Back to GetFilings.com
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, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED], FOR THE TRANSITION PERIOD FROM
_________ TO _________
COMMISSION FILE NUMBER 0-23077
IMAGEMAX, INC.
--------------
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA 23-2865585
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 PENNSYLVANIA AVENUE, SUITE 128, FORT WASHINGTON, PENNSYLVANIA 19034
----------------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 628-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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 _____.
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $3,458,962 as of March 26, 2001. On March 26, 2000 the Registrant
had outstanding 6,686,368 shares of Common Stock, no par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement (the "Definitive Proxy
Statement") to be filed with the Securities and Exchange Commission relative to
the Company's 2001 Annual Meeting of Shareholders are incorporated by reference
into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
ITEM PAGE
- ----------------- ----
PART I....................................................................... 1
Item 1. Business.................................................. 1
Item 2. Properties................................................ 10
Item 3. Legal Proceedings......................................... 11
Item 4. Submission of Matters to a Vote of Security Holders....... 11
Item 4(a). Executive Officers of the Registrant...................... 12
PART II...................................................................... 13
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters....................................... 13
Item 6. Selected Consolidated Financial Data...................... 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 15
Item 7(a). Quantitative and Qualitative Disclosures about Market Risk 20
Item 8. Financial Statements and Supplementary Data............... 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 20
PART III..................................................................... 21
Item 10. Directors and Executive Officers of Registrant............ 21
Item 11. Executive Compensation.................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 21
Item 13. Certain Relationships and Related Transactions............ 21
PART IV...................................................................... 22
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................... 22
i
PART I
ITEM 1. BUSINESS
ImageMax, Inc. was founded in November 1996 to become a leading national,
single-source provider of integrated document management solutions. On December
4, 1997, ImageMax completed its initial public offering (the "Offering") of
3,100,000 shares of Common Stock, no par value per share (the "Common Stock"),
which generated net proceeds to ImageMax of approximately $30.5 million.
Concurrently with the Offering, the Company began material operations with the
acquisition of 14 document management service companies (the "Founding
Companies"). During the first eight months of 1998, the Company acquired an
additional 13 document management service companies (the "Acquired Businesses").
In December 1998 and January 1999, the Company sold facilities in Charlotte, NC,
Cayce, SC, and Cleveland, TN (the "Southeast Group"). In May 1999, the Company
closed its production facility in Indianapolis, IN.
As of March 26, 2001, the Company operated from 30 facilities covering 14
states, employed approximately 900 people and provided services and products to
several thousand clients from 17 business units that provide full-scale
operational capabilities. 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 digital imaging and indexing software.
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. However, advances in
digital and Internet based services and other technologies continue to provide
organizations with increasingly attractive document management options. As a
result, 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. Accordingly, the Company has targeted a broad variety 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
by the Association for Information and Image Management International ("AIIM")
entitled "State of the Document Technologies Industry: 1997-2003," the U.S.
market for document management services and products exceeded $17.5 billion in
1999 and this market grew at an average annual rate of more than 20% in 1998 and
1999. The AIIM data projects a compound annual growth rate of 26% for the five
years from 1998 to 2003 resulting in a market of $41.6 billion in 2003. Expected
near-term growth rates after 2003 are approximately 16%. The Company believes
that there is a large unvended 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 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 service 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; and (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.
1
The Company believes it is one of the larger document service providers 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, do not have the volume buying power needed to negotiate
favorable supply contracts, and are unable to meet the needs of large,
geographically dispersed customers. 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 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, and (ii) demand for value-added digital conversion services,
whereby imaging is becoming part of the business process rather than paper
replacement. In addition, the Company believes consulting organizations 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; and (iii) the continued support
of product-based offerings, such as software and equipment. The formation of
strategic partnerships with, for example, integrators, technology firms, and
software providers, is an element of the Company's strategy to leverage its
capabilities and provide superior service to customers.
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, the alignment of business units
into four regions (East, Midwest, South, and West) along geographic/vertical
market lines, and the establishment of a formal organization structure that
facilitates a one-company 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.
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 - Marketing and Sales Development, and include web
and intranet initiatives, collateral and sales aids, trade shows and seminars,
and a telemarketing campaign. The Company has also developed a national sales
compensation plan that will be fully implemented in 2001 in order to motivate,
attract, and retain sales talent.
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:
2
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
- ---------------
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 in a data warehouse for subsequent retrieval and
distribution. The Company believes that digital imaging is becoming the
preferred format of storage for many organizations due to benefits such as high-
speed retrieval, and the ability to support and distribute digital images
directly to the desktop of multiple workers in multiple locations at any time.
Micrographics. The Company performs micrographic services, including the
- -------------
conversion of paper documents into microfilm images, the indexing of film for
computer-aided retrieval systems and computer output to microfilm ("COM").
Micrographic media are selected as an alternative to paper or digital media for
one or more of the following reasons: (i) film archives are more accessible,
longer-lived and less expensive to store than paper; (ii) film is eye-readable
and not subject to technological obsolescence; (iii) converting paper to film is
currently more cost-effective than scanning paper for most documents where ease
of accessibility is not needed; and (iv) there is a large base of organizations
with existing film archives and reader-printer equipment.
Data Entry and Indexing. The creation of index files for the rapid retrieval of
- -----------------------
images is a critical part of most value-added document management solutions. The
Company provides specialized indexing services to a variety of clients for both
film and digital-format documents. These labor-intensive services are often
contracted for outside the U.S. as a means to utilize qualified personnel at
generally lower cost than is available domestically.
STORAGE AND RETRIEVAL SERVICES
Film and Paper Storage and Retrieval. The Company manages the archiving of
- ------------------------------------
client documents, including processing (i.e., indexing and formatting), storage,
retrieval, delivery and return to storage of documents within a rapid time
frame. Typical archival documents include medical and legal case files,
business records and financial transaction documents. Service fees generally
include billing for storage space, plus activity charges for retrieval, delivery
and return to storage, and ultimately for document destruction. The Company
currently maintains storage facilities in three locations: (i) Chesterton, IN,
(ii) Emeryville, CA, and (iii) Monroe, LA.
Products
The Company develops proprietary, open-architecture software products which
support electronic imaging and indexing services. In addition, the Company sells
and supports third-party software and offers a wide range of digital imaging,
scanning and viewing hardware, micrographic reader-printers, micrographic film
and supplies and other equipment.
SOFTWARE
The Company 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, was initially developed for use
by document management companies in their digital conversion operations. Other
Company products, such as FileTrax, 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.
3
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, Canon, 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 business units provide extensive field maintenance and repair
services for the equipment they sell. Various business units 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 equipment and 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 had a broad base of several thousand clients in the last year. No
single client accounted for more than 5% of pro forma combined revenues for
either the years ended December 31, 2000, 1999 or 1998. The Company's customers
are not concentrated in any specific geographic area, but are concentrated
primarily in the health care, financial services, and engineering 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.
Other Vertical Markets: litigation support, retail and transportation markets,
and government entities.
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 at the business unit level by the Company's 50-
person sales force. The Company believes that a strategy of pursuing unvended
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.
