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The following items were the subject of a Form 12b-25 and are included herein:
Items 1 through 15
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, 2002
[_] 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.
--------------
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA
------------ 23-2865585
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 PENNSYLVANIA AVENUE, SUITE 200, FORT WASHINGTON, PENNSYLVANIA
- ----------------------------------------------------------------- 19034
(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:
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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the ACT). Yes [ ] No |X|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $2,705,097 as of April 10, 2003. On April 10, 2003 the Registrant
had outstanding 7,311,073 shares of Common Stock, no par value.
TABLE OF CONTENTS
Item Page
- ---- ----
PART I
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
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters 14
Item 6. Selected Consolidated Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7(a). Quantitative and Qualitative Disclosures about Market Risk 22
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 23
PART III
Item 10. Directors and Executive Officers of Registrant 24
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management 31
Item 13. Certain Relationships and Related Transactions 35
PART IV Item 14 Evaluation of Disclosure Controls and Procedures 35
Item 15. Exhibits, Financial Statement Schedules and Reports On Form 8-K 35
PART I
ITEM 1. BUSINESS
ImageMax, Inc. ("the Company") was founded in November 1996. The Company is a
single-source provider of outsourced document management solutions to U.S.
companies 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.
For the year ended December 31, 2002, the Company reported a net loss of $14.9
million or $2.19 per share. The loss includes a one-time, non-cash charge as a
result of the adoption of SFAS 142, "Goodwill and Other Intangibles". This
charge reduced the carrying value of the Company's goodwill by approximately
$15.1 million or $2.22 per share. See Note 2 to the Consolidated Financial
statements. Income before the cumulative effect of the accounting change was
$0.2 million or $0.03 per share.
For the year ended December 31, 2001, the Company reported a net loss of $9.4
million or $1.40 per share. The loss includes a restructuring charge of $5.9
million. In addition, the Company recorded an operating charge of $1.1 million
in 2001, primarily related to closed production facilities; asset write-offs and
development costs related to its ScanTrax(TM) capture software. In 2001, the net
loss excluding the restructuring and operating charges was $2.4 million or $0.36
per share.
As of April 10, 2003, the Company operated from 26 facilities covering 15
states, employed approximately 600 people and provided services and products to
several thousand clients from 15 production facilities that provide full-scale
operational capabilities.
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. Advances in digital and
Internet based services and other technologies continue to provide organizations
with increasingly attractive document management options and accordingly, 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. The Company has targeted a broad array 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
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 services 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; (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; and (e) increased focus on business continuity in light of the
events of September 11, 2001.
The Company is a national service provider in a highly fragmented industry. More
than 2,000 companies serve the document management needs of industry and
government, with a majority of these companies generating annual revenues of
less than $10 million. Many of the small businesses with which the Company
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 and do not have the
volume buying power needed to negotiate favorable supply contracts. 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.
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BUSINESS STRATEGY
The Company's goal is to serve as a leading national provider of outsourced
document management solutions. The Company believes that customer and business
trends indicate (i) a movement towards outsourcing, which allows companies to
focus on core competencies; (ii) demand for value-added digital conversion
services, whereby imaging is becoming part of the business process rather than
paper replacement; and (iii) increased focus on business continuity in light of
the events of September 11, 2001. In addition, the Company believes consulting
organizations, document management providers and technology firms are
increasingly pursuing service company partnerships to provide conversion
capabilities for their customers that augment the outsourcing model.
In serving its customers and in developing its strategic and business goals, the
Company has shifted its focus to digital conversion and related service
offerings in order to meet the changing demands of the marketplace. This shift
is designed to address specific customer needs, such as: (i) the replacement of
microfilm with digital imaging; (ii) the transition of in-house document
management operations to an outsourced approach; (iii) on-line access of digital
documents via Internet web-enabled document storage and retrieval such as
ImageMaxOnline; and (iv) the continued support of product-based offerings, such
as software and equipment. The formation of strategic partnerships with, for
example, document management providers, integrators, technology firms, and
software providers, is an element of the Company's strategy to leverage its
capabilities and provide superior service to customers.
While streamlining operations and implementing a new organization structure, the
Company continues 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, specialized training programs, and a
hiring program emphasizing digital imaging. These activities are managed through
the position of EVP - Sales and Marketing and include web and intranet
initiatives, collateral and sales aids, trade shows and seminars, and a
telemarketing campaign.
In pursuing its strategic and business goals, the Company has focused its
efforts organizationally on integrating operations and building a management
structure that supports a regionally-based sales and service organization. These
efforts to date have included the consolidation of operations in several
markets, the reassignment of former managers, sales force investments, the
alignment of production facilities into three regions (East, Central, and West)
along geographic/vertical market lines, and the establishment of a formal
organization structure that facilitates an integrated national approach. The
Company believes it has begun to realize the benefits of this structure through
improved coordination of sales activities, production capabilities, and
technical skills in the fulfillment of customer requirements.
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 believes that it 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 via its web-enabled hosting site ImageMaxOnline
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, and the ability to support and
distribute digital images directly to the desktop of multiple workers in
multiple locations at any time.
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
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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.
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.
Software
The Company sells and supports third party document management software. These
software products are marketed by the Company through a network of 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.
In addition, the Company 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(TM), was initially
developed for use by document management companies in their digital conversion
operations. Other Company products, such as FileTrax(R), were developed for
marketing to end-users. The Company has also developed and markets scanning and
viewing software package for the aperture card market called ImageMax ES. 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.
Hardware and other equipment
The Company maintains broker or dealer relationships with a number of document
management equipment suppliers, including Bell & Howell, 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 production facilities provide extensive field maintenance and repair
services for the equipment they sell. Various production facilities have
specialized technical hardware and systems integration expertise that 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 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 has a broad base of clients and no single client accounted for more
than 5% of consolidated revenues for the years ended December 31, 2002, 2001 or
2000. The Company's customers are not concentrated in any specific geographic
area, but are concentrated primarily in the health care, financial services,
engineering, and legal services 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
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:
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The Health Care Market: consists of health care providers, health care insurers
and pharmaceutical companies.
The Legal Services Market: consists of law firm litigation projects.
The Financial Services Market: consists of commercial banks, mortgage banking
companies, insurance companies, brokerage companies and credit card and loan
processing companies.
The Engineering Market: consists of manufacturers, architectural and engineering
consultants, and utilities and telecommunications companies.
Other Vertical Markets: retail and government entities.
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 in major metropolitan markets by the Company's
50-person sales force. The Company believes that a strategy of pursuing new
accounts actively, in addition to competing for existing outsourced business
(including conversion of existing accounts from film to digital media), will
enable it to increase its market position. The Company also employs methods such
as seminar selling, telemarketing, and Internet marketing.
The Company is also pursuing larger and more complex digital conversion and
system sales by combining the capacity and technical capabilities of multiple
business units. This activity has been fostered by cross-company meetings and
training, improved communications, in part facilitated by the Company's
intranet, and coordination among regional management. 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.
The Company has developed an Internet Application Service Provider ("ASP")
strategy to provide comprehensive imaging solutions including image search and
retrieval, computer output to laser disk ("COLD"), workflow, and electronic
document management systems to the marketplace. During 2002, the Company
continued refining ImageMaxOnline, its ASP-based offering, with the goal of
shortening the sales cycle and providing customer benefits in the form of
reduced capital, technology, and infrastructure risks typically associated with
in-house systems. The Company believes that ImageMaxOnline facilitates
involvement in new opportunities that occur earlier in the document life cycle
and generate both recurring hosting-related revenues along with pull-through
conversion business. In executing its Internet ASP strategy, the Company
utilizes a combination of internal and external resources that best serve
customers, including third-party arrangements with software and technology
firms.
COMPETITION
The document management services industry is highly competitive, with a
significant source of competition being 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 competitors include Affiliated Computer Services, Inc., Anacomp Inc.,
IKON Office Solutions, Lason, Inc., On-Site Sourcing, Inc., and SourceCorp
(formerly F.Y.I. Incorporated). These competitors may be larger than the
Company, have greater financial and other resources and/or 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.
INTELLECTUAL PROPERTY
The Company regards the ImageMax name, 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
4
Company to protect its proprietary information and could result in substantial
cost to, and diversion of efforts by, the Company. See Item 3: "Legal
Proceedings".
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 cannot 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, 2002, the Company had approximately 600 employees,
approximately 110 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.
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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 know of or that the Company currently thinks are immaterial may also impair
the Company's 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.
THE COMPANY HAS A HISTORY OF OPERATING LOSSES
The Company has incurred significant operating losses since its inception and
has accumulated a deficit of approximately $40.6 million as of December 31,
2002. There can be no assurance the Company will be able to operate profitably
in the near future.
For the year ended December 31, 2002, the Company reported a net loss of $14.9
million or $2.19 per share. The loss includes a one-time, non-cash charge as a
result of the adoption of SFAS 142, "Goodwill and Other Intangibles". This
charge reduced the carrying value of the Company's goodwill by approximately
$15.1 million or $2.22 per share. Income before the cumulative effect of the
accounting change was $0.2 million or $0.03 per share.
For the year ended December 31, 2001, the Company reported a net loss of $9.4
million or $1.40 per share. The loss includes a restructuring charge of $5.9
million. In addition, the Company recorded an operating charge of $1.1 million
in 2001, primarily related to the closed production facilities; asset write-offs
and development costs related to its ScanTrax(TM) capture software. In 2001, the
net loss excluding the restructuring and operating charges was $2.4 million or
$0.36 per share.
See Note 2 to the Consolidated Financial Statements for further discussion of
the Company's ability to continue as a going concern.
FAILURE TO MEET THE COMPANY'S OBLIGATIONS TO ITS DEBT HOLDERS COULD ADVERSELY
AFFECT THE COMPANY'S OPERATIONS
On June 14, 2002, the Company restructured its senior credit facility ("Credit
Facility") and subordinated debt agreement pursuant to a default under previous
credit agreements with Commerce Bank, NA and FirsTrust Bank ("Senior Lenders")
and subordinated debt investors. Default under these amended agreements, such as
the failure to make required principal and interest payments could result in the
Senior Lenders or investors immediately demanding repayment of all outstanding
amounts, which could have a material adverse effect on the Company's business,
financial condition, and results of operations.
THE RESTRUCTURING OF THE COMPANY'S AGREEMENT WITH ITS SUBORDINATED DEBT HOLDERS
COULD BE DILUTIVE TO EXISTING SHAREHOLDERS AND UPON DEFAULT COULD RESULT IN A
CHANGE IN CONTROL OF THE COMPANY
In order for the Company to enter into the June 14, 2002 Credit Facility, the
Company's subordinated debt holders, TDH III, L.P., LVIR Investor Group, LP
(formerly 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
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
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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 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) become 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.
THE COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ NATIONAL MARKET
The Common Stock currently trades on the OTC Bulletin Board. In 1999, the Common
Stock was delisted from the Nasdaq National Market because of the Company's
inability to remain in compliance with certain financial and per share market
price requirements. The Common Stock does not now, and may never; meet the
requirements for re-listing on the Nasdaq National Market. The inability to list
the Common Stock on the Nasdaq National Market substantially reduces the
liquidity of, and market for, the Common Stock.
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 the general economic and market conditions and trends;
o the Company's financial results;
o quarterly variations in the Company's financial results;
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 and may adversely affect the price of the Common Stock.
7
SIGNIFICANT AMOUNTS OF ACQUIRED GOODWILL COULD POTENTIALLY REDUCE FUTURE NET
INCOME
As of December 31, 2002, $20.0 million, or 55.8%, of the Company's total assets
represented intangible assets arising from its acquisitions, of which $19.7
million was goodwill and $0.3 million was acquired developed technology.
Goodwill is an intangible asset that represents the difference between the total
purchase price of these acquisitions and the amount of the purchase price
allocated to the fair value of the net assets acquired. In addition, as was the
case when the Company sold and closed locations in 2001, 1999, and 1998, if the
Company sells or liquidates its assets, the Company cannot be sure that the
value of these intangible assets would be recovered. The Company cannot be
certain that it will be able to fully realize these intangible assets over their
amortization periods.
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 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 completed its
calculation of the implied fair value of goodwill. As a result of the
calculation, the Company recorded a non-cash charge of approximately $15.1
million or $2.22 per share to reduce the carrying of 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 statements 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, using
the same methodology.
The Company performed a goodwill impairment test during the fourth quarter of
2002 and effective on December 31, 2002, which resulted in no additional
impairment charges to goodwill for 2002. For the period from December 31, 2002,
through April 10, 2003, no further impairment indicators were noted. There can
be no assurance that future goodwill impairment tests will not result in an
additional charge to earnings.
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.
THE COMPANY OPERATES IN A HIGHLY COMPETITIVE INDUSTRY
The Company operates in a highly competitive environment. The document
management services industry is highly fragmented and has relatively low
barriers to entry. A significant source of competition comes from the in-house
document handling capability of businesses within the Company's target markets.
