<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1997
REGISTRATION NO. 333-35567
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
IMAGEMAX, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
PENNSYLVANIA 7389 23-2865585
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
</TABLE>
TWO BALA PLAZA, SUITE 300
BALA CYNWYD, PENNSYLVANIA 19004
(610) 660-7754
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
------------------------
BRUCE M. GILLIS
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
IMAGEMAX, INC.
TWO BALA PLAZA, SUITE 300
BALA CYNWYD, PENNSYLVANIA 19004
(610) 660-7754
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
------------------------
COPIES TO:
BARRY M. ABELSON, ESQUIRE MICHAEL M. FROY, ESQUIRE
MICHAEL P. GALLAGHER, ESQUIRE MARK L. DOSIER, ESQUIRE
PAUL T. PORRINI, ESQUIRE SONNENSCHEIN NATH & ROSENTHAL
PEPPER, HAMILTON & SCHEETZ LLP 8000 SEARS TOWER
3000 TWO LOGAN SQUARE CHICAGO, IL 60606
EIGHTEENTH AND ARCH STREETS (312) 876-8000
PHILADELPHIA, PA 19103-2799
(215) 981-4000
Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, 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 of 1933, 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. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 4, 1997
PROSPECTUS
3,100,000 SHARES
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by
ImageMax, Inc. Prior to the Offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $12.00 and $14.00 per share. See "Underwriting"
for information relating to the determination of the initial public offering
price. The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "IMAG."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON
STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
| PRICE TO | UNDERWRITING | PROCEEDS TO
| PUBLIC | DISCOUNT (1) | COMPANY (2)
- --------------------------------------------------------------------------------
Per Share.... | $ | $ | $
Total(3)..... | $ | $ | $
================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $2,950,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 465,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If all such shares are
purchased, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ and $ , respectively.
The shares of Common Stock are offered by the several Underwriters, when,
as and if delivered to and accepted by them and subject to their right to reject
orders in whole or in part. It is expected that delivery of certificates for the
shares of Common Stock will be made on or about , 1997.
WILLIAM BLAIR & COMPANY JANNEY MONTGOMERY SCOTT INC.
THE DATE OF THIS PROSPECTUS IS , 1997
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 AN STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[Map With Location of Company's Headquarters and Principal Branch Offices]
------------------------
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and to make available quarterly reports
containing unaudited financial statements for the first three quarters of each
year.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING, OVER-ALLOTMENT AND SYNDICATE COVERING TRANSACTIONS AND
THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
Simultaneously with and as a condition to the closing of the Offering made
by this Prospectus, the Company will acquire 14 document management service
companies or substantially all of their assets (collectively, the "Founding
Companies"), representing 11 ownership groups, in separate transactions (the
"Acquisitions") in exchange for shares of its Common Stock, the assumption of
certain indebtedness and cash. Unless otherwise indicated, all references to
"ImageMax" shall mean ImageMax, Inc. prior to the effectiveness of the
Acquisitions and references herein to the "Company" shall include the Founding
Companies.
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, all share, per share and financial information set forth
herein: (i) gives effect to a .846154-for-one split of the outstanding shares of
Common Stock prior to the consummation of the Offering; (ii) gives effect to the
Acquisitions and the conversion of all outstanding shares of Series A
Convertible Preferred Stock ("Series A Preferred Stock") into Common Stock
simultaneously with the closing of the Offering; and (iii) assumes no exercise
of the Underwriters' over-allotment option. See "The Company" and
"Underwriting."
THE COMPANY
ImageMax was founded in November 1996 to become a leading national,
single-source provider of integrated document management solutions. Prior to the
Offering, ImageMax has not conducted any operations. ImageMax has entered into
agreements to acquire the Founding Companies simultaneously with and as a
condition to the consummation of the Offering. The Founding Companies, which
have been in business an average of over 20 years, have operations in 13 states,
employ over 950 people and provided services and products to over 5,000 clients
in the last year from 18 locations. The Company's pro forma combined revenues
for the twelve-month period ended December 31, 1996 were $43.3 million. Pro
forma combined revenues for the nine months ended September 30, 1997 were $36.5
million, an increase of 12.6% over the comparable 1996 period.
The Company has initially targeted a broad variety of services and
products, as well as technical and vertical market expertise, in order to create
a platform from which it can become a leading national, single-source provider
for clients with intensive document management needs. The Company's services
include document management consulting and systems integration, media conversion
(consisting of digital imaging and micrographics), data indexing and offshore
data entry, information storage and retrieval, and document management systems
maintenance. The Company's products include proprietary, open-architecture
digital imaging and indexing software as well as document management systems and
supplies. The Company provides these services and products individually or in
combination to provide solutions to a wide range of clients' document management
needs. The Company's service and product offering mix is designed to take
advantage of the Company's substantial technical and systems experience in the
area of digital document management as well as product and vertical market
knowledge of the Founding Companies' managers, who have an average of 14 years
industry experience.
The Company's diversified client base operates primarily in
document-intensive industries such as health care, financial services and
engineering. Key clients include Abbott Laboratories, Novartis AG, First Union
National Bank, Nordstrom Credit, Inc., The Boeing Company, General Electric
Company, Avis Rent a Car, Inc. and Waste Management, Inc.
Based on information made publicly available by the Association for
Information and Image Management International ("AIIM"), the Company believes
that the U.S. market for document management services and products was over $6.5
billion in 1996. The Company believes that this market has been growing at an
annual rate of approximately 11% since 1994. The Company further believes that
there is a substantial unvended component of the service market not accounted
for in the AIIM data because most document management services for large
organizations are currently
3
<PAGE>
performed in-house. The document management industry is also highly fragmented.
The Company estimates that there are over 2,000 companies engaged in a wide
variety of business-to-business document management services and product sales
and that a substantial majority of these companies are small businesses selling
to a single geographic market, offering a limited range of services or selling
to a limited number of client market segments. The Company believes that it will
continue to benefit from key factors driving the growth of the document
management industry, including: (i) continued advances in digital technology
which have dramatically reduced the cost of imaging, storing, indexing, and
retrieving documents electronically while improving users' ability to manage
documents more efficiently; (ii) growth in document management needs of
organizations desiring to better manage information in order to improve
productivity, competitiveness and client service; and (iii) the increasing
willingness of organizations to outsource their document management services in
order to allow them to focus on their core competencies and revenue generating
activities, reduce fixed costs, benefit from the expertise and economies of
scale of outside providers and gain access to new technologies without the risk
and expense of near-term obsolescence.
The Company intends to implement its business strategy focused on the
following key elements:
o Become a single source provider of in-house or outsourced document
management solutions by further developing consultative relationships
with clients to assess their document management needs and to recommend
and provide cost-effective combinations of services and products. The
Company will customize packages of services and products for specific
vertical markets and will expand national account coverage to service
clients who seek to benefit from working with a single vendor.
o Capitalize on business integration by creating a single nation-wide brand
name, integrating the Company's information and communications systems
and consolidating the Company's planning, acquisition support and
administration under the direction of its experienced executive
management team to enable business unit management to devote increased
resources to business generation and client service. The Company intends
to establish company-wide technology centers that will focus on software
product development, enhancement of systems integration expertise and new
product development such as data warehousing services and inter/intranet
document management solutions.
o Increase sales and marketing efforts, including hiring additional
salespeople at the Founding Companies, expanding a national account sales
force, emphasizing sales training in digital document management
applications, cross-selling additional services and products,
capitalizing on the Company's present vertical market expertise and
extending successful existing marketing programs that utilize direct
marketing, telemarketing, seminar selling and internet marketing.
o Aggressively pursue acquisitions to enhance its position as a provider of
complete document management solutions by expanding geographic coverage
and market share, expanding service and product capabilities, obtaining
key human resources and technical expertise and generating critical mass
and economies of scale nationally and in regional markets. The Company
will position itself to be a preferred acquirer of other companies in the
highly fragmented document management industry as a result of the
Company's capabilities, management personnel, solutions orientation and
integration strategy. Additionally, the Company's relationships with over
100 independent document management service providers through its
software licensing and data entry service activities provide the Company
with a valuable source of potential future acquisitions.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company........... 3,100,000 shares
Common Stock to be Outstanding after the
Offering.................................... 5,438,727 shares(1)
Use of Proceeds............................... To fund the Acquisitions and for general cor-
porate purposes, including future acquisi-
tions. See "Use of Proceeds" and "Certain
Transactions."
