SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _________ to _________
COMMISSION FILE NUMBER 0-23077
IMAGEMAX, INC.
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(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2865585
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1100 E. Hector Street, Suite 396
Conshohocken, Pennsylvania 19428
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 832-2111
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of August 4, 1998:
Common Stock, no par value 6,293,659
-------------------------- ----------------
Class Number of Shares
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Statements of Operations.................. 1
Consolidated Balance Sheets............................ 2
Consolidated Statements of Cash Flows.................. 3
Notes to Consolidated Financial Statements............. 4
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.... 7
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds........ 12
Item 4 - Submission of Matters to a Vote of
Security Holders................................. 12
Item 5 - Other Information................................ 12
Item 6 - Exhibits and Reports on Form 8-K................. 13
SIGNATURES.................................................. 14
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- -------------------
1998 1997 1998 1997
------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Services .................................. $12,393 $ -- $22,250 $ --
Products .................................. 4,199 -- 7,294 --
------- -------- ------- -------
16,592 -- 29,544 --
------- -------- ------- -------
Cost of revenues:
Services .................................. 8,293 -- 14,740 --
Products .................................. 2,700 -- 4,755 --
Depreciation .............................. 285 -- 624 --
------- -------- ------- -------
11,278 -- 20,119 --
------- -------- ------- -------
Gross profit ........................... 5,314 -- 9,425 --
Selling and administrative expenses ......... 4,043 113 7,328 168
Special compensation charge ................. -- 1,304 -- 1,304
Amortization of intangibles ................. 341 -- 641 --
------- -------- ------- -------
Operating income (loss) ................ 930 (1,417) 1,456 (1,472)
Interest expense (income), net .............. 264 (1) 312 (1)
------- -------- ------- -------
Income (loss) before income taxes ...... 666 (1,416) 1,144 (1,471)
Income tax provision ........................ 210 -- 468 --
------- -------- ------- -------
Net income (loss) ........................... $ 456 $ (1,416) $ 676 $(1,471)
======= ======== ======= =======
Basic and diluted net income (loss)
per share.................................... $ 0.08 $ (1.89) $ 0.12 $ (2.06)
======= ======== ======= =======
Shares used in computing basic and diluted
net income (loss) per share ............... 5,891 751 5,720 714
======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands except share amounts)
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 882 $ 1,310
Accounts receivable, net of allowance for doubtful
accounts of $567 and $375 as of June 30, 1998
and December 31, 1997, respectively............. 11,848 6,922
Inventories........................................ 2,327 1,997
Prepaid expenses and other......................... 667 367
Deferred income taxes.............................. 164 160
------- -------
Total current assets............................ 15,888 10,756
Property, plant and equipment, net................... 6,022 4,381
Intangibles, primarily goodwill, net................. 51,074 32,996
Other assets......................................... 132 95
------- -------
$73,116 $48,228
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term
debt .......................................... $ 201 $ 251
Accounts payable................................... 4,344 2,846
Accrued expenses................................... 4,748 3,248
Deferred revenue................................... 1,271 1,333
Income taxes payable............................... 409 84
------- -------
Total current liabilities....................... 10,973 7,762
------- -------
Deferred income taxes................................ 39 59
------- -------
Long-term debt....................................... 16,680 342
------- -------
Other long-term liabilities.......................... 89 47
------- -------
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized, none issued......................... -- --
Common stock, no par value, 40,000,000 shares
authorized, 6,293,659 and 5,537,436 shares issued
and outstanding as of June 30, 1998 and
December 31, 1997, respectively................. 52,221 47,580
Accumulated deficit................................ (6,886) (7,562)
------- -------
Total shareholders' equity...................... 45,335 40,018
------- -------
$73,116 $48,228
======= =======
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................ $ 676 $(1,471)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation and amortization ......................... 1,265 --
Special compensation charge ........................... -- 1,304
Deferred income tax benefit ........................... (27) --
Changes in operating assets and liabilities,
excluding effect of businesses acquired-
Accounts receivable, net ........................... (1,572) --
Inventories ........................................ (160) --
Prepaid expenses and other ......................... (381) --
Other assets ....................................... 5 --
Accounts payable ................................... 546 --
