14 October 2004
Yesterday Yahoo notified James Atkinson (http://www.tscm.com), administrator of mail list TSCM-L hosted on Yahoo, that the mail list would be terminated if information was posted on the list about CCS, an allegedly disreputable security firm heading toward bankruptcy according to SEC filings.
Jim had posted to TSCM-L public SEC documents about CCS. Yesterday, Yahoo surreptitiously deleted all postings about CCS from the list archives without notifying Jim. Below is Jim's description of the events along with four recent CCS postings deleted by Yahoo among dozens of others.
| List of CCS Subsidiaries (From SEC filing below] |
State of Subsidiary Incorporation |
Doing Business AS |
| Homeland Security Strategies, Inc. | Delaware | Homeland Security Strategies, Inc. |
| Homeland Security Strategies of California, Inc. |
California | Homeland Security Strategies of California, Inc. |
| Homeland Security Strategies of Florida, Inc |
Florida | Homeland Security Strategies of Florida, Inc |
| CCS International, Ltd. | Delaware | CCS International, Ltd. |
| Counter Spy Shop of Mayfair London, Ltd. | DC | Counter Spy Shop of Mayfair London, Ltd. |
| Counter Spy Shop of Mayfair London, Ltd., Inc. |
Florida | Counter Spy Shop of Mayfair London, Ltd |
| Counter Spy Shop of Mayfair London, Ltd. | CA | Counter Spy Shop of Mayfair London, Ltd. |
| Spy Shop Ltd. | NY | Counter Spy Shop of Delaware |
| Security Design Group, Inc. | NY | Security Design Group, Inc. |
| Homeland Security Strategies (UK), Ltd. | London, UK | Homeland Security Strategies (UK), Ltd. |
James Atkinson (http://www.tscm.com/) writes 14 October 2004:
Here is a copy of the email message that I received from Yahoo yesterday concerning the CCS documents on my TSCM-L mailing list http://finance.groups.yahoo.com/group/TSCM-L/ .Just moments prior to Yahoo sending this email a CCS representative was repeatedly calling me on the phone trying to get me to shut and stop posting public SEC documents concerning the company. The phrase "Reference: Yahoo! Groups:Threats" at the bottom of the message indicates that someone from CCS contacted Yahoo via their automated on-line form and filed a complaint against the group claiming that threats were being made against them.
Curiously, as of this morning Yahoo has manually removed virtually all references from the message archives about CCS, SITG, and their related operations (except for two postings made late on 10/14/04). The 115 deletions were quietly made by Yahoo sometime between 10/12/04 @ 5 PM and 10/13/04 @ 8 PM. The moderators logs indicated that the messages "just disappeared", and that no member, nor moderator issued a deletion command. Furthermore, by examining the table or list of messages there are gaps in the sequence numbers where the messages were at one time.
For example, on 10/12/04 I posted two messages containing the public documents that CCS filed with the SEC earlier that day. These were messages 9858 and 9860 which went out to the list membership, but have since been quietly deleted by Yahoo at the request of CCS. By examining the following message list you can easily see the two gaps in the numbers.
9854 Re: North Korea has a special military squad of hacker-experts Leanardo skeez100 Tue 10/12/2004
9855 Re: New picture in the photos section (Bluesniper) satcommunitfive satcommunitfive Tue 10/12/2004
9856 Re: New picture in the photos section (Bluesniper) Leanardo skeez100 Tue 10/12/2004
9857 Mayonnaise and Coffee James M. Atkinson graniteislandgroup Tue 10/12/2004
9859 Fwd: PI Ed Pankau, TX, passed away James M. Atkinson graniteislandgroup Tue 10/12/2004
9861 Re: Your product pi@precisioninvestigations.com precisionpi Wed 10/13/2004
9862 Re: New picture in the photos section (Bluesniper) syndracit syndracit Wed 10/13/2004
9863 State Prosecuter puts his loaded pc with the garbage ! contranl contranl Wed 10/13/2004
9864 Re: CCS Going Belly Up - Annual Report (Key Points) contranl contranl Wed 10/13/2004Here is another example of gaps in the message, where CCS had Yahoo delete more messages concerning them. As you will note, message number 9746 and 9747 have been deleted, both of these message mentioned SITG and CCS. One mesage was concerning an alias that CCS/SITG was using on E-Bay to quietly dump thier stale inventory and to raise emergency funds. The second message was copy of part of an SEC document pointing out that several of their senior executives had been arrested by federal agents and that the company had been involved in a felony criminal case.
9743 Re: hardware based keyboard loggers James M. Atkinson graniteislandgroup Tue 9/21/2004
9744 TSCM School reference Mitch D rockdriver Wed 9/22/2004
9745 Fighting mad in Folcroft: Citizens want answers in police bugging in NoPositiveWork@aol.com MichaelMACC Wed 9/22/2004
9748 Re: Fighting mad in Folcroft: Citizens want answers in police buggin syndracit syndracit Wed 9/22/2004
9749 Re: Fighting mad in Folcroft: Citizens want answers in police buggin Greg Horton Thu 9/23/2004
9750 Report: U.S. Airport Screeners Missed Weapons James M. Atkinson graniteislandgroup Thu 9/23/2004For another example we have message number 9515 which was concerning a help wanted posting that CCS posted to the list (under and alias) trying to find sales representatives, but the message has since been removed from the archive by Yahoo.
9509 Re: TSCM Referals Merl Klein justmerle2003 Mon 8/30/2004
9510 Re: ICOM pecularities Tech Sec Lab secureoffice Mon 8/30/2004
9511 Re: ICOM pecularities Steve Weinert steve_weinert Mon 8/30/2004
9512 FW: Returned mail: User unknown Steve Weinert steve_weinert Mon 8/30/2004
9513 Re: FW: Returned mail: User unknown James M. Atkinson graniteislandgroup Mon 8/30/2004
9514 Systemware Inc. Hawkspirit dawn_star_7 Mon 8/30/2004
9516 Getting Equipped Andy Cuff taliskeruk Mon 8/30/2004
9517 Rolls Surrette 8D and Tripp-Lite Inverted/Charger Systems For Sale James M. Atkinson graniteislandgroup Tue 8/31/2004
9518 Re: From Cryptome.org James M. Atkinson graniteislandgroup Tue 8/31/2004
9519 The Basics of RFID savanted1 savanted1 Tue 8/31/2004
9520 Ad Majorem Dei Gloriam James M. Atkinson graniteislandgroup Tue 8/31/2004
9521 Mr. siaaag Shawn Hughes (Road) high_order1 Tue 8/31/2004
9522 Re: Bluetooth A Grudko damstuff2000 Wed 9/1/2004Further, a careful search of the archives reveals that Yahoo has very recently, and very quietly deleted any message that referred to or referenced either CCS or SITG even though there were over a hundred of these messages in the archives, many of which were simply postings of public SEC documents, copies of court dockets, discussions about their products and so on. Yahoo also removed numerous historical postings made by various list members concerning CCS insolvency, criminal cases, fraud cases, employees being arrested and charged with felonies by the government, search warrants being served, and references to cases were their employees and senior management were convicted of fraud.
______________________
Date: Wed, 13 Oct 2004 13:30:27 -0700 (PDT)
Illegal-Object: Syntax error in From: address found on ams.ftl.affinity.com:
From: Yahoo!<yahoo-dev-null@yahoo-inc.com>
^-expected word, missing end of mailbox
From: <yahoo@yahoo-inc.com>
To: jmatk@tscm.com
Subject: Yahoo! Groups:Threats
Dear Yahoo! account holder:
By creating and using your Yahoo! account, you agree to abide by
Yahoo!'s Terms of Service (TOS). Pursuant to the TOS, Yahoo! reserves
the right to terminate your account or otherwise prohibit use of your
account in the event that, among other things, Yahoo! believes that you
have violated or acted inconsistently with the letter or spirit of the
TOS.
It has come to our attention that you may have violated the TOS.
Please reread the TOS and cease any use of your account that may
violate the TOS.
If your use of your Yahoo! account is brought to our attention again,
and we believe that such use violates the TOS, then we may terminate
your account without further notice.
Please do not reply to this email. Any questions concerning Yahoo!'s
Services should be submitted through the on-line form in the help area
( http://help.yahoo.com ).
-Yahoo!
Reference: Yahoo! Groups:Threats
To: TSCM-L <TSCM-L@yahoogroups.com>
From: "James M. Atkinson" <jmatk@tscm.com>
Date: Wed, 22 Sep 2004 14:35:35 -0400
Subject: [TSCM-L] Possible Death Rattle of CCS
There are several interesting events that have recently occurred, and
something very curious is afoot,
Someone is dumping CCS branded inventory on E-Bay under several different
aliases.
According to the Securities Exchange Commission, CCS (AKA, SITG, HSS, etc)
has not filed their quarterly reports as required by law. The form 10SQB
should have been filed over 3 weeks ago, and it would have covered Apr-Jun
2004. CCS has not filed for an extension or delay of any sort for the
quarterly filings.
Several weeks ago, one of the major shareholders at CCS dumped a hefty
chunk of stock on the open market (and the stock price dropped).
The accountants of record for the company stepped down around the same
time, and indicated that there was some doubt that the company would
continue to be an ongoing concern (this is often "accountant speak" when
they think the company is going to tank). Notably, the SEC documents filed
previously in March indicate some of the numbers had not been audited
(which is not good), and may be one of the other reasons that their
accountants split off from them..
CCS/SITG/HSS has been wildly spamming security groups pushing seminars,
courses, and "special deals" on equipment, and much of this push to close
some fast sales on an extremely accelerated schedule. Pushing hard to
quickly close sales outside of the normal purchasing cycle is often a sign
that a company is in dire financial shape, and needs to raise some numbers
quickly.
On August 11th, CCS announced an amusingly small COMINT sale to one of the
governments in the middle east for only 173k, and once the deal hit the
wire the stock price hick-upped, and then dropped to close to an all time
low. This is a very, very bad sign. In once version of the release they
claimed the customer simply made a deposit, and yet in another claimed they
had been paid in full.
In 2003 sales were down 32.7% over 2002 sales, and judging from the quarter
filing made prior to March 2004, numbers may likely be down a third to half
from the 2003 numbers.
Given the number of sales reported in the previous quarters (where they
filed statements), divided by the average sales per employees and the
overhead required to keep the company it is no wonder why the companies
accountants bailed out.
According to one of the SEC documents the company did file "The Company
requires additional financing which may not be readily available. The
Company's bank facility has terminated, and the only source of funds other
than operations has been loans from the Company's chief executive officer,
customer deposits and proceeds from the issuance of common stock. 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
to settle vendor payables wherever possible, a reduction in operating
expenses, and continued 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 profitability."
The stock price appears to continue to be on a downward slide, and I
suspect that once they release their quarterly results (if at all) the
shareholders will be very upset.
It's almost like CCS/SITG/HSS/G-Com is in their death rattle and they are
gasping for that last breath of air so they can file a fattened quarterly
report.
On the other hand, if CCS does tank the chief creditor will likely also be
the chief shareholder, who is also the CEO...
From a TSCM perspective there is probably going to be a flood of TSCM
equipment hitting the market shortly, so be extremely careful what you buy,
and who you buy it from (make sure they are going to be around next year).
-jma
-----------------------------------------------------------------------------------------------------
We Expertly Hunt Real Spies, Real Eavesdroppers, and Real Wiretappers.
-----------------------------------------------------------------------------------------------------
James M. Atkinson Phone: (978) 546-3803
Granite Island Group Fax: (978) 546-9467
127 Eastern Avenue #291 Web: http://www.tscm.com/
Gloucester, MA 01931-8008 Email: mailto:jmatk@tscm.com
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To: TSCM-L <TSCM-L@yahoogroups.com>
From: "James M. Atkinson" <jmatk@tscm.com>
Date: Wed, 22 Sep 2004 14:58:51 -0400
Subject: [TSCM-L] CCS Death Rattle - Continued
Here are a few notes from SEC filings about some of the legal problems that
CCS/SITG/HSS/Gcom has been having, which include a vice president,
director, and other being arrested and charged with criminal activity.
It's no wonder that they are scrambling to close some fast sales, and
inventory is getting dumped on E-Bay:
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 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. *****
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.
In June 1998, a photographer and model formerly retained by CCS filed suit
in U. S. District Court for the 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.
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 International Ltd. seeking damages of $242,400 for
breach of contract to purchase certain products.
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.
The Company is also the defendant in 3 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.
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.
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.
-----------------------------------------------------------------------------------------------------
We Expertly Hunt Real Spies, Real Eavesdroppers, and Real Wiretappers.
-----------------------------------------------------------------------------------------------------
James M. Atkinson Phone: (978) 546-3803
Granite Island Group Fax: (978) 546-9467
127 Eastern Avenue #291 Web: http://www.tscm.com/
Gloucester, MA 01931-8008 Email: mailto:jmatk@tscm.com
-----------------------------------------------------------------------------------------------------
World Class, Professional, Ethical, and Competent Bug Sweeps, and
Wiretap Detection using Sophisticated Laboratory Grade Test Equipment.
-----------------------------------------------------------------------------------------------------
[Balance of footer omitted.]
To: TSCM-L <TSCM-L@yahoogroups.com>
From: "James M. Atkinson" <jmatk@tscm.com>
Date: Tue, 12 Oct 2004 14:40:42 -0400
Subject: [TSCM-L] CCS Going Belly Up - Annual Report (Key Points)
CCS/SITG/G-Com/Homeland Security/etc finally filed their annual report, and
things look bad for them... very, very bad.
DO NOT GIVE THEM OR THEIR SUBSIDIARIES ANY MONEY, acording to their own
admission the "deposits" that customers are giving them are being used to
keep the company afloat, and not being used to provide the goods or
services to their clients. They are shutting down (or have shut down) their
retail operations, and closing their facilities. They have taken in a huge
amount of money in the form of deposit money from customers and instead of
giving the customers the ordered equipment they used the money to fund
operations of the company (which is a really bad thing) and give the
principals fat paychecks.
Given the number of locations they had across the country, and the rather
large number of employees and sales associates it is amazing that they only
moved 3 million in business last year. It's also amazing that they could
run up such a huge amount of debt to employee ratio. With 30 employees and
the number of sites the have (er, had) they should have been doing at least
12-15 million a year in business, and given the locations in NY and LA
number should have been double that.
It explains why CCS/SITG/G-Com/etc has been scrambling to sell equipment on
E-Bay through a cut-out and why they have been crowing about every penny
they get from foreign governments for micro-orders (that are not being
shipped), and spending a huge amount of money and effort posting bogus
press releases to the newswires.
It will be interesting to peel apart the infrastructure, and the
involvement of their CEO once they file for bankruptcy.
-jma
Form 10KSB for SECURITY INTELLIGENCE TECHNOLOGIES INC
--------------------------------------------------------------------------------
12-Oct-2004
Annual Report
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, 2004. 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 but 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.
We are operating under a heavy financial burden as reflected in our
substantial working capital deficiency and our continuing losses and
negative cash flow from operations. We have sought to address these
problems during fiscal 2004 by closing three of our retail operations and
converting two of them to sales offices with lower operating costs, and
entering into a credit agreement with an investor group pursuant to which
we had borrowed $200,000 at June 30, 2004. We borrowed the remaining
$300,000 during the first quarter of fiscal 2005. The $500,000 is due in
June 2005, and we may not have the funds to repay the loans at that time.
Our working capital deficiency has made it difficult for us to attract new
business and maintain relations with our customers and suppliers. Other
than our credit agreement and loans from our chief executive officer, our
main source of funds has been our customer deposits which we use for our
operations.
-15-
If we are unable to increase our sales and pay our note holders and other
creditors, it may be necessary for us to cease business and seek protection
under the Bankruptcy Code.
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. See Note 1 of Notes to
Consolidated 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.
Revenue recognition
The Company recognizes revenue from 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 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 proforma 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 the 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.
-16-
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. Because of our losses we did not
incur any income tax expense during fiscal 2004 or 2003. 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.
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.
Joint Venture Agreements
We are party to three joint venture agreements with technology companies.
In connection with these agreements we and our joint venture partner formed
new entities whose ownership and share of operating results are equally
owned. The joint venture agreements grant the new entities exclusive
marketing rights to the joint venture partner's products, except in the
countries in which the joint venture partners are domiciled. We account for
investments in the joint ventures using the equity method because our
ownership is greater than 20% and we have the ability to exercise
significant influence over the operating, investing and financing decisions
of the joint venture entities. Under the equity method, we will record our
share of joint venture income or losses and adjust the basis of its
investment accordingly. As of June 30, 2004, the joint ventures have not
generated any revenues or other significant business activity.
-17-
Foreign Currency Translation
The functional currency of our United Kingdom subsidiary is the local
currency. Accordingly, we translate 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
$17,595 as of June 30, 2004 and 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.
RESULTS OF OPERATIONS - Year Ended June 30, 2004 and Year ended June 30, 2003.
Revenues. Revenues for the year ended June 30, 2004 ("fiscal 2004") were
$3,013,332 a decrease of $715,833 or 19.2%, from revenues of $3,729,165 for
the year ended June 30, 2003 ("fiscal 2003"). During fiscal 2004, we closed
our retail stores in New York, Beverly Hills and Washington, DC and
converted our operations in Beverly Hills and Washington, DC from retail
stores to sales offices. These closures resulted in a decrease of
approximately $1.4 million from these three locations, representing a 60.7%
decline is sales from approximately $2.3 million in fiscal 2003 to
approximately $900,000 in fiscal 2004. These decreases were offset by
increased sales from our operations in New Rochelle, New York and London.
Cost of Sales. Cost of sales decreased by $424,065 or 23.2%, to $1,402,980
in fiscal 2004 from 1,827,045 in fiscal 2003. Cost of sales as a percentage
of product sales decreased to 46.6% in fiscal 2004 from 49.0% in fiscal
2003 reflecting an improvement in product mix.
Compensation and benefits. Compensation and benefits decreased by $314,778,
or 12.4% to $2,227,767 in fiscal 2004 from $2,542,545 in fiscal 2003
primarily due to (i) a reduction in expense in our New York retail store
that we closed on January 31, 2004 of $125,186, and (ii) decreases in our
Beverly Hills and Washington DC operations where we converted from retail
stores to sales offices and reduced these expenses by $179,962.
Professional fees and legal matters. Professional fees and legal matters
decreased by $3,045, or .3% to $933,576 in fiscal 2004 from $936,621 in
fiscal 2003. 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 reasonable
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, and cash flows. Because of our
financial position, we are subject to claims, which may result in
litigation from our creditors. As a result we expect that we will continue
to incur attorney's fees and the use of management resources to defend
these claims and litigation.
Stock based compensation. Stock based compensation is attributable to the
grant of options and warrants to consultants and common stock which we sold
to consultants at a discount from the market price. Options and warrants
granted to consultants were valued at $990,358 using the Black-Scholes
option-pricing model and were expensed during fiscal 2004. Comparable
expense in fiscal 2003 was $5,301. Expense related to sales of common stock
to consultants at discounts from market was $618,500 in fiscal 2004. There
were no similar transactions in fiscal 2003.
Selling, general and administrative expenses. Selling, general and
administrative decreased by $154,803, or 8.1% to $1,743,625 in fiscal 2004
from $1,910,546 in fiscal 2003. The decrease was primarily due to (i) a
decrease in rent expense of $187,488, or 29.8% to $441,288 in fiscal 2004
from $628,776 in fiscal 2003 due to lower rents in relocated sales offices
and (ii) a decease in advertising expense of $123,626, or 54.5% to $103,068
in fiscal 2004 from 226,694 in fiscal 2003 all partially offset by (iii)
and increase in travel and attendance at trade shows of $112,741, or 59.6%
to $301,781 in fiscal 2004 from $189,040 in fiscal 2003.
Unrealized (gain) loss on financial guarantees. Unrealized (gain) loss on
financial guarantees is attributable to the increase or decrease in market
value relating to our price guarantees on common stock which we have issued
in payment of trade payables. Unrealized (gain) loss on financial
guarantees changed $282,030 or 192.6%, to a gain of $135,590 in fiscal 2004
from a loss of $146,440 in fiscal 2003.
-18-
Depreciation and amortization. Depreciation and amortization decreased by
$4,581, or 4.4% to $100,142 in fiscal 2004 from $104,723 in fiscal 2003 as
a consequence of certain assets becoming fully depreciated in fiscal 2003.
Interest expense. Interest expense increased by $26,665 or 25.6% to
$131,046 in fiscal 2004 from $104,381 in fiscal 2003 as a result of a
continued increase in the Company's interest bearing outstanding debt
obligations.
As a result of the factors described above, our net loss increased by
$1,109,423, or 28.8% to $4,999,072, $.25 per share, in fiscal 2004 from
$3,848,437, $.22 per share, in fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
We require significant working capital to fund our future operations. At
June 30, 2004 we had cash of $172,621 and a working capital deficit of
$7,400,771. During fiscal 2004, we had a negative cash flow from operations
of $855,000. Our accounts payable and accrued expenses at June 30, 2004
were $3,722,228. As a result of our continuing losses, our working capital
deficiency has increased. We funded our losses through the issuance of our
common stock. We also utilized vendor credit and customer deposits. Because
we have not been able to pay our trade creditors in a timely manner, we
have been subject to litigation and threats of litigation from our trade
creditors and we have used common stock to satisfy our obligations to trade
creditors. 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 1,263,459 shares of common stock issued
during the fiscal 2004, 2003 and 2002, the market value of the common stock
on June 30, 2004 was approximately $161,811 less than the guaranteed price.
Our accounts payable and accrued expenses increased from $3,563,776 at June
30, 2003 to $3,722,228 at June 30, 2004 an increase of $158,452. After an
increase in the market value of our common stock held by trade creditors of
$135,590 our other accounts payable and accrued expenses increased by
$294,042 reflecting our inability to pay creditors currently. We also had
customer deposits and deferred revenue of $3,325,710 which relate to
payments on orders which had not been filled at that date. We have used our
advance payments to fund 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.
During the past three years 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. Our bank facility terminated on
November 1, 2002 and to date, we do not have any agreements with any
replacement bank. In 2004 we entered into a convertible credit agreement
with private investors that permits us to borrow up to $500,000 upon the
attainment of certain performance criteria. At June 30, 2004 we had
borrowed $200,000 under this credit facility and borrowed an additional
$300,000 in August and September 2004. Our obligations to these lenders
become due in June 2005. We do not presently have the resources to pay the
lenders. Unless we are either able to raise equity or debt capital, which
is unlikely based on our financial condition and history of losses which
are continuing, or the lenders extend the maturity date or convert their
debt into equity, we are unlikely to be able to pay the notes. If the
lenders seek to enforce their notes, it may be necessary for us to seek
protection under the Bankruptcy Code. Our failure to obtain similar
financing from this or 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
private investors has been from loans from our chief executive officer,
customer deposits and vendor credit. During fiscal 2004 we raised $813,000
resulting from the exercise of options to buy our common stock and the sale
of our common stock. Management cannot provide any assurance 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 our ability to continue as a going concern. Our
financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
-19-
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We Expertly Hunt Real Spies, Real Eavesdroppers, and Real Wiretappers.
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James M. Atkinson Phone: (978) 546-3803
Granite Island Group Fax: (978) 546-9467
127 Eastern Avenue #291 Web: http://www.tscm.com/
Gloucester, MA 01931-8008 Email: mailto:jmatk@tscm.com
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World Class, Professional, Ethical, and Competent Bug Sweeps, and
Wiretap Detection using Sophisticated Laboratory Grade Test Equipment.
-----------------------------------------------------------------------------------------------------
[Balance of footer omitted.]
To: TSCM-L <TSCM-L@yahoogroups.com>
From: "James M. Atkinson" <jmatk@tscm.com>
Date: Tue, 12 Oct 2004 14:56:56 -0400
Subject: [TSCM-L] CCS Going Belly Up - Annual Report Finally Filed (big post,
full filing... interesting reading)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 000-31779
SECURITY INTELLIGENCE TECHNOLOGIES, INC.
Exact name of registrant as specified in its charter)
Florida 65-0928369
(State or other jurisdiction of formation) (IRS Employer Identification No.)
145 Huguenot Street, New Rochelle, New York 10801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 654-8700
(Former name or former address, if changes since last report)
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, 2004 were
$3,013,332.
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 $2,010,401 at September 29, 2004.
The number of shares of common stock $.0001 par value, of the Registrant
issued and outstanding as of September 29, 2004 was 22,413,316.
--------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
Page
Number
PART I 3
BUSINESS 6
PROPERTIES 11
LEGAL PROCEEDINGS 11
SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS 12
PART II 12
MARKET FOR RESISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 15
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 20
CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 20
CONTROLS AND PRODEDURES 20
OTHER INFORMATION 20
PART III
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16 (a) OF THE EXCHANGE ACT OF THE REGRISTRANT 20
EXECUTIVE COMPENSATION 23
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 24
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 26
-2-
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Forward-Looking Statements
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
Management's Discussion and Analysis of Financial Condition and Results of
Operations" 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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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. Our clients include
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 Security Intelligence Technologies, Inc.
("SIT"), Homeland Security Strategies, Inc. ("HSS"), 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 sales office in the United States, one sales office
in Hong Kong and one retail store/service center 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, and ballistics.
During fiscal 2004, we entered into an exclusive distribution agreement
with a European company that develops manufacturers and markets products
designed to monitor, intercept and jam radio frequency signals and other
electronic devices. The agreement grants us the exclusive worldwide
marketing rights to its products except in the country it is domiciled. As
of June 30, 2004 we had taken orders for $555,000 of their products. We
anticipate delivery of these orders during the fourth quarter of 2004.
We are a Florida corporation organized under the name Hipstyle.com, Inc. in
June 1999. In April 2002, in a transaction characterized as a reverse
merger, CCS International, Ltd. ("CCS") was acquired by us and our
corporate name was changed to Security Intelligence Technologies, Inc. The
transaction by which we acquired the stock of CCS is referred to in this
Form 10-KSB as the "reverse merger". From and after April 17, 2002, our
business was the business conducted by CCS prior to the reverse merger.
-3-
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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.
RISK FACTORS
We require significant working capital in order to fund our operations.
At June 30, 2004, we had cash of $172,621 and a working capital deficit in
excess of $7.4 million and for the fiscal year ended June 30, 2004, our
operations generated a negative cash flow of $855,000. In order to pay our
current obligations and develop and market our products, we require
significant additional working capital. We have incurred losses in the
past, our losses are continuing and we continue to generate negative cash
flow from operations. As a result, our working capital deficiency is
increasing. In the event that we are unable to raise the necessary funding
we may be unable to continue operations and it may be necessary to seek
protection under the Bankruptcy Code.
Our increasing current liabilities reflect our inability to pay creditors
currently.
We have used our customer deposits to pay creditors and finance 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 or to make advance payments to
us. Our inability to obtain advance payments from customers will impair our
ability to obtain components necessary to make products, which, in turn,
may necessitate a cessation of business. Further, if one or more of our
creditors or customers obtain significant judgments against us and seeks to
enforce the judgments, our ability to continue in business would be
impaired and it may be necessary for us to seek protection under the
Bankruptcy Code.
We have no commercial credit availability.
Except for a $500,000 credit facility provided by a group of private
investors, we do not have any credit facility. The loans under the credit
facility, which are convertible into common stock, are due on June 30,
2005. Unless we can obtain either equity financing or a substitute lender
prior to June 30, 2005, we do not believe that we will have the resources
to pay the lenders. We do not presently have any agreements or
understandings with respect to an equity financing or credit facility, and,
in view of our substantial working capital deficit and continuing losses,
we may be unable to raise equity or obtain a credit facility. If we are not
able to pay the loans when they mature, and the lenders do not covert their
loans or grant us an extension, it may be necessary for us to cease
operations and seek protection under the Bankruptcy Code.
We have been operating at a loss, and our losses are continuing.
We sustained losses of $5.0 million, or $.25 per share (basic and diluted),
for the fiscal year ended June 30, 2004, $3.8 million, or $.22 per share
(basic and diluted), for the fiscal year ended June 30, 2003, and our
losses are continuing. We cannot give any assurance that we can or will
ever operate profitably. Our failure to operate profitably is affecting the
willingness of customers to place orders with us and the willingness of our
suppliers to provide us with necessary components.
Our independent auditors have included an explanatory paragraph in their
report as to our ability to continue as a going concern.
As a result of our continuing and significant losses and our working
capital deficiency, our independent auditors have included in their report
an explanatory paragraph as to our ability to continue as a going concern.
