- --------------------------------------------------------------------------------
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, 1998
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)
105 Carpenter Drive, Suite C
Sterling, Virginia 20164
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 709-8686
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 10, 1999 (computed by reference to
the closing price of such stock on the American Stock Exchange) was $5,832,767.
As of March 10, 1999, there were 5,878,522 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 1999 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............................................................................. 8
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................... 9
7a Quantive and Qualitative Disclosures About Market Risk.............................................. 14
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, Wachovia Bank, MCI WorldCom, Inc. and Alltel Corporation.
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. In
addition to its headquarters office in Sterling, Virginia, which is in the
Washington, D.C. metropolitan area, the Company has regional offices in Atlanta,
Dallas, and San Francisco.
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 is evaluating several opportunities to expand into
international operations, which it anticipates that 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 WorldCom, Inc.
Mobil Corporation
NationsBank
US WEST
Wachovia Bank
Alltel Corporation
4
<PAGE>
Government Other
Los Alamos National Laboratory City of Baltimore Central
Sandia National Laboratory Booking and Intake Facility
Tennessee Valley Authority Moscow Local Telephone System
U.S. Department of Energy New York City's World Trade Center
U.S. Navy Rostelecom
Rowan County (N.C.) Prison
During 1998, the Metropolitan Washington Airport Authority (operator of
both Washington National and Washington Dulles airports), MCI WorldCom, Inc.
("MCI") and Wachovia Bank accounted for 22%, 14% and 7% of the Company's earned
revenues, respectively. The loss of a significant portion of the revenue from
any of these clients would need to be replaced to avoid 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. Firm contracts are in place
for a significant portion of revenue from all three of these clients, although
the maintenance contract with the airport authority was awarded to another
company in January 1999. Even without the maintenance contract with the
airports, Stratesec has firm 1999 backlog with the airport authority for
approximately 45% of the entire 1998 revenue from the airport authority. The
Company has diversified its client base by winning several new clients
regionally and nationally. The revenues from new clients are expected to assist
in replacing any reduction in revenues from the existing clients.
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.
5
<PAGE>
Long-term maintenance contracts may be canceled without cause. As of December
31, 1997 and 1998, the Company's backlog was approximately $3.8 million and $4.0
million, respectively. Backlog as of December 31, 1998, includes projects having
a value of approximately $1.7 million for which binding contracts have not been
executed and all backlog is expected to be completed during 1999. 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, 1998, the Company had 50 employees, of which 23 were
based in the Company's headquarters located in Sterling, Virginia. The balance
work out of the company's regional offices. Six of the Company's employees are
engaged exclusively in marketing and sales, 35 employees in engineering, project
management, and technical functions, and nine employees in executive management
and administration. None of the Company's employees are represented by a labor
union and the Company believes 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 has decided to convert to a new accounting system in 2nd
quarter 1999 in order to be Year 2000 Compliant. The Company does not expect the
cost of this system to be material.
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 Sterling, Virginia,
which is in the Washington, D.C. metropolitan area. In addition, the Company
leases between approximately 2,000 and 4,000 square feet of office space in each
of the Atlanta, Dallas, and San Francisco 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 appealed the decision and it was reversed
in January 1999.
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 is traded on the American Stock Exchange
under the symbol SFT. The following table sets forth the quarterly range of high
and low closing sale prices per share for the Common Stock during the period
indicated.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
1997
Fourth Quarter (beginning October 2)............ $ 13 1/4 $ 7 7/8
1998
First Quarter..................................... 9 3/4 1 1/2
Second Quarter.................................... 2 1/2 1 1/2
Third Quarter..................................... 2 1/8 1
Fourth Quarter.................................... 1 3/4 1 1/8
1999
First Quarter (through March 10).................. 2 3/8 1 1/2
</TABLE>
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 10, 1999, there
were 65 holders of record of common stock.
Item 6. Selected Financial Data.
The selected 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.
