO of ECSI, and is the mother of Mark Barchenko,
a Vice President of the Company.
Edward Snow has been a director of ECSI since June 2000 and a member of
the Audit Committee since 2002. From October 1996 to October 1999, he was a
co-owner and operator of Phoenix Fiber Optics Inc., a manufacturer and marketer
of fiber optic products. From October 1999 to October 2000, he had 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.
Stephen Rossetti joined the Board in October 2004. Mr. Rossetti currently
serves as the president of each of Zegato Solutions, Inc. and Markquest, Inc.,
positions he has held since 2003 and 2001, respectively. Zegato is an
information technology company based in Lanham, Maryland that engages in
software development and systems integration services for the U.S. Government.
Markquest is a consulting and lobbying organization. He is also the chairman and
chief executive officer of Government Internet Systems and is a corporate
advisor of NOW Solutions, Inc., both subsidiaries of Vertical Computer Systems,
Inc., a multinational provider of Web services, underpinning Web technologies,
and administrative software services. From August 2003 to January 2004, he
served as president of Applied DNA Sciences, Inc., a provider of DNA-embedded
security solutions that protect corporate and government intellectual property
from counterfeiting and fraud. Mr. Rossetti served in the Office of the
Secretary of Defense from August 2003 to January 2004 and from 1987 to 1996
served on the Professional Staff of the Armed Services Committee, US House of
Representatives where he had an established reputation as a strident government
reform advocate. From November 1998 through January 2001, Mr. Rossetti worked
for the United States Department of Defenses as the Director of Defense
Integrated Travel. As director of the Readiness Subcommittee staff, he was
responsible for the oversight of the Department of Defense infrastructure and
combat readiness, including special operations forces, National Guard and
Reserve preparedness, chemical and biological weapons preparedness and response,
and missions other than war such as counter-drug and counter-terror.
6
Thomas F. Donahue has been a director of the Company since November, 2004.
Mr. Donahue is the founder and principal of T. F. Donahue Consulting a
consulting firm specializing in corporate finance and mergers and acquisitions.
During 2002 and 2003, he was retained by the Company to provide financial
analysis with respect to corporate operations and potential acquisitions. He
also renders consulting services to a number of public and private companies
throughout the country including analyzing and facilitating strategic planning,
assisting in obtaining and negotiating credit. From 1999 to 2002 he was the
corporate vice president and treasurer of Sensormatic Electronics Corporation,
public security company, where his responsibilities included corporate finance,
investor relations, rating agency relations, working capital management, asset
securitization, global insurance, foreign exchange, customer credit and
financing, and acquisition and economic analysis. From 1990 to 1999, he was the
vice president and treasurer of Citibank Universal Card Services Corp., a credit
card company, where he was in charge of asset securitization, investor
relations, banking relations, funding, risk management, cash management and bank
product support.
Information Concerning the Board of Directors and Executive Officers.
Board Meetings.
The Board of Directors met four times during the fiscal year ended June
30, 2005 and each incumbent director attended at least 75% of the meetings held
during the period he served as a director either in person or telephonically. In
addition, the board of directors took actions by unanimous written consent on
four occasions during the last fiscal year.
Compensation of Non-Employee Directors.
Directors receive $1,000 fee for attendance at board meetings and $500 for
telephonic participation in board meeting. Outside directors were reimbursed for
out-of-pocket expenses for attendance at such meetings. It is expected that the
Company's outside directors will receive an annual award of stock options under
the Company's equity incentive plan. In January 2004, the Company issued an
aggregate of 60,000 shares to three directors.
Board of Directors Committees.
We do not have standing committees whose functions include nominating
directors or establishing the compensation of our employees and consultants.
Nominations for directors are considered by the entire Board. Our
directors take a critical role in guiding our strategic direction and oversee
the management of our Company. Board candidates are considered based on various
criteria, such as their broad based business and professional skills and
experiences, a global business and social perspective, concern for long term
interests of shareholders, and personal integrity and judgment. In addition,
directors must have available time to devote to Board activities and to enhance
their knowledge of the industry.
