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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _________ to _________
COMMISSION FILE NUMBER 0-23077
______________________
IMAGEMAX, INC.
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA 23-2865585
------------ -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 Pennsylvania Avenue, Suite 128
Fort Washington, Pennsylvania 19034
----------------------------- -----
(Address of principal executive offices) (Zip Code)
(215) 628-3600
---------------
(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 November 13, 2000:
Common Stock, no par value 6,673,259
-------------------------- ---------
Class Number of Shares
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IMAGEMAX, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
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................... 12
SIGNATURES................................................... 13
</TABLE>
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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,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Services.................. $11,914 $11,620 $37,207 $36,224
Products.................. 2,060 2,847 7,463 9,369
------- ------- ------- -------
13,974 14,467 44,670 45,620
------- ------- ------- -------
Cost of revenues:
Services.................. 7,462 7,256 22,523 22,145
Products.................. 1,272 1,863 4,744 6,051
Depreciation.............. 502 460 1,426 1,338
------- ------- ------- -------
9,236 9,579 28,693 29,534
------- ------- ------- -------
Gross profit........... 4,738 4,888 15,977 16,086
Selling and administrative
expenses.................. 3,839 3,729 12,129 12,417
Amortization of
intangibles............... 505 452 1,428 1,348
Restructuring costs......... -- -- -- 827
------- ------- ------- -------
Operating income....... 394 707 2,420 1,494
Interest expense............ 532 616 1,672 1,620
------- ------- ------- -------
Net income (loss)........... $ (138) $ 91 $ 748 $ (126)
======= ======= ======= =======
Basic and diluted net income
(loss) per share.......... $(0.02) $0.01 $0.11 $(0.02)
======= ======= ======= =======
Shares used in computing
basic net income (loss)
per share................. 6,661 6,607 6,648 6,565
======= ======= ======= =======
Shares used in computing
diluted net income (loss)
per share................. 6,668 6,616 6,652 6,565
======= ======= ======= =======
</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,
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 1,516 $ 1,719
Accounts receivable, net of allowance for doubtful
accounts of $492 and $392 as of September 30, 2000 and
December 31, 1999, respectively............................... 10,269 9,412
Inventories...................................................... 1,643 2,031
Prepaid expenses and other....................................... 501 838
-------- --------
Total current assets.......................................... 13,929 14,000
Property, plant and equipment, net................................ 4,776 5,642
Intangibles, primarily goodwill, net.............................. 43,131 44,448
Other assets...................................................... 814 275
-------- --------
$ 62,650 $ 64,365
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt............ $ 5,629 $ 18,627
Accounts payable................................................. 2,092 2,967
Accrued expenses................................................. 3,388 4,021
Deferred revenue................................................. 2,126 1,666
-------- --------
Total current liabilities..................................... 13,235 27,281
-------- --------
Long-term debt.................................................... 11,940 970
-------- --------
Other long-term liabilities....................................... 48 41
-------- --------
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized, none issued....................................... -- --
Common stock, no par value, 40,000,000 shares authorized,
6,673,259 and 6,633,681 shares issued and outstanding
as of September 30, 2000 and December 31, 1999, respectively.. 53,443 52,837
Accumulated deficit.............................................. (16,016) (16,764)
-------- --------
Total shareholders' equity.................................... 37,427 36,073
-------- --------
$ 62,650 $ 64,365
======== ========
</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,
---------------------
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................... $ 748 $ (126)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization of intangibles...................... 2,749 2,686
Amortization of deferred financing costs.......................... 105 --
Imputed interest on subordinated debt............................. 77 --
Changes in operating assets and liabilities, excluding effect of
the Southeast Group divestiture-
Accounts receivable, net........................................ (857) 2,478
Inventories..................................................... 388 80
Prepaid expenses and other...................................... 318 (105)
Other assets.................................................... -- 231
Accounts payable................................................ (875) (1,386)
Accrued expenses................................................ (633) (1,665)
Deferred revenue................................................ 460 (875)