Accrued expenses ................................... 355 40
Income taxes payable ............................... 326 --
Deferred revenue ................................... (412) --
-------- -------
Net cash provided by (used in) operating
activities .................................... 621 (127)
-------- -------
Cash flows from investing activities:
Payments for businesses acquired, net of cash acquired.. (15,692) --
Purchases of property and equipment .................... (633) --
Increase in deferred acquisition costs ................. (18) (25)
-------- -------
Net cash used in investing activities ........... (16,343) (25)
-------- -------
Cash flows from financing activities:
Net borrowings under line of credit ...................... 16,400 --
Payment of deferred financing costs ...................... (659) --
Principal payments on debt and capital lease
obligations ........................................... (447) --
Proceeds from issuances of preferred stock ............... -- 105
-------- -------
Net cash provided by financing activities ....... 15,294 105
-------- -------
Net decrease in cash and cash equivalents .................. (428) (47)
Cash and cash equivalents, beginning of period ............. 1,310 62
-------- -------
Cash and cash equivalents, end of period ................... $ 882 $ 15
======== =======
Supplemental disclosures of cash flow information:
Cash paid for:
Interest ............................................. $ 171 $ --
======== =======
Income taxes .......................................... $ 195 $ --
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BACKGROUND AND BASIS OF PRESENTATION
ImageMax, Inc. ("ImageMax") was founded in November 1996 to become a
leading, national single source provider of integrated document management
solutions. On December 4, 1997, ImageMax sold 3,100,000 shares of its common
stock in an initial public offering (the "Offering") at $12 per share which
raised net proceeds to ImageMax of $30.5 million, net of offering costs of $6.7
million. Concurrent with the Offering, ImageMax began material operations with
the acquisition of 14 document management services companies (the "Founding
Companies"). ImageMax was identified as the accounting acquirer for financial
statement presentation purposes. These acquisitions were accounted for using the
purchase method of accounting.
The accompanying unaudited historical consolidated financial statements
include the accounts of ImageMax and its subsidiaries (the "Company"). All
material intercompany balances and transactions have been eliminated in
consolidation. The consolidated balance sheet as of December 31, 1997 has been
derived from the Company's consolidated financial statements that have been
audited by the Company's independent public accountants. The unaudited financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information pursuant to rules and regulations
of the Securities and Exchange Commission. Accordingly, unaudited interim
financial statements such as those in this report allow certain information and
footnotes required by generally accepted accounting principles for year end
financial statements to be excluded. The Company believes all adjustments
necessary for a fair presentation of these interim financial statements have
been included and are of a normal and recurring nature. Interim results are not
necessarily indicative of results for a full year. These interim financial
statements should be read in conjunction with the Company's pro forma and
historical financial statements and notes thereto included in its Annual Report
on Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There were no significant changes in the accounting policies of the Company
during the periods presented. For a description of these policies, refer to Note
2 of the Notes to Consolidated Financial Statements of ImageMax, Inc. and
Subsidiaries included in the Company's Annual Report on Form 10-K.
3. ACQUISITIONS
Since the Offering and prior to June 30, 1998, the Company acquired 11
additional document management services companies (the "Acquired Businesses").
The aggregate purchase price approximated $20.3 million plus transaction costs.
The purchases were funded through borrowings under the Company's line of credit
facility (see Note 4) and the issuance of 756,223 shares of the Company's common
stock. The excess of purchase price over net assets acquired of approximately
$18.1 million was allocated to goodwill.
4
<PAGE>
The following unaudited pro forma information shows the results of the
Company's operations in accordance with APB No. 16, "Business Combinations," for
the six months ended June 30, 1998 and 1997 as though the acquisitions of the
Acquired Businesses had occurred as of January 1, 1997 (in thousands, except
share data):
SIX MONTHS
ENDED JUNE 30,
----------------------
1998 1997
------- -------
Total revenues................................. $36,357 $34,600
Operating income............................... $ 2,119 $ 1,434
Net income (loss).............................. $ 567 $ (121)
Basic and diluted net income (loss) per share.. $ 0.10 $ (0.02)
The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the actual results of operations had the
acquisitions of the Acquired Businesses taken place as of January 1, 1997, or
the results that may occur in the future. The pro forma results do not give
effect to the Offering and exclude any reductions in historical interest
expense. Furthermore, the pro forma results do not give effect to all cost
savings or incremental costs which may occur as a result of the integration and
consolidation of the Acquired Businesses.