8
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<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ---------- ---------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Earned revenues....................... $ 2,395 $ 3,177 $ 5,824 $ 12,133 $ 6,625
Provision for contract adjustment..... -- -- -- -- 2,491
Cost of earned revenues............... 1,586 2,180 4,416 9,807 4,789
---------- ---------- ---------- ---------- -----------
Gross profit....................... 809 997 1,408 2,326 (656)
Selling, general and administrative
expenses........................... 2,670 2,871 3,701 3,756 4,179
Provision for legal judgment.......... 2,200 (1,656)
---------- ---------- ---------- ---------- -----------
Operating income (loss)............ (1,861) (1,874) (2,293) (3,630) (3,179)
Loss on sale of plant and equipment... -- -- -- -- (38)
Interest and financing fees........... (34) (102) (242) (515) (181)
Interest and other income............. 7 208 22 89 125
---------- ---------- ---------- ---------- -----------
Net income (loss).................. $ (1,888) $ (1,768) $ (2,513) $ (4,056) $ (3,523)
========== ========== ========== ========== ===========
Basic and diluted loss per share... $ (0.56) $ (0.46) $ (0.58) $ (0.85) $ (0.58)
========== ========== ========== ========== ===========
Weighted average number of
shares outstanding.............. 3,396 3,812 4,306 4,792 6,068
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996 1997 1998
----------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............. $ 266 $ 555 $ 609 $ 998 $ 443
Working capital (deficit)............. (31) 696 151 4,183 2,673
Total assets.......................... 2,034 3,046 4,567 10,108 5,828
Long-term debt, less current maturities 6 597 2,657 196 167
Total stockholders' equity (deficiency) 316 554 (1,596) 4,855 1,222
</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
9
<PAGE>
expanding its client base. As part of this effort, the Company opened four
regional offices in the United States.
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.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1995 1996 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Earned revenues.................................. 100.0% 100.0% 100.0% 100.0%
Provision for contract adjustment................ -- -- -- 37.6
Cost of earned revenues.......................... 68.6 75.8 80.9 72.3
---------- ---------- ---------- ---------
Gross profit.................................. 31.4 24.2 19.1 (9.9)
Selling, general and administrative
expenses...................................... 90.4 63.5 30.9 63.1
Provision for legal judgment..................... -- -- 18.1 (25.0)
---------- ---------- ---------- ---------
Operating income (loss)....................... (59.0) (39.3) (29.9) (48.0)
Loss on sale of plant and equipment.............. -- -- -- (0.6)
Interest and financing fees...................... (3.2) (4.2) (4.2) (2.7)
Interest and other income........................ 6.5 0.4 0.7 23.1
---------- ---------- ---------- ---------
Net income (loss)............................. (55.7)% (43.1)% (33.4)% (53.2)%
========== ========== ========== =========
</TABLE>
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Revenues decreased by 45% from $12.1 million in 1997 to $6.6 million in
1998. The decrease was due to the closeout of the World Trade Center Project. In
addition, revenues from the Metropolitan Washington Airport Authority declined
from $2.5 million in 1997 to $2.3 million in 1998.
Cost of earned revenues decreased from $9.8 million in 1997 to $4.8
million in 1998, primarily due to the decrease in revenues. Gross margin
decreased from 19.1% in 1997 to (9.9)% in the 1998 period due to the one time
charge of $2.5 million taken in the second quarter 1998.
Selling, general and administration expenses increased by 7% from $3.8
million in 1997 to $4.1 million in 1998. Overhead salaries increased by $0.4
million from the previous years as project staff worked less on jobs due to the
decreased revenues and as a result at overlap during a transition to new
10
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corporate management. Professional fees increased by $0.1 million for recruiting
fees for new corporate officers.
The Company reversed accrued expenses in the amount of $1.7 million due
to the January 1999 reversal of a judgment in a lawsuit against the Company.
Interest expense and financing fees decreased 64.9% from $0.5 million
in 1997 to $0.1 million in 1998 due to a decrease in outstanding indebtedness
resulting from the repayment of the subordinate debentures in October 1997.
Net loss improved from a net loss of $4.1 million in 1997 to a net loss
of $3.5 million in 1998. This improvement was primarily due to the reversal of
accrued expenses.
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. The Company recorded an expense of
$2.2 million to cover the judgment, including anticipated legal fees. The
judgment was reversed in January 1999. 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 net
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 in
gross margin due to increased contract revenue.
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.
Liquidity and Capital Resources
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.
12
<PAGE>
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 185,000 warrants were
outstanding at December 30, 1998.
As of December 30, 1998, the Company had $0.4 million in unrestricted
cash and working capital. 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.