Nasdaq National Market Symbol................. IMAG
</TABLE>
- ------------------
(1) Includes 1,184,468 shares of Common Stock to be issued in connection with
the Acquisitions (based on an assumed initial public offering price of
$13.00 per share). Excludes (i) 367,500 shares of Common Stock which will be
issuable upon the exercise of stock options to be granted in connection with
the Offering at an exercise price per share equal to the initial public
offering price, (ii) 232,500 shares of Common Stock available for future
grants under the Company's 1997 Incentive Plan and (iii) 250,000 shares
available for future issuances under the Company's Employee Stock Purchase
Plan. See "Management - Stock Incentive Plans."
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective purchasers of the shares of Common Stock offered
hereby.
5
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ImageMax will acquire the Founding Companies simultaneously with and as a
condition to consummation of the Offering. For financial statement presentation
purposes, ImageMax has been identified as the "accounting acquirer." The
following table presents certain summary unaudited combined historical financial
data of ImageMax and the Founding Companies, adjusted to give effect to (i) the
consummation of the Acquisitions, (ii) certain pro forma adjustments to the
historical financial statements described below and (iii) the consummation of
the Offering and the application of the estimated net proceeds therefrom. See
"Selected Financial Data," the Unaudited Pro Forma Combined Financial
Statements, including the notes thereto, and the historical financial statements
for ImageMax and the Founding Companies, including the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA COMBINED
-------------------------------------------
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------------
1996 1996 1997
------------ --------- ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Revenues.................................................. $ 43,256 $ 32,402 $ 36,473
Gross profit(2)........................................... 12,613 9,506 12,194
Selling, general and administrative expenses(3)........... 11,198 8,326 8,218
Executive compensation(4)................................. 610 458 458
Founding Companies' transaction costs(5).................. -- -- 332
Amortization of intangible assets(6)...................... 1,158 868 868
Operating income (loss)................................... (353) (146) 2,318
Interest income, net(7)................................... 37 10 (5)
Income (loss) before income taxes......................... (316) (136) 2,313
Net income (loss)(7)(8)................................... $ (500) $ (314) $ 1,173
Net income (loss) per share............................... $ (.10) $ (.06) $ .24
Shares used in computing pro forma net income (loss) per
share(9)................................................ 4,985,956 4,985,956 4,985,956
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------
PRO FORMA
PRO FORMA COMBINED
COMBINED(10) AS ADJUSTED(11)
------------ ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 2,881 $ 5,783
Working capital (deficit)................................. (26,322)(12) 8,546
Total assets.............................................. 50,924 51,839
Long-term debt, less current portion...................... 1,098 --
Shareholders' equity...................................... 10,530 44,509
</TABLE>
- ------------------
(1) The pro forma combined statement of operations data assume that the
Acquisitions and the Offering were consummated on January 1, 1996 and are
not necessarily indicative of the results the Company would have obtained
had these events actually then occurred or of the Company's future results.
(2) Includes a pro forma adjustment to increase cost of revenues to reflect the
Company's new operating leases on facilities at certain Founding Companies
(the "Rent Differential"). See Unaudited Pro Forma Combined Financial
Statements.
(3) Reflects a pro forma reduction in compensation to the owners of the
Founding Companies to which they have agreed prospectively (the
"Compensation Differential"). Selling, general and administrative expenses
include compensation costs associated with positions eliminated or which
will be eliminated in connection with the Acquisitions, including the
retirement of four senior Founding Companies' executives and other
identified head-count reductions totalling approximately $650,000, $500,000
and $300,000 for the year ended December 31, 1996 and the nine months ended
September 30, 1996 and 1997, respectively.
(4) Includes compensation of $610,000 annually based upon employment agreements
with the Company's executive management (see "Management - Employment
Agreements"). Excludes a non-recurring, non-cash compensation charge of
$2.5 million (or $0.50 per share) recorded in the nine months ended
September 30, 1997. See Note 5 to Unaudited Pro Forma Combined Financial
Statements.
(5) Reflects non-recurring transaction costs incurred by the Founding Companies
in connection with the Acquisitions.
(6) Represents amortization of $30.4 million of goodwill to be recorded as a
result of the Acquisitions over an estimated life of principally 30 years
and amortization of acquired developed technology of $0.8 million over an
estimated life of seven years. Excludes a charge of $4.0 million for
acquired in-process research and development and a $0.5 million
non-recurring charge related to a fee payable in the fourth quarter upon
the closing of the Offering. See "Certain Transactions" and Unaudited Pro
Forma Combined Financial Statements.
(7) Includes a pro forma adjustment to reflect the elimination of interest
expense resulting from the repayment of debt paid from the net proceeds of
the Offering. See "Use of Proceeds." If the effect of the Offering were
excluded, pro forma interest expense, net would be $866,000, $643,000 and
$611,000 for the year ended December 31, 1996 and the nine months ended
September 30, 1996 and 1997, respectively. Net income (loss) would be
$(1,049,000), $(711,000) and $805,000 and the net income (loss) per share
would be $(0.24), $(0.16) and $0.19, respectively, for the above periods.
(8) Reflects an estimated corporate income tax rate of 39.3% before considering
the non-deductibility of approximately $790,000 of annual amortization of
intangible assets.
(9) Represents (i) 710,770 shares of Common Stock issued and outstanding at
September 30, 1997, (ii) 1,184,468 shares to be issued in the Acquisitions
(based on an assumed initial public offering price of $13.00 per share),
(iii) 443,489 shares to be issued upon the conversion of all shares of
Series A Preferred Stock outstanding at September 30, 1997 upon the
consummation of the Offering, and (iv) 2,647,229 of the 3,100,000 shares
being sold in the Offering (at an assumed initial public offering price of
$13.00 per share) necessary to pay the cash portion of the consideration
for the Acquisitions, Founding Companies' indebtedness as described in "Use
of Proceeds" and expenses of the Acquisitions and the Offering.
(10) The pro forma combined balance sheet data assume that the Acquisitions were
consummated on September 30, 1997.
(11) Adjusted for the sale of the 3,100,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $13.00 per share and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
(12) Includes $25.4 million payable to the owners of the Founding Companies,
representing the cash portion of the consideration for the Acquisitions,
which is to be paid from the net proceeds of the Offering.
6
<PAGE>
SUMMARY FINANCIAL DATA FOR INDIVIDUAL FOUNDING COMPANIES
(IN THOUSANDS)
The following table presents summary statement of operations data for the
Founding Companies (see "The Company" for complete names of each Founding
Company) for the year ended December 31, 1996 and for the nine months ended
September 30, 1996 and 1997. Operating income (loss) has not been adjusted for
any pro forma adjustments or to take into account increased costs associated
with being a public company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Introduction." Adjusted pro
forma operating income (loss) includes operating income adjusted for the
Compensation Differential and the Rent Differential and excludes pro forma and
historical amortization of intangible assets, costs associated with being a
public company and the Company's executive management compensation. Adjusted pro
forma operating income (loss) includes compensation costs eliminated or which
will be eliminated in connection with the Acquisitions and non-recurring
transaction costs incurred by the Founding Companies in connection with the
Acquisitions (see Notes (3) and (5) to Summary Pro Forma Combined Financial
Data). See Unaudited Pro Forma Combined Financial Statements.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED
ENDED SEPTEMBER 30,(2)
DECEMBER 31, ---------------------
1996(1) 1996 1997
------------ ------ ------
<S> <C> <C> <C>
AMMCORP:
Revenues......................................... $5,573 $4,081 $4,079
Gross profit..................................... 1,746 1,153 1,340
Operating income................................. 119 18 60
Adjusted pro forma operating income.............. 528 287 330
CodaLex Group:
Revenues......................................... $4,057 $2,984 $3,756
Gross profit..................................... 962 793 1,078
Operating income (loss).......................... (122) 99 346
Adjusted pro forma operating income (loss)....... (159) 68 342
DataLink:
Revenues......................................... $3,151 $2,506 $2,564
Gross profit..................................... 567 517 647
Operating income................................. 100 190 242
Adjusted pro forma operating income.............. 103 180 274
DocuTech:
Revenues......................................... $2,322 $1,774 $2,169
Gross profit..................................... 1,206 910 1,302
Operating income................................. 459 345 643
Adjusted pro forma operating income.............. 420 329 562
I(2) Solutions:
Revenues......................................... $3,959 $3,137 $3,330
Gross profit..................................... 1,550 1,272 1,471
Operating income (loss).......................... (123) 187 267
Adjusted pro forma operating income.............. 263 260 315
IMS:
Revenues......................................... $2,292 $1,768 $1,996
Gross profit..................................... 386 299 835
Operating income (loss).......................... (218) (196) 399
Adjusted pro forma operating income (loss)....... (227) (204) 391
IDS:
Revenues......................................... $1,431 $ 941 $2,340
Gross profit..................................... 399 233 874
Operating income (loss).......................... (119) (93) 212
Adjusted pro forma operating income (loss)....... (41) (27) 640
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED
ENDED SEPTEMBER 30,(2)
DECEMBER 31, ------------------
1996(1) 1996 1997
------------ ------ ------
<S> <C> <C> <C>
OMI:
Revenues.................................................. $3,666 $2,784 $3,111
Gross profit.............................................. 815 752 869
Operating income.......................................... 140 234 248
Adjusted pro forma operating income....................... 178 220 247
Spaulding:
Revenues.................................................. $8,693 $6,526 $6,705
Gross profit.............................................. 2,876 2,123 2,140
Operating income (loss)................................... (141) (270) 165
Adjusted pro forma operating income (loss)................ (322) (414) 124
TIMCO:
Revenues.................................................. $4,991 $3,609 $3,318
Gross profit.............................................. 1,639 1,165 1,159
Operating income.......................................... 416 251 315
Adjusted pro forma operating income....................... 521 338 466
TPS:
Revenues.................................................. $3,215 $2,363 $3,203
Gross profit.............................................. 846 574 776
Operating income.......................................... 94 88 116
Adjusted pro forma operating income....................... 174 143 183
</TABLE>
- ------------------
(1) Consists of operating results for the year ended December 31, 1996, except
that I(2) Solutions' operating results are for the year ended October 31,
1996.
