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 September 30, 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 October 23, 1998.
<PAGE>
STRATESEC INCORPORATED
Quarter ended September 30, 1998
Index
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial information
Item 1. Financial Statements........................................................................... 3
Balance Sheets as of December 31, 1997 and September 30, 1998
(unaudited).......................................................................................... 3
Statements of Operations for the three months ended September 30, 1997 and
1998 (unaudited) and the nine months
ended September 30, 1997 and September 30, 1998 (unaudited).......................................... 4
Statements of Cash Flows for the nine months
ended September 30, 1997 and September 30, 1998 (unaudited).......................................... 5
Notes to Financial Statements........................................................................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................. 7
Part II. Other information
Item 2. Changes in Securities and Use of Proceeds...................................................... 11
Item 6. Exhibits and Reports on Form 8-K.............................................................. 12
Signature............................................................................................... 13
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STRATESEC INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1997* 1998
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 998,312 $ 646,172
Cash-restricted............................................................ 2,063,539 1,940,048
Accounts receivable, net of allowance for doubtful
accounts of $49,000 in 1997 and 1998..................................... 3,330,542 1,301,157
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................................... 2,108,134 1,298,463
Inventory.................................................................. 598,415 240,688
Prepaid expenses and other................................................. 140,870 127,233
-------------- --------------
Total currents assets................................................. 9,239,812 5,553,751
Plant and equipment, net...................................................... 740,156 463,088
Other assets.................................................................. 128,414 139,866
-------------- --------------
$ 10,108,382 $ 6,156,704
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current maturities of capital lease obligations............................ $ 51,100 $ 66,335
Accounts payable........................................................... 1,997,014 1,004,468
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................................... 69,734 261,725
Accrued expenses and other................................................. 2,938,789 2,757,871
-------------- --------------
Total current liabilities............................................. $ 5,056,637 $ 4,090,399
Long-term liabilities:
Capital lease obligations, less current maturities......................... 196,285 186,004
Notes payable.............................................................. -- 1,790,506
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 21,143,824
Accumulated deficit........................................................ (16,278,005) (21,115,063)
-------------- --------------
4,855,460 89,796
-------------- --------------
$ 10,108,382 $ 6,156,704
============== ==============
</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 Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Earned revenues................................ $ 4,182,763 $ 1,435,416 $ 11,422,961 $ 4,127,916
Provision for contract adjustment.............. -- -- -- 2,491,156
Cost of earned revenues........................ 3,006,339 1,044,236 8,216,515 3,281,477
-------------- -------------- -------------- --------------
Gross profit................................ 1,176,424 391,180 3,206,446 (1,644,717)
Selling, general and administrative
expenses.................................... 876,098 1,045,527 2,256,627 3,129,059
-------------- -------------- -------------- --------------
Operating income (loss)........................ 300,326 (654,347) 949,819 (4,773,776)
Loss on sale of plant and equipment............ -- -- -- (37,839)
Interest and financing fees.................... (111,711) (69,787) (343,488) (118,891)
Interest and other income...................... 24,082 27,469 35,800 93,448
-------------- -------------- -------------- --------------
Net income (loss).............................. $ 212,697 $ (696,666) $ 642,131 $ (4,837,059)
============== ============== ============== ==============
Net income (loss) per share - basic
and diluted................................. $ .05 $ (.11) $ .14 $ (.79)
============== ============== ============== ==============
Weighted average common shares
outstanding................................. 4,605,000 6,103,522 4,605,000 6,103,522
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
STRATESEC INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1998
------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................ $ 642,131 $ (4,837,058)
------------ --------------
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization.............................................. 99,958 106,570
Loss of sale of plant and equipment........................................ -- 39,162
Amortization of debt discount.............................................. 31,500 11,899
Changes in operating assets and liabilities:
Cash restriction............................................................. -- 123,491
Accounts receivable.......................................................... (376,410) 2,029,385
Inventory (Material Stores on Site).......................................... -- 357,728
Costs and estimated earnings in excess of
