<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 1996
REGISTRATION NO. 333-1990
===============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM SB-2
----------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
IMAGEMATRIX CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
COLORADO 7373 84-1313108
(STATE OR JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION OR INDUSTRIAL IDENTIFICATION NO.)
ORGANIZATION) CLASSIFICATION CODE
NUMBER)
400 S. COLORADO BOULEVARD, SUITE 500, DENVER, COLORADO 80222
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL
PLACE OF BUSINESS)
----------------
GERALD E. HENDERSON
IMAGEMATRIX CORPORATION
400 S. COLORADO BOULEVARD, SUITE 500
DENVER, COLORADO 80222
(303) 399-3700
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
CHRISTOPHER M. HAZLITT, ESQ. JOHN G. HERBERT, ESQ.
PETER J. JENSEN, ESQ. DIANA L. POWELL, ESQ.
CHRISMAN, BYNUM & JOHNSON, P.C. JOHN G. HERBERT, P.C.
1900 FIFTEENTH STREET 1675 LARIMER STREET, SUITE 310
BOULDER, COLORADO 80302 DENVER, COLORADO 80202
(303) 546-1300 (303) 534-0522
----------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
===============================================================================
<PAGE>
IMAGEMATRIX CORPORATION
FORM SB-2 CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER AND DESCRIPTION CAPTION OR LOCATION IN PROSPECTUS
--------------------------- ---------------------------------
<C> <S> <C>
Item 1. Front of Registration
Statement and Outside
Front Cover Page of
Prospectus.............. Facing Page of Registration Statement;
Outside Front Cover Page of Prospectus.
Item 2. Inside Front and Outside
Back Cover Pages of Pro-
spectus................. Inside Front and Outside Back Cover Pages
of Prospectus.
Item 3. Summary Information and
Risk Factors............ Prospectus Summary; Risk Factors.
Item 4. Use of Proceeds.......... Prospectus Summary; Use of Proceeds; Risk
Factors.
Item 5. Determination of Offering
Price................... Risk Factors; Underwriting.
Item 6. Dilution................. Risk Factors; Dilution.
Item 7. Selling Security Holders. Not Applicable.
Item 8. Plan of Distribution..... Underwriting.
Item 9. Legal Proceedings........ Business--Legal Proceedings.
Item 10. Directors, Executive Of-
ficers, Promoters and
Control Persons......... Management; Principal Shareholders; Certain
Transactions.
Item 11. Security Ownership of
Certain Beneficial Own-
ers and Management...... Principal Shareholders.
Item 12. Description of
Securities.............. Description of Securities; Capitalization.
Item 13. Interest of Named Experts
and Counsel............. Not Applicable.
Item 14. Disclosure of Commission
Policy on
Indemnification for
Securities Act
Liabilities............. Description of Securities.
Item 15. Organization Within Last
Five Years.............. Certain Transactions.
Item 16. Description of Business.. Business.
Item 17. Management's Discussion
and Analysis or Plan of
Operation............... Management's Discussion and Analysis of
Financial Condition and Results of
Operations.
Item 18. Description of Property.. Business--Properties.
Item 19. Certain Relationships and
Related Transactions.... Certain Transactions.
Item 20. Market for Common Equity
and Related Stockholder
Matters................. Inside Front Cover Page of Prospectus;
Underwriting.
Item 21. Executive Compensation... Management.
Item 22. Financial Statements..... Prospectus Summary; Financial Statements;
Selected Financial Data.
Item 23. Changes in and
Disagreements With
Accountants on
Accounting and Financial
Disclosure.............. Not Applicable.
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED MAY 17, 1996
PROSPECTUS
LOGO
1,400,000 UNITS
CONSISTING OF 1,400,000 SHARES OF COMMON STOCK
AND 1,400,000 REDEEMABLE WARRANTS
Each Unit ("Unit") of ImageMatrix Corporation, a Colorado corporation
("ImageMatrix" or the "Company") consists of one share of Common Stock, no par
value per share ("Common Stock"), and one redeemable Warrant ("Warrant"). Each
component of the Units is transferrable, together or separately, immediately
upon issuance. Two Warrants entitle the registered holder thereof to purchase
one share of Common Stock at an exercise price of $ per share (133% of the
Unit offering price), subject to adjustment, at any time after , 1997 (13
months after the date of this Prospectus) and prior to , 1999. The Company
has applied for quotation of the Units, the Common Stock and the Warrants on
the Nasdaq SmallCap Market under the symbols "IMCXU", "IMCX" and "IMCXW."
Beginning 13 months from the date of this Prospectus, the Warrants are subject
to redemption by the Company at a redemption price of $.25 per Warrant on 30
days prior written notice, provided the average of the closing bid price of the
Common Stock is at least $ per share (115% of the Warrant exercise price) for
10 consecutive trading days ending within 5 days of the date on which notice of
redemption is given. See "Description of Securities."
Prior to this offering, there has been no market for the securities of the
Company. It is currently anticipated that the initial public offering price of
the Units will be between $5.00 and $6.50 per Unit. There can be no assurance
that a market for the Company's securities will develop after completion of
this offering, or if developed, that it will be sustained. See "Underwriting"
for information relating to the factors considered in determining the initial
public offering price.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
DILUTION. SEE "RISK FACTORS" BEGINNING AT PAGE 8 AND "DILUTION" FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................... $ $ $
- --------------------------------------------------------------------------------
Total(3)................................ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Does not include additional compensation to the Representatives in the form
of a 3% nonaccountable expense allowance. In addition, see "Underwriting"
for information concerning indemnification arrangements with the
Underwriters and the other compensation payable to the Representatives.
(2) Before deducting expenses, payable by the Company, estimated at $600,000;
including the nonaccountable expense allowance of the Representatives.
(3) The Company has granted the Underwriters a 60-day option to purchase up to
210,000 additional Units on the same terms and conditions as set forth
above, solely to cover over-allotments, if any. If the Underwriters
exercise this option in full, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
It is anticipated that certificates representing the Units will be available
for delivery on or about , 1996.
NEIDIGER/TUCKER/BRUNER, INC. JOSEPH CHARLES & ASSOC., INC.
The date of this Prospectus is , 1996.
<PAGE>
CLAIMMATRIX(TM) SYSTEM
INPUT
Claims and supporting documents are
submitted by hospitals, doctors, clinics
and patients via paper, facsimile or EDI
and entered in the ClaimMatrix(TM) System [GRAPHIC APPEARS HERE]
using the Data Capture function. Individual
claim images are indexed and stored on
optical disk and critical data are extracted
from the images for claims processing.
SYSTEM
Claims and supporting documents flow
electronically through the ClaimMatrix(TM)
System, automatically routing them to case
managers for review and processing. Case
managers interact with the HMO's or Insurance [GRAPHIC APPEARS HERE]
provider's host system through the Adjudication
Interface function of the ClaimMatrix(TM) System,
allowing the processing of claims, managing the
review and acceptance process and expediting
the payment process.
INTERFACE
Throughout the claims processing function and
permanently thereafter, customer service
representatives, administrators and case
managers have the ability to access member [GRAPHIC APPEARS HERE]
claims records, interface with data, respond
to inquiries and perform various case management
tasks.
ClaimMatrix(TM) eliminates the need for paper-based claims processing in HMOs
and insurance providers, automating the claims processing task and facilitating
the electronic flow of claims throughout the HMO's and insurance provider's
overall information system.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS AND THE
COMPONENTS THEREOF AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
THE UNITS ARE OFFERED BY THE UNDERWRITERS SUBJECT TO PRIOR SALE, TO
ALLOTMENT AND WITHDRAWAL, AND TO CANCELLATION OR MODIFICATION OF THE OFFER,
WITHOUT NOTICE. THE UNDERWRITERS RESERVE THE RIGHT, IN THEIR SOLE DISCRETION,
TO REJECT ANY ORDER, IN WHOLE OR IN PART, FOR THE PURCHASE OF ANY UNITS. IN
ADDITION, EACH UNDERWRITER RESERVES THE RIGHT TO CANCEL ANY CONFIRMATION OF
SALE, EVEN AFTER THE PURCHASE PRICE HAS BEEN PAID, IF, IN THE OPINION OF THAT
UNDERWRITER, COMPLETION OF SUCH SALE WOULD VIOLATE FEDERAL OR STATE SECURITIES
LAWS OR A RULE OR POLICY OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS,
INC.
ADDITIONAL INFORMATION
The Company has filed with the Washington Office of the Securities and
Exchange Commission (the "Commission") a Registration Statement on Form SB-2
(the "Registration Statement") under the Securities Act and the rules and
regulations promulgated thereunder, covering the Units offered hereby. This
Prospectus, filed as a part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement, certain
portions of which have been omitted in accordance with the Rules and
Regulations of the Commission. Reference is made to the Registration Statement
and the exhibits and schedules thereto for further information with respect to
the Company and the Units offered hereby. Statements contained in this
Prospectus as to the contents of any contract, agreement or other document are
not necessarily complete, and in each instance, reference is made to the copy
of such contract, agreement or other document filed as an exhibit to the
Registration Statement, and each such statement is qualified in its entirety
by such reference. The Registration Statement and the exhibits thereto may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of such materials may be obtained from the Public Reference
Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by independent accountants.
ClaimMatrix(TM) and ImageMatrixSM are common law trademarks and service marks
of the Company. FileNet(R) and Watermark(R) are registered trademarks of
FileNet Corporation; Optika(R) is a registered trademark of Optika Imaging
Systems, Inc.; Oracle(R) is a registered trademark of Oracle Corporation; and
Windows NT(R) is a registered trademark of Microsoft Corporation, none of
which are affiliated with the Company. Prior to this offering, the Company has
not been subject to the reporting requirements of the Securities Exchange Act
of 1934.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. Prospective investors should consider carefully the
information discussed under "Risk Factors." Except as otherwise provided
herein, all share amounts set forth in this Prospectus assume no exercise of
the Underwriters' over-allotment option, the Warrants, the Representatives'
Warrant, or other currently outstanding warrants or options to acquire shares
in the Company. See "Underwriting," "Management--Executive Compensation" and
"Certain Transactions." Except as otherwise provided herein, the information in
this Prospectus gives retroactive effect to a .775-for-1 reverse stock split
("Reverse Stock Split") which is described under "Reverse Stock Split."
THE COMPANY
The Company designs, sells and installs document imaging and work flow
systems which improve productivity and customer service for health maintenance
organizations ("HMOs"), and health insurance companies ("Coverage Providers"),
and for businesses and associations in financial, communications, engineering
and other industries. The Company's imaging systems integrate components
manufactured by third party imaging software, hardware and peripheral vendors
as well as the Company's proprietary software and integration techniques. The
per project revenues for systems integration projects ranges between $50,000
for a small system to over $3,000,000 for a large multi-departmental system.
Using expertise gained in the design and installation of numerous imaging
systems for its clients, the Company has developed the ClaimMatrix(TM) system,
an imaging-based claims processing software and work flow control system for
Coverage Providers. The Company's ClaimMatrix(TM) system will allow users to
re-engineer their claims management processes to access information on a more
cost-effective basis and to achieve cost savings through productivity
increases. The ClaimMatrix(TM) system enhances user productivity by decreasing
claims processing time, improving overall information system quality, improving
customer service, reducing error rate and improving information flow, while
maintaining connectivity to the user's host computer system.
HMOs have become an increasingly preferred form of medical cost and treatment
management. From 1980 to 1994, the number of HMOs in the United States grew
from approximately 236 to approximately 591. More importantly, HMO membership
grew from approximately 9 million members in 1980 to approximately 56 million
members in 1995. Membership growth has fostered the establishment of larger
HMO's and the need for more efficient information systems. The Company believes
that certain fundamental developments in the health care industry, including:
(i) the emphasis by Coverage Providers, particularly HMOs, on reducing
operational costs and on improving customer service and satisfaction; and (ii)
the increasing development of imaging technology and its widening use for
productivity enhancing applications, present the Company with opportunities to
exploit these trends through the sale of automated claims processing systems.
The initial development phase of the ClaimMatrix(TM) system is complete with
on-site customer testing scheduled to commence in the second quarter of 1996.
Commercial sales are expected to commence prior to the end of the third quarter
of 1996. The ClaimMatrix(TM) system utilizes a FileNet(R) imaging engine
platform, Oracle(R) as the relational database software and Microsoft Windows
NT(R) as a network operating platform. Based on the Company's experience in
implementing claims processing systems, the Company anticipates the sales price
for the ClaimMatrix(TM) system to range from approximately $250,000 for a small
system to over $1,500,000 for a large system.
The Company, previously known as Documatrix Acquisition Corporation, was
incorporated in Colorado in July 1995. The Company's principal executive
offices are located at 400 S. Colorado Blvd., Suite 500, Denver, Colorado
80222, and its telephone number is (303) 399-3700.
4
<PAGE>
THE OFFERING
Securities Offered..........
1,400,000 Units, each Unit consisting of one
share of Common Stock and one Warrant. See
"Description of Securities."
Terms of Warrants........... Two Warrants entitle the holder to purchase one
share of Common Stock at a price of $ per
share (133% of the Unit offering price). The
Warrants are exercisable for a 23 month period
beginning 13 months after the date of this
Prospectus, subject to earlier redemption by the
Company. The exercise price and number of shares
of Common Stock issuable upon exercise of the
Warrants is subject to adjustment in certain
circumstances. See "Description of Securities--
Redeemable Warrants."
Number of Shares of Common Stock Outstanding:
Before the Offering.......
3,238,772(1)
After the Offering........
4,638,772(1)
Proposed NASDAQ symbols..... Units................................... ""IMCXU''
Common Stock............................. ""IMCX''
Warrants................................ ""IMCXW''
Use of proceeds.............
To repay debt, fund product developments and
enhancements, fund potential acquisitions, open
additional sales offices, and provide additional
working capital. See "Use of Proceeds."
- --------
(1) Excludes 1,709,318 shares underlying certain outstanding common stock
equivalents. See "Capitalization," footnote (1), on page 16.
RISK FACTORS
The securities offered hereby involve a high degree of risk and substantial
dilution. See "Risk Factors" and "Dilution."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data presented below have been derived
from the consolidated financial statements of the Company. The data as of
December 31, 1995 and for the years ended December 31, 1995 and 1994 were
derived from the Company's consolidated financial statements which have been
audited by Ernst & Young LLP, independent auditors. Ernst & Young LLP's report
on the consolidated financial statements as of December 31, 1995 and for the
years ended December 31, 1995 and 1994, which appears elsewhere herein,
includes an explanatory paragraph concerning the Company's ability to continue
as a going concern. The financial data as of March 31, 1996 and for the three
month periods ended March 31, 1996 and 1995 are derived from unaudited
financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the three months
ended March 31, 1996 are not necessarily indicative of the results that may be
expected for the entire year ended December 31, 1996. The unaudited pro forma
statements of operations for the year ended December 31, 1995 and for the three
months ended March 31, 1995 assume the operations of the imaging division of
ENTEX were owned by the Company for the entire year. The unaudited pro forma,
as adjusted, amounts reflect the receipt of the net proceeds of this offering
and the retirement of the notes payable as of January 1, 1995, and the
resultant elimination of interest expense related to these notes. The pro forma
information is based on available information and certain assumptions described
in the footnotes as set forth below, all of which the Company believes are
reasonable. The pro forma information is provided for informational purposes
only and does not purport to present what the Company's results of operations
would actually have been if the sale of the operations of Documatrix to ENTEX
in February 1995 and the purchase by the Company in August 1995 of the
operations of the imaging division of ENTEX had not occurred, or to project the
Company's results of operations or financial position for any future period.
The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
------------------------------------------------- --------------------------------
PRO FORMA
PRO FORMA 1995, AS PRO FORMA
1994 1995 1995 ADJUSTED (2) 1995 1995 1996
----------- ---------- ---------- ------------ --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 1,761,000 $1,968,000 $4,815,000 $4,815,000 $ 61,000 $1,617,000 $ 907,000
Cost of sales........... 835,000 1,262,000 3,146,000 3,146,000 66,000 1,182,000 760,000
----------- ---------- ---------- ---------- --------- ---------- ---------
Gross profit............ 926,000 706,000 1,669,000 1,669,000 (5,000) 435,000 147,000
Operating expenses...... 899,000 722,000 1,264,000 1,264,000 72,000 234,000 577,000
----------- ---------- ---------- ---------- --------- ---------- ---------
Operating income (loss). 27,000 (16,000) 405,000 405,000 (77,000) 201,000 (430,000)
Other income (expense)
Interest............... (133,000) (171,000) (269,000) (12,000) (31,000) (57,000) (85,000)
Other non-operating.... 5,000 -- -- -- -- -- (7,000)
Gain on sale of assets. -- 347,000 -- -- 347,000 -- --
----------- ---------- ---------- ---------- --------- ---------- ---------
Income (loss) from
continuing operations
before income taxes.... (101,000) 160,000 136,000 393,000 239,000 144,000 (522,000)
Provision for income
taxes.................. -- (24,000) -- -- (18,000) -- --
----------- ---------- ---------- ---------- --------- ---------- ---------
Income (loss) from
continuing operations.. (101,000) 136,000 136,000 393,000 221,000 144,000 (522,000)
Loss from discontinued
operations............. (1,958,000) -- -- -- -- -- --
----------- ---------- ---------- ---------- --------- ---------- ---------
Net income (loss)....... $(2,059,000) $ 136,000 $ 136,000 $ 393,000 $ 221,000 $ 144,000 $(522,000)
=========== ========== ========== ========== ========= ========== =========
Income (loss) per common
share from continuing
operations(1).......... $ (0.03) $ 0.04 $ 0.04 $ 0.08 $ 0.06 $ 0.04 $ (0.15)
Common shares used in
computing income (loss)
per common share(1).... 3,575,000 3,575,000 3,575,000 4,975,000 3,575,000 3,575,000 3,575,000
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------------
ACTUAL PRO FORMA(3) AS ADJUSTED(2)
------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 67 $ 67 $3,941
Working capital (deficiency)............... $(2,480) $(2,518) $4,098
Total assets............................... $ 1,460 $ 1,460 $5,090
Long-term obligations...................... -0- -0- -0-
Total stockholders' equity (deficit)....... $(1,798) $(1,836) $4,567
</TABLE>
- --------
(1) See Note 3 of Notes to Financial Statements for a description of the
computation of earnings per common share.
(2) As adjusted to reflect receipt of net proceeds of this offering less the
repayment of certain notes payable. Assumes price to public of $5.75 per
Unit, the median of the range of the anticipated initial public offering
price. See "Use of Proceeds."
(3) Pro Forma to reflect the rescission of a purchase in August, 1995 of 26,421
shares of the Company's common stock as a result of requirements of the
Corporate Financing Rule of the National Association of Securities Dealers,
Inc. relating to underwriting compensation in connection with the public
offering of the Units. See Note 8 to the unaudited consolidated financial
statements as of March 31, 1996.
7
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the securities offered hereby.
Accumulated Losses; History of Operating Losses; Explanatory Paragraph
Within Accountants' Opinion. The Company commenced its document imaging
business through a predecessor company in October 1993. See "Business--
General." The predecessor was also engaged in the management of documents in
microfiche which business was sold in 1994 and is included in the discontinued
operations line in the information presented in "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In order to execute its business
strategy and develop new software products, the Company will require
significant funds. Increased spending and decreased sales levels resulted in a
net loss of $522,000 for the three months ended March 31, 1996 and
approximately $290,000 for the month ended April 30, 1996 and may result in
future losses as the Company will incur significant expenses in connection
with research and development of its ClaimMatrix(TM) system, development of
its direct and indirect selling and marketing strategies, and the hiring of
additional personnel. The Company's current backlog is $281,500. There can be
no assurance that the Company will be profitable in the future or that the net
proceeds of this offering, together with any funds provided by operations and
presently available capital, will be sufficient to fund the Company's ongoing
operations. At March 31, 1996, the Company's current liabilities exceeded its
current assets by $2,480,000, its cash balance was $67,000, and it had fully
used its available credit lines. The Company is dependent on generating
additional sales to improve cash flow, and it is probable that the Company
will require additional debt or equity bridge financing prior to completion of
this offering. The Company believes its current operating funds, along with
the proceeds of the offering after amounts used to repay debt, will be
sufficient to finance its cash requirements for at least the next 12 months.
See "Use of Proceeds." If the Company has insufficient funds, there can be no
assurance that additional financing can be obtained on acceptable terms, if at
all. The absence of such financing would have a material adverse effect on the
Company's business, including a possible reduction or cessation of operations.
The report of the Company's independent accountants on the Company's financial
statements as of December 31, 1995 contains an explanatory statement
concerning the Company's ability to continue as a going concern. See
"Financial Statements--Report of Independent Auditors."
Variability Of Quarterly Operations. Results of operations have fluctuated
significantly in the past and may continue to fluctuate significantly from
quarter to quarter as a result of a number of factors, including but not
limited to: (i) the volume and timing of system sales; (ii) customer
purchasing patterns, long sales cycles, order cancellations and rescheduling
of system installations; (iii) the mix of direct and indirect sales; (iv) the
actions of competitors; (v) introduction of new versions of operating systems
which would require new programming expenses by the Company; and (vi) the
timing of the introduction of new software systems. In addition, the Company
believes that sales generated by the opening of additional branch offices, the
potential for arranging distribution partners and the potential of acquiring
other claims processing system providers or document imaging systems
integration companies, all of which are difficult to predict, have the
possibility of significantly increasing or decreasing the Company's revenues.
Accordingly, the Company's future operating results are likely to be subject
to significant variability from quarter to quarter and could be adversely
affected in any particular quarter. Due to the foregoing factors, it is
possible that the Company's operating results may from time to time be below
the expectations of public market analysts and investors. In such event, the
price of the Company's securities could be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Control by Existing Shareholders. Upon completion of the offering, the
Company's existing shareholders will beneficially own 70% of the Company's
outstanding Common Stock (67% if the Underwriters' over-allotment option is
exercised in full). The Company's employees and existing shareholders also
hold options to acquire 1,119,784 additional shares of the Company's Common
Stock. If such options were exercised the Company's employees and existing
shareholders would hold 76% of the Company's outstanding Common Stock
following this offering (73% if the Representative's over-allotment is
exercised in full.) Investors purchasing
8
<PAGE>
Units pursuant to this offering will, collectively, beneficially own 30% of
the Company's outstanding Common Stock (33% if the Underwriters' over-
allotment option is exercised in full). As a result, all or certain
combinations of the Company's existing shareholders, acting in concert, will
have the ability to elect or remove any or all of the Company's directors and
to control substantially all corporate actions. See "Principal Shareholders"
and "Management."
ClaimMatrix(TM) System Development Risk. The Company has completed initial
development of the Company's primary software product, the ClaimMatrix(TM)
system. The Company believes continuous research and development will be
necessary to assure the ongoing technological competitiveness of the product.
The company also intends to add additional features over time which will be
sold to clients as upgrades to the base system. Unforeseen technological
difficulties may cause delay or inability to complete future enhancements in
the product in a manner acceptable to the commercial market. There can be no
assurance that (i) the ClaimMatrix(TM) system will be developed within the
parameters envisioned by the Company; (ii) the future enhancements will be
developed within the timeline envisioned by the Company; (iii) product
benefits envisioned by the Company will be attained by the ClaimMatrix(TM)
system; or (iv) the ClaimMatrix(TM) system will be a commercially successful
product. Based upon the Company's current development schedule, it is
anticipated that the Company will begin marketing ClaimMatrix(TM) by the
second quarter of 1996. See "Business--The ClaimMatrix(TM) System."
Product Acceptance and Market Development; Future Establishment of
Distribution Partners. The market for imaging-based claims processing,
particularly for HMOs, is still relatively new and may not develop as
anticipated by the Company. The Company's success is dependent upon market
acceptance of its products and services in preference to current competing
products and services and those that may be developed by others. There can be
no assurance that the Company's products and services will achieve a
sufficient level of market acceptance to result in profitable operations. The
Company's success is also dependent upon the success of its marketing and
distribution strategy which involves, to a significant degree, reliance upon
attracting additional qualified sales personnel, the establishment of
additional branch office locations either internally, or through acquisition,
as well as adding distribution partners to sell the Company's ClaimMatrix(TM)
systems. The Company currently has no distribution partners. If the Company is
unsuccessful in securing distribution partners for the ClaimMatrix(TM) system
or the distribution partners are unsuccessful in achieving significant sales
of those systems, the Company's business would be materially and adversely
affected. See "Business--Sales and Marketing."
Reliance on Internally Developed Software and Consequential Risk of
Delay. The Company's strategy of selling integrated imaging systems which use
aspects of its internally created software creates a reliance on software
which has been used in limited installations and for a limited amount of time.
Given the short time frame and limited experience with its own software, the
Company's software could have functional problems or inadequacies which have
not yet been recognized. To the extent such flaws would require redevelopment,
the Company's ongoing customer relationships as well as its ability to sell
and market its system could be adversely affected. See "Business--Research and
Development."
Risks Relating to Competition; Dynamic Market. The market for imaging-based
information systems is intensely competitive. Many of the Company's
competitors have significantly greater financial, technical, research and
development and marketing resources than the Company. The imaging products and
services the Company sells compete with other technologies as well as with
similar products and services offered by other companies. Additionally, other
information management companies may enter the market in which the Company
competes. Competitive pressures and other factors, such as new product
introductions by the Company's competitors, or the entry into new geographic
markets, may result in significant price erosion that could have a material
adverse effect on the Company's business. The Company's products are dependent
upon a number of advanced technologies, including those relating to computer
hardware and software, scanning devices, storage devices, robotic systems and
other peripheral components, all of which are subject to rapid technological
change. To be competitive, the Company must respond effectively to
technological changes by continuing to enhance its
9
<PAGE>
existing products to incorporate emerging or evolving technologies and
standards. There can be no assurance that the Company will be able to respond
effectively to technological changes or new product announcements or
introductions by others. Furthermore, there can be no assurance that the
Company will be able to access the needed new technology at an acceptable
price. See "Business--Competition."
Revenue Concentration From Small Group of Customers. Sales of the Company's
imaging systems have been concentrated in a small number of customers. In the
year ended December 31, 1994, four customers accounted for 65% of the
Company's revenues and in the year ended December 31, 1995, two customers
accounted for 70% of the Company's total revenues and for the three months
ended March 31, 1996, five customers accounted for 76% of the Company's total
revenues. The inability to replace any such customers with significant new
customers would have a material adverse effect on the Company's business. At
December 31, 1995, approximately $497,000 (66%) of the Company's accounts
receivable were attributable to its two largest customers for the year ended
December 31, 1995, and at March 31, 1996 approximately $248,000 (78%) of the
Company's accounts receivable were attributable to its five largest customers
for the three months ended March 31, 1996. The Company believes the expected
increase in the number of sales offices and the release of the ClaimMatrix(TM)
system may decrease customer concentration levels in the future. However, the
Company expects that the proportion of revenues from large customers will
continue to be a significant factor with respect to future operations. See
"Business--Customers and Signed Sales Contracts."
Dependence on Software Vendor Relationships. The Company's products and
services integrate the software application platforms of various third party
software vendors including, but not limited to, FileNet, Inc. ("FileNet"),
Optika Imaging Systems, Inc. ("Optika"), Oracle Systems, Inc. ("Oracle"), and
Microsoft, Inc. ("Microsoft"). There can be no assurance that these vendors
will continue to conduct business with the Company over the long term, that
these vendors will not themselves attempt to compete with the Company in its
markets, or that these firms will continue to work cooperatively with the
Company in the development of the Company's products. In the case of FileNet
and Optika, the Company's vendor authorizations are an important requirement
to the Company's business operations and future plans. FileNet and Optika
regularly provide referrals of potential clients and establish credibility
with potential clients. In 1994, approximately $469,000 (27%) of the Company's
revenue was attributable to such referrals and in 1995, approximately $629,000
(13%) of the Company's revenues was attributable to such referrals. Dealer
agreements typically provide that a dealer may be terminated with cause upon
as little as 30 days' notice. The Company's current dealer agreements are
generally for durations of one year. Vendors have regularly renewed the
Company's dealer agreements; however, no assurance can be given that such
renewals will continue or that the referrals generated from such
relationships, whether the relationships continue or not, will continue to
occur. The loss of vendor authorizations from FileNet or Optika could have a
material adverse effect on the Company's business. The Company believes that
there are competitive alternatives should its relationship with any particular
software vendor deteriorate, but there can be no assurance that such
alternatives would be available, or could be implemented without adverse
effect on the Company. See "Business--Systems Integration Products and
Services."
Ability to Manage Growth in Revenue, Assets, Liabilities and Income. As a
result of internal development and expansion into additional applications and
markets, the Company has at times grown rapidly. There is no assurance that
the Company will continue to experience growth. However, growth and expansion,
if experienced, could continue to place a significant strain on the Company's
services and support operations, sales and administrative personnel and other
resources. The Company's ability to manage such growth effectively will
require the Company to continue improving its operational, management and
financial capabilities and systems. As a result, the Company is subject to
certain growth-related risks, including the risk that it will be unable to
hire and retain qualified personnel or other resources necessary to sustain
growth. See "Management Discussion and Analysis of Financial Condition and
Results of Operations."
Product Liability. The Company's products are used to provide information
that is critical to its clients' operations and management information
systems. Any failure by the Company's systems to provide accurate and timely
information or loss of client data could result in claims against the Company.
The Company maintains
10
<PAGE>
insurance to protect against errors and omissions claims associated with the
use of its systems in an amount up to a $1,000,000 total limit with a
deductible amount of $25,000 per occurrence, but there can be no assurance
that its insurance coverage would adequately cover any claim asserted against
the Company. A successful claim brought against the Company in excess of its
insurance coverage or for any reason not within the scope of coverage of its
policy could have a material adverse effect on the Company. Generally, the
Company's contracts with its clients limit the ability of such clients to seek
payment from the Company for consequential damages. Even unsuccessful claims
could result in the Company's expenditure of funds in litigation and
management time and resources. There can be no assurance that the Company will
not be subject to claims related to its products and services, that such
claims will not result in liability in excess of its insurance coverage, that
the Company's insurance will cover such claims, or that appropriate insurance
will continue to be available to the Company in the future at commercially
reasonable rates. See "Business."
Dependence on Key Personnel. Gerald E. Henderson, Blair W. McNea and certain
other executive officers and employees have been primarily responsible for the
development and expansion of the Company's business, and the loss of the
services of one or more of these individuals could have a material adverse
effect on the Company. The Company's future success will be dependent in part
upon its continued ability to recruit, motivate and retain qualified
personnel. There can be no assurance that the Company will be successful in
this regard. Except for a non-disclosure provision in Mr. Henderson's
employment agreement and a non-competition provision in the Company's
employment agreement with Dennis Hefter, Vice President--National Sales
Manager of the Company, the Company does not have non-competition agreements
with any key personnel. The Company maintains for its benefit a $1,000,000 key
man life insurance policy on the life of Mr. Henderson and a $500,000 key man
life insurance policy on the life of Mr. McNea. See "Management--Employment
Agreements."
Dependence on Proprietary Rights, Copyrights, and Potential Patents. To
develop and maintain its competitive position, the Company relies primarily
upon the technical expertise and creative skills of its personnel, independent
consultants and contractors. To protect its proprietary products, concepts and
systems, the Company relies on copyrights held by third parties and by the
Company, confidentiality and invention assignment agreements, and may in the
future file applications for patents and further copyrights for software it
develops. There can be no assurance that copyrights, patents (if applied for)
or confidentiality or invention assignment agreements will not be breached or
that the Company will have adequate remedies for any such breaches. Although
the Company is not aware of any infringement by it of intellectual property
rights held by third parties, there can be no assurance that the Company is
not infringing on the intellectual property rights of others. See "Business--
Intellectual Property." The Company has acquired non-exclusive licenses to
certain software owned by third parties which is used in certain of the
Company's products. Litigation against the Company, whether or not successful,
regarding copyrights, or infringement by the Company of the patent rights or
copyrights of others could have a material adverse effect on the Company's
business. There can be no assurance that patents or copyright registrations
which may be applied for, issued to or licensed by the Company will not be
challenged or circumvented by competitors or found to be overly broad so as to
fail to adequately protect the Company's technology or to provide it with any
competitive advantage. See "Business--Intellectual Property."
Long Sales and Delivery Cycle. Because the Company's imaging systems
typically range in sales price from $50,000 to $3,000,000, the decision by a
client to purchase a system typically involves a major commitment of capital
and an extended review and approval process. Accordingly, the sales cycle for
the Company's system is typically 6 to 12 months from initial contact to
receipt of order. During these periods, the Company may expend substantial
efforts and funds preparing a contract proposal and negotiating the contract.
The length of time between receipt of order and system acceptance typically
ranges from one to three months depending on the size of the system, the
products ordered and delivery terms. Any significant or ongoing failure to
achieve signed contracts and subsequent customer acceptance after expending
time, effort and funds, or in excess of expected completion time, could have a
material adverse effect on the Company's business. The Company has not yet
released its ClaimMatrix(TM) system for commercial sales and cannot predict
the sales cycle for such system. See "Business--Customers and Signed Sales
Contracts."
11
<PAGE>
Revenue Recognition, Percentage Completion of Projects. The Company designs
and installs systems which may take up to nine months to complete. As a result
of using the Percentage of Completion Method of Accounting for its long-term
contracts, the Company's estimates of total project costs will have a
significant influence on the amount of revenue and gross margin to be
recognized on individual contracts. In addition, the Company's estimates of
the costs to complete a project will determine the amount of revenue and gross
margin recognized through the end of each quarter. Errors in the Company's
estimates could result in the premature recording of revenues and gross
margins or the deferral into future periods of losses that should be currently
recognized. See "Notes to Consolidated Financial Statements."
Credit Risk. Although the Company has not experienced any material losses
related to client inability to pay for its services, as the Company's customer
base expands it may be subject to increased credit risk. Because the Company's
revenues are derived from a small number of significant customers, the
Company's receivables are similarly concentrated. The inability of one of
these significant customers to satisfy its obligations to the Company could
have an adverse material affect on the Company. Also, in the event that the
system performance does not meet customer expectations, customers could hold
back on payments for portions of the overall system contract until additional
services have been performed. Such hold backs could cause the Company to: (i)
incur losses on its installations or earn less profit than anticipated; or
(ii) fail to receive payments for certain portions of its work. See "Risk
Factors--Revenue Concentration From Small Group of Customers."
Uncertainty in Coverage Provider Industry; Government Health Care Reform
Proposals. The health insurance and HMO industries are subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operation of Coverage Providers. If health care reform proposals
that feature a single-payor system or that control methods by which claims are
processed and reimbursed are adopted, the anticipated market for the
ClaimMatrix(TM) system could be materially adversely affected. Health care
reform proposals have contained provisions to increase governmental
involvement in health care, lower reimbursement rates and otherwise change the
operating environment for Care Providers and Coverage Providers. Coverage
Providers may react to these proposals and the uncertainty surrounding such
proposals by curtailing or deferring investments, including those for the
Company's products and services. Cost containment measures instituted by
Coverage Providers as a result of regulatory reform or otherwise could result
in greater selectivity in the allocation of capital funds. Such selectivity
could have a material adverse effect on the Company's ability to sell its
products and services. See "Business--Health Insurance and Health Maintenance
Organization Industry Background."
Regulatory Risk. The Company does not believe that its current systems are
subject to U.S. Food and Drug Administration ("FDA") review and approval. The
core ClaimMatrix(TM) system is intended for internal use by Coverage Providers
to process claims for payment to insured or member parties. However, if the
FDA chooses to regulate software associated with medical treatment management,
it could impose extensive requirements governing pre- and post-market
conditions such as device investigation, approval, labeling and manufacturing.
In addition, such products would be subject to FDA's general controls,
including those relating to good manufacturing practices and adverse
experience reporting. To the extent the Company is forced by competitive
pressures, or it desires to expand the applications of the ClaimMatrix(TM)
system to include patient records management, the Company's systems may come
under FDA jurisdiction.
Trend Toward Capitation of Health Care Costs. So-called "capitation-based"
health care plans utilize a flat fee rate service which is negotiated with a
health care provider or group. Through capitation plans the cost risks are
transferred from the Coverage Provider to the health care provider or group.
In the event that Coverage Providers are not subject to claim risks, the
positive productivity impacts of installation of the Company's ClaimMatrix(TM)
system for Coverage Providers may be reduced, which may adversely affect the
Company's sales. See "Business."
No Prior Public Market; Determination of Offering Price. Prior to this
offering, there has been no public market for the Company's securities, and
there can be no assurance that an active trading market will develop or
12
<PAGE>
be sustained after the offering, or that the market price of the securities
will not decline below the initial public offering price. The initial public
offering price of the Units offered hereby has been determined by negotiations
between the Company and the Representatives and may not be indicative of
prices that will prevail in the trading market. See "Underwriting." The
Company has applied for inclusion of the Units, the Common Stock and the
Warrants for quotation on the Nasdaq Small Cap Market, subject to official
notice of issuance. There can be no assurance that the Company will maintain
Nasdaq listing following the completion of this offering. Consequently,
purchasers in this offering may be exposed to a substantial risk of loss of
liquidity in their investment or a reduction in the value of the Units, the
Common Stock and the Warrants after this offering should a trading market not
develop or be sustained. If a trading market develops, there may be
significant volatility from time to time in the trading of the Units, the
Common Stock and the Warrants, and factors beyond the Company's control may
adversely affect the market price of these securities. See "Underwriting."
Authorization and Issuance of Preferred Stock. The Company's Articles of
Incorporation authorize the issuance of up to 5,000,000 shares of Preferred
Stock with such rights and preferences as may be determined from time to time
by the Board of Directors. Accordingly, under the Articles of Incorporation
the Board of Directors may, without stockholder approval, issue Preferred
Stock with dividend, liquidation, conversion, voting, redemption or other
rights which could adversely affect the voting power or other rights of the
holders of the Common Stock. The issuance of any shares of Preferred Stock,
having rights superior to those of the Common Stock, may result in a decrease
of the value or market price of the Common Stock and could be used by the
Board of Directors as a device to prevent a change in control of the Company.
Holders of the Preferred Stock may have the right to receive dividends,
certain preferences in liquidation and conversion rights. The Company has not
issued any Preferred Stock and has no plans to do so. See "Description of
Securities--Preferred Stock."
Debt Service Requirement. On August 30, 1995, the Company completed its
purchase of the assets and assumption of the liabilities of the document
imaging division of ENTEX Information Services of Colorado, Inc. ("ENTEX"). As
partial consideration for that purchase, the Company issued a promissory note
(the "Note") for $1,484,000, which amount remains unpaid. Since April 1, 1996,
the Note has accrued interest at the rate of 18% per annum. There are no
principal payments required prior to maturity; the Note matured March 30,
1996. The Company intends to repay the Note with the proceeds of this offering
prior to May 30, 1996. See "Use of Proceeds." If the Note is not paid in full
by May 30, 1996, ENTEX is entitled to receive, for no additional
consideration, shares of Common Stock at the rate of one percent (1%) of the
total shares of Common Stock outstanding for each $100,000 of principal and
interest then outstanding or 14.84%, which would be equal to 484,555 shares.
If the Note is still unpaid as of August 30, 1996, ENTEX has the right to seek
a liquidation of the assets and liabilities of the Company to receive full
payment of any unpaid principal and interest. See "Certain Transactions."
The Company has a $1,160,000 promissory note payable to Bank One, Colorado,
N.A. due February 1, 1997 with interest only payable at the bank's prime rate
of interest (8.5% at December 31, 1995). The note is secured by all assets of
the Company and Mr. Henderson and the estate of his wife are co-borrowers
under such note. In March 1996, an event of default occurred on the note
payable to the bank due to the death of Mr. Henderson's wife. The bank has
issued a letter of forbearance which indicated the bank commits not to declare
a default and accelerate the loan based solely on the death of Mr. Henderson's
wife through May 31, 1996. Subsequent to May 31, 1996, the Bank may declare a
default or exercise any remedies it may have based on the death of
Mr. Henderson's wife. See "Certain Transactions."
Market Making Activities. Although they have no legal obligation to do so,
the Representatives have indicated an intention to make a market in or
otherwise effect transactions in the Units, the Common Stock and the Warrants
upon completion of the offering. Such market-making activities, if commenced,
may be discontinued at any time or from time to time by the Representatives
without obligation or prior notice. If the Representatives are a dominating
influence at such time, the Representatives' discontinuance of such market-
making activities could adversely affect the price and liquidity of the
securities. See "Underwriting."
13
<PAGE>
Securities Eligible for Future Sale. The sale of substantial amounts of
Common Stock in the public market subsequent to the completion of this
offering pursuant to Rule 144 and Regulation S promulgated under the
Securities Act of 1933, as amended (the "Securities Act") or otherwise, or the
perception that such sales could occur, may adversely affect prevailing market
prices of the Company's securities and could impair the future ability of the
Company to raise additional capital through an offering of its equity
securities. The Company and the holders of substantially all of the Company's
currently outstanding securities have agreed not to offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock, or any securities
convertible into or exercisable or exchangeable for Common Stock, for a period
of 180 days after the date of this Prospectus without the prior written
consent of the Representatives. Additionally, officers and directors of the
Company, as well as shareholders beneficially owning more than 5% of the
outstanding shares of the Company, have agreed not to offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock, or any securities
convertible into or exercisable or exchangeable for Common Stock, for a period
of 365 days after the date of this Prospectus without the prior written
consent of the Representatives. Following the respective 180 day and 365 day
periods, all current shareholders have the right to demand registration under
the Securities Act of their shares of Common Stock and to have such shares of
Common Stock included in future registered public offerings of the Company's
securities. See "Description of Securities--Registration Rights," "Securities
Eligible for Future Sale" and "Underwriting."
Broad Discretion of Management in Use of Proceeds. The Company intends to
use the net proceeds of this offering for debt repayment, working capital to
finance the Company's planned growth, for general corporate purposes and for
potential acquisitions of complementary businesses or products. Accordingly,
the Company will have broad discretion as to the application of such proceeds.
An investor will not have the opportunity to evaluate the economic, financial
and other relevant information which will be utilized by the Company in
determining the application of such proceeds. In addition, as is customary,
shareholders will not have an opportunity to vote upon any use of proceeds,
including acquisitions. See "Use of Proceeds."
Current Prospectus and State Registration Required to Exercise
Warrants. Purchasers of the Warrants included as a component of the Units in
this offering will not be able to exercise them unless at the time of exercise
a current prospectus under the Securities Act, covering the shares of Common
Stock issuable upon exercise of the Warrants is effective and such shares have
been registered for sale or are exempt from registration under the applicable
securities or "blue sky" laws of the states in which the various holders of
the Warrants reside. Although the Company has undertaken to use reasonable
efforts to maintain the effectiveness of a current prospectus covering the
Common Stock underlying the Warrants, there can be no assurance that the
Company will be able to do so. Although the Company will use its best efforts
to register or qualify the shares for sale in jurisdictions where the
registered holders of the Warrants reside, no assurance can be given that the
Company will be able to do so. Further, the Company may determine not to
register or qualify the shares underlying the Warrants in jurisdictions where
time and expense do not justify such action. The value of the Warrants may be
greatly reduced if a current prospectus covering the shares underlying the
Warrants is not effective or if such Common Stock is not registered or exempt
from registration in the states in which the holders of the Warrants then
reside. See "Description of Securities."
Risks Associated With Forward-Looking Statements. This Prospectus contains
certain forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities and Exchange Act of 1934 and
the Company intends that such forward-looking statements be subject to the
safe harbors for such statements under such sections. The Company's forward-
looking statements include the plans and objectives of management for future
operations, including plans and objectives relating to the ClaimMatrix(TM)
system, systems integration services, and future economic performance of the
Company. The forward-looking statements and associated risks set forth in this
Prospectus include or relate to: (i) the ability of the Company to attract and
retain qualified professionals for system installation and integration for the
ClaimMatrix(TM) system as well as for general imaging system integrations
("Custom Systems"), (ii) the ability of the Company to market its products and
services at competitive prices, (iii) the ability of the Company to develop
brand-name recognition for the ClaimMatrix(TM) system, (iv) the ability of the
Company to develop an effective sales staff and
14
<PAGE>
sales network of distribution partners, (v) market acceptance of the
ClaimMatrix(TM) system, (vi) success of the Company's market initiatives,
(vii) expansion of sales in the industries to which the Company provides
Custom Systems, (viii) success of the Company in forecasting demand for the
ClaimMatrix(TM) system and Custom System services, (ix) the ability of the
Company to diversify sales of Company products and services to large and small
customers, (x) the ability to maintain pricing and thereby maintain adequate
profit margins, (xi) ability to achieve adequate intellectual property
protection for the Company's products, and (xii) success of the Company in
increasing ClaimMatrix(TM) system sales as a percentage of overall revenues to
increase gross profit margins and decrease general, administrative and sales
costs as a percentage of overall gross profit.
