1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ X ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
THE EXCHANGE ACT
For the transition period from November 1, 1998 to December 31, 1998
Commission file number 0-2401
WILTEK, INC
(Exact name of small business issuer as specified in its charter)
Connecticut 06-0625999
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
542 Westport Ave., Norwalk, CT 06851
(Address of principal executive offices)
(203) 853-7400
(Issuer's telephone number)
October 31, 1998
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [X] No [ ]
State the number of shares outstanding of each of the issuer's
classes of common equity as of the latest practicable date:
Class Outstanding at May 18, 1999
Common Stock No Par Value 4,062,128 shares
Preferred Stock No Par Value 1,000,000 shares
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Wiltek, Inc.
Index
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: 3
Consolidated Balance Sheets at:
March 31, 1999, December 31, 1998 and October 31, 1998 3
Consolidated Statements of Operations
For the Three Months Ended March 31, 1999 and 1998 and
For the Two Months ended December 31, 1998 4
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 1998 and
For the Two Months Ended December 31, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 6. Exhibits and Reports on Form 8-K 13
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
WILTEK, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
---------------------------------
MARCH 31, DECEMBER 31, OCTOBER 31,
1999 1998 1998
----------- ----------- -----------
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 3,043,500 $ 796,800 $ 667,900
ACCOUNTS RECEIVABLE, LESS ALLOWANCE
FOR DOUBTFUL ACCOUNTS OF $35,000 946,600 932,500 1,073,600
OTHER CURRENT ASSETS 184,700 115,500 106,400
----------- ----------- -----------
TOTAL CURRENT ASSETS 4,174,800 1,844,800 1,847,900
EQUIPMENT, NET 878,700 886,600 897,200
OTHER ASSETS 250,000 -- --
----------- ----------- -----------
TOTAL ASSETS $ 5,303,500 $ 2,731,400 $ 2,745,100
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
TERM LOAN PAYABLE, CURRENT PORTION $ 12,800 $ 12,800 $ --
OBLIGATIONS UNDER CAPITAL LEASES, CURRENT PORTION 117,400 125,900 134,700
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,301,800 928,000 945,300
MEDICAL BENEFITS OBLIGATION, CURRENT PORTION 24,400 -- --
DEFERRED REVENUE 51,000 127,000 121,800
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 1,507,400 1,193,700 1,201,800
LONG TERM LIABILITIES:
TERM LOAN PAYABLE, LESS CURRENT PORTION 15,900 19,100 --
OBLIGATIONS UNDER CAPITAL LEASES, LESS CURRENT PORTION 46,100 74,300 92,400
MEDICAL BENEFITS OBLIGATION, LESS CURRENT PORTION 231,800 -- --
STOCKHOLDERS' EQUITY:
SENIOR CONVERTIBLE SERIES A PREFERRED STOCK, NO PAR
VALUE, 1,000,000 SHARES AUTHORIZED, 1,000,000 SHARES
ISSUED AND OUTSTANDING 3,000,000 -- --
COMMON STOCK, STATED VALUE $.331/3 PER SHARE,
9,000,000 SHARES AUTHORIZED, 4,954,693 SHARES ISSUED AND
OUTSTANDING AT MARCH 31, 1999, 4,884,693 SHARES ISSUED
AND OUTSTANDING AT DECEMBER 31,1998 AND
OCTOBER 31, 1998 1,651,500 1,628,200 1,628,200
ADDITIONAL PAID IN CAPITAL 5,596,900 5,591,800 5,591,800
ACCUMULATED DEFICIT (5,529,700) (4,559,300) (4,552,700)
LESS TREASURY STOCK AT COST, 992,565 SHARES (1,216,400) (1,216,400) (1,216,400)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,502,300 1,444,300 1,450,900
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,303,500 $ 2,731,400 $ 2,745,100
=========== =========== ===========
See accompanying notes to consolidated financial statements.
