Florida 65-0928369 |
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
The Registrant's revenues for the fiscal year ended June 30, 2002 were $5,609,557.
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, was $877,088 at September 30, 2002.
The number of shares of common stock $.0001 par value, of the Registrant
issued and outstanding as of September 30, 2002 was 17,059,346.
None
TABLE OF CONTENTS
Page Number
PART I 1
BUSINESS 1
PROPERTIES 12
LEGAL PROCEEDINGS 12
SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS 13
PART II 13
MARKET FOR RESISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 18
CHANGES IN AND DISAGREEMENT WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 18
PART III
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a)
OF THE EXCHANGE ACT OF THE REGRISTRANT 19
EXECUTIVE COMPENSATION 20
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 22
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 23
|
COMPANY OVERVIEW
We design, assemble, market and sell security products. Our products and
services are used throughout the world by military, law enforcement and security
personnel in the public and private sectors, as well as governmental agencies,
multinational corporations and non-governmental organizations. Our products
include a broad range of professional, branded law enforcement and consumer
equipment such as covert audio and video intercept, electronic countermeasures,
video, photo, and optical systems, radio communication, explosive contraband
detection, armored vehicles and clothing, nuclear, biological and chemical masks
and protective clothing, voice stress analysis lie detection, and global
positioning systems ("GPS"), used for tracking, locating and recovering vehicles
and fleet management. -- We issued an aggregate of 11,900,000 shares of common stock, 3,500,000
shares of series A preferred stock and 1,500,000 shares of series B preferred
stock to the former stockholder of CCS, with each share of series A preferred
stock and series B preferred stock being convertible into one share of common
stock if the Company has either annual net revenue of $10,000,000 or net income
of at least $1,000,000 prior to October 25, 2008, each share of series A
preferred stock having 15 votes per share, and each share of series B preferred
stock having no voting rights except as required by law.
-- Our corporate name was changed from HipStyle.com, Inc. to Security
Intelligence Technologies, Inc.
-- Our officers and directors resigned.
-- Ben Y. Jamil, Menachem Cohen, Tom Felice and Nomi Om, who were officer of
CCS prior to the merger, were elected as our directors and offices, and Sylvain
Naar, who was a director of CCS, was elected as a director.
-- We entered into a three-year employment agreement with Mr.
We require significant working capital in order to fund our operations. At June 30, 2002, we had cash of approximately $32,000 and a working capital deficit in excess of $2.1 million. In order to develop and market our products and pay our current liabilities, we require additional working capital. The merger did not provide us with any working capital and we have not been able to raise any capital since the completion of the merger. In the event that we are unable to raise the necessary funding we may be unable to continue operations. Our accounts payable and accrued expenses increased from $615,000 at June 30, 2001 to $2.1 million at June 30, 2002, reflecting our inability to pay creditors currently. We also had customer deposits and related deferred revenue of $1.4 million, which relate to payments on orders which had not been filled at that date. We have used our advance payments to continue our operations. If our vendors do not extend us necessary credit we may not be able to fill current or new orders, which may affect the willingness of our clients to continue to place orders with us. Our bank credit line terminated on November 1, 2002. Our only source of financing other than advances from our chief executive officer was our bank credit facility of $200,000 which was secured by all of our assets and guaranteed by our chief executive officer. This facility terminated on November 1, 2002, at which time all of the principal and interest on our obligations to the bank became due. On November 1, 2002 we reduced the outstanding balance to $100,000 and began discussions with the lender to extend the terms or to convert the balance to a term loan. To date, we do not have an agreement with respect to an extension with our existing lender or an agreement to convert the $100,000 outstanding balance to a term loan, or any agreements with any replacement lender. Our failure to obtain either an extension of our credit facility, a conversion of the outstanding balance to a term loan, or a facility with another lender could materially impair our ability to continue in operation, and we cannot assure you that we will be able to obtain the necessary financing. We have been operating at a loss, and our losses are continuing. We sustained losses of $2.4 million, or $.19 per share (basic and diluted), for the fiscal year ended June 30, 2002, $326,000, or $.03 per share (basic and diluted), for the fiscal year ended June 30, 2001, and our losses are continuing. We cannot give any assurance that we can or will ever operate profitably. Our independent auditors have included an explanatory paragraph in their
report as to our ability to continue as a going concern. As a result of our
continuing and significant losses and our working capital deficiency, our
independent auditors have included in their report an explanatory paragraph as
to our ability to continue as a going concern.
If we do not have access to the most current technology, we may not be able to market our products and services. The security industry is constantly changing to meet new requirements, which result from both new threats to government and industry, both from potential threats to persons and property to industrial and governmental espionage, as well as general concern about personal and family safety. In order to meet these needs we will both have to anticipate problems and develop methods or reducing the potential risk. Our failure to anticipate our potential clients' requirements or to be able to provide them with the most current technology may impair our ability to sell our products. If we are unable to fund any significant research and development and product development effort, we may not be able to offer products based on new and developing technologies. Because of our limited resources, we may not be able to develop or implement a successful marketing program. Our ability to implement an expanded marketing program is dependent upon our ability to fund the program. If we are not able to obtain necessary financing, we may be unable to market our products. Furthermore, our financial condition may inhibit potential customers from purchasing our equipment and our competitors may use our financial condition in marketing to the same customers. We are subject to government regulations, which if violated, could prohibit
us from conducting a significant portion of our export business. The United
States and other governments have strict regulations concerning the exporting
and importing of security devices, may restrict sales of certain products to
bona fide law enforcement agencies or may restrict the sale of certain products
from the United States. If we violate any of these laws, we may be subject to
civil or criminal prosecutions. If we are charged with any such violations,
regardless of whether we are ultimately cleared, we may be unable to sell our
products. During the fiscal year ended June 30, 2002, we incurred significant
expense and our reputation was impaired as a result of charges against our
employees, including one of our officers, even though the charges were
dismissed.
Because we are dependent on our management, the loss of key executive officers could harm our business. Our business is largely dependent upon our senior executive officers, Messrs. Ben Jamil, chief executive officer, Chris R. Decker, chief financial officer, Menachem Cohen, vice president, Tom Felice, vice president and Ms. Nomi On, vice president. Although we have an employment agreement with Mr. Jamil, the employment agreement does not guarantee that he will continue with us. Since we do not have an agreement with Messrs. Decker, Cohen, Felice or Ms. Om, each of these officers has the right to terminate his or her employment. Our business may be adversely affected if any of our key management personnel or other key employees left our employ. Because we lack patent or copyright protection, we cannot assure you that
others will not be able to use our proprietary information in competition with
us. We have no patent or copyright protection for our proprietary software, and
we rely on non-disclosure agreements with our employees. Since our business is
dependent upon our proprietary products, the unauthorized use or disclosure of
this information could harm our business.
Our growth may be limited if we cannot make acquisitions. A part of our
growth strategy is to acquire other businesses that are related to our current
business. Such acquisitions may be made with cash or our securities or a
combination of cash and securities. To the extent that we require cash, we may
have to borrow the funds or issue equity. Our stock price may adversely affect
our ability to make acquisitions for equity or to raise funds for acquisition
through the issues of equity securities. If we fail to make any acquisitions,
our future growth may be limited. Furthermore, because of our stock price, the
issuance of any stock or other equity securities in connection with any
acquisition may result is significant dilution to our stockholders and may
result in a change of control. As of the date of this report we do not have any
agreement or understanding, either formal or informal, as to any acquisition.
If we make any acquisitions, they may disrupt or have a negative impact on
our business. If we make acquisitions, we could have difficulty integrating the
acquired companies' personnel and operations with our own. In addition, the key
personnel of the acquired business may not be willing to work for us, and our
officers may exercise their rights to terminate their employment with us. We
cannot predict the affect expansion may have on our core business. Regardless of
whether we are successful in making an acquisition, the negotiations could
disrupt our ongoing business, distract our management and employees and increase
our expenses.
We do not anticipate paying dividends on our common stock.
The rights of the holders of common stock may be impaired by the potential
issuance of preferred stock. Our certificate of incorporation gives our board of
directors the right to create new series of preferred stock. As a result, the
board of directors may, without stockholder approval, issue preferred stock with
voting, dividend, conversion, liquidation or other rights which could adversely
affect the voting power and equity interest of the holders of common stock.
