Florida 65-0928369 (State or other jurisdiction of formation) (IRS Employer Identification No.) |
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, 2003 were $3,729,165.
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 $5,405,204 at September 24, 2003.
The number of shares of common stock $.0001 par value, of the Registrant issued and outstanding as of September 24, 2003 was 19,309,389.
TABLE OF CONTENTS
Page
Number
PART I 1
BUSINESS 1
PROPERTIES 13
LEGAL PROCEEDINGS 13
SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS 15
PART II 15
MARKET FOR RESISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 17
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 20
CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 20
PART III
|
EXECUTIVE COMPENSATION 23
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 25
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 26
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.
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.
Our products are marketed under CCS International, Ltd. ("CCS"), G-Com
Technologies and The Counter Spy Shops of Mayfair, London(R) brand names and are
sold primarily through a worldwide network of sales agents, including four
retail stores in the United States and one in London.
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.
During the year we entered into three joint Venture agreements with technology companies. On July 2, 2002 we entered into a joint venture agreement with MD Information Systems, a Russian company that develops, manufactures and markets voice logging products and services. On October 30, 2002 we entered into a joint venture agreement with Power Telecom Co., Ltd. a Korean company that develops manufactures and markets GPS equipment and services. On April 12, 2003 we entered into a joint venture agreement with VTF Company a Russian company that develops, manufactures and markets products designed to monitor, intercept and jam radio frequency signals and other radio electronic devices. In connection with these agreements we and our joint venture partners have formed new entities, limited liability companies, where ownership and results of operations are shared equally. The joint venture agreements grant the new entities exclusive marketing rights to our joint venture partner's products, except in the countries in which they are domiciled. As of June 30, 2003, the joint ventures have not generated any revenues or other significant business activity.
INDUSTRY OVERVIEW
We design and assemble security products and market to military, law
enforcement, security and corrections agencies, by providing specialized
security services and products to multinational corporations and governmental
agencies. 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.
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.
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.
GROWTH STRATEGY
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.
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 sales representatives and international distributors to
sell and service our equipment. 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.
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:
Capitalize on Exposure to Military Programs. The events of September 11,
2001, have resulted 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. 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 will also grow the scope of our
existing product and service offerings by servicing existing customers who
expand geographically.
Products and Services
We distribute a wide range of specialized products and systems covering
security, privacy, home and personal
Products
We offer the following products. 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. 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
Services
We offer comprehensive security training programs in counterintelligence and counter-surveillance in Miami, New York, Mexico, London and Hong Kong. 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 intend to schedule a series of seminars to be held throughout the world
during the first half of fiscal 2004. 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 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 five 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. However, because
of our limited resources, we have reduced our advertising and promotional
expense.
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 is 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.
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, intercept 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.
Competition
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.
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.
The marketplace for manufacturers and vendors for security and surveillance
products and systems is highly
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.
Business Combinations
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:
o 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, Ben Jamil, 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.
o Our corporate name was changed from HipStyle.com, Inc. to Security
Intelligence Technologies, Inc.
o Our officers and directors resigned.
o 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.
o 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."
Employees
As of September 24, 2003, we had a total of approximately 50 employees, of which approximately 25 were employed at our main office and 25 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. RISK FACTORS
We require significant working capital in order to fund our operations. At
Our accounts payable and accrued expenses increased from $2.1 million at
Our bank credit line terminated on November 1, 2002. Our main 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, and to date, we do not have any agreement with any replacement lender. Our failure to obtain a credit 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
Our independent auditors have included an explanatory paragraph in their
Because of our stock price and our history of losses, we may have
If we do not have access to the most current technology, we may not be
able Because of our limited resources, we may not be able to develop or
We are subject to government regulations, which if violated, could
prohibit Because we are dependent on our management, the loss of key executive
Because we lack patent or copyright protection, we cannot assure you that 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
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
We do not anticipate paying dividends on our common stock. The rights of the holders of common stock may be impaired by the potential
Shares may be issued pursuant to our stock plans which may affect the
Because we are subject to the "penny stock" rules, stockholders may have
We May Not Be Able To Comply In A Timely Manner With All Of The
Recently Enacted We lease approximately 9,840 square feet of executive offices and warehouse
space 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 2005 to 2010
at a current annual rent of $464,000, 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 the Company's subsidiaries were arrested pursuant to a
criminal complaint filed in the United States District Court of the Southern
District of Florida. The complaint alleged 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.
In June 1998, a photographer and model formerly retained by CCS filed suit in
U. S. District Court for the
On November 1, 2002, a former Company supplier filed suit in the United
States District Court for the District of Maryland, captioned Micronel Safety,
Inc. v. CCS Internationnal Ltd. seeking damages of $242,400 for breach of
contract to purchase certain products. CCS has denied the material allegations
of the plaintiff's claim and has raised affirmative defenses thereto. We believe
that we have valid defenses to the claim.