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WILTEK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Two Months Ended
Ended March 31, December 31,
--------------------------------- -----------------
1999 1998 1998
----------- ----------- -----------
REVENUES
Managed services $ 959,000 $ 1,178,800 $ 646,800
Professional services 638,200 722,100 548,100
----------- ----------- -----------
Total revenues 1,597,200 1,900,900 1,194,900
COSTS AND EXPENSES
Cost of managed services 659,600 633,900 363,200
Cost of professional services 428,500 560,200 333,900
Sales and marketing expenses 466,600 240,300 198,800
General & administrative expenses 718,100 274,900 219,000
Research and development 199,400 128,400 81,500
Other expense, net 99,900 1,500 800
Interest (income) expense, net (4,500) 11,400 4,300
----------- ----------- -----------
2,567,600 1,850,600 1,201,500
----------- ----------- -----------
NET EARNINGS (LOSS) $ (970,400) $ 50,300 $ (6,600)
=========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (.25) $ .01 $ .00
Diluted $ (.25) $ .01 $ .00
WEIGHTED AVERAGE NUMBER OF SHARES USED IN PER SHARE
CALCULATION:
Basic 3,950,461 3,844,452 3,892,128
Diluted 3,950,461 4,336,808 3,892,128
See accompanying notes to consolidated financial statements.
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WILTEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS Two Months Ended
ENDED MARCH 31, December 31,
--------------------------------- ----------------
1999 1998 1998
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ (666,400) $ (43,100) $ 199,400
INVESTING ACTIVITIES:
Capital expenditures (76,100) (60,300) (75,400)
----------- ----------- -----------
Net cash used in investing activities (76,100) (60,300) (75,400)
----------- ----------- -----------
FINANCING ACTIVITIES:
Payments on bank loan (3,200) -- --
Proceeds from bank loan -- -- 31,900
Proceeds from exercise of stock options 28,300 -- --
Proceeds from issuance of preferred stock and warrant 3,000,000 -- --
Payments under capital lease obligations (35,900) (18,900) (27,000)
----------- ----------- -----------
Net cash provided by (used in) financing activities 2,989,200 (18,900) 4,900
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,246,700 (122,300) 128,900
Cash and cash equivalents at beginning of period 796,800 462,300 667,900
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,043,500 $ 340,000 $ 796,800
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the three months for:
Interest $ 13,800 $ 13,600 $ 6,400
=========== =========== ===========
Income Taxes $ 1,300 $ 1,000 $ 800
=========== =========== ===========
Non-cash investing activities:
Capital lease obligations incurred for fixed asset
acquisitions $ -- $ 73,000 $ --
=========== =========== ===========
See accompanying notes to consolidated financial statements.
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WILTEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF ACCOUNTING
The consolidated balance sheet as of March 31, 1999, and December 31, 1998, and
the related consolidated statements of operations for the three months ended
March 31, 1999 and 1998, and the two months ended December 31, 1998, and the
consolidated statements of cash flows for the three months ended March 31, 1999
and 1998, and the two months ended December 31, 1998, are unaudited. The balance
sheet as of October 31, 1998 is derived from the audited financial statements as
reported on the Company's 10-KSB for the period then ended. 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 Company elected to change its fiscal year end from October 31 to December
31. The unaudited financial results for the two-month transition period ending
December 31, 1998 are included in this report and the audited financial results
for the two month transition period will be reported on the Company's Form
10-KSB for the year ending December 31, 1999.
The financial statements as of March 31, 1999 and December 31, 1998, and for the
three and two months 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, 1998. The accounting policies followed by
the company with respect to the unaudited interim financial statements are
consistent with those stated in the Company's Annual Report on Form 10-KSB for
the year ended October 31, 1998.
2. SECURITIES PURCHASE AGREEMENT
On January 28, 1999, Commercial Electronics Capital Partnership, LP ("CECAP"),
and a related entity, Commercial Electronics, L.L.C. (collectively,
"Purchaser"), purchased 732,160 shares of common stock from three retiring
directors at $.85 per share. In connection therewith, the Purchaser also
purchased, (i) 1,000,000 shares of convertible preferred stock with no par
value, and (ii) a warrant to purchase up to 1,500,000 shares of the Company's
common stock for 18 months at a price of $1.00 per share, for an aggregate cash
consideration paid to the Company of $3,000,000. The convertible preferred stock
is convertible into common stock at any time at the option of the holder on the
basis of 2.5 shares of common stock for each share of preferred stock.
