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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _________ to _________
Commission File Number 0-23077
----------------------
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)
(215) 628-3600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of August 14, 2003:
Common Stock, no par value 7,719,073
-------------------------- ----------------
Class Number of Shares
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IMAGEMAX, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page
Item 1 - Condensed Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations...................................... 1
Consolidated Balance Sheets................................................ 2
Consolidated Statements of Cash Flows...................................... 3
Notes to Consolidated Financial Statements................................. 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 9
Item 3 - Quantitative and Qualitative Disclosures
about Market Risk.......................................................... 14
Item 4 - Controls and Procedures.................................................... 14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.......................................................... 15
Item 5 - Other Information ......................................................... 15
Item 6 - Exhibits and Reports on Form 8-K........................................... 15
SIGNATURES................................................................................... 16
IMAGEMAX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share amounts)
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Services..................................... $ 8,663 $ 9,347 $ 18,469 $ 18,218
Products..................................... 1,230 1,672 2,557 3,139
-------- ------------ ---------- ------------
9,893 11,019 21,026 21,357
-------- ------------ ----------- ------------
Cost of revenues:
Services..................................... 5,213 5,481 11,494 10,612
Products..................................... 841 995 1,747 1,919
Depreciation................................. 271 317 543 639
-------- ------------ ------------- ------------
6,325 6,793 13,784 13,170
-------- ------------ ----------- ------------
Gross profit.............................. 3,568 4,226 7,242 8,187
Selling and administrative expenses............ 3,609 3,695 7,226 7,228
Amortization of intangibles.................... 149 113 272 208
-------- ------------ ---------- ------------
Operating income (loss)................... (190) 418 (256) 751
Interest expense............................... 324 301 642 596
-------- ------------ ------------- ------------
Income (loss) before cumulative
effect of accounting change (514) 117 (898) 155
Cumulative effect of accounting change - - - (15,084)
-------- ------------ ------------ ------------
Net income (loss) $ (514) $ 117 $ (898) $(14,929)
======== ============ ============ ============
Basic and diluted net income (loss)
per share before cumulative effect
of accounting change......................... $ (0.07) $ 0.02 $ (0.13) $ 0.02
Cumulative effect of accounting change - - - (2.22)
-------- ------------ ------------ ------------
Basic and diluted net income (loss) per share . $ (0.07) $ 0.02 $ (0.13) $ (2.20)
======== ============ ============ ============
Shares used in computing basic and
diluted net income (loss) per share.......... 6,922 6,793 6,897 6,793
======== ============ ============ ============
See accompanying notes.
1
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands except share amounts)
June 30, December 31,
2003 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 259 $ 878
Accounts receivable, net of allowance for doubtful
accounts of $ 255 and $ 275 and as of June 30, 2003 and
December 31, 2002, respectively............................................. 6,995 8,983
Inventories..................................................................... 1,200 1,165
Prepaid expenses and other...................................................... 1,317 1,086
-------- -------
Total current assets........................................................ 9,771 12,112
Property, plant and equipment, net................................................. 3,185 3,143
Intangibles, primarily goodwill, net............................................... 19,914 19,974
Other assets....................................................................... 622 625
-------- -------
Total assets................................................................ $ 33,492 $35,854
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt........................... $ 5,795 $ 802
Subordinated convertible debt, net of discount of $87........................... 7,054 --
Accounts payable................................................................ 4,542 4,867
Accrued expenses................................................................ 1,802 2,623
Deferred revenue................................................................ 1,334 1,279
-------- -------
Total current liabilities................................................... 20,527 9,571
Long-term debt..................................................................... 1,076 6,784
Subordinated convertible debt, net of discount of $ 156............................ -- 6,678
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized, none issued..................................................... -- --
Common stock, no par value, 40,000,000 shares authorized,
7,719,073 shares issued and outstanding
at June 30, 2003 and December 31, 2002...................................... 53,619 53,567
Restricted common stock............................................................ (154) (68)
Accumulated deficit................................................................ (41,576) (40,678)
-------- -------
Total shareholders' equity.................................................. 11,889 12,821
-------- -------
Total liabilities and shareholders' equity.................................. $ 33,492 $35,854
======== =======
See accompanying notes.