Based upon new contract awards and backlog in early 1999, the Company
believes that it will be able to fund its cash requirements for the remainder of
the year from operating cash flow.
Forward-Looking Statements
This Form 10-K 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-K that addresses activities, events, or developments that the Company
expects, projects, believes, or anticipates will or may occur in the future,
including 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.
13
<PAGE>
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 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.
Item 7a. Quantive and Qualitative Disclosures About Market Risk.
Not Applicable.
Item 8. Financial Statements.
The Financial Statements of the Company, together with the report
thereon of Grant Thornton LLP dated March 3, 1999 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 1999 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 1999 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 1999 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 1999 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, 1997 and 1998
Statements of Operations for the Years Ended December 31, 1996, 1997
and 1998
Statement of Stockholders' Equity (Deficiency)for the Years Ended
December 31, 1996, 1997 and 1998
Statements of Cash Flows for the Years Ended December 31, 1996, 1997
and 1998
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 Bylaws(1)
4 Form of Rights Agreement(1)
10.1 Stock Option Plan(1)
10.2 Employment Agreement with Ronald C. Thomas(1)
10.4 Consulting Agreement with Wirt D. Walker, III(1)
11 Computation of Net Income (Loss) Per Share
23.1 Consent of Grant Thornton LLP
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/BARRY W. MCDANIEL
Barry W. McDaniel
President and Chief Operating 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/ BARRY W. MCDANIEL
- --------------------------------------
Barry W. McDaniel President, Chief Operating March 30, 1999
Officer
(Principal Executive Officer)
/S/ WIRT D. WALKER, III Chairman and Director March 30, 1999
- --------------------------------------
Wirt D. Walker, III
/S/ MISHAL YOUSEF SOUD AL SABAH
- ---------------------------------------
Mishal Yousef Soud Al Sabah Director March 30, 1999
/S/ MARVIN BUSH Director March 30, 1999
- --------------------------------------
Marvin Bush
/S/ ROBERT B. SMITH, JR. Director March 30, 1999
- --------------------------------------
Robert B. Smith, Jr.
/s/ JAMES A. ABRAHAMSON Director March 30, 1999
- --------------------------------------
James A. Abrahamson
/s/ CHARLES W. ARCHER Director March 30, 1999
- ---------------------------------------
Charles W. Archer
</TABLE>
17
<PAGE>
Stratesec, Incorporated
Contents
- --------------------------------------------------------------------------------
Report of Independent Certified Public Accountants 3
Financial Statements
Balance Sheets 4
Statements of Operations 5
Statements of Shareholders' Equity (Deficit) 6
Statements of Cash Flows 7-8
Notes to Financial Statements 9-20
Supplemental Information
Schedule II--Valuation and Qualifying Accounts 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, 1997 and 1998,
and the related statements of operations, shareholders' equity (deficit), and
cash flows for the three years in the period ended December 31, 1998. 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, 1997 and 1998, and the results of its operations and its cash flows
for the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
We have also audited Schedule II of Stratesec, Incorporated, for the years ended
December 31, 1996, 1997 and 1998. In our opinion, this schedule presents fairly,
in all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Vienna, Virginia
March 3, 1999
<PAGE>
Stratesec, Incorporated
Balance Sheets
<TABLE>
<CAPTION>
December 31, 1997 1998
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 998,312 $ 442,582
Cash--restricted 2,063,539 1,900,000
Accounts receivable, net of allowance for doubtful
accounts of $49,000 in 1997 and $303,000 in 1998 3,330,542 1,297,176
Costs and estimated earnings in excess of billings on
uncompleted contracts 2,108,134 1,440,485
Inventory, net of allowance in 1998 of $184,000 598,415 57,058
Prepaid expenses 140,870 171,404
----------------- -----------------
Total Current Assets 9,239,812 5,308,705
Property and Equipment, net 740,156 460,932
Other Assets 128,414 58,099
----------------- -----------------
$ 10,108,382 $ 5,827,736
================= =================
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of capital lease obligations $ 51,100 $ 68,672
Accounts payable 1,997,014 1,455,840
Billings in excess of costs and estimated earnings
on uncompleted contracts 69,734 102,132
Accrued expenses and other 2,938,789 1,008,955
Notes payable - 1,802,404
----------------- -----------------
Total Current Liabilities 5,056,637 4,438,003
Long-Term Liabilities
Capital lease obligations, less current maturities 196,285 167,430
Commitments and Contingencies - -
Shareholders' Equity
Common stock, $.01 par value per share;
