UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Mark one:
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission File No. 0-28541
QUINTEK TECHNOLOGIES, INC.
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(Name of Small Business Issuer in its charter)
California 77-0505346
--------------------------------- --------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
17951 Lyons Circle
Huntington Beach, CA 92647
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(Address of principal executive offices)
Issuer's telephone number: 714-848-7741
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common stock,
no par value
Check whether the issuer (1) has 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 herein, and will not be contained, to the best
or 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 l0-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $298,653.
At September 29, 2004, the aggregate market value of registrant's Common Stock
held by non-affiliates was $13,560,766 based on the closing OTC Bulletin Board
bid price of $0.19 per share on that date.
At September 29, 2004, a total of 71,372,454 shares of registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
TABLE OF CONTENTS
ITEM 1 BUSINESS DESCRIPTION
ITEM 2 DESCRIPTION OF PROPERTY
ITEM 3 LEGAL PROCEEDINGS
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
5.1 Market for Common Stock
5.2 Dividends
5.3 Securities Authorized for Issuance Under Equity
Compensation Plans
5.4 Recent Sales of Unregistered Securities
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7 FINANCIAL STATEMENTS
ITEM 8 CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
9.1 Board of Directors and Executive Officers
9.2 Compensation of Directors
9.3 Management Committees
9.4 Section 16(a) Beneficial Ownership Reporting
Compliance
9.5 Code of Ethics
ITEM 10 EXECUTIVE COMPENSATION
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
13.1 Exhibits
13.2 Reports on Form 8-K
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
SIGNATURES
FINANCIAL STATEMENTS
EXHIBITS
ITEM 1 BUSINESS DESCRIPTION
Forward-Looking Statements
This annual report contains certain forward-looking statements within the
meaning of section 21 of the Securities Act of 1934, as amended, including
statements that indicate what the Company "believes," "expects," and
"anticipates" or similar expressions. These statements involve known and unknown
risks, uncertainties and other factors which may cause actual results,
performance or achievements of the Company to differ materially from those
expressed or implied by such forward-looking statements. Readers are cautioned
not to place undue reliance on these forward looking statements, which speak
only as of the date of this annual report. There can be no assurance that the
forward looking information contained herein will in fact transpire. The Company
undertakes no obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future events, or otherwise.
Introduction
Quintek Technologies, Inc. (referred to herein as the "Company", "Quintek",
"Our", or "We") is a California corporation. Quintek's corporate headquarters
are located at 17951 Lyons Circle, California, 92647. Our contact information at
that location is: phone number (714) 848-7741, fax number is (714) 848-7701 and
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our website is www.quintek.com. Our corporate filings with the Securities and
Exchange Commission ("SEC")and amendments to these filings, as well as other
information is available free of charge at our website soon after such reports
are filed electronically with the SEC, or directly on the SEC's website.
Quintek Electronics, Inc., our predecessor company, founded in July 1991,
acquired technology, related assets and patent rights to its aperture card
business during 1991 and 1992. On January 14, 1999, Quintek Electronics, Inc.
was acquired in a merger by Pacific Diagnostics Technologies, Inc. as part of
their Chapter 11 Plan of Reorganization, and the surviving entity's name was
changed to Quintek Technologies, Inc. Since the merger, Quintek continued to
sell its aperture card products and all former operations of Pacific Diagnostics
Technologies, Inc. were discontinued. On February 24, 2000, we acquired all of
the out standing shares of common stock of Juniper Acquisition Corporation
("Juniper"). Upon effectiveness of that acquisition, Quintek elected to become
the successor issuer to Juniper for reporting purposes under the Securities
Exchange Act of 1934.
Business Overview
Quintek Technologies, Inc. has been a manufacturer of hardware and software and
a service provider to the corporate and public sector markets since 1991. The
Company's new division, Quintek Services, Inc. (QSI) delivers Business Process
Outsourcing (BPO) services and Information Lifecycle Management (ILM) solutions
to document intensive industries such as healthcare and financial services. The
solutions and services the Company provides enable organizations to secure and
manage their information and document business processes more efficiently.
QSI provides Business Process Outsourcing (BPO) services to Fortune 500, Russell
2000 companies and public sector organizations. Our BPO services range from the
digitizing, indexing and uploading of source documents through simple
customer-specific, rules-based decision making.
Quintek Technologies, Inc., sells hardware, software and services for printing
large format drawings such as blueprints and CAD files (Computer Aided Design)
directly to the microfilm format of aperture cards. Quintek is the only
manufacturer of a patented chemical-free desktop microfilm printer for aperture
cards.
Recent Business Developments
On February 17, 2004, we announced our Cradle-to-Grave Strategy for providing
customer solutions at each stage of the Information Lifecycle from the creation
of documents through archival. On March 16, we announced that as our first step
in executing this plan, we hired Bob Brownell as President. Mr. Brownell has
more than twenty-five years experience in selling and delivering document
management solutions. On March 30, 2004, we announced hiring Chris de Lapp as
Senior Sales Executive. In five years with ACS, Mr. de Lapp averaged $2.75
million a year in sales, consistently exceeding his sales quote. On April 21,
2004, we announced that we would be entering the rapidly expanding Business
Process Outsourcing (BPO) market through our new Quintek Services, Inc. (QSI)
division. In June, we announced that FedEx Kinko's has selected Quintek as their
scanning partner of choice for their Western Region. On August 5, 2004 we
announced that a London Investment Company purchased $2.38 million in Quintek
stock. On August 10, 2004 we announced a $3.3 Million Funding Agreement with
Golden Gate Investors.
The growth plans for the Company are focused on its new QSI division. This plan
will use Quintek and QSI interchangeably. The status of the Chemical-Free
Microfilm business is discussed in a section by that name.
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Strategy
As companies look to outsource to overseas BPO (Business Process Outsourcing)
providers they encounter three problems that Quintek solves. First, finding the
right BPO partner is difficult because few overseas BPO providers have an
extensive U.S. sales presence. Second, many processes require Information
Technology integration and document scanning to be done domestically in order to
be performed overseas. Lastly, in the investigative process they often find
reasons portions of the process to be outsourced must be done on-site, nearby or
within the United States.
Quintek's core competencies are executive level sales skill, BPO (Business
Process Outsourcing) project management expertise, specialization in performing
high-speed, high-quality document scanning and relationships with all of the
partners necessary to deliver a complete solution on and off shore.
Management experience has shown that to sell and deliver a complete BPO solution
to a customer, a company must engage a partner or multiple partners during some
part of the process of delivering the service. Management has found that
profitability in the BPO business comes from specialization. Management believes
that the larger companies that attempt to provide all aspects of the BPO
solution internally can not compete with Companies like Quintek that offer
multi-vendor solutions. Just like Information Technology hardware and software
became unbundled into multi-vendor solutions in the 1980's and 1990's, the trend
in outsourcing is towards multi-vendor solutions. Quintek has established true
partnerships with industry leaders, where we provide important pieces that they
do not provide and vice versa, with revenue sharing going both ways.
Quintek will grow rapidly through mutually beneficial business relationships
with large organizations that provide a complementary piece of the BPO solution
but also require the pieces that Quintek provides. The scope of work for BPO
(Business Process Outsourcing) contracts ranges from basic scanning and data
entry (Level One BPO) to outsourcing an entire department (Level Five BPO).
Quintek focuses on Level One and Level Two. Level Two BPO is higher margin
business than Level One because it requires workers trained in the specific
vertical who are able to interpret data. Level Two BPO is more complex data
entry from multi-page forms. We plan to build an account and revenue base
through performing Level One BPO services domestically and reselling Level Two
BPO services from offshore providers.
Our business plan requires us to hire and retain talented staff. Management
believes that its Incentive Stock Option plan for salespeople and its Operator
Incentive Plan (OIP) for production people have been and will continue to be a
powerful tool for hiring and retaining staff. Many of Quintek's competitors are
not growth stage companies. Quintek employees understand how their efforts can
translate directly into increased shareholder value.
Market Trends
Overall BPO Market
Goldman Sachs estimates the BPO market at potentially $ 175-210 billion in
annual revenue and growing at a CAGR of roughly 20%, more than twice the
projected rate for IT spending.
According to an August 2003, Forrester Research report, the US BPO market will
expand to $146 billion in 2008. The report states that "BPO is the first stage
in the evolution of process-centric IT." The trend is towards corporations
spending more of their IT budgets on services. This provides dramatic costs
savings. Rather than companies purchasing hardware, software and labor, they can
pay a BPO vendor like Quintek by the claim or by the loan document. In this way
they do not carry the cost of infrastructure during unneeded periods.
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We expect new companies to take significant roots in this space, apart from
established players. Exult and Xchanging are two relatively recent examples.
BPO is the delegation, by the customer, of the operational responsibility for a
business process's execution and performance within the customer's environment.
It is the recognition that process improvement, not IT technology, has the
greatest potential for contribution and that, like IT, depending on the process,
that knowledge may not be available internally.
Some of the processes are critical, others are not and some of the critical
processes are IT-leverageable, and others are not.
In today's highly competitive, unpredictable and fast-changing marketplace,
organizations are challenged with improving productivity and operational
efficiency with ever-shrinking budgets. Many executives find that running the
enterprise consumes the bulk of their energy. They lack the time and resources
to manage non-core, resource-intensive functions properly.
As a result, many organizations are pursuing a Business Process Outsourcing
(BPO) strategy that manages these non-strategic business processes. With the
right partner, BPO delivers dramatic business value, significant competitive
advantage--and peace of mind. Outsourcing operations provides substantial,
measurable benefits right away.
Organizations that take advantage of BPO solutions thrive today, even amidst
market instability and ever-changing conditions. Allowing BPO suppliers to
manage these non-strategic operations provides superior flexibility and makes
organizations better able to respond to new and existing business opportunities.
Among the benefits of a BPO strategy is the ability of the organization to focus
on its core competencies--initiatives that bring in revenue and facilitate
profitable growth.
The scope of work for BPO (Business Process Outsourcing) contracts ranges from
basic data entry (Level One BPO) to outsourcing an entire department (Level Five
BPO). Quintek focuses on Level Two and Level Three. Level Three BPO is higher
margin business because it requires complex data capture from multi-page forms
done by operators trained in the vertical who are able to analyze data.
BENEFITS OF BUSINESS PROCESS OUTSOURCING
o Reduce costs--BPO provides quantifiable benefits through improved
efficiencies, lower overhead, reduced payroll and benefit expenses, and
fewer capital investments.
o Improve productivity and operational efficiencies--Non-core business
processes, such as human resources and finance and accounting, are
critical, but also resource-intensive, time-consuming, and costly.
Outsourcing improves operational efficiencies and drastically reduces
costs without large, up-front capital investments.
o Allow organizations to focus on their core business--BPO allows
organizations to move non-core business processes to a services
provider so that they may focus on the more important strategic,
revenue-generating programs that create profitable growth and sustain
business success.
o Ensure best practices, skills, and technology--BPO provides access to
proprietary workflow systems, process reengineering skills, and
innovative staffing and delivery models, combined with world-class
technology delivered by experts.
o Provide access to scalable operations and on-demand resources--BPO
provides the flexibility to respond to a rapidly changing marketplace
and scale operations up or down as conditions dictate. In a BPO
engagement, the BPO partner delivers access to global staff, processes,
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resources, and technology--wherever and whenever they are needed.
o Strengthen clients' competitive position--Organizations can leverage a
BPO strategy to improve their financial and competitive positions and
differentiate themselves from competitors. BPO results in increased
customer satisfaction, more efficient operations, access to global
capabilities, increased cash flow, and faster time-to-market.
As an example, Jack Welch, past Chairman & CEO of General Electric who delivered
26 consecutive quarters of profitability said, "70% of our business processes
should be outsourced, 70% of which should be offshore, 70% of which should be to
India."
Document Management and Imaging Market
In his book, "Business @ The Speed of Thought," Bill Gates writes, "...the
paperless office, like artificial intelligence, is one of those 'any day now'
phenomena that somehow never seem to actually arrive... paper consumption has
continued to double every four years, and 95% of all information in the US
remains on paper, compared with just 1% stored electronically. Paperwork is
increasing faster than digital technology can eliminate it."
According to a report released last week by research firm IDC, the global
document management and imaging outsourcing market reached $13 billion in 2003
and is expected to expand at a compound annual growth rate of 19.7% over the
next three years.
The rapid growth of the document management market has been largely unnoticed by
industry watchers because it is manifested very differently from industry to
industry, IDC noted. While some industries are simply shifting their efforts
from paper to electronic media in order to save money, others, such as the
health care industry as part of its Health Insurance Portability and
Accountability Act requirements, are attempting to implement cross-company
document management standards and technologies.
"Growth in this market is being fueled by the rapid adoption of imaging,
document, and content technologies overall, user demand for easy access to
documents, as well as the evolving need for imaging and document management
within particular vertical segments," said Ron Glaz, director of IDC's
digital-imaging solutions and services. "In fact, survey participants indicated
that the most important factors in choosing an imaging and document management
outsourcing vendor is their track record and specific vertical industry
expertise."
Because most BPO processes start by capturing data and organizing it into
digital formats, the need for service provider support has exploded. Companies
wanting to bring unstructured data on line have been faced with the task of
converting this information into electronic form. Unstructured data is
considered any media in paper, film, fiche or other forms that are not readily
available to the knowledge worker.
Companies electing to image capture their paper documents are turning to service
providers as a source of digitizing this information. Outsourcing this business
to service providers has proven less expensive than hiring permanent staff.
Temporary employees have proven ineffective since conversions are not generally
done all at once. Companies attempting to purchase all the necessary equipment
to do their work in-house cannot keep up with the changing technologies.
Vertical Markets
Quintek is targeting three vertical markets, Mortgage Processing, Healthcare
Claims Processing and Accounts Payable processing.
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Home Mortgage Processing
In 2002 mortgage originators funded $2.787 trillion in loans, in 2003, hey
funded $3,810 trillion in loans and according to the mortgage banker's
Association, they forecast that $2,597 trillion will be funded in 2004 and
$1.823 trillion in 2005. management believes that 2004 may beat these
projections due to the fact that $890 billion funded in the second quarter of
2004.
Sales of new mortgages and refinancings have been driven by historically low
interest rates.
Mortgage transactions are paper intensive. Portfolio's of mortgages are traded.
Almost every financial services company that generates consumer loans
(mortgages, auto, and credit cards) needs to be able to share and exchange
documents electronically with outside entities when they are selling the loan
asset to another organization. Portfolio's of mortgages are rated A through C.
This rating in significantly influenced by the quality of the title documents,
HUD forms, ESCROW documents and other closing documents associated with the
initial transaction between the home buyer and the original lender. These
documents need to pass efficiently between hundreds of people in and out of
these financial institutions.
Home mortgage company's primary business is the origination of new loans and
refinancings. They are not in the Information Technology or document management
business. They make money by charging transaction related fees and completing
these transactions quickly and efficiently with the lowest possible sales and
marketing costs. Mortgages companies outsource their document processing for two
primary reasons. Both sides of the transaction would like to eliminate the costs
associated with copying and shipping paper documents, and reduce the risks
associated with exposure to market fluctuations. There is a critical need to
minimize the amount of time it takes to complete loan sale transfer activities.
Additionally, they outsource this document processing to experts in document
imaging so that the portfolios have the highest possible value as based on the
legibility of the documentation.
Management believes that Quintek is positioned to grow in this sector as the
mortgage industry slows down. In the event that growth contracts, this allows
finance companies to address their documentation backlog, which results in sales
to Quintek. Additionally, once finance companies have to plan on slower growth,
they must also concentrate on lowering costs and outsourcing can become an even
higher priority.
Healthcare Claims Processing
The overall healthcare market drives more than $1.4 Trillion is sales. The
healthcare market is made up of doctors, hospitals, insurance companies, HMO's,
equipment suppliers and service providers. Money flows between doctors, hospital
and insurance companies based on the acceptance or rejection of individual
health care claims.
A new IDC study released on May 25, 2004 shows that U.S. spending on claims
process outsourcing services totaled $10.1 billion in 2003, a 6.8% growth over
2002. IDC projects that the market (comprised of the commercial healthcare,
government healthcare, and insurance industries) will increase to $15.7 billion
in 2008, with a five year compound annual growth rate (CAGR) of 9.1%.
"Despite being a relatively mature market, new growth opportunities are
beginning to emerge in the claims process outsourcing market. Early movers are
beginning to apply more strategic objectives to outsourcing, and this in turn is
helping to drag the claims process outsourcing industry forward, slowly, but
surely," said Romala Ravi, program manager, BPO Services.
