SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement |_| Confidential, For Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Stratesec Incorporated
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box): [X] No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
|_| Fee paid previously with preliminary materials:
|_| Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
STRATESEC INCORPORATED
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
August 15, 2001
The 2001 Annual Meeting of the Shareholders of STRATESEC Incorporated,
a Delaware corporation (the "Company"), will be held on August 15, 2001 at 2:00
p.m. local time at 2600 Virginia Avenue, N.W., Suite 900, Washington, D.C. for
the following purposes:
1. To elect a Board of seven Directors.
2. To ratify the Company's issuance of 2,000,000 restricted shares of
common stock in connection with the acquisition of Security
Systems Integration, Inc.
3. To approve an amendment to the Company's 1997 Stock Option Plan
that would increase the number of shares of Common Stock
reserved for issuance thereunder.
4. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
These items of business are more fully described in the Proxy Statement
accompanying this Notice.
Only shareholders of record at the close of business on June 25, 2001
are entitled to notice of and to vote at the meeting.
A majority of the Company's outstanding shares must be represented at
the meeting (in person or by proxy) to transact business. To assure proper
representation at the meeting, please mark, sign, and date the enclosed proxy
and mail it promptly in the enclosed self-addressed envelope. Your proxy will
not be used if you revoke such proxy either before or at the meeting.
Nassima Briggs
Secretary
Dated: July 11, 2001
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
IF YOU ARE UNABLE TO BE PERSONALLY PRESENT, PLEASE SIGN AND DATE THE ENCLOSED
PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
--------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT.
STRATESEC INCORPORATED
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
The enclosed proxy is solicited on behalf of the Board of Directors of
STRATESEC Incorporated (the "Company") for use at the Annual Meeting of
Shareholders to be held August 15, 2001 at 2:00 p.m. local time, or at any
adjournment or postponement thereof. The Annual Meeting will be held at 2600
Virginia Avenue, N.W., Suite 900, Washington, D.C. The Company's principal
offices are located at 7544 Fullerton Court, Springfield, Virginia, 22153, and
its telephone number is (703) 912-9993. These proxy solicitation materials will
be mailed to shareholders on or about July 11, 2001.
Shareholders of record at the close of business on June 25, 2001 are
entitled to notice of, and to vote at, the Annual Meeting. On June 25, 2001,
10,026,501 shares of the Company's Common Stock were issued and outstanding.
Each share of Common Stock outstanding on the record date is entitled to one
vote.
Votes Required for Approval
The seven nominees for director receiving a plurality of the votes cast
at the meeting in person or by proxy shall be elected.
The other matters will be approved if a majority of the votes cast at
the meeting approve the action. Abstentions and broker non-votes will not be
treated as votes cast and therefore will have no effect on the outcome of the
matters to be voted on at the Annual Meeting.
Any person may revoke a proxy at any time before its use by delivering
to the Company a written revocation or a duly executed proxy bearing a later
date or by attending the meeting and voting in person.
The costs of this solicitation will be borne by the Company. These
costs represent amounts normally expended for a solicitation for an election of
directors. The Company may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation material to such beneficial owners. Proxies may also be solicited
by certain of the Company's directors, officers and regular employees, without
additional compensation, personally, by telephone or otherwise.
Deadline for Receipt of Shareholder Proposals for 2002 Annual Meeting
Proposals of shareholders intended to be included in the Company's
proxy materials for its 2002 Annual Meeting must be received by the Company no
later than February 25, 2002. If a shareholder intends to submit a proposal at
the 2002 Annual Meeting that is not eligible for inclusion in the proxy
materials relating to that meeting, the stockholder must do so no later than May
10, 2002. If the stockholder fails to comply with this notice provision, the
proxy holders will be allowed to use their discretionary voting authority when
and if the proposal is raised at the 2002 Annual Meeting. Such proposals should
be addressed to: Secretary, STRATESEC Incorporated, 2600 Virginia Avenue, N.W.,
Suite 900, Washington, D.C. 20037.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of May 31, 2001 certain information
with respect to the beneficial ownership of the Company's Common Stock by (i)
each person known by the Company to be the beneficial owner of more than 5% of
the Company's voting securities, (ii) each of the Company's directors, (iii)
each of the Named Executive Officers, and (iv) all executive officers and
directors of the Company as a group.
Number Percent
of Shares (7) of Total
KuwAm Corporation 204,562 2.0%
2600 Virginia Avenue, N.W.
Washington, D.C. 20037 (1)
NetCom Solutions International, Inc. 700,000 7.0%
Wirt D. Walker, III (2)(3) 681,153 6.8%
Kamran Hashemi (4) 2,000,000 19.9%
Barry W. McDaniel (3) 95,000 *
Ronald C. Thomas (3) 133,164 1.3%
Albert Van Graves (3) 63,333 *
R. Michael Lagow (3) 43,333 *
Mishal Yousef Saud Al Sabah (3)(5) 250,326 2.5%
Emmit J. McHenry (3)(6) 705,000 7.0%
Robert B. Smith, Jr. (3) 25,000 *
James A. Abrahamson (3) 25,000 *
Charles W. Archer (3) 25,000 *
All Officers and Directors as a Group (11 persons) (7) 4,046,309 40.4%
-----------------------
* Less than one percent
(1) KuwAm Corporation is a Washington, D.C. based private investment firm. The
shareholders of KuwAm include Wirt D. Walker, III, the Chairman of the
Board of Directors of the Company, and Mishal Yousef Saud Al Sabah, a
director of the Company. Mr. Walker is also the Managing Director of KuwAm
and Mr. Al Sabah is the Chairman of KuwAm.
(2) Consists of 411,153 shares held by Mr. Walker, 28,000 shares held by Mr.
Walker's son, 50,000 shares owned by a trust for Mr. Walker's son, of which
Mr. Walker is the trustee, and 127,000 shares owned by a trust for Mr.
Walker's mother, of which Mr. Walker is also a trustee.
(3) Includes shares issuable upon exercise of options that are exercisable
within 60 days, as follows: Mr. Walker, 65,000 shares; Mr. McDaniel, 80,000
shares; Mr. Al Sabah, 25,000 shares; Mr. McHenry, 5,000 shares; Mr. Smith,
25,000 shares; Lt. Gen. Abrahamson, 25,000 shares; Mr. Archer, 25,000
shares; Mr. Van Graves, 63,333 shares; Mr. Lagow, 43,333 shares; and Mr.
Thomas, 26,667 shares.
(4) Consists of shares acquired by Mr. Hashemi through the Company's
acquisition of Security Systems Integration, Incorporated, of which Mr.
Hashemi is the founder, President and CEO.
(5) Consists of 222,266 shares held by Fifth Floor Company for General Trading
and Contracting, of which Mr. Al Sabah is a principal, and 3,060 shares
owned by Mr. Al Sabah's son.
(6) Includes shares held by NetCom Solutions International, Inc., of which Mr.
McHenry is the founder, President and CEO.
(7) At May 31, 2001, executive officers and directors of the Company as a group
held options to purchase an aggregate of 920,000 shares of Common Stock,
representing approximately 62.4% of outstanding options at that date. The
numbers set forth in this table include an aggregate of 383,333 shares
underlying options that are currently exercisable within 60 days of such
date.
PROPOSAL ONE
ELECTION OF DIRECTORS
Nominees
A board of seven directors is to be elected at the Annual Meeting.
Unless marked to the contrary, all properly signed and returned proxies will be
voted for the election of management's seven nominees named below, all of whom
are presently directors of the Company. If any nominee is unable or declines to
serve as a director at the time of the Annual Meeting, the proxies will be voted
for any nominee designated by the present Board of Directors to fill the
vacancy. The Company is not aware of any nominee who will be unable or will
decline to serve as a director. The term of office of each person elected as a
director will continue until the next Annual Meeting of Shareholders or until a
successor has been elected and qualified.
The following sets forth certain information regarding each of the
nominees for election as director:
Wirt D. Walker, III, age 55, has served as Chief Executive Officer of
the Company since January 1999; he has served as a director of the Company since
1987, and as Chairman of the Board of Directors since 1992. Since 1982, Mr.
Walker has served as a director and the Managing Director of KuwAm Corporation,
a private investment firm. He is the Chairman and Chief Executive Officer of
Aviation General, Incorporated, a publicly traded holding company with two
wholly-owned subsidiaries: Commander Aircraft Company, which manufactures,
markets and provides support services for its line of single engine, high
performance Commander aircraft and provides consulting, brokerage and
refurbishment services for piston aircraft, and Strategic Jet Services, Inc.,
which provides consulting, brokerage and refurbishment services for jet
aircraft.
Kamran Hashemi, age 47, has served as Chief Executive Officer of the
Government Services division and as a director since December 2000. Prior to
joining the Company, Mr. Hashemi served as President of Security Systems
Integration, Incorporated from 1998 to 2000. From 1983 to 1998, he was employed
by Radian, Inc., as Director, Physical Security Equipment Group, from 1988 to
1998, and as Project Engineer, from 1983 to 1987.
Barry W. McDaniel, age 52, has served as Chief Executive Officer of the
Commercial Services division since December 2000, and as a director since
January 1999. Prior to joining the Company in 1998 as its Chief Operating
Officer, Mr. McDaniel was employed by BDM International from 1989 to 1998, most
recently as Vice President of Material Distribution and Management Systems. From
1989 to 1992 he was Vice President, Business Development and Operations for the
Systems and Communications Group. Mr. McDaniel was previously employed, from
1988 to 1989, by Proxim, a real-time systems integration company as Vice
President, Government Systems Integration. From 1970 to 1987, he was employed by
the U.S. Government with his last assignment as a member of the Senior Executive
Service (SES), serving as Deputy Director of Readiness for the United States
Army Materiel Command.
Charles W. Archer, age 55, has served as a director since March 1998.
Mr. Archer has been Vice President, Strategic Development for Litton/PRC since
January 1999. Mr. Archer served as the Company's President and Chief Executive
Officer from March 1998 to January 1999. Prior to 1998, Mr. Archer was employed
for 27 years by the Federal Bureau of Investigation (F.B.I.). During his tenure
with the F.B.I., Mr. Archer held a variety of management positions involving
large integrated technology projects and finance. From 1996 to 1997, he was an
Assistant Director of the F.B.I., in charge of its Criminal Justice Information
Services Division, the F.B.I.'s largest division.
Robert B. Smith, Jr., age 64, has served as a director of the Company
since 1995. Mr. Smith has been a private investor since 1984, and has been a
director of Sunshine Mining Company, a New York Stock Exchange listed silver
mining company, since 1993. He has been a trustee for the Dalkon Shield
Claimants Trust, a public interest trust created to compensate those damaged by
the Dalkon Shield, since 1989. Mr. Smith was formerly Chief Counsel and Staff
Director of the Senate Government Operations Committee.
Lt. General James A. Abrahamson, USAF (Retired), age 67, has served as
a director of the Company since December 1997. General Abrahamson has been the
Chairman and CEO of International Air Safety, LLC since November 1996. He served
as Chairman of the Board of Directors of Oracle Corporation from 1992 to 1995
and held various executive positions and served as a member of the board of
Hughes Aircraft Company from 1989 to 1992. General Abrahamson was formerly
Commissioner of the White House Commission on Aviation Safety and Security (Gore
Commission). Prior to 1989, General Abrahamson served in the United States Air
Force. During his tenure with the Air Force he held a variety of positions,
including Director of Development of the F-16 International Fighter, Director of
NASA's Space Shuttle Program and Director of President Reagan's Strategic
Defense Initiative ("Star Wars" Program).
Emmit J. McHenry, age 57, has served as a director of the Company since
March 2000. Mr. McHenry was the founder, and currently is the President and CEO
of NetCom Solutions International, Inc., an international telecommunications,
engineering, consulting, and technical services company. Prior to founding
NetCom Solutions International in 1995, Mr. McHenry was a founder of Network
Solutions, Inc., the internet domain services provider. In the past, Mr. McHenry
has held management positions with IBM, Connecticut General, Union Mutual, and
Allstate Insurance Company. He is an active member of the State Department's
Advisory Committee for International Communications and Information Policy and
serves as a Commissioner for the Fairfax County Economic Development Authority.
He is also a director of James Martin Government Intelligence and Global
Technology, L.L.C.
Director Compensation
Directors are paid an annual fee of $10,000, payable in equal quarterly
installments, for services as a director. Such fees are prorated when a director
does not serve for a full year. Directors receive no additional compensation for
committee participation or attendance at committee meetings, other than
reimbursement of travel and lodging expenses.
The 1997 Stock Option Plan provides for the automatic annual grant of a
stock option to purchase 15,000 shares of Common Stock to each eligible
non-employee and employee director of the Company; non-employee directors will
automatically receive a non-statutory stock option and employee directors will
automatically receive an incentive stock option.
Board Meetings and Committees
The Board of Directors held a total of three meetings during the fiscal
year ended December 31, 2000. The Board has two committees: the Audit Committee
and the Compensation Committee.
The Audit Committee, comprised of Directors Abrahamson, Archer and
Smith, recommends the selection of the Company's independent accountants and
approves the scope of the audit to be conducted. The Committee is primarily
responsible for reviewing and evaluating the Company's accounting practices and
its systems of internal accounting controls. The Audit Committee held one
meeting during fiscal year 2000.
The Compensation Committee recommends the amount and type of
compensation to be paid to the Company's executive officers, reviews the
performance of the Company's key employees and administers and determines
distributions under the Company's Profit Sharing Plan. The Compensation
Committee will also determine the number of shares, if any, to be granted each
employee under such plan and the terms of such grants. The Compensation
Committee held one meeting during fiscal year 2000. The members of the
Compensation Committee are Messrs. Abrahamson and Smith.
No director attended fewer than 75% of all meetings of the Board of
Directors held during fiscal 2000 or of all meetings of any committee upon which
such director served during fiscal 2000.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is comprised of Messrs. Abrahamson and
Smith; neither are employees of the Company. They are not eligible to
participate in the Company's Profit Sharing Plan. All receive compensation for
services as a director (see "Director Compensation").
Other Officers
R. Michael Lagow, age 42, has served as Executive Vice President since
January 2000. Mr. Lagow served in various executive positions with the company
from 1993 through 1999. Prior to joining the Company, Mr. Lagow was employed as
National Sales Manager of Control Systems International, a security systems
company, from 1991 to 1993. Prior to 1993, Mr. Lagow served as Vice President,
Network Security Corporation, developing and managing new markets for that
company.
Albert V. Graves, age 37, has served as Vice President of Finance since
June 1998. Prior to joining the Company, Mr. Graves was employed by Anadac
Corporation, most recently as its Corporate Controller. Previously, Mr. Graves
was employed from 1994 to 1998 as Accounting Manager at Titan Corporation, a
government contractor, and from 1991 to 1994 as Accounting Supervisor at
Technical Resources, Inc., a bio-medical and environmental consulting firm. Mr.
Graves has also served as an Accountant for Electronic Data Systems and Crestar
Bank.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows certain information concerning the
compensation of each of the Company's most highly compensated executive officers
for services rendered in all capacities to the Company for the fiscal years
ended 2000, 1999 and 1998 (the "Named Executive Officers").
Annual Compensation Long-Term Compensation
Securities
Underlying Other Annual
Awarded Options Compensation
Year Salary Bonus (in shares) (1)
--------------------------------------------------------------------
Wirt D. Walker, III........................... 2000 -- -- 35,000 $133,500 (2)
Chairman and Chief Executive Officer 1999 -- -- 65,000 $136,000 (2)
and Director 1998 -- -- 50,000 $148,680 (2)
Barry W. McDaniel............................. 2000 $150,000 -- 60,000 $7,500
President, Chief Executive Officer, 1999 $150,000 -- 90,000 $7,500
Commercial Services Division 1998 $132,692 -- 50,000
and Director
Ronald C. Thomas............................. 2000 $121,540 -- -- $18,000 (2)
Executive Vice President (3) 1999 $145,000 $3,000 25,000 $2,600
1998 $156,496 -- 65,000 $10,000
R. Michael Lagow............................. 2000 $125,000 -- 40,000 --
Executive Vice President 1999 $105,000 $21,000 65,000 --
1998 $ 90,000
----------------------
(1) Amounts paid as director fees unless otherwise indicated.
(2) Includes consulting fees paid.
(3) Mr. Thomas served as Executive Vice-President of the Company until
September 30, 2000, after which he entered into a consulting agreement with
the Company.
Option Grants in Last Fiscal Year
The Committee approved the following stock option grants for the
executive officers during fiscal year 2000.