The following table displays supplemental cash flow information for the six
months ended June 30, 1998 of the net non-cash assets acquired relating to
Acquired Businesses (in thousands):
Fair value of assets acquired................... $23,280
Liabilities assumed............................. (2,828)
Fair value of common stock issued............... (4,641)
Cash acquired................................... (119)
-------
Total consideration........................... $15,692
=======
4. LINE OF CREDIT AND LONG-TERM OBLIGATIONS
On March 30, 1998, the Company entered into a credit facility with a bank
(the "Credit Facility"), providing a revolving line of credit of $30 million in
borrowings. Under the terms of the Credit Facility, the Company may borrow up to
$25 million to finance future acquisitions and up to $5 million for working
capital purposes. Outstanding working capital advances of up to $2 million may
be made in the form of standby letters of credit for an applicable fee. The
Credit Facility is secured by substantially all of the assets of the Company.
Borrowings under the facility bear interest at LIBOR or prime plus an applicable
margin at the option of the Company. In addition to interest and other customary
fees, the Company is obligated to remit a fee ranging from 0.2% to 0.375% per
year on unused commitments. The Credit Facility matures on December 31, 2002,
and is subject to certain financial covenants which pertain to criteria such as
minimum levels of cash flow, ratio of debt to cash flow, and ratio of fixed
charges to cash flow. The Company's available borrowing capacity under the
Credit Facility is contingent upon the Company meeting certain financial ratios
and other criteria.
Upon entering into the Credit Facility, the Company incurred $659,000 of
lending and other customary fees. The Company has capitalized these amounts and
included them within intangible assets at June 30, 1998. These costs will be
amortized to interest expense over the term of the Credit Facility.
5
<PAGE>
As of June 30, 1998, the Company had borrowed $16.4 million under the
Credit Facility. As of August 4, 1998, $18.1 million was outstanding under the
facility. The increase was attributable to working capital uses.
In connection with its acquisitions, the Company assumed debt of
approximately $928,000 representing notes payable, capital lease obligations and
other indebtedness. As of June 30, 1998, $481,000 was outstanding under this
indebtedness.
5. EARNINGS PER SHARE
The Company has presented net income (loss) per share pursuant to Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which
requires dual presentation of basic and diluted earnings per share. Basic
earnings per share ("Basic EPS") is computed by dividing the net income (loss)
for the period by the weighted average number of shares of common stock
outstanding for the period. Diluted earnings per share ("Diluted EPS") is
computed by dividing net income (loss) for the period by the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period. For both periods presented, common stock equivalents are not
included, as their effect is antidilutive and, as such, Basic EPS and Diluted
EPS are the same.
6. INTANGIBLE ASSETS
The Company continually evaluates whether events or circumstances have
occurred that indicate that the remaining useful lives of intangibles assets
should be revised or that the remaining balance of such assets may not be
recoverable. When the Company concludes it is necessary to evaluate its
long-lived assets, including intangibles, for impairment, the Company will use
an estimate of the related undiscounted cash flow as the basis to determine
whether impairment has occurred. If such a determination indicates an impairment
loss has occurred, the Company will utilize the valuation method which measures
fair value based on the best information available under the circumstances. As
of June 30, 1998, the Company believes that no revisions of the remaining useful
lives or write-downs of intangible assets are required.
7. COMPREHENSIVE INCOME
The Company has reviewed SFAS No. 130, "Reporting Comprehensive Income",
and has determined that for the six months ended June 30, 1998 and 1997, no
items meeting the definition of comprehensive income as specified in SFAS No.
130 existed in the consolidated financial statements. As such, no disclosure is
necessary to comply with SFAS No. 130.
6
<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, this Report on Form
10-Q contains certain forward-looking statements that involve substantial risks
and uncertainties. When used in this Report, the words "anticipate," "believe,"
"estimate," "expect", and similar expressions, as they relate to the Company or
its management, are intended to identify such forward-looking statements. The
Company's actual results, performance, or achievements could differ materially
from the results expressed in, or implied by, these forward-looking statements.
Factors that could cause or contribute to such differences include those set
forth in "Business--Risk Factors" as disclosed in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
The Company's revenues consist of service revenues, which are 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.
Historical Results of Operations
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997,
and Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
The results of operations for the three months ended and six months ended
June 30, 1998, respectively, include the revenues, cost of revenues and S&A
expenses of the Founding Companies for the entire period, and for Acquired
Businesses from the date of their acquisition. ImageMax did not conduct material
operations prior to the Offering. The results of operations for the three months
ended and six months ended June 30, 1997, respectively, include only S&A
expenses of ImageMax, principally legal and travel costs, and a special
compensation charge.
Unaudited Pro Forma Combined, as Adjusted, Results of Operations
The unaudited pro forma, as adjusted, combined Founding Companies' results
of operations for the three months ended June 30, 1997 include pro forma
combined revenues, cost of revenues and S&A expenses for the Founding Companies
as if their acquisition occurred on January 1, 1997. Such results are not
necessarily indicative of the results the Company would have obtained had these
events actually then occurred or of the Company's future results. These results
exclude the operating results of the Acquired Businesses. Management believes
the pro forma presentation is informative in analyzing the business.
