UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended: June 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission File No. 0-28541
QUINTEK TECHNOLOGIES, INC.
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(Name of Small Business Issuer in its charter)
California 77-0505346
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
537 Constitution Avenue, Suite B
Camarillo, California 93012
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(Address of principal executive offices)
Issuer's telephone number: 805-383-3914
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
or registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form l0-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $388,888
At October 9, 2003, the aggregate market value of registrant's Common Stock held
by non-affiliates was $6,537,581, based on the closing OTC Bulletin Board bid
price of $0.14 per share on that date.
At October 9, 2003, a total of 47,097,008 shares of registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
TABLE OF CONTENTS
ITEM 1 BUSINESS DESCRIPTION............................................ 2
ITEM 2 DESCRIPTION OF PROPERTY......................................... 8
ITEM 3 LEGAL PROCEEDINGS............................................... 8
3.1 SEC Inquiry........................................ 8
3.2 First Horizon Lawsuit............................. 9
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 9
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........ 10
5.1 Market for Common Stock.......................... 10
5.2 Dividends........................................ 10
5.3 Securities Authorized for Issuance Under Equity
Compensation Plans............................. 10
5.4 Recent Sales of Unregistered Securities.......... 11
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 11
ITEM 7 FINANCIAL STATEMENTS............................................ 13
ITEM 8 CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.......................................... 13
ITEM 8A CONTROLS AND PROCEDURES......................................... 13
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT............. 14
9.1 Board of Directors and Executive Officers........ 14
9.2 Compensation of Directors........................ 15
9.3 Management Committees............................ 15
9.4 Section 16(a) Beneficial Ownership Reporting
Compliance..................................... 15
9.5 Code of Ethics................................... 15
ITEM 10 EXECUTIVE COMPENSATION.......................................... 16
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.. 18
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 18
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K................................ 20
13.1 Exhibits...................................... 20
13.2 Reports on Form 8-K........................... 21
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES.......................... 21
SIGNATURES.................................................................. 22
FINANCIAL STATEMENTS..................................................F-1 - F-20
EXHIBITS
1
ITEM 1 BUSINESS DESCRIPTION
Forward-Looking Statements
This annual report contains certain forward-looking statements within the
meaning of section 21 of the Securities Act of 1934, as amended, including
statements that indicate what the Company "believes," "expects," and
"anticipates" or similar expressions. These statements involve known and unknown
risks, uncertainties and other factors which may cause actual results,
performance or achievements of the Company to differ materially from those
expressed or implied by such forward-looking statements. Readers are cautioned
not to place undue reliance on these forward looking statements, which speak
only as of the date of this annual report. There can be no assurance that the
forward looking information contained herein will in fact transpire. The Company
undertakes no obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future events, or otherwise.
Introduction
Quintek Technologies, Inc. (referred to herein as the "Company", "Quintek",
"Our", or "We") is a California corporation. Quintek's corporate headquarters
are located at 537 Constitution Ave., Suite B, Camarillo, California, 93012. Our
contact information at that location is: phone number (805) 383-3914, fax number
is (805) 482-6874 and our website is www.quintek.com. Our corporate filings with
the Securities and Exchange Commission ("SEC")and amendments to these filings,
as well as other information is available free of charge at our website soon
after such reports are filed electronically with the SEC, or directly on the
SEC's website.
Quintek Electronics, Inc., our predecessor company, founded in July 1991,
acquired technology, related assets and patent rights to its aperture card
business during 1991 and 1992. On January 14, 1999, Quintek Electronics, Inc.
was acquired in a merger by Pacific Diagnostics Technologies, Inc. as part of
their Chapter 11 Plan of Reorganization, and the surviving entity's name was
changed to Quintek Technologies, Inc. Since the merger, Quintek continued to
sell its aperture card products and all former operations of Pacific Diagnostics
Technologies, Inc. were discontinued. On February 24, 2000, we acquired all of
the out standing shares of common stock of Juniper Acquisition Corporation
("Juniper"). Upon effectiveness of that acquisition, Quintek elected to become
the successor issuer to Juniper for reporting purposes under the Securities
Exchange Act of 1934.
Business Overview
Quintek Technologies, Inc., sells hardware, software and services for printing
large format drawings such as blueprints and CAD files (Computer Aided Design)
directly to the microfilm format of aperture cards. Quintek is the only
manufacturer of a patented chemical-free desktop microfilm printer for aperture
cards.
Recent Business Developments
On January 30, 2003 the Company brought on a new senior management team to
assist in turning the business around and building shareholder value. As part of
this effort, Tom Sims resigned as President and Chief Executive Officer and
Robert Steele was appointed Chairman and Chief Executive Officer. Furthermore,
the Board of Directors approved the 2003 Business plan drafted by Robert Steele
and empowered him to execute that plan. The Board of Directors accepted the
resignations of Tom Sims, Kurt Kunz and Kelly Kunz as directors of the Company.
The Board of Directors also accepted the resignations of Tom Sims, Kurt Kunz,
Teresa Kunz and Catherine Sims as officers of the Company.
On January 31, 2003, the Board of Directors appointed Andrew Haag as Director,
Corporate Secretary and Corporate Treasurer. Furthermore, the Company appointed
Mr. Haag to the newly added position of Chief Financial Officer.
2
Market Overview
Quintek does business in the film-based imaging market segment within the
content and document management services market. On March 15, 2002 IDC Research
stated that "The content and document management services market will grow at a
compound annual growth rate (CAGR) of 44% to reach approximately $24.4 billion
in 2006." Daratech, Inc. sized the market for document and content management
specifically within the engineering, manufacturing and construction sector at
$1.9 billion in 2000. The content and document management services market is
comprised of several market segments such as digital document management
software and services, records management, digital imaging and film-based
imaging.
The Film-based Imaging Market
The film-based imaging market segment is the business associated with microfilm
cameras, film stock, chemicals, readers, printers, and associated services. This
is a mature, established market that has been redefined by new digital imaging
technologies over the last decade.
Trends In the Film-based Imaging Market
In June 2000, the Archivist of the United States, John W. Carlin, announced that
scanned image files would be used instead of microfilm to preserve individual
responses to the 2000 Census. In a landmark decision, the Census Bureau reversed
itself and decided to continue using microfilm. The reasons cited for staying
with microfilm were ongoing expense, the risk of losing critical data and the
advantage of a human readable format with a potential lifespan of 500 years.
Digital archives represent an ongoing expense because they require constant
expensive migration as digital standards, operating systems and media change.
During a migration, there is additional risk of losing critical data. Microfilm
is "future-proof" because it is human readable and certified by the American
National Standards Institute (ANSI) to have a 500 plus year lifespan.
For archive documents, film-based media remain superior. Film-based archival is
less expensive than digital methods and has a storage life of between 100 and
1000 years. Film-based archival already has a massive installed base of billions
of documents accumulated over more than 50 years of use.
We believe that film-based imaging, driven by archival will be a growth market.
The volume of archived paper and digital records will continue to increase for a
number of reasons, including: (i) the rapid growth of inexpensive document
producing technologies such as fax, desktop publishing software and desktop
printing; (ii) the continued proliferation of data processing technologies such
as personal computers and networks; (iii) regulatory requirements; (iv) concerns
over possible future litigation and the resulting increases in volume and
holding periods of documentation; (v) the high cost of reviewing records and
deciding whether to retain or destroy them; (vi) the failure of many entities to
adopt or follow policies on records destruction; and (vii) audit requirements to
keep back-up copies of certain records in off-site locations.
Despite the growth of new "paperless" technologies, such as the Internet and
e-mail, we believe that archived information remains predominantly film and
paper-based. Rather than eliminate paper, digital technology has created the
need for more archival.
We believe the film-based imaging market is now entering a new growth phase. We
believe that the changes in this market caused by new digital technologies have
created a new opportunities. The growth we forecast corresponds with the growth
of archive documents as addressed in the Document Lifecycle discussion below.
3
By enabling the creation of microfilm directly from digital files, Quintek
products marry modern digital technologies to the proven best-practice of
microfilm archival.
The Document Lifecycle
Digital document management technology is well suited for active documents that
require high-availability. For archive documents, digital imaging or document
management systems have been shown to be costly and unreliable as a long term
solution.
When the document is created, activity is high -- it is being used actively to
make decisions. Issues during this stage include ease and speed of access, and
the ability to share documents across networks. At some point, activity drops
sharply and the document enters a phase when it must be kept, sometimes for many
years, when activity is very low; this is the archival stage.
The issues at the archival stage are entirely different and relate to safe, long
term storage. Because the volumes are invariably high during this phase both
space and cost are major issues. Microfilm is the only proven, permanent
document storage media.
The Company believes that the future of this marketplace is in hybrid systems
which bridge the gap between these two technologies.
The Aperture Card Market
The segment of the film-based imaging market that addresses large format
engineering drawings is called the aperture card market. The aperture card
market is made up of hardware and software manufacturers, distributors,
maintenance service providers and media and consumables manufacturers.
Wet vs. Dry Silver Film - Strategic Advantage
Quintek's products use "Dry Silver" film which requires no chemicals. Older
technologies are based on "Wet Silver" film which requires the cost and
inconvenience of dealing with hazardous chemicals. Management believes that once
the need for chemicals is removed, the advantages of film-based imaging will
drive sales. We also believe that creating awareness of a modern, desktop device
that outputs digital drawings to microfilm with no chemicals will drive sales.
The company believes that there is a large installed base of Wet Silver
technology that is used in "print rooms." A print room is a dedicated area that
has the specialized film-processing and aperture card assembly areas and the
subsequent ventilation and hazardous materials handling equipment. The Quintek
product eliminates the need for such print rooms and their on-going expense.
Product Overview
Products and Services
Quintek's principal product is the Q4400 Desktop Aperture Card Printer. The
Q4400 is used by engineering departments to print directly to Aperture Cards
from digital files in a single step without using chemicals for film
development. Our solution provides a stream of revenues from the following:
Q4400 Aperture Card Printer and upgrades to that system, Quinplot software,
maintenance and blank aperture card media
The Q4400 system is comprised of Quintek's QUINPLOT Software Package and the
Q4400 Aperture Card Printer. The QUINPLOT Software and Q4400 Aperture Card
Printer operate together to provide a complete system for producing Aperture
Cards.
