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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _________ to _________
Commission File Number 0-23077
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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 (I.R.S. Employer
incorporation or organization) Identification No.)
455 Pennsylvania Avenue, Suite 200
Fort Washington, Pennsylvania 19034
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(Address of principal executive offices) (Zip Code)
(215) 628-3600
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(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock as of November 13, 2002:
Common Stock, no par value 6,793,323
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Class Number of Shares
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IMAGEMAX, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page
Item 1 - Condensed Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations...................................... 1
Consolidated Balance Sheets................................................ 2
Consolidated Statements of Cash Flows...................................... 3
Notes to Consolidated Financial Statements................................. 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 9
Item 3 - Quantitative and Qualitative Disclosures
about Market Risk...................................................... 13
PART II - OTHER INFORMATION
Item 4 - Controls and Procedures................................................ 14
Item 5 - Other Information...................................................... 14
Item 6 - Exhibits and Reports on Form 8-K....................................... 14
SIGNATURES............................................................................... 15
IMAGEMAX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Services..................................... $ 9,108 $ 8,942 $ 27,326 $ 30,041
Products..................................... 1,636 1,671 4,774 6,151
-------- -------- -------- --------
10,744 10,613 32,100 36,192
-------- -------- -------- --------
Cost of revenues:
Services..................................... 5,536 5,385 16,145 18,217
Products..................................... 1,008 990 2,927 3,658
Depreciation................................. 292 430 931 1,283
-------- -------- -------- --------
6,836 6,805 20,003 23,158
-------- -------- -------- --------
Gross profit.............................. 3,908 3,808 12,097 13,034
Selling and administrative expenses............ 3,430 3,502 10,660 11,412
Amortization of intangibles.................... 152 506 360 1,517
-------- -------- -------- --------
Operating income (loss).................. 326 (200) 1,077 105
Interest expense............................... 310 380 906 1,255
-------- -------- -------- --------
Income (loss) before cumulative
effect of accounting change.................. 16 (580) 171 (1,150)
Cumulative effect of accounting change......... - - (15,084) -
-------- -------- -------- --------
Net income (loss).............................. $ 16 $ (580) $(14,913) $ (1,150)
======== ======== ======== ========
Basic and diluted net income (loss)
per share before cumulative effect
of accounting change......................... $ 0.00 $ (0.09) $ 0.03 $ (0.17)
Cumulative effect of accounting change......... - - (2.22) -
-------- -------- -------- --------
Basic and diluted net income (loss) per share.. $ 0.00 $ (0.09) $ (2.19) $ (0.17)
======== ======== ======== ========
Shares used in computing basic and
diluted net income (loss) per share........... 6,793 6,733 6,793 6,711
======== ======== ======== ========
See accompanying notes.
1
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands except share amounts)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 175 $ 84
Accounts receivable, net of allowance for doubtful
accounts of $376 and $488 as of September 30, 2002 and
December 31, 2001, respectively............................................. 8,140 7,621
Inventories..................................................................... 1,218 1,236
Prepaid expenses and other...................................................... 875 585
------ ------
Total current assets........................................................ 10,408 9,526
Property, plant and equipment, net................................................. 2,949 3,249
Intangibles, primarily goodwill, net............................................... 19,998 35,171
Other assets....................................................................... 778 477
------- -------
Total assets............................................................ $34,133 $48,423
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt........................... $ 5,970 $ 2,031
Accounts payable................................................................ 4,028 2,711
Accrued expenses................................................................ 2,312 2,818
Deferred revenue................................................................ 1,622 1,382
------- -------
Total current liabilities................................................... 13,932 8,942
Long-term debt..................................................................... 926 5,813
Subordinated convertible debt, net of discount of $190 and $294, as of
September 30, 2002 and December 31, 2001, respectively............................. 6,080 5,976
Interest on subordinated convertible debt.......................................... 416 --
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized, none issued..................................................... -- --
Common stock, no par value, 40,000,000 shares authorized,
6,793,323 shares issued and outstanding
as of September 30, 2002 and December 31, 2001.............................. 53,494 53,494
Accumulated deficit.......................................................... (40,715) (25,802)
------- -------
Total shareholders' equity.................................................. 12,779 27,692
------- -------
Total liabilities and shareholders' equity............................... $34,133 $48,423
======= =======
See accompanying notes.
