-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A2t45/vYdyo87k/xCMCjedpuE91RVoboy/vAmm9Drp9JvqQnFLOkkqZiYUPT2H/j XMeO9Z1HztCB0CO9ShhLgQ== 0000925328-98-000097.txt : 19981028 0000925328-98-000097.hdr.sgml : 19981028 ACCESSION NUMBER: 0000925328-98-000097 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981027 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: STRATESEC INC CENTRAL INDEX KEY: 0001037453 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-DETECTIVE, GUARD & ARMORED CAR SERVICES [7381] IRS NUMBER: 222817302 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13427 FILM NUMBER: 98731125 BUSINESS ADDRESS: STREET 1: 50 TICE BLVD CITY: WOODCLIFF LAKE STATE: NJ ZIP: 07675 BUSINESS PHONE: 2019309500 MAIL ADDRESS: STREET 1: 50 TICE BLVD STREET 2: 50 TICE BLVD CITY: WOODCLIFF LAKE STATE: NJ ZIP: 07675 FORMER COMPANY: FORMER CONFORMED NAME: SECURACOM INC DATE OF NAME CHANGE: 19970409 10-Q 1 THIRD QUARTER FORM 10-Q 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, 1998 Commission File Number: 1-13427 STRATESEC INCORPORATED (formerly Securacom, 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 6,103,522 shares of Common Stock, par value $0.01 per share, outstanding at October 23, 1998. STRATESEC INCORPORATED Quarter ended September 30, 1998 Index - --------------------------------------------------------------------------------
Page Part I. Financial information Item 1. Financial Statements........................................................................... 3 Balance Sheets as of December 31, 1997 and September 30, 1998 (unaudited).......................................................................................... 3 Statements of Operations for the three months ended September 30, 1997 and 1998 (unaudited) and the nine months ended September 30, 1997 and September 30, 1998 (unaudited).......................................... 4 Statements of Cash Flows for the nine months ended September 30, 1997 and September 30, 1998 (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 2. Changes in Securities and Use of Proceeds...................................................... 11 Item 6. Exhibits and Reports on Form 8-K.............................................................. 12 Signature............................................................................................... 13
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements STRATESEC INCORPORATED BALANCE SHEETS
December 31, September 30, 1997* 1998 (Unaudited) ASSETS Current assets: Cash and cash equivalents.................................................. $ 998,312 $ 646,172 Cash-restricted............................................................ 2,063,539 1,940,048 Accounts receivable, net of allowance for doubtful accounts of $49,000 in 1997 and 1998..................................... 3,330,542 1,301,157 Costs and estimated earnings in excess of billings on uncompleted contracts.................................................... 2,108,134 1,298,463 Inventory.................................................................. 598,415 240,688 Prepaid expenses and other................................................. 140,870 127,233 -------------- -------------- Total currents assets................................................. 9,239,812 5,553,751 Plant and equipment, net...................................................... 740,156 463,088 Other assets.................................................................. 128,414 139,866 -------------- -------------- $ 10,108,382 $ 6,156,704 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Current maturities of capital lease obligations............................ $ 51,100 $ 66,335 Accounts payable........................................................... 1,997,014 1,004,468 Billings in excess of costs and estimated earnings on uncompleted contracts.................................................... 69,734 261,725 Accrued expenses and other................................................. 2,938,789 2,757,871 -------------- -------------- Total current liabilities............................................. $ 5,056,637 $ 4,090,399 Long-term liabilities: Capital lease obligations, less current maturities......................... 196,285 186,004 Notes payable.............................................................. -- 1,790,506 Stockholders' equity (deficiency): Common stock, $0.01 par value per share; authorized 20,000,000 shares; issued and outstanding 6,103,502 shares in 1997 and 1998........................................ 61,035 61,035 Additional paid-in capital................................................. 21,072,430 21,143,824 Accumulated deficit........................................................ (16,278,005) (21,115,063) -------------- -------------- 4,855,460 89,796 -------------- -------------- $ 10,108,382 $ 6,156,704 ============== ==============
* Derived from audited financial statements as of December 31, 1997. The accompanying notes are an integral part of these statements. 3 STRATESEC INCORPORATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1997 1998 1997 1998 -------------- -------------- -------------- -------------- Earned revenues................................ $ 4,182,763 $ 1,435,416 $ 11,422,961 $ 4,127,916 Provision for contract adjustment.............. -- -- -- 2,491,156 Cost of earned revenues........................ 3,006,339 1,044,236 8,216,515 3,281,477 -------------- -------------- -------------- -------------- Gross profit................................ 1,176,424 391,180 3,206,446 (1,644,717) Selling, general and administrative expenses.................................... 876,098 1,045,527 2,256,627 3,129,059 -------------- -------------- -------------- -------------- Operating income (loss)........................ 300,326 (654,347) 949,819 (4,773,776) Loss on sale of plant and equipment............ -- -- -- (37,839) Interest and financing fees.................... (111,711) (69,787) (343,488) (118,891) Interest and other income...................... 24,082 27,469 35,800 93,448 -------------- -------------- -------------- -------------- Net income (loss).............................. $ 212,697 $ (696,666) $ 642,131 $ (4,837,059) ============== ============== ============== ============== Net income (loss) per share - basic and diluted................................. $ .05 $ (.11) $ .14 $ (.79) ============== ============== ============== ============== Weighted average common shares outstanding................................. 4,605,000 6,103,522 4,605,000 6,103,522 ============== ============== ============== ==============
