As filed with the Securities and Exchange Commission on January 19, 2005
An Exhibit List can be found on page II-6.
Registration No. 333-130219
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
-----------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
QUINTEK TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
California 7389 77-0505346
---------------- -------------------------- -------------------
(State or other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification No.)
Incorporation or Code Number)
Organization)
17951 Lyons Circle
Huntington Beach, California 92647
(714) 848-7741
(Address and telephone number of principal executive offices
and principal place of business)
Robert Steele, Chief Executive Officer
QUINTEK TECHNOLOGIES, INC.
17951 Lyons Circle
Huntington Beach, California 92647
(714) 848-7741
(Name, address and telephone number of agent for service)
Copies to:
Gregory Sichenzia, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Flr.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
------------------------------- -------------------- ---------------- ------------------ --------------------
Title of each class of Amount to be Proposed Proposed Amount of
securities to be registered registered (1) maximum maximum registration fee
offering aggregate
price per offering price
share
------------------------------- -------------------- ---------------- ------------------ --------------------
Common stock, no par value 20,625,000 (2) $.24 (3) $4,950,000 $627.17
issuable upon conversion of
debentures (Golden Gate
Investors)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, no par value 3,000,000 (4) $1.00 (5) $3,000,000 $380.10
issuable upon exercise of
warrants (Golden Gate
Investors)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common stock, no par value 200,000 $.24 (3) $48,000 $6.08
(Bernadette Haag)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, no par value 200,000 $.24 (3) $48,000 $6.08
issuable upon exercise of
warrants (Bernadette Haag)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common stock, no par value 2,200,000 $.24 (3) $528,000 $66.90
issuable upon conversion of
note (David Gough)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, no par value 2,200,000 $.24 (3) $528,000 $66.90
issuable upon exercise of
warrants (David Gough)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common stock, no par value 500,000 $.24 (3) $120,000 $15.20
(Roger Lents)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, no par value 1,000,000 $.24 (3) $240,000 $30.41
issuable upon exercise of
warrants (Roger Lents)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, no par value 1,000,000 $.24 (3) $240,000 $30.41
(Stan Merdinger)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, no par value 1,000,000 $.24 (3) $240,000 $30.41
issuable upon exercise of
warrants (Stan Merdinger)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, no par value 500,000 $.24 (3) $120,000 $15.20
(Rayne Forecast)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, no par value 500,000 $.24 (3) $120,000 $15.20
issuable upon exercise of
warrants (Rayne Forecast)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common stock, no par value 9,166,667 $.24 (3) $2,200,000.08 $278.74
issuable upon conversion of
notes (Kazi Management)
------------------------------- -------------------- ---------------- ------------------ --------------------
iii
Common Stock, no par value 350,000 $.24 (3) $84,000 $10.64
issuable upon exercise of
warrants (Kazi Management)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, no par value 2,400,000 $.24 (3) $576,000 $72.98
issuable upon exercise of
warrants (Kazi Management)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, no par value 500,000 $.24 (3) $120,000 $15.20
(Gerald Hannahs)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, no par value 5,000,000 $.24 (3) $1,200,000 $152.04
issuable upon exercise of
warrants (Gerald Hannahs)
------------------------------- -------------------- ---------------- ------------------ --------------------
Total 50,341,667 $14,362,000.08 $1,819.66 (6)
------------------------------- -------------------- ---------------- ------------------ --------------------
(1) Includes shares of our common stock, no par value per share, which may be
offered pursuant to this registration statement, which shares are issuable upon
conversion of convertible debentures and the exercise of warrants held by the
selling stockholder. In addition to the shares set forth in the table, the
amount to be registered includes an indeterminate number of shares issuable upon
conversion of the debentures and exercise of the warrants, as such number may be
adjusted as a result of stock splits, stock dividends and similar transactions
in accordance with Rule 416. The number of shares of common stock registered
hereunder represents a good faith estimate by us of the number of shares of
common stock issuable upon conversion of the debentures and upon exercise of the
warrants. For purposes of estimating the number of shares of common stock to be
included in this registration statement, we calculated a good faith estimate of
the number of shares of our common stock that we believe will be issuable upon
conversion of the debentures and upon exercise of the warrants to account for
market fluctuations, and antidilution and price protection adjustments,
respectively. Should the conversion ratio result in our having insufficient
shares, we will not rely upon Rule 416, but will file a new registration
statement to cover the resale of such additional shares should that become
necessary. In addition, should a decrease in the exercise price as a result of
an issuance or sale of shares below the then current market price, result in our
having insufficient shares, we will not rely upon Rule 416, but will file a new
registration statement to cover the resale of such additional shares should that
become necessary.
(2) Includes a good faith estimate of the shares underlying convertible
debentures to account for market fluctuations.
iv
(3) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, using the average
of the high and low price as reported on the Over-The-Counter Bulletin Board on
November 16, 2004, which was $.24 per share.
(4) Includes a good faith estimate of the shares underlying warrants exercisable
at $1.00 per share to account for antidilution and price protection adjustments.
(5) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933, using the exercise
price of $1.00.
(6) $1,999.58 previously paid.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
1
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED JANUARY 19, 2005
QUINTEK TECHNOLOGIES, INC.
50,341,667 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up
to 50,341,667 shares of our common stock, including 2,700,000 shares of common
stock, up to 20,625,000 shares of common stock underlying convertible
debentures, up to 11,366,667 shares of common stock underlying convertible notes
and up to 15,650,000 shares issuable upon the exercise of common stock purchase
warrants. The convertible debentures are convertible into the number of our
shares of common stock equal to the principal amount of the debentures being
converted multiplied by 11, less the product of the conversion price multiplied
by ten times the dollar amount. The conversion price for the convertible
debentures is the lesser of (i) $0.50 or (ii) eighty percent of the of the
average of the five lowest volume weighted average prices during the twenty (20)
trading days prior to the conversion. If the volume weighted average price is
below $0.10 on a conversion date, we have the right to pre-pay the amount of the
debenture the holder elects to convert, plus accrued and unpaid interest, at
125% of such amount; however, if we elect to pre-pay in this situation, the
debenture holder has the right to withdraw the notice of conversion. Also, if
the volume weighted average price is below $0.10 at any point during a month,
the holder is not obligated to convert any portion of the debenture during that
month.
Additionally, $200,000 in convertible notes, plus interest, is
convertible into shares of our common stock at a conversion price of $0.10 per
share. $500,000 in convertible notes, plus interest, is convertible into shares
of our common stock at a conversion price of $0.06 per share. 7,750,000 warrants
are exercisable at $0.10 per share; 2,700,000 warrants are exercisable at $0.12
per share, 1,000,000 warrants are exercisable at $0.13 per share, 1,200,000
warrants are exercisable at $0.15 per share and 3,000,000 warrants are
exercisable at $1.00 per share.
The selling stockholders may sell common stock from time to time in the
principal market on which the stock is traded at the prevailing market price or
in negotiated transactions. Some of the selling stockholders may be deemed
underwriters of the shares of common stock, which they are offering. We will pay
the expenses of registering these shares.
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934 and is listed on the Over-The-Counter Bulletin Board under
the symbol "QTEK". The last reported sales price per share of our common stock
as reported by the Over-The-Counter Bulletin Board on January 18, 2005, was
$0.17.
Investing in these securities involves significant risks. See "Risk Factors"
beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _______, 2005.
The information in this Prospectus is not complete and may be changed.
This Prospectus is included in the Registration Statement that was filed by
Quintek Technologies, Inc., with the Securities and Exchange Commission. The
selling stockholders may not sell these securities until the registration
statement becomes effective. This Prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the sale is not permitted.
2
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
QUINTEK TECHNOLOGIES, INC.
We have been a manufacturer of hardware and software and a service
provider to the corporate and public sector markets since 1991. Our new
division, Quintek Services, Inc. delivers business process outsourcing services
and information lifecycle management solutions to document intensive industries
such as healthcare and financial services. The solutions and services we provide
enable organizations to secure and manage their information and document
business processes more efficiently.
Through Quintek Services, we provide business process outsourcing
services to Fortune 500, Russell 2000 companies and public sector organizations.
Our business process outsourcing services range from the digitizing, indexing
and uploading of source documents through simple customer-specific, rules-based
decision making.
We also sell hardware, software and services for printing large format
drawings such as blueprints and computer aided design files directly to the
microfilm format of aperture cards.
For the three months ended September 30, 2004, we generated revenue in
the amount of $114,266 and a net loss of $1,195,241. For the year ended June 30,
2004, we generated revenue in the amount of $298,653 and a net loss of $998,531.
As a result of recurring losses from operations (accumulated deficit of
$23,061,065), including net losses of $998,531 and $701,052 for the fiscal years
ending June 30, 2004 and 2003, respectively, our independent registered public
accounting firm, in their report dated September 21, 2004, have expressed
substantial doubt about our ability to continue as a going concern.
Our principal offices are located at 17951 Lyons Circle, Huntington
Beach, California 92647, and our telephone number is (714) 848-7741. We are a
California corporation.
The Offering
Common stock offered by selling stockholders............ Up to 50,341,667 shares, including the following:
- up to 20,625,000 shares of common stock underlying
convertible debentures in the principal amount of $300,000
(includes a good faith estimate of the shares underlying
convertible debentures to account for market fluctuations
antidilution and price protection adjustments, respectively),
- up to 3,000,000 shares of common stock issuable upon the
exercise of common stock purchase warrants at an exercise
price of $1.00 per share (includes a good faith estimate of
the shares underlying warrants to account for antidilution
and price protection adjustments, respectively);
3
- up to 11,366,667 shares of common stock underlying
convertible notes in the principal amount of $700,000 plus
accrued interest;
2,700,000 shares of common stock;
- up to 7,750,000 shares of common stock issuable upon the
exercise of common stock purchase warrants at an exercise
price of $0.10 per share;
- up to 2,700,000 shares of common stock issuable upon the
exercise of common stock purchase warrants at an exercise
price of $0.12 per share;
- up to 1,000,000 shares of common stock issuable upon the
exercise of common stock purchase warrants at a n exercise
price of $0.13 per share; and
- up to 1,200,000 shares of common stock issuable upon the
exercise of common stock purchase warrants at an exercise
price of $0.15 per share.
This number represents 39.54% of our current outstanding
stock.
Common stock to be outstanding after the offering....... Up to 127,320,844 shares
Use of proceeds......................................... We will not receive any proceeds from the sale of the common
stock. However, we will receive up to $4,409,000 upon
exercise of the warrants by the selling stockholders. We
expect to use the proceeds received from the exercise of the
warrants, if any, for general working capital purposes. We
received an aggregate of $300,000 in connection with the
issuance of the convertible debenture and $700,000 in
connection with the issuance of the convertible notes to the
selling stockholders. We used the $1,000,000 for the general
working capital purposes and the payment of professional
fees.
Over-The-Counter Bulletin Board Symbol................. QTEK
The above information regarding common stock to be outstanding after
the offering is based on 79,679,177 shares of common stock outstanding as of
January 12, 2005 and assumes the subsequent conversion of our issued convertible
debentures and convertible notes and exercise of warrants by our selling
stockholders.
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with an accredited investor on August 4, 2004 for
the sale of (i) $300,000 in convertible debentures and (ii) warrants to buy
3,000,000 shares of our common stock. This prospectus relates to the resale of
the common stock underlying these convertible debentures and warrants.
4
The investors are obligated to provide us with an aggregate of $300,000
as follows:
o $175,000 was disbursed to us on August 4, 2004;
o $50,000 has been retained for services provided to our company by
various professionals, which shall be disbursed upon effectiveness
of this registration statement; and
o $75,000 will be released upon effectiveness of this registration
statement.
The debentures bear interest at 5 3/4%, mature two years from the date
of issuance, and are convertible into our common stock, at the selling
stockholder's option. The convertible debentures are convertible into the number
of our shares of common stock equal to the principal amount of the debentures
being converted multiplied by 11, less the product of the conversion price
multiplied by ten times the dollar amount of the debenture. The conversion price
for the convertible debenture is the lesser of (i) $0.50 or (ii) eighty percent
of the of the average of the five lowest volume weighted average prices during
the twenty (20) trading days prior to the conversion. If the volume weighted
average price is below $0.10 on a conversion date, we have the right to pre-pay
the amount of the debenture the holder elects to convert, plus accrued and
unpaid interest, at 125% of such amount; however, if we elect to pre-pay in this
situation, the debenture holder has the right to withdraw the notice of
conversion. Also, if the volume weighted average price is below $0.10 at any
point during a month, the holder is not obligated to convert any portion of the
debenture during that month. Accordingly, there is in fact no limit on the
number of shares into which the debenture may be converted. In addition, the
selling stockholder is obligated to exercise the warrant concurrently with the
submission of a conversion notice by the selling stockholder. The warrant is
exercisable into 3,000,000 shares of common stock at an exercise price of $1.00
per share.
The selling stockholder has contractually agreed to restrict its
ability to convert or exercise its warrants and receive shares of our common
stock such that the number of shares of common stock held by them and their
affiliates after such conversion or exercise does not exceed 4.9% of the then
issued and outstanding shares of common stock. See the "Selling Stockholders"
and "Risk Factors" sections for a complete description of the convertible
debentures.
To obtain funding for our ongoing operations, we also entered into
several Note Purchase Agreements with several accredited investors for the sale
of $770,000 in convertible notes. The convertible notes bear interest at 10% per
annum, and mature one year from the date of issuance. $70,000 in convertible
notes have been converted into 700,000 shares of our common stock. $200,000 in
convertible notes, plus interest, is convertible into our common stock, at the
selling stockholder's option at a conversion price of $0.10 per shares. $500,000
in convertible notes, plus interest, is convertible into our common stock, at
the selling stockholder's option at a conversion price of $0.06 per shares. In
connection therewith, we issued an aggregate of 2,900,000 warrants. Of these
warrants, 2,200,000 warrants are exercisable at $0.12 per share and 700,000
warrants are exercisable at $0.15 per share. This prospectus relates to the
resale of the common stock underlying these convertible notes and warrants.
In connection with a personal guaranty, dated as of July 23, 2004,
executed by Zubair Kazi on our behalf for up to $300,000 in equipment leases, we
issued a warrant to Zubair Kazi for the purchase of 350,000 shares of our common
stock, exercisable for five years at an exercise price of $0.10 per share.
Pursuant to the personal guaranty, we agreed that for every dollar Mr. Kazi
guaranteed on an equipment lease on behalf of the Company, we would issue Mr.
Kazi 10 warrants to purchase shares of our common stock at an exercise price of
$0.10 per share. On August 10, 2004, we entered into an equipment lease with
VenCore Solutions LLC in the amount of $240,000, which Mr. Kazi executed a
personal guaranty for. In connection therewith, we issued to Mr. Kazi a warrant
to purchase 2,400,000 shares of our common stock, exercisable for five years at
an exercise price of $0.10 per share. This prospectus relates to the resale of
the common stock underlying these warrants.
5
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
Risks Relating to Our Business:
-------------------------------
We Have a History of Losses Which May Continue, Requiring Us to Seek Additional
Sources of Capital Which May Not be Available, Requiring Us to Curtail or Cease
Operations
--------------------------------------------------------------------------------
We had a net loss of $998,531 for the year ended June 30, 2004 compared
to a net loss of $701,053 for the fiscal year ended June 30, 2003. For the three
months ended September 30, 2004, we incurred a net loss of $1,195,241. We cannot
assure you that we can achieve or sustain profitability on a quarterly or annual
basis in the future. If revenues grow more slowly than we anticipate, or if
operating expenses exceed our expectations or cannot be adjusted accordingly, we
will continue to incur losses. We will continue to incur losses until we are
able to establish significant sales of our software and hardware products and
our business process outsourcing services. Our possible success is dependent
upon the successful development and marketing of our services and products, as
to which there is no assurance. Any future success that we might enjoy will
depend upon many factors, including factors out of our control or which cannot
be predicted at this time. These factors may include changes in or increased
levels of competition, including the entry of additional competitors and
increased success by existing competitors, changes in general economic
conditions, increases in operating costs, including costs of supplies, personnel
and equipment, reduced margins caused by competitive pressures and other
factors. These conditions may have a materially adverse effect upon us or may
force us to reduce or curtail operations. In addition, we will require
additional funds to sustain and expand our sales and marketing activities,
particularly if a well-financed competitor emerges. Based on our current funding
arrangements, we anticipate that we will require $250,000 in additional funds to
continue our operations for the next twelve months. In the event that our
financing arrangement with Golden Gate is terminated or if we need additional
financing, there can be no assurance that financing will be available in amounts
or on terms acceptable to us, if at all. The inability to obtain sufficient
funds from operations or external sources would require us to curtail or cease
operations.
If We are Unable to Obtain Additional Funding Our Business Operations Will be
Harmed and if We do Obtain Additional Financing Our then Existing Shareholders
may Suffer Substantial Dilution
--------------------------------------------------------------------------------
Additional capital may be required to effectively support the
operations and to otherwise implement our overall business strategy. However,
there can be no assurance that financing will be available when needed on terms
that are acceptable to us. The inability to obtain additional capital will
restrict our ability to grow and may reduce our ability to continue to conduct
business operations. If we are unable to obtain additional financing, we will
likely be required to curtail our marketing and development plans and possibly
cease our operations. Any additional equity financing may involve substantial
dilution to our then existing shareholders.
6
Our Independent Registered Public Accounting Firm Has Expressed Substantial
Doubt About Our Ability to Continue as a Going Concern, Which May Hinder Our
Ability to Obtain Future Financing
--------------------------------------------------------------------------------
In their report dated September 21, 2004, our Independent Registered
Public Accounting Firm stated that our financial statements for the year ended
June 30, 2004 were prepared assuming that we would continue as a going concern.
Our ability to continue as a going concern is an issue raised as a result of
recurring losses from operations ($23,061,065), including net losses of $998,531
and $701,052 for the fiscal years ending June 30, 2004 and 2003, respectively.
We continue to experience net losses. Our ability to continue as a going concern
is subject to our ability to generate a profit and/or obtain necessary funding
from outside sources, including obtaining additional funding from the sale of
our securities, increasing sales or obtaining loans and grants from various
financial institutions where possible. Our continued net losses and
stockholders' deficit increases the difficulty in meeting such goals and there
can be no assurances that such methods will prove successful.
Many of Our Competitors are Larger and Have Greater Financial and Other
Resources than We do and Those Advantages Could Make it Difficult for Us to
Compete With Them
--------------------------------------------------------------------------------
The general market for our products and services is extremely
competitive and includes several companies which have achieved substantially
greater market shares than we have, and have longer operating histories, have
larger customer bases, have substantially greater financial, development and
marketing resources than we do. If overall demand for our products should
decrease it could have a materially adverse affect on our operating results.
Any Inability to Adequately Protect Our Proprietary Technology Could Harm Our
Ability to Compete
--------------------------------------------------------------------------------
Our future success and ability to compete depends in part upon our
proprietary technology, patents and trademarks, which we attempt to protect with
a combination of patent, copyright, trademark and trade secret laws, as well as
with our confidentiality procedures and contractual provisions. These legal
protections afford only limited protection and are time-consuming and expensive
to obtain and/or maintain. Further, despite our efforts, we may be unable to
prevent third parties from infringing upon or misappropriating our intellectual
property.
We have been issued three patents by the United States Patent and
Trademark Office. Any patents that are issued to us could be invalidated,
circumvented or challenged. If challenged, our patents might not be upheld or
their claims could be narrowed. Our intellectual property may not be adequate to
provide us with competitive advantage or to prevent competitors from entering
the markets for our products. Additionally, our competitors could independently
develop non-infringing technologies that are competitive with, equivalent to,
and/or superior to our technology. Monitoring infringement and/or
misappropriation of intellectual property can be difficult, and there is no
guarantee that we would detect any infringement or misappropriation of our
proprietary rights. Even if we do detect infringement or misappropriation of our
proprietary rights, litigation to enforce these rights could cause us to divert
financial and other resources away from our business operations. Further, we
license our products internationally, and the laws of some foreign countries do
not protect our proprietary rights to the same extent as do the laws of the
United States.
