U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to ___________
Commission File Number: 0-21361
ENSEC INTERNATIONAL, INC.
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(Name of small business issuer in its charter)
Florida 65-0654330
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(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
352 Seventh Avenue, Suite 1040, New York, NY 10001
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(Address of principal executive offices) (zip code)
(212) 967-6611
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Registrant's telephone number, including area code
1 World Trade Center, Suite 3357, New York, NY 10048
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(Former name, former address and former fiscal year, if changed since last
report)
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value per share
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(Title of Class)
Redeemable Warrants to Purchase Common Stock, $.01 par value per share
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes ___ No X
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended December 31, 1998 were
$5,446,879.
As of March 23, 1999, the aggregate market value of the registrant's
Common Stock held by non-affiliates computed by reference to the closing price
of such stock as of such date was $1,383,737.50.
As of March 23, 1999, there were 6,016,250 shares of Common Stock
issued and outstanding.
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PART I
Item 1. DESCRIPTION OF BUSINESS
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General
Ensec International, Inc. (the "Company"), a Florida corporation, was
formed in April 1996 as a holding company for Ensec Inc., a Florida corporation
("Ensec Inc."), and Ensec Engenharia e Sistemas de Seguranca, SA. ("Ensec,
S.A."), a Brazilian corporation. Ensec, S.A. was founded in 1983 by Charles N.
Finkel, the Company's President and Chief Executive Officer. In 1991, Ensec,
S.A. established its U.S. operations with the formation of Ensec Inc.
The Company, through Ensec, S.A., designs, develops, assembles, sells,
installs and services security systems for large commercial or governmental
facilities, ranging from single function installations to high-end integrated
security systems. The Company's high-end integrated systems are based on its
proprietary software and related hardware which permit multiple devices or
systems to be combined into a unified system covering multiple sites. Since its
inception, the Company has installed approximately 400 systems, nearly all in
Brazil, for large corporations (such as Bosch, Caterpillar, Eastman Kodak,
General Motors, IBM, Microsoft and Texaco) and government agencies (such as the
Brazilian Bureau of Mint & Engraving and the Central Bank of Brazil).
The Company began marketing its En2000(TM) system in 1995 at which
time the Company was selected by the Port Authority of New York and New Jersey
through a competitive bid process to provide the new integrated access control
system for the parking facilities located in the World Trade Center. Other
significant customer contracts awarded to the Company's U.S. operations for its
En2000(TM) system include the EDS headquarters in Texas and its other facilities
located in Sacramento, California and Middlesex, United Kingdom; A.D.T.
Securities Systems, Inc. ("ADT") headquarters in Boca Raton, Florida and its
facility in Denver, Colorado and Lockheed Martin facility in Orlando, Florida.
The Company continued to experience tremendous difficulty overcoming
the cost of market entry primarily as a result of insufficient capital required
for the sales and marketing efforts that create customer knowledge, sales
opportunities and product acceptability.
In response to poor cash flow and a lack of significant backlog of
sales, in 1998, the Company elected to close Ensec Inc.; terminate all of its
U.S. employees; cease the manufacture, sale, installation and service of its
EnWork family of products and elected to license products in the United States.
As of March 16, 1998, the Company has entered into a licensing agreement with
Lockheed Martin and a service agreement with Integrated Security Resources, Inc.
As a result of those changes, revenues decreased significantly in the U.S. and
consequently, Ensec S.A. represents the majority of the consolidated operations.
The Company's business strategy is based on two objectives which the
Company believes will allow it to better serve each of its geographic markets:
In Brazil, in addition to selling the EnWorks family of products, the
Company also sells a broad range of security products and services such as data
security, time and attendance and CCTV. These products are being marketed to the
existing customer base, the general market and the Brazilian market through
Ensec S.A.'s established direct sales force and indirect sales channels. The
Company anticipates that the sale, service and maintenance of the third party
products has and will continue to account for a majority of the Company's total
sales. The Company's sales growth from distribution revenue of the third party
security products will generate additional revenues by obtaining the maintenance
contracts related to such sales. The Company has experienced a high renewal rate
of maintenance contracts. Sales of one particular type of product may in any
given quarterly period account for a majority of sales and decrease in
significance thereafter.
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In the United States, the Company is looking to license its product to
strategic partners, who, with the direct sales force and established customer
base, are financially capable of absorbing the risks of selling the ENWorks
family of products. The Company also seeks to enter into procurement contracts
with U.S. companies who wish to do business in the security industry in Brazil.
Agreement and Plan of Merger
On October 28, 1998, the Company entered into an Agreement and Plan of
Merger with Sentech EAS Corporation (Sentech) which, upon completion of the
merger, will result in the Company and Sentech becoming wholly-owned
subsidiaries of a newly-formed holding company, Sensec International, Inc.
(Sensec). Under the terms of the agreement, the Company's stockholders will
receive aproximately 60% or 1,425,000 common shares of Sensec, and Sentech
stockholders will receive approximately 40% or 950,000 common shares of Sensec.
Completion of the merger is subject to the approvals of the boards of directors
and stockholders of both the Company and Sentech.
Integrated Security Systems
Integrated security systems perform functions such as access control,
facilities management and alarm monitoring through combined subsystems and
components such as card readers, closed circuit television ("CCTV"), paging
devices, intercoms and identification badges. An integrated security system
generally includes a central command and control feature that uses a single-user
interface and shares data among subsystems to form a system that performs in a
uniform and cohesive fashion. Systems integration allows various subsystems to
communicate with each other so that one system, rather than many subsystems,
controls a company's or a location's security. The Company believes that, by
integrating disparate subsystems into a single system, functions are enhanced by
establishing uniform responses to certain conditions. The Company believes that
integrated systems involve fewer steps to process data, therefore requiring less
response time to perform functions.
In an integrated security system, a central computer is necessary to
integrate components and subsystems. The degrees of systems integration can
vary, ranging from subsystems interconnected through electrical wiring to
subsystems that communicate with each other via separate databases and that are
monitored through a central processor and finally to the most advanced
integrations which share the same database. For example, an integrated system
can be as simple as connecting a CCTV system to an alarm system for a small bank
branch or casino room. An integrated system can also be extremely advanced,
being built around a common database and combining identification cards and
graphical screen monitoring of access control with monitored alarms and HVAC
(heating, ventilation and air conditioning)/lighting management systems for
large corporate or government sites.
The primary function of an integrated security system is typically
access control. Conventional access control systems involve mechanical devices
allowing access, such as magnetic stripe card readers on turnstiles or proximity
card readers on doors. These mechanisms were often connected to a CCTV system,
but were not usually integrated with a larger premises control system. Today,
such mechanical access control systems are still being installed, but the
Company believes that the future growth in access control will come from
PC-based systems which are integrated with other building systems. Access
control is becoming increasingly important in the protection of electronic data.
Gaining access to a data stream, whether it be a corporate computer network or a
financial institution's ATM network, involves various forms of identification
and certification. These include traditional forms such as a simple personal
identification number ("PIN") or cards with magnetic stripes, but are
increasingly becoming more sophisticated, such as token cards (which allow
remote access to PlN-specific systems), remote detection cards such as ID badges
that emit radio frequencies and identification equipment based on fingerprint or
eye identification.
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While the initial purchase and installation of an integrated security
system often will cost more than a simple, stand alone alarm monitoring, access
control, CCTV or security guard system, the Company believes that integrated
systems justify their cost because they can result in reduced capital
expenditures and maintenance costs (due to the elimination of redundant
components or circuitry that would result from multiple stand-alone systems)
over time while improving performance. Staffing costs are also generally reduced
by integrated systems because operators monitor multiple functions, the
complexity of several systems has been simplified into one graphical user
interface and, as a result of the simpler nature of the system, fewer personnel
are required to operate the system. However, in Brazil, because the Company has
knowledge of the business and because of the size and maturity of the Brazilian
economy and social structure, there are a small number of larger organizations
requiring real-time integrated security systems and a large number of smaller
organizations requiring security products. Consequently, there is a limited
market for the ENWorks family of products and a large market for security system
related products.
Products and Services
The Company has established four distinct yet related sources of
revenue: Systems Integration, Product Procurement, Service and Licensing. As of
December 31, 1998, Ensec S.A. has a current backlog of orders for systems sales,
installations and service aggregating approximately $ 2.0 million. Backlog
consists of contracts or purchase orders with delivery dates scheduled within
the next 12 months. The Company currently expects to ship its entire current
backlog within the next 12 months. Variations in the magnitude and duration of
contracts received by the Company and customer delivery requirements may result
in substantial fluctuations in backlog from period to period. Since customers
may cancel or reschedule deliveries, backlog may not be a meaningful indicator
of future financial results.
Systems integration and product procurement: In response to the
requirements of the Brazilian market and as a complement to its existing
products, Ensec S.A. has entered into several systems integration agreements,
for different types of security-related products detailed as follows:
o En2000(TM) Integrated Security System
Integrated security system providing on-line (i.e., real-time)
access control/ alarm monitoring and the integration and/or secondary monitoring
(i.e., monitoring-only without operational capability) of multiple subsystems.
This system and the EnWin system, described below, consist of a central
processing unit running proprietary software that is connected to a number of
devices through distributive intelligence architecture.
The En2000 family of products is designed to permit upgrades
and improvements allowing lesser-featured systems such as the Scape system to be
expanded to provide the features of the most sophisticated system offered, the
En2000(TM) system. The En2000(TM) system was designed to be expandable from its
current function (i.e., an integrated security system) to meet the new and
changing applications needs of the customer. The foundation for this approach
was established with the selection of the object-oriented design methodology, a
real time operating system, the standard PC computing platform, and the
graphical user interface. The Company offers a number of components to expand or
enhance the En2000(TM) system including a networked access control/data
collector, a networked alarm monitoring unit, multi-site communications
capabilities and expanded databases.
o Physical Security - Access Control and Alarm Monitoring.
o Analogic and Digital Closed Circuit Television and Video Remote
Surveillance
o Data Security - consists of software that can be used in a
network environment or on a stand-alone PC. The Company has
entered into strategic alliance with PC Security in order to
offer integrated solutions in the Data Security area.
