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, 1999
Commission File Number: 1-13427
STRATESEC 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 5,866,522 shares of Common Stock, par value $0.01 per share,
outstanding at November 10, 1999.
<PAGE>
STRATESEC INCORPORATED
Quarter ended September 30, 1999
Index
- --------------------------------------------------------------------------------
Page
Part I. Financial information
Item 1. Financial Statements............................................3
Balance Sheets as of December 31, 1998 and September 30, 1999
(unaudited)..........................................................3
Statements of Operations for the three months ended
September 30, 1998 and 1999 and the nine months ended
September 30, 1998 and 1999 (unaudited)..............................4
Statements of Cash Flows for the nine months ended
September 30, 1998 and 1999 (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 1. Legal Proceedings..............................................11
Item 4. Submission of Matters to a Vote of Security Holders............11
Item 6. Exhibits and Reports on Form 8-K..............................12
Signature...............................................................13
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STRATESEC INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998* 1999
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 442,582 $ 15,930
Cash-restricted............................................................ 1,900,000 --
Accounts receivable, net of allowance for doubtful
accounts of $303,000 in 1998 and 1999.................................... 1,297,176 1,352,395
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................................... 1,440,485 1,506,909
Inventory.................................................................. 57,058 291,731
Prepaid expenses and other................................................. 171,404 104,833
-------------- --------------
Total currents assets................................................. 5,308,705 3,271,799
Plant and equipment, net...................................................... 460,932 475,797
Other assets.................................................................. 58,099 58,026
-------------- --------------
$ 5,827,736 $ 3,805,621
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current maturities of capital lease obligations............................ $ 68,672 $ 70,136
Accounts payable........................................................... 1,455,840 1,762,710
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................................... 102,132 89,460
Accrued expenses and other................................................. 1,008,955 661,155
Notes payable.............................................................. 1,802,404 --
-------------- --------------
Total current liabilities............................................. $ 4,438,003 $ 2,583,461
Long-term liabilities:
Capital lease obligations, less current maturities......................... 167,430 120,241
Shareholders' equity (deficiency):
Common stock, $0.01 par value per share; authorized
20,000,000 shares; issued 6,103,502 and 5,973,522 outstanding shares in
1998 and 5,878,522 shares
outstanding in 1999...................................................... 61,035 61,035
Treasury stock............................................................. (181,851) (392,071)
Additional paid-in capital................................................. 21,143,824 22,073,824
Accumulated deficit........................................................ (19,800,705) (20,640,867)
-------------- --------------
Total shareholders' equity............................................... 1,222,303 1,101,920
-------------- --------------
Total liabilities & shareholders' equity................................. $ 5,827,736 $ 3,805,621
============== ==============
* Derived from audited financial statements as of December 31, 1998.
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE>
STRATESEC INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Earned Revenue................................. $ 1,435,416 $ 2,426,985 $ 4,127,916 $ 6,117,875
Provision for contract adjustment.............. -- -- 2,491,156 --
Cost of earned revenue......................... 1,044,236 1,745,593 3,281,477 4,330,578
------------- ------------- ------------- -------------
Gross profit................................... 391,180 681,391 (1,644,717) 1,787,297
Selling, general and administrative
expenses.................................... 1,045,527 880,065 3,129,059 2,488,542
------------- ------------- ------------- -------------
Operating loss................................. (654,347) (198,674) (4,773,776) (701,245)
Loss on sale of plant and equipment............ -- -- (37,839) --
Interest and financing fees.................... (69,787) (37,052) (118,891) (153,339)
Interest and other income...................... 27,469 1,182 93,448 14,422
------------- ------------- ------------- -------------
Net income (loss).............................. (696,665) (234,544) (4,837,058) (840,162)
============= ============= ============= =============
Net income (loss) per share--basic
and diluted................................. (0.11) (0.04) (0.79) (0.14)
============= ============= ============= =============
Weighted average common shares
outstanding................................. 6,103,522 5,978,440 6,103,522 5,978,440
============= ============= ============= =============
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE>
STRATESEC INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $ (4,837,058) $ (840,162)
-------------- --------------
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Provision for legal judgment............................................ -- 1,900,000
Depreciation and amortization........................................... 106,570 116,911