7
Our Products may Infringe Upon the Intellectual Property Rights of Others and
Resulting Claims Against Us Could be Costly and Require Us to Enter Into
Disadvantageous License or Royalty Arrangements
--------------------------------------------------------------------------------
The business process outsourcing industry is characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement and the violation of intellectual property
rights. Although we attempt to avoid infringing upon known proprietary rights of
third parties, we may be subject to legal proceedings and claims for alleged
infringement by us or our licensees of third-party proprietary rights, such as
patents, trade secrets, trademarks or copyrights, from time to time in the
ordinary course of business. Any claims relating to the infringement of
third-party proprietary rights, even if not successful or meritorious, could
result in costly litigation, divert resources and our attention or require us to
enter into royalty or license agreements which are not advantageous to us. In
addition, parties making these claims may be able to obtain injunctions, which
could prevent us from selling our products. Furthermore, former employers of our
employees may assert that these employees have improperly disclosed confidential
or proprietary information to us. Any of these results could harm our business.
We may be increasingly subject to infringement claims as the number of, and
number of features of, our products grow.
If We are not Able to Manage the Growth of Our Company We may Never Achieve
Profitability
--------------------------------------------------------------------------------
Our success will depend on our ability to expand and manage our
operations and facilities. There can be no assurance that we will be able to
manage our growth, meet the staffing requirements of manufacturing scale-up or
for current or additional collaborative relationships or successfully assimilate
and train our new employees. In addition, to manage our growth effectively, we
will be required to expand our management base and enhance our operating and
financial systems. If we continue to grow, there can be no assurance that the
management skills and systems currently in place will be adequate or that we
will be able to manage any additional growth effectively. Failure to achieve any
of these goals could have a material adverse effect on our business, financial
condition or results of operations.
If We Are Unable to Retain the Services of Messrs. Steele, Brownell and Haag or
If We Are Unable to Successfully Recruit Qualified Personnel, We May Not Be Able
to Continue Our Operations.
--------------------------------------------------------------------------------
Our success depends to a significant extent upon the continued service
of Mr. Robert Steele, our Chief Executive Officer, Mr. Robert Brownell, our
President, and Mr. Andrew Haag, our Chief Financial Officer. Loss of the
services of Messrs. Steele, Brownell or Haag could have a material adverse
effect on our growth, revenues, and prospective business. We do not maintain
key-man insurance on the life of Messrs. Steele, Brownell or Haag. In addition,
in order to successfully implement and manage our business plan, we will be
dependent upon, among other things, successfully recruiting qualified personnel.
Competition for qualified individuals is intense. There can be no assurance that
we will be able to find, attract and retain existing employees or that we will
be able to find, attract and retain qualified personnel on acceptable terms.
Risks Relating to Our Current Financing Arrangement:
----------------------------------------------------
There Are a Large Number of Shares Underlying Our Convertible Debentures,
Convertible Notes and Warrants That May be Available for Future Sale and the
Sale of These Shares May Depress the Market Price of Our Common Stock.
--------------------------------------------------------------------------------
8
As of January 12, 2005, we had 79,679,177 shares of common stock issued
and outstanding, convertible debentures outstanding that may be converted into
an estimated 18,710,526 shares of common stock at current market prices,
convertible notes outstanding, plus interest, that may be converted into
approximately 11,366,667 shares of common stock and outstanding warrants to
purchase 15,650,000 shares of common stock. In addition, the number of shares of
common stock issuable upon conversion of the outstanding convertible debentures
may increase if the market price of our stock declines. All of the shares,
including all of the shares issuable upon conversion of the debentures and notes
and upon exercise of our warrants, may be sold without restriction. The sale of
these shares may adversely affect the market price of our common stock.
The Continuously Adjustable Conversion Price Feature of Our Convertible
Debentures Could Require Us to Issue a Substantially Greater Number of Shares,
Which Will Cause Dilution to Our Existing Stockholders.
--------------------------------------------------------------------------------
If we are unable to make repayment of the convertible debentures on a
monthly basis, our obligation to issue shares upon conversion of our convertible
debentures is essentially limitless. The following is an example of the amount
of shares of our common stock that are issuable, upon conversion of our
convertible debentures (excluding accrued interest), based on market prices 25%,
50% and 75% below the market price, as of January 12, 2005 of $0.18.
% Below Number
Outstanding Price Per With Discount of Shares % of
Market Share at 20% Issuable Stock
------ ----- ------ -------- -----
25% $.135 $.108 27,555,556 17.79%
50% $.09 $.072 42,833,333 25.17%
75% $.045 $.036 88,666,667 41.05%
As illustrated, the number of shares of common stock issuable upon
conversion of our convertible debentures will increase if the market price of
our stock declines, which will cause dilution to our existing stockholders.
The Continuously Adjustable Conversion Price feature of our Convertible
Debentures May Encourage Investors to Make Short Sales in Our Common Stock,
Which Could Have a Depressive Effect on the Price of Our Common Stock.
--------------------------------------------------------------------------------
The convertible debentures are convertible into shares of our common
stock at a 20% discount to the trading price of the common stock prior to the
conversion. The significant downward pressure on the price of the common stock
as Golden Gate Investors converts and sells material amounts of common stock
could encourage short sales by investors. This could place further downward
pressure on the price of the common stock. Golden Gate Investors could sell
common stock into the market in anticipation of covering the short sale by
converting its securities, which could cause the further downward pressure on
the stock price. In addition, not only the sale of shares issued upon conversion
or exercise of debentures and warrants, but also the mere perception that these
sales could occur, may adversely affect the market price of the common stock.
9
The Issuance of Shares Upon Conversion of the Convertible Debentures and
Convertible Notes and Exercise of Outstanding Warrants May Cause Immediate and
Substantial Dilution to Our Existing Stockholders.
--------------------------------------------------------------------------------
The issuance of shares upon conversion of the convertible debentures
and convertible notes and exercise of warrants may result in substantial
dilution to the interests of other stockholders since the selling stockholders
may ultimately convert and sell the full amount issuable on conversion. Although
Golden Gate Investors may not convert their convertible debentures and/or
exercise their warrants if such conversion or exercise would cause them to own
more than 4.9% of our outstanding common stock, this restriction does not
prevent Golden Gate Investors from converting and/or exercising some of their
holdings and then converting the rest of their holdings. In this way, Golden
Gate Investors could sell more than this limit while never holding more than
this limit. There is no upper limit on the number of shares that may be issued
which will have the effect of further diluting the proportionate equity interest
and voting power of holders of our common stock, including investors in this
offering.
In The Event That Our Stock Price Declines, The Shares Of Common Stock Allocated
For Conversion Of The Convertible Debentures and Registered Pursuant To This
Prospectus May Not Be Adequate And We May Be Required to File A Subsequent
Registration Statement Covering Additional Shares. If The Shares We Have
Allocated And Are Registering Herewith Are Not Adequate And We Are Required To
File An Additional Registration Statement, We May Incur Substantial Costs In
Connection Therewith.
--------------------------------------------------------------------------------
Based on our current market price and the potential decrease in our
market price as a result of the issuance of shares upon conversion of the
convertible debentures, we have made a good faith estimate as to the amount of
shares of common stock that we are required to register and allocate for
conversion of the convertible debentures. Accordingly, we are registering
20,625,000 shares to cover the conversion of the convertible debentures. In the
event that our stock price decreases, the shares of common stock we have
allocated for conversion of the convertible debentures and are registering
hereunder may not be adequate. If the shares we have allocated to the
registration statement are not adequate and we are required to file an
additional registration statement, we may incur substantial costs in connection
with the preparation and filing of such registration statement.
If We Are Required for any Reason to Repay Our Outstanding Convertible
Debentures, We Would Be Required to Deplete Our Working Capital, If Available,
Or Raise Additional Funds. Our Failure to Repay the Convertible Debentures, If
Required, Could Result in Legal Action Against Us, Which Could Require the Sale
of Substantial Assets.
--------------------------------------------------------------------------------
In August 2004, we entered into a Securities Purchase Agreement for the
sale of an aggregate of $300,000 principal amount of convertible debentures. The
convertible debentures are due and payable, with 5 3/4% interest, two years from
the date of issuance, unless sooner converted into shares of our common stock.
In addition, any event of default could require the early repayment of the
convertible debentures at a price equal to 125% of the amount due under the
debentures. We anticipate that the full amount of the convertible debentures,
together with accrued interest, will be converted into shares of our common
stock, in accordance with the terms of the convertible debentures. If we are
required to repay the convertible debentures, we would be required to use our
limited working capital and raise additional funds. If we were unable to repay
the debentures when required, the debenture holders could commence legal action
against us and foreclose on all of our assets to recover the amounts due. Any
such action would require us to curtail or cease operations.
10
Risks Relating to Our Common Stock:
-----------------------------------
If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
--------------------------------------------------------------------------------
Companies trading on the OTC Bulletin Board, such as us, must be
reporting issuers under Section 12 of the Securities Exchange Act of 1934, as
amended, and must be current in their reports under Section 13, in order to
maintain price quotation privileges on the OTC Bulletin Board. If we fail to
remain current on our reporting requirements, we could be removed from the OTC
Bulletin Board. As a result, the market liquidity for our securities could be
severely adversely affected by limiting the ability of broker-dealers to sell
our securities and the ability of stockholders to sell their securities in the
secondary market.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
--------------------------------------------------------------------------------
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for
transactions in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives
of the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement
from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for invest-
ors to dispose of our common stock and cause a decline in the market value of
our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
11
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by the selling stockholder. We will not
receive any proceeds from the sale of shares of common stock in this offering.
However, we will receive up to $4,409,000 upon exercise of the warrants by the
selling stockholders. We expect to use the proceeds received from the exercise
of the warrants, if any, for general working capital purposes. We received an
aggregate of $300,000 in connection with the issuance of the convertible
debenture and $700,000 in connection with the issuance of the convertible notes
to the selling stockholders. We used the $1,000,000 for the general working
capital purposes and the payment of professional fees.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol
"QTEK." For the periods indicated, the following table sets forth the high and
low bid prices per share of common stock. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions.
Low High
--- ----
2003
----
First Quarter .03 .14
Second Quarter .02 .13
Third Quarter .03 .07
Fourth Quarter .03 .19
2004
----
First Quarter .09 .17
Second Quarter .10 .19
Third Quarter .13 .26
Fourth Quarter .12 .20
2005
----
First Quarter .12 .21
Second Quarter .16 .26
Third Quarter (1) .17 .21
(1) As of January 18, 2005.
HOLDERS
As of January 12, 2005, we had approximately 504 holders of our common
stock. The number of record holders was determined from the records of our
transfer agent and does not include beneficial owners of common stock whose
shares are held in the names of various security brokers, dealers, and
registered clearing agencies. The transfer agent of our common stock is
Interwest Transfer Company.
We have never declared or paid any cash dividends on our common stock.
We do not anticipate paying any cash dividends to stockholders in the
foreseeable future. In addition, any future determination to pay cash dividends
will be at the discretion of the Board of Directors and will be dependent upon
our financial condition, results of operations, capital requirements, and such
other factors as the Board of Directors deem relevant.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Some of the information in this Form SB-2 contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However,
there may be events in the future that we are not able to accurately predict or
over which we have no control. Our actual results and the timing of certain
events could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."
Overview
--------
We have been a manufacturer of hardware and software and a service
provider to the corporate and public sector markets since 1991. Our new
division, Quintek Services, Inc. delivers business process outsourcing services
and information lifecycle management solutions to document intensive industries
such as healthcare and financial services. Business process outsourcing is the
delegation, by the customer, of the operational responsibility for a business
process's execution and performance within the customer's environment. The
solutions and services we provide enable organizations to secure and manage
their information and document business processes more efficiently.
Quintek Services provides business process outsourcing services to
Fortune 500, Russell 2000 companies and public sector organizations. Our
business process outsourcing services range from the digitizing, indexing and
uploading of source documents through simple customer-specific, rules-based
decision making.
We sell hardware, software and services for printing large format
drawings such as blueprints and computer aided design files directly to the
microfilm format of aperture cards. We are the only manufacturer of a patented
chemical-free desktop microfilm printer for aperture cards.
Critical Accounting Policies and Estimates
------------------------------------------
Revenue Recognition
-------------------
Revenue is recognized when earned. We recognize our revenue in
accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin No. 104, "Revenue Recognition in Financial Statements" and The American
Institute of Certified Public Accountants Statement of Position 97-2, "Software
Revenue Recognition," as amended as amended by Statement of Position 98-4 and
Statement of Position 98-9.
Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires us 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.
13
Cash and cash equivalents
We consider 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
We maintain reserves for potential credit losses on accounts
receivable. We review the composition of accounts receivable and analyze
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.
Inventories
We value inventories at the lower of cost (determined on first-in, first-out) or
market. We compare the cost of inventories with the market value and allowance
is made for writing down the inventories to their market value, if lower.
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. We evaluate 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 our financial
statements beginning July 1, 2002.
Long-lived assets
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", 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."
We periodically evaluate the carrying value of long-lived assets to be held and
used in accordance with SFAS 144. SFAS 144 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
14
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.
Software development costs
We have adopted Statement of Position 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.
We make 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, we
write off the amount that the unamortized software development costs exceed net
realizable value.
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 pro forma disclosure of what net income and
earnings per share would have been had we adopted the new fair value method. We
have chosen to account for stock-based compensation using Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and have
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 our stock at the date of the grant over the amount an employee is
required to pay for the stock.
Issuance of shares for service
We account 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.
Recent Accounting 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 our interim reporting period ending
January 31, 2003.
In compliance with FAS No. 148, we have elected to continue to
follow the intrinsic value method in accounting for our stock-based employee
compensation plan as defined by APB No. 25 and have made the applicable
disclosures.
15
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, 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 our 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. We do not
hold any variable interest entities.
Results of Operations for the Year Ended June 30, 2004 As Compared to the Year
Ended June 30, 2003
--------------------------------------------------------------------------------
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 our 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 our 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.
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, nine network upgrades, one
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.
16
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. We executed a financing
agreement for a total of $500,000 in convertible notes to Kazi Management VI,
LLC.
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 us 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
us making these payments.
Results of Operations for the Quarter Ended September 30, 2004 As Compared to
the Quarter Ended September 30, 2003
--------------------------------------------------------------------------------
Our revenues totaled $114,266 and $108,177 for the three months ended
September 30, 2004 and 2003, respectively, an increase of $6,089 (6%) in 2004,
primarily due to changing our sales focus to the services business. Revenues in
the previous period resulted primarily from sales of equipment, aperture card
media, and maintenance services. Revenues in this period included $60,885 from
the new services business.
For the three months ended September 30, 2004 and 2003, cost of sales
was $84,481 and $52,910, respectively, an increase of $31,571 (60%) in 2004. The
cost of sales for the previous period consisted primarily of labor and
production costs. The cost of sales for this period consisted primarily of
labor, facility and equipment lease costs.
Operating expenses totaled $1,202,109 for the three month period ended
September 30, 2004 as compared to $165,898 for the three month period ended
September 30, 2003, a $1,036,211 (625%) increase in 2004, primarily due to a
increase in sales related expenses and stock-based compensation for consulting
services accrued over the past 18 months.
During the three months ended September 30, 2004, we billed on one
contract for document services, 19 maintenance contracts, one network upgrade
and 18,000 aperture cards.
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 notes 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.
17
Liquidity & Capital Resources
-----------------------------
The reports of our independent auditors on the 2004 and 2003
consolidated financial statements included explanatory paragraphs stating that
there is substantial doubt with respect to our ability to continue as a going
concern. We believe that we have a plan to address these issues and enable us to
continue through the end of 2005. This plan includes obtaining additional equity
or debt financing and increasing sales of our outsourcing services. Although we
believe that the plan will be realized, there is no assurance that these events
will occur. In the event that we are unsuccessful, it is possible that we will
cease operations or seek bankruptcy protection. The consolidated financial
statements do not include any adjustments to reflect the uncertainties related
to the recoverability and classification of assets or the amounts and
classification of liabilities that may result from an inability on our part to
continue as a going concern.
We have historically financed operations from the issuance of debt, the
sale of common stock and the conversion of common stock warrants. On September
30, 2004, we had cash on hand of $11,670 and working capital of $(854,163) as
compared to cash on hand of $15,600 and working capital of ($2,127,979) at
period-ending June 30, 2003.
Net cash used in operating activities of $(571,727) and $552 for three
months ended September 30, 2004 and 2003, respectively, is attributed primarily
to an increase in stock-based compensation, issuance of stock for consulting
services and accounts payable and accrued expenses.
Net cash used for investing activities of $0 for the three months ended
September 30, 2004 and ($9,092) for the three months ended September 30, 2003 is
primarily related to no purchases of other assets made during the period.
Net cash provided by financing activities of $567,797 for the three
months ended September 30, 2004 is based primarily on sale of securities. Net
cash provided by financing activities of $(8,066) for the three months ended
September 30, 2003 is based primarily on proceeds from factoring offset by notes
payable to stockholders.
During the last 12 months, we have undertaken the following initiatives
to obtain funding for our ongoing operations:
1) On September 26, 2003 we entered into a Note Purchase Agreement
with Kazi Management V.I. LLC. This investor purchased five
convertible notes, each for $100,000, for a total purchase price
of $500,000. The convertible notes bear interest at 10% per annum.
These notes are convertible into shares of our common stock at a
price of $0.06. In connection with this Note Purchase Agreement,
the investor will receive up to 9,166,667 warrants exercisable at
$0.10 per share and expiring on September 26, 2008, with the
investor receiving one warrant for every share converted under the
convertible notes. This prospectus relates to the resale of the
common stock underlying these convertible notes.
2) On July 11, 2004 we entered into a Securities Purchase Agreement
with Bernadette Haag. This investor purchased a convertible note
for $20,000. On August 31, 2004, the holder converted this note
into 200,000 shares of our common stock. In connection with this
Securities Purchase Agreement, we issued the investor 200,000
warrants, exercisable at $0.15 per share, which expire on July 11,
2007. This prospectus relates to the resale of the common stock
issued upon conversion of the convertible note and the shares of
common stock underlying the warrants.
18
3) On July 27, 2004 we entered into a Securities Purchase Agreement
with Rayne Forecast. This investor purchased a convertible note
for $50,000. On August 31, 2004, the holder converted this note
into 500,000 shares of our common stock. In connection with this
Securities Purchase Agreement, we issued the investor 500,000
warrants, exercisable at $0.15 per share, which expire on July 27,
2007. This prospectus relates to the resale of the common stock
issued upon conversion of the convertible note and the shares of
common stock underlying the warrants.
4) On July 29, 2004, we entered into an Agreement with Langley Park
Investments PLC, a London investment company to issue 14,000,000
shares of our common stock to Langley Park Investments in return
for 1,145,595 shares of Langley. Fifty percent of Langley Park
Investments shares issued to us under this agreement are to be
held in escrow for two years. At the end of two years, if the
market price for our common stock at or greater than the initial
closing price, the escrow agent will release the remaining Langley
Park Investments shares to us. In the event that the market price
for our common stock is less than the initial closing price the
amount released will be adjusted.
Langley Park Investments' initial offering price was 1(pound) (One
Pound UK per share). Our shares are to be held by Langley Park
Investments for a period of at least two years. Langley Park
Investments' shares issued to us are free trading. Langley Park
Investment Trust Plc was admitted to the Full List of The London
Stock Exchange on September 30, 2004 and dealings in Langley
shares commenced on October 7, 2004.
