<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
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 as of November 8, 1998.
<PAGE>
INDEX
IMTEK OFFICE SOLUTIONS, INC.
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets -
September 30, 1998 (Restated) and June 30,
1998......................................................................... 3
Consolidated Statements of Earnings - Three months
ended September 30, 1998 and 1997............................................ 6
Consolidated Statements of Cash Flows - Three months
ended September 30, 1998 (Restated) and 1997................................. 8
Consolidated Statements of Shareholders
for the three months ended September 30, 1998............................... 10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition and Liquidity.............................................. 11
Signature............................................................................ 23
</TABLE>
The registrant hereby amends its quarterly report on Form 10-Q for the
quarter-ended September 30, 1998, to reflect changes in certain balance sheet
classifications. This amended filing contains a restated balance sheet and
statement of cash flows and the related disclosures for the quarter-ended
September 30, 1998.
2
<PAGE>
Imtek Office Solutions, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30, 1998 June 30, 1998
------------------ -------------
(Unaudited) (Audited)
(Restated)
<S> <C> <C>
CURRENT ASSETS
Cash $1,432,137 $2,949,168
Escrow deposits 1,180,755 5,054,220
Accounts receivable,(net) 2,643,716 1,390,302
Other receivables 315,177 151,235
Inventory 3,430,171 1,641,309
Deferred tax assets 82,124 82,124
Prepaid expenses and other current assets 730,496 783,480
------- -------
Total current assets 9,814,576 12,051,838
PROPERTY AND EQUIPMENT - at cost, less
accumulated depreciation and amortization 3,094,230 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 4,861,616 1,732,574
--------- ---------
$18,611,474 $16,524,757
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these
statements.
3
<PAGE>
Imtek Office Solutions, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
------------------ -------------
(Unaudited) (Audited)
(Restated)
<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 787,185 644,506
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 1,447,797 168,153
Income taxes payable 513,200 434,804
Notes payable - related party
---------- ---------
Total current liabilities 7,523,151 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 --
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
------------------ -------------
(Unaudited) (Audited)
(Restated)
<S> <C> <C>
STOCKHOLDERS' EQUITY
Preferred stock, $100 par value; authorized 75,000
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
--------- ---------
$18,611,474 $16,524,757
----------- -----------
----------- -----------
</TABLE>
5
<PAGE>
Imtek Office Solutions, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
- --------------------------------------------------------------------------------
<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
<PAGE>
<TABLE>
<CAPTION>
Quarter ended Quarter ended
September 30, 1998 September 30, 1997
------------------ -------------------
(Unaudited) (Unaudited)
<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.
7
<PAGE>
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)
(Restated)
<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 (1,417,350) (16,476)
Inventory (1,788,862) (67,266)
Accounts payable and accrued expenses (185,513) 103,359
Deferred revenue 1,279,644 --
Prepaid expenses 52,984 --
Other assets -- 11,540
Income taxes payable 78,396 4,893
Net cash (used) provided by operating
activities (1,097,617) 60,303
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment (1,272,212) (2,361)
Cash paid for acquisitions and intangibles (3,166,767) --
Cash deposit paid -- (40,000)
Net cash used in investing activities (4,438,979) (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>
8
<PAGE>
<TABLE>
<CAPTION>
1998 1997
---- ----
(Unaudited) (Unaudited)
(Restated)
<S> <C> <C>
Net cash provided by (used in) financing
activities 4,019,565 (173)
Net (decrease) increase in cash (1,517,031) 17,769
Cash at beginning of period 2,949,168 11,349
Cash at end of period $1,432,137 $29,118
Disclosure of cash flow supplemental information
Cash paid during the quarter for interest $206,613 $ --
Cash paid during the quarter for taxes $410,100 $ --
</TABLE>
9
<PAGE>
Imtek Office Solutions, Inc.
Statements of Shareholder's Equity
For the Quarters Ended
September 30 of Fiscal Year 1998 and 1999
<TABLE>
<CAPTION>
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>
10
<PAGE>
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
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, Maryland, Washington D.C., Richmond and Tidewater,
Virginia, Atlanta, Georgia and Philadelphia, Pennsylvania metropolitan markets
and grants credit to its customers in those regions.
