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EX-31.1 - CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES OXLEY ACT OF 2002 - SOMERSET INTERNATIONAL GROUP,INC. | f10k2009ex31i_somerset.htm |
EX-32.1 - CERTIFICATIONS PURSUANT TO SECTION 906 OF SARBANES OXLEY ACT OF 2002 - SOMERSET INTERNATIONAL GROUP,INC. | f10k2009ex32i_somerset.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
———————
FORM
10-K
———————
ý ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended: December 31,
2009
or
¨ TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period from: _____________ to _____________
SOMERSET
INTERNATIONAL GROUP, INC.
(Exact
name of registrant as specified in its charter)
———————
Delaware
|
13-2795675
|
|
(State
or Other Jurisdiction
|
(Commission
|
(I.R.S.
Employer
|
of
Incorporation or Organization)
|
File
Number)
|
Identification
No.)
|
90
Washington Valley Road, Bedminster, NJ 07921
(Address
of Principal Executive Office) (Zip Code)
(908)
-719-8909
(Registrant’s
telephone number, including area code)
N/A
(Former
name or former address, if changed since last report)
Securities
registered pursuant to Section 12(b) of the Act:
|
||
Title
of each class
|
Name
of each exchange on which registered
|
|
Common
Stock, $.001 par value
|
OTC
Bulletin Board
|
|
Securities
registered pursuant to Section 12(g) of the Act:
|
||
(Title
of Class)
|
———————
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨
No ý
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨
No ý
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 ¨
No ý
1
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
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-K or any amendment to this Form 10-K. ý
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer ¨ Smaller
reporting company ý
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨
No ý
The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant, computed by reference to the closing price of a share of
common stock on March 31, 2010 was $189,273.
On March
31, 2010, there were 23,348,655 outstanding shares of the registrant’s common
stock, $.001 par value.
2
PART
I
Item
1. Description of Business
(a) State
of Incorporation; Offices and Facilities
Somerset International Group, Inc.
(“Somerset”) was incorporated under the laws of the State of Delaware in 1968.
Our current activity is the acquisition of profitable and near term profitable
private small and medium sized businesses that provide proprietary security
products and solutions for people and enterprises – from personal safety to
information security – and maximizing the profitability of our acquired entities
and to act as a holding company for such entities.
Our
executive office is located at 90 Washington Valley Road, Bedminster, New
Jersey, 07921
(b)
Nature of Business
Our
current activity is the acquisition of profitable and near term profitable
private small and medium sized businesses and maximizing the profitability of
our acquired entities and to act as a holding company for such
entities.
One of
our subsidiaries, designs, assembles, installs and maintains a proprietary
personal security system for colleges and mental health facilities where
potential for crime exists.
Three of
our subsidiaries specialize in the distribution, sale, installation, and
maintenance of fire and security equipment and systems that include fire
detection, video surveillance, and burglar alarm equipment.
There are
three streams of revenues derived from these subsidiaries:
1.
|
Equipment:
|
The
pricing for an equipment sale is generally established through a customer
purchase order and is a separate stand-alone arrangement. Revenue is
recognized for equipment sales upon the delivery of the equipment, which is the
date on which customer becomes responsible for the payment of the
equipment.
2.
|
Installation:
|
Installation
services are a separate stand-alone arrangement consisting of final connections
of the equipment and individual testing of the equipment pieces. Such
services occur after electrical work has been contracted and supervised by the
customer, and completed by an outside third party. Installation
services, when performed by the Company, are separately negotiated with the
customer, and are recognized upon completion of the service by the
Company.
3.
|
Maintenance:
|
These are
separately priced contracts that are entered into with a customer typically
after the installation services are performed. Maintenance services
are not bundled into any other service. These maintenance services
are recognized as revenues as the services are performed. These
services are billed at the end of the month after the service is provided or if
provided through a contractual arrangement then pre-billed for the defined
periods, i.e. quarterly, semi-annual, or annual. Deferred Revenue on the
Company’s balance sheet represents amounts billed to customers for maintenance
to be performed in future periods.
(c)
Corporate Developments
None.
(d) 2009
Revenues
Somerset’s
revenues were $4,219,561 for the twelve months ended December 31,
2009.
(e)
Patents and Trademarks
Somerset retained its patents and other
intellectual property, which is carried at a zero basis.
Somerset holds United States Patent No.
3,877,019, titled "Photo-measuring Materials Device for Computer Storage of
Photographic and Other Materials", granted April 8, 1975; No.
3,908,078, titled "Method and Apparatus for Digital Recognition of Objects
Particularly Biological Materials", granted September 23, 1975; No. 4,613,269,
titled "Robotic Acquisition of Objects By Means Including Histogram Techniques",
granted September 23, 1986 and No. 4,642,813, titled "Electro-Optical Quality
Control Inspection of Elements on a Product", granted February 10, 1987.
Although Somerset relied primarily on its technological know-how and expertise
in the field of machine vision, some products were nevertheless based, in part,
on the technology underlying these patents. No assurance can be given
as to the validity and scope of the protection provided by these
patents.
Somerset holds and used several
registered trademarks. "ORS" was used as a general identifying symbol in respect
of its Products. "i-bot" was used in conjunction with systems when adapted for
use with industrial robots and the related electronic grippers. "FLEXVISION"
identified a flexible image computer. The alignment products were identified by
"i-lign" and circuit board inspection systems were identified by "i-flex".
Somerset has also copyrighted critical software.
(f)
Employees
As
of March 31, 2010, Somerset has 1 employee, Secure has 6 employees, Meadowlands
has 11 employees, and Fire Control has 11 employees. No employees are currently
covered under collective bargaining agreements.
Item
2. Description of Property
Somerset’s
executive office is located at 90 Washington Valley Road, Bedminster, New
Jersey, 07921. The Company leases such space on a month to month
basis. Secure’s office is located at 1800 Bloomsbury, Ocean, NJ 08812
on a month to month basis and Meadowlands and Fire Control are located at 45
Pearl Street, North Plainfield, NJ 07060 subject to a three year lease, expiring
on December 31, 2010.
3
Item 3.
Legal Proceedings
On
September 4, 2008, Keith Kesheneff and Kathryn Kesheneff filed suit in Superior
Court in New Jersey against the Company claiming that they are owed $355,000 for
a purchase price adjustment note issued by the Company. The Company
filed an answer, with counterclaims, on October 27, 2008, generally contesting
all claims. The parties recently agreed upon settlement
terms. A form of settlement agreement is being reviewed by
counsel.
On June
26, 2009, the Company filed suit in the United States District Court for the
District of New Jersey against TSG Capital Partners, LLC and others seeking to
recover $105,000 in financing fees paid by the Company, plus damages for fraud,
counsel fees, and interest. The Company has served its complaint and
is pursuing its claims.
On August
6, 2009, the holders of three promissory notes convertible into the Company’s
common stock obtained judgments against the Company in the Superior Court of New
Jersey totaling $157,636.31, plus costs of $720.00.
On
January 19, 2010, the holders of promissory note convertible into the Company’s
common stock filed suit against the Company demanding payment of the principal
amount of $175,000.00, plus accrued interest, and counsel fees. The
Company has retained counsel to respond to the litigation and to interpose such
defenses as are lawfully available.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder
Matters, and Issued Purchases of Equity Securities
On November 10, 2004, the Company was
notified that it had received clearance from the National Association of
Securities Dealers (“NASD”) to have its Common Stock quoted on the Over the
Counter (“OTC”) Bulletin Board.
Our common stock is currently traded on
the Pink Sheets under the symbol “SOSI.” Our common stock has been quoted on the
OTC Bulletin Board since November 10, 2004. The following table sets
forth the range of high and low bid quotations for each quarter of calendar year
2009, and the first quarter of calendar year 2010 up to March 30, 2010. These
quotations as reported by the OTC Bulletin Board reflect inter-dealer prices
without retail mark-up, mark-down, or commissions and may not necessarily
represent actual transactions.
Year
|
Period
|
High
|
Low
|
2009
|
First
|
$0.05
|
$0.02
|
2009
|
Second
|
$0.04
|
$0.01
|
2009
|
Third
|
$0.01
|
$0.01
|
2009
|
Fourth
|
$0.01
|
$0.01
|
2010
|
First
|
$0.02
|
$0.01
|
4
As of December 31, 2009, there were
approximately 293 holders of record of Somerset’s common stock.
Dividends
We have never paid dividends on our
common stock and do not anticipate paying such dividends in the foreseeable
future. The payment of future cash dividends by us on our common stock will be
at the discretion of our Board of Directors and will depend on our earnings,
financial condition, cash flows, capital requirements and other considerations
as our board of directors may consider relevant. Although dividends are not
limited currently by any agreements, it is anticipated that future agreements,
if any, with institutional lenders or others may limit our ability to pay
dividends on our common stock. Notwithstanding the above, we had agreed to issue
dividends to the holders of Series A Preferred Stock as set forth above. We are
not statutorily prohibited from paying dividends.
Warrants
As of
December 31, 2009, 13,100,000 warrants have been issued to seven warrant
holders. The warrant holders are entitled to purchase fully paid and
nonassessable shares of our common stock, $.001 par value per share
at a per share purchase price in the following manner:
Issue
Date
|
Expiration
Date
|
Number
of Shares of Common Stock
|
Price
|
Basis
for Warrant issuance
|
09/06/05
|
09/05/10
|
5,000
|
$0.20
|
Consulting
Services
|
09/06/05
|
09/05/10
|
5,000
|
$0.18
|
Consulting
Services
|
04/17/07
|
04/16/10
|
90,000
|
**
|
Stock
Purchase Agreement
|
06/15/07
|
06/14/12
|
7,000,000
|
$0.05
|
Convertible
Debenture
|
06/15/07
|
06/14/10
|
50,000
|
$0.12
|
Stock
Purchase Agreement
|
11/14/07
|
11/13/12
|
5,000,000
|
$0.05
|
Convertible
Debenture
|
09/08/08
|
09/07/13
|
900,000
|
$0.001
|
Amendment to
Convertible Debenture
|
01/26/09
|
01/25/12
|
50,000
|
$0.001
|
Convertible
Note
|
Total
|
13,100,000
|
** The
warrants are exercisable at $.30 if exercised within the twelve months from the
date of the warrant; $.40 if exercised within 12 months to 24 months from the
date of the warrant; and $.50 if exercised within 24 months to 36 months from
the date of the warrant.
