<PAGE> 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 June 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
THE EXCHANGE ACT
For the transition period from_______________ to_______________
Commission file number 0-2401
-----------------------------------------
E-SYNC NETWORKS, INC
---------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 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)
WILTEK, INC.
---------------------------------------------------------------------
(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:
<TABLE>
<CAPTION>
Class Outstanding at August 12, 1999
---------------------------- ------------------------------
<S> <C>
Common Stock No Par Value 4,213,928 shares
Preferred Stock No Par Value 1,000,000 shares
</TABLE>
<PAGE> 2
E-Sync Networks, Inc.
Index
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements:
Consolidated Balance Sheets at
June 30, 1999, December 31, 1998 and October 31, 1998 3
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1999 and 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
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
E-SYNC NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
-----------------------------------------------
JUNE 30, DECEMBER 31, OCTOBER 31,
1999 1998 1998
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,117,600 $ 796,800 $ 667,900
Accounts receivable, less allowance
for doubtful accounts of $35,000 1,465,700 932,500 1,073,600
Other current assets 233,700 115,500 106,400
----------------------- ----------------------- -----------------------
Total Current Assets 2,817,000 1,844,800 1,847,900
Equipment, net 1,584,400 886,600 897,200
Other assets 250,000 - -
----------------------- ----------------------- -----------------------
TOTAL ASSETS $ 4,651,400 $ 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 119,300 125,900 134,700
Accounts payable and accrued expenses 1,577,100 928,000 945,300
Medical benefits obligation, current portion 25,400 - -
Deferred revenue 5,300 127,000 121,800
----------------------- ----------------------- -----------------------
Total Current Liabilities 1,739,900 1,193,700 1,201,800
Long Term Liabilities:
Term loan payable, less current portion 12,800 19,100 -
Obligations under capital leases, less current portion 79,000 74,300 92,400
Medical benefits obligation, less current portion 224,700 - -
Stockholders' Equity:
Series A Convertible 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, 5,179,693 shares issued and
outstanding at June 30, 1999, 4,884,693 shares issued and
outstanding at December 31,1998
and October 31, 1998 1,726,500 1,628,200 1,628,200
Additional paid in capital 5,609,100 5,591,800 5,591,800
Accumulated deficit (6,524,200) (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 2,595,000 1,444,300 1,450,900
----------------------- ----------------------- -----------------------
Commitments and Contingencies
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,651,400 $ 2,731,400 $ 2,745,100
======================= ======================= =======================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
E-SYNC NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-----------------------------------------------------
1999 1998
-------------------------- --------------------------
<S> <C> <C>
REVENUES
Managed services $ 811,800 $ 1,095,100
Professional services 987,700 858,000
--------------------- ---------------------
Total revenues 1,799,500 1,953,100
COSTS AND EXPENSES
Cost of managed services 759,800 595,500
Cost of professional services 643,800 602,800
Sales and marketing 559,300 288,800
General & administrative 616,900 261,300
Research and development 218,300 122,300
Other expense, net 1,200 600
Interest (income) expense, net (5,300) 11,900
---------------------- ---------------------
2,794,000 1,883,200
--------------------- ---------------------
NET EARNINGS (LOSS) $ (994,500) $ 69,900
====================== =====================
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (.25) $ .02
Diluted $ (.25) $ .02
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN PER SHARE
CALCULATION:
Basic 4,049,628 3,849,239
Diluted 4,049,628 4,125,370
<CAPTION>
Six Months Ended
June 30,
-----------------------------------------------------
1999 1998
-------------------------- --------------------------
<S> <C> <C>
REVENUES
Managed services $ 1,770,800 $ 2,274,000
Professional services 1,625,800 1,580,000
--------------------- ---------------------
Total revenues 3,396,600 3,854,000
COSTS AND EXPENSES
Cost of managed services 1,419,500 1,229,500
Cost of professional services 1,072,100 1,162,900
Sales and marketing 1,025,900 529,000
General & administrative 1,335,000 536,200
Research and development 417,800 250,700
Other expense, net 101,000 2,100
Interest (income) expense, net (9,800) 23,300
---------------------- ---------------------
5,361,500 3,733,700
--------------------- ---------------------
NET EARNINGS (LOSS) $ (1,964,900) $ 120,300
====================== =====================
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (.49) $ .03
Diluted $ (.49) $ .03
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN PER SHARE
CALCULATION:
Basic 4,000,045 3,846,846
Diluted 4,000,045 4,114,240
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
E-SYNC NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------------------------------------
1999 1998
---------------------------------------------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (1,194,900) $ (124,400)
INVESTING ACTIVITIES:
Capital expenditures (781,900) (97,600)
-------------------- --------------------
Net cash used in investing activities (781,900) (97,600)
-------------------- --------------------
FINANCING ACTIVITIES:
Payments on bank loan (3,200) -
Proceeds from exercise of stock options 87,200 1,000
Proceeds from issuance of preferred stock and warrant - -
Payments under capital lease obligations, net (33,100) (56,000)
-------------------- --------------------
Net cash provided by (used in) financing activities 50,900 (55,000)
------------------- --------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,925,900) (277,000)
Cash and cash equivalents at beginning of period 3,043,500 340,000
------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,117,600 $ 63,000
=================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the three months for:
Interest $ 23,600 $ 20,300
=================== ===================
Income Taxes $ - . $ - .