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IDC research indicates that claims process outsourcing, though mature as a
concept, is a relatively underpenetrated market. Companies looking to play in
this market should set realistic expectations about market demand and adoption,
meet demand where it currently exists, grab low-hanging fruit and use these as
building blocks towards more comprehensive engagements, and prepare their
pursuit teams to speak to and demonstrate both the tactical and strategic
benefits of outsourcing.
The two major issues in the heavily regulated health claim industry are service
and costs. The health insurance industry is required by law to service their
customers. Claims must be paid or denied within regulated timeframes. When
claims are not processed within those time limits, expensive penalties are
invoked. Service timelines are adversely impacted when additional medical
records are required. Claim files are pended until requested documents arrive;
and documents must be manually matched to the existing file. Complex claims are
more likely to be misplaced because they must be routed to medical review
specialists, and quality control. As files are sent from one department to the
next, it is more difficult to meet service standards, and keep track of
processing timeframes. Paper files compound service inefficiencies because
documents and files are lost or delayed in routing. Claims service is expensive.
When information isn't available to insured's and providers, it causes repeated
phone calls, re-submission of claims, and additional work. The service
inefficiencies inherent to paper files generate costs and expensive regulatory
penalties.
Accounts Payable Processing
Most large companies can save money be contracting Quintek to outsource
back-office functions such as processing their accounts payable. In processing
and paying invoices, the focus is on quickly approving payments by extracting
data from scanned documents and loading into global, enterprise-wide databases
to support decision making such as paying or declining an invoice.
Customers often install and maintain their own Payment Processing Workflow
software to review, pay or decline invoices. In order to review and process
invoices with such software, the data on the paper invoices has to be scanned,
captured and loaded into the client's database or web-based ASP provided by
Quintek. Customers outsource this scanning, capturing and loading to Quintek.
Offshore partnerships
To provide Customers with compelling pricing and quality, Quintek electronically
delivers work off-shore to India where it is processed and returned to the
United States electronically. India is rapidly becoming a leading world supplier
of Business Process Outsourcing (BPO) and data conversion services. With the
India BPO market growing at a compounded annual growth rate (CAGR) of more than
25 percent, many companies based in the United States are leveraging the
compelling advantages of cost, quality and cycle time found in India.
Sales Plan
Overview
Quintek will achieve rapid growth by simultaneously establishing customer
relationships directly as well as with national sales partners, large prime
contractors and vertical-specific solution\brokers. Quintek will continue to
increase revenues through organic growth, and by quickly establishing a national
sales foothold using our compelling incentive stock option plan to attract top
sales talent. Quintek will continue to expanding to a full national sales staff
of thirty-five salespeople, and through strategic acquisitions. Quintek will
support rapid growth through two internal processes, the Quintek business unit
template procedure and the EIP (Employee Incentive Plan).
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Service Offerings
High Speed Scanning at Client Site or QSI Production Center
Fortune 500 companies and other large organizations manage documents using
Enterprise Content Management (ECM) systems such as OnBase, Documentum or
FileNet. These are very large multi-user databases with a web browser interfaces
that allow people all over the world to access and interact with document -based
content in an organized manner twenty-four hours a day and seven days a week.
For example, a large financial services company might have an ECM system that
can support a world-wide staff of 12,000 employees who need to access 30,000,000
pages of data in Adobe .pdf format.
The scope of work for a High Speed Scanning contract will usually include
Quintek receiving paper documents and delivering these documents directly into
the customer's Enterprise Content Management (ECM) system. Scanning is the
process of converting a paper document into a digital image saved in electronic
format such as a TIFF or PDF file. High-end scanners are similar to high-end
copiers with sheet feeders, but they output electronic files, not more paper.
Quintek must provide the ground transportation and secure facility for
processing the documents, the trained staff for processing the documents, the
expertise to index, scan and categorize the documents, the expertise to
re-assemble the original documents in the format and order they were delivered
and the expertise to upload the documents and the indexing into the customer's
ECM system. This often has to be done in less than 24 hours from receipt of the
document.
In its current configuration, Quintek's Huntington Beach facility can convert
60,000 images in an eight hour shift and 2,400,000 per month running two shifts.
This would result in approximately $120,000 a month in billings and a gross
profit at $0.05 an image of $48,000. Upon subsequent financing, with additional
equipment and reconfiguration, this facility has the capability of processing
600,000 images in an eight hour shift. Running two shifts at capacity, the
facility could process 13,200,000 documents a month.
Domestic/Offshore Data Entry, OCR, and Indexing
Quintek uses manual and OCR (Optical Character Recognition) technologies to
create indexing for converted digital images. Indexing of documents facilitates
a more efficient means of retrieving critical documents and information for
future use.
Quintek has ensured higher Quality Assurance (QA) standards, by utilizing an
"Enter - Enter - Compare" process, whereby two separate operators independently
index the same document, then compare results using automated systems. If
discrepancies are found between the two separate operator versions, the batch is
immediately rejected and routed to a senior project manager for rework.. This
six sigma Quality Control (QC) process guarantees clients a 99.5% accuracy rate.
Quintek performs this service in-house or offshore. Services are priced by the
keystroke. A typical healthcare claim form may require between 400 and 1000
keystrokes. With volumes in the millions, our customers may pay $0.01- $0.02 per
keystroke. Quintek resells this work to offshore partners that perform this
service so that Quintek can make 30% to 60% gross margins.
ASP (Application Service Provider) Hosting of Scanned Images
Once images have been scanned, end-user need an ECM (Enterprise Content
Management) system such as Hyland Software's OnBase, Documentum or FileNet to
use the documents now in digital formats... For customers that do not want to
install and maintain their own ECM (Enterprise Content Management) system,
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Quintek resells web-based document hosting ASP services from Quintek's partners
such as Hyland Software's OnBase or Iron Mountain's Digital Archives. This
provides Quintek's clients the efficient and immediate capability of viewing
business critical documents on line. Margins for reselling this service are
generally good, between 20% and 30% and contracts for this service usually run
for many years.
In House Imaging Solutions (Hardware, Software, and Services)
For customers that want to use their digital documents on an in-house ECM
(Enterprise Content Management) system, Quintek provides multiple solutions
based on the clients needs. Quintek offers system design, professional services
and implementation required hardware and software. This service is sold as
hardware and software products at a margin as well as labor to perform the
installation. Margins range from 20% to 40% depending on the size of the
contract.
Mailroom Outsourcing of Inbound Hardcopy or Electronic Mail
The most efficient solution for a customer is for the customer to outsource the
mail handling function to Quintek. Quintek physically retrieves the mail
directly from the post office through a P.O. Box, sorts, scans and captures key
data fields from each document. The scanned images and corresponding data are
uploaded directly to the customer's ECM or one of Quintek's ASP (Application
Service Provider) partners systems for online viewing by the customer's end
user. This service is sold per piece of mail processed. Margins range from 20%
to 40% depending on the size of the contract.
Corporate Identity
Quintek's sales force will be selling the "QSI" brand name. QSI is an acronym
for Quintek Services, Inc., a wholly-owned subsidiary of Quintek Technologies,
Inc. This document uses Quintek and Quintek interchangeably.
Quintek Sales Process
Quintek Value Proposition
The Quintek Value Proposition is that Quintek can significantly reduce our
customer's current process overhead. Quintek can change the customer's fixed
costs into variable costs and Quintek can deliver a higher quality of service
than the customer can achieve internally. A typical Return on Investment (ROI)
using Quintek's BPO services can be as fast as 90 days.
Overcoming Sales Objections
The four main sales objections faced by our sales force are the "upside-down"
debt-to-equity ratio on our balance sheet, the Company's limited track record,
lack of regional or national coverage and Dun & Bradstreet rating the company a
4 on a scale of 1 to 5.
The Company responds to these objections as follows. First, the company has been
under new management since 2003 and the historical financials do not represent
the capabilities of the current management. The new CEO and CFO of Quintek have
collectively raised more than $20 million in financing for growth-stage
companies. Second, the new sales and production team at Quintek has more than 60
years of experience delivering BPO (Business process Outsourcing) to Fortune 500
customers. They have been on board at Quintek since April 2004, so the
historical financials do not represent the capabilities of the current
management. We encourage our customers to look at the track record of the
individuals that now make up the new Quintek. Lastly, the Company forecasts that
its financials will be consistently improving over the next two quarters.
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The Company forecasts that its debt-to-equity ratio's on its balance sheet will
be right-side up and that the "going concern" statement will be removed within
the next two quarters. The D&B rating of 4 out of 5 was given when the Company's
was under previous management and its largest credit line was $10,000. The
company currently has more than $300,000 in lease financing. Once the balance
sheet is right-side up, the Company will request that D&B re-evaluate its
rating.
Quintek's Target Account Profiles
In the initial stage of Quintek's growth, the sales team is putting 50% of their
effort into targeting large, multi-year contracts and 50% of their effort into
closing smaller one-time jobs.
Managing rapid revenue growth
Quintek will achieve rapid growth by simultaneously establishing customer
relationships directly as well as with national sales partners, large prime
contractors and vertical-specific solution brokers. Quintek will continue to
increase revenues through organic growth, and by quickly establishing a national
sales foothold using our compelling incentive stock option plan to attract top
sales talent.
Quintek will continue expanding to a full national sales staff of thirty-five
salespeople through hiring and through strategic acquisitions. Quintek will
support rapid growth through two internal processes, the Quintek Office Template
(QOT) and the EIP (Employee Incentive Plan).
Direct Sales
Quintek currently has one full-time direct sales person. The Company plans to
grow this to a national staff of 35 salespeople. The job of Quintek's direct
sales team is to identify prospects before they have reached the RFP (Request
for Proposal) stage. The job of Quintek's direct sales team is to know that
these proposals are being sent out and to receive and respond to them. These
senior salespeople are experienced and paid a base salary and a sales commission
commensurate with that experience.
National Sales Partners and Prime Contractors
On June 1, 2004,, Quintek signed a sales partner agreement with FedEx Kinko's.
FedEx Kinko's has a national corporate sales team of more than 500 salespeople
who call on Fortune 500 accounts selling outsourced print room services. They
are often selling related services to the same decision makers as Quintek. With
the relationship that has been put in place between FedEx Kinko's and Quintek,
FedEx Kinko's can resell Quintek's BPO (Business Process Outsourcing) services.
The relationship is structured so that FedEx Kinko's can mark-up Quintek's
services by 10-20%...
Quintek's sales team has been training FedEx Kinko's on selling Quintek
services. Quintek's sales team responds to requests for information from FedEx
Kinko's and assists in drafting proposals. Quintek will pursue one other similar
prime contractor relationship and then focus on maintaining and supporting those
relationships.
Vertical specific solutions brokers
On April 26, 2004, Quintek signed an agreement with Single Source Partners
(SSP). Single Source Partners is a provider of mortgage solutions located in
Newport Beach, CA that supplies Business Process Outsourcing (BPO) services in
the mortgage industry. SSP is paid by financial institutions to pre-qualify
vendors and service providers. SSP also receives a finder's fee from Quintek in
the event that Quintek closes a sale with a referral from SSP. SSP and Quintek
have identified and are pursuing more than $60 million in potential business
from SSP's client companies.
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Organic growth
Quintek will place a high priority on prospecting within new accounts. Quintek
will maximize the high cost of sales by delivering excellence to the customer,
identifying and tracking additional opportunities within existing prospects and
by winning subsequent work within newly created accounts. Quintek will look to
expand geographically by recruiting new business development representatives
with existing books of business.
Initial national presence
A key milestone in the Company's business plan will be when the Huntington Beach
offices reaches break-even and 50% of the National Expansion Financing has been
secured. Once this milestone has been achieved, Quintek will hire experienced
sales people in the Northeast, Southeast and Midwest. Once one of these sales
people has a qualified opportunity that Quintek's executive team believes will
close if resources are in place, Quintek will fund the necessary resources to
close the business. A qualified opportunity in this case would be where Quintek
has been short listed for a job that can bill annual revenues of $1,000,000 with
a high probability that it will close if resources such as production space,
staff and equipment are in place.
National expansion through personal relationships
Another key milestone in the Company's business plan will be when 100% of the
lease financing and 100% of the National Expansion Financing has been secured.
Once this milestone has been reached, Quintek will make the necessary investment
to complete a national sales staff of 35 salespeople. This will be accomplished
either through acquisition or from drawing from the Company's personal network
or a combination of the two. In the event of hiring new salespeople in new
geographies, the same expansion criteria will be used as before.
Sales Incentive Stock Option Plan
Salespeople receive a stock option bonus for meeting specific revenue goals.
Details on this compensation plan are outlined in the Appendices.
Growth through Strategic Acquisitions
Quintek plans to retain a business broker to help identify compatible
acquisition targets. Quintek will focus on acquisition candidates who have
binding long-term profitable contracts with financially stable customers.
Quintek will pursue equity-based agreements that will not encumber the company
with excessive debt.
Managing Profitability
Quintek's sales people are compensated based on the Gross Profit of the sale.
Sales people receive no commission for jobs sold at less than a certain floor
Gross Profit percentage. Sales people are provided incentive to maximize Gross
Profit.
Managing the Sales Process
Salespeople submit monthly forecasts to the President. The President makes sure
that the sales people are focused on the business that makes sense for the
company. In Quintek's initial phase this is a balance between large multi-year
contracts and small "one-off" jobs. The President makes sure that the sales
people are maximizing Quintek's vertical expertise in healthcare and mortgage
clients. The President is responsible for making sure that Gross Profit margins
are being maintained.
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The President submits monthly forecasts to the CEO. The CEO submits monthly
forecasts of upcoming capital expenditure requirements to the CFO.
Sustaining a Competitive Advantage
High margins in this industry can be delivered by low employee turnover.
Quintek's Employee Incentive Program (EIP) enables Quintek to deliver quality
service at less cost than its competitors and provides incentive to its
employees to be as productive as possible and to stay at Quintek. Quintek's job
costing process and technology enables the Company to measure and reward
performance on a quarterly basis. In this way we can pay bonuses to production
staff based who exceed productivity targets. Since management believes that
Quintek's market value will appreciate, the hourly worker's ability to
accumulate stock in this manner can be a powerful incentive to deliver
performance and stay with the Company.
Verticals
Quintek is targeting three vertical markets, Outsourced Mortgage Processing,
Outsourced Healthcare Claims Processing and Outsourced Accounts Payable
Processing.
Outsourced Mortgage Processing
Data accessibility and storage is a challenging operation for today's mortgage
firm to handle efficiently. Lenders spend billions of dollars a year on
processing account data, evaluating valuable financial information, and storing
data records. Quintek's response to this operations challenge is to provide BPO
solutions to clients, accurately and economically.
Quintek's imaging and outsourcing methodology provides data entry, document
scanning, mailing operations, and media to media conversions to financial
institutions at a fraction of their current operating costs. By lowering the
cost to process the average loan through Quintek's services, millions could be
saved annually by institutional lenders, thus increasing overall revenue.
Management believes that Quintek's addressable national market for outsourced
mortgage processing is between $5 billion and $10 billion. A significant
percentage of ACS (NYSE:ACS), SourceCorp (NASDAQ:SRCP) and EDS (NYSE:EDS)
revenue comes from outsourced mortgage processing. Management believes that
Quintek will continue to win new business in this vertical even if interest
rates go up due to the increased need to deliver cost savings.
Outsourced Healthcare Claims Processing
Management believes that Quintek's addressable national market for outsourced
healthcare claims processing is in excess of $10 billion. Management believes
that there are no foreseeable market trends that could reduce demand for these
services in the foreseeable future.
Sales Partnerships
FedEx Kinko's
On June 1, 2004, Quintek signed a sales agreement with FedEx Kinko's, a division
of FedEx Corp. (NYSE:FDX). FedEx Kinko's selected Quintek Services, Inc. (QSI),
as their preferred Document Imaging & Document Scanning partner for Kinko's
Western Region. The partnership also allows the two companies to offer back
office outsourcing arrangements to deliver accuracy and efficiency. Quintek's
services are a value added upsell to the Kinko's core LOB (Line of Business).
The joint business development strategy will primarily focus on active document
digitizing as well as back-file conversions in the insurance, healthcare,
government and financial market space. This partnership provides clients a
"single source" partner by combining back office outsourcing solutions,
professional services and document conversion services.
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FedEx Kinko's sales team is reselling the following Quintek services; (1) High
Speed Scanning at Client Site or QSI Production Center, (2) Domestic/Offshore
Data Entry, OCR, and Indexing, (3) ASP Hosting of Scanned Images, (4) In House
Imaging Solutions (Hardware, Software, and Services), (5) Mailroom Outsourcing
(Inbound).