On or about March 13, 2003, an action was commenced against CCS and its
subsidiary in the Circuit Court of the 11th Judicial Circuit, Miami-Dade County,
FL captioned Welcome Publishing Company, Inc. v. CCS International, Ltd. and
Counter Spy Shop of Mayfair Ltd., Inc. seeking damages of $140,430 for an
alleged breach of an advertising contract. CCS has denied the material
allegations of the plaintiff's claim and has raised affirmative defenses
thereto. We believe that we have valid defenses to the claim. A non-binding
mediation took place on October 9, 2003 during which the parties discussed a
settlement but were unable to reach an agreement.
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 had sought to recover $91,500,
which was paid to CCS in connection with a distributorship agreement between the
parties, plus costs and interest. On July 10, 2002, the Company and Shenzhen
Newtek entered into a Settlement Agreement under which SIT issued 67,000 shares
of its common stock in full settlement, subject to certain terms, of the $67,000
claim. The Settlement Agreement granted Shenzhen Newtek a price guarantee upon
the sale of the shares and, alternatively, the option after July 10, 2003 to
return the 67,000 shares to the company in lieu of a cash payment of $35,000. In
August 2003 Shenzhen Newtek returned the 67,000 shares to the company however to
date, no cash payment has been made.
In June 2001, a former product licensee of CCS brought suit in Circuit Court,
Palm Beach, Florida, captioned Dunterman v. CCS International Ltd. The suit
claimed that CCS engaged in breach of contract, among other allegations. On
October 21, 2002, the Company and Allan L. Dunterman Jr. entered into a
Settlement Agreement under which the Company issued 110,000 shares of its common
stock in full settlement, subject to certain terms, of an $88,750 claim.
We are also the defendant in 3 pending actions arising out 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 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 Co. Ltd. and USA International Business Connections Corp. v.
CCS 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.
On December 3, 2002 EHS Elektronik Sistemleri ("EHS") submitted a demand for
arbitration to the American Arbitration Association in NY, NY claiming CCS
breached a joint venture agreement it had entered into with CCS in 1994 and
seeking a refund of the $200,000 it had paid to CCS. A hearing has been set for
October 23 and 24, 2003.
On July 1, 2002, the Company's London subsidiary, Counter Spy Shop of Mayfair
Limited ("CSS"), entered into an agreement to assume the business operations of
another UK corporation ("Predecessor") for nominal consideration. The
Predecessor is a defendant in ongoing litigation brought by a former customer,
who has sued for breach of a contract executed in 1998 and is seeking a refund
of approximately $293,000 in products and services purchased from the
Predecessor. Due to the business transfer, there is a possibility that the
plaintiff could name CSS as a defendant in the case. The Company, in
consultation with counsel, believes that the Predecessor has valid defenses to
the claim, and that CSS has valid defenses against any action that may be
brought against it.
Not applicable.
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, 2003, 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 24, 2003, the final quoted price by the OTC Bulletin Board was
$.73 per share of common stock.
As of September 24, 2003 there were 19,304,389 shares of Common Stock
outstanding, held of record by approximately 225 record holders and beneficial
owners.
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.
On April 17, 2002 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."
During the fiscal year ended June 30, 2003, we issued the following
securities in transactions that were not registered pursuant to the Securities
Act of 1933, as amended:
On July 10, 2002, the Company and Shenzhen Newtek, a former product
distributor of the Company, entered into a Settlement Agreement under which the
Company issued 67,000 restricted shares of its common stock in full settlement,
subject to certain terms, of a $67,000 claim. If the market price of the
Company's common stock on July 10, 2003 is less than $1.00 per share, the
Company is to pay the plaintiff the difference between $67,000 and the value of
the stock or in the alternative the plaintiff can return the 67,000 shares to
the Company in return for a payment of $35,000. In August 2003 Shenzhen Newtek
returned the 67,000 shares to the Company however to date, no cash payment has
been made.
On October 21, 2002, the Company and Allan L. Dunterman Jr. entered into a Settlement Agreement under which the Company issued 110,000 restricted shares of its common stock in full settlement, subject to certain terms, of an $88,750 claim. If the market price of the Company's common stock on October 21, 2003 or such later date that the plaintiff sells the shares is less than $.81 per share, the Company is to pay the plaintiff the difference between $88,750 and the value of the stock. At September 24, 2003, the closing price of the Company's common stock was $.73 per share. On October 7, 2002, the Company entered into an agreement with an investment
banking firm under which the Company issued 50,000 restricted shares of common
stock.
During the year the Company issued 112,043 restricted shares of common stock
for investor relations consulting services of $15,000.
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.
GENERAL OVERVIEW.
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, 2003. Critical accounting policies
The Company prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America. Preparing
financial statements in accordance with generally accepted accounting principles
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. The following paragraphs
include a discussion of some of the significant accounting policies and methods
applied to the preparation of the Company's consolidated financial statements.
Review Note 1 to the financial statements for further discussion of significant
accounting policies.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 combined financial statements, and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from those
estimates.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market.
