Quintek Technologies, Inc. Research Report from www.twotrades.com, QTEK's IR/promotion firm.
QTEK OTC Bulletin Board Small Cap: Emerging Growth Date: January 1, 2001
Industry: Digital Information Management Recent Price: $0.11
STRONG BUY RECOMMENDATION
Market Cap: $2.2 Mil. Fiscal Year End June 30 Book Value/Share : $ (0.03)
Shares Out.: 20.3 Mil.
Aver. Daily Vol. 20,000 12-Month Target $ 1.70
Est. Market Float: 5.3 Mil. Current Ratio 0.25 Price Range: to $ 0.04
We are initiating coverage of Quintek Technologies, Inc. (Quintek) with a strong BUY recommendation for risk capital with a 12 -18 month investment horizon. Quintek has spent the past four years positioning for mass production and distribution of its "one of a kind", patented productline and is now on the verge of entering into a highly profitable period.
Quintek supplies equipment, software, services, and media used for long term protection and retention of digital information. The company's primary product, the Q4300 Aperture Card Imaging System, connects directly to a client's digital database and is used like a standard laser printer to output text and drawing information. However, instead of printing on paper, the information is etched on aperture card film, providing a permanant,100 year archival record. The process is completely chemical-free, providing a significant competitive edge over all related equipment.
The Q4300 system is sold primarily to large companies which create and maintain engineering drawings. Related industries include; automotive, defense, utilities, road construction, ship building, aerospace, nuclear power plants, and electronics. Existing customers include: TRW, Caltrans, US Navy, Canadian Government, Duke Power, Dresser Industries, PG&E, Lockheed-Martin, Boeing, Whirlpool, Carolina Power & Light, Lufkin Industries, GTE Airfone, Zenith, and NASA.
Quintek's strategic partners include; Kitron (Q4300 manufacturing), Saab (conversion service operations), Kodak (film supplier), Anacomp (customer service) and Imation (formally part of 3M Corporation) (Q4300 distribution, customer service, and aperture card media supplier).
With a team of Worldclass partners firmly established, a proprietary product in production, a customer base consisting of fortune 500 companies, and an estimated $2.5 billion dollar market, Quintek is well positioned for significant long term growth. Based on a PE multiple of 25, our 12-month price target for QTEK is $ 1.64 per share
David V. Jackson, CFA 4338 Redwood Avenue, Suite 301, Marina Del Rey, California 90292
Facsimile: (310) 578-9977 Telephone: (310) 827-8519 E-Mail : dvjack009@aol.com
Company Profile
Quintek, with headquarters in Camarillo, CA, was established in 1991 to manufacture and distribute equipment, software, media ands services for preserving digital information. The Company's primary product, the Q4300 Aperture Card Imaging System, is used to output digital information to aperture cards, providing a permanent record which will last over 100 years. The Q4300 was originally developed by NCR Corporation at a cost of over 6.5 million dollars. Quintek acquired the technology and invested an additional 4 million dollars to add new features and make the system easily adaptable to a wide variety of user systems and related applications.
On January 14, 1999, Quintek executed a reverse merger with a non-reporting public company (PDX) as a means of going public. The merger terms, implemented under the PDX Chapter 11 Plan of Reorganization, directed PDX management to resign and allowed Quintek management to take control of the combined entity immediately after the merger. Although PDX was the surviving entity, the company name was changed to Quintek in order reflect the primary ongoing operation.
The combined company retained the assets and liabilities of both companies, which included the Q4300 productline held by Quintek and the Stat-K technology developed by PDX. The Stat-K , developed by PDX at a cost of over $20M, is a handheld device used to provide a quick measurement of the potassium level in blood. Quintek does not plan to internally re-start this product, but is actively seeking a partner or buyer for this technology.
Approximately 1.7M units in the combined organization were distributed to shareholders, administrators, and creditors of PDX under direction of the court. Each unit consisted of a share of common stock and 4 warrants with strike prices staggered at $1, $2, $3 and $4 per share. This distribution of stock and warrants to over 800 shareholders allowed Quintek to establish a public market for its stock and raise capitalization through exercise of warrants. Quintek is now a fully reporting company trading on the OTCBB under the symbol QTEK.
The Product
The Q4300 is an automatic, self-contained, tabletop system used to produce aperture card media without using chemicals for film development. Quintek believes this is a one of a kind product, which is technically and environmentally superior to all competitive products. The patent protected Q4300 system is certified by UL, FCC, TUV, GS, CS and ISO 9000 standards for quality, safety, and performance.