In connection with the aforementioned transaction, the Purchaser became the
beneficial owner of 4,732,160 shares of the Company's authorized common stock,
representing approximately 59% of the Company's outstanding common stock
(assuming the conversion of Purchaser's preferred stock into common stock and
the full exercise of the Purchaser's warrant to purchase common stock). Such
beneficial ownership, along with the fact that the Purchaser's two designees
currently constitute one half of the Company's Board of Directors, and the fact
that Purchaser has the contractual right to obtain and retain control of the
Company's Board of Directors, constituted a change in control of the Company
from the retiring directors to the Purchaser and their director nominees.
Pursuant to the Purchase Agreement, the Company signed a "Medical Benefit
Letter" which obligates the Company to provide medical benefits to the three
retiring directors and their spouses until they reach age 65 (dates ranging from
September 12, 2004 to December 29, 2009). The Company's maximum obligation under
the "Medical Benefit Letter" is $400,000. The Company accrued a liability of
approximately $260,000 representing the net present value of the maximum
$400,000 medical benefit obligation. The Company was also required to deposit
$250,000 in a Medical Escrow Fund to secure a portion of the Company's
obligation under the "Medical Benefit Letter". The Company has classified the
deposit of $250,000 as "other assets" in the accompanying balance sheet. The
Company is entitled to withdraw from the medical escrow fund medical benefits
paid pursuant to the "Medical Benefit Letter" on a quarterly basis. Such
payments totaled $3,500 during the three months ended March 31, 1999 and were
charged against the medical benefit obligation liability.
The Company announced on March 31, 1999, that it will be "doing business as"
E-Sync Networks, Inc., and will formally change its legal name to E-Sync
Networks, Inc. subject to shareholder approval at its annual shareholders'
meeting.
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3. EARNINGS PER SHARE
For the periods presented in the consolidated statement of operations, the
calculations of basic EPS and diluted EPS vary in that the weighted average
shares outstanding assuming dilution includes the incremental effect of stock
options and convertible preferred stock and common stock warrant.
Reconciliation of Basic and Diluted EPS computations:
Three Months Ended March 31,
--------------------------------------------------------------- Two Months Ended
1999 1998 December 31, 1998
------------------------------ ----------------------------- ------------------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
--------- --------- ----- --------- --------- ----- --------- --------- -----
BASIC EPS
Income (Loss) available to
Common Shareholders $(970,400) 3,950,461 $(.25) $ 50,300 3,844,452 $ .01 $ (6,600) 3,892,128 $ .00
Dilutive Effect of
Securities:
Stock Options -- -- -- -- 492,356 -- -- -- --
--------- --------- ----- --------- --------- ----- --------- --------- -----
Diluted EPS
Income (Loss) available to
Common Shareholders
plus assumed
conversions $(970,400) 3,950,461 $(.25) $ 50,300 4,336,808 $ .01 $ (6,600) 3,892,128 $ .00
========= ========= ===== ========= ========= ===== ========= ========= =====
Options to purchase 685,300 shares and 760,300 shares of common stock at prices
ranging from $.25 to $2.94 were outstanding at March 31, 1999 and December 31,
1998, respectively. No options were issued in the three months ended March 31,
1999 and 72,000 options were issued in the two months ended December 31, 1998 at
a $.56 option price which was the fair market value at the date of grant. One
million convertible preferred shares and a common stock warrant to purchase
1,500,000 common shares were also outstanding at March 31, 1999. All the stock
options, convertible preferred shares and the common stock warrant were excluded
from the calculation of Diluted EPS for the three months ended March 31, 1999
and all stock options were excluded from the calculation of Diluted EPS for the
two months ended December 31, 1998, because the Company experienced a loss for
those periods and inclusion of such securities would have had an anti-dilutive
effect.