The accompanying notes are an integral part of these statements. 4 STRATESEC INCORPORATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, 1997 1998 ------------- --------------- Cash flows from operating activities: Net income (loss)............................................................ $ 642,131 $ (4,837,058) ------------ -------------- Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization.............................................. 99,958 106,570 Loss of sale of plant and equipment........................................ -- 39,162 Amortization of debt discount.............................................. 31,500 11,899 Changes in operating assets and liabilities: Cash restriction............................................................. -- 123,491 Accounts receivable.......................................................... (376,410) 2,029,385 Inventory (Material Stores on Site).......................................... -- 357,728 Costs and estimated earnings in excess of billings on uncompleted contracts.......................................... (3,096,834) 809,671 Prepaid expenses and other................................................... (85,728) 13,647 Other assets................................................................. (16,903) (11,452) Accounts payable............................................................. 2,540,590 (992,546) Billings in excess of costs and estimated earnings on uncompleted contracts.......................................... (22,429) 191,991 Accrued expenses and other................................................... 253,938 (180,918) ------------ -------------- Total adjustments........................................................ (672,318) 2,498,626 ------------ -------------- Net cash from operating activities....................................... (30,187) (2,338,432) ------------ -------------- Cash flows from investing activities: Investment in SSIH, Ltd...................................................... (700,000) -- Sale of plant and equipment.................................................. -- 240,000 Acquisition of plant and equipment........................................... (5,044) (59,254) ------------ -------------- Net cash used by investing activities........................................ (705,044) 180,746 ------------ -------------- Cash flows from financing activities: Proceeds from notes payable.................................................. 700,000 1,850,000 Principal payments of capital lease obligations................................................................ (20,996) (44,454) ------------ -------------- Deferred registration cost................................................... (548,385) -- Net cash provided by financing activities.................................... 130,619 1,805,546 ------------ -------------- Net (decrease) in cash and cash equivalents..................................... (604,612) (352,140) Cash and cash equivalents at beginning of period................................ 609,342 998,312 ------------ -------------- Cash and cash equivalents at end of period...................................... $ 4,730 $ 646,172 ============ ==============
5 NOTES TO FINANCIAL STATEMENTS 1. Basis of Presentation The unaudited balance sheet as of September 30, 1998 and the unaudited statement of operations and statements of cash flows for the nine months ended September 30, 1997 and 1998 are condensed financial statements in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, they omit certain information included in complete financial statements and should be read in conjunction with the financial statements and notes contained in a Form 10-K which the Company filed with the Securities and Exchange Commission on March 31, 1998. In the opinion of the Company, the unaudited financial statements at September 30, 1998 and for the nine months ended September 30, 1997 and 1998, 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 nine months ended September 30, 1998 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, 1997 and September 30, 1998 which are expected to be collected within one year are as follows:
December 31, September 30, 1997 1998 --------------- --------------- Costs incurred on contracts.................................................. $ 14,229,410 $ 17,521,013 Estimated earnings........................................................... 3,473,560 4,267,393 --------------- --------------- 17,702,970 21,788,406 Less billings to date........................................................ 15,664,570 20,751,668 --------------- --------------- $ 2,038,400 $ 1,036,738 =============== ===============
