- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number 1-13427
STRATESEC INCORPORATED
(Formerly Securacom, Incorporated)
(Exact name of registrant as specified in its charter)
Delaware 22-2817302
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
50 Tice Boulevard
Woodcliff Lake, NJ 07675
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 930-9500
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange
Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 X . NO .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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. [x]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of March 27, 1998 (computed by reference to
the closing price of such stock on the American Stock Exchange) was $6,990,913.
As of March 27, 1998, there were 6,103,522 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
Portions of the Registrant's definitive Proxy Statement
regarding the 1998 Annual Meeting of Stockholders Part III
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<PAGE>
STRATESEC Incorporated
FORM 10-K
Cross Reference Sheet
<TABLE>
<CAPTION>
Item Page
Part I
<S> <C> <C>
1 Business............................................................................................ 1
2 Properties.......................................................................................... 7
3 Legal Proceedings................................................................................... 7
4 Submission of Matters to a Vote of Security Holders................................................. 7
Part II
5 Market for Registrant's Common Equity and Related Stockholder Matters............................... 8
6 Selected Financial Data............................................................................. 9
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................... 10
8 Financial Statements................................................................................ 14
9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.......................................................................... 14
Part III
10 Directors and Executive Officers of the Registrant.................................................. 15
11 Executive Compensation.............................................................................. 15
12 Security Ownership of Certain Beneficial Owners and Management...................................... 15
13 Certain Relationships and Related Transactions...................................................... 15
Part IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 16
Signatures ......................................................................................... 17
</TABLE>
<PAGE>
Part I
Item 1. Business.
General
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. This full range of capabilities enables the Company to
provide its clients with any combination of these services or complete turnkey
solutions for complex security projects. The solutions provided by the Company
include integrated security systems comprised of a command center managing one
or more subsystems or components, primarily access control systems, intrusion
detection systems, closed circuit television systems, critical condition
monitoring systems and fire detection systems. The Company is not aware of any
other company providing this comprehensive range of services on a national
basis. The Company serves more than 40 clients including airports, hospitals,
prisons, corporations, utilities, universities and government facilities. These
clients include Washington Dulles International Airport, Hewlett-Packard
Company, EDS, United Airlines, Gillette Corporation, MCI Communications
Corporation and New York City's World Trade Center.
The Company began operations in 1987 in association with a large
privately held engineering firm. In 1992, the Company became independent from
the engineering firm in conjunction with a capital infusion from a private
investment group. Since 1992, the Company has devoted a substantial amount of
resources and capital to enhancing its technical capability and services
offerings, hiring and training key personnel and expanding its client base. As
part of this effort, the Company has opened four regional offices in the United
States and one international office in Moscow, Russia.
Integrated Security Systems
Integrated security systems are comprised of one or more subsystems and
components that perform a variety of security functions for a facility or group
of facilities under the direction of a single command center. The command center
consists of a central processor, a common database and software that enable
various subsystems and components to communicate with each other and integrate
the subsystems and components into a single system. Subsystems and components
consist primarily of the following:
Access control systems, which are designed to exclude unauthorized
personnel from specified areas and provide access control that is typically
card-activated. Entry and exit activity can be monitored or recorded and may be
controlled on the basis of time and authority level.
Intrusion detection systems, which incorporate ultrasonic, infrared,
microwave and other sensors to detect unauthorized door and window openings,
glass breakage, vibration, motion and noise, and alarms and other peripheral
equipment.
Closed circuit television systems, which monitor and record entry and
exit activity or provide surveillance of designated areas. These systems can
deter theft and vandalism and support other access control systems. They can be
monitored either by a video recorder or by a monitoring screen.
1
<PAGE>
Critical condition monitoring systems, which provide supervision of
various systems and processes such as sprinkler systems, heating and
refrigeration systems, power levels, water levels and general manufacturing
processes.
Fire detection systems, which incorporate heat, ionization, smoke and
flame sensing devices, manual pull stations, evacuation sounders and systems,
sprinkler systems and elevator controls.
The Company's Services
The Company offers a full range of security services, consisting of:
(i) consulting and planning; (ii) engineering and design; (iii) systems
integration; and (iv) maintenance and technical support. At the beginning of
each new client relationship, the Company designates one of its professional
staff as the client service contact. This individual is the focal point for
communications between the Company and the client and often acts as the client's
project manager for all of its security needs. The Company's engagement may
include one or more of the elements described below.
Consulting and Planning. Security consulting and planning are the
initial phases of determining a security solution for a project. The Company has
developed a planning process that identifies all systems, policies and
procedures that are required for the successful operation of a security system
that will both meet a client's current needs and accommodate its projected
future requirements. The Company's consulting and planning process includes the
following steps:
Identify the client's objectives and security system requirements
Review the existing security system plan
Survey the site, including inventory of physical components and
software and evaluation of client's existing infrastructure and
security system
Identify and prioritize the client's vulnerabilities
Develop and evaluate system alternatives
Recommend a conceptual security plan design
Estimate the cost of implementing the conceptual plan
Develop a preliminary implementation schedule
As a result of this process, the Company provides the client with a
master plan for security services which recommends an effective security
solution that addresses routine operating needs as well as emergency situations.
The Company believes that its comprehensive planning process enables its clients
to budget for their security requirements on a long-term basis, identify
opportunities for cost reduction and prepare for future risks.
Engineering and Design. The engineering and design process involves
preparation of detailed project specifications and working drawings by a team of
the Company's engineers, systems designers and computer-aided design system
operators. These specifications and drawings detail the instrument sensitivity
requirements, layout of the control center, placement of equipment and
electrical requirements. Throughout the engineering and design process, the
Company utilizes its expertise in advanced technologies and its understanding of
its client's operational preferences to design a system that is functional,
cost-effective and accommodates the client's present and future requirements. In
addition, the Company attempts to incorporate its client's existing personnel,
equipment and other physical resources into the system design.
2
<PAGE>
When retained as a single-source provider for turnkey security
solutions, the Company also selects the system components required under the
specifications and drawings it has prepared. To the extent possible, the Company
uses off-the-shelf equipment to minimize the cost of developing custom
equipment. The Company has made a strategic decision not to represent any
equipment manufacturer exclusively, thereby maintaining objectivity and
flexibility in equipment selection. The Company believes that its technical
proficiency with the products of a wide range of manufacturers enables it to
select components that will best meet a project's requirements.
Systems Integration. Systems integration involves (i) equipment
procurement; (ii) custom systems modeling and fabrication; (iii) facility
installation; (iv) hardware, software and network integration; and (v) system
validation and testing. In addition to these basic integration services, the
Company provides engineering services to enhance the compatibility of the
client's subsystems. The Company prepares technical documentation of the system
and operations manuals and provides on-site training to client personnel.
Under the supervision of a project manager, the Company's technicians
conduct hardware installation, hardware and software integration, system
validation and testing. The aspects of systems integration that do not require a
high level of technical expertise, such as wire installation and basic
construction, are typically performed by the Company's subcontractors.
Maintenance and Technical Support. The Company provides maintenance and
technical support services on a scheduled, on-call, or emergency basis. These
services include developing and implementing maintenance programs both for
security systems designed, engineered, or integrated by the Company and for
existing systems.
Maintenance services offered by the Company include its EMS, a database
used by the Company to effectively manage a security system's components,
maintenance planning and scheduling, and costs. The system configuration
function monitors system activity and capacity, and identifies the need to
reconfigure or expand the system. The system maintenance function schedules and
records maintenance activity, and identifies equipment replacement and upgrading
requirements.