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o O&M Kronos, Time, Attendance and Human Resource Management -
computerized payroll hardware and software for personnel tracking
and management systems.
o EnWin Integrated Security System - O&M integrated security system
providing on-line access control / alarm monitoring with a more
limited number of readers and limited integration or secondary
monitoring of additional application subsystems, running on a
Windows NT platform.
o Scape Security System Offline access control system consisting of
software and DC500 terminals.
o DC500 Terminal Stand alone access control/data collector.
Service: An important part of any systems sale is the ability of the
systems provider to train, service and maintain the system. The Company has
developed a service organization to provide project management, systems design,
training, technical documentation, site surveys and audits, installation and
maintenance services.
The Company has outstanding bids totalling approximately $ 8.0 million
for its Integrated Security Systems installation and maintenance services in
Brazil. However, there can be no assurance that the Company will receive
contracts for these bids.
Licensing: In the U.S., the Company has entered into licensing
agreements with Lockheed Martin and Integrated Security Resources who are
committed to providing support for and paying royalties on the sale of software
and hardware.
Since the Company's installed base of systems is concentrated primarily
in Brazil, service revenues and related personnel resources are also primarily
based in Brazil, where the Company provides nationwide installation, project
management and maintenance services through trained technicians located
throughout Brazil. These services are provided pursuant to contracts which
typically have a duration of five years or more. The Company currently has 43
maintenance and service contracts covering 75 installations in Brazil. The
Company has the right to provide, if contracted for by the customer, maintenance
under its distribution agreements. To date, all products sold under distribution
agreements are under warranty. The Company anticipates that a majority of the
customers will enter into maintenance contracts at the warranty expiration.
However, there is no assurance that the Company will be retained by the
customer.
Intellectual Property
The Company's ability to compete successfully depends, in part, on its
ability to protect the proprietary technology contained in its products. The
Company relies on a combination of patent, trade secret, copyright and trademark
laws, together with non-disclosure agreements, to establish and protect
proprietary rights in its EnWorks(R) products. The Company generally enters into
confidentiality and/or license agreements with its employees, distributors,
customers and suppliers, and limits access to and distribution of its
proprietary information. These measures afford limited protection and there can
be no assurance that the steps taken by the Company to protect these proprietary
rights will be adequate to prevent misappropriation of its technology or the
independent development by others of similar technology. In addition, the laws
of Brazil, where the Company maintains its patents and copyrights and has
pending patent applications, do not protect the Company's proprietary rights to
the same extent as do the laws of the United States. The Company intends to seek
copyright protection under United States law with respect to some of its
technology. While the Company believes that it would be impractical and not
cost-effective for anyone to attempt to copy complex software such as that used
in the EnWorks(R) products, unauthorized parties, nevertheless, might attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. The cost of enforcement by the Company of its
information rights could be significant, regardless of the outcome of such
enforcement proceedings.
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Sales and Marketing
The Company's sales strategy is focused on the following:
o In the U.S., the Company seeks to license its product to strategic
partners, who, with the direct sales force and established customer base are
financially capable of absorbing the risks of selling the ENWorks family of
products. The Company also seeks to enter into royalty contracts with U.S.
companies who wish to do business in the security industry in Brazil.
o In Brazil, the Company is primarily a systems integrator, service /
maintenance company and utilizes third party products to arrive at a security
solution for its customers. The benefits of each product groupings are as
follows:
o En2000 Security Product: This advanced generation of EnWorks products,
which utilizes the capabilities of a QNX operating system, is the
industry's only real-time application operation system. These products are
easily integrated with any CCTV system, enhancing the productivity and
efficiency of the system. The QNX system is resourceful enough to handle
thousands of transactions on real-time basis, which is critical for an
integrated security system in a large installation environment. The En500
is a combination package of low-end access control and time & attendance
program which allows the clocking in / out during the access process in a
security environment.
o EnWin by PCSC: Price sensitive access control application that is directed
toward the competitive mid-range market. It has a memory capacity to handle
1000 employee identification cards and the last 500 transactions. This
application can handle a multitude of reader technologies, which makes it
flexible in a client environment.
o CCTV: Customized solutions to meet the customer's surveillance and security
needs with system capabilities of up to 600 cameras. By using new products
available in the international market, our expertise allows us to deliver
the best solutions to customers.
o Video Remote Surveillance: The new digital video systems developed by Roli
S.A., allow Ensec to replace the outmoded CCTV surveillance systems by
utilizing the existing cameras but managing alarms and images more easily
and using existing networks, telephone lines and even the Internet.
o Stoplock: This product, developed by PCSL, is designed as a complementary
security solution for individual PC's in a network environment for the
Access Manager. It also acts as an independent security solution for
stand-alone PC's. The unique benefit of Stoplock is that it can be
initially setup to operate independently and then, in the future, it can be
migrated seamlessly to LAN or WAN with the use of Access Manager.
o Timekeeper: A Time & Attendance system, developed by Kronos, Inc., offers
the most comprehensive set of features available in a labor management
system. It simplifies communications with data collection devices, supports
employee scheduling, delivers hours and wages data to the supervisors and
interfaces with a wide range of payroll and human resources available in
the market.
o Market Point Simplicity: A simple and automatic parking control system,
developed by Magnetic Automation Corp., allows, with a "fee computer", a
ticket dispenser, barriers and a machine readable swipe reader, the total
control of a parking area.
o Service & Maintenance: The Company has expanded and upgraded its service
and maintenance group to handle all the security-related products that the
Company installs. In addition, Ensec S.A. has expanded its services and
maintenance program to the new road concession companies in Brazil by
installing and providing maintenance for the next three years of toll
collection systems in Parana State.
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Competition
In Brazil, the Company competes with Sensormatic, Casi-Rusco and
Northern Computers Corporation, among others. In North America, significant
competitors include Software House/Sensormatic, Casi-Rusco, Matrix, Cardkey,
Diebold, Johnson Controls, Honeywell, Infographic, MDI and Pinkerton. Some of
these competitors have greater name recognition, more extensive engineering,
manufacturing, marketing and distribution capabilities and greater financial,
technological and personnel resources than the Company. The Company may also
face competition from potential new entrants into the Company's segment of the
security systems industry, many of which have substantially greater resources
than the Company. It is possible, for example, that existing or potential
competitors of the Company could introduce less expensive and/or improved
products. However, the Company believes that competition is based primarily on
product performance and features and, to a lesser extent, on the basis of price.
Other critical competitive factors include product reliability and flexibility
of use with a user's other systems. There can be no assurance that the Company
will be able to compete successfully in the future against existing or potential
competitors or successfully adapt to changes in the market for the Company's
products. An increase in competition could have a material adverse effect on the
Company's business and results of operations. In the U.S., the ability of the
licensor's of the Company's product to compete will determine the success of
Ensec, Inc. The current licensor's are believed to have established
infrastructures necessary to compete in an industry which is believed to be
highly competitive and fragmented.
Employees
As of December 31, 1998, the Company employed 37 individuals, of which
approximately 35 were employed in Brazil and 2 were employed in the U.S. All of
the Company's employees in Brazil are covered by a collective bargaining
agreement. The collective bargaining agreement expires on November 1, 1999 and
is subject to annual renewal. In the event that representatives of management
and employees are unable to agree on the terms of a new collective bargaining
agreement, a court may ultimately determine such terms by rendering a binding
judicial decision which would serve as the renewal agreement.
In addition to the collective bargaining agreement, Brazilian labor
laws are applicable to all of the Company's employees in Brazil. The
requirements of the collective bargaining agreement and the Brazilian labor laws
principally address the length of the work day, minimum daily wages for
professional workers, contributions to a retirement fund, insurance for
work-related accidents, procedures for dismissing employees, determination of
severance pay and other conditions of employment.
The Company believes that its future success will depend in large part
upon its ability to continue to attract, retain, train and motivate highly
skilled and dedicated employees. The Company has not experienced a work stoppage
and believes that its employee relations are good.
Forward-Looking Statements
The Description of Business contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). For a discussion of important factors
that could cause the actual results to differ materially from those contained in
such forward-looking statements, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Forward-Looking Statements."
Item 2. DESCRIPTION OF PROPERTY
The Company was headquartered in New York, New York up until January
31, 1999, at which time the Company elected to closed its New York office,
reducing the number of employees in the U.S. to one. Currently, the Company is
operating through the offices of an accountant in New York, New York.
The Company's Brazilian operations are headquartered in a Company-owned building
located in Cotia, a city in the greater Sao Paulo area. The building was
constructed in 1990 and is comprised of approximately 40,000 square feet of
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office and warehouse space. In addition to the Cotia-based headquarters, the
Company maintains a number of service facilities located throughout Brazil.
These offices, many of which are provided by customers of the Company, are used
principally by the Company's service technicians.
As of February 28, 1999, the Brazilian property is encumbered by a $
1.8 million term mortgage held by a Brazilian bank. This mortgage currently
bears interest at a rate of approximately 12% per annum, plus an inflation
adjustment which was approximately 6% in 1998. Interest on the mortgage is
payable monthly. Principal shall be amortized and is payable over a period of 38
months commencing on March 15, 1999. The current monthly payment is
approximately $ 66,420.00. The Company's management believes that it currently
maintains adequate insurance coverage on this property.
The Company is actively seeking to sell its Brazilian facility.
However, the Company believes that the current competitive conditions in the
Brazilian real estate market may limit the potential sale of its property in
Brazil and that the Company may experience some difficulty in selling the
property at a price which it deems to be fair. The Company has leased 50% of its
Brazilian property to De La Rue Sistemas Ltda. for a term of 60 months from
August 8, 1997 of approximately $ 18,000 per month, annually adjusted for
inflation index in Brazil.
The Company believes that its facilities are adequate to meet the
Company's current business requirements, and that suitable additional space will
be available as needed to accommodate further physical expansion of its U.S.
operations and for additional sales and support offices in the U.S.
