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, 1999
Commission File Number 1-13427
STRATESEC 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 29, 2000 (computed by reference to
the closing price of such stock on the American Stock Exchange) was $11,343,798.
.
As of March 29, 2000, there were 8,376,377 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 2000 Annual Meeting of Stockholders Part III
<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............................... 7
6 Selected Financial Data............................................................................. 8
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................... 9
7a Quantitive and Qualitative Disclosures About Market Risk............................................ 13
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.................................................. 14
11 Executive Compensation.............................................................................. 14
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..................................... 15
Signatures ......................................................................................... 16
</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 50 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
and Dallas and a field office in Rochester, New York.
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.
<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.
<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.
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, 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 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 70 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 Reagan National Airport Hewlett-Packard Company
Yuma International Airport Lazard Freres
Seattle-Tacoma Airport Lucent Technologies
Dallas Fort Worth Airport Mary Kay Cosmetics
MCI WorldCom, Inc.
Mobil Corporation
NationsBank
US WEST
Wachovia Bank
Alltel Corporation
Koch Industries
Nokia
Fina Oil and Gas Company
Kodak
Amtrak
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
U.S. Navy Center
Rostelecom
Rowan County (N.C.) Prison
Washington Metropolitan Area
Transit Authority
During 1999, MCI WorldCom, Inc. ("MCI"), Kodak and the U.S. Postal
Service accounted for 33%, 9% 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 MCI
WorldCom accounted for a substantial portion of the Company's revenue, work
performed for them was comprised of multiple projects at numerous different
facilities. Firm contracts are already in place for a significant portion of
revenue from MCI WorldCom in 2000. The Company has diversified its client base
by winning several new clients regionally and nationally. The revenues from new
clients are expected to more than replace any reduction in revenue 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.
<PAGE>
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. Long-term maintenance contracts
may be canceled without cause. As of December 31, 1998 and 1999, the Company's
backlog was approximately $4.0 million and $4.2 million, respectively. Backlog
as of December 31, 1999, includes projects having a value of approximately $2.4
million for which binding contracts have not been executed and all backlog is
expected to be completed during 2000. 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. In addition to
backlog the Company has potential follow-on projects with its existing customers
of another $14.8 million. These are projects which the Company has been informed
that are likely to happen over the next 12 to 24 months.
Employees
As of December 31, 1999, the Company had 73 employees, of which 25 were
based in the Company's headquarters located in Sterling, Virginia. The balance
work out of the company's regional offices. Eight of the Company's employees are
engaged exclusively in marketing and sales, 56 employees in engineering, project
management, and technical functions, and 9 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.
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.
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 and Dallas 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. Attorneys' fees in the amount of $262,000 were awarded to the
plaintiff and the Company has appealed the award.
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.
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 periods
indicated.
High Low
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............................ 2 3/8 1 1/2
Second Quarter........................... 1 7/10 1 1/5
Third Quarter............................ 1 3/4 1
Fourth Quarter........................... 1 9/10 1
2000
First Quarter (through March 29, 2000)... 4 1/8 2
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 27,
2000, there were 65 holders of record of common stock.
In the third quarter of 1999, the Company issued 620,000 shares of its
common stock in exchange for $930,000 principal amount of its 10% senior notes
due December 31, 1999 at a conversion price of $1.50 per share. In the fourth
quarter of 1999 and the first quarter of 2000, the Company completed a private
placement of 1,204,855 shares of its common stock to a limited number of
sophisticated and/or accredited investors at a price of $1.50 per share for
aggregate cash proceeds of $1,807,282. In the first quarter of 2000 the company
sold 700,000 shares of its common stock to a company at a price of $1.50 per
share for aggregate proceeds of $1,050,000 consisting of cash of $500,000 and a
note payable of $550,000. Each of these transactions was exempt from the
registration requirements of the Securities Act of 1933 (the "Act") pursuant to
section 4(2) of the Act because they did not involve a public offering of
securities.
