SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended: October 31, 1998
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from
Commission file number 0-2401
WILTEK, INC.
(Name of small business issuer in its charter)
CONNECTICUT 06-0625999
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
542 WESTPORT AVE., NORWALK, CT 06851
(Address of principal executive offices) (Zip Code)
(203) 853-7400
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(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 (X) No ( )
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not 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. ( )
The issuer's revenue for its most recent fiscal year was $7,584,300
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of December 29, 1998 was: $1,491,890
THE ISSUER WAS NOT INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST FIVE YEARS
As of December 29, 1998, there were 3,892,128 shares of Common Stock, No Par
Value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information with respect to Directors, Management Remuneration and
Security Ownership of Certain Beneficial Owners and Management are contained
in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders
and incorporated by reference in Part III
Wiltek, Inc.
Form 10-KSB
PART I
Item 1. Business
General
Wiltek, Inc., (Wiltek or the "company") is a Connecticut corporation, which
was organized in 1947. The company's principal offices are located at 542
Westport Avenue, Norwalk, CT 06851. Wiltek (UK) Ltd. is a wholly owned
subsidiary, which was organized in England in 1983, to provide Wiltek
services to international users. Wiltek (UK) Ltd. is located at 2 Apple
Walk, Swindon, England.
Wiltek provides outsourcing connectivity services to companies migrating
between or coexisting with multiple disparate messaging platforms. Wiltek
performs all design required for the implementation and operation of its
worldwide message and data communication services. These services enable
Wiltek's customers to seamlessly communicate with electronic mail, among all
intra- and inter-company messaging systems both private and public. All
issues of incompatible applications, systems, platforms, networks, protocols
and formats are eliminated for Wiltek's customers and their respective
trading partners.
An important feature provided to Wiltek's customers is directory
synchronization. Wiltek's directory synchronization services enable
customers' multiple internal messaging systems to have all user
address information presented in a complete, native format to all
participating systems. This service feature also allows external trading
partner systems to participate in the directory synchronization process.
Wiltek has developed a range of services, which allow customers to:
1. Connect dissimilar computer based electronic mail systems such as
IBM PROFS (r), Digital Equipment All-In-One (r), Microsoft Exchange (r) and
Microsoft Mail (r), Lotus Notes (r) and cc:Mail (r), Groupwise, POP3,
IMAP4, SMTP, etc. Generally these systems operate within different
divisions of the same company or in the customers' trading partner
facilities.
2. Communicate with public email services (AT&T Mail (r), MCI Mail (r),
Advantis (IBMMail(r)), Mercury, the Internet and X.400 services to allow
users of host-based and client/server systems to correspond with email users
outside of their company.
3. Send to facsimile devices located throughout the world utilizing our
broadcast and customized facsimile delivery service based in the US and UK.
In addition to the communication and directory synchronization services
described above, Wiltek has also developed a consulting and system
integration organization. This unit is chartered to assist
customers in the movement to Microsoft's client/server based electronic
messaging and workgroup systems. Wiltek is focusing on accounts that
require assistance in the planning for, and implementation of, Microsoft
Exchange(r), Windows NT, IIS, SMS and SNA Server. Wiltek is a Microsoft
Solution Provider and is firmly committed to the Microsoft Backoffice(r)
product line.
Microsoft has established itself, as the growth arena for business
information systems needs. This growth is the direct result of marketing
strategies and product deliverables planned and recently executed by
Microsoft. The sales and support strategy deployed by Microsoft for
business clients are dependent upon the use of value added consulting
services by Solution Providers. The basis for the Microsoft Backoffice(r)
suite of products is messaging technology.
1997 marked the initial large growth phase of Microsoft provided intranets,
based on the availability of products required by enterprise corporate
computing models. This trend continued in 1998 as wide-spread
implementation of Microsoft NT(r) server and Microsoft Exchange(r) server
based collaborative computing systems increased dramatically. The corporate
information systems model requires the availability of decision-making data,
open communications, and technology resource based marketing and operating
advantages. Wiltek also provides software engineering via our consulting
organization to design and develop workflow and routing applications and
forms.
Within the realm of messaging based technologies, use of messaging (email,
fax and directory services) has become a standard operating procedure for
successful large and medium organizations. During 1997, small organizations
were just beginning to establish business requirements for these
applications, however, the technology cost and benefit for small
organizations did not yet fit the profile of an attractive market. During
1998, small organizations, and to a degree the "Small Office Home Office"
(SOHO) market, began limited implementation and leveraging of collaborative
computing tools. This trend should continue during 1999 as technology costs
continue to decline and technology ease-of-use increases. This will lead to
use and acceptance of collaborative computing technologies across a much
wider business market. Wiltek by way of its experience and expertise is
positioned solidly in the middle of these growth markets.
Wiltek's Market
The market for Wiltek's electronic mail connectivity services is a result of
the explosive growth in the installation of email systems throughout the
world. In its broadest sense, electronic mail or messaging includes the
electronic communication between individuals who use mainframe computers,
mid-range systems, client/server platforms, personal computers, public
electronic mail, facsimile or telex machines to send and/or receive
information. The primary information type communicated via electronic mail
was once text created by individuals. Today, the more prevalent information
profiles include attached files created by computer based applications such
as spreadsheets, database segments, executable code, video and audio clips
and formatted documents such as purchase orders. This trend is indicative
of the gradual, yet inevitable movement towards unified messaging.
The other important segment of Wiltek's market is the need to collect text
and attached files from email users or from computer based data files and
deliver this information to facsimile machines. This market (sometimes
referred to as "desktop-to-fax") has grown dramatically with the worldwide
acceptance and use of services for broadcast distribution of application and
email generated information destined for facsimile delivery. Application
information includes spreadsheets, word documents, images, etc. sent
as attachments by the user communities and computer based applications.
The growth in the installed base of email systems and facsimile devices
represents a significant opportunity for providers of gateway or
connectivity software and services. Every time an email document or
attached file needs to move from one type of system to a different system,
computer or device; it will require some or all of the following
translations:
1. Protocol conversion to change the transmission method, e.g. from an
IBM SNA(r) protocol to the TCP/IP protocol.
2. Format conversion to accommodate the different structures of each
email system, e.g. IBM PROFS(r) to Microsoft Exchange(r).
3. Transmission speed conversion because the sending systems operate at
different transmission speeds than the receiving devices.
4. Code conversion to convert from one encoding standard to another, e.g.
ASCII to EBCDIC.
5. Directory synchronization to transform an individual id or name on one
system into a native appearance on another system. For example, a user's
name on Microsoft Exchange might be "Jay W. Fitzpatrick" but on a PROFS
system the name is limited to 8 characters and therefore might be presented
to the PROFS user community as "JWFITZFP."