Item 3. LEGAL PROCEEDINGS
In April 1997, the Company was notified of its infringement of U.S.
patent No. RE 35,336. The Company reviewed the claim and proposed a settlement
which was rejected by the Claimant. The Claimant reassert its claim and asserted
a new claim of infringement of U.S. Patent No. 4,126,375 and reaffirmed its
$75,0000 initial payment with a royalty equal to on all future qualifying sales
through February 1998. The Company has not responded to this proposal which
expired on December 31, 1997. No response has been received from the Claimant,
nor has any further contact been made with The Company during 1998.
The Company is party to various legal actions involving alleged
employment law claims. In the opinion of the Company's management, based upon
their experience with these types of claims, the resolution of these matters
will not have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1998.
PART II
Item 5. MARKET FOR THE ISSUER'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Description of Market for Securities
Until May 12, 1998 the Company's Common Stock and redeemable common
stock purchase warrants have been publicly traded on the Nasdaq SmallCap Market
(the "Nasdaq-SCM") under the trading symbols "ENSC" and "ENSCW", respectively.
The Company's securities were delisted for trading on Nasdaq-SCM in April 1998
and began trading on the Electronic Bulletin Board. The following table sets
forth the high and low per share and per warrant closing prices for the
Company's securities for each quarter in which such securities were traded since
September 25, 1996, as reported by The Nasdaq Stock Market, Inc.
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<TABLE>
<CAPTION>
Closing Price
High Low
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<S> <C> <C>
1998 $ $
Common Stock:
First Quarter 1.10 0.20
Second Quarter 0.50 0.08
Third Quarter 0.12 0.02
Fourth Quarter 0.20 0.02
Redeemable Warrants
First Quarter
Second Quarter 0.03 0.03
Third Quarter (*) (*)
Fourth Quarter (*) (*)
(*) During the 3rd and 4th Quarters, no trade took place
1997
Common Stock:
First Quarter 6.24 4.56
Second Quarter 5.16 1.60
Third Quarter 2.24 .26
Fourth Quarter 1.40 .18
Redeemable Warrants:
First Quarter 2.00 .60
Second Quarter 1.04 .24
Third Quarter .32 .08
Fourth Quarter .16 .02
1996
Common Stock:
Third Quarter 7.00 6.00
Fourth Quarter 7.125 6.00
Redeemable Warrants:
Third Quarter 1.375 0.875
Fourth Quarter 2.375 1.1875
</TABLE>
These quotations reflect inter-dealer prices without retail mark-up,
mark-down or commissions and may not represent actual transactions.
As of December 31 1998, the Company's Common Stock was held of record
by approximately 84 persons.
Dividends
The Company has not declared or paid any dividends on its Common Stock
since inception. The Company currently anticipates that it will retain any
future earnings for use in its business and does not anticipate paying any such
dividends in the foreseeable future. The payment of any future dividend will be
at the discretion of the Company's Board of Directors and will depend, among
other things, upon the Company's future earnings, operations, capital
requirements and financial condition, general business conditions and
contractual restrictions on payment of dividends, if any.
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Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Amounts presented herein have generally been rounded to the nearest
hundred thousand dollars and the related dollar and percentage fluctuations are
calculated based on such rounding.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain statements which are forward-looking and
the accuracy of which are based upon certain uncertainties in the Company's
future operations and results. For a discussion of important factors that could
cause the actual results to differ materially from those contained in such
forward-looking statements, see "Forward-Looking Statements" below.
Results of Operations
Comparison of the Year Ended December 31, 1998 to the Year Ended December 31,
1997
Sales. Total sales for the year ended December 31, 1998 decreased $ 0.8
million, or 12.9% to $ 5.4 million from $ 6.2 in the comparable 1997 period.
This decrease primarily occurred in the Company's North American operations
where its fiscal 1998 sales were $ 0.7 million as compared to $ 2.0 million in
the year earlier period. The Brazilian operations increased sales to $ 4.8
million or 12.6% from $ 4.3 million in the comparable 1997 year. The decrease in
the North American operations occurred because of the decision to close down
operations in the United States because of the Company's poor financial
condition and inability to resolve its long-term cash flow requirements had
resulted in loss of customer confidence and a corresponding reduction in sales.
Cost of Goods Sold. Cost of goods sold decreased $ .6 million or 15.6% to $ 3.4
million for the year ended December 31, 1998 from $ 4.0 million in the year
earlier period. The decrease in cost of goods sold was the result of a
combination of the decrease in sales and a stronger control on cost, resulting
in a larger margin.
The gross profit and gross profit percentages for the years ended December
31,1998 and 1997 were $ 2.1 million and 38.4% and $ 2.2 million and 35.8%,
respectively. The increase in gross profit is attributable to a closer control
of costs in Brazil. The gross profit percentage for 1999 is expected to maintain
itself at the present level.
Selling, General and Administrative expenses. Selling, general and
administrative expenses in 1998 decreased $ 1.2 million or 26.1% to $ 3.3
million from $ 4.2 million in 1997. During 1998, the Company reduced the number
of its US personnel and eliminated or curtailed some North American operations
which results in a $ 1.8 million reduction in expenses as compared to the 1997
period.
Research and Development Expenses. Research and development expenses
for the year ended 1998 were non existent. As a result of the Company's decision
to eliminate research and development efforts in house and contract with outside
sources in both the U.S. and Brazil to support its installations.
Other income and expenses. Interest expense decreased $ 0.2 million or
16.5% to $ 0.9 million for the year ended December 31,1999 from $ 1.1 million
for the year earlier period. This decrease is the result of the need to borrow
less due to the decision to close down Ensec Inc.
Commission income amounted to $ 1.4 million for 1998. In connection
with the sale of the currency sorting and equipment division in December 1995,
the Company is entitled to receive commissions for a period of five years from
the date of such sale up to a maximum of $2,000,000. During 1997, the
commissions received were $ 0.6 million. The Company will no longer earn
commissions from this transaction.
In 1992, certain social taxes were judged unconstitutional in Brazil.
As a result of such ruling, Ensec S.A. sought and was awarded in September 1997
after exhausting the full appeal process, a refund of such social taxes. The
award will be increased for the monetary correction as defined under Brazilian
law. With respect to such award, the Company has recognized an additional $ .2
million as other income for the year ended December 31, 1998, this increase
being the monetary correction for the period and as defined by the Brazilian
Law. The company expects to realize this asset during 1999 or 2000.
10
<PAGE>
The Company recognized the need to insure that its operations will not be
adversely impacted by Year 2000 software failures due to processing errors
potentially arising from calculations using the year 2000. In 1998, the Company
completed implementing upgrades to existing system applications as well as the
addition of new system applications. All of the Company's applications are Year
2000 compliant.
Liquidity and Capital Resources
Net cash provided by operating activities for the year ended December
31, 1998 amounted to $ 0.4 million which resulted primarily from decreases in
certain receivables and increases in accounts payables, partially offset by a
net loss and an increase in other assets. Net cash used in operating activities
for the year ended December 31, 1997 resulted primarily from a net loss for the
year then ended as well as an increase in certain receivables. No significant
capital investments were made in the year ended December 31, 1998.
The Company currently does not have any line of credit or other
short-term credit facilities established with U.S. banks and limited short-term
credited facilities established with Brazilian banks. The Company maintains its
long-term debt financing through one Brazilian bank. This loan bears interest at
a rate of 12% per annum, plus an inflation adjustment, which is expected to be
18%-20% for 1999. In February 1999, the Company completed payment on the balance
of $ 0.5 million in long-term loans. This payment was accomplished with the
sources obtained from the sale of the 10% holding the Company held in De La Rue
Cash Systems Ltda.
Working capital deficiency at December 31, 1998 increased $ 0.7 million
to $ 1.9 million at December 31, 1998 from $ 1.2 million at December 31, 1997.
This increase was substantially attributable to the Company's net loss.
The Company is party to various legal actions involving alleged
employment law claims. In the opinion of the Company's management, based upon
their experience with these types of claims, the resolution of these matters
will not have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
The Company received an unqualified opinion, from its outside auditors,
however there was an explanatory paragraph regarding the Company's ability to
continue as an ongoing concern. Management believes the Company's ability to
continue as a going concern is dependent upon securing adequate financing to
fund its operations until the time the Company is able to generate sufficient
revenues to be self-sustaining. There can be no assurance the Company will be
successful in achieving these goals.
The Company is actively seeking sources of capital to permit the
Company to continue its operations in Brazil. It has been unable to secure a
closing of any financing and there can be no assurance that financing will be
completed. Should the Company become unable to obtain additional financing, it
would result in additional financial difficulties in Brazil. The Company does
not presently meet listing requirements for the Nasdaq SmallCap Market and was
delisted in 1998 to the Nasdaq - Electronic Bulletin Board and with the
Company's securities delisted, the Company's ability to raise additional
financing has been adversely affected.
On October 28, 1998, the Company entered into an Agreement and Plan
of Merger with Sentech EAS Corporation (Sentech) which, upon completion, will
result in the Company and Sentech becoming wholly-owned subsidiaries of a
newly-formed holding company, Sensec International, Inc. (Sensec). Under the
terms of the agreement, the Company's stockholders will receive approximately
60% or 1,425,000 shares of the outstanding common shares of Sensec, and Sentech
stockholders will receive approximately 40% or 950,000 shares of the outstanding
common shares of Sensec. Completion of the merger is subject to the approvals of
the Boards of Directors and stockholders of both the Company and Sentech.
11
<PAGE>
Subsequent to this merger, Sensec will attempt to raise capital through a public
offering which could hold potential for a capital infusion for the Company.
However, the Company can give no assurances regarding the occurrence or outcome
of these events.
The Company has no commitments for capital expenditures as of December
31, 1998.
In April 1997 the Company was notified of its infringement of U.S.
patent No. RE 35,336. The Company reviewed the claim and proposed a settlement
which was rejected by the Claimant. The Claimant reassert its claim and asserted
a new claim of infringement of U.S. Patent No. 4,126,375 and reaffirmed its of
$75,0000 initial payment with a royalty equal to on all future qualifying sales
through February 1998. The Company has not responded to this proposal which
expired on December 31, 1997. No response has been received from the Claimant,
nor has any further contact been made with The Company during 1998.