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. In addition,
certain of the Company's competitors are larger than the Company, have greater
financial and other resources and/or operate in broader geographic areas than
8
the Company. Also, 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
The Company's operations depend on the performance of its executive management
team, the senior management of its regional teams and the quality and
effectiveness of its sales force. If any of the executive management team or
senior management of the regional teams is unable or unwilling to continue in
their present roles, or if the Company is unable to attract and retain other
skilled employees, including salespersons, the Company's business, financial
condition and results of operations could be materially and adversely affected.
The Company's future success and growth plans 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. 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, legal 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.
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 the timing and structure of acquisitions or dispositions;
o the timing and magnitude of costs related to acquisitions or
dispositions; and
o other factors that may be outside of the Company's control.
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 damage the Company's
reputation, expose the Company to liability, and could have a material adverse
effect on the Company's business, financial condition and results of operations.
9
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 this business
through contracts with local, state and federal government agencies, however,
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 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 any of 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.
SECURITY PROBLEMS WITH THE INTERNET MAY INHIBIT THE EXECUTION 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 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 this system or other Internet-based systems
could significantly harm this aspect of the Company's business. Someone 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 ImageMaxOnline.
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
10
market purchases of the Common Stock or a non-negotiated tender or 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.
11
ITEM 2. PROPERTIES
The Company's headquarters offices are in Fort Washington, Pennsylvania
occupying 5,535 square feet maintained under a lease expiring in December 2004.
As of April 10, 2003, the Company conducted operations through one mortgaged
property and 25 other leased facilities in 15 states containing, in the
aggregate, approximately 315,000 square feet. The Company's principal facilities
are summarized in the following table (alphabetized by state):
Approximate
Location Square Footage Principal Use(S)
- -------- -------------- ----------------
Phoenix, AZ 4,600 Document management operations, offices
Anaheim, CA 7,000 Document management operations, offices
Hayward, CA 3,000 Document management operations, offices
Sacramento, CA 12,000 Document management operations, offices
Chesterton, IN* 41,000 Document management operations, offices
Chesterton, IN 11,000 Warehouse
Indianapolis, IN 300 Office
Valparaiso, IN 28,000 Warehouse
Monroe, LA 65,000 Retail, document management operations, offices
Bossier City, LA 4,000 Offices
Canton, MA 17,000 Document management operations, offices
Saginaw, MI 20,000 Document management operations, offices
Minnetonka, MN 7,000 Document management operations, offices
Syracuse, NY 1,200 Warehouse
Syracuse, NY 9,000 Document management operations, offices
Valhalla, NY 7,000 Document management operations, offices
Philadelphia, PA 7,400 Document management operations, offices
Dallas, TX 15,000 Document management operations, offices
Houston, TX 15,600 Document management operations, offices
Houston, TX 3,600 Warehouse
Forest, VA 21,500 Document management operations, 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% at April 10, 2003). 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 $7,600. At March
31, 2003 the Company owed approximately $865,000 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.
12
ITEM 3. LEGAL PROCEEDINGS
On February 27, 2002, the Company and Mitchell Taube, then the Company's
Executive Vice president - Marketing and Sales and a member of the Company's
Board, entered into a Severance/General Release Agreement wherein Mr. Taube
agreed (i) not to compete with the Company in any document management business;
(ii) not to solicit or employ any of the Company's employees; and (iii) not to
disclose any of the Company's confidential information.
As Executive Vice President - Marketing and Sales Development for the Company,
Mr. Taube was involved in the development and maintenance of the Company's
confidential information including financial and business models, budgets,
pricing, product development plans, product mix and marketing and sales
strategies, customer information and employee compensation.
On November 21, 2002, the Company filed a compliant in the United States
District Court for the Southern District of New York against Mr. Taube,
Digiscribe International, Inc., the company Mr. Taube incorporated while
employed at the Company, and two former Company employees - Barbara Collins and
Christopher Dutra, who are now employed by Digiscribe (the "Defendants"). The
Company has asserted claims for breach of contract, misappropriation of trade
secrets, breach of fiduciary duty, and torious interference with contractual
relations and prospective contractual relations.
The Company claims that, in founding Digiscribe, a full-service document imaging
business, during the course of his employment with the Company, Mr. Taube
violated his contractual and legal obligations to the Company. The Company also
asserts that Mr. Taube continued to violate his agreements with the Company
following his departure from the Company by soliciting and employing key Company
employees. The Company further asserts that Mr. Taube continues to violate his
contractual and legal obligations to the Company, as do the defendants Dutra and
Collins, by soliciting clients of the Company and using confidential and
proprietary information of the Company.
The Company seeks to recover damages and/or injunctive relief for the breach of
Mr. Taube's agreement with the Company. The Company believes that the actions of
the Defendants have caused, and continue to cause, significant business losses
at its New York facility.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters submitted to a vote of securityholders during fourth quarter of 2002.
13
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
symbol IMAG.OB. 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
OTC Bulletin Board, as applicable, for the two most recent fiscal years of the
Company.
High Low
---- ---
2001 First Quarter $ 0.94 $ 0.56
2001 Second Quarter $ 0.76 $ 0.41
2001 Third Quarter $ 0.64 $ 0.31
2001 Fourth Quarter $ 0.37 $ 0.12
2002 First Quarter $ 0.45 $ 0.23
2002 Second Quarter $ 0.30 $ 0.17
2002 Third Quarter $ 0.27 $ 0.18
2002 Fourth Quarter $ 0.26 $ 0.12
2003 First Quarter $ 0.37 $ 0.21
On April 10, 2003, the closing bid price for a share of Common Stock as reported
by the OTC Bulletin Board was $0.37 and the number of record holders including
the number of individual participants in security position listings of the
Common Stock was approximately 1,100. The over-the-counter market quotations
reflect inter-dealer prices, without retail markup, markdown or commission and
may not necessarily represent actual transactions.
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.
Additionally, as described in "Managements Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital resources" the
Credit Facility restricts the Company's ability to pay dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
14
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.
Year Ended December 31,
-----------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars In Thousands, Except Per Share Data)
STATEMENT OF OPERATIONS DATA:
Revenues $ 44,223 $ 46,230 $ 58,098 $ 60,223 $ 64,576
Gross profit 16,333 16,383 20,301 20,959 19,172
Operating income (loss) 1,419 (7,753) 2,631 1,360 (6,298)
Net income (loss) (14,876) (9,440) 402 (771) (8,431)
Basic and diluted net income (loss) per share $(2.19) $ (1.40) $ 0.06 $ (0.12) $ (1.40)
Gross profit percentage 36.9% 35.4% 34.9% 34.8% 29.7%
December 31,
------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars In Thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $ 878 $ 84 $ 2,248 $ 1,719 $ 736
Working capital (deficiency) 2,541 584 209 (13,281) (17,228)
Intangible assets 19,974 35,171 42,689 44,448 46,607
Total assets 35,854 48,423 62,960 64,365 69,574
Total long-term debt 13,462 11,789 10,933 970 257
Total debt 14,264 13,820 17,364 19,597 20,496
Shareholders' equity 12,821 27,692 37,093 36,073 36,652
OTHER DATA:
Cash flow from operating activities $ 2,156 $ 2,008 $ 3,625 $ 1,854 $ (194)
EBITDA (1) $ 3,123 $ 2,926 $ 6,562 $ 4,989 $ 1,744
Debt/Equity 1.12 .50 .47 .54 .56
Debt/EBITDA 4.57 4.72 2.64 3.93 11.75
(1) EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization, represented here as operating income (loss) plus depreciation and
amortization and excludes restructuring charge and operating charge:
Year Ended December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Operating income (loss) $1,419 $(7,753) $2,631 $1,360 $(6,298)
Depreciation and amortization 1,704 3,633 3,931 3,629 3,047
Restructuring change - 5,939 - - -
Loss on sale of business - - - - 4,995
Operating charge (a) - 1,107 - - -
------ -------- ------ ------ --------
$3,123 $2,926 $6,562 $4,989 $1,744
====== ======== ====== ====== ========
(a) Operating charge was primarily related to closed production facilities;
asset write-offs and development costs related to ScanTrax(TM) capture software.
15
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
The Company is a national single-source provider of integrated document
management solutions. See item 1: "Business" of this Form 10-K. 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.
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 audited 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, as units are completed under the proportional
performance method, subject to consideration of guidance in SAB#101. 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.
16
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 and recorded a 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 statements 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 performed its annual
impairment review during fourth quarter of 2002 and determined that no
additional charges were required as of December 31, 2002. For the period from
December 31, 2002 through April 10, 2003, no further impairment indicators were
noted. The Company will perform its required annual impairment review during the
fourth quarter each year using the same methodology.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR
ENDED DECEMBER 31, 2001
Overview
For the year ended December 31, 2002, net loss amounted to $14.9 million or $
2.19 per basic and diluted share compared to a net loss of $9.4 million or $1.40
per basic and diluted share for the year ended December 31, 2001. In addition,
for the year ended December 31, 2002, income before cumulative effect of
accounting change amounted to $208,000 or $0.03 per basic and diluted share
before the Company recorded an impairment charge of $15.1 million or $2.22 per
share due to the adoption of SFAS 142 during the year ended December 31, 2002.
Revenues
For the year ended December 31, 2002, total revenues decreased $2.0 million, or
4.3%, as compared to the corresponding period in 2001. Service revenues
decreased 1.6% and comprised 85.3% of total revenues in 2002, as compared to
83.0% in 2001. Product revenues decreased 17.4% and comprised of 14.7% of total
revenues in 2002, as compared to 17.0% in 2001.
The overall decline in revenue is a result of the Company's strategic focus
towards digitally based conversion services and sales of third party software in
response to declining demand and opportunities in analog based conversion
services and equipment product sales. In addition, revenues were adversely
impacted by employee and customer losses at the Company's New York facility,
which is more fully described in Item 3. Legal Proceedings on page 13.
As a result of the Company's continuing focus towards digitally based services,
service revenue experienced a slight decline in revenue due to lower
micrographic conversion services and maintenance support services related to
equipment sales. These declines were partially offset by increases in the
Company's legal conversion services of litigation coding and electronic
discovery, and a modest increase with ImageMaxOnline, the Company's internet
document repository.
As the Company shifted efforts towards third party software sales, product
revenue declined due to lower sales of equipment and hardware. These declines
were partially offset by increases in sales of higher margin third party
software.
Gross Profit
For the year ended December 31, 2002, gross profit was primarily flat as
compared to 2001 as a result lower revenues offset by improved gross margins on
overall revenue. Gross profit percentage increased from 35.4% to 36.9% due to
favorable revenue mix gains primarily in digital based conversion services,
increased productivity and lower operating costs from improved operating methods
and economies of scale and higher volume from ImageMaxOnline.
Selling and Administrative Expenses
For the year ended December 31, 2002, S&A expenses decreased by $1.8 million, or
11.0%, as compared to 2001. The decrease resulted from the Company's strategy to
centralize its accounting and administrative functions net of investments aimed
at expanding its sales presence in major metropolitan markets and reduced costs
associated with management transitions experienced in the first half of 2001.
17
Operating Income (Loss)
For the year ended December 31, 2002, operating income increased by $9.2
million, as compared to the year ended December 31, 2001. Excluding the impact
of the 2001 restructuring charge of $5.9 million and the operating charge
(primarily related to closed production facilities; asset write-offs and
development costs related to ScanTrax(TM) capture software) of $1.1 million,
operating income increased $2.2 million. This increase resulted from: (1)
reductions of selling and administrative costs due to ongoing efforts to
centralize the Company's accounting and administrative functions and reduced
costs associated with management transitions experienced in the first half of
2001, and (2) the implementation of SFAS 142 resulted in lower amortization
expense of $1.6 million for 2002 versus 2001. See Note 4 - Intangible Assets for
pro forma operating income comparisons.
Interest Expense
For the year ended December 31, 2002, interest expense amounted to $1.2 million,
as compared to $1.6 million, in 2001. The decrease is due to lower senior debt
levels and lower interest rates in 2002 versus 2001.
Income Tax Provision
No current income tax or deferred income tax provision was recognized in 2002
due to the Company's loss position and net operating loss carryovers. The
Company's deferred tax asset for net operating losses was fully reserved at
December 31, 2002 and 2001.
Net Loss
Net loss amounted to $14.9 million or $2.19 per share in 2002 as compared to a
net loss of $9.4 million or $1.40 per share in 2001. Excluding the non-cash,
cumulative effect of accounting change in 2002, the Company had net income of
$0.2 million or $0.03 per share.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR
ENDED DECEMBER 31, 2000
Overview
For the year ended December 31, 2001, the Company reported a net loss of $9.4
million or $1.40 basic and diluted earnings per share. The loss included a
restructuring charge of $5.9 million. The restructuring charge was attributable
to closing the Dayton, OH, and Lincoln, NE and Portland, OR production
facilities. The restructuring charge included non-cash goodwill write-offs of
$5.4 million, severance costs of $0.1 million and facility costs of $0.4
million. These actions are consistent with the Company's strategy to improve
ongoing operating results, optimize its operating capacity and fund entry into
the Los Angeles market in 2002. The Anaheim, CA facility opened in October 2002.
