SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission File Number 1-13427
STRATESEC INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 22-2817302
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14360 Sullyfield Circle, Ste. B
Chantilly, Virginia 20151
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 995-2121
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange
Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X . NO .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
State issuer's revenue for most recent fiscal year: $9,077,330.
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of March 31, 2002 (computed by reference to
the closing price of such stock on the American Stock Exchange) was $6,136,867.
As of March 31, 2002 there were 10,401,471 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
Portions of the Registrant's definitive Proxy Statement
regarding the 2002 Annual Meeting of Stockholders Part III
STRATESEC Incorporated
FORM 10-K
Cross Reference Sheet
Item Page
Part I
1 Business.............................................................. 1
2 Properties............................................................ 7
3 Legal Proceedings..................................................... 7
4 Submission of Matters to a Vote of Security Holders................... 8
Part II
5 Market for Registrant's Common Equity and Related Stockholder Matters. 8
6 Selected Financial Data............................................... 9
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 9
7a Quantitative and Qualitative Disclosures About Market Risk............ 14
8 Financial Statements.................................................. 14
9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure............................................ 15
Part III
10 Directors and Executive Officers of the Registrant.................... 15
11 Executive Compensation................................................ 15
12 Security Ownership of Certain Beneficial Owners and Management........ 15
13 Certain Relationships and Related Transactions........................ 15
Part IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K....... 16
Signatures ........................................................... 17
Part I
Item 1. Business.
General
The Company is a single-source provider of comprehensive
technology-based security solutions for medium and large commercial and
government facilities in the United States and abroad. The Company offers a
broad range of services, including: (i) consulting and planning; (ii)
engineering and design; (iii) systems integration; and (iv) maintenance and
technical support. 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 signed a set of
agreements with software security vendors and has added these products to its
offering. The Company has added software salesmen and intends to significantly
increase security software sales as a percentage of total sales.
The Company serves more than 50 clients including airports, hospitals,
prisons, corporations, utilities, universities and government facilities. These
clients include Washington Metropolitan Transit Authority, Auto Fina, AT&T, EDS,
Kaiser Permanente and MCI WorldCom, Inc. In addition, the Company also provides
the same full range of security systems services to the Government. 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. The clients include the U.S. Army,
U.S. Navy, U.S. Air Force, and the Department of Justice.
The Company began operations in 1987 in association with a large
privately held engineering firm. In 1992, the Company became independent from
the engineering firm in conjunction with a capital infusion from a private
investment group. Since 1992, the Company has 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. In
the fourth quarter of 2000, the Company merged with Security Systems Integration
(SSI) through an exchange of stock. In addition to its headquarters office in
Chantilly, Virginia, which is in the Washington, D.C. metropolitan area, the
Company has regional offices in Atlanta and Dallas and Sacramento, California.
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:
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.
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.
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.
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.
Fire detection systems, which incorporate heat, ionization, smoke and
flame sensing devices, manual pull stations, evacuation sounders and systems,
sprinkler systems and elevator controls.
The Company's Services
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 offering. The
Company's engagement may include one or more of the elements described below.
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:
Identify the client's objectives and security system requirements
Review the existing security system plan
Survey the site, including inventory of physical components and software
and evaluation of client's existing infrastructure and security
system
Identify and prioritize the client's vulnerabilities
Develop and evaluate system alternatives
Recommend a conceptual security plan design
Estimate the cost of implementing the conceptual plan
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.
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.
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.
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.
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
in this world of heightened security risks. 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 office in expanding
relationships with existing national, commercial and government clients to
include facilities within the region.
The Company has identified several key industries or facility types
that it believes have substantial and increasing requirements for security
services, including healthcare and technology companies, corporate complexes and
industries and facilities for which security systems are required by regulation.
The Company has developed expertise in the security regulations applicable to
airports, healthcare companies, prisons and nuclear utilities, military chemical
demilitarization facilities, U.S. Military installation facilities and
classified government facilities.
The Company's marketing strategy emphasizes developing long-term
relationships with clients that have multiple facilities and complex security
requirements so that the Company can continue to provide services over a
recurring basis after the initial contract. The Company undertakes significant
pre-assessment of a prospective client's needs before an initial contact is
made. Engagements for maintenance and technical support enable the Company to
maintain long-term contact with customers and to identify new requirements as
they arise and to offer its solutions to such requirements. In the Government
Division, the Company has developed strong relationships and open-ended contract
vehicles that allow the Company to provide recurring services to its customers
for several years. As a result of successful performance, the Company receives
positive references and referrals from its existing customers to new government
customers. The Company is aggressively adding to its GSA Schedule and is using
that open contract vehicle to grow its presence in 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.
Clients
During the past three years the Company has provided services to
approximately 90 clients, including airports, hospitals, prisons, corporations,
utilities, universities and government facilities. The Company's clients have
included the following:
Airports and Aviation Corporations
Fresno Airport AT&T
United Airlines EDS
Washington-Dulles International Airport Gillette Corporation
Washington Reagan National Airport Hewlett-Packard Company
Yuma International Airport Lazard Freres
Seattle-Tacoma Airport Lucent Technologies
Dallas Fort Worth Airport Mary Kay Cosmetics
MCI WorldCom, Inc.
Mobil Corporation
NationsBank
US WEST
Wachovia Bank
Alltel Corporation
Koch Industries
Nokia
Fina Oil and Gas Company
Kodak
Amtrak
Hearst Corporation
Kaiser Permanente
Government Other
Los Alamos National Laboratory City of Baltimore Central
Sandia National Laboratory Booking and Intake Facility
Tennessee Valley Authority Moscow Local Telephone System
U.S. Department of Energy New York City's World TradeCenter
U.S. Navy Rostelecom
U.S. Army Rowan County (N.C.) Prison
U.S. Department of Justice Washington Metropolitan Area
Transit Authority
During 2001, the U.S. military accounted for 26%, MCI accounted for
11%, and Kaiser accounted for 8% of the Company's revenue. The loss of a
significant portion of the revenue from any of these clients would need to be
replaced to avoid a material adverse effect upon the Company's business,
operating results and financial condition. Although the U.S. military and
security software products and services accounted for a substantial portion of
the Company's revenue, work performed for them was comprised of multiple
projects at numerous different facilities.
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. The Company believes that it is the only
provider that focuses solely on its comprehensive range of security services
including software security to government and commercial clients on a national
basis. As a result, the Company competes with different companies depending upon
the nature of the project and the services being offered. 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.
