UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1998
Commission file number: 33-24464-NY
IMTEK OFFICE SOLUTIONS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE Tax ID #11-2958856
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(State or other jurisdiction (IRS Employer
of incorporation) Identifications No)
2111 Van Deman Street, Suite 100, Baltimore, MD 21224
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(Address of principal executive offices)
Registrant's telephone number, including area code (410) 633-5700
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
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Yes No X
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State the number of shares outstanding of each of the issuer's classes of common
equity as the latest practicable date: 7,538,361 shares as of February 10, 1999.
INDEX
IMTEK OFFICE SOLUTIONS, INC.
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1998 (unaudited) 3
and June 30, 1998 (audited) ..................................................---
Consolidated Statements of Income - Three months and six 5
months ended December 31, 1998 and 1997 ......................................---
Consolidated Statements of Shareholders Equity for the six 6
months ended December 31, 1998 ...............................................---
Consolidated Statements of Cash Flows - six months ended 7
December 31, 1998 and 1997 ...................................................---
Item 2. Management's Discussion and Analysis of Results of Operations 12
and Financial Condition and Liquidity ........................................---
PART II. Other Information
Item 1. Legal Proceedings ....................................................---
Item 6. Exhibits and reports on Form 8-K .....................................---
Financial Data Schedule ..............................................---
Signature ....................................................................---
IMTEK OFFICE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, 1998 June 30, 1998
----------------------- ---------------------
(unaudited) (audited)
CURRENT ASSETS
Cash $ 722,295 $ 2,949,168
Escrow deposit 738,557 5,054,220
Accounts receivable (net) 3,443,584 1,390,302
Other receivables 139,365 151,235
Inventory 3,357,577 1,641,309
Deferred tax assets 82,124 82,124
Prepaid expenses and other
current assets 667,415 783,480
----------------------- ---------------------
Total current assets 9,150,917 12,051,838
PROPERTY AND EQUIPMENT -
at cost,less accumulated depreciation
and amortization 3,253,831 1,880,888
OTHER NONCURRENT ASSETS 279,116 497,516
DEFERRED FINANCING COSTS, less
accumulated amortization 338,410 361,941
OTHER INTANGIBLE ASSETS, less
accumlated amortization 6,012,898 1,732,574
----------------------- ---------------------
$ 19,035,172 $ 16,524,757
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----------------------- ---------------------
See notes to consolidated financial statements
IMTEK OFFICE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 June 30, 1998
----------------------- ---------------------
(unaudited) (audited)
CURRENT LIABILITIES
Note payable - bank $ 1,728,722 $ --
Current maturities of notes payable 580,000 560,055
Current maturities of obligations under
capital lease 240,000 234,081
Accounts payable and accrued expenses 1,682,365 1,629,979
Accounts payable - related party 447,871 795,205
Customer escrow accounts 738,558 5,054,220
Deferred revenue 1,747,211 168,153
Income taxes payable 575,306 434,804
----------------------- ---------------------
Total current liabilities 7,740,033 8,876,497
NOTES PAYABLE, net of current
maturities and original issue discount 6,211,378 3,502,506
OBLIGATIONS UNDER CAPITAL LEASE,
net of current maturities 814,984 988,578