4
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 comparing the Q4400 to external service bureaus, customers save money in
terms of reduced material cost (paper, toner, etc.) and labor cost (handling
paper, packaging, shipping, etc). There are no service bureau fees, a shorter
lead time and improved security (confidential drawings can be done in-house).
When using direct output to Aperture Card, the user is expected to gain
substantial cost savings in many areas. For some users, the security issues
related to having immediate on site drawing conversion completed in a secured
area with limited access may provide a great deal of value unrelated to volume.
Also, the efficiency gained by eliminating the bottleneck associated with
service bureaus and conventional conversion results in a faster "time to market"
and greater efficiencies for the resultant products, improving ones competitive
position.
Useful Features/Benefits
The following provides a list of features of the Q4400 system: direct conversion
to aperture card (i.e. no requirement for paper plots) chemical-free operation,
fully automatic operation, compatible with a wide variety of network
configurations, compatible with a wide variety of image & text file formats,
interface can be customized to address the customer's unique application and a
compact modular design.
The following provides a list of benefits of the Q4400 system: provides a
dramatic improvement in efficiency (drawing release & distribution, design
review process, check print and a back-up of digital data base), reduced "time
to market" improves user's competitive posture and it eliminates health risk
from employee's exposure to chemicals and fumes.
5
Patents and Trademarks
The Q4400 system is protected under the following patents and trademarks:
US Patents
Patent Expiration
Number Date Name/Description
--------- ---------- ----------------
4,794,224 04/09/07 Dry Film Developer for an Aperture Card Printer
4,818,950 04/24/07 Low Jitter Phase-Locked Loop (internal circuit board)
4,841,343 03/25/08 Dry Film Development Process for an Aperture Card Printer
Trademarks
"Quintek" (Logo design), the mark, was registered on the Patent and Trademark
Office principal register as U.S. registration No. 2,604,712 on August 6, 2002.
Sales and Marketing
Quintek's primary method of distribution is through their dealer network and
direct sales efforts in geographies not currently covered by dealers. Quintek
believes that it is currently not dependent on any single customer. In FY2001
and FY2002 a majority of the Company's sales came through a dealer relationship
with Imation Corporation. Late in 2002 Imation sold this part of its business to
Decision One. Since Decision One took over this portion of Imation's business,
they have not actively sold Quintek products.
Quintek is looking to expand its dealer network to reduce exposure and increase
sales. The Company believes that this will help to insure stability and reduce
risk through the lack of reliance upon any single dealer. Three dealers have
recently signed on under our newly established Dealer Sales Agreement. This
agreement was established with the intention of increasing sales and providing a
consistent flow of information from the dealer network to increase
predictability.
Management is in the process of re-establishing relationships with many dealers
who have inquired about, or sold Quintek products in the past. Management
believes that there are many dealers throughout the Unites States that could
greatly benefit from selling Quintek's products. The Company is seeking to
establish relationships with new dealers and partners that can increase sales
and revenues.
Quintek management sees opportunities in its market by developing the dealer
network and expanding and executing in the following areas:
Positioning Quintek as the complete provider of modern aperture card
solutions.
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Management intends to position the Company as a complete provider of
modern aperture card solutions. The goal is to gain account control in
partnership with our resellers by providing all products, services and
consumables our customers require related to aperture card production.
Meeting existing market demand for the Q4400.
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Within the next 24 months we intend to put the financing and sales and
manufacturing infrastructure in place to handle 100 units per year.
6
Establish and incentivize new and existing dealers and distributors.
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The Company intends to provide improved marketing support and sales
incentives to its dealers to grow sales. The goal is to sign-up dealers
in geographical regions not currently well covered.
Selling turnkey consulting solutions.
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Quintek has been in this business for 10 years and believes it is the
leader in dry silver aperture card imaging technology. The Company
plans to leverage this leadership as well as its solution sales, to
deliver turnkey solutions to customers who are looking for a
"one-stop-shop" , helping them transition to a hybrid film and digital
based print room for their engineering documents.
Manufacturing
Prior to March, 2003, Quintek was dependent upon Kitron / Bofos for
manufacturing the 4305 Printer. Since March, 2003, all 4305 printers have been
made in Quintek's Idaho facility. As of this writing, Kitron has notified
Quintek that Quintek's tooling for the Q4305 has been shipped from Kitron to
Quintek.
Quintek's supplier of replacement ribbons has discontinued that line of
business. Quintek is not currently in possession of tooling for manufacturing
new ribbons. Quintek is in the process of finding a new source for these
ribbons.
The Company believes that the Montpelier, Idaho facility will be able to meet
current demand for its products and services. Quintek has been working with a
variety of suppliers for Q4305 and other parts. These suppliers are located
throughout the United States. The Company believes that this will help to insure
stability and reduce risk through the lack of reliance upon any single
suppliers.
Competition
The Company believes that it is the only manufacturer of a chemical-free desktop
aperture card printer. There are other aperture card printing devices available.
Both of the competitive devices the Company is aware of, are manufactured
outside of the United States. Microbox AG, based in Germany has sold a wet
CADMIC Aperture Card Plotter. Quintek believes that this product has been on the
market for the past decade. This product is a large unit that weighs roughly 772
pounds. It requires the constant replenishment and disposal of hazardous
chemicals, has specialized ventilation, plumbing and electrical requirements,
and is labor intensive to operate. Quintek was recently made aware of a Dry
CADMIC Plotter being produced by Microbox. Quintek believes that this is also a
large unit that has specialized electrical requirements, is labor intensive to
operate and not nearly as versatile as Quintek's Q4400. To the Company's
knowledge, the Dry CADMIC Plotter produced by Microbox is currently sold in the
United States by only one distributor.
Wicks and Wilson, based in the United Kingdom, also manufactures an aperture
card plotter. Their product is similar in size to the Q4400. It requires the
constant replenishment and disposal of hazardous chemicals, has specialized
ventilation, plumbing and electrical requirements, and is labor intensive to
operate. To the Company's knowledge, Wicks and Wilson has only one distributor
in the United States.
7
Product Development
Quintek's product development activities over the past two years have been
concentrated on producing custom software and hardware solutions for its
existing customers. The Company plans to package these software solutions for
sale to all of its customers. Hardware product development has recently led to
the new Q4400 product and Network Interface Upgrade. Other hardware and software
developments are in process.
Research and Development
Within the last 24 months, Quintek's investment in research and development has
been limited to product development activities. Amounts charged to operations
for the years ended June 30 2003 and 2002 were $58,000 and $63,600 respectively.
Regulation
We are not aware of any special regulations that our business is subject to,
other than general laws and regulations, such as employment and safety
regulations that apply generally to manufacturers and distributors of industrial
equipment. When in production at NCR the Q4305 unit was certified under UL, FCC,
TUV and GS standards. We are in the process of transferring the UL and FCC
certifications into our name. CE certification was received in August of 2002.
ITEM 2 DESCRIPTION OF PROPERTY
We lease 3,120 square feet for our executive offices at 537 Constitution Avenue,
Suite B, Camarillo, California. The lease expires on March 31, 2004, with an
option to extend it for three years. Our current monthly lease rate on this
facility is $2,846.
We rent, on a month-to-month basis, 1,800 square feet of office and warehouse
space at 720 N. 4th Street, Montpelier, Idaho, to manufacture our products and
service our customers. Our current monthly rent is $1,384.
ITEM 3 LEGAL PROCEEDINGS
3.1 SEC Inquiry
On September 17, 2002, we were advised by the staff of the U.S. Securities and
Exchange Commission that they will recommend that the Commission file a civil
injunctive lawsuit against us and our president, Thomas W. Sims, alleging that
we 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, regarding orders from Eurotrend Informatics, Ltd., a
private Hungarian company, and failure to timely file annual and quarterly
reports with the Commission." On March 25, 2003, we 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 September 17, 2002, we were advised by the staff of the U.S. Securities and
Exchange Commission ("Commission") that they will recommend that the Commission
file a civil injunctive lawsuit against the Company and its President at that
time, Thomas W. Sims. The suit 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 ("the Exchange Act") and Rules l0b-5, 13a-1, and
13a-13 of the Exchange Act, based on (a) false and misleading statements in
8
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, regarding orders
from Eurotrend Informatics, Ltd., a private Hungarian company, and (b) failure
to timely file annual and quarterly reports with the Commission.
The Company (on July 24, 2003) and Mr. Sims (on February 24, 2003) each
consented, without admitting or denying the allegations, to the entry of final
judgments in the proceedings in U.S. District Court, Central District of
California. On August 6, 2003, final judgments were entered by the Court against
the Company and Mr. Sims, respectively, each of which permanently enjoined them
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
judgments permanently enjoined each of them 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.
Mr. Sims was also permanently enjoined from violation of Section 17(a) of the
Securities Act of 1933 in the offer or sale of any security by the use of any
means or instruments of transportation or communication in interstate commerce
or by the use of the mails, directly or indirectly: (A) to employ any device,
scheme or artifice to defraud; (B) to obtain money or property by means of any
untrue statement of a material fact or any omission 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 transaction, practice, or course of business which operates or would operate
as a fraud or deceit upon any purchaser. Mr. Sims was ordered to pay a fine of
$25,000, and enjoined and prohibited for a period of five years from the date of
entry of judgment from : (A) participating in any offering of penny stock, and
(B) from acting as an officer or director of any issuer that has a class of
securities registered pursuant to Section 12 of the Exchange Act or is required
to file reports pursuant to Section 15(d) of the Exchange Act. Since January 30,
2003, Mr. Sims has not been an officer, director or affiliate of the Company.
3.2 First Horizon Lawsuit
On September 19, 2002, First Horizon Loan Corporation filed suit in Superior
Court of California, County of Ventura against us for breach of a lease
agreement for our former sales offices in Fairfax, Virginia. The suit alleges
that we breached the lease when our Fairfax, Virginia office was closed in July
2000 and the lease payments stopped. The suit claims approximately $78,000 in
damages. In May 2003, we reached a tentative settlement with First Horizon,
agreeing to pay a total of $20,000 to First Horizon in monthly payments
distributed over an eight month period of time. First Horizon has agreed to
dismiss the lawsuit with prejudice against us within 10 days after receipt of
the final payment referenced above.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year ended June 30, 2003.
