<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, 1999
Commission file number: 33-24464-NY
IMTEK OFFICE SOLUTIONS, INC.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-2958856
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification No)
8003 Corporate Drive, Suite C, Baltimore, Maryland 21236
----------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (410) 931-2054
-------------------
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
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity as the latest practicable date: 7,532,361 shares as of November 15, 1999.
<PAGE>
INDEX
IMTEK OFFICE SOLUTIONS, INC.
<TABLE>
<CAPTION>
PART I. Financial Information
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1999
(unaudited) and June 30, 1999 (audited).......................................................3-4
Condensed Consolidated Statements of Earnings - Three months
ended September 30, 1999 and 1998...............................................................5
Condensed Consolidated Statements of Stockholders' Equity
for the three months ended September 30, 1999...................................................6
Condensed Consolidated Statements of Cash Flows -
three months ended September 30, 1999 and 1998..................................................7
Notes to Condensed Consolidated Financial Statements.........................................8-10
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition and Liquidity............................................10-18
</TABLE>
<TABLE>
<CAPTION>
PART II. Other Information
<S> <C> <C>
Item 1. Legal Proceedings..............................................................................18
Item 3. Defaults Upon Senior Securities................................................................19
Item 4. Submission of Matters to a Vote of Security Holders............................................19
Item 6. Exhibits and reports on Form 8-K...............................................................19
Signatures..................................................................................................20
</TABLE>
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<PAGE>
IMTEK OFFICE SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
------------------ -------------
(unaudited) (audited)
CURRENT ASSETS
<S> <C> <C>
Cash $ 927,624 $ 356,489
Escrow deposit 1,627,942 753,711
Accounts receivable (net) 3,662,934 3,836,580
Other receivables -0- 109,624
Inventory 2,833,863 3,388,100
Notes Receivable 139,364 139,196
Deferred tax assets 488,712 488,712
Net assets of discontinued operations 83,739 370,984
Deposits 100,000 -0-
Prepaid expenses and other current assets 503,782 206,457
----------- -----------
Total current assets 10,367,960 9,649,853
PROPERTY AND EQUIPMENT -
at cost, less accumulated depreciation and amortization 3,013,897 3,129,551
OTHER NONCURRENT ASSETS 158,382 143,477
DEFERRED FINANCING COSTS, less accumulated amortization 355,874 288,326
OTHER INTANGIBLE ASSETS, less accumulated amortization 7,282,209 7,361,322
----------- -----------
$21,178,322 $20,572,529
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
IMTEK OFFICE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
------------------ -------------
(unaudited) (audited)
CURRENT LIABILITIES
<S> <C> <C>
Current maturities of long term debt $ 960,000 $ 953,820
Current maturities of obligations under capital lease 200,000 195,731
Accounts payable and accrued expenses 1,843,022 1,927,931
Accounts payable - related party 595,744 724,598
Accrued expenses 1,118,796 1,967,110
Customer escrow accounts 1,627,942 753,711
Deferred revenue 1,418,914 1,369,912
Income taxes payable 126,957 122,125
----------- ---------
Total current liabilities 7,891,375 8,014,938
LONG TERM DEBT, net of current maturities and original issue
discount 8,512,708 7,740,806
OBLIGATIONS UNDER CAPITAL LEASE, net of current maturities 946,329 1,051,857
DEFERRED TAX LIABILITY 51,982 51,982
PUT OPTION OBLIGATION 2,251,062 2,251,062
MINORITY INTEREST 215,909 160,174
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 5,000,000 shares;
75,000 shares Series A authorized; liquidation preference of
$832,400 Series A; issued and outstanding, 8,324 shares 83 83
Common stock, $.000001 par value; authorized 50,000,000 shares;
issued and outstanding 7,532,361 shares 8 8
Additional paid-in-capital 2,246,490 2,246,490
Accumulated deficit (937,624) (944,871)
----------- -----------
1,308,957 1,301,710
----------- -----------
$21,178,322 $20,572,529
========== ==========
</TABLE>
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<PAGE>
IMTEK OFFICE SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three Months Ended(unaudited)
--------------------------------------------------
September 30, 1999 September 30, 1998
------------------- -------------------
(Restated)
<S> <C> <C>
REVENUES
Office Solutions $ 4,809,714 $4,847,249
Merchant Banking 14,384,597 14,081,305
Specialty Finance 30,548 -0-
----------- ----------
19,224,859 18,928,554
COST OF REVENUES
Office Solutions 3,090,075 3,148,124
Merchant Banking 12,661,853 10,320,521
Specialty Finance 643 -0-
---------- ----------
15,752,571 13,468,645
GROSS PROFIT 3,472,288 5,459,909
SELLING AND GENERAL
EXPENSE 2,989,757 3,901,918
----------- ---------
OPERATING INCOME 482,531 1,557,991
INTEREST EXPENSE 414,718 180,608
INTEREST INCOME -0- 17,178
----------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST 67,813 1,394,561
MINORITY INTEREST 55,734 18,865
INCOME TAXES 4,832 594,132
------------ -------
NET INCOME FROM CONTINUING OPERATIONS 7,247 781,564
DISCONTINUED OPERATIONS -0- (124,311)
NET INCOME 7,247 657,253
Preferred Stock Dividends 18,729 15,165
----------- ------
(Loss) Income available to common Stockholders $ (11,482) $ 642,088
=============== ===========