In addition, the Company recorded an operating charge of $1.1 million in 2001,
primarily related to the closed production facilities; asset write-offs and
development costs related to its ScanTrax(TM) capture software.
The net loss excluding the restructuring and operating charges was $2.4 million
or $0.36 basic and diluted earnings per share.
Revenues
Revenues decreased $11.9 million, or 20.4%, from $58.1 million in 2000 to $46.2
million in 2001. Service revenues decreased by 20.0% and comprised 83.0% of
total revenues in 2001, as compared to 82.6% in 2000. In 2001, product revenues
decreased 22.5% and comprised 17.0% of total revenues in 2001, as compared to
17.4% in 2000.
The decline in total revenues was due primarily to: (1) lower conversion
services and equipment revenues, primarily, analog based products and services
as the Company transitions towards digital based services; and (2) the nation's
economic slowdown in the fourth quarter.
Gross Profit
For the year ended December 31, 2002, gross profit decreased by $3.9 million, or
19.3%, as compared to the corresponding period in 2000, while as a percentage of
total revenues, gross profit increased to 35.4%. The decrease of $3.9 million
was a result of the decrease in total revenues partially offset by the higher
mix of service revenues and productivity gains which resulted in the higher
gross profit percentage.
18
Selling and Administrative Expenses
For the year ended December 31, 2001, selling and administration expenses
increased by $0.4 million, or 2.8%, as compared to the year ended December 31,
2000. This increase resulted from: (1) costs incurred to revamp the Company's
sales force to a digital solutions based services proficiency; and (2) an
increase in general corporate expenses associated with insurance, workers'
compensation and professional fees.
Restructuring Charge
For the year ended December 31, 2001, the Company recorded a restructuring
charge of $5.9 million attributable to closing the Dayton, OH, Lincoln, NE and
Portland, OR operating facilities. The charge included non-cash goodwill
write-offs totaling $5.4 million, severance costs of $0.1 million and facility
costs of $0.4 million. These actions are consistent with the Company's strategy
to improve ongoing operating results, optimize its operating capacity and fund
entry into the Los Angeles market in 2002. The Company opened its facility in
Anaheim, CA in October 2002.
Operating Income (Loss)
For the year ended December 31, 2001, operating income decreased by $10.4
million, as compared to the year ended December 31, 2000. Excluding the impact
of the restructuring charge and the operating charge of $1.1 million, operating
income decreased $3.3 million. This decrease resulted from: (1) the decline in
total revenues of $11.9 million; (2) increased selling and administrative costs
of $0.4 million; and (3) which was partially offset by higher gross profit
percentages of 35.4% due to the higher mix of digital service revenues and
productivity gains.
Interest Expense
Interest expense decreased $0.6 million from $2.2 million in 2000 to $1.6
million in 2001. Interest expense for 2001 included $0.1 million relating to
bank fees. The decrease in interest expense relates to lower interest rates on
borrowings and repayment of $4.0 million of principal on the Company's senior
debt.
Income Tax Provision
No current income tax provision was recognized in 2001 due to the Company's loss
position. In 2001, due to the company's cumulative net operating loss position
for tax purposes, the Company recognized $0.1 million in income tax expense.
This expense was entirely related to deferred income taxes.
Net Loss
Net loss amounted to $9.4 million or $1.40 basic and diluted earnings per share
in 2001 as compared to a net profit of $0.4 million or $0.06 basic and diluted
earnings per share in 2000. Excluding the restructuring charge and operating
charges incurred in 2001, the Company had a net loss of $2.4 million or $0.36
basic and diluted earnings per share.
Liquidity and Capital Resources
At December 31, 2002, the Company had cash and cash equivalents of $0.9 million
and working capital of $2.5 million. On April 11, 2003, the Company completed
the Second Amendment to the Amended and Restated Credit Agreement to extend the
maturity of the Company's Revolving Credit Line ("Revolving Credit Line") from
June 30, 2003 to January 15, 2004 and to expand the borrowing availability from
$6.0 million to $7 million. In 2002, cash provided by operating activities was
$2.1 million; cash used in investing activities was $0.7 million; and cash used
in financing activities was $0.7 million. At December 31, 2001, the Company had
cash and cash equivalents of $0.1 million and working capital of $0.3 million.
In 2001, cash provided by operating activities was $2.0 million; cash used in
investing activities was $0.2 million; and cash used in financing activities was
$3.9 million.
Net cash provided by operating activities primarily represents net income before
depreciation and amortization and cumulative effect of accounting change. For
the year ended December 31, 2002, liquidation of supplies inventory to meet
maintenance and conversion services demands, 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,
decreases in accrued expenses due to payments of restructuring charges incurred
during 2001, and increases in deferred revenue for advance cash deposits on
software and systems installations.
Net cash used in investing activities represents the Company's investments in
production equipment and information technology related to ImageMaxOnline, the
sales force and corporate headquarters. For the year ended December 31, 2002,
the Company made capital expenditures of $0.7 million.
19
Net cash used in financing activities represents the $2.0 million of payments
under the Term Loan and $0.3 million in payments of deferred financing costs
offset by $1.6 million of borrowings on the Revolving Credit Line. The Company
had no availability on the Revolving Credit Line at March 31, 2003.
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 operating
requirements through 2003.
Obligations and Commitments
The Company has various short term (within 12 months) and long term (greater
than 12 months) contractual and trade obligations. The table below summarizes
the timing of such obligations.
2003 2004 2005 2006 2007 Thereafter
---- ---- ---- ---- ---- ----------
Revolving credit line $-- $ 5,744 $-- $-- $-- $--
Term Loan 730 -- -- -- -- --
Subordinated debt -- 6,678 -- -- -- --
Mortgage Loan 13 15 16 17 19 784
Capital Lease Obligations 58 62 74 38 14 --
Operating Leases 1,676 1,213 674 372 243 11
Other Accrued Expenses, primarily
operating expenses 762 -- -- -- -- --
--- ------ ----- ----- ----- -----
$ 3,239 $ 13,712 $ 764 $ 427 $ 276 $ 795
======= ======== ===== ===== ===== =====
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 expanded Revolving Credit Line will be sufficient to finance
current operating requirements through at least December 31, 2003 including
capital expenditures.
Credit Facility (The following disclosure is consistent with Note 6 to the
Consolidated Financial Statements)
On April 11, 2003, the Company completed the Second Amendment to the Amended and
Restated Credit Agreement with Commerce Bank, NA and FirsTrust Bank (the
"lenders"), which extends the maturity date of the Company's Revolving Credit
Line to January 15, 2004 and expands the borrowing availability under the
Revolving Credit Line from $6.0 to $7.0 million. The expansion of the Revolving
Credit Line is based upon the Company's Eligible Accounts Receivable and the
company intends to use the proceeds of the Revolving Credit Line primarily for
working capital purposes.
Under the Revolving Credit Line, the Company is required to pay interest monthly
at the prime rate plus 2.0% (effective rate of 6.25% as of March 31, 2003). The
outstanding principal of the Revolving Credit Line is due and payable at the end
of term on January 15, 2004. Borrowing availability is based on the level of the
Company's eligible accounts receivable, as defined in the Credit Agreement. As
of December 31, 2002, approximately $5.7 million was outstanding under the
Revolving Credit Line, and approximately $182,000 was available under the credit
line. The Company had nominal borrowing availability under the Revolving Credit
Line on March 31, 2003.
Under the Term Loan, interest is payable monthly at the prime rate plus 2.0%
(effective rate of 6.25% as of March 31, 2003). The outstanding principal amount
of the Term Loan was $730,000 at December 31, 2002. At March 31, 2003, the
outstanding balance on the term loan was $365,000 which is due June 30, 2003.
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 $746,000 (commencing with the first quarter of 2003), total
liabilities not exceeding fifty percent (50%) of net worth (as defined in the
20
Credit Agreement), and no interest payment on the subordinated convertible notes
issued to the Investors (as defined below) until February 15, 2004.
On December 23, 2002, the Company completed the First Amendment to the Amended
and Restated Credit Agreement that expanded the Company's Revolving Credit Line
from $5.25 million to $6.0 million.
On June 14, 2002, 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 the Lenders.
The Credit Facility consisted 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 purposes.
The Company incurred $40,000 in loan fees associated with the Second Amendment
payable over the second and third quarters of 2003. The Company paid $5,000 for
the First Amendment on January 2003. The Company paid $112,000 in bank fees in
2002 related to the Credit Agreement dated June 13, 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 (4.25% at December 31, 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.
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 June 14, 2002 Credit Facility, the
Company's subordinated debt holders, TDH III, L.P., LVIR Investor Group, LP
(formerly 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 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.
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
21
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.
MANAGEMENT PLANS
The Company plans to actively pursue financing alternatives in 2003 in response
to the Lender and Investor debt maturities in early 2004.
Recently Issued and Proposed Accounting Pronouncements
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. See Note 4 to the financial statements - Intangible
Assets for additional information regarding the adoption of SPAS 142.
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.
ITEM 7(A). 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 51% of its total long-term debt at
December 31, 2002. If interest rates average 25 basis points more in 2003 than
they did during 2002, the Company's interest expense would increase
approximately $18,348 on an annual basis. As of March 28, 2003, the prime rate
and the Company's interest rate 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
(4.25% at December 31, 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.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth on pages F-1 through F-17
hereto and is incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth the name, age and principal occupation of each of
the Company's directors, including the nominees.
Term Principal
Name Age Since Expires Occupation
- ---- --- ----- ------- ----------
David C. Carney 65 1997 2004 Chairman of the Board of Directors
J.B. Doherty 59 2000 2005 Director
Robert E. Drury 56 2000 2003 Director
Mark P. Glassman 39 2001 2005 Chief Executive Officer and Director
H. Craig Lewis 58 2000 2003 Director
M. Christine Murphy 54 2002 2005 Director
Frederick E. Webster, Jr. 65 2002 2004 Director
DAVID C. CARNEY became a director of the Company in December 1997 and has served
as Chairman of the board of directors since May 1999. Mr. Carney served as the
Company's Acting Chief Executive Officer from June 2000 to June 2001. Mr. Carney
was the Executive Vice President of Jefferson Health System, a health care
organization, from 1996 to April 1999. From 1991 to 1995, Mr. Carney served as
the Chief Financial Officer of CoreStates Financial Corporation. From 1980 to
1991, he served as the Philadelphia area-managing partner of Ernst & Young LLP.
Mr. Carney currently serves as a director of Radian Group, Inc. (NYSE), and AAA
Mid-Atlantic and AAA Mid-Atlantic Insurance Companies. Mr. Carney has an
undergraduate degree from Temple University and is a graduate of the Advanced
Management Program at the Harvard Business School.
J. B. DOHERTY became a director of the Company in March 2000. Mr. Doherty has
been the Chairman and President of Private Equity Management Company and
Managing General Partner of TDH since 1992. Mr. Doherty joined K.S. Sweet
Associates, a predecessor to TDH, in 1973. Prior to his role at TDH, Mr. Doherty
worked in corporate finance at Blyth Eastman Dillon. Mr. Doherty currently
serves as Chairman of the Board of Monitoring Technology Corporation. Mr.
Doherty holds a bachelor's of science degree in engineering from the United
States Naval Academy, an MBA from Stanford, and is a former officer in the
United States Marine Corps.
ROBERT E. DRURY became a director of the Company in March 2000. Mr. Drury is the
Chief Financial Officer of GCA Service Solutions, a company specializing in
facilities management to the education and corporate markets. Prior to his role,
Mr. Drury was the Chief Financial Officer of Sodexho USA-Wood Dining Services,
and Senior Vice President and Corporate Treasurer at Sodexho Marriott Services.
From 1984 to 1994, Mr. Drury was Senior Vice President and Chief Financial
Officer of the Leisure/International Sector at Aramark Corporation. Mr. Drury
holds a bachelor's of science degree in industrial engineering from Lafayette
College and a master's degree in finance and international business from New
York University.
MARK P. GLASSMAN became a director of the Company in April 2001 and has served
as the Company's Chief Executive Officer since June 2001. Mr. Glassman joined
the Company in February 1998 as Corporate Controller and was promoted to Chief
Accounting Officer in October 1998, Chief Financial Officer in May 1999, and
served as President and Chief Operating Officer from March 2001 until June 2001.
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 Business from Temple University.
