SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 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 5,878,522 shares of Common Stock, par value $0.01 per share,
outstanding at May 5, 1999.
<PAGE>
STRATESEC INCORPORATED
Quarter ended March 31, 1999
Index
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial information
Item 1. Financial Statements........................................................................... 3
Balance Sheets as of December 31, 1998 and March 31, 1999
(unaudited).......................................................................................... 3
Statements of Operations for the three months ended
March 31, 1998 and 1999 (unaudited).................................................................. 4
Statements of Cash Flows for the three months
ended March 31, 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 6. Exhibits and Reports on Form 8-K.............................................................. 11
Signature............................................................................................... 12
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STRATESEC INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1998* 1999
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 442,582 $ 165,117
Cash-restricted............................................................ 1,900,000 --
Accounts receivable, net of allowance for doubtful
accounts of $303,000 in 1998 and 1999.................................... 1,297,176 1,585,905
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................................... 1,440,485 1,420,869
Inventory.................................................................. 57,058 338,919
Prepaid expenses and other................................................. 171,404 45,911
-------------- --------------
Total currents assets................................................. 5,308,705 3,556,720
Plant and equipment, net...................................................... 460,932 433,750
Other assets.................................................................. 58,099 58,026
-------------- --------------
$ 5,827,736 $ 4,048,496
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current maturities of capital lease obligations............................ $ 68,672 $ 68,672
Accounts payable........................................................... 1,455,840 1,166,983
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................................... 102,132 89,460
Accrued expenses and other................................................. 1,008,955 938,396
Notes payable.............................................................. 1,802,404 894,303
-------------- --------------
Total current liabilities............................................. $ 4,438,003 $ 3,157,814
Long-term liabilities:
Capital lease obligations, less current maturities......................... 167,430 156,202
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) (377,028)
Additional paid-in capital................................................. 21,143,824 21,143,824
Accumulated deficit........................................................ (19,800,705) (20,093,351)
-------------- --------------
Total shareholders' equity............................................... 1,222,303 734,480
-------------- --------------
Total liabilities & shareholders' equity................................. $ 5,827,736 $ 4,048,496
============== ==============
</TABLE>
* Derived from audited financial statements as of December 31, 1998.
The accompanying notes are an integral part of these statements.
3
<PAGE>
STRATESEC INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1999
-------------- --------------
<S> <C> <C>
Earned revenues............................................................... $ 1,320,414 $ 1,510,597
Cost of earned revenues....................................................... 1,106,363 1,181,397
-------------- --------------
Gross profit............................................................... 214,051 329,200
Selling, general and administrative
expenses................................................................... 1,073,039 578,022
-------------- --------------
Operating income (loss)....................................................... (858,988) (248,822)
Loss on sale of plant and equipment........................................... (37,839) --
Interest and financing fees................................................... (12,808) (55,989)
Interest and other income..................................................... 7,198 12,165
-------------- --------------
Net income (loss)............................................................. $ (902,437) $ (292,646)
============== ==============
Net income (loss) per share - basic
and diluted................................................................ $ (0.15) $ (0.05)
============== ==============
Weighted average common shares
outstanding................................................................ 6,103,522 5,983,457
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
STRATESEC INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................ $ (902,437) $ (292,646)
------------ --------------
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization.............................................. 39,636 36,673
Loss of sale of plant and equipment........................................ 37,839 --
Amortization of debt discount.............................................. -- 11,899
Changes in operating assets and liabilities:
Provision (recovery) for legal judgment...................................... -- 1,900,000
Accounts receivable.......................................................... 975,277 (288,729)
Inventory (Material Stores on Site).......................................... -- (159,410)
Costs and estimated earnings in excess of
billings on uncompleted contracts.......................................... (301,477) 19,615
Prepaid expenses and other................................................... (9,811) 3,136
Other assets................................................................. (6,571) --
Accounts payable............................................................. (281,236) (288,857)
Billings in excess of costs and estimated
earnings on uncompleted contracts.......................................... 26,459 (12,672)
Accrued expenses and other................................................... (373,094) (70,559)
------------ --------------
Total adjustments........................................................ 107,052 1,151,097
------------ --------------
Net cash from operating activities....................................... (995,385) 858,451
------------ --------------
Cash flows from investing activities:
Sale of plant and equipment.................................................. 240,000 --
Acquisition of plant and equipment........................................... (18,425) (9,511)
------------ --------------
Net cash used by investing activities........................................ 221,575 (9,511)
------------ --------------
Cash flows from financing activities:
Proceeds from notes payable.................................................. -- (920,000)
Purchase of treasury stock................................................... -- (195,177)
Principal payments on notes payable--shareholders.............................
Principal payments of capital lease
obligations................................................................ (12,041) (11,228)
------------ --------------
Net cash provided by financing activities.................................... (12,041) (1,126,405)
------------ --------------
Net (decrease) in cash and cash equivalents..................................... (585,851) (277,465)
Cash and cash equivalents at beginning of period................................ 998,312 442,582
------------ --------------
Cash and cash equivalents at end of period...................................... $ 412,461 $ 165,117
============ ==============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited balance sheet as of March 31, 1999 and the unaudited
statement of operations and statements of cash flows for the three months ended
March 31, 1998 and 1999 are condensed financial statements in accordance with
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they omit certain information included in complete financial
statements and should be read in conjunction with the financial statements and
notes contained in a Form 10-K which the Company filed with the Securities and
Exchange Commission on March 30, 1999.