(2) Consists of operating results for the nine months ended September 30, 1996
and 1997, except that I(2) Solutions' operating results are for the nine
months ended July 31, 1996 and 1997.
ImageMax was incorporated in Pennsylvania in November 1996. The Company's
executive offices are located at Two Bala Plaza, Suite 300, Bala Cynwyd,
Pennsylvania 19004-1573, and its telephone number is (610) 660-7754.
8
<PAGE>
RISK FACTORS
This Prospectus contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Prospectus, the words
"anticipate," "believe," "estimate," "expect" and similar expressions, as they
relate to the Company or its management, are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include those discussed below. Prospective investors should
carefully consider such factors as well as the other information set forth in
this Prospectus in evaluating an investment in the shares of Common Stock
offered by this Prospectus.
ABSENCE OF COMBINED OPERATING HISTORY; RISKS OF INTEGRATION; MANAGEMENT OF
GROWTH
ImageMax was founded in November 1996 and has conducted no operations to
date. ImageMax has entered into agreements to acquire the Founding Companies
simultaneously with and as a condition to the closing of the Offering. Prior to
the consummation of the Offering, the Founding Companies will have been
operating as separate independent entities. Currently, the Company has no
centralized financial reporting system and will initially rely on the existing
reporting systems of the Founding Companies, which the Company intends to
integrate and enhance. The success of the Company will depend, in part, on the
Company's ability to integrate the operations of the Founding Companies,
including developing programs and processes that will promote cooperation and
the sharing of opportunities and resources among the Founding Companies.
ImageMax's executive management group has been assembled only recently and has
no previous experience in the document management services industry. There can
be no assurance that the executive management group will effectively be able to
oversee the combined entity and implement the Company's operating or growth
strategies. Further, to the extent that the Company is able to implement its
acquisition strategy, the resulting growth of the Company will place significant
demands on executive and senior management and on the Company's internal systems
and controls. There can be no assurance that the newly assembled management
group will be able to effectively manage the Company through a period of
significant growth. In addition, no assurance can be given that the Company's
current systems will be adequate for its future needs, that the Company will be
successful in implementing new systems or that the cost of any such new systems
will not be material. See "Business - Business Strategy" and "Management."
A number of the Founding Companies offer different services, utilize
different capabilities and technologies and target different geographic markets
and industries. These differences increase the risk inherent in successfully
completing such integration. Further, there can be no assurance that the
Company's strategy to become a national, single-source provider for integrated
document management solutions will be successful, or that the Company's target
industries will accept the Company as a provider of such services. In addition,
there can be no assurance that the operating results of the Company will match
or exceed the combined individual operating results achieved by the Founding
Companies prior to the Offering. Pro forma combined net loss for the
twelve-month period ended December 31, 1996 was $0.5 million. Pro forma combined
net income for the nine months ended September 30, 1997 was $1.2 million,
compared to a pro forma combined net loss of $0.3 million in the comparable 1996
period.
RISKS OF ACQUISITIONS
The Company intends to aggressively pursue the acquisition of additional
document management services businesses in new geographic regions and in the
regions where the Company currently operates as part of its growth strategy. Due
to consolidation in the document management services industry, there is
significant competition in acquiring such businesses, and the prices for
attractive acquisition candidates may be bid up to higher levels, particularly
in cases where competitors with greater financial and other resources than the
Company compete for the same acquisition targets. The success of any completed
acquisition, including the Acquisitions, will depend in large measure on the
Company's ability to effectively integrate the operations, management and
information systems of the acquired business. The process of integrating
acquired businesses often involves unforeseen liabilities,
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risk exposure and difficulties and may require a disproportionate amount of the
Company's financial and other resources. Acquisitions may involve a number of
additional risks, such as adverse short-term effects on the Company's reported
operating results, diversion of management's attention, the ability of the
Company to retain key personnel and clients, unanticipated problems or legal
liabilities, and amortization of acquired intangible assets, some or all of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be successful in identifying or consummating favorable acquisition
opportunities, or in integrating future acquisitions, or that acquired
businesses will achieve sales and profitability that justify the Company's
investment therein. Further, to the extent that the agreements relating to
acquisitions by the Company provide for indemnification of the Company with
respect to contingent and other liabilities of the acquired entity, such
indemnification obligations may be, and are in the case of the Acquisitions, for
a limited duration and subject to negotiated limitations. If any claims or
liabilities of the Company relating to the Founding Companies or future
acquisitions are determined to not be subject to any indemnification
obligations, or if the amount of such claims or liabilities exceed such
limitations or the ability of the sellers of the acquired entities to satisfy
their indemnification obligations, the Company's business, financial condition
and results of operations could be materially and adversely effected. See
"Business - Business Strategy."
NEED FOR ADDITIONAL FINANCING TO IMPLEMENT ACQUISITION STRATEGY
The Company intends to finance future acquisitions by using cash from
operations, by issuing shares of Common Stock and through borrowings under the
Company's then-existing credit facilities. The Company believes that its cash
position after the Offering, its cash flow from operations, the 2,000,000 shares
of Common Stock to be registered pursuant to a shelf registration statement and
its contemplated credit facility will be sufficient to fund acquisition activity
for at least 12 months following the Offering. However, no assurance can be
given that such financing sources will be adequate to fund such acquisition
activity, or that the Company will not need additional debt or equity financing
to successfully implement its acquisition strategy. There can be no assurance
that the Company will be able to obtain such financing if and when it is needed
or that, if available, such financing will be available on terms the Company
deems acceptable. If the Company does not have sufficient cash resources or
availability under its then existing credit facilities, or if the Common Stock
does not maintain sufficient value or potential acquisition candidates are
unwilling to accept Common Stock as part of the consideration for the sale of
their businesses, the Company will be unable to successfully implement its
acquisition strategy.
Promptly following consummation of the Offering, the Company intends to
enter into a credit facility (the "Credit Facility") to assist in the funding of
future acquisitions and operating activities. There can be no assurance as to
the terms, timing or ability of the Company to obtain such a credit facility.
The Company may substantially increase its level of indebtedness in the future
to finance its acquisition program. The degree to which the Company is
financially leveraged following such borrowings and the terms of the Company's
indebtedness could have important consequences to shareholders, including that
(i) the Company's ability to obtain additional financing in the future for
working capital and general corporate purposes, to make acquisitions, fund
capital expenditures and pay dividends may be impaired, (ii) a substantial
portion of the Company's cash flow from operations may have to be dedicated to
the payment of the principal of and interest on its indebtedness, (iii) certain
of the Company's borrowings may be at variable rates of interest, which will
expose the Company to the risk of increased interest rates, (iv) the Credit
Facility will contain certain financial and restrictive covenants which could
limit the ability of the Company to effect future debt or equity financings and
may otherwise restrict corporate activities, and (v) the Company may be more
highly leveraged than many of its competitors, which may place the Company at a
competitive disadvantage. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Pro Forma Combined Liquidity and Capital
Resources" and "Business - Business Strategy."