DEFERRED TAX LIABILITY 65,490 65,490
PUT OPTION OBLIGATION 302,125 335,695
MINORITY INTEREST 113,679 --
STOCKHOLDERS' EQUITY
Preferred stock, $100 par value; authorized
75,000 shares;
liquidation preference of $674,000; issued
and outstanding, 8,370 shares
(6,740 shares at June 30, 1998) 837,000 674,000
Common stock, $.000001 par value;
authorized 250,000,000 shares;
issued and outstanding 7,532366 shares
in 1998 and 5,000,000
shares in 1997 8 8
Addditional paid-in-capital 1,408,703 1,420,548
Retained earnings 1,541,772 661,435
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3,787,483 2,755,991
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$ 19,035,172 $ 16,524,757
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----------------------- ---------------------
IMTEK OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Quarter Ended Six Months Ended
------------------------------------------ ------------------------------------------
December 31, 1998 December 31, 1997 December 31, 1998 December 31, 1997
----------------- ----------------- ----------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUES
Equipment & Supplies $5,948,741 $1,613,637 $11,534,532 $2,841,073
Merchant Banking 10,016,448 4,976,894 24,097,753 4,976,894
----------------- ----------------- ----------------- -----------------
15,965,189 6,590,531 35,632,285 7,817,967
COST OF REVENUES
Equipment & Supplies 3,968,842 812,520 7,775,668 1,891,244
Merchant Banking 7,278,153 4,106,644 17,598,674 4,106,644
----------------- ----------------- ----------------- -----------------
11,246,995 4,919,164 25,374,342 5,997,888
GROSS PROFIT 4,718,194 1,671,367 10,257,943 1,820,079
SELLING AND GENERAL
EXPENSE 4,190,832 1,167,309 8,285,690 1,290,736
----------------- ----------------- ----------------- -----------------
OPERATING INCOME 527,362 504,058 1,972,253 529,343
INTEREST EXPENSE (274,684) - (438,292) -
MISCELLANEOUS INCOME 32,670 - 49,455 -
----------------- ----------------- ----------------- -----------------
INCOME BEFORE
INCOME TAXES AND MINORITY
INTEREST 285,348 504,058 1,583,416 529,343
MINORITY INTEREST 94,814 - 113,679 -
----------------- ----------------- ----------------- -----------------
190,534 504,058 1,469,737 529,343
INCOME TAXES 76,200 210,000 589,400 211,700
----------------- ----------------- ----------------- -----------------
NET INCOME 114,334 294,058 880,337 317,643
Preferred Stock Dividends $18,832 - 33,997 -
Income available to common
Stockhholders $95,502 $294,058 $846,340 $317,643
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
NET INCOME PER SHARE
Basic 0.01 0.04 0.11 0
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
Diluted
Diluted 0.01 0.04 0.11 0
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
WEIGHTED AVG. PER SHARE
Basic 7,532,366 6,269,131 7,532,366 6,269,131
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
Diluted 7,619,986 6,269,131 7,619,986 6,269,131
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
IMTEK OFFICE SOLUTIONS, INC.
CONSOLIDATED SHAREHOLDERS' EQUITY
For the period from June 30, to December 31, 1998
Preferred Stock Common Stock
------------------------- ------------------------- Paid in Retained Stockholders
Shares Amount Shares Amount Capital Earnings Equity
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance -
June 30, 1998 6,740 $ 674,000 7,532,361 $ 8 $ 1,420,548 $ 661,435 $ 2,755,991
Issuance of 1,630 163,000 - - (11,845) - 151,155
Preferred Stock
Net Income for
the period - - - - - 880,337 880,337
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance -
December 31, 1998 8,370 $ 837,000 7,532,361 $ 8 $ 1,408,703 $ 1,541,772 $ 3,787,483
------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------
See notes to consolidated financial statements.
