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 June 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 8,278,298 shares of Common Stock, par value $0.01 per share,
outstanding at August 14, 2000.
<PAGE>
2
STRATESEC INCORPORATED
Quarter ended June 30, 2000
Index
Page
Part I. Financial information
Item 1. Financial Statements.........................................3
Balance Sheets as of December 31, 1999 and June 30, 2000
(unaudited).......................................................3
Statements of Operations for the three months ended
June 30, 1999 and 2000 and the six months ended
June 30, 1999 and 2000 (unaudited)................................4
Statements of Cash Flows for the six months ended
June 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 4. Submission of Matters to a Vote of Security Holders.........12
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 June 30,
1999* 2000
------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 2,831 $ 430,811
Accounts receivable, net of allowance for doubtful
accounts of $675,000 in 1999 and 132,000 in 2000......................... 2,233,262 4,542,495
Costs and estimated earnings in excess of billings of
uncompleted contracts.................................................... 2,865,886 3,527,676
Inventory, net of allowance of 40,000 in 1999 and 2000..................... 245,903 706,940
Prepaid expenses........................................................... 4,490 15,278
-------------- --------------
Total currents assets................................................. 5,352,372 9,223,200
Property and equipment, net................................................... 546,520 554,988
Other assets ................................................................ 74,576 78,126
-------------- --------------
$ 5,973,468 $ 9,856,314
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit............................................................. $ 771,532 $ 1,425,436
Current maturities of capital lease obligations............................ 72,860 88,000
Accounts payable........................................................... 2,931,260 3,432,063
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................................... 234,338 257,819
Accrued expenses and other................................................. 627,156 607,393
-------------- --------------
Total current liabilities............................................. $ 4,637,146 $ 5,810,711
Long-term liabilities:
Capital lease obligations, less current maturities......................... 94,570 37,426
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 and8,628,377
issued and
8,278,298 outstanding in 2000............................................ 68,902 86,284
Treasury stock 252,000 shares in 1999 and
350,079 shares in 2000................................................... (409,564) (612,814)
Additional paid-in capital................................................. 22,315,957 24,905,856
Accumulated deficit........................................................ (20,733,543) (20,371,149)
------------- --------------
Total shareholders' equity............................................... 1,241,752 4,008,177
-------------- --------------
Total liabilities & shareholders' equity................................. $ 5,973,468 $ 9,856,314
============== ==============
* Derived from audited financial statements as of December 31, 1999.
</TABLE>
<PAGE>
STRATESEC INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Earned Revenues................................ $ 2,180,293 $ 4,746,773 $ 3,690,891 $ 8,413,803
Cost of earned revenue......................... 1,402,699 3,380,586 2,584,096 5,612,574
------------- ------------- ------------- -------------
Gross profit................................. 777,594 1,366,187 1,106,795 2,801,229
Selling, general and administrative
expenses.................................... 1,031,343 1,013,373 1,609,365 2,243,816
------------- ------------- ------------- -------------
Operating income (loss)...................... (253,749) 352,814 (502,570) 557,413
Interest and financing fees.................... (60,298) (115,527) (116,287) (200,897)
Interest and other income...................... 1,074 5,405 13,240 5,878
------------- ------------- ------------- -------------
Net income (loss)............................ $ (312,973) $ 242,692 $ (605,617) $ 362,394
============ ============ ============ ============
Net income (loss) per share--basic.............. (0.05) 0.03 (0.10) 0.05
============= ============= ============= ============
Net income per share--diluted................... (0.05) $ 0.03 (0.10) 0.04
============= ============ ============= ============
Weighted average common shares
Outstanding-basic........................... 5,980,621 8,019,260 5,980,621 8,019,260
============= ============= ============= =============
Weighted average common shares
Outstanding-diluted......................... 5,980,621 8,457,021 5,980,621 8,457,021
============= ============= ============= =============
</TABLE>
<PAGE>
STRATESEC INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 2000
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $ (605,618) $ 362,394
-------------- --------------
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization........................................... 74,993 101,234
Amortization of debt discount........................................... 23,798
Changes in operating assets and liabilities:
Restricted cash........................................................... 1,900,000 --
Accounts receivable....................................................... (212,292) (2,309,233)
Costs and estimated earnings in excess of
billings on uncompleted contracts....................................... (47,479) (661,790)
Inventory................................................................. (188,937) (461,037)
Prepaid expenses.......................................................... 116,633 (10,788)
Other assets.............................................................. 73 (3,550)
Accounts payable.......................................................... (8,066) 500,803
Billings in excess of costs and estimated
earnings on uncompleted contracts....................................... (12,672) 23,481
Accrued expenses and other................................................ 39,572 (19,763)
-------------- --------------
Total adjustments..................................................... 1,685,623 (2,840,643)
-------------- --------------
Net cash from (used in) operating activities.......................... 1,080,005 (2,478,249)
Cash flows from investing activities:
Acquisition of plant and equipment........................................ (105,495) (109,702)
-------------- --------------
Net cash provided (used) by investing activities.......................... (105,495) (109,702)
-------------- --------------
Cash flows from financing activities:
Proceeds from line of credit.............................................. -- 653,904
Proceeds from private placement of common stock........................... -- 2,607,281
Principal payments on debentures.......................................... (920,000) --
Principal payments on capital lease obligations........................... (15,326) (42,004)
Purchase of treasury stock................................................ (201,670) (203,250)
-------------- --------------
Net cash provided by (used in) financing activities....................... (1,136,996) 3,015,931
-------------- --------------
Net (decrease) in cash and cash equivalents.................................. (162,486) 427,980
Cash and cash equivalents at beginning of period............................. 442,582 2,831
-------------- --------------
Cash and cash equivalents at end of period................................... $ 280,096 $ 430,811
============== ==============
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest expense........................................................ $ 116,287 $ 200,897
Income tax.............................................................. $ -- $ --
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited balance sheet as of June 30, 2000 and unaudited statement
of operations and statement of cash flows for the three months ended June 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
June 30, 2000 and for the three and six months ended June 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 six months
ended June 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 June 30, 2000 which are expected to be collected within year as
follows:
<TABLE>
<CAPTION>
December 31, 1999 June 30, 2000
------------------- -------------------
<S> <C> <C>
Cost Incurred On Contracts $ 26,431,919 $ 31,950,597
Estimated Earnings 8,412,885 10,090,284
------------------- -------------------
34,844,804 42,040,881
Less Billings To Date 32,213,256 38,771,073
------------------- -------------------
2,631,548 3,269,808
=================== ===================
</TABLE>
<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 second quarter, the Company continued to expand its business
development strategy of identifying additional opportunities with existing
national/corporate clients. The Company was notified of several multi-million
dollar opportunities from its existing clients that the Company expects to be
awarded prior to the end of 2000. In addition, the Company added three new
national level accounts during the quarter. Backlog and follow-on work with
existing clients exceeded $20 million at the end of the quarter. Based on
currently identified backlog and opportunities, the Company expects to show
significantly higher revenue and profitability for the entire year.
