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 SEPTEMBER 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.
(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
-------------------------- -----
(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 December 17, 1999:
Common Stock, no par value 6,621,316
- -------------------------- ---------
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............................. 8
PART II - OTHER INFORMATION
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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Services..................................... $ 11,620 $ 13,765 $ 36,224 $ 36,015
Products..................................... 2,847 4,149 9,396 11,443
---------- ---------- ----------- ----------
14,467 17,914 45,620 47,458
--------- ---------- ----------- ----------
Cost of revenues:
Services..................................... 7,256 9,299 22,145 24,039
Products..................................... 1,863 2,702 6,051 7,457
Depreciation................................. 460 415 1,338 1,039
----------- ---------- ----------- ----------
9,579 12,416 29,534 32,535
---------- ---------- ----------- ----------
Gross profit.............................. 4,888 5,498 16,086 14,923
Selling and administrative expenses............ 3,729 5,358 12,417 12,686
Amortization of intangibles.................... 452 484 1,348 1,125
Restructuring costs............................ -- 925 827 925
-------------- ---------- ----------- ----------
Operating income (loss)................... 707 (1,269) 1,494 187
Interest expense............................... 616 432 1,620 744
------------ ---------- ----------- ----------
Income (loss) before income taxes......... 91 (1,701) (126) (557)
Income tax benefit............................. -- (468) -- --
-------------- --------- ----------- ----------
Net income (loss).............................. $ 91 $ (1,233) $ (126) $ (557)
========= ========== =========== ==========
Basic and diluted net income (loss)
per share................................ $ 0.01 $ (0.20) $ (0.02) $ (0.09)
========= ========== =========== ==========
Shares used in computing basic
net income (loss) per share.............. 6,607 6,321 6,565 5,922
========== ============= ============ ============
Shares used in computing diluted
net income (loss) per share.............. 6,616 6,321 6,565 5,922
========== ============= ============ ============
</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>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 1,474 $ 736
Accounts receivable, net of allowance for doubtful
accounts of $337 and $600 as of September 30, 1999 and
December 31, 1998, respectively............................................. 9,323 11,801
Inventories..................................................................... 2,105 2,185
Prepaid expenses and other...................................................... 714 609
-------- --------
Total current assets........................................................ 13,616 15,331
Property, plant and equipment, net................................................. 5,954 7,036
Intangibles, primarily goodwill, net............................................... 44,921 46,607
Other assets....................................................................... 369 600
-------- --------
$ 64,860 $ 69,574
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt........................... $ 18,627 $ 20,239
Accounts payable................................................................ 3,086 4,472
Accrued expenses................................................................ 3,629 5,248
Deferred revenue................................................................ 1,725 2,600
-------- --------
Total current liabilities................................................... 27,067 32,559
-------- --------
Long-term debt..................................................................... 1,019 257
-------- --------
Other long-term liabilities........................................................ 71 106
-------- --------
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized, none issued..................................................... -- --
Common stock, no par value, 40,000,000 shares authorized,
6,621,316 and 6,479,739 shares issued and outstanding
as of September 30, 1999 and December 31, 1998, respectively................ 52,822 52,645
Accumulated deficit............................................................. (16,119) (15,993)
-------- --------
Total shareholders' equity.................................................. 36,703 36,652
-------- --------
$ 64,860 $ 69,574
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................. $ (126) $ (557)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization of intangibles...................... 2,686 2,164
Amortization of deferred financing costs.......................... -- 66
Changes in operating assets and liabilities,
excluding effect of businesses acquired
and Southeast Group divestiture-
Accounts receivable, net....................................... 2,478 (2,208)
Inventories.................................................... 80 (223)
Prepaid expenses and other..................................... (105) (146)
Other assets................................................... 231 39
Accounts payable............................................... (1,386) 437
Accrued expenses............................................... (1,665) 501