Organizations who use electronic mail have the option of buying hardware and
software, which they install and operate, or to connect their different
systems to a service provider like Wiltek to perform the functions outlined
above. The magnitude of the market for these connectivity capabilities has
grown as a result of the following factors:
1. The increased size of the email and fax installed base.
2. The number of companies using email is no longer limited to large
corporations.
3. The growing use of email systems as a transport vehicle.
4. Corporations are moving from large, mainframe based computers to PC's,
LANs, and client/server platforms.
5. The need to synchronize directories of users among dissimilar systems has
been more clearly recognized.
6. The use of email has grown from an intra-enterprise application to one
that crosses company boundaries to trading partners, i.e. suppliers and
customers.
7. Further acceptance of the outsourcing model.
While many organizations have, or are in the process of standardizing
singular messaging systems, opportunities continue to exist for service
providers. Wiltek will continue to pursue such service-based
opportunities in 1999 including application management, gateway management
and outsource messaging and directory management.
Marketing Strategy and Target Customers
The company has traditionally targeted large multi-national companies that
are likely to have dissimilar computer systems and applications in multiple
locations. Such companies have been plagued with inter-divisional
communication problems because their computing strategies often differed
from division to division, resulting in computing systems that communicate
ineffectively with each other. Wiltek's customer list contains over 50
large corporations, most of which are Fortune 500 companies.
As a result of the development by Wiltek of LAN connectivity and Directory
Synchronization services, as well as Microsoft BackOffice(r) related
consulting services the company's potential market is expanding. Large
corporations who are migrating from mainframe computers to LAN and client/
server based systems need significantly more connectivity between the older
legacy systems and the new client/server messaging and collaborative
systems.To facilitate the transmission of messages and files between those
disparate messaging systems, users are requiring directory services that
incorporate the addresses of all of the users on other systems into their
individual local directories. Wiltek provides this process, known as
Directory Synchronization. In addition, the lower cost of hardware and
software for electronic messaging has broadened the base of users from
large, international corporations (typically the top 1,000 companies) to
the much larger market represented by mid-size and small companies. The
downsizing of staff in many organizations and the relatively unsophisticated
technical capabilities of smaller companies also enhances the attractiveness
of using an outsourcing service like Wiltek rather than an in-house managed
hardware/software solution.
New Services and Products
Wiltek's research and development activities are directed toward enhancing
existing services and creating new services to meet customers' data
communication needs. The company's research and development primarily
involves the creation of computer software and the customization and
integration of purchased software. The company's efforts are generally
customer driven. As new requirements arise, Wiltek develops new software or
adapts existing software to provide a solution.
The company has recently installed new client/server communications
applications to enhance our service capabilities within the rapidly growing
client/server messaging segment of the market. In addition, the company has
installed both UNIX and NT based solutions to provide X.500 Directory
Services to its customers.
An additional feature added to our facsimile delivery service is the ability
to accept and deliver a customer's message text and attachments natively from
their electronic messaging platform. This service enhancement allows
customers to send faxes natively from Lotus Notes(r), Lotus cc: Mail(r),
Groupwise(r), Microsoft Mail Exchange(r), Microsoft Mail(r), etc. This
solution does not require additional hardware or software; it simply allows
customer's to send faxes as if they were sending a mail item and
attachment(s) to another mail user. All document conversions are
transparent to the customer and are performed by the Wiltek Facsimile
delivery service. Supported attachments include MS Word(r), MS Excel(r), MS
Power Point(r), Word Perfect 5.0(r), Word Perfect 5.1(r) for DOS, Word
Perfect 5.x for Windows(r), Lotus 123(r), Lotus Freelance Graphics(r), Lotus
AmiPro(r), TIFF, BMP, GIFF, JPEG, RTF, HTML, and PostScript.
Wiltek Services also provides their customers in both large organizations
and the SOHO market with the ability to transmit messages and file
attachments into Wiltek Services via the Internet. Wiltek Services receives
these mail items with file attachments and automatically converts them into
faxable images prior to transmitting to the intended facsimile recipients.
Any organization with Internet access can be authorized for Wiltek Services
access within a matter of hours.
During 1998, Wiltek also implemented a Fax-to-email Service offering
available to any organization with Internet access. Wiltek Services
receives facsimile transmissions from any fax machine around the globe and
automatically forwards the transmissions to intended customer email
recipients via the Internet. This automated routing function is
accomplished by assigning individual telephone numbers with both "800" and
non "800" area codes, to individual or group customer recipients.
Subsequently, recipients have the ability to view and distribute the
received email with attached facsimile images without paper creation while
retaining the option of printing the received images.
Wiltek presently has Microsoft Certified System Engineers and Microsoft
Product Specialists on staff certified in a variety of Microsoft product and
technologies such as Windows NT(r) Server, Windows NT(r) Workstation,
Microsoft Mail(r), Microsoft Exchange(r), Microsoft SMS(r), Microsoft
Internet Information Server(r), TCP/IP, and Microsoft Windows for
Workgroups(r). Wiltek's certified engineers and product specialists are
located in both the Connecticut and Swindon, England facilities. These
individuals provide Wiltek's consulting customers with Microsoft
BackOffice(r) planning and implementation assistance. Wiltek concentrates
efforts towards infrastructure and application design and development within
the Microsoft NT(r) Server, Microsoft Exchange(r) and mail environments.
Application work includes software development, utilizing Visual Languages
to address application migration and workflow automation within large
organizations.
<TABLE>
<CAPTION>
Revenues
Year Ended October 31,
(In thousands of dollars)
1998 1997
<S> <C> <C>
Messaging services $4,480.1 $4,660.1
Consulting services 3,104.2 1,376.6
Total $7,584.3 $6,036.7
</TABLE>
Messaging services revenues decreased by 3.9% and Consulting services
revenues increased by 125.5% in the fiscal year ended October 31, 1998.
Messaging services revenues decreased primarily due to renegotiated
contracts at lower prices and reduced volumes from existing customers.
Wiltek's rapid consulting service revenue growth is attributable to several
factors. Early in fiscal 1998, the Company successfully completed several
large-scale and complex consulting engagements and simultaneously recruited
and hired a number of highly trained, certified and experienced consultants,
which nearly doubled its average consulting staff over fiscal 1997. As a
result, the Company has earned and now enjoys a reputation as a provider of
technically superior project management and consulting services related to
Microsoft BackOffice(r) product installations where demand for qualified and
competent service providers remains high.
Major Customers
During the year ended October 31, 1998, two customers had revenues exceeding
10% of the company's total revenues, General Electric and Sea-Land Service,
Inc. with 11.6% and 10.1%, respectively. In fiscal year 1997 Sea Land
Service, Inc. accounted for over 10% of total revenues with 15.4%.
