SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
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
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IMAGEMAX, INC.
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(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.)
1100 E. Hector Street, Suite 396
Conshohocken, Pennsylvania 19428
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(Address of principal executive offices) (Zip Code)
(610) 832-2111
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of August 10, 1999:
Common Stock, no par value 6,625,060
-------------------------- ----------------
Class Number of Shares
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page
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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 6 - Exhibits and Reports on Form 8-K............................... 11
SIGNATURES.................................................................. 12
<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,
---------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Services ........................... $ 12,092 $ 12,393 $ 24,604 $ 22,250
Products ........................... 3,579 4,199 6,549 7,294
-------- -------- -------- --------
15,671 16,592 31,153 29,544
-------- -------- -------- --------
Cost of revenues:
Services ........................... 7,447 8,293 14,889 14,740
Products ........................... 2,337 2,700 4,188 4,755
Depreciation ....................... 452 285 878 624
-------- -------- -------- --------
10,236 11,278 19,955 20,119
-------- -------- -------- --------
Gross profit .................... 5,435 5,314 11,198 9,425
Selling and administrative expenses .. 4,291 4,043 8,688 7,328
Amortization of intangibles .......... 447 341 896 641
Restructuring costs .................. -- -- 827 --
-------- -------- -------- --------
Operating income ................ 697 930 787 1,456
Interest expense ..................... 472 264 1,004 312
-------- -------- -------- --------
Income (loss) before income taxes 225 666 (217) 1,144
Income tax provision ................. -- 210 -- 468
-------- -------- -------- --------
Net income (loss) .................... $ 225 $ 456 $ (217) $ 676
======== ======== ======== ========
Basic and diluted net income (loss)
per share .......................... $ 0.03 $ 0.08 $ (0.03) $ 0.12
======== ======== ======== ========
Shares used in computing basic and
diluted net income (loss) per share 6,605 5,891 6,552 5,720
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
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IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ($400 restricted as to use as of
June 30, 1999) ........................................ $ 1,443 $ 736
Accounts receivable, net of allowance for doubtful
accounts of $349 and $600 as of June 30, 1999 and
December 31, 1998, respectively ....................... 10,465 11,801
Inventories ............................................... 2,091 2,185
Prepaid expenses and other ................................ 828 609
-------- --------
Total current assets .................................. 14,827 15,331
Property, plant and equipment, net ........................... 6,385 7,036
Intangibles, primarily goodwill, net ......................... 45,363 46,607
Other assets ................................................. 778 600
-------- --------
$ 67,353 $ 69,574
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt ..... $ 19,480 $ 20,239
Accounts payable .......................................... 4,360 4,472
Accrued expenses .......................................... 4,274 5,248
Deferred revenue .......................................... 1,563 2,600
-------- --------
Total current liabilities ............................. 29,677 32,559
-------- --------
Long-term debt ............................................... 1,016 257
-------- --------
Other long-term liabilities .................................. 84 106
-------- --------
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized, none issued ............................... -- --
Common stock, no par value, 40,000,000 shares authorized,
6,607,454 and 6,479,739 shares issued and outstanding
as of June 30, 1999 and December 31, 1998, respectively 52,786 52,645
Accumulated deficit ....................................... (16,210) (15,993)
-------- --------
Total shareholders' equity ............................ 36,576 36,652
-------- --------
$ 67,353 $ 69,574
======== ========
</TABLE>
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,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................................... $ (217) $ 676
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization ..................................... 1,774 1,265
Changes in operating assets and liabilities,
excluding effect of businesses acquired
and Southeast Group divestiture--
Accounts receivable, net ....................................... 1,336 (1,572)
Inventories .................................................... 94 (160)
Prepaid expenses and other ..................................... (219) (381)
Other assets ................................................... (178) 5
Accounts payable ............................................... (112) 546
Accrued expenses ............................................... (1,010) 355
Income taxes payable ........................................... -- 299
Deferred revenue ............................................... (1,037) (412)
-------- --------
Net cash provided by operating activities ................... 431 621
-------- --------
Cash flows from investing activities:
Proceeds from Southeast Group divestiture ............................ 563 --
Purchases of property and equipment .................................. (227) (633)
Payments for businesses acquired, net of cash acquired ............... -- (15,692)
Increase in deferred acquisition costs ............................... -- (18)
-------- --------
Net cash provided by (used in) investing activities ......... 336 (16,343)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit ..................... (720) 16,400
Payment of deferred financing costs .................................. (100) (659)
Proceeds from mortgage transaction ................................... 900 --
Principal payments on debt and capital lease
obligations ....................................................... (196) (447)
Proceeds from issuance of common stock ............................... 56 --
-------- --------
Net cash provided by (used in) financing activities ......... (60) 15,294
-------- --------
Net increase (decrease) in cash and cash equivalents ................... 707 (428)
Cash and cash equivalents, beginning of period ......................... 736 1,310
-------- --------
Cash and cash equivalents, end of period
($400 restricted as to use as of June 30, 1999) ...................... $ 1,443 $ 882
======== ========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest .......................................................... $ 1,117 $ 171
======== ========
Income taxes....................................................... $ 14 $ 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. During 1998,
ImageMax acquired 13 additional document management services companies. These
acquisitions were accounted for using the purchase method of accounting.