The
warrants may be exercised in full or in part (but not of a fractional share) by
the holder subject to ownership limitations under the respective
agreements.
Stock
Options
On August 29, 2008, the Board of
Directors, with the approval of a majority of the shareholders of the Company,
adopted the 2008 Equity Incentive Plan (the “Plan”) which will be administered
by a compensation committee (the “Committee”) appointed by the
Board.
5
On April 2, 2009, in accordance with
the Plan, two employees were issued a total of 175,000 shares under the
Plan.
Issue
Date
|
Expiration
Date
|
Number
of Shares of Common Stock
|
Price
|
04/02/09
|
04/01/12
|
100,000
|
$0.015
|
04/02/09
|
04/01/12
|
75,000
|
$0.015
|
Total
|
175,000
|
Item
6. Selected Financial Data
The table
below presents selected financial data for Somerset for the past two
years.
Results of Operations For The Year Ended December 31, | 2009 | 2008 | ||||||
Sales
|
$ | 4,219,561 | $ | 4,732,444 | ||||
Operating
Expenses
|
5,148,980 | 6,160,659 | ||||||
Loss
from Operations
|
(929,419 | ) | (1,428,215 | ) | ||||
Net
Loss attributable to Common Stockholders
|
$ | (1,653,834 | ) | $ | (2,007,719 | ) | ||
Basic
Loss per Common Share
|
$ | (0.07 | ) | $ | (0.09 | ) |
Financial Position at December 31, | 2009 | 2008 | ||||||
Total
Assets
|
$ | 4,802,022 | $ | 5,426,940 | ||||
Total
Liabilities
|
8,115,235 | 7,086,769 | ||||||
Shareholders
Equity(Deficit)
|
$ | (3,313,213 | ) | $ | (1,659,829 | ) |
6
Item
7. Management's Discussion of Financial Condition and Results of
Operations
This
Annual Report on Form 10-K includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 including,
without limitation, statements containing the words "believes," "anticipates,"
"intends," "expects," "estimates," "may," "will," "likely," "could" and words of
similar import. Such statements include statements concerning the Company's
business strategy, operations, cost savings initiatives, future compliance with
accounting standards, industry, economic performance, financial condition,
liquidity and capital resources, existing government regulations and changes in,
or the failure to comply with, governmental regulations. All
statements in this report that are not historical are forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act as amended,
including statements regarding Somerset statements regarding future sales and
its efforts to attract new customers for its products and develop
new products. Such statements are subject to risks and uncertainties
that could cause actual results to differ materially from those projected,
including, but not limited to, uncertainties relating to technologies, product
development, our ability to generate sufficient cash from operations or from
investors or lenders to fund product development and sales and marketing efforts
needed to attract new customers, operations, manufacturing, market acceptance,
cost and price of Somerset products, ability to attract new customers,
regulatory approvals, competition, intellectual property of others, and patent
protection and litigation. The Company's actual results may differ
materially from the results discussed in such forward-looking statements because
of a number of factors, including those identified elsewhere in this Annual
Report on Form 10-K. Somerset expressly disclaims any obligation or undertaking
to release publicly any updated or revisions to any forward-looking statements
contained herein to reflect any change in its expectations with regard thereto
or any change in events, conditions, or
circumstances on which any such statements are based.
General
On June 30, 2007, we entered into a
Stock Purchase Agreement (“Agreement”) in which Secure, our wholly owned
subsidiary, purchased all the shares of Meadowlands Fire, Safety, and Electrical
Supply Co., Inc., a New Jersey corporation, and Vanwell Electronics, Inc., a New
Jersey corporation (collectively “Meadowlands”) from Keith Kesheneff and Kathryn
Kesheneff, being all of the shareholders of Meadowlands. Pursuant to
the Agreement, Secure acquired Meadowlands whereby Meadowlands became a wholly
owned subsidiary of Secure. The purchase was financed through the use
of some of the proceeds of the June 15, 2007 convertible
debenture.
Effective October 1, 2007, we entered
into a Stock Purchase Agreement (“Agreement”) in which Somerset purchased all
the shares of Fire Control Electrical Systems, Inc., a New Jersey corporation
(collectively “Fire Control”) from Vincent A. Bianco and Opie F. Brinson, being
all of the shareholders of Fire Control. Pursuant to the Agreement,
Somerset acquired Fire Control whereby Fire Control became a wholly owned
subsidiary of Somerset. The purchase was financed through the use of
some of the proceeds of the November 12, 2007 convertible
debenture.
Critical
Accounting Policies and Estimates
The discussion and analysis of our
financial condition and results of operations are based upon our financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amount of assets and liabilities, revenues and expenses, including
stock issued for services and or compensation and related disclosure on
contingent assets and liabilities at the date of our financial statements.
Actual results may differ from these estimates under different assumptions and
conditions. Critical accounting policies are defined as those that are
reflective of significant judgments, estimates and uncertainties and potentially
result in materially different results under different assumptions and
conditions.
7
We have only established an allowance
for doubtful accounts for Secure’s subsidiary accounts receivable and Fire
Control. We analyzed the ability to collect accounts that are large, none of
which are currently past due for Secure. Historically, Secure has not incurred
bad debt expense and that trend is anticipated to
continue. Management will evaluate Secure’s subsidiary allowance and
Fire Control on a periodic basis.
We write down inventory for estimated
excess or obsolete inventory equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required.
We account for our goodwill and
intangible assets pursuant to Professional Standards, which require that
intangibles with definite lives continue to be amortized on a straight-line
basis over the lesser of their estimated useful lives or contractual terms.
Goodwill and intangibles with indefinite lives are evaluated at least annually
for impairment. The impairment test compares the carrying amount of
the reporting unit to its fair value. Discounted cash flows are
utilized to determine the fair value of the assets being
evaluated. The impairment test in 2009 and 2008 supported the
carrying value of goodwill, and as such, no write-down in the carrying value of
goodwill was recorded.
Revenues
Revenues of $4,219,561 for the year
ended December 31, 2009 decreased by $512,883 over revenues of $4,732,444 during
the year ended December 31, 2008. Equipment Sales revenues decreased by $994,069
for the twelve months ended December 31, 2009 versus the same period in
2008. Installation revenues increased by $423,722 and Maintenance
revenues increased by $57,464 for the twelve months ended December 31, 2009
versus the same period in 2008.
Costs of
Goods Sold
Costs of Goods Sold for the year ended
December 31, 2009 decreased to $1,866,260, representing a decrease of $570,433
over costs of goods sold of $2,436,693 during the year ended December 31,
2008. This was primarily attributable to a decrease in cost of
systems sold of $276,746 for the twelve months ended December 31, 2009 versus
the same period in 2008, as well as a decrease in the installation and service
costs of $275,578 and $18,109 in engineering and development costs for the
twelve months ended December 31, 2009 versus the same period in
2008.
Gross
Margin
Gross Margin for the year ended
December 31, 2009 increased to $2,353,301 representing an increase of $57,550
from a gross margin of $2,295,751 during the year ended December 31,
2008. This was a direct result of the net decreases in Revenues and
the Cost of Goods Sold described above.
Selling,
General, and Administrative Expenses (“SG&A”)
SG&A expenses for the year ended
December 31, 2009 of $3,282,720 decreased by $441,246 over SG&A expenses of
$3,723,966 during the year ended December 31, 2008. Selling general
and administrative expenses decreased by $367,937, amortization expense
decreased by $84,986, and depreciation expense increased by $11,677 from the
year ended December 31, 2008. This was primarily attributable to
decrease in payroll expenses of $607,637 for the twelve months ended December
31, 2009 versus the same period in 2008 and offset by non-material increases in
other categories.
8
Other
Income (Expense)
Other Expense increased to $716,471 for
the year ended December 31, 2009 from $560,500 during the year ended December
31, 2008, representing an increase of $155,971. Interest expense for
the year ended December 31, 2009 increased by $108,539 to $676,133 from interest
expense of $567,594 during the year ended December 31, 2008. This is primarily
attributable to the interest expense on the Dutchess convertible debentures
issued in June 2007 and November 2007and the notes issued in 2009.
Net
(Loss)
Net Loss attributable to common
stockholders for the year ended December 31, 2009 decreased by $353,885 to
$1,653,834 from $2,007,719 during the year ended December 31,
2008. The decrease in net loss is primarily attributable to the
increase in gross margin described above for the period and a decrease in
selling, general, and administrative expenses for the year as described
above.
Liquidity
and Capital Resources
We are currently financing our
operations primarily through cash generated by financing activities in the form
of promissory notes, convertible debentures, and equity investments. We financed
our business acquisitions through the issuance of redeemable preferred stock,
cash generated from promissory notes, and convertible debentures.
Substantially all principal payments
due under the terms of the Dutchess Debentures during 2009 are in
arrears. Partial payments of interest on these debentures were made
during 2009 and through March 31, 2010. The failure to pay any
principal or interest due under these debentures within ten days of the due date
is considered an “event of default”. As such, the entire balance of
principal and interest on the Dutchess Notes are payable on demand.
At December 31, 2009, the Company had
negative working capital of approximately $6,789,202.
