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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 November 14, 2003:
Common Stock, no par value 7,505,087
- -------------------------------- -----------------
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 Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues:
Services .................................... $ 8,626 $ 9,108 $ 27,094 $ 27,326
Products .................................... 978 1,636 3,536 4,774
-------- -------- -------- --------
9,604 10,744 30,630 32,100
-------- -------- -------- --------
Cost of revenues:
Services .................................... 5,232 5,536 16,725 16,145
Products .................................... 650 1,008 2,397 2,927
Depreciation ................................ 281 292 825 931
-------- -------- -------- --------
6,163 6,836 19,947 20,003
-------- -------- -------- --------
Gross profit .................................. 3,441 3,908 10,683 12,097
Selling and administrative expenses ........... 3,523 3,430 10,749 10,660
Amortization .................................. 135 152 408 360
Goodwill impairment charge .................... 11,362 -- 11,362 --
-------- -------- -------- --------
Operating income (loss) ....................... (11,579) 326 (11,836) 1,077
Interest expense .............................. 330 310 972 906
-------- -------- -------- --------
Income (loss) before cumulative
effect of accounting change ................. (11,909) 16 (12,808) 171
Cumulative effect of accounting change ........ -- -- -- (15,084)
-------- -------- -------- --------
Net income (loss) ............................. $(11,909) $ 16 $(12,808) $(14,913)
======== ======== ======== ========
Basic and diluted net income (loss)
per share before cumulative effect
of accounting change ........................ $ (1.72) $ 0.00 $ (1.85) $ 0.03
Cumulative effect of accounting change ........ -- -- -- (2.22)
-------- -------- --------
Basic and diluted net income (loss) per share . $ (1.72) $ 0.00 $ (1.85) $ (2.19)
======== ======== ======== ========
Shares used in computing basic and
diluted net income (loss) per share ......... 6,933 6,793 6,909 6,793
======== ======== ======== ========
See accompanying notes.
1
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands except share amounts)
September 30, December 31,
2003 2002
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 7 $ 878
Accounts receivable, net of allowance for doubtful
accounts of $ 241 and $ 275 as of September 30, 2003 and
December 31, 2002, respectively ......................... 7,025 8,983
Inventories ................................................. 1,028 1,165
Prepaid expenses and other .................................. 1,333 1,086
-------- --------
Total current assets .................................... 9,393 12,112
Property, plant and equipment, net ............................. 3,114 3,143
Intangibles, primarily goodwill, net ........................... 8,523 19,974
Other assets ................................................... 636 625
-------- --------
Total assets ........................................ $ 21,666 $ 35,854
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt ....... $ 5,544 $ 802
Subordinated convertible debt, net of discount of $ 53 ...... 7,258 --
Accounts payable ............................................ 4,284 4,867
Accrued expenses ............................................ 1,727 2,623
Deferred revenue ............................................ 1,789 1,279
-------- --------
Total current liabilities ............................... 20,602 9,571
Long-term debt ................................................. 1,064 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,
7,505,087 and 7,311,073 shares issued and outstanding
at September 30, 2003 and December 31, 2002, respectively 53,619 53,567
Restricted common stock ........................................ (133) (68)
Accumulated deficit ............................................ (53,486) (40,678)
-------- --------
Total shareholders' equity .............................. -- 12,821
-------- --------
Total liabilities and shareholders' equity ........... $ 21,666 $ 35,854
======== ========
See accompanying notes.
