-----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, O4dUfMqSP/dvMtBu25FEQkB3a41qLHV5lrhby9kyQHr8eLMdGN84OWQeigyud5sk 6+7TQUP6d29cOicUjRlKcQ== 0000925328-99-000066.txt : 19990603 0000925328-99-000066.hdr.sgml : 19990603 ACCESSION NUMBER: 0000925328-99-000066 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990602 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-K405/A SEC ACT: SEC FILE NUMBER: 001-13427 FILM NUMBER: 99638891 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-K405/A 1 FORM 10-K/A FOR STRATESEC - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission File Number 1-13427 STRATESEC INCORPORATED (Formerly Securacom, Incorporated) (Exact name of registrant as specified in its charter) Delaware 22-2817302 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 105 Carpenter Drive, Suite C Sterling, Virginia 20164 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (703) 709-8686 Securities registered pursuant to Section 12(b) of the Act: Title of Class Name of Exchange Common Stock, $.01 par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X . NO . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] The aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant as of March 10, 1999 (computed by reference to the closing price of such stock on the American Stock Exchange) was $5,832,767. As of March 10, 1999, there were 5,878,522 shares of the registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENT WHERE INCORPORATED Portions of the Registrant's definitive Proxy Statement regarding the 1999 Annual Meeting of Stockholders Part III - -------------------------------------------------------------------------------- Item 8. Financal Statements The financial statements of the Company, together with the report thereon of Grant Thornton LLP dated March 3, 1999 are presented in their entirety so as to include the Statement of Stockholders' Equity (Deficiency) for the Years Ended December 31, 1996, 1997 and 1998, which was inadvertently not included in the Company's Form 10-K as originally filed. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) (1) List of Financial Statements. The following is a list of the financial statements included at the end of this Report on Form 10-K/A beginning on page F-1: Report of Independent Certified Public Accountants Balance Sheets as of December 31, 1997 and 1998 Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998 Statement of Stockholders' Equity (Deficiency)for the Years Ended December 31, 1996, 1997 and 1998 Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 Notes to Financial Statements (2) List of Financial Statement Schedules. Schedule II - Valuation and Qualifying Accounts All other schedules have been omitted because they are not applicable or not required, or the required information is provided in the financial statements or notes thereto. (b) Reports on Form 8-K. None (c) List of Exhibits. The following is a list of exhibits furnished. Copies of exhibits will be furnished upon written request of any stockholder at a charge of $.25 per page plus postage. Exhibit Number Exhibit 3.1 Form of Restated Certificate of Incorporation(1) 3.2 Form of Bylaws(1) 4 Form of Rights Agreement(1) 10.1 Stock Option Plan(1) 10.2 Employment Agreement with Ronald C. Thomas(1) 10.4 Consulting Agreement with Wirt D. Walker, III(1) 11 Computation of Net Income (Loss) Per Share(2) 23.1 Consent of Grant Thornton LLP 27 Financial Data Schedule(2) (1) Filed as an exhibit of the same number to the Company's registration statement on Form S-1 (File No. 333-26439) and incorporated by reference. (2) Filed as an exhibit of the same number to the Company's annual report on Form 10-K 2 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STRATESEC INCORPORATED By: /s/BARRY W. MCDANIEL Barry W. McDaniel President and Chief Operating Officer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date /S/ BARRY W. MCDANIEL - -------------------------------------- Barry W. McDaniel President, Chief Operating April , 1999 Officer (Principal Executive Officer) /S/ WIRT D. WALKER, III Chairman and Director April , 1999 - -------------------------------------- Wirt D. Walker, III /S/ MISHAL YOUSEF SOUD AL SABAH - --------------------------------------- Mishal Yousef Soud Al Sabah Director April , 1999 /S/ MARVIN BUSH Director April , 1999 - -------------------------------------- Marvin Bush /S/ ROBERT B. SMITH, JR. Director April , 1999 - -------------------------------------- Robert B. Smith, Jr. /s/ JAMES A. ABRAHAMSON Director April , 1999 - -------------------------------------- James A. Abrahamson /s/ CHARLES W. ARCHER Director April , 1999 - --------------------------------------- Charles W. Archer