2
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six Months
Ended June 30,
-------------
2003 2002
Cash flows from operating activities:
Net loss.................................................................. $ (898) $ (14,929)
Adjustments to reconcile net loss to net cash
provided by operating activities -
Cumulative effect of accounting change........................... - 15,084
Compensation expense - restricted common stock................... 28 -
Depreciation and amortization.................................... 576 705
Amortization of deferred financing costs......................... 240 142
Accrued interest on subordinated debt............................ 307 270
Amortization of imputed interest................................. 69 70
Changes in operating assets and liabilities -
Accounts receivable, net................................ 1,988 (217)
Inventories............................................. (35) 68
Prepaid expenses and other.............................. (231) (350)
Other assets............................................ (248) (303)
Accounts payable........................................ (325) 553
Accrued expenses........................................ (883) (184)
Deferred revenue........................................ 55 95
-------- ---------
Net cash provided by operating activities...... 643 1,004
-------- ---------
Cash flows from investing activities:
Purchases of property and equipment....................................... (446) (153)
-------- ---------
Net cash used in investing activities.......... (446) (153)
-------- ---------
Cash flows from financing activities:
Principal payments on debt and capital lease obligations.................. (771) (1,018)
Net borrowings (payments) under line of credit............................ (45) 540
Payment of deferred financing costs....................................... - (110)
-------- ---------
Net cash used in financing activities.......... (816) (588)
-------- ---------
Net increase (decrease) in cash and cash equivalents............................... (619) 263
Cash and cash equivalents, beginning of period..................................... 878 84
-------- ---------
Cash and cash equivalents, end of period........................................... $ 259 $ 347
======== =========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest:........................................................ $ 264 $ 325
======== =========
See accompanying notes.
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BACKGROUND AND BASIS OF PRESENTATION:
ImageMax, Inc. ("ImageMax") is a single-source provider of outsourced document
management solutions to companies located throughout the United States and
concentrated primarily in the health care, financial services, engineering and
legal services industries. The Company's services include electronic (digital)
and micrographic media conversion, data entry and indexing, Internet retrieval
and hosting services, document storage (including Internet "web-enabled"
document storage and retrieval) and system integration. The Company also sells
and supports document management equipment and proprietary as well as third
party open architecture imaging and indexing software. The Company has one
reportable segment.
The accompanying unaudited condensed consolidated financial statements include
the accounts of ImageMax and its subsidiary (the "Company"). All material
intercompany balances and transactions have been eliminated in consolidation.
The consolidated balance sheet as of December 31, 2002 has been derived from the
Company's consolidated financial statements that have been audited by the
Company's independent auditors.
The unaudited financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial reporting pursuant to rules and regulations of the Securities and
Exchange Commission ("SEC") in accordance with the requirements of Form 10-Q.
Accordingly, unaudited interim financial statements such as those in this report
allow certain information and footnotes required by accounting principles
generally accepted in the United States for year end financial statements to be
excluded. The Company believes all adjustments necessary for a fair presentation
of these interim financial statements have been included and are of a normal and
recurring nature except for the goodwill impairment charge taken under SFAS 142.
Interim results are not necessarily indicative of results for a full year. These
interim financial statements should be read in conjunction with the Company's
pro forma and historical financial statements and notes thereto included in its
Annual Report on Form 10-K for the year ended December 31, 2002.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES:
Other than Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangibles" ("SFAS 142"), there were no changes in the accounting
policies of the Company during the periods presented. For a description of these
policies, refer to Note 2 to Consolidated Financial Statements of ImageMax, Inc.
and Subsidiary included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002. For a description of SFAS 142 and its impact on the
Company, refer to Note 4 hereof.
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. The
consolidated financial statements do not include any adjustments that might be
necessary should the Company be unable to continue in its existence. The Company
incurred a net loss in both the first and second quarter of 2003, and in the
first and second quarters of 2003 failed to meet a required financial covenant
under the Revolving Credit Line (the "Revolver," which matures on January 15,
2004) and was therefore in default with respect to the Revolver and its
subordinated debt agreements, which mature on February 15, 2004. Further, at
June 30, 2003, the Company was in default with respect to the Revolver and its
subordinated debt agreements due to an over-advance position on the Revolver by
$886,000, resulting from a reduction in its eligible accounts receivable, as
defined in the credit agreement, as amended. The combination of these factors
indicate significant uncertainty about the Company' ability to continue as a
going concern. The Company is in discussions with the senior lenders regarding a
definitive forbearance agreement through September 30, 2003, in which the senior
lenders would forbear from exercising the rights and remedies available to them
as a result of the defaults. The rights and remedies available to the senior
lenders include acceleration of the Revolver balance to be due and payable.
Additionally, the Company is seeking a waiver from the subordinated debt
holders.