We plan to establish a source of
revenues sufficient to cover our operating costs by acquiring additional
companies that are generating positive cash flows from operating activities
either at acquisition or projected to do so in the future, thereby furthering
the objective of becoming profitable and generating positive cash flow from
operating activities on a consolidated basis. The funds needed to
continue operations over the next twelve months will be raised from accredited
investors and/or institutional investors as in the previous financings. During
this period, the Company will attempt to reduce or defer expenses until the
capital is available. These conditions raise substantial doubt about
the Company’s ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Our need for capital may change
dramatically as a result of any additional business acquisition or combination
transaction. There can be no assurance that we will identify any
additional suitable business, product, technology or opportunity in the
future. Further, even if we locate a suitable target, there can be no
assurance that we would be successful in consummating any acquisition or
business consolidation on favorable terms or that we will be able to profitably
manage the business, product, or technology, if acquired, or otherwise
engaged. The Company intends to acquire cash flow positive companies
of such size or number that will allow it to continue as a going
concern. If we are unable to obtain debt and/or equity financing on
reasonable terms, we could be forced to delay or scale back our plans for
expansion. Consequently, there is substantial doubt about our ability to
continue to operate as a going concern.
9
Management
intends to ask pertinent questions of the proposed candidates or opportunities
in the course of its diligence phase. Management will rely heavily on
a business plan, financial statements and projections, and management’s views of
the future. Unless something comes to management’s attention as a
result of its review of the proposed candidate’s audited financial statements,
which causes management to have serious concerns on the viability or integrity
of the financial records and business projections, which would result in a
disqualification of such candidate, a transaction would be approved by the Board
of Directors. When a transaction requires shareholder approval, a
shareholder meeting must be held and a shareholder vote taken. A
proxy statement would be mailed to shareholders informing them of the meeting
and requesting their vote. However, in lieu of holding a meeting, a
majority of shareholders may sign a Shareholder’s Resolution approving of such
transaction. If a meeting is not held, an information statement must
be mailed to all of its shareholder’s informing them of the action taken by the
majority shareholders.
Recent
Accounting Pronouncements
In January 2010, the Financial
Accounting Standards Board (FASB) issued Update 2010-06, "Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about
Fair Value Measurements", which is effective for annual reporting periods
beginning after December 15, 2009 except for the disclosures about purchases,
sales, issuance and settlements in the rollforward of activity in Level 3 fair
value measurements which are effective for fiscal years beginning after December
15, 2010. This update modifies current professional standards to
require certain disclosures as follows:
|
The
amounts of significant transfers in and out of Level 1 and 2 fair value
measurements and the reasons for those
transfers.
|
|
Information
in the reconciliation of fair value measurements using significant
unobservable inputs (Level 3) about purchases, sales, issuance and
settlements (that is, on a gross basis rather than as one net
number).
|
|
Fair
value measurement disclosures for each class of assets and
liabilities.
|
|
Description
of valuation techniques and inputs used to measure fair value for both
recurring and non recurring fair value measurements that fall into either
Level 2 or Level 3.
|
|
In October 2009, FASB issued Update No.
2009-13, "Revenue Recognition: Multiple-Deliverable Revenue Arrangements which
is effective for fiscal years beginning on or after June 15, 2010 which requires
certain disclosures regarding multiple deliverable revenue arrangements as well
as addressing the accounting for multiple deliverable arrangements to enable
reporting entities to account for product and services separately rather than a
combined unit. The Company is currently evaluating the impact of this
pronouncement.
10
In October 2009, FASB issued Update No.
2009-14, "Software: Certain Revenue Arrangements That Include Software
Elements”, which is effective prospectively for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15,
2010. The update impacts the recognition of revenue arrangements that
include both tangible products and software elements and related
disclosures. The Company is currently evaluating the impact of this
pronouncement.
In October 2009, FASB issued Update No.
2009-15, "Accounting for Own-Share Lending Arrangements in Contemplation of
Convertible Debt Issuance or Other Financing”, which amends current professional
standards regarding share-lending arrangements that have been terminated as a
result of counterparty default prior to December 15, 2009. The
Company is currently evaluating the impact of this pronouncement.
Item
8. Financial Statements and Supplementary Data
Financial
Statements and schedules filed herewith are listed in the table of contents to
the financial statements on page F-1.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not
applicable, as no audit was performed.
Item
9(A). Controls and Procedures
Evaluation of disclosure
controls and procedures
The Company's management evaluated,
with the participation of its President, the effectiveness of the
design/operation of its disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the SEC Act of 1934) as of December 31,
2009. Based on such evaluation, the President of the Company
concluded that its disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
rules and regulations of the Securities and Exchange Commission and is not
operating in an effective manner.
Our
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of our financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles. Under the
supervision and with the participation of management, including our President,
we conducted a review, evaluation, and assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2009 based upon the
criteria set forth in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
11
During management’s evaluation of
internal controls over financial reporting, the following material weaknesses in
the internal control over financial reporting procedures were
found:
·
|
There
is no Audit Committee in place as required by the Sarbanes-Oxley Act of
2002.
|
·
|
There
are no controls in place to ensure complete and accurate recording of all
trade payables, accrued liabilities and accrued
purchases.
|
·
|
There
are no controls in place to determine that the inventory valuation has not
been impaired due to obsolescence and or reduction of net realizable value
below cost.
|
·
|
There
is no independent review of expenditures that are approved by the CEO by
the Audit Committee to ensure validity of
expenditures.
|
·
|
There
is no independent review of expenditure classifications to ensure they are
complete and accurate.
|
·
|
All
spreadsheets that are used in connection with preparation of the financial
statements are not independently re-calculated, reviewed and approved by
management.
|
·
|
There
is no independent review and re-calculation of stockholders’ equity
section of the financial statement.
|
·
|
There
is no independent review and re-calculation of investments in subsidiaries
and other equity investment values represented in the financial
statements.
|
·
|
There
is no independent review by company management that financial statements
are prepared in conformity with GAAP and SEC reporting requirements as
well as related footnote disclosures based on current GAAP and SEC
standards.
|
Based on
the material weaknesses noted above, management concludes that the internal
controls over financial reporting are not effective. Management will
be undertaking remediation efforts on a cost-effective basis to remediate
material weaknesses during the next fiscal year. Based on cost
constraints not all material weaknesses are expected to be
remediated. As a result, internal controls over financial reporting
are expected to remain not effective until revenues from operations are
sufficient to support additional internal controls and the formation of an audit
committee.
There
were no changes in internal control over financial reporting (as defined in
Rules 13a-15(f) and 15(d)-15(f) under the SEC Act of 1934) identified in
connection with the evaluation as of December 31, 2008 by the President, which
occurred during the most recent fiscal quarter, which have materially affected,
or are reasonably likely to materially affect, internal control over financial
reporting.
This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the company’s registered
public accounting firm pursuant to rules of the Securities and Exchange
Commission that permit the company to provide only management’s report in this
annual report.
12
Part
III
Item
10. Directors and Executive Officers and Corporate
Governance
The directors and executive officers of the Company are:
Name |
Positions with
registrant and age as of March 30,
2010
|
Has
served as director
since
|
John X. Adiletta | President, | February, 2004 |
Chief Executive Officer, | ||
Chairman, 61 | ||
13
John X.
Adiletta, President, Chief Executive Officer and a member of the Board of
Directors of the Company since February 12, 2004, at which time Somerset
International Group Inc., a New Jersey corporation 45% owned by Mr. Adiletta
purchased the majority of the controlling stock held by J.R.S. Holdings
L.L.C. Mr. Adiletta is a senior executive with over 39 years of
multi-functional experience in the telecommunication services, mobile and
modular facilities leasing, and vehicle leasing industries. Mr.
Adiletta currently serves on the Board of Directors of Output Services Group,
Inc., a privately held company.
Term of
Office:
Our sole director is appointed for a
one-year term to hold office until the next annual general meeting of our
shareholders or until removed from office in accordance with our bylaws. Our
officers are appointed by our Board of Directors and hold office until removed
by the Board.
All officers and directors listed above
will remain in office until the next annual meeting of our stockholders, and
until their successors have been duly elected and qualified. There are no
agreements with respect to the election of Directors. We have not compensated
our Directors for service on our Board of Directors, any committee thereof, or
reimbursed for expenses incurred for attendance at meetings of our Board of
Directors and/or any committee of our Board of Directors. Officers are appointed
annually by our Board of Directors and each Executive Officer serves at the
discretion of our Board of Directors. We do not have any standing committees.
Our Board of Directors may in the future determine to pay Directors’ fees and
reimburse Directors for expenses related to their activities.
None of our Officers and/or Directors
have filed any bankruptcy petition, been convicted of or been the subject of any
criminal proceedings or the subject of any order, judgment or decree involving
the violation of any state or federal securities laws within the past five (5)
years.
Certain Legal
Proceedings:
No director, nominee for director, or
executive officer of the Company has appeared as a party in any legal proceeding
material to an evaluation of his ability or integrity during the past five
years.
Compliance with 16(A) of the
Exchange Act:
Section 16(a) of the Exchange Act
requires the Company’s officers and directors, and persons who beneficially own
more than 10% of a registered class of the Company’s equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and are required to furnish copies to the Company. To the best of the
Company’s knowledge, all reports required to be filed were timely filed in
fiscal year ended December 31, 2009.
Code of
Ethics:
The Company has adopted a Code of
Ethics applicable to its Chief Executive Officer and Chief Financial Officer.
This Code of Ethics is filed herewith as an exhibit.
14
Item
11. Executive Compensation
The following summary compensation
table sets forth all compensation paid by Somerset during the fiscal years ended
December 31, 2009, 2008 and 2007 in all capacities for the accounts of the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO).
