SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: June 30, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _______________.
Commission File No. 33-24464-NY
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IMTEK OFFICE SOLUTIONS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 11-2958856
(State of Incorporation) (I.R.S. Employer Identification No.)
8003 Corporate Dr., Suite C Baltimore, MD 21224
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (410) 931-2054
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked price of such stock, as of a specified date within 60 days prior to the
date of filing.
There is currently no market for the issuer's stock.
Indicate by check mark whether the Registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Security
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as the latest practicable date. 7,532,361 shares of
common stock, par value $.000001 per share, and 8,370 shares of Series A
Convertible Preferred Stock, par value $.01 per share, issued and outstanding as
of September 30, 1999.
Documents Incorporated by Reference: NONE.
IMTEK OFFICE SOLUTIONS, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Part I.
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 15
Item 3. Legal Proceedings.............................................. 17
Item 4. Submission of Matters to a Vote of Security Holders............ 17
Part II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................ 18
Item 6. Selected Financial Data........................................ 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 19
Item 8. Financial Statements and Supplementary Data.................... 30
Part III.
Item 10. Directors and Executive Officers of the Registrant ........ 59
Item 11. Executive Compensation..................................... 61
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 63
Item 13. Certain Relationships and Related Transactions............. 65
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................... 67
SIGNATURES............................................................... 68
INDEX OF EXHIBITS........................................................ 69
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PART I
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 similar expressions, as
they relate to the Registrant, are intended to identify forward-looking
statements. Such statements reflect the current views of the Registrant 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.
ITEM 1. BUSINESS.
INTRODUCTION
Imtek Office Solutions, Inc. (the "Registrant"), formerly Spectrum
Equities, Inc., effectively commenced operations on April 1, 1997. The
Registrant has conducted its operations within four segments which include
(i) the office solutions segment, which consists of the wholesale and retail
sale of copiers and facsimile machines, the servicing of office equipment,
and the rebuilding and rental of high volume copiers and duplicators, (ii)
the commercial printing and duplicating services segment, which was
discontinued during the fourth quarter of fiscal year 1999, (iii) the
merchant banking segment, which specializes in the provision of viatical
settlement services, and (iv) the specialty finance segment, which engages in
the origination of office equipment leasing. The Registrant discontinued the
sale at retail of office supplies, which was a minor portion of the office
solutions segment, effective in the fourth quarter of fiscal year 1999. This
activity, although insignificant, was previously included within the office
solutions segment.
The Registrant principally operates in Atlanta, Georgia and the
Mid-Atlantic region, including Philadelphia, Pennsylvania, Baltimore, Maryland,
Washington, D.C., Richmond, Virginia, and the Tidewater area of Southeastern
Virginia.
HISTORY
The Registrant was incorporated in the State of Delaware on November 9,
1987, under the name Vision Capital, Inc. After its organization, the Registrant
conducted business as a photo-finishing laboratory, processing and printing film
for commercial photographers and photographic studios, including portrait studio
operations. As previously reported, the Registrant completed a public stock
offering of 10,000 shares at a price of $5.00 per share in March, 1989.
Wilmoth Acquisition.
On May 31, 1990, the Registrant entered into an agreement with
Wilmoth's Color Lab, Inc., a Tennessee corporation ("Wilmoth"), to acquire all
of the issued and outstanding shares of common stock of Wilmoth in exchange for
a total of 15,340,000 newly issued shares of the Registrant's common stock. This
transaction resulted in a change in the principal business, management, and
voting control of the Registrant. By September 1,
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1990, the merger of Wilmoth into the Registrant was completed and the Registrant
changed its name to Diversified Photographic Industries, Inc. It continued the
operations of Wilmoth as a photo-finishing laboratory located in Memphis,
Tennessee.
The Registrant continued its operations as a photo-finishing laboratory
until it ceased operations on March 15, 1992. At that time, the secured
creditors foreclosed upon the principal assets of the Registrant and the
remaining unencumbered assets were sold to United Color Labs, Inc., on August
21, 1992 for $85,000.
Chapter 11 Reorganization.
The Registrant filed for reorganization under Chapter 11 of the
Bankruptcy Code in U.S. Bankruptcy Court for the Northern District of Texas. Its
Plan of Reorganization was approved on October 5, 1995. The Registrant emerged
as a corporate shell with no liabilities relating to its prior business
ventures. On February 26, 1996, the Registrant changed its name to Spectrum
Equities, Inc.
Imtek Corporation Acquisition.
On April 22, 1997, the Registrant acquired all the issued and
outstanding common stock of Imtek Corporation, a Maryland corporation, and
changed its name to Imtek Office Solutions, Inc. This transaction is reported in
the report on Form 8-K filed by the Registrant on May 13, 1997.
Beneficial Assistance, Inc. and Thompson Business Products, Inc. Acquisition.
In October 1997, the Registrant initiated its acquisition strategy.
During that month, the Registrant acquired substantially all of the business of
Beneficial Assistance, Inc. ("Beneficial"). Beneficial is a financial services
corporation specializing in viatical settlements, the buying and reselling of
life insurance policies owned by terminally ill individuals. The acquisition was
made through two separate transactions: an asset purchase (the "Asset Purchase")
and an exchange of stock (the "Exchange").
On October 1, 1997, Imtek Services Corporation ("Services"), a
wholly-owned subsidiary of the Registrant, purchased a computer system from
Beneficial and entered into non-competition agreements with Brad C. Thompson,
Robert W. Hoover and Andrew J. Walter, the stockholders of Beneficial
(hereinafter, the "Beneficial Stockholders"). In exchange the Beneficial
Stockholders received a one-year installment note payable in the aggregate
principal amount of $240,000, bearing interest compounded annually at a rate of
8% (the "Installment Note").
Effective October 1, 1997, Beneficial distributed its assets and
liabilities to the Beneficial Stockholders (hereinafter, the "Distribution").
Approximately $35,000 in cash and a computer system purchased by the Registrant
in the Asset Purchase was excluded from the Distribution and certain contingent
liabilities carried on the books of Beneficial were excluded from the liability
distribution.
The Beneficial Stockholders then contributed the assets and liabilities
received in the Distribution to Thompson Business Products, Inc., a Maryland
corporation formed on October 10, 1997, in exchange for 50,000 shares of common
stock of Thompson. This constituted all of Thompson's authorized and issued
shares of capital stock (the "Contribution").
Immediately following the Contribution, the Registrant acquired
Thompson in a transaction in which Services exchanged 1,000,000 shares of the
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Registrant's common stock for all 50,000 shares of capital stock of Thompson.
The effect of the transaction was to make Thompson a direct wholly-owned
subsidiary of Services. Additionally, the Registrant and the Beneficial
Stockholders entered into an agreement whereby the Registrant agreed to pay up
to $185,000 to the Beneficial Stockholders in the event that certain revenue
targets were met (hereinafter the "Earnout").
The written agreements originally entered into by the parties in
connection with the Asset Purchase, the Exchange and the Earnout did not
accurately reflect the intentions of the parties nor the manner in which the
Asset Purchase, Exchange and Earnout was actually consummated. As a result, the
parties to the Asset Purchase, the Exchange and the Earnout entered into a
Restated Asset Purchase Agreement, a Restated Exchange Agreement, and the
Restated Earnout Agreement, respectively, on September 30, 1998.
On November 18, 1997, each of the Beneficial Stockholders became
directors of the Registrant. Brad C. Thompson became Chief Financial Officer and
Senior Vice President of the Registrant and Vice President of each of the
Registrant's subsidiaries. Robert W. Hoover became Executive Vice President of
the Registrant and Vice President of each of the Registrant's subsidiaries.
Andrew J. Walter became President of Funding, Senior Vice President of the
Registrant and Vice President of each of the Registrant's subsidiaries. Andrew
J. Walter resigned from all of his positions with the Registrant and its
subsidiaries effective July 1, 1998. During 1999, Mr. Hoover was elected
President of the Registrant.
On December 23, 1997, Thompson changed its name to Imtek Funding
Corporation ("Funding"). Funding has continued Thompson's and Beneficial's
viatical settlement business. The viatical settlement business is intrinsically
different from the office products and equipment sale and leasing business of
the Registrant.
Acquisition Of Richmond Business Systems, Inc. and Bohanan Business Systems,
Inc.
In October 1997, the Registrant purchased the business of two copier
equipment dealers located in Richmond, Virginia. The first acquisition was of
the assets of Richmond Business Systems, Inc. The Registrant paid $39,500 for
assets, consisting of $17,000 in accounts receivable, $11,000 in inventory,
$9,500 in furniture and fixtures, and $2,000 of goodwill.
The second Richmond, Virginia purchase was Bohanan Business Systems,
Inc., a Virginia corporation. The Registrant acquired certain assets of
Bohanan, consisting of $17,000 in accounts receivable, $12,000 in inventory,
and $5,000 in furniture and fixtures. The purchase was funded through the
assumption of certain liabilities relating to trade accounts payable, of
approximately $27,000, and a note payable in the amount of $7,000.
Acquisition of Office Supply Line Holdings, Inc. and Office Supply Line, Inc.
In November 1997, the Registrant purchased assets consisting of
inventory and equipment from Office Supply Line, Inc. ("OSL"), pursuant to an
Inventory Purchase and Sale Agreement entered into on November 1, 1997 between
OSL, Imtek Corporation and Michael L. Lowe (the "OSL Inventory Purchase
Agreement"). Prior to November 1, 1997, OSL was engaged in the business of
retail office supply sales. Pursuant to the OSL Inventory Purchase Agreement,
the Registrant assumed $70,000 in trade accounts payable, issued a note payable
in the amount of $92,000 and paid $75,000 in cash to OSL in exchange for the
purchased inventory and equipment. The $92,000 note
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payable included interest at 10% per annum and was scheduled to mature in August
1998. This note was paid in full in September 1998.
Also in November 1997, the Registrant issued 465,000 shares of its
common stock and paid cash of approximately $142,000 in exchange for all the
issued and outstanding shares of common stock of Office Supply Line Holdings,
Inc., a Virginia corporation ("Holdings").
Michael L. Lowe, President, Director and majority stockholder of
Holdings and OSL, became a director, vice president and Chief Operating Officer
of the Registrant on November 18, 1997. Mr. Lowe resigned as director and
officer of the Registrant effective August 16, 1999.
Acquisition of Capital Prepress Holdings, Inc.
On October 31, 1997, the Registrant acquired all the issued and
outstanding common shares of Capital Prepress Holdings, Inc. ("CPHI"), a
Maryland corporation, through the issuance of approximately 1,010,611 shares of
its common stock and a cash payment of $7,000. The Registrant acquired assets
consisting principally of accounts receivable, inventory, and furniture and
fixtures. CPHI provides electrical imaging for press operations. CPHI had no
significant operations prior to this acquisition.
Acquisition of GLS Holdings, Inc.
The Registrant also purchased GLS Holdings, Inc., a Maryland
corporation, in November 1997. The purchase was made through the exchange of
approximately 56,250 shares of its common stock and a cash payment of $21,636
for all the issued and outstanding shares of GLS Holdings, Inc. GLS Holdings,
Inc. was formed in October 1997 to provide litigation support and copying
services in the Baltimore, Maryland and Richmond, Virginia markets.
Series A Convertible Preferred Stock Offering.
In order to raise additional capital, the Registrant issued a private
placement memorandum dated January 10, 1998 seeking to raise a minimum of
$500,000 and a maximum of $7,500,000 through the issuance of up to 75,000 shares
of Series A Convertible non-voting preferred stock. The offering was on a best
efforts basis with a 5,000 share minimum and a 75,000 share maximum basis at a
price of $100 per share. Proceeds from this offering were designated to assist
the Registrant in financing acquisitions and to a lesser extent, fund working
capital. Proceeds of the offering were placed in escrow until a minimum of 5,000
shares had been sold. Additionally, the Registrant agreed to pay sales
commission of 7% and other anticipated offering expenses of $50,000. The
Registrant expected to receive proceeds, net of offering expenses and sales
commission, of $450,000 at a minimum and a maximum of $7,450,000. The preferred
shares carry an annual dividend rate of 9%, with dividends accruing on a daily
basis and payable annually beginning October 1, 2001. At the option of the
preferred shareholder, the preferred shares may be converted into common stock
of the Registrant at rates which vary according to the number of days the
preferred stockholders hold the preferred shares. The conversion rate varies
from 12 shares of common stock for each share of preferred held between 91 and
180 days to 21 shares of common stock for each share of preferred held if the
holding period exceeds 900 days. In the event that a share was converted into
common stock, the accrued dividends would be waived. The Registrant reserves the
right to redeem the preferred shares beginning 91 days following the issue date.
The redemption price is $100 per share, plus accrued and unpaid dividends, plus
a cash call premium also based upon a floating scale of $2 for each share held
between 91 to 180 days up to a maximum of $20 per share for shares held longer
than 900 days. See the Certificate of Designation attached as Exhibit 3.2 to the
annual report on
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Form 10-K for the nine month transition period ended June 30, 1998. The
Registrant raised $778,845 after offering expenses of $58,590. The Registrant
ceased taking subscriptions in this offering in March 1999.
Consulting Arrangement with Ferris Baker Watts, Incorporated.
On April 9, 1998, the Registrant entered into a letter of intent with
Ferris, Baker Watts, Inc. to provide investment-banking services and assist the
Registrant in evaluating its financing options. This letter of intent provided,
among other things, that the Registrant issue 250,000 warrants to Ferris, Baker
Watts to purchase a like number of shares of common stock of the Registrant at a
$5 exercise price. Such warrants would not be exercisable, however, until the
earlier of April 9, 2000, one year after a public offering, or immediately upon
a change in control of the Registrant.
Sirrom Capital Corporation Financing.
On May 29, 1998, the Registrant and its subsidiaries entered into a
financing arrangement with Sirrom Capital Corporation ("Sirrom") for a six
million dollar subordinated acquisition line of credit pursuant to a Loan
Agreement dated the same date (the "Sirrom Loan Agreement"). Advances under this
line bear interest at a rate of 14% per annum, payable monthly through May 28,
2003, at which time the entire outstanding principal balance becomes due. Under
the terms of this facility, the Registrant issued Sirrom 119,891 warrants to
purchase the Registrant's common stock at a $.01 exercise price. Should the
Registrant be unable to repay this note by May 2001 or if the Registrant did not
complete a bona fide public offering with net proceeds to the Registrant in
excess of $15,000,000 by May 1999, the Registrant agreed to issue Sirrom
additional warrants ranging in number from 40,779 to 450,000. As a result of the
Registrant not completing a public offering by May 1999, an additional 449,994
warrants were issued to Sirrom. Thus, Sirrom holds a total of 569,885 warrants
as of June 30, 1999.
The warrants grant the holder the right to require the Registrant to
redeem the warrants for a period of 60 days immediately prior to their
expiration. As a result, the fair value of the warrants has been recorded as
a long term obligation.
Acquisition of Certain Assets and Liabilities of AMI Group, Inc.
In May 1998 the Registrant deposited $460,000 to acquire the office
equipment and copier dealership book of business of the AMI Group, Inc., a
Maryland corporation based in the Washington, D.C. area. The Asset Purchase
Agreement, executed in July 1998, was subsequently amended whereby the
Registrant agreed to assume additional liabilities of approximately $738,500.
The additional liabilities consist of a $518,500 note payable to one
vendor, and $220,000 deferred service liability.
Acquisition of Perfect Copy, Inc.
On June 1, 1998, the Registrant, through its direct wholly-owned
subsidiary Imtek Corporation ("Corporation"), purchased certain assets of
Perfect Copy, Inc., a Georgia corporation ("Perfect Copy"). This acquisition was
made pursuant to an Agreement for the Sale of Assets made effective as of June
1, 1998 (the "Agreement for the Sale of Perfect Copy Assets"). Prior to the
acquisition, Perfect Copy was engaged in the business of selling and servicing
photocopy equipment, typewriters, facsimile machines and other automated office
equipment (the "Business"). Mr. Jimi Epps was the sole owner of Perfect Copy.
7
The assets acquired by Corporation include all furniture, fixtures,
equipment, automobiles, supplies, tools of trade, accounts receivable,
inventory, contract rights and leasehold interests, books and records, cash in
transit, goodwill, intellectual property, price lists, supplier lists, customer
lists, advertising, and the non-competition obligations of Jimi Epps and Donald
Blackburn (the "Perfect Copy Assets").
The Agreement excluded from the Perfect Copy Assets all cash on hand or
on deposit, the cash surrender value of any life insurance policies, marketable
securities and certain other assets set forth in the schedules to the Agreement.
Corporation did not expressly assume any liabilities in connection with the
acquisition. One exception was an agreement to assume Perfect Copy's liabilities
and responsibilities under the unexpired terms of certain maintenance and
service contracts, provided such liabilities did not exceed One Hundred Thousand
Dollars ($100,000) in the aggregate (the "Assumed Contractual
Responsibilities").
In exchange for the Perfect Copy Assets, Imtek Corporation paid Perfect
Copy Four Hundred and Ten Thousand Dollars ($410,000) at closing, which occurred
on June 3, 1998, and was obligated to pay Fifty Thousand Dollars ($50,000) to
Perfect Copy within one year of closing which was deposited with Perfect Copy's
attorney, to be paid to Perfect Copy on June 1, 1999. In addition, Imtek
Corporation agreed to assume the different maintenance contract liabilities of
Perfect Copy. Imtek Corporation paid a business broker $23,000 in connection
with the acquisition of Perfect Copy. Payment of the cash consideration by Imtek
Corporation is subject to a right of set-off in the event that Perfect Copy
fails to pay all of its liabilities, accounts payable or other obligations which
are not expressly disclosed or which are not expressly assumed by Imtek
Corporation pursuant to the Agreement. As of the date of this report,
approximately $401,000, which is net of offsets, has been paid to Perfect Copy
under the Agreement.
Barbera Business Systems Acquisition.
On July 1, 1998, the Registrant organized Imtek Acquisition
Corporation, a Maryland corporation, as a wholly-owned subsidiary ("Imtek
Acquisition") for the purpose of acquiring Barbera Business Systems, Inc. On
July 22, 1998, the Registrant, through Imtek Acquisition, purchased 600 shares
of capital stock of Barbera Business Systems, Inc., a Maryland corporation
("Barbera"). Three hundred of such shares were purchased from Joseph S. Barbera,
and three hundred of such shares were purchased from Kathleen P. Barbera (the
"Stock Acquisition"), all pursuant to the Stock Purchase Agreement and Plan of
Merger (the "Barbera Acquisition Document"). The 600 shares of Barbera capital
stock acquired by Imtek Acquisition (the "Acquired Securities") represented at
the time of the Stock Transaction, and represents on the date of filing of this
report, 60% of the issued and outstanding shares of Barbera.
The Barbera Acquisition Documents also provided that Imtek Acquisition
is to acquire the remaining 40% of Barbera by merger (the "Merger Transaction").
The Barbera Acquisition Document has now expired and the parties have agreed to
renegotiate the acquisition by Imtek Acquisition of the remaining 40% of
Barbera. As of this filing, the parties have not finalized the renegotiation.
Management expects a consummation of the remaining 40% of Barbera during the
second quarter, but can provide no assurance in that regard.
Upon completion of the Merger Transaction contingent upon successful
further negotiation (i) Imtek Acquisition shall succeed to all of the assets and
liabilities of Barbera and the same shall be automatically vested in Imtek
Acquisition (ii) all of the issued and outstanding shares of Barbera
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capital stock held by Joseph P. Barbera and Patricia A. Buddemeyer will be
canceled, and both Joseph P. Barbera and Patricia A. Buddemeyer shall be
entitled to receive a number of shares of the Registrant's common stock. The
amount of shares is yet to be determined.
The assets received in the Barbera Acquisition include customer
lists, inventory, tools, spare parts and supplies, leasehold and other
interests in machinery and equipment, furniture and other personal property,
the Barbera name, customer and supplier contracts, accounts receivable,
prepaid items and books and records (the "Barbera Assets"). Prior to the
Barbera Acquisition, the Barbera Assets were used in connection with
Barbera's sale of office products and equipment. Such use has been continued
after the closing of the Stock Transaction and the Merger Transaction.
The aggregate consideration paid by the Registrant and Imtek
Acquisition for the Acquired Securities was $1,725,119 of which $10,000 was held
in escrow pursuant to the Acquisition Documents. The purpose of the escrow was
to satisfy any liabilities arising out of an IRS audit of Barbera for Barbera's
fiscal year ended June 30, 1995 and any other federal or state taxes of Barbera
for any period ending prior to the date of the Stock Acquisition (the "IRS
Audit"). Such escrowed cash has been released as contingent liabilities have
been resolved.
The Barbera Acquisition Document further provides that Joseph P.