Accordingly, we seek to attract and retain highly qualified directors who
have sufficient time to attend to their substantial duties and responsibilities
to our Company. Recent developments in corporate governance and financial
reporting have resulted in an increased demand for such highly qualified and
productive public company directors.
Our Board will consider the recommendations of shareholders regarding
potential director candidates. In order for shareholder recommendations
regarding possible director candidates to be considered by our Board:
7
o such recommendations must be provided to the Board, c/o Arthur
Barchenko, Electronic Control Security Inc., 790 Bloomfield Avenue,
Building C-1, Clifton, New Jersey 07012, in writing at least 120
days prior to the date of the next scheduled annual meeting;
o the nominating shareholder must meet the eligibility requirements to
submit a valid shareholder proposal under Rule 14a-8 of the
Securities Exchange Act of 1934, as amended; and
o the shareholder must describe the qualifications, attributes, skills
or other qualities of the recommended director candidates.
In addition, the entire Board oversees compensation of our employees.
Compensation is based on various criteria, such as their Company's performance,
an employee's past and future contributions to the Company's operations and
performance, their professional skills and other factors the Directors deem
relevant.
Audit Committee
The Audit Committee of the Board of Directors selects our independent
public accountants with whom the Audit Committee reviews the scope of audit and
non-audit assignments and related fees, the accounting principles that we use in
financial reporting, internal financial auditing procedures and the adequacy of
our internal control procedures. The members of our Audit Committee are Gene
Rabois, Edward Snow, and Thomas Donahue, each of whom is an independent
director. The Board of Directors has determined that Gene Rabois meets the
requirements of an "audit committee financial expert" as set forth in Section
401(e) of Regulation S-B promulgated by the SEC. The Audit Committee held three
meetings in fiscal 2005, all of which were attended by each member of the Audit
Committee, except for one meeting which was attended by two members.
We adopted a new Audit Committee Charter in October 2002, a copy of which
is attached as an exhibit to this Proxy.
Shareholder Communications
Shareholders may send communications to our Board of Directors, or to
individual directors, by mailing communications in writing to c/o Arthur
Barchenko, Electronic Control Security Inc., 790 Bloomfield Avenue, Building
C-1, Clifton, New Jersey 07012.
8
EXECUTIVE OFFICERS
The Company's executive officers are:
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Name Position Age
---- -------- ---
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Arthur Barchenko President and Director 72
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Richard Stern Vice President 56
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Eldon Moberg Vice President 53
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Thomas Isdanavich Vice President 57
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Joseph McAndrew Vice President 51
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Mark Barchenko Vice President-Marketing 49
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Natalie Barchenko Secretary, Treasurer and Director 71
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Arthur and Natalie Barchenko are married and Mark Barchenko is their son.
Our officers are appointed annually by our Board of Directors and serve at
the discretion of the Board of Directors. Two of our executive officers, Arthur
Barchenko and Natalie Barchenko, are also directors of the Company. See the
section above entitled "Election of Directors" for biographical information
about these individuals. Set forth below is biographical information regarding
our executive officers who are not directors.
Richard Stern has served as our Vice President of Manufacturing from
December 1, 1997 to December 2002. He is now responsible for the overall
management of our marketing and sales support department, which includes
supervising all proposals, submittal drawings and test personnel including the
review and evaluation of new and existing products; oversight of maintenance
personnel; mechanical design of new products including the development of test
procedures; and field 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, customer
service, as well as having been 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. 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 and Application
Engineering at ECSI since July 1997. He conducts site surveys, determines the
application of technologies for specific threats, supervises installation and
training support requirements for in-house and field applications. His
9
responsibilities include threat and technology analysis planning and
coordination of all administrative phases of project and program engineering
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. Isdanavich
served in the U.S. Navy for four years.
Joseph McAndrew joined us in June, 2003 as Vice President of Operations.
Prior thereto, Mr. McAndrew spent 20 years as an innovative, hands-on
manufacturing operations executive with experience in controlling 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.
