UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2002
Commission File Number: 1-13427
STRATESEC INCORPORATED
Delaware 22-2817302
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State of Incorporation IRS Employer Identification No.
14360 Sullyfield Circle
Suite B
Chantilly, Virginia 20151
(703) 961-5688
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common stock, $0.01
par value
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.
[ X ] YES [ ] 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]
State issuer's revenue for most recent fiscal year: $1,474,680
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of December 31, 2002 (computed by reference
to the closing price of such stock on the OTC Bulletin Board) was $587,479.
As of December 31, 2002 there were 8,392,550 shares of the registrant's Common
Stock outstanding.
STRATESEC Incorporated
FORM 10-K
Table of Contents
Item Page
Part I
1 Description of business 3
2 Properties 7
3 Legal Proceedings 7
4 Submission of Matters to a Vote of Security Holders 7
Part II
5 Market for Common Equity and Related Stockholder Matters 7
6 Management's Discussion and Analysis or Plan of Operation 8
7 Financial Statements 13
8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 27
Part III
9 Directors, Executive Officers, Promoters and Control Persons 27
10 Executive Compensation 28
11 Security Ownership of Certain Beneficial Owners and Management 30
12 Certain Relationships and Related Transactions 30
13 Exhibits and Reports on Form 8-K 31
14 Controls and Procedures 31
15 Principal Accountant Fees and Services 31
Signatures 33
Part I.
Item 1. Description of Business.
History
The Company began operations in 1987 in association with a large privately held
engineering firm. In 1992, the Company became independent of the engineering
firm in conjunction with a capital infusion from a private investment group.
From 1992 through 2000, the Company devoted a substantial amount of resources
and capital to enhancing its technical capability and services offerings, hiring
and training key personnel and expanding its client base. Beginning in 2001,
however, the Company began experiencing a downturn in its business, which has
resulted in operating losses and working capital shortages. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 1 of Notes to Financial Statements.
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 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.
During 2002, the Company engaged in three transactions to dispose of certain
assets and reduce operating expenses. In May 2002, as a part of a settlement of
a lawsuit with SSI, the Company exchanged certain assets with a book value of
$193,000 for 2 million shares of the Company's common stock. In July 2002, the
Company scaled down its Texas operations. It maintained a small office in
Dallas, staffed by a senior engineer, who assists in writing proposals and
providing consulting services. During the first quarter 2003, the lease on the
Texas office space expired. During December 2002, the Company ceased funding its
California operations and on January 9, 2003, the Company executed an agreement
transferring ownership of its California operations to an unrelated party who
will also take over the Company's employees and its Pleasanton office space.
General Description of Business
The Company is a single-source provider of comprehensive technology-based
security solutions for medium and large commercial and government facilities.
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. This full range of capabilities enables the
Company to provide its clients with any combination of these services or
complete turnkey solutions for complex security projects. The solutions provided
by the Company include integrated security systems comprised of a command center
managing one or more subsystems or components, primarily access control systems,
intrusion detection systems, closed circuit television systems, critical
condition monitoring systems and fire detection systems.
The Company has served more than 50 clients including airports, hospitals,
prisons, corporations, utilities, universities and government facilities. These
clients included Washington Metropolitan Transit Authority, Auto Fina, AT&T,
EDS, Kaiser Permanente and MCI WorldCom, Inc. In addition, the Company also
offers the same full range of security systems services to Federal Government
Agencies. The Company has an open-ended contract with the General Services
Administration (GSA) that allows the government to purchase materials and
services from the Company without having to go through a full competition. The
Company has completed projects for the U.S. Military and several other
government agencies throughout the world. These projects often require
state-of-the-art security solutions for classified or high-risk government sites
under the control of the U.S. Army, U.S. Navy, U.S. Air Force, and the
Department of Justice.
Integrated Security Systems
Integrated security systems are comprised of one or more subsystems and
components that perform a variety of security functions for a facility or group
of facilities under the direction of a single command center. The command center
consists of a central processor, a common database and software that enable
various subsystems and components to communicate with each other and integrate
the subsystems and components into a single system. Subsystems and components
consist primarily of the following:
o Access control systems, which are designed to exclude unauthorized
personnel from specified areas and provide access control that is typically
card-activated. Entry and exit activity can be monitored or recorded and
may be controlled on the basis of time and authority level.
o Intrusion detection systems, which incorporate ultrasonic, infrared,
microwave and other sensors to detect unauthorized door and window
openings, glass breakage, vibration, motion and noise, and alarms and other
peripheral equipment.
o Closed circuit television systems, which monitor and record entry and exit
activity or provide surveillance of designated areas. These systems can
deter theft and vandalism and support other access control systems. They
can be monitored either by a video recorder or by a monitoring screen.
o Critical condition monitoring systems, which provide supervision of various
systems and processes such as sprinkler systems, heating and refrigeration
systems, power levels, water levels and general manufacturing processes.
The Company's Services
o The Company offers a full range of security services, consisting of: (i)
consulting and planning; (ii) engineering and design; (iii) systems
integration; and (iv) maintenance and technical support. The Company has
also added a series of software security products and services to its
offerings. The Company's engagement may include one or more of the elements
described below.
o Consulting and Planning. Security consulting and planning are the initial
phases of determining a security solution for a project. The Company has
developed a planning process that identifies all systems, policies and
procedures that are required for the successful operation of a security
system that will both meet a client's current needs and accommodate its
projected future requirements. The Company's consulting and planning
process includes the following steps:
o Identify the client's objectives and security system requirements
o Review the existing security system plan
o Survey the site, including inventory of physical components and
software and evaluation of client's existing infrastructure
and security system
o Identify and prioritize the client's vulnerabilities
o Develop and evaluate system alternatives
o Recommend a conceptual security plan design
o Estimate the cost of implementing the conceptual plan
o Develop a preliminary implementation schedule
As a result of this process, the Company provides the client with a master
plan for security services, which recommends an effective security solution
that addresses routine operating needs as well as emergency situations. The
Company believes that its comprehensive planning process enables its
clients to budget for their security requirements on a long-term basis,
identify opportunities for cost reduction and prepare for future risks.
o Engineering and Design: The engineering and design process involves
preparation of detailed project specifications and working drawings by a
team of the Company's engineers, systems designers and computer-aided
design system operators. These specifications and drawings detail the
instrument sensitivity requirements, layout of the control center,
placement of equipment and electrical requirements. Throughout the
engineering and design process, the Company utilizes its expertise in
advanced technologies and its understanding of its client's operational
preferences to design a system that is functional, cost-effective and
accommodates the client's present and future requirements. In addition, the
Company attempts to incorporate its client's existing personnel, equipment
and other physical resources into the system design.
When retained as a single-source provider for turnkey security solutions,
the Company also selects the system components required under the
specifications and drawings it has prepared. To the extent possible, the
Company uses off-the-shelf equipment to minimize the cost of developing
custom equipment. The Company has made a strategic decision not to
represent any equipment manufacturer exclusively, thereby maintaining
objectivity and flexibility in equipment selection. The Company believes
that its technical proficiency with the products of a wide range of
manufacturers enables it to select components that will best meet a
project's requirements.
o Systems Integration: Systems integration involves (i) equipment
procurement; (ii) custom systems modeling and fabrication; (iii) facility
installation; (iv) hardware, software and network integration; and (v)
system validation and testing. In addition to these basic integration
services, the Company provides engineering services to enhance the
compatibility of the client's subsystems. The Company prepares technical
documentation of the system and operations manuals and provides on-site
training to client personnel.