NET (LOSS) INCOME PER SHARE
BASIC
Continuing Operations $ (.002) $ .11
Discontinued Operations $ .000 $(.02)
-------------------- -----
Net (Loss) Income $ (.002) $ .09
======== =====
DILUTED
Continuing Operations $(.001) $ .11
Discontinued Operations $.000 $(.02)
------- -----
Net Income $(.001) $ .09
==================== =====
WEIGHTED AVG. NUMBER OF SHARES
Basic 7,532,361 7,532,361
==================== ===========
Diluted 8,246,254 7,732,494
==================== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
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<PAGE>
IMTEK OFFICE SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the three months ended September 30, 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
------------------ ------------------- Paid in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
-------- ------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -
June 30, 1999 8,324 $83 7,532,361 $8 $2,246,490 $(944,871) $1,301,710
Net Income for the
period -0- -0- -0- -0- -0- 7,247 7,247
------- ----- ------------- ---- ----------- -------- -------------
Balance -
September 30, 1999 8,324 $83 7,532,361 $8 $2,246,490 $(937,624) $1,308,957
===== === ========= == ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE>
IMTEK OFFICE SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
For the Three Months Ended
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
------------------- ------------------
(Unaudited) (Unaudited)
Restated
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,247 $ 657,253
Adjustments to reconcile net income to net cash
provided by continuing operating activities
Loss from discontinued operations -0- 124,311
Depreciation and amortization 299,065 179,501
Minority interest 55,735 18,865
Accretion of original issue discount 113,000 33,785
Changes in assets and liabilities, net of effect of acquisitions
Accounts and other receivables 280,300 (1,417,350)
Inventory 554,237 (1,761,612)
Accounts payable and accrued expenses (933,223) (185,513)
Deferred revenue 49,002 1,279,644
Accounts payable - related party (128,854) -0-
Prepaid expenses and other current assets (397,325) 52,984
Other assets (14,905) -0-
Income taxes payable 4,832 78,396
---------- -----------
Net cash (used in) provided by continuing operating activities (110,889) (939,736)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (29,846) (1,272,212)
Acquisition of intangibles and deferred financing costs (139,000) (3,166,767)
---------- -----------
Net cash used in investing activities (168,846) (4,438,979)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 4,017,447 4,780,749
Payments on long-term debt (3,305,247) (761,184)
Payments on obligations under capital lease (148,575) -0-
---------- -----------
Net cash provided by financing activities 563,625 4,019,565
CASH FLOWS PROVIDED BY (USED IN) DISCONTINUED 287,245 (157,881)
OPERATIONS
Net increase (decrease) in cash 571,135 (1,517,031)
Cash at beginning of period 356,489 2,949,168
---------- -----------
Cash at end of period $ 927,624 $ 1,432,137
========== ===========
DISCLOSURE OF SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $301,718 $ 21,073
======= ======
Cash paid for taxes $ -0- $ 20,400
=========== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-7-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
IMTEK OFFICE SOLUTIONS, INC.
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied
in the preparation of the accompanying financial statements 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, and the leasing of
office equipment. The Company conducts business in the Baltimore, Maryland,
Washington, DC, Richmond and Tidewater, Virginia, Atlanta, Georgia and
Philadelphia, Pennsylvania markets and grants credit to its customers in those
regions.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements as of
September 30, 1999, reflect the accounts of the Company, together with the
accounts of Imtek Corporation, Imtek Services Corporation, Imtek Acquisition
Corporation and Imtek Capital Corp., wholly owned subsidiaries of the
Company. All inter-company transactions have been eliminated in consolidation.
The accompanying condensed consolidated balance sheets as of
September 30, and June 30, 1999, condensed consolidated statements of
earnings for the three months ended September 30, 1999 and 1998, the
condensed statement of stockholders' equity for the three months ended
September 30, 1999, and the condensed consolidated statements of cash flows
for the three months ended September 30, 1999 and 1998 are unaudited, except
for the balance sheet as of June 30, 1999. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
It is suggested that these condensed consolidated financial statements be
read in conjunction with the financial statements and notes thereto included
in the Company's June 30, 1999 Form 10-K filed with the Securities and
Exchange Commission, Washington, D.C. 20549. 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
presented have been reflected in the accompanying condensed consolidated
financial statements. The results of operations for interim periods presented
herein are not necessarily indicative of the results which may be expected
for the entire fiscal year.
NOTE B - DISCONTINUED OPERATIONS
On April 7, 1999, the executive committee of the Company's Board of
Directors elected to discontinue the Commercial Printing and Duplicating
Services segment of the business. In fiscal 1999, the Company realized a loss on
operations, net of tax benefit, of the commercial printing and duplicating
services segment of $1,223,342, which included a provision of $479,169 for
operating losses during the phase-out period. At September 30, 1999, the Company
has realized phase out expenses, net of tax, of $124,311.