Preferred stock, which could be issued with the right to more than one vote per
share, could be utilized as a method of discouraging, delaying or preventing a
change of control. The possible impact on takeover attempts could adversely
affect the price of our common stock. Although we have no present intention to
issue any additional shares of preferred stock or to create any new series of
preferred stock, we may issue such shares in the future.
Shares may be issued pursuant to our stock plans which may affect the market
price of our common stock. We may issue stock upon the exercise of options or
pursuant to stock grants covering an aggregate of 2,000,000 shares of common
stock pursuant to our stock incentive plans, including options to purchase
1,783,000 shares subject to options which were outstanding on June 30, 2002. The
exercise of these options and the sale of the underlying shares of common stock
and the sale of stock issued pursuant to stock grants may have an adverse effect
upon the price of our stock.
Because we are subject to the "penny stock" rules, stockholders may have
difficulty in selling our common stock. Our common stock is presently subject to
the Securities and Exchange Commission's penny-stock regulations which impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse). For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of such securities and have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a risk disclosure document mandated by
the Commission relating to the penny stock market. The broker-dealer must also
disclose the commission payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Consequently, the
"penny stock" rules may restrict the ability of broker-dealers to sell the our
common stock and may negatively affect the ability of purchasers of the our
common stock to sell such securities.
Statements in this Form 10-KSB report may be "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include, but are not limited to, statements that
express our intentions, beliefs, expectations, strategies, predictions or any
other statements relating to our future activities or other future events or
conditions. These statements are based on current expectations, estimates and
projections about our business based, in part, on assumptions made by
management. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may, and probably will, differ materially
from what is expressed or forecasted in the forward-looking statements due to
numerous factors, including those described above and those risks discussed from
time to time in this Form 10-KSB report, including the risks described under
"Risk Factors" and in other documents which we file with the Securities and
Exchange Commission. In addition, such statements could be affected by risks and
uncertainties related to our financial condition, factors which affect the
security industry, market and customer acceptance, competition, government
regulations and requirements and pricing, as well as general industry and market
conditions and growth rates, and general economic conditions. Any
forward-looking statements speak only as of the date on which they are made, and
we do not undertake any obligation to update any forward-looking statement to
reflect events or circumstances after the date of this Form 10-KSB.
We design and assemble security products and market to military, law
enforcement, security and corrections personnel, by providing specialized
security services to multinational corporations and governmental agencies and by
manufacturing and installing ballistic and blast protected armoring systems for
commercial vehicles. Increasingly, governments, including the military,
businesses and individuals have recognized the need for security products and
services to protect them from the risks associated with terrorism, physical
attacks, threats of violence, white-collar crime and fraud.
As a company in the security products industry, we market our products in two
markets - the law enforcement security market and the specialized security
services market.
Law Enforcement Security Products Market. In response to an increased
emphasis on safety and protection, the number of active police officers has
increased significantly over the past several years. By 1999 there were more
than 900,000 law enforcement personnel in the United States. We expect an
increase in law enforcement personnel as a partial response to the September 11,
2001, attacks which, we believe, will lead to increased demand for security
products and we are seeking to participate in this demand.
Specialized Security Services Market. Corporations are increasingly
contracting experienced private companies to handle all or a portion of their
security services. Industry studies reflect a growth rate in the market for
worldwide security services market at a rate of 8.0% annually from 1995 to 2000,
and we believe that the market is continuing to grow. We believe that demand by
multinational corporations and governmental agencies operating in developing
nations for security services such as risk assessment, crisis management, guard
force management, security force organization and executive protection is likely
to increase as these entities continue to establish operations and manufacturing
facilities in developed and developing countries. In addition, there are risks
related to white-collar crime and fraud. Demand for corporate investigative
services continues to grow as corporations react to the need to protect their
assets against the growing threat of fraud, counterfeiting and piracy of
intellectual property.
We believe that the following strengths are critical to our success as a
provider of surveillance and security products, and security risk management
services.
Broad Portfolio of Products and Services. We believe that a broad range of
products, strong branding, a consistently growing customer base, and an
extensive distribution network is critical to our success as a provider of
security products and services. We are able to offer across-the-board security
consulting, services, equipment, and systems that enable us to provide
comprehensive solutions to our customers' security needs. Many who contact us
for answers to their security problems have neither the time nor the ability to
research solutions. Our clients anticipate and appreciate a one-stop-source of
expertise and product for a wide variety of categories that fall under the
umbrella of "security." Our goal is to strengthen our capabilities as a single
source provider of global security systems and services. Our international
infrastructure enables us to assist government buyers and multinational
corporate clients who are expanding their geographical spheres. Similarly, our
visibility is being enhanced through the expansion of our product distribution
network that in turn will expand our customer base.
Strong and Recognized Brands. We believe that our brand names are recognized
in our markets and that our market recognition, combined with what we believe is
a high level of performance has contributed to our developing market positions
in a number of the product categories in which we compete.
Strong Client Base and Extensive Distribution Network. We have a broad,
full-service network of approximately 300 sales representatives and
international distributors to sell and service our equipment. Our products are
currently sold to customers in 45 countries and we serve a client base
representing governmental and non-governmental agencies as well as multinational
corporations worldwide. We believe that the diversity of our clients' end
markets, the continued globalization of our clients and the strength of our
distribution relationships minimize our dependence on any particular product,
market, or customer.
Capitalize on Exposure to Military Programs. The events of September 11,
2001, are likely to result in additional spending by the Department of Defense.
We expect several of our product categories may be positively affected. These
include our remote track, view and hear technologies, and voice, phone, cellular
and data interception. We are well positioned to participate in these programs.
Expand Distribution Network and Product Offerings. We will continue to
leverage our distribution network by expanding our range of branded law
enforcement equipment by investing in the development of new and enhanced
products, which complement our existing offerings. If we are able to develop a
broader product line we believe that it will strengthen our relationships with
distributors, and allow us to add additional quality distributors, enhancing our
brand appeal with military, law enforcement and other end users.
Capitalize on Increased Homeland Security Requirements. We believe that we
are well positioned to provide products, services and specialized training
essential to establishing a sustainable homeland security infrastructure. After
the September 11, 2001 terrorist attacks on the United States, the U.S.
government has created the Office of Homeland Security. Although this Office's
mandate is still being finalized, a homeland security infrastructure will be
developed. We believe that we are well equipped to provide products that
additional military, law enforcement, security and corrections personnel require
to combat terrorism and threats to our homeland.
Increase Global Position in High Fright Areas. We expect to offer to service
the heightened security concerns of governments, agencies and corporations in
existing high fright areas and will seek to leverage our global expertise and
reputation for providing security products and services in newly developing high
fright areas. We target regions with economic and political instability as well
as regions with increased regulation. We also grow the scope of our existing
product and service offerings by servicing existing customers who expand
geographically.
We distribute a wide range of specialized products and systems covering
security, privacy, home and personal protection, confidential business
communications, lie detection, cellular phone privacy, drug and bomb contraband
detection, miniaturized covert audio and video surveillance and protection,
digital, the Internet, global systems for mobile communications ("GSM"),
personal communication systems ("PCS"), time division mobile access ("TDMA") and
code division multiple access ("CDMA") satellite technologies and wireless
communications.
We offer the following products.
- Covert audio and video logging systems to monitoremployees and household
surveillance. We develop and market integrated systems for the surveillance of global
system for mobile communications and other communications. With the recent
explosion in communication technologies, there are numerous fundamental systems
underlying digital wireless communications throughout the world. Intelligence
professionals require the ability to monitor, intercept and block various global
systems for mobile communications, personal communication systems and other
systems using a variety of communications access and monitoring systems. Our
customers for our global systems for mobile communications usually request us to
custom design a system to meet their communications surveillance requirements
and are based on extensive engineering studies of the existing communications
systems in each customer's country, along with an in-depth analysis of the
various individual needs of the customer. We have an exclusive license for
proprietary software we can modify for the specific purposes needed, along with
the ability to install and train personnel for system management. Examples of
our global systems for mobile communications intercept systems are the GSM 2060,
a passive off-the-air intercept system which allows a user to target a specific
cellular transmission and listen to both incoming and outgoing conversations and
the GSM 4000, which was designed for an international west European security
group and is a multi-channel monitoring system capable of intercepting various
band transmissions simultaneously, while recording multiple conversations.
