Wiltek, Inc.
Index
Page No.
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet at July 31, 1998 3
Consolidated Statement of Operations and Accumulated Deficit
For the Three and Nine Months Ended July 31, 1998 and 1997 4
Consolidated Statement of Cash Flows
For the Nine Months Ended July 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION 12
Page 2
Wiltek, Inc.
Consolidated Balance Sheet
(Unaudited)
July 31,
1998
ASSETS
Current Assets:
Cash and cash equivalents $ 523,700
Accounts receivable, less
allowance for doubtful accounts $33,200 1,122,700
Other current assets 147,200
Total Current Assets 1,793,600
Equipment, net 925,600
Total Assets $ 2,719,200
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving bank credit loan payable $ 50,000
Obligation under capital leases, current portion 143,700
Accounts payable and accrued expenses 1,056,000
Billings in excess of estimated costs and earnings
on uncompleted contracts 11,300
Deferred income 5,100
Total Current Liabilities 1,266,100
Long Term Liabilities:
Obligation under capital leases, less current portion 118,600
Commitments and Contingent Liabilities
Shareholders' Equity:
Preferred Stock 1,000,000 shares authorized and unissued
Common Stock, stated value $.33-1/3 per share,
9,000,000 shares authorized; 4,844,693 shares issued 1,614,900
Paid in Capital 5,595,200
Accumulated Deficit (4,659,100)
Less Treasury Stock at cost, 992,565 shares (1,216,500)
Total Shareholders' Equity 1,334,500
Total Liabilities and Shareholders' Equity $ 2,719,200
<FN>
See accompanying notes to consolidated financial statements.
Page 3
Wiltek, Inc.
Consolidated Statement of Operations and Accumulated Deficit
(Unaudited)
Three Months Ended Nine Months Ended
July 31, July 31,
1998 1997 1998 1997
Net Revenues
Communication services $1,892,200 $1,512,000 $5,666,300 $4,437,600
Costs and Expenses
Cost of communication
services 1,163,700 857,900 3,563,100 2,457,500
Sales expense 275,200 280,100 792,900 827,000
General & administrative
expense 260,900 226,100 786,100 653,400
Research and development 94,000 128,900 288,700 382,400
Interest expense 12,900 7,600 34,500 21,800
1,806,700 1,500,600 5,465,300 4,342,100
Net Earnings 85,500 11,400 201,000 95,500
Accumulated Deficit at
Beginning of Period (4,744,600) (4,815,200) (4,860,100) (4,899,300)
Accumulated Deficit
at End of Period $(4,659,100)$(4,803,800) $(4,659,100)$(4,803,800)
Earnings Per Common Share:
Basic $ .02 $ .00 $ .05 $ .03
Assuming Dilution $ .02 $ .00 $ .05 $ .02
Number of shares used in
per share calculation:
Basic 3,834,950 3,677,193 3,838,083 3,684,205
Assuming Dilution 4,190,249 4,008,956 4,160,836 3,942,058
<FN>
See accompanying notes to consolidated financial statements.
Page 4
Wiltek, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
July 31,
1998 1997
Cash Flow From Operating Activities:
Net Earnings $ 201,000 $ 95,500
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 156,000 169,200
Increase in accounts receivable and other
current assets (56,800) (91,400)
Decrease in accounts payable and accrued
expenses (94,300) (4,500)
Issuance of treasury stock as bonus 37,400 33,400
Total adjustments 42,300 106,700
Net cash provided by operating activities 243,300 202,200
Cash Flow Used in Investing Activities:
Capital expenditures (190,600) (89,900)
Net cash used in investing activities (190,600) (89,900)
Cash Flow Used in Financing Activities:
Net proceeds under revolving bank loan 50,000
Proceeds from exercise of stock options 2,000 2,500
Payments under capital lease obligations (107,700) (91,700)
Net cash used in financing activities (55,700) (89,200)
Net (decrease) increase in cash and cash
equivalents (3,000) 23,100
Cash and cash equivalents at beginning of
period 526,700 407,600
Cash and cash equivalents at end of period $ 523,700 $ 430,700
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the nine months for:
Interest $ 42,900 $ 27,800
Income taxes $ 4,000 $ 3,200
Non-cash investing and financing activities:
Capital expenditures in accounts payable $ 119,400 $ 14,600
Capital lease obligations incurred for
fixed asset acquisitions $ 155,300 $ 77,800
<FN>
See accompanying notes to consolidated financial statements.