2
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months
Ended September 30,
-----------------------
2002 2001
---- ----
Cash flows from operating activities:
Net loss........................................................................... $ (14,913) $ (1,150)
Adjustments to reconcile net loss to net cash
provided by operating activities--
Cumulative effect of accounting change......................................... 15,084 --
Depreciation and amortization.................................................. 1,020 2,606
Amortization of deferred financing costs....................................... 265 192
Amortization of imputed interest............................................... 104 104
Changes in operating assets and liabilities--
Accounts receivable, net................................................... (519) 1,345
Inventories................................................................ 18 113
Prepaid expenses and other................................................. (290) 542
Other assets............................................................... (292) 15
Accounts payable........................................................... 1,317 460
Accrued expenses........................................................... (259) (1,320)
Deferred revenue........................................................... 240 (1,212)
Other long-term liabilities................................................ -- (51)
------- -------
Net cash provided by operating activities.............................. 1,775 1,644
------- -------
Cash flows from investing activities:
Purchases of property and equipment................................................ (396) (665)
------- -------
Net cash used in investing activities.................................. (396) (665)
------- -------
Cash flows from financing activities:
Principal payments on debt and capital lease obligations........................... (1,544) (2,930)
Net borrowings under line of credit................................................ 530 300
Payment of deferred financing costs................................................ (274) (34)
Proceeds from issuance of common stock............................................. -- 32
------- -------
Net cash used in financing activities.................................. (1,288) (2,632)
------- -------
Net increase (decrease) in cash and cash equivalents................................... 91 (1,653)
Cash and cash equivalents, beginning of period......................................... 84 2,248
------- -------
Cash and cash equivalents, end of period............................................... $ 175 $ 595
======= =======
Supplemental disclosures of cash flow information:
Cash paid for:
Interest....................................................................... $ 464 $ 1,282
======= =======
See accompanying notes.
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BACKGROUND AND BASIS OF PRESENTATION:
ImageMax, Inc. ("ImageMax") is a single-source provider of outsourced document
management solutions to companies located throughout the United States and
concentrated primarily in the health care, financial services, engineering and
legal services industries. 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 imaging and indexing software. The Company has one
reportable segment.
The accompanying unaudited condensed consolidated financial statements include
the accounts of ImageMax and its subsidiary (the "Company"). All material
intercompany balances and transactions have been eliminated in consolidation.
The consolidated balance sheet as of December 31, 2001 has been derived from the
Company's consolidated financial statements that have been audited by the
Company's independent auditors.
The unaudited financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information pursuant to rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, unaudited interim financial statements
such as those in this report allow certain information and footnotes required by
accounting principles generally accepted in the United States for year end
financial statements to be excluded. The Company believes all adjustments
necessary for a fair presentation of these interim financial statements have
been included and are of a normal and recurring nature except for the goodwill
impairment charge taken under SFAS 142. Interim results are not necessarily
indicative of results for a full year. These interim financial statements should
be read in conjunction with the Company's pro forma and historical financial
statements and notes thereto included in its Annual Report on Form 10-K for the
year ended December 31, 2001.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES:
Other than Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangibles" ("SFAS 142"), there were no changes in the accounting
policies of the Company during the periods presented. For a description of these
policies, refer to Note 2 to Consolidated Financial Statements of ImageMax, Inc.
and Subsidiary included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001. For a description of SFAS 142 and its impact on the
Company, refer to Note 5 hereof.
3. NEW ACCOUNTING STANDARDS:
Effective January 1, 2002, Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"), was adopted. SFAS No.
142 requires the testing of goodwill and indefinite-lived intangible assets for
impairment rather than amortizing them. ImageMax ceased amortizing goodwill
effective January 1, 2002 and determined during the second quarter of 2002 that
its goodwill was impaired. The Company's amortization of goodwill and
indefinite-lived intangible assets was $1.8 million during the year 2001.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). Among other things, SFAS No. 144 significantly changes the criteria that
would have to be met to classify an asset as held-for-sale. This statement
supersedes Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", and the provisions of Accounting Principles Board Opinion 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" that relate to reporting the effects of a disposal of a segment of
a business. The Company adopted SFAS 144 effective January 1, 2002, when
adoption was mandatory. This new accounting standard had no impact on the
Company's consolidated results.
In August 2001, Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations" ("SFAS No. 143"), was issued. This statement
significantly changes the method of accruing for costs that an entity is legally
obligated to incur associated with the retirement of fixed assets. The Company
will evaluate the impact and timing of implementing SFAS No. 143, which is
required no later than January 1, 2003.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to the current year
presentation.
5. GOODWILL AND INTANGIBLE ASSETS:
Cumulative Effect of Accounting Policy Change
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS Nos.
141 and 142, "Business Combinations" and "Goodwill and Other Intangibles." SFAS
141 requires all business combinations initiated after July 1, 2001, to be
accounted for using the purchase method. SFAS 142 concluded that purchased
goodwill would not be amortized but would be reviewed for impairment when
certain events indicate that the goodwill of a reporting unit is impaired. The
Company, which has one operating segment, has determined that its reporting
units should be aggregated under SFAS 142 and deemed a single reporting unit
because they have similar economic characteristics. The impairment test uses a
fair value based approach, whereby if the implied fair value of a reporting
unit's goodwill is less than its carrying amount, goodwill would be considered
impaired. SFAS 142 requires that goodwill be tested for impairment upon adoption
if an indicator of impairment exists at that date and that any transition
adjustment be recorded at the beginning of the year in which SFAS 142 is
adopted. All goodwill and indefinite-lived intangible assets must be tested for
impairment at least annually. The new goodwill model applies not only to
goodwill arising from acquisitions completed after the effective date, but also
to goodwill previously recorded.