Deferred revenue............................................... (875) 200
--------- ---------
Net cash provided by operating activities................... 1,318 273
--------- ---------
Cash flows from investing activities:
Proceeds from Southeast Group divestiture............................ 563 --
Purchases of property and equipment.................................. (227) (2,683)
Payments for businesses acquired, net of cash acquired............... -- (16,445)
--------- ---------
Net cash provided by (used in) investing activities......... 336 (19,128)
--------- ---------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit..................... (1,589) 19,325
Payment of deferred financing costs.................................. (100) (693)
Proceeds from mortgage transaction................................... 900 --
Principal payments on debt and capital lease
obligations....................................................... (219) (524)
Proceeds from issuance of common stock............................... 92 --
--------- ---------
Net cash provided by (used in) financing activities......... (916) 18,108
--------- ---------
Net increase (decrease) in cash and cash equivalents................... 738 (747)
Cash and cash equivalents, beginning of period 736 1,310
--------- ----------
Cash and cash equivalents, end of period............................... $ 1,474 $ 563
========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest.......................................................... $ 1,683 $ 505
========= =========
Income taxes...................................................... $ 56 $ 204
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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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 September 30, 1999, had an accumulated deficit of $16.1
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 $18.5
million as of September 30, 1999. The Company has executed an interim
forbearance agreement with the banks as described in Note 5. Management is
currently in discussions with various banks concerning a refinancing of the
Company's debt. If the Company is not able to favorably restructure its
financing in a timely manner 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, as amended, 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, as amended, 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, as amended, 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 nine months
ended September 30, 1999 and $3,359,000 and $498,000 for the nine months ended
September 30, 1998.
In March 1999, management decided to close the Company's underperforming
Indianapolis, IN business unit. The closing of
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3. ACQUISITIONS AND DIVESTITURES (CONTINUED):
this business unit was substantially completed in May 1999. As of September 30,
1999, the Company recorded a loss relating to the closing 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 $467,000 for the nine months
ended September 30, 1999 and $2,487,000 and $266,000 for the nine months ended
September 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 nine months ended September 30, 1999 and 1998 as though the acquisitions had
occurred as of January 1, 1998:
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1999 1998
---- ----
Total revenue............................ $ 45,009,000 $ 46,695,000
Operating income......................... $ 1,977,000 $ 1,973,000
Net income............................... $ 357,000 $ 1,229,000
Basic and diluted net income per share... $ 0.05 $ 0.21
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 nine months ended September 30, 1999, the Company recorded a
restructuring charge of $827,000 related to the closing of the Indianapolis
business unit (comprising $557,000, including a write off of $300,000 in related
goodwill) and executive severance payments. As of September 30, 1999 and
December 31, 1998, respectively, accrued restructuring charges (classified as
accrued expenses) amounted to $530,000 and $1,124,000, of which $456,000 and
$1,120,000 related to severance payments with the remaining amount attributable
to lease termination costs. During the nine months ended September 30, 1999, the
Company paid $1,121,000 of accrued restructuring charges, of which $1,021,000
related to severance payments with the remaining $100,000 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 an interest 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. On
September 30, 1999, the Company entered into an interim forbearance agreement
(the "Interim Agreement") with the banks that are parties to its Credit
Facility. Pursuant to the Interim Agreement, the banks have agreed to forbear
from exercising their rights and
5
<PAGE>
remedies with respect to all existing defaults under the Credit Facility until
the earlier of April 1, 2000 or the occurrence of a default under the Interim
Agreement or any additional default under the Credit Facility.
Under the terms of the Interim Agreement, the amount available under the
Credit Facility is reduced to $18.5 million, the amount outstanding on September
30, 1999. The outstanding amount under the Credit Facility will now bear
interest at the prime rate plus two percent (2%) per annum (effective rate of
10.25% as of September 30, 1999). Principal repayments of $50,000, $75,000, and
$100,000 are due January 1, February 1, and March 1, 2000, respectively, with
all remaining sums payable on April 1, 2000.
