SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported): November 30, 2000
STRATESEC INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 1-13427 22-2817302
(State of (Commission File No.) (IRS Employer
Incorporation) Identification No.)
105 Carpenter Drive, Suite C
Sterling, Virginia 20164
(Address of principal executive offices, including zip code)
(703) 709-8686
(Registrant's telephone number, including area code)
STRATESEC INCORPORATED
Item 7. Financial Statements and Exhibits
Unaudited Pro Forma Combined Balance Sheet dated as of December
31, 1999
Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1999
Unaudited Pro Forma Combined Balance Sheet dated as of December
31, 1998
Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1998
Report of Independent Accountants
Audited Balance Sheet of Security Systems Integrations, Inc.
dated as of December 31, 1999
Audited Statement of Operations of Security Systems Integrations,
Inc. for the year ended December 31, 1999
Audited Statement of Sockholder's Deficit of Security Systems
Integrations, Inc. for the year ended December 31, 1999
Audited Statement of Cash Flows of Security Systems Integrations,
Inc. for the year ended December 31, 1999
Notes to Financial Statements
Report of Independent Accountants
Audited Balance Sheet of Security Systems Integrations, Inc.
dated as of December 31, 1998
Audited Statement of Income and Retained Earnings of Security Systems
Integrations, Inc. for the year ended December 31, 1998
Audited Statement of Cash Flows of Security Systems Integrations,
Inc. for the year ended December 31, 1998
Notes to Financial Statements
(c) Exhibits. None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STRATESEC INCORPORATED
/s/ Albert V. Graves
-----------------------------------
Albert V. Graves
Chief Financial Officer
Dated: February 13, 2001
February 13, 2001
To the Sole Stockholder and Director
of Security Systems Integrations, Inc.:
We have reviewed the accompanying balance sheet of Security Systems
Integrations, Inc. as of September 30, 2000 and the related statements of
income, of stockholder's deficit, and of cash flows for the nine month period
then ended, in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants. All
information included in these financial statements is the representation of the
management of Security Systems Integrations, Inc.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
SECURITY SYSTEMS INTEGRATIONS, INC.
BALANCE SHEET
SEPTEMBER 30, 2000
ASSETS
Current assets
Cash and cash equivalents $ 67,667
Accounts receivable 1,063,929
Other current assets 104,372
--------------
Total current assets 1,235,968
Property and equipment, net 214,733
Note receivable from stockholder 327,277
Deposit 50,000
--------------
Total assets $ 1,827,978
==============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Accounts payable and accrued expenses $ 421,549
Accrued payroll and related liabilities 86,192
Income taxes payable 1,066,000
Notes payable 418,456
Deferred income taxes 129,000
--------------
Total current liabilities 2,121,197
Notes payable 18,759
--------------
Total liabilities 2,139,956
--------------
Stockholder's deficit
Common stock - no par value, 10,000 shares authorized, issued, and
outstanding 100
Accumulated deficit (312,078)
--------------
Total stockholder's deficit (311,978)
Commitments
Total liabilities and stockholder's deficit $ 1,827,978
==============
SECURITY SYSTEMS INTEGRATIONS, INC.
STATEMENT OF INCOME
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
Revenue $ 6,869,531
--------------
Costs and expenses
Direct materials 2,830,947
Direct labor 351,919
Other direct costs 711,260
Indirect costs 1,009,474
--------------
4,903,600
Income before income taxes 1,965,931
Provision for income taxes 750,000
--------------
Net income $ 1,215,931
==============
SECURITY SYSTEMS INTEGRATIONS, INC.
STATEMENT OF STOCKHOLDER'S DEFICIT
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
Common Stock Total
----------------------------------
Accumulated Stockholder's
Shares Amount Deficit Deficit
Balance at December 31, 1999 10,000 $ 100 $ (90,816) $ (90,716)
Dividends paid - - (1,437,193) (1,437,193)
Net income for the nine month period ended
September 30, 2000 - - 1,215,931 1,215,931
------------- ------------- -------------- -------------
Balance at September 30, 2000 10,000 $ 100 $ (312,078) $ (311,978)
============= ============= ============== =============
SECURITY SYSTEMS INTEGRATIONS, INC.