3 Stratesec, Incorporated Contents - -------------------------------------------------------------------------------- Report of Independent Certified Public Accountants 3 Financial Statements Balance Sheets 4 Statements of Operations 5 Statements of Shareholders' Equity (Deficit) 6 Statements of Cash Flows 7-8 Notes to Financial Statements 9-20 Supplemental Information Schedule II--Valuation and Qualifying Accounts 22 Report of Independent Certified Public Accountants Board of Directors and Shareholders Stratesec, Incorporated We have audited the accompanying balance sheets of Stratesec, Incorporated (formerly known as Securacom, Incorporated), as of December 31, 1997 and 1998, and the related statements of operations, shareholders' equity (deficit), and cash flows for the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stratesec, Incorporated, as of December 31, 1997 and 1998, and the results of its operations and its cash flows for the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. We have also audited Schedule II of Stratesec, Incorporated, for the years ended December 31, 1996, 1997 and 1998. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Vienna, Virginia March 3, 1999 Stratesec, Incorporated Balance Sheets
December 31, 1997 1998 Assets Current Assets Cash and cash equivalents $ 998,312 $ 442,582 Cash--restricted 2,063,539 1,900,000 Accounts receivable, net of allowance for doubtful accounts of $49,000 in 1997 and $303,000 in 1998 3,330,542 1,297,176 Costs and estimated earnings in excess of billings on uncompleted contracts 2,108,134 1,440,485 Inventory, net of allowance in 1998 of $184,000 598,415 57,058 Prepaid expenses 140,870 171,404 ----------------- ----------------- Total Current Assets 9,239,812 5,308,705 Property and Equipment, net 740,156 460,932 Other Assets 128,414 58,099 ----------------- ----------------- $ 10,108,382 $ 5,827,736 ================= ================= Liabilities and Shareholders' Equity Current Liabilities Current maturities of capital lease obligations $ 51,100 $ 68,672 Accounts payable 1,997,014 1,455,840 Billings in excess of costs and estimated earnings on uncompleted contracts 69,734 102,132 Accrued expenses and other 2,938,789 1,008,955 Notes payable - 1,802,404 ----------------- ----------------- Total Current Liabilities 5,056,637 4,438,003 Long-Term Liabilities Capital lease obligations, less current maturities 196,285 167,430 Commitments and Contingencies - - Shareholders' Equity Common stock, $.01 par value per share; authorized 20,000,000 shares; issued and outstanding, 6,103,522 shares in 1997 and issued 6,103,522 and 5,973,522 outstanding shares in 1998 61,035 61,035 Treasury stock; 130,000 shares - (181,851) Additional paid-in capital 21,072,430 21,143,824 Accumulated deficit (16,278,005) (19,800,705) ----------------- ----------------- 4,855,460 1,222,303 ----------------- ----------------- $ 10,108,382 $ 5,827,736 ================= =================
The accompanying notes are an integral part of these statements. Stratesec, Incorporated Statements of Operations
Year ended December 31, 1996 1997 1998 ------------------ ----------------- ----------------- Earned Revenue $ 5,824,448 $ 12,132,924 $ 6,624,523 Cost of Earned Revenue 4,416,386 9,806,681 4,792,838 Provision for Contract Adjustment - - 2,491,156 ------------------ ----------------- ----------------- Gross Profit (Loss) 1,408,062 2,326,243 (659,471) Selling, General and Administrative Expenses 3,700,698 3,755,965 4,426,339 Provision (Recovery) for Legal Judgment - 2,200,000 (1,655,000) ------------------ ----------------- ----------------- Operating Loss (2,292,636) (3,629,722) (3,430,810) Loss on Sale of Equipment - - (45,000) Interest and Financing Fees (241,716) (514,891) (180,184) Interest and Other Income 21,519 88,873 133,294 ------------------ ----------------- ----------------- Net Loss $ (2,512,833) $ (4,055,740) $ (3,522,700) ================== ================= ================= Basic and Diluted Net Loss Per Share $ (.58) $ (.85) (.58) ================== ================= ================= Weighted-Average Shares Outstanding 4,306,000 4,792,000 6,068,000 ================== ================= =================
The accompanying notes are an integral part of these statements. Stratesec, Incorporated Statement of Shareholders' Equity (Deficit) Years ended December 31, 1996, 1997 and 1998
Total Additional Shareholders' Common Stock Treasury Stock Paid-in Accumulated Equity Shares Amount Shares Amount Capital Deficit (Deficit) --------- --------- --------- --------- ------------- ------------- ------------ Balance at January 1, 1996 3,953,683 $ 39,536 - $ - $ 10,224,002 $ (9,709,432) $ 554,106 Net Loss - - - - - (2,512,833) (2,512,833) Exercise of Warrants 480,457 4,805 - - 247,195 - 252,000 Issuance of Warrants - - - - 111,000 - 111,000 --------- --------- --------- --------- ------------- ------------- ------------ Balance at December 31, 1996 4,434,140 44,341 - - 10,582,197 (12,222,265) (1,595,727) Net Loss - - - - - (4,055,740) (4,055,740) Proceeds from Issuance of Common Stock 1,400,000 14,000 - - 10,533,455 - 10,547,455 Common Stock Issuance Costs - - - - (811,910) - (811,910) Exercise of Warrants 269,382 2,694 - - 706,688 - 709,382 Issuance of Warrants - - - - 62,000 - 62,000 --------- --------- --------- --------- ------------- ------------- ------------ Balance at December 31, 1997 6,103,522 61,035 - - 21,072,430 (16,278,005) 4,855,460 Net Loss - - - - - (3,522,700) (3,522,700) Purchase of Treasury Stock - - (130,000) (181,851) - - (181,851) Issuance of Warrants - - - - 71,394 - 71,394 --------- --------- --------- --------- ------------- ------------- ------------ Balance at December 31, 1998 6,103,522 $ 61,035 (130,000) $ (181,851) $ 21,143,824 $(19,800,705) $ 1,222,303 ========= ========= ========= ========= ============== ============= ============