Potential Realizable Value
Number Percent of at Assumed Annual Rates of
of Securities Total Options Stock Price Appreciation for
Underlying Granted to Option Term
Options Employees in
Granted (1) Fiscal Year Exercise Expiration
Price Date 5% 10%
------------------------------------------------------------------------------------------------------------------
Wirt D. Walker, III 35,000 6% $2.75 7/12/03 $15,171 $31,859
Barry W. McDaniel 60,000 10% $2.75 7/12/03 $26,008 $54,615
R. Michael Lagow 25,000 4% $2.75 7/12/03 $ 10,837 $22,756
15,000 3% $1.50 12/7/03 $ 3,547 $ 7,448
------ --
40,000 7%
------------------
(1) Each option is non-transferable; vests as to 33% of the shares covered
by such option over three years, commencing on the first anniversary of
the date of issuance; is canceled prior to vesting in the event the
holder either resigns from the Company or is terminated for justifiable
cause; and is void after the date listed under the heading "Expiration
Date." The exercise price of the stock subject to options was equal to
the market value on the date of grant. The number of shares issuable
upon exercise of each option is subject to adjustment subsequent to any
stock dividend, split-up, re-capitalization or certain other
transactions.
During 2000, Messrs. Walker and McDaniel were each granted an option to
purchase 15,000 shares of Common Stock for their services as a
director, pursuant to the 1997 Stock Option Plan.
Aggregated Option Exercises in Last Fiscal Year and Option Values as of December
31, 2000.
The following table shows the options exercised during fiscal 2000, the
number of shares of Common Stock represented by outstanding stock options held
by each executive officer as of December 31, 2000 and the value of such options
based on the closing price of the Company's Common Stock on December 31, 2000,
which was $2.25.
Number of Securities
Underlying Unexercised Value of Unexercised In-the-
Number of Options at FY End (#) (1) Money Options at FY End ($)(2)
------------------------- ------------------------------
Shares Acquired Value Exercisable/
Name On Exercise (#) Realized(3) Unexercisable Exercisable/Unexercisable
Wirt D. Walker, III --- --- 31,667/83,333 $0/0
Barry W. McDaniel --- --- 30,000/120,000 $0/0
Ronald C. Thomas --- --- 18,333/21,667 $0/0
Albert V. Graves --- --- 44,999/70,001 $0/0
R. Michael Lagow --- --- 21,666/83,334 $0/0
--------------
(1) Represents the total number of shares subject to stock options held by
each executive officer. These options were granted on various dates
during fiscal years 1998 through 2000 and are exercisable on various
dates beginning in 2000 and expiring in 2003.
(2) Represents the difference between the exercise price and $2.25, which
was the closing price on December 31, 2000. Stock option exercise
prices range from $1.25 to $2.75, therefore no options were in the
money at December 31, 2000.
(3) No options were exercised in 2000.
Employment and Consulting Agreements
The Company has entered into a consulting agreement with Mr. Walker, to
provide strategic and corporate development services through March 31, 2002 for
an annual fee of $126,000. The consulting agreement also contains provisions
parallel to those of the executive employment agreement.
The Company has also entered into a consulting agreement with Mr.
Thomas, starting October 1, 2000, to provide Business Development services for a
monthly fee of $6,000 plus commissions on sales renewable on a quarterly based
on performance.
BOARD AUDIT COMMITTEE REPORT
Under the guidance of a written charter adopted by the Board of
Directors, the Audit Committee is responsible for overseeing the Company's
financial reporting process on behalf of the Board of Directors. A copy of the
charter is included in Appendix A to this proxy statement.
Management has the primary responsibility for the system of internal
controls and the financial reporting process. The independent auditors have the
responsibility to express an opinion on the financial statements based on an
audit conducted in accordance with generally accepted auditing standards. The
Audit Committee has the responsibility to monitor and oversee these processes.
In fulfilling its responsibilities, the Audit Committee recommended to
the Board the selection of the Company's independent auditors, Argy, Wiltse &
Robinson, LLP. That firm has discussed with the Committee and provided written
disclosures on (1) that firm's independence as required by the Independence
Standards Board and (2) the matters required to be communicated under generally
accepted auditing standards.
The Committee reviewed with the independent auditors, and without
management present, the overall scope and specific plans for the respective
audits as well as the results of their examinations, their evaluation of the
Company's internal controls, and the overall quality, not just the
acceptability, of Aviation General's accounting and financial reporting.
Following these actions, the Committee recommended to the Board that
the audited financial statements be included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 for filing with the Securities
and Exchange Commission. The Audit Committee also recommended the selection of
Argy, Wiltse and Robinson, LLP as the Company's independent auditors for 2001.
Auditor Fees.
The fees billed to the Company by Argy, Wiltse & Robinson, LLP for
fiscal year 2000 were as follows:
Audit Fees. Argy, Wiltse & Robinson's fee for its audit of the
Company's annual financial statements and its review of the Company's quarterly
financial statements was $35,106.
Financial Information Systems Design and Implementation Fees. Argy,
Wiltse & Robinson did not provide any financial information systems design and
implementation services to the Company during 2000 and thus billed no fees for
such services.
Other Fees. Argy, Wiltse & Robinson billed the Company a total of
$11,058 for services rendered that are not described above.
The Committee has considered whether the provision of the services
included in the category "other fees" is compatible with maintaining Argy,
Wiltse & Robinson's independence.
Among the members of the Audit Committee, both Messrs. Smith, Jr. and
Abrahamson are considered "Independent" for purposes of the American Stock
Exchange listing standards. Mr. Archer served as President, CEO of the Company
until January 1999. The American Stock Exchange listing standards provide that a
Director who was an employee of the Company is not considered "Independent"
until three years following the termination of such employment. The Company
believes Mr. Archer is essential to the Audit Committee, because of his
knowledge of the Company and the Company's industry, and because of his
substantial experience in accounting and finance.
THE AUDIT COMMITTEE
CHARLES W. ARCHER
ROBERT B. SMITH, JR.
LT. GEN. JAMES A. ABRAHAMSON
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee")
is composed of Robert B. Smith, Jr. and Lt. General James A. Abrahamson. They
are independent outside directors. The Committee is charged with the
responsibility for reviewing the performance and approving the compensation of
key executives and for establishing general compensation policies and standards
for reviewing management performance. The Committee also reviews both corporate
and key executive performance in light of established criteria and goals and
approves individual key executive compensation.
Compensation Philosophy
The executive compensation philosophy of the Company is to provide
competitive levels of compensation that advance the Company's annual and
long-term performance objectives, reward corporate performance, and assist the
Company in attracting, retaining and motivating highly qualified executives. The
framework for the Committee's executive compensation programs is to establish
base salaries which are competitive to similarly sized companies and to create
incentives for excellent performance by providing executives with the
opportunity to earn additional remuneration linked to the Company's
profitability. The incentive plan goals are designed to improve the
effectiveness and enhance the efficiency of Company operations and to create
value for stockholders. It is also the Company's policy to encourage share
ownership by executive officers and non-employee directors through the grant of
stock options.
Components of Compensation
The compensation package of the Company's executive officers consists
of base annual salary, participation in the Company's 401(k) plan and stock
option grants.
At executive levels, base salaries are reviewed but not necessarily
increased annually. Base salaries are fixed at levels slightly below competitive
amounts paid to individuals with comparable qualifications, experience and
responsibilities engaged in similar businesses as the Company, based on the
experience of the Committee members, directors and employees of the Company
within the security systems industry.
The Company offers a 401(k) pre-tax employee savings plan to all
eligible employees. Employees may contribute 1% to 15% of pre-tax earnings up to
a maximum of $8,899. The Company contributes 25% of the first 5% of an
employee's contributed earnings or a maximum of 1.25% of an employee's total
earnings.
The Company uses stock options both to reward past performance and to
motivate future performance, especially long-term performance. The Committee
believes that through the use of stock options, executive interests are directly
tied to enhancing shareholder value. Stock options are granted at fair market
value as of the date of grant and generally have a term of three years. The
options vest 33% per year, beginning on the first anniversary date of the grant.
The stock options provide value to the recipients only when the market price of
the Company's Common Stock increases above the option grant price and only as
the shares vest and become exercisable.
Section 162(m) of the Internal Revenue Code, which provides for a
$1,000,000 limit on the deductibility of compensation, presently is not
applicable to the Company. The Committee will review its policy with respect to
Section 162(m) when and if the section is applicable in the future.
Compensation of Chief Executive Officer
The Committee makes decisions regarding the compensation of the Chief
Executive Officer using the same philosophy set forth above. The Committee's
approach in setting the Chief Executive Officer's compensation, as with that of
the Company's other executives, is to be competitive with other companies within
the industry, taking into consideration company size, operating conditions and
compensation philosophy and performance. Mr. Archer served as Chief Executive
Officer from April 1998 until January 1999, when Wirt D. Walker, III was
appointed to the position. Mr. Walker receives compensation of $126,000 pursuant
to a consulting agreement with the Company. He receives no additional
compensation for his services as Chief Executive Officer.
COMPENSATION COMMITTEE
ROBERT B. SMITH, JR.
LT. GEN. JAMES A. ABRAHAMSON
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and holders of more than ten percent
of the Company's Common Stock to file reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
The Company believes that during the fiscal year ended December 31, 2000, its
officers, directors and holders of more than 10% of the Company's Common Stock
complied with all Section 16(a) filing requirements.
PROPOSAL TWO
TO RATIFY THE COMPANY'S ISSUANCE OF 2,000,000 RESTRICTED SHARES OF COMMON STOCK
IN CONNECTION WITH THE ACQUISITION OF SECURITY SYSTEMS INTEGRATION, INC.
General
On November 30, 2000, STRATESEC acquired Security Systems Integration,
Inc., a Virginia corporation ("SSI") in a transaction in which SSI merged with a
subsidiary of STRATESEC and the subsidiary subsequently merged with the Company.
In connection with the transaction, the Company issued 2,000,000 restricted
shares of its common stock to the sole stockholder of SSI.
The transaction did not require the approval of STRATESEC stockholders
under Delaware corporate law. After the Company publicly announced the
transaction, however, the Company was contacted by a representative of the
American Stock Exchange who advised the Company that the transaction required
stockholder approval under the rules of the exchange because it resulted in an
increase of more than 20% in the outstanding common stock of the Company. The
Company had thought that that requirement did not apply because 350,000 of the
shares issued in the transaction were treasury shares that had previously been
listed on the exchange and the remaining 1,650,000 shares represented less than
a 20% increase. Following discussion of the matter with the AMEX representative,
the Company agreed to seek stockholder ratification of the transaction at its
2001 Annual Meeting.
Security Systems Integration, Inc.
SSI provides complete security systems to meet the complex requirements
of government customers. The services provided by SSI include vulnerability
analysis, engineering design, procurement, systems integration and maintenance
and technical support. The systems include:
o Access control systems, which are designed to exclude unauthorized
personnel from specified areas;
o Intrusion detection systems, which incorporate ultrasonic, microwave and
other sensors to protect against unauthorized entry into a facility;
o Closed circuit television systems, which monitor and record entry or
provide surveillance of designated areas and often include digital
recording capabilities for ease of review and transmission of the captured
data; and
o Personnel alerting systems, which provide wireless capability to transmit
voice or digital alerts to personnel of impending threats and allow
management the ability to tailor instructions to the specific threat.
SSI has in place contract vehicles with the federal government that
allow it to provide systems and services to the government without having to go
through a complete competition. These include a blanket contract with the
General Services Agency (GSA) and a Blanket Purchase Agreement (BPA) with the
Army. Each of these open-ended contracts can be used by any government agency
wishing to do business with SSI. As a result, the marketing and sales efforts of
SSI are considerably less than would be necessary if the entire competition
cycle had to be completed for every sale. SSI relies principally on its CEO and
Project Engineers and Project Managers to market and sell its systems and
services.
The principal clients of SSI are the United States Army, Air Force and
Navy as well as the Department of Justice. SSI has completed more than 60
systems for its clients since mid-1998. The Army accounted for over 50% of its
sales for the year 2000.
There are very few security system integrators doing business with the
government that offer the full range of services and geographical coverage
offered by SSI. Typically, there will be from one to five competitors on the
projects on which SSI is bidding. There is no single dominant provider of the
types of services that SSI provides to the government. One of the barriers to
entry in this market is the requirement to be able to provide classified systems
to the government. To provide classified systems the company must have personnel
with the proper security clearances and the company's facility must be cleared
by the appropriate agencies to protect sensitive information about the
government systems. Due to the high demand for cleared personnel, the schedule
for the government to do the appropriate investigations and grant clearances is
several months long.
SSI's backlog at the time of the acquisition was $3.8 million with
another $2.3 million in potential work already identified with existing
customers. There are also another $3.5 million of proposals awaiting decision.
The government business has continued to increase over the last few years in
response to recognized risk to government personnel, especially in overseas
locations. This growth in business is expected to continue to increase and the
government's budget for security is expected to grow significantly in 2001 and
2002.
SSI had 22 employees at the time of the acquisition. All of those
employees operated out of the Springfield, Virginia office. Of those employees,
six employees were involved in management, administration and marketing and the
remaining employees were engineers, program managers and technicians billable to
projects.
SSI's has been able to achieve relatively high profit margins on its
projects due to the size of the projects (typically $500,000 to several million
dollars), the short time schedule to complete the project (typically three to
six months) and the relatively low cost of materials. In addition, the
management/overhead burden is limited because of the low number of people
required to complete the projects and the low administration requirements of the
contract vehicles. The net profit for SSI prior to the merger was over 20% of
revenue.
Acquisition Terms
The terms of the acquisition were set forth in a merger agreement among
STRATESEC, SSI, and SSI's sole stockholder dated as of November 30, 2000 (the
"Agreement"), a copy of which is attached to this proxy statement as Appendix B.
Under the Agreement, SSI merged with a subsidiary of STRATESEC and the
subsidiary subsequently merged with STRATESEC. Kamran Hashemi, the sole
stockholder and Chief Executive Officer of SSI surrendered his shares of SSI
common stock and was issued certificates representing 2,000,000 shares of
STRATESEC common stock. Based upon the $1.50 per share market price of the
common stock at the time of the transaction, the shares issued in the
transaction had a value of $3 million. The shares of STRATESEC common stock
issued to Mr. Hashemi were not registered under the Securities Act of 1933, as
amended, and thus are subject to restrictions on transferability.
The Agreement included representations and warranties by both parties
and conditions to closing customary for a transaction of this nature. In
addition, it provided that at the effective time of the acquisition Mr. Hashemi
would be come President and Chief Executive Officer of the Company's Government
Services division and would be appointed to the Company's board of directors.
Mr. Hashemi was also granted options to purchase 200,000 shares of the Company's
common stock at an exercise price of $1.50 per share. At the effective time of
the acquisition the Company leased office space from Mr. Hashemi and
consolidated the operations of the combined company in that space. The Company
believes that the terms of the lease, which provides for monthly rent of
$10,000, are at least as favorable as those that would be available from a third
party.
Accounting Treatment
The acquisition of SSI was accounted for under the pooling-of-interests
method of accounting.
Federal Income Tax Consequences
The Company's acquisition of SSI will not have any federal income tax
consequences to the Company or its stockholders.
Reasons Why the Board Recommends a Vote FOR Proposal 2
The Board of Directors believes that the acquisition of SSI was in the
best interests of the Company because it added a government division that
complements the work that has previously been done by the Company, which has
been primarily commercial. In addition, it provides economies of scale because
it substantially increased the Company's customer base and revenue without a
corresponding increase in overhead costs. The Company is seeking stockholder
ratification of the issuance of the 2,000,000 shares of common stock in
connection with the acquisition of SSI in order to comply with the rules of the
American Stock Exchange. The Board of Directors recommends that stockholders
vote for the proposal so that the Company will have satisfied the concerns the
American Stock Exchange has raised in connection with the transaction.
Consequences if the Stockholders Fail to Ratify the Issuance of Stock in
Connection with the SSI Acquisition
If the Company's stockholders do not ratify the issuance of common
stock in connection with the SSI acquisition, the transaction will not be
rescinded. In such case, the Company may request that Mr. Hashemi restructure
the transaction in a manner that will satisfy the American Stock Exchange that
stockholder approval was not required. There can be no assurance, however, that
he would agree to amend the terms of the transaction or that the Company would
be able to satisfy the American Stock Exchange that approval of any amended
transaction was not required. As the Board of Directors believes that the SSI
acquisition and the issuance of common stock are in the best interests of the
Company, it has not held any discussions with Mr. Hashemi regarding any
amendment to the transaction. If stockholders do not ratify the issuance of
stock and an amendment to the transaction satisfactory to the American Stock
Exchange is not agreed upon, the Company could be subject to having its common
stock delisted from the American Stock Exchange.