=================== ===================
Non-cash investing activities:
Capital lease obligations incurred for fixed asset
acquisitions $ 73,600 $ - .
=================== ===================
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------------------------
1999 1998
------------------------ -------------------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (1,860,600) $ (167,500)
INVESTING ACTIVITIES:
Capital expenditures (858,800) (157,900)
-------------------- --------------------
Net cash used in investing activities (858,800) (157,900)
-------------------- --------------------
FINANCING ACTIVITIES:
Payments on bank loan (6,400) -
Proceeds from exercise of stock options 115,600 1,000
Proceeds from issuance of preferred stock and warrant 3,000,000 -
Payments under capital lease obligations, net (69,000) (74,900)
-------------------- --------------------
Net cash provided by (used in) financing activities 3,040,200 (73,900)
------------------- --------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 320,800 (399,300)
Cash and cash equivalents at beginning of period 796,800 462,300
------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,117,600 $ 63,000
=================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the three months for:
Interest $ 32,834 $ 33,100
=================== ===================
Income Taxes $ 1,000 $ 1,000
=================== ===================
Non-cash investing activities:
Capital lease obligations incurred for fixed asset
acquisitions $ 73,600 $ 73,000
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
E-SYNC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF ACCOUNTING
The consolidated balance sheet as of June 30, 1999, and December 31, 1998, and
the related consolidated statements of operations for the three and six months
ended June 30, 1999 and 1998, and the consolidated statements of cash flows for
the three and six months ended June 30, 1999 and 1998 are unaudited. The
balance sheet as of October 31, 1998 is derived from the audited financial
statements as reported on the Company's Form 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 financial statements as of June 30, 1999 and December 31, 1998, and for the
three and six months ended June 30, 1999, 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. REORGANIZATION
At the Company's annual shareholders' meeting held on July 15, 1999, the
shareholders approved the formation of E-Sync Networks, Inc., a Delaware
corporation and (at the time) a wholly-owned subsidiary of Wiltek Inc., and the
merger of Wiltek Inc. with and into E-Sync Networks, Inc., with the effect of
(i) changing the name of the issuer, (ii) changing the state of incorporation
of the issuer and (iii) amending the Certificate of Incorporation and By-laws
of the issuer (such events, collectively, the "Reorganization") The
Reorganization was consummated on July 28, 1999. By virtue thereof, Wiltek Inc.
was merged with and into E-Sync Networks, Inc. The financial statements
discussed above, represent the balance sheets, consolidated statements of
operations and cash flows of Wiltek, Inc. for the periods mentioned above;
however, such financial statements have been renamed to E-Sync Networks, Inc.
to reflect the current name of the Company at the time of filing of this report
on Form 10-QSB.
3. 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 designees
currently constitute a majority of the Company's Board of Directors, and the
fact that Purchaser has the contractual right to 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.
Utilization of the Company's net tax loss carry forwards will be significantly
limited as a result of the change in control of the Company.
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 initially recorded
a liability approximating $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 $6,100 and $9,600 during the three and six months ended June
30, 1999, respectively, and were charged against the medical benefit obligation
liability.