Marketing
The Company's marketing activities are conducted on both national and
regional levels. The Company obtains engagements through direct negotiation with
clients, competitive bid processes and referrals. At the national level, the
Company conducts analyses of various industries and targets those with
significant potential demand for security solutions. At a regional level, under
the supervision of senior management, each office develops and implements a
marketing plan for its region. The plan identifies prospective clients within
the region and sets forth a strategy for developing relationships with them.
Each regional office works with the headquarters office in expanding
relationships with existing national clients to include facilities within the
region.
The Company has identified several key industries or facility types
that it believes have substantial and increasing requirements for security
services, including telecommunication and technology companies, corporate
complexes and industries and facilities for which security systems are required
by regulation. The Company has developed expertise in the security regulations
applicable to airports, pharmaceutical companies, prisons and nuclear utilities.
3
<PAGE>
The Company's marketing strategy emphasizes developing long-term
relationships with clients so that the Company can provide additional services
as the clients' security requirements evolve. The Company undertakes significant
pre-assessment of a prospective client's needs before an initial contact is
made. A long-term relationship typically begins with an engagement to provide
consulting and planning or maintenance and technical support services.
Consulting and planning assignments place the Company in an advantageous
position, often as the client's project manager, to be engaged to implement the
plan ultimately adopted by the client. Engagements for maintenance and technical
support enable the Company to identify new requirements as they arise and to
offer its solutions to such requirements.
The Company employs a variety of pricing strategies for its services.
Proposals for consulting services are priced based on an estimate of hours
multiplied by standard rates. Systems integration engagements are priced based
upon the estimated cost of the components of the engagement, including
subcontractors and equipment, plus a profit margin. Pricing for engineering and
maintenance services vary widely depending on the scope of the specific project
and the length of engagement. All proposals are reviewed by the Company's senior
management.
Many projects require that the primary contractor obtain a performance
bond in the amount of the contract. The amount of bonding that the Company is
able to obtain depends upon the level of its working capital and net worth. The
Company believes that prior to the initial public offering of its common stock
in October 1997 (the "Offering"), its ability to compete for larger projects as
a primary or independent contractor, rather than through a joint venture or
subcontract arrangement, was constrained by its inability to obtain adequate
bonding. The Company has since secured bonding with a major surety that will
enable it to bid as a primary contractor on larger contracts.
The Company currently conducts limited international operations from
its Moscow office from which it has provided services to several clients in
Moscow. In April 1997, the Company signed a joint marketing agreement with Ahmad
N. AlBinali & Sons Co., a Saudi Arabian engineering and consulting company, to
develop and conduct business in the Kingdom of Saudi Arabia. The Company is
evaluating several additional opportunities to expand its international
operations, which it anticipates it will initially undertake through joint
ventures or partnerships with local and international companies.
Clients
During the past three years the Company has provided services to
approximately 50 clients, including airports, hospitals, prisons, corporations,
utilities, universities and government facilities. The Company's clients have
included the following:
Airports and Aviation Corporations
--------------------- ------------
Fresno Airport AT&T
United Airlines EDS
Washington-Dulles International Airport Gillette Corporation
Washington National Airport Hewlett-Packard Company
Yuma International Airport Lazard Freres
Seattle-Tacoma Airport Lucent Technologies
Mary Kay Cosmetics
MCI Telecommunications
Corporation
Mobil Corporation
NationsBank
4
<PAGE>
US WEST
Government Other
---------- -----
Los Alamos National Laboratory City of Baltimore Central
Sandia National Laboratory Booking and Intake
Tennessee Valley Authority Facility
U.S. Department of Energy Moscow Local Telephone
U.S. Navy System
New York City's World Trade
Center
Rostelecom
Rowan County (N.C.) Prison
During 1997, the World Trade Center, the Metropolitan Washington
Airport Authority (operator of both Washington National and Washington Dulles
airports), and MCI Telecommunications Corporation ("MCI") accounted for 55%, 20%
and 7% of the Company's earned revenues, respectively. The loss of any of these
clients could have a material adverse effect upon the Company's business,
operating results and financial condition. Although these clients each accounted
for a substantial portion of the Company's revenues, work performed for them was
comprised of multiple projects and, in the case of MCI, was performed for
multiple facilities. The Company plans to diversify its client base by pursuing
new clients regionally, nationally and internationally.
Competition
The security industry is highly competitive. The Company competes on a
local, regional and national basis with systems integrators, consulting firms
and engineering and design firms. The Company believes that it is the only
provider offering its comprehensive range of services on a national basis. As a
result, the Company competes with different companies depending upon the nature
of the project and the services being offered. For example, the Company has
competed with Johnson Controls, Science Applications International Corporation
and Sensormatic for systems integration work, and Lockwood Greene and Holmes &
Narver for consulting and planning and engineering and design work. Many of its
competitors have greater name recognition and financial resources than the
Company. The Company's competitors also include equipment manufacturers and
vendors that also provide security services. The Company may face future
competition from potential new entrants into the security industry and increased
competition from existing competitors that may attempt to develop the ability to
offer the full range of services offered by the Company. The Company believes
that competition is based primarily on the ability to deliver solutions that
effectively meet a client's requirements and, to a lesser extent and primarily
in competitive bid situations, on price. There can be no assurance that the
Company will be able to compete successfully in the future against existing or
potential competitors.
Backlog
The Company's backlog consists of confirmed orders, including the
balance of projects in process. The backlog also includes projects for which the
Company has been notified it is the successful bidder even though a binding
agreement has not been executed. Projects for which a binding contract has not
been executed may be canceled at any time. Binding contracts may also be subject
to cancellation or postponement, although cancellation generally obligates the
client to pay the costs incurred by the Company. During the last two years none
of the Company's contracts were canceled prior to completion. Long-term
maintenance contracts may be canceled without cause. As of December 31, 1996 and
1997, the Company's backlog was approximately $8.3 million and $3.8 million,
respectively. Backlog as of December 31, 1997, includes projects having a value
of approximately $0.5 million for which binding
5
<PAGE>
contracts have not been executed and includes $0.9 million in projects that are
not expected to be completed during 1998. Backlog orders as of any particular
date may not be indicative of actual operating results for any fiscal period.
There can be no assurance that any amount of backlog will be realized.
Employees
As of December 31, 1997, the Company had 64 employees, of which 21 were
based in the Company's headquarters office in New Jersey and the balance in its
four regional offices and its office in Moscow. Four of the Company's employees
are engaged exclusively in marketing and sales, 50 in engineering, project
management and technical functions and ten in administration. Most members of
senior management, project managers and technical staff devote a portion of
their time to marketing activities. None of the Company's employees are
represented by a labor union, and the Company believes that its employee
relations are good.
Intellectual Property
The Company has developed its Engineered Maintenance System ("EMS"), a
database system used by the Company to effectively manage a security system's
components, maintenance planning and scheduling, and costs. In addition to EMS,
the Company is developing command center software that permits the integration
of multi-vendor security systems into a unified, integrated system.
The Company relies on a combination of various methods to establish and
protect its proprietary rights. In addition, it limits access to and
distribution of its proprietary information. These measures afford limited
protection, and there can be no assurance that the steps the Company takes to
protect its proprietary rights will be adequate to prevent misappropriation of
its intellectual property or the independent development by others of similar
technology.
The Company's accounting system is not currently year 2000 compliant.
The Company has initiated a review of several integrated accounting/project
management software packages which are year 2000 compliant. Selection and
installation of the new system is expected to be complete for fiscal 1999.