Options to purchase 945,300 shares of common stock at prices ranging from $.25
to $2.94 were outstanding at March 31, 1998, 35,000 of which were issued during
the three months ended March 31, 1998. Options to purchase 349,500 shares of
common stock at prices ranging from $0.81 to $2.94 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 expire in periods
ranging from March 24, 2007, to December 15, 2007.
4. COMMITMENTS AND CONTINGENCIES
The Company entered into a Loan and Security Agreement with People's Bank in
June 1998, for a line of credit equal to $750,000 for working capital needs plus
an additional term loan of 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.
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 were converted to a term loan. The term of the loan is thirty months
payable in equal monthly principal payments of one thirtieth of the outstanding
balance at December 31, 1998, plus interest payable monthly commencing January
31, 1999, at one half percent above prime on the outstanding principal balance.
The amount outstanding under the term loan at December 31, 1998 and March 31,
1999 was approximately $31,900 and $28,700, respectively.
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The related 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 technical default of the net earnings covenant for the six month period
ended March 31, 1999; however, the Company received notification from the bank
indicating waiver of that default for the period.
The Company's lease for its existing primary offices and data center in Norwalk,
Connecticut will expire on December 31, 1999. Accordingly, on April 1, 1999 the
Company entered into a fifteen year non-cancelable lease for 20,555 square feet
of office space located in Trumbull, Connecticut. The Company intends to
relocate their primary offices and data center to the Trumbull location during
the course of the year. The Trumbull lease obligates the Company to base rent
payments commencing January 1, 2000 of $267,215 per year in years 1-5, $308,325
per year in years 6-10 and $349,435 per year in years 11-15. In addition to the
base rent, the company is also responsible for its share of taxes, utilities and
common service charges related to its pro-rated use of the facility. The lease
also provides for reimbursement by the landlord of $476,000 of an estimated $1.2
million of leasehold improvement/construction costs required to prepare the
space for its intended use.
5. BUSINESS SEGMENT INFORMATION
The FASB issued Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information (SFAS No. 131) in June
1997. SFAS 131 supersedes FASB Statement No. 14, Financial Reporting for
Segments of a Business Enterprise, but retains the requirement to report
information about major customers. SFAS 131 replaces the "industry segment'
concept of Statement 14 with a "management approach" concept as the basis for
identifying reportable segments. The management approach is based on the way
that management organizes the segments within the enterprise for making
operating decisions and assessing performance. Consequently, the segments are
evident from the structure of the enterprise's internal organization. It focuses
on financial information that an enterprise's decision makers use to make
decisions about the enterprise's operating matters. The Company adopted SFAS 131
in 1999.
The Company provides outsourced solutions for the development and hosting of
Web-based Extranet initiatives. Serving its Fortune 1000 customer base, the
Company offers secure online messaging, directory and fax services,
legacy-to-Web application development services, hosted communications, and
infrastructure support solutions that link business partners via the Web. The
operations of the Company are conducted through two business segments primarily
within the continental United States and the United Kingdom. Descriptions of the
business segments' services and operations are as follows:
MANAGED SERVICES
Managed services provides customers with hosted global messaging services for
e-mail, fax, directory services, and remote management services supported by a
24-hours-a-day, 7-days-a-week Help Desk that assures reliable and safe
electronic communications. Messaging services includes (i) TotalMail that
provides user access to e-mail, shared calendar scheduling, distribution lists
and folders, and (ii) Hosting services, whereby the Company will maintain
customers' mail servers and run the e-mail function remotely at one of its
sites. Fax services includes (i) Application to fax which simultaneously
delivers computer generated files from mainframe or PC-based applications to one
or many facsimile devices worldwide, (ii) Mailfax, which sends faxes and
attachments via e-mail, and (iii) Inbound fax, which allows receipt of inbound
faxes at the desktop via e-mail. Directory services allows customers to
outsource the management of their corporate data directories via the Company's
custom-designed directory solutions products. The Company also offers secure
e-mail and fax messaging services through public key infrastructure (PKI),
digital certificates, and SmartCard authentication products.
