UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF
SECURITIES OF SMALL BUSINESS ISSUERS Under
Section 12(b) or 12(g) of The Securities Exchange Act of
1934
Electronic Control Security Inc.
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(Name of Small Business Issuer in its charter)
New Jersey 22-2138196
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
790 Bloomfield Avenue, Clifton, New Jersey 07012
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (973) 574-8555
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Securities to be registered pursuant to Section 12(b) of the Act
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Title of each class Name of each exchange on which registered
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Securities to be registered pursuant to Section 12(g) of the Act.
Common Stock, par value $.001 per share
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(Title of Class)
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(Title of Class)
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PART I
Item 1. DESCRIPTION OF BUSINESS.
Introduction.
Electronic Control Security Inc. ("we" or "us") was incorporated under the
laws of the State of New Jersey in 1976. We and our wholly owned subsidiaries
design, manufacture and market security detection equipment for correctional,
commercial and industrial use and provide consulting and advisory services with
respect to risk assessment, including threat, vulnerability and criticality
analysis. Our product line includes:
o perimeter detection equipment (pulsed infrared, fiber-optic, thermal
and video detection);
o high-speed data communications network equipment which integrates
access control, perimeter infra-red detection systems, video
assessment, and video badging systems;
o computer security systems which detect entry into a computer
network;
o vehicle and vessel tracking devices;
o asset tracking devices; and
o a personal identification and location system.
Many of our products are designed to protect a site against terrorism,
theft and arson. We market our products to large correctional facilities,
government facilities such as military bases, nuclear power stations, airports
and private corporations including international oil producers and high
technology companies desiring to protect trade secrets and prevent intrusion
into facilities.
Risk Factors.
Set forth below are certain risks and uncertainties relating to our
business. These are not the only risks and uncertainties we face. Additional
risks and uncertainties not presently known to us or that we currently deem
immaterial may also impair our business. If any of the following risks actually
occur, our business, operating results or financial condition could be
materially adversely affected.
WE REQUIRE ADDITIONAL FUNDS TO IMPLEMENT OUR CURRENT PLANS AND FINANCE FUTURE
GROWTH
We have developed a business plan to grow our company which assumes that
we will have additional capital available to us. Our business model encompasses:
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o the engagement of additional marketing and sales personnel;
o product development;
o software development;
o adding dealers-installer worldwide; and
o the acquisition of laboratory and testing equipment.
In addition, we plan to repay certain outstanding accounts and to retain
cash for working capital. We anticipate that we will require approximately
$1,050,000 to implement fully our business plan and growth strategy.
We will seek to obtain additional funds through sales of equity and/or
debt, or other external financing in order to fund our current operations and to
achieve our business plan. We cannot assure that any additional capital
resources will be available to us, or, if available, will be on terms that will
be acceptable to us. Any additional equity financing will dilute the equity
interests of existing security holders. If adequate funds are not available or
are not available on acceptable terms, our ability to execute our business plan
and our business could be materially and adversely affected.
WE MAY FACE RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS, INVESTMENTS, STRATEGIC
PARTNERSHIPS OR OTHER VENTURES, INCLUDING WHETHER SUCH TRANSACTIONS CAN BE
LOCATED, COMPLETED AND THE OTHER PARTY INTEGRATED WITH OUR BUSINESS ON FAVORABLE
TERMS
As part of our long-term growth strategy, we may seek to acquire or make
investments in complementary businesses, technologies, services or products or
enter into strategic relationships with parties who can provide access to those
assets, if appropriate opportunities arise. From time to time, we may enter into
discussions and negotiations with companies regarding our acquiring, investing
in, or partnering with their businesses, products, services or technologies. We
may not identify suitable acquisition, investment or strategic partnership
candidates, or if we do identify suitable candidates, we may not complete those
transactions on commercially acceptable terms or at all. Acquisitions often
involve a number of special risks, including the following:
o we may experience difficulty integrating acquired operations,
products, services and personnel;
o the acquisition may disrupt our ongoing business;
o we may not be able to successfully incorporate acquired technology
and rights into our service offerings and maintain uniform
standards, controls, procedures, and policies;
o we may not be able to retain the key personnel of the acquired
company;
o the businesses we acquire may fail to achieve the revenues and
earnings we anticipated; and
o we may ultimately be liable for contingent and other liabilities,
not previously disclosed to us, of the companies that we acquire.
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We may not successfully overcome problems encountered in connection with
potential future acquisitions. In addition, an acquisition could materially
adversely affect our operating results by:
o diluting your ownership interest;
o causing us to incur additional debt; and
o forcing us to amortize expenses related to goodwill and other
intangible assets.
Any of these factors could have a material adverse effect on our business.
These difficulties could disrupt our ongoing business, distract our management
and employees and increase our expenses. Furthermore, we may incur indebtedness
or issue equity securities to pay for any future acquisitions.
WE DEPEND ON OUR RELATIONSHIPS WITH OUR STRATEGIC PARTNERS TO GENERATE A PORTION
OF OUR BUSINESS AND REVENUES AND OUR BUSINESS COULD SUFFER IF THESE
RELATIONSHIPS ARE TERMINATED
We have entered into strategic partnerships or teaming arrangements with
several large multinational corporations that promote our products and services
and incorporate our products into their projects. These strategic partners
include The Aerospace Corporation, Allied Signal Corporation, Analytical Systems
Engineering Corp., Duke Engineering & Services, Inc., Harris Corp./Electronic
Systems Sector, Honeywell Corp., KDN, Kopec, Lau Technologies, Engineered
Professional Services, Science Applications International Corporation, Secure
Applications Inc., and TRW Systems Integration Group. In the event that we are
unable to maintain these strategic relationships for any reason, our business,
operating results and financial condition could be materially adversely
affected.
OUR SERVICES AND REPUTATION MAY BE ADVERSELY AFFECTED BY PRODUCT DEFECTS OR
INADEQUATE PERFORMANCE
We believe that we offer state-of-the art products that are reliable and
competitively priced. In the event that our products do not perform to
specifications or are defective in any way, our reputation may be materially
adversely affected and we may suffer a loss of business and a corresponding loss
in revenues.
IF WE ARE UNABLE TO RETAIN KEY EXECUTIVES OR HIRE NEW QUALIFIED PERSONNEL, OUR
BUSINESS WILL BE ADVERSELYAFFECTED
Our success greatly depends on our ability to attract and retain key
technical, sales, marketing, information systems, and financial and executive
personnel. We are especially dependent on the continued services of our senior
management team, particularly Arthur Barchenko and Mark Barchenko, our
President, and Vice President, respectively, and our key
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marketing personnel. The loss of either of these persons could have a materially
detrimental effect on us. We have not entered into employment agreements with
either of these persons. We do not maintain key person life insurance on any of
our personnel. If we fail to attract, hire or retain the necessary personnel, or
if we lose the services of any member of our senior management team, our
business could be adversely affected.
RISKS OF DOING BUSINESS IN FOREIGN COUNTRIES
During 1998 and 1999, we generated approximately 40% and 60% of our
business from projects which were performed outside the United States. Certain
risks attach to operations in foreign countries, some of which are described
below:
Physical Risks
Many of our projects are undertaken in comparatively dangerous geographic
locations such as the Middle East, East Asia and other less developed areas of
the world that are subject to political and economic instability. Moreover, our
projects generally require us to provide security detection equipment and
consulting and advisory services with respect to risk assessment, including
threat, vulnerability and criticality analysis to sensitive facilities and
installations. Consequently, some of these projects may be the subject of
terrorism which may prevent us from completing the project and obtaining payment
for our services. Any failure to collect amounts due to us on projects would
have a materially adverse affect on our business as we would lose capital and
time expended on such projects without the ability to recapture the costs
associated therewith.
Enforcement of Contractual Rights
We may not be able to enforce all of our contractual rights under certain
contracts we enter into with governments or private organizations located in
some of the geographic in which we transact business. Any inability to enforce
contracts or collect payment from clients located in these areas would have
material adverse effect on our business and our results of operations.
Currency Exchange Rate Fluctuation
Some of the overseas contracts by which we provide products and services
are denominated in currencies other than United States Dollars. As a result, we
are subject to the effects of exchange rate fluctuations with respect to any of
these currencies. We have not entered into agreements or purchase instruments to
hedge our exchange rate risks although we may do so in the future.
Currency Repatriation Restrictions
Some of the foreign countries in which our clients are located have or may
enact laws
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which restrict conversion of their currencies into United States Dollars. Any
inability to convert the entire amount received from contracts performed
overseas may limit our ability to utilize revenue generated in such currencies
outside of that jurisdiction and restrict us to fund our business activities
outside those countries
COMPETITION AND TECHNOLOGICAL ALTERNATIVES
The industry in which we operate is highly competitive and has become more
so over the last several years as security issues and concerns have become a
primary consideration at both government and private facilities worldwide.
Competition is intense among a wide ranging group of product and service
providers, most of which are larger than us and possess significantly greater
assets, personnel, sales and financial resources. The principal factors
affecting competition in the industry include applied technology, product
performance, price and customer service. Any one or more of our competitors or
other enterprises not presently known to us could develop technologies and/or
products which are superior to ours, significantly underprice our products and
technologies and/or more successfully market existing, new or competing products
and technologies. To the extent that our competitors are able to achieve any of
the foregoing, our ability to compete could be materially adversely affected. We
can offer no assurance that we will be able to compete successfully against any
of our competitors now existing or which enter the market in the future.
RISKS RELATING TO OUR STOCK
NO LIQUIDITY FOR COMMON STOCK OR WARRANTS
Neither our common stock nor warrants are listed for trading on any
exchange. Consequently, holders of shares of common stock and/or warrants have
no means of liquidating theses securities should they desire to do so. We intend
to seek to have our class of common stock listed for trading on the electronic
bulletin board of the over-the-counter market at such time as this Form 10-SB is
declared effective by the Securities and Exchange Commission. No assurance can
be given that we will be able successful in causing the class of common stock to
be listed for trading on any market. If we are unsuccessful in obtaining a
listing for the shares of common stock, persons holding said shares may have to
dispose of the shares in private transactions, hence liquidity would be
extremely limited and the price obtained for the shares would not reflect market
forces.
POSSIBLE DELISTING OF OUR SECURITIES FROM TRADING ON THE ELECTRONIC BULLETIN
BOARD
Currently, our Units (each consisting of one share of common stock and one
redeemable common stock purchase warrant, as more fully described under the
heading DESCRIPTION OF SECURITIES) are listed on the electronic bulletin board
of the over-the-counter market. In early 1999, NASDAQ adopted regulations that
would prohibit securities that are not registered under
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the Securities Exchange Act of 1934 from trading on any market or electronic
exchange, including the electronic bulletin board. Any securities not so
registered by the date specified by NASDAQ would be "delisted," that is dropped
from the electronic bulletin board from trading. This Form 10-SB is intended to
register our class of common stock under the Securities Exchange Act of 1934.
However, by law, registration statements such as this Form 10-SB do not become
effective until 60 days after filing with the Securities and Exchange
Commission. A date 60 days from the filing of this Form 10-SB would extend
beyond the current deadline and our Units would be delisted from the electronic
bulletin board. If the Units are delisted from trading on the electronic
bulletin board and holders of our common stock would have no means of
liquidating these securities. Once delisted, we cannot predict when, if ever,
the Units or any other class of securities would be re-listed for trading on the
electronic bulletin board or any other market or exchange as the approval to
re-list any such securities is subject to review by the NASD.