Management continues to monitor its sales activity and implement certain
short-term cost-deferral and cost reduction measures as necessary. Management
believes that the Company will be successful in implementing these actions and
obtaining any necessary forbearance agreements from its senior lenders and
therefore have the ability to continue as a going concern through 2003. In
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
addition, the Company has retained an investment-banking firm to act as its
exclusive financial advisor to assist the Board of Directors and management in
the exploration of strategic alternatives available to the Company. In the event
the Company is unable to negotiate any necessary forbearance agreements and/or
obtain waivers of any covenant violations from its senior lenders or
subordinated debt holders currently or in the future, or to be successful in its
efforts to seek strategic alternatives that result in either the sale of the
Company or a refinancing of the senior and subordinated debt, the Company may
not have the ability to continue as a going concern.
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.
Options were not granted in the six months ending June 30, 2003 and the quarter
ended December 31, 2002. The following pro forma results would have been
reported had compensation cost been recorded for the fair value of the options
granted:
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2003 2002 2003 2002
Net loss as reported $ (514,000) $ 117,000 $ (898,000) $ (14,929,000)
Pro forma net loss (529,000) 84,000 (928,000) (14,993,000)
Basic and diluted loss per share, as reported (.07) .02 (.13) (2.20)
Pro forma basic and diluted loss per share (.07) .02 (.13) (2.21)
3. RECLASSIFICATIONS:
Prior year amounts have been reclassified to conform to the current year
presentation.
4. GOODWILL AND INTANGIBLE ASSETS:
The Company performs its annual impairment test in the fourth quarter of each
year. The Company does not believe there is any further impairment through June
30, 2003. However, there can be no assurances that there will not be an
impairment of goodwill when the Company performs its annual impairment test or
that there will not be a impairment of goodwill should the Company proceed with
strategic alternatives that result in either the sale of the Company or a
refinancing of the senior and subordinated debt.
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 $1.5 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.
5. LONG-TERM DEBT:
As of June 30, 2003, the Company made the final payment of $365,000 on its Term
Loan but was in default with respect to the Revolver and its subordinated debt
agreements due to an over-advance position on the Revolver by $886,000,
resulting from a reduction in its eligible accounts receivable, as defined in
the credit agreement, as amended. Further, as of June 30, 2003, the Company
failed to meet a required financial covenant under the Revolver and was
therefore in default with respect to the Revolver and its subordinated debt
agreements. The Company is in discussions with the senior lenders regarding a
definitive forbearance agreement through September 30, 2003, in which the senior
lenders would forbear from exercising the rights and remedies available to them
as a result of the defaults. The rights and remedies available to the senior
lenders include acceleration of the Revolver balance to be due and payable.
Additionally, the Company is seeking a waiver from the subordinated debt
holders. The over-advance balance was approximately $428,000 as of July 31,
2003, a reduction of approximately $458,000, which was primarily due to an
increase in eligible accounts receivable, as defined, and payments to the senior
lenders.
On April 11, 2003 the Company completed the Second Amendment to the Amended and
Restated Credit Agreement with the Lenders that extended the maturity date of
the Revolver to 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 June 30, 2003, approximately $5.7 million was outstanding on
the Revolver.
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
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 incurred $ 40,000 in loan fees associated with the Second Amendment
payable over the second and third quarters of 2003, which are being amortized
over the remaining loan term. The Company paid the first installment of $ 20,000
in April 2003.
The Company paid $ 5,000 for the First Amendment on January 2003.
The Company paid $ 112,000 in bank fees in 2002 (payment was made over the
second and third quarters) 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 that matured 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 was to receive monthly an amount equal to the product of the amount by
which the Prime Rate (4.0% at June 30, 2003) exceeded the Cap Rate (6.5%)
multiplied by the notional amount. The premium was amortized over a one-year
period. The Prime Rate did not exceed the Cap Rate and the Company did not
receive 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 June 30, 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.
6. 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"), agreed 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 (defined below) becomes exercisable.
The Company also issued additional warrants (the "Additional Warrants") to
purchase an aggregate of 8.4 million shares of Common Stock at a price per share
equal to the lesser of (i) $0.25 or (ii) eighty percent (80%) of the market
price of the Common Stock at the time of exercise. The Additional Warrants are
only exercisable upon (i) the date the Company defaults in the payment of any
amount due and payable under the New Notes, regardless of whether or not the
Company has exercised its Extension Right, or (ii) if the Company has exercised
its Extension Right, the date the Company pays the New Notes in full. Once the
Additional Warrant is exercisable, the New Warrants will be cancelled. The
Additional Warrant is exercisable for a period equal to (i) two (2) years in the
event of a default in the payment of amounts due and payable by the Company or
(ii) two (2) years from the date the Company exercised the Extension Right in
the event the Company pays the New Notes in full. If the Company defaults in the
payment of amounts due and payable under the New Notes, when the Company either
(i) does not exercise its Extension Right or (ii) exercises its Extension
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
7. INCOME TAXES:
At June 30, 2003, 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 nondeductibility of
the loss on the sale of business units and goodwill amortization. The timing and
manner in which the company will utilize the net operating loss carryforwards in
any year, or in total, may be limited by the provision of the Internal Revenue
Service Code. Such limitation may have an impact on the ultimate realization and
timing of these net operating loss carryforwards.