PROFESSIONAL SERVICES
Professional Services is a consulting systems design and integration services
organization that provides legacy-to-Web application development and migration.
As a Microsoft Solution Provider Partner, certified system engineers and
Microsoft product specialists assist customers to design and develop migration
strategies to Microsoft BackOffice(R) products. They provide assistance for
Windows NT(R), Exchange(R), Systems Management Server(R) (SNS), SNA Server(R),
and internet/intranet deployment through Internet Information Server(R) (IIS).
The Company's system engineers also provide design and integration services,
whereby they assess customers' information, messaging, and connectivity needs,
evaluate existing infrastructure architecture, define and test migration
processes, and prepare enterprise-wide implementation plans. Then they develop
tools, utilities and conversion software for directory support as well as design
workflow automation solutions.
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Identifiable assets by segment are those assets that are used in the operations
of each segment as well as the accounts receivable generated by each segment.
Corporate assets consist primarily of cash and cash equivalents, short term
investments, prepaid expenses, and corporate furniture, fixtures, and equipment.
Capital expenditures are comprised primarily of additions to data processing
equipment, and furniture and fixtures.
The following table presents the company's business segment financial
information:
THREE MONTHS Three Months Two Months
ENDED Ended Ended
MARCH 31, 1999 March 31, 1998 December 31, 1998
----------------- ----------------- -----------------
REVENUE:
Managed services $ 959,000 $ 1,178,800 $ 646,800
Professional services 638,200 722,100 548,100
Corporate -- -- --
----------------- ----------------- -----------------
Consolidated revenues $ 1,597,200 $ 1,900,900 $ 1,194,900
================= ================= =================
OPERATING INCOME (LOSS):
Managed services $ (611,400) $ 145,800 $ 13,400
Professional services (263,600) (82,600) (14,900)
----------------- ----------------- -----------------
Operating income (loss) from segments (875,000) 63,200 (1,500)
Corporate expenses, net 99,900 1,500 800
Interest expense (income), net (4,500) 11,400 4,300
----------------- ----------------- -----------------
Net earnings (loss) $ (970,400) $ 50,300 $ (6,600)
================= ================= =================
DEPRECIATION AND AMORTIZATION:
Managed services $ 44,200 $ 31,800 $ 28,500
Professional services 6,900 5,900 4,800
Corporate 19,700 14,800 10,400
----------------- ----------------- -----------------
Total depreciation and amortization $ 70,800 $ 52,500 $ 43,700
================= ================= =================
CAPITAL EXPENDITURES:
Managed services $ 50,600 $ 12,300 $ 59,000
Professional services -- 5,900 --
Corporate 25,500 14,800 16,400
----------------- ----------------- -----------------
Total capital expenditures $ 76,100 $ 60,300 $ 75,400
================= ================= =================
IDENTIFIABLE ASSETS AT: March 31, 1999 December 31, 1998 October 31, 1998
----------------- ----------------- -----------------
Managed services $ 1,255,600 $ 1,201,400 $ 1,328,300
Professional services 411,000 453,500 466,400
----------------- ----------------- -----------------
Total assets for reportable segments 1,666,600 1,654,900 1,794,700
Corporate 3,636,900 1,076,500 950,400
----------------- ----------------- -----------------
Total assets $ 5,303,500 $ 2,731,400 $ 2,745,100
================= ================= =================
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT OVERVIEW
The Company provides solutions for business-to business electronic
communications in a secure seamless environment. Serving its Fortune 1000
customer base, the Company designs, implements and supports solutions that
facilitate the sending and receiving of faxes and e-mail messages, managing
directories, and makes optimum use of web-based technologies. The operations of
the Company are primarily conducted through two business segments, Managed
services and Professional services.