Barbera and Patricia A. Buddemeyer shall serve as directors of Barbera until the
closing date of the Merger Transaction, at which time Joseph P. Barbera and
Patricia A. Buddemeyer will resign from the Board of Directors of Barbera. The
funds used by the Registrant to acquire the Acquired Securities were funds made
available to the Registrant from Sirrom pursuant to the Sirrom Loan Agreement.
Philadelphia Acquisitions.
In July 1998, the Registrant acquired two additional office equipment
dealers located in the metropolitan Philadelphia, Pennsylvania market. The
Registrant purchased Forbes Enterprises, Inc. a Pennsylvania corporation, for
approximately $1,122,463, acquiring accounts receivable of approximately
$250,000, furniture and equipment of approximately $335,000, inventory of
approximately $302,000, and goodwill of approximately $216,000. Additionally,
the Registrant and the Forbes executed covenants not to compete from Leighton
Forbes and Jill Forbes for $10,000 each. The Registrant also acquired Keystone
Digital Imaging, Inc., a Pennsylvania corporation, for approximately $1,826,000.
The Registrant purchased cash of approximately $40,000, accounts receivable of
approximately $266,600, inventory of approximately $616,600, furniture and
fixtures of approximately $234,000, goodwill of approximately $638,800 and
executed covenants not to compete from Ricardo Salcedo and Edmund D. Peach, III
for $15,000 each. The funds used by the Registrant to acquire these two entities
were obtained principally from Sirrom, pursuant to the Sirrom Loan Agreement,
and to a lesser extent working capital.
Mercantile Financing.
On August 30, 1998 Imtek Corporation entered into a $3,000,000
revolving credit facility with Mercantile - Safe Deposit and Trust Company
("Mercantile"). The facility is guaranteed by the Registrant and Imtek
9
Services Corporation pursuant to a Loan and Security Agreement between the
Registrant, Imtek Corporation, Imtek Services Corporation and Mercantile (the
"Mercantile Loan Agreement"). Advances under the Mercantile Loan Agreement were
collateralized by substantially all of the Registrant's assets. Funds borrowed
under the revolving credit facility bore interest at the prime rate plus 1%
payable monthly. This credit facility was retired in July 1999 and replaced by a
$10,000,000 facility from another lender. See "Provident Financing".
Ruttenberg Acquisition.
In July 1998 the Registrant's Merchant Banking segment consummated
the acquisition of certain assets of Ruttenberg and Associates, a Normal,
Illinois viaticated life insurance policy marketer. The Registrant paid $78,000
for goodwill. Funds to complete this transaction were principally obtained
from Sirrom pursuant to the Sirrom Loan Agreement.
American Copy Systems, Inc. Acquisition.
In November 1998, the Registrant purchased the business and certain
specific assets of American Copy Systems, Inc., a Pennsylvania corporation
supplying office equipment products and supplies, including photocopying and
facsimile equipment for approximately $895,000, consisting of $640,000 cash at
settlement, a note for $160,000 and a $95,000 assumption of deferred service
liabilities. The Registrant acquired property, plant, and equipment of $70,000,
cash and accounts receivable of $236,300, inventory of $213,700, a covenant not
to compete valued at $50,000, and recognized goodwill of approximately $325,000.
The funds used by the Registrant to acquire American Copy Systems, Inc. were
principally from the Sirrom Loan Agreement, and to a lesser extent from
operations. During the fourth quarter of fiscal 1999, the Registrant ceased the
business of the sale of office supplies, which activity was insignificant.
Cannon Business Machines License Agreement.
On March 12, 1999, the Registrant entered into a License and
Non-Compete Agreement with George R. and Delores M. Cannon, director-trustees
of George R. Cannon Business Machines, Inc., formerly a Maryland corporation.
Cannon Business Machine's charter was revoked for nonpayment of certain
taxes. The Registrant acquired the license for approximately $51,000. The
Registrant paid the license fee in equal monthly installments over a period
of six months. The license granted under this agreement is perpetual.
Moreover, for a period of two years from the agreement date, the licensor
provided a covenant not to compete in the State of Maryland and within 100
miles of the location of licensee's place of business. Funds used to acquire
the license and non-compete covenant were principally obtained from
operations.
Corporate Computer Services, Inc. Acquisition.
On April 16, 1999, the Registrant acquired certain specific assets and
the business of Corporate Computer Services, Inc. ("Corporate Computer"), a
Maryland corporation with operations in the Washington, D.C. area. The
Registrant paid $180,900 for property and equipment, $8,300 for other assets and
$169,300 for goodwill. Prior to April 16, 1999, Corporate Computer was in the
business of selling and servicing computer printers and related parts and
supplies. The Registrant used funds from operations to acquire Corporate
Computer.
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Provident Financing.
On July 7, 1999, the Registrant, Imtek Corporation and Barbera Business
Systems, Inc., entered into a three year $10,000,000 revolving line of credit
facility with The Provident Bank ("Provident"), an Ohio chartered banking
institution. The Provident credit facility replaced the $3,000,000 Mercantile
credit facility. Pursuant to the Provident loan agreement ("Provident Loan
Agreement"), among other covenants and restrictions, the Registrant must
maintain certain minimum consolidated net worth, consolidated liabilities to
consolidated net worth, consolidated interest coverage, and consolidated fixed
charge coverage ratios. The Provident Loan Agreement bears a variable rate of
interest, the bank's prime rate plus one percent with interest payable monthly.
Moreover, the Provident Loan Agreement requires minimum interest, based on the
variable interest rate on $5,000,000, regardless of the actual loan balance
outstanding. Advances under this credit facility are based upon a defined
borrowing base consisting principally of eligible accounts receivable and
inventory, as defined under the Provident Loan Agreement. Substantially all of
the Registrant's assets secure the debt.
W. J. Nolan
On June 16, 1999, the Registrant executed a letter of intent and term
sheet with W. J. Nolan and Company ("Nolan") which allows Nolan to raise,
through a best efforts private placement, up to $5,000,000 of junior
subordinated debt. Management anticipates that this debt offering would be
subordinated to all current lenders and would bear interest at approximately 8%,
payable semi-annually. This offering is further expected to have a floor of
$2,000,000 with a maximum of $5,000,000, excluding an allowance of 15% for over
subscription. The proposed offering is also anticipated to be in $50,000 units
and each unit would contain a warrant to purchase up to 10,000 shares of the
Registrant's common stock at an exercise price of $.10 per share.
Proceeds of this proposed offering are expected to be used primarily
for financing strategic acquisitions and, to a lesser extent, to fund working
capital requirements.
The Registrant anticipates that it will enter into a placement agency
agreement with Nolan which will allow Nolan to purchase up to an amount equal to
10% of the warrants underlying this offering. Should Nolan be successful in
raising the funds in this proposed offering, the Registrant has agreed to grant
Nolan the right of first refusal to act as a placement agent for any future
private placement offerings, or to co-manage any public stock offering for up to
two years after the closing of this proposed offering.
On July 20, 1999, the Registrant signed a financial advisory and
investment banking agreement with Nolan for a term through July 2001. Under the
terms of this agreement, the Registrant agreed to pay Nolan a monthly fee of
$2,000 commencing September 15, 1999. Moreover, the Registrant agreed to pay
Nolan a fee based upon the common Lehman formula for any acquisition or sale
transaction originated by Nolan.
Management can provide no assurances that the private placement debt
offering will be consummated or, if consummated, that it can be consummated
under terms and conditions favorable to the Registrant.
11
ACQUISITION STRATEGY
Office Solutions Business.
The Registrant's office solutions business continues the implementation
of its growth strategy through acquisitions. The Registrant's strategy is to
expand its business through the strategic acquisition of companies with similar
products and services within specific geographic regions. Additionally, the
Registrant anticipates acquiring entities in the future which may provide the
Registrant with expanded, enhanced, or additional products, services or markets.
Management cannot, however, provide any assurance that such acquisitions will
occur or that they will indeed result in additional beneficial products,
services or markets. Management believes that acquired entities having similar
products and services would benefit from the Registrant's centralized
management, systems of internal control, additional financial resources, and the
Registrant's marketing efforts, although there can be no assurances that such
benefits will indeed be realized.
Management believes that sufficient acquisition opportunities exist.
The Registrant anticipates that significant acquisitions would be funded from
the issuance of authorized but unissued shares of the Registrant's common stock,
external financing sources and, to a lesser extent, from operating funds. The
Registrant's future success with acquisitions will be dependent upon the timing
and size of the acquisition, the Registrant's ability to integrate the
acquisition into its operations with minimum integration costs, and the
Registrant's ability to successfully grow its infrastructure to sustain and
manage the combined operations. The Registrant evaluates the potential
acquisition candidates after holding discussions with the management of the
potential acquisition and, as a general rule, does not publicly announce any
such acquisition until a definitive agreement is executed.
The previously discussed acquisition transactions have been recorded
under the purchase method of accounting. Accordingly, the results of operations
of the entities, from the acquisition date, are included in the consolidated
financial statements. Generally, the purchase price has been allocated to assets
acquired and liabilities assumed based on the fair market value at the
acquisition date. As acquired entities are assimilated into the operations of
the Registrant during the allocation period, generally one year from the
acquisition date, adjustments may have been made to the allocations of the
acquisition price and, therefore, to goodwill.
COMPETITION
The Registrant's office solutions business is highly competitive with
numerous competitors in its existing geographic markets, as well as in
anticipated expansion markets. The Registrant is in direct competition with
local, regional, and national equipment suppliers and dealers, mass
merchandisers, local buying clubs, and to a lesser extent, internet on-line
competitors. Principal areas of competition focus on quality and response time
of after-the-sale service, parts availability, product capability, rental
agreements, financing and price. The Registrant competes with companies that
have greater financial strength and marketing resources.
As of June 30, 1999, the Registrant's merchant banking business
consisted primarily of providing viatical settlement services consisting of the
purchase and resale to third parties of life insurance policies owned by
terminally ill individuals. The viatical settlement industry is advancing in
maturity with numerous competitors throughout the continental United States and
limited barriers to entry. Management believes that the Registrant is one of the
larger viatical settlement companies in a very fragmented industry. The
Registrant is in direct competition with many small, privately held viatical
settlement companies as well as viatical settlement companies which are owned
by, or are divisions of, large insurance companies. Principal areas
12
of competition in connection with the purchase of policies focus on the bid
price offered to the terminally ill individual and the timeliness of responses
to any requests for bids. The Registrant is in direct competition with financial
institutions and other investment vehicles in connection with funding the resale
of the policies purchased.
As announced during the third quarter of fiscal year 1999, the
Registrant created an additional segment, Specialty Finance. This segment
consists principally of providing intermediary services in brokering financing
and leasing arrangements of office equipment. The Registrant is in direct
competition with numerous other financial services companies, including
financing companies, banks and thrift institutions, and other financing brokers,
some of which have greater resources and access to lower cost capital. The
Company's Specialty Finance segment is conducted through Imtek Capital
Corporation, a wholly-owned subsidiary of Imtek Services, Inc.
CUSTOMERS AND MARKETING
The Registrant focuses its office solutions segment marketing efforts
primarily on small and mid-size businesses, regional offices of large companies,
professional service firms, hospitals, educational institutions, and
governmental agencies located in or near the area where the Registrant maintains
a physical presence. Sales representatives and sales management are compensated
based on a combination of gross sales revenue and point-of-sale profits. A key
element of the Registrant's operating philosophy is to provide all sales
representatives and managers with an ongoing program of in-house training,
manufacturer-provided training and other educational courses and seminars. The
Registrant holds sales meetings to reinforce the consistent application of its
procedures, policies, and strategies, and manufacturers' advertising campaigns
and cooperative advertising arrangements generally enhance the Registrant's
marketing efforts.
The Registrant has marketed its merchant-banking segment through its
existing sales force and through registered broker-dealers, print media, and
mass communication media such as radio and newspapers.
The Specialty Finance segment's customer base, at present, principally
consists of the office solutions segment's customer base. Since inception, the
segment has relied on its sister segment to provide its customer base. Because
the Specialty Finance segment's customers are basically those of Office
Solutions, the segment has incurred minimal marketing expenses. However, as the
segment matures, management anticipates expanding its customer base by marketing
its service to other equipment dealers and the secondary market.
VENDORS AND SUPPLIERS
Products purchased and distributed by the Registrant's office solutions
segment may be acquired from numerous domestic and international suppliers. The
Registrant has not experienced, and does not anticipate experiencing, any
significant difficulty in obtaining these products and supplies, although the
Registrant cannot provide any assurance that such difficulties will not arise.
The Registrant's primary office solutions products are photocopiers,
facsimile equipment, personal computers, office products, and technologies and
services used in offices to manage information and documents. Management
believes that it is in the Registrant's best interest to maintain a close
working relationship with a number of equipment manufactures in order to allow
the Registrant to purchase equipment and related parts and supplies at
competitive prices. The inability of the Registrant to maintain these key
13
relationships could result in disruptions of Registrant's operations and have a
material adverse effect on its financial condition.
Because the Registrant's business is dependent upon its vendors and
suppliers, the Registrant has identified several manufacturers of photocopiers
and facsimile machines, and has established close working relationships with
those manufacturers. The Registrant acquires products and supplies for resale
from such sources as Mita, Ricoh, Sharp, Konica, and Gestetner. The Registrant
entered into renewable dealer agreements with MITA Copystar America, Inc.,
("MITA") dated November 26, 1997, Sharp Electronics Corp, dated January 6, 1998,
Gestetner Corp, dated January 5, 1998, and Dex Business Systems, dated January
26, 1998, as reported on the Registrant's Forms 10-K for the year ended
September 30, 1997 and 10-Q for the quarter ended March 31, 1998. These
agreements, among other covenants and restrictions, provide for a minimum level
of purchases by the Registrant, establishment of purchase pricing, establishment
of business locations, and termination provisions.
In July 1998, MITA Corporation, based in Japan, announced that it had
filed for bankruptcy protection. MITA Corporation advised the Registrant that it
did not expect any significant disruption in supplying its customers with
quality equipment, parts, and supplies on a timely basis. To date, the
Registrant has not experienced significant disruptions in its ability to obtain
products or parts from MITA Corporation, but cannot provide any assurances that
such disruptions will not occur in the future. Management believes that its
strategic alliance with MITA and its alternative suppliers will provide the
Registrant with sufficient product for sale at competitive prices.
As of June 30, 1999 the Registrant employed 280 persons, none of whom
were covered by a collective bargaining agreement. Management believes that its
employee relations are good, and that wages and working conditions, as compared
to industry norms, are favorable.
Sales personnel turnover is common in the office solutions industry and
the Registrant expends considerable effort to retain high quality, dedicated,
professional sales personnel. Management believes that the Registrant's sales
personnel compensation plan compares favorably to the industry norm.
Additionally, management has implemented an extensive training program with
clearly defined sales goals and career paths for its sales force. By
establishing goals, providing training and support and a defined career path for
its sales force, management believes it can maintain a high quality sales force
with turnover lower than the industry average, although there can be no
assurances of such an effect on sales force turnover. The Registrant relies
heavily on its senior management and the loss of any one of them could have a
material adverse effect on the Registrant's financial condition and the
Registrant's ability to successfully grow and implement its strategic
acquisition policy.
The Registrant's merchant banking segment purchased viaticated
insurance policies primarily from one broker. For the fiscal year ended June 30,
1999, the Registrant purchased approximately 75% of all policies purchased for
the year from this broker.
TECHNOLOGY
The Registrant believes that the office equipment market will continue
to change with the increased use of digital technology, which allows one piece
of office equipment to network directly with other office equipment. Management
further believes that this technology may result in fewer stand-alone units
being sold and that this shift to multi-functioning equipment may
14
result in increased training costs for the Registrant's service technicians.
Continued technological improvements add to the complexity of the equipment's
internal working components. The Registrant, therefore, expects that the costs
of training service personnel will likely increase.
ENVIRONMENTAL REGULATION
The Registrant's business and product lines generally do not generate
significant hazardous waste. Federal, state, and the various local regulations
have not had, and are not expected to have, a material adverse affect upon the
Registrant or its financial condition.
FINANCIAL INFORMATION ABOUT
INDUSTRY SEGMENTS
1999 1998 1997
----------- ----------- ----------
SALES TO UNAFFILIATED CUSTOMERS
Merchant banking $53,962,341 $21,088,242 $ -
Office solutions 20,879,845 3,615,750 2,094,972
Specialty finance 78,017 - -
Intersegment sales - - -
PRETAX PROFIT OR LOSS
Merchant banking $ 4,201,604 $ 1,737,173 $ -
Office solutions (4,336,386) (556,129) 78,967
Specialty finance 64,438 - -
IDENTIFIABLE ASSETS
Merchant banking $ 3,653,054 $ 8,423,800 $ -
Office solutions 16,516,288 7,301,749 1,007,339
Specialty finance 32,203 - -
ITEM 2. PROPERTIES.
The Registrant's policy is to lease its business locations in lieu of
acquiring facilities. The Registrant leases numerous properties for
administration, sales and service. In general, the Registrant's lease agreements
require a payment from the Registrant for its proportionate share of taxes,
utilities, and other common area maintenance expenses. Management
15
believes that the properties it occupies are suitable and adequate for its use.
All properties are of brick or block construction and management believes that
all properties are adequately maintained. As of June 30, 1999, the Registrant
leased 17 locations from independent landlords as follows:
The Registrant leases four (4) facilities in the Baltimore, Maryland
metropolitan area. The first location, which serves as the corporate
headquarters and houses the Registrant's Merchant Banking Segment, is a
five-year lease of approximately 10,400 square feet. The second Baltimore
facility, housing the Barbera operation, is a lease which expires in December
2001, and is approximately 9,500 square feet. The third facility utilized by the
Specialty Finance segment consists of approximately 1,550 square feet and
terminates in January 2004. The fourth location, of approximately 1,000 square
feet, is used as an outsourcing sales and production facility expiring November
2001.
The Registrant also has approximately 28,000 square feet of sales,
service and warehouse space located in Glen Dale, Maryland. This lease expires
July 2007.
The Registrant leases four facilities in the Richmond, Virginia
metropolitan area. The first lease is for the office solutions headquarters and
accounting offices. This facility consists of approximately 4,200 square feet of
prime downtown office space. This lease expires December 1999. The second
Richmond lease is for a 2,700 square foot office equipment sales and service
location, which lease expires December 31, 1999. The third Richmond location is
an outsourcing sales and service facility consisting of approximately 4,200
square feet. This lease expires July 2000. The fourth Richmond facility,
comprising approximately 7,200 square feet, is leased through February 2004 and
is a warehouse facility.
The Registrant has two facilities in the Tidewater, Virginia area. The
first facility is located in Newport News, Virginia as an office equipment sales
and service location. This facility consists of approximately 4,400 square feet
with the lease expiring February 2004. The second Tidewater location is a
Virginia Beach equipment sales office consisting of approximately 2,700 square
feet leased through December 1999.
The Registrant has two office equipment sales and service offices
located in the Atlanta, Georgia metropolitan market. The first facility is
located in Gainesville, Georgia consisting of approximately 1,800 square feet
and is leased through December 2000. The second Atlanta location is located in
Athens, Georgia consisting of approximately 1,500 square feet rented on a month
to month basis. It is management's intention to maintain this location on a
month-to-month lease. There can be no assurance that this location can be
maintained on a month-to-month lease basis under terms which are beneficial.
As of September 18, 1998, the Registrant leased three office equipment
and service facilities in the Philadelphia metropolitan market. The first
facility is located in Exton, Pennsylvania and consists of 6,700 square feet
with the lease expiring June 2003. The second facility is located in Broomall,
Pennsylvania consisting of 5,900 square feet and is leased through August 2004.
The third facility is located in Warrington, Pennsylvania consisting of
approximately 3,800 square feet. This facility is presently leased on a
month-to-month basis, which management cannot provide assurance that it can be
maintained.
The Registrant leases one facility in the Washington, D.C. metropolitan
area which consists of approximately 4,250 square feet. This lease expires in
March 2003. Presently, the facility houses outsourcing services.
16
The Registrant also has one facility in Bloomington, Illinois.
Consisting of approximately 900 square feet, this lease expires April 2003. This
facility services the Registrant's Merchant Banking Operation and is a result of
the previously reported Ruttenberg acquisition.
ITEM 3. LEGAL PROCEEDINGS
As reported in Item 1 of this report, incorporated into this item by
reference, the Registrant filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code on January 5, 1995 with the
U.S. Bankruptcy Court for the Northern District of Texas. The Registrant's
Plan of Reorganization was approved by the court on October 5, 1995.
On August 10, 1998, an order of dismissal was entered in the lawsuit
styled LEGAL AMERICA OF VIRGINIA, LTD. V. IMTEK OFFICE SOLUTIONS, INC., GEORGE
L. SIMPSON, AND MICHAEL LOWE, Richmond Circuit Court (Chancery), Case No.
HJ-420-1.