Major Vendors
During the year ended October 31, 1998 and 1997, approximately 18% and 26%
respectively, of total purchases of the Company were made from two vendors.
Management believes that there is a ready source of alternative suppliers
should a need arise and therefore loss of these suppliers would not cause
a delay or loss of sales.
Foreign and Domestic Operations and Export Sales
The Company began foreign operations in 1983 in England to provide services
to its customers outside of the United States. Operations outside the
United States are subject to the usual risks and limitations attendant upon
investments in foreign countries, such as fluctuations in currency values,
exchange control regulations, wage and price controls, employment
regulations, effects of foreign investment laws and other domestic and
foreign governmental policies affecting United States companies doing
business abroad. The company does not engage in a formal risk management
program with respect to foreign currency exposure. Typically the company
maintains cash balances in UK banks to provide for the working capital
requirements of Wiltek (UK) Ltd. As of October 31, 1998 and October 31,
1997 these deposits were $150,600 and $102,900 respectively. The company
receives a portion of its revenue from foreign revenue sources, incurs
service costs in England, denominated in UK pounds, and has assets and
liabilities in the UK. These factors give rise to currency risks which are
dependent upon the fluctuation in exchange rates between the US dollar and
UK pound. Wiltek does not use derivative instruments to hedge this risk.
All currency figures are expressed in US dollars.
Information about the company's operation in different geographical areas:
<TABLE>
<CAPTION> Year Ended October 31,
(In thousands of dollars)
United
Domestic Kingdom Total
<S> <C> <C> <C>
1998
Revenues $6,660.4 $ 923.9 $7,584.3
Net Earnings (Loss) $ 423.7$ $ (116.3) $ 307.4
Identifiable Assets $2,320.5 $ 424.6 $2,745.1
1997
Revenues $5,020.9 $ 1,015.8 $6,036.7
Net Earnings (Loss) $ (26.3) $ 65.5 $ 39.2
Identifiable Assets $1,960.4 $ 409.1 $2,369.5
<FN>
Included in the above are U.S. management costs allocated to U.K. operations
and net interest expense charged to Wiltek (U.K.) Ltd. in the amount of
$253,500 and $41,900, respectively in 1998 and $201,800 and $40,400,
respectively in 1997.
</TABLE>
Net Sales Backlog
The Company believes that sales backlog is not a meaningful indication of
future revenue because most of its revenue is derived from short-term
contracts for both communications services and consulting services which are
generally initiated within 90 days of receipt of an order.
Employees
The company and its subsidiary Wiltek (U.K.) Ltd. employed 50 full-time
employees as of October 31, 1998.
Competition
The office automation and communications field in which the company operates
is highly competitive and characterized by rapid changes due to
technological improvements and developments. Both low-cost commodity and
high-cost custom providers of services exist within the company's
marketplace. Major service competitors include Control Data Systems,
AT&T (r) and Sprint (r). Consulting competitors are ill-defined due to the
infancy of the Microsoft BackOffice (r) product line from a corporate
acceptance and implementation standpoint. Despite the competition, the
company believes that its high level of capability in software development,
network management and cost effectiveness make it competitive in the
industry.
Research and Development
The company's research and development activities are directed toward
enhancing existing services and creating new services, including consulting
services for networking and workflow automation to meet customers' data
communication needs. During fiscal years 1998 and 1997 Wiltek spent
$491,900 and $519,400, respectively, on research and software development.
Item 2. Properties
The company occupies a portion of a three-story building at 542 Westport
Avenue, Norwalk, Connecticut, as a tenant under a lease expiring
December 31, 1999. The space consists of approximately 15,000 square feet
and is utilized for offices and a computer center. The Company also
has 1,200 square feet at Building 101, Merritt 7 Corporate Park, Norwalk,
Connecticut, under a lease expiring July 23, 2001. This space was primarily
used for sales activities until June 1, 1998, when the space was sublet to
a third party for the remaining term of the lease. Additionally, the
company is leasing approximately 3,500 square feet in Swindon, England for
the Wiltek (U.K.) computer center under a lease, which expires February 1,
2004.
Item 3. Legal Proceedings
The company is not involved in any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report through the
solicitation of proxies or otherwise.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters
(a) The following table shows the range of closing bid prices for the
Common Stock, in the over-the-counter market for the fiscal quarters
indicated, as reported by NASDAQ. The quotations represent prices in the
over-the-counter market between dealers in securities, do not include retail
markup, markdown or commission and do not necessarily represent actual
transactions:
<TABLE>
<CAPTION>
Bid Prices
1998 High Low
<S> <C> <C>
First Quarter 27/32 7/16
Second Quarter 3/4 1/2
Third Quarter 7/8 5/8
Fourth Quarter 23/32 3/8
<CAPTION>
1997 High Low
<S> <C> <C>
First Quarter 13/32 7/32
Second Quarter 27/32 13/32
Third Quarter 1 3/8 5/8
Fourth Quarter 27/32 7/16
</TABLE>
(b) Approximate number of equity security holders:
<TABLE>
<CAPTION>
Approximate Number of
Record Holders as of
Title of Class December 21, 1998
<S> <C>
Common Stock, No Par Value 742
</TABLE>
(c) Dividends
The company has not paid cash dividends on its Common Stock. The payment of
dividends is at the discretion of Wiltek's Board of Directors. The company
plans to reinvest its cash flow in its business and does not anticipate
payment of cash dividends in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Summary
The following table sets forth for the periods indicated (i) percentages of
certain items to net revenue of the company and (ii) the percentage
increases (decreases) of such items as compared to the prior period:
<TABLE>
<CAPTION>
Relationship to Period to Period
Total Revenues Increase (Decrease)
Year Ended October 31, Years Ended
1998 1997 1998-97*
<S> <C> <C> <C>
Net Revenues:
Messaging services 59.1% 77.2% (3.9)%
Consulting services 40.9 22.8 125.5
Total net revenues 100.0 100.0 25.6
Cost of Services 61.1 56.0 37.2
Gross Margin 38.9 44.0 (10.9)
Sales expenses 13.6 18.7 (8.5)
General & admin. expenses 14.1 15.6 13.6
Research and development 6.5 8.6 (5.3)
Interest expense .6 .5 NM
Net Earnings 4.1% .6% 684.2%
<FN>
* NM - Not Meaningful
</TABLE>
Net Revenues
Messaging services revenues decreased by 3.9% and Consulting services
revenues increased by 125.5% in the fiscal year ended October 31, 1998.
Messaging services revenues decreased primarily due to renegotiated
contracts at lower prices and reduced volumes from existing customers.