5) On August 2, 2004, we signed a Master Lease Agreement with Vencore
Solutions, LLC, a venture leasing company located in Lake Oswego,
Oregon. Under the agreement, we established a lease line of credit
for up to $240,000 in equipment financing. This is a capital
lease, whereby we pay a 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. At
the end of the lease, we have the option to purchase the equipment
or return it. Vencore Solutions received 144,000 warrants to
purchase our common stock at $0.10, expiring on August 2, 2007.
6) We entered into a Securities Purchase Agreement with Golden Gate
Investors, Inc. in August 2004 for the sale of (i) $300,000 in
convertible debentures and (ii) warrants to buy 3,000,000 shares
of our common stock.
This prospectus relates to the resale of the common stock
underlying these convertible debentures and warrants.
The investors are obligated to provide us with an aggregate of
$300,000 as follows:
o $175,000 was disbursed to us on August 4, 2004;
o $50,000 has been retained for services provided to our
company by various professionals, which shall be
disbursed upon effectiveness of this registration
statement; and
o $75,000 will be released upon effectiveness of this
registration statement.
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The debentures bear interest at 5 3/4%, mature two years from the
date of issuance, and are convertible into our common stock, at
the selling stockholder's option. The convertible debentures are
convertible into the number of our shares of common stock equal to
the principal amount of the debentures being converted multiplied
by 11, less the product of the conversion price multiplied by ten
times the dollar amount of the debenture. The conversion price for
the convertible debenture is the lesser of (i) $0.50 or (ii)
eighty percent of the of the average of the five lowest volume
weighted average prices during the twenty (20) trading days prior
to the conversion. If the volume weighted average price is below
$0.10 on a conversion date, we have the right to pre-pay the
amount of the debenture the holder elects to convert, plus accrued
and unpaid interest, at 125% of such amount; however, if we elect
to pre-pay in this situation, the debenture holder has the right
to withdraw the notice of conversion. Also, if the volume weighted
average price is below $0.10 at any point during a month, the
holder is not obligated to convert any portion of the debenture
during that month. Accordingly, there is in fact no limit on the
number of shares into which the debenture may be converted. In
addition, the selling stockholder is obligated to exercise the
warrant concurrently with the submission of a conversion notice by
the selling stockholder. The warrant is exercisable into 3,000,000
shares of common stock at an exercise price of $1.00 per share.
Golden Gate Investors has contractually committed to convert not
less than 5% of the original face value of the debenture monthly
beginning the month after the effective date of the Registration
Statement. Golden Gate Investors is required to exercise warrants
concurrently with the exercise of a conversion notice under the
debenture and is committed to exercise at least 5% of the warrants
per month after the effective date of the Registration Statement.
In the event that Golden Gate Investors breaches the minimum
restriction on the debenture and warrant, Golden Gate will not be
entitled to collect interest on the debenture for that month. If
Golden Gate submits a conversion notice and the volume weighted
average price is less then $.10 per share, then we will be
entitled to prepay the portion of the debenture that is being
converted at 125% of such amount. If we elect to prepay, then
Golden Gate may withdraw its conversion notice.
Golden Gate has further contractually agreed to restrict its
ability to convert the debenture or exercise their warrants and
receive shares of our common stock such that the number of shares
held by the Holder and its affiliates after such conversion or
exercise does not exceed 4.9% of the then issued and outstanding
shares of our common stock.
In the event that the registration statement is not declared
effective by the required deadline, which is 150 days from the
date of the Securities Purchase Agreement, Golden Gate may demand
repayment of the Debenture of 150% of the face amount outstanding,
plus all accrued and unpaid interest, in cash. If the repayment is
accelerated, we are also obligated to issue to Golden Gate 50,000
shares of common stock and $15,000 for each 30-day period, or
portion thereof, during which the face amount, including interest
thereon, remains unpaid. If Golden Gate does not elect to
accelerate the debenture, we are required to immediately issue to
Golden Gate 50,000 shares of common stock and $15,000 for each
30-day period, or portion thereof, during which the face amount,
including interest thereon, remains unpaid.
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7) We entered into a Securities Purchase Agreement with David Gough
on August 17, 2004 for the sale of $200,000 in convertible notes.
The investor is obligated to provide us with an aggregate of
$200,000 as follows:
o $100,000 was disbursed on August 17, 2004; and
o $100,000 will be disbursed within five days of the
effectiveness of this prospectus.
Accordingly, we have received a total of $100,000 pursuant to the
Securities Purchase Agreement.
The convertible notes bear interest at 10%, mature two years from
the date of issuance, and are convertible into our common stock,
at the selling stockholders' option, at $0.10 per share. In the
event that we enter 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 these debentures at a price less than a conversion
price of $0.10, then the conversion price of these debentures will
reset to the lower of $0.10 or the lower conversion price equal to
that in the subsequent agreement. Warrants are exercisable at
$0.12 into shares of our common stock of and expire on August 17,
2007. This prospectus relates to the resale of the common stock
underlying these convertible notes and warrants.
8) On September 15, 2004 we entered into a Stock Purchase Agreement
with Stan Merdinger. This investor purchased 1,000,000 shares of
our common stock, at $0.10 per share, for a total purchase price
of $100,000. In connection with this Stock Purchase Agreement, we
issued the investor 1,000,000 warrants, exercisable at $0.13 per
share, which expire on September 15, 2007. This prospectus relates
to the resale of the common stock underlying these convertible
notes and warrants.
9) In connection with a personal guaranty, dated as of July 23, 2004,
executed by Zubair Kazi on our behalf for up to $300,000 in
equipment leases, we issued a warrant to Zubair Kazi for the
purchase of 350,000 shares of our common stock, exercisable for
five years at an exercise price of $0.10 per share. Pursuant to
the personal guaranty, we agreed that for every dollar Mr. Kazi
guaranteed on an equipment lease on behalf of the Company, we
would issue Mr. Kazi 10 warrants to purchase shares of our common
stock at an exercise price of $0.10 per share. On August 10, 2004,
we entered into an equipment lease with VenCore Solutions LLC in
the amount of $240,000, which Mr. Kazi executed a personal
guaranty for. In connection therewith, we issued to Mr. Kazi a
warrant to purchase 2,400,000 shares of our common stock,
exercisable for five years at an exercise price of $0.10 per
share. This prospectus relates to the resale of the common stock
underlying these warrants.
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, or merge with another company
to effectively maintain operations.
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BUSINESS
BACKGROUND
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 Technologies
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. Upon effectiveness of that acquisition, Quintek
Technologies elected to become the successor issuer to Juniper for reporting
purposes under the Securities Exchange Act of 1934.
BUSINESS OVERVIEW
We have been a manufacturer of hardware and software and a service
provider to the corporate and public sector markets since 1991. Our new
division, Quintek Services, Inc. delivers business process outsourcing services
and information lifecycle management solutions to document intensive industries
such as healthcare and financial services. Business process outsourcing is the
delegation, by the customer, of the operational responsibility for a business
process's execution and performance within the customer's environment. The
solutions and services we provide enable organizations to secure and manage
their information and document business processes more efficiently.
Quintek Services provides business process outsourcing services to
Fortune 500, Russell 2000 companies and public sector organizations. Our
business process outsourcing services range from the digitizing, indexing and
uploading of source documents through simple customer-specific, rules-based
decision making.
We sell hardware, software and services for printing large format
drawings such as blueprints and computer aided design files directly to the
microfilm format of aperture cards. We are 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, 2004, 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. On April 21, 2004, we announced that we would be
entering the rapidly expanding business process outsourcing market through our
new Quintek Services division. In June 2004, we announced that FedEx Kinko's has
selected us as their scanning partner of choice for their Western Region. Our
growth plan is focused on our new Quintek Services division.
OUR PRODUCTS AND SERVICES
DOCUMENT MANAGEMENT AND IMAGING MARKET
According to a March 2004 report 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.
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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.
Because most business process outsourcing 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
We are targeting three vertical markets, mortgage processing,
healthcare claims processing and accounts payable processing.
Home Mortgage Processing
In 2002 mortgage originators funded $2.787 trillion in loans, in 2003,
they 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. Sales of new mortgages and refinancings have been
driven by historically low interest rates.
Mortgage transactions are paper intensive. Portfolios 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. Portfolios 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. First, both sides of the transaction would
like to eliminate the costs associated with copying and shipping paper documents
and second, it 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.
Healthcare Claims Processing
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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 of 9.1%.
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 pending 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 insureds 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 with a business 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 application
service provider.
Offshore Partnerships
To provide customers with compelling pricing and quality, we
electronically deliver work offshore 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 and data conversion services. With the
India business process outsourcing market growing at a compounded annual growth
rate of more than 25%, many companies based in the United States are leveraging
the compelling advantages of cost, quality and cycle time found in India.
Services
High Speed Scanning at Client Site or Our Production Center
Fortune 500 companies and other large organizations manage documents
using enterprise content management 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 enterprise content
management system that can support a worldwide staff of 12,000 employees who
need to access 30 million pages of data in Adobe PDF format.
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The scope of work for a high speed scanning contract will usually
include us receiving paper documents and delivering these documents directly
into the customer's enterprise content management 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. We
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 enterprise content
management system. This often has to be done in less than 24 hours from receipt
of the document.
In its current configuration, our Huntington Beach facility can convert
25,000 images in an eight-hour shift and 1,000,000 images per month running two
shifts. If we are able to secure additional financing, with additional equipment
and reconfiguration, this facility has the capability of processing 250,000
images in an eight-hour shift. Running two shifts at that capacity, the facility
could process 10,000,000 documents a month.
Domestic/Offshore Data Entry, OCR, and Indexing
We use manual and 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.
We have ensured higher quality assurance 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 process guarantees clients a 99.5% accuracy rate.
We perform 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. We resell this work to offshore companies that perform this service.
Application Service Provider Hosting of Scanned Images
Once images have been scanned, end-users need an 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 enterprise content management system, we resell web-based
document hosting application service provider services from our partners such as
Hyland Software's OnBase or Iron Mountain's Digital Archives. This provides our
clients the efficient and immediate capability of viewing business critical
documents on line.
In House Imaging Solutions (Hardware, Software, and Services)
For customers that want to use their digital documents on an in-house
enterprise content management system, we provide multiple solutions based on the
clients needs. We offer system design, professional services and implementation
required hardware and software.
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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 us. We physically retrieve the mail
directly from the post office through a post office box, sort, scan and capture
key data fields from each document. The scanned images and corresponding data
are uploaded directly to the customer's enterprise content management or one of
our application service provider partners systems for online viewing by the
customer's end user. This service is sold per piece of mail processed.
MARKET
Overall Business Process Outsourcing Market
Goldman Sachs estimates the business process outsourcing market at
potentially $175-210 billion in annual revenue and growing at a compounded
annual growth rate of roughly 20%, more than twice the projected rate for
information technology spending.
According to an August 2003 Forrester Research report, the US business
process outsourcing market will expand to $146 billion in 2008. The trend is
towards corporations spending more of their information technology budgets on
services. Rather than purchasing hardware, software and labor, companies can pay
a business process outsourcing vendor like on a per document or job basis. In
this way, they do not carry the cost of infrastructure during unneeded periods.
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 strategy that manages these non-strategic business processes.
Outsourcing operations can potentially provide substantial, measurable benefits
right away.
Allowing business process outsourcing suppliers to manage these
non-strategic operations provides flexibility and makes organizations better
able to respond to new and existing business opportunities. Among the benefits
of a business process outsourcing 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 business process outsourcing contracts ranges
from basic scanning and data entry, also known as level one business process
outsourcing, to outsourcing an entire department, which would be level five
business process outsourcing. We focus on level two and level three. Level three
business process outsourcing is higher margin business because it requires
complex data capture from multi-page forms done by operators who are trained in
the customers specific line of business and who are able to analyze, interpret
and resolve discrepancies in our customers data.
Benefits Of Business Process Outsourcing
o Reduce costs-- business process outsourcing provides quantifiable
benefits through improved efficiencies, lower overhead, reduced
payroll and benefit expenses, and fewer capital investments.
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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-- business
process outsourcing 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-- business process
outsourcing provides access to proprietary workflow systems,
process reengineering skills, and innovative staffing and delivery
models, combined with proprietary technology delivered by experts.
o Provide access to scalable operations and on-demand resources--
business process outsourcing provides the flexibility to respond
to a rapidly changing marketplace and scale operations up or down
as conditions dictate. In a business process outsourcing
engagement, the business process outsourcing partner delivers
access to global staff, processes, resources, and
technology--wherever and whenever they are needed.
o Strengthen clients' competitive position--Organizations can
leverage a business process outsourcing strategy to improve their
financial and competitive positions and differentiate themselves
from competitors. business process outsourcing results in
efficient operations, access to global capabilities and faster
time-to-market.
STRATEGY
As companies look to outsource to overseas business process outsourcing
providers they encounter three problems that we solve. First, finding the right
business process outsourcing partner is difficult because few overseas business
process outsourcing 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.
Our core competencies are executive level sales skill, 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.
Our experience has shown that to sell and deliver a complete business
process outsourcing solution to a customer, a company must engage a partner or
multiple partners during some part of the process of delivering the service. We
have found that profitability in the business process outsourcing business comes
from specialization. We believe that the larger companies that attempt to
provide all aspects of the business process outsourcing solution internally
cannot compete with companies 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.
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We hope to grow through mutually beneficial business relationships with
large organizations that provide a complementary piece of the business process
outsourcing solution but also require the pieces that we provide. The scope of
work for business process outsourcing contracts ranges from basic scanning and
data entry, also known as level one business process outsourcing, to outsourcing
an entire department, which would be level five business process outsourcing. We
focus on level two and level three business process outsourcing. Level two
business process outsourcing is higher margin business than level one because it
requires workers trained in the customers specific line of business and who are
able to analyze, interpret and resolve discrepancies in our customers data.
Level three business process outsourcing is more complex data entry from
multi-page forms. We plan to build an account and revenue base through
performing level one business process outsourcing services domestically and
reselling level two business process outsourcing services from offshore
providers.
SALES PROCESS
Our Value Proposition
The Quintek Value Proposition is that we can significantly reduce our
customer's current process overhead. We can change the customer's fixed costs
into variable costs and we can deliver a higher quality of service than the
customer can achieve internally.
Our Target Account Profiles
In the initial stage of our 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.
Direct Sales
We currently have one full-time direct sales person. We plan to grow
our direct sales program to cover additional major markets. The job of our
direct sales team is to identify prospects before they have reached the request
for proposal stage, know that these proposals are being sent out and to receive
and respond to them.
Template engagement team
During our 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.
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Leveraging Temporary Labor
Our 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.
Offshore Partners
We currently have deal-by-deal relationships with offshore business
process outsourcing providers. We believe that there is no compelling business
reason to seek or offer an exclusive relationship with an offshore business
process outsourcing provider. There are many skilled offshore providers.
Sales Partnerships
FedEx Kinko's
On June 1, 2004, we signed a sales agreement with FedEx Kinko's, a
division of FedEx Corp. FedEx Kinko's selected us as their preferred document
imaging and 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. Our services are a value added
upsell to the Kinko's core 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.
FedEx Kinko's sales team is reselling the following services of ours;
(1) high speed scanning at client site or our production center, (2)
domestic/offshore data entry, optical character recognition scanning and
indexing, (3) application service provider hosting of scanned images, (4) in
house imaging solutions (hardware, software, and services), and (5) mailroom
outsourcing (inbound).
Single Source Partners
On April 26, 2004, we signed an agreement with Single Source Partners.
Single Source Partners is a provider of mortgage solutions located in Newport
Beach, CA that supplies business process outsourcing services in the mortgage
industry. Single Source Partners is paid by financial institutions to
pre-qualify vendors and service providers. Single Source Partners also receives
a finder's fee from us in the event that we close a sale with a referral from
them. Single Source Partners and we have identified and are pursuing more than
$60 million in potential business from Single Source Partners' client companies.
Single Source Partners provides small and midsize mortgage companies
with negotiated volume pricing and special service level agreements. Single
Source Partners receives a portion of the revenue that we bill from a referred
client. The next steps to move this relationship forward are training at Single
Source Partners and expanding our production abilities to be positioned to serve
Single Source Partners' customers nationally.
GCAP Services, Inc.
On July 2. 2004, we signed an agreement with GCAP Services. GCAP
Services 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, we can provide an end-to-end solution in
document management conversions for government clients.
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GCAP Services provides executive, strategic and tactical management
consulting services. They assist the 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
us 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.
Iron Mountain
On May 4, 2004, we signed an agreement to become a certified imaging
partner with Iron Mountain leading provider of Web based document hosting
solutions to provide our clients immediate capability of viewing business
critical documents on line.
Iron Mountain provides outsourced records and information management
services. Iron Mountain 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.
This agreement with Iron Mountain primarily offers the Iron Mountain
sales force our business process outsourcing services while enabling us to
resell web-based document hosting application service provider services, which
provide our clients the efficient and immediate capability of viewing business
critical documents on line.
Competition
There are several companies currently providing document imaging and
business process outsourcing services. These competitors are a combination of
existing microfilm conversion service providers, scanning service providers,
document management system integrators, and offshore data entry organizations.
Most of the aforementioned business process outsourcing provider companies are
doing business on a local or regional level. There are a few national providers
of business process outsourcing and document imaging services, including
Affiliated Computer Services of Dallas, TX, SourceCorp of Dallas, TX and EDS.
CHEMICAL-FREE MICROFILM 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. 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 to have a 500 plus year lifespan.
30
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, our
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.
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.
We believe 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 and 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
Our 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. We believe 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.
We believe 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. Our product
eliminates the need for such print rooms and their on-going expense.
Product Overview
Our 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.
31
The Q4400 system is comprised of our 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.
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 using direct output to aperture card, the user is expected to gain
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:
32
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
Trademarks
"Quintek" 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
Our chemical free microfilm business unit is primarily engaged in the
service and maintenance of the installed base of Q4300 and Q4400 aperture card
printers. We sell maintenance contracts on the installed base of Q43/44XX
printers for $10,200. We sell upgrades to upgrade the installed base of printers
to Windows XP/2000 for $5000. We sell extended software features to the Q43/44XX
printers for $5000.
We have determined that in order to grow sales, a redesign of the
Q43/44XX printer is required. We have determined that this investment would be
at least $250,000, and therefore, we have decided that it is in our best
interests to wait until our new Quintek Services division is profitable before
proceeding with investment in the Chemical-Free Microfilm technology.
MANUFACTURING
Prior to March, 2003, we were dependent upon Kitron/Bofos for
manufacturing the 4305 printer. Since March, 2003, all 4305 printers have been
made in our Idaho facility. As of this writing, we have been unable to obtain
the tooling for the 43/44XX printers from Kitron. Kitron believes it is owed
$100,000 and will not return our property. We dispute this debt and are
attempting to resolve this matter as quickly as possible.
Our supplier of replacement ribbons has discontinued that line of
business. We are not currently in possession of tooling for manufacturing new
ribbons. We have determined that setting up new tooling for ribbons would cost
at least $20,000.
We believe that the Montpelier, Idaho facility will be able to meet
current demand for our products and services. We have been working with a
variety of suppliers for Q4305 and other parts. These suppliers are located
throughout the United States. We believe that this will help to insure stability
and reduce risk through the lack of reliance upon any single supplier.
COMPETITION
There are several companies currently providing document imaging and
business process outsourcing services. These competitors are a combination of
existing microfilm conversion service providers, scanning service providers,
document management system integrators, and offshore data entry organizations.
Most of the aforementioned business process outsourcing provider companies are
doing business on a local or regional level. There are a few national providers
of business process outsourcing and document imaging services, including
Affiliated Computer Services of Dallas, TX, SourceCorp of Dallas, TX and EDS.