Under the supervision of a project manager, the Company's technicians
conduct hardware installation, hardware and software integration, system
validation and testing. The aspects of systems integration that do not
require a high level of technical expertise, such as wire installation and
basic construction, are typically performed by the Company's
subcontractors.
o Maintenance and Technical Support: The Company provides maintenance and
technical support services on a scheduled, on-call, or emergency basis.
These services include developing and implementing maintenance programs
both for security systems designed, engineered, or integrated by the
Company and for existing systems.
o Software Security Products and Services: The Company has signed agreements
with providers of a set of specific security software products. These
products support key initiatives in both the Government and Commercial
Sectors. These initiatives include telecommuting employees, decentralized
office locations, mobile computing, securing laptops and workstations at
the application level and securing company and agency networks. The Company
also offers the services necessary to establish and implement software
security policies.
Marketing
The Company's marketing activities are conducted on both national and regional
levels. The Company obtains engagements through existing contract vehicles with
commercial and government organizations, direct negotiation with clients,
competitive bid processes and referrals. At the national level, the Company
conducts analyses of various government agencies and industries and targets
those with significant potential demand for security solutions. At a regional
level, under the supervision of senior management, each office develops and
implements a marketing plan for its region. The plan identifies prospective
clients within the region and sets forth a strategy for developing relationships
with them. Each regional office works with the headquarters in expanding
relationships with existing national, commercial and government clients to
include facilities within the region.
The Company has changed its focus to concentrate on infrastructure (water,
utilities, etc.) and Government customers. The Company is aggressively adding to
its GSA Schedule and is using that open contract vehicle to compete for
contracts with Federal Government Agencies.
The Company employs a variety of pricing strategies for its services. Proposals
for consulting services are priced based on an estimate of hours multiplied by
standard rates. Systems integration engagements are priced based upon the
estimated cost of the components of the engagement, including subcontractors and
equipment, plus a profit margin. Pricing for engineering and maintenance
services vary widely depending on the scope of the specific project and the
length of engagement. All proposals are reviewed by the Company's senior
management.
Competition
The security industry is highly competitive. The Company competes on a local,
regional and national basis with systems integrators, consulting firms and
engineering and design firms. For example, the Company has competed with ADT,
Siemens, and Pinkerton for systems integration work. Many of its competitors
have greater name recognition and financial resources than the Company. The
Company may face future competition from potential new entrants into the
security industry and increased competition from existing competitors that may
attempt to develop the ability to offer the full range of services offered by
the Company. The Company believes that competition is based primarily on the
ability to deliver solutions that effectively meet a client's requirements and,
to a lesser extent and primarily in competitive bid situations, on price. There
can be no assurance that the Company will be able to compete successfully in the
future against existing or potential competitors.
Suppliers
The Company has distribution contracts with various suppliers. These contracts
require the Company to have certain minimum levels of purchases from the
supplier over some period, usually one year. The Company chooses not be align
itself with any one supplier so it can recommend the best solutions for its
customers. Therefore, the Company does not make purchase recommendations based
on the minimum level of purchases required to remain a distributor of products.
Consequently during the fourth quarter 2002, several suppliers have decided to
cancel their distribution contracts with the Company. The Company is negotiating
with these suppliers to complete sales where the Company has a contract in place
or proposals outstanding. Should the Company not be successful, it will have to
forgo the revenue associated with these jobs.
Customers
For the year ending December 31, 2002, contracts with Devon Construction
accounted for 11% of revenue. During the year ended December 31, 2001, contracts
with United States Military Branches accounted for approximately 33% of revenue.
Employees
As of December 31, 2002, the Company had 13 employees, of which 8 were based in
the Company's headquarters located in Chantilly, Virginia; the balance work out
of the Company's regional offices. Two of the Company's employees are engaged
exclusively in marketing and sales, seven employees are engaged in engineering,
project management and technical functions, and four employees are engaged in
executive management and administration. The company utilizes subcontractors and
temporary contract employees to staff projects that require additional support.
The Company believes its employee relations are good.
Item 2. Properties.
The Company's headquarters are located in Chantilly, Virginia, which is in the
Washington, D.C. metropolitan area. This office is in a space the Company shares
with NetCom Solutions, a shareholder of the Company. In addition, during 2002
and 2001, the Company leased office space in the Atlanta metropolitan area,
Pleasanton and Sacramento, California and Dallas, Texas. The Company believes
that its facilities are adequate and suitable for its current operations, and
that additional space is readily available if needed to support future growth.
In 2003, as part of the transfer of the California operations, Certified
Security Integrators, Inc., the acquiring company, assumed the lease for the
Pleasanton office. The Company is exploring its opportunities to sublease its
Sacramento office. The Texas office lease expired during the first quarter 2003.
Item 3. Legal Proceedings.
The Company is in litigation on two material lawsuits. The first is American
Express versus STRATESEC, for non-payment in the amount of $556,449. The Company
is challenging the amount owed. The second lawsuit is Frito-Lay versus STRATESEC
for return of funds paid to STRATESEC on a terminated contract in the amount of
$98,000. In addition, there is a judgment against the Company for $90,000 for
non-payment to a subcontractor. The lawsuit was filed by Minority Contractors of
Dallas, Texas. As of December 31, 2002, The Company has accrued $744,449 for
settlement of these matters and approximately $8,000 for related legal fees.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting on December 23, 2002 to elect five members
of the Board of Directors. Wirt D. Walker, III, Barry W. McDaniel, Emmit J.
McHenry, Charles W. Archer, and Lt. General James A. Abrahamson, USAF (Retired)
were elected.
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
As of October 2002, the Company's Common Stock is traded on the OTC Bulletin
Board under the symbol SFTC. Prior to October 2002, the Company's stock traded
on the American Stock Exchange under the symbol SFT. The following table sets
forth the quarterly range of high and low closing sale prices per share for the
Common Stock during the periods indicated:
High Low
2001
First Quarter 2.25 2.00
Second Quarter 1.59 1.10
Third Quarter 1.52 0.50
Fourth Quarter 1.22 0.43
2002
First Quarter 0.77 0.38
Second Quarter 0.78 0.21
Third Quarter 0.31 0.10
Fourth Quarter 0.28 0.02
As of January 2003, there are approximately 650 shareholders of the Company's
Common Stock.
The Company has not paid any cash dividends on its Common Stock since its
formation. It presently intends to retain its earnings for use in its business
and therefore does not anticipate paying any cash dividends in the foreseeable
future. The payment of any future dividends will be determined by the Board of
Directors in light of conditions then existing, including the Company's
earnings, financial condition and requirements, restrictions in financing
agreements, business conditions, and other factors.
Under an agreement dated January 24, 2003, the Company issued 7,000,000 shares
of its common stock to designees of E. S. Bankest, LLC, its principal lender, in
exchange for cancellation of $1,750,000 owed by the Company to E.S. Bankest
("Bankest"). The transaction was exempt from registration under the Securities
Act of 1933 (the "Act") pursuant to Section 4(2) of the Act because it did not
involve a public offering.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Plan of Operation/ Improvement
The Company incurred operating losses of approximately $5.6 million in 2002 and
$6.8 million in 2001 and net losses of approximately $8.1 million in 2002 and
$7.5 million in 2001. As of December 31, 2002, the Company had no cash, a
working capital deficit of approximately $12.7 million, and a stockholders'
deficit of approximately $12.6 million. The Company's independent public
accountants have indicated that these matters raise substantial doubt about its
ability to continue as a going concern. The following briefly describes the
Company's plan of operation in light of these circumstances.