Vote Required for Approval of Proposal 2
Approval of Proposal 2 requires the affirmative vote of the holders of
a majority of the shares represented in person or by proxy at the Annual
Meeting.
Financial Information Concerning the SSI Acquisition
This proxy statement includes as Appendix C certain historical
financial statements of SSI and financial statements of the Company that
reflect, under the pooling-of-interests method of accounting, the combined
operations of the Company and SSI.
PROPOSAL THREE
AMENDMENT OF 1997 STOCK OPTION PLAN
Introduction
In April 2001, the Board of Directors of the Company unanimously
approved a resolution, subject to shareholder approval, approving an amendment
to the Company's 1997 Stock Option Plan (the "Plan") to increase the number of
shares of Common Stock that may be issued pursuant to stock options granted
there under by 700,000 shares. Before giving effect to the proposed amendment,
426,000 shares of Common Stock remained available for issuance pursuant to
options granted under the Plan, which provides for the grant of options to
purchase up to 1,950,000 shares of Common Stock. Thus, this proposal would
increase the shares available for issuance pursuant to options granted under the
Plan to 1126,000 shares.
The Board of Directors recommends that shareholders vote for the
amendment of the Plan. The Board believes the Plan provides a means for key
employees and directors upon whose judgment and interest the Company is and will
be largely dependent for the successful conduct of its business to increase
their personal ownership interest in the Company. It is believed that such
incentive awards will further the identification of directors' and key
employees' interests with those of the Company's shareholders. Approximately 26
employees are eligible to participate in the Plan.
A summary of the Company's 1997 Stock Option Plan follows.
Eligibility
Directors and employees of the Company or any subsidiary of the Company
are eligible to receive stock options under the Plan. The Plan also provides
that both employee directors and non-employee directors are eligible for
automatic grants of options.
Administration
The Plan is administered by the Compensation Committee, which is
comprised of at least two non-employee directors of the Company. In addition to
having general supervisory and interpretive authority over the Plan, the
Committee determines, upon the recommendation of management and subject to the
terms and limits of the Plan, the employees, if any, to whom options will be
granted, the time at which options are to be granted, the number of shares to be
subject to each option, and the terms and conditions of exercise of options.
Award of Stock Options
Employees
Options to purchase shares of Common Stock granted to employees under
the Plan may be incentive stock options or non-statutory stock options.
Incentive stock options qualify for favorable income tax treatment under Code
Section 422, while non-statutory stock options do not. The exercise price of
shares of Common Stock covered by an incentive stock option may not be less than
100% (or, in the case of an incentive stock option granted to a 10% shareholder,
110%) of the fair market value of the Common Stock on the date of the option
grant. The option price of Common Stock covered by a non-statutory stock option
granted to an employee may not be less than 85% of the fair market value of the
Common Stock on the date of grant.
An incentive stock option shall be exercisable in any calendar year
only to the extent that the aggregate fair market value (determined at the date
of grant) of the Common Stock with respect to which incentive stock options are
exercisable for the first time during the calendar year does not exceed
$100,000.
Options may be exercised in whole or in part at such times as may be
specified by the Committee in the Participant's stock option agreement; provided
that, the provisions for incentive stock options shall meet certain requirements
set forth in the Plan.
Directors
Each eligible non-employee director and employee director of the
Company receives an option to purchase 15,000 shares of Common Stock following
the annual stockholders meeting.
The exercise price of these options is the market value of the Common
Stock on the date of grant, and they have a term of three years and one month
and become exercisable in three equal annual installments beginning on the first
anniversary of the date of grant.
General
Adjustments will be made in the number of shares which may be issued
under the Plan in the event of a future stock dividend, stock split or similar
pro rata change in the number of outstanding shares of Common Stock or the
future creation or issuance to shareholders generally of rights, options or
options for the purchase of Company Common Stock or preferred stock.
Exercise of Options
Generally, an option may only be exercised by payment of the full
purchase price in cash. If the option so provides, the option may be exercised
by delivering an exercise notice together with irrevocable instructions to a
broker to promptly deliver to the Company the amount of sale or loan proceeds
from the option shares to pay the exercise price.
Transferability of Stock Options
No option may be sold, transferred, pledged, or otherwise disposed of,
other than by will or by the laws of descent and distribution or pursuant to a
qualified domestic relations order. All rights granted to a participant under
the Plan shall be exercisable during his or her lifetime only by such
participant, or the participant's guardians or legal representatives. Upon the
death of a participant, his or her personal representative or beneficiary may
exercise the participant's rights under the Plan.
Amendment of the Plan and Stock Options
The Board of Directors may amend the Plan in such respects as it deems
advisable; provided that the shareholders of the Company must approve any
amendment for which shareholder approval is required by state or federal law,
exchange requirements, or the Internal Revenue Code.
Federal Income Tax Consequences
An employee or director will not incur federal income tax when he or
she is granted a stock option.
Upon exercise of a non-statutory stock option, an employee or director
generally will recognize ordinary income (which in the case of an employee is
subject to income tax withholding by the Company) equal to the difference
between the fair market value of the Common Stock on the date of the exercise
and the option price. When an employee exercises an incentive stock option, he
generally will not recognize income, unless he is subject to the alternative
minimum tax. Non-employee directors are not granted incentive stock options
under the Plan.
The Company usually will be entitled to a business expense deduction at
the time and in the amount that the recipient of an incentive award recognizes
ordinary compensation income in connection therewith. As stated above, this
usually occurs upon exercise of nonstatutory options or the sale or other
impermissible disposition of an incentive stock option before the applicable
holding period has expired. Generally, the Company's deduction is contingent
upon the Company's meeting withholding tax requirements as to employees;
however, tax legislation, enacted August 10, 1993, generally imposes a
$1,000,000 limitation on the amount of the annual compensation deduction
allowable to a publicly-held company in respect of its chief executive officer
and its four most highly paid officers. An exception is provided for certain
performance-based compensation if certain shareholder approval and outside
director requirements are satisfied. Because of certain interpretation issues
under the statutory provisions, and in the absence of Internal Revenue Service
regulations, there can be no assurance that any of the options granted under the
Plan will qualify for this exception. No deduction is allowed in connection with
an incentive stock option, unless the employee disposes of Common Stock received
upon exercise in violation of the holding period requirements.
This summary of Federal income tax consequences of non-statutory stock
options and incentive stock options does not purport to be complete. There may
also be state and local income taxes applicable to these transactions. Holders
of stock options should consult their own advisors with respect to the
application of the laws to them and to understand other tax consequences of the
awards including possible income deferral for insiders, alternative minimum tax
rules, taxes on parachute payments and the tax consequences of the sale of
shares acquired under this Plan.
Vote Required
Approval of the proposal to amend the Plan requires the affirmative
vote of the majority of the shares present in person or by proxy at the annual
meeting.
The Board of Directors recommends that you vote "for" the proposal to
amend the 1997 Stock Option Plan.
PERFORMANCE GRAPH
The Securities and Exchange Commission requires that the Company
include in this Proxy Statement a line-graph presentation comparing cumulative,
five-year shareholder returns on an indexed basis with (i) a broad equity market
index and (ii) either an industry index or peer group. An initial public
offering of the Company's stock occurred on October 2, 1997. The following graph
compares the percentage change in the cumulative total stockholder return on the
Company's Common Stock against the cumulative total return of the AMEX Market
Value Index and the Russell 2000 from October 2, 1997 through December 31, 2000.
Total return for the purpose of this graph assumes reinvestment of all
dividends, if any. The stock price performance shown on the graph is not
necessarily indicative of future price performance.
Cumulative Total Return
10/3/97 12/97 12/89 12/99 12/00
Stratesec, Inc. 100.0 114.71 17.65 16.92 26.47
Amex Market VA 100.0 100.23 107.58 137.43 141.22
Russell 2000 100.0 96.65 94.19 114.21 110.76
CERTAIN TRANSACTIONS
In December 2000, the Company entered into a lease agreement with Mr.
Kamran Hashemi for the lease of a building in Springfield, Virginia that the
Company uses as its principal offices. The terms of the lease, which provide a
monthly lease payment of $10,000, are as favorable as terms that would be
available from unrelated parties.
INDEPENDENT AUDITORS
The Board of Directors has approved a resolution retaining Argy, Wiltse
& Robinson, LLP as its independent auditors for fiscal 2001.
A representative of Argy, Wiltse & Robinson, LLP will be present at the
Annual Meeting and will have an opportunity at the meeting to make a statement
if he desires to do so and will be available to respond to appropriate
questions.
OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting.
If any other matters properly come before the meeting, it is the intention of
the persons named in the enclosed form of Proxy to vote the shares they
represent as the Board of Directors may recommend.
Dated: July 11, 2001
APPENDIX A
STRATESEC INCORPORATED
AUDIT COMMITTEE CHARTER
Organization
There shall be a committee of the board of directors (the "Board") to be known
as the audit committee (the "Committee") of STRATESEC Incorporated (the
"Corporation"). The Committee shall be composed of not less than three directors
who are independent of the management of the Corporation and are free of any
relationship that, in the opinion of the Board, would interfere with their
exercise of independent judgment as a Committee member. An "independent
director" means a person other than an officer or employee of the Corporation or
its subsidiaries or any other individual having a relationship that, in the
opinion of the Board, would interfere with the exercise of independent judgment
in carrying out the responsibilities of a director. The following persons shall
not be considered independent:
(a) a director who is or has been employed by the Corporation or any of its
affiliates for the current year or any of the past three years;
(b) a director who has accepted any compensation from the Corporation or any of
its affiliates in excess of $60,000 during the previous fiscal year, other
than compensation for Board service, benefits under a tax-qualified
retirement plan, or non-discretionary compensation;
(c) a director who is a member of the immediate family of an individual who is,
or has been in any of the past three years, employed by the Corporation or
any of its affiliates as an executive officer. Immediate family includes a
person's spouse, parents, children, siblings, mother-in-law, father-in-law,
brother-in-law, sister-in-law, son-in-law, daughter-in-law, and anyone who
resides in such person's home;
(d) a director who is a partner in, or a controlling shareholder or an
executive officer of, any for-profit business organization to which the
Corporation made, or from which the Corporation received, payments (other
than those arising solely from investments in the Corporation's securities)
that exceed 5% of the Corporation's or business organization's consolidated
gross revenues for that year, or $200,000, whichever is more, in any of the
past three years;
(e) a director who is employed as an executive of another entity where any of
the Corporation's executives serve on that entity's compensation committee.
All members of the Committee shall be able to read and understand fundamental
financial statements, and at least one member of the Committee shall have
accounting or have finance experience or professional certification in
accounting, or have other comparable experience or background. Committee members
may enhance their familiarity with finance and accounting by participating in
educational programs conducted by the Corporation or an outside consultant.
Under exceptional and limited circumstances, one non-independent director may
serve on the Committee, provided that the Board determines it to be in the best
interests of the Corporation and its shareholders, and the Board discloses the
reasons for the determination in the Corporation's next annual proxy statement.
Current employees or officers, or their immediate family members are not able to
serve on the Committee under this exception.
Statement of Policy
The Committee shall provide assistance to the corporate directors in fulfilling
their responsibility to the shareholders, potential shareholders, and investment
community relating to corporate accounting, reporting practices of the
Corporation, and the quality and integrity of the financial reports of the
Corporation. In so doing, it is the responsibility of the Committee to maintain
free and open means of communication between the directors, the independent
auditors, the internal auditors, and the financial management of the
Corporation. Moreover, it is the responsibility of the Committee to maintain the
outside auditor's accountability to the Board and the Committee, and to ensure
the independence of the outside auditor.
Responsibilities
In carrying out its responsibilities, the Committee believes its policies and
procedures should remain flexible, in order to best react to changing conditions
and to ensure to the directors and shareholders that the corporate accounting
and reporting practices of the Corporation are in accordance with all
requirements and are of the highest quality.
In carrying out these responsibilities, the audit committee will:
(a) Review and recommend to the directors the independent auditors to be
selected to audit the financial statements of the Corporation and its
divisions and subsidiaries.
(b) Meet with the independent auditors and financial management of the
Corporation to review the scope of the proposed audit for the current year
and the audit procedures to be utilized, and at the conclusion thereof
review such audit, including any comments or recommendations of the
independent auditors.
(c) Review with the independent auditors, the company's internal auditor, and
financial and accounting personnel, the adequacy and effectiveness of the
accounting and financial controls of the Corporation, and elicit any
recommendations for the improvement of such internal control procedures or
particular areas where new or more detailed controls or procedures are
desirable. Particular emphasis should be given to the adequacy of such
internal controls to expose any payments, transactions, or procedures that
might be deemed illegal or otherwise improper. Further, the Committee
periodically should review company policy statements to determine their
adherence to the code of conduct.
(d) Review the internal audit function of the Corporation including the
independence and authority of its reporting obligations, the proposed audit
plans for the coming year, and the coordination of such plans with the
independent auditors.
(e) Receive prior to each meeting a summary of findings from completed internal
audits and a progress report on the proposed internal audit plan, with
explanation for any deviations from the original plan.
(f) Review the financial statements contained in the annual report to
shareholders with management and the independent auditors to determine that
the independent auditors are satisfied with the disclosure and content of
the financial statements to be presented to the shareholders. Any changes
in accounting principles should be reviewed.
(g) Provide sufficient opportunity for the internal and independent auditors to
meet with the members of the Committee without members of management
present. Among the items to be discussed in these meetings are the
independent auditors' evaluation of the Corporation's financial,
accounting, and auditing personnel, and the cooperation that the
independent auditors received during the course of the audit.
(h) Review accounting and financial human resources and succession planning
within the Corporation.
(i) Submit the minutes of all meetings of the Committee to, or discuss the
matters discussed at each committee meeting with, the Board.
(j) Investigate any matter brought to its attention within the scope of its
duties, with the power to retain outside counsel for this purpose if, in
its judgment, that its appropriate.
(k) Ensure the receipt from the outside auditors of a formal written statement
delineating all relationships between the auditor and the company, and
actively engage in a dialogue with the auditor with respect to any
disclosed relationships or services that may impact the objectivity and
independence of the auditor and for taking, or recommending that the full
Board take, appropriate action to oversee the independence of the outside
auditor.
(l) Maintain the outside auditor's ultimate accountability to the Board and the
Committee, as representatives of the shareholders, and the ultimate
authority and responsibility of the Board and the Committee to select,
evaluate, and, where appropriate, replace the outside auditor (or to
nominate the outside auditor to be proposed for shareholder approval in any
proxy statement).
Implementation
The Board of the Corporation shall adopt this charter and certify with the
American Stock Exchange that such adoption has occurred by June 14, 2000. The
Board of the Corporation shall be in full compliance with the composition
requirements of this charter and shall certify such full compliance with the
American Stock Exchange by June 14, 2001.
APPENDIX B
AGREEMENT
THIS AGREEMENT is made and entered into this 30th day of November 2000
by and among STRATESEC, Incorporated, a Delaware corporation ("SFT"), Security
Systems Integration, Inc. a Virginia corporation ("SSI"), and Kamran Hashemi,
the holder of all of the outstanding common stock of SSI ("Hashemi").
RECITALS
WHEREAS, SFT is an integrated single-source security systems company
engaged in providing consulting and planning, engineering and design, systems
integration, and maintenance and technical support services to commercial and
government clients worldwide.
WHEREAS, SSI is engaged in the design, engineering, installation,
maintenance, technical support services and training of integrated security
systems for the commercial and government sectors worldwide.
WHEREAS, SFT AND SSI have determined that it is in their best interests
to combine their businesses.
WHEREAS, to effect such combination, SSI will merge with and into a
newly organized wholly owned subsidiary of SFT ("New SSI") and New SSI shall
merge with and into SFT (the "Merger").
WHEREAS, to accomplish the foregoing, the parties desire to adopt a
plan of reorganization to effect the merger of SSI into New SSI in accordance
with the provisions of Section 368(a) of the Internal Revenue Code of 1986, as
amended.
THEREFORE, in consideration of the premises, and the mutual covenants,
terms and conditions set forth herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 Execution, Filing and Effective Time. On the date of the closing of
the Merger, the parties agree to cause the Merger to be consummated by filing
with the offices of the Delaware and Virginia Secretaries of State Certificates
of Merger executed and acknowledged by SSI, New SSI and SFT and such other
documents as may be required by the provisions of the Delaware General
Corporation Law and as are necessary to cause the Merger to become effective.