At June 30, 2003, a valuation allowance offset the Company's tax benefit based
upon the uncertainty of the realizability of the associated deferred tax asset
given the Company's losses to date under the guidelines set forth in the
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes".
8. EARNINGS PER SHARE:
The Company has presented net loss per share pursuant to SFAS No. 128, "Earning
Per Share", which requires dual presentation of basic and diluted earnings per
share. Basic earnings per share ("Basic EPS") is computed by dividing the net
loss for the period by the weighted average number of shares of common stock
outstanding for the period. Diluted earnings per share ("Diluted EPS") is
computed by dividing net loss for the period by the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. For the six months and three months ended June 30, 2003 and 2002, common
stock equivalents are considered anti-dilutive and are not included because of
the Company's net loss position, option exercise prices and debt conversion
prices exceed the average market price for the period and as such, Basic EPS and
Diluted EPS are the same.
9. RESTRICTED COMMON STOCK:
Under the Company's 1997 Incentive Plan, in an effort to retain qualified
management, Directors and employees, the Company has cancelled 606,000 stock
options that far exceed prevailing market values and issued 925,750 shares of
restricted common stock. The following common stock issues were made in the
fourth quarter of 2002 and second quarter of 2003:
Date Shares Value
Issued: Issued: per Share:
October 22, 2002 463,500 $ 0.14
December 30, 2002 54,250 $ 0.21
April 17, 2003 408,000 $ 0.28
-------
925,750
=======
The Common stock issued is restricted from sale on the open market for a period
of two years. Compensation expense in the amount of $ 191,000 will be recognized
over the two-year vesting period.
10. NEW ACCOUNTING STANDARDS
Effective January 1, 2003, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"). This statement superseded
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Terminal Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under SFAS No. 146, an entity's
commitment to a plan, by itself, does not create an obligation that meets the
definition of a liability. SFAS No. 146 also establishes fair value as the
objective for initial measurement of the liability. Severance pay would be
recognized over time rather than at the plan commitment date if the benefit
arrangement requires employees to render future service beyond a "minimum
retention period." The provisions of SFAS No. 146 are effective for exit or
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
disposal activities that are initiated after December 31, 2002. SFAS No. 146
only applies to prospective activities, and it had no impact on the Company's
financial position or results of operations for the three and six months ended
June 30, 2003.
In January 2003, FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities" ("FASB Interpretation No. 46"), was issued. It clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to certain entities in which the equity investors do not have a
controlling financial interest or do not have sufficient equity at risk. FASB
Interpretation No. 46 became effective on January 31, 2003 for entities acquired
after such date. The effective date for entities acquired on or before January
31, 2003 is July 1, 2003. The Company has not completed its evaluation of FASB
Interpretation No. 46 and, therefore, is unable to estimate the impact, if any,
on its condensed consolidated financial statements at this time.
8
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Report on Form 10-Q contains certain forward-looking statements that
involve substantial risks and uncertainties. When used in this Report, the words
"anticipate," "believe," "estimate," "expect," "intend," and similar
expressions, as they relate to the Company or its management, are intended to
identify such forward-looking statements. The Company's actual results,
performance, or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements. Factors that could cause or
contribute to such differences include those set forth in "Business--Risk
Factors" as disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002 and other ImageMax filings with the Securities and
Exchange Commission, and risks associated with the results of the continuing
operations of ImageMax. Accordingly, there is no assurance that the results in
the forward-looking statements will be achieved.
The Company is a national single-source provider of integrated document
management solutions. The Company's revenues are derived from a broad range of
media conversion, storage and retrieval services, the sale of third party
document management software products which support digital imaging and indexing
services and the sale and service of a variety of document management equipment.
The Company's revenues consist of service revenues, which are generally
recognized as the related services are rendered, and product revenues, which are
recognized when the products are shipped to clients. Service revenues are
primarily derived from media conversion, storage and retrieval, imaging and
indexing of documents, and the service of imaging and micrographic equipment
sold. Product revenues are derived from equipment sales and software sales and
support. Cost of revenues consists principally of the costs of products sold and
wages and related benefits, supplies, facilities and equipment expenses
associated with providing the Company's services. Selling and administrative
("S&A") expenses include salaries and related benefits associated with the
Company's executive and senior management, marketing and selling activities
(principally salaries and related costs), and financial and other administrative
expenses.