6
<PAGE> 7
4. 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:
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------------------------------------------------------
1999 1998
------------------------------------------ -----------------------------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income (Loss) available to Common Shareholders $(994,500) 4,049,628 $(.25) $ 69,900 3,849,239 $.02
DILUTIVE EFFECT OF SECURITIES:
Stock Options - - - 276,131
----------------------------- ----------------------------
DILUTED EPS
Income (Loss) available to Common Shareholders
plus assumed conversions $(994,500) 4,049,628 $(.25) $69,900 4,125,370 $.02
======================================== ===================================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------------------------------------------------
1999 1998
------------------------------------------ -----------------------------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income (Loss) available to Common Shareholders $(1,964,900) 4,000,045 $(.49) $ 120,300 3,846,846 $.03
DILUTIVE EFFECT OF SECURITIES:
Stock Options - - - 267,394
----------------------------- ----------------------------
DILUTED EPS
Income (Loss) available to Common Shareholders
plus assumed conversions $(1,964,900) 4,000,045 $(.49) $120,300 4,114,240 $.03
======================================== ===================================
</TABLE>
Options to purchase 685,300 shares and 450,300 shares of common stock at prices
ranging from $.25 to $2.94 were outstanding at March 31, 1999 and June 30, 1999,
respectively. No options were issued in the six months ended June 30, 1999. One
million convertible preferred shares and a common stock warrant to purchase
1,500,000 common shares were outstanding at June 30, 1999. All the stock
options, convertible preferred shares and the common stock warrant were excluded
from the calculation of Diluted EPS for the three and six months ended June 30,
1999, because the Company experienced a loss for those periods and inclusion of
such securities would have had an anti-dilutive effect. Options to purchase
171,500 shares of common stock at prices ranging from $0.81 to $2.94 were
excluded in the computation of Diluted EPS for the three and six months ended
June30,1998 because the options' exercise price was greater than the average
market price of the common shares.
5. COMMITMENTS AND CONTINGENCIES
The Company entered into a Loan and Security Agreement with People's Bank in
June 1998, for a line of credit of $750,000 for working capital needs plus an
additional term loan of up to $100,000 for purchases of 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 was scheduled to expire on July 1, 1999,
however the Company received an extension under the same terms and conditions
until September 1, 1999.
7
<PAGE> 8
Interest on advances under the term loan are payable monthly in arrears at one
half percent above prime and the total of such advances outstanding at December
31, 1998 were converted to a term loan. The term of the loan is for 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 June 30, 1999 was approximately $31,900 and $25,500, respectively.
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 six-month basis. The Company
was in technical default of the net earnings covenant for the three and six
month periods ended June 30, 1999; however, the Company received notification
from the bank indicating waiver of that default for the respective periods.
The Company's lease for its existing primary offices and data center in Norwalk,
Connecticut will expire on December 31, 1999. 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. The Company will record the
lease expense ratably over the lease term.
6. 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 in designing and developing
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.
8
<PAGE> 9
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------ ------------------------
1999 1998
----------------------- ------------------------
<S> <C> <C>
REVENUE:
Managed services $ 811,800 $ 1,095,100
Professional services 987,700 858,000
Corporate - -
----------------------- ------------------------
Consolidated revenues $ 1,799,500 $ 1,953,100
======================= ========================
OPERATING INCOME (LOSS):
Managed services $ (577,100) $ 122,500
Professional services (421,500) (40,100)
----------------------- ------------------------
Operating income (loss) from segments (998,600) 82,400
Corporate expenses, net 1,200 600
Interest expense (income), net (5,300) 11,900
----------------------- ------------------------
Net earnings (loss) $ (994,500) $ 69,900
======================= ========================
DEPRECIATION AND AMORTIZATION:
Managed services $ 39,500 $ 32,200
Professional services 5,700 5,700
Corporate 13,100 14,600
----------------------- ------------------------
Total depreciation and amortization $ 58,300 $ 52,500
======================= ========================
CAPITAL EXPENDITURES:
Managed services $ 259,800 $ 91,900
Professional services 55,500 3,000
Corporate 466,600 2,700
----------------------- ------------------------
Total capital expenditures $ 781,900 $ 97,600
======================= ========================
<CAPTION>
SIX MONTHS ENDED JUNE 30
---------------------------------------------------
1999 1998
------------------------ ------------------------
<S> <C> <C>
REVENUE:
Managed services $ 1,770,800 $ 2,274,000
Professional services 1,625,800 1,580,000
Corporate - -
------------------------ ------------------------
Consolidated revenues $ 3,396,600 $ 3,854,000
======================== ========================
OPERATING INCOME (LOSS):
Managed services $ (1,097,300) $ 268,100
Professional services (776,400) (122,400)
------------------------ ------------------------
Operating income (loss) from segments (1,873,700) 145,700
Corporate expenses, net 101,000 2,100
Interest expense (income), net (9,800) 23,300
------------------------ ------------------------
Net earnings (loss) $ (1,964,900) $ 120,300