-8-
<PAGE>
Summarized data relating to the discontinued operation of the
Commercial Printing and Duplicating Services segment for the quarter ended
September 30, 1998 is as follows:
Revenue $738,501
Cost of Revenue 685,952
--------
Gross Profit 52,549
Selling, General and
Administrative Expense 257,440
Income Taxes (80,932)
--------
Loss from Operations $(124,311)
--------
--------
NOTE C - 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 the sale of the policies.
NOTE D - DEPENDENCE ON MAJOR VENDOR
The Company's Merchant Banking segment purchases viaticated insurance
policies primarily from one broker. For the quarter ended September 30, 1999 and
1998, the company purchased $7,828,030 and $7,730,119 in policies from this
broker, representing 61.8% and 74.9% of the policies purchased during the
respective quarter.
NOTE E - SEGMENT INFORMATION
<TABLE>
<CAPTION>
Quarter ended Quarter ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Sales to unaffiliated customers
Office Solutions $4,809,714 $4,847,249
Merchant Banking 14,384,597 14,081,305
Specialty Finance 30,548 --
-------- -----------
$19,224,859 $18,928,554
========== ==========
Operating Income (Loss)
Office Solutions $ (331,290) $ (47,999)
Merchant Banking 797,948 1,605,990
Specialty Finance 15,873 --
-------------- ----------------
$ 482,531 $ 1,557,991
============== ===========
Assets
Office Solutions $15,160,920 $12,825,952
Merchant Banking 5,860,417 3,849,923
Specialty Finance 73,246 -0-
</TABLE>
-9-
<PAGE>
<TABLE>
<S> <C> <C>
Discontinued Operations 83,739 1,935,599
------------- ------------
$ 21,178,322 $ 18,611,474
============= ============
Capital Expenditures
Office Solutions $ 29,846 $ 1,270,617
Merchant Banking -0- 1,595
Specialty Finance -0- --
------------- ------------
$ 29,846 $ 1,272,212
============= ============
Depreciation and Amortization
Office Solutions $ 282,775 $ 172,169
Merchant Banking 16,290 7,332
Specialty Finance -- --
------------- ------------
$ 299,065 $ 179,501
============= ============
</TABLE>
NOTE F - RECLASSIFICATION
Certain items in the quarter ended September 30, 1998 financial
statements have been reclassified to conform to the current quarter
presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
FORWARD LOOKING INFORMATION
This report includes or incorporates by reference certain statements
which are "forward looking statements" within the meaning of the Private
Securities Litigation Act of 1995. Forward looking statements are based on
various factors and assumptions that include known and unknown risks and
uncertainties, changes in economic conditions, increases in inventory and
equipment costs, subcontract, labor costs and general competitive factors.
Certain words, such as "goal", "expect", "believe", and simliar expressions,
as they relate to the Company, are intended to identify forward looking
statements. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions that could cause actual results to differ materially from those
reflected in the forward looking statement. No assurance can be given that
the results in any forward looking statement will be achieved.
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, among other
things, reduced product demand, market conditions, availability of suitable
acquisition candidates, increased competition, government action or other
factors.
BACKGROUND
Imtek Office Solutions, Inc., (the "Company"), as previously reported,
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 wholesale and retail sale of copiers and facsimile equipment, servicing of
office equipment, providing commercial printing and duplicating services and, to
a lesser extent, the retail sale of office supplies. Effective October 1997, the
Company commenced operation of its merchant banking business, which primarily
involved the purchase and resale of viaticated life insurance policies of
terminally ill individuals. Effective January 1999, the Company created a third
segment, Specialty Finance, which was formerly a component of the Merchant
Banking segment with no significant operations. During the prior fiscal year,
the Company elected to adopt SFAS 131, Disclosures About Segments of an
Enterprise and Related Information. Upon adoption of this statement, the Company
created a fourth segment, Commercial Printing and Duplicating Services. This
segment was previously reported in the Office Solutions segment. The Commercial
Printing and Duplicating Services segment was principally in the business of
providing outsourcing services, such as litigation support, copying services and
digital imaging services. During the fourth quarter of the prior fiscal year,
the Company elected to discontinue this segment and implemented a program to
eliminate the assets of this segment by sale, or transfer to other operating
units.
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
metropolitan Atlanta, Georgia.
-10-
<PAGE>
As previously discussed, the Company has three operating segments.
The first segment, representing the historical core business of the Company,
is the sale at retail and wholesale of copier sales and service, and to a
lesser extent the sale of office products and supplies. This segment is
referred to as Office Solutions segment. The Office Solutions segment
continues the process of growth through acquisitions as previously reported.
The strategy consists principally of acquiring smaller office equipment
dealers located within specific geographic markets consisting principally of
the Philadelphia Pennsylvania and Baltimore/Washington DC metropolitan area.
The segment anticipates acquiring additional entities which may provide
opportunity for expansion or enhancement of current products and services,
but management can provide no assurances in that regard. Management continues
to believe that adequate acquisition opportunities exist. Management
anticipates that acquisitions would be funded principally from the issuance
of capital stock, external financing sources, such as the anticipated private
placement debt offering, and, to a lesser extent, internally generated cash
flow. The Company's future success with acquisitions generally depends upon
the timing and size of the acquisition, the ability to integrate the acquired
company into the Company's operation with a minimum of integration costs, and
the Company's ability to grow and control its infrastructure to accommodate
the continued growth.
