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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 DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED], FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-23077
IMAGEMAX, INC.
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(Exact name of Registrant as specified in its charter)
PENNSYLVANIA 23-2865585
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(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
455 PENNSYLVANIA AVENUE, SUITE 128, FORT WASHINGTON, PENNSYLVANIA 19034
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 628-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock (no par value per share)
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__. No _____.
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $9,942,639 as of March 22, 2000. On March 22, 2000 the
Registrant had outstanding 6,633,681 shares of Common Stock, no par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement (the "Definitive Proxy
Statement") to be filed with the Securities and Exchange Commission relative to
the Company's 2000 Annual Meeting of Shareholders are incorporated by reference
into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I.................................................................................................... 1
Item 1. Business............................................................................ 1
Item 2. Properties.......................................................................... 12
Item 3. Legal Proceedings................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders................................. 13
Item 4(a). Executive Officers of the Registrant................................................ 14
PART II................................................................................................... 15
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters ................................................................ 15
Item 6. Selected Consolidated Financial Data................................................ 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................. 17
Item 8. Financial Statements and Supplementary Data......................................... 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................................. 26
PART III.................................................................................................. 27
Item 10. Directors and Executive Officers of Registrant...................................... 27
Item 11. Executive Compensation.............................................................. 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management.......................................................................... 27
Item 13. Certain Relationships and Related Transactions...................................... 27
PART IV................................................................................................... 28
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K......................................................................... 28
i
PART I
ITEM 1. BUSINESS
ImageMax, Inc. was founded in November 1996 to become a leading national,
single-source provider of integrated document management solutions. On December
4, 1997, ImageMax completed its initial public offering (the "Offering") of
3,100,000 shares of Common Stock, no par value per share (the "Common Stock"),
which generated net proceeds to ImageMax of approximately $30.5 million.
Concurrently with the Offering, the Company began material operations with the
acquisition of 14 document management service companies (the "Founding
Companies"). During the first eight months of 1998, the Company acquired an
additional 13 document management service companies (the "Acquired Businesses").
In December 1998 and January 1999, the Company sold operations in three
locations. Unless otherwise indicated, all references to "ImageMax" shall mean
ImageMax, Inc. prior to the acquisitions of the Founding Companies and all
references to the "Company" and its business refer to operations subsequent to
the Offering.
Prior to the Offering, ImageMax did not conduct any material operations. As of
March 22, 2000, the Company operated 14 business units in 15 states, employed
approximately 1,100 people and provided services and products to several
thousand clients from 30 facilities in 19 locations. The Company's services
include electronic (digital) and micrographic media conversion, data entry and
indexing, Internet retrieval and hosting services, document storage (including
Internet "web-enabled" document storage and retrieval) and system integration.
The Company also sells and supports document management equipment and
proprietary as well as third party open architecture digital imaging and
indexing software.
The Company's strategy is to work with clients to develop the best solution to
their document management needs, including solutions involving both outsourced
and in-house document capture, conversion, storage and retrieval. The Company
believes that a majority of current document management industry revenue is
derived from the management of film and paper media. However, advances in
digital and Internet based services and other technologies continue to provide
organizations with increasingly attractive document management options. As a
result, the Company believes the most successful service providers are those
that can offer a complete spectrum of document management services and products
encompassing solution design and expertise in the management of digital, film
and paper media. Accordingly, the Company has targeted a broad variety of
services and products, as well as technical and vertical market expertise, in
order to create a platform from which it can become a leading national,
single-source option for clients with intensive document management needs.
MARKET AND INDUSTRY OVERVIEW
Document management businesses provide services and products to capture,
convert, index, store and retrieve documents, whether such documents exist on
paper, microfilm or digital media. Based on a report made publicly available by
the Association for Information and Image Management International ("AIIM")
entitled "State of the Document Technologies Industry: 1997-2003," the Company
believes the U.S. market for document management services and products exceeded
$17.5 billion in 1999 and that this market has been growing at an average annual
rate of more than 20% in 1998 and 1999. The AIIM data project a compound annual
growth rate of 26% for the five years from 1998 to 2003 resulting in a market of
$41.6 billion in 2003. Expected near-term growth rates after 2003 are
approximately 16%. The Company believes that there is a large unvended component
of the service market not contained in the AIIM data because most document
management services for large organizations are still performed in-house.
The Company believes that the continued growth of the document management
industry is driven by such principal factors as: (a) improvement of digital
technology (i.e., CD-ROM, computer networking, Internet retrieval and
image-enabled software applications) which has dramatically reduced the cost of
imaging, storing, indexing and retrieving documents while improving users'
ability to manage documents more efficiently; (b) greater focus by many
organizations, especially those in document-intensive industries such as health
care, financial service and engineering, on document management processes and
systems as part of a wider effort to manage their information more efficiently
in order to improve productivity, competitiveness and client service; (c)
organizations' need to manage the ever increasing volume of information
facilitated by document-generating technologies such as facsimile, high-speed
printing, the Internet and computer networking; and (d) increased outsourcing of
document management services which allows organizations to focus on core
competencies and revenue generating activities, reduce fixed costs, and gain
access to new technologies without the risk and expense of near-term
obsolescence.
1
The Company believes it is one of the larger document service providers in a
highly fragmented industry. The Company believes that there are over 2,000
companies serving the document management needs of industry and government, with
a majority of these companies generating annual revenues of less than $10
million. The Company believes that many of the small businesses with which it
competes presently lack the capital for expansion, cannot keep abreast of
rapidly changing technologies, are unable to effectively manage large complex
projects, have not developed marketing and sales programs, do not have the
volume buying power needed to negotiate favorable supply contracts, and are
unable to meet the needs of large, geographically dispersed customers. The
continuing migration from paper and film to digital media has broken down many
geographic barriers to the provision of document management services and has
increased client demands for integrated operations. The Company believes that
its broad capabilities will provide an increasing competitive advantage.
BUSINESS STRATEGY
The Company's goal is to serve as a leading national, single source provider of
integrated document management solutions. To this end, the Company acquired 27
document management service companies from December 1997 to August 1998. In
September 1998, the Company shifted its primary focus from its acquisition
program to consolidate, integrate and build the management of the acquired
network of formerly independent business units. This process has the following
key elements:
Consolidate operations in selected markets. The Company will continue to
consolidate offices and functions in certain geographic markets to gain
economies of scale, coordinate sales and marketing efforts and streamline
reporting and controls. This will result in reducing redundant physical
locations and consolidating production and administrative functions among a
cluster of locations. The Company has completed or is currently consolidating
operations in California, Texas, Massachusetts, Ohio, Oregon and the Midwest.
Build an effective management structure. In 1999, the Company organized its
business units into four regions along geographic/vertical market lines and
placed the focus of day-to-day management control in the hands of five general
managers from these regions. These managers have substantially improved the
coordination of technical skills, production capabilities and sales activities
between business units to better fulfill customer requirements. This structure
has enabled the Company to reduce staffing at its corporate headquarters.
Enhance capabilities. While streamlining operations, the Company is continuing
to enhance its sales, marketing and technical capabilities and will continue to
improve the skill base of its sales force through such tools as an on-line
application database, specific vertical market training programs and a hiring
program emphasizing digital imaging. In meeting client needs, the Company shares
technical and production resources across business units and is extending across
its operations marketing programs used successfully by certain business units
with the goal of presenting a one-company image to the marketplace. To this end,
the Company appointed Mitchell J. Taube to the position of Executive
Vice-President - Marketing and Sales Development in March 2000 (effective
April 1, 2000). Mr. Taube's responsibilities now include development of Web
and Intranet initiatives, collateral and sales aids, trade shows, seminars,
telemarketing and direct mail. Moreover, his sales development efforts will
include national compensation, training and sales development, product and
service focus, and best sales practices. Finally, the Company is partnering with
providers of document management software and certain related business services
in cross-marketing agreements. These programs enable the Company to be a
single-source provider of integrated document management solutions across its
network of business units.
Form strategic partnerships. The Company is forming strategic partnerships with
providers of related business services as well as providers of document
management software and image processing hardware. For example, ImageMax
software is bundled with complementary document management software and with
certain scanning equipment. In addition, with respect to the Company's
application to become an Internet Application Service Provider, the Company
expects to enter into strategic partnerships in order to be able to effectively
leverage its capabilities in this area.
2
SERVICES AND PRODUCTS
Services
The Company offers a broad range of document management services across a
variety of media types and formats. This broad range of services, together with
the Company's technical capabilities and experience in selected vertical
markets, enables the Company to tailor document management solutions for its
clients based on their specific needs. The document management services that are
currently provided by the Company include:
Media conversion services
Media conversion is labor intensive and, particularly in the case of digital
imaging, requires increasingly sophisticated equipment and systems to be
accomplished efficiently. By maintaining a large skilled labor pool, sufficient
production capacity and technical capability, the Company can provide a
responsive and cost effective outsource alternative to its customers.
Digital Imaging. The Company's digital imaging services involve the conversion
of paper or microfilm documents into digital format through the use of optical
scanners and the conversion of computer output to digital images. Once
converted, digital images can be returned for client use on a CD-ROM or optical
disk or stored by the Company in a data warehouse for subsequent retrieval and
distribution. The Company believes that digital imaging is becoming the
preferred format of storage for many organizations due to benefits such as high
speed retrieval, multiple indexing capabilities and the ability to support and
distribute digital, film or paper output to multiple locations.
Micrographics. The Company performs micrographic services, including the
conversion of paper documents into microfilm images, the indexing of film for
computer-aided retrieval systems and computer output to microfilm ("COM").
Micrographic media are selected as an alternative to paper or digital media for
one or more of the following reasons: (i) film archives are more accessible,
longer-lived and less expensive to store than paper; (ii) film is eye-readable
and not subject to technological obsolescence; (iii) converting paper to film is
currently more cost-effective than scanning paper for most documents where ease
of accessibility is not needed; and (iv) there is a large base of organizations
with existing film archives and reader-printer equipment.
Data Entry and Indexing. The creation of index files for the rapid retrieval of
images is a critical part of most value-added document management solutions. The
Company provides specialized indexing services to a variety of clients for both
film and digital-format documents. These labor-intensive services are often
contracted for outside the U.S. as a means to utilize qualified personnel at
generally lower cost than is available domestically.
Storage and retrieval services
Film and Paper Storage and Retrieval. The Company manages the archiving of
client documents, including processing (i.e., indexing and formatting), storage,
retrieval, delivery and return to storage of documents within a rapid time
frame. Typical archival documents include medical and legal case files, business
records and financial transaction documents. Service fees generally include
billing for storage space, plus activity charges for retrieval, delivery and
return to storage, and ultimately for document destruction. The Company
currently maintains storage facilities in three locations: (i) Chesterton, IN,
(ii) Emeryville, CA, and (iii) Monroe, LA.
Products
The Company develops proprietary, open-architecture software products which
support electronic imaging and indexing services. In addition, the Company sells
and supports third-party software and offers a wide range of digital imaging,
scanning and viewing hardware, micrographic reader-printers, micrographic film
and supplies and other equipment.
3
Software
The Company develops, markets and supports a suite of proprietary
open-architecture software products that support and enhance the scanning,
indexing and retrieval of digital images for its own use and for sale to other
document management companies and end-users. Versions of these software products
can be run on Microsoft Windows-equipped networks or personal computers, and
simplify the process of scanning, indexing and retrieving electronic images of
documents. One of the Company's products, called ScanTRAX, was initially
developed for use by document management companies in their digital conversion
operations. Other Company products, such as FileTRAX, were developed for
marketing to end-users. The Company has also developed and markets a high-end
scanning and viewing software package for the aperture card market called
WebTrax. This product is utilized by both service companies and end-users to
convert and index micrographic images of large format documents (in the form of
35-millimeter aperture cards) into digital images.
In addition to its proprietary software, the Company also sells and supports
third party document management software such as ALOS, FileMagic, Hyland and
OTG. These software products are marketed by the Company through a network of
more than 70 other document management companies acting as value-added resellers
and also directly through the Company's own sales force to end-users including,
in some cases, other document management companies. The Company has also
established partnering relationships with software and equipment providers which
enable the Company's software to be packaged and sold with their product
offerings.
Hardware and other equipment
The Company maintains broker or dealer relationships with a number of document
management equipment suppliers, including Bell & Howell, Canon, Kodak, Minolta
and Xerox. These relationships allow the Company to provide clients with the
latest micrographic and digital image viewing, printing and conversion
equipment. Several business units provide extensive field maintenance and repair
services for the equipment they sell. Various business units have specialized
technical hardware and systems integration expertise which is shared across the
Company's operations. The Company also provides to its clients a wide range of
micrographic film products, digital media and other graphic supplies. The
Company has achieved certain purchasing efficiencies with equipment and film
suppliers and believes that it is an attractive dealer to equipment
manufacturers seeking to achieve broad geographic coverage with a single
company.
CLIENTS AND KEY MARKETS
The Company had a broad base of several thousand clients in the last year. No
single client accounted for more than 5% of pro forma combined revenues for
either the year ended December 31, 1999 or 1998. The Company's customers are not
concentrated in any specific geographic area, but are concentrated primarily in
the health care, financial services, and engineering industries, as well as
certain other vertical markets.
The major markets for document management services providers are
transaction-intensive industries in which the core business processes involve
documents or industries for which there are legal or regulatory considerations
requiring the processing and storage of documents in a controlled manner. While
maintaining its diversified client base, the Company intends to increase its
expertise in certain core vertical markets. An overview of the Company's major
target markets follows:
The Financial Services Market: consists of commercial banks, mortgage banking
companies, insurance companies, brokerage companies and credit card and loan
processing companies.
The Health Care Market: consists of health care providers, health care insurers
and pharmaceutical companies.
The Engineering Market: consists of manufacturers, architectural and engineering
consultants, utilities and telecommunications companies.
Other Vertical Markets: litigation support, retail and transportation markets,
and government entities.
4
The Company believes that it has a national reputation as a leading service
provider for the engineering market, which utilizes large-format drawings and
aperture cards. In addition, the Company provides document management services
for a variety of non-industry-specific functions including accounts receivable
and payable processing, shipping, human resources and management information
systems reporting.
SALES AND MARKETING
Most sales efforts are conducted at the business unit level by the Company's
50-person sales force. This sale force has succeeded in expanding its client
base by pro-actively selling the benefits of outsourcing document management
functions to clients which, at the time, were in-house operators. The Company
has also leveraged existing client relationships by cross-selling its services,
products and expertise throughout each client's organization. The Company
believes that this strategy of pursuing unvended accounts actively, in addition
to competing for existing outsourced business (including conversion of existing
clients from film to digital media), will enable it to increase its market
position. Methods such as seminar selling, telemarketing and internet marketing
also are employed by the Company.
The Company is also obtaining larger and more complex digital conversion and
system sales by combining the capacity and technical capabilities of multiple
business units. For example, the Company has successfully pursued projects which
require offshore data entry and digital media conversion capabilities. This
activity has been fostered by cross-company meetings and training, improved
communications, in part fostered by the Company's intranet, coordination among
the group leaders and, more generally, an increased familiarity among the
business unit managers. The Company seeks to attract customers away from smaller
industry providers through its ability to offer a broader range of solutions and
products for companies' document management needs.
ImageMax is currently developing an Internet Application Service Provider
("ASP") sales strategy. The Company anticipates introducing this strategy to the
marketplace beginning in April 2000. The Company's new ASP strategy will allow
it to provide comprehensive imaging solutions including computer output to laser
disk ("COLD"), workflow, and document management to the marketplace. Having a
single web-based product offering will facilitate and help standardize corporate
training and marketing efforts. The goal of the strategy is to provide a product
offering that shortens the sales cycle and provides the following client
benefits: (i) virtual elimination of large up-front capital expenditures; (ii)
reduced technology obsolescence risks; (iii) reduced burden on internal
infrastructure; and (iv) reduced involvement by internal IT personnel. The
Company feels that as a result of offering ASP services, it will be able to
become involved in many new opportunities that occur earlier in the document
life cycle and generate both recurring hosting-related revenue along with
significant pull through conversion business.
The Company believes that its ability to attract and retain additional clients
will depend on its ability to offer the broad range of services and products
necessary to satisfy such clients' document management needs and maintain a high
level of customer satisfaction.
COMPETITION
The document management services industry is competitive. A significant source
of competition is the in-house document management capability of the Company's
target client base. Additionally, the Company competes with local or regional,
independent document management companies. The Company's larger competitors
include Affiliated Computer Services, Inc., Anacomp Inc., F.Y.I. Incorporated,
IKON Office Solutions, Iron Mountain Incorporated, Lason, Inc., and Vestcom
International, Inc. Many of these competitors are larger than the Company, have
greater financial and other resources and operate in broader geographic areas
than the Company. Additionally, other potential competitors may choose to enter
the Company's areas of operation in the future. As a result of this competitive
environment, the Company may lose clients or have difficulty in acquiring new
clients and its revenues and margins may be adversely affected.
The Company believes that the principal competitive factors in document
management services include the breadth, accuracy, speed, reliability and
security of service, technical expertise, industry specific knowledge and price.
The Company competes primarily on the basis of the breadth and quality of
service, technical expertise and industry specific knowledge, and believes that
it competes favorably with respect to these factors.