4
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 2000, the Company
launched 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 will facilitate 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 expects to use 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 competitive. A significant source
of competition is 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 larger competitors
include Affiliated Computer Services, Inc., Anacomp Inc., F.Y.I. Incorporated,
IKON Office Solutions, Iron Mountain Incorporated, Lason, Inc., and Vestcom
International, Inc. Certain of 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, certain of 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
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
5
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, 2000, the Company had approximately 900 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 yet know of or that the Company currently thinks are immaterial may also
impair the Company's business 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 HAD A HISTORY OF OPERATING LOSSES
Although the Company has shown a profit in the amount of $402,000 for the year
ended December 31, 2000, the Company has had a history of significant operating
losses since inception and has an accumulated deficit of $16.4 million as of
December 31, 2000. Although the Company achieved a profit in the past year,
given the Company's history of past losses we cannot be certain that the Company
will be able to sustain such profitability should adverse events occur.
THE COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ NATIONAL MARKET
The Common Stock currently trades on the OTC Bulletin Board. In 1999, the
Common Stock was delisted from the Nasdaq National Market because of the
Company's inability to remain in compliance with certain financial and per share
market price requirements. The Common Stock does not now, and may never, meet
the requirements for re-listing on the Nasdaq National Market. The inability to
list the Common Stock on the Nasdaq National Market substantially reduces the
liquidity of, and market for, the Common Stock.
The market price for the Common Stock has been highly volatile. This volatility
may adversely affect the price of the Common Stock in the future. Prices for
the Common Stock will be determined by the marketplace and may be influenced by
many factors, including:
o the depth and liquidity of the trading market;
o investor perception of the Company;
o the general economic and market conditions and trends;
o the Company's financial results;
o quarterly variations in the Company's financial results;
6
o changes in earnings estimates by analysts and reported earnings that
vary from such estimates;
o press releases by the Company or others; and
o developments affecting the Company or its industry.
The stock market has, on occasion, experienced extreme price and volume
fluctuations which have often been unrelated to the operating performance of the
affected companies.
SIGNIFICANT AMOUNTS OF ACQUIRED GOODWILL REDUCE THE COMPANY'S NET INCOME
As of December 31, 2000, $42.7 million, or 67.8%, of the Company's total assets
represented intangible assets arising from its acquisitions, of which $42.2
million was goodwill and $0.5 million was acquired developed technology. The
Company amortizes goodwill principally over a period of 30 years and acquired
developed technology over a period of seven years. Goodwill is an intangible
asset that represents the difference between the total purchase price of these
acquisitions and the amount of this purchase price allocated to the fair value
of the net assets acquired. The amortization in a particular period represents a
non-cash expense that reduces the Company's net income in that period. In
addition, as was the case when the Company sold three locations in December 1998
and January 1999, 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.
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 competitive environment. The document management
services industry is highly fragmented and has relatively low barriers to entry.
A significant source of competition results from the in-house document handling
capability of businesses within the Company's target markets, referred to as the
"unvended" part of the market. 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. 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. 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 business units and the quality and
effectiveness of its sales force and software developers. If any of the
executive management team or senior management of the business units is unable
or unwilling to continue in their present roles, or
7
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 plans for growth also 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 and engineering industries. Fundamental
changes in the business practices of any of these markets, whether due to
regulatory, technological or other developments, could cause a material
reduction in demand by these clients for the services offered by the Company.
Any such reduction in demand may have a material adverse effect on the Company's
business, financial condition and results of operations.
THE COMPANY'S QUARTERLY RESULTS OF OPERATIONS MAY FLUCTUATE
The Company's results of operations may fluctuate in any given year, and from
quarter to quarter. Factors that may cause material fluctuations in quarterly
results of operations include:
o the gain or loss of significant clients;
o increases or reductions in the scope of services performed for
significant clients;
o the timing or completion of significant projects;
o the relative mix of higher and lower margin projects;
o changes in pricing strategies, capital expenditures and other costs
relating to the expansion of operations;
o the hiring or loss of personnel;
o other factors that may be outside of the Company's control;
o the timing and structure of acquisitions or dispositions; and
o the timing and magnitude of costs related to acquisitions or
dispositions.
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 result in liability
to the Company 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.
8
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 its business coming
from contracts with local, state and federal government agencies. Business with
governmental agencies may be easily terminated or lost because public sector
contracts generally:
o are subject to detailed regulatory requirements;
o are subject to public policies and funding priorities;
o may be conditioned upon the continuing availability of public funds,
o are subject to certain pricing constraints; and
o 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 these factors
or others unique to contracts with governmental entities may have a material
adverse effect on the Company's future business, financial condition and results
of operations.
SECURITY PROBLEMS WITH THE INTERNET MAY INHIBIT THE 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. Somebody 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.
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.
9
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.
FAILURE TO MEET THE COMPANY'S OBLIGATIONS TO ITS DEBT HOLDERS COULD ADVERSELY
AFFECT THE COMPANY'S OPERATIONS
The Company refinanced its senior bank debt during 2000 pursuant to a default
under its previous credit agreement by entering into agreements with
subordinated debt investors and a new bank group. Default under these
agreements, such as the failure to make required principal and interest payments
could result in the investors or bank group immediately demanding repayment of
all outstanding amounts, which could have a material adverse effect on the
Company's business, financial condition, and results of operations.
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 February 2002.
As of December 31, 2000, the Company conducted operations through one mortgaged
property and 28 other leased facilities in 14 states containing, in the
aggregate, approximately 403,300 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
Emeryville, CA 24,000 Warehouse
Sacramento, CA* 6,000 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
10
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
Eugene, OR 11,400 Document management operations, offices
Eugene, OR 1,500 Warehouse
Eugene, OR 2,300 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
* The Company has entered into a lease to occupy 12,000 square feet of space in
2001 which will be used for document management operations
** Mortgaged property
In April 1999, the Company executed a $900,000 mortgage loan with a lender
relating to the Chesterton facility which is mortgaged by the Company. The
Company received $869,000 in proceeds, net of closing costs, from the
transaction. Interest on the loan is at the greater of 8.50% or the U.S.
Treasury rate plus 375 basis points (9.05 % at March 23, 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. At March 26, 2001 the Company owed $863,000 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 June 7, 2000. Rex Lamb,
Steven N. Kaplan and Blair Hayes, 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
- ---------------------------------- ----------------------------------- -----------------------------------
Rex Lamb 4,968,333 269,797
Steven N. Kaplan 4,565,546 672,584
Blair Hayes 4,968,333 269,797
11
ITEM 4(A). EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers and their respective ages and positions are as
follows:
NAME AGE POSITION
- ------------------- --- ---------------------------------------------------------------------
David C. Carney.... 63 Acting Chief Executive Officer and Chairman of the Board of Directors
Mark P. Glassman... 37 President, Chief Operating Officer and Treasurer
Mitchell J. Taube.. 44 Executive Vice-President - Marketing & Sales Development and Director
DAVID C. CARNEY has served as Acting Chief Executive Officer since June, 2000,
as a director of the Company since December 1997 and as Chairman of the board of
directors since May 1999. 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), 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 was promoted to President and Chief Operating Officer of the
Company in March 2001. Mr. Glassman joined the Company in February 1998 as
Corporate Controller, was promoted to Chief Accounting Officer in October 1998,
and Chief Financial Officer in May 1999. 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 and is a certified public accountant.