Pursuant to a management and operational reorganization, the Company sold
operations in three locations (Charlotte, NC; Cayce, SC; and Cleveland, TN--the
"Southeast Group") in December 1998 and January 1999 and decided to close its
Indianapolis, IN business unit in March 1999. The Company currently operates 14
business units in 15 states.
The accompanying unaudited consolidated financial statements include the
accounts of ImageMax and its subsidiaries (the "Company"). All material
intercompany balances and transactions have been eliminated in consolidation.
These financial statements have been prepared in conformity with principles of
accounting applicable to a going concern. These principles contemplate the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company has incurred significant operating losses since
inception, and as of June 30, 1999, had an accumulated deficit of $16.2 million.
In addition, as more fully described in Note 5, ImageMax is in default of its
credit facility with its banks under which it had borrowings of $19.4 million as
of June 30, 1999. Management is currently in discussions with its banks
concerning a refinancing of the Company's debt. If the Company is not able to
favorably restructure its financing or if it continues to incur significant
operating losses, the Company may not be able to sustain its operations and
continue as a going concern. The consolidated balance sheet as of December 31,
1998 has been derived from the Company's consolidated financial statements that
have been audited by the Company's independent public accountants. The Company's
independent public accountants, Arthur Andersen LLP, have stated in their audit
report included in the Company's Annual Report on Form 10-K for the year ending
December 31, 1998 that the events of default under the Company's credit facility
raise substantial doubt about the Company's ability to continue as a going
concern.
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 for the year ending December
31, 1998.
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 changes in the accounting policies of the Company during the
periods presented. For a description of these policies, refer to Note 2 of Notes
to Consolidated Financial Statements of ImageMax, Inc. and Subsidiaries included
in the Company's Annual Report on Form 10-K for the year ending December 31,
1998.
3. ACQUISITIONS AND DIVESTITURES:
In January 1999, the Company completed its divestiture of the Southeast
Group with the sale of the Cayce, SC and Cleveland, TN business units. As of
December 31,1998, the Company recorded a loss on the sale of these business
units as part of a total charge of $4,995,000, including a write off of
$4,229,000 in related goodwill. Revenues and operating losses, respectively, of
the former Southeast Group amounted to $113,000 and $15,000 for the six months
ended June 30, 1999 and $2,769,000 and $266,000 for the six months ended June
30, 1998.
In March 1999, management decided to close the Company's underperforming
Indianapolis, IN business unit. The closing of this business unit was
substantially completed in May 1999. As of June 30, 1999, the Company recorded a
loss relating to the closing
4
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3. ACQUISITIONS AND DIVESTITURES (Continued):
of $557,000, primarily a write off in related goodwill of $300,000, severance
payments and lease termination costs. Revenues and operating losses,
respectively, of the former Indianapolis operation amounted to $498,000 and
$376,000 for the six months ended June 30, 1999 and $1,595,000 and $205,000 for
the six months ended June 30, 1998.
In the first eight months of 1998, the Company acquired 13 document
management services companies. The following unaudited pro forma information,
which excludes the results of the former Southeast Group and Indianapolis
operations (but inclusive of restructuring charges), shows the results of the
Company's operations in accordance with APB No. 16, "Business Combinations," for
the six months ended June 30, 1999 and 1998 as though the acquisitions had
occurred as of January 1, 1998:
Six Months
Ended June 30,
---------------------------
1999 1998
------------ -----------
Total revenue................................ $ 30,542,000 $31,400,000
Operating income............................. $ 1,178,000 $ 2,775,000
Net income................................... $ 174,000 $ 1,223,000
Basic and diluted net income per share....... $ 0.03 $ 0.19
The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the actual results of operations had these
acquisitions taken place as of January 1, 1998, or the results that may occur in
the future.