Long-lived assets
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets may be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
their carrying amounts.
Revenue recognition
The Company recognizes revenue from store sales upon the delivery of
merchandise to a customer. Non-refundable advance payments received under
marketing and distribution arrangements are deferred and either applied as
payments towards customer purchases made pursuant to the terms of the respective
agreements, or recognized as income at the termination of the agreement if
specified purchase quotas have not been met by the customer. Customer deposits
are initially recorded as liabilities and recognized as revenue when the related
goods are shipped.
Stock-based Compensation
The Company periodically grants stock options to employees in accordance with
the provisions of its stock option plans, with the exercise price of the stock
options being set at the closing market price of the common stock on the date of
grant. The Company accounts for stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock
Income taxes
The Company uses the liability method to determine its income tax expense.
Under this method, deferred tax assets and liabilities are computed based on
differences between financial reporting and tax basis of assets and liabilities
and are measured using the enacted rates and laws that will be in effect when
the differences are expected to reverse. Deferred tax assets are reduced by a
valuation allowance if, based on the weight of the available evidence, it is
more likely than not that all or some portion of the deferred tax assets will
not be realized. The ultimate realization of the deferred tax asset depends on
the Company's ability to generate sufficient taxable income in the future.
Financial guarantees
Certain shares issued by the Company to settle debt obligations contain a
price guarantee that requires the Company to settle in cash any difference
between the original face amount of the debt and proceeds from the creditor's
subsequent sale of the shares. The Company accounts for these transactions by
recording the debt at fair value with periodic mark-to-market adjustments until
the guarantee is settled. Unrealized gains or losses resulting from changes in
fair value are included in earnings and accrued expenses.
Fair Value of Financial Instruments
The fair values of financial instruments recorded on the balance sheet are
not significantly different from their carrying amounts due to the short-term
nature of those instruments, or because they are accounted for at fair value.
New accounting pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The adoption of this Interpretation did not
have a material effect on our consolidated financial statements. Joint Venture Agreements
During the year the Company entered into three joint Venture agreements with
technology companies. On July 2, 2002 the Company entered into a joint venture
agreement with MD Information Systems, a Russian company that develops,
manufactures and markets voice logging products and services. On October 30,
2002 the Company entered into a joint venture agreement with Power Telecom Co.,
Ltd. a Korean company that develops manufactures and markets GPS equipment and
services. On April 12, 2003 the Company entered into a joint venture agreement
with VTF Company a Russian company that develops, manufactures and markets
products designed to monitor, intercept and jam radio frequency signals and
other radio electronic devices. In connection with these agreements the Company
and its joint venture partner have formed new entities, limited liability
companies, whose ownership and share of operating results are equally owned. The
joint venture agreements grant the new entities exclusive marketing rights to
the Company's joint venture partner's products, except in the countries in which
they are domiciled. The Company accounts for its investments in the joint
ventures using the equity method because its ownership is greater than 20% and
it has the ability to exercise significant influence over the operating,
investing and financing decisions of the joint venture entities. Under the
equity method, the Company will record its pro-rata share of joint venture
income or losses and adjust the basis of its investment accordingly. As of June
30, 2003, the joint ventures have not generated any revenues or other
significant business activity.
Foreign Currency Translation
RESULTS OF OPERATIONS - Year ended June 30, 2003 and year ended June 30,
2002
Revenues. Revenues for fiscal 2003 were $3,729,165 a decrease of $1,880,392
or 33.5%, from revenues of $5,609,557 in fiscal 2002. 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. The decrease resulting from these
factors was partially offset by sales in our new retail store in London that
commenced operations on July 1, 2002.
Cost of Sales. Cost of sales decreased by $403,924 or 18.1%, to $1,827,045 in
fiscal 2003 from $2,230,969 in fiscal 2002. Cost of sales as a percentage of
product sales increased to 49.3% in fiscal 2003 from 44.5% in fiscal 2002
primarily due to writing down the cost of obsolete or slow moving items in
Fiscal 2003.
Compensation and benefits. Compensation and benefits increased by $ 448,715,
or 20.1% to $2,547,846 in fiscal 2003 from $2,236,191 in fiscal 2002 primarily
due to (i) an increase in amortization of deferred compensation relating to
stock options we have granted to consultants of 5,301, (ii) expense in our new
retail store in London that commenced operations on July 1, 2002 of $207,113 and
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 2004 as we add additional
personnel to the sales department.
Professional fees and legal matters. Professional fees and legal matters
decreased by $194,227, or 17.2% to $936,621 in fiscal 2003 from $1,130,848 in
fiscal 2002. Based on a review of outstanding legal matters and unpaid
settlements, we have established, in consultation with outside counsel, reserves
for litigation costs that are probable and can be reasonably estimated. We can
provide no assurance, however, that such reserves will be sufficient to absorb
actual losses that may result from unfavorable outcomes. Moreover, it is
possible that the resolution of litigation contingencies will have a material
adverse impact on our consolidated financial condition, results of operations or
cash flows. We also expect that we will continue to incur attorney's fees and
the use of management resources to defend pending litigation and creditor
nonpayment claims during fiscal 2004.
