SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended September 30, 2000
Commission File Number: 1-13427
STRATESEC INCORPORATED
State of Incorporation: Delaware I.R.S. Employer I.D.: 22-2817302
105 Carpenter Drive
Sterling, Virginia 20164
(703) 709-8686
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No
------------ -----------------------
There were 8,279,964 shares of Common Stock, par value $0.01 per share,
outstanding at November 14, 2000.
<PAGE>
STRATESEC INCORPORATED
Quarter ended September 30, 2000
Index
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial information
Item 1. Financial Statements................................................................................3
Balance Sheets as of December 31, 1999 and September 30, 2000
(unaudited)..............................................................................................3
Statements of Operations for the three months ended September 30, 1999
and 2000 and the nine months ended
September 30, 1999 and 2000 (unaudited)..................................................................4
Statements of Cash Flows for the nine months ended
September 30, 1999 and 2000 (unaudited)..................................................................5
Notes to Financial Statements............................................................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................................7
Part II. Other information
Item 6. Exhibits and Reports on Form 8-K..................................................................12
Signature...................................................................................................13
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STRATESEC INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 September 30,
1999* 2000
--------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 2,831 $ 228,523
Accounts receivable, net of allowance for doubtful
accounts of $675,000 in 1999 and 105,900 in 2000......................... 2,233,262 4,237,962
Costs and estimated earnings in excess of billings of
uncompleted contracts.................................................... 2,865,886 3,608,966
Inventory, net of allowance of 40,000 in 1999 and 2000..................... 245,903 904,510
Prepaid expenses........................................................... 4,490 33,048
-------------- --------------
Total currents assets................................................. 5,352,372 9,013,009
Property and equipment, net................................................... 546,520 525,413
Other assets ................................................................ 74,576 78,061
-------------- --------------
$ 5,973,468 $ 9,616,483
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit............................................................. $ 771,532 $ 1,415,237
Current maturities of capital lease obligations............................ 72,860 65,000
Accounts payable........................................................... 2,931,260 2,780,641
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................................... 234,338 393,603
Accrued expenses and other................................................. 627,156 903,945
Notes payable..............................................................
-------------- --------------
Total current liabilities............................................. $ 4,637,146 $ 5,558,426
-------------- --------------
Long-term liabilities:
Capital lease obligations, less current maturities......................... 94,570 43,515
Shareholders' equity:
Common stock, $0.01 par value per share; authorized 20,000,000 shares;
6,890,189 issued and 6,638,189 outstanding shares in 1999 and 8,630,043
issued and
8,279,964 outstanding in 2000............................................ 68,902 86,300
Treasury stock 252,000 shares in 1999 and
350,079 shares in 2000................................................... (409,564) (612,814)
Additional paid-in capital................................................. 22,315,957 24,908,964
Accumulated deficit........................................................ (20,733,543) (20,367,908)
------------- --------------
Total shareholders' equity............................................... 1,241,752 4,014,542
-------------- --------------
Total liabilities & shareholders' equity................................. $ 5,973,468 $ 9,616,483
============== ==============
* Derived from audited financial statements as of December 31, 1999.