Wiltek's rapid consulting service revenue growth is attributable to several
factors. Early in fiscal 1998, the Company successfully completed several
large-scale and complex consulting engagements and simultaneously recruited
and hired a number of highly trained, certified and experienced
consultants, which nearly doubled its average consulting staff over fiscal
1997 average. As a result, the Company has earned and now enjoys a
reputation as a provider of technically superior project management and
consulting services related to Microsoft BackOffice(r) product installations
where demand for qualified and competent service providers remains high.
Cost of Services and Gross Profit Margins.
The cost of cervices increased by 37.2% in the current fiscal year when
compared to last year primarily due to significantly higher Consulting
services sales volume. Gross margins decreased from 44.0% to 38.9%
primarily due to increased volume from lower margin consulting services
business and secondarily due to various messaging contracts renegotiated at
lower prices.
Sales Expenses
Sales expenses decreased 8.5% in the current fiscal year and as a percent of
total revenues decreased from 18.7% to 13.6%, from 1997 to 1998. The
decreases were primarily attributable to lower spending for advertising and
promotion, travel and telephone.
General & Administrative Expenses
The company's general & administrative expenses were $1,068,800 or 14.1% of
total revenues in fiscal 1998 compared to $941,000 or 15.6% of total
revenues in fiscal 1997. The 13.6% increase in expense was mainly
attributable to higher salaries and benefits.
Research and Development
Research and development expenditures were $491,900 and $519,400 for fiscal
1998 and 1997, respectively. The 5.3% reduction in expense in fiscal 1998
was mainly due to lower salaries and benefits resulting from fewer employees
assigned to R&D projects and lower depreciation expense.
Interest Expense
Interest expense increased by 55.3% to $48,300 in fiscal 1998 from $31,100,
in fiscal 1997. The increase was mainly due to higher interest associated
with increased capitalized leased asset acquisitions and costs pertaining to
Wiltek's new working capital bank credit facility.
Year 2000
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.
Liquidity and Cash Flow
Cash and cash equivalents at October 31 are presented in the following
table:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash in banks $622,700 $132,400
Bank money market funds 45,200 394,300
$667,900 $526,700
</TABLE>
Cash and cash equivalents increased by $141,200 during fiscal 1998.
The main reasons for the increase in cash were net earnings of $307,400,
depreciation of $217,400, non-cash expenses for the issuance of stock
of $37,300, a decrease in receivables of $32,200 and proceeds from exercise
of stock options of $12,000, which were partially offset by a decrease in
accounts payable of $36,800, capital expenditures of $279,100 (excluding
leased capital acquisitions) and payments under capital lease obligations of
$149,200.
Cash and cash equivalents increased by $119,100 during fiscal 1997. The
main reasons for the increase in cash were net earnings of $39,200,
depreciation of $182,500, non-cash expenses for the issuance of stock and
options of $96,100, and an increase in accounts payable of $358,900 which
were partially offset by capital expenditures of $117,300, payments under
capital lease obligations of $116,500, and an increase in accounts
receivable $326,300.
The company currently has $2,610,800 in net operating loss carry-forwards
for U.S. tax purposes, of which $354,900 will expire in 1999 and the
balance in 2007 through 2010. See note 8 to the Consolidated Financial
Statements for additional details. Wiltek (U.K.) Ltd. has a tax loss
carry-forward of $711,400.
Capital expenditures in fiscal 1998 were $486,300. Purchases included
computer equipment for $320,700, leased equipment for $164,600, and
furniture and fixtures for $1,000.
Capital expenditures in fiscal 1997 were $274,100. Purchases included
computer equipment for $98,300, leased equipment for $150,700, and
furniture and fixtures, leasehold improvements, and lab equipment for
$25,100.
Anticipated capital expenditures in 1999 will be approximately $370,000.
We expect that available cash resources, cash flow from operations and bank
credit lines will meet these capital requirements.
The company entered into capital lease obligations totaling $164,600 and
$150,700 for the years ending October 31, 1998 and 1997, respectively. The
capital leases were primarily for new computer equipment.
Item 7. Financial Statements and Supplementary Data
See the Consolidated Financial Statements annexed hereto and Item 6 above.
Item 8. Disagreement on Accounting and Financial Disclosure
During the year ended October 31, 1998, or the twenty-four month period
prior thereto, there were no disagreements on accounting and financial
disclosure practices.
PART III
Item 9. Directors and Executive Officers of the Registrant
(a) Identification of directors
Information with respect to the directors is contained in the company's
proxy statement for the 1998 Annual Meeting of Shareholders and is
incorporated herein by reference pursuant to General Instruction G (3).
(b) Identification of executive officers
The names, ages and positions of all executive officers of the company are
listed below along with a brief description of their business experience.
All officers are appointed by the Board annually to serve for the ensuing
year.
<TABLE>
<CAPTION>
Name Age Positions and Offices*
<S> <C> <C>
David S. Teitelman 42 Director, President & CEO
David P. Holst-Grubbe 41 Vice President
Kevin P. Carathanasis 30 Vice President
</TABLE>
*William P. Bunce held the position of Vice President until September 30,
1998, after which, by mutual agreement, he entered into a transition period,
following which, he will pursue other activities.
Mr. Teitelman came to the company in 1982 and served in a variety of
positions including software engineering, operations and systems
engineering. He became Director of Marketing and Systems Engineering in
1994. On April 1, 1995 he was selected to become President and CEO of the
company. He was appointed to Wiltek's Board of Directors in 1997.
Mr. Holst-Grubbe joined Wiltek in 1996 and was selected as Vice President,
Sales in January 1997. In 1998 he also assumed the Company's Marketing
responsibilities. Mr. Holst-Grubbe previously served in a variety of sales,
marketing and engineering capacities in the communications services, systems
and systems integration fields over the last 20 years at Control Data,
USSprint and General Datacom. He holds a bachelor's degree from Shepherd
College in West Virginia.
Mr. Carathanasis joined Wiltek in 1996 as director of Messaging Services,
he is responsible for overall development of messaging services strategy,
revenue attainment, and messaging services management. In January 1997, he
was selected to become Vice President, Messaging Services. He holds a
Bachelor of Science degree in computer science from Eckerd College in St.
Petersburg, FL. Prior to joining Wiltek, Kevin Carathanasis was employed by
IBM where he held various positions in electronic messaging, participating
in the development, launch, marketing, and support of electronic messaging
services.
Item 10. Management Remuneration and Transactions
The information required by this item is contained in the company's proxy
statement for the 1999 Annual Meeting of Shareholders and is incorporated
herein by reference pursuant to General Instruction G (3).
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is contained in the company's proxy
statement for the 1999 Annual Meeting of Shareholders and is incorporated
herein by reference pursuant to General Instruction G (3).