STATEMENT OF CASH FLOWS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
Cash flows from operating activities:
Net income $ 1,215,931
--------------
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 38,418
Deferred income taxes (30,000)
Increase in:
Accounts receivable (875,817)
Other current assets (99,516)
Increase (decrease) in:
Accounts payable and accrued expenses 74,693
Accrued payroll and related liabilities 48,794
Billings in excess of revenue recognized (3,111,351)
Income taxes payable 780,000
--------------
Total adjustments (3,174,779)
--------------
Net cash used in operating activities (1,958,848)
--------------
Cash flows from financing activities:
Net borrowings under bank line-of-credit 399,628
Principal payments under notes payable (17,532)
Dividends paid (1,437,193)
--------------
Net cash used in financing activities (1,055,097)
--------------
Net decrease in cash and cash equivalents (3,013,945)
Cash and cash equivalents, beginning of the nine month period 3,081,612
--------------
Cash and cash equivalents, end of the nine month period $ 67,667
==============
SECURITY SYSTEMS INTEGRATIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Security Systems Integrations, Inc. (the "Company") was incorporated in the
state of Virginia on October 10, 1997. The Company, which is privately held,
provides security systems for commercial companies and agencies of the federal
government.
The significant accounting policies followed by the Company are described below.
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.
Revenue recognition
Substantially all of the Company's contract revenue results from contracts with
agencies of the federal government. Revenue on fixed-price and cost-reimbursable
contracts includes direct costs and allocated indirect costs incurred plus
recognized profit. Profit is recognized under fixed-price contracts on the
percentage-of-completion basis. Revenue on time-and-material contracts is
recognized based upon time (at established rates) and other direct costs
incurred. Losses on contracts are provided for in the period they are first
determined.
Cash equivalents
The Company considers all highly liquid instruments with original maturities of
three months or less to be cash equivalents.
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 an accelerated method over the estimated useful lives of five to
seven 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
Income taxes have been recorded using the liability method. The income tax
provision includes federal and state income taxes both currently payable and
changes in deferred taxes due to 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.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30, 2000:
Vehicles $ 116,127
Leasehold improvements 94,386
Computer hardware and software 55,336
Office furniture 28,058
Construction equipment 17,660
--------------
311,567
Less: accumulated depreciation and amortization (96,834)
--------------
$ 214,733
Depreciation and amortization expense aggregated $38,418 for the nine month
period ended September 30, 2000.
NOTE 3 - NOTE RECEIVABLE FROM STOCKHOLDER
The note receivable to stockholder is unsecured, with installments of principal
and interest (at 7.0%) of $3,260 due monthly through September 2029. During the
nine month period ended September 30, 2000, no principal payments were received.
The Company's stockholder made no principal payments on the note.
NOTE 4 - NOTES PAYABLE
Notes payable consist of the following at September 30, 2000:
Bank line-of-credit agreement (maximum of $450,000) bearing interest at the
bank's prime rate (9.5% at September 30, 2000. This line-of-credit is
secured by substantially all of the Company's assets and is guaranteed by
the sole stockholder of the Company. This agreement
expires, if not renewed, on May 30, 2001. $ 399,628
Note payable to vendor, secured by a truck with a book value of $24,052 at
September 30, 2000, with installments of principal and interest (at
8.7%) aggregating $641 due monthly through June 2004. 24,545
Note payable to bank, unsecured, with installments of principal and
interest (at 7.0%) aggregating $1,349 due monthly through July 2001. 13,042
--------------
Total notes payable 437,215
Less: current portion (418,456)
--------------
Noncurrent portion $ 18,759
==============
The scheduled maturities of the noncurrent portion of the notes payable are as
follows as of September 30, 2000:
Years ending September 30,
-------------------------
2002 $ 6,310
2003 6,882
2004 5,567
--------------
$ 18,759
Interest expense, which approximates interest paid, aggregated $2,000 for the
nine month period ended September 30, 2000.
NOTE 5 - INCOME TAXES
The provision for income taxes consists of the following for the nine month
period ended September 30, 2000:
Current income taxes
Federal $ 657,000
State 123,000
Deferred income taxes
Federal (25,000)
State (5,000)
--------------
$ 750,000
Deferred income taxes reflect temporary differences in the recognition of
revenue and expenses for tax reporting and financial statement purposes. These
temporary differences relate principally to the use of the cash basis of
accounting for income tax purposes (prior to January 1, 1999).
During the nine month period ended September 30, 2000, the Company paid no
income taxes.