In addition to our global system for mobile communications intercept systems,
we have developed and we market cellular interception for operation on analog
advanced mobile phone systems, digital advanced mobile phone system, and time
division multiple access systems, as well as various other equipment for
wireless and hard-wired communications surveillance for voice, fax and data. We
are currently involved in the development of new tracking technology for fleet
management. As we design new products based on our core technologies and enhance
existing products with new functionalities and performance, many of the older
systems, which can only be legally sold to government and law enforcement
agencies, may become available to business and private purchasers.
We offer a configurable emergency rescue, theft recovery, fleet management or
freight management system. Our system uses the well-known global positioning
system ("GPS") satellite tracking system which can combine with an optional
sophisticated location prediction algorithm software package that takes over
position reporting functions whenever the vehicle enters a dead satellite access
zone. This unique and rugged system supplies real time position and status
information from the customer's location to one of several possible call center
configurations. The call center can track the location of a customer's vehicle
and has features to report theft, breakdowns, and rescue requests. Optional
configurations allow the end user to perform an analysis of driver's
performance, manage public transportation lines routes, perform automated fleet
and freight management for commercial trucking, and dispatch police, ambulance,
and taxicabs.
We offer comprehensive security training programs in counterintelligence and counter-surveillance in Miami, New York, Mexico, London and Hong Kong, and we intend to introduce such services in Beijing and Shanghai China as well as in Seoul, Korea. This training, offered to United States government agencies, friendly nations, and clients in the private sector in the United States and in foreign countries, includes methods of recognizing, deterring, and minimizing security risks. We have conducted seminars for intelligence personnel, crime fighting associations and their associated membership societies, from CIA to FBI to United States Customs, United States Coast Guard, military branches, police departments from New York City's strategic command to police chiefs from innumerable cities and towns across the country. We have scheduled a series of seminars to be held throughout the world during
the first half of fiscal 2003. These seminars will provide opportunities for
qualified and authorized buyers to learn about our basic global system for
mobile communications technology and our proposed solutions to intercepting and
monitoring these communications.
We offer the design, integration, application analysis and technical support
of sophisticated electronic and computer driven surveillance, monitoring,
tracking and recovery and secure communication equipment. We offer site surveys
and security solutions that include consultations and law enforcement training
by experienced security personnel who act as advisors and instructors. Our
consultants oversee in-country installations and train the client's personnel in
the installation, use and maintenance of their security equipment. These clients
are from the corporate world as well as governmental, public and private
agencies.
Marketing and Distribution
We have a network of approximately 300 sales representatives and
international distributors who sell and service our law enforcement equipment.
Our distributors and we currently operate in a number of countries and serve a
client base representing governmental and non-governmental agencies as well as
multinational corporations worldwide. However, during the past year we have been
in litigation with four of our distributors. See "Item 3. Legal Proceedings.
When first entering a foreign market, we seek to promote a comprehensive
range of products and services by seeking qualified sales representatives with
local ties and existing relationships within the country's business and
governmental communities. We try to tailor our marketing strategy to each
geographic area of the world, and further to tailor our product offering by
country. There are opportunities for cross marketing of military and law
enforcement products, which strengthen the image of each product group and
further enhance our position as an integrated provider of a wide selection of
such products and services.
We employ a variety of marketing programs in support of our reseller's
channels to make our target markets aware of the value of our integrated systems
and technology and to help create pre-sales demand for our resellers. These
programs include trade shows; advertising campaigns, seminars, direct mailings,
brochures and other promotional efforts designed to generate sales leads.
Training programs are an integral part of our customer service. In addition to
enhancing customer satisfaction, we believe that they also help breed customer
loyalty and brand awareness, so that we may sell additional products to the same
customer. We also use our website to generate brand awareness.
Although we are focusing on clients in high growth industries where the need
for investigation, brand protection and other security services are critical to
success; we are also broadening our efforts to expand our end-user marketplace.
We are developing an additional website designed to market an inexpensive line
of security equipment that is not in competition with our recognized brand
products. However, we cannot assure you that we will be successful in either
developing the website or generating any significant sales through the website.
Our engineering staff of design, mechanical and electronic engineers involved
in both developing new systems made possible by the advances in technology and
continually improving the production process and reducing the cost of the
products. While the software being developed by engineers for our systems is
based on proprietary technology, the components for such systems are often
commercially available from third parties. As our customizing allows for
outsourcing components, we have developed stable relationships with other
manufacturers, cutting down the need for stockpiling of costly inventories, also
reducing the hours and labor necessary for completing orders in a timely manner.
Although our products come with operating instructions when applicable,
installation tasks are performed for the more sophisticated global system for
mobile communications systems. Installation phases may include site surveys,
identification of central command site location, supervision of the installation
of site interfaces, and training personnel to manage systems. We generally
provide maintenance and support services for the first three to twelve months
following installation of a system, depending on the terms of each particular
contract. Thereafter, long-term service is provided on a service-contract basis.
Global system for mobile communications systems currently under development
will require differing levels of local, on-site installation. For example, one
system is largely a mobile communications intelligence gatherer requiring only
local training, while another might require construction of a central command
center, intercepts towers and installation at remote sites. We do not install
but we provide supervisory assistance for a field installation crew comprised of
both employees and independent contractors, supplemented by local labor, for
on-site construction and installation. We also provide training for use and
maintenance of equipment, and subsequent hot-line assistance.
We assemble our products from components that are readily available from a number of suppliers. We do not have any long-term supply contracts.
The security industry includes companies that offer a range of products and
services, such as access control, personnel protection, surveillance,
counter-surveillance, computer security, vehicular security, night vision, fiber
optics and communications. In order to meet the needs of a prospective customer,
we believe that it is necessary to offer integrated solutions across industry
lines rather than to offer a range of devices. Although there are a large number
of companies who offer products or services aimed at one or more segments of the
security industry. However, we believe that as the severity of the problem or
potential problem increases governments and major corporations, including
financial institutions, are less concerned with the price of the products than
with such factors as:
- The perceived ability of the vendor to treat the identity of the client,
the scope of the work and the solution in confidence.
- The ability of the vendor to offer an integrated approach that seeks to
address the problem by offering a wide range of products and services rather
than to offer solutions based on a small range of products and services.
- On the other hand, major clients are concerned about the financial
condition of the vendor, and our financial condition, including our significant
working capital deficiency and our history of losses, may raise questions as to
our ability to perform under the purchase order and to provide the necessary
support following delivery. Competitors may use our financial condition and
their stronger financial condition, resources and relationships in marketing
their products and services regardless of whether their products and services
are better than ours. As discussed below, many of our competitors are
substantially stronger than we are financially and are very well known in the
industry and have significant government and industry contacts and
relationships.
The marketplace for manufacturers and vendors for security and surveillance
products and systems is highly competitive and consists of numerous
organizations ranging from internet-based mail-order firms to former military
armament manufacturers such as, Lockheed, Martin, Harris, and others. Other
aerospace manufacturers have rushed into the arena of bomb detection and other
Explosive Ordinance Disposal ("EOD") products. The security marketplace
continues to favor the more established and reliable manufacturers such as Nice
(Israel) and Thompson C.S.F. now a part of Thales Group (France) with proven
technology, over newcomers with low cost innovations. Siemens (Germany), and
Rohde & Schwartz (Germany), are manufacturers of "simulated" base stations.
Currently there is growing competition in the cellular interception and
monitoring systems market. Although many competitors have greater financial,
technical and other resources, we believe that at present our technology gives
us a competitive advantage. In all of these areas, the major corporations have
the ability to develop competitive products and fund a marketing effort that
enable them to compete successfully against us regardless of whether their
products are superior.
Research and Development
Because of our financial condition our research and development effort has
been limited to the development of certain new products and improvement of
existing products. Because of our working capital limitations, we have not been
able to expand our research and development effort. During the past two years we
did not expend any significant amount on research and development activities.
Intellectual Property Rights
We have no patents or copyrights on our products, and we rely on non-disclosure agreements with our employees. Since our business is dependent upon our proprietary products, the unauthorized use or disclosure of this information could harm our business. We currently own a number of United States trademark registrations. Government Regulation
The United States and other governments have strict regulations concerning
the exporting and importing of certain security devices that may restrict sales
of certain products to bona fide law enforcement agencies or may restrict the
sale of products in or from the United States We are subject to federal
licensing requirements with respect to the sale in foreign countries of certain
of our products. In addition, we are obligated to comply with a variety of
federal, state, local and foreign regulations that govern our operations and the
workplace. We are also subject to certain regulations promulgated by, among
others, the United States Departments of Commerce and State.