Backlog
The Company's backlog consists of confirmed orders, including the
balance of projects in process. The backlog also includes projects for which the
Company has been notified it is the successful bidder even though a binding
agreement has not been executed. Projects for which a binding contract has not
been executed may be canceled at any time. Binding contracts may also be subject
to cancellation or postponement, although cancellation generally obligates the
client to pay the costs incurred by the Company. Long-term maintenance contracts
may be canceled without cause. As of December 31, 2000 and 2001, the Company's
backlog was approximately $4.25 million and $1.1 million, respectively. Backlog
orders as of any particular date may not be indicative of actual operating
results for any fiscal period. There can be no assurance that any amount of
backlog will be realized. In addition, the Company has existing contractual
relationships with customers who have identified $4.5 million of additional
projects expected to be awarded within 12 months.
Employees
As of December 31, 2001, the Company had 45 employees, of which 19 were
based in the Company's headquarters located in Chantilly, Virginia; the balance
work out of the Company's regional offices. Seven of the Company's employees are
engaged exclusively in marketing and sales, 29 employees are engaged in
engineering, project management, and technical functions, and seven employees
are engaged in executive management and administration. Eight of the Company's
employees are represented by a labor union in California and the Company
believes its employee relations are good.
Insurance
The Company maintains in force commercial umbrella liability insurance
with coverage of $10 million per occurrence and $10 million in the aggregate,
with a $10,000 deductible. The Company also maintains a $1.0 million insurance
policy to cover any error or omission by the Company that may result in a breach
of a security system designed, installed, maintained, or engineered by the
Company. There is no assurance that the amount of insurance carried by the
Company would be sufficient to protect it fully in the event of a significant
liability claim; however the Company believes that the amounts and coverages of
its insurance are reasonable and appropriate for its business operations. There
is no assurance that such insurance will continue to be available on
commercially reasonable terms, and the Company may elect not to retain liability
insurance at any time.
Item 2. Properties.
The Company's headquarters office is located in Chantilly, Virginia,
which is in the Washington, D.C. metropolitan area. This office is in space the
Company shares with NetCom Solutions, a shareholder of the Company. In addition,
the Company leases between approximately 2,000 and 4,000 square feet of office
space in each of the Atlanta, Dallas, and Sacramento metropolitan areas to
support its regional operations. 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.
Item 3. Legal Proceedings.
As of December 31, 2001, the Company was a defendant in three lawsuits
regarding disputes over payments to vendors with an aggregate total of
$88,000.00. As a significant subsequent event, the Company has notified the
former owner of SSI that he is in material breach of the merger agreement
between SSI and Stratesec Incorporated. The Company has terminated the
individual's employment, vacated a facility owned by him and demanded return, or
cancellation, of all 2 million shares issued as part of the merger. If the
shares are not returned, the Company intends to proceed with a lawsuit seeking
damages, as well as the return of the shares.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the stockholders of the Company
during the fourth quarter of the fiscal year covered by this report.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is 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
2000
First Quarter.............................. 4 1/8 2
Second Quarter............................. 3 7/8 1 7/8
Third Quarter.............................. 3 2
Fourth Quarter............................. 2 5/8 2
2001
First Quarter.............................. 2 3/4 2
Second Quarter............................. 1.59 1.10
Third Quarter.............................. 1.52 .50
Fourth Quarter............................. 1.22 .43
2002
First Quarter (through March 23, 2001)..... .80 .40
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.
In the fourth quarter of 1999 and the first quarter of 2000, the
Company completed a private placement of 1,204,855 shares of its common stock to
a limited number of sophisticated and/or accredited investors at a price of
$1.50 per share for aggregate cash proceeds of $1,807,282. In the first quarter
of 2000, the Company sold 700,000 shares of its common stock to a company at a
price of $1.50 per share for aggregate proceeds of $1,050,000 consisting of cash
of $500,000 and a note payable of $550,000. In the fourth quarter of 2000, the
Company issued 1,650,000 shares of stock and reissued 350,000 shares of treasury
stock in connection with the Company's merger with Security Systems
Integrations, Inc. (SSI). Each of these transactions was exempt from the
registration requirements of the Securities Act of 1933 (the "Act") pursuant to
section 4(2) of the Act because they did not involve a public offering of
securities.
Item 6. Selected Financial Data.
The selected financial data presented below (in thousands, except for
per share data) should be read in conjunction with the consolidated financial
statements and notes thereto of the Company and Managements' Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this report.
Year Ended December 31,
2000 2001
---------- ----------
(in thousands)
Statement of Operations Data:
Revenue............................... $ 23,983 $ 9,077
Cost of revenue...................... (15,375) (6,866)
-------------- -------------
Gross profit....................... 8,608 2,211
Selling, general and administrative
expenses........................... (7,179) (9,058)
-------------- -------------
Operating income................. 1,429 (6,847)
................................
Interest and financing fees........... (748) (1,148)
Interest and other income............. 75 211
-------------- -------------
Income (loss) before income taxes.. 756 (7,784)
Provision for income taxes............ (800) 289
-------------- -------------
Net loss........................... $ (44) $ (7,495)
============== =============
Basic and diluted loss per share... $ (0.00) $ (0.73)
============== =============
Diluted income per share........... $ (0.00) $ (0.00)
============== =============
Weighted average number of
shares outstanding:
Basic................ 10,027 10,290
Diluted.............. N/A N/A
Year Ended December 31,
2000 2001
---------- ----------
Balance Sheet Data:
Cash and cash equivalents................. $ 887 $ 238
Working capital (deficit)................. 1,947 (4,983)
Total assets.............................. 10,999 5,797
Long-term debt, less current maturities... 23 0
Total stockholders' equity (deficiency)... 3,052 (4,377)
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company is a single-source provider of comprehensive,
technology-based security solutions for medium and large commercial and
government facilities in the United States and abroad. The Company offers a
broad range of services, including: (i) consulting and planning; (ii)
engineering and design; (iii) systems integration; (iv) maintenance and
technical support; and (v) information security products and services.