On April 16, 1999, the Kansas Securities Commissioner issued a cease
and desist order against Imtek Funding Corporation, d/b/a Beneficial Assistance,
Inc., finding that the viatical settlement contracts were securities within the
meaning of the Kansas Securities Act. In response, the Registrant ceased all
offers and sales of viatical settlement contracts within the State of Kansas.
Subsequently, the Registrant has agreed to settle the proceeding, without
admitting or denying the allegations of the commissioner, with which the
Registrant did not concur. As part of the settlement, the Registrant has agreed
to offer rescission to the seven Kansas residents who purchased viatical
settlement contracts in Kansas and agreed, in the future, to discontinue all
offers and sales of viatical settlement contracts in Kansas unless registered in
Kansas as a security and sold by persons duly registered in Kansas as
broker-dealers. If all Kansas purchasers to whom the rescission offer was made
were to accept, the Registrant would be required to pay approximately $203,000
plus interest.
Presently, the states of Virginia, Iowa, and Colorado are conducting
investigations into whether viatical settlement contracts sold by the
Registrant, as well as others, constitute securities which require registration
under applicable state law. The Virginia Securities Division has informed the
Registrant that it intends to institute an enforcement proceeding against the
Company. Should such an enforcement proceeding be instituted, the Registrant
presently expects to vigorously defend its position. Management cannot predict
the outcome of such proceedings. An unfavorable outcome in such proceedings
could have a material adverse effect on the Registrant, its business and
financial condition.
The Registrant is a party to other legal proceedings which are in the
ordinary course of business, and management does not believe that a negative
outcome of these other matters would have a material adverse effect on the
Registrant or its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 25, 1999, stockholders entitled to vote 4,500,123 shares of
common stock of the Registrant, constituting in excess of a majority of the
total number of shares of common stock entitled to vote on the matter, signed a
written consent in lieu of a special meeting under the Delaware General
Corporation Law amending and restating the Registrant's Certificate of
Incorporation to reduce the number of shares of common stock, par value $.000001
per share, authorized for issuance under the Certificate from two
17
hundred fifty million (250,000,000) to fifty million shares (50,000,000).
Stockholders entitled to vote 3,032,238 shares of common stock did not
participate in the written consent. There were no votes against the matter,
abstentions or broker non-votes.
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.
There is no known market for the Registrant's common or preferred
stock. As of the latest practicable date there were 161 common stockholders of
record and 23 preferred stockholders of record. The Registrant did not pay
dividends during the fiscal years ended September 30, 1997, June 30, 1998 or
1999, and does not anticipate paying dividends in the future.
Information responsive to Item 701 relating to securities sold by the
Registrant (which were not registered pursuant to the Securities Act) during the
period covered by this report is set forth under Item 1 of this report and is
incorporated into this Item by reference. All such sales were made pursuant to
Section 4(2) of the Securities Act.
Pursuant to the terms of the Provident Loan Agreement and the Sirrom
Loan Agreement, as amended, neither the Registrant nor any of its subsidiaries
may declare or pay any dividend of any kind (other than stock dividends payable
to the holders of capital stock), whether in cash or in property, on any class
of capital stock of any of them.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below as of and for
the Company's fiscal year ended September 30, 1997, nine-month period ended June
30, 1998, and fiscal year ended June 30,1999, have been derived from the audited
consolidated financial statements of the Company. The data set forth below are
qualified in their entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements, the notes
thereto and the other financial and statistical information included elsewhere
in this Form 10-K.
18
Year ended Nine mos. ended Year ended
June 30, 1999 June 30, 1998 September 30, 1997
------------- --------------- ------------------
Sales $74,920,203 $24,703,902 $2,094,972
Operating income 1,287,944 1,303,033 72,433
Loss from discontinued operations (1,223,342) (110,666) --
Net (loss) income (1,606,306) 603,068 58,367
Earnings per share:
Basic
Continuing operations $ (0.06) $ 0.10 $ 0.03
Discontinued operations (0.16) (0.02) --
----------- ----------- ----------
Net income $ (0.22) $ 0.08 $ 0.03
----------- ----------- ----------
----------- ----------- ----------
Diluted
Continuing operations $ (0.06) $ 0.10 $ 0.03
Discontinued operations (0.16) (0.02) --
----------- ----------- ----------
Net income $ (0.22) $ 0.08 $ 0.03
----------- ----------- ----------
----------- ----------- ----------
Total assets $20,572,529 $16,286,133 $1,007,339
Notes payable, net of original
issue discount 8,694,626 4,062,561 --
Obligations under capital leases 1,247,588 1,222,659 --
Put warrant obligations 2,251,062 335,695 --
Preferred stock 83 67 --
Total stockholders' equity 1,301,710 27,555,991 774,072
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND
The Registrant effectively commenced operations on April 12, 1997.
Prior to this time, the Registrant was a development stage company with no
significant operations. Since the Registrant was essentially a "start-up" during
1997, and because of the Registrant's limited activity during the fiscal year
ended September 30, 1997, a period of approximately five (5) months, there are
no meaningful comparisons between 1998 and 1997. Moreover, the Registrant
changed its fiscal year-end from September 30 to June 30, effective June 30,
1998. Thus, the fiscal year ended as of June 30, 1998 consisted of a period of
nine (9) months.
For the year ended September 30, 1997, the Registrant 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 1, 1997, through the acquisition of Thompson
described in Item 1 and incorporated by reference, the Registrant began its
Merchant Banking operations by providing viatical settlement services - the
purchase and resale of life insurance policies of terminally ill individuals.
Effective January 1999, the Registrant created a third operating
segment, Specialty Finance. This segment's primary business consists of
originating and placing equipment leases with unrelated lessors. The Specialty
Finance segment essentially acts as an intermediary in financing and leasing
transactions of office equipment and copiers, and markets its product
principally to the Office Solutions segment.
19
During fiscal year 1999, the Registrant adopted SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. This
statement established revised standards under which an entity must report
business segment information using the same basis that the entity uses to
internally evaluate its performance. As a result the Registrant created an
additional segment. This segment, referred to as Commercial Printing and
Duplicating, was previously a component of the Office Solutions segment. The
financial statements have been restated to reflect this change. In April 1999
the Registrant elected to discontinue the operations of this segment.
RESULTS OF OPERATIONS
In April 1999, the Executive Committee of the Registrant's board of
directors and management elected to discontinue the commercial printing and
duplicating segment, which provided litigation outsourcing services and was
previously included within the office solutions segment. As more fully
discussed in the Notes to the Financial Statements filed with this Form 10-K
(which set forth the periods indicated, the dollar amount and effects of the
change), management made the decision to discontinue operations in this
segment after considering operating results, expectation of future earnings,
and to a lesser extent, competition within its geographic operating regions.
Consolidated.
For the fiscal year ended June 30, 1999, as compared to nine month
period ended June 30, 1998 (which has been annualized for comparison
purposes), consolidated revenue increased to approximately $75 million from
$32.9 million, annualized, for the comparable period of the prior year
primarily as a result of the growth in the Merchant Banking Segment as more
fully described below. The nine month annualized figures may not reflect
seasonal fluctuations and therefore may not be truly comparable.
Operating income from continuing operations was flat at approximately
$1.3 million for both years. On an annualized basis, operating income decreased
from $1.7 million to $1.3 million for the comparable period. Earnings before
interest, taxes, depreciation and amortization from continuing operations was
approximately $2.7 million for the year ended June 30, 1999 and was
approximately $1.8 million annualized for the short year ended June 30, 1998.
Net Income decreased to a loss of approximately $1.6 million for the year ended
June 30, 1999 as compared to an annualized profit of approximately $804,000 for
the nine month period ended June 30, 1998. As previously discussed, there are no
meaningful comparisons between the fiscal period ended June 30, 1998 and the
fiscal year ended September 30, 1997, as the Registrant was a "start-up" during
the five month period ended September 30, 1997.
Office Solutions Segment.
During the fourth quarter of fiscal 1999, after integration of
significant acquisitions within the company's recent history, management
reviewed and evaluated the operations of the segment and implemented a cost
containment program. The cost containment program focused on the identification
of operating inefficiencies, duplication of efforts, and excessive or
duplicative administrative expenses. Based upon the results of this review,
management identified several areas that were and will be focused on to
implement corrective action. Specifically, management had implemented a
reduction in force plan eliminating approximately 120 personnel to the year end
level of 280. Management anticipates, on an ongoing basis, to continue its
review and evaluation of staffing levels, making adjustments
20
as necessary. Additionally, management is focusing on general and administrative
expenses, in addition to payroll burden to realize reductions.
During the year ended June 30, 1999 the registrant adopted SFAS 131,
Disclosures About Segments of an Enterprise and Related Information. Upon
adoption of this statement, the Registrant reported its business segments using
the same basis as management uses to internally evaluate the Registrant's
performance. As a result, the Registrant established a segment labeled
Commercial Printing and Duplicating Services and restated prior year segment
information. This new segment was previously reported in the Registrant's Office
Solutions segment. The Commercial Printing and Duplicating segment was
principally in the business of providing outsourcing services such as litigation
support, copying services and digital imaging services. This segment operated in
three separate locations within the Mid-Atlantic region. During the fourth
quarter, management elected to discontinue this segment and implemented a
program to eliminate, by sale or transfer to other operating units, the assets
of this segment. As a result of the decision to discontinue the operations of
this segment, the Registrant has recognized a loss of approximately $ 1.2
million, net of tax and inclusive of a provision of approximately $479,000 for
estimated losses during the phase-out period. During the prior fiscal year, the
commercial printing and duplicating segment, which was included within the
office solutions segment, generated an operating loss, net of income taxes, of
approximately $111,000. Management believes that the discontinuance of the
commercial printing and duplicating segment will positively impact future
earnings of the office solutions segment.
In May 1999 the Registrant began modifying its financial reporting
systems for the office solutions segment centralizing data at the operating
unit level. Because of this change, same store comparisons are not meaningful
as certain locations have been combined.
Gross revenue for the office solutions segment, net of discontinued
operations, increased from an annualized fiscal 1998 figure of approximately
$4.8 million to approximately $20.9 million for the year ended June 30, 1999.
This 335% increase is principally due to acquisitions during the current
fiscal year, with significant acquisitions occurring within the first two
months of the year.
Gross revenue for the nine month period ended June 30, 1998, was $3.6
million net of discontinued operations, as compared to $2.1 million for the six
month period ended as of September 30, 1997. This increase was principally
attributable to acquisitions.
Cost of revenue for the year ended June 30, 1999, net of
discontinued operations and as compared to the annualized comparable period
of the prior year, increased by approximately $8.8 million, or 279%. This
increase is again principally due to acquisitions. The segment generated a
gross margin of approximately 43% for the year ended as of June 30, 1999, as
compared to a gross margin of approximately 35% for the prior period. This
increase is principally related to acquisition integration, wherein
management has implemented effective pricing and inventory control procedures
within the acquired operating units. As the segment increases in size and
volume, pricing concessions from significant vendors become more obtainable.
In conjunction with the above discussed cost containment program
implementation and better buying opportunities, management anticipates
nominal future margin increases.
Due to significant acquisitions during the short year ended June 30,
1998, and the limited operations of the segment during the short period ended
21
September 30, 1997, there are no meaningful year-to-year comparisons of cost of
goods sold or gross margins.
Selling and general expenses increased for the year ended June 30,
1999 as compared to the year ended as of June 30, 1998, annualized to reflect
a comparable period, by approximately $11 million, or approximately 474%. The
increase in these expenses was principally a result of the amortization of
goodwill associated with the acquisitions and deferred financing costs
related to the Sirrom Loan agreement. Amortization expense was approximately
$527,000 for the year ended June 30, 1999 and approximately $78,000 for the
nine months ended June 30, 1998. The segment also experienced an increase of
530.2% in its marketing expenses during the year as compared to the prior
period, going from approximately $22,000 for the nine month period ended June
30, 1998 to approximately $139,000 for the year ended June 30, 1999. Another
contributing factor relates to personnel costs. Administrative salaries
increased 76.8% ($389,000) from approximately $506,000 for the nine month
period ended June 30, 1998 to approximately $896,000 for the year ended June
30, 1999. Professional fees increased dramatically due to the increase in the
costs associated with auditing acquisitions, the exploration and subsequent
closing of refinancings and certain investment banking charges.
During the year ended June 30, 1999, as previously discussed,
management has embarked upon a cost containment program and as also previously
discussed, a significant component of this cost containment program relates to
the elimination of excess and redundant personnel. Thus, during the reporting
year, personnel costs increased significantly as compared to the prior year. In
addition to the personnel direct costs, indirect costs of personnel also
contributed to this increase. The segment also experienced an increase in its
marketing and advertising expenses during the year as it continued to build and
enhance its market position. Management expects that the implementation of its
cost containment program will produce results during the forthcoming year in
overall lower general and administrative expenses.
Selling and general expenses for the nine month period ended June 30,
1998 as compared to the year ended September 30, 1997 also showed a significant
increase. As previously reported, this increase was principally due to
acquisitions.
Other income and expense experienced significant increases for the year
ended June 30, 1999, as compared to the nine month period ended June 30, 1998.
This increase is principally a result of the Registrant carrying a substantial
amount of additional debt. At June 30, 1998 the registrant had total notes
payable and capital lease indebtedness of approximately $5.6 million, of which
$3.4 million was due to Sirrom, a note issued on May 28, 1998. At June 30, 1999
the Registrant had notes payable and capital lease obligations of approximately
$12.0 million, most of which was outstanding for the entire year. For the year
ended September 30, 1997, there is no meaningful comparative analysis.
Merchant Banking Segment.
As previously reported, the nine month period ended June 30, 1998
was the first period of operations for the merchant banking segment and thus
there is no meaningful comparison to any prior period. The merchant banking
segment's business is conducted through the Registrant's wholly owned
subsidiary, Imtek Funding Corporation.
The merchant banking segment derives its revenue and associated costs
primarily from viatical settlements. Viatical settlements involve the buying and
reselling of life insurance policies owned by terminally ill individuals,
22
and providing viatical settlement services. This segment's business consists of
three distinct functions. The first two are the purchase and resale of the
viaticated life insurance policies. These services are marketed principally
through a network of brokers, primarily insurance agents. The third is providing
document management and production services to assist in the underwriting
process and assistance for trustees engaged in the viatical settlement business.
Management is considering the modification of the merchant banking
segment's business such that the brokerage of viaticated contracts would
increase in significance purchase and subsequent sale of viatications may
become less significant. The segment would likely continue providing document
management services. Should management elect to fully adopt this change,
management expects that gross revenue would decrease significantly but income
from operations should only decrease slightly.
Alternatively, management is considering several marketing
alternatives, including the offering of viaticated insurance policies as a
"securitized" product. Should the segment be successful in offering these
additional "securitized" products, management believes that revenue growth
could be substantial. While there can be no assurance that this volume
increase can or could be achieved, offering these additional "securitized"
products may permit licensed security brokers the opportunity to begin
selling this product, thus expanding the segment's sales network. In fiscal
2000 management intends to expend upwards of $150,000 in designing and
introducing the product to the market. Management continues to believe that
this is a reasonable estimate of the necessary pre-operational marketing
costs which may be expended in the near term, should the company elect this
alternative.
Gross revenue for the year ended June 30, 1999 increased by $25.8
million, or approximately 92% as compared to the prior period, annualized to
represent a full year. This increase is principally due to the continued growth
and expansion of an otherwise immature industry. To a lesser extent, the company
has sought to increase its market share, resulting in increased revenue, and
profitability through economies of scale. Management increased its the market
share principally by lowering its gross profit targets, within a defined range.
The fiscal period ended June 30, 1998, a period of 9 months, was the
first period for the Registrant's merchant banking segment, and thus there is no
comparison to prior years. This first year of operations produced gross revenue
of $21.1 million ($28.9 million annualized).
Management believes that its viatical settlement contracts are not
securities subject to regulation under state securities law. The company is
aware, however, that several states are investigating to determine if the
viatical settlement business or parts of the viaticial settlement process should
be regulated. Some states have advised the Registrant that they believe that the
viatical settlement contract may be a security subject to regulation. The
Registrant can provide no assurance that a state regulatory body looking into
this matter will agree that the Registrant's viatical settlement activities are
not regulated under current law and regulations or that, if challenged,
Registrant would prevail in its position. Should the viatical settlement
contract be determined, on a widespread basis, to be a security, the segment
would experience a material adverse effect on operating income and its financial
condition. The Company is currently considering marketing alternatives to
minimize this potential negative impact. Specifically, the segment is
considering the possible securitization of the viatical settlement contract.
Should the segment be successful in offering such securitized product,
management believes that the segment could experience substantial increase in
volume as the product could be sold by
23
licensed security brokers which would, in management's opinion expand the
segment's marketing base.
Cost of revenue increased by $22.8 million, or 95%, as compared to the
prior period, annualized to represent a 12-month period. This increase is
principally in response to the revenue increase and the product mix, as affected
by the lowering of the target gross profit percentages when bidding on
viatications. During the year the product mix has been focused toward the longer
viatication periods, which generally produce higher gross margin and lower cost,
as compared to the prior year where the product mix was more diverse. This
positive impact was negated somewhat by the lowering of target margins, as
previously discussed.
The segment's profit margin, within a relevant range, generally varies
by the expected term of viatication. As the viatication period (generally a
12-month period, with a minimum of 1 year and a maximum of 4 or more years)
lengthens, the profit margin generally increases. These viatication periods are
considered the product mix.
In response to the preceding, the segment produced a gross margin of
13.4% for the year ended June 30, 1999, as compared to 14.9% for the nine month
period ended June 30, 1998. Contingent upon the product mix, and the maturation
of the industry, which brings about increased competition and thus lower gross
margins, management anticipates the gross margins to remain relatively constant.
Selling and general expense within the merchant banking segment
increased to approximately $3.0 million for the year ended as of June 30, 1999,
as compared to approximately $1.4 million for the nine month period ended June
30, 1998, annualized to reflect a full year. This approximately 114% increase is
principally in response to higher salaries and employee related costs.
Additionally, as previously reported, with the change in location during the
year, the segment experienced relocation costs, including additional
depreciation expense associated with the replacement and addition of office
furniture, fixtures, and computer equipment. Moreover, with the relocation, the
segment recognized the unamortized leasehold improvement expense. Also, as
previously reported, the segment experienced a significant increase in
professional fees. Professional fees were paid primarily for the audit of the
segments' financial statements and legal fees incurred to explore the
"securitization" of viaticals. The segment also paid fees to its attorneys to
assist in responding to various inquiries from certain states exploring whether
viaticated insurance policies or parts of the viatical settlement process should
be or is subject to be regulated under various state securities and/or insurance
laws and regulations. The segment also experienced an increase in its marketing
expenses associated with its endeavor to expand its position within the
marketplace, especially in light of the commencement of industry maturation.
Selling and general expense amounted to less than 1% of revenue for
both 1999 and 1998.
As previously reported, the Merchant Banking segment did not commence
operations until October 1, 1997. Thus, there is no comparison between the nine
month period ended June 30, 1998 and the year ended September 30, 1997.
Specialty Finance.
As previously discussed, during the third quarter of fiscal 1999, the
Registrant created the specialty finance segment, its third reportable segment,
consisting principally of office equipment financing services. The specialty
finance segment essentially acts as an intermediary in the
24
financing and leasing transactions of office equipment and copiers, and markets
its product principally to the customers of the Office Solution segment.
Previously, this segment's activities, which were insignificant, were included
within the merchant banking segment. Prior periods have not been restated, as
there were substantially no transactions.
During the year ended June 30, 1999, this segment produced gross
revenue of $78,000 and incurred total expenses of $13,250. Management
anticipates that this segment, through horizontal integration, will experience
revenue growth in the near term, although there can be no assurances of such
growth.
Selling and general expense was $13,250. Management anticipates an
incremental increase in selling and general expense in future periods as revenue
and operations increase.
FINANCIAL CONDITION AND LIQUIDITY
As previously reported, the Registrant experienced growth through
acquisitions, such that period to period comparisons may not provide meaningful
analysis.
The Registrant's ability to receive dividends from its subsidiaries is
restricted by the Sirrom Loan Agreement, the Provident Loan Agreement and other
credit facilities. The loan agreements provide that neither the Registrant nor
any of its subsidiaries may declare or pay any common stock dividend of any kind
(other than stock dividends payable to holders of capital stock), whether in
cash or in property, on any class of capital stock of any of them without the
consent of the lenders.
The Sirrom Loan Agreement, dated May 29, 1998, granted Sirrom the right
to purchase 119,891 shares of the Registrant's common stock. The agreement
further provided that the base number of warrants could increase to 569,885
shares if the Registrant did not complete a public stock offering by May 29,
1999. As of June 30, 1999, the Registrant has issued an additional 449,994
warrants to Sirrom, as the Registrant did not complete the required public stock
offering. Additionally, under the terms of the agreement, the Registrant is
obligated to issue additional warrants to Sirrom equal to 0.5% of the
outstanding warrants issued for each year the note remains unpaid beyond May 29,
2001. The issued warrants may be exercised at any time until July 31, 2003 at
$0.01 per share. The warrants have a put option associated with them that allows
Sirrom to sell the warrants back to the registrant. The Registrant has
recognized a long-term obligation of $2,251,062 and $335,695 as of June 30, 1999
and 1998, respectively.