authorized 20,000,000 shares; issued
and outstanding, 6,103,522 shares in
1997 and issued 6,103,522 and
5,973,522 outstanding shares in 1998 61,035 61,035
Treasury stock; 130,000 shares - (181,851)
Additional paid-in capital 21,072,430 21,143,824
Accumulated deficit (16,278,005) (19,800,705)
----------------- -----------------
4,855,460 1,222,303
----------------- -----------------
$ 10,108,382 $ 5,827,736
================= =================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Stratesec, Incorporated
Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31, 1996 1997 1998
------------------ ----------------- -----------------
<S> <C> <C> <C>
Earned Revenue $ 5,824,448 $ 12,132,924 $ 6,624,523
Cost of Earned Revenue 4,416,386 9,806,681 4,792,838
Provision for Contract Adjustment - - 2,491,156
------------------ ----------------- -----------------
Gross Profit (Loss) 1,408,062 2,326,243 (659,471)
Selling, General and Administrative
Expenses 3,700,698 3,755,965 4,426,339
Provision (Recovery) for Legal Judgment - 2,200,000 (1,655,000)
------------------ ----------------- -----------------
Operating Loss (2,292,636) (3,629,722) (3,430,810)
Loss on Sale of Equipment - - (45,000)
Interest and Financing Fees (241,716) (514,891) (180,184)
Interest and Other Income 21,519 88,873 133,294
------------------ ----------------- -----------------
Net Loss $ (2,512,833) $ (4,055,740) $ (3,522,700)
================== ================= =================
Basic and Diluted Net Loss Per Share $ (.58) $ (.85) (.58)
================== ================= =================
Weighted-Average Shares Outstanding 4,306,000 4,792,000 6,068,000
================== ================= =================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Stratesec, Incorporated
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31, 1996 1997 1998
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net loss $ (2,512,833) $ (4,055,740) $ (3,522,700)
---------------- ------------------ ------------------
Adjustments to reconcile net loss
to net cash used in operating activities
Provision (recovery) for legal judgment - 2,200,000 (1,655,000)
Provision for bad debts and obsolete
inventory - 6,000 437,038
Depreciation and amortization 91,859 143,298 135,957
Loss on sale of equipment - - 44,746
Noncash compensation 28,000 - -
Amortization of debt discount 5,000 171,000 23,798
Changes in assets and liabilities
(Increase) decrease in restricted cash - (2,063,539) 163,539
(Increase) decrease in accounts receivable (622,283) (1,559,086) 1,779,955
(Increase) decrease in cost and
estimated earnings in excess of
billings on uncompleted contracts (368,169) (959,574) 667,649
(Increase) decrease in inventory - (598,415) 357,728
Increase in prepaid expenses and other (20,931) (19,933) (30,534)
(Increase) decrease in other assets (1,915) 67,389 70,315
Increase (decrease) in accounts payable 1,921,291 (742,257) (541,174)
(Decrease) increase in billings in excess
of costs and estimated earnings on
uncompleted contracts (338,875) (33,450) 32,398
Increase (decrease) in accrued expenses
and other 212,999 97,283 (274,833)
---------------- ------------------ ------------------
Total Adjustments 906,976 (3,291,284) 1,211,582
---------------- ------------------ ------------------
Net Cash Used in Operating Activities (1,605,857) (7,347,024) (2,311,118)
---------------- ------------------ ------------------
Cash Flows from Investing Activities
Sale of equipment - - 240,000
Acquisition of plant and equipment (396,460) (24,787) (92,087)
---------------- ------------------ ------------------
Net Cash (Used in) Provided by
Investing Activities (396,460) (24,787) 147,913
---------------- ------------------ ------------------
Cash Flows from Financing Activities
Proceeds from notes payable and warrants 2,050,000 700,000 1,850,000
Purchase of treasury stock - - (181,851)
Principal payments on notes payable
to shareholder (200,000) (3,350,000) -
Principal payments of capital lease obligations (17,686) (34,144) (60,674)
Proceeds from issuance of common stock
and exercise of warrants 224,000 11,256,837 -
Common stock issuance costs - (811,910) -
---------------- ------------------ ------------------
Net Cash Provided by Financing Activities 2,056,314 7,760,783 1,607,475
---------------- ------------------ ------------------
</TABLE>
<PAGE>
Stratesec, Incorporated
Statements of Cash Flows--Continued
<TABLE>
<CAPTION>
Year ended December 31, 1996 1997 1998
<S> <C> <C> <C>
Net Increase (Decrease) in Cash and
Cash Equivalents 53,997 388,972 (555,730)
Cash and Cash Equivalents at
Beginning of Year 555,345 609,342 998,312
---------------- ------------------ ------------------
Cash and Cash Equivalents at End of Year 609,342 $ 998,314 $ 442,582
================ ================== ==================
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year For--
Interest $ 165,000 $ 385,000 $ 70,000
Income taxes 7,000 30,000 -
</TABLE>
During 1997 and 1998, the Company acquired equipment totaling approximately
$144,000 and $50,000, respectively, through capital lease transactions.