As of September 30, 2002, we had a total of approximately 51 employees, of which approximately 27 were employed at our main office and 24 were employed at our sales offices. None of our employees are represented by unions or covered by any collective bargaining agreements. We have not experienced any work stoppages or employee related slowdowns and believe our relationship with our employees is good. We lease approximately 9,840 square feet of executive offices and warehouse at 145 Hugeunot Street, New Rochelle, NY 10801 under a lease that expires on October 31, 2010. The annual rent is approximately $125,000, and is subject to annual increases. We also lease approximately 6,000 square feet for four of our sales offices and retail locations in Miami, Florida, New York City, Washington, DC and Beverly Hills, CA under leases that expire from 2003 to 2010 at a current annual rent of $456,000, subject to annual increases. We believe that our present facilities are adequate to meet our immediate requirements and that any additional space we may require will be available on reasonable terms. Because of our financial position, actions have been commenced or threatened
by creditors.
On May 2, 2002, Menachem Cohen, vice president and a director, and two other employees of one of our subsidiaries were arrested pursuant to a criminal complaint filed in the United States District Court of the Southern District of Florida. The complaint alleges that such individuals violated federal law in that they intentionally manufactured, assembled, possessed or sold a device used for the surreptitious interception of electronic communications and that the device was sent through the mail or transmitted in intrastate or foreign commerce. On September 4, 2002, the United States District Court of the Southern District of Florida entered an order dismissing all charges against Menachem Cohen, vice president and director, and the two other employees of one of the Company's subsidiaries. We are also the defendant in four actions arising our of our distributor agreements. On or about May 11, 2000 an action was commenced against CCS in the Supreme Court, New York County, captioned Ergonomic Systems Philippines Inc. v. CCS International Ltd. The plaintiff seeks to recover $81,000, which was paid to CCS in connection with a distributorship agreement between the parties, plus costs and interest. CCS has denied the material allegations of the claim and has raised affirmative defenses thereto. We believe that we have valid defenses to the claim. On or about May 25, 2001, an action was commenced against CCS in the United States District Court for the Southern District of New York, captioned Shenzen Newtek v. CCS International Ltd. The plaintiff seeks to recover $91,500, which was paid to CCS in connection with a distributorship agreement between the parties, plus costs and interest. We have denied the material allegations of the plaintiff's claim and have raised affirmative defenses thereto. We have also asserted a counterclaim seeking damages of $500,000 based upon the plaintiff's alleged breach of the distributorship agreement. This action was settled between the parties on July 10, 2002. On or about October 12, 2001, an action was commenced against CCS in the United States District Court for the Southern District of New York, captioned China Bohai Group C. Ltd. and USA International Business Connections Corp. v. CS International, Ltd. The plaintiff seeks to recover $250,000 paid to CCS in connection with a distributorship agreement between the parties, plus $5,000,000 of punitive damages and costs and interest. CCS has denied the material allegations of the plaintiff's claim and has raised affirmative defenses thereto. CCS has asserted a counterclaim seeking damages in the approximate amount of $1,150,000 based upon the plaintiff's alleged breach of the parties' distributorship agreement. The Company believes that it has valid defenses to the claim.
In June 1998, a photographer formerly retained by CCS filed suit in U. S.
District Court for the Southern District of New York captioned Frank Ross and
Julietta Vassilkioti v. CCS International, Ltd. The plaintiff is seeking damages
for alleged copyright infringement. The judge in the case has granted the
plaintiff partial summary judgment and a hearing to determine damages has not
yet been scheduled. Under federal judicial rules, the Company is unable to
contest the granting of partial summary judgment until a final judgment has been
rendered. The Company believes that it has substantial defenses to the claim
asserted in the lawsuit.
Not applicable.
Our products are marketed under CCS International, Ltd. ("CCS"), G-Com Technologies, Ltd. and The Counter Spy Shops of Mayfair, London(R) brand names and are sold primarily through a worldwide network of more than 300 sales agents, including four retail stores in the United States and two overseas.
Our trained, multilingual and experienced security personnel work
closely with clients to create and implement solutions to complex security
problems. These services include security planning, advice and management,
security systems integration, intellectual property asset protection, due
diligence investigations and training programs in counterintelligence, counter
surveillance, advanced driving techniques and ballistics.
We are a Florida corporation organized under the name Hipstyle.com, Inc. in June 1999. Our principal executive offices are located at 145 Huguenot Street, New Rochelle, New York 10801, telephone (914) 654-8700. Our website is www.spyzone.com. Neither the information nor other statements contained in our website nor the information contained in any other Internet website is a part of this annual report on Form 10-KSB.
On April 17, 2002, pursuant to an agreement and plan
of merger among us, CCS International, Ltd., a Delaware corporation ("CCS"), and
CCS Acquisition Corp., a Delaware corporation ("Acquisition Corp"), Acquisition
Corp. was merged into CCS, with the result that CCS became our wholly-owned
subsidiary. As a result of the merger:
-- Outstanding options and warrants to purchase a total of 1,800,500 shares of
CCS' common stock were converted into options and warrants to purchase an equal
number of shares of our common stock at exercise prices of $.50 to $1.00 per
share.
Jamil and
granted him a non-qualified stock option to purchase 1,000,000 shares of common
stock at $2.00 per share pursuant to the employment agreement. The terms of Mr.
Jamil's employment agreement are described under "Item 10. Executive
Compensation."
Because of our stock price and our history of losses, we may have difficulty in raising necessary funding for our business. Since the completion of the merger we have sought, and been unsuccessful, in our efforts to obtain funding for our business. Because of our losses, we are not able to increase our borrowing, and our present bank line is guaranteed by Ben Jamil, our chief executive officer. Because of both our low stock price and our losses, we have not been able to raise funds through the sale of our equity securities. We may not be able to obtain any additional funding, and, if we are not able to raise funding, we may be unable to continue in business. Furthermore, if we are able to raise funding in the equity markets, our stockholders will suffer significant dilution and the issuance of securities may result in a change of control.
Major corporations may be able to develop and fund marketing efforts that could
enable them to dominate the market. Because there are a number of major
companies that can both offer security products to governments and industry and
fund a product development and marketing program, these companies have the
financial ability to dominate the market, to effectively set a standard which
may be incompatible with our technology and to use their financial resources and
government and industry contacts to successfully compete against us in all major
markets, regardless of whether their technology is superior or inferior to ours.
There may be claims that a third party owns stock which is held by our chief executive officer. In connection with an agreement between Mr. Ben Y. Jamil and two financial consultants entered into prior to the reverse merger, the consultants or their designees were to purchase a 30% interest in five of our subsidiaries, and that 30% was to have been exchanged for 1,500,000 shares of series B preferred stock. Mr. Jamil has advised the consultants and their designees that, as a result of their failure to pay the consideration for the shares, the agreement is terminated and they have no interest in the series B preferred stock or the stock in the five subsidiaries. It is possible that the consultants or their designees may claim that they own the series B preferred stock or the stock in the five subsidiaries and we can give no assurance that their claim will not be upheld.
The United States has been the target of several deadly terrorist attacks
directed towards its citizens and facilities around the world. As a result,
institutions, including the United States Department of Defense and other
government agencies and multinational corporations are redefining strategies to
protect against and combat terrorism.
We believe that the demand for both security and surveillance products, and
security risk management services will continue to grow. We will address this
growth by offering a comprehensive array of premium security risk management
products and services. By establishing a critical mass of products and services
and a broad base of customers, we believe that we have developed the capacity to
perform multiple aspects of our clients' threat analyses and security provisions
on a comprehensive basis. We will continue to seek to implement this growth
strategy primarily through internal expansion of our existing businesses and
through strategic acquisitions of businesses offering complementary services,
markets, and customer bases. However, because of our financial condition and the
low price of our stock, we may not be able to acquire any businesses or
implement our growth strategy. The following elements define our growth
strategy:
- Scramblers, data and fax transmission systems to protect and
secure communications.
- Fax managers that log the activities of outgoing
and incoming faxes.
- Armored and bulletproof clothing and automobiles.
- Counter-surveillance, wiretap detection and electronic counter-measures.
- Night vision, electro-optic devices and infrared scopes and cameras.
-
Anti-hacking and secure remote computing to protect computer networks.
