UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2002
Commission File Number: 1-13427
STRATESEC INCORPORATED
Delaware 22-2817302
State of Incorporation IRS Employer Identification No.
14360 Sullyfield Circle, Suite B, Chantilly, Virginia 20151
(703) 961-5683
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes [X] No [_]
There were 8,401,472 shares of Common Stock, par value $0.01 per share,
outstanding at August 7, 2002.
STRATESEC INCORPORATED
QUARTER ENDED JUNE 31, 2002
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001. 3
Statements of Operations (unaudited) for the three and six months ended June 30,
2002 and 2001. 4
Statements of Cash Flows (unaudited) for the three and six months ended June 30,
2002 and 2001. 5
Notes to the Financial Statements - June 30, 2002 (unaudited) 6
Item 2 Management's Discussion and analysis of Financial Condition and Results of
Operations 7 - 11
Part II
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 12
Signatures 13
Exhibits
Item 10.1. E.S. Bankest Lending agreement
Item 10.2. Exchange of assets
Item 11. Computation of Earnings per Share
Item 99. Certification of filing by officers
PAR T I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STRATESEC INCORPORATED
BALANCE SHEETS
(Unaudited)
June 30, 2002 December 31, 2001
Assets
Current Assets
Cash and cash equivalents $ 73,106 $ 238,201
Accounts receivable, net of allowance for doubtful accounts
of $683,680 in 2002 and $750,000 in 2001 1,701,142 4,108,692
Costs and estimated earnings in excess of billings on
uncompleted contracts 253,770 582,698
Inventory, net of allowance of $400,000 in 2002 and 2001 203,352 190,606
Other current assets 15,108 70,728
----------- -------------
Total current assets 2,246,478 5,190,925
Property and equipment, net 96,787 483,904
Other assets 35,000 121,764
----------- -------------
Total assets $ 2,378,265 $ 5,796,593
=========== =============
Liabilities and shareholders' deficit
Current liabilities
Accounts payable $ 1,481,684 $ 2,287,718
Accrued expenses and other 308,907 304,961
Income taxes payable 955,954 955,954
Bank and other lines of credit 7,742,926 6,325,490
Billings in excess of costs and estimated earnings on
uncompleted contracts 52,246 276,984
Capital lease obligations - 22,615
----------- -------------
Total current liabilities 10,541,717 10,173,722
----------- -------------
Shareholders' deficit
Common stock, $0.01 par value per share; authorized 20,000,000
shares; 8,392,550 shares issued and outstanding as of June 30,
2002; and 10,392,550 issued
and outstanding as of December 31, 2001 104,015 104,015
Treasury stock, 2,009,000 shares as of June 30, 2002
and 9,000 as of December 31, 2001 (212,088) (18,533)
Additional paid-in capital 24,363,700 24,363,700
Accumulated deficit (32,419,079) (28,826,311)
------------ ------------
Total shareholders deficit (8,163,452) (4,377,129)
----------- -----------
Total liabilities and shareholders' deficit $ 2,378,265 $ 5,796,593
=========== ===========
The accompanying notes are an integral part of these statements.
STRATESEC INCORPORATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues $ 557,814 $ 1,688,322 $1,204,736 $ 6,150,126
Cost of revenues 447,850 1,397,257 1,031,681 4,105,109
---------- ------------ ------------- --------------
Gross profit 109,964 291,065 173,055 2,045,017
Bad debt expense 975,139 2,200,000 975,139 2,200,000
Selling, general and administrative expenses 965,277 1,195,240 2,036,119 2,691,392
---------- ------------ ------------- --------------
1,940,416 3,395,240 3,011,258 4,892,392
Operating loss (1,830,452) (3,104,175) (2,838,203) (2,846,375)
Interest and financing fees (416,251) (191,909) (754,564) (298,712)
Interest and other income - 3,234 - 5,336
---------- ------------ ------------- --------------
(416,251) (188,675) (754,564) (293,376)
---------- ------------ ------------- --------------
Net loss $ (2,246,703) $(3,292,850) $(3,592,767) $(3,139,751)
============= ============ ============ ============
Net loss per share - basic $ (0.24) $ (0.32) $ (0.36) $ (0.31)
========== ========== ========== ==========
Weighted average common shares outstanding - basic 9,676,197 10,279,964 10,036,831 10,279,964
========= ========== ========== ==========
The accompanying notes are an integral part of these statements.