In the opinion of the Company, the unaudited financial statements at
March 31, 1999 and for the three months ended March 31, 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 months ended March 31, 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 March 31, 1999 which are expected to be collected within one year are
as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
--------------- ---------------
<S> <C> <C>
Costs incurred on contracts.................................................. $ 18,988,832 $ 20,170,228
Estimated earnings........................................................... 5,289,572 5,538,915
--------------- ---------------
24,278,404 25,754,143
Less billings to date........................................................ 22,940,051 24,422,743
--------------- ---------------
$ 1,338,353 $ 1,331,409
=============== ===============
</TABLE>
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion and analysis of the Company's financial condition and
historical results of operations should be read in conjunction with the
condensed financial statements and the related notes thereto included elsewhere
in this report.
Overview
The Company is a single-source provider of comprehensive,
technology-based security solutions for medium and large commercial and
government facilities in the United States and abroad. The Company offers a
broad range of services, including: (i) consulting and planning; (ii)
engineering and design; (iii) systems integration; and (iv) maintenance and
technical support.
The first quarter of 1999 was a successful quarter in terms of
generation of new business. The Company was notified that it had been selected
for over $5 million in new business that is scheduled to be performed during
1999. In addition to work for existing customers, the new awards include work
for several new major corporate clients. As previously disclosed, the
maintenance contract with the Metropolitan Washington Airport Authority was
awarded to another company in January 1999. Although the Company's work for that
customer, which accounted for a substantial portion of its first quarter
revenues, was completed in April 1999, the loss of this work has been more than
offset by the awards of new work during the first quarter. As of March 31, 1999,
the Company's backlog was approximately $5.0 million, as compared with backlog
of $4.0 million at December 31, 1998. Backlog consists of confirmed orders,
including the balance of projects for which the Company has been notified it is
the successful bidder even though a binding agreement has not been executed.
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.
7
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1998 1999
<S> <C> <C>
Earned Revenues....................................................................... 100.0% 100.0%
Cost of earned revenues............................................................... 83.8 78.2
---------- ----------
Gross profit....................................................................... 16.2 21.8
Selling, general and administrative expenses.......................................... 81.3 38.3
---------- ----------
Operating income (loss)............................................................ (65.1) (16.4)
Loss on sale of plant and equipment................................................... (2.9) --
Interest and financing fees........................................................... (1.0) (3.7)
Interest and other income............................................................. 0.6 0.8
---------- ----------
Net income (loss).................................................................. (68.4)% (19.4)%
========== ==========
</TABLE>
Three Months Ended March 31, 1999 Compared With Three Months Ended March 31,
1998
Revenues increased by 14% from $1.3 million in the three months ended
March 31, 1998 to $1.5 million in the three months ended March 31, 1999. The
increase was due primarily to revenue of new customers. In addition, revenues
from the Metropolitan Washington Airport Authority increased from $0.4 million
in the 1998 period to $0.6 million in the 1999 period. The revenue from MCI also
increased by $0.2 million from the comparable period.
Cost of earned revenues increased from $1.1 million in the three months
ended March 31, 1998 to $1.2 million in the three months ended March 31, 1999,
primarily due to the increase in revenues.
Gross margin increased from 16.2% in the 1998 period to 21.8% in 1999.
Selling, general and administrative expenses decreased 46.1% from $1.1
million in the three months ended March 31, 1998, to $0.6 million in the three
months ended March 31, 1999. The decrease was primarily due to Company
initiatives to reduce unnecessary administrative overhead costs.
Interest expense and financing fees increased from $0.01 million in the
three months ended March 31, 1998 to $0.06 million in the three months ended
March 31, 1999.
Net loss improved from a net loss of $0.9 million in 1998 to net loss
of $0.3 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
8
<PAGE>
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.
As of March 31, 1999, the Company had cash of $0.2 million and working
capital of $0.4 million.
Based upon new contract wards 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-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 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
9
<PAGE>
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.
10
<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
11
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STRATESEC INCORPORATED
/s/BARRY MCDANIEL
- -----------------------------------------------------
Barry McDaniel
Chief Operating Officer
May 11, 1999
12
EXHIBIT 11
Calculation of Weighted Average Shares
Outstanding for Net Income (Loss) Per Share
<TABLE>
<CAPTION>
March 31,
1998 1999
------------- ---------------
<S> <C> <C>
Earnings:
Net Income (Loss).......................................................... $ (902,437) $ (292,645)
============= ==============
Shares:
Weighted Average Number of Common Shares
Outstanding............................................................. 6,103,522 5,983,457
------------- --------------
Average Common Shares Outstanding and Equivalents.......................... 6,103,522 5,983,457
============= ==============
Net Income (Loss) Per Share................................................ $ (0.15) $ (0.05)
============= ==============
</TABLE>
* -- Calculation would be antidilutive for 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 165,117
<SECURITIES> 0
<RECEIVABLES> 1,889,584
<ALLOWANCES> (302,679)
<INVENTORY> 338,919
<CURRENT-ASSETS> 3,556,720
<PP&E> 976,900
<DEPRECIATION> (543,150)
<TOTAL-ASSETS> 4,048,496
<CURRENT-LIABILITIES> 2,194,839
<BONDS> 0
0
0
<COMMON> 61,035
<OTHER-SE> 734,479
<TOTAL-LIABILITY-AND-EQUITY> 4,048,496
<SALES> 1,510,597
<TOTAL-REVENUES> 1,510,597
<CGS> 1,181,397
<TOTAL-COSTS> 1,181,397
<OTHER-EXPENSES> 578,022
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,204
<INCOME-PRETAX> (292,645)
<INCOME-TAX> 0
<INCOME-CONTINUING> (292,646)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (292,646)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> 0
</TABLE>