FACTORS OUTSIDE OF OUR CONTROL MAY AFFECT OUR OPERATING RESULTS AND CAUSE OUR
QUARTERLY RESULTS TO FLUCTUATE
Our financial results may fluctuate significantly because of several factors,
many of which are beyond our control. These factors include:
o our failure to keep pace with changing technology;
o costs associated with developing new products and services;
o cost associated with marketing our products and services may
increase significantly;
o government regulations may be enacted which effect how we do
business and the products which may be used at government
facilities;
o downward pressure on prices due to increased competition;
o changes in our operating expenses; and
o the effect of potential acquisitions.
Fluctuations caused by these and other factors could cause our business to
suffer.
WE HAVE NO INTENTION TO PAY DIVIDENDS
We have never paid any cash dividends on our common stock. We currently
intend to retain all future earnings, if any, for use in our business and do not
expect to pay any dividends in the foreseeable future.
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THE FUTURE SALE OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD EFFECT THE MARKET
FOR ANY OF OUR PUBLICLY TRADED SECURITIES
In the event that we are able to obtain a listing for our common stock on
an securities exchange, the market price of our common stock could fall if our
stockholders sell substantial amounts of common stock, including shares issued
upon the exercise of outstanding options. Such sales might also make it more
difficult for us to sell equity securities in the future at a time and price
that we deem appropriate. Please refer to our discussion in "Shares Eligible for
Future Sale."
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-SB may include "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. We intend the forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements in these sections. All statements
regarding our expected financial position and operating results, our business
strategy, our financing plans and the outcome of any contingencies are
forward-looking statements. These statements can sometimes be identified by our
use of forward-looking words such as "may," "believe," "plan," "will,"
"anticipate," "estimate," "expect," "intend" and other phrases of similar
meaning. Known and unknown risks, uncertainties and other factors could cause
the actual results to differ materially from those contemplated by the
statements. The forward-looking information is based on various factors and was
derived using numerous assumptions. Although we believe that our expectations
that are expressed in these forward-looking statements are reasonable, we cannot
promise that our expectations will turn out to be correct. Our actual results
could be materially different from our expectations, including the following:
- the effect of any new government regulations on our
business;
- we may not be able to secure funds to implement our
marketing strategy;
- we may not successfully integrate operations, personnel
or assets obtained through acquisitions;
- we may fail to compete with existing and new
competitors;
- we may not adequately respond to technological
developments; and
- we may not be able to find needed financing.
This list is intended to identify some of the principal factors that could cause
actual results to differ materially from those described in the forward-looking
statements included elsewhere in this report. These factors are not intended to
represent a complete list of all risks and uncertainties inherent in our
business, and should be read in conjunction with the more detailed cautionary
statements included in this prospectus under the caption "Risk Factors."
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Industry Overview.
Traditional markets for our security equipment encompassed correctional
facilities and detention centers, and sales to those markets accounted for a
significant portion of our revenues during the 1980's. As world terrorism
increased over the last ten years, security issues and concerns have become a
primary consideration at both government and private facilities. These sources
now comprise the material segment of our business and account for a material
portion of our revenues.
The increase in terrorism against United States government facilities and
private entities during the last several years has increased security
considerations. Terrorism can be perpetrated by direct physical harm to
personnel and property, including theft, and indirectly by electronic means
through intrusion into computer networks. Terrorism is now perpetrated for
political, economic, religious and environmental reasons and virtually every
government and multinational corporation is a potential target. The recent spate
of terrorism against American interests both within the United States and abroad
has heightened awareness of the need to enact countermeasures to prevent the
occurrence of such activities. The government and private entities are
implementing the safeguards necessary to avert potentially dangerous acts
against life and property. In addition, foreign governments and foreign private
industry have begun to implement measures to protect against terrorist
activities. We will continue to focus on the market, both domestic and foreign,
for security systems designed to prevent terrorist activities and expect that
this market will continue to grow during the next decade and beyond.
During our formative years, we derived the material portion of our
revenues from sales to correctional and detention facilities. This market has
been rejuvenated over the last several years as supported by Justice Department
statistics which reveal that though the number of felonies has decreased over
the last several years, the number of persons in the correctional population has
been increasing because an increased percentage of persons convicted are
sentenced to prison terms. In 1995, state prisons operated at approximately 4%
above capacity and federal prisons operated at approximately 25% above capacity.
During the period 1990 to 1995, the federal and state governments added 213
prisons and 280,000 prison beds, representing an increase of 41% in prison
capacity, which nearly kept pace with prison population growth. The United
States Attorney General's office has indicated that it will continue to build
new prison facilities to manage the increasing prison population. The growth of
the prison population and the construction of new prisons in conjunction with
increasing costs associated with maintaining a physical security staff, all
within a limited budget, necessitates a reliance on on-site security systems
such as those which we market. Therefore, we have determined to target the
Federal Bureau of Prisons and state correctional agencies to capitalize on this
opportunity in the coming years.
Completed Systems and Works in Progress.
We have completed hundreds of projects since our inception including
projects for
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foreign governments, government owned utilities and multinational corporations.
We work on a regular basis for the United States Department of Defense,
Department of Energy and nuclear regulated power stations.
Products and Services.
We market nine separate systems and products, most of which can be
adapted, integrated and configured for specific applications as required by the
customer. We market a number of these systems and products as a comprehensive,
fully integrated, building control security system with a real time, on-line
dual redundant central computer network. Our products are designed and
manufactured to be:
o reliable in harsh weather conditions and
o subject to low installation and maintenance costs.
In addition, the sensor systems comprising our products have been designed to
provide low nuisance and false alarm rates and are tailored specifically to meet
the needs of risk mitigation in high threat environments. We believe that we
offer the state-of-the-art sensor systems and data communications networks.
We work with our clients' engineers and architects, the systems
integrator, and the construction manager, to develop and design a system to
achieve a secure, yet normal environment for a facility. We employ the latest
standard off-the-shelf components to develop flexible systems that are
cost-effective and state-of-the-art.
In order to provide our clients with the highest quality and most advanced
systems, we incorporate into our projects products and technologies developed or
owned by other entities. After we evaluate a project, we will ascertain the most
effective and efficient solutions to satisfy a client's requirements. We then
examine the range of technologies and products available for the required
purpose and select the most appropriate product or technology for the project.
We frequently enter into technology transfer agreements covering the technology
or product to be used.
Products:
Infrared Perimeter Intrusion Detection System ("IPID(TM) System")
and Rapid Deployment Infrared Detection System ("RDIDS")
The IPID(TM) System consists of pulsed infrared sensors that detect an
intruder passing through the system's electronic pulsed infrared beams. Once a
beam is broken, the sensors automatically transmit an alarm signal to the
control center as to the exact zone of intrusion. The IPID(TM) System features a
self diagnostic system which differentiates environmental conditions from
intruders so that it does not trigger environmental alarms caused by snow, fog,
leaves or
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small animals and alarms only when an intruder passes through the infrared beam.
The system detects intruders up to 1,200 feet in dry climate, 400 feet in rain
and snow and up to 300 feet in average fog conditions and operates at extreme
temperature ranges. Various configurations of IPID(TM) are available and we can
tailor the systems to the particular installation. Intruder detection sensor
heads are easily affixed on extruded aluminum mounting systems and these poles
can be mounted vertically or horizontally, on buildings, at ground level, on top
of a fence for terrain following configuration, across sally ports, over water
or on roof tops. The system is tamper-proof, and spoofing and jam proof and is
impervious to nuisance alarms. The system is built to military specifications
and is covered by a 10-year warranty. IPID(TM) Systems are in use at nuclear
power facilities, the National Security Agency, the US Department of Energy, the
US Department of Defense, the US Department of Transportation, and detention
sites.
We also offer a rapid deployable stand-alone perimeter intrusion
detection system similar to the IPID(TM) System, marketed as the RDIDS, wherein
the pulsed infrared sensors are placed on portable tripods for mobile use and
rapid deployment. The RDIDS system employs a self-contained power source and
requires no interconnecting wiring. The RDIDS system is essentially impervious
to environmental conditions, standing water, small animals, waving grass and
vegetation and operates up to 1200 feet in clear weather and up to 300 feet
during average fog conditions. RDIDS is relatively simple to install, align and
maintain. RDIDS systems can be used in full stand-alone operation or may be
integrated with virtually any existing security annunciation system. The system
can operate temporarily on battery power as necessary. The system can be used
for immediate protection of exploration teams, pipeline construction sites,
military aircraft, temporary base camps, ammunition storage facilities and
special operations. All RDIDS carry a ten-year warranty against defects in
workmanship and material. These systems are in use at the US Department of
Defense sites.
Fiber Optic Intelligent Detection System ("FOIDS(R)")
Our FOIDS(R) product consists of a fiber optic sensor cable which can be
attached to any barrier, including a fence, wall or roof line, buried in the
ground or used beneath carpeting, above drop ceilings, imbedded in walls, in or
on any fixed surface. FOIDS(R) sensors are placed on reels which facilitate both
deployment and recovery of the system. The FOIDS(R) system is designed to be
flexible and zonal detection areas can be configured to extend to a length of
100 to 250 meters and can be located up to 66 kilometers from the power source.
The fiber optic sensors used in the system are immune to most external
electronic impulses such as radio frequency emissions, static electricity
(including lightning), and moisture and ambient temperature variations. Digital
processing minimizes nuisance alarms and permits the operator to set the desired
probability of detection (i.e., sensitivity to certain conditions or
intrusions). The expanded alarm discrimination and sensitivity control features
of the FOIDS(R) (and the RDIDS) systems allow the user to fine tune the system
and fully optimize the sensor to its environment. FOIDS(R) systems can be
equipped with audio "listen-in" capability from each fiber optic sensor to
permit quick assessment of alarm conditions. The system can operate temporarily
on battery power as necessary. The FOIDS(R) system can be fully integrated with
a variety of digital security
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platforms. The FOIDS(R) system was designed to provide long service life with
low maintenance requirements.
FOIDS(R) systems employed with top-of-the-fence-terrain-following-sensors
provide fiber optic intrusion detection which can create an environment whereby
an 8 foot fence provides 11 1/2 feet of vertical detection.
The FOIDS(R) and RDIDS systems can be combined to create an easily
deployable single-mode optical fiber sensor incorporating the most recent
developments in optical and electronic technologies to provide state-of-the-art
security in tactical situations where temporary barrier security is required.
The electronic and photonic components of these systems are housed in a single
enclosure to protect the system from damage or exposure to unfavorable
environmental conditions.
FOIDS(R) systems are in use at Department of Defense, Department of Energy
National Security Agency Department of Transportation and detention sites.
The FOIDS(R) and RDIDS systems incorporate certain technology which we
have licensed from each of Lucent Technologies, Inc. and Mason Hanger National,
Inc. By agreement dated as of January 15, 1997, Lucent Technologies, Inc.
granted to us a nonexclusive right to use certain technology relating to Optical
Fiber Sensing Systems covered by United States patent number 4,904,050. Lucent
also furnished to us all technical information relating to this technology. The
license extends through the term of the patent which is the subject of the
license. In consideration of the grant of the license, we (i) paid to Lucent an
aggregate of $50,000, (ii) agreed to pay Lucent a minimum continuing annual
royalty of $10,000 and (iii) an annual royalty equal to 4.4% of the gross
revenues derived from each product sold by us which incorporates the technology.
Under the terms of the license, we are entitled to sublicense this technology to
any of our subsidiaries.
By agreement dated March 5, 1997, we purchased from Mason Hanger National,
Inc. certain assets relating to the manufacture of the FIODS(R) product line for
an aggregate purchase price of $151,500. In addition, we entered into a license
agreement with Mason Hanger whereby we obtained a license to use certain
intellectual property, consisting of 3 United States patents, which it developed
in connection with the FOIDS(R) systems. In accordance with this license, we
agreed to pay to Mason Hanger a royalty equal to 5% of the net sales price
(defined as the invoice price by purchasers of products incorporating the
licensed patents less refunds, credits, taxes and normal trade discounts) for
products incorporating the patents licensed to us by Mason Hanger.