The forward-looking statements herein are based on current expectations that
involve a number of risks and uncertainties. Such forward-looking statements
are based on assumptions that the Company will continue to design, market and
provide new products and services on a timely basis, that competitive
conditions in the claims processing market will not change adversely or
materially, that demand for the Company's Custom Systems will continue or
increase, that the market will accept the ClaimMatrix(TM) system, that the
Company will retain and add qualified sales, research and systems integration
personnel and consultants, that the Company's forecasts will accurately
anticipate market demand, and that there will be no material adverse change in
the Company's operations or business. The foregoing assumptions are based on
judgments with respect to, among other things, future economic, competitive
and market conditions, and future business decisions, all of which are
difficult or impossible to predict accurately and many of which are beyond the
Company's control. Accordingly, although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any such
assumption could prove to be inaccurate and therefore there can be no
assurance that the results contemplated in forward-looking statements will be
realized. In addition, as disclosed elsewhere in the "Risk Factors" section of
this Prospectus, there are a number of other risks presented by the Company's
business and operations which could cause the Company's net sales or net
income, or growth in net sales or net income to vary markedly from prior
results or the results contemplated by the forward-looking statements. Growth
in absolute amounts of cost goods sold and selling, general and administrative
expenses or the occurrence of extraordinary events could cause actual results
to vary materially from the results contemplated by the forward-looking
statements. Management decisions, including budgeting, are subjective in many
respects and periodic revisions must be made to reflect actual conditions and
business developments, the impact of which may cause the Company to alter its
marketing, capital investment and other expenditures, which may also adversely
affect the Company's results of operations. In light of significant
uncertainties inherent in the forward-looking information included in this
Prospectus, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the Company's
objectives or plans will be achieved. See "Use of Proceeds" and "Business."
Immediate and Substantial Dilution. The offering involves an immediate and
substantial dilution of $4.80 per share of Common Stock or a 83.5% reduction
between the assumed initial offering price of $5.75 per share of Common Stock
(ascribing no value to the Warrants) and the pro forma net tangible book value
of $0.95 upon completion of the offering, assuming no exercise of the
Warrants, the over-allotment option, or the Representatives' Warrant. See
"Dilution."
No Dividends. The Company has not paid any dividends on its Common Stock and
does not intend to pay dividends in the foreseeable future. See "Dividend
Policy."
Staggered Terms of Directors. The Company's directors are elected to
staggered terms, such that it would require at least two years for a majority
of the Company's current directors to be replaced. See "Management."
Limitations on Liability of Directors. The Company's Articles of
Incorporation substantially limit the liability of the Company's Directors to
its shareholders for breach of fiduciary or other duties to the Company, to
the full extent permitted by Colorado law. See "Description of Securities--
Indemnification and Waiver of Director Liabilities."
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization and short-term debt of the
Company: (i) at March 31, 1996; (ii) the pro forma capitalization of the
Company after giving effect to the rescission of a purchase of 26,421 shares
of the Company's common stock and (iii) as adjusted to reflect the sale by the
Company of the 1,400,000 Units offered hereby at an assumed initial public
offering price of $5.75 per Unit (the median of the range of the anticipated
initial offering price) and the application of the net proceeds therefrom as
described under "Use of Proceeds." This table should be read in conjunction
with the Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
MARCH 31, 1996(1)
----------------------------------------
PRO
ACTUAL(2) FORMA(3) AS ADJUSTED(4)
----------- ----------- --------------
<S> <C> <C> <C>
Short Term Obligations:
Note Payable to ENTEX Information
Services of Colorado, Inc.......... $ 1,484,000 $ 1,484,000 $ --
Note Payable to Bank................ 1,160,000 1,160,000 --
Note Payable to Rolf Stepparud...... -- 38,000 --
Stockholders' Deficit:
Preferred Stock, no par value:
5,000,000 shares authorized, no
shares issued and outstanding,
actual and as adjusted........... -- -- --
Common Stock, no par value:
20,000,000 shares authorized,
3,265,193 shares issued and
outstanding actual, 3,238,772
shares issued and outstanding pro
forma, and 4,638,772 shares
issued and outstanding as
adjusted......................... (1,141,000) (1,179,000) 5,224,000
Deferred compensation............... (88,000) (88,000) (88,000)
Accumulated deficit................. (569,000) (569,000) (569,000)
----------- ----------- ----------
Total stockholders' equity
(deficit)...................... (1,798,000) (1,836,000) 4,567,000
----------- ----------- ----------
Total capitalization............ $ 846,000 $ 846,000 $4,567,000
=========== =========== ==========
</TABLE>
- --------
(1) Does not include (i) 852,500 shares reserved for issuance under the
Company's Founders and Consultants Stock Option Plan (of which 709,034
shares are subject to outstanding options); (ii) 58,125 shares reserved
for issuance under the Company's Non-Employee Directors Stock Option Plan
(of which 23,250 shares are subject to outstanding options; (iii) 387,500
shares reserved for issuance under the Company's 1996 Incentive Stock
Option Plan (of which all such shares are subject to outstanding options);
(iv) up to 64,534 shares issuable to ENTEX upon the exercise of a warrant;
(v) 140,000 Units (comprised of 140,000 shares and Redeemable Warrants to
purchase 70,000 shares) which may be purchased upon the exercise of the
Representatives' Warrant to be granted to the Representatives in
connection with this offering; (vi) 210,000 Units which may be purchased
upon the exercise of the Underwriters' over-allotment option; (vii)
105,000 shares which may be purchased upon exercise of Redeemable Warrants
issued as part of the Units in connection with such over-allotment option;
or (viii) 484,555 shares which are issuable to a Noteholder unless the
note is repaid with the proceeds of this offering prior to May 30, 1996.
See "Use of Proceeds," "Description of Securities--Stock Options and
Warrants," "Underwriting" and "Certain Transactions."
(2) Derived from the Consolidated Financial Statements of the Company included
elsewhere in this Prospectus.
(3) Pro Forma to reflect the rescission of a purchase in August, 1995 of
26,421 shares of the Company's common stock as a result of requirements of
the Corporate Financing Rule of the National Association of Securities
Dealers, Inc. relating to underwriting compensation in connection with the
public offering of the Units. See Note 8 to the unaudited consolidated
financial statements as of March 31, 1996.
(4) As adjusted to reflect the sale of the Units offered hereby and
application of the net proceeds therefrom. Assumes an initial offering
price of $5.75 per Unit, the median of the range of the anticipated
initial offering price.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock and does not currently anticipate paying any such dividends in the near
future. The Board of Directors of the Company intends to review this policy
from time to time after taking into account various factors such as the
Company's financial condition, results of operations, current and anticipated
cash needs and plans for expansion.
16
<PAGE>
DILUTION
The pro forma net tangible book value (deficit) of the Company as of March
31, 1996 was $(1,987,000), or $(.61) per share of Common Stock. Pro forma net
tangible book value per share represents the amount of the Company's net
tangible assets less total liabilities divided by the number of shares of
Common Stock outstanding after giving effect to the Reverse Stock Split and
the rescission of a purchase of 26,421 shares of the Company's common stock
(as a result of requirements of the Corporate Financing Rule of the National
Association of Securities Dealers, Inc.). After giving effect to the sale of
1,400,000 Units offered hereby (at an assumed offering price of $5.75 per Unit
(the median of the range of the anticipated initial offering price) and
allocating no value to the Warrants included in the Units, the Company's pro
forma net tangible book value at March 31, 1996 would have been $4,416,000, or
$.95 per share. This represents an immediate increase in pro forma net
tangible book value of $1.56 per share to existing stockholders and an
immediate dilution of $4.80 per share (83.5%) to new investors purchasing
shares of Common Stock in this offering.(/1/) The following table illustrates
this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of Common Stock.. $5.75
Pro forma net tangible book value (deficit) per share before
offering...................................................... (.61)
Increase per share attributable to new investors............... 1.56
----
Pro forma net tangible book value per share after offering....... .95
-----
Dilution in net tangible book value per share to new
investors(/2/).................................................. $4.80
=====
</TABLE>
- --------
(1) As adjusted to reflect the sale of the Units offered hereby and
application of the net proceeds therefrom, and to give effect to the
Reverse Stock Split. See "Reverse Stock Split." Excludes certain common
stock equivalents. See "Capitalization."
(2) If the Underwriters' over-allotment option were exercised in full, the
adjusted pro forma net tangible book value at March 31, 1996 would have
been $5,467,000, representing a per share dilution to new investors of
$4.62.
The following table sets forth a comparison of the respective numbers of
shares of Common Stock purchased or to be purchased from the Company and total
consideration paid or to be paid to the Company by the existing holders of the
Common Stock and investors purchasing 1,400,000 Units in this offering and
assumes an initial offering price of $5.75 per Unit, the median of the range
of the anticipated offering price.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
Gerald E. Henderson(1)........ 2,233,088 48.1% $ 453,000 4.7% $0.20
Existing shareholders (exclud-
ing Mr. Henderson)........... 1,005,684 21.7% 1,117,000 11.6% $1.11
New investors................. 1,400,000 30.2% 8,050,000 83.7% $5.75
--------- ------ ----------- -------
Total....................... 4,638,772 100.0% $9,620,000 100.0%
========= ====== =========== =======
</TABLE>
- --------
(1) Amount represents cash payments of $318,000 by Mr. Henderson on Documatrix
Corporation's behalf which was treated as a capital contribution into
Documatrix Corporation, $60,000 of the Company's debt which was assumed by
Mr. Henderson and a cash payment of $75,000 paid by Mr. Henderson into the
Company.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units offered hereby (at
an assumed offering price of $5.75 per Unit, the median of the range of the
initial offering price), after deducting estimated expenses payable in
connection with this offering and underwriting discounts and commissions, are
estimated to be approximately $6,403,000 ($7,454,000 if the Underwriters' over-
allotment option is exercised in full). The Company intends to use the net
proceeds approximately as follows:
<TABLE>
<S> <C>
Repayment of note payable to ENTEX Information Services of
Colorado, Inc................................................... $1,484,000
Repayment of note payable to Bank One, Colorado, N.A............. 1,160,000
Further ClaimMatrix(TM) developments and enhancements............ 1,500,000
Consulting services.............................................. 30,000
Repayment of Note Payable to Rolf Stepparud ..................... 38,000
Acquisitions, working capital and general corporate purposes,
including sales and marketing................................... 2,191,000
----------
Total.......................................................... $6,403,000
==========
</TABLE>
Repayment of Note Payable to ENTEX Information Services of Colorado, Inc.
("ENTEX"). Approximately $1,484,000 of the net proceeds will be used to repay
principal on the note payable to ENTEX issued by the Company in August 1995
(the "ENTEX Note"), which was due and payable March 30, 1996. The Note has an
interest rate which started at an annualized rate of 10% per annum beginning in
September 1995 and increases to 11% in October 1995, 12% in November 1995, 13%
in December 1995, 14% in January 1996, 15% in February of 1996, 16% in March
1996, and 18% thereafter. The ENTEX Note is secured by a second priority
security interest on all of the assets of the Company. The Company intends to
repay the ENTEX Note with proceeds from this offering prior to May 30, 1996. If
the Note is not paid by May 30, 1996 ENTEX is entitled to receive, for no
additional consideration, shares of Common Stock at the rate of one percent
(1%) of the total shares of Common Stock outstanding for each $100,000 of
principal and interest then outstanding, which would be equal to 484,555
shares. The ENTEX Note was issued to purchase the assets of the document
imaging division of ENTEX. See "Certain Transactions."
Repayment of Note Payable to Bank One, Colorado, N.A. Approximately
$1,160,000 of the net proceeds will be used to repay principal on the secured
promissory note of the Company owed to Bank One, Colorado, N.A. (the "Bank One
Note"). The interest rate on the Bank One Note is equal to the lender's prime
rate of interest (8.5% at December 31, 1995), and is due and payable February
1, 1997. The note becomes due and payable immediately upon a change in
ownership in excess of 5% of the Company. The Company is obligated to make
interest only payments prior to the maturity date. The proceeds from the Bank
One Note were used for working capital, the purchase by Documatrix in 1992 of a
former shareholder's shares, and other general corporate purposes. The Bank One
Note is secured by a first priority security interest on all of the assets of
the Company. Gerald E. Henderson, the Chief Executive Officer and a director of
the Company, and the estate of his wife are co-borrowers under the Bank One
Note. Mr. Henderson's wife passed away on March 4, 1996, creating an event of
default under the Bank One Note. The Company has received from the lender a
forbearance as to such default until May 31, 1996. See "Certain Transactions."
Further ClaimMatrix(TM) Developments and Enhancements. The Company estimates
that approximately $1,500,000 of the net proceeds will be used over the next 24
months for (i) further development and testing of the ClaimMatrix(TM) system,
and (ii) future research, development and testing in connection with the
Company's ongoing product developments and enhancements. See "Business--
Research and Development."
Consulting Services. Consulting services to be provided to the Company
pursuant to a one-year consulting agreement with Neidiger, Tucker, Bruner, Inc.
See "Underwriting."
Repayment of Note Payable to Rolf Stepparud. Approximately $38,000 of the net
proceeds will be used to repay principal on the note payable issued to Rolf
Stepparud as consideration for the rescission of his purchase of 26,421 shares
of the Company's common stock. See "Certain Transactions".
18
<PAGE>
Acquisitions, Working Capital and General Corporate Purposes, Including
Sales and Marketing. The remaining net proceeds may be used for acquisition of
claims processing system providers or document imaging systems integration
businesses, and for general working capital purposes, including increased
sales and marketing and the payment of salaries and increased overhead
expenses related to the Company's expanding operations. No acquisition has
been identified by the Company or is pending or is in negotiation as of the
date of this Prospectus.
The Company estimates that the net proceeds of this offering together with
its anticipated operating revenues will be sufficient to fund its cash
requirements for at least 12 months following the offering.
Pending application of the net proceeds as described above, the net proceeds
of the offering will be placed in interest-bearing bank accounts or invested
in other short term interest-bearing, investment grade securities. If the
Company determines that use of the proceeds of this offering in the manner
described above is impractical or inadvisable, the Company may apply the
proceeds of this offering (except as with respect to the payment of the ENTEX
Note and Bank One Note) in such a manner as it deems appropriate under then
existing circumstances.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below have been derived
from the consolidated financial statements of the Company. The data as of
December 31, 1995 and for the years ended December 31, 1995 and 1994 were
derived from the Company's consolidated financial statements which have been
audited by Ernst & Young, LLP, independent auditors. Ernst & Young LLP's
report on the consolidated financial statements as of December 31, 1995 and
for the years ended December 31, 1995 and 1994, which appears elsewhere
herein, includes an explanatory paragraph concerning the Company's ability to
continue as a going concern. The financial data as of March 31, 1996 and for
the three month periods ended March 31, 1996 and 1995 are derived from
unaudited financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the three
months ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the entire year ended December 31, 1996. The unaudited pro
forma statements of operations for the year ended December 31, 1995 and for
the three months ended March 31, 1995 assume the operations of the imaging
division of ENTEX were owned by the Company for the entire year. The unaudited
pro forma, as adjusted, amounts reflect the receipt of the net proceeds of
this offering and the retirement of the notes payable as of January 1, 1995,
and the resultant elimination of interest expense related to these notes. The
pro forma information is based on available information and certain
assumptions described in the footnotes set forth below, all of which the
Company believes are reasonable. The pro forma information is provided for
informational purposes only and does not purport to present what the Company's
results of operations would actually have been if the sale of the operations
of Documatrix to ENTEX in February 1995 and the purchase by the Company in
August 1995 of the operations of the imaging division of ENTEX has not
occurred, or to project the Company's results of operations or financial
position for any future period. The data should be read in conjunction with
the consolidated financial statements, related notes and other financial
information included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
-------------------------------------- -----------------------------
PRO FORMA
PRO FORMA 1995, AS PRO FORMA
1994 1995 1995 ADJUSTED(2) 1995 1995 1996
------- ------ --------- ----------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues--System sales.. $ 1,380 $1,851 $4,584 $4,584 $ 61 $1,601 $ 797
Revenues--Customer
Service Contracts...... 381 117 231 231 -- 16 110
------- ------ ------ ------ ------- -------- --------
1,761 1,968 4,815 4,815 61 1,617 907
Cost of goods sold--
System sales........... 722 1,203 3,041 3,041 66 1,174 711
Cost of good sold--
Customer Service
Contracts.............. 113 59 105 105 -- 8 49
------- ------ ------ ------ ------- -------- --------
835 1,262 3,146 3,146 66 1,182 760
Gross profit............ 926 706 1,669 1,669 (5) 435 147
Operating expenses:
Selling, general and
administrative
expenses.............. 899 722 1,264 1,264 72 234 577
------- ------ ------ ------ ------- -------- --------
Operating income (loss). 27 (16) 405 405 (77) 201 (430)
Other income (expense):
Interest............... (133) (171) (269) (12) (31) (57) (85)
Other non-operating
income................ 5 -- -- -- -- -- (7)
Gain on sale of net
assets................ -- 347 -- -- 347 -- --
------- ------ ------ ------ ------- -------- --------
Income (loss) from
continuing operations
before income taxes.... (101) 160 136 393 239 144 (522)
Provision for income
taxes.................. -- (24) -- -- (18) -- --
------- ------ ------ ------ ------- -------- --------
Income (loss) from
continuing operations.. (101) 136 136 393 221 144 (522)
Loss from discontinued
operations............. (1,958) -- -- -- -- -- --
------- ------ ------ ------ ------- -------- --------
Net income (loss)....... $(2,059) $ 136 $ 136 $ 393 $ 221 $ 144 $ (522)
======= ====== ====== ====== ======= ======== ========
Income (loss) per common
share from continuing
operations(1).......... $ (0.03) $ 0.04 $ 0.04 $ 0.08 $ 0.06 $ 0.04 $ (0.15)
Common shares used in
computing income (loss)
per common share(1).... 3,575 3,575 3,575 4,975 3,575 3,575 3,575
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 67 $ 67 $3,941
Working capital (deficiency)............... $(2,480) $(2,518) $4,098
Total assets............................... $ 1,460 $ 1,460 $5,090
Long-term obligations...................... -0- -0- -0-
Total stockholders' equity (deficit)....... $(1,798) $(1,836) $4,567
</TABLE>
- --------
(1) See Note 3 of Notes to Financial Statements for a description of the
computation of earnings per common share.
(2) Pro Forma to reflect the rescission of a purchase in August, 1995 of
26,421 shares of the Company's common stock as a result of requirements of
the Corporate Financing Rule of the National Association of Securities
Dealers, Inc. relating to underwriting compensation in connection with the
public offering of the Units. See Note 8 to the unaudited consolidated
financial statements as of March 31, 1996.
(3) As adjusted to reflect receipt of net proceeds of this offering less the
repayment of certain notes payable. Assumes price to public of $5.75 per
Unit, the median of the range of the anticipated initial offering price.
See "Use of Proceeds."
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information includes forward-looking statements, the
realization of which may be impacted by certain important factors discussed
under "Risk Factors--Risks Associated With Forward-Looking Statements."
OVERVIEW
The Company's total revenues are derived primarily from the sale and support
of claims processing systems and imaging system integration sales and
services. Revenues from system sales have consisted of software customization
and licenses, professional services such as system consulting, installation
and ongoing support, and third party hardware sales and software license fees.
Sources of maintenance and professional services revenues include
installation, project management, custom programming and training, as well as
maintenance and service contracts for software and certain hardware support.
The Company's systems are sold directly to end-users. The total number of end-
users of the Company's systems increased from 15 at December 31, 1994 to
approximately 31 at December 31, 1995. At this time the Company conducts no
sales through distribution partners, but is developing a distribution strategy
to incorporate distribution partners with respect to the anticipated
introduction of the ClaimMatrix(TM) system.
Revenues from sales to Coverage Providers have increased to $780,000 for the
year ended December 31, 1995 from $467,000 in the year ended December 31,
1994. The Company expects this trend to continue. The Company has had no sales
outside of North America.
The Company was organized in July 1995 and acquired the imaging business of
ENTEX in August 1995. This business had been acquired by ENTEX from Documatrix
Corporation, a company controlled by the Company's president, on February 15,
1995. The Company's president controlled the operations of the imaging
business before, during and after the period it was owned by ENTEX. In
addition, the personnel, customers, vendors, location, and tradename of the
imaging business did not change in any significant respect during such period.
As Documatrix and the Company had no operations from February 16, 1995 through
August 30, 1995 and to display a full year of operations to compare to the
full year of operations for 1994, the 1995 pro forma results of operations
incorporating the financial statements of Documatrix Corporation and the
imaging division of ENTEX as predecessor companies are being compared to the
1994 historical results of operations to clarify the readers' understanding of
the imaging business for two complete years. Similarly, the operations for the
three months ended March 31, 1996 are compared to the pro forma results for
the three months ended March 31, 1995 to present comparable operating periods.
RESULTS OF OPERATIONS
Although the Company did not own the imaging division between February 15,
1995 and August 30, 1995 (during which time it was owned by ENTEX, See
"Business--History"), the results of operations during the period of ENTEX's
ownership are reflected in the "Pro Forma 1995" column above and are utilized
herein to provide a comparison to comparable periods for the year ended
December 31, 1994 and for the three months ended March 31, 1996. The unaudited
pro forma statement of operations for the year ended December 31, 1995 assumes
the operations of the imaging division of ENTEX were owned by the Company for
the entire year. The pro forma information is based on available information
and certain assumptions, all of which the Company believes are reasonable. The
pro forma information is provided for informational purposes only and does not
purport to present what the Company's results of operations would actually
have been if the February 1995 transaction and the August 1995 transaction
(see "Business--History") had never taken place or to project the Company's
results of operations or financial position for any future period. The data
should be read in conjunction with the consolidated financial statements,
related notes and other financial information included herein.
22
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
-----------------------------------------------------------
PRO FORMA PRO-FORMA
1994 1995 1995 1995 1995 1996
------- ------- ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues--System sales.. 78.4% 94.1% 95.2% 100.0% 99.0% 87.9%
Revenues--Customer
Service Contract....... 21.6 5.9 4.8 -- 1.0 12.1
------- ------- ------- -------- ------- -------
100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales........... 47.4 64.1 65.3 108.2 73.1 83.8
------- ------- ------- -------- ------- -------
Gross profit............ 52.6 35.9 34.7 (8.2) 26.9 16.2
Operating expenses:
Selling, general and
administrative....... 51.1 36.7 26.3 118.0 14.5 63.6
------- ------- ------- -------- ------- -------
Operating income (loss). 1.5% (0.8)% 8.4% (126.2)% 12.4% (47.4)%
======= ======= ======= ======== ======= =======
</TABLE>
Comparison of Three Months Ended March 31, 1996 With Pro Forma March 31, 1995
Revenues from system sales totalled $797,000 and $1,601,000 in the three
months ended March 31, 1996 and pro forma 1995, respectively. March 31, 1995
(pro forma) revenue from system sales included $1,032,000 of revenue
recognized on a major contract with First Trust Corporation plus $569,000 of
system sales from other projects. The decrease in first quarter revenue from
year to year is primarily due to the fact that the Company delivered no
comparable large ongoing contracts during the first quarter of 1996.
For the three months ended March 31, 1996 the Company's total revenue of
$907,000 was derived from 29 customers. Five of these customers accounted for
$693,000 or (76%) of total revenue. Two principal customers in the first
quarter of 1995 accounted for 34% of total revenue for the three months ended
March 31, 1996. New customers accounted for 2% of total revenue for the three
months ended March 31, 1996. The Company expects that the proportion of
revenues from large customers will continue to be a significant factor with
respect to future operations. At March 31, 1996 approximately $248,000 (78%)
of the Company's accounts receivable were attributable to its five largest
customers during the three months ended March 31, 1996. While the Company has
no reason to believe such accounts are not collectable, the failure to collect
such accounts would have a material adverse effect on the Company's revenues
from continuing operations. See "Risk Factors--Revenue Concentration From
Small Group of Customers."
Revenues from customer service and other totalled $110,000 and $16,000 in
the three months ended March 31, 1996 and 1995 (pro forma) respectively. The
increase in customer service revenue from year to year is due to an increase
in the number of customer service contracts in place during the respective
periods.
Cost of system sales totalled $711,000 and $1,174,000 in the three months
ended March 31, 1996 and pro forma 1995, respectively. Gross profit from
system sales totalled $86,000 (10.8%) in the three months ended March 31, 1996
and $427,000 (26.7%) in the three months ended 1995. The increase in expenses
and resulting lower gross margin percentages is the result primarily of
increased personnel costs of approximately $115,000 in the first quarter of
1996 versus the comparable period in 1995.
Cost of customer service and other totalled $49,000 and $8,000 in the three
months ended March 31, 1996 and pro forma 1995, respectively. Gross profit
from customer service and other totalled $61,000 (55.5%) and $8,000 (50.0%) in
three months ended March 31, 1996 and pro forma 1995, respectively. The
increase in expenses and resulting increase in gross margin percentages is the
result of a greater number of service contracts in the first quarter of 1996
versus the comparable prior period on a pro forma basis.
Selling, general and administration expenses increased to $577,000 for the
three months ended March 31, 1996, compared to $234,000 for the three months
ended March 31, 1995 (pro forma). The increase for the three months ended
March 31, 1996 compared to the year earlier period (pro forma) is related to a
proportionate increase in the number of personnel engaged in sales, marketing
and general administration activities together with higher expenditures for
marketing and sales activities. The first quarter 1996 totals are exclusive of
$70,000 in software development costs capitalized during the period.
Interest expense (net) increased to $85,000 for the three months ended March
31, 1996 compared to $57,000 for the three months ended March 31, 1995 (pro
forma). The increase is primarily related to an increase in the
23
<PAGE>
rate of interest paid with respect to the ENTEX note during first quarter 1996
as opposed to the rate used to impute pro forma interest on the note during
1995.
The Company reported a net loss of $522,000 for the three months ended March
31, 1996 as compared to net income of $144,000 for the three months ended
March 31, 1995 (pro forma) or ($.15) and $0.04 per share for 1996 and 1995
(pro forma), respectively.
Comparison of Pro Forma Twelve Months Ended December 31, 1995 with December
31, 1994
Revenues. The Company's total pro forma revenues were $4,815,000 for fiscal
1995 compared to $1,761,000 in fiscal 1994, an increase of $3,054,000 or
173.4%. The Company's total revenues derived from sales to non-Coverage
Provider customers were $4,035,000 for fiscal 1995 compared to $1,294,000 in
fiscal 1994, an increase of $2,741,000 or 211.8%. The Company's revenues
derived from sales to Coverage Provider customers were $780,000 for fiscal
1995 compared to $467,000 for fiscal 1994, an increase of $313,000 or 67%
increase. This increase is primarily attributable to a large system
integration contract with a single customer in the financial sector, plus
increased business while performing custom solutions for Coverage Provider
customers. For the year ended December 31, 1994 the Company's total revenue of
$1,761,000 was derived from approximately 16 customers. Four of these
customers accounted for $1,153,000 or 65% of total revenue. For the year ended
December 31, 1995 the Company's total revenue of $4,815,000 was derived from
approximately 31 customers. Two of these customers accounted for $3,336,000 or
69% of total revenue. The four principal customers in 1994 accounted for 12%
of total revenue in 1995. New customers in 1995 accounted for 82% of total
revenue in 1995. One of the two principal customers in 1995 was a new customer
and accounted for 59% of total revenue. For the most part, the Company's
composition of significant customers has changed from year to year.
Gross Profit. Total pro forma gross profit was $1,669,000 in 1995 compared
to $926,000 in 1994. Gross profit margins decreased to 34.7% in fiscal 1995
from 52.6% in the previous fiscal year, reflecting larger custom integration
projects with lower margins and a lower percentage of service revenues in 1995
versus 1994.
Sales, General and Administrative Expenses. Sales, general and
administrative expenses consist primarily of salaries, commissions and related
benefits and administrative costs allocated to the Company's sales and
marketing personnel, as well as costs of corporate operations, finance and
accounting, human resources and other general operating expenses of the
Company. Pro forma sales, general and administrative expenses increased to
$1,264,000 in fiscal 1995 compared to $899,000 in fiscal 1994, an increase of
40.6%. This increase is primarily attributable to increased personnel and
facility costs and increased staffing for sales and marketing activities. Pro
forma sales, general and administrative costs as a percentage of total
revenues decreased to 25.5% in fiscal 1995 from 50% in fiscal 1994.
Research and Development. The Company incurred no significant research and
development expense in either 1994 or 1995 beyond efforts expended in the
normal course of business of providing custom system integration services for
customers. The Company expects to incur significant research and development
expenses related to ongoing improvements for the ClaimMatrix(TM) system. The
Company expects the ClaimMatrix(TM) system to become generally available for
sale to the public during June 1996. See "Business--the ClaimMatrix(TM)
System" and "Business--Research and Development."
Operating Income. The Company's pro forma operating income for fiscal 1995
increased to $405,000 from $27,000 in fiscal 1994.
Provision for Income Taxes. At December 31, 1995, the Company had net
operating loss carryforwards (NOLs) of $638,000 for income tax purposes that
expire in 2009. The use of the NOLs is limited to future taxable earnings of
the Company.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in July 1995, the Company has funded its operations,
working capital needs and capital expenditures primarily through private
placements of equity securities in which investors invested approximately
$1,230,000 in the Company.
Cash and cash equivalents at March 31, 1996 were $67,000. The Company has a
$1,160,000 bank loan bearing interest at the lender's prime index, and
borrowings as of December 31, 1995 were $1,160,000. Interest is payable
monthly and the note matures February 1, 1997. The bank loan becomes due and
payable immediately in the event of a change in ownership of 5%. The Company
intends to repay the loan with the proceeds of this offering. See "Use of
Proceeds." Gerald E. Henderson, Chairman, President and Chief Executive
Officer of the Company, and the estate of his wife are co-borrowers under such
note. See "Certain Transactions." In March 1996, an event of default occurred
on the bank loan due to the death of Mr. Henderson's wife. The bank has issued
a letter of forbearance which indicated the bank commits not to declare a
default and accelerate the loan based solely on the death of Mr. Henderson's
wife through May 31, 1996. Subsequent to May 31, 1996, the Bank may declare a
default or exercise any remedies it may have based on the death of Mr.
Henderson's wife.
The Company has a note payable to ENTEX Information Services of Colorado,
Inc. As of March 31, 1996, the principal amount of the note was approximately
$1,484,000. There are no principal payments required prior to maturity and the
note matured on March 30, 1996. If the Note is not paid in full by May 30,
1996, the Note remains outstanding and ENTEX has the right to receive shares
of Common Stock at the rate of one percent (1%) of the total shares of Common
Stock outstanding for each $100,000 of principal and interest then
outstanding. If the Note is still unpaid as of August 30, 1996, ENTEX has the
right to seek a liquidation of the assets and liabilities of the Company to
receive full payment of any unpaid principal and interest. See "Certain
Transactions" and "Use of Proceeds."
The Company intends to incur approximately $1,500,000 in expenditures on
further ClaimMatrix(TM) development and enhancement during 1996 and 1997. The
Company intends to fund these expenses from the proceeds of this offering. See
"Use of Proceeds."
The Company's independent auditors have included a paragraph in their report
to the Company's Board of Directors and Stockholders which states that the
Company's loss from operations, working capital deficiency and net capital
deficiency raise substantial doubt about its ability to continue as a going
concern (see page F-2). The Company agrees with this statement, in that
failure to succeed in its efforts to raise capital through this offering would
jeopardize its ability to execute its business strategy. The Company has
incurred a loss of approximately $290,000 for the month ended April 30, 1996
and will incur significant costs in further development of is ClaimMatrix(TM)
system. The Company's current backlog is $281,500. There can be no assurance
that the Company will be profitable in the future or that the net proceeds of
this offering, together with any funds provided by operations and presently
available capital, will be sufficient to fund the Company's ongoing
operations. At March 31, 1996, the Company's current liabilities exceeded its
current assets by $2,480,000, its cash balance was $67,000, and it had fully
used its available credit lines. The Company is dependent on generating
additional sales to improve cash flow, and it is probable that the Company
will require additional debt or equity financing prior to completion of this
offering. The Company believes its current operating funds, along with the
proceeds of the offering after amounts used to repay debt, will be sufficient
to finance its cash requirements for at least the next 12 months. See "Use of
Proceeds." If the Company has insufficient funds, there can be no assurance
that additional financing can be obtained on acceptable terms, if at all. The
absence of such financing would have a material adverse effect on the
Company's business, including a possible reduction or cessation of operations.
The Company believes that cashflows from operations along with the proceeds of
this offering will be sufficient to finance its existing cash requirements and
growth for the next 12 months, assuming market acceptance of the
ClaimMatrix(TM) product line. The Company forecasts it will incur cash outlays
of approximately $4,341,000 for payroll, capital expenditures, facilities,
travel, and other miscellaneous costs from March 31, 1996 through December
1996. This cash flow, when netted against expected cash receipts from
operations and changes in working capital components, provides a net use of
cash for the period of approximately $1,296,000. The Company believes these
cash requirements will be met by cash flow from existing service contracts,
new orders for ClaimMatrix(TM) systems and Custom Systems,
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and improvement in gross margins as ClaimMatrix(TM) revenues become a larger
portion of the Company's overall sales volume. See "Risk Factors--Accumulated
Losses; History of Operating Losses; Explanatory Paragraph Within Accountants'
Opinion" and "Risk Factors--Risks Associated with Forward-Looking Statements."
BUSINESS
GENERAL
The Company designs, sells and installs document imaging and work flow
systems for HMOs and health insurance companies ("Coverage Providers") and for
businesses and associations in the financial, communications, engineering and
other industries. The Company's imaging systems integrate components
manufactured by third party imaging software, hardware and peripheral vendors,
utilizing the Company's proprietary integration techniques as well as certain
Company-developed proprietary software utilities. Using expertise gained in
the development of numerous imaging systems for its clients, the Company has
developed the ClaimMatrix(TM) system, an imaging-based claims processing
software and work flow control system for the Coverage Provider industry. The
Company has completed initial development of the ClaimMatrix(TM) system. The
Company has not yet begun commercial sales of or derived revenues from the
ClaimMatrix(TM) System. See "Business--The ClaimMatrix(TM) System."
History
The Company, previously known as Documatrix Acquisition Corporation, was
incorporated in July 1995. In July 1995, the Company, which at that time had
no assets or liabilities, acquired all of the authorized, issued and
outstanding shares of Documatrix Corporation, a private company wholly-owned
by Gerald E. Henderson (President and Chief Executive Officer of the Company)
in exchange for 2,180,246 shares of the Company's Common Stock. At the time
the Company acquired Documatrix Corporation, the liabilities of Documatrix
Corporation exceeded its assets by $2,502,000. The assets consisted of cash
and a note receivable totaling $281,000, and the liabilities consisted of a
promissory note to Bank One for $1,500,000, an unrealized gain on the sale of
assets to Random Access, Inc. of $1,223,000, and miscellaneous other
liabilities of $61,000.
Documatrix Corporation ("Documatrix") performed services similar to those of
the Company until February 15, 1995, at which time Documatrix sold
substantially all of its assets to Random Access, Inc. ("Random") in exchange
for $51,000 in cash, the assumption of $2,476,000 of liabilities by Random,
monthly payments from Random of approximately $67,000, and a two year earnout
with potential maximum value of $1,440,000 for the first year and $1,440,000
for the second year. There are no amounts owed by Random on such earnout.
Documatrix ceased operating activities after the sale to Random.
In May 1995, Random agreed to be acquired by ENTEX Information Services,
Inc. ("EISI"). Management of EISI was not interested in having EISI diversify
into document imaging services. Consequently, EISI required Random to dispose
of its then newly acquired imaging division, as a condition of EISI's
acquisition of Random. Upon closing of EISI's acquisition of Random, Random's
name was changed to ENTEX Information Services of Colorado, Inc. ("ENTEX").
On August 30, 1995, the Company acquired the assets and liabilities of the
imaging division of ENTEX, which was the same imaging business which had been
previously sold in February 1995 by Documatrix to Random. The Company acquired
the imaging division assets and liabilities in exchange for $721,000 in cash
and a note payable of approximately $1,484,000 (the "ENTEX Note"). See
"Certain Transactions" for a description of the terms of the ENTEX Note, which
remains outstanding. The Company also issued to ENTEX, as part of the overall
consideration, a warrant to purchase Common Stock worth up to $371,068 at the
Price to the Public of the Units sold in this offering (see "Certain
Transactions" and Note 2 of the Notes to Consolidated Financial Statements).
The consolidated financial statements of the Company for the year ended
December 31, 1995 and for the three months ended March 31, 1995 include a gain
on sale of net assets of approximately $347,000. This gain is the result of
liabilities that were assumed by ENTEX from Documatrix at February 15, 1995
and were paid by ENTEX prior to the acquisition of the imaging division's
assets and liabilities by the Company at August 30, 1995.
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HEALTH INSURANCE AND HEALTH MAINTENANCE ORGANIZATION INDUSTRY BACKGROUND
From 1980 to 1995, the number of health maintenance organizations ("HMOs")
grew from approximately 236 to approximately 591. Further, HMO membership grew
from approximately 9 million members to approximately 56 million members.
Industry analysts expect membership in HMOs to double in the next five years.
The main reason for this growth has been the desire of employers, private
insured parties and other users of health insurance or HMO coverage to reduce
costs and manage health care services. In the last 25 years, administrative
staffing for health care has risen 692% compared with 77% for physicians and
162% for nurses. Additionally, competition for clients has increased on a
price and performance basis. For a Coverage Provider, lowering the cost of
processing claims provides greater profitability overall and the capacity to
offer better service in health related areas at the same price as previously
offered.
The efficiency of existing Coverage Provider information systems is limited
because a large amount of the claims processing records historically have
existed on paper. In paper-based systems, every claim is processed by (i)
sorting the claim; (ii) data key entering the information on the claim; and
then (iii) having the user's host system (if such a system existed) process
the claim information and either pay the claim (approximately 80% of the time,
on average) or route the claim for review by a case manager (20% of the time,
on average). Each claim routed to a case manager is (i) reviewed and analyzed
by the case manager, including accessing and reviewing historical paper
records on the patient; (ii) potentially reviewed by the case manager with the
care provider to clarify treatment and reasons for the claim; (iii) completed
by either approving or disapproving the claim; and (iv) routed for payment or
coverage denial. The result is a cumbersome, time consuming system which slows
claims processing, is inefficient and expensive. Additionally, customer
service is greatly hampered by the inability of case managers to access and
review accurate data on-line and assist customers at the time of their initial
contact.
The Company's ClaimMatrix(TM) system provides Coverage Providers and other
document intensive businesses with a unified electronic information management
system for claims processing. The ClaimMatrix(TM) system electronically
captures, stores and retrieves electronic images of scanned paper documents,
utilizing third party hardware devices, while structuring the flow of
information to achieve productivity increases. The Company has completed
initial development of the ClaimMatrix(TM) system. The Company has not yet
begun commercial sales of or derived revenues from the ClaimMatrix(TM) system.
See "Business--The ClaimMatrix(TM) System."
The Company's ClaimMatrix(TM) system facilitates more efficient and accurate
claims processing by (i) electronically sorting and organizing claims, (ii)
utilizing data capture technology to capture the key data on the claims and
route such information to the user's host processing system, and (iii)
electronically routing claims needing case manager review (approximately 20%
of all claims). With regard to the claims routed for further review by a case
manager, the ClaimMatrix(TM) system (i) electronically retrieves the relevant
historical document records on the patient for review by the case manager,
(ii) electronically records as a part of the patient file the case manager's
analysis in approving, approving in part or denying the claim, and (iii)
electronically implements the case manager's authorizations.
The ClaimMatrix(TM) system eliminates paper-based processing of claims. In
this paperless environment work assignments can be obtained by users "on
demand" via transmission directly to the user workstations. Work can be routed
to other case managers instantly without interdepartmental mail or other
administrative delays. By electronically tracking claims in process,
management can manage claims backlog and re-assign resources as required. The
ClaimMatrix(TM) system can produce team and user productivity reports for
management's use in monitoring performance and output of work by existing
staff. The ClaimMatrix(TM) system eliminates many redundant and non-value
added tasks on the user workstations such as manual data input (i.e. typing),
filing and retrieving paper files, sorting and batching paper files, etc.
The Company is aware of at least two other imaging-based claims processing
systems (one complete, one under development) that provide functions similar
to those of the Company's ClaimMatrix(TM) system. Management believes that the
advantage of the ClaimMatrix(TM) system over the completed competing system is
that the ClaimMatrix(TM) system is an "open" system that allows use across
several different data base platforms and network platforms and allows
customers to use software development tools to further customize their
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application and workflow. The competing system is a "closed" system that does
not allow for exchange of data among multiple platforms or further workflow
customization. It is the Company's experience that a Coverage Provider's
information system and management personnel prefer the flexibility and control
of an "open" system over a "closed" system. The other system which will
compete with the ClaimMatrix(TM) system appears to be in the development phase
and consequently management has very little information about this product.
THE COMPANY'S STRATEGY
The Company's mission is to be a leading provider of claims processing,
document management and work flow control systems for Coverage Providers. In
addition, the Company intends to continue its general imaging systems
integration business through the continued marketing and sales of custom
imaging systems for various industries such as the financial, communications
and engineering industries.
To achieve its objective to be a leading provider of claims processing,
document management and work flow control systems for Coverage Providers, the
Company is pursuing the following strategy:
Establish the ClaimMatrix(TM) System as a Turnkey Application for Imaging-
Based Claims Processing
The Company will market its imaging-based ClaimMatrix(TM) system to the
Coverage Provider industry, focusing on features and benefits which
differentiate the Company's product from custom designed systems provided by
general imaging systems integrators ("Custom Systems"). The Company believes
the ClaimMatrix(TM) system will be distinguished from Custom Systems because
(i) it is designed to improve claims processing work flow specifically for
Coverage Providers; (ii) it is designed with user-interface features
specifically for claims processing tasks, including case management, customer
service, and system administration; and (iii) the Company will focus on a
direct sales and support strategy which addresses the specific needs of
Coverage Providers. See "Risk Factors--ClaimMatrix(TM) System Development."
Market Directly to Coverage Providers
The Company believes that an opportunity exists to focus its selling efforts
on the overall Coverage Provider industry, and particularly HMOs. Industry
analysts expect continued growth in overall HMO membership and sales of HMO
information management systems. The Company believes the cost-oriented focus
of HMOs, continued economic consolidation of the Coverage Provider industry
and the productivity impacts of its system will provide the best opportunity
for marketing and selling the ClaimMatrix(TM) system. It has been the
experience of the Company when competing for various claims processing sales
opportunities, that most imaging-based claims processing systems are developed
as custom applications for the end-user by general imaging integrators
utilizing imaging software provided by third party software vendors. The
Company believes that offering a turnkey product which meets the needs of HMO
claims processing will provide it with a competitive advantage because (i)
custom software and systems development generally costs more and takes longer
to design and install than pre-developed software applications; (ii) the
Company's ClaimMatrix(TM) system is designed to process Coverage Provider
claims and consequently has the advantage of being specific to the industry
and to the underlying functions being automated; and (iii) the ClaimMatrix(TM)
system has screens, icons and workflow with built-in options which can be
configured during installation to address the specific needs of individual
Coverage Providers for processing claims.
Increase Distribution Channels
The Company believes that the long term success of its strategy will require
the Company to (i) add qualified health care information systems ("HCIS")
integrators to serve as ClaimMatrix(TM) system distributors in various
geographical and market niches of the Coverage Provider industry; (ii) acquire
regional HCIS or imaging integrators throughout the country to sell and
implement its ClaimMatrix(TM) system; (iii) establish additional Company sales
and service offices; and (iv) add post-sale service and support partners to
maintain and service the systems in remote locations. Significant system
installations often require that system integration work be
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performed at the customer site, and that technical staff be readily available
during the installation process to provide technical support and maintenance.
The Company intends to achieve this through possible partnering agreements
with other companies.