In addition, pursuant to the Interim Agreement, the Company: (i) shall not
make capital expenditures in excess of $250,000 per quarter on a non-cumulative
basis; (ii) shall maintain a minimum shareholders' equity of at least $35
million; (iii) shall not declare or pay any dividends; and (iv) shall not incur
any additional indebtedness in excess of $10,000 without the permission of its
banks. The Company has continued its discussions with various banks concerning
the possible refinancing of its debt.
During the nine months ended September 30, 1999, the Company made
$1,589,000 in principal repayments under the Credit Facility from proceeds
received from the Southeast Group divestiture, proceeds from a mortgage
transaction as described below, and cash provided by operations.
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 September 30, 1999, $189,000 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 (9.806 % at September 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 September 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 September 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 the quarter ended September 30, 1999, the
weighted average number of shares used to compute Diluted EPS includes common
stock equivalents. For all other 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
September 30, 1999, the Company believes that no revisions of the remaining
useful lives or write-downs of intangible assets are required.
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9. COMPREHENSIVE INCOME:
The Company has reviewed SFAS No. 130 and has determined that for the
quarters and nine months ended September 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.
7
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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", "intend", and similar expressions, as they relate to the
Company or its management, are intended to identify such forward-looking
statements. The Company's actual results, performance, or achievements could
differ materially from the results expressed in, or implied by, these
forward-looking statements. Factors that could cause or contribute to such
differences include those set forth in "Business--Risk Factors" as disclosed in
the Company's Annual Report on Form 10-K, as amended, 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 June 30, 1998 and March 31,
1998, respectively, are analyzed as "same-unit" results for purposes of
comparing historical results of operations for the three months and nine months
ended September 30, 1999. Results of operations excluding the Southeast Group
and the Indianapolis business unit are explained in some cases due to the fact
that these units were, respectively, divested and closed prior to September 30,
1999.
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, as amended, 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, as amended, 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 September 30, 1999 Compared to Three Months Ended
September 30, 1998
Total revenues. For the three months ended September 30, 1999, total
revenues decreased $3.4 million, or 19.2%, as compared to the corresponding
period in 1998. This decrease was due to a product revenue decrease of 31.4% and
a service revenue decrease of 15.6%. For the three months ended September 30,
1999, service revenue and product revenue, respectively, comprised 80.3% and
19.7% of total revenues, as compared to 76.8% and 23.2% in the corresponding
period in 1998.
The decrease in total revenues was comprised of a same-unit revenue
decrease of $3.7 million (primarily attributed to the divested Southeast Group
and closed Indianapolis operations) and an offsetting $0.3 million increase
attributable to acquisitions subsequent to June 30, 1998. Excluding the impact
of the divested Southeast Group and closed Indianapolis operations, same-unit
revenue decreased $1.0 million. The decrease relates to volume declines in
offshore data entry revenue and declines in product sales volumes.
Gross profit. For the three months ended September 30, 1999, gross profit
decreased by $0.6 million, or 11.1%, as compared to the corresponding period in
1998, while as a percentage of total revenues, gross profit increased to 33.8%
from 30.7%. These changes were partially due to the divestiture of the
underperforming Southeast Group and closing of the Indianapolis operations prior
to the third quarter of 1999. Excluding the effect of the Southeast Group and
Indianapolis operations, same-unit gross profit decreased $0.4 million, which
relates primarily to volume decreases in software sales.
Selling and administrative expenses. For the three months ended September
30, 1999, S&A expenses decreased by $1.6 million, or 30.4%, as compared to the
corresponding period in 1998. This decrease resulted from: (1) a decrease of
$0.4 million in corporate expenses; and (2) a decrease of $1.2 million in
same-unit S&A expenses, primarily related to the elimination of the
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Southeast Group and Indianapolis operations. The decrease in corporate expenses
relates primarily to changes in organizational structure related to headcount
and the Company's restructuring efforts effected in late 1998 and early 1999.