Managed services provides customers with messaging services for e-mail, fax,
directory services and remote management services supported by a 24-hours-a-day,
7-days-a-week Help Desk that assures reliable and safe electronic
communications. Messaging services includes (i) TotalMail that provides user
access to e-mail, shared calendar scheduling, distribution lists and folders,
and (ii) Hosting services, whereby the Company will maintain customers' mail
servers and run the e-mail function remotely at one of its sites. Fax services
includes (i) Application to fax which simultaneously delivers computer generated
files from mainframe or PC-based applications to one or many facsimile devices
worldwide, (ii) Mailfax, which seamlessly sends faxes and attachments via
e-mail, and (iii) Inbound fax, which allows receipt of inbound faxes at the
desktop via e-mail. Directory services allows customers to outsource the
management of their corporate data directories via the Company's custom-designed
Directory Solutions products. The Company also offers secure e-mail and fax
messaging services through public key infrastructure (PKI), digital
certificates, and SmartCard authentication products. Through its Remote
management services, the Company provides constant verification and analysis of
multiple network resources, and monitors network traffic and bandwidth, and file
and mail servers.
Professional services is a consulting system design and integration services
organization. As a Microsoft Solution Provider Partner, certified system
engineers and Microsoft product specialists assist customers to design and
develop seamless migration strategies, and in the migration to Microsoft
BackOffice(R) products. They provide assistance for Windows NT(R), Exchange(R),
Systems Management Server(R) (SNS), SNA Server(R), and internet/intranet
deployment through Internet Information Server(R) (IIS). The Company's system
engineers also provide design and integration services, whereby they assess
customers' information, messaging, and connectivity needs, evaluate existing
infrastructure architecture, define and test migration processes, and prepare
enterprise-wide implementation plans. Then they develop tools, utilities and
conversion software for directory support as well as design workflow automation
solutions. The professional services organization also supplies clients with
experienced project managers to scope, plan and coordinate virtually any
information technology project.
In connection with the change in control discussed in the footnotes to the
financial statements, the Company received an infusion of cash, technology and
new management direction. Accordingly, management announced that it will invest
heavily in expanding its e-commerce capabilities, products and services, and
offer e-commerce solutions for its Fortune 1000 client base. Among the expansion
initiatives, the Company will relocate its headquarters and data center to state
of the art facilities in Trumbull, Connecticut, increase its public relations
and marketing activities and significantly expand its sales, professional
services, research & development, and operations staff. These growth initiatives
position the Company for tremendous growth in the competitive
business-to-business e-commerce market and may adversely impact the Company's
earnings in the short term.
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RESULTS OF OPERATIONS
Results of Operations for the three months ended March 31, 1999 compared to the
same period last year was negatively impacted by increased costs related to the
growth initiatives discussed above.
The period to period increases (decreases) in the principal items included in
the consolidated statement of operations is summarized below:
Period to Period Increases (Decreases) for
- ----------------------------------------------------------------------
Three Months Ended
March 31, 1999 and 1998
-------------------------------
Revenues $ (303,700) (16%)
Cost of services (106,000) (9%)
Sales and marketing expenses 226,300 94%
General & administrative expenses 443,200 161%
Research and development 71,000 55%
Other expense, net 98,400 NM*
Interest (income) expense, net (15,900) NM*
----------- ----------
Net Earnings $(1,020,700) NM*
=========== ===========
*NM (Not Meaningful)
Revenues decreased by $303,700 (16%). The decrease is primarily the result of
lower Managed Service revenues of $219,800 due to cancellation of certain
services by two large customers.
Period to period comparisons in gross profit margins are summarized below:
Three Months Ended
March 31,
-----------------------------------------------------------------------------------------------
Managed Services Professional Services Total
--------------------------- --------------------------- ---------------------------
1999 1998 1999 1998 1999 1998
---------- ---------- ---------- ---------- ---------- ----------
Revenue $ 959,000 $1,178,800 $ 638,200 $ 722,100 $1,597,200 $1,900,900
Cost of services 659,600 633,900 428,500 560,200 1,088,100 1,194,100
---------- ---------- ---------- ---------- ---------- ----------
Gross margin $ 299,400 $ 544,900 $ 209,700 $ 161,900 $ 509,100 $ 706,800
========== ========== ========== ========== ========== ==========
Gross margin
percent 31% 46% 33% 22% 32% 37%
Gross margin for managed services decreased in the comparative periods mainly
due to loss of messaging contracts from higher margin customers. Gross margin
for professional services increased in the comparative periods principally
because of the reduced use of higher cost subcontract consultants and increased
revenue from higher margin consulting engagements.
