SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR TRANSITION PERIOD FROM __________ TO __________
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COMMISSION FILE NUMBER: 0-16753
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INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
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- ------------------------------------------ --------------------------------
DELAWARE 58-1722085
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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130 CEDAR STREET, FOURTH FLOOR, NEW YORK, NY 10006
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(Address of Principal Executive Offices) (Zip Code)
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(212) 306-6100
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(Registrant's Telephone Number, Including Area Code)
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N/A
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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 [ ]
----- -----
At August 10, 1999, the Registrant had outstanding 16,715,692 shares of
Class A Common Stock.
<PAGE>
IMTECH
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INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
INDEX
----------
PAGE
----------
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PART I FINANCIAL INFORMATION
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ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS 1
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF 17
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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PART II OTHER INFORMATION
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ITEM 1 LEGAL PROCEEDINGS 24
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURES 28
<PAGE>
IMTECH
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INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
PART I
FINANCIAL INFORMATION
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ITEM 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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--------
PAGE
--------
Consolidated Balance Sheets as of June 30, 1999 and March 31, 1999 2
Consolidated Statements of Operations for the
Three Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Three Months Ended
June 30, 1999 and 1998 5
Consolidated Notes to Financial Statements 6
1
<PAGE>
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CONSOLIDATED BALANCE SHEETS
Information Management Technologies Corporation and Subsidiaries
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<TABLE>
<CAPTION>
June 30, March 31,
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1999 1999
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(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash - restricted $ 225,511 $ 225,511
Accounts receivable, net of allowance for doubtful
accounts of $221,000 and $225,000 at June 30,
1999 and March 31, 1999, respectively 3,540,643 3,426,055
Inventory 360,929 648,524
Prepaid expenses and other current assets 118,368 124,252
----------- -----------
Total current assets 4,245,451 4,424,342
----------- -----------
Property and equipment - at cost
Production equipment 6,372,489 6,342,871
Computer software applications 782,329 782,329
Furniture and fixtures 488,069 488,069
Leasehold improvements 771,278 771,278
Computer equipment 902,836 902,836
----------- -----------
9,317,001 9,287,383
Less: Accumulated depreciation and amortization 5,121,771 4,796,973
----------- -----------
Net property and equipment 4,195,230 4,490,410
----------- -----------
Other assets:
Cash - restricted 233,019 228,671
Investment in INSCI Corp. 418,840 1,117,332
Goodwill, net of accumulated amortization and
impairment of $5,958,284 and $5,945,781 at
June 30, 1999 and March 31, 716,891 729,394
1999, respectively
Deposits and other 269,329 282,737
----------- -----------
Total other assets 1,638,078 2,358,134
----------- -----------
$10,078,759 $11,272,886
==================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
-2-
<PAGE>
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CONSOLIDATED BALANCE SHEETS
Information Management Technologies Corporation and Subsidiaries
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<TABLE>
<CAPTION>
June 30, March 31,
- ---------------------------------------------------------------------------------------------
1999 1999
- ---------------------------------------------------------------------------------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
<S> <C> <C>
Cash overdraft $ 363,492 $ 413,449
Loan payable - bank 2,125,941 1,845,639
Current maturities of long-term debt 4,232,365 4,260,405
Current maturities of long-term capital lease obligations 315,634 310,184
Accounts payable 2,660,544 2,374,702
Due to related party 54,412 112,249
Accrued salaries 122,929 198,304
Accrued expenses and other current liabilities 1,333,694 962,170
------------ ------------
Total current liabilities 11,209,011 10,477,102
------------ ------------
Long-term debt, less current maturities 2,218,811 2,465,257
Capital lease obligations, less current maturities 240,072 319,637
Deferred rent 323,150 332,630
Convertible obligations 4,000,000 4,990,800
Stockholders' equity (deficiency):
12% convertible preferred stock
Authorized - 3,000,000 shares at $1.00 par value;
463,673 shares issued and outstanding at
June 30, 1999 and March 31, 1999, respectively;
($463,673 of aggregate liquidation value as of
June 30, 1999 and March 31, 1999, respectively) 463,673 463,673
Class "A" common stock and capital in excess of
$.04 par value:
Authorized - 100,000,000 shares;
16,715,692 and 15,497,647 shares issued
and outstanding at June 30, 1999 and
March 31, 1999, respectively 35,256,747 35,094,747
Accumulated comprehensive income 417,689 681,300
Accumulated deficit (44,050,395) (43,552,260)
------------ ------------
Total stockholders' equity (deficiency) (7,912,285) (7,312,540)
------------ ------------
$ 10,078,759 $ 11,272,886
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
-3-
<PAGE>
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CONSOLIDATED STATEMENTS OF OPERATIONS
Information Management Technologies Corporation and Subsidiaries
For the Three Months Ended June 30, 1999 and 1998
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<TABLE>
<CAPTION>
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1999 1998
(Unaudited)
<S> <C> <C>
Revenues $ 4,530,429 $ 2,754,668
Cost of sales 3,742,061 1,696,811
------------ ------------
Gross profit 788,368 1,057,857
------------ ------------
Operating expenses:
Selling, general and administrative 1,765,640 991,527
Amortization of goodwill 12,503 --
------------ ------------
Total operating expenses 1,778,143 991,527
------------ ------------
Income (loss) from operations (989,775) 66,330
Other (income) expenses:
Interest expense, net 259,601 59,848
Gain from the sale of INSCI Corp. stock (1,192,270) --
------------ ------------
Net other (income) expenses (932,669) 59,848
------------ ------------
Net income (loss) (57,104) 6,482
Preferred stock dividends 10,200 61,380
------------ ------------
Net loss applicable to common stockholders $ (67,304) $ (54,898)
============ ============
Loss per share:
Basic $ (0.00) $ (0.01)
Diluted $ (0.00) $ (0.01)
Shares used in computing loss per share:
Basic 15,632,985 5,789,846
Diluted 15,632,985 5,789,846
STATEMENT OF COMPREHENSIVE INCOME:
Comprehensive income (loss):
Net income (loss): $ (57,104) $ 6,482
Other comprehensive income
(INSCI Corp. stock):
Proceeds from sale (1,196,260) --
Gain on sale 369,082 --
Unrealized gain 132,736 --
------------ ------------
$ (751,546) $ 6,482
============ ============
</TABLE>
-4-
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Information Management Technologies Corporation and Subsidiaries
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<TABLE>
<CAPTION>
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FOR THE THREE MONTHS ENDED JUNE 30, 1999 1998
- -----------------------------------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (57,104) $ 6,482
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization 324,798 246,016
Amortization of goodwill 12,503 --
Amortization of consulting fees 36,254 27,639
Property-in-kind interest paid on convertible debt -- 24,000
Gain from the sale of INSCI Corp. stock (1,192,270) --
Provision for doubtful accounts 138,421 19,916
Deferred rent (9,480) (5,582)
Changes in assets and liabilities, net of effects of purchased
businesses:
Accounts receivable (253,011) (213,049)
Inventory 287,595 (101,049)
Prepaid expenses and other current assets (30,370) (85,162)
Deposits and other assets 13,408 (25,926)
Accounts payable 285,842 272,071
Accrued salaries (75,375) (66,331)
Accrued expenses and current liabilities 374,890 79,381
Due from/to related parties (57,837) --
----------- -----------
Net cash (used in) provided by in operating activities (201,735) 178,406
----------- -----------
Cash flows from investing activities:
Capital expenditures (29,618) (156,120)
Proceeds from the sale of INSCI Corp. stock 545,260 --
(Increase) decrease in due from affiliate -- (80)
Net increase in due from affiliate -- 22,500
----------- -----------
Net cash provided by (used in) investing activities 515,642 (133,700)
----------- -----------
Cash flows from financing activities:
Financing from cash overdraft (49,957) 118,780
Net borrowings (repayments) under bank credit facility 280,302 23,882
Repayments of long-term debt (274,486) (84,842)
Payments of capital lease obligations (74,115) (102,526)
Payment on convertible obligations (200,000) --
Interest from restricted certificate of deposit account
used to repay capital lease obligations 4,348 --
----------- -----------
Net cash used in financing activities (313,908) (44,706)
----------- -----------
Net decrease in cash and cash equivalents -- --
Cash and cash equivalents of beginning of year -- --
----------- -----------
Cash, end of period $ -- $ --
====================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
-5-
<PAGE>
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Information Management Technologies Corporation and Subsidiaries
- --------------------------------------------------------------------------------
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FOR THE THREE MONTHS ENDED JUNE 30, 1999 1998
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest $ 125,800 $ 59,848
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SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
During the three months ended June 30, 1999, the Company exchanged
177,997 shares of INSCI Class A common stock and 1,218,045 shares of Imtech
Class A common stock in full satisfaction of $600,000 in principal and
$213,000 in accrued interest of the Company's 12% secured promissory notes.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
5(a)
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<PAGE>
IMTECH
================================================================================
INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
THE COMPANY
- -----------
Information Management Technologies Corporation (referred to as
"IMTECH") was incorporated in 1986 in the State of Delaware. IMTECH provides
graphic communications to financial institutions such as banks and brokerage
firms, as well as to medium and large service organizations within such
industries as accounting, law and finance. The Company's core business is the
production and subsequent distribution of time sensitive printed financial
research, financial reports and marketing materials. In addition, the Company
provides facility management services, which include mail room and copy center
management. The Company's customer base is principally located in New York City
and the surrounding metropolitan area, such as New Jersey, Southeast Connecticut
and Westchester County. IMTECH also services clients in Pennsylvania, the
Midwest, and as a result of a strategic alliance with a London based service
provider, in Europe as well.