Excluding the results of the Southeast Group and Indianapolis operations,
same-unit S&A decreased $0.6 million. The decrease is partially attributable to
the migration to a regional structure in the West and Midwest, as well as a
reduction in S&A at several units related to administrative and sales force
reductions.
Operating income. For the three months ended September 30, 1999, operating
income increased by $2.0 million, as compared to the corresponding period in
1998. This increase resulted from: (1) a restructuring charge in the third
quarter of 1998 of $0.9 million with no corresponding charge in the third
quarter of 1999; (2) a decrease of $0.4 million attributable to corporate
expenses; (3) an increase of $0.6 million in same-unit operating income; and (4)
an increase of $0.1 million attributable to acquisitions subsequent to June 30,
1998. Excluding the impact of the Southeast Group and Indianapolis operations,
same-unit operating income increased $0.2 million, or 17.3%. This increased
efficiency resulted in same-unit operating income, excluding the results of the
Southeast Group and Indianapolis operations, which was 11.3% of sales in the
third quarter of 1999, versus 9.0% in the same period of 1998. This increase was
due to a higher mix of service sales as opposed to product sales and cost
savings in S&A expenses as described above.
Interest expense. For the three months ended September 30, 1999, interest
expense amounted to $0.6 million, including $0.1 million relating to bank fees
under the Interim Agreement, as compared to $0.4 million in the corresponding
period in 1998. The increase includes interest of $0.1 million attributable to
borrowings under the Credit Facility, which retained a higher overall balance
and interest rate during the three months ended September 30, 1999 as compared
to the three months ended September 30, 1998. The balance of the Credit Facility
was $18.5 million as of September 30, 1999 as compared to $19.3 million as of
September 30, 1998.
Income tax provision. For the three months ended September 30, 1998 and
1999, due to the Company's cumulative loss position, no income tax provision was
recorded. As of September 30, 1998 and 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. The Company recognized an
income tax benefit of $0.5 million in the third quarter of 1998 due to the
cumulative loss position of the Company at September 30, 1998.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
Total revenues. For the nine months ended September 30, 1999, total
revenues decreased $1.8 million, or 3.9%, as compared to the corresponding
period in 1998. This decrease is due to a decrease in product revenue of 17.9%
partially offset by a service revenue increase of 0.6%. For the nine months
ended September 30, 1999, service revenue and product revenue, respectively,
comprised 79.4% and 20.6% of total revenues, as compared to 75.9% and 24.1% in
the corresponding period in 1998.
The decrease in total revenues was comprised of a same-unit revenue
decrease of $7.0 million (primarily attributed to the eliminated Southeast Group
and Indianapolis operations) and an offsetting $5.2 million increase
attributable to acquisitions subsequent to March 31, 1998. Excluding the impact
of the Southeast Group and Indianapolis operations, same-unit revenue decreased
$0.4 million. The decrease relates to volume declines in product sales volumes.
Gross profit. For the nine months ended September 30, 1999, gross profit
increased by $1.2 million, or 7.8%, as compared to the corresponding period in
1998, while as a percentage of total revenues, gross profit increased to 35.2%
from 31.4%. These increases were due to an increase of $1.9 million (3.9% of
revenues) attributable to acquisitions subsequent to March 31, 1998 offset by a
decrease of $0.6 million attributable to same-unit gross profit decreases, and
by a $0.1 million decrease attributable to corporate expenses. Excluding the
impact of the Southeast Group and Indianapolis operations, same-unit gross
profit growth was $0.5 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 nine months ended September
30, 1999, S&A expenses decreased by $0.3 million, or 2.1%, as compared to the
corresponding period in 1998. This decrease resulted from: (1) a decrease of
$1.8 million in same-unit S&A expenses; (2) an offsetting increase of $0.2
million in corporate expenses; and (3) an offsetting increase of $1.3 million
attributable to acquisitions subsequent to March 31, 1998. The increase in
corporate expenses relates primarily to company-wide incentive compensation
expense, increased travel expenses and other costs associated with pursuing
strategic alternatives. Excluding the impact of the Southeast Group and
Indianapolis operations, same-unit S&A decreased $0.3 million. The decrease is
partially attributable to the migration to a regional structure in the West and
Midwest, as well as a reduction in S&A at several units related to
administrative and sales force reductions.