Video Motion Detection System ("VMDS") and Video Assessment Systems
("VAS")
As an adjunct to its IPID(TM), RDIDS and FIODS(R), systems, we offer video
surveillance equipment to ascertain the nature of, and monitor, the announced
threat. The sole purpose of a
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perimeter detection system is to reliably sense an intrusion into a prescribed
physical area. Once an alarm has sounded, it is the operator's function to
confirm that the breach represents a risk requiring some response. The video
aspect of the system allows the operator to make a visual corroboration of the
breach and to determine whether the breach constitutes a threat (e.g., one man
or ten men) or whether the alarm represents something less (e.g., a deer). Upon
confirmation of a threatening intrusion, the operator can deploy an appropriate
response to that threat. If the perimeter system is not complimented with some
form of assessment (i.e., video confirmation), then the response force will
follow the same established procedures whether it is a dear or a man or a group
of men. The purpose of video assessment is to help the user understand the cause
of the alarm so that an adequate and appropriate response can be initiated.
The Video Motion Detection System ("VMDS") is designed and constructed for
outdoor intrusion detection by using closed circuit television ("CCTV") cameras,
digital processing and fiber optic links. The CCTV camera field of view, up to
200 meters in length, is divided into discrete cells which remain invisible to
the operator until an intruder moves into a field. The system is configured to
react to human characteristics of size, speed and direction. Once an intrusion
occurs, the operator's attention is drawn to the monitor by graphical and
audible warnings. Any cell that has been crossed is highlighted on screen,
creating a progress indicator. Multi-directional features enable detection of
intruders moving in any direction relative to the camera. Digital processing
minimizes false and nuisance alarms caused by small animals, birds and
environmental effects such as contrast changes, cloud shadows, wind induced
camera vibration, rain and snow.
VMDS can be integrated with existing security systems and with video
motion or video assessment systems and can be used with smoke and fire detection
equipment to detect fires indoors (electrical systems) and outdoors, and in
hazardous areas under risk of explosion..
Video Assessment Systems ("VAS") are integrated with other security
measures to aid in the assessment of alarm conditions. Constant attention to
video monitors can cause security control personnel to lose effectiveness. Using
video assessment as an adjunct to intrusion detection can assist in reducing
operator fatigue, ensure appropriate response and provide a record of
intrusions.
Key features of our primary VAS include automatic camera selection based
on the specific alarm detected; storage of multiple alarm area scenes
immediately when the alarm is detected; random access retrieval of stored alarm
scenes; cameras positioned to view the same direction as the perimeter system
detectors; and real-time viewing of intruded area for comparison with stored
alarm scenes.
Gamma 2000 System
In February 1998, we entered into an agreement with Rafael Armament
Development Authority, a department of the Israeli Ministry of Defense, which
developed the GAMMA 2000
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Preemptive Intrusion System. Pursuant to this agreement, Rafael appointed us as
the exclusive marketing agent for the Gamma 2000 system in the United States for
a three-year period subject to extension for an additional three years which
extension would be granted based upon sales volume of the products which is to
be determined prior to the end of the initial term of the agreement. The Gamma
2000 system is an electronic surveillance system that detects intruders before
they reach the perimeter of a secured zone. The system's field units include a
passive infrared ("PIR") sensor, closed circuit digital camera, and projectors
for nighttime use. Spaced at regular intervals, the units relay data and
real-time video images to a central control unit. The system creates a 15-to
20-meter detection and verification band outside and parallel to a secured
perimeter. The system can operate in extreme temperature ranges and in a variety
of weather conditions.
The GAMMA 2000 system integrates with established systems, and, by
providing early warning that someone may attempt to breach a perimeter, it
increases the difficulties that terrorists or other intruders will encounter in
their efforts. The GAMMA 2000 system is suited for border control, military
bases, power stations, oil and gas storage facilities, nuclear power plants,
industrial sites, prisons and airports or other situations with high-level
security demands.
High Speed Data Communications Network
Data communications represent the heart of any security system and allow
several different systems to be integrated into a single coherent security and
detection unit. We market a comprehensive PC based high-speed data
communications network which integrates access control, perimeter IDS, video
assessment, and video badging systems and which is capable of linking multiple
buildings and multiple sites worldwide. Our system is readily expandable and
modular and can be operated by the user's own computer server. Systems are
available in Windows 95 and Windows NT software platforms and can transmit
voice, video and alarm data on a single fiber optic, copper or twisted pair
wire. Further, our systems employ hot swappable keyboards, resulting in no down
time. These systems can be configured to operate on Ethernet, dedicated
telephone lines, by radio frequency communications and satellite communication
links.
The system is in use at the World Trade Center and Brookhaven National
Laboratories, among other locations.
Architectural Security Lighting Systems
A significant component of any security system includes proper and
effective lighting of the area to be protected. As a complement to our security
systems, we offer lighting systems which can enhance a facility's security by
illuminating areas which otherwise may be subject to infiltration because of
darkness or because of their location at some distance away from a facility's
main security center. Our lighting systems can be designed for interior and
exterior use and can be integrated directly into the security system, for
example, by mounting IPID sensors into custom lighting bollards. We work with
clients to design appropriate lighting systems for a
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<PAGE>
project and the equipment is built to design specifications. We have designed
and developed lighting systems for landscape architects, interior designers,
lighting consultants and end-users. We have completed lighting system projects
for, among others, the FBI Building in Washington, D.C., the Immigration and
Naturalization Service Building in Burlington, Vermont, and the Dartmouth
University Medical Center.
SecureLan
SecureLan is a local area network (a series of computers linked together
by a dual path fiber optic cable or copper wire and herein referred to as a
"LAN") physical security system. As more and more entities are linked to the
Internet, computer hackers are able to gain illegal access to the entities'
computer systems. We have developed a system which identifies an unauthorized
access to a LAN and annunciates the intrusion. Any unauthorized access to the
LAN will alert the user to shut down the network, thereby denying the intruder
access to sensitive or confidential information. A graphical map details the
location of the alarm and other pertinent information relating to the intrusion.
The active component of the SecureLan is its fiber optic sensor cable which can
be trained to sense unauthorized access to the LAN.
Vehicle and Vessel Protection Systems
We market systems designed to protect vehicles and vessels by installing
or affixing small global postioning system ("GPS") which tracks the position of
the item.
The StarLog 8 is a locating device which is capable of tracking a vehicle
or vessel and reporting and logging its location at user-specified intervals in
real-time or in batched download. The StarLog 8 consists of an eight channel GPS
tracking unit which is installed in the vehicle or vessel and the software
necessary to record its location based upon several available mapping options
which can be displayed to show position trails and current location. The StarLog
8 has applications in law enforcement, covert surveillance, cargo tracking,
fleet management, traffic analysis and billing verification.
Asset Protection
We market a radio frequency ("RF") unit which can be affixed to an asset
such as a computer or other valuable piece of property. Each RF unit transmits a
unique electronic signature to the owner's computer which identifies the
property. The software installed in the owner's computer system automatically
activates if the property is moved or tampered with. The device's tracking
capability displays movement of the property.
Personal Alarm Devices
We market a line of personal alarm systems which permit individuals to
signal for assistance instantly. The signal transmitted identifies and locates
the person in seconds. The
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Company hopes to market these devices to hospitals, colleges (for protection of
coeds at night), and mental health facilities.
Consulting Services.
We furnish consulting and advisory services with respect to risk
assessment, including threat, vulnerability and criticality analysis. Our
consulting services generally consist of evaluation and then the design and
specification of security systems that meet the client's operating and budgetary
requirements
Product Design, Manufacturing and Installation.
We design and develop new products based upon market requirements. We
research and assess threat and vulnerability issues at selected facilities
within our target markets and we design and engineer our products in-house, with
outside consultants as necessary, and in conjunction with joint venture partners
to meet the needs of clients within the target markets based upon the results of
such research. We purchase the individual components comprising our products
from third party suppliers, or subcontract to third parties the manufacture of
specific subsystems necessary for a particular product. We assemble and finish
our products at our facilities in New Jersey and Alabama. Various aspects of the
software programming required in connection with our computer products are
designed and written by in-house personnel. We are not dependent on any major
suppliers for the components of our products and we believe, should it become
necessary, that substitute suppliers for any of the components are readily
available.
We have engaged eighteen dealer-installers with locations in thirty-five
countries around the world. These entities serve to market our products in their
geographic area and to install our products in client facilities. Our
dealer-installers also serve as the support network for product installations.
Our major dealer-installers are strategically located in the key growth markets
of North and South America, the Asian rim and the Middle East.
Markets for Our Products.
We have identified a number of major geographic and industrial markets for
our products and have developed a marketing plan to access those markets and
industries. Generally, private industry and public and government facilities
possessing sensitive information, valuable assets or which otherwise may be
subject to terrorist threats by virtue of the nature of their business have
recognized the need to implement security measures to protect personnel and
property. In many instances, laws have been enacted and judicial mandates have
been handed down decreeing compliance with some minimum-security standards. We
target these entities as well as entities to which we can demonstrate the need
for security measures.
The following represent the primary markets which we target:
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o United States Government and Agencies. The United States Government
and many of its departments represent a significant market for our
products and has been a significant customer in the past. US
Government departments which have purchased our products in the past
and to which we currently actively market our products include:
o The United States Department of Defense and a number of its
subdivisions have been using our products for force and asset
protection at numerous sites including military bases and
installations;
o The United States Department of Energy in connection with its
clean-up program of military bases and government-owned
nuclear energy facilities, offer an expansive and varied
market for our products;
o The Department of Transportation; and
o Federal Bureau of Prisons. A traditional market for our
products has been correctional, justice and penal facilities.
Despite the decline in the number of crimes punishable by
incarceration, the prison population continues to rise as a
greater percentage of convicted felons are sentenced to prison
terms. Consequently, additional correctional and penal
facilities are constructed annually and the new facilities
represent a prime market for the Company's products and
services. The Company has made substantial sales to this
sector of the economy during its existence and will continue
to focus on sales to this industry.
In the past, we have marketed and sold products to other
United States government departments including the Immigration
and Naturalization Services and the National Aeronautic and
Space Agency. We will continue to focus on these and other
government departments in the future.
o Large Industrial Facilities and Major Office Complexes. These types
of facilities frequently house sensitive data and are the primary
locations where research and product development occur. Generally,
the management of the multinational corporations which own these
facilities are acutely aware of security requirements to protect
valuable property and data. The security systems we have installed
in these facilities in the past encompass total security packages to
create a "smart building." The technologies required to create a
smart building in today's environment must address power, lighting,
life safety, local area network and wide area network protection and
other security systems to create a normal yet secure environment for
employees, visitors and service personnel. Our fiber optic and
communications systems can be applied to create the smart building.
o Energy Facilities, Including Nuclear Plants, Power Utilities and
Petrochemical
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Pipelines. Nuclear and utility power stations which house sensitive
information and dangerous materials represent a large and lucrative
market for our products. These entities are critical to the normal
function of society and must be protected at all costs.
Petrochemical, natural gas and pipeline companies, many of which
operate in high risk and remote environments and geographic
locations, invest huge sums in the assets necessary to operate those
businesses and are taking steps to protect these investments through
the acquisition of security equipment and systems.
o Commercial Airports. Commercial airport security has been at the
forefront of security consciousness for many years. There are
approximately 1,200 facilities in the United States which the
Federal Aviation Agency has identified and mandated for security
systems upgrades to be completed over the next several years and we
will bid for the provision of products and services to these sites.
o Foreign/Export Opportunities. Government operations and private
industries in foreign countries all have similar security issues
which must be addressed and we, along with our strategic teaming
partners, continue to seek to penetrate these markets as time and
capital warrant. During 1998 and 1999, we generated approximately
40% and 60%, respectively, of our revenues from projects performed
outside the United States. We have completed projects in numerous
foreign countries including the Russian Federation, Saudi Arabia,
Korea, Ukraine, Columbia, Malaysia and Hong Kong. We currently are
working on projects in the Brazil, South Korea, Israel, Egypt,
Bahrain, Kuwait, Turkey, Greece, a number of African countries and
other nations around the world. We believe that the market for our
products is as strong or stronger than in the United States and we
intend to continue to pursue vigorously opportunities abroad.