6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion and analysis of the Company's financial condition and historical results of operations should be read in conjunction with the condensed financial statements and the related notes thereto included elsewhere in this report. Overview The Company is a single-source provider of comprehensive, technology-based security solutions for medium and large commercial and government facilities in the United States and abroad. The Company offers a broad range of services, including: (i) consulting and planning; (ii) engineering and design; (iii) systems integration; and (iv) maintenance and technical support. During the second quarter of 1998 a major firm fixed price contract experienced significant unforseen and continuing delays for a variety of reasons, many of which were outside the control of the Company. As a result, actual costs and estimates of future costs to complete the contract rapidly increased throughout the quarter. As a result, the Company entered into an agreement with the prime contractor whereby the prime contractor will assume the remaining costs and all associated risks and liabilities for completing the contract. In the second quarter of 1998, the Company took a one-time charge of $2,491,156 associated with the agreement. The Company believes that this alleviated a significant, near-term cash burden on the Company and will mitigate operating losses moving forward and eliminate future risks relating to the contract. The Company returned to profitability in September 1998 and expects to be profitable in the fourth quarter on significantly higher revenues as a result of increased new business booking and new client relationships. The Company derives its revenues from a mixture of different contract types including firm, fixed-price, cost plus fixed fee, and time and materials contracts. Earnings for fixed-price contracts 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. Earnings for cost plus fixed fee contracts are based on the cost incurred plus the percentage authorized by the contract. Earnings for time and materials contracts are based on the rate specified in the contract for the category of labor expended multiplied by the number of hours worked in the period. Clients are invoiced based upon negotiated payment terms for each individual contract. Terms for the fixed-price contracts usually include a 25% down payment and the balance as stages of the work are completed. Terms for cost plus fixed fee contracts allow for billing as the material is received or at the end of the month in which the material was received. Terms for time and materials contracts provide for billing each month for the number of hours worked during the month. Maintenance contracts are billed in advance, monthly, or quarterly. As a result, the Company records as an asset cost estimated earnings in excess of billings and as a liability billings in excess of costs and estimated earnings for the fixed-price contracts. 7 In the first three quarters of the year, the Company has continued to diversify its client base and reduce its dependence on a very small number of large contracts. This diversification is expected to continue for the rest of the year. 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 Nine Months Ended Ended September 30, September 30, 1997 1998 1997 1998 Earned Revenues.......................................... 100.0% 100.0% 100.0% 100.0% Provision for contract adjustment........................ -- -- -- 60.3 Cost of earned revenues.................................. 71.9 72.7 71.9 79.5 ------------ ---------- ---------- ---------- Gross profit.......................................... 28.1 27.3 28.1 (39.8) Selling, general and administrative expenses............. 21.0 72.8 19.8 75.8 ------------ ---------- ---------- ---------- Operating income (loss)............................... 7.1 (45.5) 8.3 (115.6) Loss on sale of plant and equipment...................... -- -- -- (0.9) Interest and financing fees.............................. (2.6) (4.9) (3.0) (2.9) Interest and other income................................ 0.6 1.9 0.3 2.3 ------------ ---------- ---------- ---------- Net income (loss)..................................... 5.1% 48.5% 5.6% (117.2)% ============ ========== ========== ==========
Three Months Ended September 30, 1998 Compared With Three Months Ended September 30, 1997 Revenues decreased by 65.7% from $4.2 million in the three months ended September 30, 1997 to $1.4 million in the three months ended September 30, 1998. The decrease was due primarily to a decline in work completed on existing projects. Cost of earned revenues decreased from $3.0 million in the three months ended September 30, 1997 to $1.0 million in the three months ended September 30, 1998, primarily due to the decrease in revenues. Gross margin decreased from 28.1% in the 1997 period to 27.3% in the 1998 period. Selling, general and administrative expenses increased by 19.3% from $0.8 million in the three months ended September 30, 1997, to $1.0 million in the three months ended September 30, 1998. Overhead salaries increased by $0.1 million from the previous year's period as project staff worked less on jobs due to the decreased revenues and, professional fees increased by $0.05 million due to recruiting fees for the new corporate officers. Interest expense and financing fees decreased 37.5% from $0.1 million in the three months ended September 30, 1997 to $0.07 million in the three months ended September 30, 1998 due to a decrease in outstanding indebtedness resulting from the repayment of the subordinated debentures in October 1997. 8 Due to a decrease in revenue, net income decreased from net income of $0.2 million in the three months ended September 30, 1997 to a net loss of $(0.7) million in the three months ended September 30, 1998. Nine Months Ended September 30, 1998 Compared With Nine Months Ended September 30, 1997 Revenues decreased by 64.0% from $11.4 million in the nine months ended September 30, 1997 to $4.1 million in the nine months ended September 30, 1998. The decrease was due primarily to a decline in work completed on existing projects. In addition, revenues from the Metropolitan Washington Airport Authority declined from $2.1 million in the 1997 period to $1.6 million in the 1998 period. Cost of earned revenues decreased from $8.2 million in the nine months ended September 30, 1997 to $3.3 million in the nine months ended September 30, 1998, primarily due to the decrease in revenues. Gross margin decreased from 28.1% in the 1997 period to (39.8)% in the 1998 period due to the one-time charge of $2.5 million taken in the second quarter 1998. Selling, general and administrative expenses