The Merger shall become effective when the Certificate of Merger and such other
necessary documents are so filed with the Secretary of State of the State of
Delaware (the "Effective Date").
1.2 Constituent and Surviving Corporations. SSI and New SSI shall be
the constituent corporations in the Merger. New SSI shall be the surviving
corporation and at the Effective Time, the identity and separate existence of
SSI shall cease. Upon the effectiveness of the Merger, the surviving corporation
shall possess all of the rights, privileges, immunities, powers, franchises and
authority, and be subject to all restrictions, liabilities, obligations and
duties, of the constituent corporation with which it merged; all the rights,
privileges, immunities, powers, franchises and authority of the constituent
corporations, and all assets and properties of every description, real, personal
and mixed, and every interest therein, wherever located, and all debts and other
obligations belonging or due to the constituent corporations on whatever
account, as well as all other things in action belonging or due to the
constituent corporations, shall be vested in the surviving corporation; all
rights of creditors and all liens upon any property of each constituent
corporation shall be preserved unimpaired; and any claims existing or action or
proceeding pending by or against any constituent corporation may be prosecuted
to judgment with right of appeal by the surviving corporation.
1.3 Conversion of Stock of SSI. At the Effective Time, without any
action on the part of the holder thereof, all of the outstanding shares of SSI
shall become and be converted into 2,000,000 shares of SFT common stock.
1.4 Exchange of Stock Certificates. At the Effective Time, Hashemi
shall surrender to SFT certificates representing all of the issued and
outstanding shares of common stock of SSI. As promptly as practicable following
the Effective Time, SFT shall instruct its transfer agent to issue to Hashemi
certificates representing 2,000,000 shares of SFT common stock. The shares of
SFT common stock issued to Hashemi shall not be registered under the Securities
Act of 1933, as amended, and the certificates representing such shares shall
bear an appropriate restrictive legend.
1.5 Consolidation of Headquarters Facilities. As promptly as
practicable following the Effective Time, SFT will consolidate its headquarters
and all personnel into SSI's headquarters facilities in Springfield, Virginia.
SFT will enter into a new lease for such facilities, on a triple net basis, at a
rate of $120,000 per year, payable in twelve equal monthly payments. The term of
the lease will be 60 months with an option to renew for an additional 60 months,
with an annual CPI escalation for the term of the lease.
1.6 Management and Board of Directors. At the Effective Time, Hashemi
will become President and Chief Executive Officer of SFT's Government Services
division and will be appointed to SFT's Board of Directors. Hashemi will be paid
an initial annual base salary of $250,000 per annum and will receive a bonus
equal to 5% of the net pre-tax profit of this division. Additionally, Hashemi
will be granted options, pursuant to SFT's qualified Stock Option Plan, to
purchase 200,000 shares of SFT common stock, at an exercise price equal to the
higher of $1.50 per share or the closing price of SFT's common stock on November
30, 2000. Hashemi will also receive normal compensation as a member of SFT's
Board of Directors. Hashemi agrees to serve as President and Chief Executive
Officer of SFT's Government Services division for a minimum term of 5 years, and
devote his full time and attention to the business and affairs of SFT.
Furthermore, Hashemi will sign SFT's standard non-compete and confidentiality
agreements.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SSI
2.1 Corporate Status. SSI is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Virginia, with
adequate power and authority to own or lease its properties and to carry on its
business as presently conducted. SSI is in good standing as a foreign
corporation, and is licensed or qualified to transact business, in every
jurisdiction in which the nature of the properties owned or leased by SSI or the
business transacted by SSI, requires it to be so licensed or qualified.
2.2 Due Execution and Enforceability. SSI has full power and authority
to execute and deliver this Agreement, to perform fully its obligations
hereunder, and to consummate the transactions contemplated hereby. SSI has duly
executed and delivered this Agreement. This Agreement constitutes the legal,
valid and binding obligation of SSI, enforceable against SSI in accordance with
its terms.
2.3 No Conflict or Breach. The execution, delivery and performance of
this Agreement by SSI will not (i) conflict with or result in a breach of any of
the provisions of the Certificate of Incorporation or By-laws of SSI, (ii)
conflict with or result in a material breach of or default under any indenture,
loan or credit agreement or any other agreement or instrument to which SSI is a
party, or by which SSI or any of its properties or assets may be affected or
bound, or (iii) require the authorization, consent, approval or license of any
third party or governmental entity that has not been obtained.
2.4 Capitalization. The authorized capital of SSI consists of
---------------
10,000 shares of Common Stock, no par value per share, all of which are issued
and outstanding. All of such outstanding shares are owned, by record and
beneficially, by Kamran Hashemi. There are no outstanding (i) securities of SSI
convertible into or exchangeable for shares of the capital stock or other
securities of SSI, (ii) warrants, options, subscriptions or other rights,
contingent or otherwise, obligating SSI to issue, or entitling any person to
purchase or obtain, any shares of the capital stock or other securities of SSI,
or (iii) other than this Agreement, any agreements or understandings with
respect to the voting, sale, or transfer of, or placing any restrictions upon,
shares of the capital stock of SSI. There are no preemptive or similar rights on
the part of any holders of the Shares or any class of securities or other equity
interests of SSI.
2.5 Financial Statements. Attached hereto as Appendix 1 are true and
complete copies of the financial statements of SSI for the periods ending
December 31, 1998 and 1999, and August 31, 2000 (the "Financial Statements").
The Financial Statements fairly present the financial condition, assets,
liabilities and results of operations of SSI at the date and for the period
indicated, in each case, in accordance with generally accepted accounting
principles, consistently applied. Since the date of the balance sheet included
with the Financial Statements (the "Balance Sheet"), (i) SSI has been operated
only in the ordinary course of business consistent with past practice; and (ii)
there has been no bonus paid to any Director, officer or employee of SSI, no
dividend or other distribution paid to any shareholder of SSI, and no other
payment made other than in the ordinary course of business.
2.6 No Undisclosed Liabilities. SSI has no material liabilities or
obligations of any nature, direct or indirect, contingent or absolute, accrued
or unaccrued, due or to become due, whether arising out of contract, tort,
statute or otherwise, except (i) as and to the extent disclosed or reserved
against in the Balance Sheet or specifically disclosed in the notes thereto,
(ii) liabilities and obligations not reflected or reserved against in the
Balance Sheet that are specifically identified in Schedule 2.6 attached hereto,
and (iii) liabilities and obligations that were incurred after the date of the
Balance Sheet in the ordinary course of business consistent with past practice
that (A) are not prohibited by this Agreement, and (B) individually and in the
aggregate could not reasonably be expected to be material to SSI. Since the date
of the Balance Sheet, there has not occurred or come to exist any Material
Adverse Effect or any event, occurrence, fact, condition, change, development or
effect that, individually or in the aggregate, could reasonably be expected to
become or result in a Material Adverse Effect.
2.7 Certain Financial Matters. As of November 30, 2000, SSI has the
current assets, current liabilities, working capital, firm backlog set forth in
Schedule 2.7, and has a reasonable basis for the year 2001 projected revenue set
forth in that schedule.
2.8 Litigation, Claims, etc. Except as set forth in Schedule 2.8
attached hereto, there are no actions, suits, proceedings, claims or
investigations pending or, to the knowledge of SSI, threatened against SSI, in
any court or before any governmental or administrative agency. There are no
outstanding orders, judgments, decrees or injunctions issued by any governmental
authority against SSI, or that in any way affect its Business. There is no basis
for any action, suit or proceeding, or governmental inquiry or investigation
against SSI that is likely to have any Material Adverse Effect on the Business,
as presently conducted.
2.9 Contracts. SSI has delivered, or caused to be delivered, to SFT
complete and correct copies of all written Contracts, and accurate descriptions
of all material terms of all oral Contracts. All Contracts are legal, valid,
binding, in full force and effect, and enforceable against the parties thereto.
SSI is not in default in the performance, observance or fulfillment of any
obligation, covenant or condition contained in any Contract. The enforceability
of all Contracts against SSI and each other party thereto will not be affected
in any manner by the execution, delivery or performance of this Agreement, and
no Contract contains any change of control or other terms or conditions that
will become applicable or inapplicable as a result of the consummation of the
transactions contemplated by this Agreement.
2.10 No Employment Contracts. There are no employment contracts,
oral or written, to which SSI is bound.
2.11 Assets. SSI has good and marketable title to, valid leasehold
interests in, or valid rights under contract to use, all of the respective
properties and assets (real, personal or mixed, tangible or intangible), used in
connection with or necessary for the conduct of the Business (the "Assets"), in
each case free and clear of any Lien, except (i) Liens reserved against in the
Balance Sheet, to the extent so reserved, and (ii) Liens for Taxes not yet due
and payable or which are being contested in good faith and by appropriate
proceedings.
2.12 Compliance with Laws. The Business has been established and
operated in compliance with all applicable federal, state, local or other
governmental laws or ordinances, and any order, rule or regulation of any
federal, state, local or other governmental agency or body (including, without
limitation, all environmental, energy, safety, health, zoning,
anti-discrimination, antitrust, wage and hour and price and wage control laws,
ordinances, orders, rules or regulations), the non-compliance with which, or the
violation of which, will have a Material Adverse Effect on the Business, and SSI
has not received any claim or notice of violation with respect thereto.
2.13 Tax Matters. (a) All Returns required to be filed by SSI have been
duly and timely filed and all such Returns are true and correct. All Taxes shown
to be due on such Returns, or that may become due by SSI with respect to any
period (or portion thereof) ending on or before the Closing Date, have been paid
or have been adequately reserved for in the books and records of SSI and will
not exceed $20,000 as of the Closing Date. SSI has duly and timely withheld all
Taxes required to be withheld and such withheld Taxes have been either duly and
timely paid to the proper governmental authority or properly set aside in
accounts for such purpose and will be duly and timely paid to the proper
governmental authority.
(b) No Taxes or Returns on or with respect to SSI are currently under
audit, examination or investigation by any governmental authority. No
governmental authority is now asserting or threatening to assert against SSI any
deficiency or claim for any such Taxes or any adjustment to such Taxes.
2.14 Employee Benefit Plans and Arrangements. Except as described in
Schedule 2.14 attached hereto, there are no employee benefit plans, whether
formal or informal, whether or not set forth in writing, and whether covering
one person or more than one person, sponsored or maintained by SSI. For the
purposes hereof, the term "employee benefit plan" includes all plans, funds,
programs, policies, arrangements, practices, customs and understandings
providing benefits of economic value to any employee, former employee, or
present or former beneficiary, dependent or assignee of any such employee or
former employee other than regular salary, wages or commissions paid
substantially concurrently with the performance of the services for which paid.
Without limitation, the term "employee benefit plan" includes all employee
welfare benefit plans within the meaning of section 3(1) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and all employee
pension benefit plans within the meaning of section 3(2) of ERISA.
2.15 Intellectual Property. Schedule 2.15 attached hereto sets forth a
complete and correct list of (i) all Intellectual Property that is owned by SSI,
and (ii) all written or oral licenses and arrangements pursuant to which (A) the
use by any Person of Intellectual Property is permitted by SSI, or (B) the use
by SSI of Intellectual Property is permitted by any Person. Schedule 2.15
contains all Intellectual Property used or held for use in connection with,
necessary for the conduct of, or otherwise material to the Business. Immediately
after the Closing, SSI will own or have the right to use all Intellectual
Property described on Schedule 2.15 free from any Liens.
2.16 Insurance. Schedule 2.16 attached hereto contains a complete and
correct list of all insurance policies maintained by or on behalf of SSI. SSI
has delivered to SFT complete and correct copies of all such policies together
with all riders and amendments thereto. Such policies are in full force and
effect, and all premiums due thereon have been paid. SSI has complied in all
respects with the terms and provisions of such policies.
2.17 Affiliate Contracts. Except as set forth in Schedule 2.17 attached
hereto, no stockholder, officer, director, or employee of the SSI or any
Associate or Affiliate of any such Person, (i) owns directly or indirectly any
interest in any Person that is a supplier, customer or competitor of or lessor
to SSI, (ii) serves as Representative to any Person that is a supplier, customer
or competitor of SSI, or (iii) has a debtor or a creditor relationship with SSI.
2.18 Disclosure. No representation or warranty hereunder or information
contained in the Financial Statements, or any certificate, statement or other
document delivered by SSI in connection with this Agreement, contains any untrue
statement of material fact or omits to state a material fact necessary in order
to make the statements contained herein or therein not misleading. SSI
recognizes that SFT is basing its decision to consummate the transactions
contemplated by this Agreement in reliance upon the SSI's representations and
warranties, the Financial Statements and the other information supplied
hereunder. There is no fact known to SSI that presently materially and adversely
affects the assets, liabilities, financial condition, results of operations or
prospects of SSI or the Business that has not been disclosed in this Agreement,
the Financial Statements, or in a certificate, statement or other document
delivered by or on behalf of SSI. Copies of all documents referred to herein or
delivered or made available to SFT in connection herewith, are true, correct and
complete copies thereof and include all amendments, supplements and
modifications thereto or waivers thereunder.
ARTICLE III
REPRESENTATIONS OF SFT
3.1 Corporate Status. SFT is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware, with
adequate power and authority to own or lease its properties and to carry on its
business as presently conducted. SFT is in good standing as a foreign
corporation, and is licensed or qualified to transact business, in every
jurisdiction in which the nature of the properties owned or leased by SFT or the
business transacted by SSI, requires it to be so licensed or qualified.
3.2 Due Execution and Enforceability. SFT has full power and authority
to execute and deliver this Agreement, to perform fully its obligations
hereunder, and to consummate the transactions contemplated hereby. SFT has duly
executed and delivered this Agreement. This Agreement constitutes the legal,
valid and binding obligation of SFT, enforceable against SSI in accordance with
its terms.
3.3 No Conflict or Breach. The execution, delivery and performance of
this Agreement by SFT will not (i) conflict with or result in a breach of any of
the provisions of the Certificate of Incorporation or By-laws of SFT, (ii)
conflict with or result in a material breach of or default under any indenture,
loan or credit agreement or any other agreement or instrument to which SFT is a
party, or by which SFT or any of its properties or assets may be affected or
bound, or (iii) require the authorization, consent, approval or license of any
third party or governmental entity that has not been obtained.
3.4 SEC Filings and Financial Statements. SSI has been provided copies
of SFT's Form 10-K for the fiscal year ended December 31, 1999 and Form 10-Q for
the nine months ended September 30, 2000, each of which include financial
statements of SFT (the "SFT Financial Statements"). The SFT Financial Statements
fairly present the financial condition, assets, liabilities and results of
operations of SFT at the dates and for the periods indicated, in each case, in
accordance with generally accepted accounting principles, consistently applied.
Since September 30, 2000, (i) SFT has been operated only in the ordinary course
of business consistent with past practice; and (ii) there has been no bonus paid
to any Director, officer or employee of SFT, no dividend or other distribution
paid to any shareholder of SFT, and no other payment made other than in the
ordinary course of business.
3.5 No Undisclosed Liabilities. SFT has no material liabilities or
obligations of any nature, direct or indirect, contingent or absolute, accrued
or unaccrued, due or to become due, whether arising out of contract, tort,
statute or otherwise, except (i) as and to the extent disclosed or reserved
against in the SFT Financial Statements or in the notes thereto, (ii)
liabilities and obligations that were incurred after September 30, 2000 in the
ordinary course of business consistent with past practice that (A) are not
prohibited by this Agreement, and (B) individually and in the aggregate could
not reasonably be expected to be material to SFT. Since September 30, 2000,
there has not occurred or come to exist any Material Adverse Effect or any
event, occurrence, fact, condition, change, development or effect that,
individually or in the aggregate, could reasonably be expected to become or
result in a Material Adverse Effect.
ARTICLE IV
COVENANTS OF SSI, SFT and HASHEMI
4.1 Non-competition. (a) During the period beginning of the Effective
Date and ending on the second anniversary thereof (the "Restriction Period"),
Hashemi shall not, without the prior written consent of SFT (which consent may
be withheld in SFT's sole discretion), directly or indirectly, alone or in
conjunction with any Entity (as defined below), own, manage, operate or control,
or participate in the ownership, management, operation or control of, or become
associated, as an employee, director, officer, advisor, agent, consultant,
principal, partner, member or independent contractor with, or lender to, any
person, enterprise, firm partnership, corporation, limited liability entity,
cooperative, or other entity (any such person or entity, an "Entity") other than
SFT and its Affiliates, engaged in or aiding others to engage in any business
substantially similar to the Business.