IMTEK OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Six Months Ended December 31
1998 1997
---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES $ 880,337 $ 294,058
Net income
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 308,401 12,357
Minority interest 113,679 -
Amortization of put option obligation (33,570) -
Changes in assets and liabilities
Accounts and other receivables (2,041,412) (691,855)
Inventory (1,716,268) (118,831)
Accounts payable and accrued expenses 294,948 1,093,182
Deferred revenue 1,579,058
Prepaid expenses 116,065 (320,989)
Other assets 218,400 (124,644)
Income taxes payable 140,502 214,893
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Net cash (used) provided by operating activities (729,756) 358,171
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,500,813) (306,155)
Acquisitions and intangibles (4,437,324) (303,746)
------------------- ------------------
Net cash used in investing activities (5,938,137) (609,901)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 4,686,685 531,855
Payments on notes payable (396,820) -
Issuance of preferred Stock - net 151,155 -
Change in paid in capital - (29,112)
------------------- ------------------
Net cash provided by financing activities 4,441,020 502,843
Net (decrease) increase in cash (2,226,873) 251,013
Cash at beginning of period 2,949,168 11,349
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Cash at end of period $ 722,295 $ 262,362
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DISCLOSURE OF CASH FLOW SUPPLEMENTAL INFORMATION
Cash paid during the quarter for interest $ 442,347 $ -
------------------- ------------------
------------------- ------------------
Cash paid during the quarter for taxes $ 440,100 $ -
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------------------- ------------------
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
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NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statement follows:
NATURE OF BUSINESS
The Company is a regional supplier of equipment products and services used
by offices to manage information and documents. The Company also provides a
variety of specialty finance and merchant banking services, primarily the
purchase and sale of viaticated life insurance policies. The Company
conducts business in the Baltimore, Maryland, Washington, DC, Richmond and
Tidewater, Virginia, Atlanta, Georgia and Philadelphia, Pennsylvania
markets and grants credit to its customers in those regions.
In July, 1998 the Company's Board of Directors approved a change in the
fiscal-year-end from September 30th to June 30th of each year, effective
June 30, 1998. The audited financial statements as of June 30, 1998 are for
a period of nine months beginning October 1, 1997.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements as of December 31, 1998,
reflects the accounts of the Company, together with the accounts of Imtek
Corporation, Imtek Services, Corporation, and Imtek Acquisition
Corporation, wholly owned subsidiaries of the Company. All inter-company
transactions have been eliminated in consolidation.
The accompanying consolidated balance sheets as of December 31, 1998 and
1997, consolidated statements of earnings for the quarter ended and six
months ended December 31, 1998, the statement of shareholders' equity for
the quarter-ended December 31, 1998, and the consolidated statement of cash
flows for the six months ended December 31, 1998 and 1997 are unaudited. In
the opinion of management, all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the results of operations
for the interim periods presented have been reflected in the accompanying
consolidated financial statements. The result of operations for interim
periods presented herein are not necessarily indicative of the results
which may be expected for the entire fiscal year.
NOTE B - RESTRICTED CASH AND CUSTOMER ESCROW ACCOUNTS
The company's merchant banking subsidiary attempts to pre-fund certain asset
viaticated life insurance purchases with funds received from third party
purchasers. Funds are collected in an escrow account and released to the Company
upon the sale of the policies.
NOTE C - LONG-TERM DEBT
Long term debt consists of:
Amount
-------------------
Subordinated acquisition line $ 5,664,305
Equipment Notes 306,314
Notes to Individuals 820,759
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6,791,378
Current Maturties 580,000
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$ 6,211,378
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NOTE D - Dependence on Major Vendor
The Company's merchant banking segment purchased viaticated insurance
policies primarily from one broker. For the quarter ended December 31, 1998
the company purchased $4,440,721 in policies from this broker ($12,170,840
for the six months ended December 31, 1998) representing 61% of the policies
purchased during the quarter (69% for the six months ended December 31, 1998).