Marketing.
We have developed a multi-tiered marketing plan which allows us to
effectively market our products to each of the separate government and industry
segments we have identified as target markets both in the United States and
internationally. Our marketing strategy highlights its products strengths as
they apply to that particular industry.
The primary goals of our marketing strategy are to
o broaden the base of potential clients to which we can market our
products and
o validate the efficacy of our product line to those not familiar with
our product offerings.
To that end, we have entered into teaming, representative and joint venture
relationships with
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major corporations in each of the industries which comprise our target markets.
These entities generally enjoy a strong market presence in their respective
industries and we believe that our association with these entities affords us
and our products with added credibility.
We have entered teaming arrangements with The Aerospace Corporation,
Allied Signal Corporation, Analytical Systems Engineering Corp., Duke
Engineering & Services, Inc., Harris Corp./Electronic Systems Sector, Honeywell
Corp., KDN, Kopec, Lau Technologies, Engineered Professional Services, Science
Applications International Corporation, Secure Applications Inc., and TRW
Systems Integration Group. Each of our teaming partners has expertise in the
different industries which we have identified as markets for our products and
assist in introducing us to potential clients and purchasers or otherwise
include our products as subsystems of a larger project.
We develop and maintain relationships with large systems integrators such
as Lockheed Martin, TRW, Honeywell, Dyne McDermott, Mason & Hanger,
Westinghouse, Sandia, Bechtel, Securacom, NISE East, MET Technology and others,
and have built a reputation among these companies as a technology resource,
technology application and support organization with respect to the security
industry. Numerous orders are generated from our association with these entities
which are among the largest in the world in their respective fields, conduct
business with other large companies in the development and construction of huge
projects and have the ability to influence project purchases.
Members of our management team have many years of experience in the field
of security. Each member of the management team is assigned an area and makes
direct contact with, and sales proposals to, government and industrial
organizations in that area. In addition, we have engaged dealers/sales
representatives (many of which also serve as installers of ours products)
throughout the United States and around the world to actively market our
products to governments and private industry.
We attempt to develop and maintain relationships and contacts with
employees of each of the major government agencies encompassing our target
markets and have cultivated such relationships in the past. In addition, we rely
on our teaming and strategic partners for introductions to appropriate personnel
at these agencies.
A significant portion of our international business is generated through
our network of independent dealer/installers. We have entered into agreements
with dealers/installers which allow us to maintain a presence in thirty five
countries worldwide. Our agreements generally extend for a period of two years
and provide the dealer/installer with discounts from current product prices as
an incentive to market our products in their geographic area. We rely on our
dealer/installer base to represent us and our product line throughout the world
and to apprise us of potential projects which can incorporate our products. In
addition, we rely on our dealers/installers to introduce our company and our
products to key government and private enterprise personnel in their respective
geographic regions.
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We also attend the major trade shows for each industry and advertise in
relevant industry publications. If additional working capital becomes available,
we will seek to increase our advertising in industry specific publications to
create greater name recognition.
Growth Strategy.
In order to achieve a sustainable and realistic growth rate, we believe
that the company must devote additional resources to marketing and product
development. Specifically, we intend to:
o Add two persons to our marketing and sales team. We will seek to add two
persons to our marketing team who have extensive sales and marketing
experience in the areas of marketing to the United States government and
the petroleum and chemical markets, as we believe these areas represent
the greatest potential for growth in the near and medium term. We believe
that additional sales and marketing personnel will allow us to access
additional markets and develop the focused marketing efforts required to
develop business in our target markets.
o Commence the development of new products and software to support the new
and existing products. We intend to develop new products and software to
up-grade the current IPID system to a microprocessor system using a Window
NT platform. We also intend to up-grade the FOIDS product line by
incorporating new hardware and software based on the Windows NT platform.
We will use the Window NT software to integrate these systems as well as
our video motion detection systems to meet our customers' requirements. We
believe that the new products and software will ad sale volume by enabling
us to expand product application capabilities, which will result in the
expansion of marketing opportunities.
o Expand our base of dealers/installers worldwide. We believe that an
effective and cost efficient means of increasing sales is to expand our
base of dealers/installers worldwide. These entities serve as our local
agents to market products and provide customer support. Furthermore, these
entities are familiar with local laws and frequently have local contacts
in government and business at decision-making levels. We will seek to
expand our international base of dealers/installers by advertising in
trade publications, though our company web site and through international
customer referrals.
o Purchase laboratory and testing equipment. We intend to purchase certain
laboratory and testing equipment which will allow us to enhance and
maintain product quality standards and support our extended warranty
program.
We anticipate that we will require approximately $1,050,000 to implement
fully our business plan and growth strategy. As yet, we have not identified a
source of such funds but will seek to place equity or debt securities to obtain
the financing to permit us to implement this plan.
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Competition.
As the government and private industry become increasingly concerned with
security issues, the security and anti-terrorism industry has grown accordingly.
Competition is intense among a wide ranging group of product and service
providers, most of which are larger than us and possess significantly greater
assets, personnel, sales and financial resources, but most of which, we believe,
specialize in only one or two products or product lines or sales to a limited
number of the industries which comprise the market for security products. The
principal factors affecting competition in the industry include applied
technology, product performance, price and customer service. We believe that we
have a competitive advantage over other product and service providers in the
industry because:
o we offer a wide range of products to meet numerous security
requirements;
o our products are flexible (many of our products can be configured to
meet specific needs and can be integrated with each other and with
and into existing security systems);
o our products are reliable;
o our products are relatively easy and inexpensive to install and
maintain;
o our products do not have high incidence of nuiasance or false
alarms, and
o we have been successful in teaming with large multinational
companies which market and incorporate the Company's products in
their product offerings, thereby lending credibility to the efficacy
of the Company's products.
Employees.
We employ eighteen (18) individuals on a full-time basis including four
(4) design and engineering staff, seven (7) manufacturing and assembly
employees, two (2) marketing employees and five (5) administrative employees. A
number of the employees serve in multiple capacities, for example, Arthur
Barchenko serves as our President but also is an integral member of the
Company's marketing team.
ITEM 2. MANAGEMENT'S DICUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Fiscal 1999 Compared to 1998
Results of Operations. Revenues in the fiscal year ended June 30, 1999 were
$2,146,722 a decline of 4% as compared to $2,244,924 for fiscal year ended June
30, 1998.
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This revenue decrease was primarily due to a Department of Defense funds
shift to cover the costs of the Bosnia and Kosovo missions.
Cost of goods sold decreased from 60.3% for the period ending June 30,
1998 to 47.3% for the period ending June 30, 1999, and gross profit increased
from 39.7% to 52.7% for the same period.
Selling, general and administrative expenses decreased from $993, 554 for
the period ending June 30, 1998 to $953,271 for the period ending June 30, 1999.
Net income increased by $19,601 to $187,000 from $167,399. Earnings per share
remained at $0.05.
Liquidity and Capital Resources. We have financed our capital requirements
through personal loans from Arthur Barchenko and his family members and
extending terms of payment from suppliers. For the fiscal year ended June 30,
1999, our working capital deficiency was reduced by $172,645 from $232,724 to
$60,079, primarily due to the decrease in cost of goods sold and increase in
gross profit.
Current assets increased by $74,539 from June 30, 1998 to June 30, 1999
and current liabilities decreased by $98,106 during the same period.
We have no material commitments for purchases or capital equipment at this
time. We believe that our working capital and sales revenues will not be
sufficient to meet our capital requirements for the foreseeable future. A bank
line of credit in the amount of $250,000 will be required to address current
needs.
Comparison of nine months ended March 31, 2000 and March 31, 1999:
Revenues for the third quarter of 2000 reflected sales of $585,893 by the
Company's wholly-owned subsidiary, ECSI International, Inc. Sales for the nine
months ended March 31, 2000 were reduced from the prior year to $1,528,555. This
reduction reflects reduced sales of FOIDS 3000 integrated systems in 2000.
Projects involving this product line are expected to move forward in fiscal
2000.
General and administrative costs remained steady at approximately $225,000 per
quarter, due to steady employment at core staffing levels and no major changes
in fixed costs. Overall sales were not as strong as expected due to a delay in
funding of approved government projects.
As a result of the above, the income from operations for the first nine months
of fiscal 2000 was $35,016, a decrease from the similar period of 1999.
Net interest expense of $10,461 for the nine months of fiscal 2000 reflects a
period charge for the line of credit with Hudson United Bank.
Liquidity and Capital Resources
Cash for operations for the first nine months of 2000 were provided primarily by
loan proceeds from the revolving line of credit from Hudson United Bank.
To obtain additional working capital for its planning operations in 2001, the
Company is discussing a private placement with an investment group.
Item 3. DESCRIPTION OF PROPERTY.
Our corporate headquarters are located at 790 Bloomfield Avenue, Clifton,
New Jersey where we lease approximately 10,000 square feet of space divided
among administrative (3,000 sq. feet) and manufacturing (7,000 sq. feet) space.
We have leased this space through May 1,, 2008 at a rent of $3,917 per month. We
also lease approximately 2,500 square feet of manufacturing space at 260 Finney
Drive, Huntsville, Alabama. We have leased this space through June 30, 2002 at a
rent of $1,550 per month. We believe that this space is sufficient for our
current requirements and that additional space is available on commercially
reasonable terms, if necessary.
Item - 4 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 25, 2000,
regarding the beneficial ownership of Common Stock of (1) each person or group
known by us to beneficially
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own 5% or more of the outstanding shares of Common Stock, (2) each director and
officer and (3) all executive officers and directors as a group. Unless
otherwise noted, the persons named below have sole voting and investment power
with respect to the shares shown as beneficially owned by them.
<TABLE>
<CAPTION>
Amount of
Name of Beneficial Percent of Outstanding
Beneficial Owner 1 Ownership Shares of Class Owned
------------------ --------- ---------------------
<S> <C> <C>
Arthur Barchenko 2 893,538 25.00%
Mark R. Barchenko 3 19,250 .005%
Gene Rabois 50,000 .014%
Richard Stern -0-
Eldon Moberg -0-
Natalie Barchenko 4 924,749 26.94%
All officers
and directors as a group (5 persons) 993,999 27.8%
</TABLE>
1. The address for each of the persons named in the foregoing chart is c/o
the Company.
2. Includes 93,233 shares of common stock held in a trust for the benefit of
Andrew Barchenko of which Arthur Barchenko is the trustee and over which
shares he exercises voting control and dispository power.
3. Mark Barchenko is Arthur Barchenko's son.
4. Arthur Barchenko and Natalie Barchenko are married
Item - 5 DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Name Age Title
---- --- -----
Arthur Barchenko 66 President and Director
Mark R. Barchenko 43 Vice-President and Director
Richard Stern 50 Vice-President
Eldon Moberg 47 Vice-President
Gene Rabois 55 Director
All directors hold office until the next annual meeting of stockholders
and until their successors have been elected and qualified. The Board of
Directors elects the officers annually.
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Arthur Barchenko has been our President and a Director since December
1976. Mr. Barchencko also participates in the management of our subsidiaries.
From June 1952 to May 1972, he held various sales and marketing positions at
Lightolier, Inc., a company engaged in the manufacturing and marketing of
lighting fixtures. During his tenure at Lightolier, Inc., Mr. Barchenko served
as the vice president of sales and was responsible for directing a sales force
of approximately 150 persons and a support staff of approximately 50 persons.