24
H. CRAIG LEWIS became a director of the Company in April 2000. Mr. Lewis has
been the Vice President--Corporate Affairs at Norfolk Southern Corporation since
1997. Prior to joining Norfolk Southern, Mr. Lewis was a partner with the law
firm of Dechert Price & Rhodes. From 1971 to 1994, Mr. Lewis served in the State
Senate of Pennsylvania where he chaired the Judiciary and Ethics Committees and
was Minority Chairman of the Appropriations Committee. Mr. Lewis holds an
undergraduate degree from Millersville University and J.D. from Temple
University School of Law.
M. CHRISTINE MURPHY became a director in the Company in October 2002. Ms. Murphy
is Chairman and Chief Executive Officer of S. Zitner Company, a manufacturer of
chocolate products sold by grocery and drug chains throughout the Mid-Atlantic
area. From 1990 to 1998 Ms. Murphy was Executive Vice president and Chief
Financial Officer of WESTON, an international environment-consulting firm. In
1985, Ms. Murphy was appointed Deputy Director of Finance and Revenue
Commissioner for the City and School District of Philadelphia. Prior to 1985,
she was a partner in the firm of Arthur Young & Company, a predecessor firm to
Ernst & Young LLP. Ms. Murphy is a Certified Public Accountant and currently
serves as a director of Sovereign Bank. Ms. Murphy has an undergraduate degree
from Stonehill College and an MBA from Drexel University.
FREDERICK E. WEBSTER, JR. became a director of the Company in October 2002. Dr.
Webster is Charles Henry Jones Third Century Professor of Management, Emeritus,
at the Tuck School of Business at Dartmouth College, where he has been on the
faculty since 1965. Dr. Webster is also Visiting Scholar at the Eller College of
Business and Public Administration at the University of Arizona. Dr. Webster is
President of FEW Consulting Services, Inc., specializing in executive education
and strategic consulting and is the author of many books and articles on
marketing strategy and organization. Dr. Webster served as Executive Director of
the Marketing Science Institute in Cambridge, Massachusetts from 1987 to 1989
and was a Visiting Professor at Centre d'Etudes Industrielles in Geneva,
Switzerland. Dr. Webster currently serves as a director of Samuel Cabot, Inc.,
Rock of Ages Corporation (NASDAQ), and Diamond Phoenix Corporation, and is on
the Executive Directors Council of the Marketing Science Institute. Dr. Webster
holds a PH. D. degree from Stanford University, an MBA from the Tuck School of
Business, and an A.B. from Dartmouth College.
The Company's executive officers and their respective ages and positions are as
follows:
Name Age Position
- ---- --- --------
David C. Carney 65 Chairman of the Board of Directors
Mark P. Glassman 39 Chief Executive Officer and Director
Jay M. Rose 51 Executive Vice President-- Sales and Marketing
Richard E. Lane 35 Senior Vice President-- Operations
David B. Walls 40 Chief Financial Officer and Treasurer and Secretary
DAVID C. CARNEY - See Item 10, Directors and Executive Officers of Registrant.
MARK P. GLASSMAN - See Item 10, Directors and Executive Officers of Registrant.
JAY M. ROSE is the Executive Vice President - Sales and Marketing. He joined the
Company in November 2001. From 1998 to 2001, Mr. Rose was employed by First
Consulting Group, a publicly held global consulting firm focused on information
technology for the healthcare and life sciences industries as an Executive Vice
President and the Managing Director of FCG Life Sciences. From 1995 to 1998, Mr.
Rose was employed by Integrated Systems Consulting Group, a publicly held
systems integration services firm, where he held several positions including
Chief Operating Officer and Vice President of Sales. From 1983 to 1995, Mr. Rose
held a variety of positions at Shared Medical Systems, a publicly held company
providing information technology software and services to the healthcare
industry. Mr. Rose holds a BA from Wesleyan University, a MSE from the
University of Pennsylvania, and a MBA from Stanford University.
RICHARD E. LANE was promoted to Senior Vice President - Operations in February
2002. Mr. Lane joined the Company in June 2000 as a Product Manager and was
promoted to Senior Vice President of Technology in November 2000. In 1993, he
founded Record Technologies, Inc. (RTI), a service bureau focused on the
Litigation Support market, which he operated until January 2000. From 1990 to
1993, Mr. Lane was employed by Dun & Bradstreet Software, a developer of
financial and manufacturing applications, where he held various consulting
positions within their Professional Services division. Mr. Lane has an
undergraduate degree in Business from Bowling Green University.
25
DAVID B. WALLS has served as Chief Financial Officer since May 2001, when he
joined the Company. From March 1995 to September 2000, Mr. Walls was employed at
Campbell Soup Company, where he held various operational and corporate finance
positions, including Vice President of Finance - Campbell's Away from Home
Division and Director - Financial Reporting and Analysis. From 1985 to March
1995, Mr. Walls was an auditor with Price Waterhouse. Mr. Walls has an
undergraduate degree in Accounting from Widener University and is a certified
public accountant.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers and directors and persons who own more than ten
percent (10%) of the Company's common stock to file initial reports of ownership
and reports of change of ownership with the Securities and Exchange Commission.
Executive officers and directors are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they file. To the Company's knowledge, based solely on its review of the
copies of such reports received or written representations from such executive
officers and directors, that no other reports were required, the Company
believes that during its fiscal year ended December 31, 2002, all reporting
persons complied with all applicable filing requirements.
26
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation of the named executive officers
for the last three fiscal years.
Long Term Compensation
----------------------
Annual Compensation Awards Payout
------------------- ------ ------
Other
Annual Restricted Securities LTIP
Name and Compen- Stock Underlying Payout All other
Principal Position Year Salary Bonus sation Awards(6) Options (#) ($) Compensation
------------------ ---- ------ ----- ------- --------- ----------- ------ ------------
David C. Carney(1) 2002 $103,125 $10,000 -- $23,800 -- -- --
Chairman of the Board 2001 134,531 -- -- -- 37,500 -- --
Executive Officer 2000 93,389 -- -- -- -- -- --
Mark P. Glassman (2) 2002 $184,375 $20,000 $2,362 $16,800 -- -- --
Chief Executive Officer 2001 170,625 30,000 2,021 -- 50,000 -- --
2000 137,046 15,000 692 -- -- -- --
Jay M. Rose (3) 2002 $165,000 $20,000 $339 -- 12,500 -- --
Executive Vice President-- 2001 17,875 -- -- -- 50,000 -- --
Sales and Marketing 2000 -- -- -- -- -- -- --
Richard E. Lane (4) 2002 $145,000 $7,500 $1,675 $4,900 27,500
Senior Vice President -- 2001 122,481 7,500 1,336 -- 20,000 -- --
Operations 2000 60,077 -- -- -- -- -- --
David B. Walls (5) 2002 $147,500 $5,000 $938 -- 27,500
Chief Financial Officer, 2001 89,654 -- -- -- 20,000 -- --
Treasurer and Secretary 2000 -- -- -- -- -- -- --
(1) Mr. Carney served as Acting Chief Executive Officer from June 2000 to June
2001. Mr. Carney became a director of the Company in December 1997 and has
served as Chairman of the board of directors since May 1999. On April 11,
2002, the Company cancelled 143,000 common stock options issuable at $1.6875
to $2.375. On October 22, 2002, the Company issued 170,000 shares of
restricted common stock issued at $0.14 per share which are fully vested as
of October 22, 2004.
(2) As of June 2001, Mr. Glassman was appointed to the position of Chief
Executive Officer. Mr. Glassman was President and Chief Operating Officer
from March 2001 to June 2001, Chief Financial Officer from May 1999 to March
2001, and Chief Accounting Officer from October 1998 to May 1999. Previous
to that date, Mr. Glassman held the position of Corporate Controller. On
April 11, 2002, the Company cancelled 87,000 common stock options issuable
at $1.6875 and $2.375. On October 22, 2002 the Company issued 120,000 shares
of restricted common stock issued at $0.14 per share which are fully vested
as of October 22, 2004.
(3) Mr. Rose has held the position of Executive Vice President - Sales and
Marketing since he joined the Company in November 2001.
(4) Mr. Lane has held the position of Senior Vice President-Operations since
February 2002. Mr. Lane served as Senior Vice President-Technology from
November 2000 to January 2002. Previous to November 2000, Mr. Lane served as
a Product Manager from June 2000 to October 2000. On October 22, 2002, the
Company cancelled 35,000 common stock options issuable at $1.4062 and issued
35,000 shares of restricted common stock issued at $0.14 per share, which
are fully vested as of October 22, 2004.
(5) Mr. Walls has held the position of Chief Financial Officer, Treasurer and
Secretary since he joined the Company in May 2001.
27
(6) Restricted Stock Awards
Dividends
Name Outstanding Shares Value at December 31, 2002 Date Vested Payable
- ---- ------------------ -------------------------- ----------- -------
David C. Carney 170,000 $35,700 October 22, 2004 None
Mark P. Glassman 120,000 $25,200 October 22, 2004 None
Richard E. Lane 35,000 $7,350 October 22, 2004 None
Stock Option Grants In 2002
Under the Company's 1997 Incentive Plan, 67,500 stock options were granted in
2002 to the named executive officers at exercise prices of $0.40.
Potential Realizable
Value
at Assumed Annual
% of Rates
Total of Stock Price
Number Options Appreciation
of Options Granted to Exercise Expiration for Option Term
Name Granted Employee Price Date 5% ($) 10% ($)
---- ------- -------- ----- ---- ------ -------
Jay M. Rose 12,500 4.2% $0.40 April 10, 2007 $ 1,381 $ 3,053
Richard E. Lane 27,500 9.3% $0.40 April 10, 2007 $ 3,039 $ 6,716
David B. Walls 27,500 9.3% $0.40 April 10, 2007 $ 3,039 $ 6,716
28
Aggregated Option Exercises in Last Fiscal Year And
Fiscal Year-End Option Values
The table below shows option exercises by the named executive officers in 2002
and year-end amounts of shares of common stock underlying outstanding options.
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable (1)
---- --------------- ------------ ------------- -----------------
David C. Carney -- -- 12,500/25,000 $--
Mark P. Glassman -- -- 16,667/33,333 --
Jay M. Rose -- -- 16,667/45,833 168/333
Richard E. Lane -- -- 6,667/40,833 --
David B. Walls -- -- 6,667/40,833 --
Mr. Carney was granted 37,500 options on April 24, 2001 at exercise price of
$0.45, the closing price on the grant date. One-third of the options granted
were exercisable at December 31, 2002.
Mr. Glassman was granted 50,000 options on April 24, 2001 at an exercise price
of $0.45, the closing price on the grant date. One-third of the options granted
were exercisable at December 31, 2002.
Mr. Rose was granted 50,000 and 12,500 options respectively on November 16, 2001
and April 11, 2002 at an exercise price of $0.20 and $0.45, the closing prices
on those dates. One third of the options issued in 2001 were exercisable at
December 31, 2002.
Mr. Lane was granted 20,000 and 27,500 options, respectively, on April 24, 2001
and April 11, 2002 at exercise price of $0.45 and $0.40, the closing prices on
those dates. One-third of the options granted in 2001 were exercisable at
December 31, 2002.
Mr. Walls was granted 20,000 and 27,500 options respectively on May 3, 2001 and
April 11, 2002 at exercise prices of $0.55 and $0.40, the closing price on those
dates. One third of the options granted in 2001 were exercisable at December 31,
2002.
(1) Based on a closing price of $0.21 on the OTC Bulletin Board on December 31,
2002, the last business day of 2002. Stock options of 50,000 exercisable by Mr.
Rose had had a value of $0.01 at December 31, 2002.
Board of Directors Compensation
In addition to the compensation noted above, during 2002, directors received
$1,000 ($500 by telephone) for quarterly board meetings, $1,000 ($500 by
telephone) for Audit Committee meetings and $500 for Compensation Committee
meetings. Mr. Carney and Mr. Glassman are employees of the Company and do not
receive board compensation.
29
Employment Agreements
The Company entered into employment agreements with Mr. Carney and Mr. Glassman
in April 2000. Mr. Carney's agreement expired April 1, 2002. Mr. Glassman's
agreement expires December 31, 2004.
Mr. Carney serves as Chairman of the board of directors at a base annual salary
of $93,750. Mr. Glassman serves as Chief Executive Officer at a base annual
salary of $187,500. From April 2000 to March 2001, Mr. Glassman served as Chief
Financial Officer (at $150,000 base annual salary).
At the discretion of the board of directors, the base annual salary of each
officer is subject to increases periodically, and each such officer may receive
an annual incentive bonus. Each of the employment agreements provides for
customary benefits including life, health and disability insurance, and 401(k)
plan participation. Each of the employment agreements further provides that if
the employee is terminated without cause, or in connection with a change of
control, as defined therein, the employee is entitled to receive 12 months' base
salary and benefits.