During the year ended June 30, 1999, the Registrant issued an
additional 1,584 share of non-voting Convertible Series A Preferred Stock.
Proceeds of $152,025, net of issuance costs for the year ended June 30, 1999,
and $626,820, net of issuance costs for the nine month period ended June 30,
1998, were used principally to fund acquisitions, and to a lesser extent for
working capital. The preferred shares carry a dividend rate of 9%, payable
annually beginning October 1, 2001. At June 30, 1999, the Registrant had accrued
$76,407 in cumulative dividends. The Registrant 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 anticipate redeeming the shares
in the fiscal year ended June 30, 2000.
The Registrant used the Sirrom credit facility primarily to fund
acquisitions. As previously reported, as of September 1998 the Registrant
25
had fully utilized the Sirrom credit facility. In August 1998 Sirrom
subordinated their security position to the Registrant's senior lender.
Acquisitions during the current fiscal year were funded principally from the
Sirrom Loan Agreement and to a lesser extent, working capital generated by the
Registrant.
In August 1998 the Registrant entered into a two year $3,000,000 line
of credit agreement with Mercantile Safe Deposit and Trust Company. Advances
under this line were limited to 70% of eligible accounts receivable and bore
interest at prime plus 1%, payable monthly. This line was secured by
substantially all of the Registrant's assets.
In July 1999 the Registrant refinanced the Mercantile line of credit
with a $10,000,000 revolving line of credit facility with The Provident Bank
(Provident). This line expires July 1, 2002. Advances bear interest at prime
plus 1% on the higher of a borrowing floor of $5,000,000 or the unpaid principal
balance. Advances are limited to 70% of certain accounts receivable and 40% to
60% of certain inventories. Provident's line of credit is secured by a senior
lien on substantially all of the Company's assets.
The Registrant expects to continue its expansion strategy by
acquisitions and therefore is attempting to secure additional funding sources.
During the fourth quarter of the reporting year, the Registrant began
negotiations with W.J. Nolan and Company to raise, through a best efforts
private placement offering, up to $5 million. Management anticipates that this
may be a debt offering which would likely require issuance of a significant
number of warrants. Proceeds from this offering are expected to be used
primarily for financing acquisitions in markets which the Registrant's Office
Solutions segment currently conducts business, and to a lesser extent, to fund
working capital requirements. There can be no assurance that this financing will
be successful or that future acquisitions can be obtained on terms acceptable to
the Registrant.
Total assets increased to $20.4 million at June 30, 1999 from $16.3
million at June 30, 1998. This increase is principally due to acquisitions
during the year.
OFFICE SOLUTIONS SEGMENT.
The Office Solutions segment increased total assets to $11.7 million,
net of discontinued operations, as compared to $7.2 million as of June 30, 1998.
After taking account of discounted operations, the net increase in total segment
assets of $4.5 million is principally due to acquisitions. As more fully
described in the notes to the financial statements the registrant consummated
eight acquisitions which contributed additional net assets of approximately $7.2
million at the time of purchase. Because acquisitions were accounted for under
the purchase method of accounting, the segment recognized a significant increase
in goodwill.
Accounts receivable increased to $3.8 million as of June 30, 1999, as
compared to $.63 million in the prior year. This significant increase is
principally in response to acquisitions and general revenue growth. However, as
a percent of sales, net of discontinued operations, accounts receivable also
showed a modest decrease to approximately 18% of sales for the year ended June
30, 1999, as compared to approximately 18% for the nine month period ended June
30, 1998.
For the nine month period ended June 30, 1998, as compared to the year
ended September 30, 1997, accounts receivable experienced significant growth,
which was also principally in response to acquisitions.
26
The segment also experienced significant growth in inventory. For the
year ended June 30, 1999, inventory increased to approximately $3.4 million
compared to $1.6 million for the prior period ended June 30, 1998. Acquisitions
during the year were the principal factor causing this increase. However, as a
percentage of sales, inventory declined to 16% for the year ended June 30, 1999,
as compared to 45% for the nine month period ended June 30, 1998. The segment
continues to monitor its inventory levels and strives to minimize the carrying
costs and excessive inventory. Also, during the year ended June 30, 1999, the
segment reviewed the inventory and reduced the carrying value for items that had
infrequent utilization. Management believes that, in order for the Registrant to
provide the highest level of service to its customers (due to the age of the
machines in the customer base), it may be necessary to stock certain items which
may be slow moving.
Inventory at June 30, 1998 compared to September 30, 1997 also reported
a significant increase, which was principally due to acquisitions.
Property and equipment, net of discontinued operations, increased by
approximately $1.1 million at June 30, 1999 as compared to June 30, 1998. This
increase is principally in response to acquisitions and, to a lesser extent,
increases in the segment's computerized operational and financial systems. Costs
associated with the Y2K problem have been minimal for the segment since the
computerized systems have generally been purchased from third party vendors
having responsibility for upgrading such systems. As previously reported in the
Registrant's Form 10-Q for the quarter dated March 31, 1999 which is hereby
incorporated by reference, the Registrant began a modification of the Office
Solution's segment financial reporting system. The segment began converting its
accounting software in May 1999 and began centralizing its reporting procedures
effectively to the "hub" level. The intended benefit of these modifications is
to provide management more timely and specific financial information. Management
believes that these modifications will ultimately strengthen the accounting
internal controls and provide more concise operational information as well as
other efficiencies. Management can provide no assurance that this conversion
will produce its intended results.
For the nine month period ended June 30, 1998, as compared to the
year ended as of September 30, 1997, property and equipment also reported
significant increases due principally to acquisitions and implementation of
the primary computerized accounting and operational systems.
Intangible assets, consisting principally of goodwill, increased by
approximately $5.5 million as of June 30, 1999 compared to the prior year. This
increase relates primarily to acquisitions during the current year, with Barbera
contributing approximately $1.7 million of this increase. Moreover, the
Philadelphia acquisitions contributed approximately $0.9 million of the
increase. In March 1999, the segment amended the purchase agreement with the AMI
Group, whereby the Registrant agreed to assume additional liabilities, including
$518,500 of notes payable and $220,000 of deferred service liabilities, thus
increasing the purchased goodwill by approximately $738,500. Also, during the
year, the goodwill balances associated with previous acquisitions were adjusted
to reflect additional liabilities assumed or paid our to reflect changes in
estimates or to adjust for other factors which were unknown at time of purchase.
Thus, as the acquisition is assimilated into the Registrant's operations and all
facts and circumstances become more fully known, the acquisition price,
including the assumption of additional liabilities, may, and has, necessitated
increases to the purchased goodwill. Management generally allows for a period
not to exceed 12 months for adjustments to the acquisition price.
27
Goodwill as of June 30, 1998, compared to September 30,1997 showed a
significant increase due principally to acquisitions.
The segment experienced significant growth in accounts payable and
accrued expenses, net of discontinued operations, as of June 30, 1999 compared
to June 30, 1998. The increase of approximately $2.3 million relates principally
to acquisitions and general revenue and volume increases. To a lesser extent,
this increase relates to the accrual of earned but unpaid wages, salaries, and
the related tax liabilities.
Consistent with previous discussions, accounts payable and accrued
expenses also showed significant increase as of June 30, 1998 compared to
September 30,1997. This increase also was principally due to acquisitions.
Deferred revenue increased by approximately 714.7% as of June 30, 1999
compared to June 30, 1998. The increase of approximately $1.2 million relates
principally to acquisitions, and to a lesser extent, general volume increases
during the year.
Deferred revenue as of June 30, 1998, compared to September 30, 1997
likewise showed an increase primarily as a result of acquisitions.
Notes payable as of June 30, 1999, both current and non-current
portions, increased dramatically as compared to June 30, 1998. This increase of
approximately $6.3 million relates principally to additional borrowings on the
Sirrom Loan Agreement and the Mercantile Bank Loan Agreement. The Sirrom loan
was used principally to fund acquisitions and, to a lesser extent, to fund
working capital requirements. The Sirrom Loan Agreement has been fully utilized
at June 30, 1999. The Mercantile Bank line was used principally to fund working
capital needs.
As previously discussed in Part I, Item 1 of this report on Form 10-K,
the Registrant has replaced the $3 million Mercantile Bank loan agreement with a
$10 million revolving line of credit facility with The Provident Bank. The
Provident loan agreement was effected on July 1, 1999 with a three-year term.
This note bears interest at prime plus 1% with a minimum borrowing floor of $5.0
million. Advances under this agreement are calculated upon a borrowing base
consisting principally of eligible accounts receivable and inventory as defined
in the agreement. Substantially all of the Registrant's assets secure the debt.
This debt is being used to fund working capital requirements and contains
certain covenants including the requirement that the Registrant maintain certain
ratios and net worth.
MERCHANT BANKING SEGMENT.
As previously reported, the Registrant did not commence merchant
banking segment operations until October 1997. The nine month period ended
June 30, 1998 was the first period of operations. Thus, there is no
comparison between June 30, 1998 and September 30, 1997. Because the segment
just commenced operations, with significant anticipated and realized growth,
year to year comparisons may not produce meaningful analysis.
At June 30, 1999, the merchant banking segment reported total assets of
$8.1 million as compared to $8.5 million at June 30, 1998. This decrease of
approximately $0.4 million is principally related to a decrease in accounts
receivable from the prior year-end when the segment recognized several large
viatications during the last days of the fiscal year. These settlements resulted
in the segment recognizing escrowed cash, prepaid commissions and other related
current liabilities. The segment did not replicate these large settlements at
June 30, 1999, and thus escrowed cash, prepaid commissions and
28
other current liabilities are significantly lower at June 30, 1999. The effect
of the prior year last days' settlements were offset during the current year by
asset and liability increases associated with revenue growth.
During the year, as previously reported, the segment relocated its
headquarters. As a result of this relocation, the segment expended approximately
$177,000 to purchase office furniture and computer equipment. Thus, property
plant and equipment increased by approximately 73% as compared to the prior
year.
Moreover, with the previously announced acquisition of Ruttenberg, the
segment recognized approximately $78,000 of goodwill. As a result of this
acquisition other assets also showed an increase compared to the prior year.
SPECIALTY FINANCE SEGMENT.
As previously discussed, the specialty finance segment effectively commenced
operations during the third quarter of fiscal 1999. Prior to such commencement
of operations, the segment was included within the merchant banking segment
although the segment had no significant assets. Therefore, there can be no
meaningful comparison to the prior years.
Total assets for the specialty finance segment as of June 30, 1999 are
$32,200, consisting principally of cash and other current assets. Liabilities
consist of accounts payable. The Specialty Finance segment has established
working relationships with several funding sources.
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 may lead to company-wide disruptions. The costs of such company-wide
disruptions could have a material adverse effect on the Registrant's results of
operations and financial condition.
The Registrant has created a three-phase plan to address its Y2K
issues. The first phase is to identify the known sources of potential Y2K
problems. The second phase is to develop and implement a plan of action to
resolve known Y2K problems. The third and final phase is to test the results of
phase two.
The Registrant has substantially completed phase one and two of its
three-phase plan and has identified its significant risk exposure areas. The
Registrant has identified a number of applications within its financial systems,
including the Registrant's core financial and reporting systems, which are Y2K
compliant due to their recent implementation, which applications were acquired
from third party vendors. In other areas, the Registrant either has or is in the
process of contacting vendors to ensure the applicable software and computer
based hardware is or will be Y2K compliant. To date, significant third party
vendors have assured the Registrant that they are or will be Y2K compliant in
the near term.
Management does not anticipate significant additional expenses in
future periods associated with the known Y2K issues confronting the Registrant.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Imtek Office Solutions, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Imtek Office
Solutions, Inc. and Subsidiaries as of June 30, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended June 30, 1999, and the nine months in the period ended June 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Imtek Office
Solutions, Inc. and Subsidiaries as of June 30, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
the year ended June 30, 1999 and the nine month period ended June 30, 1998 in
conformity with generally accepted accounting principles.
We have also audited Schedule II for the year ended June 30, 1999 and the
nine month period ended June 30, 1998. In our opinion, the schedule presents
fairly, in all material respects, the information required to be set forth
therein.
/S/ GRANT THORNTON LLP
- -----------------------
BALTIMORE, MARYLAND
OCTOBER 22, 1999
30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Imtek Office Solutions, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Imtek Office
Solutions, Inc. and Subsidiaries as of September 30, 1997 and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note B to the financial statements, the Company restated its
financial statements to reflect the change in its method of accounting for the
business combination of Spectrum Equities, Inc. and Imtek Corporation as a
reverse acquisition during the year ended September 30, 1997.
In our opinion, the 1997 financial statements referred to above present fairly,
in all material respects, the financial position of Imtek Office Solutions, Inc.
and Subsidiaries as of September 30, 1997, and the results of their operations
and their cash flows for the year the ended in conformity with generally
accepted accounting principles.
We have also audited the consolidated financial statement schedules listing on
the accompanying index at Item 14(a)(2) for the year ended September 30, 1997.
In our opinion, the schedules present fairly, in all material respects, the
information required to be set forth therein.
/S/ ROSENBERG, RICH, BAKER, BERMAN & COMPANY
- --------------------------------------------
BALTIMORE, MARYLAND
DECEMBER 19, 1997 (EXCEPT AS TO NOTE B,
AS TO WHICH THE DATE IS SEPTEMBER 23, 1998)
31
IMTEK OFFICE SOLUTIONS, INC. AND SUBSIDIARIES
(FORMERLY SPECTRUM EQUITIES, INC.)
CONSOLIDATED BALANCE SHEETS
JUNE 30,
- --------------------------------------------------------------------------------
ASSETS
1999 1998
---- ----
CURRENT ASSETS
Cash $ 356,489 $ 2,943,968
Escrow deposits 753,711 5,054,220
Accounts receivable, less allowance for doubtful accounts
of $103,075 at June 30, 1999 (1998 - $0) 3,836,580 740,847
Other receivables 109,624 82,168
Inventory 3,388,100 1,626,432
Notes receivable 139,196 --
Deferred tax assets 488,712 82,124
Net assets of discontinued operations 370,984 560,584
Prepaid expenses and other current assets 206,457 775,912
------------ ------------
Total current assets 9,649,853 11,866,255
PROPERTY AND EQUIPMENT - at cost, less accumulated
depreciation and amortization 3,129,551 1,838,655
OTHER NONCURRENT ASSETS 143,477 488,344
DEFERRED FINANCING COSTS, less accumulated amortization
of $75,750 at June 30, 1999 (1998 - $6,135) 288,326 361,941
OTHER INTANGIBLE ASSETS, less accumulated amortization of
$537,584 at June 30, 1999 (1997 - $72,119) 7,361,322 1,730,938
------------ ------------
$ 20,572,529 $ 16,286,133
------------ ------------
------------ ------------
CURRENT LIABILITIES
Current maturities of long term debt $ 953,820 $ 560,055
Current maturities of obligations under capital lease 195,731 234,081
Accounts payable - trade 1,927,931 447,528
Accounts payable - related party 724,598 795,205
Accrued expenses 1,967,110 943,827
Customer escrow accounts 753,711 5,054,220
Deferred revenue 1,369,912 168,153
Income taxes payable 122,125 434,804
------------ ------------
Total current liabilities 8,014,938 8,637,873
LONG TERM DEBT, net of current maturities, less original issue
discounts of $2,138,316 in 1999 and $330,100 in 1998 7,740,806 3,502,506
OBLIGATIONS UNDER CAPITAL LEASE, net of current maturities 1,051,857 988,578
DEFERRED TAX LIABILITY 51,982 65,490
PUT WARRANT OBLIGATION 2,251,062 335,695
MINORITY INTEREST IN SUBSIDIARY 160,174 --
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 5,000,000 shares; 75,000 Series A
authorized; liquidation preference of $832,400 Series A; issued and
outstanding, 8,324 shares in 1999 and 6,740 shares in 1998 83 67
Common stock, $.000001 par value; authorized 50,000,000 shares in 1999,
250,000,000 shares in 1998; issued and outstanding, 7,532,366 shares 8 8
Additional paid-in-capital 2,246,490 2,094,481
(Accumulated deficit) retained earnings (944,871) 661,435
------------ ------------
1,301,710 2,755,991
------------ ------------
$ 20,572,529 $ 16,286,133
------------ ------------
------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
32
IMTEK OFFICE SOLUTIONS, INC. AND SUBSIDIARIES
(FORMERLY SPECTRUM EQUITIES, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1999, NINE MONTHS ENDED JUNE 30, 1998 AND YEAR
ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Revenue
Equipment and supplies $ 20,879,845 $ 3,615,750 $ 2,094,972
Merchant banking 53,962,341 21,088,242 --
Specialty finance 78,017 -- --
------------ ------------ ------------
74,920,203 24,703,992 2,094,972
COST OF REVENUE
Equipment and supplies 11,923,122 2,356,606 1,868,703
Merchant banking 46,704,773 17,943,694 --
Specialty finance 322 -- --
------------ ------------ ------------
58,628,217 20,300,300 1,868,703
------------ ------------ ------------
Gross profit 16,291,986 4,403,692 226,269
SELLING AND GENERAL EXPENSE 15,004,042 3,100,659 153,836
------------ ------------ ------------
Operating income 1,287,944 1,303,033 72,433
Other (expense) income
INTEREST INCOME 2,942 -- 6,534
INTEREST EXPENSE (1,276,752) (121,989) --
MINORITY INTERESTS IN SUBSIDIARY (124,478) -- --
------------ ------------ ------------
(Loss) income from continuing operations before income (70,344) 1,181,044 78,967
taxes
INCOME TAXES 312,620 467,310 20,600
------------ ------------ ------------
Net (loss) income from continuing operations (382,964) 713,734 58,367
DISCONTINUED OPERATIONS
Loss on operation of commercial printing and duplicating
services segment, including provision of $479,169 for
operating losses during phase-out period, less income tax
benefit of $614,744 in 1999 and $69,630 in 1998 (1,223,342) (110,666) --
------------ ------------ ------------
NET (LOSS) INCOME (1,606,306) 603,068 58,367
Preferred stock dividends 71,352 5,055 --
------------ ------------ ------------
(LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS $ (1,677,658) $ 598,013 $ 58,367
------------ ------------ ------------
------------ ------------ ------------
EARNINGS PER SHARE
BASIC
CONTINUING OPERATIONS $ (0.06) $ 0.10 $ 0.03
DISCONTINUED OPERATIONS (0.16) (0.02) --
------------ ------------ ------------
NET INCOME $ (0.22) $ 0.08 $ 0.03
------------ ------------ ------------
------------ ------------ ------------
DILUTED
CONTINUING OPERATIONS $ (0.06) $ 0.10 $ 0.03
DISCONTINUED OPERATIONS (0.16) (0.02) --
------------ ------------ ------------
NET INCOME $ (0.22) $ 0.08 $ 0.03
------------ ------------ ------------
------------ ------------ ------------
WEIGHTED AVERAGE COMMON SHARES
BASIC 7,532,361 7,412,033 2,253,425
------------ ------------ ------------
------------ ------------ ------------
DILUTED 7,532,361 7,430,570 2,253,425
------------ ------------ ------------
------------ ------------ ------------
33
IMTEK OFFICE SOLUTIONS, INC. AND SUBSIDIARIES
(FORMERLY SPECTRUM EQUITIES, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED JUNE 30, 1999, NINE MONTHS ENDED JUNE 30, 1998 AND YEAR
ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
(Accumulated
Preferred Stock Common Stock Additional deficit)
-------------------- ---------------------- paid-in retained Stockholders
Shares Amount Shares Amount Capital Earnings Equity
------ ------ ------ ------ ------------- ------------- ------
BALANCE AT OCTOBER 1, 1996 -- $ -- 243,901,667 $ 244 $ 78,613 $ (76,715) $ 2,142
Issuance of stock -- -- 6,098,333 6 2,994 -- 3,000
1 for 400 share reverse
stock split -- -- (249,375,000) (249) 249 -- --
Exchange of stock for
Imtek Corporation stock -- -- 4,375,000 4 710,559 -- 710,563
Net income for the period -- -- -- -- -- 58,367 58,367
----- ---------- ----------- ------------ ------------ ------------ ------------
BALANCE AT SEPTEMBER 30, 1997 -
AS PREVIOUSLY STATED -- -- 5,000,000 5 792,415 (18,348) 774,072
Adjustment to prior period -- -- -- -- (76,715) 76,715 --
----- ---------- ----------- ------------ ------------ ------------ ------------
BALANCE AT SEPTEMBER 30, 1997 -
AS RESTATED -- -- 5,000,000 5 715,700 58,367 774,072
Shares issued in
connection with -- -- 2,532,361 3 354,528 -- 354,531
acquisitions
Issuance of preferred stock 6,740 67 -- -- 626,753 -- 626,820
Issuance of stock warrants -- -- -- -- 397,500 -- 397,500
Net income for the period -- -- -- -- -- 603,068 603,068
----- ---------- ----------- ------------ ------------ ------------ ------------
Balance at June 30, 1998 6,740 67 7,532,361 8 2,094,481 661,435 2,755,991
Issuance of preferred stock 1,584 16 -- -- 152,009 -- 152,025
Net loss for the year -- -- -- -- -- (1,606,306) (1,606,306)
----- ---------- ----------- ------------ ------------ ------------ ------------
Balance at June 30, 1999 8,324 $ 83 7,532,361 $ 8 $ 2,246,490 $ (944,871) $ (1,301,710)
----- ---------- ----------- ------------ ------------ ------------ ------------
----- ---------- ----------- ------------ ------------ ------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
34
IMTEK OFFICE SOLUTIONS, INC. AND SUBSIDIARIES
(FORMERLY SPECTRUM EQUITIES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, 1999, NINE MONTHS ENDED JUNE 30, 1998 AND YEAR
ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(1,606,306) $ 603,068 $ 58,367
Adjustments to reconcile net income to net cash provided by
Continuing operating activities
Loss from discontinued operations 1,223,342 110,666 --
Depreciation and amortization 1,085,092 188,085 3,925
Minority interest equity in earnings 124,478 -- --
Accretion of original issue discount 107,151 5,595 --
Changes in assets and liabilities,
net of effect of acquisitions
Accounts and other receivables (1,752,574) 1,048,051 (36,210)
Inventory (45,447) (649,771) (131,950)
Accounts payable and accrued expenses 218,977 (515,410) 190,299
Deferred revenue (51,738) 168,153 --
Accounts payable - related parties (70,607) 720,240 --
Deferred income taxes (420,096) (16,634) --
Prepaid expenses 662,692 (378,412) --
Other assets 512,675 (472,344) --
Income tax payable (312,679) 414,204 20,600
----------- ----------- -----------
Net cash (used in) provided by continuing operating (325,040) 1,225,491 105,031
activities
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and equipment (40,810) (514,334) (35,740)
Cash paid for acquisitions and intangibles (5,106,403) (840,583) --
Cash deposit paid -- -- (40,000)
Net cash used in investing activities (5,147,213) (1,354,917) (75,740)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock -- -- 3,000
Proceeds from notes payable 5,608,722 3,570,000 22,368
Payments on notes payable (1,227,536) (95,182) --
Notes receivable advances -- -- (25,541)
Deferred financing costs -- (368,076) --
Payments on obligations under capital lease (614,695) (18,036) --
Issuance of preferred stock 152,025 626,820 --
----------- ----------- -----------
Net cash provided by (used in) financing activities (173) 3,918,516 3,715,526
CASH FLOWS USED IN DISCONTINUED OPERATIONS (1,033,742) (671,250) --
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH (2,587,479) 2,914,850 29,118
CASH AT BEGINNING OF YEAR 2,943,968 29,118 --
----------- ----------- -----------
CASH AT END OF YEAR $ 356,489 $ 2,943,968 $ 29,118
----------- ----------- -----------
----------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
35
IMTEK OFFICE SOLUTIONS, INC. AND SUBSIDIARIES
(FORMERLY SPECTRUM EQUITIES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEAR ENDED JUNE 30, 1999, NINE MONTHS ENDED JUNE 30, 1998 AND YEAR
ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
DISCLOSURE OF CASH FLOW SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest $1,112,837 $ 68,656 $ --
Taxes 433,898 -- --
NONCASH TRANSACTIONS:
During fiscal 1999:
The Company purchased assets and stock of Forbes, KDI, Barbera, American
Copy, Corporate Computer, AMI and Ruttenberg for an aggregate purchase
price of $7,323,267, including cash, assumed liabilities, and notes of
$1,520,301.