Item 12. Certain Relationships and Related Transactions
Not applicable.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
The consolidated financial statements filed as part of this
report are as listed in the Index to Financial Statements on
page 17, which immediately precede such statements.
(2) Exhibits
A list of the exhibits required by Item 601 of Regulation S-K
filed as part of this report is set forth in the Index to
Exhibits on page 34, which immediately precedes such exhibits
and is incorporated herein by reference.
(b) Reports on Form 8-K
There was no information requiring a filing on form 8-K during the
twelve months ended October 31, 1998.
Signatures
Pursuant to the requirements of Section 13 or 15 (d) 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.
WILTEK, INC.
By:
_____________________________________
David S. Teitelman, President & CEO
_____________________________________
Walter R. Keisch, Chief Financial Officer
Date: December 29, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated:
___________________________________ Date: December 29, 1998
Jay W. Fitzpatrick
Chairman
___________________________________ Date: December 29, 1998
David S. Teitelman
Director, President and Chief Executive Officer
___________________________________ Date: December 29, 1998
Boris Frenkiel
Director and Secretary
___________________________________ Date: December 29, 1998
F. Spencer Pooley
Director
___________________________________ Date: December 29, 1998
Graeme MacLetchie
Director
___________________________________ Date: December 29, 1998
David Holst-Grubbe
Vice President, Sales and Marketing
___________________________________ Date: December 29, 1998
Kevin Carathanasis
Vice President, Messaging Services
Wiltek, Inc.
Index to Financial Statements
New York, New YDecember 11, 1998ork
<TABLE>
<CAPTION>
Wiltek, Inc.
Consolidated Balance Sheet
<S> <C>
Cash and cash equivalents $ 667,900
Accounts receivable, less allowance for
doubtful accounts - $35,000 1,073,600
Other current assets 106,400
Total current assets 1,847,900
Equipment, net 897,200
Total assets $ 2,745,100
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Obligation under capital leases, current portion $ 134,700
Accounts payable and accrued expenses 945,300
Deferred income 121,800
Total current liabilities 1,201,800
Long term liabilities
Obligation under capital leases, less current portion 92,400
Commitments and contingencies
Shareholders' equity
Preferred stock, 1,000,000 shares authorized and unissued
Common stock, stated value $.33-1/3 per share,
common shares authorized 9,000,000,
shares issued 4,884,693 1,628,200
Paid-in capital 5,591,800
Accumulated deficit (4,552,700)
Less treasury stock at cost, 992,565 shares (1,216,400)
Total shareholders' equity 1,450,900
Total liabilities and shareholders' equity $ 2,745,100
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Wiltek, Inc.
Consolidated Statements of Operations
Year Ended October 31,
1998 1997
<S> <C> <C>
Net Revenues
Messaging services $4,480,100 $4,660,100
Consulting services 3,104,200 1,376,600
Total net revenues 7,584,300 6,036,700
Costs and Expenses
Cost of messaging services 2,428,700 2,230,100
Cost of consulting services 2,208,000 1,149,400
Sales expenses 1,031,200 1,126,500
General and administrative expenses 1,068,800 941,000
Research and development 491,900 519,400
Interest expense 48,300 31,100
7,276,900 5,997,500
Net Earnings 307,400 $ 39,200
Earnings Per Common Share:
Basic $.08 $.01
Diluted $.07 $.01
Number of Shares used in per share calculation:
Basic 3,838,083 3,684,205
Diluted 4,140,364 4,000,135
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Wiltek, Inc.
Consolidated Statements of Cash Flows
Year Ended October 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 307,400 $ 39,200
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 217,400 182,500
Issuance of treasury stock as bonus 37,300 78,600
Issuance of non-employee stock option 17,500
Decrease (increase) in accounts
receivable and other current assets 32,200 (326,300)
(Decrease) increase in accounts
payable and accrued expenses (36,800) 358,900
Total adjustments 250,100 311,200
Net cash provided by operating activities 557,500 350,400
Cash flows from investing activities:
Capital expenditures (279,100) (117,300)
Net cash used in investing activities (279,100) (117,300)
Cash flow from financing activities:
Proceeds from exercise of stock options 12,000 2,500
Payments under capital lease obligations (149,200) (116,500)
Net cash used in financing activities (137,200) (114,000)
Net increase in cash and cash equivalents 141,200 119,100
Cash and cash equivalents at
beginning of year 526,700 407,600
Cash and cash equivalents at end of year $ 667,900 $ 526,700
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes $ 5,000 $ 3,200
Interest expense $ 55,600 $ 39,300
Non-cash investing and financing activities:
Capital expenditures in accounts payable $ 57,300 $ 14,700
Capital lease obligations incurred
for fixed asset acquisitions $ 164,600 $ 150,700
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
Wiltek, Inc.
Notes to Consolidated Financial Statements
Note 1 - Accounting Policies and Practices
General: The Company operates exclusively in the messaging and integration
services industry segment with two lines of business, 1) the design and
management of data communication networks and services and 2) consulting/
system integration services related primarily to implementation, directory
integration and development of Microsoft(r) Networking, Microsoft
Exchange(r) and related Microsoft BackOffice(r) products. These services
are principally performed in the United States.
During the fiscal year ended October 31, 1998, two customers accounted for
more than 10% of the Company's total revenues. These customers were General
Electric and Sea-Land Services, Inc. with 11.6% and 10.1%, respectively.
General Electric's accounts receivable balance exceeded 10% of the
outstanding accounts receivable with 13.7%.
During the fiscal year ended October 31, 1997, Sea-Land Services, Inc
accounted for more than 10% of the Company's total revenues with 15.4%.
Three customers' accounts receivable balances exceeded 10% of the
outstanding accounts receivable. These customers in aggregate amounted
to 44.1% of the accounts receivable balance.
The Company began foreign operations in 1983 when it established its
computer center in London, England. During fiscal year 1998, the U.K.
operation's total revenues were $923,900 with a net loss of $116,300.
Included in the above were $253,500 in U.S. management costs allocated
to U.K. operations and inter-company net interest expense charged to Wiltek
(U.K.) Ltd. for $41,900. Identifiable total assets amounted to $424,600.
The U.S. dollar is the functional currency of the U.K. operation.
During fiscal year 1997, the U.K. operation's total revenues were $1,015,800
with net earnings of $65,500. Included in the above were $201,800 in U.S.
management costs allocated to U.K. operations and inter-company net interest
expense charged to Wiltek (U.K.) Ltd. in the amount of $40,400.
Identifiable total assets were $409,100.
Consolidation: The accompanying consolidated financial statements include
the accounts of the Company and its subsidiary, Wiltek (U.K.) Ltd. All
significant inter-company transactions have been eliminated in
consolidation.