NOTE E - Segment information
Qtr ended Qtr ended Six month Six Month
Dec. 31, '98 Dec. 31, '97 Dec. 31, '98 Dec. 31, '97
---------------- ----------------- ----------------- -----------------
Sales to unaffiliated customers
Office Solutions $5,948,741 $1,613,637 $11,534,532 $2,841,073
Merchant Banking 10,016,448 4,976,894 24,097,753 4,976,894
---------------- ----------------- ----------------- -----------------
$15,965,189 $6,590,531 $35,632,285 $7,817,967
---------------- ----------------- ----------------- -----------------
---------------- ----------------- ----------------- -----------------
Operating Income (loss)
Office Solutions ($142,157) ($216,192) ($303,256) ($190,907)
Merchant Banking 669,520 720,250 2,275,509 720,250
---------------- ----------------- ----------------- -----------------
$527,363 $504,058 $1,972,253 $524,343
---------------- ----------------- ----------------- -----------------
---------------- ----------------- ----------------- -----------------
Assets
Office Solutions - - $15,602,817 $1,622,289
Merchant Banking - - 3,432,355 3,705,527
---------------- ----------------- ----------------- -----------------
- - $19,035,172 $5,327,816
---------------- ----------------- ----------------- -----------------
---------------- ----------------- ----------------- -----------------
Capital Expenditures
Office Solutions $327,387 $96,958 $1,499,228 $101,553
Merchant Banking - 204,602 1,585 204,602
---------------- ----------------- ----------------- -----------------
$327,387 $301,560 $1,500,813 $306,155
---------------- ----------------- ----------------- -----------------
---------------- ----------------- ----------------- -----------------
Depreciation and Amount
Office Solutions $162,668 $1,290 $293,737 $5,215
Merchant Banking 7,332 7,142 14,664 7,142
---------------- ----------------- ----------------- -----------------
$170,000 $8,432 $308,401 $12,357
---------------- ----------------- ----------------- -----------------
---------------- ----------------- ----------------- -----------------
NOTE F - Acquisitions
During the quarter ended December 31, 1998 the Company completed the
purchase of certain customer accounts of the AMI Group, Inc. for the assumption
of certain liabilities of approximately $650,000. The AMI Group, Inc. was a
Washington D.C. based office equipment dealer.
During the quarter ended December 31, 1998 the Company acquired certain
assets of American Copy Systems, Inc., a Warrington, Pennsylvania office
equipment dealer, for approximately $895,000. The assets acquired included
accounts receivable and cash of approximately $236,000, inventory of
approximately $215,000, furniture and fixture of approximately $70,000 a
covenant not to compete of $50,000 and certain other intangibles of $325,000.
This transaction was funded primarily through the remaining cash from the
Sirrom indebtedness of approximately $640,000, the issuance of a note payable
of $160,000, and the assumption of certain liabilities of approximately
$95,000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
BACKGROUND
Imtek Office Solutions, Inc., (the "Company"), as previously reported,
effectively commenced operations on April 22, 1997. Prior to April 22, 1997,
the Company, and its predecessor, was a development stage company with no
significant operations. The Company, for the fiscal year ended as of
September 30, 1997 was primarily engaged in the wholesale and retail sale of
copiers and facsimile equipment, servicing of office equipment, providing
commercial printing and duplicating services, and to a lesser extent, the
retail sale of office supplies. Effective October 1, 1997, the Company
commenced its operation of its merchant banking business, primarily providing
viatical settlements, the purchase and resale of life insurance policies of
terminally ill individuals. The Company operates principally in the
Mid-Atlantic region consisting of Baltimore, Maryland, Philadelphia, PA,
Washington D.C., Richmond, Virginia, Tidewater area of Southeastern Virginia,
and the metropolitan Atlanta, Georgia market.
The Company changed its fiscal year end from September 30 to June 30, effective
June 30, 1998 as previously reported on form 8-K of July 30, 1998, which is
incorporated by reference. Since the Company was in a start-up mode during 1997
with limited activity during fiscal year ended September 30, 1997 (a period of
five months), and the transition period ended as of June 30, 1998 (a period of 9
months), comparisons to prior year's results may not provide meaningful
analysis.
During the prior year, as previously reported, the Company effectively
created two operating segments. The first segment, representing the
historical core business of the Company, is the sale at retail and wholesale
of office products, copier sales and service, and commercial printing and
copying services. This segment is referred to as Office Solutions. The second
segment is referred to as Merchant Banking and consists principally of
viatical settlements and to a lesser extent specialty finance services,
including copier and office equipment leasing, accounts receivable financing
and factoring. The Merchant Banking segment effectively commenced operations
during the second quarter of the prior year, and thus there are no
comparisons to the prior year for this segment.