The Company is focusing on U.S. security government business in the Washington,
DC area. The Sales team has identified and targeted certain Federal agencies and
constantly monitors them for potential contracts. When Requests for Proposals
are issued, the Sales team reviews the proposals with our technical
implementation team and if appropriate, the Company will submit a proposal.
The Company has shifted the focus of its Virginia office to the obtaining
contracts in the Federal Government sector. The Company is aggressively pursuing
Federal security projects during the current Government fiscal year. The Company
believes that there will be a significant increase in Federal security projects.
In the Atlanta office, the Company is focusing on the commercial sector. The
Atlanta office is currently partnering with a minority-owned company and has
been awarded an open-ended contact with Georgia Power. The contract has an
estimated value of $3,000,000 over three years. In addition, the Atlanta office
has a steady stream of business from other clients.
To date, the Company has 17 proposals outstanding with a combined value of
$620,000. The Company has identified approximately $7,000,000 in projects, which
the Company believes it has the potential to be awarded over the next year, but
there can be no assurance that the Company will be awarded any contracts.
The Company also continued to reduce overhead costs in the beginning of 2003,
with the closure of the California and Texas offices and further reductions of
corporate staff. The Company maintained an employee in Texas to assist in
writing proposals and providing consulting services. The Company has reduced its
overhead by over 50% from the 2002 monthly average.
In order to lower costs and focus on the Company's primary business of physical
security consulting, design, and installation, the Company has narrowed its
focus to representing or providing software security products and services to a
very select set of products.
The Company is also attempting to obtain additional capital and is considering
strategic alternatives, including joint ventures and a sale or merger of the
Company. If it cannot obtain substantial additional capital or enter into a
favorable strategic transaction, the Company's operations will likely continue
to be severely curtailed.
Critical Accounting Policies and Estimates
The financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America, which requires the Company
to make certain estimates and assumptions. A summary of significant accounting
policies is disclosed in Note 1 to the financial statements, which are included
in the Company's annual report on Form 10-KSB for the year ended December 31,
2002. The following section is a summary of certain aspects of those accounting
policies that may require subjective or complex judgments and are most important
to the portrayal of Company's financial condition and results of operations. The
Company believes that there is a low probability that the use of different
estimates or assumptions in making these judgments would result in materially
different amounts being reported in the financial statements.
Revenue Recognition
The Company derives its revenue principally from long-term contracts, which are
generally on a fixed-price basis. Revenue on fixed-price contracts includes
direct costs and allocated indirect costs incurred plus recognized profit.
Revenue is recognized under fixed-price contracts on the
percentage-of-completion basis. The percentage of completion of individual
contracts includes management's best estimate 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
estimated earnings in excess of billings on uncompleted contracts.
Contract costs include all direct material, direct labor and direct 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 occur.
Allowance for Doubtful Accounts
Provision is made for doubtful accounts based on anticipated collection losses.
Estimated losses are determined from historical collection experience and a
review of outstanding receivables.
Results of Operations
Overview
Revenues were limited during the first half of 2002, averaging slightly under
$200,000 per month. This was below the $300,000 to $500,000 per month that the
Company had expected. The reduction was due to the failure of the attempted
restart of the Company's Texas office and continued delays in contract awards.
Due to the continued lack of significant business from the Texas office, on July
31, 2002 the Company decided to discontinue installation operations in Texas.
The Company maintains a presence in Texas for consulting work with a small
senior staff.
During the third and fourth quarters 2002, revenues were adversely affected due
to the Company's inability to fund purchases of materials and work on projects.
The Company estimates it has had to forgo approximately $400,000 in revenue and
$120,000 in gross margin during the third and fourth quarters because it did not
have sufficient working capital to fund projects.
The Company is aggressively pursuing business while simultaneously continuing to
reduce costs to correspond to its current level of business. During December
2002, the Company ceased funding its California operations and on January 9,
2003, the Company executed an agreement transferring ownership of its California
operations to an unrelated party who will also take over the Company's employees
and its Pleasanton office space.
The following table details operations of the Company for the year ended
December 31, 2002:
California Texas
Direct Direct Headquarters and
Total Operations Operations Other Operations
---------------- - ---------------- -- ---------------- -- ------------------
Revenue $ 1,474,680 $ 713,019 $ 69,999 $ 691,662
Costs of revenue 1,543,642 702,323 171,147 670,172
---------------- ---------------- ---------------- ------------------
Gross margin (68,962) 10,696 (101,148) 21,490
Bad debts 1,745,835 300,000 370,000 1,075,835
Inventory write-off 590,606 590,606 - -
Selling, general
and administrative
expenses 3,104,594 699,402 792,370 1,612,822
---------------- ---------------- ---------------- ------------------
Operating loss (5,509,997) (1,579,312) (1,263,518) (2,667,167)
Other income
(expense) (2,126,995) - - (2,126,995)
---------------- ---------------- ---------------- ------------------
Net loss before
income taxes $ (7,636,992) $ (1,579,312) $ (1,263,518) $ (4,794,162)
================ ================ ================ ==================
As of the end December 2002, excluding the California operations, the Company
has a backlog of $550,000, a large proposal valued at over $3 million over 3
years, $620,000 of new proposals for near term projects, and has identified $4.5
million in targets on which it expects potential customers to announce requests
for proposals within 6 months.
Year Ended December 31, 2002 Compared with Year Ended December 31, 2001
The following describes the Company's results of operations for the twelve-month
periods ended December 31, 2002 and 2001.
Revenue decreased for both the three and twelve-month periods ended December 31,
2002 as compared to the prior year. Revenue also decreased in the third and
fourth quarters of 2002 as compared to the second quarter 2002. The primary
reason for the decline is the Company's lack of working capital, which makes it
difficult for the Company to obtain and perform contracts for new projects. As
stated above, the Company believes that it has had to forgo approximately
$400,000 in revenue that it would have recognized in the third and fourth
quarter 2002 had the funds been available. In addition, the Company has
continued to suffer from adverse economic conditions and the lack of capital
spending generally in the commercial sector.
Cost of revenue decreased for the three and twelve months ended December 31,
2002 as compared to the periods ended December 31, 2001, primarily due to the
decrease in revenue. The Company has continued to experience a decrease in gross
profit margin as it has controlled costs.
Bad debt expense for the fourth quarter of 2002 and the full year decreased as
compared to the same periods in 2001. Bad debts for the fourth quarter include a
reserve of $467,477 principally to cover all open receivables from the
California and Texas regions since the Company has ceased operations in those
regions.
Bad debt expense during the third quarter 2002 included approximately $141,000
for a customer that is dependent upon MCI WorldCom, Inc. for payment and
$168,000 increased general accounts receivable reserves. The bad debt expense in
the second quarter 2002 reflected a write off of $715,000 for WorldCom Inc. and
other receivables; and the remainder of $260,000 is a general increase in
reserves. WorldCom Inc. filed for Chapter 11 bankruptcy in July 2002.
Selling, general and administrative expenses have decreased substantially as
compared to the prior year amounts as the Company was reducing staff and other
expenses. Selling, general and administrative expenses have stayed roughly the
same for 2002 management has cut unnecessary expenses as of the fourth quarter
2001. In addition, overhead costs have been reduced by 50% in January 2003 as a
result of closure of the California offices and additional employee reductions
in the corporate headquarters staff.
Interest expense and financing fees increased significantly as compared to the
prior year, due to net borrowings of 2.9 million in 2002. At the end of the
second quarter 2002, the interest rate and financing fees decreased and, as a
result, the interest expenses in the fourth quarter 2002 were less than the
interest expenses in the fourth quarter 2001. The Company continues to be a net
borrower every quarter.