Further Develop Technological Capabilities
The Company believes that its long term success in selling and marketing its
ClaimMatrix(TM) system will require it to maintain its high level
technological capabilities in imaging-based systems integration. To that end,
the Company will continue to perform general imaging systems integration on
various industry applications, in order to create and keep abreast of the
latest technology in the field. Approximately 20 of the Company's personnel
are technically oriented with significant experience in the areas of document
imaging, electronic claims processing and computer information systems.
The Company has working experience with integrating networking, database,
and data storage technologies. In addition the Company has experience
integrating disparate networks and applications across many platforms. The
Company often tests third party product upgrades and "beta" releases to remain
abreast of and competent with new technologies. The Company is a Microsoft
Solutions Partner(R) and an Oracle Solutions Partner(R) and as such is
continuously working with the latest in client/server-based software
solutions.
SYSTEMS INTEGRATION PRODUCTS AND SERVICES
The Company designs and integrates document imaging solutions intended to
improve productivity and reduce operating costs for its business and
institutional clients in paper-intensive business environments.
In implementing imaging solutions for its clients, the Company incorporates
various imaging software components and technologies from major document
imaging software vendors, such as FileNet, Optika and Watermark (with whom the
Company has reseller agreements) and from more general software vendors such
as Oracle and Microsoft (with whom the Company believes no reseller agreements
are required by industry practice), together with the Company's proprietary
integration techniques and Company-developed software utilities. Such
utilities include (i) software code which serves as a driver for a document
scanner and also enables the reading of bar code data; (ii) software code for
indexing and filing bar-coded documents; and (iii) other software utility type
sub-routines. The Company has sought, where possible, to retain the ownership
of such software applications, including the right to copyright and license
the use of such applications. The per project revenues for systems integration
projects range between $50,000 for a small departmental system to over
$3,000,000 for a large, multi-departmental system.
The Company undertakes a thorough investigation of its clients' specific
application requirements in an effort to deliver solutions that fit the
client's environment. The document imaging systems that the Company implements
for its clients are designed to operate within and across clients' local area
network ("LAN") and wide area network ("WAN") computer based management
information systems. These computer networks connect the client's multiple
computers, including micro-, mini- and/or mainframe computers, into a
centralized management information system. The implementation of a document
imaging system across such a network provides the client's personnel the
ability to input, organize, share, retrieve and store key data resources in a
manner which improves productivity and customer service.
The Company serves a growing number of businesses and institutions in the
western United States. The Company utilizes sales offices which target
business and institutional accounts. In addition to its headquarters in
Denver, Colorado, the Company has offices in Bellevue, Washington, Portland,
Oregon and Minneapolis, Minnesota. For customers who purchase a maintenance
contract, the Company provides post sale support which includes 24 hours x 7
days a week (24x7) remote and on-site service response, an (800) telephone
number for service questions and enhancement inquiries by customers, a self
developed on-line Customer Care Database which allows service technicians to
access relevant installation information by client site and perform on-line
maintenance. Additionally, training is provided for using various imaging
applications, performing systems
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administration and database management, and ongoing server configurations,
implementing client station enhancements, and educating clients on ongoing
upgrade possibilities.
Professional Services
In order to offer a complete information and document management system to
its clients and to ensure client satisfaction, the Company provides system
design, installation, integration and other post-installation services to end-
users.
Installation and Integration Services. The Company provides system analysis
recommendations, project management, site preparation, customization, systems
integration, installation and training services for its clients. The majority
of the Company's revenues have arisen from the installation of multi-user
imaging systems which share information or documents between two or more
departments of a customer's information system. The Company installed two such
multi-departmental systems in 1994, representing 39% of its revenues. In 1995,
the Company installed or upgraded three such systems, representing 76% of its
revenues. The Company believes there is a limited number of competitors with
the technical capabilities to undertake such sophisticated installations. The
Company believes that the quality of its installation and integration services
is crucial to its success and that it has a competitive advantage as a result
of its installation services expertise.
Post-Installation Services. The Company's post-installation services include
routine software and hardware maintenance, and user assistance and training.
These services are provided under the terms of the Company's renewable
maintenance agreements, fees for which are generally based upon a percentage
of the originally installed system's cost. The Company currently has
maintenance contracts in place with 21 customers, generating approximately
$446,000 in annual revenues. The Company's contracts are for one year, with an
evergreen clause which allows for their annual renewal. It has been the
Company's experience that maintenance contracts are regularly renewed. The
Company estimates that the typical contract lasts an average of five years and
that the contracts in place will represent approximately $2,000,000 in revenue
over the next five years assuming such contracts continue to be renewed.
Vendors
The Company is a dealer, sometimes referred to as a value added reseller, or
"VAR", for the following principal imaging software vendors: Optika, FileNet
and Microsystems Technology, Inc.
The Company must be approved as an authorized dealer by many of the vendors
of the components that the Company utilizes in its document imaging
integration projects. In the case of FileNet and Optika, the Company's vendor
authorizations are an important requirement to the Company's business
operations and future strategies. Dealer agreements typically provide that a
dealer may be terminated with cause upon as little as 30 days' notice. The
Company's current dealer agreements are generally for durations of one year.
Vendors have regularly renewed the Company's dealer agreements; however, no
assurance can be given that such renewals will continue. The loss of vendor
authorizations from FileNet or Optika could have a material adverse effect on
the Company's business.
The Company also purchases imaging systems components including software,
hardware and peripheral devices from other vendors and suppliers. The Company
does not have any long-term agreements or commitments with the vendors or
suppliers of such components, but believes that competitive sources of supply
are available for such components.
The Company continually evaluates new imaging components and products,
internally, through discussions with its clients and vendors and through input
received from trade sources including publications, associations and trade
shows. The Company is selective in choosing the imaging components and
products used in its integration projects, primarily emphasizing the needs of
its clients. The Company often designs and integrates systems that include a
variety of products from different vendors.
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THE CLAIMMATRIX(TM) SYSTEM
The Company has completed initial development of an imaging-based claims
processing software and work flow control system for the Coverage Provider
industry, known as the ClaimMatrix(TM) system. Development of the
ClaimMatrix(TM) system has been based upon the Company's experience in
designing several claims processing imaging systems for Coverage Providers.
The initial development phase of the ClaimMatrix(TM) system is complete. In
the initial development phase, the Company developed each of the subsystems
below to the level of functional operability. The final phase of development,
currently in progress, will use on-site customer testing which is expected to
result in further enhancements in the user interfaces of the system. The
Company also expects such testing to lead to refinements in the system's
ability to integrate with various Coverage Provider host systems. The Company
has not yet begun commercial sales of or derived revenues from the
ClaimMatrix(TM) system. Commercial sales are expected to commence prior to the
end of the third quarter of 1996.
The Company's ClaimMatrix(TM) system is comprised of seven subsystems:
1. The Data Capture function converts paper records, faxes and electronic
data interchange ("EDI") submitted data, into electronic records using third
party scanning devices, and further utilizes host emulation, desktop
automation and indexing processes to facilitate the scanning, indexing and
digital storage of claims.
2. The Workflow function allows users to model overall claims processing
workflow and to direct workflow within the ClaimMatrix(TM) system. By
providing automatic and directed workflow features, systems administrators are
able to orchestrate document flow automatically within the organization.
Additionally, directed workflow can augment the overall claims case management
process, speeding the processing of data within various Coverage Provider
departments.
3. The Case Management Interface function facilitates the tracking of claims
through the case management process via the client's host system by using
image-enabled data and host emulation to access and re-direct data within the
Coverage Provider organization. By accessing imaged documents and indexing
them to comprehensive patient/care provider/plan databases, the Case
Management Interface function improves Coverage Provider productivity by
accelerating the claims case management process and improving overall quality.
4. The Customer Service function allows customer service representatives to
access claim information, digital images of claims for review, initiation of
claims into the workflow module for review and perform ad hoc administration.
Customer service is a key competitive factor for HMOs. The Customer Service
Function allows customer service representatives to respond quickly and
accurately to patient or care provider inquiries and direct the claims
processing system to initiate appropriate responses.
5. The Exception Processing function allows the special handling and
workflow direction of pending and unique claims, providing a method to
manipulate workflow within the organization for extraordinary and variant
claims. This subsystem provides a customer satisfaction tool allowing the
manipulation or direction of claims through the organization within a critical
timeline and within workflow parameters.
6. The Quality Assurance function allows claims processing and system
administrators to monitor claims flow, review pending claims status and audit
the overall workflow of various or particular claims to insure compliance with
Coverage Provider review procedures. Overall claims processing quality can be
assured by monitoring variances system wide as well as monitoring particular
claims which may be outside the normal parameters of processing.
7. The ClaimMatrix(TM) System User Interface function provides an intuitive
interface which automatically presents the highest priority claim together
with related working documents to the user. The user is prompted for the
required tasks to be performed and the system initiates completion of the work
items by electronically annotating documents. Completed work is automatically
routed to the next processing station or archived for later retrieval and
review. Rules-based routing creates uniform claims processing and task
completion, ensuring consistent procedures within the Coverage Provider,
eliminating redundancy and eliminating errors caused by omission of tasks.
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The Company supplies standard Application Programming Interfaces ("APIs")
using Microsoft(R) Object Linking and Embedding ("OLE") which allows customers
and distribution partners to access workflow, information management and
imaging-based data directly from their own application software. The OLE-based
APIs convert the request for information into a format which the
ClaimMatrix(TM) system can interpret. Applications may run on the same
workstation or on any external host computer, ranging from a personal computer
to a mainframe. After a particular application has been integrated using the
OLE-based API, the development cost to ImageMatrix may be reduced or
eliminated for subsequent installations.
The price for the ClaimMatrix(TM) system is expected to range from $250,000
to over $1,500,000, depending upon the number of user licenses (known as "seat
licenses") sold for the system and the complexity of integration with the
client's established information system. The Company expects to pursue a
pricing structure which is similar to that of competitive imaging-based claims
processing systems. The Company believes its product competes favorably on
productivity benefits and technological sophistication and will initially use
that form of differentiation as its key competitive sales strategy.
Additionally, it has been the experience of the Company that its pricing is
less expensive than Custom Systems provided by general imaging systems
integrators because the amount of custom programming and software and hardware
integration is minimized with a turnkey system such as ClaimMatrix(TM). The
Company is currently beginning to market the Claimatrix(TM) system and there
can be no assurance that the pricing and marketing strategy will succeed. The
Company may have to revise its strategy over time, which may adversely affect
the Company's financial performance. See "Risk Factors--ClaimMatrix(TM) System
Development;" "Risk Factors--Product Acceptance and Market Development;" and
"Risk Factors--Competition; Dynamic Market."
Professional Services
The Company will provide system design, installation, integration and other
post-installation services to end-users directly for the ClaimMatrix(TM)
system consistent with the level of services provided to its systems
integration customers. In addition, the Company will provide training to end
users on the features and functions of the ClaimMatrix(TM) system.
Installation and Integration Services. The Company provides system analysis
recommendations, project management, site preparation, customization, systems
integration, installation and training services for its customers. The Company
believes that the quality of its installation and integration services is
crucial to its success and that it has a competitive advantage due to its
installation services expertise.
Post-installation Services. The Company's post-installation services include
routine software and hardware maintenance, user assistance and a software
product upgrade release program. These services are provided under the terms
of the Company's renewable hardware and software maintenance agreements, fees
for which are generally based upon a percentage of the then-current list
prices of the third party software that the Company markets.
RESEARCH AND DEVELOPMENT
The Company plans to extend the capabilities of the ClaimMatrix(TM) system
to increase its functionality as a digital information storage and retrieval
system. The Company's software research and development efforts are focused
primarily on ongoing improvements in existing product platforms and adding
functions such as enhanced optical character recognition ("OCR") capabilities
within the next 12 months, enhanced EDI capabilities within the next 12
months, and an enhanced member enrollment function within the next 24 months.
The Company believes that it can respond quickly to market requirements by
acquiring additional complementary products or by licensing them for
distribution as components or additional features and benefits within the
ClaimMatrix(TM) system.
The Company's research and development efforts will be influenced
significantly by customer requirements. New features may be customized
initially for delivery to a single customer and then incorporated into future
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versions of the products. Although the Company will initially focus its
efforts on expanding its market penetration in the claims processing market,
the Company will continue to perform large, systems integration projects for
clients in the financial, communications, engineering and other industries.
Participating in this activity provides the Company with the equivalent of
project-funded research and development into additional practical applications
of imaging and workflow technology. The custom installation and service nature
of the Company's systems integration business in the years ended December 31,
1994 and 1995 was such that it did not incur direct research and development
expense. The Company plans to increase its direct research and development
costs not borne by customer funded projects. In the quarter ended March 31,
1996, the Company spent approximately $103,000 for research and development of
the ClaimMatrix(TM) system, of which approximately $70,000 was capitalized.
The Company anticipates research and development expenditures in 1996 will be
approximately $550,000, and will increase to $950,000 in 1997 due to increased
dedicated staffing for software programming and other system development
activities.
SALES AND MARKETING
Systems Integration Products and Services
The Company currently markets its imaging systems integration services
directly through its own sales organization. The Company will continue to sell
systems directly through its offices in Denver, Colorado, Portland, Oregon,
Bellevue, Washington and Minneapolis, Minnesota. The Company intends to open
additional branch offices through internal growth as well as selectively
acquiring integrators in key markets for its system.
The Company's sales of its custom designed imaging and workflow systems
("Custom Systems") are focused towards medium to large (more than 100
employees) businesses and institutions. In addition to sales and marketing of
the ClaimMatrix(TM) system to Coverage Providers (see below), the Company
intends to continue to sell Custom Systems to financial, communications,
engineering and other industries. In 1994, the Company completed four major
installations: one in the health care sector, two in the financial sector and
one in the engineering sector. In 1995, the Company completed eight major
installations: two in the health care sector, three in the financial sector,
one in the communications sector, one in the minerals management sector, and
one in the aluminum sector. Sales are generated primarily by the Company's
sales force, currently comprised of four imaging sales personnel. The Company
intends to increase sales personnel staffing immediately upon completion of
this offering.
The Company's sales professionals are supported by a team of document
imaging and computer network technicians. These technicians support the
clients during the system installation process and after the sale, provide the
clients with repair, maintenance and support services to maintain the imaging
systems. The Company's training programs enable clients and their personnel to
be more productive using their document imaging systems.
The Company conducts document imaging seminars and events, utilizes
brochures, booklets, direct response mail, advertisements in industry
publications and a World Wide Web page on the Internet, to communicate the
Company's capabilities. The Company is also a participant in three industry
trade groups, the Association of Information and Imaging Managers (AIIM),
Association of Records Managers and Administrators (ARMA) and Group Health
Association of America (GHAA).
Referrals from vendors, particularly FileNet and Optika, and customers are a
significant source of prospective clients and establish credibility with
potential clients. In 1994, revenues related to vendor referrals were
responsible for $469,370 (26%) of the Company's revenue and in 1995 revenues
related to vendor referrals were responsible for $629,200 (13%) of the
Company's revenues. There are no contractual requirements for such referrals
and they could cease at any time.
ClaimMatrix(TM) System
For direct and indirect sales, the Company's sales efforts will focus on
Coverage Providers which have (i) adequate capital resources to purchase the
ClaimMatrix(TM) system; (ii) an information system infrastructure in
33
<PAGE>
place to allow the integration of imaged documents into the workflow of the
organization; and (iii) adequate size to leverage the productivity benefits of
the system.
The Company will target its direct sales and marketing efforts at the
hundreds of HMOs and insurance providers that can benefit from the
productivity impacts of its ClaimMatrix(TM) system. The Company believes its
greater opportunity is in the second and third tier Coverage Providers which
are undergoing rapid change, consolidation and cost containment pressures.
The Company's account representatives practice a solution selling focus with
a cost justification basis, generally demonstrating a short pay back period
relative to system cost. The Company believes that the key value of its system
lies in productivity enhancements through reduced payroll and operating costs
and higher output within current staffing levels.
The Company plans to market its product indirectly through referral and
finder's fee relationships with large, HCIS accounting, plan administration
and general information system ("IS") vendors in the managed care segment of
the market. The Company has only recently begun this process, and does not yet
have any such distribution partners.
The Company plans to market the ClaimMatrix(TM) system through its
headquarters office in Denver, Colorado. The Company's marketing efforts will
be focused on target marketing to Coverage Providers throughout the United
States. The Company will support its ClaimMatrix(TM) system through
advertising, focused marketing, publishing articles and technical papers on
the software and participating in trade shows for the Coverage Provider.
In 1995, the Company spent approximately $515,000 on sales and marketing
efforts. The company plans to increase spending in those areas to
approximately $1,575,000 in 1996 and $3,825,000 in 1997, primarily through the
addition of additional sales and sales support personnel as well as additional
marketing expenditures as described above.
Sales Office Locations
<TABLE>
<CAPTION>
LOCATION OPENING DATE TOTAL CURRENT EMPLOYEES
-------- ------------- -----------------------
<S> <C> <C>
Denver, Colorado December 1992 24
Bellevue, Washington December 1994 3
Portland, Oregon October 1995 1
Minneapolis, Minnesota March 1996 1
</TABLE>
CUSTOMERS AND SALES CONTRACTS
The Company's customers include businesses and institutions throughout the
western United States. As of February 1996, the Company had approximately 31
end-users of claims processing and general imaging systems which it has
installed. The Company believes that the installed customer base of its
current customers represents a significant opportunity to market and sell its
products and services. Most prospective system users require the ability to
view a comprehensive system in action, witnessing the features and benefits as
well as discussing the decision and integration process with current users.
The Company believes its pool of referent accounts for its system integration
work and software products is an important asset as it tries to increase
sales.
In the fiscal year ended December 31, 1995, including the period of time the
Company's operations were owned by ENTEX, one customer (First Trust
Corporation) accounted for approximately 59% of the Company's total revenues
and a different customer (FHP International) accounted for approximately 11%
of total revenues. In the quarter ended March 31, 1996, five customers
accounted for approximately 76% of total revenues. At December 31, 1995,
approximately $497,000 (66%) of the Company's accounts receivable were
attributable to its two largest customers during the year ended December 31,
1995, and at March 31, 1996 approximately
34
<PAGE>
$248,000 (78%) of the Company's accounts receivable were attributable to its
five largest customers during the three months ended March 31, 1996. See "Risk
Factors--Revenue Concentration From Small Group of Customers."
During 1995, the Company delivered goods and services to 31 different
customers as compared to 16 different customers in 1994. This increase is due
to increased market penetration. The Company expects that the proportion of
revenues from large clients will continue to be a significant factor with
respect to future revenues.
The Company's backlog is composed of the following two components:
1. System Contracts and Orders. As of May 1, 1996, the Company had
approximately $29,800 in contracts and orders for systems which had not been
installed or recognized as revenue. Such contracts and orders may contain
provisions which allow their cancellation without agreement by the Company.
Additionally, delays, changes and modifications in orders and contracts
regularly occur so there can be no assurance that the value of the contract or
order will eventually become revenue for the Company. See "Risk Factors--
Variability of Quarterly Operations;" "Risk Factors--Long Sales and Delivery
Cycle;" and "Risk Factors--Risks Associated With Forward-Looking Statements."
2. Maintenance Agreements. As of May 1, 1996, the Company had approximately
$251,700 remaining in signed contracts for maintenance and service support for
systems which it had already installed. Such contracts are in place with 21
customers, generating approximately $446,000 in annual revenues. The Company's
contracts are for one year, with an evergreen clause which allows for their
annual renewal. It has been the Company's experience that maintenance
contracts are regularly renewed. The Company estimates that the typical
contract lasts an average of five years and that the contracts in place will
represent approximately $2,000,000 in revenue over the next five years
assuming such contracts continue to be renewed. Such contracts contain
provisions which allow their cancellation without the agreement of the
Company. See "Risk Factors--Variability of Quarterly Operations;" "Risk
Factors--Long Sales and Delivery Cycle;" and "Risk Factors--Risks Associated
With Forward-Looking Statements."
COMPETITION
The Company is in a competitive industry that may be affected by rapid
changes in technology and spending habits in both the business and
institutional client sectors. Some of the Company's competitors have greater
financial and technological resources and have more established sales and
marketing organizations.
Competitors of the Company's ClaimMatrix(TM) system include: (i) national
health care information systems vendors, (ii) MACESS Corporation and Image
Process Design, Inc., vendors of competitive claims processing automation
systems, (iii) imaging software companies which sell imaging systems either
partially or exclusively on a direct basis such as FileNet, Optika, ViewStar,
IBM and Wang Laboratories, (iv) business solutions consultants with a national
presence such as Andersen Consulting, Electronic Data Systems (EDS), Perot
Systems and TRW, (v) regional imaging integrators, and (vi) numerous small
local imaging integrators.
The Company believes that the principal competitive factors in its market
are the referent installed base of customers, system features and reliability,
customer service and sales and marketing efforts.
Competitors of the Company's custom imaging system business would include:
(i) imaging software companies which sell imaging systems either partially or
exclusively on a direct basis such as FileNet, Optika, ViewStar, International
Business Machines (IBM) and Wang Laboratories, (ii) business solutions
consultants with a national presence such as Andersen Consulting, Electronic
Data Systems (EDS), Perot Systems and TRW, (iii) regional imaging integrators,
and (iv) numerous small local imaging integrators.
INTELLECTUAL PROPERTY
The Company regards its ClaimMatrix(TM) software as proprietary and will
rely primarily on a combination of copyrights, employee confidentiality and
invention assignment agreements, distribution and software license
35
<PAGE>
agreements to safeguard its software products. The Company has filed an
application for federal copyright registration of the ClaimMatrix(TM) system.
The initial development phase of the ClaimMatrix(TM) system is complete. See
"Business--The ClaimMatrix(TM) System." The Company has not applied for a
patent for the ClaimMatrix(TM) system but the Company may from time to time
investigate the appropriateness of patent applications for its technology or
certain aspects of its technology.
The Company does not presently have any federally registered service marks
or trademarks. The Company has filed applications for federal service marks
for the marks ImageMatrix(TM) and ClaimMatrix(TM) and may in the future file
federal applications for such other marks as the Company may originate related
to further product and service developments. There is no assurance that
registered service marks will be granted, or that if granted, that the service
marks can be protected from conflicting uses or claims of prior use,
infringement upon or confusion with another trademark.
EMPLOYEES
As of the date of this Prospectus, the Company had 29 full time employees,
including 24 in Denver, Colorado; 3 in Bellevue, Washington; one in Portland,
Oregon; and one in Minneapolis, Minnesota. None of the Company's employees is
represented by a labor union or subject to a collective bargaining agreement.
The Company has never experienced a work stoppage and believes that its
employee relations are good.
LEGAL PROCEEDINGS
As of the date hereof, to the Company's knowledge, there are no material
legal proceedings pending against the Company.
PROPERTIES
The Company leases office space for its corporate headquarters at 400 South
Colorado Blvd., Suite 500, Denver, Colorado 80222. The Company believes that
its facilities are suitable and adequate for its current operations. The
Company houses its management, administrative, sales, system design and
installation, software design and programming, training and service support
and maintenance at its headquarters. The Company also leases offices in
Bellevue, Washington, Portland, Oregon, and Minneapolis, Minnesota.
36
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The names, ages and positions of the directors, officers and certain key
employees of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- -------------------------------------------------------------------
<S> <C> <C>
Gerald E. Henderson (A). 57 Chairman of the Board, President, Chief Executive Officer, Director
Blair W. McNea.......... 33 Vice President--Business Development, Secretary, Director
Keith E. Brue........... 58 Vice President--Chief Financial Officer, Treasurer
Dennis Hefter........... 33 Vice President--National Sales Manager
Nowell Outlaw........... 27 Chief Technical Officer
Eric Stainbrook......... 33 Director of Product Development
Denise Terrell.......... 38 Director of Marketing
David Seigle (A)........ 56 Director
Jaidev Sugavanam (C).... 40 Director
Robert Beekmann (A)(C).. 55 Director
</TABLE>
- --------
(A) Member of the Audit Committee
(C) Member of the Compensation Advisory Committee
Gerald E. Henderson has been Chairman of the Board, President and Chief
Executive Officer of the Company and its predecessor corporations since 1992.
See "Certain Transactions." Mr. Henderson has more than 31 years of senior
organizational management, operations management, sales management, and
software development experience, including industry specific experience of 14
years in computer software, four years in systems integration, and 13 years in
the oil and gas industry. From 1990 to 1992, he served as Chairman of the
Board and Chief Executive Officer of Denver Resources, Inc., a company
involved in the acquisition of oil and gas properties. Mr. Henderson sold
Documatrix Corporation to the Company in July 1995. See "Certain
Transactions."
Blair W. McNea has been Vice President--Business Development of the Company,
Secretary, and a Director since December 1995. Mr. McNea has over 11 years of
experience in organizational management, financial transactions, sales,
corporate development and mergers and acquisitions. From January 1995 through
September 1995, Mr. McNea served as Vice President of Business Development at
ENTEX Information Systems of Colorado, Inc. From March 1993 to December 1994,
Mr. McNea was an independent consultant on mergers and acquisitions and his
clients at such time included ENTEX. From April 1991 to March 1993, Mr. McNea
served as Commercial Manager--European Sales for Destron/Fearing, Inc., an
identification automation company. From January 1988 to April 1991, Mr. McNea
was a Corporate Banker and Territory Manager for Norwest Corporate Bank.
Keith E. Brue has been Vice President--Chief Financial Officer and Treasurer
of the Company since October 1995. He has more than 25 years of experience as
Chief Financial Officer and/or Chief Operations Officer of companies,
including public companies, in technology, computer and communications
industries. Mr. Brue served as a consultant to technology and growth companies
in the Colorado region from 1994 through October 1995. From 1989 through 1994,
Mr. Brue served as Chief Financial Officer of Republic Telcom Systems in
Boulder, Colorado, a voice compression and telecommunications equipment
company. The Company was sold to a competitor in 1994. From 1987 to 1989, Mr.
Brue served as Chief Operations Officer at Promega Corporation, a Madison,
Wisconsin based producer of enzymes in the biotechnology industry. From 1973
to 1987 Mr. Brue served as Chief Financial Officer of Nicolet Instruments
Corporation, a Madison, Wisconsin based medical instruments company. Nicolet
Instruments Corporation was listed on the New York Stock Exchange and was sold
to a competitor in 1988.
37
<PAGE>
Dennis Hefter has been Vice President--National Sales Manager of the Company
since December 1995. Mr. Hefter has over 11 years of experience in management
positions. From January 1995 through December 1995, Mr. Hefter was a branch
manager for Ameridata, Inc., a computer systems and services integrator. From
January 1988 to January 1995, Mr. Hefter was President, Member of the Board of
Directors and a major shareholder of Micro Recovery Systems, Inc. ("MRS") a
Wyomissing, Pennsylvania computer systems and services integrator. Ameridata,
Inc. purchased MRS in January 1995. The Company has agreed that Mr. Hefter
will be nominated as a director of the Company at such time as the Company
identifies an outside director to be added to the Board of Directors in
addition to Mr. Hefter.
Nowell Outlaw has been with the Company since October 1994; since November
1995 he has served as Chief Technical Officer, and prior to that time he
served as the Director of Technology Solutions. From March 1992 through
October 1994, Mr. Outlaw served in various capacities with Optika Imaging
Systems, Inc., one of which positions was Imaging Product Manager of the
Complex Systems Group. See "Certain Transactions." From May 1991 through March
1992, he served as a Systems Engineer with Electronic Data Systems, Inc.
Eric Stainbrook has been Director of Product Development since January 1996.
Mr. Stainbrook has 9 years of information services experience, 7 of which are
in the health care industry. From July 1995 to December 1995, Mr. Stainbrook
was Manager--Imaging Workflow Projects with Unipac Service Company, a student
loan processing company. From 1989 to July 1995 he served as Manager of
Technology Solutions, Business Analyst and a Programmer with FHP International
and its predecessor health maintenance organizations.
Denise Terrell has been Director of Marketing since September 1995. Ms.
Terrell has 11 years of marketing experience in the imaging software industry.
From February 1995 to September 1995, Ms. Terrell was a Business Process
Analyst with Lewan & Associates. From 1992 to 1995, she was an account
executive with ViewStar Corporation. From 1985 through 1992, she served as
Manager of Marketing Operations, Manager of Sales Support and Marketing
Programs, Product Manager, Senior Product Specialist and Senior Systems
Consultant with FileNet Corporation.
David Seigle has been a director of the Company since July 1995. Since 1991,
Mr. Seigle has been a consultant to technology and software industry
businesses. Mr. Seigle was a founding member of the management team of FileNet
Corporation, an imaging software and systems company, and from 1982 to 1991
held several positions with that company including as Vice President of
Marketing, and Senior Vice President of International Sales and Customer
Support. See "Certain Transactions."
Jaidev Sugavanam has been a director since November 1995. In 1987 Mr.
Sugavanam founded Advanced Systems and Peripherals, Inc., a St. Louis based
computer systems integrator for school systems and businesses, and served as
President and Chief Executive Officer until its sale to ENTEX Information
Systems of Colorado, Inc. ("ENTEX") in March 1995. He currently serves as the
Vice President of the Education Access division of ENTEX. See "Certain
Transactions."
Robert Beekmann has been a director of the Company since November 1995. He
is the founding and managing partner of Beekmann & Vanderberg & Co., LLC, a
Denver-based CPA and business consulting firm. From 1980 through 1994, he was
a partner with the Denver accounting firm of Scullion, Beekmann & Co. He is a
licensed Certified Public Accountant and Certified Financial Planner.
There are presently five directors serving on the Company's Board of
Directors. The Articles of Incorporation and Bylaws of the Company divide the
directors into three groups, with each group containing one-third of the
directors, as near as may be. The terms of the directors are staggered, with
the terms of Gerald Henderson and David Seigle expiring at the Company's
annual stockholders' meeting in 1999, the terms of Blair McNea and Jaidev
Sugavanam expiring at the Company's annual stockholders' meeting in 1998, and
the term of Robert Beekmann expiring at the Company's annual stockholders'
meeting in 1997. Upon expiration of the initial staggered terms, directors
will be elected for terms of three (3) years, to succeed those directors whose
terms expire. The Company has applied for directors and officers liability
insurance in the amount of $1,000,000 per occurrence and $1,000,000 in the
aggregate ($75,000 deductible), effective May 1, 1996.
38
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. The Audit Committee recommends the Company's independent
auditors, reviews the scope of their engagement, consults with the auditors,
reviews the results of their examinations, acts as liaison between the Board
of Directors and the auditors and reviews various Company policies, including
those relating to accounting and internal controls. The Audit Committee first
met with the Company's independent auditors in April 1996.
Compensation Advisory Committee. The Compensation Advisory Committee
("Compensation Committee") administers the 1996 Incentive Stock Option Plan
and the Founders and Outside Consultants Stock Option Plan, and determines the
salaries, bonuses and other compensation of the Company's President and CEO as
well as other officers and executives as directed by the Board of Directors of
the Company. See "Management--Stock Option Plans." The Compensation Committee
has met twice, in December 1995 and in January 1996.
Pursuant to the Underwriting Agreement, Neidiger, Tucker, Bruner, Inc. has
the right to designate an advisor to the Board of Directors and the Company
has agreed to certain indemnification obligations with respect to such
advisor. See "Underwriting."
EXECUTIVE COMPENSATION
The following tables set forth the compensation paid to the Company's Chief
Executive Officer and its four highest paid executive officers who were paid
more than $100,000 in salary and bonus during the year ended December 31, 1995
or who were hired in 1995 and are to be paid more than $100,000 in salary.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------------------------- ---------------------
NAME AND PRINCIPAL OTHER ANNUAL SECURITIES UNDERLYING
POSITION YEAR SALARY ($) BONUS($) COMPENSATION ($) OPTIONS/SARS (#)
------------------ ---- ---------- -------- ---------------- ---------------------
<S> <C> <C> <C> <C> <C>
Gerald E. Henderson(1).. 1995 115,200 100,000(2) -- --
Chief Executive Officer
Keith E. Brue(3)........ 1995 28,077 -- -- 77,500
Chief Financial Officer
Dennis C. Hefter(4)..... 1995 250 -- -- 77,500
Vice President--
National Sales Manager
Blair W. McNea(5)....... 1995 2,077 -- -- --
Vice President--
Business Development
</TABLE>
- --------
(1) Effective January 1, 1996, Mr. Henderson's base salary was increased to
$156,000 per year.
(2) A non-recurring bonus was paid to Mr. Henderson in 1995 in consideration
for his waiver to permit the Company to assume his employment agreement
with Documatrix Corporation at the time of the Company's acquisition of
Documatrix Corporation. See "Certain Transactions."
(3) Mr. Brue joined the Company in October 1995. His annual salary is
$120,000.
(4) Mr. Hefter joined the Company in December 1995. His annual salary is
$120,000. Mr. Hefter purchased 155,000 shares of Common Stock from Gerald
Henderson, the Chief Executive Office of the Company, at a price of $1.94
per share at a time the value of the common stock was $2.58 per share. The
Company recorded $100,000 deferred compensation expense in connection with
such sale, and Mr. Hefter is deemed to have received $100,000 of deferred
compensation. The deferred compensation will be amortized over a two-year
period beginning in January 1996 pursuant to the vesting provisions of the
restricted stock agreement between Messrs. Henderson and Hefter.
(5) Mr. McNea joined the Company in December 1995. His annual salary is
$108,000. Prior to becoming an officer of the Company, Mr. McNea served as
a consultant to the Company. Consulting fees paid to Treuhand, Inc., a
corporation wholly-owned by Mr. McNea, amounted to approximately $33,000
for the year ended December 31, 1995.
39
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL EXERCISE
UNDERLYING OPTIONS/SARS OR
OPTIONS/SARS GRANTED TO EMPLOYEES BASE PRICE
NAME GRANTED (#) IN FISCAL YEAR ($/SH) EXPIRATION DATE
- ---- ------------ -------------------- ---------- ---------------
<S> <C> <C> <C> <C>
Gerald E. Henderson..... 0 -- -- --
Keith E. Brue........... 77,500(1) 20.0 $2.58 11/02/00
Dennis C. Hefter........ 77,500(2) 20.0 $2.58 12/15/00
Blair W. McNea.......... 0(3) -- -- --
</TABLE>
- --------
(1) Option becomes exercisable at the rate of 1/36th of such option per month
beginning December 2, 1995.
(2) Option becomes exercisable at the rate of 1/36th of such option per month
beginning January 15, 1996.
(3) Treuhand, Inc., a corporation wholly-owned by Mr. McNea, received options
to purchase 175,492 shares of Common Stock in connection with financial
consulting services rendered prior to the time Mr. McNea became an
employee of the Company. Such options have an exercise price of $2.58 per
share. 87,746 of such options expire August 1, 1997, and 87,746 of such
options expire August 1, 2000.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
ON EXERCISE REALIZED OPTIONS/SARS AT FY-END AT FY-END
NAME (#) ($) (#) ($)(1)
- ---- ----------- -------- ------------------------- -------------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------- -------------------------
<S> <C> <C> <C> <C>
Gerald E. Henderson..... 0 -- 0/0 $0/$0
Keith E. Brue........... 0 -- 2,153/75,347 $6,825/$238,850
Dennis C. Hefter........ 0 -- 0/77,500 $0/$245,675
Blair W. McNea(2)....... 0 -- 87,746/87,746 $278,155/$278,155
</TABLE>
- --------
(1) Calculation based upon difference between $5.75 per Unit (the median of
the range of the anticipated offering price) and the exercise price of
$2.58 per share.
(2) Options are held by Treuhand, Inc., a corporation wholly-owned by Mr.
McNea.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Gerald E. Henderson,
President and Chief Executive Officer of the Company, effective January 1,
1996, which extends through December 31, 1997 with certain automatic renewal
provisions. The employment agreement, as amended, establishes Mr. Henderson's
base salary at $156,000 in 1996 and $180,000 in 1997. The agreement may be
terminated by the Company with or without cause, by Mr. Henderson for cause,
or upon Mr. Henderson's death or his inability to perform his normal duties on
account of disability for a period of 90 or more days. "Cause" is defined in
the agreement. Mr. Henderson is also entitled to receive bonuses of $30,000 in
1996 if the Company's net income equals or exceeds $1,000,000 and $45,000 in
1997 if the Company's net income equals or exceeds $3,800,000. Mr. Henderson
is entitled to additional bonuses equal to 5% of the Company's 1996 net income
and 2.32% of 1997 net income. Mr. Henderson is entitled to receive a $700
monthly car allowance and to participate in insurance and other benefit,
pension or health plans provided by the Company to its key executive
employees. Upon the Company's termination of Mr. Henderson's employment for
any reason other than death, disability, or by the Company for cause, as
defined in the employment agreement, Mr. Henderson is entitled to a one-time
severance payment equal to his annual salary at the time of severance, plus
additional payments for a period of 12 months from the date of termination of
his employment at the base salary rate in effect at the time of the
termination of employment plus continued health insurance coverage for 24
months from the date of termination.
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<PAGE>
Mr. Henderson is also entitled to a salary continuation benefit payable upon
his disability, which benefit shall equal 100% of his then current salary
until a determination of complete disability is made, and thereafter shall
equal 80% of his current salary for up to 36 months of such disability. Upon
termination for any reason other than death, the Company is required to
transfer the Company's insurance policy on Mr. Henderson's life to him without
charge providing he assumes the future premiums.
SEVERANCE AGREEMENTS
The Company has a Severance Agreement with Dennis Hefter, Vice President and
National Sales Manager of the Company, whereby Mr. Hefter is entitled to
severance payments equal to his total earnings over the six month period prior
to termination if he is terminated by the Company without cause as defined in
the Severance Agreement. Mr. Hefter has agreed not to compete with the Company
or to induce other employees to leave the employment of the Company for a
period of six months after his resignation or termination, whether for cause
or without cause. Mr. Hefter's Severance Agreement terminates pursuant to its
terms on December 31, 1997.
The Company's employment arrangement with Blair McNea, Vice President--
Business Development of the Company, provides that he shall receive at least
180 days advance notice prior to termination of his employment.
DIRECTOR COMPENSATION
The Company pays its non-employee directors a fee of $1,000 for each
regularly scheduled meeting for service on the Board of Directors meeting,
plus reimbursement of travel costs and expenses incurred in attending Board
and Committee meetings. Pursuant to the terms of the Non-Employee Directors
Stock Option Plan, each director other than Mr. Henderson and Mr. McNea
received options to purchase 7,750 shares of Common Stock at an exercise price
of $2.58 per share. In each year, non-employee directors will receive options
to acquire 5,812 shares of Common Stock on the first business day after the
Annual Meeting of Shareholders, at the closing price of the Company's Common
Stock on the date prior to the grant of the option. All options granted under
the Non-Employee Directors Stock Option Plan become exercisable on the
following vesting schedule: 40% of a particular grant amount vests on the next
succeeding annual meeting, and an additional 30% of the grant amount vests on
the second succeeding annual meeting and the remaining 30% of the grant amount
vests on the third succeeding annual meeting. See "Management--Stock Option
Plans." Mr. McNea and Mr. Seigle received options related to certain
consulting services they performed for the Company. See "Certain
Transactions."
STOCK OPTION PLANS
Founders and Consultants Stock Option Plan
The Company's Founders and Consultants Stock Option Plan (the "Founders
Plan") was adopted by the Board of Directors in July 1995 and approved by the
shareholders in March 1996. The Founders Plan permits the granting of both
incentive stock options ("ISOs") and non-statutory stock options ("NSOs").
Incentive stock options may only be granted to persons who are employees of
the Company, which may include officers and directors who are employees. Non-
statutory options may be granted to persons who are officers, directors,
employees or consultants of the Company. A total of 852,500 shares of the
Company's Common Stock is reserved for issuance pursuant to awards granted
under the Founders Plan and options for an aggregate of 709,034 shares are
outstanding. No options have yet been exercised. See "Certain Transactions."
Since November 1995, the Founders Plan has been administered by the
Compensation Advisory Committee of the Board of Directors, which consists
solely of disinterested directors, as such term is defined in Rule 16b-3
promulgated pursuant to the Securities Exchange Act of 1934, as amended. The
exercise price of incentive stock options granted under the Founders Plan must
be at least 100% (or 110% in the case of a holder of 10% or more of the voting
power of all classes of stock of the Company) of the fair market value of the
Company's Common Stock at the date of grant while the exercise price of non-
qualified options is at the discretion of the Compensation Advisory Committee
(the "Committee"). The Founders Plan gives broad powers to the Committee to
administer and interpret the Plan, including the authority to select the
individuals to be granted
41
<PAGE>
options and to prescribe the particular form and conditions of each option
granted. Options may be granted pursuant to the Founders Plan through July
2005. The Founders Plan may be terminated earlier by the Board of Directors in
its sole discretion. Holders of options under the Founders Plan have certain
registration rights for shares of Common Stock underlying such options. See
"Description of Securities--Registration Rights." The ability of such holders
to dispose of such underlying shares of Common Stock is limited by lock-up
agreements with the Representative. See "Underwriting."
1996 Incentive Stock Option Plan
The Company's 1996 Incentive Stock Option Plan (the "1996 Plan") was adopted
by the Board of Directors in November 1995 and approved by the shareholders in
March 1996. The 1996 Plan provides for the grant of options to acquire a
maximum of 387,500 shares of Common Stock. All options available under the
1996 Plan have been granted to key employees, however none of such options
have been exercised. The 1996 Plan permits the grant of ISOs and NSOs at the
discretion of the Committee. The Committee determines the terms and conditions
of options granted under the 1996 Plan, including the exercise price. The
exercise price of incentive stock options granted under the 1996 Plan must be
at least 100% (or 110% in the case of a holder of 10% or more of the voting
power of all classes of stock of the Company) of the fair market value of the
Company's Common Stock at the date of grant while the exercise price of non-
qualified options is at the discretion of the Committee. Each option must
expire within 10 years of the date of grant. Unless otherwise provided by the
Committee, options granted under the 1996 Plan generally vest at the rate of
33.33% per year over a three-year period. Options granted under the 1996 Plan
are not transferable other than by will or the laws of descent and
distribution. Securities subject to options granted under the 1996 Plan that
have lapsed or terminated may again be subject to options granted under such
Plan.
Non-Employee Directors Stock Option Plan
The Non-Employee Directors Stock Option Plan (the "Directors Plan") was
adopted by the Board of Directors in November 1995 and approved by the
shareholders in March 1996. The Directors Plan permits the granting of options
to purchase an aggregate of 58,125 shares of Common Stock to non-employee
directors of the Company. As of the date of this Prospectus, options for
23,250 shares have been granted under the Directors Plan. The Directors Plan
provides for automatic grants of non-qualified stock options to non-employee
directors of the Company at an exercise price equal to the then-current fair
market value. An initial grant of options to purchase 7,750 shares, at a price
equal to $2.58 was awarded to each of the three non-employee directors in
November 1995. Commencing with the Annual Meeting of Shareholders to be held
in 1997, each non-employee director will receive an annual grant of options to
purchase an additional 5,812 shares on the first business day after such
annual meeting. Options granted under the Directors Plan are not transferable
other than by will or the laws of descent and distribution. Options under the
Directors Plan generally become exercisable as to 40% of the option shares on
the first annual meeting of shareholders following the grant date, with an
additional 30% per year on each of the next two such annual meetings. Options
terminate 30 days following cessation of service as a director for any reason
other than death. Upon the death, retirement or total and permanent disability
of a non-employee director, options which were exercisable on such date are
exercisable by the holder or its legal representatives or heirs for up to four
years from such event. Under no circumstance may an option be exercised more
then ten years following the date of grant.
42
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial ownership
of shares of Common Stock of the Company for each director of the Company, for
the Chief Executive Officer, for all directors and executive officers of the
Company as a group, and for each shareholder who is known by the Company to own
more than 5% of the Company's Common Stock as of the date of this Prospectus.
<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING SHARES
------------------------------
NUMBER OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING
---------------- --------------------- --------------- --------------
<S> <C> <C> <C>
Gerald E. Henderson ...... 2,078,088 64.16 44.80
400 S. Colorado Blvd.,
Ste. 500
Denver, CO 80222
K.D. Heidrich ............ 293,469(2) 8.59 6.09
1113 Spruce Street,
Ste. 400
Boulder, CO 80302
Daryl F. Yurek............ 293,469(3) 8.59 6.09
1113 Spruce Street,
Ste. 400
Boulder, CO 80302
C. Channing Buckland ..... 232,500(4) 7.18 5.01
2200--690 Granville St.
