SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1998
Commission File Number: 1-13427
STRATESEC INCORPORATED
(formerly Securacom, Incorporated)
State of Incorporation: Delaware I.R.S. Employer I.D.: 22-2817302
105 Carpenter Drive
Sterling, Virginia 20164
(703) 709-8686
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 twelve months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No
There were 6,103,522 shares of Common Stock, par value $0.01 per share,
outstanding at May 13, 1998.
<PAGE>
STRATESEC INCORPORATED
Quarter ended March 31, 1998
Index
- --------------------------------------------------------------------------------
Page
Part I. Financial information
Item 1. Financial Statements........................................... 3
Balance Sheets as of December 31, 1997 and March 31, 1998
(unaudited).......................................................... 3
Statements of Operations for the three months ended
March 31, 1997 and 1998 (unaudited).................................. 4
Statements of Cash Flows for the three months ended
March 31, 1997 and 1998 (unaudited).................................. 5
Notes to Financial Statements........................................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 8
Part II. Other information
Item 2. Changes in Securities and Use of Proceeds...................... 11
Item 6. Exhibits and Reports on Form 8-K.............................. 11
Signature............................................................... 12
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STRATESEC INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1997* 1998
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................. $ 998,312 $ 412,461
Cash-restricted............................................................ 2,063,539 2,063,539
Accounts receivable, net of allowance for doubtful
accounts of $49,000 in 1997 and 1998..................................... 3,330,542 2,355,265
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................................... 2,108,134 2,409,581
Inventory.................................................................. 598,415 598,415
Prepaid expenses and other................................................. 140,870 150,681
-------------- --------------
Total currents assets................................................. 9,239,812 7,989,942
Plant and equipment, net...................................................... 740,156 490,496
Other assets.................................................................. 128,414 134,985
-------------- --------------
$ 10,108,382 $ 8,615,423
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current maturities of capital lease obligations............................ $ 51,100 $ 62,464
Accounts payable........................................................... 1,997,014 1,715,778
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................................... 69,734 96,193
Accrued expenses and other................................................. 2,938,789 2,565,695
-------------- --------------
Total current liabilities............................................. $ 5,056,637 $ 4,440,130
Long-term liabilities:
Capital lease obligations, less current maturities......................... 196,285 222,270
Stockholders' equity (deficiency):
Common stock, $0.01 par value per share; authorized
20,000,000 shares; issued and outstanding
6,103,502 shares in 1997 and 1998........................................ 61,035 61,035
Additional paid-in capital................................................. 21,072,430 21,072,430
Accumulated deficit........................................................ (16,278,005) (17,180,442)
-------------- --------------
4,855,460 3,953,023
-------------- --------------
$ 10,108,382 $ 8,615,423
============== ==============
</TABLE>
* Derived from audited financial statements as of December 31, 1997.
The accompanying notes are an integral part of these statements.
3
<PAGE>
STRATESEC INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1998
-------------- --------------
<S> <C> <C>
Earned revenues........................................................... $ 3,297,899 $ 1,320,414
Cost of earned revenues................................................... 2,326,223 1,106,363
-------------- --------------
Gross profit........................................................... 971,676 214,051
Selling, general and administrative
expenses............................................................... 645,656 1,073,039
-------------- --------------
Operating income (loss)................................................... 326,020 (858,988)
Loss on sale of plant and equipment....................................... -- (37,839)
Interest and financing fees............................................... (127,276) (12,808)
Interest and other income................................................. 7,399 7,198
-------------- --------------
Net income (loss)...................................................... $ 206,143 $ (902,437)
============== ==============
Weighted average common shares
outstanding............................................................ 5,105,000 6,103,522
============== ==============
Net income (loss) per share - basic and diluted $ .04 $ (.15)
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
STRATESEC INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1998
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................... $ 206,143 $ (902,437)
--------------- ----------------
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization......................................... 30,689 39,636
Loss of sale of plant and equipment................................... -- 37,839
Amortization of debt discount......................................... 10,500
Changes in operating assets and liabilities:
Accounts receivable..................................................... (533,400) 975,277
Costs and estimated earnings in excess of
billings on uncompleted contracts..................................... (777,107) (301,447)
Prepaid expenses and other.............................................. 9,494 (9,811)
Other assets............................................................ (57,951) (6,571)
Accounts payable........................................................ 183,129 (281,236)
Billings in excess of costs and estimated earnings
on uncompleted contracts.............................................. 400,729 26,459
Accrued expenses and other.............................................. 54,524 (373,094)
--------------- ----------------
Total adjustments................................................... (679,393) 107,052
--------------- ----------------
Net cash from operating activities.................................. (473,250) (795,385)
--------------- ----------------
Cash flows from investing activities:
Investment in SSIH, Ltd................................................. (700,000) --
Sale of plant and equipment............................................. -- 240,000
Acquisition of plant and equipment...................................... -- (18,425)
--------------- ----------------
Net cash used by investing activities................................... (700,000) 221,575
--------------- ----------------
Cash flows from financing activities:
Proceeds from notes payable............................................. 700,000 --
Principal payments of capital lease obligations (5,351) (12,041)
--------------- ----------------
Net cash provided by financing activities............................... 694,649 (12,041)
--------------- ----------------
Net (decrease) in cash and cash equivalents................................ (478,601) (585,851)
Cash and cash equivalents at beginning of period 609,342 998,312
--------------- ----------------
Cash and cash equivalents at end of period................................. $ 130,741 $ 412,461
=============== ================
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited balance sheet as of March 31, 1998 and the unaudited
statements of operations and statements of cash flows for the three months ended
March 31, 1997 and 1998 are condensed financial statements in accordance with
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they omit certain information included in complete financial
statements and should be read in conjunction with the financial statements and
notes contained in a Form 10-K which the Company filed with the Securities and
Exchange Commission on March 31, 1998.