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 Managements' Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this report.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Earned revenues....................... $ 3,177 $ 5,824 $ 12,133 $ 6,625 $ 10,631
Provision for contract adjustment..... - - - 2,491 -
Cost of earned revenues............... 2,180 4,416 9,807 4,793 7,443
---------- ---------- ---------- ---------- -----------
Gross profit....................... 997 1,408 2,326 (659) 3,188
Selling, general and administrative
expenses........................... 2,871 3,701 3,756 4,427 3,878
Provision for legal judgment.......... 2,200 (1,655)
---------- ---------- ---------- --------- -----------
Operating income (loss)............ (1,874) (2,293) (3,630) (3,431) (690)
Loss on sale of plant and equipment... - - - (45) 1
Interest and financing fees........... (102) (242) (515) (180) (259)
Interest and other income............. 208 22 89 133 15
---------- ---------- ---------- ---------- -----------
Net income (loss).................. $ (1,768) $ (2,513) $ (4,056) $ (3,523) $ (933)
========= ========= ========= ========= -----------
Basic and diluted loss per share... $ (0.46) $ (0.58) $ (0.85) $ (0.58) $ (0.15)
========= ========= ========= ========= -----------
Weighted average number of
shares outstanding.............. 3,812 4,306 4,792 6,068 6,099
Year Ended December 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ---------- ---------- ---------- -------------
Balance Sheet Data:
Cash and cash equivalents............. $ 555 $ 609 $ 998 $ 443 $ 3
Working capital (deficit)............. 696 151 4,183 871 715
Total assets.......................... 3,046 4,567 10,108 5,828 5,973
Long-term debt, less current maturities 597 2,657 196 167 95
Total stockholders' equity (deficiency) 554 (1,596) 4,855 1,222 1,242
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company is a single-source provider of comprehensive,
technology-based security solutions for medium and large commercial and
government facilities in the United States and abroad. The Company offers a
broad range of services, including: (i) consulting and planning; (ii)
engineering and design; (iii) systems integration; and (iv) maintenance and
technical support.
The Company began operations in 1987 in association with a large
privately held engineering firm. As a start-up, the Company expended significant
capital on the development of the Company's business and infrastructure, and it
accumulated losses of approximately $2.8 million from 1987 through 1991 on
aggregate revenues of approximately $17.2 million. The Company's revenues from
1990 through 1994 were generated primarily by a contract to design and integrate
extensive security upgrades at three nuclear facilities for the Tennessee Valley
Authority (the "TVA"). In 1992, the Company became independent from the
engineering firm in conjunction with a capital infusion from a private investor
group. At the same time, the Company hired new management with extensive
expertise in the security industry. Since 1992, the Company has devoted a
substantial amount of resources and capital to enhancing its technical
capability and services offerings, hiring and training key personnel and
expanding its client base. As part of this effort, the Company opened four
regional offices in the United States.
The Company derives its revenue 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 revenue 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,
---------------------------------------------------------
1996 1997 1998 1999
----- ---- ----- -----
<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.......................... 75.8 80.9 72.3 70.0
------------ ------------ ------------ -----------
Gross profit.................................. 24.2 19.1 (9.9) 30.0
Selling, general and administrative
expenses...................................... 63.5 30.9 66.8 36.5
Provision for legal judgment..................... - 18.1 (25.0) -
------------ ------------ ------------ ----------
Operating income (loss)....................... (39.3) (29.9) (51.7) (6.5)
Gains (loss) on sale of plant and equipment...... - - (0.08) -
Interest and financing fees...................... (4.2) (4.2) (2.7) (2.4)
Interest and other income........................ 0.4 0.7 2.0 0.1
------------ ------------ ------------ -----------
Net income (loss)............................. (43.1)% (33.4)% (53.2)% (8.8)%
============= ============= ============ ===========
</TABLE>
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Revenues increased by 60% from $6.6 million in 1998 to $10.6 million in
1999. The increase was due to a significant increase in the Company's business
base and several significant projects with the Company's existing customers.
Cost of earned revenues increased from $4.8 million in 1998 to $7.4
million in 1999, primarily due to the increase in revenues. Gross margin
increased from (9.9)% in 1998 to 30% in 1999.
Selling, general and administration expenses decreased by 11% from $4.4
million in 1998 to $3.9 million in 1999. Without the $0.4 million increase to
reserves for doubtful accounts, the decrease in selling, general, and
administrative expenses would have been 21%. Overhead salaries, rent and other
costs were significantly reduced during 1999.
Interest expense and financing fees increased 44% from $0.18 million in
1998 to $0.26 million in 1999 due to the increased use of an asset based credit
facility.