Name and Principal Position | Year | Annual Compensation | Restricted Stock Awards |
John X. Adiletta, CEO | 2009 | $366,000 | 0 |
2008 | $366,000 | 0 | |
2007 | $332,750 | 0 |
John X. Adiletta, our Chairman,
President and CEO, entered into an employment Agreement with Somerset-NJ in
January 2004, pursuant to which he currently receives a base salary of $250,000
(subject to a minimum upward adjustment of 10% annually). Pursuant to our merger
with Somerset-NJ we assumed the obligations set forth in the employment
agreement. Mr. Adiletta is also eligible for such bonus compensation as may
be determined by the Board of Directors from time to time, as well as a bonus of
five percent (5%) of the earnings before interest, depreciation, and
amortization based on our audited consolidated results. The employment agreement
terminates on December 31, 2009. The agreement contains non-competition and
termination non-solicitation provisions which survive the termination of
Mr. Adiletta’s employment for one year. In the event of termination of
employment without cause, the agreement provides that we shall: (1) pay
Mr. Adiletta severance equaling the greater of the balance of the term of
the agreement or one year’s salary, (2) provide to Mr. Adiletta certain
medical (including disability) and vacation benefits; and (3) within 3 months of
termination, pay to Mr. Adiletta an amount equal to the bonus paid to
Mr. Adiletta in the preceding year under the agreement. In the event of a
change of control, as defined in the agreement, Mr. Adiletta may at his
election, at any time within one year after such event, terminate the agreement
with 60 days prior written notice. Upon such termination, Mr. Adiletta is
entitled to: (1) a lump-sum severance payment equal to 200% of
Mr. Adiletta’s annual salary rate in effect as of the termination, or if
greater, such rate in effect immediately prior to the change in control of
Somerset, (2) an amount equal to 200% of his bonus for the previous year; and
(3) for a eighteen (18) month period after such termination certain disability,
accident and group health insurance benefits. On August 29, 2008, the
Board of Directors, with the approval of a majority of the shareholders of the
Company entered into an amendment to extend the Employment Agreement dated
January 6, 2004 for an additional 3 years from January 6, 2009. On
January 6, 2009, Mr. Adiletta signed an additional agreement, in which he agreed
to permanently waive the 2009 salary increase provided for in his employment
agreement. The additional agreement is for the period of January 6, 2009 though
January 5, 2010. On January 6, 2010, Mr. Adiletta signed an
additional agreement, in which he agreed to permanently waive the 2010 salary
increase provided for in his employment agreement. The additional agreement is
for the period of January 6, 2010 though January 5, 2011.
Directors do not receive any monetary
remuneration for their services as such.
The Company has a 401(k) retirement
savings plan.
15
Item
12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth the
number and percentage of the shares of Somerset’s voting stock owned as of March
31, 2010 by all persons known to Somerset who own more than 5% of the
outstanding number of such shares, by all directors of Somerset, and by all
officers and directors of Somerset as a group. Unless otherwise
indicated, each of the stockholders has sole voting and investment power with
respect to the shares beneficially owned.
Title of Class | Name | Number of Shares Beneficially Owned | Percent of Class |
Common | John X. Adiletta | 5,750,000 | 24.62% |
c/o 90 Washington Valley Road | |||
Bedminster, New Jersey 09721 | |||
Common | William F. Farley | 4,980,436 | 21.33% |
c/o 90 Washington Valley Road | |||
Bedminster, New Jersey 07921 | |||
Voting | All Directors and Officers as a group | 5,637,633 | 24.62% |
Item 13.
Certain Relationships and Related Transactions
The stockholder note payable was
$388,528 at December 31, 2008. The note plus accrued interest matured on
December 31, 2001. On July 1, 2004, the Company amended the note to add accrued
interest through June 30, 2004 of $266,855 to the principal amount of $503,602.
The new principal amount of the note was repaid with a $150,000 payment on March
11, 2005 and monthly payments of $17,928 including annual interest at 10%
beginning March 1, 2006 and ending July 1, 2009. Payments are
currently in arrears.
Item
14. Principal Accounting Fees and Services
Audit
Fees
For the Company's fiscal year ended
December 31, 2009 there was no audit performed and therefore no
fees. For the Company's fiscal year ended December 31, 2008, the
Company was billed approximately $122,000, for professional services rendered
for the audit and review of its financial statements.
Tax
Fees
For the Company's fiscal years ended
December 31, 2009 and 2008, the Company incurred no fees for preparation of its
corporate income tax returns.
All Other
Fees
None for 2009 and 2008.
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.
16
Effective May 6, 2003, the Securities
and Exchange Commission adopted rules that require that before our auditor is
engaged by us to render any auditing or permitted non-audit related service, the
engagement be:
-approved
by our audit committee; or
-entered
into pursuant to pre-approval policies and procedures established by the audit
committee, provided the policies and procedures are detailed as to the
particular service, the audit committee is
informed of each service, and such policies and procedures do not include
delegation of the audit committee's responsibilities to management.
We do not have an audit
committee. Our entire board of directors pre-approves all services
provided by our independent auditors.
The pre-approval process has just been
implemented in response to the new rules. Therefore, our board of directors
does not have records of what percentage of the above fees was
pre-approved. However, all of the above services and fees were
reviewed and approved by the entire board of directors either before or after
the respective services were rendered.
PART
IV
Item
15. Exhibits, Financial Statement Schedules
(a)
Reports on Form 8-K and Form 8K-A
On
January 2, 2009, the Company filed an 8K to disclose that the Company had
entered into a convertible promissory note with an accredited investor for
$30,000 with a conversion rate of $.25 per share.
(b)
Exhibits
14
Code of Ethics*
31.1 Certification
of John X. Adiletta pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification
of John X. Adiletta pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
*Filed as
an exhibit to our December 31, 2008 Form 10k filed with the SEC on
March 31,
2009.
17
Signatures
Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned hereunto duly
authorized.
SOMERSET INTERNATIONAL GROUP, INC. | ||
(Registrant) | ||
Date: March 31, 2010 | By: | /s/ John X. Adiletta |
John X. Adiletta | ||
Chief Executive Officer | ||
18
SOMERSET
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONTENTS
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS | Page |
Unaudited Balance Sheets December 31, 2009 and 2008 | F-2 |
Unaudited
Statements of Operations For
the Years Ended December 31, 2009 and 2008
|
F-3 |
Unaudited
Statements of Stockholders' Equity (Deficit) For
the Years Ended December 31, 2009 and
2008
|
F-4 |
Unaudited Statements of Cash Flows For the Years Ended December 31, 2009 and 2008 | F-5 |
Notes to Unaudited Consolidated Financial Statements | F-6 - F-20 |
F-1
(SEE NOTE
1B – BASIS OF PRESENTATION)
UNAUDITED
CONSOLIDATED BALANCE SHEET
DECEMBER
31, 2009 AND 2008
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 43,633 | $ | 65,732 | ||||
Accounts
receivable, net
|
572,548 | 645,233 | ||||||
Inventories
|
615,379 | 488,156 | ||||||
Prepaid
expenses
|
84,208 | 4,209 | ||||||
Other
current assets
|
10,265 | 10,444 | ||||||
Total
Current Assets
|
1,326,033 | 1,213,774 | ||||||
Property
and equipment, net
|
127,617 | 115,873 | ||||||
Other
Assets:
|
||||||||
Deposits
|
7,120 | 9,825 | ||||||
Deferred
financing costs, net
|
116,676 | 215,000 | ||||||
Customer
Lists, net
|
1,024,221 | 1,619,185 | ||||||
Distribution
agreements, net
|
-- | 52,928 | ||||||
Goodwill
|
2,200,355 | 2,200,355 | ||||||
Total
other assets
|
3,348,372 | 4,097,293 | ||||||
TOTAL
ASSETS
|
$ | 4,802,022 | $ | 5,426,940 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY(DEFICIT)
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
$ | 1,685,102 | $ | 1,264,356 | ||||
Promissory
notes payable - current
|
1,493,017 | 1,360,561 | ||||||
Dutchess
promissory notes payable - current
|
3,875,920 | 1,023,000 | ||||||
Accrued
interest payable
|
791,290 | 276,865 | ||||||
Deferred
revenue
|
269,906 | 268,081 | ||||||
Total
Current Liabilities
|
8,115,235 | 4,192,863 | ||||||
Dutchess
promissory notes payable – non-current
|
-- | 2,853,407 | ||||||
Promissory
notes payable – non-current portion
|
-- | 40,499 | ||||||
TOTAL
LIABILITIES
|
8,115,235 | 7,086,769 | ||||||
Stockholders’
Equity(Deficit):
|
||||||||
Common
Stock, 200,000,000 shares authorized,
|
23,349 | 23,334 | ||||||
$.001
par value, 23,348,655 and 23,333,655 shares issued and outstanding in 2009
and 2008 respectively
|
||||||||
Capital
in excess of par value
|
31,367,243 | 31,366,808 | ||||||
Accumulated
deficit
|
(34,703,805 | ) | (33,049,971 | ) | ||||
Total
Stockholders’ (Deficit)
|
(3,313,213 | ) | (1,659,829 | ) | ||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ (DEFICIT)
|
$ | 4,802,022 | $ | 5,426,940 |
See
accompanying Notes to the Consolidated Financial Statements
F-2
SOMERSET
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(SEE NOTE
1B – BASIS OF PRESENTATION)
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
2009
|
2008
|
|||||||
Revenues
|