Mark Barchenko joined us in 1993 and has served as our Vice-President of
Marketing on two separate occasions most recently since 2004. He has focused his
marketing and business development efforts on Southeast Asian government
projects and U.S. airports and maritime facilities. Mr. Barchenko spearheaded
the IS09001-2000 quality program based on the international standard of
operation, from inception through registration during 2000. Mr. Barchenko is
active with American Defense Preparedness Association, and American Society of
Industrial Society. He served on the Radio Technical Commission for Aeronautics
Committee 183 as a member of the special access control security task force for
the Federal Aviation Administration. Mr. Barchenko holds a U.S. patent titled
"Jet Propulsion Engine Assembly for Aircraft."
10
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Principal Shareholders, Directors, Nominees and Executive
Officers and Related Stockholder Matters
The following table sets forth, as of October 21, 2005, certain
information with respect to the beneficial ownership of shares of our common
stock by: (i) each person known to us to be the beneficial owner of more than 5
percent of our outstanding shares of common stock, (ii) each director and
officer of our Company, and (iii) our directors and executive officers as a
group.
- --------------------------------------------------------------------------------
Name Beneficial Owner (1) Number of Shares Percent of Class (2)
- ------------------------- ---------------- --------------------
- --------------------------------------------------------------------------------
Arthur Barchenko (3) 1,186,643 14.17%
- --------------------------------------------------------------------------------
Richard Stern (4) 35,000 *
- --------------------------------------------------------------------------------
Eldon Moberg (5) 65,000 *
- --------------------------------------------------------------------------------
Thomas Isdanavich (6) 30,000 *
- --------------------------------------------------------------------------------
Joseph McAndrew (7) 30,000 *
- --------------------------------------------------------------------------------
Mark Barchenko 46,108 *
- --------------------------------------------------------------------------------
Natalie Barchenko (8) 1,609,079 19.26%
- --------------------------------------------------------------------------------
Gene Rabois (9) 100,203 1.23%
- --------------------------------------------------------------------------------
Robert F. Reiter (10) 30,000 *
- --------------------------------------------------------------------------------
Edward Snow (11) 35,000 *
- --------------------------------------------------------------------------------
Stephen Rossetti (12) 5,000 *
- --------------------------------------------------------------------------------
Thomas Donahue (13) 45,000 *
- --------------------------------------------------------------------------------
Directors and officers
as a group (12 persons) (14) 3,116,830 35.69%
- --------------------------------------------------------------------------------
* 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 8,172,822 shares outstanding as of October 21, 2005.
(3) Consists of 984,643 shares of common stock, including 155,536 shares not
registered in Mr. Barchenko's name but over which he has dispository power
and control, and options to purchase 200,000 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 180,000
shares of common stock.
(9) Consists of 95,203 shares of common stock and options to purchase 5,000
shares of common stock.
(10) Consists of 10,000 shares of common stock and options to purchase 25,000
shares of common stock.
(11) Consists of 5,000 shares of common stock and options to purchase 30,000
shares of common stock.
(12) Consists of options to purchase 5,000 shares of common stock.
(13) Consists of 20,000 shares of common stock and 25,000 shares of common
stock and options to purchase shares of common stock.
(14) Includes options to purchase an aggregate of up to 560,000 shares of
common stock which are held by all directors and officers as a group.
11
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning the annual
and long-term compensation of the person serving as the Company's chief
executive officer (the "Named Executive") during the last three years. No other
executive officers received annual compensation in excess of $100,000 during the
last three fiscal years.
- ------------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
- ------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Awards Payouts
- ------------------------------------------------------------------------------------------------------------------------------
Restricted Securities
Other Annual Stock Underlying All Other
Name and Salary Bonus Compensation Award(s) Options/SARs LTIP Payouts Compensation
Principle Position Year ($) ($) ($) ($) (#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------
Arthur Barchenko, 2005 $ 130,000 250,000
President
2004 $96,000 50,000
2003 $101,700
- ------------------------------------------------------------------------------------------------------------------------------
Compensation Pursuant to Management Contracts
None.