In July, 1998 the Company's Board of Directors approved a change in the
fiscal year-end from September 30th to June 30th of each year, 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 reflect the accounts of the Company, together with 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
11
<PAGE>
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 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 agreements in order to acquire
five businesses through either the purchase of some or all of such entities'
assets or stock. The transactions are summarized below:
Forbes Enterprises
On July 1, 1998 the Company acquired certain assets of Forbes
Enterprises, Inc., a Philadelphia, Pennsylvania office equipment dealer, in
exchange for $115,000 in cash and the assumption of certain liabilities
amounting to approximately $750,000.
Keystone Digital Imaging
On July 22, 1998, the Company acquired certain assets of Keystone
Digital Imaging, Inc. ("KDI"), a Philadelphia, Pennsylvania equipment dealer for
$800,000 in cash, issuance by the Company of a note payable of $130,000 and the
assumption of certain deferred maintenance policies of approximately $141,000.
Barbera Business Systems, Inc.
Effective July 1, 1998, the Company purchased a 60% interest of the
total outstanding common stock of Barbera Business Systems, Inc. ("Barbera") for
$1,725,119 in cash and a commitment on the Company's part to acquire the
remaining 40% of the outstanding common stock of Barbera for 200,000
12
<PAGE>
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.
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.
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 (the "Mercantile Loan Agreement"). Advances under this line
are limited to 70% of eligible accounts receivable and certain lease
receivables. Advances under this line bear interest at the prime rate plus1% and
are secured by a senior interest in substantially all of the Company's assets.
The Mercantile Loan Agreement requires that the Company comply with certain
financial covenants set forth in the agreement.
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") on May 29, 1998. Advances
under the Sirrom line of credit (the "Sirrom
13
<PAGE>
Loan Agreement") bear interest at an annual rate of 14% payable monthly through
May, 2003. This note is secured by a second priority lien on substantially all
of the Company's assets. As additional consideration, the Company issued Sirrom
warrants to purchase 119,891 shares of Company 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 conjunction with the acquisition of certain of the entities, the
Company has issued or assumed certain notes payable to various individuals.
These notes are unsecured, bearing interest at rates ranging from 8% to 10% and
maturing at various dates through June, 2002.
The equipment note payable is payable in approximate monthly
installments of $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 in policies from this broker, representing 86% of
the policies purchased by the Company's merchant banking segment for the
quarter. In addition, the Company has entered into an agent agreement (the
"Kelco Agreement") with this broker for certain fundraising and viaticated life
insurance policy generation services.
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)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Office solutions ($161,099) 25,286
Merchant banking 1,605,990 --
---------
$1,444,891 25,286
Assets
Office solutions $14,761,551 $1,007,339
Merchant banking 3,849,923 --
----------- ----------
$18,611,474 $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>
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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, from April 22, 1997 through September 30, 1997, was
primarily engaged in the wholesale and retail marketing and servicing of copiers
and facsimile equipment, 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 (the "Merchant Banking" segment), primarily through the
generation of viatical settlements (the purchase and resale of life insurance
policies of terminally ill individuals). The Company operates principally in the
Mid-Atlantic region, consisting of Baltimore, Maryland, Philadelphia,
Pennsylvania, Washington D.C., Richmond, Virginia, the Tidewater area of
southeastern Virginia, and the metropolitan Atlanta, Georgia market.
The Company changed its fiscal year-end from September 30th to June
30th of each year effective June 30, 1998, as previously reported on Form 8-K
filed with the Securities and Exchange Commission on August 13, 1998. 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 settlement services 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 the implementation of
its growth strategy through acquisitions. The strategy consists principally of
acquiring smaller office equipment dealers located within specified geographic
markets. 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 Company will benefit
16
<PAGE>
from the acquisition of entities with similar products and services, and that
the acquired companies would benefit, after a reasonable assimilation period,
from the Company's centralized management, system of internal 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 either by the Company or the acquired entities.
Management believes that adequate acquisition opportunities are
available. The Company anticipates that significant acquisitions would be funded
principally from the 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
from operations to the extent available. 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 such acquisitions.