Prior to their acquisition, the Founding Companies were managed as
independent private companies, and the results of their operations reflect
different tax structures (S corporations and C corporations) which have
influenced, among other things, their historical levels of owners' compensation.
Certain former owners and key employees of the Founding Companies have agreed to
certain reductions in their historical compensation subsequent to their
acquisition, and these adjustments are reflected in the pro forma results of
operations.
7
<PAGE>
The Company has begun and will continue to integrate the operations and
administrative functions of the Founding Companies over a period time. This
integration process may present opportunities to reduce costs through the
elimination of duplicative functions and through economies of scale, but will
also necessitate additional costs and expenditures for corporate management and
administration, systems integration and facilities expansion. These costs and
possible cost-savings may make the comparison to past pro forma operating
results incompatible with, or not indicative of, future performance.
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
PRO FORMA, AS PRO FORMA, AS
ADJUSTED, COMBINED ADJUSTED, COMBINED
HISTORICAL FOUNDING COMPANIES, HISTORICAL FOUNDING COMPANIES,
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
-------------- ------------------- -------------- -------------------
(IN THOUSANDS-EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Services ................... $12,393 $ 9,587 $22,250 $ 17,961
Products ................... 4,199 3,592 7,294 6,630
------- -------- ------- --------
16,592 13,179 29,544 24,590
------- -------- ------- --------
Cost of revenues:
Services ................... 8,293 6,058 14,740 11,229
Products ................... 2,700 2,439 4,755 4,492
Depreciation ............... 285 352 624 695
------- -------- ------- --------
11,278 8,849 20,119 16,416
------- -------- ------- --------
Gross profit ............ 5,314 4,330 9,425 8,174
Selling and administrative
expenses ................... 4,043 2,878 7,328 5,692
Special compensation charge .. -- 1,304 -- 1,304
Amortization of intangibles .. 341 299 641 598
------- -------- ------- --------
Operating income (loss) . 930 (151) 1,456 580
Interest expense (income),
net ........................ 264 (5) 312 (10)
------- -------- ------- --------
Income (loss) before
income taxes ..... 666 (146) 1,144 590
Income tax provision ......... 210 532 468 897
------- -------- ------- --------
Net income (loss) ............ $ 456 $ (678) $ 676 $ (307)
======= ======== ======= ========
Basic and dilutive net
income (loss) per share .... $ 0.08 $ (0.12) $ 0.12 $ (0.06)
======= ======== ======= ========
Shares used in computing
basic and dilutive net
income (loss) per share .... 5,891 5,457 5,720 5,457
======= ======== ======= ========
</TABLE>
8
<PAGE>
Results of Historical Three Months Ended June 30, 1998 Compared to Pro Forma
Combined, as Adjusted, Three Months Ended June 30, 1997
Total revenues. For the three months ended June 30, 1998, total revenues
increased $3.4 million, or 25.9%, as compared to the corresponding period in
1997. This increase was derived from a service revenue increase of 29.3% and a
product revenue increase of 16.9%. For the three months ended June 30, 1998,
service revenue and product revenue, respectively, comprised 74.7% and 25.3% of
total revenues, as compared to 72.7% and 27.3% in the corresponding period in
1997.
The increase in total revenues, as well as the change in mix between
service and product revenues, was primarily attributable to the Acquired
Businesses which are not included in the three months ended June 30, 1997. When
comparing the three months ended June 30, 1998 to the corresponding period in
1997, the Founding Companies' experienced a decline in total revenues of 1.9%
and a slight change in mix (73% service revenues and 27% product revenues).
Gross profit. For the three months ended June 30, 1998, gross profit
increased by $984,000, or 22.7%, as compared to the corresponding period in
1997, while as a percentage of total revenues, gross profit declined from 32.9%
to 32.0%. The Founding Companies' experienced a decrease of $86,000 and a
decline in gross profit percentage of 0.5%. Acquired Businesses contributed $1.1
million of gross profit at a gross profit percentage of 29.0% for the three
months ended June 30, 1998.
The Founding Companies' gross profit percentage decline was primarily due
to: (1) a shift toward lower margin equipment and supplies sales and away from
higher margin service and software sales; (2) higher service costs in the South
Carolina and Virginia business units, primarily due to inefficient
production; and (3) an offsetting decrease in service costs at most other
locations, particularly in the California and Oregon business units, due to a
combination of improved media conversion efficiency and larger revenue volumes.