P.O. Box 10337
Vancouver, British
Columbia
Canada V76 1HZ
David Seigle ............. 219,366(5) 6.51 4.60
400 S. Colorado Blvd.,
Ste. 500
Denver, CO 80222
Blair W. McNea............ 219,366(6) 6.34 4.52
400 S. Colorado Blvd.,
Ste. 500
Denver, CO 80222
Opus Capital, Inc. ....... 203,052(7) 5.94 4.22
1113 Spruce Street,
Ste. 400
Boulder, CO 80302
Jaidev Sugavanam ......... 176,137 5.44 3.80
400 S. Colorado Blvd.,
Ste. 500
Denver, CO 80222
Dennis C. Hefter.......... 170,070(8) 5.23 3.65
400 S. Colorado Blvd.,
Ste. 500
Denver, CO 80222
Robert Beekmann .......... 0 -- --
400 S. Colorado Blvd.,
Ste. 500
Denver, CO 80222
All directors and execu-
tive officers as a group
(7 persons).............. 2,792,504(9) 79.01 56.59
</TABLE>
- --------
(1) As adjusted to give effect to the Reverse Stock Split. See "Reverse Stock
Split."
(2) Includes 24,027 shares held by Opus Capital, Inc. ("Opus"), of which Mr.
Heidrich is a 50% shareholder, and includes options held by Opus to
purchase 179,025 shares which are currently exercisable or become
exercisable within 60 days.
(3) Includes 24,027 shares held by Opus, of which Mr. Yurek is a 50%
shareholder, and includes options held by Opus to purchase 179,025 shares
which are currently exercisable or become exercisable within 60 days.
43
<PAGE>
(4) Includes 155,000 shares owned by Welcome Opportunities, Ltd. ("Welcome")
over which Mr. Buckland exercises investment power. Mr. Buckland owns
approximately 6% of Welcome. Also includes 77,500 shares held by Channing
Investments Corporation, a corporation wholly-owned by Mr. Buckland.
(5) Includes 87,746 shares owned by the Seigle Family Trust, of which Mr.
Seigle is the trustee and beneficiary. Includes options held by the Seigle
Family Trust to purchase 131,620 shares, which are currently exercisable
or become exercisable within 60 days.
(6) Includes options to purchase 87,746 shares which are currently exercisable
or become exercisable within 60 days. Includes options held by Treuhand,
Inc. to purchase 131,620 shares, which are currently exercisable or become
exercisable within 60 days. Mr. McNea is the sole shareholder of Treuhand,
Inc.
(7) Includes options to purchase 179,025 shares which are currently
exercisable or become exercisable within 60 days.
(8) Includes options to purchase 15,070 shares which are currently exercisable
or become exercisable within 60 days.
(9) Includes options to purchase 295,533 shares which are currently
exercisable or come exercisable with in 60 days.
CERTAIN TRANSACTIONS
In July 1995, the Company sold Common Stock to certain individuals and
entities (the "Founding Investment"), which included Gerald E. Henderson,
Chairman of the Board, President, Chief Executive Officer and a director of
the Company, Opus Capital, Inc. a management consultant to the Company, and
The Seigle Family Trust. David Seigle, a director of the Company, is the
primary beneficiary and trust administrator of The Seigle Family Trust. Mr.
Henderson exchanged all of the outstanding shares of Documatrix Corporation
("Documatrix") for 2,180,246 shares of ImageMatrix Corporation common stock.
Opus Capital, Inc. and The Seigle Family Trust purchased 179,025 and 87,746
shares respectively at a price of $.26 per share. The exchange with Mr.
Henderson of Documatrix shares for shares of the Company was based on terms
and conditions negotiated with third party investors. The Company exchanged
the shares as part of its overall transaction to acquire the assets of the
imaging division of ENTEX (See "Business--General--History") and complete the
private placement of common shares discussed above in July 1995 and below in
August 1995. Gross proceeds of the Founding Investment were $68,844 before
legal and related expenses. Proceeds of the Founding Investment were used to
capitalize the firm, for anticipated private placement expenses and general
expenses necessary to complete the transaction to purchase the document
imaging division of ENTEX. The terms and conditions of the share exchange were
structured in such a way that they were agreeable both to Mr. Henderson and
third party investors in an arms-length transaction.
On December 30, 1994, as a condition of its Letter of Intent with ENTEX,
Documatrix sold its microfilm and microfiche business ("Microfilm Division")
to a company owned by a former officer and director of Documatrix. Mr.
Henderson and Documatrix neither had, nor retain, an interest in the company
which purchased the Microfilm Division. The former officer is no longer
affiliated with Documatrix or the Company. For the year ended December 31,
1994, the Microfilm Division had a loss from operations of $796,000. At the
time of the sale the net assets of the Microfilm Division were $1,454,000.
Documatrix sold the Microfilm Division for $292,000 and recorded a loss of
$1,162,000 on such sale.
At the time of the exchange of Mr. Henderson's Documatrix shares for shares
in the Company, and except for Mr. Henderson being the sole director and the
owner of all outstanding Documatrix shares, no other affiliations existed
between officers and directors of Documatrix and the Company. Mr. Henderson's
original cost and therefore his basis in the Documatrix shares was $318,000.
As of the date of the transfer of the shares of Documatrix to the Company,
Documatrix's liabilities (including $1,223,000 unrealized gain on sale of
assets) exceeded its assets by $2,502,000. At the acquisition date, the amount
of a bank liability of Documatrix (the "Bank One Note") was $1,500,000.
Subsequent to the acquisition date, the note was reduced by the following
transactions: (a) $60,000 was assumed personally by Mr. Henderson in exchange
for a $60,000 increase in his
44
<PAGE>
basis in the Company, and (b) $280,000 was repaid out of the receipt of funds
from the note receivable related to the disposition of the discontinued
microfilm/microfiche operations. The remaining $1,160,000 is due February 1,
1997 with interest only payable monthly up to that date. In the event of a
change in ownership in excess of 5% of the Company, the note becomes
immediately due and payable. Interest on this note is payable at the bank's
prime rate of interest (8.5% at December 31, 1995). The Bank One Note is
secured by all assets of the Company and includes Mr. Henderson and the estate
of his wife as co-borrowers. Mr. Henderson's wife passed away on March 4,
1996, creating an event of default under the Bank One Note. The Company has
received from the lender a forbearance as to such default until May 31, 1996.
The proceeds of the Bank One Note were used exclusively for working capital,
the purchase by Documatrix in 1992 of a former shareholder's shares, and other
general corporate purposes. A portion of the proceeds of this offering will be
used for repayment of the Bank One Note. See "Use of Proceeds." Documatrix is
now a wholly owned subsidiary of the Company.
In August 1995, the Company sold Common Stock to certain individuals and
entities in a private placement (the "Private Placement"). Mr. Henderson
purchased 52,842 shares, Opus Capital, Inc. purchased 70,455 shares, Welcome
Opportunities, Ltd. and Channing Investments Corporation, the investments of
which are directed by C. Channing Buckland, collectively purchased 232,500
shares, Jaidev Sugavanam, a director of the Company, purchased 176,137 shares
and other investors purchased 286,242 shares. These shares were purchased at a
price of $1.42 per share. Gross proceeds of the private placement were
$1,161,271 with net proceeds of approximately $1,138,000, after legal and
related expenses. Proceeds of the Private Placement were used to make an
initial purchase payment of $721,000 to ENTEX for the purchase of the document
imaging division. The remaining portion was used for working capital purposes.
On August 30, 1995, the Company completed its purchase of the assets and
assumption of the liabilities of the document imaging division of ENTEX
("Seller"). As consideration for that purchase, the Company paid $721,000 in
cash and issued a promissory note (the "Note") for approximately $1,484,000.
The Note has an interest rate which originally starts at an annualized rate of
10% per annum beginning in September 1995 and increases to 11% in October
1995, 12% in November 1995, 13% in December 1995, 14% in January 1996, 15% in
February 1996, 16% in March 1996, and 18% thereafter. There are no principal
payments required prior to maturity; the Note matured March 30, 1996.
Additionally, the Seller received a warrant to purchase Common Stock worth up
to $371,068 at the Price to the Public of the Units sold in this offering. The
warrant expires August 29, 2000. The Company intends to repay the Note with
the proceeds of the offering prior to May 30, 1996. See "Use of Proceeds." If
the Note is not paid in full by May 30, 1996, ENTEX has the right to receive
shares of Common Stock at the rate of one percent (1%) of the total shares of
Common Stock outstanding for each $100,000 of principal and interest then
outstanding, which would be equal to 484,555 shares. If the Note is still
unpaid as of August 30, 1996, ENTEX has the right to seek a liquidation of the
assets and liabilities of the Company to receive full payment of any unpaid
principal and interest. At the time of the transaction, Messrs. Henderson and
McNea were also employed by ENTEX. Mr. Sugavanam, a director of the Company,
is Vice President of the Education Access division of ENTEX. See "Management."
On September 26, 1995, Gerald Henderson, President and Chief Executive
Officer of the Company, personally granted to Blair McNea, Vice President--
Business Development, an option to acquire up to 87,746 shares of the
Company's Common Stock owned by Mr. Henderson at an exercise price of $1.42
per share from him or his estate. This option expires September 26, 2000.
On January 1, 1996, Gerald Henderson sold 155,000 shares of the Company's
Common Stock owned by Mr. Henderson to Dennis Hefter, an officer of the
Company, at a price of $1.94 per share. Deferred compensation of $100,000 has
been recorded for the excess of the fair value of the shares sold above the
price paid by Mr. Hefter.
On September 30, 1995 the Company granted options pursuant to its Founders
Plan (see "Management--Stock Option Plans") to purchase shares of Common Stock
at an exercise price of $2.58 per share to the following persons in the
following amounts:
45
<PAGE>
<TABLE>
<CAPTION>
NAME AMOUNT
---- ------
<S> <C>
Opus Capital, Inc........................ Options to acquire 179,025 shares
Treuhand, Inc............................ Options to acquire 87,746 shares
David Seigle............................. Options to acquire 87,746 shares
</TABLE>
The above-described options were immediately exercisable and remain
exercisable until August 1, 1997. Treuhand, Inc. also received consulting fees
from the Company during fiscal 1995 which totaled approximately $33,000. Blair
McNea, Vice President--Business Development, is the sole shareholder of
Treuhand, Inc. Opus Capital, Inc., a shareholder of the Company, provided
management consulting and advisory services to the Company. Mr. Seigle is a
director of the Company and is the trustee and primary beneficiary of the
Seigle Family Trust, a shareholder of the Company.
On November 2, 1995 the Company granted options pursuant to its Founders Plan
to purchase shares of Common Stock at an exercise price of $2.58 per share to
the following persons in the following amounts:
<TABLE>
<CAPTION>
NAME AMOUNT
---- ------
<S> <C>
Treuhand, Inc............................. Options to acquire 87,746 shares
David Seigle.............................. Options to acquire 87,746 shares
</TABLE>
The above-described options become exercisable on the following schedule: 20%
on June 1, 1996 and the remaining 80% first become exercisable at the rate of
1/24th per month commencing October 1, 1995 so that all such options are
exercisable as of September 1, 1997. Notwithstanding the above, in the event
that the Company is involved in a change of control, these options immediately
become fully exercisable. These options remain exercisable until the earlier of
August 1, 2000 or 90 days after the holder ceases to render ongoing services to
the Company.
On November 2, 1995 the Company granted options pursuant to its Founders Plan
to Opus Capital, Inc. to purchase 179,025 shares of the Company's Common Stock
at an exercise price of $ per share (125% of the initial public offering
price). These options are exercisable from November 1, 1996 through February 1,
1998.
All options granted under the Founders Plan were granted at a price of $2.58
or at 125% of the price per share offered to the public for the Company's
initial public offering ("IPO"). The Company believes these options were priced
at or above fair market value for the following reasons: (i) the most recent
sale of shares by the Company, within four months prior to grant date had been
at a price of $1.42; (ii) no material changes had occurred between such sales
and the option grant dates; and (iii) the Company was subsequently advised by
an independent certified public accountant that the determination by the Board
of Directors of fair market value was reasonable.
The Company also agreed to pay, and has paid, Opus Capital, Inc. $10,000 per
month for management consulting services for the period of September 1, 1995
through April 30, 1996.
All future transactions with affiliates will be approved by a committee of
disinterested directors.
REVERSE STOCK SPLIT
In March 1996, the Board of Directors and the shareholders of the Company
approved a reverse split of the then outstanding shares of Common Stock on the
basis of .775 for 1.
46
<PAGE>
DESCRIPTION OF SECURITIES
UNITS
Each Unit consists of one share of Common Stock and one Warrant. Two
Warrants entitle the holder to purchase one share of Common Stock. The Common
Stock and Warrants are transferable, together or separately as of the date of
this Prospectus. The Company has applied for quotation of the Units, the
Common Stock and the Warrants on the NASDAQ Small Cap Market.
GENERAL
The authorized capital stock of the Company consists of an aggregate of
20,000,000 shares of Common Stock, no par value, and 5,000,000 shares of
Preferred Stock, no par value. As of the date hereof, 3,238,772 shares of
Common Stock, and no shares of Preferred Stock, are outstanding.
COMMON STOCK
Subject to preferences that may be applicable to any then outstanding
Preferred Stock, holders of Common Stock are entitled to receive such
dividends, if any, as are declared by the Board of Directors of the Company
out of funds legally available for the payment of dividends. The Company
expects to retain any earnings to finance the development of its business.
Accordingly, the Company does not anticipate payment of any dividends on the
Common Stock for the foreseeable future. In the event of any liquidation,
dissolution or winding-up of the Company, the holders of Common Stock will be
entitled to receive a pro rata share of the net assets of the Company
remaining after payment or provision for payment of the debts and other
liabilities of the Company and after payment of any liquidation preferences
associated with any shares of Preferred Stock that may then be outstanding.
Holders of Common Stock have no preemptive, subscription, redemption, or
conversion rights.
Holders of Common Stock are entitled to one vote per share in all matters to
be voted upon by shareholders. There is no cumulative voting for the election
of directors, which means that the holders of shares entitled to exercise more
than 50% of the voting rights in the election of directors are able to elect
all of the directors. Holders of Common Stock have no preemptive rights to
subscribe for or to purchase any additional shares of Common Stock or other
obligations convertible into shares of Common Stock which may hereafter be
issued by the Company. All of the outstanding shares of Common Stock are, and
the shares to be sold pursuant to this offering will be, fully paid and non-
assessable. Holders of Common Stock of the Company are not liable for further
calls or assessments. As of the date of this Prospectus, there were twenty
holders of record of the Company's Common Stock.
PREFERRED STOCK
There are no commitments, options or other rights presently outstanding for
the issuance of Preferred Stock. The Company has no present plan to issue
shares of its Preferred Stock. Preferred Stock may be issued from time to time
in one or more series. The Board of Directors, without further approval of the
shareholders, is authorized to fix the rights and terms relating to dividends,
conversion, voting, redemption, liquidation preferences, sinking funds and any
other rights, preferences, privileges and restrictions applicable to each such
series of Preferred Stock. The issuance of Preferred Stock, while providing
flexibility in connection with possible financing, acquisitions and other
corporate purposes, could, among other things, adversely affect the voting
power of the holders of Common Stock and, under certain circumstances, be used
as means of discouraging, delaying or preventing a change in control the
Company.
REDEEMABLE WARRANTS
Warrants
The Company has authorized the issuance of 1,750,000 Warrants (including
210,000 Warrants issuable upon exercise of the Underwriters' over-allotment
option and 140,000 Warrants issuable upon exercise of the
47
<PAGE>
Representatives' Warrant) to purchase an aggregate of 875,000 shares of Common
Stock and has reserved 875,000 shares of Common Stock for issuance upon
exercise of the Warrants.
Two Warrants entitle the registered holder to purchase one share of Common
Stock at an exercise price of $ per share (133% of the Unit offering price)
at any time during a 23 month period beginning 13 months from the date of this
Prospectus. The Warrants may be exercised only in quantities to purchase full
shares of Common Stock. Beginning 13 months from the date of this Prospectus
the Warrants are redeemable by the Company on 30 days' prior written notice at
a redemption price of $.25 per Warrant, provided the average closing bid price
of the Company's Common Stock in the Nasdaq Small Cap Market for any 10
consecutive trading days ending within 5 days of the notice of redemption
exceeds $ per share (115% of the Unit offering price) (subject to adjustment
by the Company, as described below, in the event of any reverse stock split or
similar events). The notice of redemption will be sent to the address of the
registered holder of the Warrant. All Warrants not exercised prior to the
redemption date must be redeemed if any are redeemed.
General
The Warrants will be issued pursuant to a warrant agreement (the "Warrant
Agreement") between the Company and American Securities Transfer, Incorporated
as warrant agent (the "Warrant Agent"), and will be evidenced by warrant
certificates in registered form. The exercise prices of the Warrants were
determined by negotiation between the Company and the Representatives and
should not be construed to be predictive of, or to imply that, any price
increases will occur in the Company's securities. The exercise price of the
Warrants and the number and kind of shares of Common Stock or other securities
and property to be obtained upon exercise of the Warrants are subject to
adjustment in certain circumstances including a stock split of, or stock
dividend on, or a subdivision, combination or recapitalization of, the Common
Stock or the issuance of shares of Common Stock at less than the market price
of the Common Stock. Additionally, an adjustment would be made upon the sale
of all or substantially all of the assets of the Company for less than the
market value, a merger or other unusual events (other than share issuances
pursuant to employee benefit and stock incentive plans for directors, officers
and employees of the Company) so as to enable warrantholders to purchase the
kind and number of shares or other securities or property (including cash)
receivable in such event by a holder of the kind and number of shares of
Common Stock that might otherwise have been purchased upon exercise of such
Warrant. No adjustment for previously paid cash dividends, if any, will be
made upon exercise of the Warrants.
The Warrants may be exercised upon surrender of the Warrant certificate on
or prior to the expiration date (or earlier redemption date) of such Warrants
at the offices of the Warrant Agent with the form of subscription on the
reverse side of the Warrant certificate completed and executed as indicated,
accompanied by payment of the full exercise price (by certified or bank check
payable to the order of the Company) for the number of Warrants being
exercised. Shares of Common Stock issuable upon exercise of Warrants and
payment in accordance with the terms of the Warrants will be fully paid and
non-assessable.
In connection with the solicitation of Warrant exercises, unless granted an
exemption by the Securities and Exchange Commission from its Rule 10b-6, the
Representatives and any other soliciting broker/dealer will be prohibited from
engaging in any market-making activities with respect to the Company's
securities for the period commencing either 2 or 9 business days (depending on
the market price of the Company's Common Stock) prior to any solicitation
activity for the exercise of Warrants until the later of (i) the termination
of such solicitation activity, or (ii) the termination (by waiver or
otherwise) of any right which the Representatives or any other soliciting
broker/dealer may have to receive a fee for the exercise of the Warrants
following such solicitation. As a result, either or both of the
Representatives or any other soliciting broker/dealer may be unable to provide
a market for the Company's securities, should they desire to do so, during
certain periods while the Warrants are exercisable.
The Warrants do not confer upon the warrantholder any voting or other rights
of a shareholder of the Company. Upon notice to the warrantholders, the
Company has the right to reduce the exercise price or extend the expiration
date of the Warrants. Although this right is intended to benefit
warrantholders, to the extent the
48
<PAGE>
Company exercises this right when the Warrants would otherwise be exercisable
at a price higher than the prevailing market price of the Common Stock, the
likelihood of exercise, and resultant increase in the number of shares
outstanding, may result in making more costly, or impeding, a change in
control in the Company.
The description above is subject to the provisions of the Warrant Agreement,
which has been filed as an exhibit to the Registration Statement, a copy of
which this Prospectus forms a part, and reference is made to such exhibit for
a detailed description. See "Additional Information."
TRANSFER AGENT AND WARRANT AGENT
American Securities Transfer, Incorporated, Denver, Colorado, serves as
transfer agent and Warrant Agent for the Units, Common Stock and Warrants.
REGISTRATION RIGHTS
Holders of all 3,238,772 Shares of currently outstanding Common Stock, and
options and warrants to purchase an aggregate of 1,184,318 shares of Common
Stock ("Registrable Securities") have demand registration rights during the
period beginning six months after the date of the consummation of this
offering, and have piggy-back registration rights with respect to certain
registration statements filed by the Company (other than the registration
statement of which this Prospectus is a part) pursuant to various registration
rights agreements with the Company. The piggy-back registration rights provide
that the Company will include in certain registrations (and in any
underwriting involved therein) all Registrable Securities requested by holders
thereof to be so included, provided the aggregate value of such Registrable
Securities is at least $200,000.
Commencing six months after the Company's initial public offering, holders
of not less than 25% of the then outstanding Registrable Securities or a
lesser percentage if the net aggregate price to the public of such Registrable
Securities exceeds $1,000,000 may cause the Company to file a registration
statement registering such shares. In addition, persons holding not less than
25% of the outstanding Registrable Securities may require the Company to
register such Registrable Securities on Form S-3; provided, however, that the
Company is not required to effect more than one such registration in any six
month period. All expenses of registrations (and of state qualification up to
$15,000) will be borne by the Company, whether such registration is by piggy-
back or on demand.
In connection with such registration rights, the Company has agreed to
indemnify the holder of such Registrable Securities included in such a
registration statement, and each officer and director of the Company, against
expenses, damages, or liabilities arising out of or based upon any untrue
statement or omission of a material fact in any registration statement or
prospectus, except to the extent such expense, damage or liability was
attributable holder, officer or director.
The Representatives also have certain demand and piggy-back registration
rights with respect to the securities underlying the Representatives' Warrant.
See "Underwriting."
Any exercise of such registration rights by the holders of Registrable
Securities or the Representatives' Warrant, or the Company's independent
decision to register shares, may result in dilution in the interest of the
Company's shareholders, hinder efforts by the Company to arrange future
financing of the Company and/or have an adverse effect on the market price of
the Company's Units, Common Stock and Warrants.
STOCK OPTIONS AND ADDITIONAL WARRANTS
The Founders Plan provides for the grant of options to acquire a maximum of
852,500 shares of Common Stock. As of the date of this Prospectus options to
acquire 709,034 shares have been granted under the Founders Plan at exercise
prices ranging from $2.58 to $ (125% of the Unit offering price). See
"Certain Transactions." The 1996 Plan provides for the grant of options to
acquire a maximum of 387,500 shares of Common Stock. As of the date of this
prospectus, options to acquire 387,500 shares have been granted under the 1996
Plan at an exercise price of $2.58 per share. The Directors Plan provides for
the grant of options to acquire a maximum of 58,125 shares of Common Stock. As
of the date of this prospectus, options to acquire 23,250
49
<PAGE>
shares have been granted under the Directors Plan at an exercise price of
$2.58 per share. See "Management--Stock Option Plans."
On August 29, 1995 the Company granted stock purchase warrants and
associated registration rights thereto to ENTEX as a part of the Company's
purchase of the document imaging division of ENTEX. See "Certain
Transactions." The warrant entitles the holder to purchase Common Stock worth
up to $371,068 at the Price to Public of the Units sold in this offering. Such
warrant expires August 29, 2000. In addition, the Company is required to issue
to ENTEX shares comprising 1% of the then issued and outstanding shares of the
Company for every $100,000 in outstanding indebtedness to ENTEX on May 30,
1996, which at the current indebtedness outstanding would equal 484,555
shares. The Company intends to repay the note to ENTEX with proceeds of this
offering prior to May 30, 1996. All shares issued to ENTEX pursuant to the
Warrant held by ENTEX or pursuant to the default terms of the promissory note
issued to ENTEX are subject to registration rights as described above.
The Company has agreed to sell to the Representatives in connection with
this offering Warrants to purchase 140,000 Units, exercisable for a period of
four years commencing one year from the date of this offering, at an exercise
price of $ per Unit (120% of the Unit offering price) the
("Representatives' Warrant"). See "Underwriting."
INDEMNIFICATION AND WAIVER OF DIRECTOR LIABILITY
Colorado law and the Articles of Incorporation and Bylaws of the Company
provide that officers and directors of the Company have the right to
indemnification from the Company for liability arising out of certain actions.
Such indemnification may be available for liabilities arising in connection
with this offering. Insofar as indemnification for liabilities arising under
the Act may be permitted to directors, officers or persons controlling the
Company pursuant to such indemnification provisions, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
The Company has adopted in its Articles of Incorporation a provision which
limits personal liability for breach of the fiduciary duty of its directors to
the extent provided by Section 7-108-402 of the Colorado Revised Statutes.
Such provision eliminates the personal liability of directors for damages
occasioned by breach of fiduciary duty, except for liability based on the
director's duty of loyalty to the Company, liability for acts or omissions not
made in good faith, liability for acts or omissions involving intentional
misconduct, liability based on payments of improper dividends, liability based
on violations of state securities laws, and liability for acts occurring prior
to the date such provision was added.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have 4,638,772 shares of
Common Stock outstanding (4,848,772 shares if the Underwriters' over-allotment
option is exercised in full) based upon the number of shares outstanding as of
February 11, 1996 and giving effect to the Reverse Stock Split. The 1,400,000
Units sold in the offering, and the shares of Common Stock and Warrants
underlying the Units, will be freely tradeable without restriction or further
registration under the Securities Act unless acquired by an "affiliate" of the
Company as that term is defined in Rule 144 ("Rule 144") under the Securities
Act, which shares will be subject to the resale limitations of Rule 144
described below. It is currently anticipated that, for trading purposes, the
Units will be separated into their component parts after this offering and
that an active market for the Units will not be maintained.
Immediately prior to completion of the offering, 3,238,772 shares of Common
Stock (the "Restricted Shares") are outstanding.
Holders of 465,898 of such Restricted Shares are not residents of the United
States and were non-residents at the time they purchased such shares, and the
eventual resale of such shares is governed by Regulation S promulgated under
the Securities Act of 1933. Regulation S, as currently in effect, permits re-
sales of shares after 40 days after the original purchase, subject to certain
conditions. The non-resident shareholders acquired
50
<PAGE>
their Restricted Shares in August 1995 and such shares may be re-sold in the
United States, in conformity with Regulation S without restriction at any time
subject only to the six month lock-up agreement among such shareholders, the
Company and the Representative.
The approximately 2,772,874 Restricted Shares remaining will first become
eligible for resale under Rule 144 at various times commencing in July 1997.
In general, under Rule 144 as currently in effect, a stockholder who has
beneficially owned for at least two years shares privately acquired directly
or indirectly from the Company or from an affiliate of the Company, and
persons who are affiliates of the Company who have acquired the shares in
registered transactions, will be entitled to sell within any three month
period a number of shares that does not exceed the greater of: (i) 1% of the
outstanding shares of the Common Stock (approximately 46,600 shares
immediately after completion of the offering, or approximately 48,700 shares
if the Underwriters' over-allotment option is exercised in full); or (ii) the
average weekly trading volume in the Common Stock during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
requirements relating to the manner and notice of sale and the availability of
current public information about the Company.
In general under Rule 144(k), as currently in effect, a stockholder, who is
not an affiliate of the Company, and who has beneficially owned such shares
for at least three years, may sell all of such stockholder's shares without
the volume limitations of Rule 144 described above.
Holders of all of the Company's Common Stock outstanding prior to this
offering may require that such shares be registered under the Securities Act.
See "Description of Securities--Registration Rights."
The holders of all of the Company's currently outstanding securities, with
the exception of the Company itself, its officers, directors and 5% or greater
shareholders, have agreed with Neidiger, Tucker, Bruner, Inc. ("NTB") and the
Company not to offer, sell or otherwise dispose of any shares of Common Stock
or securities convertible into or exercisable or exchangeable for such shares
for a period of 180 days after the effective date of this offering without the
prior written consent of NTB. The Company itself, its officers, directors and
5% or greater shareholders have agreed with NTB and the Company not to offer,
sell or otherwise dispose of any shares of Common Stock or securities
convertible into or exercisable or exchangeable for such shares for a period
of 360 days after the date of this offering without the prior written consent
of NTB.
The Company has reserved 387,500 shares of Common Stock for issuance under
the 1996 Plan, 58,125 shares under the Director's Plan and 852,500 shares of
Common Stock under the Founders Plan. At appropriate times subsequent to
completion of the offering, the Company intends to file registration
statements under the Securities Act to register the Common Stock to be issued
under those plans. After the effective date of such registration statements,
shares issued under these plans will be freely tradable without restriction or
further registration under the Securities Act, unless acquired by affiliates
of the Company.
Pursuant to the Company's August 1995 acquisition of the document imaging
division from ENTEX, the Company issued ENTEX a warrant which entitles the
holder to purchase Common Stock worth up to $371,068 at the Price to Public of
the Units sold on this offering. Such warrant expires August 29, 2000. In
addition, the Company is required to issue to ENTEX shares comprising 1% of
the then issued and outstanding shares of the Company for every $100,000 in
outstanding indebtedness to ENTEX on May 30, 1996, which at the current
indebtedness outstanding would equal 484,555 shares. ENTEX also received
certain registration rights that could require the Company to register its
shares under the Securities Act. See "Certain Transactions."
Prior to this offering, there has been no market for the Company's
securities. No predictions can be made with respect to the effect, if any,
that public sales of shares of the Common Stock or the availability of shares
for sale will have on the market price of the Common Stock after the offering.
Sales of substantial amounts of Common Stock in the public market following
the offering, or the perception that such sales may occur, could adversely
affect the market price of the Common Stock or the ability of the Company to
raise capital through sales of its equity securities. See "Risk Factors--
Securities Eligible for Future Sale."
51
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Neidiger/Tucker/Bruner, Inc. and
Joseph Charles & Assoc., Inc. are the Representatives, have severally agreed,
subject to the terms and conditions set forth in the Underwriting Agreement,
to purchase from the Company the following respective number of Units at the
initial public offering price less the underwriting discount set forth on the
cover page of this Prospectus:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF UNITS
------------ ---------------
<S> <C>
Neidiger/Tucker/Bruner, Inc. ..............................
Joseph Charles & Assoc., Inc...............................
---------
TOTAL.................................................... 1,400,000
=========
</TABLE>
The Company has been advised by the Representatives that the several
Underwriters propose to offer the Units at the initial public offering price
set forth on the cover page of this Prospectus and to selected dealers at that
price, less a concession not in excess of $ per Unit. After the offering,
the public offering price and the concession may be changed. The
Representatives have informed the Company that the Underwriters do not intend
to confirm sales to any accounts for which any of them exercises discretionary
authority.
The Units are being offered by the several Underwriters, subject to prior
sale, when, as, and if delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part and subject to
approval of certain legal matters by counsel and to various other conditions.
The nature of the Underwriters' obligation is such that they must purchase all
1,400,000 Units offered hereby, if any are purchased.
The Company has granted to the Underwriters an option, exercisable for 60
days from the date of this Prospectus, to purchase up to 210,000 additional
Units at the same price per Unit that the Underwriters pay for the 1,400,000
Units. The Underwriters may exercise this option only for the purpose of
covering over-allotments that they make in the sale of the 1,400,000 Units
offered hereby.
The Company has agreed to pay the Representatives a nonaccountable expense
allowance of 3% of the gross offering proceeds, which will include proceeds
from the over-allotment option to the extent exercised. The Representatives'
expenses in excess of the expense allowance will be born by the
Representatives. To the extent that the expenses of the Representatives are
less than the expense allowance, the excess will be deemed to be compensation
to the Representatives.
The Company and the Underwriters have agreed to indemnify each other and
related persons against certain liabilities, including liabilities under the
federal securities laws, and, if such indemnifications are unavailable or are
insufficient, the Company and the Underwriters have agreed to damage
contribution arrangements between them based upon the relative benefits
received from the offering made hereby and the relative fault resulting from
such damages.
Each of the Company's shareholders have agreed not to offer, sell, transfer,
assign or otherwise dispose of any of the shares they own of the Company's
Common Stock (or securities convertible into Common Stock) as of the date of
this Prospectus for periods of not less than 6 months and not more than 12
months from the date of this Prospectus without the prior written consent of
Neidiger, Tucker, Bruner, Inc. ("NTB"). The 12-month restriction is applicable
to an aggregate of 2,746,451 shares owned by the Company's officers, directors
and each person who owns 5% or more of the outstanding shares of the Common
Stock (or securities convertible into Common Stock). The 6-month restriction
is applicable to the other shareholders of the Company who own an aggregate of
492,321 shares of Common Stock. Any sales of Common Stock by such persons
under Rule 144 during the respective restrictive periods will be executed only
with or through NTB provided that the commissions therefor are competitive
with other broker/dealers.
The Company has agreed that, at the closing of this offering, it will enter
into a Consulting Agreement retaining NTB as a financial consultant to the
Company for a 12-month period for a fee of $30,000 payable in full at the
closing out of the net proceeds of the offering. The agreement also provides
for a consulting fee, ranging up to 5% of the consideration involved in any
transaction (including mergers and acquisitions)
52
<PAGE>
consummated by the Company in which NTB introduced the other party to the
Company during the term of the agreement if the transaction is completed
within 36 months from the close of the offering.
The Company has agreed that for a period of 3 years from the date of this
Prospectus, NTB shall have the right to designate one person as an adviser to
the Company's Board of Directors. That person will be reimbursed for his or
her expenses in attending meetings of the Board and will receive compensation
equal to that received by outside directors but will have no power to vote as
a director. That person will be indemnified by the Company against any claim
arising out of his or her attendance at meetings of the Board or advice to the
Board to the maximum extent permitted by law. During such 3-year period, the
Company has agreed with the Representatives to hold meetings of its Board at
intervals of not less than 90 days. In the event the Company maintains a
liability insurance policy with coverage of acts of its officers and
directors, the Company has agreed that, if possible, it will include the
advisor designee as an insured under the policy. Any advisor designated by NTB
shall be acceptable to the Company which acceptance shall not be unreasonably
withheld.
The Company has agreed to sell to the Representatives upon the closing of
the offering, for $100, Representatives' Warrants to purchase 140,000 Units.
Such Units will be the same as the Units offered hereby except that they: (a)
will have an exercise price of $ per Unit (140% of the Unit offering price)
and $ per underlying Warrant (165% of the public exercise price for the
Warrant component of the offered Units); and, (b) are exercisable for a 48-
month period commencing one year from the effective date of the offering made
by this Prospectus. The Representatives' Warrants may be exercised in a
cashless transaction whereby the Representatives' Warrant, itself, at the
holder's option, may be exchanged, in whole or in part, for the underlying
Common Stock and Warrants. Such cashless exercise will be permitted commencing
one year after the issue date of the Representatives' Warrants and only if the
Company's Common Stock is listed or approved for trading on an exchange,
inter-dealer communication system or national quotation bureau. In such
cashless exercise, the Company shall issue to the holder of the exchanged
Representatives' Warrants (i) the number of shares of the Company's Common
Stock which is determined by dividing the imputed warrant value (which is the
current market value of the shares less the exercise price of the
Representatives' Warrants exchanged) by the current market value of the shares
and (ii) the same number of Unit Warrants as shares of common stock issued in
such exchange. The anti-dilution provisions of the Representatives' Warrants
will be the same as those provided for in the Warrant component of the Units
offered hereby. The Representatives' Warrants will be non-transferrable,
except to officers of the Representatives, for a period of 12 months from the
date of this Prospectus, subject to compliance with applicable securities
laws. During the term of the Representatives' Warrants, the holder is given,
at nominal cost, the opportunity to profit from a rise in the market price of
the Units, the Common Stock or the Warrants. The Company may find it more
difficult to raise additional equity capital while the Representatives'
Warrants are outstanding. At any time at which the Representatives' Warrants
can be expected to be exercised, the Company would likely be able to obtain
additional equity capital on more favorable terms. Any profit realized by the
Representatives (or any holder of the Representatives' Warrants) on the sale
of the shares of Common Stock or the Warrants included in the Units or the
sale of the shares of Common Stock underlying the Warrant may be deemed
underwriting compensation.
The Representatives' Warrants will provide certain "demand" rights to
require, on any one occasion after one year from the date of this Prospectus,
that the Company file, at its expense, a registration statement with respect
to the Warrants and/or Common Stock (including the Common Stock issued upon
exercise of such Warrants) (said securities the "Registrable Securities") in
order to effect a public offering thereof, and "piggyback" rights to require
the registration of such Common Stock in certain registration statements filed
by the Company with the Securities and Exchange Commission. Such registration
rights may be transferred to any subsequent holder of the Registrable
Securities. Holders of Registrable Securities may exercise their registration
rights with respect to all or part of their Registrable Securities provided,
that the holders requesting registration represent not less than a majority of
the Registrable Securities then outstanding.
Upon exercise of the Warrant component of the Units offered hereby,
commencing thirteen months from the date of this Prospectus, the Company will
pay NTB fee of 5% of the aggregate exercise price of Warrants
53
<PAGE>
exercised through the efforts and with the assistance of NTB if: (i) the market
price of the Company's Common Stock on the date the Warrant is exercised is
greater than the exercise price of the Warrant; (ii) the purchaser has
indicated in writing that the transaction was solicited and has designated the
broker/dealer who is to receive the commission for such exercise; (iii) the
Warrant is not held in a discretionary account; (iv) disclosure of the
compensation arrangements was made (by delivery of this Prospectus or
otherwise) both at the time of the offering and at the time of exercise of the
Warrant; and (v) the solicitation of the exercise of the Warrant is not in
violation of Rule 10b-6 promulgated under the Securities Exchange Act of 1934.
In connection with the solicitation of Warrant exercises, unless granted an
exemption by the Securities and Exchange Commission from its Rule 10b-6, the
Representatives and any other soliciting broker/dealer will be prohibited from
engaging in any market-making activities with respect to the Company's
securities for the period commencing either 2 or 9 business days (depending on
the market price of the Company's Common Stock) prior to any solicitation
activity for the exercise of Warrants until the later of (i) the termination of
such solicitation activity, or (ii) the termination (by waiver or otherwise) of
any right which the Representatives or any other soliciting broker/dealer may
have to receive a fee for the exercise of the Warrants following such
solicitation. As a result, the Representatives or any other soliciting
broker/dealer may be unable to provide a market for the Company's securities,
should they desire to do so, during certain periods while the Warrants are
exercisable.
Prior to the offering, there has been no public market for the securities of
the Company. The initial public offering price of the Units and the exercise
price of the Warrants have been determined by negotiation between the Company
and the Representatives. Among the factors considered in determining the
initial public offering price of the Units and the exercise price of the
Warrants were certain financial and operating information of the Company in
recent periods, the future prospects of the Company, an assessment of the
Company's management and the industry in which it operates, the number of
securities offered, the price that the purchasers of such securities might be
expected to pay given the nature of the Company, and the general condition of
the securities markets at the time of the offering. There can be no assurance,
however, that the prices at which the Units, the Common Stock or the Warrants
may sell in the public market after this offering will not be lower then which
it is sold by the Underwriters.
Application is currently pending to have the Units, the Common Stock and the
Warrants approved for quotation on the NASDAQ SmallCap Market upon completion
of this offering.
The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement, copies of which are on file at the
offices of the Company, the Representatives and the Commission. See "Additional
Information."
LEGAL MATTERS
The validity of the Units offered hereby will be passed upon for the Company
by Chrisman, Bynum & Johnson, P.C., Boulder, Colorado. John G. Herbert, P.C.,
Denver, Colorado has acted as counsel for the Representatives in connection
with certain legal matters relating to the Units offered hereby.
EXPERTS
The consolidated financial statements of ImageMatrix Corporation at December
31, 1995, and for each of the two years in the period ended December 31, 1995,
and the financial statements of the Imaging Division of Random Access, Inc. for
the period February 16, 1995 through August 30, 1995, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young, LLP,
independent auditors, as set forth in their reports thereon (the report on the
consolidated financial statements of ImageMatrix Corporation contains an
explanatory paragraph with respect to the Company's ability to continue as a
going concern as described in Note 2) appearing elsewhere herein, and are
included in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
IMAGEMATRIX CORPORATION
Report of Independent Auditors........................................... F-2
Consolidated Financial Statements at December 31, 1995 and for each of
the two years in the period ended December 31, 1995
Consolidated Balance Sheet............................................. F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statements of Stockholders' Deficit....................... F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-7
IMAGING DIVISION OF RANDOM ACCESS, INC.
Report of Independent Auditors.......................................... F-17
Statement of Operations................................................. F-18
Statement of Cash Flows................................................. F-19
Notes to Statements of Operations and Cash Flows........................ F-20
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ............................. F-22
INTERIM FINANCIAL STATEMENTS OF IMAGEMATRIX CORPORATION
Consolidated Balance Sheet at March 31, 1996 (Unaudited)............... F-25
Consolidated Statements of Operations for the three months ended March
31, 1996 and 1995 (Unaudited)......................................... F-26
Consolidated Statements of Cash Flows for the three months ended March
31, 1996 and 1995 (Unaudited)......................................... F-27
Notes to Consolidated Financial Statements for the three months ended
March 31, 1996 and 1995 (Unaudited)................................... F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
ImageMatrix Corporation
We have audited the accompanying consolidated balance sheet of ImageMatrix
Corporation and subsidiary as of December 31, 1995, and the related
consolidated statements of operations, stockholders' deficit, and cash flows
for each of the two years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ImageMatrix
Corporation and subsidiary at December 31, 1995, and the consolidated results
of their operations and their cash flows for each of the two years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the financial statements, the Company's loss from
operations, working capital deficiency and net capital deficiency raise
substantial doubt about its ability to continue as a going concern.