</TABLE>
<PAGE>
STRATESEC INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 2000 1999 2000
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Earned Revenue................................. $ 2,426,985 $ 3,450,603 $ 6,117,875 $ 11,864,407
Cost of earned revenue......................... 1,745,593 2,006,213 4,330,578 7,618,787
------------- ------------- ------------- -------------
Gross profit................................. 681,392 1,444,390 1,787,297 4,245,620
Selling, general and administrative
expenses.................................... 880,065 1,324,993 2,488,542 3,568,809
------------- ------------- ------------- -------------
Operating income (loss)...................... (198,673) 119,397 (701,245) 676,811
Interest and financing fees.................... (37,052) (116,156) (153,340) (317,053)
Interest and other income...................... 1,182 - 14,422 5,878
------------- ------------- ------------- -------------
Net income (loss)............................ $ (234,543) $ 3,241 $ (840,163) $ 365,636
============ ============ ============ ============
Net income (loss) per share--basic.............. (0.04) 0.00 (0.14) 0.05
============= ============= ============= =============
Net income per share--diluted................... (0.04) $ 0.00 (0.14) 0.04
============= ============ ============= =============
Weighted average common shares
Outstanding-basic........................... 5,978,440 8,019,260 5,978,440 8,019,260
============= ============= ============= =============
Weighted average common shares
Outstanding-diluted......................... -- 8,562,143 -- 8,562,143
============= ============= ============= =============
</TABLE>
<PAGE>
STRATESEC INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 2000
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $ (840,163) $ 365,636
-------------- --------------
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Provision for legal judgment................................................ 1,900,000 -
Depreciation and amortization............................................. 116,910 153,666
Amortization of debt discount............................................. 35,697 -
Changes in operating assets and liabilities:
Accounts receivable....................................................... (55,219) (2,004,700)
Costs and estimated earnings in excess of
billings on uncompleted contracts....................................... (66,424) (743,080)
Inventory................................................................. (234,673) (658,607)
Prepaid expenses.......................................................... 66,571 (28,558)
Other assets.............................................................. 73 (3,485)
Accounts payable.......................................................... 306,870 (150,619)
Billings in excess of costs and estimated
earnings on uncompleted contracts....................................... (12,672) 159,265
Accrued expenses and other................................................ (347,800) 276,789
-------------- --------------
Total adjustments..................................................... 1,709,333 (2,999,330)
-------------- --------------
Net cash provided (used) by operating activities...................... 869,170 (2,633,694)
-------------- --------------
Cash flows from investing activities:
Acquisition of plant and equipment........................................ (131,776) (132,559)
-------------- --------------
Net cash provided (used) by investing activities...................... (131,776) (132,559)
-------------- --------------
Cash flows from financing activities:
Proceeds from notes payable.................................................. (1,838,101) -
Principal payments on notes payable - shareholders........................... 930,000 -
Proceeds from line of credit.............................................. - 643,705
Proceeds from private placement of common stock........................... - 2,610,405
Principal payments on capital lease obligations........................... (45,725) (58,915)
Purchase of treasury stock................................................ (210,220) (203,250)
-------------- --------------
Net cash provided (used) by financing activities........................ (1,164,046) 2,991,945
-------------- --------------
Net increase (decrease) in cash and cash equivalents......................... (426,652) 225,692
Cash and cash equivalents at beginning of period............................. 442,582 2,831
-------------- --------------
Cash and cash equivalents at end of period................................... $ 15,930 $ 228,523
============== ==============
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest expense........................................................ $ 153,339 $ 301,063
Income tax.............................................................. $ - $ -
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited balance sheet as of September 30, 2000 and unaudited
statement of operations and statement of cash flows for the three months ended
September 30, 1999 and 2000 are condensed financial statements prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. Accordingly, they omit certain information included in complete
financial statements and should be read in conjunction with the financial
statements and notes included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 filed with the Securities and Exchange
Commission on March 30, 2000.
In the opinion of the Company, the unaudited financial statements at
September 30, 2000 and for the three and nine months ended September 30, 1999
and 2000 include all adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation of the financial position and
results of operations for such periods. Results of operations for the three and
nine months ended September 30, 2000 are not necessarily indicative of results
to be expected for the full year.
2. Cost and Estimated Earnings on Uncompleted Contracts
Cost and estimated earnings on uncompleted contracts at December 31,
1999 and September 30, 2000 which are expected to be collected within year as
follows:
December 31, 1999 September 30, 2000
------------------- -------------------
Cost Incurred On Contracts $ 26,431,919 $ 33,956,810
Estimated Earnings 8,412,885 10,808,660
------------------- ----------------
34,844,804 44,765,470
Less Billings To Date 32,213,256 41,550,107
------------------- ----------------
$ 2,631,548 $ 3,215,363
=================== ================
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion and analysis of the Company's financial condition and
historical results of operations should be read in conjunction with the
condensed financial statements and the related notes included elsewhere in this
report.
Overview
The Company is a single-source provider of comprehensive,
technology-based security solutions for medium and large commercial and
government facilities in the United States and abroad. The Company offers a
broad range of services, including: (i) consulting and planning; (ii)
engineering and design; (iii) systems integration; and (iv) maintenance and
technical support.