The second segment is the Merchant Banking segment and consists
principally of the purchase and sale of viaticated life insurance policies.
The Merchant Banking segment commenced operations during October 1997.
Presently the Merchant Banking segment markets its product principally
through a network consisting primarily of insurance agents. The Company is
also currently investigating several marketing alternatives, including
offering viaticated insurance policies as a "securitized" product. If the
Company is successful in offering these additional "securitized" products,
management believes that the segment has the potential to experience a
substantial increase in volume. While there can be no assurance that this
substantial increase in volume may be achieved, offering these additional
securitized products should allow licensed security brokers the opportunity
to begin selling this product, thus expanding the segment's sales network.
Management anticipates providing an initial funding of up to several hundred
thousand dollars during the second and third quarters of the current year in
designing these products and introducing them into the market.
The Company believes that the conduct of its viatical business is
not presently a security subject to regulation under current state securities
laws. The Company is aware, however, that several states are attempting to
regulate, or to determine if the Company's viatical business, or parts of the
viatical settlement process, should be regulated under state securities or
"blue sky" laws, or such states insurance laws or regulations. During April
1999, as previously reported, the Kansas Securities Commissioner issued a
cease and desist order, finding that the viatical settlement contract was a
security within the meaning of the Kansas Securities Act. In response, the
Company has ceased all offers and sales of viatical settlement contracts
within the state of Kansas. Additionally, the Company has agreed to settle
the proceeding, without admitting or denying the allegations of the
Commissioner, with which the Company did not concur. Also, as part of the
settlement agreement, the Company agreed to offer recision to the ten Kansas
residents who purchased viatical settlement contracts. Had all ten purchasers
accepted the Company's recision offer, the Company's maximum liability would
be approximately $250,000, plus interest at 15% on that amount from the date
of purchase through the date of the purchaser's acceptance of the recision
offer. At present, six Kansas purchasers have accepted the Company's
recision offer, with the Company's liability of $177,651 plus interest. Two
Kansas residents have rejected the Company's recission offer to date. It is
the Company's intention to subsequently resell the contracts. Should the
Company be able to resell the contracts, the effect of the recission on the
Company's operating results should be minimal.
Moreover, the states of Virginia, Iowa, and Colorado are conducting
investigations into whether viatical settlement contracts sold by the
Company, as well as others, constitute securities which require registration
under applicable state law.
The Company believes that the conduct of its viatical business may
not be subject to regulation under state securities or insurance laws or
regulations, as such laws and regulations are now written. The Company can
provide no assurance, however, that a state regulatory body looking into this
matter at present, or in the future, will concur with the Company's position
in this regard or that if
-11-
<PAGE>
challenged, the Company will prevail in its position. Regulation by the
states could materially increase regulatory compliance costs, disrupt
business, preclude sales in those states, and potentially have a material
adverse effect on the Company's viatical business. Even if the Company is
affirmed in its position that the viatical business is not currently
regulated under state securities or insurance laws and regulations, there can
be no assurance that such laws will not be amended by the states to regulate
the Company's viatical business in future.
The third segment, Specialty Finance consists principally of
providing intermediary services in brokering financing and leasing
arrangements of office equipment. Previously, the segment's activities were
included within the Merchant Banking segment. Since prior activity was
inconsequential and immaterial, prior periods have not been restated to
reflect the change.
RESULTS OF OPERATIONS
OFFICE SOLUTIONS SEGMENT
The Office Solutions segment generated gross revenue, net of
discontinued operations, of approximately $4.8 million. Sales were flat as
compared to the comparable quarter of the prior year due primarily to the
Company's cost containment program, wherein the sales force has been reduced
and "right-sized". The segment has commenced the rebuilding of its sales
force with experienced copier sales personnel and anticipates the impact of
this strategy will be realized through subsequent sales increases and
improved profitability. Additionally, the segment has begun the process of
eliminating the business of the sale of office supplies, with sales declining
by approximately $160,000 during the quarter, as compared to the comparable
quarter of the prior year. The segment expects to completely discontinue the
sale of office supplies within the next quarter.
For the quarter ended September 30, 1998, as compared to the comparable
period of the prior year, revenue dramatically increased, a change of
approximately 300%, due principally to acquisitions. Revenue increased from
approximately $1.2 million to approximately $4.8 million. To a lesser extent,
the revenue increase was related to same store sales increases.
Cost of Goods Sold for the Office Solution segment showed a slight
decline for the current quarter as compared to the comparable period of the
prior year. The segment's total cost of goods sold decreased to approximately
$3.09 million as compared to $3.12 million for the quarters ended September
30, 1999 and 1998, respectively. This decrease of approximately 1% compares
to the flat revenue. Thus, the segment reported comparable gross margin,
slightly increasing from 35.62% to 35.75% for the quarter ended as of
September 30, 1998 and 1999, respectively. This slight improvement in gross
margin relates principally to the reduction in the office products and
supplies division, which generates lower gross margins than other divisions
within the segment.
