<PAGE>
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 JUNE 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
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(Address of principal executive offices) (Zip Code)
(215) 628-3600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of August 4, 2000:
Common Stock, no par value 6,661,088
-------------------------- ---------
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)
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
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IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Services........................... $13,172 $12,092 $25,293 $24,604
Products........................... 2,831 3,579 5,403 6,549
------- ------- ------- -------
16,003 15,671 30,696 31,153
------- ------- ------- -------
Cost of revenues:
Services........................... 7,834 7,447 15,061 14,889
Products........................... 1,931 2,337 3,472 4,188
Depreciation....................... 464 452 924 878
------- ------- ------- -------
10,229 10,236 19,457 19,955
------- ------- ------- -------
Gross profit.................... 5,774 5,435 11,239 11,198
Selling and administrative expenses.. 4,278 4,291 8,290 8,688
Amortization of intangibles.......... 473 447 923 896
Restructuring costs.................. -- -- -- 827
------- ------- ------- -------
Operating income................ 1,023 697 2,026 787
Interest expense..................... 551 472 1,140 1,004
------- ------- ------- -------
Net income (loss).................... $ 472 $ 225 $ 886 $ (217)
======= ======= ======= =======
Basic and diluted net income (loss)
per share.......................... $0.07 $0.03 $0.13 $(0.03)
======= ======= ======= =======
Shares used in computing basic
net income (loss) per share........ 6,649 6,605 6,641 6,552
======= ======= ======= =======
Shares used in computing diluted
net income (loss) per share........ 6,651 6,605 6,643 6,552
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
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IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 2,507 $ 1,719
Accounts receivable, net of allowance for doubtful
accounts of $501 and $392 as of June 30, 2000 and
December 31, 1999, respectively.......................... 10,455 9,412
Inventories................................................. 1,563 2,031
Prepaid expenses and other.................................. 844 838
-------- --------
Total current assets..................................... 15,369 14,000
Property, plant and equipment, net........................... 5,101 5,642
Intangibles, primarily goodwill, net......................... 43,573 44,448
Other assets................................................. 835 275
-------- --------
$ 64,878 $ 64,365
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt....... $ 7,133 $ 18,627
Accounts payable............................................ 2,326 2,967
Accrued expenses............................................ 3,944 4,021
Deferred revenue............................................ 1,962 1,666
-------- --------
Total current liabilities................................ 15,365 27,281
-------- --------
Long-term debt............................................... 11,925 970
-------- --------
Other long-term liabilities.................................. 38 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,
6,661,088 and 6,633,681 shares issued and outstanding
as of June 30, 2000 and December 31, 1999, respectively.. 53,428 52,837
Accumulated deficit......................................... (15,878) (16,764)
-------- --------
Total shareholders' equity............................... 37,550 36,073
-------- --------
$ 64,878 $ 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>
Six Months
Ended June 30,
---------------------
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................... $ 886 $ (217)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization of intangibles...................... 1,847 1,774
Amortization of deferred financing costs.......................... 40 --
Imputed interest on subordinated debt............................. 41 --
Changes in operating assets and liabilities, excluding effect of
the Southeast Group divestiture-
Accounts receivable, net........................................ (1,043) 1,336
Inventories..................................................... 468 94
Prepaid expenses and other...................................... (6) (219)
Other assets.................................................... -- (178)
Accounts payable................................................ (641) (112)
Accrued expenses................................................ (125) (1,010)
Deferred revenue................................................ 296 (1,037)
------- -------
Net cash provided by operating activities.................... 1,763 431
------- -------
Cash flows from investing activities:
Purchases of property and equipment.................................. (383) (227)
Proceeds from Southeast Group divestiture............................ -- 563
------- -------
Net cash provided by (used in) investing activities.......... (383) 336
------- -------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit..................... (5,942) (720)
Proceeds from subordinated debt transaction.......................... 6,000 --
Proceeds from mortgage transaction................................... -- 900
Payment of deferred financing costs.................................. (600) (100)
Proceeds from issuance of common stock............................... 38 56
Principal payments on debt and capital lease
obligations........................................................ (88) (196)
------- -------
Net cash used in financing activities........................ (592) (60)
------- -------
Net increase in cash and cash equivalents............................. 788 707
Cash and cash equivalents, beginning of period........................ 1,719 736
------- -------
Cash and cash equivalents, end of period.............................. $ 2,507 $ 1,443
======= =======
Supplemental disclosures of cash flow information:
Cash paid for:
Interest.......................................................... $ 984 $ 1,117
======= =======
Income taxes...................................................... $ 53 $ 14
======= =======
</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 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 independent public accountants. The Company's
independent public accountants, Arthur Andersen LLP, have stated in their audit
report included in the Company's Annual Report on Form 10-K for the year ending
December 31, 1999 that the events of default under the Company's credit facility
as of that date raise 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
generally accepted accounting principles for interim financial information
pursuant to rules and regulations of the Securities and Exchange Commission.