Effective January 1, 2002, the Company adopted SFAS 142. Upon adoption of SFAS
142, the Company ceased amortization of its goodwill and determined that the
fair value of the reporting units exceeded the reporting units' carrying value.
During the six months ended June 30, 2002, the Company completed its calculation
of the implied fair value of goodwill under SFAS 142 and recorded a one time,
non-cash charge of approximately $15.1 million to reduce the carrying value of
its goodwill. Such charge is non-operational in nature and is reflected as a
cumulative effect of an accounting change in the accompanying consolidated
statement of operations as of January 1, 2002. In calculating the impairment
charge, the fair value of the reporting units of the Company was estimated using
both discounted cash flow methodology and recent comparable transactions. The
Company will perform its required annual impairment review during the fourth
quarter of each year, commencing in the fourth quarter of 2002 using the same
methodology.
The following table presents the impact of SFAS 142 on income prior to
cumulative effect of accounting change per share had the standard been in effect
for the three months and nine months ended September 30, 2001.
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) - as reported $16,000 $(580,000) $171,000 $(1,150,000)
Amortization of goodwill -- 412,000 -- 1,210,000
------- --------- -------- -----------
Net income (loss) adjusted $16,000 $(168,000) $171,000 $60,000
======= ========== ======== =======
Basic and diluted income (loss) prior
to cumulative effect of accounting
change per share as reported $0.00 ($0.09) $0.03 $(0.17)
===== ======= ===== ======
Basic and diluted income (loss) prior
to cumulative effect of accounting
change per share as adjusted $0.00 $(0.02) $0.03 $0.01
===== ======= ===== =====
The Company is required to perform goodwill impairment tests on an annual basis
and between tests in certain circumstances. For the period from June 30, 2002
through November 13, 2002, no further impairment indicators were noted. No
additional impairment charge of goodwill has been recognized. There can be no
assurance that future goodwill impairment tests will not result in an additional
charge to earnings.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. LONG-TERM DEBT:
On June 14, 2002, ImageMax, Inc. (the "Company") completed the closing (the
"Closing") of a new $7.48 million senior credit facility (the "Credit Facility")
pursuant to the Credit Agreement dated June 13, 2002 (the "Credit Agreement")
with Commerce Bank, NA and FirsTrust Bank (the "Lenders"). The Credit Facility
consists of a $5.25 million revolving credit line (the "Revolving Credit Line")
and a $2.23 million term loan (the "Term Loan"). The Company used the proceeds
of the Credit Facility to repay existing senior debt and for working capital.
Under the Revolving Credit Line, the Company is required to pay interest monthly
at the prime rate plus 2.0% (effective rate of 6.75% as of September 30, 2002).
The outstanding principal of the Revolving Credit Line is due and payable at the
end of term on June 30, 2003. Borrowing availability is based on the level of
the Company's eligible accounts receivable, as defined in the Credit Agreement.
As of September 30, 2002, approximately $4.7 million was outstanding under the
Revolving Credit Line, and approximately $539,000 was available under the credit
line. The Company borrowed $300,000 on the Revolving Credit Line in October
2002.
Under the Term Loan, interest is payable monthly at the prime rate plus 2.0%
(effective rate of 6.75% as of September 30, 2002). The outstanding principal
amount of the Term Loan is due and payable in three consecutive quarterly
payments of $500,000 commencing June 30, 2002, with two additional quarterly
installments of $365,000 due on March 31, 2003 and June 30, 2003. At September
30, 2002, the Company paid its quarterly installment of $500,000 which resulted
in a balance on the Term loan of $1.23 million.
The Credit Facility restricts the payment of dividends and is secured by
substantially all assets of the Company and requires maintenance of various
financial and restrictive covenants, including a minimum level of quarterly
EBITDA of $750,000 (commencing with the second quarter of 2002), total
liabilities not exceeding fifty percent (50%) of net worth (as defined in the
Credit Agreement), and no interest payment on the subordinated convertible notes
issued to the Investors (as defined below) until February 15, 2004.
The Company paid $56,115 in bank fees at the Closing, and an additional $56,115
on September 12, 2002, which are being amortized over the loan term.
In connection with the Credit Facility, the Company entered into an interest
rate cap agreement maturing on June 13, 2003, with a total notional amount of
$2,000,000. The Company paid the counterparty a premium of $7,500 on June 12,
2002, and will receive monthly an amount equal to the product of the amount by
which the Prime Rate (4.75% at September 30, 2002) exceeds the Cap Rate (6.5%)
multiplied by the notional amount. The premium is being amortized over a one
year period. Since entering the interest rate cap agreement, the Prime Rate has
not exceeded the Cap Rate. Accordingly, the Company has not received any
payments under this agreement.