5
INTELLECTUAL PROPERTY
The Company regards the ImageMax name, certain of its software products,
information and know-how as proprietary and relies primarily on a combination of
trademarks, copyrights, trade secrets and confidentiality agreements to protect
its proprietary rights. The Company's business is not materially dependent on
any patents and it does not believe that any of its other proprietary rights are
of any material value. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to obtain and use information that the
Company regards as proprietary, and policing unauthorized use of the Company's
proprietary information may be difficult. Litigation may be necessary for the
Company to protect its proprietary information and could result in substantial
cost to, and diversion of efforts by, the Company.
The Company does not believe that any of its proprietary rights infringe the
proprietary rights of third parties. Any infringement claims, whether with or
without merit, can be time consuming and expensive to defend or may require the
Company to enter into royalty or licensing agreements or cease the allegedly
infringing activities. The failure to obtain such royalty agreements, if
required, and the Company's involvement in such litigation could have a material
adverse effect on the Company's business, financial condition and results of
operations.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that: (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for hazardous substances and solid and liquid wastes; and
(ii) impose liability for the costs of cleaning up, and certain damages
resulting from, sites of past spills, disposal or other releases of solid and
liquid wastes.
The Company is not currently aware of any environmental conditions relating to
present or past waste generation at or from these facilities that would be
likely to have a material adverse effect on the business, financial condition or
results of operations of the Company. However, the Company can not be certain
that environmental liabilities will not have a material adverse effect on its
business, financial condition or results of operations.
EMPLOYEES
As of December 31, 1999, the Company had approximately 1,100 employees,
approximately 120 of whom were employed primarily in management and
administration. None of the Company's employees are subject to a collective
bargaining agreement, and the Company considers its relations with its employees
to be good.
RISK FACTORS
You should carefully consider the following risks and uncertainties when reading
this Annual Report on Form 10-K. If any of the events described below actually
occur, the Company's business, financial condition or results of operations
could be materially adversely affected. Additional risks that the Company does
not yet know of or that the Company currently thinks are immaterial may also
impair the Company's business operations.
The Company has made forward-looking statements in this Annual Report on Form
10-K including information concerning the possible or assumed future of its
operations and those proceeded by, followed by, or that include the words
"anticipates," "believes," "estimates," "expects" or similar expressions. You
should understand that the risk factors described below, in addition to those
risks and uncertainties discussed elsewhere in this document, could affect the
Company's future results and could cause those results to differ materially from
those expressed in the Company's forward-looking statements.
6
THE COMPANY HAS EXPERIENCED OPERATING LOSSES AND MAY NOT BE ABLE TO CONTINUE AS
A GOING CONCERN
The Company has incurred significant operating losses since the Offering and has
an accumulated deficit of $16.8 million as of December 31, 1999. For the year
ended December 31, 1999, the Company incurred a net loss of $0.8 million. This
loss includes restructuring costs (primarily related to the closing of the
Indianapolis business unit and executive severance payments) of $0.8 million and
investment advisory fees and expenses of $0.6 million.
On March 30, 1998, the Company entered into a credit facility (as amended the
"Credit Facility"), providing a revolving line of credit of $30 million in
borrowings with First Union National Bank (successor by merger to Corestates
Bank, N.A.) and Commerce Bank, N.A. (together, the "Banks"). This agreement was
substantially amended in November 1998 as described below. Under the initial
terms of the Credit Facility, the Company could borrow up to $25 million to
finance future acquisitions and up to $5 million for working capital purposes.
Prior to amendment, borrowings under the facility bore interest at LIBOR or
prime plus an applicable margin at the option of the Company. In addition to
interest and other customary fees, the Company was obligated to remit a fee
ranging from 0.2% to 0.375% per year on unused commitments. The Credit Facility
is secured by substantially all of the assets of the Company. The Credit
Facility is subject to certain financial covenants which pertain to criteria
such as minimum levels of cash flow, ratio of debt to cash flow, and ratio of
fixed charges to cash flow. Prior to amendment, borrowing under the Credit
Facility was contingent upon the Company meeting certain financial ratios and
other criteria.
An amendment to the Credit Facility dated November 16, 1998 amended certain
financial covenants for future periods, reduced the amount available under the
Credit Facility to the amount ($20.1 million) outstanding on November 6, 1998,
changed the maturity date to December 1, 1999 from December 31, 2002, required a
$5.0 million principal repayment or commitments therefor by December 31, 1998,
required all borrowings to bear a rate of prime plus an applicable margin and
changed other provisions. As of December 31, 1998, the Company was in default of
certain financial and other covenants under the amended Credit Facility,
including cash flow ratios and the requirement for a $5.0 million principal
repayment or commitments therefor. On March 29, 1999, the Company entered into a
forbearance agreement with the banks that are parties to its Credit Facility
(the "Forbearance Agreement"). Pursuant to the Forbearance Agreement, the banks
agreed to forbear from exercising their rights and remedies with respect to all
existing defaults under the Credit Facility until the earlier of June 30, 1999
or the occurrence of a default under the Forbearance Agreement or an additional
default under the Credit Facility. On June 30, 1999, the Forbearance Agreement
expired. On September 30, 1999, the Company entered into an interim forbearance
agreement (the "Interim Agreement") with the banks that are parties to its
Credit Facility. On February 15, 2000, the Company amended its Interim Agreement
dated September 30, 1999 (the "Amended Interim Agreement"). Simultaneously on
February 15, 2000, the Company completed a $6 million financing transaction
involving the sale of convertible subordinated notes with warrants to TDH III,
L.P., Dime Capital Partners, Inc. and Robert E. Drury. Pursuant to the Amended
Interim Agreement, the banks have agreed to forbear from exercising their rights
and remedies with respect to all existing defaults under the Credit Facility
until the earlier of June 30, 2000 or the occurrence of a default under the
Amended Interim Agreement or any additional default under the Credit Facility.
Under the terms of the Amended Interim Agreement, the amount available under the
Credit Facility was reduced to $13.3 million and requires further principal
reductions of $150,000, $250,000, and $300,000 on April 1, May 1, and June 1,
2000, respectively, with all remaining sums payable on June 30, 2000. The
outstanding amount under the Credit Facility will now bear interest at the prime
rate plus two percent (2%) per annum (effective rate of 10.75% as of March 22,
2000).
In addition, pursuant to the Amended Interim Agreement, the Company: (i) shall
not make capital expenditures in excess of $250,000 for the calendar quarter
ending March 31, 2000 and $500,000 for the calendar quarter ending June 30,
2000, in each case determined on a non-cumulative basis; (ii) shall maintain a
minimum shareholders' equity, together with the Notes, of at least $42 million;
(iii) shall not declare or pay any dividends; and (iv) shall not incur any
additional indebtedness in excess of $10,000 without the permission of the
Banks. The Company has continued its discussions with various banks concerning
the possible refinancing of its debt.
7
During the year ended December 31, 1999, the Company made $1,589,000 in
principal repayments under the Credit Facility from proceeds received from the
Southeast Group divestiture, proceeds from a mortgage transaction, and cash
provided by operations.
As of December 31, 1999, the Company had a working capital deficiency of $13.3
million. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
The Company's independent public accountants, Arthur Andersen LLP, have stated
in their audit report included in this Annual Report on Form 10-K that the
events of default under the Credit Facility raise substantial doubt about the
Company's ability to continue as a going concern. See page F-2. If the Company
is not able to favorably restructure its financing or if it continues to incur
significant operating losses, the Company may not be able to sustain its
operations and continue as a going concern.
THE COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ NATIONAL MARKET
On January 28, 1999, the Nasdaq Stock Market, Inc. ("Nasdaq") notified the
Company that the Common Stock was delisted from the Nasdaq National Market,
effective with the close of business, January 28, 1999, because of the Company's
inability to remain in compliance with certain maintenance standards required
for continued listing on the Nasdaq National Market. Presently, and since that
date, the Common Stock has been eligible to trade on the OTC Bulletin Board. The
delisting of the Common Stock from the Nasdaq National Market may substantially
reduce the liquidity of, and market for, such Common Stock.
SIGNIFICANT AMOUNTS OF ACQUIRED GOODWILL REDUCE THE COMPANY'S NET INCOME
As of December 31, 1999, $44.4 million, or 69.1%, of the Company's total assets
represented intangible assets arising from its acquisitions, of which $43.9
million was goodwill and $0.5 million was acquired developed technology. The
Company amortizes goodwill over a period of 30 years and acquired developed
technology over a period of seven years. Goodwill is an intangible asset that
represents the difference between the total purchase price of these acquisitions
and the amount of this purchase price allocated to the fair value of the net
assets acquired. The amortization in a particular period represents a non-cash
expense that reduces the Company's net income in that period. In addition, as
was the case when the Company sold three locations in December 1998 and January
1999, if the Company sells or liquidates its assets, the Company cannot be sure
that the value of these intangible assets would be recovered. In addition, the
Company cannot be certain that it will be able to fully realize these intangible
assets over their amortization periods.
CHANGES IN TECHNOLOGY COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS
The announcement or introduction of competing services or products incorporating
new technologies or the emergence of new technical standards could render some
or all of the Company's services or products unmarketable. The Company believes
that its future success depends on its ability to enhance its current services
or products and develop new services or products that address the increasingly
sophisticated needs of its clients. The failure of the Company to develop and
introduce enhancements and new services in a timely and cost-effective manner in
response to changing technologies or client requirements could have a material
adverse effect on the Company's business, financial condition or results of
operations. Further, many of the current services and products offered by the
Company use technologies that are non-proprietary in nature. The Company cannot
be certain that it will be able to obtain the rights to use any newly developed
technologies, that it will be able to effectively implement these technologies
on a cost-effective basis or that these technologies will not ultimately render
obsolete the Company's role as a third party provider of document management
services and products.
8
THE COMPANY OPERATES IN A HIGHLY COMPETITIVE INDUSTRY
The Company operates in a competitive environment. The document management
services industry is highly fragmented and has relatively low barriers to entry.
A significant source of competition results from the in-house document handling
capability of businesses within the Company's target markets, referred to as the
"unvended" part of the market. These businesses may not increasingly outsource
their document management requirements and other businesses may develop
capabilities to keep in-house many of the document management services they
currently outsource. Many of the Company's competitors are larger than the
Company, have greater financial and other resources than the Company and operate
in broader geographic areas than the Company. Other companies may choose to
enter the document management services industry in the future. Further, if the
Company enters new geographic areas, it will likely encounter significant
competition from established competitors in each of these new areas. As a result
of this competitive environment, the Company may lose clients or have difficulty
in acquiring new clients, and its business, financial condition and results of
operations may be adversely affected.
THE COMPANY MUST BE ABLE TO ATTRACT AND RETAIN KEY MANAGEMENT AND OTHER
PERSONNEL
In September 1998, November 1998 and April 1999, respectively, the Company's
Chief Executive Officer, Chief Operating Officer and Chief Financial Officer
resigned from their employment with the Company, and since September 1998, the
Company has been operating under an Acting Chief Executive Officer. In addition,
the Company's operations depend on the performance of its executive management
team, the senior management of its business units and the quality and
effectiveness of its sales force. If any of the executive management team or
senior management of the business units is unable or unwilling to continue in
their present roles, or if the Company is unable to attract and retain other
skilled employees, the Company's business, financial condition and results of
operations could be materially and adversely affected.
The Company's future success and plans for growth also depend on its ability to
attract, train and retain personnel in all areas of its business. There is
strong competition for qualified personnel in the document management services
industry and in many of the geographic markets in which the Company competes.
The current federal minimum wage is $5.15 per hour and increases in the minimum
wage at the federal or state level could materially adversely affect the
Company's business, financial condition and results of operations. In addition,
individual states have increased or may increase their minimum wage above the
federal minimum.
THE COMPANY DEPENDS ON SELECTED MARKETS FOR ITS REVENUES
The Company derives its revenues primarily from its target markets, including
the health care, financial services and engineering industries. Fundamental
changes in the business practices of any of these markets, whether due to
regulatory, technological or other developments, could cause a material
reduction in demand by these clients for the services offered by the Company.
Any such reduction in demand may have a material adverse effect on the Company's
business, financial condition and results of operations.
9
THE COMPANY'S QUARTERLY RESULTS OF OPERATIONS MAY FLUCTUATE
The Company's results of operations may fluctuate in any given year, and from
quarter to quarter. Factors that may cause material fluctuations in quarterly
results of operations include:
o the gain or loss of significant clients;
o increases or reductions in the scope of services performed for
significant clients;
o the timing or completion of significant projects;
o the relative mix of higher and lower margin projects;
o changes in pricing strategies, capital expenditures and other costs
relating to the expansion of operations;
o the hiring or loss of personnel;
o other factors that may be outside of the Company's control;
o the timing and structure of acquisitions; and o the timing and
magnitude of costs related to acquisitions.
As a result of the foregoing and other factors, the Company may experience
material fluctuations in its results of operations on a quarterly basis, which
may contribute to volatility in the price of the Common Stock. Given the
possibility of these fluctuations, the Company believes that quarterly
comparisons of the results of its operations during any fiscal year may not be
meaningful and that results for any one fiscal quarter may not be indicative of
future performance.
THE COMPANY MAY INCUR LIABILITY FOR BREACH OF CONFIDENTIALITY
A substantial portion of the Company's business involves the handling of
documents containing confidential and other sensitive information. The Company's
unauthorized disclosures of this type of information could result in liability
to the Company and could have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS RELATED TO ENVIRONMENTAL CONDITIONS
For part of its operations the Company uses chemical products that are regulated
under federal, state and local laws as hazardous substances and which produce
wastes that also are regulated under these laws. The Company is not currently
aware of any environmental conditions relating to present or past waste
generation at or from these operations that would be likely to have a material
adverse effect on its business, financial condition or results of operations.
However, any environmental liabilities incurred by the Company under these laws
could have a material adverse effect on the Company's business, financial
condition and results of operations.
PUBLIC SECTOR MARKET AND CONTRACTING RISKS
Though a modest portion of the Company's present business involves public sector
contracts, the Company anticipates growth in the portion of its business coming
from contracts with local, state and federal government agencies. Business with
governmental agencies may be easily terminated or lost because public sector
contracts generally:
o are subject to detailed regulatory requirements;
o are subject to public policies and funding priorities;
o may be conditioned upon the continuing availability of public funds,
o are subject to certain pricing constraints; and
o may be terminated for a variety of factors, including when it is in the
best interests of the particular governmental agency.
Loss or termination of significant public sector contracts due to these factors
or others unique to contracts with governmental entities may have a material
adverse effect on the Company's future business, financial condition and results
of operations.
10
THE PRICE OF THE COMMON STOCK IS SUBJECT TO SIGNIFICANT VOLATILITY
The market price for the Common Stock has been highly volatile. This volatility
may adversely affect the price of the Common Stock in the future. Prices for the
Common Stock will be determined by the marketplace and may be influenced by many
factors, including;
o the depth and liquidity of the trading market;
o investor perception of the Company;
o general economic and market conditions and trends;
o the Company's financial results;
o quarterly variations in the Company's financial results;
o changes in earnings estimates by analysts and reported earnings that
vary from such estimates;
o press releases by the Company or others; and
o developments affecting the Company or its industry.
The stock market has, on occasion, experienced extreme price and volume
fluctuations which have often been unrelated to the operating performance of the
affected companies.
SECURITY PROBLEMS WITH THE INTERNET MAY INHIBIT THE DEVELOPMENT OF THE COMPANY'S
INTERNET APPLICATION SERVICE STRATEGY
The secure transmission and placement of confidential information over the
Internet is essential to the success of the Company's recent introduction of an
Internet Application Service Provider ("ASP") strategy. This strategy focuses on
placing customer data on a secure web site and enabling customers to access this
data via the Internet. Substantial security breaches on the this system or other
Internet-based systems could significantly harm this aspect of the Company's
business. Somebody who is able to circumvent the security systems could obtain
access to the otherwise confidential information of the Company's clients.
Security breaches also could damage the Company's reputation and expose the
Company to a risk of loss or litigation and possible liability. The Company has
invested funds to protect against security breaches and their consequences and
may incur additional expense to remedy any security breaches if they occur. The
Company's insurance policies may not be adequate to reimburse the Company for
losses caused by security breaches. There can be no guarantee that these
security measures will prevent security breaches. Customers generally are
concerned with security and privacy on the Internet and any publicized security
problems could inhibit the growth of the Internet and, therefore, the Company's
ASP service.
PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS AND
PENNSYLVANIA LAW COULD DETER TAKEOVER ATTEMPTS
Some provisions of the Company's amended and restated articles of incorporation
(referred to as the "articles") and amended and restated bylaws (referred to as
the "bylaws") could delay or frustrate the removal of incumbent directors,
discourage potential acquisition proposals and proxy contests and delay, defer
or prevent a change in control of the Company, even if such events could be
beneficial, in the short term, to the interests of the shareholders. For
example, the articles allow the Company to issue preferred stock with rights
senior to those of the Common Stock without shareholder action and provide that
the Company's shareholders may call a special meeting of shareholders only upon
a request of shareholders owning at least 50% of the Company's capital stock.
