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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2002
Commission File Number: 1-13427
STRATESEC INCORPORATED
State of Incorporation: Delaware I.R.S. Employer I.D.: 22-2817302
14360 Sullyfield Circle Ste. B
Chantilly, Virginia 20151
(703) 631-5163
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 10,401,472 shares of Common Stock, par value $0.01 per share,
outstanding at May 14, 2002.
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STRATESEC INCORPORATED
QUARTER ENDED MARCH 31, 2002
INDEX
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PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................3
Balance Sheets as of December 31, 2001 and March 31, 2002
(unaudited).........................................................3
Statements of Operations for the three months ended
March 31, 2001 and 2002 (unaudited).................................4
Statements of Cash Flows for the three months ended
March 31, 2001 (unaudited)..........................................5
Notes to Financial Statements.........................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..............................10
Signature...............................................................11
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STRATESEC INCORPORATED
BALANCE SHEETS
December 31, March 31,
2001* 2002
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(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 238,201 $ 102,400
Accounts receivable, net of allowance for doubtful
accounts of $750,000 in 2001 and 2002 4,108,692 4,267,787
Costs and estimated earnings in excess of
billings on uncompleted contracts 582,698 198,355
Inventory, net of allowance of $400,000 in 2001
and 2002 190,606 234,018
Other current assets 70,728 70,558
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TOTAL CURRENT ASSETS 5,190,925 4,873,098
Property and Equipment, net 483,904 435,034
Other Assets 121,764 121,764
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$ 5,796,593 $ 5,429,896
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,287,718 $ 1,787,447
Accrued expenses and other 304,961 713,160
Income taxes payable 955,954 955,954
Bank and other lines of credit 6,325,490 7,520,540
Billings in excess of costs and estimated earnings
on uncompleted contracts 276,984 169,984
Capital lease obligations 22,615 6,004
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TOTAL CURRENT LIABILITIES 10,173,722 11,153,089
Long-Term Liabilities
Capital lease obligations, less current maturities
Commitments and Contingencies - -
Shareholders' Equity
Common stock, $0.01 par value per share; authorized
20,000,000 shares; 10,401,471 issued and 10,392,550
outstanding shares in 2001 and 2002 104,015 104,015
Treasury stock, 8,891 shares in 2001and 2002 (18,533) (18,533)
Additional paid-in capital 24,363,700 24,363,700
Accumulated deficit (28,826,311) (30,172,375)
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(4,377,129) (5,723,193)
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$ 5,796,593 $ 5,429,896
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* Derived from audited financial statements as of December 31, 2001.
The accompanying notes are an integral part of these statements.
3
STRATESEC INCORPORATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
2001 2002
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Earned revenues $ 4,461,804 $ 646,922
Cost of earned revenues 2,705,468 583,831
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Gross profit 1,756,336 63,091
Selling, general and administrative expenses 1,496,152 1,070,842
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Operating income (loss) 260,184 (1,007,751)
Other income (expense) (104,701) (338,313)
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Net income before income tax provision 155,483 (1,346,064)
Income tax provision
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Net income (loss) $ 155,483 $ (1,346,064)
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Net income (loss) per share - basic $ 0.02 $ (0.13)
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Net income per share - diluted $ 0.01 $ n/a
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Weighted average common shares outstanding - basic 10,279,780 10,392,550
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Weighted average common shares outstanding - diluted 10,514,364 n/a
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The accompanying notes are an integral part of these statements.
4
STRATESEC INCORPORATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
2001 2002
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Cash Flows from Operating Activities:
Net income (loss) $ 155,483 $ (1,346,064)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 54,619 52,690
Changes in operating assets and liabilities:
Accounts receivable (403,811) (159,095)
Costs and estimated earnings in excess
of billings on uncompleted contracts (809,601) 384,363
Inventory (443,200) (43,412)
Other current assets (166,332) 170
Other assets (1,519)
Accounts payable 125,086 (500,271)
Accrued expenses and other 510,861 408,199
Billings in excess of costs and estimated
earnings on uncompleted contracts (107,000)
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Total adjustments (1,133,357) 35,644
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Net cash provided (used) by operating activities (977,874) (1,310,420)
Cash Flows from Investing Activities:
Acquisition of plant and equipment (54,760) (3,820)
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Net cash provided (used) by investing activities (54,760) (3,820)
Cash Flows from Financing Activities:
Proceeds from line of credit 1,038,005 1,195,050
Principal payments on capital lease obligations (16,611)
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Net cash provided (used) by financing activities 1,038,005 1,178,439
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Net increase (decrease) in cash and cash equivalents 5,371 (135,801)
Cash and cash equivalents at beginning of period 887,214 238,201
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Cash and cash equivalents at end of period $ 892,585 $ 102,400
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Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest expense $ 104,873 $ 338,476
Income taxes $ - $ -
The accompanying notes are an integral part of these statements.