======================== ========================
DEPRECIATION AND AMORTIZATION:
Managed services $ 83,700 $ 64,000
Professional services 12,600 11,600
Corporate 32,800 29,400
------------------------ ------------------------
Total depreciation and amortization $ 129,100 $ 105,000
======================== ========================
CAPITAL EXPENDITURES:
Managed services $ 310,400 $ 104,100
Professional services 55,500 28,800
Corporate 492,900 25,000
------------------------ ------------------------
Total capital expenditures $ 858,800 $ 157,900
======================== ========================
</TABLE>
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS AT: JUNE 30, 1999 DECEMBER 31, 1998 OCTOBER 31, 1998
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Managed services $ 1,498,000 $ 1,201,400 $ 1,328,300
Professional services 897,000 453,500 466,400
----------------------- ----------------------- -----------------------
Total assets for reportable segments 2,395,100 1,654,900 1,794,700
Corporate 2,256,300 1,076,500 950,400
----------------------- ----------------------- -----------------------
Total assets $ 4,651,400 $ 2,731,400 $ 2,745,100
======================= ======================= =======================
</TABLE>
9
<PAGE> 10
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 making 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 in designing and
developing 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 note 3 to the financial
statements, the Company received cash, access to 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 a new
state of the art facility in Trumbull, Connecticut, increase its public
relations and marketing activities and significantly expand its sales,
professional services, research & development, and operations staff. Management
believes these growth initiatives position the Company for tremendous growth in
the competitive business-to-business e-commerce market and may continue to
adversely impact the Company's earnings in the short term.
10
<PAGE> 11
RESULTS OF OPERATIONS
Results of operations for the three and six months ended June 30, 1999 compared
to the same periods last year was negatively impacted by increased costs related
to the growth initiatives discussed above.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Period to period comparisons of revenues, cost of services and gross margins are
summarized below:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------------------------------------------------------------------------------------------------
Managed Services Professional Services Total
------------------------------------ ------------------------------------- ------------------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 811,800 $ 1,095,100 $ 987,700 $ 858,000 $ 1,799,500 1,953,100
Cost of services 759,800 595,500 643,800 602,800 1,403,600 1,198,300
--------------- --------------- --------------- --------------- --------------- ---------------
Gross margin $ 52,000 $ 499,600 $ 343,900 $ 255,200 $ 395,900 $ 754,800
=============== =============== =============== =============== =============== ===============
Gross margin
percent 6% 46% 35% 30% 22% 39%
</TABLE>
Revenues decreased by $153,600 or 8% for the three month period. The decrease
resulted from lower managed services revenue of $283,300 partially offset by
increased professional services revenue of $129,700. The decline in second
quarter managed services revenue compared to the same period last year was
primarily due to the discontinuance of customized outsourced messaging services
by two large customers who elected in late 1998 to bring this function in-house.
Gross margin for managed services decreased in the comparative periods due to
the loss of managed services contracts from higher margin customers, discussed
above and increased costs associated with growth initiatives discussed above.
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.
Sales and marketing expenses increased by $270,500 or 94% for the three months
ended June 30, 1999, compared to the same period last year. This represents 31%
of total revenues for the three months ended June 30, 1999, compared to 15% of
total revenues for the same period last year. The increase is primarily due to
increased salaries, benefits, and recruiting costs related to the hiring of
additional sales and marketing personnel. In addition, the Company incurred
approximately $114,400 of non-recurring expenses related to several initiatives
it has undertaken, including development of a new web site, and expansion of the
sales and marketing departments. Additional cost increases pertain to increased
marketing and public relation activities.
General and administrative expenses increased by $355,600 or 136% for the three
months ended June 30, 1999, compared to the same period last year. The increase
is the result of facility relocation expenses of $136,700 and higher
professional fees, insurance costs, travel expenses and salaries and benefits
related to the hiring of additional personnel in the current period.
Research and development expenses increased by $96,100 or 78% for the three
months ended June 30, 1999, compared to the same period last year. The increase
is primarily due to increased salaries, benefits, and recruiting costs related
to the hiring of additional software engineering personnel.
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
$17,200 in interest expense (net of interest income) for the three months ended
June 30, 1999, compared to the same period last year, was primarily the result
of interest earned on $3,000,000 proceeds from the sale of equity securities.
The Company reported a net loss for the three months ended June 30, 1999 of
$994,500 or $.25 per share compared to net earnings of $69,900 or $.02 per
share, on a diluted basis, for the three months ended June 30, 1998. The
decrease in net earnings of $1,064,400 over the comparative periods is primarily
attributable to the company's growth initiatives discussed above.