STRATESEC INCORPORATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended Six Months Ended
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Cash flows from operating activities:
Net loss $(2,246,703) $(3,292,850) $(3,592,767) $(3,139,751)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 163,615 90,284 216,305 120,383
Provision for bad debts 975,139 2,200,000 975,139 2,200,000
Loss on disposition of property and equipment 43,101 - 43,101 -
Changes in operating assets and liabilities
Accounts receivable 1,685,506 1,118,059 1,526,411 714,248
Costs of estimated earnings in excess of
billings on uncompleted contracts (149,435) (538,314) 234,927 (1,347,375)
Inventory 30,666 233,422 (12,746) (209,778)
Other current assets 27,210 543,594 27,380 377,262
Other assets 36,764 5,323 36,764 3,804
Accounts payable (305,763) 97,412 (806,034) 222,498
Accrued expenses and other (388,037) (554,857) 20,162 (43,996)
Billings in excess of costs and estimated
earnings on uncompleted contracts
(117,739) - (224,738) -
--------- ---------- --------- --------------
Net cash used by operating activities (245,676) (97,927) (1,556,096) (1,102,705)
Cash flows from investing activities
Acquisition of property and equipment - - (3,820) (27,856)
Cash flows from financing activities
Proceeds from line of credit 222,386 42,623 1,417,436 1,080,628
Principal payments on capital lease obligations (6,004) (25,221) (22,615) (25,221)
------- -------- -------- --------
Net cash provided by financing activities 216,382 17,402 1,394,821 1,055,407
------- ------ --------- ---------
Net increase (decrease) in cash and cash equivalents (29,294) (80,525) (165,095) (75,154)
Cash and cash equivalents at beginning of period 102,400 892,585 238,201 887,214
------- ------- ------- -------
Cash and cash equivalents at end of period $ 73,106 $ 812,060 $ 73,106 $ 812,060
========= ========= ========= =========
Supplemental disclosures of cash flow information
Interest paid $ - $ 114,889 $ - $ 219,762
======== ========= ======= =========
In May 2002, certain non-cash assets
and liabilities with a fair value of
$193,555 were exchanged in a reacquisition
of 2 million shares of treasury stock. $ 193,555 $ - $ 193,555 $ -
========== ======= ========= =======
The accompanying notes are an integral part of these statements.
NOTES TO FINANCIAL STATEMENTS
June 30, 2002
(unaudited)
1. BASIS OF PRESENTATION
The unaudited balance sheet as of June, 2002 and unaudited statement of
operations and statement of cash flows for the three and six months ended
June 30, 2001 and 2002 are condensed financial statements prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. Accordingly, they omit certain information included in complete
financial statements and should be read in conjunction with the financial
statements and notes included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001 filed with the Securities and Exchange
Commission on March 30, 2002.
In the opinion of the Company, the unaudited financial statements at June
30, 2002 and for the three and six months ended June, 2001 and 2002 include
all adjustments, consisting only of normal recurring adjustments necessary
for a fair presentation of the financial position and results of operations
for such periods. Results of operations for the three and six months ended
June 30, 2002 are not necessarily indicative of results to be expected for
the full year.
On November 30, 2000, the Company acquired Security Systems Integration,
Inc. (SSI) in a business combination accounted for as a pooling of
interests. In the transaction, SSI merged with a wholly owned subsidiary of
the Company, which then merged into the Company. The Company exchanged of
1,650,000 in newly-issued shares and 350,000 in treasury shares of its
common stock for all of the outstanding stock of SSI.
On May 29, 2002, the Company exchanged certain assets and liabilities with
a fair value of $193,555 to reacquire 2 million shares of Stratesec
Incorporated.
2. COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND BILLINGS IN EXCESS
OF COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Cost and estimated earnings in excess of billings on uncompleted contracts,
as well as the related billings in excess of costs and estimated earnings
on uncompleted contracts, represent revenue recognized on long-term
fixed-price contracts based on the percentage-of-completion method less the
related billings to date. Revenue recognized in excess of billing is
included in the asset balance and billings in excess of recognized revenue
is included in the liability balance.