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Sales and marketing expenses increased by $226,300 or 94% for the three months
ended March 31, 1999, compared to the same period last year. This represents 29%
of total revenues for the three months ended March 31, 1999, compared to 13% for
the same respective period last year. The increase is primarily due to increased
salaries, benefits, and recruiting costs related to the hiring of additional
sales personnel. In addition, the Company incurred approximately $97,000 of
non-recurring expenses related to several initiatives it has undertaken,
including but not limited to development of a new web site, and expansion of the
sales and marketing departments.
General and administrative expenses increased by $443,200 or 161%, for the three
months ended March 31, 1999, compared to the same period last year. The increase
is primarily the result of a provision for medical benefit obligation of
$260,000 as disclosed in the footnotes to the financial statements and facility
relocation expenses of $95,100. In addition, the Company experienced higher
legal fees and higher salaries and benefits in the current period.
Research and development expenses increased by $71,000 or 55% for the three
months ended March 31, 1999, compared to the same period last year. This
increase relates primarily to a $60,000 expenditure for consulting services
related to the Company's new encryption technology for secured messaging.
Other expense increased by $98,400, for the three months ended March 31, 1999,
compared to the same period last year. The increase is mainly attributable to
the identification and write-off of impaired equipment and leasehold
improvements having no future value.
Interest income is comprised of interest earned on cash in money market accounts
and interest expense is comprised of interest costs pertaining to capitalized
lease obligations and interest on the bank term loan payable. The decrease of
$15,900 in interest expense (net of interest income) for the three months ended
March 31, 1999, compared to the same period last year, was primarily the result
of interest earned on $3,000,000 proceeds from the sale of 1,000,000 shares of
preferred stock and common stock warrant.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased during the three months ended March 31,
1999, by $2,246,700 from $796,800 at December 31, 1998. The increase in cash was
due to cash received from financing activities of $2,989,200 primarily from the
sale of 1,000,000 shares of preferred stock and common stock warrant for
$3,000,000. This receipt of cash was partially offset by cash used for capital
expenditures of $76,100, and cash used in operating activities of $666,400.
Reference is made to the footnotes to the Company's financial statements for
discussions as to the company's secured borrowing facility and the need for
capital for leasehold improvements.
YEAR 2000
The Company established a Year 2000 (Y2K) oversight committee in 1998, to review
all of the Company's computer systems and programs as well as those of third
parties whose data the Company relies on in any material respect. The objective
of the review is to assess the ability of the computer systems and programs to
process transactions in the year 2000. A formal Y2K compliance program was
created that encompasses five key readiness areas: 1) awareness, 2) assessment;
3) renovation; 4) validation and notification; and 5) implementation. Specific
Y2K compliance performance procedures and timetables have been developed for
each readiness area. Management anticipates having the Y2K compliance program
substantially completed and verified for all production environments on or
before June 30, 1999. The Company has also contacted substantially all of their
hardware and software component suppliers requesting a Y2K compliance
certification letter. To date, information accumulated from a majority of our
key suppliers indicates that their products are either Y2K compliant or they are
in the process of developing remediation plans. The Company will develop a
supplier action list and contingency plan based on the suppliers' progress to
adequately address the Y2K issue.
The Company has budgeted approximately $100,000 through the year 1999 for the
Y2K compliance program, $75,000 of which is for internal labor. Nominal
expenditures, primarily for maintenance, will be made beyond the year 2000.
TAXES
Federal and State income tax provisions were not booked due to the availability
of net tax loss carry forwards resulting from losses in prior years. Utilization
of the net tax loss carry forwards will be significantly limited as a result of
the change in control of the Company.