4. RESTRUCTURING COSTS:
For the six months ended June 30, 1999, the Company recorded a
restructuring charge of $827,000, primarily related to the closing of the
Indianapolis business unit (comprising $557,000, including a write off of
$300,000 in related goodwill, severance payments, and lease termination costs)
and executive severance payments. As of June 30, 1999 and December 31, 1998,
respectively, accrued restructuring charges (classified as accrued expenses)
amounted to $746,000 and $1,124,000, of which $641,000 and $1,120,000 related to
severance payments with the remaining amount attributable to lease termination
costs. During the six months ended June 30, 1999, the Company paid $905,000 of
accrued restructuring charges, of which $836,000 related to severance payments
with the remaining $69,000 attributable to lease termination costs.
5. LINE OF CREDIT AND LONG-TERM OBLIGATIONS:
On March 30, 1998, the Company entered into a credit facility, providing a
revolving line of credit of $30 million in borrowings (the "Credit Facility").
This agreement was substantially amended in November 1998 as described below.
Under the initial terms of the Credit Facility, the Company could borrow up to
$25 million to finance future acquisitions and up to $5 million for working
capital purposes. Prior to amendment, borrowings under the facility bore
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 was
obligated to remit a fee ranging from 0.2% to 0.375% per year on unused
commitments. The Credit Facility is secured by substantially all of the assets
of the Company. The Credit Facility 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. Prior to amendment,
borrowing under the Credit Facility was contingent upon the Company meeting
certain financial ratios and other criteria.
An amendment to the Credit Facility dated November 16, 1998 amended certain
financial covenants for future periods, reduced the amount available under the
Credit Facility to the amount ($20.1 million) outstanding on November 6, 1998,
changed the maturity date to December 1, 1999 from December 31, 2002, required a
$5.0 million principal repayment or commitments therefor by December 31, 1998,
required all borrowings to bear a rate of prime plus an applicable margin and
changed other provisions.
As of December 31, 1998, the Company was in default of certain financial
and other covenants under the amended Credit Facility, including cash flow
ratios and the requirement for a $5.0 million principal repayment or commitments
therefor. On March 29, 1999, the Company entered into a forbearance agreement
with the banks that are parties to its Credit Facility (the "Forbearance
Agreement"). Pursuant to the Forbearance Agreement, the banks agreed to forbear
from exercising their rights and remedies with respect to all existing defaults
under the Credit Facility until the earlier of June 30, 1999 or the occurrence
of a default under the Forbearance Agreement or an additional default under the
Credit Facility. On June 30, 1999, the Forbearance Agreement expired, at which
time the annual interest rate increased by 1/2%. The Company has continued its
discussions with the banks concerning a refinancing of its debt, however, there
can be no assurance that the Company will be able to complete such refinancing.
As of June 30, 1999 and through August 10, 1999, respectively, the Company
had $19.4 and $18.5 million outstanding under
5
<PAGE>
the Credit Facility at interest rates of 9.75% and 10.50%. During the six
months ended June 30, 1999, the Company made $720,000 in principal repayments
under the Credit Facility from proceeds received from the Southeast Group
divestiture and cash provided by operations. The decrease in outstanding
borrowings since June 30 represents the application of $869,000 in proceeds
received from a mortgage transaction as described below.
In connection with the acquisition of certain businesses, the Company
assumed debt of approximately $600,000 (net of repayments from proceeds from the
Offering), representing notes payable, capital lease obligations and other
indebtedness. As of June 30, 1999, $200,000 was outstanding under this
indebtedness.
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 loan is at the greater of 8.50% or the U.S. Treasury
rate plus 375 basis points (9.73% at June 30, 1999). 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.
6. INCOME TAXES:
As of June 30, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $3.6 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 special compensation,
acquired research and development charges, losses on the sale of business units
and goodwill amoritization. As of June 30, 1999, 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 ("SFAS") No. 109.
7. EARNINGS PER SHARE:
The Company has presented net income (loss) per share pursuant to 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 all periods presented, Common stock
equivalents are not included, as their effect is antidilutive and, as such,
Basic EPS and Diluted EPS are the same.