If we do not have access to the most current technology, we may not be able
to market our products and services.
The security industry is constantly changing to meet new requirements,
which result from both new threats to government and industry, both from
potential threats to persons and property to industrial and governmental
espionage, as well as general concern about personal and family safety. In
order to meet these needs we will both have to anticipate problems and
develop methods or reducing the potential risk. We rely primarily on the
performance and design characteristics of our products in marketing our
products, which requires access to state-of-the art technology in order to
be competitive. Our business could be adversely affected if we cannot
obtain licenses for such updated technology or develop state-of-the-art
technology ourselves. Because of our financial problems, we are not able to
devote any significant effort to research and development, which could
increase our difficulties in making sales of our products.
-4-
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Because of our limited resources, we may not be able to develop or
implement a successful marketing program.
Our ability to implement an expanded marketing program is dependent upon
our ability to fund the program. If we are not able to obtain necessary
financing, we may be unable to market our products. Furthermore, our
financial condition may inhibit potential customers from purchasing our
equipment and our competitors may use our financial condition in marketing
to the same customers.
We are subject to government regulations, which if violated, could prohibit
us from conducting a significant portion of our export business and result in
criminal liability.
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 year
ended June 30, 2003 we incurred significant expense and our reputation was
impaired as a result of criminal charges against our employees, including
one of our officers, even though the charges were dismissed.
Because we are dependent on our management, the loss of key executive
officers could harm our business.
Our business is largely dependent upon our senior executive officers,
Messrs. Ben Jamil, chief executive officer, Chris R. Decker, chief
financial officer, and Menahem Cohen, 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, and Cohen, both of these officers has the right to
terminate his employment. Our business may be adversely affected if any of
our key management personnel or other key employees left our employ.
Because we lack patent or copyright protection, we cannot assure you that
others will not be able to use our proprietary information in competition with
us.
--------------------------------------------------------------------------------
We have no patent or copyright protection for our proprietary software, and
we rely on non-disclosure agreements with our employees. Since our business
is dependent upon our proprietary products, the unauthorized use or
disclosure of this information could harm our business.
Major corporations may be able to develop and fund marketing efforts that
could enable them to dominate the market.
Because there are a number of major companies that can both offer security
products to governments and industry and fund a product development and
marketing program, these companies have the financial ability to dominate
the market, to effectively set a standard which may be incompatible with
our technology and to use their financial resources and government and
industry contacts to successfully compete against us in all major markets,
regardless of whether their technology is superior or inferior to ours.
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 and financial condition
may adversely affect our ability to make acquisitions for equity or to
raise funds for acquisitions through the issuance 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 in
significant dilution to our stockholders and may result in a change of
control. As of the date of this report we do not have any agreement or
understanding, either formal or informal, as to any acquisition.
If we make any acquisitions, they may disrupt or have a negative impact on
our business.
If we make acquisitions, we could have difficulty integrating the acquired
companies' personnel and operations with our own. In addition, the key
personnel of the acquired business may not be willing to work for us, and
our officers may exercise their rights to terminate their employment with
us. We cannot predict the affect expansion may have on our core business.
Regardless of whether we are successful in making an acquisition, the
negotiations could disrupt our ongoing business, distract our management
and employees and increase our expenses.
We do not anticipate paying dividends on our common stock.
The rights of the holders of common stock may be impaired by the potential
issuance of preferred stock.
Our certificate of incorporation gives our board of directors the right to
create new series of preferred stock. As a result, the board of directors
may, without stockholder approval, issue preferred stock with voting,
dividend, conversion, liquidation or other rights which could adversely
affect the voting power and equity interest of the holders of common stock.
Preferred stock, which could be issued with the right to more than one vote
per share, could be utilized as a method of discouraging, delaying or
preventing a change of control. The possible impact on takeover attempts
could adversely affect the price of our common stock. Although we have no
present intention to issue any additional shares of preferred stock or to
create any new series of preferred stock, we may issue such shares in the
future.
-5-
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Shares may be issued pursuant to our stock plans which may affect the
market price of our common stock.
We may issue stock upon the exercise of options or pursuant to stock grants
covering an aggregate of 2,970,000 shares of common stock pursuant to our
stock incentive plans, including options to purchase 2,609,500 shares which
were outstanding on June 30, 2004. The exercise of these options and the
sale of the underlying shares of common stock and the sale of stock issued
pursuant to stock grants may have an adverse effect upon the price of our
stock.
Because we are subject to the "penny stock" rules, stockholders have
difficulty in selling our common stock.
Because our stock is traded on the OTC Bulletin Board and our stock price
is very low, our stock is subject to the Securities and Exchange
Commission's penny stock rules, which impose additional sales practice
requirements on broker-dealers that sell our stock to persons other than
established customers and institutional accredited investors. These rules
may affect the ability of broker-dealers to sell our common stock and may
affect the ability of our stockholders to sell any common stock they may own.
A third party may claim ownership of stock held by our chief executive
officer.
In connection with an agreement between Mr. Ben Jamil and two financial
consultants entered into prior to the April 2002 reverse merger of CCS into
us, 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.
We may not be able to comply in a timely manner with recently enacted
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 that relate to
companies whose common stock is not listed in the Nasdaq Stock Market or a
registered stock exchange. As a result of our financial condition and the
price of our stock, we may be unable to attract independent directors or
implement certain policies which are required but which are expensive to
implement, including systems relating to accounting controls. Our failure
to be in compliance with applicable securities laws and regulations could
result in our inability to continue to be traded on the OTC Bulletin Board
which in turn would result in increased difficulty for stockholders to sell
their shares.
INDUSTRY OVERVIEW
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.
-6-
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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 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 8.0% annually from 1999 to 2003, and
we believe that the market is continuing to grow. We believe that demand by
multinational corporations and governmental agencies 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, demand for
corporate investigative services continues to grow as businesses react to
the need to protect their assets against the growing threat of white collar
crime including 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, and a distribution network is critical to our
success as a provider of security products and services. We are able to
offer a wide range of security consulting services, equipment, and systems
that enable us to provide comprehensive solutions to our customers'
security needs. Our goal is to strengthen our capabilities as a single
source provider of global security systems and services. Our international
infrastructure enables us to assist government buyers and multinational
corporate clients who are responding to security concerns as they both
expand their business into new countries and seek to provide greater
security for their existing facilities and personnel.
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.
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.
Products and Services
We distribute a wide range of specialized products and systems covering
security, privacy, home and personal protection, confidential business
communications, lie detection, cellular phone privacy, drug and bomb
contraband detection, miniaturized covert audio and video surveillance and
protection, digital, the Internet, global systems for mobile communications
("GSM"), personal communication systems ("PCS"), time division mobile
access ("TDMA") and code division multiple access ("CDMA") satellite
technologies and wireless communications.
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Products
We offer the following products:
- 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.
- Communication jamming systems.
We develop and market integrated systems for the surveillance of global
system for mobile communications and other communications. With the recent
developments 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 integrated systems for
the surveillance of 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 integrated systems for the surveillance of global system
for mobile communications, 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 offer radio communication; monitoring and radio frequency jamming
equipment designed to combat terrorist activation of bombs utilizing radio
controlled incendiary devices ("RCIED's"). These products include a system
built into a briefcase for VIP personal protection, and vehicle mounted
systems for military use. These systems have multiple bands and operate by
creating an intensive electromagnetic field that saturates the airwaves
thereby disabling the operation of a RCIED.
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 line routes, perform automated fleet and freight management
for commercial trucking, and dispatch police, ambulance, and taxicabs.
Services
We offer comprehensive security training programs in counterintelligence
and counter-surveillance in Miami, New York, 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.
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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 three 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.
Joint Venture Agreements
We are a party to three joint venture agreements with technology companies.
In connection with these agreements we and our joint venture partner formed
new entities whose ownership and share of operating results are equally
owned. The joint venture agreements grant the new entities exclusive
marketing rights to the joint venture partner's products, except in the
countries the joint venture partners are domiciled.
Product Design and Installation
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.
We generally provide installation services for the more sophisticated
integrated systems for the surveillance of global systems 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 warranty 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.
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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.
There are a large number of companies who offer products or services aimed
at one or more segments of the security industry, and new technologies are
being developed by both new companies and major companies. 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, raise
questions as to our ability to perform under the purchase order and to
provide the necessary support following delivery. Competitors have used and
may continue to use our financial condition and their stronger financial
condition, resources and relationships in marketing their products and
services regardless of whether their products and services are better than
ours. As discussed below, many of our competitors are substantially
stronger than we are financially and are very well known in the industry
and have significant government and industry contacts and relationships.
The marketplace for manufacturers and vendors for security and surveillance
products and systems is highly competitive and consists of numerous
organizations ranging from internet-based mail-order firms to military
armament manufacturers such as, Lockheed Martin, and Harris. 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. Siemens (Germany), and Rohde
& Schwartz (Germany), are manufacturers of "simulated" base stations.
Currently there is growing competition in the cellular interception and
monitoring systems market. Although many competitors have greater
financial, technical and other resources, we believe that at present our
technology gives us a competitive advantage, although because of our
financial condition and continuing losses, we are having difficulty
competing in this market. 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.
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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 subject to 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.
Employees
As of September 29, 2004, we had a total of approximately 30 employees, of
whom 18 were employed at our main office and 12 were employed at our sales
offices or service center. 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.
Item 2. PROPERTIES
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 9,000 square
feet for five of our sales offices and one retail/service center locations
in Miami, Florida, New York City, Washington, DC Beverly Hills, CA, London,
England, and Hong Kong under leases that expire from 2004 to 2010 at a
current annual rent of $428,000 , 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.
Item 3. LEGAL PROCEEDINGS
Because of our financial position, actions have been commenced or
threatened by creditors. Currently we are defending lawsuits for the
collection of approximately $894,000 and have been unable to satisfy
approximately $167,000 of judgments previously rendered in actions by
creditors.
In June 1998, a photographer and model formerly retained by CCS filed suit
in U. S. District Court for the 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 reached a settlement on May 7, 2004
with the plaintiffs for $600,000 payable with 550,459 shares of the
Company's common stock. The agreement stipulates the shares will be valued
at their average closing price for the 30 days beginning July 7, 2005 and
ending August 5, 2005. CCS has guaranteed that the value of the shares will
be at least $300,000 and is responsible for the amount that $300,000
exceeds the value of the shares. Ben Jamil, our chief executive officer and
principal stockholder has guaranteed that the value of the shares will be
at least $150,000.
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 International 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. In August 2004, Micronel Safety, Inc. found another buyer
for the products and on August 16, 2004 the case was dismissed.
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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, Florida 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. The Company believes that it has valid
defenses to the claim. The case appears to be going to trial however, a
trial date has not been set.
The Company is also the defendant in three actions arising out of
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. On August 3, 2004, the Court granted the plaintiff's claim which,
together with accrued interest, totaled $120,223. The Company believes that
it has a valid basis for appeal of the court's verdict, but it can give no
assurance the court verdict will not be upheld.
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 submitted a demand for
arbitration to the American Arbitration Association in New York City
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. On
March 4, 2004 the arbitrator awarded the plaintiff's claim which, together
with accrued interest, totaled $223,620. The Company believes that it has a
valid basis for appeal of the arbitrator's award but it can give no
assurance the American Arbitration Association will not uphold the award.
On July 1, 2002, the Company's London subsidiary, Homeland Security
Strategies (UK), Ltd. (formerly Counter Spy Shop of Mayfair Limited) ("HSS
of UK"), entered into an agreement to assume the business operations of
another United Kingdom 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 HSS of UK as a
defendant in the case. The Company, in consultation with counsel, believes
that the Predecessor has valid defenses to the claim, and that HSS of UK
has valid defenses against any action that may be brought against it.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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 July 1, 2002 until June 30, 2004, as reported by the
OTC Bulletin Board.
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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.
COMMON STOCK
High Low
High Low
-------------
------------- ---------- ----------
Fiscal 2004 Fiscal 2003
--------------------- -------------------
Quarter ended Quarter ended
September 30, 2003 $ 0.70 $ 0.70 September 30, 2002 $
0.17 $ 0.15
Quarter ended Quarter ended
December 31, 2003 $ 0.40 $ 0.35 December 31, 2002 $
0.18 $ 0.16
Quarter ended Quarter ended
March 31, 2004 $ 0.80 $ 0.65 March 31, 2003 $
0.07 $ 0.04
Quarter ended Quarter ended
June 30, 2004 $ 0.80 $ 0.66 June 30, 2003 $
0.12 $ 0.10
On September 29, 2004, the last quoted price by the OTC Bulletin Board was
$.30 per share of common stock.
As of September 29, 2004 there were 22,413,316 shares of Common Stock
outstanding, held of record by approximately 584 record holders and
beneficial owners.
The following table sets forth information as to equity compensation plans
pursuant to which we may issue our equity securities.
Number
of securities
remaining
available for
Weighted
average future issuance under
Number of securities to
be exercise price of equity compensation plans
issued upon exercise
of outstanding options, (excluding securities
outstanding
options, warrants and rights reflects in columns (a))
warrants and
rights (b) (c)
(a)
------------------------------------------- ----------------------------
---------------------- -------------------------
Equity compensation plans approved by
security
holders -0-
N.A. -0-
------------------------------------------- ----------------------------
---------------------- -------------------------
Equity compensation plans not approved by
security
holders 3,970,000
$.84 89,500
------------------------------------------- ----------------------------
---------------------- -------------------------
Total 3,970,000
$.84 89,500
------------------------------------------- ----------------------------
---------------------- -------------------------
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 to directors, employees,
officers, agents, consultants and independent contractors who perform
services for the Company. As of June 30, 2004, 1,959,500 options to
purchase shares of common stock have been issued and are outstanding under
this plan.
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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."
As of July 3, 2003 our board of directors adopted the 2003 Stock Incentive
Plan (the "2003 Plan") which provided for the grant of non-qualified stock
options to purchase a maximum of 320,000 shares of common stock or the
grant of shares to directors, employees, officers, agents, consultants and
independent contractors who perform services for the Company. As of June
30, 2004, 236,000 shares have been issued to consultants and 35,000 shares
have been issued to an officer for services rendered.
As of January 23, 2004 our board of directors adopted the 2004 Stock
Incentive Plan (the "2004 Plan") which provided for the grant of
non-qualified stock options to purchase a maximum of 650,000 shares of
common stock or the grant of shares to directors, employees, officers,
agents, consultants and independent contractors who perform services for
the Company. As of June 30, 2004, 650,000 options to purchase shares of
common stock have been issued and are outstanding under this plan.
During the fiscal year ended June 30, 2004, we issued the following
securities 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:
We issued 16,468 shares of common stock to an officer and an employee in
payment of accrued compensation totaling $7,000.
We issued 167,500 shares of common stock to consultants in payment of
consulting fees of $99,625.
On May 7, 2004, we issued 550,459 shares of common stock to Frank Ross and
Juliett Vassilkioti, pursuant to a settlement agreement. See "Item 3. Legal
Proceedings." The settlement agreement provides that the shares will be
valued at their average closing price for the 30 days beginning July 7,
2005 and ending August 5, 2005. CCS has guaranteed that the value of the
shares at that time will be at least $300,000 and is responsible for the
amount that $300,000 exceeds that value. Ben Jamil, our chief executive
officer and principal stockholder has guaranteed that the shares will have
a value of at least $150,000. At September 29, 2004 the value of the shares
based upon the closing price of our common stock was $165,138.
We issued 100,000 shares of common stock to creditors in full settlement,
subject to certain terms, of $37,000 of accounts payable. If the proceeds
from the sale of the common stock when the creditors sell the shares is
less than $37,000, we are to pay the creditors the difference between
$37,000 and the proceeds received from the sale of the shares. At September
29, 2004 the value of the shares based upon the closing price of our common
stock was $30,000.
We sold 1,190,000 shares of common stock and issued warrants to purchase
500,000 shares of common stock for $154,000, including 1,000,000 shares of
common stock and warrants to purchase 500,000 shares of common stock at an
exercise price of $.15 per share sold to Jason S. Lyons for $135,000 and
180,000 shares of common stock sold to GSM Communications, Inc. for
$18,000. The warrants vest immediately, have cashless exercise rights and a
life of three years. These options and warrants were valued at $268,624
using the Black-Scholes option-pricing model and were expensed during the
year ended June 30, 2004. In addition we have expensed $611,500
representing the difference between the market value and the actual price
paid for the 1,190,000 shares of common stock.
During the year ended June 30, 2004 we registered 2,920,000 shares of
common stock and issued the following shares:
In July 2003, we formalized consulting contracts with Michael D. Farkas,
Jason S. Lyons and an additional financial consultant relating to
acquisition services, financial public relations and operational
performance services. In connection therewith we granted immediately
exercisable options to purchase a total of 2,600,000 shares of common stock
of which 1,700,000 options were granted to Michael Farkas, and options to
purchase 400,000 shares were granted to Jason S. Lyon. The exercise price
ranged from $.10 per share to $.50 per share. As of June 30, 2004 the
consultants had exercised options to purchase 2,600,000 shares of common
stock, for a total of $659,000. Of these options, options to purchase
1,700,000 shares were exercised by Michael D. Farkas for $400,000, and
options to purchase 400,000 shares were exercised by Jason S. Lyons for
$140,000. These options were valued at $405,727 using the Black-Scholes
option-pricing model and were expensed during the year ended June 30, 2004.
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We issued 136,000 shares of common stock to consultants in full settlement,
subject to certain terms, of $52,050 of payables. If the proceeds from the
sale of the common stock when the creditors sell the shares is less than
$52,050, we are to pay the creditors the difference between $52,050 and the
proceeds received from the sale of the shares. At September 29, 2004 the
value of the shares based of closing price of the Company's common stock
was $40,800.
We issued 35,000 shares of common stock to an officer in payment of accrued
compensation totaling $7,000.
We issued 100,000 shares of common stock to consultants in payment of
consulting fees of $39,456.
No underwriting or other compensation was paid in connection with these
transactions.
On June 10, 2004 we entered into a convertible credit agreement with
private investors, including Michael D. Farkas, Ostonian Securities
Limited, Kesef Equity Group, Inc., and GSM Communications, Inc. that
provides for the Company to borrow up to $500,000 upon the attainment of
certain performance criteria prior to September 15, 2004. At June 30, 2004
the Company had borrowed $200,000 under this agreement and borrowed an
additional $300,000 during the first quarter of fiscal 2005. The notes are
convertible, at the note holder's option, into the Company's common stock,
at $.10 per share.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, 2004. 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 but 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.
We are operating under a heavy financial burden as reflected in our
substantial working capital deficiency and our continuing losses and
negative cash flow from operations. We have sought to address these
problems during fiscal 2004 by closing three of our retail operations and
converting two of them to sales offices with lower operating costs, and
entering into a credit agreement with an investor group pursuant to which
we had borrowed $200,000 at June 30, 2004. We borrowed the remaining
$300,000 during the first quarter of fiscal 2005. The $500,000 is due in
June 2005, and we may not have the funds to repay the loans at that time.
Our working capital deficiency has made it difficult for us to attract new
business and maintain relations with our customers and suppliers. Other
than our credit agreement and loans from our chief executive officer, our
main source of funds has been our customer deposits which we use for our
operations.
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If we are unable to increase our sales and pay our note holders and other
creditors, it may be necessary for us to cease business and seek protection
under the Bankruptcy Code.
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. See Note 1 of Notes to
Consolidated 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.
Revenue recognition
The Company recognizes revenue from 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 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 proforma 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 the 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.
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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. Because of our losses we did not
incur any income tax expense during fiscal 2004 or 2003. 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.
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.
Joint Venture Agreements
We are party to three joint venture agreements with technology companies.
In connection with these agreements we and our joint venture partner formed
new entities whose ownership and share of operating results are equally
owned. The joint venture agreements grant the new entities exclusive
marketing rights to the joint venture partner's products, except in the
countries in which the joint venture partners are domiciled. We account for
investments in the joint ventures using the equity method because our
ownership is greater than 20% and we have the ability to exercise
significant influence over the operating, investing and financing decisions
of the joint venture entities. Under the equity method, we will record our
share of joint venture income or losses and adjust the basis of its
investment accordingly. As of June 30, 2004, the joint ventures have not
generated any revenues or other significant business activity.
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Foreign Currency Translation
The functional currency of our United Kingdom subsidiary is the local
currency. Accordingly, we translate 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
$17,595 as of June 30, 2004 and 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.
RESULTS OF OPERATIONS - Year Ended June 30, 2004 and Year ended June 30, 2003.
Revenues. Revenues for the year ended June 30, 2004 ("fiscal 2004") were
$3,013,332 a decrease of $715,833 or 19.2%, from revenues of $3,729,165 for
the year ended June 30, 2003 ("fiscal 2003"). During fiscal 2004, we closed
our retail stores in New York, Beverly Hills and Washington, DC and
converted our operations in Beverly Hills and Washington, DC from retail
stores to sales offices. These closures resulted in a decrease of
approximately $1.4 million from these three locations, representing a 60.7%
decline is sales from approximately $2.3 million in fiscal 2003 to
approximately $900,000 in fiscal 2004. These decreases were offset by
increased sales from our operations in New Rochelle, New York and London.
Cost of Sales. Cost of sales decreased by $424,065 or 23.2%, to $1,402,980
in fiscal 2004 from 1,827,045 in fiscal 2003. Cost of sales as a percentage
of product sales decreased to 46.6% in fiscal 2004 from 49.0% in fiscal
2003 reflecting an improvement in product mix.
Compensation and benefits. Compensation and benefits decreased by $314,778,
or 12.4% to $2,227,767 in fiscal 2004 from $2,542,545 in fiscal 2003
primarily due to (i) a reduction in expense in our New York retail store
that we closed on January 31, 2004 of $125,186, and (ii) decreases in our
Beverly Hills and Washington DC operations where we converted from retail
stores to sales offices and reduced these expenses by $179,962.
Professional fees and legal matters. Professional fees and legal matters
decreased by $3,045, or .3% to $933,576 in fiscal 2004 from $936,621 in
fiscal 2003. 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 reasonable
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, and cash flows. Because of our
financial position, we are subject to claims, which may result in
litigation from our creditors. As a result we expect that we will continue
to incur attorney's fees and the use of management resources to defend
these claims and litigation.
Stock based compensation. Stock based compensation is attributable to the
grant of options and warrants to consultants and common stock which we sold
to consultants at a discount from the market price. Options and warrants
granted to consultants were valued at $990,358 using the Black-Scholes
option-pricing model and were expensed during fiscal 2004. Comparable
expense in fiscal 2003 was $5,301. Expense related to sales of common stock
to consultants at discounts from market was $618,500 in fiscal 2004. There
were no similar transactions in fiscal 2003.
Selling, general and administrative expenses. Selling, general and
administrative decreased by $154,803, or 8.1% to $1,743,625 in fiscal 2004
from $1,910,546 in fiscal 2003. The decrease was primarily due to (i) a
decrease in rent expense of $187,488, or 29.8% to $441,288 in fiscal 2004
from $628,776 in fiscal 2003 due to lower rents in relocated sales offices
and (ii) a decease in advertising expense of $123,626, or 54.5% to $103,068
in fiscal 2004 from 226,694 in fiscal 2003 all partially offset by (iii)
and increase in travel and attendance at trade shows of $112,741, or 59.6%
to $301,781 in fiscal 2004 from $189,040 in fiscal 2003.
Unrealized (gain) loss on financial guarantees. Unrealized (gain) loss on
financial guarantees is attributable to the increase or decrease in market
value relating to our price guarantees on common stock which we have issued
in payment of trade payables. Unrealized (gain) loss on financial
guarantees changed $282,030 or 192.6%, to a gain of $135,590 in fiscal 2004
from a loss of $146,440 in fiscal 2003.
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Depreciation and amortization. Depreciation and amortization decreased by
$4,581, or 4.4% to $100,142 in fiscal 2004 from $104,723 in fiscal 2003 as
a consequence of certain assets becoming fully depreciated in fiscal 2003.
Interest expense. Interest expense increased by $26,665 or 25.6% to
$131,046 in fiscal 2004 from $104,381 in fiscal 2003 as a result of a
continued increase in the Company's interest bearing outstanding debt
obligations.
As a result of the factors described above, our net loss increased by
$1,109,423, or 28.8% to $4,999,072, $.25 per share, in fiscal 2004 from
$3,848,437, $.22 per share, in fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
We require significant working capital to fund our future operations. At
June 30, 2004 we had cash of $172,621 and a working capital deficit of
$7,400,771. During fiscal 2004, we had a negative cash flow from operations
of $855,000. Our accounts payable and accrued expenses at June 30, 2004
were $3,722,228. As a result of our continuing losses, our working capital
deficiency has increased. We funded our losses through the issuance of our
common stock. We also utilized vendor credit and customer deposits. Because
we have not been able to pay our trade creditors in a timely manner, we
have been subject to litigation and threats of litigation from our trade
creditors and we have used common stock to satisfy our obligations to trade
creditors. 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 1,263,459 shares of common stock issued
during the fiscal 2004, 2003 and 2002, the market value of the common stock
on June 30, 2004 was approximately $161,811 less than the guaranteed price.
Our accounts payable and accrued expenses increased from $3,563,776 at June
30, 2003 to $3,722,228 at June 30, 2004 an increase of $158,452. After an
increase in the market value of our common stock held by trade creditors of
$135,590 our other accounts payable and accrued expenses increased by
$294,042 reflecting our inability to pay creditors currently. We also had
customer deposits and deferred revenue of $3,325,710 which relate to
payments on orders which had not been filled at that date. We have used our
advance payments to fund 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.
During the past three years 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. Our bank facility terminated on
November 1, 2002 and to date, we do not have any agreements with any
replacement bank. In 2004 we entered into a convertible credit agreement
with private investors that permits us to borrow up to $500,000 upon the
attainment of certain performance criteria. At June 30, 2004 we had
borrowed $200,000 under this credit facility and borrowed an additional
$300,000 in August and September 2004. Our obligations to these lenders
become due in June 2005. We do not presently have the resources to pay the
lenders. Unless we are either able to raise equity or debt capital, which
is unlikely based on our financial condition and history of losses which
are continuing, or the lenders extend the maturity date or convert their
debt into equity, we are unlikely to be able to pay the notes. If the
lenders seek to enforce their notes, it may be necessary for us to seek
protection under the Bankruptcy Code. Our failure to obtain similar
financing from this or 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
private investors has been from loans from our chief executive officer,
customer deposits and vendor credit. During fiscal 2004 we raised $813,000
resulting from the exercise of options to buy our common stock and the sale
of our common stock. Management cannot provide any assurance 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 our ability to continue as a going concern. Our
financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
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Item 7. FINANCIAL STATEMENTS
The financial statements begin on Page F-1.
Item 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On June 29, 2004 we accepted the resignation of Schneider & Associates LLP
as the Registrant's independent public accountants and selected Demetrius &
Company, L.L.C. to serve as the our independent public accountant for the
fiscal year ending June 30, 2004. At no time since its engagement has
Demetrius & Company, L.L.C. had any direct or indirect financial interest
in or any connection with us or any of our subsidiaries other than as
independent accountant. Neither we nor anyone on our behalf consulted
Demetrius & Company L.L.C. prior to engagement regarding the application of
accounting principles to a specific completed or contemplated transaction
or the type of audit opinion that might be rendered on our financial
statements.
Our financial statements for the fiscal years ended June 30, 2002 and June
30, 2003 were audited by Schneider & Associates 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 Schneider &
Associates 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 years ended June 30, 2002 and June
30, 2003 and financial statements filed on Form 10QSB for subsequent
interim periods preceding their resignation on June 29, 2004.
ITEM 8A CONTROLS AND PROCEDURES
As of the end of the fiscal year ended June 30, 2004, our chief executive
officer and chief financial officer evaluated the effectiveness of our
disclosure controls and procedures. Based on their evaluation, the chief
executive officer and the chief financial officer have concluded that our
disclosure controls and procedures are effective in alerting them to
material information that is required to be included in the reports that we
file or submit under the Securities Exchange Act of 1934.
There has been no change in our internal control over financial reporting
that occurred during our last fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 8b. OTHER INFORMATION
Not applicable.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL
Set forth below is information concerning our directors and executive
officers.