Selling and administrative expenses. For the three months ended June 30,
1998, S&A expenses increased by $1.2 million, or 40.5%, as compared to the
corresponding period in 1997. This increase is comprised of $605,000 in
corporate expenses; $713,000 attributable to the Acquired Businesses; and an
offsetting decrease of $153,000 attributable to the Founding Companies.
The increase in corporate expenses relates primarily to the staffing of the
Company's headquarters function; the integration of technology; sales
development costs; increased travel and marketing expenses; and the costs
associated with being a public company. Pro forma results for 1997 exclude the
bulk of corporate overhead costs. The Founding Companies' decrease is primarily
attributable to cost reduction measures at several business units.
Special compensation charge. For the three months ended June 30, 1997, the
Company sold a total of 186,154 shares of common stock to officers and directors
of ImageMax at prices of $1.18 and $2.36 per share. As a result, the Company
recorded a non-recurring, non-cash compensation charge of $1.3 million,
representing the difference between the amount paid for the shares and the
deemed value for accounting purposes (based on the Offering price of $12.00 per
share).
Operating income. For the three months ended June 30, 1998, operating
income increased $1.1 million, as compared to an operating loss of $151,000 in
the corresponding period in 1997. Excluding the impact of corporate expenses,
operating income increased by $1.7 million for the three months ended June 30,
1998 as compared to the corresponding period in 1997.
Interest expense, net. For the three months ended June 30, 1998, net
interest expense amounted to $264,000 as compared to net interest income of
$5,000 in the corresponding period in 1997. The increase in interest expense is
attributable to borrowings under the Credit Facility and the amortization of
related financing costs.
9
<PAGE>
Income tax provision. For the three months ended June 30, 1998, the
effective income tax rate amounted to 31.5%, as compared to a tax provision of
$532,000 on a loss before taxes of $146,000 in the corresponding period in 1997.
The decline in the effective tax rate is primarily due to: (1) an increase in
income before taxes; (2) a lessening of the impact of non-deductible goodwill
amortization in relation to pre-tax earnings; and (3) the use of net operating
losses originating in 1997.
Results of Historical Six Months Ended June 30, 1998 Compared to Pro Forma
Combined, as Adjusted, Six Months Ended June 30, 1997
Total revenues. For the six months ended June 30, 1998, total revenues
increased $4.9 million, or 20.1%, as compared to the corresponding period in
1997. This increase was derived from a service revenue increase of 23.9% and a
product revenue increase of 10.0%. For the six months ended June 30, 1998,
service revenue and product revenue, respectively, comprised 75.3% and 24.7% of
total revenues, as compared to 73.0% and 27.0% in the corresponding period in
1997.
The increase in total revenues was comprised of $500,000 attributable to
the Founding Companies and $4.4 million attributable to the Acquired Businesses
which are not included in the six months ended June 30, 1997. The Founding
Companies' increase was primarily due to: (1) increased utilization of media
conversion capacity; and (2) an increase in off-shore data entry sales volume.
Gross profit. For the six months ended June 30, 1998, gross profit
increased by $1.2 million, or 15.3%, as compared to the corresponding period in
1997, while as a percentage of total revenues, gross profit declined from 33.2%
to 31.9%. The Founding Companies' experienced a decrease of $29,000 and a
decline in gross profit percentage of 0.7%. Acquired Businesses contributed $1.3
million of gross profit at a gross profit percentage of 27.9% for the six months
ended June 30, 1998.
The Founding Companies' gross profit percentage decline was primarily due
to: (1) higher service costs in the South Carolina and Virginia business units,
primarily due to production inefficiencies; (2) an offsetting decrease in
service costs at most other locations, particularly in the California, Indiana,
and Oregon business units, due to a combination of improved media conversion
efficiency and larger revenue volumes; (3) an offsetting increase attributable
to the increase in high margin digital imaging software sales; and (4) an
offsetting increase attributable to the increase in off-shore data entry volume.
Selling and administrative expenses. For the six months ended June 30,
1998, S&A expenses increased by $1.6 million, or 28.7%, as compared to the
corresponding period in 1997. This increase is comprised of $1.0 million in
corporate expenses; $0.9 million attributable to the Acquired Businesses; and an
offsetting decrease of $0.3 million attributable to the Founding Companies.
The increase in corporate expenses relates primarily to the staffing of the
Company's headquarters function; the integration of technology; sales
development costs; increased travel and marketing expenses; and the costs
associated with being a public company. The Founding Companies' decrease is
primarily attributable to cost reduction measures at several business units.