NOTE 6 - RETIREMENT PLAN
Effective January 1, 2000, the Company implemented a defined contribution 401(k)
profit sharing plan (the Plan) for all employees. Participants must have at
least three months of service and be at least 21 years of age to be eligible to
participate in the Plan. 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. Company contributions to the Plan are at the discretion of
management and vest ratably over five years, beginning with the second year of
participation. No Company contributions to the Plan were made for the nine month
period ended September 30, 2000.
NOTE 7 - CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. The Company's management believes the risk of loss
associated with cash and cash equivalents is very low since cash and cash
equivalents are maintained in financial institutions. However, at September 30,
2000, the Company had cash and cash equivalents on deposit with a financial
institution that exceeded the federally insured limit. To date, accounts
receivable have been derived primarily from contracts with agencies of the
federal government. Accounts receivable are generally due within 30 days and no
collateral is required. The Company maintains reserves for potential credit
losses and historically such losses have been insignificant and within
management's expectations.
NOTE 8 - COMMITMENTS
The Company leases office space for its headquarters, and other offices, under
the terms of noncancelable operating leases, which expire at various dates
through December 31, 2002. The following is a schedule by year of the future
minimum lease payments required under operating leases, which have initial or
remaining terms in excess of one year as of September 30, 2000:
Years ending September 30,
-------------------------
2001 122,000
2002 120,000
2003 30,000
--------------
$ 272,000
During 1999, the Company entered into a lease agreement for office space from
its stockholder. The Company recorded lease expense aggregating $90,000 in
connection with this lease during the nine month period ended September 30,
2000. This lease agreement provides for payments of $10,000 per month through
December 31, 2002.
Rent expense aggregated $124,674 for the nine month period ended September 30,
2000.
NOTE 9 - SUBSEQUENT EVENT
Effective November 30, 2000, the Company merged with STRATESEC, Incorporated
under an agreement whereby the Company's stockholder surrendered all issued and
outstanding shares of the Company's common stock in exchange for 2,000,000
shares of STRATESEC, Incorporated common stock.
STRATESEC INCORPORATED
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 2000
Pro Forma Pro Forma
STRATESEC SSI Adjustments Combined
ASSETS
Current Assets
Cash and cash equivalents $ 228,523 $ - $ - $ 228,523
Accounts receivable, net of allowance for doubtful accounts4,237,962 928,640 - 5,166,602
Costs and estimated earnings in excess of
billings on uncompleted contracts 3,608,966 135,288 - 3,744,254
Inventory and other assets, net of allowance 937,558 104,372 - 1,041,930
Total current assets 9,013,009 1,168,300 - 10,181,309
Property, equipment and other, net 603,474 592,010 - 1,195,484
$ 9,616,483 $ 1,760,310 $ - $11,376,793
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit and other current debt obligations 1,480,237 437,215 - 1,917,452
Accounts payable 2,780,641 219,992 - 3,000,633
Billings in excess of costs and estimated earnings -
on uncompleted contracts 393,603 - - 393,603
Accrued expenses and other 903,945 1,415,081 - 2,319,026
Total current liabilities 5,558,426 2,072,288 - 7,630,714
Long-Term Liabilities
Capital lease obligations, less current maturities 43,515 - - 43,515
Commitments and Contingencies - - - -
Shareholders' Equity
Common stock 86,300 100 - 86,400
Treasury stock (612,814) - (612,814)
Additional paid-in capital 24,908,964 - - 24,908,964
Retained earnings (accumulated deficit) (20,367,908) (312,078) - (20,679,986)
4,014,542 (311,978) - 3,702,564
$ 9,616,483 $ 1,760,310 $ - $11,376,793
STRATESEC INCORPORATED
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS For the
nine months ended September 30, 2000
Pro Forma Pro Forma
STRATESEC SSI Adjustments Combined
Earned revenues $11,864,407 $6,801,143 $ - $18,665,550
