ECSI International, Inc. (EKCS)
2003 Interview with: Arthur Barchenko, President and CEO
Business News, Financial News, Stocks, Money & Investment Ideas, CEO Interview
and Information on their Infrared Perimeter Intrusion Detection (IPID®) system and Fiber Optic Intelligence Detection System (FOIDS®).

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ECSI International – with a very strong position in South East Asia, the Middle East and Central America is projecting growth in the US because of Homeland Security infrastructure requirements



Technology
Security Solutions Providers
(OTC: EKCS)

ECSI International, Inc.

790 Bloomfield Ave. – Bldg. C, Ste. 1
Clifton, NJ 07012
Phone: 973-574-8555



Arthur Barchenko
President and
Chief Executive Officer

Interview conducted by:
Lynn Fosse
Editor

CEOCFOinterviews.com
February 2003

Bio of CEO,
Arthur Barchenko CEO:
Arthur Barchenko has been our President and a Director since December 1976.  Mr. Barchencko founded ECSI International, Inc. in 1976, ECSI-SEM Consultants III in 1981, and ECSI-DSA in 1988.  He participates in the management of our subsidiaries and is responsible for all phases of products and system manufacturing, including production planning, quality control, organization and overall contract administration.  Mr. Barchenko’s professional affiliations include the American Society of Industrial Security (ASIS), the American Defense Preparedness Association (ADPA), the American Correctional Association (ACA), and the Institute of Nuclear Materials Management (INMM).  Mr. Barchenko has been cited as a contributing author for National Defense, Security Management, Airport Magazine, the Aviation Security Tech. Conference in Atlantic City, and Security Technology, among others.  He attended New York University and the New School for Social Research.

Company Profile:
 ECSI International, Inc. (Electronic Control Security, Inc.) (OTC BB: EKCS), a global leader in security and anti-terrorist systems, designs, manufactures and markets physical electronic security systems for high profile, high-threat environments. The employment of Risk, Threat and Vulnerability Assessment with Risk Analysis allows ECSI to determine and address the security needs of government installations, business organizations and corporate executives. The company has marketing agreements with GE FANUC, Dell, Visage and M3 Technologies.

Founded in 1976, ECSI has been controlling strategic, high profile sites with the most reliable, state-of-the-art sensor systems and a data communications network designed to support multi-technological requirements. The Company provides the highest quality and most technologically advanced equipment available for Perimeter Intrusion Detection, Video Assessment, Access Control, Communications and Data Communications

Network security. ECSI equipment is built for harsh weather conditions with low installation, operating and maintenance costs. In addition, their products provide low nuisance and false alarm rates.

ECSI International products include the Infrared Perimeter Intrusion Detection (IPID®) system and Fiber Optic Intelligence Detection System (FOIDS®). The IPID® system is comprised of pulsed infrared sensors that detect an intruder passing through its electronic beams and then pinpoint the exact zone of intrusion. FOIDS® is ECSI's Sagnac Interferometry technology. Both are in use at nuclear power generating facilities and government installations across the country.

Company Markets:
ECSI is a security solutions provider in the following markets: infrastructure, water, dams, DOD, NRC and DOE sites.  Completed projects include nuclear power generating facilities, the Strategic Petroleum Reserves, Military, Aviation, Maritime facilities, University, College, Corporate, Hospital Campuses, and large industrial petrochemical plants.

CEOCFOinterviews: Mr. Barchenko, please give us a brief history of ECSI International.

Mr. Barchenko: “When we started the company it was primarily a design and manufacturing firm for the correctional industry. We developed the specific systems that were correctional facility oriented and then completed a number of installations at major facilities for approximately five years. During that period, we developed certain technologies and realized that these technologies had broader applications than just the correctional market. We began to move away from the correctional market for various reasons but stayed with the product that was developed for that particular application.  That product evolved into a series of pulsed infrared detection systems that were used for perimeter security. The perimeter security system market became our target. For the past ten years we have been further developing the technologies required to address perimeter security and access control for both the government and private sectors.”

CEOCFOinterviews: What are the larger areas of concern in protecting a facility?

Mr. Barchenko: “Some of the larger concerns effect penetration of the outer perimeter in an undetected manner. The concern is to identify an attempted breach of a perimeter early enough so that the response team from within the facility can address the threat in a timely and effective manner.  Therefore, before you can really apply any technology whether it be pulsed infrared, fiber-optics, microwave or thermal detection with motion detection for redundancy, one must do a threat and vulnerability assessment of the site.