Restructuring costs. For the nine months ended September 30, 1999, the
Company recorded a restructuring charge of $0.8 million, attributable to the
closing of the Indianapolis business unit (totaling $0.6 million, including a
write-off in related goodwill of $0.3 million, severance payments, and lease
termination costs) and executive severance payments. For the nine months ended
September
9
<PAGE>
30, 1998, the Company recorded a restructuring charge of $0.9 million, primarily
for severance payments related to headcount reductions at the corporate office
and facility costs associated with business unit consolidations.
Operating income. For the nine months ended September 30, 1999, operating
income increased by $1.3 million, or 698.9%, as compared to the corresponding
period in 1998. Excluding the impact of restructuring costs, operating income
increased $1.2 million, or 108.7%. This increase resulted from: (1) an increase
of $1.1 million in same-unit operating income; (2) an increase of $0.5 million
attributable to acquisitions subsequent to March 31, 1998; and (3) an offsetting
increase in corporate expenses of $0.4 million. Excluding the impact of the
Southeast Group and Indianapolis operations, same-unit operating income growth
amounted to $0.7 million, or 18.3%. This increased efficiency resulted in
same-unit operating income, excluding the results of the Southeast Group and
Indianapolis operations, which was 13.0% of sales for the first nine months of
1999, versus 10.9% in the same period of 1998. This increase was due to a higher
mix of service sales as opposed to product sales, efficiencies at the Virginia
business unit as described above, and cost savings in S&A expenses also as
described above.
Interest expense. For the nine months ended September 30, 1999, interest
expense amounted to $1.6 million, including $0.2 million relating to bank fees
under the Forbearance Agreement and Interim Agreement, as compared to interest
expense of $0.7 million in the corresponding period in 1998. The increase
includes interest of $0.7 million attributable to borrowings under the Credit
Facility, which retained a higher overall balance and interest rate during the
nine months ended September 30, 1999 as compared to the nine months ended
September 30, 1998. The balance of the Credit Facility was $18.5 million as of
September 30, 1999 as compared to $19.3 million as of September 30, 1998.
Income tax provision. For the nine months ended September 30, 1999 and
1998, due to the Company's cumulative loss position, no income tax provision was
recorded. As of September 30, 1999 and 1998, 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.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999 and December 31, 1998, respectively, the Company
had cash and cash equivalents of $1.5 million and $0.7 million, and a working
capital deficit of $13.5 million and $17.2 million. The working capital deficits
as of September 30, 1999 and December 31, 1998, respectively, were due to the
classification of borrowings under the Credit Facility of $18.5 million and
$20.1 million as current liabilities as a result of the Company being in default
of certain financial and other covenants, as described below. The Company has
entered into the Interim Agreement pursuant to which the Company has agreed to
make scheduled repayments of principal beginning January 1, 2000 and repay the
entire principal on or before April 1, 2000. Although the Company is generating
positive cash flow from operations, to continue its operations through the next
12 months, the Company will need additional financing from sources other than
funds received through operations to meet these obligations. To that end, the
Company is in discussions with various banks and other third parties concerning
the possibility of refinancing the Company's debt and has retained William
Blair & Company LLC as financial advisor to the Company's Board of Directors to
assist in evaluating the Company's strategic alternatives. There can be no
assurance that the Company will be able to refinance its debt in a timely
manner.