Special compensation charge. For the six months ended June 30,1997, the
Company sold a total of 186,154 shares of Common stock to officers and directors
of ImageMax at prices of $1.18 and $2.36 per share. As a result, the Company
recorded a non-recurring, non-cash compensation charge of $1.3 million,
representing the difference between the amount paid for the shares and the
deemed value for accounting purposes (based on the Offering price of $12.00 per
share).
10
<PAGE>
Operating income. For the six months ended June 30, 1998, operating income
increased by $876,000, or 151.0%, as compared to the corresponding period in
1997. Excluding the impact of corporate expenses, operating income increased by
$1.8 million, or 190.3%.
Interest expense, net. For the six months ended June 30, 1998, net interest
expense amounted to $312,000 as compared to net interest income of $10,000 in
the corresponding period in 1997. The increase in interest expense is
attributable to borrowings under the Credit Facility and the amortization of
related financing costs.
Income tax provision. For the six months ended June 30, 1998, the effective
income tax rate amounted to 40.9%, as compared to a tax provision of $897,000 on
income before taxes of $590,000 in the corresponding period in 1997. The decline
in the effective tax rate is primarily due to: (1) an increase in income before
taxes; (2) a lessening of the impact of non-deductible goodwill amortization in
relation to pre-tax earnings; and (3) the use of net operating losses
originating in 1997.
Liquidity and Capital Resources
The Company's primary capital requirements relate to the implementation of
its acquisition program and, to a lesser extent, working capital and capital
expenditures.
As of June 30, 1998 and December 31, 1997, respectively, the Company had
cash and cash equivalents of $882,000 and $1.3 million, and working capital of
$4.9 million and $3.0 million. The increase in working capital was primarily
attributed to Acquired Businesses and borrowings under the Credit Facility.
For the six months ended June 30, 1998, net cash provided by operating
activities amounted to $621,000; net cash used in investing activities amounted
to $16.3 million; and net cash provided by financing activities amounted to
$15.3 million.
Net cash provided by operating activities represents an increase in working
capital derived principally from improved cash management offset by the payment
of accrued expenses related to the Offering.
Net cash used in investing activities represents the Company's investments
in the Acquired Businesses and capital equipment and technology. In the six
months ended June 30, 1998, the Company made $633,000 of capital expenditures,
principally production equipment and computer hardware.
Net cash provided by financing activities represents borrowings of $16.4
million under the Credit Facility, the payment of $659,000 in related financing
costs, net of repayments of other indebtedness. Of the amount borrowed under the
facility, $14.4 million was used to finance the purchase of the Acquired
Businesses and $2.0 million was used for working capital purposes and capital
expenditures. As of June 30, 1998 and August 4, 1998, respectively, $13.6
million and $11.9 million was available under the facility. The decrease in
availability from June 30 is due to borrowings of $1.7 million for working
capital purposes.
The Company plans to continue with its acquisition program and to invest in
equipment and technology to meet the needs of its expanding operations and to
improve its operating efficiency. The Company believes that the capital
resources described above will be sufficient to meet its liquidity requirement
for its operations and acquisition program in the foreseeable future.
11
<PAGE>
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company issued a total of 740,904 shares of common stock as partial
consideration in connection with the acquisition of the following eight
companies:
o On April 23, 1998, 94,340 shares in connection with FileTrac, Inc. of
Hayward, CA
o On April 23, 1998, 75,472 shares in connection with MicroFilm World,
Inc. of Charlotte, NC
o On May 7, 1998, 20,270 shares in connection with COMSTOR, Inc. of
Houston, TX
o On May 7, 1998, 91,448 shares in connection with Southwest Image
Technology, Inc. of Houston, TX
o On May 8, 1998, 133,922 shares in connection with Concept
Micro-Imaging, Inc. of Minnetonka, MN
o On June 8, 1998, 15,811 shares in connection with Micrographics Plus,
Inc. of Houston, TX
o On June 11, 1998, 173,535 shares in connection with RIS Document
Solutions, Inc. of Dallas, TX
o On June 11, 1998, 136,106 shares in connection with Advanced Image
Management, Inc. of Syracuse, NY
These issuances of common stock did not involve underwriters and were
exempt from registration under the Securities Act by virtue of the exemption
provided by Section 4(2) thereof for transactions not involving any public
offering.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECRUITY HOLDERS
The Company held its Annual Meeting of Shareholders on June 15, 1998. Bruce
M. Gillis, David C. Carney, and Mitchell J. Taube, 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
------- --------- ---------------
Bruce M. Gillis 4,658,736 60,633
David C. Carney 4,678,236 41,133
Mitchell J. Taube 4,658,736 60,633
Arthur Andersen, LLP was ratified to serve as the Company's independent
accountants for the fiscal year ending December 31, 1998, with 4,419,587 votes
favoring ratification, 293,732 votes opposing, and 6,050 votes abstaining.