Unrealized loss on financial guarantees. Unrealized loss on financial
guarantees is attributable to the decrease in market value relating to our price
guarantees on common stock which we have issued in payment of trade payables.
Unrealized loss on financial guarantees decreased $4,513, or 3.0% to $146,440 in
fiscal 2003 from $150,953 in fiscal 2002.
Depreciation and amortization. Depreciation and amortization increased by
$19,949, or 23.5% to $104,723 in fiscal 2003 from $84,774 in fiscal 2002
primarily as a consequence of expensing the net book value of leasehold
improvements in our Washington, DC store from where we have relocated before the
end of the depreciable life of the improvements.
Interest expense. Interest expense increased by $39,023, or 59.7% to $104,381
in fiscal 2003 from $65,358 in fiscal 2002 as a result of a continued increase
in the ordinary course of business of the Company's outstanding debt
obligations.
Income tax benefit. The income tax benefits of $29,000 in fiscal 2002
represented refundable taxes recovered through net operating loss carry-back
claims in January 2003. In January 2003, we received approximately $158,000 of
tax refunds from a federal loss carry-back refund claim. Since our carry-back
ability has been utilized and the future realization of our losses is uncertain,
no benefit resulting from our losses in fiscal 2003 has been provided.
As a result of the forgoing, our net loss increased by $1,448,778, or 60.0%
to $3,848,437, $.22 per share, in fiscal 2003 from $2,399,659, $.19 per share,
in fiscal 2002 as a result of the factors described above.
We require significant working capital to fund our future operations. At June
30, 2003 we had cash of $21,638 and a working capital deficit of $5,805,771. The
aggregate amount of accounts payable and accrued expenses at June 30, 2003 was
$3,563,776. As a result of our continuing losses, our working capital deficiency
has increased.
We funded our losses through loans from our chief executive. At June 30, 2003, we owed our chief executive officer $1,451,620, of which $575,066 was incurred during fiscal 2003. We also utilized vendor credit and customer deposits and deferred license fees. 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. In many instances 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 577,000 shares of common stock issued during fiscal 2003 and 2002, the market value of the common stock on June 30, 2003 was approximately $297,393 less than the guaranteed prices. Our accounts payable and accrued expenses increased from $2,079,121 at June 30, 2002 to $3,563,776 at June 30, 2003 reflecting our inability to pay creditors currently. We also had customer deposits and deferred revenue of $2,312,769 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
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, 2003. 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
DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL
Set forth below is information concerning our directors and executive
officers.
Ben 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 a director of CCS since October 2001 and became one of
our directors upon completion of the merger. He had been vice president sales
until May 2003 when he resigned that position to pursue other opportunities.
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.
Sylvain Naar has been a director of CCS since March 2002 and became one of
our directors upon completion of the merger. He became vice president in May of
2003. 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.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent
(10%) of a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission ("SEC") initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than ten percent stockholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. To the Company's knowledge, based solely on its review of
the copies of such reports furnished to the Company during the year June 30,
2003, all Section 16(a) filing requirements applicable to its officers,
directors and greater than ten percent beneficial
Director Compensation
Directors who are also employees of the Company are not paid any fees or
other remuneration for service on the Board or any of its Committees.
Meetings and Committees of the Board of Directors.
The Board of Directors met three (3) times during the fiscal year ended June
30, 2003. The Board of Directors has a standing Audit Committee.
The Audit Committee
Through May 1, 2003 the Audit Committee of the Board of Directors consisted
of two (2) individuals Chris R. Decker an officer and director and Sylvain Naar,
a director. On May 1, 2003 Tom Felice a director and previous officer replaced
Sylvain Naar. The Audit Committee met once (1) time during the fiscal year
ending June 30, 2003. The Audit Committee is primarily responsible for reviewing
the services performed by the Company's independent public accountants,
evaluating the Company's accounting policies and its system of internal
controls, and reviewing significant finance transactions.
The functions of the Audit Committee are focused on three areas:
o the adequacy of the Company's internal controls and financial reporting
process and the reliability of the Company's financial statements.
o the independence and performance of the Company's independent public
accountants.
o the Company's compliance with legal and regulatory requirements.
The Audit Committee meets with management periodically to consider the
adequacy of the Company's internal controls and the objectivity of its financial
reporting. The Audit Committee discusses these matters with the Company's
independent public accountants and with appropriate Company financial personnel.
Meetings are held with the independent public accountants who have unrestricted
access to the Audit Committee. The Audit Committee also appoints and engages the
independent public accountants and reviews periodically their performance and
independence from management. In addition, the Audit Committee reviews the
Company's financing plans and reports recommendations to the full Board of
Directors for approval and to authorize action.