On July 24, 1998, IMTECH consummated its acquisition of KRL Litho, Inc.
d/b/a "The Skillcraft Group" ("Skillcraft"). Skillcraft, like IMTECH, provides
graphic communications services including financial research report printing,
commercial printing, graphic arts design and fulfillment services to financial
and commercial organizations located primarily in the New York Metropolitan
area. Skillcraft's production equipment is complementary to that of its parent,
IMTECH. In addition, IMTECH, on November 13, 1998 consummated its acquisition of
RDS, Research Distribution Services, Inc. ("RDS") subject to certain post
closing matters which have not as yet been completed. RDS provides intelligent
fulfillment and distribution services to the research report production
industry. IMTECH and its three wholly owned subsidiaries, Halcon Acquisition
Corp. ("Halcon"), Skillcraft and RDS (collectively known as the "Company")
operate as separate divisions under a new organization known as SkillTech Global
Graphics & Communications, Inc. ("SkillTech"). Halcon is a holding Company and
has no active operations. Hereafter, IMTECH, Skillcraft and RDS collectively may
be referred to as the "Company" or "SkillTech".
The Company's graphic communications services include digital
communications, two and four color digital printing, intelligent inserting, high
volume duplication, graphic design, electronic publishing, document fulfillment,
micrographics, data processing, as well as bindery and distribution services.
The Company's printing and distribution services are generally performed at
IMTECH, the South Printing Facility known as "SkillTech South" and at
Skillcraft, the North Printing Facility known as "SkillTech North", both located
in downtown New York City. The facilities management services include
independent, on-site management of client systems for providing document
duplication, distribution and mailroom management.
The Company holds a 1% ownership interest in INSCI Corp. ("INSCI") at
June 30, 1999.
PRINCIPLES OF CONSOLIDATION. The financial statements include the accounts of
IMTECH and its wholly owned subsidiaries, Skillcraft, RDS and Halcon. All
significant intercompany transactions and balances have been eliminated.
6
<PAGE>
IMTECH
================================================================================
INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
BASIS OF PRESENTATION AND MANAGEMENTS PLANS
- -------------------------------------------
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate the
continuation of the Company as a going concern. However, the Company has
sustained substantial losses in the current quarter and the last two years and
has experienced a deficiency in cash flows from operations in each of its last
three years. The Company had a working capital deficiency of approximately
$6,968,000 as of June 30, 1999. Management has begun to evaluate opportunities
to obtain additional financing to provide sufficient working capital and other
resources to meet current obligations as they become due. In addition,
management has taken certain measures to leverage the strength of the combined
companies. However, there can be no assurances that the Company will be
successful in implementing measures that will be successful.
As a first step to implementing its business plan, IMTECH completed the
acquisitions of KRL Litho, Inc. (also known as "Skillcraft") and RDS, Research
Distribution Services, Inc. ("RDS"). The acquisitions have increased the revenue
base of the organization as a whole and have also expanded the Company's
production capabilities to provide economies of scale and efficiencies that now
allow SkillTech to maximize profits while offering its clients a variety of
solutions to their research report production requirements. However, because of
the deterioration of the acquired Skillcraft business, the Company has
experienced a severe downturn in its business.
In January 1999, management undertook certain measures to begin leveraging the
strength of the combined companies, and at the same time address its declining
business at Skillcraft. Accordingly, management has consolidated and streamlined
the operations of the organization's daytime (first) shifts. Additionally, the
Company was able to obtain certain concessions from its unions to adjust other
production shifts to minimize the amount of overtime costs incurred without
affecting workloads during peak production periods. Management also scaled back
and eliminated certain professional services, which were utilized during the
integration of the personnel of IMTECH, Skillcraft and RDS immediately following
the acquisitions. The Company undertook the termination of employees who served
similar roles in the respective companies to reflect the downturn in work. The
Company also eliminated or scaled back certain other public relation,
professional and technology related agreements. The Company's Chairman and CEO,
Matti Kon, and its President and CFO, Joseph Gitto, reduced their compensation
arrangements by 25%, or $50,000 each per annum. Members of the Company's senior
management agreed to concessions of 10% of their annual compensation. In
addition, the Company suspended interest payments to certain investor groups.
The Company's management believes that it is improbable to maintain all of these
concessions for an extended period. The Company is exploring various financial
alternatives, including a capital infusion, and has retained a financial advisor
to assist the Company in evaluating financial strategies or alternatives.
Management believes that because of the severe downturn in its business,
directly attributable to the Skillcraft decline in business, the Company will
not be able to attain profitability with two operating locations and believes
that the improvement in its gross profits achieved in fiscal 1999 will begin to
deteriorate as the company has to support increasing idle capacity. If the
Company is unable to secure the financing required to consolidate its operations
and curtail its losses and protect its profit margins, the Company may be forced
to find an acquirer for the business or pursue other remedies to protect its
assets.
During the year ended March 31, 1999, MTB Bank, the Company's main
lender, amended its credit arrangement with IMTECH to include the eligible trade
accounts receivable of Skillcraft and increased the borrowing base of the credit
line to $2,500,000, subject to a $750,000 reserve against eligible receivables.
7
<PAGE>
IMTECH
================================================================================
INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------------
The following is a summary of the significant accounting policies that
have been applied on a consistent basis in the preparation of the accompanying
financial statements:
1. REVENUE RECOGNITION
-------------------
Revenue is recorded when services are performed or at the time the products
are delivered to customers.
2. RESTRICTED CASH
---------------
At June 30, 1999 the Company had $458,530 in a Certificate of Deposit
account ("CD") with a bank. The CD is maintained as collateral for the
Company's obligation under a lease for production equipment. According to
the terms of the CD, the funds may be drawn by the Company in accordance
with the following schedule:
----------------------------------------------
Available
Maturity Date for
Release
----------------------------------------------
September 30, 1999 $ 225,511
September 30, 2000 233,019
------------
Total cash - restricted 458,530
Less: Current portion 225,511
------------
Cash - restricted - long-term $ 233,019
===========
----------------------------------------------
3. INVENTORY
---------
Inventory consists primarily of paper, toner and inks, and is stated at the
lower of cost or market(cost being determined on a first in, first out
basis).
