<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
Commission file number: 33-24464-NY
IMTEK OFFICE SOLUTIONS, INC.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE Tax ID #11-2958856
- - ---------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
2111 Van Deman Street, Suite 100, Baltimore, MD 21224
-----------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (410) 633-5700
--------------
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 No X
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity as the latest practicable date: 7,538,361 shares of common
stock as of November 8, 1998.
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INDEX
IMTEK OFFICE SOLUTIONS, INC.
Page
PART I. Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets -
September 30, 1998 and June 30, 1998.............................. 3
Consolidated Statements of Income - Three months
ended September 30, 1998 and 1997................................. 6
Consolidated Statements of Cash Flows - Three months
ended September 30, 1998 and 1997................................. 8
Consolidated Statements of Shareholders Equity for the
Quarters ended September 30....................................... 9
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition and Liquidity.............................15
PART II. Other Information
Item 1. Legal Proceedings........................................22
Item 2. Changes in Securities and Use
of Proceeds..............................................22
Item 4. Submission of Matters to a Vote
of Security Holders......................................22
Item 6. Exhibits and Reports on Form 8-K.........................23
Exhibit 10 - Kelco Agreement
Exhibit 27 - Financial Data Schedule
Signature..................................................................25
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Imtek Office Solutions, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
------------- --------
1998 1998
---- ----
(unaudited) (audited)
<S> <C> <C>
CURRENT ASSETS
Cash $1,432,137 $2,949,168
Escrow deposits 1,180,755 5,054,220
Accounts receivable,(net) 3,610,466 1,390,302
Other receivables 315,177 151,235
Inventory 3,355,171 1,641,309
Deferred tax assets 82,124 82,124
Prepaid expenses and other current assets 730,496 783,480
------- -------
Total current assets 10,706,326 12,051,838
PROPERTY AND EQUIPMENT - at cost, less accumulated
depreciation and amortization 2,995,254 1,880,888
OTHER NONCURRENT ASSETS 497,516 497,516
DEFERRED FINANCING COSTS, less accumulated amortization 343,536 361,941
OTHER INTANGIBLE ASSETS, less accumulated amortization 4,493,961 1,732,574
--------- ---------
$19,036,593 $16,524,757
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
3
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Imtek Office Solutions, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
------------- --------
1998 1998
---- ----
(unaudited) (audited)
<S> <C> <C>
CURRENT LIABILITIES
Note payable - bank $1,328,722 $ -
Current maturities of notes payable 575,000 560,055
Current maturities of obligations under capital lease 238,000 234,081
Accounts payable - trade 1,012,304 644,506
Accounts payable - related party 455,205 795,205
Accrued expenses 997,287 985,473
Customer escrow accounts 1,180,755 5,054,220
Deferred revenue 1,647,797 168,153
Income taxes payable 513,200 434,804
Notes payable - related party ----------- --------------
Total current liabilities 7,948,270 8,876,497
NOTES PAYABLE, net of current maturities and original issue
discount 6,178,405 3,502,506
OBLIGATIONS UNDER CAPITAL LEASE, net of current maturities 984,659 988,578
DEFERRED TAX LIABILITY 65,490 65,490
PUT OPTION OBLIGATION 318,910 335,695
MINORITY INTEREST 18,865 ---
STOCKHOLDERS' EQUITY
Preferred stock, $100 par value; authorized 75,000
</TABLE>
4
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<TABLE>
<S> <C> <C>
shares;
liquidation preference of $674,000; issued and
outstanding,
6,740 shares in 1998 674,000 674,000
Common stock, $.000001 par value; authorized
250,000,000 shares;
issued and outstanding, 7,532,366 shares in 1998
and 5,000,000
shares in 1997 8 8
Additional paid-in-capital 1,420,548 1,420,548
Retained earnings 1,427,438 661,435
--------- -------
3,521,994 2,755,991
--------- ---------
$19,036,593 $16,524,757
----------- -----------
----------- -----------
</TABLE>
5
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Imtek Office Solutions, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
- - ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
Quarter ended Quarter ended
September 30, 1998 September 30, 1997
(unaudited) (unaudited)
<S> <C> <C>
Revenue
Equipment and supplies $5,585,791 $1,227,437
Merchant banking 14,081,305 -
---------- ----------
19,667,096 1,227,437
Cost of revenue
Equipment and supplies 3,806,826 1,078,724
Merchant banking 10,320,521 -
---------- -----------
14,127,347 1,078,724
---------- -----------
Gross profit 5,539,749 148,713
Selling and general expense 4,094,858 123,427
--------- -------
Operating income 1,444,891 25,286
Miscellaneous income 16,785