The next steps to move this relationship forward are training Kinko's sales team
and expanding Quintek's footprint to partner with Kinko's nationally.
Single Source Partners (SSP)
On April 26, 2004, Quintek signed an agreement with Single Source Partners
(SSP). Single Source Partners is a provider of mortgage solutions located in
Newport Beach, CA that supplies Business Process Outsourcing (BPO) services in
the mortgage industry. SSP is paid by financial institutions to pre-qualify
vendors and service providers. SSP also receives a finder's fee from Quintek in
the event that Quintek closes a sale with a referral from SSP. SSP and Quintek
have identified and are pursuing more than $60 million in potential business
from SSP's client companies.
SSP provides small and midsize mortgage companies with negotiated volume pricing
and special service level agreements. SSP maintains a "Best in Class" vendor
team for their clients. Single Source Partners receives a portion of the revenue
that Quintek bills from a referred client. More information on Single Source
Partners is available at www.singlesourcepartners.com. The next steps to move
this relationship forward are training at Single Source Partners and expanding
Quintek's footprint to be positioned to serve SSP's customers nationally.
GCAP Services, Inc. (GCAP)
GCAP is a management consulting firm headquartered in Irvine, CA that provides
Business Process and Systems Redesign solutions to the Federal, State and Local
Government sector. Together, Quintek and GCAP provide a total end-to-end
solution in document management conversions for government clients.
GCAP provides executive, strategic and tactical management consulting services.
They assist Federal government and public agencies to meet compliance
requirements by the design and implementation of business systems and the
establishment of new or streamlined procedures.
A partial list of client that GCAP Services may be able to introduce to Quintek
includes County of Orange-California, Judicial Council of California -
Administrative Office of the Courts, Los Angeles County Metropolitan
Transportation Authority, Los Angeles City Community Redevelopment Agency, Los
Angeles County Department of Public Works, United States Navy - Naval Facility
Engineering Command. More information about GCAP Services can be found at
www.gcapservices.com. The next steps to move this relationship forward are
training at GCAP and expanding Quintek's footprint to be positioned to serve
GCAP's customers nationally.
Iron Mountain
On May 4, 2004, Quintek signed an agreement to become a Certified Imaging
Partner with Iron Mountain leading provider of Web based document hosting
solutions to provide QSI clients the efficient and immediate capability of
viewing business critical documents on line.
Iron Mountain Incorporated (NYSE:IRM) provides outsourced records and
information management services and has a market capitalization of $4 billion
with 2003 revenues of $1.5 billion. The company services more than 200,000
customer accounts throughout the United States, Canada, Europe and Latin
America. Iron Mountain offers records management services for both physical and
digital media, disaster recovery support services, and consulting.
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This agreement with Iron Mountain primarily offers the Iron Mountain salesforce
Quintek's BPO services while enabling Quintek to resell web-based document
hosting ASP services, which provide Quintek's clients the efficient and
immediate capability of viewing business critical documents on line.
The next step with Iron Mountain is to convince their senior management to
select QSI as the preferred imaging partner in Southern California. Management
believes that additional investment is necessary to expand the capabilities at
our Huntington Beach facility before this relationship can move forward.
Examples of Customer Contracts
The scope of work for BPO (Business Process Outsourcing) contracts ranges from
basic data entry (Level One BPO) to outsourcing an entire department (Level Five
BPO). Quintek focuses on Level Two and Level Three. Level Three BPO is higher
margin business because it requires complex data capture from multi-page forms
done by operators trained in the vertical who are able to analyze data.
Mortgage Processing
Mortgage companies may outsource their document process to one or more vendors.
Financial institutions manage documents using Enterprise Content Management
(ECM) systems such as OnBase, Documentum or FileNet. These are very large
enterprise wide networks utilizing web browser interfaces that allow people all
over the world to access and interact with document based repositories in up to
20 language. For example, a large financial services company might have an ECM
system that can support a world-wide staff of 12,000 employees who need to
access 30,000,000 pages of data in Adobe .pdf format.
The scope of work for a Mortgage Processing contract will usually include
Quintek receiving paper documents and delivering these documents directly into
the customer's Enterprise Content Management (ECM) system. Quintek must provide
the transportation and secure facility for processing the documents, the trained
staff for processing the documents, the expertise to index, scan and categorize
the documents, the expertise to re-assemble the original documents in their
original order and the expertise to upload the documents and the indexing into
the customer's ECM system. This often has to be done in less than 24 hours from
receipt of the document.
These ECM systems require constant, large scale document processing to input and
upload new paper documents. Mortgage companies that decide to outsource send out
Requests for Proposals (RFP's). The job of the Quintek sales team is to identify
prospects before they have reached the RFP stage and to receive and respond to
these RFP's. Quintek prices these jobs by the committed image. A committed image
is an image that has been uploaded into the customer's database and written to
their mass storage system.
Healthcare Claims Processing
With mortgage documentation the focus is on having digital "copies" of the
original loan documents all throughout the process. In processing healthcare
claims, the focus is on extracting data from scanned documents into multi-user
databases and paying or denying a claim.
Doctors and hospitals are referred to as "Healthcare Providers." Insurance
companies are referred to as "Healthcare Payers." Healthcare Payers either
maintain their own claim review and payment software or they purchase claim
review and payment software as a service from software developers such as
MedNet, an ASP (Application Service Provider). In order to review and pay
claims, the data on the paper claim has to be extracted and converted into an
electronic format. Quintek provides the service of receiving claims in paper
form via mail or fax and returning them as digital images with the corresponding
data which may sent directly to an ASP for viewing and processing.
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Quintek prices these jobs by the scanned image and by the number of claims
keyed. Quintek scans the original bill, which results in a digital image saved
in electronic format. Quintek sends the scanned images to an offshore partner
who performs the Level Three data capture service. The healthcare payer pays
Quintek for the entire service. Quintek resells the offshore providers services
to the client. Quintek makes between 30% and 60% gross margin on reselling the
Level Three BPO data capture service.
Accounts Payable Processing
Most large companies can save money be contracting Quintek to outsource
back-office functions such as processing their accounts payable. In processing
and paying invoices, the focus is on quickly approving payments by extracting
data from scanned documents and loading into global, enterprise-wide databases
to support decision making such as paying or declining an invoice.
Customers often install and maintain their own Payment Processing Workflow
software to review, pay or decline invoices. In order to review and process
invoices with such software, the data on the paper invoices has to be scanned,
captured and loaded into the client's database or web-based ASP provided by
Quintek. Customers outsource this scanning, capturing and loading to Quintek.
Quintek prices these jobs by the scanned image and by the number of data
elements keyed. Quintek scans the original invoice, which results in a digital
image saved in electronic format as a TIFF or PDF file. Quintek electronically
sends the scanned images to our offshore partner who performs the Level Three
data entry BPO service. The customer pays Quintek for the entire service.
Quintek resells the offshore providers services to the client. Quintek makes
between 30% and 60% gross margin on reselling the Level Two BPO data entry
service.
Sales Incentive Plan
Quintek's sales compensation plan is designed for senior salespeople who are
experienced and are paid a base salary and a sales commission commensurate with
that experience. For a new salesperson in a new territory, billed sales quotas
are $500,000 in year one, $800,000 in year two and $1.2 million in year three.
Quintek sales people receive a base salary of $75,000. Quintek sales people are
compensated based on the Gross Profit of the sale. Sales people receive no
commission for jobs sold at less than 20% Gross Profit. Sales commission scale
from 4% to 7.5% as Gross Profit goes from 20% to greater than 40%. Salespeople
receive a stock option bonus for meeting specific revenue goals. Details on
stock option compensation are outlined in the Appendices.
Execution Plan
Currently, Quintek has one office in Huntington Beach and one region, Southern
California. We have seven full-time employees in Huntington Beach, a Senior
Salesperson, a Project Manager, a Production Manager, an Administrative
Assistant and the executive team of CEO, President and CFO.
We have a 7,000 sq. ft. facility that has 3,000 sq. ft. of production space. In
its current configuration, Quintek's Huntington Beach facility could process
13,200,000 documents a month.
Our business plan calls for us to expand to profitability within three years
with thirty-five salespeople organized into four regions totaling twenty such
offices nationwide. To accomplish this goal, we have identified ten key
milestones that need to be accomplished.
Managing Profitability
Production Managers will be compensated based on successfully raising
profitability.
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Template engagement team
During Quintek's initial expansion, each region will need to have three key
personnel.
Production Manager. Production Manager is responsible for delivering services to
the customer. This includes hiring and supervising production staff and bringing
projects in under budget.
Project Manager. Project Manager is responsible for supporting the pre-sales
effort involving the development of proposals. Project Manager is responsible
for post sales support, customer relations and coordinating the initial
implementation of new business. Project Manager is responsible for working with
Finance to order equipment based on the day-to-day needs of the project.
Senior Sales Representative. The Senior Sales Representative is responsible for
identifying sales prospects, closing sales and is the customer's main contact
during implementation.
Leveraging Temporary Labor
Quintek's business model relies heavily on the use of temporary labor. Volume of
business can vary dramatically from week to week. Profitability is based on not
having any more full-time staff than is necessary.
Production Staff Incentive plan
Quintek's Operator Incentive Program (OIP) enables Quintek to deliver quality at
less cost than its competitors and provides incentive to the Company's employees
to be as productive as possible and to stay at Quintek.
Maintaining Margins
We plan to minimize layers of management as we grow and reward employees for
cost savings. Quintek will cultivate a culture of saving money. Managers will be
empowered to award stock options to employees who help save money.
Offshore Partners
Quintek currently has deal-by-deal relationships with offshore BPO providers.
Management believes that there is no compelling business reason to seek or offer
an exclusive relationship with an offshore BPO provider. There are many skilled
offshore providers. Bob Brownell, Quintek President has been to Chennai, India
and toured facilities and developed face-to-face relationships with BPO partners
that are brought in on a deal-by-deal basis.
Customer Solution Partnerships
Management experience has shown that to sell and deliver a complete BPO solution
to a customer, a company must engage a partner or multiple partners during some
part of the process of delivering the service. Management has found that
profitability in the BPO business comes from specialization. Management believes
that the larger companies that attempt to provide all aspects of the BPO
solution internally can not compete with Companies like Quintek that offer
multi-vendor solutions. Just like Information Technology hardware and software
became unbundled into multi-vendor solutions in the 1980's and 1990's, the trend
in outsourcing is towards multi-vendor solutions. Quintek has established true
partnerships with industry leaders, where we provide specialty services that
they do not provide and vice versa, with revenue sharing going both ways.
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FedEx Kinko's
On June 1, 2004, Quintek signed a sales agreement with FedEx Kinko's, a division
of FedEx Corp. (NYSE:FDX). FedEx Kinko's selected Quintek Services, Inc. (QSI),
as their preferred Document Imaging & Document Scanning partner for Kinko's
Western Region. The partnership also allows the two companies to offer back
office outsourcing arrangements to deliver accuracy and efficiency. The joint
business development strategy is primarily focused on active document digitizing
as well as back-file conversions in the insurance, healthcare, government and
financial market space. This partnership provides clients a "single source"
partner by combining back office outsourcing solutions, professional services
and document conversion services.
We do not risk losing accounts to FedEx Kinko's because FedEx Kinko's does not
sell or market competing services
FedEx Kinko's sales team is reselling the following Quintek services; (1) High
Speed Scanning at Client Site or QSI Production Center, (2) Domestic/Offshore
Data Entry, OCR, and Indexing, (3) ASP Hosting of Scanned Images, (4) In-House
Imaging Solutions (Hardware, Software, and Services) and (5) Mailroom
Outsourcing of Inbound mail.
Single Source Partners (SSP)
Single Source Partners is a provider of mortgage solutions located in Newport
Beach, CA that supplies Business Process Outsourcing (BPO) services in the
mortgage industry. SSP provides small and midsize mortgage companies with
negotiated volume pricing and special service level agreements. SSP maintains a
"Best in Class" vendor team for their clients. Single Source Partners receives a
portion of the revenue that Quintek bills from a referred client. More
information on Single Source Partners is available at
www.singlesourcepartners.com.
GCAP Services, Inc. (GCAP)
GCAP is a management consulting firm headquartered in Irvine, CA that provides
Business Process and Systems Redesign solutions to the Federal, State and Local
Government sector. Together, Quintek and GCAP provide a total end-to-end
solution in document management conversions for government clients. GCAP
provides executive, strategic and tactical management consulting services. They
assist Federal government and public agencies to meet compliance requirements by
the design and implementation of business systems and the establishment of new
or streamlined procedures. More information about GCAP Services can be found at
www.gcapservices.com.
Iron Mountain
On May 4, 2004, Quintek signed an agreement to become a Certified Imaging
Partner with Iron Mountain. This agreement with Iron Mountain enables Quintek to
resell web-based document hosting ASP services, which provides Quintek's clients
the efficient and immediate capability of viewing business critical documents on
line.
Iron Mountain Incorporated (NYSE:IRM) provides outsourced records and
information management services and has a market capitalization of $4 billion
with 2003 revenues of $1.5 billion. The company services more than 200,000
customer accounts throughout the United States, Canada, Europe and Latin
America. Iron Mountain offers records management services for both physical and
digital media, disaster recovery support services, and consulting.
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We do not risk losing accounts to Iron Mountain because Iron Mountain does not
sell or market competing services.
This relationship with Iron Mountain helps Quintek close sales because through
Iron Mountain, Quintek can deliver fast online access to data and images,
combining multiple file types on one platform, SAS70 - DOD - HIPAA compliant
facility, workflow-enabled, completely secure and quick to implement. Through
Iron Mountain, Quintek is providing its clients a system that is fully mirrored
and load-balanced with auto-failover capability ensuring access and
availability.
Template office
Quintek plans to open four major market BPO facilities and sixteen standard BPO
facilities in secondary markets.
Chemical-Free Microfilm (CFM) Business Unit
The Film-based Imaging Market
The film-based imaging market segment is the business associated with microfilm
cameras, film stock, chemicals, readers, printers, and associated services. This
is a mature, established market that has been redefined by new digital imaging
technologies over the last decade.
Trends In the Film-based Imaging Market
In June 2000, the Archivist of the United States, John W. Carlin, announced that
scanned image files would be used instead of microfilm to preserve individual
responses to the 2000 Census. In a landmark decision, the Census Bureau reversed
itself and decided to continue using microfilm. The reasons cited for staying
with microfilm were ongoing expense, the risk of losing critical data and the
advantage of a human readable format with a potential lifespan of 500 years.
Digital archives represent an ongoing expense because they require constant
expensive migration as digital standards, operating systems and media change.
During a migration, there is additional risk of losing critical data. Microfilm
is "future-proof" because it is human readable and certified by the American
National Standards Institute (ANSI) to have a 500 plus year lifespan.
For archive documents, film-based media remain superior. Film-based archival is
less expensive than digital methods and has a storage life of between 100 and
1000 years. Film-based archival already has a massive installed base of billions
of documents accumulated over more than 50 years of use.
By enabling the creation of microfilm directly from digital files, Quintek
products marry modern digital technologies to the proven best-practice of
microfilm archival.
The Document Lifecycle
Digital document management technology is well suited for active documents that
require high-availability. For archive documents, digital imaging or document
management systems have been shown to be costly and unreliable as a long term
solution.
When the document is created, activity is high -- it is being used actively to
make decisions. Issues during this stage include ease and speed of access, and
the ability to share documents across networks. At some point, activity drops
sharply and the document enters a phase when it must be kept, sometimes for many
years, when activity is very low; this is the archival stage.
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The issues at the archival stage are entirely different and relate to safe, long
term storage. Because the volumes are invariably high during this phase both
space and cost are major issues. Microfilm is the only proven, permanent
document storage media.
The Company believes that the future of this marketplace is in hybrid systems
which bridge the gap between these two technologies.
The Aperture Card Market
The segment of the film-based imaging market that addresses large format
engineering drawings is called the aperture card market. The aperture card
market is made up of hardware and software manufacturers, distributors,
maintenance service providers and media and consumables manufacturers. Aperture
Cards are produced by many Departments of Transportation, City and County Plan
and Permit offices, Power Companies, Federal Agencies such as the Bureau of Land
Management. Aerospace companies are required by the Department of Defense to
submit documents in Aperture Card format. U.S. Navy ships and submarines
maintain their engineering drawings in Aperture Card format.
Wet vs. Dry Silver Film - Strategic Advantage
Quintek's products use "Dry Silver" film which requires no chemicals. Older
technologies are based on "Wet Silver" film which requires the cost and
inconvenience of dealing with hazardous chemicals. Management believes that once
the need for chemicals is removed, the advantages of film-based imaging will
drive sales. We also believe that creating awareness of a modern, desktop device
that outputs digital drawings to microfilm with no chemicals will drive sales.