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 (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, in the amount 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, Inc., 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
17
<PAGE>
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. To
acquire the business of KDI, the Company paid approximately $1,071,000, in
exchange for approximately $266,000 of accounts receivable, $40,000 in cash,
$616,000 of inventory, $234,000 of furniture and fixtures, and $689,000 of
goodwill. Again, the Sirrom Loan Agreement provided the funds to complete these
transactions. During the quarter-ended 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-ended September 30, 1998. 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 also 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 September 30, 1998, as compared to gross revenue of approximately
$1.2 million, or 100 percent of the gross revenue for the quarter ended
September 30, 1997. This 355 percent increase of gross revenue over the
comparable quarter of the prior year is principally due to acquisitions during
the year and, to a lesser extent, same store/location revenue increases.
Moreover, the segment generated positive increases in its gross margin
during the quarter-ended 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 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 is due principally to recent acquisitions
and the resulting improvement in 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, however, experience significant
growth in 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
18
<PAGE>
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 due to acquisitions during the period. The
acquisitions caused the Company to incur significant occupancy and management
expenses. As acquisitions are assimilated into the segment's operations, it is
anticipated that these expenses will be reduced, and eliminated where
duplication exists, but there can be no assurance that such reductions will
indeed occur. Management has also embarked on a program to review and adjust
supervisory and management level staffing, such that overhead costs are more in
line with revenue growth and duplication of efforts is eliminated where
practical.
As previously discussed, management anticipates a certain level of
transformation and assimilation expenditures with each acquisition. Such
expenditures consist principally of incremental marketing efforts, training
costs to ensure sales and service personnel operate at the highest level of
professionalism, competency, and in accordance with established segment policy
and procedures and additional general and administrative expenses associated
with the improvement of the acquisition's infrastructure. Additionally, the
segment incurs additional expenses in connection with 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 dramatic sales increase and improvement within the
segment's gross margins during the quarter-ended 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. However,
management is monitoring the segment's overhead and continues to adjust its
policies where necessary, but not without consideration for future growth and
allowance of sufficient time and resources to fully transform 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 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 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 previous
quarters. Moreover, selling and general and
19
<PAGE>
administrative expense for the quarter was $942,000, or 6.7% of sales. General
and administrative expense during the quarter increased 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 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, 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 $12.8
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 a result of
acquisitions. However, with the Company's aggressive strategic
"growth-through-acquisitions" plan, a by-product is the short term distortion of
certain balance sheet accounts and their resultant financial ratios. Management
monitors this affect and has charted a course of action to mitigate this effect
without over-reaction, so that unintended results are not achieved.
During the quarter-ended 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 $2.6
million as of September 30, 1998. A result of this significant increase, which
again is principally related to acquisitions, is that days sales in accounts
receivable increased from approximately 30 days for the quarter ended
September 30, 1997 to 43 days for the quarter-ended September 30, 1998.
Additionally, again in response to acquisitions, inventory also significantly
increased, rising to a level of 81 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 $2.8 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
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management computer systems. Management expects these expenditures to continue
at a lower rate in the near term, but can provide no assurances in that regard.
Corresponding to the increases in accounts receivable and inventory,
current liabilities also materially increased during the current quarter.
Accounts payable increased to approximately $900,000 for the quarter-ended
September 30, 1998, from approximately $160,000 for the comparable quarter of
the prior year. Current maturities of long term debt likewise significantly
increased. These increases are due principally to acquisitions.
Long term assets for the Office Solutions segment, consisting
principally of goodwill and intangible assets, also showed material growth,
which again is principally in response to acquisitions.
Long term debt, as previously reported, increased materially in
response to the funding of acquisitions. Moreover, as previously reported, the
Company entered into two loan agreements which are being utilized principally to
fund acquisitions and, to a lesser extent, working capital requirements.
During the quarter-ended September 30, 1998, the segment produced
negative cash flow, as compared to positive cash flow of approximately $18,000
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 September 30, 1998, the Merchant Banking segment
had total assets of approximately $5.5 million. Total assets did decline at
September 30, 1998, however, 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
during 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.
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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.
Management does not anticipate material additional expense in future
periods associated with known Y2K issue.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q/A for the quarter-ended
September 30, 1998 to be signed on its behalf by the undersigned thereunto duly
authorized.
IMTEK OFFICE SOLUTIONS, INC.
Date: December 3, 1998
----------------------------------
Brad Thompson
Chief Financial Officer and
Duly Authorized Officer
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