10-Q 2 form10q.txt FORM 10-Q FOR STRATESEC SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended March 31, 2001 Commission File Number: 1-13427 STRATESEC INCORPORATED State of Incorporation: Delaware I.R.S. Employer I.D.: 22-2817302 7544 Fullerton Court Springfield, Virginia 22153 (703) 912-9993 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes X No ------------ ----------------------- There were 10,026,501 shares of Common Stock, par value $0.01 per share, outstanding at May 11, 2001. 2 STRATESEC INCORPORATED Quarter ended March 31, 2001 Index Page Part I. Financial information Item 1. Financial Statements...........................................3 Balance Sheets as of December 31, 2000 and March 31, 2001 (unaudited).........................................................3 Statements of Operations for the three months ended March 31, 2000 and 2001 (unaudited).................................4 Statements of Cash Flows for the three months ended March 31, 2000 (unaudited)..........................................5 Notes to Financial Statements.......................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................7 Part II. Other information Item 6. Exhibits and Reports on Form 8-K.............................12 Signature..............................................................13 PART I. FINANCIAL INFORMATION Item 1. Financial Statements STRATESEC INCORPORATED BALANCE SHEETS

* Derived from audited financial statements as of December 31, 2000. STRATESEC INCORPORATED STATEMENTS OF OPERATIONS (Unaudited)

STRATESEC INCORPORATED STATEMENTS OF CASH FLOWS (Unaudited)