8. 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, 1999, the Company believes that no revisions of the remaining useful
lives or write-downs of intangible assets are required.
9. COMPREHENSIVE INCOME:
The Company has reviewed SFAS No. 130 and has determined that for the
quarters and six month ended June 30, 1999 and 1998, 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
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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 ending December 31, 1998 and other ImageMax filings with
the Securities and Exchange Commission, and risks associated with the results of
the continuing operations of ImageMax. Accordingly, there is no assurance that
the results in the forward-looking statements will be achieved.
The Company'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
The results of operations include the revenues, cost of revenues and S&A
expenses of the companies acquired in connection with the Offering from January
1, 1998, and for acquisitions subsequent to the Offering from the date of their
acquisition. Acquisitions that were completed by March 31, 1998 are analyzed as
"same-unit" results for purposes of comparing historical results of operations.
These interim financial statements should be read in conjunction with the
Company's pro forma and historical financial statements and notes thereto
included in its Annual Report on Form 10-K for the year ending December 31,
1998. The Company's independent public accountants, Arthur Andersen LLP, have
stated in their audit report included in the Company's Annual Report on Form
10-K for the year ending December 31, 1998 that the events of default under the
Company's credit facility raise substantial doubt about the Company's ability to
continue as a going concern.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Total revenues. For the three months ended June 30, 1999, total revenues
decreased $0.9 million, or 5.6%, as compared to the corresponding period in
1998. This decrease is primarily due to a product revenue decrease of 14.8% and
a service revenue decrease of 2.4%. For the three months ended June 30, 1999,
service revenue and product revenue, respectively, comprised 77.2% and 22.8% of
total revenues, as compared to 74.7% and 25.3% in the corresponding period in
1998.
The decrease in total revenues was comprised of a same-unit revenue
decrease of $1.4 million (primarily attributed to the Southeast Group and
Indianapolis operations) and an offsetting $0.5 million increase attributable to
acquisitions subsequent to March 31, 1998. Excluding the results of the former
Southeast Group and Indianapolis operations, same-unit revenue increased $0.6
million.
Gross profit. For the three months ended June 30, 1999, gross profit
increased by $0.1 million, or 2.3%, as compared to the corresponding period in
1998, while as a percentage of total revenues, gross profit increased to 34.7%
from 32.0%. These increases were primarily due to an increase attributable to
acquisitions subsequent to March 31, 1998. Excluding results of the Southeast
Group and Indianapolis operations, same-unit gross profit growth was $0.2
million, primarily due to improved production efficiencies in the Virginia
business unit and an offsetting decline resulting from costs relating to
software development.
Selling and administrative expenses. For the three months ended June 30,
1999, S&A expenses increased by $0.2 million, or 6.1%, as compared to the
corresponding period in 1998. This increase resulted from: (1) an increase of
$0.4 million in corporate expenses; (2) an increase of $0.2 million attributable
to acquisitions subsequent to March 31, 1998; and (3) an offsetting decrease of
$0.4 million in same-unit S&A expenses, primarily attributable to the Southeast
Group and Indianapolis' operations. The increase in corporate expenses relates
primarily to company-wide incentive compensation expense, increased travel
expenses and the costs associated with pursuing strategic alternatives.
Excluding the results of the Southeast Group and Indianapolis operations,
same-unit S&A increased $0.1 million.
Operating income. For the three months ended June 30, 1999, operating
income decreased by $0.2 million, or 25.1%, as compared to the corresponding
period in 1998. This decrease resulted from: (1) an increase of $0.4 million
attributable to the increase in corporate expenses described above; (2) an
increase of $0.3 million in same-unit operating income; and (3) a decrease of
$0.1 million attributable to acquisitions subsequent to March 31, 1998.
Excluding the results of the Southeast Group and Indianapolis operations,
same-unit operating income growth amounted to less than $0.1 million.
7
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Interest expense. For the three months ended June 30, 1999, interest
expense amounted to $0.5 million, as compared to $0.3 million in the
corresponding period in 1998. The increase includes interest of $0.2 million
attributable to borrowings under the Credit Facility, which increased to $19.4
million as of June 30, 1999 as compared to $16.4 million as of June 30, 1998.