Cost of earned revenues 7,618,788 3,894,127 - 11,512,915
Gross profit 4,245,619 2,907,016 - 7,152,635
Selling, general and administrative expenses 3,584,799 1,009,473 - 4,594,272
Operating income (loss) 660,820 1,897,543 - 2,558,363
Interest and financing fees (295,185) 68,388 - (226,797)
Income (loss) before income taxes 365,635 1,965,931 - 2,331,566
Provision for income taxes 750,000 750,000
Net income (loss) $ 365,635 $1,215,931 $ - $1,581,566
Net income (loss) per share - basic $ 0.05 $ - $ - $ -
Net income per share - diluted $ 0.04 $ - $ - $ -
Weighted average common shares outstanding - basic 7,941,397 - - -
Weighted average common shares outstanding - diluted 8,216,487 - - -
STRATESEC INCORPORATED
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1999
Pro Forma Pro Forma
STRATESEC SSI Adjustments Combined
ASSETS
Current Assets
Cash and cash equivalents $ 2,831 $ 3,081,612 $ - $3,084,443
Accounts receivable, net of allowance for
doubtful accounts 2,233,262 188,112 - 2,421,374
Costs and estimated earnings in excess of
billings on uncompleted contracts 2,865,886 - - 2,865,886
Inventory and other assets, net of allowance 250,393 4,856 - 255,249
Total current assets 5,352,372 3,274,580 - 8,626,952
Property, equipment and other, net 621,096 630,428 - 1,251,524
------------- ------------- --------- -------------
$ 5,973,468 $ 3,905,008 $ - $9,878,476
============= ============= ========= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit and other current debt obligations 844,392 20,319 - 864,711
Accounts payable 2,931,260 346,856 - 3,278,116
Billings in excess of costs and estimated earnings
on uncompleted contracts 234,338 3,111,351 - 3,345,689
Accrued expenses and other 627,156 482,398 - 1,109,554
------------- ------------- --------- -------------
Total current liabilities 4,637,146 3,960,924 - 8,598,070
Long-Term Liabilities
Debt obligations, less current maturities 94,570 34,800 - 129,370
Commitments and Contingencies - - - -
Shareholders' Equity
Common stock 68,902 - - 68,902
Treasury stock (409,564) - - (409,564)
Additional paid-in capital 22,315,957 100 - 22,316,057
Accumulated deficit (20,733,543) (90,816) - (20,824,359)
1,241,752 (90,716) - 1,151,036
------------- ------------- --------- -------------
$ 5,973,468 $ 3,905,008 $ - $9,878,476
============= ============= ========= =============
STRATESEC INCORPORATED
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the year ended December 31, 1999
Pro Forma Pro Forma
STRATESEC SSI Adjustments Combined
Earned revenues $10,631,131 $4,085,308 $ - $14,716,439
Cost of earned revenues 7,443,087 2,795,119 - 10,238,206
Gross profit 3,188,044 1,290,189 - 4,478,233
Selling, general and administrative expenses 3,878,103 436,027 - 4,314,130
Operating income (loss) (690,059) 854,162 - 164,103
Interest and financing fees (242,779) - - (242,779)
Income (loss) before income taxes (932,838) 854,162 - (78,676)
Provision for income taxes - (325,000) - (325,000)
Net income (loss) $ (932,838) $ 529,162 $ - $ (403,676)
============== ============== ========== ==============
Net income (loss) per share - basic $ (0.15) $ - $ - $ -
============== ============== ========== ==============
Net income per share - diluted N/A $ - $ - $ -
============== ============== ========== ==============
Weighted average common shares outstanding - basic 6,099,435 - - -
============== ============== ========== ==============
Weighted average common shares outstanding - diluted N/A - - -
============== ============== ========== ==============
STRATESEC INCORPORATED
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1998
Pro Forma Pro Forma
STRATESEC SSI Adjustments Combined
ASSETS
Current Assets
Cash and cash equivalents $ 442,582 $ 112,480 $ - $ 555,062
Cash - restricted 1,900,000 - - 1,900,000
Accounts receivable, net of allowance for
doubtful accounts 1,297,176 1,305,710 - 2,602,886
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,440,485 - - 1,440,485
Inventory and other assets, net of allowance 228,462 3,557 - 232,019
Total current assets 5,308,705 1,421,747 - 6,730,452
Property, equipment and other, net 519,031 79,965 - 598,996
------------- ------------- --------- -------------
$ 5,827,736 $ 1,501,712 $ - $7,329,448