MITCHELL J. TAUBE has managed the Company's New York (Westchester County)
business unit since December 1997 and has served as a director of the Company
since June 1998. In March 2000, Mr. Taube was appointed to the position of
Executive Vice-President - Marketing & Sales Development (effective April 1,
2000), whereby he is leading efforts around development of Web and Intranet
initiatives, collateral and sales aids, telemarketing and direct mail, national
sales compensation, and training and sales development. Mr. Taube has an
undergraduate degree and an MBA from Hofstra University.
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 same
symbol. 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
-------- -------
1999 First Quarter........................... $2 3/16 $1/2
1999 Second Quarter.......................... $1 27/32 $1 1/8
1999 Third Quarter........................... $2 1/2 $1 3/4
1999 Fourth Quarter.......................... $2 3/8 $1 3/8
2000 First Quarter........................... $2 1/16 $1 1/4
2000 Second Quarter.......................... $1 13/16 $1 3/8
2000 Third Quarter........................... $2 3/4 $1 3/16
2000 Fourth Quarter.......................... $1 5/8 $5/8
2001 First Quarter (through March 26, 2001).. $13/16 $9/16
On March 26, 2001, the closing bid price for a share of Common Stock as reported
by the OTC Bulletin Board was $19/32 and the number of record holders including
the number of individual participants in security position listings of the
Common Stock was approximately 1,100. The over-the-counter market quotations
reflect inter-dealer prices, without retail markup, markdown or commission and
may not necessarily represent actual transactions.
On February 15, 2000, the Company completed a $6 million financing transaction
involving the sale of the Notes with the Investor Warrants to TDH III L.P., Dime
Capital Partners, Inc. and Robert E. Drury. The Notes are due and payable upon
the fourth anniversary of the date of issuance and bear an interest rate of nine
percent (9%) payable semi-annually. The Company cannot voluntarily prepay the
Notes. The Notes are convertible into the Company's Common Stock, no par value,
at a price of $3.50 per share, which price may be adjusted downward if, under
certain circumstances, the holders thereof convert the Notes prior to the third
anniversary of the date of issuance. 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.
On June 12, 2000, the Company completed a refinancing of its bank debt. In
connection with the refinancing, the Company issued warrants to the banks to
purchase 100,000 shares of Common Stock of the Company with substantially
similar terms as the Investor Warrants.
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."
13
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:
FROM INCEPTION
(NOVEMBER 12, 1996)
YEAR ENDED DECEMBER 31, TO DECEMBER 31,
----------------------
2000 1999 1998 1997 1996
------- -------- -------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues....................................... $58,098 $ 60,223 $ 64,576 $ 3,111 $ --
Cost of revenues............................... 37,797 39,264 45,404 2,221 --
------- -------- -------- ------- ------
Gross profit................................ 20,301 20,959 19,172 890 --
Selling and administrative expenses............ 15,737 16,378 17,606 2,074 23
Amortization of intangibles.................... 1,933 1,844 1,482 112 --
Restructuring costs............................ -- 827 1,387 -- --
Investment advisory fees and expenses.......... -- 550 -- -- --
Loss on sale of business units................. -- -- 4,995 -- --
Special compensation charge.................... -- -- -- 2,235 --
Acquired in-process research and development
charge........................................ -- -- -- 4,000 --
------- -------- -------- ------- ------
Operating income (loss)..................... 2,631 1,360 (6,298) (7,531) (23)
Interest expense............................... 2,189 2,131 2,133 8 --
------- -------- -------- ------- ------
Income (loss) before taxes..................... 442 (771) (8,431) (7,539) (23)
Income tax expense............................. 40 -- -- -- --
------- -------- -------- ------- ------
Net income (loss).............................. $ 402 $ (771) $ (8,431) $(7,539) $ (23)
======= ======== ======== ======= ======
Basic and diluted net income (loss) per share.. $0.06 $(0.12) $(1.40) $(8.13) $(0.04)
======= ======== ======== ======= ======
Shares used in computing basic
net income (loss) per share................... 6,654 6,579 6,034 928 550
======= ======== ======== ======= ======
Shares used in computing diluted
net income (loss) per share................... 6,658 6,579 6,034 928 550
======= ======== ======== ======= ======
Depreciation and amortization.................. $ 3,931 $ 3,629 $ 3,047 $ 206 --
======= ======== ======== ======= ======
Gross profit percentage........................ 34.9% 34.8% 29.7% 28.6% N/A
======= ======== ======== ======= ======
Selling and administrative expenses as a
percentage of revenues........................ 27.1% 27.2% 27.3% 66.7% N/A
======= ======== ======== ======= ======
DECEMBER 31,
------------
2000 1999 1998 1997 1996
------- -------- -------- ------- ------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 2,248 $ 1,719 $ 736 $ 1,310 $ 62
Working capital (deficiency)................... 209 (13,281) (17,228) 2,994 57
Intangible assets.............................. 42,689 44,448 46,607 32,996 --
Total assets................................... 62,960 64,365 69,574 48,228 62
Total debt..................................... 17,364 19,597 20,496 593 --
Shareholders' equity........................... 37,093 36,073 36,652 40,018 57
14
OTHER DATA:
Cash flow from operating activities.. 3,625 1,854 (194) 186 (18)
Ebitda (1)........................... 6,562 4,989 1,744 (1,090) (23)
Debt/Equity.......................... .47 .54 .56 .02 N/A
Debt/Ebitda.......................... 2.64 3.93 11.75 N/A N/A
(1) Earnings before interest, taxes, depreciation, amortization, loss on sale
of business unit, special compensation charge and acquired in-process
research and development charge. The Company's management believes this
information to be of material assistance in evaluating the Company's
financial and operating results.
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.
In connection with the Offering, the Company acquired the Founding Companies.
During the first eight months of 1998, the Company acquired the Acquired
Businesses. In December 1998 and January 1999, the Company sold the Southeast
Group operations. In May 1999, the Company closed its facility in Indianapolis,
IN.
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.
Although the Company has shown a profit in the amount of $400,000 for the year
ended December 31, 2000, the Company has incurred significant operating losses
since inception, and as of December 31, 2000 had an accumulated deficit of $16.4
million.
15
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR
ENDED DECEMBER 31, 1999
Revenues
Total 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; offset by (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 and Investor Warrants in February 2000.
16
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.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR
ENDED DECEMBER 31, 1998
Revenues
Total Revenues. Revenues decreased $4.4 million, or 6.7%, from $64.6 million in
1998 to $60.2 million in 1999. Service revenues decreased 2.9% and comprised
79.6% of total revenues in 1999 as compared to 76.5% in 1998. In 1999, product
revenues decreased 19.3% and comprised 20.4% of total revenues in 1999 as
compared to 23.5% in 1998.