The Company's Office Solutions segment continues the implementation of its
"growth-through-acquisitions" strategy. The strategy consists principally of
acquiring smaller office equipment dealers located within specified
geographic markets. Additionally, the Company anticipates acquiring other
entities in the future which may provide the Company with expanded, enhanced
or additional products, services or markets, but can provide no assurance
that such acquisitions will indeed provide such beneficial products, services
or markets. Management believes that these acquired entities, with such
similar products and services would benefit, after a reasonable assimilation
period, from the Company's centralized management, system of internal
control, additional financial resources, efficiencies associated with certain
economies of scale, and marketing efforts, although there can be no assurance
that such benefits will be realized. Management further believes that
adequate acquisition opportunities are available. The Company anticipates
that significant acquisitions would be funded principally from issuance of
authorized but unissued shares of the Company's common stock, external
financing sources, such as the Sirrom and Mercantile Bank Loan Agreements,
and to a lesser extent from internally generated cash flow. The Company's
future success with acquisitions will depend upon the timing and size of the
acquisition; the ability to integrate the acquired company into its
operations with a minimum of integration costs and the Company's ability to
grow its infrastructure to accommodate the continued growth.
ACQUISITIONS:
During the quarter ended December 31, 1998 the Company completed the purchase
of certain customer accounts of the AMI Group, Inc. in exchange for the
assumption of certain liabilities in the approximate amount of $650,000. The
AMI Group, Inc. was a Washington D.C. based office equipment dealer.
During the quarter ended December 31, 1998, the Company acquired certain
assets of American Copy Systems, Inc., a Warrington, Pennsylvania office
equipment dealer, for approximately $895,000. The assets acquired included
accounts receivable and cash of approximately $236,000, inventory of
approximately $215,000, furniture and fixture of approximately $70,000 a
covenant not to compete of $50,000 and certain other intangibles in the
approximate amount of $325,000. This transaction was funded primarily through
the remaining cash from the Sirrom indebtedness of approximately $640,000,
the issuance of a note payable in the amount of $160,000, and the assumption
of certain liabilities of approximately $95,000.
RESULTS OF OPERATIONS:
Office Solutions Segment
The Office Solutions segment generated gross revenue of $5,949,000 and
$11,535,000 for the quarter and six month period ended as of December 31, 1998,
as compared to $1,614,000 and $2,841,000 for the comparable periods of the prior
year. These increases over the comparable period of the prior year relate
principally to revenue derived from acquisitions. As previously reported, the
segment anticipates future revenue growth through acquisitions.
In addition to management's focus of revenue growth through acquisitions,
the company has experienced internally generated growth. During the second
quarter the segmented generated an increase in same location revenue sales of
$1.7 million, as compared to $1.6 million for the comparable period of the prior
year. Same location revenue for the six-month period also increased during the
current year, as compared to the prior year, by approximately $700,000, or 23%.
These increases are a result of to management's continuing focus on quality of
service, both during and subsequent to point of sale. Moreover, as previously
reported, management placed additional investments within these locations with
the intention of adequately staffing and supporting the operations. These
previous investments have contributed to the revenue increases, which are in
excess of cost of living increases.
In addition to the revenue growth, for both the quarter and six month
period ended as of December 31, 1998, the Office Solutions segment also
experienced positive performance of its gross margins. The segment reported
gross margin of 33.3% and 32.5% for the quarter and six-month period of the
current fiscal year, respectively. Same location gross margins for the
quarter and six-month period were 21.4% and 20.3% as compared to 49.6% and
33.4% for the comparable periods of the prior year. As previously reported,
the prior year second quarter contained several large, non-recurring sources
of revenue, and thus resulted in substantially higher gross margin than
customary. The segment produced a first quarter prior year gross margin of
12.1% and a second quarter gross margin of 49.6%. Absent the prior year
favorable second quarter fluctuation, the segment has shown improvement in
the current year within the same location gross margins.