Management has primary responsibility for the Company's financial statements
and the overall reporting process, including the Company's system of internal
controls. The independent public accountants audit the annual financial
statements prepared by management, express an opinion as to whether those
financial statements present fairly the financial position, results of
operations and cash flows of the Company in conformity with generally accepted
accounting principles and discusses with the Audit Committee any issues they
believe should be raised with the Audit Committee.
The Audit Committee reviews the Company's audited financial statements and
meets with both management and Schneider & Associates, LLP, the Company's
independent public accountants, to discuss such audited financial statements,
and financial statements included in quarterly reports on Form 10-QSB.
Management represents to the Audit Committee that the financial statements are
prepared in accordance with generally accepted accounting principles. The Audit
Committee receives from and discusses with Schneider & Associates, LLP the
written disclosure and the letter required by Independence Standards Board
Standard No. 1 (Independence Discussions with Audit Committees). These items
relate to that firm's independence from the Company.
Set forth below is information with respect to compensation paid or accrued
by us for fiscal years ended June 30, 2003 and 2002 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.
Option Exercises and Outstanding Options
The following table sets forth information concerning the exercise of options
during the fiscal year ended June 30, 2003 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.
There were no option grants in the fiscal year ended June 30, 2003 to any
officer named in the summary compensation table.
The following table and discussion provides information as to the shares of
common stock benefically owned on September 24, 2003 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 24, 2003.
The shares beneficially owned by Michael Farkas represents 1,641,100 shares
of common stock owned by him and 54,000 shares of common stock owned by Atlas
Equity, which is beneficially owned by Mr. Farkas.
Atlas Equity had agreed to pledge 1,500,000 shares of common stock, which
shares were to be released to Atlas Equity if we raise $925,000 by June 14,
2002. On December 16, 2003 the Company and Atlas Equity and certain successor
owners of Atlas Equity's Pledged Shares entered into and agreement that reduced
the number of Pledged Shares to 750,000, restricted the number of Pledged Shares
that could be sold for a period of one year and extended the date to raise the
$925,000 to July 7, 2004. To date Atlas Equity has raised $525,000 of financing.
The shares beneficially owned by Mr. Decker represent shares of common stock
issuable upon exercise of options held by him.
The shares beneficially owned by Mr. Cohen represent shares of common stock
issuable upon exercise of options held by him.
The shares beneficially owned by Ms. Om represent shares of common stock
issuable upon exercise of options held by him.
The shares beneficially owned by Mr. Felice represent shares of common stock
issuable upon exercise of options held by him.
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
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:
o 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.
o 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.
o Our officers and directors resigned.
o Ben 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.
o 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/A filed on July 1, 2002 with respect to Items
1, 2 and 7.
(2) Current Report on Form 8-K filed on October 24, 2002 with respect to Item
4.
(3) Current Report on Form 8-K filed on October 29, 2002 with respect to Item
4.
(4) Current Report on Form 8-K filed on June 27, 2003 with respect to Item 5.
(b) Exhibits
Exhibit 2.1 Agreement and Plan of Merger dated as of February 28, 2002 among the
Registrant, CCS International, Ltd., and
3.1 Articles of incorporation (2)
3.1 Articles of Amendment to Articles of Incorporation (4)
3.2 By-laws (2)
10.1 Employment Agreement, dated as of April 17, 2002, by and between the
Registrant and Ben Jamil. (3)
10.2 Form of pledge Agreement, dated as of April 17, 2002, by and between the
Registrant and Atlas Equity (3)
10.3 Agreement dated as of December 16, 2002, by and between the Registrant
and ATLAS EQUITY and successor owners of Atlas Equity's pledged shares.
10.3 2002 Stock Plan (4)
10.4 Lease dated June 1, 2000 between Rotterdam Ventures, Inc. d/b/a Galesi
Enterprises and the Registrant. (4)
10.5 2003 Stock Incentive Plan
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.
(4) Filed as an exhibit to the Registrant's Form 10-KSB filed with the
commission on November 6, 2002, and incorporated herein by reference.
1. Audit Fees. The aggregate fees billed for the audit of our financial
statements and review of financial statements included in our quarterly Form
10-QSB were $67,825 and $71,829 for the fiscal years ended June 30, 2003 and
June 30, 2002 respectively.
2. Audit-Related Fees. There were no audit-related fees billed for the fiscal
years ended June 30, 2003 and June 30, 2002.
3. Tax Fees. Tax fees billed were $725 and $3,512 for the fiscal years ended
June 30, 2003 and June 30, 2002 respectively.
4. All Other Fees. Fees related to the reverse merger were $19,950 for the
fiscal year ended June 30, 2002.
Notes to financial statements F - 6 - F- 24
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, 2003, and the
related statements of operations, changes in stockholders' deficit and cash
flows for the years ended June 30, 2003 and June 30, 2002. 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, 2003, and the
results of their operations and their cash flows for the years ended June 30,
2003 and June 30, 2002 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 Note 1, the
Company has incurred operating losses in fiscal 2003 and 2002, 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
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.