Liquidity and Capital Resources
As indicated above, the Company has incurred substantial operating losses, has
no cash, and has a significant working capital deficit. The Company is seeking
to obtain capital, reduce costs and increase new business. If it is unable to
obtain working capital, reduce costs or increase new business, its ability to
continue as a going concern is in doubt.
The Company's principal capital requirements are increased working capital
necessary to support its operations. The Company is currently funding its
working capital requirements with cash generated by operations and a receivables
factoring agreement with Bankest. The formal terms of the agreement provide for
Bankest to procure the Company's accounts receivables in exchange for a fee.
While there is no formal commitment, Bankest has verbally agreed to provide an
over-advance (i.e., provide additional funds) to fund critical operating cash
needs.
Should the lender be unwilling or unable to provide funding to the Company,
there would likely be material adverse consequences to the Company's operations
because it would not have sufficient working capital to fund projects and
conduct its business.
The Company has limited options to obtain working capital from sources other
than Bankest due to the low level of cash being generated from operations and
the high level of debt owed to the lender as compared to the assets of the
Company.
Forward-Looking Statements
This Form 10-KSB includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act. All statements, other than statements of historical fact, included in this
Form 10-KSB that address activities, events, or developments that the Company
expects, projects, believes, or anticipates will or may occur in the future,
including matters having to do with existing or future contracts, the Company's
ability to fund its operations and repay debt, business strategies, expansion
and growth of operations and other such matters, are forward-looking statements.
These statements are based on certain assumptions and analyses made by our
management in light of its experience and its perception of historical trends,
current conditions, expected future developments, and other factors it believes
are appropriate in the circumstances. These statements are subject to a number
of assumptions, risks and uncertainties, including general economic and business
conditions, the business opportunities (or lack thereof) that may be presented
to and pursued by the Company, the Company's performance on its current
contracts and its success in obtaining new contracts, the Company's ability to
attract and retain qualified employees, and other factors, many of which are
beyond the Company's control. You are cautioned that these forward-looking
statements are not guarantees of future performance and those actual results or
developments may differ materially from those projected in such statements.
Item 7. Financial Statements.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
STRATESEC Incorporated
We have audited the accompanying balance sheet of STRATESEC Incorporated as of
December 31, 2002, and the related statements of operations, shareholders'
equity (deficit) and cash flows for the year then ended. 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 audit. The financial statements of STRATESEC, Incorporated as of and for the
year ended December 31, 2001 were audited by other auditors whose report, dated
March 8, 2002, expressed an unqualified opinion and included a paragraph
regarding the Company's ability to continue as a going concern.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides 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, 2002, the results of its operations and its cash flows for the year
then ended, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming STRATESEC
Incorporated will continue as a going concern. As more fully described in Note 2
to the financial statements, the Company has suffered recurring losses from
operations and has a working capital deficiency. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that may result from the
outcome of this uncertainty.
/s/ Reznick Fedder & Silverman, P.C.
Bethesda, Maryland
February 28, 2003
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of STRATESEC Incorporated:
In our opinion, the accompanying consolidated balance sheets and the related
statements of operations, of stockholders' equity, and of cash flows present
fairly, in all material respects, the financial position of STRATESEC
Incorporated (formerly known as Securacom, Incorporated) at December 31, 2001,
and the result of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. 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 audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Argy, Wiltse & Robinson, P.C.
McLean, Virginia
March 8, 2002
STRATESEC Incorporated
BALANCE SHEETS
December 31, 2002 and 2001
2002 2001
------------------ -----------------
Assets
Current assets
Cash and cash equivalents $ - $ 238,201
Accounts receivable, net of allowance for doubtful
accounts of $467,477 in 2002 and $750,000 in 2001 227,399 4,108,692
Costs and estimated earnings in excess of billings on
uncompleted contracts 104,184 582,698
Inventory, net of allowance of $0 in 2002 and
$400,000 in 2001 - 190,606
Other current assets - 70,728
-- ------------------ -- -----------------
Total current assets 331,583 5,190,925
Property and equipment, net 57,542 483,904
Other assets 29,227 121,765
-- ------------------ -- -----------------
Total assets $ 418,352 $ 5,796,593
== ================== == =================
Liabilities and shareholders' deficit
Current liabilities
Bank overdraft $ 12,052 $ -
Accounts payable 1,691,642 2,287,718
Accrued expenses and other 1,047,161 304,961
Income taxes payable 1,568,328 955,954
Line of credit 8,627,484 6,325,490
Billings in excess of costs and estimated earnings on
uncompleted contracts 95,136 276,984
Capital lease obligations - 22,615
-- ------------------ -- -----------------
Total current liabilities 13,041,803 10,173,722
-- ------------------ -- -----------------
Commitments and contingencies (See notes 2, 5 and 8) - -
Shareholders' deficit
Common stock, $0.01 par value per share; authorized 20,000,000 shares;
10,401,471 shares issued, 8,392,550 shares outstanding as of December
31, 2002
and 10,392,550 as of December 31, 2001 104,015 104,015
Treasury stock, 2,008,921 shares as of December 31, 2002
and 8,921 as of December 31, 2001, at cost (212,088) (18,533)
Additional paid-in capital 24,363,700 24,363,700
Accumulated deficit (36,879,078) (28,826,311)
-- ------------------ -- -----------------
Total shareholders deficit (12,623,451) (4,377,129)
-- ------------------ -- -----------------
Total liabilities and shareholders' deficit $ 418,352 $ 5,796,593
== ================== == =================
The accompanying notes are an integral part of these statements
STRATESEC Incorporated
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2002 and 2001
2002 2001
-- ------------------ -----------------
Revenues $ 1,474,680 $ 9,077,330
Cost of revenues 1,543,642 6,865,988
-- ------------------ -- -----------------
Gross margin (68,962) 2,211,342
Bad debt expense 1,745,835 3,878,922
Inventory write-off 590,606 -
Selling, general and administrative expenses 3,104,594 5,179,313
-- ------------------ -- -----------------
Operating loss (5,509,997) (6,846,893)
Other income (expense)
Penalties and interest on unpaid taxes (436,915) -
Interest and financing fees (1,604,563) (1,148,563)
Loss on disposition of property (85,707) -
Other income 190 210,509
-- ------------------ -- -----------------
Total other expense (2,126,995) (938,054)
-- ------------------ -- -----------------
Loss before provision for income taxes (7,636,992) (7,784,947)
Income tax benefit (provision) (415,775) 289,046
-- ------------------ -- -----------------
Net loss $ (8,052,767) $ (7,495,901)
== ================== == =================
Net loss per share - basic $ (0.87) $ (0.73)
== ================== == =================
Weighted average common shares outstanding - basic 9,212,431 10,290,162
== ================== == =================
The accompanying notes are an integral part of these statements
STRATESEC Incorporated
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 2002 and 2001
Total Shareholders'
Common Stock Treasury Stock Additional Paid-
------------ -------------- Accumulated
Shares Amount Shares Amount in-Capital Deficit Equity (Deficit)
------------ ---------- ------------ ------------- -------------- --------------- ---------------
Balance, 10,280,043 $ 102,800 (79) $ (164) $24,279,914 $(21,330,410) $ 3,052,140
January 1, 2001
Sale of common stock 121,428 1,215 - - 83,786 - 85,001
Purchase of treasury stock - - (8,842) (18,369) - - (18,369)
Net loss - - - - - (7,495,901) (7,495,901)
---------- --------- ----------- ----------- ----------- ------------- -------------
Balance,
December 31, 2001 10,401,471 104,015 (8,921) (18,533) 24,363,700 (28,826,311) (4,377,129)
Exchange of assets for
