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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED], FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-23077
IMAGEMAX, INC.
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(Exact name of Registrant as specified in its charter)
PENNSYLVANIA 23-2865585
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(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
455 PENNSYLVANIA AVENUE, SUITE 128, FORT WASHINGTON, PENNSYLVANIA 19034
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 628-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock (no par value per share)
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No _____.
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $1,494,531 as of April 9, 2002. On April 9, 2002 the Registrant
had outstanding 6,793,323 shares of Common Stock, no par value.
TABLE OF CONTENTS
ITEM PAGE
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PART I..................................................................................... 1
Item 1. Business................................................................ 1
Item 2. Properties.............................................................. 11
Item 3. Legal Proceedings....................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders..................... 12
PART II.................................................................................... 14
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters .................................................... 14
Item 6. Selected Consolidated Financial Data.................................... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 17
Item 7(a). Quantitative and Qualitative Disclosures about Market Risk.............. 23
Item 8. Financial Statements and Supplementary Data............................. 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................................... 24
PART III................................................................................... 25
Item 10. Directors and Executive Officers of Registrant.......................... 25
Item 11. Executive Compensation.................................................. 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................................................. 28
Item 13. Certain Relationships and Related Transactions.......................... 32
PART IV.................................................................................... 32
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................................. 32
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PART I
ITEM 1. BUSINESS
ImageMax, Inc. ("the Company") was founded in November 1996. The Company is a
single-source provider of outsourced document management solutions to U.S.
companies and concentrated primarily in the health care, financial services,
engineering and legal services industries. The Company's services include
electronic (digital) and micrographic media conversion, data entry and indexing,
Internet retrieval and hosting services, document storage (including Internet
"web-enabled" document storage and retrieval) and system integration. The
Company also sells and supports document management equipment and proprietary,
as well as third party open architecture imaging and indexing software. The
Company has one reportable segment.
For the year ended December 31, 2001 the Company reported a net loss of $9.4
million or $1.40 per share. The loss includes a restructuring charge of $5.9
million. The restructuring charge is attributable to closing the Dayton, OH,
Lincoln, NE and Portland, OR production facilities. The restructuring charge
included non-cash goodwill write-offs of $5.4 million, severance costs of $0.1
million and facility costs of $0.4 million and is expected to result in $0.7
million of annual cash flow through reductions in personnel and facilities
costs. These actions are consistent with the Company's strategy to improve
ongoing operating results, optimize its operating capacity and fund entry into
the Los Angeles market in 2002.
In addition, the Company recorded an operating charge of $1.1 million in 2001,
primarily related to the closed production facilities, asset write-offs and
development costs related to its ScanTrax(TM) capture software.
The net loss excluding the restructuring and operating charges was $2.4 million
or $0.36 per share.
As of April 9, 2002, the Company operated from 25 facilities covering 14 states,
employed approximately 700 people and provided services and products to several
thousand clients from 15 production facilities that provide full-scale
operational capabilities.
The Company's strategy is to work with clients to develop the best solution to
their document management needs, including solutions involving both outsourced
and in-house document capture, conversion, storage and retrieval. The Company
believes that a majority of current document management industry revenue is
derived from the management of film and paper media. Advances in digital and
Internet based services and other technologies continue to provide organizations
with increasingly attractive document management options and accordingly, the
Company believes the most successful service providers are those that can offer
a complete spectrum of document management services and products encompassing
solution design and expertise in the management of digital, film and paper
media. The Company has targeted a broad array of services and products, as well
as technical and vertical market expertise, in order to create a platform from
which it can become a leading national, single-source option for clients with
intensive document management needs.
MARKET AND INDUSTRY OVERVIEW
Document management businesses provide services and products to capture,
convert, index, store and retrieve documents, whether such documents exist on
paper, microfilm or digital media. According to a report made publicly available
in 2000 by the Association for Information and Image Management International
("AIIM") entitled "State of the Document Technologies Industry: 1997-2003," the
compound annual growth rate for the document management industry through 2003 is
expected to be approximately 26% and result in a market of $41.6 billion by
2003. Expected near-term growth rates after 2003 are approximately 16%. The
Company believes that there is a large untapped component of the service market
not contained in the AIIM data because most document management services for
large organizations are still performed in-house.
The Company believes that the continued growth of the document management
industry is driven by such principal factors as: (a) improvement of digital
technology (i.e., CD-ROM, computer networking, Internet retrieval and
image-enabled software applications) which has dramatically reduced the cost of
imaging, storing, indexing and retrieving
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documents while improving users' ability to manage documents more efficiently;
(b) greater focus by many organizations, especially those in document-intensive
industries such as health care, financial services and engineering, on document
management processes and systems as part of a wider effort to manage their
information more efficiently in order to improve productivity, competitiveness
and client service; (c) organizations' need to manage the ever increasing volume
of information facilitated by document-generating technologies such as
facsimile, high-speed printing, the Internet and computer networking; (d)
increased outsourcing of document management services which allows organizations
to focus on core competencies and revenue generating activities, reduce fixed
costs, and gain access to new technologies without the risk and expense of near-
term obsolescence; and (e) increased focus on disaster recovery in light of the
events of September 11, 2001.
The Company is a national service provider in a highly fragmented industry. More
than 2,000 companies serve the document management needs of industry and
government, with a majority of these companies generating annual revenues of
less than $10 million. Many of the small businesses with which the Company
competes presently lack the capital for expansion, cannot keep abreast of
rapidly changing technologies, are unable to effectively manage large complex
projects, have not developed marketing and sales programs and do not have the
volume buying power needed to negotiate favorable supply contracts. The
continuing migration from paper and film to digital media has broken down many
geographic barriers to the provision of document management services and has
increased client demands for integrated operations. The Company believes that
its broad capabilities will provide an increasing competitive advantage.
BUSINESS STRATEGY
The Company's goal is to serve as a leading national provider of outsourced
document management solutions. The Company believes that customer and business
trends indicate (i) a movement towards outsourcing, which allows companies to
focus on core competencies; (ii) demand for value-added digital conversion
services, whereby imaging is becoming part of the business process rather than
paper replacement; and (iii) increased focus on disaster recovery in light of
the events of September 11, 2001. In addition, the Company believes consulting
organizations, document management providers and technology firms are
increasingly pursuing service company partnerships to provide conversion
capabilities for their customers that augment the outsourcing model.
In serving its customers and in developing its strategic and business goals, the
Company has shifted its focus to digital conversion and related service
offerings in order to meet the changing demands of the marketplace. This shift
is designed to address specific customer needs, such as: (i) the replacement of
microfilm with digital imaging; (ii) the transition of in-house document
management operations to an outsourced approach; (iii) on-line access of digital
documents via Internet web-enabled document storage and retrieval such as
ImageMaxOnline; and (iv) the continued support of product-based offerings, such
as software and equipment. The formation of strategic partnerships with, for
example, document management providers, integrators, technology firms, and
software providers, is an element of the Company's strategy to leverage its
capabilities and provide superior service to customers.
While streamlining operations and implementing a new organization structure, the
Company continues to enhance its sales, marketing, and technical capabilities
and will continue to improve the skill base of its sales force through such
tools as an on-line application database, specialized training programs, and a
hiring program emphasizing digital imaging. These activities are managed through
the position of EVP - Sales and Marketing and include web and intranet
initiatives, collateral and sales aids, trade shows and seminars, and a
telemarketing campaign
In pursuing its strategic and business goals, the Company has focused its
efforts organizationally on integrating operations and building a management
structure that supports a regionally-based sales and service organization. These
efforts to date have included the consolidation of operations in several
markets, the reassignment of former managers, sales force investments, the
alignment of production facilities into three regions (East, Central, and West)
along geographic/vertical market lines, and the establishment of a formal
organization structure that facilitates an integrated national approach. The
Company has begun to realize the benefits of this structure through improved
coordination of sales activities, production capabilities, and technical skills
in the fulfillment of customer requirements.
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SERVICES AND PRODUCTS
Services
The Company offers a broad range of document management services across a
variety of media types and formats. This broad range of services, together with
the Company's technical capabilities and experience in selected vertical
markets, enables the Company to tailor document management solutions for its
clients based on their specific needs. The document management services that are
currently provided by the Company include:
MEDIA CONVERSION SERVICES
Media conversion is labor intensive and, particularly in the case of digital
imaging, requires increasingly sophisticated equipment and systems to be
accomplished efficiently. By maintaining a large skilled labor pool, sufficient
production capacity and technical capability, the Company can provide a
responsive and cost effective outsource alternative to its customers.
Digital Imaging. The Company's digital imaging services involve the conversion
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of paper or microfilm documents into digital format through the use of optical
scanners and the conversion of computer output to digital images. Once
converted, digital images can be returned for client use on a CD-ROM or optical
disk or stored by the Company via its web-enabled hosting site ImageMaxOnline
for subsequent retrieval and distribution. The Company believes that digital
imaging is becoming the preferred format of storage for many organizations due
to benefits such as high-speed retrieval, and the ability to support and
distribute digital images directly to the desktop of multiple workers in
multiple locations at any time.
Micrographics. The Company performs micrographic services, including the
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conversion of paper documents into microfilm images, the indexing of film for
computer-aided retrieval systems and computer output to microfilm ("COM").
Micrographic media are selected as an alternative to paper or digital media for
one or more of the following reasons: (i) film archives are more accessible,
longer-lived and less expensive to store than paper; (ii) film is eye-readable
and not subject to technological obsolescence; (iii) converting paper to film is
currently more cost-effective than scanning paper for most documents where ease
of accessibility is not needed; and (iv) there is a large base of organizations
with existing film archives and reader-printer equipment.
Data Entry and Indexing. The creation of index files for the rapid retrieval of
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images is a critical part of most value-added document management solutions. The
Company provides specialized indexing services to a variety of clients for both
film and digital-format documents. These labor-intensive services are often
contracted for outside the U.S. as a means to utilize qualified personnel at
generally lower cost than is available domestically.
STORAGE AND RETRIEVAL SERVICES
Film and Paper Storage and Retrieval. The Company manages the archiving of
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client documents, including processing (i.e., indexing and formatting), storage,
retrieval, delivery and return to storage of documents within a rapid time
frame. Typical archival documents include medical and legal case files, business
records and financial transaction documents. Service fees generally include
billing for storage space, plus activity charges for retrieval, delivery and
return to storage, and ultimately for document destruction.
Products
The Company develops proprietary, open-architecture software products which
support electronic imaging and indexing services. In addition, the Company sells
and supports third-party software and offers a wide range of digital imaging,
scanning and viewing hardware, micrographic reader-printers, micrographic film
and supplies and other equipment.
3
SOFTWARE
The Company develops, markets and supports a suite of proprietary open-
architecture software products that support and enhance the scanning, indexing
and retrieval of digital images for its own use and for sale to other document
management companies and end-users. Versions of these software products can be
run on Microsoft Windows-equipped networks or personal computers, and simplify
the process of scanning, indexing and retrieving electronic images of documents.
One of the Company's products, called ScanTrax(TM), was initially developed for
use by document management companies in their digital conversion operations.
Other Company products, such as FileTrax(R), were developed for marketing to
end-users. The Company has also developed and markets a high-end scanning and
viewing software package for the aperture card market called ImageMax ES. This
product is utilized by both service companies and end-users to convert and index
micrographic images of large format documents (in the form of 35-millimeter
aperture cards) into digital images.
In addition to its proprietary software, the Company also sells and supports
third party document management software. These software products are marketed
by the Company through a network of more than 70 other document management
companies acting as value-added resellers and also directly through the
Company's own sales force to end-users including, in some cases, other document
management companies. The Company has also established partnering relationships
with software and equipment providers which enable the Company's software to be
packaged and sold with their product offerings.
HARDWARE AND OTHER EQUIPMENT
The Company maintains broker or dealer relationships with a number of document
management equipment suppliers, including Bell & Howell, Kodak, Minolta and
Xerox. These relationships allow the Company to provide clients with the latest
micrographic and digital image viewing, printing and conversion equipment.
Several production facilities provide extensive field maintenance and repair
services for the equipment they sell. Various production facilities have
specialized technical hardware and systems integration expertise that is shared
across the Company's operations. The Company also provides to its clients a wide
range of micrographic film products, digital media and other graphic supplies.
The Company has achieved certain purchasing efficiencies with film suppliers and
believes that it is an attractive dealer to equipment manufacturers seeking to
achieve broad geographic coverage with a single company.
CLIENTS AND KEY MARKETS
The Company has a broad base of clients and no single client accounted for more
than 5% of consolidated revenues for the years ended December 31, 2001, 2000 or
1999. The Company's customers are not concentrated in any specific geographic
area, but are concentrated primarily in the health care, financial services,
engineering, and legal services industries, as well as certain other vertical
markets.
The major markets for document management services providers are transaction-
intensive industries in which the core business processes involve legal or
regulatory considerations requiring the processing and storage of documents in a
controlled manner. While maintaining its diversified client base, the Company
intends to increase its expertise in certain core vertical markets. An overview
of the Company's major target markets follows:
The Financial Services Market: consists of commercial banks, mortgage banking
companies, insurance companies, brokerage companies and credit card and loan
processing companies.
The Health Care Market: consists of health care providers, health care insurers
and pharmaceutical companies.
The Engineering Market: consists of manufacturers, architectural and engineering
consultants, utilities and telecommunications companies.
The Legal Services Market: consists of law firm litigation projects.
Other Vertical Markets: retail and government entities.
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The Company believes that it has a national reputation as a leading service
provider for the engineering market, which utilizes large-format drawings and
aperture cards. In addition, the Company provides document management services
for a variety of non-industry-specific functions including accounts receivable
and payable processing, shipping, human resources and management information
systems reporting.
SALES AND MARKETING
Most sales efforts are conducted in major metropolitan markets by the Company's
50-person sales force. The Company believes that a strategy of pursuing new
accounts actively, in addition to competing for existing outsourced business
(including conversion of existing accounts from film to digital media), will
enable it to increase its market position. The Company also employs methods such
as seminar selling, telemarketing, and Internet marketing.
The Company is also pursuing larger and more complex digital conversion and
system sales by combining the capacity and technical capabilities of multiple
business units. This activity has been fostered by cross-company meetings and
training, improved communications, in part facilitated by the Company's
intranet, and coordination among regional management. The Company seeks to
attract customers away from smaller industry providers through its ability to
offer a broader range of solutions and products for companies' document
management needs.
The Company has developed an Internet Application Service Provider ("ASP")
strategy to provide comprehensive imaging solutions including image search and
retrieval, computer output to laser disk ("COLD"), workflow, and electronic
document management systems to the marketplace. During 2001, the Company
continued refining ImageMaxOnline, its ASP-based offering, with the goal of
shortening the sales cycle and providing customer benefits in the form of
reduced capital, technology, and infrastructure risks typically associated with
in-house systems. The Company believes that ImageMaxOnline facilitates
involvement in new opportunities that occur earlier in the document life cycle
and generate both recurring hosting-related revenues along with pull-through
conversion business. In executing its Internet ASP strategy, the Company
utilizes a combination of internal and external resources that best serve
customers, including third-party arrangements with software and technology
firms.
COMPETITION
The document management services industry is highly competitive, with a
significant source of competition being the in-house document management
capability of the Company's target client base. Additionally, the Company
competes with local or regional, independent document management companies. The
Company's competitors include Affiliated Computer Services, Inc., Anacomp Inc.,
IKON Office Solutions, Iron Mountain Incorporated, Lason, Inc. and SourceCorp
(formerly F.Y.I. Incorporated). These competitors are larger than the Company,
have greater financial and other resources and/or operate in broader geographic
areas than the Company. Additionally, other potential competitors may choose to
enter the Company's areas of operation in the future. As a result of this
competitive environment, the Company may lose clients or have difficulty in
acquiring new clients and its revenues and margins may be adversely affected.
The Company believes that the principal competitive factors in document
management services include the breadth, accuracy, speed, reliability and
security of service, technical expertise, industry specific knowledge and price.
The Company competes primarily on the basis of the breadth and quality of
service, technical expertise and industry specific knowledge, and believes that
it competes favorably with respect to these factors.
INTELLECTUAL PROPERTY
The Company regards the ImageMax name, its software products, information and
know-how as proprietary and relies primarily on a combination of trademarks,
copyrights, trade secrets and confidentiality agreements to protect its
proprietary rights. The Company's business is not materially dependent on any
patents and it does not believe that any of its other proprietary rights are of
any material value. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to obtain and use information that the
Company regards as proprietary, and policing unauthorized use of the Company's
proprietary information may be difficult. Litigation may be necessary for the
5
Company to protect its proprietary information and could result in substantial
cost to, and diversion of efforts by, the Company.
The Company does not believe that any of its proprietary rights infringe the
proprietary rights of third parties. Any infringement claims, whether with or
without merit, can be time consuming and expensive to defend or may require the
Company to enter into royalty or licensing agreements or cease the allegedly
infringing activities. The failure to obtain such royalty agreements, if
required, and the Company's involvement in such litigation could have a material
adverse effect on the Company's business, financial condition and results of
operations.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that: (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for hazardous substances and solid and liquid wastes; and
(ii) impose liability for the costs of cleaning up, and certain damages
resulting from, sites of past spills, disposal or other releases of solid and
liquid wastes.
The Company is not currently aware of any environmental conditions relating to
present or past waste generation at or from these facilities that would be
likely to have a material adverse effect on the business, financial condition or
results of operations of the Company. However, the Company cannot be certain
that environmental liabilities will not have a material adverse effect on its
business, financial condition or results of operations.
EMPLOYEES
As of December 31, 2001, the Company had approximately 700 employees,
approximately 110 of whom were employed primarily in management and
administration. None of the Company's employees are subject to a collective
bargaining agreement, and the Company considers its relations with its employees
to be good.
RISK FACTORS
You should carefully consider the following risks and uncertainties when reading
this Annual Report on Form 10-K. If any of the events described below actually
occur, the Company's business, financial condition or results of operations
could be materially adversely affected. Additional risks that the Company does
not know of or that the Company currently thinks are immaterial may also impair
the Company's operations.
The Company has made forward-looking statements in this Annual Report on Form
10-K including information concerning the possible or assumed future of its
operations and those proceeded by, followed by, or that include the words
"anticipates," "believes," "estimates," "expects" or similar expressions. You
should understand that the risk factors described below, in addition to those
risks and uncertainties discussed elsewhere in this document, could affect the
Company's future results and could cause those results to differ materially from
those expressed in the Company's forward-looking statements.
THE COMPANY HAS A HISTORY OF OPERATING LOSSES
The company has incurred significant operating losses since its inception and
has accumulated a deficit of approximately $25.8 million as of December 31,
2001. There can be no assurance the Company will be able to operate profitably
in the near future.
For the year ended December 31, 2001 the Company reported a net loss of $9.4
million or $1.40 per share. The loss includes a restructuring charge of $5.9
million. The restructuring charge is attributable to closing the Dayton, OH,
Lincoln, NE and Portland, OR production facilities. The restructuring charge
included non-cash goodwill write-offs of $5.4 million, severance costs of $0.1
million and facility costs of $0.4 million and is expected to result in $0.7
million of annual cash flow through reductions in personnel and facilities
costs.
In addition, the Company recorded an operating charge of $1.1 million in 2001,
primarily related to the closed production facilities, asset write-offs and
development costs related to its ScanTrax(TM) capture software.
See Note 2 to the Consolidated Financial Statements for further discussion of
the Company's ability to continue as a going concern.