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SIGNIFICANT INTANGIBLE ASSETS
Approximately $31.2 million, or 60.3%, of the Company's pro forma combined
total assets as of September 30, 1997 represent intangible assets arising from
the Acquisitions, of which approximately $30.4 million is goodwill which will be
amortized using an estimated life of principally 30 years and approximately $0.8
million is acquired developed technology which will be amortized over a period
of seven years. Goodwill is an intangible asset that represents the difference
between the total purchase price of the Acquisitions and the amount of such
purchase price allocated to the fair value of the net assets acquired. Goodwill
and other intangibles are amortized over a period of time, with the amount
amortized in a particular period constituting a non-cash expense that reduces
the Company's net income in that period. A reduction in net income resulting
from the amortization of goodwill and other intangibles may have an adverse
impact upon the market price of the Company's Common Stock. In addition, in the
event of a sale or liquidation of the Company or its assets, there can be no
assurance that the value of such intangible assets would be recovered.
IMPORTANCE OF DEVELOPMENT OF NEW SERVICES AND MAINTENANCE OF TECHNOLOGICAL
CAPABILITIES
The announcement or introduction of competing services or products
incorporating new technologies or the emergence of new technical standards could
render some or all of the Company's services or products unmarketable. The
Company believes that its future success depends on its ability to enhance its
current services or products and develop new services or products that address
the increasingly sophisticated needs of its clients. The failure of the Company
to develop and introduce enhancements and new services in a timely and
cost-effective manner in response to changing technologies or client
requirements could have a material adverse effect on the Company's business,
financial condition or results of operations. Further, many of the Company's
current services and products are non-proprietary in nature and there can be no
assurance that the Company will be able to obtain the rights to use any such
technologies, that it will be able to effectively implement such technologies on
a cost-effective basis or that such technologies will not ultimately render
obsolete the Company's role as a third party provider of document management
services and products.
COMPETITION
The Company operates in a competitive environment. The document management
services industry is highly fragmented and has relatively low barriers to entry.
A significant source of competition is the in-house document handling capability
of businesses within the Company's target markets, the so-called "unvended" part
of the market. There can be no assurance that these businesses will outsource
more of their document management needs or that other businesses will not bring
in-house services that they currently outsource. In addition, certain of the
Company's competitors are larger businesses, many of which have greater
financial and other resources than the Company. Certain of these competitors
operate in broader geographic areas than the Company, and others may choose to
enter the Company's areas of operation in the future. In addition, there may be
no assurance that other companies with greater resources than the Company will
not enter the document management services industry in the future. Further, the
Company intends to enter new geographic areas and expects to encounter
significant competition from established competitors in each of such new areas.
As a result of this competitive environment, the Company may lose clients or
have difficulty in acquiring new clients, and its business, financial condition
and results of operations may be adversely affected. See "Business -
Competition."
RELIANCE ON MANAGEMENT AND PERSONNEL
The Company's operations and future prospects are dependent on the
performance of its executive management team, including Bruce M. Gillis, S.
David Model, James D. Brown and Andrew R. Bacas. The Company will also be
dependent on senior management of the Founding Companies and on the senior
management of businesses acquired in the future. If any of these people are
unable or unwilling to continue in their present roles, or if the Company is
unable to attract and retain other skilled employees, the Company's business,
financial condition and results of operations could be materially and adversely
affected. See "Management."
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The Company's future success and plans for growth also depend on its
ability to attract, train and retain personnel in all areas of its business.
There is strong competition for qualified personnel in the document management
services industry and in many of the geographic markets in which the Company
competes. As of September 1, 1997, the federal minimum wage increased to $5.15
an hour and there can be no assurance that such rate will not be substantially
increased in the future. In addition, California and other states have increased
or may increase their minimum wage above the federal minimum. Increases in the
minimum wage may cause the Company to increase wages to remain competitive.
Accordingly, the Company's business, financial condition and results of
operations may be adversely affected.
POTENTIAL LIABILITY FOR BREACH OF CONFIDENTIALITY
A substantial portion of the Company's business involves the handling of
documents containing confidential and other sensitive information. There can be
no assurance that unauthorized disclosures of such information will not result
in liability to the Company. It is possible that such liabilities could have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON CERTAIN MARKETS
The Company derives its revenues primarily from its target markets,
including the health care, financial services and engineering industries.
Fundamental changes in the business practices of any of these markets, whether
due to regulatory, technological or other developments, could cause a material
reduction in demand by such clients for the services offered by the Company. Any
such reduction in demand may have a material adverse effect on the business,
financial condition and results of operations of the Company. See "Business -
Clients and Key Markets."
ENVIRONMENTAL RISKS RELATED TO CERTAIN OPERATIONS OF THE COMPANY
Certain of the Company's operations utilize chemical products which are
regulated under federal, state and local laws as hazardous substances, and
produce wastes which are regulated under these laws. The Company is not
currently aware of any environmental conditions relating to present or past
waste generation at or from these facilities that would be likely to have a
material adverse effect on the business, financial condition or results of
operations of the Company. However, there can be no assurances that
environmental liabilities will not have a material adverse effect on the
business, financial condition and results of operations of the Company. See
"Business - Environmental Matters."
EFFECT OF POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's results of operations are subject to variations in any given
year, and from quarter to quarter. Factors that may cause material fluctuations
in quarterly results of operations include the timing and structure of
acquisitions, the timing and magnitude of costs related to such acquisitions,
the gain or loss of significant clients, increases or reductions in the scope of
services performed for significant clients, the timing or completion of
significant projects, the relative mix of higher and lower margin projects,
changes in pricing strategies, capital expenditures and other costs relating to
the expansion of operations, the hiring or loss of personnel, and other factors
that may be outside of the Company's control. In addition, because the
anticipated financial benefits of the combination of the Founding Companies may
not be generated immediately, the Company's initial results as a combined
company may reflect corporate overhead that exceeds the realized benefits. As a
result of the foregoing and other factors, the Company may experience material
fluctuations in its results of operations on a quarterly basis, which may
contribute to volatility in the price of the Common Stock. Given the possibility
of such fluctuations, the Company believes that quarterly comparisons of the
results of its operations during any fiscal year may not be meaningful and that
results for any one fiscal quarter may not be indicative of future performance.
The Company will incur non-recurring charges related to the closing of the
Acquisitions and the Offering of approximately $4.5 million in the fourth
quarter of 1997, including an estimated charge of approximately $4.0 million for
acquired in-process research
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and development and a $0.5 million charge related to a fee payable in the fourth
quarter upon the closing of the Offering. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
CASUALTY; RISK OF BUSINESS INTERRUPTIONS
Certain types of casualty losses that may be experienced by the Company may
not be fully insurable on a cost-effective basis. In the future, should
uninsured losses or damages occur, the Company could lose both its investment in
and anticipated profits from the affected property and may continue to be
obligated on any leasehold obligations, mortgage indebtedness or other
obligations related to such property. Any significant damage to the Company's
facilities or other event that causes significant interruptions in the Company's
operations may not be covered by insurance and could have a material adverse
effect on the Company's business, financial condition or results of operations.
See "Business - Facilities."
PUBLIC SECTOR MARKET AND CONTRACTING RISKS
Though a modest portion of the Company's present business involves public
sector contracts, the Company anticipates a growing portion of its business
coming from local, state and federal government agencies. Public sector
contracts are subject to detailed regulatory requirements and public policies,
as well as to funding priorities. Contracts with public sector customers may be
conditioned upon the continuing availability of public funds, which in turn
depends upon lengthy and complex budgetary procedures, and may be subject to
certain pricing constraints. Moreover, public sector contracts may generally be
terminated for a variety of factors, including when it is in the best interests
of the respective government. There can be no assurance that these factors or
others unique to contracts with governmental entities will not have a material
adverse effect on the Company's future business, financial condition and results
of operations.
SUBSTANTIAL INFLUENCE OF MANAGEMENT AND EXISTING SHAREHOLDERS
Based on an assumed initial public offering price of $13.00 per share, the
existing shareholders of ImageMax, the former shareholders of the Founding
Companies and the directors and other executive officers of the Company, and
entities affiliated with them, will beneficially own approximately 43% of the
then outstanding shares of Common Stock following the completion of the Offering
(39.6% if the Underwriters' over-allotment option is exercised in full) and are
likely to continue to exercise substantial control over the Company's affairs.