2
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months
Ended September 30,
----------------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net loss ........................................................... $(12,808) $(14,913)
Adjustments to reconcile net loss to net cash
provided by operating activities -
Cumulative effect of accounting change .................... -- 15,084
Goodwill impairment charge ................................ 11,362 --
Compensation expense - restricted common stock ............ 52 --
Depreciation and amortization ............................. 888 1,020
Amortization of deferred financing costs .................. 345 265
Accrued interest on subordinated debt ..................... 478 417
Amortization of imputed interest .......................... 102 104
Changes in operating assets and liabilities -
Accounts receivable, net ......................... 1,958 (519)
Inventories ...................................... 12 18
Prepaid expenses and other ....................... (247) (290)
Other assets ..................................... (270) (292)
Accounts payable ................................. (583) 1,317
Accrued expenses ................................. (971) (676)
Deferred revenue ................................. 510 240
-------- --------
Net cash provided by operating activities 828 1,775
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ................................ (482) (396)
-------- --------
Net cash used in investing activities ... (482) (396)
-------- --------
Cash flows from financing activities:
Principal payments on debt and capital lease obligations ........... (796) (1,544)
Net borrowings (payments) under line of credit ..................... (305) 530
Payment of deferred financing costs ................................ (116) (274)
-------- --------
Net cash used in financing activities ... (1,217) (1,288)
-------- --------
Net increase (decrease) in cash and cash equivalents ........................ (871) 91
Cash and cash equivalents, beginning of period .............................. 878 84
-------- --------
Cash and cash equivalents, end of period .................................... 7 $ 175
======== ========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest .................................................. $ 398 $ 464
======== ========
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. In the
first, second and third quarters of 2003, the Company incurred net losses and
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. The Company entered into the First Amendment of the
Forbearance Agreement effective September 30, 2003 with the senior lenders,
which extended the forbearance period until October 31, 2003. The Company is in
discussions with the senior lenders to extend the forbearance period for the
balance of 2003. The rights and remedies available to the senior lenders include
acceleration of the Revolver balance to be due and payable. Further, at
September 30, 2003, the Company had resolved the over-advance position that
existed at June 30, 2003 of $886,000, resulting from a reduction in its eligible
accounts receivable, as defined in the credit agreement, as amended. There was
no over-advance position at September 30, 2003. The Company will require
additional working capital in order to continue to meet its current operating
obligations beyond December 31, 2003. The combination of these factors indicates
significant uncertainty about the Company's ability to continue as a going
concern.
Management continues to monitor its sales activity and implement certain
short-term cost-deferral and cost reduction measures where possible. 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. The Company
is in negotiations with its subordinated debt holders to obtain necessary
working capital and the Company is also in discussions to obtain forbearance
from the senior lenders. There can be no assurance that these negotiations or
discussions will be successful and any agreement with the subordinated debt
holders would be subject to approval by the Company's senior lenders. In the
event the Company is unable to secure additional working capital, negotiate any
necessary forbearance agreements and/or obtain waivers of any covenant
violations from its senior lenders or subordinated debt
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
holders currently or in the future, or to be successful in its efforts to locate
and consummate 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, may not be able to pay its
obligations as they come due, its operations may be significantly curtailed and
the Company may have to consider additional alternatives, which may include
bankruptcy or liquidation.
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 nine months ending September 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 September 30 Nine Months Ended September 30
------------------------------- -------------------------------
2003 2002 2003 2002
Net income (loss) as reported $ (11,909,000) $ 16,000 $ (12,808,000) $ (14,913,000)
Pro forma net income (loss) (11,924,000) (19,000) (12,853,000) (15,012,000)
Basic and diluted loss per share, as reported (1.72) .00 (1.85) (2.19)
Pro forma basic and diluted loss per share (1.72) .00 (1.86) (2.20)
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, 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. SFAS 142
requires companies to perform an impairment test between the normal required
annual tests when an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying amount. Management reviewed
SFAS 142 and believed that in accordance with SFAS 142 there were impairment
indicators, such as incurring operating losses through the first nine months of
2003, the inability to meet a required quarterly financial covenant under the
Revolver and the termination of the forbearance agreement with the bank on
October 31, 2002, that required the Company to perform the impairment test as of
September 30, 2003.
The Company completed its calculation of the implied fair value of goodwill
during the quarter ended September 30, 2003 and recorded a non-cash charge to
the carrying value of goodwill in the amount of $11.4 million.
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.