The company believes that there is a large installed base of Wet Silver
technology that is used in "print rooms." A print room is a dedicated area that
has the specialized film-processing and aperture card assembly areas and the
subsequent ventilation and hazardous materials handling equipment. The Quintek
product eliminates the need for such print rooms and their on-going expense.
Product Overview
Products and Services
Quintek's principal product is the Q4400 Desktop Aperture Card Printer. The
Q4400 is used by engineering departments to print directly to Aperture Cards
from digital files in a single step without using chemicals for film
development. Our solution provides a stream of revenues from the following:
Q4400 Aperture Card Printer and upgrades to that system, Quinplot software,
maintenance and blank aperture card media
The Q4400 system is comprised of Quintek's QUINPLOT Software Package and the
Q4400 Aperture Card Printer. The QUINPLOT Software and Q4400 Aperture Card
Printer operate together to provide a complete system for producing Aperture
Cards.
The QUINPLOT Software operates on a standard PC platform under Windows 2000, or
XP and functions to interface the user system and operator with the Q4400
printer. The QUINPLOT operates across the customer's network similar to any
laser printer and is compatible with all standard vector and raster file
formats. The QUINPLOT Software can be used to control and monitor a number of
related functions, including; image queuing, graphics workstation (image
view/mark-up/edit), password protection, drawing release, index data formats,
index data entry and all aspects of the aperture card production cycle. The
QUINPLOT Software is designed to easily adapt to the client's existing workflow,
indexing methods and file formats.
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The Q4400 is packaged in a small, self contained, table-top box which fits well
into office, reprographics, laboratory and CAD/CAM work environments. The Q4400
Printer uses a low power laser to record images directly on Dry Silver film,
which is premounted on blank aperture card media and packaged in light-tight
cassettes. The film is developed using a patented heat process and therefore
requires no chemicals and emits no toxins into the atmosphere. The card is
automatically labeled using an internal print/punch module. The Q4400 is
completely automatic, extremely reliable and can operate unattended until the
blank aperture card media is depleted.
Cost Savings
When comparing the Q4400 to alternative aperture card production methods, the
Q4400 saves the customer money in terms of reducing the following: labor cost,
downtime, hard cost (material), floor space and maintenance cost. Furthermore,
there are no employee health hazards from chemical fumes and spills, no
liability from employee exposure to chemicals/fumes and the added benefit of a
faster "time to market".
When comparing the Q4400 to external service bureaus, customers save money in
terms of reduced material cost (paper, toner, etc.) and labor cost (handling
paper, packaging, shipping, etc). There are no service bureau fees, a shorter
lead time and improved security (confidential drawings can be done in-house).
When using direct output to Aperture Card, the user is expected to gain
substantial cost savings in many areas. For some users, the security issues
related to having immediate on site drawing conversion completed in a secured
area with limited access may provide a great deal of value unrelated to volume.
Also, the efficiency gained by eliminating the bottleneck associated with
service bureaus and conventional conversion results in a faster "time to market"
and greater efficiencies for the resultant products, improving ones competitive
position.
Useful Features/Benefits
The following provides a list of features of the Q4400 system: direct conversion
to aperture card (i.e. no requirement for paper plots) chemical-free operation,
fully automatic operation, compatible with a wide variety of network
configurations, compatible with a wide variety of image & text file formats,
interface can be customized to address the customer's unique application and a
compact modular design.
The following provides a list of benefits of the Q4400 system: provides a
dramatic improvement in efficiency (drawing release & distribution, design
review process, check print and a back-up of digital data base), reduced "time
to market" improves user's competitive posture and it eliminates health risk
from employee's exposure to chemicals and fumes.
Patents and Trademarks
The Q4400 system is protected under the following patents and trademarks:
US Patents
Patent Expiration
Number Date Name/Description
--------- ---------- ----------------
4,794,224 04/09/07 Dry Film Developer for an Aperture Card Printer
4,818,950 04/24/07 Low Jitter Phase-Locked Loop (internal circuit board)
4,841,343 03/25/08 Dry Film Development Process for an Aperture Card Printer
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Trademarks
"Quintek" (Logo design), the mark, was registered on the Patent and Trademark
Office principal register as U.S. registration No. 2,604,712 on August 6, 2002.
Sales and Marketing
Quintek's CFM Business Unit is primarily engaged in the service and maintenance
of the installed base of Q4300 and Q4400 Aperture Card Printers. The company
sells maintenance contracts on the installed base of Q43/44XX printers for
$10,200. The Company sells upgrades to upgrade the installed base of printers to
Windows XP/2000 for $5000.00. The Company sells extended software features to
the Q43/44XX printers for $5000.00.
Quintek has determined that in order to grow sales, a redesign of the Q43/44XX
printer is required. New management determined that this investment would be at
least $250,000. new management has decided that it is in the best interests of
Quintek's shareholders to wait until the new QSI services division is profitable
before proceeding with investment in the Chemical-Free Microfilm technology.
Manufacturing
Prior to March, 2003, Quintek was dependent upon Kitron / Bofos for
manufacturing the 4305 Printer. Since March, 2003, all 4305 printers have been
made in Quintek's Idaho facility. As of this writing, Quintek has been unable to
obtain the tooling for the 43/44XX printers from Kitron. Kitron believe it is
owed $100,000 and will not return Quintek's property. Quintek disputes this
debt.
Quintek's supplier of replacement ribbons has discontinued that line of
business. Quintek is not currently in possession of tooling for manufacturing
new ribbons. Quintek has determined that setting up new tooling for ribbons
would cost at least $20,000.
The Company believes that the Montpelier, Idaho facility will be able to meet
current demand for its products and services. Quintek has been working with a
variety of suppliers for Q4305 and other parts. These suppliers are located
throughout the United States. The Company believes that this will help to insure
stability and reduce risk through the lack of reliance upon any single
suppliers.
Competition
The Company believes that it is the only manufacturer of a chemical-free desktop
aperture card printer. There are other aperture card printing devices available.
Both of the competitive devices the Company is aware of, are manufactured
outside of the United States. Microbox AG, based in Germany has sold a wet
CADMIC Aperture Card Plotter. Quintek believes that this product has been on the
market for the past decade. This product is a large unit that weighs roughly 772
pounds. It requires the constant replenishment and disposal of hazardous
chemicals, has specialized ventilation, plumbing and electrical requirements,
and is labor intensive to operate. Quintek was recently made aware of a Dry
CADMIC Plotter being produced by Microbox. Quintek believes that this is also a
large unit that has specialized electrical requirements, is labor intensive to
operate and not nearly as versatile as Quintek's Q4400. To the Company's
knowledge, the Dry CADMIC Plotter produced by Microbox is currently sold in the
United States by only one distributor.
Wicks and Wilson, based in the United Kingdom, also manufactures an aperture
card plotter. Their product is similar in size to the Q4400. It requires the
constant replenishment and disposal of hazardous chemicals, has specialized
ventilation, plumbing and electrical requirements, and is labor intensive to
operate. To the Company's knowledge, Wicks and Wilson has only one distributor
in the United States.
22
ITEM 2 DESCRIPTION OF PROPERTY
On July 31, 2004, we terminated our lease at 537 Constitution Avenue, Suite B,
Camarillo, California.
We lease 7,090 square feet for our executive and QSI sales and production
offices at 17951 Lyons Circle, California. The lease expires on June 30, 2008,
with an option to extend it for four years. Our current monthly lease rate on
this facility is $7485.72
We rent, on a month-to-month basis, 1,800 square feet of office and warehouse
space at 720 N. 4th Street, Montpelier, Idaho, to manufacture our products and
service our customers. Our current monthly rent is $1,384.
ITEM 3 LEGAL PROCEEDINGS
On April 16, 2004, Decision One Corporation filed suit in the County of Bannock,
Idaho against us for $22,661.56 for goods provided. Since 2000, Decision One
(formerly Imation) has been both a vendor to Quintek and a reseller of Quintek's
Q4300 Printers. Quintek filed a counterclaim on August 1, 2004. We assert that
Decision One used their authority as a dealer of our product to disparage us, in
violation of their dealer agreement and we lost hundreds of thousands in
business because of it.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on June 30, 2004
As of the close of business May 14, 2004, the record date of this meeting and
reported the total number of shares outstanding and entitled to vote as
48,884,994. The correct number of shares represented at this meeting was
41,055,287, 84.22% of total shares outstanding. Votes were cast on the following
matters.
1. Robert Steele and Andrew Haag were elected directors of the company to
serve for the ensuing year and until their successors are elected and
qualify.
2. Kabani & Co., Certified Public Accountants, was appointed as the
independent auditors of the company having received the required
percentage of votes.
3. The proposal to increase the number of authorized shares of common
stock to 200,000,000 received the required percentage of votes.
4. The proposal to authorize the Board of Directors to divide the
Preferred Stock into any number of classes or series, fix the
designation and number of shares of each such series or class, and
alter or determine the rights, preferences, privileges and restrictions
of each class or series of Preferred Stock not yet issued received the
required percentage of votes.
5. The proposal to authorize a quorum for any shareholder meeting to be at
least one third of the shares entitled to vote received the required
percentage of votes.
6. The proposal to adopt the Quintek Technologies, Inc. 2004 Stock Option
Plan received the required percentage of votes.
23
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
5.1 Market for Common Stock
Since January 14, 1999, our common stock has traded on the OTC Bulletin Board
(symbol "QTEK"). On September 30, 2004, there were 495 listed shareholders of
record and 2365 non-objecting owners of the stock. The high and low bid prices
per share for our stock for each quarter commencing July 1, 2001 and ending June
30, 2004 are listed below. The high and low bid prices per share for our stock
for the quarter ending September 30, 2004 were $0.20 and $0.12, respectively.
This information was obtained from Media General Financial Services and Reuters.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
High Low High Low High Low High Low
FY2002 $0.11 $0.05 $0.39 $0.05 $0.50 $0.09 $0.47 $0.07
FY2003 $0.14 $0.03 $0.13 $0.02 $0.07 $0.03 $0.19 $0.03
FY2004 $0.17 $0.09 $0.19 $0.10 $0.26 $0.13 $0.20 $0.12
The quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
5.2 Dividends
We presently intend to retain future earnings, if any, to provide funds for use
in the operation and expansion of our business. Accordingly, we have not
declared or paid any dividends to our common shareholders and do not presently
intend to do so. Any future decision whether to pay dividends will depend on our
financial condition and any other factors that our Board of Directors deems
relevant.
5.3 Securities Authorized for Issuance Under Equity Compensation Plans
Our Chief Executive Officer and Chief Financial Officer entered into employment
agreements on January 31, 2003 with the Company which grants each of them the
right to earn substantial equity compensation from the Company. Pursuant to the
employment agreements, the Company has agreed to sell to each of them stock (or
grant to each rights to purchase additional shares of common stock) at $0.03 per
share such that, including all options or shares previously issued to or
purchased by each of them, each would own, in the aggregate, shares of common
stock or rights to purchase shares of common stock representing ten percent
(10%) of the current outstanding common stock of Quintek, on a fully-diluted
basis after taking into account the issuance of such additional shares to each
officer and assuming the issuance of all other shares subject to currently
outstanding options or warrants. The employment agreements state that the
agreement(s) specifically granting the shares to be purchased by the officers
will have, at minimum, new termination and repurchase provisions, with the
termination provisions to be consistent with new termination and repurchase
provisions set forth in this Agreement. The agreement(s) also will contain
provisions providing the officers with pre-emptive rights to purchase additional
shares of common stock under certain circumstances. Options to the two officers
shall vest according to the following schedule: Right of each to purchase two
and a half percent (2.5%) of outstanding common stock, upon the authorization of
additional shares by the shareholders of Quintek; assuming that authorization of
more shares is approved by the shareholders of the Company, options giving each
of the officers the right to purchase an additional two and a half percent
(2.5%) of outstanding common stock at the time of grant, will be granted upon
the one (1) year anniversary of each officer's employment agreement for the
following three (3) years. In the event of a sale of Quintek, termination of the
officers' employment agreements by the Company, or any other event that may
impede Quintek's ability to fulfill its obligations under the officers'
employment agreements, all options will be immediately vest.
24
Our President entered into employment agreements on March 12, 2004 with the
Company which grants him the right to earn substantial equity compensation from
the Company. QUINTEK will sell him additional shares of common stock (or grant
to him rights to purchase additional shares of common stock) in QUINTEK so that,
including all options or shares previously issued to or purchased by him, he
would own, in the aggregate, shares of common stock or rights to purchase shares
of common stock representing five percent (5%) of the current outstanding common
stock in QUINTEK on a fully-diluted basis after taking into account the issuance
of such additional shares to him and assuming the issuance of all other shares
subject to currently outstanding options or warrants. The purchase price for
such shares (or the exercise price for such options) will be equal to seventy
five percent (75%) of the five day closing average price of the Company's common
stock immediately prior to the execution of this Agreement, but they have
otherwise not as yet determined how such additional shares and/or options will
be issued to him. It is contemplated that QUINTEK and Mr. Brownell will enter
into a separate agreement or agreements on these additional shares and/or
options within 90 days of the date of this Agreement (or upon the authorization
of additional shares by the Shareholders of Quintek.. Specifically, it is
presently anticipated that the new stock agreement(s) will have, at minimum, new
termination and repurchase provisions, with the termination provisions to be
consistent with the termination provisions set forth in this Agreement. The
agreement(s) also will contain provisions providing him with pre-emptive rights
to purchase additional shares of common stock of QUINTEK under certain
circumstances. Options shall vest according to the following schedule: Right to
purchase 1.25% of outstanding common stock, upon the authorization of additional
shares by the Shareholders of Quintek, assuming that authorization of more
shares is approved by the shareholders of the Company, options giving him the
right to purchase an additional 1.25% of outstanding common stock at the time of
grant, will be granted to him upon the 1 year anniversary of this Agreement for
the following three years. In the event of a sale of QUINTEK, or any other event
that may impede QUINTEK's ability to fulfill its obligations under this
Agreement, all options will immediately vest.
5.4 Recent Sales of Unregistered Securities
To satisfy stock purchase agreement totaling $1,946,000, Quintek issued
14,000,000 shares of common stock at $0.139.
The company sold stock totaling $105,000, Quintek issued 1,500,000 shares of
common stock to two entities.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our revenues totaled $298,653 and $388,888 for the twelve months ended June 30,
2004 and 2003, respectively, a decrease of $90,235 (23%) in 2004 due primarily
to changing the company's sales focus to the services business.
For the twelve months ended June 30, 2004 and 2003, cost of revenue was $184,964
and $261,050 respectively, a decrease of $76,086 (29%). Our cost of revenue for
both periods consisted mostly of labor and production costs. Cost of revenue
decreased in 2004 due to decreased revenues from changing the company's sales
focus to the services business.
Operating expenses totaled $1,083,246 for the twelve-month period ended June 30,
2004 as compared to $822,273 for the prior twelve-month period. The $260,973
(24%) increase in operating expenses is due primarily to investment in the new
services business.
25
We incurred no acquisition expenses in the twelve months ended June 30, 2004 and
2003, respectively.
During the 12 month period ending June 30, 2004, we sold one contract for
document services, (19) customer service contracts, (9) network upgrades, (1)
unit of QuinPlot software, and 154,000 aperture cards. We expect to continue
generating sales revenue from these products in the future.
For the twelve months ended June 30, 2004 and 2003, Total Assets equaled
$147,275 and $214,006 respectively, a decrease of $66,731 (31%) primarily due to
a decrease in accounts receivable, intangible assets and investments.
For the twelve months ended June 30, 2004 and 2003, Total Current Liabilities
equaled $2,177,580 and $1,458,364, an increase of $719,216 (49%) primarily due
to financing to grow the business. Quintek executed a financing agreement for a
total of $500,000 in convertible notes to KMVI.
For the twelve months ended June 30, 2004 and 2003, Accounts payable and accrued
expenses equaled $438,826 and $316,924 (the sum of $116,609 and $200,315),
respectively, an increase of $121,902 (38%) primarily due to accrued legal
expenses, leases purchases and office relocation costs to facilitate new revenue
streams.
For the twelve months ended June 30, 2004 and 2003, Loans payable from
stockholders equaled $244,056 and $32,300 respectively, an increase of $211,756
(650%) primarily due to stockholders loaning free trading shares to the Company
to facilitate financing to move the business forward.