Loss of sale of plant and equipment..................................... 39,162 --
Amortization of debt discount........................................... 11,899 35,697
Cash restriction........................................................ 123,491 --
Changes in operating assets and liabilities:
Accounts receivable....................................................... 2,029,385 (55,219)
Inventory (Material Stores on Site)....................................... 357,728 (234,673)
Costs and estimated earnings in excess of
billings on uncompleted contracts....................................... 809,671 (66,424)
Prepaid expenses and other................................................ 13,647 66,571
Other assets.............................................................. (11,462) 73
Accounts payable.......................................................... (992,546) 306,870
Billings in excess of costs and estimated
earnings on uncompleted contracts....................................... 191,991 (12,672)
Accrued expenses and other................................................ (180,918) (347,800)
-------------- --------------
Total adjustments..................................................... 2,498,626 1,709,332
-------------- --------------
Net cash from (used in) operating activities.......................... (2,338,432) 869,170
-------------- --------------
Cash flows from investing activities:
Sale of plant and equipment............................................... 240,000 --
Acquisition of plant and equipment........................................ (59,254) (131,776)
-------------- --------------
Net cash used by investing activities..................................... 180,746 (131,776)
-------------- --------------
Cash flows from financing activities:
Proceeds from notes payable............................................... 1,850,000 (1,838,101)
Purchase of treasury stock................................................ -- (210,220)
Principal payments on notes payable--shareholders.......................... -- (930,000)
Principal payments of capital lease
obligations............................................................. (44,454) (45,725)
-------------- --------------
Net cash provided by (used in) financing activities....................... 1,805,546 (1,164,046)
-------------- --------------
Net (decrease) in cash and cash equivalents.................................. (352,140) (426,652)
Cash and cash equivalents at beginning of period............................. 998,312 442,582
-------------- --------------
Cash and cash equivalents at end of period................................... $ 646,172 $ 15,930
============== ==============
The accompanying notes are an integral part of these statements.
</TABLE>
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited balance sheet as of September 30, 1999 and unaudited
statements of operations for the three months ended September 30, 1998 and 1999
and the nine months ended September 30, 1998 and 1999 and the unaudited
statements of cash flows for the nine months ended September 30, 1998 and 1999
are condensed financial statements prepared 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 included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 filed with the
Securities and Exchange Commission on March 30, 1999.
In the opinion of the Company, the unaudited financial statements at
September 30, 1999 and for the three and nine months ended September 30, 1998
and 1999, include all adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation of the financial position and
results of operations for such periods. Results of operations for the three and
nine months ended September 30, 1999 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,
1998 and September 30, 1999 which are expected to be collected within one year
are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
--------------- ---------------
<S> <C> <C>
Costs incurred on contracts.................................................. $ 18,988,832 $ 23,319,410
Estimated earnings........................................................... 5,289,572 7,050,742
--------------- ---------------
24,278,404 30,370,152
Less billings to date........................................................ 22,940,051 28,952,703
--------------- ---------------
$ 1,338,353 $ 1,417,449
=============== ===============
</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 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 third quarter, the Company's business continued to grow and
at the end of the quarter, the Company had approximately $14 million in backlog
and follow on projects, as well as a strong bid and proposal log. Many of the
Company's existing clients are major corporate accounts with multiple facilities
throughout the United States. The Company expects these accounts to be long-term
relationships that will generate significant revenues each year. The Company
continues to increase business with existing clients as well as expand and
diversify its client base. Clients currently include Alltel, Dallas/Fort Worth
Technologies, MCI/Worldcom, Koch Industries, Hewlett-Packard, Winn Dixie, EDS,
Dallas Semiconductor, Eastman Kodak, FINA Inc., Nokia and Washington
Metropolitan Transit Authority.
During the third quarter, the holders of the Company's 10% senior notes
totaling $930,000 due December 31, 1999, exchanged their notes for the Company's
common stock valued at $1.50 per share. Additionally, the Company's largest
shareholder, the KuwAm Group, agreed to purchase or privately place up to
500,000 newly issued shares of Stratesec common stock at the same price. The
effect of these transactions is not significantly dilutive, substantially
strengthens the balance sheet, leaves the Company debt free, and better
positions the Company to support its continuing growth and improvement in
operating results.
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.