||||||||
Equipment
sales
|
$ | 1,446,838 | $ | 2,440,907 | ||||
Installation
revenues
|
960,086 | 536,364 | ||||||
Maintenance
revenues
|
1,812,637 | 1,755,173 | ||||||
Total
revenues
|
4,219,561 | 4,732,444 | ||||||
Costs
of goods sold
|
||||||||
Material
cost of systems sold
|
972,518 | 1,249,264 | ||||||
Install
and service costs
|
775,884 | 1,051,462 | ||||||
Engineering
and development
|
117,858 | 135,967 | ||||||
Total
costs of goods sold
|
1,866,260 | 2,436,693 | ||||||
Gross
margin
|
2,353,301 | 2,295,751 | ||||||
Selling,
general, and administrative expenses
|
||||||||
Selling,
general, and administrative expense
|
2,486,911 | 2,854,848 | ||||||
Depreciation
expense
|
49,595 | 37,918 | ||||||
Amortization
expense
|
746,214 | 831,200 | ||||||
Total
selling, general, and administrative expenses
|
3,282,720 | 3,723,966 | ||||||
Loss
from operations
|
(929,419 | ) | (1,428,215 | ) | ||||
Other
Income(Expense)
|
||||||||
Interest
expense
|
(676,133 | ) | (567,594 | ) | ||||
Other
income (expense)
|
(40,338 | ) | 7,094 | |||||
Total
other expense
|
(716,471 | ) | (560,500 | ) | ||||
Loss
before income taxes
|
(1,645,890 | ) | (1,988,715 | ) | ||||
Provision
for income taxes
|
7,944 | 19,004 | ||||||
Net
loss
|
(1,653,834 | ) | (2,007,719 | ) | ||||
Net
loss attributable to common stockholders
|
$ | (1,653,834 | ) | $ | (2,007,719 | ) | ||
Basic
and diluted net loss per common share
|
$ | (0.07 | ) | $ | (0.09 | ) | ||
Weighted
Average Number of Common Shares
|
23,348,573 | 23,170,528 | ||||||
See
accompanying Notes to the Consolidated Financial Statements
F-3
SOMERSET
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(SEE NOTE
1B – BASIS OF PRESENTATION)
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
PREFERRED
STOCK
|
COMMON
STOCK
|
CLASS
A
COMMON
STOCK
|
CAPITAL
IN
|
TOTAL
STOCKHOLDERS’
|
||||||||||||||||||||||||||||||||
SHARES
|
PAR
VALUE
|
SHARES
|
PAR
VALUE
|
SHARES
|
PAR
VALUE
|
EXCESS
OF PAR
|
ACCUMULATED
DEFICIT
|
EQUITY
(DEFICIT)
|
||||||||||||||||||||||||||||
Balance
at December 31, 2007
|
- | $ | - | 23,058,655 | $ | 23,059 | - | - | $ | 31,349,583 | $ | (31,042,252 | ) | $ | 330,390 | |||||||||||||||||||||
Net
Loss
|
- | - | - | - | - | - | - | (2,007,719 | ) | (2,007,719 | ) | |||||||||||||||||||||||||
Issuance
of Common Stock for cash
|
- | - | 25,000 | 25 | - | - | 2,225 | - | 2,250 | |||||||||||||||||||||||||||
Issuance
of Common Stock for cash
|
- | - | 75,000 | 75 | - | - | 2,925 | - | 3,000 | |||||||||||||||||||||||||||
Issuance
of Common Stock for
services
|
- | - | 175,000 | 175 | - | - | 12,075 | - | 12,250 | |||||||||||||||||||||||||||
Balance
at December 31, 2008
|
- | $ | - | 23,333,655 | $ | 23,334 | - | - | $ | 31,366,808 | $ | (33,049,971 | ) | $ | (1,659,829 | ) |
PREFERRED
STOCK
|
COMMON
STOCK
|
CLASS
A
COMMON
STOCK
|
CAPITAL
IN
|
TOTAL
STOCKHOLDERS’
|
||||||||||||||||||||||||||||||||
SHARES
|
PAR
VALUE
|
SHARES
|
PAR
VALUE
|
SHARES
|
PAR
VALUE
|
EXCESS
OF PAR
|
ACCUMULATED
DEFICIT
|
EQUITY
(DEFICIT)
|
||||||||||||||||||||||||||||
Balance
at December 31, 2008
|
- | $ | - | 23,333,655 | $ | 23,334 | - | - | $ | 31,366,808 | $ | (33,049,971 | ) | $ | (1,659,829 | ) | ||||||||||||||||||||
Net
Loss
|
- | - | - | - | - | - | - | (1,653,834 | ) | (1,653,834 | ) | |||||||||||||||||||||||||
Issuance
of Common Stock for cash
|
- | - | 15,000 | 15 | - | - | 435 | - | 450 | |||||||||||||||||||||||||||
Balance
at December 31, 2009
|
- | $ | - | 23,348,655 | $ | 23,349 | - | - | $ | 31,367,243 | $ | (34,703,805 | ) | $ | ( 3,313,213 | ) |
See
accompanying Notes to the Consolidated Financial Statements
F-4
SOMERSET
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(SEE NOTE
1B – BASIS OF PRESENTATION)
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
Cash
Flows From Operating Activities:
|
2009
|
2008
|
||||||
Net
Loss
|
$ | (1,653,834 | ) | $ | (2,007,719 | ) | ||
Adjustments
to reconcile net loss to
|
||||||||
net
cash used in operating activities:
|
||||||||
Depreciation
|
49,595 | 37,918 | ||||||
Amortization
|
746,214 | 831,200 | ||||||
Gain
on sale of equipment
|
-- | (2,500 | ) | |||||
Stock
issued for services
|
-- | 12,250 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
72,685 | 305,944 | ||||||
Inventories
|
(127,223 | ) | 84,551 | |||||
Prepaid
expense
|
(79,999 | ) | 4,773 | |||||
Other
current assets
|
179 | 10,395 | ||||||
Deposits
|
2,705 | -- | ||||||
Accounts
payable and accrued expenses
|
418,747 | 517,677 | ||||||
Accrued
interest payable
|
514,425 | 80,890 | ||||||
Deferred
revenue
|
1,825 | (42,830 | ) | |||||
Net
Cash Used in Operating Activities
|
(54,681 | ) | (167,451 | ) | ||||
Cash
Flows From Investing Activities:
|
||||||||
Purchase
of equipment
|
-- | (19,830 | ) | |||||
Proceeds
from sale of fixed assets
|
-- | 26,300 | ||||||
Net
Cash Provided by (Used in) Investing Activities
|
-- | 6,470 | ||||||
Cash
Flows From Financing Activities:
|
||||||||
Payment
of Dutchess debentures
|
-- | (206,000 | ) | |||||
Proceeds
from issuance of notes payable
|
80,000 | 200,000 | ||||||
Payment
of seller note
|
-- | (104,165 | ) | |||||
Payment
of promissory notes
|
(47,418 | ) | (13,232 | ) | ||||
Payment
of stockholder note payable
|
-- | -- | ||||||
Net
Cash Provided by (Used in ) Financing Activities
|
32,582 | (123,397 | ) | |||||
Net
Change in Cash and Cash Equivalents
|
(22,099 | ) | (284,378 | ) | ||||
Cash
at Beginning of the Year
|
65,732 | 350,110 | ||||||
Cash
at End of the Year
|
$ | 43,633 | $ | 65,732 | ||||
Cash
paid for:
|
||||||||
Interest
|
$ | 158,856 | $ | 574,878 | ||||
Income
Taxes
|
$ | 7,942 | $ | 19,004 | ||||
Non
Cash Investing & Financing Activities:
|
||||||||
Promissory
note incurred upon acquisition of equipment
|
$ | 61,339 | $ | 80,430 | ||||
Stock
issued in conjunction with issuance of notes payable
|
$ | 450 | $ | -- |
See
accompanying Notes to the Consolidated Financial Statements
F-5
Note
1. Business and Basis of Presentation
A. Nature of the
Business
Somerset International Group, Inc. (the
“Company”) is in the business of acquiring profitable or near term profitable
private small and medium sized businesses that provide proprietary security
products and solutions for people and enterprises – from personal safety to
information security – and maximizing the profitability of our acquired entities
and to act as a holding company for such entities. On July 7, 2004, we entered
into a Plan and Agreement of Merger with Secure Systems, Inc., a New Jersey
corporation, which provides wireless security products and services marketed
throughout the United States.
Our executive office is located at 90
Washington Valley Road, Bedminster, New Jersey, 07921.
Customers are located primarily in the
northeastern United States.
B. Basis of
Presentation
The unaudited consolidated financial
statements included herein have not been audited by the Company’s independent
registered accounting firm. Therefore, these statements have not been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. The accompanying unaudited consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America, which contemplate continuation of the
Company as a going concern. This contemplates the realization of
assets and the liquidation of liabilities in the normal course of business.
Currently, the Company does not have significant cash or other material assets,
nor does it have operations or a source of revenue which is adequate to cover
its administrative costs for a period in excess of one year and allow it to
continue as a going concern. This contemplates the realization of
assets and the liquidation of liabilities in the normal course of business.
Management is actively involved in exploring business opportunities which they
believe will allow the Company to increase shareholder’s value and allow it to
continue as a going concern. In order to continue operations, the
Company requires additional capital infusions to acquire or develop business
opportunities. Management continues to search out financing
opportunities to finance its operations. If management is unsuccessful in this
regard, they would seek to sell or dissolve the Company. The Company
had net losses for the years ended December 31, 2009 and 2008 of approximately
$1,654,000 and $2,008,000, respectively, and had an accumulated deficit of
approximately $34,700,000 and a stockholders’ deficit of approximately
$3,313,000 as of December 31, 2009. The Company also utilized net
cash in operating activities of approximately $54,700 in 2009. In addition at
December 31, 2009, the Company has a working capital deficit of approximately
$6,789,000. The Company will require financing to fund its current operations
and will require additional financing to acquire or develop other business
opportunities. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
F-6
Note
2. Significant Accounting Policies
A.
|
Cash and cash
equivalents
|
Cash and cash equivalents include
cash on hand and in the bank, as well as all short-term securities held for the
primary purpose of general liquidity. Such securities normally mature
within three months from the date of acquisition.
B.
|
Accounts
Receivables
|
Accounts receivables are
uncollateralized customer obligations due under normal trade terms requiring
payment within 30 days from the invoice date. Accounts receivables
are stated at the amount billed to the customer. Interest is not
billed or accrued. Accounts receivables in excess of 90 days old are
considered delinquent. Payments to accounts receivables are allocated
to the specific invoices identified on the customers remittance advice or, if
unspecified, are applied to the oldest invoice. The Company has an
allowance for doubtful accounts of approximately $31,000 and $41,000 as of
December 31, 2009 and 2008, respectively, based on its historical
collectability.