Option Grants in the Last Fiscal Year
The following table presents certain information concerning stock
options granted to the Named Executive under our various stock option plans
during the 2005 fiscal year.
- --------------------------------------------------------------------------------------------------------
Option/SAR Grants in Last Fiscal Year
- --------------------------------------------------------------------------------------------------------
Individual Grants
- --------------------------------------------------------------------------------------------------------
Number of Securities
Underlying % of Total Options/SARs Exercise or
Options/SARs Granted to Employees in Base Price
Name Granted (#) Fiscal Year ($/Sh) Expiration Date
---- ----------- ----------- ------ ---------------
- --------------------------------------------------------------------------------------------------------
Arthur Barchenko 250,000 (1) 22.73% 2.40 January 2, 2014
- --------------------------------------------------------------------------------------------------------
(1) Of the 250,000 options granted to Mr. Barchenko during fiscal 2005,
options to purchase 50,000 shares of common stock vest in each of the next
five years.
12
Fiscal Year-End Option Numbers and Values
The following table sets forth additional information as of June 30, 2005,
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 shareholders and plans or arrangements not submitted to our
shareholders 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
- ---------------------------------------------------------------------------------------------------
Shares
Acquired
on Value Number of Securities Value of Unexercised In-the
Exercise Realized Underlying Unexercised Money Options/SARs at FY-End
--------- --------- Options/SARs at FY-End (#) ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- --- --- ------------------------- -------------------------
- ---------------------------------------------------------------------------------------------------
Arthur
Barchenko -0- -0- 150,000/150,000/250,000 $$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 2,000,000 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.
Equity Compensation Plan Information
The following table sets forth additional information as of June 30, 2005,
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 shareholders and plans or
arrangements not submitted to our shareholders 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.
13
Equity Compensation Plan Information
- ------------------------------------------------------------------------------------------------------------------------
Weighted-average
Number of securities to be exercise price of Number of securities available
issued upon exercise of outstanding for future issuance under equity
outstanding options, warrants options, warrants compensation plans (excluding
Plan Category and rights and rights securities reflected in column (a))
- ------------------------------------------------------------------------------------------------------------------------
Equity compensation 1,110,000 $2.03 945,000
plans approved
by security holders
- ------------------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders
- ------------------------------------------------------------------------------------------------------------------------
Total 1,110,000 $2.03 645,000
- ------------------------------------------------------------------------------------------------------------------------
Other Compensation
None.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Act of 1934 requires our officers and
directors, and greater than 10% shareholders, to file reports of ownership and
changes in ownership of our securities with the Securities and Exchange
Commission. Copies of the reports are required by SEC regulation to be furnished
to us. Based on our review of these reports and written representations from
reporting persons, we believe that all reports were filed late and some have not
yet been filed. The Company expects that all reports not heretofore filed for
the 2005 fiscal year will be filed by December 31, 2005.
CODE OF CONDUCT AND ETHICS
We have adopted a code of conduct and ethics that applies to our
directors, officers and all employees. The code of conduct and ethics will be
posted on our website at www. ecsi@anti-terrorism.com shortly after the date of
the Annual Meeting. Until that time, the code of business conduct and ethics may
be obtained free of charge by writing to Electronic Control Security Inc., Attn:
Arthur Barchenko, 790 Bloomfield Avenue, Building C, Suite 1, Clifton, New
Jersey 07012.
CERTAIN RELATIONSHIPS AND 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, 2005 and 2004, related party debt consisted of
$500,697 and $432,545, 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
14
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, holders of Series B Preferred Stock
are entitled to sell their shares under an effective registration statement.
PROPOSAL NO. 2
RATIFICATION OF SELECTION OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors is seeking stockholder ratification of the
selection by the Audit Committee of the Board of Directors of Demetrius & Co.,
L.L.C. ("Demetrius & Co.") to serve as our independent registered public
accounting firm for the fiscal year ending June 30, 2005. Demetrius & Co. served
as our independent registered public accounting firm with respect to the audit
of our financial statements for the fiscal year ended June 30, 2005.