Item 5. OTHER INFORMATION
Discretionary Proxy Voting Authority/Shareholder Proposals
On May 21, 1998 the Securities and Exchange Commission adopted an amendment
to Rule 14a-4, as promulgated under the Securities and Exchange Act of 1934. The
amendment to Rule 14a-4(c)(1) governs the Company's use of its discretionary
proxy voting authority with respect to a shareholder proposal which the
shareholder has not sought to include in the Company's proxy statement. The new
amendment provides that if a proponent of a proposal fails to notify the company
at least 45 days prior to the month and day of mailing of the prior year's proxy
statement, then the management proxies will be allowed to use their
discretionary voting authority when the proposal is raised at the meeting,
without any discussion of the matter in the proxy statement.
12
<PAGE>
With respect to the Company's 1999 Annual Meeting of Shareholders, if the
Company is not provided notice of a shareholder proposal, which the shareholder
has not previously sought to include in the Company's proxy statement, by March
16, 1999, the management proxies will be allowed to use their discretionary
authority as outlined above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
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).
27 Financial Data Schedule (filed in electronic format only.)
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IMAGEMAX, INC.
BY: /S/ BRUCE M. GILLIS August 14, 1998
- ---------------------------- ---------------
Bruce M. Gillis Date
Chairman of the Board and
Chief Executive Officer
BY: /S/ JAMES D. BROWN August 14, 1998
- ---------------------------- ---------------
James D. Brown Date
Chief Financial Officer and
Principal Accounting Officer
14
<PAGE>
EX. 10.26
AMENDMENT NO. 1
TO
CREDIT AGREEMENT
AMENDMENT NO. 1 dated as of June 9,1998 by and among IMAGEMAX, INC., a
Pennsylvania corporation (referred to herein as the "Borrower"), each Subsidiary
of Borrower (referred to herein, with the Borrower, as the "Company
Affiliates"), FIRST UNION NATIONAL BANK (successor by merger to CORESTATES BANK,
N.A.), a national banking association for itself ("First Union"), and as agent
hereunder (the "Agent") and any other bank becoming party to this Agreement, and
their successors and assigns (First Union in its individual capacity and such
other banks, each referred to herein as a "Bank," or collectively, the "Banks").
WHEREAS, the Borrower, the other Company Affiliates, the Agent and First
Union entered into a certain Credit Agreement dated as of March 30, 1998 (as
amended on the date hereof and hereafter, the "Credit Agreement"); and
WHEREAS, Commerce Bank, N.A. has become a "Bank" under the Credit Agreement
on the date hereof;
WHEREAS, the Borrower, the other Company Affiliates, the Agent and the
Banks have agreed to amend the Credit Agreement in certain respects;
NOW THEREFORE, in consideration of the mutual agreements herein contained,
the parties hereto, intending to be legally bound, hereby agree as follows:
1. Definitions. Section 1.01 of the Credit Agreement shall be amended to
restate the definition of "Required Banks" as follows:
"Required Banks" means: (a) if the Agent, as a Bank, holds aggregate
Ratable Shares of seventy percent (70%) or more, then all of the Banks, or
(b) otherwise, then Banks holding aggregate Ratable Shares of at least
seventy percent (70%); provided that, any Bank in default of its
obligations
<PAGE>
under this Agreement will not be counted for purposes of determining the
Required Banks.
2. Funded Debt to Cash Flow Covenant. Section 9.02 is hereby amended to
read in full as follows:
Section 9.02. Ratio of Funded Debt to Cash Flow. The Company
Affiliates shall not permit the ratio of Funded Debt at the end of any
fiscal quarter to its Adjusted Cash Flow for the immediately preceding
three (3) fiscal quarters to exceed the following ratios:
Fiscal Quarters Ending
In the Following Periods Ratio
------------------------ -----
Closing through 03/31/98 2.0 to 1.0
04/01/98 through 12/31/98 2.5 to 1.0
01/01/99 through 12/31/99 3.0 to 1.0
01/01/00 through 12/31/00 3.5 to 1.0
01/01/01 through 12/31/01 3.0 to 1.0
01/01/02 and thereafter 2.5 to 1.0
3. Restriction on Acquisitions. Section 9.10(b)(iii) and (c)(ii) are each
amended to delete the word "Required" in the first line.