------- -------
Net cash provided by operating activities.................... 2,480 1,318
------- -------
Cash flows from investing activities:
Purchases of property and equipment.................................. (560) (227)
Proceeds from Southeast Group divestiture............................ -- 563
------- -------
Net cash provided by (used in) investing activities.......... (560) 336
------- -------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit..................... (7,442) (1,589)
Proceeds from subordinated debt transaction.......................... 6,000 --
Proceeds from mortgage transaction................................... -- 900
Payment of deferred financing costs.................................. (631) (100)
Proceeds from issuance of common stock............................... 53 92
Principal payments on debt and capital lease
obligations........................................................ (103) (219)
------- -------
Net cash used in financing activities........................ (2,123) (916)
------- -------
Net increase (decrease) in cash and cash equivalents.................. (203) 738
Cash and cash equivalents, beginning of period........................ 1,719 736
------- -------
Cash and cash equivalents, end of period.............................. $ 1,516 $ 1,474
======= =======
Supplemental disclosures of cash flow information:
Cash paid for:
Interest.......................................................... $ 1,521 $ 1,683
======= =======
Income taxes...................................................... $ 85 $ 56
======= =======
</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 closed 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 consolidated balance sheet as of December 31, 1999 has been
derived from the Company's consolidated financial statements that have been
audited by the Company's previous independent public accountants. The
Company's previous 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, 1999 that the events of default under the
Company's credit facility as of that date raised substantial doubt about the
Company's ability to continue as a going concern. The Company has since
refinanced the credit facility and is no longer in default on any of its debt
(see Note 5).
The unaudited financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information pursuant to rules and regulations of the Securities and
Exchange Commission ("SEC). Accordingly, unaudited interim financial statements
such as those in this report allow certain information and footnotes required by
accounting principles generally accepted in the United States 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, 1999.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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,
1999.
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. 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.
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 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 $476,000 for the nine months ended September
30, 1999.
4
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3. ACQUISITIONS AND DIVESTITURES (CONTINUED):
The following unaudited pro forma information compares the actual results
of the Company's operations for the nine months ended September 30, 2000 with
the results for the nine months ended September 30, 1999 excluding the results
of the former Southeast Group and Indianapolis operations:
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
Actual Pro forma
2000 1999
----------- -----------
<S> <C> <C>
Total revenue........................... $44,670,000 $45,009,000
Operating income........................ $ 2,420,000 $ 1,977,000
Net income.............................. $ 748,000 $ 357,000
Basic and diluted net income per share.. $ 0.11 $ 0.05
</TABLE>
The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the actual results of operations, 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, primarily related to the closing of the
Indianapolis business unit and executive severance payments. As of September
30, 2000 and December 31, 1999, respectively, accrued restructuring charges
(classified as accrued expenses) amounted to $47,000 and $263,000, of which
$25,000 and $196,000 related to severance payments with the remaining amount
attributable primarily to lease termination costs. During the nine months ended
September 30, 2000, the Company paid $216,000 of accrued restructuring charges,
of which $171,000 related to severance payments with the remaining $45,000
attributable to lease termination costs.
5. LINE OF CREDIT AND LONG-TERM OBLIGATIONS:
On March 30, 1998, the Company entered into a credit facility (as amended
the "Old Credit Facility"), providing a revolving line of credit of $30 million
in borrowings with First Union National Bank (successor by merger to Corestates
Bank, N.A.) and Commerce Bank, N.A. (together, the "Banks"). Under the initial
terms of the Old Credit Facility, the Company could borrow up to $25 million to
finance future acquisitions and up to $5 million for working capital purposes.
Pursuant to a default under the Old Credit Facility, the Company entered
into several forbearance agreements with the Banks covering the period from
March 29, 1999 to June 30, 2000 in which they agreed to forbear from exercising
their rights and remedies with respect to all existing defaults under the Old
Credit Facility.