common stock - - (2,000,000) (193,555) - - (193,555)
Net loss - - - - - (8,052,767) (8,052,767)
---------- --------- ----------- ----------- ----------- ------------- -------------
Balance,
December 31, 2002 10,401,471 $ 104,015 (2,008,921) $ (212,088) $24,363,700 $(36,879,078) $(12,623,451)
========== ========= =========== =========== =========== ============= =============
The accompanying notes are an integral part of these statements
STRATESEC Incorporated
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002 and 2001
2002 2001
-- ------------------ -----------------
Cash flows from operating activities:
Net loss $ (8,052,767) $ (7,495,901)
Adjustments to reconcile net loss to net cash used in
operating expenses
Depreciation 212,944 257,535
Provision for bad debts and inventory reserve (982,523) 1,357,277
Loss on disposition of property 85,707 -
Inventory write-off 590,606 -
Changes in operating assets and liabilities
Accounts receivable 4,162,916 (555,032)
Costs of estimated earnings in excess of billings on
uncompleted contracts 778,514 3,732,542
Inventory - (149,724)
Other current assets 43,389 (25,578)
Accounts payable (596,076) (832,678)
Accrued expenses and other 758,416 (715,785)
Income taxes payable 612,374 (289,046)
Billings in excess of costs and estimated earning on
uncompleted contracts (181,848) 139,675
-- ------------------ -- -----------------
Net cash used by operating activities (2,568,348) (4,576,715)
Cash flows from investing activities:
Acquisition of property and equipment (3,820) (65,526)
Decrease in deposits 42,536 2,304
------------------ -----------------
Net cash provided (used) by investing activities 38,716 (63,222)
Cash flows from financing activities
Bank overdraft 12,052 -
Net borrowing under line of credit 2,301,994 3,993,935
Issuance of common stock - 85,001
Purchase of common stock - (18,369)
Principal payments on capital lease obligations (22,615) (69,643)
-- ------------------ -- -----------------
Net cash provided by financing activities 2,291,431 3,990,924
-- ------------------ -- -----------------
Net increase (decrease) in cash (238,201) (649,013)
Cash at the beginning of period 238,201 887,214
-- ------------------ -- -----------------
Cash at end of period $ - $ 238,201
== ================== == =================
Supplemental disclosures of cash flow information
Interest paid $ 1,029,453 $ 351,325
== ================== == =================
In May 2002, certain non-cash assets and liabilities with a fair value
totaling $193,555 were exchanged for 2 million share of
common stock. $ 193,555 $ -
== ================== == =================
The accompanying notes are an integral part of these statements.
STRATESEC Incorporated
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
STRATESEC Incorporated (the "Company") is incorporated under the laws of the
State of Delaware. The Company is a single-source provider of comprehensive
technology-based security solutions for medium and large commercial and
government facilities. 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. This full range of
capabilities enables the Company to provide its clients with any combination of
these services or complete turnkey solutions for complex security projects. The
solutions provided by the Company include integrated security systems comprised
of a command center managing one or more subsystems or components, primarily
access control systems, intrusion detection systems, closed circuit television
systems, critical condition monitoring systems and fire detection systems.
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 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.
During 2002, the Company engaged in three transactions to dispose of certain
assets and reduce operating expenses. In May 2002, as a part of a settlement of
a lawsuit with SSI, the Company exchanged certain assets with a book value of
$193,000 for 2 million shares of the Company's common stock.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated amounts.
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 trade accounts receivable. The Company provides credit
to its clients in the normal course of business. The Company routinely assesses
the financial strength of its clients.
The carrying value of financial instruments potentially subject to valuation
risk (principally consisting of cash, accounts receivable and accounts payable)
approximates fair market value.
Revenue recognition
The Company derives its revenue principally from long-term contracts, which are
generally on a fixed-price basis. Revenue on fixed-price contracts includes
direct costs and allocated indirect costs incurred plus recognized profit.
Revenue is recognized under fixed-price contracts on the
percentage-of-completion basis. The percentage of completion of individual
contracts includes management's best estimate 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.
Contract costs include all direct material, direct labor, subcontract costs and
indirect 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
occur.
Costs and estimated earnings in excess of billings on uncompleted contracts
represent revenue recognized in excess of amounts billed to clients. Billings in
excess of costs and estimated earnings on uncompleted contracts represents
billings in excess of revenue recognized.
Accounts receivable
The allowance is for doubtful accounts management's estimate of receivables that
will not be collected. The allowance is based upon formulas that are reviewed
for adequacy regularly but generally remain a function of age of the receivables
and specific information known about clients.
Inventory
Inventory consists of equipment and parts held for sale, and is stated at the
lower of cost or market, with cost being determined by the first-in, first-out
method. During 2002, the Company wrote off inventory totaling $590,606.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization of property and equipment is
computed using the straight-line method over the estimated useful lives of three
to ten years. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the estimated useful lives of the
assets or the term of the related lease.
Income taxes
The income tax provision includes federal and state income taxes both currently
payable and changes in deferred taxes due to temporary differences between
financial reporting and tax bases of assets and liabilities. Deferred tax assets
and liabilities are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.
Loss per share
The Company has adopted SFAS No. 128, "Earnings per Share" (EPS), which requires
public companies to present basic earnings per share. Basic EPS is based the on
weighted-average number of shares outstanding without consideration of common
stock equivalents.
December 31,
2002 2001
--------------------- --------------------
Net loss available for common shareholders (A) $ (8,052,767) $ (7,495,901)
===================== ====================
Weighted average outstanding:
Common stock (B) 9,212,431 10,290,162
Stock options and warrants - -
--------------------- --------------------
Common stock and stock equivalents (C) 9,212,431 10,290,162
===================== ====================
Loss per share:
Basic (A/B) $ (0.87) $ (0.73)
Diluted (A/C) $ (0.87) $ (0.73)
Unexercised employee stock options were previously granted to purchase 2,255,000
and 2,304,334 shares of the Company's common stock as of December 31, 2002 and
2001, respectively, were not included in the computations of diluted earnings
per share. The Company incurred net losses for the years ended December 31, 2002
and 2001, therefore, all potential common shares are antidilutive and not
included in the calculation of diluted loss per share.
2. MANAGEMENT'S PLANS
These financial statements have been prepared on a going concern basis, which
assumes the realization of assets and liquidation of liabilities in the normal
course of business. The Company has suffered recurring losses from operations
and has a significant working capital deficiency. The ability of the Company to
continue as a going concern is dependent on the Company's ability to generate
future profitable operations and to obtain additional financing or capital
institution. These matters raise substantial doubt about the Company's ability
to continue as a going concern.
The financial statements do not reflect any adjustments that would be necessary
if the going concern assumption were not appropriate. If the going concern basis
was not appropriate for these financial statements, then adjustments would be
necessary relating to the recoverability and classification of recorded asset
carrying amounts or the amount and classification of liabilities.
The Company is focused on reducing costs and attempting to obtain additional
capital and is considering strategic alternatives, including joint ventures and
a sale or merger of the Company. If it cannot obtain substantial additional
capital or enter into a favorable strategic transaction, the Company's
operations will likely continue to be severely curtailed.
3.