Foreign Currency Exchange Rates and Translation Gains and Losses
The Company has a substantial portion of its operations located in
Brazil. Therefore, a substantial portion of its sales are collected in Brazilian
reais (plural of real, the Brazilian currency) and a substantial portion of the
Company's expenses are incurred in Brazilian reais, in each case rather than
U.S. dollars. Although it is impossible to predict future exchange rate
fluctuations between the U.S. dollar and other currencies, it can be anticipated
that, to the extent the U.S. dollar strengthens or weakens against the Brazilian
real or other currencies, a substantial portion of the Company's reported net
sales, cost of goods sold and operating expenses will be commensurably lower or
higher than they would have been with a stable foreign currency relationship.
The consolidated financial statements of Ensec S.A. have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation". SFAS No 52
provides that all balance sheet accounts are translated at year-end exchange
rates, except for equity accounts which are translated at historical rates, if
the local currency is the functional currency. Income and expense accounts and
cash flows are translated at the average currency exchange rates in effect
during the year.
Prior to January 1, 1998, Ensec S.A. regarded the U.S. dollar as its
functional currency as per the prescribed accounting method for companies
subject to hyper-inflationary economies. As a result, a combination of current
and historical currency exchange rates were used in translating assets and
liabilities. The resulting translation adjustments were included in operations.
Beginning on January 1, 1998, Ensec S.A. was no longer considered to
be operating in a hyper-inflationary economy and thus the Company began to
translate the financial statements of Ensec S.A. using the local currency as the
functional currency. The resulting translation adjustments are included in
accumulated other comprehensive income.
Although in 1994, the inflation rate in Brazil was approximately 900%,
in 1995, 1996, 1997 and 1998 inflation rates decreased to 22%, 10%, 8% and 6%
respectively. For 1999, the Company believes there will be an increase in
inflation in Brazil, possibly in the 18% to 20% range.
Forward-Looking Statements
The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operations contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21 E of the Exchange Act, which represent the Company's expectations or beliefs
concerning future events, including without limitation the following: changes in
the Company's sales, costs, expenses and other financial information; changes or
adjustments in the Company's marketing and business strategies; the scope,
nature and effects of the Company's downsizing plan, including without
limitation the reduction of the Company's workforce and the potential sale of
the Company's Brazilian headquarters; the possibility of fluctuations in the
Brazilian economy, interest rates and currency and the effects thereof, if any,
on the Company; the Company's ability to secure additional credit facilities or
12
<PAGE>
other future sources of financing in the U.S. and Brazil, as well as other
sources, if necessary for the Company to do so; and the sufficiency of the
Company's cash provided by operating, investing and financing activities for the
Company's future liquidity and capital resource needs.
The Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those contained in the forward-looking statements, including without limitation
the following: general economic conditions; specific economic conditions
relating to the production of integrated security systems (including software);
the economic, social and political conditions in Brazil; the demand for the
Company's products; the size and timing of future orders and new contracts;
specific feature requests by customers; production delays or manufacturing
inefficiencies; management decisions to commence or discontinue product lines;
the Company's ability to design and introduce new products on a cost-effective
and timely basis; the amount and timing of research and development
expenditures; the maintenance of present and the availability of future
strategic alliances and joint marketing or servicing agreements; the
introduction of new products and product enhancements by the Company or its
competitors; the budgeting cycle of customers; changes in the proportion of
revenues attributable to license fees and maintenance and support services;
changes in the level of operating expenses; and the present and future level of
competition in the industry. As a result of these and other important factors,
the results actually achieved may differ materially from expected results
included in these statements.
Item 7. FINANCIAL STATEMENTS
The Company's Consolidated Financial Statements which are required to
be included in this Item 7 are set forth in a separate section of this Report
and commence on Page immediately following Page __ of this Report.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 27, 1999, the Company appointed Rothstein, Kass & Company,
P.C. as independent public accountants for the year ended December 31, 1998 to
replace Grant Thornton, LLP. There had been no disagreements with Grant
Thornton, LLP on any matter of accounting principles as practices, financial
statement disclosure or auditing scope or procedure or any other reportable
events.
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The directors and executive officers of the Company, and certain
officers of its subsidiaries, their ages, and positions with the Company, Ensec
Inc. and Ensec, S.A. are forth below:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C>
Charles N. Finkel 49 Chairman of the Board (Class III Director) and Chief
Executive Officer of the Company.
Flavio R. da Silva 50 Vice President-Brazil and Class II Director of the
Company; President, Chief Operating Officer and
Director of Ensec, S.A.
Raymond E. List 54 Class II Director of the Company.
Theodore Pemberton 48 Chief Financial Officer of the Company and Director of Administration
and Finance of Ensec S.A.
</TABLE>
13
<PAGE>
Charles N. Finkel founded Ensec, S.A. in 1983 and has been Chairman of
the Board, Chief Executive Officer, and a Class III director of the Company
since its inception in April 1996. Mr. Finkel has 18 years of experience in the
security industry commencing with Engesa, S.A., an armaments company based in
Sao Paulo, Brazil, where Mr. Finkel was director of export sales. In 1983, Mr.
Finkel left Engesa to found Ensec, S.A. Mr. Finkel received a degree in civil
engineering from Armando Alvares Peteado, Brazil, and a Masters degree in
Marketing from Getulio Vargas, Brazil.
Flavio R. da Silva joined the Company in December 1995 and has served
as a Class II director of the Company since April 1996. Prior to joining the
Company in 1995, Mr. da Silva held management positions, from 1971 to 1989, for
Brasilit S.A., a manufacturer of building products, and from 1990 to 1995, for
Fortilit S.A. and predecessor companies, a manufacturer of PVC products. Mr. da
Silva received Bachelor of Science and Masters degrees in Business
Administration from Mackenzie University, Brazil, and a Ph.D. in Engineering
from the University of Sao Paulo, Brazil.
Raymond E. List joined the Company's Board of Directors as a Class II
director in October 1996. Mr. List is a Managing General Partner in Fairfax
Partners, a venture capital partnership with investments in health care,
software and environmental companies. From 1988 to 1994, Mr. List served as
President and Chairman of ICF Kaiser Engineers, Inc., a worldwide engineering
and construction company. Mr. List received a Bachelor of Civil Engineering
degree from Union College in Schenectady, New York, a Masters degree in
Engineering from Manhattan College, Bronx, New York and a Masters degree in
Business Administration from Harvard University in Cambridge, Massachusetts.
Theodore O. Pemberton joined the company, as Chief Financial Officer
of Ensec International and also holding the position of Finance Administration
Director of Ensec S.A. Prior to joining the Company, Mr. Pemberton was a
Business Consultant from February 1997 through July 1998, with JAS Airfreight,
an international freight forwarder, where he was responsible for the
reorganization of the administration and financial departments in Brazil and
Mercosul countries. He was also a Business Development Advisor for Seaco
Development International S/A, of Luxembourg - Latin American Division, a group
of international investors interested in real estate, hotels, and theme parks.
From September 1993 through February 1997, Mr. Pemberton was the CFO for Willett
Ltda, a multi-national manufacturer of industrial printers and labelers. Mr.
Pemberton is a graduate of FEAO, Sao Paulo, Brazil majoring in Economics and is
a registered economist in the Brazilian Association of Professional Economists.
Election of Directors
The Board of Directors is currently comprised of 3 members. Pursuant to
the Company's Articles, the Board of Directors is divided into three classes, as
nearly equal in number as possible, designated Class I, Class II and Class III.
The term of the initial Class I directors terminates on the date of the 2000
annual meeting of shareholders; the term of the initial Class II directors
terminates on the date of the 1998 annual meeting of shareholders and the term
of the initial Class III directors terminates on the date of the 1999 annual
meeting of shareholders. At each annual meeting of shareholders, successors to
the class of directors whose term expires at that annual meeting shall be
elected for a three-year term. Mr. da Silva and Mr. List are currently a Class
II director and Mr. Finkel is currently a Class III director. There are no
family relationships among any of the directors of the Company.
14
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, executive officers and any persons who
beneficially own ten percent or more of the Company's Common Stock to file with
the Securities and Exchange Commission (the "Commission") initial reports of
beneficial ownership and reports of changes in beneficial ownership of Common
Stock. Such persons are required by regulations of the Commission to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely upon (i) a review of Forms 3 and 4 and amendments thereto
furnished to the Company during fiscal year 1997 and Form 5 and amendments
thereto furnished to the Company with respect to fiscal year 1997, and (ii)
written representations from such reporting persons that no Form 5 filings were
required with respect to such fiscal year, the Company believes that each filing
required to be made pursuant to Section 16(a) was made by each such reporting
person on a timely basis.
Item 10. EXECUTIVE COMPENSATION
Compensation of Executive Officers
The following table sets forth, as of December 31, 1998, all
compensation paid during the Company's last three fiscal years to the Company's
Chief Executive Officer and to executive officers whose total annual
compensation exceeded $100,000 during the last three fiscal years.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Compensation Awards
Annual Compensation(2) Number of Securities
Name and Principal Salary Bonus Other Annual Underlying All Other
Position Year US$ US$ Compensation Options Compensation
-------- ---- --- --- ------------ ------- ------------
US$ (3) US$
<S> <C> <C> <C> <C> <C> <C>
Charles N. Finkel 1998 240,000(6) 0 0 0 0
Chief Executive 1997 240,000 20,000(7) 10,000 0 0
Office of the Company. 1996 216,112 0 10,240 25,000 35,642 (4)
Flavio R. da Silva, 1998 125,381 0 0 0 0
Vice President-Brazil 1997 136,017 31,750 (5) 12,300 0 0
of the Company and 1996 124,331 0 17,542 50,000 0
President and Chief
Operating Officer
of Ensec, S.A
</TABLE>
(1) In accordance with the rules of the Commission, the compensation described
in this table does not include medical group life insurance or other benefits
received by the named executive officers which are available generally to all
salaried employees of the Company, and certain perquisites and other personal
benefits, securities or property received by the executives which do not exceed
the lesser of $50,000 or 10% of any such named executive officer's salary and
bonus disclosed in this table.