Management continues its attention on cost containment and operational
efficiencies. Selling, general and administrative expense increased by
approximately $350,000 in the second quarter as compared to the previous
quarter. This increase relates principally to additional administrative costs
from acquisitions, which may have been incurred during only a portion of
the prior quarter. As compared to the comparable quarter of the prior year,
selling, general and administrative expense increased from $1 million to $1.9
million, almost doubling. However, as previously discussed, revenue during
this same period increased by approximately 275%. Thus, as a percentage of
revenue, the segment has significantly decreased the effect, contracting from
63% of revenue to 32% for the comparable quarter of the prior year. Moreover,
for the six-month period ended as of December 31, 1998, the segment similarly
mitigated the effect of these expenses as compared to revenue, declining to
30.4% from 39.9% for the current six-month period as compared to the prior
year. Management, as previously reported, continues to anticipate a certain
level of transformation and assimilation costs with acquisitions, which could
continue to stabilize and effectively decline as a percentage of revenue.
As previously reported, management anticipates a certain level of
assimilation costs with acquisitions. These expenditures consist principally
of incremental marketing efforts, training costs to insure sales and service
personnel operate at the highest level of professionalism, competency and in
accordance with established policy and procedure, and general and
administrative expense with the improvement of the acquisition's
infrastructure. With additional acquisitions, these costs, which have been
stabilized, should continue to decline as a percentage of revenue, but the
Company can provide no assurances in that regard.
Moreover, as previously reported general and administrative costs for
the prior period ended December 31, 1997 where below then-expected levels. In
the prior year, for example, management waived remuneration. Thus payroll and
directly related costs such as benefits, for the six-month period of
approximately $325,000 where not incurred during the prior year.
Additionally, as also previously reported, the Company, in prior periods did
not incur facilities expense such as rent and utilities for some locations.
Thus, there can be no direct comparison to the comparable periods of the
prior year.
Based upon the preceding, the segment reported positive results from
operation, before income tax and interest expense. As compared to the comparable
quarter of the prior year, the segment reversed its course and produced an
operating profit of $52,500 for the current quarter as compared to a loss of
$209,000 in the prior year's comparable quarter. For the six-month period this
trend continued with the segment reporting an operating profit of $189,000 as
compared to an operating loss of $183,500 in the prior year. However, as
compared to the prior quarter, the trend temporarily reversed with the current
quarter's profit less than the operating profit of the prior quarter by
approximately $84,000. This fluctuation is principally in response to the
previously discussed increases in general and administrative expenses.
As previously reported, the segment continues to implement its growth
strategy through acquisitions, and to a lessor extent, internal growth. It is
anticipated that the strategy of acquiring smaller and localized office
equipment dealers within specified geographic areas will continue. Furthermore,
it is anticipated that acquired companies would benefit, after a reasonable
assimilation period, from the Company's centralized management, system of
internal control, additional financial resources, efficiencies associated with
certain economics of scale, and marketing resources. There can be no assurances
that such benefits will be realized, however.
Merchant Banking Segment
As previously reported, the Merchant Banking segment did not commence
operations until October 1997. Thus, there is no meaningful comparison to the
prior year's comparable periods.
During the second quarter and for the six month period ended as of
December 31, 1998, the Merchant Banking segment accounted for 62.7 and 67.6
percent of the Company's consolidated revenue, respectively. Revenue for the
segment decreased by approximately $3.92 million or 27.8 percent as compared
to the prior quarter. This revenue decline was anticipated by management and
was the result of seasonal variations. With the November and December holiday
season, management anticipated lower viatical settlement volume. Management
further anticipates the revenue volume to return to the previously
experienced levels, if not to continue, in the near term to increase. The
Company can provide no assurances, however, that revenue volume will indeed
return to the previously experienced levels or increase.