The bylaws provide for the Board of Directors of the Company to be divided into
three classes of directors serving three-year staggered terms and that directors
may be removed only for cause.
The articles authorize the issuance of up to 40,000,000 shares of Common Stock
and 10,000,000 shares of preferred stock, no par value per share. The Board of
Directors of the Company has the power to determine the price and terms under
which preferred stock may be issued and to fix the terms. The ability of the
Board of Directors of the Company to issue one or more series of Preferred Stock
without shareholder approval, as well as certain applicable statutory provisions
under the Pennsylvania Business Corporation Law of 1988, as amended, could deter
or delay unsolicited changes in control of the Company by discouraging open
market purchases of the Common Stock or a non-negotiated tender or
11
exchange offer for Common Stock, which may be disadvantageous to the Company's
shareholders who may otherwise desire to participate in this type of transaction
and receive a premium for their shares.
The Pennsylvania Business Corporation Law contains a number of statutory
"anti-takeover" provisions applicable to the Company. One such provision
prohibits, subject to exceptions, a "business combination" with a shareholder or
group of shareholders (and certain affiliates and associates of such
shareholders) beneficially owning more than 20% of the voting power of a public
corporation (referred to as an "interested shareholder") for a five-year period
following the date on which the holder became an interested shareholder. This
provision may discourage open market purchases of a corporation's stock or a
non-negotiated tender or exchange offer for such stock and, accordingly, may be
considered disadvantageous by a shareholder who would desire to participate in
any such transaction. The Pennsylvania Business Corporation Law also provides
that directors may, in discharging their duties, consider the interests of a
number of different constituencies, including shareholders, employees,
suppliers, customers, creditors and the community in which it is located.
Directors are not required to consider the interests of shareholders to a
greater degree than other constituencies' interests. The Pennsylvania Business
Corporation Law expressly provides that directors do not violate their fiduciary
duties solely by relying on poison pills or the anti-takeover provisions of the
Pennsylvania Business Corporation Law.
ABSENCE OF DIVIDENDS
The Company has never declared or paid cash dividends on its Common Stock and
currently intends to retain all available funds for use in the operation and
expansion of its business. The Company does not anticipate that any cash
dividends on the Common Stock will be declared or paid in the foreseeable
future.
ITEM 2. PROPERTIES
In March 2000, the Company relocated its corporate headquarters to Fort
Washington, Pennsylvania, where it occupies 3,494 square feet maintained under a
lease expiring in February 2002. Previously, the Company's headquarters offices
were located in Conshohocken, Pennsylvania where it had occupied 2,955 square
feet under a lease that expired in February 2000. In addition, as of December
31, 1999, the Company conducted operations through one mortgaged property and 29
other leased facilities in 14 states containing, in the aggregate, approximately
404,700 square feet. The Company's principal facilities are summarized in the
following table (alphabetized by state):
APPROXIMATE
LOCATION SQUARE FOOTAGE PRINCIPAL USE(S)
- -------- -------------- ----------------
Tempe, AZ 8,800 Document management operations, offices
Hayward, CA 15,600 Document management operations, offices
Emeryville, CA 24,000 Warehouse
Sacramento, CA 6,000 Document management operations
Chesterton, IN* 41,000 Offices, document management operations
Chesterton, IN 11,000 Warehouse
Indianapolis, IN 300 Offices
Valparaiso, IN 28,000 Warehouse
Monroe, LA 65,000 Retail, document management operations, offices
Bossier City, LA 4,000 Offices
Stoughton, MA 47,000 Document management operations, offices
Saginaw, MI 20,000 Document management operations, offices
Minnetonka, MN 7,000 Document management operations, offices
Lincoln, NE 4,300 Document management operations, offices
Lincoln, NE 6,900 Warehouse, offices
Millwood, NY 1,000 Offices
Syracuse, NY 1,200 Warehouse
Syracuse, NY 9,000 Document management operations, offices
12
Dayton, OH 12,500 Document management operations, offices
Eugene, OR 11,400 Document management operations, offices
Eugene, OR 1,500 Warehouse
Eugene, OR 2,300 Document management operations, offices
Portland, OR 13,500 Document management operations, offices
Philadelphia, PA 2,000 Document management operations, offices
Dallas, TX 15,000 Document management operations, offices
Houston, TX 20,000 Document management operations, offices
Houston, TX 3,600 Document management operations, offices
Forest, VA 21,500 Document management operations, offices
Richmond, VA 1,300 Offices
- ------------
* Mortgaged property
In April 1999, the Company executed a $900,000 mortgage loan with a lender
relating to the Chesterton facility which is mortgaged by the Company. The
Company received $869,000 in proceeds, net of closing costs, from the
transaction. Interest on the loan is at the greater of 8.50% or the U.S.
Treasury rate plus 375 basis points (9.72% at March 22, 2000). The loan carries
a ten-year term (maturing May 2009), is secured by the mortgaged property, and
requires equal monthly repayments of principal and interest of $10,000. At March
22, 2000 the Company owed $893,000 remaining on the mortgage.
The Company believes that its properties are generally well maintained, in good
condition and adequate for its present needs, and that suitable additional or
replacement space will be available when needed. The Company owns or leases
under both operating and capital leases substantial computer, scanning and
imaging equipment which it believes to be adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time a party to litigation arising in the ordinary
course of its business. The Company is not subject to any pending material
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on December 8, 1999. Andrew
R. Bacas and Lewis E. Hatch, Jr., the director nominees set forth in the Notice
of Annual Meeting, were elected to serve as directors. The following table gives
the details of the votes cast for each director nominee:
Nominee Votes For Votes Abstained
------- --------- ---------------
Andrew R. Bacas 4,936,678 410,184
Lewis E. Hatch, Jr. 4,571,865 774,997
The Company's 1997 Incentive Plan was approved with 2,711,637 votes favoring
approval, 386,320 opposing, and 101,810 abstaining. An amendment to the 1997
Incentive Plan to increase the number of shares of Common Stock available for
awards under the plan was approved with 2,322,229 votes favoring approval,
806,868 opposing, and 70,670 abstaining.
13
ITEM 4(A). EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers and their respective ages and positions are as
follows:
NAME AGE POSITION
--- --------
Andrew R. Bacas.............. 41 Acting Chief Executive Officer, Secretary and Vice Chairman of the Board of Directors
Blair Hayes.................. 37 President, Chief Operating Officer and Director
Mark P. Glassman............. 36 Executive Vice-President - Chief Financial Officer and Treasurer
Rex Lamb..................... 41 Executive Vice-President - Chief Technology Officer and Director
Mitchell J. Taube............ 43 Executive Vice-President - Marketing & Sales Development and Director
ANDREW R. BACAS has served as the Company's Acting Chief Executive Officer
and Vice Chairman since September 1998. He is also a founder of the Company and
has served as a director since its inception. Mr. Bacas joined GBL Capital
Corporation (a firm engaged to manage the daily business operations of ImageMax
prior to December 1997) in May 1997 and served as the Company's Senior Vice
President -- Corporate Development from December 1997 to September 1998, when he
became Acting Chief Executive Officer of the Company. From 1992 to May 1997, Mr.
Bacas was an associate and later a Vice-President -- Corporate Finance of
Simmons & Company International, an investment bank to the international oil
service and equipment industry. From 1991 to 1992, Mr. Bacas was a financial
analyst for the Upstream Business Unit at Exxon Company, USA. From 1984 to 1991,
Mr. Bacas was a Naval Flight Officer in the United States Navy. Mr. Bacas has an
undergraduate degree in Engineering from Yale University and an MBA from the
Wharton School of the University of Pennsylvania.
BLAIR HAYES served as the Company's Executive Vice-President - Operations from
May 1999 until his promotion to President and Chief Operating Officer in
March 2000 (effective April 1, 2000), at which time he was also elected to serve
on the Board of Directors. From 1998 to May 1999, Mr. Hayes served as
General Manager and Business Unit Support Manager/Group Leader for the Company.
Mr. Hayes served as Vice President of Advanced Image Management, Inc. from 1988
until its acquisition by the Company in 1998. From 1985 to 1988, Mr. Hayes was
President of Image Capture Limited, which was merged to form Advanced Image
Management, Inc. in 1988. Prior to 1985, Mr. Hayes was Operations Manager of
Mi-Kal County Matic, Inc., a family-owned micrographic service bureau. Mr. Hayes
has spent his entire career in the document management services industry.
MARK P. GLASSMAN has served as the Company's Chief Financial Officer since May
1999. Mr. Glassman joined the Company in February 1998 as Corporate Controller
and was promoted to Chief Accounting Officer in October 1998. From 1993 to
February 1998, Mr. Glassman was employed at Right Management Consultants, Inc.,
a publicly-held international consulting firm, where he held various financial
and operational positions, including Corporate Accounting Director and Corporate
Director of Planning and Development. From 1987 to 1993, Mr. Glassman was an
auditor with Touche Ross & Co. and Deloitte & Touche. Mr. Glassman has an
undergraduate degree in Accounting from Temple University and is a certified
public accountant.
REX LAMB has managed the Company's Lincoln, Nebraska business unit and has
served as a director of the Company since December 1997. In March 2000, Mr. Lamb
was appointed to the position of Executive Vice-President - Chief Technology
Officer (effective April 1, 2000), whereby he will lead efforts around software
development, Internet-based services, and telecommunications. Mr. Lamb founded
DocuTech, Inc., a document management services company, in 1991 and served as
its President from inception until its acquisition by the Company in December
1997. Mr. Lamb co-founded DocuTech Data Systems, Inc., a provider of
open-architecture document-scanning software products, in 1994 and served as its
President since inception until its acquisition by the Company in December 1997.
Mr. Lamb has an undergraduate degree in Education from the University of
Nebraska.
MITCHELL J. TAUBE has managed the Company's Millwood, New York business unit
since December 1997 and has served as a director of the Company since June 1998.
In March 2000, Mr. Taube was appointed to the position of Executive
Vice-President - Marketing & Sales Development (effective April 1, 2000),
whereby he will lead efforts around development of Web and Intranet initiatives,
collateral and sales aids, telemarketing and direct mail, national sales
compensation, and training and sales development. Mr. Taube is a director of
Briarcliff Manor Education Foundation and currently serves on the Service
Company Executive Committee of the Association for Information and Image
Management International. Mr. Taube has an undergraduate degree and an MBA from
Hofstra University.
14
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock formerly traded on the Nasdaq National Market under
the symbol "IMAG" and presently trades on the OTC Bulletin Board under the same
symbol. Shares of the Company's Common Stock were first traded publicly on
December 4, 1997. The following table sets forth, for the periods indicated, the
high and low bid prices per share of the Common Stock, as reported on the Nasdaq
National Market or the OTC Bulletin Board, as applicable, for the two most
recent fiscal years of the Company.
HIGH LOW
---- ---
1998 First Quarter............................................. $11 5/8 $5 5/8
1998 Second Quarter............................................ $8 1/2 $5
1998 Third Quarter............................................. $6 $2
1998 Fourth Quarter............................................ $2 11/16 $11/16
1999 First Quarter............................................. $2 3/16 $1/2
1999 Second Quarter............................................ $1 27/32 $1 1/8
1999 Third Quarter............................................. $2 1/2 $1 3/4
1999 Fourth Quarter............................................ $2 3/8 $1 3/8
2000 First Quarter (through March 22, 2000).................... $2 1/16 $1 1/4
On March 22, 2000, the closing bid price for a share of Common Stock as reported
by the OTC Bulletin Board was $1 5/8 and the number of holders of record of the
Common Stock was 99. The over-the-counter market quotations reflect inter-dealer
prices, without retail markup, markdown or commission and may not necessarily
represent actual transactions.
On February 15, 2000, the Company completed a $6 million financing transaction
involving the sale of convertible subordinated notes with warrants to TDH III
L.P., Dime Capital Partners, Inc. and Robert E. Drury. The Notes are due and
payable upon the fourth anniversary of the date of issuance and bear an interest
rate of nine percent (9%) payable semi-annually. The Company cannot voluntarily
prepay the Notes. The Notes are convertible into the Company's Common Stock, no
par value, at a price of $3.50 per share, which price may be adjusted downward
if, under certain circumstances, the holders thereof convert the Notes prior to
the third anniversary of the date of issuance. The Company also issued Warrants
to the Investors to purchase an additional 1,800,000 shares of Common Stock of
the Company (subject to downward adjustment under certain circumstances), no par
value, at $3.50 per share.
On January 28, 1999, Nasdaq notified the Company that the Common Stock was
delisted from the Nasdaq National Market, effective with the close of business,
January 28, 1999, due to the Company's inability to remain in compliance with
certain maintenance standards required for continued listing on the Nasdaq
National Market. Presently, and since that date, the Common Stock has been
eligible to trade on the OTC Bulletin Board. The OTC Bulletin Board is operated
by the National Association of Securities Dealers as a forum for electronic
trading and quotation.
The Company has not paid any dividends since its inception and currently intends
to retain all earnings for use in its business. In addition, the Company is
subject to certain restrictions with respect to the payment of dividends on its
Common Stock, pursuant to the provisions contained in its credit facility. The
declaration and payment of dividends in the future will be determined by the
Company's Board of Directors in light of conditions then existing, including the
Company's earnings, financial condition, capital requirements and other factors.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data presented below have been
derived from the Company's consolidated financial statements for each of the
periods indicated. The data set forth below is qualified by reference to and
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Consolidated Financial
Statements included as Items 7 and 8 in this Annual Report on Form 10-K.
15
STATEMENT OF OPERATIONS DATA:
FROM INCEPTION
(NOVEMBER 12, 1996)
YEAR ENDED DECEMBER 31, TO DECEMBER 31,
---------------------------------------
1999 1998 1997 1996
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues................................................. $60,223 $64,576 $ 3,111 $ --
Cost of revenues......................................... 39,264 45,404 2,221 --
------- ------- ------- ------
Gross profit................................ 20,959 19,172 890 --
Selling and administrative expenses...................... 16,378 17,606 2,074 23
Amortization of intangibles.............................. 1,844 1,482 112 --
Restructuring costs...................................... 827 1,387 -- --
Investment advisory fees and expenses.................... 550 -- -- --
Loss on sale of business units........................... -- 4,995 -- --
Special compensation charge.............................. -- -- 2,235 --
Acquired in-process research and development
charge.............................................. -- -- 4,000 --
------- ------- ------- ------
Operating income (loss)..................... 1,360 (6,298) (7,531) (23)
Interest expense......................................... 2,131 2,133 8 --
------- ------- ------- ------
Net loss................................................. $ (771) $(8,431) $(7,539) $ (23)
======= ======= ======= ======
Basic and diluted net loss per share..................... $ (0.12) $ (1.40) $ (8.13) $(0.04)
======= ======= ======= ======
Shares used in computing basic and diluted
net loss per share.................................. 6,579 6,034 928 550
======= ======= ======= ======
Depreciation and amortization............................ $ 3,629 $ 3,047 $ 206 --
======= ======= ======= ======
Gross profit percentage.................................. 34.8% 29.7% 28.6%
==== ==== ====
Selling and administrative expenses as a
percentage of revenues.............................. 27.2% 27.3% 66.7%
==== ==== ====
BALANCE SHEET DATA:
DECEMBER 31,
----------------------------------------------------------
1999 1998 1997 1996
---- ---- ---- ----
(IN THOUSANDS)
Cash and cash equivalents................................ $ 1,719 $ 736 $ 1,310 $ 62
Working capital (deficiency)............................. (13,281) (17,228) 2,994 57
Intangible assets........................................ 44,448 46,607 32,996 --
Total assets............................................. 64,365 69,574 48,228 62
Total debt............................................... 19,597 20,496 593 --
Shareholders' equity..................................... 36,073 36,652 40,018 57
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and related notes thereto and the "Selected Consolidated
Financial Data" set forth in Item 6 of this Annual Report on Form 10-K. Except
for the historical information contained herein, this and other sections of this
Annual Report on Form 10-K contain certain forward-looking statements that
involve substantial risks and uncertainties. When used in this Annual Report on
Form 10-K, the words "anticipate," "believe," "estimate," "expect", and similar
expressions, as they relate to the Company or its management, are intended to
identify such forward-looking statements. The Company's actual results,
performance, or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements. Factors that could cause or
contribute to such differences include those set forth in "Business -- Risk
Factors."
INTRODUCTION
ImageMax was founded in November 1996 to become a leading, national
single-source provider of integrated document management solutions. See
"Business." The Company's revenues are derived from a broad range of media
conversion, storage and retrieval services, the sale of proprietary, open-
architecture software products which support digital imaging and indexing
services and the sale and service of a variety of document management equipment.
In connection with the Offering, the Company acquired 14 document management
service companies (the "Founding Companies"). Since the Offering through
December 31, 1998, the Company has acquired the Acquired Businesses. In December
1998 and January 1999, the Company sold facilities in Charlotte, NC, Cayce, SC,
and Cleveland, TN (the "Southeast Group"). In May 1999, the Company closed its
facility in Indianapolis, IN.