33
We believe that we are the only manufacturer of a chemical-free desktop
aperture card printer. There are other aperture card printing devices available.
Both of the competitive devices we are aware of are manufactured outside of the
United States by Microbox AG, based in Germany and Wicks and Wilson, based in
the United Kingdom. This product is a large unit that weighs roughly 772 pounds.
To our knowledge, the 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.
EMPLOYEES
On October 25, 2004, we had a total of 12 employees: three in
management, two in sales, four in production and three in administration. None
of the employees is covered by a collective bargaining agreement and we believe
that our relations with our employees are good.
DESCRIPTION OF PROPERTIES
We maintain our principal office at 17951 Lyons Circle, Huntington
Beach, California 92647. Our telephone number at that office is (714) 848-7741
and our facsimile number is (714) 848-7701. We lease 7,090 square feet of office
space. The lease expires on June 30, 2008, and we hold an option to extend the
lease for an additional four years. The monthly rent is $7,485.72. We believe
that our current office space and facilities are sufficient to meet our present
needs and do not anticipate any difficulty securing alternative or additional
space, if needed, on terms acceptable to us.
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.
LEGAL PROCEEDINGS
From time to time, we may become party to litigation or other legal
proceedings that we consider to be a part of the ordinary course of our
business. Except as described below, we are not involved currently in legal
proceedings that could reasonably be expected to have a material adverse effect
on our business, prospects, financial condition or results of operations. We may
become involved in material legal proceedings in the future.
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 us and a reseller of
our Q4300 Printers. We 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 of dollars
in business because of it.
34
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following information sets forth the names of our officers and
directors, their present positions with us, and their biographical information.
Name Age Office(s) Held
---------------------- -------- ------------------------------
Robert Steele 38 Chief Executive Officer and
Director
Robert Brownell 49 President
Andrew Haag 37 Chief Financial Officer and
Director
Robert Steele, Age 38, Chief Executive Officer and Director
-----------------------------------------------------------
Robert Steele has been our Chief Executive Officer, President, and Chairman of
the Board of Directors since January 30, 2003. From 1999 to 2001, Mr. Steele
served as the Chief Executive Officer of ibrite, Inc., a mobile information
management software company. For nine years, from 1988 through 1998, Mr. Steele
served as Corporate Vice President & Chief Technology Officer for CADD
Microsystems, Inc., a leading provider of Autodesk Computer Aided Design
software, consulting, training and integration services in the Washington, DC
Metropolitan Area. Mr. Steele received a Bachelor of Science in Electronic and
Computer Engineering from George Mason University in 1988.
Robert Brownell, Age 49, President
----------------------------------
Robert Brownell has been our President since March 2004. From 2000 until 2004,
Mr. Brownell was Senior Vice President at ImageMax, Inc. of Fort Washington, PA,
a national provider of document and information management services with
revenues of more than $40 million dollars. From 1991 to 1999, Mr. Brownell was
Vice President, Worldwide Channel Sales for Document Control Solutions, Inc., of
Fullerton, CA, a. document management systems integration company. He received
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, a records and
information management systems for active documents. Mr. Brownell has a degree
in Business Administration and Marketing Management from Mount San Antonio
College.
Andrew Haag, Age 37, Chief Financial Officer and Director
---------------------------------------------------------
Andrew Haag has been our 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. From May 2001 until November 2001, Mr.
Haag was employed by Aquasearch, Inc., a publicly held microalgae products
company. From November 1998 through April 2001 he was employed by Nutmeg
Securities, Ltd.. 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, an investment banking firm, located in Stamford, CT and Beverly
Hills, CA, rising to Managing Director. Mr. Haag attended the University of
Maine and CUNY Hunter College. Mr. Haag holds a Series 7 and a Series 63 license
from the Securities and Exchange Commission.
35
Committees of the Board Of Directors
------------------------------------
None.
Terms of Office
---------------
Our directors are appointed for a one-year term to hold office until
the next annual general meeting of the holders of our common stock or until
removed from office in accordance with our by-laws. Our officers are appointed
by our board of directors and hold office until removed by our board of
directors.
EXECUTIVE COMPENSATION
The following tables set forth certain information regarding our CEO
and each of our most highly-compensated executive officers whose total annual
salary and bonus for the fiscal years ending June 30, 2004, 2003 and 2002
exceeded $100,000:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Other
Annual Restricted Options LTIP
Name & Principal Salary Bonus Compen- Stock SARs Payouts All Other
Position Year ($) ($) sation ($) Awards($) (#) ($) Compensation
------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Robert Steele 2004 72,000 0 - - - - -
Chief Executive 2003 30,000 (3) 0 2,500 (1) - - - -
Officer 2002 - 0 - - - - -
------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Robert Brownell 2004 37,500 (4) 0 - - - - -
President 2003 - 0 - - - - -
2002 - 0 - - - - -
------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Tom Sims 2004 - 0 - - - - -
President 2003 19,400 0 1,570 (1) - - - -
2002 19,500 0 6,106 (1) $68,000 (2) - - -
(1) Represent payments for automobile and health insurance.
(2) 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.
(3) Represents compensation received by Mr. Steele while serving as our
President & CEO from 2/1/03 to 6/30/03.
(4) Represents compensation received by Mr. Brownell while serving as our
President from 3/12/04 to 6/30/04
Employee Stock Incentive Plan
The 2004 Stock Option Plan was adopted by the board of directors on
March 30, 2004 and approved by the shareholders on June 30, 2004. The Plan
provides for the issuance of up to 5,000,000 options.
36
Option Grants to the Named Executive Officers and Directors as of July 31, 2004:
None.
Under the plan, options may be granted which are intended to qualify as
incentive stock options, or ISOs, under Section 422 of the Internal Revenue Code
of 1986, as amended, or which are not intended to qualify as incentive stock
options thereunder, or Non-ISOs. The 2002 Stock Option Plan and the right of
participants to make purchases thereunder are intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code of
1986, as amended. The 2002 Stock Option Plan is not a qualified deferred
compensation plan under Section 401(a) of the Internal Revenue Code and is not
subject to the provisions of the Employee Retirement Income Security Act of
1974.
Purpose
The purpose of the 2004 Stock Option Plan is to enhance our
profitability and value for the benefit of our stockholders principally by
enabling us to offer our employees and consultants and our subsidiaries and
non-employee directors stock-based incentives in us in order to attract, retain
and reward such individuals and strengthen the mutuality of interest between
such individuals and our stockholders.
Eligibility
All our employees and consultants and our subsidiaries and
non-employee directors designated by our Board of Directors to participate in
the 2004 Stock Option Plan are eligible to receive options under the 2004 Stock
Option Plan.
Available Shares
Options covering a maximum of 11,822,500 shares of common stock may
be issued under the 2004 Stock Option Plan. If an option expires, terminates or
is cancelled, the unissued shares of common stock subject to the option will
again be available under the 2004 Stock Option Plan.
Terms of Stock Options
Under the 2004 Stock Option Plan, options granted to employees may
be in the form of incentive stock options or nonqualified stock options. Options
granted to consultants or non-employee directors may only be nonqualified stock
options. The committee that administers the 2004 Stock Option Plan (see
Administration below) (the Committee) will determine the number of shares
subject to each option, the term of each option (which may not exceed ten years
or, in the case of an incentive stock option granted to a 10% stockholder, five
years), the exercise price per share of stock subject to each option, the
vesting schedule (if any) and the other material terms of the option. No
incentive stock option may have an exercise price less than 100% of the fair
market value of the common stock at the time of the grant (or, in the case of an
incentive stock option granted to a 10% stockholder, 110% of the fair market
value). The exercise price of a nonqualified stock option will be determined by
the Committee.
The option price upon exercise may be paid in cash or, if so
determined by the Committee, in shares of common stock by a reduction in the
number of shares of common stock issuable upon the exercise of the option or by
such other method as the Committee determines. Options may be made exercisable
in installments, and the exercisability of options may be accelerated by the
Committee. The Committee may at any time offer to buy an option previously
37
granted on such terms and conditions as the Committee establishes. At the
discretion of the Committee, options may provide for reloads (i.e., a new option
is granted for the same number of shares as the number used by the holder to pay
the option price upon exercise). Subject to limited exceptions, options are
forfeited upon termination of employment or service. Options are not assignable
(except by will or the laws of descent and distribution).
Options may not be granted after the tenth anniversary of the 2004
Stock Option Plan's adoption.
Change in Control
Unless otherwise determined by the Committee at the time of the
grant, upon a change in control (as defined in the 2004 Stock Option Plan), all
of the options automatically will become fully exercisable. However, unless
otherwise determined by the Committee at the time of the grant, no acceleration
or exercisability of an option will occur, if the Committee determines prior to
a change in control that the option will be honored or assumed or new rights
substituted immediately following the change in control; provided that, the new
rights or alternative option is based on stock which is or will be traded on an
established securities market, contains at least substantially equivalent terms
and conditions as the option being assumed, and has substantially equal earnings
value.
Certain Reorganizations
The 2004 Stock Option Plan provides for appropriate adjustments of
the number and kind of shares to be issued upon exercise of an option and of the
exercise price to reflect changes in the capital structure of the corporation,
stock splits, recapitalizations, mergers and reorganizations.
Amendment or Termination of the 2004 Stock Option Plan
The 2004 Stock Option Plan may be amended by the Board of Directors
of the Company, except that stockholder approval of amendments will be required
among other things (a) to the extent stockholder approval is required by Rule
16b-3 under the Exchange Act, and (b) to (i) increase the maximum number of
shares subject to options granted in a fiscal year, (ii) change the
classification of employees eligible to receive awards, (iii) extend the maximum
option period under the 2004 Stock Option Plan, or (iv) increase the number of
shares that may be issued under the 2004 Stock Option Plan. The 2004 Stock
Option Plan is effective for ten years from the date the 2004 Stock Option Plan
was adopted during which time options may be granted.
Administration
The 2004 Stock Option Plan will be administered by the Committee,
However, with respect to option grants to non-employee directors and any action
under the 2004 Stock Option Plan relating to options held by non-employee
directors, the Committee will consist of the entire Board of Directors. The
Committee will determine the individuals who will receive options and the terms
of the options, which will be reflected in written agreements with the holders.
Decisions by the Board of Directors or the Committee with respect to the 2004
Stock Option Plan are final and binding.
Federal Income Tax Consequences
Incentive Stock Options. An optionee will not recognize income upon
the grant or exercise of an incentive stock option. Instead, the optionee will
be taxed at the time he or she sells the stock purchased pursuant to the option.
The optionee will be taxed on the difference between the price he or she paid
38
for the stock and the amount for which he or she sells the stock. If the
optionee does not sell the stock within two years from the date of grant of the
option and one year from the date the stock is transferred to the optionee, the
gain will be a long-term capital gain, and the Company will not be entitled to a
deduction. If the optionee sells the stock at a gain prior to that time, the
difference between the amount the optionee paid for the stock and the lesser of
the fair market value on the date of exercise or the amount for which the stock
is sold will be taxed as ordinary income and the Company will be entitled to a
corresponding deduction. If the stock is sold for an amount in excess of the
fair market value on the date of exercise, the excess amount will be taxed as
capital gain. If the optionee sells the stock for less than the amount he or she
paid for it, the loss will be taxed as a capital loss. Exercise of an incentive
stock option may subject an optionee to, or increase an optionees liability for,
the alternative minimum tax.
Non-Qualified Stock Options. An optionee will not recognize income
upon the grant of a non-qualified stock option under the 2004 Stock Option Plan
or at any time prior to the exercise of the option or a portion thereof.
Generally, at the time the optionee exercises a non-qualified option or portion
thereof, the optionee will recognize compensation taxable as ordinary income in
an amount equal to the excess of the fair market value of the underlying stock
on the date the option is exercised over the option price of the stock and the
Company will then be entitled to a corresponding deduction. At that time, the
Company will be subject to income tax withholding requirements and will have the
right to require an optionee who is or was an employee of the Company to remit
in cash to the Company an amount sufficient to satisfy any federal, state and
local tax requirements prior to the delivery of any certificate or certificates
for such shares of stock.
A subsequent taxable disposition of the stock acquired upon exercise
of an option and held as a capital asset will result in a capital gain or loss
measured by the difference between the fair market value of the stock on the
date of the option exercise and the amount realized on later disposition.
Compensation Of Directors
All of our directors are full time employees of ours. 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.
Employment Agreements
---------------------
Robert Steele
We entered into an employment agreement with Robert Steele on January
31, 2003 to serve as our Chief Executive Officer. The agreement is for five
years, with a base salary of $72,000 per annum, plus benefits.
Andrew Haag
We entered into an employment agreement with Andrew Haag on January 31,
2003 to serve as our Chief Financial Officer. The agreement is for five years,
with a base salary of $72,000 per annum, plus benefits.
Robert Brownell
We entered into an employment agreement with Robert Brownell on March
12, 2004 to serve as our President. The agreement is for four years, with a base
salary of $12,500 per month, plus benefits. In addition, if our quarterly gross
revenue meets or exceeds the following amounts, Mr. Brownell's salary will
increase as indicated:
39
Gross Revenues Salary (per month)
$900,000 $15,000
$1,200,000 $18,000
$1,500,000 $24,000
If our quarterly gross revenues decrease, Mr. Brownell's base salary
will decrease accordingly, subject to the minimum base salary of $12,500 per
month.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 26, 2004, Quintek issued a convertible note for $100,000 in
cash to an accredited investor. The note bears 10% simple interest and matures
one year from the above date. The note converts into common stock at $0.06 a
share. (Zubir Kazi)
On June 7, 2004, Quintek issued a convertible note titled for $100,000
in cash to an accredited investor. The note bears 10% simple interest and
matures one year from the above date. The note converts into common stock at
$0.06 a share. (Zubir Kazi)
On November 26, 2003, Quintek issued a warrant to an accredited
investor to purchase 8,333,333 shares of Quintek common stock at an of exercise
price $0.06, expiring November 26, 2008, in consideration for $500,000
investment in convertible notes. (Zubir Kazi)
On July 23, 2003, Quintek issued a warrant to TJ&K Investment Trust,
LLC to purchase 142,857 shares of Quintek Common Stock at an exercise price of
$0.13, expiring July 23, 2006 in consideration for a stock loan to Quintek of
1,428,572 shares of common stock. In additional consideration for the loan of
stock from the lender, Quintek released the lender from a lock up on 285,714
shares of common stock. (Kurt Kunz)
On November 6, 2003, Quintek issued a warrant to TJ&K Investment Trust,
LLC to purchase 1,100,000 shares of Quintek Common Stock at an exercise price of
$0.175, expiring November 6, 2008 in consideration for a stock loan to Quintek
of 1,100,000 shares of common stock. (Kurt Kunz)
In connection with a personal guaranty, dated as of July 23, 2004,
executed by Zubair Kazi on our behalf for up to $300,000 in equipment leases, we
issued a warrant to Zubair Kazi for the purchase of 350,000 shares of our common
stock, exercisable for five years at an exercise price of $0.10 per share.
Pursuant to the personal guaranty, we agreed that for every dollar Mr. Kazi
guaranteed on an equipment lease on behalf of the Company, we would issue Mr.
Kazi 10 warrants to purchase shares of our common stock at an exercise price of
$0.10 per share. On August 10, 2004, we entered into an equipment lease with
VenCore Solutions LLC in the amount of $240,000, which Mr. Kazi executed a
personal guaranty for. In connection therewith, we issued to Mr. Kazi a warrant
to purchase 2,400,000 shares of our common stock, exercisable for five years at
an exercise price of $0.10 per share. This prospectus relates to the resale of
the common stock underlying these warrants.
Changes in Registrant's Certifying Accountant
On March 15, 2004, we received a letter dated March 8, 2004 from Heard,
McElroy &Vestal resigning as our independent public accountants. The decision to
resign by Heard, McElroy &Vestal did not involve a dispute with us over
accounting policies or practices. On March 24, 2004, we appointed Kabani &
Company, Inc., Certified Public Accountants as our new independent public
accountants. The decision to retain Kabani & Company was made by our Board of
Directors.
40
The reports of Heard, McElroy &Vestal on our financial statements for
the year ended June 30, 2003 did not contain an adverse opinion or disclaimer of
opinion, nor was it qualified or modified as to uncertainty, audit scope or
accounting principles.
During our fiscal year ended June 30, 2003, and through March 8, 2004,
there were no disagreements with Heard, McElroy &Vestal on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to Heard, McElroy
&Vestal's satisfaction, would have caused Heard, McElroy &Vestal to make
reference to the subject matter of the disagreement in connection with its
report on the financial statements for such year.
During our fiscal year ended June 30, 2003, and through March 15, 2004,
there were no reportable events (as defined in Item 304(a)(1)(v) of Regulation
S-K).
We provided Heard, McElroy &Vestal with a copy of our Item 4 disclosure
on a Form 8-K and we requested that Heard, McElroy &Vestal review such
disclosures and provide a letter addressed to the Securities and Exchange
Commission as specified by Item 304(a)(3) of Regulation S-K. Such letter was
filed as Exhibit 16.1 to our Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 25, 2004.
During the fiscal year ended June 30, 2003, and the subsequent interim
period up to March 8, 2004, we did not consult with Kabani & Company regarding
(i) the application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
our financial statements, and neither a written report was provided to us or
oral advice was provided that the new accountant concluded was an important
factor considered by us in reaching a decision as to the accounting, auditing or
financial reporting; or (ii) any matter that was either the subject of a
disagreement or a reportable event, as described in Item 304(a)(1)(iv) and
(a)(1)(v) of Regulation S-K.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of January 12, 2005
o by each person who is known by us to beneficially own more than 5%
of our common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
Name and Address Amount and Nature Percent Prior Percent After
Of Beneficial Holder of Beneficial Ownership (1) to Offering (2) Offering (3)
-------------------- ----------------------- ------------- ----------
Robert Steele 3,275,297 (4) 3.95% 2.51%
17951 Lyons Circle
Huntington Beach, CA 92647
Robert Brownell 861,062 (5) 1.07% *
17951 Lyons Circle
Huntington Beach, CA 92647
(continued)
41
Name and Address Amount and Nature Percent Prior Percent After
Of Beneficial Holder of Beneficial Ownership (1) to Offering (2) Offering (3)
-------------------- ----------------------- ------------- ----------
Andrew Haag 2,967,824 (6) 3.68% 2.31%
17951 Lyons Circle
Huntington Beach, CA 92647
Executive Officers and Directors 7,104,183 (7) 8.38% 5.36%
As A Group (3 persons)
Zubair Kazi 8,487,201 (8) 9.90% 9.90% (8)
A-1-A Estate Thomas
St. Thomas, U.S. Virgin Islands 00802
Langley Park Investments PLC 14,000,000 17.57% 11.00%
30 Farringdon Street
London EC4A 4HJ U.K.
David W. Gough 4,400,000 (10) 5.23% 3.34%
1180 Sir William Lane
Lake Forest, IL 60045
Gerald Hannahs 5,500,000 (9) 6.50% 4.16%
17710 Leatha Lane
Little Rock, AR 72223 * Less then one percent.
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of January 12, 2005 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) Percentage based on 79,679,177 shares of common stock outstanding.
(3) Percentage based on 127,320,844 shares of common stock outstanding.
(4) Includes 2,275,297 shares that may be acquired upon exercise of stock
options exercisable within 60 days and 1,000,000 shares that may be acquired
upon the conversion of shares of Series A Convertible Preferred Stock.
(5) Includes 611,062 shares that may be acquired upon exercise of stock options
exercisable within 60 days and 250,000 shares that may be acquired upon the
conversion of shares of Series A Convertible Preferred Stock.
(6) Includes 1,000,000 shares that may be acquired upon the conversion of shares
of Series A Convertible Preferred Stock.