Stratesec, Incorporated Statements of Cash Flows
Year ended December 31, 1996 1997 1998 Cash Flows from Operating Activities Net loss $ (2,512,833) $ (4,055,740) $ (3,522,700) ---------------- ------------------ ------------------ Adjustments to reconcile net loss to net cash used in operating activities Provision (recovery) for legal judgment - 2,200,000 (1,655,000) Provision for bad debts and obsolete inventory - 6,000 437,038 Depreciation and amortization 91,859 143,298 135,957 Loss on sale of equipment - - 44,746 Noncash compensation 28,000 - - Amortization of debt discount 5,000 171,000 23,798 Changes in assets and liabilities (Increase) decrease in restricted cash - (2,063,539) 163,539 (Increase) decrease in accounts receivable (622,283) (1,559,086) 1,779,955 (Increase) decrease in cost and estimated earnings in excess of billings on uncompleted contracts (368,169) (959,574) 667,649 (Increase) decrease in inventory - (598,415) 357,728 Increase in prepaid expenses and other (20,931) (19,933) (30,534) (Increase) decrease in other assets (1,915) 67,389 70,315 Increase (decrease) in accounts payable 1,921,291 (742,257) (541,174) (Decrease) increase in billings in excess of costs and estimated earnings on uncompleted contracts (338,875) (33,450) 32,398 Increase (decrease) in accrued expenses and other 212,999 97,283 (274,833) ---------------- ------------------ ------------------ Total Adjustments 906,976 (3,291,284) 1,211,582 ---------------- ------------------ ------------------ Net Cash Used in Operating Activities (1,605,857) (7,347,024) (2,311,118) ---------------- ------------------ ------------------ Cash Flows from Investing Activities Sale of equipment - - 240,000 Acquisition of plant and equipment (396,460) (24,787) (92,087) ---------------- ------------------ ------------------ Net Cash (Used in) Provided by Investing Activities (396,460) (24,787) 147,913 ---------------- ------------------ ------------------ Cash Flows from Financing Activities Proceeds from notes payable and warrants 2,050,000 700,000 1,850,000 Purchase of treasury stock - - (181,851) Principal payments on notes payable to shareholder (200,000) (3,350,000) - Principal payments of capital lease obligations (17,686) (34,144) (60,674) Proceeds from issuance of common stock and exercise of warrants 224,000 11,256,837 - Common stock issuance costs - (811,910) - ---------------- ------------------ ------------------ Net Cash Provided by Financing Activities 2,056,314 7,760,783 1,607,475 ---------------- ------------------ ------------------
Stratesec, Incorporated Statements of Cash Flows--Continued
Year ended December 31, 1996 1997 1998 Net Increase (Decrease) in Cash and Cash Equivalents 53,997 388,972 (555,730) Cash and Cash Equivalents at Beginning of Year 555,345 609,342 998,312 ---------------- ------------------ ------------------ Cash and Cash Equivalents at End of Year 609,342 $ 998,314 $ 442,582 ================ ================== ================== Supplemental Disclosures of Cash Flow Information: Cash Paid During the Year For-- Interest $ 165,000 $ 385,000 $ 70,000 Income taxes 7,000 30,000 -
During 1997 and 1998, the Company acquired equipment totaling approximately $144,000 and $50,000, respectively, through capital lease transactions. The accompanying notes are an integral part of these statements. Stratesec, Incorporated Notes to Financial Statements - -------------------------------------------------------------------------------- December 31, 1997 and 1998 - -------------------------------------------------------------------------------- NOTE A--BUSINESS AND SUMMARY OF ACCOUNTING POLICIES Stratesec, Incorporated (the Company), formerly known as Securacom, Incorporated, is a provider of comprehensive security solutions for large commercial and government facilities worldwide. At December 31, 1996, the Company was approximately 91 percent owned by KuwAm Corporation: two private investment partnerships of which KuwAm serves as general partner, Special Situations Investment Holdings, Ltd., and Special Situations Investment Holdings L.P. II; and certain individual limited partners of the investment partnerships (the KuwAm Group). On October 1, 1997, the Company completed an initial public offering and sold 1,400,000 shares of common stock and the KuwAm Group sold 808,000 shares of stock. At December 31, 1997 and 1998, the KuwAm Group owns approximately 53 percent and 31 percent of the Company, respectively. A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows: Revenue Recognition The Company derives its revenue principally from long-term contracts which are generally on a fixed-price basis. Earnings are recognized on the basis of the Company's estimates of the percentage of completion of individual