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
2002 2001
--------------------- --------------------
Office furniture and equipment $ 162,222 $ 632,348
Computer equipment 151,199 449,100
Leasehold improvements - 227,439
Vehicles 7,715 159,251
Computer software 41,815 65,519
----------------- -----------------
362,951 1,533,657
Less accumulated depreciation and amortization (305,409) (1,049,752
------------------ -----------------
$ 57,542 $ 483,904
================= =================
Depreciation and amortization expense on property and equipment (including
equipment under capital leases) was $212,944 for the year ended December 31,
2002 and $257,535 for the year ended December 31, 2001.
4. LINE OF CREDIT
During 2001, the Company had a line of credit with E. S. Bankest, LLC
("Bankest"). In 2002, the line of credit was converted to a factoring
arrangement. The amount outstanding at December 31, 2002 is due on demand with
interest (computed as a discount on amounts factored and the duration that the
factored amount is unpaid) due monthly. Discounts range from 2.5% - 4.5%. This
line-of-credit is secured by accounts receivable. The interest rate on the
amounts over the amount of receivables factored at December 31, 2002, was prime
rate plus 2%.
Interest and discount fees related to the line-of-credit, which approximated
interest paid, aggregated $1,604,563 for the twelve months ended December 31,
2002 and $1,148,563 for the year ended December 31, 2001.
5. RELATED PARTY TRANSACTIONS
The following summarizes the significant related party transactions.
The Company entered into a one-year lease, beginning March 24, 2002, with Netcom
Solutions International, a company controlled by a stockholder who is also a
director. The lease calls for monthly payments of approximately $10,000 for rent
and expenses for phone, Internet, and other typical office services. As of
December 31, 2002 $6,400 was payable to Netcom Solutions International and is
included in accrued expenses other on the Balance Sheet.
During 2001, the Company issued warrants for the purchase of 400,000 shares of
its common stock to Bankest. These warrants expired on December 31, 2002.
On April 23, 1997, the Company entered into a consulting agreement with its
Chairman. The agreement provides for an annual consulting fee of $140,000. The
term of the agreement was fives years. Upon the expiration of the initial term,
or any renewal term, the agreement provided for automatic renewal for successive
one-year renewal terms, unless terminated by either party upon written notice to
the other party at least 90 days prior to the expiration of the then current
term. During 1997, the agreement was amended by both parties to reduce the
annual consulting fee to $126,000. For the year ended December 31, 2002,
$126,000 was paid to the Chairman of the Company.
During 2002, the Company engaged KuwAm Corporation, a corporation of which the
Chairman is a Managing Director, for corporate secretarial services at the rate
of $2,500 per month.
6. RETIREMENT PLAN
The Company maintains a 401(k) profit sharing plan (the "Plan") for all
employees who have attained the age of 21 and completed three months of service.
Participants may make voluntary contributions to the Plan up to the maximum
amount allowable by law, but not to exceed 15% of their annual compensation. The
Company made no contributions to the plan during 2002 and 2001.
7. SIGNIFICANT CLIENTS
For the year ending December 31, 2002, contracts with one client accounted for
11% of revenue. During the year ended December 31, 2001, contracts with one
client accounted for approximately 33% of revenue.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space and vehicles under operating leases with terms
expiring at dates through 2005. One of these leases is with a related party (see
Note 5). The leases for office space include minimum lease payments,
reimbursable operating costs and real estate taxes. The vehicle leases generally
range from four to five years.
Future minimum annual lease payments as of December 31, 2002 are:
Year Ended December 31,
2003 137,181
2004 71,793
2005 46,097
----------
Total $ 255,071
=========
Income Taxes Payable
The Company presently owes the U.S. government $1,346,136 in income taxes,
interest and penalties, which have been accrued as of December 31, 2002. The
Company has submitted an Offer-in-Compromise to the Internal Revenue Service to
settle the entire debt for $25,000. The Company feels that given its
circumstances, it is a reasonable offer which will be accepted by the Internal
Revenue Service (IRS).
In addition, the Company owes the State of Virginia approximately $222,192 in
income tax, interest and penalties. The Company also owes $150,858 in sales tax.
Both amounts have been accrued as of December 31, 2002. The Company has
submitted an Offer-in-Compromise to settle the entire debt for $10,000. The
Company feels that given its circumstances, it is a reasonable offer and the
state of Virginia will accept it.
Should the IRS or the State of Virginia not accept the Company's offer, there
would be a material adverse effect on the Company.
9. STOCK 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 and was amended
to increase the grant of options up to 2,650,000 shares. 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. The term of all options
granted is three years and one month, with vesting occurring ratably over three
years.
The Company has elected to follow Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees," and related
interpretations in measuring compensation expense for its stock options. Under
APB No. 25, because the exercise price of the Company's employee stock 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
(loss) and earnings (loss) per share as if the Company had expensed employee
stock options under the fair value method. For purposes of pro forma disclosure,
the estimated fair value of the options is amortized to expense over the vesting
period. Under the fair value method, the Company's net loss in 2002 would have
increased by $187,950 or $0.02 per share. Under the fair value method, the
Company's net loss in 2001 would have increased by $445,000 or $0.04 per share.
The weighted-average fair value of the individual options granted during 2002
and 2001 is estimated as $0.07 and $0.70, respectively, on the date of grant.
The fair values were determined using a Black-Scholes option-pricing model with
the following assumptions:
2002 2001
----------------- ----------------
Dividend yield 0% 0%
Volatility 105% 350%
Risk-free interest rate 3.10% 3.10%
Expected life 3 years 3 years
Stock option activity during the years ended December 31, 2002 and 2001 is
summarized below:
Weighted Average
Number of Shares Exercise Price
Outstanding at January 1, 2001 1,908,000 $ 1.92
Granted 895,000 0.70
Exercised - -
Forfeited (898,966) 2.04
----------
Outstanding at December 31, 2001 1,904,334 1.29
Granted 1,555,000 0.07
Exercised - -
Forfeited (1,204,334) 1.36
-----------
Outstanding at December 31, 2002 2,255,000 0.47
===========
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2002:
Weighted Averages
Number of Options Remaining Contractual
Exercise Price Outstanding Life (Years) Options Exercisable
1.50 25,000 0.26 22,962
2.75 145,000 0.53 120,147
1.50 20,000 0.92 14,050
0.70 510,000 1.70 228,276
0.07 1,555,000 3.06 12,440
10. INCOME TAXES
The Company's benefit from (provision for) income taxes differs from the amount
of income tax determined by applying the applicable federal and state statutory
income tax rates to the loss before income taxes because differences between
estimated and actual tax liabilities for prior years, and the Company's
valuation allowance, which has been established for the net operating loss
carry-forwards and temporary differences that are not presently considered
likely to be realized. Income tax expense for the year ended December 31, 2002
has increased by $415,405 because of notices received from federal and state
agencies.
The benefit from (provision for) income taxes consists of the following for the
years ended December 31:
2002 2001
------------------- -------------------
Current income tax benefit ( expense)
Federal $ (406,938) $ 242,799
State (8,837) 46,247
Deferred income tax benefit (expense)
Federal - -
State - -
------------------- -------------------
Total benefit from (provision for) income taxes $ (415,775) $ 289,046
=================== ===================
The deferred income tax asset results from differences in the bases for assets
and liabilities presented in the financial statements and the amounts reported
in the income tax returns.