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Name Age Position
------------------ ---- --------
Ben Jamil 71 Chairman of the board, chief
executive officer
and director
Chris R. Decker 57 Chief financial officer and director
Tom Felice 42 Director
Menahem Cohen 51 Vice president and director
Sylvain Naar 62 Director
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 reverse merger in
April 2002. 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 and a director in August 2002. Prior to
April 2002 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 joined CCS at its inception as vice president of consumer sales.
He took a leave of absence in November 2000 to consult for a family
business and returned to CCS in October 2001 when he became vice president
sales and director of CCS. He assumed such positions with us upon
completion of the reverse merger in April 2002. In May 2003 he resigned his
position as vice president sales to pursue other opportunities but remains
as a member of the board of directors.
Menahem 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.
Sylvain Naar has been a director of CCS since March 2002 and became a
drector upon completion of the reverse merger in April 2002. He became vice
president in May of 2003 and resigned from that position in August 2003.
From 1990 to February 2002, Mr. Naar was vice president for product and
business development at Copytele, Inc. 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, 2004, all Section 16(a)
filing requirements applicable to its officers, directors and greater than
ten percent beneficial owners were satisfied except for four reports
covering four transactions of Ben Jamil which took place during the period
of August 23, 2002 and January 30, 2004, and six reports covering six
transactions of Chris R. Decker which took place during the period of
August 23, 2002 and August 4, 2004. These reports were filed on October 1,
2004 and none of the reports covered transactions that involved a public
purchase or sale of securities.
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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 twelve (12) times during the fiscal year ended
June 30, 2004. 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 our chief financial officer and
Sylvain Naar, a director. On May 1, 2003 Tom Felice a director and former
officer replaced Sylvain Naar. The Audit Committee met once (1) time during
the fiscal year ending June 30, 2004. 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's policy is to pre-approve all audit and permissible
non-audit services provided by the independent auditors. These services may
include audit services, audit-related services, tax services and other
services. The independent auditors and management are required to
periodically report to the Audit Committee regarding the extent of services
provided by the independent auditors in accordance with this pre-approval,
and the fees for the services performed to date. The Audit Committee may
also pre-approve particular services on a case-by-case basis.
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, 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 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.
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ITEM 10. EXECUTIVE COMPENSATION
Set forth below is information with respect to compensation paid or accrued
by us for fiscal years ended June 30, 2004, and 2003 to our chief executive
officer. No other officer received compensation of $100,000 during any of
those fiscal years.
Summary Compensation Table
Long-Term
Compensation
(Adwards)
Fiscal
Options, SARs
Name and Principal
Position Year Salary Bonus (Number)
-------------------------------- ------------
------------ -------------------------------
Ben Jamil, chief executive 2004 $ 250,000 $
- 200,000
officer 2003 250,000 -
-
2002 172,799 -
1,000,000
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, the board of directors of the Company adopted the
2002 Stock Plan (the "2002 Plan"), which provided for the grant of
non-qualified stock options to purchase a maximum of 2,000,000 shares of
common stock to directors, employees, officers, agents, consultants and
independent contractors who perform services for the Company. In connection
with the reverse merger outstanding options to purchase a total of
1,800,500 shares of CCS' common stock were converted into options to
purchase an equal number of shares of the Company's common stock at
exercise prices of $.50 to $1.00 per share, which were the same exercise
prices as the options under the CCS plan. As of June 30, 2004 a total of
1,959,500 options to purchase shares of common stock are outstanding under
the 2002 Plan.
As of July 3, 2003 the board of directors of the Company adopted the 2003
Stock Incentive Plan (the "2003 Plan") which provided for the grant of
non-qualified stock options to purchase a maximum of 320,000 shares of
common stock or the grant of shares to directors, employees, officers,
agents, consultants and independent contractors who perform services for
the Company. As of June 30, 2004, 246,000 shares have been issued to
consultants and 35,000 shares have been issued to an officer for services
rendered.
As of January 23, 2004 our board of directors adopted the 2004 Stock
Incentive Plan (the "2004 Plan") which provided for the grant of
non-qualified stock options to purchase a maximum of 650,000 shares of
common stock or the grant of shares to directors, employees, officers,
agents, consultants and independent contractors who perform services for
the Company. As of June 30, 2004, 650,000 options to purchase shares of
common stock have been issued and are outstanding under this plan.
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Option Exercises and Outstanding Options
The following table sets forth information concerning the exercise of
options during the fiscal year ended June 30, 2004 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.
Aggregate Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Value
Number
of
Securities
Value of
Underlying
Unexercised
Unexercised
In-the-Money
Options
at Fiscal Options at Fiscal
Year
End Year End
-----------------
-------------------
Shares Acquired
Upon Value Exercisable/ Exercisable/
Name Exercise Realized
Unexercisable Unexercisable
-------------------- ---------------------
-------------- ----------------- -------------------
Ben
Jamil -- --
1,200,000 --/--
Option Grants in Fiscal Year
Ended June 30, 2004
Percent
of Potential Realizable Value an
Total
Options Annual Rates of Stock Price
Number of Shares Granted
to Exercise Appreciation for Option Term
Underlying Employees in Price
Per Expiration -------------------------------
Name Options Granted Fiscal
Year Share Date 5% 10%
----------------------- ----------------- --------------- ---------
----------- ------- ----------
Ben
Jamil 200,000 100.0% $ .25
Jan 2014 $31,445 $79,687
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and discussion provides information as to the shares of
common stock beneficially owned on September 10, 2004 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.
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Shares of
Common Percentage of
Stock
Benefically Outstanding
Name Owned
Common Stock
-------------------------------------------- -----------------------
------------------
Ben
Jamil 11,338,000
50.1%
145 Huguenot Street
New Rochelle, NY 10801
Michael D.
Farkas 2,150,100 9.4%
1691 Michigan Avenue, Suite 425
Miami, FL 33139
Ostonian Securities
Limited 2,203,496 9.3%
60 St. James Street
London, England SW1 ALE
Jason S.
Lyons 1,915,000
8.4%
7239 San Salvador Dr
Boca Raton, FL 33433
Kesef Equity Group,
Inc. 1,750,000 7.2%
14 Lyle Farm Lane
Englishtown, NJ 07726
GSM Communications,
Inc. 1,289,500 5.6%
1221 Brickell Avenue, Suite 900
Miami, FL 33131
Chris R.
Decker 785,000
3.4%
Menahem
Cohen 450,000
2.0%
Tom
Felice 253,000
1.1%
Sylvain
Naar -
-
All directors and officers as
a 12,826,000 54.4%
group (6 individuals)
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 10, 2004.
The shares beneficially owned by Mr. Jamil represent 11,138,000 shares of
common stock and 200,000 shares of common stock issuable upon exercise of
options held by him.
The shares beneficially owned by Michael D. Farkas represents 1,036,000
shares of common stock owned by him, 471,600 shares of common stock owned
by his wife, Rebecca Farkas, 37,500 shares of common stock owned by their
children, and the holdings of Atlas Equity Group, Inc., which is
beneficially owned by him consisting of 55,000 shares of common stock owned
by them and 550,000 shares of common stock issuable upon the conversion of
notes payable held by them.
The shares beneficially owned by Mr. Lyons represents 1,400,000 shares of
common stock owned by him and 500,000 shares of common stock issuable upon
the exercise of warrants owned by Lyons Capital Group LLC which is
beneficially owned by Jason S. Lyons.
The shares beneficially owned by Ostonian Securities Limited represent
953,496 shares of common stock and 1,250,000 shares of common stock
issuable upon the conversion of notes payable held by them.
The shares beneficially owned by Kesef Equity Group, Inc. represent
1,750,000 shares of common stock issuable upon the conversion of notes
payable held by them.
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The shares beneficially owned by GSM Communications, Inc. represent 639,500
shares of common stock and 650,000 shares of common stock issuable upon the
conversion of notes payable held by them.
The shares beneficially owned by Mr. Decker represent 335,000 shares of
common stock and 450,000 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 Mr. Felice represent 3,000 shares of
common stock and 250,000 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 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.
Item 12. Certain Relationships and Related Transactions
In March 2004 we sold 1,000,000 shares of common stock to Jason S. Lyons
for $135,000, and issued warrants to purchase 500,000 shares of common
stock at an exercise price of $.15 per share. The warrants vest
immediately, have cashless exercise rights and a life of three years.
In July 2003, we formalized consulting contracts with Michael D. Farkas and
Jason S. Lyons relating to acquisition services, financial public relations
and operational performance services. In connection therewith we granted
immediately exercisable options to purchase a total of 1,700,000 options to
Michael D. Farkas, and options to purchase 400,000 shares were granted to
Jason S. Lyons. The exercise price ranged from $.10 per share to $.50 per
share. As of June 30, 2004 options to purchase 1,700,000 shares were
exercised by Michael Farkas for $400,000, and options to purchase 400,000
shares were exercised by Jason S. Lyons for $140,000.
During fiscal 2004 we sold 180,000 shares of common stock to GSM
Communications, Inc. for $18,000.
On June 10, 2004 we entered into a convertible credit agreement with
private investors, including Michael D. Farkas, Ostonian Securities
Limited, Kesef Equity Group, Inc., and GSM Communications, Inc. that
provides for the Company to borrow up to $500,000 upon the attainment of
certain performance criteria prior to September 15, 2004. At June 30, 2004
the Company had borrowed $200,000 under this agreement and borrowed an
additional $300,000 during the first quarter of fiscal 2005. The notes are
convertible, at the note holder's option, into the Company's common stock,
at $.10 per share.
During fiscal year 2004 we paid commissions of $35,000 related to financing
activities to Atlas Capital Services, LLC which is beneficially owned by
Michael D. Farkas.
On January 23, 2004 we issued options to purchase 200,000 shares of common
stock to Ben Jamil.
On January 23, 2004 we issued options to purchase 150,000 shares of common
stock to Menahem Cohen.
On January 23, 2004 we issued options to purchase 150,000 shares of common
stock to Chris R. Decker, and on January 12, 2004 we issued 35,000 shares
of common stock to Mr. Decker in payment of accrued wages.
-26-
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The agreement relating to the April 2002 reverse merger provided, as a
condition to CCS' obligation to close, that we receive proceeds of
$1,000,000 from a private sale of the our securities. This condition was
not met at closing, and CCS completed the reverse merger with us having
received only $75,000. At the closing of the reverse merger, we entered
into a stock pledge agreement with Atlas Equity Group, Inc. a Florida
corporation beneficially owned by Michael D. Farkas who is a stockholder of
the Company, and who beneficially owns more than 5% of our common stock,
pursuant to which Atlas Equity was to have pledged 1,500,000 shares of our
common stock. Atlas Equity never delivered the shares to be held pursuant
to the pledge agreement. The pledge agreement stipulated the pledged shares
were to be returned to Atlas Equity if we sold shares of common stock
sufficient to generate net cash proceeds of $925,000 to us prior to June 1,
2002, which date was subsequently extended to June 14, 2002. On December
16, 2002, we and Atlas Equity and certain successor owners of Atlas
Equity's pledged shares entered into an 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, expanded the money raising activity
to include the issuance of debt and extended the date to raise the $925,000
to July 7, 2004. As of June 30, 2004 we had sold shares of common stock and
issued debt generating net cash proceeds of $993,000 and all pledged shares
have been released.
Item 13. EXHIBITS AND REPORTS ON FORM 8-KSB
(a) Reports on Form 8-KSB
(1) Current Report on Form 8-K filed on June 30, 2004 with respect to Item 4.
(2) Current Report on Form 8-K/A filed on July 30, 2004 with respect to
Item 4.
(b) Exhibits
Exhibit
No. Description
2.1 Agreement and Plan of Merger dated as of February 28, 2002 among the
Registrant, CCS International, Ltd., and CCS Merger Corp.(1)
3.1 Articles of incorporation (2)
3.1 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. (5)
10.3 2002 Stock Plan. (4)
10.4 2003 Stock Incentive Plan (5)
10.5 Consulting Agreement, dated as of July 2, 2003, by and between the
Registrant and Michael D. Farkas. (6)
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10.6 Consulting Agreement, dated as of July 2, 2003, by and between the
Registrant and Shimon Fishman. (6)
10.7 Consulting Agreement, dated as of July 18, 2004, by and between the
Registrant and Jason S. Lyons (7)
10.8 2004 Stock Plan.
10.9 Revolving Convertible Credit Agreement, dated June 10, 2004, by and
between the Registrant and private investors, including Michael D.
Farkas
14.1 Code of Ethics.
21.1 List of Subsidiaries.
23.1 Consent of Independent Auditors.
31.1 Certification of chief executive officer.
31.2 Certification of chief financial officer.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(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.
(5) Filed as an exhibit to the Registrant's Form 10-KSB filed with the
commission on October 14, 2003, and incorporated herein by
reference.
(6) Filed as an exhibit to the Registrant's Form S-8 filed with the
commission on July 22, 2004, and incorporated herein by reference.
(7) Filed as an exhibit to the Registrant's Form S-8 filed with the
commission on September 29, 2003, and incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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 $60,073 and $67,825 for the fiscal years ended June 30,
2004 and June 30, 2003 respectively.
2. Audit-Related Fees. There were no audit-related fees billed for the
fiscal years ended June 30, 2004 and June 30, 2003.
3. Tax Fees. Tax fees billed were $8,890 and $725 for the fiscal years
ended June 30, 2004 and June 30, 2003 respectively.
-28-
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4. All Other Fees. There were no other fees billed for the fiscal years
ended June 30, 2004 and June 30, 2003.
-29-
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INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F - 1
Independent Auditors' Report F - 2
Consolidated Balance Sheet June 30, 2004 F - 3
Consolidated Statements of Operations for the years
ended June 30, 2004 and June 30,
2003 F - 4
Consolidated Statement of Changes in Stockholders' Deficit
for the years ended June 30, 2004 and June 30,
2003 F - 5
Consolidated Statements of Cash Flows for the years
ended June 30, 2004 and June 30,
2003 F - 6
Notes to Consolidated Financial Statements F - 7 - F -22
-30-
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Security Intelligence
Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Security
Intelligence Technologies, Inc. and Subsidiaries as of June 30, 2004, and
the related consolidated statements of operations, changes in stockholders'
deficit, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provide a reasonable basis for our
opinion.
In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Security Intelligence Technologies, Inc. and its subsidiaries
as of June 30, 2004, and the consolidated results of their operations and
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated 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
2004 and 2003, 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 consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
DEMETRIUS & COMPANY, L.L.C.
Wayne, New Jersey
October 4, 2004
F-1
-31-
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INDEPENDENT AUDITORS' REPORT
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 year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our 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 audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit 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 year then
ended 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.
Schneider & Associates LLP
Jericho, New York
October 10, 2003
F-2
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SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2004
ASSETS
Current Assets:
Cash
$ 172,621
Inventory
959,825
Other current
assets
223,872
------------
Total current
assets 1,356,318
Property and Equipment, at cost less accumulated depreciation
and amortization of
$170,969 22,248
Other
assets
35,071
------------
Total
assets
$ 1,413,637
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued
expenses $ 3,722,228
Note payable -
CEO/stockholder
1,509,151
Convertible notes
payable 200,000
Customer
deposits
1,917,031
Deferred
revenue
1,408,679
------------
Total current
liabilities 8,757,089
------------
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,
22,306,816 shares issued and
outstanding 2,231
Additional paid in
capital 3,808,283
Accumulated
deficit
(11,136,871)
Accumulated other comprehensive
loss (17,595)
------------
Total stockholders'
deficit (7,343,452)
------------
Total liabilities and stockholders'
deficit $ 1,413,637
============
The accompanying notes are an integral part of these financial statements.
F-3
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SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
---------------------------
June 30,
---------------------------
2004 2003
------------
------------
Sales $ 3,013,332 $
3,729,165
------------
------------
Costs and expenses:
Cost of
sales 1,402,980 1,827,045
Compensation and
benefits 2,227,767 2,542,545
Professional fees and legal
matters 933,576 936,621
Stock based
compensation 1,608,858 5,301
Selling, general and administrative
expenses 1,743,625 1,910,546
Unrealized (gain) loss on financial
guarantees (135,590) 146,440
Depreciation and
amortization 100,142 104,723
------------
------------
7,881,358
7,473,221
------------
------------
Operating
loss (4,868,026) (3,744,056)
Interest
expense 131,046 104,381
------------
------------
Net loss $ (4,999,072) $
(3,848,437)
============
============
Net loss per above $ (4,999,072) $
(3,848,437)
Other comprehensive loss - translation adjustment (17,595) --
------------
------------
Total comprehensive loss $ (5,016,667) $
(3,848,437)
============
============
Loss per share, basic and
diluted $ (0.25) $ (0.22)
============
============
Weighted average number of
shares 20,036,902 17,278,269
============
============
The accompanying notes are an integral part of these financial statements.
F-4
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SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 2004 AND 2003
Convertible
Preferred Retained Accumulated
--------------------------------------
Additional Earnings Other Total
Series A Series B Common
Stock Paid-in (Accumulated Comprehensive Stockholders'
Shares Amount Shares Amount Shares Amount
Capital Deficit) Loss Deficit
-------------------------------------------------------------------------------------------------------------
Balances, July
1, 2002 3,500,000 $350 1,500,000 $150 16,992,346
$1,699 $418,417 $(2,289,362) $- $(1,868,746)
Issuance of
common stock
to settle
debt - - - - 419,043 42
83,405 - - 83,447
Amortization of
deferred
compensation - - - - - -
5,301 - - 5,301
Net
loss - - - - - -
- (3,848,437) - (3,848,437)
-----------------------------------------------------------------------------------------------------------
Balances,
June 30, 2003 3,500,000 350 1,500,000 150
17,411,389 1,741 507,123 (6,137,799) - (5,628,435)
Sale of common
stock - - - - 1,190,000 119
168,881 - - 169,000
Adjustment to
record
discount
given on
stock
sales - - - - - - 596,500
- - 596,500
Issuance of
common stock
to settle
debt - - - - 836,459 84
756,083 - 756,167
Stock issued to
consultants - - - - 2,868,968 287
789,338 - 789,625
Amortization of
deferred
compensation - - - - - -
990,358 - 990,358
Net
loss - - - - - -
- (4,999,072) - (4,999,072)
Other
comphrehensive
loss - - - - - -
- - (17,595) (17,595)
-----------------------------------------------------------------------------------------------------------
Balances,
June 30, 2004 3,500,000 $350 1,500,000 $150 22,306,816 $2,231
$3,808,283 $(11,136,871) $(17,595) $(7,343,452)
===========================================================================================================
The accompanying notes are an integral part of these financial statements.
F-5
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SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years
Ended
--------------------------
June
30,
--------------------------
2003
2003
-------------
------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net
loss
$(4,999,072) $(3,848,437)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and
amortization 100,142
104,723
Unrealized (gain) loss on financial
guarantees (135,590) 146,440
Stock issued to consultants and officers for
services 123,625 --
Amortization of deferred
compensation 990,358 5,301
Discount on common stock sold and issued for
services 618,500 --
Other comprehensive
loss (17,595) --
Noncash compensation -
CEO/stockholder 28,872 139,976
Noncash interest expense -
CEO/stockholder 55,887 47,649
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Decrease in
inventory 488,489
741,873
(Increase) decrease in other current
assets (171,430) 133,073
Increase in accounts payable and accrued
expenses 1,050,209 1,421,662
Increase in customer
deposits 639,336 227,923
Increase in deferred
revenue 373,605 688,883
-----------
-----------
Net cash used in operating
activities (854,664)
(190,934)
-----------
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (Increase) in other
assets 19,875 (7,213)
-----------
-----------
Net cash used in investing
activities 19,875
(7,213)
-----------
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock 813,000 --
Repayments of note payable -
bank -- (200,000)
Borrowings under note payable -
CEO/stockholder -- 387,441
Repayments of note payable -
CEO/stockholder (27,228) --
Borrowings under convertible credit
facility 200,000 --
-----------
-----------
Net cash provided by financing
activities 985,772 187,441
-----------
-----------
Net increase (decrease) in
cash 150,983
(10,706)
Cash, beginning of
year 21,638
32,344
-----------
-----------
Cash, end of
year $
172,621 $ 21,638
===========
===========
The accompanying notes are an integral part of these financial statements.
F-6
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SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
Security Intelligence Technologies, Inc. ("SIT"), a Florida corporation and
its wholly owned subsidiaries (collectively the "Company") are engaged in
the design, assembly and sale of security and surveillance products and
systems. The Company purchases finished items for resale from independent
manufacturers, and also assembles off-the-shelf electronic devices and
other components into proprietary products and systems at its own
facilities. The Company generally sells to businesses, distributors,
government agencies and consumers through five sales offices located in
Miami, Florida; Beverly Hills, California; Washington, DC; Hong Kong, and
its executive offices located in New Rochelle, New York and through its
retail store/service center in London, England.
On April 17, 2002, SIT, then known as Hipstyle.com, Inc. acquired all of
the stock of CCS International, Ltd. ("CCS"), a Delaware corporation, and
its wholly-owned subsidiaries. As a result of, and in connection with this
transaction, the name of the corporation was changed from Hipstyle.com,
Inc. to Security Intelligence Technologies, Inc. and CCS and its
subsidiaries became SIT's wholly-owned subsidiaries, the stockholders of
CCS obtained control of the merged entity after the transaction was
completed. This transaction is referred to in the notes to the Consolidated
Financial Statements as the "reverse merger". Under reverse acquisition
accounting, CCS is considered the accounting acquirer and SIT (then known
as Hipstyle.com, Inc.) is considered the acquired company. Inasmuch as SIT
had no substantive assets or operations at the date of the transaction, the
merger has been recorded as an issuance of CCS stock to acquire SIT,
accompanied by a recapitalization, rather than as a business combination.
Principles of Consolidation
The consolidated financial statements include the accounts of SIT and its
wholly-owned subsidiaries, CCS, Spy Shop, Ltd. d/b/a Counter Spy Shop of
Delaware, a Delaware corporation (formerly a retail store closed on January
31, 2004); Security Design Group, Inc., a New York corporation (formerly a
manufacturing operation, currently inactive); Counter Spy Shop of Mayfair
London, Ltd., a District of Columbia corporation (formerly a retail store
closed on July 1, 2003); CCS Counter Spy Shop of Mayfair London, Ltd., a
California corporation (formerly a retail store closed on January 1, 2004);
Counter Spy Shop of Mayfair, Ltd., a Florida corporation (formerly a sales
office/retail store that ceased operations on March 31, 2004, currently
inactive); and Homeland Security Strategies (UK), Ltd. (formerly Counter
Spy Shop of Mayfair Limited, a retail store/service center. The financial
statements for the year ended June 30, 2004 include the operations of
Homeland Security Strategies, Inc., a New York corporation, that commenced
operations on August 20, 2003; Homeland Security Strategies of California,
Inc., a California corporation, that operates a sales office that commenced
operations on December 26, 2003; and Homeland Security Strategies Inc of
Florida, Inc., a Florida corporation, that operates a sales office that
commenced operations on January 30, 2004. All significant intercompany
balances and transactions have been eliminated in consolidation.
Basis of Financial Statement Presentation - Going Concern Explanatory
Paragraph
The financial statements of the Company have been prepared assuming the
Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The Company incurred net losses of $4,999,072 and
$3,848,437 for the years ended June 30, 2004 and June 30, 2003
respectively. In addition, at June 30, 2004, the Company had a working
capital deficit of $7,400,771 and a deficiency in stockholders' equity of
$7,343,452 and, for the year ended June 30, 2004, the Company had negative
cash flow from operations of $855,000. The Company is also a defendant in
material and costly litigation, which has significantly
F-7
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SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Basis of Financial Statement Presentation - Continued:
impacted liquidity. (See Note 16). The Company requires significant
additional financing which may not be available. The Company's bank
facility terminated on November 1, 2002 and the only source of funds other
than operations has been the exercise of options to purchase shares of the
Company's common stock, the sale of the Company's common stock, a credit
facility with a group of private investors, loans from the Company's chief
executive officer and customer deposits. (See Notes 5, 6, 9 and 11).
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 to settle vendor payables wherever possible, a reduction in
operating expenses, and continued 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 profitability.
The accompanying financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
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.
Property and equipment
Assets are stated at cost. Depreciation is computed over the estimated
useful life of the assets generally using the straight-line method over
periods ranging from five to seven years. Additions and major renewals and
betterments are capitalized and depreciated over their estimated useful
lives. Repairs and maintenance are charged to operating expenses as incurred.
Revenue recognition
The Company recognizes revenue from 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.
F-8
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SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
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 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 the 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.
FASB Statement 123, "Accounting for Stock-Based Compensation," requires the
Company to provide pro forma information regarding net income (loss) and
income
(loss) per share as if compensation cost for the Company's stock option
issuances had been determined in accordance with the fair value based
method prescribed in FASB Statement 123. The Company estimates the fair
value of each stock option at the grant date by using the Black-Scholes
option-pricing model with the following weighted-average assumptions used
for grants in fiscal 2004 and 2003: dividend yield of 0%, risk-free
interest rate of 3.38%, expected lives of eight years, and expected
volatility of 120%. Under the accounting provisions of SFAS Statement 123,
the Company's net loss and loss per share for 2004 and 2003 would have been
the pro forma amounts indicated below:
Year
Ended June 30,
--------------------------------------
2004
2003
----------------
------------------
Net loss:
As
reported $
(4,999,072) $ (3,848,437)
Deduct: Total stock based employee compensation expense
determined under the fair value based method for all
awards (249,859) (310,041)
-----------------
-----------------
$
(5,248,931) $ (4,158,478)
=================
=================
Loss per share:
As
reported $
(0.25) $ (0.22)
Proforma
$ (0.26) $ (0.24)
F-9
-39-
--------------------------------------------------------------------------------
SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
continued
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.
Advertising
Advertising costs are expensed as incurred. The Company incurred
advertising expenses of approximately $103,000 and $227,000 during the
years ended June 30, 2004 and 2003 respectively.
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. (See Note 4)
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.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which
requires mandatorily 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.
F-10
-40-
--------------------------------------------------------------------------------
SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO ONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Joint Venture Agreements
The Company is a party to three joint venture agreements with technology
companies. In connection with these agreements the Company and its joint
venture partner formed new entities whose ownership and share of operating
results are equally owned. The joint venture agreements grant the new
entities exclusive marketing rights to the joint venture partner's
products, except in the countries in which the joint venture partners are
domiciled. The Company accounts for its investments in the joint ventures
using the equity method because the Company's ownership is greater than 20%
and the Company 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 share of joint venture
income or losses and adjust the basis of its investment accordingly. As of
June 30, 2004, the joint ventures have not generated any revenues or other
significant business activity. Foreign Currency Translation
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 $17,595 as of June 30, 2004 and 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.
Concentration of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash balances. The
Company limits the amount of credit exposure to any one financial
institution. The Company generally does not grant credit to domestic or
foreign customers.
Research and development costs
Research and development costs are charged to expense as incurred.
Loss Per Share
The Company calculates earnings per share in accordance with SFAS No. 128,
Earnings Per Share, and SEC Staff Accounting Bulletin No. 98. Accordingly,
basic and diluted loss per share is computed using the weighted average
number of shares of common stock outstanding and excludes all common stock
equivalents outstanding during the period. Common stock equivalents consist
of shares issuable upon the exercise of stock options and warrants using
the treasury stock method. Stock options and preferred stock that are
convertible into common stock based on the Company's attainment of
performance goals are not includible in the calculation of earnings per
share until the specified targets are met. The following securities have
been excluded from the diluted computation for fiscal 2004 and 2003 because
they are contingently issuable and/or antidilutive:
F-11
-41-
--------------------------------------------------------------------------------
SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Loss Per Share - Continued
--------------------------
Year Ended June 30,
---------------------------
2004 2003
---------- ---------
Series A Convertible Preferred Stock 3,500,000 3,500,000
Series B Convertible Preferred Stock 1,500,000 1,500,000
Stock options 2,609,500 1,959,500
Warrants 900,000 400,000
Reclassifications
Certain reclassifications have been made to the prior year financial
statements in order to conform to the current year presentation.
2. INVENTORY
Inventories consist of the following at June 30, 2004:
Small components and supplies $ 214,565
Finished goods 745,260
---------------
$ 959,825
===============
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30, 2004:
Office furniture and equipment $ 188,567
Leasehold improvements 4,650
---------------
193,217
Accumulated depreciation and amortization (170,969)
---------------
$ 22,248
===============
Depreciation and amortization expense was $100,142 and $104,723 for the
years ended June 30, 2004 and 2003, respectively.