In April 1999, the Company executed a $900,000 mortgage loan with a lender
relating to a Company-owned property that houses a production facility. 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 (9.00% at September 30, 2002). 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.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. SUBORDINATED CONVERTIBLE DEBT:
In order for the Company to enter into the Credit Facility, the Company's
subordinated debt holders, TDH III, L.P., Dime Capital Partners, Inc. and Robert
E. Drury (the "Investors"), were required to forego payments of interest until
February 15, 2004. In consideration for such forbearance of interest, the
Company and the Investors amended the terms of the $6 million convertible
subordinated loan and warrant purchase agreement (the "Amendment") on June 14,
2002.
Under the terms of the Amendment, the Investors received new convertible
subordinated notes (the "New Notes") that replaced the existing notes purchased
by the Investors on February 15, 2000 and capitalized $0.27 million of the
currently outstanding interest. The New Notes and accrued interest are due and
payable on February 15, 2004. Interest accrues at a rate of nine percent (9%),
compounded semi-annually on June 30 and December 31. The Company cannot
voluntarily prepay the New Notes. However, the Company can elect to extend the
due date of the New Notes to February 15, 2005 (the "Extension Right"), if the
Company pays seventy-five percent (75%) of the currently outstanding principal
balance of the New Notes and interest accrued thereon by February 15, 2004. Up
to an aggregate of approximately $2.0 million of the principal amount of the New
Notes is voluntarily convertible by the Investors into the Company's common
stock, no par value, (the "Common Stock") at a price of $0.40 per share (subject
to downward adjustment under certain circumstances), for approximately 4.9
million shares of Common Stock.
The Company also issued new warrants (the "New Warrants") that replaced the
existing warrants issued to the Investors on February 15, 2000. The New Warrants
provide that the Investors may purchase an aggregate of 1.8 million shares of
Common Stock (subject to downward adjustment under certain circumstances) at
$3.50 per share (subject to downward adjustment under certain circumstances).
The New Warrants are only exercisable once the Company has repaid the New Notes
in full. If the holder of a New Warrant converts its New Note, in whole or in
part, into shares of Common Stock, their New Warrant will be cancelled.
Furthermore, the New Warrants will be cancelled if the Additional Warrants
(defined below) becomes exercisable.
The Company also issued additional warrants (the "Additional Warrants") to
purchase an aggregate of 8.4 million shares of Common Stock at a price per share
equal to the lesser of (i) $0.25 or (ii) eighty percent (80%) of the market
price of the Common Stock at the time of exercise. The Additional Warrants are
only exercisable upon (i) the date the Company defaults in the payment of any
amount due and payable under the New Notes, regardless of whether or not the
Company has exercised its Extension Right, or (ii) if the Company has exercised
its Extension Right, the date the Company pays the New Notes in full. Once the
Additional Warrant is exercisable, the New Warrants will be cancelled. The
Additional Warrant is exercisable for a period equal to (i) two (2) years in the
event of a default in the payment of amounts due and payable by the Company or
(ii) two (2) years from the date the Company exercised the Extension Right in
the event the Company pays the New Notes in full. If the Company defaults in the
payment of amounts due and payable under the New Notes, when the Company either
(i) does not exercise its Extension Right or (ii) exercises its Extension Right
after the New Notes have been converted, in whole or in part, into shares of
Common Stock, then the Investors can exercise the Additional Warrant by delivery
of two-year, interest free, non-recourse notes secured by the pledge of the
Additional Warrant shares or by cashless exercise, and the Investors shall be
entitled to vote the 8.4 million shares of Common Stock. In the event that the
Company exercises its Extension Right and pays the remainder due by February 15,
2005, and the New Notes have not been converted, in whole or in part, into
shares of Common Stock, then the number of shares of Common Stock purchasable
under the Additional Warrants shall be reduced to an aggregate of 2.2 million
shares of Common Stock.
8. INCOME TAXES:
At September 30, 2002, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $11.9 million expiring in 2016
through 2021. 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 loss on the sale of business units and goodwill
amortization. The timing and manner in which the company will utilize the net
operating loss carryforwards in any year, or in total, may be limited by the
provision of the Internal Revenue Service Code. Such limitation may have an
impact on the ultimate realization and timing of these net operating loss
carryforwards.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. INCOME TAXES (continued):
At September 30, 2002, 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 the Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes".
9. EARNINGS PER SHARE:
The Company has presented net income (loss) per share pursuant to SFAS No. 128,
"Earnings Per Share", which requires dual presentation of basic and diluted
earnings per share. Basic earnings per share ("Basic EPS") is computed by
dividing the net income (loss) for the period by the weighted average number of
shares of common stock outstanding for the period. Diluted earnings per share
("Diluted EPS") is computed by dividing net income (loss) for the period by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period. For the three months and nine months ended
September 30, 2002, common stock equivalents are not included because option
exercise prices and debt conversion prices exceed the average market price for
the period and as such, Basic EPS and Diluted EPS are the same. For the three
months and nine months ended September 30, 2001, common stock equivalents are
not included, as their effect is antidilutive and, as such, Basic EPS and
Diluted EPS are the same.