The Q4300 is comprised of the Q4303 Universal Interface and the Q4305 Aperture Card Plotter. The two components operate together to provide a turnkey system for producing aperture media directly from CAD or Raster image files.
The Q4303 is based on the PC Pentium Computer and functions to interface the Q4305 recorder with the operator and customer system. Quintek's proprietary software provides the controls necessary to retrieve digital files from the user network, convert the user files into raster data, center and scale the image for film presentation, and output the appropriate information to the 4305 plotter. In most cases the 4303 software can be easily expanded and/or adapted to accommodate user files (compatible with over 100 different file formats) and system applications without modifying the customer's existing software.
The Q4303 Plotter uses a Helium-Neon laser to record image data directly onto dry silver film, which is premounted on blank aperture card stock 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 aperture cards are automatically labeled using an internal print/punch module.
US PATENTS
- 4,794,224 (Dry Film Developer)
- 4,818,950 (Low Jitter Phase-Locked Loop)
- 4,841,343 (Dry Film Development Process)
Aperture Card Media
The aperture card is about the size of a "timecard" (approximately 3" x 7') and contains a 35 x 48 MM dry silver film chip mounted over an "aperture" located on the right hand side of the card. The dry silver film is currently available from Eastman Kodak Company and Quintek believes that Kodak will continue to improve, produce and supply dry silver film in the long term, for both aperture card and microfiche applications. The aperture cards used with Quintek's equipment are produced by Imation, using Kodak's dry silver film.
Drawing content is typically recorded on the aperture card film chip at reduced size ranging from 16X to 30X magnification. Related drawing information (i.e. title, drawing number, revision level, page number, etc.) is printed across the top of the card. In many applications the related drawing information is also punched into the body of the card, in Hollerith code format, so the card can be identified when used with automated sorting, and duplicating equipment.
Aperture cards can be used to provide documents and drawings on film for use as a working reference, or to back-up digital data for long term storage. The aperture card film used with the Q4300 system has a Life Expectancy rating of over 100 years per ANSI standards and 1000 years per Kodak test and analysis. The media can be used with most
standard microfilm viewers, duplicators, and printers. The filmed information can be easily converted back into digital data using conventional aperture card scanners, a key factor in the overall storage process.
Aperture cards are not used to replace short term digital media such as CD-ROM, magnetic disk or magnetic tape. Instead, they are used to back-up digital media by providing a cost effective means to capture digital information for permanent retention, insuring against loss of information due to catastrophic events, technology obsolescence, computer virus, hard disk crash, software incompatibility, or degradation of digital storage media.
After the sale of a Q4300 system, there is also a built in "annuity". The Q4300 compatible aperture cards are sold by Quintek at 35-40 cents each (retail), and a customer is expected to consume from 20,000 to 70,000 cards annually. Quintek believes that substantial revenue and profit will be realized from sales of Q4300 compatible aperture cards as Quintek's customer base expands from sales of new Q4300 systems.
Customer Benefits
By incorporating the Q4300 system, a customer can bypass the labor intensive process normally required for producing aperture cards internally using conventional filming equipment. Further, Quintek believes customers will save a significant amount of time and money using the Q4300 as a result of reduced operational cost and increased efficiency. By using the Q4300 system, the customer can eliminate much of the equipment, floor space, operators, maintenance, and chemicals normally required for aperture card production. Quintek believes the cost savings can be significant, with the exact amount dependant on existing customer equipment and the volume of aperture cards produced.
The Q4300 System is used primarily to:
1) improve the efficiency of existing microfilm database management, 2) insure the integrity of the customer's digital database by providing an eyereadable and archival backup, 3) provide a media which can be easily interpreted anywhere in the world and at anytime in the future, and perhaps most importantly 4) provide a permanent record which cannot be altered by man and which is highly resistant to decay from aging and environmental factors. Film storage is considered to be the only truly reliable form of long-term storage, primarily due to evolution of technology, which makes yesterday's digital storage media incompatible with today's drives, formats, and software applications. This is evidenced by ongoing changes in government regulations requiring that digital information with a useful life of more than seven years must be backed up on microfilm.