As of December 31, the differences are summarized as follows:
2002 2001
--------------------- ---------------------
Current deferred tax assets
Allowance for doubtful accounts $ 158,000 $ 420,000
Inventory allowance - 160,000
Reserve for note receivable
from stockholder - 131,000
Accrued vacation pay and other - 5,000
Valuation allowance (158,000) (716,000)
--------------------- ---------------------
Net current deferred tax asset - -
===================== =====================
Non-current deferred tax assets and liabilities
Depreciation - (35,000)
Net operating loss carry-forwards 13,130,800 11,115,000
Valuation allowance (13,130,800) (11,080,000)
--------------------- ---------------------
Non-current deferred tax asset $ - $ -
===================== =====================
The Company has provided a full valuation allowance for deferred tax assets
since realization of these future benefits cannot be reasonably assured as a
result of recurring operating losses. If the Company achieves profitability,
these deferred tax assets would be available to offset future income tax
liabilities and expense, subject to certain limitations.
At December 31, 2002, the Company had net operating loss carry-forwards of
approximately $34 million, for income tax purposes which expire in various years
through 2022. Certain substantial changes in the Company's ownership would
result in an annual limitation on the amount of the net operating loss
carry-forwards which can be utilized.
11. SUBSEQUENT EVENTS (UNAUDITED)
California Operations
On January 9, 2003, the Company executed an agreement transferring ownership of
substantially all assets of its California operations to an unrelated party.
Under the terms of the agreement, the Company assigned its rights in the assets
of the California operation, unpaid receivable as of the date of the sale. The
buyer agreed to use reasonable efforts to assist the Company in collecting
unpaid receivables. In addition, the buyer assumed all liabilities and
obligations of the California operation except a property lease entered into by
the Company. On January 28, 2003, the Company entered into a sublease for the
same property. Payments due to the Company under the sublease are sufficient to
cover the Company's obligation under the original lease agreement.
Forgiveness of Debt
Under an agreement dated January 24, 2003, the Company issued 7,000,000 shares
of its common stock to designees of E. S. Bankest LLC, its principal lender, in
exchange for cancellation of $1,750,000 owed by the Company to Bankest.
Item 8. Changes in and disagreements with accountants on accounting and
financial disclosure
During 2002, Argy, Wiltse, and Robinson resigned as the auditors of the Company.
There were no disputes as to accounting issues or financial disclosure. The
Company has retained Reznick Fedder & Silverman, P.C. to perform the audit of
the 2002 financial statements.
Part III
Item 9. Directors and Executive Officers of the Registrant.
The following sets forth certain information regarding each of the Company's
Directors and Executive Officers:
Wirt D. Walker, III, age 56, has served as Chief Executive Officer of the
Company since January 1999; he has served as a director of the Company since
1987 and as Chairman of the Board of Directors since 1992. Since 1982, Mr.
Walker has served as a director and the Managing Director of KuwAm Corporation,
a private investment firm. He is the Chairman and Chief Executive Officer of
Aviation General, Incorporated, a publicly traded holding company with two
wholly-owned subsidiaries: Commander Aircraft Company, which manufactures,
markets and provides support services for its line of single engine, high
performance Commander aircraft and provides consulting, brokerage and
refurbishment services for piston aircraft, and Strategic Jet Services, Inc.,
which provides consulting, brokerage and refurbishment services for jet
aircraft.
Barry W. McDaniel, age 53, has served as President/Chief Executive Officer of
the Company since December 2000 and as a director since January 1999. Prior to
joining the Company, Mr. McDaniel was employed by BDM International from 1989 to
1996, most recently as Vice President of Material Distribution and Management
Systems. From 1989 to 1992 he was Vice President, Business Development and
Operations for the Systems and Communications Group. Mr. McDaniel was previously
employed, from 1988 to 1989, by Proxim, a real-time systems integration company
as Vice President, Government Systems Integration. From 1970 to 1987, he was
employed by the U.S. Government with his last assignment as a member of the
Senior Executive Service (SES), serving as Deputy Director of Readiness for the
United States Army Materiel Command.
Charles W. Archer, age 56, has served as a director since March 1998. Mr. Archer
has been Vice President, Strategic Development for Litton/PRC since January
1999. Mr. Archer served as the Company's President and Chief Executive Officer
from March 1998 to January 1999. Prior to 1998, Mr. Archer was employed for
twenty-seven years by the Federal Bureau of Investigation. During his tenure
with the F.B.I., Mr. Archer held a variety of management positions involving
large integrated technology projects and finance. From 1996 to 1997, he was an
Assistant Director of the F.B.I., in charge of its Criminal Justice Information
Services Division, the F.B.I.'s largest division.
Lt. General James A. Abrahamson, USAF (Retired), age 68, has served as a
director of the Company since December 1997. General Abrahamson is the Chairman
and CEO of International Air Safety, LLC. He served as Chairman of the Board of
Directors of Oracle Corporation from 1992 to 1995 and held various executive
positions and served as a member of the board of Hughes Aircraft Company from
1989 to 1992. General Abrahamson was formerly Commissioner of the White House
Commission on Aviation Safety and Security (Gore Commission). Prior to 1989,
General Abrahamson served in the United States Air Force. During his tenure with
the Air Force he held a variety of positions, including Director of Development
of the F-16 International Fighter, Director of NASA's Space Shuttle Program and
Director of President Reagan's Strategic Defense Initiative ("Star Wars"
Program).
Emmit J. McHenry, age 58, has served as a director of the Company since March
2000. Mr. McHenry is the founder, President and CEO of NetCom Solutions
International, Inc., an international telecommunications, engineering,
consulting, and technical services company. Prior to founding NetCom Solutions
International in 1995, Mr. McHenry was a founder of Network Solutions, Inc., the
internet domain services provider. In the past, Mr. McHenry has held management
positions with IBM, Connecticut General, Union Mutual, and Allstate Insurance
Company. He is an active member of the State Department's Advisory Committee for
International Communications and Information Policy and serves as a Commissioner
for the Fairfax County Economic Development Authority. He is also a director of
James Martin Government Intelligence and Global Technology, L.L.C.
Item 10. Executive Compensation.
The following table shows certain information concerning the compensation of
each of the Company's most highly compensated executive officers for services
rendered in all capacities to the Company for the fiscal years ended 2002, 2001
and 2000 (the "Named Executive Officers").
Annual Compensation Long -Term Other
Compensation Compensation
------------------------------------------ -------------------- ---------------------
Year Salary Awarded Bonus Securities Other Compensation
Underlying
Options
(in shares)
-------- ----------- --------------- -------------------- ---------------------
Wirt D. Walker, III 2002 $ - $ - 350,000 (1) $126,000
Chairman and Director 2001 - - 115,000 (1) 101,769
2000 - - 35,000 (1) 133,500
Barry W. McDaniel 2002 146,634 - 450,000 -
President, Chief Executive 2001 130,962 - 215,000 7,500
Officer and Director 2000 150,000 - 60,000 7,500
(1) Includes consulting fees paid.
Option Grants in Last Fiscal Year
The Committee approved the following stock option grants for the executive
officers during fiscal year 2002.
Number of Securities % of Total Options
Underlying Options Granted to Employees Exercise Expiration
Granted (1) in Fiscal Year Price Date
--------------------------- ---------------------- ----------- ---------------
Wirt D. Walker, III 350,000 22.51% 0.07 1/23/06
Barry W. McDaniel 450,000 28.94% 0.07 1/23/06
(1) Each option is non-transferable; vests as to 33% of the shares covered
by such option over three years, commencing on the first anniversary of
the date of issuance; is canceled prior to vesting in the event the
holder either resigns from the Company or is terminated for justifiable
cause; and is void after the date listed under the heading "Expiration
Date." The exercise price of the stock subject to options was equal to
the market value on the date of grant. The number of shares available
for issuance upon exercise of each option is subject to adjustment
subsequent to any stock dividend, split-up, re-capitalization or
certain other transactions.