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.
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.
- Covert audio and video logging systems
to monitor employees and household surveillance.
- 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.
taxicabs.
Product Design and Installation
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.
o 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.
June 30, 2003, we had cash of approximately $22,000 and a working
capital deficit in excess of $5.9 million. In order to develop and market our
products and pay our current liabilities, we require additional working capital.
In the event that we are unable to raise the necessary funding we may be unable
to continue operations.
June 30, 2002 to $3.7 million at June 30, 2003, reflecting our inability to pay
creditors currently. We also had customer deposits and related deferred revenue of $2.3 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.
sustained losses of $3.8 million, or $.22 per share (basic and diluted), for the fiscal year ended June 30, 2003, $2.4 million, or $.19 per share (basic and diluted), for the fiscal year ended June 30, 2002, and our losses are continuing. We cannot give any assurance that we can or will ever operate profitably.
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.
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 adequate funding for our business. Because of our losses, we are not able to increase our borrowing. Because of both our low stock price and our losses, we have not been able to raise adequate 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.
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.
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.
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, which 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 years ended June 30, 2003
and 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.
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, Sylvain
Naar, 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, Naar 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.
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.
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.
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.
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.
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 1,992,500 shares subject to options which were outstanding on June 30,
2003. 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.
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 our common stock and may
negatively affect the ability of purchasers of our common stock to sell such
securities.
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
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.
Or Proposed Corporate Governance Provisions.
Beginning with the enactment of the Sarbanes-Oxley Act of 2002 in July 2002, a
significant number of new corporate governance requirements have been adopted or
proposed. We believe that we currently comply with all of the requirements that
have become effective thus far, and with many of the requirements that will
become effective in the future. Although we currently expect to comply with all
current and future requirements, we may not be successful in complying with
these requirements at all times in the future. In addition, certain of these
requirements will require us to make changes to our corporate governance
practices. For example, one Nasdaq proposal
(which may become applicable to
companies listed on the OTC Bulletin Board)
under review by the Securities
and Exchange Commission will require that a majority of our Board of Directors
be composed of independent directors by our 2004 Annual Meeting of Stockholders.
Currently, only one of the members of our Board of Directors, Tom Felice, is
considered to be independent. We may not be able to attract a sufficient number
of directors in the future to satisfy this requirement, if enacted and if it
becomes applicable to our Company. Additionally, the Commission recently passed
a final rule that requires companies to disclose whether a member of their Audit
Committee satisfies certain criteria as a "financial expert." We currently do
not have an Audit Committee member that satisfies this requirement and, we may
not be able to satisfy this, or other, corporate governance requirements at all
times in the future, and our failure to do so could cause the Commission or
Nasdaq to take disciplinary actions against us, including an action to delist
our stock from the OTC Bulletin Board or any other exchange or electronic
trading system where our shares of common stock trade.
Southern District of New York captioned Ross & Vassilkioti v. CCS
International, Ltd. seeking damages for alleged copyright infringement and other
claims. The judge in the case has granted the plaintiff partial summary judgment
as to the copyright infringement. On June 18, 2003, a jury awarded the
plaintiffs $350,000 on the copyright infringement portion of the case. 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 meritorious and valid defenses against the additional claims
asserted in the lawsuit and a valid basis for appeal of the jury award of
$350,000 and any additional adverse verdicts that may occur in this case. A
trial date for the remaining counts of the action has been set for October 16,
2003.
We believe that we have valid defenses to the claim.
COMMON STOCK
High Low High Low
-------- ------- -------- --------
Fiscal 2003 Fiscal 2002
------------------- ---------------
Quarter ended Quarter ended
September 30, 2002 $ 0.17 $ 0.15 September 30, 2001 N/A N/A
Quarter ended Quarter ended
December 31, 2002 $ 0.18 $ 0.16 December 31, 2001 $ 0.35 $ 0.15
Quarter ended Quarter ended
March 31, 2003 $ 0.07 $ 0.04 March 31, 2002 $ 2.55 $ 0.15
Quarter ended Quarter ended
June 30, 2003 $ 0.12 $ 0.10 June 30, 2002 $ 2.05 $ 0.30
The following table sets forth information as to equity compensation plans
pursuant to which we may issue our equity securities.
------------------------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
Weighted average future issuance under
Number of securities to exercise price of equity compensation plans
be issued upon exercise outstanding plans (excluding
of outstanding options, options, warrants securities reflects in columns (a))
warrants and rights and rights columns (a))
(a) (b) (c)
------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by
by security holders -0- N.A. -0-
------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not approved by
approved by security holders 3,400,000 $.97 7,500
------------------------------------------------------------------------------------------------------------------------------
Total 3,400,000 $.97 7,500
------------------------------------------------------------------------------------------------------------------------------
During the year the Company issued 80,000 restricted shares of common stock in
full payment of trade payables of $18,267.