F-12
-42-
--------------------------------------------------------------------------------
SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at June 30, 2004 consisted of the
following:
Accounts payable - trade $1,941,295
Professional fees and legal matters 1,181,864
Potential liability for guarantees of common stock
issued in settlement of claims 161,803
Payroll liabilities 389,988
Deferred rent payable 47,278
----------
$3,722,228
==========
Outstanding lawsuits initiated by the Company's Creditors for nonpayment of
accrued liabilities were approximately $894,167 as of June 30, 2004. In
addition, as of June 30, 2004, the Company was subject to outstanding
judgments of approximately $167,000 relating to claims against the Company
for non-payment of obligations.
As of June 30, 2004 the Company had issued 1,263,459 shares of common stock
subject to financial guarantees with a maximum liability of $824,584.
5. NOTES PAYABLE - CEO/STOCKHOLDER
This amount represents (i) notes payable to the Company's chief executive
officer, and including accrued interest of $138,742 based on an interest
rate of 5% per annum and (ii) deferred salary of $196,271. The Notes are
secured by substantially all of the assets of the Company and are due on
demand.
6. NOTES PAYABLE CONVERTIBLE CREDIT FACILITY
On June 10, 2004 the Company entered into a convertible credit agreement
with private investors, including Michael D. Farkas, Ostonian Securities
Limited, Kesef Equity Group, Inc., and GSM Communications, Inc. that
provides for the Company to borrow up to $500,000 upon the attainment of
certain performance criteria prior to September 15, 2004. At June 30, 2004
the Company had borrowed $200,000 under this agreement and borrowed an
additional $300,000 during the first quarter of fiscal 2005. The notes bear
interest at the rate of 10% per annum, are convertible into the Company's
common stock, $.0001 at $.10 per share and mature on June 30, 2005. The
conversion feature was valued at $315,333 using the Black-Scholes
option-pricing model and was expensed during the year ended June 30, 2004
as stock based compensation.
7. PREFERRED STOCK
The board of directors has authorized two series of preferred stock, the
Series A preferred stock, consisting of 3,500,000 shares, and the Series B
preferred stock, consisting of 1,500,000 shares. Both Series A and Series B
preferred shares have a liquidation preference of $1.00 per share and are
each convertible into one share of common stock if CCS has either
consolidated annual net revenue of at least $10,000,000 or annual
consolidated net income of at least $1,000,000 prior to October 15, 2008.
Each share of Series A preferred stock has 15 votes per share. Series B
preferred stock is nonvoting except as required by law. All of the shares
of Series A preferred stock and Series B preferred stock are held by the
Company's chief executive officer.
F-13
-43-
--------------------------------------------------------------------------------
SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
8. STOCK OPTIONS
Stock Option Plans
As of January 21, 2002, the board of directors of the Company adopted the
2002 Stock Plan (the "2002 Plan"), which provided for the grant of
incentive and non-qualified stock options to purchase a maximum of
2,000,000 shares of common stock to directors, employees, officers, agents,
consultants and independent contractors who perform services for the
Company. As of June 30, 2004, a total of 1,959,500 options to purchase
shares of common stock are outstanding under the 2002 Plan.
As of July 3, 2003 the board of directors of the Company adopted the 2003
Stock Incentive Plan (the "2003 Plan") which provided for the grant of
non-qualified stock options to purchase a maximum of 320,000 shares of
common stock or the grant of shares to directors, employees, officers,
agents, consultants and independent contractors who perform services for
the Company. As of June 30, 2004, 236,000 shares have been issued to
consultants and 35,000 shares have been issued to an officer for services
rendered.
As of January 23, 2004 our board of directors adopted the 2004 Stock
Incentive Plan (the "2004 Plan") which provided for the grant of
non-qualified stock options to purchase a maximum of 650,000 shares of
common stock or the grant of shares to directors, employees, officers,
agents, consultants and independent contractors who perform services for
the Company. As of June 30, 2004, 650,000 options to purchase shares of
common stock have been issued under this plan.
A summary of changes in common stock options during fiscal 2004 and 2003
follows:
Number of Weighted Average
Shares Exercise Price
---------- ------------------
Outstanding at June 30, 2002 1,783,000 $ 0.61
Granted 300,000 0.08
Cancelled (90,500) 1.34
Exercised -- --
---------- ----------
Outstanding at June 30, 2003 1,992,500 0.50
Granted 650,000 0.25
Cancelled (33,000) 1.34
Exercised -- --
---------- ----------
Outstanding at June 30, 2004 2,609,500 $ 0.42
========== ==========
F-14
-44-
--------------------------------------------------------------------------------
SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
8. STOCK OPTIONS - Continued:
Stock Option Plans - Continued"
The following table summarizes information about stock options outstanding
at June 30, 2004:
Weighted
Average
Number Remaining Number
Exercise Outstanding Contractual Exercisable
Price 6/30/2004 Life (Months) 6/30/2004
----------- ----------- -------------- ------------
$ 0.08 300,000 98 300,000
$ 0.25 650,000 115 650,000
$ 0.50 1,605,500 91 1,593,500
$ 1.00 49,000 91 49,000
$ 1.90 5,000 93 5,000
----------- -------------- -----------
2,609,500 98 2,597,500
============ ============== ===========
At June 30, 2004 there were 79,500 options available for future grant under
the 2002, 2003, and 2004 Stock Plans.
Other Option Grant
Pursuant to the chief executive officer's employment agreement, the Company
granted him a non-qualified stock option to purchase 1,000,000 shares of
common stock at an exercise price of $2.00 per share. These options vest
upon achievement by the Company of $10,000,000 of annual revenues. Due to
the uncertainty of reaching the stipulated performance target, the Company
has not established a measurement date for the option. Upon determination
that the achievement of the revenue threshold is probable, the Company will
value the option on the measurement date using the intrinsic value method,
and will record the resulting charge, if any, over the remaining vesting
period.
Common Stock Purchase Warrants
In April 2002, in connection with the reverse merger, (see Note 1) warrants
to purchase a total of 400,000 shares of CCS common stock issued to a
consultant were converted into warrants to purchase an equal number of
shares of the Company's common at an exercise price of $.50 per share,
subject to an anti-dilution provision, as defined. The warrants vested on
April 17, 2003. The Company has valued the warrants at $22,770 using the
Black-Scholes option pricing model.
F-15
-45-
--------------------------------------------------------------------------------
SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
9. CONSULTING AGREEMENTS AND RELATED TRANSACTIONS
In July 2003 the Company formalized consulting contracts with Michael D.
Farkas, Jason S. Lyons and an additional financial consultant relating to
acquisition services, financial public relations and operational
performance services. In connection therewith the Company granted
immediately exercisable options to purchase a total of 2,600,000 shares of
common stock, of which options to purchase 1,700,000 shares were granted to
Michael D. Farkas, and options to purchase 400,000 shares were granted to
Jason S. Lyons. The exercise price ranged from $.10 per share to $.50 per
share. As of June 30, 2004 the consultants had exercised options to
purchase 2,600,000 shares of common stock for a total of $659,000. Of these
options, options to purchase 1,700,000 shares were exercised by Michael D.
Farkas for $400,000, and 400,000 options exercised by Jason S. Lyons for
$140,000. These options were valued at $405,727 using the Black-Scholes
option-pricing model and were expensed as stock based compensation during
the year ended June 30, 2004.
During the year ended June 30, 2004 the Company sold 1,190,000 shares of
common stock and issued warrants to purchase 500,000 shares of common stock
at an exercise price of $.15 per share for $154,000, including 1,000,000
shares of common stock and warrants to purchase 500,000 shares of common
stock with an exercise price of $.15 per share sold to Jason S. Lyons for
$135,000, and 180,000 shares of common stock sold to GSM Communications,
Inc. for $18,000. The warrants vest immediately, have cashless exercise
rights and a life of three years. These options and warrants were valued at
$268,624 using the Black-Scholes option-pricing model and were expensed
during the year ended June 30, 2004. In addition the Company has expensed
as stock based compensation $611,500 representing the difference between
the market value and the actual price paid for the 1,190,000 shares of
common stock.
10. PLEDGE AGREEMENT
The agreement relating to the April 2002 reverse merger provided, as a
condition to CCS' obligation to close, that the Company receive proceeds of
$1,000,000 from a private sale of the Company's securities. This condition
was not met at closing, and CCS completed the reverse merger with the
Company having received only $75,000. At the closing of the reverse merger,
the Company entered into a stock pledge agreement with Atlas Equity Group,
Inc. a Florida corporation beneficially owned by Michael D. Farkas who is a
stockholder of the Company, and who beneficially owns more than 5% of the
Company's common stock, pursuant to which Atlas Equity was to have pledged
1,500,000 shares of common stock of the Company. Atlas Equity never
delivered the shares to be held pursuant to the pledge agreement. The
pledge agreement stipulated the pledged shares were to be returned to Atlas
Equity if the Company sold shares of its common stock sufficient to
generate net cash proceeds of $925,000 to the Company prior to June 1,
2002, which date was subsequently extended to June 14, 2002. On December
16, 2002 the Company and Atlas Equity and certain successor owners of Atlas
Equity's pledged shares entered into an 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, expanded the money raising activity
to include the issuance of debt and extended the date to raise the $925,000
to July 7, 2004. As of June 30, 2004 the Company had sold shares of its
common stock and issued debt generating net cash proceeds of $993,000 and
all pledged shares have been released.
F-16
-46-
--------------------------------------------------------------------------------
SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
11. ISSUANCES OF SECURITIES
During the fiscal year ended June 30, 2004, the Company issued the
following securities:
The Company issued 51,468 shares of its common stock to an officer and an
employee in payment of accrued compensation totaling $14,000.
The Company issued 267,500 shares of its common stock to consultants in
payment of consulting fees of $139,081.
On May 7, 2004, the Company issued 550,459 shares of its common stock to
Frank Ross and Juliett Vassilkioti, pursuant to a settlement agreement. See
"Item 3. Legal Proceedings." The settlement agreement provides that the
shares will be valued at their average closing price for the 30 days
beginning July 7, 2005 and ending August 5, 2005. CCS has guaranteed that
the value of the shares at that time will be at least $300,000 and is
responsible for the amount that $300,000 exceeds that value. Ben Jamil, the
Company's chief executive officer and principal stockholder has guaranteed
that the shares will have a value of at least $150,000. (See Note 16). At
September 29, 2004 the value of the shares based upon the closing price of
our common stock was $165,138.
The Company issued 236,000 shares of its common stock to creditors in full
settlement, subject to certain terms, of $89,050 of payables. If the
proceeds from the sale of the common stock when the creditors sell the
shares is less than $89,050, the Company is to pay the creditors the
difference between $89,050 and the proceeds received from the sale of the
shares. At September 29, 2004 the value of the shares based upon the
closing price of the Company's common stock was $70,800.
During the fiscal year ended June 30, 2003, we issued the following
securities:
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.
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.
The Company issued 112,043 restricted shares of common stock for investor
relations consulting services of $15,000 and issued 80,000 restricted
shares of common stock in full payment of trade payables of $18,267.
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.
F-17
-47-
--------------------------------------------------------------------------------
SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
12. INCOME TAXES
There was no income tax expense or benefit in fiscal 2004 and 2003 due to
operating losses. In January 2003 the Company received approximately
$158,000 of tax refunds from a federal loss carry-back claim.
Following is a reconciliation of the provision for incometaxes (tax
benefit) with income taxes on the federal statutory rate:
June 30,
----------------------------------
2004 2003
---------------
----------------
Federal tax at statutory rate $ (1,700,000) $
(1,355,000)
State and local taxes, net of federal
effect (297,000) (159,000)
Nondeductible
items 237,000 93,000
Change in valuation
allowance 1,760,000 1,421,000
---------------
----------------
Income taxes (tax
benefit) $ - $ -
===============
================
Components of deferred taxes are as follows:
June 30,
--------------------------------
Deferred tax assets: 2004 2003
---------------
---------------
Net operating losses $ 2,912,000 $
1,798,000
Deferred rent
payable 18,000 22,000
Reserves and
allowances 762,000 480,000
Stock based
compensation 413,000 16,000
Deferred
revenue 563,000 413,000
---------------
---------------
4,668,000
2,729,000
Deferred tax liability:
Property and
equipment (6,000) 6,000
---------------
---------------
4,662,000
2,723,000
Less valuation
allowance (4,662,000) (2,723,000)
---------------
---------------
Net deferred
taxes $ - $ -
===============
===============
The Company files a consolidated federal return with its U.S. subsidiaries
and combined state tax returns where permitted.
The Company has recorded valuation allowances to offset tax benefits
arising from deferred tax items because their realization is uncertain. The
Company has federal net operating loss carry-forwards of approximately
$7,300,000 available to offset future federal taxable income. These losses
expire in 2021, 2022, 2023 and 2024.
13. 401(K) SAVINGS PLAN
The Company maintains a qualified deferred compensation plan under section
401(k) of the Internal Revenue Code. Under the plan, employees may elect to
defer up to 15% of their salary, subject to the Internal Revenue Service
limits. The Company may make a discretionary match as well as a
discretionary contribution. The Company did not make any contributions to
the plan for the years ended June 30, 2004 and 2003.
F-18
-48-
--------------------------------------------------------------------------------
SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
14. RELATED PARTY TRANSACTIONS
Employment Agreement
In April 2002, in connection with the completion of the reverse merger, the
Company entered into a three-year employment agreement with Mr. Jamil
pursuant to which he agreed to serve as the Company's 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 the Company achieves certain performance criteria. In
addition to the base salary, the chief executive officer 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, the
Company granted the chief executive officer a non-qualified stock option to
purchase 1,000,000 shares of common stock at an exercise price of $2.00 per
share. These options vest upon achievement by the Company of $10,000,000 of
annual revenues.
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Year
Ended
-----------------------------
June
30,
-----------------------------
2004
2003
--------------
-------------
Cash paid during the period for:
Interest $
74,063 $ 56,732
==============
=============
Income taxes (refunded - net) $
2,929 $ (153,707)
==============
=============
Non-cash financing and investing activities:
Common stock issued to settle accounts payable $
756,166 $ 83,447
==============
=============
Accrued interest and deferred salary credited
to loan payable - CEO/stockholder $
84,759 $ 187,625
==============
=============
16. COMMITMENTS AND CONTINGENCIES
Litigation
Settled matters
In June 1998, a photographer and model formerly retained by CCS filed suit
in U. S. District Court for the 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 reached a settlement on May 7, 2004
with the plaintiffs for $600,000
F-19
-49-
--------------------------------------------------------------------------------
SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
16. COMMITMENTS AND CONTINGENCIES - Continued
Litigation - Continued
Settled matters - Continued
payable with 550,459 shares of the Company's common stock. The agreement
stipulates the shares will be valued at their average closing price for the
30 days beginning July 7, 2005 and ending August 5, 2005. CCS has
guaranteed that the value of the shares will be at least $300,000 and is
responsible for the amount that $300,000 exceeds the value of the shares.
Ben Jamil, the Company's chief executive officer and principal stockholder
has guaranteed that the value of the shares will be at least $150,000 and
has guaranteed that the shares will have a value of at least $150,000.
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 International Ltd. seeking damages of $242,400 for
breach of contract to purchase certain products. In August 2004, Micronel
Safety, Inc. found another buyer for the products and on August 16, 2004
the case was dismissed.
Pending Matters
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, Florida 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. The Company believes that it has valid
defenses to the claim. The case appears to be going to trial, however, a
trial date has not been set.
The Company is also the defendant in three actions arising out of
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. On August 3, 2004, the Court granted the plaintiff's claim which,
together with accrued interest, totaled $120,223. The Company believes that
it has a valid basis for appeal of the court's verdict, but it can give no
assurance the court verdict will not be upheld.
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 submitted a demand for
arbitration to the American Arbitration Association in New York City
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. On
March 4, 2004 the arbitrator awarded the plaintiff's claim which, together
with accrued interest, totaled $223,620. The Company believes that it has a
valid basis for appeal of the arbitrator's award, but it can give no
assurance the American Arbitration Association will not uphold the award.
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SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
16. COMMITMENTS AND CONTINGENCIES
Litigation - Continued:
Pending Matters
On July 1, 2002, the Company's London subsidiary, Homeland Security
Strategies (UK), Ltd. (formerly Counter Spy Shop of Mayfair Limited) ("HSS
of UK"), entered into an agreement to assume the business operations of
another United Kingdom 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 HSS of UK as a
defendant in the case. The Company, in consultation with counsel, believes
that the Predecessor has valid defenses to the claim, and that HSS of UK
has valid defenses against any action that may be brought against it.
Because of our financial position, actions have been commenced or
threatened by creditors. As of June 30, 2004 we are defending lawsuits for
the collection of approximately $894,167 and have been unable to satisfy
approximately $167,000 of judgments previously rendered in actions by
creditors.
Given that litigation is subject to many uncertainties, it is not possible
to predict the outcome of the litigation pending against the Company.
However, it is possible that the Company's business, results of operations,
cash flows or financial position could be materially affected by an
unfavorable outcome of certain pending litigation in amounts in excess of
those that the Company has recognized. All such cases are being, and will
continue to be vigorously defended, and the Company believes that it has
meritorious and valid defenses against all such litigation, as well as a
valid basis for appeal of any adverse verdicts, should they result.
Stock Purchase Agreements
On January 31, 2002, Mr. Jamil entered into an understanding with two
financial consulting companies to sell to them 30% of his interest in the
common stock of CCS's subsidiaries, excluding Security Design, Inc., for
nominal consideration. Mr. Jamil has advised the Company that neither the
two financial consultants nor their designees have paid the required
consideration for the shares, and that he has never formally transferred
any stock ownership in the subsidiaries to the financial consultants or
their designees. Further, a total of 1,500,000 shares of the Company's
Series B Preferred Stock were issued to the chief executive officer in
partial exchange for his shares in the subsidiaries, and not to the
financial consultants or their designees as had been contemplated by
agreements between the chief executive officer and the financial
consultants or their designees. The Company cannot give any assurance that
the financial consultants will not claim that they are entitled to the
Series B shares.
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SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
Operating Leases
The Company leases office space, retail stores and sales offices and office
equipment under non-cancelable operating leases that expire over various
periods through 2010. Rent expense is being recognized on a straight-line
basis to account for rent concessions and graduated charges during the
lease term, resulting in deferred rent payable of $47,278. Total rent
expense for the years ended June 30, 2004 and 2003 was approximately
$481,456 and $632,288 respectively. The approximate future minimum rental
commitments for all long-term non-cancelable operating leases are as follows:
Year ending
June 30, Amount
----------------- ---------------
2005 $ 514,894
2006 300,999
2007 266,697
2008 242,100
2009 162,954
Thereafter 250,697
---------------
$ 1,738,341
===============
17. SUBSEQUENT EVENTS
NOTES PAYABLE CONVERTIBLE CREDIT FACILITY
During August and September 2004, the Company borrowed an additional
$300,000 under their convertible credit facility. (See Note 6).
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SECURITY INTELLIGENCE TECHNOLOGIES, INC.
/s/ Ben Jamil
-------------------------------------
Ben Jamil
Chairman of the Board of Directors,
President and Chief Executive Officer
Dated: October 12, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
/s/ Ben Jamil /s/ Chris R. Decker
-------------------------------------- ------------------------------------
Ben Jamil Chief Financial Officer and Director
Chairman of the Board of Directors, Dated: October 12, 2004
President and Chief Executive Officer
Dated: October 12, 2004
/s/ Menachem Cohen /s/ Sylvain Naar
------------------------------------- -------------------------------------
Menachem Cohen Sylvain Naar
Vice President and Director Director
Dated: October 12, 2004 Dated: October 12, 2004
/s/ Tom Felice
-------------------------------------
Tom Felice
Director
Dated: October 12, 2004
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Exhibit 10.8
SECURITY INTELLIGENCE TECHNOLOGIES, INC.
2004 Stock Incentive Plan
1. Purpose; Definitions.
The purpose of the Security Intelligence Technologies, Inc. 2004 Stock
Incentive Plan (the "Plan") is to enable Security Intelligence
Technologies, Inc. (the "Company") to attract, retain and reward the key
employees, director and consultants as hereinafter set forth.
For purposes of the Plan, the following terms shall be defined as set forth
below:
(a) "Affiliate" means any corporation, partnership, limited liability
company, joint venture or other entity, other than the Company and its
Subsidiaries, that is designated by the Board as a participating employer
under the Plan, provided that the Company directly or indirectly owns at
least 20% of the combined voting power of all classes of stock of such
entity or at least 20% of the ownership interests in such entity.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
(d) "Commission" means the Securities and Exchange Commission or any
successor thereto.
(e) "Common Stock" means the Common Stock, par value $.0001 per share, of
the Company or any class of common stock into which such common stock may
hereafter be converted or for which such common stock may be exchanged
pursuant to the Company's certificate of incorporation or as part of a
recapitalization, reorganization or similar transaction.
(f) "Company" means Security Intelligence Technologies, Inc., a Florida
corporation, or any successor corporation.
(g) "Eligible Persons" means persons who are natural persons and whose
services to the Company are not in connection with the offer or sale of
securities in a capital-raising transactions and do not directly or
indirectly promote or maintain a market for the Company's securities.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
(i) "Non-Qualified Stock Option" means any Stock Option that is not an
incentive stock option as defined in Section 422 of the Code.
(j) "Plan" means this Security Intelligence Technologies, Inc. 2003 Stock
Incentive Plan, as hereinafter amended from time to time.
(k) "Stock Grant" means an award of shares of Stock that is subject to
restrictions under Section 6 of the Plan.
(l) "Stock Option" or "Option" means any option to purchase shares of
Common Stock as set forth in Section 5 of the Plan.
(m) "Subsidiary" means any corporation or other business association,
including a partnership or limited liability company (other than the
Company), in an unbroken chain of corporations or other business
associations beginning with the Company if each of the corporations or
other business associations (other than the last corporation in the
unbroken chain) owns equity interests (including stock, partnership
interests or membership interests in limited liability companies)
possessing 50% or more of the total combined voting power of all classes of
equity in one of the other corporations or other business associations in
the chain.
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2. Administration.
The Plan shall be administered by a Committee of not less than two
directors of the Company who shall be appointed by the Board and who shall
serve at the pleasure of the Board. If, and to the extent that, no
Committee exists which has the authority to so administer the Plan, the
functions of the Committee specified in the Plan shall be exercised by the
Board.
3. Common Stock Subject to Plan.
(a) The total number of shares of Common Stock reserved and available for
issuance under the Plan shall be six hundred twenty-five thousand (625,000)
shares of Common Stock. In the event that Options granted pursuant to said
Section 4 shall for any reason terminate or expire unexercised or Stock
Grants granted pursuant to Section 6 shall be forfeited, such number of
shares of Common Stock shall be available for the registrant pursuant to
Stock Options or Stock Grants pursuant to the Plan.
(b) In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split, stock distribution, reverse
split, combination of shares or other change in corporate structure
affecting the Common Stock, such substitution or adjustment shall be made
in the aggregate number of shares reserved for issuance under the Plan and
the Options, in the number and option price of shares of Common Stock
subject to outstanding Options, as may be determined to be appropriate by
the Committee, in its reasonable discretion and consistent with generally
accepted accounting principles consistently applied, provided that the
number of shares subject to any Option shall always be a whole number.
4. Grant of Options. The Committee may grant Non-Qualified Stock Options
under the Plan to Eligible Persons. Options granted under the Plan shall be
at such exercise price, not less than the par value per share, and shall
have such term and shall be exercisable in such installments as the
Committee shall, in its sole discretion, determine.
5. Exercise of Options.
(a) The Options may be exercised by payment of cash or of shares of Common
Stock having a value equal to the exercise price or by the surrender of
options to buy shares of Common Stock having a value equal to the exercise
price. The exercise price may also be paid as follows:
(b) The Committee may at any time offer to buy out for a payment in cash or
Common Stock, any Option in whole or in part and without regard to whether
the Option is then exercisable on such terms and conditions as the
Committee shall establish and communicate to the Option Holder at the time
that such offer is made. Nothing in this Paragraph 5(b) shall require any
Option Holder to accept such offer.
6. Stock Grants.
(a) Administration. Shares of Stock Grant may be issued to Eligible Persons
either alone, in addition to or in tandem with other awards granted under
the Plan and/or cash awards made outside of the Plan. The Committee shall
determine the Eligible Persons to whom, and the time or times at which,
Stock Grants will be made, the number of shares to be awarded, the price
(if any) to be paid by the recipient of a Stock Grant, subject to Paragraph
6(b) of the Plan, the time or times within which such awards may be subject
to forfeiture, and all other terms and conditions of the awards. The
Committee may condition the grant of Stock Grant upon the attainment of
specified performance goals or such other factors as the Committee may, in
its sole discretion, determine. The provisions of Stock Grant awards need
not be the same with respect to each recipient.
(b) Awards and Certificates.
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(i) The prospective recipient of a Stock Grant shall have such rights with
respect to such award as are determined by the Committee, and, if requested
by the Committee, unless and until such recipient has executed an agreement
evidencing the award and has delivered a fully executed copy thereof to the
Company, and has otherwise complied with the applicable terms and
conditions of such award.
(ii) The purchase price for shares of Stock Grant may be equal to or less
than their par value and may be zero. Stock Grants may be issued to
Eligible Persons in consideration for services rendered.
(iii) Awards of Stock Grant must be accepted within a period of 60 days (or
such shorter period as the Committee may specify at grant) after the award
date, by executing a Stock Grant Award Agreement (if required by the
Committee) and paying the price, if any, required under Paragraph 6(b)(ii).
(iv) Each participant receiving a Stock Grant shall be issued a stock
certificate in respect of such shares of Stock Grant. Such certificate
shall be registered in the name of such participant, and shall bear an
appropriate legend referring to the terms, conditions, and restrictions
applicable to such award; provided, however, that if such Stock Grant is
not subject to restrictions, the certificate shall only have such legends,
if any, as may be required by applicable federal securities laws.
(v) If the Stock Grant is subject to restrictions, the Committee shall
require that (A) the stock certificates evidencing shares of Stock Grant be
held in the custody of the Company until the restrictions thereon shall
have lapsed, and (B) as a condition of any Stock Grant award, the
participant shall have delivered a stock power, endorsed in blank, relating
to the Stock Grant covered by such award.
(c) Restrictions and Conditions. The shares of Stock Grant awarded pursuant
to this Section 6 may, in the discretion of the Committee, be subject to
any one or more of the following restrictions and conditions:
(i) Subject to the provisions of the Plan and the award agreement, during a
period set by the Committee commencing with the date of such award (the
"Restriction Period"), the participant shall not be permitted to sell,
transfer, pledge or assign shares of Stock Grant awarded under the Plan.
Within these limits, the Committee, in its sole discretion, may provide for
the lapse of such restrictions in installments and may accelerate or waive
such restrictions in whole or in part, based on service, performance and/or
such other factors or criteria as the Committee may determine, in its sole
discretion.
(ii) Except as provided in this Paragraph 6(c)(ii) and Paragraph 6(c)(i) of
the Plan, the participant shall have, with respect to the shares of Stock
Grant, all of the rights of a stockholder of the Company, including the
right to vote the shares and the right to receive any regular cash
dividends paid out of current earnings. The Committee, in its sole
discretion, as determined at the time of award, may permit or require the
payment of cash dividends to be deferred and, if the Committee so
determines, reinvested, subject to Paragraph 6(c)(v) of the Plan, in
additional Stock Grant to the extent shares are available under Section 3
of the Plan, or otherwise reinvested. Stock dividends, splits and
distributions issued with respect to Stock Grant shall be treated as
additional shares of Stock Grant that are subject to the same restrictions
and other terms and conditions that apply to the shares with respect to
which such dividends are issued, and the Committee may require the
participant to deliver an additional stock power covering the shares
issuable pursuant to such stock dividend, split or distribution. Any other
dividends or property distributed with regard to Stock Grant, other than
regular dividends payable and paid out of current earnings, shall be held
by the Company subject to the same restrictions as the Stock Grant.
(iii) Subject to the applicable provisions of the award agreement and this
Section 6, upon termination of a participant's employment with the Company
and any Subsidiary or Affiliate for any reason during the Restriction
Period, all shares still subject to restriction will vest, or be forfeited,
in accordance with the terms and conditions established by the Committee at
or after grant.
(iv) If and when the Restriction Period expires without a prior forfeiture
of the Stock Grant subject to such Restriction Period, certificates for an
appropriate number of unrestricted shares, and other property held by the
Company with respect to such Restricted Shares, shall be delivered to the
participant promptly.