============= ============= ========= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit and other current debt obligations 1,871,076 - - 1,871,076
Accounts payable 1,455,840 113,830 - 1,569,670
Billings in excess of costs and estimated earnings
on uncompleted contracts 102,132 646,523 - 748,655
Accrued expenses and other 1,008,955 153,656 - 1,162,611
------------- ------------- --------- -------------
Total current liabilities 4,438,003 914,009 - 5,352,012
Long-Term Liabilities
Capital lease obligations, less current maturities 167,430 - - 167,430
Commitments and Contingencies - - - -
Shareholders' Equity
Common stock 61,035 - - 61,035
Treasury stock (181,851) - - (181,851)
Additional paid-in capital 21,143,824 401,345 - 21,545,169
Retained earnings (accumulated deficit) (19,800,705) 186,358 - (19,614,347)
------------- ------------- --------- -------------
1,222,303 587,703 - 1,810,006
============= ============= ========= =============
STRATESEC INCORPORATED
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the year ended December 31, 1998
Pro Forma Pro Forma
STRATESEC SSI Adjustments Combined
Earned revenues $ 6,624,523 $1,781,447 $ - $8,405,970
Cost of earned revenues 4,792,838 1,267,469 - 6,060,307
Provision for contract adjustment 2,491,156 - - 2,491,156
Gross profit (659,471) 513,978 - (145,493)
Selling, general and administrative expenses 4,426,339 207,620 - 4,633,959
Recovery of legal judgment (1,655,000) - - (1,655,000)
Operating income (loss) (3,430,810) 306,358 - (3,124,452)
Interest and financing fees (91,890) - - (91,890)
Income (loss) before income taxes (3,522,700) 306,358 - (3,216,342)
Provision for income taxes - (120,000) (120,000)
Net income (loss) $(3,522,700) $ 186,358 $ - $ (3,336,342)
============== ============== ========== ==============
Net income (loss) per share - basic $ (0.58) $ - $ - $ -
============== ============== ========== ==============
Net income per share - diluted N/A $ - $ - $ -
============== ============== ========== ==============
Weighted average common shares outstanding - basic 6,099,435 - - -
============== ============== ========== ==============
Weighted average common shares outstanding - diluted N/A - - -
============== ============== ========== ==============
REPORT OF INDEPENDENT ACCOUNTANTS
February 6, 2001
To the Sole Stockholder and Director
of Security Systems Integrations, Inc.:
In our opinion, the accompanying balance sheet and the related statements of
income, of stockholder's deficit, and of cash flows present fairly, in all
material respects, the financial position of Security Systems Integrations, Inc.
(an S Corporation) at December 31, 1999 and 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. These financial statements
are the responsibility of 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.
SECURITY SYSTEMS INTEGRATIONS, INC.
BALANCE SHEET
DECEMBER 31, 1999
ASSETS
Current assets
Cash and cash equivalents $ 3,081,612
Accounts receivable 188,112
Other current assets 4,856
--------------
Total current assets 3,274,580
Property and equipment, net 253,151
Note receivable from stockholder 327,277
Deposit 50,000
--------------
Total assets $ 3,905,008
==============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Accounts payable and accrued expenses $ 346,856
Accrued payroll and related liabilities 37,398
Billings in excess of revenue recognized 3,111,351
Income taxes payable 286,000
Notes payable 20,319
Deferred income taxes 159,000
--------------
Total current liabilities 3,960,924
Notes payable 34,800
--------------
Total liabilities 3,995,724
--------------
Stockholder's deficit
Common stock - no par value, 10,000 shares authorized, issued, and
outstanding 100
Accumulated deficit (90,816)
--------------
Total stockholder's deficit (90,716)
Commitments
--------------
Total liabilities and stockholder's deficit $ 3,905,008
==============
SECURITY SYSTEMS INTEGRATIONS, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1999
Revenue $ 4,085,308
--------------
Costs and expenses
Direct materials 1,436,262
Direct labor 570,227
Other direct costs 788,630
Indirect costs 436,027
--------------
3,231,146
Income before income taxes 854,162
Provision for income taxes (325,000)
--------------
Net income $ 529,162
==============
SECURITY SYSTEMS INTEGRATIONS, INC.