The accompanying notes are an integral part of these statements.
<PAGE>
Stratesec, Incorporated
Notes to Financial Statements
- --------------------------------------------------------------------------------
December 31, 1997 and 1998
- --------------------------------------------------------------------------------
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 percent 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 and 1998, the
KuwAm Group owns approximately 53 percent and 31 percent of the Company,
respectively.
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows:
Revenue Recognition
The Company derives its revenue 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 the 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.
The asset "costs and estimated earnings in excess of billings on uncompleted
contracts" represents revenue 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 revenue
recognized.
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.
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.
<PAGE>
Stratesec, Incorporated
Notes to Financial Statements--Continued
- --------------------------------------------------------------------------------
December 31, 1997 and 1998
- --------------------------------------------------------------------------------
NOTE A--BUSINESS AND SUMMARY OF ACCOUNTING POLICIES--Continued
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.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (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.
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 revenue and expenses
during the reporting period. Actual results could differ from those
estimates. In addition, the Company estimates an allowance for doubtful
accounts based on the creditworthiness of its clients, as well as general
economic conditions. Consequently, an adverse change in those factors could
affect the Company's estimate.
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 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.
<PAGE>
Stratesec, Incorporated
Notes to Financial Statements--Continued
- --------------------------------------------------------------------------------
December 31, 1997 and 1998
- --------------------------------------------------------------------------------
NOTE A--BUSINESS AND SUMMARY OF ACCOUNTING POLICIES--Continued
Loss Per Share
The Company has adopted SFAS No. 128, "Earnings Per Share" (EPS), 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.
When dilutive, the calculation takes into account the shares that may be
issued upon exercise of stock options and warrants, reduced by the shares
that may be repurchased with the funds received from the exercise, based on
the average price during the year.
Stock options and warrants have not been included in the calculation of
diluted earnings per share as their inclusion would be antidilutive.
- --------------------------------------------------------------------------------
NOTE B--OPERATIONS
As shown in the accompanying financial statements, the Company has incurred
recurring operating losses and has an accumulated deficit of $19,800,705 at
December 31, 1998. In such 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 existing cash
and cash equivalents generated from 1999 operations will be sufficient 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 doing so.
- --------------------------------------------------------------------------------
NOTE C--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts are as follows at
December 31:
1997 1998
------------- -------------
Costs incurred on contracts $ 14,229,410 $ 18,988,832
Estimated earnings 3,473,560 5,289,572
------------- -------------
17,702,970 24,278,404
Less billings to date 15,664,570 22,940,051
------------- -------------
$ 2,038,400 $ 1,338,353
============= =============
<PAGE>
Stratesec, Incorporated
Notes to Financial Statements--Continued
- --------------------------------------------------------------------------------
December 31, 1997 and 1998
- --------------------------------------------------------------------------------
NOTE C--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
--Continued
In addition, included in accounts receivable at December 31, 1997 and 1998,
were retainages of approximately $648,000 and $45,000, respectively, which
are anticipated to be collected within one year. Included in accounts
payable at December 31, 1997 and 1998, were retainages of approximately
$111,000 and $-0-, respectively.
During the third quarter of 1998, the Company negotiated a final settlement
on a major contract. As a result of the adjustments, revenue and gross
margin for 1998 were reduced by $2,491,000.