For the twelve months ended June 30, 2004 and 2003, Factoring payable equaled
$43,230 and $146,890, respectively, a decrease of $103,660 (70%) due to the
Company making these payments.
We are currently in default on two outstanding promissory notes totaling
$62,495. Interest continues to accrue against the principal. The notes are
unsecured. The holders of the bonds that are in default have indicated that they
do not want to convert their debt to stock and wish to be repaid in cash. At
present we do not have the funds to repay the indebtedness. We do not know
whether we will be able to repay or renegotiate this debt. If we are unable to
cure the default or renegotiate our debt, we may not be able to continue as a
going concern.
We owe $97,000 in payroll withholding taxes that are past due.
Liquidity and Capital Resources
We have historically financed operations from the sale of common stock and the
conversion of common stock warrants. At June 30, 2004, we had cash on hand of
$15,600 and working capital of $(2,127,979) as compared to cash on hand of
$21,162 and working capital of $(1,351,096) at year-end, June 30, 2003.
Net cash used in operating activities of $ (595,947) for the twelve months ended
June 30, 2004, is attributable primarily to a net loss of $(998,531) increases
in Accounts payable and accrued expenses of $119,040, increases in Payroll and
payroll taxes payable of $51,023, Depreciation and amortization of $50,730, a
decrease in Accounts receivable of $44,382 and an increase in deferred revenue
of $46,006.
There was no Net cash provided by investing activities for the twelve months
ending June 30, 2004.
Net cash provided by financing activities was $590,385 for the twelve months
ending June 30, 2004. The increase is primarily attributable to proceeds from
notes of $500,000, loans from stockholders of $211,756 coupled with a net
paydown of factoring payables of $103,660.
26
On August 4th, 2004 Quintek entered into an agreement with the private equity
fund, Golden Gate Investors, based in San Francisco, CA to provide Quintek with
$3.3 million in capital. This capital will allow Quintek to move forward and
execute its growth plans.
The deal is structured as two year $300,000 convertible notes paying 5 3/4%
interest and 3,000,000 warrants to purchase common stock for a period of three
years at $1.00. The "Conversion Price" shall be equal to the lesser of (i)
$0.50, or (ii) 80% of the average of the 5 lowest Volume Weighted Average Prices
during the 20 Trading Days prior to Holder's election to convert, or (iii) 80%
of the Volume Weighted Average Price on the Trading Day prior to Holder's
election to convert market price of Quintek's common stock prior to conversion.
Upon conversion of the note, the fund is obligated to simultaneously exercise
the $1.00 warrants providing added funding to the company. The Warrant must be
exercised concurrently with the conversion of this Debenture in an amount equal
to ten times the dollar amount of the Debenture conversion.
On August 17th, 2004 the company entered into a Securities Purchase Agreement
with an individual investor to purchase two (2) convertible debentures each for
one hundred thousand dollars ($100,000) paying ten percent (10%). The initial
Debenture was purchased at closing. The second Debenture will be purchased
within five days of a registration statement being declared effective covering
the Conversion Shares and Warrant Shares. Debentures are convertible into the
Common stock of the Company. Conversion Price per share shall be the lower of
(i) $0.10 ("Maximum Base Price"); or (ii) in the event the Borrower enters into
an agreement subsequent to execution of the Securities Purchase Agreement to
sell Common Stock or a convertible instrument that converts into Common Stock
prior to conversion of this Debenture at a price less than the Conversion Price
of this Debenture, then the Conversion Price of this Debenture shall be
immediately reset to a lower Conversion Price equal to that described in the
subsequent agreement. Warrants are exercisable at $0.12 into the Common Stock of
the Company and expire on August 17, 2007.
On July 29th, 2004 Quintek entered into an Agreement with LANGLEY PARK
INVESTMENTS PLC, a London Investment Company to issue 14,000,000 shares of QTEK
to Langley in return for 1,145,595 shares of Langley. Fifty percent of Langley
shares issued to Quintek under this agreement are to be held in escrow for two
years. At the end of two years if the market price for Quintek common stock at
or greater than the Initial Closing Price escrow agent will release the full
amount. In the event that the market price for Quintek common stock is less than
the Initial Closing Price the amount released will be adjusted.
Langley is in the process of attaining listing with the United Kingdom Listing
Authority. Langley's initial offering price is 1(pound) (One Pound UK per
share). Quintek shares are to be held by Langley for a period of at least two
years. Langley shares issued to Quintek are to be free trading. In the event
that this transaction does not close the 14,000,000 shares of Quintek held in
escrow are to be returned to the Company.
It is estimated that this transaction is expected to be completed and listing
achieved by September 30, 2004.
On July 27th, 2004 the Company entered into a Securities Purchase Agreement with
an individual investor. This investor purchased a convertible debenture for
fifty thousand dollars ($50,000) paying ten percent (10%). The Debenture was
purchased at closing. This Debenture was converted into the Common Stock of the
Company at a price of $0.10. Warrants are exercisable into at $0.15 into the
Common Stock of the Company and expire on July 27th, 2007.
27
On August 2, 2004, Quintek signed a Master Lease Agreement with Vencore
Solutions, LLC, a venture leasing company located in Lake Oswego, Oregon. Under
the agreement Quintek established a lease line of credit for up to $240,000 in
equipment financing. This is a capital lease where Quintek pays monthly rental
rate equal to 3.45% of the total hardware purchases and 6.35% of the total
software purchases. The lease term for hardware purchases is 36 months and 18
months for software. The effective annual interest rate is roughly 8%. Purchases
made will be recognized both as an asset and as a liability (for the lease
payments) on the balance sheet. The firm gets to claim depreciation each year on
the asset and also deducts the interest expense component of the lease payment
each year. At the end of the lease, Quintek has the option to purchase the
equipment or return it. Vencore Solutions received 144,000 warrants for Quintek
common stock at $0.10, expiring on August 2, 2007.
We believe that the receipt of net proceeds from the sale of the common stock
and the exercise of common stock warrants plus cash generated internally from
sales will be sufficient to satisfy our future operations, working capital and
other cash requirements for the remainder of the fiscal year. However, if we are
unable to raise sufficient capital, we may need to sell certain assets, enter
into new strategic partnerships, reorganize the company, or merge with another
company to effectively maintain operations. Our audit for the years ended June
30, 2004 and 2003 contains a going concern qualification.
ITEM 7 FINANCIAL STATEMENTS
See pages F-l, et seq., included herein.
ITEM 8 CHANGES IN AND DISAGREEEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
Board of Directors and Executive Officers
Our board of directors consists of two members. Directors are elected at the
Annual Meeting of Shareholders and serve until their successors have been
elected and qualified. Officers are appointed by and serve at the discretion of
the Board of Directors.
The following is a summary description of our current directors, executive
officers and significant employees:
Robert Steele, Age 38, Chief Executive Officer and Director
-----------------------------------------------------------
Robert Steele has been the Company's Chief Executive Officer, President, and
Chairman of the Board of Directors since January 30, 2003. For nine years, from
1988 through 1998, Mr. Steele served as Corporate Vice President & Chief
Technology Officer for CADD Microsystems, Inc. (CMI), currently the leading
provider of Autodesk Computer Aided Design software, consulting, training and
integration services in the Washington, DC Metropolitan Area. During his time at
CMI, the company grew from $50,000 in annual sales to more than $3,000,000. Mr.
Steele sold and supervised significant systems integration contracts with
clients such as Lucent Technologies, Long Airdox Mining (Division of the Fortune
500 Marmon Group), ABB, GSA (General Services Administration), FAA (Federal
Aviation Administration) and NRO (National Reconnaissance Office). Mr. Steele
received a Bachelor of Science in Electronic and Computer Engineering from
George Mason University in 1988.
28
Robert Brownell, Age 49, President
----------------------------------
Robert Brownell has been the Company's President since March 2004. Mr. Brownell,
has nearly 25 years experience within the Document Management field. Mr.
Brownell has more than 20 years experience selling outsourcing at the executive
level. His experience ranges from building private companies from start-up to
over $16 million in annual revenues to managing operations and sales forces of
public companies generating roughly $50-$500 million in annual revenues. Mr.
Brownell has a degree in Business Administration and Marketing Management from
Mount San Antonio College.
Mr. Brownell was Vice President, Worldwide Channel Sales for Document Control
Solutions, Inc., of Fullerton, CA. Document Control Solutions is one of the
nation's leading document management systems integrators with revenues of more
than $15 million dollars. Mr. Brownell directed all company sales and marketing,
administrative infrastructure, project managers and sales engineers. He designed
and implemented highly structured business plan which resulted in increased
sales and profits beyond company expectations. He led the effort that doubled
revenues over three consecutive years. He was personally presented the FileNET
Dealer of the Year award in 1997.
In the 1980's, Mr. Brownell was Branch Manager, TAB Products Company of Los
Angeles, CA. TAB is a worldwide leader in records and information management
systems for active documents. Mr. Brownell had profit and loss responsibility
for Los Angeles office with a staff of thirty sales, administrative and service
personnel. He grew sales from $500,000 to $5,000,000 over five years.
Andrew Haag, Age 37, Chief Executive Officer and Director
---------------------------------------------------------
Andrew Haag has been the Company's Chief Financial Officer and a Director since
January 31, 2003. Prior to that, from December 2002, he was employed by the
Camelot Group, Inc., an investment banking firm, to assist its corporate clients
on capital structure, the structure of PIPE transactions and the preparation of
offering documents. From May 2001, Mr. Haag was employed by Aquasearch, Inc., a
publicly held company, where he raised significant funds from private sources,
advised its CEO on strategic business development issues and successfully
negotiated several contracts to benefit the company. Mr. Haag assisted in
drafting corporate business plan, terms of investment, press releases and other
corporate documents. From November 1998 through April 2001 he was employed by
Nutmeg Securities, Ltd., where he advised institutional and individual clientele
on corporate offerings and equity trading, and performed corporate advisory work
for both public and private companies. From June 1998 through October 1998 Mr.
Haag was a Managing Director of Waldron & Co. Inc., an investment bank located
in Irvine, CA.
From 1992 through 1998 he was employed by Auerbach, Pollak & Richardson,
investment bankers, located in Stamford, CT and Beverly Hills, CA, rising to
Managing Director, where he: assisted in the development of the firm, attracting
and referring new hires and clients to all offices; developed a national and
international client base for the firm that participated in a majority of the
firm's corporate offerings; set up and managed road shows for firm's corporate
clientele; attracted a wide variety of corporate clientele; assisted in the
structuring and funding of offerings for corporate clientele; and increased
visibility of the firm through networking of research and offerings. Mr. Haag
attended the University of Maine and CUNY Hunter College.
Senior management has significant incentive to stay with the company to execute
this plan through stock option grants vesting over a four year timeframe.
Compensation detail is available in the Company's public filings.
Experienced Staff
Quintek has attracted staff members with experience in sales & marketing,
operations and administration. Chris de Lapp, Senior Account Executive,
served from 1995 to 2002 as Senior Business Development Manager for
29
Affiliated Computer Services, Inc. (NYSE:ACS), a $6.5 billion dollar
provider of Business Process Outsourcing (BPO) and Information Technology
(IT) solutions. Sam Contreras, Operations Manager, has more than ten years
operations experience completing jobs in this space for major corporations
covering all verticals. Laura Reiter, Project Manager, has more than ten
years experience in providing efficiency studies and administrative support
for two national service providers.
9.2 Compensation of Directors
All of our directors are full time employees of Quintek. Because we have no
independent directors, we pay no compensation to any directors for their service
on the board over and above their employment compensation. There are no family
relationships among the directors or executive officers.
9.3 Management Committees
We have not established compensation or executive committees. Currently, our
entire board of directors serves as our audit committee. Because of the small
size of the Company and the risk attendant to a small public company, we are
currently unable to attract an audit committee financial expert to our Board of
Directors.
9.4 Section 16(a) Beneficial Ownership Reporting Compliance
To our knowledge, Robert Steele, a current director and Chief Executive Officer,
and Andrew Haag, a current director and Chief Financial Officer, have filed a
Form 3 to report their appointment to our Board of Directors or as an officer of
our Company.
9.5 Code of Ethics
On June 10, 2003 our board of directors adopted a code of ethics, a copy of
which is filed as an exhibit to this report on our 2003 Form 10-KSB, that
applies to our principal executive and financial officers. We intend to
file amendments, changes or waivers to the code of ethics as required by
SEC rules.
ITEM 10 EXECUTIVE COMPENSATION
ITEM 10 EXECUTIVE COMPENSATION
None of our executive officers received a total annual salary and bonus of more
than $100,000 for the year ended June 30, 2003. The following table summarizes
the yearly compensation of our past and current President for the three years
ended June 30, 2003.
30
----------------- Annual Compensation ------ ---------- Long Term Compensation -------------
Securities
Other Annual Restricted Underlying All Other
Name Year Salary Compensation (3) Stock Awards Options Compensation
---- ---- ------ ---------------- ------------ ----------- ------------
Tom Sims FY2003 $ 19,400 $ 1,570 -- -- --
President FY2002 $ 19,500 $ 6,106 $ 68,000 (4) -- --
Robert Steele
Chairman &CEO FY2004 $ 72,000 -- -- -- --
President FY2003 $30,000 (1) $ 2,500 -- -- --
Andrew Haag FY2004 $ 72,000 -- -- -- --
CFO FY2003 $30,000 (5) -- -- -- --
Robert Brownell FY2004 $37,500 (2) -- -- -- --
President
Notes:
1) Represents compensation received by Steele while serving as our President &
CEO from 2/1/03 to 6/30/03 2) Represents compensation received by Brownell
while serving as our President from 3/12/04 to 6/30/04
3) These amounts represent the Company's payments to provide an automobile and
health insurance for Mr. Sims and Mr. Steele.
4) This represents an issuance of 200,000 shares of restricted common stock
valued at $0.06 per share and 800,000 shares of restricted common stock
valued at $0.07 per share to or for the benefit of Tom Sims
5) Represents compensation received by Mr. Haag while serving as our CFO from
2/1/03 to 6/30/03.
No Stock Options Were Granted in Fiscal 2003
Quintek did not grant any stock options or stock appreciation rights or
Long-Term Incentive Plan Awards to its officers or employees, in the fiscal year
ended June 30, 2004.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the ownership of our common stock, as of
September 9, 2004 by our directors and significant shareholders. On September 9,
2004, 200,000,000 shares of our stock were authorized and approximately
70,068,566 shares of our common stock were outstanding. This information was
given to us by the transfer agent and the numbers are based on definitions found
in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934.
Shareholder Title Shares %
----------- ----- ------------ -----
Officers, Directors and Key Employees
Robert Steele, CEO and Chairman (1) (2) CEO & Chairman 3,275,297 4.7%
Robert Brownell, President (3) (4) President 861,062 1.2%
Andrew Haag (5) (6) CFO, Director 3,275,297 4.7%
Kurt Kunz (7) Founder / VP Engineering 3,825,429 5.5%
Key Investors
Zubair Kazi Investor 4,428,572 6.3%
Institutional Ownership
Langley Park Investments PLC Investor 14,000,000 20.0%
Golden Gate Investors (8) Investor 3,000,000 4.3%
31
(1) 2,275,297 options to purchase stock at .03 good till September 8, 2009
(2) 1,000,000 Series A Preferred Stock Convertible into common on a 1
for 1 basis (3) 611,062 options to purchase stock at .10 good till
September 8, 2009 (4) 250,000 Series A Preferred Stock Convertible into
common on a 1 for 1 basis (5) 2,275,297 options to purchase stock at
.03 good till September 8, 2009 (6) 1,000,000 Series A Preferred Stock
Convertible into common on a 1 for 1 basis
(7) Includes 142,857 warrants to purchase common stock at $0.13 and
1,100,000 warrants to purchase common stock at $0.175.
(8) 3,000,000 options to purchase common stock at $1.00 good until August
2, 2007.
In addition, the company has 495 shareholders of record and 2365 non-objecting
owners of the stock.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 12 Certain Relationships and Related Transactions
(1) To satisfy stock purchase agreement totaling $1,946,000, Quintek issued
14,000,000 shares of common stock at $0.139.
(2) To satisfy payment of a consulting agreement for 60 days of service, Quintek
issued 300,000 shares of common stock.
(3) To a conversion pursuant to a note purchase agreement for $50,000, Quintek
issued 500,000 shares of common stock at $0.10.
(4) To satisfy repayment of loans from stockholders totaling $211,056, Quintek
issued 4,682,572 shares of common stock, 1,800,000 warrants to purchase common
stock at $0.175 expiring 11-6-08, 100,000 warrants to purchase common stock at
$0.16 expiring 6-24-06, and 142,857 warrants to purchase common stock at $0.13
expiring 7-23-06 and 400,000 warrants at $0.175 expiring 11-7-08 to three
entities.