For the nine months ended September 30, 1999, net cash provided by
operating activities amounted to $1.3 million; net cash provided by investing
activities amounted to $0.3 million; and net cash used in financing activities
amounted to $0.9 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. The increase in net
cash provided by operating activities for the nine months ended September 30,
1999 relative to September 30, 1998 is primarily due to the divestiture of the
Southeast Group and the closing of the Indianapolis operations in addition to
overall increases in existing operations.
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 nine months ended September 30, 1999, the Company made
capital expenditures of $0.2 million, principally on production equipment and
computer hardware.
Net cash used in financing activities represents the repayment of
borrowings under the Credit Facility of $1.6 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, proceeds from the mortgage of one of the
Company's facilities, 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.
10
<PAGE>
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 the Forbearance Agreement
with the banks that are parties to its Credit Facility. 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. On September 30, 1999, the
Company entered into the Interim Agreement with the banks that are parties to
its Credit Facility. Pursuant to the Interim Agreement, the banks have agreed to
forbear from exercising their rights and remedies with respect to all existing
defaults under the Credit Facility until the earlier of April 1, 2000 or the
occurrence of a default under the Interim Agreement or any additional default
under the Credit Facility.
Under the terms of the Interim Agreement, the amount available under the
Credit Facility is reduced to $18.5 million, the amount outstanding on September
30, 1999. The outstanding amount under the Credit Facility will now bear
interest at the prime rate plus two percent (2%) per annum (effective rate of
10.25% as of September 30, 1999). Principal repayments of $50,000, $75,000, and
$100,000 are due January 1, February 1, and March 1, 2000, respectively, with
all remaining sums payable on April 1, 2000.
In addition, pursuant to the Interim Agreement, the Company: (i) shall not
make capital expenditures in excess of $250,000 per quarter on a non-cumulative
basis; (ii) shall maintain a minimum shareholders' equity of at least $35
million; (iii) shall not declare or pay any dividends; and (iv) shall not incur
any additional indebtedness in excess of $10,000 without the permission of its
banks. The Company has continued its discussions with various banks and other
third parties concerning the possible refinancing of its debt.
The Company plans to selectively invest in equipment and technology to meet
the needs of its operations and to improve its operating efficiency, within the
confines of these limitations.
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". 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.
11
<PAGE>
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
substantially resolved 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 has communicated with its key 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 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 that it has substantially completed its
remediation efforts as of September 30, 1999. The Company has substantially
completed any modifications or replaced its affected internal systems in a
manner that it believes will minimize any detrimental effects on operations.
These systems include the Company's production systems and equipment,
telecommunications equipment, and computers and network equipment in both the
production and administration areas. The Company has not undertaken and has no
plans to undertake any contingency planning.
The cost to date of developing an inventory of potential internal Year 2000
issues, the analysis of that inventory, and remediation of the issues found to
cause potential operational problems has been approximately $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 obtained as
a result of unanticipated circumstances may result in increased costs.
In addition to working to make its own internal systems Year 2000 ready,
the Company has surveyed 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.
However, the Company recognizes that it is highly dependent on the utilities
industry in order to perform its core production activities. Accordingly,
failure of the Company's utilities' vendors to supply adequate service could
have a material adverse effect on the Company's financial position, liquidity
or results of operations.
12
<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:
1. The Company filed a Form 8-K on October 7, 1999 reporting that the Company
had entered into the Interim Agreement with the banks that are the parties to
the Company's Credit Facility.
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.
<TABLE>
<S> <C>
BY: /S/ ANDREW R. BACAS December 21, 1999
------------------- -----------------
Andrew R. Bacas Date
Chief Executive Officer
BY: /S/ MARK P. GLASSMAN December 21, 1999
-------------------- -----------------
Mark P. Glassman Date
Chief Financial Officer and Principal Accounting Officer
</TABLE>
14
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<RECEIVABLES> 9,660 13,184
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<INVENTORY> 2,105 2,391
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