5. LONG-TERM DEBT:
The Company entered into the First Amendment of the Forbearance Agreement
("First Amendment") effective September 30, 2003 in which the senior lenders
agreed to forbear from exercising the rights and remedies available to them as a
result of the financial covenant default through October 31, 2003. The original
forbearance agreement expired on September 30, 2003. The rights and remedies
available to the senior lenders include acceleration of the Revolver balance to
be due and payable. In the first, second and third quarters, the Company
incurred net losses and 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. The Company incurred $30,000 in
bank fees associated with the original
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
forbearance agreement dated August 21, 2003 and paid $15,000 in September 2003
with the remaining balance of $15,000 due in November 2003. In addition, the
Company incurred $25,000 in fees related to the First Amendment.
Further, at September 30, 2003, the Company had resolved the over-advance
position that existed at June 30, 2003 of $886,000, resulting from a reduction
in its eligible accounts receivable, as defined in the credit agreement, as
amended. There was no over-advance position at September 30, 2003. As of
September 30, 2003, approximately $5.4 million was outstanding on the Revolver.
As of June 30, 2003, the Company made the final payment of $365,000 on its Term
Loan.
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.
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 the first installment of $20,000
in April 2003 and the second installment of $20,000 in September 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 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 September 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.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company also issued additional warrants (the "Additional Warrants") to
purchase an aggregate of 8.4 million shares of Common Stock at a price per share
equal to the lesser of (i) $0.25 or (ii) eighty percent (80%) of the market
price of the Common Stock at the time of exercise. The Additional Warrants are
only exercisable upon (i) the date the Company defaults in the payment of any
amount due and payable under the New Notes, regardless of whether or not the
Company has exercised its Extension Right, or (ii) if the Company has exercised
its Extension Right, the date the Company pays the New Notes in full. Once the
Additional Warrant is exercisable, the New Warrants will be cancelled. The
Additional Warrant is exercisable for a period equal to (i) two (2) years in the
event of a default in the payment of amounts due and payable by the Company or
(ii) two (2) years from the date the Company exercised the Extension Right in
the event the Company pays the New Notes in full. If the Company defaults in the
payment of amounts due and payable under the New Notes, when the Company either
(i) does not exercise its Extension Right or (ii) exercises its Extension Right
after the New Notes have been converted, in whole or in part, into shares of
Common Stock, then the Investors can exercise the Additional Warrant by delivery
of two-year, interest free, non-recourse notes secured by the pledge of the
Additional Warrant shares or by cashless exercise, and the Investors shall be
entitled to vote the 8.4 million shares of Common Stock. In the event that the
Company exercises its Extension Right and pays the remainder due by February 15,
2005, and the New Notes have not been converted, in whole or in part, into
shares of Common Stock, then the number of shares of Common Stock purchasable
under the Additional Warrant shall be reduced to an aggregate of 2.2 million
shares of Common Stock.
7. INCOME TAXES:
At September 30, 2003, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $13.4 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 September 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 nine months and three months ended September 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.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
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 nine months ended
Septmeber 30, 2003.
In January 2003, Financial Accounting Standards Board Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FASB Interpretation No. 46"),
was issued. Among other things, FASB Interpretation No. 46 defines a variable
interest entity ("VIE") as an entity that either has investor voting rights that
are not proportional to their economic interests or has equity investors that do
not provide sufficient financial resources for the entity to support its
activities. FASB Interpretation No. 46 requires a VIE to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
VIE's activities. If no company is subject to a majority of such risk,
consolidation would be required by a company that is entitled to receive a
majority of the VIE's residual returns. The Company currently intends to adopt
FASB Interpretation No. 46 in the fourth quarter of 2003, when adoption is
mandatory, retroactive to January 1, 2003. While management has not completed
its evaluation of FASB Interpretation No. 46 at this time, it does not expect
that the adoption of FASB Interpretation No. 46 will have a significant impact
on the Company's financial statements.
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.