On June 12, 2000, the Company closed on a new $14.5 million senior credit
facility (the "New Credit Facility") pursuant to the Credit Agreement dated June
9, 2000 (the "Credit Agreement") with Commerce Bank, NA and FirsTrust Bank
(together, the "New Banks"). The New Credit Facility consists of a two-year
$7.0 million revolving credit line (the "Revolving Credit Line") and a four-year
$7.5 million term loan (the "Term Loan").
Under the Revolving Credit Line, interest is payable monthly at the prime
rate plus 1.5% (effective rate of 11.0% as of the September 30, 2000) with
principal due and payable in June 2002. Borrowing availability is based on the
level of the Company's eligible accounts receivable, as defined in the Credit
Agreement. As of September 30, 2000, approximately $3.6 million was outstanding
under the Revolving Credit Line.
Under the Term Loan, interest is payable monthly at the prime rate plus
2.0% (effective rate of 11.5% as of September 30, 2000). The outstanding
principal amount of the Term Loan was $7.5 million as of September 30, 2000 and
is due and payable in consecutive quarterly payments of $500,000 commencing
September 30, 2000 until March 31, 2004. The first payment due on September 30,
2000 was paid on October 2, 2000, the first business day following the due date,
and as such, is not reflected in the accompanying consolidated financial
statements. In addition, on an annual basis, the Company is required to reduce
the principal amount outstanding under the Term Loan to the extent that EBITDA
(as defined in the Credit Agreement: net income plus interest expense, tax
provision, depreciation, amortization, losses from asset dispositions and
insurance recoveries, minus gains from asset dispositions and insurance
recoveries), as adjusted, exceeds certain specified levels set forth in the
Credit Agreement and upon certain asset sales by the Company, if any.
5
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5. LINE OF CREDIT AND LONG-TERM OBLIGATIONS (CONTINUED):
The New Credit Facility is secured by substantially all assets of the
Company and requires maintenance of various financial and restrictive covenants
including minimum levels of EBITDA and net worth. The Company also issued
warrants to the New Banks to purchase an additional 100,000 shares of common
stock of the Company (subject to downward adjustment under certain
circumstances) at $3.50 per share. The warrants are exercisable beginning one
year from the date of issuance. The warrants expire five years from the date of
issuance. The Company also paid $242,500 in bank fees to the New Banks upon
closing.
During the nine months ended September 30, 2000, the Company made
$7,442,000 in net principal repayments under the Old Credit Facility and the New
Credit Facility, including $6,000,000 from proceeds received from the
convertible debt financing (see Note 6).
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 Old
Credit Facility. Interest on the loan is at the greater of 8.50% or the U.S.
Treasury rate plus 375 basis points (9.63 % at September 30, 2000). The loan
carries a ten-year term (maturing May 2009), is secured by the mortgaged
property, and requires equal monthly repayments of principal and interest of
$10,000.
6. CONVERTIBLE DEBT FINANCING:
On February 15, 2000, the Company completed a $6 million financing
transaction involving the sale of convertible subordinated notes (the "Notes")
and warrants (the "Investor Warrants") to TDH III, L.P. ("TDH"), Dime Capital
Partners, Inc. and Robert E. Drury (the "Investors"). The proceeds of this
financing were used to repay $5 million of the Old Credit Facility and provide
working capital for the Company. Additionally, J.B. Doherty, the managing
general partner of TDH, and Mr. Drury joined the Company's Board of Directors.