The decrease in total revenues was comprised of a same-unit decrease of $8.7
million (primarily attributed to the divested Southeast Group and closed
Indianapolis operations) and an offsetting $4.4 million increase attributable to
acquisitions subsequent to March 31, 1998. Excluding the impact of the Southeast
Group and Indianapolis operations, same-unit revenue increased $0.4 million. The
increase relates to increased service revenue (primarily due to increased
digital services) offset by a volume decline in software product sales volume.
Gross Profit
For the year ended December 31, 1999, gross profit increased by $1.8 million, or
9.3%, as compared to the corresponding period in 1998, while as a percentage of
total revenues, gross profit increased to 34.8% from 29.7%. These increases were
due to an increase of $1.7 million (2.9% of revenues) attributable to
acquisitions subsequent to March 31, 1998 and an increase of $0.2 million
attributable to same-unit gross profit increases, offset by a $0.1 million
decrease attributable to corporate expenses. Excluding the impact of the
Southeast Group and Indianapolis operations, same-unit gross profit growth was
$1.8 million, primarily due to improved production efficiencies in the Virginia
and Massachusetts business units, increased digital services revenues (which
typically carry a higher gross profit percentage) and an offsetting decline
resulting from a lower volume of digital imaging software sales and associated
development costs.
Selling and Administrative Expenses
For the year ended December 31, 1999, S&A expenses decreased by $1.2 million, or
7.0%, as compared to the year ended December 31, 1998. This decrease is
comprised of: (1) $2.2 million attributable to same-unit S&A expenses; and (2)
an offsetting increase of $1.0 million attributable to acquisitions subsequent
to March 31, 1998. Excluding the impact of the Southeast Group and Indianapolis
operations, same-unit S&A decreased $0.2 million. The decrease is partially
attributable to the migration to a regional structure in the West and Midwest,
as well as a reduction in S&A at several units as a result of administrative and
sales force reductions.
Restructuring Costs
For the year ended December 31, 1999, the Company recorded a restructuring
charge of $0.8 million, attributable to the closing of the Indianapolis business
unit, totaling $0.6 million (including a write-off in related goodwill of $0.3
million, severance payments, and lease termination costs), and $0.2 million of
executive severance payments. For the year ended December 31, 1998, the Company
recorded a restructuring charge of $1.4 million, primarily for severance
payments related to headcount reductions at the corporate office and a business
unit and facility costs associated with business unit consolidations.
17
Investment Advisory Fees and Expenses
In 1999, the Company incurred a charge of $0.6 million representing fees and
expenses related to the pursuit of strategic alternatives. In February 2000, the
Company closed on a $6 million convertible subordinated debt financing.
Loss on Sale of Business Units
In 1998, the Company incurred a loss of $5.0 million, related to the sales in
December 1998 and January 1999 of facilities in Charlotte, NC, Cayce, SC and
Cleveland, TN and represents the difference between the net proceeds from the
transactions and the net asset value of these locations, including $4.2 million
of goodwill.
Operating Income (Loss)
Operating income increased by $7.7 million, from an operating loss of $6.3
million in 1998 to operating income of $1.4 million in 1999. Excluding the
impact of restructuring costs, investment advisory fees and expenses, and loss
on sale of business units, operating income increased $2.7 million, or 3,164%.
This increase resulted from: (1) an increase of $2.2 million in same-unit
operating income; (2) an increase of $0.6 million attributable to acquisitions
subsequent to March 31, 1998; and (3) an offsetting increase in corporate
expenses of $0.1 million. Excluding the impact of the Southeast Group and
Indianapolis operations, same-unit operating income growth amounted to $1.8
million, or 47%. This increased efficiency resulted in same-unit operating
income, excluding the results of the Southeast Group and Indianapolis
operations, which was 11.9% of sales for 1999, versus 8.1% for 1998. This
increase was due to a higher mix of service sales (as opposed to product sales),
efficiencies at the Virginia and Massachusetts business units as described
above, and cost savings in S&A expenses also described above.
Interest Expense
Interest expense was $2.1 million in 1998 and 1999. Interest expense for 1999
included $0.2 million relating to bank fees. Interest expense for 1998 included
a write-off of debt financing costs related to the Company's credit facility of
$0.8 million.
Income Tax Provision
Due to the Company's loss position, no income tax provision was recognized in
1999 or 1998.
Net Loss
Net loss amounted to $0.8 million in 1999 as compared to $8.4 million in 1998.
Excluding restructuring costs in 1999 and 1998, the loss on sale of business
units in 1998, and the investment and advisory fees in 1999, net income amounted
to $0.6 million in 1999 and net loss amounted to $2.0 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
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.
On March 30, 1998, the Company entered into a credit facility (as amended the
"Old Credit Facility"), providing a revolving line of credit of $30 million in
borrowings with First Union National Bank (successor by merger to CoreStates
Bank, N.A.) and Commerce Bank, N.A. (together, the "Banks"). Under the initial
terms of the Old Credit Facility, the Company could borrow up to $25 million to
finance future acquisitions and up to $5 million for working capital purposes.
18
Pursuant to a default under the Old Credit Facility, the Company entered into
several forbearance agreements with the Banks between March 29, 1999 and June
30, 2000 in which they agreed to forbear from exercising their rights and
remedies with respect to all existing defaults under the Old Credit Facility.
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 (the "Investors"). The proceeds of this financing were used
to repay $5 million of the Old 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 are 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 are 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 the third anniversary of the date of issuance. The
Company also issued the Investor Warrants to purchase an additional 1,800,000
shares of common stock of the Company (subject to downward adjustment under
certain circumstances) 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 five
years from the date of issuance. 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 will
amortize the $553,000 over the four-year term of the Notes.
On June 12, 2000, the Company closed on a new $14.5 million senior credit
facility (the "New Credit Facility") pursuant to the Credit Agreement dated June
9, 2000 (the "Credit Agreement") with Commerce Bank, N.A. and FirsTrust Bank
(together the "New Banks"). The New Credit Facility consists 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, the Company is required to pay interest monthly
at the prime rate plus 1.5% (effective rate of 9.5% as of March 26, 2001). The
outstanding principal of the Revolving Credit Line is due and payable at the end
of term in June 2002. Borrowing availability is based on the level of the
Company's eligible accounts receivable, as defined in the Credit Agreement. As
of March 26, 2001, approximately $3.9 million was outstanding under the
Revolving Credit Line.
Under the Term Loan, interest is payable monthly at the prime rate plus 2.0%
(effective rate of 10.0% as of March 26, 2001). The outstanding principal
amount of the Term Loan was $6.5 million as of March 26, 2001 and is due and
payable in consecutive quarterly payments of $500,000 commencing September 30,
2000 until March 31, 2004. The payment due on December 31, 2000 was paid on
January 2, 2001, the first business day following the due date, and as such, is
not reflected on the consolidated balance sheets. In addition, on an annual
basis, the Company is required to reduce the principal amount outstanding under
the Term Loan to the extent that EBITDA (as defined in the Credit Agreement), as
adjusted, exceeds certain specified levels set forth in the Credit Agreement and
upon certain asset sales by the Company.
The New Credit Facility is secured by substantially all assets of the Company
and requires maintenance of various financial and restrictive covenants
including minimum levels of EBITDA and net worth.
