UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended December 31, 1998. Commission File Number: 0-12661 Exact Name of Registrant as Specified in its Charter: IMTEC, Inc. State of Incorporation: Delaware I.R.S. Employer Identification Number: 03-0283466 Address of Principal Executive Offices: One Imtec Lane Bellows Falls, VT 05101 Registrant's Telephone Number: 802-463-9502 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 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. [X] YES [ ] NO APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common shares outstanding as of January 29, 1999; 1,587,313 IMTEC, INC. INDEX Page # Part I Financial Information Condensed Balance Sheets - December 31, 1998 and June 30, 1998 3 - 4 Condensed Statements of Income - Three Months and Six Months Ended December 31, 1998 and 1997 5 Condensed Statements of Cash Flows Three Months and Six Months Ended December 31, 1998 and 1997 6 Notes to Condensed Financial Statements 7 - 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II Other Information Item 4 Submission of Matters to a Vote of Security Holders 12 Item 6 Exhibits and Reports on Form 8-K 12 Signatures 13 PART I - FINANCIAL INFORMATION IMTEC, INC. CONDENSED BALANCE SHEETS (Unaudited) December 31, June 30 1998 1998 . ASSETS Current Assets: Cash and cash equivalents $ 57,897 $ 84,100 Accounts receivable: Trade, less allowance for doubtful accounts: December 31, 1998 - $211,000 June 30, 1998 - $198,000 1,904,271 2,259,107 Inventories 2,351,885 2,286,123 Prepaid expenses and other 98,411 60,725 Deferred income tax 85,941 85,941 ---------- ---------- Total Current Assets 4,498,405 4,775,996 ----------- ----------- Plant and equipment - net 2,044,247 1,587,914 Other Assets: Deposits 65,355 60,347 Computer software - net 77,273 97,469 Other intangibles - net 1,790,781 1,832,023 ------------ ------------ $ 8,476,061 $ 8,353,749 ========= ========= The accompanying notes are an integral part of these condensed financial statements. PART I - FINANCIAL INFORMATION IMTEC, INC. CONDENSED BALANCE SHEETS (CONTINUED) (Unaudited) December 31, June 30, 1998 1998 . LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable - bank $ 135,676 $ 0 Current installments of long term debt 235,567 235,567 Accounts payable 624,580 469,972 Income tax payable 144,053 33,323 Accrued liabilities: Salaries and wages 159,530 486,555 Commissions 47,815 68,375 Other 273,908 432,165 ------------ ------------ Total Current Liabilities 1,621,129 1,725,957 Long term debt less current installments 457,052 575,118 Stockholders' equity: Common stock - $.01 par value; authorized 5,000,000 shares, issued and outstanding: 1,587,313 shares December 31, 1998 1,585,713 shares June 30, 1998 15,873 15,857 Additional paid-in capital 2,599,163 2,591,629 Retained Earnings 3,782,844 3,445,188 ----------- ----------- Total Stockholders' Equity 6,397,880 6,052,674 ----------- ----------- $ 8,476,061 $ 8,353,749 =========== =========== The accompanying notes are an integral part of these condensed financial statements. IMTEC, INC. CONDENSED STATEMENTS OF INCOME (Unaudited) Six Months Ended Three Months Ended December 31, December 31, 1998 1997 1998 1997 ---- ---- ---- ---- Net Sales $6,212,386 $5,403,964 $3,363,003 $2,784,440 Cost of Sales 3,627,650 2,820,221 1,969,587 1,441,709 ----------- ----------- ----------- ----------- Gross Profit 2,584,736 2,583,743 1,393,416 1,342,731 Selling, general and administrative expenses 1,740,273 1,587,204 877,372 810,554 Research and development expenses 243,417 290,015 121,146 156,229 ----------- ----------- ----------- ----------- Operating Profit 601,046 706,524 394,898 375,948 Other Income: Miscellaneous income and other expenses 2,918 20,463 2,093 9,740 Interest Expense (39,236) (34,890) (21,758) (27,065) ----------- ----------- ----------- ----------- Income Before Income Taxes 564,728 692,097 375,233 358,623 Income Tax Expense 227,054 274,171 151,989 142,083 --------- --------- --------- ---------- Net Income $ 337,674 $ 417,926 $ 223,244 $ 216,540 ======= ======= ======= ======= Earnings per share - Basic $ .21 $ .27 $ .14 $ .14 ====== ====== ====== ====== Earnings per share - Diluted $ .20 $ .25 $ .14 $ .13 ====== ====== ====== ====== The accompanying notes are an integral part of these condensed financial statements. IMTEC, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended December 31, 1998 1997 ---- ---- Cash flows from operating activities: Net Income $337,674 $417,926 Adjust, to reconcile net income to, net cash provided by operating activities: Depreciation & amortization 287,998 300,137 Increase (decrease) in cash from: Accounts receivable 349,810 (280,894) Inventory (65,762) (677,403) Marketable securities 0 40,812 Prepaid expenses and other assets (37,686) (36,191) Accounts payable 154,608 126,453 Income tax payable 110,730 73,372 Accrued liabilities (505,842) (99,201) --------- --------- Net cash provided by (used in ) operating activities 631,530 (134,989) -------- --------- Cash flows from investment activities - Expenditures for property & equipment, computer software and other intangible assets (682,896) (301,050) Acquisition of Customark 0 (1,900,000) -------- ---------- Net cash used in investment activities (682,896) (2,201,050) Cash flows from financing activities: Net borrowing under line of credit 135,676 143,524 Proceeds from new long term debt 0 1,200,000 Principal payments on long term debt (118,066) (168,060) Proceeds from issuance of stock 7,553 0 -------- --------- Net cash provided by (used