Once the threat and vulnerability assessment is completed, a risk mitigation analysis should be implemented in order to determine the value of the asset you are protecting and how many layers of protection are needed in order to secure that asset.  Once that is done you would select the technology that best fits the particular location and the particular facility as to the assets contained therein.  Another consideration is the environment in which the facility is located; if the site is located in a warm and humid climate or snow/ fog conditions prevail, these factors enter into the analysis.   

CEOCFOinterviews: Is cost the main factor in how many layers the company will use?

Mr. Barchenko: “I don’t think in today’s environment and especially since 9/11, that cost has been or should be the factor. It’s more important to have a perimeter system that is dependable, has a probability of detection in the 98.5 to 99% range, and has minimal nuisance and false alarms and one that the guard force can count on and have confidence in. One thing that is necessary with perimeter detection systems is to build confidence in the guard force. That is if an alarm should occur at the perimeter, the guard force will identify the alarm, the cause of the alarm and respond in a timely manner to prevent an intrusion by an individual or a group of individuals.

If one has a system based solely on cost, the chances are the system will not function as effectively and therefore create numerous nuisance and false alarms that result in the guard force losing confidence in the system. The guards will not address a true incursion when it occurs since they will treat it as a nuisance or false alarm. They become so accustomed to acknowledging and resetting the system without addressing the cause when a true breach occurs, the guards do not respond.

Today, systems are addressed more on a life-cycle basis.   Where certain systems may be less costly from an equipment standpoint, they usually prove more costly from an installation and maintenance standpoint. The installed system may be less expensive initially, but very costly over the life of the system which is normally seven to ten years. If you evaluate the price of the system over that period of time, your cost is much more realistic. One of the features of the products the company offers is our equipment has a ten year warranty, so if a component should fail, we will replace it at no charge.”

CEOCFOinterviews: Can you tell us about the new technology that you have licensed and how it will affect what you do?

Mr. Barchenko: “This new technology known as acoustic perimeter intrusion detection system, or APIDS, will enhance what we do. The sensor, developed by Penn State University, is an acoustic sensor and was developed for 1,500 to 2,000 ft. applications. Along the 1,500 to 2,000 ft. deployment, one could identify an intrusion within approximately thirty feet along the entire length of the perimeter. That particular sensor system, integrated properly with video for assessment purposes, will be a natural for very large perimeters such as airports, oil refineries, reservoirs and dam facilities.

This particular system can be deployed on almost any structurally sound fence, which is important in itself since the fence structure requires significant amount of physical improvement before mounting a sensor system. The other feature is that the APIDS cost of installation is significantly less than most other perimeter systems on the market today. We see it as complementing what we do and expanding our market into areas we wouldn’t have ordinarily been able to effectively address at reasonable cost.”

CEOCFOinterviews: Do you grow your product portfolio through R&D or acquisitions?

Mr. Barchenko: “Since ECSI is a small business with limited R&D resources, we have looked to other companies that have developed technology but were not able to effectively bring it to market. In the case of Penn State, they found us to be a solid company with whom they wanted to affiliate due to our reputation in the industry and the market acceptance we have as a company. Some of the technology we acquired, for example, the fiber-optics sensor systems, was purchased from Mason & Hanger, a company that was primarily in the management and operations end of the business.  Mason and Hanger developed the technology to the point where they were satisfied with its marketability but then determined they should stick to their core business and decided to sell the fiber-optic sensor system division.

CEOCFOinterviews: Was it just technology that you acquired?

Mr. Barchenko: “We acquired the entire division.  The people who operated the facility remained and, for the past four years, we have been successful in growing the fiber-optics sensor market and as a product line for our company. Penn State, on the other hand, has developed APIDS as a laboratory concept and came to us to finalize the development and bring it to market. We are always looking for new technology. At times we develop it internally, other times we find people that have developed it but are unable to bring it to bring it to market. If they do not have the manufacturing facilities, we are a perfect fit. We pay the company or university for the licensing and manufacturing rights and then we introduce it and market it on an international basis.”

CEOCFOinterviews: What is you sales and marketing model?