Page 5
Wiltek, Inc.
Notes To Consolidated Financial Statements
The Consolidated Balance Sheet as of July 31, 1998, and the related
Consolidated Statements of Operations and Accumulated Deficit for the three
and nine-month periods ended July 31, 1998 and 1997, and the Consolidated
Statement of Cash Flows for the nine-month periods ended July 31, 1998 and
1997, are unaudited. In the opinion of management, all adjustments
necessary for a fair presentation of such financial statements have been
included. Such adjustments consisted only of normal recurring items.
Interim results are not necessarily indicative of results for a full year.
The financial statements as of July 31, 1998, and for the three and nine
month periods then ended should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on
Form 10-KSB for the year ended October 31, 1997.
The accounting policies followed by the company with respect to the
unaudited interim financial statements are consistent with those stated
in the 1997 Wiltek, Inc. Annual Report on Form 10-KSB.
The Company does not engage in a formal risk management program with
respect to foreign currency transaction exposure. Typically the company
maintains cash balances in U.K. banks to provide for the working capital
requirements of Wiltek (UK) Ltd. As of July 31, 1998 and July 31, 1997,
these cash balances were $283,500 and $179,000, respectively. The Company
receives a portion of its revenue from foreign sources, incurs service
costs in England denominated in U.K. Pounds and has assets and liabilities
in the U.K. Such factors give rise to currency risks, which are dependent
upon exchange rate fluctuations between the U.S. Dollar and U.K. Pound.
Wiltek does not use derivative instruments to hedge such foreign currency
risks.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings per Share" as of the first
Quarter fiscal 1998. SFAS 128 revised the standards for computation and
presentation of earnings per share ("EPS"), requiring the presentation of
both basic EPS and EPS assuming dilution. Basic EPS is based on the
weighted average shares outstanding during the applicable period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock. Prior periods have been restated to conform with the provisions of
SFAS 128.
For the periods presented in the Consolidated Statement of Operations and
Accumulated Deficit, the calculations of basic EPS and EPS assuming
Dilution vary in that the weighted average shares outstanding assuming
Dilution include the incremental effect of stock options.
Page 6
Reconciliation of Basic and Diluted EPS computations:
Three Months Ended July 31,
1998 1997
Income Shares Per Share Income Shares Per Share
Basic EPS:
Income available
to Common
Shareholders $ 85,500 3,834,950 $ .02 $ 11,400 3,677,193 $ .00
Diluted Effect
of Securities:
Stock Options 355,299 $ .00 331,763 $ .00
Diluted EPS:
Income available
to Common
Shareholders
plus assumed
conversions $ 85,500 4,190,249 $ .02 $ 11,400 4,008,956 $ .00
Nine Months Ended July 31,
1998 1997
Income Shares Per Share Income Shares Per Share
Basic EPS
Income available
to Common
Shareholders $201,000 3,838,083 $ .05 $ 95,500 3,684,205 $ .03
Diluted Effect
of Securities:
Stock Options 322,753 $ .00 257,853 $(.01)
Diluted EPS:
Income available
to Common
Shareholders
plus assumed
conversions $201,000 4,160,836 $ .05 $ 95,500 3,942,058 $ .02
Options to purchase 349,500 shares of common stock at prices ranging from
$0.81 to $2.94 were outstanding at July 31, 1998, and were excluded in the
computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares. These options, which
expire June 7, 1998, to December 15, 2007, included 160,000 of options
issued during the nine months ended July 31, 1998.
Options to purchase 264,500 shares of common stock at prices ranging from
$0.56 to $2.94 were outstanding at July 31, 1997, and were excluded in the
computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares. These options, which
expire June 7, 1998, to December 15, 2007, included 25,000 of options
issued during the nine months ended July 31, 1997.