Mr. Barchenko also served as a member of the board of directors and on the
executive committee Lightolier, Inc. Prior to organizing Electronic Control
Security Inc., Mr. Barchenko co-founded and directed the operations of Bajer
Industries, a lighting manufacturing company that was subsequently sold to the
Charter Group. He attended New York University and the New School for Social
Research.
Mark Barchenko joined us in 1993 and has served as our Vice-President of
Marketing and as a member of the Board of Director since June 1996. Mr.
Barchencko also participates in the management of our subsidiaries. Mr.
Barchenko has over 20 years experience with our company and is involved in
operations as well as marketing and business development. He has been
extensively involved in organizational development of our company as well as
with the structuring and implementation of policies and procedures in all areas
of operations. He has focused his marketing and business development efforts in
the areas of the U.S. Air Force, airports, maritime, railroads, pharmaceutical,
petrochemical facilities and site remediation. Mr. Barchenko developed a
customer base with major master systems integration firms in the government and
private market sectors. He also has been directly involved in design and
manufacturing of specialty lighting elements and systems and also with various
security sensor systems. 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 for upgrade of
FAR 107.14(a) and (b) as a member of the special access control security task
force for the Federal Aviation Administration. Through his affiliation with
these entities, Mr. Barchenko develops and maintains contacts with the staff of
many of our clients and target clients. Mr. Barchenko holds a U.S. patent
entitled "Jet Propulsion Engine Assembly for Aircraft". Mr. Barchenko earned a
B.A. Degree form the American University, School of Government and Public
Administration in Washington, D.C. in 1978. Mark Barchekno is the son of Arthur
Barchenko, our President.
Richard Stern has served as our Vice-President-Manufacturing since
December 1, 1997. He is responsible for the overall management of our
manufacturing department, which includes supervising all manufacturing,
maintenance and test personnel; manufacturing engineering, including the review
and evaluation of new and existing product design in a manufacturing
environment; oversight of maintenance of plant equipment and facilities;
mechanical package design of new product development; quality control, including
the development of test equipment and procedures; production scheduling;
shipping and receiving and inventory of all materials and finished products,
purchasing and expediting of materials and supplies, and oversight of
manufacturing personnel, labor reports. Prior to joining us, Mr. Stern spent 25
years in the data communication and temperature processing fields. He has held
managerial positions in manufacturing, engineering, quality control, service, as
well as being involved in the design and
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<PAGE>
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
Huntsville, Alabama. His duties include planning and coordinating manufacturing
schedules and resources and the provision of technical data for security system
design and project cost analysis. Prior to joining us, Mr. Moberg was the
Production Supervisor for Mason & Hanger National, Inc. a company engaged in the
manufacture and marketing of our FOIDS product line where he initially was a
production support technician and performed optical / electronic fabrication and
testing of a fiber optic based security system and components. Thereafter, as
Production Supervisor, he was responsible for planning and scheduling personnel,
materials and equipment to support product manufacture. Other duties included
procurement, product acceptance testing QA / QC, inventory control and MRP
system operation. Before entering private industry, Mr. Moberg served for twenty
years in the United States Army where he gained experience as senior radar
repair technician for several Army Air Defense systems, team leader for missile
system direct support maintenance and training developer for newly acquired Army
missile systems.
Gene Rabois has served as our Chief Financial Officer and as a member of
our Board of Directors since October 1, 1989. He has more that thirty years of
progressive experience in accounting and finance, Securities and Exchange
Commission financial reporting, installation and management of computer systems
and control and administrative of corporate financial affairs. Mr. Rabois
currently serves as the Controller for a printing. Mr. Rabois earned a Master of
Business Administration, University of Michigan in 1967 and a Bachelor of
Business Administration, University of Michigan in 1966.
Item - 6 EXECUTIVE COMPENSATION
The following table sets forth the information regarding compensation paid
(on an annualized basis) for the Named Executive Officer for the periods
indicated.
SUMMARY COMPENSATION TABLE
Name and Principle Position Year Salary
--------------------------- ----- ------
Arthur Barchenko-President 1999 $85, 000
No other officer, director or employee received a salary (including cash and
other compensation) during 1999 in excess of $100,000.
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Stock Options
Incentive Stock Option Plan. In 1986, we adopted an Incentive Stock Option
Plan which we renewed in 1996 for a second ten-year term. We have reserved
750,000 shares of common stock for issuance under the Stock Option Plan. Our
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.
As of the date hereof, there are 210,000 outstanding options under the
Incentive Stock Option Plan. These options are exercisable at prices ranging
from $.06 to $.30 and expire from between 2002 to 2010.
Nonstatutory Stock Option Plan. The Company also has adopted a
nonstatutory stock option plan and has reserved 250,000 shares of common stock
for issuance to Directors, employees and nonemployees. Options granted pursuant
to this plan will be non-transferable and expire, if not exercised within five
years from the date of the grant. Options will be granted in such amounts and at
such exercise prices as the Board of Directors may determine.
As of the date hereof, there are 50,000 outstanding options under the
Nonstatutory Stock Option Plan. These options are held by one person and are
exercisable at a price of $.30 per share. These options expire on January 1,
2010.
Item - 7 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since our inception, we have relied on loans from officers, directors,
shareholders and their affiliates to assist in the funding of our operations. At
December 31, 1999, we owed certain of our officers and directors (and their
respective affiliates) an aggregate of $661,203. Of said amount, we owe
$524,591.19 to Arthur Barchenko, our President and a member of the Board of
Directors, and affiliates of Mr. Barchenko. The loans from Mr. Barchenko and his
affiliates are evidenced by a series of agreements which provide for the
repayment of the loans with interest rates ranging from no interest to interest
computed at a rate of 10% per annum. The principal amount of these loans is
repayable over a six-year period (though the lenders have, in the past, extended
the repayment dates) as follows:
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<PAGE>
Year Principal Due
---- -------------
2000 $ 84,121
2001 $114,032
2002 $150,623
2003 $145,623
2004 $134,832
2005 $ 31,972
The foregoing amounts do not provide for the payment of interest payable on the
principal to be repaid in each such year.
Item - 8 DESCRIPTIONS OF SECURITIES
General
Our authorized capital consists of 15,000,000 shares of common stock, par
value $.001 per share, and 5,000,000 shares of Preferred Stock, par value $.01
per share. At February 22, 2000 there were 3,574,000 shares of common stock and
no shares of Preferred Stock outstanding. In addition, we have outstanding
1,300,000 Redeemable Common Stock Purchase Warrants. Set forth below is a
summary description of certain provisions relating to our capital stock
contained in our Certificate of Incorporation and By-Laws and under the Business
Corporation Act of the State of New Jersey. The summary is qualified in its
entirety by reference to our Certificate of Incorporation and By-Laws and the
New Jersey corporation laws.
Units
During February 1987, we sold and issued 1,300,000 Units in connection
with a public offering of our securities pursuant to the Securities Act of 1933.
Each Unit consists of one share of Common Stock and one Redeemable Common Stock
Purchase Warrant. The Common Stock and Warrant included in each Unit are
separately transferable.
Common Stock
Each share of Common Stock entitles the holder thereof to share ratably in
dividends and distributions, if any, on the Common Stock when, as and if
declared by the Board of Directors, from funds legally available therefor. There
are no preemptive, subscription or conversion rights. Upon liquidation,
dissolution or winding up of the affairs of the company and after payment of
creditors and satisfaction of any amounts outstanding to holders of the
Preferred Stock, the assets legally available for distribution will be divided
ratably on a share-for-share basis among the
26
<PAGE>
holders of the outstanding shares of Common Stock. The holders of the
outstanding shares of Common Stock are not entitled to cumulative voting and are
entitled to one vote per share with respect to all matters that are required by
law to be submitted to a vote of shareholders, including the election of
Directors. Accordingly, the holders of more than 50% of the outstanding shares
of Common Stock will have the ability to elect all of the Directors.
Preferred Stock
As yet, no shares of Preferred Stock have been designated by the Board of
Directors. The Board of Directors has the authority, without further action by
the holders of the Common Stock, to issue Preferred Stock in one or more series
and to fix as to any such series the dividend rate, redemption prices,
preferences on liquidation or dissolution, sinking fund terms, if any,
conversion rights, voting rights and any other preference or special rights and
qualifications. Shares of Preferred Stock issued by the Board of Directors could
be utilized, under certain circumstances, as a method of raising additional
capital, for possible acquisitions or for any purpose. The Board of Directors
has not authorized the issuance of any series of Preferred Stock and there are
no agreements, understandings or plans for the issuance of any Preferred Stock.
Warrants
As a part of the Units issued in our public offering, we issued 1,300,000
warrants to purchase an aggregate of up to 1,300,000 shares of Common Stock and
have reserved a like number of shares of Common Stock for issuance upon exercise
of such Warrants. Each Warrant entitles the holder to purchase one share of
Common Stock at a price of $2.50 per share until February 26, 2001. The exercise
prices are subject to adjustment under certain circumstances. The Warrants are
subject to redemption on not less than thirty days notice, at a per Warrant
price of $.10, provided, the closing price of the Common Stock exceeds $3.50 per
share (subject to adjustments for stock dividends) stock splits and the like,
for thirty consecutive business days. The closing price is defined as the last
reported sales price of the Common Stock on the Over the Counter Bulletin Board
or, in the case on any national securities exchange, or if the Common Stock is
not listed or admitted to trading on any such exchange, a representative closing
bid price in the over-the-counter market. The Warrants are exercisable only if
is a currently effective registration statement on file with the Securities and
Exchange Commission relating to the shares of Common Stock underlying the
Warrants, and only if such shares are qualified for sale under applicable state
securities or "blue sky" laws of the jurisdictions in which the various Warrant
holders reside. As of the date hereof, none of these warrants have been
exercised.
Notwithstanding the foregoing, Registrant may at its option reduce the
exercise price and extend the termination date of the Warrants.
Shares Eligible for Future Sale
Currently, only our Units are traded publicly on the Over-the-Counter
electronic bulletin
27
<PAGE>
board.
As of the date of this Form 10-SB, we have a total of 3,574,000 shares of
common stock outstanding. Of these outstanding shares, 1,374,000 shares are
freely tradable, without restriction by or further registration under the
Securities Act of 1933 by persons other than our "affiliates," as defined in
Rule 144 under the Securities Act.
All the other outstanding shares of common stock (2,200,000 shares) are
"restricted securities" for purposes of the Securities Act and may not be sold
unless they are registered under the Securities Act or unless an exemption from
registration, such as that provided by Rule 144, is available.
In addition, all of the 1,300,000 Warrants outstanding are freely tradable
without further restriction by or registration under the Securities Act.
We can make no prediction as to the effect, if any, that market sales of
shares of Common Stock or the availability of shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of significant
numbers of shares of Common Stock in the public market could adversely affect
the market price of the Common Stock and could impair our future ability to
raise capital through an offering of its equity securities.
Transfer Agent
Continental Stock Transfer and Trust Company, located at 2 Broadway New
York, NY 10004, is the transfer agent and registrar for our common stock and the
warrant agent for our warrants.
PART II
Item 1. MARKET PRICE AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Price
On March 5, 2000 the closing bid price per Unit was $1.31. There is no
public trading market for the registrants Common Stock or Warrants.