Insurance
The Company maintains in force commercial umbrella liability insurance
with coverage of $10 million per occurrence and $10 million in the aggregate,
with a $10,000 deductible. The Company also maintains a $1.0 million insurance
policy to cover any error or omission by the Company that may result in a breach
of a security system designed, installed, maintained, or engineered by the
Company. There is no assurance that the amount of insurance carried by the
Company would be sufficient to protect it fully in the event of a significant
liability claim; however the Company believes that the amounts and coverages of
its insurance are reasonable and appropriate for its business operations. There
is no assurance that such insurance will continue to be available on
commercially reasonable terms, and the Company may elect not to retain liability
insurance at any time.
6
<PAGE>
Item 2. Properties.
The Company's headquarters office is located in Woodcliff Lake, New
Jersey, where the Company leases approximately 7,600 square feet of office space
under a lease that expires in 2000. In addition, the Company leases between
approximately 2,000 and 4,000 square feet of office space in each of the
Atlanta, Dallas, San Francisco and Washington, D.C. metropolitan areas to
support its regional operations. The Company believes that its facilities are
adequate and suitable for its current operations, and that additional space is
readily available if needed to support future growth.
Item 3. Legal Proceedings.
Although the Company is a defendant in certain suits arising from the
normal conduct of its business, management does not believe that the resolution
of this litigation will have a material adverse effect on the Company's
financial position, results of operations, or cash flows. This litigation
includes SecuraComm Consulting, Inc. v. Securacom, Incorporated. In this action,
filed in the U.S. District Court for the district of New Jersey in October 1995,
the plaintiff, a consulting company, sought injunctive relief and damages for
alleged confusion in the marketplace and lost business resulting from the
Company's alleged infringement of plaintiff's claimed service mark. In November
1997, the court ruled in favor of the plaintiff and enjoined the Company from
using the name "Securacom, Incorporated" and awarded the plaintiff damages in
the amount of $1,900,000. The Company has appealed the decision and believes
that it will be reversed upon appeal.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the stockholders of the Company
during the fourth quarter of the fiscal year covered by this Report.
7
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock traded on the American Stock Exchange under
the symbol SFT. The following tables sets forth the quarterly range of high and
low closing sale prices per share for the Common Stock during the period
indicated.
High Low
1997
Fourth Quarter (beginning October 2) $13 1/4 $ 7 7/8
1998
First Quarter (through March 27) 9 3/4 1 7/16
The Company has not paid any cash dividends on its common stock since
its formation. It presently intends to retain its earnings for use in its
business and therefore does not anticipate paying any cash dividends in the
foreseeable future. The payment of any future dividends will be determined by
the Board of Directors in light of conditions then existing, including the
Company's earnings, financial condition and requirements, restrictions in
financing agreements, business conditions, and other factors.
As of March, 1998, there were 66 holders of record of common stock.
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.
8
<PAGE>
Expenses incurred in connection with the Offering were:
<TABLE>
<CAPTION>
(A) (B)
<S> <C> <C>
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
</TABLE>
(A) Direct or indirect payments to directors or officers of the issuer.
(B) Direct or indirect payments to others.
Item 6. Selected Financial Data.
The selected consolidated financial data presented below (in thousands,
except for per share data) should be read in conjunction with the consolidated
financial statements and notes thereto of the Company and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report.
The selected financial data presented below should be read in
conjunction with the consolidated financial statements and the notes thereto of
the Company and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ---------- ---------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Earned revenues....................... $ 3,245 $ 2,395 $ 3,177 $ 5,824 $ 12,133
Cost of earned revenues............... 2,904 1,586 2,180 4,416 9,807
---------- ---------- ---------- ---------- -----------
Gross profit....................... 341 809 997 1,408 2,326
Selling, general and administrative
expenses........................... 2,123 2,670 2,871 3,701 3,756
Provision for legal judgment.......... 2,200
---------- ---------- ---------- ---------- -----------
Operating income (loss)............ (1,782) (1,861) (1,874) (2,293) (3,630)
Interest and financing fees........... (34) (102) (242) (515)
Interest and other income............. 7 208 22 89
---------- ---------- ---------- ---------- -----------
Net income (loss).................. $ (1,782) $ (1,888) $ (1,768) $ (2,513) $ (4,056)
========== ========== ========== ========== ===========
Basic and diluted loss per share... $ (0.62) $ (0.56) $ (0.46) $ (0.58) $ (0.85)
========== ========== ========== =========== ===========
Weighted average number of
shares outstanding.............. 2,889 3,396 3,812 4,306 4,792
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............ $ 237 $ 266 $ 555 $ 609 $ 998
Working capital (deficit)............ 683 (31) 696 151 4,183
Total assets......................... 1,999 2,034 3,046 4,567 10,108
Long-term debt, less current
maturities........................ 25 6 597 2,657 196
Total stockholders' equity
(deficiency)...................... 702 316 554 (1,596) 4,855
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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 began operations in 1987 in association with a large
privately held engineering firm. As a start-up, the Company expended significant
capital on the development of the Company's business and infrastructure, and it
accumulated losses of approximately $2.8 million from 1987 through 1991 on
aggregate revenues of approximately $17.2 million. The Company's revenues from
1990 through 1994 were generated primarily by a contract to design and integrate
extensive security upgrades at three nuclear facilities for the Tennessee Valley
Authority (the "TVA"). In 1992, the Company became independent from the
engineering firm in conjunction with a capital infusion from a private investor
group. At the same time, the Company hired new management with extensive
expertise in the security industry. Since 1992, the Company has devoted a
substantial amount of resources and capital to enhancing its technical
capability and services offerings, hiring and training key personnel and
expanding its client base. As part of this effort, the Company opened four
regional offices in the United States and one international office in Moscow,
Russia.
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% down payment 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.
10
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<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Earned revenues.................................. 100.0% 100.0% 100.0%
Cost of earned revenues.......................... 68.6 75.8 80.9
-------- -------- ---------
Gross profit.................................. 31.4 24.2 19.1
Selling, general and administrative expenses..... 90.4 63.5 30.9
Provision for legal judgment..................... 18.1
-------- -------- ---------
Operating income (loss)....................... (59.0) (39.3) (29.9)
Interest and financing fees...................... (3.2) (4.2) (4.2)
Interest and other income........................ 6.5 0.4 0.7
-------- -------- ---------
Net income (loss)............................. (55.7)% (43.1)% (33.4)%
======== ======== =========
</TABLE>
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996
Revenues increased by 108.6% from $5.8 million in 1996 to $12.1 million
in 1997. The increase was due to work completed for new clients and an increase
in work completed on existing projects. Revenues from the World Trade Center
project, which commenced in October 1996, increased from $1.6 million in 1996 to
$6.6 million in 1997 In addition, revenues from the Metropolitan Washington
Airport Authority increased from $1.2 million in 1996 to $2.5 million in 1997.
In addition, $0.1 million of revenue was recognized in 1997 on a project for
which all of the costs were accrued during 1996.
Cost of earned revenues increased by 122.0% from $4.4 million in 1996
to $9.8 million in 1997, primarily due to the increase in revenues. Gross margin
declined from 24.2% in 1996 to 19.1% in 1997. In 1996 there was a one-time
adjustment of $0.2 million to the cost of earned revenues to reflect a reduction
in a subcontractor's costs upon the final closeout of the TVA project. Net of
this adjustment, gross margin was 20.8% in 1996.
In the fourth quarter of 1997, the Company adjusted its estimate of the
cost to complete on several contracts. As a result of this change in estimate,
both revenue and gross margins were adjusted downward by $1.3 million for the
year. Prior to those adjustments, the Company would have had revenue of $13.4
million with a gross margin of 26.7%.