5
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited balance sheet as of March 31, 2002 and unaudited statement of
operations and statement of cash flows for the three months ended March 31, 2001
and 2002 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, 2001
filed with the Securities and Exchange Commission on March 30, 2002.
In the opinion of the Company, the unaudited financial statements at March
31, 2002 and for the three months ended March 31, 2001 and 2002 include all
adjustments, consisting only of normal recurring adjustments necessary for a
fair presentation of the financial position and results of operations for such
periods. Results of operations for the three months ended March 31, 2002 are not
necessarily indicative of results to be expected for the full year.
On November 30, 2000, the Company acquired Security Systems Integration,
Inc. (SSI) in a business combination accounted for as a pooling of interests. In
the transaction, SSI merged with a wholly owned subsidiary of the Company, which
then merged into the Company. The Company exchanged of 1,650,000 in newly-issued
shares and 350,000 in treasury shares of its common stock for all of the
outstanding stock of SSI.
2. COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND BILLINGS IN EXCESS
OF COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Cost and estimated earnings in excess of billings on uncompleted contracts,
as well as the related billings in excess of costs and estimated earnings on
uncompleted contracts, represent revenue recognized on long-term fixed-price
contracts based on the percentage-of-completion method less the related billings
to date. Revenue recognized in excess of billing is included in the asset
balance and billings in excess of recognized revenue is included in the
liability balance.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis of the Company's financial condition and
historical results of operations should be read in conjunction with the
condensed financial statements and the related notes included elsewhere in this
report.
OVERVIEW
The Company is a single-source provider of comprehensive, technology based
security solutions for medium and large commercial and government facilities in
the United States and abroad. The Company offers a broad range of services,
including: (i) consulting and planning; (ii) engineering and design; (iii)
systems integration; and (iv) maintenance and technical support.
The following plan addresses management's approach to improving the
financial condition of the Company.
Sales remained slow through the first quarter, averaging slightly over
$200,000 per month. This was below the $300,000 to $500,000 per month that the
Company expected. The reduction was due to a slower restart than anticipated in
Texas and continued delays in contract awards. The second quarter will start
very slow, but based on sales projections, the Company expects revenue to
improve by the end of the second quarter to $800,000 per month. The Company
projects sales per month of $1 million by the end of the third quarter and $1.2
million per month by the end of the fourth quarter. To achieve this improvement
in sales, the Company has added several major accounts to replace the accounts
that froze their capital budgets. For example, we have added Hewitt and
Associates, EMC Corporation, Kaiser Permanente, Veritas Software, Clarion
Realty, The Washington Metropolitan Transit Authority, Guinette County in
Georgia, CMT Construction, San Jose Construction Group, Devcon Construction and
American University. In addition, we have restarted projects with EDS, Trammel
Crow, Amtrak and several other prior customers.
As of May 15, there are $3 million in projects on which the Company has
been informed that it is the vendor of choice, and there are $5.8 million more
in high probability proposals outstanding. The Company has contracts on $1.2
million of the $3 million, and has been verbally notified on the other $1.8
million of projects. The Company believes that all of the remaining $1.8 million
will be awarded to the Company over the next 60 days but even if 80% of the
amount is awarded, there will be $.72 million dollars of new business awarded in
June and July. If the company merely maintains that rate of new business, it
will significantly improve operating profits.
The Company has also obtained the commitment from its finance company, E.S.
Bankest, to finance the material and the cash flow necessary to work as much
business as the Company can win; as a result the Company's financial condition
should not prevent execution of its projects.
In order to expand its offering and add higher margin revenue, the Company
has also added the capability to provide software security products and services
to its customers. The Company has software in evaluation at the U.S. Postal
Service now for a potential major sale. The Company will add more security
software products and services and expects to expand its customer base
significantly in this area. The fixed overhead required to support these
products and services is very low and the profitability is very high. We expect
that the overall Company profitability will be significantly improved as
software sales are recorded.