9
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
5.1 Market for Common Stock
Since January 14, 1999, our common stock has traded on the OTC Bulletin Board
(symbol "QTEK"). On September 30, 2003, there were 493 listed shareholders of
record and 1747 beneficial shareholders of our common stock. The high and low
bid prices per share for our stock for each quarter commencing July 1, 2000 and
ending June 30, 2003 are listed below. The high and low bid prices per share for
our stock for the quarter ending September 30, 2003 were $0.17 and $0.09,
respectively. This information was obtained from Media General Financial
Services.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
High Low High Low High Low High Low
----- ----- ----- ----- ----- ----- ----- -----
FY2001 $0.94 $0.27 $.31 $0.05 $0.27 $0.11 $0.16 $0.08
FY2002 $0.11 $0.05 $0.39 $0.05 $0.50 $0.09 $0.47 $0.07
FY2003 $0.14 $0.03 $0.13 $0.02 $0.07 $0.03 $0.19 $0.03
The quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
5.2 Dividends
We presently intend to retain future earnings, if any, to provide funds for use
in the operation and expansion of our business. Accordingly, we have not
declared or paid any dividends to our common shareholders and do not presently
intend to do so. Any future decision whether to pay dividends will depend on our
financial condition and any other factors that our Board of Directors deems
relevant.
5.3 Securities Authorized for Issuance Under Equity Compensation Plans
We currently have no equity compensation plans in place that have been approved
by security holders.
However, our Chief Executive Officer and Chief Financial Officer entered into
employment agreements on January 31, 2003 with the Company which grants each of
them the right to earn substantial equity compensation from the Company.
Pursuant to the employment agreements, the Company has agreed to sell to each of
them stock (or grant to each rights to purchase additional shares of common
stock) at $0.03 per share such that, including all options or shares previously
issued to or purchased by each of them, each would own, in the aggregate, shares
of common stock or rights to purchase shares of common stock representing ten
percent (10%) of the current outstanding common stock of Quintek, on a
fully-diluted basis after taking into account the issuance of such additional
shares to each officer and assuming the issuance of all other shares subject to
currently outstanding options or warrants. The employment agreements state that
the agreement(s) specifically granting the shares to be purchased by the
officers will have, at minimum, new termination and repurchase provisions, with
the termination provisions to be consistent with new termination and repurchase
provisions set forth in this Agreement. The agreement(s) also will contain
provisions providing the officers with pre-emptive rights to purchase additional
shares of common stock under certain circumstances. Options to the two officers
shall vest according to the following schedule: Right of each to purchase two
and a half percent (2.5%) of outstanding common stock, upon the authorization of
additional shares by the shareholders of Quintek; assuming that authorization of
more shares is approved by the shareholders of the Company, options giving each
of the officers the right to purchase an additional two and a half percent
(2.5%) of outstanding common stock at the time of grant, will be granted upon
10
the one (1) year anniversary of each officer's employment agreement for the
following three (3) years. In the event of a sale of Quintek, termination of the
officers' employment agreements by the Company, or any other event that may
impede Quintek's ability to fulfill its obligations under the officers'
employment agreements, all options will be immediately vest.
Although our board of directors has approved the employment agreements, none of
the rights or options to purchase common stock described in the employment
agreements above have vested; and those rights or options will vest only upon
the approval by the shareholders of an amendment of the Company's Articles of
Incorporation which increases the number of authorized shares of common stock
that may issued by the Company.
5.4 Recent Sales of Unregistered Securities
We have made no sales of unregistered securities during the quarter ended June
30, 2003. However, we have made a number of agreements to issue stock at a later
date, base upon authorization of more shares and acceptance in changes to be
proposed to the Articles of Incorporation by the shareholders. See notes 6 and 8
of our financial statements for the years ending June 30, 2002 and 2003, Item 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS and ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our revenues totaled $388,888 and $446,005 for the twelve months ended June 30,
2003 and 2002, respectively, a decrease of $57,117 (13%) in 2003 due primarily
to a decrease in sales of equipment.
For the twelve months ended June 30, 2003 and 2002, cost of sales was $261,050
and $198,696 respectively, an increase of $62,354 (31%). Our cost of sales for
both periods consisted mostly of labor and production costs. Cost of sales
increased and consequently gross margin decreased in 2003 primarily due to an
increase in the cost of equipment parts.
Operating expenses totaled $822,273 for the twelve-month period ended June 30,
2003 as compared to $1,108,034 for the prior twelve-month period. The $285,761
(26%) decrease in operating expenses is due primarily to a reduction in stock
based compensation for services.
We incurred no acquisition expenses in the twelve months ended June 30, 2003 and
2002, respectively.
During the 12 month period ending June 30, 2003 we sold four (4) aperture card
systems, 178,000 aperture cards, and nine (9) customer service contracts. We
expect to continue generating sales revenue from these same products in the
future.
During the eight months prior to September 30, 2003, management has focused on
reducing the outstanding debt and liabilities in default of the Company. On
January 30, 2003 Quintek's employees and prior management team signed agreements
to convert $252,213 of monies owed into 1,008,854 shares of Series A Preferred
Stock at a rate of ($0.25) twenty five cents per share. During the six month
period ended June 31, 2003, we made offers to all holders of our promissory
notes and convertible bonds to convert their bond principal and accrued interest
into Series B Preferred stock at a rate of at a rate of ($0.25) twenty five
cents per share. As of June 30, 2003, we received commitments to convert
$198,268 of debt into 724,077 shares of Series A Preferred stock and 648,256
shares of Series B Preferred stock. The balance of related debt, $208,728 still
remains outstanding. These monies represent our liabilities in process of
conversion to stock. The conversion will become effective if and when the
shareholders of the Company approve an amendment to the articles of
incorporation to increase the amount of authorized shares for issuance.
11
We are currently in default of $151,695 (principal and interest) of our
outstanding convertible bonds. Interest continues to accrue against the
principal of all outstanding convertible bonds whose holders have not agreed to
the conversion to stock. The convertible bonds are unsecured, general
obligations of the Company which are convertible into common stock at the option
of the holders. The holders of the bonds that are in default have indicated that
they do not want to convert their debt to stock and wish to be repaid in cash.
At present we do not have 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 are currently in default of $24,603 (principal and interest) of our
outstanding promissory notes. Interest continues to accrue against the principal
of all outstanding promissory notes. The notes are unsecured, general
obligations of the Company. The holders of the notes that are in default have
indicated that they wish to be repaid in cash. At present we do not have 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.
Through September 30, 2003 we received agreements to convert $20,148 in
outstanding past due payables into Series C Preferred stock at ($1.00) one
dollar per share. The conversion will become effective if and when the
shareholders of the Company approve an amendment to the articles of
incorporation to increase the amount of authorized shares for issuance.
Through September 30, 2003 we received agreements to convert $74,452 in
outstanding past due payables into $60,183 of three year promissory notes
bearing an annual interest rate of 8%.
Liquidity and Capital Resources
We have historically financed operations from the sale of common stock and the
conversion of common stock warrants. At June 30, 2003, we had cash on hand of
$21,162 and working capital of $(1,351,096) as compared to cash on hand of
$2,602 and working capital of $(1,126,757) at year-end, June 30, 2002.
Net cash used in operating activities of $102,330 for the twelve months ended
June 30, 2003, is attributable primarily to operating losses as adjusted for
stock issued for services of $221,183, warrants issued for services of
$90,000,and depreciation of $46,195.
Net cash provided by investing activities of $12,790 for the twelve months ended
June 30, 2002 consists of collections on notes receivable from stockholders and
proceeds from the sale of fixed assets.
Net cash provided by financing activities of $108,100 for the twelve months
ended June 30, 2003 represents cash received from the issuance of common stock
of $100,000.
Prior to June 2003, we occasionally entered into factoring agreements with a
factoring company (the "Factor"). The Factor funds 85% of the face value of
approved invoices and retains the remaining 15% as a deposit against its fees.
When payments are remitted to the Factor, the deposit, less fees ranging from 1%
to 15%, is refunded. Fees are determined based on the length of time the invoice
is outstanding.
12
In June 2003, we entered into an agreement to sell two purchase orders to a
private investor. The agreement allowed for the investor to buy these two
purchase orders at 97% of face value. This investor was paid directly from the
sales proceeds once they were received by Quintek. As part of the financing
agreement, the investor will received a warrant to purchase 500,000 shares of
our common stock at an exercise price of $0.046 per share, if and when
additional shares of common stock are authorized for issuance by our
shareholders. The warrant will have an expiration date of June 2, 2008. As of
June 30, 2003, we received $123,083 in financing under this agreement.
In June 2003, we entered into a Purchase Order Financing Agreement with a
business management company. As part of this agreement, the investor received an
equity fee of a warrant to purchase 1,500,000 shares of our common stock at an
exercise price of $0.043 per share, if and when additional shares of common
stock are authorized for issuance by our shareholders. The warrant will have an
expiration date of June 13, 2008. The financing is limited to $200,000 per month
and $4,800,000 in total financing over the 2 year life of the agreement. The
investor will receive an additional warrant, as a bonus, to purchase two
additional shares of our common stock for each $1.00 of financing provided.
These bonus warrants shall allow the investor to purchase common stock at the
day average closing price of our stock immediately prior to closing of a
financing. As of June 30, 2003, we received no financing under this agreement.
Perfected Purchase Orders (delivered to and accepted by the customer) will be
purchased by the investor at three percent (3%) discount to the investor, or
ninety-seven percent (97%) of face value. Non-Perfected Purchase orders (not yet
shipped to customer) will be purchased by the investor at ten percent (10%)
discount to the investor, or ninety percent (90%) of face value. Quintek will
pay a late fee as follows. For Perfected Purchase Orders not paid within 30 days
Quintek will pay a late fee equal to three percent (3%) per month. For
Non-Perfected Purchase Orders not paid within 60 days Quintek will pay a late
fee equal to five percent (5%) per month. Late fees may be paid in cash or stock
at the option of the investor.
We assumed certain payroll tax liabilities as the result of the merger with
Pacific Diagnostic Technologies, Inc., on January 14, 1999. We have negotiated a
payment plan with the Internal Revenue Service to pay the payroll taxes assumed
in the merger. As of October 1, 2003, Quintek was behind in those payments to
the Internal Revenue Service in the amount of $35,239 has been in contact with
Internal Revenue Service regarding remedying this issue.