Selling, general and administrative expenses increased by 2.7% from
$3.7 million in 1996 to $3.8 million in 1997, due to a $0.2 million increase in
salaries and consulting fees offset by a $0.1 million decrease in professional
fees
In November 1997 SecuraComm Consulting, Inc. was awarded a $1.9 million
judgment in a lawsuit against the Company. Although the Company believes that it
will be successful in its appeal of the court's ruling, it has recorded an
expense of $2.2 million to cover the judgment, including anticipated legal fees.
See Item 3--Legal Proceedings.
Interest expense and financing fees increased 112.8% from $0.2 million
in 1996 to $0.5 million in 1997 due to an increase in outstanding indebtedness
resulting from the issuance of $2.1 million of subordinated debentures during
1996 and $0.7 million of subordinated debentures during the first three months
of 1997 and the recording of an expense of $0.2 million for amortization of debt
discounts upon retirement of subordinated debentures in October 1997.
11
<PAGE>
Net income decreased from a net loss of $2.5 million in 1996 to a loss
of $ 4.1 million in 1997. This decrease in net income was primarily due to
recording a $2.2 million expense for the legal judgment and an adjustment of
anticipated margin on several major contracts, offset somewhat by an increase a
gross margin due to increased contract revenue.
Although the Company's revenues increased significantly during the
year, the total revenue for 1997 was below the Company's anticipated break-even
point due to reduced revenue in the fourth quarter. Management of the Company
has taken measures to reduce the break-even point for the Company by reducing
staff, initiating cost-cutting measures, and reorganizing the management
structure of the Company.
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
Revenues increased by 83.4% from $3.2 million in 1995 to $5.8 million
in 1996. In October 1996, the Company was awarded an $8.3 million contract as
part of the security upgrade at the World Trade Center. Revenues of $1.6 million
were recognized from this project in 1996. Work for the Metropolitan Washington
Airport Authority increased by $1.0 million from $0.2 million in 1995 to $1.2
million in 1996. Work for MCI Telecommunications Corporation increased by $0.2
million from $0.6 million in 1995 to $0.8 million in 1996.
Cost of earned revenues increased by 102.6% from $2.2 million in 1995
to $4.4 million in 1996 primarily due to the increase in revenues. Gross margin
declined from 31.4% in 1995 to 24.2% in 1996 as a result of a change in the mix
of work performed. In 1996, a greater proportion of the work performed involved
system integration projects, which historically have had lower margins than the
other services provided by the Company.
Selling, general and administrative expenses increased by 28.9% from
$2.9 million in 1995 to $3.7 million in 1996. The increase was due to increases
in legal fees of $0.4 million incurred in the successful defense of certain
litigation, increased staffing expense of $0.3 million and increased office
expenditures of $0.1 million. The increases in staffing and office expenditures
were due to the Company's investment in infrastructure and capabilities to
accommodate future growth in revenues.
Interest expense and financing fees increased 137.7% from $0.1 million
in 1995 to $0.2 million in 1996 as a result of the issuance of $2.1 million of
10% subordinated debentures during 1996.
The net loss increased 42.2% from $1.8 million in 1995 to $2.5 million
in 1996 as a result of lower project margins, higher selling, general and
administrative expenses, increased financing fees, and proceeds from a
litigation settlement of $0.2 million which was recognized in 1995.
Year Ended December 31, 1995 Compared With Year Ended December 31, 1994
Revenues increased by 32.6% from $2.4 million in 1994 to $3.2 million
in 1995. Contract revenue from the TVA project in 1994 was $1.6 million as
compared with $1.3 million in 1995. Revenue from work completed for MCI was $0.1
million in 1994 as compared with $0.6 million in 1995. In 1995, the Company also
initiated and completed work on the Baltimore Correctional Intake Facility,
resulting in revenue of $0.4 million during that year. The Company's first major
preventive maintenance contract for Dulles Airport (Metropolitan Washington
Airport Authority) was also initiated in 1995 and generated revenue of $0.3
million.
12
<PAGE>
Cost of earned revenues increased by 37.4% from $1.6 million in 1994 to
$2.2 million in 1995 due primarily to the increase in revenue. Gross margin on
projects declined from 33.8% in 1994 to 31.4% in 1995 as a result of a change in
the mix of work performed to include a greater proportion of system integration
projects in 1995.
Selling, general and administrative expenses increased 7.5% from $2.7
million in 1994 to $2.9 million in 1995. The increase was due to an increase in
staffing and office rents.
Interest expense and financing fees increased 197.6% from $0.03 million
in 1994 to $0.1 million in 1995.
The net loss of $1.8 million represents a $0.1 million improvement from
the net loss of $1.9 million in 1994 as the higher volume of work and the
proceeds of a litigation settlement more than offset the impact of lower margins
and higher spending for selling, general and administrative expenses and
interest expense.
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.
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.
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.
13
<PAGE>
As of December 31, 1997, the Company had $4.2 million in working
capital. Of that amount $2.1 million is restricted. A court, as described in
Item 3 -- Legal Proceedings, ordered the Company to pay damages of $1.9 million
to a plaintiff in a legal proceeding. Although the Company believes that the
court's decision will be reversed on appeal, the Company was required to post a
bond in the amount of $1.9 million pending a decision on the appeal. As
collateral for the bond, the Company has purchased a certificate of deposit that
has a maturity date of October 10, 1998 and bears interest at 5.76%.
The Company has in the past experienced cash flow shortages. The
Company believes that the $2.1 million unrestricted portion of working capital
is sufficient to meet its current operating needs. Until a decision on the
appeal is ordered, however, the Company is pursuing sources of debt financing to
fund its anticipated growth and $2.0 million in capital requirements to expand
and upgrade its management information systems, which will make them year 2000
compliant, and document its command center integration software.
Item 8. Financial Statements.
The Financial Statements of the Company, together with the report
thereon of Grant Thornton LLP dated March 20, 1998 are listed in Item 14(a)(1)
and are included at the end of this Report on Form 10-K, beginning on page F-1,
and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
14
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 is contained in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders under the captions
"Directors and Nominees" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934."
Item 11. Executive Compensation.
The information required by Item 11 is contained in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders under the caption
"Executive Compensation," and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is contained in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders under the caption "Common
Stock Ownership of Certain Beneficial Owners and Management," and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is contained in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders under the caption
"Compensation Committee Interlocks and Insider Participation and Certain
Transactions," and is incorporated herein by reference.
15
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) List of Financial Statements. The following is a list of the
financial statements included at the end of this Report of Form 10-K beginning
on page F-1:
Report of Independent Certified Public Accountants
Balance Sheets as of December 31, 1996 and 1997
Statements of Operations for the Years Ended December
31, 1995, 1996 and 1997
Statement of Stockholders' Equity (Deficiency) for the Years
Ended December 31, 1995, 1996 and 1997
Statements of Cash Flows for the Years Ended December 31, 1995, 1996
and 1997
Notes to Financial Statements
(2) List of Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not
applicable or not required, or the required information is
provided in the financial statements or notes thereto.
(b) Reports on Form 8-K.
None
(c) List of Exhibits. The following is a list of exhibits furnished.
Copies of exhibits will be furnished upon written request of any stockholder at
a charge of $.25 per page plus postage.