Effectively commencing in the third quarter of this year, the Merchant
Banking segment will offer the additional service of financial brokering of
office equipment sales and leases. The segment will broker the financing
under a subsidiary corporation, Imtek Capital Corporation. This subsidiary
has entered into an agreement with a financial services company where by the
subsidiary may facilitate financing arrangements. Such financing arrangements
are expected to be on a non-recourse and non-refundable basis.
Corresponding to the 28% decline in second quarter revenue, costs of
revenue declined by 29.4%, as compared to the prior quarter. In conjunction
with the decline of costs, the segment reported an increase in operating
margin. The gross margin increased from 17.6% in the previous quarter to
18.2% for the second quarter. This increase was principally in response to
management's effective price bidding and to the product mix of viatical
settlements during the period, wherein viaticated life insurance policies
where more heavily weighted to longer viatication terms.
As previously reported, the segment's profit margin, within a relevant
range, generally varies by the expected term of viatication. As the viatication
period lengthens, the corresponding profit margin generally increases.
Viatication periods generally run in six-month intervals, with a minimum of six
months and a normal maximum of 48 months. These viatication periods are deemed
to be the product mix.
The segment experienced a significant increase in selling, general and
administrative expense during the second quarter as compared to the previous
quarter. Selling, general and administrative expense climbed by approximately
$420,000. For the second quarter these expenses were 12.1% of revenue as
compared to 5.6% of revenue in the previous quarter. The substantial increase
relates principally to the previously reported acquisition of a specialty
financial services marketing group. This acquisition was fully integrated
during the second quarter and correspondingly generated additional expenses.
These additional expenses relate primarily to increases in payroll, and
related fringe benefits of approximately $250,000. Additionally, the segment
experienced an increase in such corollary expenses as advertising and
marketing costs, office supplies expense, travel and entertainment, and other
indirectly related expenses such as telephone and postage. Management views
these incremental costs as an investment in not only securing future revenue,
but also the maintenance of gross margins. As the industry matures,
management anticipates increased competition with subsequent margin
shrinkage. By investing in the segment currently, it is management's opinion,
that the continued future success becomes more viable.
In addition to the selling, general and administrative cost increases
associated with the acquisition, the segment experienced an increase of
approximately $83,000 in professional fees. This increase relates principally to
the accounting fees of the year-end audit, which are expensed as incurred.
Management anticipates that these expenses will settle to a more normal relevant
range within the near term.
Although the segment experienced an improvement in its operating margins
during the second quarter, the unusual, significant increase in
administrative expense resulted in a lower than expected pretax net income of
3.1% of revenue, as compared to 12% in the prior quarter. In light of
continued increases in competition, management anticipates its pretax net
income to also settle within a relevant range, which is more typical of the
industry. The segment anticipates continuing to fully employ its assets and
resources, including additional future infrastructure investments to maintain
its competitive position within the industry.
FINANCIAL CONDITION AND LIQUIDITY
Office Solutions Segment
Total assets of the Office Solutions segment decreased from $15.2
million as of the prior quarter to $12.8 million as of the current quarter.
The decrease in cash accounted for approximately $600,000 of this decline.
Moreover, accounts receivable also declined by approximately $800,000. The
receivable decline was due principally to greater emphasis being placed on
cash management during the quarter. Finally, other receivables accounted for
the remaining total asset reduction.
The segment experienced an effective decline in inventory during the
quarter as compared to the prior quarter. Although inventory increased by
approximately $73,000, this increase, 2.2%, was significantly less than the
experienced revenue increase.
The segment produced a current ratio of approximately 2 to 1 for the
current quarter, which is comparable to the preceding quarter. As compared to
the comparable quarter of the prior year, the segment, through its cash
management, showed a significant improvement, raising the current ratio from
approximately 1.5 to 2.0. As the segment continues its assimilation of
acquisitions, this ratio is also expected to stabilize within a more relevant
range.