(5) The company sold stock totaling $105,000, Quintek issued 1,500,000 shares of
common stock to two entities.
(6) As compensation for investor relations services, Quintek issued 500,000
shares of common stock to one entity.
(7) As compensation for eleven months of consulting services, Quintek issued
243,888 shares of common stock to one entity.
(8) As compensation for research services, Quintek issued 150,000 shares of
common stock to one entity.
(9) To satisfy a conversion of a $20,000 note from Bernadette Haag, Quintek
issued 200,000 shares of common stock at $0.10. Mrs. Haag is the mother of
Andrew Haag, CFO.
(10) To satisfy an employment agreement, Quintek issued 300,000 shares of common
stock.
(11) As compensation for investor relations services, Quintek issued 50,000
shares of common stock.
(12) To satisfy repayment of loans from stockholders totaling $32,300 Quintek
has agreed to issue 400,000 shares of common stock, as part of this agreement
Quintek is forgiving $6,000 owed to the Company by this stockholder.
32
(13) To satisfy back payroll and all monies due to prior managements and
employees of Quintek totaling $252,213 the Company issued 1,006,854 shares of
Series A Preferred stock convertible into Common Stock on a share for share
basis with a liquidation preference of $0.25 per share.
(14) To satisfy employment contracts for three executives Quintek issued
2,250,000 shares of Series A Preferred stock. The Series A Preferred Stock is
convertible into Common Stock on a one for one basis and has a liquidation
preference of $0.25 per share.
(15) To satisfy a past due investor relations agreement, Quintek issued 32,000
Shares of Series B Preferred Stock and 175,000 shares of common stock to one
entity. The Series B Preferred Stock is convertible into Common Stock on a five
for one basis and has a liquidation preference of $0.25 per share.
(16) To satisfy loans in default totaling $162,064 Quintek issued 648,255 Shares
of series B preferred stock to investors. The Series B Preferred Stock is
convertible into Common Stock on a five for one basis and has a liquidation
preference of $0.25 per share.
(17) To satisfy loans in default totaling $36,204 Quintek issued 724,077 shares
of Series A preferred stock to investors. The Series A Preferred Stock is
convertible into Common Stock on a one for one basis and has a liquidation
preference of $0.25 per share.
(18) To satisfy aged accounts payable totaling $20,148 the Company issued 20,148
shares of Series C Preferred stock. The Series C Preferred Stock is convertible
into Common Stock on a twenty for one basis and has a liquidation preference of
$1.00 per share.
(19) As compensation for consulting services, Quintek issued 250,000 shares of
common stock. The services were not performed and the stock is being returned.
(20) As payment of interest under a purchase order financing agreement, Quintek
issued 14,291 shares of common stock.
(21) To satisfy conversion of a note for $106,421.71, Quintek issued 1,773,695
shares of common stock at $0.06 per share.
Class L Warrants have been offered to holders of Class J Warrants as part of an
exchange program in which one Class L Warrant is exchanged for two Class J
Warrants. Quintek will issue 3,063,432 Class L warrants at a Strike Price of
$0.25, with a Term of 1 year using Series A Preferred Stock as Underlying stock
convertible to common stock at a ratio of 1:1.
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
13.1 Exhibits
Exhibit 1. Employment Agreement between Quintek Technologies, Inc. and Robert
Brownell dated March 12, 2004.
13.2 Reports on Form 8-K
On June 7, 2004 we filed a report on Form 8-K that described that on Wednesday,
June 2, 2004, Quintek was awarded certification as an Imaging Partner with an
international provider of outsourced records and information management.
On April 7, 2004 we filed a report on Form 8-K that described that the Company
appointed Kabani & Company, Inc., Certified Public Accountants as its new
independent public accountants.
33
On March 31, 2004 we filed a report on Form 8-K that described that in January
the Company announced a new President and a new division of the Company, Quintek
Services, Inc. (QSI) to perform Business Process Outsourcing (BPO) services.
On March 24, 2003 we filed a report on Form 8-K that described that he decision
of our prior auditors, HMV, to resign did not involve a dispute with the Company
over accounting policies or practices.
On February 9, 2004 we filed a report on Form 8-K that disclosed that the
Company has recently developed a plan to position Quintek as a mass storage
vendor.
On January 2, 2004 we filed a report on Form 8-K that stated that our Board of
Directors repealed the Company's existing bylaws and adopted an entire new set
of bylaws ("2004 Bylaws"), replacing the previous bylaws.
On June 30, 2003 we filed a report on Form 8-K that stated that on June 2, 2003,
Kazi Management VI, LLC ("KMVI") and Quintek Technologies, Inc. ("Quintek")
entered into a Purchase Financing Agreement ("Agreement").
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed by the Company's auditors for professional services
rendered in connection with the audit of the Company's annual consolidated
financial statements for fiscal 2004 and 2003 and reviews of the consolidated
financial statements included in the Company's Forms 10-QSB were $20,375 for
2003 and $20,000 for 2004.
Audit-Related Fees
For fiscal 2004 and 2003, the Company's auditors did not bill any fees for
assurance and related services that are reasonably related to the performance of
the audit or review of the Company's financial statements and are not reported
under "Audit Fees" above.
Tax Fees
No fees were billed by the Company's auditors for professional services for tax
compliance, tax advice, and tax planning for fiscal 2004 and 2003, respectively.
All Other Fees
No fees were billed by the Company's auditors for all other non-audit services
rendered to the Company, such as attending meetings and other miscellaneous
financial consulting, in fiscal 2004 and 2003.
Audit Committee
The audit committee meets prior to filing of any Form 10-QSB or 10-KSB to
approve those filings. In addition, the committee meets to discuss audit plans
and anticipated fees for audit and tax work prior to the commencement of that
work. Approximately 100% of all fees paid to our independent auditors for fiscal
2004 are pre-approved by the audit committee.
34
SIGNATURES
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 hereunto duly authorized.
Date: September 30, 2004 QUINTEK TECHNOLOGIES, INC.
By: /s/ Robert Steele
--------------------------------------
Robert Steele, Chief Executive Officer
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 indicated.
Date: September 30, 2004 /s/ Robert Steele
---------------------------------------
Robert Steele, Chief Executive Officer
and Director
Date: September 30, 2004 /s/ Andrew Haag
---------------------------------------
Andrew Haag, Chief Financial Officer
and Director
35
QUINTEK TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
JUNE 30, 2004
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Quintek Technologies, Inc
We have audited the accompanying balance sheet of Quintek Technologies, Inc (a
California Corporation) as of June 30, 2004 and the related statements of
operations, stockholders' deficit and cash flows for the year 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 audit.
We conducted our audit of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). 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
audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Quintek Technologies, Inc as of
June 30, 2004 and the results of its operations and its cash flows for the year
ended June 30, 2004 in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 21 to the
combined financial statements, the Company's significant operating losses and
insufficient capital raise substantial doubt about its ability to continue as a
going concern. Management's plans regarding those matters also are described in
Note 21. The combined financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ KABANI & COMPANY, INC.
---------------------------------
Fountain Valley, California
September 21, 2004
F-1
QUINTEK TECHNOLOGIES, INC.
BALANCE SHEET
JUNE 30, 2004
ASSETS
------
CURRENT ASSETS:
Cash & cash equivalents $ 15,600
Accounts receivable (net of allowance for doubtful accounts
$15,179) 28,736
Prepaid expenses 5,264
--------
Total current assets 49,600
PROPERTY AND EQUIPMENT, net 73,419
OTHER ASSETS:
Deposits 8,416
Intangible assets, net 14,951
Other assets 889
--------
$147,275
========
The accompanying notes are an integral part of these financial statements.
F-2
>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable & accrued expenses $ 438,826
Factoring payables 43,230
Payroll and payroll taxes payable 187,138
Payroll taxes assumed in merger 96,661
Current portion of long-term debt 47,504
Loans payable-stockholders 244,056
Convertible bonds 62,495
Convertible notes 500,000
Deferred revenue 87,040
Liabilities in process of conversion to stock 470,629
------------
Total current liabilities 2,177,580
Long term debt , net of current portion 63,379
STOCKHOLDERS' DEFICIT
Common stock, .001 par value; authorized shares 50,000,000
issued and outstanding shares 48,749,994 487,500
Additional paid in capital 20,475,680
Shares to be issued-Series A Preferred stock, 250,000 shares 40,000
Unamortized consulting fees (35,798)
Accumulated deficit (23,061,065)
------------
Total stockholders' deficit (2,093,683)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 147,275
============
The accompanying notes are an integral part of these financial statements.
F-4
QUINTEK TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
2004 2003
------------ ------------
Net revenue $ 298,653 $ 388,888
Cost of revenue 184,964 261,050
------------ ------------
Gross profit 113,689 127,838
Operating expenses
Selling, general and administrative 960,209 601,090
Inventory write off 35,259 --
Impairment - investment 28,778 --
Stock based compensation for services 59,000 221,183
------------ ------------
Total Operating Expenses 1,083,246 822,273
------------ ------------
Loss from Operations (969,557) (694,435)
Non-operating income (expense):
Gain on investments 16 19,792
Other income 157 17,500
Interest income 11,136 --
Interest expense (39,483) (43,910)
------------ ------------
Total non-operating income (expense) (28,174) (6,618)
------------ ------------
Loss before provision for income taxes (997,731) (701,053)
Provision for income taxes 800 --
------------ ------------
Net loss $ (998,531) $ (701,053)
============ ============
Basic and diluted net loss per share $ (0.02) $ (0.01)
============ ============
Basic and diluted weighted average shares outstanding 48,164,549 46,762,008
============ ============
The accompanying notes are an integral part of these financial statements.
F-5
QUINTEK TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
Common stock
--------------------------- Un- Total
Additional Shares amortized Accum- stock-
paid in to be consulting ulated holder's
Shares Amount capital issued fees deficit deficit
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at June 40,162,008 $ 401,620 $ 19,997,017 $ -- $ -- $(21,361,481) $ (962,844)
30, 2002
Stock issuances 6,600,000 66,000 266,383 -- -- -- 332,383
Warrant issuances -- -- 20,691 -- -- -- 20,691
Allowance on
subscription
receivable -- -- 42,689 -- -- -- 42,689
Net loss for the
year ended June
30, 2003 -- -- -- -- -- (701,053) (701,053)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at June
30, 2003 46,762,008 467,620 20,326,780 -- -- (22,062,534) (1,268,134)
Issuance of
shares for
services 200,000 2,000 13,000 -- -- -- 15,000
Issuance of
shares for
conversion of
bond and interest 1,773,695 17,737 88,685 -- -- -- 106,422
Issuance of
shares for debt
settlement 14,291 143 1,643 -- -- -- 1,786
250,000 shares of
Pref. stock to be
issued for
compensation -- -- -- 40,000 -- -- 40,000
Common stock
options granted -- -- 4,000 -- -- -- 4,000
Issuance of stock
warrants -- -- 41,572 -- (35,798) -- 5,774
Net loss for the
year ended June
30, 2004 -- -- -- -- -- (998,531) (998,531)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at June
30, 2004 48,749,994 $ 487,500 $ 20,475,680 $ 40,000 $ (35,798) $(23,061,065) $ (2,093,683)
============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
-5-
QUINTEK TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
2004 2003
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(998,531) $(701,053)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 50,730 46,195
Impairment of investment 28,778 --
Inventory write off 35,259 --
Issuance of stock for services 15,000 221,183
Issuance of stock issued for interest payment 17,222 --
Shares to be issued for compensation 40,000 --
Issuance of warrant for service 5,774 --
Stock options
granted 4,000
Subscription receivable forgiven for services -- 42,689
(Increase) decrease in current assets:
Accounts receivable 44,382 (45,906)
Inventory (30,888) 53,055
Other assets 3,593 (4,279)
Prepaid Expenses 3,353 --
Deposits (6,021) 2,599
Investments (16) (19,792)
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses 119,040 82,135
Payroll and payroll taxes payable 51,023 80,806
Payroll taxes assumed in merger (26,611) --
Deferred revenue 46,006 13,148
Liabilities in process of conversion to stock 1,960 --
--------- ---------
Total Adjustments 402,584 471,833
--------- ---------
Net cash used in operating activities (595,947) (229,220)
--------- ---------
(continued)
F-6
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for property & equipment -- (5,803)
Proceeds from sale of investment -- 19,792
Decrease in employee receivables -- (1,199)
--------- ---------
Net cash provided by investing activities -- 12,790
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Subscriptions receivable -- 12,200
Payments on factoring payables (131,885) --
Proceeds from factor 28,225 126,890
Proceeds (payment) on loans from stockholders 211,756 (4,100)
Payments on notes payable (17,711) --
Proceeds from convertible notes 500,000 --
Proceeds from issuance of common stock -- 100,000
--------- ---------
Net cash provided by financing activities 590,385 234,990
--------- ---------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 18,560 (5,562)
CASH & CASH EQUIVALENTS, BEGINNING BALANCE 21,162 2,602
--------- ---------
CASH & CASH EQUIVALENTS, ENDING BALANCE $ 15,600 $ 21,162
========= =========
The accompanying notes are an integral part of these financial statements.
F-7
QUINTEK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
The Company was originally incorporated under the laws of the State of
California on April 16, 1993, as Quintek Electronics, Inc. On January 14, 1999,
the Company merged with Pacific Diagnostic Technologies, Inc. in a business
combination accounted for as a purchase. The acquisition took place under a plan
of reorganization. Quintek Electronics, Inc. ("QEI") became public when it was
acquired by Pacific Diagnostic Technologies, Inc. ("PDX") through a reverse
merger and Chapter 11 Plan of Reorganization. Under the plan, all assets of QEI
were sold to PDX, all PDX management resigned once the Plan was confirmed, and
QEI's management and operating plan were adopted by the new operating entity.
Shortly after the confirmation of the plan, the name of the reorganized debtor
was changed to Quintek Technologies, Inc. ("QTI"). QTI assumed the assets,
liabilities, technology and public position of both QEI and PDX.
On February 24, 2000, the Company acquired all of the outstanding common stock
of Juniper Acquisition Corporation ("Juniper"). For accounting purposes, the
acquisition was treated as a capitalization of the Company with the Company as
the acquirer (reverse acquisition).
The Company was established for the primary purpose of developing,
manufacturing, and distributing the 4300 Aperture Card Imaging System
technologies, used for recording digital images on aperture card media ("the
4300 system").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES & REALIZATION OF ASETS
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all liquid investments with a maturity of three months or
less from the date of purchase that are readily convertible into cash to be cash
equivalents.
Accounts Receivable
The Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. Reserves are recorded primarily on a
specific identification basis. Allowance for doubtful debts amounted to $15,179
as at June 30, 2004.
F-9
Inventories
Inventories are valued at the lower of cost (determined on FIFO, first-in,
first-out) or market. The Management compares the cost of inventories with the
market value and allowance is made for writing down the inventories to there
market value, if lower.
Equity Method of Accounting for Investments
Investments in companies in which the Company has a 20% to 50% interest or has
significant influence over the operating and financial policies of the investee
are carried at cost, adjusted for the Company's proportionate share of
undistributed earnings or losses.
Property & Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to earnings as incurred; additions, renewals and betterments
are capitalized. When property and equipment are retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the
respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line over
the estimated useful lives (3-7 years) of the assets.
Intangible Assets
Intangible assets consist of patents and purchased proprietary processes and are
being amortized using straight-line method over their remaining useful lives of
4 years. The Company evaluates intangible assets for impairment, at least on an
annual basis and whenever events or changes in circumstances indicate that the
carrying value may not be recoverable from its estimated future cash flows.
Recoverability of intangible assets, other long-lived assets and, goodwill is
measured by comparing their net book value to the related projected undiscounted
cash flows from these assets, considering a number of factors including past
operating results, budgets, economic projections, market trends and product
development cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second test is
performed to measure the amount of impairment loss. Potential impairment of
goodwill after July 1, 2002 is being evaluated in accordance with SFAS No. 142.
The SFAS No. 142 is applicable to the financial statements of the Company
beginning July 1, 2002.
Long-lived assets
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations for a Disposal of a Segment of a
Business." The Company periodically evaluates the carrying value of long-lived
assets to be held and used in accordance with SFAS 144. SFAS 144 requires
F-10
impairment losses operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amounts. In that event, a loss is recognized based on the
amount by which the carrying amount exceeds the fair market value of the
long-lived assets. Loss on long-lived assets to be disposed of is determined in
a similar manner, except that fair market values are reduced for the cost of
disposal.