We believe that the receipt of net proceeds from the sale of the common stock
and the exercise of common stock warrants plus cash generated internally from
sales will be sufficient to satisfy our future operations, working capital and
other cash requirements for the remainder of the fiscal year. However, if we are
unable to raise sufficient capital, we may need to sell certain assets, enter
into new strategic partnerships, reorganize the company, or merge with another
company to effectively maintain operations. Our audit for the years ended June
30, 2003 and 2002 contains a going concern qualification.
ITEM 7 FINANCIAL STATEMENTS
See pages F-l, et seq., included herein.
ITEM 8 CHANGES IN AND DISAGREEEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 8A CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (collectively, the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for the Company. Such officers have concluded
13
(based on their evaluation of these controls and procedures as of a date within
90 days of the filing of this report) that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in this report is accumulated and communicated to the Company's
management, including its principal executive officers as appropriate, to allow
timely decisions regarding required disclosure. The Certifying Officers also
have indicated that there were no significant changes in the Company's internal
controls or other factors that could significantly affect such controls
subsequent to the date of their evaluation, and there were no corrective actions
with regard to significant deficiencies and material weaknesses.
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
9.1 Board of Directors and Executive Officers
Our board of directors consists of two members. Directors are elected at the
Annual Meeting of Shareholders and serve until their successors have been
elected and qualified. Officers are appointed by and serve at the discretion of
the Board of Directors.
The following is a summary description of our current directors, executive
officers and significant employees:
Robert Steele, Age 37, Chief Executive Officer and Director
Robert Steele has been the Company's Chief Executive Officer, President, and
Chairman of the Board of Directors since January 30, 2003. He was a consultant
to the Company from December 4, 2002. From May 1999 through June 2001 he was the
founder and Chief Executive Officer of iBrite, a wireless information software
company whose software products enable customers to deploy complex content such
as engineering technical manuals and sales literature and pricing to small
mobile devices such as PDAs. Mr. Steele provided the initial product design and
assembled and led the team that: created a wireless / mobile software company
and raised two rounds of financing totaling $4.5 Million; developed business
plans and financial models including detailed sales & marketing, forecasting,
budgeting, competitive analysis and market positioning within the wireless
industry; established contractual partnerships with AOL and Global Knowledge, a
$400M training company; and created iBrite's Wireless iDNA Architecture. iBrite
filed three patents based on Mr. Steele's designs and released eight software
products. From September 1988 through April 1998 Mr. Steele served as Corporate
Vice President & Chief Technology Officer for CADD Microsystems, Inc. (CMI),
currently the leading provider of AutoDesk Computer Aided Design software,
consulting, training and integration services in the Washington, DC Metropolitan
Area. Mr. Steele sold and supervised significant consulting contracts with
clients such as Lucent Technologies, Long Airdox Mining (Division of the Fortune
500 Marmon Group), ABB, GSA (General Services Administration), FAA (Federal
Aviation Administration) and NRO (National Reconnaissance Office).Mr. Steele
received a Bachelor of Science in Electronic and Computer Engineering from
George Mason University in 1988.
Andrew Haag, Age 35, Chief Executive Officer and Director
Andrew Haag has been the Company's Chief Financial Officer and a Director since
January 31, 2003. Prior to that, from December 2002, he was employed by the
Camelot Group, Inc., an investment banking firm, to assist its corporate clients
on capital structure, the structure of PIPE transactions and the preparation of
offering documents. From May, 2001, Mr. Haag was employed by Aquasearch, Inc., a
publicly held company, where he raised significant funds from private sources,
advised its CEO on strategic business development issues, successfully
negotiated several contracts to benefit the company. Mr. Haag assisted in
drafting corporate business plan, terms of investment, press releases and other
14
corporate documents. From November 1998 through April 2001 he was employed by
Nutmeg Securities, Ltd., where he advised institutional and individual clientele
on corporate offerings and equity trading, and performed corporate advisory work
for both public and private companies. From June 1998 through October 1998 Mr.
Haag was a Managing Director of Waldron & Co. Inc., an investment bank located
in Irvine, CA.
From 1992 through 1998 he was employed by Auerbach, Pollak & Richardson,
investment bankers, located in Stamford, CT and Beverly Hills, CA, rising to
Managing Director, where he: assisted in the development of the firm, attracting
and referring new hires and clients to all offices; developed a national and
international client base for the firm that participated in a majority of the
firm's corporate offerings; set up and managed road shows for firm's corporate
clientele; attracted a wide variety of corporate clientele; assisted in the
structuring and funding of offerings for corporate clientele; and increased
visibility of the firm through networking of research and offerings. Mr. Haag
attended the University of Maine and CUNY Hunter College.
Significant Employees
Kurt Kunz, Vice President, Engineering Mr. Kunz, co-founder of Quintek, is
Quintek's Vice President of Engineering. Prior to Quintek, Mr. Kunz held the
positions of Software Design Engineer, Mechanical Design Engineer, Systems
Engineer and Engineering Manager at three high tech companies; QED Systems
(1986-1987), Alpharel (1987-1990), and PMT (1990-1991). Mr. Kunz received his BS
degree in Mechanical Engineering from the University of Utah in 1986.
9.2 Compensation of Directors
All of our directors are full time employees of Quintek. Because we have no
independent directors, we pay no compensation to any directors for their service
on the board over and above their employment compensation. There are no family
relationships among the directors or executive officers.
9.3 Management Committees
We have not established compensation or executive committees. Currently, our
entire board of directors serves as our audit committee. Because of the small
size of the Company and the risk attendant to a small public company, we are
currently unable to attract an audit committee financial expert to our Board of
Directors. On June 11, 2003, our board of directors adopted an Audit Committee
Charter which is attached as an exhibit to this Report on Form 10KSB.
9.4 Section 16(a) Beneficial Ownership Reporting Compliance
To our knowledge, based solely on a review of Section 16(a) forms furnished to
us, we believe that Robert Steele, a current director and Chief Executive
Officer, and Andrew Haag, a current director and Chief Financial Officer, each
failed to timely filed a Form 3 to report his appointment to our Board of
Directors or as an officer of our Company. The forms were filed late by both Mr.
Steele and Mr. Haag on September 19, 2003.
9.5 Code of Ethics
On June 10, 2003 our board of directors adopted a code of ethics, a copy of
which is filed as an exhibit to this report on Form 10-KSB, that applies to our
principal executive and financial officers. We intend to file amendments,
changes or waivers to the code of ethics as required by SEC rules.
15
ITEM 10 EXECUTIVE COMPENSATION
None of our executive officers received a total annual salary and bonus of more
than $100,000 for the year ended June 30, 2003. The following table summarizes
the yearly compensation of our past and current President for the three years
ended June 30, 2003.
----------------- Annual Compensation ------------------ ---------- Long Term Compensation ----------
Securities
Other Annual Restricted Underlying All Other
Name Year Salary Compensation (3) Stock Awards Options Compensation
---- ---- ------ --------------- ------------ ----------- ------------
Tom Sims FY2003 (1) $19,400 $1,570 -- -- --
President FY2002 $19,500 $6,106 $ 68,000 (4) -- --
FY2001 $60,000 -- -- -- --
Robert Steele FY2003 (2) $30,000 $2,500 -- -- --
President
Notes:
1) Represents compensation received by Sims while serving as our President
from 6/30/02 to 1/31/03
2) Represents compensation received by Steele while serving as our President
from 2/1/03 to 6/30/03
3) These amounts represent the Company's payments to provide an automobile and
health insurance for Mr. Sims and Mr. Steele.
4) This represents an issuance of 200,000 shares of restricted common stock
valued at $0.06 per share and 800,000 shares of restricted common stock
valued at $0.07 per share to or for the benefit of Tom Sims
No Stock Options Were Granted in Fiscal 2003
Quintek did not grant any stock options or stock appreciation rights or
Long-Term Incentive Plan Awards to its officers or employees, in the fiscal year
ended June 30, 2003.
Aggregated 2001 Option Exercises and Year-End Values
The following table summarizes the number and value of all unexercised stock
options held by Mr. Sims and Mr. Steele at June 30, 2003. No stock appreciation
or similar rights were exercised during or remained outstanding at the end of
Fiscal 2003.
Number of Securities Underlying Value of Unexercised In-the-
Unexercised Options/SARs at FY-End (#) Money Options/SARs at FY-
End ($)
Name Shares Value
Acquired on Realized Exercisable/Unexercisable Exercisable/Unexercisable
Exercise
Tom Sims 0 $0 285,000*/0 $0/$0**
Robert Steele 0 $0 0/0 $0/$0**
16
* Includes options and shares granted to Catherine Sims who is the wife of Tom
Sims. ** Based on a closing bid price on the OTC Bulletin Board on June 30,
2003.
Executive Employment Agreements: On January 31, 2003, the Company entered into
an Employment Agreement with Robert Steele to become our President and Chief
Executive Officer for a period of five years ending January 31, 2008, with a
salary of $6,000 per month. Mr. Steele's salary remains unchanged until such
time as the Company's quarterly gross revenue (as determined by its regular
accountants) shall exceed or equal the sum of $300,000. Should this occur, his
salary for the following quarter shall be increased to $9,000 per month. At such
time as the Company's quarterly gross revenue shall exceed or equal the sum of
$600,000, his salary for the following quarter shall be increased to $12,000 per
month; and at such time as the Company's quarterly gross revenue shall exceed or
equal the sum of $600,000, his salary for the following quarter shall be
increased to $12,000 per month; and at such time as the Company's quarterly
gross revenue shall exceed or equal the sum of $900,000, his salary for the
following quarter shall be increased to $15,000 per month . However, if the
quarterly gross revenue decreases below the benchmark levels described, Mr.
Steele's salary shall be decreased to the corresponding monthly salary. Mr.