The following table sets forth the quarterly high and low closing bid and
closing ask prices (in U.S. dollars) for the Units for the period June 30, 1997
through December 31, 1999:
28
<PAGE>
Closing Bid
High Low
--------------------------------
1998
JAN. 2
THRU .01 .01
MAR. 31
APR. 1
THRU .375 .01
JUNE 30
JULY 1
THRU .375 .13
SEPT. 30
OCT. 1
THRU .25 .05
DEC. 31
1999
JAN. 4
THRU .25 .0625
MAR. 31
APR. 1
THRU .25 .0625
JUNE 30
JULY 1
THRU .50 .125
SEPT. 30
OCT. 1
THRU .25 .0625
DEC. 31
Source: National Quotation Bureau, LLC
The foregoing data represents prices between dealers and does not include
retail mark-ups, mark-downs or commissions, nor does such data represent actual
transactions or adjustments for stock-splits or dividends.
29
<PAGE>
Dividends
To date, Registrant has not declared or paid dividends on its Common
Stock. Registrant presently plans to retain earnings, if any, for use in its
business.
Trading Market
The Units trade on the EBB-OTC under the symbol "EKCSU".
Principal Market-Makers
On December 31, 1999, there were four active market makers of the Units.
The principal market makers of the Units during 1999 have been Grady and Hatch,
Sharpe Capital Inc., Fordham Financial MGT, Inc., Hill Thompson Magid and Co.
Inc.
Number of Shareholders of Record
As of December 3, 1999, there were approximately 484 shareholders of
record of the Units, approximately 500 shareholders of record of the Common
Stock and approximately 484 holders of record of the Warrants.
Item 2. LEGAL PROCEEDINGS
We are not party to nor are we aware of any litigation involving the
company.
Item 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
Not applicable.
Item 4. RECENT SALES OF UNREGISTERED SECURITIES.
During October 1999, we issued, pursuant to the exemption afforded by
Section 4(2) of the Securities Act of 1933, 100,000 shares of common stock to a
financial public relations firm in partial consideration for services to be
rendered in our behalf. The shares were issued pursuant to an agreement between
us and the public relations firm and were valued at $.0375, an amount equal to
60% of the closing bid price of the Units on the date of issuance.
Other than the foregoing securities and options issued to officers and
employees, we have not issued any securities during the last three years.
30
<PAGE>
Item 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Certificate of Incorporation provides that none of our directors or
officers shall be personally liable to the company or any stockholder to the
full extent permitted under the corporate laws of the State of New Jersey. Under
the Business Corporation Act of the State of New Jersey, no director or officer
shall be liable for damages for breach of any duty owed to the company or its
shareholders, except that such laws do not relieve a director or officer from
liability for any breach of a duty based upon any act or omission (a) in breach
of such person's duty of loyalty to the corporation or its shareholders, (b) not
in good faith or involving a knowing violation of law or (c) resulting in the
receipt by such person of an improper personal benefit.
Additionally, our By-Laws provide for the indemnification of any of our
directors, officers and employees by reason of their serving in such capacity
against expenses and liabilities in connection with any proceeding involving
him/her by reason of his/her being or having been a corporate agent, other than
a proceeding by or in the right of the corporation, if (a) such person acted in
good faith and in a manner he/she reasonably believed to be or not opposed to
the best interest of the corporation, or (b) in a criminal proceeding, if such
person had no reasonable cause to believe that his/her conduct was unlawful. In
addition, the company may indemnify a corporate agent against expenses and
liabilities in connection with any proceeding by or in right of the corporation
if he acted in good faith and in a manner he/she reasonably believed to be in or
not opposed to the best interest of the corporation. Such indemnification is not
deemed to be exclusive of any other rights to which those indemnified may be
entitled, under any by-law, agreement, vote of stockholders or otherwise. The
foregoing provisions of our Certificate of Incorporation may reduce the
likelihood of derivative litigation against our directors and officers for
breach of their fiduciary duties, even though such action, if successful, might
otherwise benefit us and our stockholders.
31
<PAGE>
PART F/S
32
<PAGE>
Contents
--------------------------------------------------------------------------------
Independent Auditors' Report F-1
Balance Sheets as of June 30, 1999 and 1998 F-2
Statements of Income and Deficit for the years ended
June 30, 1999 and 1998 F-3
Statements of Cash Flows for the years ended
June 30, 1999 and 1998 F-4
Notes to Financial Statements F-5 - F-10
Unaudited Interim Balance Sheets as of March
31, 2000 and 1999 F-11 - F-12
Unaudited Interim Statements of Operations for
the nine months ended March 31, 2000 and 1999 F-13
Unaudited Interim Statements of Cash Flows for
the nine months ended March 31, 2000 and 1999 F-14 - F-15
Notes to Financial Statements F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Electronic Control Security Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Electronic
Control Security, Inc. and Subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of income, deficit, and cash flow for the years
then ended. These financial statements are the responsibility of the Company's
managment. Our responsibility is to express an Opinion on these financial
statements based on our audit.
Except as discussed in the following paragraph, we conducted our audits in
accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
We did not observe the physical inventory (stated at $350,031) taken as of June
30, 1997, since that date was prior to our initial engagement as auditors of the
Company, and the Company's records do not permit adequate retroactive tests of
inventory quantities.
In our opinion, except for the effects of such adjustments, if any, as might
have been determined to be necessary in the consolidated statements of income,
deficit, and cash flows for the year ended June 30, 1998 had we been able to
observe the physical inventory taken as of June 30, 1997, the financial
statements referred to in the first paragraph present fairly, in all material
respects, the financial position of Electronic Control Security, Inc. and its
subsidiaries as of June 30, 1999 and 1998, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
DEMETRIUS & COMPANY, L.L.C.
Wayne, New Jersey
October 22, 1999
F-1
<PAGE>
ELECTRONIC CONTROL SECURITY INC.
BALANCE SHEETS
JUNE 30, 1999
ASSETS
1999 1998
----------- -----------
Current assets:
Cash $ 3,032
Accounts and contracts receivable, net of allowance
for doubtful accounts of $-0- and $43,402 65,890 $ 285,584
Inventories 672,302 399,417
Deferred income taxes 27,000 60,000
Other current assets 67,310 15,994
----------- -----------
Total Current Assets 835,534 760,995
Property, equipment and purchased software at cost
net of accumulated depreciation of
$196,200 and $151,180 197,869 109,440
Intangible assets at cost, net of
accumulated amortization of $12,606 and $8,267 47,451 49,731
Deferred charges at cost, net of
accumulated amortization of $40,512 and $20,256 122,256 40,511
Due from affiliate 57,726
Deferred income taxes 349,000 290,000
Other Assets 25,086 32,226
----------- -----------
$ 1,577,196 $ 1,340,629
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities
Bank overdraft $ 33,043 $ 94,079
Accounts payable and accrued expenses 646,843 641,508
Current maturities of long-term debt 24,000
Obligation under capital leases 17,558 6,510
Payroll taxes payable 74,602 81,767
Income taxes payable 15,446 32,646
Due to affiliate 10,133
Due to officers and shareholders 73,988 137,209
----------- -----------
Total Current Liabilities 895,613 993,719
Obligation under capital lease 31,902 13,710
Long term debt 38,000
Due to affiliate 192,518 202,651
Due to officers and shareholders 362,724 308,380
Other liabilities 151,795 104,525
----------- -----------
Total Liabilities 1,672,552 1,622,985
----------- -----------
Shareholders' deficiency:
Preferred stock, $.01 par value:
Authorized and none issued - 5,000,000 shares
Common stock, $.001 par value:
Authorized - 15,000,000 shares
Issued and outstanding - 3,474,000 shares 3,474 3,474
Paid-in capital 1,436,498 1,436,498
Accumulated deficit (1,535,328) (1,722,328)
----------- -----------
Total Shareholders' Deficiency (95,356) (282,356)
----------- -----------
$ 1,577,196 $ 1,340,629
=========== ===========
The accompanying notes are an integral part of the statements.
F-2
<PAGE>
ELECTRONIC CONTROL SECURITY INC.
STATEMENTS OF INCOME AND DEFICIT
YEARS ENDED JUNE 30, 1999 AND 1998
1999 1998
----------- -----------
Revenues $ 2,146,722 $ 2,244,924
Cost of sales 1,015,758 1,353,458
----------- -----------
Gross Profit 1,130,964 891,466
----------- -----------
Operating expenses and other income:
Selling, general and administrative expense 953,271 993,554
Interest expense 21,069 25,024
Other income (5,176) (307,246)
----------- -----------
Total Operating Expenses and Other Income 969,164 711,332
----------- -----------
Income before Provision for Income Taxes 161,800 180,134
Provision (credit) for income taxes (25,200) 12,735
----------- -----------
Net Income 187,000 167,399
Deficit at beginning (1,722,328) (1,889,727)
----------- -----------
Deficit at End $(1,535,328) $ 1,722,328)
=========== ===========
Basic and diluted earnings per common share $ 0.05 $ 0.05
=========== ===========
Number of weighted average
common shares outstanding 3,474,000 3,474,000
=========== ===========
The accompanying notes are an integral part of the statements.
F-3
<PAGE>
ELECTRONIC CONTROL SECURITY INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers 2,366,416 $ 2,691,421
Cash paid to vendors and employees (2,191,399) (2,659,711)
Interest paid (21,069) (25,024)
income taxes paid (18,000) (89)
Other income 5,176
----------- -----------
Net Cash Provided by Operating Activities 141,124 6,597
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (41,096) (14,567)
Software development (57,843) (7,998)
----------- -----------
Net Cash Used in Investing Activities (98,939) (22,565)
----------- -----------
Cash flows from financing activities:
Proceeds (payments) of loans 47,270 (64,751)
Increase (reduction) of bank overdraft (61,036) 92,791
Payments on notes payable (10,000)
Payments on lease obligations (6,510)
Loan payments to officers and shareholders - net (8,877) (12,072)
----------- -----------
Net Cash Provided by (Used in) Financing Activities (39,153) 15,968
----------- -----------
Net Increase (Decrease) in Cash 3,032
Cash at beginning
----------- -----------
Bank Overdraft, at End $ 3,032
=========== ===========
<CAPTION>
Supplemental schedule of non cash investing and financing:
1999 1998
----------- -----------
<S> <C> <C>
Equipment acquired under capitalized lease $ 35,750 $ 10,719
Promissory notes issued in connection with settlement
relating to investment in partnership 72,000
</TABLE>
The accompanying notes are an integral part of the statements.
F-4
<PAGE>
ELECTRONIC CONTROL SECURITY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
1. NATURE OF OPERATIONS
Electronic Control Security, Inc. (The "Company") is engaged in the
design, manufacture and marketing of electronic security and lighting
systems for high threat environments. The Company currently offers five
separate security and lighting sub-systems: Infrared Perimater Intrusion
Detection (IPID(TM)), Fiber Optic Intelligence Detection System
(FOIDS(TM)), Automatic Assessment Signal Processor (AASP); Data Comm
System/Access Control (DSA(TM)); and an Architectural Lighting Product
System. The Company also performs consulting services which consists
principally of designing security systems for correctional facilities, and
offers design services on both in-house projects and for outside clients.
The Company has customers throughout the world.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements include the accounts of Electronic Control
Security, Inc. and its subsidiaries, SEM Consultants III, Inc. ECSI
International, Inc., ECSI-FOIDS, Inc. and ECSI-DSA, Inc., collectively
"the Company". The statements also include one hundred percent of the
accounts of ECSI-EAG International, a joint venture until March, 1999. The
Company owned a fifty-one percent interest in this joint venture. The
remaining Forty-nine percent of ECSI-EAG International was owned by W.T.
Sports Ltd. (See Note 6) and was reflected as a minority interest. All
significant intercompany accounts and transactions have been eliminated.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Ending inventory is primarily composed of raw materials and
work-in-process.
Property and Equipment and Depreciation
Depreciation is provided for by straight-line and accelerated methods over
the estimated useful lives of the assets, which vary from three to ten
years. Cost of repairs and maintenance are charged to operations in the
period incurred.