The Company's revenues consist of service revenues, which are generally
recognized as the related services are rendered, and product revenues, which are
recognized when the products are shipped to clients. Service revenues are
primarily derived from media conversion, storage and retrieval, imaging and
indexing of documents, and the service of imaging and micrographic equipment
sold. Product revenues are derived from equipment sales and software sales and
support. Cost of revenues consists principally of the costs of products sold and
wages and related benefits, supplies, facilities and equipment expenses
associated with providing the Company's services. Selling and administrative
("S&A") expenses include salaries and related benefits associated with the
Company's executive and senior management, marketing and selling activities
(principally salaries and related costs), and financial and other administrative
expenses.
The Company has incurred significant operating losses since inception, and as of
December 31, 1999 had an accumulated deficit of $16.8 million. In addition, as
more fully described under "Liquidity and Capital Resources," the Company is in
default of its credit facility with its banks under which it has borrowed $13.2
million as of March 22, 2000, which raises substantial doubt about the ability
of the Company to continue as a going concern. See "Business -- Risk Factors"
and report of independent public accountants included in this Annual Report on
Form 10-K.
HISTORICAL RESULTS OF OPERATIONS
Years Ended December 31, 1999
The results of operations for the year ended December 31, 1999 include the
revenues, cost of revenues and S&A expenses of all units of the Company for the
entire year. See results of historical operations for the years ended December
31, 1999 compared to historical results of operations for the year ended
December 31, 1998 for a discussion of historical 1999 operating results.
Acquisitions that were completed by March 31, 1998 are analyzed as "same-unit"
results for purposes of comparing historical results of operations for the year
ended December 31, 1999. Results of operations excluding the Southeast Group and
the Indianapolis business unit are explained in some cases due to the fact that
these units were divested and closed prior to December 31, 1999.
17
Year Ended December 31, 1998
The results of operations for the year ended December 31, 1998 include the
revenues, cost of revenues and S&A expenses of the Founding Companies for the
entire year, and for Acquired Businesses from the dates of their acquisitions.
See results of historical operations for the year ended December 31, 1999 and
1998 compared to supplemental pro forma, as adjusted, results of operations for
the year ended December 31, 1997 for a discussion of historical 1998 operating
results.
Year ended December 31, 1997
The results of operations for the year ended December 31, 1997 include the
revenues, cost of revenues and S&A expenses for the Founding Companies only from
December 9, 1997, the date of their acquisitions.
Revenues and Cost of Revenues. Revenues and cost of revenues for the year ended
December 31, 1997 consisted entirely of the operating results of the Founding
Companies from December 9, 1997. Prior to the acquisitions of the Founding
Companies, the Company generated no operating revenues.
Selling and Administrative Expenses. S&A expenses amounted to $2.1 million for
the year ended December 31, 1997. These expenses consisted primarily of Founding
Companies' administrative expenses and of management fees paid to GBL Capital
Corporation, including $0.5 million pursuant to a management agreement.
Special Compensation Charge. In 1997, the Company sold a total of 259,135 shares
of Common Stock to officers and directors of ImageMax and to certain management
personnel of the Founding Companies, at prices of $1.18, $2.36 and $4.73 per
share. As a result, the Company recorded a non-recurring, non-cash compensation
charge of approximately $2.2 million, representing the difference between the
amount paid for the shares and the deemed value for accounting purposes (based
on the Offering price of $12.00 per share).
Acquired In-process Research and Development Charge. In connection with one of
the Founding Companies, the Company incurred a one-time charge of $4.0 million
for acquired in-process research and development relating to the value of
certain software development projects underway as of the acquisition.
HISTORICAL RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND SUPPLEMENTAL PRO FORMA, AS ADJUSTED, RESULTS OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 1997.
Prior to their acquisitions, the Founding Companies were managed throughout 1997
as independent private companies, and their results of operations reflect
different tax structures (S corporations and C corporations) which influenced,
among other things, their historical levels of owners' compensation. Certain
former owners and key employees of the Founding Companies agreed to certain
reductions in their historical compensation subsequent to the Offering.
In July 1996, the Commission issued Staff Accounting Bulletin No. 97 ("SAB 97")
relating to business combinations immediately prior to an initial public
offering. SAB 97 requires that these combinations be accounted for using the
purchase method of acquisition accounting. Under the purchase method of
accounting, one of the companies must be designated as the accounting acquiror.
In the Offering, ImageMax was identified as the accounting acquiror.
Accordingly, $33.1 million of goodwill relating to the Founding Companies has
been amortized as a non-cash charge to the statement of operations principally
over a 30-year period and developed technology of $0.8 million has been
amortized over a seven-year period. The annual pro forma impact of this
amortization expense in 1997 was $1.2 million, of which $0.8 million is
non-deductible for tax purposes. This factor will tend to cause the effective
tax rate to be higher than the statutory rate.
18
For purposes of discussion, the following table presents supplementary pro
forma, as adjusted, results of operations for the year ended December 31, 1997
as if the acquisitions of the Founding Companies and the Offering occurred on
January 1, 1997. The supplemental pro forma, as adjusted, results do not reflect
the acquisition of the Acquired Businesses. The supplemental pro forma, as
adjusted, results are not necessarily indicative of the results the Company
would have obtained had these events actually then occurred or of the Company's
future results. Management believes the following presentation is informative in
analyzing the business.
HISTORICAL RESULTS SUPPLEMENTAL PRO
FOR THE YEAR ENDED FORMA, AS ADJUSTED
DECEMBER 31, FOR THE YEAR ENDED
-------------------------------
1999 1998 DECEMBER 31, 1997
---- ---- -----------------
(IN THOUSANDS)
Revenues:
Services........................ $47,960 79.6% $49,387 76.5% $35,898 73.4%
Products........................ 12,263 20.4 15,189 23.5 13,032 26.6
------- ----- ------- ----- ------- -----
60,223 100.0 64,576 100.0 48,930 100.0
------- ----- ------- ----- ------- -----
Cost of revenues:(1)
Services........................ 29,615 49.2 33,252 51.5 22,914 46.8
Products........................ 7,864 13.1 10,587 16.4 8,695 17.8
Depreciation.................... 1,785 3.0 1,565 2.4 1,317 2.7
------- ----- ------- ----- ------- -----
39,264 65.2 45,404 70.3 32,926 67.3
------- ----- ------- ----- ------- -----
Gross profit................ 20,959 34.8 19,172 29.7 16,004 32.7
Selling and administrative
expenses(2)(3)(4)............... 16,378 27.2 17,606 27.3 12,719 26.0
Amortization of intangibles(6)..... 1,844 3.1 1,482 2.3 1,195 2.4
Restructuring costs................ 827 1.4 1,387 2.2 -- --
Investment and advisory fees
and expenses.................... 550 0.9 -- -- -- --
Loss on sale of business units..... -- -- 4,995 7.7 -- --
Special compensation charge(5)..... -- -- -- -- 2,235 4.6
------- ----- ------- ----- ------- -----
Operating income (loss)..... 1,360 2.3 (6,298) (9.7) (145) (0.3)
Interest expense(7)................ 2,131 3.5 2,133 3.4 70 0.1
Interest income.................... -- -- -- -- (94) (0.2)
------- ----- ------- ----- ------- -----
Loss before income taxes.... (771) (1.3) (8,431) (13.1) (121) (0.2)
Income tax provision(8)............ -- -- -- -- 1,139 2.3
------- ----- ------- ----- ------- -----
Net loss........................... $ (771) (1.3)% $(8,431) (13.1)% $(1,260) (2.6)%
======= ====== ======= ====== ======= =====
UNLESS OTHERWISE INDICATED, THE FOLLOWING FOOTNOTES APPLY ONLY TO THE
SUPPLEMENTAL PRO FORMA, AS ADJUSTED, OPERATING RESULTS FOR THE YEAR ENDED
DECEMBER 31, 1997.
- ------------
(1) Includes a pro forma adjustment to increase cost of revenues to reflect the
Company's new operating leases on facilities at certain Founding Companies.
(2) Reflects a pro forma reduction in compensation to the former owners of the
Founding Companies to which they have agreed prospectively.
(3) Includes compensation of $610,000 annually based upon employment agreements
with the Company's executive management.
(4) Includes non-recurring transaction costs of $742,000 incurred by the
Founding Companies in connection with their acquisitions.
19
(5) Includes a non-recurring, non-cash special compensation charge. See Note 10
to the Consolidated Financial Statements.
(6) Includes amortization on the $33.1 million of goodwill recorded as a result
of the acquisitions of the Founding Companies over an estimated life of
principally 30 years and amortization of acquired developed technology of
$0.8 million over an estimated life of seven years. Excludes a charge of
$4.0 million for acquired in-process research and development.
(7) Reflects adjustment for the elimination of interest expense resulting from
the repayment of debt paid from the net proceeds of the Offering.
(8) Reflects an estimated corporate income tax rate of 39.3% before considering
the non-deductibility of approximately $0.8 million of annual amortization
of intangible assets and the $2.2 million special compensation charge.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR
ENDED DECEMBER 31, 1998
Revenues
Total Revenues. Revenues decreased $4.4 million, or 6.7%, from $64.6 million in
1998 to $60.2 million in 1999. Service revenues decreased 2.9% and comprised
79.6% of total revenues in 1999 as compared to 76.5% in 1998. In 1999, product
revenues decreased 19.3% and comprised 20.4% of total revenues in 1999 as
compared to 23.5% in 1998.
The decrease in total revenues was comprised of a same-unit decrease of $8.7
million (primarily attributed to the divested Southeast Group and closed
Indianapolis operations) and an offsetting $4.4 million increase attributable to
acquisitions subsequent to March 31, 1998. Excluding the impact of the Southeast
Group and Indianapolis operations, same-unit revenue increased $0.4 million. The
increase relates to increased service revenue (primarily due to increased
digital services) offset by a volume decline in software product sales volume.
Gross Profit
For the year ended December 31, 1999, gross profit increased by $1.8 million, or
9.3%, as compared to the corresponding period in 1998, while as a percentage of
total revenues, gross profit increased to 34.8% from 29.7%. These increases were
due to an increase of $1.7 million (2.9% of revenues) attributable to
acquisitions subsequent to March 31, 1998 and an increase of $0.2 million
attributable to same-unit gross profit increases, offset by a $0.1 million
decrease attributable to corporate expenses. Excluding the impact of the
Southeast Group and Indianapolis operations, same-unit gross profit growth was
$1.8 million, primarily due to improved production efficiencies in the Virginia
and Massachusetts business units, increased digital services revenues (which
typically carry a higher gross profit percentage) and an offsetting decline
resulting from a lower volume of digital imaging software sales and associated
development costs.
Selling and Administrative Expenses
For the year ended December 31, 1999, S&A expenses decreased by $1.2 million, or
7.0%, as compared to the year ended December 31, 1998. This decrease is
comprised of: (1) $2.2 million attributable to same-unit S&A expenses; and (2)
an offsetting increase of $1.0 million attributable to acquisitions subsequent
to March 31, 1998. Excluding the impact of the Southeast Group and Indianapolis
operations, same-unit S&A decreased $0.2 million. The decrease is partially
attributable to the migration to a regional structure in the West and Midwest,
as well as a reduction in S&A at several units as a result of administrative and
sales force reductions.
Restructuring Costs
For the year ended December 31, 1999, the Company recorded a restructuring
charge of $0.8 million, attributable to the closing of the Indianapolis business
unit, totaling $0.6 million (including a write-off in related goodwill of $0.3
million, severance payments, and lease termination costs), and $0.2 million of
executive severance payments. For the year ended December 31, 1998, the Company
recorded a restructuring charge of $1.4 million, primarily for severance
payments related to headcount reductions at the corporate office and a business
unit and facility costs associated with business unit consolidations.
20
Investment Advisory Fees and Expenses
In 1999, the Company incurred a charge of $0.6 million representing fees and
expenses related to the pursuit of strategic alternatives. In February 2000, the
Company closed on a $6 million convertible subordinated debt financing (see
"Recent Developments").
Loss on Sale of Business Units
In 1998, the Company incurred a loss of $5.0 million, related to the sales in
December 1998 and January 1999 of facilities in Charlotte, NC, Cayce, SC and
Cleveland, TN and represents the difference between the net proceeds from the
transactions and the net asset value of these locations, including $4.2 million
of goodwill.
Operating Income (Loss)
Operating income increased by $7.7 million, from an operating loss of $6.3
million in 1998 to operating income of $1.4 million in 1999. Excluding the
impact of restructuring costs, investment advisory fees and expenses, and loss
on sale of business units, operating income increased $2.7 million, or 3,164%.
This increase resulted from: (1) an increase of $2.2 million in same-unit
operating income; (2) an increase of $0.6 million attributable to acquisitions
subsequent to March 31, 1998; and (3) an offsetting increase in corporate
expenses of $0.1 million. Excluding the impact of the Southeast Group and
Indianapolis operations, same-unit operating income growth amounted to $1.8
million, or 47%. This increased efficiency resulted in same-unit operating
income, excluding the results of the Southeast Group and Indianapolis
operations, which was 11.9% of sales for 1999, versus 8.1% for 1998. This
increase was due to a higher mix of service sales (as opposed to product sales),
efficiencies at the Virginia and Massachusetts business units as described
above, and cost savings in S&A expenses also described above.
Interest Expense
Interest expense was $2.1 million in 1998 and 1999. Interest expense for 1999
included $0.2 million relating to bank fees under the Forbearance Agreement and
Interim Agreement. Interest expense for 1998 included a write-off of debt
financing costs related to the Credit Facility of $0.8 million.
Income Tax Provision
Due to the Company's loss position, no income tax provision was recognized in
1999 or 1998.
Net Loss
Net loss amounted to $0.8 million in 1999 as compared to $8.4 million in 1998.
Excluding restructuring costs in 1999 and 1998, the loss on sale of business
units in 1998, and the investment and advisory fees in 1999, net income amounted
to $0.6 million in 1999 and net loss amounted to $2.0 million in 1998.
RESULTS OF HISTORICAL OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED
TO SUPPLEMENTAL PRO FORMA, AS ADJUSTED, RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1997
Revenues
Total Revenues. Revenues increased $15.6 million, or 31.9%, from $48.9 million
in 1997 to $64.6 million in 1998. Service revenues increased 37.6% and comprised
73.4% of total revenues in 1997 as compared to 76.5% in 1998. In 1998, product
revenues increased 16.6% and comprised 26.6% of total revenues in 1997 as
compared to 23.5% in 1998. In 1998, the Southeast Group, which was sold in
December 1998 and January 1999, had total revenues of $6.5 million, comprised of
$3.7 million (57.3%) of service revenues and $2.8 million (42.7%) of product
revenues.
21
The increase in total revenues was comprised of decrease of $0.6 million
attributable to the Founding Companies and an increase of $16.2 million
attributable to the Acquired Businesses, which are not included in the year
ended December 31, 1997. The Founding Companies' decrease was primarily due to:
(1) a decrease in volume at the Massachusetts, Indiana, and South Carolina
business units; (2) an offsetting increase in off-shore data entry sales volume;
and (3) an offsetting increase in digital imaging sales volume.
Service Revenues. Service revenues increased $13.5 million, or 37.6%, from $35.9
million in 1997 to $49.4 million in 1998. This increase was comprised of an
increase of $0.1 million attributable to the Founding Companies and an increase
of $13.4 million attributable to the Acquired Businesses, which are not included
in the year ended December 31, 1997. The Founding Companies' increase was
primarily due to: (1) a decrease in volume at the Massachusetts, Indiana, and
South Carolina business units; (2) an offsetting increase in off-shore data
entry sales volume; and (3) an offsetting increase at the Virginia business unit
attributable to several large digital conversion projects.
Product Revenues. Product revenues increased $2.2 million, or 16.6%, from $13.0
million in 1997 to $15.2 million in 1998. This increase was comprised of a
decrease of $0.6 million attributable to the Founding Companies and an increase
of $2.8 attributable to the Acquired Businesses, which are not included in the
year ended December 31, 1997. The Founding Companies' decrease was primarily due
to a decrease in volume at the Massachusetts, South Carolina, and Virginia
business units and an offsetting increase in digital imaging sales volume.
Cost of Revenues
Cost of Services. Cost of services increased $10.3 million, or 45.1%, from $22.9
million in 1997 to $33.3 million in 1998. As a percentage of service revenues,
cost of services amounted to 63.8% in 1997 as compared to 67.3% in 1998. In
1998, cost of services as a percentage of service revenues attributable to the
Founding Companies and Acquired Businesses amounted to 67.8% and 66.0%,
respectively. The increase in cost of services as a percentage of service
revenues of 3.5% was primarily due to an increase attributable to production
inefficiencies (such as high labor costs and rework) at the Massachusetts, South
Carolina, and Virginia business units and an offsetting decrease in service
costs at most other locations, particularly in the California and New York
business units, due to a combination of improved media conversion efficiency and
larger off-shore data entry sales volumes.
Cost of Products. Cost of products decreased $1.9 million, or 21.8%, from $8.7
million in 1997 to $10.6 million in 1998. As a percentage of product revenues,
cost of products amounted to 66.7% in 1997 as compared to 69.7% in 1998. In
1998, cost of products as a percentage of product revenues attributable to the
Founding Companies and Acquired Businesses amounted to 68.1% and 76.9%,
respectively. The increase in cost of products as a percentage of product
revenues of 3.0% was primarily due to an increase attributable to unfavorable
product mix at the Massachusetts, South Carolina, and Virginia business units
and an increase attributable to costs associated with the development of
software.