Accordingly, unaudited interim financial statements such as those in this report
allow certain information and footnotes required by generally accepted
accounting principles for year end financial statements to be excluded. The
Company believes all adjustments necessary for a fair presentation of these
interim financial statements have been included and are of a normal and
recurring nature. Interim results are not necessarily indicative of results for
a full year. These interim financial statements should be read in conjunction
with the Company's pro forma and historical financial statements and notes
thereto included in its Annual Report on Form 10-K for the year ending December
31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
There were no changes in the accounting policies of the Company during the
periods presented. For a description of these policies, refer to Note 2 of Notes
to Consolidated Financial Statements of ImageMax, Inc. and Subsidiaries included
in the Company's Annual Report on Form 10-K for the year ending December 31,
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 six months ended June 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 June 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 $376,000 for the six months ended June 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 six months ended June 30, 2000 with the
results for the six months ended June 30, 1999 excluding the results of the
former Southeast Group and Indianapolis operations:
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------
Actual Pro forma
2000 1999
----------- -----------
<S> <C> <C>
Total revenue........................... $30,696,000 $30,542,000
Operating income........................ $ 2,026,000 $ 1,178,000
Net income.............................. $ 886,000 $ 174,000
Basic and diluted net income per share.. $ 0.13 $ 0.03
</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 six months ended June 30, 1999, the Company recorded a
restructuring charge of $827,000, primarily related to the closing of the
Indianapolis business unit and executive severance payments. As of June 30,
2000 and December 31, 1999, respectively, accrued restructuring charges
(classified as accrued expenses) amounted to $55,000 and $263,000, of which
$33,000 and $196,000 related to severance payments with the remaining amount
attributable primarily to lease termination costs. During the six months ended
June 30, 2000, the Company paid $208,000 of accrued restructuring charges, of
which $163,000 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 "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 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 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 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 June 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 June 30, 2000, approximately $5.1 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 the June 30, 2000). The outstanding
principal amount of the Term Loan was $7.5 million as of June 30, 2000 and is
due and payable in consecutive quarterly payments of $500,000 commencing
September 30, 2000 until March 31, 2004. In addition, on an annual basis, the
Company is required to reduce the principal amount outstanding under the Term
Loan to the extent that EBITDA (as defined in the Credit Agreement; net income
plus interest expense, tax provision, depreciation, amortization, losses from
asset dispositions and insurance recoveries, minus gains from asset dispositions
and insurance recoveries), as adjusted, exceeds certain specified levels set
forth in the Credit Agreement and upon certain asset sales by the Company, if
any.
The New Credit Facility 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
5
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5. LINE OF CREDIT AND LONG-TERM OBLIGATIONS (Continued):
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 six months ended June 30, 2000, the Company made $5,942,000 in
net principal repayments under the Credit Facility from proceeds received from
the convertible subordinated debt financing (see Note 6) and cash provided by
operations. The Company used the proceeds of the New Credit Facility to repay
the entire remaining balance of the Credit Facility.
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 (9.65 % at June 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 "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 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 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.
7. INCOME TAXES:
As of June 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 June 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 three and six months ended June 30, 2000,
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.