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PART II. OTHER INFORMATION
The statements in this quarterly report on Form 10-QSB that are not historical
fact constitute "forward-looking statements". Said forward-looking statements
involve risks and uncertainties which may cause the actual results, performance
or achievements of the Company and its subsidiaries to be materially different
from any future results, performance or achievements, express or implied by such
forward-looking statements. These forward-looking statements are identified by
their use of forms of such terms and phrases as "expects", "intends", "goals",
"estimates", "projects", "plans", "anticipates", "should", "future", believes"
and "scheduled".
The variable which may cause differences include, but are not limited to, the
following general economic and business conditions; competition; success of
operating initiatives; operating costs; advertising and promotional efforts; the
existence or absence of adverse publicity; changes in business strategy or
development plans; the ability to retain management; availability, terms and
deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit costs;
availability and cost of raw materials and supplies; and changes in, or failure
to comply with, government regulations. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this filing will
prove to be accurate. In the light of the significant uncertainties inherent in
the forward-looking statement included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and exceptions of the Company will be achieved.
Item 2. Tax Changes in Securities and Use of Proceeds
On January 15, 1999, the Company sold 70,000 shares of its common
stock to Graeme MacLetchie, a Director of the Company, upon the
exercise of previously issued stock options. Half of such options
were exercised at a price of $0.56 per share and the other half of
such options were exercised at a price of $0.25 per share which were
the fair market value of the shares at time of grant. The Company
believes that the offer and sale of its securities in such
transaction was exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act") by virtue
of Section 4(2) thereof.
On January 28, 1999, the Company consummated the sale of preferred
stock and warrants described in its Current Report on Form 8-K dated
February 28, 1999. Said transaction is described in more detail in
Item 6(b) below. The Company believes that the offer and sale of its
securities in such transaction was exempt from the registration
requirements of the Securities Act, by virtue of Section 4(2)
thereof.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
Exhibit Number Description of Exhibit
27 Financial Data Schedule (filed separately herewith)
(bb) Reports on Form 8-K
1. The Company filed a Current Report on Form 8-K dated
February 12, 1999 which disclosed that on January 28,
1999, Commercial Electronics Capital Partnership, LP
("CECAP"), and a related entity, Commercial Electronics,
L.L.C. (collectively, "Purchaser"), purchased 732,160
shares of common stock from three retiring directors at
$.85 per share. The Purchaser also purchased from the
Company, 1,000,000 shares of new preferred stock,
convertible into common stock at any time at the option of
the holder on the basis of 2.5 shares of common stock for
each share of preferred stock and a warrant to purchase up
to 1,500,000 shares of the Company's common stock for 18
months at a price of $1.00 per share, for an aggregate
cash consideration paid to the Company of $3,000,000.
In connection therewith, the Purchaser became the
beneficial owner of 4,732,160 shares of the Company's
authorized common stock, representing approximately 59% of
the Company's outstanding common stock (assuming the
conversion of Purchaser's preferred stock into common
stock and the full exercise of the Purchaser's warrant to
purchase common stock). Such beneficial ownership, along
with the fact that the Purchaser's three designees
constitute a majority of the Company's Board of Directors,
and the fact Purchaser has the contractual right to retain
control of the Company's Board of Directors, constitutes a
change in control of the Company from the Selling
Directors to the Purchaser and its director nominees.
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2. In connection with the change in control of the Company, the
company filed a Form 8-K dated March 10, 1999 which disclosed
that effective March 5, 1999 the Company terminated its previous
accountants, Grant Thornton LLP and appointed the firm of KPMG
LLP as the Company's new independent accountants. Additionally,
the Company disclosed it had decided to change the date on which
the Company's fiscal year ends from October 31, to December 31.
The audited financial results for the two-month transition
period ending December 31, 1998 will be reported on the
Company's Form 10-KSB for the fiscal year ending on December 31,
1999.
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: May 18, 1999 WILTEK, INC.
/s/ Walter Keisch
Walter Keisch, Vice President Finance and CFO
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