Steele receives an automobile allowance of $500 per month and all other benefits
provided to other full-time employees. Additionally, he is eligible for an
annual bonus based upon the Recast Profits of Quintek over the prior twelve (12)
month calendar/fiscal year period. If Quintek's Recast Profit Margin for the
prior twelve (12) month calendar/fiscal year period is less than six (6%)
percent then he will not receive any bonus; but if it equals or exceeds six (6%)
percent, then he will be paid a bonus of three (3%) percent of Recast Profits
within thirty (30) days of such year end. For each additional one (1%) percent
of Recast Profits over and above six (6%) percent of Recast Profits for the
prior twelve (12) month calendar/fiscal year period, he will receive an
additional bonus of one (1%) percent of Recast Profits, such additional bonus to
be prorated for each additional one (1%) percent in Recast Profit Margin over
and above the sum of six (6%) percent of Recast Profit Margin for the prior
twelve (12) month calendar/fiscal year period. For example, if at the end of
calendar/fiscal year 2004, Quintek's Recast Profits for the prior year amount to
$994,200 then Mr. Steele would be paid the sum of $99,552 within thirty (30)
days. For the purposes of the agreement, "Executive's Compensation" is defined
as Mr. Steel's salary, car allowance and interest paid on Steele's loans (if
any) to Quintek, as calculated by Quintek's regular accountant(s). In the
Employment Agreement, "Recast Profits" was defined as net profits before
interest, taxes, depreciation and amortization (EBITDA), less Executive's
Compensation, and "Recast Profit Margin" was defined as the quotient of Recast
Profits divided by gross revenue. Mr. Steele received a grant of 1,000,000
shares of Series A Preferred Stock upon execution of the Employment Agreement,
and Quintek agreed to sell stock (or grant to Mr. Steele rights to purchase
additional shares of common stock) at $0.03 per share such that, including all
options or shares previously issued to or purchased by Mr. Steele, he would own,
in the aggregate, shares of common stock or rights to purchase shares of common
stock representing ten percent (10%) of the current outstanding common stock of
Quintek, on a fully-diluted basis after taking into account the issuance of such
additional shares to Mr. Steele and assuming the issuance of all other shares
subject to currently outstanding options or warrants. The Employment Agreement
states that the agreement(s) specifically granting the shares to be purchased by
Mr., Steele will have, at minimum, new termination and repurchase provisions,
with the termination provisions to be consistent with new termination and
repurchase provisions set forth in this Agreement. The agreement(s) also will
contain provisions providing Mr., Steele with pre-emptive rights to purchase
additional shares of common stock under certain circumstances. Options to Mr.,
Steele shall vest according to the following schedule: Right to purchase two and
a half percent (2.5%) of outstanding common stock, upon the authorization of
additional shares by the shareholders of Quintek; assuming that authorization of
more shares is approved by the shareholders of the Company, options giving
17
Executive the right to purchase an additional two and a half percent (2.5%) of
outstanding common stock at the time of grant, will be granted to executive upon
the one (1) year anniversary of Steele's Employment Agreement for the following
three (3) years. In the event of a sale of Quintek, termination of the
Employment Agreement by the Company, or any other event that may impede
Quintek's ability to fulfill its obligations under the Employment Agreement, all
options will be immediately vest. The Employment Agreement shall not be
terminated by any merger or consolidation where Quintek is not the consolidated
or surviving corporation or by any transfer of all or substantially all of the
assets of Quintek. In the event of any such merger or consolidation or transfer
of assets, the surviving or resulting corporation or the transferee of the
assets of Quintek shall be bound by and shall have the benefit of the provisions
of the Employment Agreement, and Quintek shall take all steps necessary to
ensure that such corporation or transferee is bound by the provisions of the
Employment Agreement.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the ownership of our common stock, as of October
1, 2003 by our directors and by two shareholders who owned more than 5% of the
outstanding shares. This information was given to us by the transfer agent and
the numbers are based on definitions found in Rules 13d-3 and 13d-5 under the
Securities Exchange Act of 1934.
On October 1, 2003, 47,097,008 shares of our common stock were outstanding.
Shares Owned
Shareholder Number Percent
Robert Steele, President, CEO and Chairman 400,000 0.85%
Andrew Haag, CFO, Director 0 0.0%
Zubair Kazi (3) 4,428,572 9.40%
Kurt Kunz, VP Engineering (1) (2) 2,024,428 4.30%
All directors as a group (2 persons) 400,000 0.85%
(1) These shares and options are beneficially owned equally by Kurt Kunz, his
wife, Teresa, and their children.
(2) Includes warrants to purchase 350,000 shares of restricted common stock at
$1.00 per share within 60 days after June 30, 2003
(3) Includes 1,428,572 shares owned by Kazi Management VI, Inc., an affiliate of
Mr. Kazi.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the past we made unsecured loans to our previous directors and officers,
listed below. This is no longer a practice of the Company. These loans were all
renegotiated as of June 30, 1999. The current loan terms each provide that they
are due in 20 years, on June 30, 2019. They bear interest at 4% per annum. Each
officer is obligated to pay $100 per month until the loan matures and to pay the
remaining unpaid balance in one balloon payment on June 30, 2019. At June 30,
2002, and June 30, 2003, the following amounts of principal and interest on
these loans were unpaid:
18
6/30/02 6/30/03
Tom Sims $ 200,085 $ 216,409
Kurt Kunz 86,716 96,599
Kelly Kunz 50,624 55,897
Teresa Kunz 14,200 13,850
--------- ---------
$ 351,625 $ 382,754
These loans were not made in arms-length negotiations between us and the
borrowers. The borrowers could not have obtained unsecured loans on similar
terms from unrelated third parties. Because of the unsecured nature and length
of these loans, they have been discounted by $378,926 (99%) on our financial
statements. See, Note 3 to our Financial Statements for the Years ended June 30,
2003 and 2002. To the extent that the interest rate, maturity and other terms of
these loans are more favorable than could be obtained from third parties, the
benefit received by the directors and officers can be considered additional
compensation to them.
In January 2003, we entered into a Consulting Agreement with Zubair Kazi. In
exchange for his business consulting services, Mr. Kazi was granted a warrant,
expiring July 31, 2003, to purchase 4,500,000 shares of our common stock at an
exercise price of $0.02 per share. Mr. Kazi currently owns approximately 9.4% of
the Company's outstanding common stock.
In June 2003, we entered into an agreement to sell two purchase orders to Zubair
Kazi, a private investor. Mr. Kazi currently owns 9.4% of the Company's
outstanding common stock. The agreement allowed for the investor to buy these
two purchase orders at 97% of face value. This investor was paid directly from
the sales proceeds once they were received by Quintek. As part of the financing
agreement, the investor will receive a warrant to purchase 500,000 shares of our
common stock at an exercise price of $0.046 per share, if and when additional
shares of common stock are authorized for issuance by our shareholders. The
warrant will have an expiration date of June 2, 2008. As of June 30, 2003, we
received $123,083 in financing under this agreement.
In June 2003, we entered into a Purchase Order Financing Agreement with a
business management company owned by Zubair Kazi. As part of this agreement, Mr.
Kazi's company (or "investor") received an equity fee of a warrant to purchase
1,500,000 shares of our common stock at an exercise price of $0.043 per share,
if and when additional shares of common stock are authorized for issuance by our
shareholders. The warrant will have an expiration date of June 13, 2008. The
financing is limited to $200,000 per month and $4,800,000 in total financing
over the 2 year life of the agreement. The company will receive an additional
warrant, as a bonus, to purchase two additional shares of our common stock for
each $1.00 of financing provided. These bonus warrants shall allow the investor
to purchase common stock at the average closing price of our stock for the 90
days prior to the closing of the Purchase Order financing transaction they
represent or a fifty percent (50%) discount to the closing price of Quintek's
common stock at the day of the closing of the transaction they represent. As of
June 30, 2003, we received no financing under this agreement. Perfected Purchase
Orders (delivered to and accepted by the customer) will be purchased by the
investor at three percent (3%) discount to the investor, or ninety-seven percent
(97%) of face value. Non-Perfected Purchase orders (not yet shipped to customer)
will be purchased by the investor at ten percent (10%) discount to the investor,
or ninety percent (90%) of face value. Quintek will pay a late fee as follows.
For Perfected Purchase Orders not paid within 30 days Quintek will pay a late
fee equal to three percent (3%) per month. For Non-Perfected Purchase Orders not
paid within 60 days Quintek will pay a late fee equal to five percent (5%) per
month. Late fees may be paid in cash or stock at the option of the investor.
19
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
13.1 Exhibits
2.1 # Agreement and Plan of Reorganization between Quintek Technologies,
Inc., and Juniper Acquisition Corporation.
3.1 * Articles of Incorporation.
3.2 * Bylaws.
4.1 ** Form of Irrevocable Proxy Granted to Chief Executive Officer dated
January 30 or 31, 2003
10.1* Cooperation Agreement between Quintek Electronics, Inc., Qtek
Aperture AB, and Bofors AB, Missiles Production (November 21,
1997).
10.2* 4300 License Agreement between Quintek Technologies, Inc. and Qtek
Aperture Card AB (January 18, 2000).
10.3* Additional Agreement between Quintek Technologies, Inc. and Qtek
Aperture Card AB (January 18, 2000)
10.4*** Consulting Agreement between Quintek Technologies, Inc. and Robert
Steele dated December 16, 2002 (previously filed as Exhibit 10.1)
10.5*** Consulting Agreement between Quintek Technologies, Inc. and Zubair
Kazi dated January 31, 2003 (previously filed as Exhibit 10.2).
10.6*** Warrant Agreement between Quintek Technologies, Inc. and Zubair
Kazi dated January 31, 2003 (previously filed as Exhibit 10.3).
10.7**** Purchase Order Financing Agreement dated June 2, 2003 between Kazi
Management VI, LLC and Quintek Technologies, Inc. (previously
filed as Exhibit 10.1).
10.8***** Consulting Agreement between Quintek Technologies, Inc. and Gary
Litt dated February 3, 2003 (previously filed as Exhibit 10.4).
10.9 Employment Agreement between Quintek Technologies, Inc. and Robert
Steele dated January 31, 2003
10.10 Employment Agreement between Quintek Technologies, Inc. and Andrew
Haag dated January 31, 2003
20.1 Code of Ethical Conduct adopted June 10, 2003
20.2 Audit Committee Charter adopted June 11, 2003
31.1 Certification pursuant to Rule 13a-14 of the Securities Exchange
Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, of the Chief Executive Officer of Quintek Technologies,
Inc.
31.2 Certification pursuant to Rule 13a-14 of the Securities Exchange
Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, of the Chief Financial Officer of Quintek Technologies,
Inc.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the
Chief Executive Officer of Quintek Technologies, Inc.