Shareholder ratification of the selection of Demetrius & Co. as our
independent registered public accounting firm is not required by our Bylaws or
otherwise. However, the Board is submitting the selection of Demetrius & Co. to
our shareholders for ratification as a matter of good corporate practice. If our
shareholders fail to ratify the selection, the Audit Committee will reconsider
whether or not to retain the firm. Even if the selection is ratified, the Audit
Committee in their discretion may direct the appointment of a different
independent accounting firm at any time during the year if they determine that
such a change would be in our best interests and the best interests of our
shareholders.
A representative of Demetrius & Co. is expected to attend the Annual
Meeting with the opportunity to make a statement if he or she desires to do so,
and is expected to be available to respond to appropriate questions.
OUR BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS A VOTE "FOR" PROPOSAL 2
REPORT OF AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee consults with our principal accounting officer and
other key members of our management and with our independent auditors with
regard to the plan of audit; reviews, in consultation with the independent
auditors, their report of audit, or proposed report of audit and the
accompanying management letter, if any; and consults with our principal
accounting officer and other key members of our management and with our
independent auditors with regard to the adequacy of the internal accounting
controls. The Board of Directors adopted a written Audit Committee Charter in
October 2002, a copy of which is attached hereto as Appendix A.
In fulfilling its responsibilities, the Audit Committee selected Demetrius
& Company, L.L.C. as our independent accountants for purposes of auditing our
financial statements for the fiscal year ending June 30, 2005. The Audit
Committee has reviewed and discussed with management and the independent
auditors our audited financial statements; discussed with the independent
auditors the matters required to be discussed by Codification of Statements on
Auditing Standards No. 61; received the written disclosures and the letter from
the independent auditors required by Independence Standards Board Standard No.
1; and discussed with the independent accountants their independence from our
Company.
15
Based on the reviews and discussions with management and Demetrius &
Company, L.L.C., the Audit Committee recommended to the Board that our audited
consolidated financial statements be included in our Annual Report on Form
10-KSB for the fiscal year ended June 30, 2005, filed with the Securities and
Exchange Commission.
The Board of Directors evaluated the independence of each member of the
Audit Committee. As part of its evaluation, the Board of Directors determined,
in the exercise of its business judgment, that Messrs. Rabois and Snow are
independent under Rule 4350(d) of the Nasdaq Stock Market Listing Standards and
are financially literate each in his own capacity.
Based upon its work and the information received in the inquiries outlined
above, the Audit Committee is satisfied that its responsibilities under the
charter for the period ended June 30, 2005, were met and that our financial
reporting and audit processes are functioning effectively.
Submitted by the Audit Committee
of the Board of Directors:
Gene Rabois
Edward Snow
Thomas Donahue
INDEPENDENT ACCOUNTANTS
The Company first engaged Demetrius & Company, L.L.C. as its Company's
principal accountant to audit the Company's financial statements for the fiscal
year ended June 30, 1998. We have engaged Demetrius & Company, L.L.C. to audit
the Company's financial statements for the fiscal year ending June 30, 2006. A
representative of Demetrius & Company, L.L.C. is expected to be present at the
Annual Meeting. The representative will have an opportunity to make a statement
if he so desires and is expected to be available to respond to appropriate
questions of shareholders.
FEES OF THE INDEPENDENT PUBLIC ACCOUNTANTS FOR FISCAL 2005
Audit Fees
The aggregate fees billed by Demetrius & Company, L.L.C. for professional
services related to the audit of the Company's consolidated financial statements
for the fiscal year ended June 30, 2005 were $36,789. The reviews of the
consolidated condensed financial statements included in the Company's Quarterly
reports on Forms 10-QSB for the fiscal year ended June 30, 2005 were performed
by Demetrius & Company, L.L.C. The fees billed by Demetrius & Company, L.L.C.
for those services plus its consent were $10,200. The aggregate fees billed by
Demetrius & Company, L.L.C. in connection with the year end audit and quarterly
reviews for the fiscal year ended June 30, 2004 were $35,000.