billings on uncompleted contracts.......................................... (3,096,834) 809,671
Prepaid expenses and other................................................... (85,728) 13,647
Other assets................................................................. (16,903) (11,452)
Accounts payable............................................................. 2,540,590 (992,546)
Billings in excess of costs and estimated
earnings on uncompleted contracts.......................................... (22,429) 191,991
Accrued expenses and other................................................... 253,938 (180,918)
------------ --------------
Total adjustments........................................................ (672,318) 2,498,626
------------ --------------
Net cash from operating activities....................................... (30,187) (2,338,432)
------------ --------------
Cash flows from investing activities:
Investment in SSIH, Ltd...................................................... (700,000) --
Sale of plant and equipment.................................................. -- 240,000
Acquisition of plant and equipment........................................... (5,044) (59,254)
------------ --------------
Net cash used by investing activities........................................ (705,044) 180,746
------------ --------------
Cash flows from financing activities:
Proceeds from notes payable.................................................. 700,000 1,850,000
Principal payments of capital lease
obligations................................................................ (20,996) (44,454)
------------ --------------
Deferred registration cost................................................... (548,385) --
Net cash provided by financing activities.................................... 130,619 1,805,546
------------ --------------
Net (decrease) in cash and cash equivalents..................................... (604,612) (352,140)
Cash and cash equivalents at beginning of period................................ 609,342 998,312
------------ --------------
Cash and cash equivalents at end of period...................................... $ 4,730 $ 646,172
============ ==============
</TABLE>
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited balance sheet as of September 30, 1998 and the unaudited
statement of operations and statements of cash flows for the nine months ended
September 30, 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
September 30, 1998 and for the nine months ended September 30, 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 nine months ended
September 30, 1998 are not necessarily indicative of results to be expected for
the full year.
2. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts at December 31,
1997 and September 30, 1998 which are expected to be collected within one year
are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
--------------- ---------------
<S> <C> <C>
Costs incurred on contracts.................................................. $ 14,229,410 $ 17,521,013
Estimated earnings........................................................... 3,473,560 4,267,393
--------------- ---------------
17,702,970 21,788,406
Less billings to date........................................................ 15,664,570 20,751,668
--------------- ---------------
$ 2,038,400 $ 1,036,738
=============== ===============
</TABLE>
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.
During the second quarter of 1998 a major firm fixed price contract
experienced significant unforseen and continuing delays for a variety of
reasons, many of which were outside the control of the Company. As a result,
actual costs and estimates of future costs to complete the contract rapidly
increased throughout the quarter. As a result, the Company entered into an
agreement with the prime contractor whereby the prime contractor will assume the
remaining costs and all associated risks and liabilities for completing the
contract. In the second quarter of 1998, the Company took a one-time charge of
$2,491,156 associated with the agreement. The Company believes that this
alleviated a significant, near-term cash burden on the Company and will mitigate
operating losses moving forward and eliminate future risks relating to the
contract.
The Company returned to profitability in September 1998 and expects to
be profitable in the fourth quarter on significantly higher revenues as a result
of increased new business booking and new client relationships.
The Company derives its revenues from a mixture of different contract
types including firm, fixed-price, cost plus fixed fee, and time and materials
contracts. Earnings for fixed-price contracts 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. Earnings for cost plus fixed fee contracts are based on the cost
incurred plus the percentage authorized by the contract. Earnings for time and
materials contracts are based on the rate specified in the contract for the
category of labor expended multiplied by the number of hours worked in the
period.
Clients are invoiced based upon negotiated payment terms for each
individual contract. Terms for the fixed-price contracts usually include a 25%
down payment and the balance as stages of the work are completed. Terms for cost
plus fixed fee contracts allow for billing as the material is received or at the
end of the month in which the material was received. Terms for time and
materials contracts provide for billing each month for the number of hours
worked during the month. Maintenance contracts are billed in advance, monthly,
or quarterly. As a result, the Company records as an asset cost estimated
earnings in excess of billings and as a liability billings in excess of costs
and estimated earnings for the fixed-price contracts.
7
<PAGE>
In the first three quarters of the year, the Company has continued to
diversify its client base and reduce its dependence on a very small number of
large contracts. This diversification is expected to continue for the rest of
the year.