Earnings Per Share
Earnings per share for the years ended June 30, 1999 and 1998 are based
upon the weighted average of common outstanding. The exercise of stock
options and warrants was not assumed as their effect would be
anti-dilutive.
Use of Estimates
The preparation of financial statements in conformity with 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 reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-5
<PAGE>
ELECTRONIC CONTROL SECURITY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Software Purchased
Software purchased by the Company and utilized in providing contract
services is capitalized at cost and amortized on a straight-line basis
over three to five years.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes,"
which requires the use of the liability method of accounting for income
taxes. The liability method measures deferred income taxes by applying
enacted statutory rates in effect at the balance sheet date to the
differences between the tax bases of the assets and liabilities and their
reported amounts in the financial statements. The resulting deferred tax
asset or liability is adjusted to reflect changes in tax laws as they
occur.
Deferred income taxes reflect temporary differences in reporting assets
and liabilities for income tax and financial accounting purposes. These
temporary differences arise primarily from net operating loss
carryforwards.
Fair Value of Financial Instruments
The Company has adopted Statement or Financial Accounting Standards No.
107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments"
which requires entities to disclose the fair value of financial
instruments for which it is practicable to estimate fair value.
The Company's financial instruments include cash, accounts receivable,
accounts payable, accrued expenses, other current liabilities and
long-term debt. The carrying values of cash, accounts receivable, accounts
payable, accrued expenses and other current liabilities are representative
of their fair value due to the short-term maturity of these instruments.
The carrying value of the Company's long-term debt is considered to
approximate its fair value, based on current market rates and conditions.
Intangible Assets
The cost of licenses, trademarks and software development acquired are
being amortized on the straight-line method over their useful lifes,
ranging from 5 to 15 years. Amortization expense charged to operations was
$4,339 and $4,934 for the years ended June 30, 1999 and 1998.
Start-up Costs
Deferred charges consisting of advertising, marketing and promotional
programs for the FOIDS (TM) system and the United States Military and
National Security Agency are capitalized and amortized over one to three
years. Amortization expense charged to operations was $20,255 for the
years ended June 30, 1999 and 1998.
Advertising Costs
Advertising costs are reported in selling, general and administrative
expenses, and include advertising, marketing and promotional programs.
These costs not deferred at year-end are charged to expenses in the year
in which incurred. Advertising costs for the year ended June 30, 1999 and
1998 were approximately $40,000 and $22,000, respectively.
NET INCOME PER SHARE
Basic earnings per share has been computed by dividing net income (the
numerator), by the weighted-average number of common shares (the
denominator) for the period. Such shares amounted to 3,474,000 in 1999 and
1998.
SEGMENT INFORMATION
In June 1997, Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 131, "Disclosure About Segments of
an Enterprise and Related Information" ("Statement 131"), effective for
financial statements for fiscal years beginning after December 15, 1997.
Statement 131 establishes standards for the reporting by public business
enterprises of financial and descriptive information about reportable
operating segments in annual financial statements and interim financial
reports issued by shareholders. The Company primarily provides
installation services for companies located in high threat environments in
need of security systems that are located throughout the world, and
considers all of its operations as one segment because expenses support
multiple products and services. Management uses one measurement of
profitability and does not disaggregate its business for internal
reporting.
Sales to foreign governments and agencies were approximately 60% and 40%
of revenues for the years ended June 30, 1999 and 1998, respectively.
F-6
<PAGE>
ELECTRONIC CONTROL SECURITY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications
Certain reclassifications of prior years' amounts have been made to
conform with the current year presentation.
3. SHAREHOLDERS' DEFICIENCY
Common Stock & Warrant
The Company has a total of 1,300,000 units outstanding consisting of one
share of common stock and one redeemable common stock purchase warrant.
The common stock and warrant included in each unit became separately
transferable on February 26, 1988. Each warrant entitles the holder to
purchase one share of common stock at a price of $2.50 per share until
February 26, 2001. The exercise price is subject to adjustment under
certain circumstances.
The warrants are subject to redemption by the Company, at any time after
they become separately transferable from the common stock, on not less
than thirty days notice, at $.10 per warrant, provided the closing price
of the Company's common stock shall have exceeded $3.50 per share for any
thirty consecutive business days prior to such calls from redemption.
Stock Option Plans
Pursuant to Statement of Financial Accounting Standard No. 123 (SFAS 123)
"Accounting for Stock-Based Compensation" the Company has elected to
account for its employee stock option plans under APB Opinion No. 25
"Accounting for Stock Issued To Employees". Accordingly, no compensation
cost has been recognized for these plans.
The Company's stock has not been actively traded in recent years, and
there are no market quotes available. Accordingly, it is impractical to
compute the effect on earnings, if any.
a. Incentive Stock Option Plan
During September 1986, the Company adopted an incentive stock option
plan for which 750,000 shares of common stock have been reserved.
Under the plan, incentive stock options were granted to certain
employees of the Company. These options expire ten years from the
date of grant.
The following table summarizes option plan activity:
Option
Number Price
of Shares Ranges
Outstanding at June 30, 1997 190,000 $.05 - $.125
Issued 40,000 $.10
-------
Outstanding at June 30, 1998 230,000 $.05 - $.125
Issued 30,000 $.125 - $ .25
-------
Outstanding at June 30, 1999 260,000 $.05 - $ .25
=======
b. Nonstatutory Stock Option Plan
As of June 30, 1999, the Company has a nonstatutory stock option
plan with 250,000 shares of common stock reserved as follows:
Option
Number Price
of Shares Ranges
Outstanding at June 30, 1998 0
Issued 10,000 $.25 - $.30
------
Outstanding at June 30, 1999 10,000
------
F-7
<PAGE>
ELECTRONIC CONTROL SECURITY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
4. INVENTORIES
Inventories at June 30, 1999 and 1998 consist of the following:
1999 1998
-------- --------
Raw materials $172,746 $237,013
Work-in-process 169,861 57,904
Finished goods 329,695 104,500
-------- --------
$672,302 $399,417
======== ========
5. PROPERTY EQUIPMENT AND PURCHASED SOFTWARE
Property, equipment and purchased software also consists of the following:
1999 1998
-------- --------
Furniture and fixtures $ 20,844 $ 18,185
Machinery and equipment 221,420 151,872
Improvements 9,296 1,962
Software 142,509 88,601
-------- --------
394,069 260,620
Less Accumulated
Depreciation 196,200 151,180
-------- --------
$197,869 $109,440
======== ========
Equipment under capital leases included in property, equipment and
purchased software are as follows:
Machinery and equipment $ 62,832 $ 27,082
Less Accumulated
Depreciation 13,734 6,530
-------- --------
$ 49,098 $ 20,552
======== ========
6. NOTE PAYABLE
On May 17, 1999 the Company issued a promissory note to W.T. Sports Ltd.
the former forty-nine percent owner of ECSI-EAG Interational, for $72,000.
The note payable was issued to release virtually all assets and
liabilities of the joint venture and W.T. Sports, Ltd. and its affiliates.
The note is payable in thirty-six monthly payments of $2,000 beginning
March 26, 1999. The note is non-interest bearing, and collateralized by
the IPID(TM) trademark.
7. RELATED PARTY TRANSACTIONS
The Company has loans payable to officers, shareholders and an affiliated
company which is owned by two shareholders. The loans have various payment
schedules and interest rates. Some loans are non-interest bearing and
other loans range from 8% to 12%.
Maturities of related party debt are as follows:
Years ending June 30:
2000 $ 84,121
2001 114,032
2002 150,623
2003 145,623
2004 134,832
2005 10,132
--------
$639,363
========
8. OBLIGATION UNDER CAPITAL LEASES
Future minimum lease payments for assets under capital leases at June 30,
1999
Years ending June 30:
2000 $18,880
2001 18,666
2002 9,662
2003 9,662
2004 9,662
-------
66,532
Amount representing interest 17,072
-------
Present Value of Net Minimum
Lease Payments $49,460
=======
F-8
<PAGE>
ELECTRONIC CONTROL SECURITY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
9. COMMITMENTS AND CONTINGENCIES
Lease Agreements
Future minimum annual rental payments required under noncancellable
operating leases for years after June 30, 1999 are as follows:
Year ending
-----------
2000 $44,000
2001 45,000
2002 46,000
2003 47,000
2004 48,000
Thereafter 193,000
Rent expense under all operating leases was $67,363 and $64,847 for the
years ended June 30, 1999 and 1998.
Legal Actions
The Company is currently not involved in any legal actions.
License Agreements
In March 1997, the Company acquired intellecutal property, equipment and
tooling form Mason & Hanger National, Inc. and a patent license from
Lucent Technologies, Inc. for the Fiber Optic Intelligence Detection
Systems (FOIDS(TM)). In conjunction with these acquisitions, the Company
has two license agreements whereby royalties totaling 9.4% will be paid on
revenues from the Fiber Optic Intelligence Detection System (FOIDS(TM)).
Minimum payments for these agreements are $35,000 annually through March
5, 2007. If minimum payments are not made, the agreements may be
terminated. License and royalty expenses were $39,473 and $42,845 for the
years ended June 30, 1999 and 1998.
10. INCOME TAXES
The provision for taxes for the year ended June 30, 1999 and 1998 includes
the following components.
1999 1998
-------- --------
Federal
Current $ 54,000 $ 36,846
Deferred (20,000) (15,000)
Benefits of
operating loss
carryforwards (54,000) (5,000)
State
Current 39,800 19,889
Deferred (6,000) (5,000)
Benefits of
operating loss
carryforwards (39,000) (19,000)
-------- --------
($25,200) $ 12,735
======== ========
The components of the deferred tax asset as of June 30, 1999 and 1998 are
as follows:
1999
Current Noncurrent
-------- --------
Total deferred tax assets $27,000 $582,000
Total valuation allowance (233,000)
-------- --------
Net Deferred Tax Asset $27,000 $349,000
======== ========
1998
Current Noncurrent
-------- --------
Total deferred tax assets $60,000 $677,000
Total valuation allowance (387,000)
-------- --------
$60,000 $290,000
======== ========
The deferred tax asset valuation allowance at June 30, 1997 was $259,000.
F-9
<PAGE>
ELECTRONIC CONTROL SECURITY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
10. INCOME TAXES (Continued)
The reconciliation of estimated income taxes attributed to operations at
the United States statutory tax rate to reported provision for income
taxes is as follows:
1999 1998
-------- --------
Provision for taxes
computed using alternative
minimum tax rate in 1998 $54,000 $ 36,846
State taxes, net of
Federal benefit 39,800 19,889
Utilization of net
operating loss
carryforwards:
Federal (54,000) (5,000)
State (39,000) (19,000)
Recognition of deferred
income tax asset:
Federal (20,000) (15,000)
State (6,000) (5,000)
-------- --------
Provision for
Income Taxes ($25,200) $ 12,735
======== ========
At June 30, 1999 the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $1,422,000 and
$1,593,000, respectively, expiring through 2011.
11. CASH FLOWS
Reconciliation of Net Income to Net Cash Provided by Operating Activities:
1999 1998
Net income $ 187,000 $ 167,399
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Deferred income taxes (26,000) (20,000)
Depreciation and
amortization 69,424 61,389
Other income (307,246)
(Increase) decrease:
Accounts receivable 219,694 446,497
Inventories (272,885) (49,386)
Other current assets (51,316) (15,994)
Other assets 34,237 (86,444)
Increae (decrease):
Accounts payable and
accrued expenses 5,335 (122,025)
Payroll taxes payable (7,165) (87,985)
Income taxes payable (17,200) 32,646
Other current
liabilities (12,254)
--------- ---------
Net Cash Provided by
Operating Activities $ 141,124 $ 6,597
========= =========
12. CONCENTRATIONS AND ECONOMIC DEPENDENCY
The Company had two customers that accounted for 34% of net revenues for
the year ended June 30, 1999. One customer accounted for 43% of accounts
receivable at June 30, 1999.