8
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Report on Form 10-Q contains certain forward-looking statements that
involve substantial risks and uncertainties. When used in this Report, the words
"anticipate," "believe," "estimate," "expect," "intend," 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" as disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 and other ImageMax filings with the Securities and
Exchange Commission, and risks associated with the results of the continuing
operations of ImageMax. Accordingly, there is no assurance that the results in
the forward-looking statements will be achieved.
ImageMax was founded in November 1996 to become a leading, national
single-source provider of integrated document management solutions. The
Company's revenues are derived from a broad range of media conversion, storage
and retrieval services, the sale of proprietary, as well as third party
open-architecture software products which support digital imaging and indexing
services and the sale and service of a variety of document management equipment.
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.
Critical Accounting Policies
The following discussion and disclosures included elsewhere in this Report, are
based upon the unaudited consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates, judgments and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities at the date of the financial statements and
for the period then ended. On an on-going basis, the Company evaluates the
estimates used, including those related to the allowance for doubtful accounts,
impairments of tangible and intangible assets, income taxes, and contingencies.
The Company has based its estimates on historical experience, current conditions
and various other assumptions that the Company believes to be reasonable under
the circumstances. These estimates form the basis for making judgments about the
carrying values of assets and liabilities and are not readily apparent from
other sources. The Company uses these estimates to assist in the identification
and assessment of the accounting treatment necessary with respect to commitments
and contingencies. Actual results may differ from these estimates under
different assumptions or conditions. The Company believes the following critical
accounting policies involve more significant judgments and estimates used in the
preparation of the consolidated financial statements.
Revenue Recognition
The Company recognizes media conversion services revenue on services in process,
such as scanning projects, based on the percentage-of-completion method in
accordance with SOP 81-1. Revenue generated from software sales fall under the
guidance of SOP 97-2. Hardware and other equipment revenue is recognized FOB
shipping point.
Accounting for Acquisitions
The Company was founded in November 1996 and on December 4, 1997 completed its
initial public offering (the "Offering"). Concurrent with the Offering, the
Company began material operations with the acquisition of 14 document management
service companies and in the first eight months of 1998 acquired an additional
13 document management service companies. The purchase price of these
acquisitions was determined after due diligence of the acquired business, market
research, strategic planning, and the forecasting of expected future results and
synergies. Estimated future results and expected synergies are subject to
revisions as the Company integrates each acquisition and attempts to leverage
resources.
Each acquisition was accounted for using the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16, "Accounting for
Business Combinations" resulting in the capitalization of the cost in excess of
fair value of the net assets acquired in each of these acquisitions as goodwill.
9
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company's acquisitions have resulted in a significant accumulation of
goodwill and for acquisitions prior to July 1, 2001, the Company amortized the
related goodwill over an estimated benefit period of 30 years. There have been
no acquisitions completed after July 1, 2001 and the Company is no longer
amortizing goodwill beginning on January 1, 2002, in accordance with SFAS 142,
"Goodwill and Other Intangible Assets". Upon adoption of SFAS 142 during the six
months ended June 30, 2002, the Company completed its calculation of the implied
fair value of goodwill under SFAS 142 and recorded a one time, non-cash charge
of approximately $15.1 million to reduce the carrying value of its goodwill.
Such charge is non-operational in nature and is reflected as a cumulative effect
of an accounting change in the accompanying consolidated statement of operations
as of January 1, 2002. In calculating the impairment change, the fair value of
the reporting units of the Company was estimated using both discounted cash flow
methodology and recent comparable transactions. The Company will perform its
required annual impairment review during the fourth quarter of each year,
commencing in the fourth quarter of 2002 using the same methodology.
Historical Results of Operations
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001
Overview. For the three months ended September 30, 2002, net income amounted to
$16,000 or $0.00 per Basic and Diluted share compared to a net loss of $580,000
or $0.09 per Basic and Diluted share for the three months ended September 30,
2001.
Revenues. For the three months ended September 30, 2002, total revenues
increased $0.1 million, or 1.2%, as compared to the corresponding period in
2001. This was primarily due to a services revenue increase of 1.9%. For the
three months ended September 30, 2002, services revenue and products revenue,
respectively, comprised 84.8% and 15.2% of total revenues, as compared to 84.3%
and 15.7% in the corresponding period in 2001.
In services revenue, legal conversion services, litigation coding and electronic
data discovery were the primary drivers of the third quarter increase. In
addition, ImageMaxOnline, the Company's internet document repository, reported a
modest increase in the quarter. Products revenue was flat versus 2001; however,
the mix was favorable as higher margin software products were the larger
component of revenue in the quarter.
Gross profit. For the three months ended September 30, 2002, gross profit
increased by $0.1 million, or 2.6%, as a result of higher revenues and improved
gross profit percentage due to favorable mix gains. Gross profit percentage
improved from 35.9% to 36.4% in the current quarter 2002 versus the same
corresponding quarter in 2001.