Interest expense (163,608) (27)
--------- ----
Income before taxes and minority interest 1,298,068 25,313
Minority interest (net of income tax of $12,600) 18,865 -
Income taxes 513,200 4,893
------- -----
NET INCOME 766,003 20,420
Preferred stock dividends 15,165 -
------ --------
Income available to common stockholders $750,838 $20,420
-------- -------
-------- -------
</TABLE>
6
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<TABLE>
<S> <C> <C>
Earnings per share
Basic $0.10 $0.03
----- -----
----- -----
Diluted $0.10 $0.03
----- -----
----- -----
Weighted average shares outstanding
Basic 7,532,366 2,253,425
--------- ---------
--------- ---------
Diluted 7,613,246 2,253,425
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
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Imtek Office Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $766,003 $20,420
Adjustments to reconcile net income to
net cash
provided by operating activities
Depreciation and amortization 115,001 3,833
Minority interest 18,865 -
Amortization of put option obligation (16,785) -
Changes in assets and liabilities - -
Accounts and other receivables (2,384,105) (16,476)
Inventory (1,713,862) (67,266)
Accounts payable and accrued expenses 39,612 103,359
Deferred revenue 1,479,644 -
Prepaid expenses 52,984 -
Other assets - 11,540
Income taxes payable 78,396 4,893
Net cash (used) provided by operating activities (1,564,247) 60,303
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment (1,173,236) (2,361)
Cash paid for acquisitions and intangibles (2,799,113) -
Cash deposit paid - (40,000)
Net cash used in investing activities (3,972,349) (42,361)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 4,780,749 22,368
Payments on notes payable (761,184) -
Notes receivable advances - (22,541)
</TABLE>
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Imtek Office Solutions, Inc.
Statements of Shareholder's Equity
For the Quarters Ended
September 30
<TABLE>
1998 1999
---- ----
<S> <C> <C>
Balance - beginning of period $ 661,435 $37,947
Net income 766,003 20,420
---------- -------
Balance - end of period $1,427,438 $58,367
---------- -------
---------- -------
</TABLE>
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Imtek Office Solutions, Inc.
Notes to Consolidated Financial Statements
September 30, 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied
in the preparation of the accompanying financial statement follows:
NATURE OF BUSINESS
Imtek Office Solutions (the "Company") is a regional supplier of
equipment, products and services used by offices to manage information and
documents. The Company also provides a variety of specialty finance and
merchant banking services, primarily the purchase and sale of viaticated life
insurance policies. The Company conducts business in the Baltimore,
Washington DC, Richmond and Tidewater Virginia metropolitan markets as well
as the Atlanta, Georgia and Philadelphia, Pennsylvania metropolitan markets
and grants credit to customers in those regions.
In July, 1998 the Company's Board of Directors approved a change in the
fiscal year-end from September 30 to June 30, effective June 30, 1998. The
audited financial statements as of June 30, 1998 are for a period of nine months
beginning October 1, 1997.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements as of September
30, 1998 include the accounts of Imtek Corporation, Imtek Services
Corporation and Imtek Acquisition Corporation, all wholly owned subsidiaries
of the Company. All inter-company transactions have been eliminated in
consolidation.
The accompanying consolidated balance sheet as of September 30, 1998,
the consolidated statement of earnings for the quarter ended September 30, 1998,
the statement of shareholders' equity for the quarter ended September 30, 1998
and the statement of cash flows for the quarter ended September 30, 1998 are
unaudited. In the opinion of management, all adjustments, consisting of normal
recurring accruals necessary for a fair presentation of the results of
operations for the interim periods
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presented have been reflected in the accompanying consolidated financial
statements. The results of the interim periods presented herein are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
NOTE B -RESTRICTED CASH AND CUSTOMER ESCROW ACCOUNTS
The Company's merchant banking subsidiary, Imtek Funding
Corporation, attempts to pre-fund certain viaticated life insurance purchases
with funds received from third party purchasers. Funds are collected in an
escrow account and released to the Company upon sale of the policies.
NOTE C - BUSINESS ACQUISITIONS
In July, 1998, the Company entered into acquisition agreements with
five entities to purchase assets or stock. The transactions are summarized
below:
Forbes Enterprises
On July 1, 1998 the Company acquired certain assets of Forbes
Enterprises, a Philadelphia, Pennsylvania office equipment dealer, in exchange
for cash of $115,000 and the assumption of certain liabilities of approximately
$750,000.