The Notes are due and payable upon the fourth anniversary of the date of
issuance and accrue interest at nine percent (9%) payable semi-annually. The
Company cannot voluntarily prepay the Notes. The Notes are initially convertible
into the Company's common stock, no par value, at $3.50 per share, which price
may be adjusted downward if, under certain circumstances, the holders thereof
convert the Notes prior to the third anniversary of the date of issuance. The
Company also issued the Investor Warrants to purchase an additional 1,800,000
shares of common stock of the Company (subject to downward adjustment under
certain circumstances) at $3.50 per share. The Investor Warrants are exercisable
beginning the later of (i) one year from the date of issuance or (ii) the
conversion of the Notes into common stock. The Investor Warrants expire five
years from the date of issuance. The estimated fair value of the Investor
Warrants of $553,000 has been recorded as an increase to shareholders' equity
and a related reduction in the carrying amount of the Notes. The Company will
amortize the $553,000 over the four year term of the Notes.
7. INCOME TAXES:
As of September 30, 2000, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $6.7 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, 2000, a valuation allowance was
established for the Company's tax benefit based upon the uncertainty of the
realizability of the associated deferred tax asset given the Company's losses to
date under the guidelines set forth in Statement of Financial Accounting
Standards ("SFAS") No. 109.
8. 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 nine months ended September 30, 1999,
common stock equivalents are not included, as their effect is antidilutive and,
as such, Basic EPS and Diluted EPS are the same. For all other periods
presented, the weighted average number of shares used to compute Diluted EPS
includes common stock equivalents.
9. 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
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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, 2000,
the Company believes that no revisions of the remaining useful lives or write-
downs of intangible assets are required.
10. REVENUE RECOGNITION:
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
("SAB 101"), Revenue Recognition, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosures related to revenue recognition policies.
Any changes to the Company's revenue recognition policy resulting from the
implementation of SAB 101 would be reported as a change in accounting principles
in the quarter ending December 31, 2000. To the extent that SAB 101 is relevant
to the recognition of revenue on the Company's future services, the Company
would adopt the new accounting principle effective January 1, 2001. Accordingly,
any services previously reported as revenue that do not meet SAB 101 revenue
recognition guidance would be recorded as revenue in future periods. The Company
is still in the process of assessing the impact of SAB 101 on its financial
statements. Management believes that SAB 101 will not affect the underlying
strength of its business operations as measured by the dollar value of its
products shipped and cash flows from operations.
7
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PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 the Company's ability to attract and
retain qualified employees and those factors set forth in "Business--Risk
Factors" as disclosed in the Company's Annual Report on Form 10-K for the year
ending December 31, 1999 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
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Total revenues. For the three months ended September 30, 2000, total
revenues decreased $0.5 million, or 3.4%, as compared to the corresponding
period in 1999. This decrease was due to a product revenue decrease of 27.6%
partially offset by a service revenue increase of 2.5%. The product revenue
decrease was due to a 14.9% decline in software sales and a 30.3% decline in
equipment and related supplies sales. For the three months ended September 30,
2000, service revenue and product revenue, respectively, comprised 85.3% and
14.7% of total revenues, as compared to 80.3% and 19.7% in the corresponding
period in 1999.
The Company has shifted its focus towards services, particularly conversion
services, and has de-emphasized equipment sales in the majority of its markets.
The Company believes that the migration towards services, which includes the
Company's new Internet document repository service, ImageMaxOnline, will result
in a higher gross profit percentage, as service revenues generally carry a
higher gross profit percentage than equipment revenues.
The decrease in total revenues included $0.8 million attributable to
declines in product revenues (including $0.1 million in software sales)
partially offset by a $0.3 million increase in service revenues. The service
revenue increase was comprised of an increase of $1.5 million attributable to
litigation support and coding services and a decrease of $1.2 million in other
services, primarily document conversion. Conversion services were adversely
affected by lower staffing levels (which directly impacts the level of
production throughput), which the Company believes is indicative of the tight
U.S. labor market, and by the relocation of production facilities in California
and Oregon. The Company believes that its ability to attract and retain
production staff is a key factor in sustaining and growing service revenues, and
has recently developed a plan to increase long-term conversion capacity and
productivity, which in part targets staffing increases and retention.