The Company performs its annual impairment test in the fourth quarter of each
year. 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. SFAS 142
requires companies to perform an impairment test between the normal required
annual tests when an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying
9
amount. Management reviewed SFAS 142 and believed that in accordance with SFAS
142 there were impairment indicators, such as incurring operating losses through
the first nine months of 2003, the inability to meet a required quarterly
financial covenant under the Revolver and the termination of the forbearance
agreement with the bank on October 31, 2002, that required the Company to
perform the impairment test as of September 30, 2003.
The Company completed its calculation of the implied fair value of goodwill
during the quarter ended September 30, 2003 and recorded a non-cash charge to
the carrying value of goodwill in the amount of $11.4 million.
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 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.
Results of Operations
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
Overview: For the three months ended September 30, 2003, net loss amounted to
$11.9 million or $1.72 per basic and diluted share compared to net income of
$16,000 or $0.00 per basic and diluted share for the three months ended
September 30, 2002. The Company recorded a goodwill impairment charge of $11.4
million in the quarter due to impairment indicators as defined under SFAS 142
"Goodwill and Other Intangibles".
Revenues: For the three months ended September 30, 2003, total revenues
decreased $1.1 million, or 10.6% as compared to the corresponding period in
2002. For the three months ended September 30, 2003, services revenue and
products revenue, respectively, comprised 89.8% and 10.2% of total revenues, as
compared to 84.8% and 15.2% in the corresponding period in 2002.
Services revenue decreased 5.3% or $0.5 million primarily due to declines in
data entry and litigation coding ($0.4 million) and electronic data discovery
($0.4 million), partially offset by an increase in conversion services ($0.3
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 revenue is attributed to a change
in business terms, effective July 2003, in which the outsourced component of
these services were directly billed by the provider to certain customers. The
impact of this change was to reduce services revenue and cost of services
revenue by $0.4 million.
Products revenue decreased 40.0% or $0.7 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. Results related to
equipment and supplies revenues are consistent with recent trends as the Company
continues to focus its efforts on services based revenues.
Gross Profit: For the three months ended September 30, 2003, gross profit
decreased by $0.5 million, or 11.9%. Gross profit percentage decreased from
36.4% to 35.8% in 2003 versus the same corresponding quarter in 2002. The impact
of the change in business terms regarding electronic data discovery services
discussed above was to increase gross profit percentage from 34.3% to 35.8%.
Gross profit declined $0.2 million on services revenue primarily due to 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 September 30,
2003, selling and administrative expenses increased by $93,000, or by 2.7% as
compared to the corresponding period in 2002, due primarily to a $53,000 charge
incurred for telecommunications utilization and higher business insurance costs.
Interest Expense: Interest expense remained constant as the company maintained
relatively consistent debt levels at September 30, 2003 versus September 30,
2002.
10
Results of Operations
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002
Overview: For the nine months ended September 30, 2003, net loss amounted to
$12.8 million or $1.85 per basic and diluted share compared to a net loss of
$14.9 million or $2.19 per basic and diluted share for the nine months ended
September 30, 2002. The Company recorded a goodwill impairment charge of $11.4
million in the third quarter of 2003 due to impairment indicators defined under
SFAS 142 "Goodwill and Intangibles". As previously disclosed, in the first nine
months of 2002 the Company recorded a non-cash goodwill charge of $15.1 million
or $2.22 per share as a result of implementing SFAS 142.
Revenues: For the nine months ended September 30, 2003, total revenues decreased
$1.5 million or 4.6% as compared to the corresponding period in 2002. For the
nine months ended September 30, 2003, services revenue and products revenue,
respectively, comprised 88.5% and 11.5% of total revenues, as compared to 85.1%
and 14.9% in the corresponding period in 2002.