42
(7) Includes 2,886,359 shares that may be acquired upon exercise of stock
options exercisable within 60 days and 2,250,000 shares that may be acquired
upon the conversion of shares of Series A Convertible Preferred Stock.
(8) Kazi Management VI, LLC holds 2,437,072 shares and $500,000 in notes
convertible into common stock at $0.06. Upon full conversion of the notes, Kazi
Management VI will receive 8,333,333 shares of common stock and a warrant to
purchase one share of common stock for each conversion share at $0.06
exercisable within five years. Kazi Management VI, LLC also owns 2,750,000
warrants that are currently exercisable. Kazi Management VI does not have the
right to convert any portion of the Notes or Warrants that would cause Kazi
Management VI to be deemed the beneficial owner of more than 9.9% of our
outstanding shares of Common Stock. Therefore, Kazi Management VI is only in
control of 8,754,981 shares at the time of the offering but will be in control
of more shares, up to 9.9% after the offering.
(9) Includes 5,000,000 shares that may be acquired upon exercise of stock
options exercisable within 60 days.
43
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 200,000,000 shares of Common Stock, no
par value. As of January 12, 2005, there were 79,679,177 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have engaged Interwest Transfer Company, as independent transfer
agent or registrar.
PREFERRED STOCK
We are authorized to issue 50,000,000 shares of preferred stock, no
par value per share. As of January 12, 2005, there were 3,794,150 shares of
preferred stock issued and outstanding. The shares of preferred stock may be
issued in series, and shall have such voting powers, full or limited, or no
voting powers, and such designations, preferences and relative participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, as shall be stated and expressed in the resolution or
resolutions providing for the issuance of such stock adopted from time to time
by the board of directors. The board of directors is expressly vested with the
authority to determine and fix in the resolution or resolutions providing for
the issuances of preferred stock the voting powers, designations, preferences
and rights, and the qualifications, limitations or restrictions thereof, of each
such series to the full extent now or hereafter permitted by the laws of the
State of California.
Series A Preferred Stock
The general terms of the Series A Preferred Stock is as follows: no par
value; 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 - we have 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. As of January 12, 2005, there were 3,654,931 shares of Series
A Preferred Stock outstanding.
Series B Preferred Stock
The general terms of the Series B Preferred Stock is as follows: no par
value; Liquidation Preference - $0.25 per share plus any unpaid accumulated
dividends; Dividends - cumulative annual rate of $0.0005 per share when and as
44
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 - we have 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. As of January 12, 2005, there were 121,271 shares of
Series B Preferred Stock outstanding.
Series C Preferred Stock
The general terms of the Series C Preferred Stock is as follows: no par
value; 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 - we have 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. As
of January 12, 2005, there were 17,948 shares of Series C Preferred Stock
outstanding.
WARRANTS
In connection with a Securities Purchase Agreement dated August 2004,
the accredited investor was issued 3,000,000 warrants to purchase shares of
common stock. The warrants are exercisable until two years from the date of
issuance at a purchase price of $1.00 per share.
In connection with several Note Purchase Agreements we entered into
with several accredited investors, we issued an aggregate of 2,900,000 warrants.
Of these warrants, 2,200,000 warrants are exercisable at $0.12 per share and
700,000 warrants are exercisable at $0.15 per share.
In connection with a promissory note issued on October 16, 2004, we
issued 5,000,000 warrants, exercisable at $0.15 per share.
In connection with a stock purchase agreement we entered into on
September 15, 2004, we issued 1,000,000 warrants, exercisable at $0.13 per
share.
In connection with a personal guaranty, dated as of July 23, 2004,
executed by Zubair Kazi on our behalf for up to $300,000 in equipment leases, we
issued a warrant to Zubair Kazi for the purchase of 350,000 shares of our common
stock, exercisable for five years at an exercise price of $0.10 per share.
Pursuant to the personal guaranty, we agreed that for every dollar Mr. Kazi
guaranteed on an equipment lease on behalf of the Company, we would issue Mr.
Kazi 10 warrants to purchase shares of our common stock at an exercise price of
$0.10 per share. On August 10, 2004, we entered into an equipment lease with
VenCore Solutions LLC in the amount of $240,000, which Mr. Kazi executed a
personal guaranty for. In connection therewith, we issued to Mr. Kazi a warrant
to purchase 2,400,000 shares of our common stock, exercisable for five years at
an exercise price of $0.10 per share. This prospectus relates to the resale of
the common stock underlying these warrants.
45
CONVERTIBLE SECURITIES
To obtain funding for our ongoing operations, we entered into the
following transactions involving convertible securities:
1) On September 26, 2003 we entered into a Note Purchase Agreement with Kazi
Management V.I. LLC. This investor purchased five convertible notes, each for
$100,000, for a total purchase price of $500,000. The convertible notes bear
interest at 10% per annum. These notes are convertible into shares of our common
stock at a price of $0.06. In connection with this Note Purchase Agreement, the
investor will receive up to 9,166,667 warrants exercisable at $0.10 per share
and expiring on September 26, 2008, with the investor receiving one warrant for
every share converted under the convertible notes. This prospectus relates to
the resale of the common stock underlying these convertible notes.
2) On July 11, 2004 we entered into a Securities Purchase Agreement with
Bernadette Haag. This investor purchased a convertible note for $20,000. On
August 31, 2004, the holder converted this note into 200,000 shares of our
common stock. In connection with this Securities Purchase Agreement, we issued
the investor 200,000 warrants, exercisable at $0.15 per share, which expire on
July 11, 2007. This prospectus relates to the resale of the common stock issued
upon conversion of the convertible note and the shares of common stock
underlying the warrants.
3) On July 27, 2004 we entered into a Securities Purchase Agreement with Rayne
Forecast. This investor purchased a convertible note for $50,000. On August 31,
2004, the holder converted this note into 500,000 shares of our common stock. In
connection with this Securities Purchase Agreement, we issued the investor
500,000 warrants, exercisable at $0.15 per share, which expire on July 27, 2007.
This prospectus relates to the resale of the common stock issued upon conversion
of the convertible note and the shares of common stock underlying the warrants.
4) On July 29, 2004, we entered into an Agreement with Langley Park Investments
PLC, a London investment company to issue 14,000,000 shares of our common stock
to Langley Park Investments in return for 1,145,595 shares of Langley. Fifty
percent of Langley Park Investments shares issued to us under this agreement are
to be held in escrow for two years. At the end of two years, if the market price
for our common stock at or greater than the initial closing price, the escrow
agent will release the remaining Langley Park Investments shares to us. In the
event that the market price for our common stock is less than the initial
closing price the amount released will be adjusted.
Langley Park Investments' initial offering price was 1(pound) (One
Pound UK per share). Our shares are to be held by Langley Park Investments for a
period of at least two years. Langley Park Investments' shares issued to us are
free trading. Langley Park Investment Trust Plc was admitted to the Full List of
The London Stock Exchange on September 30, 2004 and dealings in Langley shares
commenced on October 7, 2004.
5) On August 2, 2004, we signed a Master Lease Agreement with Vencore Solutions,
LLC, a venture leasing company located in Lake Oswego, Oregon. Under the
agreement, we established a lease line of credit for up to $240,000 in equipment
financing. This is a capital lease, whereby we pay a 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. At the end of the lease, we have the option to purchase the
equipment or return it. Vencore Solutions received 144,000 warrants to purchase
our common stock at $0.10, expiring on August 2, 2007.
46
6) We entered into a Securities Purchase Agreement with Golden Gate Investors,
Inc. in August 2004 for the sale of (i) $300,000 in convertible debentures and
(ii) warrants to buy 3,000,000 shares of our common stock.
This prospectus relates to the resale of the common stock underlying
these convertible debentures and warrants.
The investors are obligated to provide us with an aggregate of $300,000
as follows:
o $175,000 was disbursed to us on August 4, 2004;
o $50,000 has been retained for services provided to our company by
various professionals, which shall be disbursed upon effectiveness
of this registration statement; and
o $75,000 will be released upon effectiveness of this registration
statement.
The debentures bear interest at 5 3/4%, mature two years from the date
of issuance, and are convertible into our common stock, at the selling
stockholder's option. The convertible debentures are convertible into the number
of our shares of common stock equal to the principal amount of the debentures
being converted multiplied by 11, less the product of the conversion price
multiplied by ten times the dollar amount of the debenture. The conversion price
for the convertible debenture is the lesser of (i) $0.50 or (ii) eighty percent
of the of the average of the five lowest volume weighted average prices during
the twenty (20) trading days prior to the conversion. If the volume weighted
average price is below $0.10 on a conversion date, we have the right to pre-pay
47
the amount of the debenture the holder elects to convert, plus accrued and
unpaid interest, at 125% of such amount; however, if we elect to pre-pay in this
situation, the debenture holder has the right to withdraw the notice of
conversion. Also, if the volume weighted average price is below $0.10 at any
point during a month, the holder is not obligated to convert any portion of the
debenture during that month. Accordingly, there is in fact no limit on the
number of shares into which the debenture may be converted. In addition, the
selling stockholder is obligated to exercise the warrant concurrently with the
submission of a conversion notice by the selling stockholder. The warrant is
exercisable into 3,000,000 shares of common stock at an exercise price of $1.00
per share.
Golden Gate Investors has contractually committed to convert not less
than 5% of the original face value of the debenture monthly beginning the month
after the effective date of the Registration Statement. Golden Gate Investors is
required to exercise warrants concurrently with the exercise of a conversion
notice under the debenture and is committed to exercise at least 5% of the
warrants per month after the effective date of the Registration Statement. In
the event that Golden Gate Investors breaches the minimum restriction on the
debenture and warrant, Golden Gate will not be entitled to collect interest on
the debenture for that month. If Golden Gate submits a conversion notice and the
volume weighted average price is less then $.10 per share, then we will be
entitled to prepay the portion of the debenture that is being converted at 125%
of such amount. If we elect to prepay, then Golden Gate may withdraw its
conversion notice.
Golden Gate has further contractually agreed to restrict its ability to
convert the debenture or exercise their warrants and receive shares of our
common stock such that the number of shares held by the Holder and its
affiliates after such conversion or exercise does not exceed 4.9% of the then
issued and outstanding shares of our common stock.
In the event that the registration statement is not declared effective
by the required deadline, which is 150 days from the date of the Securities
Purchase Agreement, Golden Gate may demand repayment of the Debenture of 150% of
the face amount outstanding, plus all accrued and unpaid interest, in cash. If
the repayment is accelerated, we are also obligated to issue to Golden Gate
50,000 shares of common stock and $15,000 for each 30-day period, or portion
thereof, during which the face amount, including interest thereon, remains
unpaid. If Golden Gate does not elect to accelerate the debenture, we are
required to immediately issue to Golden Gate 50,000 shares of common stock and
$15,000 for each 30-day period, or portion thereof, during which the face
amount, including interest thereon, remains unpaid.
Conversion Calculation
The convertible debentures are convertible into the number of our
shares of common stock equal to the principal amount of the debentures being
converted multiplied by 11, less the product of the conversion price multiplied
by ten times the dollar amount. The conversion price for the convertible
debentures is the lesser of (i) $0.50 or (ii) eighty percent of the of the
average of the five lowest volume weighted average prices during the twenty (20)
trading days prior to the conversion. For example, assuming conversion of
$300,000 of debentures on January 12, 2005, a conversion price of $0.136 per
share, the number of shares issuable upon conversion would be:
($300,000 x 11) - ($.136 x (10 x $300,000)) = 2,892,000/$.136 = 21,264,706
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our convertible
debentures, based on market prices 25%, 50% and 75% below the market price, as
of January 12, 2005 of $0.18.
48
% Below Number % of
Outstanding Price Per With Discount of Shares
Market Share at 20% Issuable Stock
------ ----- ------ -------- -----
25% $.135 $.108 27,555,556 17.79%
50% $.09 $.072 42,833,333 25.17%
75% $.045 $.036 88,666,667 41.05%
7) We entered into a Securities Purchase Agreement with David Gough on August
17, 2004 for the sale of $200,000 in convertible notes.
The investor is obligated to provide us with an aggregate of $200,000
as follows:
o $100,000 was disbursed on August 17, 2004; and
o $100,000 will be disbursed within five days of the effectiveness
of this prospectus.
Accordingly, we have received a total of $100,000 pursuant to the
Securities Purchase Agreement.
The convertible notes bear interest at 10%, mature two years from the
date of issuance, and are convertible into our common stock, at the selling
stockholders' option, at $0.10 per share. In the event that we enter 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 these debentures at a price less than a conversion price of
$0.10, then the conversion price of these debentures will reset to the lower of
$0.10 or the lower conversion price equal to that in the subsequent agreement.
Warrants are exercisable at $0.12 into shares of our common stock of and expire
on August 17, 2007. This prospectus relates to the resale of the common stock
underlying these convertible notes and warrants.
8) On September 15, 2004 we entered into a Stock Purchase Agreement with Stan
Merdinger. This investor purchased 1,000,000 shares of our common stock, at
$0.10 per share, for a total purchase price of $100,000. In connection with this
Stock Purchase Agreement, we issued the investor 1,000,000 warrants, exercisable
at $0.13 per share, which expire on September 15, 2007. This prospectus relates
to the resale of the common stock underlying these convertible notes and
warrants.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our By-laws, as amended, provide to the fullest extent permitted by
California law, our directors or officers shall not be personally liable to us
or our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our By-laws, as amended, is to
eliminate our right and our shareholders (through shareholders' derivative suits
on behalf of our company) to recover damages against a director or officer for
breach of the fiduciary duty of care as a director or officer (including
breaches resulting from negligent or grossly negligent behavior), except under
certain situations defined by statute. We believe that the indemnification
provisions in our By-laws, as amended, are necessary to attract and retain
qualified persons as directors and officers.
49
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares o a combination of
any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders or their respective pledgees, donees,
transferees or other successors in interest, may also sell the shares directly
to market makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling stockholders, but excluding brokerage commissions or underwriter
discounts.
50
The selling stockholders, alternatively, may sell all or any part of
the shares offered in this prospectus through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling stockholders defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder is contractually
restricted from engaging in short sells. In addition, if a such short sale is
deemed to be a stabilizing activity, then the selling stockholder will not be
permitted to engage in a short sale of our common stock. All of these
limitations may affect the marketability of the shares.
We have agreed to indemnify the selling stockholders, or their
transferees or assignees, against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
selling stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholders and the broker-dealer.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for
transactions in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny
stocks, the broker or dealer must
o obtain financial information and investment experience objectives
of the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
51
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement
from the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the
shares of common stock by the selling stockholders. We will not receive any
proceeds from the resale of the common stock by the selling stockholders. We
will receive proceeds from the exercise of the warrants. Assuming all the shares
registered below are sold by the selling stockholders, none of the selling
stockholders will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is
offering the resale of shares of common stock by this prospectus, the number of
shares of common stock beneficially owned by each person, the number of shares
of common stock that may be sold in this offering and the number of shares of
common stock each person will own after the offering, assuming they sell all of
the shares offered.
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial of Common
Issuable Upon Stock, Common Stock Beneficial Percentage of Ownership Stock Owned
Conversion of Assuming Included in Ownership Common Stock After the After
Name Debentures, Notes Full Prospectus Before the Owned Before Offering Offering
and/or Warrants Conversion (1) Offering* Offering* (4) (4)
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Golden Gate 24,264,706 (3) 23.34% Up to 4,105,446 4.9% -- --
Investors, 23,625,000
Inc.(2) shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Bernadette Haag 200,000 (5) ** Up to 400,000 ** -- --
400,000
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
David Gough 4,400,000 (6) 5.23% Up to 4,400,000 5.23% -- --
4,400,000
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
(continued)
52
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial of Common
Issuable Upon Stock, Common Stock Beneficial Percentage of Ownership Stock Owned
Conversion of Assuming Included in Ownership Common Stock After the After
Name Debentures, Notes Full Prospectus Before the Owned Before Offering Offering
and/or Warrants Conversion (1) Offering* Offering* (4) (4)
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Roger Lents 500,000 (7) ** Up to 1,000,000 1.25% -- --
1,500,000
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Stan Merdinger 2,000,000 (8) 2.45% Up to 2,000,000 2.45% -- --
2,000,000
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Rayne Forecast 1,000,000 (10) 1.24% Up to 1,000,000 1.24% -- --
Inc. (9) 1,000,000
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Kazi Management 11,916,667 (12) 13.01% Up to 8,487,201 9.9% (13) -- --
VI, LLC (11) 11,916,667
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Gerald Hannahs 5,000,000 (14) 5.90% Up to 5,500,000 6.45% -- --
5,500,000
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
* These columns represents the aggregate maximum number and percentage of shares
that certain selling stockholders can own at one time (and therefore, offer for
resale at any one time) due to their 4.9% and 9.9% limitations.
** Less than one percent.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the convertible debentures is subject to adjustment depending on,
among other factors, the future market price of the common stock, and could be
materially less or more than the number estimated in the table.
53
(1) Includes a good faith estimate of the shares issuable upon conversion of
the convertible debentures and convertible notes and exercise of warrants, based
on current market prices. Because the number of shares of common stock issuable
upon conversion of the convertible debentures is dependent in part upon the
market price of the common stock prior to a conversion, the actual number of
shares of common stock that will be issued upon conversion will fluctuate daily
and cannot be determined at this time. Under the terms of the convertible
debentures, if the convertible debentures had actually been converted on January
12, 2005, the conversion price would have been $.136. The actual number of
shares of common stock offered in this prospectus, and included in the
registration statement of which this prospectus is a part, includes such
additional number of shares of common stock as may be issued or issuable upon
conversion of the convertible debentures and exercise of the related warrants by
reason of any stock split, stock dividend or similar transaction involving the
common stock, in accordance with Rule 416 under the Securities Act of 1933.
However the selling stockholders have contractually agreed to restrict their
ability to convert their convertible debentures or exercise their warrants and
receive shares of our common stock such that the number of shares of common
stock held by them in the aggregate and their affiliates after such conversion
or exercise does not exceed 4.9% of the then issued and outstanding shares of
common stock as determined in accordance with Section 13(d) of the Exchange Act.
Accordingly, the number of shares of common stock set forth in the table for the
selling stockholders exceeds the number of shares of common stock that the
selling stockholders could own beneficially at any given time through their
ownership of the convertible debentures and the warrants. In that regard, the
beneficial ownership of the common stock by the selling stockholder set forth in
the table is not determined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as amended.
(2) The selling stockholder is an unaffiliated third party. Norman Lizt has
investment and voting control over the shares owned by Golden Gate Investors,
Inc.
(3) Includes 20,625,000 shares of common stock underlying our $300,000
convertible debenture and 3,000,000 shares of common stock underlying common
stock purchase warrants issued to Golden Gate Investors, Inc.
(4) Assumes that all securities registered will be sold.
(5) Includes 200,000 shares of common stock underlying common stock purchase
warrants issued to Bernadette Haag.
(6) Includes 2,200,000 shares of common stock underlying our $200,000
convertible note and 2,200,000 shares of common stock underlying common stock
purchase warrants issued to David Gough.
(7) Includes 500,000 shares of common stock underlying common stock purchase
warrants issued to Roger Lents.
(8) Includes 1,000,000 shares of common stock underlying common stock purchase
warrants issued to Stan Merdinger.
(9) The selling stockholder is an unaffiliated third party. Todd Davis has
investment and voting control over the shares owned by Rayne Forecast Inc.
(10) Includes 500,000 shares of common stock underlying common stock purchase
warrants issued to Rayne Forecast, Inc.
54
(11) The selling stockholder is an unaffiliated third party. Zubair Kazi has
investment and voting control over the shares owned by Kazi Management VI, LLC.
(12) Represents 9,166,667 shares of common stock underlying $500,000 in
convertible notes issued to Kazi Management VI, LLC.