Critical Accounting Policies
The following discussion and disclosures included elsewhere in this Report are
based upon the unaudited condensed consolidated financial statements, which have
been prepared in accordance with the requirements of Form 10-Q and accounting
principles generally accepted in the United States for interim financial
reporting. 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. The Company continually 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.
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. The
consolidated financial statements do not include any adjustments that might be
necessary should the Company be unable to continue in its existence.
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 No. 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.
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 $1.5 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.
The Company performs its annual impairment test in the fourth quarter of each
year. The Company does not believe there is any further impairment through June
30, 2003. However, there can be no assurances that there will not be an
9
impairment of goodwill further impairment through June 30, 2003. However, there
can be no assurances that there will not be an impairment of goodwill when the
Company performs its annual impairment test or that there will not be a
impairment of goodwill should the Company proceed with strategic alternatives
that result in either the sale of the Company or a refinancing of the senior and
subordinated debt.
Results of Operations
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
Overview: For the three months ended June 30, 2003, net loss amounted to $0.5
million or $0.07 per basic and diluted share compared to net income of $0.1
million or $0.02 per basic and diluted share for the three months ended June 30,
2002. Although the trend towards service based revenues and decline in analog
equipment and related supplies revenues continued, the overall mix of services
revenue changed significantly, due primarily to the Digiscribe litigation
disclosed in the Company's Form 10-Q filing dated May 15, 2003 and volatility
related to litigation projects utilizing electronic data discovery. Conversion
services revenue represented 65.4% and 53.5% and services related to electronic
data discovery, data entry, and litigation coding collectively represented 8.4%
and 18.6% for the three months ended June 30, 2003 and 2002, respectively. In
addition, the Company believes that sluggish sales activities related to
software and related services, coupled with delayed buying decisions, were
indicative of the prolonged effects of the national economy and war in Iraq and
further impacted overall results in the quarter.
Revenues: For the three months ended June 30, 2003, total revenues decreased
$1.1 million, or 10.2% as compared to the corresponding period in 2002. For the
three months ended June 30, 2003, services revenue and products revenue,
respectively, comprised 87.6% and 12.4% of total revenues, as compared to 84.8%
and 15.2% in the corresponding period in 2002.
Services revenue decreased 7.3% or $0.7 million primarily due to declines in
data entry and litigation coding ($0.6 million) and electronic data discovery
($0.6 million), partially offset by an increase in conversion services ($0.6
million). The decrease in data entry and litigation coding revenue is primarily
attributed to the loss of former customers that were part of the Digiscribe
litigation disclosed in the Company's Form 10-Q filing dated May 15, 2003. The
decrease in electronic data discovery services is primarily attributed to
volatility due to the effects of timing (arising from the nature and scope of
litigation) and the generally wide range of potential outcomes that can arise
from legal projects. The increase in conversion services revenue is primarily
attributed to volume related to several scanning projects.
Products revenue decreased 26.4% or $0.4 million as a result of lower analog
equipment and related supplies sales and lower third party software revenues.
These declines were primarily attributable to volume and the Company believes
that results related to software, coupled with delayed buying decisions, were
indicative of the prolonged effects of the national economy and war in Iraq.
Results related to equipment and supplies revenues are consistent with recent
trends as the Company focuses its efforts on service based revenues.
Gross Profit: For the three months ended June 30, 2003, gross profit decreased
by $0.7 million, or 15.6%. Gross profit percentage decreased from 38.4% to 36.1%
in 2003 versus the same corresponding quarter in 2002.
Gross profit declined $0.4 million on services revenue primarily due to lower
pricing and volume on electronic data discovery services and the decrease in
data entry and litigation coding noted above, partially offset by higher
conversion services volume that improved production capacity utilization in
several locations.
Gross profit declined $0.3 million on products revenue due primarily to volume
declines noted above.
Selling and Administrative Expenses: For the three months ended June 30, 2003,
selling and administrative expenses decreased by $86,000, or by 2.3% as compared
to the corresponding period in 2002, due primarily to a benefit of $0.1 million
related to the settlement of the Digiscribe litigation.
Interest Expense: Interest expense remained constant as the company maintained
relatively consistent debt levels at June 30, 2003 versus June 30, 2002.
Results of Operations
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Overview: For the six months ended June 30, 2003, net loss amounted to $0.9
million or $0.13 per basic and diluted share compared to a net loss of $14.9
million or $2.20 per basic and diluted share for the six months ended June 30,
2002. Overall results for the first half of 2003 were down despite a 1% increase
in total services revenue, including a 5% increase in conversion service
revenues versus the six months ended June 30, 2002, due in part to the
Digiscribe litigation disclosed in the Company's Form 10-Q filing dated
10
May 15, 2003. Conversion services revenues represented 60.6% and 56.6% for the
six months ended June 30, 2003 and 2002, respectively. In addition, the Company
believes that sluggish sales activities related to software and related
services, coupled with delayed buying decisions, were indicative of the
prolonged effects of the national economy and war in Iraq and further impacted
overall results in the first half.