Environmental Benefits
Quintek believes that; 1) in many areas the chemical by-products produced by traditional film processing equipment are classified as hazardous waste material by local government agencies 2) Federal and State government regulations relating to chemical processing are becoming more complex and stringent as time goes on, 3) failure to understand and comply with these regulations can result in fines, shutdowns, increased capital expenditures, high disposal cost, and negative publicity, and 4) employee health problems and related law suits are of great concern to companies using chemical based processing equipment.
Market
Marketing efforts are focused primarily on large companies that have the need to distribute or store engineering drawings in a condensed, archival, and eye-readable format. Companies which require engineering drawings, documents, or records to be stored for over seven (7) years are considered prime prospects for the Q4300 system, regardless of the type of system used for creating or accessing the information. The total market is estimated to be $2.5 Billion per year.
QUINTEK CUSTOMER BASE
TRW Boeing Aqua Chem Bofors Lennex
Dresser Industries Canadian Government SCGC National Machinery PG&E
Smith Industries Zenith Aramco Morgan Construction Mallory Controls
Caltrans AT&SF Lockheed-Martin Duke Power Company Carolina Pwr & Light
US Navy NASA Whirlpool GTE Airfone Lufkin Industries
York Anacomp Salt River Project Baltimore Gas & Elect. Ampaco
Carroll Touch McCanna Giddings and Lewis Century Film SCE
Competition
Quintek has both indirect and direct competition. Indirect competition presents itself in the form of paper plotters, cameras, keypunch equipment and any other product which can be used as part of the conventional aperture card production process. Quintek believes that the combined cost of all "indirect competitive" equipment required to generate an aperture card can run from 2-3 times higher than the cost of the Q4300 system. Further, Quintek believes that many companies with conventional aperture card equipment can normally justify purchasing a Q4300 system by simply discarding existing equipment and eliminating the ongoing expenses associated with operation and maintenance.
Direct competitors are manufactures of equipment which produce aperture cards directly from a digital data source. Leading companies in the field include; Wicks and Wilson Limited (WWL), Tameran, Laser Scan, Microbox, and formerly Imation. Quintek believes that the products manufactured by all of these companies use chemicals for film development and as a result, are more complex, less reliable, and more expensive than the Q4300. The Laser Scan and former Imation products are not compatible with raster files and therefore are much less competitive, since the majority of potential customers require compatibility with both vector and raster type files. The Tameran product retails for over $125K and the other products sell for over $85K. Quintek's system retails for $50K - $75K, with exact price depending on options selected.
Future Products
Quintek believes the Q4300 technology can be used as a baseline to develop new enhancements and spin-off products using engineering R&D resources at Quintek and Kitron. Products and capabilities planned for near future development include: 1) high speed aperture card scanning & recording, 2) aperture card Faxing via Internet (using encoding techniques to insure information integrity), and 3) a roll film recorder/scanners. Quintek believes that Roll Film will make an ideal replacement for optical media and magnetic tape for long-term storage of digital information from non-engineering industries, such as banking, medical, financial, insurance, etc.
Imation
In July of 2000, Quintek turned its primary competitor into a partner when it entered into a distribution and marketing agreement with Imation. Under the new relationship, Imation has agreed to sell, install and service Quintek's 4300 Aperture Card Imaging System under a worldwide distribution program. It is probable that Imation's market leadership, global distribution network, and top-notch customer service capability could dramatically enhance Quintek's market presence and provide customers with worldwide access to this valuable technology. Given the fact that Quintek has a "one of a kind" product that complements the Imation product line, it's conceivable that
Imation could view Quintek as an acquisition candidate once its sales and technical staff become fully acquainted with the Q4300 product line. Imation has an existing installed base of approximately 5,000 clients using wet film technology for producing aperture cards. Imation hopes to market the Q4300 system to these clients as a replacement for this chemical-based equipment. We see significant earnings potential that will become fully apparent as Imation ramps up to a full-scale sales and marketing program.
Imation Corp is a global technology company, supplying data storage, information management, color management, and imaging solutions worldwide. Imation was spun-off from Minnesota Mining and Manufacturing Company (3M) in June 1996, taking the film and engineering products and services and leaving the 3M parent with those products related to its bonding and coating technologies, such as Scotch tape. Imation Corp had revenues of $1.4 billion and employed approximately 4,850 people as of Dec. 31, 1999.