6
FAILURE TO MEET THE COMPANY'S OBLIGATIONS TO ITS DEBT HOLDERS COULD ADVERSELY
AFFECT THE COMPANY'S OPERATIONS
On April 11, 2002, the Company entered into a commitment letter to restructure
its senior bank credit facility and subordinated debt agreements pursuant to a
technical default under its previous credit agreement with Commerce Bank N.A.
and FirsTrust Bank ("the senior lenders") and a payment default under its
subordinated debt agreement with TDH III L.P., Dime Capital Partners, Inc. and
Robert E. Drury (collectively the "Sub-Debt Holders"). A default under these new
agreements, such as the failure to make required principal and interest payments
could result in the senior lenders and Sub-Debt Holders demanding repayment of
all outstanding amounts, which could have a material adverse effect on the
Company's business, financial condition, and results of operations.
THE RESTRUCTURING OF THE COMPANY'S AGREEMENT WITH ITS SUBORDINATED DEBT HOLDERS
COULD BE DILUTIVE TO EXISTING SHAREHOLDERS AND UPON DEFAULT COULD RESULT IN A
CHANGE IN CONTROL OF THE COMPANY
In order for the Company to enter into the commitment letter with its senior
lenders to restructure the senior debt, the Company's Sub-Debt Holders had to
commit to forego payments of interest until February 15, 2004. As consideration
for such forbearance of interest, the Company and the Sub-Debt Holders have
entered into a commitment letter to restructure the subordinated debt
agreements. Under the terms of the restructuring, the Sub-Debt Holders will
receive new convertible subordinated notes (the "New Notes") that will replace
the existing notes purchased by the Sub-Debt Holders on February 15, 2000. $1.9
million of the principal amount of the New Notes will be voluntarily convertible
into the Company's Common Stock, no par value, at a reduced price of $0.40 per
share. Such a conversion would result in the Sub-Debt Holders obtaining
approximately 4.8 million shares of the Company's Common Stock. If the New
Notes are converted, the issuance of these additional shares could result in
substantial dilution to the Company's existing shareholders'.
Additionally, the terms of this commitment provides that if the Company fails to
repay the entire principal amount of the New Notes, plus accrued interest, by
February 15, 2004 (which may be extended to February 15, 2005 under certain
limited circumstances), a new warrant issued to the Sub-Debt Holders will become
exercisable for a period of two years (the "Additional Warrants"). The
Additional Warrants would permit the Sub-Debt Holders to purchase up to an
aggregate of 8.2 million shares of the Company's Common Stock at a price per
share equal to the lower of (i) $0.25 or (ii) 80% of the then market price of
the Company's Common Stock. In such an event, the Sub-Debt Holders would have a
controlling interest in the Company. This control may adversely affect the
trading price for the Company's Common Stock and would have the ability to exert
substantial influence over the Company's business and affairs and all matters
requiring approval by the Company's shareholders, including the election and
removal of directors and any proposed merger, consolidation or sale of all or
substantially all of the Company's assets.
THE COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ NATIONAL MARKET
The Common Stock currently trades on the OTC Bulletin Board. In 1999, the Common
Stock was delisted from the Nasdaq National Market because of the Company's
inability to remain in compliance with certain financial and per share market
price requirements. The Common Stock does not now, and may never, meet the
requirements for re-listing on the Nasdaq National Market. The inability to list
the Common Stock on the Nasdaq National Market substantially reduces the
liquidity of, and market for, the Common Stock.
The market price for the Common Stock has been highly volatile. This volatility
may adversely affect the price of the Common Stock in the future. Prices for the
Common Stock will be determined by the marketplace and may be influenced by many
factors, including:
. the depth and liquidity of the trading market;
. investor perception of the Company;
. the general economic and market conditions and trends;
. the Company's financial results;
. quarterly variations in the Company's financial results;
. changes in earnings estimates by analysts and reported earnings that vary
from such estimates;
. press releases by the Company or others; and
. developments affecting the Company or its industry.
The stock market has, on occasion, experienced extreme price and volume
fluctuations which have often been unrelated to the operating performance of the
affected companies and may adversely affect the price of the Common Stock.
SIGNIFICANT AMOUNTS OF ACQUIRED GOODWILL COULD POTENTIALLY REDUCE FUTURE NET
INCOME
As of December 31, 2001, $35.2 million, or 72.6%, of the Company's total assets
represented intangible assets arising from its acquisitions, of which $34.8
million was goodwill and $0.4 million was acquired developed technology.
Goodwill is an intangible asset that represents the difference between the total
purchase price of these acquisitions and the amount of the purchase price
allocated to the fair value of the net assets acquired. In addition, as was the
case when the Company sold and closed locations in 2001, 1999, and 1998, if the
Company sells or liquidates its assets, the Company cannot be sure that the
value of these intangible assets would be recovered. The Company cannot be
certain that it will be able to fully realize these intangible assets over their
amortization periods.
Effective January 1, 2002, the Company adopted the Financial Accounting
Standards Board's ("FASB") SFAS No. 142, "Goodwill and Other Intangibles." FASB
142 concluded that purchased goodwill will not be amortized but will be reviewed
for impairment when certain events indicate that the goodwill of a reporting
unit (as defined under SFAS No. 131, "Disclosures about Segments of Enterprise
and Related Information") is impaired. The impairment test will use a fair-value
based approach, whereby if the implied fair value of a reporting unit's goodwill
is less than its carrying amount, goodwill would be considered impaired.
As of January 1, 2002, all goodwill and indefinite-lived intangible assets must
be tested for impairment and a transition adjustment will be recognized.
Management has not yet determined the exact amount of goodwill impairment under
these new standards, but believes the non-cash cumulative effect charge to
equity will be approximately $6.0 to $8.0 million and recognized in the second
quarter of 2002. Amortization of goodwill will cease as of January 1, 2002, and,
thereafter, all goodwill and any indefinite-lived intangible assets must be
tested at least annually for impairment. The effect of the non-amortization
provisions on 2002 operations cannot be forecast, but if these rules had applied
to goodwill in 2001, management believes that full-year 2001 net income would
have increased by approximately $1.8 million or $0.27 per share.
7
CHANGES IN TECHNOLOGY COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS
The announcement or introduction of competing services or products incorporating
new technologies or the emergence of new technical standards could render some
or all of the Company's services or products unmarketable. The Company believes
that its future success depends on its ability to enhance its current services
or products and develop new services or products that address the increasingly
sophisticated needs of its clients. The failure of the Company to develop and
introduce enhancements and new services in a timely and cost-effective manner in
response to changing technologies or client requirements could have a material
adverse effect on the Company's business, financial condition or results of
operations. Further, many of the current services and products offered by the
Company use technologies that are non-proprietary in nature. The Company cannot
be certain that it will be able to obtain the rights to use any newly developed
technologies, that it will be able to effectively implement these technologies
on a cost-effective basis or that these technologies will not ultimately render
obsolete the Company's role as a third party provider of document management
services and products.
THE COMPANY OPERATES IN A HIGHLY COMPETITIVE INDUSTRY
The Company operates in a highly competitive environment. The document
management services industry is highly fragmented and has relatively low
barriers to entry. A significant source of competition comes from the in-house
document handling capability of businesses within the Company's target markets.
These businesses may not increasingly outsource their document management
requirements and other businesses may develop capabilities to keep in-house many
of the document management services they currently outsource. In addition,
certain of the Company's competitors are larger than the Company, have greater
financial and other resources and/or operate in broader geographic areas than
the Company. Also, other companies may choose to enter the document management
services industry in the future. Further, if the Company enters new geographic
areas, it will likely encounter significant competition from established
competitors in each of these new areas. As a result of this competitive
environment, the Company may lose clients or have difficulty in acquiring new
clients, and its business, financial condition and results of operations may be
adversely affected.
THE COMPANY MUST BE ABLE TO ATTRACT AND RETAIN KEY MANAGEMENT AND OTHER
PERSONNEL
The Company's operations depend on the performance of its executive management
team, the senior management of its regional teams and the quality and
effectiveness of its sales force and software developers. If any of the
executive management team or senior management of the regional teams is unable
or unwilling to continue in their present roles, or if the Company is unable to
attract and retain other skilled employees, including salespersons and software
developers, the Company's business, financial condition and results of
operations could be materially and adversely affected.
The Company's future success and growth plans depend on its ability to attract,
train and retain personnel in all areas of its business. There is strong
competition for qualified personnel in the document management services industry
and in many of the geographic markets in which the Company competes. Increases
in the minimum wage at the federal or state level could materially adversely
affect the Company's business, financial condition and results of operations. In
addition, individual states have increased or may increase their minimum wage
above the federal minimum.
THE COMPANY DEPENDS ON SELECTED MARKETS FOR ITS REVENUES
The Company derives its revenues primarily from its target markets, including
the health care, financial services, legal services and engineering industries.
Fundamental changes in the business practices of any of these markets, whether
due to regulatory, technological or other developments, could cause a material
reduction in demand by these clients for the services offered by the Company.
Any such reduction in demand may have a material adverse effect on the Company's
business, financial condition and results of operations.
8
THE COMPANY'S QUARTERLY RESULTS OF OPERATIONS MAY FLUCTUATE
The Company's results of operations may fluctuate in any given year, and from
quarter to quarter. Factors that may cause material fluctuations in quarterly
results of operations include:
. the gain or loss of significant clients;
. increases or reductions in the scope of services performed for
significant clients;
. the timing or completion of significant projects;
. the relative mix of higher and lower margin projects;
. changes in pricing strategies, capital expenditures and other
costs relating to the expansion of operations;
. the hiring or loss of personnel;
. the timing and structure of acquisitions or dispositions;
. the timing and magnitude of costs related to acquisitions or
dispositions; and
. other factors that may be outside of the Company's control.
As a result of the foregoing and other factors, the Company may experience
material fluctuations in its results of operations on a quarterly basis, which
may contribute to volatility in the price of the Common Stock. Given the
possibility of these fluctuations, the Company believes that quarterly
comparisons of the results of its operations during any fiscal year may not be
meaningful and that results for any one fiscal quarter may not be indicative of
future performance.
THE COMPANY MAY INCUR LIABILITY FOR BREACH OF CONFIDENTIALITY
A substantial portion of the Company's business involves the handling of
documents containing confidential and other sensitive information. The Company's
unauthorized disclosures of this type of information could damage the Company's
reputation, expose the Company to liability, and could have a material adverse
effect on the Company's business, financial condition and results of operations.
RISKS RELATED TO ENVIRONMENTAL CONDITIONS
For part of its operations the Company uses chemical products that are regulated
under federal, state and local laws as hazardous substances and which produce
wastes that also are regulated under these laws. The Company is not currently
aware of any environmental conditions relating to present or past waste
generation at or from these operations that would be likely to have a material
adverse effect on its business, financial condition or results of operations.
However, any environmental liabilities incurred by the Company under these laws
could have a material adverse effect on the Company's business, financial
condition and results of operations.
PUBLIC SECTOR MARKET AND CONTRACTING RISKS
Though a modest portion of the Company's present business involves public sector
contracts, the Company anticipates growth in the portion of this business
through contracts with local, state and federal government agencies, however,
business with governmental agencies may be easily terminated or lost because
public sector contracts generally:
. are subject to detailed regulatory requirements;
. are subject to public policies and funding priorities;
. may be conditioned upon the continuing availability of public
funds,
. are subject to certain pricing constraints; and
. may be terminated for a variety of factors, including when it
is in the best interests of the particular governmental agency.
Loss or termination of significant public sector contracts due to any of these
factors or others unique to contracts with governmental entities may have a
material adverse effect on the Company's future business, financial condition
and results of operations.
9
SECURITY PROBLEMS WITH THE INTERNET MAY INHIBIT THE DEVELOPMENT OF THE COMPANY'S
INTERNET APPLICATION SERVICE STRATEGY
The secure transmission and placement of confidential information over the
Internet is essential to the success of the Company's recent introduction of an
Internet ASP strategy. This strategy focuses on placing customer data on a
secure web site and enabling customers to access this data via the Internet.
Substantial security breaches on this system or other Internet-based systems
could significantly harm this aspect of the Company's business. Someone who is
able to circumvent the security systems could obtain access to the otherwise
confidential information of the Company's clients. Security breaches also could
damage the Company's reputation and expose the Company to a risk of loss or
litigation and possible liability. The Company has invested funds to protect
against security breaches and their consequences and may incur additional
expense to remedy any security breaches if they occur. The Company's insurance
policies may not be adequate to reimburse the Company for losses caused by
security breaches. There can be no guarantee that these security measures will
prevent security breaches. Customers generally are concerned with security and
privacy on the Internet and any publicized security problems could inhibit the
growth of the Internet and, therefore, the Company's ASP service ImageMaxOnline.
PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS AND
PENNSYLVANIA LAW COULD DETER TAKEOVER ATTEMPTS
Some provisions of the Company's amended and restated articles of incorporation
(referred to as the "articles") and amended and restated bylaws (referred to as
the "bylaws") could delay or frustrate the removal of incumbent directors,
discourage potential acquisition proposals and proxy contests and delay, defer
or prevent a change in control of the Company, even if such events could be
beneficial, in the short term, to the interests of the shareholders. For
example, the articles allow the Company to issue preferred stock with rights
senior to those of the Common Stock without shareholder action and provide that
the Company's shareholders may call a special meeting of shareholders only upon
a request of shareholders owning at least 50% of the Company's capital stock.
The bylaws provide for the Board of Directors of the Company to be divided into
three classes of directors serving three-year staggered terms and that directors
may be removed only for cause.
The articles authorize the issuance of up to 40,000,000 shares of Common Stock
and 10,000,000 shares of preferred stock, no par value per share. The Board of
Directors of the Company has the power to determine the price and terms under
which preferred stock may be issued and to fix the terms. The ability of the
Board of Directors of the Company to issue one or more series of Preferred Stock
without shareholder approval, as well as certain applicable statutory provisions
under the Pennsylvania Business Corporation Law of 1988, as amended, could deter
or delay unsolicited changes in control of the Company by discouraging open
market purchases of the Common Stock or a non-negotiated tender or exchange
offer for Common Stock, which may be disadvantageous to the Company's
shareholders who may otherwise desire to participate in this type of transaction
and receive a premium for their shares.
The Pennsylvania Business Corporation Law contains a number of statutory
"anti-takeover" provisions applicable to the Company. One such provision
prohibits, subject to exceptions, a "business combination" with a shareholder or
group of shareholders (and certain affiliates and associates of such
shareholders) beneficially owning more than 20% of the voting power of a public
corporation (referred to as an "interested shareholder") for a five-year period
following the date on which the holder became an interested shareholder. This
provision may discourage open market purchases of a corporation's stock or a
non-negotiated tender or exchange offer for such stock and, accordingly, may be
considered disadvantageous by a shareholder who would desire to participate in
any such transaction. The Pennsylvania Business Corporation Law also provides
that directors may, in discharging their duties, consider the interests of a
number of different constituencies, including shareholders, employees,
suppliers, customers, creditors and the community in which it is located.
Directors are not required to consider the interests of shareholders to a
greater degree than other constituencies' interests. The Pennsylvania Business
Corporation Law expressly provides that directors do not violate their fiduciary
duties solely by relying on poison pills or the anti-takeover provisions of the
Pennsylvania Business Corporation Law.
10
ABSENCE OF DIVIDENDS
The Company has never declared or paid cash dividends on its Common Stock and
currently intends to retain all available funds for use in the operation and
expansion of its business. The Company does not anticipate that any cash
dividends on the Common Stock will be declared or paid in the foreseeable
future.
ITEM 2. PROPERTIES
The Company's headquarters offices are in Fort Washington, Pennsylvania
occupying 3,494 square feet maintained under a lease expiring in August 2002. As
of December 31, 2001, the Company conducted operations through one mortgaged
property and 25 other leased facilities in 14 states containing, in the
aggregate, approximately 370,100 square feet. The Company's principal facilities
are summarized in the following table (alphabetized by state):
APPROXIMATE
LOCATION SQUARE FOOTAGE PRINCIPAL USE(S)
- -------- -------------- ----------------
Tempe, AZ 8,800 Document management operations, offices
Hayward, CA 3,000 Document management operations, offices
Sacramento, CA 12,000 Document management operations
Chesterton, IN* 41,000 Offices, document management operations
Chesterton, IN 11,000 Warehouse
Indianapolis, IN 300 Offices
Valparaiso, IN 28,000 Warehouse
Monroe, LA 65,000 Retail, document management operations, offices
Bossier City, LA 4,000 Offices
Stoughton, MA 47,000 Document management operations, offices
Saginaw, MI 20,000 Document management operations, offices
Minnetonka, MN 7,000 Document management operations, offices
Lincoln, NE ** 6,800 Document management operations, offices
Lincoln, NE ** 9,600 Warehouse
Syracuse, NY 1,200 Warehouse
Syracuse, NY 9,000 Document management operations, offices
Valhalla, NY 7,000 Document management operations, offices
Dayton, OH ** 12,500 Document management operations, offices
Portland, OR ** 13,500 Document management operations, offices
Philadelphia, PA 2,000 Document management operations, offices
Dallas, TX 15,000 Document management operations, offices
Houston, TX 20,000 Document management operations, offices
Houston, TX 3,600 Document management operations, offices
Forest, VA 21,500 Document management operations, offices
Richmond, VA 1,300 Offices
* Mortgaged property
** Facilities shut down in first quarter of 2002
11
In April 1999, the Company executed a $900,000 mortgage loan with a lender
relating to the Chesterton facility which is mortgaged by the Company. The
Company received $869,000 in proceeds, net of closing costs, from the
transaction. Interest on the loan is at the greater of 8.50% or the U.S.
Treasury rate plus 375 basis points (9% at March 31, 2002). The loan carries a
ten-year term (maturing May 2009), is secured by the mortgaged property, and
requires equal monthly repayments of principal and interest of $10,000. At March
31, 2002 the Company owed $872,000 on the mortgage.
The Company believes that its properties are generally well maintained, in good
condition and adequate for its present needs, and that suitable additional or
replacement space will be available when needed. The Company owns or leases
under both operating and capital leases substantial computer, scanning and
imaging equipment which it believes to be adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time a party to litigation arising in the ordinary
course of its business. Management believes that such matters, either
individually or in the aggregate, should not have a material adverse effect on
the Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on November 8, 2001. David
C. Carney and Robert E. Drury, the director nominees set forth in the Notice of
Annual Meeting, were elected to serve as directors. The following table gives
the details of the votes cast for each director nominee:
Nominee Votes For Votes Abstained
------- --------- ---------------
David C. Carney 4,738,444 538,237
Robert E. Drury 4,772,215 504,466
J.B. Doherty did not stand for election as his term expires in 2002. Mark P.
Glassman, Rex Lamb and H. Craig Lewis also did not stand for election as their
terms expire in 2003.
12
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock formerly traded on the Nasdaq National Market under
the symbol "IMAG" and presently trades on the OTC Bulletin Board under the
symbol IMAG.OB. Shares of the Company's Common Stock were first traded publicly
on December 4, 1997. The following table sets forth, for the periods indicated,
the high and low bid prices per share of the Common Stock, as reported on the
Nasdaq National Market or the OTC Bulletin Board, as applicable, for the two
most recent fiscal years of the Company.