Net loss improved from a net loss of $3.5 million in 1998 to a net loss
of $0.93 million in 1999. Without the additional $0.4 million reserved for
doubtful accounts, the 1999 loss was $0.56 million. This improvement was
primarily due to a significant increase in revenue and gross margin as well as a
decrease in selling, general and administrative costs.
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 16% from $3.8
million in 1997 to $4.4 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 of overlap during a transition to new
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 64.7% from $0.1 million
in 1997 to $0.8 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.
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.
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.
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. 93,000 warrants were
outstanding at December 31, 1999.
During February 1999, the $1.9 million the Company was required to post
as collateral for a bond pending its appeal of a law suit was released when the
trial court's judgment was reversed. The Company paid off $0.9 million of the
convertible subordinated debentures during the first quarter 1999. In September
1999 all of the holders of the remaining subordinated debentures agreed to
exchange their notes for the Company's common stock valued at $1.50 per share.
Additionally, to support the significant increase in business, the Board
approved a private placement of 500,000 shares at $1.50 per share, which was
subsequently increased to 1,204,855 shares. The board also approved the sale of
up to 21% equity in the company to a minority partner. Netcom Solutions
International subsequently purchased approximately 8% or 700,000 shares of the
Company at $1.50 per share. As of March 23, 2000, all of these transactions had
been completed. In summary, $930,000 of debt was converted to equity, $1.8
million was received by the private placement and $1.05 million in the form of
cash and a short-term note was received from the sale of a minority interest.
As of December 31, 1999 the Company had $.003 million in unrestricted
cash and working capital. With the infusion of capital from the private
placement and with operating cash flow, the Company believes it will be able to
fund its cash requirements for the remainder of the year.
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 address 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.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
Item 8. Financial Statements.
The Financial Statements of the Company, together with the reports
thereon of Grant Thorton LLP dated March 3, 1999 and Keller, Bruner & Co., LLP
dated March 24, 2000 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.
On December 3, 1999, the Company dismissed Grant Thornton LLP ("Grant
Thornton") as its independent auditors and on December 7, 1999 appointed Keller
Bruner & Co., LLP ("Keller Bruner") as its independent auditors for the fiscal
year ending December 31, 1999. The decision to dismiss Grant Thornton and to
retain Keller Bruner was recommended by the Registrant's audit committee and
approved by its Board of Directors.
The reports of Grant Thornton as of and for the fiscal years ended
December 31, 1998 and 1997 did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles. During the fiscal years ended December 31, 1998 and 1997,
and during the subsequent interim periods prior to December 3, 1999, there were
no (i) disagreements between Grant Thornton and the Registrant on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Grant Thornton, would have caused it to make a reference to the subject matter
of the disagreement in connection with its reports on the Registrant's financial
statements, or (ii) "reportable events" within the meaning of Item 304(a)(1)(v)
of Regulation S-K promulgated under the Securities Act of 1933, as amended.
On December 7, 1999, the Company engaged the certified public
accounting firm of Keller Bruner & Co., LLP to serve as its principal
independent accounting firm to audit its financial statements for the year ended
December 31, 1999. Prior to the engagement of Keller Bruner, the Registrant did
not consult with such firm on any accounting, auditing or financial reporting
issue.
Part III
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 will be contained in the Company's
Proxy Statement for the 2000 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 will be contained in the Company's
Proxy Statement for the 2000 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 will be contained in the Company's
Proxy Statement for the 2000 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 will be contained in the Company's
Proxy Statement for the 2000 Annual Meeting of Stockholders under the caption
"Compensation Committee Interlocks and Insider Participation and Certain
Transactions", and is incorporated herein by reference.
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:
Reports of Independent Certified Public Accountants
Balance Sheets as of December 31, 1999 and 1998
Statements of Operations for the Years Ended December 31, 1999, 1998
and 1997
Statement of Stockholders' Equity (Deficiency) for the Years
Ended December 31, 1999, 1998 and 1997
Statements of Cash Flows for the Years Ended December 31, 1999,
1998 and 1997
Notes to Financial Statements
(2) List of Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not
applicable or not required, or the required information is
provided in the financial statements or notes thereto.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K on December 10, 1999 to
report a change in its independent public accountants under Item 4
of the report. The report was amended on December 23, 1999.
(c) List of Exhibits. The following is a list of exhibits furnished.
Copies of exhibits will be furnished upon written request of any stockholder at
a charge of $.25 per page plus postage.