Income tax provision. For the three months ended June 30, 1999, due to the
Company's cumulative loss position, no income tax provision was recorded. As of
June 30, 1999, 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 SFAS No. 109. In the three months ended June 30, 1998, the income tax
provision amounted to $0.2 million, an effective income tax rate of 31.5%.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Total revenues. For the six months ended June 30, 1999, total revenues
increased $1.6 million, or 5.4%, as compared to the corresponding period in
1998. This increase is primarily due to a service revenue increase of 10.6% and
a product revenue decrease of 10.2%. For the six months ended June 30, 1999,
service revenue and product revenue, respectively, comprised 79.0% and 21.0% of
total revenues, as compared to 75.3% and 24.7% in the corresponding period in
1998.
The increase in total revenues was comprised of a same-unit revenue
decrease of $2.6 million (primarily attributed to the Southeast Group and
Indianapolis operations) and an offsetting $4.2 million increase attributable to
acquisitions subsequent to March 31, 1998. Excluding the results of the former
Southeast Group and Indianapolis operations, same-unit revenue increased $0.7
million.
Gross profit. For the six months ended June 30, 1999, gross profit
increased by $1.8 million, or 18.8%, as compared to the corresponding period in
1998, while as a percentage of total revenues, gross profit increased to 35.9%
from 31.9%. These increases were primarily due to an increase of $1.7 million
(10.6% of revenues) attributable to acquisitions subsequent to March 31, 1998
and an increase of $0.1 million attributable to same-unit gross profit
increases. Excluding the results of the former Southeast Group and Indianapolis
operations, same-unit gross profit growth was $0.9 million, primarily due to
improved production efficiencies in the Virginia business unit and an offsetting
decline resulting from a lower volume of digital imaging software sales and
associated development costs.
Selling and administrative expenses. For the six months ended June 30,
1999, S&A expenses increased by $1.4 million, or 18.6%, as compared to the
corresponding period in 1998. This increase resulted from: (1) an increase of
$0.7 million in corporate expenses; (2) an increase of $1.1 million attributable
to acquisitions subsequent to March 31, 1998; and (3) an offsetting decrease of
$0.4 million in same-unit S&A expenses. The increase in corporate expenses
relates primarily to company-wide incentive compensation expense, increased
travel expenses and the costs associated with pursuing strategic alternatives.
Excluding the results of the Southeast Group and Indianapolis operations,
same-unit S&A increased $0.3 million.
Restructuring costs. For the six months ended June 30, 1999, the Company
recorded a restructuring charge of $0.8 million, primarily attributable to the
closing of the Indianapolis unit (totaling $0.6 million, including a write-off
in related goodwill of $0.3 million, severance payments, and lease termination
costs) and executive severance payments.
Operating income. For the six months ended June 30, 1999, operating income
decreased by $0.7 million, or 46.0%, as compared to the corresponding period in
1998. Excluding the impact of restructuring costs, operating income increased
$0.1 million, or 10.8%. This increase resulted from: (1) an increase of $0.8
million attributable to corporate expenses described above; (2) an increase of
$0.5 million in same-unit operating income; and (3) an increase of $0.4 million
attributable to acquisitions subsequent to March 31, 1998. Excluding the impact
of the Southeast Group and Indianapolis operations, same-unit operating income
growth amounted to $0.4 million.
Interest expense. For the six months ended June 30, 1999, interest expense
amounted to $1.0 million, including $0.1 million relating to bank fees under the
Forbearance Agreement, as compared to interest expense of $0.3 million in the
corresponding period in 1998. The increase includes interest of $0.6 million
attributable to borrowings under the Credit Facility, which increased to $19.4
million as of June 30, 1999 as compared to $16.4 million as of June 30, 1998.
Income tax provision. For the six months ended June 30, 1999, due to the
Company's cumulative loss position, no income tax provision was recorded. As of
June 30, 1999, 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 SFAS No. 109. In the six months ended June 30, 1998, the income tax
provision amounted to $0.5 million, an effective income tax rate of 41.0%.