HIGH LOW
---- ---
2000 First Quarter........................................ $2.06 $1.25
2000 Second Quarter....................................... $1.81 $1.38
2000 Third Quarter........................................ $2.75 $1.19
2000 Fourth Quarter....................................... $1.63 $0.63
2001 First Quarter........................................ $0.94 $0.56
2001 Second Quarter....................................... $0.76 $0.41
2001 Third Quarter........................................ $0.64 $0.31
2001 Fourth Quarter....................................... $0.37 $0.12
2002 First Quarter........................................ $0.45 $0.20
On April 9, 2002, the closing bid price for a share of Common Stock as reported
by the OTC Bulletin Board was $0.22 and the number of record holders including
the number of individual participants in security position listings of the
Common Stock was approximately 1,100. The over-the-counter market quotations
reflect inter-dealer prices, without retail markup, markdown or commission and
may not necessarily represent actual transactions.
14
On January 28, 1999, Nasdaq notified the Company that the Common Stock was
delisted from the Nasdaq National Market, effective with the close of business,
January 28, 1999, due to the Company's inability to remain in compliance with
certain maintenance standards required for continued listing on the Nasdaq
National Market. Presently, and since that date, the Common Stock has been
eligible to trade on the OTC Bulletin Board. The OTC Bulletin Board is operated
by the National Association of Securities Dealers as a forum for electronic
trading and quotation.
The Company has not paid any dividends since its inception and currently intends
to retain all earnings for use in its business. In addition, the Company is
subject to certain restrictions with respect to the payment of dividends on its
Common Stock, pursuant to the provisions contained in its credit facility. The
declaration and payment of dividends in the future will be determined by the
Company's Board of Directors in light of conditions then existing, including the
Company's earnings, financial condition, capital requirements and other factors.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data presented below have been
derived from the Company's consolidated financial statements for each of the
periods indicated. The data set forth below is qualified by reference to and
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Consolidated Financial
Statements included as Items 7 and 8 in this Annual Report on Form 10-K.
STATEMENT OF OPERATIONS DATA:
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues................................................. $46,230 $58,098 $60,223 $64,576 $3,111
Gross profit ............................................ 16,383 20,301 20,959 19,172 890
Operating income (loss).................................. (7,753) 2,631 1,360 (6,298) (7,531)
Net income (loss)........................................ (9,440) 402 (771) (8,431) (7,539)
Basic and diluted net income (loss) per share............ $ (1.40) $ 0.06 $ (0.12) $ (1.40) $(8.13)
Gross profit percentage.................................. 35.4% 34.9% 34.8% 29.7% 28.6 %
15
DECEMBER 31,
------------
2001(2) 2000 1999 1998 1997(1)
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 84 $ 2,248 $ 1,719 $ 736 $ 1,310
Working capital (deficiency)............................. 314 209 (13,281) (17,228) 2,994
Intangible assets........................................ 35,171 42,689 44,448 46,607 32,996
Total assets............................................. 48,423 62,960 64,365 69,574 48,228
Total debt............................................... 13,550 17,364 19,597 20,496 593
Shareholders' equity..................................... 27,692 37,093 36,073 36,652 40,018
OTHER DATA:
Cash flow from operating activities ..................... $ 2,008 $ 3,625 $ 1,854 $ (194) $ 186
EBITDA .................................................. $ (4,120) $ 6,562 $ 4,989 $ 1,744 $ (1,090)
Debt/Equity.............................................. .49 .47 .54 .56 .02
Debt/EBITDA.............................................. N/A 2.64 3.93 11.75 N/A
(1)1997 EBITDA includes earnings before interest, taxes, depreciation,
amortization, loss on sale of business unit, special compensation charge and
acquired in-process research, development charge.
(2)2001 EBITDA includes earnings before interest, taxes, depreciation,
amortization, restructuring and operating charges.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and related notes thereto and the "Selected Consolidated
Financial Data" set forth in Item 6 of this Annual Report on Form 10-K. Except
for the historical information contained herein, this and other sections of this
Annual Report on Form 10-K contain certain forward-looking statements that
involve substantial risks and uncertainties. When used in this Annual Report on
Form 10-K, the words "anticipate," "believe," "estimate," "expect," and similar
expressions, as they relate to the Company or its management, are intended to
identify such forward-looking statements. The Company's actual results,
performance, or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements. Factors that could cause or
contribute to such differences include those set forth in "Business -- Risk
Factors."
INTRODUCTION
ImageMax was founded in November 1996 to become a leading, national
single-source provider of integrated document management solutions. See
"Business." The Company's revenues are derived from a broad range of media
conversion, storage and retrieval services, the sale of proprietary,
open-architecture software products which support digital imaging and indexing
services and the sale and service of a variety of document management equipment.
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 filing,
are based upon the audited consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates, judgments and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities at the date of the financial statements and
for the period then ended. On an on-going basis, the Company evaluates the
estimates used, including those related to the allowance for doubtful accounts,
impairments of tangible and intangible assets, income taxes, and contingencies.
The Company has based its estimates on historical experience, current conditions
and various other assumptions that the Company believes to be reasonable under
the circumstances. These estimates form the basis for making judgments about the
carrying values of assets and liabilities and are not readily apparent from
other sources. The Company uses these estimates to assist in the identification
and assessment of the accounting treatment necessary with respect to commitments
and contingencies. Actual results may differ from these estimates under
different assumptions or conditions. The Company believes the following critical
accounting policies involve more significant judgments and estimates used in the
preparation of the consolidated financial statements. For a full description of
the Company's accounting policies see Note 2 to the Consolidated Financial
Statements.
Revenue Recognition
Media Conversion Services Revenue
Principally, the Company recognizes revenue on services in process, such as
scanning projects, based on the percentage-of-completion method in accordance
with SOP 81-1.
Software Revenue
Approximately 10% of the Company's revenue is generated from software sales that
fall under the guidance of SOP 97-2.
Hardware and Other Equipment Revenue
10% of revenues are generated from equipment sales. Revenue is recognized FOB
shipping point.
Accounting for Acquisitions
The Company was founded in November 1996 and on December 4, 1997 completed its
initial public offering (the "Offering"). Concurrent with the Offering, the
Company began material operations with the acquisition of 14 document management
service companies and in the first eight months of 1998 acquired an additional
13 document management service companies. The purchase price of these
acquisitions was determined after due diligence of the acquired business, market
research, strategic planning, and the forecasting of expected future results and
synergies. Estimated future results and expected synergies are subject to
revisions as we integrate each acquisition and attempt to leverage resources.
Each acquisition was accounted for using the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16, "Accounting for
Business Combinations" resulting in the capitalization of the cost in excess of
fair value of the net assets acquired in each of these acquisitions as goodwill.
The Company's acquisitions have resulted in a significant accumulation of
goodwill and for acquisitions prior to July 1, 2001, the Company amortized over
an estimated benefit period of 30 years. There have been no acquisitions
completed after July 1, 2001 and the Company will no longer amortize any
goodwill beginning on January 1, 2002, in accordance with SFAS 142, "Goodwill
and Other Intangible Assets". Through December 31, 2001, the Company reviewed
its existing goodwill for impairment, consistent with the guidelines of SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and determined that no amounts of goodwill were
impaired using the undiscounted future cash flow methodology of SFAS 121, other
than those relating to the production facilities closed in Dayton, OH, Lincoln,
NE and Portland, OR in the first quarter of 2002. Effective January 1, 2002, The
Company has reviewed goodwill for impairment consistent with the guidelines of
SFAS 142 using a discounted future cash flow approach. The methodology for
determining impairment under SFAS 142 is significantly different and could
result in different determinations than under SFAS 121. Pursuant to SFAS 142,
the Company reviewed its goodwill for impairment and while the Company has not
determined the exact amount of impairment under this standard, it believes the
non-cash cumulative effect charge to shareholders' equity will be approximately
$6.0 to $8.0 million. This estimated charge will be recorded in the second
quarter of 2002.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR
ENDED DECEMBER 31, 2000
Overview
For the year ended December 31, 2001 the Company reported a net loss of $9.4
million or $1.40 per share. The loss includes a restructuring charge of $5.9
million. The restructuring charge is attributable to closing the Dayton, OH,
Lincoln, NE and Portland, OR production facilities. The restructuring charge
included non-cash goodwill write-offs of $5.4 million, severance costs of $0.1
million and facility costs of $0.4 million and is expected to yield $0.7 million
of annual cash flow. These actions are consistent with the Company's strategy to
improve ongoing operating results, optimize its operating capacity and fund
entry into the Los Angeles market in 2002.
In addition, the Company recorded an operating charge of $1.1 million in 2001,
primarily related to the closed production facilities, asset write-offs and
development costs related to its ScanTrax(TM) capture software.
The net loss excluding the restructuring and operating charges was $2.4 million
or $0.36 per share.
Revenues
Revenues decreased $11.9 million, or 20.4%, from $58.1 million in 2000 to $46.2
million in 2001. Service revenues decreased by 20% and comprised 83% of total
revenues in 2001, as compared to 82.6% in 2000. In 2001, product revenues
decreased 22.5% and comprised 17% of total revenues in 2001, as compared to
17.4% in 2000.
17
The decline in total revenues was due primarily to: (1) lower conversion
services and equipment revenues, primarily, analog based products and services
as the Company transitions towards digital based services; and (2) the nation's
economic slowdown in the fourth quarter.
Gross Profit
For the year ended December 31, 2001, gross profit decreased by $3.9 million, or
19.3%, as compared to the corresponding period in 2000, while as a percentage of
total revenues, gross profit increased to 35.4%. The decrease of $3.9 million
was a result of the decrease in total revenues partially offset by the higher
mix of service revenues and productivity gains which resulted in the higher
gross profit percentage.
Selling and Administrative Expenses
For the year ended December 31, 2001, S&A expenses increased by $0.4 million, or
2.8%, as compared to the year ended December 31, 2000. This increase resulted
from: (1) costs incurred to revamp the Company's sales force to a digital
solutions based services proficiency; and (2) an increase in general corporate
expenses associated with insurance, workers' compensation and professional fees.
Restructuring Charge
For the year ended December 31, 2001, the Company recorded a restructuring
charge of $5.9 million attributable to closing the Dayton, OH, Lincoln, NE and
Portland, OR operating facilities. The charge included non-cash goodwill
write-offs totaling $5.4 million, severance costs of $0.1 million and facility
costs of $0.4 million and is expected to yield $0.7 million of annual cash flow
through reductions in personnel and facilities costs. These actions are
consistent with the Company's strategy to improve ongoing operating results,
optimize its operating capacity and fund entry into the Los Angeles market in
2002.
Operating Income (Loss)
For the year ended December 31, 2001, operating income decreased by $10.4
million, as compared to the year ended December 31, 2000. Excluding the impact
of the restructuring charge and the operating charge of $1.1 million, operating
income decreased $3.3 million. This decrease resulted from: (1) the decline in
total revenues of $11.9 million; (2) increased selling and administrative costs
of $0.4 million; and (3) which was partially offset by higher gross profit
percentages of 35.4% due to the higher mix of digital service revenues and
productivity gains.
Interest Expense
Interest expense decreased $0.6 million from $2.2 million in 2000 to $1.6
million in 2001. Interest expense for 2001 included $0.1 million relating to
bank fees. The decrease in interest expense relates to lower interest rates on
borrowings and repayment of $4.0 million of principal on the company's senior
debt.
Income Tax Provision
No current income tax provision was recognized in 2001 due to the Company's loss
position. In 2001, due to the company's cumulative net operating loss position
for tax purposes, the Company recognized $0.1 million in income tax expense.
This expense was entirely related to deferred income taxes.
Net Loss
Net loss amounted to $9.4 million or $1.40 per share in 2001 as compared to a
net profit of $0.4 million or $.06 per share in 2000. Excluding the
restructuring charge and operating charges incurred in 2001, the Company had a
net loss of $2.4 million or $0.36 per share.
18
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR
ENDED DECEMBER 31, 1999
Overview
For the year ended December 31, 2000 net income was $0.4 million or $.06 per
share compared to a net loss of $0.8 million or $.12 per share in 1999.
Revenues
Revenues decreased $2.1 million, or 3.5%, from $60.2 million in 1999 to $58.1
million in 2000. Service revenues increased by less than 0.1% and comprised
82.6% of total revenues in 2000 as compared to 79.6% in 1999. In 2000, product
revenues decreased 17.4% and comprised 17.4% of total revenues in 2000 as
compared to 20.4% in 1999.
The decrease in total revenues was comprised of a decrease of $0.6 million
attributable to the sale of the Southeast Group units in January 1999 and volume
declines related to the closing of the Indianapolis business unit in May 1999.
The remaining decrease of $1.5 million was comprised of a $2.1 million decrease
in product revenues (including $0.3 million in software sales) which was
partially offset by a $0.6 million increase in service revenues excluding the
Southeast Group and Indianapolis units (primarily litigation support and coding
services).
Gross Profit
For the year ended December 31, 2000, gross profit decreased by $0.7 million, or
3.1%, as compared to the corresponding period in 1999, while as a percentage of
total revenues, gross profit went up to 35.0%. The decrease of $0.7 million was
a result of the decrease in total revenues while the higher mix of service
revenues resulted in the higher gross profit percentage. Excluding the impact of
the Southeast Group and Indianapolis operations, gross profit decreased by $0.8
million, primarily attributable to declines in software sales, partially offset
by a higher service revenue mix of non-software revenues.
Selling and Administrative Expenses
For the year ended December 31, 2000, S&A expenses decreased by $0.6 million, or
3.9%, as compared to the year ended December 31, 1999. This decrease resulted
from: (1) a decrease of $0.7 million in business unit S&A expenses, primarily
local administrative costs; (2) a decrease of $0.3 million related to the sale
of the Southeast Group units and the closing of the Indianapolis operations; and
(3) an offsetting increase of $0.4 million in corporate expenses, primarily
marketing and personnel costs. The increase in corporate expenses is primarily
attributable to marketing and personnel costs.
Operating Income
For the year ended December 31, 2000, operating income increased by $1.3
million, or 93.5%, as compared to the year ended December 31, 1999. Excluding
the impact of restructuring costs and investment advisory fees and expenses,
operating income decreased $0.1 million, or 3.9%. This decrease resulted from:
(1) increased corporate expenses of $0.7 million; (2) an increase of $0.1
million attributable to business unit operations; and (3) an increase of $0.5
million related to the sale of the Southeast Group units and the closing of the
Indianapolis operations. The increase in corporate expenses relates to an
increase in fixed asset depreciation, amortization of deferred financing fees
related to the February 2000 subordinated debt financing and the June 2000 bank
debt refinancing, a $0.2 million increase in incentive compensation, and
increases in sales and marketing.
Interest Expense
Interest expense increased $0.1 million from $2.1 million in 1999 to $2.2
million in 2000. Interest expense for 2000 included $0.1 million relating to
bank fees. Interest expense for 1999 included $0.2 million relating to bank
fees. The increase in interest expense relates to (1) higher interest rates on
borrowings; (2) interest attributable to a mortgage on one of the Company's
facilities beginning in April 1999; and (3) imputed interest attributable to the
placement of the Notes in February 2000.
20
Income Tax Provision
In 2000, due to the Company's cumulative net operating loss position for tax
purposes, the Company recognized less than $0.1 million in income tax expense.
This expense was entirely related to state and local taxes. No income tax
provision was recognized in 1999 due to the Company's loss position.
Net Income
Net income amounted to $0.4 million in 2000 as compared to a net loss of $0.8
million in 1999. Excluding restructuring costs and investment and advisory fees
incurred in 1999, the Company had net income of $0.6 million in 1999
LIQUIDITY AND CAPITAL RESOURCES
General
At December 31, 2001, the Company had cash and cash equivalents of $0.1 million
and a working capital of $0.3 million. In 2001, cash provided by operating
activities was $2.0 million due primarily to improved working capital
efficiencies; cash used in investing activities was $0.2 million; and cash used
in financing activities was $3.9 million. At December 31, 2000, the Company had
cash and cash equivalents of $2.2 million and working capital of $0.2 million.
In 2000, cash provided by operating activities was $3.6 million due primarily to
improved operating results leading to net income rather than a net loss; cash
used in investing activities was $0.7 million; and cash used in financing
activities was $2.4 million. In 1999, cash provided by operating activities was
$1.9 million; cash provided by investing activities was $0.2 million; and cash
used in financing activities was $1.1 million.
Credit Facility
On June 12, 2000, the Company closed on a $14.5 million senior credit facility
(the "Credit Facility") pursuant to the Credit Agreement dated June 9, 2000 (the
"Credit Agreement") with Commerce Bank, N.A. and FirsTrust Bank (together, the
"Banks"). The Credit Facility consisted of a two-year $7.0 million revolving
credit line (the "Revolving Credit Line") and a four-year $7.5 million term loan
(the "Term Loan").
Under the Revolving Credit Line, interest was payable monthly at the prime rate
plus 1.5% (effective rate of 6.25% as of March 31, 2002). The outstanding
principal amount of the Revolving Credit Line was approximately $4.2 million as
of March 31, 2002 and was due and payable at the end of the term in June 2002.
Borrowing availability was based on the level of the Company's eligible accounts
receivable, as defined in the Credit Agreement.
Under the Term Loan, interest was payable monthly at the prime rate plus 2.0%
(effective rate of 6.75% as of March 31, 2002). The outstanding principal amount
of the Term Loan was $6.4 million as of March 31, 2002 and was due and payable
in quarterly payments of $500,000 commencing September 30, 2000 until March 31,
2004. In addition, on an annual basis, the Company was required to reduce the
principal amount outstanding under the Term Loan to the extent that EBITDA (as
defined in the Credit Agreement), as adjusted, exceeded certain specified levels
set forth in the Credit Agreement and upon certain asset sales by the Company,
if any.
The Credit Facility restricted the payment of dividends and was secured by
substantially all assets of the Company and required maintenance of various
financial and restrictive covenants including minimum levels of EBITDA and net
worth. The Company also issued warrants to the Banks to purchase an additional
100,000 shares of common stock of the Company (subject to downward adjustment
under certain circumstances) at $3.50 per share. The warrants are exercisable
beginning one year from the date of issuance. The warrants expire five years
from the date of issuance. The Company also paid $242,500 in bank fees to the
Banks upon closing.
On March 30, 2001, the Company entered into an amendment to the Credit Facility
(the "Amendment") which reduced the minimum levels of EBITDA required under the
restrictive covenants. In addition, the Amendment increased the level of
payments under the Term Loan by a minimum of $1,000,000 over a 12 month period.
The increase included minimum payments of $600,000 on May 30, 2001, $150,000 on
June 30, 2001, and $150,000 on September 30, 2001, all of which were made. The
balance of $100,000 was to be split over December 31, 2001 and March 31, 2002
and was repaid.
The Company has been in technical default on its senior Credit Facility
(relating to EBITDA and net worth covenants) since September 30, 2001. In order
to remedy such default, on April 11, 2002, the Company and the Banks have
entered into a commitment letter to restructure the senior Credit Facility.
The commitment letter provides that the Company and the Banks will enter into a
new $7.48 million senior credit facility (the "New Credit Facility") with the
Banks consisting of a $5.25 million revolving credit line (the "New Revolving
Credit Line") and a $2.23 million term loan (the "New Term Loan").
Under the New Revolving Credit Line, interest will be payable monthly at prime
plus 2.0% with principal due and payable June 30, 2003. Borrowing availability
under the New Revolving Credit Line is based on the level of the Company's
eligible accounts receivable (as defined)
Under the New Term Loan, interest will be payable monthly at prime plus 2.0%
with principal due and payable in three consecutive quarterly installments of
$500,000 commencing June 30, 2002 with two additional quarterly installments of
$365,000 due on March 31, 2003 and June 30, 2003.