Keystone Digital Imaging
On July 22, 1998, the Company acquired certain assets of Keystone
Digital Imaging ("KDI"), a Philadelphia, Pennsylvania equipment dealer for a
cash payment of $800,000, issuance of a note payable of $130,000 and the
assumption of deferred maintenance policies of approximately $141,000.
Barbera Business Systems, Inc. ("Barbera")
Effective July 1, 1998, the Company purchased a 60% interest of the
total outstanding common stock of Barbera Business Systems, Inc. for a cash
payment of $1,725,119 and the agreement to acquire the remaining 40% of the
outstanding common stock of Barbera for 200,000 shares of the Company's common
stock. The Barbera acquisition is described in the report filed by the Company
on Form 8-K with the Securities and Exchange Commission on August 13, 1998.
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AMI Group, Inc.
The Company entered into an agreement to purchase certain customer
accounts for the assumption of liabilities of approximately $610,000 from AMI
Group, Inc., a Washington DC based office equipment dealer.
The following table reflects the unaudited proforma combined results
of operations of the company and all acquisitions which the Company has
consummated as of September 30, 1998 on the basis that they had taken place
as of July 1, 1997 (the beginning of the quarter ended September 30, 1997).
<TABLE>
<S> <C>
Revenues $8,699,200
Net loss $ (167,000)
Net loss per common share:
Basic $ (.02)
Diluted $ (.02)
Shares used in computation:
Basic 7,532,366
Diluted 7,613,246
</TABLE>
In management's opinion, the unaudited proforma combined results of
operations are not indicative of the actual results that would have occurred
had the acquisitions been consummated at the beginning of 1997 or of future
operations of the combined entities under the ownership or management of the
Company.
NOTE D - NOTE PAYABLE - BANK
In August, 1998, the Company entered into a two year, $3,000,000
working capital line of credit with the Mercantile Bank and Trust Company of
Baltimore, Maryland. Advances under this credit line are limited to 70% of
eligible accounts receivable and certain leases. Advances under this credit
line bear interest at prime plus1% and are secured by a senior interest in
substantially all of the Company's assets. The agreement contains certain
financial covenants which the Company must maintain.
NOTE E - LONG TERM DEBT
<TABLE>
<CAPTION>
Long term debt consists of : Amount
------
<S> <C>
Subordinated acquisition line $5,664,305
Notes to individuals 854,961
Equipment note 234,138
-------
6,753,404
Less: current maturities 575,000
-------
$6,178,405
</TABLE>
The Company entered into a $6,000,000 subordinated acquisition line of
credit with Sirrom Capital Corporation ("Sirrom") in May, 1998. Advances under
this line bear interest at an annual rate of 14% payable monthly through May,
2003. This note is collateralized by a second lien on substantially all of the
Company's assets. As additional consideration, the Company issued Sirrom
warrants to purchase
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119,891 shares of common stock. The value of these warrants ($335,695) has
been reflected as original issue discount and is being amortized over the
life of the loan on a straight line basis.
In connection with the acquisition of certain entities, the Company
has issued or assumed certain notes payable to various individuals. These
notes are unsecured, bear interest at rates ranging from 8% to 10, and
mature at various dates through June, 2002.
The Equipment note payable is payable in monthly installments of
approximately $7,300, including interest at an annual rate of 8.25, and
matures in August, 2003. This note is secured by certain high speed
duplicating equipment having an original cost of approximately $240,000.
NOTE F - DEPENDENCE ON MAJOR VENDOR
The Company's Merchant Banking segment purchased viaticated
insurance policies primarily from one broker. For the quarter ended September
30, 1998 the Company purchased $7,730,119 from this Broker, representing 86%
of the policies purchased for the quarter. In addition, the Company has
entered into an agent agreement with this broker for certain fund raising and
viaticated life insurance policy generation services, which is attached to
this report as Exhibit 10 and incorporated herein by reference.
NOTE G - SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Sales to unaffiliated customers
Office solutions $5,585,791 $1,227,437
Merchant Banking 14,081,305 -
----------- -----------
19,667,096 $1,227,437
Operating income (loss)
Office solutions $(161,099) 25,286
Merchant banking 1,605,990 -
---------
$1,444,891 25,286
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C>
Assets
Office solutions $15,186,670 $1,007,339
Merchant banking 3,849,923 -
---------
$19,036,593 $1,007,339
Capital expenditures
Office solutions $1,171,641 0
Merchant banking 1,595 0
----- -
-
$1,173,236 0
Depreciation and amortization
Office solutions $107,669 $1,691
Merchant banking 7,332 -
-----
$115,001 $1,691
</TABLE>
14
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Certain statements in this report set forth management's intentions,
plans, beliefs, expectations or predictions of the future based on current
facts and analyses. Actual results may differ materially from those indicated
in such statements, due to a variety of factors including reduced product
demand, market conditions, the availability of suitable acquisition
candidates, increased competition, government action and other factors.