These shareholders acting together would likely be able to elect a sufficient
number of directors to control the Board of Directors and to approve or
disapprove most matters submitted to a vote of shareholders. See "Principal
Shareholders."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. Although application has been made to have the Common Stock approved for
quotation on the Nasdaq National Market, there can be no assurance that an
active trading market will develop upon completion of the Offering or, if it
does develop, that such market will be sustained. Accordingly, purchasers of the
Common Stock may experience difficulty selling or otherwise disposing of their
shares. The initial public offering price of the Common Stock will be determined
by negotiation among the Company and the representatives of the Underwriters and
may not be indicative of the market price of the Common Stock after the
Offering. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. The market price for the Common
Stock following the Offering may be highly volatile. Prices for the Common Stock
will be determined by the marketplace and may be influenced by many factors,
including the depth and liquidity of the trading market, investor perception of
the Company and general economic and market conditions and trends. In addition,
factors such as the Company's financial results, quarterly variations in the
Company's financial results, changes in earnings estimates by analysts, reported
earnings that vary from such estimates, press releases by the Company or others,
and developments affecting the Company or its industry generally may have a
significant impact on the market price of the Common Stock. The stock
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market has, on occasion, experienced extreme price and volume fluctuations which
have often been unrelated to the operating performance of the affected
companies.
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate dilution of $10.56 per share in the pro forma net tangible book value
per share of Common Stock (based upon an assumed initial public offering price
of $13.00 per share) as of September 30, 1997. See "Dilution." In the event the
Company issues additional Common Stock in the future, including shares which may
be issued in connection with future acquisitions, purchasers of Common Stock in
the Offering may experience further dilution in the net tangible book value per
share of the Common Stock of the Company. See "Shares Eligible for Future Sale."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
Sales, or the possibility of sales, of Common Stock by the Company's
existing shareholders could adversely affect the market price of the Company's
Common Stock following the Offering. Upon consummation of the Offering (based on
an assumed initial public offering price of $13.00 per share), the Company will
have outstanding an aggregate of 5,438,727 shares of Common Stock. Of these
shares, all of the shares sold in the Offering will be freely tradeable without
restriction or further registration under the Securities Act, unless such shares
are purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act of 1933, as amended (the "Securities Act").
Simultaneously with the closing of the Offering (based on an assumed
initial public offering price of $13.00 per share), the Company will issue in
the Acquisitions, in the aggregate, 1,184,468 shares of Common Stock as a
portion of the consideration for the Founding Companies. Such shares and the
1,154,259 shares of Common Stock held by existing shareholders are "restricted
securities" as that term is defined in Rule 144 under the Securities Act
("Restricted Shares"). Restricted Shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under the
Securities Act. As a result of the contractual restrictions described below and
certain exemptions under the Securities Act, the Restricted Shares will be
eligible for sale in the public market as follows: (i) 765,769 shares will be
eligible for sale upon expiration of the lock-up agreements at least 180 days
after the date of this Prospectus; (ii) 388,490 shares will become eligible for
sale at various times between six months and one year from the consummation of
the Offering; and (iii) 1,184,468 shares will be eligible for sale pursuant to
the provisions of Rule 144 one year from the consummation of the Offering.
Additionally, 367,500 shares of Common Stock may be acquired upon the exercise
of outstanding stock options to be granted upon completion of the Offering to
certain directors and officers of the Company which vest over a period of three
years. The Company has reserved for future issuances an additional 232,500
shares of Common Stock under its 1997 Incentive Plan and 250,000 shares for
future issuances under its Employee Stock Purchase Plan. The Company intends to
register the shares issuable upon exercise of options granted under such plan,
and upon such registration, such shares will be eligible for resale in the
public market. Further, the Company intends to register 2,000,000 shares of
Common Stock on a shelf registration to be utilized as consideration for future
acquisitions, if any. Upon issuance, such shares generally will be eligible for
resale in the public market. The Company, the Company's directors and officers,
and certain shareholders of the Company have agreed not to offer, sell or
otherwise dispose of any shares of Common Stock or any securities exercisable
for or convertible into Common Stock for a period of 180 days after the date of
this Prospectus without the prior written consent of William Blair & Company,
L.L.C., except for the sale by the Company of shares of Common Stock in the
Offering, in the Acquisitions and in other acquisition transactions (so long as
the persons receiving such Common Stock agree to be similarly restricted for the
remainder of the 180 day lock-up period). The shareholders of Founding Companies
receiving shares of Common Stock pursuant to the Acquisitions have agreed not to
offer, sell or otherwise dispose of such shares until one year after the closing
of the Acquisitions, except for transfers to immediate family members who agree
to be bound by such restrictions. Notwithstanding the preceding, shareholders of
the Founding Companies receiving shares of Common Stock pursuant to the
Acquisitions and all current shareholders have been granted certain "piggyback"
registration rights
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permitting them to include their shares in certain future registration
statements filed by the Company. See "Shares Eligible for Future Sale."
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN ARTICLES, BYLAW AND STATUTORY
PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Articles") and Amended and Restated Bylaws (the "Bylaws")
could delay or frustrate the removal of incumbent directors, discourage
potential acquisition proposals and proxy contests and delay, defer or prevent a
change in control of the Company, even if such events could be beneficial, in
the short term, to the interests of the shareholders. For example, the Articles
allow the Company to issue preferred stock with rights senior to those of the
Common Stock without shareholder action and provide that the Company's
shareholders may call a special meeting of shareholders only upon a request of
shareholders owning at least 50% of the Company's capital stock and the Bylaws
provide for the Board of Directors to be divided into three classes of directors
serving three-year staggered terms. See "Description of Capital Stock."
The Articles authorize the issuance of up to 40,000,000 shares of Common
Stock and 10,000,000 shares of Preferred Stock, no par value per share (the
"Preferred Stock"). The Board of Directors will have the power to determine the
price and terms under which any such Preferred Stock may be issued and to fix
the terms thereof. The ability of the Board of Directors to issue one or more
series of Preferred Stock without shareholder approval, as well as certain
applicable statutory provisions under the Pennsylvania Business Corporation Law,
could deter or delay unsolicited changes in control of the Company by
discouraging open market purchases of the Common Stock or a non-negotiated
tender or exchange offer for such stock, which may be disadvantageous to the
Company's shareholders who may otherwise desire to participate in such
transaction and receive a premium for their shares.
The Pennsylvania Business Corporation Law of 1988, as amended (the "BCL")
contains a number of statutory "anti-takeover" provisions applicable to the
Company. One such BCL provision prohibits, subject to certain exceptions, a
"business combination" with a shareholder or group of shareholders (and certain
affiliates and associates of such shareholders) beneficially owning more than
20% of the voting power of a public corporation (an "interested shareholder")
for a five-year period following the date on which the holder became an
interested shareholder. This provision may discourage open market purchases of a
corporation's stock or a non-negotiated tender or exchange offer for such stock
and, accordingly, may be considered disadvantageous by a shareholder who would
desire to participate in any such transaction. The BCL also provides that
directors may, in discharging their duties, consider the interests of a number
of different constituencies, including shareholders, employees, suppliers,
customers, creditors and the community in which it is located. Directors are not
required to consider the interests of shareholders to a greater degree than
other constituencies' interests. The BCL expressly provides that directors do
not violate their fiduciary duties solely by relying on poison pills or the
anti-takeover provisions of the BCL.
ABSENCE OF DIVIDENDS
The Company has never declared or paid cash dividends on its Common Stock
and currently intends to retain all available funds for use in the operation and
expansion of its business. The Company does not anticipate that any cash
dividends on the Common Stock will be declared or paid in the foreseeable
future. See "Dividend Policy."
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THE COMPANY
ImageMax was founded in November 1996 to become a leading national,
single-source provider of integrated document management solutions. Prior to the
Offering, ImageMax has not conducted any operations. ImageMax has entered into
definitive agreements to acquire simultaneously with, and as a condition to, the
consummation of the Offering, the Founding Companies directly or through wholly-
owned subsidiaries. For a description of the transactions pursuant to which
these businesses will be acquired, see "Certain Transactions."
The Founding Companies consist of: Utz Medical Enterprises, Inc., the
parent of American Micro-Med Corporation ("AMMCORP"); CodaLex Microfilming
Corporation ("CMC"), Imaging Information Industries, Inc. ("I(3)" and,
collectively with CMC, "CodaLex"); Laser Graphics Systems and Services, Inc.
("Laser Graphics" and, collectively with CodaLex, the "CodaLex Group"); DataLink
Corporation ("DataLink"); DocuTech, Inc. ("DTI") and DocuTech Data Systems, Inc.