4. PROPERTY AND EQUIPMENT
----------------------
Expenditures for capital assets are recorded at cost. Depreciation of
capital assets is provided to relate the cost of the depreciable assets to
operations over their estimated useful service lives. In that connection,
production equipment, computer hardware and software and furniture and
fixtures are depreciated by the straight-line method over estimated useful
lives ranging from five to seven years. Leasehold improvements are
amortized by the straight-line method over the lesser of the lease term or
estimated useful lives of the improvements. Major additions and betterments
are capitalized and repairs and maintenance are charged to operations in
the period incurred. At the time of disposal of any property and equipment,
the cost and accumulated depreciation or amortization are removed from the
accounts and any resulting gain or loss is recognized in the current
period's operations.
8
<PAGE>
IMTECH
================================================================================
INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- ------------------------------------------------------
5. DEFERRED FINANCING COSTS
------------------------
Costs incurred to secure financing arrangements are included in deposits
and other assets on the balance sheet. The costs are amortized over the
life of the related credit facilities, which range from 11 to 110 months.
6. CONCENTRATION OF CREDIT RISK
----------------------------
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and accounts
receivable. The Company maintains cash balances at various banks and places
its temporary cash investments in a money market fund with one financial
institution. Accounts at the banks and financial institution are insured by
the Federal Deposit Insurance Corporation (FDIC) and the Securities
Investor Protection Corporation (SIPC) up to $100,000 and $500,000,
respectively. The Company performs ongoing credit evaluations of its
customers and records reserves for potentially uncollectible accounts
receivable which are deemed credit risks as determined by management. The
Company generally does not require collateral for its accounts receivable.
Accounts receivable consist of geographically and industry dispersed
customers.
7. USE OF ESTIMATES
----------------
The preparation of the financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
8. LONG-LIVED ASSETS
-----------------
The Company reviews for the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of asset may
not be recoverable. An impairment loss would be recognized when estimated
future cash flows expected to result from the use of the asset and its
eventual disposition is less than its carrying amount.
9. GOODWILL
--------
In connection with the acquisition of RDS, IMTECH recorded
goodwill resulting from the excess of the purchase price over the fair
value of net assets acquired. Goodwill is amortized on a straight-line
basis over an estimated life of fifteen (15) years.
10. RECLASSIFICATION
----------------
Certain prior year amounts have been reclassified to conform to the fiscal
2000 presentation.
9
<PAGE>
IMTECH
================================================================================
INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
INVESTMENT IN INSCI CORP.
- -------------------------
The Company at June 30, 1999 held a 1% ownership interest (investment)
in INSCI, its former majority-owned subsidiary. The investment is accounted for
under the "Securities Available For Sale" method as promulgated by SFAS No. 115.
As a result, the investment is carried at fair market value. During the first
quarter of fiscal 2000, the Company sold or exchanged in settlement of debt,
334,495 shares of INSCI stock (details of exchange fully described on page 11
under "12% Mandatory Convertible Secured Promissory Notes").
------------------------------------ ------------- ------------
JUNE 30, MARCH 31,
1999 1999
------------------------------------ ------------- ------------
Number of shares held 96,535 436,032
Cost basis of shares held $ 1,151 $ 5,201
Market value of shares, $418,810 $1,117,332
Unrealized gain $417,659 $1,112,131
------------------------------------ ------------- ----------
At June 30, 1999, all of the shares of INSCI Corp. stock referred to
above were pledged as collateral securing the Company's outstanding obligations
under its credit arrangement with MTB Bank (66,535 shares) and other pledge
obligations (30,000 shares), respectively.
LOAN PAYABLE - BANK
- -------------------
The Company maintains a secured credit arrangement with MTB Bank (the
"Bank") which expires in October 1999. Under the provisions of the credit
arrangement, the Company can borrow up to 80% of the eligible accounts
receivable of IMTECH and Skillcraft and 35% of the eligible paper inventory of
IMTECH (up to a maximum of $50,000), both of which in the aggregate cannot
exceed a total of $2,500,000 (including $250,000 in outstanding letters of
credit) at any one time. The Bank, as part of the increase in the credit
agreement has made available under the borrowing formula 80% of eligible
accounts receivable less a reserve of $750,000. All outstanding obligations
under the arrangement bear interest at the bank's prime rate (8% at June 30,
1999) plus two percent (2%). At June 30, 1999, the Company was indebted to the
Bank for outstanding obligations totaling approximately $2,126,000. In
conjunction with the execution of the credit arrangement, the Company entered
into a security agreement, which grants the Bank a security interest in
substantially all of the assets of IMTECH and Skillcraft as collateral for all
indebtedness outstanding under the arrangement. IMTECH, Skillcraft and RDS have
executed cross-corporate guarantees.
IMTECH has issued an aggregate of 50,000 warrants to the Bank which
entitles it to purchase 50,000 shares of IMTECH Class A common stock at prices
ranging from $1.00 to $1.81 per share, exercisable until November 2000.The
credit arrangement contains a minimum tangible net worth ("net worth") covenant
of $2,000,000 as of March 31, 1999 for a period of six months until September
30, 1999, which has been waived.
10
<PAGE>
IMTECH
================================================================================
INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
12% MANDATORY CONVERTIBLE SECURED PROMISSORY NOTES
- --------------------------------------------------
In connection with a February 1997 private placement, IMTECH issued
convertible secured promissory notes in exchange for proceeds of $1,000,000. The
notes bear interest at a per annum rate of 12%, which at the option of
management, can either be paid in cash or in the Company's Class A common stock.
The notes were secured initially by a pledge of 500,000 shares of INSCI Corp.
stock. The Company had the right, under the pledge agreement, to receive the
return of 100,000 shares of the pledged stock in the event it became required in
order for IMTECH to obtain a credit line or enter into a lease/purchase
agreement for equipment. In November 1997, the Company exercised that right and
received the return of 66,535 shares of INSCI Corp. stock, which were used to
pledge as collateral for the outstanding obligations under the credit
arrangement with MTB Bank. In addition, in November 1997, the Company received
the return of 33,968 shares of INSCI Corp. stock which were sold pursuant to
Rule 144, and the proceeds were used to purchase equipment. In addition, the
Company pledged 30,000 shares to a financial advisor to the Company. At March
31, 1999, 369,497 shares of INSCI Corp. stock remained as collateral which were
pledged against the notes.
In May 1999, the Company was notified by one of the convertible note
holders that pursuant to the default provisions of the note agreement, because
of the Company's continued delisting from the NASDAQSM SmallCap Stock Market,
the Company was in default on its notes. As such, the noteholders accelerated
their right to repayment of principal and interest by forcing the liquidation of
the underlying shares of INSCI stock pledged as collateral. The Company sold
156,498 shares of the INSCI stock and exchanged an additional 177,997 shares of
INSCI stock in full satisfaction of the principal ($600,000) and accrued
interest ($51,000). In addition, the Company issued 1,218,045 shares of IMTECH
Class A common stock to satisfy the remaining accrued interest of $162,000.
12% SUBORDINATED MANDATORY CONVERTIBLE DEBENTURES
- -------------------------------------------------
To finance part of the acquisition funding for the purchase of
Skillcraft, on July 24, 1998, IMTECH issued 12% subordinated convertible
debentures (the "Debentures") in the aggregate amount of $4,000,000. The
Debentures are convertible into shares of IMTECH Class A Common Stock and bear
interest at a rate of 12% per annum in addition to providing debenture holders
10% of consolidated profits for a period of five (5) years commencing from the
date of closing of the acquisition. The Debentures have an automatic mandatory
conversion at the expiration of the 5-year term.
RELATED PARTY TRANSACTIONS
- --------------------------
IMTECH is party to a consulting agreement with Blitz Systems, Inc.