Cash Equivalents: For purposes of the statement of cash flows, the Company
considers all highly liquid instruments including money market funds and
certificates of deposit with original maturities of three months or less to
be cash equivalents. The Company currently has on deposit in the U.S.
approximately $36,900, which is subject to concentration of credit risk as
it is not insured. Funds on deposit in the U.K. in the amount of $150,600
are not insured.
Revenue Recognition: Customers are invoiced at the beginning of the month
for fixed rate services and at the end of the month for usage sensitive
services. Consulting services are primarily on a time and material basis
and are invoiced mid-month and at month-end. Revenue is recognized when
services are performed.
In accordance with the terms of contracts with some of its customers, the
Company pays the common carrier communication costs incurred by the
customers. The Company is reimbursed by the customers for these costs.
The reimbursement is reflected as a reduction of expenses in the Company's
consolidated statement of operations and is not included in revenues.
Amounts billed to the Company and subsequently re-billed to the customers
during the fiscal years ended October 31, 1998 and 1997 were $624,400 and
$738,400, respectively.
Equipment: Equipment is carried at cost. Major renewals and betterments
are charged to the equipment accounts, while replacements, maintenance and
repairs which do not improve or extend the life of the respective assets,
are expensed currently. The Company follows the policy of providing for
depreciation of equipment over the estimated useful lives: computer
equipment - 5 years; furniture and fixtures - 8 to 10 years; automobiles - 4
years, leasehold improvements over the remaining life of the lease. Fixed
assets under capital lease obligations are depreciated over five years.
When equipment is retired or otherwise disposed of, the related cost and
accumulated depreciation and amortization are eliminated from the accounts
and the resulting profit or loss is credited or charged to income.
Research and Development: The Company's research and development activities
are directed toward enhancing existing services and creating new services to
meet customers' data communication needs. During fiscal years 1998 and
1997, Wiltek spent $491,900 and $519,400, respectively, on research and
software development.
Taxes: The Company follows the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109).
Earnings Per Share: The Company adopted the provisions of Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share,"
which is effective for financial statements issued after December 15, 1997.
The new standard eliminates primary and full diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. 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. 1997 Earnings per Share have been restated to conform to the
provisions of SFAS 128. The effect of adopting this new standard does not
have a material impact on the disclosure of earnings per share in the
financial statements.
Use of Estimates: In preparing the Company's financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The valuation allowance for the deferred tax asset (see note 8) is based on
an estimate, which is particularly sensitive to change in the near term. It
is possible that changes in this estimate will occur and the effect of such
change may be significant to the financial statements of the Company.
Advertising and Promotion Costs: Advertising and promotion costs are
expensed when incurred. These costs were $106,000 in 1998 and $144,600
in 1997.
Fair Value of Financial Instruments: Based on borrowing rates currently
available to the Company for capital leases with similar terms and
maturities, the fair value of the Company's capital leases approximates
the carrying value. The carrying values of all other financial instruments
potentially subject to valuation risk, principally cash, accounts receivable
and accounts payable, also approximate fair value because of their
short-term maturities.
Impairment of Long-lived Assets: Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived Assets and
for Long-lived Assets to be Disposed Of" ("SFAS No. 121") establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets. Under
provisions of the Statement, impairment losses are recognized when expected
future cash flows are less than the assets' carrying value. Accordingly,
when indicators of impairment are present, the Company will evaluate the
carrying value of equipment in relation to the operating performance and
future undiscounted cash flows of the underlying business. SFAS No. 121
requires analysis of each item on an individual asset-by-asset basis, where
applicable. The amount of the impairment loss is the excess of the carrying
amount of the impaired asset over the fair value of the asset. Generally,
fair value represents the expected future cash flows from the use of the
asset or group of assets; discounted at an interest rate commensurate with
the risks involved.
Accounting for Stock-Based Compensation: In 1996, the Financial Accounting
Standards Board issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). The statement defines a fair value based
method of accounting for an employee stock option. Companies may, however,
elect to adopt this new accounting rule through a pro forma disclosure
option, while continuing to use the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the disclosure option, companies must make pro forma
disclosures of net earnings and earnings per share, as if the fair value
method of accounting described below had been applied.
Under the new fair value method, compensation cost is measured at the grant
date based on the value of the award and is recognized over the service (or
vesting) period. Under the intrinsic value based method, compensation cost
is the excess, if any, of the quoted market price of the stock at grant
date, over the amount an employee must pay to acquire the stock.
The adoption of this Statement was required, either through adoption or
disclosure in 1997. The Company decided to follow the accounting
prescribed by APB Opinion No. 25.
Employee Benefit Plan: The Company has established a 401(k) defined
contribution plan covering substantially all eligible employees. An
eligible employee may elect to reduce his taxable compensation and have the
amount of any such reduction contributed to the Plan on the employee's
behalf. The Company may also make a discretionary matching contribution to
the Plan. During the fiscal years ended 1998 and 1997, the Company's
matched contribution was 15%.
An eligible employee may elect to reduce his taxable compensation by 15%
(but not more than $10,000 per year or such greater amount as may be set by
the Internal Revenue Service). The amount of the reduction is called
elective deferral. The Company will then contribute the elective deferral
to the Plan on the employee's behalf. The Company's contributions to the
plan for the years ended October 31, 1998 and 1997, were $34,700 and
$21,600, respectively.
New Accounting Pronouncements: The Financial Accounting Standards Board has
recently issued Statement of Financial Accounting Standards No. 130 ("SFAS
130"), "Reporting Comprehensive Income," Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures About Segments of an Enterprise
and Related Information" and Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities".
SFAS 130 governs the reporting and display of comprehensive income and its
components, while SFAS 131 requires that all businesses report financial and
descriptive information about their reportable operating segments. Both
statements are applicable to fiscal years beginning after December 15, 1997.
SFAS 133 requires all businesses to measure derivative financial instruments
at fair value and record them as assets or liabilities in the statement of
financial position and to reflect changes in fair value as gains or losses.
SFAS 133 is applicable to fiscal years beginning after June 15, 1999.
The impact of adopting SFAS No. 130 and SFAS No. 133 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 131 on consolidated financial statement disclosures.
Note 2 - Equipment
<TABLE> October 31,
1998
<S> <C>
Computer equipment $ 1,012,000
Capital leases 633,200
Other equipment 47,700
Furniture and fixtures 21,800
Leasehold improvements 360,700
2,075,400
Less: accumulated depreciation
and amortization 1,178,200
Equipment, net $ 897,200
</TABLE>
<TABLE>
<CAPTION>
Note 3 - Accounts Payable and Accrued Expenses
October 31,
1998
<S> <C>
Accounts payable $ 533,200
Accrued compensation 299,400
Other accrued expenses 112,700
Total accounts payable and
accrued expenses $ 945,300
</TABLE>
Note 4 - Obligation under Capital Leases
During the fiscal years ended October 31, 1998 and 1997, the Company entered
into various capital lease agreements for new computer equipment totaling
$164,600 and $150,700, respectively. The lease terms vary from 36 to 39
months, with interest rates between 11.13% and 35.08%.
