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 January 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
THE EXCHANGE ACT
For the transition period from to
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Commission file number 0-2401
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WILTEK, INC
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(Exact name of small business issuer as specified in its charter)
Connecticut 06-0625999
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
542 Westport Ave., Norwalk, CT 06851
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(Address of principal executive offices)
(203) 853-7400
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(Issuer's telephone number)
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(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
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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 March 15, 1999
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Common Stock No Par Value 3,962,128 shares
Preferred Stock No Par Value 1,000,000 shares
Wiltek, Inc.
Index
Page No.
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PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet at January 31, 1999 3
Consolidated Statements of Operations
For the Three Months Ended January 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended January 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION 10
2
Wiltek, Inc.
Consolidated Balance Sheet
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(Unaudited)
January 31,
1999
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ASSETS
Current Assets:
Cash and cash equivalents $ 3,439,500
Accounts receivable, less
allowance for doubtful accounts $35,000 1,038,700
Other current assets 105,700
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Total Current Assets 4,583,900
Equipment, net 880,100
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Total Assets $ 5,464,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Term loan payable, current portion $ 12,800
Obligation under capital leases, current portion 122,200
Accounts payable and accrued expenses 735,500
Deferred income 84,600
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Total Current Liabilities 955,100
Long Term Liabilities:
Term loan payable, less current portion 19,200
Obligation under capital leases, less current portion 65,500
Commitments and Contingencies Liabilities
Stockholders' Equity:
Senior Convertible Series A Preferred Stock, no par value
1,000,000 shares authorized, issued and outstanding 2,985,000
Common Stock, stated value $.331/3 per share,
9,000,000 shares authorized, 4,954,693 shares issued
and outstanding 1,651,500
Additional Paid in Capital 5,611,900
Accumulated Deficit (4,607,700)
Less Treasury Stock at cost, 992,565 shares (1,216,500)
Total Stockholders' Equity 4,424,200
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Total Liabilities and Stockholders' Equity $ 5,464,000
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See accompanying notes to consolidated financial statements.
3
Wiltek, Inc.
Consolidated Statements of Operations
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(Unaudited)
Three Months Ended
January 31,
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1999 1998
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Net Revenues
Messaging services $ 949,800 $1,150,700
Consulting services 770,900 668,900
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Total net revenues 1,720,700 1,819,600
Costs and Expenses
Cost of messaging services 547,600 645,900
Cost of consulting services 480,100 501,400
Sales expense 293,000 255,400
General & administrative expense 321,500 249,300
Research and development 125,600 120,600
Interest expense 7,900 10,900
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1,775,700 1,783,500
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Net (Loss) Earnings (55,000) 36,100
(Loss) Earnings Per Common Share:
Basic $(.01) $.01
Diluted $(.01) $.01
Weighted average number of shares used in per share calculation:
Basic 3,903,795 3,815,505
Diluted 3,903,795 4,135,797
See accompanying notes to consolidated financial statements.
4
Wiltek, Inc.
Condensed Consolidated Statements of Cash Flows
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(Unaudited)
Three Months Ended
January 31,
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1999 1998
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Net Cash (Used in) Provided by Operating Activities (166,900) 53,700
Cash Flow (Used in) Investing Activities:
Capital expenditures (83,000) (87,600)
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Net cash (used in) investing activities (83,000) (87,600)
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Cash Flow Provided by (Used in) Financing Activities:
Proceeds from bank loan to finance capital assets 31,900 -
Proceeds from exercise of stock options 28,000 1,000
Proceeds from issuance of preferred stock 2,985,000 -
Proceeds from issuance of common stock warrant 15,000 -
Payments under capital lease obligations (38,400) (32,700)
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Net cash provided by (used in) financing activities 3,021,500 (31,700)
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Net increase (decrease) in cash and cash equivalents 2,771,600 (65,600)
Cash and cash equivalents at beginning of period 667,900 526,700
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Cash and cash equivalents at end of period $3,439,500 $461,100
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Supplemental Disclosure of Cash Flow Information:
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Cash paid during the three months for:
Interest $ 9,700 $ 13,200
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Income taxes $ 1,200 $ 1,500
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Non-cash investing and financing activities:
Capital expenditures in accounts payable $ 23,000 $151,900
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Capital lease obligations incurred for fixed asset acquisitions $ $ 90,500
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See accompanying notes to consolidated financial statements.
5
Wiltek, Inc.
Notes To Consolidated Financial Statements
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The Consolidated Balance Sheet as of January 31, 1999, and the related
Consolidated Statements of Operations for the three months ended January 31,
1999 and 1998, and the Consolidated Statements of Cash Flows for the three
months ended January 31, 1999 and 1998, 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 January 31, 1999, and for the three 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 1998
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 January 31, 1999, and January 31, 1998, these cash balances
were $122,900 and $129,200, 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.