Revenues: For the six months ended June 30, 2003, total revenues decreased $0.3
million or 1.5% as compared to the corresponding period in 2002. For the six
months ended June 30, 2003, services revenue and products revenue, respectively,
comprised 87.8% and 12.2% of total revenues, as compared to 85.3% and 14.7% in
the corresponding period in 2002.
Services revenue increased 1.4% or $0.3 million due primarily to increases in
litigation projects utilizing electronic data discovery services ($1.0 million)
and digital conversion services as a result of higher volume, notably in
southern California, a facility opened in the fourth quarter of 2002 ($0.4
million). These increases were substantially offset by a decrease in data entry
and litigation coding services ($1.2 million) related to the loss of former
customers that were part of the Digiscribe litigation disclosed in the Company's
Form 10-Q filing dated May 15, 2003.
Products revenue decreased 18.5% or $0.6 million as a result of lower analog
equipment and related supplies sales and lower third party software revenues.
These declines were primarily attributable to volume and the Company believes
that results related to software, coupled with delayed buying decisions, were
indicative of the prolonged effects of the national economy and war in Iraq.
Results related to equipment and supplies revenues are consistent with recent
trends as the Company focuses its efforts on service based revenues.
Gross Profit: For the six months ended June 30, 2003, gross profit decreased by
$0.9 million, or 11.5%. Gross profit percentage decreased from 38.3% to 34.4% in
2003 versus the same corresponding period in 2002.
Gross profit declined $0.5 million on services revenue primarily due to: lower
margins on projects utilizing electronic data discovery services resulting from
lower prices accorded to large volume customers; the decline in data entry and
litigation coding services noted above; and the impact of severe weather on
operations in the Mid-Atlantic and Northeast during the first quarter of 2003.
These effects were partially offset by an increase in gross profit related to
conversion services in the second quarter of 2003 as a result of higher volume
and production capacity utilization.
Gross profit declined $0.4 million on products revenue due primarily to volume
declines noted above.
Selling and Administrative Expenses: For the six months ended June 30, 2003,
selling and administrative expenses were flat as compared to the corresponding
period in 2002. Administrative expenses included a benefit of $0.1 million
related to the settlement of the Digiscribe litigation in the second quarter of
2003, which was more than offset by expenses incurred in the first quarter of
2003 related to the move of operations to more cost effective facilities within
the Boston, Detroit and Philadelphia markets.
Interest Expense: Interest expense remained constant as the company maintained
relatively consistent debt levels at June 30, 2003 versus June 30, 2002.
Liquidity and Capital Resources
The Company incurred a net loss in both the first and second quarter of 2003,
and in the first and second quarters of 2003 failed to meet a required financial
covenant under the Revolving Credit Line (the "Revolver", which matures on
January 15, 2004) and was therefore in default with respect to the Revolver and
its subordinated debt agreements, which mature on February 15, 2004. Further, at
June 30, 2003, the Company was in default with respect to the Revolver and its
subordinated debt agreements due to an over-advance position on the Revolver by
$886,000, resulting from a reduction in its eligible accounts receivable, as
defined in the credit agreement, as amended. The combination of these factors
indicate significant uncertainty about the Company' ability to continue as a
going concern. The Company is in discussions with the senior lenders regarding a
definitive forbearance agreement through September 30, 2003, in which the senior
lenders would forbear from exercising the rights and remedies available to them
as a result of the defaults. The rights and remedies available to the senior
lenders include acceleration of the Revolver balance to be due and payable.
Additionally, the Company is seeking a waiver from the subordinated debt
holders.
Management continues to monitor its sales activity and implement certain
short-term cost-deferral and cost reduction measures as necessary. Management
believes that the Company will be successful in implementing these actions and
therefore have the ability to continue as a going concern through 2003. In
addition, the Company has retained an investment-banking firm to act as its
exclusive financial advisor to assist the Board of Directors and management in
the exploration of strategic alternatives available to the Company. In the event
11
the Company is unable to negotiate any necessary forbearance agreements and/or
obtain waivers of any covenant violations from its senior lenders or
subordinated debt holders currently or in the future, or to be successful in its
efforts to seek strategic alternatives that result in either the sale of the
Company or a refinancing of the senior and subordinated debt, the Company may
not have the ability to continue as a going concern.