4.2 Confidentiality. SSI shall keep confidential any and all
information relating to SFT, or this Agreement, and each Seller shall not
disclose or use any such information, provided that such Seller may disclose or
use any such information (i) as has become generally available to the public
other than through a breach of this Agreement by such Seller or any other
Seller, (ii) as becomes available to such Seller on a non-confidential basis
from a source other than another party hereto, provided that such source is not
known or reasonably believed by such Seller to be bound by a confidentiality
agreement or other obligation of secrecy, (iii) as may be required in any
report, statement or testimony required to be submitted to any governmental
authority having or claiming to have jurisdiction over it, or as may be
otherwise required by applicable law, or as may be required in response to any
summons or subpoena or in connection with any litigation, (iv) as may be
required to obtain any governmental approval or consent required in order to
consummate the transactions contemplated by this Agreement or (v) as may be
necessary to establish such Seller's rights under this Agreement; provided,
further, that in the case of clauses (iii) and (iv), the Person intending to
disclose confidential information will promptly notify the party to whom it is
obliged to keep such information confidential and, to the extent practicable,
provide such party a reasonable opportunity to prevent public disclosure of such
information.
ARTICLE V
CONDITIONS PRECEDENT TO CLOSING
5.1 Conditions to Obligations of SFT. The obligations of SFT to
consummate the transactions contemplated hereby shall be subject to the
fulfillment, on or prior to the Effective Date, of the following covenants:
(i) Hashemi shall be ready and able to surrender his Shares at the Closing.
(ii) All of the representations and warranties of SSI shall be true and
correct.
5.2 Conditions to Obligations of the Sellers. The obligation of SSI to
consummate the transactions contemplated hereby shall be subject to the
fulfillment, on or prior to the Effective Date, of the following covenants:
ARTICLE VI
INDEMNIFICATION
6.1 Indemnification by SSI and Hashemi. SSI and Hashemi jointly and
severally covenant and agree to defend, indemnify and hold harmless SFT, its
Affiliates, and its respective Directors, officers, employees and shareholders
(collectively, the "SFT Indemnitees") from and against, and pay or reimburse the
SFT Indemnitees for, any and all claims, demands, liabilities, obligations,
losses, fines, costs, expenses, royalties, actions, claims or investigations,
deficiencies or damages (whether absolute, accrued, conditional or otherwise and
whether or not resulting from third party claims), including interest and
penalties with respect thereto and out-of-pocket expenses and reasonable
attorneys' and accountants' fees and expenses incurred in the investigation or
defense of any of the same or in asserting, preserving or enforcing any of their
respective rights hereunder (collectively, "Losses"), resulting from, arising
out of or relating to (i) any inaccuracy of any representation or warranty when
made or deemed made by such Seller herein or in connection herewith; or (ii) any
failure of SSI or Hashemi to perform any covenant or agreement hereunder or
fulfill any other obligation in respect hereof.
6.2 Indemnification by SFT. SFT covenants and agrees to defend,
indemnify and hold harmless SSI (the "SSI Indemnitees") from and against, and
pay or reimburse SSI Indemnitees for, any and all Losses resulting from or
arising out of (i) any inaccuracy in any representation or warranty made by the
Buyer herein or in connection herewith; or (ii) any failure by the Buyer to
perform any covenant or agreement hereunder or to fulfill any other obligation
in respect hereof.
6.3 Survival of Representations and Warranties. The representations and
warranties contained in this Agreement shall survive the execution and delivery
of this Agreement, any examination by or on behalf of the parties hereto, and
the consummation of the transactions contemplated herein.
ARTICLE VII
DEFINITIONS
The following terms shall have the meanings ascribed to them below.
"Affiliate" of a Person has the meaning given such term in the
Securities Exchange Act of 1934, as amended.
"Associate" of a Person shall mean (i) any Person of which such Person
or any person included in clause (ii) hereof is an officer or partner
or is, directly or indirectly, the beneficial owner of 10% or more of
any class of equity, (iii) any trust or other estate in which such
Person or any person included in clause (iii) hereof has a substantial
beneficial interest or serves as trustee or in a similar fiduciary
capacity, and (iii) any relative or spouse of such Person, or any
relative of such spouse.
"Business" shall mean the assets and operations of SSI as currently
conducted.
"Closing" shall have the meaning set forth in Section [ ] hereof.
"Contract" shall mean any commitment, arrangement or agreement
(written or oral).
"Liens" shall mean any lien, adverse claim, security interest,
encumbrance, charge or other restrictions or limitations of any nature
whatsoever.
"Material Adverse Effect" shall mean any event, occurrence, fact,
condition, change, development or effect that is or could reasonably be
expected to be materially adverse to the Business, operations, results
of operations, condition (financial or otherwise), prospects,
properties (including intangible properties), Assets or liabilities of
the Company taken as a whole.
"Person" shall mean any natural person, firm, partnership association,
corporation, company, trust, business trust, governmental authority or
other entity.
"Representative" shall mean an accountant, counsel, consultant,
officer, director, employee or agent.
"Return" shall mean any return, report, declaration, form, claim for
refund or information return or statement relating to Taxes, including
any schedule or attachment thereto, and including any amendment
thereof.
"Taxes" shall mean any federal, state, provincial, local, foreign or
other income, alternative, minimum, accumulated earnings, personal
holding company, franchise, capital stock, net worth, capital, profits,
windfall profits, gross receipts, value added, sales (including,
without limitation, bulk sales), use, goods and service, excise, custom
duties, transfer, conveyance, mortgage, registration, stamp,
documentary, recording, premium, severance, environmental (including,
without limitation, Taxes under Section 59A of the Code), real
property, personal property, ad valorem, intangibles, rent, occupancy,
license, occupational, employment, unemployment insurance, social
security, disability, workers' compensation, payroll, health care,
withholding, estimated or other similar tax, levy, impost, fee, duty or
other governmental charge or assessment or deficiencies thereof
(including all interest and penalties thereon and additions thereto,
whether disputed or not) imposed by any governmental authority or other
taxing authority.
ARTICLE VIII
MISCELLANEOUS
8.1 Notices. All notices and other communications under this Agreement
shall be in writing and shall be deemed given when (a) delivered by hand, (b)
transmitted by telecopier (assuming clear transmission) or (c) delivered, if
sent by Express Mail, Federal Express or other express delivery service, or
registered or certified mail, return receipt requested, to the addressee at the
following addresses or telecopier numbers (or to such other addresses or
telecopier number as a party may specify by notice given to the other party
pursuant to this provision):
If to SSI:
Security Systems Integration
7544 Fullerton Court
Springfield, VA 22153-2829
Fax No: (703) 912-9976
If to Hashemi:
Kamran Hashemi
606 Brockman Court
Great Falls, VA 22066
Tel No: (703) 404-0004
If to SFT:
STRATESEC, Incorporated
c/o KuwAm Corporation
2600 Virginia Avenue
Suite 900
Washington, D.C. 20037
Attn: Wirt D. Walker III
Chairman and Chief Executive Officer
Fax No: (202) 965-0886
With a copy to:
Dyer Ellis & Joseph
600 New Hampshire Avenue, N.W.
Suite 1100
Washington, D.C. 20037
Attn: John F. Kearney
Fax No: (202) 944-3068
8.2 Amendments. Except as otherwise provided herein, this Agreement may
not be amended, modified or revised, in whole or in part, except by written
instrument signed by all parties hereto.
8.3 Assignability. Neither party hereto may assign any of the rights or
obligations created by this Agreement except with the express written consent of
the other party hereto.
8.4 Binding Effect. The provisions of this Agreement shall be binding
upon, and inure to the benefit of, the parties hereto, their respective personal
representatives, heirs, successors and permitted assigns.
8.5 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
8.6 Headings. All headings contained in this Agreement are inserted as
a matter of convenience and for ease of reference only and shall not be
considered in the construction or interpretation of any provision of this
Agreement.
8.7 Appendices. All appendices and schedules attached hereto are
expressly made a part of this Agreement, as fully as though completely set forth
herein, and all references to this Agreement herein or in any of such appendices
and schedules shall be deemed to refer to and include all such appendices and
schedules.
8.8 Severability. Each term and provision of this Agreement shall be
valid and enforceable to the fullest extent permitted by applicable law. Should
any term or provision of this Agreement be held invalid, illegal or
unenforceable, the remainder of this Agreement, including the application of
such term to the extent not invalid, illegal or unenforceable, shall not be
affected thereby, and this Agreement shall be interpreted as if such term or
provision, to the extent invalid, illegal or unenforceable, did not exist.
8.9 No Waiver. No course of dealing between the parties, and no delay
by either party in exercising any right, power or remedy hereunder, shall
operate as a waiver thereof, or otherwise prejudice the exercise by such party
of that right, power or remedy.
8.10 Entire Agreement. This Agreement, including all appendices and
schedules attached hereto, constitutes the entire agreement of the parties
hereto with respect to the matters hereof and supersedes any prior oral and
written understandings or agreements.
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
STRATESEC, INCORPORATED
By:
------------------------------------
Wirt D. Walker III
Chairman and Chief Executive Officer
SECURITIES SYSTEMS INTEGRATION, INC.
By:
------------------------------------
Kamran Hashemi
KAMRAN HASHEMI
--------------------------------
APPENDIX C
Index to Financial Statements
Report of Independent Accountants.........................................F-2
Independent Auditor's Report..............................................F-3
Balance Sheets as of December 31, 2000 and December 31, 1999..............F-4
Statements of Operations for the years ended December 31, 2000
and December 31, 1999.....................................................F-5
Statements of Stockholders' Equity for the years ended December 31, 2000
and December 31, 1999.....................................................F-6
Statements of Cash Flows for the years ended December 31, 2000
and December 31, 1999.....................................................F-7
Notes to Financial Statements.............................................F-9
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of STRATESEC Incorporated:
In our opinion, the accompanying consolidated balance sheet 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, 2000,
and the result of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
We have also audited Schedule II of STRATESEC Incorporated for the year ended
December 31, 2000. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.
The financial statements of STRATESEC Incorporated for the year ended December
31, 1999 were audited by other independent accountants whose report dated March
24, 2000 expressed an unqualified opinion on those financial statements.
McLean, Virginia
March 23, 2001
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Stratesec, Incorporated
We have audited the accompanying balance sheet of Stratesec, Incorporated
(formerly known as Securacom, Incorporated), as of December 31, 1999, and the
related statements of operations, changes in shareholders' equity, and cash
flows for the year then ended (which financial statements are not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Stratesec, Incorporated, as of
December 31, 1999, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles
before those statements were restated for the pooling of interests transaction
referred to in Note 3 to the financial statements. We have not audited the
financial statements of Stratesec, Incorporated for any period subsequent to
December 31, 1999.
We have also audited Schedule II of Stratesec, Incorporated, for the year ended
December 31, 1999 (which schedule is not presented separately herein). In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein before this schedule was restated
for the pooling of interests transaction referred to in Note 3 to the financial
statements.
Frederick, Maryland
March 24, 2000
STRATESEC INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 887,214 $ 3,084,443
Accounts receivable, net of allowance for doubtful accounts of
$350,000 in 2000, and $675,000 in 1999 3,953,660 2,421,374
Costs and estimated earnings in excess of billings on uncompleted
contracts 4,615,240 2,865,886
Inventory, net of allowance of $70,000 in 2000 and
$40,000 in 1999 370,882 245,903
Other current assets 45,150 9,346
--------------- ---------------
Total current assets 9,872,146 8,626,952
Property and equipment, net 675,913 799,671
Note receivable from stockholder 327,277 327,277
Deposits 124,068 124,576
--------------- ---------------
Total assets $ 10,999,404 $ 9,878,476
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,120,396 $ 3,278,116
Accrued expenses 1,020,746 719,673
Income taxes payable 1,245,000 286,000
Bank and other lines-of-credit 2,331,555 771,532
Billings in excess of costs and estimated earnings on uncompleted contracts 137,309 3,345,689
Capital lease obligations 69,642 72,860
Deferred income taxes 0 159,000
--------------- ---------------
Total current liabilities 7,924,648 8,632,870
Capital lease obligations 22,616 94,570
--------------- ---------------
Total liabilities 7,947,264 8,727,440
--------------- ---------------
Stockholders' equity
Common stock, $0.01 par value per share; 20,000,000 shares authorized;
10,280,043 issued and 10,279,964 outstanding shares in
2000, and 8,540,189 issued and 8,688,189 outstanding shares in 1999 102,800 85,402
Additional paid-in capital 24,279,914 21,686,907
Accumulated deficit (21,330,410) (20,824,359)
Less: treasury stock of 79 shares in 2000 and (98,000) in 1999, at cost (164) 203,086
--------------- ---------------
Total stockholders' equity 3,052,140 1,151,036
Commitments
--------------- ----------------
Total liabilities and stockholders' equity $ 10,999,404 $ 9,878,476
================ ================
STRATESEC INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
--------------- ---------------
Revenue $ 23,983,154 $ 14,716,439
Cost of revenue (15,374,922) (10,238,206)
--------------- ---------------
Gross profit 8,608,232 4,478,233
Selling, general and administrative expenses (7,179,379) (4,314,130)
--------------- ---------------
Operating profit 1,428,853 164,103
Gain on sale of equipment 0 1,601
Interest and financing fees (747,806) (258,984)
Interest and other income 75,122 14,604
--------------- ---------------
Income (loss) before income taxes 756,169 (78,676)
Provision for income taxes (800,000) (325,000)
--------------- ---------------
Net loss $ (43,831) $ (403,676)
=============== ===============
Basic and diluted net loss per share $ (0.00) $ (0.05)
================ ===============
Weighted-average shares outstanding 10,026,501 8,099,435
=============== ===============
STRATESEC INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000 AND 1999
Common Stock Treasury Stock Additional Total
------------------------ ---------------------------
Paid-in- Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
----------- -------- ---------- --------- ----------- ------------ ----------
Balance at January 1,
1999, as previously
reported 6,103,522 $ 61,035 (130,000) $ (181,851) $ 21,143,824 $ (19,800,705) $ 1,222,303
Adjustment in connection
with pooling of
interests (Note 3) 1,650,000 16,500 350,000 612,650 (227,805) 186,358 587,703
----------- -------- ---------- --------- ----------- ------------ ----------
Balance at January 1,
1999, as restated 7,753,522 77,535 220,000 430,799 20,916,019 (19,614,347) 1,810,006
Net loss 0 0 0 0 0 (403,676) (403,676)
Dividends paid 0 0 0 0 (401,245) (806,336) (1,207,581)
Purchase of treasury stock 0 0 (122,000) (227,713) 0 0 (227,713)
Conversion of debenture
bonds to common stock 620,000 6,200 0 0 923,800 0 930,000
Private placement of
common stock 166,667 1,667 0 0 248,333 0 250,000
---------- -------- ------------ --------- ----------- ------------ ----------
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
========== ======== ========== ======== ========== =========== =========
STRATESEC INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
--------------- ---------------
Cash flows from operating activities:
Net loss $ (43,831) $ (403,676)
--------------- ---------------
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 280,228 201,322
Change in allowance for doubtful accounts and inventory obsolescence (295,000) 228,000
Loss on sale of equipment 0 (1,601)
Deferred income taxes (159,000) 39,000
Transfer of property and equipment to inventory 0 (140,308)
(Increase) decrease in:
Restricted cash 0 1,900,000
Accounts receivable (1,207,286) (190,488)
Costs and estimated earnings in excess of billings on uncompleted
contracts (1,749,354) (1,425,401)
Inventory (154,979) (44,845)
Other current assets (35,804) 165,615
Increase (decrease) in:
Accounts payable (157,720) 1,708,446
Accrued expenses 301,073 (322,938)
Income taxes payable 959,000 286,000
Billings in excess of costs and estimated earnings on uncompleted
contracts (3,208,380) 2,597,034
-------------- --------------
Total adjustments (5,427,222) 4,999,836
-------------- --------------
Net cash (used in) provided by operating activities (5,471,053) 4,596,160
-------------- --------------
Cash flows from investing activities:
Increase in notes receivable from stockholder 0 (490,000)
Principal payments received under notes receivable from stockholder 0 162,723
Proceeds from the sale of equipment 0 9,833
Purchases of property and equipment, net (156,470) (328,020)
Decrease (increase) in deposits 508 (66,477)
-------------- --------------
Net cash used in investing activities (155,962) (711,941)
-------------- --------------
Cash flows from financing activities:
Dividend payments (462,220) (1,207,581)
Net borrowings under bank line-of-credit 1,560,023 771,532
Repurchase of common stock (203,250) (227,713)
Proceeds from the issuance of common stock 2,610,405 250,000
Principal payments under capital lease obligations (75,172) (68,672)
Principal payments on debentures 0 (872,404)
-------------- --------------
Net cash provided by (used in) financing activities 3,429,786 (1,354,838)
-------------- --------------
Net (decrease) increase in cash (2,197,229) 2,529,381
Cash and cash equivalents at the beginning of the year 3,084,443 555,062
-------------- --------------
Cash and cash equivalents at the end of the year $ 887,214 $ 3,084,443
=============== ===============
STRATESEC INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
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, the
Company 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, 2000 and
1999, the KuwAm Group owned approximately 11 percent and 38 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 estimates 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 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 are determined.