7
<PAGE>
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 Ended Nine Months Ended
September 30, September 30,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Earned revenues........................................... 100.0% 100.0% 100.0% 100.0%
Provision for contract adjustment......................... 0.0 0.0 60.3 0.0
Cost of earned revenues................................... 72.7 71.9 79.5 70.8
---------- ---------- ---------- ----------
Gross profit........................................... 27.3 28.1 (39.8) 29.2
Selling general and administrative expenses............... 72.8 36.3 75.8 40.7
---------- ---------- ---------- ----------
Operating income (loss)................................ (45.5) (8.2) (115.6) (11.5)
Loss on sale of plant and equipment....................... 0.0 0.0 (0.9) 0.0
Interest and financing fees............................... (4.9) (1.5) (2.9) (2.5)
Interest and other income................................. 1.9 0.0 2.3 0.2
---------- ---------- ---------- ----------
Net income (loss)...................................... (48.5)% (9.8)% (117.2)% (13.7)%
--------- --------- --------- ---------
</TABLE>
Three Months Ended September 30, 1999 Compared With Three Months Ended September
30, 1999
Revenues increased by 69% from $1.4 million in the three months ended
September 30, 1998 to $2.4 million in the three months ended September 30, 1999.
The increase was due primarily to revenue from new customers.
Cost of earned revenues increased from $1.0 million in the three months
ended September 30, 1998 to $1.7 million in the three months ended September 30,
1999, primarily due to the increase in revenues. Gross margin improved from
27.3% in the 1998 period to 28.1% in 1999.
Selling, general and administrative expenses decreased by 15.8% from
$1.0 million in the three months ended September 30, 1998 to $0.8 million in the
three months ended September 30, 1999.
Interest expense and financing fees decreased from $0.07 million in the
three months ended September 30, 1998 to $0.03 million in the three months ended
September 30, 1999.
Net loss improved from a net loss of $0.7 million in 1998 to net loss
of $0.2 million in 1999.
Nine Months Ended September 30, 1999 Compared With Nine Months Ended September
30, 1998.
Revenues increased by 48% from $4.1 million in the nine months ended
September 30, 1998 to $6.1 million in the nine months ended September 30, 1999.
The increase was due primarily to revenue from new customers.
Cost of earned revenues increased from $3.3 million in the nine months
ended September 30, 1998 to $4.3 million in the nine months ended September 30,
1999, primarily due to the increase in revenues. Gross margin increased from
(39.8)% in the 1998 period to 29.2% in 1999.
8
<PAGE>
Selling, general and administrative expenses decreased 20% from $3.1
million in the nine months ended September 30, 1998, to $2.5 million in the nine
months ended September 30, 1999. The decrease was primarily due to Company
initiatives to reduce unnecessary administrative overhead costs.
Interest expense and financing fees remained at $0.1 million in the
nine months ended September 30, 1998 and in the nine months ended September 30,
1999.
Net loss improved from a net loss of $4.8 million in 1998 to net loss
of $0.8 million in 1999.
Liquidity and Capital Resources
In October 1997, the Company completed its initial public offering of
Common Stock, which resulted in net proceeds to the Company of approximately
$9.7 million after payment of offering expenses by the Company. 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 185,000 warrants were
outstanding at December 30, 1998.
During February 1999, the $1.9 million the Company was required to post
as collateral for a bond pending its appeal of a lawsuit was released when the
trial court's judgment was reversed. In February 1999, the Company repaid
$920,000 of the outstanding debentures.
During September 1999 all of the holders of the company's 10% senior
notes totaling $930,000 due December 31, 1999, have agreed to exchange their
notes for the Company's common stock valued at $1.50 per share. Additionally,
the Company's largest shareholder, the KuwAm group, has agreed to purchase or
privately place up to 500,000 newly issued shares of Stratesec common stock at
the same price, $1.50 per share.
As of September 30, 1999, the Company had cash of $0.01 million and
working capital of $0.7 million. The Company is pursuing obtaining
financing/credit facilities to increase working capital to fund a significant
ramp up of new business.