Depreciation. Depreciation increased $0.2 million, or 18.9%, from $1.3 million
in 1997 to $1.5 million in 1998, due primarily to depreciation of machinery and
other capital equipment of the Acquired Businesses.
Gross Profit
As a result of higher service and product revenues as described above, gross
profit increased $3.2 million, or 19.8%, from $16.0 million in 1997 to $19.2
million in 1998. In 1998, the Founding Companies experienced a decrease of $1.7
million and a decline in gross profit percentage of 3.0% as compared to the year
ended December 3, 1997. In 1998, Acquired Businesses contributed $4.9 million of
gross profit at a gross profit percentage of 30.1% and the former Southeast
Group had gross profit of $0.9 million and a gross profit percentage of 13.9%.
The Founding Companies' gross profit percentage decline was primarily due to:
(1) higher service costs in the Massachusetts, South Carolina and Virginia
business units, primarily due to production inefficiencies (such as high labor
costs and rework); (2) an increase attributable to costs associated with the
development of software; and (3) an offsetting decrease in service costs at most
other locations, particularly in the California and New York business units, due
to a combination of improved media conversion efficiency and larger off-shore
data entry sales volumes.
22
Selling and Administrative Expenses (Including Executive Compensation and
Founding Companies' Transaction Costs)
For the year ended December 31, 1998, S&A expenses increased by $4.9 million, or
38.4%, as compared to the year ended December 31, 1997. This increase is
comprised of: $3.2 million in corporate expenses; $3.8 million attributable to
the Acquired Businesses; an offsetting decrease of $1.4 million attributable to
the Founding Companies; and an offsetting decrease of $0.7 million related to
non-recurring transaction costs incurred by the Founding Companies for the year
ended December 31, 1997 in connection with their acquisitions.
The increase in corporate expenses is primarily due to: (1) the staffing of the
Company's headquarters function; (2) the integration of technology; (3) sales
development costs; (4) increased travel and marketing expenses; and (5) the
costs associated with being a public company. In September 1998, the Company
began implementing a cost reduction plan that included headcount reductions at
the corporate office that will provide annual cost savings of approximately $0.8
million. Because the corporate office was formed at the end of 1997, pro forma
results for 1997 exclude the majority of corporate overhead expenses.
In 1997, the Founding Companies' incurred approximately $0.7 million of
transaction costs in connection with their acquisition by the Company, which
primarily consisted of outside accounting and legal fees. The Company also
incurred additional S&A expenses of $0.6 million for its corporate function in
1997, excluding executive management compensation. Corporate S&A expenses
included $0.3 million of Company formation costs (primarily audit and other
public company expenses) triggered by the Offering in December 1997. Excluding
Founding Companies' transaction' costs and corporate S&A expenses, S&A expenses
and executive compensation amounted to $10.7 million in 1997.
Amortization of Intangible Assets
Amortization of $1.2 million in 1997 consists of the estimated amortization of
intangible assets (principally goodwill) related to the acquisitions of the
Founding Companies, as though they had taken place on January 1, 1996.
Amortization of $1.5 million in 1998 includes amortization of intangible assets
(principally goodwill) of the Founding Companies and amortization of goodwill
associated with the Acquired Businesses.
Restructuring Costs and Loss on Sale of Business Units
For the year ended December 31, 1998, the Company recorded a restructuring
charge of $1.4 million, primarily for severance payments related to headcount
reductions at the corporate office and a business unit and facility costs
associated with business unit consolidations. In addition, the Company incurred
a loss of $5.0 million, related to the sales in December 1998 and January 1999
of facilities in Charlotte, NC, Cayce, SC and Cleveland, TN and represents the
difference between the net proceeds from the transactions and the net asset
value of these locations, including $4.2 million of goodwill.
Operating Loss
Operating loss increased by $6.3 million, from an operating loss of $145,000 in
1997 to an operating loss of $6.3 million in 1998. In 1998, the former Southeast
Group incurred an operating loss of $0.7 million, or 10.2%, on total revenues of
$6.5 million. Excluding restructuring costs and loss on sale of business units,
operating income amounted to $84,000 in 1998.
Interest Income (Expense)
Interest income, net of interest expense, was $24,000 in 1997 as compared to
interest expense of $2.1 million in 1998. The increase in interest expense is
attributable to borrowings under the Credit Facility and the amortization and
write-off of the related debt financing costs.
23
Income Tax Provision
Due to the Company's loss position, no income tax provision was recognized in
1998. In 1997, the pro forma income tax provision amounted to $1.1 million. See
"Supplemental Pro Forma, as adjusted, Results of Operations for the Year Ended
December 31, 1997 Compared to the Year Ended December 31, 1996" for further
discussion of the 1997 pro forma income tax provision.
Net Loss
Net loss amounted to $1.3 million in 1997 as compared to $8.4 million in 1998.
Excluding restructuring costs and loss on sale of business units in 1998 and the
special compensation charge in 1997, net loss amounted to $2.0 million in 1998
and net income amounted to $1.0 million in 1997. The decrease in net income of
$3.0 million was primarily attributable to: (1) interest expense attributable to
borrowings under the Credit Facility used to finance the Acquired Businesses,
including the amortization of $0.9 million in related financing costs, and for
general corporate purposes; (2) an increase in S&A expenses; (3) an increase in
amortization attributable to the Acquired Businesses; (4) an offsetting increase
in gross profit; and (5) an offsetting increase attributable to no income tax
benefit.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalents of $1.7 million
and a working capital deficiency of $13.3 million. The working capital
deficiency was due to the classification of borrowings under the Credit Facility
of $18.5 million as a current liability as a result of the Company being in
default of certain financial and other covenants, as described below. In 1999,
cash provided by operating activities was $1.9 million due to improved operating
results leading to a lower net loss; cash provided by investing activities was
$0.2 million; and cash used in financing activities was $1.1 million. In 1998,
cash used in operating activities was $0.2 million; cash used in investing
activities was $19.2 million; and cash provided by financing activities was
$18.8 million. To continue its operations through the next 12 months, the
Company will need additional financing from sources other than funds received
through operations.
On March 30, 1998, the Company entered into the Credit Facility, providing a
revolving line of credit of $30 million in borrowings with the Banks. This
agreement was substantially amended in November 1998 as described below. Under
the initial terms of the Credit Facility, the Company could borrow up to $25
million to finance future acquisitions and up to $5 million for working capital
purposes. Prior to amendment, borrowings under the facility bore interest at
LIBOR or prime plus an applicable margin at the option of the Company. In
addition to interest and other customary fees, the Company was obligated to
remit a fee ranging from 0.2% to 0.375% per year on unused commitments. The
Credit Facility is secured by substantially all of the assets of the Company.
The Credit Facility is subject to certain financial covenants which pertain to
criteria such as minimum levels of cash flow, ratio of debt to cash flow, and
ratio of fixed charges to cash flow. Prior to amendment, borrowing under the
Credit Facility was contingent upon the Company meeting certain financial ratios
and other criteria.
An amendment to the Credit Facility dated November 16, 1998 amended certain
financial covenants for future periods, reduced the amount available under the
Credit Facility to the amount ($20.1 million) outstanding on November 6, 1998,
changed the maturity date to December 1, 1999 from December 31, 2002, required a
$5.0 million principal repayment or commitments therefor by December 31, 1998,
required all borrowings to bear a rate of prime plus an applicable margin and
changed other provisions. As of December 31, 1998, the Company was in default of
certain financial and other covenants under the amended Credit Facility,
including cash flow ratios and the requirement for a $5.0 million principal
repayment or commitments therefor. On March 29, 1999, the Company entered into
the Forbearance Agreement with the banks that are parties to its Credit
Facility. Pursuant to the Forbearance Agreement, the banks agreed to forbear
from exercising their rights and remedies with respect to all existing defaults
under the Credit Facility until the earlier of June 30, 1999 or the occurrence
of a default under the Forbearance Agreement or an additional default under the
Credit Facility. On June 30, 1999, the Forbearance Agreement expired. On
September 30, 1999, the Company entered into the Interim Agreement with the
Banks. On February 15, 2000, the Company amended its Interim Agreement dated
September 30, 1999. Simultaneously on February 15, 2000, the Company completed a
$6 million financing transaction involving the sale of the Notes with the
Warrants to TDH, Dime Capital Partners, Inc. and Robert E. Drury (see "Recent
24
Developments"). Pursuant to the Amended Interim Agreement, the banks have agreed
to forbear from exercising their rights and remedies with respect to all
existing defaults under the Credit Facility until the earlier of June 30, 2000
or the occurrence of a default under the Amended Interim Agreement or any
additional default under the Credit Facility.
For a summary of the terms of the Amended Interim Agreement please see "Recent
Developments" below.
During the year ended December 31, 1999, the Company made $1,589,000 in
principal repayments under the Credit Facility from proceeds received from the
Southeast Group divestiture, proceeds from a mortgage transaction, and cash
provided by operations.
The Company has halted its acquisition program, but continues to selectively
invest in equipment and technology to meet the needs of its operations and to
improve its operating efficiency.
YEAR 2000 COMPLIANCE
Throughout 1999, the Company performed an inventory of exposures of its internal
systems and identified operational steps necessary to deal with exposure to Year
2000 related problems. Remediation for all identified exposures to the Company's
internal systems and equipment was implemented prior to December 31, 1999. The
Company also conducted Year 2000 compliance testing on certain of its
proprietary software products licensed to clients in accordance with standards
promulgated by the British Standards Institute and provided upgraded versions of
its non-compliant products to all clients. The Company has not encountered any
significant problems in 2000. The total cost of the Year 2000 project incurred
through December 31, 1999 did not have a material effect on the results of
operations. In 2000 the Company will continue to monitor critical systems and
equipment. The Company does not expect costs related to Year 2000 efforts in
2000 to have a material effect on the results of operations.
RECENT DEVELOPMENTS
On February 15, 2000, the Company completed a $6 million financing transaction
involving the sale of the Notes with the Warrants to TDH, Dime Capital Partners,
Inc. and Robert E. Drury. The proceeds of this financing was used primarily to
repay senior bank debt and provide working capital for the Company.
Additionally, J.B. Doherty, the managing general partner of TDH, joined the
Company's Board of Directors.
The Notes are due and payable upon the fourth anniversary of the date of
issuance and bear an interest rate of nine percent (9%) payable semi-annually.
The Company cannot voluntarily prepay the Notes. The Notes are convertible into
the Company's Common Stock, no par value, at a price of $3.50 per share, which
price may be adjusted downward if, under certain circumstances, the holders
thereof convert the Notes prior to the third anniversary of the date of
issuance. The Company also issued Warrants to the Investors to purchase an
additional 1,800,000 shares of Common Stock of the Company (subject to downward
adjustment under certain circumstances), no par value, at $3.50 per share.
Simultaneous with this investment, the Company amended its Interim Agreement
with the Banks who are parties to its Credit Facility. Pursuant to the Amended
Interim Agreement, the Banks have agreed to forbear from exercising their rights
and remedies with respect to all existing defaults under the Credit Facility
until June 30, 2000 or the occurrence of a default under the Amended Interim
Agreement or any additional default under the Credit Facility.
Under the terms of the Amended Interim Agreement, the Company was required to
pay to the Banks $5 million from the proceeds of investment discussed above,
reducing the outstanding principal balance thereof to $13.4 million. Principal
repayments of $50,000, $125,000, $150,000, $250,000 and $300,000 are due
February 15, March 1, April 1, May 1 and June 1, 2000, respectively, with all
remaining sums payable on June 30, 2000. The Amended Interim Agreement also (i)
prohibits the Company from making capital expenditures in excess of $250,000 for
the quarter ending March 31, 2000 and $500,000 for the quarter ending June 30,
2000, in each case determined on a non-cumulative basis; (ii) requires that the
Company maintain a minimum stockholders' equity, together with the Notes, of $42
million; (iii) prohibits the Company from declaring or paying any dividends and
(iv) prohibits the Company from incurring any additional indebtedness in excess
of $10,000 without the permission of the Banks.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth on pages F-1 through F-20
hereto and is incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information contained under the caption "Election of Class II Directors" and
the information contained under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the caption "Executive Compensation" in the
Company's definitive proxy statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the caption "Stock Ownership of Principal
Shareholders and Management" in the Company's definitive proxy statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement is incorporated herein
by reference.
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See Index to the Consolidated Financial Statements which begin on page
F-1 of this Annual Report.
2. Financial Statement Schedules
See Schedule II -- Valuation and Qualifying Accounts on page F-21 of this
Annual Report.
3. Exhibits
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.1* Agreement and Plan of Reorganization dated September 9, 1997, by and
among the Company, DocuTech Data Systems, Inc., and Rex Lamb and Mark
Creglow (including escrow agreement).
2.2* Asset Purchase Agreement dated September 9, 1997 by and among the
Company, Rex Lamb and Vicki Lamb (including escrow agreement).
2.3* Agreement and Plan of Reorganization dated September 9, 1997, by and
among the Company, Utz Medical Enterprises, Inc., and David C. Utz,
Jr. (including escrow agreement).
2.4* Agreement and Plan of Reorganization dated September 9, 1997 by and
among Jane Semasko and John Semasko, Oregon Micro-Imaging, Inc. and
the Company (including escrow agreement).
2.5* Asset Purchase Agreement dated September 9, 1997 by and among
Spaulding Company, Inc., Semco Industries, Inc., and the Company
(including escrow agreement).
2.6* Asset Purchase Agreement dated September 9, 1997 by and among Total
Information Management Corporation and the Company (including escrow
agreement).
2.7* Stock Purchase Agreement dated September 9, 1997 by and among Ovidio
Pugnale, Image Memory Systems, Inc. and the Company (including escrow
agreement).
2.8* Agreement and Plan of Reorganization dated September 9, 1997, by and
among the Company, International Data Services of New York, Inc., and
Mitchell J. Taube and Ellen F. Rothschild-Taube (including escrow
agreement).
2.9* Stock Purchase Agreement dated September 9, 1997 by and among David
Crowder, TPS Micrographics, Inc. and the Company (including escrow
agreement).
2.10* Agreement and Plan of Reorganization dated September 11, 1997 by and
among the Company, Image and Information Solutions, Inc. and Gary
Blackwelder (including escrow agreement).
2.11* Agreement and Plan of Reorganization dated September 9, 1997 by and
among Madeline Solomon, David C. Yezbak, CodaLex Microfilming
Corporation and the Company (including escrow agreement).
2.12* Asset Purchase Agreement dated September 9, 1997 by and among Imaging
Information Industries, Inc., Gerald P. Gorman, Theodore J. Solomon,
Jr., Charles P. Yezbak, III, David C. Yezbak and the Company
(including escrow agreement).
28
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.13* Agreement and Plan of Reorganization dated September 9, 1997 by and
among Gerald P. Gorman, Theodore J. Solomon, Theodore J. Solomon, Jr.,
Charles P. Yezbak, III, David C. Yezbak, Laser Graphics Systems &
Services, Inc. and the Company (including escrow agreement).
2.14* Asset Purchase Agreement dated September 9, 1997 by and among DataLink
Corporation, Judith E. DeMott, Geri E. Davidson and the Company
(including escrow agreement).
2.15*** Asset Purchase Agreement, dated January 23, 1998, by and among
Integrated Information Services, L.L.C., Pettibone, L.L.C and Heisley
Holding, L.L.C. and ImageMax, Inc. (incorporated by reference to
Exhibit 2.1 of the Company's 8-K filed on February 3, 1998).
2.16*** Asset Purchase Agreement, dated February 9, 1998, by and among
Document Management Group Inc., Theron Robinson and ImageMax, Inc.
(incorporated by reference to Exhibit 2.1 of the Company's 8-K filed
on February 24, 1998).
2.17*** Asset Purchase Agreement, dated February 9, 1998, by and among
Image-Tec, Inc., Theron Robinson and Robert Robinson and ImageMax,
Inc. (incorporated by reference to Exhibit 2.2 of the Company's 8-K
filed on February 24, 1998).
3.1* Amended and Restated Articles of Incorporation of the Company.
3.2* Amended and Restated Bylaws of the Company.
4.1* Specimen Stock Certificate.
4.2* Shareholders Agreement between the Company and certain of its
shareholders dated November 19, 1996.
4.3* Amendment No. 1 to Shareholders Agreement dated November 19, 1996.
4.4* Form of Joinder to Shareholders Agreement executed by Bruce M. Gillis,
Sands Point Partners I, Wilblairco Associates, Osage Venture Partners,
Steven N. Kaplan, Brian K. Bergeron, James M. Liebhardt, G. Stuart
Livingston, III, Richard D. Moseley, David C. Utz, Jr., Bruce M.
Gillis, Custodian for Claire Solomon Gillis, Bruce M. Gillis,
Custodian for Katherine Tessa Solomon Gillis, S. David Model, Andrew
R. Bacas, David C. Yezbak, Theodore J. Solomon, Walter F. Gilbert,
Carmen DiMatteo, Patrick M. D'Agostino, David L. Crowder, James D.
Brown and Mary M. Brown, JTWROS, Mitchell S. Taube and Ellen F.