The Company began operations in 1987 in association with a large
privately held engineering firm. As a start-up, the Company expended significant
capital on the development of the Company's business and infrastructure, and it
accumulated losses of approximately $2.8 million from 1987 through 1991 on
aggregate revenues of approximately $17.2 million. The Company's revenues from
1990 through 1994 were generated primarily by a contract to design and integrate
extensive security upgrades at three nuclear facilities for the Tennessee Valley
Authority (the "TVA"). In 1992, the Company became independent from the
engineering firm in conjunction with a capital infusion from a private investor
group. At the same time, the Company hired new management with extensive
expertise in the security industry. Since 1992, the Company has 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. As part of this effort, the Company opened four
regional offices in the United States. In November 2000, the Company merged with
SSI, a security systems integration firm exclusively providing security systems
and services to the U.S. Government. The resources and contracts of SSI were
combined with those of the Company and became the Government Division of the
Company. During 2001, the Government Division failed to generate revenues at
expected levels, and will be reorganized.
The Company derives its revenue primarily from long-term, fixed-price
contracts. Earnings are recognized based upon the Company's estimates of the
cost and percentage of completion of individual contracts. Earned revenue equal
the project's total contract amount multiplied by the proportion that direct
project costs incurred on a project bear to estimated total project costs.
Project costs include direct labor and benefits, direct material, subcontract
costs, project related travel and other direct expenses.
Clients are invoiced based upon negotiated payment terms for each
individual contract. Terms usually include a 25% down payment and the balance as
stages of the work are completed. Maintenance contracts are billed either in
advance, monthly, or quarterly. As a result, the Company records as an asset,
costs and estimated earnings in excess of billings and as a liability, billings
in excess of costs and estimated earnings.
Results of Operations
The following table sets forth the percentages of earned revenues
represented by certain items reflected in the Company's statements of
operations.
Year Ended December 31,
2000 2001
---- ----
Revenue................................... 100.0% 100.0%
Cost of revenue........................... (64.1%) (75.6%)
--------- ---------
Gross profit........................... 35.9% 24.4%
Selling, general and administrative
expenses............................... (29.9%) (99.8%)
--------- ---------
Operating income....................... 6.0% (75.4%)
Gain on sale of plant and equipment....... 0.0% 0.0%
Interest and financing fees............... (3.1%) (12.7%)
Interest and other income................. 0.3% 2.3%
Provision for income taxes................ (3.4%) 3.2%
--------- ----------
Net loss............................... (0.2%) (82.6%)
========= =========
Year Ended December 31, 2001 Compared with Year Ended December 31, 2000
Revenue decreased by 62.1% from 24.0 million in 2000 to $9.0 million in
2001. The decrease was due to a severe decrease in revenue from existing
commercial customers as a result of a freeze or reduction in capital spending in
the telecom and information technology (IT) sectors. In addition, ramp up of new
commercial customers in other business sectors was slow due to economic
conditions. The Government sector revenue from existing customers also declined
dramatically and no new Government customers were added.
Cost of revenue decreased from $15.4 million in 2000 to $6.9 million in
2001, primarily due to the decrease in revenue. Gross margin decreased from
35.9% in 2000 to $24. 4% in 2001. The gross margin was adversely affected by the
trailing costs associated with completion of 3 large Government and one
commercial contract.
Selling, general and administrative expenses increased by 27.0% from
$7.2 million in 2000 to $9.1 million in 2001. The increase is due to the
increase in reserves and write-offs from $687,000 in 2000 to $3.9 million in
2001 that are included in selling, general and administrative expenses. Without
the reserves and write-offs, selling, general and administrative expenses
actually decreased by $1.8 million to $5.1 million or 26%. The circumstances
giving rise to these reserves and write-offs are discussed below under
"Management Plan for Improvement."
Interest expense and financing fees increased 47% from $0.75 million in
2000 to $1.1 million in 2001. The growth was due to the increased use of the
line of credit as compared with in 2000 when private equity was used.
Net income decreased from a net loss of $0.04 million in 2000 to a net
loss of $7.5 million in 2001. These decreases in net income were primarily due
to the significant decrease in revenue and the write-offs and reserves the
Company recorded for obsolete inventory and uncollectable receivables.
Management Plan For Improvement
The following plan addresses management's approach to improving the
financial condition of the Company as well as the plan to regain compliance with
the American Stock Exchange's continued listing standards.
The Company's revenues grew from $6 million of revenue in 1998, $14
million in 1999 and $24 million in 2000. However, the Company's financial
results for 2001 were impacted by the severe downturn in the economy, especially
in the Telecom and IT sectors. The Company had concentrated on those areas for
its national commercial accounts because of the approach taken by companies
within those sectors with regard to security. Companies within those segments
typically have multiple sites but exercise central control over security
policies and system implementations. As a result, the Company had grown that
business segment to $14 million a year. When the Telecom and IT sectors crashed
most of these companies instituted a freeze or reduction of capital spending and
the Company's contracts were scaled back or cancelled causing a reduction of
over one million dollars a month in business. The Company did not immediately
reduce staff, as our customers believed that the reductions would be temporary.
In addition, the entire economy continued to deteriorate causing not only
further reductions in business, but causing several of our customers to go out
of business or to stop paying outstanding payables.
As a result of the foregoing, revenue for 2001 was $9,077,330 with a
loss after unusual items of $7,495,493. The unusual items recorded during the
year consists of the following:
o Disputed accounts receivable for terminated contracts due to
customer economic conditions......................................................$794,800
o Costs associated with completion of contracts in the Texas region
after closure of that regional office.............................................$784,000
o Potentially uncollectable accounts as a result of customer
economic difficulties...........................................................$1,089,000
o Write off of, or reserve for, obsolete inventory recovered from
previous contracts over the last 36 months........................................$686,000
o Costs associated with settlements over disputed charges from
subcontractors and vendors........................................................$380,000
o Excess overhead expenses associated with financial commitments
as a result of the merger agreement between SSI and Stratesec...................$1,200,000
o Excess interest charges due to the requirement to use a factor to
provide the company credit facility...............................................$819,000
Total...........................$5,752,800
In 2002, sales are expected to remain slow through the first quarter,
averaging from $300,000 to $500,000 in monthly in revenue. Based on sales
projections, the Company expects revenue to improve in the second quarter to an
average of $800,000 per month by the end of the quarter. The Company projects
sales per month of $1 million by the end of the third quarter and $1.2 million
per month by the end of the fourth quarter. To achieve this improvement in
sales, the Company has added several major accounts to replace the accounts that
froze their capital budgets. For example, we have added Hewitt and Associates,
EMC Corporation, Kaiser Permanente, Veritas Software, Clarion Realty, The
Washington Metropolitan Transit Authority, Guinette County in Georgia, CMT
Construction, San Jose Construction Group, Devcon Construction and American
University. In addition, we have restarted projects with EDS, Trammel Crow,
Amtrak and several other prior customers.