Management's plans as to these matters are described in Note 2. The 1995
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
ERNST & YOUNG LLP
Denver, Colorado
March 4, 1996, except for Note 13, as to
which the date is March 29, 1996
F-2
<PAGE>
IMAGEMATRIX CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
(IN THOUSANDS,
EXCEPT SHARE
INFORMATION)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 550
Accounts receivable, less allowance for doubtful accounts
of $18.................................................... 752
Inventory.................................................. 216
Prepaid expenses and other current assets.................. 44
-------
Total current assets..................................... 1,562
Property and equipment, at cost:
Computer equipment......................................... 169
Office furniture and equipment............................. 28
-------
197
Less accumulated depreciation.............................. (13)
-------
184
Other assets, net of accumulated amortization of $15......... 176
-------
Total assets............................................. $ 1,922
=======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses...................... $ 505
Deferred revenue........................................... 61
Note payable to ENTEX Information Services of Colorado,
Inc. (Note 6)............................................. 1,484
-------
Total current liabilities................................ 2,050
Note payable to bank (Note 5)................................ 1,160
Stockholders' deficit:
Preferred Stock, no par value, 5,000,000 shares authorized,
no shares issued or outstanding........................... --
Common Stock, no par value, 20,000,000 shares authorized,
3,265,193 shares issued and outstanding (net capital
deficiency)(Note 2)....................................... (1,141)
Deferred compensation...................................... (100)
Accumulated deficit........................................ (47)
-------
Total stockholders' deficit.............................. (1,288)
-------
Total liabilities and stockholders' deficit.............. $ 1,922
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
IMAGEMATRIX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1995 1994
----------- -----------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
DATA)
<S> <C> <C>
Revenue:
System sales....................................... $ 1,851 $ 1,380
Service contracts and other........................ 117 381
----------- -----------
1,968 1,761
Costs of revenues:
Cost of revenues--systems.......................... 1,203 722
Cost of revenues--service contracts and other...... 59 113
----------- -----------
1,262 835
----------- -----------
Gross profit......................................... 706 926
Selling, general and administrative expenses......... 693 881
Depreciation and amortization........................ 29 18
----------- -----------
722 899
----------- -----------
Operating income (loss).............................. (16) 27
Other income (expense):
Interest........................................... (171) (133)
Other nonoperating income.......................... -- 5
Gain on sale of net assets (Note 2)................ 347 --
----------- -----------
Income (loss) from continuing operations before
income taxes........................................ 160 (101)
Provision for income taxes........................... (24) --
----------- -----------
Income (loss) from continuing operations............. 136 (101)
Discontinued operations (Note 12):
Loss from operations of discontinued
microfilm/microfiche division..................... -- (796)
Loss on disposal of microfilm/microfiche division.. -- (1,162)
----------- -----------
Loss from discontinued operations.................... -- (1,958)
----------- -----------
Net income (loss).................................... $ 136 $ (2,059)
=========== ===========
Per share data:
Income (loss) from continuing operations............. $ 0.04 $ (0.03)
Discontinued operations.............................. -- (0.55)
----------- -----------
Net income (loss).................................... $ 0.04 $ (0.58)
=========== ===========
Common shares used in computing net income (loss) per
common share (Note 3)............................... 3,574,968 3,574,968
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
IMAGEMATRIX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (NOTE 2)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES(1) AMOUNT COMPENSATION DEFICIT DEFICIT
--------- ------- ------------ ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DOCUMATRIX CORPORATION:
Balance, December 31,
1993................. -- $ 318 $ -- $(944) $ (626)
Net loss............ -- -- -- (2,059) (2,059)
--------- ------- ----- ------- -------
Balance, December 31,
1994................. -- 318 -- (3,003) (2,685)
Net income to July
25, 1995........... -- -- -- 183 183
--------- ------- ----- ------- -------
Balance July 25,
1995................. -- 318 -- (2,820) (2,502)
IMAGEMATRIX CORPORATION:
Reclassification of
equity accounts on
July 25, 1995...... -- (318) -- 318 --
Assumption of
liabilities in
excess of assets
acquired at July
25, 1995 in
exchange for common
stock (Note 2)..... 2,180,246 (2,502) -- 2,502 --
Issuance of common
stock to founders
for cash (Note 7).. 266,771 63 -- -- 63
Issuance of common
stock to accredited
investors for cash
(Note 7)........... 818,176 1,138 -- -- 1,138
Assumption of debt
by primary
stockholder (Note
5)................. -- 60 -- -- 60
Deferred
compensation
related to sale of
common stock....... -- 100 (100) -- --
Net loss............ -- -- -- (47) (47)
--------- ------- ----- ------- -------
Balance, December 31,
1995................. 3,265,193 $(1,141) $(100) $ (47) $(1,288)
========= ======= ===== ======= =======
</TABLE>
- --------
(1) No shares have been displayed for the period January 1, 1994 to July 24,
1995 as the activity for these periods related to Documatrix Corporation,
the predecessor company.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
IMAGEMATRIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1995 1994
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations............. $ 136 $ (101)
Adjustments to reconcile income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization...................... 29 18
Gain on sale of net assets......................... (347) --
Changes in operating assets and liabilities, net of
effects from business combinations and
dispositions:
Accounts receivable.............................. 541 (143)
Inventory........................................ (238) (540)
Prepaid expenses and other current assets........ (41) (13)
Accounts payable, accrued liabilities and
deferred income................................. 254 1,200
Other assets..................................... (110) 13
Loss from discontinued operations.................... -- (796)
Change in net operating assets of discontinued
operations and other adjustments.................... -- 154
---------- ------------
Net cash provided (used) by operating activities..... 224 (208)
INVESTING ACTIVITIES
Proceeds from sale to ENTEX Information Services of
Colorado, Inc....................................... 118 --
Purchase of net assets from ENTEX Information
Services, Inc. plus expenses incurred of $66........ (787) --
Purchases of computer equipment and furniture--
continued operations................................ (140) (31)
Purchases of computer equipment and furniture--
discontinued operations............................. -- (40)
Proceeds from disposal of discontinued operations.... 292 --
---------- ------------
Net cash provided (used) by investing activities..... (517) (71)
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock............... 1,201 --
Principal payments on note to bank................... (280) (1,118)
Decrease in due to principal stockholder............. (83) (8)
Proceeds from note to bank........................... -- 1,500
Net proceeds from line of credit with bank........... -- 241
Payments to former owner............................. -- (332)
---------- ------------
Net cash provided (used) by financing activities..... 838 283
---------- ------------
Net increase in cash and cash equivalents............ 545 4
Cash and cash equivalents at beginning of year....... 5 1
---------- ------------
Cash and cash equivalents at end of year............. $ 550 $ 5
========== ============
Supplemental schedule of additional cash flow
information and noncash activities:
Cash paid during the year for interest............. $ 191 $ 125
Assumption of debt by primary stockholder.......... 60 --
Receivable arising from sale of discontinued
operations........................................ -- 292
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
IMAGEMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. BUSINESS OPERATIONS AND ORGANIZATION
ImageMatrix Corporation (the "Company") provides imaging and business
process automation solutions for paper-intensive organizations, with a primary
focus on health and dental care claims processing, as well as customer account
systems in financial institutions.
The Company's current customer base is primarily located in the western half
of the United States and is serviced from offices in Denver, Colorado;
Bellevue, Washington; Portland, Oregon; and Minneapolis, Minnesota.
2. BASIS OF PRESENTATION
Excess of Liabilities Over Assets and Management's Plans
The Company has incurred operating losses and has working capital and net
capital deficiencies at December 31, 1995, which raise substantial doubt about
its ability to continue as a going concern. The Company also has notes payable
of approximately $2,644,000 at December 31, 1995 of which approximately
$1,484,000 is due on March 30, 1996 (see Notes 5 and 6). Management of the
Company intends to fund these deficiencies and fund the payment of the
maturity of the notes payable from the proceeds of an initial public offering
and by generating increased cash flows from its business operations. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Company Formation
The Company, previously known as Documatrix Acquisition Corporation, was
incorporated in July 1995. In July 1995, the Company acquired all of the
authorized, issued and outstanding shares of Documatrix Corporation
("Documatrix"), a private company wholly-owned by Gerald E. Henderson
(President and Chief Executive Officer of the Company), in exchange for
2,180,246 shares of the Company's Common Stock. As Mr. Henderson owned all of
the shares of Documatrix at the acquisition date, this transaction has been
recorded as a combination of entities under common control and the assets and
liabilities of Documatrix have been recorded at Documatrix's historical cost.
Liabilities of Documatrix exceeded its assets by approximately $2,502,000 at
the date ImageMatrix acquired Mr. Henderson's shares in Documatrix. The
operations of Documatrix have been included as a predecessor company in these
financial statements and are shown as if the Company owned Documatrix for all
periods presented.
Documatrix performed services similar to those of the Company until February
15, 1995. On that date, Documatrix sold substantially all of its assets and
liabilities to ENTEX Information Services of Colorado, Inc. ("ENTEX"),
formerly known as Random Access, Inc. ENTEX assumed Documatrix's net
liabilities except for a $1,500,000 note payable to Bank One, Colorado N.A.,
which was retained by Documatrix and was subsequently included in the net
liabilities of Documatrix acquired by the Company in July 1995. The net
liabilities assumed by ENTEX totaled approximately $1,459,000 and consisted
primarily of accounts payable, a bank operating line of credit, and deferred
revenue and was offset primarily by inventories and accounts receivable. ENTEX
paid $51,000 in cash to Documatrix, agreed to make payments to Documatrix
pursuant to an earnout agreement based on the operating results of the imaging
division, and agreed to make monthly payments to Documatrix aggregating
approximately $67,000 until the earlier of August 31, 1996 or the point in
time that ENTEX had paid Documatrix $1,500,000, pursuant to the earnout
agreement. Documatrix did not have any significant operating activities after
the sale to ENTEX.
F-7
<PAGE>
IMAGEMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Documatrix was also involved in the sale and maintenance of data storage and
retrieval systems utilizing microfilm and microfiche until December 1994, when
this segment of the business was acquired by a former officer of Documatrix
(see Note 12 for a further discussion of the sale of the microfilm/microfiche
business).
On August 30, 1995, the Company repurchased the assets and liabilities of
the imaging division of ENTEX, which was comprised primarily of the assets and
liabilities which had been previously sold in February 1995 by Documatrix to
ENTEX. The Company acquired these assets and liabilities (including the
earnout liability to Documatrix) of ENTEX's imaging division in exchange for
$721,000 in cash and a note payable of approximately $1,484,000. The Company
also issued warrants to ENTEX as part of the overall consideration (see Note
7). The acquisition of these assets and liabilities was accounted for using
the purchase method of accounting and the excess of the purchase price over
the fair value of the net assets acquired was applied to reduce the gain on
the sale of the assets in February 1995. The gain on the sale of assets
exceeded the excess of the purchase price over the fair value of net assets
acquired by approximately $347,000.
The following represents the summarized results of operations for Documatrix
for the period from January 1, 1995 to July 24, 1995 and the summarized
consolidated results of operations for the Company for the period from July
25, 1995 to December 31, 1995. The consolidated statement of operations for
the year ended December 31, 1995 is comprised of both of these components.
<TABLE>
<CAPTION>
JANUARY 1, 1995 JULY 25, 1995, YEAR ENDED
TO JULY 24, 1995 TO DECEMBER 31, 1995 DECEMBER 31, 1995
---------------- -------------------- -----------------
<S> <C> <C> <C>
Revenue................. $ 61 $ 1,907 $ 1,968
Costs of revenues....... (66) (1,196) (1,262)
---- ------- -------
Gross profit............ (5) 711 706
Other income
(expenses)............. 188 (758) (570)
---- ------- -------
Net income (loss) ...... $183 $ (47) $ 136
==== ======= =======
</TABLE>
The following represents the pro forma results of operations as if the
transfer of the net liabilities to ENTEX from Documatrix and the subsequent
acquisition of the assets and liabilities from ENTEX by the Company had never
occurred (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Revenue......................................................... $4,815
Net income...................................................... $ 136
Net income per common share..................................... $ 0.04
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stock Split
On March 4, 1996, the Company's shareholders approved a split of the Common
Stock on a 0.775-for-1 basis (the "Stock Split"). All par value, authorized
shares, Common Stock and Common per share amounts have been retroactively
restated in the consolidated financial statements to reflect the Stock Split.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, Documatrix. All material
intercompany balances and transactions have been eliminated in consolidation.
F-8
<PAGE>
IMAGEMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less when purchased to be cash equivalents.
Inventory
Inventory, consisting primarily of purchased hardware and software, is
stated at the lower of cost or market with cost determined on a first-in,
first-out ("FIFO") basis.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from three to six years.
Other Assets
Costs associated with the pending public offering of the Company's common
shares of $81,362 have been deferred and are included in other assets. These
costs will be netted against the proceeds received from the sale of common
shares. If the pending offering is terminated, these costs will be charged to
operations.
Software Development Costs
The costs incurred internally to develop computer software products to be
sold or otherwise marketed are charged to expense until technological
feasibility of the product has been established. Once technological
feasibility of the related software product has been established, computer
software development costs are capitalized and reported at the lower of
amortized cost or net realizable value. When a product is ready for general
release, its capitalized costs are amortized using the straight-line method of
amortization over a period not to exceed four years. The Company has not
capitalized any software development costs from inception through December 31,
1995.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement 121 in the first quarter of 1996 and, based on
current circumstances, does not believe the effect of adoption will be
material.
In October 1995, the FASB issued FASB Statement No. 123, Accounting for
Stock-Based Compensation, which would allow the Company to expense the fair
value of all employee stock awards on the date of grant. The Company continues
to follow Accounting Principles Board Statement No. 25 and does not plan to
adopt this new fair value approach to account for employee stock awards, as
allowed by the Statement. However, the Company will be required to provide
fair value disclosures relating to employee stock awards effective with the
first quarter of 1996.
Revenue Recognition
Revenues from contracts extending over a period of time, which are being
performed on a firm price basis, are recognized on the percentage of
completion method. The Company's basis for measuring the extent of
F-9
<PAGE>
IMAGEMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
progress toward completion is the ratio of costs incurred to total estimated
costs. Profits expected to be realized on contracts are based on the Company's
estimates of total contract sales value and costs at completion. These
estimates are reviewed periodically throughout the lives of the contracts on a
contract by contract basis with adjustments to profits resulting from such
reviews being recorded on a cumulative basis in the period in which the
reviews are made. When management believes the cost of completing a contract
will exceed contract-related revenues, the full amount of the anticipated
contract loss is immediately recognized.
Revenues from the sale of software licenses and hardware products are
recognized at the time of shipment unless significant future obligations
remain. In these instances, revenue is not recognized until obligations have
been satisfied or are no longer significant. The Company accrues for estimated
product returns at the time revenue is recognized. If no reasonable basis of
estimating the degree of collectibility of related sales receivables exists,
revenue is accounted for using the installment method.
Software and hardware maintenance and other revenues are comprised of post-
contract customer support agreements, training, and consulting services. Post-
contract customer support agreements are recorded as unearned maintenance fees
and recognized as revenue ratably over the contract period. Training service
revenues are recognized as the service is performed. Costs associated with
post-sale customer obligations are accrued and recognized as expense ratably
over the contract period.
Income Taxes
Income taxes have been provided using the liability method in accordance
with FASB Statement No. 109, Accounting for Income Taxes.
Significant Customers and Concentration of Credit Risk
The Company had one principal customer which accounted for approximately 51%
of revenue and another principal customer which accounted for approximately
17% of revenue for the year ended December 31, 1995. For the year ended
December 31, 1994, the Company had two principal customers which each
accounted for approximately 20% of revenue, another principal customer that
accounted for approximately 13% of revenue, and another principal customer
that accounted for approximately 12% of revenue. Accounts receivable from
principal customers was approximately $497,000 at December 31, 1995. In order
to reduce credit risk, the Company requires substantial down payments and
progress payments during the course of an installation.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, short-term trade
receivables and payables and debt. The carrying values of cash and short-term
trade receivables and payables approximate fair value. The fair value of the
Company's debt is considered to approximate recorded value as the note payable
to Bank One, Colorado N.A. has a variable interest rate and as the note
payable to ENTEX Information Services of Colorado, Inc. carries an interest
rate deemed to approximate market rates for the Company.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Earnings Per Common Share
Pursuant to Securities and Exchange Commission Staff Accounting Bulletins
and Staff Policy, common and common equivalent shares issued during the 12-
month period prior to an initial public offering at prices below
F-10
<PAGE>
IMAGEMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the public offering price are presumed to have been issued in contemplation of
the public offering, even if antidilutive, and have been included in the
calculation as if these common and common equivalent shares were outstanding
for all periods presented (using the treasury stock method, and the estimated
initial public offering price for the Company's common stock).
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1995
-----------
<S> <C>
Accounts payable--trade........................................ $157
Accrued expenses............................................... 310
Due to Mr. Henderson........................................... 38
----
$505
====
</TABLE>
5. NOTE PAYABLE TO BANK
The Company has a $1,160,000 promissory note payable to Bank One, Colorado
N.A. The note payable became an obligation of the Company when it acquired
Documatrix. At the acquisition date, the amount of the note was $1,500,000.
Subsequent to the acquisition date, the note was reduced by the following
transactions: (a) $60,000 which was assumed personally by Mr. Henderson in
exchange for a $60,000 increase in his basis in the Company, and (b) $280,000
was repaid out of the receipt of funds from the disposition of the
discontinued microfilm/microfiche operations (see Note 12). The remaining
$1,160,000 is due February 1, 1997 with interest only payable monthly up to
that date. In the event of a change in ownership in excess of 5% of either
Documatrix or ImageMatrix Corporation, the note becomes immediately due and
payable. Interest on this note is payable at the bank's prime rate of interest
(8.5% at December 31, 1995). The note is secured by all assets of the Company
and includes as co-borrowers Mr. Henderson and his wife. The proceeds of the
Bank One Note were used by Mr. Henderson for working capital and to acquire
Documatrix.
6. NOTE PAYABLE TO ENTEX INFORMATION SERVICES OF COLORADO, INC.
As part of the acquisition of the assets and liabilities of the imaging
division of ENTEX (see Note 2), the Company executed a promissory note dated
August 30, 1995 issued to ENTEX in the amount of approximately $1,484,000
having an initial interest rate of 10% per annum, increasing at an annualized
rate of 1% per month commencing September 30, 1995 through March 30, 1996 at
which point the rate will be 18% per annum until the note balance is paid.
This note requires interest only payments through March 30, 1996, at which
time the total note balance is due and payable. If this note is not paid in
full by May 30, 1996, the note remains outstanding and ENTEX is entitled to
receive, for no additional consideration, shares of the Company's Common Stock
at the rate of 1% of the total Common Stock outstanding for each $100,000 in
indebtedness still outstanding.
If the note is still unpaid as of August 30, 1996, ENTEX has the right to
seek the liquidation of the assets and liabilities of the Company to receive
full payment of any unpaid principal and interest. This note is subordinate to
the Bank One, Colorado N.A. debt (see Note 5).
7. STOCKHOLDERS' EQUITY
Preferred Stock
Pursuant to the Company's Articles of Incorporation, the Company's Board of
Directors may issue up to 5,000,000 shares of Preferred Stock. The Company's
Board of Directors has the authority to fix the rights,
F-11
<PAGE>
IMAGEMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
powers, preferences and privileges, and the qualifications, limitations or
restrictions thereof, of any series of Preferred Stock, including but not
limited to dividend rights, dividend rates, conversion rights, voting rights,
and liquidation preferences. The Company's Board of Directors has not yet
established any rights, powers, preferences or privileges for the Preferred
Stock.
Common Stock
In July 1995, the Company sold 266,771 shares of its Common Stock for
approximately $69,000, exclusive of offering costs of approximately $6,000.
In August 1995 the Company sold 818,176 shares of its Common Stock for
approximately $1,161,000, exclusive of offering costs of approximately
$23,000.
Warrants
In conjunction with the purchase of the assets and liabilities from ENTEX,
the Company issued a warrant to ENTEX to purchase shares of the Company's
Common Stock. The exercise price of the shares underlying the warrant will be
equal to the price per share offered to the public for the Company's planned
initial public offering ("IPO"). The number of shares issuable upon exercise
of the warrant shall be computed as follows: balance of the note payable to
ENTEX (see Note 6) plus unpaid interest multiplied by 0.25, divided by the
warrant exercise price. The warrant automatically terminate on August 29,
2000.
Stock Options
On July 24, 1995, the Company adopted the ImageMatrix Corporation Founders
and Consultants Stock Option Plan ("1995 Plan") for employees, directors and
consultants of the Company. The 1995 Plan provides for the issuance of
incentive and non-statutory stock options of up to 852,500 shares of the
Company's Common Stock. Options issued under the 1995 Plan are exercisable
under conditions as determined by the Company's Board of Directors, with the
term of each option being a maximum of ten years from the date of grant.
During the year ended December 31, 1995, all 709,034 options issued under the
1995 Plan had an exercise price of $2.58 per share except 179,025 options
which were issued at an exercise price of 125% of the price to the public of
the Company's planned IPO. Of the options granted during the year ended
December 31, 1995, 354,517 are exercisable at December 31, 1995, 179,025 will
become exercisable on November 1, 1996 and 175,492 will become 20% exercisable
on June 1, 1996 with the remaining 80% vesting monthly from October 1, 1995
through October 1, 1997 at the rate of 1/24th per month.
On November 2, 1995, the Company adopted the ImageMatrix Corporation 1996
Stock Option Plan ("1996 Plan") for employees, directors and consultants of
the Company. The 1996 Plan provides for the issuance of incentive and non-
statutory stock options of up to 387,500 shares of the Company's Common Stock.
Options issued under the 1996 Plan are exercisable under conditions determined
by the Company's Board of Directors, with the terms of each option being a
maximum of ten years from the date of grant. During the year ended December
31, 1995, all 387,500 options issued under the 1996 Plan had an exercise price
of $2.58 per share. The options granted during the year ended December 31,
1995 vest ratably over a 36-month period.
On November 2, 1995, the Company also adopted the ImageMatrix Corporation
Stock Option Plan for Non-Employee Directors ("Non-Employee Plan"). Each
member of the Company's Board of Directors who is not otherwise an employee of
the Company is eligible to participate in this plan. All options granted under
this plan are non-statutory and expire no later than ten years from the date
of grant. The Non-Employee Plan provides for the issuance of up to 58,125
shares of the Company's Common Stock. Each of the three Non-Employee Directors
received 7,750 options on the date of adoption of this plan and each Non-
Employee Director is eligible to receive an additional 5,813 shares annually.
The options vest 40%, 30% and 30% at the first, second and third annual
meeting after the date of grant, respectively. The Company granted 23,250
options under the Non-Employee Plan having an exercise price of $2.58 per
share during the year ended December 31, 1995.
F-12
<PAGE>
IMAGEMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock option activity during the period from the Company's formation in July
1995 to December 31, 1995 was as follows:
<TABLE>
<S> <C>
Granted.......................................................... 1,119,784
Exercised........................................................ --
Terminated....................................................... --
---------
Outstanding at December 31, 1995................................. 1,119,784
=========
Options exercisable at December 31, 1995......................... 369,748
=========
Options available for grant at December 31, 1995................. 178,341
=========
</TABLE>
The Company has reserved 1,298,125 shares of its authorized Common Stock
under the plans. All grants made during 1995 were at per share prices higher
than fair market value.
Dividends
No dividends have been paid on the Company's Common Stock since the
Company's inception.
Deferred Compensation
Deferred compensation represents the amount recorded as compensation
resulting from the agreement between the Company's President, CEO and primary
shareholder and another officer of the Company, who accepted employment with
the Company in December 1995. Pursuant to this agreement, the Company's
president sold shares to the other officer at a price that was in the
aggregate $100,000 below the deemed fair value of the shares sold. The Company
recorded deferred compensation and a credit to Common Stock of $100,000, which
will be amortized over a period of two years pursuant to the vesting
provisions of the restricted stock agreement which is part of the agreement.
8. PROVISION FOR INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As of December 31,
1995, the Company's net deferred tax asset has been fully reserved with a
valuation allowance. Significant components of the Company's deferred tax
assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Deferred tax assets:
Net operating loss (NOL) carryforwards...................... $ 238
AMT credit carryforwards.................................... 14
Tax-basis goodwill.......................................... 446
Other....................................................... 29
-----
Total deferred tax assets................................. 727
Deferred tax liabilities:
Fixed asset differences..................................... 7
Deferred compensation....................................... 32
-----
Total deferred tax liabilities............................ 39
-----
Net deferred tax asset........................................ 688
Valuation allowance........................................... (688)
-----
Net deferred taxes............................................ $ --
=====
</TABLE>
F-13
<PAGE>
IMAGEMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table reconciles the amount which would be provided by
applying the 34% federal statutory rate to income before income tax expense to
federal income taxes actually provided (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-------------
1995 1994
----- ------
<S> <C> <C>
Income taxes at federal statutory rate of 34%.............. $ 54 $ (686)
Benefit of tax losses not recognized....................... -- 686
Benefit due to utilization of regular tax NOLs............. (54) --
AMT arising from NOL carryforward limitation............... 24 --
---- ------
Total income tax expense................................... $ 24 $ --
==== ======
</TABLE>
At December 31, 1995, the Company had NOLs of approximately $638,000 for
income tax purposes that expire in 2009. The use of the NOLs is limited to
future taxable earnings of ImageMatrix Corporation and Documatrix.
9. LEASE COMMITMENTS
The Company leases its office space for the Denver, Colorado location under
a long-term operating lease. The lease may be extended after the initial lease
term for an additional five-year term. Lease payments for the years ended
December 31, 1995 and 1994 totaled approximately $60,000 and $35,000,
respectively. Future lease commitments in the aggregate for the initial lease
term are as follows (in thousands):
<TABLE>
<S> <C>
1996.................................................................. $115
1997.................................................................. 124
1998.................................................................. 136
1999.................................................................. 46
----
Total................................................................. $421
====
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
Mr. Henderson has entered into an employment agreement with the Company that
provides for a base salary of $156,000 in calendar year 1996 and $180,000 in
calendar year 1997 and additional bonuses based on the performance of the
Company. Mr. Henderson is entitled to receive a termination payment equal to
100% of his then current annual salary plus monthly payments for twelve months
totalling his then current annual salary, if his employment is terminated by
the Company, with or without cause.
The Company has entered into agreements with its primary suppliers to act as
an authorized reseller. Typically, these agreements extend for one year and
are generally renewable for additional one-year periods unless terminated
sooner by mutual consent of the parties or a breach by one of the parties of
the agreement provisions. Certain of these agreements include provisions for
the Company to meet specified sales goals. The loss of such agreements could
have a material adverse effect on the Company's business. However, management
of the Company believes that if one of these contracts were to be terminated
by a supplier, the Company would be able to obtain similar hardware or
software from alternate suppliers. There can be no assurance the Company will
be successful in obtaining agreements with alternate suppliers.
11. RELATED PARTY TRANSACTIONS
Opus Capital, Inc. was paid $10,000 for services rendered during the initial
capitalization efforts for Documatrix in August of 1995. Opus Capital, Inc. is
also under retainer at the rate of $10,000 per month from
F-14
<PAGE>
IMAGEMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
September 1, 1995 through April 30, 1996 for consulting services to the
Company's management including consulting services related to the Company's
proposed public offering. The total amount paid has been deferred in other
assets as a cost of the offering. Opus Capital, Inc. and affiliates of Opus
Capital, Inc. currently own 249,479 shares (7.63%) of the total outstanding
Common Stock of the Company. In addition, Opus Capital, Inc. received stock
options to purchase an aggregate of 358,050 shares of Common Stock (see Note
7).
The Company is leasing office furniture and equipment from the Company's
majority shareholder and CEO at a cost of $839 per month under an operating
lease for a term of three years. The Company may purchase the office furniture
and equipment at fair market value at the end of the lease term.
Treuhand, Inc. a corporation wholly-owned by a board member and an officer
of the Company, was paid $32,965 for the year ended December 31, 1995 for
consulting services related to developing financing strategies for the
Company. Mr. Henderson also granted this board member and officer an option to
acquire up to 87,746 shares of his stock in the Company at a price of $1.42
per share. This option expires September 26, 2000.
As discussed in Note 5, Mr. Henderson personally assumed $60,000 of
Documatrix's note payable to bank during 1995. In exchange, the Company
recorded an increase in Mr. Henderson's basis in the Company of $60,000. There
is no contingent liability on the part of the Company with respect to this
transaction.
12. DISCONTINUED OPERATIONS
On December 30, 1994, Documatrix sold the portion of its business consisting
of its microfilm and microfiche product lines to a company owned by a former
officer of Documatrix.
The buyer purchased assets and assumed liabilities related to those product
lines as follows:
<TABLE>
<S> <C>
Receivables...................................................... $ 211
Inventory........................................................ 85
Prepaid expenses and other assets................................ 9
Equipment and vehicles........................................... 119
Intangible....................................................... 1,110
-------
1,534
Liabilities assumed.............................................. (80)
-------
Net assets sold.................................................. 1,454
Sales price...................................................... 292
-------
Loss on sale..................................................... $(1,162)
=======
</TABLE>
The Company received the sales proceeds during calendar year 1995.
Revenues and cost of goods sold and other expenses related to the product
lines sold are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1994
-----------
<S> <C>
Revenues....................................................... $ 1,635
Cost of goods sold and other expenses.......................... (2,431)
-------
Loss from operations........................................... $ (796)
=======
</TABLE>
F-15
<PAGE>
IMAGEMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. SUBSEQUENT EVENT
In March 1996, an event of default occurred on the note payable to bank
(Note 7) due to the death of Mr. Henderson's wife. The bank has issued a
letter of forbearance which indicates the bank commits not to declare a
default and accelerate the loan based solely on the death of Mr. Henderson's
wife through May 31, 1996. Subsequent to May 31, 1996, the Bank may declare a
default or exercise any remedies it may have based on the death of Mr.
Henderson's wife. This note is included in long term liabilities in the
consolidated balance sheet at December 31, 1995.
F-16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
ImageMatrix Corporation
We have audited the accompanying statements of operations and cash flows of
the Imaging Division of Random Access, Inc. for the period February 16, 1995
through August 30, 1995. These statements of operations and cash flows are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these statements of operations and cash flows based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of operations and
cash flows are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
statements of operations and cash flows. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall statements of operations and cash flows
presentation. We believe that our audit of the statements of operations and
cash flows provides a reasonable basis for our opinion.
In our opinion, the statements of operations and cash flows referred to
above present fairly, in all material respects, the results of operations and
cash flows for the Imaging Division of Random Access, Inc. for the period
February 16, 1995 through August 30, 1995, in conformity with generally
accepted accounting principles.
Denver, Colorado
March 4, 1996
F-17
<PAGE>
IMAGING DIVISION OF RANDOM ACCESS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD
FEBRUARY 16, 1995
THROUGH
AUGUST 30, 1995
-----------------
(IN THOUSANDS)
<S> <C>
Revenue:
System sales................................................ $2,733
Service contracts and other................................. 114
------
2,847
Cost of revenues:
Cost of revenues--systems................................... 1,838
Cost of revenues--service contracts and other............... 46
------
1,884
------
Gross profit.................................................. 963
Selling, general and administrative expenses.................. 533
Depreciation and amortization................................. 64
------
597
------
Operating income.............................................. 366
Interest expense.............................................. (4)
Loss on sale of assets (Note 1)............................... (485)
------
Net loss...................................................... $ (123)
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
IMAGING DIVISION OF RANDOM ACCESS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD
FEBRUARY 16, 1995
THROUGH
AUGUST 30, 1995
-----------------
(IN THOUSANDS)
<S> <C>
OPERATING ACTIVITIES
Net loss..................................................... $ (123)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.............................. 64
Loss on sale of assets..................................... 485
Changes in operating assets and liabilities, net of effects
from acquisitions of net liabilities from Documatrix
Corporation and sale of net assets to ImageMatrix
Corporation:
Accounts receivable...................................... (1,115)
Inventory................................................ 579
Prepaid expenses and other current assets................ (59)
Accounts payable, accrued liabilities and deferred
income.................................................. (1,269)
-------
Net cash used in operating activities........................ (1,438)
INVESTING ACTIVITIES
Purchases of computer equipment, furniture, and leasehold
improvements................................................ (31)
-------
Net cash used in investing activities........................ (31)
FINANCING ACTIVITIES
Borrowings from Random Access, Inc........................... 2,147
Principal payments on note to bank........................... (678)
-------
Net cash provided by financing activities.................... 1,469
-------
Net increase in cash and cash equivalents.................... --
Cash and cash equivalents at beginning of period............. --
-------
Cash and cash equivalents at end of period................... $ --
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
IMAGING DIVISION OF RANDOM ACCESS, INC.
NOTES TO STATEMENTS OF OPERATIONS AND CASH FLOWS
PERIOD FEBRUARY 16, 1995 THROUGH AUGUST 30, 1995
1. BASIS OF PRESENTATION
The Imaging Division of Random Access, Inc. ("Division") provided imaging
and business process automation solutions for paper-intensive organizations,
with a primary focus on health and dental care claims processing, as well as
customer account systems for financial institutions. The Division was wholly-
owned by Random Access, Inc. ("Random") during the period February 16, 1995
through August 30, 1995.
The Division was formed on February 16, 1995 when it assumed the net
liabilities of Documatrix Corporation ("Documatrix"). Since the liabilities
assumed exceeded the assets acquired on the assumption date, goodwill was
recorded to the extent of the net asset deficiency acquired and the additional
cash paid of $51,000 to acquire the assets. In addition to the net asset
deficiency acquired, the Division also agreed to pay Documatrix amounts
pursuant to an earnout agreement, based on the operating results of the
Division, and to make monthly payments totaling approximately $67,000 until
the earlier of August 31, 1996 or the point in time that the Division had paid
Documatrix $1,500,000 pursuant to the earnout agreement. No amounts were paid
on the earnout agreement.
On August 30, 1995, Random agreed to sell substantially all of the net
assets of the Division, including the earnout agreement liability, to
ImageMatrix Corporation ("ImageMatrix"), a successor corporation to
Documatrix, except for the liability associated with the amounts borrowed from
Random to finance the Division's operations. The Division recognized a loss of
approximately $485,000 on the sale of the net assets to ImageMatrix. Random
received proceeds consisting of cash of $721,000 and a note payable to Random
in the amount of approximately $1,484,000 from ImageMatrix in exchange for the
net assets sold.
The accompanying statement of operations includes those costs incurred by
Random which relate to the Division during the period February 16, 1995
through August 30, 1995. These costs were determined via specific
identification, as well as allocation of employee benefit expenses based on
salary expenses. Management believes this allocation method to be reasonable.
The Division had no separate operations prior to February 16, 1995 or after
August 30, 1995.
The accompanying statement of operations does not include interest on the
intercompany account between Random and the Division. This intercompany
account was used to reflect cash transactions of Random which related to the
Division, and had an average balance owing to Random during the period
February 16, 1995 through August 30, 1995 of $1,073,500.
2. SIGNIFICANT ACCOUNTING POLICIES
Depreciation
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to six years.
Goodwill Amortization
Goodwill is amortized as an operating expense under the straight-line method
over a useful life of fifteen years.
Revenue Recognition
Revenues from contracts extending over a period of time, which are being
performed on a firm price basis, are recognized on the percentage of
completion method. The Company accrues for estimated product returns at the
time the revenue is recognized. Revenues from the sale of software licenses
and hardware products are recognized at the time of shipment unless
significant future obligations remain. In these instances, revenue is not
recognized until obligations have been satisfied or are no longer significant.
Software and hardware maintenance and other revenues are comprised of post-
contract customer support agreements, training, and consulting services. Post-
contract customer support agreements are recorded as unearned maintenance fees
and recognized as revenue over the contract period. Training service revenues
are
F-20
<PAGE>
IMAGING DIVISION OF RANDOM ACCESS, INC.
NOTES TO STATEMENTS OF OPERATIONS AND CASH FLOWS--(CONTINUED)
recognized as the service is performed. Costs associated with post-sale
customer obligations are accrued and recognized as expense ratably over the
contract period.
Significant Customers
The Company had a principal customer which accounted for approximately 64%
of its total revenues for the period February 16, 1995 through August 30,
1995.
3. RENT EXPENSE
The Division leased office space and various office equipment. Rent expense
amounted to $41,525 for the period February 16, 1995 through August 30, 1995.
All lease commitments were either transferred to ImageMatrix or terminated
upon the transfer of the Division's net assets to ImageMatrix on August 30,
1995.
F-21
<PAGE>
IMAGEMATRIX CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
The unaudited pro forma statement of operations should be read in
conjunction with other information contained elsewhere in this prospectus
under the headings "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
financial statements of ImageMatrix Corporation and of the Imaging Division of
Random Access, Inc. See "Index to Financial Statements."
The following unaudited pro forma statement of operations of the Company
assumes operations of the Imaging Division of Random Access, Inc. had been
owned by the Company for the entire year. However, historical combined results
may not be comparable to, or indicative of, future performance.
F-22
<PAGE>
IMAGEMATRIX CORPORATION
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
IMAGING DIVISION
OF RANDOM
ACCESS, INC.
IMAGEMATRIX PERIOD IMAGEMATRIX
CORPORATION FEBRUARY 16, PRO FORMA
YEAR ENDED 1995 THROUGH YEAR ENDED
DECEMBER 31, AUGUST 30, PRO FORMA DECEMBER 31,
1995 1995 ADJUSTMENTS 1995
------------ ---------------- ----------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
System sales.......... $1,851 $2,733 $ $ 4,584
Customer service
contract and other... 117 114 231
------ ------ ---- ---------
1,968 2,847 4,815
Cost of sales:
Cost of revenues--
systems.............. 1,203 1,838 3,041
Cost of revenues--
service contracts and
other................ 59 46 105
------ ------ ---- ---------
1,262 1,884 3,146
------ ------ ---- ---------
Gross profit............ 706 963 1,669
Selling, general and
administrative
expenses............... 693 533 1,226
Depreciation and
amortization........... 29 64 (55)(a) 38
------ ------ ---- ---------
722 597 (55) 1,264
------ ------ ---- ---------
Operating income
(loss)................. (16) 366 55 405
Other income (expense):
Interest.............. (171) (4) (94)(b) (269)
Gain (loss) on sale of
assets............... 347 (485) 138 (c) --
------ ------ ---- ---------
Income (loss) before
income taxes........... 160 (123) 99 136
Provision for income
taxes.................. (24) -- 24 (d) --
------ ------ ---- ---------
Net income (loss)....... $ 136 $ (123) $123 $ 136
====== ====== ==== =========
Net income per common
share.................. $ 0.04
Common shares used in
computing net income
per common share....... 3,574,968
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
statement of operations.
F-23
<PAGE>
IMAGEMATRIX CORPORATION
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(a) To eliminate goodwill amortization expense during the period the Imaging
Division was owned and operated by Random Access, Inc.
(b) To record interest expense during the period February 16, 1995 through
August 30, 1995 on the note payable issued in connection with the
acquisition of the net assets of the Imaging Division by ImageMatrix
Corporation on August 30, 1995.
(c) To eliminate the gain on sale of assets recorded at February 15, 1995 by
Documatrix Corporation (predecessor to ImageMatrix Corporation), and to
eliminate the loss on sale of assets recorded at August 30, 1995 by the
Imaging Division of Random Access, Inc.
(d) To eliminate the alternative minimum tax (AMT) as ImageMatrix
Corporation's AMT loss carryforward would not have been used if the sale
to Random Access, Inc. had not occurred.
F-24
<PAGE>
IMAGEMATRIX CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY AT
MARCH 31, MARCH 31, 1996
1996 (NOTE 8)
--------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 67
Accounts receivable, less allowance for doubtful ac-
counts of $21...................................... 319
Unbilled revenues................................... 170
Inventory........................................... 121
Prepaid expenses and other current assets........... 101
-------
Total current assets.................................. 778
Property and equipment, at cost:
Computer equipment.................................. 281
Office furniture and equipment...................... 44
-------
325
Less accumulated depreciation....................... (41)
-------
284
Software development costs............................ 70
Other assets, net of accumulated amortization of $26.. 328
-------
Total assets.......................................... $ 1,460
=======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses............... $ 510
Deferred revenue.................................... 104
Note payable to bank................................ 1,160
Note payable to ENTEX Information Services of Colo-
rado, Inc. ........................................ 1,484
-------
Total current liabilities............................. 3,258
Stockholders' deficit:
Preferred Stock, no par value, 5,000,000 shares au-
thorized, no shares issued or outstanding.......... -- $ --
Common Stock, no par value, 20,000,000 shares
authorized, 3,265,193 shares issued and outstanding
and 3,238,772 shares issued and outstanding pro
forma (net capital deficiency)..................... (1,141) (1,179)
Deferred compensation, net of accumulated amortiza-
tion of $12........................................ (88) (88)
Accumulated deficit................................. (569) (569)
------- -------
Total stockholders' deficit........................... (1,798) $(1,836)
------- =======
Total liabilities and stockholders' deficit........... $ 1,460
=======
</TABLE>
See accompanying notes to these consolidated financial statements.
F-25
<PAGE>
IMAGEMATRIX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED
-------------------- MARCH 31,
1996 1995 1995
--------- --------- ------------
<S> <C> <C> <C>
Revenue:
System sales.............................. $ 797 $ 61 $ 1,601
Service contracts and other............... 110 -- 16
--------- --------- ---------
907 61 1,617
Costs of revenues:
Cost of revenues--systems................. 711 66 1,174
Cost of revenues--service contracts and
other.................................... 49 -- 8
--------- --------- ---------
760 66 1,182
--------- --------- ---------
Gross profit................................ 147 (5) 435
Selling, general and administrative
expenses................................... 577 72 234
--------- --------- ---------
Operating income (loss)..................... (430) (77) 201
Other income (expense):
Interest.................................. (85) (31) (57)
Other nonoperating ....................... (7) -- --
Gain on sale of net assets................ -- 347 --
--------- --------- ---------
Income (loss) before income taxes........... (522) 239 144
Provision for income taxes.................. -- (18) --
--------- --------- ---------
Net income (loss)........................... $ (522) $ 221 $ 144
--------- --------- ---------
Net income (loss) per common share.......... $ (0.15) $ 0.06 $ 0.04
========= ========= =========
Common shares used in computing net income
(loss) per common share.................... 3,574,968 3,574,968 3,574,968
========= ========= =========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-26
<PAGE>
IMAGEMATRIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------
1996 1995
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss).......................................... $ (522) $ 221
Adjustments to reconcile income (loss) to net cash provided
(used) by operating activities:
Depreciation and amortization............................ 51 11
Gain on sale of net assets............................... -- (347)
Changes in operating assets and liabilities, net of
effect from business disposition:
Accounts receivable.................................... 433 114
Unbilled revenues...................................... (170) --
Inventory.............................................. 95 (405)
Prepaid expenses and other current assets.............. (57) (13)
Accounts payable, accrued liabilities and deferred
income................................................ 48 360
Software development costs............................. (70) --
Other assets........................................... (163) --
-------- -------
Net cash provided (used) by operating activities........... (355) (59)
INVESTING ACTIVITIES
Proceeds from sale to ENTEX Information Services of
Colorado, Inc............................................. -- 79
Purchases of computer equipment and furniture.............. (128) --
Proceeds from disposal of discontinued operations.......... -- 12
-------- -------
Net cash provided (used) by investing activities........... (128) 91
FINANCING ACTIVITIES
Decrease in due to principal stockholder................... -- (35)
-------- -------
Net cash used by financing activities...................... -- (35)
-------- -------
Net decrease in cash and cash equivalents.................. (483) (3)
Cash and cash equivalents at beginning of year............. 550 5
-------- -------
Cash and cash equivalents at end of year................... $ 67 $ 2
======== =======
</TABLE>
See accompanying notes to these consolidated financial statements.
F-27
<PAGE>
IMAGEMATRIX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
1. BASIS OF PRESENTATION
The Company, in its opinion, has included all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation of its
financial position at March 31, 1996 and the results of its operations for the
three months ended March 31, 1996 and 1995. The results of operations for the
three months ended March 31, 1996 are not necessarily indicative of the
results for a full year.
2. GOING CONCERN
The Company's operating results and financial position has continued to
deteriorate since March 31, 1996. The Company's net loss for the month ended
April 30, 1996 was approximately $290,000 and cash on hand and trade
receivables at April 30, 1996 was approximately $253,000. These indicators
raise substantial doubt about the Company's ability to continue as a going
concern. The Company will need to raise additional funds through equity or
debt placements in order to meet its obligations on existing debt and to
sustain operations. The unaudited financial statements do not include any
adjustments that might result from this uncertainty.
3. SOFTWARE DEVELOPMENT COSTS
The Company capitalized approximately $70,000 of software development costs
during the three months ended March 31, 1996 related to the Company's
ClaimMatrix product. These costs will be amortized once the product is
available for general release for a period not to exceed 36 months.
4. NOTES PAYABLE
In March 1996, the death of Mr. Henderson's wife, who was a co-borrower on
the note payable to bank, resulted in an event of default on the note. The
bank has issued a letter of forbearance through May 31, 1996 which indicates
that the bank commits not to declare a default and accelerate the loan based
solely on the event of default which occurred. Subsequent to May 31, 1996, the
bank may declare a default or exercise any remedies it may have based on the
event of default. This note is included in current liabilities at March 31,
1996, and in long term liabilities at December 31, 1996.
5. DEFERRED OFFERING COSTS
During the quarter ended March 31, 1996, the Company capitalized additional
costs related to the pending public offering of the Company's common shares.
The deferred offering costs at March 31, 1996 related to the Company's planned
public offering are approximately $244,000. These costs will be netted against
the proceeds received from the sale of common shares. If the pending offering
is terminated, these costs will be charged to operations.
6. NEWLY IMPLEMENTED ACCOUNTING STANDARD
On January 1, 1996, the Company adopted Financial Accounting Standards Board
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. The impact of the adoption
of this Statement was not material.
F-28
<PAGE>
7. PRO FORMA STATEMENT OF OPERATIONS
The pro forma statement of operations for the three months ended March 31,
1995 assumes operations of the Imaging Division of Random Access, Inc. had
been owned by the Company for the entire three month period. However,
historical combined results may not be comparable to, or indicative of, future
performance. The pro forma statement of operations for the three months ended
March 31, 1995 includes adjustments to (i) eliminate goodwill amortization
expense during the period the Imaging Division was owned and operated by
Random Access, Inc.; (ii) record interest expense during the period February
16, 1995 through August 30, 1995 on the note payable issued in conjunction
with the acquisition of the net assets of the Imaging Division by ImageMatrix
Corporation on August 30, 1995; (iii) eliminate the gain on sale of assets
recorded at February 15, 1995 by Documatrix Corporation (predecessor to
ImageMatrix Corporation); and (iv) eliminate the alternative minimum tax (AMT)
as ImageMatrix Corporation's AMT less carryforward would not have been used if
the sale to Random Access, Inc. had not occurred.
8. PRO FORMA STOCKHOLDERS' EQUITY
The pro forma stockholders' equity at March 31, 1996 represents the
stockholders' equity balance as adjusted for the rescission of the sale of
26,421 shares of the Company's common stock in August, 1995. This rescission
is the result of provisions of the Corporate Financing Rule of The National
Association of Securities Dealers, Inc. relating to underwriter compensation
in connection with the Company's proposed public offering. This rescission was
effective May 16, 1996.