Exhibit
Number Exhibit
3.1 Form of Restated Certificate of Incorporation1
3.2 Form of Bylaws1
4 Form of Rights Agreement1
10.1 Stock Option Plan1
10.2 Employment Agreement with Ronald C. Thomas1
10.4 Consulting Agreement with Wirt D. Walker, III1
11 Computation of Net Income (Loss) Per Share
23.1 Consent of Grant Thornton LLP
23.2 Consent of Keller, Bruner & Co., 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.
<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 President, Chief Operating March 30, 2000
- -------------------------------------- Officer
Barry W. McDaniel (Principal Executive Officer)
/s/ WIRT D. WALKER, III Chairman and Director March 30, 2000
- --------------------------------------
Wirt D. Walker, III
/S/ ALBERT V. GRAVES Vice President Finance March 30, 2000
- --------------------------------------
Albert V. Graves (Principal Accounting Officer)
/s/ MISHAL YOUSEF SOUD AL SABAH
- --------------------------------------
Mishal Yousef Soud Al Sabah Director March 30, 2000
/s/ ROBERT B. SMITH, JR. Director March 30, 2000
- --------------------------------------
Robert B. Smith, Jr.
/s/ JAMES A. ABRAHAMSON Director March 30, 2000
- --------------------------------------
James A. Abrahamson
/s/ CHARLES W. ARCHER Director March 30, 2000
- --------------------------------------
Charles W. Archer
/s/ EMMIT J. MCHENRY Director March 30, 2000
- --------------------------------------
Emmit J. McHenry
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Stratesec, Incorporated
We have audited the accompanying balance sheet of Stratesec, Incorporated
(formerly known as Securacom, Incorporated), as of December 31, 1999, and the
related statements of operations, changes in shareholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free 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 audit provides 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, 1999, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
We have also audited Schedule II of Stratesec, Incorporated, for the year ended
December 31, 1999. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.
KELLER BRUNER & COMPANY, LLP
Frederick, Maryland
March 24, 2000
<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 two 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 two years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
Vienna, Virginia
March 3, 1999
<PAGE>
STRATESEC, INCORPORTED
BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 2,831 $ 442,582
Cash - restricted - 1,900,000
Accounts receivable, net of allowance for doubtful
accounts of $675,000 in 1999 and $303,000 in 1998 2,233,262 1,297,176
Costs and estimated earnings in excess of billings on
uncompleted contracts 2,865,886 1,440,485
Inventory, net of allowance of $40,000 in 1999 and
$184,000 in 1998 245,903 57,058
Prepaid expenses 4,490 171,404
------------------ ------------------
Total current assets 5,352,372 5,308,705
Property and Equipment, net 546,520 460,932
Other Assets 74,576 58,099
------------------ ------------------
$ 5,973,468 $ 5,827,736
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
Current Liabilities
Line of Credit $ 771,532 $ -
Current maturities of capital lease obligations 72,860 68,672
Accounts payable 2,931,260 1,455,840
Billings in excess of costs and estimated earnings
on uncompleted contracts 234,338 102,132
Accrued expenses and other 627,156 1,008,955
Notes payable - 1,802,404
------------------ -----------------
Total current liabilities 4,637,146 4,438,003
------------------ -----------------
Long-Term Liabilities
Capital lease obligations, less current maturities 94,570 167,430
------------------ -----------------
Commitments and Contingencies - -
Shareholders' Equity
Common stock, $.01 par value per share; authorized
20,000,000 shares; 6,890,189 issued and 6,638,189
outstanding shares in 1999 and 6,103,522
issued and 5,973,522 outstanding shares in 1998 68,902 61,035
Treasury stock; 252,000 shares in 1999 and
130,000 shares in 1998 (409,564) (181,851)
Additional paid-in capital 22,315,957 21,143,824
Accumulated deficit (20,733,543) (19,800,705)
------------------ -----------------
1,241,752 1,222,303
------------------ -----------------
$ 5,973,468 $ 5,827,736
================== ==================
</TABLE>
See Notes to Financial Statements.