The New Credit Facility restricts the payment of dividends, is secured by
substantially all of the assets of the Company and requires maintenance of
various financial and restrictive covenants including a minimum level of
quarterly EBITDA of $750,000 (commencing with the second quarter of 2002) total
liabilities cannot exceed fifty percent (50%) of net worth (as defined) and no
interest payment on the subordinated convertible notes issued to the Investors
(as defined below) until February 15, 2004. The Company will also pay $60,000 in
bank fees upon closing the New Credit Facility, and an additional $58,000 will
be due 90 days after closing.
Convertible Subordinated Debt
On February 15, 2000, the Company completed a $6 million financing transaction
involving the sale of convertible subordinated notes (the "Notes") and warrants
(the "Investor Warrants") to TDH III, L.P. ("TDH"), Dime Capital Partners, Inc.
and Robert E. Drury (collectively, the "Investors"). The proceeds of this
financing were used to repay $5 million under the previous credit facility, and
provide working capital for the Company. Additionally, J.B. Doherty, the
managing general partner of TDH, and Mr. Drury, joined the Company's Board of
Directors.
The Notes were due and payable upon the fourth anniversary of the date of
issuance and accrue interest at nine percent (9%) payable semi-annually. The
Company cannot voluntarily prepay the Notes. The Notes were initially
convertible into the Company's Common stock, no par value, at $3.50 per share,
which price may be adjusted downward if, under certain circumstances, the
holders thereof convert the Notes prior to February 15, 2003. The Company also
issued the Investor Warrants to the Investors to purchase an additional
1,800,000 shares of Common stock of the Company (subject to downward adjustment
under certain circumstances), no par value, at $3.50 per share. The Investor
Warrants are exercisable beginning the later of (i) one year from the date of
issuance or (ii) the conversion of the Notes into Common Stock. The Investor
Warrants expire on February 15, 2005. The estimated fair value of the Investor
Warrants of $553,000 has been recorded as an increase to shareholders' equity
and a related reduction in the carrying amount of the Notes. The Company is
amortizing the $553,000 discount over the four-year term of the Notes.
In order for the Company to enter into the commitment letter with its senior
lenders to restructure the Credit Facility, the Investors had to commit to
forego payments of interest until February 2004. As consideration for such
forbearance of interest, on April 11, 2002, the Company and the Investors
entered into a commitment letter to amend the $6 million subordinated debt
agreement. Under the terms of the commitment letter, the Investors will receive
new convertible subordinated notes (the "New Notes") that will replace the
existing Notes purchased by the Investors on February 15, 2000 and outstanding
interest of $0.27 million will be capitalized. The New Notes and accrued
interest will be due and payable on February 14, 2004. Interest will accrue at
nine percent (9%) per annum, compounded semi-annually. $1.9 million of the
principal amount of the New Notes will be voluntarily convertible into the
Company's Common Stock, no par value, at a reduced price of $0.40 per share, for
approximately 4.8 million shares of Common Stock.
In the event that the Investors covert the New Notes or the Company pays all of
the outstanding balance on February 15, 2004, the commitment letter provides
that the Investor Warrants will be cancelled. If, however, the Company pays
substantially all (a minimum of seventy-five percent (75%)) of the New Notes on
February 15, 2004, the commitment letter provides that the Investor Warrants
will be cancelled and additional warrants (the "Additional Warrants") will be
issued for the purchase of 8.2 million shares, no par value, at a price equal to
the lesser of (i) $0.25 or (ii) 80% of the then current market price of the
Common Stock, which Additional Warrants will be exercisable until February 15,
2006. In the event that the Company elects to pay seventy-five percent (75%) of
the outstanding balance on February 15, 2004, the commitment letter provides
that the remainder of the outstanding balance will be due on February 15, 2005,
and the Additional Warrants cannot be voted or exercised during such year
extension; provided, however, that if the Company does not pay the remaining
outstanding balance by February 15, 2005, the Additional Warrants would become
exercisable and the voting rights are effective. In the event that the Company
receives an extension to pay the remainder of the balance until February 15,
2005, the Investors elect to convert the New Notes, and the Company pays the
remainder due on February 15, 2005, the commitment letter provides that the
Additional Warrants will be cancelled; provided, however, that if the Investors
do not convert, the Additional Warrants will be reduced so that the Investors
can purchase up to an aggregate of 2.1 shares of Common Stock, no par value,
which will be exercisable until February 15, 2006. If the Company cannot meet
the minimum payment threshold on February 15, 2004, the Investor Warrants will
be cancelled, the Additional Warrants will be exercisable and the shares of
Common Stock exercisable thereunder shall be voted by the Investors.
21
Obligations and Commitments
The Company has various short term (within 12 months) and long term (greater
than 12 months) contractual and trade obligations. The table below summarizes
the timing of such obligations.
2000 2003 2004 2005 2006 Thereafter
-----------------------------------------------------
Revolving credit line $ - $4,169 $ - $ - $ - $ -
Term Loan 2,000 730 - - - -
Subordinated debt - - 6,000 - - -
Mortgage Loan 11 12 14 15 16 811
Capital Lease Obligations 20 20 13 13 - -
Operating Leases 1,190 795 638 396 258 455
Other Accrued Expenses,
primarily operating
expenses 1,245 - - - - -
------ ------ ------- ----- ----- ------
$4,466 $5,726 $ 6,665 $ 424 $ 274 $1,266
====== ====== ======= ===== ===== ======
The Company continues to selectively invest in equipment and technology to meet
the needs of its operations and to improve its operating efficiency. The Company
may also consider selective synergistic in-market acquisitions in the future.
The Company believes that its operating cash flow together with the unused
portion of the new Revolving Credit Line will be sufficient to finance current
operating requirements for at least the next twelve months including capital
expenditures.
Recently Issued and Proposed Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.s
141 and 142, "Business Combinations" And "Goodwill and Other Intangibles." FASB
141 requires all business combinations initiated after July 1, 2001, to be
accounted for using the purchase method. FASB 142 concluded that purchased
goodwill would not be amortized but would be reviewed for impairment when
certain events indicate that the goodwill of a reporting unit is impaired. The
impairment test will use a fair value based approach, whereby if the implied
fair value of a reporting unit's good will is less than its carrying amount,
goodwill would be considered impaired. FASB 142 does not require that goodwill
be tested for impairment upon adoption unless an indicator of impairment exists
at that date. However, it would require that a benchmark assessment be performed
for all existing reporting units with six months of the date of adoption. The
new goodwill model applies not only to goodwill arising from acquisitions
completed after the effective date, but also to goodwill previously recorded.
The Company has not yet determined the exact amount of goodwill impairment under
these new standards, but believes the non-cash cumulative effect charge to
shareholders equity will be approximately $6.0 to $8.0 million and recognized in
the second quarter of 2002.
As of December 31, 2001, goodwill represented 72.6% of total assets and 127.0%
of shareholders' equity. As of January 1, 2002, all goodwill and indefinite-
lived intangible assets must be tested for impairment and a transition
adjustment will be recognized. Management has not yet determined the exact
amount of goodwill impairment under these new standards, but believes the non-
cash cumulative effect charge to equity will be approximately $6.0 to $8.0
million and recognized in the second quarter of 2002. Amortization of goodwill
will cease as of January 1, 2002, and, thereafter, all goodwill and any
indefinite-lived intangible assets must be tested at least annually for
impairment. The effect of the non-amoritzation provisions on 2002 operations
cannot be forecast, but if these rules had applied to goodwill in 2001,
management believes that full-year 2001 net earnings would have increased by
approximately $1.8 million ($0.27 per share).
In August 2001, Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations" ("SFAS No. 143), was issued. This statement
significantly changes the method of accruing for costs that an entity is legally
obligated to incur associated with the retirement of fixed assets. ImageMax will
evaluate the Impact and timing of Implementing SFAS No. 143, which is required
no later than January 1, 2003
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No.
144"). Among other things, SFAS No. 144 significantly changes the criteria that
would have to be met to classify an asset as held-for-sale. This statement
supersedes Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
and the provisions of Accounting Principles Board Opinion 30 Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions that relate to reporting the effects of a disposal of a statements.
Implementation of this standard is required no later than January 1, 2002.
22
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is to changing interest rates. The
Company has variable-rate debt representing 57.4% of its total debt at December
31, 2001. If interest rates average 25 basis points more in 2002 than they did
during 2001, the Company's interest expense would be increased by $19,000. These
amounts are determined by considering the impact of the hypothetical interest
rates on the Company's variable-rate long-term debt at December 31, 2001. The
Company has limited its interest rate risk by entering into an interest rate cap
agreement. The agreement, which matures on June 9, 2002, is for a total notional
amount of $6,000,000. In connection with this agreement the Company paid the
counterparty a premium of $29,000 on June 9, 2000, and will receive monthly an
amount equal to the product of the amount by which the Prime Rate (4.75% at
December 31, 2001) exceeds the Cap Rate (11.5%) multiplied by the notional
amount. During 2001, the Prime Rate has not exceeded the Cap Rate. Accordingly,
the Company has not received any payments under this agreement during 2001 or
2000.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth on pages F-1 through F-24
hereto and is incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Board of Directors of the Company approved the engagement of Ernst & Young
LLP ("Ernst") as its independent auditors, to replace Arthur Andersen LLP
("Andersen") on September 21, 2000 pursuant to the recommendation of the Audit
Committee.
Andersen previously audited the Company's financial statements for the years
ended December 31, 1996 through December 31, 1999. The reports of Andersen on
the Company's financial statements for the years ended December 31, 1996 through
December 31, 1999 did not contain an adverse opinion or a disclaimer of opinion
and were not qualified or modified as to audit scope or accounting principles.
For the years ended December 31, 1998 and 1999 the reports of Andersen contained
an explanatory paragraph regarding the ability of the Company to continue as a
going concern. During the same periods, and subsequent interim periods, there
were no disagreements with Andersen on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure. During
the Company's two most recent fiscal years and subsequent interim periods, there
were no reportable events (as defined in Regulation S-K Item (a)(1)(v)).
In connection with the reissuance of their report, Andersen has removed the
explanatory paragraph from their opinion, regarding the ability of the Company
to continue as a going concern given the Company's credit facility entered into
in June, 2000. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth the name, age and principal occupation of each of
the Company's directors, including the nominees.
NAME AGE SINCE TERM EXPIRES PRINICIPAL OCCUPATION
---- --- ----- ------------ ---------------------
David C. Carney 64 1997 2004 Chairman of the Board
of Directors
J.B. Doherty 58 2000 2002 Director
Robert E. Drury 55 2000 2004 Director
Mark P. Glassman 38 2001 2003 Chief Executive Officer and
Director
Rex Lamb 43 1997 2003 Director
H. Craig Lewis 57 2000 2003 Director
DAVID C. CARNEY became a director of the Company in December 1997 and has served
as Chairman of the board of directors since May 1999. Mr. Carney served as the
Company's Acting Chief Executive Officer from June 2000 to June 2001. Mr. Carney
was the Executive Vice President of Jefferson Health System, a health care
organization, from 1996 to April 1999. From 1991 to 1995, Mr. Carney served as
the Chief Financial Officer of CoreStates Financial Corporation. From 1980 to
1991, he served as the Philadelphia area managing partner of Ernst & Young LLP.
Mr. Carney currently serves as a director of Radian Group, Inc. (NYSE), and AAA
Mid-Atlantic and AAA Mid-Atlantic Insurance Companies. Mr. Carney has an
undergraduate degree from Temple University and is a graduate of the Advanced
Management Program at the Harvard Business School.
J. B. DOHERTY became a director of the Company in March 2000. Mr. Doherty has
been a Chairman and President of Private Equity Management Company and Managing
General Partner of TDH since 1992. Mr. Doherty joined K.S. Sweet Associates, a
predecessor to TDH, in 1973. Prior to his role at TDH, Mr. Doherty worked in
corporate finance and private placements with Blyth Eastman Dillon. From 1970 to
1972, Mr. Doherty worked at AT&T and Raychem Corporation. Mr. Doherty currently
serves as a director of Monitoring Technology Corporation. Mr. Doherty holds a
bachelor's of science degree in engineering from the United States Naval
Academy, an MBA from Stanford, and is a former officer in the United States
Marine Corps.
ROBERT E. DRURY became a director of the Company in March 2000. Mr. Drury has
been the Chief Financial Officer of ChemConnect, Inc., a private company
providing Internet based e-business solutions and Internet exchange services to
the worldwide chemical industry since 1998. Prior to his role at ChemConnect,
Mr. Drury was the Senior Vice President and Corporate Treasurer at Sodhexo
Marriott Services. From 1984 to 1994, Mr. Drury was Senior Vice President and
Chief Financial Officer of the Leisure/International Sector at Aramark
Corporation. Mr. Drury holds a bachelor's of science degree in industrial
engineering from Lafayette College and a master's degree in finance and
international business from New York University.
MARK P. GLASSMAN became a director of the Company in April 2001 and has served
as the Company's Chief Executive Officer since June 2001. Mr. Glassman joined
the Company in February 1998 as Corporate Controller and was promoted to Chief
Accounting Officer in October 1998, Chief Financial Officer in May 1999, and
served as President and Chief Operating Officer from March 2001 until June 2001.
From 1993 to February 1998, Mr. Glassman was employed at Right Management
Consultants, Inc., a publicly-held international consulting firm, where he held
various financial and operational positions, including Corporate Accounting
Director and Corporate Director of Planning and Development. From 1987 to 1993,
Mr. Glassman was an auditor with Touche Ross & Co. and Deloitte & Touche. Mr.
Glassman has an undergraduate degree in Business from Temple University.
REX LAMB previously managed the Company's Lincoln, Nebraska business until
March 2000, and has served as a director of the Company since December 1997. In
October 2000, Mr. Lamb was appointed Vice President of Sales for the Company's
Midwest region until he resigned in October 2001. From March 2000 until October
2000, Mr. Lamb served as the Company's Senior Vice President--Technology. Mr.
Lamb founded DocuTech, Inc., a document management services company, in 1991 and
served as its President from inception until its acquisition by the Company in
December 1997. Mr. Lamb co-founded DocuTech Data Systems, Inc., a provider of
open-architecture document-scanning software products, in 1994 and served as its
President since inception until its acquisition by us in December 1997. Mr. Lamb
has an undergraduate degree in Education from the University of Nebraska.
H. CRAIG LEWIS became a director of the Company in April 2000. Mr. Lewis has
been the Vice President--Corporate Affairs at Norfolk Southern Corporation since
1997. Prior to joining Norfolk Southern, Mr. Lewis was a partner with the law
firm of Dechert Price & Rhodes. From 1971 to 1994, Mr. Lewis served in the State
Senate of Pennsylvania where he chaired the Judiciary and Ethics Committees and
was Minority Chairman of the Appropriations Committee. Mr. Lewis currently
serves as a director of Raytech Corporation (NYSE). Mr. Lewis holds an
undergraduate degree from Millersville University and J.D. from Temple
University School of Law.
The Company's executive officers and their respective ages and positions are as
follows:
NAME AGE POSITION
- ---- --- --------
David C. Carney.............. 64 Chairman of the Board of Directors
Mark P. Glassman............. 38 Chief Executive Officer and Director
Jay M. Rose.................. 50 Executive Vice President - Sales and
Marketing
Richard E. Lane.............. 34 Senior Vice President - Operations
David B. Walls............... 39 Chief Financial Officer and Treasurer and
Secretary
DAVID C. CARNEY has served as a director of the Company since December 1997 and
as Chairman of the board of directors since May 1999. Mr. Carney served as our
Acting Chief Executive Officer from June 2000 to June 2001. He was the Executive
Vice President of Jefferson Health System, a health care organization, from 1996
to April 1999. From 1991 to 1995, Mr. Carney served as the Chief Financial
Officer of CoreStates Financial Corporation. From 1980 to 1991, he served as the
Philadelphia area managing partner of Ernst & Young LLP. Mr. Carney currently
serves as a director of Radian Group, Inc. (NYSE), AAA Mid-Atlantic and AAA
Mid-Atlantic Insurance Companies. Mr. Carney has an undergraduate degree from
Temple University and is a graduate of the Advanced Management Program at the
Harvard Business School.
MARK P. GLASSMAN has served as our Chief Executive Officer since June 2001. Mr.
Glassman joined the Company in February 1998 as Corporate Controller, was
promoted to Chief Accounting Officer in October 1998, Chief Financial Officer in
May 1999, and served as President and Chief Operating Officer from March 2001
until June 2001. From 1993 to February 1998, Mr. Glassman was employed at Right
Management Consultants, Inc., a publicly held international consulting firm,
where he held various financial and operational positions, including Corporate
Accounting Director and Corporate Director of Planning and Development. From
1987 to 1993, Mr. Glassman was an auditor with Touche Ross & Co. and Deloitte &
Touche. Mr. Glassman has an undergraduate degree in Business from Temple
University.
JAY M. ROSE is the Executive Vice President - Sales and Marketing. He joined
the Company in November 2001. From 1998 to 2001, Mr. Rose was employed by First
Consulting Group, a publicly held global consulting firm focused on information
technology for the healthcare and life sciences industries as an Executive Vice
President and the Managing Director of FCG Life Sciences. From 1995 to 1998, Mr.
Rose was employed by Integrated Systems Consulting Group, a publicly held
systems integration services firm, where he held several positions including
Chief Operating Officer and Vice President of Sales. From 1983 to 1995, Mr. Rose
held a variety of positions at Shared Medical Systems, a publicly held company
providing information technology software and services to the healthcare
industry. Mr. Rose holds a BA from Wesleyan University, a MSE from the
University of Pennsylvania, and a MBA from Stanford University.
RICHARD E. LANE was promoted to Senior Vice President - Operations in February
2002. Mr. Lane joined the Company in June 2000 as a Product Manager and was
promoted to Senior Vice President of Technology in November 2000. In 1993, he
founded Record Technologies, Inc. (RTI), a service bureau focused on the
Litigation Support market, which he operated until January 2000. From 1990 to
1993, Mr. Lane was employed by Dun & Bradstreet Software, a developer of
financial and manufacturing applications, where he held various consulting
positions within their Professional Services division. Mr. Lane has an
undergraduate degree in Business from Bowling Green University.
DAVID B. WALLS has served as our Chief Financial Officer since May 2001 when he
joined the Company From March 1995 to September 2000, Mr. Walls was employed at
Campbell Soup Company, where he held various operational and corporate finance
positions, including Vice President of Finance - Campbell's Away from Home
Division and Director - Financial Reporting and Analysis. From 1985 to March
1995, Mr. Walls was an auditor with Price Waterhouse. Mr. Walls has an
undergraduate degree in Accounting from Widener University and is a certified
public accountant.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers and directors and persons who own more than ten
percent (10%) of the Company's common stock to file initial reports of ownership
and reports of change of ownership with the Securities and Exchange Commission.
Executive officers and directors are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they file. To the Company's knowledge, based solely on its review of the
copies of such reports received or written representations from such executive
officers and directors, that no other reports were required, the Company
believes that during its fiscal year ended December 31, 2001, all reporting
persons complied with all applicable filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation of the named executive
officers for the last three fiscal years.