Forward-Looking Statements
This Form 10-Q includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act. All statements, other than statements of historical fact, included in this
Form 10-Q that addresses activities, events, or developments that the Company
expects, projects, believes, or anticipates will or may occur in the future,
including
9
<PAGE>
matters having to do with existing or future contracts, the Company's ability to
fund its operations and repay debt, business strategies, expansion and growth of
operations and other such matters, are forward- looking statements. These
statements are based on certain assumptions and analyses made by our management
in light of its experience and its perception of historical trends, current
conditions, expected future developments, and other factors it believes are
appropriate in the circumstances. These statements are subject to a number of
assumptions, risks and uncertainties, including general economic and business
conditions, the business opportunities (or lack thereof) that may be presented
to and pursued by the Company, the Company's performance on its current
contracts and its success in obtaining new contracts, the Company's ability to
attract and retain qualified employees, and other factors, many of which are
beyond the Company's control. You are cautioned that these forward-looking
statements are not guarantees of future performance and that actual results or
developments may differ materially from those projected in such statements.
Year 2000 Update
The Company evaluated its internal operating systems and software for
Year 2000 compliance. Based on this analysis, the Company replaced its
accounting system to ensure Year 2000 compliance. The cost of this replacement
was $25,000. The Company replaced several obsolete computers and upgraded the
software on its remaining computers at an estimated cost of $20,000. The Company
has reviewed its computers and remaining systems and does not foresee incurring
any additional costs to make them Year 2000 compliant.
The Company has installed and maintained an assortment of security
systems for its customers. To address the issue of Year 2000 compliance, the
Company has surveyed its suppliers for a status of all software and hardware
purchased on behalf of its customers. The Company has communicated the results
to its customers and based on the status reports, it has made recommendations on
how to resolve any Year 2000 problems and issues. The Company has evaluated the
cost required to upgrade security systems installed by the Company for Year 2000
compliance and has proposed solutions for its customers. Based on these
evaluations and solutions, the Company has begun to upgrade several of its
customers' systems as they have requested. The Company expects to complete the
upgrades for its existing customers by the fourth quarter of 1999. It should be
noted that the Company does not manufacture its own system components, but uses
components by other vendors; therefore, there is no internal software
development cost associated with the upgrades for its customers' security
systems.
Since the Company has tested its internal systems for Year 2000
compliance, the Company does not feel that a contingency plan is necessary for
internal operations. The risk associated with the Company's customers' upgrade
is contingent upon its completing their Year 2000 compliance and providing the
Company with the documentation and equipment necessary to complete Year 2000
upgrades for its customers prior to the end of 1999. The Company has identified
alternative vendors to allow it to meet any customer requirements that are
deemed critical. In addition, the Company's customers can supplement their
automated systems with guard services if the security system upgrades are not
complete by the end of 1999.
If the Company's suppliers were unable to provide the Company with the
equipment and information necessary to upgrade the security systems, it could
result in the Company's inability to provide electronic security to customers in
accord with current contract terms. This could lead to termination of the
contract which would result in significant loss of revenue for the Company.
Based
10
<PAGE>
upon the responses of our vendors on the surveys, the Company does not expect
this to occur and does not have a contingency plan for this responsibility.
11
<PAGE>
PART II. OTHER INFORMATION
Item 1. 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 appealed the decision and it was reversed
in January 1999.
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
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
November 15, 1999
12
EXHIBIT 11
Calculation of Weighted Average Shares
Outstanding for Net Income (Loss) Per Share
<TABLE>
<CAPTION>
September 30,
1998 1999
------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Net Income (Loss).......................................................... $ (4,837,058) $ (840,162)
============= ==============
Shares:
Weighted Average Number of Common Shares
Outstanding............................................................. 6,103,522 5,978,440
------------- --------------
Average Common Shares Outstanding and Equivalents.......................... 6,103,522 5,978,440
============= ==============
Net Income (Loss) Per Share................................................ $ (0.79) $ (0.14)
============= ==============
* -- Calculation would be antidilutive for 1998.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 15,930
<SECURITIES> 0
<RECEIVABLES> 1,655,075
<ALLOWANCES> (302,679)
<INVENTORY> 291,731
<CURRENT-ASSETS> 3,271,798
<PP&E> 1,099,185
<DEPRECIATION> (623,388)
<TOTAL-ASSETS> 3,805,621
<CURRENT-LIABILITIES> 2,513,325
<BONDS> 0
0
0
<COMMON> 61,035
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,805,621
<SALES> 6,117,875
<TOTAL-REVENUES> 6,117,875
<CGS> 4,330,578
<TOTAL-COSTS> 4,330,578
<OTHER-EXPENSES> 2,488,542
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 153,339
<INCOME-PRETAX> (840,162)
<INCOME-TAX> 0
<INCOME-CONTINUING> (840,162)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (840,162)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