Selling and administrative expenses. For the three months ended September 30,
2002, S&A expenses decreased by $0.1 million, or 2.0%, as compared to the
corresponding period in 2001. The decrease resulted from the Company's ongoing
efforts to centralize its accounting and administrative functions net of
investments aimed at expanding its sales presence in major metropolitan markets
such as Chicago, Los Angeles and Minneapolis.
Interest expense. For the three months ended September 30, 2002, interest
expense amounted to $0.3 million, as compared to interest expense of $0.4
million in the corresponding period in 2001. The decrease is due to lower senior
debt levels and lower interest rates in 2002 versus 2001.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended
September 30, 2001
Overview. For the nine months ended September 30, 2002, net loss amounted to
$14.9 million or $2.22 per Basic and Diluted share compared to a net loss of
$1.1 million or $0.17 per Basic and Diluted share for the nine months ended
September 30, 2001. In addition, for the nine months ended September 30, 2002,
income before cumulative effect of accounting change amounted to $171,000 or
$0.03 per Basic and Diluted share before the Company recorded an impairment
charge of $15.1 million due to the implementation of SFAS 142 during the nine
months ended September 30, 2002.
Revenues. For the nine months ended September 30, 2002, total revenues decreased
$4.1 million, or 11.3%, as compared to the corresponding period in 2001. This
was due to a product revenue decrease of 22.4% and a service revenue decrease of
9.0%. For the nine months ended September 30, 2002, service revenue and product
revenue, respectively, comprised 85.1% and 14.9% of total revenues, as compared
to 83.0% and 17.0% in the corresponding period in 2001.
10
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The decline in total revenue was due primarily to lower micrographics conversion
services and equipment and supplies sales as the Company continues its
transition to higher margin services and products. Overall, the Company's
revenue mix continues to improve with digital conversion services, legal
services, ImageMaxOnline, and software and systems sales increasing as a
percentage of total revenue.
Gross profit. For the nine months ended September 30, 2002, gross profit
decreased by $0.9 million, or 7.2%, as compared to the corresponding period in
2001 as a result of lower revenues. However, during the same corresponding
periods, gross profit percentage increased from 36.0% to 37.8% due to favorable
revenue mix gains due to the Company's migration to digital conversion services,
and software products along with lower operating costs.
Selling and administrative expenses. For the nine months ended September 30,
2002, S&A expenses decreased by $0.8 million, or 6.6%, as compared to the
corresponding period in 2001. The decrease resulted from the Company's ongoing
efforts to centralize its accounting and administrative functions net of
investments aimed at expanding its sales presence in major metropolitan markets.
Interest expense. For the nine months ended September 30, 2002, interest expense
amounted to $0.9 million, as compared to interest expense of $1.3 million in the
corresponding period in 2001. The decrease is due to lower senior debt levels
and lower interest rates in 2002 versus 2001.
Liquidity and Capital Resources
As of September 30, 2002, the Company had cash and cash equivalents of $0.2
million and a working capital deficit of $3.5 million. The working capital
deficit includes the outstanding balance of the Revolving Credit Line of $4.7
million which is due June 30, 2003. As of December 31, 2001 the Company had cash
and cash equivalents of $0.1 million and working capital of $0.6 million. In
addition, the Company made $1.5 million in principal payments on the Term Loan
for the nine months ended September 30, 2002. For the nine months ended
September 30, 2002 net cash provided by operating activities amounted to $1.8
million; net cash used in investing activities amounted to $0.4 million; and net
cash used in financing activities amounted to $1.3 million.
Net cash provided by operating activities primarily represents net income before
depreciation and amortization and cumulative effect of accounting change. For
the nine months ended September 30, 2002, liquidation of supplies inventory to
meet maintenance and conversion services demands, increases in deferred revenue
for advance cash deposits on software and systems installations, and increases
in accounts payable to accommodate working capital needs were offset by
increased billings to customers, increases in prepaid assets and deposits for
upcoming projects, and decreases in accrued expenses due to payments of
restructuring charges incurred during 2001.
Net cash used in investing activities represents the Company's investments in
production facilities equipment and information technology for ImageMaxOnline,
the sales force and corporate headquarters. For the nine months ended September
30, 2002, the Company made capital expenditures of $0.4 million.
Net cash used in financing activities primarily represents the $1.5 million of
payments under the Term Loan and $0.3 million in payments of deferred financing
costs offset by $0.5 borrowings on the Revolver loan. The Company borrowed
$300,000 on the Revolving Credit Line in October 2002.
The Company continues to selectively invest in equipment and technology to meet
the needs of its operations and to improve its operating efficiency. The Company
may also consider selective synergistic in-market acquisitions in the future.
The Company believes that its operating cash flow together with the unused
portion of the new Revolving Credit Line will be sufficient to finance current
operating requirements through the first half of 2003.