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards Payout
------ ------
Securities
Other Underlying
Annual Restricted Options LTIP
Name and Compen Stock ------- Payout All other
Principal Position Year Salary Bonus -sation Awards (#) ($) Compensation
------------------ ---- ------ ----- ------- ------ --- --- ------------
David C. Carney(1) 2001 $134,531 - - - 37,500 - -
Chairman of the Board and 2000 93,389 - - - 75,000 - -
Former Acting Chief 1999 - - - - 58,000 - -
Executive Officer
Mark P. Glassman (2) 2001 $170,625 $30,000 $2,021 - 50,000 - -
Chief Executive Officer 2000 137,046 15,000 692 - 75,000 - -
1999 101,731 - - - - -
Jay M. Rose (3) 2001 $ 17,875 - - - 50,000 - -
Executive Vice President - 2000 - - - - - - -
Sales and Marketing 1999 - - - - - - -
Richard E. Lane (4) 2001 $122,481 $ 7,500 $1,336 - 20,000 - -
Senior Vice President - 2000 60,077 - - - 35,000 - -
Operations 1999 - - - - - - -
David B. Walls (5) 2001 $ 89,654 - - - 20,000 - -
Chief Financial Officer, 2000 - - - - - - -
Treasurer and Secretary 1999 - - - - - - -
Blair Hayes(6) 2001 $191,780 - $ 909 - - - -
Former President and 2000 162,019 - 2,329 - 100,000 - -
Chief Operating Officer 1999 114,577 40,000 2,194 - - - -
Mitchell J. Taube(7) 2001 $142,077 55,000 $2,045 - 25,000 - -
Former Executive Vice 2000 143,269 - 4,973 - 75,000 - -
President - Marketing & 1999 111,346 - 1,154 - - - -
Sales Development
25
- --------------------------------------------------------------------------------
(1) Mr. Carney served as Acting Chief Executive Officer from June 2000 to June
2001. Mr. Carney became a director of ImageMax in December 1997 and has
served as Chairman of the board of directors since May 1999.
(2) As of June 2001, Mr. Glassman was appointed to the position of Chief
Executive Officer. Mr. Glassman was President and Chief Operating Officer
from March 2001 to June 2001, Chief Financial Officer from May 1999 to
March 2001, and Chief Accounting Officer from October 1998 to May 1999.
Previous to that date, Mr. Glassman held the position of Corporate
Controller
(3) Mr. Rose has held the position of Executive Vice President-Sales and
Marketing since he joined the Company in November 2001. Mr. Rose's annual
salary is $165,000.
(4) Mr. Lane has held the position of Senior Vice President-Operations since
February 2002. Mr. Lane served as Senior Vice President-Technology from
November 2000 to January 2002. Previous to November 2000, Mr. Lane served
as a Product Manager from June 2000 to October 2000.
(5) Mr. Walls has held the position of Chief Financial Officer, Treasurer and
Secretary since he joined the Company in May 2001. Mr. Walls' annual salary
is $150,000.
(6) As of March 2001, Mr. Hayes resigned from the position of President and
Chief Operating Officer. Mr. Hayes served as our President and Chief
Operating Officer from April 2000 through March 2001. Mr. Hayes was
Executive Vice-President - Operations from May 1999 to April 2000. Previous
to that date, Mr. Hayes held the position of General Manager and Business
Unit Support Manager/Group Leader.
(7) As of November 2001, Mr. Taube resigned from the position of Executive Vice
President - Marketing and Sales Development. Mr. Taube served as our
Executive Vice-President - Marketing & Sales Development from March 2000 to
November 2001. Mr. Taube managed the Company's New York (Westchester
County) business unit from December 1997 until March 2000.
Stock Option Grants In 2001
Under our 1997 Incentive Plan, 202,500 stock options were granted in
2001 to the named executive officers at exercise prices of $0.55, $0.45 and
$0.20.
% of Total Potential Realizable Value at Assumed
Number Options Annual Rates of Stock Price
of Options Granted to Exercise Expiration Appreciation for Option Term
Name Granted Employee Price Date 5% ($) 10% ($)
---- ------- -------- ----- ---- ------ -------
David C. Carney 37,500 7.9% $0.45 April 24, $4,662 $ 10,302
2006
Mark P. Glassman 50,000 10.6% $0.45 April 24, $6,216 $ 13,736
2006
Jay M. Rose 50,000 10.6% $0.20 November $2,763 $ 6,105
16,2006
Richard E. Lane 20,000 4.2% $0.45 April 24, $2,487 $ 5,495
2006
David B. Walls 20,000 4.2% $0.55 May 3, $3,039 $ 6,716
2006
Mitchell J. Taube 25,000 5.3% $0.45 April 24, $3,108 $ 6,868
2006
26
Aggregated Option Exercises in Last Fiscal Year And Fiscal
Year-End Option Values
The table below shows option exercises by the named executive officers in
2001 and year-end amounts of shares of common stock underlying outstanding
options.
Value of
Number of Unexercised
Securities In-the-Money
Underlying Options at
Unexercised FY-End ($)
Options at Exercisable/
FY-End (#) Unexercisable
Shares Acquired on Value Exercisable/ -------------
Name Exercise (#) Realized ($) Unexercisable (1)
---- ------------ ------------ ------------- ---
David C. Carney - - 93,000/87,500 $ -
Mark P. Glassman - - 37,000/100,000 -
Jay M. Rose - - 0/50,000 -
Richard E. Lane - - 11,667/43,333 -
David B. Walls - - 0/20,000 -
Mitchell J. Taube - - 35,000/75,000 -
Mr. Carney was granted 10,000, 58,000, 75,000 and 37,500 options, respectively,
on October 1, 1998, June 29, 1999, February 15, 2000 and April 24, 2001 at
exercise prices of $2.375, $1.75, $1.6875 and $0.45, the closing price on those
dates. One Third of the options grant in 2000, and all of the options granted in
1998 and 1999 were all exercisable at December 31, 2001.
Mr. Glassman was granted 12,000, 75,000 and 50,000 options, respectively, on
October 1, 1998, February 15, 2000 and April 24, 2001 at exercise prices of
$2.375, $1.6875 and $0.45, the closing price on those dates. One-third of the
options granted in 2000 and all of the options granted in 1998 were exercisable
at December 31, 2001.
Mr. Rose was granted 50,000 options on November 16, 2001 at an exercise price of
$0.20, the closing price on that date.
Mr. Lane was granted 35,000 and 20,000 options, respectively, on June 1, 2000
and April 24, 2001 at exercise prices of $1.41 and $0.45, the closing prices on
those dates. One third of the options granted in 2000 were exercisable at
December 31, 2001.
Mr. Walls was granted 20,000 options on May 3, 2001 at an exercise price of
$0.55, the closing price on that date.
Mr. Taube was granted 10,000, 75,000 and 25,000 options, respectively, on
October 1, 1998, February 15, 2000 and April 24, 2001 at exercise prices of
$2.375, $1.6875 and $0.45, the closing price on those dates. One-third of the
options granted in 2000 and all of the options granted in 1998 were exercisable
at December 31, 2001.
(1) Based on a closing price of $0.28 on the OTC Bulletin Board on December 31,
2001, the last business day of 2001, there is no value ascribed to the
exercisable or unexercisable options at that date.
27
Employment Agreements
ImageMax Inc. entered into employment agreements with Mr. Carney, Mr.
Glassman, Mr. Hayes and Mr. Taube in April 2000. Mr. Carney's agreement expired
April 1, 2002 Mr. Glassman's agreement expires December 31, 2004. Mr. Hayes
employment with the Company terminated as of April 2001. Mr. Taube tendered his
resignation to the Company effective November 30, 2001 for personal reasons.
Mr. Carney serves as Chairman of the board of directors at a base
annual salary of $131,250. Mr. Glassman serves as Chief Executive Officer at a
base annual salary of $175,000. From March 2000 to November 2001, Mr. Taube
served as Executive Vice President - Marketing and Sales Development at an
annual base salary of $150,000. Mr. Taube's employment with the Company
terminated as of November 2001. In 2000, Mr. Glassman served as Chief Financial
Officer (at $150,000 base annual salary) and Chief Accounting Officer. From
April 2000 to March 2001, Mr. Hayes served as President and Chief Operating
Officer at annual base salary of $175,000
At the discretion of the board of directors, the base annual salary of
each officer is subject to increases periodically, and each such officer may
receive an annual incentive bonus. Each of the employment agreements provides
for customary benefits including life, health and disability insurance, and
401(k) plan participation. Each of the employment agreements further provides
that if the employee is terminated without cause, or in connection with a change
of control, as defined therein, the employee is entitled to receive 12 months'
base salary and benefits.
Separation Agreement
In November 2001, we entered into a separation agreement with Mr. Taube
covering the terms upon which he resigned as Executive Vice President of
Marketing and Sales Development. As payment for his past service to the Company,
the separation agreement provided that the Company was obligated to pay Mr.
Taube $62,500 over a period of six (6) months, beginning November 30, 2001.
In June 2001, the Company entered into a separation agreement with Mr. Hayes
covering the terms upon which he resigned as President and Chief Operating
Officer. As payment for his past service to the Company, the separation
agreement provided that the Company was obligated to pay Mr. Hayes $175,000 over
a period of twelve (12) months, beginning as of April 2001 (the termination
date). The separation agreement also provides that Mr. Hayes and his family are
allowed to continue to receive coverage under the Company's group medical plan
for a period of twelve (12) months beginning April 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 9, 2002, certain
information with regard to beneficial ownership, as determined in accordance
with Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as
amended, of outstanding shares of our common stock by (1) each person, entity or
group known by us to beneficially own five percent (5%) or more of the
outstanding shares of our common stock, (2) each director and director nominee
individually, (3) our named executive officers, and (4) all directors and
executive officers as a group.
28
The percentages of beneficial ownership shown below are based on the
6,793,323 shares of Common Stock issued and outstanding as of April 9, 2002,
unless otherwise stated. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and generally includes those
securities over which a person may exercise voting or investment power. In
addition, shares of common stock which a person has the right to acquire upon
the conversion of preferred stock or convertible subordinated notes or the
exercise of stock options and warrants within 60 days of the date of this table
are deemed outstanding for the purpose of computing the percentage ownership of
that person, but are not deemed outstanding for computing the percentage
ownership of any other person. Except as indicated in the footnotes to this
table or as affected by applicable community property laws, the persons named in
the table have sole voting and investment power with respect to all shares of
common stock beneficially owned.
Total Number of Shares Percentage of Class of
Name and Address of of Common Stock Common Stock
Beneficial Owner Beneficially Owned(1) Beneficially Owned(1)
---------------- --------------------- ---------------------
Dime Capital Partners, Inc................. 2,518,571 (2) 27.0%
1401 Valley Road
3/rd/ Floor
Wayne, NJ 07470
J.B. Doherty............................... 1,052,144 (3) 13.6%
c/o TDH III, LP
919 Conestoga Road
Building One, Suite 201
Rosemont, PA 19010
TDH III, LP................................ 937,144 (4) 12.1%
919 Conestoga Road
Building One, Suite 201
Rosemont, PA 19010
Bruce M. Gillis............................ 429,452 (5) 6.2%
331 Aubrey Road
Wynnewood, PA 19096
Fagan Investment Group..................... 351,600 (6) 5.2%
5201 N. O'Connor Blvd
Suite 440
Irving, Texas 75039
Andrew R. Bacas............................ 290,526 (7) 4.3%
c/o ImageMax, Inc.
455 Pennsylvania Ave., Suite 128
Fort Washington, PA 19034
Mitchell J. Taube.......................... 248,904 (8) 3.6%
c/o ImageMax, Inc.
503 Grasslands Road
Valhalla, NY 10595
Rex Lamb................................... 242,521 (9) 3.6%
c/o ImageMax, Inc.
5001 Rentworth Court
Lincoln, NE 68516
29
David C. Carney............................ 110,000 (10) 1.6%
c/o ImageMax, Inc.
455 Pennsylvania Ave., Suite 128
Fort Washington, PA 19034
Robert Drury............................... 63,571 (11) *
c/o ImageMax, Inc.
455 Pennsylvania Ave., Suite 128
Fort Washington, PA 19034
Mark P. Glassman........................... 42,000 (12) *
c/o ImageMax, Inc.
455 Pennsylvania Ave., Suite 128
Fort Washington, PA 19034
Jay M. Rose................................ 50,000 (13) *
c/o ImageMax, Inc.
455 Pennsylvania Ave., Suite 128
Fort Washington, PA 19034
Richard E. Lane............................ 11,667 (14) *
c/o ImageMax, Inc.
455 Pennsylvania Ave., Suite 128
Fort Washington, PA 19034
H. Craig Lewis............................. 5,000 (15) *
c/o ImageMax, Inc.
455 Pennsylvania Ave., Suite 128
Fort Washington, PA 19034
David B. Walls............................. -- (16) *
c/o ImageMax, Inc.
455 Pennsylvania Ave., Suite 128
Fort Washington, PA 19034
All Executive Officers and Directors 2,116,333 (17) 26.4%
as a Group (9 persons).................
_____________________________
* - Less than 1% of the outstanding Common Stock.
(1) As used in this table, "beneficial ownership" means the sole or shared
power to vote or direct the voting of a security, or the sole or shared
investment power with respect to a security, which means the power to
dispose, or direct the disposition, of a security. A person is deemed as of
any date to have beneficial ownership of any security that such person has
the right to acquire within 60 days after such date.
(2) Represents 1,228,571 and 1,290,000 shares, respectively, issuable upon the
conversion of convertible subordinated notes and the exercise of warrants,
both of which are exercisable at $3.50 per share within 60 days of April 9,
2002. On April 11, 2002, the Company entered into a commitment to amend the
convertible subordinated notes - see "Management's Discussion and Analysis
-- Liquidity and Capital Resources".
(3) Includes 937,144 shares beneficially owned by TDH III, LP and issuable upon
the conversion of convertible subordinated notes and the exercise of
warrants both of which are exercisable at $3.50 per share within 60 days at
April 9, 2002. On April 11, 2002, the Company entered into a commitment to
amend the convertible subordinated notes - see "Management's Discussion and
Analysis -- Liquidity and Capital Resources". See footnote 4 below. Mr.
Doherty is the Managing General Partner of TDH III, LP. Excludes 12,000
shares issuable at $0.45 per share upon the exercise of stock options
granted April 24, 2001, which are not exercisable within 60 days of April
9, 2002.
30
(4) Represents 457,144 and 480,000 shares, respectively, issuable upon the
conversion of convertible subordinated notes and the exercise of warrants,
both of which are exercisable at $3.50 per share within 60 days of April 9,
2002. On April 11, 2002, the Company entered into a commitment to amend the
convertible subordinated notes - see "Management's Discussion and Analysis
-- Liquidity and Capital Resources".
(5) Includes 100,000 shares issuable upon the exercise of stock options granted
which are exercisable at $12.00 per share within 60 days of April 9, 2002
and expire on December 8, 2002.
(6) As reported on Schedule 13d-3 filed on or about October 23, 2001.
(7) Includes 30,000 and 5,000 shares, respectively, issuable upon the exercise
of stock options granted which are exercisable at $2.375 and $1.6875 per
share within 60 days of April 9, 2002. Excludes 10,000 and 12,000 shares,
respectively, issuable at $1.6875 and $0.45 per share upon the exercise of
stock options granted February 15, 2000 and April 24, 2001, which are not
exercisable within 60 days of April 9, 2002.
(8) Includes 10,000 and 25,000 shares, respectively, issuable upon the exercise
of stock options granted which are exercisable at $2.375 and $1.6875 per
share within 60 days of April 9, 2002. Excludes 50,000 and 25,000 shares,
respectively, issuable at $1.6875 and $0.45 per share upon the exercise of
stock options granted February 15, 2000 and April 24, 2001, which are not
exercisable within 60 days of April 9, 2002.
(9) Includes 15,000 and 3,333 shares, respectively, issuable upon the exercise
of stock options granted which are exercisable at $2.375 and $1.6875 per
share within 60 days of April 9, 2002. Excludes 6,667 and 10,000 shares,
respectively, issuable at $1.6875 and $0.45 per share upon the exercise of
stock options granted February 15, 2000 and April 24, 2001, which are not
exercisable within 60 days of April 9, 2002.
(10) Includes 10,000, 58,000 and 25,000 shares, respectively, issuable upon the
exercise of stock options granted which are exercisable at $2.375, $1.75
and $1.6875 per share within 60 days of April 9, 2002. Excludes 50,000 and
37,500 shares, respectively, issuable at $1.6875 and $0.45 per share upon
the exercise of stock options granted February 15, 2000 and April 24, 2001,
which are not exercisable within 60 days of April 9, 2002.
(11) Includes 28,571 and 30,000 shares, respectively, issuable upon the
conversion of convertible subordinated notes and the exercise of warrants,
both of which are exercisable at $3.50 per share within 60 days of April 9,
2002. On April 11, 2002, the Company entered into a commitment to amend its
convertible subordinated notes -- "Managements' Discussion and Analysis --
Liquidity and Capital Resources". Also includes 5,000 shares issuable upon
the exercise of stock options granted which are exercisable at $1.625 per
share within 60 days of October 11, 2001. Excludes 10,000 and 12,000
shares, respectively, issuable at $1.625 and $0.45 per share upon the
exercise of stock options granted June 9, 2000 and April 24, 2001, which
are not exercisable within 60 days of April 9, 2002.
(12) Includes 12,000 and 25,000 shares, respectively, issuable upon the exercise
of stock options granted which are exercisable at $2.375 and $1.6875 per
share within 60 days of April 9, 2002. Excludes 100,000 shares, half of
which are issuable at $1.6875 and half at $0.45 per share, respectively,
upon the exercise of stock options granted February 15, 2000 and April 24,
2001, which are not exercisable within 60 days of April 9, 2002.
(13) Excludes 50,000 shares issuable at $0.20 per share upon exercise of stock
options granted November 16, 2001 which are not exercisable within 60 days
of April 9, 2002.
(14) Includes 11,667 shares issuable upon the exercisable at $1.41 per share
within 60 days of April 9, 2002. Excludes 23,333 and 20,000 shares,
respectively, issuable at $1.41 and $0.45 per share upon the exercise of
stock options granted June 1, 2000 and April 24, 2001, which are not
exercisable within 60 days of April 9, 2002.
(15) Includes 5,000 shares issuable upon the exercise of stock options granted
which are exercisable at $1.50 per share within 60 days of April 9, 2002.
Excludes 10,000 and 12,000 shares, respectively, issuable at $1.50 and
$0.45 per share upon the exercise of stock options granted June 5, 2000 and
April 24, 2001, which are not exercisable within 60 days of April 9, 2002.
(16) Excludes 20,000 shares issuable at $0.55 per share upon the exercise of
stock options granted May 3, 2001 which are not exercisable within 60 days
of April 9, 2002.
(17) Includes 485,715 and 510,000 shares, respectively, issuable upon the
conversion of convertible subordinated debt and the exercise of warrants,
both of which are exercisable at $3.50 per share within 60 days of April 9,
2002. Also includes 240,000 shares which are issuable upon the exercise of
stock options granted which are exercisable within 60 days of April 9,
2002, and excludes 470,500 shares issuable upon the exercise of stock
options which are not exercisable within 60 days of April 9, 2002.
31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Subordinated Debt Restructuring
On April 11, 2002, the Company entered into a commitment letter to
restructure the subordinated debt held by TDH III, L.P., Dime Capital Partners,
Inc., and Robert E. Drury. Mr. Doherty, a member of the Company's Board of
Directors, is a principal of TDH III, L.P. Mr. Drury is also a member of the
Company's Board of Directors. For a full description of the restructuring see
- -- "Management's Discussion and Analysis -- Liquidity and Capital Resources."
Future Transactions
We have adopted a policy that we will not enter into any material
transaction in which a director or officer has a direct or indirect financial
interest, unless the transaction is determined by our board of directors to be
fair as to us or is approved by a majority of our disinterested directors or by
our shareholders, as provided for under Pennsylvania law.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See Index to the Consolidated Financial Statements, which begin on page
F-1 of this Annual Report.