For the quarter ended as of September 30, 1999, as compared to the
comparable quarter of the prior year, the segment's gross margin showed
improvement. Acquisitions and the discontinuance of the lower margin
Commercial Printing and Duplicating Services segment accounted for
substantially all of this improvement.
Selling, general and administrative expenses for the quarter ended
as of September 30, 1999 as compared to the comparable quarter of the prior
year, net of discontinued operations, increased by approximately $2.2 million
from approximately $1.5 million. Approximately $100,000 of this increase
relates to acquistions.
-12-
<PAGE>
The segment has reduced its sales force and administrative headcount, and
thus during the current quarter realized a cost savings of approximately
$45,000. However, due to previous acquisitions, the segment recognized
significant expenses associated with amortization of goodwill, accretion of
the original issue discount on long term debt, and depreciation expense, as
compared to the comparable quarter of the prior year.
For the quarter ended as of September 30, 1998, as compared to the
comparable quarter of the prior year, selling, general and administrative
expense increased dramatically, rising to $1.1 million as compared to $123,000.
This significant increase was due principally to acquisitions.
As previously reported, the Company anticipates a certain level of
transformation and assimilation expenditures with acquisitions. 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 policy and
procedures, and general and administrative expenses associated with the
improvement of the acquisition's infrastructure.
Interest expense for the quarter ended as of September 30, 1999, as
compared to the comparable quarter of the prior year, increased significantly.
This increase is principally in response to acquisition debt, and to a lesser
extent, debt used to fund current operations.
MERCHANT BANKING SEGMENT
For the quarter ended as of September 30, 1999, the Merchant Banking
segment generated gross revenue of $14.4 million, as compared to $14.1
million in the comparable quarter of the prior year. This slight increase,
approximately $303,000, or 2.15%, is in line with management's expectations
given the maturation of the industry, increased competition, and the effect
of several states considering viatical settlements to be securities, thus
constricting the viatical settlement market.
As previously reported, the segment has attempted to maintain its
market share through the contraction of its margins. Moreover, the segment
has used this strategy to facilitate growth, and/or maintenance of its market
share where practical. Additionally, as previously reported, the segment's
profit margins are affected by its product mix, which is defined as the
viatication period. Viatication periods, generally in intervals of 12 month
periods, range from 1 year to 4 or more years, with the gross margin
increasing as the viatication period lengthens.
Cost of Revenue for the quarter end September 30, 1999 as compared to
the quarter ended September 30, 1998, increased by approximately $2.3 million or
approximately 22.7%. With the current year increase, gross margin declined to
11.98% from 26.71% in the comparable period of the prior year. This gross margin
decline is principally related to the product mix and the segment's continuation
of its previously reported marketing strategy, wherein the segment
has sought to increase its market share, resulting in increased revenue - or the
maintenance of existing revenue volume - with corresponding increased
profitability through economies of scale. Moreover, during the comparable
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<PAGE>
quarter of the prior year, revenue and its corresponding costs where impacted by
the product mix being more heavily weighted toward the longer viatication
periods, with their higher gross margins.
Selling, general and administrative expense for the quarter ended
September 30, 1999, was approximately $733,750, representing 5.1% of gross
revenue. As compared to the comparable quarter of the prior year, selling
general and administrative expense contracted by approximately $208,500. This
reduction is principally related to reductions in payroll expense, professional
fees expense, and computer/consulting expense. These reductions were partially
offset by increases in rent and facilities expense, which related to the
previously reported relocation of the segment to the new headquarters facility,
and to a lesser extent, administrative supplies expenses. Postage and other
marketing expenses showed a slight increase in response to increased marketing
efforts resulting from the industry maturation process.
Selling, general and administrative expense for the quarter ended as of
September 30, 1998, which represented 6.7% of gross revenue were principally
impacted by increases in professional fees and higher payroll costs.
Interest expense for the quarter ended September 30, 1999, as compared
to the comparable quarter of the prior year, increased due to the Ruttenberg
acquisition and to a lesser extent, working capital requirements.
SPECIALTY FINANCE SEGMENT
As previously discussed, the Company during the third quarter of the
prior fiscal year created a third segment called Specialty Finance. This
segment consists principally of a wholly owned subsidiary, Imtek Capital
Corporation and provides intermediary services in brokering financing and
leasing arrangements of office equipment. Therefore, there are no comparisons
to the comparable quarter of the prior year as there was no segment activity.
For the three months ended September 30, 1999, the Specialty Finance
segment generated revenue of approximately $30,500, recognizing total costs
of approximately $14,675, resulting in operating income of approximately
$15,875. Building rent and related expenses, and communications expense, such
as telephone and postage expense, account for substantially all of the
segment's recognized expenses. Management anticipates that this segment will
experience growth in the future, such that the current profit margin may not
be maintained. Management can provide no assurance that such anticipated
growth will be experienced and that the resultant cost structure may not
materially change.
FINANCIAL CONDITION AND LIQUIDITY
As previously reported, the Company has experienced growth within
the Office Solutions segment principally through acquisitions. However,
during the quarter ended September 30, 1999 the segment did not consummate an
acquisition. Acquisition activity within the last several quarters has been
below the segment's historical norms. The segment has been restricted in its
acquisition activity due to funding constraints and has used this period to
integrate previously acquired entities into the segment's operating and
philosophical structure and culture.