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. 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.
Issued to Employees", and accordingly accounts for employee stock-based
compensation utilizing the intrinsic value method. FAS No. 123, "Accounting for
Stock-Based Compensation", establishes a fair value based method of accounting
for stock-based compensation plans. The Company has adopted the disclosure only
alternative under FAS No. 123, which requires disclosure of the pro forma
effects on earnings and earnings per share as if FAS No. 123 had been adopted as
well as certain other information. Stock options granted to non-employees are
recorded at their fair value, as determined in accordance with SFAS No. 123 and
Emerging Issues Task Force Consensus No. 96-18, and recognized over the related
service period. Deferred charges for options granted to non-employees are
periodically re-measured until the options vest.
In December 2002, the FASB
issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation. Although it does not require use of fair value method of
accounting for stock-based employee compensation, it does provide alternative
methods of transition. It also amends the disclosure provisions of SFAS No.123
and APB No. 28, Interim Financial Reporting, to require disclosure in the
summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
SFAS No. 148's amendment of the transition and annual disclosure requirements is
effective for fiscal years ending after December 15, 2002. The amendment of
disclosure requirements of APB No. 28 is effective for interim periods beginning
after December 15, 2002. We adopted SFAS No. 148 and APB No.28 on January 1,
2003.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business combinations initiated after
June 30, 2001 be accounted for under the purchase method and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives not be amortized, but will instead be tested at least
annually for impairment. We adopted SFAS No. 142 on July 1, 2002. We did not
carry any goodwill or other intangibles on our balance sheets as of June 30,
2003 or 2002, and therefore the adoption of SFAS No. 142 did not have a material
effect on our financial position or operating results.
In June 2001, the
FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No.
143 addresses financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated asset retirement
costs. This statement is effective for fiscal years beginning after June 15,
2002, however earlier application is permitted. We adopted SFAS No. 143 on July
1, 2002. The adoption of this statement did not have a material effect on our
financial position or operating results.
In August 2001, the FASB issued
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, it retains many of the fundamental provisions of SFAS No. 121.
SFAS No. 144 also supersedes the accounting and reporting provisions of APB No.
30, Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. However,
it retains the requirement in APB No. 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. We adopted SFAS No 144 on July 1, 2002. The
adoption of SFAS No. 144 did not have a material effect on our financial
position or results of operations.
In June 2002, the FASB issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities, which
addresses accounting for restructuring and similar costs. SFAS No. 146
supersedes previous accounting guidance, principally Emerging Issues Task Force
("EITF") 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit on Activity (including Certain Costs Incurred in a
Restructuring). We were required to adopt SFAS No. 146 for restructuring
activities initiated after December 31, 2002, and we adopted SFAS No. 146 on
January 1, 2003. SFAS No. 146 requires that the liability for costs associated
with an exit or disposal activity be recognized when the liability is incurred.
Under EITF 94-3, a liability for an exit cost was recognized at the date of our
commitment to an exit plan. SFAS No. 146 also established that the liability
should initially be measured and recorded at fair value. The adoption of SFAS
No. 146 did not have a material effect on our financial position or results of
operations.
In November 2002, the FASB issued FIN No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The interpretation elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
value,
or market value, of the obligations it assumes under the guarantee and must
disclose that information in its interim and annual financial statements. The
provisions related to recognizing a liability at inception of the guarantee for
the fair value of the guarantor's obligations do not apply to product warranties
or to guarantees accounted for as derivatives. The disclosure requirements are
effective for financial statements of interim or annual periods ending after
December 15, 2002, and the initial recognition and initial measurement
provisions apply on a prospective basis to guarantees issued or modified after
December 31, 2002. We adopted FIN No. 45 on January 1, 2003. The adoption of FIN
No. 45 did not have a material effect on our financial position or results of
operations.
In May
2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity, which requires mandatory
redeemable financial instruments to be classified as liabilities, the result of
which requires related expense to be classified as interest expense rather than
minority interest on a prospective basis. SFAS No. 150 is effective in the three
months ended June 30, 2003 for financial instruments entered into or modified
after May 31, 2003, and is otherwise effective July 1, 2003 for previously
issued instruments. SFAS No. 150 is not expected to have a material impact on
our financial position or results of operations.
The functional currency of the Company's UK subsidiary is the local currency.