Rothschild-Taube, JTWROS, John Semasko and Jane Semasko, JTWROS, Wolfe
F. Model and Renate H. Model.
10.1*+ 1997 Incentive Plan.
10.2*+ 1997 Employee Stock Purchase Plan.
10.3*+ Management Agreement between GBL Capital Corporation and the Company
dated November 27, 1996.
10.4*+ Employment Agreement between the Company and Bruce M. Gillis dated as
of August 1, 1997.
10.5*+ Employment Agreement between the Company and James D. Brown dated as
of August 18, 1997.
10.6*+ Employment Agreement between the Company and S. David Model dated as
of August 18, 1997.
10.7*+ Employment Agreement between the Company and Andrew R. Bacas dated as
of August 1, 1997.
10.8**+ Employment Agreement between the Company and John E. Semasko dated as
of September 9, 1997.
29
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.9**+ Employment Agreement between the Company and Rex Lamb dated as of
September 9, 1997.
10.10* Lease Agreement dated March 26, 1996 by and between Marlyn D. Schwarz
and Rex Lamb d/b/a DocuTech.
10.11* Lease Agreement dated February 24, 1992 by and between Marlyn Schwarz
d/b/a Old Cheney Plaza and Rex Lamb d/b/a DocuTech.
10.12* Lease Agreement dated September 1, 1994 by and between Jonstar Realty
Corporation and Spaulding Company, Inc. (renewed May 27, 1997).
10.13 [Intentionally left blank]
10.14* Lease dated September 1, 1995 by and between Robert S. Greer and
Elvera A. Greer and American Micro-Med Corporation.
10.15* Lease dated February 8, 1994 and Lease Rider dated as of February 1,
1994 by and between Oporto Development Corp. and International Data
Services of New York, Inc.
10.16* Amendment of Lease dated June 6, 1996 between East Cobb Land
Development and Investment Co., L.P. and Imaging Information
Industries/David Yezbak, extended by letter dated July 16, 1997.
10.17 [Intentionally left blank]
10.18* Lease dated January 10, 1996 by and between FinancialEnterprises III
and TPS Imaging Solutions, Inc.
10.19* Lease Agreement dated March 31, 1995 by and between Technical
Publications Service, Inc. and TPS Micrographics, Inc.
10.20* Standard Industrial Commercial MultiTenant Lease-Gross dated June 20,
1994 by and between Northgate Assembly of God, North Sacramento, d/b/a
Arena Christian Center and Total Information Management Corporation.
10.21* Lease dated January 26, 1981 and Extension of Lease dated October,
1992 by and between Trader Vic's Food Products and Total Information
Management Corporation.
10.22* Standard Industrial Lease dated September 24, 1991 by and between
Charles F. Coss, Viola B. Coss, Tracey C. Quinn, John Coss, Peter B.
Coss, Elizabeth Coss, Tracey C. Quinn as Trustee for Geoffrey C. Quinn
and Elizabeth Coss, as Trustee for Caitlin N. Shay and Total
Information Management Corporation extended by letter dated October
18, 1996 from James Bunker to Peter Coss.
10.23* Lease dated January 1, 1993 between CSX Transportation, Inc. and
American Micro-Med Corporation.
10.24* Lease and Service Agreement dated September 4, 1997 and two Addendums
dated October 15, 1997 between American Executive Centers, Inc. and
the Company.
10.25** Credit Agreement by and among the Company and Subsidiaries and
CoreStates Bank, N.A., for itself and as Agent, and any other Banks
becoming Party, dated as of March 30, 1998.
10.26*** Amendment No. 1 to Credit Agreement by and among the Company and
Subsidiaries and First Union National Bank (successor by merger to
CoreStates Bank, N.A.), for itself and as Agent, and any other Banks
becoming Party, dated as of March 30, 1998 (incorporated by reference
to Exhibit 10.25 of the Company's Form 10-K filed March 31, 1998, File
No. 0-23077).
10.27*** Amendment No. 2 to Credit Agreement by and among the Company and
Subsidiaries and First Union National Bank (successor by merger to
CoreStates Bank, N.A.), for itself and as Agent, and any other Banks
becoming Party, dated as of November 16, 1998).
30
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.28*** Master Demand Note, dated January 20, 1998, payable to First Union
National Bank (successor by merger to CoreStates Bank, N.A.)
(incorporated by reference to Exhibit 10.1 of the Company's Form 8-K
filed on February 3, 1998).
10.29*** Security Agreement, dated January 20, 1998, between First Union
National Bank (successor by merger to CoreStates Bank, N.A.) and the
Company (incorporated by reference to Exhibit 10.2 of the Company's
Form 8-K filed on February 3, 1998).
10.30*** Forbearance Agreement dated March 29, 1999 by and among the Company,
First Union National Bank (successor by merger to CoreStates Bank,
N.A.) and Commerce Bank, N.A.
10.31***+ Amendment No. 1 dated as of October 1, 1998 to Employment Agreement
between the Company and James D. Brown dated as of August 18, 1997.
10.32***+ Separation Agreement by and between Bruce M. Gillis and the Company
dated September 18, 1998.
10.33***+ Separation Agreement by and between Richard D. Moseley and the Company
dated September 30, 1998.
10.34***+ Separation Agreement by and between David Model and the Company dated
November 9, 1998.
10.35@+ Separation Agreement by and between James D. Brown and the Company
dated as of April 30, 1999.
10.36@@+ Employment Agreement by and between the Company and Mark P. Glassman
dated as of March 1, 1999, as amended by Amendment No. 1 to Employment
Agreement dated as of May 1, 1999.
10.37@@@ Forbearance Agreement dated September 30, 1999 by and among the
Company, First Union National Bank (successor by merger to CoreStates
Bank, N.A.) and Commerce Bank, N.A.
10.38% Loan and Warrant Purchase Agreement by and among the Company, TDH,
III, L.P., Dime Capital Partners, Inc. and Robert Drury dated February
15, 2000.
10.39% Form of Promissory Note.
10.40% Form of Warrant.
10.41% Amendment to Forbearance Agreement by and among the Company, First
Union National Bank and Commerce Bank, N.A. dated February 15, 2000.
10.42+ Amendment No. 1 to Employment Agreement between the Company and Blair
Hayes dated as of April 1, 1999.
21 Subsidiaries.
23.1 Consent of Independent Public Accountants.
27 Financial Data Schedule (filed in electronic format only).
* Incorporated by reference to the designated exhibit of the Company's
Registration Statement on Form S-1 filed on September 12, 1997, as amended (file
number 333-35567).
**Incorporated by reference to the designated exhibit of the Company's Annual
Report on Form 10-K filed on March 31, 1998 (file number 000-23077).
***Incorporated by reference to the designated exhibit of the Company's Annual
Report on Form 10-K filed on March 31, 1999 (file number 000-23077).
@ Incorporated by reference to the designated exhibit of the Company's Annual
Report on Form 10-K/A filed on April 30, 1999 (file number 000-23077).
@@ Incorporated by reference to the designated exhibit of the Company's
Quarterly Report on Form 10-Q filed on May 17, 1999 (file number 000-23077).
@@@ Incorporated by reference to the designated exhibit of the Company's Report
on Form 8-K filed on October 7, 1999 (file number 000-23077).
% Incorporated by reference to exhibits 10.1, 10.2, 10.3 and 10.4 of the
Company's Report on Form 8-K filed on March 2, 2000 (file number 000-23077).
31
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
The Company filed a Form 8-K on March 2, 2000 reporting that the Company
completed a $6 million financing transaction involving the sale of convertible
subordinated notes to TDH III, L.P., Dime Capital Partners, Inc. and Robert E.
Drury.
32
IMAGEMAX, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
PAGE
----
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations................................... F-4
Consolidated Statements of Shareholders' Equity......................... F-5
Consolidated Statements of Cash Flows................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Financial Statement Schedule:
II. Valuation and Qualifying Accounts.................................. F-21
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ImageMax, Inc.:
We have audited the accompanying consolidated balance sheets of ImageMax, Inc.
(a Pennsylvania Corporation) and Subsidiaries as of December 31, 1999 and 1998
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements and schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
ImageMax, Inc. and Subsidiaries as of December 31, 1999 and 1998 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company is in default of certain
financial and other covenants under its credit facility, which raises
substantial doubt about the ability of the Company to continue as a going
concern. Management's plans in regard to this matter are also described in Note
1. The accompanying financial statements do not include any adjustments relating
to the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable
to continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements and Financial Statement Schedule is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not a required part of the basic financial statements. This schedule has
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 7, 2000
F-2
IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS - EXCEPT SHARE AMOUNTS)
DECEMBER 31
--------------------------
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 1,719 $ 736
Accounts receivable, net of allowance for doubtful
accounts of $392 and $600, as of December 31, 1999
and 1998, respectively......................................................... 9,412 11,801
Inventories...................................................................... 2,031 2,185
Prepaid expenses and other....................................................... 838 609
-------- --------
Total current assets...................................................... 14,000 15,331
Property, plant and equipment, net...................................................... 5,642 7,036
Intangibles, primarily goodwill, net.................................................... 44,448 46,607
Other assets............................................................................ 275 600
-------- --------
$ 64,365 $ 69,574
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term
debt........................................................................... $ 18,627 $ 20,239
Accounts payable................................................................. 2,967 4,472
Accrued expenses................................................................. 4,021 5,248
Deferred revenue................................................................. 1,666 2,600
-------- --------
Total current liabilities................................................. 27,281 32,559
-------- --------
Long-term debt.......................................................................... 970 257
-------- --------
Other long-term liabilities............................................................. 41 106
-------- --------
Commitments and contingencies (Note 12)
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized, none issued........................................................ -- --
Common stock, no par value, 40,000,000 shares
authorized, 6,633,681 and 6,479,739 shares issued and
outstanding at December 31, 1999 and 1998,
respectively................................................................... 52,837 52,645
Accumulated deficit.............................................................. (16,764) (15,993)
-------- --------
Total shareholders' equity................................................ 36,073 36,652
-------- --------
$ 64,365 $ 69,574
======== ========
The accompanying notes are an integral part of these statements.
F-3
IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS - EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
----------------------------------------
1999 1998 1997
---- ---- ----
Revenues:
Services..................................................... $ 47,960 $ 49,387 $ 2,344
Products..................................................... 12,263 15,189 767
----------- ---------- ----------
60,223 64,576 3,111
----------- ---------- ----------
Cost of revenues:
Services..................................................... 29,615 33,252 1,603
Products..................................................... 7,864 10,587 524
Depreciation................................................. 1,785 1,565 94
----------- ---------- ----------
39,264 45,404 2,221
----------- ---------- ----------
Gross profit......................................... 20,959 19,172 890
Selling and administrative expenses............................... 16,378 17,606 2,074
Amortization of intangibles....................................... 1,844 1,482 112
Restructuring costs............................................... 827 1,387 --
Investment advisory fees and expenses............................. 550 -- --
Loss on sale of business units.................................... -- 4,995 --
Special compensation charge....................................... -- -- 2,235
Acquired in-process research and development
charge....................................................... -- -- 4,000
----------- ---------- ----------
Operating income (loss).............................. 1,360 (6,298) (7,531)
Interest expense.................................................. 2,131 2,133 8
----------- ---------- ----------
Net loss.......................................................... $ (771) $ (8,431) $ (7,539)
=========== =========== ==========
Basic and diluted net loss per share.............................. $ (0.12) $ (1.40) $ (8.13)
=========== ========== ==========
Shares used in computing basic and
diluted net loss per share................................... 6,578,984 6,034,130 927,565
=========== ========== ==========
The accompanying notes are an integral part of these statements.
F-4
IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS - EXCEPT SHARE AMOUNTS)
PREFERRED STOCK COMMON STOCK
-------------------- ------------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
--------- ------- ---------- ------- ----------- --------
BALANCE, DECEMBER 31, 1996................ 126,924 $ 73 550,000 $ 7 $ (23) $ 57
Sales of Preferred and Common
stock.............................. 316,565 2,479 160,770 1,468 -- 3,947
Sale of Common stock in initial
public offering, net of offering
costs.............................. -- -- 3,100,000 30,465 -- 30,465
Issuance of Common stock for
acquisitions....................... -- -- 1,283,177 13,088 -- 13,088
Conversion of Preferred stock to
Common stock....................... (443,489) (2,552) 443,489 2,552 -- --
Net loss............................. -- -- -- -- (7,539) (7,539)
--------- ------- ---------- ------- -------- -------
BALANCE, DECEMBER 31, 1997................ -- -- 5,537,436 47,580 (7,562) 40,018
Issuance of Common stock for
acquisitions....................... -- -- 930,484 5,037 -- 5,037
Sale of Common stock................. -- -- 11,819 28 -- 28
Net loss............................. -- -- -- -- (8,431) (8,431)
--------- ------- ---------- ------- -------- -------
BALANCE, DECEMBER 31, 1998................ -- -- 6,479,739 52,645 (15,993) 36,652
Issuance of Common stock for
acquisitions....................... -- -- 76,190 85 -- 85
Sale of Common stock................. -- -- 77,752 107 -- 107
Net loss............................. -- -- -- -- (771) (771)
--------- ------- ---------- ------- -------- -------
BALANCE, DECEMBER 31, 1999................ -- $ -- 6,633,681 $52,837 $(16,764) $36,073
========= ======= ========== ======= ======== =======
The accompanying notes are an integral part of these statements.
F-5
IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
---- ---- ----
Cash Flows from Operating Activities:
Net loss....................................................... $ (771) $ (8,431) $ (7,539)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Depreciation and amortization of intangibles ........... 3,629 3,047 206
Loss on sale of business units.......................... -- 4,995 --
Amortization of deferred financing costs................ -- 904 --
Special compensation charge............................. -- -- 2,235
Acquired in-process research and development
charge............................................... -- -- 4,000
Changes in operating assets and liabilities, net
of effect from acquisitions and divestiture-
Accounts receivable, net............................. 2,389 (1,852) 42
Inventories.......................................... 154 (104) (91)
Prepaid expenses and other........................... (229) 46 (55)
Other assets......................................... 417 (390) --
Accounts payable..................................... (1,505) 556 277
Accrued expenses..................................... (1,296) 159 1,046
Deferred revenue..................................... (934) 876 65
-------- --------- ---------
Net cash provided by (used in)
operating activities........................... 1,854 (194) 186
-------- --------- ---------
Cash Flows from Investing Activities:
Proceeds from business units sold.............................. 563 350 --
Purchases of property and equipment............................ (362) (3,040) (90)
Purchases of businesses, net of cash acquired.................. -- (16,483) (26,696)
-------- -------- --------
Net cash provided by (used in)
investing activities........................... 201 (19,173) (26,786)
-------- -------- --------
Cash Flows from Financing Activities:
Net borrowings (repayments) under line of credit............... (1,589) 20,100 --
Payment of deferred financing costs............................ (192) (803) --
Proceeds from mortgage transaction............................. 900 -- --
Principal payments on debt and capital lease obligations....... (298) (532) (4,329)
Proceeds from sales of Common and Preferred stock.............. 107 28 32,177
-------- --------- --------
Net cash provided by (used in)
financing activities........................... (1,072) 18,793 27,848
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents.............. 983 (574) 1,248
Cash and Cash Equivalents, Beginning of Year...................... 736 1,310 62
-------- --------- ---------
Cash and Cash Equivalents, End of Year............................ $ 1,719 $ 736 $ 1,310
======== ========= ========
The accompanying notes are an integral part of these statements.
F-6
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND LIQUIDITY:
ImageMax, Inc. ("ImageMax") was incorporated in Pennsylvania on November 12,
1996. ImageMax was formed to become a leading national, single-source provider
of integrated document management solutions. ImageMax had conducted no
operations prior to acquiring certain businesses on December 9, 1997 and
completed a number of additional acquisitions in the first eight months of 1998,
as discussed in Note 3. Prior to their acquisition, these businesses had been
operating independently. Given the nature of ImageMax, it is subject to many
risks, including but not limited to, (i) the ability to obtain adequate
financing to fund operations and potential future acquisitions, (ii) a limited
combined operating history, (iii) the potential inability to manage growth, (iv)
possible fluctuations in quarterly results, (v) reliance on certain markets, and
(vi) reliance on key personnel.
The accompanying consolidated financial statements have been prepared in
conformity with principles of accounting applicable to a going concern. These
principles contemplate the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has incurred
significant operating losses since inception, and as of December 31, 1999 had an
accumulated deficit of $16.8 million. In addition, as more fully described in
Note 7, ImageMax is in default of its credit facility with its banks under which
it had borrowed $18.5 million as of December 31, 1999, which raises substantial
doubt about the ability of ImageMax to continue as a going concern. On February
15, 2000, ImageMax completed a $6 million convertible debt financing (see Note
16). Management is currently negotiating a new credit facility with other
lenders. There can be no assurance that the credit facility will be refinanced.
See report of independent public accountants.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
ImageMax and its subsidiaries (the "Company"). All material intercompany
balances and transactions have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue recognition
Service and product revenues are recognized when the services are rendered or
products are shipped to customers. Deferred revenue represents payments for
services that are billed in advance of performance. No single customer exceeded
5% of revenues for any period presented.