(13) Kazi Management VI, LLC holds 2,437,072 shares and $500,000 in notes
convertible into common stock at $0.06. Upon full conversion of the notes, Kazi
Management VI will receive 8,333,333 shares of common stock and a warrant to
purchase one share of common stock for each conversion share at $0.06
exercisable within five years. Kazi Management VI does not have the right to
convert any portion of the Notes or Warrants that would cause Kazi Management VI
to be deemed the beneficial owner of more than 9.9% of our outstanding shares of
Common Stock. Therefore, Kazi Management VI is only in control of 7,701,664
shares at the time of the offering but will be in control of more shares, up to
9.9% after the offering.
(14) Includes 5,000,000 shares of common stock underlying common stock purchase
warrants issued to Gerald Hannahs.
Terms of Convertible Debentures and Convertible Notes
To obtain funding for our ongoing operations, we entered into the
following transactions involving convertible securities:
1) On September 26, 2003 we entered into a Note Purchase Agreement
withKazi Management V.I. LLC. This investor purchased five convertible notes,
each for $100,000, for a total purchase price of $500,000. The convertible notes
bear interest at 10% per annum. These notes are convertible into shares of our
common stock at a price of $0.06. In connection with this Note Purchase
Agreement, the investor will receive up to 9,166,667 warrants exercisable at
$0.10 per share and expiring on September 26, 2008, with the investor receiving
one warrant for every share converted under the convertible notes. This
prospectus relates to the resale of the common stock underlying these
convertible notes.
2) On July 11, 2004 we entered into a Securities Purchase Agreement with
Bernadette Haag. This investor purchased a convertible note for $20,000. On
August 31, 2004, the holder converted this note into 200,000 shares of our
common stock. In connection with this Securities Purchase Agreement, we issued
the investor 200,000 warrants, exercisable at $0.15 per share, which expire on
July 11, 2007. This prospectus relates to the resale of the common stock issued
upon conversion of the convertible note and the shares of common stock
underlying the warrants.
3) On July 27, 2004 we entered into a Securities Purchase Agreement with
Rayne Forecast. This investor purchased a convertible note for $50,000. On
August 31, 2004, the holder converted this note into 500,000 shares of our
common stock. In connection with this Securities Purchase Agreement, we issued
the investor 500,000 warrants, exercisable at $0.15 per share, which expire on
July 27, 2007. This prospectus relates to the resale of the common stock issued
upon conversion of the convertible note and the shares of common stock
underlying the warrants.
55
4) On July 29, 2004, we entered into an Agreement with Langley Park
Investments PLC, a London investment company to issue 14,000,000 shares of our
common stock to Langley Park Investments in return for 1,145,595 shares of
Langley. Fifty percent of Langley Park Investments shares issued to us under
this agreement are to be held in escrow for two years. At the end of two years,
if the market price for our common stock at or greater than the initial closing
price, the escrow agent will release the remaining Langley Park Investments
shares to us. In the event that the market price for our common stock is less
than the initial closing price the amount released will be adjusted.
Langley Park Investments' initial offering price was 1(pound) (One
Pound UK per share). Our shares are to be held by Langley Park Investments for a
period of at least two years. Langley Park Investments' shares issued to us are
free trading. Langley Park Investment Trust Plc was admitted to the Full List of
The London Stock Exchange on September 30, 2004 and dealings in Langley shares
commenced on October 7, 2004.
5) We entered into a Securities Purchase Agreement with Golden Gate
Investors, Inc. in August 2004 for the sale of (i) $300,000 in convertible
debentures and (ii) warrants to buy 3,000,000 shares of our common stock.
This prospectus relates to the resale of the common stock underlying
these convertible debentures and warrants.
The investors are obligated to provide us with an aggregate of $300,000
as follows:
o $175,000 was disbursed to us on August 4, 2004;
o $50,000 has been retained for services provided to our company by
various professionals, which shall be disbursed upon effectiveness
of this registration statement; and
o $75,000 will be released upon effectiveness of this registration
statement.
The debentures bear interest at 5 3/4%, mature two years from the date
of issuance, and are convertible into our common stock, at the selling
stockholder's option. The convertible debentures are convertible into the number
of our shares of common stock equal to the principal amount of the debentures
being converted multiplied by 11, less the product of the conversion price
multiplied by ten times the dollar amount of the debenture. The conversion price
for the convertible debenture is the lesser of (i) $0.50 or (ii) eighty percent
of the of the average of the five lowest volume weighted average prices during
the twenty (20) trading days prior to the conversion. If the volume weighted
average price is below $0.10 on a conversion date, we have the right to pre-pay
the amount of the debenture the holder elects to convert, plus accrued and
unpaid interest, at 125% of such amount; however, if we elect to pre-pay in this
situation, the debenture holder has the right to withdraw the notice of
conversion. Also, if the volume weighted average price is below $0.10 at any
point during a month, the holder is not obligated to convert any portion of the
debenture during that month. Accordingly, there is in fact no limit on the
number of shares into which the debenture may be converted. In addition, the
selling stockholder is obligated to exercise the warrant concurrently with the
submission of a conversion notice by the selling stockholder. The warrant is
exercisable into 3,000,000 shares of common stock at an exercise price of $1.00
per share.
56
Golden Gate Investors has contractually committed to convert not less
than 5% of the original face value of the debenture monthly beginning the month
after the effective date of the Registration Statement. Golden Gate Investors is
required to exercise warrants concurrently with the exercise of a conversion
notice under the debenture and is committed to exercise at least 5% of the
warrants per month after the effective date of the Registration Statement. In
the event that Golden Gate Investors breaches the minimum restriction on the
debenture and warrant, Golden Gate will not be entitled to collect interest on
the debenture for that month. If Golden Gate submits a conversion notice and the
volume weighted average price is less then $.10 per share, then we will be
entitled to prepay the portion of the debenture that is being converted at 125%
of such amount. If we elect to prepay, then Golden Gate may withdraw its
conversion notice.
Golden Gate has further contractually agreed to restrict its ability to
convert the debenture or exercise their warrants and receive shares of our
common stock such that the number of shares held by the Holder and its
affiliates after such conversion or exercise does not exceed 4.9% of the then
issued and outstanding shares of our common stock.
In the event that the registration statement is not declared effective
by the required deadline, which is 150 days from the date of the Securities
Purchase Agreement, Golden Gate may demand repayment of the Debenture of 150% of
the face amount outstanding, plus all accrued and unpaid interest, in cash. If
the repayment is accelerated, we are also obligated to issue to Golden Gate
50,000 shares of common stock and $15,000 for each 30-day period, or portion
thereof, during which the face amount, including interest thereon, remains
unpaid. If Golden Gate does not elect to accelerate the debenture, we are
required to immediately issue to Golden Gate 50,000 shares of common stock and
$15,000 for each 30-day period, or portion thereof, during which the face
amount, including interest thereon, remains unpaid.
Conversion Calculation
The convertible debentures are convertible into the number of our
shares of common stock equal to the principal amount of the debentures being
converted multiplied by 11, less the product of the conversion price multiplied
by ten times the dollar amount. The conversion price for the convertible
debentures is the lesser of (i) $0.50 or (ii) eighty percent of the of the
average of the five lowest volume weighted average prices during the twenty (20)
trading days prior to the conversion. For example, assuming conversion of
$300,000 of debentures on January 12, 2005, a conversion price of $0.136 per
share, the number of shares issuable upon conversion would be:
($300,000 x 11) - ($.136 x (10 x $300,000)) = 2,892,000/$.136 = 21,264,706
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our convertible
debentures, based on market prices 25%, 50% and 75% below the market price, as
of January 12, 2005 of $0.18.
% Below Number
Outstanding Price Per With Discount of Shares % of
Market Share at 20% Issuable Stock
------ ----- ------ -------- -----
25% $.135 $.108 27,555,556 17.79%
50% $.09 $.072 42,833,333 25.17%
75% $.045 $.036 88,666,667 41.05 %
57
7) We entered into a Securities Purchase Agreement with David Gough on August
17, 2004 for the sale of $200,000 in convertible notes.
The investor is obligated to provide us with an aggregate of $200,000
as follows:
o $100,000 was disbursed on August 17, 2004; and
o $100,000 will be disbursed within five days of the effectiveness
of this prospectus.
Accordingly, we have received a total of $100,000 pursuant to the
Securities Purchase Agreement.
The convertible notes bear interest at 10%, mature two years from the
date of issuance, and are convertible into our common stock, at the selling
stockholders' option, at $0.10 per share. In the event that we enter 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 these debentures at a price less than a conversion price of
$0.10, then the conversion price of these debentures will reset to the lower of
$0.10 or the lower conversion price equal to that in the subsequent agreement.
Warrants are exercisable at $0.12 into shares of our common stock of and expire
on August 17, 2007. This prospectus relates to the resale of the common stock
underlying these convertible notes and warrants.
8) On September 15, 2004 we entered into a Stock Purchase Agreement with Stan
Merdinger. This investor purchased 1,000,000 shares of our common stock, at
$0.10 per share, for a total purchase price of $100,000. In connection with this
Stock Purchase Agreement, we issued the investor 1,000,000 warrants, exercisable
at $0.13 per share, which expire on September 15, 2007. This prospectus relates
to the resale of the common stock underlying these convertible notes and
warrants.
A complete copy of the Securities Purchase Agreements, Note Purchase
Agreements and Stock Purchase Agreement and related documents are filed with the
SEC as exhibits to our Form SB-2 relating to this prospectus.
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
EXPERTS
Kabani & Company, Inc., Independent Registered Public Accounting Firm,
have audited, as set forth in their report thereon appearing elsewhere herein,
our financial statements at June 30, 2004 and for the year then ended that
appear in the prospectus. Heard, McElroy & Vestal, LLP, Independent Registered
Public Accounting Firm, have audited, as set forth in their report thereon
appearing elsewhere herein, our financial statements at June 30, 2003 and for
the year then ended that appear in the prospectus. The financial statements
referred to above are included in this prospectus with reliance upon the
Independent Registered Public Accounting Firm's opinions based on their
expertise in accounting and auditing.
58
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the
Securities Act of 1933, as amended, relating to the shares of common stock being
offered by this prospectus, and reference is made to such registration
statement. This prospectus constitutes the prospectus of Quintek Technologies,
Inc., filed as part of the registration statement, and it does not contain all
information in the registration statement, as certain portions have been omitted
in accordance with the rules and regulations of the Securities and Exchange
Commission.
We are subject to the informational requirements of the Securities
Exchange Act of 1934 which requires us to file reports, proxy statements and
other information with the Securities and Exchange Commission. Such reports,
proxy statements and other information may be inspected at public reference
facilities of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C.
20549. Copies of such material can be obtained from the Public Reference Section
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
59
INDEX TO FINANCIAL STATEMENTS
QUINTEK TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
For the Years Ended June 30, 2004 and June 30, 2003
Reports of Independent Registered Public Accounting Firms F-1 to F-2
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-10
Consolidated Statement of Convertible Preferred Stock and
Stockholders' (Deficit) F-11 to F-12
Consolidated Statement of Cash Flows F-13
Notes to Financial Statements F-14 to F-24
For the Quarter Ended September 30, 2004
Consolidated Balance Sheet (unaudited) F-25
Consolidated Statements of Operations (unaudited) F-26
Consolidated Statement of Cash Flows (unaudited) F-27
Notes to Unaudited Financial Statements F-28 to F-38
60
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
To the Board of Directors and Stockholders
Quintek Technologies, Inc.
Camarillo, California
Independent Auditor's Report
----------------------------
We have audited the accompanying balance sheet of Quintek Technologies, Inc., as
of June 30, 2003, 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 in accordance with auditing standards generally accepted
in the United States of America. 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 provides a
reasonable basis for our opinion.
In our opinion, based on our audit, the 2003 financial statements referred to
above present fairly, in all material respects, the financial position of
Quintek Technologies, Inc., as of June 30, 2003, and the results of its
operations and cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern; however, the Company
has experienced losses from operations and substantial doubt exists as to its
ability to continue as a going concern. Continuation is dependent upon the
success of future operations. Management's plans in regard to those matters are
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ HEARD, McELROY & VESTAL, LLP
Shreveport, LA
September 18, 2003
F-2
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-3
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.
BALANCE SHEET
JUNE 30, 2003
A S S E T S 2003
----------- --------
Current assets:
Cash 21,162
Accounts receivable (net of allowance for bad
debts of $26,498 and $20,498) 73,118
Inventory 4,371
Other 8,617
--------
Total current assets 107,268
Property and equipment, at cost:
Equipment 102,881
Computer and office equipment 93,297
Furniture and fixtures 33,518
--------
229,696
Less-accumulated depreciation (206,687)
--------
Net fixed assets 23,009
Other assets:
Deposits 2,395
Intangible assets (net of accumulated amortization
of $87,100 and $53,082) 48,973
Investments 28,762
Employee receivables, net 3,599
--------
Total other assets 83,729
--------
Total assets 214,006
=========
The accompanying notes are an integral part of the financial statements.
F-5
LIABILITIES AND STOCKHOLDERS' (DEFICIT) 2003
--------------------------------------- -----------
Current liabilities:
Accounts payable 200,315
Factoring payable 146,890
Payroll and payroll taxes payable 136,115
Payroll taxes assumed in merger 123,272
Accrued expenses 116,609
Current portion of long-term debt 12,330
Notes payable-stockholders 32,300
Other liabilities 29,135
Convertible bonds 151,695
Unearned revenue 41,034
Liabilities in process of conversion to stock 468,669
-----------
Total current liabilities 1,458,364
Long-term debt, net of current portion 24,659
Stockholders' (deficit):
Common stock-$0.01 par value, 50,000,000 shares
authorized, 46,762,008 and 40,162,008 issued
and outstanding 467,620
Additional paid-in capital 20,326,780
Retained (deficit) (22,062,534)
-----------
(1,268,134)
Less-subscriptions receivable (883)
-------------------------------------------------- -----------
Total stockholders' (deficit) (1,269,017)
-----------
Total liabilities and stockholders' (deficit) 214,006
===========
The accompanying notes are an integral part of the financial statements.
F-6
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-7
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.
F-8
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-9
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-10
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-11
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-12
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-13
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-14
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-15
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-16
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-17
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-18
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-19
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-20
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-21
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-22
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-23
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.
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-24
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-25
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-26
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-27
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.
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-28
QUINTEK TECHNOLOGIES, INC.
BALANCE SHEET
SEPTEMBER 30, 2004
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 11,670
Accounts receivable (net of allowance for doubtful accounts $15,179) 36,685
Prepaid expenses 9,180
Investments in marketable securities 1,330,000
------------
Total current assets 1,387,535
PROPERTY AND EQUIPMENT, net 276,708
OTHER ASSETS:
Deposits 36,748
Intangible assets, net 6,447
Other assets 883
------------
TOTAL ASSETS $ 1,708,322
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable & accrued expenses $ 587,296
Factoring payables 20,000
Payroll and payroll taxes payable 176,155
Payroll taxes assumed in merger 96,661
Current portion of long-term debt 136,562
Loans payable-stockholders 32,300
Convertible bonds 62,495
Convertible debentures 100,000
Convertible notes 500,000
Deferred revenue 59,600
Liabilities in process of conversion to stock 470,629
Dividend payable 2,813
------------
Total current liabilities 2,244,511
LONG TERM DEBT, net of current portion 188,091
CONVERTIBLE DEBENTURES 225,000
SHARES TO BE ISSUED - Series A Redeemable Preferred stock, 2,250,000 shares 360,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, .001 par value; authorized shares 200,000,000
issued and outstanding shares 71,122,454 711,225
Additional paid in capital 23,535,509
Shares to be issued-Common Stock 1,000,000 shares 100,000
Unamortized consulting fees (66,894)
Investments held in escrow (1,330,000)
Accumulated deficit (24,259,120)
------------
Total stockholders' deficit (1,309,280)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 1,708,322
============
The accompanying notes are an integral part of these financial statements.
F-29
QUINTEK TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
------------ ------------
Net revenue $ 114,266 $ 108,177
Cost of revenue 84,481 52,910
------------ ------------
Gross profit 29,785 55,267
Operating expenses
Selling, general and administrative 840,109 165,898
Stock based compensation 362,000
------------ ------------
Total Operating Expenses 1,202,109 165,898
------------ ------------
Loss from Operations (1,172,323) (110,631)
Non-operating income (expense):
Other income 3,325 2,982
Interest expense (25,443) (6,060)
------------ ------------
Total non-operating income (expense) (22,117) (3,078)
------------ ------------
Loss before provision for income taxes (1,194,441) (113,709)
Provision for income taxes 800 --
------------ ------------
Net loss (1,195,241) (113,709)
Dividend requirement for preferred stock 2,813 --
------------ ------------
Net loss applicable to common shareholders $ (1,198,053) $ (113,709)
============ ============
Basic and diluted weighted average shares outstanding 58,506,835 46,762,008
============ ============
Basic and diluted net loss per share (0.02) (0.00)
------------ ------------
Basic and diluted net loss per share for dividends
for preferred stock 0.00 0.00
------------ ------------
Basic and diluted net loss per share applicable
to common shareholders (0.02) (0.00)
============ ============
The accompanying notes are an integral part of these financial statements.
F-30
QUINTEK TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,198,053) $ (113,709)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 28,456 11,274
Stock based compensation 362,000 --
Issuance of stock for consulting services 170,000 --
Stock options granted 1,500 --
(Increase) decrease in current assets:
Accounts receivable (7,949) 67,129
Inventory -- (1,384)
Other assets (8,291) 1,620
Prepaid expenses (3,916) --
Deposits (28,332) --
Increase (decrease) in liabilities:
Dividend payable 2,813
Accounts payable and accrued expenses 148,471 43,298
Payroll and payroll taxes payable (10,984) (7,676)
Deferred revenue (27,440) --
Liabilities in process of conversion to stock -- --
----------- -----------
Total adjustments 626,326 114,261
----------- -----------
Net cash provided (used) in operating activities (571,727) 552
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of other assets -- (9,092)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on factoring payables (23,230) (126,890)
Proceeds (payment) on loans from stockholders -- 100,000
Proceeds( payments) on notes payable, (8,973) 18,824
Proceeds from issuance of debentures 325,000 --
Proceeds from issuance of convertible notes 70,000 --
Proceeds from issuance of common stock and warrants 205,000 --
----------- -----------
Net cash provided (used in) by financing activities 567,797 (8,066)
----------- -----------
NET DECREASE IN CASH & CASH EQUIVALENTS (3,930) (16,606)
CASH & CASH EQUIVALENTS, BEGINNING BALANCE 15,600 21,162
----------- -----------
CASH & CASH EQUIVALENTS, BEGINNING BALANCE $ 11,670 $ 4,556
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-31
QUINTEK TECHNOLOGIES,
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
1. Description of business
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 Electronics
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. Upon effectiveness of that acquisition, Quintek
Electronics elected to become the successor issuer to Juniper for reporting
purposes under the Securities Exchange Act of 1934.
We have been a manufacturer of hardware and software and a service
provider to the corporate and public sector markets since 1991. Our new
division, Quintek Services, Inc. delivers business process outsourcing services
and information lifecycle management solutions to document intensive industries
such as healthcare and financial services. Business process outsourcing is the
delegation, by the customer, of the operational responsibility for a business
process's execution and performance within the customer's environment. The
solutions and services we provide enable organizations to secure and manage
their information and document business processes more efficiently.
Quintek Services provides business process outsourcing services to
Fortune 500, Russell 2000 companies and public sector organizations. Our
business process outsourcing services range from the digitizing, indexing and
uploading of source documents through simple customer-specific, rules-based
decision making.