STATEMENT OF STOCKHOLDER'S DEFICIT
YEAR ENDED DECEMBER 31, 1999
Common Stock Retained Total
---------------------------------- Earnings Stockholder's
(Accumulated Equity
Shares Amount Deficit) (Deficit)
---------------- ---------------- ---------------- -------------
Balance at December 31, 1998 10,000 $ 401,345 $ 186,358 $ 587,703
Dividends paid - (401,245) (806,336) (1,207,581)
Net income for the year ended December 31, 1999 - - 529,162 529,162
------------- ------------- ------------- -------------
Balance at December 31, 1999 10,000 $ 100 $ (90,816) $ (90,716)
============= ============= ============= =============
SECURITY SYSTEMS INTEGRATIONS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
Cash flows from operating activities:
Net income $ 529,162
--------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 39,349
Deferred income taxes 39,000
(Increase) decrease in:
Accounts receivable 1,117,598
Other current assets (1,299)
Increase in:
Accounts payable and accrued expenses 233,026
Accrued payroll and related liabilities 3,742
Billings in excess of revenue recognized 2,464,828
Income taxes payable 286,000
--------------
Total adjustments 4,182,244
--------------
Net cash provided by operating activities 4,711,406
--------------
Cash flows from investing activities:
Purchases of property and equipment, net (212,535)
Increase in note receivable from stockholder (490,000)
Principal repayments under note receivable from stockholder 162,723
Increase in deposit (50,000)
--------------
Net cash used in investing activities (589,812)
--------------
Cash flows from financing activities:
Proceeds from notes payable 76,107
Principal payments under notes payable (20,988)
Dividends paid (1,207,581)
--------------
Net cash used in financing activities (1,152,462)
--------------
Net increase in cash and cash equivalents 2,969,132
Cash and cash equivalents, beginning of the year 112,480
--------------
Cash and cash equivalents, end of the year $ 3,081,612
==============
SECURITY SYSTEMS INTEGRATIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Security Systems Integrations, Inc. (the "Company") was incorporated in the
state of Virginia on October 10, 1997. The Company, which is privately held,
provides security systems for commercial companies and agencies of the federal
government.
The significant accounting policies followed by the Company are described below.
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.
Revenue recognition
Substantially all of the Company's contract revenue results from contracts with
agencies of the federal government. Revenue on fixed-price and cost-reimbursable
contracts includes direct costs and allocated indirect costs incurred plus
recognized profit. Profit is recognized under fixed-price contracts on the
percentage-of-completion basis. Revenue on time-and-material contracts is
recognized based upon time (at established rates) and other direct costs
incurred. Losses on contracts are provided for in the period they are first
determined. Amounts billed in excess of revenue recognized is reflected as a
liability on the accompanying balance sheet.
Cash equivalents
The Company considers all highly liquid instruments with original maturities of
three months or less to be cash equivalents.
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 an accelerated method over the estimated useful lives of five to
seven 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
Income taxes have been recorded using the liability method. The income tax
provision includes federal and state income taxes both currently payable and
changes in deferred taxes due to
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.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1999:
Vehicles $ 116,127
Leasehold improvements 94,386
Computer hardware and software 55,336
Office furniture 28,058
Construction equipment 17,660
--------------
311,567
Less: accumulated depreciation and amortization (58,416)
--------------
$ 253,151
==============
Depreciation and amortization expense aggregated $39,349 for the year ended
December 31, 1999.
NOTE 3 - NOTE RECEIVABLE FROM STOCKHOLDER
The note receivable to stockholder is unsecured, with installments of principal
and interest (at 7.0%) of $3,260 due monthly through September 2029. During the
year ended December 31, 1999, principal payments of $161,511 were received in
excess of the amounts required by the note receivable, accordingly, the balance
has been classified as noncurrent.
NOTE 4 - NOTES PAYABLE
Notes payable consist of the following at December 31, 1999:
Note payable to vendor, secured by a truck with a book value of $40,087 at
December 31, 1999, with installments of principal and interest (at
8.7%) aggregating $641 due monthly through June 2004. $ 31,107
Note payable to bank, unsecured, with installments of principal and
interest (at 7.0%) aggregating $1,349 due monthly through July 2001. 24,012
--------------
Total notes payable 55,119
Less: current portion (20,319)
--------------
Noncurrent portion $ 34,800
==============
The scheduled maturities of the noncurrent portion of the notes payable are as
follows as of December 31, 1999:
Years ending December 31,
------------------------
2001 $ 15,028
2002 6,448
2003 7,032
2004 6,292
--------------
$ 34,800
==============
Interest expense, which approximates interest paid, aggregated $1,888 for the
year ended December 31, 1999.