Strategic Partners
Kitron
In 1998, Quintek formed an alliance with Kitron (formally Bofors AB) to facilitate mass production and further engineering development of the Q4300 system. Kitron has agreed to manufacture Q4300 units, internal modules, and spare parts, on an "as required" basis, in support of Quintek's delivery requirements. It is anticipated that Kitron will be able to increase production of the Q4300 line to accommodate the increase in orders expected as a result of the Imation agreement.
Kitron is a large Norwegian Company which manufactures a variety of military and industrial products. The Q4300 is manufactured at their missile production facility located in Karlskoga, Sweden. Quintek believes the Q4300 is viewed by Kitron as an ideal fit for their production line because of their well proven expertise in mass producing high quality, laser based products, and their own dedication towards using aperture cards for archiving engineering information. Quintek believes the Q4300 equipment produced by Kitron will continue to be of the highest caliber, meeting ISO 9000 standards for production quality and consistency.
Qtek AB
Qtek (officially "Qtek Aperture Card AB") is located within the Kitron campus in Karlskoga, Sweden and was established to coordinate Kitron/Quintek transactions, distribute and support the Q4300 system in Europe, and operate a Q4300 based service bureau for converting images from digital format into aperture card media for long term storage. Kitron is supporting Qtek by bringing in sales and conversion business from internal divisions, other divisions within Celsius and Saab, and a worldwide customer base. Qtek has already successfully completed numerous conversion contracts from the Royal Netherlands Army and several divisions of Kitron and Celsius. A three year contract was recently awarded to Qtek for handling aperture card production within numerous Saab divisions.
Quintek currently holds a 49% equity position in Qtek. In return for this equity position, Quintek has provided funding and know-how for operational start-up and assigned Q4300 manufacturing rights to Qtek. Kes AB ("Kesab") currently holds the remaining 51% equity position in Qtek. Kesab is a Swedish company, based in Stockholm, primarily responsible for initiating and nurturing the relationship with Kitron, Saab and Celsius. Key employees and management from Kesab have been used to establish Qtek and conduct ongoing operations. Qtek has engaged Kitron to manufacture the Q4300 system under subcontract agreement. Kitron plans to support Qtek by providing soft loans, facilities, and marketing support to Qtek on favorable terms.
Celsius
Celsius, a multi-billion dollar division of Saab Technologies, plans to support Qtek in acquiring long term conversion contracts and in allocating a massive, environmentally controlled, storage facility for archiving the aperture cards produced by Qtek. The archiving facility is built into a large mountain in Karlskoga and is referred to as the "Iron Mountain". Quintek believes that a significant amount of business may result from this relationship, as a direct result of Celsius and their prestigious European associates (e.g. other Celsius divisions, Saab divisions, military customers, large European companies, etc).
Acquisitions and Investments
Quintek plans to expand its productline, asset base, and customer base by acquiring related technologies and making investments in promising young companies. In mid summer 2000, Quintek acquired a 5% equity position in Microshield Technologies, Inc, a small private company located in Atascadero, California. Microshield was established for the purpose of developing, manufacturing, and distributing products for protecting consumers from the microwave radiation emitted from cell phones. Studies show that frequent users of cell phones may be at risk of developing brain cancer from the radiation emitted from the cell phone antenna. Industry and consumers are becoming aware of the risk, but little has been done to resolve the problem.
Microshield has developed a patented shielding product which has been tested by independent labs and proven to shield over 90% of cell phone radiation. Microshield believes there are no other shielding products available on the market today that actually provide effective protection. Headsets allow the cell phone to be moved to a different part of the body, however, the headset wire can act like an antenna and actually increase the amount of radiation channeled into the brain.
Microshield expects to be in production by March 2001, with product available for distribution shortly thereafter. Microshield estimates there are currently over 600 million cell phone users worldwide, growing at a rate of 3 million users per week.
Microshield plans to sell shielding adapters into this market initially as an accessory product, and in the future as a part of the cell phone chassis under licensing agreement with leading cell phone manufacturers. Microshield expects to penetrate 8 % of this market over the next 5 years at a retail price ranging from $30-$40 per shield.
Quintek has added 5% of Microshield's projected profits to its own 5 year projections, as reflected in Table 1 under Outside Investments
Financial Discussion & Investment Opinion
Quintek has recently streamlined its operations, reduced its operating costs, and increased its sales visibility by teaming with Imation. Under the new structure, Quintek is now in position to become profitable by selling two Q4300 systems per month and plans to report its first profitable quarter ending December 31, 2000 from sales of seven systems during this three month period.