We sell hardware, software and services for printing large format
drawings such as blueprints and computer aided design files directly to the
microfilm format of aperture cards. We are the only manufacturer of a patented
chemical-free desktop microfilm printer for aperture cards.
2. Basis of Presentation
The accompanying unaudited financial statements of Quintek Technologies, Inc
(the "Company) have been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission for the presentation of interim
financial information, but do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
F-32
QUINTEK TECHNOLOGIES,
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
statements. In the opinion of management, the accompanying unaudited financial
statements of the Company include all adjustments (consisting only of normal
recurring adjustments) considered necessary to present fairly its financial
position as of September 30, 2004, the results of operations for the three
months ended September, 2004 and 2003, and cash flows for the three months ended
September 30, 2004 and 2003. The operating results for the three month period
ended September 30, 2004 are not necessarily indicative of the results that may
be expected for the year ending June 30, 2005 The audited financial statements
for the year ended June 30, 2004 were filed on October 1, 2004 with the
Securities and Exchange Commission and is hereby referenced. The information
included in this Form 10-QSB should be read in conjunction with Management's
Discussion and Analysis and financial statements and notes thereto included in
the Company's 2004 Form 10-KSB.
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.
Research and Development
Research and development costs are charged to operations when incurred and are
included in operating expenses. The amount charged to operations for the three
months ended September 30, 2004 and 2003 was $15,073 and 12,406, respectively.
Marketable securities
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. The Company has recorded such shares as shares
held in escrow amounting $1,330,000 as contra equity in the accompanying
financial statements. 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 attained listing with the United Kingdom Listing Authority. 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.
The Company's marketable securities (Langley's shares) are classified as
available-for-sale and, as such, are carried at fair value. Securities
classified as available-for-sale may be sold in response to changes in interest
rates, liquidity needs, and for other purposes. The investment in marketable
securities represents less than twenty percent (20%) of the outstanding common
stock and stock equivalents of the investee, As such, the investment is
accounted for in accordance with the provisions of SFAS No. 115.
Unrealized holding gains and losses for marketable securities are excluded from
earnings and reported as a separate component of stockholder's equity. Realized
gains and losses for securities classified as available-for-sale are reported in
earnings based upon the adjusted cost of the specific security sold. On
September 30, 2004, the investments have been recorded at $1,330,000 based upon
the fair value of the marketable securities.
Marketable securities classified as available for sale consisted of the
following as of September 30, 2004:
F-33
QUINTEK TECHNOLOGIES,
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
Market Accum. Number of
Investee Name Cost at Value at Unrealized Shares Held at
(Symbol) September 30, 2004 September 30, 2004 Gain (Loss) September 30, 2004
- - ---------------------------------------------------------------------------------------------------------
Langley Park Investments, PLC $ 1,330,000 $ 1,330,000 $ - 572,798
-----------------------------------------------------
Totals $ 1,330,000 $ 1,330,000 $ -
=====================================================
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.
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. Issuance of shares for service
F-34
QUINTEK TECHNOLOGIES,
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
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.
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 financial statements as substantially
all of the Company's operations are conducted in one industry segment.
Reclassifications
Certain comparative amounts have been reclassified to conform with the current
period 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 period ended September 30, 2004 and 2003, as follows ($ in
thousands, except per share amounts):
F-35
QUINTEK TECHNOLOGIES,
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
Period ended September 30,
2004 2003
------------- -----------
Net loss - as reported $ (1,194$ (114)
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 (362) --
------------- -----------
Pro forma net loss $ (1,556) $ (114)
============= ===========
E arnings (loss) per share:
Basic, as reported $ (0.02) $ (0.00)
Diluted, as reported $ (0.02) $ (0.00)
Basic, pro forma $ (0.02) $ (0.00)
Diluted, pro forma $ (0.02) $ (0.00)
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,
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.
F-36
QUINTEK TECHNOLOGIES,
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." The EITF reached a consensus about the
criteria that should be used to determine when an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement
of an impairment loss and how that criteria should be applied to investments
accounted for under SFAS No. 115, "ACCOUNTING IN CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES." EITF 03-01 also included accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. Additionally, EITF 03-01 includes new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the Financial Accounting Standards Board (FASB)
delayed the accounting provisions of EITF 03-01; however the disclosure
requirements remain effective for annual reports ending after June 15, 2004. The
Company will evaluate the impact of EITF 03-01 once final guidance is issued.
In April of 2004, the EITF reached consensus on the guidance provided in EITF
Issue No. 03-6, "Participating Securities and the Two-Class Method under SFAS
No. 128 Earnings Per Share" ("EITF 03-6"). EITF 03-6 clarifies whether a
security should be considered a "participating security" for purposes of
computing earnings per share ("EPS") and how earnings should be allocated to a
"participating security" when using the two-class method for computing basic
EPS. The adoption of EITF 03-6 does not have a significant impact on the
Company's financial position or results of operations.
In May of 2004, the FASB revised FASB Staff Position ("FSP") No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" and issued FSP No. 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" ("FSP No. 106-2"). FSP 106-2
provides accounting guidance to the employers who sponsor post retirement health
care plans that provide prescription drug benefits; and the prescription drug
benefit provided by the employer is "actuarially equivalent" to Medicare Part D
and hence qualifies for the subsidy under the Medicare amendment act. The
adoption of FSP 106-2 does not have a significant impact on the Company's
financial position or results of operations.
SEC Staff Accounting Bulletin (SAB) No. 105, "APPLICATION OF ACCOUNTING
PRINCIPLES TO LOAN COMMITMENTS," summarizes the views of the staff of the SEC
regarding the application of generally accepted accounting principles to loan
commitments accounted for as derivative instruments. SAB No.105 provides that
the fair value of recorded loan commitments that are accounted for as
derivatives under SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES," should not incorporate the expected future cash flows
related to the associated servicing of the future loan. In addition, SAB No. 105
requires registrants to disclose their accounting policy for loan commitments.
The provisions of SAB No. 105 must be applied to loan commitments accounted for
as derivatives that are entered into after March 31, 2004. The adoption of this
accounting standard does not have a material impact on the Company's financial
statements.
F-37
QUINTEK TECHNOLOGIES,
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
3. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2004, consists of the following:
Scanning Equipment $ 193,677
Computer and office equipment 111,752
Other depreciable assets 102,880
Software 76,164
Furniture and fixture 35,589
---------
520,062
Accumulated depreciation (243,354)
---------
$ 276,708
=========
4. INTANGIBLE ASSETS
The Company evaluates intangible assets and other long-lived 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 has been
evaluated in accordance with SFAS No. 142. The SFAS No. 142 is applicable to the
financial statements of the Company beginning July 1, 2002. Net intangible
assets at September 30, 2004 were as follows:
Patents and proprietary processes $ 136,067
Accumulated amortization 129,620
-----------
$ 6,447
===========
Amortization expenses for the Company's intangible assets over the future
periods are estimated to be: Twelve months period ended September 30,
2005-$6,447.
5. EMPLOYEE RECEIVABLES
Notes receivable from employees, unsecured,
due on June 30, 2019, interest at 4% $ 377,649
Interest receivable in connection with
above notes receivable 18,385
---------
396,034
Valuation allowance (393,208)
---------
$ 2,826
=========
F-38
QUINTEK TECHNOLOGIES,
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
6. 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 September 30, 2004, the Company had a factoring payable balance of $20,000.
7. 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 September 30,
2004. The Company is delinquent on payments of these payroll tax liabilities.
8. LONG TERM PAYABLES
Leases payable, interest at 7.9% to 20%, due various dates $ 273,680
in 2005 to 2008
Note payable, DFS, interest at 15.99%, due Jun & Jul 2006 2,720
Notes payable, AP conversion, interest at 8%, due 2006 44,208
Note payable - Vendor, monthly installments $404, July 2005 4,045
324,653
Current portion 136,562
$ 188,091
The future maturity of the long term payables is as follows:
2005 $ 136,562
2006 110,699
2007 77,392
Total $ 324,653
=========
F-39
QUINTEK TECHNOLOGIES,
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
9. 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 September 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.
10. CONVERTIBLE DEBENTURES
During the period ended September 30, 2004, the Company raised capital through
the issuance of convertible debentures in the amount of $325,000.
One debenture in the amount of $300,000 pays interest at 5 3/4% interests and
includes 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 debenture, 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. Upon execution of
the securities purchase agreement, $225,000 of the purchase price was due and
paid to the Company. The remaining $75,000 is due the Company upon declaration
from the Securities and Exchange Commission that the Registration Statement for
the conversion shares and warrants is effective.
A second agreement consists of 2 convertible debentures each for $100,000 which
bears simple interest at 10%. The initial Debenture for $100,000 was purchased
during August 2004. The second Debenture for $100,000 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-40
QUINTEK TECHNOLOGIES,
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
The conversion right of the debenture holder with respect to the individual
debentures shall only exist upon the Company's registration statement
registering the Shares underlying the debentures and other Securities being
declared effective by the Securities and Exchange Commission. As of September
30, 2004, the criteria to convert the debentures to common stock were not met.
The total interest on these convertible debentures for the period ended
September 30, 2004 amounted to $3,326.
11. CONVERTIBLE NOTES
During the year ended June 30, 2004, the Company raised capital through the
issuance of convertible promissory notes in the amount of $500,000. All the
notes are for a one year period and bear simple interest at the rate of 10%. The
due dates of these notes are from November 26, 2004 through June 4, 2005.
The notes plus any accrued interest through the date of conversion 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 conversion right of the note holder with respect to the individual notes
shall only exist upon: (i) the approval of a proxy statement to be filed with
the Securities and Exchange Commission and approval of an amendment by the
Company's shareholders to authorize to 200,000,000 the number of shares of
common stock and (ii) the Company's registration statement registering the
Shares underlying the notes and other Securities has been declared effective by
the Securities and Exchange Commission. As of September 30, 2004, the criteria
to convert the notes to common stock were not met.
The total interest on these convertible notes for the period September 30, 2004
amounted to $12,500.
12. LIABILITIES IN PROCESS OF CONVERSION TO STOCK
The Company has a total of $470,629 liabilities in process of conversion to
stock as of September 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.
F-41
QUINTEK TECHNOLOGIES,
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
14. LOANS PAYABLE - STOCKHOLDERS
The Company has a loan payable balance of $32,300 to the stockholders at
September 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.
During the period ended September 30, 2004, 2,043,888, shares of common stock
were issued for services valued at $170,000.
During the period ended September 30, 2004, 4,682,572 shares of common stock
were issued for conversion of loans from shareholders bond amounting $211,756.
During the period ended September 30, 2004, $70,000 of outstanding notes were
converted to 700,000 shares of common stock. In connection with this
transaction, $28,297 of beneficial conversion feature expense was recorded.
On September 15, 2004, the Company agreed to issue and sell to an Investor
1,000,000 shares of the Company's Common Stock and warrants purchase up to
1,000,000 shares of Common Stock. The investor purchased from the Company
1,000,000 shares of Common Stock of the Company for $.10 per share, for an
aggregate of $100,000, and also received from the Company (a) warrants to
purchase up to 1,000,000 shares of Common Stock of the Company at $.13 per share
at any time through September 15, 2007.
The Company agreed to provide with respect to the Common Stock as well as the
Common Stock issuable upon exercise of the Warrants certain registration rights
under the Securities Act;
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 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.
F-42
QUINTEK TECHNOLOGIES,
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
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.
$3,464 was amortized during the period ended September 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 September 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
Warrants
Number
of
Warrants
--------
Outstanding June 30, 2004 3,263,432
Issued during the period 1,000,000
Exercised 0
---------
Outstanding September 30, 2004 4,263,432
=========
c. Stock Option Agreements
The Company granted 50,000 stock options to one employee during the period ended
September 30, 2004.
The Company recorded $ 1,500 as compensation expense due to issuance of the
options, during the period ended September 30, 2004.
The number and weighted average exercise prices of options granted by the
Company are as follows:
Options
Number
of
Options
--------
Outstanding June 30, 2004 2,215,000
Granted during the period 50,000
Exercised 0
Expired/forfeited 0
---------
Outstanding September 30, 2004 2,265,000
F-43
QUINTEK TECHNOLOGIES,
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
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 six month ended June 30, 2004 as follows ($ in thousands, except
per share amounts). :
Net loss - as reported $ (1198)
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 (1)
-------------
Pro forma net loss $ (1,199)
=============
Earnings per share:
Basic, as reported $ 0.02
Diluted, as reported $ 0.02
Basic, pro forma $ 0.02
Diluted, pro forma $ 0.02
The assumptions used in calculating the fair value of options granted using the
Black-Scholes option- pricing model are 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
F-44
QUINTEK TECHNOLOGIES,
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 2004, the Company had 2,250,000
shares of Series A Preferred Stock to be issued valued at $360,000. The Company
has recorded a cumulative dividend of $2,813 for the preferred stockholders for
the three month period ended September 30, 2004, in the accompanying financial
statements.
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.
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 12)
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 period ended September 30, 2004.
The Company paid $9,754 interest during the period ended June 30, 2004.
F-45
QUINTEK TECHNOLOGIES,
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
The cash flow statement for the period ended ended September 30, 2004 does not
include the following non-cash investing and financing transactions;
o 4,682,572 shares of common stock were issued for conversion of
loans from stockholders amounting to $211,756.
o Machinery and equipment was acquired through financing agreements
in the amount of $223,242.
o 1,145,595 of shares of a publicly held entity were purchased in
exchange for 14,000,000 shares of the Company's common stock. The
shares received were valued at $2,660,000. Of this amount 572,798
are trading shares, the remaining 572,797 shares are being held in
escrow.
18. COMMITMENTS AND CONTINGENCIES
a) Operating Leases
Effective July 1, 2004 the Company relocated its 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
period ended June 30, 2004 rent expense for these operating leases totaled
$29,711.
The future minimum lease payments under non-cancelable leases are as follows:
2005 $ 79,000
2006 81,000
2007 83,000
2008 64,000
---------
$ 307,000
=========
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
F-46
QUINTEK TECHNOLOGIES,
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
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 exchange: (A) to employ any device, scheme or artifice 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
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.
d) Litigation
During the year ended June 30, 2004, a creditor of the Company filed suit
against the Company for $22,662 for goods provided. The Company filed a
counterclaim in August 2004.
The $22,662 is included in accounts payable and accrued expenses in the
accompanying financial statements.
19. 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.
20. 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 September 30, 2004, the Company had incurred
cumulative losses of $24,256,306 including net losses of $1,198,053 and $113,709
for the periods ended September 30, 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
F-47
QUINTEK TECHNOLOGIES,
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 2004, towards (i) obtaining additional
equity financing (ii) controlling of salaries and general and administrative
expenses (iii) management of accounts payable and (iv) evaluation of its
distribution and marketing methods.
21. SUBSEQUENT EVENTS
During October 2004, the Company converted various liabilities and stock based
compensation to shares of stock as follows:
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 $340,000. 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.
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-48
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our By-laws, as amended, provide to the fullest extent permitted by
California law, our directors or officers shall not be personally liable to us
or our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our By-laws, as amended, is to
eliminate our right and our shareholders (through shareholders' derivative suits
on behalf of our company) to recover damages against a director or officer for
breach of the fiduciary duty of care as a director or officer (including
breaches resulting from negligent or grossly negligent behavior), except under
certain situations defined by statute. We believe that the indemnification
provisions in our By-laws, as amended, are necessary to attract and retain
qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated
expenses, all of which we will pay, in connection with the issuance and
distribution of the securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 1,999.58
Accounting fees and expenses 20,000.00*
Legal fees and expenses 35,000.00*
Miscellaneous 5,000.00
-----------
TOTAL $61,999.58*
===========
* Estimated.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In October and December 2001, we issued a total of 1,025,000 shares of
restricted common stock at an average rate of $0.064 per share to two
individuals and three companies as compensation for consulting, corporate
promotion, corporate development, and investor relation services. These
issuances were exempt from registration pursuant to Section 4(2) of the
Securities Act.
In October, November and December 2001, we sold 3,250,000 shares of
restricted common stock at an average price of $0.043 per share to four
individuals. These issuances were exempt from registration pursuant to Section
4(2) of the Securities Act.
In November and December 2001 we issued 20,000 shares of restricted
common stock at an average rate of $0.076 per share to two individuals as a loan
fee. These issuances were exempt from registration pursuant to Section 4(2) of
the Securities Act.
In October 2001 we executed a stock swap with PanaMed, Inc in which
2,000,000 shares of PanaMed restricted common stock was exchanged for 2,000,000
shares of Quintek restricted common stock.
On January 8, 2002, we sold 360,000 shares of restricted common stock
at an average price of $0.05 per share to three individuals in reliance on the
exemption contained in Section 4(2) of the Securities Act of 1933, for a total
consideration of $23,000. The closing price of our common stock on the OTC
Bulletin Board on the day these shares were sold was $0.21 per share.
We entered a special agreement, executed by the purchaser on March 15,
2002, to sell 105,000 shares of our common stock to one company upon the
exercise of warrants. The agreement allowed a reduction of the exercise price to
$0.10 per share under the condition that they exercise the warrants within 60
days and that they purchase an equal number of shares of restricted common
stock, if requested by us within 120 days, at the price of $0.06 per share. The
closing price of our common stock on the OTC Bulletin Board on March 15, 2002,
was $0.18 per share. On March 19, 2002, we sold 54,477 shares of stock to the
purchaser for $5,447 upon the exercise of Class D warrants under this agreement.
The closing price of our common stock on March 19, 2002, was $0.18 per share.
The purchaser exercised the remainder of the warrants at the reduced, $0.10 per
share price, after the close of the quarter. These Class D warrants originally
had been issued as part of the plan of reorganization of our predecessor,
Pacific Diagnostics Technologies, Inc., in 1999, and the stock issued on
exercise of the warrants was issued in reliance on the exemption from contained
in Section 1145 of the U.S. Bankruptcy Code.
In June 2002 we issued 689,000 shares of restricted stock to one
individual and one company as finder fees. These issuances were exempt from
registration pursuant to Section 4(2) of the Securities Act.
In April 2002 we issued 51,462 shares of restricted stock to one
individual in a transaction based on converting his convertible bond into stock
at a rate of $0.22 per share.
In April and May 2002 we sold 2,805,000 shares of restricted stock to
16 individuals and one company at a price of $0.05 per share.
In April and May 2002 we issued 50,523 shares of free trading stock to
one individual at a rate of $0.10 per share in transactions based on exercising
Class B, C and D, warrants under an agreement.
Subsequent to June 30, 2002 we sold 333,333 shares of restricted stock
to an individual at a rate of $0.03 per share, issued 416,667 shares of
restricted stock to two individuals for consulting services, and issued 224,000
shares of restricted stock to an individual in a transaction based on converting
his convertible bond into stock at a rate of $0.05 per share.
II-2
In September 2002, we issued 167,667 shares of restricted common stock
to one individual for consulting services in reliance on the exemption contained
in Section 4(2) of the Securities Act of 1933. The closing price of our common
stock on the OTC Bulletin Board on the contract date (September 12, 2002) was
$0.06 per share.
In September 2002, we sold 333,333 shares of restricted common stock at
a price of $0.03 per share to one individual in reliance on the exemption
contained in Section 4(2) of the Securities Act of 1933, for a total
consideration of $10,000. The closing price of our common stock on the OTC
Bulletin Board on the sale date (September 12, 2002) was $0.06 per share.
In September 2002, we issued 224,000 shares of restricted common stock
to one individual in reliance on the exemption contained in Section 4(2) of the
Securities Act of 1933, for a total consideration of $11,200. The stock was
issued as consideration for converting a convertible bond into stock. The
closing price of our common stock on the OTC Bulletin Board on the day the bond
was sold (July 11, 2001) was $0.06 per share.