<PAGE>
STRATESEC, INCORPORTED
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ------------------ -----------------
<S> <C> <C> <C>
Earned revenue $ 10,631,131 $ 6,624,523 $ 12,132,924
Cost of earned revenue 7,443,087 4,792,838 9,806,681
Provision for contract adjustment - 2,491,156 -
----------------- ------------------ -----------------
Gross profit (loss) 3,188,044 (659,471) 2,326,243
Selling, general and administrative
expenses 3,878,103 4,426,339 3,755,965
Provision (recovery) for legal judgment - (1,655,000) 2,200,000
----------------- ------------------ -----------------
Operating loss (690,059) (3,430,810) (3,629,722)
Gain (loss) on sale of equipment 1,601 (45,000) -
Interest and financing fees (258,984) (180,184) (514,891)
Interest and other income 14,604 133,294 88,873
----------------- ------------------ -----------------
Net loss $ (932,838) $ (3,522,700) $ (4,055,740)
================= ================== =================
Basic and diluted net loss per share $ (.15) $ (.58) $ (.85)
================= ================== =================
Weighted-average shares outstanding 6,099,435 6,068,000 4,792,000
================= ================== =================
</TABLE>
See Notes to Financial Statements.
<PAGE>
STRATESEC, INCORPORTED
STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Additional Total
Common Stock Treasury Stock Paid-in Accumulated Shareholders'
------------------------ ------------------------
Shares Amount Shares Amount Capital Deficit Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 4,434,140 $ 44,341 - $ - $ 10,582,197 $(12,222,265) $ (1,595,727)
Net loss - - - - - (4,055,740) (4,055,740)
Proceeds from issuance of
common stock 1,400,000 14,000 - - 10,533,455 - 10,547,455
Common stock issuance costs - - - - (811,910) - (811,910)
Exercise of warrants 269,382 2,694 - - 706,688 - 709,382
Issuance of warrants - - - - 62,000 - 62,000
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 6,103,522 61,035 - - 21,072,430 (16,278,005) 4,855,460
Net loss - - - - - (3,522,700) (3,522,700)
Purchase of treasury stock - - (130,000) (181,851) - - (181,851)
Issuance of warrants - - - - 71,394 - 71,394
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 6,103,522 61,035 (130,000) (181,851) 21,143,824 (19,800,705) 1,222,303
Net loss - - - - - (932,838) (932,838)
Purchase of treasury stock - - (122,000) (227,713) - - (227,713)
Conversion of debenture bonds
to common stock 620,000 6,200 - - 923,800 - 930,000
Private placement of common
stock 166,667 1,667 - - 248,333 - 250,000
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 6,890,189 $ 68,902 (252,000) $ (409,564) $ 22,315,957 $(20,733,543) $ 1,241,752
==============================================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
STRATESEC, INCORPORTED
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net loss $ (932,838) $ (3,522,700) $ (4,055,740)
Adjustments to reconcile net loss to net
cash used in operating activities:
Provision (recovery) for
legal judgment - (1,655,000) 2,200,000
Provision for bad debts and obsolete
inventory 228,371 437,038 6,000
Depreciation and amortization 161,973 135,957 143,298
Loss (gain) on sale of equipment (1,601) 44,746 -
Amortization of debt discount - 23,798 171,000
Transfer to property and equipment
from inventory (140,308) - -
Changes in assets and liabilities:
(Increase) decrease in:
Restricted cash 1,900,000 163,539 (2,063,539)
Accounts receivable (1,308,086) 1,779,955 (1,559,086)
Costs and estimated earnings in
excess of billings on uncompleted
contracts (1,425,401) 667,649 (959,574)
Inventory (45,216) 357,728 (598,415)
Prepaid expenses and other 166,914 (30,534) (19,933)
Other assets (16,477) 70,315 67,389
Increase (decrease) in:
Accounts payable 1,475,420 (541,174) (742,257)
Billings in excess of costs and
estimated earnings on uncompleted
contracts 132,206 32,398 (33,450)
Accrued expenses and other (381,799) (274,833) 97,283
-----------------------------------------------------------------
Net cash (used in)
operating activities (186,842) (2,311,118) (7,347,024)
-----------------------------------------------------------------
Cash Flows from Investing Activities
Sale of equipment 9,833 240,000 -
Acquisition of property and equipment (115,485) (92,087) (24,787)
-----------------------------------------------------------------
Net cash (used in) provided
by investing activities (105,652) 147,913 (24,787)
-----------------------------------------------------------------
</TABLE>
<PAGE>
STRATESEC, INCORPORTED
STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Proceeds from notes payable
and warrants $ - $ 1,850,000 $ 700,000
Purchase of treasury stock (227,713) (181,851) -
Principal payments on notes payable
to shareholder - - (3,350,000)
Principal payments of capital
lease obligations (68,672) (60,674) (34,144)
Proceeds from issuance of common stock
and exercise of warrants - - 11,256,837
Common stock issuance costs - - (811,910)
Proceeds from line of credit 771,532 - -
Principal payments on debentures (872,404) - -
Proceeds from private placement of
common stock 250,000 - -
------------------------------------------------------------------
Net cash (used in) provided
by financing activities (147,257) 1,607,475 7,760,783
------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents (439,751) (555,730) 388,972
Cash and cash equivalents
Beginning 442,582 998,312 609,342
------------------------------------------------------------------
Ending $ 2,831 $ 442,582 $ 998,314
==================================================================
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest expense $ 318,182 $ 70,000 $ 385,000
Income taxes $ - $ - $ 30,000
Supplemental Schedule of Noncash Financing and
Investing Activities
Conversion of debenture bonds
to common stock $ 930,000 $ - $ -
Acquisition of equipment
through capital leases $ - $ 50,000 $ 144,000
</TABLE>
See Notes to Financial Statements.