As of June 30, 2003, the Company had cash and cash equivalents of $ 0.3 million
and a working capital deficit of $ 10.8 million. The working capital deficit
includes the outstanding balance of the Revolver of $ 5.7 million and
subordinated convertible debt of $ 7.1 million, which are due January 15, 2004
and February 15, 2004, respectively. As of December 31, 2002 the Company had
cash and cash equivalents of $ 0.9 million and working capital of $ 2.5 million.
In addition, the Company made $ 0.8 million in principle payments on the Term
Loan for the six months ended June 30, 2003. For the six months ended June 20,
2003 net cash provided by operating activities amounted to $ 0.6 million; net
cash used in investing activities amounted to $ 0.4 million; and net cash used
in financing activities amounted to $ 0.8 million.
Net cash provided by operating activities primarily represents net loss before
depreciation and amortization. For the six months ended June 30, 2003, increases
in deferred revenue for advance customer deposits and increased cash collections
on accounts receivable were offset by inventory purchases to meet future
production needs, increases in prepaid assets and deposits for upcoming
projects, decreases in accrued expenses due to payment of 2002 sales commissions
and other operating expenses, and decreases in accounts payable.
Net cash used in investing activities represents the Company's investments in
equipment and information technology for new and existing production facilities.
For the six months ended June 30, 2003, the Company made capital expenditures of
$ 0.4 million.
Net cash used in financing activities primarily represents the $ 0.8 million of
payments under the Term Loan and $ 45,000 of net payments on the Revolver.
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
believes that its operating cash flow will be sufficient to finance operating
requirements through 2003.
Management Plans
The Company has retained the investment-banking firm of Janney Montgomery Scott,
LLC ("Janney") to act as its exclusive financial advisor to assist management
and the Board of Directors in the exploration of strategic alternatives
available to the Company.
For the third quarter of 2003 the Company expects total revenue to increase
versus the second quarter of 2003 and additionally anticipates that the overall
mix of revenue, with continuing emphasis on conversion services, and
productivity will generate a consistent gross profit percentage. In addition,
the Company has implemented certain cost-deferral and cost-reduction actions
that are expected to provide cash savings in the third quarter.
In connection with definitive forbearance agreement discussions and at the
senior lenders' request, the Company has begun a schedule of weekly payments to
the senior lenders through September 30, 2003 that totals $350,000 ($140,000 has
been paid as of August 13, 2003) and expects to make a final payment on
September 30, 2003 sufficient to eliminate the over-advance position. In an
effort to enhance the senior lenders' collateral position, the Company will
purchase credit insurance on a portion of its trade accounts receivable. In
exchange for the Company purchasing credit insurance the senior lenders have
proposed increasing the borrowing availability on the Company's insured trade
accounts receivable balances.
Credit Facility (The following disclosure is consistent with Note 5 to the
Consolidated Financial Statements)
As of June 30, 2003, the Company made the final payment of $365,000 on its Term
Loan but was in default with respect to the Revolver and its subordinated debt
agreements due to an over-advance position on the Revolver by $886,000,
resulting from a reduction in its eligible accounts receivable, as defined in
the credit agreement, as amended. Further, as of June 30, 2003, the Company
failed to meet a required financial covenant under the Revolver and was
therefore in default with respect to the Revolver and its subordinated debt
agreements. The Company is in discussions with the senior lenders regarding a
definitive forbearance agreement through September 30, 2003, in which the senior
lenders would forbear from exercising the rights and remedies available to them
as a result of the defaults. The rights and remedies available to the senior
lenders include acceleration of the Revolver balance to be due and payable.
Additionally, the Company is seeking a waiver from the subordinated debt
holders. The over-advance balance was approximately $428,000 as of July 31,
2003, a reduction of approximately $458,000, which was primarily due to an
increase in eligible accounts receivable, as defined, and payments to the senior
lenders.
On April 11, 2003 the Company completed the Second Amendment to the Amended and
12
Restated Credit Agreement with the Lenders that extended the maturity date of
the Revolver to 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 June 30, 2003, approximately $5.7 million was outstanding on
the Revolver.
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 incurred $40,000 in loan fees associated with the Second Amendment
payable over the second and third quarters of 2003, which are being amortized
over the remaining loan term. The Company paid $ 20,000 in April 2003 for the
first installment for the Second Amendment in 2002. The Company paid $5,000 for
the First Amendment on January 2003. The Company paid $112,000 in bank fees in
2002 (payment was made over the second and third quarters) 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 that matured 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 was to receive monthly an amount equal to the product of the amount by
which the Prime Rate (4.0% at June 30, 2003) exceeded the Cap Rate (6.5%)
multiplied by the notional amount. The premium was amortized over a one-year
period. The Prime Rate did not exceed the Cap Rate and the Company did not
receive 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 June 30, 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.