NOTE 5 - INCOME TAXES
The provision for income taxes consists of the following for the year ended
December 31, 1999:
Current income taxes
Federal $ 241,000
State 45,000
Deferred income taxes
Federal 33,000
State 6,000
--------------
$ 325,000
Deferred income taxes reflect temporary differences in the recognition of
revenue and expenses for tax reporting and financial statement purposes. These
temporary differences relate principally to the use of the cash basis of
accounting for income tax purposes (prior to the year ended December 31, 1999).
During the year ended December 31, 1999, the Company paid no income taxes.
NOTE 6 - CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. The Company's management believes the risk of loss
associated with cash and cash equivalents is very low since cash and cash
equivalents are maintained in financial institutions. However, at December 31,
1999, the Company had cash and cash equivalents on deposit with a financial
institution that exceeded the federally insured limit by approximately
$3,100,000. To date, accounts receivable have been derived primarily from
contracts with agencies of the federal government. Accounts receivable are
generally due within 30 days and no collateral is required. The Company
maintains reserves for potential credit losses and historically such losses have
been insignificant and within management's expectations.
NOTE 7 - COMMITMENTS
The Company leases office space for its headquarters, and other offices, under
the terms of noncancelable operating leases, which expire at various dates
through December 31, 2002. The following is a schedule by year of the future
minimum lease payments required under operating leases, which have initial or
remaining terms in excess of one year as of December 31, 1999:
Years ending December 31,
------------------------
2000 $ 125,000
2001 122,000
2002 120,000
--------------
$ 367,000
During 1999, the Company entered into a lease agreement for office space from
its stockholder. The Company recorded lease expense aggregating $40,000 in
connection with this lease during the year ended December 31, 1999. This lease
agreement provides for payments of $10,000 per month through December 31, 2002.
Total rent expense aggregated $83,443 for the year ended December 31, 1999.
NOTE 8 - SUBSEQUENT EVENTS
Effective January 1, 2000, the Company implemented a defined contribution 401(k)
profit sharing plan (the Plan) for all employees. Participants must have at
least three months of service and be at least 21 years of age to be eligible to
participate in the Plan. 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. Company contributions to the Plan are at the discretion of
management. The Company contributions vest ratably over five years, beginning
with the second year of participation.
Effective November 30, 2000, the Company merged with STRATESEC, Incorporated
under an agreement whereby the Company's stockholder surrendered all issued and
outstanding shares of the Company's common stock in exchange for 2,000,000
shares of STRATESEC, Incorporated common stock.
REPORT OF INDEPENDENT ACCOUNTANTS
February 6, 2001
To the Sole Stockholder and Director
of Security Systems Integrations, Inc.:
In our opinion, the accompanying balance sheet and the related statements of
income and retained earnings and of cash flows present fairly, in all material
respects, the financial position of Security Systems Integrations, Inc. (an S
Corporation) at December 31, 1998 and 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. These financial statements are the
responsibility of 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.
SECURITY SYSTEMS INTEGRATIONS, INC.
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
Current assets
Cash and cash equivalents $ 112,480
Accounts receivable 1,305,710
Other current assets 3,557
--------------
Total current assets 1,421,747
Property and equipment, net 79,965
--------------
Total assets $ 1,501,712
==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable and accrued expenses $ 113,830
Accrued payroll and related liabilities 33,656
Billings in excess of revenue recognized 646,523
Deferred income taxes 120,000
--------------
Total current liabilities 914,009
--------------
Stockholder's equity
Common stock - no par value, 10,000 shares authorized, issued, and
outstanding 401,345
Retained earnings 186,358
--------------
Total stockholder's equity 587,703
Commitments
--------------
Total liabilities and stockholder's equity $ 1,501,712
==============
SECURITY SYSTEMS INTEGRATIONS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1998
Revenue $ 1,781,447
--------------
Costs and expenses
Direct labor 226,736
Direct materials 499,636
Other direct costs 541,097
Indirect costs 207,620
--------------
1,475,089
Income before income taxes 306,358
Provision for income taxes (120,000)
--------------
Net income 186,358
Retained earnings, beginning of the year 0
--------------
Retained earnings, end of the year $ 186,358
==============
SECURITY SYSTEMS INTEGRATIONS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
Cash flows from operating activities:
Net income $ 186,358
--------------
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 19,067
Deferred income taxes 120,000
Increase in:
Accounts receivable (1,305,710)
Other current assets (3,557)
Accounts payable and accrued expenses 113,830
Accrued payroll and related liabilities 33,656
Billings in excess of revenue recognized 646,523
--------------
Total adjustments (376,191)
--------------
Net cash used in operating activities (189,833)
Cash flows from investing activity:
Purchases of property and equipment, net (99,032)
Cash flows from financing activity:
Proceeds from the sale of common stock 401,345
--------------
Net increase in cash and cash equivalents 112,480
Cash and cash equivalents, beginning of the year 0
--------------
Cash and cash equivalents, end of the year $ 112,480
==============
SECURITY SYSTEMS INTEGRATIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Security Systems Integrations, Inc. (the "Company") was incorporated in the
state of Virginia on October 10, 1997. The Company, which is privately held,
provides security systems for commercial companies and agencies of the federal
government.