Fixed assets, as compared to the prior quarter, also remained constant
due to the absence of significant acquisitions during the quarter. As
compared to the prior year, in response to the previously reported
acquisitions, fixed assets increased significantly.
The segment's liabilities were likewise reduced during the quarter, as
compared to the prior quarter. These reductions were again principally in
response to cash flow increases and a reduction of current notes payable.
Accounts payable, however, showed a marked increase, rising to approximately
$2 million as compared to $700,000 as of the previous quarter. This increase
was in response to calendar year end fluctuations in vendor payments, with
one division incurring in excess of $300,000 in vendor payables to purchase
equipment late in the quarter. Additionally, several divisions incurred
significant expenses to vendors at quarter end for annual agreements.
Finally, acquisitions accounted for the remaining increase. Acquisitions are
also the primary contributor to the increase as compared to the comparable
quarter of the prior year.
Consistent with previous reports, the segment's long-term liabilities
continue to experience growth brought about due to acquisitions. Management
continues to anticipate future acquisitions, which would be funded from external
sources, issuance of additional capital, and to a lesser extent, from internally
generated cash flow.
Merchant Banking Segment
As previously, reported, the Merchant Banking segment did not commence
operations until October, 1997. Thus, there is no meaningful comparison to
the prior year comparable periods as the segment was just commencing
operation and was not in existence for the entire quarter and six-month
period.
For the quarter and six month period ended as of December 31, 1998, the
Merchant Banking segment had total assets, excluding inter-company assets, of
$3,400,000, as compared to $3,850,000. This represents a decrease of
$450,000. This decrease is principally due to second quarter's revenue
contraction.
The segment, in direct response to the revenue decline, experienced a
reduction in cash, prepaid commissions, and escrowed cash. Current
liabilities were also reduced, albeit to a lesser extent for the quarter
ended as of December 31, 1998 as compared to the previous quarter. In
response to the change in current assets and liabilities, the segment
experienced a reduction of its current ratio from 1.47 to 1.24 for the three
month period ended as of December 31, 1998 as compared to the prior quarter.
This current ratio decline is partially in response to larger settlement
advances at December 31, 1998 as compared to the prior quarter. The $85,000
decrease in unrestricted cash, relating to the reduction of revenues due to
the holiday season, was the principal driving force behind the current ratio
decline during the second quarter, as compared to the prior quarter.
YEAR 2000 STATEMENT
The year 2000 (Y2K) issue is the result of computer programs using a two-digit
year, such that the computer system may interpret the year 2000 as 1900. Should
this occur, a system-wide failure of computer systems would be eminent and could
lead to company-wide disruptions. The cost of such company-wide disruptions
could have a material adverse effect on the Company's financial condition and
results of operations.
As previously reported, the Company has implemented its three phase plan to
address its Y2K issue and has principally completed both phase 1 and 2 of its
plan. A number of applications have been identified as either Y2K compliant or
that the third party vendor has provided the Company with assurance that the
application will be Y2K compliant.
Management does not anticipate significant additional expense in future
periods associated with any known Y2K issue.
Item 1. Legal Proceedings
In November, 1998 the Company settled a $500,000 lawsuit (which was
reported in Item 3 of the Company's annual report on Form 10 K for the
fiscal year ended June 30, 1998) which alleged certain copyright
infringements and breach of contract damages. Settlement terms called for a
payment of $60,000 made in December,1998 and subsequent semi-annual
installments made through December 2000, totaling $82,500.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMTEK OFFICE SOLUTIONS, INC.
By: /s/Edwin C. Hirsch
-----------------------------------
Edwin C. Hirsch, President
And Chief Executive Officer
By: /s/ Brad Thompson
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Financial Officer
Dated: February 15, 1999