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 concludes it is necessary to evaluate its long-
lived assets, including intangibles, for impairment, the Company will use an
estimate of
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9. INTANGIBLE ASSETS (Continued):
the related undiscounted cash flow as the basis to determine whether impairment
has occurred. If such a determination indicates an impairment loss has occurred,
the Company will utilize the valuation method which measures fair value based on
the best information available under the circumstances. As of June 30, 2000, the
Company believes that no revisions of the remaining useful lives or write-downs
of intangible assets are required.
10. COMPREHENSIVE INCOME:
The Company has reviewed SFAS No. 130 and has determined that for the
quarters and six months ended June 30, 2000 and 1999, 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
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 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 June 30, 2000 Compared to Three Months Ended June 30, 1999
Total revenues. For the three months ended June 30, 2000, total revenues
increased $0.3 million, or 2.1%, as compared to the corresponding period in
1999. This increase was due to a service revenue increase of 8.9% partially
offset by a product revenue decrease of 20.9%. The product revenue decrease was
due to a 19.5% decline in software sales, which generally retain higher gross
profit percentages, and a 21.1% decline in equipment sales, which generally
retain lower gross profit percentages. For the three months ended June 30, 2000,
service revenue and product revenue, respectively, comprised 82.3% and 17.7% of
total revenues, as compared to 77.2% and 22.8% 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 product, ImageMaxOnline, will result
in a higher gross profit percentage, as service revenues generally carry a
higher gross profit percentage than equipment revenues.
The increase in total revenues included $2.0 million attributable to
increased volume in litigation services and indexing. This increase was
partially offset by decreases of: (1) $0.7 million attributable to declines in
product revenues (including $0.1 million in software sales); (2) $0.9 million
attributable to the decreased volumes in conversion services in the Virginia,
Texas and California business units; and (3) $0.1 million related to the closing
of the Indianapolis business unit.
Gross profit. For the three months ended June 30, 2000, gross profit
increased by $0.3 million, or 6.2%, as compared to the corresponding period in
1999. This was caused by an increasing service revenue mix, partially offset by
volume declines in software sales, which generally retain higher gross profit
percentages.
Selling and administrative expenses. For the three months ended June 30,
2000, S&A expenses decreased by less than $0.1 million, or 0.3%, as compared to
the corresponding period in 1999. This decrease resulted primarily from reduced
administrative expenses, and the closing of the Indianapolis operations, mostly
offset by increased investments in sales and marketing.
Operating income. For the three months ended June 30, 2000, operating
income increased by $0.3 million, or 46.8%, as compared to the corresponding
period in 1999. This increase resulted from: (1) an increase of $0.2 million
attributable to increased profits from continuing operations at the business
unit level, primarily due to increased revenues in litigation services and
indexing as described above; and (2) an increase of $0.1 million attributable to
decreased corporate expenses and the closing of the Indianapolis business unit.
Interest expense. For the three months ended June 30, 2000, interest
expense amounted to $0.6 million, as compared to interest expense of $0.5
million in the corresponding period in 1999. The increase relates to (1) higher
interest rates on the borrowings
8
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under the Credit Facility for the three months ended June 30, 2000 as opposed to
the three months ended June 30, 1999; (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 Warrants in February
2000.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Total revenues. For the six months ended June 30, 2000, total revenues
decreased $0.5 million, or 1.5%, as compared to the corresponding period in
1999. This decrease was due to a product revenue decrease of 17.5% partially
offset by a service revenue increase of 2.8%. The product revenue decrease was
due to a 24.4% decline in software sales, which generally retain higher gross
profit percentages, and a 17.1% decline in equipment sales, which generally
retain lower gross profit percentages. For the six months ended June 30, 2000,
service revenue and product revenue, respectively, comprised 82.4% and 17.6% of
total revenues, as compared to 79.0% and 21.0% 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 increase of $0.1
million was comprised of an increase of $1.2 million in service revenue
(primarily litigation services and indexing) and a decrease of $1.1 million in
product revenue (including $0.3 million in software sales).