In addition, an employment agreement with Gary Blackwelder was amended as of
December 9, 2002 to allow for successive one year extensions unless either the
Company or Mr. Blackwelder elects not to renew not less than three (3) months
prior to termination of the then current term of the agreement. In the
amendment, the parties acknowledged that the first renewal term of the
employment agreement commenced December 10, 2002. The remainder of the terms and
conditions of Mr. Blackwelder's employment agreement will stay the same.
Separation Agreement
In November 2001, the Company entered into a separation agreement with Mr. Taube
covering the terms upon which he resigned as Executive Vice President of
Marketing and Sales Development. As payment for his past service to the Company,
the separation agreement provided that the Company was obligated to pay Mr.
Taube $62,500 over a period of six (6) months, beginning November 30, 2001. The
Company's obligation to Mr. Taube was paid in full during 2002. See Item 3:
"Legal Proceedings".
In June 2001, the Company entered into a separation agreement with Mr. Hayes
covering the terms upon which he resigned as President and Chief Operating
Officer. As payment for his past service to the Company, the separation
agreement provided that the Company was obligated to pay Mr. Hayes $175,000 over
a period of twelve (12) months, beginning as of April 2001 (the termination
date). The separation agreement also provides that Mr. Hayes and his family are
allowed to continue to receive coverage under the Company's group medical plan
for a period of twelve (12) months beginning April 2001. The Company's
obligation to Mr. Hayes was paid in full during 2002.
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
- ------------------------------------
(A) (B) (C)
Number of securities to be Number of securities remaining
issued upon exercise of Weighted-Average available for future issuance under
outstanding options, and exercise price of equity compensation plans (excluding
Plan Category vesting of restricted stock outstanding options securities reflected in column (a)
------------- --------------------------- ------------------- ------------------------------------
Equity compensation
plans approved by
security holders 1,324,750 $0.89 275,250
Equity compensation
plans not approves by
security holders -- -- --
--------- ----- -------
Total 1,324,750 $0.89 275,250
========= ===== =======
Beneficial Ownership Information
The following table sets forth, as of March 31, 2003, certain information with
regard to beneficial ownership, as determined in accordance with Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended, of
outstanding shares of our common stock by (1) each person, entity or group known
by us to beneficially own five percent (5%) or more of the outstanding shares of
our common stock, (2) each director and director nominee individually, (3) our
named executive officers, and (4) all directors and executive officers as a
group.
The percentages of beneficial ownership shown below are based on the 7,311,073
shares of Common Stock issued and outstanding as of March 31, 2003, unless
otherwise stated. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes those
securities over which a person may exercise voting or investment power. In
addition, shares of common stock which a person has the right to acquire upon
the conversion of preferred stock or convertible subordinated notes or the
exercise of stock options and warrants within 60 days of the date of this table
are deemed outstanding for the purpose of computing the percentage ownership of
that person, but are not deemed outstanding for computing the percentage
ownership of any other person. Except as indicated in the footnotes to this
table or as affected by applicable community property laws, the persons named in
the table have sole voting and investment power with respect to all shares of
common stock beneficially owned.
31
Total Number of Shares Percentage of Class
Name and Address of of Common Stock of Common Stock
Beneficial Owner Beneficially Owned(1) Beneficially Owned(1)
---------------- --------------------- ---------------------
LVIR Investor Group, LP (16) 4,822,745 (2) 39.7%
1162 St. Georges Avenue
Suite #260
Avenel, NJ 07001
J.B. Doherty 1,950,760 (3) 21.4%
c/o TDH III, LP
Radnor Court, Suite 210
259 Radnor-Chester Road
Radnor, PA 19087
TDH III, LP 1,794,510 (4) 19.7%
Radnor Court, Suite 210
259 Radnor-Chester Road
Radnor, PA 19087
Andrew R. Bacas 248,527 (5) 3.4%
5 Embarcadeo Center
Suite 2900
San Francisco, CA 94111-4066
David C. Carney 73,875 (9) 1.0%
c/o ImageMax, Inc.
455 Pennsylvania Ave., Suite 200
Fort Washington, PA 19034
Robert Drury 196,783 (6) 2.7%
c/o ImageMax, Inc.
455 Pennsylvania Ave., Suite 200
Fort Washington, PA 19034
M. Christine Murphy 1,875 (13) *
c/o ImageMax, Inc.
455 Pennsylvania Ave., Suite 200
Fort Washington, PA 19034
Frederick E. Webster, Jr. 1,875 (14) *
c/o ImageMax, Inc.
455 Pennsylvania Ave., Suite 200
Fort Washington, PA 19034
Mark P. Glassman 60,833 (10) *
c/o ImageMax, Inc.
455 Pennsylvania Ave., Suite 200
Fort Washington, PA 19034
Jay M. Rose 160,833 (7) 2.2%
c/o ImageMax, Inc.
455 Pennsylvania Ave., Suite 200
Fort Washington, PA 19034
Richard E. Lane 54,063 (11) *
c/o ImageMax, Inc.
455 Pennsylvania Ave., Suite 200
Fort Washington, PA 19034
32
H. Craig Lewis 17,208 (12) *
c/o ImageMax, Inc.
455 Pennsylvania Ave., Suite 200
Fort Washington, PA 19034
David B. Walls 87,500 (8) 1.2%
c/o ImageMax, Inc.
455 Pennsylvania Ave., Suite 200
Fort Washington, PA 19034
All Executive Officers and Directors 2,603,750 (15) 27.6%
as a Group (9 persons)
* - Less than 1% of the outstanding Common Stock.
(1) As used in this table, "beneficial ownership" means the sole or shared power
to vote or direct the voting of a security, or the sole or shared investment
power with respect to a security, which means the power to dispose, or
direct the disposition, of a security. A person is deemed as of any date to
have beneficial ownership of any security that such person has the right to
acquire within 60 days after such date.
(2) Represents 3,532,745 and 1,290,000 shares, respectively, issuable upon the
conversion of convertible subordinated notes (exercisable at $.40 per share)
and the exercise of warrants (exercisable at $3.50 per share) within 60 days
of March 15, 2003. On June 14, 2002, the Company completed an amendment to
the subordinated notes agreement - see "Management's Discussion and Analysis
- Liquidity and Capital Resources".
(3) Includes 1,314,510 and 480,000 shares which are also discussed in note (4)
below, respectively, beneficially owned by TDH III, LP and issuable upon the
conversion of convertible subordinated notes (exercisable at $0.40 per
share) and the exercise of warrants (exercisable at $3.50 per share) within
60 days at March 15, 2003. On June 14, 2002, the Company completed an
amendment to the subordinated notes (exercisable at $.40 per share)
agreement - see "Management's Discussion and Analysis - Liquidity and
Capital Resources". Mr. Doherty is the Managing General Partner of TDH III,
LP. Excludes 4,000 and 11,667 shares, respectively, issuable at $0.45 and
$0.40 per share upon the exercise of stock options granted April 24, 2001
and April 10, 2002 which are not exercisable within 60 days of March 15,
2003.
(4) Represents 1,314,510 and 480,000 shares which are also discussed in note (3)
above, respectively, issuable upon the conversion of convertible
subordinated notes (exercisable at $.40 per share) and the exercise of
warrants (exercisable at $3.50 per share) within 60 days of March 15, 2003.
On June 14, 2002, the Company completed an amendment to the subordinated
notes agreement - see "Management's Discussion and Analysis - Liquidity and
Capital Resources".
(5) Includes 30,000, 10,000 and 8,000 shares, respectively, issuable upon the
exercise of stock options granted which are exercisable at $2.375 and
$1.6875 and $0.45 per share within 60 days of March 15, 2003. Excludes 4,000
shares, respectively, issuable at $0.45 per share upon the exercise of stock
options granted April 24, 2001, which are not exercisable within 60 days of
March 15, 2003.
(6) Includes 82,158 and 30,000 shares, respectively, issuable upon the
conversion of convertible subordinated notes (exercisable at $.40 per share)
and the exercise of warrants (exercisable at $3.50 per share) within 60 days
of April 9, 2002. On June 14, 2002, the Company completed an amendment to
the subordinated notes agreement - see "Management's Discussion and Analysis
- Liquidity and Capital Resources". Excludes 4,000 and 11,667 shares,
respectively, issuable at $0.45 and $0.40 per share upon the exercise of
stock options granted April 24, 2001 and April 10, 2002 which are not
exercisable within 60 days of March 15, 2003. On October 22, 2002, the
Company cancelled 15,000 common stock options issuable at $1.6875 and issued
18,000 shares of restricted common stock issued at $0.14 per share, which
are fully vested as of October 22, 2004. Restricted common stock vested as
of March 15, 2003 amounted to 3,375 shares.
33
(7) Includes 16,667 and 4,167 shares issuable upon the exercise of stock
options granted which are exercisable at $0.20 and $0.40 per share within
60 days of March 15, 2003. Excludes 33,333 and 8,333 shares, respectively,
issuable at $0.20 and $0.40 per share upon exercise of stock options
granted November 16, 2001 which are not exercisable within 60 days of March
15, 2003.
(8) Excludes 6,667 and 18,333 shares, respectively, issuable at $0.55 and $0.40
per share upon the exercise of stock options granted May 3, 2001 and April
10, 2002 which are not exercisable within 60 days of March 15, 2003.
(9) Includes 25,000 shares issuable upon the exercise of stock options granted
which are exercisable at $0.45 per share within 60 days of March 15, 2003.
Excludes 12,500 shares, issuable at $0.45 per share upon the exercise of
stock options granted April 24, 2001, which are not exercisable within 60
days of March 15, 2003. On October 22, 2002, the Company cancelled 143,000
common stock options issuable at $1.6875 to $2.375 and issued 170,000
shares of restricted common stock issued at $0.14 per share, which are
fully vested as of October 22, 2004. Restricted common stock vested as of
March 15, 2003 amounted to 31,875 shares.
(10) Includes 33,333 shares, issuable upon the exercise of stock options granted
which are exercisable at $0.45 per share within 60 days of March 15, 2003.
Excludes 16,667 shares, issuable at $ $0.45 per share, upon the exercise of
stock options granted April 24, 2001, which are not exercisable within 60
days of March 15, 2003. On October 22, 2002, the Company cancelled 87,000
common stock options issuable at $1.6875 and $2.375 and issued 120,000
shares of restricted common stock issued at $0.14 per share, which are
fully vested as of October 22, 2004. Restricted common stock vested as of
March 15, 2003 amounted to 22,500 shares.
(11) Includes 13,333 and 9,167 shares issuable upon the exercisable at $0.45 and
$0.40 per share within 60 days of March 15, 2003. Excludes 6,667 and 18,333
shares, respectively, issuable at $0.45 and $0.40 per share upon the
exercise of stock options granted April 24, 2001 and April 10, 2002, which
are not exercisable within 60 days of March 15, 2003. On October 22, 2002,
the Company cancelled 35,000 common stock options issuable at $1.4062 and
issued 35,000 shares of restricted common stock issued at $0.14 per share,
which are fully vested as of October 22, 2004. Restricted common stock
vested as of March 15, 2003 amounted to 6,563 shares.
(12) Includes 8,000 and 5,833 shares respectively, issuable at $0.45, and $0.40
per share within 60 days of March 15, 2003. Excludes 4,000 and 11,667
shares, respectively, issuable at $0.45 and $0.40 per share upon the
exercise of stock options granted April 24,2002 and April 10, 2002, which
are not exercisable within 60 days of March 15, 2003. On October 22, 2002,
the Company cancelled 15,000 common stock options issuable at $1.6875 and
issued 18,000 shares of restricted common stock issued at $0.14 per share,
which are fully vested as of October 22, 2004. Restricted common stock
vested as of March 15, 2003 amounted to 3,375 shares.
(13) On October 22, 2002, the Company issued 10,000 shares of restricted common
stock issued at $0.14 per share, which are fully vested as of October 22,
2004. Restricted common stock vested as of March 15, 2003 amounted to 1,875
shares.
(14) On October 22, 2002, the Company issued 10,000 shares of restricted common
stock issued at $0.14 per share which are fully vested as of October 22,
2004. Restricted common stock vested as of March 15, 2003 amounted to 1,875
shares.
(15) Includes 1,396,668 and 510,000 shares, respectively, issuable upon the
conversion of convertible subordinated debt (exercisable at $.40 per share)
and the exercise of warrants (exercisable at $3.50 per share) within 60
days of March 15, 2003. Also includes 227,832 shares which are issuable
upon the exercise of stock options granted which are exercisable within 60
days of March 15, 2003, and excludes 171,834 shares issuable upon the
exercise of stock options which are not exercisable within 60 days of March
15, 2003.
(16) LVIR Investors Group, LP formerly known as Dime Capital Partners, Inc.