For the periods presented in the Consolidated Statement of Operations, the
calculations of basic EPS and EPS assuming dilution vary in that the weighted
average shares outstanding assuming dilution includes the incremental effect of
stock options.
Reconciliation of Basic and Diluted EPS computations:
Three Months Ended January 31,
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1999 1998
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Per Per
Income Shares Share Income Shares Share
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Basic EPS
Income available to Common Shareholders $(55,000) 3,903,795 $(.01) $36,100 3,815,505 $.01
Dilutive Effect of Securities:
Stock Options 320,292
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Diluted EPS
Income available to Common Shareholders
plus assumed conversions
$(55,000) 3,903,795 $(.01) $36,100 4,315,797 $.01
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All options were excluded from the calculation of 1999 Diluted EPS because the
Company experienced a loss for the quarter ended January 31, 1999 and such
options would have had an anti-dilutive effect.
Options to purchase 185,000 shares of common stock (160,000 of which were issued
during the three months ended January 31, 1998) at prices ranging from $0.81 to
$0.87 were outstanding at January 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, expiring in periods ranging
from March 24, 2007, to December 15, 2007, were still outstanding at January 31,
1998.
6
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.
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 due and 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 January 31, 1999 was
$32,000.
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.
Wiltek 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 or functionality Wiltek 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.
Wiltek 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. Wiltek 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.
7
Wiltek, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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Liquidity and Capital Resources
Cash and cash equivalents increased during the three months ended January 31,
1999, by $2,771,600 from $667,900 at October 31, 1998. The increase in cash was
due to cash received from financing activities of $3,021,500 primarily from the
sale of 1,000,000 shares of preferred stock for $2,985,000. This receipt of
cash was partially offset by cash used for capital expenditures of $83,000, and
cash used in operating activities of $166,900. Cash used in operating
activities was comprised of an increase in accounts payables and other current
liabilities of $212,700, partially offset by net earnings before depreciation of
$10,800 and a decrease in accounts receivables and other current assets of
$35,000.
Results of Operations
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
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Three Months Ended
January 31, 1999 and 1998
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Net Revenues $ (98,900) (5%)
Cost of Services (119,600) (10%)
Sales Expense 37,600 15%
General & Administrative Expense 72,200 29%
Research and Development 5,000 4%
Interest Expense (3,000) (28%)
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Net Earnings $ (91,100) (252%)
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Net Revenues decreased by $98,900 (5%). The decrease resulted from lower
Messaging Service revenues of $200,900 due to discontinued services by two major
customers. This was partially offset by an increase of $102,000 (15%) in
Consulting Services revenue due to continued expansion of those services.
8
Period to period comparisons in Gross Profit Margins are summarized below:
Three Months Ended
January 31,
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Messaging Services Consulting Services Total
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1999 1998 1999 1998 1999 1998
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Revenue $949,800 $1,150,700 $770,900 $668,900 $1,720,700 $1,819,600
Costs 547,600 645,900 480,100 501,400 1,027,700 1,147,300
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Gross Profits $402,200 $ 504,800 $290,800 $167,500 $ 693,000 $ 672,300
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Gross Profit
Margins 42% 44% 38% 25% 40% 37%
Gross profit margin for Messaging Services decreased in the comparative periods.
The decrease is primarily due to loss of messaging contracts from higher margin
customers. Gross profit margin for Consulting Services increased in the
comparative periods. The increase is primarily a result of the reduced use of
higher cost subcontract consultants and increased revenue from higher margin
consulting engagements.
The Company's Selling Expenses were 17% of total revenues for the three months
ended January 31, 1999, compared to 14% same respective period last year. Sales
expense increased by 15% for the three months ended January 31, 1999, compared
to the same period last year. The increase in sales expenses is primarily due
to increased salaries related to the hiring of additional sales personnel.
The increase of $72,200, or 29%, in General and Administrative Expenses for the
three months ended January 31, 1999, compared to the same period last year is
primarily the result of salary increases coupled with higher executive travel in
the current period. In addition, the Company incurred increased legal fees
approximating $11,000 in the current quarter resulting from non-recurring
activities in connection with the change in control of the Company.
The increase in Research and Development Expenses for the three months ended
January 31, 1999, compared to the same period last year relates to normal
inflationary increases over the two periods.
The decrease in Interest Expense (net of interest income) for the three months
ended January 31, 1999, was due to lower interest on lease obligations
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.
9
PART II. OTHER INFORMATION
Item 6. Exhibits and 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, L.P. ("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.
As a consequence, 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.
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 "stub year" period will be reported on the Company's
Form 10-KSB for the fiscal year ending on December 31, 1999.
SIGNATURE
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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: March 15, 1999 WILTEK, INC.
/s/ David S. Teitelman
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David S. Teitelman
President
10