BACKGROUND
Imtek Office Solutions, Inc. (the "Company") effectively commenced
operations on April 22, 1997. Prior to April 22, 1997, the Company was a
development stage company with no significant operations. The Company, for
the fiscal year-ended September 30, 1997, was primarily engaged in the retail
and wholesale sale of copiers and facsimile equipment, the servicing of
office equipment, the providing commercial printing and duplicating services
and, to a lesser extent, the retail sale of office supplies. Effective
October 1, 1997, the Company commenced operation of its Merchant Banking
segment, primarily through the purchase and resale of life insurance policies
of terminally ill individuals ("viatical settlements"). The Company operates
principally in the Mid-Atlantic region, consisting of Baltimore, Maryland,
Philadelphia, PA, Washington D.C., Richmond, Virginia, Tidewater area of
Southeastern Virginia, and the metropolitan Atlanta, Georgia market.
The Company changed its fiscal year-end from September 30 to June
30, effective June 30, 1998, as previously reported on Form 8-K filed with
the Securities and Exchange Commission on August 13, 1998 and incorporated
herein by reference. Because the Company was in a start-up mode during 1997
with limited activity during fiscal year ended September 30, 1997 (a period
of five months), and the transition period ended as of June 30, 1998 (a
period of 9 months), comparisons to prior year's results may not provide
meaningful analysis.
During the first quarter of fiscal year 1998, as previously reported,
the Company effectively created two operating segments. The first segment,
representing the historical core business of the Company, is the sale at retail
and wholesale of office products, copier sales and service, and commercial
printing and copying services. This segment is referred to as the Office
Solutions segment. The second segment, referred to as the Merchant Banking
segment, consists principally of viatical settlements and to a lesser extent
specialty finance services, including copier and office equipment leasing,
accounts receivable financing and factoring. The Merchant Banking segment
effectively commenced operations during the second quarter of the prior year,
and thus there are no comparisons to the prior year for this segment.
The Company's Office Solutions segment continues to implement its
growth strategy through acquisitions. The strategy consists principally of
acquiring smaller office equipment dealers located within specified
geographic markets. Additionally, the Company anticipates acquiring other
entities in the future which may provide the Company with expanded, enhanced
or additional products, services or markets, but can provide no assurance
that such acquisitions will indeed provide such beneficial products, services
or markets. Management believes that the acquired entities with similar
products and services would benefit, after a reasonable assimilation period,
from the Company's centralized management, system of internal
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control, additional financial resources, efficiencies associated with certain
economies of scale, and marketing efforts. There can be no assurance,
however, that such benefits will be realized. Management further believes
that adequate acquisition opportunities are available. The Company
anticipates that significant acquisitions would be funded principally from
issuance of authorized but unissued shares of the Company's common stock,
external financing sources, such as the Sirrom and Mercantile Bank Loan
Agreements and, to a lesser extent, from internally generated cash flow. The
Company's future success with acquisitions will depend upon the timing and
size of the acquisition, the ability to integrate the acquired company into
its operations with a minimum of integration costs, and the Company's ability
to grow its infrastructure to accommodate the continued growth.
ACQUISITIONS:
During the quarter ended as of September 30, 1998, the Office
Solutions segment completed four acquisitions, while the Merchant Banking
Segment completed one acquisition of a specialty financial services marketing
firm.
As more fully discussed in the Company's 10-K for fiscal year ended
June 30, 1998, the Office Solutions segment acquired the business of AMI Group,
Inc., a Washington D.C. based office equipment and copier dealer. The
acquisition was completed in August 1998 for a cash payment of $460,000 and
required the segment to assume additional liabilities of approximately $150,000.
Funds used to complete this acquisition were derived from the Sirrom loan
agreement. During the quarter ended as of September 30, 1998, this acquisition
provided approximately $964,000 of revenue and contributed approximately
$169,000 towards the segment's gross profit. Moreover, this acquisition provided
operating income before taxes and interest of approximately $127,000.
Additionally, as previously discussed in the Company's annual report on
Form 10-K for fiscal year-ended June 30, 1998, the segment acquired a 60 percent
interest in Barbera Business Systems, a Baltimore, Maryland based office
equipment and copier dealer. This acquisition contributed $1.2 million of gross
revenue during the quarter ended as of September 30, 1998. Additionally, Barbera
Business Systems contributed approximately $339,000 towards the segment's gross
profit and approximately $79,000 of operating income before interest and taxes.
