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Kratos Submits Late Financials, Reports Heavy Losses in Restructuring

Kratos Defense and Security, the new name of San Diego-based Wireless Facilities Inc., filed delayed quarterly results for the first and second quarters of this year, a move the company says should maintain its listing on Nasdaq.

The reports, which could have led to delisting the company’s stock from the exchange, were due to an internal investigation into the company’s stock option granting methods that uncovered a major fraud this year.

On Oct. 9, former WFI employee Vencent Donlan was sentenced to 46 months in federal prison and ordered to pay $8.45 million in restitution after he pleaded guilty to two felony counts in July in connection with a scheme that involved illegally obtaining stock options he converted to 728,000 shares of WFI common stock. Donlan and his wife then sold the stock and netted more than $6.2 million from 2002 to 2003, according to federal prosecutors.

WFI discovered Donlan’s fraud as it was conducting an investigation into whether some of its stock options were backdated. Donlan, WFI’s former stock options administrator, was found to have been manipulating and issuing false stock from 1998 to 2003. The company reported taking charges of $55 million related to the fraud.

Since January, Kratos has been in a restructuring mode, changing the company’s business from designing and operating telephone networks for larger wireless carriers to providing technology services to federal government agencies.

The dramatic shift has caused quite an upheaval in the firm’s belated bottom line results.

For the first quarter ended March 31, Kratos had a net loss of $20 million on revenue of $49 million. That compared with a net loss of $800,000 on revenue of $32.9 million for the like quarter of 2006.

For the second quarter ended June 30, Kratos reported a net profit of $4.2 million on revenue of $47.8 million, compared with a net profit of $600,000 on revenue of $34.2 million for the same quarter of 2006.

For the six months, Kratos had a net loss of $15.9 million on revenue of $96.8 million, compared with a net loss of $1.4 million on revenue of $67.1 million for the first half of 2006.

Chief Executive Officer Eric DeMarco, who took over as chief executive last year, said the financials don’t reflect the company’s new business model, and included operations from businesses sold, and many expenses that will be eliminated or reduced as the company continues “to right-size our corporate infrastructure.”

WFI sold three units during the first half that generated $200 million in revenue annually and employed some 1,000 workers. Today, a revamped Kratos is generating about half its prior revenues, but has half the number of employees.

“With the completion of the transition service agreements we have in place through the end of this year, we believe we can successfully normalize the business by the first quarter of 2008,” DeMarco said.

In other news, Kratos said it was awarded two new contracts with the Defense Contracts Management Agency, with a combined total value of about $22 million, if all options are exercised.

Now traded on Nasdaq under KTOS, shares declined 11 cents to close Oct. 8 at $2.62, and have ranged from $1.01 to $2.98 in the past 52 weeks.

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Accredited Deal Nearly Done:

The sale of San Diego subprime lender Accredited Home Lenders Holding Co. to a Texas private equity firm appears to be on track and should be completed by mid-October.

Last week, Dallas-based Lone Star Funds said that as of Oct. 5 it received 23.9 million of Accredited’s shares in a stock tender offer, or more than 95 percent of the total Accredited shares outstanding.

That threshold would permit the deal to close several days after Oct. 11, according to earlier Lone Star press statements.

The two parties originally agreed to an acquisition June 4 that called for Lone Star to pay $15.10 per share, but as the subprime mortgage industry imploded, Lone Star renegotiated the price to $11.75, or an aggregate $311 million.

Accredited Home Lenders, like all subprime lenders, has been reeling since last year, with a surge in delinquencies and defaulted mortgages.

The company that originated $16 billion in mortgages in 2006 halted all lending activities last month and closed its retail offices. It has let go more than 3,000 workers since the beginning of this year.

As of last month, the head count was 1,000, down from 4,200 on Dec. 31.

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Websense Completes Purchase:

Websense Inc., a San Diego provider of Web filtering software, completed the acquisition of SurfControl, a British firm that’s also providing Internet security software protection to computer networks, on Oct. 3.

The all-cash transaction was reported as 204 million British pounds, which translates to about $415 million.

As a result of the purchase, Websense says it doubled its customer base to more than 50,000 organizations, and now protects the Internet-fielded content to some 42 million employees.

Last year, SurfControl had sales of $114 million and 600 employees.

Websense generated $180 million in sales last year, and has 728 employees.

Websense, a public company since 2000, says it is financing the transaction , its largest ever , with existing cash and a $210 million loan arranged by Morgan Stanley Senior Funding and Bank of America.

Traded on Nasdaq under WBSN, shares closed Oct. 8 at $21.48, and have ranged from $18.52 to $28.25 in the past 52 weeks.

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Ticker Takes:

Axesstel Inc. said it signed an agreement with an Estonian company to supply fixed wireless and broadband data products. WD-40 Co. declared its regular 25 cents per share dividend payable Oct. 31 to shareholders of record on Oct. 18. SYS Technologies Inc. said it landed a contract with a potential value of $2 million for its network management product with a new customer, an undisclosed agency of the federal government. NextWave Wireless Inc. said its compensation committee approved stock option grants to purchase 508,637 shares of common stock for 89 new employees who joined the company as part of its acquisition of IPWireless Inc. ViaSat Inc. said it received an $18.3 million contract from the U.S. Air Force to support continued development of its joint communication simulator. International Lottery & Totalizator Systems said it received a $2 million order from the Philippine Gaming Management Co. for new lottery terminals. NTN Buzztime Inc. launched a new game, Odds on Sports, through its network of bars and restaurants in North America and the United Kingdom. Document Sciences entered a partnership with Volante Technologies to automate the production and transmission of trade confirmations. … PriceSmart Inc. reported net sales of $78 million in September, up 25 percent from September 2006.


Send any news of locally based public companies to Mike Allen via e-mail at

mallen@sdbj.com

. He can be reached at (858) 277-6359.

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