contracts, whereby total estimated income is earned based upon the proportion that costs incurred bear to the Company's estimate of total contract costs. The percentage of completion of individual contracts includes management's best estimates of the amounts expected to be realized on the contracts. It is at least reasonably possible that the amounts the Company will ultimately realize could differ materially in the near term from the amounts estimated in arriving at the earned revenue and costs and earnings in excess of billings on uncompleted contracts. Contract costs include all direct material, direct labor and subcontract costs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability, including those arising from contract revisions and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. The asset "costs and estimated earnings in excess of billings on uncompleted contracts" represents revenue recognized in excess of amounts billed to clients. The liability "billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenue recognized. Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Inventory Inventory consisting of equipment held for sale is stated at the lower of cost or market, with cost being determined by the first-in, first-out method. Stratesec, Incorporated Notes to Financial Statements--Continued - -------------------------------------------------------------------------------- December 31, 1997 and 1998 - -------------------------------------------------------------------------------- NOTE A--BUSINESS AND SUMMARY OF ACCOUNTING POLICIES--Continued Plant and Equipment Plant and equipment are stated at cost. Depreciation is provided using the straight-line method based on the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the economic life of the improvements or the lease term. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. In addition, the Company estimates an allowance for doubtful accounts based on the creditworthiness of its clients, as well as general economic conditions. Consequently, an adverse change in those factors could affect the Company's estimate. Concentrations of Credit Risk and Fair Value of Financial Instruments The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash, money market funds and trade accounts receivable. The Company places its cash and money market funds with high credit quality institutions. In general, such investments exceed the FDIC insurance limit. The Company provides credit to its clients in the normal course of business. The Company routinely assesses the financial strength of its clients and, as a consequence, believes its trade accounts receivable exposure is limited. The carrying value of financial instruments potentially subject to valuation risk (principally consisting of cash, accounts receivable and accounts payable) approximates fair market value. Stratesec, Incorporated Notes to Financial Statements--Continued - -------------------------------------------------------------------------------- December 31, 1997 and 1998 - -------------------------------------------------------------------------------- NOTE A--BUSINESS AND SUMMARY OF ACCOUNTING POLICIES--Continued Loss Per Share The Company has adopted SFAS No. 128, "Earnings Per Share" (EPS), which requires public companies to present basic earnings per share and, if applicable, diluted earnings per share. Basic EPS is based on the weighted-average number of common shares outstanding without consideration of common stock equivalents. Diluted earnings per share is based on the weighted-average number of common and common equivalent shares outstanding. When dilutive, the calculation takes into account the shares that may be issued upon exercise of stock options and warrants, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average price during the year. Stock options and warrants have not been included in the calculation of diluted earnings per share as their inclusion would be antidilutive. - -------------------------------------------------------------------------------- NOTE B--OPERATIONS As shown in the accompanying financial statements, the Company has incurred recurring operating losses and has an accumulated deficit of $19,800,705 at December 31, 1998. In such circumstances, the Company's continued existence is dependent upon its ability to generate profitable operations and, if necessary, secure financing to fund future operations. Management is addressing these matters by cutting overhead expenses and reorganizing the Company's management structure. The Company anticipates that existing cash and cash equivalents generated from 1999 operations will be sufficient to meet its working capital needs. The Company has, in the past, been able to secure additional financing to meet its operating requirements, although there can be no assurance that it will be able to continue doing so. - -------------------------------------------------------------------------------- NOTE C--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Costs and estimated earnings on uncompleted contracts are as follows at December 31: 1997 1998 ------------- ------------- Costs incurred on contracts $ 14,229,410 $ 18,988,832 Estimated earnings 3,473,560 5,289,572 ------------- ------------- 17,702,970 24,278,404 Less billings to date 15,664,570 22,940,051 ------------- ------------- $ 2,038,400 $ 1,338,353 ============= ============= Stratesec, Incorporated Notes to Financial Statements--Continued - -------------------------------------------------------------------------------- December 31, 1997 and 1998 - -------------------------------------------------------------------------------- NOTE C--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS --Continued In addition, included in accounts receivable at December 31, 1997 and 1998, were retainages of approximately $648,000 and $45,000, respectively, which are anticipated to be collected within one year. Included in accounts payable at December 31, 1997 and 1998, were retainages of approximately $111,000 and $-0-, respectively. During the third quarter of 1998, the Company negotiated a final settlement on a major contract. As a result of the adjustments, revenue and gross margin for 1998 were reduced by $2,491,000. During the fourth quarter of 1997, the Company revised its estimate of cost to complete on several contracts. As a result of the adjustments, revenue and gross margin for 1997 were reduced by $1,248,000. In February 1996, the Company negotiated a final settlement on a major contract with the Tennessee Valley Authority. As a result, the Company wrote off approximately $238,000 of amounts owed to a subcontractor and reduced cost of earned revenues. - -------------------------------------------------------------------------------- NOTE D--PROPERTY AND EQUIPMENT Property and equipment are summarized as follows at December 31:
1997 1998 Useful Life ------------------ ----------------- ------------- Cars $ - $ 27,492 3 years Computer equipment 249,158 277,263 5 years Equipment and fixtures 508,034 565,128 10 years Aircraft 335,000 - 10 years Leasehold improvements 68,739 68,739 5 years Computer software - 28,787 3 years ------------------ ----------------- 1,160,931 967,409 Less: Accumulated depreciation and amortization 420,775 506,477 ------------------ ----------------- $ 740,156 $ 460,932 ================== =================
Stratesec, Incorporated Notes to Financial Statements--Continued - -------------------------------------------------------------------------------- December 31, 1997 and 1998 - -------------------------------------------------------------------------------- NOTE E--NOTES PAYABLE During the years ended December 31, 1996 and 1997, the Company issued subordinated debentures to the KuwAm Group totaling $3,250,000, with 478,580 of warrants to purchase common stock of the Company at $7.00 per share. The debentures bore interest at 10 percent and were repaid in full from the proceeds of the initial public offering. The value of the warrants of $176,000 was determined based upon an appraisal of the securities by an independent firm and was recorded as additional paid-in capital. All 478,580 warrants are outstanding at December 31, 1998. During April 1998, the Company's board of directors approved issuance of up to $2 million in convertible subordinated debentures in an effort to provide additional working capital. As of December 31, 1998, the Company had sold $1,850,000 of these debentures to related parties with 185,000 warrants attached to purchase common stock of the Company at $2.50 per share. The debentures bear interest at 10 percent semiannually. The value of the warrants was $71,393 at issuance and was determined by the Company, using the Black-Scholes valuation model and was recorded as additional paid-in capital. All 185,000 warrants are outstanding at December 31, 1998. In addition, the debentures are convertible into the Company stock at $8.50 per share. Interest expense on the notes amounted to approximately $125,000, $413,000 and $136,000 (including $5,000, $171,000 and $24,000 of amortization of debt discount) for the years ended December 31, 1996, 1997 and 1998, respectively. During February 1999, the Company paid $920,000 of the outstanding $1,850,000 debt at December 31, 1998. - -------------------------------------------------------------------------------- NOTE F--ACCRUED EXPENSES Accrued expenses and other are summarized as follows for the year ended December 31: 1997 1998 ------------ ------------ Legal judgment $ 2,200,000 $ 262,290 Payroll 273,877 78,419 Employee expense reimbursements 62,607 - Professional fees 45,745 34,796 Deferred rent obligation 56,515 54,504 Sales tax 54,618 90,221 Interest and foreign tax 140,423 227,656 Other 105,004 261,069 ------------ ------------ $ 2,938,789 $ 1,008,955 ============ ============ Stratesec, Incorporated Notes to Financial Statements--Continued - -------------------------------------------------------------------------------- December 31, 1997 and 1998 - -------------------------------------------------------------------------------- NOTE G--OBLIGATIONS UNDER CAPITAL LEASE AGREEMENTS The Company has entered into various capital lease agreements