(2) In accordance with their employment agreements, the Company paid to Messrs.
Finkel and da Silva a monthly automobile allowance and paid to Mr. da Silva the
amount of his medical premiums which exceed those provided under Ensec, S.A.'s
employee benefit plan. Additionally, the amounts in this column include the
value of additional employment-related benefits which accrued to Messrs. Finkel
and da Silva during fiscal 1996 under Brazilian law.
15
<PAGE>
(3) The value of these options are detailed in the "Option Grants in Last Fiscal
Year" table below. All options were granted under the Company's 1996 Stock
Option Plan (the "Plan").
(4) Represents the following compensation for expenses paid by the Company on
behalf of the named executive officer in fiscal year 1996: (i) $1,786 in
property maintenance expenses; (ii) $3,575 in car expenses; (iii) $5,381 in meal
expenses; (iv) $14,283 in travel expenses; (v) $5,700 in entertainment expenses;
and (vi) $4,917 in miscellaneous expenses.
(5) Represents a bonus earned by Mr. da Silva which was accrued by the Company
in 1997 and paid in 1998.
(6) Represents total salaries earned by Mr. Finkel in 1998, of which only $
120,000 were paid, the balance of which is owed to Mr. Finkel.
(7) Represents a bonus earned and not paid to Mr. Finkel which was accrued by
the Company in 1997.
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
None
Aggregated Option Exercises in Last Fiscal Year and F-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In the Money
Options at F - End (1) Options at F-End (2)
Name Not Exercisable Exercisable Not Exercisable Exercisable
---- --------------- ----------- --------------- -----------
<S> <C> <C>
Charles N. Finkel 0 0 n/a n/a
(3)..................
Flavio R. da Silva 23,333 76,667 0 0
</TABLE>
(1) These options have an exercise price of between $1.5625 and $2.00 per share
and are exercisable during the period from 1997 to 2007.
(2) These values represent potential gains on both exercisable and unexercisable
options based on the closing price of the underlying Common Stock as of December
31, 1997 less the exercise price of the options.
(3) On July 24, 1997, Charles Finkel elected to cancel his 25,000 options.
Compensation of Directors
In fiscal year 1998, the Company did not pay a director's fee or other
similar compensation to any director of the Company for their service as such.
The Company does not intend to compensate non-employee directors for serving as
directors of the Company, except to reimburse them for their reasonable expenses
incurred in connection with such service and to issue grants of Director Awards
(as defined below) under the Plan. See "-- 1996 Stock Option Plan." Directors
who are also employees of the Company do not receive additional compensation for
serving as a director.
Employment Agreements
The Company or its subsidiaries are parties to substantially similar
employment agreements with Messrs. Finkel, and da Silva, pursuant to which each
of these individuals serve as an executive officer of the Company and Ensec S.A.
Each of the employment agreements is for an initial three year term, which
commenced in May 1996 and will automatically renew for successive three-year
terms unless either party provides written notice to the other party least 90
days prior to renewal.
16
<PAGE>
Pursuant to the employment agreements, Messrs. Finkel, and da Silva,
received an annual base salary for fiscal year 1998 of $240,000 ($ 120,000 was
paid, the remainder was accrued by the Company) and $125,381, respectively,
which may be increased from time to time by the Board of Directors.
The agreements provide that upon the termination of employment by the
Company, other than for cause (as defined in the agreements), the Company shall
pay an amount equal to the aggregate present value of the product of (x) the
average aggregate annual compensation subject to U.S. income tax and paid to Mr.
Finkel by the Company during the five calendar years preceding the taxable year
in which the date of termination occurs, multiplied by (y) 2.99. The Company
shall pay an amount equal to the total amount of Base Salary and Bonus received
by Mr. da Silva pursuant to this Agreement for the twelve (12) month period
ending on the Date of Termination. The agreements provide for non-competition,
non-solicitation and non-disclosure covenants.
The agreements also provide for each executive officer to receive a
grant of options under the Plan which will vest in one-third equal installments
over a two-year period. The first two vestings occurred as of September 30, 1996
and 1997, and the final vesting will occur on September 30, 1998. The options
granted to Mr. da Silva are incentive stock options (as defined in Section 422
of the Internal Revenue Code of 1986, as amended (the "Code")) and provide for
an exercise price of $2.00 per share, subject to adjustment in accordance with
the terms of the Plan. In order for the options to vest, the executive officer
must be employed by the Company or any of its subsidiaries as of the date of
vesting. According to the terms of the Plan and each executive officer's option
agreement, the vesting of options will be accelerated and the all of the options
will become immediately exercisable in the event the executive officer is
terminated by the Company other than for Cause (as defined in such executive
officer's employment agreement), or in the event of certain changes in control
of the Company.
1996 Stock Option Plan
The Company has adopted the Plan, pursuant to which stock options (both
Nonqualified Stock Options and Incentive Stock Options, as defined in the Plan),
stock appreciation rights, restricted stock, performance share awards and
phantom stock unit awards may be granted to directors and certain key employees
(the "Participants"). The Plan provides for the automatic grant to directors who
are not employees of the Company (each, a "Director Award") or its subsidiaries,
at such time as an individual becomes a director of the Company, of Nonqualified
Stock Options to purchase 15,000 shares of Common Stock at an exercise price per
share equal to the greater of $2.00 or the fair market value of the shares on
the date of grant. A Director Award vests in equal increments of 5,000 shares
per year, commencing upon the date of the Company's annual meeting of
shareholders for the election of directors next following the date that such
individual became a director and continuing with each such successive annual
meeting provided such person remains a director of the Company as of such date.
The Plan also provides for the acceleration of the vesting schedule of Director
Awards in certain circumstances.
With respect to the grant of awards under the Plan to persons other
than nonemployed directors, the committee which is responsible for administering
the Plan (the "Committee") will determine persons eligible to be granted stock
options, stock appreciation rights, performance share awards and restricted
stock, the amount of stock or rights to be optioned or granted to each such
person, and the terms and conditions of any such option, grant or award. An
Incentive Stock Option is intended to qualify as an incentive stock option
within the meaning of Section 422 of the Code. Any Incentive Stock Option
granted under the Plan will have an exercise price of not less than 100% of the
fair market value of the shares on the date on which such option is granted.
With respect to an Incentive Stock Option granted to a Participant who owns more
than 10% of the total combined voting stock of the Company or any parent or
subsidiary of the Company, the exercise price for such option must be at least
110% of the fair market value of the shares subject to the option on the date
the option is granted. A Nonqualified Stock Option granted under the Plan (i.e.,
an option to purchase Common Stock that does not meet the Code's requirements
for Incentive Stock Options) must have an exercise price of at least the par
value of the stock.
17
<PAGE>
Stock appreciation rights may be granted in conjunction with the grant
of an Incentive or Nonqualified Stock Option under the Plan or independently of
any such option. A stock appreciation right granted in conjunction with a stock
option may be an alternative right, in which event, the exercise of the stock
option terminates the stock appreciation right to the extent of the shares
purchased upon exercise of the stock option and, correspondingly, the exercise
of the stock appreciation right terminates the stock option to the extent of the
shares with respect to which such right is exercised. A stock appreciation
right, may not, however, be granted in conjunction with an Incentive Stock
Option under circumstances in which the exercise of the stock appreciation right
affects the right to exercise the Incentive Stock Option or vice versa, unless
certain terms and conditions are met.
Subject to the terms of the Plan, the Committee may award shares of
restricted stock to the Participants. Generally, a restricted stock award will
not require the payment of any option price by the Participant but will call for
the transfer of shares to the Participant subject to forfeiture, without payment
of any consideration by the Company, if the Participant's employment terminates
during a "restricted" period (which must be at least six months) specified in
the award of the restricted stock.
Performance shares may be awarded to participants based upon the degree
to which certain objective performance goals, as established by the Committee,
are attained. The amount earned with respect to an award of performance shares
will usually be payable in stock based upon the fair market value of such stock
upon the valuation date. The Committee, may, however, vary the composition of a
performance share award at its discretion.
The Company may also issue phantom stock unit awards to Participants
upon terms and conditions established by the Committee from time to time. A
phantom stock unit entitles the holder of such unit to a hypothetical equivalent
of one share of stock granted in connection with a Plan award or deferred
performance share award. Phantom stock unit awards are nontransferable and will
be subject to forfeiture if employment of the Participant is terminated before
such awards become vesting in accordance with their terms.
There are 450,000 shares of Common Stock authorized for possible
issuance under the Plan. As of December 31, 1998, options to purchase 251,667 of
such reserved shares have been granted to executive officers and non-employee
directors of the Company.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial Ownership of Common Stock
The following table sets forth information with respect to the shares
of Common Stock beneficially owned as of April 7, 1999 by (i) those persons who
were beneficial owners of more than 5% of the Company's outstanding shares of
Common Stock (as obtained from reports regarding such ownership filed by such
persons with the Securities and Exchange Commission), (ii) each of the Company's
directors and certain of its executive officers, and (iii) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner (1) Amount and Nature of Beneficial Owner Percent of Class
- ------------------------------------ --- ------------------------------------- ----------------
<S> <C> <C>
Charles N. Finkel (2) 3,425,000 56.93%
Flavio R. da Silva (3) 63,334 1.0%
Raymond E. List (4) 15,000 0.3%
All directors and executive 3,503,334 (2-5) 58.23%
officers as a group (3 persons)
</TABLE>
* Less than one (1%) percent
18
<PAGE>
(1) Unless otherwise indicated, the address of each shareholder is 352 Seventh
Avenue, Suite 1040, New York, New York 10001. Unless otherwise indicated, the
Company believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially owned
by them. A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days of April 7, 1998 upon the exercise of
options and warrants or the conversion of convertible securities and the table
above reflects shares of Common Stock which may be acquired upon the exercise of
options granted under the Plan that have already vested or will vest within 60
days of April 7, 1998.