The Company has received from an escrow account $4,300,509 representing
the decrease in net deposits from third party purchasers.
The Company acquired property and equipment under capital lease and notes
payable amounting to $639,624 and $354,000 respectively.
The Company issued 449,994 warrants to purchase common stock in connection
with a note payable. At issuance, the warrants had a fair value of
$1,795,476.
The Company revalued warrants issued in fiscal 1998 to purchase common
stock to reflect the increase in the fair value of the stock. The
revaluation resulted in an increase in the original issue discount of
approximately $120,000.
During fiscal 1998:
The Company purchased assets and stock of Thompson, Perfect Copy, OSL,
CPHI, GLS and Chesapeake for 2,532,361 shares of common stock,
representing an aggregate price of $2,063,497, including cash, assumed
liabilities, and notes payable of $1,708,966.
The Company acquired $1,240,695 of office equipment under capital lease.
The Company issued 119,891 warrants to purchase common stock in connection
with a note payable. The warrants had a fair market value of $335,695.
The Company issued 250,000 warrants to purchase common stock in connection
with a consulting agreement. The warrants had a fair value of $397,500.
The Company placed $5,054,220 of deposits from third party purchasers of
viaticated life insurance policies in an escrow account.
During fiscal 1997:
The Company issued 4,375,000 shares of stock in exchange for certain
assets of Imtek Corporation as follows:
Inventory $353,954
Accounts receivable 356,609
--------
$710,563
--------
--------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
36
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts of
Imtek Office Solutions, Inc., a Delaware corporation, and its wholly-owned
subsidiaries, Imtek Corporation, a Maryland corporation, and Imtek Services
Corporation (Services), a Maryland corporation, and Imtek Acquisition
Corporation (Acquisition), a Maryland Corporation..
During 1999, Acquisition acquired a 60% interest in Barbera Business
Systems, Inc. (Barbera) and Imtek Corporation acquired Forbes Enterprises,
Inc. (t/a Innovative Office Services) (IOS), Keystone Digital Imaging, Inc.
(KDI), Legal America of Virginia, Ltd. (LA), AMI Group, Inc. (AMI), American
Copy Systems, Inc. (ACS), Cannon Business Machines (CBS) and Corporate
Computer Services (CCS). All of the acquisitions were accounted for as
purchases. Revenue and results of operations from the respective dates of
acquisition have been included in the accompanying financial statements.
During 1998, Imtek Corporation acquired Office Supply Line (OSL), Capital
Prepress Holdings, Inc. (CPHI), GLS Holdings, Inc. (GLS), Richmond Business
Systems (RBS), Bohanon Business Systems, Inc. (BBS) and Perfect Copy. The
acquisitions were accounted for as purchases. Revenue and results of
operations from the respective dates of acquisition have been included in
the accompanying financial statements.
Services' wholly-owned subsidiaries include Imtek Funding (Funding) which
operates in Merchant Banking and Imtek Capital Corporation (Capital) which
operates the Specialty Finance segment. In October 1997, Funding acquired
Thompson Office Products, a company engaged in the purchase and resale of
viaticated insurance policies. The acquisition was accounted for as a
purchase. Revenue and results of operations from the date of acquisition
have been included in the accompanying financial statements.
Significant intercompany transactions have been eliminated in consolidation.
BUSINESS OPERATIONS
The Company operates in the United States. During fiscal 1999, on the basis
of revenues, the Company's business operations were 28% in the selling and
servicing of office products and supplies, 72% in the purchase and resale of
viaticated insurance policies of terminally ill individuals, with less than
1% of revenue being derived by brokering financing and leasing arrangements
of office equipment. During fiscal 1998, on the basis of revenues, the
Company's business operations were 15% in the selling and servicing of
office products and supplies and 85% in the purchase and resale of
viaticated insurance policies of terminally ill individuals . During fiscal
1997, all of the Company's
37
business operations were in selling and servicing of office products and
supplies. The primary business segments and a description of the business
operations of each company follows.
Imtek Corporation is in the business of selling and servicing copiers,
facsimile machines and printers, sales of office supplies, and commercial
printing and copying. The Company conducts business in the Philadelphia,
Baltimore, Washington, D.C., Richmond and Tidewater, Virginia, and Atlanta,
Georgia metropolitan areas and grants credit to customers in those regions.
Funding's principal business activity is the purchase and resale of
viaticated insurance policies. Funding contracts with terminally ill
individuals who desire to sell their life insurance policies for cash.
Funding conducts this business through a broker network it has established
throughout the continental United States.
Capital's principal business activity is originating and placing equipment
leases with unrelated leasors.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents. Escrow deposits are not considered cash.
REVENUE RECOGNITION
Imtek Corporation and Acquisition recognize revenue on equipment sales and
supplies upon shipment of the sale. Revenue for servicing of the equipment
is recognized at the time the service is performed. Deferred revenue
consists of unearned maintenance contract revenue that is recognized using
the straight-line method over the life of the related contract, generally
twelve months.
Imtek Funding recognizes revenue on viatical contracts at the time title to
the policy is transferred to the purchaser.
Capital earns fees upon the origination and placement of equipment leases
with unrelated leasors.
ACCOUNTS RECEIVABLE
The Company utilizes the allowance method of accounting for doubtful
accounts. The Company performs ongoing credit evaluations of its customers
and maintains an allowance for potential credit losses. The allowance is
based on a review of current accounts receivable. Uncollectible accounts are
written off against the allowance when deemed uncollectible.
INVENTORY
Inventories consist of copy machines, facsimile machines, duplicators, and
parts and supplies used in the maintenance of office machines and consumable
supplies. Inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
38
PROPERTY AND EQUIPMENT
The Company provides depreciation and amortization for financial statement
purposes over the estimated useful lives of the fixed assets using the
straight-line method. Accelerated methods are utilized for tax purposes.
Expenditures for maintenance and repairs are charged to expense in the
period the charges are incurred.
The estimated service lives used in determining depreciation and
amortization are as follows:
Furniture and fixtures, production equipment and
equipment held for leases 5-7 years
Computer equipment and software 5 years
Leasehold improvements 5-10 years
Vehicles 5 years
DEFERRED FINANCING COSTS
Deferred financing costs represent costs incurred in obtaining funding under
a note payable. The costs are being amortized over the five year life of the
related note.
OTHER INTANGIBLE ASSETS
Other intangible assets represent costs in excess of net assets acquired and
non-compete agreements in connection with businesses acquired. Costs in
excess of net assets acquired are being amortized to operations on a
straight-line basis over fifteen years. Non-compete agreements are being
amortized over the life of the agreement, generally 3 to 5 years.
ORIGINAL ISSUE DISCOUNT
The original issue discount, which is shown as a reduction of the note
payable, represents the value of warrants issued in connection with the
related note payable. The original issue discount is being amortized over
the remaining life of the note.
FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, escrow deposits, accounts
receivable, accounts payable, and long-term debt. The carrying amount of
these financial instruments approximates their fair market value.
LONG-LIVED ASSETS
The recoverability of long-lived assets is evaluated at the operating unit
level by an analysis of operating results and consideration of other
significant events or changes in the business environment. If an operating
unit has current operating losses and there is a likelihood that such
operating losses will continue, the Company will determine if impairment
exists based on the undiscounted expected future cash flows from operations
before interest. Impairment losses
39
would be measured based on the amount by which the carrying amount exceeds
the fair value.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenue and expenses during the reporting period.
Actual results could differ from those estimates.
INCOME TAXES
Income taxes are provided based on the liability method for financial
reporting purposes. Deferred and prepaid taxes are provided for on temporary
differences in the basis of assets and liabilities which are recognized in
different periods for financial and tax reporting purposes.
ADVERTISING
Advertising costs are expensed as incurred. Total advertising and promotion
expense for the year ended June 30, 1999 and the nine month period ended
June 30, 1998 amounted to $233,525 and $67,907, respectively. There was no
advertising expense for the year ended September 30, 1997.
RECLASSIFICATIONS
Certain items in the fiscal 1998 and 1997 financial statements have been
reclassified to conform to the current year presentation.
EARNINGS PER SHARE
Basic earnings per share amounts have been computed based on the weighted
average number of common shares outstanding. Diluted earnings per share
reflects the increase in average common shares outstanding that would result
from the assumed exercise of outstanding securities, calculated using the
treasury stock method.
FISCAL YEAR CHANGE
In July 1997, the Board of Directors approved a change in the Company's
fiscal year end from September 30 to June 30, effective with the fiscal
period beginning October 1, 1996.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued No. 130, REPORTING COMPREHENSIVE INCOME (SFAS
130), which is effective for fiscal years beginning after December 15, 1997.
The statement establishes standards for reporting and display of
comprehensive income and its components. Implementation of this disclosure
standard did not have an effect on the Company.
40
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
NEWLY ISSUED ACCOUNTING STANDARDS - CONTINUED
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION (SFAS 131), which is effective for fiscal
years beginning after December 15, 1997. The statement establishes revised
standards under which an entity must report business segment information in
its financial statements on the basis that is used internally for evaluating
segment performance. The Company adopted SFAS 131 in the fiscal year
beginning July 1, 1998 and has restated its prior year segment data to
conform to this presentation.
In December 1997, SFAS No. 132, EMPLOYERS' DISCLOSURE ABOUT PENSION AND
OTHER POST RETIREMENT BENEFITS, was issued and is effective for the
Company's 1999 fiscal year. The statement revises current disclosure
requirements for employers' pensions and other retiree benefits.
Implementation of this disclosure standard did not affect the Company's
financial position or results of operations.
In June 1998, SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, was issued and is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The statement establishes
accounting and reporting standards for derivative instruments, and for
hedging activities. Implementation of this standard is not anticipated to
have an effect on the Company.
NOTE B - PRIOR PERIOD ADJUSTMENT
Additional paid-in capital and accumulated deficit were restated as of
September 30, 1997 to reflect the acquisition of Imtek Corporation by
Spectrum Equities, Inc. as a reverse acquisition, treating Imtek Corporation
as the acquirer. Previous financial statements reflected Spectrum Equities
as the acquirer.
Prior to the acquisition, Spectrum Equities, Inc. was a public shell
corporation with no operations since 1992. Imtek Corporation was a
development stage enterprise prior to the acquisition.
Simultaneous with the acquisition, the Company was renamed Imtek Office
Solutions, Inc.
NOTE C - DISCONTINUED OPERATIONS
On April 7, 1999, the executive committee of the Board of Directors of the
Company made a decision to discontinue the commercial printing and
duplicating services segment of the business. In 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 includes a provision of
$479,169 for operating losses during the phase-out period. In 1998, the
loss, net of tax benefit, on operations was approximately $110,000.
41
NOTE C - DISCONTINUED OPERATIONS - CONTINUED
Summarized data relating to the discontinued operations of the commercial
printing and duplicating services segment as of and for the year ended June
30, 1999 and the nine month period ended June 30, 1998 are as follows:
1999 1998
---- ----
Results of operations
Operating revenue $2,306,257 $2,238,650
Operating loss (1,838,086) (180,296)
Net loss (1,223,342) (110,666)
Net assets of discontinued operations
Current assets $832,638 $ 746,167
Property and equipment, net 434,437 42,233
Other assets 19,032 10,808
Current liabilities 915,123 238,624
NOTE D - ESCROW DEPOSITS AND CUSTOMER ESCROW ACCOUNTS
Deposits by prospective purchasers of viaticated life insurance policies are
made to a "Viatical Trust" bank account administered by an independent
trustee (Trustee.) Fifteen percent of the funds are advanced to the Company
and reflected as a liability until the transaction settles. If the
prospective purchaser decides not to settle the transaction, the Trustee
refunds the deposit and the Company refunds the advance without interest.
Upon a sale, funds are disbursed by the Trustee to the insured for the
agreed purchase price of the life insurance policy. The balance, less fees
to the Trustee for its services, is paid to Funding. The ownership of the
policy is transferred to the Trustee and the purchaser is designated as the
beneficiary.
Upon a sale the Trustee also deposits funds into a separate escrow account
to pay future premiums on the policy based upon the estimated remaining life
of the insured. For policies sold after September 30, 1997, Funding is not
liable for and does not guarantee the payment of insurance premiums beyond
the amounts deposited.
Upon the death of an insured, the Trustee collects the policy proceeds and
remits those funds to the policy purchaser.
NOTE E - BUSINESS ACQUISITIONS
YEAR ENDED JUNE 30, 1999
On July 1, 1998, the Company acquired certain assets of Forbes Enterprises,
Inc. (Forbes) a business engaged in the sale, rental and servicing of office
equipment and supplies in exchange for cash of
42
$115,000, assumption of liabilities and notes payable of approximately
$1,007,463.
On July 22, 1998, the Company acquired certain assets of Keystone Digital
Imaging, Inc. (KDI), a Pennsylvania corporation engaged in the sale,
leasing, rental, servicing and wholesaling of office equipment, products and
supplies. The transaction was funded through a cash payment of $800,000 at
settlement, issuance of a note payable of $130,000 and assumption of
maintenance contract and other liabilities totaling $896,082.
In July 1998, the Company acquired 60% of the common stock of Barbera
Business Systems, Inc (Barbera), a Maryland corporation engaged in the
retail business of selling, leasing and servicing office equipment and
related supplies throughout Maryland and Washington DC, in exchange for a
cash payment of $1,500,000 and a note payable of $225,119.
In July 1998, the Company entered into an agreement with AMI Group, Inc.
(AMI), a Maryland corporation involved in selling photocopy equipment and
providing third party administrative and marketing services for equipment
resellers. Under the terms of the agreement, the Company purchased certain
assets, in exchange for the assumption of liabilities amounting to $460,000.
In March 1999, the Company amended the purchase agreement whereby the
Company agreed to assume additional liabilities including $518,500 of notes
payable and $220,000 in deferred service liabilities.
In July 1998 the Company entered into an agreement with Ruttenberg &
Associates (Ruttenberg), an Illinois corporation involved in the sale of
viaticated insurance policies. The transaction was accounted for as a
purchase with a cash payment of $78,000 at settlement.
On July 28, 1998, the Company acquired certain assets of Legal America of
Virginia, Ltd. (Legal), a Missouri corporation engaged in commercial
duplication. The transaction was funded through a cash payment of $68,603
at settlement. (See note C).
On November 1, 1998, the Company acquired certain assets of American Copy
Systems, Inc. (ACS), a Pennsylvania corporation engaged in the sale, rental,
servicing and wholesaling of office equipment and supplies. The transaction
was funded through a cash payment of $640,000 at settlement, issuance of a
note payable for $160,000, and the assumption of maintenance contract
liabilities of $95,000.
In March 1999, the Company entered into a License and Non-Compete Agreement
with George R. Cannon Business Machines, Inc. (Cannon), for $51,000, payable
over six months.
On April 16, 1999, the Company acquired certain assets of Corporate Computer
Services, Inc. (Corporate Computer), a business engaged in selling and
servicing computer printers. The transaction was funded through a cash
payment of $100,000 at settlement, assumption of liabilities of $171,000,
and notes payable totaling $87,500.
The fiscal 1999 acquisitions have been recorded under the purchase method of
accounting; accordingly, the results of operations of the entities from
their respective acquisition dates are included in the
43
accompanying consolidated financial statements. The purchase prices have
been allocated to assets acquired and liabilities assumed based on the fair
market value at the dates of acquisition.
The fair value of assets acquired and liabilities assumed are summarized as
follows:
Corporate
Forbes KDI Barbera AMI Ruttenberg Legal ACS Cannon Computer
----------- ----- ------- ---- ---------- ----- ------ -------- --------
Current assets $551,330 $923,239 $1,485,937 $ -- $ $ -- $449,679 $ -- $180,890
--
PP&E 335,000 234,000 89,775 56,549 -- 23,000 70,000 -- 8,300
Covenants not to 20,000 30,000 - -- -- 50,000 --
compete
Goodwill 216,133 638,843 1,672,022 1,141,951 78,000 45,603 325,321 51,000 169,310
Other assets -- -- 93,237 -- -- -- -- -- --
Current liabilities -- -- (1,575,659) -- -- -- -- -- --
Long-term -- -- (4,500) -- -- -- -- -- --
liabilities
Minority interest -- -- (35,516) -- -- -- -- -- --
NINE MONTH PERIOD ENDED JUNE 30, 1998
On October 1, 1997, the Company acquired all of the issued corporate stock
of Thompson Business Products ("Thompson"), an entity owned by officers of
the Company, in exchange for 1,000,000 shares of the Company's common stock
valued at $140,000 and cash of $172,826. Thompson purchases and resells
insurance policies of terminally ill individuals.
On October 1, 1997, the Company acquired certain assets of Richmond Business
Systems, Inc. ("RBS") for cash of $39,500.
On October 1, 1997, the Company acquired certain assets of Bohanon Business
Systems, Inc. ("BBS"). The transaction was funded through the assumption of
trade payables of $27,000 and issuance of a note payable of $7,000.