for equipment with a cost of approximately $293,000 and $342,000 at December 31, 1997 and 1998, respectively. The leases expire at various times through 2002. The related future minimum lease payments, as of December 31, 1998, are as follows: Year ending December 31, 1999 $ 103,325 2000 106,048 2001 70,399 2002 25,813 2003 - ------------- 305,585 Amount representing interest (69,483) ------------- $ 236,102 ============= The net book value of assets held under capitalized leases at December 31, 1998, was $209,505. - -------------------------------------------------------------------------------- NOTE H--RELATED PARTY TRANSACTIONS The Company had agreements (the Agreements) with KuwAm Corporation (KuwAm) whereby the Company paid a fee of 5 percent of the capital raised from the private sale of common stock and subordinated debentures under the Agreements. The Company incurred approximately $103,000, $35,000 and $-0- of investment banking fees under the Agreements during 1996, 1997 and 1998, respectively, which have been recorded as a reduction of proceeds from sales of equity securities and interest and financing fees for sales of subordinated debentures. The Company issued subordinated debentures in the amount of $1,850,000 with 185,000 warrants attached and incurred related interest to the KuwAm Corporation and other related parties of $180,992 as of December 31, 1998. During 1998, the Company sold its aircraft, which had a book value of $335,000 and accumulated depreciation of approximately $50,000, to a related party for $240,000 in cash. The Company recorded a loss of approximately $45,000 on the sale. During 1997, of the total $3,350,000 proceeds received from the issuance of notes payable, the Company invested $700,000 in a limited partnership interest of Special Situations Investment Holdings, Ltd. (SSIH) recorded at cost which was deemed to be equivalent to fair market value. At the conclusion of the initial public offering, SSIH redeemed the limited partnership interest at $700,000 plus interest. Stratesec, Incorporated Notes to Financial Statements--Continued - -------------------------------------------------------------------------------- December 31, 1997 and 1998 - -------------------------------------------------------------------------------- NOTE I--INITIAL PUBLIC OFFERING On October 1, 1997, the Company completed an initial public offering of 1,400,000 shares of its common stock, par value $.01 per share (common stock), at an initial offering price of $8.50 per share. In addition, the majority shareholder sold 808,000 shares at $8.50 per share. The net proceeds from the offering to the Company were approximately $9,735,000. On October 7, 1997, the Company issued to the underwriter, at a purchase price of $0.001 per warrant, warrants to purchase up to an aggregate of 140,000 shares of common stock at an exercise price of $13.18 per share, all of which are outstanding at December 31, 1998. - -------------------------------------------------------------------------------- NOTE J--EMPLOYEE STOCK WARRANTS AND OPTIONS In 1997, the board of directors approved the adoption of the 1997 Stock Option Plan. The 1997 Stock Option Plan provides for the grant of nonqualified options to purchase up to 500,000 shares of the Company's common stock. Options may be granted to employees, officers, directors and consultants of the Company for the purchase of common stock of the Company at a price not less than the fair market value of the common stock on the date of the grant. In December 1997, 15,000 options were issued to a new director at $8.625 per share. In February 1998, the Company issued to employees and directors an additional 180,000 options at $2.375 per share. In June and September 1998, 145,000 and 20,000 additional options, respectively, were issued to employees and directors at $1.50 per share. During 1996, the Company granted nonqualified options to purchase shares of the Company's stock. The options were granted on a discretionary basis. In January 1996, 50,000 options were granted, and in June 1996, 75,000 options were granted. All 1996 options expire in 1999. The Company has elected to follow Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in measuring compensation expense for its stock warrants and options. Under APB No. 25, because the exercise price of the Company's employee stock warrants and options is not less than the fair market value of the underlying stock on the date of grant, no compensation expense is recognized. However, SFAS No. 123, "Accounting for Stock-Based Compensation," requires presentation of pro forma net income and earnings per share as if the Company had accounted for its employee stock warrants and options, granted subsequent to December 31, 1994, under the fair value method of that statement. For purposes of pro forma disclosure, the estimated fair value of the warrants and options is amortized to expense over the vesting period. Under the fair value method, the Company's net loss in 1998 would have increased by $109,000 or $.01 per share on a basic and diluted basis. Under the fair value