("Blitz"), a company owned 100% by the Chief Executive Officer of the Company,
which expires in October 1999. Blitz is a computer systems consulting firm
specializing in developing total business solutions for business management
systems. Blitz's responsibilities under the contract are to reengineer,
reorganize and run the day-to-day operations of Skilltech's data processing
department and provide custom programming (WOTS etc.) and support for these
programs at a cost of $59,000 per month. More specifically, Blitz provides
extensive technical support for many of the organization's clients on-site and
is responsible for analyzing, designing and developing customized database
systems as required by management.
11
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IMTECH
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INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
COMMITMENTS AND CONTINGENCIES
- -----------------------------
EMPLOYEE BENEFIT PLANS
- ----------------------
The Company sponsors a 401(k) plan covering all eligible employees
(personnel with twelve consecutive months of service). Employer contributions to
the plan are based on the discretion of management. Employees can elect to
contribute up to a maximum of 15% of their salaries to the plan. Since its
inception, IMTECH has not made any contributions to the plan, matching or
otherwise.
EMPLOYMENT AGREEMENTS
- ---------------------
In December 1996, the Board of Directors appointed Matti Kon as the
Company's Chief Executive Officer. Consequently, the Company entered into an
employment agreement subsequently amended which provides for a base annual
salary of $250,000 plus an incentive bonus equal to 20% of operating income, up
to a maximum of $500,000. The agreement had an initial one-year term and awarded
Mr. Kon 500,000 options to purchase 500,000 shares of the Company's Class A
Common Stock at an exercise price of $1.18 per share as a signing bonus. The
options vested after one year of service and expire in December 1999. The
agreement further provides that Mr. Kon has the right to devote his time and
attention to his other business interests. In January 1998, the Board of
Directors elected to renew Mr. Kon's contract and extend his options for an
additional two-year period through December 1999. Consequently, Mr. Kon was
awarded an additional 500,000 options to purchase 500,000 shares of the
Company's Class A Common stock at $1.18 per share. The additional 500,000
options vested after the completion of Mr. Kon's second year of service and are
exercisable until December 31, 1999.
The Company has entered into an employment agreement with Mr. Joseph
Gitto, its President and Chief Financial Officer. The agreement, as amended in
July 1997, expires in December 1999 and provides for an annual base salary of
$180,000. In addition, Mr. Gitto is entitled to an incentive bonus equal to 15%
of operating income, up to a maximum of $150,000. At the time of the original
agreement, Mr. Gitto was awarded 600,000 options to purchase 600,000 shares of
the Company's Class A Common stock at exercise prices ranging from $1.25 to
$1.88 per share. The options vest over a three-year period and expire in April
2000. As noted previously, Messrs. Kon and Gitto have agreed to reductions in
their compensation of $50,000 respectively effective March 1999.
OTHER
- -----
In November 1995, IMTECH entered into a three year service agreement
with Corporate Relations Group, Inc. ("CRG"), whereby CRG was to provide IMTECH
with promotional and brokerage communication services. As consideration for its
services, IMTECH was to pay CRG the sum of $300,000 or 171,000 shares of its
free trading Class A Common Stock plus 500,000 options to purchase 500,000
shares of its Class A Common Stock at exercise prices ranging from $1.75 to
$3.06 per share for a period of five years. IMTECH elected to pay CRG by issuing
171,000 shares of Class A Common Stock. Initially, IMTECH delivered to CRG
92,250 shares of the freely traded Class A Common Stock, which it borrowed from
a number of shareholders. IMTECH repaid the shareholders by making cash interest
payments at a rate of 10% per annum, in addition to making cash payments for the
borrowed shares. The balance of the 78,750 shares was not remitted to CRG. CRG
has asserted a claim for the balance of the shares. IMTECH has disputed the
claim based upon the position that CRG did not perform under the provisions of
the service contract.
12
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IMTECH
================================================================================
INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
COMMITMENTS AND CONTINGENCIES (CONTINUED)
- -----------------------------------------
OTHER (CONTINUED)
- -----------------
While the Company has not commenced legal action to recover the shares
of stock and/or monetary and/or punitive damages from CRG, the Company is
considering the cost of commencing an action as related to the chances of a
monetary recovery from CRG.
The Company agreed under various agreements with convertible security
holders to file a registration statement on Form S-3 for their underlying shares
of Class A Common Stock. Since the Company withdrew its registration statement
(and amendments thereto), it is possible the holders of these securities may
assert a claim against the Company based on the Company's failure to comply with
the registration requirements.
The Company is currently negotiating with its landlord to reduce its
rent covering the South Printing Facility. The landlord has claimed certain
defaults by the Company in its lease. In addition, the landlord has requested
that the Company post a letter of credit in the amount of $100,000 with a
financial institution for additional rent security. There are no assurances that
the Company will be successful in its attempts to re-negotiate its lease and
reduce its monthly rent obligation, or resolve the claim of additional rent by
the landlord.
The Company was advised by the NASDAQ Stock Market, Inc. ("NASDAQSM")
that it no longer meets the current NASDAQSM listing requirements for continued
listing on the NASDAQSM SmallCap Stock Market. Continued inclusion on the
NASDAQSM SmallCap Stock Market generally requires that (i) the Company maintains
at least $2,000,000 in tangible net assets; or (ii) $35,000,000 in market
capitalization; or (iii) net income of at least $500,000 in two of the three
prior years. Additionally, the Company is required to maintain at least 500,000
shares in the public float valued at $1,000,000 or more, a minimum common stock
bid price of $1.00, at least two active market makers, and at least 300
shareholders of its stock. On the close of business, January 14, 1999, the
Company received notification from NASDAQSM that it was not in compliance with
the tangible net assets and dollar price listing rules and therefore decided to
relocate the Company's securities from its SmallCap stock market to the
over-the-counter market on the NASD's "Electronic Bulletin Board". As a result,
the liquidity of the Company's securities could be impaired, not only in the
number of securities which could be bought and sold, but also through delays in
the timing of transactions, reduction in security analysis and the news media's
coverage of the Company and lower prices for the Company's securities than might
otherwise be attained.
Harold Russell ("Russell") has filed an action in the New York State
Supreme Court against the Company, claiming the aggregate sum of $3,750,000, in
addition to interest and attorney's fees, alleging that the Company has made no
payments pursuant to the installment promissory note issued to Russell as a
result of the purchase of Skillcraft by IMTECH. The Company is contesting the
action filed by Russell as the promissory note issued by the Company to Russell
is being held in escrow and subject to escrow agreement. Additionally, the
Company has denied that he is entitled to the sum claimed by him based upon the
claim of fraud and misrepresentation with respect to the purchase of his stock
ownership in Skillcraft. Additionally, Russell has served a notice of
intent to arbitrate, before the American Arbitration Association, asserting a
claim that the Company and Halcon Acquisition Corp. ("Halcon"), a wholly owned
subsidiary of the Company, violated his employment agreement by terminating his
employment. The Company's subsidiary, Halcon, terminated his employment
agreement based upon allegations of fraud in the inducement by Russell in
entering into the employment agreement which was related to the acquisition of
the Skillcraft shares of stock from Mr. Russell.
13
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IMTECH
================================================================================
INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
COMMITMENTS AND CONTINGENCIES (CONTINUED)
- -----------------------------------------
OTHER (CONTINUED)
- -----------------
The Company filed an action in the New York State Supreme Court (New
York County) against Russell. The action is for damages sustained by the Company
as a result of alleged fraud and intentional misrepresentation with respect to
the purchase of stock from Mr. Russell on July 24, 1998, wherein the Company
purchased all of the issued and outstanding common stock of Skillcraft. The
Company has claimed compensatory and punitive damages in the sum of $12,500,000
and $10,000,000, respectively. An additional claim for recission and damages has
also been asserted against Russell. Russell is contesting the Company claims and
denies the allegations asserted by the Company. Russell has made a motion to
dismiss the Company's complaint and the Company is awaiting the Court's
Decision.