3. Computation of Earnings per Share
For the three months ending For the six months ending
--------------------------- -------------------------
6/30/02 6/30/01 6/30/02 6/30/01
------- ------- ------- -------
Net Loss $(2,246,703) $(3,292,850) $(3,592,767) $(3,139,751)
Weighted Average Number of Common
Shares Outstanding 9,676,197 10,279,964 10,036,831 10,279,964
Net Loss per Share - Basic $ (0.24) $ (0.32) $ (0.36) $ (0.31)
========== ========== ========== ==========
4. Taxes payable
The Company presently owes the U.S. government approximately $812 thousand in
income taxes which are accrued and appear in the liability section of the
Balance Sheet. The Company has not accrued approximately $450 thousand in
interest and penalties. The Company believes that given its current
circumstances, it is probable that the Company will not have to pay the interest
and penalties. The Company has submitted an Offer in Compromise to the Internal
Revenue Service to settle the entire debt for $25,000. The Company feels that
given its circumstances, it is a reasonable offer and the IRS will accept it.
In addition, the Company owes the State of Virginia approximately $143 thousand
in income taxes and $176 thousand in sales tax which are accrued and appear in
the liability section of the Balance Sheet. The sales tax arises from sales to
the Federal government that are sales tax exempt in the State of Virginia. The
Company is presently exploring its options to appealing these taxes and to make
an Offer in Compromise, similar to its offer to the Internal Revenue Service.
Should the IRS or the State of Virginia not accept the Company's offer, there
would be a material adverse effect on the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis of the Company's financial condition and historical
results of operations should be read in conjunction with the condensed financial
statements and the related notes included elsewhere in this report.
OVERVIEW
The Company is a single-source provider of comprehensive, technology based
security solutions for medium and large commercial and government facilities in
the United States and abroad. The Company offers a broad range of services,
including: (i) consulting and planning; (ii) engineering and design; (iii)
systems integration; and (iv) maintenance and technical support.
The following plan addresses management's approach to improving the financial
condition of the Company.
Sales remained slow through the first half of 2002, averaging slightly under
$200,000 per month. This was below the $300,000 to $500,000 per month that the
Company expected. The reduction was due to a slower restart than anticipated in
the Company's Texas office and continued delays in contract awards. Due to the
continued lack of significant business from the Texas office, on July 31, 2002
the Company decided to discontinue installation operations in Texas. The Company
maintains its Texas office to continue consulting work with a small senior
staff.
The Company has shifted the focus of its Virginia office to concentrate totally
on U.S. Government business. The Company is actively searching for experienced
Government sales personnel to aggressively pursue the expected significant
increase in Federal security projects during the next Government fiscal year.
Should the Company not gain significant additional work from its Virginia
office, the Company may decide to cease security installation business in the
Virginia area.
The Company is aggressively pursuing business while simultaneously looking at
paring costs to our current level of business. These cost cuts look at the level
of personnel needed to work current and anticipated jobs. The Company has
continued its initiatives to reduce its overhead expenses to reduce its
breakeven point to match the reduced sales volume. The Company looks to be cash
flow neutral by the 4th quarter of 2002.
`
As of August 1, there are $2.4 million in projects on which the Company has been
informed that it is the vendor of choice, and there are $4.9 million more in
high probability proposals outstanding. The Company has contracts on $1.6
million of the $2.4 million, and has been verbally notified on the other $0.78
million of projects. The Company believes that all of the remaining $0.78
million will be awarded to the Company over the next 60 days if capital spending
by its customers resumes.
In order to lower costs and focus on the Company's primary business of physical
security consulting, design, and installation, the Company has narrowed its
focus to representing or providing software security products and services to a
very select set of products.
Critical Accounting Policies and Estimates
The financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America, which requires the Company
to make certain estimates and assumptions. A summary of significant accounting
policies is disclosed in Note 1 to the financial statements which are included
in the Company's annual report on Form 10-KSB for the year ended December 31,
2001. The following section is a summary of certain aspects of those accounting
policies that may require subjective or complex judgments and are most important
to the portrayal of Company's financial condition and results of operations. The
Company believes that there is a low probability that the use of different
estimates or assumptions in making these judgments would result in materially
different amounts being reported in the financial statements.