In the opinion of the Company, the unaudited financial statements at
March 31, 1998 and for the three months ended March 31, 1997 and 1998, include
all adjustments, consisting only of normal recurring adjustments necessary for a
fair presentation of the financial position and results of operations for such
periods. Results of operations for the three months ended March 31, 1998 are not
necessarily indicative of results to be expected for the full year.
2. Net Income (Loss) Per Share
The Company has adopted SFAS No. 128, "Earnings Per Share," which
requires public companies to present basic earnings per share and, if
applicable, diluted earnings per share. Basic EPS is based on the weighted
average number of common shares outstanding without consideration of common
stock equivalents. Diluted earnings per share is based on the weighted average
number of common and common equivalent shares outstanding. The calculation takes
into account the shares that may be issued upon exercise of stock options and
warrants, reduced by the shares that may be repurchased with the funds received
from the exercise, based on the average price during the period. For 1998, stock
options and warrants have not been included in the calculation of diluted
earnings per share as their inclusion would be antidilutive.
3. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts at December 31,
1997 and March 31, 1998 which are expected to be collected within one year are
as follows;
December 31, March 31,
1997 1998
--------------- ---------------
Costs incurred on contracts................ $ 14,229,410 $ 15,335,669
Estimated earnings......................... 3,473,560 3,683,209
--------------- ---------------
17,702,970 19,018,878
Less billings to date...................... 15,664,570 16,705,220
--------------- ---------------
$ 2,038,400 $ 2,313,658
=============== ===============
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion and analysis of the Company's financial condition and
historical results of operations should be read in conjunction with the
condensed financial statements and the related notes thereto included elsewhere
in this report.
Overview
The Company is a single-source provider of comprehensive,
technology-based security solutions for medium and large commercial and
government facilities in the United States and abroad. The Company offers a
broad range of services, including: (i) consulting and planning; (ii)
engineering and design; (iii) systems integration; and (iv) maintenance and
technical support.
The Company derives its revenues primarily from long-term, fixed-price
contracts. Earnings are recognized based upon the Company's estimates of the
cost and percentage of completion of individual contracts. Earned revenues equal
the project's total contract amount multiplied by the proportion that direct
project costs incurred on a project bear to estimated total project costs.
Project costs include direct labor and benefits, direct material, subcontract
costs, project related travel and other direct expenses.
Clients are invoiced based upon negotiated payment terms for each
individual contract. Terms usually include a 25% downpayment and the balance as
stages of the work are completed. Maintenance contracts are billed either in
advance, monthly, or quarterly. As a result, the Company records as an asset
costs and estimated earnings in excess of billings and as a liability billings
in excess of costs and estimated earnings.
Results of Operations
The following table sets forth the percentages of earned revenues
represented by certain items reflected in the Company's statements of
operations.
Three Months
Ended
March 31,
1997 1998
----------- -----------
Earned Revenues..................................... 100.0% 100.0%
Cost of earned revenues............................. 70.4 83.8
----------- ----------
Gross profit..................................... 29.6 16.2
Selling, general and administrative expenses........ 19.6 81.3
----------- ----------
Operating income (loss).......................... 10.0 (65.1)
Loss on sale of plant and equipment................. -- (2.9)
Interest and financing fees......................... (3.9) (1.0)
Interest and other income........................... 0.2 0.6
----------- ----------
Net income (loss)................................ 6.3% (68.4)%
=========== ==========
7
<PAGE>
Three Months Ended March 31, 1998 Compared With Three Months Ended March 31,
1997
Revenues decreased by 60.0% from $3.3 million in the three months ended
March 31, 1997 to $1.3 million in the three months ended March 31, 1998. The
decrease was due primarily to a decline in work completed on existing projects.