2. Financial Statement Schedules
See Schedule II -- Valuation and Qualifying Accounts on page F-24 of this
Annual Report.
Any financial statement schedules otherwise required have been omitted
because they are not applicable.
3. Exhibits
EXHIBIT
NO. DESCRIPTION
- ---- -----------
2.1* Agreement and Plan of Reorganization dated September 9,
1997, by and among the Company, DocuTech Data Systems, Inc.,
and Rex Lamb and Mark Creglow (including escrow agreement).
2.2* Asset Purchase Agreement dated September 9, 1997 by and
among the Company, Rex Lamb and Vicki Lamb (including escrow
agreement).
2.3* Agreement and Plan of Reorganization dated September 9,
1997, by and among the Company, Utz Medical Enterprises,
Inc., and David C. Utz, Jr. (including escrow agreement).
2.4* Agreement and Plan of Reorganization dated September 9, 1997
by and among Jane Semasko and John Semasko, Oregon Micro-
Imaging, Inc. and the Company (including escrow agreement).
2.5* Asset Purchase Agreement dated September 9, 1997 by and
among Spaulding Company, Inc., Semco Industries, Inc., and
the Company (including escrow agreement).
2.6* Asset Purchase Agreement dated September 9, 1997 by and
among Total Information Management Corporation and the
Company (including escrow agreement).
2.7* Stock Purchase Agreement dated September 9, 1997 by and
among Ovidio Pugnale, Image Memory Systems, Inc. and the
Company (including escrow agreement).
2.8* Agreement and Plan of Reorganization dated September 9,
1997, by and among the Company, International Data Services
of New York, Inc., and Mitchell J. Taube and Ellen F.
Rothschild-Taube (including escrow agreement).
32
2.9* Stock Purchase Agreement dated September 9, 1997 by and
among David Crowder, TPS Micrographics, Inc. and the Company
(including escrow agreement).
2.10* Agreement and Plan of Reorganization dated September 11,
1997 by and among the Company, Image and Information
Solutions, Inc. and Gary Blackwelder (including escrow
agreement).
2.11* Agreement and Plan of Reorganization dated September 9, 1997
by and among Madeline Solomon, David C. Yezbak, CodaLex
Microfilming Corporation and the Company (including escrow
agreement).
2.12* Asset Purchase Agreement dated September 9, 1997 by and
among Imaging Information Industries, Inc., Gerald P.
Gorman, Theodore J. Solomon, Jr., Charles P. Yezbak, III,
David C. Yezbak and the Company (including escrow
agreement).
2.13* Agreement and Plan of Reorganization dated September 9, 1997
by and among Gerald P. Gorman, Theodore J. Solomon, Theodore
J. Solomon, Jr., Charles P. Yezbak, III, David C. Yezbak,
Laser Graphics Systems & Services, Inc. and the Company
(including escrow agreement).
2.14* Asset Purchase Agreement dated September 9, 1997 by and
among DataLink Corporation, Judith E. DeMott, Geri E.
Davidson and the Company (including escrow agreement).
2.15*** Asset Purchase Agreement, dated January 23, 1998, by and
among Integrated Information Services, L.L.C., Pettibone,
L.L.C and Heisley Holding, L.L.C. and ImageMax, Inc.
(incorporated by reference to Exhibit 2.1 of the Company's
8-K filed on February 3, 1998).
2.16*** Asset Purchase Agreement, dated February 9, 1998, by and
among Document Management Group Inc., Theron Robinson and
ImageMax, Inc. (incorporated by reference to Exhibit 2.1 of
the Company's 8-K filed on February 24, 1998).
2.17*** Asset Purchase Agreement, dated February 9, 1998, by and
among Image-Tec, Inc., Theron Robinson and Robert Robinson
and ImageMax, Inc. (incorporated by reference to Exhibit 2.2
of the Company's 8-K filed on February 24, 1998).
3.1* Amended and Restated Articles of Incorporation of the
Company.
3.2*// Amended and Restated Bylaws of the Company.
4.1* Specimen Stock Certificate.
4.2* Shareholders Agreement between the Company and certain of
its shareholders dated November 19, 1996.
4.3* Amendment No. 1 to Shareholders Agreement dated November 19,
1996.
4.4* Form of Joinder to Shareholders Agreement executed by Bruce
M. Gillis, Sands Point Partners I, Wilblairco Associates,
Osage Venture Partners, Steven N. Kaplan, Brian K. Bergeron,
James M. Liebhardt, G. Stuart Livingston, III, Richard D.
Moseley, David C. Utz, Jr., Bruce M. Gillis, Custodian for
Claire Solomon Gillis, Bruce M. Gillis, Custodian for
Katherine Tessa Solomon Gillis, S. David Model, Andrew R.
Bacas, David C. Yezbak, Theodore J. Solomon, Walter F.
Gilbert, Carmen DiMatteo, Patrick M. D'Agostino, David L.
Crowder, James D. Brown and Mary M. Brown, JTWROS, Mitchell
S. Taube and Ellen F. Rothschild-Taube, JTWROS, John Semasko
and Jane Semasko, JTWROS, Wolfe F. Model and Renate H.
Model.
10.1*+/ 1997 Incentive Plan., as amended and restated through April
24, 2001.
10.2*+ 1997 Employee Stock Purchase Plan.
10.3*+ Management Agreement between GBL Capital Corporation and the
Company dated November 27, 1996.
33
10.4*+ Employment Agreement between the Company and Bruce M. Gillis
dated as of August 1, 1997.
10.5*+ Employment Agreement between the Company and James D. Brown
dated as of August 18, 1997.
10.6*+ Employment Agreement between the Company and S. David Model
dated as of August 18, 1997.
10.7*+ Employment Agreement between the Company and Andrew R. Bacas
dated as of August 1, 1997.
10.8**+ Employment Agreement between the Company and John E. Semasko
dated as of September 9, 1997.
10.9**+ Employment Agreement between the Company and Rex Lamb dated
as of September 9, 1997.
10.10* Lease Agreement dated March 26, 1996 by and between Marlyn
D. Schwarz and Rex Lamb d/b/a DocuTech.
10.11* Lease Agreement dated February 24, 1992 by and between
Marlyn Schwarz d/b/a Old Cheney Plaza and Rex Lamb d/b/a
DocuTech.
10.12* Lease Agreement dated September 1, 1994 by and between
Jonstar Realty Corporation and Spaulding Company, Inc.
(renewed May 27, 1997).
10.13 [Intentionally left blank]
10.14* Lease dated September 1, 1995 by and between Robert S. Greer
and Elvera A. Greer and American Micro-Med Corporation.
10.15* Lease dated February 8, 1994 and Lease Rider dated as of
February 1, 1994 by and between Oporto Development Corp. and
International Data Services of New York, Inc.
10.16* Amendment of Lease dated June 6, 1996 between East Cobb Land
Development and Investment Co., L.P. and Imaging Information
Industries/David Yezbak, extended by letter dated July 16,
1997.
10.17 [Intentionally left blank]
10.18* Lease dated January 10, 1996 by and between Financial
Enterprises III and TPS Imaging Solutions, Inc.
10.19* Lease Agreement dated March 31, 1995 by and between
Technical Publications Service, Inc. and TPS Micrographics,
Inc.
10.20* Standard Industrial Commercial MultiTenant Lease-Gross dated
June 20, 1994 by and between Northgate Assembly of God,
North Sacramento, d/b/a Arena Christian Center and Total
Information Management Corporation.
10.21* Lease dated January 26, 1981 and Extension of Lease dated
October, 1992 by and between Trader Vic's Food Products and
Total Information Management Corporation.
10.22* Standard Industrial Lease dated September 24, 1991 by and
between Charles F. Coss, Viola B. Coss, Tracey C. Quinn,
John Coss, Peter B. Coss, Elizabeth Coss, Tracey C. Quinn as
Trustee for Geoffrey C. Quinn and Elizabeth Coss, as Trustee
for Caitlin N. Shay and Total Information Management
Corporation extended by letter dated October 18, 1996 from
James Bunker to Peter Coss.
34
10.23* Lease dated January 1, 1993 between CSX Transportation, Inc.
and American Micro-Med Corporation.
10.24* Lease and Service Agreement dated September 4, 1997 and two
Addendums dated October 15, 1997 between American Executive
Centers, Inc. and the Company.
10.25** Credit Agreement by and among the Company and Subsidiaries
and CoreStates Bank, N.A., for itself and as Agent, and any
other Banks becoming Party, dated as of March 30, 1998.
10.26*** Amendment No. 1 to Credit Agreement by and among the Company
and Subsidiaries and First Union National Bank (successor by
merger to CoreStates Bank, N.A.), for itself and as Agent,
and any other Banks becoming Party, dated as of March 30,
1998 (incorporated by reference to Exhibit 10.25 of the
Company's Form 10-K filed March 31, 1998, File No. 0-23077).
10.27*** Amendment No. 2 to Credit Agreement by and among the Company
and Subsidiaries and First Union National Bank (successor by
merger to CoreStates Bank, N.A.), for itself and as Agent,
and any other Banks becoming Party, dated as of November 16,
1998).
10.28*** Master Demand Note, dated January 20, 1998, payable to First
Union National Bank (successor by merger to CoreStates Bank,
N.A.) (incorporated by reference to Exhibit 10.1 of the
Company's Form 8-K filed on February 3, 1998).
10.29*** Security Agreement, dated January 20, 1998, between First
Union National Bank (successor by merger to CoreStates Bank,
N.A.) and the Company (incorporated by reference to Exhibit
10.2 of the Company's Form 8-K filed on February 3, 1998).
10.30*** Forbearance Agreement dated March 29, 1999 by and among the
Company, First Union National Bank (successor by merger to
CoreStates Bank, N.A.) and Commerce Bank, N.A.
10.31***+ Amendment No. 1 dated as of October 1, 1998 to Employment
Agreement between the Company and James D. Brown dated as of
August 18, 1997.
10.32***+ Separation Agreement by and between Bruce M. Gillis and the
Company dated September 18, 1998.
10.33***+ Separation Agreement by and between Richard D. Moseley and
the Company dated September 30, 1998.
10.34***+ Separation Agreement by and between David Model and the
Company dated November 9, 1998.
10.35@+ Separation Agreement by and between James D. Brown and the
Company dated as of April 30, 1999.
10.36@@+ Employment Agreement by and between the Company and Mark P.
Glassman dated as of March 1, 1999, as amended by Amendment
No. 1 to Employment Agreement dated as of May 1, 1999.
10.37@@@ Forbearance Agreement dated September 30, 1999 by and among
the Company, First Union National Bank (successor by merger
to CoreStates Bank, N.A.) and Commerce Bank, N.A.
10.38% Loan and Warrant Purchase Agreement by and among the
Company, TDH, III, L.P., Dime Capital Partners, Inc. and
Robert Drury dated February 15, 2000.
10.39% Form of Promissory Note.
10.40% Form of Warrant.
35
10.41% Amendment to Forbearance Agreement by and among the Company,
First Union National Bank and Commerce Bank, N.A. dated
February 15, 2000.
10.42%%+ Amendment No. 1 to Employment Agreement between the Company
and Blair Hayes dated as of April 1, 1999.
10.43%%%+ Employment Agreement by and between the Company and Mark P.
Glassman dated as of April 1, 2000.
10.44%%%+ Employment Agreement by and between the Company and Blair
Hayes dated as of April 1, 2000.
10.45%%%+ Employment Agreement by and between the Company and Rex Lamb
dated as of April 1, 2000.
10.46%%%+ Employment Agreement by and between the Company and Mitchell
J. Taube dated as of April 1, 2000.
10.47#+ Employment Agreement by and between the Company and David C.
Carney dated as of April 1, 2000.
10.48## Credit Agreement dated as of June 9, 2000, by and among
ImageMax, Inc., together with its wholly-owned direct and
indirect subsidiaries, ImageMax of Virginia, Inc., ImageMax
of Arizona, Inc., ImageMax of Ohio, Inc., ImageMax of
Delaware, Inc., ImageMax of Indiana, Inc., and Ammcorp
Acquisition Corp.; FirsTrust Bank and Commerce Bank, N.A.
10.49## Warrant Purchase Agreement dated as of June 9, 2000, by and
among ImageMax, Inc., Commerce Bank, N.A. and FirsTrust
Bank.
10.50## Form of Warrant.
10.51/ Second Amendment to Credit Agreement dated as of March 30,
2001, by and among ImageMax, Inc. together with its wholly-
owned subsidiary, ImageMax of Delaware, Inc. and Commerce
Bank, N.A., as agent for Lenders.
10.52/ Amendment to Term Loan Note dated as of March 30, 2001, by
and among ImageMax, Inc., together with its wholly-owned
subsidiary, ImageMax of Delaware, Inc. and Commerce Bank,
N.A.
10.53/ Amendment to Term Loan Note dated as of March 30, 2001 by
and among ImageMax, Inc., together with its wholly-owned
subsidiary, ImageMax of Delaware, Inc., and FirsTrust Bank.
10.54//+ Amended and Restated Employment Agreement between ImageMax,
Inc. and Mark P. Glassman dated as of June 27, 2001.
16### Letter from Arthur Andersen, LLP dated September 28, 2000.
21% Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Arthur Andersen LLP, Independent Public
Accountants.
* Incorporated by reference to the designated exhibit of the Company's
Registration Statement on Form S-1 filed on September 12, 1997, as amended (file
number 333-35567).
** Incorporated by reference to the designated exhibit of the Company's Annual
Report on Form 10-K filed on March 31, 1998 (file number 000-23077).
36
*** Incorporated by reference to the designated exhibit of the Company's Annual
Report on Form 10-K filed on March 31, 1999 (file number 000-23077).
@ Incorporated by reference to the designated exhibit of the Company's Annual
Report on Form 10-K/A filed on April 30, 1999 (file number 000-23077).
@@ Incorporated by reference to the designated exhibit of the Company's
Quarterly Report on Form 10-Q filed on May 17, 1999 (file number 000-23077).
@@@ Incorporated by reference to the designated exhibit of the Company's Report
on Form 8-K filed on October 7, 1999 (file number 000-23077).
% Incorporated by reference to exhibits 10.1, 10.2, 10.3 and 10.4 of the
Company's Report on Form 8-K filed on March 2, 2000 (file number 000-23077).
%% Incorporated by reference to the designated exhibit of the Company's Annual
Report on Form 10-K filed on March 30, 2000 (file number 000-23077).
%%% Incorporated by reference to the designated exhibit of the Company's
Quarterly Report on Form 10-Q filed on May 15, 2000 (file number 000-23077).
# Incorporated by reference to the designated exhibit of the Company's Quarterly
Report on Form 10-Q filed on November 14, 2000 (file number 000-23077).
## Incorporated by reference to exhibits 10.1, 10.2 and 10.3 of the Company's
Report on Form 8-K filed on June 27, 2000 (file number 000-23077).
### Incorporated by reference to exhibit 16 of the Company's Report on Form 8-K
filed on September 28, 2000 (file number 000-23077).
+ Management contract or compensatory plan or arrangement.
/ Incorporated by reference to the designated exhibit of the Company's Quarterly
Report or Form 10-Q filed on May 15, 2001 (file number 000- 23077)
// Incorporated by reference to the designated exhibit of the Company's
Quarterly Report or Form 10-Q filed on August 14, 2001 (file number 000- 23077)
/// Incorporated by reference to the designated exhibit of the Company's
Quarterly Report or Form 10-Q filed on November 14, 2001 (file number 000-
23077)
(b) Reports on Form 8-K.
* Incorporated by reference to the designated exhibit of the Company's Form 8-K
filed on November 7, 2001, concerning third quarter 2001 operating results and
technical default of senior credit agreement financial covenants.
* * Incorporated by reference to the designated exhibit of the Company's Form
8-K filed on October 26, 2001 concerning the resignation of Andrew R. Bacas from
the Board of Directors of ImageMax, Inc.
37
IMAGEMAX, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
PAGE
----
Report of Ernst & Young LLP.......................................................... F-2
Report of Arthur Andersen LLP....................................................... F-3
Consolidated Balance Sheets.......................................................... F-4
Consolidated Statements of Operations................................................ F-5
Consolidated Statements of Shareholders' Equity...................................... F-6
Consolidated Statements of Cash Flows................................................ F-7
Notes to Consolidated Financial Statements........................................... F-8
Financial Statement Schedule:
II. Valuation and Qualifying Accounts............................................... F-24
F-1
Report of Independent Auditors
The Board of Directors and Shareholders,
ImageMax, Inc.
We have audited the accompanying consolidated balance sheets of ImageMax, Inc.
and subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
two years in the period ended December 31, 2001. Our audit also included the
financial statement schedule for the two years ended December 31, 2001 listed in
the index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ImageMax, Inc. and
subsidiaries at December 31, 2001 and 2000 and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, financial statement schedules, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the 2001 and 2002 information set
forth therein.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 22, 2002,
except for note 6 and Note 7 as to which
the date is April 12, 2002
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ImageMax, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of ImageMax, Inc. (a Pennsylvania
Corporation) and Subsidiaries for the year ended December 31, 1999. These
financial statements and schedule referred to below are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of their operations
and cash flows of ImageMax, Inc. and Subsidiaries for the year ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the Index to Consolidated
Financial Statements and Financial Statement Schedule is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not a
required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/S/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
March 7, 2000
F-3
IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands - except share amounts)
DECEMBER 31
-----------
2001 2000
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 84 $ 2,248
Accounts receivable, net of allowance for doubtful
accounts of $488 and $506, as of December 31, 2001
and 2000, respectively................................................ 7,621 10,080
Inventories............................................................. 1,236 1,526
Prepaid expenses and other.............................................. 585 1,238
--------- ---------
Total current assets............................................. 9,526 15,092
Property, plant and equipment, net............................................. 3,249 4,374
Intangibles, primarily goodwill, net........................................... 35,171 42,689
Other assets................................................................... 477 805
--------- ---------
Total assets..................................................... $ 48,423 $ 62,960
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term
debt.................................................................. $ 2,031 $ 6,431
Accounts payable........................................................ 2,711 2,332
Accrued expenses........................................................ 3,088 3,607
Deferred revenue........................................................ 1,382 2,513
--------- ---------
Total current liabilities........................................ 9,212 14,883
Long-term debt................................................................. 5,813 5,365
Subordinated convertible debt, net of discount of $294 and $432 at
2001 and 2000, respectively.................................................... 5,706 5,568
Other long-term liabilities.................................................... -- 51
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized, none issued............................................... -- --
Common stock, no par value, 40,000,000 shares
authorized 6,793,323 and 6,686,368 shares issued and
outstanding at December 31, 2001 and 2000,
respectively.......................................................... 53,494 53,455
Accumulated deficit..................................................... (25,802) (16,362)
--------- ---------
Total shareholders' equity....................................... 27,692 37,093
--------- ---------
Total liabilities and shareholders' equity....................... $ 48,423 $ 62,960
========= =========
See accompanying notes.