Revenue Recognition
The Company derives its revenue principally from long-term contracts, which are
generally on a fixed-price basis. Revenue on fixed-price contracts includes
direct costs and allocated indirect costs incurred plus recognized profit.
Revenue is recognized under fixed-price contracts on the
percentage-of-completion basis. The percentage of completion of individual
contracts includes management's best estimate of the amounts expected to be
realized on the contracts. It is at least reasonably possible that the amounts
the Company will ultimately realize could differ materially in the near term
from the amounts estimated in arriving at the earned revenue and costs and
estimated earnings in excess of billings on uncompleted contracts.
Contract costs include all direct material, direct labor and direct subcontract
costs. Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job
conditions and estimated profitability, including those arising from contract
revisions and final contract settlements, may result in revisions to costs and
income and are recognized in the period in which the revisions occur.
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.
RESULTS OF OPERATIONS
The following describes the Company's results of operations for the three and
six-month periods ended June 30, 2002 and 2001, as required by the SEC's
regulations. The Company believes, however, that information for sequential
quarterly periods is more meaningful in light of recent trends in its business
and has also has included such information in the tables and discussion that
follows.
THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH THREE AND SIX MONTHS
ENDED JUNE 30, 2001
Quarter Ended 6/30/02 3/31/02 12/31/01 9/30/01
------------- ------- ------- -------- -------
Revenue $ 557,814 $646,922 $1,232,554 $1,694,650
Revenue decrease as a percentage as 14% 48% 28% -
compared to the previous quarter
Revenue decreased for both the three and six month periods ended June 30, 2002
as compared to the prior year. Revenues from the last three consecutive quarters
has decreased but at a decreasing rate 28%, 48%, and 14% for the quarters ending
December 31, 2001, March 31, 2002 and June 30, 2002 respectively. The Company
has continued to suffer from the adverse economic conditions and the lack of
capital spending in the commercial sector. The Government sector revenue from
existing customers also declined dramatically and no new Government customers
have been added since the 1st quarter 2002.
Quarter Ended 6/30/02 3/31/02 12/31/01 9/30/01
------------- ------- ------- -------- -------
Revenue $557,814 $646,922 $ 1,232,554 $ 1,694,650
Cost of Revenue 447,850 583,831 1,735,449 1,025,430
Gross Profit $109,964 $ 63,091 $(502,895) $ 669,220
Gross Profit % 20% 10% (41)% 40%
Cost of revenue decreased for the three and six months ended June 30, 2002 as
compared to the periods ended June 30, 2001, primarily due to the decrease in
revenue. Gross margin for the six month period ended June 30, 2002 as compared
to June 30, 2001 decreased from 34% in 2001 to 15% in 2002. This was due to
aggressive bidding to win contracts and excess labor cost to complete several
contracts.
Gross Margins for the three month periods ended June 30, 2002 and 2001 were
approximately the same at 20% verses 18%, respectively. Gross margin percentages
for the quarters ended December 31 and September 30, 2001 are (41)% and 40%,
respectively. When the 3rd and 4th quarters are combined, there is a gross
profit margin of 6%. For these periods the gross margins were 6%, 10%, and 20%,
respectively. The Company believes gross margin percentages will continue to
increase toward our historical gross margin of 30%.
Quarter Ended 6/30/02 3/31/02 12/31/01 9/30/01
------------- ------- ------- -------- -------
Bad debt expense $ 975,139 $ - $1,878,922 $ (200,000)
Selling, General, and
Administrative expenses $965,277 $1,070,842 $1,035,394 $1,452,527
Interest expense $416,251 $338,313 $797,238 $52,613
Net Loss $2,246,703 $1,346,064 $3,925,189 $ 430,961
Net cash used in
operations $245,676 $1,310,420 $2,312,530 $1,161,480
Net borrowings $222,386 $1,195,050 $2,311,292 $602,015
Bad debt expense decreased for the three and six months ended June 30, 2002 as
compared to the three and six month periods June 30, 2001. The bad debt expense
in the second quarter 2002 reflects the total reserve of all WorldCom Inc.
receivables due to the Chapter 11 filing in July 2002 of WorldCom Inc. In
addition, reserves were added to reflect difficulties in collecting from a set
of customers with whom the Company no longer does business.