Audit Related Fees
There were no fees billed by Demetrius & Company, L.L.C. for audit related
services for the fiscal years ended June 30, 2004 or 2005.
16
Tax Services
The aggregate fees billed by Demetrius & Company, L.L.C. for tax services
during the fiscal years ended June 30, 2005 and 2004 were $13,000 and $14,000,
respectively.
All Other Services
During 2004, Demetrius & Company, L.L.C. billed the Company $5,000 for
services in connection with the preparation of a SEC filing of a private
placement.
COST OF SOLICITATION OF PROXIES
We will pay the cost of this solicitation. We may request persons holding
shares in their names for others to forward soliciting materials to their
principals to obtain authorization for the execution of proxies, and we will
reimburse such persons for their expenses in so doing.
SHAREHOLDER PROPOSALS
A shareholder proposal intended for inclusion in the proxy statement and
form of proxy for the Annual Meeting of Shareholders of the Company to be held
in 2005 must be received by the Company before September 1, 2005, at its
executive offices located at 790 Bloomfield Avenue, Building C-1, Clifton, New
Jersey 07012, Attention: Arthur Barchenko. Any shareholder proposal submitted
outside the processes of Rule 14a-8 under the Securities Exchange Act of 1934
for presentation at our 2005 Annual Meeting will be considered untimely for
purposes of Rule 14a-4 and 14a-5 if notice thereof is received by us after
September 1, 2005.
OTHER BUSINESS
The Board of Directors does not intend to present, and has no knowledge
that others will present, any other business at the Annual Meeting. If, however,
any other matters are properly brought before the Annual Meeting, it is intended
that the persons named in the enclosed proxy will vote the shares represented
thereby in accordance with their best judgment.
17
ELECTRONIC CONTROL SECURITY INC.
Audit Committee Charter
Organization
There shall be a committee of the board of directors to be known as the
audit committee. The audit committee shall be composed of directors, the
majority of whom are independent of the management of the corporation and are
free of any relationship that, in the opinion of the board of directors, would
interfere with their exercise of independent judgment as a committee member.
Statement of Policy
The audit committee shall provide assistance to the corporate directors in
fulfilling their responsibility to the shareholders, potential shareholders, and
investment community relating to corporate accounting, reporting practices of
the corporation, and the quality and integrity of the financial reports of the
corporation. In so doing, it is the responsibility of the audit committee to
maintain free and open means of communication between the directors, the
independent auditors, the controller's, and the financial management of the
corporation.
Responsibilities
In carrying out its responsibilities, the audit committee believes its policies
and procedures should remain flexible, in order to best react to changing
conditions and to ensure to the directors and shareholders that the corporate
accounting and reporting practices of the corporation are in accordance with all
requirements and are of the highest quality.
In carrying out these responsibilities, the audit committee will:
1. Provide an open avenue of communication between the controller, the
independent auditor, and the board of directors.
2. Review and update the committee's charter annually.
3. Create an agenda for the ensuing year.
4. Maintain minutes or other records of meetings and activities of the Audit
Committee.
5. Recommend to the board of directors the independent auditors to be
nominated, approve the compensation of the independent auditor, and review
and approve the discharge of the independent auditors.
6. Review and concur in the appointment, replacement, reassignment, or
dismissal of the director of internal auditing.
7. Confirm and assure the independence of the independent auditor, including
a review of management consulting services and related fees provided by
the independent auditor.
8. Inquire of management, the controller and the independent auditor about
significant risks or exposures and assess the steps management has taken
to minimize such risks to the company.
18
9. Consider, in consultation with the independent auditor and the controller,
the audit scope and plan of the controller and the independent auditor.
10. Consider with Management and the independent auditor the rationale for
employing audit firms other than the principal independent auditor.
11. Review with the controller and the independent auditor the coordination of
audit effort to assure completeness of coverage, reduction of redundant
efforts, and the effective use of audit resources.
12. Consider and review with the independent auditor and the controller:
a) The adequacy of the company's internal controls including
computerized information system controls and security.
b) Any related significant findings and recommendations of the
independent auditor and the controller together with management's
responses thereto.
c) The adequacy of internal controls and procedures related to
executive travel and entertainment.