During July, 1998, the segment acquired two separate businesses in the
metropolitan Philadelphia, Pennsylvania area. Forbes Enterprises, Inc.,
("Forbes") and Keystone Digital Equipment, Inc. ("KDI"), are office equipment
and copier dealerships, as more fully described in the Company's annual report
on Form 10-K for fiscal year ended June 30, 1998. To acquire Forbes, the Company
paid approximately $865,000 for approximately $250,000 of accounts receivable,
$335,000 of furniture and equipment, $302,000 of inventory, and $20,000 for a
covenant not to compete. The segment paid approximately $1,071,000 for
approximately $266,000 of accounts receivable, $40,000 in cash, $616,000 of
inventory, $234,000 of furniture and fixtures,
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and $689,000 of goodwill to acquire the business of KDI. The Sirrom Loan
Agreement provided the funds to complete these transactions. During the quarter
ended as of September 30, 1998, these acquisitions provided approximately
$938,000 of revenue and contributed operating income of approximately $45,000,
before interest and taxes.
The Merchant Banking segment completed one acquisition during the
quarter. Effective July 1, 1998, as more fully discussed in the Company's annual
report on Form 10-K for fiscal year ended June 30, 1998, the Merchant Banking
segment acquired certain assets of Ruttenberg and Associates, a Normal, Illinois
specialty financial services marketing group. The segment paid $78,000,
for the customer lists and certain fixed assets. The Sirrom Loan Agreement
provided the necessary funding for this acquisition.
RESULTS OF OPERATIONS:
OFFICE SOLUTIONS SEGMENT
The Office Solutions segment accounted for approximately $5.6
million of gross revenue, or 28.4 percent of the consolidated gross revenue
for the quarter-ended as of September 30, 1998, as compared to gross revenue
of approximately $1.2 million, or 100 percent of the gross revenue for the
quarter-ended as of September 30, 1997. This 355 percent increase of gross
revenue over the comparable quarter of the prior year is due principally to
acquisitions occurring during the year and, to a lesser extent, same
store/location revenue increases.
The segment generated positive increases in its gross margin during
the quarter-ended as of September 30, 1998 as compared to the comparable
quarter of the prior year. The segment generated a gross margin of 17.9
percent during the quarter-ended as of September 30, 1998, as compared to a
gross margin of 12.1 percent for the comparable quarter of the prior year.
The principal reason for this positive improvement again relates to
acquisitions and the resultant product mix.
Although the segment experienced positive improvement in its gross
margin during the first quarter of fiscal 1999 as compared to the comparable
quarter of the prior year, the segment did experience significant growth of
its general and administrative expenses during the quarter-ended as of
September 30, 1998. The segment incurred general and administrative expense
in excess of $1.1 million for the first quarter of fiscal 1999, as compared
to $123,000 for the same period of the prior year. As a percent of gross
revenue, general and administrative expense represented 20.2 percent of gross
revenue for the first quarter of fiscal year 1999 as compared to 10.1 percent
for the first quarter of fiscal year 1998. This dramatic increase is
principally in response to acquisitions occurring during the period. The
acquisitions significantly increased occupancy and management expenses.
As acquisitions are assimilated into the segment's operations, it is
anticipated that these expenses will be
17
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reduced or eliminated where duplication exists, but there can be no assurance
that such reductions in expense will indeed occur. Management has embarked on
a program to review and adjust supervisory and management level staffing to
bring overhead costs more in line with revenue growth and eliminate
duplication of efforts.
As previously discussed, management anticipates a certain level of
transformation and assimilation expenditures with each acquisition. Such
expenditures consist principally of incremental marketing efforts and training
costs to ensure that sales and service personnel operate at the highest level
of professionalism, competency, and in accordance with established segment
policy and procedures. Additionally, the segment incurs additional expenses
in the search for applicable acquisition candidates. Management believes that
as a percentage of revenue, these costs should begin to stabilize in future
periods but can provide no assurances in that regard.
In light of the sales increases and improvements within the
segment's gross margins during the quarter ended as of September 30, 1998, as
compared to the comparable quarter of the preceding year, the segment's
management remains committed to its strategic acquisition growth strategy.
Management is monitoring the segment's overhead, however, and continues to
adjust its strategy where necessary, but not without consideration for future
growth and allowance of sufficient time and resources to fully assimilate the
acquired company into the segment's operations.