Software revenue includes software licensing fees, consulting, implementation,
training and maintenance. Depending on contract terms and conditions, software
license fees are recognized upon delivery of the product if no significant
vendor obligations remain and collection of the resulting receivable is deemed
probable. The Company's software licensing agreements provide for customer
support (typically 90 days) as an accommodation to purchasers of its products.
The portion of the license fee associated with customer support is unbundled
from the license fee and is recognized ratably over the warranty period as
maintenance revenue.
F-7
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Consulting, implementation and training revenues are recognized as the services
are performed. Maintenance revenues are recognized ratably over the terms of the
maintenance agreements.
Cash and cash equivalents
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash equivalents are carried at
cost, which approximates market value. At December 31, 1999 and 1998, cash
equivalents primarily consisted of funds in money market accounts.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories primarily represent microfiche viewing and imaging equipment,
service parts and related supplies.
Property, plant and equipment
Property, plant and equipment are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets
(see Notes 4 and 5). Leasehold improvements are amortized over the lesser of
their useful life or the term of the lease.
Upon sale or other disposition of assets, the cost and related accumulated
depreciation and amortization are removed from the respective accounts, and the
resulting gain or loss, if any, is included in operating results.
Intangibles
Intangibles consist of goodwill and developed technology (see Note 5). Goodwill,
representing the excess of cost over the fair value of the net tangible and
identifiable intangible assets of acquired businesses (see Note 3), is stated at
cost and is amortized over the estimated life of principally 30 years. Developed
technology represents costs paid for certain software technology and is being
amortized over 7 years (see Note 5).
Software development costs
The Company capitalizes certain costs incurred to internally develop software
which is licensed to customers. Capitalization of such software development
costs begins upon the establishment of technological feasibility (typically
determined to be upon completion of a working model) and concludes when the
product is available for general release. For the periods represented, such
costs were immaterial. Costs incurred prior to the establishment of the
technological feasibility are charged to product development expense as
incurred.
Income taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and income tax basis of assets and
liabilities measured using enacted income tax rates and laws that are expected
to be in effect when the differences reverse.
Accounting for stock-based compensation
The Company applies Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees," in accounting for its stock
options. APB 25 requires the intrinsic value method for stock options granted to
employees. The Company follows the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits pro forma disclosure of
net loss and loss per share using a fair value based method of accounting for
employee stock option plans in the accompanying notes to the financial
statements.
F-8
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Supplemental cash flow information
The Company paid cash for interest of $2,074,000, $1,043,000 and $5,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. The Company paid
cash for income taxes of $98,000 and $175,000 for the years ended December 31,
1999 and 1998, respectively. There were no cash payments made for income taxes
for the year ended December 31, 1997.
The following table displays the supplemental cash flow information for the
years ended December 31, 1998 and 1997 of the net non-cash assets acquired
relating to acquired businesses described in Note 3:
YEAR ENDED
DECEMBER 31
---------------------------------
1998 1997
---- ----
Fair value of assets acquired..................... $ 24,873,000 $51,806,000
Liabilities assumed............................... (3,224,000) (10,972,000)
Fair value of Common stock issued................. (5,037,000) (13,088,000)
Cash acquired..................................... (129,000) (1,050,000)
------------- --------------
Total consideration............................... $ 16,483,000 $ 26,696,000
============ ============
Loss per share
The Company has presented loss per share pursuant to SFAS No. 128, "Earnings Per
Share," and the Securities and Exchange Commission Staff Accounting Bulletin No.
98. Basic earnings per share ("Basic EPS") is computed by dividing the net loss
for each period by the weighted average number of shares of Common stock
outstanding for each period. Diluted earnings per share ("Diluted EPS") is
computed by dividing net income (loss) for each period by the weighted average
number of shares of Common stock and Common stock equivalents outstanding during
each period. For all years presented, Common stock equivalents are not included,
as their effect is antidilutive and, as such, Basic EPS and Diluted EPS are the
same.
Fair value of financial instruments
Cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses are reflected in the financial statements at fair value due to their
short-term nature. The carrying amount of long-term debt and capital lease
obligations approximates fair value on the balance sheet dates.
Comprehensive income
The Company has reviewed SFAS No. 130, "Reporting Comprehensive Income," and has
determined that for the years ended December 31, 1999, 1998 and 1997, no items
meeting the definition of comprehensive income as specified in SFAS No. 130
existed in the consolidated financial statements. As such, no disclosure is
necessary to comply with SFAS No. 130.
F-9
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Segment reporting
The Company has reviewed SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," and has determined that no further
disclosure is necessary to comply with SFAS No. 131 since the Company operates
in one business segment.
3. INITIAL PUBLIC OFFERING AND ACQUISITIONS:
On December 9, 1997, ImageMax sold 3,100,000 shares of its Common stock in an
initial public offering (the "Offering") at $12 per share, which raised net
proceeds to ImageMax of $30,465,000 net of Offering costs.
Concurrent with the Offering, ImageMax began material operations with the
acquisition of 14 document management services companies (the "Founding
Companies"). These acquisitions were accounted for using the purchase method of
accounting.
For the acquisition of the Founding Companies, ImageMax had been identified as
the accounting acquiror for financial statement presentation purposes. The total
purchase price of the Founding Companies was $40.7 million, which consisted of:
(i) $27.1 million in cash paid to the sellers; (ii) 1,283,177 shares of Common
stock issued to the sellers; and (iii) transaction costs of $0.5 million. For
purposes of computing the purchase price for accounting purposes, the value of
the Common stock issued to the sellers was determined using an estimated fair
value of $10.20 per share (or $13.1 million), which represents a discount of 15%
from the Offering price of $12.00, due to a one-year restriction on the sale and
transferability of the shares issued. Of the total purchase price of $40.7
million, $4.0 million was allocated to acquired in-process research and
development and was charged to expense upon the consummation of the acquisition
of the Founding Companies. Acquired in-process research and development reflects
the value of development projects underway at the time of the acquisition at one
of the Founding Companies. In connection with this transaction, all identifiable
assets acquired, including intangible assets, were assigned a portion of the
cost of the acquired company based upon an independent valuation.
During the first eight months of 1998, the Company acquired 13 additional
document management services companies (the "Acquired Businesses"). These
acquisitions also were accounted for using the purchase method of accounting.
The total purchase price of the Acquired Businesses was $21.5 million, which
consisted of: (i) $16.6 million in cash paid to sellers; (ii) 930,484 shares of
Common stock issued to sellers; and (iii) transaction costs of $0.7 million. For
purposes of computing the purchase price for accounting purposes, the value of
the Common stock issued to the sellers of $5.0 million was based on the market
price of the Common stock at the time of the transaction, less a discount of
15%, due to a one-year restriction on the sale and transferability of the shares
issued.
The following unaudited pro forma information shows the results of the Company's
operations in accordance with APB Opinion No. 16, "Business Combinations," for
the year ended December 31, 1998 and 1997 as though the acquisitions of the
Founding Companies and the Acquired Businesses had occurred as of January 1,
1997. There were no business acquisitions in 1999. These results exclude certain
business units which were sold in December 1998 and January 1999 (see Note 15):
YEAR ENDED
DECEMBER 31
-----------------------------
1998 1997
---- ----
Total revenues........................................ $ 64,759,000 $ 63,340,000
Operating loss........................................ $ (124,000) $ 536,000
Net loss.............................................. $ (2,755,000) $ (998,000)
Basic and diluted net loss per share.................. $ (0.44) $ (0.16)
F-10
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INITIAL PUBLIC OFFERING AND ACQUISITIONS: -- (CONTINUED)
The pro forma results have been prepared for comparative purposes only and are
not necessarily indicative of the actual results of operations had the
acquisition of the Founding Companies and the Acquired Businesses taken place as
of January 1, 1997, or the results that may occur in the future. The pro forma
results for the year ended December 31, 1998, do not reflect the $5.0 million
loss on the sale of business units. The pro forma results do not give effect to
the Offering and exclude any reductions in historical interest expense for the
year ended December 31, 1997. In addition, the pro forma results exclude the
$4.0 million acquired in-process research and development charge and the $0.5
million management fee paid to GBL Capital (see Note 13).
4. PROPERTY, PLANT AND EQUIPMENT:
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------
(YEARS) 1999 1998
------- ---- ----
Building and improvements.................. 8-40 $ 1,438,000 $ 1,410,000
Machinery and equipment.................... 3-5 6,480,000 6,114,000
Furniture and office equipment............. 5 575,000 564,000
Transportation equipment................... 5 499,000 489,000
----------- -----------
8,992,000 8,577,000
Less: Accumulated depreciation and amortization (3,350,000) (1,541,000)
----------- -----------
$ 5,642,000 $ 7,036,000
=========== ===========
As of December 31, 1999 and 1998, the Company had $144,000 and $200,000 in
equipment, net of accumulated amortization, financed under capital leases,
respectively. See Note 5 regarding long-lived assets impairment evaluation.
5. INTANGIBLE ASSETS:
DECEMBER 31,
--------------------------------
1999 1998
---- ----
Goodwill........................................... $ 46,954,000 $ 47,269,000
Developed technology............................... 820,000 820,000
------------ --------------
47,774,000 48,089,000
Less- Accumulated amortization..................... (3,326,000) (1,482,000)
------------ ------------
$ 44,448,000 $ 46,607,000
============ ============
Goodwill is amortized over principally 30 years and developed technology is
amortized over 7 years. The Company continually evaluates whether events or
circumstances have occurred that indicate that the remaining useful lives of the
intangibles assets should be revised or that the remaining balance of such
assets may not be recoverable. When the Company concludes it is necessary to
evaluate its long-lived assets, including intangibles, for impairment, the
Company will use an estimate of the related undiscounted cash flow as the basis
to determine whether impairment has occurred. If such a determination indicates
an impairment loss has occurred, the Company will utilize the valuation method
which measures fair value based on the best information available under the
circumstances.
In 1998, the Company wrote off $1,644,000 of goodwill related to a business unit
sold in December 1998 and $2,585,000 related to two business units sold in
January 1999 due to the impairment of the recoverability of the related goodwill
based on the proceeds to be received (see Note 15). In 1999, the Company wrote
off $315,000 of goodwill related to a business unit closed in May 1999.
F-11
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INTANGIBLE ASSETS: -- (CONTINUED)
As of December 31, 1999, the Company believes that no revisions of the remaining
useful lives or write-downs of intangible assets are required; however, the
Company's continuing review of its business units may lead to write-downs in the
future.
6. ACCRUED EXPENSES:
DECEMBER 31
-----------------------
1999 1998
---- ----
Compensation and benefits........................... $ 1,070,000 $ 1,096,000
Professional fees................................... 404,000 361,000
Restructuring costs (Note 14)....................... 263,000 1,145,000
Other............................................... 2,284,000 2,646,000
------------ ------------
$ 4,021,000 $ 5,248,000
=========== ===========
7. LINE OF CREDIT:
On March 30, 1998, the Company entered into a credit facility (as amended the
"Credit Facility"), providing a revolving line of credit of $30 million in
borrowings with First Union National Bank (successor by merger to Corestates
Bank, N.A.) and Commerce Bank, N.A. (together, the "Banks"). This agreement was
substantially amended in November 1998 as described below. Under the initial
terms of the Credit Facility, the Company could borrow up to $25 million to
finance future acquisitions and up to $5 million for working capital purposes.
Prior to amendment, borrowings under the facility bore interest at LIBOR or
prime plus an applicable margin at the option of the Company. In addition to
interest and other customary fees, the Company was obligated to remit a fee
ranging from 0.2% to 0.375% per year on unused commitments. The Credit Facility
is secured by substantially all of the assets of the Company. The Credit
Facility is subject to certain financial covenants which pertain to criteria
such as minimum levels of cash flow, ratio of debt to cash flow, and ratio of
fixed charges to cash flow. Prior to amendment, borrowing under the Credit
Facility was contingent upon the Company meeting certain financial ratios and
other criteria.
An amendment to the Credit Facility dated November 16, 1998 amended certain
financial covenants for future periods, reduced the amount available under the
Credit Facility to the amount ($20.1 million) outstanding on November 6, 1998,
changed the maturity date to December 1, 1999 from December 31, 2002, required a
$5.0 million principal repayment or commitments therefor by December 31, 1998,
required all borrowings to bear a rate of prime plus an applicable margin and
changed other provisions. As of December 31, 1998, the Company was in default of
certain financial and other covenants under the amended Credit Facility,
including cash flow ratios and the requirement for a $5.0 million principal
repayment or commitments therefor. On March 29, 1999, the Company entered into a
forbearance agreement with the banks that are parties to its Credit Facility
(the "Forbearance Agreement"). Pursuant to the Forbearance Agreement, the banks
agreed to forbear from exercising their rights and remedies with respect to all
existing defaults under the Credit Facility until the earlier of June 30, 1999
or the occurrence of a default under the Forbearance Agreement or an additional
default under the Credit Facility. On June 30, 1999, the Forbearance Agreement
expired. On September 30, 1999, the Company entered into an interim forbearance
agreement (the "Interim Agreement") with the Banks. On February 15, 2000, the
Company amended its Interim Agreement dated September 30, 1999 (the "Amended
Interim Agreement") (see Note 16).
Under the terms of the Amended Interim Agreement, the amount available under the
Credit Facility was reduced to $13.3 million. The outstanding amount under the
Credit Facility bears interest at the prime rate plus two percent (2%) per annum
(effective rate of 10.50% as of December 31, 1999).
F-12
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LINE OF CREDIT: -- (CONTINUED)
The Company has continued its discussions various banks concerning the possible
refinancing of its debt (see Note 1).
During the year ended December 31, 1999, the Company made $1,589,000 in
principal repayments under the Credit Facility from proceeds received from the
Southeast Group divestiture, proceeds from a mortgage transaction (see Note 8),
and cash provided by operations.
All of the Company's indebtedness under the Credit Facility is classified as
short-term debt.
In connection with the Credit Facility, the Company incurred $904,000 of lending
and other customary fees during 1998. These costs were initially capitalized and
amortized to interest expense over the original term of the Credit Facility. At
December 31, 1998, the remaining unamortized costs of $803,000 were written off
and included in interest expense.
8. LONG-TERM DEBT:
DECEMBER 31,
--------------------
1999 1998
---- ----
Obligations under capital leases.................. $ 117,000 $ 242,000
Notes payable and mortgage loan................... 969,000 154,000
--------- ---------
1,086,000 396,000
Less- Current portion............................. (116,000) (139,000)
--------- ---------
$ 970,000 $ 257,000
========= =========
In connection with the acquisition of the Founding Companies (see Note 3), the
Company assumed approximately $4.9 million of notes payable, capital lease
obligations and other indebtedness. Of this amount, $4.3 million was repaid with
the net proceeds of the Offering. Debt assumed in connection with the
acquisition of the Acquired Businesses was not significant. In April 1999, the
Company executed a $900,000 mortgage loan with a lender relating to a
Company-owned property that houses a business unit operation. The Company
received $869,000 in proceeds, net of closing costs, from the transaction. In
July 1999, the $869,000 was applied to the balance of the Credit Facility.
Interest on the mortgage is at the greater of 8.50% or the U.S. Treasury rate
plus 375 basis points (10.287 % at December 31, 1999). The loan carries a
ten-year term (maturing May 2009), is secured by the mortgaged property, and
requires equal monthly repayments of principal and interest of $10,000. Interest
rates on the outstanding obligations under capital leases range from 9.3% to
21.3% and the weighted average interest rate on these obligations approximates
15.0% as of December 31, 1999. Interest rates on the notes payable outstanding
balances range from 8.0% to 15.6% and the weighted average interest rate on
these balances approximates 10.0% as of December 31, 1999.
As of December 31, 1999, future scheduled principal payments on the Company's
notes payable and capital lease obligations are as follows:
2000.............................................. $ 116,000
2001.............................................. 84,000
2002.............................................. 25,000
2003.............................................. 14,000
2004.............................................. 847,000
-----------
$ 1,086,000
===========
F-13
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES:
At December 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $6.7 million. The net operating
loss carryforward differs from the accumulated deficit principally due to
differences in the recognition of certain expenses for financial and income tax
reporting purposes, as well as, the nondeductibility of the special compensation
and acquired research and development charges, loss on the sale of business
units and goodwill amortization.