13. Review with management and the independent auditor at the completion of
the annual examination:
a) The company's annual financial statements and related footnotes.
b) The independent auditor's audit of the financial statement's and his
or her report thereon.
c) Any significant changes required in the independent auditor's audit
plan.
d) Any serious difficulties or disputes with management encountered
during the course of the audit.
e) Other matters related to the conduct of the audit which are to be
communicated to the committee under generally accepted auditing
standards.
14. Consider and review with management and the controller:
a) Significant findings during the year and management's responses
thereto.
b) Any difficulties encountered in the course of their audits,
including any restrictions on the scope of their work or access to
required information.
c) Any changes required in the planned scope of their audit plan.
d) The internal auditing department budget and staffing.
e) The internal auditing department charter.
19
f) Internal auditing compliance with the IIA's Standards for the
Professional Practice of Internal Auditing (Standards).
15. Review filings with the SEC and other published documents containing the
company's financial statements and consider whether the information
contained in these documents is consistent with the information contained
in the financial statements.
16. Review with management, the independent auditor, and the controller
auditing the interim financial report before it is filed with the SEC or
other regulations.
17. Review policies and procedures with respect to officers and director's;
expense accounts and perquisites, including their use of corporate assets,
and consider the results of any review of these areas by the controller or
the independent auditor.
18. Review legal and regulatory matters that may have a material impact to the
financial statement's related company compliance policies, and programs
and reports received from regulators.
19. Meet with the controller, the independent auditor, and management in
separate executive sessions to discuss any matters that the committee or
these groups believe should be discussed privately with the audit
committee.
20. Report committee actions to the board of directors with such
recommendations as the committee may deem appropriate.
21. Prepare a letter for inclusion in the annual report that describes the
committee's composition and responsibilities, and how they were
discharged.
22. The audit committee shall have the power to conduct or authorize
investigations into any matters within the committee's scope of
responsibilities. The committee sha1l be empowered to retain independent
counsel, accountants, or others to assist it in the conduct of any
investigation.
23. The committee shall meet at least one time per year or more frequently as
circumstances require. The committee may ask members of management or
others to attend the meeting and provide pertinent information as
necessary.
24. The committee will perform such other functions as assigned by law, the
company's charter or bylaws, or the board of directors.
The membership of the audit committee shall consist of at least two independent
members of the board of directors who shall serve at the pleasure of the board
of directors. Audit committee members and the committee chairman shall be
designated by the full board of directors.
The duties and responsibilities of a member of the audit committee are in
addition to those duties set out for a member of the board of directors.
20
Directions to ECSI International, Inc.
790 Bloomfield Ave.
Bldg. C Suite 1
Clifton, NJ 07012
973-574-8555
From New York City:
Exit Lincoln Tunnel and take 395 to Rt. 3W.
Proceed on Rte. 3W to the Bloomfield Ave. exit.
Make a right at the bottom of the ramp and *proceed to round-about. Go half-way
around circle, past Home Depot on the right.
Continue straight through the light; you will see Atlantic Casting on the left.
Right after Atlantic Casting, there is an orange brick building, 790 Bloomfield
Ave.
Immediately after the building, there is a driveway. Make a left into the
driveway and go back into the industrial complex.
The company is located on the left in the white building with blue letters
'ECSI'.
Traveling East on Rt. 3:
Via Parkway:
Take Exit 53 (Sports Arena) onto Rt. 3 East. **Take the Bloomfield Ave. exit. At
bottom of ramp make a right onto Bloomfield Ave. and following directions from *
above.
Via Rt. 46 E - follow to Rt. 3E and **directions above.
Via Rt. 80 East - to Rt. 46 E to Rt. 3 E and follow **directions above.
Via Rt. 80 West to Rt. 46 W to Rt. 3 E and follow **directions above.
Via NJ Turnpike North:
Exit 16W (GW Bridge). Follow signs for Route 3 West (Sports Complex) to
Bloomfield Avenue exit on right. Follow * directions above.
21