During the year ended December 31, 2000, the Company made $7,142,000 in net
principal repayments under the Old Credit Facility and the New Credit Facility
including $6,000,000 from proceeds received from the convertible debt financing.
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 Revolving Credit Line will be sufficient to finance
current operating requirements for at least the next twelve months including
capital expenditures and acquisitions.
19
YEAR 2000 COMPLIANCE
The Company completed its Year 2000 compliance review and remediation efforts
prior to January 1, 2000. During 2000, the Company did not experience any
significant systems or equipment problems arising from Year 2000 related
computer issues and the total cost for Year 2000 compliance incurred by the
Company did not have a material effect on the results of operations.
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 67.6% of its total long-term debt at
December 31, 2000. If interest rates average 25 basis points more in 2001 than
they did during 2000, the Company's interest expense would be increased by
$29,000. 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, 2000. 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 (9.5% at December 31, 2000) exceeds the Cap Rate (11.5%)
multiplied by the notional amount. During 2000, the Prime Rate has not exceeded
the Cap Rate. Accordingly, the Company has not received any payments under this
agreement during 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth on pages F-1 through F-20
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 new credit facility entered
into in June, 2000. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information contained under the caption "Election of Class I Directors" and
the information contained under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the caption "Executive Compensation" in the
Company's definitive proxy statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the caption "Stock Ownership of Principal
Shareholders and Management" in the Company's definitive proxy statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement is incorporated herein
by reference.
21
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-20 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).
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).
22
EXHIBIT
NO. DESCRIPTION
- --- -----------
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.
10.2*+ 1997 Employee Stock Purchase Plan.
10.3*+ Management Agreement between GBL Capital Corporation and the Company
dated November 27, 1996.
10.4*+ Employment Agreement between the Company and Bruce M. Gillis dated
as of August 1, 1997.
10.5*+ Employment Agreement between the Company and James D. Brown dated
as of August 18, 1997.
10.6*+ Employment Agreement between the Company and S. David Model dated
as of August 18, 1997.
10.7*+ Employment Agreement between the Company and Andrew R. Bacas dated
as of August 1, 1997.
10.8**+ Employment Agreement between the Company and John E. Semasko dated as
of September 9, 1997.
23
EXHIBIT
NO. DESCRIPTION
- --- -----------
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.
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).
24
EXHIBIT
NO. DESCRIPTION
- --- -----------
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.
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.
25
EXHIBIT
NO. DESCRIPTION
- --- -----------
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).
*** 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.
(b) Reports on Form 8-K.
None.
26
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-20
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
ImageMax, Inc.
We have audited the accompanying consolidated balance sheet of ImageMax, Inc.
and subsidiaries as of December 31, 2000, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year then
ended. Our audit also included the financial statement schedule as of and for
the year ended December 31, 2000 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 schedules 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 2000 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ImageMax, Inc. and subsidiaries as of December 31, 2000, and the consolidated
results of their operations and their cash flows for the year ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related 2000 financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 22, 2001
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ImageMax, Inc.:
We have audited the accompanying consolidated balance sheet of ImageMax, Inc.
(a Pennsylvania Corporation) and Subsidiaries as of December 31, 1999 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period 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 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
ImageMax, Inc. and Subsidiaries as of December 31, 1999 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Our audits were 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 audits 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.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 7, 2000
F-3
IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS - EXCEPT SHARE AMOUNTS)
DECEMBER 31
--------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 2,248 $ 1,719
Accounts receivable, net of allowance for doubtful
accounts of $506 and $392, as of December 31, 2000
and 1999, respectively................................. 10,080 9,412
Inventories.............................................. 1,526 2,031
Prepaid expenses and other............................... 1,238 838
-------- --------
Total current assets................................. 15,092 14,000
Property, plant and equipment, net.......................... 4,374 5,642
Intangibles, primarily goodwill, net........................ 42,689 44,448
Other assets................................................ 805 275
-------- --------
$ 62,960 $ 64,365
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term
debt................................................... $ 6,431 $ 18,627
Accounts payable......................................... 2,332 2,967
Accrued expenses......................................... 3,607 4,021
Deferred revenue......................................... 2,513 1,666
-------- --------
Total current liabilities............................ 14,883 27,281
Long-term debt.............................................. 5,365 970
Subordinated convertible debt, net of discount of $432...... 5,568 --
Other long-term liabilities................................. 51 41
Commitments and contingencies (Note 11)
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized, none issued................................ -- --
Common stock, no par value, 40,000,000 shares
authorized, 6,686,368 and 6,633,681 shares issued and
outstanding at December 31, 2000 and 1999,
respectively........................................... 53,455 52,837
Accumulated deficit...................................... (16,362) (16,764)
-------- --------
Total shareholders' equity........................... 37,093 36,073
-------- --------
$ 62,960 $ 64,365
======== ========
The accompanying notes are an integral part of these statements.
F-4
IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS - EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
-----------------------------------
2000 1999 1998
---------- ---------- ----------
Revenues:
Services..................................... $ 47,964 $ 47,960 $ 49,387
Products..................................... 10,134 12,263 15,189
---------- ---------- ----------
58,098 60,223 64,576
---------- ---------- ----------
Cost of revenues:
Services..................................... 29,481 29,615 33,252
Products..................................... 6,318 7,864 10,587
Depreciation................................. 1,998 1,785 1,565
---------- ---------- ----------
37,797 39,264 45,404
---------- ---------- ----------
Gross profit............................ 20,301 20,959 19,172
Selling and administrative expenses............ 15,737 16,378 17,606
Amortization of intangibles.................... 1,933 1,844 1,482
Restructuring costs............................ -- 827 1,387
Investment advisory fees and expenses.......... -- 550 --
Loss on sale of business units................. -- -- 4,995
---------- ---------- ----------
Operating income (loss)................. 2,631 1,360 (6,298)
Interest expense............................... 2,189 2,131 2,133
---------- ---------- ----------
Income (loss) before income taxes....... 442 (771) (8,431)
Income taxes................................... 40 -- --
---------- ---------- ----------
Net income (loss).............................. $ 402 $ (771) $ (8,431)
========== ========== ==========
Basic and diluted net income (loss) per share.. $0.06 $(0.12) $(1.40)
========== ========== ==========
Shares used in computing basic
net income (loss) per share.................. 6,654,468 6,578,984 6,034,130
========== ========== ==========
Shares used in computing diluted
net income (loss) per share.................. 6,657,626 6,578,984 6,034,130
========== ========== ==========
The accompanying notes are an integral part of these statements.
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, 1997...... 5,537,436 $47,580 $ (7,562) $40,018
Issuance of Common stock for
acquisitions................. 930,484 5,037 -- 5,037
Sale of Common stock.......... 11,819 28 -- 28
Net loss...................... -- -- (8,431) (8,431)
--------- ------- -------- -------
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
========= ======= ======== =======
The accompanying notes are an integral part of these statements.