20
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the
Chief Financial Officer of Quintek Technologies, Inc.
# Incorporated by reference to Exhibit 2.1 to the Form 8-K dated February
24, 2000.
* Incorporated by reference to Form 10-KSB for the fiscal year ended June
30, 2000.
** Incorporated by reference to Form 10-QSB for quarter ended Dec.31,
2002.
*** Incorporated by reference to Registration Statement on Form S-8 filed
March 11, 2003.
**** Incorporated by reference to Form 8-K filed July 14, 2003.
***** Incorporated by reference to Registration Statement on Form S-8 filed
August 18, 2003.
13.2 Reports on Form 8-K
On June 2, 2003 we filed a report on Form 8-K that described: (a) the settlement
on or about May 23, 2003 of a lawsuit against us by a former landlord; (b) a
letter to shareholders from our Chief Executive Officer dated May 28, 2003; and
(c) a press release dated March 28, 2003 indicating that our annual shareholder
meeting will be delayed because additional time will be needed to deal with the
number of items to be voted upon in the proxy materials to be sent to
shareholders.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed by the Company's auditors for professional services
rendered in connection with the audit of the Company's annual consolidated
financial statements for fiscal 2003 and 2002 and reviews of the consolidated
financial statements included in the Company's Forms 10-QSB were $75,733 for
2002 and $20,375 for 2003. An additional $21,084 was billed to the Company as
cumulative "late fees", by the auditor of the Company's annual consolidated
financial statements for fiscal 2002.
Audit-Related Fees
For fiscal 2003 and 2002, the Company's auditors did not bill any fees for
assurance and related services that are reasonably related to the performance of
the audit or review of the Company's financial statements and are not reported
under "Audit Fees" above.
Tax Fees
No fees were billed by the Company's auditors for professional services for tax
compliance, tax advice, and tax planning for fiscal 2003 and 2002, respectively.
All Other Fees
No fees were billed by the Company's auditors for all other non-audit services
rendered to the Company, such as attending meetings and other miscellaneous
financial consulting, in fiscal 2003 and 2002.
Audit Committee
The audit committee meets prior to filing of any Form 10-QSB or 10-KSB to
approve those filings. In addition, the committee meets to discuss audit plans
and anticipated fees for audit and tax work prior to the commencement of that
work. Approximately 100% of all fees paid to our independent auditors for fiscal
2003 are pre-approved by the audit committee.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: October 14, 2003 QUINTEK TECHNOLOGIES, INC.
By: /s/ Robert Steele
--------------------------------------
Robert Steele, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated.
Date: October 14, 2003 /s/ Robert Steele
---------------------------------------
Robert Steele, Chief Executive Officer
and Director
Date: October 14, 2003 /s/ Andrew Haag
---------------------------------------
Andrew Haag, Chief Financial Officer
and Director
22
QUINTEK TECHNOLOGIES, INC.
--------------------------
CAMARILLO, CALIFORNIA
TABLE OF CONTENTS
Page
Independent Auditor's Report F-1-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' (Deficit) F-5
Statements of Cash Flows F-6-7
Notes to Financial Statements F-8-19
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-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, 2002, and the related statements of operations, stockholders'
(deficit), and cash flows for the year then ended June 30, 2002. 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.
In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of Quintek
Technologies, Inc., as of June 30, 2002, and the results of its operations and
cash flows for the year then ended June 30, 2002, 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/ SPRAYBERRY, BARNES, MARIETTA & LUTTRELL
Oxnard, California
October 11, 2002
F-2
QUINTEK TECHNOLOGIES, INC.
BALANCE SHEETS AT
JUNE 30, 2003 AND 2002
A S S E T S 2003 2002
----------- -------- --------
Current assets:
Cash 21,162 2,602
Accounts receivable (net of allowance for bad
debts of $26,498 and $20,498) 73,118 27,212
Inventory 4,371 57,426
Other 8,617 2,038
-------- --------
Total current assets 107,268 89,278
Property and equipment, at cost:
Equipment 102,881 102,881
Computer and office equipment 93,297 88,492
Furniture and fixtures 33,518 32,526
-------- --------
229,696 223,899
Less-accumulated depreciation (206,687) (192,210)
----------------------------------------------------- -------- --------
Net fixed assets 23,009 31,689
Other assets:
Deposits 2,395 4,994
Intangible assets (net of accumulated amortization
of $87,100 and $53,082) 48,973 82,985
Investments 28,762 28,762
Employee receivables, net 3,599 2,400
-------- --------
Total other assets 83,729 119,141
-------- --------
Total assets 214,006 240,108
======== ========
The accompanying notes are an integral part of the financial statements.
LIABILITIES AND STOCKHOLDERS' (DEFICIT) 2003 2002
--------------------------------------- ----------- -----------
Current liabilities:
Accounts payable 200,315 207,335
Factoring payable 146,890 20,000
Payroll and payroll taxes payable 136,115 307,522
Payroll taxes assumed in merger 123,272 123,272
Accrued expenses 116,609 134,521
Current portion of long-term debt 12,330 --
Notes payable-stockholders 32,300 36,400
Other liabilities 29,135 28,594
Convertible bonds 151,695 330,505
Unearned revenue 41,034 27,886
Liabilities in process of conversion to stock 468,669 --
----------- -----------
Total current liabilities 1,458,364 1,216,035
Long-term debt, net of current portion 24,659 --
Stockholders' (deficit):
Common stock-$0.01 par value, 50,000,000 shares
authorized, 46,762,008 and 40,162,008 issued
and outstanding 467,620 401,620
Additional paid-in capital 20,326,780 19,997,017
Retained (deficit) (22,062,534) (21,361,481)
----------- -----------
(1,268,134) (962,844)
Less-subscriptions receivable (883) (13,083)
-------------------------------------------------- ----------- -----------
Total stockholders' (deficit) (1,269,017) (975,927)
----------- -----------
Total liabilities and stockholders' (deficit) 214,006 240,108
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-3
QUINTEK TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
JUNE 30, 2003 AND 2002
2003 2002
---------- ----------
Sales 388,888 446,005
Cost of sales 261,050 198,696
---------- ----------
Gross margin 127,838 247,309
Operating expenses:
Selling, general and administrative 601,090 654,621
Stock-based compensation for services 221,183 453,413
---------- ----------
Total operating expenses 822,273 1,108,034
---------- ----------
Loss from operations (694,435) (860,725)
Other income (expenses):
Other income 17,500 25,424
Gain (loss) on investments 19,792 (166,112)
Interest expense (43,910) (49,525)
---------- ----------
Total other income (expenses) (6,618) (190,213)
---------- ----------
Net (loss) before income taxes (701,053) (1,050,938)
Provision for income taxes -- 800
---------- ----------
Net (loss) (701,053) (1,051,738)
========== ==========
Net loss per share:
Basic and diluted ($ 0.02) ($ 0.03)
The accompanying notes are an integral part of the financial statements.
F-4
QUINTEK TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIT) FOR THE YEARS ENDED
JUNE 30, 2003 AND 2002
Additional Total
Common Stock Paid-In Retained Stockholders'
Shares Amount Capital Deficit Deficit
----------- ----------- ----------- ----------- -----------
Balance, June 30, 2001 22,237,793 222,378 19,355,796 (20,309,743) (731,569)
Stock issuances 17,924,215 179,242 741,377 -- 920,619
Allowance on subscription
receivable -- -- (100,156) -- (100,156)
Net (loss) -- -- -- (1,051,738) (1,051,738)
----------- ----------- ----------- ----------- -----------
Balance, June 30, 2002 40,162,008 401,620 19,997,017 (21,361,481) (962,844)
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) -- -- -- (701,053) (701,053)
----------- ----------- ----------- ----------- -----------
Balance, June 30, 2003 46,762,008 467,620 20,326,780 (22,062,534) (1,268,134)
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-5
QUINTEK TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
JUNE 30, 2003 AND 2002
2003 2002
---------- ----------
Cash flows from operating activities:
Net (loss) (701,053) (1,051,738)
Adjustments to reconcile net (loss) to net cash
(used) by operating activities:
Depreciation and amortization 46,195 46,000
Common stock issued for services 221,183 453,413
Subscription receivable forgiven for services 42,689 --
(Gain) loss on investment (19,792) 166,112
(Increase) decrease:
Accounts receivable (45,906) 6,119
Inventory 53,055 (17,339)
Other current assets (4,279) 11,913
Deposits 2,599 2,300
Increase (decrease):
Accounts payable 68,848 (114,135)
Factoring payable 126,890 20,000
Payroll and payroll taxes payable 80,806 199,485
Payroll taxes assumed in merger -- (33,520)
Accrued contingency payable -- (100,000)
Accrued expenses 12,746 34,884
Other current liabilities 541 (14,495)
Unearned revenue 13,148 (19,708)
---------- ----------
Total adjustments 598,723 641,029
---------- ----------
Net cash (used) by operating activities (102,330) (410,709)
Cash flows from investing activities:
Purchase of property and equipment (5,803) --
Proceeds from sale of investment 19,792 --
Net (increase) in employee receivables (1,199) --
---------- ----------
Net cash provided by investing activities 12,790 --
Cash flows from financing activities:
Proceeds from issuance of common stock 100,000 281,004
Proceeds from the issuance of convertible bonds -- 129,200
Payments on convertible bonds -- (45,900)
Borrowing from investee -- 36,400
Payments on borrowing from investee (4,100) --
Payments received on subscriptions 12,200 9,534
---------- ----------
Net cash provided by financing activities 108,100 410,238
---------- ----------
The accompanying notes are an integral part of the financial statements.
F-6
QUINTEK TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
JUNE 30, 2003 AND 2002
2003 2002
------- -------
Net increase (decrease) in cash 18,560 (471)
Cash-beginning of year 2,602 3,073
------- -------
Cash-end of year 21,162 2,602
======= =======
Interest paid 14,256 21,328
======= =======
Income taxes paid -- --
======= =======
The accompanying notes are an integral part of the financial statements.
Noncash transactions:
During the year ended June 30, 2002, the Company determined that $100,156 of
subscriptions receivable was uncollectible and has written off the amount
through additional paid-in capital.
During the year ended June 30, 2002, the Company exchanged 2,000,000 shares of
its common stock for 2,000,000 shares of the common stock of PanaMed Corp. The
transaction was valued at $186,202. This investment was accounted for by the
equity method.