11
<PAGE> 12
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
Period to period comparisons of revenues, cost of services and gross margins are
summarized below:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------------------------------------------------------------------------------------
Managed Services Professional Services Total
------------------------------------ ------------------------------------- ------------------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 1,770,800 $ 2,274,000 $ 1,625,800 $ 1,580,000 $ 3,396,600 $ 3,854,000
Cost of services 1,419,500 1,229,500 1,072,100 1,162,900 2,491,600 2,392,400
--------------- --------------- --------------- --------------- --------------- ---------------
Gross margin $ 351,300 $ 1,044,500 $ 553,700 $ 417,100 $ 905,000 $ 1,461,600
=============== =============== =============== =============== =============== ===============
Gross margin
percent 20% 46% 34% 26% 27% 38%
</TABLE>
Revenues decreased by $457,400 or 12% for the six month period ended June 30
1999 compared to the same period last year. The decrease is primarily the result
of lower managed services revenue of $503,200 partially offset by $129,700 of
increased professional services revenue. Managed services revenue declined
primarily due to the discontinuance of customized outsourced messaging services
by two large customers who elected in late 1998 to bring this function in-house.
Gross margin for managed services decreased in the comparative periods mainly
due to loss of messaging contracts from higher margin customers, discussed above
and increased costs associated with growth initiatives discussed above. 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.
Sales and marketing expenses increased by $496,900 or 94% for the six months
ended June 1999 compared to the same period last year. This represents 30% of
total revenues for the six months ended June 30, 1999, compared to 14% for the
same period last year. The increase is primarily due to increased salaries,
benefits, and recruiting costs related to the hiring of additional sales and
marketing personnel. In addition, the Company incurred approximately $211,400 of
non-recurring expenses related to several initiatives it has undertaken,
including development of a new web site, and expansion of the sales and
marketing departments. Additional cost increases pertain to increased marketing
and public relation activities.
General and administrative expenses increased by $798,800 or 149%, for the six
months ended June 30, 1999, compared to the same period last year. The increase
is primarily the result of a provision for medical benefit obligation of
$260,000 for three retiring directors and their spouses as disclosed in note 3
to the financial statements and facility relocation expenses of $231,900. In
addition, the Company experienced higher professional fees, insurance costs,
travel expenses and salaries and benefits related to the hiring of additional
personnel in the current period.
Research and development expenses increased by $167,100 or 67% for the six
months ended June 30, 1999, compared to the same period last year. The increase
is primarily due to increased salaries, benefits, and recruiting costs related
to the hiring of additional software engineering personnel. In addition, the
Company incurred an expenditure of approximately $60,000 for consulting services
related to the Company's new encryption technology for secured messaging.
Other expense increased by $98,900, for the six months ended June 30, 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
$33,100 in net interest expense for the six months ended June 30, 1999, compared
to the same period last year, was primarily the result of interest earned on
$3,000,000 proceeds from the sale of equity securities.
The Company reported a net loss for the six months ended June 30, 1999 of
$1,964,900 or $.49 per share compared to net earnings of $120,300 or $.03 per
share, on a diluted basis, for the six months ended June 30, 1998. The decrease
in net earnings of $2,085,200 over the comparative periods is primarily
attributable to the company's growth initiatives discussed above.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased during the three months ended June 30, 1999,
by $1,925,900 from $3,043,500 at March 31, 1999. The decrease in cash was due to
cash used in operating activities of $1,194,900 and cash used for capital
expenditures of $781,900, partially offset by cash provided by financing
activities of $50,900.
Cash and cash equivalents increased during the six months ended June 30, 1999,
by $320,800 from $796,800 at December 31, 1998. The increase in cash was due to
cash received from financing activities of $3,040,200 primarily from the sale of
equity securities for $3,000,000, partially offset by cash used for capital
expenditures of $858,800, and cash used in operating activities of $1,860,600.
During the three months ended June 30, 1999, the Company entered into a capital
lease for computer equipment costing $73,600 with a 36 month lease term at an
implied interest rate of 6.81%. The lease requires quarterly payments
approximating $4,900 with an option to purchase the equipment at 1% of the
original equipment cost at the end of the lease term.