Accounts payable & accrued expenses
Accounts payable and accrued expenses consist of the following:
Accounts payable $ 203,612
Accrued expenses 235,214
-----------
$ 438,826
Software development costs
The Company has adopted Statement of Position 98-1 ("SOP 98-1") "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use", as its
accounting policy for internally developed computer software costs. Under SOP
98-1, computer software costs incurred in the preliminary development stage are
expensed as incurred. Computer software costs incurred during the application
development stage are capitalized and amortized over the software's estimated
useful life.
The Company makes on-going evaluations of the recoverability of its capitalized
software by comparing the amount capitalized for each product to the estimated
net realizable value of the product. If such evaluations indicate that the
unamortized software development costs exceed the net realizable value, the
Company writes off the amount which the unamortized software development costs
exceed net realizable value.
Advertising
The Company expenses advertising costs as incurred. Advertising expense was $792
and $236 for the years ended June 30, 2004 and 2003, respectively.
Research and Development
Expenditures for software development costs and research are expensed as
incurred. The amounts charged to operations for the years ended June 30, 2004
and 2003 were $5,026 and $58,000, respectively.
Income taxes
Deferred taxes are provided for on a liability method for temporary differences
between the financial reporting and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and rates on
F-11
the date of enactment. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will be realized. For the year ended June 30,
2004, such differences were insignificant.
Stock-based compensation
SFAS No. 123 prescribes accounting and reporting standards for all stock-based
compensation plans, including employee stock options, restricted stock, employee
stock purchase plans and stock appreciation rights. SFAS No. 123 requires
compensation expense to be recorded (i) using the new fair value method or (ii)
using the existing accounting rules prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for stock issued to employees" (APB 25) and related
interpretations with proforma disclosure of what net income and earnings per
share would have been had the Company adopted the new fair value method. The
Company has chosen to account for stock-based compensation using Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
has adopted the disclosure only provisions of SFAS 123. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee is required to pay for the stock.
The Company's board of directors authorized a stock award and long-term
incentive plan which includes stock appreciation rights and certain stock
incentive awards. The plan was approved by the shareholders as of June 30, 2004.
Fair value of financial instruments
Statement of financial accounting standard No. 107, Disclosures about fair value
of financial instruments, requires that the Company disclose estimated fair
values of financial instruments. The carrying amounts reported in the statements
of financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.
Basic and diluted net loss per share
Net loss per share is calculated in accordance with the Statement of financial
accounting standards No. 128 (SFAS No. 128), "Earnings per share". SFAS No. 128
superseded Accounting Principles Board Opinion No.15 (APB 15). Net loss per
share for all periods presented has been restated to reflect the adoption of
SFAS No. 128. Basic net loss per share is based upon the weighted average number
of common shares outstanding. Diluted net loss per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period.
F-12
Revenue Recognition
Revenue is recognized when earned. The Company recognizes its revenue in
accordance with the Securities and Exchange Commissions ("SEC") Staff Accounting
Bulletin No. 104, "Revenue Recognition in Financial Statements" ("SAB 104") and
The American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," as amended as amended by
SOP 98-4 and SOP 98-9.
Issuance of shares for service
The Company accounts for the issuance of equity instruments to acquire goods and
services based on the fair value of the goods and services or the fair value of
the equity instrument at the time of issuance, whichever is more reliably
measurable.
Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended by SFAS No. 137, is effective for fiscal years beginning after June 15,
2000. SFAS No. 133 requires the Company to recognize all derivatives as either
assets or liabilities and measure those instruments at fair value. It further
provides criteria for derivative instruments to be designated as fair value,
cash flow and foreign currency hedges and establishes respective accounting
standards for reporting changes in the fair value of the derivative instruments.
After adoption, the Company is required to adjust hedging instruments to fair
value in the balance sheet and recognize the offsetting gains or losses as
adjustments to be reported in net income or other comprehensive income, as
appropriate. The Company has complied with the requirements of SFAS 133, the
effect of which was not material to the Company's financial position or results
of operations as the Company does not participates in such activities.
Reporting segments
Statement of financial accounting standards No. 131, Disclosures about segments
of an enterprise and related information (SFAS No. 131), which superseded
statement of financial accounting standards No. 14, Financial reporting for
segments of a business enterprise, establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performances. Currently,
SFAS 131 has no effect on the Company's consolidated financial statements as
substantially all of the Company's operations are conducted in one industry
segment.
F-13
Reclassifications
Certain comparative amounts have been reclassified to conform with the current
year's presentation.
Recent Pronouncements
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used, on reported
results. The Statement is effective for the Companies' interim reporting period
ending January 31, 2003.
In compliance with FAS No. 148, the Company has elected to continue to follow
the intrinsic value method in accounting for its stock-based employee
compensation plan as defined by APB No. 25 and has made the applicable
disclosures below.
Had the Company determined employee stock based compensation cost based on a
fair value model at the grant date for its stock options under SFAS 123, the
Company's net earnings per share would have been adjusted to the pro forma
amounts for the year ended June 30, 2004 and 2003, as follows ($ in thousands,
except per share amounts). :
Year ended June 30
2004 2003
------------ ----------
Net loss - as reported $ (999) (701)
Stock-Based employee compensation
expense included in reported net
income, net of tax -- --
Total stock-based employee
compensation expense determined
under fair-value-based method for all
rewards, net of tax (8) --
------------ ----------
Pro forma net loss $ (1,006) (701)
============ ==========
Earnings (loss) per share:
Basic, as reported $ (0.02) $(0.01)
Diluted, as reported $ (0.02) $(0.01)
Basic, pro forma $ (0.02) $(0.01)
Diluted, pro forma $ (0.02) $(0.01)
On May 15 2003, the FASB issued FASB Statement No. 150 ("SFAS 150"), Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS 150 changes the accounting for certain financial instruments that,
F-14
under previous guidance, could be classified as equity or "mezzanine" equity, by
now requiring those instruments to be classified as liabilities (or assets in
some circumstances) in the statement of financial position. Further, SFAS 150
requires disclosure regarding the terms of those instruments and settlement
alternatives. SFAS 150 affects an entity's classification of the following
freestanding instruments: a) Mandatorily redeemable instruments b) Financial
instruments to repurchase an entity's own equity instruments c) Financial
instruments embodying obligations that the issuer must or could choose to settle
by issuing a variable number of its shares or other equity instruments based
solely on (i) a fixed monetary amount known at inception or (ii) something other
than changes in its own equity instruments d) SFAS 150 does not apply to
features embedded in a financial instrument that is not a derivative in its
entirety. The guidance in SFAS 150 is generally effective for all financial
instruments entered into or modified after May 31, 2003, and is otherwise
effective at the beginning of the first interim period beginning after June 15,
2003. For private companies, mandatorily redeemable financial instruments are
subject to the provisions of SFAS 150 for the fiscal period beginning after
December 15, 2003. The adoption of SFAS No. 150 does not have a material impact
on the Company's financial position or results of operations or cash flows.
In December 2003, the Financial Accounting Standards Board (FASB) issued a
revised Interpretation No. 46, "Consolidation of Variable Interest Entities"
(FIN 46R). FIN 46R addresses consolidation by business enterprises of variable
interest entities and significantly changes the consolidation application of
consolidation policies to variable interest entities and, thus improves
comparability between enterprises engaged in similar activities when those
activities are conducted through variable interest entities. The Company does
not hold any variable interest entities.
3. INVENTORIES
Inventory consists of parts and supplies. The Company recorded an allowance of
obsolesce amounting $ 35,259 as on June 30, 2004. As a result, 100% of inventory
totaling $332,904 was reserved for obsolescence.
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2004, consists of the following:
Computer and office equipment $ 111,752
Machinery and equipment 48,670
Other depreciable assets 102,880
Furniture and fixture 33,518
---------
296,820
Accumulated depreciation (223,401)
---------
$ 73,419
5. INTANGIBLE ASSETS
Net intangible assets at June 30, 2004 were as follows:
Patents and proprietary processes $ 136,067
Accumulated amortization 121,116
---------
$ 14,951
Amortization expense for the Company's current amortizable intangible assets
over the next fiscal year is estimated to be:
2005 $ 14,951
F-15
6. IMPAIREMENT OF INVESTMENT
The investments held by the Company consisted of a 49% ownership interest in
Qtek Aperture Card AB, a Swedish corporation and a 8.54% ownership in PanaMed
Corp. The investment in Qtek was accounted for using the equity method of
accounting due to the significant influence that the Company had over its
investee. The PanaMed investment was accounted for using the equity method for
the year ending June 30, 2002; The PanaMed investment is accounted for at cost,
which is zero. The total value of the Qtek Aperture AB investment amounted to
$28,778 at June 30, 2004. On June 30, 2004, the Company evaluated its investment
according to FASB 144 and recognized an impairment loss equal to the book value
of these intangible assets amounting $28,778.
7. EMPLOYEE RECEIVABLES
Notes receivable from officers, unsecured,
due on June 30, 2019, interest at 4% $ 377,649
Interest receivable in connection with
above notes receivable 15,559
----------
393,208
Valuation allowance (393,208)
---------
--
=========
8. FACTORING PAYABLE
The Company has entered into an agreement with a factoring company ("the
Factor") to factor purchase orders with recourse. The Factor funds 97% or 90%
based upon the status of the purchase order. The Factor has agreed to purchase
up to $4,800,000 of qualified purchase orders over the term of the agreement;
however, the Factor does not have to purchase more than $200,000 in any given
month. The agreement term is from June 2, 2003 to June 2, 2005. The Company will
pay a late fee of 3% for payments not made within 30 days and 5% for those not
made in 60 days. At the option of the Factor, the late fees may be paid with
Company stock. If paid by Company stock, the stock bid price will be discounted
50% in computing the shares to be issued in payment of the late fee.
The Company has agreed to issue the Factor 1,500,000 warrants purchasing the
Company's stock as a fee for the factoring agreement. The stock issued under the
warrants can be purchased at the average closing price of the Company's stock
for the 90 days prior to the factoring agreement.
The Company has also issued the Factor bonus warrants. The Factor will receive
two (2) bonus warrants for each dollar of purchase orders purchased. The bonus
warrants will be exercisable at the average closing price of the Company's
common stock for the 90 days prior to the purchase order transactions they
represent or a 50% discount to the closing price of the Company's stock at the
time exercised at the option of the Factor. Both warrants are for a five year
period.
At June 30, 2004, the Company had a factoring payable balance of $43,230.
F-16
9. PAYROLL TAXES-ASSUMED IN MERGER
The Company assumed $205,618 of payroll tax liabilities in the merger with
Pacific Diagnostic Technologies, Inc. The balance was $96,661 at June 30, 2004.
The Company is delinquent on payments of these payroll tax liabilities.
10. LONG TERM PAYABLES
Lease payable, interest at 7.9% to 15%, due various dates $ 55,367
in 2005 to 2008
Note payable, DFS, interest at 15.99%, due Jun & Jul 2006 3,669
Notes payable, AP conversion, interest at 8%, due 2006 51,847
--------
$110,883
Current portion 47,504
--------
63,379
The future maturity of the long term payables is as follows:
2005 $ 47,504
2006 43,122
2007 19,243
2008 1,014
----------
Total $ 110,883
=========
11. CONVERTIBLE BONDS
Bonds payable with interest at 9%, due on various
dates in 2001 and 2002, convertible to shares of
Common stock in increments of $1,000 or more. $ 21,354
Bonds payable with interest at 12%, due July 2002,
convertible to shares of common stock in increments
of $500 or more. 41,141
==========
$ 62,495
=========
Certain of the outstanding convertible bonds have matured as of December 31,
2002. The holders of the matured bonds do not wish to renew the bonds and have
asked for payment; however, the Company does not have the cash to repay these
bonds.
Bondholders have been asked to exchange their bonds for Series B preferred
stock. As of June 30, 2004, holders of $198,000 of the bonds including accrued
interest had acted on this. The $198,000 is included in the liability section of
the financials under "Liabilities in Process of Conversion to Stock," since the
preferred stock has not been issued.
12. CONVERTIBLE NOTES
The company issued $500,000 convertible notes during the year ended June 30,
2004. Each note bears a simple interest rate of 10%. Notes are convertible to
the common stock of the Company at $.06. Additionally, the holder will receive
one bonus warrant for each conversion share. Each bonus warrant will be
exercisable for a period of 5 years from the date of issuance into one share of
common stock at a price of $.10.
The total interest on these convertible notes for the year ended June 30, 2004
amounted to $15,177.
F-17
13. LIABILITIES IN PROCESS OF CONVERSION TO STOCK
The Company has a total of $470,629 liabilities in process of conversion to
stock as of June 30, 2004. This amount consists of the following:
Bond payable $198,268
Accounts payable 20,147
Payrolls payable 252,214
---------
$470,629
Bonds for $188,268 are convertible to one share of Series A Preferred stock for
each $.05 of debt owed by the Company. Remaining $10,000 bond is convertible to
one share of Series B Preferred stock for each $.25 of debt owed by the Company.
Accounts payable are convertible to one share of Series C Preferred stock for
each $1.00 of payable owed by the Company.
Payrolls payable are convertible to one share of Series A Preferred stock for
each $.25 of debt owed by the Company.
14. LOANS PAYABLE - STOCKHOLDERS
The company has a loan payable balance of $244,056 to the stockholders at June
30, 2004. These loans are interest free, unsecured and due on demand.
15. STOCKHOLDERS' EQUITY
a. Common Stock and Warrants
The Company has authorized 50 million shares of common stock with a par value of
$0.001 per share. Each share entitles the holder to one vote. There are no
dividend or liquidation preferences, participation rights, call prices or rates,
sinking fund requirements, or unusual voting rights associated with these
shares. During the year ended June 30, 2003, the Company established the Class L
warrants and initiated the process of establishing the Class A Preferred stock
which underlies these warrants.
Upon surrender of either a Class J or L warrant, the holder is entitled to
purchase one share of the Company's stock at the designated exercise price. For
each warrant class, the number of warrants outstanding, the exercise price, the
type of underlying stock, and the expiration dates are defined as follows:
Class J - 6,458,384 warrants to purchase common restricted stock with an
exercise price of $1.00 per share expired on January 14, 2004.
Class L - warrants were established in March 2003, with an exercise price of
$.25 per share, an expiration date of January 14, 2005 and Series A Preferred as
underlying stock. As of June 30, 2004, holders of Class J exchanged their
warrants for 3,063,432 Class L Warrants.
At June 30, 2004, the outstanding warrants of classes A, B, C, D, E, F, G, H, I
and J have expired.
During the year ended June 30, 2004, 200,000 shares of common stock were issued
for services valued at $15,000.
During the year ended June 30, 2004, 1,773,695 shares of common stock were
issued for conversion of bond amounting $106,422.
During the year ended June 30, 2004, 14,291 shares of common stock were issued
for debt settlement amounting $1,786.
F-18
During the year ended June 30, 2004, 200,000 shares of warrants were issued for
consulting services for three years beginning February 2004, valued at $41,572.
$5,774 was amortized during the year ended June 30, 2004. The fair value of the
warrants is estimated on the grant date using the Black-Scholes Model. The
following assumptions were made in estimating fair value.
Annual rate of quarterly dividends 0.00%
Discount rate - Bond Equivalent Yield 3.50%
Expected life 3 years
Expected volatility 100%
b. Common Stock Reserved
At June 30, 2004, common stock was reserved for the following reasons:
Outstanding convertible bond 151,919 shares
Exercise of Class L warrants 3,063,432 shares
c. Stock Option Agreements
The Company granted 200,000 stock options to two employees during the year ended
June 30, 2004.
The Company recorded $ 4,000 as compensation expense due to issuance of the
options, during the year ended June 30, 2004.