(2) Includes 3,425,000 shares that are indirectly owned by Mr. Finkel through
wholly-owned entities.
(3) Consists of 63,334 of the Option Shares. Does not include 26,666 option
shares which are not currently exercisable within 60 days.
(4) Consists of 15,000 Option Shares which may be acquired upon the exercise of
options granted as Director Awards under the Plan. Does not include 15,000
option shares which are not currently exercisable within 60 days.
(5) Includes 25,000 of the Option Shares which may be acquired by an executive
officer of the Company not named in the table set forth above. Does not include
20,000 caption shares which are not currently exercisable within 60 days.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All related party transactions were on terms no less favorable than
those with unaffiliated third parties. All future transactions will be on terms
no less favorable than the Company could obtain based upon negotiations with
unaffiliated third parties in arms length transactions.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Index
3.1 Articles of Incorporation of the Company, as amended (1)
3.2 Bylaws of the Company (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Redeemable Warrant Certificate (1)
10.1 1996 Stock Option Plan, as amended (1)
10.2 Strategic Alliance Agreement between Lockheed Martin IMS and Ensec
Inc. (1)
10.3 Card Access Systems Agreement between Ensec Inc. and Electronic Data
Systems Corporation, as amended to the date hereof (1)
10.4 Software Value Added Reseller Agreement between Ensec Inc. and ICL
Enterprises (1)
10.5 Agreement between Ensec Inc. and The Port Authority of New York
and New Jersey (1)
10.6 Agreement for Purchase and Sale of the Bank Automation Division of
Ensec, S.A. between De La Rue Investimentos Ltda. and Ensec S.A. (1)
10.7 Form of Employment Agreement representing Employment Agreements
between the Company and each of Charles N. Finkel, and Flavio R.
da Silva . (1)
10.8 ADT Original Equipment Manufacturer Agreement between Ensec Inc.
and ADT (2)
10.9 Merger Agreement signed between the Company and Sentech EAS on
October 28, 1998. Filed as an exhibit to the Company's 8K, as
filed with the Commission on October 28, 1998.
11.1 Statement Regarding Computation of Per Share Earnings
21.1 Subsidiaries of the Registrant (1)
27.1 Financial Data Schedule (4)
19
<PAGE>
(1) Filed as an exhibit to Amendment No. 3 to the Company's Registration
Statement on Form SB-2 (File No. 333-06223), as filed with and declared
effective by the Commission on September 25, 1996.
(2) Filed as an exhibit by amendment to the Company's Quarterly Report on Form
10-QSB, dated as of September 30, 1996, as filed with the Commission on November
13, 1996 (File No. 0-21361).
(3) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB, dated
as of September 30, 1997, as filed with Commission on November 19, 1997 (File
No. 0-21361)
(4) Filed as an exhibit to the Company's 8K, as filed with the Commission on
October 28, 1998.
(5) Filed as an exhibit hereto.
Reports on Form 8-K
The Company has filed the reports on Form 8-K since the last filing of
the last 10-QSB, filed on 10/28/1998.
(5) Filed 11/08/98, Merger agreement signed with Sentech EAS dated 10/28/1998
(6) Filed 02/03/99, Change of Certifying Accountants
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the registrant caused this report to be signed on its
behalf by the undersigned, "hereunto duly authorized.
ENSEC INTERNATIONAL. INC.
(Registrant)
Date: April 9, 1999 By: /s/ Charles N. Finkel
--------------------------------
Charles N. Finkel
Chairman and Chief
Executive Officer
Date: April 9, 1999 By: /s/ Theodore O . Pemberton
--------------------------------
Theodore O Pemberton
Chief Financial Officer
In accordance with the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: April 9, 1999 By: /s/ Charles N. Finkel
--------------------------------
Charles N. Finkel
Director, Chairman and Chief
Executive Officer
(Principal Executive Officer)
Date: April 9, 1999 By: /s/ Raymond E. List
--------------------------------
Raymond E. List
Director
Date: April 9, 1999 By: /s/ Flavio R. da Silva
--------------------------------
Flavio R. da Silva
Director
20
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Financial Statements:
Independent Auditors' Report F-2
Predecessor Independent Auditors' Report F-3
Consolidated Balance Sheet F-4
Consolidated Statements of Operations and Comprehensive Loss F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8-17
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Ensec International, Inc.
We have audited the accompanying consolidated balance sheet of Ensec
International, Inc. and Subsidiaries as of December 31, 1998 and the related
consolidated statements of operations and comprehensive loss, stockholders'
deficit and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of Ensec
International, Inc. and Subsidiaries for the year ended December 31, 1997 were
audited by other auditors whose report dated April 8, 1998, expressed an
unqualified opinion on those statements with an explanatory paragraph relating
to the Company's ability to continue as a going concern.
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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Ensec
International, Inc. and Subsidiaries as of December 31, 1998, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 12 to
the consolidated financial statements, the Company has suffered significant
losses from operations and has a working capital deficit and a stockholders'
deficit at December 31, 1998. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans regarding
those matters are also described in Note 12. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
March 11, 1999
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of
Ensec International, Inc.
We have audited the accompanying consolidated statements of operations and
comprehensive loss, stockholders' deficit and cash flows of Ensec International,
Inc. and Subsidiaries (the "Company") for the year ended December 31, 1997.
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 statements of operations and comprehensive loss,
stockholders' deficit and cash flows are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statements of operations and comprehensive loss,
stockholders' deficit and cash flows. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the results of operations and their
cash flows. We believe that our audit of the statements of operations and
comprehensive loss, stockholders' deficit and cash flows provide a reasonable
basis for our opinion.
In our opinion, the statements of operations and comprehensive loss,
stockholders' deficit and cash flows referred to above present fairly, in all
material respects, the consolidated results of operations and cash flows of
Ensec International, Inc. for the year ended December 31, 1997 in conformity
with generally accepted accounting principles.
The accompanying consolidated statements of operations and comprehensive loss,
stockholders' deficit and cash flows have been prepared assuming the Company
will continue as a going concern. As shown in the financial statements referred
to above, the Company incurred a consolidated net loss of $5,869,866 during the
year ended December 31, 1997, and as of that date, the Company's consolidated
current liabilities exceeded its consolidated current assets by $1,163,556.
These factors, among others, as discussed in Note 12 to the financial
statements, raise doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 12. The consolidated statements of operations and comprehensive loss,
stockholders' deficit and cash flows do no include any adjustments that might
result from the outcome of this uncertainty.
/s/ Grant Thornton, LLP
Fort Lauderdale, Florida
April 8, 1998
F-3
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
ASSETS
Current assets:
Cash $ 58,055
Accounts receivable, less allowance for doubtful
accounts of $90,924 1,107,618
Inventories 594,006
Other current assets 154,022
------------
Total current assets 1,913,701
Property and equipment, net 1,668,711
Social taxes receivable 921,681
Other assets 100,737
------------
$ 4,604,830
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term loan $ 166,185
Long-term debt, current portion 1,092,243
Accounts payable 1,358,440
Accrued expenses and other liabilities 1,132,449
------------
Total current liabilities 3,749,317
------------
Long-term debt, less current portion 1,913,536
------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $.01 par value,
authorized 3,000,000 shares,
none issued
Common stock, $.01 par value,
authorized 20,000,000 shares,
issued and outstanding 6,016,250 shares 60,163
Additional paid-in capital 13,896,108
Accumulated other comprehensive loss (132,036)
Accumulated deficit (14,882,258)
------------
Total stockholders' deficit (1,058,023)
------------
$ 4,604,830
============
See accompanying notes to consolidated financial statements
F-4
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS Years Ended
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Revenues $ 5,446,879 $ 6,197,891
Cost of revenues 3,357,968 3,978,053
----------------- -----------------
Gross profit 2,088,911 2,219,838
----------------- -----------------
Selling, general and administrative expenses 3,255,997 4,448,639
Research and development 791,237
Write-down of long-lived assets 3,575,789
Translation gain (259,317)
----------------- -----------------
Operating loss (1,167,086) (6,336,510)
----------------- -----------------
Other expenses (income)
Interest income (25,547) (52,927)
Interest expense 905,238 1,083,769
Commission income (1,357,685) (642,315)
Rental and other income (249,323) (128,596)
Tax recovery (191,390) (726,575)
----------------- -----------------
(918,707) (466,644)
----------------- -----------------
Net loss $ (248,379) $ (5,869,866)
================= =================
Loss per common share
Basic and diluted $ (0.04) $ (1.04)
================= =================
Weighted average number of common shares
outstanding
Basic and diluted 6,007,373 5,656,250
================= =================
COMPREHENSIVE LOSS
Net loss $ (248,379) $ (5,869,866)
Other comprehensive loss,
foreign currency translation adjustment (132,036)
----------------- -----------------
Comprehensive loss $ (380,415) $ (5,869,866)
================= =================
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------------- ----------------------------
Shares Amount Shares Amount
------------- ------------ -------------- ------------
<S> <C> <C> <C>
Balances, January 1, 1997 $ - 5,656,250 $ 56,563
Offering costs
Net loss
------------- ------------ -------------- ------------
Balances, December 31, 1997 5,656,250 56,563
Issuance of common stock 360,000 3,600
Foreign currency translation adjustment
Net loss
------------- ------------ -------------- ------------
Balances, December 31, 1998 $ - 6,016,250 $ 60,163
============= ============ ============== ============
(RESTUBBED TABLE)
Accumulated
Additional Other Total
Paid-in Comprehensive Accumulated Stockholders'
Captial Loss Deficit Deficit
----------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balances, January 1, 1997 $ 13,721,482 $ - $ (8,764,013) $ 5,014,032
Offering costs (1,774) (1,774)
Net loss (5,869,866) (5,869,866)
----------------- --------------- ---------------- ----------------
Balances, December 31, 1997 13,719,708 (14,633,879) (857,608)
Issuance of common stock 176,400 180,000
Foreign currency translation adjustment (132,036) (132,036)
Net loss (248,379) (248,379)
----------------- --------------- ---------------- ----------------
Balances, December 31, 1998 $ 13,896,108 $ (132,036) $ (14,882,258) $ (1,058,023)
================= =============== ================ ================
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (248,379) $ (5,869,866)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 216,681 535,932
Write-down of long-lived assets 3,575,789
Stock issued for services 180,000
Increase (decrease) in cash attributable to changes
in assets and liabilities:
Accounts receivable (123,989) 340,782
Social taxes receivable 369,567 (399,040)
Inventories (121,758) 238,880
Other current assets (42,838) 197,605
Other assets (380,373) (395,762)
Accounts payable 690,863 87,678
Accrued expenses and other liabilities (116,844) (56,784)
------------------ ------------------
Net cash provided by (used in) operating activities: 422,930 (1,744,786)
------------------ ------------------
Net cash used in investing activities,
acquisition of property and equipment (9,845) (280,946)
------------------ ------------------
Cash flows from financing activities:
Net borrowings under short-term loans 166,185
Net repayments under loan agreements (512,108) (17,794)
Offering costs (1,774)
------------------ ------------------
Net cash used in financing activities (345,923) (19,568)
------------------ ------------------
Effect of exchange rate changes on cash (220,910)
------------------ ------------------
Net decrease in cash (153,748) (2,045,300)
Cash, beginning of year 211,803 2,257,103
------------------ ------------------
Cash, end of year $ 58,055 $ 211,803
================== ==================
Supplemental disclosure of cash flow
information, cash paid during the year for:
Interest $ 905,238 $ 769,065
================== ==================
Income taxes $ - $ 11,129
================== ==================
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Operations and Summary of Significant Accounting
Policies
Nature of Operations
Ensec International, Inc. ("Ensec International") and Subsidiaries
(collectively, the "Company") designs, assembles, sells, licenses
and maintains integrated security systems. Ensec International has
two wholly-owned subsidiaries, Ensec Engenharia a Sistemas de
Seguranca S.A. ("Ensec S.A."), a Brazilian corporation and Ensec
Inc., a Florida corporation.