method, the Company's net loss in 1997 would have increased by $60,000 or $.01 per share on a basic and diluted basis. Under the fair value method, in 1996, the Company's net loss would not have had a material change. The weighted-average fair value of the individual warrants and options granted during 1996, 1997 and 1998 is estimated as $.04, $1.13 and $.29, respectively, on the date of grant. The fair values were determined using a Black-Scholes option-pricing model with the following assumptions: Stratesec, Incorporated Notes to Financial Statements--Continued - -------------------------------------------------------------------------------- December 31, 1997 and 1998 - -------------------------------------------------------------------------------- NOTE J--EMPLOYEE STOCK WARRANTS AND OPTIONS--Continued
1996 1997 1998 Dividend yield - - - Volatility 50% 50% 50% Risk-free interest rate 6.06 6.18 5.5 Forfeiture rate - - - Expected life 3 years 3 years 3 years
Stock warrant and option activity during 1996-1998 is summarized below:
Shares of Common Weighted- Stock Attributable Average Exercise to Warrants Price of Warrants and Options and Options Unexercised at January 1, 1996 1,012,375 $ 2.36 Granted 400,797 6.58 Exercised 480,457 .53 Expired 48,333 5.41 -------------- ------------ Unexercised at December 31, 1996 884,382 5.10 Granted 200,000 7.12 Exercised 269,382 2.63 Expired 100,000 6.50 -------------- ------------ Unexercised at December 31, 1997 715,000 6.39 Granted 505,000 2.06 Exercised - - Expired 610,000 4.82 -------------- ------------ Unexercised at December 31, 1998 610,000 4.87 ============== ============
Stratesec, Incorporated Notes to Financial Statements--Continued - -------------------------------------------------------------------------------- December 31, 1997 and 1998 - -------------------------------------------------------------------------------- NOTE J--EMPLOYEE STOCK WARRANTS AND OPTIONS--Continued The following table summarizes information concerning outstanding and exercisable warrants and options at December 31, 1998:
Weighted-Average Remaining Warrants and Number Contractual Options Exercise Price Outstanding Life (Years) Exercisable $ 7.00 250,000 .75 125,000 8.625 15,000 2.05 5,000 2.375 180,000 2.19 - 1.50 165,000 2.56 -
During the year ended December 31, 1996, the president of the Company exercised warrants for the purchase of 53,320 shares of common stock at an exercise price of $.53 per share. Since no amount was paid upon exercise of the warrants, the Company recorded compensation expense of $28,000. - -------------------------------------------------------------------------------- NOTE K--INCOME TAXES Deferred tax attributes resulting from differences between financial accounting amounts and tax bases of assets and liabilities at December 31, 1997 and 1998, follow:
1997 1998 ----------------- ----------------- Current assets and liabilities Allowance for doubtful accounts $ 19,000 $ 121,000 Accrued vacation pay and other 49,000 53,000 Provision for legal judgment 880,000 218,000 Inventory allowance - 74,000 ----------------- ----------------- 948,000 466,000 Valuation allowance (948,000) (466,000) ----------------- ----------------- Net current deferred tax asset (liability) $ - $ - ----------------- ----------------- Noncurrent assets and liabilities Depreciation $ (71,000) $ (88,000) Net operating loss carryforward 5,499,000 7,484,000 ----------------- ----------------- 5,428,000 7,396,000 Valuation allowance (5,428,000) (7,396,000) ----------------- ----------------- Noncurrent deferred tax asset (liability) $ - $ - ================= =================
Stratesec, Incorporated Notes to Financial Statements--Continued - -------------------------------------------------------------------------------- December 31, 1997 and 1998 - -------------------------------------------------------------------------------- NOTE K--INCOME TAXES--Continued The valuation allowance has been established for those loss carryforwards and temporary differences which are not presently considered likely to be realized. The provision for income taxes differs from the effective tax rate used in the financial statements as a result of current year net operating losses, the benefit of which has not been recognized in the current year. As of December 31, 1998, the Company has net operating loss carryforwards of approximately $18,700,000, which expire in 2002 through 2018. In 1992, a major stockholder of the Company significantly increased his ownership of the Company. As a result of a complex set of rules limiting the utilization of net operating loss carryforwards in tax years following a corporate ownership change (enacted in the Tax Reform Act of 1986), the ability of the Company to utilize net operating losses of approximately $3.5 million may be limited. Also, the shares issued in connection with the Company's initial public offering are expected to create an ownership change. However, based on the expected value of the Company immediately before such ownership change and the resulting limitation as defined, the Company expects to be