In The Boardroom With...

Mr. Gary Vassalotti
President
VIMCOR

SecurityStockWatch.com: Thank you for joining us today, Gary. Please give us an overview of your background.

Gary Vassalotti: I started as an Equity Analyst and Portfolio Manager with First American Bankshares in Washington, DC, following several market sectors and countries. I was responsible for Capital Goods, Technology, Defense, Utilities, parts of Mexico, Spain, Italy. First American was subsequently purchased by First Union (now Wachovia), where I continued in my role as an Equity Analyst.

While working as an analyst for the banks, I participated in special projects that gave me programming knowledge and a better insight into the Technology and Defense Industries.

SecurityStockWatch.com: We understand that you have recently prepared for Investrend Research the "Homeland Security Sector Report" for First Quarter 2007. One of the key sections includes an extensive analysis of the 2007 budget vs.. the 2008 Budget. What are major budget changes that you see ahead? Click here for your free copy of the 55 page Homeland Security Sector Report for First Quarter 2007.

Gary Vassalotti: I did compare the prior budgets to the current budget for 2007. By looking at the budget increase each agency experiences, it may be possible to divine industries that would benefit from the changes. With the news about border security and fencing, it is not surprising to see a large budget increase for the US Customs & Border Protection Division with a 31% revenue growth.

With an ever increasing scrutiny of who and what enters US ports, I see a continued emphasis on the US Customs & Border Protection as well as US Citizenship and Immigration Services (budget increased 29%).

SecurityStockWatch.com: There has been some consolidation in the security industry - who are the major players at this time?

Gary Vassalotti: Major players in the industry include the defense industry; the goals and the technology are similar. So, with that in mind, investors should look at Honeywell (NYSE: HON - security equipment) Siemens (NYSE: SI - fire monitoring, systems integration), General Electric (NYSE: GE - security equipment and services), Ingersoll Rand (NYSE: IR - systems services and integration) United Technologies (NYSE: UTX - monitoring, guard services), Tyco (NYSE: TYC - through ADT, its home security segment) Marsh McLennan (NYSE: MMC - through its acquisition of Kroll O’gara), Stanley Works (NYSE: SWK - systems integration and services), and Diebold (NYSE: DBD - systems services and integration).

SecurityStockWatch.com: The War on Terror surges on - what is your perspective of the market drivers for the security industry?

Gary Vassalotti: The major driver in the past, and the foreseeable future is security in the travel industry. That is, not only security for passengers on the airlines and the aircraft themselves, but security in individual travel in that who is permitted access to the country. During the past year we have seen the problems that have arisen with passports. They are trying to make the passports more secure and less prone to counterfeiting by implanting an RFID chip into the document. Companies that provide technology to secure ports, documents, cargo, and transport systems should continue to see a strong market for their products.

SecurityStockWatch.com: What's the status in your opinion of attaining a secure, verifiable, travel document in the near future? Are we making progress?

Gary Vassalotti: As I mentioned in the previous answer, the government is attempting to secure the passport documents with RFID chips. There has been some question as to the security of these chips and the ability to read them with upgraded readers from a distance. The chip data should have the ability to be encrypted, that should add a layer of protection. If this is done, then passports should be much harder to counterfeit.

SecurityStockWatch.com: Chemical facilities throughout the U.S. seem to be quite vulnerable - what's being done to improve security at those facilities?

Gary Vassalotti: Not much is heard about scrutinizing these facilities... I believe the lack of blatant news may be an attempt to not draw attention to the situation. There have been some news from security companies about how they may have won some contracts to provide security devices to these facilities. But, there is a lot that is left to be done. Historically, we have not had to harden civilian facilities against attack, and they have been built relatively close to large population centers and transportation hubs. The technology to secure them is becoming more reliable and plentiful, but there remains a lot of work to be done.

This, of course, should provide market potential for companies that service this arena.

SecurityStockWatch.com: Please tell us about the HSX. Which companies comprise this Homeland Security Index and how has it performed vs. the major indexes?

Gary Vassalotti: The HSX is an industry index developed jointly Cronus Capital Markets and The International Securities Exchange (ISE). The index contains 30 companies selected from small, mid, and large capitalization US companies, with no company making up more than 25% of the index. This index does try to exclude defense contractors and other large conglomerates so that it can concentrate on firms that are predominately 'Homeland Security' focused.

The table below shows the makeup of the index, and the companies weighting in the index:

With the growth of this market segment, and the focus that has been put on it by investors, the index has done well compared to the broader market indexes. To determine a projected change in the index, I take each of the component companies and run them independently through my valuation model. Then I weight this 12-18month expected return by the respective companies weight in the index.

My valuation model is a ‘relative’ model. It utilizes some historical price ratios, some estimated ratios, with some of the ratios relative to the broader market indexes. Utilizing this model, and weighting the individual expected returns, I obtained an implied 12-18 month expected return of 5.16%. This valuation should be viewed in context of the broader market indexes, and not as an absolute expected change. The updated expected return reflects the increase in value of the HSX. The prior expected return was a little over 16%.