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.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Earned Revenues.......................................... 100.0% 100.0% 100.0% 100.0%
Provision for contract adjustment........................ -- -- -- 60.3
Cost of earned revenues.................................. 71.9 72.7 71.9 79.5
------------ ---------- ---------- ----------
Gross profit.......................................... 28.1 27.3 28.1 (39.8)
Selling, general and administrative expenses............. 21.0 72.8 19.8 75.8
------------ ---------- ---------- ----------
Operating income (loss)............................... 7.1 (45.5) 8.3 (115.6)
Loss on sale of plant and equipment...................... -- -- -- (0.9)
Interest and financing fees.............................. (2.6) (4.9) (3.0) (2.9)
Interest and other income................................ 0.6 1.9 0.3 2.3
------------ ---------- ---------- ----------
Net income (loss)..................................... 5.1% 48.5% 5.6% (117.2)%
============ ========== ========== ==========
</TABLE>
Three Months Ended September 30, 1998 Compared With Three Months Ended September
30, 1997
Revenues decreased by 65.7% from $4.2 million in the three months ended
September 30, 1997 to $1.4 million in the three months ended September 30, 1998.
The decrease was due primarily to a decline in work completed on existing
projects.
Cost of earned revenues decreased from $3.0 million in the three months
ended September 30, 1997 to $1.0 million in the three months ended September 30,
1998, primarily due to the decrease in revenues. Gross margin decreased from
28.1% in the 1997 period to 27.3% in the 1998 period.
Selling, general and administrative expenses increased by 19.3% from
$0.8 million in the three months ended September 30, 1997, to $1.0 million in
the three months ended September 30, 1998. Overhead salaries increased by $0.1
million from the previous year's period as project staff worked less on jobs due
to the decreased revenues and, professional fees increased by $0.05 million due
to recruiting fees for the new corporate officers.
Interest expense and financing fees decreased 37.5% from $0.1 million
in the three months ended September 30, 1997 to $0.07 million in the three
months ended September 30, 1998 due to a decrease in outstanding indebtedness
resulting from the repayment of the subordinated debentures in October 1997.
8
<PAGE>
Due to a decrease in revenue, net income decreased from net income of
$0.2 million in the three months ended September 30, 1997 to a net loss of
$(0.7) million in the three months ended September 30, 1998.
Nine Months Ended September 30, 1998 Compared With Nine Months Ended September
30, 1997
Revenues decreased by 64.0% from $11.4 million in the nine months ended
September 30, 1997 to $4.1 million in the nine months ended September 30, 1998.
The decrease was due primarily to a decline in work completed on existing
projects. In addition, revenues from the Metropolitan Washington Airport
Authority declined from $2.1 million in the 1997 period to $1.6 million in the
1998 period.
Cost of earned revenues decreased from $8.2 million in the nine months
ended September 30, 1997 to $3.3 million in the nine months ended September 30,
1998, primarily due to the decrease in revenues. Gross margin decreased from
28.1% in the 1997 period to (39.8)% in the 1998 period due to the one-time
charge of $2.5 million taken in the second quarter 1998.
Selling, general and administrative expenses increased by 39% from $2.3
million in the nine months ended September 30, 1997, to $3.1 million in the nine
months ended September 30, 1998. Overhead salaries increased by $0.7 million
from the previous year's period as project staff worked less on jobs due to the
decreased revenues and as a result of overlap during a transition to new
corporate management. Professional fees increased by $0.1 million for recruiting
fees for the new corporate officers.
Interest expense and financing fees decreased 65.3% from $0.3 million
in the nine months ended September 30, 1997 to $0.1 million in the nine months
ended September 30, 1998 due to a decrease in outstanding indebtedness resulting
from the repayment of the subordinated debentures in October 1997.
Net income decreased from net income of $0.6 million in the nine months
ended September 30, 1997 to a net loss of $(4.8) million for the nine months
ended September 30, 1998. This decrease in net income was primarily due to a
decrease in revenue and the one-time charge of $2,491,156 associated with an
agreement with a prime contractor to transfer the remaining cost and all
associated risks for completion of a major firm fixed-price contract to the
prime contractor.