Harold Russell's Motion for Summary of Judgement in the New York State
Supreme Court action against the Company for the sum of $3,750,000 has been
denied by the Court and the action dismissed. However, the Court granted Mr.
Russell Judgment in the sum of $234,000 on a separate Promissory Note issued by
the Company for monies advanced by Russell. The Company is considering an appeal
of the Judgement.
Additionally, the State Court lifted the stay of arbitration, which
enables Mr. Russell to proceed with his arbitration claim filed with the
American Arbitration Association, wherein he claims that Halcon Acquisition
Corp. and the Company are responsible for breach of his Employment Agreement
based, upon alleged wrongful termination. The Company and Halcon are contesting
Mr. Russell's claims with respect to the termination of his employment and the
Company anticipates that it will proceed to the arbitration hearing with Mr.
Russell.
The New York State Supreme Court granted Mr. Russell's motion to
Dismiss the Company's Complaint based upon claims of fraud and misrepresentation
against Mr. Russell with respect to the July 24, 1998 Stock Purchase Agreement.
The Company had claimed compensatory and punitive damages, as well as a claim
for rescission. The Company is appealing the Court's decision with respect to
the dismissal of the action.
In May of 1999, a Company known as Amplicon, Inc. ("Amplicon")
commenced an action against the Company in the United States District Court for
the Southern District of New York alleging violation of an equipment lease by
and between Amplicon and the Company. The Company leased a Heidelberg Four Color
Quick Master Printing Press and related equipment by executing a lease/purchase
agreement with Amplicon. The Amplicon claim is that the Company is obligated to
pay the sum of $345,405, the balance of the payments due under the lease and, in
addition, is required to agree with Amplicon on the termination of the lease as
to the purchase price for the equipment. The Company secured all payments under
the lease by posting a standby letter of credit in favor of Amplicon
guaranteeing that all payments under the lease were to be made.
Additionally, Amplicon commenced an action to obtain an order of
seizure of the equipment claiming that Amplicon is entitled to possession of the
leased equipment, and that in the event of default in payments, Amplicon can
proceed to recover possession of the equipment. The Company is contesting the
matter as the Company has asserted its answer to the complaint in that the lease
is subject to an arbitration provision and, that representatives of Amplicon
misrepresented to the Company and committed acts of fraud by their
misrepresentation in having the Company execute a lease agreement which was
inconsistent with the written lease proposal provided by Amplicon to the Company
prior to the execution of the lease purchase agreement. The action is currently
pending before the Court.
The Company completed a private placement offering under Regulation D
on July 24, 1998 for the sum of $4,000,000. The offering involved the issuance
of a 12% convertible debenture which provided for the right of the holder of the
debenture, in addition to receiving interest payments, to receive 10% of the
profits of the Skillcraft division of the Company. The term of the convertible
14
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IMTECH
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INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
COMMITMENTS AND CONTINGENCIES (CONTINUED)
- -----------------------------------------
OTHER (CONTINUED)
- -----------------
debenture is for a period of five years with the right of the holder to convert
the debenture into shares of Class A common stock of the Company, at any time
during the term of the debenture. The right of conversion granted to the holder
the right to convert the note into either 40% of the issued and outstanding
Class A common stock for the conversion within the first year or up to 70% of
the issued and outstanding Class A common stock thereafter. In April 1999, the
holders of the promissory note declared the Company in default of nonpayment of
monetary interest during the first year of the note, and it is the Company's
position that based upon the terms and conditions of the promissory note, the
principal ($4,000,000) of the note as per the terms of the note is payable in
shares of Class A common stock of the Company. As of the current date, the
holders of the notes have not taken any action with respect to their notice of
default.
The Company issued a promissory note to Harry Markovits, a former
director of the Company. The balance due on the promissory note is approximately
$133,000. Mr. Markovits passed away in April of 1998 and the note was
transferred to his estate. The estate has asserted a claim for the sum of
$133,000 plus interest due and that the Company has defaulted in payment of the
note. Additionally, the agreement with Mr. Markovits required that the Company
deliver to him 50,000 shares of the common stock of INSCI Corp., which is held
in escrow. Mr. Markovits was further granted a subordinate UCC lien on the
assets of the Company to secure the repayment of the promissory note. The lien
granted to Mr. Markovits is a lien subordinated to the Company's principal
lender, MTB Bank.
In August 1999, the Landlord, at 480 Canal Street Premises (Trinity
Church), commenced an action in the New York Civil Court to reclaim possession
of the Canal Street Premises from KRL Litho, Inc. d/b/a Skillcraft, based upon
non-payment of rent for the Premises. The Landlord and Tenant proceeding was
settled with Trinity Church by entering into a Stipulation of Settlement,
providing for a Judgment against Skillcraft for the sum of $113,725, in
addition to the Judgment granting possession of the Premises to Trinity Church.
Both the monetary Judgment and the Judgment of Possession of the Premises, as
per the terms of the Stipulation, have been stayed pending payments being made
to Trinity Church, pursuant to the terms of the Stipulation of Settlement. In
the event of a default in payment which is uncured, Trinity Church may proceed
with the money Judgment, crediting all payments made, and obtain possession of
the Canal Street Premises.
The Company has entered into a Settlement Agreement with Press Room
Union Welfare Trust Fund, representing workers at the Canal Street Premises,
wherein the Company agreed that it would make weekly payments against the
$130,553 due to the Union. As part of the Settlement Agreement, the Company
provided a Confession of Judgment for the sum due, less any amount paid by the
Company.
15
<PAGE>
The Company is dependent upon its financing arrangements with MTB Bank,
its secured lender, in addition to GE Capital Corp., its secured equipment
lender. In the event that either MTB Bank or GE Capital Corp. discontinues the
credit accommodation with the Company, the Company may be unable to obtain other
credit or lending facilities and may be compelled to discontinue the operation
of its business. In the further event that the primary vendors that are
supplying goods and services to the Company do not continue to do so by
continuing the afford credit to the Company, the Company me be unable to find
new sources of supply to enable the Company to continue its business.
SUBSEQUENT EVENTS
- -----------------
Robert Sachs, a principal shareholder of the Company, requested to be
appointed to the Board of Directors of the Company. The Board resolved to
appoint Mr. Sachs to the Board, and shortly after he agreed to serve on the
Board, Mr. Sachs resigned from the Board.
[THIS SPACE INTENTIONALLY LEFT BLANK]
16
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IMTECH
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INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
COMPARISON OF RESULTS OF OPERATIONS
- -----------------------------------
The following schedule sets forth the percentage relationship of
significant items of the Company's results of operations to revenues:
---------------------
FOR THE THREE MONTHS
ENDED JUNE 30,
---------------------
1999 1998
---------------------
-------------------------------------------------------------
Revenues 100% 100%
Cost of sales 83 62
---------------------------------------------- ------ -------
Gross profit 17 38
Selling, general and administrative 38 36
---------------------------------------------- ------ -------
Income (loss) from operations (21) 2
Other expenses:
Interest expense, net 5 2
Gain from Sale of INSCI Corp. Stock (26) --
---------------------------------------------- ------ -------
Net loss (1) --
Preferred stock dividends -- 2
---------------------------------------------- ------ -------
Net loss applicable to common stockholders (1)% (2)%
============================================== ====== ========
17
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IMTECH
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INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED 6/30/99 AS COMPARED TO THE THREE MONTHS ENDED 6/30/98
- ------------------------------------------------------------------------
During the quarter ended June 30, 1999 (First Quarter Fiscal 2000), the
Company generated consolidated revenues of approximately $4,530,000 compared to
revenues of approximately $2,755,000 in the prior year period. The increase in
revenues, $1,775,000 or 64% is attributable to the Company's acquisition of its
wholly owned subsidiaries, Skillcraft and RDS, in the second quarter of fiscal
1999. IMTECH reported $1,920,000 or 42% of consolidated revenues, a decrease of
$835,000 or 30% from revenues of $2,755,000 in the prior year period. Skillcraft
reported revenues of $2,486,000 or 55% of consolidated revenues and RDS reported
revenues of $124,000 or 3% of consolidated revenues. The decrease in revenues at
the IMTECH facility is mostly attributable to workflow management decisions to
produce larger print jobs at the Skillcraft facility.