Exhibit
Number Exhibit
3.1 Form of Restated Certificate of Incorporation1
3.2 Form of Bylaws1
4 Form of Rights Agreement1
10.1 Stock Option Plan1
10.2 Employment Agreement with Ronald C. Thomas1
10.3 Employment Agreement with Larry M. Weaver1
10.4 Consulting Agreement with Wirt D. Walker, III1
11 Computation of Net Income (Loss) Per Share
23.1 Consent of Grant Thornton LLP
23.2 Consent of Amper, Politziner & Mattia
27 Financial Data Schedule
1 Filed as an exhibit of the same number to the Company's registration
statement on Form S-1 (File No. 333-26439) and incorporated by reference.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STRATESEC INCORPORATED
By: /S/ RONALD C. THOMAS
Ronald C. Thomas
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/S/ RONALD C. THOMAS
Ronald C. Thomas President, Chief Executive March 31, 1998
Officer, and Director
(Principal Executive Officer)
/S/ LARRY M. WEAVER
Larry M. Weaver Executive Vice President and March 31, 1998
Chief Financial Officer
(Principal Financial and
Accounting Officer)
/S/ WIRT D. WALKER, III Chairman and Director March 31, 1998
Wirt D. Walker, III
/S/ MISHAL YOUSEF SOUD AL SABAH Director March 31, 1998
Mishal Yousef Soud Al Sabah
/S/ MARVIN BUSH Director March 31, 1998
Marvin Bush
Director March , 1998
Robert B. Smith, Jr.
Director March , 1998
James A. Abrahamson
</TABLE>
17
<PAGE>
STRATESEC Incorporated
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-2 - F-3
Balance Sheets as of December 31, 1996 and 1997 F-4
Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 F-5
Statement of Shareholders' Equity (Deficiency) for the
years ended December 31, 1995, 1996 and 1997 F-6
Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 F-7
Notes to Financial Statements F-8 - F-21
Schedule II - Valuation and Qualifying Accounts F-22
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
STRATESEC Incorporated
We have audited the accompanying balance sheets of STRATESEC Incorporated
(formerly known as Securacom Incorporated) as of December 31, 1996 and 1997, and
the related statements of operations, shareholders' equity (deficiency), and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of STRATESEC Incorporated as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
We have also audited Schedule II of STRATESEC Incorporated for the years ended
December 31, 1996 and 1997. In our opinion, this schedule presents fairly, in
all material respects, the information required to be set forth therein.
Grant Thornton LLP
Parsippany, New Jersey
March 20, 1998
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
STRATESEC Incorporated
We have audited the accompanying statements of operations, stockholders' equity
and cash flows of STRATESEC Incorporated (formerly known as Securacom,
Incorporated) for the year ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant accounting estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operation and cash flows of STRATESEC
Incorporated for the year ended December 31, 1995, in conformity with generally
accepted accounting principles.
We have also audited Schedule II of STRATESEC Incorporated for the year ended
December 31, 1995. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.
AMPER, POLITZINER & MATTIA
June 3, 1996
Edison, New Jersey
<PAGE>
STRATESEC Incorporated
BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS 1996 1997
------------- -------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 609,342 $ 998,312
Cash - restricted 2,063,539
Accounts receivable, net of allowance for doubtful accounts
of $42,000 in 1996 and $49,000 in 1997 1,777,456 3,330,542
Costs and estimated earnings in excess of billings on
uncompleted contracts 1,148,560 2,108,134
Inventory 598,415
Prepaid expenses and other 120,937 140,870
------------- -------------
Total current assets 3,656,295 9,239,812
Plant and equipment, net 714,989 740,156
Other assets 195,803 128,414
------------- -------------
$ 4,567,087 $ 10,108,382
============ ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIENCY)
Current liabilities
Current maturities of capital lease obligations $ 21,454 $ 51,100
Accounts payable 2,739,271 1,997,014
Billings in excess of costs and estimated earnings
on uncompleted contracts 103,184 69,734
Accrued expenses and other 641,506 2,938,789
------------- ------------
Total current liabilities 3,505,415 5,056,637
Long-term liabilities
Notes payable 2,541,000
Capital lease obligations, less current maturities 116,399 196,285
Commitments and contingencies
Shareholders' equity (deficiency)
Common stock, $.01 par value per share; authorized
20,000,000 shares; issued and outstanding,
4,434,140 shares in 1996 and 6,103,522 shares in 1997 44,341 61,035
Additional paid-in capital 10,582,197 21,072,430
Accumulated deficit (12,222,265) (16,278,005)
----------- -----------
(1,595,727) 4,855,460
------------ ------------
$ 4,567,087 $ 10,108,382
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
STRATESEC Incorporated
STATEMENTS OF OPERATIONS
Year ended December 31,
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Earned revenues $ 3,176,523 $ 5,824,448 $12,132,924
Cost of earned revenues 2,179,964 4,416,386 9,806,681
---------- ---------- -----------
Gross profit 996,559 1,408,062 2,326,243
Selling, general and administrative expenses 2,870,570 3,700,698 3,755,965
Provision for legal judgment 2,200,000
----------------- ----------------- -----------
Operating loss (1,874,011) (2,292,636) (3,629,722)
Interest and financing fees (101,707) (241,716) (514,891)
Interest and other income 208,026 21,519 88,873
----------- ------------ -------------
NET LOSS $(1,767,692) $(2,512,833) $ (4,055,740)
========== ========== ===========
Basic and diluted net loss per share $(.46) $(.58) $(.85)
========== ========== ===========
Weighted average shares outstanding 3,812,000 4,306,000 4,792,000
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
STRATESEC Incorporated
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Total
Additional shareholders'
Common stock paid-in Accumulated equity
Shares Amount capital deficit (deficiency)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 3,542,889 $35,429 $ 8,221,984 $ (7,941,740) $ 315,673
Net loss (1,767,692) (1,767,692)
Proceeds from issuance of
common stock 410,794 4,107 2,075,818 2,079,925
Common stock issuance costs (76,800) (76,800)
Issuance of warrants 3,000 3,000
--------------- ----------- --------------- ------------------ --------------
Balance at December 31, 1995 3,953,683 39,536 10,224,002 (9,709,432) 554,106
Net loss (2,512,833) (2,512,833)
Exercise of warrants 480,457 4,805 247,195 252,000
Issuance of warrants 111,000 111,000
--------------- ----------- ------------ ------------------ ------------
Balance at December 31, 1996 4,434,140 44,341 10,582,197 (12,222,265) (1,595,727)
Net loss (4,055,740) (4,055,740)
Proceeds from issuance of
common stock 1,400,000 14,000 10,533,455 10,547,455
Common stock issuance costs (811,910) (811,910)
Exercise of warrants 269,382 2,694 706,688 709,382
Issuance of warrants 62,000 62,000
--------------- ----------- ------------- ------------------ -------------
Balance at December 31, 1997 6,103,522 $61,035 $21,072,430 $(16,278,005) $ 4,855,460
========= ====== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
STRATESEC Incorporated
STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(1,767,692) $(2,512,833) $ (4,055,740)
---------- ---------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities
Provision for legal judgment 2,200,000
Depreciation and amortization 62,457 91,859 143,298
Noncash compensation 27,500 28,000
Amortization of debt discount 5,000 171,000
Changes in operating assets and liabilities
Restricted cash (2,063,539)
Accounts receivable (767,135) (622,283) (1,553,086)
Costs and estimated earnings in excess of
billings on uncompleted contracts 177,124 (368,169) (959,574)
Inventory (598,415)
Prepaid expenses and other (30,043) (20,931) (19,933)
Other assets (146,978) (1,915) 67,389
Accounts payable 115,265 1,921,291 (742,257)
Billings in excess of costs and estimated
earnings on uncompleted contracts 249,846 (338,875) (33,450)
Accrued expenses and other 145,620 212,999 97,283
----------- ----------- -------------
Total adjustments (166,344) 906,976 (3,291,284)
----------- ----------- -----------
Net cash used in operating activities (1,934,036) (1,605,857) (7,347,024)
---------- ---------- -----------
Cash flows from investing activities
Acquisition of plant and equipment (17,868) (396,460) (24,789)
------------ ----------- -------------
Cash flows from financing activities
Proceeds from notes payable - shareholder 800,000 2,050,000 700,000
Principal payments on notes payable - shareholder (200,000) (3,350,000)
Principal payments of capital lease obligations (19,068) (17,686) (34,144)
Proceeds from issuance of common stock and
exercise of warrants 1,537,425 224,000 11,256,837
Common stock issuance costs (76,800) (811,910)
------------ ----------------- ------------
Net cash provided by financing activities 2,241,557 2,056,314 7,760,783
---------- ---------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 289,653 53,997 388,970
Cash and cash equivalents at beginning of year 265,692 555,345 609,342
----------- ----------- ------------
Cash and cash equivalents at end of year $ 555,345 $ 609,342 $ 998,312
=========== =========== ============
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 97,000 $ 165,000 $ 385,000
Income taxes 2,000 7,000 30,000
</TABLE>
During 1995, the Company issued 103,000 shares of common stock in payment of
notes payable totaling $515,000.