The Company had two customers that accounted for 26% of net revenues for
the year ended June 30, 1998 and 58% of accounts receivable at June 30,
1998.
F-10
<PAGE>
ELECTRONIC CONTROL SECURITY INC. AND SUBSIDIARY
UNAUDITED INTERIM CONSOLIDATED BALANCE SHEETS
ASSETS
March 31 March 31
2000 1999
---------- ----------
Current assets:
Cash and cash equivalents $ 0 $ 0
Accounts receivable 296,063 81,218
Other receivables 21,453 4,277
Inventories 622,476 675,449
Prepaid expenses 0 0
Due from officer 0 0
Other current assets 27,000 27,000
---------- ----------
Total current assets 966,992 787,944
Fixed assets 186,201 191,878
Patents 0 0
Other assets, net 655,574 545,607
---------- ----------
Total assets $1,808,767 $1,525,429
========== ==========
See accompanying notes to unaudited financial statements.
F-11
<PAGE>
ELECTRONIC CONTROL SECURITY INC. AND SUBSIDIARY
UNAUDITED INTERIM CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
March 31 March 31
2000 1999
----------- -----------
Current liabilities:
Current portion of long-term debt $ 369,515 $ 41,558
Accounts payable 549,108 506,120
Accrued liabilities 39,378 73,919
Other current liabilities 83,869 194,126
Deferred acquisition obligation - current 0 0
----------- -----------
Total current liabilities 1,041,870 815,723
Long-term liabilities:
Deferred acquisition obligation 0 0
Long-term debt 827,237 828,192
Note payable 0 0
----------- -----------
Total liabilities 1,869,107 1,643,915
----------- -----------
Commitments and deficiencies:
Stockholders' (deficiency):
Common stock, par value $.001
Authorized: 5,000,000 shares
Issued and outstanding 3,574,000 shares 3,474 3,474
Paid-in capital 1,436,498 1,436,498
Accumulated deficit (1,500,312) (1,558,458)
----------- -----------
Total stockholders' (deficiency) (60,340) (118,486)
----------- -----------
Total liabilities and stockholders'
(deficiency) $ 1,808,767 $ 1,525,429
=========== ===========
See accompanying notes to unaudited financial statements.
F-12
<PAGE>
ELECTRONIC CONTROL SECURITY INC. AND SUBSIDIARY
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months ended
March 31
---------------------------
2000 1999
----------- -----------
Revenues 1,528,555 1,697,069
----------- -----------
Costs and expenses
Cost of revenue 734,201 595,742
Selling, general and administrative
expenses 675,766 761,339
Engineering costs 79,679 168,370
----------- -----------
Total costs and expenses 1,489,646 1,525,451
----------- -----------
Income from operations 38,909 171,618
----------- -----------
Other income (expense):
Interest income 0 0
Interest expense (10,461) (18,722)
Other - net 6,568 10,974
Gain on disposal of fixed assets 0 0
----------- -----------
Total other (expense) income (3,893) (7,748)
----------- -----------
Net income $ 35,016 $ 163,870
=========== ===========
Basic and diluted earnings per common share:
Basic earnings per common share $ .01 $ .05
=========== ===========
Weighted average common shares 3,574,000 3,474,000
=========== ===========
Diluted earnings per common share $ .01 $ .05
=========== ===========
Weighted average diluted common shares 3,574,000 3,474,000
=========== ===========
See accompanying notes to unaudited financial statements.
F-13
<PAGE>
ELECTRONIC CONTROL SECURITY INC. AND SUBSIDIARY
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
March 31 March 31
2000 1999
--------- ---------
Cash flows from investing activities:
Net income $ 35,016 $ 163,870
Adjustments to reconcile net cash used
in operating activities:
Depreciation 31,887 30,957
Amortization 26,060 19,543
Interest, net 0 0
Gain/loss on sale of long-term
investment 0 0
Gain on disposal of fixed assets 0 0
Changes in assets and liabilities:
Accounts receivable (230,173) 204,366
Other receivables (21,453) (4,277)
Inventory 49,826 (276,032)
Prepaid expenses 0 0
Other assets (70,531) (103,688)
Accounts payable (45,293) (61,469)
Accrued liabilities (61,553) 0
Other liabilities 9,267 (14,366)
--------- ---------
Net cash (used in) operating
activities (276,947) (41,096)
--------- ---------
See accompanying notes to unaudited financial statements.
F-14
<PAGE>
ELECTRONIC CONTROL SECURITY INC. AND SUBSIDIARY
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
March 31 March 31
2000 1999
--------- ---------
Cash flows from investing activities:
Purchase of long-term investment $ 0 $ 0
Sale of securities available for sale 0 0
Purchase of fixed assets 20,219 113,395
Proceeds from sale of fixed assets 0 0
--------- ---------
Net cash (used for) investing activities (20,219) (113,395)
--------- ---------
Cash flows from financing activities:
Proceeds of long-term debt, net 189,859 100,785
Loan payable 0 0
Officer's loan 104,275 53,706
Payment of deferred debt obligation 0 0
--------- ---------
Net cash provided by financing
activities 294,134 154,491
--------- ---------
Net (decrease) increase in cash (3,032) 0
Cash and cash equivalents at beginning of
period 3,032 0
--------- ---------
Cash and cash equivalents at end of period $ 0 $ 0
========= =========
Supplementary disclosure of cash flow information:
Interest paid during the period 10,461 18,722
Income taxes paid during the period 800 800
See accompanying notes to unaudited financial statements.
F-15
<PAGE>
ELECTRONIC CONTROL SECURITY INC.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
The accompanying financial statements for Electronic Control Security Inc. (the
"Company") have been prepared by the Company, without audit, in accordance with
generally accepted accounting principles for interim financial information. In
the opinion of management, the information contained herein reflects all of the
Company adjustments (consisting only of normal recurring adjustments) necessary
to present fairly the results for the interim periods presented. The unaudited
financial statements of the Company should be read in conjunction with the
financial statements for the year ended June 30, 1999.
The results of operations for the interim periods shown in this report are not
necessarily indicative of results to be expected for the full year.
F-16
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Fiscal 1999 Compared to 1998
Results of Operations.
Revenues in the fiscal year ended June 30, 1999 were $2,146,722 a decline of 4%
as compared to $2,244,924 for fiscal year ended June 30, 1998.
This revenue decrease was primarily due to a Department of Defense funds shift
to cover the costs of the Bosnia and Kosovo missions.
Cost of goods sold decreased from 60.3% for the period ending June 30, 1998 to
47.3% for the period ending June 30, 1999, and gross profit increased from 39.7%
to 52.7% for the same period.
Selling, general and administrative expenses decreased from $993,554 for the
period ending June 30, 1998 to $953,554 for the period ending June 30, 1999. Net
income increased by $19,601 to $187,000 from $167,399. Earnings per share
remained at $0.05.
Liquidity and Capital Resources
The Company has financed its capital requirements through personal loans from
Arthur Barchenko family members and extending terms of payment from suppliers.
For the fiscal year ended June 30, 1999, working capital deficiency was reduced
by $172,645 from $232,724 to $60,079, primarily due to the decrease in cost of
goods sold and increase in gross profit.
Current assets increased by $74,539 from June 30, 1998 to June 30, 1999 and
current liabilities decreased by $98,106 during the same period.
The Company has no material commitments for purchases or capital equipment at
this time. Management believes that the Company's working capital and sales
revenues will not be sufficient to meet its capital requirements for the
foreseeable future. A bank line of credit in the amount of $250,000 will be
required to address current needs.
The Company Listing
The Company is not listed in the Electronic Bulletin Board.
<PAGE>
Corporate Data
Board of Directors
Arthur Barchenko
President and Chief
Executive Officer
Alexander Kloubek
Vice President, Secretary and
System Analyst
Mark R. Barchenko
Vice President,
Business Development
Gene Rabois, C.P.A.
Advisory Board
Anatole Forostenko
Account Manager, Smith Barney
Ross Kelly
President, Security Assistance and
Special Operations
John Kim
President, Unidex Group, Inc.
Corporate Auditors
Demetrius & Company, L.L.C.
Wayne Interchange Plaza I
145 Route 46 West
Wayne, New Jersey 07470-6830
Officers
Arthur Barchenko
President and Chief
Executive Officer
Alexander Kloubek
Vice President, Secretary and
System Analyst
Mark R. Barchenko
Vice President,
Business Development
Richard Stern
Vice President,
Manufacturing, ECSI
Eldon Moberg,
Vice President,
Manufacturing, FOIDS
Transfer Agent and Registrar
Continental Stock Transfer &
Trust Company
2 Broadway, 17th Floor
New York, New York 10004
Corporate Counsel
Ruffa & Ruffa, P.C.
150 East 58th Street
New York, New York 10155
Executive Office
790 Bloomfield Avenue C1
Clifton, New Jersey 07012
Phone: 973-574-8555
Fax 973-574-8562
E-mail [email protected]
Website anti-terrorism.com
Subsidiary
SEM Consultants III, Inc.
<PAGE>
ELECTRONIC CONTROL SECURITY INC.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
Part II Other Information
Item 2 Changes in Securities
In 1999, the Company issued 100,000 shares of its Common Stock to Howard Bronson
as part of an agreement to handle the Company public relations. All of the
Common Stock was issued pursuant to Section 4(2) of the Securities Act of 1933.
<PAGE>
PART III
Item 1. INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
----------- ----------------------
3.1 Certificate of Incorporation of Electronic Control Security Inc.
3.2 By-Laws of Electronic Control Security Inc.
3.3 Certificate of Incorporation of SEM Consultants III, Inc.
3.4 By-Laws of SEM Consultants III, Inc.
3.5 Certificate of Incorporation of ECSI International, Inc.
3.6 By-Laws of ECSI International, Inc.
3.7 Certificate of Incorporation of ECSI FOIDS, Inc.
3.8 By-Laws of ECSI FOIDS, Inc.
3.9 Certificate of Incorporation of ECSI-DSA, Inc.
3.10 By-Laws of ECSI-DSA, Inc.
4.1 Specimen Form of Common Stock Certificate.
4.2 Form of Redeemable Common Stock Purchase Warrant issued to
public in 1987.
4.3 Form of Qualified Stock Option Certificate.
4.4 Form of Non- Qualified Stock Option Certificate.
10 Material Contracts
10.1 Patent License and Technical Information Agreement Relating to
Fiber Optic Sensing Systems dated as of January 15, 1997 between
Lucent Technologies Inc. and Electronic Control Security Inc.
33
<PAGE>
10.2 Agreement dated March 5, 1997 between Mason Hanger National,
Inc. and Electronic Control Security Inc. relating to the
purchase of certain assets relating to the FOIDS Product Line.
10.3 License dated March 5, 1997 between Mason Hanger National, Inc.
and Electronic Control Security Inc. relating to the license of
certain intellectual property used in connection with the
manufacture of the FOIDS Product Line.
10.4 Lease Agreement with 580 Brighton Road Associates for space in
Clifton New Jersey.
10.5 Lease Agreement with The Theta Group for space in Huntsville,
Alabama.
10.6 Teaming agreement with Rafael Armament Development Authority.
23.1 Consent of Demetrius & Company, L.L.C.
27.1 Financial Statement Schedule
34
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned thereunto duly authorized.
ELECTRONIC CONTROL SECURITY INC.
Date: December 13, 1999 By: /s/ Arthur Barchenko
----------------- ------------------------------
Arthur Barchenko, President
35
<PAGE>
EXHIBITS TO FORM 10-SB
ELECTRONIC CONTROL SECURITY INC.,
36