-14-
<PAGE>
Moreover, as discussed below, the Company has entered into negotiations with
a financial advisor to raise through a private placement offering,
approximately $5 million of subordinated debentures. If successful, this
offering would be principally used to fund acquisitions and, to a lesser
extent, for working capital purposes.
The Company's ability to receive dividends from its subsidiaries is
restricted by its loan agreements. The loan agreements generally provide that
the Company may not declare or pay dividends on any common stock, other than
stock dividends, without the express consent of the lenders. Moreover, as
previously reported, the Sirrom loan agreement provides Sirrom the right to
purchase 569,885 shares of the Company's common stock. The warrants may be
exercised at any time until July 31, 2003 at $0.01 per share. The warrants
further provide Sirrom with a put option such that Sirrom may sell the warrants
back to the Company. The Company has recognized a long-term put obligation of
approximately $2.25 million as of September 30, 1999 and June 30, 1999.
Moreover, as previously reported, the Company during the fiscal years
1999 and 1998 issued shares of preferred non-voting convertible Series A stock.
Proceeds, net of issuance costs, were used principally to fund acquisitions. The
preferred shares carry a dividend rate of 9%, payable annually, beginning
October 1, 2001. The Company may redeem the shares for $100 per share, plus
accrued dividends, plus a call premium based on the elapsed time between the
issue date and cash redemption, which ranges from $2.00 for 91 days to $20.00
for over 900 days. Management does not presently anticipate redeeming the
shares.
As previously reported on Form 10-K for the year ended June 30, 1999,
the Company entered into a $10 million revolving line-of-credit with the
Provident Bank on July 7, 1999. The proceeds of the credit facility were used to
replace the Mercantile Bank line and fund working capital requirements. The
line-of-credit expires on July 1, 2002. Borrowings accrue interest at 1% above
the bank's prime rate of interest on the greater of the unpaid principal balance
of the note or $5,000,000, whichever is greater.
On November 18, 1999, The Provident Bank verbally notified the
Company that it was in default of certain financial covenants contained in
the Loan and Security Agreement and the Guarantee entered into by the
Company, Intek Corporation and Barbera Business Systems, Inc. relating to The
Provident Bank revolving line of credit provided to Imtek Corporation and
Barbera Business Systems, Inc. Specifically, the bank has verbally notified
the Company that it believes the Company was in default of covenants relating
to minimum consolidated net worth, consolidated interest coverage ratio and
consolidated fixed charge coverage ratio as of the closing date and believes
the Company to be in default of covenants relating to minimum consolidated
net worth and the ratio of consolidated liabilities to consolidated net worth
as of September 30, 1999. As of November 22, 1999, the Company has borrowed
approximately $4 million under the Provident credit line. The Company is
currently in discussions with The Provident Bank to obtain a waiver of the
foregoing defaults and an amendment to the covenants and expects, but cannot
provide any assurance, that such a waiver and/or amendment is forthcoming.
Also, as previously reported, the Company entered into a loan
agreement with Finova Mezzanine Capital Corporation (Finova), formerly Sirrom
Capital Corporation, in May, 1998 primarily to fund acquisitions, and to a
lesser extent, to fund working capital requirements. During the prior year,
the Company has fully utilized the credit facility. The Company anticipates
that in conjunction with its anticipated private placement that the
subordinated loan agreement may be amended to allow the maturity date to be
shortened to November 30, 2001.
Additionally, as previously reported, the Company has commenced
negotiations with W.J. Nolan to raise through a best efforts private
placement up to $5 million. The Company and the placement agent may also sell
additional units to cover over allotments, if any, up to $750,000. Proceeds
are expected to be used primarily to finance acquisitions and to a lesser
extent to fund working capital requirements.
-15-
<PAGE>
There can be no assurance that this financing will be commenced or that, if
commenced, it will be successful or that future acquisitions can be obtained
on terms acceptable to the Company. The Company anticipates that this private
placement will be a debt offering which would likely require the issuance of
a significant number of warrants to purchase the Company's common stock.
Office Solutions Segment
The Office Solutions segment reported total assets of approximately
$15.4 million as of September 30, 1999, as compared to $16.5 million for the
year ended as of June 30, 1999, and $12.8 million as of September 30, 1998
after restating the prior year to conform to the current year presentation,
taking account of the creation and discontinuance of the Commercial Printing
and Duplicating segment.
During the quarter accounts receivable declined by approximately
$284,000. This decline relates principally to the segment's continued focus on
cash management and the timely collection of its accounts receivable. As
compared to the comparable quarter of the prior year, accounts receivable
increased by approximately $1.0 million. This increase relates principally to
acquisitions and their related revenue growth.
While the segment has focused on cash management, it has also continued
its efforts to monitor and maintain efficient and effective inventory levels.
Thus, during the quarter ended as of September 30, 1999, as compared to June 30,
1999, inventory has been reduced by approximately $550,000. As compared to the
comparable quarter of the prior year, inventory decreased by approximately
$600,000. This decrease was due principally to the assimilation of acquisitions
into the company and the liquidation of excess inventory through controlled
inventory replenishments.