The number and weighted average exercise prices of options granted by the
Company are as follows:
Outstanding
Options Weighted
Number Average
of Exercise
Options Price
--------- ---------
Outstanding June 30, 2002 2,015,000 $ 1.01
Granted during the year 0 0
Exercised 0 0
Expired/forfeited 0 0
--------- ---------
Outstanding June 30, 2003 2,015,000 $ 1.01
Granted during the year 200,000 $ 0.13
Exercised 0 0
Expired/forfeited 0 0
--------- ---------
Outstanding June 30, 2004 2,215,000 $ 0.93
========= =========
F-19
Following is a summary of the status of options outstanding at June 30, 2004:
Outstanding Options Exercisable Options
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Exercise Price Number Life Price Number Price
-------------- --------- ------------------ ------------- ------------ -----------
$ 1.00-4.00 2,015,000 7 months $ 1.01 2,015,000 $ 0.93
$ 0.13 200,000 9 months $ 0.13 200,000 $ 0.93
Pro forma information regarding the effect on operations is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that statement. Pro forma
information using the Black-Scholes method at the date of grant based on the
following assumptions for the year ended June 30, 2004 and 2003 was as follows:
Expected life (years) 1 year
Risk-free interest rate 1.40% and 3.40%
Dividend yield 0% and 0%
Volatility 45% and 100%
d. Stock transactions approved by the shareholder's
At the annual meeting of the shareholders held June 30, 2004, the shareholders
approved by a majority vote to increase to 200,000,000 shares, no par value
common stock, and 50,000,000 shares no par value, preferred stock which the
corporation shall have authority to issue. The board of directors is authorized
to divide the preferred stock into any number of classes or series, fix the
designation and number of shares of each such series or class and alter or
determine the rights, preferences, privileges and restrictions of each or series
of preferred stock
Series A Preferred Stock
The general terms of the Series A Preferred Stock is as follows: Par value -
$0.00; Liquidation Preference - $0.25 per share plus any unpaid accumulated
dividends; Dividends - cumulative annual rate of $0.005 per share when and as
declared by the Board of Directors; Conversion Rights - convertible to common
stock at a 1:1 ratio ; Redemption Rights - the Company has the right to redeem
part or all of the stock upon 30 days written notice at a rate of $0.25 per
share plus all accumulated and unpaid dividends thereon at the dividend rate of
$0.005 annually per share; Voting Rights - one vote per share on all matters
requiring shareholder vote. At June 30, 2004, the Company had 250,000 shares of
Series A Preferred Stock to be issued valued at $40,000 for the compensation.
Series B Preferred Stock
The general terms of the Series B Preferred Stock is as follows: Par Value -
$0.00; Liquidation Preference - $0.25 per share plus any unpaid accumulated
dividends; Dividends - cumulative annual rate of $0.0005 per share when and as
declared by the Board of Directors; Conversion Rights - convertible to common
stock at a 1:5 ratio (i.e. 1 share of Series B Preferred stock is convertible
into 5 shares of common stock) ; Redemption Rights - the Company has the right
to redeem part or all of the stock upon 30 days written notice at a rate of
$0.25 per share plus all accumulated and unpaid dividends thereon at the
dividend rate of $0.0005 annually per share; Voting Rights - one vote per share
on all matters requiring shareholder vote.
F-19
Series C Preferred Stock
The general terms of the Series C Preferred Stock is as follows: Par value -
$0.00; Liquidation Preference - $1.00 per share plus any unpaid accumulated
dividends; Dividends - cumulative annual rate of $.0005 per share when as
declared by the Board of Directors; Conversion Rights - 1:20 ratio (i.e. 1 share
of Preferred Series C stock is convertible into 20 shares of common stock);
Redemption Rights - the Company has the right to redeem part or all of the stock
upon 30 days written notice at the rate of $1.00 per share plus all accumulated
and unpaid dividends thereon at the dividend rate of $.0005 annually per share.;
Voting Rights - one vote per share on all matters requiring shareholder vote.
Liabilities in process of conversion to stock:
The Company has entered into agreements with various vendors and employees to
convert their liabilities into the above, three preferred series of stock
pending approval of same. The conversion rate varies. (note 13)
16. INCOME TAXES
The Company accounts for income taxes using the liability approach to financial
accounting and reporting. The Company has a deferred tax asset due to net
operating loss carryforwards and temporary taxable differences due to
stock-based compensation for income tax purposes. Through June 30, 2004, the
Company incurred net operating losses for federal tax purposes of $8,000,000.
The net operating loss carryforward may be used to reduce taxable income through
the year 2024. The availability of the Company's net operating loss
carryforwards are subject to limitation if there is a 50% or more positive
change in the ownership of the Company's stock.
The deferred tax assets are $3,057,951 and $2,718,450 as of June 30, 2004 and
2003, respectively. However, due to the ongoing nature of the losses and the
potential inability of the Company to ever realize the benefit, a valuation
allowance has been established for 100% of the deferred tax asset. Net operating
loss carryforwards expire at various times through the year 2023.
The effects of temporary differences that give rise to significant portions of
the deferred tax benefit for the years ended June 30, 2004 and 2003 are
presented below:
2004 2003
----- -----
Net operating loss 319,441 163,156
Stock-based compensation 20,060 75,202
-------- --------
339,501 238,358
Less-valuation allowance (339,501) (238,358)
-------- --------
Total -- --
======== ========
The following is a reconciliation of the provision for income taxes at the U.S.
federal income tax rate to the income taxes reflected in the Consolidated
Statements of Operations:
F-20
June 30, June 30,
2004 2003
-------- --------
Tax expense (credit) at statutory rate-federal (32)% (32)%
State tax expense net of federal tax (8) (8)
Permanent differences 1 1
Valuation allowance 39 39
-------- -------
Tax expense at actual rate -- --
======== =======
17. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect method as
defined under the Financial Accounting Standard No. 95.
The Company paid $-0- for income tax during the years ended June 30, 2004 and
2003. The Company paid $29,937 and $14,256 interest during the years ended June
30, 2004 and 2003, respectively.
The cash flow statement for the year ended June 30, 2004 does not include the
following non-cash investing and financing transactions;
o 200,000 shares of common stock were issued for services valued at
$15,000.
o 1,773,695 shares of common stock were issued for conversion of bond
amounting to $106,422.
o 14,291 shares of common stock were issued for debt settlement amounting
$1,786.
o Machinery and equipment was acquired through financing agreements in
the amount of $67,125.
o Accounts payable were converted to notes payable in the amount of
$30,965.
18. MAJOR CUSTOMERS AND SUPPLIERS
The Company had one customer that accounted for 21% of revenue for the year
ended June 30, 2004. Accounts receivable from this major customer was $-0- at
June 30, 2004. For the year ended June 30, 2003, the Company had four customers
that accounted for more than 55% of revenue. Accounts receivable from these
major customers were approximately $69,000 at June 30, 2003.
There are currently only two known suppliers of aperture cards that use dry
silver film. A continued supply of aperture card media is crucial to the success
of the Company because without cards, customers have no use for the Company's
equipment, services and software.
1.1.1 19. COMMITMENTS AND CONTINGENCIES
a) Operating Leases
The Company leases its California office facility under a non-cancelable
operating lease that requires total monthly rental payments of $2,846. Upon
expiration on March 31, 2004, the Company leased the premises on a month to
month basis until June 30, 2004. Effective July 1, 2004 the Company relocated
their executive offices to Huntington Beach, California and entered into a four
year lease agreement. The agreement contains a base rent escalation clause. The
Company leases its Idaho office facility under a month-to-month rental agreement
at $1,384 per month. For the years ended June 30, 2004 and 2003, rent expense
for these operating leases totaled $56,997 and $45,279, respectively.
F-21
The future minimum lease payments under non-cancelable leases are as follows:
2005 $ 79,661
2006 81,354
2007 83,049
2008 84,744
---------
$328,808
b) Purchase Obligation
The Company has established a licensing agreement with Qtek Aperture Card AB.
Under the agreement, the Company is required to purchase at least 25 of the
Q4305 units at approximately $18,000 each before June 30, 2004. As of June 30,
2004, the Company had purchased 15 units under the agreement. The agreement
expired June 30, 2004. The Company did not purchase the remaining units. Several
of the original units purchased were inoperable and required on-site repairs due
to omissions in manufacturing. Qtek Aperture Card AB has refused to take
responsibility for the failed units and has denied the Company's request to
return tooling, designs and other intellectual property. The Company believes
that Qtek Aperture Card AB has breached this agreement and has no further
obligation to purchase units from them. The financial statements contain no
accrued liability in connection with this transaction.
c) Income Tax Return Filings
The Company has not filed income tax returns for several years. Due to operating
losses, income tax liability and penalties would not be substantial. However,
the State of California could potentially revoke the Company's charter if the
Company does not become current on its income tax return filings.
d) Securities and Exchange Commission Inquiry
On September 17, 2002, the Company was advised by the staff of the U.S.
Securities and Exchange Commission that they will recommend that the Commission
file civil injunctive lawsuits against the Company and its president, Thomas W.
Sims. The suits would allege that the Company violated Section 17(a) of the
Securities Act of 1933 and Sections 10(b) and 13(a) of the Securities Exchange
Act of 1934 and Rules 10b-5, 13a-1, and 13a-13, based on false and misleading
statements in press releases disseminated by the Company on October 22, 2001 and
October 25, 2001, regarding the Company's investment in PanaMed Corp. and the
press releases disseminated on January 8, 2002 and March 20, 2002, and failure
to timely file annual and quarterly reports with the Commission. On March 25,
2003, the Company signed, without admitting or denying the allegations, a
proposed settlement agreement with the U.S. Securities and Exchange Commission,
which permanently restrains and enjoins the Company from engaging in acts which
would constitute violations of these regulations in the future. On August 6,
2003, a final judgment was entered by the U.S. District Court, Central District
of California, against the Company which permanently enjoined the Company from
violating Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder by using any means or instrumentality of interstate commerce, or of
the mails, or of any national securities rtifice to defraud; (B) to make any
untrue statement of a material fact or omitting to state a material fact
necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading; or (C) to engage in
any act, practice, or course of business which operates or would operate as a
fraud or deceit upon any person, in connection with the purchase or sale of any
F-22
security. Further, the final judgment permanently enjoined the Company from
violating Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13
promulgated thereunder, by failing to file with the Commission in accordance
with Commission rules and regulations, information and documents required by the
Commission to keep current information and documents required in or with an
application or registration statement filed pursuant to Section 12 of the
Exchange Act or annual or quarterly reports as the Commission has prescribed.
20. BASIC AND DILUTED NET LOSS PER SHARE
Net loss per share is calculated in accordance with the Statement of financial
accounting standards No. 128 (SFAS No. 128), "Earnings per share." Basic net
loss per share is based upon the weighted average number of common shares
outstanding. Diluted net loss per share is based on the assumption that all
dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the period.
Weighted average number of shares used to compute basic and diluted loss per
share for the years ended June 30, 2004 and 2003 are the same since the effect
of dilutive securities is anti-dilutive.
21. GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. This basis of accounting contemplates the recovery
of the Company's assets and the satisfaction of its liabilities in the normal
course of business. Through June 30, 2004, the Company had incurred cumulative
losses of $23,061,065 including net losses of $998,531 and $701,053 for the
fiscal years 2004 and 2003, respectively. In view of the matters described in
the preceding paragraph, recoverability of a major portion of the recorded asset
amounts shown in the accompanying balance sheet is dependent upon continued
operations of the Company, which in turn is dependent upon the Company's ability
to raise additional capital, obtain financing and to succeed in its future
operations. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
Management has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue as a going concern. Management devoted considerable effort
during the period ended June 30, 2004, cing (ii) controlling of salaries and
general and administrative expenses (iii) management of accounts payable and
(iv) evaluation of its distribution and marketing methods.
22. SUBSEQUENT EVENTS
On July 27, 2004, the Company entered into a Securities Purchase Agreement with
an individual investor. This investor purchased a convertible debenture for
$50,000 which bears simple interest at 10%. The Debenture was converted into the
Common Stock of the Company at a price of $0.10 per share. The investor received
one bonus warrant for each conversion share. Each warrant is exercisable into
one share of Common Stock at $0.15 per share. The warrants expire on July 27,
2007.
F-23
On July 29, 2004, the Company entered into an Agreement with LANGLEY PARK
INVESTMENTS PLC, a London Investment Company to issue 14,000,000 shares of the
Company's common stock to Langley in return for 1,145,595 shares of Langley.
Fifty percent of Langley shares issued to the Company under this agreement is to
be held in escrow for two years. At the end of two years if the market price for
the Company's common stock is at or greater than the Initial Closing Price the
escrow agent will release the full amount. In the event that the market price
for the Company's common stock is less than the Initial Closing Price the amount
released will be adjusted.
Langley is in the process of attaining listing with the United Kingdom Listing
Authority. Langley's initial offering price is 1(pound) (One Pound UK per
share). The Company's shares are to be held by Langley for a period of at least
two years. Langley shares issued to the Company are to be free trading. In the
event that this transaction does not close the 14,000,000 shares of the
Company's stock held in escrow are to be returned to the Company.
On August 2, 2004, the Company signed a Master Lease Agreement with Vencore
Solutions, LLC, a venture leasing company located in Lake Oswego, Oregon. Under
the agreement the Company established a lease line of credit for up to $240,000
in equipment financing. This is a capital lease where the Company pays monthly
rental rate equal to 3.45% of the total hardware purchases and 6.35% of the
total software purchases. The lease term for hardware purchases is 36 months and
18 months for software. The effective annual interest rate is roughly 8%.
Vencore Solutions received 144,000 warrants for the Company's common stock at
$0.10 per share, expiring on August 2, 2007 in connection with this agreement.
On August 4, 2004 the Company entered into an agreement with the private equity
fund, Golden Gate Investors, based in San Francisco, CA to provide the Company
with $3.3 million in capital.
The deal is structured as two year $300,000 convertible notes paying 5 3/4%
interest and 3,000,000 warrants to purchase common stock for a period of three
years at $1.00. The "Conversion Price" shall be equal to the lesser of (i)
$0.50, or (ii) 80% of the average of the 5 lowest Volume Weighted Average Prices
during the 20 Trading Days prior to Holder's election to convert, or (iii) 80%
of the Volume Weighted Average Price on the Trading Day prior to Holder's
election to convert market price of the Company's common stock prior to
conversion.
Upon conversion of the note, the fund is obligated to simultaneously exercise
the $1.00 warrants providing added funding to the company. The Warrant must be
exercised concurrently with the conversion of this Debenture in an amount equal
to ten times the dollar amount of the Debenture conversion.
On August 17, 2004 the company entered into a Securities Purchase Agreement with
an individual investor to purchase 2 convertible debentures each for $100,000
which bears simple interest at 10%. The initial Debenture was purchased at
closing. The second Debenture will be purchased within five days of a
registration statement being declared effective covering the Conversion Shares
and Warrant Shares. Debentures are convertible into the Common stock of the
Company. Conversion Price per share shall be the lower of (i) $0.10 ("Maximum
Base Price"); or (ii) in the event the Borrower enters into an agreement
subsequent to execution of the Securities Purchase Agreement to sell Common
Stock or a convertible instrument that converts into Common Stock prior to
conversion of this Debenture at a price less than the Conversion Price of this
Debenture, then the Conversion Price of this Debenture shall be immediately
reset to a lower Conversion Price equal to that described in the subsequent
agreement. Warrants are exercisable at $0.12 per share into the Common Stock of
the Company and expire on August 17, 2007.
F-24
On September 27, 2004, the Company was in process of converting various
liabilities and stock based compensation to shares of stock as follows:
4,682,572 shares of common stock were issued as repayment of $211,056 in loans
from stockholders. In addition, 1,800,000 warrants to purchase common stock at
$0.175 per share expiring November 6, 2008, 100,000 warrants to purchase common
stock at $0.16 per share expiring June 24, 2006, 142,857 warrants to purchase
common stock at $0.13 per share expiring July23, 2006 and 400,000 warrants to
purchase common stock at $0.175 expiring November 7, 2008 were granted.
400,000 shares of common stock were issued as repayment of $32,300 in loans from
a stockholder. As part of the agreement, the Company forgave $6,000 owed to the
Company by the stockholder.
1,008,054 shares of Series A preferred stock were issued as conversion of $252,
213 in back payroll. The Series A preferred stock is convertible to common stock
on a 1:1 basis.
2,250,000 shares of Series A preferred stock were issued as compensation for
services in the amount of $140,000. 250,000 shares valued at $40,000 were
recorded as shares to be issued during the year ended June 30, 2004. The series
A preferred stock is convertible to common stock on a 1:1 basis.
724,077 shares of Series A preferred stock were issued for a $36,204 convertible
bond. The series A preferred stock is convertible to common stock on a 1:1
basis.
F-26
648,255 shares of Series B preferred stock were issued for $162,064 in
convertible bonds. The Series B preferred stock is convertible into common stock
on a 1:5 basis. One share of Series B preferred stock is convertible into 5
shares of common stock.
32,000 shares of Series B preferred stock and 175,000 of common stock were
issued to satisfy a past due agreement. The Series B preferred stock is
convertible into common stock on a 1:5 basis. One share of Series B preferred
stock is convertible into 5 shares of common stock.
20,148 shares of Series C preferred stock were issued in conversion of $20,148
in accounts payable. The Series C preferred stock is convertible into common
stock on a 1:20 basis. One share of Series C preferred stock is convertible into
20 shares of common stock.
F-25