34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Subordinated Debt Restructuring
On June 14, 2002, the Company completed an amendment to restructure the
subordinated debt held by TDH III, L.P., LVIR Investor Group, LP (formerly Dime
Capital Partners, Inc.), and Robert E. Drury. Mr. Doherty, a member of the
Company's Board of Directors, is a principal of TDH III, L.P. Mr. Drury is also
a member of the Company's Board of Directors. For a full description of the
restructuring see-- "Management's Discussion and Analysis-- Liquidity and
Capital Resources."
The Company has adopted a policy that we will not enter into any material
transaction in which a director or officer has a direct or indirect financial
interest, unless the transaction is determined by our board of directors to be
fair as to us or is approved by a majority of our disinterested directors or by
our shareholders, as provided for under Pennsylvania law.
Related Party Lease
The Company entered into lease extensions for its Monroe, Louisiana locations
[or however we otherwise refer to Monroe in public disclosure] which enable the
Company to extend the leases for one year periods. The aggregate annual base
rent payable pursuant to these leases is approximately $240,000. An entity that
is affiliated with Mr. Blackwelder is the landlord for each of these locations.
PART IV
ITEM 14. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectives of the design an operation of the Company's disclosure
controls and procedures pursuant to Rule 15D-15 of the Securities Exchange Act
of 1934. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company required to be disclosed in the Company's periodic SEC
reports. There have been no significant changes in the Company's internal
controls or in other factors, which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
ITEM 15. 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-17 of
this Annual Report.
Any financial statement schedules otherwise required have been omitted
because they are not applicable.
3. Exhibits
23.1 Consent of ERNST & YOUNG LLP.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.3 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
99.4 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
35
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 between 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).
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).
36
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., as amended and restated through April 24,
2001.
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.
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.
37
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 Financial Enterprises
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).
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.
38
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.
10.43%%%+ Employment Agreement by and between the Company and Mark P.
Glassman dated as of April 1, 2000.
10.44%%%+ Employment Agreement by and between the Company and Blair Hayes
dated as of April 1, 2000.
10.45%%%+ Employment Agreement by and between the Company and Rex Lamb
dated as of April 1, 2000.
10.46%%%+ Employment Agreement by and between the Company and Mitchell J.
Taube dated as of April 1, 2000.
10.47#+ Employment Agreement by and between the Company and David C.
Carney dated as of April 1, 2000.
10.48## Credit Agreement dated as of June 9, 2000, by and among ImageMax,
Inc., together with its wholly-owned direct and indirect
subsidiaries, ImageMax of Virginia, Inc., ImageMax of Arizona,
Inc., ImageMax of Ohio, Inc., ImageMax of Delaware, Inc.,
ImageMax of Indiana, Inc., and Ammcorp Acquisition Corp.;
FirsTrust Bank and Commerce Bank, N.A.
10.49## Warrant Purchase Agreement dated as of June 9, 2000, by and among
ImageMax, Inc., Commerce Bank, N.A. and FirsTrust Bank.
10.50## Form of Warrant.
10.51/ Second Amendment to Credit Agreement dated as of March 30, 2001,
by and among ImageMax, Inc. together with its wholly-owned
subsidiary, ImageMax of Delaware, Inc. and Commerce Bank, N.A.,
as agent for Lenders.
39
10.52/ Amendment to Term Loan Note dated as of March 30, 2001, by and
among ImageMax, Inc., together with its wholly-owned subsidiary,
ImageMax of Delaware, Inc. and Commerce Bank, N.A.
10.53/ Amendment to Term Loan Note dated as of March 30, 2001 by and
among ImageMax, Inc., together with its wholly-owned subsidiary,
ImageMax of Delaware, Inc., and FirsTrust Bank.
10.54//+ Amended and Restated Employment Agreement between ImageMax, Inc.
and Mark P. Glassman dated as of June 27, 2001.
10.55 Second Amendment to Amended and Restated Credit Agreement Amended
dated as of April 11, 2003 by and among ImageMax, Inc., ImageMAX
of Delaware, Inc., FirsTrust Bank and Commerce Bank, N.A.
10.56 Second Amendment to Amended and Restated Subordination Agreement.
10.57 Second Amended and Restated Revolving Credit Note dated April 11,
2003 made by ImageMax, Inc. and ImageMAX of Delaware, Inc. in
favor of Commerce Bank, N.A.
10.58 Second Amended and Restated Revolving Credit Note dated April 11,
2003 made by ImageMax, Inc. and ImageMAX of Delaware, Inc. in
favor of FirsTrust.
10.59 Amendment to Employment Agreement between ImageMax, Inc. and Gary
Blackwelder dated as of December 9, 2002, executed on April 14,
2003.
10.60 Amendment to Lease Agreement dated as of December 9, 2002,
executed on April 14, 2003 for property 3000 DeSoto Street,
Monroe, Ouachita Parish, Louisiana by and between ImageMax, Inc.
and The Gary Blackwelder Family Limited Partnership.
10.61 Amendment to Lease Agreement dated as of December 9, 2002,
executed on April 14, 2003 for property 3002 DeSoto Street,
Monroe, Ouachita Parish, Louisiana by and between ImageMax, Inc.
and The Gary Blackwelder Family Limited Partnership.
10.62 Amendment to Lease Agreement dated as of December 9, 2002,
executed on April 14, 2003 for property 705 North 31st Street,
Monroe, Ouachita Parish, Louisiana by and between ImageMax, Inc.
and The Gary Blackwelder Family Limited Partnership.
10.63 Amendment to Lease Agreement dated as of December 9, 2002,
executed on April 14, 2003 for Suite 100, 1911 Citizens Bank
Drive, Bossier, Louisiana, Bossier Parish, Louisiana by and
between ImageMax, Inc. and The Gary Blackwelder Family Limited
Partnership.
16### Letter from Arthur Andersen, LLP dated September 28, 2000.
* 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).
%% Incorporated by reference to the designated exhibit of the Company's Annual
Report on Form 10-K filed on March 30, 2000 (file number 000-23077).
%%% Incorporated by reference to the designated exhibit of the Company's
Quarterly Report on Form 10-Q filed on May 15, 2000 (file number 000-23077).
# Incorporated by reference to the designated exhibit of the Company's
Quarterly Report on Form 10-Q filed on November 14, 2000 (file number
000-23077).
## Incorporated by reference to exhibits 10.1, 10.2 and 10.3 of the Company's
Report on Form 8-K filed on June 27, 2000 (file number 000-23077).
### Incorporated by reference to exhibit 16 of the Company's Report on Form 8-K
filed on September 28, 2000 (file number 000-23077).
+ Management contract or compensatory plan or arrangement.
40
/ Incorporated by reference to the designated exhibit of the Company's
Quarterly Report or Form 10-Q filed on May 15, 2001 (file number 000- 23077)
// Incorporated by reference to the designated exhibit of the Company's
Quarterly Report or Form 10-Q filed on August 14, 2001 (file number 000-
23077)
/// Incorporated by reference to the designated exhibit of the Company's
Quarterly Report or Form 10-Q filed on November 14, 2001 (file number
000-23077)
(b) Reports on Form 8-K.
The Company filed a Form 8-K on January 6, 2003 reporting the first Amendment to
Amended and Restated Credit Agreement dated December 23, 2002.
A. Exhibits
10.1 Amended and Restated Senior Credit Agreement dated June
13, 2002 by and among ImageMax, Inc., ImageMax of
Delaware, Inc., Commerce Bank, NA and FirsTrust Bank
(filed as Exhibit 10.1 to the Form 8-K filed on June 24,
2002).
10.2 First Amendment to Convertible Subordinated Loan and
Warrant Purchase Agreement dated as of June 13, 2002, by
and among ImageMax, Inc., TDH, III, L.P., Dime Capital
Partners, Inc., and Robert Drury (filed as Exhibit 10.2
to the Current Report on Form 8-K filed on June 24,
2002).
10.3 First Amendment to the Amended and Restated Credit
Agreement dated December 23, 2002 by and among ImageMax,
Inc., ImageMax of Delaware, Inc., Commerce Bank, NA, as
agent and lender, and FirsTrust Bank, as lender.
10.4 First Amended and Restated Revolving Credit Note in
favor of Commerce Bank, NA in the principal amount of
$3.6 million dated December 23, 2002.
10.5 First Amended and Restated Revolving Credit Note in
favor of FirsTrust Bank, NA in the principal amount of
$2.4 million dated December 23, 2002.
41
IMAGEMAX, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page
----
Report of Ernst & Young LLP 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-17
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders, ImageMax, Inc.
We have audited the accompanying consolidated balance sheets of ImageMax, Inc.
and subsidiary as of December 31, 2002 and 2001 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2002. Our audits also included the
financial statement schedule listed in the index at Item 15(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ImageMax, Inc. and
subsidiary at December 31, 2002 and 2001 and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and other intangible
assets to comply with the accounting provisions of Statement of Financial
Accounting Standards No. 142.
/S/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 5, 2003, except for the second paragraph of
Note 2 and Note 6, as to which the date is
April 11, 2003
F-2
IMAGEMAX, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands--- except share amounts)
December 31
-----------------------
2002 2001
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 878 $ 84
Accounts receivable, net of allowance for doubtful accounts of $274
and $488 as of December 31, 2002 and 2001, respectively 8,983 7,621
Inventories 1,165 1,236
Prepaid expenses and other 1,086 585
-------- --------
Total current assets 12,112 9,526
Property, plant and equipment, net 3,143 3,249
Intangibles, primarily goodwill, net 19,974 35,171
Other assets 625 477
-------- ---------
Total assets $ 35,854 $ 48,423
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt $ 802 $ 2,031
Accounts payable 4,867 2,711
Accrued expenses 2,623 2,818
Deferred revenue 1,279 1,382
-------- --------
Total current liabilities 9,571 8,942
Long-term debt 6,784 5,813
Subordinated convertible debt, net of discount of $156 and $294 at
2002 and 2001, respectively 6,678 5,976
Commitments and contingencies (Note 10) -- --
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized, none issued -- --
Common stock, no par value, 40,000,000 shares authorized, 7,311,073
and 6,793,323 shares issued and outstanding at December 31, 2002 and 2001,
respectively 53,567 53,494
Deferred compensation (68) --
Accumulated deficit (40,678) (25,802)
-------- --------
Total shareholders' equity 12,821 27,692
-------- --------
Total liabilities and shareholders' equity $ 35,854 $ 48,423
======== ========
See accompanying notes.
F-3
IMAGEMAX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands -- except share and per share amounts)
Year Ended December 31
----------------------------
2002 2001 2000
---- ---- ----
Revenues:
Services $ 37,734 $ 38,375 $ 47,964
Products 6,489 7,855 10,134
--------- ---------- ----------
44,223 46,230 58,098
--------- ---------- ----------
Cost of revenues:
Services 22,572 23,460 29,481
Products 4,131 4,775 6,318
Depreciation 1,187 1,612 1,998
--------- ---------- ----------
27,890 29,847 37,797
--------- ---------- ----------
Gross profit 16,333 16,383 20,301
Selling and administrative expenses 14,398 16,176 15,737
Amortization of intangibles 516 2,021 1,933
Restructuring charge -- 5,939 --
--------- ---------- ----------
Operating income (loss) 1,419 (7,753) 2,631
Interest expense 1,211 1,586 2,189
--------- ---------- ----------
Income (loss) before cumulative effect accounting change 208 (9,339) 442
Cumulative effect of accounting change (15,084) -- --
--------- ---------- ----------
Income (loss) before income taxes (14,876) (9,339) 442
Income taxes -- 101 40
--------- ---------- ----------
Net income (loss) $(14,876) $ (9,440) $ 402
========= ========== ==========
Basic and diluted net income (loss) per share $ (2.19) $ (1.40) $ 0.06
========= ========== ==========
Shares used in computing basic net income (loss) per share 6,795,863 6,724,298 6,654,468
========= ========== ==========
Shares used in computing diluted net income (loss) per share 6,795,863 6,724,298 6,657,626
========= ========== ==========
See accompanying notes.
F-4
IMAGEMAX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands -- except share amounts)
Common Stock Deferred Accumulated
Shares Amount Compensation Deficit Total
------ ------ ------------ ------- -----
BALANCE, DECEMBER 31, 1999 6,633,681 $52,837 $ -- $(16,764) $ 36,073
Value of warrants issued -- 553 -- -- 553
Sale of Common stock 52,687 65 -- 65
Net income -- -- -- 402 402
--------- ------- ---- -------- --------
BALANCE, DECEMBER 31, 2000 6,686,368 53,455 -- (16,362) 37,093
--------- ------- -- -------- --------
Sale of Common stock 106,955 39 -- -- 39
Net loss -- -- -- (9,440) (9,440)
--------- ------- ---- -------- --------
BALANCE, DECEMBER 31, 2001 6,793,323 53,494 -- (25,802) 27,692
--------- ------- ---- -------- --------
Restricted stock issued 517,750 73 (73) -- --
Compensation expense - restricted stock -- -- 5 -- 5
Net loss -- -- -- (14,876) (14,876)
--------- ------- ---- -------- --------
BALANCE, DECEMBER 31, 2002 7,311,073 $53,567 $(68) $(40,678) $ 12,821
========= ======= ==== ======== ========
See accompanying notes.