On October 31, 1997, the Company acquired all of the outstanding common
stock of Capital Prepress Holdings, Inc. ("CPHI") in exchange for 1,010,611
shares of common stock valued at $141,486 and a cash payment of $7,000. CPHI
is a provider of digital imaging services.
On November 1, 1997, the Company acquired all of the common stock of Office
Supply Line Holding, Inc. ("OSLHI"), an entity owned by one of the Company's
officers, in exchange for 465,000 shares of the Company's common stock
valued at $65,170 and cash of $142,161. Additionally, the Company acquired
the inventory of Office Supply Line, Inc., an entity related to OSLHI for
$237,000, payable in $75,000 cash, $70,000 of assumed trade payables, and a
$92,000 note payable. The Office Supply Line entities operate a retail
office supply business.
On November 1, 1997, the Company acquired all of the outstanding common
stock of GLS Holdings, Inc. ("GLS") in exchange for 56,250 shares of common
stock valued at $7,875 and a cash payment of $21,636. GLS is a provider of
litigation support copy services.
44
NOTE E - BUSINESS ACQUISITIONS - CONTINUED
NINE MONTH PERIOD ENDED JUNE 30, 1998 - CONTINUED
On June 1, 1998, the Company acquired certain assets of Perfect Copy, Inc.
The transaction was funded by a cash payment of $410,000 at settlement, a
$50,000 escrow deposit and the assumption of maintenance contract
liabilities of $100,000.
The fiscal 1998, acquisitions have been recorded under the purchase method
of accounting; accordingly, the results of operations of the entities from
their respective acquisition dates are included in the accompanying
consolidated financial statements. The purchase prices have been allocated
to assets acquired and liabilities assumed based on fair market value at the
dates of acquisition. The fair value of assets acquired and liabilities
assumed are summarized as follows:
OSLHI Perfect
Thompson RBS BBS CPHI and OSL GLS Copy, Inc.
----------- ------- ------- -------- -------- ----- ----------
Current assets $ 1,388,929 $28,000 $29,000 $ - $237,000 $ - $292,000
Property and - 9,500 5,000 - - - 110,000
equipment
Other assets - - - - - - -
Goodwill 1,253,269 2,000 - 148,486 207,331 29,511 123,000
Intangibles 30,000 - - - - - 35,000
Current liabilities (1,279,929) - - - - - -
Long-term liabilities (1,079,443) - - - - - -
YEAR ENDED SEPTEMBER 30, 1997
On April 22, 1997, the Company purchased a 100% interest in Imtek
Corporation for 4,375,000 shares of the Company's common stock (see Note B).
Imtek Corporation was incorporated on April 1, 1997.
The balance sheet of Imtek Corporation consisted of:
Assets
Inventory $353,954
Trade notes receivable 356,609
--------
Stockholders' equity $710,563
--------
--------
45
NOTE E - BUSINESS ACQUISITIONS - CONTINUED
The following table reflects unaudited pro forma combined results of
operations of the Company and the above acquisitions on the basis that the
acquisitions had taken place at the beginning of the fiscal period for each
of the periods presented:
1999 1998 1997
------------ ------------ -----------
Revenues $75,434,443 $25,487,605 $8,958,416
Net (loss) income (1,551,621) 676,781 40,856
Net (loss) income per common share:
Basic (.22) .09 .01
Diluted (.22) .09 .01
Shares used in computation
Basic 7,532,361 7,532,361 7,532,361
Diluted 7,532,361 7,540,117 7,532,361
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred
had the acquisitions been consummated at the beginning of the fiscal years or
of future operations of the combined companies under the ownership and
management of the Company.
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1999 1998
------------- ----------
Office equipment $1,725,113 $1,329,597
Computer equipment and software 331,763 60,355
Furniture and fixtures 1,652,682 527,840
Leasehold improvements 53,431 27,448
Vehicles 24,188 5,029
------- ------
Total property and equipment 3,787,177 1,950,269
Less accumulated depreciation and amortization 657,626 111,614
------- -------
Property and equipment, net $3,129,551 $1,838,655
---------- ----------
---------- ----------
NOTE G - ACCOUNTS PAYABLE - RELATED PARTY
To finance certain inventory purchases, the Company used the trade credit
facilities of CMS and Amerilease, entities owned by certain of the Company's
officers. The balance payable at June 30, 1999 and 1998 was $724,598 and
$795,205, respectively.
46
NOTE H - LONG TERM DEBT
Long-term debt consisted of the following at June 30:
1999 1998
------------ ----------------
Mercantile Bank $2,976,723 $ -
Sirrom Capital Corporation 6,000,000 3,370,000
Former owner of Thompson Office Products 609,126 705,099
Former owners of Keystone Digital Imaging, Inc. 130,000 -
Former owners of American Copy Systems, Inc. 160,000 -
Mita Leasing 605,100 -
Main Street Bank 86,463 -
Former owners of Corporate Computers 87,500 -
Crestar Bank - 51,475
Regency Bank - 200,000
Transamerica 100,000 -
Zulka and Cage 78,030 66,087
------ ------
$10,832,942 $4,392,661
----------- ----------
----------- ----------
Less: current maturities (953,820) (560,055)
----------- ----------
9,879,122 3,832,606
Less: original issue discount (2,138,316) (330,100)
----------- ----------
$ 7,740,806 $3,502,506
----------- ----------
----------- ----------
In August 1998, the Company entered into a two-year revolving line-of-credit
agreement with Mercantile-Safe Deposit & Trust Company (Mercantile) for a
$3,000,000 revolving credit facility to meet short-term working capital
needs. Advances under the line are limited to 70% of eligible accounts
receivable and leases. The borrowings bear interest at prime plus 1% and
provide for a facility fee of 1/2% of the average unused portion of the
line. The borrowings are collateralized by a first priority lien on accounts
receivable, inventory, equipment and all other assets. The agreement
stipulates certain financial covenants. As disclosed in Note T, this
facility was replaced subsequent to year end, with a revolving
line-of-credit with The Provident Bank, which has a maturity date of July 1,
2002. As a result, the Mercantile note has been classified as non-current.
On May 29, 1998, the Company entered into a subordinated acquisition line of
credit agreement with Sirrom Capital Corporation (Sirrom) for $6,000,000.
The Company is using this facility to finance acquisitions and for working
capital. This note is collateralized by substantially all of the Company's
assets and all outstanding stock of the Company's subsidiaries. Sirrom
subordinated its security position to the revolving line-of-credit lender.
Interest on the balance, due Sirrom at 14% per annum, is payable monthly
through May 28, 2003, at which time the entire outstanding principal balance
is due. As additional consideration, the Company granted Sirrom warrants for
119,891 shares in 1998 and an additional 449,994 warrants in 1999. Issuance
of these warrants is reflected as an original issue discount of $2,131,171
and $335,695 at June 30, 1999 and 1998, respectively, which will be
amortized over the term of the loan on a straight-line basis.
47
NOTE H - LONG TERM DEBT - CONTINUED
In conjunction with the acquisition of Thompson, the Company issued its
unsecured note payable to a former owner of Thompson. The note has an unpaid
balance of $424,333 and $705,099 at June 30, 1999 and 1998, respectively.
The note required a balloon payment of $160,000 on July 1, 1998 with monthly
payments thereafter of $13,333, including interest at 8%, through June 2002.
On July 1, 1998 the Company entered into a Severance Agreement and
General Release with Andrew J. Walter, a former shareholder of Thompson.
Under the agreement the Company agreed to purchase 150,000 shares of the
Company's common stock from Mr. Walter at a price of $5 per share upon
the effective date of a registration statement relating to a public
offering by the Company of its common stock or December 31, 1999,
whichever is earlier, and agreed to provide Mr. Walter with registration
rights in connection with shares of common stock of the Company which are
not to be purchased by the Company pursuant to the Severance Agreement and
General Release and certain other consideration. At June 30, 1999, the
Company has recorded a note payable in the amount of $184,794 which
represents the difference between the fair value of the stock at the date
of the note and the agreed upon price of $5 per share.
On July 22, 1998, in connection with the acquisition of KDI, the Company
issued a $130,000 unsecured, non-interest leasing note payable maturing July
22, 1999.
In connection with the Company's acquisition of American Copy Systems, Inc.,
the Company issued a $160,000 unsecured, non-interest bearing note payable
which matures November 1999.
On April 15, 1999, the Company assumed three unsecured notes payable to Mita
Copystar America, Inc., formerly with AMI having an aggregate outstanding
balance of $605,100 as of June 30, 1999. The notes bear interest ranging
from 0% to 15% and have maturities ranging from September 15, 1999 to March
15, 2003.
On August 14, 1998, the Company issued a note payable to Main Street Bank
for $110,000. The note requires monthly payments of $3,460, including
interest at 8.25% through October 15, 2001. The note is collateralized by
certain production equipment.
In connection with the acquisition of Corporate Computer, the Company issued
an unsecured note to the sellers in the amount of $75,000. The note requires
monthly payments of $6,250 plus interest at 8%. The note was fully paid at
June 30, 1999.
Also in connection with the acquisition of Corporate Computer, the Company
issued a $12,500 8% convertible note payable to the seller. The note's
principal is due on April 16, 2004. The note is convertible through April
16, 2004 into 12,500 shares of common stock on or after the date on which
the Company has satisfied all of its filing requirements under the
Securities Act of 1934.
The Company had a collateralized note payable outstanding to Crestar Bank.
The note called for monthly installments of $922 including principal and
interest at 8.56%, through February 15, 2002. The note was repaid during
1999.
The Company had a $350,000 revolving line-of-credit with Regency Bank,
bearing interest at prime plus 3/4% payable monthly. The line was
collateralized by all accounts receivable, chattel paper, certain inventory
and general intangibles and was guaranteed by all subsidiaries. This line
was repaid in 1999.
The Company issued a $100,000 note payable to Transamerica Distribution
Finance for the purchase of equipment. The note, which is secured by the
equipment purchased is due in full on December 21, 1999 and bears
interest at 1.5% per month.
48
The Company has unsecured working capital notes payable to two individuals
which have an aggregate outstanding balance of $88,530 and $66,087 at June
30, 1999 and 1998, respectively. The notes, which are due on August 1,
2001, require monthly payments ranging from $744 to $850 plus interest
ranging from 10% to 12%.
Scheduled maturities of notes payable for the next five years are as
follows:
2000 $ 876,207
2001 364,564
2002 330,728
2003 9,064,149
2004 12,500
--------------
$10,648,148
-----------
-----------
NOTE I - OBLIGATION UNDER CAPITAL LEASE
The Company leases furniture and equipment under capital leases expiring at
various dates through 2004. The following is a schedule of property leased under
these agreements:
1999 1998
---------- ---------
Printing equipment $1,667,184 $1,240,695
Furniture and fixtures 213,135
---------
-
1,880,319 1,240,695
Less accumulated depreciation (235,277) (66,466)
-------- -------
$1,645,042 $1,174,229
---------- ----------
---------- ----------
Minimum future principal payments under the capital leases as of June 30,
1999 are as follows:
2000 $195,731
2001 229,970
2002 282,046
2003 437,553
2004 102,288
Of the total future payments, $1,013,450 are due to Amerilease, an entity
owned by certain of the Company's officers.
NOTE J - PUT WARRANT OBLIGATION
Under an agreement dated May 29, 1998, the warrant holder (Sirrom) was
granted the right to purchase 119,891 shares (Base Number) of the Company's
common stock. The agreement provided that the base number of warrants
increased to 569,885 shares as a result of the Company not completing a
secondary public offering by May 29, 1999. Under the terms of the note, the
Company is obligated to issue additional warrants to Sirrom equal to 0.5% of
the outstanding warrants issued for each year the note remains unpaid beyond
May 29, 2001.
49
NOTE J - PUT WARRANT OBLIGATION - CONTINUED
The warrants may be exercised at any time until July 31, 2003 at $.01 per
share.
A Put Option on the warrants grants the holder the right to require the
Company to redeem the warrants for a period of 60 days immediately prior to
their expiration for the fair value of the shares of common stock
represented by the warrants. As a result of this Put Option, this liability,
which will be adjusted to reflect changes in the fair value of the
underlying stock, has been classified as a long-term obligation of
$2,251,062 and $335,695 as of June 30, 1999 and 1998, respectively.
NOTE K - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company conducts its operations in leased facilities. Rent under
operating leases which expire at various dates through 2006 and require
monthly rent payments ranging from $750 to $13,917.
In June 1997, the Company entered into a lease agreement for three high
volume Xerox copiers from a related party. These copiers are rented on a
month-to-month basis with a thirty-day notification period required to
terminate the lease. Monthly lease payments are computed based upon $.01 per
copy.
The following is a schedule by year of base real estate rentals payable on
operating leases that have initial or remaining lease terms in excess of one
year as of June 30, 1999.
YEAR AMOUNT
2000 $725,752
2001 692,801
2002 643,695
2003 623,051
2004 422,229
Thereafter 271,211
Total rent expense for the year ended June 30, 1999, nine months ended June
30, 1998, and year ended September 30, 1997 was $884,155, $271,910, and
$7,674 respectively.
FINANCIAL ADVISOR AGREEMENT
During 1998, the Company entered into a one year agreement with Ferris Baker
Watts (FBW) to provide financial advisory services to the Company. Under
terms of this agreement, the Company issued FBW 250,000 warrants to purchase
the Company's common stock for $5 per share. The warrants were valued at
$397,500, expire May 2003 and are exercisable at the earlier of (1) March
2, 2000, (2) one year after a public offering, or (3) upon a change of
control transaction.
50
In the event of a public offering, the Company agreed to grant FBW the
option to purchase an additional 15% of the Company's offered Common Stock
up to 30 days subsequent to the public offering at a price which
approximates 93% of the gross price.
LITIGATION
The Company was involved in litigation which alleged copyright infringement
and breach of contract claiming damages of $500,000. In November 1998, a
settlement was reached whereby the Company paid $60,000 in December 1998,
and is required to make semiannual installments totaling $82,500 through
December 2000.
On April 16, 1999, the Kansas Securities Commissioner issued a cease and
desist order against Imtek Funding Corporation d/b/a Beneficial Assistance,
finding that the Company's viatical settlement contracts are securities
within the meaning of the Kansas Securities Act. In response, the Company
has ceased all offers and sales of all viatical settlement contracts within
the State of Kansas. The Company believes that the determination made by the
Securities Commissioner is incorrect and plans to request a hearing to
contest the determination. The Company has sold approximately 8 viatical
settlement contracts to Kansas residents, aggregating approximately
$203,000. If the Company is unsuccessful in contesting the cease and desist
order, the Company will be precluded from offering and selling viatical
settlement contracts in the State of Kansas unless it complies with all
applicable provisions of the Kansas Securities Act and the regulations
promulgated thereunder. Additionally, purchasers of the Company's viatical
settlement contracts who were sold viatical settlement contracts in
violation of applicable Kansas law may become entitled to rescind their
purchases and receive a refund of the purchase price plus interest at the
statutory rate from the date of sale. The Company has received verbal
commitments from 7 of the 8 purchasers who have expressed their interest not
to have the contract rescinded.
Presently, the states of Virginia, Iowa, and Colorado are conducting
investigations into whether viatical settlement contracts sold by the
Registrant, as well as others, constitute securities which require
registration under applicable state law. The Virginia Securities Division
has informed the Registrant that it intends to institute an enforcement
proceeding against the Company. Should such an enforcement proceeding be
instituted, the Registrant presently expects to vigorously defend its
position. Management cannot predict the outcome of such proceedings. An
unfavorable outcome in such proceedings could have a material adverse effect
on the Registrant, its business and financial condition.
The Company is a party to other legal proceedings which are in the ordinary
course of business, and management does not believe that a negative outcome
of these other matters would have a material adverse effect on the
Registrant or its business or financial condition.
PREMIUM LIABILITY
The Company, in conjunction with its purchase of Thompson, acquired
existing viaticated life insurance contracts for which the Company has
premium payment risk should the insured out live the estimated life
51
expectancy. As of June 30, 1999, the Company has recorded approximately
$126,000 to reserve against these premium losses. For policies entered into
after October 1, 1997, the Company has no liability for future premiums and
has no intention of funding future premiums.
STOCK REPURCHASE AGREEMENT
On July 1, 1998, the Company entered into a Severance Agreement and General
Release with Andrew J. Walter, a former shareholder of Thompson under which
Mr. Walter terminated his employment and resigned from all positions with
the Registrant and its subsidiaries and provided the Registrant and its
subsidiaries with a general release. Under the agreement, the Company agreed
to purchase 150,000 shares of the Company's common stock from Mr. Walter at
a price of $5 per share upon the effective date of a registration statement
relating to a public offering by the Company of its common stock or December
31, 1999, whichever is earlier, and agreed to provide Mr. Walter with
registration rights in connection with shares of common stock of the Company
which are not to be purchased by the Company pursuant to the Severance
Agreement and General Release and certain other consideration.
NOTE L - STOCKHOLDERS' EQUITY
PREFERRED STOCK
In January 1998, the Company offered up to $7,500,000 of non-voting,
Convertible Series A Preferred Stock. Proceeds from the issuance were used
primarily to fund acquisitions. Through June 30, 1998, the Company
terminated the offering after having sold 6,740 shares for $626,820, net of
issuance costs. In fiscal 1999, an additional 1,584 shares were sold for
$151,590, net of issuance costs.
The preferred shares carry a dividend rate of 9.0% payable annually
beginning October 1, 2001. In the event of a conversion of the shares into
common stock, any accrued and unpaid dividends will be waived. At June 30,
1999 the aggregate amount of cumulative dividends in arrears was $76,407, or
$9.18 per share.
The Company may redeem the shares for $100 per share, plus accrued and
unpaid dividends, plus a cash call premium based on the elapsed time between
the issue date and cash redemption which ranges from $2.00 for 91 days to
$20 for over 900 days. Upon liquidation, dissolution, or winding up of the
Company, holders of shares will receive $100 per share plus accrued and
unpaid dividends. Such distributions have priority over any distribution to
common stockholders.
At the option of the holder, the shares are convertible into common stock.
The conversion rate is based upon the conversion date and ranges from 12 to
21 shares of common stock.
STOCK OPTION PLAN
On August 23, 1998, the Board of Directors adopted the Company's 1999 Stock
Option Plan. All present and future employees of the Company are
52
eligible to receive incentive awards under the Plan. Non-employee directors
and consultants or other independent contractors are also eligible. The Plan
authorizes the reservation of 25,000,000 shares of common stock for issuance
pursuant to incentive awards. No more than 1,000,000 shares may be awarded
to an employee in any year. An independent committee administers the Plan.
Options to purchase shares of common stock granted under the Plan may be
incentive stock options or nonstatutory options. The option price covered by
an incentive stock option may not be less than 100% (or, in the case of an
incentive stock option granted to a 10% stockholder, 110%) of the fair
market value of the common stock on the date of the grant. In addition, no
more than $100,000 of incentive stock options, based on the exercise price,
may be initially exercisable in any calendar year under the Plan. The
exercise price of a non-statutory option may not be less than 100% of the
fair market value of the stock on the date of grant. There are no options
presently outstanding under the plan.
NOTE M - RELATED PARTY TRANSACTIONS
During 1998, the Company entered into a capital lease for equipment with
a value of $1,240,695 from Amerilease, an affiliate. In 1999, furniture
and equipment with a value of $639,624 was leased from Amerilease.
From October 1, 1997 through December 31, 1997, the Company paid $150,000 in
management fees to Beneficial Assistance, Inc., an entity owned by officers
of the Company.
Through October 1, 1997, the Company had a servicing agreement with CMS, an
entity owned by certain of the Company's officers. CMS performed certain
maintenance, repair, marketing and administrative tasks for the Company.
Payments for the year ended September 30, 1997 to CMS were approximately
$977,000.
During fiscal 1997, the Company also engaged in trade credit facility
transactions with Amerilease, a company owned by certain of the Company's
officers. The total compensation to Amerilease for the year ended September
30, 1997 was approximately $107,000.
NOTE N - DEPENDENCE ON MAJOR VENDORS
For the year ended June 30, 1999 approximately $40,388,000 or 75% of the
viaticated insurance policies purchased by the Company were purchased from
one broker.
During 1997 the Company purchased copiers, facsimile machines and other
office equipment primarily from one manufacturer. The cost of the equipment
purchased from this manufacturer was approximately $744,000. During 1999 and
1998 there was no vendor or manufacturer which represented more than 10% of
purchases.
53
NOTE O - CONCENTRATIONS OF CREDIT RISK
The Company maintains its cash balances at several financial institutions.
The Federal Deposit Insurance Corporation insures deposits at each
institution up to $100,000. Balances in excess of this amount are $92,033
for the year ended June 30, 1999. The company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit
risk on cash and cash equivalents.
NOTE P - EARNINGS PER COMMON SHARE
The following table reconciles the numerators and denominators of the basic
and diluted earnings per share (EPS) computations.