(v) The actual or deemed reinvestment of dividends or dividend equivalents
in additional Stock Grant at the time of any dividend payment shall only be
permissible if sufficient shares of Stock are available under the Plan for
such reinvestment (taking into account then outstanding Stock Options,
Stock Purchase Rights and other Plan awards).
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7. Amendments. Neither this Plan nor the Options or Stock Grants granted
pursuant to this Plan may be amended, altered or discontinued as to any
Option Holder without the approval of the Option Holder or the holder of
the Stock Grant.
8. General Provisions.
(a) The Committee may require each person purchasing shares pursuant to an
Option to represent to and agree with the Company in writing that the
optionee or participant is acquiring the shares without a view to
distribution thereof. The certificates for such shares may include any
legend which the Committee deems appropriate to reflect any restrictions on
transfer. All certificates or shares of Common Stock or other securities
delivered under the Plan shall be subject to such stock-transfer orders and
other restrictions as the Committee may deem advisable under the rules,
regulations, and other requirements of the Commission, any stock exchange
upon which the Common Stock is then listed, and any applicable Federal or
state securities law, and the Committee may cause a legend or legends to be
put on any such certificates to make appropriate reference to such
restrictions.
(b) Nothing contained in this Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to stockholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases.
(c) Neither the adoption of the Plan nor the grant of any award pursuant to
the Plan shall confer upon any employee of the Company or any Subsidiary or
Affiliate any right to continued employment with the Company or a
Subsidiary or Affiliate, as the case may be, nor shall it interfere in any
way with the right of the Company or a Subsidiary or Affiliate to terminate
the employment of any of its employees at any time.
(d) No later than the date as of which an amount first becomes includible
in the gross income of an Option Holder for Federal income tax purposes
with respect to any Option, the Option Holder shall pay to the Company, or
make arrangements satisfactory to the Committee regarding the payment of,
any Federal, state, or local taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the
Committee, withholding obligations may be settled with Common Stock,
including Common Stock that is part of the award that gives rise to the
withholding requirement. The obligations of the Company under the Plan
shall be conditional on such payment or arrangements and the Company and
its Subsidiaries or Affiliates shall, to the extent permitted by law, have
the right to deduct any such taxes from any payment of any kind otherwise
due to the participant.
9. Effective Date of Plan. The Plan shall be effective as of January 23,
2004 the date the Plan was approved by the Board.
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Exhibit 10.9
REVOLVING CONVERTIBLE CREDIT AGREEMENT
This Revolving Convertible Credit Agreement (this "Agreement") is made and
entered into effective as of June 10, 2004 (the "Effective Date") by and
between the Lenders set forth in the signature pages hereto each a "Lender"
and collectively the "Lenders"), and Security Intelligence Technologies,
Inc., a Florida corporation ("Borrower").
RECITALS
WHEREAS, the Lenders desire to loan certain sums to Borrower from time to
time, and Borrower wishes to borrow certain sums from the Lenders, on and
subject to the terms and conditions contained in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in this Agreement and for
other good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the Lenders and Borrower hereby, intending to be
legally bound by the terms hereof, agree as follows:
1. Certain Definitions. As used herein:
1.1 The term "Business Day" means any day other than a Saturday, Sunday, or
other day on which commercial banks in New York, New York are authorized or
required by law to close.
1.2 The term "Credit Period" means that period of time beginning on the
Effective Date and ending on September 15, 2004.
1.3 The term "Loan Documents" means, collectively, this Agreement, the Note
(as defined below) executed and delivered pursuant hereto, and any other
documents executed or delivered by Borrower pursuant to this Agreement or
in connection with any Loan.
1.4 The term "Maturity Date" means that date which is the earlier to occur
of: (a) June 30, 2005; or (b) the date on which the Lenders or each Lender
declares the entire unpaid principal amount and all accrued interest on
each outstanding Note immediately due and payable in full under Section 10.
2. Amount and Terms of Credit.
2.1 Commitment to Lend. (a) Subject to the terms and conditions of this
Agreement, and in reliance on the representations, warranties and covenants
of Borrower set forth in this Agreement, each Lender agrees to make loans
of funds to Borrower during the Credit Period on a revolving basis (such
loans being collectively hereinafter referred to as "Loans" and each
individually as a "Loan"), in an aggregate cumulative total principal
amount not to exceed five hundred thousand (US $500,000.00) dollars (the
"Commitment") according to such Lender's pro rata part as set forth in the
signature pages hereto; provided however; the initial loan shall be in the
amount of $200,000 (the "Initial Loan") and unless otherwise agreed to by
the Lender each such additional Loan shall be in an amount not less than
$150,000.00 (the "Base Rate Borrowing"). In the event the difference
between the Commitment and the outstanding Loans is less than the Base Rate
Borrowing, then the amount to be borrowed shall be the difference between
the Commitment and Base Rate Borrowing. Notwithstanding the foregoing, on
any date of determination, the aggregate amount of the Loans shall never
exceed the Commitment and Borrower may not draw down more than once in any
thirty (30) day period.
(b) Notwithstanding the foregoing, no Lender will be obligated to make a
Loan to Borrower:
(i) unless and until Borrower executes and delivers to such Lender a Note
(as defined in Section 2.2) for the principal amount of such Loan;
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(ii) after the Credit Period;
(iii) unless and until all relevant terms and conditions of this Agreement,
including but not limited to the conditions precedent and other provisions
of Sections 6 (with respect to All Loans), 7 (with respect to the Second
Tranche of the Loan), and 8 (with respect to the Third and Fourth Tranche
of the Loan) have been satisfied in full; and
(iv) unless and until Borrower first gives the Lender written notice of
Borrower's request for a Loan hereunder that sets forth (x) the principal
amount to be borrowed by Borrower under such requested Loan, and (y) that
the Borrower has met the condition precedent to such Loan together with
evidence of such condition being met (a "Loan Notice"), and (z) the date on
which such Loan is requested to be advanced, which date shall not be sooner
than five (5) Business Days following Lenders' receipt of such Loan Notice.
2.2 Note. Borrower's indebtedness to Lender under each Loan advanced by
Lender under this Agreement will be evidenced by a separate Promissory Note
of Borrower in the form attached hereto as Exhibit "A" (the "Note"). The
Note will provide that interest on unpaid principal will accrue at a rate
equal to 10% per annum (calculated on the basis of a 365/66-day year)
compounded annually (but in no event higher than the highest lawful rates).
2.3 Maturity. Unless payment thereof is accelerated or otherwise becomes
due earlier under the terms of this Agreement (including but not limited to
the provisions of Section 10) or the terms of a Note the unpaid principal
amount of all Loans and all unpaid interest accrued thereon, together with
any other fees, expenses or costs incurred in connection therewith, will be
immediately due and payable to Lender in full on the Maturity Date.
2.4 Prepayment. Subject to the Conversion rights set forth in Section 4
hereto, Borrower may at any time and from time to time on any Business Day
prepay any Loan in whole or in part in increments of U.S. $10,000.00 on at
least five (5) Business Day's prior written notice, or telephonic notice
promptly confirmed in writing, received by Lender no later than 10:00 a.m.,
Eastern Standard Time. Each prepayment will be applied as follows: (a)
first, to the payment of interest accrued on all Loans outstanding, and (b)
second, to the extent that the amount of such prepayment exceeds the amount
of all such accrued interest, to the payment of principal on such Loan or
Loans as Borrower may designate.
3. Closing Date; Delivery.
3.1 Closing Date. The closing of the initial Loan (the "Closing") will be
held by mail and/or telecopy on the Effective Date (the "Closing Date"), or
at such other time and place as Borrower and Lender may mutually agree.
3.2 Delivery. At the Closing, Borrower will execute and deliver to Lender
the Note, duly executed by Borrower.
4. Representations and Warranties of Borrower. Borrower hereby represents
and warrants to Lender that:
4.1 Organization and Standing; Charter Documents. Borrower is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Florida, and has all requisite corporate power and authority to
own, lease and operate its properties and to conduct its business as such
is presently conducted and as proposed to be conducted. Borrower is duly
qualified to do business as a foreign corporation in good standing in any
state or jurisdiction in the United States in which it is required to be
qualified to do intrastate business as the Company's business is currently
conducted, except for jurisdictions in which failure to so qualify could
not reasonably be expected to have a material adverse effect on the
business and operations of the Company taken as a whole. True and accurate
copies of the Certificate of Incorporation (the "Charter") and Bylaws of
Borrower, each as amended and currently in effect, have been delivered to
Lender and Lender's counsel.
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4.2 Authorization. All corporate action on the part of Borrower and its
officers, directors and stockholders that is necessary for the
authorization, execution, delivery and performance of each of the Loan
Documents by Borrower has been taken; and each of the Loan Documents, when
executed and delivered by Borrower, will constitute valid and legally
binding obligations of Borrower, enforceable in accordance with their terms.
5. Conversion.
5.1 Conversion Procedure. (a) Lender may elect at anytime by prior written
notice to the Company (a "Conversion Notice"), including after receipt of
notice of prepayment by the Borrower as set forth in Section 2.4 above, to
have all or a portion of the unpaid principal amount of the Loan, together
with all accrued and unpaid interest thereon converted into a number of
shares of the Conversion Stock (as hereinafter defined) determined by
dividing the outstanding principal amount of the Loan plus all accrued and
unpaid interest, by the Conversion Price (as hereinafter defined) then in
effect (the date of any such conversion, a "Conversion Date").
(b) Except as otherwise expressly provided herein, the conversion of the
Loan shall be deemed to have been effected as of the close of business on
the Conversion Date. At such time as such conversion has been effected, the
rights of the Lender shall cease to the extent of the conversion hereof,
and the "Person" or "Persons" (which shall include any natural person,
firm, partnership, association, corporation, limited liability company or
trust) in whose name or names any certificate or certificates for shares of
Conversion Stock are to be issued upon such conversion shall be deemed to
have become the holder or holders of record of the shares of Conversion
Stock represented thereby.
(c) As soon as possible after a conversion has been effected (but in any
event within five (5) Business Days), the Company shall deliver to the
Lender or the converting holder ("Holder") a certificate or certificates
representing the number of shares of Conversion Stock issuable by reason of
such conversion in such name or names and such denomination or
denominations as the converting Holder has specified.
(d) The issuance of certificates for shares of Conversion Stock upon
conversion of the Loan shall be made without charge to the Holder hereof
for any issuance tax in respect thereof or other cost incurred by the
Company in connection with such conversion and the related issuance of
shares of Conversion Stock. Upon conversion of the Loan, the Company shall
take all such actions as are necessary in order to insure that the
Conversion Stock issuable with respect to such conversion shall be validly
issued, fully paid and non assessable.
(e) The Company shall not close its books against the transfer of
Conversion Stock issued or issuable upon conversion of the Loan in any
manner which interferes with the timely conversion of the Loan. The Company
shall assist and cooperate with any Holder required to make any
governmental filings or obtain any governmental approval prior to or in
connection with the conversion of the Loan (including, without limitation,
making any filings required to be made by the Company).
(f) Except as otherwise expressly agreed in writing between the Holder and
the Company, upon a conversion of the Loan, the Loan shall be converted
into Conversion Stock.
(g) When issued, the Conversion Stock are, or will be (i) duly and validly
authorized, (ii) fully issued, paid and nonassessable, and (iii) free and
clear of any security interests, liens, claims, or other encumbrances,
subject to restrictions upon transfer under the Securities Act of 1993, as
amended.
5.2 Conversion Price. Subject to Reclassification, Merger, Sale of Assets
and Stock Splits, Combinations and Dividends set forth in Section 5.4
below, the Conversion Price shall be $.10 per share; provided however, upon
an Event of Default, the Conversion Price shall be reduced to $.05 per share.
5.3 Conversion Stock. For purposes hereof, "Conversion Stock" means the
common stock of the Company. 5.4 The Conversion Price above and number and
kind of shares or other securities to be issued upon conversion determined
pursuant to Section 5, shall be subject to the adjustment from time to time
upon the happening of certain events while this conversion right remains
outstanding, as follows:
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(a) Merger, Sale of Assets, etc. If the borrower at any time shall
consolidate with or merge into or sell or convey all or substantially all
its assets to any other corporation, this Note, as to the unpaid principle
portion thereof and accrued interest thereon, shall thereafter be deemed to
evidence the right to purchase such number and kind of shares or other
securities or property that would have been issuable or distribute on
account of such consolidation, merger, sale or conveyance, upon or with
respect to the securities subject to the conversion or purchase right
immediately prior to such consolidation, merger, sale or conveyance. The
foregoing provision shall similarly apply to successive transactions of a
similar nature by any such successor or purchaser.
(b) Reclassification, etc. If the borrower at any time shall, by
reclassification or otherwise, change the common stock into the same or a
different number of securities of any class or classes, this Note, as to
the unpaid principal portion thereof and accrued interest thereon, shall
thereafter be deemed to evidence the right to purchase such number and kind
of securities as would have been issuable as the result of such change with
the respect to the common stock immediately prior to such reclassification
or other change.
(c) Stock Splits Combinations and Dividends. If the shares of common stock
are subdivided or combined into a greater or smaller number of shares of
common stock, or if a dividend is paid on the common stock in shares of
common stock, the Conversion Price, as amended shall be proportionately
reduced in case of subdivision of shares or stock dividend or
proportionately increased in case of combination of shares, in each such
case by the ratio which the total number of shares of common stock
outstanding immediately prior to such event.
5.5 Maximum Conversion Amount. The Lender shall not be entitled to convert
on a Conversion Date that amount of the Note in connection with that number
of shares of Common Stock which would be in excess of the some of (i) the
number of shares of Common Stock beneficially owned by the Lender and its
affiliates on a Conversion Date, and (ii) the number of shares of Common
Stock issuable upon the conversion of the Note with respect to which the
determination of this proviso is being made on a Conversion Date, which
would result in beneficial ownership by the Lender and is affiliates of
more than 9.99% of the outstanding shares of Common Stock of the Company on
such Conversion Date. For the purposes of the proviso for the immediately
proceeding sentence, beneficial ownership shall be determined in accordance
with Section 13 (d) of the Securities Exchange Act of 1934, as amended, and
Regulation 13d-3 thereunder. Subject to the foregoing, the Lender shall not
be limited to aggregate conversions of only 9.99%. The Lender may void the
conversion limitation described in this section 5.5 upon 75 days prior
notice to the Company. The Lender may allocate which of the equity of the
Company deemed beneficially owned by the subscriber shall be included in
the 9.99% amount described above and which shall be allocated to the excess
above 9.99%. 6. Conditions Precedent to Initial and All Loans. The
obligation of Lender to make each Loan will be subject to the satisfaction
of all the following additional conditions precedent:
6.1 No Event of Default. No event will have occurred and be continuing, and
no event would result from the making of such Loan, that would constitute
an Event of Default as defined herein.
6.2 Note. Lender will have received the Note representing such Loan,
executed by a duly authorized officer of Borrower.
6.3 Representations True. All representations and warranties of Borrower
contained in this Agreement or in any other Loan Documents will be true,
correct and complete in all respects with the same effect as though such
representations and warranties had been made on and as of the date such
Loan is actually advanced (except to the extent such representations and
warranties specifically relate to an earlier date, in which case they will
be true, accurate and complete in all material respects as of such earlier
date).
6.4 All Agreements Performed. All agreements, obligations, conditions and
covenants set forth in this Agreement and all other Loan Documents to be
performed by Borrower through the date such Loan is advanced will have been
duly performed and complied with in all respects.
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6.5 No Sale Transaction. No Sale Transaction shall have occurred. A "Sale
Transaction" shall be deemed to have occurred upon the happening of any of
the following events: (i) a merger or consolidation of the Borrower with or
into another issuer; or (ii) the exchange or sale of all or a portion of
the outstanding shares of the Borrower for securities of another issuer, or
other consideration provided by such issuer or another party to such
transaction; and in the case of either (i) or (ii), the Borrower's
shareholders prior to the transaction, do not possess, immediately after
such transaction, more than 50% of the voting power of the securities
issued and outstanding of any one or more of the following: (x) the
Borrower; (y) such other issuer; or (z) such other constituent party to the
transaction; or a sale (other than in the ordinary course of business) of
more than 90% of the Borrower's assets to a third party not an affiliate of
the Borrower immediately prior to such transaction.
6.6 As of the Closing Date, the Borrower is a fully reporting company with
the class of securities registered pursuant to Section 12 (g) of the
Securities and Exchange Act of 1934.
6.7 No material adverse change in the Borrower's business or business
prospects shall have occurred after the date of the most recent financial
statements.
6.8 The Borrower's Common Stock is listed on, and the Borrower's compliance
with the listing requirements of the OTC Bulletin Board, Nasdaq SmallCap
Market, American Stock Exchange, new York Stock Exchange or NASDAQ National
Market System (any of the foregoing the "Principal Market").
6.9 The Borrower has not received notice from Principal Market that the
Borrower is not in compliance with the requirements for continued listing,
which notice has not been resolved in a manner affirming the Borrower's
compliance with such requirements.
7. Conditions Precedent to Additional Loans. In addition to the conditions
precedent set forth in Section 6 above, Lender shall only be obligated to
lend Borrower more than one tranche under this Agreement (in addition to
the initial Loan), if Borrower meets one of the following benchmarks:
(i) Bona fide purchase order by the Saudi Arabian Licensee, as set forth in
the License Agreement dated ___, 2004 with respect to the Saudi Arabian
Territory to buy a minimum of 5 armored cars with VIP jamming equipment; or
(ii) Bona Fide purchase order by a United States federal, state or local
court, administrative agency or commission or other governmental authority
or instrumentality (a "US Governmental Entity") for the purchase of a
minimum of 3 VIP Bomb jammers; or
(iii) Bona Fide purchase order by a US Governmental Entity in excess of
$250,000; or
(iv) Bona Fide purchase order by a foreign federal, state or local court,
administrative agency or commission or other governmental authority or
instrumentality (a "Foreign Governmental Entity") or a middleman
representing a Foreign Government Entity in excess of $300,000; or
(v) Bona Fide purchase order by a third-party non-affiliated Licensee or
distributor in excess of $500,000; or
(vi) Reduction in debt of in the minimum amount of $500,000 (the "Debt
Reduction Amount"); provided however, in the event any issuance of common
stock at greater than a 50% discount to market shall not be counted towards
the Debt Reduction Amount.
Notwithstanding the foregoing, in the event the Borrower wishes to borrow
more than two tranches under this Credit Agreement, the Borrower must meet
more than one of the foregoing benchmarks during the Credit Period.
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8. Representations and Warranties of the Lenders. Each Lender, severally
and not jointly, represents and warrants to Company as of the Closing Date
(or additional Closing Date, as applicable) as follows:
(a) Investment Intent: Authority. This Agreement is made with Lender in
reliance upon Lender's representation to Company, evidenced by Lender's
execution of this Agreement, that Lender is entering into this Agreement
for investment for Lender's own account, not as nominee or agent, for
investment and not with a view to, or for resale in connection with, any
distribution or public offering thereof within the meaning of the 1933 Act;
provided, however, that by making the representations herein, Lender does
not agree to hold any of the Conversion Stock for any minimum or other
specific term and reserves the right to dispose of the Conversion Stock, at
any time in accordance with or pursuant to a registration statement or an
exemption under the 1933 Act. Lender has the requisite right, power,
authority and capacity to enter into and perform this Agreement and the
Agreement will constitute a valid and binding obligation upon Lender,
except as the same may be limited by bankruptcy, insolvency, moratorium,
and other laws of general application affecting the enforcement of
creditors' rights.
(b) Knowledge and Experience. Lender (i) has such knowledge and experience
in financial and business matters as to be capable of evaluating the merits
and risks of Lender's entire prospective investment in the Company; (ii)
has the ability to bear the economic risks of Lender's prospective investment;
(iii) has had all questions which have been asked by Lender satisfactorily
answered by Company; and (iv) has not been offered the investment
opportunity by any form of advertisement, article, notice or other
communication published in any newspaper, magazine, or similar media or
broadcast over television or radio, or any seminar or meeting whose
attendees have been invited by any such media. Lender represents and
warrants that it is an "accredited investor" within the meaning of Rule 501
of Regulation D of the Securities Act.
9. Other Covenants of Borrower. Borrower hereby covenants and agrees with
Lender as follows.
9.1 Financial and Other Information and Inspection. During the Credit
Period, Borrower will provide to Lender all the reports and rights
described below in this Section 9.1:
(a) Annual Financial Information. As soon as practicable after the end of
each fiscal year of Borrower, but no later than one hundred twenty (120)
days thereafter, an audited consolidated balance sheet of Borrower and its
subsidiaries as at the end of such fiscal year, and consolidated statements
of income and cash flows of Borrower and its subsidiaries for such year,
prepared in accordance with generally accepted accounting principles and
setting forth in each case in comparative form the financial statements for
the previous fiscal year, all in reasonable detail and audited and
certified by independent public accountants acceptable to Lender.
(b) Quarterly Financial Information. As soon as practicable after the end
of each fiscal quarter of Borrower, and in any event within forty-five (45)
days thereafter, an unaudited consolidated balance sheet of Borrower and
its subsidiaries as at the end of such quarter and consolidated statements
of income and cash flows of Borrower and its subsidiaries for each such
quarter and for the fiscal year to date, prepared in accordance with
generally accepted accounting principles, all in reasonable detail.
(c) Inspection Rights. The right to visit and inspect any of the properties
of Borrower or any of its subsidiaries, and to discuss its and their
affairs and finances with its and their officers, all at such reasonable
times and as often as may reasonably be requested by Lender.
(d) Other Information. With reasonable promptness, such other information
and data, including, without limitation, lists of property and accounts,
budgets, agreements with insurers, forecasts, tax returns and reports, with
respect to Borrower and its subsidiaries as may from time to time may be
reasonably requested by Lender, and all such other information and
communications (including, without limitation, notices of meetings of
Borrower's shareholders) as Borrower will have supplied to its holders of
any shares of its capital stock.
9.2 Further Assurances. In addition to the obligations and documents which
this Agreement expressly requires Borrower to execute, deliver and perform,
Borrower will execute, deliver and perform, and will cause its subsidiaries
to execute, deliver and perform, any and all further acts or documents
which Lender may reasonably require in order to carry out the purposes of
this Agreement or any of the other Loan Documents.
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10. Events of Default of Borrower.
10.1 The occurrence of any of the following events will constitute an
"Event of Default ":
(a) Borrower fails to pay any principal or any accrued interest under any
Note or any Loan when the same is due and payable, or fails to pay any
amount of principal or accrued interest due under any Note or any Loan on
the Maturity Date therefor, and such failure to pay is not cured by
Borrower within five (5) calendar days after Lender gives written notice of
such failure to pay to Borrower;
(b) any material representation or warranty made by or on behalf of
Borrower in this Agreement or in any other Loan Document, or any statement
or certificate that Borrower may at any time give in writing pursuant
thereto or in connection therewith is false, misleading or incomplete in
any material respect when made (or deemed to have been made);
(c) Borrower fails or neglects to perform, keep or observe any covenant set
forth in this Agreement or in any of the other Loan Documents, and the same
has not been cured within ten (10) calendar days after Borrower becomes
aware thereof;
(d) Borrower or any of its subsidiaries becomes insolvent, or makes an
assignment for the benefit of creditors, or applies for or consents to the
appointment of a receiver, liquidator, custodian or trustee for it or for a
substantial part of its property or business, or such a receiver,
liquidator, custodian or trustee otherwise is appointed and is not
discharged within thirty
(30) calendar days after such appointment; or
(e) bankruptcy, insolvency, reorganization or liquidation proceedings or
other proceedings for relief under any bankruptcy law or any law for the
relief of debtors are instituted by or against Borrower or any of its
subsidiaries, or any order, judgment or decree is entered against Borrower
or any such subsidiary decreeing its dissolution or liquidation; provided,
however, with respect to an involuntary petition in bankruptcy, such
petition is not have been dismissed within thirty (30) days after the
filing of such petition.
10.2 Remedies of Lender. Upon and after the occurrence of any Event of
Default or Sale Transaction, Lender will have no further obligation to make
any Loan or Loans to Borrower, and in addition, at Lender's sole option by
written notice to Borrower, Lender take any one or more of the following
actions:
(a) Lender may immediately terminate the Commitment and all liabilities and
obligations of Lender under this Agreement, without affecting Lender's
rights under this Agreement and the Note(s);
(b) Lender may declare the entire principal amount of and all accrued
interest on the Note(s) and all Loans to immediately be due and payable in
full, whereupon such amounts will immediately become due and payable in
full, provided that in the case of an Event of Default listed in paragraph
(d) or (e) of
Section 10.1, the principal and interest will immediately become due and
payable without the requirement of any notice or other action by Lender; and
(c) Exercise all rights and remedies granted under the Loan Documents or
otherwise available to Lender at law or in equity.
11. Registration Rights. The Company has agreed to provide the Lenders with
certain registration rights as set forth in the attached Registration
Rights Agreement executed concurrent herewith and made a part hereof.
12. Miscellaneous.
12.1 Survival. The representations and warranties of Borrower contained in
or made pursuant to this Agreement and all the other Loan Documents will
survive the execution and delivery of the Loan Documents.
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12.2 Entire Agreement. This Agreement, the Note, and the exhibits and
schedules attached hereto constitute the entire agreement and understanding
among the parties with respect to the subject matter thereof and supersede
any prior understandings or agreements of the parties with respect to such
subject matter.
12.3 Successors and Assigns. The terms and conditions of this Agreement
will inure to the benefit of and be binding upon the respective successors
and assigns of the parties; provided, however, that neither party may
assign or delegate any of its rights or obligations hereunder or under any
other Loan Document or any interest herein or therein without the other
party's prior written consent.
12.4 No Third Party Beneficiaries; Construction. Nothing in this Agreement,
express or implied, is intended to confer upon any third party any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement. This Agreement and its
exhibits are the result of negotiations between the parties and has been
reviewed by each party hereto; accordingly, this Agreement will be deemed
to be the product of the parties hereto, and no ambiguity will be construed
in favor of or against any party.
12.5 Governing Law. This Agreement will be governed by and construed in
accordance with the internal laws of the State of New York as applied to
agreements entered into solely between residents of, and to be performed
entirely in, such State, without reference to that body of law relating to
conflicts of law or choice of law.
12.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed in original, but all of which
together will constitute one and the same instrument.
12.7 Notices. Any notice required or permitted under this Agreement will be
given in writing and will be deemed effectively given upon personal
delivery; upon confirmed transmission by telecopy or telex; or three (3)
days following deposit with the United States Post Office, by certified or
registered mail, postage prepaid, addressed:
To Borrower:
Security Intelligence Technologies, Inc.
145 Hugenot Street
New Rochelle, New York 10801
Fax: 914-654-1302
Attention: Chief Executive Officer
To Lender: To The Address Set Forth In The Signature Pages Hereto or at
such other address as such party may specify by written notice given in
accordance with this Section.
12.8 Modification; Waiver. This Agreement may be modified or amended only
by a writing signed by both parties hereto. No waiver or consent with
respect to this Agreement will be binding unless it is set forth in writing
and signed by the party against whom such waiver is asserted. No course of
dealing between Borrower and Lender will operate as a waiver or
modification of any party's rights under this Agreement or any other Loan
Document. No delay or failure on the part of either party in exercising any
right or remedy under this Agreement or any other Loan Document will
operate as a waiver of such right or any other right. A waiver given on one
occasion will not be construed as a bar to, or as a waiver of, any right or
remedy on any future occasion.
12.9 Rights and Remedies Cumulative. The rights and remedies of Lender
herein provided will be cumulative and not exclusive of any other rights or
remedies provided by law or otherwise.
12.10 Severability. Any invalidity, illegality or unenforceability of any
provision of this Agreement in any jurisdiction will not invalidate or
render illegal or unenforceable the remaining provisions hereof in such
jurisdiction and will not invalidate or render illegal or unenforceable
such provision in any other jurisdiction.
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12.11 Attorneys' Fees. If any party hereto commences or maintains any
action at law or in equity (including counterclaims or cross-complaints)
against the other party hereto by reason of the breach or claimed breach of
any term or provision of this Agreement or any other Loan Document, then
the prevailing party in said action will be entitled to recover its
reasonable attorney's fees and court costs incurred therein.