MERCHANT BANKING SEGMENT
As previously stated, the Merchant Banking segment did not
effectively commence operations until October, 1997. Thus, there is no
comparison to the prior year's comparable quarter. The Merchant Banking
segment accounted for $14.1 million of the Company's consolidated gross
revenue, or 71.6 percent for the quarter ended as of September 30, 1998,
after subtracting direct costs of revenue in excess of $10.3 million during
the first quarter of fiscal 1999. Thus, the segment generated a gross profit
of $3.76 million, or a gross margin of 26.7 percent. The segment was able to
maintain a higher-than-expected margin during the quarter ended as of
September 30, 1998 as a result of higher-than-expected margins associated
with the product mix, wherein the segment's viaticated life insurance
policies where more heavily weighted to longer viatication terms than
previously. Moreover, selling and general and administrative expense for the
quarter amounted to $942,000, or 6.7% of sales, which is comparable to the
preceding quarter. General and administrative expense during the quarter
increased, however, due to increased professional fees associated with the
Company's financial statement audit and year-end reporting.
The Merchant Banking segment derives its revenue and associated
costs from financing activities principally from viatical settlements and, to
a lesser extent, from the
18
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financing of office equipment and factoring of accounts receivable. It is
anticipated that this component of the Company will continue to expand in the
foreseeable future, but there can be no assurance in that regard. The profit
margin for this segment, within a relevant range, generally varies by the
expected term of viatication. As the viatication period lengthens, the profit
margins and associated risk of capital fluctuation increase. These
viatication periods are considered to be the product mix.
FINANCIAL CONDITION AND LIQUIDITY
OFFICE SOLUTIONS SEGMENT
Total assets for the Office Solutions segment increased to $15.2
million as of September 30, 1998, as compared to $1 million for the period
ended as of September 30, 1997. This dramatic increase is principally the
result of acquisitions. The Company's aggressive strategic
growth-through-acquisitions plan may, however, cause a short term distortion
of certain balance sheet accounts and resultant financial ratios. Management
monitors this affect and has charted a course of action to mitigate this
negative impact without over reaction such that unintended results are not
achieved.
During the quarter ended as of September 30, 1998, the Office
Solutions segment produced a current ratio of approximately 2:1, as compared
to 4:1 for the comparable period of the prior year. The segment's accounts
receivable provided a significant contribution to this negative trend.
Accounts receivable increased from $393,000 in the comparable quarter of the
prior year to $3.6 million as of September 30, 1998. A product of this
significant increase, which again is principally due to acquisitions, is that
days sales in accounts receivable increased from approximately 30 days for
the quarter-ended September 30, 1997, to 59 days for the quarter-ended as of
September 30, 1998. Additionally, again in response to acquisitions,
inventory also significantly increased, rising to a level of 55 days of
inventory in sales for the quarter ended September 30, 1998 as compared to 35
days for the comparable quarter in the preceding year. Management anticipates
that as it continues to integrate acquired business entities into the
Company's operation, duplication and excesses should gradually deminish and
subsequently level off, but can provide no assurance in that regard.
Property and equipment also significantly increased from $34,000 at
September 30, 1997 to approximately $2.5 million as of September 30, 1998.
Acquisitions were the principal reason for this dramatic increase. The segment,
as previously reported, has incurred significant expense to implement and
improve its infrastructure and financial management computer systems. These
expenditures are anticipated to continue.
Corresponding to the increases in accounts receivable and inventory,
current liabilities also significantly increased during the current quarter.
Accounts payable
19
<PAGE>
increased to approximately $900,000 for the quarter ended as of September 30,
1998, up from approximately $160,000 for the comparable quarter of the prior
year. Current maturities of long term debt likewise significantly increased.
These increases are principally in response to acquisitions.
In response to acquisitions long term assets for the Office
Solutions segment, consisting principally of goodwill and intangible assets,
also showed significant growth.
Long term debt, as previously reported, increased significantly in
response to the funding of acquisitions. Moreover, as previously reported, the
Company entered into several loan agreements which are being utilized
principally to fund acquisitions and, to a lesser extent, working capital.
During the quarter-ended as of September 30, 1998 the segment
produced negative cash flow, as compared to positive cash flow of
approximately $18 thousand for the comparable quarter of the preceding year.
The negative cash flow is principally in response to the segment's operating
loss and the change in current assets as compared to the change in current
liabilities for the quarter, as discussed above.
MERCHANT BANKING SEGMENT
As previously discussed, this segment did not commence operations
until October of 1997. Thus, there is no comparison to the prior year
comparable quarter. For the quarter ended as of September 30, 1998, the
Merchant Banking segment had total assets of approximately $5.5 million.
However, total assets did decline at September 30, 1998 as compared to the
preceding quarter. This decline relates principally to the previously
reported viatical settlements which occurred during the last day of the
preceding quarter but were not settled until the reporting quarter.