During the fourth quarter of 1997, the Company revised its estimate of cost
to complete on several contracts. As a result of the 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--PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at December 31:
<TABLE>
<CAPTION>
1997 1998 Useful Life
------------------ ----------------- -------------
<S> <C> <C> <C>
Cars $ - $ 27,492 3 years
Computer equipment 249,158 277,263 5 years
Equipment and fixtures 508,034 565,128 10 years
Aircraft 335,000 - 10 years
Leasehold improvements 68,739 68,739 5 years
Computer software - 28,787 3 years
------------------ -----------------
1,160,931 967,409
Less: Accumulated depreciation
and amortization 420,775 506,477
------------------ -----------------
$ 740,156 $ 460,932
================== =================
</TABLE>
<PAGE>
Stratesec, Incorporated
Notes to Financial Statements--Continued
- --------------------------------------------------------------------------------
December 31, 1997 and 1998
- --------------------------------------------------------------------------------
NOTE E--NOTES PAYABLE
During the years ended December 31, 1996 and 1997, the Company issued
subordinated debentures to the KuwAm Group totaling $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 percent 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, 1998.
During April 1998, the Company's board of directors approved issuance of up
to $2 million in convertible subordinated debentures in an effort to provide
additional working capital. As of December 31, 1998, the Company had sold
$1,850,000 of these debentures to related parties with 185,000 warrants
attached to purchase common stock of the Company at $2.50 per share. The
debentures bear interest at 10 percent semiannually. The value of the
warrants was $71,393 at issuance and was determined by the Company, using
the Black-Scholes valuation model and was recorded as additional paid-in
capital. All 185,000 warrants are outstanding at December 31, 1998. In
addition, the debentures are convertible into the Company stock at $8.50 per
share.
Interest expense on the notes amounted to approximately $125,000, $413,000
and $136,000 (including $5,000, $171,000 and $24,000 of amortization of debt
discount) for the years ended December 31, 1996, 1997 and 1998,
respectively. During February 1999, the Company paid $920,000 of the
outstanding $1,850,000 debt at December 31, 1998.
- --------------------------------------------------------------------------------
NOTE F--ACCRUED EXPENSES
Accrued expenses and other are summarized as follows for the year ended
December 31:
1997 1998
------------ ------------
Legal judgment $ 2,200,000 $ 262,290
Payroll 273,877 78,419
Employee expense reimbursements 62,607 -
Professional fees 45,745 34,796
Deferred rent obligation 56,515 54,504
Sales tax 54,618 90,221
Interest and foreign tax 140,423 227,656
Other 105,004 261,069
------------ ------------
$ 2,938,789 $ 1,008,955
============ ============
<PAGE>
Stratesec, Incorporated
Notes to Financial Statements--Continued
- --------------------------------------------------------------------------------
December 31, 1997 and 1998
- --------------------------------------------------------------------------------
NOTE G--OBLIGATIONS UNDER CAPITAL LEASE AGREEMENTS
The Company has entered into various capital lease agreements for equipment
with a cost of approximately $293,000 and $342,000 at December 31, 1997 and
1998, respectively. The leases expire at various times through 2002. The
related future minimum lease payments, as of December 31, 1998, are as
follows:
Year ending December 31,
1999 $ 103,325
2000 106,048
2001 70,399
2002 25,813
2003 -
-------------
305,585
Amount representing interest (69,483)
-------------
$ 236,102
=============
The net book value of assets held under capitalized leases at December 31,
1998, was $209,505.
- --------------------------------------------------------------------------------
NOTE H--RELATED PARTY TRANSACTIONS
The Company had agreements (the Agreements) with KuwAm Corporation (KuwAm)
whereby the Company paid a fee of 5 percent of the capital raised from the
private sale of common stock and subordinated debentures under the
Agreements. The Company incurred approximately $103,000, $35,000 and $-0- of
investment banking fees under the Agreements during 1996, 1997 and 1998,
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.
The Company issued subordinated debentures in the amount of $1,850,000 with
185,000 warrants attached and incurred related interest to the KuwAm
Corporation and other related parties of $180,992 as of December 31, 1998.
During 1998, the Company sold its aircraft, which had a book value of
$335,000 and accumulated depreciation of approximately $50,000, to a related
party for $240,000 in cash. The Company recorded a loss of approximately
$45,000 on the sale.
During 1997, 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, 1997 and 1998
- --------------------------------------------------------------------------------
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, 1998.