Gross profit. For the three months ended September 30, 2000, gross profit
decreased by $0.1 million, or 3.0%, as compared to the corresponding period in
1999. Gross profit percentage increased from 33.8% to 33.9% due primarily to the
higher mix of service revenues, which generally carry a higher gross profit
percentage than equipment and related supplies revenue.
Selling and administrative expenses. For the three months ended September
30, 2000, S&A expenses increased by $0.1 million, or 3.0%, as compared to the
corresponding period in 1999. This increase resulted primarily from increased
expenses attributable to personnel increases resulting from efforts to hire
sales and management staff to fill key positions in the organization. This
increase was mostly offset by reduced administrative expenses, and a decrease of
$0.1 million related to the closing of the Indianapolis operations. The Company
expects to continue to augment its sales and management teams in order to meet
long-term goals.
Operating income. For the three months ended September 30, 2000, operating
income decreased by $0.3 million, or 44.2%, as compared to the corresponding
period in 1999. This decrease resulted from: (1) a decrease of $0.1 million
attributable to decreased profits from operations at the business unit level,
primarily due to decreased product revenues as described above; (2) a decrease
of
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$0.1 million attributable to increased corporate expenses, partially offset by
the closing of the Indianapolis business unit; and (3) a decrease of $0.1
million attributable to the amortization of capitalized bank fees related to the
New Credit Facility.
Interest expense. For the three months ended September 30, 2000, interest
expense amounted to $0.5 million, as compared to interest expense of $0.6
million in the corresponding period in 1999, which included $0.1 million
relating to bank fees.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Total revenues. For the nine months ended September 30, 2000, total
revenues decreased $1.0 million, or 2.1%, as compared to the corresponding
period in 1999. This decrease was due to a product revenue decrease of 20.3%
partially offset by a service revenue increase of 2.7%. The product revenue
decrease was due to a 21.4% decline in software sales and a 20.1% decline in
equipment sales. For the nine months ended September 30, 2000, service revenue
and product revenue, respectively, comprised 83.3% and 16.7% of total revenues,
as compared to 79.4% and 20.6% in the corresponding period in 1999.
The decrease in total revenues was comprised of $0.6 million attributable
to the sale of the Southeast Group units and volume declines related to the
closing of the Indianapolis business unit. The remaining decrease of $0.4
million was comprised of a decrease of $1.9 million in product revenue
(including $0.3 million in software sales) and an increase of $1.5 million in
service revenue excluding the Southeast Group and Indianapolis units (primarily
litigation support and coding services).
Gross profit. For the nine months ended September 30, 2000, gross profit
decreased by $0.1 million, or 0.7%, as compared to the corresponding period in
1999. Gross profit percentage increased from 35.3% to 35.8% due primarily to the
higher mix of service revenues, which generally carry a higher gross profit
percentage than equipment and related supplies revenue. Excluding results of the
former Southeast Group and Indianapolis operations, gross profit decreased $0.3
million, primarily due to volume declines in software sales, partially offset by
a higher service revenue mix of non-software revenues.
Selling and administrative expenses. For the nine months ended September
30, 2000, S&A expenses decreased by $0.3 million, or 2.3%, as compared to the
corresponding period in 1999. This decrease resulted from: (1) a decrease of
$0.4 million in business unit S&A expenses; (2) a decrease of $0.3 million
related to the sale of the Southeast Group units and the closing of the
Indianapolis operations; and (3) an offsetting increase of $0.4 million in
corporate expenses. The increase in corporate expenses is primarily attributable
to sales and marketing, and personnel related increases, including incentive
compensation.
Restructuring costs. For the nine months ended September 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 of related goodwill of $0.3 million, severance payments, and lease
termination costs) and executive severance payments.
Operating income. For the nine months ended September 30, 2000, operating
income increased by $0.9 million, or 62.0%, as compared to the corresponding
period in 1999. Excluding the impact of restructuring costs and the results of
the Southeast Group units and the Indianapolis operations, operating income
decreased $0.4 million, or 13.7%.