1999 1998 1997
------------------------------------- -------------------------------------- ----------
(Loss)
income Income
from from
continuing Discontinued continuing Discontinued
Operations operations Net loss operations operations Net income Net income
Basic EPS
Consolidated $(382,964) $(1,223,342) $(1,606,306) $713,734 $(110,666) $603,068 $58,367
income (loss)
Less deemed
dividend on
preferred stock 71,352 - 71,352 5,055 - 5,055 -
--------- ----------- ----------- -------- --------- -------- -------
Income (loss)
available to
common
stockholders $(454,316) $(1,223,342) $(1,677,658) $708,679 $(110,606) $598,013 $58,367
--------- ----------- ----------- -------- --------- -------- -------
--------- ----------- ----------- -------- --------- -------- -------
Weighted average
number of common
shares
outstanding 7,532,361 7,532,361 7,532,361 7,412,033 7,412,033 7,412,033 2,253,525
---------- ----------- ----------- -------- --------- --------- ---------
---------- ----------- ----------- -------- --------- --------- ---------
Basic EPS $(0.06) $(0.16) $(0.22) $0.10 $(0.02) $.08 $.03
------ ------ ------ ----- ------ ---- ----
------ ------ ------ ----- ------ ---- ----
Diluted EPS
Consolidated
income (loss) $(382,964) $(1,223,342) $(1,606,306) $713,734 $(110,666) $603,068 $58,367
Less deemed dividend
on preferred stock 71,352 - 71,352 - - - -
--------- ----------- ----------- -------- --------- -------- -------
Income (loss)
available to
common
stockholders $(454,316) $(1,677,658) $(1,677,658) $713,734 $(110,666) $603,068 $58,367
--------- ----------- ----------- -------- --------- -------- -------
--------- ----------- ----------- -------- --------- -------- -------
Weighted average
number of common
shares
outstanding 7,532,361 7,532,361 7,532,361 7,412,033 7,412,033 7,412,033 2,253,425
Effect of dilutive
securities:
Stock options
and warrants - - - 10,782 10,782 10,782 -
Convertible
notes payable - - - - - - -
Preferred stock - - - 7,755 7,755 7,755 -
--------- ----------- ----------- -------- --------- -------- -------
Adjusted weighted
average number
of common shares
outstanding 7,532,361 7,532,361 7,532,361 7,430,570 7,430,570 7,430,570 2,253,425
--------- ----------- ----------- --------- --------- ---------- ---------
--------- ----------- ----------- --------- --------- ---------- ---------
Diluted EPS $(0.06) $(0.16) $(0.22) $0.10 $(0.02) $.08 $.03
--------- ----------- ----------- -------- --------- -------- -------
--------- ----------- ----------- -------- --------- -------- -------
54
During 1999, warrants for 819,885 shares, 8,324 shares of preferred stock,
and a convertible note for 12,500 shares have been excluded, as they are
anti-dilutive. In 1998, warrants for 250,000 shares of common stock have
been excluded, as they are anti-dilutive.
NOTE Q - INCOME TAXES
The Company deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements
or tax returns. Deferred tax liabilities and assets are determined based on
the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
The Company's provision for income taxes attributable to continuing
operations is comprised as follows:
1999 1998 1997
---------- -------- --------
Currently payable $ 380,515 $ 414,314 $ 20,600
Benefit of operating loss carryback (259,296) -- --
Deferred 191,401 52,996 --
--------- --------- -------
$ 312,620 $ 467,310 $20,600
--------- --------- -------
--------- --------- -------
The Company's provision for income taxes attributable to continuing
operations differs from the anticipated Federal statutory rate.
Differences between the statutory rate and the Company's provision are as
follows:
1999 1998 1997
Taxes at Federal statutory rate $ (23,917) $ 401,555 $ 26,849
Benefit of operating loss carryovers (259,296) -- (11,845)
State income taxes 300,969 65,755 5,596
Valuation allowance 313,551 -- --
Other (18,687) -- --
--------- --------- -------
$ 312,620 $ 467,310 $20,600
--------- --------- -------
--------- --------- -------
55
NOTE Q - INCOME TAXES - CONTINUED
Deferred taxes at June 30 are comprised as follows:
1999 1998
--------- ---------
Current
Operating loss carryforwards $ 263,849 $ 56,948
Phase-out loss on commercial printing and duplicating
services segment 185,055 --
Deferred expense on stock warrants 25,176 --
Allowance for collectible receivables 39,808 --
--------- ---------
Current deferred tax asset 488,712 82,124
Non-current
Depreciation and amortization (108,929) (65,490)
Operating loss carryforwards 465,622 --
--------- ---------
Non-current deferred tax asset(liability) 356,693 (65,490)
--------- ---------
Total deferred tax asset before valuation allowances 845,405 16,634
Valuation allowances (408,675) --
--------- ---------
Net deferred tax asset $ 436,730 $ 16,634
--------- ---------
--------- ---------
In 1999, the Company generated a net operating loss of approximately
$1,300,000 for tax purposes, of which approximately $671,000 will be carried
back in prior years resulting in a refund of approximately $259,000. The
remaining tax losses of approximately $629,000 are available to offset
future taxable earnings and expire on June 30, 2019.
NOTE R - INDUSTRY SEGMENTS
The Company currently operates in three segments: Office Solutions, Merchant
Banking and Specialty Finance. Prior to its discontinuance in 1999, the
Company also operated in the Commercial Printing and Duplicating Services
segment. Office Solutions includes the sale of business equipment and the
service thereof. Merchant Banking is comprised principally of the processing
of viatical settlements. Specialty Finance consists principally of
brokering, financing and leasing arrangements of office equipment and
copiers. Corporate costs are allocated to each segment's operations monthly
and are included in the measure of each segment's profit or loss. Corporate
and other includes unallocated corporate costs.
56
NOTE R - INDUSTRY SEGMENTS - CONTINUED
Information by industry segment is as follows:
1999 1998 1997
------------ ------------ ------------
REVENUES FROM EXTERNAL CUSTOMERS
Office Solutions $ 20,879,845 $ 3,615,750 $ 2,094,972
Merchant Banking 53,962,341 21,088,242 --
Specialty Finance 78,017 -- --
------------ ------------ ------------
$ 74,920,203 $ 24,703,992 $ 2,094,972
------------ ------------ ------------
------------ ------------ ------------
INTEREST EXPENSE
Office Solutions $ 1,192,606 $ 121,989 $ --
Merchant banking 44,146 -- --
------------ ------------ ------------
$ 1,236,752 $ 121,989 $ --
------------ ------------ ------------
------------ ------------ ------------
INTEREST INCOME
Office Solutions $ 2,942 $ -- $ 6,534
------------ ------------ ------------
------------ ------------ ------------
INCOME TAX (BENEFIT) EXPENSE
Office Solutions $ 1,358,394) $ (204,278) $ 20,600
Merchant Banking 1,646,128 671,588 --
Specialty Finance 24,886 -- --
$ 312,620 $ 467,310 $ 20,600
------------ ------------ ------------
------------ ------------ ------------
DEPRECIATION AND AMORTIZATION
Office Solutions $ 909,450 $ 141,689 $ 3,925
Merchant Banking 175,642 46,396 --
Specialty Finance -- -- --
------------ ------------ ------------
$ 1,085,092 $ 188,085 $ 3,925
------------ ------------ ------------
------------ ------------ ------------
SEGMENT NET PROFIT (LOSS) BEFORE TAXES
Office Solutions $ (4,336,386) $ (556,129) $ 78,967
Merchant Banking 4,201,604 1,737,173 --
Specialty Finance 64,438 -- --
------------ ------------ ------------
$ (70,344) $ 1,181,044 $ 78,967
------------ ------------ ------------
------------ ------------ ------------
57
NOTE R - INDUSTRY SEGMENTS - CONTINUED
1999 1998 1997
----------- ----------- -----------
SEGMENT ASSETS
Office Solutions $16,516,288 $ 7,301,749 $ 1,007,339
Merchant Banking 3,653,054 8,423,800 --
Specialty Finance 32,203 -- --
----------- ----------- -----------
Total reportable segments 20,201,545 15,725,549 1,007,339
Discontinued operations 370,984 560,584 --
----------- ----------- -----------
$20,572,529 $16,286,133 $ 1,007,339
----------- ----------- -----------
----------- ----------- -----------
EXPENDITURES FOR SEGMENT ASSETS
Office Solutions $ 4,866,758 $ 1,112,310 $ 35,740
Merchant Banking 280,455 241,707 --
Specialty Finance
-- -- --
----------- ----------- -----------
$ 5,147,213 $ 1,354,017 $ 35,740
----------- ----------- -----------
----------- ----------- -----------
NOTE S - RETIREMENT PLAN
The Company sponsors a defined contribution 401(k) Profit Sharing Plan
covering all full time employees who have been employed for six months. The Plan
is noncontributory by the Company and allows participants to contribute a
portion of their annual salary up to limitations established by ERISA.
NOTE T - SUBSEQUENT EVENTS
Only July 1, 1999, the Company entered into a $10,000,000 revolving
line-of-credit agreement with The Provident Bank. The proceeds of the line
were used to replace the existing line of credit with Mercantile Bank and
for working capital. The line-of-credit expires on July 1, 2002. Borrowings
accrue interest at 1% above the bank's prime on the greater of the unpaid
principal balance of the note or $5,000,000. The line specifies certain
covenants and requirements to maintain specified ratios and net worth. The
line is collateralized by substantially all assets of the Company.
On August 16, 1999, the Company entered into a Severance Agreement and
General Release with Michael Lowe, a former director and officer of the
Company under which Mr. Lowe terminated his employment and resigned from all
positions with the Company and provided a General Release. Under the
agreement, in addition to other covenants and commitments, the Company
agreed to a severance payment of $164,000, payable in equal monthly
installments for a period of 12 months, less standard withholdings required
by law. Additionally, the Company agreed to issue to Mr. Lowe stock options
to purchase 10,000 shares
58
of the common stock of the Registrant, at a price of $1.00 per share, which
will vest in four equal quarterly installments beginning of the sixth month
anniversary of the Agreement. Finally, the Agreement contains a limited
non-compete provisions for a period of one year from the date of the
Agreement.
FINANCIAL STATEMENT SCHEDULES
Additions
Balance at Charged to Charged Balance
Beginning Costs and To Other at end
Description Of Period Expenses Accounts Deductions of Period
Year Ended June 30, 1999
Allowance for Doubtful
Receivables $ -0- $103,075 $ -0- $ -0- $103,075
------ -------- ------ ------ --------
------ -------- ------ ------ --------
Valuation allowances on
deferred tax assets $ -0- $408,675 $ -0- $ -0- $408,675
------ -------- ------ ------ --------
------ -------- ------ ------ --------
Nine Month Period Ended
June 30, 1998
Allowance for Doubtful
Receivables $4,000 $ -0- $ -0- $4,000 $ -0-
------ -------- ------ ------ --------
------ -------- ------ ------ --------
Year Ended
September 30, 1997
Allowance for
Doubtful Receivables $ -0- $ 4,000 $ -0- $ -0- $ 4,000
------ -------- ------ ------ --------
------ -------- ------ ------ --------
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors, executive officers and key management employees of the
Registrant as of October 29, 1999 are:
NAME AGE POSITION
Edwin C. Hirsch 51 Chairman of the Board,
Chief Executive Officer
Robert W. Hoover 53 Director, President
Brad C. Thompson 43 Director,Chief Financial
Officer, Treasurer and
Assistant Secretary
Robert J. Brown 53 Senior Vice President
Secretary
59
Richard H. Guilford 71 Director, Executive Vice
President
Peter B. Lilly 51 Director
Bruce A. Edge 47 Director
Edwin C. Hirsch has been the Registrant's Chief Executive Officer and
Chairman of the Board of Directors since April 22, 1997. Mr. Hirsch served as
President of the Registrant from April 22, 1997 to June 1998. From August 1995
through October 1997, Mr. Hirsch was the President of CMS Inc. From 1990 through
1996 Mr. Hirsch served as the President of Reptech, Inc., a US-China
joint-venture entity in connection with the sale and production of high energy
magnets. Mr. Hirsch currently serves on the Board of Directors of Reptech, Inc.
From 1984 through 1989, Mr. Hirsch was a principal in Commonwealth Financial
Associates, Inc., a merchant banking company. Mr. Hirsch holds a B.S. in
Engineering from the US Military Academy at West Point. After completing his
military obligation, Mr. Hirsch began his professional career in sales with IBM
and Commercial Credit Company.
Robert W. Hoover has been the Registrant's President since June 1998
and has been a Director of the Registrant since November 18, 1997. Prior to that
time Mr. Hoover was the Executive Vice President of the Registrant since joining
the Registrant November 18, 1997. From 1995 through September 30, 1997, Mr.
Hoover was the President of Beneficial Assistance, Inc., an entity acquired by
the Registrant in October 1997. The business of Beneficial Assistance, Inc. is
currently conducted by Imtek Funding, a wholly-owned indirect subsidiary of the
Registrant. From 1984 through 1994, Mr. Hoover was a principal with Commonwealth
Financial Associates. From 1977 through 1983, Mr. Hoover was employed by
Commercial Credit Company holding several senior management positions.
Mr. Hoover holds a B.A. from Loyola College in Baltimore.
Brad C. Thompson CPA has been the Registrant's Chief Financial Officer
and Director since November 18, 1997. From January 1997 until September 30,
1997, Mr. Thompson served as Vice President of Beneficial Assistance, Inc., an
entity acquired by the Registrant in October 1997. From 1993 through October
1997, Mr. Thompson was a director and shareholder in the public accounting firm
of Schiller, Holinsky & Gardyn, PA. From 1980 through 1993, Mr. Thompson was a
senior manager with Grant Thornton LLP. Prior to that Mr. Thompson was employed
by a local Baltimore accounting firm. Mr. Thompson is a 1978 graduate of Loyola
College in Baltimore.
Robert J. Brown has served as a Senior Vice President and Secretary
since April 1997. Mr. Brown served as director of the Registrant from April 1997
through September 11, 1998. Prior to joining the Registrant, Mr. Brown owned and
managed several equipment leasing and financial services companies including
American Banking Services, Inc. which managed equipment and lease portfolios for
the RTC and several banks. From 1967 through 1982, Mr. Brown was employed by
Commercial Credit Company where he held a variety of credit and marketing
management positions. Mr. Brown is a graduate of the University of Baltimore.
Richard H. Guilford was elected as a director of the Registrant on
September 11, 1998. Additionally, he was appointed to the position of Executive
Vice President, effective August 31, 1999. Mr. Guilford
60
currently serves as the Chairman of the Board of Corporate & Financial
Management, Ltd., a Richmond, Virginia professional services Firm; Market-Pro,
Inc. an Atlanta Georgia based employment placement firm; and the Star Group
Ltd., an environmental engineering firm. Mr. Guilford is also a member of the
board of directors of Environmentics, Inc. Previously he founded an
environmental engineering firm, HazWaste Industries, Inc., an INC. 500 Company,
and served as its Chairman, President and Treasurer until the company was sold
in 1995. Prior to HazWaste Industries, Inc., Mr. Guilford served in a variety of
senior management level positions of several financial services companies,
including President & COO of Fidelity Corporation, a NYSE multinational
financial services holding company. Mr. Guilford attended the University of
Richmond and completed the Executive Program from the Darden Graduate School of
Business, University of Virginia.
Peter B. Lilly, was elected a director of the Registrant on September
11, 1998. Mr. Lilly currently serves as a director for Peabody Holding Company,
Inc., the National Coal Association and the National Mining Association. From
1991 through 1998, Mr. Lilly served as the President and Chief Operating Officer
of Peabody Holding Company, Inc. From 1980 through 1991, Mr. Lilly served as a
Senior Vice President of the Kerr-McGee Corporation and was the President of
Kerr-McGee Coal Corporation. Mr. Lilly received a B.S. in Engineering from the
US Military Academy, an MBA in Industrial Marketing and Operations Management
from Harvard University and graduated from the Kellogg School at Northwestern
University.
Bruce A. Edge was appointed as an interim director of the Registrant
on October 13, 1999 by the board of directors to fill the vacancy created by
the resignation of Michael Lowe. Mr. Edge was elected by the stockholders of
the Registrant at its annual meeting held on October 27, 1999. Mr. Edge
currently serves as Chief Executive Officer and Chairman of Rite Off, Inc.
which is engaged in the production of packaged aerosol goods, a position he
has held since January. In 1994, Mr. Edge co-found Apex Specialty Materials,
Inc. ("ASM"), where he served as Chairman of the Board, co-CEO, and CFO, and
had strategic and financial responsibility for the company until January,
1999 when he joined Rite Off, Inc. Prior to joining ASM, Mr. Edge was with
Hercules, Inc. where he worked in the areas of specialty chemicals and
plastics. Mr. Edge holds a Bachelor of Science degree in accounting from
Delaware State University.
All directors hold office until the next annual meeting of the
shareholders of the Registrant and until their successors are elected and
qualified. Officers hold office until the first meeting of the directors
following the annual meeting of shareholders and until their successors are
elected and qualified, subject to earlier removal by the Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION.
The Registrant has not awarded or paid bonuses or other non-cash
compensation to its executives since the effective commencement of operations.
1999 1998 (1) 1997(2)
NAME AND PRINCIPAL POSITION
Edwin C. Hirsch
Chief Executive Officer 179,250 61,167 0 (3)
Robert W. Hoover
Executive Vice President 179,000 60,333 0 (4)
Brad C. Thompson
Chief Financial Officer 154,800 57,317 0 (5)
Robert J. Brown
Senior Vice President 126,300 54,817 0 (6)
61
Richard H. Guilford
Chief Operating Officer 71,500 0 0 (7)
Michael L. Lowe
Chief Operating Officer 171,000 60,333 0 (8)
(resigned August 16, 1999)
(1) Salaries stated for fiscal year 1998 represent amounts
actually earned during such nine-month period. Prior to
January 1, 1998, none of the persons listed were compensated
for their services. From January 1, 1998 through May 31, 1998,
the annual salary for each executive listed and employed was
$100,000 per year.
(2) As previously reported, the Registrant conducted no operations
prior to April 1997. The officers of the Registrant received
no compensation for their services to the Registrant prior to
January 1998.
(3) During the 1997 fiscal year, Mr. Hirsch served as the
Company's Chief Executive Officer and Chairman. During such
time, Mr. Hirsch received no compensation.
(4) Robert W. Hoover was not employed by the Registrant during the
1997 fiscal year.
(5) Mr. Thompson was not employed by the Registrant during the
1997 fiscal year.
(6) Mr. Brown served as a Senior Vice President and Secretary of
the Registrant since April 1997, but received no salary for
his services during the 1997 fiscal year.
(7) Mr. Guilford was not employed by the Registrant during the
1997 or 1998 fiscal year.
(8) Mr. Lowe served as Chief Operating Officer of the Registrant
from April 1997 until August 1999, at which time he resigned
from the Registrant, but received no salary for his services
during the 1997 fiscal year.
The Registrant has not adopted a policy for compensating its directors.
The Registrant's Board of Directors has not elected committees. It is
anticipated that the Board will establish, at a minimum, an audit committee and
a compensation committee. The Registrant did not compensate any Director in
connection with service on the Board. The Registrant compensated its directors
who are also officers as noted above, in their capacity as officers of the
Registrant.
As previously reported, on July 1, 1998 the Registrant and its
subsidiaries entered into a Severance Agreement and General Release with Andrew
J. Walter, under which Mr. Walter terminated his employment and resigned from
all positions with the Registrant and its subsidiaries and provided the
Registrant and its subsidiaries with a general release. Under the agreement, the
Registrant made a cash payment of $160,000 to Mr. Walter, less standard
withholdings required
62
by law, and made a commitment to pay Mr. Walter $160,000 a year for the four
year period following July 1, 1998 on a bi-weekly basis in accordance with its
regular payroll policies and practices. In addition, the Registrant agreed to
purchase 150,000 shares of common stock of the Registrant from Mr. Walter at a
price of $5 per share upon the effective date of a registration statement
relating to a public offering by the Registrant of its common stock or December
31, 1999, whichever is earlier, and agreed to provide Mr. Walter with
registration rights in connection with shares of common stock of the Registrant
which are not to be purchased by the Registrant pursuant to the Severance
Agreement and General Release and certain other consideration.
On August 16, 1999, the Registrant and its subsidiaries entered into a
Severance Agreement and General Release with Michael L. Lowe, under which Mr.