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 will 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
As shown in the accompanying financial statements, the Company has incurred
recurring operating losses and has an accumulated deficit of $21,330,410 at
December 31, 2000. The Company's continued existence is dependent upon its
ability to generate profitable operations and, if necessary, secure financing to
fund future operations. Management is addressing these matters by reducing
overhead expenses and reorganizing the Company's management structure.
Management believes that actions previously and presently taken to revise the
Company's operating and financial requirements are sufficient to fund future
operations.
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) and
$806,336 ($0.10 per share) in 2000 and 1999, respectively, and paid a return of
capital dividend of $401,245 ($0.05 per share) in 1999. 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, plant 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)
--------------- ---------------
Stockholder' equity (deficit) $ 4,014,542 $ (311,978)
=============== ===============
The following is a reconciliation of the amounts of revenue and net income
previously reported for 1999 with amounts restated for the business combination:
Revenue:
SFT, as previously reported $ 10,631,131
SSI 4,085,308
---------------
As restated $ 14,716,439
===============
Net (loss) income
SFT, as previously reported $ (932,838)
SSI 529,162
---------------
As restated $ (403,676)
===============
Basic and diluted net (loss) income per share
SFT, as previously reported $ (0.15)
SSI 0.10
--------------
As restated $ (0.05)
==============
NOTE 4 - 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.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
2000 1999
---------- ---------
Office furniture and equipment $ 611,493 $ 611,493
Computer equipment 441,857 531,395
Leasehold improvements 191,836 191,837
Vehicles 159,251 143,619
Computer software 63,694 48,193
---------- ---------
1,468,131 1,526,537
Less: accumulated depreciation and amortization (792,218) (726,866)
---------- ---------
$ 675,913 $ 799,671
========== =========
Equipment purchased under capital leases approximated $342,000 at December 31,
2000 and 1999. Accumulated depreciation on those assets approximated $272,000
and $201,000 at December 31, 2000 and 1999, respectively.
Depreciation and amortization expense on property and equipment (including
equipment under capital leases) was $280,228 and $201,322 for the years ended
December 31, 2000 and 1999, 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. During the year ended December 31, 1999,
principal payments of $162,723 were received in excess of the amounts required
by the note receivable. Accordingly, no principal payments have been received
during the year ended December 31, 2000 and the remaining balance has been
classified as noncurrent.
NOTE 7 - BANK AND OTHER LINES-OF-CREDIT
Bank and other lines-of-credit consists of the following at December 31:
2000 1999
---------------- ----------------
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. $ 1,799,681 $ 771,532
Bank line-of-credit (maximum amount of $450,000), due on demand with interest
at the bank's prime rate (9.5% at December 31, 2000). The line-of-credit is
secured by a certificate of deposit, and expires, if not
renewed, on May 31, 2001. 450,000 0
Bank line-of-credit (maximum amount of $100,000), due on demand, with
interest at the bank's prime rate plus 1.75% (11.25% at December 31, 2000)
due monthly. This line-of-credit is secured by equipment and machinery
and expired on March 5, 2001. 81,874 0
-------------- --------------
Total $ 2,331,555 $ 771,532
============== ==============
Interest expense related to the lines-of-credit, which approximated interest
paid, aggregated $447,806 and $258,984 for the years ended December 31, 2000 and
1999, 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 are outstanding at
December 31, 2000, but expire in April 2001.
During February 1999, the Company paid $872,404 of the outstanding $1,802,404
debt at December 31, 1998. During September 1999, the remaining $930,000 of
debentures was converted to 620,000 shares of common stock at $1.50 per share.
NOTE 9 - ACCRUED EXPENSES
Accrued expenses are summarized as follows as of December 31:
2000 1999
----------- ----------
Accrued payroll and related liabilities $ 228,669 $ 105,643
Legal judgment 262,290 262,290
Accrued interest and penalties 300,000 0
Directors fees 17,500 0
Sales tax 111,666 38,649
Other 100,621 313,091
----------- ----------
$ 1,020,746 $ 719,673
============ ===========
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company issued subordinated debentures in the amount of $1,850,000 with
185,000 warrants attached and incurred related interest to the KuwAm Corporation
and other related parties of $180,992 for the year ended December 31, 1998. No
interest was incurred under these debentures during the years ended December 31,
1999. In 1999, the Company paid, in two separate transactions, $872,404 and
issued 620,000 shares of common stock to extinguish the debt.
During 1999, the Company sold 166,667 shares of common stock in a private
placement at a price of $1.50 per share to two related parties.
During 2000, the Company sold 175,688 shares 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.
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 are outstanding at December 31, 2000. These
warrants expire on October 7, 2001.
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 warrants and options. Under APB No.
25, because the exercise price of the Company's employee stock warrants and
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 warrants and 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 warrants and options is amortized to
expense over the vesting period. 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. Under the fair value method, the Company's net loss in 2000 would
have increased by $186,000 or $0.03 per share on a basic and diluted basis.
The weighted-average fair value of the individual warrants and options granted
during 2000 and 1999 is estimated as $1.61 and $1.22, respectively, on the date
of grant. The fair values were determined using a Black-Scholes option-pricing
model with the following assumptions:
2000 1999
----------- --------
Dividend yield - -
Volatility 140% 125%
Risk-free interest rate 5.50% 6.48%
Expected life 3 years 3 years
Stock option activity during the years ended December 31, 2000 and 1999 is
summarized below:
Weighted
Average
Number Exercise
of Shares Price
Outstanding at January 1, 1999 610,000 $ 4.87
Granted 727,500 1.65
Exercised - -
Forfeited (174,500) 4.53
------------- --------
Outstanding at December 31, 1999 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
============= =======
The following table summarizes information concerning outstanding and
exercisable warrants and options at December 31, 2000.
Weighted-Average
Remaining Warrants and
Exercise Number Contractual Options
Price Outstanding Life (Years) Exercisable
-------------- ------------------- --------------- ----- ----------------
$ 2.375 170,000 0.19 113,333
2.500 93,000 0.42 62,000
1.500 288,000 1.26 142,667
1.875 339,000 1.05 113,000
1.250 145,000 1.50 48,333
1.500 520,000 2.93 -
2.750 253,000 2.50 -
3.000 100,000 2.25 -
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 income (loss) 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 the 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 provision for income taxes consists of the following for the years ended
December 31:
2000 1999
-------------- ---------
Current income taxes
Federal $ 806,000 $ 241,000
State 153,000 45,000
Deferred income taxes
Federal (134,000) 33,000
State (25,000) 6,000
-------------- ---------------
$ 800,000 $ 325,000
============== ===============
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.
2000 1999
---------- ---------
Current assets and liabilities
Allowance for doubtful accounts $ 140,000 $ 270,000
Unamortized Section 481 adjustment 0 159,000
Accrued vacation pay and other 19,000 21,000
Provision for legal judgment 105,000 105,000
Inventory allowance 28,000 16,000
---------- ---------
292,000 571,000
Valuation allowance (292,000) (412,000)
---------- ---------
Net current deferred tax asset (liability) $ 0 $ 159,000
========== =========
Noncurrent assets and liabilities
Depreciation $ (39,000) $ (39,000)
Net operating loss carryforward 8,422,000 7,849,000
---------- ---------
8,383,000 7,810,000
Valuation allowance (8,383,000) (7,810,000)
---------- ---------
Noncurrent deferred tax asset (liability) $ 0 $ 0
========== =========
During the years ended December 31, 2000 and 1999, 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
$453,000 and $360,000, respectively.
As of December 31, 2000, the Company has net operating loss carryforwards of
approximately $21,100,000, which expire, if not utilized, in various years
through 2020.
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 their annual compensation.
Company contributions to the Plan vest to the participants ratably over a two
year period. Company contributions to the Plan were $27,000 and $20,000, for the
years ended December 31, 2000 and 1999, 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, 2000, contracts with three clients accounted
for approximately 29 percent, 19 percent and 13 percent of revenue. For the year
ended December 31, 1999, contracts with three clients accounted for
approximately 33 percent, 9 percent and 7 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 operating and capital leases
that have initial or remaining terms in excess of one year as of December 31,
2000:
Capital Lease Operating
Years ending December 31, Obligations Leases
------------------------ ----------------- ------------
2001 $ 79,235 $ 257,000
2002 25,813 236,000
2003 0 179,000
2004 0 164,000
2005 0 164,000
-------------- --------------
Total minimum lease payments 105,048 $ 1,000,000
==============
Less: imputed interest (12,790)
--------------
Present value of minimum lease payments 92,258
Current portion of capital lease obligations (69,642)
-----------
Noncurrent portion of capital lease obligations $ 22,616
===========
Rent expense aggregated $287,000 and $242,000 for the years ended December 31,
2000 and 1999, respectively.
STRATESEC INCORPORATED
BALANCE SHEETS
December 31, March 31,
2000* 2001
----- ----
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 887,214 $ 892,585
Accounts receivable, net of allowance for doubtful
accounts of $350,000 in 2000 and 2001 3,953,660 4,103,655
Costs and estimated earnings in excess of
billings on uncompleted contracts 4,615,240 5,831,351
Inventory, net of allowance of $70,000 in 2000
and 2001 370,882 814,082
Other current assets 45,150 211,482
----------------- -----------------
Total current assets 9,872,146 11,699,921
Property and Equipment, net 675,913 676,054
Note Receivable from Stockholder 327,277 327,277
Other Assets 124,068 123,203
----------------- -----------------
$10,999,404 $ 12,826,455
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 3,120,396 $ 3,245,482
Accrued expenses and other 1,020,746 1,531,607
Income taxes payable 1,245,000 1,245,000
Bank and other lines of credit 2,331,555 3,369,560
Billings in excess of costs and estimated earnings
on uncompleted contracts 137,309 137,309
Capital lease obligations
69,642 69,642
----------------- -----------------
Total current liabilities 7,924,648 9,598,600
Long-Term Liabilities
Capital lease obligations, less current maturities 22,616 22,616
Commitments and Contingencies - -
Shareholders' Equity
Common stock, $0.01 par value per share; authorized
20,000,000 shares; 10,280,043 issued and 10,279,964
outstanding shares in 2000 and 2001 102,800 102,800
Treasury stock, 79 shares in 2001 (164) (164)
Additional paid-in capital 24,279,914 24,279,914
Accumulated deficit (21,330,410) (21,177,311)
----------------- -----------------
3,052,140 3,205,239
----------------- -----------------
$10,999,404 $ 12,826,455
================= =================
* Derived from audited financial statements as of December 31, 2000.
STRATESEC INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
2000 2001
---- ----
Earned revenues $ 4,362,480 $ 4,461,804
Cost of earned revenues 2,686,801 2,705,468
-------------------------------------
Gross profit 1,675,679 1,756,336
Selling, general and administrative expenses 1,380,847 1,496,152
-------------------------------------
Operating income (loss) 294,832 260,184
Other income (expense) (100,943) (104,701)
-------------------------------------
Net income before income tax provision 193,889 155,483
Income tax provision
-------------------------------------
Net income (loss) $ 193,889 $ 155,483
=====================================
Net income (loss) per share - basic $ 0.02 $ 0.02
=====================================
Net income per share - diluted $ 0.02 $ 0.01
=====================================
Weighted average common shares outstanding - basic 9,240,861 10,279,780
=====================================
Weighted average common shares outstanding - diluted 9,547,893 10,514,364
=====================================
STRATESEC INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2000 2001
---- ----
Cash Flows from Operating Activities:
Net income (loss) $ 193,889 $ 155,483
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 41,361 54,619
Changes in operating assets and liabilities:
Accounts receivable (1,389,225) (403,811)
Costs and estimated earnings in excess
of billings on uncompleted contracts (149,629) (809,061)
Inventory (167,078) (443,200)
Other current assets (5,453) (166,332)
Other assets (550) (1,519)
Accounts payable (632,519) 125,086
Accrued expenses and other 2,863 510,861
Billings in excess of costs and estimated
earnings on uncompleted contracts 90,059 -
-----------------------------------
Total adjustments (2,210,171) (1,133,357)
-----------------------------------
Net cash provided (used) by operating activities (2,016,282) (977,874)
Cash Flows from Investing Activities:
Acquisition of plant and equipment (66,375) (54,760)
-----------------------------------
Net cash provided (used) by investing activities (66,375) (54,760)
Cash Flows from Financing Activities:
Proceeds from line of credit 384,957 1,038,005
Proceeds from private placement of common stock 2,057,282 -
Dividends paid (1,289,269) -
Principal payments on capital lease obligations (21,001) -
Purchase of treasury stock (75,000) -
-----------------------------------
Net cash provided (used) by financing activities 1,056,969 1,038,005
-----------------------------------
Net increase (decrease) in cash and cash equivalents (1,025,688) 5,371
Cash and cash equivalents at beginning of period 3,084,443 887,214
-----------------------------------
Cash and cash equivalents at end of period $ 2,058,755 $ 892,585
===================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest expense $ 85,370 $ 104,873
Income taxes - -
Supplemental Schedule of Non-cash Financing and
Investing Activities:
Sale of common stock by receipt of note receivable $ 550,000 -
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.
February 13, 2001
To the Sole Stockholder and Director
of Security Systems Integrations, Inc.:
We have reviewed the accompanying balance sheet of Security Systems
Integrations, Inc. as of September 30, 2000 and the related statements of
income, of stockholder's deficit, and of cash flows for the nine month period
then ended, in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants. All
information included in these financial statements is the representation of the
management of Security Systems Integrations, Inc.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
SECURITY SYSTEMS INTEGRATIONS, INC.
BALANCE SHEET
SEPTEMBER 30, 2000
ASSETS
Current assets
Cash and cash equivalents $ 67,667
Accounts receivable 1,063,929
Other current assets 104,372
--------------
Total current assets 1,235,968
Property and equipment, net 214,733
Note receivable from stockholder 327,277
Deposit 50,000
--------------
Total assets $ 1,827,978
==============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Accounts payable and accrued expenses $ 421,549
Accrued payroll and related liabilities 86,192
Income taxes payable 1,066,000
Notes payable 418,456
Deferred income taxes 129,000
--------------
Total current liabilities 2,121,197
Notes payable 18,759
--------------
Total liabilities 2,139,956
--------------
Stockholder's deficit
Common stock - no par value, 10,000 shares authorized, issued, and
outstanding 100
Accumulated deficit (312,078)
--------------
Total stockholder's deficit (311,978)
Commitments
Total liabilities and stockholder's deficit $ 1,827,978
==============
SECURITY SYSTEMS INTEGRATIONS, INC.
STATEMENT OF INCOME
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
Revenue $ 6,869,531
--------------
Costs and expenses
Direct materials 2,830,947
Direct labor 351,919
Other direct costs 711,260
Indirect costs 1,009,474
--------------
4,903,600
Income before income taxes 1,965,931
Provision for income taxes 750,000
--------------
Net income $ 1,215,931
==============
SECURITY SYSTEMS INTEGRATIONS, INC.
STATEMENT OF STOCKHOLDER'S DEFICIT
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
Common Stock Total
----------------------------------
Accumulated Stockholder's
Shares Amount Deficit Deficit
Balance at December 31, 1999 10,000 $ 100 $ (90,816) $ (90,716)
Dividends paid - - (1,437,193) (1,437,193)
Net income for the nine month period ended
September 30, 2000 - - 1,215,931 1,215,931
------------- ------------- -------------- -------------
Balance at September 30, 2000 10,000 $ 100 $ (312,078) $ (311,978)
============= ============= ============== =============
SECURITY SYSTEMS INTEGRATIONS, INC.