-
Bomb and weapons and other contraband detection for airport security, business,
and home.
- Personal Protection Products
- Voice stress analyzers and
lie detection to evaluate the honesty of employees or vendors
- Tracking and
recovery and fleet management systems
- Cellular telephone tracking systems
for 911 emergency programs.
Product Design and Installation
We seek to address the competition in the industry by a three-tiered approach --
we offer a broad range of products and services, we offer what we believe are
strong brands and we have a strong client base with an extensive distribution
network.
Employees
In June 2001, a former product distributor of CCS brought suit in Circuit Court,
Palm Beach, Florida captioned Allan L. Dunterman, Jr. v. CCS International, Ltd.
The plaintiff claims that CCS engaged in breach of contract, among other
allegations. CCS has moved the complaint to the U. S. District Court for the
Southern District of Florida, where it is pending. In its answer to the
complaint, CCS has denied any wrongdoing and has asserted numerous affirmative
defenses. The parties have exchanged initial written discovery.
Our common stock is traded on the OTC Bulletin Board under the symbol SITG.
The following table sets forth the range of high and low bid quotations for our
common stock from December 31, 2001, when trading in our stock commenced, until
June 30, 2002, as reported by OTC Bulletin Board. On April 17, 2002, we acquired
CCS, with the result that our business changed to the business of CCS, and the
business conducted by us under the name Hipstyle.com, Inc. was discontinued.
Accordingly, stock price information for periods prior to April 17, 2002 do not
reflect our present business.
The quotes represent inter-dealer prices without adjustment or mark-ups,
markdowns or commissions and may not necessarily represent actual transactions.
The trading volume of our securities fluctuates and may be limited during
certain periods. As a result, the liquidity of an investment in the Company's
securities may be adversely affected. Because of our stock price, our common
stock is subject to the SEC's penny stock rules, which adversely affects the
ability of persons to purchase or sell our stock.
On September 30, 2002, the final quoted price by the OTC Bulletin Board was
$.17 per share of common stock.
As of September 30, 2002 there were 17,059,346 shares of Common Stock
outstanding, held of record by approximately 210 record holders and beneficial
owners.
The following table sets forth information as to equity compensation plans
pursuant to which we may issue our equity securities.
As of January 21, 2002, our board of directors adopted the 2002 Stock Plan,
which provided for the grant of non-qualified stock options to purchase a
maximum of 2,000,000 shares of common stock. The 2002 Plan provides for the
grant of incentive stock options and nonqualified stock options to purchase
shares of Common Stock, to directors, employees, officers, agents, consultants
and independent contractors who perform services for the Company. Any incentive
stock options which may be granted pursuant to this plan are subject to
stockholder approval of the plan. As of the date of this annual report on Form
10-KSB, stockholder approval of the 2002 stock plan has not been obtained, and
all options granted under the plan are non-qualified stock options.
During the fiscal year ended June 30, 2002, we issued the following
securities in transactions that were not registered pursuant to the Securities
Act of 1933, as amended.
(a) In April 2002, in connection with the acquisition of CCS, we issued the
following securities:
-- We issued an aggregate of 11,900,000 shares of common stock, 3,500,000
shares of series A preferred stock and 1,500,000 shares of series B preferred
stock to the former stockholder of CCS, with each share of series A preferred
stock and series B preferred stock being convertible into one share of common
stock if the Company has either annual net revenue of $10,000,000 or net income
of at least $1,000,000 prior to October 25, 2008, each share of series A
preferred stock having 15 votes per share, and each share of series B preferred
stock having no voting rights except as required by law.
-- We granted options to purchase a total of 1,800,500 shares of common stock
at exercise prices of $.50 to $1.00 per share. These shares were issued pursuant
to the 2002 stock plan.
-- We issued warrants to purchase a total 400,000 shares of common stock at
an exercise price of $.50 per share to a consultant in connection with the
reverse merger.
-- We granted Ben Jamil a non-qualified stock option to purchase 1,000,000
shares of common stock at $2.00 per share pursuant to his employment agreement.
-- We sold 75,000 shares of common stock to Michael Farkas, the beneficial owner of Atlas Equity Group Inc. ("ATLAS EQUITY"), a principal stockholder of the Company prior to the reverse merger for $75,000. These issuances were exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act. No underwriting
or other compensation was paid in connection with these transactions.
(b) On April 25, 2002 we issued 17,346 shares of common stock to an
accredited investor as full payment of trade payables in the amount of $25,297.
This issuance was exempt from the registration requirements of the Securities
Act pursuant to Section 4(2) of the Securities Act. No underwriting or other
compensation was paid in connection with this transaction.
(c) In May and June 2002, we issued 400,000 shares of common stock to an
accredited investor for which the investor agreed to the cancellation of trade
accounts payable in the amount of $322,953. In connection with the stock
issuance, the investor agreed to hold the stock for one year, and if the sales
proceeds were less than the amount of the trade payables that were cancelled, we
would pay the investor the difference. These issuances were exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) of the
Securities Act. No underwriting or other compensation was paid in connection
with these transactions.
GENERAL OVERVIEW.
Historical results and trends should not be taken as indicative of future
operations. Management's statements contained in this report that are not
historical facts are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results may differ materially from
those included in the forward-looking statements. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of complying with
those safe harbor provisions. RESULTS OF OPERATIONS - Year ended June 30, 2002 and year ended June 30,
2001
Revenues. Revenues for fiscal 2002 were $5,609,557 a decrease of $619,687 or 10.0%, from revenues of $6,229,244 in fiscal 2001. The decrease is primarily a consequence of a decrease in advertising and promotional expenditures and attendance at fewer international trade shows caused by limited resources. In addition, our financial condition and losses may have affected the willingness of customers to purchase products from us. Cost of Sales. Cost of sales decreased by $393,236 or 15.0%, to $2,230,969 in
fiscal 2002 from $2,624,205 in fiscal 2001. Cost of sales as a percentage of
product sales decreased to 44.5% in fiscal 2002 from 47.6% in fiscal 2001
reflecting an improvement in product mix.
Compensation and benefits. Compensation and benefits increased by $ 238,896,
or 12.0% to $2,236,191 in fiscal 2002 from $1,997,295 in fiscal 2001 reflecting
increased expenditures to enhance the infrastructure of the Company by adding
personnel to the marketing department and the sales department in anticipation
of increased sales which did not materialize. We anticipate this trend of
increased expenditures will continue in Fiscal 2003 as we add additional
personnel to the sales department.
Professional fees and legal settlements. Professional fees and legal
settlements increased by $725,807, or 179.9% to $1,130,848 in fiscal 2002 from
$405,041 in fiscal 2001 primarily due to (i) increased litigation, (ii) costs of
$285,000 associated with defending criminal charges filed against our employees,
including an officer and director, the related representation in a potential
investigation by the United States Customs Service, and (iii) fees related to
the reverse merger. The fees incurred in connection with the reverse merger and
the criminal proceeding were one-time charges which we do not expect to be
significant in fiscal 2003. However, because of our financial problems, it is
possible that we will continue to incur significant litigation expenses arising
from creditor actions.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $648,178, or 43.5% to $2,139,123 in fiscal
2002 from $1,490,945 in fiscal 2001. The significant changes were (i) an
increase in rent expense of $218,037, or 81.3% to $491,728 in fiscal 2002 from
$268,158 in fiscal 2001 resulting from a non-recurring settlement of rent in
fiscal 2001 of $203,840, (ii) an increase in insurance expense of $49,276, or
50.1% to $146,102 in fiscal 2002 from $96,826 in fiscal 2001, due to increased
coverage and Unrealized loss on derivatives. Unrealized loss on derivatives of $150,953 in
fiscal 2002 is attributable to the decrease in market value relating to our
price guarantees on common stock which we issued during fiscal 2002 in payment
of trade payables. There were no similar transactions in fiscal 2001.
Interest expense. Interest expense increased by $13,654, or 26.4% to $65,358
in fiscal 2002 from $51,704 in fiscal 2001 as a result of a continued increase
in the ordinary course of business of the Company's outstanding debt prior to
the repayment of $200,000 of outstanding bank loan principal in the fourth
quarter of fiscal 2002
Income tax benefit. The income tax benefits of $101,000 in fiscal 2001 and
$29,000 in fiscal 2002 represent refundable taxes expected to be recovered
through net operating loss carry-back claims, offset by current state income tax
expense of $4,000 and $5,000 in fiscal 2002 and fiscal 2001, respectively.