F-5
IMAGEMAX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
-------------------------------
2002 2001 2000
-------- ------- ------
Cash Flows from Operating Activities:
Net income (loss) $(14,876) $(9,440) $ 402
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Cumulative effect of accounting change 15,084 -- --
Compensation expense - restricted common stock 5 -- --
Gain on sale of box storage assets -- (84) --
Depreciation and amortization of intangibles 1,307 3,378 3,757
Amortization of deferred financing costs 397 255 174
Imputed interest on subordinated debt 138 138 121
Restructuring charge -- 5,939 --
Changes in operating assets and liabilities, net
of effect from acquisitions and divestiture:
Accounts receivable, net (1,362) 2,251 (668)
Inventories 71 66 505
Prepaid expenses and other (501) 653 (400)
Other assets (157) 73 (64)
Accounts payable 2,158 377 (635)
Accrued expenses (5) (467) (414)
Deferred revenue (103) (1,131) 847
-------- ------- ------
Net cash provided by operating activities 2,156 2,008 3,625
-------- ------- ------
Cash Flows from Investing Activities:
Purchases of property and equipment (650) (773) (730)
Proceeds from sale of box storage assets -- 532 --
-------- ------- ------
Net cash used in investing activities (650) (241) (730)
-------- ------- ------
Cash Flows from Financing Activities:
Principal payments on long-term debt (2,013) (4,270) (659)
Net borrowings (repayments) under line of credit 1,575 300 (14,642)
Proceeds from subordinated debt transaction -- -- 6,000
Payment of deferred financing costs (274) -- (630)
Proceeds from long-term borrowing -- -- 7,500
Proceeds from sales of Common and Preferred stock -- 39 65
-------- ------- ------
Net cash used in financing activities (712) (3,931) (2,366)
-------- ------- ------
Net Increase (Decrease) in Cash and Cash Equivalents 794 (2,164) 529
Cash and Cash Equivalents, Beginning of Year 84 2,248 1,719
-------- ------- ------
Cash and Cash Equivalents, End of Year $ 878 $ 84 $2,248
======== ======= ======
See accompanying notes.
F-6
IMAGEMAX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND:
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
ImageMax and its subsidiary (the "Company"). All material intercompany balances
and transactions have been eliminated in consolidation.
Basis of presentation
The accompanying consolidated financial statements of the Company have been
prepared on a going-concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Accordingly, the consolidated financial statements do not include any
adjustments that might be necessary should the Company be unable to continue in
existence. In 2002, the Company incurred a net loss of $14.9 million and, as of
December 31, 2002, had an accumulated deficit of $40.7 million. In addition, the
Company anticipates that it will not meet its financial covenant (EBITDA) for
the first quarter of 2003. These factors create significant uncertainty about
the Company's ability to continue as a going concern. In April 2003, the Company
entered into an amended credit facility with its banks, which extended the
maturity date of its revolving credit line to January 15, 2004, expanded the
borrowing availability under the line from $6.0 million to $7.0 million and
waived the first quarter 2003 covenant violation. The amended credit facility
requires the Company on a quarterly basis beginning in June 2003 to meet a
specified level of EBITDA and to not exceed a maximum leverage ratio, as
defined. Management has implemented a sales and operating plan in 2003, which
they believe will allow the Company to meet these quarterly covenants. The
Company has also developed an analysis of its working capital requirements to
ensure it will be able to meet its vendor obligations in a satisfactory manner
to allow the Company to achieve its 2003 sales and operating plan. Further,
management has identified certain short-term and long-term cost-deferral and
cost-cutting measures, which can be implemented in a timely manner, should the
Company not perform at necessary levels. Management believes that these actions
will enable the Company to meet its quarterly financial covenants throughout
2003, and therefore, have the necessary financing to continue as a going
concern.
Use of estimates
The preparation of financial statements are in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. 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 consolidated revenues for any period presented.
Media conversion revenues are recognized as units are completed under the
proportional performance method subject to consideration of the guidance in SAB
#101.
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 in accordance with SOP 97-2. 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 service revenue.
Consulting, implementation and training revenues are recognized as the services
are performed. Revenue related to maintenance agreements is recognized ratably
over the terms of the maintenance agreements.
Shipping and handling costs
Shipping and handling costs are included in costs of sales.
F-7
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, 2002 and 2001, 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 office supplies held for retail sale and
microfiche viewing and imaging equipment for sale, 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 Note 3). Leasehold improvements are amortized over the lesser of their
useful life or the term of the lease. Amortization of assets recorded as capital
leases is included with depreciation expense.
Intangibles
Intangibles consist of goodwill and developed technology (see Note 4). Goodwill,
representing the excess of cost over the fair value of the net tangible and
identifiable intangible assets of acquired businesses (see Note 4), is stated at
cost and is tested annually for impairment and in the interim under certain
circumstances. 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 developed technology should be
revised or that the remaining balance may not be recoverable. When the Company
concludes it is necessary to evaluate intangibles, for impairment, the Company
will use an estimate of the related discounted cash flow as the basis to
determine whether impairment has occurred.
Derivative financial instruments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133, as amended, establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires entities to record all derivative instruments on the
balance sheet at fair value. Changes in the fair value of derivatives are
recorded in each period in current earnings or other comprehensive income, based
on whether a derivative is designated as part of a hedge transaction and the
type of hedge transaction. The ineffective portion of all hedges is recognized
in earnings. The Company adopted SFAS 133, as amended, effective January 1,
2001. The adoption of SFAS 133 had no effect on the Company's financial position
and results of operations.
The Company entered into an interest-rate cap agreement to hedge the exposure to
increasing interest rates with respect to its variable rate debt. The premium
paid in connection with the agreement is included in interest expense ratably
over the life of the agreement. Payments received as a result of the cap
agreement are recognized as a reduction of interest expense. The unamortized
cost of the agreement is included in other assets.
Accounting for stock-based compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), encourages entities to record compensation expense
for stock-based employee compensation plans at fair value but provides the
option of measuring compensation expense using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25"). The Company accounts for stock-based
compensation in accordance with APB 25. The following presents pro forma results
of operations as if SFAS 123 had been used to account for stock-based
compensation plans.
The weighted average fair value of options granted during 2002, 2001 and 2000 is
estimated at $0.01, $0.26, and $0.72 per share under option, respectively. The
following pro forma results would have been reported had compensation cost been
recorded for the fair value of the options granted:
Year Ended December 31
----------------------------------------------
2002 2001 2000
---- ---- ----
Net income (loss), as reported $ (14,876,000) $ (9,440,000) $ 402,000
Pro forma net income (loss) (14,999,000) (9,635,000) $ 131,000
Basic and diluted income (loss) per share, as reported (2.19) (1.40) $ 0.06
Pro forma basic and diluted income (loss) per share (2.21) (1.43) $ 0.02
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Supplemental cash flow information
Interest paid was $655,000, $1,384,000, and $2,123,000 for the years ended
December 31, 2002, 2001, and 2000 respectively. The Company incurred $180,000 of
capital lease obligations in 2002.
F-8
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.
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. See Note 4 to the financial statements - Intangible
Assets for additional information regarding the adoption of SPAS 142.
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.
3. PROPERTY, PLANT AND EQUIPMENT:
Estimated December 31
Useful Lives ------------------------------
(Years) 2002 2001
------- ---- ----
Building and improvements 2-40 $ 1,707,000 $ 1,622,000
Machinery and equipment 3-5 8,045,000 7,367,000
Furniture and office equipment 5 770,000 651,000
Transportation equipment 5 597,000 569,000
----------- -----------
11,119,000 10,209,000
Less: Accumulated depreciation (7,976,000) (6,960,000)
----------- -----------
$ 3,143,000 $ 3,249,000
=========== ===========
As of December 31, 2002 and 2001, the Company had $250,000 and $70,000 in
equipment, net of accumulated depreciation, financed under capital leases,
respectively.
4. INTANGIBLE ASSETS:
Included in intangible assets on the Balance Sheet are $469,000 of developed
technology net of accumulated amortization of $236,800 and $116,800 at December
31, 2002 and 2001, respectively.
Included in the restructuring charge on the statement of operations of
$5,939,000 in 2001, the Company wrote off $5,389,000 of goodwill related to
three production facilities shut down in the first quarter of 2002 (see Note
11).
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 annually
and when certain events indicate that the goodwill of a reporting unit may be
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 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.
F-9
Effective January 1, 2002, the Company adopted SFAS 142. Upon adoption of SFAS
142, the Company ceased amortization of its goodwill and completed its
calculation of the implied fair value of goodwill. As a result of the
calculation, the Company recorded a 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 following table presents the impact of SFAS 142 on net income per share had
the standard been in effect since January 1, 2001.
Year Ended December 31,
------------------------------------
2002 2001
---- ----
Net loss - as reported $(14,876,000) $(9,440,000)
Amortization of goodwill -- 1,649,000
------------ ------------
Net loss adjusted $(14,876,000) $(7,791,000)
============ ============
Basic and diluted loss per share as reported $(2.19) $(1.40)
====== ======
Basic and diluted loss per share as adjusted $(2.19) $(1.16)
====== ======
The Company performed its annual impairment test in the fourth quarter of 2002
and determined no impairment exists on the goodwill balance at December 31,
2002. For the period from December 31, 2002 through April 10, 2003, no further
impairment indicators were noted. There can be no assurance that future goodwill
impairment tests will not result in an additional charge to earnings.
5. ACCRUED EXPENSES:
December 31
----------------------------
2002 2001
---- ----
Compensation and benefits $1,576,000 $1,144,000
Insurance premium payable 130,000 75,000
Professional fees 115,000 149,000
Restructuring costs (Note 12) 40,000 475,000
Other 762,000 975,000
---------- ----------
$2,623,000 $2,818,000
========== ==========
6. LONG-TERM DEBT:
Long-term debt consists of the following:
December 31
----------------------------
2002 2001
---- ----
Revolving credit line $5,744,000 $4,169,000
Term loan 730,000 2,730,000
Mortgage loan 865,000 879,000
Other debt and capital lease obligations 247,000 66,000
---------- ----------
7,586,000 $7,844,000
Less- Current portion (802,000) (2,031,000)
---------- ----------
$6,784,000 $5,813,000
========== ==========
On April 11, 2003, the Company completed the Second Amendment to the Amended and
Restated Credit Agreement with Commerce Bank, NA and FirsTrust Bank (the
"lenders"), which extends the maturity date of the Company's Revolving Credit
Line to January 15, 2004 and expands the borrowing availability under the
Revolving Credit Line from $6.0 to $7.0 million. The expansion of the Revolving
Credit Line is based upon the Company's Eligible Accounts Receivable and the
Company intends to use the proceeds of the Revolving Credit Line primarily for
working capital purposes.
Under the Revolving Credit Line, the Company is required to pay interest monthly
at the prime rate plus 2.0% (effective rate of 6.25% as of March 31, 2003). The
outstanding principal of the Revolving Credit Line is due and payable at the end
of term on January 15, 2004. Borrowing availability is based on the level of the
Company's eligible accounts receivable, as defined in the Credit Agreement. As
of December 31, 2002, approximately $5.7 million was outstanding under the
Revolving Credit Line, and approximately $182,000 was available under the credit
line. The Company had nominal borrowing availability under the Revolving Credit
Line on March 31, 2003.
F-10
Under the Term Loan, interest is payable monthly at the prime rate plus 2.0%
(effective rate of 6.25% as of March 31, 2003). The outstanding principal amount
of the Term Loan was $730,000 at December 31, 2002. At March 31, 2003, the
outstanding balance on the Term Loan was $365,000 which is due June 30, 2003.
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 $746,000 (commencing with the first quarter of 2003), 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
obtained a waiver from the banks for violation of the first quarter 2003 EBITDA
covenant.
On December 23, 2002, the Company completed the First Amendment to the Amended
and Restated Credit Agreement that expanded the Company's Revolving Credit Line
from $5.25 million to $6.0 million.
On June 14, 2002, 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 the Lenders.
The Credit Facility consisted 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 purposes.
The Company incurred $40,000 in loan fees associated with the Second Amendment
payable over the second and third quarters of 2003. The Company paid $5,000 for
the First Amendment on January 2003. The Company paid $112,000 in bank fees in
2002 related to the Credit Agreement dated June 13, 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 (4.25% at December 31, 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 (9.01% at March 28, 2003). 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 $7,600.