Revenues from the World Trade Center project declined from $1.9 million in the
1997 period to $0.5 in the 1998 period. In addition, revenues from the
Metropolitan Washington Airport Authority declined from $0.7 million in the 1997
period to $0.4 million in the 1998 period. The revenue from MCI also declined
$0.1 for the comparable periods.
Cost of earned revenues decreased from $2.3 million in the three months
ended March 31, 1997 to $1.1 million in the three months ended March 31, 1998,
primarily due to decrease in revenues. Gross margin decreased from 29.6% in the
1997 period to 16.2% in the 1998 period as the margins on both the World Trade
Center project and Metropolitan Washington Airport Authority projects are lower
than in the previous year.
Selling, general and administrative expenses increased by 66.2% from
$0.6 million in the three months ended March 31, 1997, to $1.1 million in the
three months ended March 31, 1998. Overhead salaries increased by $0.2 million
from the previous year's period as project staff worked less on jobs due to the
decreased revenues, professional fees increased by $0.1 million for recruiting
fees for the new corporate officers and office expenses increased $0.1 due to
increased office space.
Interest expense and financing fees decreased 89.9% from $0.1 million
in the three months ended March 31, 1997 to $0.01 million in the three months
ended March 31, 1998 due to a decrease in outstanding indebtedness resulting
from the repayment of the subordinated debentures in October 1997.
Net income decreased from a net income of $0.2 million in the three
months ended March 31, 1997 to a net loss of $0.9 million in the three months
ended March 31, 1998. This decrease in net income was primarily due to the
significant decrease in revenues and the increase in selling, general and
administrative expenses.
Liquidity and Capital Resources
Prior to the Offering in October 1997, the Company's primary sources of
cash were the proceeds from private placements of Common Stock and notes from
1992 through 1995 and of subordinated debentures and warrants during 1995, 1996,
and the first three months of 1997. During each of those years, the Company's
operations had negative cash flows as the Company increased its marketing
efforts, opened new offices and hired additional staff to support anticipated
growth. The net use of cash from operations in 1994, 1995, and 1996 was $1.9
million, $1.9 million and $1.6 million. For the year ended December 31, 1997,
the use of cash from operations was $7.4 million, primarily due to the operating
loss, the restriction of $1.9 million in cash as collateral for the appeal bond
posted in litigation, and a reduction in accounts payable. For the three months
ended March 31, 1998, the Company had negative cash flow from operations of $0.8
million as a result of its operating loss.
From 1992 through 1995, members of a private investor group purchased
an aggregate of 3.6 million shares of Common Stock at a total purchase price of
$8.3 million, generating net proceeds to the Company of $8.0 million, and $0.5
million aggregate principal amount of 10% demand notes, generating an equal
amount of net proceeds to the Company. The demand notes were converted in 1995
into 103,000 shares of Common Stock.
8
<PAGE>
In addition, from 1995 through March 31, 1997, members of the same
investor group purchased $3.4 million aggregate principal amount of 10%
subordinated debentures, together with warrants to purchase 478,580 shares of
Common Stock at an exercise price of $7.00 per share, generating net proceeds to
the Company of $3.2 million. In 1996, an additional $0.2 million was raised
through the exercise of warrants by members of the Board of Directors.
In October 1997, the Company completed the Offering, which resulted in
net proceeds to the Company of approximately $9.7 million after payment of
offering expenses by the Company. Following the Offering, the Company's interest
in a partnership was redeemed at its cost of $0.7 million plus interest of $0.02
million. In the fourth quarter of 1997, the Company received proceeds of
approximately $0.7 million upon the exercise of warrants to purchase 269,382
shares of Common Stock by employees. In October 1997, the Company used proceeds
of the Offering to repay $3.4 million of outstanding notes payable.
As of March 31, 1998, the Company has $0.4 million in unrestricted cash
and working capital of $3.6 million. Of that amount, $2.1 million is in the form
of restricted cash. This cash is restricted to serve as collateral for a bond
posted by the Company pending appeal of a $1.9 million judgment against the
Company.
During April 1998, the Board of Directors approved the issuance of up
to $2.0 million of convertible subordinated debentures to provide additional
working capital. As of May 13, 1998, the Company had issued and sold $1,450,000
of debentures. The debentures have an interest rate of 10%, are due on December
31, 1999 and are convertible into common stock of the Company at $8.50 per
share. In addition, the holders were issued 100 warrants for each $1,000 of
investment with an exercise price of $2.50 and a term of three years.