- --------------------------------------------------------------------------------
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
nonqualified 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 1997, 15,000 options were issued to a new
director at $8.625 per share. In February 1998, the Company issued to
employees and directors an additional 180,000 options at $2.375 per share.
In June and September 1998, 145,000 and 20,000 additional options,
respectively, were issued to employees and directors at $1.50 per share.
During 1996, the Company granted nonqualified options to purchase shares of
the Company's stock. The options were granted on a discretionary basis. In
January 1996, 50,000 options were granted, and in June 1996, 75,000 options
were granted. All 1996 options expire in 1999.
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
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 is amortized to expense
over the vesting period. Under the fair value method, the Company's net loss
in 1998 would have increased by $109,000 or $.01 per share on a basic and
diluted basis. 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 1996, the Company's net loss would
not have had a material change.
The weighted-average fair value of the individual warrants and options
granted during 1996, 1997 and 1998 is estimated as $.04, $1.13 and $.29,
respectively, on the date of grant. The fair values were determined using a
Black-Scholes option-pricing model with the following assumptions:
<PAGE>
Stratesec, Incorporated
Notes to Financial Statements--Continued
- --------------------------------------------------------------------------------
December 31, 1997 and 1998
- --------------------------------------------------------------------------------
NOTE J--EMPLOYEE STOCK WARRANTS AND OPTIONS--Continued
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Dividend yield - - -
Volatility 50% 50% 50%
Risk-free interest rate 6.06 6.18 5.5
Forfeiture rate - - -
Expected life 3 years 3 years 3 years
</TABLE>
Stock warrant and option activity during 1996-1998 is summarized below:
<TABLE>
<CAPTION>
Shares of Common Weighted-
Stock Attributable Average Exercise
to Warrants Price of Warrants
and Options and Options
<S> <C> <C>
Unexercised at January 1, 1996 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
Granted 505,000 2.06
Exercised - -
Expired 610,000 4.82
-------------- ------------
Unexercised at December 31, 1998 610,000 4.87
============== ============
</TABLE>
<PAGE>
Stratesec, Incorporated
Notes to Financial Statements--Continued
- --------------------------------------------------------------------------------
December 31, 1997 and 1998
- --------------------------------------------------------------------------------
NOTE J--EMPLOYEE STOCK WARRANTS AND OPTIONS--Continued
The following table summarizes information concerning outstanding and
exercisable warrants and options at December 31, 1998:
<TABLE>
<CAPTION>
Weighted-Average
Remaining Warrants and
Number Contractual Options
Exercise Price Outstanding Life (Years) Exercisable
<S> <C> <C> <C>
$ 7.00 250,000 .75 125,000
8.625 15,000 2.05 5,000
2.375 180,000 2.19 -
1.50 165,000 2.56 -
</TABLE>
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,
1997 and 1998, follow:
<TABLE>
<CAPTION>
1997 1998
----------------- -----------------
<S> <C> <C>
Current assets and liabilities
Allowance for doubtful accounts $ 19,000 $ 121,000
Accrued vacation pay and other 49,000 53,000
Provision for legal judgment 880,000 218,000
Inventory allowance - 74,000
----------------- -----------------
948,000 466,000
Valuation allowance (948,000) (466,000)
----------------- -----------------
Net current deferred tax asset (liability) $ - $ -
----------------- -----------------
Noncurrent assets and liabilities
Depreciation $ (71,000) $ (88,000)
Net operating loss carryforward 5,499,000 7,484,000
----------------- -----------------
5,428,000 7,396,000
Valuation allowance (5,428,000) (7,396,000)
----------------- -----------------
Noncurrent deferred tax asset (liability) $ - $ -
================= =================
</TABLE>
<PAGE>
Stratesec, Incorporated
Notes to Financial Statements--Continued
- --------------------------------------------------------------------------------
December 31, 1997 and 1998
- --------------------------------------------------------------------------------
NOTE K--INCOME TAXES--Continued
The valuation allowance has been established for those loss carryforwards
and temporary differences which are not presently considered likely to be
realized.
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, 1998, the Company has net operating loss carryforwards
of approximately $18,700,000, which expire in 2002 through 2018.
In 1992, a major stockholder of the Company significantly increased his
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
approximately $13,000, $17,000 and $16,000 for the years ended December 31,
1996, 1997 and 1998, respectively.