As a result of the forgoing, our net loss increased by $2,073,332, or 635.4%
to $2,399,659, $.19 per share, in fiscal 2002 from $326,327, $.03 per share, in
fiscal 2001 as a result of the factors described above.
We require significant working capital to fund our future operations. At June
30, 2002 we had cash of $32,344 and a working capital deficit of $2,143,592. The
aggregate amount of accounts payable and accrued expenses at June 30, 2002 was
$2,030,866. As a result of our continuing losses, our working capital deficiency
has increased.
We funded our losses through loans from our chief executive officer. At June
30, 2002, we owed our chief executive officer $876,554, of which $457,554 was
incurred during fiscal 2002. We also utilized vendor credit and customer
deposits. Because we have not been able to pay our trade creditors in a timely
manner, we have been subject to litigation and threats of litigation from our
trade creditors and we have used common stock to satisfy our obligations to
trade creditors. When we issue common stock, we have provided that if the stock
does not reach a specified price level one year from issuance, we will pay the
difference between that price level and the actual price. As a result, we have
contingent obligations to our some of these creditors. With respect to 400,000
shares of common stock issued during fiscal 2002, the market value of the common
stock on June 30, 2002 was approximately $150,953 less than the guaranteed
price.
Our accounts payable and accrued expenses increased from $615,584 at June 30, 2001 to $2,030,866 at June 30, 2002 reflecting our inability to pay creditors currently. We also had customer deposits and deferred revenue of $1,395,963 which relate to payments on orders which had not been filled at that date. We have used our advance payments to continue our operations. If our vendors do not extend us necessary credit we may not be able to fill current or new orders, which may affect the willingness of our clients to continue to place orders with us. We require substantial funds to support our operations. Since the completion of the merger we have sought, and been unsuccessful, in our efforts to obtain funding for our business. Because of our losses, we are not able to increase our borrowing. Our bank facility terminated on November 1, 2002. On November 1, 2002 we reduced the outstanding balance to $100,000 and began discussions with the lender to extend the terms or to convert the balance to a term loan. To date, we do not have an agreement with respect to an extension with our existing lender or an agreement to convert the $100,000 outstanding balance to a term loan, or any agreements with any replacement lender. Our failure to obtain either an extension of our credit facility, a conversion of the outstanding balance to a term loan, or a facility with another lender could materially impair our ability to continue in operation, and we cannot assure you that we will be able to obtain the necessary financing. Our main source of funds other than the bank facility has been from loans from our chief executive officer. Because of both our low stock price and our losses, we have not been able to raise funds through the sale of our equity securities. We may not be able to obtain any additional funding, and, if we are not able to raise funding, we may be unable to continue in business. Furthermore, if we are able to raise funding in the equity markets, our stockholders will suffer significant dilution and the issuance of securities may result in a change of control. The merger agreement relating to the reverse merger provided, as a condition to CCS' obligation to close, that we closed on a private sale from which the we realized proceeds of $1,000,000. This condition was not met at closing, and CCS completed the reverse merger without the Company having received any proceeds from a private placement. At the closing of the reverse merger, we entered into a stock pledge agreement with ATLAS EQUITY, a Florida corporation and principal stockholder of the Company, pursuant to which ATLAS EQUITY was to have pledged 1,500,000 shares of common stock. Atlas Equity never delivered the shares to be held pursuant to the pledge agreement. The pledge agreement stipulated the pledged shares were to be returned to ATLAS EQUITY if we sold shares of unregistered common stock sufficient to generate net cash proceeds of $925,000 to us prior to June 1, 2002, which date was subsequently extended to June 14, 2002. To date, ATLAS EQUITY has not delivered the shares to be pledged and we have not received any financing. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with respect to these matters include its attempts to settle vendor payables wherever possible, a reduction in operating expenses, and financing from the chief executive officer in the absence of other sources of funds. Management cannot provide any assurance that its plans will be successful in alleviating its liquidity concerns and bringing the Company to the point of sustained profitability. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.
On April 18, 2002, our board of directors dismissed Salibello & Broder LLP as our independent public accountants and selected Schneider & Associates LLP to serve as our independent public accountant for the fiscal year ending June 30, 2002. At no time since its engagement has Schneider & Associates LLP had any direct or indirect financial interest in or any connection with us or any of our subsidiaries other than as independent accountant. Our financial statements for the fiscal year ended June 30, 2001 were audited by Salibello & Broder LLP, whose report on such financial statements did not include any adverse opinion, or disclaimer of opinion, nor was the report qualified or modified as to audit scope or accounting principles. The report however was modified as to our ability to continue as a going concern. There were no disagreements with Salibello & Broder LLP on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures in connection with the audit for the fiscal year ended June 30, 2001 and financial statements filed on Form 10-QSB for subsequent interim periods preceding their dismissal on April 18, 2002 On December 8, 2000, Berenfeld, Spritzer, Shechter and Sheer, our independent public accountants resigned as our independent auditors and our board of directors selected Salibello & Broder LLP to serve as our independent public accountants for the fiscal year ending June 30, 2001. At no time since its engagement has Salibello & Broder LLP had any direct or indirect financial interest in us or any connection with any of our subsidiaries other than as independent accountant. Our financial statements for the fiscal year ended June 30, 2000 and for the
period June 22, 1999 (inception) to June 30, 1999 were audited by Berenfeld,
Spritzer, Shechter and Sheer whose report on such financial statements did not
contain any adverse opinion, or disclaimer of opinion, nor was the report
qualified or modified as to audit scope or accounting princilples. The report
however was modified as to our ability to continue as a going concern. There
were no disagreements with Berenfeld, Spritzer, Shechter and Sheer on any matter
of accounting principles or practices, financial statement disclosures, or
auditing scope or procedures in connection with the audit for the fiscal year
ended June 30, 2000 and the period June 22, 1999 (inception) to June 30, 1999
and financial statements filed on Form 10-QSB for subsequent interim periods
preceding their resignation on December 8, 2000.
Set forth below is information concerning our directors and executive
officers.
Ben Y. Jamil has been chairman of the board, president, chief executive
officer and a director of CCS since its organization in July 1992. He assumed
such positions with us upon completion of the merger. Mr. Jamil has more than 40
years experience in government, military, law enforcement and business security,
specializing in the design, and marketing of sophisticated, hi-tech systems for
communication, voice and data privacy, surveillance and monitoring.
Chris R. Decker, a certified public accountant, joined us in April 2002 and became chief financial officer in August 2002. Prior to that he was controller for Trumarkets LLC, a broker dealer, from June 1, 2001 until April 2002, an independent consultant from April 1999 until June 2001, was vice president corporate controller for County Seat Stores, Inc., a retailer of specialty apparel, from January 1998 until April 1999 and for three years prior thereto, was executive vice president, chief financial officer of All American Food Group, Inc. a franchising company in the specialty food sector. Tom Felice has been vice president and a director of CCS since October 2001.
He assumed these positions with us upon completion of the merger, at which time
he was also elected chief operating officer. He joined CCS at its inception as
vice president of consumer sales. He took a leave of absence in November 2000 to
consult for a family business and returned to CCS in October 2001.
Menachem Cohen has been vice president for Latin American sales and a
director of CCS since January 2002 and became our vice president and a director
upon completion of the merger. He was a consultant to CCS from its inception in
1992 until 2002.
Nomi Om has been vice president of international marketing for CCS since 1995
and a director since January 2002. She became our vice president and a director
upon completion of the merger. Starting with CCS in 1992 as production manager,
Ms. Om became director of special projects as a sales engineer, and in 1995 was
appointed Vice President of International Marketing and Director of our Asian
Market.
Set forth below is information with respect to compensation paid or accrued
by us for fiscal years ended June 30, 2002, 2001 and 2000 to our chief executive
officer. No other officer received compensation of $100,000 during any of those
fiscal years.