Accordingly, the Company translates all assets and liabilities into U.S. dollars
at current rates. Revenues, costs, and expenses are translated at average rates
during each reporting period. Gains and losses resulting from the translation of
the consolidated financial statements are excluded from results of operations
and are reflected as a translation adjustment and a separate component of
stockholders' deficit. Translation adjustments were immaterial as of June 30,
2003. Gains and losses resulting from foreign currency transactions are
recognized in the consolidated statement of operations in the period they occur.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased by $228,577, or 10.7% to $1,910,546 in fiscal
2003 from $2,139,123 in fiscal 2002. The significant changes were primarily due
to (i) a decrease in advertising expense of $114,201, or 33.5% to $226,694 in
fiscal 2003 from $340,895 in fiscal 2002, (ii) a decrease in telephone expense
of $74,578, or 33.5% to $148,108 in fiscal 2003 from $222,686 in fiscal 2002,
due to lower rates charged by new service providers and (iii) a decrease in
shipping costs of $41,626, or 45.6% to $49,924 in fiscal 2003 from $91,550 in
fiscal 2002 all partially offset by expenses in our new retail store in London
that commenced operations on July 1, 2002.
borrowing. Our bank facility terminated on November 1, 2002. and to date, we do
not have any agreements with any replacement lender. Our failure to obtain a
credit 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, customer deposits and
vendor credit. Because of both our low stock price and our losses, we were not
been able to raise funds through the sale of our equity securities in fiscal
2002 and 2003. During July, August and September 2003 our stock price increased
and we raised $525,000 resulting from the exercise of options to buy our common
stock. Management cannot provide any assurance that our stock price will
increase or remain at its current level or that we will be able to raise any
more money 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 might suffer significant dilution and
the issuance of securities may result in a change of control. 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.
Name Age Position
---- --- --------
Ben Jamil 70 Chairman of the board, chief executive officer
and director
Chris R. Decker 56 Chief financial officer and director
Tom Felice 42 Director
Manchem Cohen 51 Vice president and director
Nomi Om 42 Vice president and director
Sylvain Naar 62 Vice president and director
owners were satisfied.
Long-Term
Compensation (Adwards)
Fiscal Options, SARs
Name and Principal Position Year Salary Bonus (Number)
----------------------------- ------- ----------- -------------------------
Ben Jamil, chief executive 2003 $ 250,000 $ - 1,000,000
officer 2002 172,799 - -
2001 135,200 - -
Number of
Securities Value of
Underlying Unexercised In-
Unexercised the-Money
Options at Fiscal Options at Fiscal
Year End Year End
Shares Acquired Value Exercisable/ Exercisable/
Name Upon Exercise Realized Unexercisable Unexercisable
---- ------------- -------- ------------- -------------
Ben Jamil -- -- --/1,000,000 --/--
Shares of Common Percentage of
Stock Benefically Outstanding
Name Owned Common Stock
----------------------------------- ----------------------- ---------------
Ben Jamil 11,900,000 61.6%
145 Huguenot Street
New Rochelle, NY 10801
Michael Farkas 1,695,100 8.8%
1221 Brickell Avenue
Miami, FL 33131
Chris R. Decker 300,000 1.5%
Menachem Cohen 300,000 1.5%
Tom Felice 250,000 1.3%
Nomi Om 250,000 1.3%
Sylvain Naar - -
All directors and officers as a 13,000,000 63.7%
group (6 individuals)
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.
No. Description
Independent Auditors Report F - 1
Consolidated Balance Sheet June 30, 2003 F - 2
Consolidated Statements of Operations for the year ended June 30, 2003
and June 30, 2002 F - 3
Consolidated Statement of Stockholder's Deficit for the years ended June
30, 2003 and June 30, 2002 F - 4
Consolidated Statements of Cash Flow for the years ended June 30, 2003
and June 30, 2002 F - 5
October 10, 2003 Schneider & Associates LLP
SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2003
ASSETS
Current Assets:
Cash $ 21,638
Inventory 1,448,314
Other current assets 52,442
-------------
Total current assets 1,522,394
Property and Equipment, at cost less accumulated depreciation
and amortization of $431,541 122,390
Other assets 54,946
-------------
Total assets $ 1,699,730
=============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 3,563,776
Note payable - CEO/stockholder 1,451,620
Customer deposits 1,277,695
Deferred revenue 1,035,074
-------------
Total current liabilities 7,328,165
-------------
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 preference, 3,500,000 shares
authorized, issued and outstanding 350
Series B Convertible-$1.00 per share liquidation preference, 1,500,000 shares
authorized, issued and outstanding 150
Common stock, $.0001 par value, 100,000,000 shares authorized,
17,411,389 shares issued and outstanding 1,741
Additional paid in capital 507,123
Accumulated deficit (6,137,799)
-------------
Total stockholders' deficit (5,628,435)
-------------
Total liabilities and stockholders' deficit $ 1,699,730
=============
The accompanying notes are an integral part of these financial statements.
F-2
SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
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June 30,
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2003 2002
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Sales $ 3,729,165 $ 5,609,557
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Costs and expenses:
Cost of sales 1,827,045 2,230,969
Compensation and benefits 2,547,846 2,236,191
Professional fees and legal matters 936,621 1,130,848
Selling, general and administrative expenses 1,910,546 2,139,123
Unrealized loss on financial guarantees 146,440 150,953
Depreciation and amortization 104,723 84,774
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7,473,221 7,972,858
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Operating loss (3,744,056) (2,363,301)
Interest expense 104,381 65,358