Mr. Barchenko: “There are a number of levels we work at. The first is through professional sales and representation. Our own national sales manager and international sales manager create market acceptance and market demand with the end user, be it a government agency or large corporation. After the market acceptance and demand develops, the end-user usually has a dealer-installer or systems integrator bid on the project.  We then submit proposals to these people.  The next step is to supply the equipment including soft services in support of the installation process.   These dealer-installers are our customers; we train the personnel on how to install the product and they sell it to the end-user and maintain it after installation.

We also have a corporate account manager who develops teaming relationships with large corporate entities working for the government. They become our customers and, in turn, sell products and services to government agencies. That is our marketing approach.  We also spend a considerable amount of time at the major trade shows and following up the leads that are obtained from those trade shows. Through advertising we receive any number of inquiries.   They are classified and then distributed to our sales reps who follow up with the inquirer and personally present our products. That is basically the method we use for successfully reaching out to the target markets which we have determined fit our mission.”

CEOCFOinterviews: Is each installation customized?

Mr. Barchenko: “In most cases the people operating the facility do not know exactly what the requirement is or how the problem should be addressed. Therefore, we are usually asked to come in and work with the security consultant or security director.  ECSI works with the professionals to do a site survey, prepare a conceptual solution and submit a budget for a basic and alternate approach for solving the threat at the site. This takes a period of time and a significant amount of effort on our part as well as the consultant and end user consultant. Once the team evaluates the threat, mitigates the risk, applies the technology, works out an arrangement to meet the owner’s budget as well as the consultants’ requirements, we then supply the technology to meet the site installation requirements.  In most cases we insist on supplying the supervision, commissioning, testing of the system and training of the personnel to operate and maintain the system to ensure the end-user will be satisfied with the equipment and its performance.  Success is based on the customer’s complete satisfaction.”

CEOCFOinterviews: How has 9/11 impacted business?

Mr. Barchenko: “9/11 was horrific for everyone worldwide. As far as the security industry goes, it presents complex challenges. The last year and-a-half has been very active from the standpoint of threat assessments and setting up programs for the various industrial and infrastructure concerns of corporate America and the government. However, there has been a limited amount of funding released to address and implement these security programs. We are hoping that the latter part of fiscal 2003, and certainly 2004, will see those funds released and flowing into the industry so both the government and the private sector can actually implement the security programs required.  The target markets we have chosen are a country’s infrastructure such as airports, marine terminals, and energy and water resources. That is one of the reasons we are excited about the Penn State acoustic perimeter intrusion detection system, as most of these applications are very large area perimeters.”

CEOCFOinterviews: What are the concerns and your efforts with state run airports?

Mr. Barchenko: “In the past we have installed a system or two at a particular terminal within the airport.  Now, our current mission statement has to do with creating a comprehensive security envelope for an entire airport, and not just selling a product. We found at present, the States have been more concerned with product purchase and product application than a so-called “total solution” for an airport environment.  Since 9/11 funds have been spent on the installation of explosive-detection and x-ray systems. There has been very little discussion addressing perimeter security, personnel security, or how to address a threat if an explosive devise is detected. One has to be concerned about the outer perimeter, employer access control, passenger and baggage verification, explosive containment and disposal, support service groups such as food and fuel suppliers, cleaning personnel, etc.  All of these issues need to be addressed in order to secure an airport.

Our proposal is all inclusive:  we submit a solution of the technologies that will address all of these concerns from the outer perimeter, access control, background checks of individuals working at the airport, matching baggage to passenger, making sure the passenger who checks in is the passenger who passes through the x-ray screening and metal detection and ultimately boards the aircraft.  The total program we have developed incorporates access control, facial recognition, retina scan, personnel detection and background checks, explosive detection, containment and disposal etc. in order to secure an airport. The other area we are focusing on is cargo inspection, which is one of the threats that must be addressed.  Right now cargo is not screened as well as it should be before loading onto the aircraft.  We are addressing this critical area by a teaming agreement with a company called HAZ-X Holdings, Ltd. Of Belize, who do port and cargo inspection. As a team, we supply the security and they supply the cargo inspection equipment.”

CEOCFOinterviews: Are you finding more interest in your products and services in the United States or abroad?

Mr. Barchenko: “Interesting question.  We find that the airports that are paying attention to a total solution are outside the country. We are looking forward to enjoying significant growth for the company in the overseas market during 2003-2004. We hope that the total solution concept and growth in the United States will catch up in the latter part of 2004-2005.”