Employment Agreement
In April 2002, in connection with the completion of the reverse merger, we entered into a three-year employment agreement with Ben Jamil pursuant to which Mr. Jamil agreed to serve as our president and chief executive officer. The agreement calls for an annual base compensation of $250,000 and may be increased on each anniversary date commencing May 1, 2003 by 10% if we achieve certain performance criteria. In addition to the base salary, Mr. Jamil is eligible to receive an annual discretionary bonus commencing June 30, 2003, at the sole discretion of the board of directors. Pursuant to the agreement, we granted Mr. Jamil a non-qualified stock option to purchase 1,000,000 shares of common stock at an exercise price of $2.00 per share. The option vests upon our attaining $10,000,000 of annual revenue and expires on April 17, 2007. Stock Options
As of January 21, 2002, our board of directors adopted the 2002 Stock Plan,
which provided for the grant of non-qualified stock options to purchase a
maximum of 2,000,000 shares of common stock. The 2002 Plan provides for the
grant of incentive stock options and nonqualified stock options to purchase
shares of Common Stock, to directors, employees, officers, agents, consultants
and independent contractors who perform services for the Company. Any incentive
stock options which may be granted pursuant to this plan are subject to
stockholder approval of the plan. As of the date of this annual report on Form
10-KSB, stockholder approval of the 2002 stock plan has not been obtained, and
all options granted under the plan are non-qualified stock options.
The following table sets forth information concerning the exercise of options
during the fiscal year ended June 30, 2002 and the fiscal year-end value of
options held by our chief executive officer, who is the only officer named in
the summary compensation table. No stock appreciation rights have been granted.
The following table sets forth information concerning options granted during
the fiscal year ended June 30, 2002 to our chief executive officer.
* The potential realizable value is not included since the options are
exercisable at $2.00 per share, which is in excess of the fair market value at
the date of grant. These options were granted to Mr. Jamil pursuant to his
employment agreement.
The following table and discussion provides information as to the shares of
common stock benefically owned on September 30, 2002 by:
- each director;
- each officer named in the executive compensation table;
- each person owning of record or known by us based on information provided
to us by the persons named below, to own beneficially at least 5% of our common
stock; and
- all officers and directors as a group.
Except as otherwise indicated each person has the sole power to vote and
dispose of all shares of common stock listed opposite his name. Stockholders are
deemed to own shares of common stock issuable upon the exercise of options or
upon conversion of convertible securities which are exercisable or convertible
within 60 days of September 30, 2002.
The shares beneficially owned by Michael Farkas represents 75,000 shares of common stock owned by him, 468,000 shares of common stock owned by Mr. Farkas' wife, Rebecca Farkas, as to which he disclaims beneficial ownership, and 804,000 shares of common stock owned by ATLAS EQUITY, which is beneficially owned by Mr. Farkas. ATLAS EQUITY agreed to pledge 1,500,000 shares of common stock, which shares are to be released to ATLAS EQUITY if we raise $925,000 by June 14, 2002. As of the date of this report, ATLAS EQUITY has not delivered the shares to be pledged and we have not received any financing. The shares beneficially owned by Mr. Felice represent shares of common stock
issuable upon exercise of options held by him.
On April 17, 2002, pursuant to an agreement and plan of merger among us, CCS
and our wholly-owned subsidiary, the subsidiary was merged into CCS, with the
result that CCS became our wholly-owned subsidiary. As a result of the merger:
- We issued an aggregate of 11,900,000 shares of common stock, 3,500,000
shares of series A preferred stock and 1,500,000 shares of series B preferred
stock to the former stockholders of CCS, with each share of series A preferred
stock and series B preferred stock being convertible into one share of common
stock if the Company has either annual net revenue of $10,000,000 or net income
of at least $1,000,000 prior to October 25, 2008, each share of series A
preferred stock having 15 votes per share, and each share of series B preferred
stock having no voting rights except as required by law. The series A and B
preferred stock was issued to Mr. Ben Jamil.
- Outstanding options and warrants to purchase a total of 1,800,500 shares of
CCS' common stock were converted into options and warrants to purchase an equal
number of shares of our common stock at exercise prices of $.50 to $1.00 per
share.
- Our officers and directors resigned.
- Ben Y. Jamil, Menachem Cohen, Tom Felice and Nomi Om, who were officer of
CCS prior to the merger, were elected as our directors and offices, and Sylvain
Naar, who was a director of CCS, was elected as a director.
- We entered into a three-year employment agreement with Mr. Jamil and
granted him a non-qualified stock option to purchase 1,000,000 shares of common
stock at $2.00 per share pursuant to the employment agreement. The terms of Mr.
Jamil's employment agreement are described under "Item 10. Executive
Compensation."
(a) Reports on Form 8-KSB
(1) Current Report on Form 8-K filed on April 24, 2002 with respect to Items
1 and 2. (b) Exhibits
2.1 Agreement and Plan of Merger dated as of February 28, 2002 among the
Registrant, CCS International, Ltd., and CCS Merger Corp.(1)
3.1 Articles of incorporation (2)
3.2 Articles of Amendment to Articles of Incorporation
3.3 By-laws (2)
10.1 Employment Agreement, dated as of April 17, 2002, by and between the
Registrant and Ben Jamil. (3)
10.4 Lease dated June 1, 2000 between Rotterdam Ventures, Inc. d/b/a Galesi
Enterprises and the Registrant.
21.1 List of Subsidiaries
(1) Filed as an exhibit to the Registrant's Form 8-K with a report date of
February 28, 2002 and which was filed with the Commission on March 5, 2002, and
incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Form 10SB12G which was filed with
the Commission on October 17, 2000, and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Form 8-K with a report date of
April 17, 2002 and which was filed with the Commission on April 25, 2002, and
incorporated herein by reference.
To the Board of Directors and Stockholders Security Intelligence
Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Security
Intelligence Technologies, Inc. and subsidiaries as of June 30, 2002, and the
related statements of operations, changes in stockholders' deficit and cash
flows for the years ended June 30, 2002 (consolidated basis) and June 30, 2001
(combined basis). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Security
Intelligence Technologies, Inc. and subsidiaries as of June 30, 2002, and the
results of their operations and their cash flows for the years ended June 30,
2002 (consolidated basis) and June 30, 2001 (combined basis) in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note1, the
Company has incurred operating losses in fiscal 2002 and 2001, negative cash
flows from operations, and has limited cash and other resources to fund future
operations. In addition, the Company is involved in material litigation, the
costs of which have significantly impacted liquidity. Management's plans
concerning these matters are also discussed in Note 1. The financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
Jericho, New York
High Low
Fiscal 2002
Quarter ended
December 31, 2001 $0.35 $0.15
Quarter ended
March 31, 2002 $2.55 $0.15
Quarter ended
June 30, 2002 $2.05 $0.30
Number of securities
remaining available
Weighted average for future issuance
Number of securities to exercise price of under equity
be issued upon outstanding compensation plans
exercise of options, warrants (excluding
outstanding options, and rights securities reflects
warrants and rights (b) in columns (a))
(a) (c)
------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by security holders -0- N.A. -0-
------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not approved by security holders 3,400,000 $1.02 217,000
------------------------------------------------------------------------------------------------------------------------
Total 3,400,000 $1.02 217,000
------------------------------------------------------------------------------------------------------------------------
We granted a non-qualified stock option to Mr. Ben Jamil, chief executive
officer and a director, to purchase 1,000,000 shares of common stock at $2.00
per share. Mr. Jamil's employment agreement is described under "Item 10.
Executive Compensation."
The following discussion should be read in conjunction with the financial
statements and notes thereto of the Company. Such financial statements and
information have been prepared to reflect the Company's financial position as of
June 30, 2002.
Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies and expectations of
the Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," "prospects" or similar
expressions. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain.
(iii) an increase in website and internet related costs of
$41,525, or 287.6% to $55,963 in fiscal 2002 from $14,438 in fiscal 2001
expended to increase website sales and improve communications.
Depreciation and amortization. Depreciation and amortization decreased by
$2,607, or 3.0% to $84,774 in fiscal 2002 from $87,381 in fiscal 2001 primarily
as a consequence of the certain assets becoming fully-depreciated in fiscal
2001.