The Company has in the past experienced cash flow shortages. The
Company believes that the $1.5 million unrestricted portion of working capital
and the subordinated debenture financing is sufficient to meet its current
operating needs.
9
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Company's Registration Statement on Form S-1 (File No. 333-26439)
relating to the initial public offering (the "Offering") of an aggregate of
2,208,000 shares (the "Shares") of its Common Stock, par value $0.01 per share,
was declared effective by the Securities and Exchange Commission on October 1,
1997. Of the 2,208,000 shares of Common Stock registered under the Registration
Statement, 1,400,000 were sold by the Company and 808,000 were sold by a
stockholder of the Company that owns more than 10% of the Company's outstanding
Common Stock (the "Selling Stockholder"). The 808,000 shares sold by the Selling
Stockholder included 288,000 shares sold upon exercise of an over-allotment
option granted to the underwriters of the Offering. The managing underwriters of
the Offering were Cruttenden Roth Incorporated and Scott & Stringfellow, Inc.
The Offering commenced on October 1, 1997, and the sale of the Shares
was completed on October 7, 1997. The Shares were sold at a price of $8.50 per
share, for aggregate proceeds of $11,900,000 and $6,868,000 to the Company and
the Selling Stockholder, respectively. After deducting underwriting discounts
and commissions of $0.7225 per share and a $408,000 non-accountable expense
allowance paid to the Representatives (of which $297,500 was paid by the Company
and $110,500 was paid by the Selling Stockholder), the Selling Stockholder
received net proceeds of $6,173,720 and the Company received net proceeds of
$10,591,000 less expenses incurred in connection with the Offering, all of which
were paid by the Company. On October 7, 1997, the Company also issued to the
Representatives, at a purchase price of $0.001 per warrant, warrants to purchase
up to an aggregate of 140,000 shares of Common Stock.
Expenses incurred in connection with the Offering were:
(A) (B)
Underwriting discounts and commissions 1,011,500
Other expenses................................ 113,000 1,040,000
Through December 31, 1997, the use of net proceeds of $9.7 million has been as
follows:
(A) (B)
Repayment of indebtedness...................... 3,350,000
Working capital................................ 6,385,500
(A) Direct or indirect payments to directors or officers of the issuer.
(B) Direct or indirect payments to others.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
11.1 Calculation of Net Income (Loss) Per Share
27.1 Financial Data Schedule
10
<PAGE>
b. Reports on Form 8-K.
None
Signature
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 thereunto duly authorized.
STRATESEC INCORPORATED
/s/ LARRY M. WEAVER
- -----------------------------------------------------
Larry M. Weaver
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
May 14, 1998
11
EXHIBIT 11
Calculation of Weighted Average Shares
Outstanding for Net Income (Loss) Per Share
<TABLE>
<CAPTION>
March 31,
1997 1998
------------ ------------
<S> <C> <C>
Earnings:
Net Income (Loss)................................................................ $ 206,143 $ (902,437)
============ =============
Shares:
Weighted Average Number of Common Shares
Outstanding................................................................... 4,434,140 6,103,522
Additional Shares Under Treasury Stock Method
from Warrants Issued 12 Months Prior to 3/31/97*.............................. 670,860 --
------------ -------------
Average Common Shares Outstanding and Equivalents................................ 5,105,000 6,103,522
============ =============
Net Income (Loss) Per Share...................................................... $ .04 $ (.15)
============ =============
</TABLE>
* -- Calculation would be antidilutive for 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 412,461
<SECURITIES> 0
<RECEIVABLES> 2,404,265
<ALLOWANCES> (49,000)
<INVENTORY> 598,415
<CURRENT-ASSETS> 7,989,942
<PP&E> 893,746
<DEPRECIATION> (403,250)
<TOTAL-ASSETS> 8,615,423
<CURRENT-LIABILITIES> 4,428,766
<BONDS> 0
0
0
<COMMON> 61,035
<OTHER-SE> 3,891,988
<TOTAL-LIABILITY-AND-EQUITY> 8,615,423
<SALES> 1,320,414
<TOTAL-REVENUES> 1,320,414
<CGS> 1,106,363
<TOTAL-COSTS> 1,106,363
<OTHER-EXPENSES> 1,073,039
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,808
<INCOME-PRETAX> (902,437)
<INCOME-TAX> 0
<INCOME-CONTINUING> (902,437)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (902,437)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> 0
</TABLE>