Additionally, escrowed cash, with its corresponding current liability,
decreased at September 30, 1998 as compared to the prior quarter balance.
YEAR 2000 STATEMENT
The year 2000 ("Y2K") issue is the result of computer programs using a
two-digit year, such that the computer system may interpret the year 2000 as
1900. Should this occur, a system-wide failure of computer systems would be
eminent and could lead to company-wide disruptions. The cost of such
company-wide disruptions could have a material adverse effect on the Company's
financial condition and results of operations.
As previously reported, the Company has implemented its three phase
plan to address its Y2K issue and has principally completed both phase 1 and 2
of its plan. A number of applications have been identified as either Y2K
compliant or that the third party vendor has provided the Company with assurance
that the application will be Y2K compliant.
20
<PAGE>
Management does not anticipate significant additional expense in future
periods associated with any known Y2K issue.
21
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
There has been no material change in the status of legal proceedings as
reported in Item 3 of the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1998.
Item 2. Changes in Securities and Use of Proceeds.
Under the terms of that certain Loan and Security Agreement among the
Company, Imtek Corporation, a Maryland corporation and wholly owned subsidiary
of the Registrant, Imtek Services Corporation, also a Maryland corporation and
wholly owned subsidiary of the Company and Mercantile Safe Deposit and Trust
Company (the "Mercantile Loan Agreement"), neither Imtek Corporation nor Imtek
Services Corporation may make any dividend or other distribution, direct or
indirect (other than stock dividends payable to the their holders of capital
stock), on account of any equity interest in either of them now or hereafter
outstanding until such time as all obligations have been satisfied under the
Mercantile Loan Agreement.
On May 29, 1998, the Registrant and its subsidiaries entered into a
financing arrangement with Sirrom Capital Corporation ("Sirrom") for a six
million dollar subordinated acquisition line of credit pursuant to a Loan
Agreement dated the same date (the "Sirrom Loan Agreement"). Pursuant to the
terms of the Sirrom Loan Agreement, neither the Registrant nor any of its
subsidiaries may declare or pay any dividend of any kind (other than stock
dividends payable to the holders of capital stock), whether in cash or in
property, on any class of capital stock of any of them.
Item 4 - Submission of Matters to a Vote of Security Holders.
At the annual meeting of stockholders held on September 11, 1998, the
following matters were submitted to stockholders' vote and were approved by a
majority of votes:
(1) The following six directors were elected: Edwin C. Hirsch, Jr.,
Michael L. Lowe, Brad C. Thompson, Robert W. Hoover,
Richard H. Guilford, and Peter B. Lilly;
(2) The Company's 1998 Stock Option Plan was adopted; and
(3) The selection of Grant Thornton LLP as the independent auditors
for the Company for 1998 was ratified.
22
<PAGE>
Results of the voting were as follows:
<TABLE>
Votes Votes Votes Broker
For Against Abstained Nonvotes
or
Withheld
<S> <C> <C> <C> <C>
(1) Election of Directors
Edwin C. Hirsch, Jr. 6,121,872 -- 1,410,489 --
Michael L. Lowe 6,121,872 -- 1,410,489 --
Brad C. Thompson 6,121,872 -- 1,410,489 --
Robert W. Hoover 6,121,872 -- 1,410,489 --
Richard H. Guilford 6,121,872 -- 1,410,489 --
Peter B. Lilly 6,121,872 -- 1,410,489 --
(2) Adoption of Company's 1998 Stock Option Plan 6,122,122 250 1,409,989 --
(3) Ratification of Selection of
Auditors 6,122,122 250 1,409,989 --
</TABLE>
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit:
10 - Kelco Agreement
27 - Financial Data Schedule
(b) Reports on Form 8-K:
(1) Current Report on Form 8-K filed August 7, 1998 reporting a change
in the Company's certifying accountants;
(2) Current Report on Form 8-K filed August 13, 1998 reporting an
acquisition of assets; and
23
<PAGE>
(3) Current Report on Form 8-K filed August 13, 1998 reporting a
change in the Company's fiscal year.
24
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q for the quarter ended
September 30, 1998 to be signed on its behalf by the undersigned thereunto duly
authorized.
IMTEK OFFICE SOLUTIONS, INC.
Date: November 16, 1998 /s/ BRAD C. THOMPSON
----------------------------------
Brad C. Thompson
Chief Financial Officer and
Duly Authorized Officer
25
<PAGE>
EX. 10.
MEMORANDUM OF UNDERSTANDING
TO ENTER INTO JOINT VENTURE AGREEMENT
Parties: The parties to this agreement are:
Beneficial Assistance, an Imtek Company hereafer referred to as Beneficial;
and
Kelco, Inc. hereafter referred to as Kelco.