C.
|
Property
and Equipment
|
Property, equipment, and leasehold
improvements are stated at cost. Depreciation is provided on a
straight-line method over the estimated useful lives of the assets ranging from
two-seven years. Leasehold improvements are depreciated over the
lesser of their useful lives or the term of the lease. Expenditures
for maintenance and repairs are charged to expense as incurred.
D.
|
Concentration of
Credit Risk:
|
The Company maintains its cash in bank
deposit accounts at high credit quality financial institutions. The
balances, at times, may exceed federally insured limits.
Currently,
Secure System, Inc. has five customers which accounted for all of their
revenues. Meadowlands has approximately 200 active accounts and Fire Control has
approximately 150 active accounts which accounted for all of their
revenues. While our goal is to diversify Secure’s and Fire Control’s
customer base, Secure expects to continue to depend upon a relatively small
number of customers for a significant percentage of its revenues for the
foreseeable future. Significant reductions in sales to any of our customers may
have a material adverse effect on us by reducing our revenues and our gross
margins.
E.
|
Use of
Estimates:
|
The preparation of financial statements
in conformity with United States generally accepted accounting principles
requires management to make estimates and assumptions that affect certain
reported amounts and disclosures including the disclosure of contingent assets
and liabilities. Accordingly, actual results could differ from those
estimates. Most critical are the fair value estimates related to the
net tangible and identifiable assets of acquired companies, as well as customer
lists and the estimated fair value of reporting units used when evaluating
Goodwill for impairment.
F.
|
Income
Taxes:
|
The Company files tax returns in the
U.S. federal jurisdiction and various states. The Company has no open
years prior to 2006.
F-7
The
Company adopted the accounting pronouncement dealing with uncertain tax
positions as of January 1, 2009. Upon adoption of this accounting
pronouncement, the Company had no unrecognized tax
benefits. Furthermore, the Company had no unrecognized tax benefits
at December 31, 2009.
Deferred income tax assets and
liabilities are recognized for the differences between financial and income tax
reporting basis of assets and liabilities based on enacted tax rates and laws.
The deferred income tax provision or benefit generally reflects the net change
in deferred income tax assets and liabilities during the year. The current
income tax provision reflects the tax consequences of revenues and expenses
currently taxable or deductible on the Company’s various income tax returns for
the year reported. The Company’s deferred tax items are net operating loss
carryforwards, other items, and related deferred tax assets and have been offset
by a valuation allowance for the same amount.
G.
|
Fair Value of
Financial Instruments:
|
The carrying amounts of cash, accounts
receivable, accounts payable, promissory notes payable, and stockholder note
payable approximate fair value because of the terms of these financial
instruments.
H.
|
Principles of
Consolidation:
|
The consolidated financial statements
include the operations of Somerset International Group, Inc., its wholly owned
subsidiaries Fire Control Electrical Systems, Inc. and Secure System, Inc., and
Secure System Inc.’s wholly owned subsidiaries Meadowlands Electronics Inc., and
Vanwell Electronics Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation.
I.
|
Reclassifications:
|
Certain reclassifications were made to
the 2008 financial statements in order to conform to the 2009 financial
statement presentation. Such reclassifications had no effect on
2008’s reported net loss.
J.
|
Stock Based
Compensation and Stock
Sales:
|
Stock and warrants issued for employee
compensation services have been determined based on the value of the instrument
issued at date of issuance for such services. In addition, during
2009 and 2008 the Company issued warrants as part of certain sales of common
stock. The value of these warrants has been included in additional
paid in capital as part of the value of the overall stock sale.
K.
|
Revenue
Recognition:
|
Installation, subscription and
maintenance revenues include installation of equipment and testing at customer
sites, fees for leased wireless equipment, and fees for equipment maintenance.
These revenues are recognized as the services are performed, or ratably over
time in the case of fees that may be billed quarterly or semi-annually in
advance. Revenues related to pre-billed services are deferred until the service
is provided and thereby earned. Equipment revenue is recognized when the
equipment is delivered to the customer. The Company recognizes revenue only when
persuasive evidence of an arrangement exists, when delivery of merchandise has
occurred or services have been rendered, the fee is established and is
determinable and collection is reasonably assured.
F-8
The
Company has three separate and distinct revenue streams – equipment sales,
installation and maintenance.
The
description of each stream is as follows:
·
|
Equipment:
|
The
pricing for an equipment sale is generally established through a customer
purchase order and is a separate stand-alone arrangement. Revenue is
recognized for equipment sales upon the delivery of the equipment, which is the
date on which customer becomes responsible for the payment of the
equipment.
·
|
Installation:
|
Installation
services are a separate stand-alone arrangement consisting of final connections
of the equipment and individual testing of the equipment pieces. Such
services occur after electrical work has been contracted and supervised by the
customer, and completed by an outside third party. Installation
services, when performed by the Company, are separately negotiated with the
customer, and are recognized upon completion of the service by the
Company.
·
|
Maintenance:
|
These are
separately priced contracts that are entered into with a customer typically
after the installation services are performed. Maintenance services
are not bundled into any other service. These maintenance services
are recognized as revenues as the services are performed. These
services are billed at the end of the month after the service is provided or if
provided through a contractual arrangement then pre-billed for the defined
periods, i.e. quarterly, semi-annual, or annual. Deferred Revenue on the
Company’s balance sheet represents amounts billed to customers for maintenance
to be performed in future periods.
L.
|
Inventory:
|
Inventory consists primarily of parts
and work in process products held for sale. Inventory, at year end, is stated at
the lower of cost or market, with cost being determined on a first in/first out
basis.
F-9
M.
|
Loss Per
Share:
|
The Company computes net loss per share
in accordance with Professional Standards and utilizes guidance provided by SEC
Staff Accounting Bulletin No. 98 (SAB 98). Under these provisions basic loss per
share is computed by dividing the Company’s net loss for the period by the
weighted-average number of shares of common stock outstanding during the period.
Diluted net loss per share excludes potential common shares if the effect is
anti-dilutive. Diluted earnings per share are determined in the same manner as
basic earnings per share except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock method.
As the Company had a net loss, the impact of the assumed exercise of the stock
options and warrants is anti-dilutive and as such, these amounts have been
excluded from the calculation of diluted loss per share. For the periods ended
December 31, 2009 and 2008, 4,208,505 and 3,859,314 of common stock equivalent
shares were excluded from the computation of diluted net loss per share after
considering ownership limitations of certain warrants and conversion
features.
N.
|
Advertising
Costs:
|
Advertising costs are treated as period
costs and expenses as incurred. During the years ended December 31,
2009 and 2008 advertising costs totaled approximately $6,832 and $69,996,
respectively, and are included in operating expenses in the accompanying
consolidated statements of income.
O.
|
Goodwill and
Intangible Assets:
|
Goodwill and intangible assets result
primarily from acquisitions accounted for under the purchase method. In
accordance with Professional Standards, goodwill and intangible assets with
indefinite lives are not amortized but are subject to impairment by applying a
fair value based test. Intangible assets with finite useful lives related to
software, customer lists, covenant not to compete and other intangibles are
being amortized on a straight-line basis over the estimated useful life of the
related asset, generally three to seven years. As of December 31,
2009, no impairment charge was necessary.
In accordance with Professional
Standards, the Company reviews the carrying value of goodwill and intangible
assets with indefinite lives annually or on an interim basis in certain
circumstances as required. The Company measures impairment losses by comparing
carrying value to fair value. The impairment test compares the carrying amount
of the reporting unit to its fair value. Discounted cash flows are
utilized to determine the fair value of the assets being
evaluated. The impairment test in 2009 and 2008 supported the
carrying value of goodwill, and as such, no write-down in the carrying value of
goodwill was recorded.
In accordance with Professional
Standards, long-lived assets used in operations are reviewed for impairment
whenever events or change circumstances indicate that carrying amounts may not
be recoverable. For long-1ived assets to be held used, the Company recognizes an
impairment loss only if its carrying amount is not recoverable through its
undiscounted cash flows and measures the impairment loss based on the difference
between carrying amount and fair value.
Note
3. Recent Accounting Pronouncements
In January 2010, the Financial
Accounting Standards Board (FASB) issued Update 2010-06, "Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about
Fair Value Measurements", which is effective for annual reporting periods
beginning after December 15, 2009 except for the disclosures about purchases,
sales, issuance and settlements in the rollforward of activity in Level 3 fair
value measurements which are effective for fiscal years beginning after December
15, 2010. This update modifies current professional standards to
require certain disclosures as follows:
F-10
|
The
amounts of significant transfers in and out of Level 1 and 2 fair value
measurements and the reasons for those
transfers.
|
|
Information
in the reconciliation of fair value measurements using significant
unobservable inputs (Level 3) about purchases, sales, issuance and
settlements (that is, on a gross basis rather than as one net
number).
|
|
Fair
value measurement disclosures for each class of assets and
liabilities.
|
|
Description
of valuation techniques and inputs used to measure fair value for both
recurring and non recurring fair value measurements that fall into either
Level 2 or Level 3.
|
|
In October 2009, FASB issued Update No.
2009-13, "Revenue Recognition: Multiple-Deliverable Revenue Arrangements which
is effective for fiscal years beginning on or after June 15, 2010 which requires
certain disclosures regarding multiple deliverable revenue arrangements as well
as addressing the accounting for multiple deliverable arrangements to enable
reporting entities to account for product and services separately rather than a
combined unit. The Company is currently evaluating the impact of this
pronouncement.
In October 2009, FASB issued Update No.
2009-14, "Software: Certain Revenue Arrangements That Include Software
Elements”, which is effective prospectively for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15,
2010. The update impacts the recognition of revenue arrangements that
include both tangible products and software elements and related
disclosures. The Company is currently evaluating the impact of this
pronouncement.
In October 2009, FASB issued Update No.
2009-15, "Accounting for Own-Share Lending Arrangements in Contemplation of
Convertible Debt Issuance or Other Financing”, which amends current professional
standards regarding share-lending arrangements that have been terminated as a
result of counterparty default prior to December 15, 2009. The
Company is currently evaluating the impact of this pronouncement.