Service revenue decreased 0.8% or $0.2 million due primarily to a decrease in
data entry and litigation coding service ($1.6 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. This decrease was offset by
increases in digital conversion services revenue as a result of higher volume,
notably in southern California, a facility opened in the fourth quarter of 2002
($1.0 million) and in litigation projects utilizing electronic data discovery
services ($0.6 million). Conversion services revenue increased 6% as digitally
based services increased over the prior period. As noted above, there was a
change in business terms, effective July 2003, in which the outsourced component
of certain electronic data discovery services were directly billed by the
provider to certain customers. The impact of this change was to reduce services
revenue and cost of services revenue by $0.4 million.
Products revenue decreased 25.9% or $1.2 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 continues to focus its efforts on services based revenues.
Gross Profit: For the nine months ended September 30, 2003, gross profit
decreased by $1.4 million, or 11.7%. Gross profit percentage decreased from
37.7% to 34.9% in 2003 versus the same corresponding period in 2002.
Gross profit declined $0.7 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 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 and third quarters of 2003 as a result of higher volume and
production capacity utilization. The impact of the change in business terms
regarding electronic data discovery services discussed above was to increase
gross profit percentage from 34.4% to 34.9%.
Gross profit declined $0.7 million on products revenue due primarily to volume
declines noted above.
Selling and Administrative Expenses: For the nine months ended September 30,
2003, selling and administrative expenses increased $89,000 as compared to the
corresponding period in 2002. The increase was related to a $53,000 charge
incurred for telecom utilization and higher business insurance costs. In
addition, 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 September 30, 2003 versus September 30,
2002.
Liquidity and Capital Resources
In the first, second and third quarters of 2003, the Company incurred net losses
and 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. The First Amendment of the Forbearance Agreement, in which
the Company's senior lenders agreed to forbear certain of their rights in
default, expired on October 31, 2003. The rights and remedies available to the
senior lenders include acceleration of the Revolver balance to be due and
payable. Further, at September 30, 2003, the Company resolved the over-advance
position that existed at June 30, 2003 of $886,000, resulting from a reduction
in its eligible accounts receivable, as defined in the credit agreement, as
amended. There was no over-advance position at September 30, 2003. The Company
will require additional working capital in order to continue to meet its current
operating obligations. The combination of these factors indicates significant
uncertainty about the Company's ability to continue as a going concern.
11
Management continues to monitor its sales activity and implement certain
short-term cost-deferral and cost reduction measures where possible. 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. The Company
is in negotiations with its subordinated debt holders to obtain necessary
working capital and the Company is also in discussions to obtain forbearance
from the senior lenders. There can be no assurance that these negotiations or
discussions will be successful and any agreement with the subordinated debt
holders would be subject to approval by the Company's senior lenders. In the
event the Company is unable to secure additional working capital, 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 locate and consummate
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, may not be able to pay its debts as they
come due, its operations may be significantly curtailed and the Company may have
to consider additional alternatives, which may include bankruptcy or
liquidation.
As of September 30, 2003, the Company had nominal cash and cash equivalents, and
a working capital deficit of $11.2 million. The working capital deficit includes
the outstanding balance of the Revolver of $5.4 million and subordinated
convertible debt of $7.3 million, which are due January 15, 2004 and February
15, 2004, respectively. Working capital net of the senior and subordinated debt
balances was approximately $1.6 million as of September 30, 2003. 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 principal
payments on the Term Loan for the six months ended June 30, 2003 and reduced its
Revolver balance by $0.3 million for the nine months ended September 30, 2003.
For the nine months ended September 30, 2003 net cash provided by operating
activities amounted to $0.8 million; net cash used in investing activities
amounted to $0.5 million; and net cash used in financing activities amounted to
$1.2 million. The Company will require additional working capital in order to
continue to meet its current operating obligations.
Net cash provided by operating activities primarily represents net loss before
depreciation and amortization. For the nine months ended September 30, 2003,
increases in deferred revenue for advance customer deposits, increased cash
collections on accounts receivable and decreases in inventories to meet future
production needs were offset by 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
arising from the Company's ongoing efforts to manage its working capital
position.
Net cash used in investing activities represents the Company's investments in
equipment and information technology for new and existing production facilities.