The future scheduled principal payments on the Company's long-term debt and
subordinated convertible debt (see Note 7):
2003 $802,000
2004 12,498,000
2005 90,000
2006 55,000
2007 33,000
Thereafter 786,000
-----------
$14,264,000
===========
7. SUBORDINATED CONVERTIBLE DEBT:
In order for the Company to enter into the June 14, 2002 Credit Facility, the
Company's subordinated debt holders, TDH III, L.P., LVIR Investors Group, LP
(formerly known as 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.
F-11
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 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) become 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:
No current income tax provision was recognized in 2002 due to the Company's
operating loss position. A deferred tax expense was recognized in 2001 for the
additional valuation allowance recorded to offset the net deferred tax asset of
$101,000.
At December 31, 2002, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $13.6 million expiring in 2016
through 2022. 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
non-deductibility of the special compensation and acquired research and
development charges, 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 code. Such limitation may have an impact on
the ultimate realization and timing of these nets operating loss carryforwards.
The components of income taxes are as follows:
Year Ended December 31
----------------------------------------
2002 2001 2000
---- -------- -------
Current:
Federal $ - $ - $ 7,800
State - - 32,200
---- -------- -------
- - 40,000
---- -------- -------
Deferred:
Federal - 78,241 -
State - 22,759 -
---- -------- -------
- 101,000 -
---- -------- -------
- - -
$ - $101,000 $40,000
==== ======== =======
F-12
The reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
Year Ended December 31
---------------------------------------
2002 2001 2000
---- ---- ----
Income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit -- (0.2) 4.8
Nondeductible loss on sale of business units -- -- --
Other nondeductible items (0.2) 0.3 5.9
Nondeductible goodwill amortization (15.7) (1.1) 56.0
Change in valuation reserve (15.4) (33.8) (91.7)
Other (2.7) (0.3) --
----- -------- -----
-- (1.1%) 9.0%
== ====== ====
The tax effect of temporary differences that give rise to deferred taxes are as
follows:
December 31
---------------------------
2002 2001
---- ----
Gross deferred tax assets:
Accruals and reserves not currently deductible $ 255,000 $ 421,000
Net operating loss carryforwards 4,637,000 5,347,000
Depreciation 326,000 --
Goodwill amortization 1,905,000 --
Other 159,000 224,000
Valuation allowance (7,282,000) (5,004,000)
----------- -----------
$ - $ 988,000
=========== ===========
Gross deferred tax liabilities:
Depreciation $ - $ 79,000
Goodwill amortization - 909,000
----------- -----------
$ - $ 988,000
=========== ===========
At December 31, 2002, a valuation allowance was established for the Company's
tax assets 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 Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. The increase (decrease) in the valuation allowance was $2,278,000
in 2002, $3,137,000 in 2001, and ($573,000) in 2000.
9. BENEFIT PLANS:
Incentive common stock 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 five to ten years after the date of grant.
F-13
Total Shares Restricted
Available Available Common Stock Options Price Aggregate
Shares For Grant Stock Outstanding Per Share Price
--------- --------- ----------- ------------- ------------- -----------
Balance, December 31, 1999 1,600,000 1,135,000 -- 465,000 $1.75 - 12.00 $ 2,487,500
Granted -- (956,000) -- 956,000 .81 - 1.72 1,537,280
Cancelled -- 341,500 -- (341,500) 1.50 - 2.38 (623,813)
--------- --------- ------- ---------- ------------- -----------
Balance, December 31, 2000 1,600,000 520,500 -- 1,079,500 $ .81 - 12.00 $ 3,400,967
--------- --------- ------- ---------- ------------- -----------
Granted -- (472,500) -- 472,500 $ .20 - .69 $ 209,588
Cancelled -- 161,500 -- (161,500) .45 - 1.69 (240,188)
--------- --------- ------- ---------- ------------- -----------
Balance, December 31, 2001 1,600,000 209,500 -- 1,390,500 $ .20 -$12.00 $ 3,370,367
--------- --------- ------- ---------- ------------- -----------
Granted -- (295,000) -- 295,000 $ .35 - .40 $ 117,625
Restricted Stock Issued -- (517,750) 517,750 -- .14 - .21 73,488
Cancelled -- 878,500 -- (878,500) .40 - 12.00 (2,370,498)
--------- --------- ------- ---------- ------------- -----------
Balance, December 31, 2002 1,600,000 275,250 517,750 807,000 $ .14 -$12.00 $ 1,190,982
========= ========= ======= ========== ============= ===========
Restricted stock
Under the Company's 1997 Incentive Plan, in an effort to retain qualified
management, Directors and employees, the Company cancelled 468,500 stock options
that far exceeded prevailing market values and issued 517,750 shares of
restricted common stock. The following common stock issues were made in the
fourth quarter of 2002:
Date Shares Value per
Issued Issued Share
October 22, 2002 463,500 $0.14
December 30, 2002 54,250 $0.21
-------
517,750
=======
The Common Stock issued is restricted from sale on the open market for a period
of two years. Compensation expense in the amount of $73,000 will be recognized
over the two-year vesting period.
Common stock options
Set forth below are the outstanding options at December 31, 2002, summarized by
range of exercise price:
Number Weighted Weighted Number Weighted
Range Of Outstanding Average Average Exercisable Average
Exercise Prices At 12/31/02 Remaining Life Exercise Price At 12/31/02 Exercise Price
--------------- ----------- -------------- -------------- ----------- --------------
$0.35 to $0.40 245,000 4.3 $ 0.40 -- --
$0.20 to $0.69 399,500 3.6 $ 0.45 133,167 $0.45
$1.50 to $1.69 45,000 2.3 $ 1.63 30,000 $1.63
$2.38 to $12.00 110,000 3.3 $ 6.75 110,000 $6.75
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 4.5%, 5.0%, and 6.5% in 2002, 2001, and 2000, respectively, an
expected life of 5 years, expected dividend yield of zero, and an expected
volatility of 57% in 2002 and 2001 and 40% in 2000 and 1999.
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.
F-14
Effective December 31, 2001, the Purchase Plan has been suspended indefinitely
because the maximum amount of shares available under the Purchase Plan have been
purchased by employees of the Company. Employees purchased 106,955 shares and
52,687 shares in 2001 and 2000, respectively.
The Company also maintains a defined contribution 401(k) plan, which permits
participation by substantially all employees. In connection with the plan, the
Company's matching contribution charged to expense was approximately $80,000 in
2002, $98,000 in 2001, and $115,000 in 2000.
10. 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, 2002, 2001 and 2000 was $1,928,000, $1,840,000, and $1,455,000,
respectively. Future minimum lease payments under non-cancelable operating
leases as of December 31, 2002 are as follows:
2003 $ 1,676,000
2004 1,213,000
2005 674,000
2006 372,000
2007 243,000
2008 and thereafter 11,000
-----------
$ 4,189,000
===========
The Company leases operating facilities at prices, which, in the opinion of
management, approximate market rates from entities that are owned by certain
shareholders and employees of the Company. Rent expense on these leases was
$204,000, $316,000, and $314,000 for the years ended December 31, 2002, 2001 and
2000, respectively.
Employment agreements
The Company has entered into an employment agreement with its Chief Executive
Officer, Regional Sales Vice President - West Region and Vice President and
General Manager - Gulf States that provides for minimum annual compensation.
Future minimum compensation commitments under this agreement as of December 31,
2002 is as follows:
2003 $ 404,000
2004 187,500
---------
$ 591,500
=========
Separation agreements
During 2001, the Company and two of its former executive officers and other
employees entered into separation agreements upon termination of their
employment with the Company. The separation agreements provided $300,000 of
compensation and benefits, which has been charged to the statement of operations
for the year ended December 31, 2001. Such amounts were paid during 2002.
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, 2002 are not considered material.
11. RESTRUCTURING CHARGES:
For the year ended December 31, 2001, the Company recorded a restructuring
charge of $5,939,000 related to the closing of production facilities in Dayton,
OH, Lincoln, NE, and Portland, OR in the fourth quarter. The charge incurred
consisted of non-cash goodwill write-offs of $5,389,000, severance costs of
$167,000 and facility costs of $383,000. Total non-recurring non-cash charges in
the 2001 restructuring charge amounted to $5,465,000. These actions are
consistent with the Company's strategy to improve ongoing operating results,
optimize its operating capacity and fund entry into the Los Angeles market in
2002.
As of December 31, 2002, accrued restructuring charges (classified as accrued
expenses) amounted to $40,000 related to facility costs. During the year ended
December 31, 2002 the Company paid $435,000 of accrued restructuring charges of
which $165,000 related to severance payments and $270,000 to facility costs.
During the year ended December 31, 2000, the Company paid $263,000 of accrued
restructuring charges, of which $196,000 related to severance payments with the
remaining $67,000 attributable to lease termination costs.
F-15
12. GAIN ON SALE OF BOX STORAGE ASSETS:
For the year ended December 31, 2001, the Company recorded a gain on sale of box
storage assets of $84,000 related to the sale in October 2001 of its assets in
Emeryville, CA. The gain represents the difference between the net proceeds from
the transaction and the net asset values, including $366,000 of goodwill. For
the year ended December 31, 2001, these assets accounted for $250,000 and
$(50,000) of the Company's consolidated revenues and operating loss,
respectively.
13. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Quarter ended,
---------------------------------------------------------------
March 31, June 30, September 30, December 31,
2002 2002 2002 2002
---- ---- ---- ----
Revenues $ 10,338,000 $ 11,019,000 $ 10,744,000 $ 12,122,000
Gross profit 3,961,000 4,226,000 3,908,000 4,238,000
Net income (loss) - as restated (1) (15,046,000) 117,000 16,000 37,000
Net income (loss) basic and diluted
per share - as restated (2.22) 0.02 (0.00) 0.01
Net income - as reported (1) 38,000 117,000 16,000 37,000
Net income basic and diluted
per share - as reported $0.01 $0.02 $(0.00) $0.01
Quarter ended,
---------------------------------------------------------------
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
---- ---- ---- ----
Revenues $ 12,275,000 $ 13,304,000 $ 10,613,000 $ 10,038,000
Gross profit 4,392,000 4,834,000 3,808,000 3,349,000
Net loss (2) (371,000) (199,000) (580,000) (8,290,000)
Net loss basic and diluted per share $ (0.06) $ (0.03) $ (0.09) $(1.22)
(1) The Company's net loss in the quarter ended March 31, 2002 included a
non-cash goodwill impairment charge for a cumulative effect of accounting
change in the amount of $ 15,084,000.
(2) The Company's net loss in the quarter ended December 31, 2001 includes a
restructuring charge of $5,939,000 and an operating charge of $1,107,000,
primarily related to closed production facilities; asset write-offs and
development costs related to ScanTrax(TM) capture software.
14. CONCENTRATION OF CREDIT RISK:
The Company has a broad base of clients and no single client accounted for more
than 5% of consolidated revenues for the years ended December 31, 2002, 2001 or
2000. The Company's customers are not concentrated in any specific geographic
area, but are concentrated primarily in the health care, financial services,
engineering, and legal services industries, as well as certain other vertical
markets.
F-16
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Balance,
Beginning Charged Balance,
Description Of Year To Expense Deductions (1) End Of Year
----------- ------- ---------- -------------- -----------
Allowance for doubtful accounts:
2002 $488,000 $ 55,000 $(269,000) $274,000
2001 $506,000 $307,000 $(325,000) $488,000
2000 $392,000 $349,000 $(235,000) $506,000
Balance,
Beginning Charged Balance,
Description Of Year To Expense Deductions (2) End Of Year
----------- ------- ---------- -------------- -----------
Restructuring accruals:
2002 $475,000 $ 0 $(435,000) $ 40,000
2001 $ 0 $475,000 $ 0 $475,000
2000 $263,000 $ 0 $ (263,000) $ 0
(1) Uncollectible accounts written off, net of recoveries.
(2) Represents amount paid.
F-17
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 April 15, 2003 By: /S/ DAVID B. WALLS
----------------------
Chief Financial Officer, Treasurer,
and Secretary
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 Dated
---------- ----- -----
/s/ DAVID C. CARNEY Chairman of the Board of Directors April 15, 2003
- ---------------------------------------------
David C. Carney
/s/ MARK P. GLASSMAN Chief Executive Officer and Director April 15, 2003
- -----------------------------------------------
Mark P. Glassman
/s/ J.B. DOHERTY Director April 15, 2003
- ------------------------------------------------
J.B. Doherty
/s/ ROBERT E. DRURY Director April 15, 2003
- ------------------------------------------------
Robert E. Drury
/s/ H. CRAIG LEWIS Director April 15, 2003
- ------------------------------------------------
H. Craig Lewis
/s/ M. CHRISTINE MURPHY Director April 15, 2003
- -------------------------------------------------
M. Christine Murphy
/s/ DR. FREDERICK E. WEBSTER, JR. Director April 15, 2003
- --------------------------------------------------
Dr. Frederick E. Webster, Jr.
F-18