During 1996 and 1997, the Company acquired equipment totalling approximately
$149,000 and $144,000 through capital lease transactions, respectively.
The accompanying notes are an integral part of these statements.
<PAGE>
STRATESEC Incorporated
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
NOTE A - BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
STRATESEC Incorporated (the "Company", formerly known as Securacom
Incorporated) is a provider of comprehensive security solutions for large
commercial and government facilities worldwide. At December 31, 1996, the
Company was approximately 91%-owned by KuwAm Corporation, two private
investment partnerships of which KuwAm serves as general partner, Special
Situations Investment Holdings, Ltd. and Special Situations Investment
Holdings L.P. II, and certain individual limited partners of the investment
partnerships (the "KuwAm Group"). On October 1, 1997, the Company completed
an initial public offering and sold 1,400,000 shares of common stock and
the KuwAm Group sold 808,000 shares of stock. At December 31, 1997, the
KuwAm Group owns approximately 53% of the Company.
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows:
1. Revenue Recognition
The Company derives its revenues principally from long-term contracts
which are generally on a fixed price basis. Earnings are recognized on
the basis of the Company's estimates of the percentage of completion of
individual contracts, whereby total estimated income is earned based
upon the proportion that costs incurred bear to the Company's estimate
of total contract costs.
The percentage of completion of individual contracts includes
management's best estimates of the amounts expected to be realized on
these contracts. It is at least reasonably possible that the amounts
the Company will ultimately realize could differ materially in the near
term from the amounts estimated in arriving at the earned revenue and
costs and earnings in excess of billings on uncompleted contracts.
Contract costs include all direct material, direct labor and
subcontract costs. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined.
Changes in job performance, job conditions and estimated profitability,
including those arising from contract revisions and final contract
settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined.
<PAGE>
STRATESEC Incorporated
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1997
NOTE A (continued)
The asset "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of
amounts billed to clients. The liability "Billings in excess of costs
and estimated earnings on uncompleted contracts" represents billings in
excess of revenues recognized.
2. Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
3. Inventory
Inventory consisting of equipment held for sale is stated at the lower
of cost or market with cost being determined by the first-in first-out
method.
4. Plant and Equipment
Plant and equipment are stated at cost. Depreciation is provided using
the straight-line method based on the estimated useful lives of the
related assets. Leasehold improvements are amortized over the shorter
of the economic life of the improvements or the lease term.
5. Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting
for Income Taxes." SFAS No. 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax assets and liabilities are
determined based on the temporary differences between the financial
statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to
reverse.
<PAGE>
STRATESEC Incorporated
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1997
NOTE A (continued)
6. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
the financial statements as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. In addition to the estimates of revenues earned
on contracts as described in Note A-1 and Note C, the Company estimates
an allowance for doubtful accounts based on the creditworthiness of
their clients, as well as general economic conditions. Consequently, an
adverse change in those factors could affect the Company's estimate.
7. Concentrations of Credit Risk and Fair Value of Financial Instruments
The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash, money market funds and trade
accounts receivable. The Company places its cash and money market funds
with high credit quality institutions. In general, such investments
exceed the FDIC insurance limit.
The Company provides credit to its clients in the normal course of
business. The Company routinely assesses the financial strength of its
clients and, as a consequence, believes that its trade accounts
receivable exposure is limited.
The carrying value of financial instruments potentially subject to
valuation risk (principally consisting of cash, accounts receivable and
accounts payable) approximates fair market value.
8. 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
<PAGE>
STRATESEC Incorporated
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1997
NOTE A (continued)
by the shares that may be repurchased with the funds received from the
exercise, based on the average price during the year.
Stock options and warrants have not been included in the calculation of
diluted earnings per share as their inclusion would be antidilutive.
Reference is made to Notes E, I and J.
NOTE B - LIQUIDITY
As shown in the accompanying financial statements, STRATESEC Incorporated
has incurred recurring operating losses and has an accumulated deficit of
$16,278,005 at December 31, 1997. In these circumstances, the Company's
continued existence is dependent upon its ability to generate profitable
operations and, if necessary, secure financing to fund future operations.
Management is addressing these matters by cutting overhead expenses and
reorganizing the Company's management structure. The Company anticipates
that it will generate sufficient cash flow from 1998 operations to meet its
working capital needs. The Company has, in the past, been able to secure
additional financing to meet its operating requirements, although there can
be no assurance that it will be able to continue to do so.
NOTE C - COSTS AND ESTIMATED EARNINGS ON
UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts at December 31, 1996
and 1997 are as follows:
1996 1997
-------------- -------------
Costs incurred on contracts $32,222,489 $14,229,410
Estimated earnings 3,889,963 3,473,560
----------- -----------
36,112,452 17,702,970
Less billings to date 35,067,076 15,664,570
---------- ----------
$ 1,045,376 $ 2,038,400
=========== ===========
<PAGE>
STRATESEC Incorporated
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1997
NOTE C (continued)
In addition, included in accounts receivable at December 31, 1996 and 1997
were retainages of $76,983 and $648,061, respectively, which are
anticipated to be collected within one year. Included in accounts payable
at December 31, 1996 and 1997 were retainages of $111,278 and $29,015,
respectively,
During the fourth quarter of 1997, the Company revised its estimate of cost
to complete on several contracts. As a result of these adjustments, revenue
and gross margin for 1997 were reduced by $1,248,000.
In February 1996, the Company negotiated a final settlement on a major
contract with the Tennessee Valley Authority. As a result, the Company
wrote off approximately $238,000 of amounts owed to a subcontractor and
reduced cost of earned revenues.
NOTE D - PLANT AND EQUIPMENT
Plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
Useful
1996 1997 life
---------- ---------- --------
<S> <C> <C> <C>
Computer equipment $275,110 $ 249,158 5 years
Equipment and fixtures 328,885 508,034 10 years
Aircraft (a) 335,000 335,000 10 years
Leasehold improvements 53,471 68,739 5 years
--------- -----------
992,466 1,160,931
Accumulated depreciation and amortization 277,477 420,775
------- ----------
$714,989 $ 740,156
======= ==========
</TABLE>
(a) The aircraft was purchased in 1996 from a firm whose principal
shareholders are the same as those of the Company. The Company sold
the aircraft back to the manufacturer in February, 1998 for $240,000.
<PAGE>
STRATESEC Incorporated
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1997
NOTE E - NOTES PAYABLE
During the years ended December 31, 1995, 1996 and 1997, the Company issued
subordinated debentures to the KuwAm Group totalling $3,250,000 with
478,580 of warrants to purchase common stock of the Company at $7.00 per
share. The debentures bore interest at 10% and were repaid in full from the
proceeds of the initial public offering. The value of the warrants of
$176,000 was determined based upon an appraisal of the securities by an
independent firm and was recorded as additional paid-in capital. All
478,580 warrants are outstanding at December 31, 1997.