Gross profit. For the six months ended June 30, 2000, gross profit
increased by less than $0.1 million, or 0.4%, as compared to the corresponding
period in 1999. Excluding results of the former Southeast Group and Indianapolis
operations, gross profit decreased $0.1 million, primarily due to volume
declines in software sales, mostly offset by a higher service revenue mix of
non-software revenues.
Selling and administrative expenses. For the six months ended June 30,
2000, S&A expenses decreased by $0.4 million, or 4.6%, 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 $0.3 million in
corporate expenses. The increase in corporate expenses primarily relates to an
accrual for incentive compensation. Excluding the Southeast Group and
Indianapolis operations, business unit S&A decreased $0.4 million, primarily due
to reduced administrative expenses, mostly offset by increased investments in
sales and marketing.
Restructuring costs. For the six months ended June 30, 1999, the Company
recorded a restructuring charge of $0.8 million, primarily attributable to the
closing of the Indianapolis unit (totaling $0.6 million, including a write-off
of related goodwill of $0.3 million, severance payments, and lease termination
costs) and executive severance payments.
Operating income. For the six months ended June 30, 2000, operating income
increased by $1.2 million, or 157.4%, as compared to the corresponding period in
1999. Excluding the impact of restructuring costs, operating income increased
$0.4 million, or 25.5%. This increase resulted from an increase of $0.4 million
attributable to the sale of the Southeast Group units and the closing of the
Indianapolis business unit.
Interest expense. For the six months ended June 30, 2000, interest expense
amounted to $1.1 million, including $0.1 million relating to bank fees, as
compared to interest expense of $1.0 million in the corresponding period in
1999, including $0.1 million relating to bank fees under the Forbearance
Agreement. The increase relates to (1) higher interest rates on the borrowings
under the Credit Facility for the three months ended June 30, 2000 as opposed to
the three months ended June 30, 1999; (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 Warrants in February
2000.
Liquidity and Capital Resources
As of June 30, 2000 and December 31, 1999, respectively, the Company had
cash and cash equivalents of $2.5 million and $1.7 million, working capital of
less than $0.1 million as of June 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 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 Credit
Facility.
For the six months ended June 30, 2000 net cash provided by operating
activities amounted to $1.8 million; net cash used in investing activities
amounted to $0.4 million; and net cash used in financing activities amounted to
$0.6 million.
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Net cash provided by operating activities primarily represents earnings
before amortization and depreciation which were 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 six months ended June 30, 2000, the
Company made capital expenditures of $0.4 million, principally production
equipment, computer hardware, and delivery vehicles.
Net cash used in financing activities represents the repayment under the
Credit Facility of $5.9 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
Credit Facility were derived from the subordinated debt transaction and 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 with the Banks. 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.
Pursuant to a default under the Credit Facility, the Company entered
into several forbearance agreements with the Banks between March 29, 1999 and
September 30, 1999 in which they agreed to forbear from exercising their rights
and remedies with respect to all existing defaults under the 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 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 the August 4,
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 the August 4, 2000, approximately $5.1 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 the August 4, 2000). The outstanding
principal amount of the Term Loan was $7.5 million as of August 4, 2000 is due
and payable in consecutive quarterly payments of $500,000 commencing September
30, 2000 until the end of the term on March 31, 2004. 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 six months ended June 30, 2000, the Company made $5,942,000
in net principal repayments under the Credit Facility from proceeds received
from the subordinated debt financing and cash provided by operations. The
Company used the proceeds of the New Credit Facility to repay the entire
remaining balance of the Credit Facility.
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.
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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 June 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:
27 Financial Data Schedule (filed in electronic format only.)
B. Reports on Form 8-K:
The Company filed a Form 8-K on June 27, 2000 reporting that the Company
completed the closing of a new $14.5 million senior credit facility on June
12, 2000 pursuant to the Credit Agreement dated June 9, 2000 with Commerce
Bank, NA and FirsTrust Bank.
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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 August 14, 2000
------------------- ---------------
David C. Carney Date
Chairman and Acting Chief Executive Officer
BY: /S/ MARK P. GLASSMAN August 14, 2000
-------------------- ---------------
Mark P. Glassman Date
Chief Financial Officer and Principal Accounting Officer
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