Selling, general and administrative expenses decreased by 28.4% from $1.5
million in the 3rd quarter 2001 to $1.0 million in the 2nd quarter 2002 due to
the Company's continued efforts to reduce overhead expenses and its break-even
point.
Interest expense and financing fees increased significantly in both the year
over year comparisons and quarter to quarter with the exception of the 4th
quarter 2001 which included a large back interest accrual due to a higher rater
effective July 1, 2001. The increase was due to the increased use of line of
credit and increase rate of interest.
Net loss decreased for the second quarter 2002 as compared to 2001. The increase
in the net loss for the 2nd quarter 2002 as compared to the 1st quarter is due
to the increase in bad debts. The 1st half 2002 net loss is greater than the
same period in 2001 due to a significant reduction in gross profit. The 1st half
2002 net loss is significantly less then the 2nd half of 2001 due primarily to a
reduction in selling, general, and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are increased working capital
needed to support the rebuild of the Company. The Company currently is funding
its working capital requirements with cash generated by operations and a
receivables factoring facility with a financial institution. The Company is
seeking additional financing to reduce outstanding aged accounts payable and to
provide the working capital to fund the sales projected for 2002. If it is
unable to obtain additional financing, its ability to obtain new business and
increase revenue may be limited and its ability to continue as a going concern
is in doubt.
The Company's lender E.S. Bankest is a finance company which has the financial
capacity to fund the all the Company's financing needs. Bankest has shown a
great deal of flexibility in working with the Company's in meeting the Company's
continuing working capital needs. However, Bankest has made no firm commitment
to continue to fund the Company and there can be no assurance that Bankest will
continue to fund the working capital needs of the Company.
The Company is currently in merger negotiations with a privately held,
profitable information security company. There is no definitive agreement at
this time with this company and there can be no assurance an agreement will be
reached. Forward-Looking Statements
This Form 10-QSB 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.
PART II. OTHER INFORMATION
ITEM 5. Other Information
Delisting of Securities from American Stock Exchange
Stratesec, Incorporated received notice on July 18, 2002, from the
American Stock Exchange staff that the Company no longer complies with
the Exchange's continued listing guidelines due to recurring losses and
stockholders' equity and that its securities are, therefore, subject to
being delisted from the Exchange. The Company fails to meet the
following listing standards as established by the American Stock
Exchange:
o Stockholders' equity is less than $2 million and it has sustained
losses from continuing operations and/or net losses in two of its
three most recent fiscal years.
o Stockholders' equity is less than $4 million and it has sustained
losses from continuing operations and/or net losses in three of
its four most recent fiscal years.
o The opinion of the Company's prior auditors, Argy, Wiltse and
Robinson, LLP, that the Company's recurring losses from operations
and net capital deficiencies raises substantial doubt about the
Company's ability to continue as a going concern.
Stratesec has appealed the determination and has requested a hearing
before the Committee of the Exchange. There can be no assurance that
the Company's request for continued listing will be granted. Stratesec
is currently in merger negotiations with a privately held, profitable
information security company. If the merger is consummated Stratesec
believes it will comply with AMEX listing requirements. There is no
definitive agreement at this time with this company and there can be no
assurance an agreement will be reached.
Should the Company be delisted by the American Stock Exchange, the
Company believes it is eligible to trade on the BBX, OTC Bulletin Board
(OTCBB). The Company believes that the exchange on which the Company's
shares are traded does not affect the market value or intrinsic value
of the Company's business.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10. Material Contracts
10.1 Revised Line of Credit Agreement with E.S. Bankest,
signed 6/15/02
10.2 Agreement to exchange assets and liabilities for 2
million shares of Stratesec Incorporated.
11. Calculation of Net Income per Share
99. Other exhibits
Certifications of filing by officers
b. Reports on Form 8-K.
The forms 8-K listed below are hereby incorporated by reference.
o May 31, 2002
o July 19, 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STRATESEC INCORPORATED
/s/ BARRY MCDANIEL
-------------------------
Barry McDaniel
President and Chief Executive Officer
/s/ RICHARD ROOMBERG
-------------------------
Richard Roomberg
Executive Vice President, Chief Operating Officer,
and Chief Financial Officer
August 14, 2002