During the quarter the Company experienced improvement in results over
the same period in 1999, but had expected an even stronger quarter in 2000. The
Company has experienced some delays from clients in implementing capital
expenditures for security, due to the slow down in economy. However, the Company
currently has in excess of $20 million in backlog and identified follow on
business from existing clients as well as a strong bid and proposal log.
The Company continues to build its infrastructure and broaden its
client base. The Company believes its annual revenues for year 2000 will be from
$16 to 18 million and should reach from $25 to 30 million in year 2001, versus
1999 revenues of $10.6 million and 1998 revenues of $6.6 million. The Company
has added senior sales personnel in Texas, Georgia, Virginia and California. The
2000 revenue results do not reflect the relationships and experience that the
expanded sales force contribute. In addition, the move to the west coast will
add several million dollars to the existing revenue base of the Company.
The Company derives its revenues primarily from long-term, fixed-price
contracts. Earnings are recognized based upon the Company's estimates of the
cost and percentage of completion of individual contracts. Earned revenues equal
the project's total contract amount multiplied by the proportion that direct
project costs incurred on a project bear to estimated total project costs.
Project costs include direct labor and benefits, direct material, subcontract
costs, project related travel and other direct expenses.
Clients are invoiced based upon negotiated payment terms for each
individual contract. Terms usually include a 25% down payment and the balance as
stages of the work are completed. Maintenance contracts are billed either in
advance, monthly, or quarterly. As a result, the Company records as an asset,
costs and estimated earnings in excess of billings, and as a liability, billings
in excess of costs and estimated earnings.
<PAGE>
Results of Operations
The following table sets forth the percentages of earned revenues
represented by certain items reflected in the Company's statements of
operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ------------------------
1999 2000 1999 2000
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Earned revenues........................................... 100.0% 100.0% 100.0% 100.0%
Cost of earned revenues................................... 71.9 58.1 70.8 64.2
---------- ---------- ---------- -----------
Gross profit........................................... 28.1 41.9 29.2 35.8
Selling general and administrative expenses............... 36.3 38.4 40.6 30.1
---------- ---------- ---------- -----------
Operating income (loss)................................ (8.2) 3.5 (11.4) 5.7
Interest and financing fees............................... (1.5) (3.4) (2.5) (2.7)
Interest and other income................................. 0.0 0.0 0.2 0.1
---------- ---------- ---------- -----------
Net income (loss)...................................... (9.7)% 0.1% (13.7)% 3.1%
========== ========== ========== ===========
</TABLE>
Three Months Ended September 30, 2000 Compared With Three Months Ended September
30, 1999
Revenues increased by 42% from $2.4 million in the three months ended
September 30, 1999 to $3.4 million in the three months ended September 30, 2000.
The increase was due primarily to revenue from new customers. The customer base
increased to 70 accounts with revenue split evenly between 15 major accounts and
the other 50 small or new accounts.
Cost of earned revenues increased from $1.7 million in the three months
ended September 30, 1999 to $2.0 million in the three months ended September 30,
2000, primarily due to the increase in revenues. Gross margin improved from
28.1% in the 1999 period to 41.9% in 2000. The improvement in margins resulted
from better volume discounts on material prices as well as higher margin
contracts.
Selling, general and administrative expenses increased 50.6% from $0.8
million in the three months ended September 30, 1999 to $1.3 million in the
three months ended September 30, 2000.
Interest expense and financing fees increased from $0.03 million in the
three months ended September 30, 1999 to $0.10 million in the three months ended
September 30, 2000. Interest expenses increased due to an increase in borrowing
resulting from the increase in revenues and costs.
Net income improved from a net loss of $0.2 million in 1999 to net
income of $3.2 thousands in 2000.
Nine Months Ended September 30, 2000 Compared With Nine Months Ended September
30, 1999
Revenues increased by 94% from $6.1 million in the nine months ended
September 30, 1999 to $11.9 million in the nine months ended September 30, 2000.
The increase was due primarily to revenue from new customers.
Cost of earned revenues increased from $4.3 million in the nine months
ended September 30, 1999 to $7.6 million in the nine months ended September 30,
2000, primarily due to the increase in revenues. Gross margin increased from
29.2% in the 1999 period to 35.8% in 2000. Gross margin increases were due to
better volume discounts on cost of material as well as higher margin contracts.