Recitals:
Whereas Beneficial and Kelco have agreed to enter into this memorandum of
understanding and whereas it will mutually benefit the profitability of both
parties it is hereby agreed that Beneficial and Kelco shall enter into a
strategic alliance.
Responsibilities of Beneficial:
1. Beneficial shall be solely responsible for the development,
implementation, and closing of all marketing and sales efforts
related to the funding from individuals, groups, professional
associations and institutions of any sort and description for the
purposes of funding viatical settlement contracts.
2. Beneficial shall provide to Kelco all agreements Beneficial has with all
current agents and/or brokers including those in California and Florida
who currently provide placement services for viatical contracts for the
terminally ill.
3. Beneficial shall modify its existing Purchase Authorization Agreement to
include a reference to add as an acceptable alternative choice in
addition to William R. Evans, Chartered, a viatical settlement company
licensed to do business in any state where licensing is required.
4. It is understood and agreed that William R. Evans, Chartered shall
retain responsibility for all policy follow-up including but not limited
to policy update, premium payment and administration of whatever nature
or action required. In each case where the owner of the policy is Kelco,
William R. Evans shall be designated as the irrevocable beneficiary of
all viatical contracts envisioned by this joint venture agreement
memorandum of understanding.
5. Beneficial guarantees that Kelco shall have the right of first refusal
to present to Kelco all viatical contracts for funding and that
Beneficial shall in all cases attempt to fund contracts presented to it
by Kelco.
6. Beneficial shall use its expertise in developing all of these funding
sources for the purpose of funding viatical contracts generated by
Kelco, contemplated, realized, or actually funded under this
agreement.
<PAGE>
Responsibilities of Kelco:
1. Kelco shall have sole responsibility for the development, marketing,
maintenance, and closing for all efforts in the production, purchase
and contract generation of terminally ill patients for any viatical
contract.
2. Kelco guarantees that Beneficial shall have the right of first refusal
to fund the purchase of all contracts produced through Beneficial's
resources. If Beneficial refuses a contract purchase, Kelco shall pay
Beneficial a 2% commission based upon face amount for viatical
settlements successfully viaticated with another buyer. If the Kelco
profit falls below 2%, Kelco and Beneficial shall reasonably negotiate a
commission.
3. Kelco shall prepare an agreement authorizing Beneficial to distribute
Kelco advertising/promotional materials on Kelco's behalf.
Both parties to this Memorandum of Understanding agree and covenant that it
is their mutual intent to share net profits generated equally on the closing
of any viatical contract established under this strategic alliance. Such
establishment includes any contact funded by Beneficial and purchased by
Kelco. The net profitability and any formulas for costs of operation shall be
disclosed on an ancillary memorandum of understanding executed simultaneously
with the execution of this agreement. On an annual basis, Kelco's public
accountants shall attest to the net profit distribution to Beneficial.
The parties further agree that ancillary agreements necessary to effectuate this
agreement and any other necessary agency agreements, licenses contracts and the
like required to effectuate the intent of this agreement shall be executed by
the parties as reasonably soon after the completion of this memorandum as
practicable. Further, any information that must be shared for the efficient
administration of the joint venture shall be provided to each party at the
request of the other party hereto. Any request by one party of the other party
shall be provided as soon as reasonably practicable following such request.
This memorandum of understanding is a preliminary agreement of understanding
and the full joint venture agreement may be produced as soon as practicable
following the execution of this agreement.
In Witness Whereof we have signed this Memorandum of Understanding.
For Beneficial Assistance
By: /s/ ANDREW J. WALTER
--------------------------------
Name: Andrew J. Walter Andrew J. Walter, President
For Kelco, Inc.
Steve Keller By: President
- - ------------------------------------ --------------------------------
Name Name-Title
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,612,592
<SECURITIES> 0
<RECEIVABLES> 3,925,643
<ALLOWANCES> 0
<INVENTORY> 3,355,171
<CURRENT-ASSETS> 10,706,326
<PP&E> 3,165,738
<DEPRECIATION> 170,484
<TOTAL-ASSETS> 19,036,593
<CURRENT-LIABILITIES> 7,948,270
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 1,420,548
<TOTAL-LIABILITY-AND-EQUITY> 19,036,593
<SALES> 19,667,096
<TOTAL-REVENUES> 19,667,096
<CGS> 14,127,347
<TOTAL-COSTS> 18,222,205
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 163,608
<INCOME-PRETAX> 1,298,068
<INCOME-TAX> 513,200
<INCOME-CONTINUING> 766,003
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 766,003
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