F-6
IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
-------- ------- --------
Cash Flows from Operating Activities:
Net income (loss)..................................... $ 402 $ (771) $ (8,431)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation and amortization of intangibles...... 3,757 3,629 3,047
Amortization of deferred financing costs.......... 174 -- 904
Imputed interest on subordinated debt............. 121 -- --
Loss on sale of business units.................... -- -- 4,995
Changes in operating assets and liabilities, net
of effect from acquisitions and divestiture-
Accounts receivable, net........................ (668) 2,389 (1,852)
Inventories..................................... 505 154 (104)
Prepaid expenses and other...................... (400) (229) 46
Other assets.................................... (64) 417 (390)
Accounts payable................................ (635) (1,505) 556
Accrued expenses................................ (414) (1,296) 159
Deferred revenue................................ 847 (934) 876
-------- ------- --------
Net cash provided by (used in)
operating activities......................... 3,625 1,854 (194)
-------- ------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment................... (730) (362) (3,040)
Proceeds from business units sold..................... -- 563 350
Purchases of businesses, net of cash acquired......... -- -- (16,483)
-------- ------- --------
Net cash provided by (used in)
investing activities......................... (730) 201 (19,173)
-------- ------- --------
Cash Flows from Financing Activities:
Net borrowings (repayments) under line of credit...... (14,642) (1,589) 20,100
Proceeds from subordinated debt transaction........... 6,000 -- --
Payment of deferred financing costs................... (630) (192) (803)
Proceeds from long-term borrowing..................... 7,500 -- --
Principal payments on long-term debt.................. (659) (298) (532)
Proceeds from sales of Common and Preferred stock..... 65 107 28
Proceeds from mortgage transaction.................... -- 900 --
-------- ------- --------
Net cash provided by (used in)
financing activities......................... (2,366) (1,072) 18,793
-------- ------- --------
Net Increase (Decrease) in Cash and Cash Equivalents... 529 983 (574)
Cash and Cash Equivalents, Beginning of Year........... 1,719 736 1,310
-------- ------- --------
Cash and Cash Equivalents, End of Year................. $ 2,248 $ 1,719 $ 736
======== ======= ========
The accompanying notes are an integral part of these statements.
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 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.
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.
F-8
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
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, 2000 and 1999, 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 4). Leasehold improvements are amortized over the lesser of their
useful life or the term of the lease.
Upon sale or other disposition of assets, the cost and related accumulated
depreciation and amortization are removed from the respective accounts, and the
resulting gain or loss, if any, is included in operating results.
INTANGIBLES
Intangibles consist of goodwill and developed technology (see Note 5). Goodwill,
representing the excess of cost over the fair value of the net tangible and
identifiable intangible assets of acquired businesses (see Note 3), is stated at
cost and is amortized over its estimated life (principally 30 years). Developed
technology represents costs paid for certain software technology and is being
amortized over 7 years (see Note 5).
DERIVATIVE FINANCIAL INSTRUMENTS
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 10 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 $2,123,000, $2,074,000 and $1,043,000 for the years ended
December 31, 2000, 1999, and 1998 respectively. Income taxes paid were $85,000,
$98,000 and $175,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
F-9
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
The following table displays the supplemental cash flow information for the year
ended December 31, 1998 of the net non-cash assets acquired relating to acquired
businesses described in Note 3:
YEAR ENDED
DECEMBER 31
1998
------------
Fair value of assets acquired. $ 24,873,000
Liabilities assumed. (3,224,000)
Fair value of Common stock issued. (5,037,000)
Cash acquired. (129,000)
------------
Total consideration $ 16,483,000
============
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.
ACCOUNTING PRONOUNCEMENTS PENDING ADOPTION
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 is required to adopt 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.
3. ACQUISITIONS:
During the first eight months of 1998, the Company acquired 13 additional
document management services companies (the "Acquired Businesses"). These
acquisitions were accounted for using the purchase method of accounting. The
total purchase price of the Acquired Businesses was $21.5 million, which
consisted of: (i) $16.6 million in cash paid to sellers; (ii) 930,484 shares of
Common stock issued to sellers; and (iii) transaction costs of $0.7 million. For
purposes of computing the purchase price for accounting purposes, the value of
the Common stock issued to the sellers of $5.0 million was based on the market
price of the Common stock at the time of the transaction, less a discount of
15%, due to a one-year restriction on the sale and transferability of the shares
issued. During 1999, the Company issued an additional 76,190 shares of Common
Stock in consideration for the Acquired Businesses.
F-10
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS: -- (CONTINUED)
The following unaudited pro forma information shows the results of the Company's
operations in accordance with APB Opinion No. 16, "Business Combinations," for
the year ended December 31, 1998 as though the acquisitions of the Acquired
Businesses had occurred as of January 1, 1998. There were no business
acquisitions in 1999 or 2000. These results exclude certain business units that
were sold in December 1998 and January 1999 (see Note 13):
YEAR ENDED
DECEMBER 31
1998
------------
Total revenues........................ $64,759,000
Operating loss........................ $ (124,000)
Net loss.............................. $(2,755,000)
Basic and diluted net loss per share.. $ (0.44)
The pro forma results have been prepared for comparative purposes only and are
not necessarily indicative of the actual results of operations had the
acquisition of the Acquired Businesses taken place as of January 1, 1998, or the
results that may occur in the future. The pro forma results for the year ended
December 31, 1998, do not reflect the $5.0 million loss on the sale of business
units.
4. PROPERTY, PLANT AND EQUIPMENT:
DECEMBER 31
ESTIMATED -------------------------
USEFUL LIVES
(YEARS) 2000 1999
------------ ----------- -----------
Building and improvements........................ 2-40 $ 1,507,000 $ 1,438,000
Machinery and equipment.......................... 3-5 7,141,000 6,480,000
Furniture and office equipment................... 5 575,000 575,000
Transportation equipment......................... 5 499,000 499,000
----------- -----------
9,722,000 8,992,000
Less: Accumulated depreciation and amortization (5,348,000) (3,350,000)
----------- -----------
$ 4,374,000 $ 5,642,000
=========== ===========
As of December 31, 2000 and 1999, the Company had $38,000 and $144,000 in
equipment, net of accumulated amortization, financed under capital leases,
respectively. See Note 5 regarding long-lived assets impairment evaluation.
5. INTANGIBLE ASSETS:
DECEMBER 31,
------------
2000 1999
----------- -----------
Goodwill......................... $46,954,000 $46,954,000
Developed technology............. 820,000 820,000
----------- -----------
47,774,000 47,774,000
Less: Accumulated amortization... (5,085,000) (3,326,000)
----------- -----------
$42,689,000 $44,448,000
=========== ===========
Goodwill is amortized over 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
F-11
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INTANGIBLE ASSETS: -- (CONTINUED)
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.
In 1998, the Company wrote off $1,644,000 of goodwill related to a business unit
sold in December 1998 and $2,585,000 related to two business units sold in
January 1999 due to the impairment of the recoverability of the related goodwill
based on the proceeds to be received (see Note 13). In 1999, the Company wrote
off $315,000 of goodwill related to a business unit closed in May 1999.
As of December 31, 2000, 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.