Current liabilities, in response to the change in accounts
receivable and inventory, likewise decreased. This decrease was principally
in accrued expense and accounts payable which were paid with proceeds from
the Provident facility.
As previously reported in the Company's form 10-K for the year ended
as of June 30, 1999, the Company entered into a $10 million revolving line of
credit agreement with the Provident Bank on July 7, 1999. The proceeds of the
line were used to replace the then existing line of credit agreement with
Mercantile Bank and for working capital. The Provident Bank line of credit
expires on July 1, 2002. Borrowings accrue interest at 1% above the bank's
prime lending rate on the greater of the unpaid balance or $5 million. The
credit line specifies certain covenants and requirements to maintain certain
ratios and net worth. The line is collateralized by substantially all of the
Company's assets.
At September 30, 1999, borrowings under the Provident Bank line of
credit was approximately $3.9 million. Proceeds of the line were used to
retire existing debt and to fund working capital requirements.
Additionally, as previously reported on Form 10-K for the year ended
June 30, 1999, on August 16, 1999, the Company entered into a severance
agreement with a former officer of the Company. The Company agreed to a
severance payment of $164,000
-16-
<PAGE>
payable in equal monthly installments for a period of twelve months, less
standard withholdings required by law. Additionally, the Company agreed to issue
stock options to purchase 10,000 shares of the Company's common stock at a price
of $1 per share.
Merchant Banking Segment
The Merchant Banking segment reported assets of approximately $5.9
million, as compared to approximately $3.85 million for the comparable
quarter of the prior year. This increase relates principally to increases in
customer escrow account and accounts receivable. This increase was, however,
offset by a decrease in cash of approximately $1.5 million. Fixed assets
increased by approximately $122,000 compared to the comparable quarter of the
prior year, which as previously reported relates to the segment's relocation
during the fourth quarter of the prior fiscal year with resultant increases
in office furniture purchases. Deposits increased by approximately $125,000
due to a $100,000 retainer with the segment's council in anticipation of
efforts necessary in the securitization of viatical settlement contracts.
Moreover, the segment deposited approximately $25,000 with an investment
advisor in contemplation of a private placement of subordinated debt. Current
liabilities increased by approximately $25,000, which consists principally of
increases in customer escrow liabilities, and advances on settlements.
Moreover, long term debt increased by approximately $315,000, as compared to
the comparable quarter of the prior year, due principally to the previously
reported Ruttenberg acquisition. Goodwill was also increased, as previously
reported in form 10-K for the year ended June 30, 1999, for the stock
repurchase/put obligation of a former shareholder, Mr. Andrew Walter.
The segment's assets, as compared to June 30, 1999, increased by
approximately $2.2 million. As discussed above, this increase is in response to
the customer escrow accounts, increases in accounts receivable, and increases in
deposits.
As previously reported, the Company, after entering into an
agreement with the state of Kansas Securities Commissioner, has consented to
offer 10 purchasers of viatical settlement contracts within Kansas the right
to rescind the sale of the contract. The Company has agreed to repurchase the
contracts and pay interest at the rate of 15% from the date of settlement
through the date of rescission. The segment anticipates that its maximum
exposure is approximately $250,000 in the event that all ten purchasers elect
to rescind. To date, six Kansas resident purchasers have executed rescission
agreements with the Company. In addition to interest at 15%, the Company is
obligated to repurchase the six contracts for approximately $177,650. The
Company expects to resell these contracts, such that any effect on the
Company's results of operations and financial condition should be minimal.
The Company can provide no assurance that such contracts can be resold, or
that other states presently evaluating whether viatical settlement contracts
are securities under applicable state law will not also require the Company
to offer rescission options to purchasers within their states. Should such
rescission offers be required, the impact upon the Company's financial
position and condition could be material and adverse.
-17-
<PAGE>
Specialty Finance Segment
As previously discussed, the Specialty Finance segment came into
existence during the third quarter of the prior fiscal year. Thus, there is no
comparison to comparable quarter of the prior period.
Total assets for the Specialty Finance segment was approximately
$73,000 as of September 30, 1999, as compared to $32,000 for the year ended
as of June 30, 1999. This increase of approximately $41,000 relates
principally an increase in the prefund. The lessor advances the segment with
cash in anticipation of funding requirements on future leases. The segment
has created working relations with several funding sources. The segment must
utilize the prefund amount within a reasonable time period, or return the
funds to the lessor upon receipt of a call notice. Additionally, during the
period ended June 30, 1999, the segment had recognized inventory of $28,752,
consisting of equipment which was to be financed and leased to a unrelated
customer. The segment, during the quarter ended September 30, 1999, has
completed the transaction and thus inventory has been eliminated.
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 disruption. The cost of such company-wide
disruptions could have a material adverse affect on the Company's financial
position.
As previously reported, the Company has implemented a plan to address
its Y2K issue and has substantially completed the plan. A number of computer
applications have been identified as either Y2K compliant or that the third
party vendor has assured the Company that their software is Y2K compliant.