As of March 31, 2002, there were $3.6 million in projects on which the
Company has been informed that it is the vendor of choice; there are $4.8
million more in high probability proposals outstanding. The Company has
contracts on $1.2 million of the $3.6 million, and has been verbally notified on
the other $2.4 million of projects. The Company believes that all of the
remaining $2.4 million will be awarded to the Company over the next 60 days but
even if 80% of the amount is awarded, there will be $1 million dollars of new
business awarded each month of the second quarter. If the company merely
maintains that rate of new business, it will begin to generate operating
profits.
The Company has also obtained the commitment from its finance company,
E.S. Bankest, to finance the material and the cash flow necessary to work as
much business as the Company can win; as a result the Company's financial
condition should not prevent execution of its projects.
In order to expand its offering and add higher margin revenue, the
Company has also added the capability to provide software security products and
services to its customers. The Company has software in evaluation at the U.S.
Postal Service now for a potential major sale. The Company will add more
security software products and services and expects to expand its customer base
significantly in this area. The fixed overhead required to support these
products and services is very low and the profitability is very high. We expect
that the overall Company profitability will be significantly improved as
software sales are recorded.
The Company is also in the process of adding products for sale to the
federal government to its GSA schedule. Since the Company has its headquarters
in the Washington, D.C. suburbs, we expect the business with the federal
government to grow over the next 12 months. Security funding for federal
government buildings has been increased tremendously since September 11, 2001.
The federal government recently allocated the fiscal year 2002 budget, but
through March had operated under a condition of no new projects since September
2001. Contacts inside the federal government have informed us that the budgets
have now been allocated and we expect sales to the federal government to
increase..
The Company has also implemented the following initiatives to reduce
its overhead expenses so that break-even revenue will be $600,000 per month:
o Reduced full-time and temporary corporate staff
o Reduced executive management
o Relocated headquarters to shared facilities with Netcom Solutions, a
privately held IT company and shareholder of STRATESEC
o Restructured salaries of sales force to lower base and higher commissions
o Consolidated costs (telephones, utilities, etc.) with Netcom Solutions
o Restructured operations to increase use of subcontractors on a fixed price
basis
Based on the projected increase in monthly sales and the decrease in
overhead, the Company expects to be profitable on an operating basis by the end
of the second quarter. In order to improve the equity position on its balance
sheet, the Company is aggressively exploring mergers and acquisitions with other
physical and software security firms as well as pursuing external equity
funding. In addition, to reduce the liabilities on its balance sheet, the
Company has prepared an offer in compromise to the IRS that will eliminate
$930,000 of tax liability, if accepted. The Company also intends to attempt to
convert a significant amount of the line of credit debt to equity.
Liquidity and Capital Resources
During February 1999, the $1.9 million the Company was required to post
as collateral for a bond pending its appeal of a lawsuit was released when the
trial court's judgment was reversed. The Company paid off $0.9 million of the
convertible subordinated debentures during the first quarter 1999. In September
1999 all of the holders of the remaining subordinated debentures agreed to
exchange their notes for the Company's common stock valued at $1.50 per share.
Additionally, to support the significant increase in business, the Board
approved a private placement of 500,000 shares at $1.50 per share, which was
subsequently increased to 1,204,855 shares. The board also approved the sale of
up to 21% equity in the company to a minority partner. Netcom Solutions
International subsequently purchased approximately 8% or 700,000 shares of the
Company at $1.50 per share. As of March 2000, $930,000 of debt was converted to
equity, the private placement and $1.05 million in the form of cash received
$1.8 million and a short-term note was received from the sale of a minority
interest.
The Company's principal capital requirements are increased working
capital needed to support its growth. The Company currently is funding its
working capital requirements with cash generated by operations and a receivables
factoring facility with a financial institution. The Company is seeking
additional financing to reduce outstanding aged accounts payable and to provide
the working capital to fund the sales projected for 2002. If it is unable to
obtain additional financing, its ability to obtain new business and increase
revenue may be limited.
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 7a. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
Item 8. Financial Statements.
The Financial Statements of the Company, together with the reports
thereon of Argy, Wiltse & Robinson, P.C. dated March 8, 2002 are listed in Item
14(a)(1) and are included at the end of this Report on Form 10-K, beginning on
page F-1, and are incorporated herein by reference.
Part III
Item 9. Directors and Executive Officers of the Registrant.
The information required by Item 9 will be contained in the Company's
Proxy Statement for the 2002 Annual Meeting of Stockholders under the captions
"Directors and Nominees" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934."
Item 10. Executive Compensation.
The information required by Item 10 will be contained in the Company's
Proxy Statement for the 2002 Annual Meeting of Stockholders under the caption
"Executive Compensation", and is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 11 will be contained in the Company's
Proxy Statement for the 2002 Annual Meeting of Stockholders under the caption
"Common Stock Ownership of Certain Beneficial Owners and Management", and is
incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information required by Item 12 will be contained in the Company's
Proxy Statement for the 2002 Annual Meeting of Stockholders under the caption
"Compensation Committee Interlocks and Insider Participation and Certain
Transactions", and is incorporated herein by reference.
Part IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) List of Financial Statements. The following is a list of the
financial statements included at the end of this Report of Form 10-KSB beginning
on page F-1:
Reports of Independent Certified Public Accountants
Balance Sheets as of December 31, 2001 and 2000
Statements of Operations for the Years Ended December 31, 2001 and 2000
Statement of Stockholders' Equity for the Years Ended December 31, 2001
and 2000
Statements of Cash Flows for the Years Ended December 31, 2001
and 2000
Notes to Financial Statements
(2) List of Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable or not
required, or the required information is provided in the financial statements or
notes thereto.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K on December 13, 2000 to report a change
in its independent public accountants under Item 4 of the report. The Company
filed a report on Form 8-K on December 15, 2000 to report its merger with SSI.
The report was amended on February 13, 2001. The Company filed a report on Form
8-K on February 23, 2001 to report a change in its independent public
accountants. The report was amended on February 27, 2001.
(c) List of Exhibits. The following is a list of exhibits furnished.
Copies of exhibits will be furnished upon written request of any stockholder at
a charge of $0.25 per page plus postage.
Exhibit
Number Exhibits
3.1 Form of Restated Certificate of Incorporation1
3.2 Form of Bylaws1
4 Form of Rights Agreement1
10.1 Stock Option Plan1
10.2 Employment Agreement with Ronald C. Thomas1
10.4 Consulting Agreement with Wirt D. Walker, III1
23.2 Consent of Argy, Wiltse & Robinson, P.C.
1 Filed as an exhibit of the same number to the Company's registration
statement on Form S-1 (File No. 333-26439) and incorporated by reference.