in) finance activities 25,163 1,175,464 -------- --------- Net increase (decrease) in cash (26,203) (1,160,575) Cash and cash equlivants at the beginning of period 84,100 1,352,562 -------- --------- Cash and cash equlivants at the end of period $ 57,897 $ 191,987 ======== ========= Supplemental Information Disclosures: Interest paid $ 39,236 $ 34.890 Income tax paid $116,334 $200,800 -------- -------- The accompanying notes are an integral part of these condensed financial statements. IMTEC, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) 1 - Basis of Presentation The financial information included herein is unaudited: however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The results of operations for the six-month period ended December 31, 1998 are not necessarily indicative of the results to be expected for the full year. 2 - Inventories Inventories consist of: December 31, June 30, 1998 1998 ---- ---- Finished Products $ 33,055 $ 158,907 Work in Process 364,377 190,122 Purchased Components 2,054,453 1,937,094 ----------- ----------- $ 2,351,885 $ 2,286,123 =========== =========== Inventory cost consisted of the cost of purchased components and supplies, manufacturing labor and manufacturing overhead. 3 - Liability for Estimated Product Warranty On December 31, 1998 and June 30, 1998, the Company had provided $114,899 and $124,570 respectively, against future product warranties based on its experience with customer claims. Warranty expenses amounted to approximately $19,000 for the six-month period ended December 31, 1998 and $36,000 for the six-month period ended December 31, 1997. 4 - Earnings per Share Basic earnings per share were computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the year. The diluted computation is performed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the year, if dilutive. Common stock equivalents (stock options and warrants) are assumed to be exercised when they are issued and the proceeds used to repurchase outstanding shares of the Company's common stock at the average price during the period. The average number of common share and common share equivalents entering into the calculation of basic and diluted earnings per share are as follows: Six months ended December 31, 1998 1997 Weighted average shares - Basic 1,586,966 1,553,088 Dilutive effect of options 66,525 84,919 --------- --------- Weighted average shares - diluted 1,653,491 1,638,007 ========= ========= Three months ended December 31, 1998 1997 Weighted average shares - Basic 1,587,220 1,553,088 Dilutive effect of options 53,473 96,932 --------- --------- Weighted average shares - diluted 1,640,693 1,650,020 ========= ========= 5 - Pro Forma Information On August 12, 1997, IMTEC acquired the Customark division of Markem Crop. The following pro froma reflects operations had Customark been a part of IMTEC since July 1, 1997. Six Months Ended Three Months Ended December 31, December 31, 1998 1997 1998 1997 ---- ---- ---- ---- Revenues $6,212,386 $5,598,568 $3,363,003 $2,784,440 Net Income 337,674 428,997 223,244 216,540 Diluted Income per Share $0.20 $0.26 $0.14 $0.13 The unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisition actually been made at the beginning of fiscal 1997. IMTEC, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 The statements contained in the following Management's Discussion and Analysis of Financial Condition and Results of Operations which are not historical are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 31E of the Securities Exchange Act of 1934, as amended. These forward looking statements represent the Company's present expectations or beliefs concerning future events, however the Company cautions that such statements are qualified by important factors. Such factors, could cause actual results to differ materially from those indicated in Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS Three Months and Six Months Ended December 31, 1998 as compared to Three Months and Six Months Ended December 31, 1997 Revenues for the three months and six months ended December 31, 1998 increased approximately 20.8% and approximately 15.0%, respectively, over the corresponding periods in 1997. Revenues from Bar Code labels and printing supplies were $2,341,428 and $4,429,879 for the three month and six month periods ended December 31, 1998 compared to $2,164,062 and $4,024,923, respectively, for the same periods last year. Bar Code labels and printing supplies represented 69.6% and 71.3% of total revenue for the three month and six month periods ended December 31, 1998 compared to 77.7% and 74.5%, respectively, for the same periods last year. Revenues from the sales of Industrial Bar Code Equipment were $1,021,585 and $1,782,507 for the three and six month periods ended December 31, 1998 compared to $620,317 and $1,379,041 for the same periods in 1997. Industrial Bar Code Equipment sales represented 30.4% and 28.7% of total revenue for the three month and six month periods ended December 31, 1998 compared to 22.3% and 25.5%, respectively, for the same periods last year. Management believes that the trend in Industrial Bar Code Equipment sales will continue to move upward due to expanded partnering and distribution relationships, new product offerings and expanded use of technology. Total backlog for all products as of December 31, 1998 was approximately $3,621,253, the majority of which is scheduled to ship by June 30, 1999, compared to approximately $2,048,580 as of December 31, 1997. Cost of sales for the three