In February 1998, the Company closed its Florida facility.
Consequently, substantially all of the Company's 1998 operations
were derived from Brazil (see Note 10.)
Principles of Consolidation
The consolidated financial statements include the accounts of
Ensec International and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
Inventories
Inventories, which are primarily comprised of parts and supplies,
are stated at the lower of cost or market, with cost being
determined on the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment is stated at cost less accumulated
depreciation and amortization. Depreciation and amortization is
computed using the straight-line method over the following
estimated useful lives .
Estimated
Asset Useful Lives
Building and improvements 40 Years
Machinery and equipment 5-10 Years
Furniture and fixtures 5-10 Years
Impairment of Long-Lived Assets
The Company periodically reviews its long-lived assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be fully
recoverable. To determine the recoverability of its long-lived
assets, the Company evaluates the probability that future
undiscounted net cash flows will be less than the carrying amount
of the assets. Impairment is the amount by which the carrying
value of the assets exceeds its fair value.
Capitalized Software Costs
The costs of software development, including significant product
enhancements, incurred subsequent to establishing technological
feasibility had been capitalized in accordance with SFAS No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed" and amortized over the estimated economic
useful life of the software product. However, in light of the
Company's uncertainty of continuing as a going concern and in
accordance with its policy on impairment of long-lived assets, all
capitalized software costs, aggregating $3,308,905, were
written-off during 1997. Costs incurred, prior to establishment of
technological feasibility, are charged to research and development
expense.
F-8
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Operations and Summary of Significant Accounting
Policies (Continued)
Foreign Currency Translation
The consolidated financial statements of Ensec S.A. have been
translated into U.S. dollars in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation". SFAS No 52 provides that all balance sheet accounts
are translated at year-end exchange rates, except for equity
accounts which are translated at historical rates, if the local
currency is the functional currency. Income and expense accounts
and cash flows are translated at the average currency exchange
rates in effect during the year.
Prior to January 1, 1998, Ensec S.A. regarded the U.S. dollar as
its functional currency as per the prescribed accounting method
for companies subject to hyper-inflationary economies. As a
result, a combination of current and historical currency exchange
rates were used in translating assets and liabilities. The
resulting translation adjustments were included in operations.
Beginning on January 1, 1998, Ensec S.A. was no longer considered
to be operating in a hyper-inflationary economy and thus the
Company began to translate the financial statements of Ensec S.A.
using the local currency as the functional currency. The resulting
translation adjustments are included in accumulated other
comprehensive income.
Revenue Recognition
Revenue is recognized upon delivery and acceptance for normal
product sales, which are those systems which do not require
significant software customization and are completed within
relatively short time-frames. Revenue from those systems that
require significant customization is recognized as contract
revenues under the percentage of completion method of accounting.
Progress billings in amounts receivable under maintenance
contracts is recognized over the terms of the related agreements.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
The Company complies with SFAS No. 109, "Accounting for Income
Taxes", which requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred
income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in
the future, based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable
income. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
F-9
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Operations and Summary of Significant Accounting
Policies (Continued)
Use of Estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
The fair value of the Company's assets and liabilities, which
qualify as financial instruments under SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments," approximate the
carrying amounts presented in the consolidated balance sheet.
Loss Per Common Share
The Company complies with SFAS No. 128, "Earnings Per Share" which
requires dual presentation of basic and diluted earnings per
share. Basic earnings per share excludes dilution and is computed
by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the year.
Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
entity.
Comprehensive Loss
During the year ended December 31, 1998, the Company adopted SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes new rules for the reporting and display of
comprehensive loss and its components; however, the adoption of
this Statement had no impact on the Company's net loss or
shareholders' deficit. SFAS No. 130 requires the Company's change
in the foreign currency translation adjustment to be included in
other comprehensive loss, a component of stockholders' deficit.
Reclassifications
Certain 1997 amounts have been reclassified to conform to the 1998
presentation.
F-10
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Property and Equipment
Property and equipment consists of the following at December 31,
1998:
Land $ 257,752
Building and improvements 1,235,175
Machinery and equipment 2,131,787
Furniture and fixtures 96,016
-----------
3,720,730
Less accumulated depreciation
and amortization 2,052,019
-----------
$ 1,668,711
===========
As a result of the Company closing its Florida facility, the
Company recorded a 1997 impairment loss in the value of its
furniture and fixtures, equipment and leasehold improvements of
$266,884.
NOTE 3 - Short-term Loan
The Company has a 90 day bank facility in the amount of $166,185,
due March 15, 1999 and bearing interest at 3% plus inflation per
month. The facility was renewed on March 15, 1999.
NOTE 4 - Long-term Debt
Long-term debt consists of the following at December 31, 1998:
Mortgage note payable, monthly
principal and interest payments
through 2002, bearing interest
at 12% per annum plus inflation
adjustment (approximately 6% in
1998) $ 2,733,622
Term note payable, monthly principal
and interest payments through
February 1999, bearing interest
at 6% per annum, guaranteed by the
Chief Executive Officer of the Company 236,476
Other 35,681
-----------
3,005,779
Less current portion 1,092,243
-----------
$ 1,913,536
===========
F-11
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Long-term Debt (Continued)
Future minimum annual payments of long-term debt are as follows:
Year ending December 31,
1999 $ 1,092,243
2000 820,086
2001 820,086
2002 273,364
-----------
$ 3,005,779
===========
NOTE 5 - Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following at
December 31, 1998:
Salaries and bonuses $ 140,000
Labor claims 194,162
Advances from customers 239,576
Deferred income 309,548
Other 249,163
-----------
$ 1,132,449
===========
NOTE 6 - Contingencies
Litigation
In April 1997, the Company was notified of its infringement of
U.S. Patent No. RE 35,336. The Company has reviewed the claim, and
has proposed a settlement. On September 18, 1997, the Claimant
rejected the Company's offer, reaffirmed its infringement claim,
asserted a new claim of infringement of U.S. Patent No. 4,126,375
and reaffirmed the proposal set forth below. The Claimant's latest
proposal, which expired on December 31, 1997, provided the Company
with a nonexclusive, worldwide license, with the maximum cost of
the license being a $75,000 initial payment with a royalty payment
equal to 5% on all future qualifying sales through February 1998.
As of the date hereof, no further contact has taken place between
the Company and the Claimant. However, if the Company is found to
have infringed upon the Claimant's patents, the Company's
financial condition could be materially adversely affected. In
addition, the cost of defending or settling this claim could be
significant and have a material adverse affect on the Company.
The Company is party to various legal actions involving alleged
employment law claims. In the opinion of the Company's management,
based upon their experience with these types of claims, the
resolution of these matters will not have a material adverse
effect on the financial position, results of operations or cash
flows of the Company.
Employment Agreements
The Company has an agreement with its President and Chief
Executive Officer which provides for a severance payment 2.99
times the employee's average annual compensation paid by the
Company as defined by the agreement.
F-12
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Contingencies (Continued)
The Company has an employment agreement with its President and
Chief Operating Officer of Ensec S.A. providing the employee with
severance benefits equal to the total amount of base salary and
bonus received for the twelve month period ended on the date of
termination. The agreement also calls for a bonus dependent on the
financial performance of Ensec S.A., which is subject to the
approval of the Board of Directors of the Company.
NOTE 7 - Stockholders' Deficit
During 1998, the company issued 360,000 shares of Common Stock for
services in connection with certain consulting agreements and
professional fees valued at $180,000, which were charged to
operations during 1998.
NOTE 8 - Warrants and Stock Option Plan
Pursuant to its 1996 initial public offering, the Company
completed the sale of redeemable warrants to purchase 2,185,000
shares of Common Stock at $.10 per warrant. Each redeemable
warrant entitles the holder thereof to purchase one share of
Common Stock at an exercise price of $7.00 per share, subject to
adjustment in certain events, at any time on or after September
25, 1997 and expiring four years from that date. The redeemable
warrants may be redeemed by the Company commencing on September
25, 1997 at a price $.10 per warrant subject to certain prior
notification requirements and provided that the closing bid price
of the Common Stock has been at least 150% of the then current
exercise price of the warrants for a period of 20 consecutive
trading days ending on the third day prior to the date on which
the Company gives notice of the redemption. No warrants have been
redeemed as of December 31, 1998.