Lowe terminated his employment and resigned from all positions with the
Registrant and its subsidiaries and provided the Registrant with a General
Release. Under the agreement, in addition to other covenants and commitments,
the Registrant agreed to a severance payment of $164,000, payable in equal
monthly installments for a period of 12 months, less standard withholdings
required by law. Additionally, the Registrant agreed to issue to Mr. Lowe stock
options to purchase 10,000 shares of the common stock of the Registrant, at a
price of $1.00 per share, which vest in four equal quarterly installments
beginning on the sixth month anniversary of the Agreement. The agreement also
contains a limited non-compete provision for a period of one year from the date
of the Agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of October 14, 1999, there were 7,532,361 shares of Common Stock
outstanding and and 8370 shares of non-voting preferred stock, par value $.01
per share (the "Preferred Stock"), outstanding. The following table and
footnotes thereto set forth certain information about the Common Stock of the
Company beneficially owned as of October 14, 1999, by (i) each of the executive
officers identified in the Summary Compensation Table (the "Named Executive
Officers") and each director of the Company; (ii) the directors and executive
officers as a group; and (iv) each other person who is known by the Company to
own beneficially more than five percent (5%) of the Company's outstanding equity
securities. None of the persons or entities named below beneficially own any
Preferred Stock. Except as otherwise indicated, each of the stockholders named
below has sole voting and investment power with respect to securities
beneficially owned.
63
Percent
Number of of
Name Shares Class
Robert J. Brown, V.P., Director 1,386,844 (9) 18.41
1210 Lorene Drive
Pasadena, MD 21122
Edwin C. Hirsch, CEO, Director
704 Severnside Avenue
Serverna Park, MD 21146 2,273,590 (10) 30.18
Brad C. Thompson, CFO, Director
8348 Fairwood Court
Pasadena, MD 21122 425,500 (11) 5.65
Robert W. Hoover, EVP, Director
2593 Lawnside Road
Timonium, MD 21093 680,000 (12) 9.01
Richard H. Guilford, Director 0 0
Peter B. Lilly, Director 320,500 (13) 4.25
Bruce A. Edge, Director 0 0
All Directors and Executive Officers as a
Group (6 Persons) 4,826,307 64.07
Other Beneficial Owners of More Than 5% of
Common Stock
Bison Financial, LLC 742,246 9.85
Michael L. Lowe 709,325 (14) 9.42
9 Includes (i) 1,043,000 shares owned of record by Mr. Brown, (ii) 314,217
shares owned of record by Pamela Brown, Mr. Brown's spouse, and (iii) 29,627
shares which are owned of record by American Trading Services, Inc. and with
respect to which Mr. Brown shares voting and investment power with Mr. Hirsch as
fifty percent (50%) owner of American Trading Services, Inc.
10 Includes (i) 943,000 shares owned of record by Mr. Hirsch with respect to
which Mr. Hirsch has exclusive voting and investment power, (ii) 314,217 shares
owned of record by Mr. Hirsch's spouse, Janet M. Eckman, (iii) 742,246 shares
which are owned by Bison Financial, LLC of which Mr. Hirsch is sole member, (iv)
244,500 shares owned by
64
Mescalero, LLC of which Mr. Hirsch is a sole member, and (v) 29,627 shares owned
by American Trading Systems, Inc., and with respect to which Mr. Hirsch shares
voting and investment power with Mr. Brown, a fifty percent (50%) owner of
American Trading Services, Inc.
11 Includes (i) 123,000 shares owned of record by Mr. Thompson, with respect to
which Mr. Thompson has exclusive voting and investment power, (ii) 50,000 shares
owned of record by Janice F. Thompson, Mr. Thompson's spouse, (iii) 10,000
shares owned of record by Eric F. Thompson, Mr. Thompson's son, (iv) 10,000
shares owned of record by Mary E. Thompson, Mr. Thompson's daughter, (v) 230,500
shares owned of record by Toas, LLC, a limited liability company, with respect
to which Mr. Thompson shares voting and investment power with Mr. Lowe and Mr.
Guilford, as a forty-five percent (45%) member of Taos, LLC, and (vi) 1,000
shares owned by Louis Thompson and 1,000 shares owned by Margaret Thompson,
parents of Mr. Brad Thompson.
12 Includes (i) 179,000 shares owned of record by Mr. Hoover, with respect to
which Mr. Hoover has exclusive voting and investment power, (ii) 200,000 shares
owned of record by Sandra Hoover, Mr. Hoover's wife, (iii) 300,000 shares owned
of record by Wilderness, LLC, a limited liability company wholly owned by Mr.
Hoover, and (iv) 500 shares owned by Charles Firth and 500 shares owned by Betty
Firth, Mr. Hoover's father and mother-in-law, respectively.
13 Includes (i) 90,000 shares owned by JOJ, LLC owned jointly by Mr. Hirsch and
Mr. Guilford, and (ii) 230,500 shares owned of record by Taos, LLC, with respect
to which Mr. Guilford has a ten percent (10%) voting interest.
14 Includes (i) 463,325 shares owned beneficially and of record by Michael L.
Lowe, (ii) 2,750 shares owned of record by Matthew Lowe, Mr. Lowe's son, (iii)
2,750 shares owned of record by Brian Lowe, Mr. Lowe's son, (iv) 10,000 shares
owned of record by Karen Lowe, Mr. Lowe's spouse, and (v) 230,500 shares owned
of record by Taos, LLC, a limited liability company with respect to which Mr.
Lowe shares voting and investment power with Mr.
Thompson and Mr. Guilford, as a forty-five percent (45%) member.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For the period from April 22, 1997 (the date of commencement of
operations) through September 30, 1997, the Company had a servicing agreement
with CMS, Inc. ("CMS"), an entity equally owned by Edwin C. Hirsch, an officer
and a director of the Registrant, and Robert J. Brown, an officer of the
Registrant. Under the terms of this agreement, CMS performed certain
maintenance, repair, marketing and administrative tasks for the Registrant. The
Company paid approximately $977,000 for these services during the year ended
September 30, 1997. This contract was terminated October 1, 1997.
65
During the year ended June 30, 1998, the Registrant used the trade
credit facilities of CMS. The balance due CMS at June 30, 1998 was approximately
$511,000.
During the nine month period ended June 30, 1998, the Registrant
purchased certain equipment for resale through Amerilease, Inc. ("AI"), an
entity owned equally by Messrs. Hirsch and Brown. Equipment purchased under this
arrangement amounted to approximately $366,000. The Registrant owed AI
approximately $284,000 under this arrangement at June 30, 1998.
The Registrant also leases certain equipment from AI. The equipment
involved in connection with these leases, having an approximate value of
$1,880,319 at June 30, 1999, has been accounted for as capital leases on the
Registrant's financial statements. Under the terms of these leases, the
Registrant paid AI $614,695 during the year ended June 30, 1999. The present
value of the net minimum lease payments as of June 30, 1999 was approximately
$1,013,450.
From October 1 through December 31, 1997, the Registrant paid $150,000
in management fees to Beneficial Assistance, Inc., an entity owned by Robert W.
Hoover, Brad Thompson (current officers and directors of the Registrant) and
Andrew J. Walter, a former officer and director of the Company.
On July 1, 1998 as previously reported the Registrant and its
subsidiaries entered into a Severance Agreement and General Release with Andrew
J. Walter, under which Mr. Walter terminated his employment and resigned from
all positions with the Registrant and its subsidiaries and provided the
Registrant and its subsidiaries with a General Release. Under the agreement, the
Registrant made a cash payment of $160,000 to Mr. Walter, less standard
withholdings required by law, and made a commitment to pay Mr. Walter $160,000 a
year for the four-year period following July 1, 1998 on a bi-weekly basis in
accordance with its regular payroll policies and practices. In addition, the
Registrant agreed to purchase 150,000 shares of common stock of the Registrant
from Mr. Walter at a price of $5 per share upon the effective date of a
registration statement relating to a public offering by the Registrant of its
common stock or December 31, 1999, whichever is earlier, and agreed to provide
Mr. Walter with registration rights in connection with shares of common stock of
the Registrant which are not to be purchased pursuant to the Severance Agreement
and General Release and certain other consideration.
On August 16, 1999, the Registrant and its subsidiaries entered into a
Severance Agreement and General Release with Michael L. Lowe, under which Mr.
Lowe terminated his employment and resigned from all positions with the
Registrant and its subsidiaries and provided a General Release. Under the
agreement, in addition to other covenants and commitments, the Registrant agreed
to a severance payment of $164,000, payable in equal monthly installments for a
period of 12 months, less standard withholdings required by law. Additionally,
the Registrant agreed to issue to Mr. Lowe stock options to purchase 10,000
shares of the common stock of the Registrant, at a price of $1.00 per share,
which will vest in four equal quarterly installments beginning on the sixth
month anniversary of the Agreement. Finally, the
66
Agreement contains a limited non-compete provision for a period of one year from
the date of the Agreement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a) The following documents are filed as part of this report:
(1) List of Financial Statements. The following Consolidated
Financial Statements of Imtek Office Solutions, Inc. and Subsidiaries
are included in Item 8 on pages 30 through 58 of this report:
(i) Audit Report of Grant Thornton LLP
(ii) Audit Report of Rosenberg Rich Baker Berman & Company
(iii) Consolidated Balance Sheets as of June 30, 1999 and
1998.
(iv) Consolidated Statements of Operations for the year ended
June 30, 1999, the nine month period ended June 30, 1998, and the year ended
September 30, 1997
(v) Consolidated Statements of Stockholders' Equity for the
year ended June 30, 1999,the nine month period ended June 30, 1998, and the year
ended September 30, 1997
(vi) Consolidated Statements of Cash Flows for the year ended
June 30, 1999, the nine month period ended June 30, 1998, and the year ended
September 30, 1997
(vii) Notes to Consolidated Financial Statements for June 30,
1999, June 30, 1998 and September 30, 1997
(2) List of Financial Statement Schedules. Schedule II is
included herein on page __. Other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
not required under the related instruction or are inapplicable, and therefore
have been omitted.
(b) Reports on Form 8-K. NONE.
(c) Exhibits. A list of Exhibits required to be filed as part of this
report is set forth in the Index to Exhibits, which immediately precedes such
Exhibits, and is incorporated herein by reference.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
--------------------
Date: October 15, 1999 Edwin C. Hirsch,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
/s/ EDWIN C. HIRSCH Chairman
- -----------------------
Edwin C. Hirsch Principal Executive Officer 11/1/99
and Director
/s/ ROBERT W. HOOVER President and Director 11/1/99
- -----------------------
Robert W. Hoover
/s/ BRAD C. THOMPSON Chief Financial Officer 11/1/99
- -----------------------
Brad C. Thompson (Principal Financial and
Accounting Officer) and Director
/s/ RICHARD H. GUILFORD Director 11/1/99
- -----------------------
Richard H. Guilford
68
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
The Registrant is filing this annual report pursuant to Section 15(d)
of the Act and has furnished to the Securities and Exchange Commission (the
"Commission") for its information at the time of filing of this report, four
copies of every proxy statement, form of proxy or other proxy soliciting
material sent to more than ten of its security holders with respect to any
annual or other meeting of security holders. No annual report to security
holders was required to be sent or has been sent to security holders during the
period covered by this report or prior to the date this annual report was filed
with the Commission.
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- ---------------------------
2. Plans of Acquisition. Schedules to the following
agreements have been omitted. The Registrant will
furnish a copy of any omitted schedule to the
Securities and Exchange Commission upon request.
2.1 Restated Beneficial Assistance Asset Purchase
Agreement dated September 30, 1998 but made effective
October 1, 1997, attached as Exhibit 2.1 to the
Annual Report on Form 10-K for the transition period
ended June 30, 1998 and incorporated herein by
reference.
2.2 Restated Thompson Exchange Agreement dated September
30, 1998 but made effective October 30, 1997,
attached as Exhibit 2.2 to the Annual Report on Form
10-K for the transition period ended June 30, 1998
and incorporated herein by reference.
2.3 Restated Earnout Agreement dated September 30, 1998
but made effective October 30, 1997, attached as
Exhibit 2.3 to the Annual Report on Form 10-K for the
transition period ended June 30, 1998 and
incorporated herein by reference.
69
2.4 Holdings Exchange Agreement dated as of November 1,
1997 between the Registrant, Office Supply Line
Holdings, Inc., Michael L. Lowe and certain other
shareholders of Office Supply Line Holdings, Inc.,
attached as Exhibit 2.4 to the Annual Report on Form
10-K for the transition period ended June 30, 1998
and incorporated herein by reference.
2.5 OSL Inventory Purchase Agreement dated as of November
1, 1997 between the Registrant, Office Supply Line,
Inc., and Michael L. Lowe, attached as Exhibit 2.5 to
the Annual Report on Form 10-K for the transition
period ended June 30, 1998 and incorporated herein by
reference.
2.6 Perfect Copy Agreement for Sale of Assets dated June
3, 1998 between but made effective June 1, 1998
between Imtek Corporation and Perfect Copy, Inc.,
attached as Exhibit 2.6 to the Annual Report on Form
10-K for the transition period ended June 30, 1998
and incorporated herein by reference.
2.7 Stock Purchase Agreement and Plan of Merger among the
Registrant, Imtek Acquisition Corporation, Barbera
Business Systems, Inc. and certain stockholders of
Barbera Business Systems, Inc., dated July 22, 1998,
attached as Exhibit 99.1 to the Current Report on
Form 8-K filed with the Commission on August 13, 1999
and incorporated herein by reference.
3. Articles of Incorporation and Bylaws.
3.1 Amended and Restated Certificate of Incorporation
adopted by stockholders by unanimous written consent
on May 28, 1998, attached as Exhibit 3.1 to the
Annual Report on Form 10-K for the transition period
ended June 30, 1998 and incorporated herein by
reference.
3.2 Certificate of Designation of Series A Convertible
Preferred Stock of Registrant, as filed with the
Delaware Secretary of State on March
70
23, 1998, attached as Exhibit 3.2 to the Annual
Report on Form 10-K for the transition period ended
June 30, 1998 and incorporated herein by reference.
3.3 Amended and Restated Certificate of Incorporation
adopted by stockholder by unanimous written consent
on June 25, 1999.
3.4 Amended and Restated Bylaws, as amended and restated
by the Board of Directors on September 11, 1998,
attached as Exhibit 3.3 to the Annual Report on Form
10-K for the transition period ended June 30, 1998
and incorporated herein by reference.
4. Instruments defining the rights of security holders,
including indentures.
4.1 Certificate of Designation of Series A Convertible
Preferred Stock of Registrant, as filed with the
Delaware Secretary of State on March 23, 1998,
attached as Exhibit 3.2 to the Annual Report on Form
10-K for the transition period ended June 30, 1998
and incorporated herein by reference.
4.2 Loan and Security Agreement relating to the
$10,000,000 Revolving Line of Credit provided by The
Provident Bank to Imtek Corporation and Barbera
Business Systems, Inc. (the "Provident Loan"),
attached hereto as Exhibit 10.15 and incorporated
herein by reference.
4.3 Loan Agreement among Registrant, Imtek Corporation,
Imtek Services Corporation, Imtek Funding Corporation
and Sirrom Capital Corporation dated May 29, 1998,
attached hereto as Exhibit 10.9.1 and incorporated
herein by reference.
4.4 Stock Purchase Warrant and Registration Rights
Agreement issued by Registrant to Sirrom Capital
Corporation dated May 29, 1998,
71
attached hereto as Exhibit 10.9.3 and incorporated
herein by reference.
4.5 Stock Purchase Warrant and Registration Rights
Agreement from Imtek Office Solutions to Finova
Mezzanine Capital dated July 1999, attached hereto as
Exhibit 10.9.6 and incorporated herein by reference.
10. Material Contracts.
10.1 Reserved.
10.2 Reserved.
10.3 Reserved.
10.4 Reserved.
10.5 Reserved.
10.6.1 Reserved.
10.6.2 Lease with The Morris Weinman Company for 111 Water
Street expiring November 26, 2000, attached as
Exhibit 10.6.2 to the Annual Report on Form 10-K for
the transition period ended June 30, 1998 and
incorporated herein by reference.
10.6.3 Lease with Glenn Dale Business Center, L.L.C. for
Glenn Dale Business Center location expiring July
2007, attached as Exhibit 10.6.3 to the Annual Report
on Form 10-K for the transition period ended June 30,
1998 and incorporated herein by reference.
10.6.4 Lease with White Marsh Business Center Limited
Partnership expiring November 2001, attached as
Exhibit 10.6.4 to the Annual Report on Form 10-K for
the transition period ended June 30, 1998 and
incorporated herein by reference.
10.6.5 Lease with Athens Associates Limited for 2375 W.
Broad Street, Suite A, Athens, Georgia location,
attached as Exhibit 10.6.5 to the Annual Report on
Form 10-K for the transition
72
period ended June 30, 1998 and incorporated herein by
reference.
10.6.6 Lease with Executive Cove, L.L.C. for 5604 Executive
Cove Center expiring December 31, 1999, attached as
Exhibit 10.6.6 to the Annual Report on Form 10-K for
the transition period ended June 30, 1998 and
incorporated herein by reference.
10.6.7 Lease with E&M Realty Holding Company for the 10th
floor of the 8th and Main Building expiring December
30, 1998, attached as Exhibit 10.6.7 to the Annual
Report on Form 10-K for the transition period ended
June 30, 1998 and incorporated herein by reference.
10.6.8 Lease with Pied Ventures, LLC for office space on 1st
and 2nd floor of the building located at 20 North 8th
Street, Richmond Virginia, attached as Exhibit 10.6.8
to the Annual Report on Form 10-K for the transition
period ended June 30, 1998 and incorporated herein by
reference.
10.6.9 Lease with Larry Bielfeldt, Agent for office space
known as Suite 3, 1603 Visa Dr., Normal, IL, attached
as Exhibit 10.6.9 to the Annual Report on Form 10-K
for the transition period ended June 30, 1998 and
incorporated herein by
reference.
10.7 Severance Agreement and General Release between the
Registrant and its subsidiaries and Andrew J. Walter
dated July 1, 1998, attached as Exhibit 10.7 to the
Annual Report on Form 10-K for the transition period
ended June 30, 1998 and incorporated herein by
reference.
10.8 Severance Agreement and General Release between the
Registrant and its subsidiaries and Michael L. Lowe
dated August 16, 1999.
10.9.1 Loan Agreement among Registrant, Imtek Corporation,
Imtek Services Corporation, Imtek Funding Corporation
and Sirrom Capital
73
Corporation dated May 29, 1998.
10.9.2 $6,000,000 Secured Promissory Note.
10.9.3 Stock Purchase Warrant and Registration Rights
Agreement issued by Registrant to Sirrom Capital
Corporation on May 29, 1998.
10.9.4 Second Amendment to Loan Agreement and Loan
Documents among Registrant, Imtek Corporation,
Imtek Services Corporation and Imtek Funding
Corporation and Finova Mezzanine Capital,
Inc. dated July 1999.
10.9.5 $6,000,000 Amended and Restated Secured Promissory
Note from Registrant, Imtek Corporation, Imtek
Services Corporation, Imtek Funding Corporation,
Imtek Acquisition Corporation, Barbera Business
Systems and Imtek Capital Corporation to Finova
Mezzanine Capital, Inc.
10.9.6 Stock Purchase Warrant and Registration Rights
Agreement from Registrant to Finova Mezzanine Capital
dated July 1999.
10.10.1 Loan and Security Agreement relating to the
$10,000,000 Revolving Line of Credit provided by The
Provident Bank to Imtek Corporation and Barbera
Business Systems, Inc. (the "Provident Loan").
10.10.2 $10,000,000 Revolving Loan Promissory Note.
10.10.3 Secured Guaranty Agreement entered into between the
Registrant and The Provident Bank relating to the
Provident Loan.
10.10.4 Stock Pledge Agreement between the Registrant and
The Provident Bank pledging stock of Imtek
Corporation.
10.10.5 Stock Pledge Agreement between Imtek Services
Corporation and The Provident Bank pledging stock of
Imtek Funding Corporation and Imtek Capital
Corporation.
74
10.10.6 Stock Pledge Agreement between Imtek Acquisition
Corporation and The Provident Bank pledging stock of
Barbera Business Systems, Inc.
10.11 Cannon License Agreement dated March 12, 1999
between Imtek Corporation, George R. Cannon and
Dolores M. Cannon.
10.12 Stock Option Plan adopted by stockholders at the
annual meeting of stockholders of the Registrant held
on September 11, 1998.
11 Statement re: Computation of Earnings Per Share.
Exhibit 11 is included on page 40 of this Annual
Report.
14 Subsidiaries of the Registrant.
14.1 Imtek Corporation, a Maryland corporation.
14.2 Imtek Services Corporation, a Maryland corporation.
14.3 Imtek Funding Corporation, a Maryland corporation
doing business under the name of Beneficial
Assistance, is a wholly owned subsidiary of Imtek
Services Corporation.
14.4 Imtek Acquisition Corporation, a Maryland corporation.
14.5 Barbera Business Systems, Inc., a Maryland
corporation, is 60% owned by the Registrant.
14.6 Imtek Capital Corporation, a Maryland corporation.
27 Financial Data Schedule.
75