12.12 Investment Banking Fees. It is hereby agreed that Atlas Capital
Services, LLC has acted as an Investment Banker with respect to the Credit
Agreement and shall receive a commission equal to: (i) 10% in cash of
whatever funds are loaned to the Company under this Credit Agreement, and
(ii) 10% of whatever funds are loaned to the Company under this Credit
Agreement in the form of warrants to purchase common stock of the Company
at the exercise price of $.10 per share. The warrants shall contain terms
and conditions customary in a warrant of this kind and shall have
piggy-back registration rights with the registration of the Conversion
Stock. The cash portion of the fee shall be paid directly from the Lenders
to Atlas.
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IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement as of the Effective Date.
================================================================================
BORROWER LENDERS
By: /s/ Ben Jamil GSM Communications, Inc.
------------------------------
Name: Ben Jamil
Title: Chief Executive Officer By: /s/ Leovigildo Lopez
-----------------------------------------
Name: Leovigildo Lopez
Title: President
Address: 1221 Brickell Avenue, Suite 900
Miami, Florida 33131
Fax No. (305)
--------------
Amount: $65,000
Kesef Equity Group, Inc
By: /s/ Victor Salimeo
-----------------------------------------
Name: Victor Salimeo
Title: President
Address: 14 Lyle Farm Lane
Englishtown, NJ 07726
Fax No.
Amount: $175,000
Ostonian Securities Limited
By: /s/ Jose Masis
-----------------------------------------
Name: Jose Masis
Title: President
Address: 60 St. James Street, 1st Floor
London, England SW1 ALE
Fax No.
Amount: $125,000
--------------------------------------------------------------------------------
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IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement as of the Effective Date.
===========================================================================================
BORROWER LENDERS
By: /s/ Ben Jamil Robert A. Schechter
------------------------------
Name: Ben Jamil
Title: Chief Executive Officer By: /s/ Robert A Schechter
---------------------------------------------------
Name: Robert A. Schechter
Address: c/o The Atlas Group of
Companies, LLC
135 East 57th Street, 26th
Floor
New York , New York 10022
Fax No. (212) 716-1501
Amount: $30,000
Shimon S. Fishman
By: /s/ Shimon Fishman
----------------------------------------------------
Name: Shimon S. Fishman
Address: c/o The Atlas Group of
Companies, LLC
135 East 57th Street, 26th
Floor
New York , New York 10022
Fax No. (212) 716-1501
Amount: $30,000
Steven Pollan
By: /s/ Steven Pollan
----------------------------------------------------
Name: Steven Pollan
Address: c/o Atlas Capital
Services, LLC
135 East 57th Street, 26th
Floor
New York , New York 10022
Fax No. (212) 267-3501
Amount: $20,000
Atlas Equity Group, Inc.
By /s/ Michael D. Farkas
----------------------------------------------------
Name: Michael D. Farkas
Title: President
Address: 1691 Michigan Avenue,
Suite 425
Miami, Florida 33139
Fax No. (305) 539-0901
Amount: $55,000
===========================================================================================
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF
CERTAIN
STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS
ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO
BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF
TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY
PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
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REVOLVING CONVERTIBLE PROMISSORY NOTE
This Revolving Convertible Promissory Note (this "Note") is made and
delivered pursuant to that certain Revolving Convertible Credit Agreement
dated as of June 10, 2004 between Borrower and Lender (as such terms are
defined below), as such may be amended from time to time (the "Credit
Agreement"). Unless otherwise defined herein, all capitalized terms used in
this Note shall have the same meanings that are given to such terms in the
Credit Agreement, the terms of which are incorporated into this Note by
reference.
1. Obligation. FOR VALUE RECEIVED, the undersigned, Security Intelligence
Technologies, Inc., a Florida corporation ("Borrower") hereby promises to
pay to the order of Robert A. Schechter, a resident of the State of New
York, ("Lender" or "Holder") on or before June 30, 2005 (the "Maturity
Date"), at Lender's principal place of business at c/o The Atlas Group of
Companies, LLC 135 East 57th Street, 26th Floor, New York, New York 10022,
or at such other place as Holder may direct, the principal sum of Thirty
Thousand ($30,000.00) Dollars or so much thereof as may be advanced and
outstanding, together with all interest accrued on unpaid principal, to be
computed on each advance of a Loan from the date of its disbursement to
Borrower, at a rate equal to 10% per annum (calculated on the basis of a
365/66-day year), compounded annually . As used herein, the term "Holder"
shall initially mean Lender, and shall subsequently mean each person or
entity to whom this Note is duly assigned. The outstanding unpaid principal
balance of this Note at any time shall be the total principal amounts
advanced hereunder by Holder less the amounts of payments of principal made
hereon by Borrower, which balance may be endorsed hereon from time to time
by Holder in accordance with Section 2. Payments of interest on this Note
shall be payable on a quarterly basis, on the last business day of each
calendar quarter.
2. Recording of Loans and Payments. Holder is authorized to record on
Schedule A hereto, and on any continuation(s) of such Schedule that may be
attached to this Note: (a) the date and principal amount of each Loan
advanced by Lender under the Credit Agreement; and (b) the date and amount
of each payment or prepayment of principal and/or accrued interest of any
Loan; which recordation will constitute prima facie evidence of the
accuracy of the information so endorsed on Schedule A; provided however,
that any failure to record such information on such Schedule or
continuation thereof will not in any manner affect the obligations of
Borrower to make payments of principal and interest in accordance with the
terms of this Note. Holder will promptly provide Borrower with a copy of
each recordation made by Holder on Schedule A attached hereto.
3. Prepayment. Subject to the Conversion Rights set forth in Section 5 of
the Credit Agreement, prepayment of unpaid principal and/or interest due
under this Note may be made at any time without penalty as specified in the
Credit Agreement. Unless otherwise agreed in writing by Holder, all
payments will be made in lawful tender of the United States and will be
applied (a) first, to the payment of accrued interest, and (b) second, (to
the extent that the amount of such prepayment exceeds the amount of all
such accrued interest), to the payment of principal.
4. Conversion of Debt. Holder has the right to convert this Note in
accordance with the Conversion Procedures set forth in the Credit Agreement.
5. Default; Acceleration of Obligation. Borrower will be deemed to be in
default under this Note and the outstanding unpaid principal balance of
this Note, together with all interest accrued thereon, will immediately
become due and payable in full, without the need for any further action on
the part of Holder, upon the occurrence of any Event of Default (as defined
in the Credit Agreement).
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6. Remedies on Default; Acceleration. Upon any Event of Default, Holder
will have, in addition to its rights and remedies under this Note and the
Credit Agreement, full recourse against any real, personal, tangible or
intangible assets of Borrower, and may pursue any legal or equitable
remedies that are available to Holder, and may declare the entire unpaid
principal amount of this Note and all unpaid accrued interest under this
Note to be immediately due and payable in full.
7. Waiver and Amendment. Any provision of this Note may be amended or
modified only by a writing signed by both Borrower and Holder. Except as
provided below with respect to waivers by Borrower, no waiver or consent
with respect to this Note will be binding or effective unless it is set
forth in writing and signed by the party against whom such waiver is
asserted. No course of dealing between Borrower and Holder will operate as
a waiver or modification of any party's rights or obligations under this
Note. No delay or failure on the part of either party in exercising any
right or remedy under this Note will operate as a waiver of such right or
any other right. A waiver given on one occasion will not be construed as a
bar to, or as a waiver of, any right or remedy on any future occasion.
8. Waivers of Borrower. Borrower hereby waives presentment, notice of
non-payment, notice of dishonor, protest, demand and diligence. This Note
may be amended only by a writing executed by Borrower and Holder.
9. Governing Law. This Note will be governed by and construed in accordance
with the internal laws of the State of New York as applied to agreements
between residents thereof to be performed entirely within such State,
without reference to that body of law relating to conflict of laws or
choice of law.
10. Severability; Headings. The invalidity or unenforceability of any term
or provision of this Note will not affect the validity or enforceability of
any other term or provision hereof. The headings in this Note are for
convenience of reference only and will not alter or otherwise affect the
meaning of this Note.
11. Jurisdiction; Venue. Borrower, by its execution of this Note, hereby
irrevocably submits to the in personam jurisdiction of the state courts of
the State of New York and of the United States District Court for the
Southern District of New York that are located in New York, New York, for
the purpose of any suit, action or other proceeding arising out of or based
upon this Note.
12. Attorneys' Fees. If suit is brought for collection of this Note,
Borrower agrees to pay all reasonable expenses, including attorneys' fees,
incurred by Holder in connection therewith whether or not such suit is
prosecuted to judgment.
13. Assignment. This Note is not assignable by Holder without the written
consent of Borrower. This Note may not be assigned or delegated by
Borrower, whether by voluntary assignment or transfer, operation of law,
merger or otherwise.
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14. Credit Agreement. This Note incorporates by reference all the
provisions of the Credit Agreement, including but not limited to all
provisions contained therein with respect to Events of Default, waivers,
remedies and covenants, Conversion Rights, and the description of the
benefits, rights and obligations of each of Borrower and Holder under the
Credit Agreement.
IN WITNESS WHEREOF, Borrower has executed this Note as of the date and year
first above written.
BORROWER
SECURITY INTELLIGENCE TECHNOLOGIES, INC.
By: /s/ Ben Jamil
----------------------------------------
Name: Ben Jamil
Title: Chief Executive Officer
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SCHEDULE A
TO REVOLVING PROMISSORY NOTE
RECORD OF LOANS AND REPAYMENT OF LOANS
1.
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THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF
CERTAIN
STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS
ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO
BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF
TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY
PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
REVOLVING CONVERTIBLE PROMISSORY NOTE
This Revolving Convertible Promissory Note (this "Note") is made and
delivered pursuant to that certain Revolving Convertible Credit Agreement
dated as of June 10, 2004 between Borrower and Lender (as such terms are
defined below), as such may be amended from time to time (the "Credit
Agreement"). Unless otherwise defined herein, all capitalized terms used in
this Note shall have the same meanings that are given to such terms in the
Credit Agreement, the terms of which are incorporated into this Note by
reference.
1. Obligation. FOR VALUE RECEIVED, the undersigned, Security Intelligence
Technologies, Inc., a Florida corporation ("Borrower") hereby promises to
pay to the order of Shimon S. Fishman, a resident of the State of New York,
("Lender" or "Holder") on or before June 30, 2005 (the "Maturity Date"), at
Lender's principal place of business at c/o The Atlas Group of Companies,
LLC 135 East 57th Street, 26th Floor, New York, New York 10022, or at such
other place as Holder may direct, the principal sum of Thirty Thousand
($30,000.00) Dollars or so much thereof as may be advanced and outstanding,
together with all interest accrued on unpaid principal, to be computed on
each advance of a Loan from the date of its disbursement to Borrower, at a
rate equal to 10% per annum (calculated on the basis of a 365/66-day year),
compounded annually . As used herein, the term "Holder" shall initially
mean Lender, and shall subsequently mean each person or entity to whom this
Note is duly assigned. The outstanding unpaid principal balance of this
Note at any time shall be the total principal amounts advanced hereunder by
Holder less the amounts of payments of principal made hereon by Borrower,
which balance may be endorsed hereon from time to time by Holder in
accordance with Section 2. Payments of interest on this Note shall be
payable on a quarterly basis, on the last business day of each calendar
quarter.
2. Recording of Loans and Payments. Holder is authorized to record on
Schedule A hereto, and on any continuation(s) of such Schedule that may be
attached to this Note: (a) the date and principal amount of each Loan
advanced by Lender under the Credit Agreement; and (b) the date and amount
of each payment or prepayment of principal and/or accrued interest of any
Loan; which recordation will constitute prima facie evidence of the
accuracy of the information so endorsed on Schedule A; provided however,
that any failure to record such information on such Schedule or
continuation thereof will not in any manner affect the obligations of
Borrower to make payments of principal and interest in accordance with the
terms of this Note. Holder will promptly provide Borrower with a copy of
each recordation made by Holder on Schedule A attached hereto.
3. Prepayment. Subject to the Conversion Rights set forth in Section 5 of
the Credit Agreement, prepayment of unpaid principal and/or interest due
under this Note may be made at any time without penalty as specified in the
Credit Agreement. Unless otherwise agreed in writing by Holder, all
payments will be made in lawful tender of the United States and will be
applied (a) first, to the payment of accrued interest, and (b) second, (to
the extent that the amount of such prepayment exceeds the amount of all
such accrued interest), to the payment of principal.
4. Conversion of Debt. Holder has the right to convert this Note in
accordance with the Conversion Procedures set forth in the Credit Agreement.
-74-
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5. Default; Acceleration of Obligation. Borrower will be deemed to be in
default under this Note and the outstanding unpaid principal balance of
this Note, together with all interest accrued thereon, will immediately
become due and payable in full, without the need for any further action on
the part of Holder, upon the occurrence of any Event of Default (as defined
in the Credit Agreement).
6. Remedies on Default; Acceleration. Upon any Event of Default, Holder
will have, in addition to its rights and remedies under this Note and the
Credit Agreement, full recourse against any real, personal, tangible or
intangible assets of Borrower, and may pursue any legal or equitable
remedies that are available to Holder, and may declare the entire unpaid
principal amount of this Note and all unpaid accrued interest under this
Note to be immediately due and payable in full.
7. Waiver and Amendment. Any provision of this Note may be amended or
modified only by a writing signed by both Borrower and Holder. Except as
provided below with respect to waivers by Borrower, no waiver or consent
with respect to this Note will be binding or effective unless it is set
forth in writing and signed by the party against whom such waiver is
asserted. No course of dealing between Borrower and Holder will operate as
a waiver or modification of any party's rights or obligations under this
Note. No delay or failure on the part of either party in exercising any
right or remedy under this Note will operate as a waiver of such right or
any other right. A waiver given on one occasion will not be construed as a
bar to, or as a waiver of, any right or remedy on any future occasion.
8. Waivers of Borrower. Borrower hereby waives presentment, notice of
non-payment, notice of dishonor, protest, demand and diligence. This Note
may be amended only by a writing executed by Borrower and Holder.
9. Governing Law. This Note will be governed by and construed in accordance
with the internal laws of the State of New York as applied to agreements
between residents thereof to be performed entirely within such State,
without reference to that body of law relating to conflict of laws or
choice of law.
10. Severability; Headings. The invalidity or unenforceability of any term
or provision of this Note will not affect the validity or enforceability of
any other term or provision hereof. The headings in this Note are for
convenience of reference only and will not alter or otherwise affect the
meaning of this Note.
11. Jurisdiction; Venue. Borrower, by its execution of this Note, hereby
irrevocably submits to the in personam jurisdiction of the state courts of
the State of New York and of the United States District Court for the
Southern District of New York that are located in New York, New York, for
the purpose of any suit, action or other proceeding arising out of or based
upon this Note.
12. Attorneys' Fees. If suit is brought for collection of this Note,
Borrower agrees to pay all reasonable expenses, including attorneys' fees,
incurred by Holder in connection therewith whether or not such suit is
prosecuted to judgment.
13. Assignment. This Note is not assignable by Holder without the written
consent of Borrower. This Note may not be assigned or delegated by
Borrower, whether by voluntary assignment or transfer, operation of law,
merger or otherwise.
14. Credit Agreement. This Note incorporates by reference all the
provisions of the Credit Agreement, including but not limited to all
provisions contained therein with respect to Events of Default, waivers,
remedies and covenants, Conversion Rights, and the description of the
benefits, rights and obligations of each of Borrower and Holder under the
Credit Agreement.
IN WITNESS WHEREOF, Borrower has executed this Note as of the date and year
first above written.
BORROWER
SECURITY INTELLIGENCE TECHNOLOGIES, INC.
By: /s/ Ben Jamil
-----------------------------------------
Name: Ben Jamil
Title: Chief Executive Officer
-75-
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SCHEDULE A
TO REVOLVING PROMISSORY NOTE
RECORD OF LOANS AND REPAYMENT OF LOANS
-76-
--------------------------------------------------------------------------------
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF
CERTAIN
STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS
ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO
BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF
TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY
PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
REVOLVING CONVERTIBLE PROMISSORY NOTE
This Revolving Convertible Promissory Note (this "Note") is made and
delivered pursuant to that certain Revolving Convertible Credit Agreement
dated as of June 10, 2004 between Borrower and Lender (as such terms are
defined below), as such may be amended from time to time (the "Credit
Agreement"). Unless otherwise defined herein, all capitalized terms used in
this Note shall have the same meanings that are given to such terms in the
Credit Agreement, the terms of which are incorporated into this Note by
reference.
1. Obligation. FOR VALUE RECEIVED, the undersigned, Security Intelligence
Technologies, Inc., a Florida corporation ("Borrower") hereby promises to
pay to the order of Steven Pollan, a resident of the State of New York,
("Lender" or "Holder") on or before June 30, 2005 (the "Maturity Date"), at
Lender's principal place of business at c/o Atlas Capital Services, LLC 135
East 57th Street, 26th Floor, New York, New York 10022, or at such other
place as Holder may direct, the principal sum of Twenty Thousand
($20,000.00) Dollars or so much thereof as may be advanced and outstanding,
together with all interest accrued on unpaid principal, to be computed on
each advance of a Loan from the date of its disbursement to Borrower, at a
rate equal to 10% per annum (calculated on the basis of a 365/66-day year),
compounded annually . As used herein, the term "Holder" shall initially
mean Lender, and shall subsequently mean each person or entity to whom this
Note is duly assigned. The outstanding unpaid principal balance of this
Note at any time shall be the total principal amounts advanced hereunder by
Holder less the amounts of payments of principal made hereon by Borrower,
which balance may be endorsed hereon from time to time by Holder in
accordance with Section 2. Payments of interest on this Note shall be
payable on a quarterly basis, on the last business day of each calendar
quarter.
2. Recording of Loans and Payments. Holder is authorized to record on
Schedule A hereto, and on any continuation(s) of such Schedule that may be
attached to this Note: (a) the date and principal amount of each Loan
advanced by Lender under the Credit Agreement; and (b) the date and amount
of each payment or prepayment of principal and/or accrued interest of any
Loan; which recordation will constitute prima facie evidence of the
accuracy of the information so endorsed on Schedule A; provided however,
that any failure to record such information on such Schedule or
continuation thereof will not in any manner affect the obligations of
Borrower to make payments of principal and interest in accordance with the
terms of this Note. Holder will promptly provide Borrower with a copy of
each recordation made by Holder on Schedule A attached hereto.
3. Prepayment. Subject to the Conversion Rights set forth in Section 5 of
the Credit Agreement, prepayment of unpaid principal and/or interest due
under this Note may be made at any time without penalty as specified in the
Credit Agreement. Unless otherwise agreed in writing by Holder, all
payments will be made in lawful tender of the United States and will be
applied (a) first, to the payment of accrued interest, and (b) second, (to
the extent that the amount of such prepayment exceeds the amount of all
such accrued interest), to the payment of principal.
4. Conversion of Debt. Holder has the right to convert this Note in
accordance with the Conversion Procedures set forth in the Credit Agreement.
-77-
--------------------------------------------------------------------------------
5. Default; Acceleration of Obligation. Borrower will be deemed to be in
default under this Note and the outstanding unpaid principal balance of
this Note, together with all interest accrued thereon, will immediately
become due and payable in full, without the need for any further action on
the part of Holder, upon the occurrence of any Event of Default (as defined
in the Credit Agreement).
6. Remedies on Default; Acceleration. Upon any Event of Default, Holder
will have, in addition to its rights and remedies under this Note and the
Credit Agreement, full recourse against any real, personal, tangible or
intangible assets of Borrower, and may pursue any legal or equitable
remedies that are available to Holder, and may declare the entire unpaid
principal amount of this Note and all unpaid accrued interest under this
Note to be immediately due and payable in full.
7. Waiver and Amendment. Any provision of this Note may be amended or
modified only by a writing signed by both Borrower and Holder. Except as
provided below with respect to waivers by Borrower, no waiver or consent
with respect to this Note will be binding or effective unless it is set
forth in writing and signed by the party against whom such waiver is
asserted. No course of dealing between Borrower and Holder will operate as
a waiver or modification of any party's rights or obligations under this
Note. No delay or failure on the part of either party in exercising any
right or remedy under this Note will operate as a waiver of such right or
any other right. A waiver given on one occasion will not be construed as a
bar to, or as a waiver of, any right or remedy on any future occasion.
8. Waivers of Borrower. Borrower hereby waives presentment, notice of
non-payment, notice of dishonor, protest, demand and diligence. This Note
may be amended only by a writing executed by Borrower and Holder.
9. Governing Law. This Note will be governed by and construed in accordance
with the internal laws of the State of New York as applied to agreements
between residents thereof to be performed entirely within such State,
without reference to that body of law relating to conflict of laws or
choice of law.
10. Severability; Headings. The invalidity or unenforceability of any term
or provision of this Note will not affect the validity or enforceability of
any other term or provision hereof. The headings in this Note are for
convenience of reference only and will not alter or otherwise affect the
meaning of this Note.
11. Jurisdiction; Venue. Borrower, by its execution of this Note, hereby
irrevocably submits to the in personam jurisdiction of the state courts of
the State of New York and of the United States District Court for the
Southern District of New York that are located in New York, New York, for
the purpose of any suit, action or other proceeding arising out of or based
upon this Note.
12. Attorneys' Fees. If suit is brought for collection of this Note,
Borrower agrees to pay all reasonable expenses, including attorneys' fees,
incurred by Holder in connection therewith whether or not such suit is
prosecuted to judgment.
13. Assignment. This Note is not assignable by Holder without the written
consent of Borrower. This Note may not be assigned or delegated by
Borrower, whether by voluntary assignment or transfer, operation of law,
merger or otherwise.
-78-
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14. Credit Agreement. This Note incorporates by reference all the
provisions of the Credit Agreement, including but not limited to all
provisions contained therein with respect to Events of Default, waivers,
remedies and covenants, Conversion Rights, and the description of the
benefits, rights and obligations of each of Borrower and Holder under the
Credit Agreement.
IN WITNESS WHEREOF, Borrower has executed this Note as of the date and year
first above written.
BORROWER
SECURITY INTELLIGENCE TECHNOLOGIES, INC.
By: /s/ Ben Jamil
----------------------------------------
Name: Ben Jamil
Title: Chief Executive Officer
-79-
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SCHEDULE A
TO REVOLVING PROMISSORY NOTE
RECORD OF LOANS AND REPAYMENT OF LOANS
-80-
--------------------------------------------------------------------------------
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF
CERTAIN
STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS
ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO
BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF
TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY
PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
REVOLVING CONVERTIBLE PROMISSORY NOTE
This Revolving Convertible Promissory Note (this "Note") is made and
delivered pursuant to that certain Revolving Convertible Credit Agreement
dated as of June 10, 2004 between Borrower and Lender (as such terms are
defined below), as such may be amended from time to time (the "Credit
Agreement"). Unless otherwise defined herein, all capitalized terms used in
this Note shall have the same meanings that are given to such terms in the
Credit Agreement, the terms of which are incorporated into this Note by
reference.
1. Obligation. FOR VALUE RECEIVED, the undersigned, Security Intelligence
Technologies, Inc., a Florida corporation ("Borrower") hereby promises to
pay to the order of Kesef Equity Group, Inc., a ___________ Corporation
("Lender" or "Holder") on or before June 30, 2005 (the "Maturity Date"), at
Lender's principal place of business at 14 Lyle Farm Lane, Englishtown, NJ
07726, or at such other place as Holder may direct, the principal sum of
One Hundred Seventy Five Thousand ($175,000.00) Dollars or so much thereof
as may be advanced and outstanding, together with all interest accrued on
unpaid principal, to be computed on each advance of a Loan from the date of
its disbursement to Borrower, at a rate equal to 10% per annum (calculated
on the basis of a 365/66-day year), compounded annually . As used herein,
the term "Holder" shall initially mean Lender, and shall subsequently mean
each person or entity to whom this Note is duly assigned. The outstanding
unpaid principal balance of this Note at any time shall be the total
principal amounts advanced hereunder by Holder less the amounts of payments
of principal made hereon by Borrower, which balance may be endorsed hereon
from time to time by Holder in accordance with
Section 2. Payments of interest on this Note shall be payable on a
quarterly basis, on the last business day of each calendar quarter.
2. Recording of Loans and Payments. Holder is authorized to record on
Schedule A hereto, and on any continuation(s) of such Schedule that may be
attached to this Note: (a) the date and principal amount of each Loan
advanced by Lender under the Credit Agreement; and (b) the date and amount
of each payment or prepayment of principal and/or accrued interest of any
Loan; which recordation will constitute prima facie evidence of the
accuracy of the information so endorsed on Schedule A; provided however,
that any failure to record such information on such Schedule or
continuation thereof will not in any manner affect the obligations of
Borrower to make payments of principal and interest in accordance with the
terms of this Note. Holder will promptly provide Borrower with a copy of
each recordation made by Holder on Schedule A attached hereto.
3. Prepayment. Subject to the Conversion Rights set forth in Section 5 of
the Credit Agreement, prepayment of unpaid principal and/or interest due
under this Note may be made at any time without penalty as specified in the
Credit Agreement. Unless otherwise agreed in writing by Holder, all
payments will be made in lawful tender of the United States and will be
applied (a) first, to the payment of accrued interest, and (b) second, (to
the extent that the amount of such prepayment exceeds the amount of all
such accrued interest), to the payment of principal.
4. Conversion of Debt. Holder has the right to convert this Note in
accordance with the Conversion Procedures set forth in the Credit Agreement.
-81-
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5. Default; Acceleration of Obligation. Borrower will be deemed to be in
default under this Note and the outstanding unpaid principal balance of
this Note, together with all interest accrued thereon, will immediately
become due and payable in full, without the need for any further action on
the part of Holder, upon the occurrence of any Event of Default (as defined
in the Credit Agreement).
6. Remedies on Default; Acceleration. Upon any Event of Default, Holder
will have, in addition to its rights and remedies under this Note and the
Credit Agreement, full recourse against any real, personal, tangible or
intangible assets of Borrower, and may pursue any legal or equitable
remedies that are available to Holder, and may declare the entire unpaid
principal amount of this Note and all unpaid accrued interest under this
Note to be immediately due and payable in full.
7. Waiver and Amendment. Any provision of this Note may be amended or
modified only by a writing signed by both Borrower and Holder. Except as
provided below with respect to waivers by Borrower, no waiver or consent
with respect to this Note will be binding or effective unless it is set
forth in writing and signed by the party against whom such waiver is
asserted. No course of dealing between Borrower and Holder will operate as
a waiver or modification of any party's rights or obligations under this
Note. No delay or failure on the part of either party in exercising any
right or remedy under this Note will operate as a waiver of such right or
any other right. A waiver given on one occasion will not be construed as a
bar to, or as a waiver of, any right or remedy on any future occasion.
8. Waivers of Borrower. Borrower hereby waives presentment, notice of
non-payment, notice of dishonor, protest, demand and diligence. This Note
may be amended only by a writing executed by Borrower and Holder.
9. Governing Law. This Note will be governed by and construed in accordance
with the internal laws of the State of New York as applied to agreements
between residents thereof to be performed entirely within such State,
without reference to that body of law relating to conflict of laws or
choice of law.
10. Severability; Headings. The invalidity or unenforceability of any term
or provision of this Note will not affect the validity or enforceability of
any other term or provision hereof. The headings in this Note are for
convenience of reference only and will not alter or otherwise affect the
meaning of this Note.
11. Jurisdiction; Venue. Borrower, by its execution of this Note, hereby
irrevocably submits to the in personam jurisdiction of the state courts of
the State of New York and of the United States District Court for the
Southern District of New York that are located in New York, New York, for
the purpose of any suit, action or other proceeding arising out of or based
upon this Note.
12. Attorneys' Fees. If suit is brought for collection of this Note,
Borrower agrees to pay all reasonable expenses, including attorneys' fees,
incurred by Holder in connection therewith whether or not such suit is
prosecuted to judgment.
13. Assignment. This Note is not assignable by Holder without the written
consent of Borrower. This Note may not be assigned or delegated by
Borrower, whether by voluntary assignment or transfer, operation of law,
merger or otherwise.
-82-
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14. Credit Agreement. This Note incorporates by reference all the
provisions of the Credit Agreement, including but not limited to all
provisions contained therein with respect to Events of Default, waivers,
remedies and covenants, Conversion Rights, and the description of the
benefits, rights and obligations of each of Borrower and Holder under the
Credit Agreement.