Credit Facility (The following disclosure is consistent with Note 6 to the
Consolidated Financial Statements)
On June 14, 2002, ImageMax, Inc. (the "Company") completed the closing (the
"Closing") of a new $7.48 million senior credit facility (the "Credit Facility")
pursuant to the Credit Agreement dated June 13, 2002 (the "Credit Agreement")
with Commerce Bank, NA and FirsTrust Bank (the "Lenders"). The Credit Facility
consists of a $5.25 million revolving credit line (the "Revolving Credit Line")
and a $2.23 million term loan (the "Term Loan"). The Company used the proceeds
of the Credit Facility to repay existing senior debt and for working capital.
11
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Under the Revolving Credit Line, the Company is required to pay interest monthly
at the prime rate plus 2.0% (effective rate of 6.75% as of September 30, 2002).
The outstanding principal of the Revolving Credit Line is due and payable at the
end of term on June 30, 2003. Borrowing availability is based on the level of
the Company's eligible accounts receivable, as defined in the Credit Agreement.
As of September 30, 2002, approximately $4.7 million was outstanding under the
Revolving Credit Line and approximately $539,000 was available under the credit
line. The Company borrowed $300,000 on the Revolving Credit Line in October
2002.
Under the Term Loan, interest is payable monthly at the prime rate plus 2.0%
(effective rate of 6.75% as of September 30, 2002). The outstanding principal
amount of the Term Loan is due and payable in three consecutive quarterly
payments of $500,000 commencing June 30, 2002, with two additional quarterly
installments of $365,000 due on March 31, 2003 and June 30, 2003. At September
30, 2002, the company paid $500,000 which resulted in a balance on the Term loan
of $1.23 million.
The Credit Facility restricts the payment of dividends and is secured by
substantially all assets of the Company and requires maintenance of various
financial and restrictive covenants, including a minimum level of quarterly
EBITDA of $750,000 (commencing with the second quarter of 2002), total
liabilities not exceeding fifty percent (50%) of net worth (as defined in the
Credit Agreement), and no interest payment on the subordinated convertible notes
issued to the Investors (as defined below) until February 15, 2004.
The Company paid $56,115 in bank fees at the Closing, and an additional $56,115
on September 12, 2002.
In connection with the Credit Facility, the Company entered into an interest
rate cap agreement maturing on June 13, 2003, with a total notional amount of
$2,000,000. The Company paid the counterparty a premium of $7,500 on June 12,
2002, and will receive monthly an amount equal to the product of the amount by
which the Prime Rate (4.75% at September 30, 2002) exceeds the Cap Rate (6.5%)
multiplied by the notional amount. Since entering the interest rate cap
agreement, the Prime Rate has not exceeded the Cap Rate. Accordingly, the
Company has not received any payments under this agreement.
Convertible Subordinated Debt (The following disclosure is consistent with Note
7 to the Consolidated Financial Statements)
In order for the Company to enter into the Credit Facility, the Company's
subordinated debt holders, TDH III, L.P., Dime Capital Partners, Inc. and Robert
E. Drury (the "Investors"), were required to commit to forego payments of
interest until February 15, 2004. In consideration for such forbearance of
interest, the Company and the Investors amended the terms of the $6 million
convertible subordinated loan and warrant purchase agreement (the "Amendment")
on June 14, 2002.
Under the terms of the Amendment, the Investors received new convertible
subordinated notes (the "New Notes") that replaced the existing notes purchased
by the Investors on February 15, 2000 and capitalized $0.27 million of the
currently outstanding interest. The New Notes and accrued interest are due and
payable on February 15, 2004. Interest accrues at a rate of nine percent (9%),
compounded semi-annually on June 30 and December 31. The Company cannot
voluntarily prepay the New Notes. However, the Company can elect to extend the
due date of the New Notes to February 15, 2005 (the "Extension Right"), if the
Company pays seventy-five percent (75%) of the currently outstanding principal
balance of the New Notes and interest accrued thereon by February 15, 2004. Up
to an aggregate of approximately $2.0 million of the principal amount of the New
Notes is voluntarily convertible by the Investors into the Company's common
stock, no par value, (the "Common Stock") at a price of $0.40 per share (subject
to downward adjustment under certain circumstances), for approximately 4.9
million shares of Common Stock.
The Company also issued new warrants (the "New Warrants") that replaced the
existing warrants issued to the Investors on February 15, 2000. The New Warrants
provide that the Investors may purchase an aggregate of 1.8 million shares of
Common Stock (subject to downward adjustment under certain circumstances) at
$3.50 per share (subject to downward adjustment under certain circumstances).
The New Warrants are only exercisable once the Company has repaid the New Notes
in full. If the holder of a New Warrant converts its New Note, in whole or in
part, into shares of Common Stock, their New Warrant will be cancelled.
Furthermore, the New Warrants will be cancelled if the Additional Warrant (as
defined below) becomes exercisable.