("DDS") (collectively, "DocuTech"); Image & Information Solutions ("I(2)
Solutions"); Image Memory Systems, Inc. ("IMS"); International Data Services of
New York, Inc. ("IDS"); Oregon Micro-Imaging, Inc. ("OMI"); Semco Industries,
Inc. ("Spaulding"); Total Information Management Corporation ("TIMCO"); and TPS
Micrographics, Inc. ("TPS").
Upon consummation of the Acquisitions, the Company will employ over 950
people, have operations in 13 states and will have provided services to over
5,000 clients in the last year from 18 business locations. For the year ended
December 31, 1996 and the nine months ended September 30, 1997, the Company had
pro forma combined revenues of $43.3 million and $36.5 million respectively.
Certain information regarding each of the Founding Companies is summarized
below:
AMMCORP (Chesterton, Indiana, near Chicago) is a provider of microfilm,
scanning and record storage and retrieval services primarily to health care
providers in the Chicago metropolitan area, northern Indiana, southern Michigan
and western Ohio. As a medical records specialist, AMMCORP offers 24-hour,
365-day physically staffed retrieval. David C. Utz, Jr. has been the Chairman
and Chief Executive Officer of AMMCORP since August 1988. Mr. Utz has served as
a Director of ImageMax since its inception in November 1996 and will enter into
a three-year employment agreement with the Company upon consummation of the
Offering.
THE CODALEX GROUP is comprised of three micrographic and digital imaging
service businesses under common control, CMC (Cayce, South Carolina near
Columbia), Laser Graphics (Cleveland, Tennessee, near Chattanooga) and I(3)
(Marietta, Georgia, near Atlanta). The CodaLex Group primarily serves the health
care and financial services markets in the southeastern U.S. and is a Kodak
imaging equipment broker-dealer in all three locations. I(3) was started in 1995
to focus on digital imaging and is a Canon dealer. David C. Yezbak has served as
President of CMC, Laser Graphics and I(3) since 1995 and as Vice President of
CodaLex from 1992 to 1995. Mr. Yezbak will enter into a three-year employment
agreement with the Company upon consummation of the Offering. Theodore J.
Solomon has served as Chairman of the Board of CMC, Laser Graphics and I(3)
since 1992. Mr. Solomon will enter into a part-time consulting agreement with
the Company upon consummation of the Offering, with an initial term of six
months.
DATALINK (Tempe, Arizona) was formed in 1984 as a
computer-output-to-microfiche ("COM") specialist serving the Phoenix
metropolitan area. DataLink has broadened its offerings to include micrographic
and digital imaging services and systems. Judith K. DeMott has been the
President of DataLink since its formation. Ms. DeMott will enter into a one-year
consulting agreement with the Company upon consummation of the Offering.
DOCUTECH (Lincoln, Nebraska) includes the businesses of DTI, a micrographic
and digital imaging service business, and DDS, a provider of open-architecture
document scanning software products. DTI primarily serves the health care and
financial services markets in Nebraska. DDS markets its DocuROM(Trademark),
FileTRAX(Trademark), ScanTRAX(Trademark) and other scanning and digital image
management software nationally to both end-users and other document management
businesses including six of the Founding Companies. DDS has more than 70 other
document management businesses acting as value-
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added resellers of its software products. DTI is a Canon dealer in
Nebraska. Rex Lamb founded DTI in 1991 and has served as its President since
inception. Mr. Lamb co-founded DDS in 1994 and has served as its President since
inception. Upon consummation of the Offering, Mr. Lamb will enter into a
three-year employment agreement with the Company and is expected to join the
Company's Board of Directors. Mark Creglow co-founded DDS in 1994 and has served
as its Vice President since inception. Prior to founding DDS, Mr. Creglow was
Regional Sales Manager for Distribution Management Systems, Inc. Upon
consummation of the Offering, Mr. Creglow will enter into a three-year
employment agreement with the Company.
I(2) SOLUTIONS (Monroe, Louisiana) is a provider of micrographic, digital
imaging, digital data storage and graphic design services primarily to
hospitals, state and local government agencies, engineering and general
commercial clients from its Monroe facilities. I(2) Solutions also operates a
retail store at its Monroe location, which produces litigation exhibits and
architectural and engineering prints and sells engineering, drafting and related
supplies. I(2) Solutions is a Kodak dealer in Louisiana, Texas and Mississippi,
a Minolta dealer in Louisiana, Texas and Arkansas and an OCE dealer in Louisiana
and Texas and provides service and repair support to its equipment customers.
Gary D. Blackwelder joined I(2) Solutions in 1976, and became President in 1986.
Mr. Blackwelder will enter into a five-year employment agreement with the
Company upon consummation of the Offering.
IMS (Dayton, Ohio) provides micrographic and digital imaging services
specializing in large-format documents (primarily engineering drawings) to a
national client base of manufacturing businesses. IMS is a Photomatrix dealer.
Ovidio Pugnale joined IMS's predecessor in 1980 as General Manager and became
IMS's President in 1986. Mr. Pugnale will enter into a three-year employment
agreement with the Company following consummation of the Offering.
IDS (Millwood, New York, near New York City) is a provider of offshore data
entry services supporting forms processing as well as the indexing of both
microfilmed and digitally-imaged records. IDS also performs litigation support.
IDS serves end-users and document management companies nationally. Mitchell J.
Taube and Ellen Rothschild-Taube co-founded IDS in 1989, since which time Mr.
Taube has served as President and Ms. Rothschild-Taube has served as Vice
President. Mr. Taube and Ms. Rothschild-Taube (on a part-time basis) will enter
into three-year employment agreements with the Company upon consummation of the
Offering.
OMI (Eugene, Oregon) provides micrographics and digital imaging products
and services primarily to health care providers, financial institutions and
government agencies in Oregon and Washington from its Eugene facility and a
branch office in Portland, Oregon. OMI is a certified dealer of Canon
micrographic and digital imaging equipment in Oregon, and provides service and
repair support to its equipment customers. John E. Semasko acquired OMI in 1975
and has served as its President since inception. Mary Jane Semasko has served as
Vice President since OMI's inception. Mr. and Mrs. Semasko will enter into
three-year employment agreements with the Company and Mr. Semasko is expected to
join the Board of Directors upon consummation of the Offering.
SPAULDING (Stoughton, Massachusetts, near Boston) provides both
small-format and large-format document filming and digital imaging services and
equipment sales and related maintenance service to a variety of commercial,
non-profit and government clients in the New England region. Spaulding has a
branch office in Worcester, Massachusetts. Spaulding is a Minolta dealer for
micrographics and hybrid micrographic systems equipment in Maine, Massachusetts,
New Hampshire and Vermont, a Xerox dealer for large-format scanners, plotters,
and digital imaging equipment in New England and eastern New York and a Fujitsu
scanning equipment systems dealer throughout the Northeast. Spaulding also acts
as a nationwide value added reseller of specialized software and hardware for
Adobe Systems Incorporated, Computervision Corporation, CDP Communications,
Inc., Cadnet Corporation and Westbrook Technologies, Inc. Carmen DiMatteo,
Spaulding's President, has been with Spaulding for 37 years and will enter into
a consulting agreement with the Company upon consummation of the Offering for an
initial term of six months.
TIMCO (Emeryville, California, near San Francisco) provides micrographics,
digital imaging and record storage and retrieval services primarily to financial
services and government clients in
17
<PAGE>
northern California. TIMCO maintains a branch office in Sacramento,
California. James E. Bunker co-founded TIMCO in 1980 and has served as its
Chairman since the founding. Mr. Bunker will enter into a two-year employment
agreement with the Company upon consummation of the Offering. Jeffry P. Kalmon
joined TIMCO in 1984 as a sales representative and has served as its President
since 1996. Mr. Kalmon will enter into a three-year employment agreement with
the Company upon consummation of the Offering.
TPS (Forest, Virginia, near Lynchburg) provides micrographic and digital
imaging services to general commercial, health care, financial institutions and
government entities in Virginia. TPS also sells and services Canon micrographic
and digital imaging equipment. TPS maintains a branch office in Richmond,
Virginia. Having joined TPS in 1978, David L. Crowder has served as its
President since 1990. Mr. Crowder will enter into a three-year employment
agreement with the Company upon consummation of the Offering.