6. ACCRUED EXPENSES:
DECEMBER 31
-----------
2000 1999
----------- ------------
Compensation and benefits................. $ 1,800,000 $ 1,270,000
Insurance premium payable................. 619,000 --
Professional fees......................... 162,000 404,000
Restructuring costs (Note 12)............. -- 263,000
Other..................................... 1,026,000 2,084,000
----------- ------------
$ 3,607,000 $ 4,021,000
=========== ============
7. LONG-TERM DEBT:
Long-term debt consists of the following:
DECEMBER 31
-----------
2000 1999
----------- ------------
Revolving credit line..................... $ 3,869,000 $ 18,511,000
Term loan................................. 7,000,000 --
Mortgage loan............................. 863,000 895,000
Other debt and capital lease obligations.. 64,000 191,000
----------- ------------
11,796,000 19,597,000
Less- Current portion..................... (6,431,000) (18,627,000)
----------- ------------
$ 5,365,000 $ 970,000
=========== ============
On March 30, 1998, the Company entered into a credit facility (as amended the
"Old Credit Facility"), providing a revolving line of credit of $30 million in
borrowings with First Union National Bank (successor by merger to Corestates
Bank, N.A.) and Commerce Bank, N.A. (together, the "Banks"). Under the initial
terms of the Old Credit Facility, the Company could borrow up to $25 million to
finance future acquisitions and up to $5 million for working capital purposes.
Pursuant to a default under the Old Credit Facility, the Company entered into
several forbearance agreements with the Banks covering the period from March 29,
1999 to June 30, 2000 in which they agreed to forbear from exercising their
rights and remedies with respect to all existing defaults under the Old Credit
Facility.
F-12
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT: -- (CONTINUED)
On June 12, 2000, the Company closed on a new $14.5 million senior credit
facility (the "New Credit Facility") pursuant to the Credit Agreement dated June
9, 2000 (the "Credit Agreement") with Commerce Bank, NA and FirsTrust Bank
(together, the "New Banks"). The New Credit Facility consists 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 is payable monthly at the prime rate
plus 1.5% (effective rate of 11.0% as of December 31, 2000) with principal due
and payable in June 2002. Borrowing availability is based on the level of the
Company's eligible accounts receivable, as defined in the Credit Agreement. The
obligation of the New Banks to make any extension of credit is subject to the
satisfaction of Commerce Bank in its sole and absolute discretion of certain
conditions precedent on the relevant borrowing or issue date.
Under the Term Loan, interest is payable monthly at the prime rate plus 2.0%
(effective rate of 11.5% as of December 31, 2000) with principal due and payable
in consecutive quarterly payments of $500,000 commencing September 30, 2000
until March 31, 2004. The payment due on December 31, 2000 was paid on January
2, 2001, the first business day following the due date. In addition, on an
annual basis, the Company is required to reduce the principal amount outstanding
under the Term Loan to the extent that EBITDA (as defined in the Credit
Agreement: net income plus interest expense, tax provision, depreciation,
amortization, losses from asset dispositions and insurance recoveries, minus
gains from asset dispositions and insurance recoveries), as adjusted, exceeds
certain specified levels set forth in the Credit Agreement and upon certain
asset sales by the Company, if any.
The New Credit Facility restricts the payment of dividends and is secured by
substantially all assets of the Company and requires maintenance of various
financial and restrictive covenants including minimum levels of EBITDA and net
worth. The Company also issued warrants to the New 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 New Banks upon closing.
In connection with the New 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 (9.5% at December 31, 2000) exceeds the Cap Rate (11.5%)
multiplied by the notional amount. During 2000, the Prime Rate has not exceeded
the Cap Rate. Accordingly, the Company has not received any payments under this
agreement during 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 (9.21% at December 31, 2000). The loan
carries a ten-year term (maturing May 2009), is secured by the mortgaged
property, and requires equal monthly repayments of principal and interest of
$7,500.
As of December 31, 2000, future scheduled principal payments on the Company's
long-term debt and subordinated convertible debt (See Note 8) are as follows:
2001...................... $ 6,431,000
2002...................... 2,019,000
2003...................... 2,014,000
2004...................... 7,332,000
-----------
$17,796,000
===========
F-13
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. 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 (the "Investors"). The proceeds of this financing were used
to repay $5 million under the Old 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 are due and payable upon the fourth anniversary of the date of
issuance and bear interest at nine percent (9%) payable semi-annually. The
Company does not have the option to voluntarily prepay the Notes. The Notes are
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 the third anniversary of the date
of issuance. 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 five years from the date of issuance. 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.
9. INCOME TAXES:
At December 31, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $6.5 million. 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 components of income taxes are as follows:
YEAR ENDED
DECEMBER 31
-----------------------------------
2000 1999 1998
------- -------- -----------
Current:
Federal........................ $ 7,800 $ -- $ --
State.......................... 32,200 -- --
------- -------- -----------
40,000 -- --
------- -------- -----------
Deferred:
Federal........................ -- 27,000 (1,455,000)
State.......................... -- 5,000 (398,000)
------- -------- -----------
-- 32,000 (1,853,000)
------- -------- -----------
Change in valuation allowance.. -- (32,000) 1,853,000
------- -------- -----------
$40,000 $ -- $ --
======= ======== ===========
F-14
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES: -- (CONTINUED)
The reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
YEAR ENDED
DECEMBER 31
----------------------------
2000 1999 1998
----- ------ ------
Income tax rate................................. 34.0% (34.0)% (34.0)%
State income taxes, net of federal tax benefit.. 4.8 (5.6) (5.6)
Nondeductible loss on sale of business units.... -- -- 12.0
Other nondeductible items....................... 5.9 6.4 1.8
Nondeductible goodwill amortization............. 56.0 37.5 3.8
Change in valuation reserve..................... (91.7) (4.3) 22.0
----- ------ ------
9.0% --% --%
===== ====== ======
The tax effect of temporary differences that give rise to deferred taxes are as
follows:
DECEMBER 31
-----------
2000 1999
----------- -----------
Gross deferred tax assets:
Accruals and reserves not currently deductible.. $ 376,000 $ 580,000
Net operating loss carryforwards................ 2,222,000 2,662,000
Other........................................... 255,000 352,000
Valuation allowance............................. (1,867,000) (2,440,000)
----------- -----------
$ 986,000 $ 1,154,000
=========== ===========
Gross deferred tax liabilities:
Depreciation.................................... $ 38,000 $ 424,000
Goodwill amortization........................... 847,000 629,000
----------- -----------
$ 885,000 $ 1,053,000
=========== ===========
At December 31, 2000, 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.
10. 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.
F-15
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. BENEFIT PLANS: -- (CONTINUED)
OPTIONS OUTSTANDING
--------------------------------------------------------------------------
AVAILABLE PRICE AGGREGATE
FOR GRANT SHARES PER SHARE PRICE
----------------- ----------------- ---------------- ----------------
Balance, December 31, 1997................... 232,500 367,500 $12.00 $ 4,410,000
Granted.................................... (359,000) 359,000 2.19 - 12.00 1,419,375
Cancelled.................................. 247,500 (247,500) 12.00 (2,970,000)
--------- ---------- ----------------
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
========= ========== ================
Set forth below are the outstanding options at December 31, 2000, summarized by range of exercise price:
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES 12/31/00 REMAINING LIFE EXERCISE PRICE 12/31/00 EXERCISE PRICE
- ------------------- -------- --------- ---------- ------------- ----------------
$0.81 to $1.75 755,000 4.6 $ 1.61 19,333 $ 1.75
$2.19 to $2.38 167,000 7.8 $ 2.31 111,333 $ 2.31
$12.00 150,000 2.1 $ 12.00 133,333 $ 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 6.5%, 6.2%, and 4.4%, in 2000, 1999, and 1998, respectively, an
expected life of 5 years, expected dividend yield of zero, and an expected
volatility of 40%.