Page 7
In accordance with the SFAS 109, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. However,
in view of the uncertainty as to whether the Company will produce sufficient
taxable income to utilize its deferred tax assets, a 100% valuation
allowance has been established against such deferred tax assets. To offset
taxable income during the nine months ending July 31, 1998, the Company used
$295,000 and $299,200 in operating loss carry forwards for Federal and
State tax purposes, respectively. This resulted in a reduction of deferred
Tax assets in the amount of $107,700. To offset taxable income during the
nine months ending July 31, 1997, the Company used $84,500 and $87,600 in
operating loss carry forwards for federal and state tax purposes,
respectively. This resulted in a reduction of deferred tax assets in the
amount of $87,400.
During the nine-month periods ended July 31, 1998 and 1997, approximately
15.6% and 29.9% respectively, of total purchases of the Company were made
from one vendor. Management believes that there is a ready source of
alternative suppliers should a need arise. Therefore, loss of this
supplier would not cause a delay or loss of sales.
In accordance with the contract terms with some of its customers, the
Company pays the common carrier communication costs incurred by the
customers and is subsequently reimbursed for such costs by its customers
These reimbursements are reflected as a reduction of expenses in the
Company's Consolidated Statement of Operations and are not included in
revenues. Such amounts billed to the Company and subsequently re-billed to
customers during the nine-month periods ended July 31, 1998 and 1997, were
$481,600 and $400,500, respectively.
During the nine-month periods ended July 31, 1998 and 1997, one customer
accounted for more than 10% of the Company's total revenues. This customer
was Sea-Land, representing 10.6% and 19.0% of revenues for the respective
nine-month periods.
At July 31, 1998, two customers accounted for 10% or more of the Company's
total receivables. These customers were First Data Corp. and Cable &
Wireless and with 18.4%, and 12.1%, respectively. At July 31, 1997, three
customers accounted for 10% or more of the Company's total receivables.
These customers were Cable & Wireless, First Data Corp. and Ford Motor
Company with 16.3%, 12.2% and 11.5%, respectively.
The Company entered into a Loan and Security Agreement with People's Bank
in June 1998, whereby, People's will make available a line of credit equal
to $750,000 for working capital needs plus an additional term loan up to
$100,000 for purchases of capital equipment.
The working capital loan requires that interest be paid monthly on
outstanding advances during the term of the loan at one quarter percent
above prime and a fee on the unused portion of the loan will be payable
quarterly at one quarter percent. The working capital facility will expire
on July 1, 1999.
Page 8
Interest on advances under the term loan, are payable monthly in arrears at
one half percent above prime and the total of such advances outstanding at
December 31, 1998, will be converted to a term loan. Thereafter, the term
of the loan shall be thirty months payable in equal monthly principal
payments of one thirtieth of the outstanding balance at December 31, 1998,
plus interest shall be due and payable monthly commencing January 31, 1999,
at one half percent above prime on the outstanding principal balance.
The Security agreement provides that the loans be secured by the Company's
existing and future assets. Covenants under the Loan and Security
Agreement provide that the Company's Current Ratio cannot be lower than
1.2, Tangible Net Worth be at least $1,000,000 and the Company must achieve
$100,000 Net Earnings for each six-month period on a rolling quarterly
basis. The Company was in compliance with all the terms of the Loan and
Security Agreement as of the date of this report.
The Company recognizes the need to ensure its operations will not be
adversely impacted by year 2000 software failures. Software failures
due to processing errors potentially arising from calculations using the
year 2000 date are a known risk. The Company is addressing this risk
to the availability and integrity of financial systems and the reliability
of operational systems. The Company has established processes for evaluating
and managing the risks and costs associated with this problem. This issue
has been addressed with respect to the Company's financial software.
The Company's Operations Department is currently addressing year 2000 issues
to ensure that all computers and programs will be free from software failure.
The Company is utilizing internal resources to identify, correct or
reprogram, and test the systems for the year 2000 compliance. It is
anticipated that all reprogramming efforts will be completed by
December 31, 1998, allowing adequate time for testing.
New Accounting Pronouncements:
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," and Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures About Segments of an Enterprise and
Related Information." SFAS 130 governs the reporting and display of
comprehensive income and its components, while SFAS 131 requires that all
public businesses report financial and descriptive information about their
reportable operating segments. Both statements are applicable to fiscal
years beginning after December 15, 1997.
The impact of adopting SFAS No. 130 is not expected to be material to the
consolidated financial statements or notes to the consolidated financial
statements. Management is currently evaluating the effect of SFAS No. 131
on consolidated financial statement disclosures.