F-29
<PAGE>
[LOGO OF IMAGEMATRIX CORPORATION]
SOFTWARE ARCHITECTURE
ClaimMatrix(TM) System
Visual WorkFlo(R) Microsoft(R) Visual Basic(R)
Microsoft(R) Windows NT(TM)
Oracle(R)
Database
FileNet(R) FileNet(R) FileNet(R) 3rd Party 3rd Party
Imaging Imaging Imaging Software Software
Capture Workflow Indexing EDI* OCR*
The ClaimMatrix(TM) System provides a turnkey claims processing solution for
Coverage Providers built on industry-leading software platforms such as
FileNet(R) imaging engine, an "open" Oracle(R) database software platform and
Microsoft(R) Windows NT(TM) for networking.
*Optional custom feature
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE SALE
OR OFFERING OF ANY UNITS COVERED BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY IMAGEMATRIX CORPORATION. THIS PROSPECTUS DOES NOT CONSTITUTE AN OF-
FER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, IN ANY JURISDICTION TO ANY PERSON TO WHOM
IT IS NOT LAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. UNDER
NO CIRCUMSTANCES SHOULD THE DELIVERY OF THIS PROSPECTUS OR THE SALE OR OFFERING
OF ANY UNITS COVERED BY THIS PROSPECTUS CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE BUSINESS OR OPERATIONS OF IMAGEMATRIX CORPORATION SINCE
THE DATE OF THIS PROSPECTUS.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information..................................................... 3
Prospectus Summary......................................................... 4
Risk Factors............................................................... 8
Capitalization............................................................. 16
Dividend Policy............................................................ 16
Dilution................................................................... 17
Use of Proceeds............................................................ 18
Selected Consolidated Financial Data....................................... 20
Management's Discussion and Analysis....................................... 22
Business................................................................... 26
Management................................................................. 37
Principal Shareholders..................................................... 43
Certain Transactions....................................................... 44
Reverse Stock Split........................................................ 46
Description of Securities.................................................. 47
Shares Eligible for Future Sale............................................ 50
Underwriting............................................................... 52
Legal Matters.............................................................. 54
Experts.................................................................... 54
Financial Statements....................................................... F-1
</TABLE>
UNTIL , 1996, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS EF-
FECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
==============================================================================
==============================================================================
[LOGO OF IMAGEMATRIX CORPORATION]
1,400,000 UNITS
CONSISTING OF 1,400,000 SHARES
OF COMMON STOCK
AND 1,400,000 WARRANTS
---------------
PROSPECTUS
---------------
NEIDIGER/TUCKER/BRUNER, INC.
JOSEPH CHARLES & ASSOC., INC.
, 1996
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation and Bylaws of the Company provide that the
Company shall indemnify to the fullest extent permitted by Colorado law any
person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action, suit or proceeding, by reason of the
fact that he or she is or was a director or officer of the Company or is or
was serving at the request of the Company in any capacity and in any other
corporation, partnership, joint venture, trust or other enterprise. The
Colorado Business Corporation Act (the "Colorado Act") permits the Company to
indemnify an officer or director who was or is a party or is threatened to be
made a party to any proceeding because of his or her position, if the officer
or director acted in good faith and in a manner he or she reasonably believed
to be in the best interests of the Company or, if such officer or director was
not acting in an official capacity for the Company, he or she reasonably
believed the conduct was not opposed to the best interests of the Company.
Indemnification is mandatory if the officer or director was wholly successful,
on the merits or otherwise, in defending such proceeding. Such indemnification
(other than as ordered by a court) shall be made by the Company only upon a
determination that indemnification is proper in the circumstances because the
individual met the applicable standard of conduct. Advances for such
indemnification may be made pending such determination. Such determination
shall be made by a majority vote of a quorum consisting of disinterested
directors or of a committee of at least two disinterested directors, or by
independent legal counsel or by the shareholders.
In addition, the Articles of Incorporation provide for the elimination, to
the extent permitted by Colorado law, of personal liability of directors to
the Company and its shareholders for monetary damages for breach of fiduciary
duty as directors. The Colorado Act provides for the elimination of personal
liability of directors for damages occasioned by breach of fiduciary duty,
except for liability based on the director's duty of loyalty to the Company,
liability for acts or omissions not made in good faith, liability for acts or
omissions involving intentional misconduct, liability based on payments of
improper dividends, liability based on violations of state securities laws,
and liability for acts occurring prior to the date such provision was added.
See the second and third paragraphs of Item 28 below for information
regarding the position of the Securities and Exchange Commission with respect
to the effect of any indemnification for liabilities arising under the
Securities Act.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses to be borne
by the Company in connection with the offering described in the Registration
Statement, other than underwriting commissions and discounts and the
Representative's nonaccountable expense allowance.
<TABLE>
<S> <C>
Registration Fee................................................. $ 6,596
National Association of Securities Dealers, Inc. Fee............. 2,412
Legal Fees and Expenses.......................................... 150,000
Accounting Fees and Expenses..................................... 150,000
Printing and Engraving Expenses.................................. 45,000
Blue Sky Fees and Expenses....................................... 7,500
Underwriters' Legal Fees for Blue Sky............................ 20,000
Transfer Agent's and Registrar's Fees............................ 5,000
Nasdaq Listing Fees.............................................. 8,000
Consulting Fees.................................................. 65,000
Miscellaneous Expenses........................................... 140,492
--------
Total.......................................................... $600,000
========
</TABLE>
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The information in this Item gives retroactive effect to a .775-for-1
reverse stock split of the Company's Common Stock which was effective March 5,
1996.
The Registrant sold the following unregistered securities during 1995. No
sales of securities have occurred in 1996.
(1) On July 24, 1995, the Company issued 2,180,246 shares of Common Stock to
Gerald E. Henderson, as a founder of the Company, in exchange for all of the
issued and outstanding shares (100 shares) of Documatrix Corporation, and the
Company issued an aggregate of 266,771 shares of Common Stock to its
additional founders for an aggregate purchase price of $68,844, as follows:
<TABLE>
<S> <C>
Seigle Family Trust....................................... 87,746 shares
Opus Capital, Inc......................................... 148,025 shares
K. D. Heidrich SEP IRA.................................... 15,500 shares
Daryl F. Yurek SEP IRA.................................... 15,500 shares
</TABLE>
The Company believes this transaction was private in nature and was exempt
from the registration requirements of Section 5 of the Securities Act of 1933
(the "Securities Act") by virtue of the exemption contained in Section 4(2) of
the Securities Act.
(2) On August 31, 1995, the Company sold an aggregate of 818,176 shares of
Common Stock to 11 accredited investors (six Canadian residents and five
United States residents), for an aggregate purchase price of $1,161,271, as
follows:
<TABLE>
<S> <C>
Gerald E. Henderson....................................... 52,842 shares
Opus Capital, Inc......................................... 70,455 shares
Welcome Opportunities, Ltd................................ 155,000 shares
Channing Investments Corporation.......................... 77,500 shares
Jaidev Sugavanam.......................................... 176,137 shares
Brian Gruson.............................................. 52,842 shares
Gregg T. Aspnes........................................... 26,421 shares
*Southwest Securities, Inc. f/b/o Rolf Stepparud.......... 26,421 shares
Doug Johnson.............................................. 51,538 shares
N.O. Johnson, Sr.......................................... 51,520 shares
James Oleynick............................................ 77,500 shares
</TABLE>
* On May 16, 1996, the purchase of 26,421 shares by Southwest Securities,
Inc. f/b/o Rolf Stepparud was rescinded.
The Company believes this transaction was private in nature and was exempt
from the registration requirements of Section 5 of the Securities Act by
virtue of the exemptions provided by Regulation D and Regulation S of the
Securities Act.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
1.2* Form of Selected Dealer Agreement.
1.3* Representatives' Warrant Agreement.
1.4* Form of Agreement Among Underwriters.
3.1* Amended and Restated Articles of Incorporation of the Company in form
to be in effect upon closing of offering.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.2* Bylaws of the Company.
4.1* Form of certificate for shares of Common Stock.
4.2* Form of Warrant Agreement and Redeemable Warrant.
5.1* Opinion of Chrisman, Bynum & Johnson, P.C.
10.1* Employment Agreement dated December 29, 1995 by and between
ImageMatrix Corporation and Gerald E. Henderson.
10.2* Severance Agreement dated December 26, 1995 by and between ImageMatrix
Corporation and Dennis C. Hefter.
10.3* Letter Agreement dated December 21, 1995 by and between ImageMatrix
Corporation and Blair W. McNea.
10.4* ImageMatrix Corporation Founders and Consultants Stock Option Plan.
10.5* ImageMatrix Corporation 1996 Stock Option Plan.
10.6* ImageMatrix Corporation Stock Option Plan of Non-Employee Directors.
10.7* Asset Purchase Agreement dated August 30, 1995 by and among Documatrix
Acquisition Corporation, Random Access, Inc. and Gerald E. Henderson.
10.8* Authorized Reseller Agreement dated February 21, 1996 by and between
ImageMatrix Corporation and Optika Imaging Systems, Inc.
10.9* Reseller Agreement dated January 8, 1996 by and between ImageMatrix
Corporation and FileNet Corporation.
10.10* Asset Purchase Agreement dated February 15, 1995 by and among Random
Access, Inc., Documatrix Corporation, and Gerald Henderson.
10.11* Change In Terms Agreement dated December 27, 1995 by and among Bank
One Colorado, N.A., Gerald E. Henderson, Carolyn Lee Henderson and
Documatrix Corporation, as amended by Change in Terms Agreement dated
February 29, 1996 by and among Bank One Colorado, N.A., Gerald E.
Henderson, Carolyn Lee Henderson, Documatrix Corporation and
Imagematrix Corporation.
10.12 Stock Recision Agreement dated May 16, 1996 by and between Rolf
Stepparud and ImageMatrix Corporation, and related promissory note.
11.1 Statement of Computation of Per Share Earnings.
23.1 Consent of Ernst & Young LLP.
Consent of Chrisman, Bynum & Johnson, P.C. (included in its opinion
23.2* filed as Exhibit 5.1).
24.1* Power of Attorney (included in signature page of original filing).
24.2* Power of Attorney of Jaidev Sugavanam.
</TABLE>
- --------
* Previously filed
ITEM 28. UNDERTAKINGS.
The undersigned small business issuer will provide to the Underwriter at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
II-3
<PAGE>
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned small business issuer will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the small business issuer pursuant to Rule
424(b)(1), or (4) or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
II-4
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS OF FILING ON FORM SB-2 AND HAS CAUSED THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THERE UNTO DULY AUTHORIZED, IN THE CITY OF DENVER, STATE OF
COLORADO, ON THE 16TH DAY OF MAY, 1996.
ImageMatrix Corporation
/s/ Gerald E. Henderson
By: _________________________________
GERALD E. HENDERSON
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATES INDICATED.
NAME TITLE DATE
---- ----- ----
/s/ Gerald E. Henderson President, Chief
- ------------------------------------- Executive Officer May 16, 1996
GERALD E. HENDERSON (Principal
Executive Officer)
and Director
/s/ Keith E. Brue Chief Financial
- ------------------------------------- Officer, Vice May 16, 1996
KEITH E. BRUE President,
Treasurer
(Principal
Accounting Officer)
* Vice President--
- ------------------------------------- Business May 16, 1996
BLAIR W. MCNEA Development,
Secretary and
Director
* Director
- ------------------------------------- May 16, 1996
ROBERT BEEKMANN
* Director
- ------------------------------------- May 16, 1996
DAVID SEIGLE
* Director
- ------------------------------------- May 16, 1996
JAIDEV SUGAVANAM
/s/ Gerald E. Henderson
*By: ________________________________
GERALD E. HENDERSON,
ATTORNEY-IN-FACT
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
------- ---------------------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement.
1.2* Form of Selected Dealer Agreement.
1.3* Representatives' Warrant Agreement.
1.4* Form of Agreement Among Underwriters.
3.1* Amended and Restated Articles of Incorporation of the Company
in form to be in effect upon closing of offering.
3.2* Bylaws of the Company.
4.1* Form of certificate for shares of Common Stock.
4.2* Form of Warrant Agreement and Redeemable Warrant.
5.1* Opinion of Chrisman, Bynum & Johnson, P.C.
10.1* Employment Agreement dated December 29, 1995 by and between
ImageMatrix Corporation and Gerald E. Henderson.
10.2* Severance Agreement dated December 26, 1995 by and between
ImageMatrix Corporation and Dennis C. Hefter.
10.3* Letter Agreement dated December 21, 1995 by and between
ImageMatrix Corporation and Blair W. McNea.
10.4* ImageMatrix Corporation Founders and Consultants Stock Option
Plan.
10.5* ImageMatrix Corporation 1996 Stock Option Plan.
10.6* ImageMatrix Corporation Stock Option Plan for Non-Employee
Directors.
10.7* Asset Purchase Agreement dated August 30, 1995 by and among
Documatrix Acquisition Corporation, Random Access, Inc. and
Gerald E. Henderson.
10.8* Authorized Reseller Agreement dated February 21, 1996 by and
between ImageMatrix Corporation and Optika Imaging Systems,
Inc.
10.9* Reseller Agreement dated January 8, 1996 by and between
ImageMatrix Corporation and FileNet Corporation.
10.10* Asset Purchase Agreement dated February 15, 1995 by and among
Random Access, Inc., Documatrix Corporation, and Gerald
Henderson.
10.11* Change In Terms Agreement dated December 27, 1995 by and among
Bank One Colorado, N.A., Gerald E. Henderson, Carolyn Lee
Henderson and Documatrix Corporation, as amended by Change in
Terms Agreement dated February 29, 1996 by and among Bank One
Colorado, N.A., Gerald E. Henderson, Carolyn Lee Henderson,
Documatrix Corporation and Imagematrix Corporation.
10.12 Stock Recision Agreement dated May 16, 1996 by and between Rolf
Stepparud and ImageMatrix Corporation, and related promissory
note.
11.1 Statement of Computation of Per Share Earnings.
23.1 Consent of Ernst & Young, LLP.
23.2* Consent of Chrisman, Bynum & Johnson, P.C. (included in its
opinion filed as Exhibit 5.1).
24.1* Power of Attorney (included in signature page of original
filing).
24.2* Power of Attorney of Jaidev Sugavanam.
</TABLE>
- --------
*Previously filed
<PAGE>
ImageMatrix CORPORATION
1,400,000 Units
UNDERWRITING AGREEMENT
----------------------
NEIDIGER, TUCKER, BRUNER, INC. ______________, 1996
300 Plaza Level
1675 Larimer Street
Denver, Colorado 80202
JOSEPH CHARLES & ASSOC., INC.
356 North Camden Drive
Beverly Hills, California 90210
(As Representatives of the Several
Underwriters named in Schedule I hereto)
Gentlemen:
ImageMatrix Corporation, a Colorado corporation (the "Company"),
proposes to sell to the several underwriters named in Schedule I hereto (the
"Underwriters"), on whose behalf Neidiger, Tucker, Bruner, Inc. and Joseph
Charles & Assoc., Inc. are acting as the representatives (the
"Representatives"), 1,400,000 Units (the "Firm Units"), each Unit consisting of
one share of the Common Stock, no par value, of the Company (the "Common Stock")
and one Redeemable Common Stock Purchase Warrant (the "Warrants"). The terms of
the Units and the components of the Units shall be as described in the
Registration Statement which is described below in Section 1(a). In addition,
for the sole purpose of covering over-allotments in connection with the sale of
the Firm Units, the Company proposes to grant to the several Underwriters an
option to purchase up to an additional 210,000 Units (the "Option Units").
The Company further agrees to sell and issue to you individually, and
not in your capacities as Representatives, five-year warrants (the
"Representatives' Warrants") to purchase, for 120% of the public offering price
of the Firm Units, an aggregate of 140,000 Units (the "Representatives' Warrant
Units"). Each Representatives' Warrant Unit consists of one share of Common
Stock ("Warrant Unit Shares") and one Redeemable Common Stock Purchase Warrant
("Underlying Warrant"). The terms and conditions of the Representatives'
Warrants, Representatives' Warrant
-1-
<PAGE>
Units, Warrant Unit Shares and Underlying Warrant, including the purchase price
thereof, shall be as set forth in the Representatives' Warrant Agreement filed
as an exhibit to the Registration Statement.
Each of the Representatives has advised the Company that: (a) it is
authorized to enter into this Agreement on behalf of the several Underwriters;
and (b) the several Underwriters are willing, acting severally and not jointly,
to purchase the numbers of Firm Units set forth opposite their respective names
in Schedule I.
The Firm Units, any Option Units purchased pursuant to this Agreement
and the Representatives' Warrant Units are collectively called herein the
"Units" and the Warrants included in the Units and the Representatives' Warrants
are collectively called herein the "Warrants." The shares of Common Stock
issuable upon exercise of the Warrants are collectively called the "Warrant
Shares" and the Warrant Shares, together with the shares of Common Stock
included in the Units, are collectively called the "Shares." The Shares,
Warrants and the Representatives' Warrant Units are sometimes referred to herein
collectively as the "Underlying Securities." The term "Underwriters" refers to
any individual member of the underwriting syndicate and includes any party
substituted for an Underwriter under Section 7 hereof.
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties. The Company represents and
warrants to, and agrees with, each Underwriter that:
(a) A registration statement on Form SB-2 (File No. 33-31990), and
as a part thereof a preliminary prospectus and related exhibits, for
registration of the Units, Warrants, and Shares has been prepared by
the Company in conformity with the requirements of the Securities Act
of 1933, as amended, and the rules and regulations promulgated
thereunder (the "1933 Act" and the "1933 Act Regulations",
respectively) has been filed with the Securities and Exchange
Commission (the "Commission"). One or more amendments to such
registration statement have been so prepared and filed in the form
delivered to you. No other amendment thereto has been filed and none
will be filed with the Commission prior to the time such registration
statement becomes effective which shall be disapproved by you promptly
after reasonable notice thereof. The registration statement, including
the prospectus, Part II, the documents incorporated by reference
therein and all schedules and exhibits thereto, as amended at the time
when it becomes effective is hereinafter referred to as the
"Registration Statement." Any prospectus included in the Registration
Statement and in any amendments thereto prior to the effective date of
the Registration Statement is referred to herein as the "Preliminary
Prospectus." The prospectus on file with the Commission when the
Registration Statement becomes effective is herein referred to as the
"Prospectus," except that if the prospectus filed by the Company
pursuant to Rules 424(b) and 430A of the 1933 Act Regulations of the
Commission differs from the prospectus on file at the time the
-2-
<PAGE>
Registration Statement becomes effective, the term "Prospectus" shall
also include the Rules 424(b) and 430A prospectus from and after the
time it is transmitted to the Commission for filing.
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission or any state of the United
States or other regulatory body, and each Preliminary Prospectus, at
the time of filing thereof, did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided,
however, that the foregoing shall not apply to statements or omissions
made in reliance upon and in conformity with written information
furnished to the Company by you or by an Underwriter(s) through you
expressly for use in the Registration Statement or Prospectus.
(c) When the Registration Statement becomes effective, and at all
times subsequent thereto up to and including each Closing Date (as
defined in Section 3), the Registration Statement, any post-effective
amendment thereto and the Prospectus, each as amended or supplemented,
will contain all statements which are required to be stated therein in
accordance with the 1933 Act and 1933 Act Regulations and shall
otherwise comply in all material respects with the requirements of the
1933 Act and 1933 Act Regulations. No such document shall contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that the foregoing shall not apply to
statements or omissions made in reliance upon and in conformity with
written information furnished to the Company by an Underwriter(s)
through you expressly for use in the Registration Statement or
Prospectus.
(d) To the best of the Company's knowledge and information, each
firm of accountants which certified any of the financial statements
included in the Registration Statement is an independent certified
public accountant as required by the 1933 Act and the 1933 Act
Regulations. The financial statements (including the related notes)
included in the Registration Statement, any Preliminary Prospectus and
the Prospectus present fairly the financial condition, the results of
operations, changes in financial condition and cash flows of the
Company at the dates and for the periods indicated and have been
prepared in accordance with generally accepted accounting principles
and accounting requirements of the 1933 Act and the 1933 Act
Regulations applied on a consistent basis throughout the periods
indicated. All adjustments necessary for a fair presentation of results
for such periods have been made. The selected financial data included
in the Registration Statement, any Preliminary Prospectus and the
Prospectus present fairly the information shown therein and have been
compiled on a basis consistent with the audited financial statements
included in the Registration Statement, any Preliminary Prospectus and
the Prospectus.
-3-
<PAGE>
(e) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Colorado, with full
power and authority (corporate and other) to own or lease its
properties and conduct its business as described in the Prospectus, and
is duly qualified to do business and is in good standing in each
jurisdiction in which the character of the business conducted by it or
the location of the properties owned or leased by it makes such
qualification necessary, except where the failure to do so would not
have a material adverse effect. The Company holds all material
licenses, certificates, permits, consents, orders and approvals or
other authorizations necessary to lease or own, as the case may be, and
to operate its property and conduct its business as described in the
Prospectus. None of the activities or businesses of the Company is in
violation of any law, rule, regulation or order of the United States,
any state, county or locality, or of any agency or body of the United
States or of any state, county or locality, other than violations which
would not have a material adverse effect upon the Company. The Company
has no "subsidiaries" (as that term is defined in the 1933 Act
Regulations) and has not had any subsidiaries since its formation,
other than the subsidiary or subsidiaries ("Subsidiary" or
"Subsidiaries") identified in the Registration Statement. (As used
herein, the term "Company," when used with respect to any period during
which any Subsidiary was a subsidiary of the Company, shall be deemed
to include such Subsidiary or Subsidiaries.) The Company does not own
or hold any interest in any corporation, partnership, joint venture or
other entity except as described in the Registration Statement and
Preliminary Prospectus and the Prospectus.
(f) The capitalization of the Company is or will be as set forth
under the caption "Capitalization" in the Prospectus, and the Units and
the Underlying Securities conform or will conform to the description
thereof contained under the caption "Description of Securities" in the
Prospectus. The outstanding shares of Common Stock have been, and the
Units and their components upon issuance and delivery and payment
therefor in the manner contemplated by this Agreement, will be, duly
authorized, validly issued, fully paid and nonassessable. The shares of
Common Stock are not subject to preemptive rights or other rights to
subscribe for or to purchase additional securities from the Company, or
subject to any restriction upon voting or transfer, pursuant to the
Company's Articles of Incorporation or Bylaws, as amended, or any
agreement (except as provided in Section 4(u) hereof) or other
instrument to which the Company is a party or by which it is bound.
Neither the filing of the Registration Statement nor the offering or
sale of the Units, Warrants or Shares, as contemplated by this
Agreement and the Representatives' Warrant Agreement, gives rise to any
rights other than those which have been waived or satisfied.
(g) Except as may be described in or contemplated by the
Prospectus, there has not been any material adverse change in, or any
adverse development that materially affects, the business, properties,
financial condition, results of operations or prospects of the Company
from the date as of which information is given in the Prospectus; and
except as described in the Prospectus, the Company has not, directly or
indirectly, incurred any
-4-
<PAGE>
material liabilities or obligations, direct or contingent, not in the
ordinary course of business, other than obligations related to the
offering of the Units and as otherwise provided herein, or entered into
any transaction not in the ordinary course of business which is
material to the business of the Company and required to be disclosed in
the Prospectus. Except as described in or contemplated by the
Prospectus, there has not been any material change in the capital stock
of, or any incurrence of long-term debt by, the Company, or any
issuance or grant of options, warrants or rights to purchase the
capital stock of the Company, or any declaration or payment of any
dividend on the capital stock of the Company from the date as of which
information will be given in the Prospectus.
(h) The Company is not, nor with the giving of notice or lapse of
time or both will it be, in violation of or in default under, nor will
the execution or delivery hereof or of the Representatives' Warrant
Agreement or consummation of the transactions contemplated hereby or
thereby result in a violation of, or constitute a default that would be
material to the business of the Company under the Company's Articles of
Incorporation or Bylaws, as amended, or other governing documents of
the Company, or any material agreement, deed of trust, indenture or
other instrument, to which the Company is a party or by which it is
bound, or to which any of its properties is subject, nor will the
Company's performance of its obligations hereunder or under the
Representatives' Warrant Agreement violate any law, rule,
administrative regulation or decree of any court or any governmental
agency or body having jurisdiction over the Company or any of its
properties, or result in the creation or imposition of any lien,
charge, claim or encumbrance upon any property or asset of the Company.
Except for an order of the Commission declaring the Registration
Statement effective, and except for permits and similar authorizations
required under the securities or "blue sky" laws of certain states of
the United States and for such permits and authorizations which have
been obtained, no consent, approval, authorization or order of any
court, governmental agency or body or financial institution is required
in connection with the consummation of the transactions contemplated by
this Agreement or the Representatives' Warrant Agreement.
(i) This Agreement, including the Representatives' Warrant
Agreement and the other agreements of the Company provided for herein,
has been duly authorized, executed and delivered by the Company and
constitute the valid and binding agreement of the Company enforceable
against the Company in accordance with its terms, except insofar as
rights to indemnity and/or contribution may be limited by federal or
state securities laws or the public policy underlying such laws and
except as enforcement may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting creditors' rights
generally, and be subject to general principles of equity (regardless
of whether such enforceability is considered in a proceeding in equity
or at law). The Units, Warrants and Shares have been duly authorized
for issuance and sale, and, when issued pursuant to this Agreement and
the Representatives' Warrant Agreement against payment of the
consideration therefor, will be validly issued, fully paid and
nonassessable and not subject to preemptive rights. The Shares issuable
upon exercise of the Warrants have been duly
-5-
<PAGE>
authorized and reserved for issuance upon exercise of the Warrants and
when issued upon payment of the consideration therefor will be validly
issued, fully paid and nonassessable shares of Common Stock and not
subject to preemptive rights.
(j) The Company has good and marketable title to each of the items
of real property and good title to each of the items of personal
property which are described or referred to in the Prospectus as being
owned by it and valid and enforceable leasehold interests in each of
the items of real and personal property which are referred to in the
Prospectus as being leased by it, in each case free and clear of all
liens, encumbrances, claims, security interests and defects, other than
those described in the Prospectus and those which do not and will not
have a material adverse effect upon the value and the Company's use of
such properties or the Company's business, financial condition or
results of operations.
(k) There is no litigation or governmental proceeding to which the
Company is a party or to which any property of the Company is subject
or which is pending in which the Company has been served or, to the
best knowledge of the Company, is otherwise pending or threatened
against the Company, nor is there any basis therefor, which will result
in any material adverse change in the financial condition, results of
operations, business or prospects of the Company or which is required
to be disclosed in the Prospectus which has not been disclosed in the
Prospectus. To the Company's knowledge, no labor disturbance by the
employees of the Company exists or is imminent which, if it now exists
or comes to exist, is expected materially to affect adversely the
financial condition, results of operations, business or prospects of
the Company or which is required to be disclosed in the Prospectus.
(l) The descriptions in the Registration Statement and the
Prospectus of material contracts and other documents are accurate in
all material respects and present fairly the information required to be
disclosed, and there are no contracts or other documents required to be
described in the Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement under the 1933 Act or the 1933
Act Regulations which have not been so described or filed as required.
Each material contract or other instrument (however characterized or
described) to which the Company is a party or by which its property or
business is or may be bound or affected and to which reference is made
in the Prospectus has been duly and validly executed by the Company, is
in full force and effect in all material respects and is enforceable
against the parties thereto in accordance with its terms, subject, as
to enforcement of remedies, to applicable bankruptcy, insolvency,
reorganization, moratorium and other laws affecting the rights of
creditors generally and the discretion of courts in granting equitable
remedies; and none of such contracts or instruments has been assigned
by the Company and neither the Company nor, to the best knowledge of
the Company, any other party is in material default thereunder, which
default would have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company;
and, to the best knowledge of the Company, no event has occurred which,
with the lapse of time or the giving of notice, or both, would
constitute a default thereunder,
-6-
<PAGE>
which would have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company. None of
the material provisions of such contracts or instruments violates any
existing applicable law, rule, regulation, judgment, order or decree of
any governmental agency or court having jurisdiction over the Company
or any of its assets or business including, without limitation, those
relating to health care or employee benefits, which violation would
have a material adverse effect on the business, prospects, financial
condition or results of the operations of the Company.
(m) The Company has filed with the appropriate federal, state and
local governmental agencies, and all foreign countries and political
subdivisions thereof, all tax returns, including franchise tax returns,
which are required to be filed or has duly obtained extensions of time
for the filing thereof and has paid all taxes shown on such returns and
all assessments received by it to the extent that the same have become
due. The provisions for income taxes payable, if any, shown on the
financial statements filed with or as part of the Registration
Statement are sufficient for all accrued and unpaid foreign and
domestic taxes, whether or not disputed, and for all periods to and
including the dates of such financial statements. The Company has not
executed or filed with any taxing authority, foreign or domestic, any
agreement extending the period for assessment or collection of any
income taxes and is not a party to any pending action or proceeding by
any foreign or domestic governmental agency for assessment or
collection or taxes; and no claims for assessment or collection of
taxes have been asserted against the Company.
(n) The Company is not in violation of or in default under (i) any
term or provision of its Articles of Incorporation or Bylaws, as
amended; (ii) any material term or provision or any material financial
covenant of any indenture, mortgage, contract, commitment or other
agreement or instrument to which it is a party or by which it or any of
its property or business is or may be bound or affected; or (iii) any
existing applicable law, rule, regulation, judgment, order or decree of
any governmental agency or court, domestic or foreign, having
jurisdiction over the Company or any of its properties or business the
violation of which would have a material adverse effect on the Company.
The Company owns, possesses or has obtained all governmental and other
(including those obtainable from third parties) licenses, permits,
certifications, registrations, approvals or consents and other
authorizations necessary to own or lease, as the case may be, and to
operate its properties, whether tangible or intangible, and to conduct
any of the business operations of the Company as presently conducted
(except where the Company's failure to obtain such license, permit,
certification, registration, approval, consent or other authorization
would not materially adversely affect the Company) and all such
licenses, permits, certifications, registrations, approvals, consents
and other authorizations are outstanding and in good standing, and
there are not any proceedings pending or, to the best of the knowledge
of the Company, threatened, seeking to cancel, terminate or limit such
licenses, permits, certifications, registrations, approvals or consents
or other authorizations.
-7-
<PAGE>
(o) The books, records and accounts of the Company accurately and
fairly reflect, in reasonable detail, the transactions in and
dispositions of assets of, and results of operations of, the Company.
The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific
authorization; (ii) transactions are recorded in a manner sufficient to
permit preparation of financial statements in conformity with
applicable generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorizations; and
(iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences. The Company's internal accounting controls
and procedures are sufficient to cause the Company to comply in all
material respects with applicable law.
(p) Neither the Company nor to the Company's knowledge any officer,
director or employee of or agent acting on behalf of the Company has at
any time (i) made any contributions to any candidate for political
office in violation of law, or failed to disclose fully any
contributions to any candidate for political office in accordance with
any applicable statute, rule, regulation or ordinance requiring such
disclosure, (ii) made any payment to any governmental officer or
official, or other person charged with similar public or quasi-public
duties, other than payments required or allowed by applicable law,
(iii) made any payment outside the ordinary course of business to any
purchasing, selling, licensing or reselling agent or person charged
with similar duties of any entity to which the Company sells or from
which the Company buys products, services or rights for the purpose of
influencing such agent or person to buy products, services or rights
from or sell products, services or rights to the Company, or (iv)
engaged in any transaction on behalf of the Company, maintained any
bank account for the Company, or used any corporate funds of the
Company, except for transactions, bank accounts and funds which have
been and are reflected in the normally maintained books and records of
the Company.
(q) The Company's properties are adequately insured by insurors of
recognized financial responsibility against loss or damage by fire and
other appropriate risks (including computer failure), the Company's
performance is adequately guaranteed by bonding firms of recognized
financial responsibility in accordance with all requirements under its
agreements and all applicable regulations and rules applicable to its
agreements; and the Company maintains such other insurance and
performance guaranty bonds as are prudent or customarily maintained by
companies of comparable size and in the same or similar business and in
the same or similar localities; the Company has not been refused any
insurance or bonding coverage sought or applied for; and the Company
has no reason to believe that it will not be able to renew its existing
insurance coverage and performance guaranty bonds as and when such
coverage expires or to obtain similar coverage from similar insurors
and bonding firms as may be necessary to continue its business at a
cost that would not
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<PAGE>
materially and adversely affect the condition (financial or otherwise),
business prospects, net worth or results of operations of the Company,
except as described in or contemplated by the Prospectus.
(r) The Company owns or possesses adequate and enforceable rights
to use all patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights, copyright
applications, licenses, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures) and other similar rights and proprietary
knowledge (collectively, "Intangibles") employed by it in connection
with the operation of its business, including, without limitation, the
Intangibles described or referred to in the Prospectus and any
Intangibles incorporated into any product of the Company described in
the Prospectus. The Company is not in material breach of, or in
material default under, any license, reseller, integrator or other
agreement or instrument to which any Intangibles are subject. All third
parties whose consent to assignment of any agreement with respect to
the Intangibles or any product of the Company or any third party which
incorporates any Intangibles have consented to such assignment to the
Company. Except as may be set forth in the Prospectus, the Company has
not received any notice of infringement of or conflict with, and to
best of the Company's knowledge, the Company is not infringing or in
conflict with, asserted rights of others with respect to any Intangible
which, singly or in the aggregate, if the subject of a decision, ruling
or finding unfavorable to the Company, would materially and adversely
affect the financial condition, results of operations, business or
prospects of the Company.
(s) There are no outstanding loans or advances or guarantees of
indebtedness by the Company to or for the benefit of any of the
officers or directors of the Company or owners of record of more than
five percent of the outstanding shares of Common Stock, or any of the
members of the families of any of them, which are required by the 1933
Act Regulations to be described in the Registration Statement, which
are not fully and adequately described therein.
(t) The Company is not, and, upon completion of the offering of the
Units and application of the net proceeds therefrom in the manner
contemplated under the caption "Use of Proceeds" in the Prospectus,
will not be, an "investment company" as defined in the Investment
Company Act of 1940, as amended.
(u) The Company has not taken and shall not take, directly or
indirectly, any action resulting in a violation of Rule 10b-6 or Rule
10b-7 under the Securities Exchange Act of 1934, as amended (the "1934
Act"), or designed to cause or result in, or which has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the Units or the Underlying Securities to
facilitate the sale or resale of any of such securities.
-9-
<PAGE>
(v) As of the effective date of the Registration Statement, the
Common Stock has been duly registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended and the rules and
regulations promulgated thereunder (the "1934 Act" and the "1934 Act
Regulations", respectively) and the Units, the Common Stock and the
Warrants have been approved for quotation on the National Association
of Securities Dealers Automated Quotation System ("NASDAQ") upon
official notice of issuance.
(w) No person (other than a person affiliated with either of you)
has rendered services of any nature whatsoever to the Company for which
such person has received compensation required to be aggregated with
the compensation to be received by the Underwriters in connection with
this offering and no person has any claim for services in the nature of
a finder's fee or brokerage fee with respect to this offering for which
the Company or any Underwriter may be responsible.
(x) The Company has retained a public relations firm acceptable to
the Company and you for a period of six months commencing with the Firm
Closing Date (as defined in Section 3 below).
(y) Within the three years prior to the filing of the Registration
Statement, neither the Company nor any predecessor or affiliate thereof
has sold any securities in violation of Section 5(a) of the 1933 Act.
No unregistered securities of the Company or any affiliate or a
predecessor of the Company have been sold within three years of the
date hereof except as stated in Part II of the Registration Statement.
(z) Any certificate signed by any officer of the Company and
delivered to you or to your counsel shall be deemed a representation
and warranty by the Company to you as to the matters covered thereby.
2. Purchase, Sale and Delivery of the Units and Representatives'
Warrant Units.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, and subject to the terms and conditions
herein set forth, the Company shall sell to the Underwriters the Firm
Units, and subject to the terms and conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase from the
Company, at a price per Unit of $_____, at the place and time
hereinafter specified, the number of Firm Units set forth opposite
their respective names in Schedule I hereto, subject to adjustment in
accordance with Section 7 hereof. The Underwriters agree to release the
Firm Units for resale to the public at the price of $____ per Firm Unit
promptly, in the judgment of the Representatives, after the effective
date of the Registration Statement on the terms set forth in the
Prospectus.
(b) On the basis of the representations, warranties, covenants and
agreements herein contained, and subject to the terms and conditions
herein set forth, for the sole
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<PAGE>
purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Units as contemplated by the
Prospectus, the Company hereby grants the Underwriters an option to
purchase, severally and not jointly, up to an aggregate of 210,000
Option Units in the aggregate. The purchase price per Unit to be paid
for the Option Units shall be the same price per Unit as for the Firm
Units. The option granted hereby may be exercised as to all or any part
of the Option Units at any time or times not more than 60 days
subsequent to the effective date of this Agreement. No Option Units
shall be sold and delivered unless the Firm Units previously have been,
or simultaneously are, sold and delivered. The right to purchase the
Option Units or any portion thereof may be surrendered and terminated
at any time upon notice to the Company by you.
(c) On the basis of the representations, warranties, covenants and
agreements herein contained, and subject to the terms and conditions
herein set forth, the Company shall sell to you individually, and/or
your designated officers, and not as the Representatives of the
Underwriters, at the Firm Closing Date, for $100, Representatives'
Warrants to purchase an aggregate of up to 140,000 Representatives'
Warrant Units. The price, terms and provisions of the Representatives'
Warrant Units and the respective rights and obligations of the Company
and the holders of the Representatives' Warrants and/or
Representatives' Warrant Units and the components thereof are set forth
in the Representatives' Warrant Agreement between the Company and the
Representatives and executed simultaneously herewith.
3. Time of Delivery and Payment. Delivery of certificates for the
Firm Units and certificates for the Option Units, to the extent that the option
to purchase the Option Units is exercised, as well as the Representatives'
Warrant Agreement and Representatives' Warrants, and the respective payments
therefor shall be made at the offices of Neidiger, Tucker, Bruner, Inc. at 300
Plaza Level, 1675 Larimer, Denver, Colorado 80202 (or such other place as
mutually may be agreed upon by you and the Company), at 10:00 A.M., Denver,
Colorado time, on the fourth full Business Day following the date the
Registration Statement becomes effective (the "Firm Closing Date") (it being
contemplated that the determination of the public offering price of the Units
shall occur after the 4:30 p.m EST close of trading on the New York Stock
Exchange on the effective date and most secondary trading will not occur until
after the opening of the market on the next business day); provided that such
date may be accelerated or extended by agreement of the Company and you or
postponed pursuant to the provisions of Section 7 hereof.
The option to purchase Option Units granted in Section 2 hereof may be
exercised during the term thereof by written notice to the Company from you.
Such notice shall set forth the aggregate number of Option Units as to which the
option is being exercised and the time and date during the term thereof, as
determined by you, when the Option Units are to be delivered (the "Option
Closing Date"). Delivery and payment for such Option Units are to be at the
offices set forth above for delivery and payment of the Firm Units. (The Firm
Closing Date and the Option Closing Date are herein individually referred to as
the "Closing Date" and collectively referred to herein as the "Closing Dates.")
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<PAGE>
Delivery of certificates for the Firm Units and the Option Units shall
be made by or on behalf of the Company to you, for the respective accounts of
the Underwriters, against payment by you of the purchase price therefor by
either wire transfer of immediately available funds or certified or official
bank check or checks payable in Denver Clearing House funds to the order of the
Company. The certificates for the components of the Units shall be registered in
such names and denominations as you shall have requested at least two full
Business Days prior to the applicable Closing Date, and shall be made available
for checking and packaging at a location as may be designated by you at least
one full Business Day prior to such Closing Date. Time shall be of the essence,
and delivery at the time and place specified in this Agreement is a further
condition to the obligations of each Underwriter.
4. Covenants. The Company covenants and agrees with each
Underwriter as follows:
(a) The Company shall comply with the provisions of and make all
requisite filings with the Commission pursuant to Rule 430A and Rule
424(b) under the 1933 Act and 1933 Act Regulations and notify you
promptly, and confirm in writing, of all such filings. The Company
shall use its best efforts to cause the Registration Statement and any
amendment thereto to become effective and, upon notification from the
Commission that the Registration Statement or any amendment thereto has
become effective, shall so advise you promptly, in writing. The Company
shall notify you promptly of any request by the Commission for any
amendment of or supplement to the Registration Statement or the
Prospectus or for additional information; the Company shall carefully
prepare and file with the Commission promptly upon your request, any
amendment of or supplement to the Registration Statement or Prospectus
which, in your reasonable opinion, may be necessary or advisable in
connection with the distribution of the Units; and the Company shall
not file any amendment of or supplement to the Registration Statement
or the Prospectus which is not approved by you after reasonable notice
from the Company to you, which approval shall not be unreasonably
withheld or delayed. The Company shall advise you promptly of the
issuance by the Commission, any state securities commission or any
other regulatory body of any stop order or other order suspending the
effectiveness of the Registration Statement, suspending or preventing
the use of the Prospectus or suspending the qualification of the Units
and the securities comprising the Units for offering or sale in any
jurisdiction, or of the institution of any proceedings for any such
purpose; and the Company shall use its best efforts to prevent the
issuance of any stop order or other such order and, should a stop order
or other such order be issued, to obtain as soon as possible the
lifting thereof.
(b) The Company shall furnish to the Representatives and their
counsel, from time to time and without charge, a reasonable number of
copies of the Registration Statement as originally filed and as
subsequently amended, of which at least four copies of each such filing
shall be manually signed and shall include all exhibits.
(c) Within the time during which a Prospectus relating to the Units
is required to be delivered under the 1933 Act and 1933 Act
Regulations, the Company shall comply
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<PAGE>
with all requirements imposed upon it by the 1933 Act or the 1934 Act,
as now or hereafter amended, and by the 1933 Act Regulations, as from
time to time in force, so far as is necessary to permit the continuance
of sales of or dealings in the Units as contemplated by the provisions
hereof and the Prospectus. If during such period any event occurs as a
result of which the Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of
the circumstances then existing, not misleading, or if during such
period it is otherwise necessary, in the opinion of the Company or in
your opinion, to amend the Registration Statement or supplement the
Prospectus to comply with the 1933 Act, the Company or you, as the case
may be, shall promptly notify the other party and the Company shall
amend the Registration Statement or supplement the Prospectus (at the
expense of the Company) so as to correct such statement or omission or
effect such compliance.
(d) The Company shall cooperate with you and your counsel in
connection with the registration or qualification of the Units for sale
under the "blue sky" laws of such jurisdictions which you shall
designate and to continue such qualifications in effect for as long a
period as you may reasonably request, except that in no event shall the
Company be obligated in connection therewith to qualify as a foreign
corporation or as a dealer in any jurisdiction where it is not already
so qualified, or to execute a general consent for service of process in
suits other than those arising out of the offer and sale of the Units,
or to take any action which would subject it to taxation in any
jurisdiction where it is not now so subject.
(e) The Company shall make generally available to its security
holders (and shall deliver to you), in the manner contemplated by Rule
158(b) under the 1933 Act, as soon as practicable but in any event not
later than 45 days after the end of its fiscal quarter in which the
first anniversary date of the effective date of the Registration
Statement occurs, an earnings statement satisfying the requirements of
Section 11(a) of the 1933 Act covering a period of at least twelve
consecutive months beginning after the effective date of the
Registration Statement.
(f) For a period of five (5) years from the effective date of the
Registration Statement, the Company will deliver to you on a timely
basis (i) a copy of each report, including, without limitation, reports
on Form 8-K, 10-C, 10-K (or 10-KSB) and 10-Q (or 10-QSB) or any
successor form and exhibits thereto filed with or furnished by the
Company to the Commission, any securities exchange or the National
Association of Securities Dealers, Inc. (the "NASD") on the date each
such report or document is so filed or furnished; (ii) as soon as
practicable, copies of any reports or communications (financial or
other) of the Company mailed to its security holders; (iii) as soon as
practicable, a copy of any Schedule 13D, 13G, 14D-1, 13E-3 or 13E-4 (or
any successor form) received or prepared by the Company from time to
time; and (iv) such additional information concerning the business and
financial condition of the Company as you may from time to time
reasonably request and which can be prepared or obtained by the Company
without unreasonable effort or expense.
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<PAGE>
(g) The Company shall apply the net proceeds of the sale of the
Firm Units and any Option Units as set forth in the Prospectus under
the caption "Use of Proceeds." In particular, the Company shall prior
to May 30, 1996 pay in full the Company's obligations to ENTEX and the
Company shall prior to May 30, 1996 pay in full the outstanding
principal amount and all interest and principal payable in respect of
the Company's obligations to BankOne, regardless of the extension of
due date on the BankOne obligation executed between the Company and
BankOne in February 1996 on any forbearance of any default in respect
of the death of any Co-Borrower. Prior to the full application of such
net proceeds in the manner therein contemplated, the Company shall
invest or reinvest such proceeds only in high quality, short-term
investments or cash equivalents as described in the Prospectus.