F-4
IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands - except share and per share amounts)
YEAR ENDED DECEMBER 31
---------------------------------------------
2001 2000 1999
---------- ----------- ----------
Revenues:
Services..................................................... $ 38,375 $ 47,964 $ 47,960
Products..................................................... 7,855 10,134 12,263
---------- ---------- ----------
46,230 58,098 60,223
---------- ---------- ----------
Cost of revenues:
Services..................................................... 23,460 29,481 29,615
Products..................................................... 4,775 6,318 7,864
Depreciation................................................. 1,612 1,998 1,785
---------- ---------- ----------
29,847 37,797 39,264
---------- ---------- ----------
Gross profit......................................... 16,383 20,301 20,959
Selling and administrative expenses............................... 16,176 15,737 16,378
Amortization of intangibles....................................... 2,021 1,933 1,844
Restructuring charge.............................................. 5,939 -- 827
Investment advisory fees and expenses............................. -- -- 550
---------- ---------- ----------
Operating income (loss).............................. (7,753) 2,631 1,360
Interest expense.................................................. 1,586 2,189 2,131
---------- ---------- ----------
Income (loss) before income taxes.................... (9,339) 442 (771)
Income taxes...................................................... 101 40 --
---------- ---------- ----------
Net income (loss)................................................. $ (9,440) $ 402 $ (771)
========== ========== ==========
Basic and diluted net income (loss) per share..................... $ (1.40) $ 0.06 $ (0.12)
========== ========== ==========
Shares used in computing basic
net income (loss) per share.................................. 6,724,298 6,654,468 6,578,984
========== ========== ==========
Shares used in computing diluted
net income (loss) per share.................................. 6,724,298 6,657,626 6,578,984
========== ========== ==========
See accompanying notes.
F-5
IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands - except share amounts)
COMMON STOCK ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ ------ ------- -----
BALANCE, DECEMBER 31, 1998...................................... 6,479,739 $52,645 $(15,993) $ 36,652
Issuance of Common stock for
acquisitions............................................. 76,190 85 -- 85
Sale of Common stock....................................... 77,752 107 -- 107
Net loss................................................... -- -- (771) (771)
---------- ------- -------- --------
BALANCE, DECEMBER 31, 1999...................................... 6,633,681 52,837 (16,764) 36,073
Value of warrants issued................................... -- 553 -- 553
Sale of Common stock....................................... 52,687 65 -- 65
Net income................................................. -- -- 402 402
---------- ------- -------- --------
BALANCE, DECEMBER 31, 2000...................................... 6,686,368 53,455 (16,362) 37,093
Sale of Common stock....................................... 106,955 39 -- 39
Net loss................................................... -- -- (9,440) (9,440)
---------- ------- -------- --------
BALANCE, DECEMBER 31, 2001...................................... 6,793,323 $53,494 $(25,802) $ 27,692
========== ======= ======== ========
See accompanying notes.
F-6
IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
---- ---- ----
Cash Flows from Operating Activities:
Net income (loss).............................................. $ (9,440) $ 402 $ (771)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Gain on sale of box storage assets...................... (84) -- --
Depreciation and amortization of intangibles............ 3,378 3,757 3,629
Amortization of deferred financing costs................ 255 174 --
Imputed interest on subordinated debt................... 138 121 --
Restructuring charge.................................... 5,939 -- --
Changes in operating assets and liabilities, net
of effect from acquisitions and divestiture-
Accounts receivable, net............................. 2,251 (668) 2,389
Inventories.......................................... 66 505 154
Prepaid expenses and other........................... 653 (400) (229)
Other assets......................................... 73 (64) 417
Accounts payable..................................... 377 (635) (1,505)
Accrued expenses..................................... (467) (414) (1,296)
Deferred revenue..................................... (1,131) 847 (934)
-------- -------- -------
Net cash provided by
operating activities........................... 2,008 3,625 1,854
-------- -------- -------
Cash Flows from Investing Activities:
Purchases of property and equipment............................ (773) (730) (362)
Proceeds from sale of box storage assets....................... 532 -- 563
-------- -------- -------
Net cash provided by (used in)
investing activities........................... (241) (730) 201
-------- -------- --------
Cash Flows from Financing Activities:
Principal payments on long-term debt........................... (4,270) (659) (298)
Net borrowings (repayments) under line of credit............... 300 (14,642) (1,589)
Proceeds from subordinated debt transaction.................... -- 6,000 --
Payment of deferred financing costs............................ -- (630) (192)
Proceeds from long-term borrowing.............................. -- 7,500 --
Proceeds from sales of Common and Preferred stock.............. 39 65 107
Proceeds from mortgage transaction............................. -- -- 900
-------- -------- -------
Net cash used in
financing activities........................... (3,931) (2,366) (1,072)
-------- -------- -------
Net Increase (Decrease) in Cash and Cash Equivalents.............. (2,164) 529 983
Cash and Cash Equivalents, Beginning of Year...................... 2,248 1,719 736
-------- -------- -------
Cash and Cash Equivalents, End of Year............................ $ 84 $ 2,248 $ 1,719
======== ======== =======
See accompanying notes.
F-7
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND:
ImageMax, Inc. ("ImageMax") is a single-source provider of outsourced document
management solutions to companies located throughout the United States and
concentrated primarily in the health care, financial services and engineering
industries. The Company's services include electronic (digital) and micrographic
media conversion, data entry and indexing, Internet retrieval and hosting
services, document storage (including Internet "web-enabled" document storage
and retrieval) and system integration. The Company also sells and supports
document management equipment and proprietary as well as third party open
architecture imaging and indexing software. The Company has one reportable
segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
ImageMax and its subsidiaries (the "Company"). All material intercompany
balances and transactions have been eliminated in consolidation.
Basis of presentation
The accompanying consolidated financial statements of the Company have been
prepared on a going-concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Accordingly, the consolidated financial statements do not include any
adjustments that might be necessary should the Company be unable to continue in
existence. In 2001, the Company incurred a net loss of $9.4 million and, as of
December 31, 2001, had an accumulated deficit of $25.8 million. In addition, as
more fully described in Note 6, in 2001 the Company violated its financial
covenants on the credit facility with its senior lenders under which it had
borrowed $6.9 million as of December 31, 2001, which required the Company to
enter into a new credit facility with the senior lenders and, as a result, to
also amend its subordinated note agreement. These factors create significant
uncertainty about the Company's ability to continue as a going concern. In April
2002, the Company entered into a commitment letter to amend the credit facility
with its senior lenders, which require the Company on a quarterly basis
beginning in June 2002, to meet a specified level of EBITDA and to not exceed a
maximum leverage ratio, as defined. The Company has implemented a sales and
operating plan in 2002, which includes certain cost deferral and cost reduction
measures in the event the Company does not perform as expected. The Company
believes that this 2002 plan will enable it to meet its quarterly financial
covenants throughout 2002, and therefore have the necessary financing to
continue as a going concern.
Use of estimates
The preparation of financial statements are in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue recognition
Service and product revenues are recognized when the services are rendered or
products are shipped to customers. Deferred revenue represents payments for
services that are billed in advance of performance. No single customer exceeded
5% of consolidated revenues for any period presented.
Media conversion revenues are recognized on a percentage of completion method
with progress-to-completion measured based primarily upon labor hours incurred
or units completed.
F-8
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Software revenue includes software licensing fees, consulting, implementation,
training and maintenance. Depending on contract terms and conditions, software
license fees are recognized upon delivery of the product if no significant
vendor obligations remain and collection of the resulting receivable is deemed
probable. The Company's software licensing agreements provide for customer
support (typically 90 days) as an accommodation to purchasers of its products.
The portion of the license fee associated with customer support is unbundled
from the license fee and is recognized ratably over the warranty period as
service revenue.
Consulting, implementation and training revenues are recognized as the services
are performed. Revenue related to maintenance agreements is recognized ratably
over the terms of the maintenance agreements.
Shipping and handling costs
Shipping and handling costs are included in costs of sales.
Cash and cash equivalents
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash equivalents are carried at
cost, which approximates market value. At December 31, 2001 and 2000, cash
equivalents primarily consisted of funds in money market accounts.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories primarily represent microfiche viewing and imaging equipment that
the Company offers for sale, service parts and related supplies.
Property, plant and equipment
Property, plant and equipment are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets
(see Note 3). Leasehold improvements are amortized over the lesser of their
useful life or the term of the lease. Amortization of assets recorded as capital
leases is included with depreciation expense.
Intangibles
Intangibles consist of goodwill and developed technology (see Note 4). Goodwill,
representing the excess of cost over the fair value of the net tangible and
identifiable intangible assets of acquired businesses (see Note 4), is stated at
cost and is amortized over its estimated life (principally 30 years). and
developed technology is amortized over 7 years. The Company continually
evaluates whether events or circumstances have occurred that indicate that the
remaining useful lives of the intangibles assets should be revised or that the
remaining balance of such assets may not be recoverable. When the Company
concludes it is necessary to evaluate its long-lived assets, including
intangibles, for impairment, the Company will use an estimate of the related
undiscounted cash flow as the basis to determine whether impairment has
occurred. If such a determination indicates an impairment loss has occurred, the
Company will utilize the valuation method that measures fair value based on the
best information available under the circumstances.
F-9
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Derivative financial instruments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133, as amended, establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires entities to record all derivative instruments on the
balance sheet at fair value. Changes in the fair value of derivatives are
recorded in each period in current earnings or other comprehensive income, based
on whether a derivative is designated as part of a hedge transaction and the
type of hedge transaction. The ineffective portion of all hedges is recognized
in earnings. The Company adopted SFAS 133, as amended, effective January 1,
2001. The adoption of SFAS 133 had no effect on the Company's financial position
and results of operations.
The Company entered into an interest-rate cap agreement to hedge the exposure to
increasing interest rates with respect to its variable rate debt. The premium
paid in connection with the agreement is included in interest expense ratably
over the life of the agreement. Payments received as a result of the cap
agreement are recognized as a reduction of interest expense. The unamortized
cost of the agreement is included in other assets.
Accounting for stock-based compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), encourages entities to record compensation expense
for stock-based employee compensation plans at fair value but provides the
option of measuring compensation expense using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25"). The Company accounts for stock-based
compensation in accordance with APB 25. Note 9 presents pro forma results of
operations as if SFAS 123 had been used to account for stock-based compensation
plans.
Supplemental cash flow information
Interest paid was $1,384,000, $2,123,000, and $2,074,000 for the years ended
December 31, 2001, 2000, and 1999 respectively. Income taxes paid were $181,000,
$85,000, and $98,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
Fair value of financial instruments
Cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses are reflected in the financial statements at fair value due to their
short-term nature. The carrying amount of long-term debt and capital lease
obligations approximates fair value on the balance sheet dates.
F-10
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.s
141 and 142, "Business Combinations" And "Goodwill and Other Intangibles." FASB
141 requires all business combinations initiated after July 1, 2001, to be
accounted for using the purchase method. FASB 142 concluded that purchased
goodwill would not be amortized but would be reviewed for impairment when
certain events indicate that the goodwill of a reporting unit is impaired. The
impairment test will use a fair value based approach, whereby if the implied
fair value of a reporting unit's good will is less than its carrying amount,
goodwill would be considered impaired. FASB 142 does not require that goodwill
be tested for impairment upon adoption unless an indicator of impairment exists
at that date. However, it would require that a benchmark assessment be performed
for all existing reporting units with six months of the date of adoption. The
new goodwill model applies not only to goodwill arising from acquisitions
completed after the effective date, but also to goodwill previously recorded.
As of January 1, 2002, all goodwill and indefinite-lived intangible assets must
be tested for impairment and a transition adjustment will be recognized.
Management has not yet determined the exact amount of goodwill impairment under
these new standards, but believes the non-cash cumulative effect charge to
equity will be approximately $6.0 to $8.0 million and recognized in the first
quarter of 2002. Amortization of goodwill will cease as of January 1, 2002, and,
thereafter, all goodwill and any indefinite-lived intangible assets must be
tested at least annually for impairment. The effect of the non-amoritzation
provisions on 2002 operations cannot be forecast, but if these rules had applied
to goodwill in 2001, management believes that full-year 2001 net earnings would
have increased by approximately $1.8 million ($0.27 per share).
In August 2001, Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations" ("SFAS No. 143"), was issued. This statement
significantly changes the method of accruing for costs that an entity is legally
obligated to incur associated with the retirement of fixed assets. The Company
will evaluate the impact and timing of implementing SFAS No. 143, which is
required no later than January 1, 2003.
Accounting Pronouncements Pending Adoption
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
No. 144"). Among other things, SFAS No. 144 significantly changes the criteria
that would have to be met to classify an asset as held-for-sale. This statement
supersedes Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
and the provisions of Accounting Principles Board Opinion 30 Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions that relate to reporting the effects of a disposal of a segment of
a business. The Company is currently evaluating the impact of adopting SFAS No.
144 on its consolidated financial statements. Implementation of this standard is
required no later than January 1, 2002.
3. PROPERTY, PLANT AND EQUIPMENT:
ESTIMATED DECEMBER 31
USEFUL LIVES -----------
(YEARS) 2001 2000
----- ---- ----
Building and improvements.................. 2-40 $ 1,622,000 $ 1,507,000
Machinery and equipment.................... 3-5 7,367,000 7,141,000
Furniture and office equipment............. 5 651,000 575,000
Transportation equipment................... 5 569,000 499,000
----------- -----------
10,209,000 9,722,000
Less: Accumulated depreciation and amortization (6,960,000) (5,348,000)
----------- -----------
$ 3,249,000 $ 4,374,000
=========== ===========
As of December 31, 2001 and 2000, the Company had $70,000 and $38,000 in
equipment, net of accumulated amortization, financed under capital leases,
respectively.
F-11
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INTANGIBLE ASSETS:
DECEMBER 31,
------------
2001 2000
---- ----
Goodwill.................................. $41,202,000 $46,954,000
Developed technology...................... 820,000 820,000
----------- -----------
42,022,000 47,774,000
Less: Accumulated amortization............ (6,851,000) (5,085,000)
----------- -----------
$35,171,000 $42,689,000
=========== ===========
Included in the restructuring charge on the statement of operations of
$5,939,000 in 2001, the Company wrote off $5,389,000 of goodwill related to
three production facilities shut down in the first quarter of 2002 (see Note
12).
Other than the estimated range of impact on Goodwill from adopting FAS 142 (See
Note 2), as of December 31, 2001, the Company believes that no revisions of the
remaining useful lives or write-downs of intangible assets are required;
however, the Company's continuing review of its business units may lead to
write-downs in the future.
5. ACCRUED EXPENSES:
DECEMBER 31
-----------
2001 2000
---- ----
Compensation and benefits.......... $1,144,000 $1,800,000
Insurance premium payable.......... 75,000 619,000
Professional fees.................. 149,000 162,000
Restructuring costs (Note 12)...... 475,000 --
Other.............................. 1,245,000 1,026,000
--------- ----------
$3,088,000 $3,607,000
========== ==========
F-12
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT:
Long-term debt consists of the following:
DECEMBER 31
-----------
2001 2000
---- ----
Revolving credit line........................ $ 4,169,000 $ 3,869,000
Term loan.................................... 2,730,000 7,000,000
Mortgage loan................................ 879,000 863,000
Other debt and capital lease obligations..... 66,000 64,000
----------- -----------
$ 7,844,000 11,796,000
Less- Current portion........................ (2,031,000) (6,431,000)
----------- -----------
$ 5,813,000 $ 5,365,000
=========== ===========
On June 12, 2000, the Company closed on a $14.5 million senior credit facility
(the "Credit Facility") pursuant to the Credit Agreement dated June 9, 2000 (the
"Credit Agreement") with Commerce Bank, N.A. and FirsTrust Bank (together, the
"Banks"). The Credit Facility consisted of a two-year $7.0 million revolving
credit line (the "Revolving Credit Line") and a four-year $7.5 million term loan
(the "Term Loan").
Under the Revolving Credit Line, interest was payable monthly at the prime rate
plus 1.5% (effective rate of 6.25% as of December 31, 2001). The outstanding
principal amount of the Revolving Credit Line was approximately $4.2 million as
of December 31, 2001 and was due and payable at the end of the term in June
2002. The weighted average interest rate on short-term borrowings was 8.41% in
2001. Borrowing availability was based on the level of the Company's eligible
accounts receivable, as defined in the Credit Agreement. At December 31, 2001,
$106,000 was available under the credit line.
Under the Term Loan, interest is payable monthly at the prime rate plus 2.0%
(effective rate of 6.75% as of December 31, 2001). The outstanding principal
amount of the Term Loan was $2.73 million as of December 31, 2001 and was due
and payable in quarterly payments of $500,000 commencing September 30, 2000
until March 31, 2004. In addition, on an annual basis, the Company was required
to reduce the principal amount outstanding under the Term Loan to the extent
that EBITDA (as defined in the Credit Agreement), as adjusted, exceeded certain
specified levels set forth in the Credit Agreement and upon certain asset sales
by the Company, if any.
The Credit Facility restricts the payment of dividends and was secured by
substantially all assets of the Company and required maintenance of various
financial and restrictive covenants including minimum levels of EBITDA and net
worth. The Company also issued warrants to the Banks to purchase an additional
100,000 shares of common stock of the Company (subject to downward adjustment
under certain circumstances) at $3.50 per share. The warrants are exercisable
beginning one year from the date of issuance. The warrants expire five years
from the date of issuance. The Company also paid $242,500 in bank fees to the
Banks upon closing.
On March 30, 2001, the Company entered into an amendment to the Credit Facility
(the "Amendment") which reduced the minimum levels of EBITDA required under the
restrictive covenants. In addition, the Amendment increased the level of
payments under the Term Loan by a minimum of $1,000,000 over a 12 month period.
The increase included minimum payments of $600,000 on May 30, 2001, $150,000 on
June 30, 2001, and $150,000 on September 30, 2001, all of which were made. The
balance of $100,000 was split over December 31, 2001 and March 31, 2002 and was
repaid.
The Company has been in technical default on its senior Credit Facility
(relating to EBITDA and net worth covenants) since September 30, 2001. In order
to remedy such default, on April 12, 2002, the Company and the Banks have
entered into a commitment letter to restructure the Credit Facility.
The commitment letter provides that the Company and the Banks will enter into a
new $7.48 million senior credit facility (the "New Credit Facility") with the
senior lenders consisting of a $5.25 million revolving credit line (the "New
Revolving Credit Line") and a $2.23 million term loan (the "New Term Loan").
Under the New Revolving Credit Line, interest will be payable monthly at prime
plus 2.0% with principal due and payable June 30, 2003. Borrowing availability
under the New Revolving Credit Line is based on the level of the Company's
eligible accounts receivable (as defined).
Under the New Term Loan, interest will be payable monthly at prime plus 2.0%
with principal due and payable in three consecutive quarterly installments of
$500,000 commencing June 30, 2002 with two additional quarterly installments of
$365,000 due on March 31, 2003 and June 30, 2003.
The New Credit Facility restricts the payment of dividends, is secured by
substantially all of the assets of the Company and requires maintenance of
various financial and restrictive covenants including a minimum level of
quarterly EBITDA of $750,000 (commencing with the second quarter of 2002), total
liabilities cannot exceed fifty percent (50%) of net worth (as defined) and no
interest payment on the subordinated convertible notes issued to the Investors
(as defined below) until February 15, 2004. The Company will also pay $60,000 in
bank fees upon closing the New Credit Facility, and an additional $58,000 will
be due 90 days after closing.
F-13
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the Revised Credit Facility, the Company entered into an
interest rate cap agreement maturing on June 9, 2002, with a total notional
amount of $6,000,000. The Company paid the counterparty a premium of $29,000 on
June 9, 2000, and will receive monthly an amount equal to the product of the
amount by which the Prime Rate 4.75% at December 31, 2001) exceeds the Cap Rate
(11.5%) multiplied by the notional amount. During 2001 and 2000, the Prime Rate
has not exceeded the Cap Rate. Accordingly, the Company has not received any
payments under this agreement during 2001 and 2000.