<PAGE>
STRATESEC, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant 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, 1999 and 1998, the KuwAm Group owned
approximately 47 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 estimated 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 and parts held for sale is stated
at the lower of cost or market, with cost being determined by the first-in,
first-out method.
Property and equipment: Property 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.
<PAGE>
STRATESEC, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
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.
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.
<PAGE>
STRATESEC, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Operations
As shown in the accompanying financial statements, the Company has incurred
recurring operating losses and has an accumulated deficit of $20,733,543 at
December 31, 1999. 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. As discussed in Note 14, the Company has secured additional financing
to meet its 2000 operating requirements. There can be no assurance that
additional financing will be available in the future.
Note 3. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts are as follows at December
31:
1999 1998
- -------------------------------------------------------------------------------
Costs incurred on contracts $ 26,431,919 $ 18,988,832
Estimated earnings 8,412,885 5,289,572
- -------------------------------------------------------------------------------
34,844,804 24,278,404
Less billings to date 32,213,256 22,940,051
- -------------------------------------------------------------------------------
$ 2,631,548 $ 1,338,353
===============================================================================
In addition, included in accounts receivable at December 31, 1999 and 1998, were
retainages of approximately $30,600 and $45,000, respectively, which are
anticipated to be collected within one year.
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, revenues and
gross margin for 1997 were reduced by $1,248,000.
<PAGE>
STRATESEC, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4. Property and Equipment
Property and equipment are summarized as follows at December 31:
<TABLE>
<CAPTION>
Useful Lives 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cars 3 years $ 27,492 $ 27,492
Computer equipment 5 years 476,059 277,263
Equipment and fixtures 10 years 565,775 565,128
Leasehold improvements 5 years 97,451 68,739
Computer software 3 years 48,193 28,787
- -------------------------------------------------------------------------------------------------------------------
1,214,970 967,409
Less: Accumulated depreciation
and amortization 668,450 506,477
- -------------------------------------------------------------------------------------------------------------------
$ 546,520 $ 460,932
===================================================================================================================
</TABLE>
Note 5. Notes Payable
During the years ended December 31, 1997 and 1996, 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, 1999.
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 $0, $136,000 and
$413,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
During February 1999, the Company paid $872,404 of the outstanding $1,802,404
debt at December 31, 1998. During September 1999, the remaining $930,000 of
debentures were converted to 620,000 shares of common stock at $1.50 per share.
<PAGE>
STRATESEC, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6. Accrued Expenses
Accrued expenses and other are summarized as follows for the year ended December
31:
1999 1998
- --------------------------------------------------------------------------------
Legal judgment $ 262,290 $ 262,290
Payroll & withholdings 68,245 78,419
Professional fees - 34,796
Deferred rent obligation - 54,504
Sales tax 38,649 90,221
Interest and foreign tax - 227,656
Other 257,972 261,069
- --------------------------------------------------------------------------------
$ 627,156 $ 1,008,955
================================================================================
Note 7. Obligations Under Capital Lease Agreements
The Company has entered into various capital lease agreements for equipment with
a cost of approximately $342,000 at December 31, 1999 and 1998. The leases
expire at various times through 2002. The related future minimum lease payments,
as of December 31, 1999, are as follows:
Years ending December 31,
- -----------------------------------------------------------------------
2000 $ 106,048
2001 70,399
2002 25,813
- -----------------------------------------------------------------------
202,260
Amount representing interest (34,830)
- -----------------------------------------------------------------------
$ 167,430
=======================================================================
The net book value of assets held under capitalized leases at December 31, 1999
was $141,034.