(h) The Company shall file such reports with the Commission with
respect to the sale of the Units and the application of the proceeds
therefrom as may be required in accordance with Rule 463 under the 1933
Act.
(i) The Company shall pay or cause to be paid (i) all expenses
(including stock transfer taxes, if any) incurred in connection with
the delivery of the Firm Units and Option Units to the Underwriters,
(ii) all fees and expenses (including, without limitation, fees and
expenses of the Company's accountants and counsel) in connection with
the preparation, printing, filing, delivery and shipping of the
Registration Statement (including the financial statements therein and
all amendments and exhibits thereto), each Preliminary Prospectus and
the Prospectus as amended or supplemented, and the copying, delivery
and shipping (but not preparation) of the Underwriting Agreement and
other underwriting documents, including Underwriters' Questionnaires,
Underwriters' Powers of Attorney, Blue Sky Memoranda, Agreements Among
Underwriters and Selected Dealer Agreements and any letters
transmitting the offering materials to selling group members (including
costs of mailing and shipment); (iii) all filing fees and fees for
legal services and disbursements of Representatives' counsel incurred
in connection with the registration/qualification of the Units under
state securities laws; (iv) the filing fees, listing fees and costs of
the NASD and NASDAQ; (v) applicable listing or similar fees; (vi) the
cost of printing certificates representing the components comprising
the Units; (vii) the cost and charges of the transfer agent or
registrar for the Units and Underlying Securities; (viii) the costs of
"tombstone" advertisements in such publications as you shall reasonably
request, as well as the costs of any other advertising undertaking at
the Company's request, including all graphic slide costs (not to exceed
$3,000 in the aggregate); (ix) the costs of preparing, printing and
distributing bound volumes for you and your counsel; (x) the costs of
all due diligence meetings to be held in cities selected by mutual
agreement of the Company and you; provided, however, each of the
Company and you shall be solely responsible for the travel expenses of
their respective employees or representatives to attend such meetings;
and (xi) all other costs and expenses incident to the performance of
the obligations of the Company under this Agreement which are not
otherwise provided for in this section. In addition, the Company shall
also pay to you, individually and not in your capacity as
Representatives, at the
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<PAGE>
applicable Closing Date, a nonaccountable expense allowance equal to 3%
of the initial public offering price of the Units purchased on such
Closing Date (including Option Units purchased pursuant to the option
granted pursuant to Section 2 hereof). If the sale of the Units
provided for herein is not consummated by reason of any termination of
this Agreement pursuant to Section 8(b) hereof, or by reason of any
failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed or because any condition of the
Underwriter's obligations set forth in Section 5 herein is not
fulfilled, the Company shall reimburse the Representatives for all of
the Representatives' accountable out-of-pocket expenses (including
reasonable fees and disbursements of Representatives' counsel) actually
incurred in connection with the investigation, preparing to market and
marketing of the Units or in contemplation of performing
Representatives' obligations hereunder, such reimbursement not to
exceed in the aggregate $_________. The Representatives acknowledge
that $25,000 has been paid by the Company to be applied against the
stated expense allowance.
(j) The Company, at its expense, shall furnish the holders of its
Common Stock, Units and Underlying Securities with annual reports
containing audited financial statements prepared in accordance with the
applicable accounting requirements of the 1933 and 1934 Acts and the
1933 and 1934 Act Regulations and reported on by its independent
certified accountants. For five (5) years after the First Closing Date,
at its expense, the Company shall furnish to you (i) as soon as
practicable after the end of each fiscal year, a balance sheet of the
Company and any Subsidiary as at the end of such fiscal year together
with statements of income or operations, shareholders' equity and cash
flows of the Company for such fiscal year, all in reasonable detail and
accompanied by a copy of the certificate or report thereon of the
Company's independent certified public accountants; (ii) as soon as
they are available, a copy of all reports (financial or other) mailed
to the Company's shareholders; (iii) as soon as they are available, a
copy of all reports and financial statements furnished to or filed with
the Commission; and (iv) such other information as you may from time to
time reasonably request and which can be prepared or provided without
unreasonable effort or expense.
(k) If and so long as the Company has an active subsidiary or
subsidiaries, the financial statements provided for in Section 4(j)
will be on a consolidated basis to the extent the accounts of the
Company and its subsidiary or subsidiaries are consolidated in reports
furnished to its shareholders generally. Separate financial statements
shall be furnished for all subsidiaries whose accounts are not
consolidated but which at the time are significant subsidiaries as
defined in the 1933 and 1934 Act Regulations.
(l) The Company shall continue to maintain the system of internal
accounting controls described in Section 1(o).
(m) For a period of five (5) years from the effective date of the
Registration Statement, the Company shall comply with all filing and
reporting requirements of the 1934
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<PAGE>
Act which may from time to time be applicable to the Company, including
those necessary to maintain the registration of the Common Stock under
Section 12(g) of the 1934 Act.
(n) The Company shall use its best efforts to maintain the
inclusion of the Units, the Common Stock and the Warrants for quotation
on NASDAQ. If the Common Stock qualifies at a future time for quotation
on the National Market System of NASDAQ ("NASDAQ NMS"), the Company
will use its best efforts to obtain inclusion of the Common Stock and
Warrants for quotation of NASDAQ NMS.
(o) For a period of five (5) years from the effective date of the
Registration Statement, the Company shall (i) use its best efforts to
register and remain covered by the Corporation Records Service
(including annual report information) published by Standard & Poor's
Corporation; (ii) retain a transfer agent for the Common Stock
reasonably acceptable to you and, at your request, shall cause such
transfer agent to provide you on a monthly basis with copies of the
Company's stock transfer sheets and, as and when requested by you, a
current list of the Company's security holders, including a list of the
beneficial owners of securities held by Depository Trust Company and
any other nominees; and (iii) retain such accounting firm as its
independent public accountants as shall be reasonably acceptable to
you.
(p) The Company shall take such steps as shall be necessary to
ensure that neither the Company nor any subsidiary thereof shall become
an "investment company" within the meaning of such term under the
Investment Company Act of 1940, as amended, and the rules and
regulations thereunder.
(q) Prior to the filing and closing of the public offering
contemplated by this Agreement, no discussions will be held by any
representative of the Company with any member of the news media or
release any information or other publicity about the Company, its
business or its management without the approval of counsel to the
Company and Representatives.
(r) For as long as the Company's Common Stock, or other securities
are registered under the 1934 Act, to comply in all material respects
with the 1934 Act and 1934 Act Regulations thereunder and to hold
annual meetings of shareholders for the election of directors within
180 days following the end of the Company's fiscal year.
(s) The Company shall use its best efforts to obtain and to cause
to be in force within 60 days of the effective date of the Registration
Statement policies of life insurance in the face amounts and on the
lives of such key employees of the Company as designated by the
Representatives; and each policy shall identify the Company as the
beneficiary thereof.
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<PAGE>
(t) For a period of 12 months from the effective date of the
Registration Statement, the Company shall not authorize or otherwise
effect any change in the compensation to any officer and/or director of
the Company without 30 days' prior written notice to you.
(u) Prior to the effective date of the Registration Statement, the
Company shall cause (i) each officer, director of the Company and each
holder of 5% or more of the Company's Common Stock (or securities
convertible into Common Stock) to furnish to you their written
agreement, in form and content satisfactory to your counsel, whereby
each such person shall not sell, pledge, assign or otherwise dispose or
contract to dispose of any of their shares of Common Stock (or
securities convertible into Common Stock) for a period of 12 months
following the effective date of the Registration Statement without the
prior written consent of Neidiger, Tucker, Bruner, Inc., and (ii) each
other holder of the Company's Common Stock (or securities convertible
into Common Stock) to furnish to you their written agreement, in form
and content satisfactory to your counsel, whereby each such person
shall not sell, pledge, assign or otherwise dispose or contract to
dispose of any of their shares of Common Stock (or securities
convertible into Common Stock) for a period of 6 months from the
effective date of the Registration Statement without the prior written
consent of Neidiger, Tucker, Bruner, Inc. The foregoing agreements
shall also provide that any sale of shares of Common Stock by such
persons during the applicable restrictive period, and which sale is
subject to Rule 144 under the 1933 Act (or comparable provision under
the 1933 Act) shall be made in transactions by or directly with
Neidiger, Tucker, Bruner, Inc.
(v) So long as any Warrants are outstanding, the Company shall use
its best efforts to cause post-effective amendments to the Registration
Statement to become effective in compliance with the 1933 Act and
without any lapse of time between the effectiveness of any such post-
effective amendments and cause a copy of each Prospectus, as then
amended, to be delivered to each holder of record of a Warrant and to
furnish to the Underwriters and each dealer as many copies of each such
Prospectus as the Underwriters or dealer may reasonably request.
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<PAGE>
(w) On the Firm Closing Date, the Company and NTB shall enter into
an agreement which shall provide that NTB shall have the right to
designate one person as an advisor to the Company's Board of Directors.
Such advisor will be reimbursed for his or her expenses in attending
meetings of the Board of Directors and will receive cash compensation
equal to that received by any other outside director but will have no
power to vote as a director. Such person shall be indemnified by the
Company against any claim arising out of his or her participation in
meetings of the Board of Directors to the same extent as directors.
During the stated 3 year period, NTB's advisor to the Company's Board
of Directors will be (i) invited to attend all meetings of the
Company's Board of Directors; (ii) provided with a copy of all Actions
by Unanimous Written Consent of the Board of Directors in Lieu of an
Actual Meeting; (iii) furnished with a copy of all public filings by
the Company and Company press releases as released; (iv) updated by the
Company's management, on at least a quarterly basis, regarding the
Company's activities, prospects and financial condition; and (v)
advised immediately of material events to the extent consistent with
applicable law. During the subject 3 year period, the Company will hold
meetings of its Board of Directors at intervals of not less than 90
days each year. Any advisor to the Company's Board of Directors
designated by NTB also shall be acceptable to the Company, which
acceptance shall not be unreasonably withheld and such advisor(s) shall
each be required to execute an appointment letter representing that
such advisor will comply with certain responsibilities under the
federal securities laws with respect to Company information obtained by
such advisor in the attendance at meetings of the Board of Directors,
in a form to be agreed between the Company and NTB on the Firm Closing
Date.
(x) Upon the exercise of any Warrants after ______________________,
1997 (13 months after the effective date of the Registration
Statement), and assuming that the Company desires assistance to solicit
Warrant exercises, the Company will pay NTB a solicitation fee of 5% of
the aggregate exercise price of such Warrants which are exercised
through the efforts and with the assistance of NTB, if (i) the market
price of the Common
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Stock is greater than the exercise price of such Warrants on the date
of exercise, (ii) written confirmation by the warrantholder that the
exercise of the Warrant was solicited by NTB and that NTB is designated
to receive the solicitation fee, (iii) the Warrant is not held in a
discretionary account, (iv) disclosure of compensation arrangements has
been made in documents provided to the warrant holder (such as the
Prospectus) both as part of the original offering and at the time of
exercise and (v) the solicitation of the Warrant was not in violation
of Rule 10b-6 promulgated under the 1934 Act.
(y) On the Firm Closing Date, the Company shall enter into a
consulting agreement ("Consulting Agreement"), retaining NTB,
individually, and not as a Representative of the Underwriters, as
financial consultant to the Company for a period of 12 months for a fee
of $30,000 ($2,500 monthly for 12 months) all payable in full on the
Firm Closing Date. As financial consultant, NTB will advise the Company
as to market conditions, financial alternatives, resource allocation,
mergers, acquisition and other business combinations and other
investment banking services. Such consulting Agreement will also
provide for such compensation to NTB as shall be agreed between the NTB
and the Company for varying percentages not to exceed five percent (5%)
of any consideration paid or received by the Company or the Company's
shareholders in any transaction (including mergers and acquisitions)
consummated by the Company in which NTB introduced the other party to
the Company within 36 months from the Firm Closing Date if such
transaction is consummated within 36 months from the Firm Closing Date.
5. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters hereunder to purchase and pay for the Units are subject to
the accuracy, as of the date hereof and each Closing Date (as if made at such
Closing Date), of the representations and warranties of the Company contained
herein and any certificate of the Company pursuant to the terms hereof to the
performance by the Company of its obligations hereunder and to the following
additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and all filings required by Rule
424 and Rule 430A under the 1933 Act shall have been made within the
time period required by the 1933 Act Regulations prior to the Firm
Closing Date; no stop order suspending the effectiveness of the
Registration Statement or any amendment or supplement thereto shall
have been issued; no proceedings for the issuance of such an order
shall have been initiated or threatened; and any request of the
Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been
complied with to your satisfaction.
(b) You shall not have advised the Company that the Registration
Statement or Prospectus, or any amendment or supplement thereto,
contains an untrue statement of fact which, in your reasonable opinion,
is material, or omits to state a fact which, in your reasonable
opinion, is material and is required to be stated therein or is
necessary to make
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the statements therein, in light of the circumstances under which they
were made, not misleading.
(c) On each Closing Date, there shall have been furnished to you
the opinion (addressed to you as Representatives) of Chrisman, Bynum &
Johnson, P.C., Boulder, Colorado, special securities counsel for the
Company, dated such Closing Date and in form and substance reasonably
satisfactory to counsel for you and stating that it may be relied upon
by counsel for the Representatives in giving their opinion, if required
by you, to the effect that:
(i) Each of the Company and its subsidiaries has been duly
organized and is validly existing as a corporation in good
standing under the laws of Colorado, with full corporate power
and authority to own or lease its properties and conduct its
business as described in the Prospectus. The Company is duly
qualified to do business and is in good standing in each
jurisdiction, to the extent the character of the business
conducted by it or the location of the properties owned or
leased by it makes such qualification necessary, except to the
extent that the failure to so qualify does not have a material
adverse effect upon the Company.
(ii) The authorized, issued and outstanding share capital of
the Company is as set forth under the caption "Capitalization"
in the Prospectus and the Units, Common Stock, Representatives'
Warrants and Underlying Securities conform to the descriptions
thereof contained under the captions "Description of
Securities" and "Underwriting" in the Prospectus. The offering
and sale of securities pursuant to the Prospectus will not
violate the rights of any holder of the Company's outstanding
securities including its common stock, warrants or options, and
all required notices, consents or waivers required with respect
to any security holder pursuant to any Registration Right
Agreement(s) as referred to in the Prospectus have been given
by the parties thereto. The outstanding shares of Common Stock
have been, and the Units and each Unit component, upon issuance
and delivery and payment therefor in the manner herein
described will be duly authorized, validly issued, fully paid
and nonassessable. There are no preemptive or, except as
described in the Registration Statement, other rights to
subscribe for or to purchase from the Company, or any
restriction upon the voting or transfer of, any Common Stock
pursuant to the Company's Articles of Incorporation or Bylaws,
as amended, or, to the best knowledge of such counsel, any
agreement or other instrument to which the Company is a party
or by which it is bound, except restrictions under applicable
securities laws and as provided in Section 4(u) hereof.
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(iii) To the best of such counsel's knowledge, the Company
is not, nor with the giving of notice or lapse of time or both
would be, in violation of or in default under, nor will the
execution or delivery hereof or of the Representatives' Warrant
Agreement or Unit Warrant Agreement or consummation of the
transactions contemplated hereby or thereby result in a
violation of, or constitute a default under, the Company's
Articles of Incorporation or Bylaws, as amended, of the
Company, or any material agreement, indenture or other
instrument to which the Company is a party or by which it is
bound nor will the performance by the Company of its
obligations hereunder or under the Representatives' Warrant
Agreement or Unit Warrant Agreement violate any law, rule,
administrative regulation or decree of any court or any
governmental agency or body having jurisdiction over the
Company or any of its properties which would have a material
and adverse effect, or result in the creation or imposition of
any lien, charge, claim or encumbrance, upon any property or
asset of the Company.
(iv) Each of this Underwriting Agreement, the
Representatives' Warrant Agreement, the Unit Warrant Agreement
and the Warrants has been duly authorized, executed and
delivered by the Company, constitutes the valid and binding
agreement of the Company, and is enforceable against the
Company in accordance with its terms except insofar as rights
to indemnity and/or contribution may be limited by applicable
securities laws or the public policy underlying such laws and
except as enforcement may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting creditors'
rights generally, and be subject to general principles of
equity (regardless of whether such enforceability is considered
in a proceeding in equity or at law).
(v) The Warrant Shares (including those issuable upon
exercise of the Representatives' Warrants) and Representatives'
Warrant Units have been duly authorized and reserved for
issuance and, when issued and delivered in accordance with the
terms of this Agreement and the Representatives' Warrant
Agreement, respectively, will be duly and validly issued, fully
paid and nonassessable.
(vi) The certificates representing the Underlying Securities
and the Representatives' Warrants are in due and proper form.
(vii) The information, if any, required to be set forth in
the Registration Statement in answer to Item 9 of Form SB-2
(insofar as it relates to such counsel) is to the best of such
counsel's knowledge accurately and adequately set forth therein
in all material respects.
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(viii) To the best of such counsel's knowledge, all
descriptions in the Prospectus of statutes, regulations, legal
or governmental proceedings, contracts and other documents and
the description of the consequences to the Company of such
laws, proceedings or documents are accurate and fairly present
the information required to be shown in all material respects;
and such counsel does not know of any statutes, regulations,
proceedings, contracts or documents of a character required to
be summarized or described in the Prospectus or to be filed as
exhibits to the Registration Statement which are not so
summarized, described or filed, nor does such counsel know of
any pending or threatened litigation or any governmental
proceeding, statute or regulation required to be described in
the Prospectus which is not so described.
(ix) To the best of such counsel's knowledge, the Company
owns or has adequate and enforceable rights to use each of the
Intangibles (as defined in Section 1(r)) used in connection
with the operation of the Company's business, including,
without limitation, the Intangibles described or referred to in
the Prospectus and any Intangibles incorporated into any
product of the Company described in the Prospectus, and all
statements with respect to the Intangibles, including
statements with respect to products of the Company which
incorporate any Intangibles, are accurate and fairly present
the information required to be presented in all material
respects.
(x) To the best of such counsel's knowledge, no holder of
any securities of the Company has any right to require
registration of shares of Common Stock or other securities of
the Company under the 1933 Act, except as any such right may
arise under the Representatives' Warrant Agreement and certain
Registration Rights Agreements among the Company and the
holders of all its outstanding Common Stock as set forth in
Part II of the Registration Statement, including any
registration rights applicable to any options or warrants
heretofore granted by the Company and all rights to require
registration in connection with the offering and sale of
securities described in the Prospectus, pursuant to the
Registration Rights Agreement(s) or any similar agreement to
which the Company is a party have been effectively waived by
all parties for the applicable periods stated in Section 4(u).
The description of the Registration Rights Agreement set forth
in the Prospectus is accurate and fairly presents the
information required to be shown in all material respects.
(xi) The presently outstanding shares of Common Stock of the
Company were issued in transactions which were not subject to
the registration provisions of the 1933 Act and applicable
state securities laws, except that such opinion shall not
include an opinion regarding subjective
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investment intent of purchasers in any private placement. To
the best knowledge of such counsel, there is a reasonable basis
to conclude that neither the offering nor sale of any presently
outstanding shares of Common Stock will be integrated with the
offering of the Units for purposes of registration under the
Securities Act, or qualification under any state securities
laws.
(xii) Except for the order of the Commission declaring the
Registration Statement effective under the 1933 Act, and except
for permits and similar authorizations required under the
securities or "blue sky" laws of certain jurisdictions and for
such permits and authorizations which have been obtained, no
consent, approval, authorization or order of any federal or
state court, governmental agency or body is required in
connection with the consummation by the Company of the
transactions contemplated by this Agreement, the Warrants or
the Representatives' Warrant Agreement.
(xiii) The Registration Statement and any post-effective
amendments thereto have become effective under the 1933 Act
and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has
been issued and, to the best of such counsel's knowledge, no
proceedings for that purpose have been instituted or are
pending before or threatened by the Commission or any state of
the United States or other regulatory body and all filings
required by Rule 424 under the 1933 Act in connection with the
public offering of the Units have been made within the time
periods required; and the Registration Statement and the
Prospectus and any amendment or supplement thereto, as of their
respective effective dates, comply as to form in all material
respects with the requirements of the 1933 Act (except that
counsel need express no opinion with respect to the financial
statements, management's discussion and analysis or other
financial data included therein).
(xiv) To the best of such counsel's knowledge, the Company
has reasonable grounds to believe that it meets all the
requirements for filing on Form SB-2.
(xv) The Company is not, and following completion of the
offering of the Units and receipt and intended investment of
proceeds therefrom as described in the Prospectus, will not be,
an "investment company" as defined in the Investment Company
Act of 1940, as amended.
In rendering the foregoing opinion, counsel may state that such
opinion is limited to federal and applicable state law, and rely, as to
matters of fact, upon certificates of responsible officers of the
Company and on certificates of public
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officials, and may base its opinion upon such reasonable investigations
and assumptions as shall be set forth in such opinion. In rendering
such opinion such counsel may rely, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to
counsel to you) of other counsel familiar with the applicable laws and
admitted to practice in the applicable jurisdiction. The opinion of
such counsel for the Company shall state that the opinion of any such
other counsel is in form satisfactory to such counsel and that in their
opinion the Representatives and they are justified in relying thereon.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of
the Company, representatives of the independent public accountants for
the Company, representatives of the Representative and counsel for the
Representative at which the contents of the Registration Statement and
related matters were discussed and, although such counsel has not
independently verified, is not passing upon and does not assume any
responsibility for, the accuracy, completeness or fairness of the
statements contained in the Registration Statement, no facts have come
to the attention of such counsel that lead it to believe that the
Registration Statement, as of the date it is declared effective by the
Commission, contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus as
of the Closing Date includes an untrue statement of a material fact or
omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading (it being understood that such counsel need
not comment as to the financial statements, management's discussion and
analysis, and other financial data included in the Registration
Statement, and the Prospectus or the exhibits to the Registration
Statement).
(d) There shall have been furnished to you the certificate, dated
the Closing Date and addressed to you as Representatives, signed by the
President and Chief Executive Officer and by the Treasurer and Chief
Financial Officer of the Company, to the effect that (i) the
representations and warranties of the Company contained in Section 1 of
this Agreement are true and correct as if made at and as of such
Closing Date, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
at or prior to such Closing Date; (ii) no stop order suspending the
effectiveness of the Registration Statement has been issued, and no
proceedings for that purpose to their knowledge have been initiated or
threatened; (iii) the signers of said certificate have carefully
examined the Registration Statement and the Prospectus, and any
amendments or supplements thereto, and such documents contain all
statements and information required to be included therein, and do not
include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; and (iv) since the effective date of
the Registration Statement, there
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<PAGE>
has occurred no event required to be set forth in an amendment or
supplement to the Registration Statement or the Prospectus which has
not been so set forth.
(e) Since the effective date of the Registration Statement under
the 1933 Act, the Company shall not have sustained any loss by fire,
flood, accident or other calamity, nor shall it have become a party to
or the subject of any litigation, individually or in the aggregate,
which is materially adverse to the Company, nor shall there have been a
material adverse change in the general affairs, business, key
personnel, capitalization, financial position or net worth of the
Company, whether or not arising in the ordinary course of business,
which loss, litigation or change, in your reasonable judgment, shall
render it inadvisable to proceed with the delivery of the Units.
(f) On the date of this Agreement and on each Closing Date, Ernst &
Young shall have furnished to the Representatives a letter or letters
dated respectively as of the date of this Agreement and as of each
Closing Date, in form and substance satisfactory to the
Representatives, confirming that they are independent accountants
within the meaning of the 1933 Act and the applicable 1933 Act
Regulations and stating in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules included in the Registration
Statement and Prospectus and reported on by them comply in form
in all material respects with applicable accounting
requirements of the 1933 Act and the 1933 Act Regulations;
(ii) on the basis of a reading of the latest unaudited
financial statements made available by the Company; their
limited review in accordance with standards established by the
American Institute of Certified Public Accountants of the
unaudited interim financial information for the 3 month period
ended March 31, 1996, and as at March 31, 1996, carrying out
certain specified procedures (but not an examination in
accordance with generally accepted auditing standards) which
would not necessarily reveal matters of significance with
respect to the comments set forth in such letter; a reading of
the minutes of the meetings of the stockholders, directors and
audit and compensation committees of the Company; and inquiries
of certain officials of the Company who have responsibility for
financial and accounting matters of the Company as to
transactions and events subsequent to December 31, 1995,
nothing came to their attention which caused them to believe
that:
A. any unaudited financial statements included in the
Registration Statement and the Prospectus do not comply
in form in all material respects with applicable
accounting requirements of the 1933 Act and with the
1933 Act
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<PAGE>
Regulations with respect to registration statements on
Form SB-2; and said unaudited financial statements are
not in conformity with generally accepted accounting
principles applied on a basis substantially consistent
with that of the audited financial statements included
in the Registration Statement and the Prospectus; and
B. with respect to the period subsequent to March 31,
1996, there were any changes, at a specified date not
more than five business days prior to the date of the
letter, in the long-term debt of the Company or capital
stock of the Company or decreases in the stockholders'
equity of the Company or decreases in working capital,
total assets, income from operations or gross profit of
the Company as compared with the amounts shown on the
March 31, 1996 balance sheet included in the
Registration Statement and the Prospectus or for the
period from March 31, 1996 to such specified date there
were any decreases, as compared with the amounts shown
in the balance sheet at December 31, 1995 included in
the Prospectus, in net revenues or income before income
taxes or in total or per share amounts of net income of
the Company except in all instances for changes or
decreases set forth in such letter, in which case the
letter shall be accompanied by an explanation by the
Company as to the significance thereof unless said
explanation is not deemed necessary by the
Representatives; and
(iii) they have performed certain other specified procedures
as a result of which they determined that certain information
of an accounting, financial or statistical nature (which is
limited to accounting, financial or statistical information
derived from the general accounting records of the Company) set
forth in the Registration Statement and the Prospectus,
including the information set forth under the captions "Summary
Financial Information", "Risk Factors", "Dilution",
"Capitalization", "Selected Financial Data", "Management
Discussion and Analysis of Financial Condition and Results of
Operations", "Business" and "Management" in the Prospectus,
agrees with the accounting records of the Company excluding any
questions of legal interpretation.
References to the Prospectus in this paragraph (f) include
any supplement thereto at the date of the letter.
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The Representatives shall have also received from Ernst &
Young a letter stating that the Company's system of internal
accounting controls, taken as a whole, is sufficient to meet
the broad objectives of internal accounting control insofar as
those objectives pertain to the prevention or detection of
errors or irregularities in the amounts that would be material
in relation to the financial statements of the Company.
(g) Subsequent to the date of this Agreement or, if earlier, the
dates as of which information is given in the Registration Statement
(exclusive of any amendment thereof) and the Prospectus (exclusive of
any supplement thereto), there shall not have been (i) any change or
decrease specified in the letter or letters referred to in paragraph
(f) of this Section 5 or (ii) any change, or any development involving
a prospective change, in or affecting the business or properties of the
Company the effect of which, in any case referred to in clause (i) or
(ii) above, is, in the judgment of the Representatives, so material and
adverse as to make it impractical or inadvisable to proceed with the
offering or delivery of the Units as contemplated by the Registration
Statement (exclusive of any amendment thereof) and the Prospectus
(exclusive of any supplement thereto).
(h) On or prior to the date of this Agreement, the NASD shall have
approved the Underwriters' participation and the distribution of the
Units to be sold pursuant to the Registration Statement and the
Prospectus.
(i) The Units, the Common Stock and the Warrants shall have been
designated for quotation on NASDAQ Small Cap, and, in each case,
subject only to notice of issuance.
(j) At or prior to the Firm Closing Date, the Representatives'
Warrant Agreement shall have been entered into by the Company and you,
and the Representatives' Warrants shall have been issued and sold to
you pursuant to the Representatives' Warrant Agreement.
(k) At or prior to the Firm Closing Date, you shall have received
the written agreements and representations described in Section 4(u),
(w), and (y) hereof.
(l) Prior to the Firm Closing Date, the Company shall have
furnished to the Representatives such further information, certificates
and documents as the Representatives may reasonably request.
If any of the conditions specified in this Section 5 shall not have
been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above
or elsewhere in this Agreement shall not be in all material respects
reasonably satisfactory in form and substance to the Representatives
and counsel for the Representatives, this Agreement and all obligations
of the Underwriters hereunder may be canceled at, or at any time prior
to, the Firm Closing Date by the Representatives. Notice
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of such cancellation shall be given to the Company in writing, or by
telephone or facsimile and confirmed in writing.
6. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each Underwriter,
each of their respective officers, directors, partners, employees,
agents and counsel, and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section
20(a) of the 1934 Act, against any loss, claim, damage or liability (or
any action in respect thereof), joint or several, to which such
Underwriter may become subject, under the 1933 Act or otherwise,
insofar as such loss, claim, damage or liability (or action with
respect thereto) arises out of or is based upon (i) any untrue
statement or alleged untrue statement of a material fact made by the
Company in Section 1 hereof, or (ii) any untrue statement or alleged
untrue statement of a material fact contained (A) in the Prospectus or
any amendment or supplement thereto, or (B) in any application or other
document executed by the Company specifically for that purpose or based
upon written information furnished by the Company filed with any state
or other jurisdiction in order to qualify any or all of the Units or
other securities under the securities laws thereof or with the
Commission or securities regulatory authority or securities exchange
(any such application, document or information being hereinafter called
a "Application"), or (iii) the omission or alleged omission to state in
the Registration Statement, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto or in any Application
a material fact required to be stated therein or necessary to make the
statements therein not misleading; and shall, promptly upon request,
reimburse each Underwriter for any reasonable legal or reasonable other
expenses as incurred by such Underwriter in connection with
investigating, preparing to defend, or defending against or appearing
as a third-party witness in connection with any such loss, claim,
damage, liability or action, notwithstanding the possibility that
payments for such expenses might later be held to be improper, in which
case the person receiving them shall promptly refund them; provided,
however, that the Company shall not be liable in any such case to the
extent, but only to the extent, that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon
or in conformity with written information furnished to the Company
through you by or on behalf of any Underwriter specifically for use in
the preparation of the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or
any Blue Sky Application; and provided further, that with respect to
any untrue statement or omission or alleged untrue statement or
omission made in any Preliminary Prospectus, the indemnity agreement
contained in this paragraph shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims,
damages, liabilities or expenses purchased the Units concerned (or to
the benefit of any person controlling such Underwriter) to the extent
that any such loss, claim, damage, liability or expense of such
Underwriter or controlling person results from the fact that a copy of
the Prospectus was not sent or given to such person at or prior to the
written confirmation of sale of such Units as required by the 1933 Act,
and if the untrue statement
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or omission has been corrected in the Prospectus, unless such failure
to deliver the Prospectus was a result of noncompliance by the Company
with its obligations under Section 4(c) hereof.
(b) Each Underwriter severally, but not jointly, shall indemnify
and hold harmless the Company, each of its directors, each nominee (if
any) for director named in the Prospectus, each of its officers who has
signed the Registration Statement and each person who controls the
Company within the meaning of Section 15 of the 1933 Act or Section
20(a) of the 1934 Act, against any loss, claim, damage or liability (or
any action in respect thereof) to which the Company or any such
director, nominee, officer or controlling person may become subject,
under the 1933 Act or otherwise, insofar as such loss, claim, damage or
liability (or action with respect thereof) arises out of or is based
upon (i) any claim which results from failure to send or give a copy of
the Prospectus to an investor at or prior to the written confirmation
of sale of Units at any time when the Company shall have delivered
sufficient Prospectuses to the Underwriters to effect distribution of
such Prospectus (ii) any untrue statement or alleged untrue statement
of a material fact contained (A) in the Registration Statement, any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or (B) in any Application, or (iii) the omission or alleged
omission to state in the Registration Statement, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto or
in any Application a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, except that such
indemnification shall be available in each such case to the extent, but
only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon or
in conformity with written information furnished to the Company by such
Underwriter specifically for use in the preparation thereof; and shall
reimburse any legal or other expenses as and when reasonably incurred
by the Company or any such other indemnified person in connection with
investigating, defending against, settling, compromising or paying any
such loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of any claim or the commencement of any
action, the indemnified party shall, if a claim with respect thereto is
to be made against the indemnifying party under such subsection, notify
the indemnifying party in writing of the claim or the commencement of
that action; and the failure to notify the indemnifying party shall not
relieve it from any liability that it may have to an indemnified party
otherwise than under such subsection. If any such claim or action is
brought against an indemnified party, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes,
jointly with any other similarly notified indemnifying party, to assume
the defense thereof with counsel reasonably satisfactory to the
indemnified party. After notice from the indemnifying party to the
indemnified party of its election to assume the defense of such claim
or action, the indemnifying party shall not be liable to the
indemnified party under such subsection for any legal or other expenses
subsequently incurred by the indemnified party in connection with
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the defense thereof other than reasonable costs of investigation,
except that you shall have the right to employ counsel to represent you
and those other Underwriters who may be subject to liability arising
out of any claim with respect to which indemnity may be sought by the
Underwriters against the Company under such subsection if, in your
reasonable judgment, it is advisable for you and those Underwriters to
be represented by separate counsel, and in that event the reasonable
legal fees and expenses of one such separate counsel shall be paid by
the Company.
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a
result of the losses, claims, damages or liabilities referred to in
subsection (a) or (b) above (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the
Underwriters from the offering of the Units, or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of
the Company and the Underwriters in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities,
as well as any other relevant equitable considerations. The relative
respective benefits received by the Company and the Underwriters shall
be deemed to be in the same proportion that the total net proceeds from
the offering of the Units (before deducting expenses other than the
non-accountable expense allowance) received by the Company and the
total underwriting discounts and commissions received by the
Underwriters bear to one another. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by
the Company or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contributions pursuant
to this subsection (d) were to be determined by pro rata allocation or
by any other method of allocation which does not take into account the
equitable considerations referred to in the first sentence of this
subsection (d). The amount paid by an indemnified party as a result of
the losses, claims, damages or liabilities referred to in this
subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending against any action or claim which is the
subject of this subsection (d). Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the
Units underwritten by it and distributed to the public exceeds the
amount of any damages that such Underwriter has otherwise been required
to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d)
to contribute are several in proportion to their respective
underwriting obligations and are
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not joint. Each party entitled to contribution agrees that upon the
service of a summons or other initial legal process upon it in any
action instituted against it with respect to which contribution may be
sought, it shall promptly give written notice of such service to the
party or parties from whom contribution may be sought, but the omission
so to notify such party or parties of any such service shall not
relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically
provided in Section 6(c) above).
(e) The obligations of the Company under this Section 6 shall be in
addition to any liability that the Company may otherwise have, and
shall extend, upon the same terms and conditions, to each person, if
any, who controls any Underwriter within the meaning of Section 15 of
the Securities Act or Section 20(a) of the 1934 Act, and the
obligations of each Underwriter under this Section 6 shall be in
addition to any liability that such Underwriter may otherwise have, and
shall extend, upon the same terms and conditions, to each director of
the Company (including any person who, with his consent, is named in
the Registration Statement as about to become a director of the
Company), to each officer of the Company who has signed the
Registration Statement and to each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act or Section
20(a) of the 1934 Act.
7. Substitution of Underwriters. If on any Closing Date any Underwriter
defaults in its obligation to purchase the number of Units which it has agreed
to purchase hereunder, the non-defaulting Underwriters shall be obligated to
purchase (in the respective proportions which the number of Firm Units set forth
opposite the name of each non-defaulting Underwriter in Schedule I hereto bears
to the total number of Firm Units set forth opposite the names of all of the
non-defaulting Underwriters in Schedule I hereto) the Units which the defaulting
Underwriter agreed but failed to purchase on such Closing Date, except that the
non-defaulting Underwriters shall not be obligated to purchase any of the Units
if the total number of Units on such Closing Date which the defaulting
Underwriter or Underwriters agreed but failed to purchase exceeds 10% of the
total number of Units to be purchased on such Closing Date, and any non-
defaulting Underwriter shall not be obligated to purchase more than 110% of the
number of Units which it agreed to purchase on such Closing Date pursuant to the
terms of Section 2 hereof. If the foregoing maximums are exceeded, the non-
defaulting Underwriters, and any other underwriters satisfactory to you who so
agree, shall have the right, but shall not be obligated, to purchase (in such
proportions as may be agreed upon among them) all the Units to be purchased on
such Closing Date; and if the non-defaulting Underwriters and any other
underwriters satisfactory to you do not elect to purchase the Units that the
defaulting Underwriter or Underwriters agreed but failed to purchase, this
Agreement shall terminate without liability on the part of any non-defaulting
Underwriter or the Company except for the payment of expenses to be borne by the
Company and the Underwriters as provided in Section 4(i) hereof and the
indemnity and contribution agreements of the Company and the Underwriters
contained in Section 6 hereof.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have for damages caused by its default. If the other
underwriters satisfactory to you are obligated or agree
-31-
<PAGE>
to purchase the Units of a defaulting Underwriter, either you or the Company may
postpone the Firm Closing Date for up to seven full Business Days in order to
effect any changes that may be necessary in the Registration Statement, the
Prospectus or in any other document or agreement, and to file promptly any
amendments or any supplements to the Registration Statement or the Prospectus
which in your reasonable opinion may thereby be made necessary.
8. Effective Date and Termination.
(a) This Agreement shall become effective at 11:00 A.M., Denver,
Colorado time, on the earlier of (i) the first full Business Day
following the date the Registration Statement becomes effective, or
(ii) at such time after the Registration Statement becomes effective as
you shall release the Firm Units for sale to the public. You shall
notify the Company and its counsel immediately after you have taken any
action that causes this Underwriting Agreement to become effective.
Until this Agreement is effective, it may be terminated by the Company
by giving notice as hereinafter provided to you or by you by giving
notice as hereinafter provided to the Company, except that the
provisions of Sections 4(i) and 6 hereof shall at all times be
effective. For purposes of this Agreement, the release of the Firm
Units for sale to the public shall be deemed to have been made when you
release, by telegram or otherwise, firm offers of the Firm Units to
securities dealers or release for publication a newspaper advertisement
relating to the Firm Units, whichever occurs first.
(b) This Agreement shall be subject to termination by you (subject,
however, to your undertakings with the NASD) by giving notice to the
Company prior to the delivery of and payment for the Units, if prior to
such time (i) the Company shall have failed, refused or been unable to
perform any agreement on its part to be performed hereunder unless
compliance therewith or performance or satisfaction thereof shall have
been expressly waived in writing by the Representatives; (ii) any other
condition of the obligations of the Underwriters hereunder is not
fulfilled; (iii) there shall have occurred any material adverse change,
since the respective dates as of which information is given in the
Prospectus, in or affecting the business or financial condition of the
Company or the Company's earnings, business affairs, management or
prospects of the Company, whether or not arising in the ordinary course
of its business; (iv) there shall have occurred an outbreak of major
hostilities (or an escalation thereof) in which the United States is
involved, a declaration by the United States of a national emergency or
war or other calamity or crisis the effect of which on financial
markets is such as to result, in your judgment, in a material
impairment of this Agreement by making it impracticable or inadvisable
to proceed with the offering or delivery of the Units as contemplated
by the Prospectus (exclusive of any supplement thereto); (v) there
shall have occurred suspension of trading in securities on the New York
Stock Exchange, the American Stock Exchange or the NASDAQ market system
or minimum or maximum prices shall have been established on either of
said Exchange or market system; (vi) a banking moratorium shall have
been declared by federal or state authorities; (vii) there shall have
occurred any action by any federal, state or local government or agency
in respect to monetary or fiscal affairs or regulations affecting
health care delivery or the health care
-32-
<PAGE>
claims process which in the reasonable opinion of the Representatives
have a material adverse effect on the securities markets in the United
States or the business prospects of the Company or business generally;
or
(c) This Agreement also may be terminated as provided in Section 5.
(d) Any termination of this Agreement pursuant to this Section 8
shall be without liability on the part of the Company or the
Underwriters, except as otherwise provided in Sections 4(i) and 6
hereof.
Any notice referred to in Section 8 above may be given at the
address specified in Section 10 hereof in writing or by facsimile or
telephone; and if by facsimile or telephone, shall be immediately
confirmed in writing.
9. Survival of Indemnities, Contribution, Warranties and Representations.
The indemnity and contribution agreements contained in Section 6 and the
representations, warranties and covenants of the Company in Sections 1 and 4
shall survive the delivery of the Units to the Underwriters hereunder and shall
remain in full force and effect, regardless of any termination or cancellation
of this Agreement or any investigation made by or on behalf of any indemnified
party or any party to the contribution provisions of Section 6(d).
10. Notices. Except as otherwise provided in this Agreement, (a)
whenever notice is required by the provisions hereof to be given to the Company,
such notice shall be in writing and personally delivered or sent by mail or
facsimile transmission to the Company at 1400 South Colorado Boulevard, Suite
500, Denver, Colorado 80222, Attention: Gerald E. Henderson, President,
(facsimile: (303) 399-1554) with a copy to Chrisman, Bynum & Johnson, P.C.,
1900 Fifteenth Street, Boulder, Colorado 80302, Attention: Christopher M.
Hazlitt, Esq. (facsimile: (303) 449-5426); and (b) whatever notice is required
by the provisions hereof to be given to the Representatives such notice shall be
in writing and personally delivered or sent by mail or facsimile transmission to
Neidiger, Tucker, Bruner, Inc. at 300 Plaza Level, 1675 Larimer Street, Denver,
Colorado 80202, Attention: Mr. Anthony B. Petrelli, Senior Vice President
(facsimile: (303) 623-9310), with a copy to John G. Herbert, P.C., 1675 Larimer
Street, Suite 310, Denver, Colorado 80202, Attention: John G. Herbert, Esq.
(facsimile: (303) 534-3638); and to Joseph Charles & Assoc., Inc., 356 North
Camden Drive, Beverly Hills, California 90210, Attention: Richard A. Rappaport,
Managing Director.
11. Representations and Warranties and Information Furnished by
Underwriters. Each Representative, for itself and on behalf of the several
Underwriters, represents and warrants (and the Company acknowledges) that the
statements set forth in the table on the front cover page with respect to
underwriting discounts, the paragraph on or about the inside front cover page
with respect to stabilization, and under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus (except for statements made under
the caption "Underwriting" in any such Prospectus relating to sales or
dispositions by the Company and the Company's undertakings), constitute the
-33-
<PAGE>
only written information furnished by or on behalf of the Underwriters referred
to in paragraphs (b) and (c) of Section 1 hereof and in paragraphs (a) and (b)
of Section 6 hereof, and are true and correct in all material respects. The
Representatives further represent and warrant that they have been authorized by
each of the several Underwriters as Representatives to enter into this
Underwriting Agreement on its behalf and to act in the matter herein provided.
12. Parties. This Agreement is made solely for the benefit of the
several Underwriters, the Company, and any officer, director or controlling
person referred to in Section 6 hereof, and their respective successors and
assigns, and, except as provided in Section 15 of this Agreement, no other
person shall acquire or have any right by virtue of this Agreement. The term
"successors and assigns," as used in this Agreement, shall not include any
purchaser of any of the Units from the Underwriters. You shall act on behalf of
each of the several Underwriters and the Company shall be entitled to act and
rely upon any statement, request, notice or agreement on behalf of each of the
several Underwriters if the same shall have been made or given in writing by
you.
13. Definition of "Business Day". For purposes of this Agreement,
"Business Day" means any day on which the New York Stock Exchange, Inc. is open
for trading.
14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Colorado without giving effect to the
choice of law or conflict of laws, principles or rules thereof.