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
Pursuant to the requirements of the Securities Act of 1933, the
following persons in the capacities and on the dates indicated have signed this
registration statement.
Signature Title Date
/s/ BARRY W. MCDANIEL Co-President/Chief Executive Officer April 12, 2002
-------------------------------------- (Principal Executive Officer)
Barry W. McDaniel
/s/ WIRT D. WALKER, III Chairman and Director April 12, 2002
--------------------------------------
Wirt D. Walker, III
/s/ ALBERT V. GRAVES Chief Financial Officer April 12, 2002
-------------------------------------- (Principal Accounting Officer)
Albert V. Graves
/s/ JAMES A. ABRAHAMSON Director April 12, 2002
--------------------------------------
James A. Abrahamson
/s/ CHARLES W. ARCHER Director April 12, 2002
--------------------------------------
Charles W. Archer
/s/ EMMIT J. MCHENRY Director April 12, 2002
--------------------------------------
Emmit J. McHenry
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 2000, and the result of its operations and its cash flows for the years 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 audits. We conducted our audits 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
audits provide a reasonable basis for the opinion expressed above.
We have also audited Schedule II of STRATESEC Incorporated for the years ended
December 31, 2001 and 2000. In our opinion, this schedule presents fairly, in
all material respects, the information required to be set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 2 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 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
McLean, Virginia
March 8, 2002
STRATESEC INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 238,201 $ 887,214
Accounts receivable, net of allowance for doubtful accounts of
$750,000 at 2001 and $350,000 at 2000 4,108,692 3,953,660
Costs and estimated earnings in excess of billings on uncompleted
contracts, net of allowance of $300,000 at 2001 and $0 at 2000 582,698 4,615,240
Inventory, net of allowance of $400,000 at 2001 and
$70,000 at 2000 190,606 370,882
Other current assets 70,728 45,150
--------------- ---------------
Total current assets 5,190,925 9,872,146
Property and equipment, net 483,904 675,913
Note receivable from stockholder, net 0 327,277
Deposits 121,764 124,068
--------------- ---------------
Total assets $ 5,796,593 $ 10,999,404
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,287,718 $ 3,120,396
Accrued expenses 304,961 1,020,746
Income taxes payable 955,954 1,245,000
Bank and other lines-of-credit 6,325,490 2,331,555
Billings in excess of costs and estimated earnings on uncompleted contracts 276,984 137,309
Capital lease obligations 22,615 69,642
--------------- ---------------
Total current liabilities 10,173,722 7,924,648
Capital lease obligations 0 22,616
--------------- ---------------
Total liabilities 10,173,722 7,947,264
--------------- ---------------
Stockholders' (deficit) equity
Common stock, $0.01 par value per share; 20,000,000 shares authorized;
10,401,471 issued and 10,392,550 outstanding shares at 2001, and 10,280,043
issued and 10,279,964 outstanding shares at
2000 104,015 102,800
Additional paid-in capital 24,363,700 24,279,914
Accumulated deficit (28,826,311) (21,330,410)
Less: treasury stock of 8,921 shares at 2001 and 79 shares at 2000, at cost (18,533) (164)
--------------- ---------------
Total stockholders' (deficit) equity (4,377,129) 3,052,140
Commitments
--------------- -----------------
Total liabilities and stockholders' equity $ 5,796,593 $ 10,999,404
================ ================
STRATESEC INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
--------------- ---------------
Revenue $ 9,077,330 $ 23,983,154
Cost of revenue (6,865,988) (15,374,922)
--------------- ---------------
Gross profit 2,211,342 8,608,232
Selling, general and administrative expenses (5,179,313) (6,492,352)
Bad debt expense (3,878,922) (687,027)
--------------- ---------------
Operating (loss) profit (6,846,893) 1,428,853
Interest and financing fees (1,148,563) (747,806)
Interest and other income 210,509 75,122
--------------- ---------------
(Loss) income before income taxes (7,784,947) 756,169
Benefit from (provision for) income taxes 289,046 (800,000)
--------------- ---------------
Net loss $ (7,495,901) $ (43,831)
=============== ===============
Basic and diluted net loss per share $ (0.73) $ (0.00)
================ ================
Weighted-average shares outstanding 10,290,162 10,026,501
=============== ===============
STRATESEC INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001 AND 2000
Common Stock Treasury Stock
------------------------- ------------------------ Additional Total
Paid-in- Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit (Deficit)
Equity
------------ ----------- --------- ----------- ------------ -------------- ----------
Balance at December 31, 1999 8,540,189 $ 85,402 98,000 $ (203,086) $ 21,686,907 $ (20,824,359) $ 1,151,036
Net loss 0 0 0 0 0 (43,831) (43,831)
Dividends paid 0 0 0 0 0 (462,220) (462,220)
Private placement of common stock 1,738,188 17,382 0 0 2,589,900 0 2,607,282
Sale of common stock 1,666 16 0 0 3,107 0 3,123
Purchase of treasury stock 0 0 (98,079) (203,250) 0 0 (203,250)
---------- ----------- --------- ----------- ------------ ------------- -----------
Balance at December 31, 2000 10,280,043 102,800 (79) (164) 24,279,914 (21,330,410) 3,052,140
Net loss 0 0 0 0 0 (7,495,901) (7,495,901)
Sale of common stock 121,428 1,215 0 0 83,786 0 85,001
Purchase of treasury stock 0 0 (8,842) (18,369) 0 0 (18,369)
---------- ----------- --------- ------------ ------------ ------------- -----------
Balance at December 31, 2001 10,401,471 $ 104,015 (8,921) $ (18,533) $ 24,363,700 $ (28,826,311) $(4,377,129)
========== =========== ========= ============ ============ ============= ===========
STRATESEC INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
---------------- ----------------
Cash flows from operating activities:
Net loss $ (7,495,901) $ (43,831)
--------------- ---------------
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 257,535 280,228
Change in allowances for doubtful accounts, inventory obsolescence, and
note receivable, net 1,357,277 (295,000)
Deferred income taxes 0 (159,000)
(Increase) decrease in:
Accounts receivable (555,032) (1,207,286)
Costs and estimated earnings in excess of billings on uncompleted
contracts 3,732,542 (1,749,354)
Inventory (149,724) (154,979)
Other current assets (25,578) (35,804)
Increase (decrease) in:
Accounts payable (832,678) (157,720)
Accrued expenses (715,785) 301,073
Income taxes payable (289,046) 959,000
Billings in excess of costs and estimated earnings on uncompleted
contracts 139,675 (3,208,380)
-------------- --------------
Total adjustments 2,919,186 (5,427,222)
-------------- --------------
Net cash used in operating activities (4,576,715) (5,471,053)
-------------- --------------
Cash flows from investing activities:
Purchases of property and equipment, net (65,526) (156,470)
Decrease in deposits 2,304 508
-------------- --------------
Net cash used in investing activities (63,222) (155,962)
-------------- --------------
Cash flows from financing activities:
Net borrowings under bank and other lines-of-credit 3,993,935 1,560,023
Principal payments under capital lease obligations (69,643) (75,172)
Repurchase of common stock (18,369) (203,250)
Proceeds from the issuance of common stock 85,001 2,610,405
Dividend payments 0 (462,220)
-------------- --------------
Net cash provided by financing activities 3,990,924 3,429,786
-------------- --------------
Net decrease in cash and cash equivalents (649,013) (2,197,229)
Cash and cash equivalents at the beginning of the year 887,214 3,084,443
-------------- --------------
Cash and cash equivalents at the end of the year $ 238,201 $ 887,214
=============== ===============
STRATESEC INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of business and principles of consolidation
The accompanying financial statements include the accounts of STRATESEC
Incorporated (SFT) and its wholly-owned subsidiary, Security Systems
Integration, Inc. (SSI) (collectively referred to as the Company). SFT, formerly
known as Securacom Incorporated, is incorporated under the laws of the State of
Delaware to provide comprehensive security solutions for large commercial and
government facilities worldwide.