In October 2002, we issued 250,000 shares of restricted common stock to
1 individual for consulting services in reliance on the exemption contained in
Section 4(2) of the Securities Act of 1933. The closing price of our common
stock on the OTC Bulletin Board on the contract date (October 1, 2002) was $0.06
per share.
In October 2002, we issued 200,000 shares of restricted common stock to
one individual and 200,000 shares of restricted common stock to one company for
consulting services in reliance on the exemption contained in Section 4(2) of
the Securities Actof 1933. The closing price of our common stock on the OTC
Bulletin Board on the contract date (September 3, 2002) was $0.04 per share.
In October 2002, we issued 150,000 shares of restricted common stock to
one company for consulting services in reliance on the exemption contained in
Section 4(2) of the Securities Act of 1933. The closing price of our common
stock on the OTC Bulletin Board on the contract date (March 1, 2002) was $0.19
per share.
In October 2002, we issued 250,000 shares of restricted common stock
to one individual for consulting services in reliance on the exemption contained
in Section 4(2) of the Securities Act of 1933.
In October 2002, we issued 200,000 shares of restricted common stock
to one individual and 200,000 shares of restricted common stock to one company
for consulting services in reliance on the exemption contained in Section 4(2)
of the Securities Act of 1933.
In October 2002, we issued 150,000 shares of restricted common stock
to one company for consulting services in reliance on the exemption contained in
Section 4(2) of the Securities Act of 1933.
In December 2002, we issued 424,000 shares of restricted common
stock to two individuals and 16,000 shares of restricted common stock to 1
company for consulting services in reliance on the exemption contained in
Section 4(2) of the Securities Act of 1933.
In March 2003, we issued 400,000 shares of stock to Robert Steele as
compensation for consulting services performed during the months of December
2002 and January 2003, prior to assuming the position of our President & CEO on
January 31, 2003. In March 2003 these shares were registered with the Securities
and Exchange Commission on Form S-8 of the Securities Act of 1933.
II-3
In January 2003, we issued a warrant to purchase 4,500,000 shares of
common stock, under a special warrant agreement, to one individual as
compensation for consulting services. The warrant has an exercise price of 2
cents per share, an expiration date of July 31, 2003, and a requirement for the
underlying stock to be registered on Form S-8 of the Securities Act of 1933.
In March 2003, we issued 4,500,000 shares of common stock to one
individual upon exercise of the warrants described in Item 2 (B) for $90,000 in
cash. The common stock was subsequently registered with the Securities and
Exchange Commission on Form S-8 of the Securities Act of 1933.
On September 26, 2003, we sold to a single accredited investor, five
convertible notes, each for $100,000 for a total purchase price of $500,000. The
convertible notes bear interest at 10% per annum. These notes are convertible
into shares of our common stock at a price of $0.06. In connection with this
Note Purchase Agreement, the investor will receive up to 9,166,667 warrants
exercisable at $0.10 per share and expiring on September 26, 2008, with the
investor receiving one warrant for every share converted under the convertible
notes.
In October 2003 we issued 1,773,695 shares of restricted common
stock to one individual in return for converting to equity the principal
($89,200) and accrued interest ($17,222) of a convertible bond. The convertible
bond had been held for over 2 years and this caused the shares issued on the
principal amount to become immediately eligible for legend removal under Rule
144(k).
In October 2003 we issued 14,291 shares of restricted common stock
to one individual as a late fee incurred during a purchase order financing
transaction. The stock had a market value of $1,372.
To satisfy stock purchase agreement totaling $1,946,000, Quintek issued
14,000,000 shares of common stock at $0.139.
We issued 1,500,000 shares of common stock to two entities in exchange
for $105,000.
On July 11, 2004, we sold a $20,000 convertible promissory note, 10%
interest per annum, to an accredited investor. The note is due one year from
issuance. On August 31, 2004, the note was converted into 200,000 shares of
common stock at $0.10. Additionally, the investor was granted, for each share
converted pursuant to the note, one warrant to purchase a share of common stock
at $0.15, expiring July 1, 2007.
On July 15, 2004, we issued 300,000 shares of common stock to a
consultant in consideration of $45,000 of services performed pursuant to a
consulting agreement.
On July 17, 2004, we sold a $100,000 convertible promissory note, 10%
interest per annum, to an accredited investor. The note is due one year from
issuance. The note is convertible into 1,000,000 shares of common stock at
$0.10. Additionally, the investor was granted, for each share converted pursuant
to the note, one warrant to purchase a share of common stock at $0.15, expiring
July 17, 2007.
In connection with a personal guaranty, dated as of July 23, 2004,
executed by Zubair Kazi on our behalf for up to $300,000 in equipment leases, we
issued a warrant to Zubair Kazi for the purchase of 350,000 shares of our common
stock, exercisable for five years at an exercise price of $0.10 per share.
Pursuant to the personal guaranty, we agreed that for every dollar Mr. Kazi
guaranteed on an equipment lease on behalf of the Company, we would issue Mr.
Kazi 10 warrants to purchase shares of our common stock at an exercise price of
$0.10 per share.
II-4
On July 27, 2004, we sold a $50,000 convertible promissory note, 10%
interest per annum, to an accredited investor. The note is due one year from
issuance. On August 31, 2004, the note was converted into 500,000 shares of
common stock at $0.10. Additionally, the investor was granted, for each share
converted pursuant to the note, one warrant to purchase a share of common stock
at $0.15, expiring July 27, 2007.
On July 29, 2004, we entered into an Agreement with Langley Park
Investments PLC, a London investment company to issue 14,000,000 shares of our
common stock to Langley Park Investments in return for 1,145,595 shares of
Langley. Fifty percent of Langley Park Investments shares issued to us under
this agreement are to be held in escrow for two years. At the end of two years,
if the market price for our common stock at or greater than the initial closing
price, the escrow agent will release the remaining Langley Park Investments
shares to us. In the event that the market price for our common stock is less
than the initial closing price the amount released will be adjusted.
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with an accredited investor on August 4, 2004 for
the sale of (i) $300,000 in convertible debentures and (ii) warrants to
buy3,000,000 shares of our common stock. This prospectus relates to the resale
of the common stock underlying these convertible debentures and warrants.
The investors are obligated to provide us with an aggregate of $300,000
as follows:
o $175,000 was disbursed to us on August 4, 2004;
o $50,000 has been retained for services provided to our company by
various professionals, which shall be disbursed upon effectiveness
of this registration statement; and
o $75,000 will be released upon effectiveness of this registration
statement.
The debentures bear interest at 5 3/4%, mature two years from the date
of issuance, and are convertible into our common stock, at the selling
stockholder's option. The convertible debentures are convertible into the number
of our shares of common stock equal to the principal amount of the debentures
being converted multiplied by 11, less the product of the conversion price
multiplied by ten times the dollar amount of the debenture. The conversion price
for the convertible debenture is the lesser of (i) $0.50 or (ii) eighty percent
of the of the average of the five lowest volume weighted average prices during
the twenty (20) trading days prior to the conversion. If the volume weighted
average price is below $0.10 on a conversion date, we have the right to pre-pay
the amount of the debenture the holder elects to convert, plus accrued and
unpaid interest, at 125% of such amount; however, if we elect to pre-pay in this
situation, the debenture holder has the right to withdraw the notice of
conversion. Also, if the volume weighted average price is below $0.10 at any
point during a month, the holder is not obligated to convert any portion of the
debenture during that month. Accordingly, there is in fact no limit on the
number of shares into which the debenture may be converted. In addition, the
selling stockholder is obligated to exercise the warrant concurrently with the
submission of a conversion notice by the selling stockholder. The warrant is
exercisable into 3,000,000 shares of common stock at an exercise price of $1.00
per share.
The selling stockholder has contractually agreed to restrict its
ability to convert or exercise its warrants and receive shares of our common
stock such that the number of shares of common stock held by them and their
affiliates after such conversion or exercise does not exceed 4.9% of the then
issued and outstanding shares of common stock. See the "Selling Stockholders"
and "Risk Factors" sections for a complete description of the convertible
debentures.
II-5
In the event that the registration statement is not declared effective
by the required deadline, Golden Gate may demand repayment of the debenture of
150% of the face amount outstanding, plus all accrued and unpaid interest, in
cash. If the repayment is accelerated, we are also obligated to issue to Golden
Gate 50,000 shares of common stock and $15,000 for each 30 day period, or
portion thereof, during which the face amount, including interest thereon,
remains unpaid. If Golden Gate does not elect to accelerate the debenture, we
are required to immediately issue to Golden Gate 50,000 shares of common stock
and $15,000 for each 30 day period, or portion thereof, during which the face
amount, including interest thereon, remains unpaid.
On August 5, 2004, we sold 1,000,000 shares of common stock to an
accredited investor in consideration of $70,000.
On August 5, 2004, we sold 500,000 shares of common stock to an
accredited investor in consideration of $35,000.
On August 10, 2004, we entered into an equipment lease with VenCore
Solutions LLC in the amount of $240,000, which Mr. Kazi executed a personal
guaranty for. In connection therewith, we issued to Mr. Kazi a warrant to
purchase 2,400,000 shares of our common stock, exercisable for five years at an
exercise price of $0.10 per share.
On August 14, 2004, we issued 302,271 shares of common stock to a
consultant in consideration of $36,300 of services performed pursuant to a
consulting agreement.
On August 14, 2004, we issued 243,888 shares of common stock to a
consultant in consideration of $30,600 of services performed pursuant to a
consulting agreement.
We entered into a Securities Purchase Agreement with an accredited
investor on August 17, 2004 for the sale of $200,000 in convertible notes.
The investor is obligated to provide us with an aggregate of $200,000
as follows:
o $100,000 was disbursed on August 17, 2004; and
o $100,000 will be disbursed within five days of the effectiveness
of this prospectus.
Accordingly, we have received a total of $100,000 pursuant to the
Securities Purchase Agreement.
The convertible notes bear interest at 10%, mature two years from the
date of issuance, and are convertible into our common stock, at the selling
stockholders' option, at $0.10 per share. In the event that we enter 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 these debentures at a price less than a conversion price of
$0.10, then the conversion price of these debentures will reset to the lower of
$0.10 or the lower conversion price equal to that in the subsequent agreement.
Warrants are exercisable at $0.12 into shares of our common stock of and expire
on August 17, 2007.
On August 26, 2004, we issued 150,000 shares of common stock to a
consultant in consideration of $22,500 of services performed pursuant to a
consulting agreement.
II-6
On September 15, 2004, we sold 1,000,000 shares of common stock to an
investor in consideration of $100,000; additionally, the investor was granted a
warrant to purchase 1,000,000 of common stock at an exercise price of $0.13,
expiring on September 15, 2007.
On September 26, 2004, we issued 230,275 shares of common stock to a
consultant in consideration of $33,200 of services performed pursuant to a
consulting agreement.
On September 27, 2004, we issued 648,256 shares of Series B Preferred
Stock to three creditors in consideration of conversion of $162,063.88 in debt.
On September 27, 2004, we issued 724,077 shares of Series A Preferred
Stock in consideration of conversion of $36,203.84 in debt.
On September 27, 2004, we issued 18,981 shares of Series C Preferred
Stock to eleven creditors in consideration of conversion of $18,981.16 in debt.
On September 27, 2004, we issued 1,006,854 shares of Series A Preferred
Stock to five employees in consideration of conversion of $251,713.50 in debt.
On September 29, 2004, we issued 700,000 shares of common stock to a
consultant in consideration of $133,000 of services performed pursuant to a
consulting agreement.
On September 30, 2004, we sold 14,000,000 shares of common stock to an
institutional investor at $0.139 per share, for gross proceeds of $1,946,000.
On October 4, 2004, we sold 250,000 shares of common stock to an
investor in consideration of $25,000; additionally, the investor was granted a
three-year warrant to purchase 250,000 shares of common stock at an exercise
price of $0.15.
On October 16, 2004, we sold a $250,000 promissory note, 5.75% interest
per annum, to an accredited investor. The note is due six months from issuance.
Additionally, the investor was granted 5,000,000 warrant to purchase common
stock at $0.10, expiring October 16, 2007.
On November 24, 2004, we issued 54,545 shares of our common stock to
one consultant for services provided pursuant to a consulting agreement.
On November 24, 2004, we issued 2,794,920 shares of our common stock to
one investor pursuant to the investor's conversion of Series B convertible
preferred stock.
On December 3, 2004, we issued 500,000 shares of our common stock to
Gerald Hannahs pursuant to an exercise of a warrant for $23,000.
On December 13, 2004, we issued 7,500 shares of our common stock to one
consultant for services rendered pursuant to a consulting agreement.
On December 13, 2004, we issued 2,000 shares of our Series A
convertible preferred stock to three investors in exchange for debt we owed to
the investors.
On December 22, 2004, we issued 1,967,824 shares of our common stock to
Andrew Haag, an officer and director of ours, pursuant to an exercise of a
warrant on a cashless basis.
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On January 10, 2005, we issued 328,000 shares of our common stock to
one investor pursuant to the investor's conversion of Series A convertible
preferred stock.
On January 12, 2005, we issued 250,000 shares of our common stock to
one consultant for services rendered pursuant to a consulting agreement.
* All of the above offerings and sales were deemed to be exempt under
rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as
amended. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were accredited investors, business associates of Radix or executive
officers of Quintek, and transfer was restricted by Quintek in accordance with
the requirements of the Securities Act of 1933. In addition to representations
by the above-referenced persons, we have made independent determinations that
all of the above-referenced persons were accredited or sophisticated investors,
and that they were capable of analyzing the merits and risks of their
investment, and that they understood the speculative nature of their investment.
Furthermore, all of the above-referenced persons were provided with access to
our Securities and Exchange Commission filings.
Except as expressly set forth above, the individuals and entities to
whom we issued securities as indicated in this section of the registration
statement are unaffiliated with the Company.
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ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2.
References to "the Company" in this Exhibit List mean Quintek Technologies,
Inc., a California corporation.
Exhibit # Exhibit Name
--------- ------------
3.1 Articles of Incorporation of the Registrant
3.2 Amendment to the Articles of Incorporation
3.3 By-laws of the Registrant, filed as an exhibit to the current
report on Form 8-K filed with the Commission on January 14,
2004 and incorporated herein by reference.
3.3 Certificate of Designation for Series A Preferred Stock
3.4 Certificate of Designations for Series B Preferred Stock
3.5 Certificate of Designations for Series C Preferred Stock
4.1 Securities Purchase Agreement dated June 2004 entered between
the Company and Golden Gate Investors, Inc., filed as an
exhibit to the amended annual report on Form 10-KSB/A filed
with the Commission on October 13, 2004 and incorporated
herein by reference.
4.2 Convertible Debenture dated August 2004 entered between the
Company and Golden Gate Investors, Inc.
4.3 Warrant to Purchase Common Stock dated August 2004 issued to
Golden Gate Investors, Inc.
4.4 Registration Rights Agreement dated August 2004 entered
between Golden Gate Investors, Inc. and the Company
4.5 Note Purchase Agreement dated November 2003 entered between
the Company and Kazi Management V.I. LLC, filed as an exhibit
to the amended annual report on Form 10-KSB/A filed with the
Commission on October 13, 2004 and incorporated herein by
reference.
4.6 Convertible Note I dated November 2003 issued to Kazi
Management V.I. LLC, filed as an exhibit to the amended annual
report on Form 10-KSB/A filed with the Commission on October
13, 2004 and incorporated herein by reference.
4.7 Convertible Note II dated November 2003 issued to Kazi
Management V.I. LLC, filed as an exhibit to the amended annual
report on Form 10-KSB/A filed with the Commission on October
13, 2004 and incorporated herein by reference.
4.6 Convertible Note III dated November 2003 issued to Kazi
Management V.I. LLC, filed as an exhibit to the amended annual
report on Form 10-KSB/A filed with the Commission on October
13, 2004 and incorporated herein by reference.
4.6 Convertible Note IV dated November 2003 issued to Kazi
Management V.I. LLC, filed as an exhibit to the amended annual
report on Form 10-KSB/A filed with the Commission on October
13, 2004 and incorporated herein by reference.
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4.7 Convertible Note V dated November 2003 issued to Kazi
Management V.I. LLC, filed as an exhibit to the amended annual
report on Form 10-KSB/A filed with the Commission on October
13, 2004 and incorporated herein by reference.
4.8 Common Stock Purchase Warrant issued to Kazi Management V.I.
LLC, filed as an exhibit to the amended annual report on Form
10-KSB/A filed with the Commission on October 13, 2004 and
incorporated herein by reference.
4.9 Loan and Security Agreement dated November 2003 entered
between the Company and Kazi Management V.I. LLC, filed as an
exhibit to the amended annual report on Form 10-KSB/A filed
with the Commission on October 13, 2004 and incorporated
herein by reference.
4.10 Registration Rights Agreement dated November 2003 entered
between the Company and Kazi Management V.I. LLC, filed as an
exhibit to the amended annual report on Form 10-KSB/A filed
with the Commission on October 13, 2004 and incorporated
herein by reference.
4.11 Stock Purchase Agreement, dated July 7, 2004, between the
Company and Langley Park Investments PLC, filed as an exhibit
to the amended annual report on Form 10-KSB/A filed with the
Commission on October 13, 2004 and incorporated herein by
reference.
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent, filed
as an exhibit to the registration statement on Form SB-2 filed
with the Commission on November 22, 2004 and incorporated
herein by reference.
10.1 Employment Agreement between the Registrant and Robert Steele,
dated January 31, 2003, filed as an exhibit to the amended
annual report on Form 10-KSB/A filed with the Commission on
October 13, 2004 and incorporated herein by reference.
10.2 Employment Agreement between the Registrant and Andrew Haag,
dated January 31, 2003, filed as an exhibit to the annual
report on Form 10-KSB filed with the Commission on October 14,
2003 and incorporated herein by reference.
10.3 Employment Agreement between the Registrant and Robert
Brownell, dated January 31, 2003, filed as an exhibit to the
annual report on Form 10-KSB filed with the Commission on
October 14, 2003 and incorporated herein by reference.
10.4 Purchase Order Financing Agreement, dated as of June 2, 2003,
by and between the Company and Kazi Management VI, LLC, filed
as an exhibit to the annual report on Form 10-KSB filed with
the Commission on October 14, 2003 and incorporated herein by
reference.
10.5 Guaranty Agreement, dated as of July 23, 2004, by and between
the Company and Zubair Kazi.
10.6 Equipment Lease Agreement, dated as of August 10, 2004, by and
between the Company and Vencore Solutions LLC.
II-10
10.7 Equipment Guaranty Agreement, dated as of August 10, 2004, by
Zubair Kazi, to Vencore Solutions LLC, for the benefit of the
Company.
14.1 Code of Ethical Conduct, filed as an exhibit to the annual
report on Form 10-KSB filed with the Commission on October 14,
2003 and incorporated herein by reference.
14.2 Audit Committee Charter, filed as an exhibit to the annual
report on Form 10-KSB filed with the Commission on October 14,
2003 and incorporated herein by reference.
23.1 Consent of Kabani & Company, Inc., Independent Registered
Public Accounting Firm
23.2 Consent of Heard, McElroy & Vestal, LLP, Independent
Registered Public Accounting Firm
23.3 Consent of legal counsel (see Exhibit 5.1)
II-11
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-12
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of
Huntington Beach, State of California, on January 19, 2005.
QUINTEK TECHNOLOGIES, INC.
By: /s/ ROBERT STEELE
---------------------------------------
Robert Steele, President, Chief Executive Officer and
Director
By: /s/ ANDREW HAAG
---------------------------------------
Andrew Haag, Chief Financial Officer and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT STEELE Chief Executive Officer and Director January 19, 2005
--------------------------------
Robert Steele
/s/ ANDREW HAAG Chief Financial Officer and Director January 19, 2005
--------------------------------
Andrew Haag
II-13