CEOCFOinterviews: Is it difficult finding the right people to represent the company and to do the work needed as you have been building up in the last couple of years?

Mr. Barchenko: “The industry does not have a college or university program.  We have the American Society of Industrial Security that offers programs for the training of personnel and the various aspects of security. We find it very difficult to find competent professional marketing and sales personnel. Therefore, most of our people have been trained internally.   They almost always come from within the industry, as a former security consultant/integrator or installer with some basic knowledge of the industry. We take it upon ourselves to educate and train our own people.  It is very seldom we bring someone in from the outside who does not have a sound industry background.

CEOCFOinterviews: How do you generate most of your sales and do you have recurring revenues through upgrades as part of your model?

Mr. Barchenko: “The majority of all work in the past has been outright sales and, yes, we are constantly upgrading the technology. We offer those upgrades to our customers. However, our mission right now is to develop recurring revenue and, therefore, the major programs we are offering will include: design, build, install, lease and maintain for five, seven or ten years. During this period we will guarantee to upgrade the equipment to the latest state-of-the-art during the lease/purchase program. At the end of the lease, the owner will have the option to purchase the system for one dollar and renew our maintenance program or not purchase the equipment and just continue the upgrades and the maintenance going forward.”

CEOCFOinterviews: That sounds like a good thing for them and a good thing for you!

Mr. Barchenko: “Yes, we call it a ‘government private partnership’.”

CEOCFOinterviews: Do you have much competition and why are so many people coming to you for your services?

Mr. Barchenko: “There is a great deal of competition; it has been a fragmented industry, made up of many small single technology companies. In the past five years or so and particularly since 9/11, the larger companies have been acquiring the smaller companies and creating so-called “Homeland Defense Groups.” Those companies such as G.E. (General Electric Company – NYSE: GE), set up their own security group after they were unable to acquire Honeywell International, Inc. (NYSE: HON). AlliedSignal acquired and became Honeywell; Lockheed Martin Corporation (NYSE: LMT) has been acquiring many small companies, as has Northrop Grumman Corp. (NYSE: NOC). We look to work with these larger corporations and we do on certain projects.

People in the Department of Defense, Department of Energy, and Nuclear Regulatory Commission, come to us because we have been working at their facilities for twenty years and are highly regarded. Our customers know they come first.  If there is a problem, we address it and worry about fault later. When a customer requires support, our people are on the ground within twenty-four to forty-eight hours. They recommend us again and again on new projects, such as the strategic petroleum reserves for example.  We have been working at their site since The Boeing Company (NYSE: BA) managed the reserves about twelve or fourteen years ago. We are constantly working with Strategic Petroleum Reserves on upgrading their security and within the past year and-a-half, they have asked us to supply the second layer of security, which totals approximately $1.5 million and is now about 90% complete. We were selected based on our previous service and support as well as recommendations from their employees and professionals.”

CEOCFOinterviews: Are there any patents or proprietary technology or is it simply the ability to put it together well?

Mr. Barchenko: “It is a combination. We have patents and the knowledge of how to apply that technology so that it can effectively operate at a given site. You mentioned earlier that each job was a custom application and you are correct. The greatest strength of our company and the focus that we have had for the last ten to fifteen years has been to develop a standard off-the-shelf product that could be inventoried in a sub-assembly and component state. It would then be custom configured to meet the specific sites requirements. Therefore, we are able to turn that project very quickly.  We are able to respond to an inquiry and a purchase order and then deliver in a relatively short period of time by using all standard components and custom configuring the sensors to adapt to that specific site’s requirement.”

CEOCFOinterviews: Will you tell us a bit about the cash and credit position of the company?

Mr. Barchenko: “The cash position could be better than it is right now because we currently have a lot of money tied up in inventory. Inventory build-up has been required to address the projected in-coming orders. The orders that were projected to be released have been slower than anticipated. Therefore, we probably have inventory of $750,000 - $1,000,000 more than we should. We expect to be able to ship this material during the next twelve months which will relieve some of the cash pressures we have at this time. As far as the finances go, we completed a $2 million private placement about a year ago and invested that money to strengthen our marketing, design engineering and software programming group, as well as building the necessary inventory required for the projects we have committed and anticipate being released in the months ahead.”

CEOCFOinterviews: In closing, what would you like to say to your shareholders and potential investors?

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