Note 8. 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 $35,000 of investment banking fees under the
Agreements during 1997, which have been recorded as a reduction of proceeds from
sales of equity securities and interest and financing fees for sales of
subordinated debentures. There were no fees incurred in 1999 or 1998.
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 $0 and $180,992 for the years ended December 31,
1999 and 1998 respectively. In 1999, the Company paid, in two separate
transactions, $872,404 and issued 620,000 shares of common stock to extinguish
the debt.
<PAGE>
STRATESEC, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8. Related Party Transactions (Continued)
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.
During 1999, the Company sold 166,667 shares of common stock in a private
placement at a price of $1.50 per share to two related parties.
Note 9. 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 10. 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 and was amended
to increase the grant of options up to 1.2 million shares. 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. At various times throughout 1999, 727,500 additional options were issued
to employees and directors at prices ranging between $1.25 and $1.88 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 expired 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,
<PAGE>
STRATESEC, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 10. Employee Stock Warrants and Options (Continued)
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 1999 would have increased by $186,000 or $.03 per share on a basic and
diluted basis. 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.
The weighted-average fair value of the individual warrants and options granted
during 1997, 1998 and 1999 is estimated as $1.13, $.29 and $1.22, respectively,
on the date of grant. The fair values were determined using a Black-Scholes
option-pricing model with the following assumptions:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Dividend yield - - -
Volatility 125% 50% 50%
Risk-free interest rate 6.48 5.50 6.18
Expected life 3 years 3 years 3 years
Stock warrant and option activity during 1999 - 1997 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, 1997 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
Granted 727,500 1.65
Exercised - -
Expired 174,500 4.53
- -------------------------------------------------------------------------------------------------------------------
Unexercised at December 31, 1999 1,163,000 1.84
===================================================================================================================
</TABLE>
<PAGE>
STRATESEC, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 10. Employee Stock Warrants and Options (Continued)
The following table summarizes information concerning outstanding and
exercisable warrants and options at December 31, 1999:
<TABLE>
<CAPTION>
Weighted-Average
Remaining Warrants and
Number Contractual Options
Exercise Price Outstanding Life (Years) Exercisable
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 8.625 15,000 1.05 10,000
2.375 170,000 1.19 113,333
2.50 93,000 1.42 31,000
1.500 354,500 2.26 105,000
1.875 385,500 2.05 -
1.250 145,000 2.50 -
</TABLE>
Note 11. Income Taxes
Deferred tax attributes resulting from differences between financial accounting
amounts and tax bases of assets and liabilities at December 31, 1999 and 1998,
follow:
1999 1998
- ------------------------------------------------------------------------------
Current assets and liabilities
Allowance for doubtful accounts $ 270,000 $ 121,000
Accrued vacation pay and other 21,000 53,000
Provision for legal judgment 105,000 218,000
Inventory allowance 16,000 74,000
-----------------------------
412,000 466,000
Valuation allowance (412,000) (466,000)
-----------------------------
Net current deferred tax asset (liability) $ - $ -
=============================
Noncurrent assets and liabilities
Depreciation $ (39,000) $ (88,000)
Net operating loss carryfoward 7,849,000 7,484,000
-----------------------------
7,810,000 7,396,000
Valuation allowance (7,810,000) (7,396,000)
-----------------------------
Noncurrent deferred tax asset (liability) $ - $ -
=============================
<PAGE>
STRATESEC, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11. 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, 1999, the Company has net operating loss carryforwards of
approximately $19,600,000, which expire in 2002 through 2019.
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. Utilization of losses incurred
after the initial public offering may be limited by future ownership changes.
Note 12. 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
$20,000, $16,000 and $17,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
Note 13. Litigation Settlement
In January 1999, the Company received a favorable judgment in its appeal
regarding litigation arising from its trademark case in 1997. This resulted in
the reversal of accrued expenses of $1,655,000, net of $245,000 in previously
awarded attorney fees which have been remended 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.