15. Submission to Jurisdiction and Waiver of Inconvenient Forum. The
Company, by the execution and delivery of this Underwriting Agreement,
designates and appoints CT Corporation System as the authorized agent of the
Company upon whom process may be served in any suit, proceeding or other action
which is brought against the Company in any United States federal or state court
sitting in the City and County of Denver, State of Colorado, and which relates
to or arises out of this Underwriting Agreement or the offering of the Units
hereunder and the Company expressly accepts jurisdiction of any such court in
respect of any such suit, proceeding or other action and, without limiting other
methods of obtaining jurisdiction, expressly submits to exclusive personal
jurisdiction of any such court in respect of any such suit, proceeding or other
action. Such designation and appointment shall be irrevocable, unless and until
a successor authorized agent in the City and County of Denver, State of Colorado
reasonably acceptable to you shall have been appointed by the Company, such
successor shall have accepted such appointment and written notice thereof shall
have been given to you. The Company further agrees that service of process upon
its authorized agent or successor (and written notice of said service to the
Company, given as provided in Section 10 above) shall be deemed in every respect
personal service of process upon the Company in any such suit, proceeding or
other actions. (For the Company's convenience only and not for the purposes of
service of process or effecting personal jurisdiction in any such suit,
proceeding or other action, copies of such process shall also, if practicable,
be mailed to the notice parties set forth in Section 10 of this agreement if
Neidiger, Tucker, Bruner, Inc. shall be the party serving such process on giving
such notice.) The Company hereby irrevocably waives any objection that it may
have or hereafter have to the laying of venue of any such action or proceeding
arising out
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<PAGE>
of or based on the Units, or this Agreement or otherwise relating to
the offering, issuance and sale of the Units in any federal or state court
sitting in City and County of Denver and State of Colorado and hereby further
irrevocably waives any claim that any such action or proceeding in any such
court has been brought in an inconvenient forum. The Company agrees that any
final judgment after exhaustion of all appeals or the expiration of time to
appeal in any such action or proceeding arising out of the sale of the Units or
this Agreement rendered by any such federal court or state court shall be
conclusive, and may be enforced in any other jurisdiction by suit on the
judgment or in any other manner provided by law. Nothing contained in this
Agreement shall affect or limit the right of any Underwriter to serve any
process or notice of motion or other application in any other manner permitted
by law or limit or affect the right of any Underwriter to bring any action or
proceeding against the Company or any of its property in the courts of any other
jurisdiction. The Company further agrees to take any and all action, including
the execution and filing of all such instruments and documents, as may be
necessary to continue such designation and appointment or such substitute
designation and appointment in full force and effect. The Company hereby agrees
to the exclusive jurisdiction of the courts of the State of Colorado, or the
federal courts sitting in the City and County of Denver, State of Colorado in
connection with any action brought by it relating to this Agreement or the
offering of the Units hereunder.
The provisions of this Section 15 are also intended to benefit those
persons who acquire the Firm Units and the Option Units from the Underwriters.
16. Counterparts. This Underwriting Agreement may be signed in two or
more counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
-35-
<PAGE>
Please confirm, by signing and returning to us counterparts of this
Agreement, that you are acting on behalf of yourself and the several
Underwriters and that the foregoing correctly sets forth the agreement among the
Company and the several Underwriters.
Very truly yours,
IMAGEMATRIX CORPORATION
By:
-------------------------------
Name:
Title:
Confirmed and accepted as of
the date first above mentioned:
NEIDIGER, TUCKER, BRUNER, INC. and
JOSEPH CHARLES & ASSOC., INC.
As Representatives of the Several
Underwriters Named in Schedule I
hereto
By: NEIDIGER, TUCKER, BRUNER, INC.
By:
----------------------------------
Name:
Title:
By: JOSEPH CHARLES & ASSOC., INC.
By:
----------------------------------
Name:
Title:
-36-
<PAGE>
SCHEDULE I
----------
<TABLE>
<CAPTION>
Name Number of Units
- ---- ---------------
<S> <C>
Neidiger, Tucker, Bruner, Inc.
Joseph Charles & Assoc., Inc.
---------------
Total 1,400,000
=========
</TABLE>
<PAGE>
IMAGEMATRIX CORPORATION
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
These Restated and Amended Articles of Incorporation of IMAGEMATRIX
CORPORATION (the "Corporation"), were adopted by the shareholders. The number
of votes cast for the restatement and amendments by each voting group entitled
to vote separately on the amendment was sufficient for approval by that voting
group, and the number of shares voted for the restatement and amendments was
sufficient for approval. These Amended and Restated Articles of Incorporation
supersede the original Articles of Incorporation and all amendments and
supplements thereto. These Amended and Restated Articles of Incorporation: (i)
contain amendments; and (ii) correctly set forth the provisions of the Articles
of Incorporation, as amended.
ARTICLE I
NAME
The name of the Corporation is IMAGEMATRIX CORPORATION.
ARTICLE II
AUTHORIZED CAPITAL
The aggregate number of shares of capital stock which the Corporation
shall have authority to issue is Twenty-five Million (25,000,000) shares, no par
value per share, of which Twenty Million (20,000,000) shares shall be designated
as Common Stock and Five Million (5,000,000) shares shall be designated as
Preferred Stock. The board of directors of the Corporation shall have the
authority to fix the rights, powers, preferences and privileges, and the
qualifications, limitations or restrictions thereof, of any series of Preferred
Stock, including but not limited to dividend rights, dividend rates, conversion
rights, voting rights, and liquidation preferences; and to fix the number of
shares constituting any such series and the designation thereof; and to increase
or decrease the number of shares of any such series (but not below the number of
shares thereof then outstanding).
ARTICLE III
OFFICES
The street address of the registered office of the Corporation is:
c/o Chrisman, Bynum & Johnson, P.C., 1900 Fifteenth Street, Boulder, CO 80302,
and the name of the registered agent at that address is Christopher M. Hazlitt.
The address of the Corporation's principal office is: 400 South Colorado
Boulevard, Suite 500, Denver, CO 80222.
<PAGE>
ARTICLE IV
PURPOSES
The purpose for which the Corporation is organized is to engage in any
lawful business.
ARTICLE V
PREEMPTIVE RIGHTS
No holder of any shares of the Corporation, whether now or hereafter
authorized, shall have any preemptive or preferential right to acquire any
shares or securities of the Corporation, including shares or securities held in
the treasury of the Corporation.
ARTICLE VI
QUORUM FOR SHAREHOLDERS' MEETINGS
A majority of the votes entitled to be cast on any matter by each voting
group entitled to vote on a matter shall constitute a quorum of that voting
group for action on the matter.
ARTICLE VII
BOARD OF DIRECTORS
The corporate powers shall be exercised by or under the authority of, and
the business and affairs of the Corporation shall be managed under the direction
of a board of directors. The number of directors shall be fixed and may be
altered from time to time in accordance with the Bylaws.
The terms of the directors shall be staggered in accordance with the
following provisions: The number of directors shall be divided into three
groups, with each group containing one-third of the total, as near as may be.
The terms of the directors in the first group shall expire at the third annual
shareholders' meeting after their election, the terms of the directors in the
second group shall expire at the second annual shareholders' meeting after their
election, and the terms of the members in the third group shall expire at the
first annual shareholders' meeting after their election. Upon the expiration of
the initial staggered terms, directors shall be elected for terms of three
years, to succeed those whose terms expire.
Despite the expiration of his or her term, a director continues to serve
until his or her successor is elected and qualified.
Directors may be removed from office only for cause.
-2-
<PAGE>
ARTICLE VIII
CUMULATIVE VOTING
Each outstanding share of Common Stock shall be entitled to one vote and
each outstanding fractional share of Common Stock shall be entitled to a
corresponding fractional vote on each matter submitted to a vote of
shareholders. Cumulative voting shall not be allowed in the election of
directors.
ARTICLE IX
LIMITATION ON DIRECTOR LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or to its shareholders for monetary damages for breach of fiduciary
duty as a director; except that this provision shall not eliminate or limit the
liability of a director to the Corporation or to its shareholders for monetary
damages otherwise existing for:
(i) any breach of the director's duty of loyalty to the Corporation or
to its shareholders;
(ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(iii) acts specified in Section 7-108-403 of the Act; or
(iv) any transaction from which the director directly or indirectly
derived any improper personal benefit.
If the Act is hereafter amended or superseded to eliminate or limit further the
liability of a director, then, in addition to the elimination and limitation of
liability provided by the preceding sentence, the liability of each director
shall be eliminated or limited to the fullest extent permitted by the Act as so
amended or superseded. Any repeal or modification of this Article IX shall not
adversely affect any right or protection of a director of the Corporation under
this Article IX, as in effect immediately prior to such repeal or modification,
with respect to any liability that would have accrued, but for this Article IX,
prior to such repeal or modification.
ARTICLE X
INDEMNIFICATION
The Corporation shall indemnify, to the fullest extent permitted by
applicable law in effect from time to time, any person, and the estate and
personal representative of any such person, against all liability and expense
(including attorneys' fees) incurred by reason of the fact that the person is or
was a director or officer of the Corporation or, while serving as a director or
officer of the Corporation, such person is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee, fiduciary, or
agent of, or in any similar
-3-
<PAGE>
managerial or fiduciary position of, another domestic or foreign corporation or
other individual or entity or of an employee benefit plan. The Corporation
shall also indemnify any person who is serving or has served the Corporation as
director, officer, employee, fiduciary, or agent, and that person's estate and
personal representative, to the extent and in the manner provided in any bylaw,
resolution of the shareholders or directors, contract, or otherwise, so long as
such provision is legally permissible.
ARTICLE XI
TERM OF EXISTENCE
The duration of the Corporation shall be perpetual.
ARTICLE XII
Upon the filing of these Amended and Restated Articles of Incorporation,
each share of the Corporation's Common Stock issued at the time Articles of
Amendment containing this amendment is filed with the Secretary of State of the
State of Colorado shall be and hereby is automatically changed and reclassified
without further action into seventy-seven.five/one-hundredth (77.5/100th) of a
fully paid and nonassessable share, of the Corporation's Common Stock, provided
that no fractional shares shall be issued to any shareholder pursuant to such
change and reclassification. The Corporation may issue to each shareholder who
would otherwise be entitled to a fractional share as a result of such change and
reclassification a number of shares rounded up to the next whole share.
IMAGEMATRIX CORPORATION
/s/ Keith E. Brue
--------------------------------------
Keith E. Brue, Vice President
/s/ Blair W. McNea
-------------------------------------
Blair W. McNea, Secretary
-4-
<PAGE>
BYLAWS
OF
IMAGEMATRIX CORPORATION
ARTICLE I
SHAREHOLDERS
1. ANNUAL SHAREHOLDERS' MEETING. The annual shareholders' meeting
of IMAGEMATRIX CORPORATION (the "Corporation") shall be held each year on such
date and at the time and place as shall be established from time to time by the
board of directors.
2. SPECIAL SHAREHOLDERS' MEETING. A special shareholders' meeting
for any purpose or purposes, may be called by the board of directors, the chief
executive officer, the chairman of the board, or the president. The Corporation
shall also hold a special shareholders' meeting in the event it receives, in the
manner specified in Section VII.3., one or more written demands for the meeting,
stating the purpose or purposes for which it is to be held, signed and dated by
the holders of shares representing not less than one-tenth of all of the votes
entitled to be cast on any issue at the meeting. Special meetings shall be held
at the principal office of the Corporation or at such other place as the board
of directors may determine.
3. RECORD DATE FOR DETERMINATION OF SHAREHOLDERS.
(a) In order to make a determination of shareholders (1)
entitled to notice of or to vote at any shareholders' meeting or at
any adjournment of a shareholders' meeting, (2) entitled to demand a
special shareholders' meeting, (3) entitled to take any other action,
(4) entitled to receive payment of a share dividend or a distribution,
or (5) for any other purpose, the board of directors may fix a future
date as the record date for such determination of shareholders. The
record date may be fixed not more than seventy days before the date of
the proposed action.
(b) Unless otherwise specified when the record date is fixed,
the time of day for determination of shareholders shall be 5:00 p.m.
local time on the record date.
(c) A determination of shareholders entitled to be given notice
of or to vote at a shareholders' meeting is effective for any
adjournment of the meeting unless the board of directors fixes a new
record date, which the board shall do if the meeting is adjourned to a
date more than one hundred twenty days after the date fixed for the
original meeting.
(d) If no record date is otherwise fixed, the record date for
determining shareholders entitled to be given notice of and to vote at
an annual or special shareholders' meeting is the day before the first
notice is given to shareholders.
(e) The record date for determining shareholders entitled to
take action without a meeting is the date a writing upon which the
action is taken is first received by the Corporation.
<PAGE>
4. VOTING LIST.
(a) After a record date is fixed for a shareholders' meeting, the
secretary shall prepare a list of the names of all its shareholders who are
entitled to be given notice of the meeting. The list shall be arranged by
voting groups and within each voting group by class or series of shares,
shall be alphabetical within each class or series, and shall show the
address of, and the number of shares of each such class and series that are
held by, each shareholder.
(b) The shareholders' list shall be available for inspection by any
shareholder, beginning the earlier of ten days before the meeting for which
the list was prepared or two business days after notice of the meeting is
given and continuing through the meeting, and any adjournment thereof, at
the Corporation's principal office or at a place identified in the notice
of the meeting in the city where the meeting will be held.
(c) The secretary shall make the shareholders' list available at
the meeting, and any shareholder or agent or attorney of a shareholder is
entitled to inspect the list at any time during the meeting or any
adjournment.
5. NOTICE TO SHAREHOLDERS.
(a) The secretary shall give notice to shareholders of the date,
time, and place of each annual and special shareholders' meeting no fewer
than ten nor more than sixty days before the date of the meeting; except
that, if the articles of incorporation are to be amended to increase the
number of authorized shares, at least thirty days' notice shall be given.
Except as otherwise required by the Colorado Business Corporation Act, the
secretary shall be required to give such notice only to shareholders
entitled to vote at the meeting.
(b) Notice of an annual shareholders' meeting need not include a
description of the purpose or purposes for which the meeting is called
unless a purpose of the meeting is to consider an amendment to the articles
of incorporation, a restatement of the articles of incorporation, a plan of
merger or share exchange, disposition of substantially all of the property
of the Corporation, consent by the Corporation to the disposition of
property by another entity, or dissolution of the Corporation.
(c) Notice of a special shareholders' meeting shall include a
description of the purpose or purposes for which the meeting is called.
(d) Notice of a shareholders' meeting shall be in writing and shall
be given:
(1) by deposit in the United States mail, properly addressed
to the shareholder's address shown in the Corporation's current
record of shareholders, first class postage prepaid, and, if so
given, shall be effective when mailed; or
<PAGE>
(2) by telegraph, teletype, electronically transmitted
facsimile, electronic mail, mail, or private carrier or by personal
delivery to the shareholder, and, if so given, shall be effective
when actually received by the shareholder.
(e) If an annual or special shareholders' meeting is adjourned to a
different date, time, or place, notice need not be given of the new date, time
or place if the new date, time, or place is announced at the meeting before
adjournment; provided, however, that, if a new record date for the adjourned
meeting is fixed pursuant to Section I.3.(c), notice of the adjourned meeting
shall be given to persons who are shareholders as of the new record date.
(f) If three successive notices are given by the Corporation,
whether with respect to a shareholders' meeting or otherwise, to a shareholder
and are returned as undeliverable, no further notices to such shareholder shall
be necessary until another address for the shareholder is made known to the
Corporation.
6. QUORUM. Shares entitled to vote as a separate voting group may take
action on a matter at a meeting only if a quorum of those shares exists with
respect to that matter. One third (1/3) of the votes entitled to be cast on the
matter by the voting group shall constitute a quorum of that voting group for
action on the matter. If a quorum does not exist with respect to any voting
group, the president, the board of directors, chief executive officer, chairman
of the board, or the holders of a majority of outstanding shares, whether
present in person or by proxy, whether or not a member of that voting group, may
adjourn the meeting to a different date, time, or place, and (subject to the
next sentence) notice need not be given of the new date, time, or place if the
new date, time, or place is announced at the meeting before adjournment. If a
new record date for the adjourned meeting is or must be fixed pursuant to
Section I.3.(c), notice of the adjourned meeting shall be given pursuant to
Section I.5. to persons who are shareholders as of the new record date. At any
adjourned meeting at which a quorum exists, any matter may be acted upon that
could have been acted upon at the meeting originally called; provided, however,
that, if new notice is given of the adjourned meeting, then such notice shall
state the purpose or purposes of the adjourned meeting sufficiently to permit
action on such matters. Once a share is represented for any purpose at a
meeting, including the purpose of determining that a quorum exists, it is deemed
present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or shall be set for that
adjourned meeting.
7. VOTING ENTITLEMENT OF SHARES. Except as stated in the articles of
incorporation, each outstanding share, regardless of class, is entitled to one
vote, and each fractional share is entitled to a corresponding fractional vote,
on each matter voted on at a shareholders' meeting.
8. PROXIES; ACCEPTANCE OF VOTES AND CONSENTS.
(a) A shareholder may vote either in person or by proxy.
-3-
<PAGE>
(b) An appointment of a proxy is not effective against the
Corporation until the appointment is received by the Corporation. An
appointment is valid for eleven months unless a different period is
expressly provided in the appointment form.
(c) The Corporation may accept or reject any appointment of a proxy,
revocation of appointment of a proxy, vote, consent, waiver, or other
writing purportedly signed by or for a shareholder, if such acceptance or
rejection is in accordance with the provisions of (S)(S) 7-107-203 and 7-
107-205 of the Colorado Business Corporation Act.
9. WAIVER OF NOTICE.
(a) A shareholder may waive any notice required by the Colorado
Business Corporation Act, by the articles of incorporation or these bylaws,
whether before or after the date or time stated in the notice as the date
or time when any action will occur or has occurred. The waiver shall be in
writing, be signed by the shareholder entitled to the notice, and be
delivered to the Corporation for inclusion in the minutes or filing with
the corporate records, but such delivery and filing shall not be conditions
of the effectiveness of the waiver.
(b) A shareholder's attendance at a meeting waives objection to
lack of notice or defective notice of the meeting, unless the shareholder
at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting because of lack of notice or defective
notice, and waives objection to consideration of a particular matter at the
meeting that is not within the purpose or purposes described in the meeting
notice, unless the shareholder objects to considering the matter when it is
presented.
10. ACTION BY SHAREHOLDERS WITHOUT A MEETING. Any action required or
permitted to be taken at a shareholders' meeting may be taken without a meeting
if all of the shareholders entitled to vote thereon consent to such action in
writing. Action taken pursuant to this section shall be effective when the
Corporation has received writings that describe and consent to the action,
signed by all of the shareholders entitled to vote thereon. Action taken
pursuant to this section shall be effective as of the date the last writing,
necessary to effect the action, is received by the Corporation, unless all of
the writings necessary to effect the action specify another date, which may be
before or after the date the writings are received by the Corporation. Such
action shall have the same effect as action taken at a meeting of shareholders
and may be described as such in any document. Any shareholder who has signed a
writing describing and consenting to action taken pursuant to this section may
revoke such consent by a writing signed by the shareholder describing the action
and stating that the shareholder's prior consent thereto is revoked, if such
writing is received by the secretary of the Corporation before the effectiveness
of the action.
11. MEETINGS BY TELECOMMUNICATIONS. Any or all of the shareholders may
participate in an annual or special shareholders' meeting by, or the meeting may
be conducted through the use of, any means of communication by which all persons
participating
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in the meeting may hear each other during the meeting. A shareholder
participating in a meeting by this means is deemed to be present in person at
the meeting.
ARTICLE II
DIRECTORS
1. AUTHORITY OF THE BOARD OF DIRECTORS. The corporate powers shall be
exercised by or under the authority of, and the business and affairs of the
Corporation shall be managed under the direction of, a board of directors.
2. NUMBER. The number of directors shall be at least five (5) and not
more than nine (9). Within that range, the number of directors shall be as
stated by resolution adopted by the board of directors from time to time, but no
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director.
3. QUALIFICATION. Directors shall be natural persons at least eighteen
years old but need not be residents of the State of Colorado or shareholders of
the Corporation.
4. ELECTION. The board of directors shall be elected at the annual
meeting of the shareholders or at a special meeting called for that purpose.
5. TERM.
The directors shall serve for staggered terms as provided in the
articles of incorporation.
The term of a director elected to fill a vacancy by the board of
directors, even if less than a quorum, expires at the next annual meeting at
which directors are elected. Unless prohibited by the articles of
incorporation, shareholders may fill a vacancy that occurs on the board of
directors. If shareholders are permitted by the articles of incorporation to
fill a vacancy on the board of directors, the term of a director so elected
shall be the unexpired term of his or her last predecessor in office elected by
the shareholders.
6. RESIGNATION. A director may resign at any time by giving written
notice of his or her resignation to any other director or (if the director is
not also the secretary) to the secretary. The resignation shall be effective
when it is received by the other director or secretary, as the case may be,
unless the notice of resignation specifies a later effective date. Acceptance
of such resignation shall not be necessary to make it effective unless the
notice so provides.
7. REMOVAL. Any director may be removed by the shareholders, of the
voting group that elected the director only with cause at a meeting called for
that purpose. The notice of the meeting shall state that the purpose, or one of
the purposes, of the meeting is removal of
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the director. A director may be removed only if the number of votes cast in
favor of removal exceeds the number of votes cast against removal.
8. VACANCIES.
(a) If a vacancy occurs on the board of directors, including a
vacancy resulting from an increase in the number of directors:
(1) The shareholders may fill the vacancy at the next annual
meeting or at a special meeting called for that purpose; or
(2) The board of directors may fill the vacancy; or
(3) If the directors remaining in office constitute fewer than a
quorum of the board, they may fill the vacancy by the affirmative vote
of a majority of all the directors remaining in office.
(b) Notwithstanding Section II.8.(a), if the vacant office was held
by a director elected by a voting group of shareholders, then, if one or
more of the remaining directors were elected by the same voting group, only
such directors are entitled to vote to fill the vacancy if it is filled by
directors, and they may do so by the affirmative vote of a majority of such
directors remaining in office; and only the holders of shares of that
voting group are entitled to vote to fill the vacancy if it is filled by
the shareholders.
(c) A vacancy that will occur at a specific later date, by reason of
a resignation that will become effective at a later date under Section
II.6. or otherwise, may be filled before the vacancy occurs, but the new
director may not take office until the vacancy occurs.
9. MEETINGS. The board of directors may hold regular or special meetings
in or out of the State of Colorado. The board of directors may, by resolution,
establish dates, times and places for regular meetings, which may thereafter be
held without further notice. Special meetings may be called by the president,
chairman, chief executive officer or by any two directors and shall be held at
the principal office of the Corporation unless another place is consented to by
every director. At any time when the board consists of a single director, that
director may act at any time, date, or place without notice.
10. NOTICE OF SPECIAL MEETING. Notice of a special meeting shall be given
to every director at least forty eight (48) hours before the time of the
meeting, stating the date, time, and place of the meeting. The notice need not
describe the purpose of the meeting. Notice may be given orally to the
director, personally or by telephone or other wire or wireless communication.
Notice may also be given in writing by telegraph, teletype, electronically
transmitted facsimile, electronic mail, mail, or private carrier. Notice shall
be effective at the earliest of the time it is received; five days after it is
deposited in the United States mail,
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<PAGE>
properly addressed to the last address for the director shown on the records of
the Corporation, first class postage prepaid; or the date shown on the return
receipt if mailed by registered or certified mail, return receipt requested,
postage prepaid, in the United States mail and if the return receipt is signed
by the director to which the notice is addressed.
11. QUORUM. Except as provided in Section II.8., a majority of the number
of directors fixed in accordance with these bylaws shall constitute a quorum for
the transaction of business at all meetings of the board of directors. The act
of a majority of the directors present at any meeting at which a quorum is
present shall be the act of the board of directors, except as otherwise
specifically required by law.
12. WAIVER OF NOTICE.
(a) A director may waive any notice of a meeting before or after the
time and date of the meeting stated in the notice. Except as provided by
Section II. 12.(b), the waiver shall be in writing and shall be signed by
the director. Such waiver shall be delivered to the secretary for filing
with the corporate records, but such delivery and filing shall not be
conditions of the effectiveness of the waiver.
(b) A director's attendance at or participation in a meeting waives
any required notice to him or her of the meeting unless, at the beginning
of the meeting or promptly upon his or her later arrival, the director
objects to holding the meeting or transacting business at the meeting
because of lack of notice or defective notice and does not thereafter vote
for or assent to action taken at the meeting.
13. ATTENDANCE BY TELEPHONE. One or more directors may participate in a
regular or special meeting by, or conduct the meeting through the use of, any
means of communication by which all directors participating may hear each other
during the meeting. A director participating in a meeting by this means is
deemed to be present in person at the meeting.
14. DEEMED ASSENT TO ACTION. A director who is present at a meeting of
the board of directors when corporate action is taken shall be deemed to have
assented to all action taken at the meeting unless:
(a) The director objects at the beginning of the meeting, or promptly
upon his or her arrival, to holding the meeting or transacting business at
the meeting and does not thereafter vote for or assent to any action taken
at the meeting;
(b) The director contemporaneously requests that his or her dissent
or abstention as to any specific action taken be entered in the minutes of
the meeting; or
(c) The director causes written notice of his or her dissent or
abstention as to any specific action to be received by the presiding
officer of the meeting before adjournment
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of the meeting or by the secretary (or, if the director is the secretary,
by another director) promptly after adjournment of the meeting.
The right of dissent or abstention pursuant to this Section II.14. as to a
specific action is not available to a director who votes in favor of the action
taken.
15. ACTION BY DIRECTORS WITHOUT A MEETING. Any action required or
permitted by law to be taken at a board of directors' meeting may be taken
without a meeting if all members of the board consent to such action in writing.
Action shall be deemed to have been so taken by the board at the time the last
director signs a writing describing the action taken, unless, before such time,
any director has revoked his or her consent by a writing signed by the director
and received by the secretary or any other person authorized by the bylaws or
the board of directors to receive such a revocation. Such action shall be
effective at the time and date it is so taken unless the directors establish a
different effective time or date. Such action has the same effect as action
taken at a meeting of directors and may be described as such in any document.
ARTICLE III
COMMITTEES OF THE BOARD OF DIRECTORS
Subject to the provisions of Section 7-109-106 of the Colorado Business
Corporation Act (the "Act"), the board of directors may create one or more
committees and appoint one or more members of the board of directors to serve on
them. The creation of a committee and appointment of members to it shall
require the approval of a majority of all the directors in office when the
action is taken.
The provisions of these bylaws governing meetings, action without meeting,
notice, waiver of notice, and quorum and voting requirements of the board of
directors apply to committees and their members as well.
To the extent specified by resolution adopted from time to time by a
majority of all the directors in office when the resolution is adopted, each
committee shall exercise the authority of the board of directors with respect to
the corporate powers and the management of the business and affairs of the
Corporation, except that a committee shall not:
(a) Authorize distributions;
(b) Approve or propose to shareholders action that the Act
requires to be approved by shareholders;
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<PAGE>
(c) Fill vacancies on the board of directors or on any of its
committees;
(d) Amend the articles of incorporation pursuant to Section 7-
110-102 of the Act, as amended or superseded;
(e) Adopt, amend, or repeal bylaws;
(f) Approve a plan of merger not requiring shareholder approval;
(g) Authorize or approve reacquisition of shares, except
according to a formula or method prescribed by the board of
directors; or
(h) Authorize or approve the issuance or sale of shares, or a
contract for the sale of shares, or determine the
designation and relative rights, preferences, and
limitations of a class or series of shares; except that the
board of directors may authorize a committee or an officer
to do so within limits specifically prescribed by the board
of directors.
The creation of, delegation of authority to, or action by, a committee does
not alone constitute compliance by a director with applicable standards of
conduct.
ARTICLE IV
OFFICERS
1. GENERAL. The Corporation shall have as officers a president, a
secretary, and a treasurer, who shall be appointed by the board of directors.
The board of directors may appoint such other officers, including a chairman of
the board, as they may consider necessary. The board of directors and such
other officers as the board of directors may authorize from time to time, acting
singly, may appoint as additional officers one or more vice presidents,
assistant secretaries, assistant treasurers, and such other subordinate officers
as the board of directors or such other appointing officers deem necessary or
appropriate. The officers of the Corporation shall hold their offices for such
terms and shall exercise such authority and perform such duties as shall be
determined from time to time by these bylaws, the board of directors, or (with
respect to officers whom are appointed by the appointing officers) the persons
appointing them; provided, however, that the board of directors may change the
term of offices and the authority of any officer appointed by the appointing
officers. Any two or more offices may be held by the same person. The officers
of the Corporation shall be natural persons at least eighteen years old.
2. TERM. Each officer shall hold office from the time of appointment
until the time of removal or resignation pursuant to Section IV.3. or until the
officer's death.
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<PAGE>
3. REMOVAL AND RESIGNATION. Any officer appointed by the board of
directors may be removed at any time by the board of directors. Any officer
appointed by an appointing officer may be removed at any time by the board of
directors or by the person appointing the officer. Any officer may resign at
any time by giving written notice of resignation to any director (or to any
director other than the resigning officer if the officer is also a director), to
the chief executive officer, to the president, to the secretary, or to the
officer who appointed the officer. Notwithstanding this Section IV.3, a
resignation may constitute a breach of contract. Acceptance of such resignation
shall not be necessary to make it effective, unless the notice so provides.
4. PRESIDENT. The president shall preside at all meetings of
shareholders, and the president shall also preside at all meetings of the board
of directors unless the board of directors has appointed a chairman, vice
chairman, or other officer of the board and has authorized such person to
preside at meetings of the board of directors instead of the president. Subject
to the direction and control of the board of directors, the president shall be
the chief executive officer of the Corporation and as such shall have general
and active management of the business of the Corporation. The president may
negotiate, enter into, and execute contracts, deeds, and other instruments on
behalf of the Corporation as are necessary and appropriate to the conduct of the
business and affairs of the Corporation or as are approved by the board of
directors. The president shall have such additional authority and duties as are
appropriate and customary for the office of president and chief executive
officer, except as the same may be expanded or limited by the board of directors
from time to time.
5. VICE PRESIDENT. The vice president, if any, or, if there are more
than one, the vice presidents in the order determined by the board of directors
or the president (or, if no such determination is made, in the order of their
appointment), shall be the officer or officers next in seniority after the
president. Each vice president shall have such authority and duties as are
prescribed by the board of directors or president. Upon the death, absence, or
disability of the president, the vice president, if any, or, if there are more
than one, the vice presidents in the order determined by the board of directors
or the president, shall have the authority and duties of the president.
6. SECRETARY. The secretary shall be responsible for the preparation and
maintenance of minutes of the meetings of the board of directors and of the
shareholders and of the other records and information required to be kept by the
Corporation under section 7-116-101 of the Act and for authenticating records of
the Corporation. The secretary, president or other authorized officer shall
give, or cause to be given, notice of all meetings of the shareholders and
special meetings of the board of directors. The secretary will keep the minutes
of such meetings, have charge of the corporate seal and have authority to affix
the corporate seal to any instrument requiring it (and, when so affixed, it may
be attested by the secretary's signature), be responsible for the maintenance of
all other corporate records and files and for the preparation and filing of
reports to governmental agencies (other than tax returns), and have such other
authority and duties as are appropriate and customary for the office of
secretary, except as the same may be expanded or limited by the board of
directors from time to time.
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<PAGE>
7. ASSISTANT SECRETARY. The assistant secretary, if any, or, if there are
more than one, the assistant secretaries in the order determined by the board of
directors or the secretary (or, if no such determination is made, in the order
of their appointment) shall, under the supervision of the secretary, perform
such duties and have such authority as may be prescribed from time to time by
the board of directors or the secretary, and shall have such other authority and
duties as are appropriate and customary for the office of assistant secretary,
except as the same may be expanded or limited by the board of directors from
time to time. Upon the death, absence, or disability of the secretary, the
assistant secretary, if any, or, if there are more than one, the assistant
secretaries in the order designated by the board of directors or the secretary
(or, if no such determination is made, in the order of their appointment), shall
have the authority and duties of the secretary.
8. TREASURER. The treasurer shall have control of the funds and the care
and custody of all stocks, bonds, and other securities owned by the Corporation,
and shall be responsible for the preparation and filing of tax returns. The
treasurer shall receive all moneys paid to the Corporation and, subject to any
limits imposed by the board of directors, shall have authority to give receipts
and vouchers, to sign and endorse checks and warrants in the Corporation's name
and on the Corporation's behalf, and give full discharge for the same. The
treasurer shall also have charge of disbursement of funds of the Corporation,
shall keep full and accurate records of the receipts and disbursements, and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Corporation in such depositories as shall be designated by the
board of directors. The treasurer shall have such additional authority and
duties as are appropriate and customary for the office of treasurer, except as
the same may be expanded or limited by the board of directors from time to time.
9. ASSISTANT TREASURER. The assistant treasurer, if any, or, if there
are more than one, the assistant treasurers in the order determined by the board
of directors or the treasurer (or, if no such determination is made, in the
order of their appointment) shall, under the supervision of the treasurer, have
such authority and duties as may be prescribed from time to time by the board of
directors or the treasurer. The assistant treasurer shall have such additional
authority and duties as are appropriate and customary for the office of
assistant treasurer, except as the same may be expanded or limited by the board
of directors from time to time. Upon the death, absence, or disability of the
treasurer, the assistant treasurer, if any, or if there are more than one, the
assistant treasurers in the order determined by the board of directors or the
treasurer (or, if no such determination is made, in the order of their
appointment), shall have the authority and duties of the treasurer.
10. COMPENSATION. Officers shall receive such compensation for their
services as may be authorized or ratified by the board of directors. Election
or appointment of an officer shall not of itself create a contractual right to
compensation for services performed as such officer.
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ARTICLE V
INDEMNIFICATION
1. DIRECTORS. The corporation shall indemnify directors of the
corporation in their capacities as directors pursuant to the procedures set
forth in, and to the fullest extent authorized by, Colorado law as the same
exists or may hereafter be amended. The right to indemnification provided
herein shall be a contract right and shall include the right to be paid by the
corporation in accordance with Colorado law for expenses incurred in advance of
any proceeding's final disposition.
2. OFFICERS, EMPLOYEES, FIDUCIARIES AND AGENTS. The corporation may
indemnify officers, employees, fiduciaries and agents of the corporation to the
same extent as is permitted for directors under Colorado law (and to a greater
extent if consistent with law). No such indemnification shall be made without
the prior approval of the Board of Directors and the determination by the Board
of Directors that such indemnification is permissible.
3. INSURANCE. The corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee, fiduciary and
agent of the corporation or another corporation, partnership, joint venture,
trust, or other enterprise against any expense, liability or loss whether or not
the corporation would have the power to indemnify such person against such
expense, liability or loss under Colorado law.
4. NOT EXCLUSIVE. The foregoing rights of indemnification shall not
be exclusive of other rights to which any director, officer, employee or agent
may be entitled as a matter of law.
ARTICLE VI
SHARES
1. CERTIFICATES. Certificates representing shares of the capital
stock of the Corporation shall be in such form as is approved by the board of
directors and shall be signed by the chairman or vice chairman of the board of
directors (if any), or the president or any vice president. All certificates
shall be consecutively numbered, and the names of the owners, the number of
shares, and the date of issue shall be entered on the books of the Corporation.
Each certificate representing shares shall state upon its face:
(a) That the Corporation is organized under the laws of the State of
Colorado;
(b) The name of the person to whom issued;
(c) The number and class of the shares and the designation of the
series, if any, that the certificate represents;
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(d) The par value, if any, of each share represented by the
certificate;
(e) If the Corporation is authorized to issue different classes or
series of shares, a conspicuous statement, on the front or back of each
certificate, that the Corporation will furnish to the shareholder, on
request in writing and without charge, information concerning the
designations, preferences, limitations, and relative rights applicable to
each class, the variations in preferences, limitations, and rights
determined for each series, and the authority of the board of directors to
determine variations for future classes or series; and
(f) Any restrictions imposed by the Corporation upon the transfer of
the shares represented by the certificate.
2. FACSIMILE SIGNATURES. Where a certificate is signed:
(a) By a transfer agent other than the Corporation or its employee, or
(b) By a registrar other than the Corporation or its employee, any or
all of the officers' signatures on the certificate required by Section
VI.1. may be facsimile. If any officer, transfer agent or registrar who
has signed, or whose facsimile signature or signatures have been placed
upon, any certificate, shall cease to be such officer, transfer agent, or
registrar, whether because of death, resignation, or otherwise, before the
certificate is issued by the Corporation, it may nevertheless be issued by
the Corporation with the same effect as if he or she were such officer,
transfer agent or registrar at the date of issue.
3. TRANSFERS OF SHARES. Transfers of shares shall be made on the books
of the Corporation only upon presentation of the certificate or certificates
representing such shares properly endorsed by the person or persons appearing
upon the face of such certificate to be the owner, or accompanied by a proper
transfer or assignment separate from the certificate, except as may otherwise be
expressly provided by the statutes of the State of Colorado or by order of a
court of competent jurisdiction. The officers or transfer agents of the
Corporation may, in their discretion, require a signature guaranty before making
any transfer. The Corporation shall be entitled to treat the person in whose
name any shares are registered on its books as the owner of those shares for all
purposes and shall not be bound to recognize any equitable or other claim or
interest in the shares on the part of any other person, whether or not the
Corporation shall have notice of such claim or interest.
4. SHARES HELD FOR ACCOUNT OF ANOTHER. The board of directors may adopt
by resolution a procedure whereby a shareholder of the Corporation may certify
in writing to the Corporation that all or a portion of the shares registered in
the name of such shareholder are held for the account of a specified person or
persons. The resolution shall set forth:
(a) The classification of shareholders who may certify;
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(b) The purpose or purposes for which the certification may be made;
(c) The form of certification and information to be contained herein;
(d) If the certification is with respect to a record date or closing
of the stock transfer books, the time after the record date or the closing
of the stock transfer books within which the certification must be received
by the Corporation; and
(e) Such other provisions with respect to the procedure as are deemed
necessary or desirable. Upon receipt by the Corporation of a certification
complying with the procedure, the persons specified in the certification
shall be deemed, for the purpose or purposes set forth in the
certification, to be the holders of record of the number of shares
specified in place of the shareholder making the certification.
ARTICLE VII
MISCELLANEOUS
1. CORPORATE SEAL. The board of directors may adopt a seal, circular in
form and bearing the name of the Corporation and the words "SEAL" and
"COLORADO," which, when adopted, shall constitute the seal of the Corporation.
The seal may be used by causing it or a facsimile of it to be impressed,
affixed, manually reproduced, or rubber stamped with indelible ink.
2. FISCAL YEAR. The board of directors may, by resolution, adopt a
fiscal year for the Corporation.
3. RECEIPT OF NOTICES BY THE CORPORATION. Notices, shareholder writings
consenting to action, and other documents or writings shall be deemed to have
been received by the Corporation when they are received:
(a) At the registered office of the Corporation in the State of
Colorado;
(b) At the principal office of the Corporation (as that office is
designated in the most recent document filed by the Corporation with the
Secretary of State for the State of Colorado designating a principal
office) addressed to the attention of the secretary of the Corporation;
(c) By the secretary of the Corporation wherever the secretary may be
found; or
(d) By any other person authorized from time to time by the board of
directors, the president, or the secretary to receive such writings,
wherever such person is found.
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4. AMENDMENT OF BYLAWS. These bylaws may at any time and from time to
time be amended, supplemented, or repealed by the board of directors.
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IMAGEMATRIX CORPORATION
May 16, 1996
Southwest Securities, Inc.
f/b/o Rolf Stepparud
Re: Stock Recision Agreement
------------------------
Dear Rolf:
This Agreement will confirm the agreement we have reached regarding the recision
of your purchase of ImageMatrix Corporation (the "Company") Common Stock. On
August 31, 1995, you purchased 26,421 shares (on a post stock split basis) of
Common Stock issued by the Company at a price (on a post stock split basis) of
$1.42.
Subsequent to your purchase, the Company entered into negotiations, and later
entered into a letter of intent, with Neidiger, Tucker, Bruner, Inc. ("NTB") for
NTB to co-underwrite an initial public offering ("IPO") of the Company's Common
Stock and warrants. You are an employee of NTB.
Because you are affiliated with NTB, the National Association of Securities
Dealers ("NASD"), in its review of the proposed terms of the underwriting,
included the difference between the proposed IPO price and the price you paid
for your stock in the permissible underwriting compensation to be charged by
NTB. In addition, applicable NASD rules would have limited the number of
securities that could be offered by the number of shares held by you absent this
recision. The Company understands that NTB will refuse to proceed with the
underwriting if such difference is charged against its compensation, so NTB
discussed the matter with you. Based on those discussions, it is our
understanding that you agreed to rescind your purchase of your Common Stock
pursuant to this Agreement.
You are aware that the Company is planning to proceed with the IPO after the
repurchase of your Common Stock from you, and by your signature below you
confirm that you have received a copy of the Preliminary Prospectus dated May 7,
1996. You have agreed to immediately transfer all right, title and interest in
and to your 26,421 shares of Company Common Stock for a price of $37,517.82,
payable in the form of a non-interest bearing unsecured promissory note (the
"Note") to be issued by the Company. The Note will be payable upon the closing
of the IPO or December 31, 1996, whichever shall first occur.
There are no agreements or understandings between us, or by any officer,
director or employee of the Company, to make any other payment, direct or
indirect, whether in cash, stock, options, warrants, other forms of derivative
securities, or otherwise, or any other payment or consideration to you, other
than the Note.
<PAGE>
If this Agreement accurately reflects our agreement, please so indicate by
executing a copy of this Agreement and returning it to me. We will then issued
the Note and cancel your Certificate which you agree to deliver to us.
Very truly yours,
IMAGEMATRIX CORPORATION
By: /s/ KEITH E. BRUE, VP-CFO By: /s/ DENNIS HEFTER, VP
------------------------- ---------------------
Keith E. Brue Dennis Hefter
AGREED TO, this 16th day of May, 1996:
/s/ ROLF STEPPARUD
--------------
Rolf Stepparud
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PROMISSORY NOTE
$37,517.82 BOULDER, COLORADO
DATED: MAY 16, 1996
FOR VALUE RECEIVED, IMAGEMATRIX CORPORATION, a Colorado corporation
("Maker"), promises to pay to the order of ROLF STEPPARUD ("Holder"), and his
successors and assigns, the sum of Thirty-Seven Thousand Five Hundred Seventeen
and 82/100 Dollars ($37,517.82), without interest, at 1620 Columbine Avenue,
Boulder, Colorado, or at such other place as the holder hereof may direct in
writing.
This note shall be due and payable upon the earlier of the closing of the
Maker's initial public offering, or on December 31, 1996.
The Maker and endorsers of this Promissory Note jointly and severally waive
demand, presentment, protest, notice of protest and notice of nonpayment or
dishonor of this note, and each of them consents to extensions of the time of
payment of this note.
No delay or omission on the part of the holder hereof in the exercise of
any right or remedy shall operate as a waiver thereof, and no single or partial
exercise by the holder hereof of any right or remedy shall preclude other or
further exercise thereof or of any other right or remedy.
Signed and delivered at Boulder, Colorado this 16th day of May, 1996.
IMAGEMATRIX CORPORATION
By: /s/ KEITH E. BRUE
-----------------------------
Keith E. Brue, Vice President
and Chief Financial Officer
By: /s/ DENNIS HEFTER
------------------------------
Dennis Hefter, Vice President
\\N:\WG1\IMAGEMAT\IPO\UNSECNOT.NOT\\
<PAGE>
IMAGEMATRIX CORPORATION
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<S> <C> <C>
Applicable Common Shares:
Net effect of common stock--based on the treasury stock
method using the projected IPO price of $5.75
Shares issued during the year.......................... 3,265,193
Less: Treasury stock assumed purchased
Net stock proceeds.................................... 1,201,000
Divided by: IPO price................................. $ 5.75
----------
(208,870)
Net effect of common stock options--based on the
treasury stock method using the projected IPO price of
$5.75:
Shares assumed issued for stock options................ 940,759
Less: Treasury stock assumed purchased
Options having an exercise price below projected IPO
price................................................ 940,759
Multiplied by: Exercise price......................... $ 2.58
----------
$2,427,158
Divided by: IPO price................................. $ 5.75
----------
(422,114)
---------
Total shares.......................................... 3,574,968
=========
</TABLE>
These shares were used to calculate earnings per share for all periods
presented. Due to the recent formation of the Company, weighted share
calculations are not required.
<PAGE>
EXHIBIT 23.1
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Consent of Independent Auditors
We consent to the references to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
March 4, 1996, except for Note 13 as to which the date is March 29, 1996 on the
financial statements of ImageMatrix Corporation as of December 31, 1995 and for
each of the two years in the period then ended and our report dated
March 4, 1996 on the financial statements of the Imaging Division of Random
Access, Inc. for the period February 16, 1995 through August 30, 1995, in
Amendment No. 2 to the Registration Statement (Form SB-2 No. 333-1990) and
related Prospectus of ImageMatrix Corporation dated May 16, 1996.
ERNST & YOUNG LLP
Denver, Colorado
May 16, 1996