7
The Company is also in the process of adding products for sale to the
federal government to its GSA schedule. Since the Company has its headquarters
in the Washington, D.C. suburbs, we expect the business with the federal
government to grow over the next 12 months. Security funding for federal
government buildings has been increased tremendously since September 11, 2001.
The federal government recently allocated the fiscal year 2002 budget, but
through March had operated under a condition of no new projects since September
2001. Contacts inside the federal government have informed us that the budgets
have now been allocated and we expect sales to the federal government to
increase..
The Company has also implemented the following initiatives to reduce its
overhead expenses so that break-even revenue will be $600,000 per month:
o Reduced full-time and temporary corporate staff
o Reduced executive management
o Relocated headquarters to shared facilities with Netcom Solutions, a
privately held IT company and shareholder of STRATESEC
o Restructured salaries of sales force to lower base and higher
commissions
o Consolidated costs (telephones, utilities, etc.) with Netcom Solutions
o Restructured operations to increase use of subcontractors on a fixed
price basis
Based on the projected increase in monthly sales and the decrease in
overhead, the Company expects to be profitable on a monthly operating basis by
the end of June. In order to improve the equity position on its balance sheet,
the Company is aggressively exploring mergers and acquisitions with other
physical and software security firms as well as pursuing external equity
funding. In addition, to reduce the liabilities on its balance sheet, the
Company has prepared an offer in compromise to the IRS that will eliminate
$930,000 of tax liability, if accepted. The Company also intends to attempt to
convert a significant amount of the line of credit debt to equity.
RESULTS OF OPERATIONS
The following table sets forth the percentage of earned revenues
represented by certain items reflected in the Company's statements of
operations:
Three Months Ended
March 31,
2001 2002
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Earned revenues 100.0% 100.0%
Cost of earned revenues 60.6 90.2
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Gross profit 39.4 9.8
Selling, general and administrative expenses 33.5 165.5
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Operating income (loss) 5.8 (155.8)
Other income (expense) (2.3) (52.3)
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Net income (loss) 3.5% (208.1)%
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8
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2001
Revenue decreased by 86% from 4.4 million in 2001 to $.6 million in 2002.
The decrease was due to a severe decrease in revenue from existing commercial
customers as a result of a freeze or reduction in capital spending in the
telecom and information technology (IT) sectors. In addition, ramp up of new
commercial customers in other business sectors was slow due to economic
conditions. The Government sector revenue from existing customers also declined
dramatically and no new Government customers were added.
Cost of revenue decreased from $2.7 million in 2001 to $.5 million in 2002,
primarily due to the decrease in revenue. Gross margin decreased from 39.3% in
2001 to 10% in 2002. The gross margin was adversely affected by the trailing
costs associated with completion of 2 large Government and one commercial
contract.
Selling, general and administrative expenses decreased by 28.4% from $1.5
million in 2001 to $1.0 million in 2002.
Interest expense and financing fees increased from $0.1 million in 2001 to
$ 0.4million in 2002. The increase was due to the increased use of line of
credit.
Net income decreased from a net income of $0.1 million in 2001 to a net
loss of $1.3 million in 2002. This decrease in net income was primarily due to
the significant decrease in revenue.
LIQUIDITY AND CAPITAL RESOURCES
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. The Company paid off $0.9 million of the
convertible subordinated debentures during the first quarter 1999. In September
1999 all of the holders of the remaining subordinated debentures 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 2000, $930,000 of debt was converted to
equity, the private placement and $1.05 million in the form of cash received
$1.8 million and a short-term note was received from the sale of a minority
interest.
The Company's principal capital requirements are increased working capital
needed to support the rebuild of the company.The Company currently is funding
its working capital requirements with cash generated by operations and a
receivables factoring facility with a financial institution. The Company is
seeking additional financing to reduce outstanding aged accounts payable and to
provide the working capital to fund the sales projected for 2002. If it is
unable to obtain additional financing, its ability to obtain new business and
increase revenue may be limited.
9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
11.1 Calculation of Net Income Per Share
b. Reports on Form 8-K.
None
10
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
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Barry McDaniel
President and Chief Executive Officer
May 14, 2002
11