IN WITNESS WHEREOF, Borrower has executed this Note as of the date and year
first above written.
BORROWER
SECURITY INTELLIGENCE TECHNOLOGIES, INC.
By: /s/ Ben Jamil
----------------------------------------
Name: Ben Jamil
Title: Chief Executive Officer
-83-
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SCHEDULE A
TO REVOLVING PROMISSORY NOTE
RECORD OF LOANS AND REPAYMENT OF LOANS
-84-
--------------------------------------------------------------------------------
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF
CERTAIN
STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS
ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO
BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF
TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY
PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
REVOLVING CONVERTIBLE PROMISSORY NOTE
This Revolving Convertible Promissory Note (this "Note") is made and
delivered pursuant to that certain Revolving Convertible Credit Agreement
dated as of June 10, 2004 between Borrower and Lender (as such terms are
defined below), as such may be amended from time to time (the "Credit
Agreement"). Unless otherwise defined herein, all capitalized terms used in
this Note shall have the same meanings that are given to such terms in the
Credit Agreement, the terms of which are incorporated into this Note by
reference.
1. Obligation. FOR VALUE RECEIVED, the undersigned, Security Intelligence
Technologies, Inc., a Florida corporation ("Borrower") hereby promises to
pay to the order of Ostonian Securities Limited, a ___________ Corporation
("Lender" or "Holder") on or before June 30, 2005 (the "Maturity Date"), at
Lender's principal place of business at 60 St. James Street, 1st Floor,
London England SW1 ALE, or at such other place as Holder may direct, the
principal sum of One Hundred Twenty Five Thousand ($125,000.00) Dollars or
so much thereof as may be advanced and outstanding, together with all
interest accrued on unpaid principal, to be computed on each advance of a
Loan from the date of its disbursement to Borrower, at a rate equal to 10%
per annum (calculated on the basis of a 365/66-day year), compounded
annually . As used herein, the term "Holder" shall initially mean Lender,
and shall subsequently mean each person or entity to whom this Note is duly
assigned. The outstanding unpaid principal balance of this Note at any time
shall be the total principal amounts advanced hereunder by Holder less the
amounts of payments of principal made hereon by Borrower, which balance may
be endorsed hereon from time to time by Holder in accordance with Section
2. Payments of interest on this Note shall be payable on a quarterly basis,
on the last business day of each calendar quarter.
2. Recording of Loans and Payments. Holder is authorized to record on
Schedule A hereto, and on any continuation(s) of such Schedule that may be
attached to this Note: (a) the date and principal amount of each Loan
advanced by Lender under the Credit Agreement; and (b) the date and amount
of each payment or prepayment of principal and/or accrued interest of any
Loan; which recordation will constitute prima facie evidence of the
accuracy of the information so endorsed on Schedule A; provided however,
that any failure to record such information on such Schedule or
continuation thereof will not in any manner affect the obligations of
Borrower to make payments of principal and interest in accordance with the
terms of this Note. Holder will promptly provide Borrower with a copy of
each recordation made by Holder on Schedule A attached hereto.
3. Prepayment. Subject to the Conversion Rights set forth in Section 5 of
the Credit Agreement, prepayment of unpaid principal and/or interest due
under this Note may be made at any time without penalty as specified in the
Credit Agreement. Unless otherwise agreed in writing by Holder, all
payments will be made in lawful tender of the United States and will be
applied (a) first, to the payment of accrued interest, and (b) second, (to
the extent that the amount of such prepayment exceeds the amount of all
such accrued interest), to the payment of principal.
4. Conversion of Debt. Holder has the right to convert this Note in
accordance with the Conversion Procedures set forth in the Credit Agreement.
-85-
--------------------------------------------------------------------------------
5. Default; Acceleration of Obligation. Borrower will be deemed to be in
default under this Note and the outstanding unpaid principal balance of
this Note, together with all interest accrued thereon, will immediately
become due and payable in full, without the need for any further action on
the part of Holder, upon the occurrence of any Event of Default (as defined
in the Credit Agreement).
6. Remedies on Default; Acceleration. Upon any Event of Default, Holder
will have, in addition to its rights and remedies under this Note and the
Credit Agreement, full recourse against any real, personal, tangible or
intangible assets of Borrower, and may pursue any legal or equitable
remedies that are available to Holder, and may declare the entire unpaid
principal amount of this Note and all unpaid accrued interest under this
Note to be immediately due and payable in full.
7. Waiver and Amendment. Any provision of this Note may be amended or
modified only by a writing signed by both Borrower and Holder. Except as
provided below with respect to waivers by Borrower, no waiver or consent
with respect to this Note will be binding or effective unless it is set
forth in writing and signed by the party against whom such waiver is
asserted. No course of dealing between Borrower and Holder will operate as
a waiver or modification of any party's rights or obligations under this
Note. No delay or failure on the part of either party in exercising any
right or remedy under this Note will operate as a waiver of such right or
any other right. A waiver given on one occasion will not be construed as a
bar to, or as a waiver of, any right or remedy on any future occasion.
8. Waivers of Borrower. Borrower hereby waives presentment, notice of
non-payment, notice of dishonor, protest, demand and diligence. This Note
may be amended only by a writing executed by Borrower and Holder.
9. Governing Law. This Note will be governed by and construed in accordance
with the internal laws of the State of New York as applied to agreements
between residents thereof to be performed entirely within such State,
without reference to that body of law relating to conflict of laws or
choice of law.
10. Severability; Headings. The invalidity or unenforceability of any term
or provision of this Note will not affect the validity or enforceability of
any other term or provision hereof. The headings in this Note are for
convenience of reference only and will not alter or otherwise affect the
meaning of this Note.
11. Jurisdiction; Venue. Borrower, by its execution of this Note, hereby
irrevocably submits to the in personam jurisdiction of the state courts of
the State of New York and of the United States District Court for the
Southern District of New York that are located in New York, New York, for
the purpose of any suit, action or other proceeding arising out of or based
upon this Note.
12. Attorneys' Fees. If suit is brought for collection of this Note,
Borrower agrees to pay all reasonable expenses, including attorneys' fees,
incurred by Holder in connection therewith whether or not such suit is
prosecuted to judgment.
13. Assignment. This Note is not assignable by Holder without the written
consent of Borrower. This Note may not be assigned or delegated by
Borrower, whether by voluntary assignment or transfer, operation of law,
merger or otherwise.
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14. Credit Agreement. This Note incorporates by reference all the
provisions of the Credit Agreement, including but not limited to all
provisions contained therein with respect to Events of Default, waivers,
remedies and covenants, Conversion Rights, and the description of the
benefits, rights and obligations of each of Borrower and Holder under the
Credit Agreement.
IN WITNESS WHEREOF, Borrower has executed this Note as of the date and year
first above written.
BORROWER
SECURITY INTELLIGENCE TECHNOLOGIES, INC.
By: /s/ Ben Jamil
----------------------------------------
Name: Ben Jamil
Title: Chief Executive Officer
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SCHEDULE A
TO REVOLVING PROMISSORY NOTE
RECORD OF LOANS AND REPAYMENT OF LOANS
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THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF
CERTAIN
STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS
ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO
BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF
TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY
PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
REVOLVING CONVERTIBLE PROMISSORY NOTE
This Revolving Convertible Promissory Note (this "Note") is made and
delivered pursuant to that certain Revolving Convertible Credit Agreement
dated as of June 10, 2004 between Borrower and Lender (as such terms are
defined below), as such may be amended from time to time (the "Credit
Agreement"). Unless otherwise defined herein, all capitalized terms used in
this Note shall have the same meanings that are given to such terms in the
Credit Agreement, the terms of which are incorporated into this Note by
reference.
1. Obligation. FOR VALUE RECEIVED, the undersigned, Security Intelligence
Technologies, Inc., a Florida corporation ("Borrower") hereby promises to
pay to the order of Atlas Equity Group, Inc., a Florida Corporation
("Lender" or "Holder") on or before June 30, 2005 (the "Maturity Date"), at
Lender's principal place of business at 1691 Michigan Avenue, Suite 425
Miami, Florida 33139, or at such other place as Holder may direct, the
principal sum of Fifty Five Thousand ($55,000.00) Dollars or so much
thereof as may be advanced and outstanding, together with all interest
accrued on unpaid principal, to be computed on each advance of a Loan from
the date of its disbursement to Borrower, at a rate equal to 10% per annum
(calculated on the basis of a 365/66-day year), compounded annually . As
used herein, the term "Holder" shall initially mean Lender, and shall
subsequently mean each person or entity to whom this Note is duly assigned.
The outstanding unpaid principal balance of this Note at any time shall be
the total principal amounts advanced hereunder by Holder less the amounts
of payments of principal made hereon by Borrower, which balance may be
endorsed hereon from time to time by Holder in accordance with
Section 2. Payments of interest on this Note shall be payable on a
quarterly basis, on the last business day of each calendar quarter.
2. Recording of Loans and Payments. Holder is authorized to record on
Schedule A hereto, and on any continuation(s) of such Schedule that may be
attached to this Note: (a) the date and principal amount of each Loan
advanced by Lender under the Credit Agreement; and (b) the date and amount
of each payment or prepayment of principal and/or accrued interest of any
Loan; which recordation will constitute prima facie evidence of the
accuracy of the information so endorsed on Schedule A; provided however,
that any failure to record such information on such Schedule or
continuation thereof will not in any manner affect the obligations of
Borrower to make payments of principal and interest in accordance with the
terms of this Note. Holder will promptly provide Borrower with a copy of
each recordation made by Holder on Schedule A attached hereto.
3. Prepayment. Subject to the Conversion Rights set forth in Section 5 of
the Credit Agreement, prepayment of unpaid principal and/or interest due
under this Note may be made at any time without penalty as specified in the
Credit Agreement. Unless otherwise agreed in writing by Holder, all
payments will be made in lawful tender of the United States and will be
applied (a) first, to the payment of accrued interest, and (b) second, (to
the extent that the amount of such prepayment exceeds the amount of all
such accrued interest), to the payment of principal.
4. Conversion of Debt. Holder has the right to convert this Note in
accordance with the Conversion Procedures set forth in the Credit Agreement.
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5. Default; Acceleration of Obligation. Borrower will be deemed to be in
default under this Note and the outstanding unpaid principal balance of
this Note, together with all interest accrued thereon, will immediately
become due and payable in full, without the need for any further action on
the part of Holder, upon the occurrence of any Event of Default (as defined
in the Credit Agreement).
6. Remedies on Default; Acceleration. Upon any Event of Default, Holder
will have, in addition to its rights and remedies under this Note and the
Credit Agreement, full recourse against any real, personal, tangible or
intangible assets of Borrower, and may pursue any legal or equitable
remedies that are available to Holder, and may declare the entire unpaid
principal amount of this Note and all unpaid accrued interest under this
Note to be immediately due and payable in full.
7. Waiver and Amendment. Any provision of this Note may be amended or
modified only by a writing signed by both Borrower and Holder. Except as
provided below with respect to waivers by Borrower, no waiver or consent
with respect to this Note will be binding or effective unless it is set
forth in writing and signed by the party against whom such waiver is
asserted. No course of dealing between Borrower and Holder will operate as
a waiver or modification of any party's rights or obligations under this
Note. No delay or failure on the part of either party in exercising any
right or remedy under this Note will operate as a waiver of such right or
any other right. A waiver given on one occasion will not be construed as a
bar to, or as a waiver of, any right or remedy on any future occasion.
8. Waivers of Borrower. Borrower hereby waives presentment, notice of
non-payment, notice of dishonor, protest, demand and diligence. This Note
may be amended only by a writing executed by Borrower and Holder.
9. Governing Law. This Note will be governed by and construed in accordance
with the internal laws of the State of New York as applied to agreements
between residents thereof to be performed entirely within such State,
without reference to that body of law relating to conflict of laws or
choice of law.
10. Severability; Headings. The invalidity or unenforceability of any term
or provision of this Note will not affect the validity or enforceability of
any other term or provision hereof. The headings in this Note are for
convenience of reference only and will not alter or otherwise affect the
meaning of this Note.
11. Jurisdiction; Venue. Borrower, by its execution of this Note, hereby
irrevocably submits to the in personam jurisdiction of the state courts of
the State of New York and of the United States District Court for the
Southern District of New York that are located in New York, New York, for
the purpose of any suit, action or other proceeding arising out of or based
upon this Note.
12. Attorneys' Fees. If suit is brought for collection of this Note,
Borrower agrees to pay all reasonable expenses, including attorneys' fees,
incurred by Holder in connection therewith whether or not such suit is
prosecuted to judgment.
13. Assignment. This Note is not assignable by Holder without the written
consent of Borrower. This Note may not be assigned or delegated by
Borrower, whether by voluntary assignment or transfer, operation of law,
merger or otherwise.
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14. Credit Agreement. This Note incorporates by reference all the
provisions of the Credit Agreement, including but not limited to all
provisions contained therein with respect to Events of Default, waivers,
remedies and covenants, Conversion Rights, and the description of the
benefits, rights and obligations of each of Borrower and Holder under the
Credit Agreement.
IN WITNESS WHEREOF, Borrower has executed this Note as of the date and year
first above written.
BORROWER
SECURITY INTELLIGENCE TECHNOLOGIES, INC.
By: /s/ Ben Jamil
-----------------------------------------
Name: Ben Jamil
Title: Chief Executive Officer
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SCHEDULE A
TO REVOLVING PROMISSORY NOTE
RECORD OF LOANS AND REPAYMENT OF LOANS
-92-
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THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF
CERTAIN
STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS
ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO
BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF
TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY
PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
REVOLVING CONVERTIBLE PROMISSORY NOTE
This Revolving Convertible Promissory Note (this "Note") is made and
delivered pursuant to that certain Revolving Convertible Credit Agreement
dated as of June 10, 2004 between Borrower and Lender (as such terms are
defined below), as such may be amended from time to time (the "Credit
Agreement"). Unless otherwise defined herein, all capitalized terms used in
this Note shall have the same meanings that are given to such terms in the
Credit Agreement, the terms of which are incorporated into this Note by
reference.
1. Obligation. FOR VALUE RECEIVED, the undersigned, Security Intelligence
Technologies, Inc., a Florida corporation ("Borrower") hereby promises to
pay to the order of GSM Communications, Inc., a Florida Corporation
("Lender" or "Holder") on or before June 30, 2005 (the "Maturity Date"), at
Lender's principal place of business at 1221 Brickell Avenue, Suite 900,
Miami, Florida 33131, or at such other place as Holder may direct, the
principal sum of Sixty Five Thousand ($65,000.00) Dollars or so much
thereof as may be advanced and outstanding, together with all interest
accrued on unpaid principal, to be computed on each advance of a Loan from
the date of its disbursement to Borrower, at a rate equal to 10% per annum
(calculated on the basis of a 365/66-day year), compounded annually . As
used herein, the term "Holder" shall initially mean Lender, and shall
subsequently mean each person or entity to whom this Note is duly assigned.
The outstanding unpaid principal balance of this Note at any time shall be
the total principal amounts advanced hereunder by Holder less the amounts
of payments of principal made hereon by Borrower, which balance may be
endorsed hereon from time to time by Holder in accordance with
Section 2. Payments of interest on this Note shall be payable on a
quarterly basis, on the last business day of each calendar quarter.
2. Recording of Loans and Payments. Holder is authorized to record on
Schedule A hereto, and on any continuation(s) of such Schedule that may be
attached to this Note: (a) the date and principal amount of each Loan
advanced by Lender under the Credit Agreement; and (b) the date and amount
of each payment or prepayment of principal and/or accrued interest of any
Loan; which recordation will constitute prima facie evidence of the
accuracy of the information so endorsed on Schedule A; provided however,
that any failure to record such information on such Schedule or
continuation thereof will not in any manner affect the obligations of
Borrower to make payments of principal and interest in accordance with the
terms of this Note. Holder will promptly provide Borrower with a copy of
each recordation made by Holder on Schedule A attached hereto.
3. Prepayment. Subject to the Conversion Rights set forth in Section 5 of
the Credit Agreement, prepayment of unpaid principal and/or interest due
under this Note may be made at any time without penalty as specified in the
Credit Agreement. Unless otherwise agreed in writing by Holder, all
payments will be made in lawful tender of the United States and will be
applied (a) first, to the payment of accrued interest, and (b) second, (to
the extent that the amount of such prepayment exceeds the amount of all
such accrued interest), to the payment of principal.
4. Conversion of Debt. Holder has the right to convert this Note in
accordance with the Conversion Procedures set forth in the Credit Agreement.
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5. Default; Acceleration of Obligation. Borrower will be deemed to be in
default under this Note and the outstanding unpaid principal balance of
this Note, together with all interest accrued thereon, will immediately
become due and payable in full, without the need for any further action on
the part of Holder, upon the occurrence of any Event of Default (as defined
in the Credit Agreement).
6. Remedies on Default; Acceleration. Upon any Event of Default, Holder
will have, in addition to its rights and remedies under this Note and the
Credit Agreement, full recourse against any real, personal, tangible or
intangible assets of Borrower, and may pursue any legal or equitable
remedies that are available to Holder, and may declare the entire unpaid
principal amount of this Note and all unpaid accrued interest under this
Note to be immediately due and payable in full.
7. Waiver and Amendment. Any provision of this Note may be amended or
modified only by a writing signed by both Borrower and Holder. Except as
provided below with respect to waivers by Borrower, no waiver or consent
with respect to this Note will be binding or effective unless it is set
forth in writing and signed by the party against whom such waiver is
asserted. No course of dealing between Borrower and Holder will operate as
a waiver or modification of any party's rights or obligations under this
Note. No delay or failure on the part of either party in exercising any
right or remedy under this Note will operate as a waiver of such right or
any other right. A waiver given on one occasion will not be construed as a
bar to, or as a waiver of, any right or remedy on any future occasion.
8. Waivers of Borrower. Borrower hereby waives presentment, notice of
non-payment, notice of dishonor, protest, demand and diligence. This Note
may be amended only by a writing executed by Borrower and Holder.
9. Governing Law. This Note will be governed by and construed in accordance
with the internal laws of the State of New York as applied to agreements
between residents thereof to be performed entirely within such State,
without reference to that body of law relating to conflict of laws or
choice of law.
10. Severability; Headings. The invalidity or unenforceability of any term
or provision of this Note will not affect the validity or enforceability of
any other term or provision hereof. The headings in this Note are for
convenience of reference only and will not alter or otherwise affect the
meaning of this Note.
11. Jurisdiction; Venue. Borrower, by its execution of this Note, hereby
irrevocably submits to the in personam jurisdiction of the state courts of
the State of New York and of the United States District Court for the
Southern District of New York that are located in New York, New York, for
the purpose of any suit, action or other proceeding arising out of or based
upon this Note.
12. Attorneys' Fees. If suit is brought for collection of this Note,
Borrower agrees to pay all reasonable expenses, including attorneys' fees,
incurred by Holder in connection therewith whether or not such suit is
prosecuted to judgment.
13. Assignment. This Note is not assignable by Holder without the written
consent of Borrower. This Note may not be assigned or delegated by
Borrower, whether by voluntary assignment or transfer, operation of law,
merger or otherwise.
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14. Credit Agreement. This Note incorporates by reference all the
provisions of the Credit Agreement, including but not limited to all
provisions contained therein with respect to Events of Default, waivers,
remedies and covenants, Conversion Rights, and the description of the
benefits, rights and obligations of each of Borrower and Holder under the
Credit Agreement.
IN WITNESS WHEREOF, Borrower has executed this Note as of the date and year
first above written.
BORROWER
SECURITY INTELLIGENCE TECHNOLOGIES, INC.
By: /s/ Ben Jamil
----------------------------------------
Name: Ben Jamil
Title: Chief Executive Officer
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SCHEDULE A
TO REVOLVING PROMISSORY NOTE
RECORD OF LOANS AND REPAYMENT OF LOANS
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REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of June 10,
2004, by and among Security Intelligence Technologies, Inc., a Florida
corporation (the "Company"), and the undersigned Lenders (each, a "Lender"
and collectively, the "Lenders").
WHEREAS:
A. In connection with the Revolving Convertible Credit Agreement by and
among the parties hereto of even date herewith (the "Credit Agreement"),
the Company has agreed, upon the terms and subject to the conditions of the
Credit Agreement, to issue to the Lenders shares of the Company's common
stock, par value $0.0001 per share (the "Common Stock") upon the conversion
of the Loans into Common Stock;
B. To induce the Lenders to execute and deliver the Credit Agreement, the
Company has agreed to provide certain registration rights under the
Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933
Act"), and applicable state securities laws. NOW, THEREFORE, in
consideration of the premises and the mutual covenants contained herein and
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Company and each of the Lenders hereby agree
as follows:
DEFINITIONS.
As used in this Agreement, the following terms shall have the following
meanings:
"Lender" means a Lender, any transferee or assignee thereof to whom a
Lender assigns its rights under this Agreement and who agrees to become
bound by the provisions of this Agreement in accordance with Section 9 and
any transferee or assignee thereof to whom a transferee or assignee assigns
its rights under this Agreement and who agrees to become bound by the
provisions of this Agreement in accordance with Section 9.
"Person" means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization and a
governmental or any department or agency thereof.
"Register," "registered," and "registration" refer to a registration
effected by preparing and filing one or more Registration Statements (as
defined below) in compliance with the 1933 Act and pursuant to Rule 415
under the 1933 Act or any successor rule providing for offering securities
on a continuous or delayed basis ("Rule 415"), and the declaration or
ordering of effectiveness of such Registration Statement(s) by the United
States Securities and Exchange Commission (the "SEC").
"Registrable Securities" means the Common Stock issued or issuable to the
Lender pursuant to the Credit Agreement (and any shares of capital stock
issued or issuable with respect to the Common Stock as a result of any
stock split, stock dividend, recapitalization, exchange or similar event or
otherwise.)
"Registration Statement" means a registration statement or registration
statements of the Company filed under the 1933 Act covering the Registrable
Securities. Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Credit Agreement.
REGISTRATION.
Mandatory Registration. The Company shall prepare, and, as soon as
practicable but in no event later than 30 days after the expiration of the
Credit Period (the "Filing Deadline"), file with the SEC a Registration
Statement on Form SB-2 covering the resale of all of the Registrable
Securities. In the event that Form SB-2 is unavailable for such a
registration, the Company shall use such other form as is available for
such a registration, subject to the provisions of Section 2(b) and shall
contain the "Plan of Distribution" attached hereto as Annex A. The Company
shall use its best efforts to have the Registration Statement declared
effective by the SEC as soon as practicable prior to the 120th day
following the Filing Deadline (the "Effectiveness Date"); provided,
however, the Effectiveness Date shall be the 120th day following the Filing
Deadline if the SEC reviews and provides comments on the Registration
Statement.
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RELATED OBLIGATIONS.
At such time as the Company is obligated to file a Registration Statement
with the SEC pursuant to Section 2(a), the Company will use its best
efforts to effect the registration of the Registrable Securities in
accordance with the intended method of disposition thereof and, pursuant
thereto, the Company shall have the following obligations:
The Company shall promptly prepare and file with the SEC a Registration
Statement with respect to the applicable Registrable Securities (but in no
event later than the applicable Filing Deadline) and use its best efforts
to cause such Registration Statement relating to the Registrable Securities
to become effective as soon as practicable after such filing prior to the
Effectiveness Date. The Company shall keep each Registration Statement
effective pursuant to Rule 415 at all times until the earlier of (i) the
date as of which the Lenders may sell all of the Registrable Securities
covered by such Registration Statement without restriction pursuant to Rule
144(k) (or successor thereto) promulgated under the 1933 Act or (ii) the
date on which the Lenders shall have sold all the Registrable Securities
covered by such Registration Statement (the "Registration Period"), which
Registration Statement (including any amendments or supplements thereto and
prospectuses contained therein) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein, or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading. The term "best
efforts" shall mean, among other things, that the Company shall submit to
the SEC, within two (2) business days after the Company learns that no
review of a particular Registration Statement will be made by the staff of
the SEC or that the staff has no further comments on the Registration
Statement, as the case may be, a request for acceleration of effectiveness
of such Registration Statement to a time and date not later than 48 hours
after the submission of such request.
The Company shall prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to a Registration Statement and
the prospectus used in connection with such Registration Statement, which
prospectus is to be filed pursuant to Rule 424 promulgated under the 1933
Act, as may be necessary to keep such Registration Statement effective at
all times during the Registration Period, and, during such period, comply
with the provisions of the 1933 Act with respect to the disposition of all
Registrable Securities of the Company covered by such Registration
Statement until such time as all of such Registrable Securities shall have
been disposed of in accordance with the intended methods of disposition by
the seller or sellers thereof as set forth in such Registration Statement.
In the case of amendments and supplements to a Registration Statement which
are required to be filed pursuant to this Agreement (including pursuant to
this Section 3(b)) by reason of the Company filing a report on Form 10-K,
Form 10-Q or Form 8-K or any analogous report under the Securities Exchange
Act of 1934, as amended (the "1934 Act"), the Company shall have
incorporated such report by reference into the Registration Statement, if
applicable, or shall file such amendments or supplements with the SEC on
the same day on which the 1934 Act report is filed which created the
requirement for the Company to amend or supplement the Registration Statement.
The Company shall furnish to each Lender whose Registrable Securities are
included in any Registration Statement, without charge, (i) promptly after
the same is prepared and filed with the SEC, at least one copy of such
Registration Statement and any amendment(s) thereto, including financial
statements and schedules, all documents incorporated therein by reference,
all exhibits and each preliminary prospectus, (ii) upon the effectiveness
of any Registration Statement, ten (10) copies of the prospectus included
in such Registration Statement and all amendments and supplements thereto
(or such other number of copies as such Lender may reasonably request) and
(iii) such other documents, including copies of any preliminary or final
prospectus, as such Lender may reasonably request from time to time in
order to facilitate the disposition of the Registrable Securities owned by
such Lender.
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The Company shall use its best efforts to (i) register and qualify, unless
an exemption from registration and qualification applies, the resale by the
Lenders of the Registrable Securities covered by a Registration Statement
under such other securities or "blue sky" laws of all the states of the
United States, (ii) prepare and file in those jurisdictions, such
amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and
(iv) take all other actions reasonably necessary or advisable to qualify
the Registrable Securities for sale in such jurisdictions; provided,
however, that the Company shall not be required in connection therewith or
as a condition thereto to (x) qualify to do business in any jurisdiction
where it would not otherwise be required to qualify but for this
Section 3(d), (y) subject itself to general taxation in any such
jurisdiction, or (z) file a general consent to service of process in any
such jurisdiction. The Company shall promptly notify each Lender who holds
Registrable Securities of the receipt by the Company of any notification
with respect to the suspension of the registration or qualification of any
of the Registrable Securities for sale under the securities or "blue sky"
laws of any jurisdiction in the United States or its receipt of actual
notice of the initiation or threatening of any proceeding for such purpose.
The Company shall notify each Lender in writing of the happening of any
event, as promptly as practicable after becoming aware of such event, as a
result of which the prospectus included in a Registration Statement, as
then in effect, includes an untrue statement of a material fact or omission
to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading (provided that in no event shall such notice contain
any material, nonpublic information), and promptly prepare a supplement or
amendment to such Registration Statement to correct such untrue statement
or omission, and deliver ten (10) copies of such supplement or amendment to
each Lender(or such other number of copies as such Lender may reasonably
request). The Company shall also promptly notify each Lender in writing (i)
when a prospectus or any prospectus supplement or post-effective amendment
has been filed, and when a Registration Statement or any post-effective
amendment has become effective (notification of such effectiveness shall be
delivered to each Lenderby facsimile on the same day of such effectiveness
and by overnight mail), (ii) of any request by the SEC for amendments or
supplements to a Registration Statement or related prospectus or related
information, and (iii) of the Company's reasonable determination that a
post-effective amendment to a Registration Statement would be appropriate.
The Company shall use its best efforts to prevent the issuance of any stop
order or other suspension of effectiveness of a Registration Statement, or
the suspension of the qualification of any of the Registrable Securities
for sale in any jurisdiction and, if such an order or suspension is issued,
to obtain the withdrawal of such order or suspension at the earliest
possible moment and to notify each Lender who holds Registrable Securities
being sold of the issuance of such order and the resolution thereof or its
receipt of actual notice of the initiation or threat of any proceeding for
such purpose.