The significant accounting policies followed by the Company are described below.
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.
Revenue recognition
Substantially all of the Company's contract revenue results from contracts with
agencies of the federal government. Revenue on fixed-price and cost-reimbursable
contracts includes direct costs and allocated indirect costs incurred plus
recognized profit. Profit is recognized under fixed-price contracts on the
percentage-of-completion basis. Revenue on time-and-material contracts is
recognized based upon time (at established rates) and other direct costs
incurred. Losses on contracts are provided for in the period they are first
determined. Amounts billed in excess of revenue recognized is reflected as a
liability on the accompanying balance sheet.
Cash equivalents
The Company considers all highly liquid instruments with original maturities of
three months or less to be cash equivalents.
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 an accelerated method over the estimated useful lives of five to
seven 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
Income taxes have been recorded using the liability method. The income tax
provision includes federal and state income taxes both currently payable and
changes in deferred taxes due to 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.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1998:
Computer hardware and software $ 60,523
Vehicles 30,000
Office furniture 6,509
Leasehold improvements 2,000
--------------
99,032
Less: accumulated depreciation and amortization (19,067)
--------------
$ 79,965
==============
Depreciation and amortization expense aggregated $19,067 for the year ended
December 31, 1998.
NOTE 3 - INCOME TAXES
The provision for income taxes consists of the following for the year ended
December 31, 1998:
Deferred income taxes
Federal $ 101,000
State 19,000
--------------
$ 120,000
==============
Deferred income taxes reflect temporary differences in the recognition of
revenue and expenses for tax reporting and financial statement purposes. These
temporary differences relate principally to the use of the cash basis of
accounting for income tax purposes.
At December 31, 1998, the Company has net operating loss carryforwards available
to offset future taxable income of approximately $213,000. If not used, the
Company's net operating loss carryforwards will expire in 2018.
During the year ended December 31, 1998, the Company paid no income taxes.
NOTE 4 - CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. The Company's management believes the risk of loss
associated with cash and cash equivalents is very low since cash and cash
equivalents are maintained in financial institutions. However, at December 31,
1998, the Company had cash and cash equivalents on deposit with a financial
institution that exceeded the federally insured limit. To date, accounts
receivable have been derived primarily from contracts with agencies of the
federal government. Accounts receivable are generally due within 30 days and no
collateral is required. The Company maintains reserves for potential credit
losses and historically such losses have been insignificant and within
management's expectations.
NOTE 5 - COMMITMENTS
The Company leases office space for its headquarters under the terms of a
noncancelable operating lease, which expires on December 31, 2002, with its sole
stockholder. The following is a schedule by year of the future minimum lease
payments required under operating leases, which have initial or remaining terms
in excess of one year as of December 31, 1998:
Years ending December 31,
------------------------
1999 $ 68,000
2000 125,000
2001 122,000
2002 120,000
--------------
$ 435,000
==============
Rent expense aggregated $23,229 for the year ended December 31, 1998.
NOTE 6 - SUBSEQUENT EVENTS
Effective January 1, 2000, the Company implemented a defined contribution 401(k)
profit sharing plan (the Plan) for all employees. Participants must have at
least three months of service and be at least 21 years of age to be eligible to
participate in the Plan. 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. Company contributions to the Plan are at the discretion of
management. The Company contributions vest ratably over five years, beginning
with the second year of participation.
Effective November 30, 2000, the Company merged with STRATESEC, Incorporated
under an agreement where the Company's sole stockholder surrendered all issued
and outstanding shares of the Company's common stock in exchange for 2,000,000
shares of STRATESEC, Incorporated common stock.