In connection with the January 1998 issuance of Common Stock for
services, the Company also issued 330,000 warrants to purchase the
same number of underlying shares at $1.20 per share. The warrants
became exercisable on April 1, 1998 for a term of three years.
In June 1996, the Company adopted the 1996 Stock Option Plan (the
"Plan"), pursuant to which stock options (both Nonqualified Stock
Options and Incentive Stock Options, as defined in the Plan),
stock appreciation rights and restricted stock may be granted to
directors, key employees and consultants (the "Participants").
There are 450,000 shares authorized for possible issuance under
the Plan. The Plan provides for the automatic grant to directors
("Directors Awards"), who are not employees of the Company at such
time as an individual becomes a director of the Company, of
Nonqualified Stock Options to purchase 15,000 shares of common
stock at an exercise price equal to the greater of $3.00 or the
fair market value of the shares on the date of the grant. In 1997,
the Company's Board of Directors approved the reduction of the
exercise price of all options initially granted at an option price
of $3.00 or above to $2.00 per share.
The options of a Director Award vest in increments of 5,000 shares
per year, commencing on the date of the Company's annual
shareholders' meeting next following the date such individual
became a director and continuing with each such successive annual
meeting provided such person remains a director of the Company as
of such date. The Plan also provides for the acceleration of the
vesting schedule in certain circumstances.
F-13
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Warrants and Stock Option Plan (Continued)
Stock appreciation rights may be granted in conjunction with the
grant of a Nonqualified or Incentive Stock Option under the Plan
or independently of any such stock option. A stock appreciation
right granted in conjunction with a stock option may be an
alternative right. In this event, the exercise of stock option
terminates the stock appreciation right to the extent of the
shares to which such right is exercised. A stock appreciation
right may not, however, be granted in conjunction with an
Incentive Stock Option under certain circumstances in which the
exercise of the stock appreciation right affects the right to
exercise the Incentive Stock Option or vice versa, unless certain
terms and conditions are met. Subject to the terms of the Plan,
the Company may award shares of restricted stock to the
Participants. Generally, a restricted stock award will not require
payment of any option price by the Participant but will call for
the transfer of share to the Participant subject to forfeiture,
without payment of any consideration by the Company, if the
Participant's employment terminates during a "restricted" period
(which must be at least six months) specified in the award of the
restricted stock.
At December 31, 1998, Nonqualified Stock Options to purchase
30,000 shares of Common Stock at $2.00 per share were outstanding
to a director. Also, options to purchase 30,000 shares not
associated with the Plan were granted in October 1996 to a
consultant. The consultant's options vest and have the same
exercise price as the options granted to the director.
The Company complies with the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation". Accordingly,
no compensation cost has been recognized for the Plan. Had
compensation cost for the Plan been determined based on the fair
value at the grant date of awards in the years ended December 31,
1998 and 1997 consistent with the provisions of SFAS No. 123, the
Company's net loss and net loss per common share would have been
increased to the pro-forma amounts indicated below:
1998 1997
Net loss as reported $ (248,379) $(5,869,866)
Net loss, pro forma $ (325,064) $(5,925,790)
Basic and diluted loss per common
share, as reported $ (0.04) $ (1.04)
Basic and diluted loss per common
share, pro forma $ (0.05) $ (1.05)
F-14
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Warrants and Stock Option Plan (continued)
A summary of the status of the Plan as of December 31, 1998 and
1997 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning
of year 153,333 $ 2.50 385,000 3.26
Granted 125,000 1.56
Exercised
Forfeited 63,333 2.00 356,667 3.00
Outstanding, end of year 90,000 1.81 153,333 2.50
Options exercisable at year end 46,666 1.84 51,111 -
Weighted-average fair value of
options granted during the year 1.44
Range of exercise prices on
outstanding options, end of year 1.56-2.00 1.56-6.34
Weighted average remaining
contractual life 8.50 9.56
</TABLE>
The fair value of each option granted is estimated on the date of
grant using the Black-Scholes options pricing method with the
following weighted average assumptions used for grants in 1997:
expected volatility of 150.79%, risk free interest rate of 6.37%
and expected life of five years.
NOTE 9 - Income Taxes
The components of the Company's deferred tax assets or liabilities
follow:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net operating loss - Federal $ 3,607,000 $ 2,834,084
Net operating loss - Foreign 1,600,000 2,673,000
Depreciation 92,310
Other 1,088 4,572
----------- -----------
5,208,088 5,603,966
Less valuation allowance
Federal 3,608,088 2,930,966
Foreign 1,600,000 2,673,000
----------- -----------
$ - $ -
=========== ===========
</TABLE>
At December 31, 1998, the Company had net operating loss
carryforwards for income tax purposes approximately as follows:
Federal $ 10,608,000
Foreign corporate taxes $ 4,000,000
F-15
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - Income Taxes (Continued)
The federal tax NOL expires throughout 2018. The foreign NOL's
have no expiration date and therefore can be carried forward
indefinitely. Due to historical losses, valuation allowances have
been established for the tax benefits attributed to the Federal
and Foreign tax NOL's. The difference between the tax benefit
reflected in the consolidated statement of operations and the
amount calculated at the federal statutory income tax rate of 34%
results primarily from reserving against tax benefits derived from
net operating losses.
NOTE 10 - Information Concerning Business Segments
The Company is engaged principally in one line of business -
integrated security systems which represent substantially all of
the Company's consolidated sales. The following table presents
information about the Company by geographic area. There were no
material amounts of sales or transfers among geographic areas and
no material amounts of United States export balance.
<TABLE>
<CAPTION>
United
States Brazil Consolidated
------------------ ------------------ ------------------
<S> <C> <C> <C>
1998
Revenues $ 664,221 $ 4,782,658 $ 5,446,879
Operating loss (753,848) (413,238) (1,167,086)
Identifiable assets 320,669 4,284,161 4,604,830
1997
Revenues $ 1,950,186 $ 4,247,705 $ 6,197,891
Operating loss (5,545,633) (790,877) (6,336,510)
Identifiable assets 516,237 4,483,725 4,999,962
</TABLE>
Substantially all of the Company's operations are based in Brazil.
Consequently, the Company's business, earnings, asset values and
prospects may be materially adversely affected by developments
with respect to inflation, interest rates, currency fluctuations,
government policies, price and wage controls, exchange control
regulations, taxation, expropriation, social instability, and
other political, economic or diplomatic developments in or
affecting Brazil. Although the Company has been able to operate in
Brazil for over 15 years, it has no control over such conditions
and developments, and can provide no assurance that such
conditions and developments will not adversely affect the
Company's consolidated financial position, results of operations
or cash flows.
In January 1999, the Brazilian Central Bank (BAC) changed its
foreign policy by abandoning the exchange bank that it used to
administer the floating rates of the Brazilian real against the
U.S. dollar, leaving the market free to negotiate the exchange
rate. Consequently, the Brazilian real significantly devalued in
relationship to the U.S. dollar during 1999. At December 31, 1998
and March 11, 1999 the exchange rate was approximately 1.2 and 1.9
Brazilian reais, respectively, to the U.S. dollar.
F-16
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Other Matters
Lease of Brazilian Facility
In August 1997, Ensec S.A. entered into an agreement to lease 50%
of the Brazilian facility to another entity. The initial lease
term is for ten years with a noncancellable term for the first
five years. The annual rental charge is approximately $216,000
adjusted annually for changes in purchasing power of the real and,
at the request of either the lessor or lessee, for changes in the
rental market values of the property. In addition to the monthly
rental charge the lease also provides that the lessee pay for its
share of maintenance, taxes and other operating expenses.
Employees Retirement Plan
As a result of the Company closing its Florida facility and thus
terminating its U.S. workforce, the Company discontinued its
401(k) profit sharing plan.
NOTE 12 Continuing Operations
The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern.
The Company has suffered significant losses from operations and
has a working capital deficit of $1,835,616 and a stockholders'
deficit of $1,058,023 as of December 31, 1998. These conditions
raise substantial doubt about the Company's ability to continue as
a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty. Management's plans include a search for new capital.
On October 28, 1998, the Company entered into an Agreement and
Plan of Merger with Sentech EAS Corporation (Sentech) which, upon
completion, will result in the Company and Sentech becoming
wholly-owned subsidiaries of a newly-formed holding company,
Sensec International, Inc. (Sensec). Under the terms of the
agreement, the Company's stockholders will receive approximately
60% or 1,425,000 shares of the outstanding common shares of
Sensec, and Sentech stockholders will receive approximately 40% or
950,000 shares of the outstanding common shares of Sensec.
Completion of the merger is subject to the approvals of the Boards
of Directors and stockholders of both the Company and Sentech.
Subsequent to this merger, Sensec will attempt to raise capital
through a public offering which could hold potential for a capital
infusion for the Company. However, the Company can give no
assurances regarding the occurrence or outcome of these events.
F-17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 58055
<SECURITIES> 0
<RECEIVABLES> 1198542
<ALLOWANCES> 90924
<INVENTORY> 594006
<CURRENT-ASSETS> 1913701
<PP&E> 3720730
<DEPRECIATION> 2052019
<TOTAL-ASSETS> 4604830
<CURRENT-LIABILITIES> 3749317
<BONDS> 0
0
0
<COMMON> 60163
<OTHER-SE> (132036)
<TOTAL-LIABILITY-AND-EQUITY> 4604830
<SALES> 5446879
<TOTAL-REVENUES> 5446879
<CGS> 3357968
<TOTAL-COSTS> 3357968
<OTHER-EXPENSES> 3255997
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 905238
<INCOME-PRETAX> (248379)
<INCOME-TAX> 0
<INCOME-CONTINUING> (248379)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (248379)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