The following table indicates the date each Founding Company was
established and sets forth the Founding Companies' revenues for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
REVENUES
REVENUES NINE MONTHS ENDED
TWELVE MONTHS SEPTEMBER 30,
YEAR ENDED -----------------
ESTABLISHED DECEMBER 31, 1996 1996 1997
----------- ----------------- ------- -------
<S> <C> <C> <C> <C>
AMMCORP................................................ 1976 $ 5,573 $ 4,081 $ 4,079
The CodaLex Group...................................... 1972 4,057 2,984 3,756
DataLink............................................... 1984 3,151 2,506 2,564
DocuTech............................................... 1991 2,322 1,774 2,169
I(2) Solutions......................................... 1974 3,959(1) 3,137(1) 3,330(1)
IMS.................................................... 1961 2,292 1,768 1,996
IDS.................................................... 1989 1,431 941 2,340
OMI.................................................... 1975 3,666 2,784 3,111
Spaulding.............................................. 1886 8,693 6,526 6,705
TIMCO.................................................. 1980 4,991 3,609 3,318
TPS.................................................... 1975 3,215 2,363 3,203
------- ------- -------
Total combined revenues.............................. 43,350 32,473 36,571
Elimination of inter-company revenues(2)........... (94) (71) (98)
------- ------- -------
Total pro forma combined revenues.................. $43,256 $32,402 $36,473
======= ======= =======
</TABLE>
- ------------------
(1) Represents results for the twelve months ended October 31, 1996 and nine
months ended July 31, 1996 and 1997.
(2) Represents DocuTech and IDS revenues from other Founding Companies.
The aggregate consideration (excluding transaction costs) that will be paid
by the Company to acquire the Founding Companies consists of approximately $25.4
million in cash and 1,184,468 shares of Common Stock based on an assumed initial
public offering price of $13.00 per share. In addition, the Company will repay
approximately $5.5 million of indebtedness (based upon the September 30, 1997
relevant account balances) assumed by the Company in the Acquisitions,
substantially all of which is guaranteed by the respective shareholders of the
Founding Companies. See "Use of Proceeds."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,100,000 shares of
Common Stock offered hereby, after deducting underwriting discounts and
estimated offering expenses, are estimated to be approximately $34.5 million
($40.2 million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $13.00 per share. Of this amount,
approximately $31.4 million will be used to fund the Acquisitions, including:
(i) the $25.4 million cash portion of the purchase price for the Founding
Companies; (ii) $5.5 million of indebtedness (based upon the September 30, 1997
relevant account balances) to be assumed from the Founding Companies and repaid
by the Company; and (iii) $0.5 million to pay the transaction fees associated
with the Acquisitions.
The remaining net proceeds will be used for general corporate purposes,
which are expected to include future acquisitions. Pending such uses, the net
proceeds will be invested in short-term, interest-bearing investment grade
securities. The Company intends to enter into the Credit Facility to assist in
the funding of future acquisitions and operating activities. The Company also
may utilize Common Stock to fund future acquisitions. There can be no assurance
that the Credit Facility or the Common Stock will be sufficient to fund the
Company's needs. As of the date of this Prospectus, the Company has no
commitments or agreements with respect to any acquisitions other than of the
Founding Companies. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Pro Forma Combined Liquidity and Capital
Resources."
Of the cash portion of the purchase price, approximately $7.3 million
represents the purchase price to be paid for certain Founding Companies which
are affiliated with persons who are or will become officers, directors or 5%
shareholders of the Company. Of the indebtedness to be repaid (which was used
for working capital, equipment purchases and general corporate purposes),
approximately $3.1 million (as of September 30, 1997) is an obligation of a
Founding Company whose shareholder is a Director of the Company and
approximately $77,000 (as of September 30, 1997) is comprised of obligations of
two Founding Companies, certain shareholders of which are to be elected as
Directors of the Company upon consummation of the Offering. See "The Company"
and "Certain Transactions." The indebtedness to be repaid from the proceeds of
the Offering bears effective interest rates ranging from approximately 4% to
12%. Such indebtedness would otherwise mature at various dates through 2010. The
consideration to be paid for the Founding Companies was determined through arm's
length negotiations among ImageMax and representatives of the Founding
Companies. See "Certain Transactions."
DIVIDEND POLICY
The Company intends to retain its earnings, if any, to finance the
expansion of its business and for general corporate purposes and therefore does
not anticipate paying any cash dividends on its Common Stock in the foreseeable
future. Any payment of future dividends will be at the discretion of the Board
of Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions with respect to the payment of dividends and other factors that the
Company's Board of Directors deems relevant.
19
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and current maturities
of long-term obligations and capitalization at September 30, 1997 (i) of
ImageMax, (ii) on a pro forma combined basis giving effect to the conversion of
all outstanding shares of Series A Preferred Stock into an aggregate of 443,489
shares of Common Stock and the consummation of the Acquisitions and the issuance
of 1,184,468 shares of Common Stock in connection therewith (based on an assumed
initial public offering price of $13.00 per share), and (iii) as further
adjusted to reflect the issuance and sale of the 3,100,000 shares of Common
Stock offered hereby and the application of the estimated net proceeds
therefrom, based on an assumed initial public offering price of $13.00 per
share. See "Use of Proceeds." This table should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements of the Company, including the
Notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------------
PRO FORMA
IMAGEMAX PRO FORMA COMBINED,
HISTORICAL COMBINED AS ADJUSTED
---------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt and current maturities of long-term $ -- $ 4,281 $ --
obligations...............................................
Pro forma cash due Founding Companies....................... -- 25,430 --
------ ------- -------
$ -- $29,711 $ --
====== ======= =======
Long-term obligations, less current maturities.............. $ -- $ 1,098 $ --
Shareholders' equity:
Preferred Stock, no par value, 10,000,000 shares
authorized; 524,125 shares issued and outstanding,
historical; no shares issued or outstanding, pro forma
combined and pro forma combined, as adjusted............ 2,719 -- --
Common Stock, no par value, 40,000,000 shares authorized;
710,770 shares issued and outstanding, historical;
2,338,727 shares issued and outstanding pro forma
combined (1); and 5,438,727 shares issued and
outstanding, pro forma combined, as adjusted (1)........ 1,567 17,374 51,853
Accumulated deficit....................................... (2,844) (6,844) (7,344)
------ ------- -------
Total shareholders' equity.............................. 1,442 10,530 44,509
------ ------- -------
Total capitalization.................................. $1,442 $11,628 $44,509
====== ======= =======
</TABLE>
- ------------------
(1) Includes 1,184,468 shares of Common Stock to be issued in connection with
the Acquisitions (based on an assumed initial public offering price of
$13.00 per share). Excludes (i) 367,500 shares of Common Stock which will be
issuable upon the exercise of stock options to be granted in connection with
the Offering at an exercise price per share equal to the initial public
offering price, (ii) 232,500 shares of Common Stock available for future
grants under the Company's 1997 Incentive Plan, and (iii) 250,000 shares
available for future issuances under the Company's Employee Stock Purchase
Plan. See "Management - Stock Incentive Plans."
20
<PAGE>
DILUTION
The deficit in pro forma combined net tangible book value of the Company at
September 30, 1997 was $20.7 million or $8.86 per share of Common Stock. The
deficit in pro forma combined net tangible book value per share represents the
amount by which the Company's pro forma combined total liabilities exceeds the
Company's pro forma combined tangible assets, divided by the number of shares of
Common Stock to be outstanding after giving effect to the Acquisitions. After
giving effect to the sale of 3,100,000 shares of Common Stock in the Offering
and the deduction of the underwriting discounts and commissions and estimated
expenses associated with the Offering, the pro forma combined net tangible book
value of the Company at September 30, 1997 would have been approximately $13.3
million or $2.44 per share. This represents an immediate increase in pro forma
combined net tangible book value of $11.30 per share to existing shareholders
and an immediate dilution of $10.56 per share to purchasers of Common Stock in
the Offering. The following table illustrates this pro forma dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
Pro forma combined deficit in net tangible book value
per share before the Offering........................ $ (8.86)
Increase in pro forma combined net tangible book value
per share attributable to new investors.............. 11.30
-------
Pro forma combined net tangible book value per share after
the Offering.............................................. 2.44
------
Dilution per share to new investors......................... $10.56
======
</TABLE>
The following table sets forth, on a pro forma combined basis to give
effect to the Acquisitions, the number of shares of Common Stock purchased from
the Company, the total consideration paid and the average price per share paid
by existing and Founding Companies' shareholders and the new investors
purchasing shares of Common Stock from the Company in the Offering, before
deducting underwriting discounts and commissions and estimated expenses
associated with the Offering and the Acquisitions:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
------------------------ ------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders...................... 1,154,259 21.2% $ 1,791,500 3.3% $ 1.55
Founding Companies' shareholders(1)........ 1,184,468 21.8 13,088,371 23.7 11.05
----------- ----- ----------- ------
2,338,727 43.0 14,879,871 27.0 6.36
New investors.............................. 3,100,000 57.0 40,300,000 73.0 13.00
----------- ----- ----------- ------
Total.................................. 5,438,727 100.0% $55,179,871 100.0% 10.15
=========== ===== =========== ======
</TABLE>
- ------------------
(1) Represents the number of shares of Common Stock and the related fair value
of such shares to be issued in connection with the Acquisitions (based on an
assumed initial public offering price of $13.00 per share).