Interest expense. For the nine months ended September 30, 2000, interest
expense amounted to $1.7 million, including $0.1 million relating to bank fees,
as compared to interest expense of $1.6 million in the corresponding period in
1999, including $0.2 million relating to bank fees. The increase relates to (1)
higher interest rates on borrowings; (2) interest attributable to a mortgage on
one of the Company's facilities beginning in April 1999; and (3) imputed
interest attributable to the placement of the Notes and Investor Warrants in
February 2000.
Liquidity and Capital Resources
As of September 30, 2000 and December 31, 1999, respectively, the Company
had cash and cash equivalents of $1.5 million and $1.7 million, working capital
of $0.7 million as of September 30, 2000 and a working capital deficit of $13.3
million as of December 31, 1999. The working capital deficit as of December 31,
1999, was due to the classification of borrowings under the Old Credit Facility
of $18.5 million as a current liability as a result of the Company being in
default of certain financial and other covenants, as described below. The
Company entered into the Amended Interim Agreement pursuant to which the Company
agreed to make scheduled repayments of principal through June 1, 2000 and repay
the entire principal on or before June 30, 2000. The Company entered into the
New Credit Facility on June 12, 2000. The Company used the proceeds of the New
Credit Facility to repay the entire remaining balance of the Old Credit
Facility.
For the nine months ended September 30, 2000 net cash provided by operating
activities amounted to $2.5 million; net cash used in investing activities
amounted to $0.6 million; and net cash used in financing activities amounted to
$2.1 million.
Net cash provided by operating activities primarily represents earnings
before amortization and depreciation which were
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largely offset by an increase in accounts receivable, 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 used in investing activities represents the Company's investments
in capital equipment and technology. For the nine months ended September 30,
2000, the Company made capital expenditures of $0.6 million, principally
production equipment, computer hardware, and delivery vehicles.
Net cash used in financing activities represents the repayment under the
Old Credit Facility and New Credit Facility of $7.4 million, the payment of $0.6
million related to debt financing costs, and $0.1 million in repayments of debt
and capital lease obligations, largely offset by $6.0 million in proceeds of the
subordinated debt transaction on February 15, 2000. The funds used to repay
borrowings under the Old Credit Facility and New Credit Facility were derived
from the subordinated debt transaction and cash provided by operations. The
first $0.5 million payment on the Term Loan due on September 30, 2000 was paid
on October 2, 2000, the first business day following the due date, and as such,
is not reflected in the accompanying consolidated financial statements.
On March 30, 1998, the Company entered into the Old Credit Facility,
providing a revolving line of credit of $30 million in borrowings with the
Banks. Under the initial terms of the Old Credit Facility, the Company could
borrow up to $25 million to finance future acquisitions and up to $5 million for
working capital purposes.
Pursuant to a default under the Old Credit Facility, the Company
entered into several forbearance agreements with the Banks between March 29,
1999 and June 30, 2000 in which they agreed to forbear from exercising their
rights and remedies with respect to all existing defaults under the Old Credit
Facility.
The proceeds of the financing on February 15, 2000 were used to repay $5
million of senior bank debt and provide working capital for the Company.
Additionally, J.B. Doherty, the managing general partner of TDH, and Mr. Drury
joined the Company's Board of Directors.
The Notes are due and payable upon the fourth anniversary of the date of
issuance and accrue interest at nine percent (9%) payable semi-annually. The
Company cannot voluntarily prepay the Notes. The Notes are initially convertible
into the Company's common stock, no par value, at $3.50 per share, which price
may be adjusted downward if, under certain circumstances, the holders thereof
convert the Notes prior to the third anniversary of the date of issuance. The
Company also issued Warrants to the Investors to purchase an additional
1,800,000 shares of common stock of the Company (subject to downward adjustment
under certain circumstances) at $3.50 per share. The Warrants are exercisable
beginning the later of (i) one year from the date of issuance or (ii) the
conversion of the Notes into common stock. The Warrants expire five years from
the date of issuance. The estimated fair value of the Warrants of $553,000 has
been recorded as an increase to shareholders' equity and a related reduction in
the carrying amount of the Notes. The Company will amortize the $553,000 over
the four year term of the Notes.