The components of income taxes are as follows:
YEAR ENDED
DECEMBER 31
--------------------------------------------
1999 1998 1997
---- ---- ----
Current:
Federal................................................. $ -- $ -- $ --
State................................................... -- -- --
---------- ---------- ---------
-- -- --
---------- ---------- ---------
Deferred:
Federal................................................. 27,000 (1,455,000) (424,000)
State................................................... 5,000 (398,000) (130,000)
---------- ---------- ---------
32,000 (1,853,000) (554,000)
Change in valuation allowance........................... (32,000) 1,853,000 554,000
---------- ---------- ---------
$ -- $ -- $ --
========== ========== ==========
The reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
YEAR ENDED
DECEMBER 31
------------------------------------
1999 1998 1997
---- ---- ----
Income tax rate................................................. (34.0)% (34.0)% (34.0)%
State income taxes, net of federal tax benefit.................. (5.6) (5.6) (5.8)
Nondeductible special compensation and acquired
in-process research and development charge................... -- -- 32.0
Nondeductible loss on sale of business units.................... -- 12.0 --
Other nondeductible items....................................... 6.4 1.8 --
Nondeductible goodwill amortization............................. 37.5 3.8 0.5
Change in valuation reserve..................................... (4.3) 22.0 7.3
----- ----- -----
--% --% --%
===== ===== =====
F-14
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES: -- (CONTINUED)
The tax effect of temporary differences as established in accordance with SFAS
No. 109 that give rise to deferred taxes are as follows:
DECEMBER 31
------------------
1999 1998
---- ----
Gross deferred tax assets:
Accruals and reserves not currently deductible......... $ 580,000 $ 1,217,000
Net operating loss carryforwards....................... 2,662,000 1,605,000
Other.................................................. 352,000 420,000
Valuation allowance.................................... (2,440,000) (2,407,000)
---------- ----------
$1,154,000 $ 835,000
========== ===========
Gross deferred tax liabilities:
Depreciation........................................... $ 424,000 $ 356,000
Goodwill amortization.................................. 629,000 378,000
---------- -----------
$1,053,000 $ 734,000
========== ===========
At December 31, 1999, a valuation allowance was established for the Company's
tax benefit based upon the uncertainty of the realizability of the associated
deferred tax asset given the Company's losses to date under the guidelines set
forth in SFAS No. 109.
10. SHAREHOLDERS' EQUITY:
In November 1996, ImageMax issued 423,077 shares of Common stock to its founding
shareholders for $5,000. In November 1996, ImageMax sold 126,924 shares of
Series A Convertible Preferred Stock ("Series A Preferred Stock") and 126,923
shares of Common stock to certain of its founders and a director of ImageMax,
for $75,000. Each share of Series A Preferred Stock is convertible into one
share of Common stock.
In April 1997, ImageMax sold 88,847 shares of Series A Preferred Stock to
certain of its founders and two additional accredited investors for $100,000.
In June 1997, ImageMax sold 97,308 shares of Common stock to certain of its
founders and two of its executive officers for $230,000.
In September 1997, ImageMax sold 227,719 shares of Series A Preferred Stock and
63,462 shares of Common stock for total consideration for $1,082,000 and
$300,000, respectively, to certain of its founders and other accredited
investors.
In December 1997, ImageMax sold 3,100,000 shares of Common stock in the Offering
and issued 1,283,177 shares of Common stock in partial consideration for the
acquisition of the Founding Companies (see Note 3). In connection with the
Offering, all of the Series A Preferred Stock outstanding as of the date of the
Offering was converted into 443,489 shares Common stock.
In 1997, ImageMax sold a total of 259,135 shares of Common stock (including
shares of Common stock to be issued upon conversion of the Preferred stock) at
prices of $1.18, $2.36 and $4.73 per share to officers, directors and certain
management of the Founding Companies. As a result, ImageMax recorded a
non-recurring non-cash compensation charge of $2,235,000, representing the
difference between the amount paid for the shares and the deemed value for
accounting purposes of $12.00 per share (the Offering price).
During 1998, the Company issued 930,484 shares of Common stock in partial
consideration for the acquisition of the Acquired Businesses (see Note 3).
F-15
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SHAREHOLDERS' EQUITY: -- (CONTINUED)
During 1999, the Company issued 76,190 shares of Common stock in partial
consideration for the acquisition of the Acquired Businesses (see Note 3).
11. BENEFIT PLANS:
Stock option plan
The Company's 1997 Incentive Plan, as amended (the "Incentive Plan") provides
for the award of up to 1,600,000 shares of its Common stock to its employees,
directors and other individuals who perform services for the Company. The
Incentive Plan provides for granting of various stock based awards, including
incentive and non-qualified stock options, restricted stock and performance
shares and units. Options granted under the Incentive Plan are granted at fair
market value at the date of grant, generally vest in equal installments over
three years, and expire 10 years after the date of grant.
OPTIONS OUTSTANDING
-----------------------
AVAILABLE PRICE AGGREGATE
FOR GRANT SHARES PER SHARE PRICE
--------- -------- --------- ---------
Balance, December 31, 1996........... -- -- $-- $--
Authorized......................... 600,000 -- -- --
Granted............................ (367,500) 367,500 12.00 4,410,000
-------- -------- ---------
Balance, December 31, 1997........... 232,500 367,500 12.00 4,410,000
Granted............................ (359,000) 359,000 2.19 - 12.00 1,419,375
Cancelled.......................... 247,500 (247,500) 12.00 (2,970,000)
------- -------- ----------
Balance, December 31, 1998........... 121,000 479,000 2.19 - 12.00 2,859,375
Authorized......................... 1,000,000 -- -- --
Granted............................ (58,000) 58,000 1.75 101,500
Cancelled.......................... 72,000 (72,000) 2.19 - 12.00 (473,375)
------ -------- ----------
Balance, December 31, 1999........... 1,135,000 465,000 1.75 - 12.00 $2,487,500
========= ======== ==========
Set forth below are the outstanding options at December 31, 1999, summarized by
range of exercise price:
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES 12/31/99 REMAINING LIFE EXERCISE PRICE 12/31/99 EXERCISE PRICE
--------------- -------- -------------- -------------- -------- --------------
$1.75 58,000 9.5 $1.75 0 N/A
$2.19 to $2.38 257,000 8.4 $2.28 85,664 $2.28
$12.00 150,000 8.1 $12.00 116,667 $12.00
For purposes of the SFAS no. 123 disclosure requirements, the fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option pricing model using the following assumptions: weighted average risk free
interest rate of 6.2%, 4.4% and 6.0%, in 1999, 1998 and 1997, respectively, an
expected life of 5 years in 1999 and 1998, and 7 years in 1997, expected
dividend yield of zero, and an expected volatility of 40%.
The weighted average fair value of options granted during 1999, 1998 and 1997 is
estimated at $0.90, $1.12 and $6.35, respectively. The Company's net loss would
have been increased and the following pro forma results would have been reported
had compensation cost been recorded for the fair value of the options granted:
F-16
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. BENEFIT PLANS: -- (CONTINUED)
YEAR ENDED DECEMBER 31
--------------------------------------
1999 1998 1997
---- ---- ----
Net loss, as reported............................... $(771,000) $(8,431,000) $(7,539,000)
Pro forma net loss.................................. $(1,108,000) $(8,829,000) $(7,588,000)
Basic and diluted loss per share, as reported....... $(0.12) $(1.40) $(8.13)
Pro forma basic and diluted loss per share.......... $(0.17) $(1.46) $(8.18)
Employee stock purchase plan
The Company provides for an Employee Stock Purchase Plan (the "Purchase Plan")
that allows all full-time employees of the Company, other than 5% shareholders,
temporary employees, and employees having less than six months of service with
the Company, to purchase shares of the Company's Common stock at a discount from
the prevailing market price at the time of purchase. The purchase price of such
shares is equal to 90% of the lower of the fair value of the share on the first
and last days of the quarterly period. Such shares are issued by the Company
from its authorized and unissued Common stock. A maximum of 250,000 shares of
the Company's Common stock will be available for purchase under the plan. The
Purchase Plan will be administered by the Board of Directors, which may delegate
responsibility to a committee of the Board. The Board of Directors may amend or
terminate the Purchase Plan at their discretion. The Purchase Plan is intended
to comply with the requirements of Section 423 of the Internal Revenue Code.
For the year ended December 31, 1999 and 1998, employees purchased 59,005 and
30,566 shares under the Purchase Plan of which 46,640 and 11,819 shares were
issued in 1999 and 1998, respectively.
12. COMMITMENTS AND CONTINGENCIES:
Operating leases
The Company leases operating facilities, office equipment and vehicles under
non-cancelable leases. Rent expense under operating leases for the years ended
December 31, 1999, 1998 and 1997 was $1,558,000, $2,706,000 and $119,000,
respectively. Future minimum lease payments under noncancelable operating leases
as of December 31, 1999 are as follows:
2000................................................. 1,309,000
2001................................................. 1,084,000
2002................................................. 788,000
2003................................................. 366,000
2004................................................. 275,000
2005 and thereafter.................................. 864,000
----------
$4,668,000
==========
The Company leases operating facilities at prices which, in the opinion of
management, approximate market rates from entities which are owned by certain
shareholders and directors of the Company. Rent expense on these leases was
$536,000, $582,000 and $64,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
F-17
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
Employment and consulting agreements
The Company has entered into employment agreements with its Acting Chief
Executive Officer and Chief Financial Officer, that provide for minimum annual
compensation. In addition, the Company entered into employment or consulting
agreements with several management members of the businesses acquired by the
Company that provide for minimum annual compensation. Future minimum
compensation commitments under these agreements as of December 31, 1999 are as
follows:
2000................................................ $1,770,000
2001................................................ 522,000
2002................................................ 158,000
2003................................................ 0
2004................................................ 0
----------
$2,450,000
==========
Separation agreements
During 1998, the Company and three of its former executive officers entered into
separation agreements upon termination of their employment with the Company. The
separation agreements provided $781,000 of compensation and benefits, which has
been charged to the statement of operations for the year ended December 31, 1998
as restructuring costs (see Note 14).
In connection with the separation agreements and existing employment and
consulting agreements, should a change of control, as defined, occur within
certain specified periods, these agreements provide, among other things, that
the Company make payments of up to $1,253,000. The periods specified expire at
various dates through December 31, 2000. Should a change of control occur beyond
this date, the Company is not obligated to make any payments under these
agreements.
Other matters
The Company is party to various claims arising in the ordinary course of
business. Although the ultimate outcome of these matters is presently not
determinable, management, after consultation with legal counsel, does not
believe that the resolution of these matters will have a material adverse effect
on the Company's consolidated financial position or results of operations.
The Company occasionally enters into agreements with its suppliers in the normal
course of business that require the Company to purchase minimum amounts of
inventory in future years in order to obtain favorable pricing. These
commitments at December 31, 1999 are not considered material.
13. RELATED-PARTY MANAGEMENT CONTRACT:
In November 1996, the Company entered into a management contract with GBL
Capital Corp. ("GBL"), an entity whose shareholders were also shareholders of
ImageMax. One GBL shareholder is the former Chief Executive Officer and another
is the current Acting Chief Executive Officer of the Company. GBL was engaged to
manage the daily business operations of ImageMax. ImageMax paid GBL $5,000 upon
entering into the agreement and was required to pay monthly fees
F-18
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. RELATED-PARTY MANAGEMENT CONTRACT: -- (CONTINUED)
ranging from $10,000 to $25,000. The monthly fee payments were terminated on
July 31, 1997 when the two officers of ImageMax began to be paid directly by
ImageMax. GBL services were ceased at that date. Upon the closing of the
Offering, the Company paid GBL a fee of $500,000 in accordance with the terms of
the management contract. Such fees were, in effect, compensation to the officers
of the Company. The $500,000 was charged to the statement of operations for the
year ended December 31, 1997 as general and administrative expense upon the
consummation of the Offering.
14. RESTRUCTURING COSTS:
For the year ended December 31, 1998, the Company recorded restructuring costs
of $1,387,000, primarily for severance payments related to headcount reductions
at the corporate office and a business unit and facility costs associated with
business unit consolidations. For the year ended December 31, 1999, the Company
recorded restructuring costs of $827,000 related to the closing of the
Indianapolis business unit (comprising $557,000, including a write off of
$300,000 in related goodwill) and executive severance payments.
As of December 31, 1999 and December 31, 1998, respectively, accrued
restructuring charges (classified as accrued expenses) amounted to $263,000 and
$1,145,000, of which $196,000 and $1,120,000 related to severance payments with
the remaining amount attributable to lease termination costs. During the year
ended December 31, 1999, the Company paid $1,409,000 of accrued restructuring
charges (and took a non-cash charge of $300,000 upon the closure of a business
unit), of which $1,194,000 related to severance payments with the remaining
$215,000 attributable to lease termination costs.
15. LOSS ON SALE OF BUSINESS UNITS:
For the year ended December 31, 1998, the Company recorded a loss on sale of
business units of $4,995,000, related to the sales in December 1998 and January
1999 of facilities in Charlotte, NC, Cayce, SC and Cleveland, TN. The loss
represents the difference between the net proceeds from the transactions and the
net asset value of these locations, including $4,229,000 of goodwill (see Note
5). For the year ended December 31, 1998, these business units accounted for
$6,496,000 and $660,000 of the Company's consolidated revenues and operating
loss, respectively.
16. CONVERTIBLE DEBT FINANCING:
On February 15, 2000, the Company completed a $6 million financing transaction
involving the sale of convertible subordinated notes (the "Notes") and warrants
(the "Warrants") to TDH III, L.P. ("TDH"), Dime Capital Partners, Inc. and
Robert E. Drury (the "Investors") (see Note 7). The proceeds of this financing
were used to repay $5 million of senior bank debt and provide working capital
for the Company. Additionally, J.B. Doherty, the managing general partner of
TDH, joined the Company's Board of Directors.
The Notes are due and payable upon the fourth anniversary of the date of
issuance and bear interest at nine percent (9%) payable semi-annually. The
Company cannot voluntarily prepay the Notes. The Notes are initially convertible
into the Company's Common stock, no par value, at $3.50 per share, which price
may be adjusted downward if, under certain circumstances, the holders thereof
convert the Notes prior to the third anniversary of the date of issuance. The
Company also issued Warrants to the Investors to purchase an additional
1,800,000 shares of Common stock of the Company (subject to downward adjustment
under certain circumstances), no par value, at $3.50 per share. The Warrants are
exercisable beginning the later of (i) one year from the date of issuance or
(ii) the conversion of the Notes into Common stock. The Warrants expire five
years from the date of issuance.
Simultaneous with this investment, the Company amended its Interim Agreement
with the Banks who are parties to the Credit Facility. Pursuant to the Amended
Interim Agreement, the Banks have agreed to forbear from exercising their rights
and remedies with respect to all existing defaults under the Credit Facility
until June 30, 2000 or the occurrence of a default under the Amended Interim
Agreement or any additional default under the Credit Facility.
F-19
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. CONVERTIBLE DEBT FINANCING: -- (CONTINUED)
Under the terms of the Amended Interim Agreement, the Company was required to
pay to the Banks $5 million from the proceeds of investment discussed above,
reducing the outstanding principal balance thereof to $13.4 million. Principal
repayments of $50,000, $125,000, $150,000, $250,000 and $300,000 are due
February 15, March 1, April 1, May 1 and June 1, 2000, respectively, with all
remaining sums payable on June 30, 2000. The Amended Interim Agreement also (i)
prohibits the Company from making capital expenditures in excess of $250,000 for
the quarter ending March 31, 2000 and $500,000 for the quarter ending June 30,
2000, in each case determined on a non-cumulative basis; (ii) requires that the
Company maintain a minimum stockholders' equity, together with the Notes, of $42
million; (iii) prohibits the Company from declaring or paying any dividends and
(iv) prohibits the Company from incurring any additional indebtedness in excess
of $10,000 without the permission of the Banks.
F-20
IMAGEMAX, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE,
BEGINNING OF CHARGED TO RESERVE OF BALANCE,
DESCRIPTION YEAR EXPENSE ACQUISITIONS DEDUCTIONS END OF YEAR
----------- ------------ ---------- ------------ ---------- -----------
Allowance for doubtful accounts:
1999............................ $600,000 $ 92,000 $ -- $(300,000) $392,000
1998............................ $375,000 185,000 150,000 (110,000) $600,000
1997............................ $ -- -- 375,000 -- $375,000
BALANCE,
BEGINNING OF CHARGED TO BALANCE,
DESCRIPTION YEAR EXPENSE DEDUCTIONS END OF YEAR
----------- ------------ ---------- ------------ -----------
Restructuring accruals:
1999..................................... $1,145,000 $ 827,000 $(1,709,000) $ 263,000
1998..................................... $ -- 1,387,000 (242,000) $ 1,145,000
F-21
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.
IMAGEMAX, INC.
Dated: March 30, 2000 By: /s/ ANDREW R. BACAS
-------------------------------
Andrew R. Bacas
Acting 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 indicated and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/S/ ANDREW R. BACAS Acting Chief Executive Officer March 30, 2000
- ------------------- (Principal Executive Officer)
Andrew R. Bacas
/s/ MARK P. GLASSMAN Chief Financial Officer March 30, 2000
- -------------------- (Principal Accounting Officer)
Mark P. Glassman
/s/ DAVID C. CARNEY Chairman of the Board of March 30, 2000
- -------------------
David C. Carney Directors
/s/ LENNOX K. BLACK Director March 30, 2000
- -------------------
Lennox K. Black
/s/ J.B. DOHERTY Director March 30, 2000
- ----------------
J.B. Doherty
/s/ ROBERT E. DRURY Director March 30, 2000
- -------------------
Robert E. Drury
s/ LEWIS E. HATCH, JR. Director March 30, 2000
- ----------------------
Lewis E. Hatch, Jr.
s/ BLAIR HAYES Director March 30, 2000
- --------------
Blair Hayes
/s/ STEVEN N. KAPLAN Director March 30, 2000
- --------------------
Steven N. Kaplan
/s/ REX LAMB Director March 30, 2000
- ------------
Rex Lamb
/s/ MITCHELL J. TAUBE Director March 30, 2000
- ---------------------
Mitchell J. Taube