increased by 39% from $2.3 million in the nine months ended September 30, 1997, to $3.1 million in the nine months ended September 30, 1998. Overhead salaries increased by $0.7 million from the previous year's period 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 the new corporate officers. Interest expense and financing fees decreased 65.3% from $0.3 million in the nine months ended September 30, 1997 to $0.1 million in the nine months ended September 30, 1998 due to a decrease in outstanding indebtedness resulting from the repayment of the subordinated debentures in October 1997. Net income decreased from net income of $0.6 million in the nine months ended September 30, 1997 to a net loss of $(4.8) million for the nine months ended September 30, 1998. This decrease in net income was primarily due to a decrease in revenue and the one-time charge of $2,491,156 associated with an agreement with a prime contractor to transfer the remaining cost and all associated risks for completion of a major firm fixed-price contract to the prime contractor. Liquidity and Capital Resources Prior to the Company's initial public offering (the "Offering") in October 1997, the Company's primary sources of cash were the proceeds from private placements of Common Stock and notes from 1992 through 1995 and of subordinated debentures and warrants during 1995, 1996, and the first three months of 1997. During each of those years, the Company's operations had negative cash flows as the Company increased its marketing efforts, opened new offices and hired additional staff to support anticipated growth. The net use of cash from operations in 1994, 1995, and 1996 was $1.9 million, $1.9 million and $1.6 million. For the year ended December 31, 1997, the use of cash from operations was $7.4 million, primarily due to the operating loss, the restriction of $1.9 million in cash as collateral for the appeal bond posted in litigation, and a reduction in accounts payable. For the nine months ended September 30, 1998, the Company had negative cash flow from operations of $2.3 million as a result of its operating loss. 9 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. All 160,000 warrants are outstanding at September 30, 1998. As of September 30, 1998, the Company has $0.6 million in unrestricted cash and working capital of $1.5 million. Of that amount, $1.9 million of current assets is in the form of restricted cash. This cash is restricted to serve as collateral for a bond posted by the Company pending appeal of a $1.9 million judgment against the Company. If the Company fails to win the appeal of the lawsuit, it may require additional working capital to fund operations during the remainder of the year. Year 2000 The Company has evaluated products and services it offers in relation to Year 2000 compliance and found that a majority of installed computer systems and software products manufactured over 5 years ago are coded to accept only two-digit year value. These date code fields will need to accept four-digit entries to differentiate between the 21st century and the 20th century dates. Many of the Company's vendors' computer systems and software need to be upgraded or replaced in order to comply with Year 2000 requirements. The Company has made contact with its key suppliers to determine their capability with respect to Year 2000 problems and any risk associated with it. The Company's major vendors have Year 2000 compliance updates already developed or scheduled to be developed prior to year end 1998. A failure of a key vendor to provide the Company with necessary components or services could result in delay by the Company in providing products or services to the Company's customers and have a 10 material adverse effect on the Company's business, financial condition and results of operations. Although the Company does not expect Year 2000 issues to have a material impact on its financial results or operations, there can be no assurance that there will be no disruptions or that the Company will not incur significant costs to avoid disruptions. Internally, the Company has no automated systems except for its accounting system. The Company has decided to convert to a new accounting system in June 1999 in order to be Year 2000 compliant. The Company does not expect the cost of this system to be material. 11 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 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. These transactions were exempt from registration under the Securities Act of 1933 (the "Act") pursuant to Section 4(2) of the Act and Rule 506 of Regulation D thereunder. 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 12 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 October 27, 1998 13 EX-11 2 CALCULATION OF WEIGHTED AVERAGE SHARES EXHIBIT 11 Calculation of Weighted Average Shares Outstanding for Net Income (Loss) Per Share
September 30, 1997 1998 ------------- --------------- Earnings: Net Income (Loss).......................................................... $ 642,131 $ (4,837,058) ============= ============== Shares: Weighted Average Number of Common Shares Outstanding............................................................. 4,434,140 6,103,522 Additional Shares Under Treasury Stock Method from Warrants Issued 12 Months Prior to 3/31/97*........................ 170,674 -- ------------- -------------- Average Common Shares Outstanding and Equivalents.......................... 4,604,814 6,103,522 ============= ============== Net Income (Loss) Per Share................................................ $ .14 $ (.79) ============= ==============
* -- Calculation would be antidilutive for 1998. EX-27 3 FDS --
5 1 U.S. DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 646,172 0 1,350,423 (49,266) 240,688 5,553,751 934,595 471,508 6,156,703 4,090,399 0 0 0 61,035 28,761 6,156,703 4,127,916 4,127,916 5,772,633 5,772,633 3,129,059 0 118,891 (4,837,052) 0 (4,837,052) 0 0 0 (4,837,052) (0.79) 0
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