The Company shall use its best efforts either to (i) cause all the
Registrable Securities covered by a Registration Statement to be listed on
each securities exchange on which securities of the same class or series
issued by the Company are then listed, if any, if the listing of such
Registrable Securities is then permitted under the rules of such exchange,
or (ii) secure designation and quotation of all the Registrable Securities
covered by the Registration Statement on the Nasdaq National Market, or
(iii) if, despite the Company's best efforts to satisfy the preceding
clause (i) or (ii), the Company is unsuccessful in satisfying the preceding
clause (i) or (ii), to secure the inclusion for quotation on The Nasdaq
SmallCap Market for such Registrable Securities. The Company shall pay all
fees and expenses in connection with satisfying its obligation under this
Section 3(g).
The Company shall cooperate with the Lenders who hold Registrable
Securities being offered and, to the extent applicable, facilitate the
timely preparation and delivery of certificates (not bearing any
restrictive legend) representing the Registrable Securities to be offered
pursuant to a Registration Statement and enable such certificates to be in
such denominations or amounts, as the case may be, as the Lenders may
reasonably request and registered in such names as the Lenders may request.
The Company shall provide a transfer agent and registrar of all such
Registrable Securities not later than the effective date of the applicable
Registration Statement.
If requested by an Lender, the Company shall (i) as soon as practicable
incorporate in a prospectus supplement or post-effective amendment such
information as an Lender requests to be included therein relating to the
sale and distribution of Registrable Securities, including, without
limitation, information with respect to the number of Registrable
Securities being offered or sold, the purchase price being paid therefor
and any other terms of the offering of the Registrable Securities to be
sold in such offering; (ii) as soon as practicable make all required
filings of such prospectus supplement or post-effective amendment after
being notified of the matters to be incorporated in such prospectus
supplement or post-effective amendment; and (iii) as soon as practicable,
supplement or make amendments to any Registration Statement if reasonably
requested by an Lender of such Registrable Securities.
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Within two (2) business days after a Registration Statement which covers
applicable Registrable Securities is ordered effective by the SEC, the
Company shall deliver to Lenders confirmation that such Registration
Statement has been declared effective by the SEC.
OBLIGATIONS OF THE LENDORS.
Not less than two days prior to the filing of the Registration Statement or
any related Prospectus or any amendment or supplement thereto, the Company
shall furnish to the Lenders copies of the Registration Statement to be
filed. The Company shall not file the Registration Statement or any such
Prospectus or any amendments or supplements thereto to which the Lenders of
a majority of the Registrable Securities shall reasonably object in good
faith or for which a Lender shall have notified the Company or its counsel
that the information for such Lender is not correct.
Each Lender, by such Lender's acceptance of the Registrable Securities,
agrees to cooperate with the Company as reasonably requested by the Company
in connection with the preparation and filing of any Registration Statement
hereunder, unless such Lender has notified the Company in writing of such
Lender's election to exclude all of such Lender's Registrable Securities
from such Registration Statement.
Each Lender agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3(f) or the first
sentence of 3(e), such Lender will immediately discontinue disposition of
Registrable Securities pursuant to any Registration Statement(s) covering
such Registrable Securities until such Lender's receipt of the copies of
the supplemented or amended prospectus contemplated by Section 3(f) or the
first sentence of 3(e) or receipt of notice that no supplement or amendment
is required.
EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and commissions,
incurred in connection with registrations, filings or qualifications
pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting
fees, and fees and disbursements of counsel for the Company ("Registration
Expense") shall be paid directly by the Lenders in accordance with their
Pro Rata amount; provided however, that such Registration Expense shall be
deemed a Loan to the Company on the same terms and conditions set forth in
the Credit Agreement; provided further however, that the Lender's
obligation for such Registration Expense shall not exceed $50,000.
Notwithstanding the foregoing, any additional Registration Expense in
excess of $50,000 shall be the obligation of and be paid by the Company.
INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
To the fullest extent permitted by law, the Company will, and hereby does,
indemnify, hold harmless and defend each Lender, the directors, officers,
partners, employees, agents, representatives of, and each Person, if any,
who controls any Lender within the meaning of the 1933 Act and of the 1934
Act (each, an "Indemnified Person"), against any losses, claims, damages,
liabilities, judgments, fines, penalties, charges, costs, reasonable
attorneys' fees, amounts paid in settlement or expenses, joint or several,
(collectively, "Claims") incurred in investigating, preparing or defending
any action, claim, suit, inquiry, proceeding, investigation or appeal taken
from the foregoing by or before any court or governmental, administrative
or other regulatory agency, body or the SEC, whether pending or threatened,
whether or not an indemnified party is or may be a party thereto
("Indemnified Damages"), to which any of them may become subject insofar as
such Claims (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon: (i) any untrue statement
or alleged untrue statement of a material fact in a Registration Statement
or any post-effective amendment thereto or in any filing made in connection
with the qualification of the offering under the securities or other "blue
sky" laws of any jurisdiction in which Registrable Securities are offered
("Blue Sky Filing"), or the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) any untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus
if used prior to the effective date of such Registration Statement, or
contained in the final prospectus (as amended or supplemented, if the
Company files any amendment thereof or supplement thereto with the SEC) or
the omission or alleged omission to state therein any material fact
necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading,
(iii) any violation or alleged violation by the Company of
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the 1933 Act, the 1934 Act, any other law, including, without limitation,
any state securities law, or any rule or regulation thereunder relating to
the offer or sale of the Registrable Securities pursuant to a Registration
Statement or
(iv) any material violation of this Agreement (the matters in the foregoing
clauses (i) through (iv) being, collectively, "Violations"). Subject to
Section
6(c), the Company shall reimburse the Indemnified Persons, promptly as such
expenses are incurred and are due and payable, for any legal fees or other
reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary
contained herein, the indemnification agreement contained in this Section
6(a): (i) shall not apply to a Claim by an Indemnified Person arising out
of or based upon a Violation which occurs in reliance upon and in
conformity with information furnished in writing to the Company by such
Indemnified Person for such Indemnified Person expressly for use in
connection with the preparation of the Registration Statement or any such
amendment thereof or supplement thereto, if such prospectus was timely made
available by the Company pursuant to Section
3(c), and if such new prospectus will have cured the defect giving rise to
such Claims; (ii) with respect to any preliminary prospectus, shall not
inure to the benefit of any such person from whom the person asserting any
such Claim purchased the Registrable Securities that are the subject
thereof (or to the benefit of any person controlling such person) if the
untrue statement or omission of material fact contained in the preliminary
prospectus was corrected in the prospectus, as then amended or
supplemented, if such prospectus was timely made available by the Company
pursuant to Section 3(c), and the Indemnified Person was promptly advised
in writing not to use the incorrect prospectus prior to the use giving rise
to a violation and such Indemnified Person, notwithstanding such advice,
used it; and (iii) shall not be available to the extent such Claim is based
on a failure of the Lender to deliver or to cause to be delivered the
prospectus made available by the Company, if such prospectus was timely
made available by the Company pursuant to Section 3(d) and if such new
prospectus will have cured the defect giving rise to such Claims;
(iv) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the Company,
which consent shall not be unreasonably withheld. Such indemnity shall
remain in full force and effect regardless of any investigation made by or
on behalf of the Indemnified Person and shall survive the transfer of the
Registrable Securities by the Lenders pursuant to Section 9.
In connection with any Registration Statement in which an Lender is
participating, each such Lender agrees to severally and not jointly
indemnify, hold harmless and defend, to the same extent and in the same
manner as is set forth in Section 6(a), the Company, each of its directors,
each of its officers who signs the Registration Statement each Person, if
any, who controls the Company within the meaning of the 1933 Act or the
1934 Act (each an "Indemnified Party"), against any Claim or Indemnified
Damages to which any of them may become subject, under the 1933 Act, the
1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise
out of or are based upon any Violation, in each case to the extent, and
only to the extent, that such Violation occurs in reliance upon and in
conformity with written information furnished to the Company by such Lender
expressly for use in connection with such Registration Statement; and,
subject to Section 6(c), such Lender will reimburse any legal or other
expenses reasonably incurred by an Indemnified Party in connection with
investigating or defending any such Claim; provided, however, that the
indemnity agreement contained in this Section 6(b) and the agreement with
respect to contribution contained in Section 7 shall not apply to amounts
paid in settlement of any Claim if such settlement is effected without the
prior written consent of such Lender; provided, further, however, that the
Lender shall be liable under this Section 6(b) for only that amount of a
Claim or Indemnified Damages as does not exceed the net proceeds to such
Lender as a result of the sale of Registrable Securities pursuant to such
Registration Statement. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of such
Indemnified Party and shall survive the transfer of the Registrable
Securities by the Lenders pursuant to Section 9. Notwithstanding anything
to the contrary contained herein, the indemnification agreement contained
in this Section 6(b) with respect to any preliminary prospectus shall not
inure to the benefit of any Indemnified Party if the untrue statement or
omission of material fact contained in the preliminary prospectus was
corrected on a timely basis in the prospectus, as then amended or
supplemented.
Promptly after receipt by an Indemnified Person or Indemnified Party under
this Section 6 of notice of the commencement of any action or proceeding
(including any governmental action or proceeding) involving a Claim, such
Indemnified Person or Indemnified Party shall, if a Claim in respect
thereof is to be made against any indemnifying party under this Section 6,
deliver to the indemnifying party a written notice of the commencement
thereof, and the indemnifying party shall have the right to participate in,
and, to the extent the indemnifying party so desires, jointly with any
other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying
party and the Indemnified Person or the Indemnified Party, as the case may
be; provided, however, that an
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Indemnified Person or Indemnified Party shall have the right to retain its
own counsel with the fees and expenses of not more than one counsel for
such Indemnified Person or Indemnified Party to be paid by the indemnifying
party, if, in the reasonable opinion of counsel retained by the
indemnifying party or the indemnified party, the representation by such
counsel of the Indemnified Person or Indemnified Party and the indemnifying
party would be inappropriate due to actual or potential differing interests
between such Indemnified Person or Indemnified Party and any other party
represented by such counsel in such proceeding. In the case of an
Indemnified Person, legal counsel referred to in the immediately preceding
sentence shall be selected by the Lenders holding a majority in interest of
the Registrable Securities included in the Registration Statement to which
the Claim relates. The Indemnified Party or Indemnified Person shall
cooperate with the indemnifying party in connection with any negotiation or
defense of any such action or Claim by the indemnifying party and shall
furnish to the indemnifying party all information reasonably available to
the Indemnified Party or Indemnified Person which relates to such action or
Claim. The indemnifying party shall keep the Indemnified Party or
Indemnified Person apprized as to the status of the defense or any
settlement negotiations with respect thereto. No indemnifying party shall
be liable for any settlement of any action, claim or proceeding effected
without its prior written consent, provided, however, that the indemnifying
party shall not unreasonably withhold, delay or condition its consent. No
indemnifying party shall, without the prior written consent of the
Indemnified Party or Indemnified Person, consent to entry of any judgment
or enter into any settlement or other compromise which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to
such Indemnified Party or Indemnified Person of a release from all
liability in respect to such Claim or litigation. Following indemnification
as provided for hereunder, the indemnifying party shall be subrogated to
all rights of the Indemnified Party or Indemnified Person with respect to
all third parties, firms or corporations relating to the matter for which
indemnification has been made. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is prejudiced in its ability to defend
such action.
The indemnification required by this Section 6 shall be made by periodic
payments of the amount thereof during the course of the investigation or
defense, as and when bills are received or Indemnified Damages are incurred.
The indemnity agreements contained herein shall be in addition to (i) any
cause of action or similar right of the Indemnified Party or Indemnified
Person against the indemnifying party or others, and (ii) any liabilities
the indemnifying party may be subject to pursuant to the law.
CONTRIBUTION.
To the extent any indemnification by an indemnifying party is prohibited or
limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be
liable under Section 6 to the fullest extent permitted by law; provided,
however, that:
(i) no person involved in the sale of Registrable Securities, which person
is guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) in connection with such sale, shall be entitled to
contribution from any person involved in such sale of Registrable
Securities who was not guilty of fraudulent misrepresentation; and (ii)
contribution by any seller of Registrable Securities shall be limited in
amount to the net amount of proceeds received by such seller from the sale
of such Registrable Securities pursuant to such Registration Statement.
REPORTS UNDER THE 1934 ACT.
With a view to making available to the Lenders the benefits of Rule 144
promulgated under the 1933 Act or any other similar rule or regulation of
the SEC that may at any time permit the Lenders to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees
to:
make and keep public information available, as those terms are understood
and defined in Rule 144;
file with the SEC in a timely manner all reports and other documents
required of the Company under the 1933 Act and the 1934 Act so long as the
Company remains subject to such requirements (it being understood that
nothing herein shall limit the Company's obligations under Section 4(c) of
the Credit Agreement) and the filing of such reports and other documents is
required for the applicable provisions of Rule 144; and
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furnish to each Lender so long as such Lender owns Registrable Securities,
promptly upon request, (i) a written statement by the Company that it has
complied with the reporting requirements of Rule 144, the 1933 Act and the
1934 Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and
(iii) such other information as may be reasonably requested to permit the
investors to sell such securities pursuant to Rule 144 without registration.
ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall be automatically assignable by the
Lenders to any transferee of all or any portion of Registrable Securities
if: (i) the Lender agrees in writing with the transferee or assignee to
assign such rights, and a copy of such agreement is furnished to the
Company within a reasonable time after such transfer or assignment; (ii)
the Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of (a) the name and address of such
transferee or assignee, and (b) the securities with respect to which such
registration rights are being transferred or assigned; (iii) if applicable,
immediately following such transfer or assignment the further disposition
of such securities by the transferee or assignee is restricted under the
1933 Act and applicable state securities laws;
(iv) at or before the time the Company receives the written notice
contemplated by clause (ii) of this sentence the transferee or assignee
agrees in writing with the Company to be bound by all of the provisions
contained herein; and (v) such transfer shall have been made in accordance
with the applicable requirements of the Credit Agreement. At the
transferees request, the Company shall promptly prepare and file any
required prospectus supplement under Rule 424(b)(3) of the Securities Act
or other applicable provision of the Securities Act to appropriately amend
the list of Selling Stockholders thereunder to include such transferee.
AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof may
be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the
Company and Lenders who then hold two-thirds of the Registrable Securities,
other than any amendments to the timing and length of filing and
effectiveness of a Registration Statement or the consequences for failure
of the Company to timely perform such obligations, which require the
consent of each affected Lender. Any amendment or waiver effected in
accordance with this Section 10 shall be binding upon each Lender and the
Company. No such amendment shall be effective to the extent that it applies
to less than all of the holders of the Registrable Securities. No
consideration shall be offered or paid to any Person to amend or consent to
a waiver or modification of any provision of any of this Agreement unless
the same consideration also is offered to all of the parties to this
Agreement. Notwithstanding the foregoing, the Company and the Lenders agree
that this Agreement shall be automatically amended without further action
by the Company and the Lenders to add additional investors to this
Agreement who purchase Common Stock in Additional Closings as defined in
Section 2 of the Credit Agreement.
OTHER REGISTRATION STATEMENTS; PIGGY-BACK REGISTRATIONS.
Prior to the eleventh (11th) day after the Company files the Registration
Statement, the Company shall not file a registration statement (including
any shelf registration statements) (other than on Form S-8) with the
Commission with respect to any securities of the Company.
If at any time during the Registration Period there is not an effective
Registration Statement covering all of the Registrable Securities and the
Company shall determine to prepare and file with the Commission a
registration statement relating to an offering for its own account or the
account of others under the Securities Act of any of its equity securities,
other than on Form S-4 or Form S-8 (each as promulgated under the 1933 Act)
or their then equivalents relating to equity securities to be issued solely
in connection with any acquisition of any entity or business or equity
securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to each Lender written notice of
such determination and, if within fifteen days after receipt of such
notice, any such Lender shall so request in writing, the Company shall
include in such registration statement all or any part of such Registrable
Securities such holder requests to be registered, subject to customary
underwriter cutbacks applicable to all holders of registration rights.
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MISCELLANEOUS.
A Person is deemed to be a holder of Registrable Securities whenever such
Person owns or is deemed to own of record such Registrable Securities. If
the Company receives conflicting instructions, notices or elections from
two or more Persons with respect to the same Registrable Securities, the
Company shall act upon the basis of instructions, notice or election
received from the registered owner of such Registrable Securities.
Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing
and will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated
and kept on file by the sending party); or (iii) one business day after
deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
If to the Company:
Security Intelligence Technologies, Inc.
145 Huguenot Street
New Rochelle, NY 10801
Telephone: 914-654-8700
Facsimile: 914-654-1302
Attention: Chief Executive Officer
If to the Lender, to its address and facsimile number set forth on the
Schedule of Lenders attached hereto, with copies to such Lender's
representatives as set forth on the Schedule of Lenders, or to such other
address and/or facsimile number and/or to the attention of such other
person as the recipient party has specified by written notice given to each
other party five (5) days prior to the effectiveness of such change.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender's facsimile machine containing the time, date,
recipient facsimile number and an image of the first page of such
transmission or (C) provided by a courier or overnight courier service
shall be rebuttable evidence of personal service, receipt by facsimile or
receipt from a nationally recognized overnight delivery service in
accordance with clause (i), (ii) or (iii) above, respectively.
Failure of any party to exercise any right or remedy under this Agreement
or otherwise, or delay by a party in exercising such right or remedy, shall
not operate as a waiver thereof.
All questions concerning the construction, validity, enforcement and
interpretation of this Agreement shall be governed by the internal laws of
the State of New York, without giving effect to any choice of law or
conflict of law provision or rule. Each party hereby irrevocably waives
personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at
the address for such notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and
notice thereof. Nothing contained herein shall be deemed to limit in any
way any right to serve process in any manner permitted by law. If any
provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES
ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING
OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
This Agreement, the Credit Agreement, and the Loan Documents constitute the
entire agreement among the parties hereto with respect to the subject
matter hereof and thereof. There are no restrictions, promises, warranties
or undertakings, other than those set forth or referred to herein and
therein. This Agreement, the Credit Agreement and the Loan Documents
supersede all prior agreements and understandings among the parties hereto
with respect to the subject matter hereof and thereof.
Subject to the requirements of Section 9, this Agreement shall inure to the
benefit of and be binding upon the permitted successors and assigns of each
of the parties hereto.
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The headings in this Agreement are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof.
This Agreement may be executed in identical counterparts, each of which
shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by facsimile transmission of a copy of this
Agreement bearing the signature of the party so delivering this Agreement.
Each party shall do and perform, or cause to be done and performed, all
such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions
contemplated hereby.
All consents and other determinations required to be made by the Lenders
pursuant to this Agreement shall be made, unless otherwise specified in
this Agreement, by Lenders holding at least a majority of the Registrable
Securities.
The language used in this Agreement will be deemed to be the language
chosen by the parties to express their mutual intent and no rules of strict
construction will be applied against any party.
The obligations of each Lender hereunder are several and not joint with the
obligations of any other Lender hereunder, and no Lender shall be
responsible in any way for the performance of the obligations of any other
Lender hereunder. Nothing contained herein or in any other agreement or
document delivered at any closing, and no action taken by any Lender
pursuant hereto or thereto, shall be deemed to constitute the Lenders as a
partnership, an association, a joint venture or any other kind of entity,
or create a presumption that the Lenders are in any way acting in concert
with respect to such obligations or the transactions contemplated by this
Agreement. Each Lender shall be entitled to protect and enforce its rights,
including without limitation the rights arising out of this Agreement, and
it shall not be necessary for any other Lender to be joined as an
additional party in any proceeding for such purpose.
This Agreement is intended for the benefit of the parties hereto and their
respective permitted successors and assigns, and is not for the benefit of,
nor may any provision hereof be enforced by, any other Person.
* * * * * *
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IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement as of the Effective Date.
================================================================================
BORROWER LENDERS
By: /s/ Ben Jamil GSM Communications, Inc.
--------------------------------------
Name:
Title: By: /s/ Leovigildo Lopez
-------------------------------------
Name: Leovigildo Lopez
Title: President
Address: 1221 Brickell Avenue,
Suite 900
Miami, Florida 33131
Fax No. (305)
-------------
Kesef Equity Group, Inc
By: /s/ Victor Salimeo
-------------------------------------
Name: Victor Salimeo
Title: President
Address: 14 Lyle Farm Lane
Englishtown, NJ 07726
Fax No.
------------------
Ostonian Securities Limited
By: /s/ Jose Masis
--------------------------------------
Name: Jose Masis
Title: President
Address: 60 St.James Street,
1st Floor
London, England SW1 ALE
Fax No.
-------------------------
================================================================================
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IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement as of the Effective Date.
===========================================================================================
BORROWER LENDERS
By: Robert A. Schechter
---------------------------------------
Name:
Title: By: /s/ Robert A. Schechter
-----------------------------------------------
Name: Robert A. Schechter
Address: c/o The Atlas Group of
Companies, LLC
135 East 57th Street,
26th Floor
New York , New York 10022
Fax No. (212) 716-1501
Shimon S. Fishman
----------------------------------------------
By: /s/ Shimon Fishman
Name: Shimon S. Fishman
Address: c/o The Atlas Group of
Companies, LLC
135 East 57th Street,
26th Floor
New York , New York 10022
Fax No. (212) 716-1501
Steven Pollan
By: /s/ Steven Pollan
-----------------------------------------------
Name: Steven Pollan
Address: c/o Atlas Capital
Services, LLC
135 East 57th Street,
26th Floor
New York , New York 10022
Fax No. (212) 267-3501
Atlas Equity Group, Inc.
By: /s/ Michael D. Farkas
-----------------------------------------------
Name: Michael D. Farkas
Title: President
Address: 1691 Michigan Avenue,
Suite 425
Miami, Florida 33139
Fax No. (305) 539-0901
================================================================================
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Annex A Plan of Distribution
The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their
shares of Common Stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be
at fixed or negotiated prices. The Selling Stockholders may use any one or
more of the following methods when selling shares:
ordinary brokerage transactions and transactions in which the broker dealer
solicits purchasers;
block trades in which the broker dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
purchases by a broker dealer as principal and resale by the broker dealer
for its account;
an exchange distribution in accordance with the rules of the applicable
exchange;
privately negotiated transactions;
short sales
broker dealers may agree with the Selling Stockholders to sell a specified
number of such shares at a stipulated price per share;
a combination of any such methods of sale; and
any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker dealers engaged by the Selling Stockholders may arrange for other
brokers dealers to participate in sales. Broker dealers may receive
commissions or discounts from the Selling Stockholders (or, if any broker
dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated. The Selling Stockholders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
The Selling Stockholder may from time to time pledge or grant a security
interest in some or all of the Shares or common stock or Warrant owned by
them and, if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of common
stock from time to time under this prospectus, or under an amendment to
this prospectus under Rule 424(b)(3) or other applicable provision of the
Securities Act of 1933 amending the list of Selling Stockholders to include
the pledgee, transferee or other successors in interest as selling
stockholders under this prospectus.
The Selling Stockholders also may transfer the shares of common stock in
other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes
of this prospectus.
The Selling Stockholders and any broker dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning
of the Securities Act in connection with such sales. In such event, any
commissions received by such broker dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The Selling Stockholders
have informed the Company that it does not have any agreement or
understanding, directly or indirectly, with any person to distribute the
Common Stock.
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The Company is required to pay all fees and expenses incident to the
registration of the shares. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act.
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Exhibit 14.1 Security Intelligence Technologies, Inc.
Code of Ethics
We maintain a code of ethics that applies to our principal executive
officer, principal financial officer, controller, or persons performing
similar functions. Any waiver of the code must be approved by the Audit
Committee and must be disclosed in accordance with SEC rules.
--------------------------------------------------------------------------------
Policy:
A goal of Security Intelligence Technologies, Inc. and its subsidiaries is
to promoting professional and ethical conduct with respect to its business
practices worldwide. This policy provides ethical standards to which all of
our executive officers, including our principal executive, financial and
accounting officers, our directors, our financial managers and all
employees are expected to adhere and promote. regarding individual and peer
responsibilities, and responsibilities to other employees, to us, to the
public and to the other stockholders.
Our Policy is to:
(1) comply with laws and regulations of applicable national, state, and
local governments and regulatory agencies;
(2) prepare and develop all information and data in a manner that
facilitates full, fair, accurate, complete, timely and understandable and
relevant disclosure in reports and documents that we file with, or submits
to, the Securities and Exchange Commission and any other government
agencies or use in other public communications;
(3) act with honesty and integrity, avoid actual or apparent conflicts of
interest between our personal and professional relationships.
(4) act in good faith, responsibly, with due care, competence and
thoroughness, without misrepresenting material facts or allowing
independent, professional judgment to be subordinated;
(5) maintain the confidentiality of information acquired, except when
authorized or otherwise legally obligated to disclose such information and
refrain from using confidential information acquired for personal advantage;
(6) share knowledge and maintain skills important and relevant to the needs
of us and our employees;
(7) proactively promote ethical behavior as a responsible professional
among peers and business community; and
(8) exercise responsible use of and control over all our assets and resources.
We are committed to complying with both the letter and the spirit of all
applicable laws, rules and regulations. Any information you may have
concerning any violation of this Code of Ethics should be brought to the
attention of the Audit Committee. The Board of Directors may determine, or
designate appropriate persons to determine, appropriate additional
disciplinary or other actions to be taken in the event of violations of
this Code of Ethics.
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If you provide information to the Audit Committee, it will be treated in
confidence. Communications to the Audit Committee should be sent to the
attention of Director Tom Felice.
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Exhibit 21.1
List of Subsidiaries
State of
Subsidiary Incorporation Doing
Business AS
------------------------------------------ --------------
--------------------------------------------------
Homeland Security Strategies,
Inc. Delaware Homeland Security Strategies, Inc.
Homeland Security Strategies of
California,
Inc. California Homeland Security
Strategies of California, Inc.
Homeland Security Strategies of Florida,
Inc Florida Homeland Security Strategies of Florida, Inc
CCS International, Ltd. Delaware CCS
International, Ltd.
Counter Spy Shop of Mayfair London,
Ltd. DC Counter Spy Shop of Mayfair London, Ltd.
Counter Spy Shop of Mayfair London, Ltd.,
Inc. Florida Counter Spy Shop of Mayfair London, Ltd
Counter Spy Shop of Mayfair London,
Ltd. CA Counter Spy Shop of Mayfair London, Ltd.
Spy Shop
Ltd. NY Counter Spy
Shop of Delaware
Security Design Group,
Inc. NY Security Design Group, Inc.
Homeland Security Strategies (UK), Ltd. London,
UK Homeland Security Strategies (UK), Ltd.
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Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Security Intelligence
Technologies, Inc.
We hereby consent to the inclusion of our report dated October 10, 2003
relating to the consolidated financial statements of Security Intelligence
Technologies, Inc. and subsidiaries for the year ended June 30, 2003
appearing in the Annual Report on Form 10-KSB of Security Intelligence
Technologies, Inc. for the year ended June 30, 2004.
/s/ Schneider & Associates LLP
------------------------------
Schneider & Associates LLP
Certified Public Accountants
October 12, 2004
Jericho, New York
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EXHIBIT 31.1
CERTIFICATION
I, Ben Jamil, certify that:
1. I have reviewed this Annual Report on Form 10-KSB of Security
Intelligence Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report; 4. The
registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and d)
disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's fourth
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
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--------------------------------------------------------------------------------
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Dated: October 12, 2004
/s/ Ben Jamil
----------------------------------
Ben Jamil, Chief Executive
Officer
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EXHIBIT 31.2
CERTIFICATION
I, Chris R. Decker, certify that:
1. I have reviewed this Annual Report on Form 10-KSB of Security
Intelligence Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report; 4. The
registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and d)
disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's fourth
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Dated: October 12, 2004
/s/ Chris R. Decker
----------------------------------------
Chris R. Decker, Chief Financial Officer
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EXHIBIT 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report on Form 10-KSB of Security
Intelligence Technologies, Inc. (the "Company") for the period ended June
30, 2004, as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Ben Jamil, the Chief Executive Officer of the
Company, and I, Chris R. Decker, Chief Financial Officer of the Company, do
hereby certify pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906
of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief
that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: October 12, 2004
/s/ Ben Jamil
----------------------------------
Ben Jamil, Chief Executive Officer
/s/ Chris R. Decker
----------------------------------------
Chris R. Decker, Chief Financial Officer
This certification shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
ss.18 of the Securities Exchange Act of 1934, as amended.
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