Liquidity and Capital Resources
Prior to the Company's initial public offering (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 nine months ended
September 30, 1998, the Company had negative cash flow from operations of $2.3
million as a result of its operating loss.
9
<PAGE>
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.
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 Company sold an additional $400,000 of debentures as of
August 25, 1998. 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 value
of the warrants of $71,394 was determined based upon the Black Scholes Valuation
Model and was recorded as additional paid-in capital. All 160,000 warrants are
outstanding at September 30, 1998.
As of September 30, 1998, the Company has $0.6 million in unrestricted
cash and working capital of $1.5 million. Of that amount, $1.9 million of
current assets 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. If the Company fails to win the appeal of
the lawsuit, it may require additional working capital to fund operations during
the remainder of the year.
Year 2000
The Company has evaluated products and services it offers in relation
to Year 2000 compliance and found that a majority of installed computer systems
and software products manufactured over 5 years ago are coded to accept only
two-digit year value. These date code fields will need to accept four-digit
entries to differentiate between the 21st century and the 20th century dates.
Many of the Company's vendors' computer systems and software need to be upgraded
or replaced in order to comply with Year 2000 requirements. The Company has made
contact with its key suppliers to determine their capability with respect to
Year 2000 problems and any risk associated with it. The Company's major vendors
have Year 2000 compliance updates already developed or scheduled to be developed
prior to year end 1998. A failure of a key vendor to provide the Company with
necessary components or services could result in delay by the Company in
providing products or services to the Company's customers and have a
10
<PAGE>
material adverse effect on the Company's business, financial condition and
results of operations. Although the Company does not expect Year 2000 issues to
have a material impact on its financial results or operations, there can be no
assurance that there will be no disruptions or that the Company will not incur
significant costs to avoid disruptions. Internally, the Company has no automated
systems except for its accounting system. The Company has decided to convert to
a new accounting system in June 1999 in order to be Year 2000 compliant. The
Company does not expect the cost of this system to be material.
11
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
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 Company sold an additional $400,000 of debentures as of
August 25, 1998. 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. These
transactions were exempt from registration under the Securities Act of 1933 (the
"Act") pursuant to Section 4(2) of the Act and Rule 506 of Regulation D
thereunder.
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
b. Reports on Form 8-K.
None
12
<PAGE>
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/BARRY MCDANIEL
- -----------------------------------------------------
Barry McDaniel
Chief Operating Officer
October 27, 1998
13
EXHIBIT 11
Calculation of Weighted Average Shares
Outstanding for Net Income (Loss) Per Share
<TABLE>
<CAPTION>
September 30,
1997 1998
------------- ---------------
<S> <C> <C>
Earnings:
Net Income (Loss).......................................................... $ 642,131 $ (4,837,058)
============= ==============
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*........................ 170,674 --
------------- --------------
Average Common Shares Outstanding and Equivalents.......................... 4,604,814 6,103,522
============= ==============
Net Income (Loss) Per Share................................................ $ .14 $ (.79)
============= ==============
</TABLE>
* -- Calculation would be antidilutive for 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 646,172
<SECURITIES> 0
<RECEIVABLES> 1,350,423
<ALLOWANCES> (49,266)
<INVENTORY> 240,688
<CURRENT-ASSETS> 5,553,751
<PP&E> 934,595
<DEPRECIATION> 471,508
<TOTAL-ASSETS> 6,156,703
<CURRENT-LIABILITIES> 4,090,399
<BONDS> 0
0
0
<COMMON> 61,035
<OTHER-SE> 28,761
<TOTAL-LIABILITY-AND-EQUITY> 6,156,703
<SALES> 4,127,916
<TOTAL-REVENUES> 4,127,916
<CGS> 5,772,633
<TOTAL-COSTS> 5,772,633
<OTHER-EXPENSES> 3,129,059
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 118,891
<INCOME-PRETAX> (4,837,052)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,837,052)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,837,052)
<EPS-PRIMARY> (0.79)
<EPS-DILUTED> 0
</TABLE>