The Company has spent approximately $.9 million on capital equipment and
leasehold improvement/construction costs, primarily for its new offices and data
center in Trumbull, Connecticut during the six months ended June 30, 1999. The
Company intends to spend an additional estimated $1.4 million for capital
equipment and leasehold improvement/construction costs for its Trumbull facility
plus approximately $.9 million for capitalized software during the third and
fourth quarters of 1999. The Company expects that it will be able to pay for
these expenditures from (i) cash obtained from Commercial Electronics, LLC and
Commercial Electronics Capital Partnership exercising their common stock warrant
as described in note 3 to the financial statements (the warrant holders
indicated that they intend to exercise the warrant by the end of August,1999),
(ii) cash generated from working capital and (iii) additional bank and lease
financing. The Company also expects to raise cash through the sale of its equity
securities.
YEAR 2000
The Company established a Year 2000 (Y2K) executive 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 was to assess the ability of the computer systems and
programs to process transactions in the year 2000 and to implement remedial
solutions to preclude interruption of the Company's business operations and
services to its suppliers and customers. Part of the remediation process
includes transitioning customers from and retirement of Y2K non-compliant legacy
systems. The legacy system transitioning process is substantially complete with
final verification and testing to be completed during the third quarter of 1999.
The Company has also contacted all of its hardware and software component
suppliers and has received responses from all verifying Y2K readiness. While
systems testing and remediation for the Company's Y2K project is substantially
complete, management anticipates post remediation testing to continue during the
third quarter 1999 with one hundred percent testing and compliance achieved on
or before October 31, 1999.
The Company 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.
13
<PAGE> 14
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 variables 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 statements 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. Changes in securities and use of proceeds
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
-------------- ----------------------
<S> <C>
27 Financial Data Schedule (filed separately herewith)
</TABLE>
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated August 6, 1999
which disclosed that effective on July 28, 1999, Wiltek, Inc., a
Connecticut Corporation ("Wiltek"), was merged with and into its
wholly-owned subsidiary, E-Sync Networks, Inc., a Delaware
corporation ("E-Sync"), pursuant to an Agreement and Plan of Merger
dated July 15, 1999, by and between Wiltek and E-Sync (the "Merger
Agreement").
Pursuant to the terms of the Merger Agreement, E-Sync is the
surviving corporation (the "Surviving Corporation"). Pursuant to
the Merger Agreement, each share of Wiltek Common Stock, no par
value, was converted into one fully paid and nonassessable share of
the Surviving Corporation Series A Preferred Stock, $.01 par value
per share.
The Certificate of Incorporation of E-Sync has become the
Certificate of Incorporation of the Surviving Corporation, and the
By-laws of E-Sync have become the By-laws of the Surviving
Corporation. In addition, Wiltek's 1999 Long-Term Incentive Plan
has been re-named "E-Sync Networks, Inc.'s 1999 Long-Term Incentive
Plan", and applies to the Surviving Corporation in the same manner
as it applied to Wiltek.
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: August 12, 1999 E-SYNC NETWORKS, INC.
/s/ Walter Keisch
---------------------------------------
Walter Keisch, Vice President Finance
and CFO
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE E-SYNC NETWORKS,
INC. (FORMERLY WILTEK, INC.) CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1999 AND
THE CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999 DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1999 JAN-01-1999 APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1999 JUN-30-1998 JUN-30-1998
<CASH> 1,118 1,118 0 0
<SECURITIES> 0 0 0 0
<RECEIVABLES> 1,501 1,501 0 0
<ALLOWANCES> 35 35 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 2,817 2,817 0 0
<PP&E> 2,603 2,603 0 0
<DEPRECIATION> 1,018 1,018 0 0
<TOTAL-ASSETS> 4,651 4,651 0 0
<CURRENT-LIABILITIES> 1,740 1,740 0 0
<BONDS> 317 317 0 0
0 0 0 0
3,000 3,000 0 0
<COMMON> 1,727 1,727 0 0
<OTHER-SE> (2,132) (2,132) 0 0
<TOTAL-LIABILITY-AND-EQUITY> 4,651 4,651 0 0
<SALES> 1,800 3,397 1,953 3,854
<TOTAL-REVENUES> 1,800 3,397 1,953 3,854
<CGS> 1,044 2,492 1,198 2,392
<TOTAL-COSTS> 2,798 5,270 1,871 3,708
<OTHER-EXPENSES> 1 101 1 2
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> (5) (10) 12 23
<INCOME-PRETAX> (995) (1,965) 70 120
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (995) (1,965) 70 120
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (995) (1,965) 70 120
<EPS-BASIC> (.25) (.49) .02 .03
<EPS-DILUTED> (.25) (.49) .02 .03
</TABLE>