STATEMENT OF CASH FLOWS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
Cash flows from operating activities:
Net income $ 1,215,931
--------------
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 38,418
Deferred income taxes (30,000)
Increase in:
Accounts receivable (875,817)
Other current assets (99,516)
Increase (decrease) in:
Accounts payable and accrued expenses 74,693
Accrued payroll and related liabilities 48,794
Billings in excess of revenue recognized (3,111,351)
Income taxes payable 780,000
--------------
Total adjustments (3,174,779)
--------------
Net cash used in operating activities (1,958,848)
--------------
Cash flows from financing activities:
Net borrowings under bank line-of-credit 399,628
Principal payments under notes payable (17,532)
Dividends paid (1,437,193)
--------------
Net cash used in financing activities (1,055,097)
--------------
Net decrease in cash and cash equivalents (3,013,945)
Cash and cash equivalents, beginning of the nine month period 3,081,612
--------------
Cash and cash equivalents, end of the nine month period $ 67,667
==============
SECURITY SYSTEMS INTEGRATIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Security Systems Integrations, Inc. (the "Company") was incorporated in the
state of Virginia on October 10, 1997. The Company, which is privately held,
provides security systems for commercial companies and agencies of the federal
government.
The significant accounting policies followed by the Company are described below.
Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated amounts.
Revenue recognition
Substantially all of the Company's contract revenue results from contracts with
agencies of the federal government. Revenue on fixed-price and cost-reimbursable
contracts includes direct costs and allocated indirect costs incurred plus
recognized profit. Profit is recognized under fixed-price contracts on the
percentage-of-completion basis. Revenue on time-and-material contracts is
recognized based upon time (at established rates) and other direct costs
incurred. Losses on contracts are provided for in the period they are first
determined.
Cash equivalents
The Company considers all highly liquid instruments with original maturities of
three months or less to be cash equivalents.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization of property and equipment is
computed using an accelerated method over the estimated useful lives of five to
seven years. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the estimated useful lives of the
assets or the term of the related lease.
Income taxes
Income taxes have been recorded using the liability method. The income tax
provision includes federal and state income taxes both currently payable and
changes in deferred taxes due to differences between financial reporting and tax
bases of assets and liabilities. Deferred tax assets and liabilities are
measured using the enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30, 2000:
Vehicles $ 116,127
Leasehold improvements 94,386
Computer hardware and software 55,336
Office furniture 28,058
Construction equipment 17,660
--------------
311,567
Less: accumulated depreciation and amortization (96,834)
--------------
$ 214,733
Depreciation and amortization expense aggregated $38,418 for the nine month
period ended September 30, 2000.
NOTE 3 - NOTE RECEIVABLE FROM STOCKHOLDER
The note receivable to stockholder is unsecured, with installments of principal
and interest (at 7.0%) of $3,260 due monthly through September 2029. During the
nine month period ended September 30, 2000, no principal payments were received.
The Company's stockholder made no principal payments on the note.
NOTE 4 - NOTES PAYABLE
Notes payable consist of the following at September 30, 2000:
Bank line-of-credit agreement (maximum of $450,000) bearing interest at the
bank's prime rate (9.5% at September 30, 2000. This line-of-credit is
secured by substantially all of the Company's assets and is guaranteed by
the sole stockholder of the Company. This agreement
expires, if not renewed, on May 30, 2001. $ 399,628
Note payable to vendor, secured by a truck with a book value of $24,052 at
September 30, 2000, with installments of principal and interest (at
8.7%) aggregating $641 due monthly through June 2004. 24,545
Note payable to bank, unsecured, with installments of principal and
interest (at 7.0%) aggregating $1,349 due monthly through July 2001. 13,042
--------------
Total notes payable 437,215
Less: current portion (418,456)
--------------
Noncurrent portion $ 18,759
==============
The scheduled maturities of the noncurrent portion of the notes payable are as
follows as of September 30, 2000:
Years ending September 30,
-------------------------
2002 $ 6,310
2003 6,882
2004 5,567
--------------
$ 18,759
Interest expense, which approximates interest paid, aggregated $2,000 for the
nine month period ended September 30, 2000.
NOTE 5 - INCOME TAXES
The provision for income taxes consists of the following for the nine month
period ended September 30, 2000:
Current income taxes
Federal $ 657,000
State 123,000
Deferred income taxes
Federal (25,000)
State (5,000)
--------------
$ 750,000
Deferred income taxes reflect temporary differences in the recognition of
revenue and expenses for tax reporting and financial statement purposes. These
temporary differences relate principally to the use of the cash basis of
accounting for income tax purposes (prior to January 1, 1999).
During the nine month period ended September 30, 2000, the Company paid no
income taxes.
NOTE 6 - RETIREMENT PLAN
Effective January 1, 2000, the Company implemented a defined contribution 401(k)
profit sharing plan (the Plan) for all employees. Participants must have at
least three months of service and be at least 21 years of age to be eligible to
participate in the Plan. Participants may make voluntary contributions to the
Plan up to the maximum amount allowable by law, but not to exceed 15% of their
annual compensation. Company contributions to the Plan are at the discretion of
management and vest ratably over five years, beginning with the second year of
participation. No Company contributions to the Plan were made for the nine month
period ended September 30, 2000.
NOTE 7 - CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. The Company's management believes the risk of loss
associated with cash and cash equivalents is very low since cash and cash
equivalents are maintained in financial institutions. However, at September 30,
2000, the Company had cash and cash equivalents on deposit with a financial
institution that exceeded the federally insured limit. To date, accounts
receivable have been derived primarily from contracts with agencies of the
federal government. Accounts receivable are generally due within 30 days and no
collateral is required. The Company maintains reserves for potential credit
losses and historically such losses have been insignificant and within
management's expectations.
NOTE 8 - COMMITMENTS
The Company leases office space for its headquarters, and other offices, under
the terms of noncancelable operating leases, which expire at various dates
through December 31, 2002. The following is a schedule by year of the future
minimum lease payments required under operating leases, which have initial or
remaining terms in excess of one year as of September 30, 2000:
Years ending September 30,
-------------------------
2001 122,000
2002 120,000
2003 30,000
--------------
$ 272,000
During 1999, the Company entered into a lease agreement for office space from
its stockholder. The Company recorded lease expense aggregating $90,000 in
connection with this lease during the nine month period ended September 30,
2000. This lease agreement provides for payments of $10,000 per month through
December 31, 2002.
Rent expense aggregated $124,674 for the nine month period ended September 30,
2000.
NOTE 9 - SUBSEQUENT EVENT
Effective November 30, 2000, the Company merged with STRATESEC, Incorporated
under an agreement whereby the Company's stockholder surrendered all issued and
outstanding shares of the Company's common stock in exchange for 2,000,000
shares of STRATESEC, Incorporated common stock.
STRATESEC INCORPORATED
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 2000
Pro Forma Pro Forma
STRATESEC SSI Adjustments Combined
ASSETS
Current Assets
Cash and cash equivalents $ 228,523 $ - $ - $ 228,523
Accounts receivable, net of allowance for doubtful accounts4,237,962 928,640 - 5,166,602
Costs and estimated earnings in excess of
billings on uncompleted contracts 3,608,966 135,288 - 3,744,254
Inventory and other assets, net of allowance 937,558 104,372 - 1,041,930
Total current assets 9,013,009 1,168,300 - 10,181,309
Property, equipment and other, net 603,474 592,010 - 1,195,484
$ 9,616,483 $ 1,760,310 $ - $11,376,793
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit and other current debt obligations 1,480,237 437,215 - 1,917,452
Accounts payable 2,780,641 219,992 - 3,000,633
Billings in excess of costs and estimated earnings -
on uncompleted contracts 393,603 - - 393,603
Accrued expenses and other 903,945 1,415,081 - 2,319,026
Total current liabilities 5,558,426 2,072,288 - 7,630,714
Long-Term Liabilities
Capital lease obligations, less current maturities 43,515 - - 43,515
Commitments and Contingencies - - - -
Shareholders' Equity
Common stock 86,300 100 - 86,400
Treasury stock (612,814) - (612,814)
Additional paid-in capital 24,908,964 - - 24,908,964
Retained earnings (accumulated deficit) (20,367,908) (312,078) - (20,679,986)
4,014,542 (311,978) - 3,702,564
$ 9,616,483 $ 1,760,310 $ - $11,376,793
STRATESEC INCORPORATED
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS For the
nine months ended September 30, 2000
Pro Forma Pro Forma
STRATESEC SSI Adjustments Combined
Earned revenues $11,864,407 $6,801,143 $ - $18,665,550
Cost of earned revenues 7,618,788 3,894,127 - 11,512,915
Gross profit 4,245,619 2,907,016 - 7,152,635
Selling, general and administrative expenses 3,584,799 1,009,473 - 4,594,272
Operating income (loss) 660,820 1,897,543 - 2,558,363
Interest and financing fees (295,185) 68,388 - (226,797)
Income (loss) before income taxes 365,635 1,965,931 - 2,331,566
Provision for income taxes 750,000 750,000
Net income (loss) $ 365,635 $1,215,931 $ - $1,581,566
Net income (loss) per share - basic $ 0.05 $ - $ - $ -
Net income per share - diluted $ 0.04 $ - $ - $ -
Weighted average common shares outstanding - basic 7,941,397 - - -
Weighted average common shares outstanding - diluted 8,216,487 - - -
STRATESEC INCORPORATED
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1999
Pro Forma Pro Forma
STRATESEC SSI Adjustments Combined
ASSETS
Current Assets
Cash and cash equivalents $ 2,831 $ 3,081,612 $ - $3,084,443
Accounts receivable, net of allowance for
doubtful accounts 2,233,262 188,112 - 2,421,374
Costs and estimated earnings in excess of
billings on uncompleted contracts 2,865,886 - - 2,865,886
Inventory and other assets, net of allowance 250,393 4,856 - 255,249
Total current assets 5,352,372 3,274,580 - 8,626,952
Property, equipment and other, net 621,096 630,428 - 1,251,524
------------- ------------- --------- -------------
$ 5,973,468 $ 3,905,008 $ - $9,878,476
============= ============= ========= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit and other current debt obligations 844,392 20,319 - 864,711
Accounts payable 2,931,260 346,856 - 3,278,116
Billings in excess of costs and estimated earnings
on uncompleted contracts 234,338 3,111,351 - 3,345,689
Accrued expenses and other 627,156 482,398 - 1,109,554
------------- ------------- --------- -------------
Total current liabilities 4,637,146 3,960,924 - 8,598,070
Long-Term Liabilities
Debt obligations, less current maturities 94,570 34,800 - 129,370
Commitments and Contingencies - - - -
Shareholders' Equity
Common stock 68,902 - - 68,902
Treasury stock (409,564) - - (409,564)
Additional paid-in capital 22,315,957 100 - 22,316,057
Accumulated deficit (20,733,543) (90,816) - (20,824,359)
1,241,752 (90,716) - 1,151,036
------------- ------------- --------- -------------
$ 5,973,468 $ 3,905,008 $ - $9,878,476
============= ============= ========= =============
STRATESEC INCORPORATED
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the year ended December 31, 1999
Pro Forma Pro Forma
STRATESEC SSI Adjustments Combined
Earned revenues $10,631,131 $4,085,308 $ - $14,716,439
Cost of earned revenues 7,443,087 2,795,119 - 10,238,206
Gross profit 3,188,044 1,290,189 - 4,478,233
Selling, general and administrative expenses 3,878,103 436,027 - 4,314,130
Operating income (loss) (690,059) 854,162 - 164,103
Interest and financing fees (242,779) - - (242,779)
Income (loss) before income taxes (932,838) 854,162 - (78,676)
Provision for income taxes - (325,000) - (325,000)
Net income (loss) $ (932,838) $ 529,162 $ - $ (403,676)
============== ============== ========== ==============
Net income (loss) per share - basic $ (0.15) $ - $ - $ -
============== ============== ========== ==============
Net income per share - diluted N/A $ - $ - $ -
============== ============== ========== ==============
Weighted average common shares outstanding - basic 6,099,435 - - -
============== ============== ========== ==============
Weighted average common shares outstanding - diluted N/A - - -
============== ============== ========== ==============
STRATESEC INCORPORATED
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1998
Pro Forma Pro Forma
STRATESEC SSI Adjustments Combined
ASSETS
Current Assets
Cash and cash equivalents $ 442,582 $ 112,480 $ - $ 555,062
Cash - restricted 1,900,000 - - 1,900,000
Accounts receivable, net of allowance for
doubtful accounts 1,297,176 1,305,710 - 2,602,886
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,440,485 - - 1,440,485
Inventory and other assets, net of allowance 228,462 3,557 - 232,019
Total current assets 5,308,705 1,421,747 - 6,730,452
Property, equipment and other, net 519,031 79,965 - 598,996
------------- ------------- --------- -------------
$ 5,827,736 $ 1,501,712 $ - $7,329,448
============= ============= ========= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit and other current debt obligations 1,871,076 - - 1,871,076
Accounts payable 1,455,840 113,830 - 1,569,670
Billings in excess of costs and estimated earnings
on uncompleted contracts 102,132 646,523 - 748,655
Accrued expenses and other 1,008,955 153,656 - 1,162,611
------------- ------------- --------- -------------
Total current liabilities 4,438,003 914,009 - 5,352,012
Long-Term Liabilities
Capital lease obligations, less current maturities 167,430 - - 167,430
Commitments and Contingencies - - - -
Shareholders' Equity
Common stock 61,035 - - 61,035
Treasury stock (181,851) - - (181,851)
Additional paid-in capital 21,143,824 401,345 - 21,545,169
Retained earnings (accumulated deficit) (19,800,705) 186,358 - (19,614,347)
------------- ------------- --------- -------------
1,222,303 587,703 - 1,810,006
============= ============= ========= =============
STRATESEC INCORPORATED
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the year ended December 31, 1998
Pro Forma Pro Forma
STRATESEC SSI Adjustments Combined
Earned revenues $ 6,624,523 $1,781,447 $ - $8,405,970
Cost of earned revenues 4,792,838 1,267,469 - 6,060,307
Provision for contract adjustment 2,491,156 - - 2,491,156
Gross profit (659,471) 513,978 - (145,493)
Selling, general and administrative expenses 4,426,339 207,620 - 4,633,959
Recovery of legal judgment (1,655,000) - - (1,655,000)
Operating income (loss) (3,430,810) 306,358 - (3,124,452)
Interest and financing fees (91,890) - - (91,890)
Income (loss) before income taxes (3,522,700) 306,358 - (3,216,342)
Provision for income taxes - (120,000) (120,000)
Net income (loss) $(3,522,700) $ 186,358 $ - $ (3,336,342)
============== ============== ========== ==============
Net income (loss) per share - basic $ (0.58) $ - $ - $ -
============== ============== ========== ==============
Net income per share - diluted N/A $ - $ - $ -
============== ============== ========== ==============
Weighted average common shares outstanding - basic 6,099,435 - - -
============== ============== ========== ==============
Weighted average common shares outstanding - diluted N/A - - -
============== ============== ========== ==============
REPORT OF INDEPENDENT ACCOUNTANTS
February 6, 2001
To the Sole Stockholder and Director
of Security Systems Integrations, Inc.:
In our opinion, the accompanying balance sheet and the related statements of
income, of stockholder's deficit, and of cash flows present fairly, in all
material respects, the financial position of Security Systems Integrations, Inc.
(an S Corporation) at December 31, 1999 and the results of its operations and
its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
SECURITY SYSTEMS INTEGRATIONS, INC.
BALANCE SHEET
DECEMBER 31, 1999
ASSETS
Current assets
Cash and cash equivalents $ 3,081,612
Accounts receivable 188,112
Other current assets 4,856
--------------
Total current assets 3,274,580
Property and equipment, net 253,151
Note receivable from stockholder 327,277
Deposit 50,000
--------------
Total assets $ 3,905,008
==============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Accounts payable and accrued expenses $ 346,856
Accrued payroll and related liabilities 37,398
Billings in excess of revenue recognized 3,111,351
Income taxes payable 286,000
Notes payable 20,319
Deferred income taxes 159,000
--------------
Total current liabilities 3,960,924
Notes payable 34,800
--------------
Total liabilities 3,995,724
--------------
Stockholder's deficit
Common stock - no par value, 10,000 shares authorized, issued, and
outstanding 100
Accumulated deficit (90,816)
--------------
Total stockholder's deficit (90,716)
Commitments
--------------
Total liabilities and stockholder's deficit $ 3,905,008
==============
SECURITY SYSTEMS INTEGRATIONS, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1999
Revenue $ 4,085,308
--------------
Costs and expenses
Direct materials 1,436,262
Direct labor 570,227
Other direct costs 788,630
Indirect costs 436,027
--------------
3,231,146
Income before income taxes 854,162
Provision for income taxes (325,000)
--------------
Net income $ 529,162
==============
SECURITY SYSTEMS INTEGRATIONS, INC.