12
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company also issued additional warrants (the "Additional Warrants") to
purchase an aggregate of 8.4 million shares of Common Stock at a price per share
equal to the lesser of (i) $0.25 or (ii) eighty percent (80%) of the market
price of the Common Stock at the time of exercise. The Additional Warrants are
only exercisable upon (i) the date the Company defaults in the payment of any
amount due and payable under the New Notes, regardless of whether or not the
Company has exercised its Extension Right, or (ii) if the Company has exercised
its Extension Right, the date the Company pays the New Notes in full. Once the
Additional Warrant is exercisable, the New Warrants will be cancelled. The
Additional Warrant is exercisable for a period equal to (i) two (2) years in the
event of a default in the payment of amounts due and payable by the Company or
(ii) two (2) years from the date the Company exercised the Extension Right in
the event the Company pays the New Notes in full. If the Company defaults in the
payment of amounts due and payable under the New Notes, when the Company either
(i) does not exercise its Extension Right or (ii) exercises its Extension Right
after the New Notes have been converted, in whole or in part, into shares of
Common Stock, then the Investors can exercise the Additional Warrant by delivery
of two-year, interest free, non-recourse notes secured by the pledge of the
Additional Warrant shares or by cashless exercise, and the Investors shall be
entitled to vote the 8.4 million shares of Common Stock. In the event that the
Company exercises its Extension Right and pays the remainder due by February 15,
2005, and the New Notes have not been converted, in whole or in part, into
shares of Common Stock, then the number of shares of Common Stock purchasable
under the Additional Warrant shall be reduced to an aggregate of 2.2 million
shares of Common Stock.
New Accounting Standards
See Note 3 in the Notes to Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is to changing interest rates. The
Company has variable-rate debt representing 53% of its total long-term debt at
September 30, 2002. If interest rates average 25 basis points more in 2002 than
they did during 2001, the Company's interest expense would increase
approximately $17,240 on an annual basis. Year-to-date as of November 13, 2002,
the prime rate and the Company's interest rates on variable-rate debt have not
changed. The Company has limited its interest rate risk by entering into an
interest rate cap agreement. The agreement, which matures on June 13, 2003, is
for a total notional amount of $2,000,000. In connection with this agreement the
Company paid the counterparty a premium of $7,500 on June 13, 2002, and will
receive monthly an amount equal to the product of the amount by which the Prime
Rate (4.75% at September 30, 2002) exceeds the Cap Rate (6.5%) multiplied by the
notional amount. Since entering the interest rate cap agreement, the Prime Rate
has not exceeded the Cap Rate. Accordingly, the Company has not received any
payments under this agreement.
13
PART II -- OTHER INFORMATION
ITEM 4. Controls and Procedures
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's
Chief Executive Officer and its Chief Financial Officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of a date
within 90 days of the filing date of this quarterly report of Form 10-Q (the
"Evaluation Date")), have concluded that as of the Evaluation Date, the
Company's disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company and its consolidated
subsidiaries would be made known to them by others within those entities,
particularly during the period in which this quarterly report on Form 10-Q was
being prepared.
ITEM 5. Other Information.
On October 22, 2002, the Company announced the appointment of two new directors
to the Company's Board, M. Christine Murphy and Dr. Frederick E. Webster, Jr.
Ms. Murphy is Chairman and Chief Executive Officer of S. Zitner Company, a
Philadelphia based manufacturer of fine confections and also serves on several
boards including Sovereign Bank, The Allegheny West Foundation and the Greater
Philadelphia Chamber of Commerce. Dr. Webster is the Charles Henry Jones 3rd
Century Professor of Management, Emeritus, at the Tuck School of Business at
Dartmouth, a Visiting Scholar of Business and Public Administration at the
University of Arizona and President of FEW Consulting Services, Inc.
Ms. Murphy was appointed a Class II director with a term expiring in 2005. Mr.
Webster was appointed a Class III director with a term expiring in 2003.
Effective October 22, 2002, the director classification for Mr. Robert E. Drury
was changed from Class I to Class III with a term expiring in 2003.
ITEM 6. Exhibits and Reports on Form 8-K.
A. Exhibits.
99.1 Certification pursuant to 18 U.S.C.ss. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C.ss. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.3 Certification pursuant to 18 U.S.C.ss. 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
99.4 Certification pursuant to 18 U.S.C.ss. 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
B. Reports on Form 8-K:
None.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IMAGEMAX, INC.
BY: /S/ MARK P. GLASSMAN November 13, 2002
-------------------- -----------------
Mark P. Glassman
Chief Executive Officer
BY: /S/ DAVID B. WALLS November 13, 2002
------------------ -----------------
David B. Walls
Chief Financial Officer, Treasurer and Secretary
15
EXHIBIT INDEX
99.1 Certification pursuant to 18 U.S.C.ss. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C.ss. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.3 Certification pursuant to 18 U.S.C.ss. 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
99.4 Certification pursuant to 18 U.S.C.ss. 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
16