Management does not anticipate significant additional expense or company-wide
disruptions in future periods associated with the Y2K issue.
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings
In November, 1998 the Company settled a $500,000 lawsuit (which was
reported in Item 3 of the Company's annual report on Form 10-K for the fiscal
year ended June 30, 1999) which alleged certain copyright infringements and
breach of contract damages. Settlement terms called for a payment of $60,000
made in December, 1998 and subsequent semi-annual installments made through
December 2000, totaling $82,500.
As previously reported, on April 16, 1999, the Kansas Securities
Commissioner issued a cease and desist order against Imtek Funding Corporation,
d/b/a Beneficial Assistance, Inc., the Merchant Banking segment of the Company,
finding that the viatical settlement contracts were securities within the
meaning of the Kansas Securities Act. In response, the Company has ceased all
offers and sales of viatical settlement contracts within the state of Kansas.
Additionally, the Company has agreed to settle the preceding, without admitting
or denying the allegations of the Commissioner, with which the Company did not
-18-
<PAGE>
concur. Also, as part of the settlement agreement with the state of Kansas, the
Company agreed to offer rescission to the ten residents of Kansas, previously
reported and thought to be seven residents, who purchased viatical settlement
contracts. Had all ten Kansas purchasers accepted the Company's rescission
offer, the Company's maximum liability would be approximately $250,000, plus
interest at 15% on that amount from the date of purchase through the date of the
purchaser's acceptance of the rescission offer. At present, six Kansas purchaser
have accepted the Company's rescission offer with the Company's liability of
$177,651, plus interest. Two Kansas residents have rejected the Company's
rescission offer to date. It is the Company's intention to subsequently resell
the contracts. Should the Company be able to resell the contracts, the effect of
the rescission on the Company's operating results should not be material. The
Company can provide no assurance, however, that the contracts will be resold or
that the effects of the Kansas rescission or other rescissions which the Company
may be required to conduct in the future, will not have a material adverse
effect on the Company, its financial condition or its results of operations.
As previously reported, the states of Virginia, Iowa, and Colorado
are conducting investigations into whether viatical settlement contracts sold
or brokered by the Company, as well as others, constitute securities which
require registration under applicable state law. The Virginia Securities
Division has informed the Company that it may institute an enforcement
proceeding against the company. Should such an enforcement proceeding be
instituted, the Company presently expects to vigorously defend its position.
Management cannot predict the outcome of such proceeding. An unfavorable
outcome in such proceedings could have a material adverse effect on the
Company, its business and financial condition.
The Company is a party to other legal proceedings which are in the
normal course of business, and management does not believe that that a negative
outcome of these matters would have a material adverse effect on the Company's
business or its financial condition.
Item 3. Defaults Upon Senior Securities
On November 18, 1999, The Provident Bank verbally notified the Company that
it was in default of certain financial covenants contained in the Loan and
Security Agreement and the Guarantee entered into by the Company, Intek
Corporation and Barbera Business Systems, Inc. relating to a $10,000,000
revolving line of credit provided to Imtek Corporation and Barbera Business
Systems, Inc. Specifically the bank has verbally notified the Company that it
believes the Company was in default of covenants relating to minimum
consolidated net worth, the ratio of consolidated liabilities to consolidated
net worth, consolidated interest coverage ratio and consolidated fixed charge
coverage ratio as of the closing date and believes the Company to be in
default of covenants relating to minimum consolidated net worth and the ratio
of consolidated liabilities to consolidated net worth as of September 30,
1999. As of November 22, 1999, the Company has borrowed approximately $4
million under the Provident credit line. The Company is currently in
discussions with The Provident Bank to obtain a waiver of the foregoing
defaults and an amendment of the covenants and expects, but cannot provide
any assurance, that such a waiver and/or amendment is forthcoming.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its 1999 annual meeting of stockholders on October 27, 1999.
The only matter to be voted on at the annual meeting was the election of six
directors. Stockholders entitled to vote 6,662,288 shares of common stock
were present at the meeting in person or by proxy. Edwin C. Hirsch, Brad C.
Thompson, Peter B. Lilly, and Richard H. Guilford each received 6,292,788
votes for their election to the board of directors and no votes against.
Robert W. Hoover received 6,218,338 votes for his election and 74,450 votes
against his election. Bruce A. Edge received 6,277,288 votes for his election
and 15,500 votes against. One stockholder entitled to vote 369,500 shares at
the meeting abstained from voting on the matter. There were no broker
non-votes. All six nominees were duly elected by more than a plurality of all
votes entited to be cast, in accordance with Delaware law and the bylaws of
the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit:
Financial Data Schedule
(b) Reports on Form 8-K:
None
-19-
<PAGE>
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.
IMTEK OFFICE SOLUTIONS, INC.
By: /s/Edwin C. Hirsch
---------------------
Edwin C. Hirsch, President
And Chief Executive Officer
By: /s/ Brad Thompson
--------------------------
Brad C. Thompson,
Financial Officer
Dated: November 22, 1999
20
<PAGE>
Imtek Office Solutions, Inc.
Index to Exhibits
Exhibit 27. Financial Data Schedule (filed herewith)
21
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