The Company's consolidated cost of sales were $3,742,00 or 83% of
revenues for the quarter ended June 30, 1999; an increase of $2,045,000 or 120%
from cost of sales of $1,697,000 or 62% in the quarter ended June 30, 1998. The
increase of the consolidated cost of sales is attributed to the Company's
acquisition of its wholly owned subsidiaries, Skillcraft and RDS, during the
second quarter of fiscal 1999. The cost of sales of the acquired companies
contributed $2,433,000 or 65% of the total cost. The net increase in
consolidated cost of sales was offset by a decrease in cost of sales at IMTECH
of $388,000 or 23% to cost of sales of $1,309,000 or 68% of sales for the
quarter ended June 30, 1999 compared to cost of sales of $1,697,000 or 62% for
the quarter ended June 30, 1998.
In the quarter ended June 30, 1999, the Company reported consolidated
gross profit of $788,000 or 17% compared to gross profit of $1,058,000 or 38% in
the quarter ended June 30, 1998. For the quarter ended June 30, 1999, IMTECH
reported gross profit of $611,000 or 32% of IMTECH sales, a decrease of $447,000
or 42% as compared to gross profit of $1,058,000 or 38% of IMTECH sales, in the
quarter ended June 30, 1998. Skillcraft reported gross profits of $177,000 or 7%
of Skillcraft revenues for the quarter ended June 30, 1999. The diminishing
margins at Skillcraft are due to the deterioration of business acquired in the
Skillcraft acquisition which was due to the loss of large commercial accounts
and certain profitable financial clients. (See details in legal proceedings and
liquidity analysis). Gross profits at RDS were $34,000 or 27% of RDS revenues.
Consolidating operating expenses were $1,778,000 or 38% of consolidated
revenues for the quarter ended June 30, 1999, an increase of $787,000 or 79%
from operating expenses of $992,000 or 36% in the quarter ended June 30, 1998.
Selling, General and Administrative expenses ("SG&A") for the quarter
ended June 30, 1999 were $1,766,000 or 38% of consolidated revenues. SG&A
expenses at the Company's acquired wholly owned subsidiaries contributed to
$1,087,000 or 62% of consolidated SG&A expense. SG&A expenses at IMTECH were
$678,000 or 38% of IMTECH sales for the quarter ended June 30, 1999, a decrease
of $314,000 or 32% from SG&A expenses of $992,000 or 36% of IMTECH sales in the
quarter ended June 30, 1998.
During the quarter ended June 30,1999, the Company recorded
amortization of goodwill of approximately $13,000 related to the acquisition of
RDS during fiscal 1999.
18
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IMTECH
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INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED 6/30/99 AS COMPARED TO THE THREE MONTHS ENDED 6/30/98
- ------------------------------------------------------------------------
(CONTINUED)
- -----------
Consolidated interest expense for the quarter ended June 30, 1999 was
approximately $260,000 or 6% of consolidated revenues, an increase of $200,000
from interest expense of $60,000 or 2% in the quarter ended June 30, 1998. The
increase in interest expense is attributable to interest costs incurred as a
result of increased borrowing under a credit arrangement with MTB Bank, as well
as interest accrued on the Company's 12% subordinated convertible debentures
issued in connection with the July 1998 acquisition of Skillcraft.
During the quarter ended June 30, 1999, the Company sold or exchanged
shares of INSCI stock to redeem the principal and interest on the Company's 12%
convertible notes issued in February 1997. The Company recorded a gain of
approximately $1,192,000 or 26% from the transaction. (See Convertible
Securities footnote on page 11 for details).
During the quarter ended June 30, 1999, the Company recorded a dividend
of $10,200 on its 12% preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The schedule below sets forth the Company's cash flow activities for the three
months ended June 30, 1999 and 1998:
--------------------------
FOR THE THREE MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
--------------------------
----------------------------------------
Operating activities $(202,000) $ 178,000
Investing activities 516,000 (134,000)
Financing activities (314,000) (44,000)
---------------------------------------- -----------------------
Decrease in cash and cash equivalents $ -- $ --
======================================== =======================
19
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IMTECH
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INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------------------
OPERATION ACTIVITIES
- --------------------
During the three months ended June 30, 1999, the Company used cash of
$202,000 in operations. This use of cash is attributable to losses incurred at
the Company's wholly owned subsidiary Skillcraft. These uses of cash from
operating losses were partially offset by an increase of payables and a decrease
in inventory levels.
INVESTING ACTIVITIES
- --------------------
During the three months ended June 30, 1999, the Company realized net
cash from investing activities of $516,000. These proceeds were primarily
attributable to the sale of INSCI stock, which was used to satisfy the
Company's obligation to its 12% convertible note holders which had declared the
Company in default of the note agreements in May 1999.
FINANCING ACTIVITIES
- --------------------
During the three months ended June 30, 1999, the Company had a use of
cash of $314,000 from financing activities. This use of cash is attributable to
the repayment of approximately $599,000 in debt offset by increased bank
borrowing of $280,000.
CAPITAL RESOURCES
- -----------------
As of June 30, 1999 the Company had a working capital deficiency of
approximately $6,968,000.
In November 1997, IMTECH entered into a secured credit arrangement with
MTB Bank (the "Bank"). Under the credit arrangement, IMTECH is allowed to borrow
up to 80% of eligible accounts receivable and 35% of eligible paper inventory
(up to a maximum of $50,000), both of which in the aggregate cannot exceed a
total of $1,500,000 (including $250,000 in outstanding letters of credit) at any
one time. The agreement was subsequently amended in August 1998 to include the
acquisition of Skillcraft. The amended agreement increased the company's
borrowing capacity to $2,500,000. MTB, as part of the increase in the credit
agreement has made available under the borrowing formula, 80% of eligible
accounts receivable less a reserve of $750,000.
IMTECH's management is constantly focused on investing its capital and
labor in its production infrastructure by introducing cutting edge technology in
conjunction with investments in state-of-the-art production equipment. These
efforts are designed to streamline the IMTECH operations and enable it to
service its clients economically and more efficiently, as well as
to broaden
the scope of services it offers. In addition, IMTECH has embarked on an
extensive marketing campaign to create an awareness in the financial research
community. However, the changing environment of the financial research printing
industry requires that IMTECH take certain measures to ensure its ability to
stay competitive and continue to build a business platform for future growth.
Over the past year, IMTECH has been witness to the merger of many of its
clients. These mergers have created a perception in the financial research
printing industry that a larger printer is needed to meet the resulting printing
demand. The creation of these larger combined entities, along with the
20
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IMTECH
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INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------------------
emergence of the presence of European banks in the U.S. brokerage industry, has
created a need to establish a global presence to remain competitive.
In response to these evolving market conditions, on July 24, 1998,
IMTECH acquired all of the issued and outstanding common stock of KRL Litho,
Inc., d/b/a The Skillcraft Group ("Skillcraft") for a price of approximately
$8,772,000, which consisted of a purchase price of $9,000,000 less working
capital adjustments of $228,000.
Skillcraft provides graphic communications services including financial
research report printing, commercial printing, graphics arts design and various
fulfillment services to financial and commercial organizations located primarily
in the New York Metropolitan area. In addition, on November 13, 1998, IMTECH
acquired all of the issued and outstanding common stock of RDS Research
Distribution Services, Inc. ("RDS") for a purchase price of $1,060,000. RDS is a
New York based provider of intelligent fulfillment and distribution services to
the research report production industry. The acquisitions of both Skillcraft and
RDS provide a business platform capable of protecting IMTECH against declines of
market share in the printing industry, and establishes a basis for continued
future growth. IMTECH and its two wholly owned subsidiaries, Skillcraft and RDS
(collectively known as the "Company"), operate as separate divisions doing
business as Skilltech Global Graphics and Communications, "SkillTech". By
creating a new organization that can provide complete financial research and
commercial printing services, the Company believed it would be more competitive
in its existing markets and would expand its production capabilities to create
new products and market opportunities. In addition, Skillcraft's affiliation
with a London based printer would assist the Company in establishing a global
presence.