NOTES TO FINANCIAL STATEMENTS 1. Basis of Presentation The unaudited balance sheet as of March 31, 2001 and unaudited statement of operations and statement of cash flows for the three months ended March 31, 2000 and 2001 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, 2000 filed with the Securities and Exchange Commission on March 30, 2001. In the opinion of the Company, the unaudited financial statements at March 31, 2001 and for the three months ended March 31, 2000 and 2001 include all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for such periods. Results of operations for the three months ended March 31, 2001 are not necessarily indicative of results to be expected for the full year. On November 30, 2000, the Company acquired Security Systems Integration, Inc. (SSI) in a business combination accounted for as a pooling of interests. In the transaction, SSI merged with a wholly owned subsidiary of the Company, which then merged into the Company. The Company exchanged of 1,650,000 in newly-issued shares and 350,000 in treasury shares of its common stock for all of the outstanding stock of SSI. 2. Cost and Estimated Earnings on Uncompleted Contracts and Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts Cost and estimated earnings in excess of billings on uncompleted contracts, as well as the related billings in excess of costs and estimated earnings on uncompleted contracts, represent revenue recognized on long-term fixed-price contracts based on the percentage-of-completion method less the related billings to date. Revenue recognized in excess of billing is included in the asset balance and billings in excess of recognized revenue is included in the liability balance. 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. During the first quarter, STRATESEC Incorporated completed the consolidation of operations and facilities with Security Systems Integration Incorporated (SSI), with which it merged on December 1, 2000. This consolidation has resulted in significantly lower fixed overhead and improved operating efficiencies. As a result of the cost reductions, the overhead costs in succeeding quarters will be $400,000 less per quarter. The cost savings will be generated from a combination of overhead personnel reductions and reductions in indirect expenses. STRATESEC continues to build and diversify its commercial and government client base. Backlog, anticipated follow-on business from existing clients and pending projects currently exceed $30 million. STRATESEC is currently structured organizationally to do in excess of $30 million in annual revenue and yield 15% pretax profit margins. The Company's financial break-even point is approximately $13 million in annual revenue. STRATESEC Incorporated has grown significantly over the past three years. Annual revenues for 1998, 1999, and 2000 were $8.4 million, $14.7 million, and $23.7 million respectively. Future growth, to a large extent, will be dependent upon the Company's ability to secure appropriate working capital to finance the capital demands a sustained high rate of growth places upon a business. In this regard, the Company is currently in discussions with a number of financial institutions. The Company derives its revenues 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 revenues 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 percentage of earned revenues represented by certain items reflected in the Company's statements of operations: Three Months Ended March 31, 2000 2001 ---- ---- Earned revenues 100.0% 100.0% Cost of earned revenues 61.6 60.6 -------------- -------------- Gross profit 38.4 39.4 Selling, general and administrative expenses 31.7 33.5 -------------- -------------- Operating income (loss) 6.8 5.8 Other income (expense) (2.3) (2.3) -------------- -------------- Net income (loss) 4.4% 3.5% ============== ============== Three Months Ended March 31, 2001 Compared With Three Months Ended March 31, 2000 Revenues increased by 2% from $4.4 million in the three months ended March 31, 2000 to $4.5 million in the three months ended March 31, 2001. Revenue growth was restrained by the general slow down in the economy and by the need for additional working capital. The revenue in the quarter was comprised of 56% commercial work and 44% government projects. The majority of the revenue from government projects in the quarter resulted from substantial completion of two major projects. The Company has received verbal notification of a replacement project of similar size to these two projects and is awaiting formal notification. In addition, there are proposals outstanding for government projects totaling five times the amount of the two projects substantially completed in the first quarter. Commercial revenue resulted from partial completion of a large number of small to medium size projects. These projects will need to be replaced by the initiation of new projects from outstanding proposals and identified follow-on work from existing customers. Cost of earned revenues were $2.7 million in the three months ended March 31, 2000 and $2.7 million in the three months ended March 31, 2001. Gross margin increased from 39.1% in the 2000 period to 39.3% in 2001. Gross margins within the industry range from 30% to 40% indicating the Company has effective project cost controls in place. The Company expects to be able to maintain gross margins in the 35% to 40% range. Selling, general and administrative expenses increased 8.4% from $1.3 million in the three months ended March 31, 2000 to $1.5 million in the three months ended March 31, 2001. The increase was due primarily to the consolidation/merger expenses and the one-time termination and other fees associated with the merger. By the end of the quarter, the monthly recurring selling, general and administrative costs had been reduced by 40% of the combined overhead of SSI and STRATESEC prior to the merger. Interest expense and financing fees remained at $0.1 million in the three months ended March 31, 2001. New income decreased from $0.19 million in 2000 to net income of $0.15 million in 2001. Net income would have been significantly higher than the first quarter 2000 net income without the selling, general and administrative costs there were eliminated by the end of the quarter 2000. Liquidity and Capital Resources Through 1997, the Company funded its capital requirements with cash generated by operations, private equity offerings, and its initial public offering in October 1997. During April 1998, the Board of Directors approved the issuance of up to $2.0 million of convertible subordinated debentures to provide additional working capital. As of May 13, 1998, the Company had issued and sold $1,450,000 of debentures. The Company sold an additional $400,000 of debentures as of August 25,1998. The debentures have an interest rate of 10%, are due on December 31, 1999 and are convertible into common stock of the Company at $8.50 per share. In addition, the holders were issued 100 warrants for each $1,000 of investment with an exercise price of $2.50 and a term of three years. During February 1999, the $1.9 million the Company was required to post as collateral for a bond pending its appeal of a law suit 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, $1.8 million was received by the private placement and $1.05 million in the form of cash and a short-term note was received from the sale of a minority interests. 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. As of March 31, 2001 the Company had $0.8 million in unrestricted cash and working capital of $2.1 million. During the quarter the Company used its credit line as well as extending payables with vendors to provide the working capital required. As a result of extending payables, the Company has moved to a cash basis with several major vendors which will constrain revenue recognition until additional working capital is in place. The cash balances going forward will be reduced by the need to immediately fund the acquisition of materisl from vendors until outstanding payables can be reduced as a result of obtaining additional working capital. The Company is seeking additional financing to reduce outstanding aged accounts payable and to provide the working capital to fund the increase in sales projected for 2001. This Form 10-Q 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-Q that addresses 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 that actual results or developments may differ materially from those projected in such statements. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a. Exhibits 11.1 Calculation of Net Income Per Share b. Reports on Form 8-K. None Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STRATESEC INCORPORATED /s/ BARRY MCDANIEL Barry McDaniel President and Chief Operating Officer May 15, 2001

STRATESEC INC 10-Q