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)
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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 ----------------------------------------------------------------------------------------------------- World Class, Professional, Ethical, and Competent Bug Sweeps, and Wiretap Detection using Sophisticated Laboratory Grade Test Equipment. ----------------------------------------------------------------------------------------------------- ------------------------ Yahoo! Groups Sponsor --------------------~--> Make a clean sweep of pop-up ads. Yahoo! Companion Toolbar. Now with Pop-Up Blocker. Get it for free! http://us.click.yahoo.com/L5YrjA/eSIIAA/yQLSAA/UBhwlB/TM --------------------------------------------------------------------~-> ======================================================== TSCM-L Technical Security Mailing List "In a multitude of counselors there is strength" To subscribe to the TSCM-L mailing list visit: http://www.yahoogroups.com/community/TSCM-L It is by caffeine alone I set my mind in motion. It is by the juice of Star Bucks that thoughts acquire speed, the hands acquire shaking, the shaking is a warning. It is by caffeine alone I set my mind in motion. =================================================== TSKS Yahoo! Groups Links <*> To visit your group on the web, go to: http://groups.yahoo.com/group/TSCM-L/ <*> To unsubscribe from this group, send an email to: TSCM-L-unsubscribe@yahoogroups.com <*> Your use of Yahoo! Groups is subject to: http://docs.yahoo.com/info/terms/
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- ----------------------------------------------------------------------------------------------------- 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 14:56:56 -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- -------------------------------------------------------------------------------- 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- -------------------------------------------------------------------------------- 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- -------------------------------------------------------------------------------- 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- -------------------------------------------------------------------------------- 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- -------------------------------------------------------------------------------- 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. -7- -------------------------------------------------------------------------------- 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. -8- -------------------------------------------------------------------------------- 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. -9- -------------------------------------------------------------------------------- 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. -10- -------------------------------------------------------------------------------- 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. -11- -------------------------------------------------------------------------------- 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. -12- -------------------------------------------------------------------------------- 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. -13- -------------------------------------------------------------------------------- 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. -14- -------------------------------------------------------------------------------- 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. -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- -------------------------------------------------------------------------------- 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. -20- -------------------------------------------------------------------------------- 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. -21- -------------------------------------------------------------------------------- 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. -22- -------------------------------------------------------------------------------- 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. -23- -------------------------------------------------------------------------------- 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. -24- -------------------------------------------------------------------------------- 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. -25- -------------------------------------------------------------------------------- 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- -------------------------------------------------------------------------------- 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) -27- -------------------------------------------------------------------------------- 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- -------------------------------------------------------------------------------- 4. All Other Fees. There were no other fees billed for the fiscal years ended June 30, 2004 and June 30, 2003. -29- -------------------------------------------------------------------------------- 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- -------------------------------------------------------------------------------- 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- -------------------------------------------------------------------------------- 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 -32- -------------------------------------------------------------------------------- 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 -33- -------------------------------------------------------------------------------- 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 -34- -------------------------------------------------------------------------------- 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 -35- -------------------------------------------------------------------------------- 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 -36- -------------------------------------------------------------------------------- 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 -37- -------------------------------------------------------------------------------- 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 -38- -------------------------------------------------------------------------------- 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. F-20 -50- -------------------------------------------------------------------------------- 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. F-21 -51- -------------------------------------------------------------------------------- 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). F-22 -52- -------------------------------------------------------------------------------- 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 -53- -------------------------------------------------------------------------------- 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. -54- -------------------------------------------------------------------------------- 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. -55- -------------------------------------------------------------------------------- (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). -56- -------------------------------------------------------------------------------- 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. -57- -------------------------------------------------------------------------------- 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; -58- -------------------------------------------------------------------------------- (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. -59- -------------------------------------------------------------------------------- 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: -60- -------------------------------------------------------------------------------- (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. -61- -------------------------------------------------------------------------------- 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. -62- -------------------------------------------------------------------------------- 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. -63- -------------------------------------------------------------------------------- 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. -64- -------------------------------------------------------------------------------- 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. -65- -------------------------------------------------------------------------------- 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. -66- -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- -67- -------------------------------------------------------------------------------- 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. -68- -------------------------------------------------------------------------------- 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). -69- -------------------------------------------------------------------------------- 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. -70- -------------------------------------------------------------------------------- 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 -71- -------------------------------------------------------------------------------- SCHEDULE A TO REVOLVING PROMISSORY NOTE RECORD OF LOANS AND REPAYMENT OF LOANS 1. -72- -------------------------------------------------------------------------------- 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- -------------------------------------------------------------------------------- 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- -------------------------------------------------------------------------------- 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- -------------------------------------------------------------------------------- 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- -------------------------------------------------------------------------------- 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- -------------------------------------------------------------------------------- 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- -------------------------------------------------------------------------------- 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- -------------------------------------------------------------------------------- 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. -86- -------------------------------------------------------------------------------- 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 -87- -------------------------------------------------------------------------------- SCHEDULE A TO REVOLVING PROMISSORY NOTE RECORD OF LOANS AND REPAYMENT OF LOANS -88- -------------------------------------------------------------------------------- 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. -89- -------------------------------------------------------------------------------- 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. -90- -------------------------------------------------------------------------------- 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 -91- -------------------------------------------------------------------------------- SCHEDULE A TO REVOLVING PROMISSORY NOTE RECORD OF LOANS AND REPAYMENT OF LOANS -92- -------------------------------------------------------------------------------- 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. -93- -------------------------------------------------------------------------------- 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. -94- -------------------------------------------------------------------------------- 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 -95- -------------------------------------------------------------------------------- SCHEDULE A TO REVOLVING PROMISSORY NOTE RECORD OF LOANS AND REPAYMENT OF LOANS -96- -------------------------------------------------------------------------------- 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. -97- -------------------------------------------------------------------------------- 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. -98- -------------------------------------------------------------------------------- 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. -99- -------------------------------------------------------------------------------- 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 -100- -------------------------------------------------------------------------------- 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 -101- -------------------------------------------------------------------------------- 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 -102- -------------------------------------------------------------------------------- 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. -103- -------------------------------------------------------------------------------- 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. -104- -------------------------------------------------------------------------------- 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. * * * * * * -105- -------------------------------------------------------------------------------- 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. ------------------------- ================================================================================ -106- -------------------------------------------------------------------------------- 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 ================================================================================ -107- -------------------------------------------------------------------------------- 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. -108- -------------------------------------------------------------------------------- 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. -109- -------------------------------------------------------------------------------- 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. -110- -------------------------------------------------------------------------------- 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. -111- -------------------------------------------------------------------------------- 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. -112- -------------------------------------------------------------------------------- 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 -113- -------------------------------------------------------------------------------- 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 -114- -------------------------------------------------------------------------------- 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 -115- -------------------------------------------------------------------------------- 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 -116- -------------------------------------------------------------------------------- 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. -117- ----------------------------------------------------------------------------------------------------- We Expertly Hunt Real Spies, Real Eavesdroppers, and Real Wiretappers. ----------------------------------------------------------------------------------------------------- James M. 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