8
<PAGE>
Liquidity and Capital Resources
As of June 30, 1999 and December 31, 1998, respectively, the Company had
cash and cash equivalents of $1.4 million ($0.4 million restricted as to use)
and $0.7 million, and a working capital deficit of $14.9 million and $17.2
million. The working capital deficits as of June 30, 1999 and December 31, 1998,
respectively, were due to the classification of borrowings under the Credit
Facility of $19.4 million and $20.1 million as current liabilities. To continue
its operations through the next 12 months, the Company will need additional
financing from sources other than funds received through operations. To that
end, the Company is in discussions with its banks that are parties to the Credit
Facility concerning a refinancing of the Company's debt. In addition, the
Company has retained William Blair & Company LLC as financial advisor to the
Company's Board of Directors to assist in evaluating the Company's strategic
options.
For the six months ended June 30, 1999 net cash provided by operating
activities amounted to $0.4 million; net cash provided by investing activities
amounted to $0.3 million; and net cash used in financing activities amounted to
$0.1 million.
Net cash provided by operating activities primarily represents a decrease
in accounts receivable (due primarily to an increase in the rate of cash
collections) that was largely offset by payments to vendors and a reduction in
accrued expenses, including bank fees and the payment of severance and other
expenses relating to the Company's restructuring charges.
Net cash provided by investing activities represents proceeds from the
Southeast Group divestiture and the Company's investments in capital equipment
and technology. For the six months ended June 30, 1999, the Company made capital
expenditures of $0.2 million, principally production equipment and computer
hardware.
Net cash used in financing activities represents the repayment of
borrowings under the Credit Facility of $0.7 million, repayments of other debt
assumed in the acquisition of certain businesses of $0.2 million, payment of
$0.1 million related to debt financing costs, offset by proceeds from the
mortgage of one of the Company's facilities for $0.9 million. The funds used to
repay borrowings under the Credit Facility were derived from proceeds received
from the Southeast Group divestiture as well as cash provided by operations.
On March 30, 1998, the Company entered into the Credit Facility, providing
a revolving line of credit of $30 million in borrowings. This agreement was
substantially amended in November 1998 as described below. Under the initial
terms of the Credit Facility, the Company could borrow up to $25 million to
finance future acquisitions and up to $5 million for working capital purposes.
Prior to amendment, borrowings under the facility bore 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 was obligated to remit a fee
ranging from 0.2% to 0.375% per year on unused commitments. The Credit Facility
is secured by substantially all of the assets of the Company. The Credit
Facility 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. Prior to amendment, borrowing under the Credit
Facility was contingent upon the Company meeting certain financial ratios and
other criteria.
An amendment to the Credit Facility dated November 16, 1998 amended certain
financial covenants for future periods, reduced the amount available under the
Credit Facility to the amount ($20.1 million) outstanding on November 6, 1998,
changed the maturity date to December 1, 1999 from December 31, 2002, required a
$5.0 million principal repayment or commitments therefor by December 31, 1998,
required all borrowings to bear a rate of prime plus an applicable margin and
changed other provisions.
As of December 31, 1998, the Company was in default of certain financial
and other covenants under the amended Credit Facility, including cash flow
ratios and the requirement for a $5.0 million principal repayment or commitments
therefor. On March 29, 1999, the Company entered into a forbearance agreement
with the banks that are parties to its Credit Facility (the "Forbearance
Agreement"). Pursuant to the Forbearance Agreement, the banks agreed to forbear
from exercising their rights and remedies with respect to all existing defaults
under the Credit Facility until the earlier of June 30, 1999 or the occurrence
of a default under the Forbearance Agreement or an additional default under the
Credit Facility. On June 30, 1999, the Forbearance Agreement expired at which
time the annual interest rate increased by 1/2%, and the Company has continued
its discussions with the banks concerning a refinancing of its debt, however,
there can be no assurance that the Company will be able to complete such
refinancing.
The Company plans to selectively invest in equipment and technology to meet
the needs of its operations and to improve its operating efficiency.
Year 2000 Compliance
At midnight on December 31, 1999, computer systems that use two digits to
represent the year are at risk of malfunction or failure. Many systems will
continue to run, but may interpret any date in the year '00 to be prior to any
date in the year '99, posing potential date comparison problems, or may fail to
recognize that the Year 2000, unlike 1900, is a leap year. Businesses and
systems that use a four-digit format to report and process dates later than
December 31, 1999 are often denoted as "Year 2000 compliant".
9
<PAGE>
While many systems have no date comparison functions and operate in a
date-independent mode they may have a date function.