Note
4. Inventory
Inventory
consists of the following at December 31, 2009:
2009
|
2008
|
|||||||
Raw
materials
|
$ | 429,978 | $ | 398,468 | ||||
Work
in progress
|
116,553 | 81,188 | ||||||
Finished
goods
|
68,848 | 8,500 | ||||||
Total
|
$ | 615,379 | $ | 488,156 |
F-11
Note
5. Property, Equipment, and Leasehold Improvements
2009
|
2008
|
|||||||
Equipment
|
$ | 311,490 | $ | 309,034 | ||||
Furniture
|
97,203 | 97,203 | ||||||
Leasehold
Improvements
|
69,108 | 69,108 | ||||||
Vehicles
|
488,676 | 428,353 | ||||||
Total
|
966,477 | 903,699 | ||||||
Accumulated
Depreciation
|
(838,860 | ) | (787,826 | ) | ||||
Property,
Equipment, and Leasehold Improvements, net
|
$ | 127,617 | $ | 115,873 |
Depreciation
expense for the years ended December 31, 2009 and 2008 was $45,595 and $37,918,
respectively.
Note
6. Promissory Notes Payable
The
Company’s debt obligations are comprised of Dutchess notes payable issued in
connection with the Company’s acquisitions of Vanwell and Meadowlands and their
acquisition of Fire Control and other various notes payable. All notes
past their respective payment due dates are in default. The following
is a summary of those obligations:
F-12
Various
Notes Payable:
Outstanding
balances on notes payable consist of the following at December 31:
2009
|
2008
|
|||||||
Note
issued in January 2004 with interest at 12% per annum, convertible at
$0.25 per share. Payment due date was extended to December 31,
2005.
|
$ | 175,000 | $ | 175,000 | ||||
Note
issued in June 2004 with interest at 12% per annum, convertible at $0.25
per share. Payment due date was extended to December 31, 2005.
[a]
|
100,000 | 100,000 | ||||||
Notes
issued in March 2005, with interest at 15% per annum, convertible at $0.15
per share. Payment due date was extended to December 31,
2005.
|
74,000 | 74,000 | ||||||
Note
issued in April 2005 with interest at 12% per annum, convertible at the
lesser of $0.15 per share. Payment due date was extended to December
31, 2005. [b]
|
20,000 | 20,000 | ||||||
June
2007, interest bearing short term note issued to the sellers in connection
Vanwell and Meadowlands acquisition, convertible into the Company’s common
stock at $0.40 per share.
|
20,833 | 20,833 | ||||||
September
2007, non-interest bearing short term note issued to the sellers in
connection Vanwell and Meadowlands acquisition.
|
355,000 | 355,000 | ||||||
Note
issued in August 2008, with interest at 15% per annum, convertible at $.25
per share. Payment due date is March 2009.
|
50,000 | 50,000 | ||||||
Note
issued in October 2008, with interest at 15% per annum, convertible at
$.25 per share. Payment due date is April 2009.
|
150,000 | 150,000 | ||||||
Note
issued in January 2009, with interest at 15% per annum, convertible at
$.25 per share. Payment due date is April
2009.[c]
|
30,000 | -- | ||||||
Note
issued in January 2009, with interest at 15% per annum, convertible at
$.25 per share. Payment due date is April 2009.
[d]
|
50,000 | -- | ||||||
10%
stockholder note payable, with monthly payments of $17,928. Payments
are in arrears.
|
388,528 | 388,528 | ||||||
Vehicle
Loans
|
79,656 | 67,699 | ||||||
Total
notes payable
|
1,493,017 | 1,401,060 | ||||||
Less
Current Portion
|
1,493,017 | 1,360,561 | ||||||
Long
Term Portion
|
$ | -- | $ | 40,499 |
[a]:
In connection with the June 2004 note, the Company issued 100,000 shares
of stock valued at approximately $15,000, which was recorded as a debt discount
paid and is amortizable over the life of the debt. Due to limitations on
conversion, debt discount related to the warrants and conversion feature is
insignificant to these financial statements.
[b]:
In connection with the April 2005 note, the Company issued 20,000 shares
of stock valued at approximately $6,000, which was recorded as a debt discount
paid and is amortizable over the life of the debt. Due to limitations on
conversion, debt discount related to the warrants and conversion feature is
insignificant to these financial statements.
[c]:
In connection with the January 2009 $30,000 note, the Company issued
15,000 shares of stock valued at approximately $450, which was recorded as a
debt discount paid and is amortizable over the life of the debt. Debt
discount related to the conversion feature is insignificant to these financial
statements.
[b]:
In connection with the January 2009 $50,000 note, the debt discount
related to the conversion feature and warrant issued is insignificant to these
financial statements.
F-13
Dutchess
Notes Payable:
Dutchess
notes payable consist of the following at December 31:
2009
|
2008
|
|||||||
June
2007 14% convertible note payable, as amended, with Dutchess Private
Equities Fund, Ltd., with payments as described below, convertible at the
lesser of $0.20 per share or 75% of the lowest closing bid price for the
previous 10 business days [a]
|
$ | 2,582,720 | $ | 2,581,207 | ||||
November
2007 14% convertible note payable, as amended, with Dutchess Private
Equities Fund, Ltd., with payments as described below, convertible at the
lesser of $0.10 per share or 75% of the lowest closing bid price for the
previous 10 business days [b]
|
1,293,200 | 1,350,000 | ||||||
Total
Dutchess notes payable
|
3,875,920 | 3,876,407 | ||||||
Less
Current Portion
|
3,875,920 | 1,023,000 | ||||||
Long
Term Portion
|
$ | -- | $ | 2,853,407 |
[a]:
In connection with the June 2007 note, the Company issued, as amended, a
5-year warrant to purchase 7,000,000 shares of stock with an exercise price of
$.05 per share. Deferred financing costs paid to Dutchess, amounting to $205,000
are amortizable over the life of the debt. Due to limitations on
conversion, debt discount related to the warrants and conversion feature is
insignificant to these financial statements.
[b]:
In connection with the November 2007 note, the Company issued a 5-year
warrant to purchase 5,000,000 shares of stock with an exercise price of $0.05
per share. Deferred financing costs paid to Dutchess, amounting to $150,000 are
amortizable over the life of the debt. Due to limitations on conversion,
debt discount related to the warrants and conversion feature is insignificant to
these financial statements.
On September 8, 2008, Somerset
International Group, Inc. (the “Company”) entered into an amendment to its
Debenture dated June 12, 2007 (the “June Debenture”) between Dutchess Private
Equities Fund, Ltd. (“Dutchess”) and the Company; and a debenture dated November
13, 2007 (the “November Debenture”) between Dutchess and the Company
(collectively, the Debenture”). Pursuant to the amendment, the
parties agreed to the following:
1.
|
The
Company shall pay interest at the rate of 14% per annum, compounded
daily, on the unpaid face amount of the debenture to
Dutchess with monthly interest payments at 12% of the
interest accrued on the principal balance of the a debenture from the last
interest payment until such time as the current interest payment is due
and payable and the remaining 2% of the interest due and payable upon
request from Dutchess or upon the maturity
date.
|
F-14
2.
|
The
Company warrants that no indebtedness of the Company is senior to the
Debenture in right of payment, whether with respect to interest,
damages or upon liquidation or dissolution or
otherwise.
|
3.
|
As
to the June Debenture, commencing on December 30, 2007, the
Company agreed to make the following monthly amortizing
payments:
|
·
|
December
30, 2007 – May 31, 2008 Fifteen thousand dollars
($15,000)/month
|
·
|
June
30, 2008 Thirty-five thousand dollars
($35,000)
|
·
|
July
31, 2008 Fifteen thousand dollars
($15,000)
|
·
|
August
31, 2008 – December 30, 2008 Two thousand dollars
($2,000)/month
|
·
|
January
31, 2009 – May 31, 2009 Forty-five thousand dollars
($45,000)/month
|
·
|
June
30, 2009 thereafter until the face amount is paid in full Seventy-five
thousand dollars ($75,000)/month
|
4.
|
As
to the November Debenture, commencing on December 30, 2007, the
Company shall make the following monthly amortizing
payments:
|
·
|
January
31, 2008 – July 31, 2008 Eight thousand dollars
($8,000)
|
·
|
August
31, 2008 – January 31, 2009 Three thousand dollars
($3,000)
|
·
|
February
28, 2009 – July 31, 2009 Twenty thousand dollars
($20,000)/month
|
·
|
August
31, 2009 – April 30, 2010 Thirty thousand dollars
($30,000)/month
|
·
|
May
31, 2010 thereafter until the face amount is paid in full Forty thousand
dollars ($40,000)/month
|
As additional consideration for
Dutchess to enter into this Amendment, the Company issued a warrant to Dutchess
to purchase up to 900,000 shares of the Company’s common stock with an exercise
price equal to par value. Dutchess’s ownership of the Company’s
shares is limited to 4.99% of shares issued and
outstanding. The fair value of these warrants is not material
to these financial statements. This warrant is not freely tradable by
Dutchess.
The Dutchess notes are securitized by
the assets of the company. Substantially all principal payments due
under the terms of the Dutchess Debentures during 2009 are in
arrears. Partial payments of interest on these debentures were made
during 2009 and through March 31, 2009. The failure to pay any
principal or interest due under these debentures within ten days of the due date
is considered an “event of default”. As such, the entire balance of
principal and interest on The Dutchess Notes are payable on demand.
Note
7. Preferred Stock
The preferred stock of the Company has
a par value of $.001 per share and 100,000,000 shares have been authorized to be
issued. No shares of preferred stock were issued or outstanding at December 31,
2009 and 2008. On September 28, 2007, in accordance with the terms of
the Series A Preferred Stock, all of the holders of preferred stock converted
such stock to common stock.