At December 31, 1996, SFT was approximately 91 percent owned by KuwAm
Corporation, two private investment partnerships (of which KuwAm serves as
general partner), Special Situations Investment Holdings, Ltd., and Special
Situations Investments Holdings L.P. II; and certain individual limited partners
of the investment partnerships (the KuwAm Group). On October 1, 1997, SFT
completed an initial public offering and sold 1,400,000 shares of common stock
and the KuwAm Group sold 808,000 shares of stock. At December 31, 2001 and 2000,
the KuwAm Group owned approximately 10 percent and 11 percent of the Company,
respectively.
On November 30, 2000, the Company acquired Security Systems Integration, Inc.
(SSI). To effect the combination, SSI merged into a newly organized wholly-owned
subsidiary of the Company (Note 3). SSI is a security systems company that
provides design, engineering, installation, maintenance, technical support, and
training services, primarily to the federal government.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Use of estimates
The preparation of consolidated 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 cash, money market funds and trade accounts
receivable. The Company places its cash and money market funds with high credit
quality institutions. In general, such investments exceed the FDIC insurance
limit.
The Company provides credit to its clients in the normal course of business. The
Company routinely assesses the financial strength of its clients and, as a
consequence, believes its trade accounts receivable exposure is limited.
The carrying value of financial instruments potentially subject to valuation
risk (principally consisting of cash, accounts receivable and accounts payable)
approximates fair market value.
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.
The asset "costs and estimated earnings in excess of billings on uncompleted
contracts" represents revenue recognized in excess of amounts billed to clients.
The liability "billings in excess of costs and estimated earnings on uncompleted
contracts" represents billings in excess of revenue recognized.
Cash equivalents
The Company considers all highly liquid instruments with original maturities of
three months or less to be cash equivalents.
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.
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
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 using enacted tax rates in effect for the year
in which the differences are expected to reverse. 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 and, if applicable, diluted
earnings per share. Basic EPS is based on weighted-average number of shares
outstanding without consideration of common stock equivalents. Diluted EPS is
based on the weighted-average number of common and common equivalent shares
outstanding. When dilutive, the calculation takes into account the shares that
may be issued upon exercise of stock options and warrants, reduced by the shares
that may be repurchased with the funds received from the exercise, based on the
average price during the year.
Stock options and warrants have not been included in the calculation of dilutive
earnings per share as their inclusion would be antidilutive.
NOTE 2 - OPERATIONS
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplates continuation of the Company as a going concern.
However, the Company has sustained substantial operating losses in recent years.
In addition, the Company has used substantial amounts of working capital in its
operations, financed primarily through over-line borrowing from its
line-of-credit with a financing company. Further, at December 31, 2001, current
liabilities exceed current assets by $4,982,797, and total liabilities exceed
total assets by $4,377,129.
In view of these matters, realization of a major portion of the assets in the
accompanying balance sheets is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements, and the success of its future operations. Management
believes that actions presently being taken to revise the Company's operating
and financial requirements provide the opportunity for the Company to continue
as a going concern.
NOTE 3 - BUSINESS COMBINATION
On November 30, 2000, the Company acquired Security Systems Integration, Inc.
(SSI) in a business combination accounted for as a pooling of interests. SSI
became a wholly-owned subsidiary of the Company through the exchange of
1,650,000 in newly-issued shares and 350,000 in treasury shares of the Company's
common stock for all of the outstanding stock of SSI. The accompanying financial
statements for 2000 are based on the assumption that SFT and SSI were combined
for the full year. Financial statements for prior years have been restated to
give effect to the combination.
Prior to the merger, SSI paid cash dividends of $462,220 ($0.05 per share) in
2000. Per share amounts are based on the equivalent number of common shares that
would have been outstanding during these years, after giving effect to the
pooling of interest in 2000.