Interest expense on these notes amounted to approximately $37,000, $125,000
and $413,000 (including $5,000 and $171,000 in 1996 and 1997, respectively,
of amortization of debt discount) for the years ended December 31, 1995,
1996 and 1997, respectively.
NOTE F - ACCRUED EXPENSES
Accrued expenses and other are summarized as follows:
December 31,
1996 1997
Legal judgment (see Note N) $2,200,000
Payroll $237,515 273,877
Employee expense reimbursements 107,236 62,607
Professional fees 87,875 45,745
Deferred rent obligation 74,295 56,515
Other 134,585 300,045
------- ----------
$641,506 $2,938,789
======= =========
<PAGE>
STRATESEC Incorporated
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1997
NOTE G - OBLIGATIONS UNDER CAPITAL LEASE AGREEMENTS
The Company has entered into various capital lease agreements for equipment
with a cost of $197,895 and $292,970 at December 31, 1996 and 1997,
respectively. The leases expire at various times through 2002. Accumulated
amortization amounted to $29,447 and $63,264 at December 31, 1996 and 1997,
respectively. The related future minimum lease payments, as of December 31,
1997, are as follows:
Fiscal Capital
year leases
1998 $ 89,944
1999 86,375
2000 92,344
2001 58,954
2002 15,707
--------
Net minimum lease payments 343,324
Amount representing interest (95,939)
$247,385
NOTE H - RELATED PARTY TRANSACTIONS
The Company had agreements (the "Agreements") with KuwAm Corporation
whereby the Company paid a fee of five percent of the capital raised from
the private sale of common stock and subordinated debentures under the
Agreements. The Company incurred approximately $77,000, $103,000 and
$35,000 of investment banking fees under the Agreements during 1995, 1996
and 1997, respectively, which have been recorded as a reduction of proceeds
from sales of equity securities and interest and financing fees for sales
of subordinated debentures.
Of the total $3,350,000 proceeds received from the issuance of notes
payable, the Company invested $700,000 in a limited partnership interest of
Special Situations Investment Holdings, Ltd. ("SSIH") recorded at cost
which was deemed to be equivalent to fair market value. At the conclusion
of the initial public offering, SSIH redeemed the limited partnership
interest at $700,000 plus interest.
<PAGE>
STRATESEC Incorporated
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1997
NOTE I - INITIAL PUBLIC OFFERING
On October 1, 1997, the Company completed an initial public offering of
1,400,000 shares of its common stock, par value $.01 per share ("Common
Stock"), at an initial offering price of $8.50 per share. In addition, the
majority shareholder sold 808,000 shares at $8.50 per share. The net
proceeds from the offering to the Company were approximately $9,735,000. On
October 7, 1997, the Company issued to the underwriter, at a purchase price
of $0.001 per warrant, warrants to purchase up to an aggregate of 140,000
shares of Common Stock at an exercise price of $13.18 per share, all of
which are outstanding at December 31, 1997.
NOTE J - EMPLOYEE STOCK WARRANTS AND OPTIONS
In 1997, the Board of Directors approved the adoption of the 1997 Stock
Option Plan. The 1997 Stock Option Plan provides for the grant of options
to purchase up to 500,000 shares of the Company's common stock. Options may
be granted to employees, officers, directors and consultants of the Company
for the purchase of common stock of the Company at a price not less than
the fair market value of the common stock on the date of the grant. In
December of 1997, 15,000 options were issued to a new director at $8.625
per share. In February of 1998, the Company issued to employees and
directors an additional 330,000 options at $2.375 per share.
The Company has elected to follow Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in measuring compensation expense for its stock warrants
and options. Under APB No. 25, because the exercise price of the Company's
employee stock warrants and options is not less than the fair market value
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. However, SFAS No. 123, "Accounting for
Stock-Based Compensation," requires presentation of pro forma net income
and earnings per share as if the Company had accounted for its employee
stock warrants and options, granted subsequent to December 31, 1994, under
the fair value method of that statement. For purposes of pro forma
disclosure, the estimated fair value of the warrants and options
<PAGE>
STRATESEC Incorporated
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1997
NOTE J (continued)
is amortized to expense over the vesting period. Under the fair value
method, the Company's net loss in 1997 would have increased by $60,000 or
$.01 per share on a basic and diluted basis. Under the fair value method,
in 1995 and 1996, the Company's net loss would not have had a material
change.
Because SFAS No. 123 is applicable only to options and warrants granted
subsequent to December 31, 1994, and the warrants have a three-year vesting
period, its pro forma effect will not be fully reflected until 1998.
The weighted average fair value of the individual warrants and options
granted during 1995, 1996 and 1997 is estimated as $0.4, $.04 and $1.13,
respectively, on the date of grant. The fair values were determined using a
Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ---------
<S> <C> <C> <C>
Dividend yield - - -
Volatility 50% 50% 50%
Risk-free interest rate 6.70 6.06 6.18
Forfeiture rate - - -
Expected life 3 years 3 years 3 years
</TABLE>
<PAGE>
STRATESEC Incorporated
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1997
NOTE J (continued)
Stock warrant and option activity during 1995-1997 is summarized below:
Shares of common Weighted
stock attributable average exercise
to warrants price of warrants
and options and options
Unexercised at December 31, 1994 802,227 $1.78
Granted 245,148 4.63
Exercised
Expired 35,000 5.00
-----------
Unexercised at December 31, 1995 1,012,375 2.36
Granted 400,797 6.58
Exercised 480,457 .53
Expired 48,333 5.41
-----------
Unexercised at December 31, 1996 884,382 5.10
Granted 200,000 7.12
Exercised 269,382 2.63
Expired 100,000 6.50
----------
Unexercised at December 31, 1997 715,000 6.39
==========
The following table summarizes information concerning outstanding and
exercisable warrants and options at December 31, 1997:
<TABLE>
<CAPTION>
Warrants and options outstanding
Weighted-average
remaining Warrants and
Exercise Number contractual options
price outstanding life (years) exercisable
<S> <C> <C> <C>
$5.00 225,000 .3 150,000
7.00 475,000 1.6 96,667
8.625 15,000 3.0
</TABLE>
<PAGE>
STRATESEC Incorporated
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1997
NOTE J (continued)
During the year ended December 31, 1996, the President of the Company
exercised warrants for the purchase of 53,320 shares of common stock at an
exercise price of $.53 per share. Since no amount was paid upon exercise of
the warrants, the Company recorded compensation expense of $28,000.
NOTE K - INCOME TAXES
Deferred tax attributes resulting from differences between financial
accounting amounts and tax bases of assets and liabilities at December 31,
1996 and 1997 follow:
<TABLE>
<CAPTION>
1996 1997
-------------- ----------------
<S> <C> <C>
Current assets and liabilities
Allowance for doubtful accounts $ 17,000 $ 19,000
Accrued vacation pay 38,000 49,000
Provision for legal judgment 880,000
------------- -------------
55,000 948,000
Valuation allowance (55,000) (948,000)
------------- -------------
Net current deferred tax asset (liability) $ - $ -
============= =============
Noncurrent assets and liabilities
Depreciation $ (58,000) $ (71,000)
Net operating loss carryforward 4,744,000 5,499,000
------------- -------------
4,686,000 5,428,000
Valuation allowance (4,686,000) (5,428,000)
------------- -------------
Noncurrent deferred tax asset (liability) $ - $ -
============= =============
</TABLE>
The valuation allowance has been established for those loss carryforwards
and temporary differences which are not presently considered more likely
than not to be realized.
