SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended March 31, 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 shares of Common Stock, par value $0.01 per share, outstanding at May
, 2000.
<PAGE>
2
STRATESEC INCORPORATED
Quarter ended March 31, 2000
Index
Page
Part I. Financial information
Item 1. Financial Statements...........................................3
Balance Sheets as of December 31, 1999 and March 31, 2000
(unaudited).........................................................3
Statements of Operations for the three months ended
March 31, 1999 and 2000 (unaudited).................................4
Statements of Cash Flows for the three months ended
March 31, 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 1. Legal Proceedings.............................................11
Item 4. Submission of Matters to a Vote of Security Holders...........11
Item 6. Exhibits and Reports on Form 8-K.............................12
Signature..............................................................13
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STRATESEC INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1999* 2000
-------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 2,831 $ 453,264
Accounts receivable, net of allowance for doubtful
accounts of $675,000 in 1999 and 2000.................................... 2,233,262 3,937,008
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................................... 2,865,886 3,015,515
Inventory, net of allowance of 40,000 in 1999 and 2000..................... 245,903 412,981
Prepaid expenses........................................................... 4,490 3,143
-------------- --------------
Total currents assets................................................. 5,352,372 7,821,911
Property and equipment, net................................................... 546,520 570,441
Other assets ................................................................ 74,576 75,126
-------------- --------------
$ 5,973,468 $ 8,467,478
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit............................................................. $ 771,532 $ 1,105,417
Current maturities of capital lease obligations............................ 72,860 80,000
Accounts payable........................................................... 2,931,260 2,375,723
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................................... 234,338 324,397
Accrued expenses and other................................................. 627,156 621,776
Notes payable.............................................................. -- --
-------------- --------------
Total current liabilities............................................. $ 4,637,146 $ 4,507,313
Long-term liabilities:
Capital lease obligations, less current maturities......................... 94,570 66,429
Shareholders' equity (deficiency):
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 and8,628,377 issued and
8,326,377 outstanding in 2000............................................ 68,902 86,284
Treasury stock 252,000 shares in 1999 and
302,000 shares in 2000................................................... (409,564) (484,564)
Additional paid-in capital................................................. 22,315,957 24,905,857
Accumulated deficit........................................................ (20,733,543) (20,613,841)
------------- -------------
Total shareholders' equity............................................... 1,241,752 3,893,736
-------------- --------------
Total liabilities & shareholders' equity................................. $ 5,973,468 $ 8,467,478
============== ==============
</TABLE>
* Derived from audited financial statements as of December 31, 1999.
<PAGE>
STRATESEC INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
1999 2000
------------- -------------
Earned Revenues................................ $ 1,510,597 $ 3,667,030
Cost of earned revenue......................... 1,181,397 2,231,988
------------- -------------
Gross profit................................. 329,200 1,435,042
Selling, general and administrative
expenses.................................... 578,022 1,230,443
------------- -------------
Operating income (loss)...................... (248,822) 204,599
Interest and financing fees.................... (55,989) (85,370)
Interest and other income...................... 12,165 473
------------- -------------
Net income (loss)............................ $ (292,646) $ 119,702
=========== ============
Net income (loss) per share--basic............. (0.05) 0.02
============ =============
Net income per share--diluted.................. N/a $ 0.02
============= ============
Weighted average common shares
Outstanding-basic........................... 5,983,457 7,240,861
============= =============
Weighted average common shares
Outstanding-diluted......................... n/a 7,547,893
============= =============
<PAGE>
12
STRATESEC INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 2000
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $ (292,646) $ 119,702
------------- -------------
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization........................................... 36,673 41,361
Amortization of debt discount........................................... 11,899
Changes in operating assets and liabilities:
Restricted cash........................................................... 1,900,000
Accounts receivable....................................................... (288,729) (1,153,746)
Costs and estimated earnings in excess of
billings on uncompleted contracts....................................... 19,615 (149,629)
Inventory.................................................................... (159,410) (167,078)
Prepaid expenses.......................................................... 3,136 1,347
Other assets.............................................................. -- (550)
Accounts payable.......................................................... (288,857) (555,537)
Billings in excess of costs and estimated
earnings on uncompleted contracts....................................... (12,672) 90,059
Accrued expenses and other................................................ (70,559) (5,380)
------------- --------------
Total adjustments..................................................... 1,151,096 (1,899,153)
-------------- --------------
Net cash from (used in) operating activities.......................... 858,450 (1,779,451)
Cash flows from investing activities:
Acquisition of plant and equipment........................................ (9,511) (65,282)
------------- -------------
Net cash provided (used) by investing activities.......................... (9,511) (65,282)
------------- -------------
Cash flows from financing activities:
Proceeds from line of credit.............................................. -- 333,885
Proceeds from private placement of common stock........................... 2,057,282
Principal payments on debentures.......................................... (920,000) --
Principal payments on capital lease obligations........................... (11,228) (21,001)
Purchase of treasury stock................................................ (195,177) (75,000)
------------- -------------
Net cash provided by (used in) financing activities....................... (1,126,405) 2,295,166
-------------- --------------
Net (decrease) in cash and cash equivalents.................................. (277,466) 450,433
Cash and cash equivalents at beginning of period............................. 442,582 2,831
-------------- --------------
Cash and cash equivalents at end of period................................... $ 165,116 $ 453,264
============== ==============
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest expense........................................................ $ 55,989 $ 85,370
Income taxes............................................................ $ -- $ --
Supplemental Schedule of Non-cash Financing and
Investing Activities:
Sale of common stock by receipt of note receivable...................... $ -- $ 550,000
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited balance sheet as of March 31, 2000 and unaudited
statement of operations and statement of cash flows for the three months ended
March 31, 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
March 31, 2000 and for the three months ended March 31, 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 months ended March 31, 2000 are not
necessarily indicative of results to be expected for the full year.
2. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts at December 31,
1999 and March 31, 2000 which are expected to be collected within one year are
as follows:
December 31, March 31,
1999 2000
------------- --------------
Costs incurred on contracts............ $ 26,431,919 $ 28,663,907
Estimated earnings...................... 8,412,885 9,191,515
------------ --------------
34,844,804 37,855,422
Less billings to date................... 32,213,256 35,164,304
------------ --------------
$ 2,631,548 $ 2,691,118
============== ==============
<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.
The first quarter of 2000 continued the improvements in new business
development. By the end of the first quarter the company had $20 million in
backlog and follow-on projects identified with existing customers. During the
first quarter the Company's strategy of adding large commercial clients with
many facilities began to significantly expand the recurring revenue base from
existing customers. The Company received over $5 million in new awards during
the quarter. In addition, the Company added 10 new customers during the quarter.
There were no customers lost during the quarter. The Company's focused marketing
efforts to provide high quality integrated security systems to major commercial
accounts will allow the companies to grow revenue and profits over the long
term.
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:
Three Months Ended
March 31,
1999 2000
--------- ----------
Earned revenues................................... 100.0% 100.0%
Cost of earned revenues........................... 78.2 60.9
-------- ----------
Gross profit................................... 21.8 39.1
Selling general and administrative expenses....... 38.3 33.5
-------- ----------
Operating income (loss)........................ (16.5) 5.6
Interest and financing fees....................... (3.7) (2.3)
Interest and other income......................... 0.8 0.0
-------- ----------
Net income (loss).............................. (19.4)% 3.3%
------ ---------
Three Months Ended March 31, 2000 Compared With Three Months Ended March 31,
1999
Revenues increased by 142% from $1.5 million in the three months ended
March 31, 1999 to $3.7 million in the three months ended March 31, 1999. The
increase was due primarily to revenue of new customers and increased revenue
from existing customers. The increase in revenue was primarily due to the growth
of large commercial accounts such as MCI Worldcom and Nokia.
Cost of earned revenues increased from $12 million in the three months
ended March 31, 1999 to $2.2 million in the three months ended March 31, 2000,
primarily due to the increase in revenues. Gross margin increased from 21.8% in
the 1999 period to 39.1% in 2000. Margins improved due to improved pricing from
key vendors on several large projects and higher rates for labor.
Selling, general and administrative expenses increased 113% from $.6
million in the three months ended March 31, 1999 to $1.2 million in the three
months ended March 31, 2000. The increase was primarily due to Company
initiatives to increase business development, and to manage the increased
business. The growth in selling, general and administrative expenses was
proportionately less than the growth in revenues thereby decreasing the expenses
as a percentage of revenues.
Interest expense and financing fees increased from $0.06 million in the
three months ended March 31, 1999 to $0.1 million in the three months ended
March 31, 2000. The growth in Interest and Financing Fees was proportionately
less than the growth in revenue thereby decreasing the Interest and Financing
Fees as a percentage of revenue.
Net loss improved from a net loss of $0.3 million in 1999 to net income
of $0.1 million in 2000. The improvement was due to improved gross margins,
constrained growth in selling, general and administrative expenses and
dramatically improved revenue.
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.
As of March 31, 2000, the Company had cash of $0.4 million and working
capital of $0.7 million. The Company is pursuing obtaining financing/credit
facilities to increase working capital to fund a significant ramp up of new
business.
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
[Any new or pending?]
Item 2. Changes in Securities and Use of Proceeds.
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. 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
May , 2000
EXHIBIT 11
Calculation of Weighted Average Shares
Outstanding for Net Income (Loss) Per Share
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 2000
------------- --------------
<S> <C> <C>
Earnings:
Net Income (Loss).......................................................... $ (292,646) $ 119,702
============ ==============
Shares:
Weighted Average Number of Common Shares
Outstanding............................................................. 5,983,457 7,240,861
------------- --------------
Average Common Shares Outstanding and Equivalents.......................... n/a 7,547,893
============= ==============
Net Income (Loss) Per Share-Basic.......................................... $ (0.05) $ 0.02
============ ==============
Net Income (Loss) Per Share-Diluted........................................ $ n/a $ 0.02
============= ==============
</TABLE>
* -- Calculation would be antidilutive for 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 453,264
<SECURITIES> 0
<RECEIVABLES> 4,612,008
<ALLOWANCES> (675,000)
<INVENTORY> 412,981
<CURRENT-ASSETS> 7,821,911
<PP&E> 1,280,252
<DEPRECIATION> 709,811
<TOTAL-ASSETS> 8,467,478
<CURRENT-LIABILITIES> 4,507,313
<BONDS> 0
0
0
<COMMON> 86,284
<OTHER-SE> 484,564
<TOTAL-LIABILITY-AND-EQUITY> 8,467,478
<SALES> 3,667,030
<TOTAL-REVENUES> 3,667,030
<CGS> 2,231,988
<TOTAL-COSTS> 2,231,998
<OTHER-EXPENSES> 1,230,443
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85,370
<INCOME-PRETAX> 111,702
<INCOME-TAX> 0
<INCOME-CONTINUING> 119,702
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 119,702
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