Summarized results of operation of the separate companies for the period for
January 1, 2000 through September 30, 2000, the last completed quarter prior to
the date of acquisition, are as follows:
SFT SSI
--------------- ---------------
Net revenue $ 11,864,407 $ 6,869,531
=============== ===============
Net income $ 365,636 $ 1,215,931
================ ================
The summarized assets and liabilities of the separate companies on September 30,
2000, the last completed quarter prior to the date of acquisition, were as
follows:
SFT SSI
--------------- ---------------
Cash and cash equivalents $ 228,523 $ 67,667
Accounts receivable 4,237,962 1,063,929
Costs and estimated earnings in excess of billings on uncompleted
contracts 3,608,966 0
Other current assets 937,558 104,372
Property and equipment, net 525,413 214,733
Other assets 78,061 377,277
--------------- ---------------
Total assets 9,616,483 1,827,978
Current liabilities (5,558,426) (2,121,197)
Noncurrent liabilities (43,515) (18,759)
--------------- ---------------
Stockholders' equity (deficit) $ 4,014,542 $ (311,978)
=============== ===============
NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND BILLINGS
IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings in excess of billings on uncompleted contracts, as
well as the related billings in excess of costs and estimated earnings on
uncompleted contracts, represent revenue recognized on long-term fixed-price
contracts based on the percentage-of-completion method less the related billings
to date. Revenue recognized in excess of billing is included in the asset
balance and billings in excess of recognized revenue is included in the
liability balance.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
2001 2000
------------ --------------
Office furniture and equipment $ 632,348 $ 611,493
Computer equipment 449,100 441,857
Leasehold improvements 227,439 191,836
Vehicles 159,251 159,251
Computer software 65,519 63,694
------------ --------------
1,533,657 1,468,131
Less: accumulated depreciation
and amortization (1,049,753) (792,218)
------------ --------------
$ 483,904 $ 675,913
============ ===============
Equipment purchased under capital leases approximated $342,000 at December 31,
2001 and 2000. Accumulated depreciation on those assets approximated $323,000
and $272,000 at December 31, 2001 and 2000, respectively.
Depreciation and amortization expense on property and equipment (including
equipment under capital leases) was $257,535 and $280,228 for the years ended
December 31, 2001 and 2000, respectively.
NOTE 6 - NOTE RECEIVABLE FROM STOCKHOLDER
The note receivable from stockholder (with an original balance of $490,000) is
unsecured, with installments of principal and interest (at 7.0%) of $3,260 due
monthly through September 2029. No principal payments have been received during
the years ended December 31, 2001 or 2000. As such, the unpaid balance of
$327,277 has been fully reserved.
NOTE 7 - BANK AND OTHER LINES-OF-CREDIT
Bank and other lines-of-credit consists of the following at December 31:
2001 2000
---------------- ----------------
Line-of-credit with financing company (maximum amount of 80% of eligible
accounts receivable), 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 and inventory. At December 31, 2001 total
borrowings exceeded the allowable limit described above by $2,438,536. $ 6,325,490 $ 1,799,681
Bank line-of-credit (maximum amount of $450,000), due on demand with interest
at the bank's prime rate (4.75% at December 31, 2001). The line-of-credit
is secured by a certificate of deposit, and expires, if not
renewed, on May 31, 2002. 0 450,000
Bank line-of-credit (maximum amount of $100,000), due on demand, with
interest at the bank's prime rate plus 1.75% (6.5% at December 31, 2001)
due monthly. This line-of-credit is secured by equipment and machinery
and expired on March 5, 2002. 0 81,874
-------------- --------------
Total $ 6,325,490 $ 2,331,555
============== ==============
Interest expense related to the lines-of-credit, which approximated interest
paid, aggregated $462,512 and $447,806 for the years ended December 31, 2001 and
2000, respectively.
NOTE 8 - NOTES PAYABLE TO STOCKHOLDERS
During April 1998, the Company's board of directors approved issuance of up to
$2 million in convertible subordinated debentures in an effort to provide
additional working capital. In 1998, the Company sold $1,850,000 of these
debentures to related parties, with 185,000 warrants attached to purchase common
stock of the Company at $2.50 per share. The debentures bear interest at 10
percent semiannually. The value of the warrants was $71,393 at issuance and was
determined by the Company, using the Black-Scholes valuation model and was
recorded as additional paid-in capital. All 185,000 warrants were outstanding at
December 31, 2000 and expired in April 2001.
NOTE 9 - ACCRUED EXPENSES
Accrued expenses are summarized as follows at December 31:
2001 2000
----------- ----------
Accrued payroll and related liabilities $ 146,343 $ 228,669
Sales tax 94,795 111,666
Accrued interest and penalties 50,000 300,000
Legal judgment 0 262,290
Directors fees 0 17,500
Other 13,823 100,621
----------- ----------
$ 304,961 $ 1,020,746
============ ===========
NOTE 10 - RELATED PARTY TRANSACTIONS
During 2000, the Company sold 175,688 shares of common stock in a private
placement at a price of $1.50 per share to one related party.
During 2000, the Company entered into a noncancelable lease agreement with a
stockholder for office space in Springfield, Virginia. The lease agreement
provides for payments of $10,000 per month through December 31, 2005 and has
been included in the operating lease commitment schedule in Note 17.
During 2001, the Company issued warrants for the purchase of 400,000 shares of
its common stock (Note 11) to its financing company (Note 7).
NOTE 11 - STOCK WARRANTS
In conjunction with its initial public offering in 1997, the Company issued to
the underwriter, at a purchase price of $0.001 per warrant, warrants to purchase
up to an aggregate of 140,000 shares of common stock at an exercise price of
$13.18 per share, all of which were outstanding at December 31, 2000. These
warrants expired on October 7, 2001.
During 2001, the Company issued to its financing company (Note 7) warrants to
purchase 400,000 shares of common stock at a purchase price of $1 per share for
the first 200,000 shares and $0.70 per share for the remaining 200,000 shares.
The weighted average fair value of these warrants granted during 2001 is
estimated at $0.85 on the date of the grant. These warrants are all outstanding
at December 31, 2001 and, if not exercised, expire on December 31, 2002.
NOTE 12 - EMPLOYEE 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 1,950,000 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 (APB) Opinion 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 and earnings per
share as if the Company had accounted for its employee stock options, granted
subsequent to December 31, 1994, under the fair value method of that statement.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the vesting period. Under the fair value method, the
Company's net loss in 2001 would have increased by $445,000 or $0.04 per share
on a basic and diluted basis. Under the fair value method, the Company's net
loss in 2000 would have increased by $225,000 or $0.02 per share on a basic and
diluted basis.
The weighted-average fair value of the individual options granted during 2001
and 2000 is estimated as $0.70 and $1.61, respectively, on the date of grant.