<PAGE>
STRATESEC Incorporated
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1997
NOTE K (continued)
The provision for income taxes differs from the effective tax rate used in
the financial statements as a result of current year net operating losses,
the benefit of which has not been recognized in the current year.
As of December 31, 1997, the Company has net operating loss carryforwards
of approximately $14,000,000, which expire in 2002 through 2012.
In 1992, a major stockholder of the Company significantly increased its
ownership of the Company. As a result of a complex set of rules limiting
the utilization of net operating loss carryforwards in tax years following
a corporate ownership change (enacted in the Tax Reform Act of 1986), the
ability of the Company to utilize net operating losses of approximately
$3.5 million may be limited.
Also, the shares issued in connection with the Company's initial public
offering are expected to create an ownership change. However, based on the
expected value of the Company immediately before such ownership change and
the resulting limitation as defined, the Company expects to be able to
utilize its net operating losses of approximately $8.7 million incurred
after August 1992 through the date of the initial public offering. Losses
incurred after the initial public offering may be limited by future
ownership changes.
NOTE L - EMPLOYEE BENEFIT ARRANGEMENTS
The Company established a contributory employee savings plan under Section
401(k) of the Internal Revenue Code. The Company contributes amounts to
individual participant accounts based on specific provisions of the plan.
The cost to the Company for the employer match under the plan was $8,238,
$12,728 and $16,665, for the years ended December 31, 1995, 1996 and 1997,
respectively.
NOTE M - COMMITMENTS AND CONTINGENCIES
Leases
The Company conducts all of its operations from leased facilities
consisting of its corporate headquarters and branch office locations. All
facility leases are classified as operating leases with terms ranging from
one to five years.
<PAGE>
STRATESEC Incorporated
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1997
NOTE M (continued)
The following is a schedule by years of approximate future minimum rental
payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1997:
Year ending December 31, Amount
1998 $ 385,000
1999 389,000
2000 243,000
2001 98,000
2002 72,000
-----------
$ 1,187,000
Rent expense for the years ended December 31, 1995, 1996 and 1997 was
$236,000, $286,000 and $248,000, respectively.
Employment and Consulting Agreements
In 1997, the Company entered into employment agreements with its President
and Chief Financial Officer that provide for annual base salaries of
$165,000 and $125,000, respectively, through March 31, 2002 and 2000,
respectively. The agreements provide for an additional payment equal to
three times the annual base salary if the executive is terminated due to a
change in control as defined in the agreement. The Company also entered
into a consulting agreement with the Chairman of the Company (and managing
partner of KuwAm Corporation) that provides for an annual consulting fee of
$145,000 through March 31, 2002. As of February 1998, the annual base
salaries under these agreements were reduced by 10%.
NOTE N - LITIGATION
The Company is a party in certain legal actions arising from the normal
conduct of its business. In November, the United States District Court of
New Jersey decided in favor of Securacom Consulting, Inc. in its trademark
case against Securacom, Incorporated. The judgment calls for Securacom,
Incorporated to abandon its corporate name and holds the Company liable for
<PAGE>
STRATESEC Incorporated
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996 and 1997
NOTE N (continued)
$1,900,000 in damages. The Company is currently appealing this decision and
believes the judgment will be reversed. However, the Company has accrued
$2,200,000 in expenses equal to the amount of the judgment plus attorneys'
fees. The Company had to purchase a $1,900,000 certificate of deposit which
is restricted as collateral for an Appeal Bond filed with the court.
NOTE O - ACQUISITION
Effective August 1, 1995, STRATESEC Incorporated acquired the assets and
certain liabilities of Franklin M. Sterling & Associates, Inc. in exchange
for issuing 25,000 shares of common stock to, and employment of, Franklin
M. Sterling, P.E. as Senior Vice President in charge of STRATESEC's West
Coast offices. The Company recorded compensation expense of $27,500 in 1995
relating to the issuance of these shares of common stock.
NOTE P - SIGNIFICANT CLIENTS
During the year ended December 31, 1995, contracts with three clients
accounted for approximately 41%, 18% and 13% of earned revenues. During the
year ended December 31, 1996, contracts with four clients accounted for
approximately 28%, 22%, 14% and 11% of earned revenue. For the year ended
December 31, 1997, two clients accounted for approximately 55% and 20%,
respectively, of earned revenue.
NOTE Q - INTEREST AND OTHER INCOME
Included in interest and other income for the year ended December 31, 1995
is a gain on settlement of litigation, net of expenses and fees of
$205,179.
<PAGE>
STRATESEC Incorporated
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- --------- -------- ---------- ---------
Additions
(1) (2)
Charged to
Balance at Charged to other Balance at
beginning costs and accounts - Deductions - end of
Description of period expenses describe describe period
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful accounts $ 42,000 $43,000 - $(36,000) (A) $ 49,000
======== ====== ======= ========
Year ended December 31, 1996
Allowance for doubtful accounts $120,000 $(78,000) (A) $ 42,000
======= ======= ========
Year ended December 31, 1995
Allowance for doubtful accounts $ 97,000 $23,000 $120,000
======== ====== =======
</TABLE>
- ----------
(A) Uncollectible accounts written off.
Exhibit 11
Loss Per Share
<TABLE>
<CAPTION>
1995 1996 1997
--------------- ---------------- -----------------
<S> <C> <C> <C>
Net Loss.................................................. $ (1,767,692) $ (2,512,833) $ (4,055,740)
=============== =============== ==================
Weighted average shares outstanding....................... 3,812,000 4,306,000 4,792,000
=============== =============== ==================
Basic and diluted net loss per share (a) $ (0.46) $ (0.58) $ (0.85)
=============== =============== ==================
</TABLE>
(a) Stock options and warrants have not been included in the calculation of
diluted earnings per share as their inclusion would be antidilutive.
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We have issued our report dated March 20, 1998, accompanying the financial
statements and schedule included in the Annual Report of STRATESEC, Incorporated
on Form 10-K for the year ended December 31, 1997. We hereby consent to the
incorporation by reference of said report in the Registration Statements of
STRATESEC, Incorporated on Form S-8 (File No. 333-38805), effective October 27,
1997.
GRANT THORNTON LLP
New York, New York
March 20, 1998
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation of our report dated June 3, 1996 on the
financial statements of STRATESEC Incorporated (formerly known as Securacom
Incorporated) for the year ended December 31, 1995 which is included in this
form 10-K of STRATESEC Incorporated, and to the reference of our Firm under the
caption "Experts" in the Form 10-K which is expected to be filed on or about
March 31, 1998.
AMPER, POLITZINER & MATTIA P.A.
March 31, 1998
Edison, New Jersey
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<CASH> 998,312
<SECURITIES> 0
<RECEIVABLES> 3,379,542
<ALLOWANCES> (49,000)
<INVENTORY> 598,415
<CURRENT-ASSETS> 9,239,812
<PP&E> 1,160,931
<DEPRECIATION> (420,775)
<TOTAL-ASSETS> 10,108,382
<CURRENT-LIABILITIES> 5,056,637
<BONDS> 0
0
0
<COMMON> 61,035
<OTHER-SE> 4,794,425
<TOTAL-LIABILITY-AND-EQUITY> 10,108,382
<SALES> 12,132,924
<TOTAL-REVENUES> 12,132,924
<CGS> 9,806,681
<TOTAL-COSTS> 9,806,681
<OTHER-EXPENSES> 5,955,965
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 514,891
<INCOME-PRETAX> (4,055,740)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,055,740)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,055,740)
<EPS-PRIMARY> (0.85)
<EPS-DILUTED> (0.85)
</TABLE>