During the year ended June 30, 2003, the Company had the following noncash
transactions:
Increase (decrease)
Account payable (75,868)
Payroll and payroll taxes payable (252,213)
Accrued expenses (30,658)
Convertible bonds (178,810)
Liabilities in process of conversion to stock 468,669
Notes payable 36,989
Common stock 2,240
Additional paid-in capital 29,651
F-7
QUINTEK TECHNOLOGIES, INC.
--------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
JUNE 30, 2003 AND 2002
----------------------
1. Summary of Significant Accounting Policies
This summary of significant accounting policies of Quintek Technologies,
Inc. ("the Company") is presented to assist in understanding the
Company's financial statements. These accounting policies conform to
accounting principles generally accepted in the United States of America
and have been consistently applied in the preparation of the financial
statements.
a) Nature 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. At the time of the merger, PDX was a
nonoperating public entity and QTI has no intention of carrying on
the former operations of PDX.
The plan was structured to compensate all related parties with
common stock and units. Each unit consisted of one share of common
stock, one Class A warrant, one Class B warrant, one Class C
warrant and one Class D warrant. PDX shareholders received
unrestricted units at a ratio of one QTI unit for 25 shares of PDX
stock, resulting in a distribution of 310,535 units. PDX creditors
received unrestricted QTI units at a ratio of one QTI unit for $3
of previous PDX debt, resulting in a net distribution of 885,549
units. Chapter 11 administrators and consultants received
approximately 610,000 unrestricted QTI units, attorneys received
220,000 unrestricted units and market-makers received 200,000
unrestricted units. QEI shareholders received 11,096,167 shares of
restricted common stock.
On February 24, 2000, the Company acquired all of the outstanding
common stock of Juniper Acquisition Corporation ("Juniper"). For
accounting purposes, the acquisition has been treated as a
capitalization of the Company with the Company as the acquirer
(reverse acquisition). The historical financial statements prior to
February 24, 2000 are those of the Company.
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"). Aperture cards are small,
rectangular cards each of which contains a 35mm strip of microfilm,
which is used for storing visual information. The 4300 system is
intended to eliminate the problems of conventional aperture card
manufacturing by producing aperture card media with a chemical free
process. The chemistry and fumes involved with conventional
photographic film development may be
F-8
1. Summary of Significant Accounting Policies (Continued)
hazardous and the waste material resulting from the chemical
process may be considered hazardous material. The Company's 4300
system does not use a chemical process and does not produce any
hazardous material.
b) Basis of Accounting
The Company reports on the accrual basis of accounting for both
financial statement and income tax purposes. Revenue from product
sales is recognized upon shipment of the product. Revenue from
services is recognized as the service is provided using the
straight-line method over the life of the contract. A related
liability is recorded for the unearned portion of service revenue
received.
c) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America 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.
d) Major Customers
For the year ended June 30, 2003, the Company had four customers
that accounted for more than 55% of revenue. For the year ended
June 30, 2003, revenues from the Company's major customers amounted
to approximately $214,000. Accounts receivable from these major
customers were approximately $69,000 at June 30, 2003. For the year
ended June 30, 2002, the Company had one customer that accounted
for more than 10% of revenue. For the year ended June 30, 2002,
revenues from the Company's major customer amount to approximately
$166,000. Accounts receivable from this major customer was
approximately $200 at June 30, 2002.
e) Major Suppliers
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.
f) Concentration of Credit Risk -- Cash
The Company maintains its cash balances in various financial
institutions. The balances are insured by the Federal Deposit
Insurance Corporation up to $100,000. At various times throughout
the years ended June 30, 2003 and 2002, the Company has maintained
balances in excess of federally insured limits.
g) Accounts Receivable
The allowance for bad debts is established through a provision for
bad debts charged to expense. Receivables are charged off against
the allowance when management believes that the collectibility of
the account is unlikely. Recoveries of amounts previously charged
off are credited to the allowance.
h) Inventory
Inventory consists of parts and supplies, and is stated at the
lower of cost or market. Cost is determined on a FIFO (first-in,
first-out) basis.
F-9
1. Summary of Significant Accounting Policies (Continued)
Inventories are summarized as follows at June 30:
2003 2002
---- ----
Parts and supplies 302,015 355,070
Reserve for obsolescence (297,644) (297,644)
------------- -------------
4,371 57,426
============= =============
i) Property, Equipment, and Depreciation
Property and equipment are recorded at cost. Depreciation of
property and equipment is provided using the straight-line and
accelerated methods over the following estimated useful lives:
Equipment-5 years, computers and office equipment-3-7 years and
furniture and fixtures-7 years.
Expenditures for maintenance and repairs are charged against
operations when incurred. Major renewals and betterments are
capitalized.
j) Intangible Assets
The cost of patents and purchased proprietary processes acquired
are being amortized using the straight-line method over their
remaining useful lives of 4 years.
k) Payroll Taxes-Assumed in Merger
The Company assumed $205,618 of payroll tax liabilities in the
merger with Pacific Diagnostic Technologies, Inc. The balance at
June 30, 2003 and 2002 was $123,272.
l) 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.
m) Research and Development
Research and development costs are charged to operations when
incurred and are included in operating expenses. The amounts
charged to operations for the years ended June 30, 2003 and 2002
were $58,000 and $63,600, respectively.
n) Advertising
The Company expenses advertising costs as they are incurred.
Advertising expense was $236 and $-0- for the years ended June 30,
2003 and 2002, respectively.
o) Income Taxes
The Company accounts for income taxes using the liability approach
to financial accounting and reporting. Current income taxes are
based on the year's income taxable for federal and state reporting
purposes.
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. The deferred tax asset is
$2,718,450 and $2,480,092 as of June 30, 2003 and 2002,
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 2022.
F-10
1. Summary of Significant Accounting Policies (Continued)
The effects of temporary differences that give rise to significant
portions of the deferred tax benefit are presented below:
2003 2002
----------- ----------
Net operating loss 163,156 133,328
Stock-based compensation 75,202 35,982
----------- ----------
238,358 169,310
Less-valuation allowance (238,358) (169,310)
----------- ----------
Total - -
=========== ==========
p) Stock-Based Compensation
The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of APB 25,
Accounting for Stock Issued to Employees, and complies with the
disclosure provisions of SFAS 123, Accounting for Stock-Based
Compensation. Under APB 25, compensation cost is recognized based
on the difference, if any, on the date of grant between the fair
value of the Company's stock and the amount an employee must pay to
acquire 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. Nothing has been issued under
the plan and the plan has not been approved by the shareholders as
of June 30, 2003.
q) Net Loss Per Share
Basic net loss per share is based on the weighted average number of
common shares outstanding of 39,170,392 and 33,950,872 at June 30,
2003 and 2002, respectively. The basic and diluted earnings per
share calculations are the same.
Securities that were not included in the earnings per share
calculation because they were antidilutive consist of the
convertible bonds, stock options, and warrants. If these items were
included, they would increase weighted average shares outstanding
by 419,726 at June 30, 2002.
r) Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 141,
"Business Combination" ("SFAS 141") and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 141 requires all business combinations
to be accounted for using the purchase method of accounting and is
effective for all business combinations completed after June 30,
2001. SFAS 142 requires the use of a nonamortization approach to
account for purchased goodwill and certain intangibles. Under a
nonamortization approach, goodwill and certain intangibles will not
be amortized into results of operations, but instead will be
reviewed for impairment and written down and charged to results of
operations only in the periods in which the recorded value of
goodwill and certain intangibles is more than its fair value. The
provisions of each statement were adopted on July 1, 2002. The
adoption of this statement did not have a material impact on the
Company's financial position or results of operations.
F-11
1. Summary of Significant Accounting Policies (Continued)
In June 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS 143") was
issued. SFAS 143 addresses financial accounting and reporting for
legal obligations associated with the retirement of tangible
long-lived assets and the associated retirement costs that result
from the acquisition, construction, or development and normal
operation of a long-lived asset. Upon initial recognition of a
liability for an asset retirement obligation, SFAS 143 requires an
increase in the carrying amount of the related long-lived asset.
The asset retirement cost is subsequently allocated to expense
using a systematic and rational method over the assets useful life.
SFAS 143 was effective for fiscal years beginning after June 15,
2002. The adoption of this statement did not have a material impact
on the Company's financial position or results of operations.
In August 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards Board No. 144,
"Accounting for the Impairment of Disposal of Long-Lived Assets."
SFAS 144 addresses financial accounting and reporting for the
impairment of long-lived assets and for the long-lived assets to be
disposed of. SFAS 144 was required for adoption for fiscal years
beginning after December 15, 2001 and interim periods within those
fiscal years. The adoption of this statement did not have a
material impact on the Company's financial position or results of
operations.
In April 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards Board No. 145,
Rescission of FASB Statement 4, 44, and 64, Amendment of FASB
Statement No. 13 and Technical Corrections (FASB 145). SFAS 145 was
required for adoption for fiscal years beginning May 15, 2002, with
early adoption of the provisions related to the rescission of
Statement 4 encouraged. The adoption of this statement did not have
a material impact on the Company's financial position or results of
operations.
In July 2002, the Financial Accounting Standards Board (SFAS)
issued Statement of Financial Accounting Standards Board No. 146,
"Accounting for Restructuring Costs" ("SFAS 146"). SFAS 146 applies
to costs associated with and exit activity (including
restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines,
terminating employees and contracts, and relocating plant
facilities or personnel. Under SFAS 146, a company will record a
liability for a cost associated with an exit disposal activity when
that liability is incurred and can be measured at fair value. SFAS
146 was effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption
encouraged. Under SFAS 146, a company may not restate its
previously issued financial statements and the new Statement
grandfathers the accounting for liabilities that a company had
previously recorded under EITF issue 94-3. The adoption of this
statement did not have a material impact on the Company's financial
position or results of operations.
s) Reclassifications
Certain accounts in the prior year financial statements have been
reclassified to conform with the current year presentation.
F-12
2. Going Concern
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 sustained substantial operating losses
and has been advised of an inquiry by the SEC as described in Note 7(d).
In view of these matters, realization of a major portion of the assets in
the accompanying balance sheet is dependent upon continued operations of
the Company, which in turn is dependent upon the Company's ability to
meet its financing requirements, and the success of its future
operations.