Quintek projects it will generate $4,515,960 in revenues and $1,730,365 in gross profits during the 12 month period ending December 31, 2001. By reducing operational expenses to $647,208 per year and factoring in outside investments, interest income, and tax loss carry over, Quintek projects a profit of $1,375,699 for year 2001 (refer to Table 1).
Quintek expects continued growth in years 2-5, as Imation continues to market the Q4300 to its base of over 5,000 existing clients. The Company's pretax income projections totaling $146,604,141 on revenues of $277,744,906 for the next 5 years are based on penetrating 10% of the estimated $2.5B market for this product. Using a PE multiple of 25 on pre tax income, our 12-month price target for QTEK is $1.64 per share. The price target for years 2, 3, 4 and 5 is $5.27, $14.94, $38.53, and $82.86, respectively.
The price of QTEK stock has declined significantly during CY2000 and is currently trading well below its true value. Many factors led to this decline, including; the general decline of the stock market and a lack of profitability in the first three quarters of year 2000. With the company now projecting a profit for the fourth quarter and the potential for significant profitability in the future, we strongly recommend purchase of Quintek common shares for investors seeking an investment with exceptional value and the potential for significant reward.
TABLE 1
QUINTEK TECHNOLOGIES, INC.
PROJECTED INCOME STATEMENT
CY2001E
CY2002E
CY2003E
CY2004E
CY2005E
Revenues
4,515,960
10,763,672
29,395,307
74,598,078
158,471,889
Cost of Goods Sold
2,785,595
5,858,303
14,682,535
32,588,444
65,176,888
Gross Profit
1,730,365
4,905,369
14,712,772
42,009,634
93,295,001
Gross Margin
38.32%
45.57%
50.05%
56.31%
58.87%
OPERATING EXPENSES
Sales & Marketing
128,840
206,144
391,674
861,683
2,154,208
% Revenues
2.85%
1.92%
1.33%
1.16%
1.36%
Research & Development
180,277
396,609
971,692
2,380,645
6,308,709
% Revenues
3.99%
3.68%
3.31%
3.19%
3.98%
G & A
292,860
468,576
937,152
2,249,165
5,622,913
% Revenues
6.48%
4.35%
3.19%
3.02%
3.55%
Depreciation
45,231
74,188
124,188
212,855
369,188
% Revenues
1.00%
0.69%
0.42%
0.29%
0.23%
Total Operating Expenses
647,208
1,145,517
2,424,706
5,704,348
14,455,018
% Revenues
14.33%
10.64%
8.25%
7.65%
9.12%
Income From Operations
1,083,157
3,759,852
12,288,066
36,305,286
78,839,983
Operating Margin
23.99%
34.93%
41.80%
48.67%
49.75%
Outside Investments
321,680
769,922
1,502,930
2,478,516
4,735,547
% Revenues
7.12%
7.15%
5.11%
3.32%
2.99%
Interest Income
12,635
158,044
607,568
1,343,465
2,645,564
% Revenues
0.28%
1.47%
2.07%
1.80%
1.67%
Interest Expense
41,773
51,575
51,575
51,575
51,575
% Revenues
0.93%
0.48%
0.18%
0.07%
0.03%
Pretax Income
1,375,699
4,636,243
14,346,989
40,075,692
86,169,519
Pretax Margin
30.46%
43.07%
48.81%
53.72%
54.38%
Income Tax
2,143,572
16,030,277
34,467,808
% Revenues
7.29%
21.49%
21.75%
Net Income
1,375,699
4,636,243
12,203,417
24,045,415
51,701,711
Net income Per Share
$0.065
$0.21
$0.60
$1.54
$3.31
Shares Outstanding
21,000,000
22,000,000
24,000,000
26,000,000
26,000,000
Price per Share
$1.64
$5.27
$14.94
$38.53
$82.86
Any recommendation contained in this report may not be suitable for all investors. Furthermore, information contained in this report has been obtained from sources believed to be reliable but no guarantee can be made about its completeness or accuracy. Communications Capital Corporation may effect transactions including transactions contrary to any recommendations made herein, or have positions in the securities mentioned herein (or options with respect thereto) and may also have performed investment banking services for the issuers of such securities. Communications Capital Corporation was compensated through the issuance of 25,000 restricted common shares of Quintek for the preparation of this report. |