months and six months ended December 31, 1998 were 58.6% and 58.4% respectively, compared to 51.8% and 52.2% for the same periods in 1997. The increase from the prior year is related to two major factors. The first is product mix particularly caused by the increase in Equipment sales noted above. The second is an increase in factory overhead caused by the startup of another Media production facility. Selling, general and administrative expenses were $877,372 for the quarter ended December 31, 1998 and $1,740,273 for the six months ended December 31, 1998, as compared to $810,554 and $1,587,204, respectively, for the corresponding periods ended December 31, 1997. This increase is the result of increased Sales and Marketing activity. Development and engineering expenses for the three months and six months ended December 31, 1998 were $121,146 (3.6% of sales) and $243,417 (3.9% of sales) compared to $156,229 (5.6% of sales) and $290,015 (5.4% of sales), respectively, for the same periods last year. The Company anticipates that the level of the dollars spent for development and engineering will remain constant. The Company's effective tax rate was approximately 40% for all periods presented, and is based on the Company's estimated effective tax rate for the full year. LIQUIDITY AND CAPITAL RESOURCES: As of December 31, 1998, the Company's principal available sources of liquidity were, respectively, from operations and a $1,000,000 bank line of credit, of which $864,324 was available as of December 31, 1998. Accounts receivable decreased from $2,259,107 at June 30, 1998 to $1,904,271 at December 31, 1998, as a direct result of the decrease in sales revenues from the fourth quarter of Fiscal 1998 ($3,921,961) to the second quarter of Fiscal 1999 ($3,363,003). Inventories increased from $2,286,123 at June 30, 1998 to $2,351,885 at December 31, 1998. This increase is the result of the anticipated increase in sales activity. The Company's capital commitments for fiscal 1999 are expected to be at approximately the same level as fiscal 1998. The Company believes that it will be able to offset the effects of inflation by selected price increases in its products, although it can give no assurances in this regard. The Company anticipates that cash flows from operations, together with current cash and funds available under the Company's line of credit, will be sufficient to meet the Company's working capital and capital equipment expenditure requirements for the foreseeable future. Recent Accounting Pronouncements SFAS No. 130, "Reporting Comprehensive Income," was adopted by the Company during the first quarter and it had no effect upon the Company's financial position, results of operation or financial statement disclosures as it does not have any element of comprehensive income. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," will be adopted for the Company's fiscal 1999 annual financial statements. The Company is currently evaluating the effect that the new standard will have on disclosures in its annual financial statements. In June 1998, The Financial Accounting and Standards Board issued SFAS No. 133, "Accounting for Derivatives Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SAFS No. 133 is effective for all fiscal quarters of fiscal years that begin after June 15, 1999. The Company does not anticipate the adoption of this statement to have a material effect on its financial statements. Year 2000 The Company has reviewed the issue of Year 2000. All of its manufacturing and accounting software has been brought into compliance, effective June 16,1998. There are neither internal clocks nor dating mechanisms within the Company's products that would be affected by changing dates. The Company is confident that its products and services will continue uninterrupted into the new millennium. No material additional costs are anticipated at this time. The Company's contingency plan in the event other parties should be unable to provide Year 2000 compliant electronic data is to revert to paper documentation from these parties. However, to the extent that customers, vendors or other entities with which the Company has material relationships do not adequately address Year 2000 issues, the Company could experience payment delays. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's outstanding long-term and short-term debt at December 31, 1998 bears interest at variable rates; therefore, the Company's results of operations would be affected by interest rate changes to the extent of the notes outstanding. Due to the short-term nature and insignificant amount of the Company's notes payable and the decreasing amounts of its long-term debt, an immediate 10 percent change in interest rates would not have a material effect on the Company's results of operations over the next fiscal year. PART II - OTHER INFORMATION Item 1 - Legal Proceedings None Item 2 - Changes in Securities Not applicable Item 3 - Defaults upon Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders A. October 26, 1998 - Annual Meeting of Stockholders B. Election of Directors - all nominees elected Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K Exhibit 27 - Financial Data Schedule The Company filed no reports on form 8-K during the quarter 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 hereunto duly authorized. IMTEC, INC. BY:_____/s/ Richard L. Kalich__________ Richard L. Kalich President & Chief Executive Officer BY:____/s/ George S. Norfleet III________ George S. Norfleet III Secretary / Treasurer