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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Earned revenues........................................... 100.0% 100.0% 100.0% 100.0%
Cost of earned revenues................................... 64.3 71.2 70.0 66.7
---------- ---------- ---------- -----------
Gross profit........................................... 35.7 28.8 30.0 33.3
Selling general and administrative expenses............... 47.3 21.3 43.6 26.6
---------- ---------- --------- -----------
Operating income (loss)................................ (11.6) 7.5 (13.6) 6.7
Interest and financing fees............................... (2.8) (2.4) (3.2) (2.4)
Interest and other income................................. 0.0 0.0 0.4 0.0
---------- ---------- ---------- -----------
Net income (loss)...................................... (14.4)% 5.1% (16.4)% 4.3%
========== ========== ========== ===========
</TABLE>
Three Months Ended June 30, 2000 Compared With Three Months Ended June 30, 1999
Revenues increased by 118% from $2.2 million in the three months ended
June 30, 1999 to $4.7 million in the three months ended June 30, 2000. 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 $1.4 million in the three months
ended June 30, 1999 to $3.4 million in the three months ended June 30, 2000,
primarily due to the increase in revenues. Gross margin decreased from 35.7% in
the 1999 period to 28.8% in 2000. Second quarter revenue had a larger
proportionate number of price-competitive contracts than the historical average.
As the ratio of non-competitive contracts to price-competitive contracts moves
back to the norm, margins will increase.
Selling, general and administrative expenses decreased 1.7% from $1.03
million in the three months ended June 30, 1999 to $1.01 million in the three
months ended June 30, 2000. The decrease was primarily due to Company
initiatives to control the selling, general and administrative expenses.
Interest expense and financing fees increased from $0.06 million in the
three months ended June 30, 1999 to $0.12 million in the three months ended June
30, 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 income improved from a net loss of $0.3 million in 1999 to net
income of $0.2 million in 2000. The improvement was due to improved gross
margins, constrained growth in selling, general and administrative expenses and
dramatically improved revenue.
Six Months Ended June 30, 2000 Compared With Six Months Ended June 30, 1999
Revenues increased by 128% from $3.7 million in the six months ended
June 30, 1999 to $8.4 million in the six months ended June 30, 2000. 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 $2.6 million in the six months
ended June 30, 1999 to $5.6 million in the six months ended June 30, 2000,
primarily due to the increase in revenues. Gross margin increased from 30.0% in
the 1999 period to 33.3% 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 39% from $1.6
million in the six months ended June 30, 1999 to $2.2 million in the six months
ended June 30, 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 $0.12 million in the
six months ended June 30, 1999 to $0.20 million in the six months ended June 30,
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 income improved from a net loss of $0.6 million in 1999 to net
income of $0.3 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.
During the six months ended June 30, 2000, approximately $2.5 million
of cash was used in operating activities. This was a result of net income offset
by increases in acounts 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 June 30, 2000, the Company had cash of $0.4 million and working
capital of $3.4 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 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on June 12, 2000.
At the meeting, the shareholders elected the following individuals as members of
the Board of Directors: Wirt D. Walker, III, Barry W. McDaniel, Charles W.
Archer, Mishal Yousef Saud Al Sabah, Robert B. Smith, Jr., James A. Abrahamson
and Emmit J. McHenry.
The voting results of the election of directors and the other matters
voted upon at the meeting are as follows:
<PAGE>
Election of Directors:
Votes Withheld
For Authority
Nominee:
Wirt D. Walker, III................................. 4,937,639 3,000
Barry W. McDaniel................................... 4,937,639 3,000
Charles W. Archer................................... 4,937,189 3,450
Mishal Yousef Saud Al Sabah......................... 4,937,639 3,000
Robert B. Smith, Jr................................. 4,937,189 3,450
James A. Abrahamson................................. 4,937,639 3,000
Emmit J. McHenry.................................... 4,937,639 3,000
Other Matters:
<TABLE>
<CAPTION>
Abstentions
and
Description of Votes Votes Broker
Matter For Against Non-Votes
<S> <C> <C> <C>
Approval of an amendment to the Company's
1997 Stock Option Plan ............................. 2,896,797 8,450 2,035,392
</TABLE>
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
August 14, 2000