Selling, general and administrative expenses as a percentage of
revenues decreased from 40.7% in the nine months ended September 30, 1999 to
30.2% in the nine months ended September 30, 2000. The decrease was primarily
due to Company initiatives to reduce unnecessary administrative overhead costs,
and due to the increase in the revenue base. These expenses also reflect a
significant increase in expenses related to increasing the sales force.
Interest expense and financing fees remained at 2.5% of revenues in the
nine months ended September 30, 1999 and in the nine months ended September 30,
2000.
Net income improved from a net loss of $0.84 million in 1999 to net
income of $0.37 million in 2000.
Liquidity and Capital Resources
In October 1997, the Company completed its initial public offering of
Common Stock, which resulted in net proceeds to the Company of approximately
$9.7 million after payment of offering expenses by the Company. In the fourth
quarter of 1997, the Company received proceeds of approximately $0.7 million
upon the exercise of warrants to purchase 269,382 shares of Common Stock by
employees. In October 1997, the Company used proceeds of the initial public
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 had an interest rate of 10%, were due on
December 31, 1999 and were 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.
During February 1999, the $1.9 million the Company was required to post
as collateral for a bond pending its appeal of a lawsuit was released when the
trial court's judgment was reversed. In February 1999, the Company repaid
$920,000 of the outstanding debentures.
During September 1999 all of the holders of the company's 10% senior
notes totaling $930,000 due December 31, 1999, have agreed to exchange their
notes for the Company's common stock valued at $1.50 per share. Additionally, 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.
During the nine months ended September 30, 2000, approximately $2.6
million of cash was used in operating activities. This was a result of net
income offset by increases in accounts receivables, inventories, and costs and
estimated earnings in excess of billings on uncompleted contracts due to the
increase in business during the period.
As of September 30, 2000, the Company had cash of $0.2 million and
working capital of $3.5 million. The Company is pursuing obtaining
financing/credit facilities to increase working capital to fund a significant
ramp up of new business.
This Form 10-Q includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act. All statements, other than statements of historical fact, included in this
Form 10-Q that addresses activities, events, or developments that the Company
expects, projects, believes, or anticipates will or may occur in the future,
including matters having to do with existing or future contracts, the Company's
ability to fund its operations and repay debt, business strategies, expansion
and growth of operations and other such matters, are forward-looking statements.
These statements are based on certain assumptions and analyses made by our
management in light of its experience and its perception of historical trends,
current conditions, expected future developments, and other factors it believes
are appropriate in the circumstances. These statements are subject to a number
of assumptions, risks and uncertainties, including general economic and business
conditions, the business opportunities (or lack thereof) that may be presented
to and pursued by the Company, the Company's performance on its current
contracts and its success in obtaining new contracts, the Company's ability to
attract and retain qualified employees, and other factors, many of which are
beyond the Company's control. You are cautioned that these forward-looking
statements are not guarantees of future performance and that actual results or
developments may differ materially from those projected in such statements.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
11.1 Calculation of Net Income (Loss) Per Share
27.1 Financial Data Schedule
b. Reports on Form 8-K.
None
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STRATESEC INCORPORATED
/s/BARRY MCDANIEL
Barry McDaniel
Chief Operating Officer
November 14, 2000
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
Calculation of Weighted Average Shares
Outstanding for Net Income (Loss) Per Share
Nine Months Ended
September 30,
1999 2000
------------- ---------------
<S> <C> <C>
Earnings:
Net Income (Loss).......................................................... $ (840,163) $ 365,636
============= ==============
Shares:
Weighted Average Number of Common Shares
Outstanding............................................................. 5,978,440 8,019,260
------------- --------------
Average Common Shares Outstanding and Equivalents.......................... - 8,216,487
============= ==============
Net Income (Loss) Per Share-Basic.......................................... $ (0.14) $ 0.05
============= ==============
Net Income (Loss) Per Share-Diluted........................................ $ - $ 0.04
============= ==============
</TABLE>
* -- Calculation would be antidilutive for 1998.