The fair values were determined using a Black-Scholes option-pricing model with
the following assumptions:
2001 2000
----------- --------
Dividend yield 0% 0%
Volatility 350% 140%
Risk-free interest rate 3.10% 5.50%
Expected life 3 years 3 years
Stock option activity during the years ended December 31, 2001 and 2000 is
summarized below:
Weighted
Average
Number Exercise
of Shares Price
Outstanding at January 1, 2000 1,163,000 $ 1.84
Granted 873,000 2.03
Exercised (1,666) 1.88
Forfeited (126,334) 2.48
------------- ----------
Outstanding at December 31, 2000 1,908,000 1.92
Granted 895,000 0.70
Exercised 0 0.00
Forfeited (898,666) 2.04
------------- ----------
Outstanding at December 31, 2001 1,904,334 $ 1.29
============= ==========
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2001:
Weighted-Average
Remaining
Exercise Number Contractual Options
Price Outstanding Life (Years) Exercisable
-------------- ------------------- ------------------ ----------------
$ 1.500 48,000 0.75 31,999
1.875 223,000 0.05 148,667
1.250 145,000 0.50 96,666
1.500 385,000 1.93 128,333
2.750 175,000 1.50 58,333
3.000 33,334 1.25 11,111
0.700 895,000 2.62 0
NOTE 13 - INCOME TAXES
The Company's 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) income before income taxes due to the Company's merger with
SSI, for which an income tax provision has been provided based on its income
before income taxes, and to changes in SFT's valuation allowance, which has been
established for the net operating loss carryforwards and temporary differences
that are not presently considered likely to be realized. The benefit from income
taxes at December 31, 2001 relates to a change of estimate concerning the SSI
taxes payable, which was adjusted upon the completion of the related income tax
returns.
The benefit from (provision for) income taxes consists of the following for the
years ended December 31:
2001 2000
-------------- --------------
Current income taxes
Federal $ 242,799 $ (806,000)
State 46,247 (153,000)
Deferred income taxes
Federal 0 134,000
State 0 25,000
-------------- --------------
$ 289,046 $ (800,000)
============== ==============
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:
2001 2000
-------------- ---------------
Current assets and liabilities
Allowance for doubtful accounts $ 420,000 $ 140,000
Inventory allowance 160,000 28,000
Reserve for note receivable from stockholder 131,000 0
Accrued vacation pay and other 5,000 19,000
Provision for legal judgment 0 105,000
-------------- --------------
716,000 292,000
Valuation allowance (716,000) (292,000)
-------------- --------------
Net current deferred tax asset (liability) $ 0 $ 0
============== ==============
Noncurrent assets and liabilities
Depreciation $ (35,000) $ (39,000)
Net operating loss carryforward 11,115,000 8,422,000
-------------- --------------
11,080,000 8,383,000
Valuation allowance (11,080,000) (8,383,000)
-------------- --------------
Noncurrent deferred tax asset (liability) $ 0 $ 0
============== ==============
During the years ended December 31, 2001 and 2000, the valuation allowance
established for the net operating loss carryforwards and temporary differences
that are not presently considered likely to be realized were increased by
$3,121,000 and $453,000, respectively.
As of December 31, 2001, the Company has net operating loss carryforwards of
approximately $27,800,000, which will expire, if not utilized, in various years
through 2021. No income taxes were paid during the years ended December 31, 2001
and 2000.
The ability of the Company to utilize net operating losses of approximately $3.5
million, which were incurred prior to 1992, may be limited due to significant
ownership changes that have occurred since these losses were created.
The Company's initial public offering (IPO) also created an ownership change.
However, net operating losses of approximately $8.7 million incurred after 1992,
but before the IPO, are expected to be utilized, if sufficient income is
generated, before they expire.
NOTE 14 - RETIREMENT PLAN
The Company maintains a defined contribution 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 contributes an amount equal to 25% of the lesser of
each participant's voluntary contribution or 5% of his or her annual
compensation. Company contributions to the Plan vest to the participants ratably
over a two year period. Company contributions to the Plan were $11,500 and
$27,000, for the years ended December 31, 2001 and 2000, respectively.
NOTE 15 - EMPLOYMENT AND CONSULTING AGREEMENTS
The Company entered into a consulting agreement with its chairman (who is also
managing partner of KuwAm Corporation) which provides for an annual consulting
fee of $145,000 through March 31, 2002. As of February 1998, the annual
consulting fee under this agreement was reduced by 10 percent.
NOTE 16 - SIGNIFICANT CLIENTS
During the year ended December 31, 2001, contracts with three clients accounted
for approximately 33 percent, 6 percent and 4 percent of revenue. For the year
ended December 31, 2000, contracts with three clients accounted for
approximately 29 percent, 19 percent and 13 percent of revenue.
NOTE 17 - COMMITMENTS
The Company leases office space for its headquarters in Springfield, Virginia
and satellite facilities under the terms of noncancelable operating leases,
which expire at various dates through December 2005. The Company also leases
equipment and automobiles under the terms of capital lease agreements, which
expire at various dates through November 2002. The following is a schedule of
the future minimum lease payments required under capital and operating leases
that have initial or remaining terms in excess of one year as of December 31,
2001:
Capital Operating
Years ending December 31, Leases Leases
------------------------ ----------------- ----------------
2002 $ 25,813 $ 374,000
2003 0 364,000
2004 0 180,000
2005 0 169,000
-------------- --------------
Total minimum lease payments 25,813 $ 1,087,000
==============
Less: imputed interest (3,198)
--------------
Present value of minimum lease payments 22,615
Current portion of capital lease obligations (22,615)
-----------
Noncurrent portion of capital lease obligations $ 0
===========
Rent expense aggregated $376,000 and $287,000 for the years ended December 31,
2001 and 2000, respectively.
STRATESEC INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
Additions
-----------------------------
Balance Charged Charged Balance
at to Costs to Other at End
Beginning and Accounts Deductions of
Description of Period Expenses (describe) (describe) Period
----------- ------------- -------- --------- ------------- ----------
Year ended December 31, 2001
Allowance for doubtful accounts $ 350,000 $ 2,489,860 $ 0 $ (2,089,860)(A) $ 750,000
============ ============ ========== ============= ==========
Reserve for costs and estimated
earnings in excess of billings
on uncompleted contracts $ 0 $ 300,000 $ 0 $ 0 $ 300,000
============ ============ ========== ============= ==========
Inventory reserve $ 70,000 $ 330,000 $ 0 $ 0 $ 400,000
============ ============ ========== ============= ==========
Reserve on note receivable from
stockholder $ 0 $ 327,277 $ 0 $ 0 $ 327,277
============ ============ ========== ============= ==========
Year ended December 31, 2000
Allowance for doubtful accounts $ 675,000 $ 245,000 $ 0 $ (570,000)(A) $ 350,000
=========== ============ ========== ============= ==========
Inventory reserve $ 40,000 $ 30,000 $ 0 $ 0 $ 70,000
============ ============ ========== ============= ==========
--------
(A) Write-off of uncollectible accounts.