Convertible Subordinated Debt (The following disclosure is consistent with Note
6 to the Consolidated Financial Statements)
In order for the Company to enter into the June 14, 2003 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"), agreed 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 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
13
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.
New Accounting Standards
Effective January 1, 2003, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"). This statement superseded
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Terminal Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under SFAS No. 146, an entity's
commitment to a plan, by itself, does not create an obligation that meets the
definition of a liability. SFAS No. 146 also establishes fair value as the
objective for initial measurement of the liability. Severance pay would be
recognized over time rather than at the plan commitment date if the benefit
arrangement requires employees to render future service beyond a "minimum
retention period." The provisions of SFAS No. 146 are effective for exit or
disposal activities that are initiated after December 31, 2002. SFAS No. 146
only applies to prospective activities, and it had no impact on the Company's
financial position or results of operations for the three and six months ended
June 30, 2003.
In January 2003, FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities" ("FASB Interpretation No. 46"), was issued. It clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to certain entities in which the equity investors do not have a
controlling financial interest or do not have sufficient equity at risk. FASB
Interpretation No. 46 became effective on January 31, 2003 for entities acquired
after such date. The effective date for entities acquired on or before January
31, 2003 is July 1, 2003. The Company has not completed its evaluation of FASB
Interpretation No. 46 and, therefore, is unable to estimate the impact, if any,
on its condensed consolidated financial statements at this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is to changing interest rates. The
Company has variable-rate debt representing 47% of its total long-term debt at
June 30, 2003. If interest rates average 25 basis points more in 2003 than they
did during 2002, the Company's interest expense would increase approximately $
8,199 on an annual basis (interest expense for 2002 was $1.2 million). As of
August 14, 2003, the prime rate and the Company's interest rates on
variable-rate debt have not changed. The Company has limited its interest rate
risk by entering into an interest rate cap agreement. The agreement, which
matured on June 13, 2003, was 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 was to receive monthly an amount equal to the
product of the amount by which the Prime Rate (4.25% at June 30, 2003) exceeded
the Cap Rate (6.5%) multiplied by the notional amount. The Prime Rate did not
exceed the Cap Rate and the Company did not receive any payments under this
agreement.
ITEM 4. CONTROLS AND PROCEDURES
(a) An evaluation was performed under the supervision and with the
participation of the Company's management, including its Chief Executive
Officer, or CEO, and Chief Financial Officer, of CFO, of the effectiveness of
the Company's disclosure controls and procedures, (as such term is defined under
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") as of June 30, 2003. Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act, is recorded, processed, summarized and reported as
specified in Securities and Exchange Commission rules and forms.
(b) There were no significant changes in the Company's internal control
over financial reporting that occurred during the Company's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
14
PART II -- OTHER INFORMATION
ITEM 1. Legal Proceedings
As previously disclosed in the Company's March 31, 2003 Form 10-Q filed on May
15, 2003, the Company reached a final settlement with Digiscribe International,
Inc. on May 2, 2003.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
31.1 Certification pursuant to 18 U.S.C. ss. 1350, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 signed by Mark P.
Glassman, Chief Executive Officer (filed herewith).
31.2 Certification pursuant to 18 U.S.C. ss. 1350, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 signed by David
B. Walls, Chief Financial Officer (filed herewith).
32.1 Certification pursuant to 18 U.S.C. ss. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Mark P.
Glassman, Chief Executive Officer (filed herewith).
32.2 Certification pursuant to 18 U.S.C. ss. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 signed by David
B. Walls, Chief Financial Officer (filed herewith).
b. Reports on Form 8-K:
The Company filed a Form 8-K on May 16, 2003 reporting the Press Release
dated May 15, 2003 which disclosed the preliminary financial results of the
Company for the fiscal quarter ended March 31, 2003.
The Company filed a Form 8-K on August 1, 2003 reporting the Press Release
dated August 1, 2003 which disclosed the preliminary financial results of
the Company for the fiscal quarter ended June 30, 2003.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IMAGEMAX, INC.
BY: MARK P. GLASSMAN August 14, 2003
-------------------- ---------------
Mark P. Glassman
Chief Executive Officer
BY: DAVID B. WALLS August 14, 2003
------------------ ---------------
David B. Walls
Chief Financial Officer, Treasurer and Secretary
16
EXHIBIT INDEX
31.1 Certification pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 signed by Mark P.
Glassman, Chief Executive Officer (filed herewith).
31.2 Certification pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 signed by David B. Walls,
Chief Financial Officer (filed herewith).
32.1 Certification pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 signed by Mark P.
Glassman, Chief Executive Officer (filed herewith).
32.2 Certification pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 signed by David B. Walls,
Chief Financial Officer (filed herewith).