Management is not certain that current cash and cash generated from
operations will be sufficient to meet its anticipated cash needs until
the end of its fiscal year. Accordingly, the Company will require an
additional capital infusion or revenues from additional sales to continue
operations. Management is not certain if additional capital or sales
proceeds will become available and is considering other strategic
alternatives, which may include a merger, asset sale, or another
comparable transaction, or financial restructuring. If unsuccessful in
completing a strategic transaction, the Company may be required to cease
operations.
3. Employee Receivables 2003 2002
----------- ----------
Notes receivable from officers, unsecured,
due on June 30, 2019, plus interest at 4% 382,754 351,625
Interest receivable in connection with
above notes receivable 4,425 23,755
----------- ----------
387,179 375,380
Valuation allowance (383,580) (372,980)
----------- ----------
3,599 2,400
=========== ==========
4. Investments
The investments held by the Company consist 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 is accounted for using the equity
method of accounting due to the significant influence that the Company
has over its investee. The PanaMed investment was accounted for using the
equity method for the year ending June 30, 2002; however, the Company no
longer has significant influence over this entity. The PanaMed investment
is accounted for at cost, which is zero. The market value of the PanaMed
shares the Company holds is approximately $215,000.
F-13
Pertinent financial information for Qtek Aperture Card AB as of June 30,
2003 and 2002, is as follows:
2003* 2002
------- -------
Balance sheet:
Assets -- 123,047
======= =======
Liabilities -- 76,049
Equity -- 46,998
------- -------
-- 123,047
======= =======
Income statement:
Revenue -- 165,000
Expenses -- 124,000
------- -------
Net loss 41,000
X -- X 49%
------- -------
Company's share of net income -- 20,090
======= =======
*2003 data is unavailable.
4. Investments (Continued)
Pertinent financial information for PanaMed Corp. as of June 30, 2002, is
as follows:
Balance sheet:
Assets 110,416
============
Liabilities 362,398
Equity (251,982)
------------
110,416
Income statement:
Revenue -
Expenses (4,100,109)
------------
Net loss 4,100,109
x 8.54%
Company's share of net income 350,347
============
Company's share of net loss limited to
its investment 186,202
============
F-14
5. Note Payable
2003 2002
------------- ------------
Note payable to PanaMed, Inc. at 9%,
due on demand, unsecured. 32,300 36,400
============= ============
6. Convertible Bonds
Convertible bonds consists of the following:
Bonds payable with interest at 9%, due on various
dates in 2002, convertible to shares of common stock
in increments of $1,000 or more at rates ranging
from $0.06 - $1.00 per share. 110,554 249,364
Bonds payable with interest at 12%, due July 2002,
convertible to shares of common stock in increments
of $500 or more at rates ranging
from $0.05 - $0.75 per share. 41,141 81,141
------------- ------------
151,695 330,505
============= ============
The majority of outstanding convertible bonds expired before June 30,
2002. The bondholders do not wish to renew the bonds and have asked for
payment. However, the Company does not have the cash to repay these
bonds.
F-15
6. Convertible Bonds (Continued)
Bondholders have been asked to exchange their bonds for Series B
preferred stock. As of June 30, 2003, 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.
7. Commitments and Contingencies
a) Operating Leases
The Company leases its California office facility under a
noncancelable operating lease that requires total monthly rental
payments of $2,846. The lease expired on March 31, 2002 and the
Company has exercised the option to extend the lease an additional
24 months. The lease contains a rental payment 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, 2003 and 2002, rent expense for these
operating leases totaled $45,279 and $49,848, respectively.
Minimum future rental payments under the noncancelable operating
lease is as follows:
Year ended June 30,
2004 25,614
=============
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, 2003, the Company had
purchased 15 units under the agreement.
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.
F-16
7. Commitments and Contingencies (Continued)
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.
e) Lawsuit
On September 19, 2002, First Horizon Loan Corp. filed suit for
damages for breach of a lease agreement for the Company's former
sales offices in Fairfax, Virginia. The suit alleges that the
Company breached the lease when the Fairfax office was closed in
July 2000 and lease payments were stopped. In May 2003, the Company
and First Horizon reached a settlement in which the total sum of
$20,000 is to be paid to First Horizon over a nine-month period of
time.
8. Stockholders' Deficit
a. Common Stock and Warrants
The Company has authorized 50 million shares of $0.01 par value
common stock. 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. At June 30, 2003, there were
46,762,008 shares of common stock issued and outstanding. During
the year ended June 30, 2003, the Company established the Class L
warrants and initiated the process of establishing the Series A
Preferred stock which underlies these warrants.
During the third quarter of the fiscal year ended June 30, 2003,
the Company established the Class L warrants with the following
general terms; 1) exercise price of 25 cents per share, 2)
expiration date of January 14, 2005, and 3) Series A Preferred
stock designated as underlying stock. During this same period, the
Company initiated an exchange program with the existing Class J
Warrant holders in which the Company offered to exchange one Class
L Warrant for two Class J warrants, with the exchange number
rounded up to the next whole number in cases where an odd number of
Class J warrants were submitted for exchange. For each class, the
number of warrants outstanding, the strike price and the expiration
dates are as follows:
Class J- 6,458,384 warrants on restricted stock with a strike
price of $1.00 per share, expiring 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, 2003, holders of Class J warrants totaling
6,126,861 shares of common stock have agreed to exchange their
warrants for 3,063,431 Class L warrants (a two for one
exchange ratio).
Warrants E, F, G, and I expired on March 31, 2002. Warrants B, C,
and D expired on July 31, 2002. Warrants H expired October 1, 2002.
b. Common Stock Reserved
At June 30, 2003, common stock was reserved for the following
reasons:
F-17
8. Stockholders' Deficit (Continued)
Conversion of bonds 1,695,728 shares
Exercise of Class J warrants classified as
stock options 3,063,431 shares
Exercise of Class J warrants 331,523 shares
c. Stock Option Agreements
The Company has granted fixed employee stock-based compensation
options. The fixed option agreements typically have a maximum term
of 5 years and are fully vested at the date of grant. The fair
value of each option granted is estimated on the grant date using
the Black-Scholes Model. The following assumptions were made in
estimating fair value.
Fixed
Options
Dividend yield 0.00%
Risk-free interest rate 3.40%
Expected life 5 years
Expected volatility 180%
Had compensation cost been determined on the basis of fair value
pursuant to FASB Statement No. 123, net loss and loss per share
would not have been reduced because no options were issued during
the years ended June 30, 2003 and 2002.
The Company applies APB Opinion 25 in accounting for its fixed
stock compensation. Compensation cost charged to operations for the
year ended June 30, 2003 and 2002 was $.
Following is a summary of the status of the stock option agreements
during the year ended June 30, 2003:
Number of Weighted Average
Shares Exercise Price
Outstanding at July 1, 2002 2,015,000 $ 1.01
Granted -- --
Exercised -- --
Forfeited -- --
--------- ----------
Outstanding at June 30, 2003 2,015,000 1.01
--------- ----------
Options exercisable at June 30, 2003 2,015,000 1.01
========= ==========
F-18
8. Stockholders' Deficit (Continued)
Following is a summary of the status of the stock option agreements
outstanding at June 30, 2003:
Weighted Average Weighted
Remaining Average
Exercise Price Range Number Contractual Life Exercise Price
-------------------- --------- ---------------- --------------
$1.00 - $4.00 2,015,000 19 months $1.01
Pending stock transactions needing shareholder approval:
Series A Preferred Stock
During the third quarter of the fiscal year ended June 30, 2003,
the board of directors allocated 7,000,000 shares out of an
authorized 10,000,000 shares of Preferred stock to be used to
establish Series A Preferred stock with general terms as defined
below: Par value - $0.00; Liquidation Preference - $0.25 per share
plus any unpaid accumulated dividends; Dividends - cumulative
annual rate of $0.005 per share; Conversion Rights - convertible to
common stock at a 1:1 ratio if and when a majority of the Company's
shareholders vote to approve an increase in authorized common
shares from 50,000,000 to 200,000,000; 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; Voting Rights - one vote per
share on all matters requiring shareholder vote.
Prior to issuing the Series A Preferred stock, the Company will
need to modify its articles of incorporation and obtain approval on
such changes from a majority of the shareholders. A shareholder
meeting is scheduled for later this year to vote on this and other
corporate matters.
Series B Preferred Stock
During the third quarter of fiscal year ended June 30, 2003, the
board of directors allocated 1,613,680 shares out of a remaining
authorized 3,000,000 shares of Preferred stock to be used to
establish Series B Preferred stock with the following terms: 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 our Board of Directors;
Conversion Rights - convertible to common stock at a 1:5 ratio
(i.e. 1 share of Preferred Series B stock is convertible to 5
shares of common stock) if and when a majority of the Company's
shareholders vote to approve an increase in authorized common
shares from 50,000,000 to 200,000,000; 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; Voting Rights - one vote per
share on all matters requiring shareholder vote.
Prior to issuing the Series B Preferred stock, the Company will
need to modify its articles of incorporation and obtain approval on
such changes from a majority of the shareholders. A shareholder
meeting is scheduled for later this year to vote on this and other
corporate matters.
F-19
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, two
preferred series of stock pending approval of same. The conversion
rate varies.
9. Related Party Transactions
During the year ended June 30, 2003, the Company sold aperture cards to
Qtek Aperture Card AB, a related party, for $13,397.
During the year ended June 30, 2002, the Company sold aperture cards to
Qtek Aperture Card AB, a related party, for $1,884.
Included in factoring payable at June 30, 2003 is $20,000 due to a
stockholder.
10. 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 to purchase
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, 2003 and 2002, the Company had a factoring payable balance of
$146,890 and $20,000, respectively.
11. Subsequent Events
In August 2003, the Company issued 200,000 shares of common stock as
payment for services. The value of this transaction was determined to be
$8,000.
12. Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of financial instruments:
Cash and Cash Equivalents. The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Accounts Receivable and Accounts Payable. The carrying amount of accounts
receivable and accounts payable in the balance sheet approximates fair
value.
Short-Term and Long-Term Debt (including factoring payable). The carrying
amount of the revolving credit facility approximates fair value.
The carrying amounts of the Company's financial instruments at June 30,
2003, approximate fair value.
F-20