able to utilize its net operating losses of approximately $8.7 million incurred after August 1992 through the date of the initial public offering. Losses incurred after the initial public offering may be limited by future ownership changes. - -------------------------------------------------------------------------------- NOTE L--EMPLOYEE BENEFIT ARRANGEMENTS The Company established a contributory employee savings plan under Section 401(k) of the Internal Revenue Code. The Company contributes amounts to individual participant accounts based on specific provisions of the plan. The cost to the Company for the employer match under the plan was approximately $13,000, $17,000 and $16,000 for the years ended December 31, 1996, 1997 and 1998, respectively. - -------------------------------------------------------------------------------- NOTE M--COMMITMENTS AND CONTINGENCIES Leases The Company conducts all its operations from leased facilities consisting of its corporate headquarters and branch office locations. All facility leases are classified as operating leases with terms ranging from one to five years. Stratesec, Incorporated Notes to Financial Statements--Continued - -------------------------------------------------------------------------------- December 31, 1997 and 1998 - -------------------------------------------------------------------------------- NOTE M--COMMITMENTS AND CONTINGENCIES--Continued The following is a schedule by years of approximate future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1998: Year ending December 31, 1999 $ 226,000 2000 159,000 2001 118,000 2002 88,000 2003 12,000 -------------- $ 603,000 ============== Rent expense for the years ended December 31, 1996, 1997 and 1998 was approximately $286,000, $248,000 and $345,000, respectively. Employment and Consulting Agreements In 1998, the Company entered into employment agreements with its executive vice president which provides for annual base salaries of $150,000. The agreements provide for an additional payment equal to three times the annual base salary if the executive is terminated due to a change in control as defined in the agreement. The Company also entered into a consulting agreement with its chairman (who is also managing partner of KuwAm Corporation) which provides for an annual consulting fee of $145,000 through March 31, 2002. As of February 1998, the annual base salaries under these agreements were reduced by 10 percent. - -------------------------------------------------------------------------------- NOTE N--SUBSEQUENT EVENT In January 1999, the Company received a favorable judgment in its appeal regarding litigation arising from its trademark case in 1997. This subsequent event resulted in the reversal of its accrued expenses of $1,655,000, net of $245,000 in previously awarded attorney fees which have been remanded to the state court. The Company had restricted cash of $1,900,000 related to this judgment at December 31, 1998, which was released in February 1999. Subsequent to year-end, the Company purchased 95,000 shares of common stock worth approximately $200,000. Stratesec, Incorporated Notes to Financial Statements--Continued - -------------------------------------------------------------------------------- December 31, 1997 and 1998 - -------------------------------------------------------------------------------- NOTE O--SIGNIFICANT CLIENTS During the year ended December 31, 1996, contracts with four clients accounted for approximately 22 percent, 14 percent and 11 percent of earned revenue. For the year ended December 31, 1997, two clients accounted for approximately 55 percent and 20 percent of earned revenue. During the year ended December 31, 1998, contracts with three clients accounted for approximately 35 percent, 20 percent and 9 percent of earned revenue. STRATESEC Incorporated SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E -------- --------- -------- ---------- --------- Additions (1) (2) Charged to Balance at Charged to other Balance at beginning costs and accounts - Deductions - end of Description of period expenses describe describe period Year ended December 31, 1998 Allowance for doubtful accounts $ 49,000 $253,000 - $ - $ 302,000 ======== ====== ======= Inventory Researve $ - $183,000 - $ - $ 183,000 ======== ====== ======= Year ended December 31, 1997 Allowance for doubtful accounts $ 42,000 $43,000 - $(36,000) (A) $ 49,000 ======== ====== ======= ======== Year ended December 31, 1996 Allowance for doubtful accounts $120,000 $(78,000) (A) $ 42,000 ======= ======= ========
- ---------- (A) Uncollectible accounts written off. EX-23.1 2 CONSENT OF GRANT THORNTON CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated March 3, 1999, accompanying the consolidated financial statements and schedule included in the Annual Report of Stratesec, Incorporated on Form 10-K/A for the year ended December 31, 1998. We hereby consent to the incorporation by reference of the aforementioned report in the registration statement on Form S-8. GRANT THORNTON LLP Vienna, Virginia March 3, 1999 -----END PRIVACY-ENHANCED MESSAGE-----