IMTECH paid approximately $4,772,000 at the Skillcraft closing and
issued promissory notes to its sellers in the aggregate amount of $4,000,000
payable in forty (40) equal monthly installments of $100,000, commencing in
November 1998. The funds for the $4,772,000 down payment were raised through a
private placement completed by IMTECH whereby it issued 12% subordinated
convertible debentures for the aggregate amount of $4,000,000, and executing a
secured promissory note for proceeds of $1,300,000 borrowed from General
Electric Capital Corporation ("GE"). For the net assets of RDS, IMTECH paid
$36,000 of the required $60,000 at closing and issued a promissory note to the
seller of RDS in the amount of $1,000,000, payable in forty (40) equal monthly
installments of $25,000 scheduled to commence in December 1998. The Company as
of June 30,1999 has not remitted the remaining $24,000 due at closing and has
not made any payments toward its note obligation on the RDS purchase. Excess
funds raised over the minimum down payments required at the closing of the
acquisitions were used for the immediate working capital requirements of the
combined organization.
The Company is continuing to identify and pursue additional potential
acquisition candidates to respond to the changing environment of the financial
research printing industry. Industry mergers have created a perception in the
financial research printing industry that larger printers are needed to meet the
resulting printing demands. The creation of the combined larger entities coupled
with the price-cutting by competitors to garner more market share has
contributed toward IMTECH's past operating difficulties.
21
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IMTECH
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INFORMATION MANAGEMENT TECHNOLOGIES CORPORATIOn AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------------------
In January 1999, management undertook certain measures to address
losses incurred from the deterioration of business at the Skillcraft facility as
a result of the alleged fraud and misrepresentation by Russell in the conveyance
of Skillcraft. Despite these operating difficulties the Company tried to begin
leveraging the strengths of the combined companies. Accordingly, management has
consolidated and streamlined the operations of the organization's daytime
(first) shifts. Additionally, the Company was able to obtain certain concessions
from its unions to adjust other production shifts to minimize the amount of
overtime costs incurred without affecting workloads during peak production
periods.
Management has also scaled back and eliminated certain professional
consulting services, which were utilized during the integration of the personnel
of IMTECH, Skillcraft and RDS immediately following the acquisitions.
In addition, the Company undertook the termination of employees who
served similar roles in the respective companies to reflect the severe decline
in sales. The Company also eliminated or scaled back certain other public
relation, professional and technology related agreements. The Company's Chairman
and CEO, Matti Kon, and its President and CFO, Joseph Gitto, reduced their
compensation arrangements by $50,000 each per annum. Members of the Company's
senior management agreed to concessions of 10% of their annual compensation. The
Company has suspended interest payments to certain investor groups. The
Company's management believes that it is improbable to maintain all of these
concessions for an extended period. The Company is exploring various financial
alternatives, including a capital infusion and has retained a financial advisor
to assist the Company in evaluating financial strategies or alternatives.
Management believes that due to the severe downturn in its business, directly
attributable to the allegations against Mr. Russell, the Company will not be
able to attain profitability with two operating locations and believes that the
improvement in its gross profits achieved in fiscal 1999 will begin to
deteriorate as the Company has to support increasing idle capacity. If the
Company is unable to secure the financing required to consolidate its operations
and curtail its losses and protect its profit margins, the Company may be forced
to find an acquirer for the business or pursue other remedies.
NEW ACCOUNTING STANDARDS
- ------------------------
During the fiscal year ended March 31, 1999, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes new standards for reporting and
displaying comprehensive income and its components in a financial statement that
is displayed with the same prominence as other financial statements.
INFLATION
- ---------
The Company has not experienced significant increases in the prices of
materials or in the payment of operating expenses as a result of inflation.
Although inflation has not been a significant factor to date, there can be no
assurances that it will not be in the future.
22
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IMTECH
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INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
YEAR 2000 COMPUTER SOFTWARE CONVERSION
- --------------------------------------
The Company relies on numerous computer programs in its day- to- day
business. Older computer programs use only two digits to identify a year in its
date field. As a result, when the Company has to identify the year 2000, the
computer will think it means the year 1900 and the operation attempting to be
performed may fail or crash resulting in the potential interference in the
operations of the Company's business. The Company has implemented procedures to
safeguard against the Year 2000 conversion problem. The cost of the
implementation of the Year 2000 safeguards was not material to the Company as a
whole. In addition, the Company has had communications with all of its major
customers and suppliers to determine the extent to which the Company's interface
systems are vulnerable to any failure by third parties to upgrade their own
software. The Company believes that its large customers and suppliers are
addressing the issues and will timely adjust their systems. However, if such
modifications are not made by its vendors or customers, or are not completed in
a timely manner, the Company's operations could adversely be affected.
FORWARD LOOKING INFORMATION
- ---------------------------
This Form 10-Q report contains "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on management's expectations, estimates,
projections and assumptions. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "estimates," and variations of such words and similar
expressions are intended to identify such forward looking statements which
include, but are not limited to, projections of revenues, earnings and cash
flows. These forward looking statements are subject to risks and uncertainties
which could cause the Company's actual results or performance to differ
materially from those expressed or implied in such statements. These risks and
uncertainties include, but are not limited to, the following: the Company's
successful execution of internal performance plans; performance issues with key
suppliers; subcontractors and business partners; legal proceedings; product
demand and market acceptance risks; the effect of economic conditions; the
impact of competitive products and pricing; product development;
commercialization and technological difficulties; and capacity and supply
constraints or difficulties.
23
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IMTECH
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INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
PART II
OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
In November 1995, IMTECH entered into a three year service agreement
with Corporate Relations Group, Inc. ("CRG"), whereby CRG was to provide IMTECH
with promotional and brokerage communication services. As consideration for its
services, IMTECH was to pay CRG the sum of $300,000 or 171,000 shares of its
free trading Class A Common Stock plus 500,000 options to purchase 500,000
shares of its Class A Common Stock at exercise prices ranging from $1.75 to
$3.06 per share for a period of five years. IMTECH elected to pay CRG by issuing
171,000 shares of Class A Common Stock. Initially, IMTECH delivered to CRG
92,250 shares of the freely traded Class A Common Stock, which it borrowed from
a number of shareholders. IMTECH repaid the shareholders by making cash interest
payments at a rate of 10% per annum, in addition to making cash payments for the
borrowed shares. The balance of the 78,750 shares was not remitted to CRG. CRG
has asserted a claim for the balance of the shares. IMTECH has disputed the
claim based upon the position that CRG did not perform under the provisions of
the service contract.
While the Company has not commenced legal action to recover the shares
of stock and/or monetary and/or punitive damages from CRG, the Company is
considering the cost of commencing an action as related to the chances of a
monetary recovery from CRG as it understands that CRG has been the subject of a
regulatory inquiry concerning the conduct of its business.
The Company agreed under various agreements with convertible security
holders to file a registration statement on Form S-3 for their underlying shares
of Class A Common Stock. Since the Company withdrew its registration statement
(and amendments thereto), it is possible the holders of these securities may
assert a claim against the Company based on the Company's failure to comply with
the registration requirements.