Accumulated depreciation for capitalized lease equipment amounted to
$299,700 and $256,200 for the fiscal years ended 1998 and 1997,
respectively.
The related future lease minimum payments as of October 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Year Ending October 31
Capital Leases
<S> <C>
1999 $175,400
2000 101,400
2001 15,400
Net minimum lease payment 292,200
Amount representing interest 65,100
Obligation under capital leases $227,100
</TABLE>
Note 5 - Changes in Shareholders' Equity
Set forth below is a summary of changes in shareholders' equity for the two
years ended October 31, 1998:
<TABLE>
<CAPTION>
Common Treasury Stock
Shares Common Paid-In Accumulated
Issued Stock Capital Deficit Cost Shares
<S> <C> <C> <C> <C> <C> <C>
Balance at
10/31/96
4,826,693 $1,608,900 $5,650,600 $(4,899,300) $(1,403,900) 1,146,235
Issuance of
treasury
stock as bonus (56,300) 134,900 (110,598)
Issuance of
non-employee
stock option 17,500
Exercise
of stock
options
10,000 3,300 ( 800)
Net Earnings 39,200
Balance at
10/31/97
4,836,693 1,612,200 5,611,000 (4,860,100) (1,269,000) 1,035,637
Issuance of
treasury
stock as bonus ( 15,200) 52,600 (43,072)
Exercise
of Stock
options
48,000 16,000 ( 4,000)
Net Earnings 307,400
Balance at
10/31/98
4,884,693 $1,628,200 $5,591,800 $(4,552,700) $(1,216,400) 992,565
<FN>
During the fiscal year ended October 31, 1998, 43,072 shares of common stock
held as treasury stock with a market value of $37,400 were awarded to four
of the officers. During the fiscal year ended October 31, 1997, 5,108
shares of common stock held as treasury stock with a market value of $3,400
were awarded to one of the officers.
</TABLE>
Note 6 - Stock Options
The maximum number of shares, which may have been awarded under the 1983 and
1988 stock option plans to employees, was 500,000 and 400,000, respectively.
No shares are available for future grants under these plans, at October 31,
1998.
The 1994 stock option plans for employees (750,000 shares) and non-employees
(100,000 shares) were approved. An aggregate of 850,000 shares was
authorized under this plan.
At October 31, 1998, 72,000 and 30,000 shares are available for future
grants to employees and non-employees, respectively.
None of the above option prices were less then fair market value at the date
of grant. The options are exercisable beginning at the date of grant. The
maximum term of the grant is ten years. The following table summarizes the
options granted under the plan for the two years ended October 31, 1998:
EMPLOYEES:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding at 11/1/96 706,300 $.54
Granted 125,000 $.42
Exercised ( 10,000) $.25
Expired (112,000) $.52
Outstanding at 10/31/97 709,300 $.53
Granted 195,000 $.81
Exercised ( 48,000) $.25
Expired (238,000) $1.38
Outstanding at 10/31/98 618,300 $.48
Non-Employees
Weighted Average
Shares Exercise Price
Outstanding at 11/1/96 35,000 $.25
Granted 35,000 $.56
Outstanding at 10/31/97 70,000 $.41
Outstanding at 10/31/98 70,000 $.41
</TABLE>
The Company recorded compensation expense of $17,500 for options granted to
non-employees in the year ended October 31, 1997.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company accounts for its option plan under APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations and, accordingly, no compensation cost has been recognized
for the employee stock option plan. Had compensation cost for the Company's
employee stock option plan been determined based on the fair value at the
grant date for awards, net earnings and earnings per share would have been
reduced as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net Earnings
As reported $ 307,400 $ 39,200
Pro forma $ 194,800 $ (10,800)
Earnings Per Share
As reported
Basic $ .08 $ .01
Diluted $ .07 $ .01
Pro forma
Basic $ .05 $ .00
Diluted $ .05 $ (.01)
<FN>
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation relating to
grants before 1996. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: expected volatility of 100% in 1998
and 200% in 1997, weighted average risk free rate of 5.9% in 1998 and 6.8%
in 1997 and weighted average expected life of 8 years in 1998 and 1997. The
weighted average grant date fair value of options granted during 1998 and
1997 was $0.68 and $0.56, respectively.
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes information about the stock options at
October 31, 1998.
Options Outstanding Options Exercisable
Range Number Weighted Average Weighted Number Weighted
of Outstanding Remaining Average Exercisable Average
Exercise at Contractual Exercise at Exercise
Prices 10/31/98 Life Price 10/31/98 Price
<S> <C> <C> <C> <C> <C>
$0 to $.25 371,800 6.47 $ .25 371,800 $ .25
$.50 to $.56 75,000 8.08 $ .54 75,000 $ .54
$.81 to $1.28 165,000 8.89 $ .87 165,000 $ .87
$2.94 6,500 1.60 $2.94 6,500 $2.94
618,300 7.26 $ .48 618,300 $ .48
</TABLE>
<TABLE>
<CAPTION>
Note 7 - Earnings Per Share
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 include the
incremental effect of stock options. The following table shows the
reconciliation of Basic and Diluted EPS computations:
Twelve Months Ended
October 31, 1998
<S> <C> <C> <C>
Earnings Shares Per Share
Basic EPS
Earnings $ 307,400 3,838,083 $.08
Diluted Effect of Securities:
Stock Options 302,281 (.01)
Diluted EPS
Earnings plus assumed conversions $ 307,400 4,140,364 $ .07
Twelve Months Ended
October 31, 1997
Earnings Shares Per Share
Basic EPS
Earnings $ 39,200 3,684,205 $ .01
Diluted Effect of Securities:
Stock Options 315,930 .00
Diluted EPS
Earnings plus assumed conversions $ 39,200 4,000,135 $ .01
<FN>
Excluded in the 1998 computation of Diluted EPS were options to purchase
171,500 shares of common stock at prices ranging from $0.81 to $2.94 because
the options' exercise price was greater than the average market price of the
common shares. These options, which expire March 21, 1999 to December 15,
2007, included 160,000 of options issued during the twelve months ended
October 31, 1998. Excluded in the 1997 computation of Diluted EPS were
options to purchase 208,000 shares of common stock at prices ranging from
$0.81 to $2.94 because the options' exercise price was greater than the
average market price of the common shares. These options, which expire
June 7, 1998 to March 24, 2007, included 25,000 shares of options issued
during the twelve months ended October 31, 1997.