Page 9
Wiltek, Inc.
Management's' Discussion and Analysis of
Financial Condition and Results of Operations
Financial Condition and Liquidity:
Cash and cash equivalents decreased during the nine months ended July 31,
1998, by $3,000 from $526,700 at October 31, 1997. The decrease in cash
was mainly due to net cash used for capital expenditures of $190,600 and
payments under capital lease obligations of $107,700 partially offset by
cash provided by operating activities of $243,300 and net proceeds from
revolving bank loan of $50,000. Cash provided by operating activities was
comprised of net earnings before depreciation and issuance of Treasury
Stock of $394,400, partially offset by an increase in accounts receivables
and other current assets and a decrease in payables and other current
liabilities of $56,800 and $94,300, respectively. The Company anticipates
additional capital expenditures during the fourth quarter approximating
$10,000 and expects that existing cash resources and external financing
will meet such capital requirements.
Results of Operations:
The period to period increases (decreases) in the principal items included
in the Consolidated Statement of Operations and Accumulated Deficit is
summarized below:
Comparison of Increases (Decreases) for
Three Months Ended Nine Months Ended
July 31, 1998 and 1997 July 31, 1998 and 1997
Net Revenues $ 380,200 25% $ 1,228,700 28%
Cost of Services 305,800 36% 1,105,600 45%
Sales Expense (4,900) (2%) (34,100) (4%)
General & Admin. Expense 34,800 15% 132,700 20%
Research and Development (34,900) (27%) (93,700) (25%)
Interest Expense 5,300 70% 12,700 58%
Net Earnings $ 74,100 650% $ 105,500 110%
<FN>
Communication Services Revenue increased by $380,200 (25%) and $1,228,700
(28%) during the three and nine months ended July 31, 1998, respectively,
when compared to the same periods last year. The increases resulted from
expansion of our consulting services.
Page 10
Period to period comparisons in Gross Profit Margins are summarized below:
Three Months Ended Nine Months Ended
July 31, July 31,
1998 1997 1998 1997
Communication Svcs. Revenue $1,892,200 $1,512,000 $5,666,300 $4,437,600
Communication Svcs. Costs 1,163,700 857,900 3,563,100 2,457,500
Gross Profits $ 728,500 $ 654,100 $2,103,200 $1,980,100
Gross Profit Margins 39% 43% 37% 45%
Gross Profit Margin for Communication Services has decreased in the
comparative periods. The decreases are primarily a result of increased
revenue from the consulting service component of Communication Services
with reduced margins and secondarily due to re-negotiated Communication
Services agreements also with lower margins. The Company anticipates
margins on consulting activities will improve as new consulting employees
have been hired which will reduce the need to use higher cost subcontract
consultants on various consulting engagements. Consulting margins will
also improve as new contracts are signed at higher standard billing rates,
implemented during March 1998.
The Company's Selling Expenses were 15% and 14% of total revenues for the
three and nine-month periods ended July 31, 1998, respectively compared to
19% and 19% during the same respective periods last year. Sales expense
decreased by 2% and 4% during the three and nine-month periods ended
July 31, 1998, compared to the same respective periods last year. The
decreases in sales expenses are primarily due to lower salaries and
benefits and lower marketing costs.
Increases in General and Administrative Expenses for the three and nine
month periods ended July 31, 1998, compared to the same periods last year
are primarily the result of a new executive administrative position and
higher travel, legal and telephone costs.
Decreases in Research and Development Expenses for the three and nine-month
periods ended July 31, 1998, compared to the same periods last year are the
result of lower salaries and benefits due to fewer people working on
research and development projects and lower travel expenses.
Increases in Interest Expense (net of interest income) for the three and
nine month periods ended July 31, 1998, were caused by higher interest
expenses due to increased capital lease obligations. Also, current low
interest rates on cash balances combined with lower cash balances due to
increased capital spending yielded lower interest income.
Federal and State income tax provisions are not booked due to the
availability of net tax loss carry forwards resulting from losses in prior
years.
Page 11
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
Reports on Form 8-K - There were no reports on Form 8-K filed for
the nine months ended July 31, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 14, 1998 WILTEK, INC.
______________________________
David S. Teitelman
President & CEO
Page 12