For the nine months ended September 30, 2003, the Company made capital
expenditures of $0.5 million.
Net cash used in financing activities primarily represents the $0.8 million of
payments under the Term Loan, $0.3 of net payments on the Revolver, and $0.1
payment of deferred financing costs.
The Company continues to selectively invest in equipment and technology to meet
the needs of its operations and to improve its operating efficiency.
Credit Facility (The following disclosure is consistent with Note 5 to the
Consolidated Financial Statements)
The Company entered into the First Amendment of the Forbearance Agreement
("First Amendment") effective September 30, 2003 in which the senior lenders
agreed to forbear from exercising the rights and remedies available to them as a
result of the financial covenant default through October 31, 2003. The original
forbearance agreement expired on September 30, 2003. The rights and remedies
available to the senior lenders include acceleration of the Revolver balance to
be due and payable. In the first, second and third quarters of 2003, the Company
incurred net losses and 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.
The Company incurred $30,000 in bank fees associated with the forbearance
agreement dated August 21, 2003 and paid $15,000 in September 2003 with the
remaining balance of $15,000 due in November 2003. In addition, the Company
incurred $25,000 in fees related to the First Amendment. Further, at September
30, 2003, the Company resolved the over-advance position that existed at June
30, 2003 of $886,000, resulting from a reduction in its eligible accounts
receivable, as defined in the credit agreement, as amended. There was no
over-advance position at September 30, 2003.
As of June 30, 2003, the Company made the final payment of $365,000 on its Term
Loan.
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 September 30, 2003, approximately $5.4 million was outstanding
on the Revolver.
12
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 and
$20,000 in November 2003 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 September 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 September 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
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
13
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 nine months ended
September 30, 2003.
In January 2003, Financial Accounting Standards Board Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FASB Interpretation No. 46"),
was issued. Among other things, FASB Interpretation No. 46 defines a variable
interest entity ("VIE") as an entity that either has investor voting rights that
are not proportional to their economic interests or has equity investors that do
not provide sufficient financial resources for the entity to support its
activities. FASB Interpretation No. 46 requires a VIE to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
VIE's activities. If no company is subject to a majority of such risk,
consolidation would be required by a company that is entitled to receive a
majority of the VIE's residual returns. The Company currently intends to adopt
FASB Interpretation No. 46 in the fourth quarter of 2003, when adoption is
mandatory, retroactive to January 1, 2003. While management has not completed
its evaluation of FASB Interpretation No. 46 at this time, it does not expect
that the adoption of FASB Interpretation No. 46 will have a significant impact
on the Company's financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is to changing interest rates. The
Company has variable-rate debt representing 39% of its total debt as of
September 30, 2003. If interest rates average 25 basis points more in 2003 than
they did in 2002, the Company's interest expense would increase approximately
$13,600 on an annual basis (interest expense for 2002 was $1.2 million). As of
November 13, 2003, the prime rate had not changed, however, the Company's
interest rate on its variable-rate Revolver debt increased 50 basis points in
accordance with the original forbearance agreement dated August 21, 2003.
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 September 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 changes in the Company's internal control over
financial reporting identified in connection with the evaluation of such
controls 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
None.
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 August 1, 2003 reporting the Press Release
dated August 1, 2003 which disclosed preliminary financial results of the
Company for the fiscal quarter ended June 30, 2003.
The Company filed a Form 8-K on August 28, 2003 reporting the Forbearance
Agreement dated August 21, 2003 by and among ImageMax, Inc., Commerce Bank,
NA, and FirsTrust Bank.
The Company filed a Form 8-K on October 8, 2003 reporting the First
Amendment to the Forbearance Agreement dated September 30, 2003 by and
among ImageMax, Inc., Commerce Bank, NA, and FirsTrust Bank.
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: /S/ MARK P. GLASSMAN November 14, 2003
-------------------- -----------------
Mark P. Glassman
Chief Executive Officer
BY: /S/ DAVID B. WALLS November 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).