4. Exhibit 2.01. Exhibit 2.01 is hereby amended as attached hereto.
5. Cgpitalized Terms. All capitalized terms used in this Amendment, unless
otherwise defined herein, shall have the meanings ascribed thereto in the
Agreement.
6. Representations and Covenants. The Company Affiliates certify that all
representations and warranties contained in the Credit Agreement, including
without limitation the schedules thereto, are true, correct and complete on and
as of the date hereof, and that all covenants and agreements made in the Credit
Agreement have been complied with and fulfilled, and that no Default or Event of
Default is in existence on the date hereof.
7. Ratification. Other than as specifically set forth herein, the Company
Affiliates hereby ratify and confirm the Credit Agreement and all instruments
and agreements
2
<PAGE>
relating thereto, and confirms that (a) all of the foregoing remain in full
force and effect, (b) each of the foregoing is enforceable against the Company
Affiliates in accordance with its terms, and (c) the Company Affiliates have no
defenses to their obligations or claims relative to the Credit Agreement.
8. Miscellaneous. Article XII of the Credit Agreement is incorporated
herein by this reference and shall apply to this Amendment No. 1. Execution of
this Amendment No. 1 shall not constitute an agreement by the Agent or any Bank
to execute any other amendment or modification of the Credit Agreement.
References to the Credit Agreement in any document relating thereto shall be
deemed to include this Amendment No. 1. This Amendment No. 1 may be executed in
counterparts.
IN WITNESS WHEREOF, the Company Affiliates, the Agent and the Banks have
caused this Agreement to be duly executed and delivered as of the day and year
first above written.
FIRST UNION NATIONAL BANK, successor by
merger to CORESTATES BANK, N.A. for itself
and as Agent
By: /s/ William Johnston
-----------------------------------------
William Johnston
Vice President
Address: Broad & Chestnut Streets
P.O. Box 7618
Philadelphia, PA 19101
With a copy to:
FIRST UNION NATIONAL BANK,
successor by merger to
CORESTATES BANK, N.A.
Meetinghouse Business Center
2240 Butler Pike
Plymouth Meeting, PA 19462
Attn: William Johnston
IMAGEMAX, INC.
IMAGEMAX OF INDIANA, INC.
IMAGEMAX OF SOUTH CAROLINA, INC.
IMAGEMAX OF TENNESSEE, INC.
3
<PAGE>
IMAGEMAX OF ARIZONA, INC.
IMAGEMAX OF NEBRASKA, INC.
IMAGEMAX OF OHIO, INC.
IMAGEMAX OF NEW YORK, INC.
IMAGEMAX OF OREGON, INC.
IMAGEMAX OF CALIFORNIA, INC.
IMAGEMAX OF VIRGINIA, INC.
AMMCORP ACQUISITION CORP.
IMAGEMAX OF DELAWARE, INC.
Attest:
By: /s/ Andrew R. Bacas By: /s/ James D. Brown
------------------- -------------------------
Andrew R. Bacas James D. Brown
Secretary Treasurer
Address: 1100 Hector Street
Suite 396
Conshohocken, PA 19428
Attn: President
[corporate seal]
4
<PAGE>
Exhibit 2.01
Banks and Ratable Shares
Revolving Credit
Facility
----------------
First Union National Bank,
Successor by merger to
Corestates Bank, N.A.
Broad & Chestnut Streets
Philadelphia, PA 19101 $20,000,000
Commerce Bank, N.A.
1701 Route 70 East
Cherry Hill, NJ 08034 $10,000,000
5
<PAGE>
ImageMAX, Inc.
1100 Hector Street, Suite 396
Conshohocken, PA 19428
June 9, 1998
First Union National Bank
2240 Butler Pike
Plymouth Meeting, PA 19462-1302
Attn: William Johnston
Commerce Bank, N.A.
200 Lancaster Avenue
Devon, PA 19333
Attn: Roger L. Bomgardner
Re: Credit Agreement dated March 30, 1998
Gentlemen:
This is to confirm that all documentation sent under Sections 9.10(b)(iii)
or (c)(ii) will be sent by overnight courier, receipt confirmation required, and
that each Bank will receive the same documentation package.
Very truly yours,
IMAGEMAX, INC.
By: /s/ James D. Brown
-------------------------------
James D. Brown
Treasurer
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