STATEMENT OF STOCKHOLDER'S DEFICIT
YEAR ENDED DECEMBER 31, 1999
Common Stock Retained Total
---------------------------------- Earnings Stockholder's
(Accumulated Equity
Shares Amount Deficit) (Deficit)
---------------- ---------------- ---------------- -------------
Balance at December 31, 1998 10,000 $ 401,345 $ 186,358 $ 587,703
Dividends paid - (401,245) (806,336) (1,207,581)
Net income for the year ended December 31, 1999 - - 529,162 529,162
------------- ------------- ------------- -------------
Balance at December 31, 1999 10,000 $ 100 $ (90,816) $ (90,716)
============= ============= ============= =============
SECURITY SYSTEMS INTEGRATIONS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
Cash flows from operating activities:
Net income $ 529,162
--------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 39,349
Deferred income taxes 39,000
(Increase) decrease in:
Accounts receivable 1,117,598
Other current assets (1,299)
Increase in:
Accounts payable and accrued expenses 233,026
Accrued payroll and related liabilities 3,742
Billings in excess of revenue recognized 2,464,828
Income taxes payable 286,000
--------------
Total adjustments 4,182,244
--------------
Net cash provided by operating activities 4,711,406
--------------
Cash flows from investing activities:
Purchases of property and equipment, net (212,535)
Increase in note receivable from stockholder (490,000)
Principal repayments under note receivable from stockholder 162,723
Increase in deposit (50,000)
--------------
Net cash used in investing activities (589,812)
--------------
Cash flows from financing activities:
Proceeds from notes payable 76,107
Principal payments under notes payable (20,988)
Dividends paid (1,207,581)
--------------
Net cash used in financing activities (1,152,462)
--------------
Net increase in cash and cash equivalents 2,969,132
Cash and cash equivalents, beginning of the year 112,480
--------------
Cash and cash equivalents, end of the year $ 3,081,612
==============
SECURITY SYSTEMS INTEGRATIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Security Systems Integrations, Inc. (the "Company") was incorporated in the
state of Virginia on October 10, 1997. The Company, which is privately held,
provides security systems for commercial companies and agencies of the federal
government.
The significant accounting policies followed by the Company are described below.
Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated amounts.
Revenue recognition
Substantially all of the Company's contract revenue results from contracts with
agencies of the federal government. Revenue on fixed-price and cost-reimbursable
contracts includes direct costs and allocated indirect costs incurred plus
recognized profit. Profit is recognized under fixed-price contracts on the
percentage-of-completion basis. Revenue on time-and-material contracts is
recognized based upon time (at established rates) and other direct costs
incurred. Losses on contracts are provided for in the period they are first
determined. Amounts billed in excess of revenue recognized is reflected as a
liability on the accompanying balance sheet.
Cash equivalents
The Company considers all highly liquid instruments with original maturities of
three months or less to be cash equivalents.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization of property and equipment is
computed using an accelerated method over the estimated useful lives of five to
seven years. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the estimated useful lives of the
assets or the term of the related lease.
Income taxes
Income taxes have been recorded using the liability method. The income tax
provision includes federal and state income taxes both currently payable and
changes in deferred taxes due to
differences between financial reporting and tax bases of assets and liabilities.
Deferred tax assets and liabilities are measured using the enacted tax rates and
laws that are expected to be in effect when the differences are expected to
reverse.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1999:
Vehicles $ 116,127
Leasehold improvements 94,386
Computer hardware and software 55,336
Office furniture 28,058
Construction equipment 17,660
--------------
311,567
Less: accumulated depreciation and amortization (58,416)
--------------
$ 253,151
==============
Depreciation and amortization expense aggregated $39,349 for the year ended
December 31, 1999.
NOTE 3 - NOTE RECEIVABLE FROM STOCKHOLDER
The note receivable to stockholder is unsecured, with installments of principal
and interest (at 7.0%) of $3,260 due monthly through September 2029. During the
year ended December 31, 1999, principal payments of $161,511 were received in
excess of the amounts required by the note receivable, accordingly, the balance
has been classified as noncurrent.
NOTE 4 - NOTES PAYABLE
Notes payable consist of the following at December 31, 1999:
Note payable to vendor, secured by a truck with a book value of $40,087 at
December 31, 1999, with installments of principal and interest (at
8.7%) aggregating $641 due monthly through June 2004. $ 31,107
Note payable to bank, unsecured, with installments of principal and
interest (at 7.0%) aggregating $1,349 due monthly through July 2001. 24,012
--------------
Total notes payable 55,119
Less: current portion (20,319)
--------------
Noncurrent portion $ 34,800
==============
The scheduled maturities of the noncurrent portion of the notes payable are as
follows as of December 31, 1999:
Years ending December 31,
------------------------
2001 $ 15,028
2002 6,448
2003 7,032
2004 6,292
--------------
$ 34,800
==============
Interest expense, which approximates interest paid, aggregated $1,888 for the
year ended December 31, 1999.
NOTE 5 - INCOME TAXES
The provision for income taxes consists of the following for the year ended
December 31, 1999:
Current income taxes
Federal $ 241,000
State 45,000
Deferred income taxes
Federal 33,000
State 6,000
--------------
$ 325,000
Deferred income taxes reflect temporary differences in the recognition of
revenue and expenses for tax reporting and financial statement purposes. These
temporary differences relate principally to the use of the cash basis of
accounting for income tax purposes (prior to the year ended December 31, 1999).
During the year ended December 31, 1999, the Company paid no income taxes.
NOTE 6 - CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. The Company's management believes the risk of loss
associated with cash and cash equivalents is very low since cash and cash
equivalents are maintained in financial institutions. However, at December 31,
1999, the Company had cash and cash equivalents on deposit with a financial
institution that exceeded the federally insured limit by approximately
$3,100,000. To date, accounts receivable have been derived primarily from
contracts with agencies of the federal government. Accounts receivable are
generally due within 30 days and no collateral is required. The Company
maintains reserves for potential credit losses and historically such losses have
been insignificant and within management's expectations.
NOTE 7 - COMMITMENTS
The Company leases office space for its headquarters, and other offices, under
the terms of noncancelable operating leases, which expire at various dates
through December 31, 2002. The following is a schedule by year of the future
minimum lease payments required under operating leases, which have initial or
remaining terms in excess of one year as of December 31, 1999:
Years ending December 31,
------------------------
2000 $ 125,000
2001 122,000
2002 120,000
--------------
$ 367,000
During 1999, the Company entered into a lease agreement for office space from
its stockholder. The Company recorded lease expense aggregating $40,000 in
connection with this lease during the year ended December 31, 1999. This lease
agreement provides for payments of $10,000 per month through December 31, 2002.
Total rent expense aggregated $83,443 for the year ended December 31, 1999.
NOTE 8 - SUBSEQUENT EVENTS
Effective January 1, 2000, the Company implemented a defined contribution 401(k)
profit sharing plan (the Plan) for all employees. Participants must have at
least three months of service and be at least 21 years of age to be eligible to
participate in the Plan. Participants may make voluntary contributions to the
Plan up to the maximum amount allowable by law, but not to exceed 15% of their
annual compensation. Company contributions to the Plan are at the discretion of
management. The Company contributions vest ratably over five years, beginning
with the second year of participation.
Effective November 30, 2000, the Company merged with STRATESEC, Incorporated
under an agreement whereby the Company's stockholder surrendered all issued and
outstanding shares of the Company's common stock in exchange for 2,000,000
shares of STRATESEC, Incorporated common stock.
REPORT OF INDEPENDENT ACCOUNTANTS
February 6, 2001
To the Sole Stockholder and Director
of Security Systems Integrations, Inc.:
In our opinion, the accompanying balance sheet and the related statements of
income and retained earnings and of cash flows present fairly, in all material
respects, the financial position of Security Systems Integrations, Inc. (an S
Corporation) at December 31, 1998 and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of management; our responsibility is to express an opinion on
these financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
SECURITY SYSTEMS INTEGRATIONS, INC.
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
Current assets
Cash and cash equivalents $ 112,480
Accounts receivable 1,305,710
Other current assets 3,557
--------------
Total current assets 1,421,747
Property and equipment, net 79,965
--------------
Total assets $ 1,501,712
==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable and accrued expenses $ 113,830
Accrued payroll and related liabilities 33,656
Billings in excess of revenue recognized 646,523
Deferred income taxes 120,000
--------------
Total current liabilities 914,009
--------------
Stockholder's equity
Common stock - no par value, 10,000 shares authorized, issued, and
outstanding 401,345
Retained earnings 186,358
--------------
Total stockholder's equity 587,703
Commitments
--------------
Total liabilities and stockholder's equity $ 1,501,712
==============
SECURITY SYSTEMS INTEGRATIONS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1998
Revenue $ 1,781,447
--------------
Costs and expenses
Direct labor 226,736
Direct materials 499,636
Other direct costs 541,097
Indirect costs 207,620
--------------
1,475,089
Income before income taxes 306,358
Provision for income taxes (120,000)
--------------
Net income 186,358
Retained earnings, beginning of the year 0
--------------
Retained earnings, end of the year $ 186,358
==============
SECURITY SYSTEMS INTEGRATIONS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
Cash flows from operating activities:
Net income $ 186,358
--------------
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 19,067
Deferred income taxes 120,000
Increase in:
Accounts receivable (1,305,710)
Other current assets (3,557)
Accounts payable and accrued expenses 113,830
Accrued payroll and related liabilities 33,656
Billings in excess of revenue recognized 646,523
--------------
Total adjustments (376,191)
--------------
Net cash used in operating activities (189,833)
Cash flows from investing activity:
Purchases of property and equipment, net (99,032)
Cash flows from financing activity:
Proceeds from the sale of common stock 401,345
--------------
Net increase in cash and cash equivalents 112,480
Cash and cash equivalents, beginning of the year 0
--------------
Cash and cash equivalents, end of the year $ 112,480
==============
SECURITY SYSTEMS INTEGRATIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Security Systems Integrations, Inc. (the "Company") was incorporated in the
state of Virginia on October 10, 1997. The Company, which is privately held,
provides security systems for commercial companies and agencies of the federal
government.
The significant accounting policies followed by the Company are described below.
Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated amounts.
Revenue recognition
Substantially all of the Company's contract revenue results from contracts with
agencies of the federal government. Revenue on fixed-price and cost-reimbursable
contracts includes direct costs and allocated indirect costs incurred plus
recognized profit. Profit is recognized under fixed-price contracts on the
percentage-of-completion basis. Revenue on time-and-material contracts is
recognized based upon time (at established rates) and other direct costs
incurred. Losses on contracts are provided for in the period they are first
determined. Amounts billed in excess of revenue recognized is reflected as a
liability on the accompanying balance sheet.
Cash equivalents
The Company considers all highly liquid instruments with original maturities of
three months or less to be cash equivalents.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization of property and equipment is
computed using an accelerated method over the estimated useful lives of five to
seven years. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the estimated useful lives of the
assets or the term of the related lease.
Income taxes
Income taxes have been recorded using the liability method. The income tax
provision includes federal and state income taxes both currently payable and
changes in deferred taxes due to differences between financial reporting and tax
bases of assets and liabilities. Deferred tax assets and liabilities are
measured using the enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1998:
Computer hardware and software $ 60,523
Vehicles 30,000
Office furniture 6,509
Leasehold improvements 2,000
--------------
99,032
Less: accumulated depreciation and amortization (19,067)
--------------
$ 79,965
==============
Depreciation and amortization expense aggregated $19,067 for the year ended
December 31, 1998.
NOTE 3 - INCOME TAXES
The provision for income taxes consists of the following for the year ended
December 31, 1998:
Deferred income taxes
Federal $ 101,000
State 19,000
--------------
$ 120,000
==============
Deferred income taxes reflect temporary differences in the recognition of
revenue and expenses for tax reporting and financial statement purposes. These
temporary differences relate principally to the use of the cash basis of
accounting for income tax purposes.
At December 31, 1998, the Company has net operating loss carryforwards available
to offset future taxable income of approximately $213,000. If not used, the
Company's net operating loss carryforwards will expire in 2018.
During the year ended December 31, 1998, the Company paid no income taxes.
NOTE 4 - CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. The Company's management believes the risk of loss
associated with cash and cash equivalents is very low since cash and cash
equivalents are maintained in financial institutions. However, at December 31,
1998, the Company had cash and cash equivalents on deposit with a financial
institution that exceeded the federally insured limit. To date, accounts
receivable have been derived primarily from contracts with agencies of the
federal government. Accounts receivable are generally due within 30 days and no
collateral is required. The Company maintains reserves for potential credit
losses and historically such losses have been insignificant and within
management's expectations.
NOTE 5 - COMMITMENTS
The Company leases office space for its headquarters under the terms of a
noncancelable operating lease, which expires on December 31, 2002, with its sole
stockholder. The following is a schedule by year of the future minimum lease
payments required under operating leases, which have initial or remaining terms
in excess of one year as of December 31, 1998:
Years ending December 31,
------------------------
1999 $ 68,000
2000 125,000
2001 122,000
2002 120,000
--------------
$ 435,000
==============
Rent expense aggregated $23,229 for the year ended December 31, 1998.
NOTE 6 - SUBSEQUENT EVENTS
Effective January 1, 2000, the Company implemented a defined contribution 401(k)
profit sharing plan (the Plan) for all employees. Participants must have at
least three months of service and be at least 21 years of age to be eligible to
participate in the Plan. Participants may make voluntary contributions to the
Plan up to the maximum amount allowable by law, but not to exceed 15% of their
annual compensation. Company contributions to the Plan are at the discretion of
management. The Company contributions vest ratably over five years, beginning
with the second year of participation.
Effective November 30, 2000, the Company merged with STRATESEC, Incorporated
under an agreement where the Company's sole stockholder surrendered all issued
and outstanding shares of the Company's common stock in exchange for 2,000,000
shares of STRATESEC, Incorporated common stock.
STRATESEC INCORPORATED
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD AUGUST 15, 2001
The undersigned, having received the Annual Report to the Stockholders
and the accompanying Notice of Annual Meeting of Stockholders and Proxy
Statement dated July 11, 2001 hereby appoints Wirt D. Walker, III, Nassima
Briggs and each of them, proxies with full power of authorization, and hereby
authorizes them to represent and vote the shares of Common Stock of STRATESEC
INCORPORATED (the "Company") which the undersigned would be entitled to vote if
personally present at the Annual Meeting of Stockholders of the Company to be
held on August 15, 2001 at 2:00 p.m. local time, and any adjournment thereof,
and especially to vote
1. PROPOSAL ONE -- ELECTION OF DIRECTORS WITHHOLD AUTHORITY
FOR all nominees listed below _ to vote for all nominees
listed below _
Wirt D. Walker, III, Barry W. McDaniel, Kamran Hashemi,
Robert B. Smith, Jr., Emmit J. McHenry, Charles W. Archer,
Lt. General James A. Abrahamson, USAF (Retired)
To withhold authority to vote for any individual nominee, write that
nominee's name on the space provided below.
------------------------------------------------------------------------
2. PROPOSAL TWO -- To consider and vote upon the proposal to ratify the
issuance of 2,000,000 restricted shares of common stock in connection
with the acquisition of Security Systems Integration, Inc.
_ FOR _ AGAINST _ ABSTAIN
3. PROPOSAL THREE -- To consider and vote upon the proposal to amend the
Company's 1997 Stock Option Plan to increase the number of shares of
common stock reserved for issuance thereunder.
_ FOR _ AGAINST _ ABSTAIN
4. IN THEIR DISCRETION the proxies are authorized to vote upon such other
business as may properly come before the meeting.
ON REVERSE SIDE
In the ballot provided for that purpose, if you specify a choice as the
action to be taken this proxy will be voted in accordance with such choice. If
you do not specify a choice, it will be voted FOR Proposal One, Two and Three as
described in the Proxy Statement.
Any proxy or proxies previously given for the meeting are revoked.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY, USING THE
ENCLOSED ENVELOPE.
Dated:__________________________________, 2001
---------------------------------------------
(Signature)
---------------------------------------------
(Signature if held jointly)
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian please give full title of each. If a corporation, please
sign in full corporate name by president or other authorized office. If a
partnership, please sign in partnership name by authorized person.