F-15
Our
Board of Directors has the authority, without further action by the
shareholders, to issue from time to time the preferred stock in one or more
series for such consideration and with such relative rights, privileges,
preferences and restrictions that the Board may determine. The preferences,
powers, rights and restrictions of different series of preferred stock may
differ with respect to dividend rates, amounts payable on liquidation, voting
rights, conversion rights, redemption provisions, sinking fund provisions and
purchase funds and other matters. The issuance of preferred stock could
adversely affect the voting power or other rights of the holders of common
stock.
Note 8.
Related Party Transactions
The balance of the stockholder note
payable was $388,528 both at December 31, 2009 and 2008. The original
stockholder note was partially repaid with a $150,000 payment on March 11, 2005
and monthly payments of $17,928 including annual interest at 10% beginning March
1, 2006 and ending July 1, 2009. Such payments are in arrears as of
December 31, 2009.
Note
9. Stockholders’ Equity (Deficit)
As of December 31, 2009, 200,000,000
shares of Common Stock are authorized, 23,348,655 shares of common stock issued
and outstanding, and held by 293 shareholders. There are also 13,100,000
warrants issued and outstanding. Holders of our common stock are
entitled to one vote for each share on all matters submitted to a stockholder
vote.
The following is a summary of warrants
outstanding at December 31, 2009:
Issue
Date
|
Expiration
Date
|
Number
of Shares of Common Stock
|
Price
|
Basis
for Warrant issuance
|
09/06/05
|
09/05/10
|
5,000
|
$0.20
|
Consulting
Services
|
09/06/05
|
09/05/10
|
5,000
|
$0.18
|
Consulting
Services
|
04/17/07
|
04/16/10
|
90,000
|
**
|
Stock
Purchase Agreement
|
06/15/07
|
06/14/12
|
7,000,000
|
$0.05
|
Convertible
Debenture
|
06/15/07
|
06/14/10
|
50,000
|
$0.12
|
Stock
Purchase Agreement
|
11/14/07
|
11/13/12
|
5,000,000
|
$0.05
|
Convertible
Debenture
|
09/08/08
|
09/07/13
|
900,000
|
$0.001
|
Amendment
to Convertible Debenture
|
01/26/09
|
01/25/12
|
50,000
|
$0.001
|
Convertible
Note
|
Total
|
13,100,000
|
** The
warrants are exercisable at $.30 if exercised within the twelve months from the
date of the warrant; $.40 if exercised within 12 months to 24 months from the
date of the warrant; and $.50 if exercised within 24 months to 36 months from
the date of the warrant.
As of December 31, 2009, intrinsic
value associated with outstanding warrants is not significant.
Holders of common stock do not have
cumulative voting rights. Therefore, holders of a majority of the
shares of common stock voting for the election of directors can elect all of the
directors. Holders of our common stock representing a majority of the voting
power of our capital stock issued and outstanding and entitled to vote,
represented in person or by proxy, are necessary to constitute a quorum at any
meeting of our stockholders. A vote by the holders of a majority of our
outstanding shares is required to effectuate certain fundamental corporate
changes such as liquidation, merger or an amendment to our Articles of
Incorporation.
F-16
In addition, we also have Class A
common stock, which has a par value of $.0035 per share and 12,000,000 shares
have been authorized to be issued. As of December 31, 2009, there are no shares
of Class A common stock issued and outstanding. Both common stock and Class A
common stock have the same voting rights.
The following is a summary of common
stock issued by the Company during 2009 and 2008:
Date
|
Shares
Issued
|
Consideration
|
Amount
|
|||
August
2008
|
25,000
at approximately $0.09 per share
|
Private
Placement
|
$ | 2,250 | ||
October
2008
|
75,000
at approximately $0.04 per share
|
Private
Placement
|
$ | 3,000 | ||
November
2008
|
175,000
at approximately $0.07 per share
|
Consulting
services
|
$ | 12,250 | ||
January
2009
|
15,000
at approximately $0.03 per share
|
Private
Placement
|
$ | 450 |
Note
10. Acquisition Agreements
None.
Note
11. Intangibles and Goodwill
Following is a summary of intangibles
subject to amortization at December 31, 2009:
Intangibles
subject to amortization:
|
Gross
Amount
|
Accumulated
Amortization
|
Net
|
|||||||||
Customer
Lists
|
$ | 2,805,700 | $ | 1,781,479 | $ | 1,024,221 | ||||||
Distribution
Agreements
|
165,505 | 165,505 | -- | |||||||||
$ | 2,971,205 | $ | 1,946,984 | $ | 1,024,221 |
Amortization expense related to these
assets for 2009 and 2008 was approximately $594,743 annually. Estimated
amortization expense for each of the ensuing years through December 31, 2012 is,
approximately, $594,743, $405,993, and $23,495.
F-17
The following table summarizes the
activity in goodwill for 2008 and 2009:
Beginning
balance 1/1/2008, net
|
$ | 2,200,355 | ||
2008
activity
|
0 | |||
Ending
balance 12/31/2008, net
|
$ | 2,200,355 | ||
2009
activity
|
0 | |||
Ending
balance 12/31/2009, net
|
$ | 2,200,355 |
The
Company’s annual impairment test indicated that no impairment had occurred in
2009 and 2008 relating to the Secure reporting unit.
Note
12. Commitments and Contingencies
The Company has entered into an
employment agreement with the President and CEO that became effective January 6,
2004. The employment agreement has a term of five years. In the event of
termination of employment without cause, the agreement provides that the Company
shall pay severance equaling the greater of the balance of the term of the
agreement or one year’s salary. On August 29, 2008, the Board of
Directors, with the approval of a majority of the shareholders of the Company
entered into an amendment to extend the employment agreement dated January 6,
2004 for an additional 3 years from January 6, 2009. On January 6,
2009, the President and CEO signed an additional agreement, in which he agreed
to permanently waive the fiscal 2009 salary increase provided for in his
employment agreement. The additional agreement is for the period of January 6,
2009 though January 5, 2010. On January 6, 2010, Mr. Adiletta signed
an additional agreement, in which he agreed to permanently waive the 2010 salary
increase provided for in his employment agreement. The additional agreement is
for the period of January 6, 2010 though January 5, 2011. The
President and CEO’s compensation for the year ended December 31, 2009 was
$366,000.
Secure leases its facility on a month
to month basis at a monthly rent of $4,821.
Meadowlands leased its facility through
a three year lease that terminated on February 28, 2009, at a monthly rent of
$3,450. Effective March 1, 2009, it relocated its facilities to those
occupied by Fire Control.
Fire
Control leases its facility through a three year lease that expires December 31,
2010 at a monthly rent of $4,800.
On
September 4, 2008, Keith Kesheneff and Kathryn Kesheneff filed suit in Superior
Court in New Jersey against the Company claiming that they are owed $355,000 for
a purchase price adjustment note issued by the Company. The Company
filed an answer, with counterclaims, on October 27, 2008, generally contesting
all claims. The parties recently agreed upon settlement
terms. A form of settlement agreement is being reviewed by
counsel.
On June
26, 2009, the Company filed suit in the United States District Court for the
District of New Jersey against TSG Capital Partners, LLC and others seeking to
recover $105,000 in financing fees paid by the Company, plus damages for fraud,
counsel fees, and interest. The Company has served its complaint and
is pursuing its claims.
On August
6, 2009, the holders of three promissory notes convertible into the Company’s
common stock obtained judgments against the Company in the Superior Court of New
Jersey totaling $157,636.31, plus costs of $720.00.
F-18
On
January 19, 2010, the holders of promissory note convertible into the Company’s
common stock filed suit against the Company demanding payment of the principal
amount of $175,000.00, plus accrued interest, and counsel fees. The
Company has retained counsel to respond to the litigation and to interpose such
defenses as are lawfully available.
Note
13. Income Taxes:
The reconciliation of income tax
expense computed at the U.S. federal statutory rate to the provision for income
taxes is as follows for the year ended December 31:
2009
|
2008
|
|||||||
Tax
Benefit at U.S. statutory rate
|
$ | (388,000 | ) | $ | (485,000 | ) | ||
Non
Deductible Expenses
|
-- | |||||||
Change
in valuation allowance
|
388,000 | 485,000 | ||||||
Provision
for income taxes
|
$ | -- | $ | -- |
Federal
net operating loss carryforwards
|
$ | 2,193,000 | $ | 1,805 ,000 | ||||
State
net operating loss carryforwards
|
480,000 | 394,000 | ||||||
Other
|
79,000 | 79,000 | ||||||
Valuation
allowance
|
(2,752,000 | ) | (2,278,000 | ) | ||||
Net
deferred tax asset
|
$ | -- | $ | -- |
The
Company has federal and state net operating loss carry forwards of approximately
$8,468,000 and $7,300,000, respectively. Such carryforwards expire at
various times through 2028 and may be limited due to ownership changes.
Such losses are limited to due to a change in control.
Note
14. Equity Incentive Plan
On August 29, 2008, the Board of
Directors, with the approval of a majority of the shareholders of the Company,
adopted the 2008 Equity Incentive Plan (the “Plan”) which will be administered
by a compensation committee (the “Committee”) appointed by the
Board.
The total
number of shares reserved and available for grant and issuance is 2,500,000
shares. The maximum number of shares granted to a participant may not
exceed 20% of the total shares subject to the Plan. Only directors,
officers, employees, consultants, and advisors of the Company and its
subsidiaries are eligible for awards under the Plan. Additionally,
the awards granted under the Plan may not be transferred or
assigned.
F-19
Options
may be granted to eligible persons, and the exercise period and price, as
defined in the Plan, shall be determined by the Committee. Share
limits and shares available under the Plan, outstanding awards, as well as the
prices of awards are subject to adjustment if certain events occur.
There
have been 175,000 shares issued under the Plan.
Note
15. Subsequent Events
The
Company has evaluated subsequent events through March 31, 2010 which is the date
these financial statements were issued, and has determined that there are no
events requiring recognition or disclosure in these financial
statements.
F-20