In April 1999, the Company executed a $900,000 mortgage loan with a lender
relating to a Company-owned property that houses a business unit operation. The
Company received $869,000 in proceeds, net of closing costs, from the
transaction. In July 1999, the $869,000 was applied to the balance of the Credit
Facility. Interest on the mortgage is at the greater of 8.50% or the U.S.
Treasury rate plus 375 basis points 9.00% at December 31, 2001). The loan
carries a ten-year term (maturing May 2009), is secured by the mortgaged
property, and requires equal monthly repayments of principal and interest of
$10,000.
The future scheduled principal payments on the Company's long-term debt and
subordinated convertible debt (see Note 7) in accordance with the Banks
commitment is as follows:
2002................................................. $ 2,031,000
2003................................................. 4,932,000
2004................................................. 6,026,000
2005................................................. 27,000
2006................................................. 16,000
Thereafter........................................... 812,000
-----------
$13,844,000
===========
F-14
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SUBORDINATED CONVERTIBLE DEBT:
On February 15, 2000, the Company completed a $6 million financing transaction
involving the sale of convertible subordinated notes (the "Notes") and warrants
(the "Investor Warrants") to TDH III, L.P. ("TDH"), Dime Capital Partners, Inc.
and Robert E. Drury (collectively, the "Investors"). The proceeds of this
financing were used to repay $5 million under the previous credit facility, and
provide working capital for the Company. Additionally, J.B. Doherty, the
managing general partner of TDH, and Mr. Drury, joined the Company's Board of
Directors.
The Notes were due and payable upon the fourth anniversary of the date of
issuance and accrue interest at nine percent (9%) payable semi-annually. The
Company cannot voluntarily prepay the Notes. The Notes were initially
convertible into the Company's Common stock, no par value, at $3.50 per share,
which price may have been adjusted downward if, under certain circumstances, the
holders thereof convert the Notes prior to February 15, 2003. The Company also
issued the Investor Warrants to the Investors to purchase an additional
1,800,000 shares of Common stock of the Company (subject to downward adjustment
under certain circumstances), no par value, at $3.50 per share. The Investor
Warrants are exercisable beginning the later of (i) one year from the date of
issuance or (ii) the conversion of the Notes into Common Stock. The Investor
Warrants expire on February 15, 2005. The estimated fair value of the Investor
Warrants of $553,000 has been recorded as an increase to shareholders' equity
and a related reduction in the carrying amount of the Notes. The Company is
amortizing the $553,000 discount over the four-year term of the Notes.
In order for the Company to enter into the commitment letter with its senior
lenders to restructure the Credit Facility, the Investors had to commit to
forego payments of interest until February 15, 2004 on the Notes. As
consideration for such forbearance of interest, on April 13, 2002, the Company
and the Investors entered into a commitment letter to amend the $6 million
subordinated debt agreement. Under the terms of the commitment letter, the
Investors will receive new convertible subordinated notes (the "New Notes") that
will replace the existing Notes purchased by the Investors on February 15, 2000
and outstanding interest of $0.27 million will be capitalized. The New Notes and
accrued interest will be due and payable on February 14, 2004. Interest will
accrue at nine percent (9%) per annum, compounded semi-annually. $1.9 million of
the principal amount of the New Notes will be voluntarily convertible into the
Company's Common Stock, no par value, at a reduced price of $0.40 per share, for
approximately 4.8 million shares of Common Stock.
In the event that the Investors convert the New Notes or the Company pays all of
the outstanding balance on February 15, 2004, the commitment letter provides
that the Investor Warrants will be cancelled. If, however, the Company pays
substantially all (a minimum of seventy-five percent (75%)) of the New Notes on
February 15, 2004, the commitment letter provides that the Investor Warrants
will be cancelled and additional warrants (the "Additional Warrants") will be
issued for the purchase of 8.2 million shares, no par value, at a price equal to
the lesser of (i) $0.25 or (ii) 80% of the then current market price of the
Common Stock, which Additional Warrants will be exercisable until February 15,
2006. In the event that the Company elects to pay seventy-five percent (75%) of
the outstanding balance on February 15, 2004, the commitment letter provides
that the remainder of the outstanding balance will be due on February 15, 2005,
and the Additional Warrants cannot be voted or exercised during such year
extension; provided, however, that if the Company does not pay the remaining
outstanding balance by February 15, 2005, the Additional Warrants would become
exercisable and the voting rights are effective. In the event that the Company
receives an extension to pay the remainder of the balance until February 15,
2005, the Investors elect to convert the New Notes, and the Company pays the
remainder due on February 15, 2005, the commitment letter provides that the
Additional Warrants will be cancelled; provided, however, that if the Investors
do not convert, the Additional Warrants will be reduced so that the Investors
can purchase up to an aggregate of 2.1 shares of Common Stock, no par value,
which will be exercisable until February 15, 2006. If the Company cannot meet
the minimum payment threshold on February 15, 2004, the Investor Warrants will
be cancelled, the Additional Warrants will be exercisable and the shares of
Common Stock exercisable thereunder shall be voted by the Investors.
F-15
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES:
No current income tax provision was recognized in 2001 due to the Company's loss
position. A deferred tax expense was recognized in 2001 for the additional
valuation allowance recorded to offset the net Deferred Tax Asset of $101,000.
At December 31, 2001, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $15.9 million expiring in 2016
through 2021. The net operating loss carryforward differs from the accumulated
deficit principally due to differences in the recognition of certain expenses
for financial and income tax reporting purposes, as well as, the
nondeductibility of the special compensation and acquired research and
development charges, loss on the sale of business units and goodwill
amortization. The timing and manner in which the company will utilize the net
operating loss carryforwards in any year, or in total, may be limited by the
provision of the internal revenue service code. Such limitation may have an
impact on the ultimate realization and timing of these net operating loss
carryforwards.
The components of income taxes are as follows:
YEAR ENDED
DECEMBER 31
-----------
2001 2000 1999
---- ---- ----
Current:
Federal.................................................... -- $ 7,800 $ --
State...................................................... -- 32,200 --
-------- -------- ---------
-- 40,000 --
-------- -------- ---------
Deferred:
Federal.................................................... 78,241 -- 27,000
State...................................................... 22,759 -- 5,000
-------- -------- ---------
101,000 -- 32,000
-------- -------- ---------
Change in valuation allowance.............................. -- -- (32,000)
-------- -------- ---------
$101,000 $ 40,000 $ --
======== ======== =========
The reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
F-16
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED
DECEMBER 31
-----------
2001 2000 1999
---- ---- ----
Income tax rate............................................ 34.0% 34.0% (34.0)%
State income taxes, net of federal tax benefit............. (0.2) 4.8 (5.6)
Nondeductible loss on sale of business units............... -- -- --
Other nondeductible items.................................. 0.3 5.9 6.4
Nondeductible goodwill amortization........................ (1.1) 56.0 37.5
Change in valuation reserve................................ (33.8) (91.7) (4.3)
Other (0.3) -- --
----- ------- ---------
(1.1)% 9.0% --%
===== ======= =========
The tax effect of temporary differences that give rise to deferred taxes are as
follows:
DECEMBER 31
-----------
2001 2000
---- ----
Gross deferred tax assets:
Accruals and reserves not currently deductible......... 421,000 $ 376,000
Net operating loss carryforwards....................... 5,347,000 2,222,000
Other.................................................. 224,000 255,000
Valuation allowance.................................... (5,004,000) (1,867,000)
----------- -----------
$ 988,000 $ 986,000
=========== ===========
Gross deferred tax liabilities:
Depreciation........................................... $ 79,000 $ 38,000
Goodwill amortization.................................. 909,000 847,000
----------- -----------
$ 988,000 $ 885,000
=========== ===========
At December 31, 2001, a valuation allowance was established for the Company's
tax benefit based upon the uncertainty of the realizability of the associated
deferred tax asset given the Company's losses to date under the guidelines set
forth in Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. The increase (decrease) in the valuation allowance was $3,137,000
in 2001, $(573,000) in 2000, and $33,000 in 1999.
F-17
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. BENEFIT PLANS:
Stock option plan
The Company's 1997 Incentive Plan, as amended (the "Incentive Plan") provides
for the award of up to 1,600,000 shares of its Common stock to its employees,
directors and other individuals who perform services for the Company. The
Incentive Plan provides for granting of various stock based awards, including
incentive and non-qualified stock options, restricted stock and performance
shares and units. Options granted under the Incentive Plan are granted at fair
market value at the date of grant, generally vest in equal installments over
three years, and expire five to ten years after the date of grant.
OPTIONS OUTSTANDING
-------------------
AVAILABLE PRICE AGGREGATE
FOR GRANT SHARES PER SHARE PRICE
--------- ------ --------- -----
Balance, December 31, 1998........... 121,000 479,000 2.19 - 12.00 2,859,375
Authorized......................... 1,000,000 -- -- --
Granted............................ (58,000) 58,000 1.75 101,500
Cancelled.......................... 72,000 (72,000) 2.19 - 12.00 (473,375)
--------- --------- ----------
Balance, December 31, 1999........... 1,135,000 465,000 1.75 - 12.00 2,487,500
Granted............................ (948,500) 948,500 .81 - 1.72 1,537,280
Cancelled.......................... 341,500 (341,500) 1.50 - 2.38 (623,813)
--------- --------- ----------
Balance, December 31, 2000........... 528,000 1,072,000 $ .81 - 12.00 $3,400,967
Authorized......................... -- -- -- --
Granted............................ (472,500) 472,500 .20 - .69 209,588
Cancelled--...................... 161,500 (161,500) .45 - 1.69 (240,188)
--------- --------- -------------- ----------
Balance, December 31, 2001 217,000 1,383,000 $ .20 -$12.00 $3,370,368
========= ========= ============== ==========
Set forth below are the outstanding options at December 31, 2001, summarized by
range of exercise price:
F-18
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES 12/31/01 REMAINING LIFE EXERCISE PRICE 12/31/01 EXERCISE PRICE
--------------- -------- -------------- -------------- -------- --------------
$0.20 to $0.63 464,500 4.4 $ 0.44 -- --
$0.81 to $1.75 601,500 3.7 $ 1.63 219,833 $ 1.64
$2.19 to $2.38 167,000 6.8 $ 2.31 167,000 $ 2.31
$12.00 150,000 1.1 $12.00 150,000 $12.00
For purposes of the SFAS No. 123 disclosure requirements, the fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option pricing model using the following assumptions: weighted average risk free
interest rate of 5.0%, 6.5%, and 6.2 in 2001, 2000, and 1999, respectively, an
expected life of 5 years, expected dividend yield of zero, and an expected
volatility of 57% in 2001 and 40% in 2000 and 1999.
The weighted average fair value of options granted during 2001, 2000 and 1999 is
estimated at $0.26, $0.72, and $0.90 per share under option, respectively. The
following pro forma results would have been reported had compensation cost been
recorded for the fair value of the options granted:
YEAR ENDED DECEMBER 31
----------------------
2001 2000 1999
---- ---- ----
Net income (loss), as reported.................................... $(9,440,000) $402,000 $ (771,000)
Pro forma net income (loss)....................................... (9,635,000) $131,000 $(1,108,000)
Basic and diluted income (loss) per share, as reported............ (1.40) $ 0.06 $ (0.12)
Pro forma basic and diluted income (loss) per share............... (1.43) $ 0.02 $ (0.17)
Employee stock purchase plan
The Company provides for an Employee Stock Purchase Plan (the "Purchase Plan")
that allows all full-time employees of the Company, other than 5% shareholders,
temporary employees, and employees having less than six months of service with
the Company, to purchase shares of the Company's Common stock at a discount from
the prevailing market price at the time of purchase. The purchase price of such
shares is equal to 90% of the lower of the fair value of the share on the first
and last days of the quarterly period. Such shares are issued by the Company
from its authorized and unissued Common stock. A maximum of 250,000 shares of
the Company's Common stock will be available for purchase under the plan. The
Purchase Plan will be administered by the Board of Directors, which may delegate
responsibility to a committee of the Board. The Board of Directors may amend or
terminate the Purchase Plan at their discretion. The Purchase Plan is intended
to comply with the requirements of Section 423 of the Internal Revenue Code.
F-19
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the year ended December 31, 2001, and 2000, employees purchased 106,955 and
52,687 shares under the Purchase Plan of which 77,662 and 39,489 shares were
issued in 2001 and 2000, respectively.
Effective December 31, 2001, the Purchase Plan has been suspended indefinitely
because the maximum amount of shares available under the Purchase Plan have been
purchased by employees of the Company.
The Company also maintains a defined contribution 401(k) plan, which permits
participation by substantially all employees. In connection with the plan, the
Company's matching contribution charged to expense was approximately $98,000 in
2001, $115,000 in 2000, and $118,000 in 1999.
10. COMMITMENTS AND CONTINGENCIES:
Operating leases
The Company leases operating facilities, office equipment and vehicles under
non-cancelable leases. Rent expense under operating leases for the years ended
December 31, 2001, 2000 and 1999 was $1,840,000, $1,455,000, and $1,558,000
respectively. Future minimum lease payments under noncancelable operating leases
as of December 31, 2001 are as follows:
2002........................................ 1,190,000
2003........................................ 795,000
2004........................................ 638,000
2005........................................ 396,000
2006........................................ 258,000
2007 and thereafter......................... 455,000
-----------
$3,732,000
===========
The Company leases operating facilities at prices, which, in the opinion of
management, approximate market rates from entities that are owned by certain
shareholders and employees of the Company. Rent expense on these leases was
$316,000, $314,000, and $536,000 for the years ended December 31, 2001, 2000 and
1999, respectively.
F-20
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employment agreements
The Company has entered into employment agreements with each of its officers and
several key members of management that provide for minimum annual compensation.
Future minimum compensation commitments under these agreements as of December
31, 2001 are as follows:
2002........................................ $ 580,000
2003........................................ 288,000
2004........................................ 175,000
2005........................................ ---
2006........................................ ---
-----------
$1,043,000
Separation agreements ===========
During 2001, the Company and two of its former executive officers and other
employees entered into separation agreements upon termination of their
employment with the Company. The separation agreements provided $300,000 of
compensation and benefits, which has been charged to the statement of operations
for the year ended December 31, 2001.
Other matters
The Company is party to various claims arising in the ordinary course of
business. Although the ultimate outcome of these matters is presently not
determinable, management, after consultation with legal counsel, does not
believe that the resolution of these matters will have a material adverse effect
on the Company's consolidated financial position or results of operations.
The Company occasionally enters into agreements with its suppliers in the normal
course of business that require the Company to purchase minimum amounts of
inventory in future years in order to obtain favorable pricing. These
commitments at December 31, 2001 are not considered material.
F-21
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. RESTRUCTURING CHARGES:
For the year ended December 31, 2001, the Company recorded a restructuring
charge of $5,939,000 related to the closing of production facilities in Dayton,
OH, Lincoln, NE, and Portland, OR in the fourth quarter. The charge incurred
consisted of non-cash goodwill write-offs of $5,389,000, severance costs of
$167,000 and facility costs of $383,000 and is expected to yield $0.7 million of
annual cash flow through reduction of personnel and facilities costs. Total non-
recurring non-cash charges in the 2001 restructuring charge amounted to
$5,465,000. These actions are consistent with the Company's strategy to improve
ongoing operating results, optimize its operating capacity and fund entry into
the Los Angeles market in 2002.
As of December 31, 2001, accrued restructuring charges (classified as accrued
expenses) amounted to $475,000, of which $167,000 related to severance payments
with the remaining amount attributable to facility costs. During the year ended
December 31, 2000, the Company paid $263,000 of accrued restructuring charges,
of which $196,000 related to severance payments with the remaining $67,000
attributable to lease termination costs.
For the year ended December 31, 1999, the Company recorded a restructuring
charge of $827,000 related to the closing of the Indianapolis business unit
(comprising $557,000, including a write off of $300,000 in related goodwill) and
executive severance payments.
12. GAIN ON SALE OF BOX STORAGE ASSETS:
For the year ended December 31, 2001, the Company recorded a gain on sale of box
storage assets of $84,000 related to the sale in October 2001 of its assets in
Emeryville, CA. The gain represents the difference between the net proceeds from
the transaction and the net asset values, including $366,000 of goodwill. For
the year ended December 31, 2001, these assets accounted for $250,000 and
$(50,000) of the Company's consolidated revenues and operating loss,
respectively.
F-22
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Quarter ended,
March 31, 2001 June 30, 2001September 30, 2001December 31, 2001
-------------- ------------------------------------------------
Revenues............................................. $12,275,000 $ 13,304,000 $10,613,000 $ 10,038,000
Gross profit......................................... 4,392,000 4,834,000 3,808,000 3,349,000
Net income (loss) (1)................................ (371,000) (199,000) (580,000) (8,290,000)
Net income (loss) per share (basic and diluted) $ (0.06) $ (0.03) $ (0.09) (1.22)
Quarter ended,
March 31, 2000 June 30, 2000September 30, 2000December 31, 2000
-------------- -------------------------------------------------
Revenues............................................. $14,693,000 $ 16,003,000 $13,974,000 $ 13,428,000
Gross profit......................................... 5,465,000 5,774,000 4,738,000 4,324,000
Net income (loss).................................. 414,000 472,000 (138,000) (346,000)
Net income (loss) per share (basic and diluted)...... $ 0.06 $ 0.07 $ (0.02) $ (0.05)
(1) The Company's net income in the quarter ended December 31, 2001 includes a
restructuring charge of $5,939,000 and an operating charge of $1,107,000.
4. CONCENTRATION OF CREDIT RISK:
The Company has a broad base of clients and no single client accounted for more
than 5% of consolidated revenues for the years ended December 31, 2001, 2000 or
1999. The Company's customers are not concentrated in any specific geographic
area, but are concentrated primarily in the health care, financial services,
engineering, and legal services industries, as well as certain other vertical
markets.
F-23
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE,
BEGINNING OF CHARGED TO BALANCE,
DESCRIPTION YEAR EXPENSE DEDUCTIONS (1) END OF YEAR
----------- ---- ------- -------------- -----------
Allowance for doubtful accounts:
2001............................ $506,000 $307,000 $(325,000) $488,000
2000............................ $392,000 $349,000 $(235,000) $506,000
1999............................ $600,000 $ 92,000 $(300,000) $392,000
BALANCE,
BEGINNING OF CHARGED TO BALANCE,
DESCRIPTION YEAR EXPENSE DEDUCTIONS (2) END OF YEAR
----------- ---- ------- -------------- -----------
Restructuring accruals:
2001............................ $ 0 $ 475,000 $ 0 $ 475,000
2000............................ $ 263,000 $ 0 $ (263,000) $ 0
1999............................ $ 1,145,000 $ 827,000 $ (1,709,000) $ 263,000
(1) Uncollectible accounts written off, net of recoveries.
(2) Represents amount paid.
F-24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IMAGEMAX, INC.
Dated April 15, 2002 By: /s/ DAVID B. WALLS
----------------------
Chief Financial Officer, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ DAVID C. CARNEY Chairman of the Board of Directors April 15, 2002
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David C. Carney
/s/ MARK P. GLASSMAN Chief Executive Officer and Director April 15, 2002
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Mark P. Glassman
/s/ J.B. DOHERTY Director April 15, 2002
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J.B. Doherty
/s/ ROBERT E. DRURY Director April 15, 2002
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Robert E. Drury
/s/ REX LAMB Director April 15, 2002
- ------------
Rex Lamb
/s/ H. CRAIG LEWIS Director April 15, 2002
- ------------------
H. Craig Lewis