During 2002, Messrs. Walker and McDaniel were each granted an option to purchase
50,000 shares of Common Stock for their services as a director, pursuant to the
1997 Stock Option Plan.
Aggregated Option Exercises in Last Fiscal Year and Option Values as of December
31, 2002
The following table shows the options exercised during fiscal 2002, the number
of shares of Common Stock represented by outstanding stock options held by each
executive officer as of December 31, 2002 and the value of such options based on
the closing price of the Company's Common Stock on December 31, 2002, which was
$0.07.
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the- Money Options at
December 31, 2002 December 31, 2002
Shares
Acquired on Value Exercisable / Exercisable /
Exercise Realized Unexercisable (1) Unexercisable (2)
------------- ------------ -------------------------- ---------------------------
Wirt D. Walker, III - - 83,275 / 416,725 - / -
Barry W. McDaniel - - 149,550 / 575,450 - / -
(1) Represents the total number of shares subject to stock options held by
each executive officer. These options were granted on various dates
during fiscal years 2000 through 2002 and are exercisable on various
dates beginning in 2001 and expiring in 2006.
(2) Represents the difference between the exercise price and $0.07, which
was the closing price on December 31, 2002. Stock option exercise
prices range from $0.07 to $2.75, therefore no options were in the
money at December 31, 2002.
(3) No options were exercised in 2002.
The following table details information regarding the Company's existing equity
compensation plans as of December 31, 2002:
(a) (b) (c)
Number of securities remaining
Number of Securities to Weighted-average available for future issuance
be issued upon exercise exercise price of under equity compensation plans
of outstanding options, outstanding options, (excluding securities reflected
Plan Category warrants and rights warrants and rights in column (a)
--------------------------- ------------------------- -----------------------------------
Equity compensation plans
approved by security 2,255,000 0.41 395,000
holders
Equity compensation plans
not approved by security N/A N/A N/A
holders
--------------------------- ------------------------- -----------------------------------
Total
=========================== ========================= ===================================
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of February, 2002 certain information with
respect to the beneficial ownership of the Company's Common Stock by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
Company's voting securities, (ii) each of the Company's directors, (iii) each of
the Named Executive Officers, and (iv) all executive officers and directors of
the Company as a group.
Number of Shares Percent of Total
--------------------- -------------------
Bankest Capital Corp. 6,600,000 42.9%
Netcom Solutions, Inc. 700,000 8.3%
Wirt D. Walker, III (1) (2) 650,010 7.7%
Barry W. McDaniel (2) 144,524 1.7%
Emmit J. McHenry (2) (3) 732,857 8.7%
James A. Abrahamson (2) 29,286 *
Charles W. Archer (2) 32,857 *
All officers and directors as a group (5 persons) (4) 1,589,534 18.9%
* Less than one percent
(1) Consists of 429,010 shares held by Mr. Walker, 45,000 shares held by Mr.
Walker's son, 50,000 shares owned by a trust for Mr. Walker's son, of which
Mr. Walker is the trustee, and 126,000 shares owned by a trust for Mr.
Walker's mother, of which Mr. Walker is also a trustee. Does not include
204,562 shares owned by KuwAm Corporation, of which Mr. Walker is the
Managing Director.
(2) Includes shares available for issuance upon exercise of options that are
exercisable within 60 days, as follows: Mr. Walker, 61,666 shares; Mr.
McDaniel, 111,667 shares; Mr. McHenry, 15,000 shares; Lt. Gen. Abrahamson,
15,000 shares; Mr. Archer, 15,000 shares.
(3) Includes shares held by NetCom Solutions International, Inc., of which Mr.
McHenry is the founder, President and CEO.
(4) On October 23, 2002, executive officers and directors of the Company as a
group held options to purchase an aggregate of 515,000 shares of Common
Stock, representing approximately 23.8% of outstanding options at that
date. The numbers set forth in this table include an aggregate of 218,333
shares underlying options that are currently exercisable within 60 days of
such date.
Item 12. Certain Relationships and Related Transactions.
The Company entered into a one-year lease, beginning March 24, 2002, with Netcom
Solutions, Inc., a company controlled by Emmit McHenry, a stockholder who is
also a director. The lease calls for monthly payments of approximately $10,000
for rent and expenses for phone, Internet, and other typical office services.
On April 23, 1997, the Company entered into a consulting agreement with its
Chairman. The agreement provides for an annual consulting fee of $140,000. The
term of the agreement was fives years. Upon the expiration of the initial term,
or any renewal term, the agreement provided for automatic renewal for successive
one-year renewal terms, unless terminated by either party upon written notice to
the other party at least 90 days prior to the expiration of the then current
term.
During 1997, the agreement was amended by both parties to reduce the annual
consulting fee to $126,000. As of December 31, 2002, $126,000 was paid to the
Chairman of the Company.
During 2002, the Company engaged KuwAm Corporation, a corporation of which its
Chairman is a Managing Director, for corporate secretarial services at the rate
of $2,500 per month.
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Exhibit Description
10 Agreement dated January 27, 2003, between STRATESEC
Incorporated and E.S. Bankest LLC.
23.1 Consent of Reznick Fedder & Silverman, P.C.
23.2 Consent of Argy, Wiltse & Robinson, P.C.
99 Certificate
(b)Reports on Form 8-K filed during calendar years 2001 and through January
2003 are hereby incorporated by reference.
Item 14. Controls and Procedures
The Chief Executive Officer (who is serving as the Company's principal executive
officer and principal financial officer) has concluded, based on his evaluation
as of a date within 90 days prior to the date of the filing of this report, that
the company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the company in the reports filed or
submitted by it under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and include controls and procedures designed to ensure
that information required to be disclosed by the company in such reports is
accumulated and communicated to the company's management, including the Chief
Executive Officer, as appropriate to allow timely decisions regarding required
disclosure.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
such evaluation.
Item 15. Principal Accountant Fees and Services
Audit Fees
During 2002 and 2001, the Company was billed an aggregate of $87,166 and $7,000
for services provided by Argy, Wiltse & Robinson and Reznick Fedder & Silverman
P.C., respectively, for the audits of the Company's 2002 and 2001 annual
financial statements and for reviews of the financial statements included in our
quarterly reports on Form 10-Q filed during those periods. The total expected
fees for the audit of the Company's 2002 financial statements is $37,000.
Financial Information System Design or Implementation Services Fees
During 2002, Reznick Fedder & Silverman P.C. provided no financial information
systems or design services.
All Other Fees
During 2002, Reznick Fedder & Silverman P.C. did not provide any additional
services other than audit and quarterly reviews of the Company's 10QSB filings.
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/Chief Executive Officer/
Chief Financial Officer
Signature Title Date
/s/ Barry W. McDaniel April 15, 2003
------------------------------------- ------------------------------------------- --------------------
Barry W. McDaniel President, Chief Executive Officer, Chief
Financial Officer and Director
/s/ Wirt D. Walker III April 15, 2003
------------------------------------- -- ------------------------------------------- --- --------------------
Wirt D. Walker III Chairman and Director
------------------------------------- ------------------------------------------- --------------------
James A. Abrahamson Director
/s/ Charles W. Archer April 15, 2003
------------------------------------- ------------------------------------------- --------------------
Charles W. Archer Director
------------------------------------- ------------------------------------------- --------------------
Emmit J. McHenry Director
Exhibit 99
CERTIFICATION
I, Barry W. McDaniel, certify that:
1. I have reviewed this annual report on Form 10-K of STRATESEC Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Barry W. McDaniel
Barry W. McDaniel
Chief Executive Officer
April 15, 2003