On June 12, 2000, the Company closed on the New Credit Facility pursuant to
the Credit Agreement with the New Banks. The New Credit Facility consists of
the Revolving Credit Line and the Term Loan.
Under the Revolving Credit Line, the Company is required to pay interest
monthly at the prime rate plus 1.5% (effective rate of 11.0% as of November 10,
2000). The outstanding principal of the Revolving Credit Line is due and
payable at the end of term in June 2002. Borrowing availability is based on the
level of the Company's eligible accounts receivable, as defined in the Credit
Agreement. As of November 10, 2000, approximately $3.9 million was outstanding
under the Revolving Credit Line.
Under the Term Loan, interest is payable monthly at the prime rate
plus 2.0% (effective rate of 11.5% as of November 10, 2000). The outstanding
principal amount of the Term Loan was $7.0 million as of November 10, 2000 is
due and payable in consecutive quarterly payments of $500,000 commencing
September 30, 2000 until March 31, 2004. The first payment due on September 30,
2000 was paid on October 2, 2000, the first business day following the due date,
and as such, is not reflected on the consolidated balance sheets. In addition,
on an annual basis, the Company is required to reduce the principal amount
outstanding under the Term Loan to the extent that EBITDA (as defined in the
Credit Agreement), as adjusted, exceeds certain specified levels set forth in
the Credit Agreement and upon certain asset sales by the Company.
The New Credit Facility is secured by substantially all assets of the
Company and requires maintenance of various financial and restrictive covenants
including minimum levels of EBITDA and net worth.
During the nine months ended September 30, 2000, the Company made
$7,442,000 in net principal repayments under the Old Credit Facility and the New
Credit Facility, including $6,000,000 from proceeds received from the
convertible debt financing.
The Company continues to selectively invest in equipment and technology to
meet the needs of its operations and to improve its operating efficiency. The
Company may also consider selective synergistic in-market acquisitions in the
future. The Company
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believes that its operating cash flow together with the unused portion of the
Revolving Credit Line will be sufficient to finance current operating
requirements including capital expenditures and acquisitions.
Change in Certifying Accountant
As of September 21, 2000 the Company will use Ernst & Young as its
independent auditors in lieu of Arthur Andersen LLP.
Year 2000 Compliance
Throughout 1999, the Company performed an inventory of exposures of its
internal systems and identified operational steps necessary to deal with
exposure to Year 2000 related problems. Remediation for all identified exposures
to the Company's internal systems and equipment was implemented prior to
December 31, 1999. The Company also conducted Year 2000 compliance testing on
certain of its proprietary software products licensed to clients in accordance
with standards promulgated by the British Standards Institute and provided
upgraded versions of its non-compliant products to all clients. The Company has
not encountered any significant Year 2000 problems in 2000. The total cost of
the Year 2000 project incurred through September 30, 2000 did not have a
material effect on the results of operations. In 2000, the Company will continue
to monitor critical systems and equipment. The Company does not expect costs
related to Year 2000 efforts in 2000 to have a material effect on its results of
operations.
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PART II -- OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-k
A. Exhibits:
10.47 Employment Agreement between the Company and David C. Carney dated
as of April 1, 2000.
27 Financial Data Schedule (filed in electronic format only.)
B. Reports on Form 8-K:
The Company filed a Form 8-K on September 21, 2000 reporting a change in the
Company's Independent Auditors.
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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/ DAVID C. CARNEY November 13, 2000
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David C. Carney Date
Chairman and Acting Chief Executive Officer
BY: /S/ MARK P. GLASSMAN November 13, 2000
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Mark P. Glassman Date
Chief Financial Officer and Principal Accounting Officer
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