Harold Russell ("Russell") has filed an action in the New York State
Supreme Court against the Company, claiming the aggregate sum of $3,750,000, in
addition to interest and attorney's fees, alleging that the Company has made no
payments pursuant to the installment promissory note issued to Russell as a
result of the purchase of Skillcraft by IMTECH. The Company is contesting the
action filed by Russell as the promissory note issued by the Company to Russell
is being held in escrow and subject to escrow agreement. Additionally, the
Company has denied that he is entitled to the sum claimed by him based upon the
claim of fraud and misrepresentation with respect to the purchase of his stock
ownership in Skillcraft. Russell has served a notice of intent to arbitrate
before the American Arbitration Association, asserting a claim that the Company
and Halcon Acquisition Corp., a wholly owned subsidiary of the Company, violated
his employment agreement by terminating his employment. The Company's
subsidiary, Halcon, terminated his employment agreement based upon allegations
of fraud in the inducement by Russell in entering into the employment agreement
which was related to the acquisition of the Skillcraft shares of stock from Mr.
Russell.
The Company filed an action in the New York State Supreme Court (New
York County) against Russell. The action is for damages sustained by the Company
as a result of alleged fraud and intentional misrepresentation with respect to
the purchase of stock from Mr. Russell on July 24, 1998, wherein the Company
purchased all of the issued and outstanding common stock of Skillcraft. The
Company has claimed compensatory and punitive damages in the sum of $12,500,000
and $10,000,000, respectively. An additional
24
<PAGE>
IMTECH
================================================================================
INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
- --------------------------------------------------------------------------------
claim for rescission and damages has also been asserted against Russell. Russell
is contesting the Company claims and denies the allegations asserted by the
Company.
Harold Russell's Motion for Summary of Judgement in the New York State
Supreme Court action against the Company for the sum of $3,750,000 has been
denied by the Court and the action dismissed. However, the Court granted Mr.
Russell Judgment in the sum of $234,000 on a separate Promissory Note issued by
the Company for monies advanced by Russell. The Company is considering an appeal
of the Judgement.
Additionally, the State Court lifted the stay of arbitration, which
enables Mr. Russell to proceed with his arbitration claim filed with the
American Arbitration Association, wherein he claims that Halcon Acquisition
Corp. and the Company are responsible for breach of his Employment Agreement
based upon alleged wrongful termination. The Company and Halcon are contesting
Mr. Russell's claims with respect to the termination of his employment and the
Company anticipates that it will proceed to the arbitration hearing with Mr.
Russell.
The New York State Supreme Court granted Mr. Russell's motion to
Dismiss the Company's Complaint based upon claims of fraud and misrepresentation
against Mr. Russell with respect to the July 24, 1998 Stock Purchase Agreement.
The Company had claimed compensatory and punitive damages, as well as a claim
for rescission. The Company is appealing the Court's decision with respect to
the dismissal of the action.
On May of 1999, a Company known as Amplicon, Inc. ("Amplicon")
commenced an action against the Company in the United States District Court for
the Southern District of New York alleging violation of an equipment lease by
and between Amplicon and the Company. The Company leased a Heidelberg Four Color
Quick Master Printing Press and related equipment by executing a lease/purchase
agreement with Amplicon. The Amplicon claim is that the Company is obligated to
pay the sum of $345,405, the balance of the payments due under the lease and, in
addition, is required to agree with Amplicon on the termination of the lease as
to the purchase price for the equipment. The Company secured all payments under
the lease by posting a standby letter of credit in favor of Amplicon
guaranteeing that all payments under the lease were to be made.
Additionally, Amplicon commenced an action to obtain an order of
seizure of the equipment claiming that Amplicon is entitled to possession of the
leased equipment, and that in the event of default in payments, Amplicon can
proceed to recover possession of the equipment. The Company is contesting the
matter as the Company has asserted its answer to the complaint in that the lease
is subject to an arbitration provision and, in addition, that representatives of
Amplicon misrepresented to the Company and committed acts of fraud by their
misrepresentation in having the Company execute a lease agreement which was
inconsistent with the written lease proposal provided by Amplicon to the Company
prior to the execution of the lease purchase agreement. The action is currently
pending before the Court.
The Company completed a private placement offering under Regulation D
on July 24, 1998 for the sum of $4,000,000. The offering involved the issuance
of an 12% convertible debenture, which provided for the right of the holder of
the debenture, in addition to receiving interest payments, to also receive 10%
of the profits of the Company. The term of the convertible debenture is for a
period of five years with the right of the holder to convert the debenture into
shares of Class A common stock of the Company, at any time during the term of
the debenture. The right of conversion granted to the holder the right to
convert the note into either 40% of the issued and outstanding Class A common
stock for the conversion within the first year or up to 70% of the issued and
outstanding Class A common stock thereafter. In April, 1999, the holders of the
25
<PAGE>
IMTECH
================================================================================
INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
- --------------------------------------------------------------------------------
promissory note declared the Company in default of nonpayment of monetary
interest during the first year of the note, and it is the Company's position
that based upon the terms and conditions of the promissory note, the principal
($4,000,000) of the note as per the terms of the note is payable in shares of
Class A common stock of the Company. As of the current date, the holders of the
notes have not taken any action with respect to their notice of default.
The Company issued a promissory note to Harry Markovits, a former
director of the Company. The balance due on the promissory note is approximately
$133,000. Mr. Markovits passed away in April of 1998 and the note was
transferred to his estate. The estate has asserted a claim for the sum of
$133,000 plus interest due and that the Company has defaulted in payment of the
note. Additionally, the agreement with Mr. Markovits required that the Company
deliver to him 50,000 shares of the common stock of a Company known as INSCI
Corp.,which is currently held in escrow. Mr. Markovits was further granted a
subordinate UCC lien on the assets of the Company to secure the repayment of the
promissory note. The lien granted to Mr. Markovits is a lien subordinated to the
Company's principal lender, MTB Bank.
In August 1999, the Landlord, at 480 Canal Street Premises (Trinity
Church), commenced an action in the New York Civil Court to reclaim possession
of the Canal Street Premises from KRL Litho, Inc. d/b/a Skillcraft, based upon
non-payment of rent for the Premises. The Landlord and Tenant proceeding was
settled with Trinity Church by entering into a Stipulation of Settlement,
providing for a Judgment against Skillcraft for the sum of $113,725, in
addition to the Judgment granting possession of the Premises to Trinity Church.
Both the monetary Judgment and the Judgment of Possession of the Premises, as
per the terms of the Stipulation, have been stayed pending payments being made
to Trinity Church, pursuant to the terms of the Stipulation of Settlement. In
the event of a default in payment which is uncured, Trinity Church may proceed
with the money Judgment, crediting all payments made, and obtain possession of
the Canal Street Premises.
The Company has entered into a Settlement Agreement with Press Room
Union Welfare Trust Fund, representing workers at the Canal Street Premises,
wherein the Company agreed that it would make weekly payments against the
$130,553 due to the Union. As part of the Settlement Agreement, the Company
provided a Confession of Judgment for the sum due, less any amount paid by the
Company.
- --------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
[a] EXHIBITS
--------
1) Financial Data Schedule as of and for the three months ended June
30, 1999.
[b] REPORTS ON FORM 8-K
During the period between April 1, 1999 and August 14, 1999, the
Company did not file any 8K reports with the Commission.
26
<PAGE>
IMTECH
================================================================================
INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
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, thereunto duly authorized.
INFORMATION MANAGEMENT TECHNOLOGIES
CORPORATION
By:_____________________________________
Joseph A. Gitto Jr.,
President and Chief Financial Officer
DATED: NEW YORK, NEW YORK
AUGUST 14, 1999
27
<PAGE>
IMTECH
================================================================================
INFORMATION MANAGEMENT TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
================================================================================
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, thereunto duly authorized.
INFORMATION MANAGEMENT TECHNOLOGIES
CORPORATION
BY: /S/ JOSEPH A. GITTO, JR.
-----------------------------
JOSEPH A. GITTO JR.,
PRESIDENT AND
CHIEF FINANCIAL OFFICER
DATED: NEW YORK, NEW YORK
AUGUST 14, 1999
28
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