If full system operation and correct display of dates subsequent to January
1, 2000 are possible, these systems may be denoted as "Year 2000 operationally
ready". Many systems and subsystems using two-digit dates will operate smoothly
until the end of their technological or economic life without regard to the
actual date. These systems are unaffected by whether it is 2000 or 1900, make no
"real-time" date comparisons and have no date display features. At the other
extreme are systems which will cease functioning or malfunction when an
unacceptable date is perceived (which in some cases could be during 1999). The
categories in which the Company faces potential exposure are as follows:
o Business Applications - Includes proprietary software, all
client/server and desktop hardware and software used in routine
business operations including order processing, system design and
documentation, procurement, and production.
o Infrastructure/Embedded Systems - Includes building facilities,
production equipment and systems, control systems and instrumentation.
o Telecommunications - Includes voice, video and data switching systems
and network components.
o Business Relationships - Includes the supply chain for the Company's
products and service providers including banks, insurance companies,
payroll and pension plan administrators, legal, accounting and
consulting firms as well as public utilities, telecommunications
providers, transportation and overnight delivery companies and local
government services.
The Company recognizes that the Year 2000 problem is a serious,
enterprise-wide issue. The Company has formed a management team, with active
participation by representatives throughout the company, to address Year 2000
issues. Within each business unit, designated personnel have identified and are
working to resolve potential Year 2000 issues in the Company's internal
operations as well as the products that it provides to its customers. In
addition, the Company is communicating with its suppliers to determine the
extent to which the systems of the suppliers are equipped to handle Year 2000
issues. The Company believes that appropriate personnel and resources have been
assigned to this effort. Continued diligence by the members of the Company's
Year 2000 team and appropriate monitoring by and support from senior management
are intended to further enhance the Company's efforts to ensure that its
business will not be negatively impacted by any Year 2000 issues in any material
adverse respect.
The Company has completed Year 2000 compliance testing on certain of its
proprietary software products licensed to clients in accordance with standards
promulgated by the British Standards Institute ("BSI"). These standards address
that: (i) no value for current date will cause any interruption in operation;
(ii) date-based functionality must behave consistently for dates prior to,
during, and after year 2000; (iii) in all interfaces and data storage, the
century in any date must be specified either explicitly or by unambiguous
algorithms or inferencing rules; and (iv) year 2000 must be recognized as a leap
year. Certain software products licensed to clients have been found to comply
with these standards. Certain other proprietary software products licensed to
clients have not met the BSI Standards, in that such products operate on a
third-party platform that has been disclosed as not Year 2000 compliant. The
Company has developed and made available to all clients upgraded versions of its
proprietary FileTRAX, ScanTRAX and ImageMaxES software which are Year 2000
compliant according to the BSI standards.
An inventory of exposures of the Company's internal systems has been
completed and operational steps necessary to deal with each exposure have been
identified. The Company believes it is on schedule to complete its remediation
efforts by September 30, 1999, subject to the completion of receiving all third
party Year 2000 compliance questionnaires. The Company plans to modify or
replace its affected internal systems in a manner that will minimize any
detrimental effects on operations. The Company has not undertaken, nor does it
intend to undertake, any contingency planning at this time.
The Company believes that the cost of developing an inventory of potential
internal Year 2000 issues, the analysis of that inventory, and remediation of
any issues found to cause potential operational problems will not exceed
$100,000. While the Company presently believes that the ultimate outcome of any
such modifications or replacements will not have a material effect on the
Company's current financial position, liquidity or results of operations,
information developed as a result of the Company's ongoing remediation effort
may result in increased cost estimates and such costs could have a material
effect on results of operations.
In addition to working to make its own internal systems Year 2000 ready,
the Company has and will continue to survey its key suppliers to determine the
extent to which the systems of such suppliers are Year 2000 compliant and the
extent to which the Company could be affected by the failure of such third
parties to be Year 2000 compliant. The Company cannot presently estimate the
impact of the failure of such parties to be Year 2000 compliant, but to date it
has not identified any likely failure that would have a material effect on
results of operations.
10
<PAGE>
PART II -- OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits:
27 Financial Data Schedule (filed in electronic format only.)
B. Reports on Form 8-K:
None.
11
<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/ ANDREW R. BACAS August 16, 1999
--------------------------- ---------------
Andrew R. Bacas Date
Acting Chief Executive Officer
BY: /s/ MARK P. GLASSMAN August 16, 1999
-------------------------- ---------------
Mark P. Glassman Date
Chief Financial Officer and Principal Accounting Officer
12
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