</TABLE>
<TABLE>
<CAPTION>
Note 8 - Income Taxes
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting and the amounts used for income tax purposes. In accordance with
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. The Company has established a
valuation allowance to reduce its net deferred tax asset to zero at
October 31, 1998 because current evidence indicates that it is more likely
than not that the deferred tax asset will not be realized. The valuation
reserve was reduced by $330,100 in the fiscal year ended 1998 as a result of
utilization and expiration of net operating loss carry-forwards. The
Company accounts for the investment tax credit by the flow-through method.
In fiscal years ended 1998 and 1997, general and administrative expenses
included tax expense of $5,000 and $3,800, respectively. Significant
components of the Company's deferred tax assets as of October 31, 1998
are as follows:
<S> <C>
Deferred tax assets:
Net operating loss carry-forward $1,256,300
Investment tax credit carry-forward 36,700
Deferred tax asset 1,293,000
Less valuation allowance 1,293,000
Net deferred tax assets $ 0
</TABLE>
At October 31, 1998, the Company's U.S. operating loss carry-forwards for
Federal tax purposes approximated $2,610,800 and $1,216,500 for state tax
purposes. The Company's loss carry-forwards for Federal tax purposes were
reduced by $591,500. The reduction was due to utilization of $302,300 of net
loss carry-forwards in 1998, resulting in a tax benefit of $120,000, the
expiration of $262,900 in loss carry-forwards and an adjustment by the IRS
of $26,300. The Company's loss carry-forwards for State tax purposes were
reduced by $307,000 resulting from the utilization of net loss carry-
forwards in 1998. The Federal loss carry-forward for alternative
minimum tax purposes was $2,600,000. The Company's U.K. operating loss
carry-forwards are approximately $711,400 for tax purposes as of October 31,
1998. The expected Federal Statutory rate is 34%. This has been reduced by
the use of net operating loss carry-forwards by 34%.
The Internal Revenue Service has completed its examination of Federal income
tax returns for fiscal years ended 1995, 1996 and 1997 which resulted in an
adjustment to decrease net operating loss carry-forwards by $169,700.
At October 31, 1998, investment tax credits approximating $36,700 are
available to reduce future taxes on taxable income after the future tax
benefits arising from existing operating loss carry-forwards have been
realized. The U.S. tax loss carry-forwards and investment tax credit carry-
forwards expire as follows:
<TABLE>
<CAPTION>
Tax Loss Investment Tax
Expiration Carry-forwards Credit Carry-forwards
<S> <C> <C>
1999 $ 354,900 $ 18,400
2000 14,400
2001 3,900
2007 404,400
2008 628,100
2009 474,800
2010 748,600
$ 2,610,800 $ 36,700
</TABLE>
The Tax Reform Act of 1986 enacted a complex set of rules (Internal Revenue
Code Section 382) limiting the utilization of net operating loss carry-
forwards to offset future taxable income following a corporate "ownership
change." Generally, this occurs when there is a greater than 50% change in
ownership.
Note 9 - Commitments and Contingent Liabilities
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. At October 31, 1998, there were no advances outstanding
against the working capital facility.
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. At
October 31, 1998 there were no advances outstanding against the term loan.
The security agreement provides that the loans be collateralized 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.
Annual employment agreements are in effect with three officers of the
Company which call for a base compensation to be mutually agreed upon at
renewal and upon failure to reach agreement will terminate, with the
officer, in certain circumstances, being entitled to a severance payment
in an amount equal to one-quarter to one-half of their then current annual
base compensation. The minimum aggregate payoffs under such contracts
approximate $141,500.
Total rental expenses for office space, equipment and automobiles included
in the results of operations for fiscal years ended October 31, 1998 and
1997, were $290,700 and $311,500 respectively. Minimum rental commitments
under non-cancelable operating leases covering space and equipment are as
follows:
<TABLE>
<CAPTION>
Fiscal Year Rental Commitments
<S> <C>
1999 $ 240,400
2000 116,000
2001 90,600
2002 90,600
2003 90,600
2004 22,600
$ 650,800
</TABLE>
WILTEK, INC.
Index to Exhibits
<TABLE>
<CAPTION>
Sequential Page
Exhibit No. Description Number
<S> <C> <C>
22 Subsidiary 35
24 Consent of Independent Certified
Public Accountants 36
</TABLE>
Exhibit 22
WILTEK, INC.
Subsidiary
Jurisdiction of
Name Incorporation
Wiltek (U.K.) Ltd. United Kingdom
The corporation listed is a direct subsidiary of Wiltek, which owns 100% of
the voting securities. The subsidiary is included in the consolidated
financial statements.
Exhibit 24
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated December 11, 1998, accompanying the
consolidated financial statements included in the Annual Report of Wiltek,
Inc. and Subsidiary on Form 10-KSB for the year ended October 31, 1998. We
hereby consent to the incorporation by reference of said report in the
Registration Statement of Wiltek, Inc. on Form S-8 (Reg. No. 33-7271).
GRANT THORNTON LLP
New York, New York
December 11, 1998
Page Reference
Report of Independent Certified Public Accountants 18
Consolidated Balance Sheet at October 31, 1998 19
Consolidated Statements of Operations for the Years Ended
October 31, 1998 and 1997 20
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1998 and 1997 21
Notes to the Consolidated Financial Statements 22-33
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders of Wiltek, Inc.
We have audited the accompanying consolidated balance sheet of Wiltek, Inc.
and Subsidiary (the "Company") as of October 31, 1998, and the related
consolidated statements of operations and cash flows for each of the two
years then ended. 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 audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Wiltek,
Inc. and Subsidiary as of October 31, 1998, and the consolidated results of
their operations and their consolidated cash flows for each of the two
years then ended, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
NEW YORK, NEW YORK
DECEMBER 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 668
<SECURITIES> 0
<RECEIVABLES> 1109
<ALLOWANCES> 35
<INVENTORY> 0
<CURRENT-ASSETS> 1848
<PP&E> 2075
<DEPRECIATION> 1178
<TOTAL-ASSETS> 2745
<CURRENT-LIABILITIES> 1202
<BONDS> 0
0
0
<COMMON> 1628
<OTHER-SE> (177)
<TOTAL-LIABILITY-AND-EQUITY> 2745
<SALES> 7584
<TOTAL-REVENUES> 7584
<CGS> 7229
<TOTAL-COSTS> 7229
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48
<INCOME-PRETAX> 307
<INCOME-TAX> 0
<INCOME-CONTINUING> 307
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 307
<EPS-PRIMARY> .08
<EPS-DILUTED> .07
</TABLE>