The weighted average fair value of options granted during 2000, 1999, and 1998
is estimated at $0.72, $0.90, and $1.12 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
-----------------------------------
2000 1999 1998
-------- ----------- -----------
Net income (loss), as reported........................... $402,000 $ (771,000) $(8,431,000)
Pro forma net income (loss).............................. $131,000 $(1,108,000) $(8,829,000)
Basic and diluted income (loss) per share, as reported... $ 0.06 $ (0.12) $ (1.40)
Pro forma basic and diluted income (loss) per share...... $ 0.02 $ (0.17) $ (1.46)
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
F-16
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. BENEFIT PLANS: -- (CONTINUED)
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.
For the year ended December 31, 2000, and 1999, employees purchased 52,687 and
77,752 shares under the Purchase Plan of which 39,489 and 65,387 shares were
issued in 2000 and 1999, respectively.
The Company also maintains a defined contribution 401(k) plan, which permits
participation by substantially all employees. In connection with the plan, the
Company's matching contribution charged to expense was approximately $115,000 in
2000, $118,000 in 1999 and $125,000 in 1998.
11. 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, 2000, 1999 and 1998 was $1,455,000, $1,558,000, and $2,706,000,
respectively. Future minimum lease payments under noncancelable operating leases
as of December 31, 2000 are as follows:
2001.................. $1,483,000
2002.................. 1,215,000
2003.................. 708,000
2004.................. 569,000
2005.................. 328,000
2006 and thereafter... 694,000
----------
$4,997,000
==========
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
$314,000, $536,000 and $582,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
EMPLOYMENT AND CONSULTING 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, 2000 are as follows:
2001.................. $1,111,000
2002.................. 880,000
2003.................. 102,000
2004.................. 0
2005.................. 0
----------
$2,093,000
==========
F-17
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
SEPARATION AGREEMENTS
During 1998, the Company and three of its former executive officers entered into
separation agreements upon termination of their employment with the Company. The
separation agreements provided $781,000 of compensation and benefits, which has
been charged to the statement of operations for the year ended December 31, 1998
as restructuring costs (see Note 12).
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, 2000 are not considered material.
12. RESTRUCTURING COSTS:
For the year ended December 31, 1998, the Company recorded restructuring costs
of $1,387,000, primarily for severance payments related to headcount reductions
at the corporate office and a business unit and facility costs associated with
business unit consolidations. For the year ended December 31, 1999, the Company
recorded restructuring costs 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.
As of December 31, 1999, accrued restructuring charges (classified as accrued
expenses) amounted to $263,000, of which $196,000 related to severance payments
with the remaining amount attributable to lease termination costs. As of
December 31, 2000 there were no remaining accrued restructuring charges. 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.
13. LOSS ON SALE OF BUSINESS UNITS:
For the year ended December 31, 1998, the Company recorded a loss on sale of
business units of $4,995,000, related to the sales in December 1998 and January
1999 of facilities in Charlotte, NC, Cayce, SC and Cleveland, TN. The loss
represents the difference between the net proceeds from the transactions and the
net asset value of these locations, including $4,229,000 of goodwill (see Note
5). For the year ended December 31, 1998, these business units accounted for
$6,496,000 and $660,000 of the Company's consolidated revenues and operating
loss, respectively.
14. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Quarter ended
----------------------------------------------------------------------
March 31, 2000 June 30, 2000 September 30, 2000 December 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)
F-18
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED): -- (CONTINUED)
Quarter ended,
----------------------------------------------------------------------
March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
--------------- ------------- ------------------ ------------------
Revenues......................................... $15,482,000 $15,671,000 $14,467,000 $14,603,000
Gross profit..................................... 5,763,000 5,435,000 4,888,000 4,873,000
Net income (loss) (1)............................ (442,000) 225,000 91,000 (645,000)
Net income (loss) per share (basic and diluted).. $ (0.07) $ 0.03 $ 0.01 $ (0.10)
(1) The Company's net income in the quarter ended March 31, 1999 includes a
restructuring charge of $827,000. The Company's net income in the quarter ended
December 31, 1999 includes a charge for investment advisory fees and expenses of
$550,000.
F-19
IMAGEMAX, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE,
BEGINNING OF CHARGED TO RESERVE OF BALANCE,
DESCRIPTION YEAR EXPENSE ACQUISITIONS DEDUCTIONS(1) END OF YEAR
- ---------------------------------- ------------ ---------- ------------ ------------ -----------
Allowance for doubtful accounts:
2000............................ $392,000 $349,000 $ -- $ (235,000) $ 506,000
1999............................ $600,000 $ 92,000 $ -- $ (300,000) $ 392,000
1998............................ $375,000 $185,000 $ 150,000 $ (110,000) $ 600,000
BALANCE,
BEGINNING OF CHARGED TO BALANCE,
DESCRIPTION YEAR EXPENSE DEDUCTIONS(2) END OF YEAR
- ---------------------------------- ------------ ------------ ----------- -----------
Restructuring accruals:
2000............................ $ 263,000 $ 0 $ (263,000) $ 0
1999............................ $ 1,145,000 $ 827,000 $(1,709,000) $ 263,000
1998............................ $ -- $1,387,000 $ (242,000) $1,145,000
(1) Uncollectible accounts written off, net of recoveries.
(2) Represents amount paid.
F-20
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: March 30, 2001 By: /s/ DAVID C. CARNEY
------------------------
David C. Carney
Acting Chief Executive Officer and Chairman of the
Board of Directors
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 Acting Chief Executive March 30, 2001
- ------------------------- Officer and Chairman of
David C. Carney the Board of Directors
(Principal Executive Officer)
/s/ MARK P. GLASSMAN President, Chief Operating March 30, 2001
- ------------------------- Officer and Treasurer
Mark P. Glassman (Principal Accounting Officer)
/s/ ANDREW R. BACAS Director March 30, 2001
- -------------------------
Andrew R. Bacas
/s/ J.B. DOHERTY Director March 30, 2001
- -------------------------
J.B. Doherty
/s/ ROBERT E. DRURY Director March 30, 2001
- -------------------------
Robert E. Drury
/s/ LEWIS E. HATCH, JR. Director March 30, 2001
- -------------------------
Lewis E. Hatch, Jr.
Director March 30, 2001
- -------------------------
Blair Hayes
Director March 30, 2001
- -------------------------
Steven N. Kaplan
Director March 30, 2001
- -------------------------
Rex Lamb
/s/ H. CRAIG LEWIS Director March 30, 2001
- -------------------------
H. Craig Lewis
/s/ MITCHELL J. TAUBE Director March 30, 2001
- -------------------------
Mitchell J. Taube