Name Age Position
---------------------------- -------------- ----------------------------------------------
Ben Y. Jamil 69 Chairman of the board, chief executive officer
and director
Chris R. Decker 55 Chief financial officer and director
Tom Felice 41 Vice president sales and director
Manchem Cohen 50 Vice president and director
Nomi Om 41 Vice president and director
Sylvain Naar 61 Director
Sylvain Naar has been a director of CCS since March 2002 and became one of our
directors upon completion of the merger. From 1990 to February 2002, Mr. Naar
was vice president for product and business development at Copytele, a developer
of advanced flat panel displays and secure communication products. With over 30
years experience in telecommunications, Mr. Naar has held numerous executive
positions at Hazeltine, Thomson, CSF, and Alcatel.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation (Adwards)
Fiscal Options, SARs
Name and Principal Position Year Salary Bonus (Number)
------------------------------- --------- ----------- -----------------------------------------
Ben Jamil, chief executive 2002 $143,223 $- 1,000,000
officer 2001 135,200 -
2000 135,200 -
Option Exercises and Outstanding Options
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year Fiscal Year
End End
Shares Value
Percent of Potential Realizable Value
Total an Annual Rates of Stock
Number of Options Price Appreciation for
Shares Granted to Option Term
Underlying Employees Exercise --------------------------
Options in Fiscal Price Per Expiration
Name Granted Year Share Date 5% 10%
--------------------------------------------------------------------------------
Ben Jamil 1,000,000 100.0% $2.00 April 2007 $ * $ *
Shares of Common Percentage of
Stock Benefically Outstanding
Name Owned Common Stock
---------------------------------- ------------------ --------------
Ben Jamil 11,900,000 68.7%
145 Huguenot Street
New Rochelle, NY 10801
Michael Farkas 1,347,000 7.8%
1221 Brickell Avenue
Miami, FL 33131
Chris R. Decker - -
Menachem Cohen - -
Tom Felice 250,000 1.4%
Nomi Om - -
Sylvain Naar - -
All directors and officers as a 12,150,000 70.2%
group (6 individuals)
In connection with an agreement between Mr. Ben Jamil and two financial
consultants entered into prior to the reverse merger, the consultants or their
designees were to purchase a 30% interest in five of our subsidiaries, and that
30% was to have been exchanged for 1,500,000 shares of series B preferred stock.
Mr. Jamil has advised the consultants and their designees that, as a result of
their failure to pay the consideration for the shares, the agreement is
terminated and they have no interest in the series B preferred stock or the
stock in the five subsidiaries. It is possible that the consultants or their
designees may claim that they own the series B preferred stock or the stock in
the five subsidiaries.
(2) Current Report on Form 8-K filed on May 6, 2002 with respect to
Item 5.
(3) Current Report on Form 8-K/A filed on July 1, 2002 with respect
to Item 1, 2 and 7.
(4) Current Report on Form 8-K filed on October 24, 2002
with respect to Item 4.
(5) Current Report on Form 8-K filed on October 29,
2002 with respect to Item 4.
10.2 Form of pledge Agreement, dated as of
April 17, 2002, by and between the Registrant and ATLAS EQUITY (3)
Independent Auditors Report F - 1
Consolidated Balance Sheet June 30, 2002 F - 2
Statements of Operations for the years ended June 30, 2002
(consolidated basis) and June 30, 2001 (combined basis) F - 3
Statement of Stockholder's Deficit for the years ended June
30, 2002 (consolidated basis) and June 30, 2001 (combined basis) F - 4
Statements of Cash Flow for the years ended June 30, 2002
(consolidated basis) and June 30, 2001 (combined basis) F - 5
Notes to financial statements F - 6 - F - 23
October 17, 2002
Current Assets:
Cash $32,344
Inventory 2,190,187
Other current assets 185,515
-----------
Total current assets 2,408,046
Property and Equipment, at cost less accumulated
depreciation and amortization of $390,938 227,113
Other assets 47,733
-----------
Total assets $2,682,892
===========
Current liabilities:
Note payable - bank $200,000
Accounts payable and accrued expenses 2,030,866
Note payable - CEO/stockholder 876,554
Customer deposits 1,049,772
Deferred revenue 346,191
Deferred rent payable 48,255
-----------
Total current liabilities 4,551,638
-----------
Commitments and contingencies - See Notes
Stockholders' deficit:
Preferred stock, $.0001 par value, 10,000,000 shares
authorized:
Series A Convertible-$1.00 per share liquidation
authorized, issued and outstanding 150
Common stock, $.0001 par value, 100,000,000 shares
authorized, 16,992,346 issued and outstanding 1,699
Additional paid in capital 418,417
Accumulated deficit (2,289,362)
-----------
Total stockholders' deficit (1,868,746)
-----------
Total liabilities and stockholders' deficit $2,682,892
===========
The accompanying notes are an integral part of these financial statements.
Year Ended
--------------------------
June 30,
--------------------------
2002 2001
-------------- -----------
(Consolidated) (Combined)
Sales $5,609,557 $6,229,244
-------------- -----------
Costs and expenses:
Cost of sales 2,230,969 2,624,205
Compensation and benefits 2,236,191 1,997,295
Professional fees and legal settlements 1,130,848 405,041
Selling, general and administrative
expenses 2,139,123 1,490,945
Unrealized loss on derivatives 150,953 -
Depreciation and amortization 84,774 87,381
-------------- -----------
7,972,858 6,604,867
-------------- -----------
Operating loss (2,363,301) (375,623)
Interest expense 65,358 51,704
-------------- -----------
Loss before income tax benefit (2,428,659) (427,327)
Income tax benefit (29,000) (101,000)
-------------- -----------
Net loss $(2,399,659) $(326,327)
============== ===========
Loss per share, basic and diluted $(0.19) $(0.03)
============== ===========
Weighted average number of shares 12,896,403 11,900,000
============== ===========
|
The accompanying notes are an integral part of these financial statements.
Security Intelligence Technologies, Inc. and Subsidiaries
Statement of Changes in Stockholders' Deficit
Years Ended June 30, 2002 and 2001
Retained
Convertible Preferred Additional Earnings Total
Series A Series B Common Stock Paid-in (Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Capital Deficit) Deficit
--------------------------------------------------------------------------------------------
Balances, July 1, 2000 - $- - $- 5,100 $5,100 - $436,624 $441,724
Net loss - - - - - - - (326,327) (326,327)
--------------------------------------------------------------------------------------------
Balances,
June 30, 2001 (combined) - - - - 5,100 5,100 - 110,297 115,397
Issuance of preferred stock
to CEO/stockholder in
exchange for common
stock of affiliated
companies 3,500,000 350 1,500,000 150 (4,100)(4,100) 3,600 - -
11,900 for 1 forward common
stock split and change in par value
to $.0001 per share - - - - 11,899,000 190 (190) - -
Sale of common stock - - - - 75,000 7 74,993 - 75,000
Issuance of common stock
to settle debt - - - - 417,346 42 348,248 348,290
Issuance of common stock
and elimination of
accumulated deficit
of legal acquirer in
reverse merger - - - - 4,600,000 460 (44,814) - (44,354)
Amortization of deferred
compensation - - - - - - 36,580 - 36,580
Net loss - - - - - - - (2,399,659) (2,399,659)
--------------------------------------------------------------------------------------------
Balances,
June 30, 2002 (consolidated) 3,500,000 $350 1,500,000 $150 16,992,346 $1,699 $418,417 $(2,289,362) $(1,868,746)
============================================================================================
|
The accompanying notes are an integral part of these financial statements.
Year Ended
-------------------------
June 30,
-------------------------
2002 2001
-------------- ----------
(Consolidated) (Combined)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,399,659) $(326,327)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 84,774 87,381
Unrealized loss on derivatives 150,953 -
Amortization of deferred compensation 36,580 -
CHANGES IN OPERATING ASSETS AND
LIABILITIES:
(Increase) in inventory (190,751) (109,411)
(Increase) in other current
assets (70,127) (95,811)
Increase (decrease) in accounts
payable and accrued expenses 1,568,265 (587,135)
Increase in customer deposits 754,275 295,497
(Decrease) increase in deferred
revenue (258,673) 505,509
Increase in deferred rent payable 18,597 29,658
-------------- ----------
Net cash used in operating activities (305,766) (200,639)
-------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,166) (26,393)
(Increase) in other assets (10,500) (22)
-------------- ----------
Net cash used in investing activities (12,666) (26,415)
-------------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 75,000 -
Borrowings under note payable - bank - 300,000
Repayments of note payable - bank (200,000) -
Borrowings under note payable -
CEO/stockholder 607,554 -
Repayments of note payable -
CEO/stockholder (150,000) (90,224)
-------------- ----------
Net cash provided by financing activities 332,554 209,776
-------------- ----------
Net increase (decrease) in cash 14,122 (17,278)
Cash, beginning of year 18,222 35,500
-------------- ----------
Cash, end of year $32,344 $18,222
============== ==========
|
The accompanying notes are an integral part of these financial statements.
- Continued