Note 14. 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
- --------------------------------------------------------------------------------
Note 14. 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, 1999:
Years ending December 31:
- ------------------------------------------------------------------------------
2000 $ 179,000
2001 141,000
2002 98,000
2003 25,000
- ------------------------------------------------------------------------------
$ 443,000
==============================================================================
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $159,000, $345,000 and $248,000, 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 15. Subsequent Event
In the first quarter of 2000 the Company completed a private placement of
1,038,188 shares of its common stock to a limited number of investors at a price
of $1.50 per share for aggregate proceeds of $1,557,282. In addition, the
Company sold 700,000 shares (representing approximately 8% of the total
outstanding shares of the Company) of its common stock to a company at a price
of $1.50 per share for aggregate proceeds of $1,050,000 consisting of cash of
$500,000 and a note payable of $550,000, bearing interest at 8% due on June 15,
2000.
Note 16. Significant Clients
During the year ended December 31, 1999, contracts with three clients accounted
for approximately 33 percent, 9 percent and 7 percent of earned revenue. For the
year ended December 31, 1998, contracts with three clients accounted for
approximately 35 percent, 20 percent and 9 percent of earned revenue. For the
year ended December 31, 1997, two clients accounted for approximately 55 percent
and 20 percent of earned revenue.
<PAGE>
STRATESEC, INCORPORTED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Additions
----------------------------
Balance Charged Charged Balance
at to Costs to Other at End
Beginning and Accounts Deductions of
Description of Period Expenses (describe) (describe) Period
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999,
Allowance for Doubtful
Accounts $ 302,000 $ 372,000 $ - $ - $ 674,000
===========================================================================
Inventory Reserve $ 183,000 $ 40,000 $ - $ (183,000) (B) $ 40,000
===========================================================================
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
===========================================================================
</TABLE>
(A) Uncollectible accounts written off.
(B) Adjustment in inventory valuation.
EXHIBT 11
CALCULATION OF WEIGHTED AVG SHARES
OUTSTANDING FOR NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
DECEMBER 30,
------------------------------------
1998 1999
------------------------------------
<S> <C> <C>
EARNINGS:
NET INCOME(LOSS) $ (3,522,700.00) $ (932,838.00)
====================================
SHARES:
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 6,068,000.00 6,099,435.00
- -
------------------------------------
AVERAGE COMMON SHARES OUTSTANDING AND EQUIVALENTS 6,068,000.00 6,099,435.00
====================================
NET INCOME (LOSS) PER SHARE $ (0.58) $ (0.15)
====================================
</TABLE>
Consent of Independent Certified Public Accountants
STRATESEC, Incorporated
We have issued our report dated March 3, 1999, accompanying the consolidated
financial statements and schedules included in the Annual Report of Stratesec,
Incorporated on Form 10-K for the year ended December 31, 1999. We hereby
consent to the incorporation by reference of the aforementioned report in the
Registration Statement of Stratesec, Incorporated on Form S-8.
GRANT THORNTON LLP
Vienna, Virginia
March 30, 2000
Consent of independent certified public accountants
We have issued our report dated March 24, 2000 accompanying the financial
statement and schedule included in the Annual Report of Stratesec, Incorporated
on Form 10-K for the year ended December 31, 1999. We hereby consent to the
incorporation by reference of the aforementioned report in the registration
statement on Form S-8.
KELLER BRUNER & COMPANY, LLP
Frederick, Maryland
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,831
<SECURITIES> 0
<RECEIVABLES> 5,774,148
<ALLOWANCES> (675,000)
<INVENTORY> 245,903
<CURRENT-ASSETS> 5,352,372
<PP&E> 1,214,970
<DEPRECIATION> (668,450)
<TOTAL-ASSETS> 5,973,468
<CURRENT-LIABILITIES> 4,637,146
<BONDS> 0
0
0
<COMMON> 68,902
<OTHER-SE> (409,564)
<TOTAL-LIABILITY-AND-EQUITY> 5,973,468
<SALES> 10,641,131
<TOTAL-REVENUES> 10,641,131
<CGS> 7,443,087
<TOTAL-COSTS> 11,321,190
<OTHER-EXPENSES> 258,984
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 258,984
<INCOME-PRETAX> (932,838)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (932,838)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