- --------------------------------------------------------------------------------
NOTE M--COMMITMENTS AND CONTINGENCIES
Leases
The Company conducts all 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, 1997 and 1998
- --------------------------------------------------------------------------------
NOTE M--COMMITMENTS AND CONTINGENCIES--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, 1998:
Year ending December 31,
1999 $ 226,000
2000 159,000
2001 118,000
2002 88,000
2003 12,000
--------------
$ 603,000
==============
Rent expense for the years ended December 31, 1996, 1997 and 1998 was
approximately $286,000, $248,000 and $345,000, respectively.
Employment and Consulting Agreements
In 1998, the Company entered into employment agreements with its executive
vice president which provides for annual base salaries of $150,000. 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 its chairman (who is also managing partner of KuwAm
Corporation) which 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 percent.
- --------------------------------------------------------------------------------
NOTE N--SUBSEQUENT EVENT
In January 1999, the Company received a favorable judgment in its appeal
regarding litigation arising from its trademark case in 1997. This
subsequent event resulted in the reversal of its accrued expenses of
$1,655,000, net of $245,000 in previously awarded attorney fees which have
been remanded to the state court. The Company had restricted cash of
$1,900,000 related to this judgment at December 31, 1998, which was released
in February 1999.
Subsequent to year-end, the Company purchased 95,000 shares of common stock
worth approximately $200,000.
<PAGE>
Stratesec, Incorporated
Notes to Financial Statements--Continued
- --------------------------------------------------------------------------------
December 31, 1997 and 1998
- --------------------------------------------------------------------------------
NOTE O--SIGNIFICANT CLIENTS
During the year ended December 31, 1996, contracts with four clients
accounted for approximately 22 percent, 14 percent and 11 percent of
earned revenue. For the year ended December 31, 1997, two clients
accounted for approximately 55 percent and 20 percent of earned revenue.
During the year ended December 31, 1998, contracts with three clients
accounted for approximately 35 percent, 20 percent and 9 percent of earned
revenue.
<PAGE>
STRATESEC Incorporated
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
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, 1998
Allowance for doubtful accounts $ 49,000 $253,000 - $ - $ 302,000
======== ======== ======= ========
Inventory Reserve $ $183,000 - $ - $ 183,000
======== ======== ======= ========
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
======= ======== ======= ========
</TABLE>
- ----------
(A) Uncollectible accounts written off.
Exhibit 11
Loss Per Share
<TABLE>
<CAPTION>
1995 1996 1997 1998
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net Loss.................................................. $ (1,767,692) $ (2,512,833) $ (4,055,740) $ (3,522,700)
============= ============= ============== =============
Weighted average shares outstanding....................... 3,812,000 4,306,000 4,792,000 6,068,000
============= ============= ============== =============
Basic and diluted net loss per share (a).................. $ (0.46) $ (0.58) $ (0.85) $ (0.58)
============= ============= ============== =============
</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 3, 1999, accompanying the consolidated
financial statements and schedule included in the Annual Report of Stratesec,
Incorporated on Form 10-K for the year ended December 31, 1998. We hereby
consent to the incorporation by reference of the aforementioned report in the
registration statement on Form S-8.
GRANT THORNTON LLP
Vienna, Virginia
March 3, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 442,582
<SECURITIES> 0
<RECEIVABLES> 1,600,176
<ALLOWANCES> (303,000)
<INVENTORY> 57,058
<CURRENT-ASSETS> 5,308,705
<PP&E> 967,409
<DEPRECIATION> 506,477
<TOTAL-ASSETS> 5,827,736
<CURRENT-LIABILITIES> 4,438,003
<BONDS> 0
0
0
<COMMON> 61,035
<OTHER-SE> 1,161,268
<TOTAL-LIABILITY-AND-EQUITY> 5,827,736
<SALES> 6,624,523
<TOTAL-REVENUES> 6,624,523
<CGS> 7,283,994
<TOTAL-COSTS> 7,283,981
<OTHER-EXPENSES> 4,426,339
<LOSS-PROVISION> (1,655,000)
<INTEREST-EXPENSE> 180,184
<INCOME-PRETAX> (3,522,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,522,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,522,700)
<EPS-PRIMARY> (0.79)
<EPS-DILUTED> 0
</TABLE>