21
<PAGE>
SELECTED FINANCIAL DATA
ImageMax will acquire the Founding Companies simultaneously with and as a
condition to the consummation of the Offering. For financial statement
presentation purposes, ImageMax has been identified as the "accounting
acquiror." ImageMax was formed in November 1996 and its operating activity
through September 30, 1997 has been limited principally to negotiating the
agreements to acquire the Founding Companies. ImageMax's historical statement of
operations data include a net loss of $23,134 and $2.8 million for the period
from inception (November 1996) to December 31, 1996 and for the nine months
ended September 30, 1997, respectively. The loss for the nine months ended
September 30, 1997 consists of a $2.5 million non-recurring, non-cash
compensation charge and general and administrative expenses. ImageMax's
statement of operations data discussed above and the historical September 30,
1997 balance sheet data presented below have been derived from the financial
statements of ImageMax appearing elsewhere in this Prospectus. The selected
unaudited pro forma combined financial data present data for the Company,
adjusted for (i) the effect of the Acquisitions, (ii) the effects of certain pro
forma adjustments to the historical financial statements described below and
(iii) the consummation of the Offering and the application of the net proceeds
therefrom. See the Unaudited Pro Forma Combined Financial Statements, including
the Notes thereto, and the historical Financial Statements of ImageMax's and the
Founding Companies, including the Notes thereto, appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PRO FORMA COMBINED
-------------------------------------------------
YEAR NINE MONTHS ENDED
ENDED SEPTEMBER 30,
DECEMBER 31, -----------------------------
1996 1996 1997
------------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:(1)
Revenues:
Services............................................ $ 31,553 $ 22,938 $ 27,172
Products............................................ 11,703 9,464 9,301
--------- ---------- ----------
43,256 32,402 36,473
--------- ---------- ----------
Cost of revenues:(2)
Services............................................ 20,267 14,946 17,090
Products............................................ 8,968 6,889 6,160
Depreciation........................................ 1,408 1,061 1,029
--------- ---------- ----------
30,643 22,896 24,279
--------- ---------- ----------
Gross profit...................................... 12,613 9,506 12,194
Selling, general, and administrative expenses(3)...... 11,198 8,326 8,218
Executive compensation(4)............................. 610 458 458
Founding Companies' transaction costs(5).............. -- -- 332
Amortization of intangible assets(6).................. 1,158 868 868
--------- ---------- ----------
Operating income (loss)............................. (353) (146) 2,318
Interest income (expense), net(7)..................... 37 10 (5)
--------- ---------- ----------
Income (loss) before income taxes................... (316) (136) 2,313
Income tax provision(8)............................... 184 178 1,140
--------- ---------- ----------
Net income (loss)(7).................................. $ (500) $ (314) $ 1,173
========= ========== ==========
Pro forma net income (loss) per share................. $ (.10) $ (.06) $ .24
========= ========== ==========
Shares used in computing pro forma net income (loss)
per share(9)........................................ 4,985,956 4,985,956 4,985,956
========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------------------
PRO FORMA
IMAGEMAX PRO FORMA COMBINED,
HISTORICAL COMBINED(10) AS ADJUSTED(11)
---------- ------------ ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $1,362 $ 2,881 $ 5,783
Working capital (deficit)............................... (550) (26,322)(12) 8,546
Total assets............................................ 3,354 50,924 51,839
Long-term debt, less current portion.................... -- 1,098 --
Shareholders' equity.................................... 1,442 10,530 44,509
</TABLE>
22
<PAGE>
- ------------------
(1) The pro forma combined statement of operations data assume that the
Acquisitions and the Offering were consummated on January 1, 1996 and are
not necessarily indicative of the results the Company would have obtained
had these events actually then occurred or of the Company's future results.
(2) Includes the Rent Differential. See Unaudited Pro Forma Combined Financial
Statements.
(3) Includes the Compensation Differential. Selling, general and administrative
expenses include compensation costs associated with positions eliminated or
which will be eliminated in connection with the Acquisitions, including the
retirement of four senior Founding Companies' executives and other
identified head-count reductions totalling approximately $650,000, $500,000
and $300,000 for the year ended December 31, 1996 and the nine months ended
September 30, 1996 and 1997, respectively.
(4) Includes compensation of $610,000 annually based upon employment agreements
with the Company's executive management (see "Management - Employment
Agreements"). Excludes a non-recurring, non-cash compensation charge of
$2.5 million (or $0.50 per share) recorded in the nine months ended
September 30, 1997. See Note 5 to Unaudited Pro Forma Combined Financial
Statements.
(5) Reflects non-recurring transaction costs incurred by the Founding Companies
in connection with the Acquisitions.
(6) Represents amortization of $30.4 million of goodwill to be recorded as a
result of the Acquisitions over an estimated life of principally 30 years
and amortization of acquired developed technology of $0.8 million over an
estimated life of seven years. Excludes a charge of $4.0 million for
acquired in-process research and development and a $0.5 million charge
related to a fee payable in the fourth quarter upon the closing of the
Offering. See "Certain Transactions" and Unaudited Pro Forma Combined
Financial Statements.
(7) Includes a pro forma adjustment to reflect the elimination of interest
expense resulting from the repayment of debt paid from the net proceeds of
the Offering. See "Use of Proceeds." If the effect of the Offering were
excluded, pro forma interest expense, net would be $866,000, $643,000 and
$611,000 for the year ended December 31, 1996 and the nine months ended
September 30, 1996 and 1997, respectively. Net income (loss) would be
$(1,049,000), $(711,000) and $805,000 and the net income (loss) per share
would be $(0.24), $(0.16) and $0.19, respectively, for the above periods.
(8) Reflects an estimated corporate income tax rate of 39.3% before considering
the non-deductibility of approximately $790,000 of annual amortization of
intangible assets.
(9) Represents (i) 710,770 shares of Common Stock issued and outstanding at
September 30, 1997, (ii) 1,184,468 shares to be issued in the Acquisitions
(based on an assumed initial public offering price of $13.00 per share),
(iii) 443,489 shares to be issued upon the conversion of all outstanding
shares of Series A Preferred Stock outstanding at September 30, 1997 upon
the consummation of the Offering, and (iv) 2,647,229 of the 3,100,000
shares being sold in the Offering (at an assumed initial public offering
price of $13.00 per share) necessary to pay the cash portion of the
consideration for the Acquisitions, Founding Companies' indebtedness as
described in "Use of Proceeds" and expenses of the Acquisitions and the
Offering.
(10) The pro forma combined balance sheet data assume that the Acquisitions were
consummated on September 30, 1997.
(11) Adjusted for the sale of the 3,100,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $13.00 per share and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
(12) Includes $25.4 million payable to the owners of the Founding Companies,
representing the cash portion of the consideration for the Acquisitions,
which is to be paid from the net proceeds of the Offering.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. This and other sections of this
Prospectus contain certain forward-looking statements that involve substantial
risks and uncertainties. When used, the words "anticipate," "believe,"
"estimate," "expect," and similar expressions as they relate to the Company or
its management are intended to identify such forward-looking statements. The
Company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed in "Risk Factors."
INTRODUCTION
ImageMax was founded in November 1996 to become a leading, national
single-source provider of integrated document management solutions. Prior to the
Offering, ImageMax has not conducted any operations. ImageMax has entered into
agreements to acquire the Founding Companies, simultaneously with and as a
condition to consummation of the Offering. The Founding Companies have been in
business an average of over 20 years, have operations in 13 states, employ over
950 people and in the last year provided services to over 5,000 clients from 18
locations. The Company's net revenues will be derived from a broad range of
media conversion, storage and retrieval services, the sale of proprietary,
open-architecture software products which support digital imaging and indexing
services and the sale and service of a variety of document management equipment.
The Founding Companies have been managed throughout the periods presented
as independent private companies, and their results of operations reflect
different tax structures (S corporations and C corporations) which have
influenced, among other things, their historical levels of owners' compensation.
In connection with the organization of the Company, these owners and certain key
employees have agreed to certain reductions in their compensation commencing on
the consummation of the Offering.
ImageMax, which has conducted no operations to date other than in
connection with the Acquisitions and the financing activities related thereto,
including the Offering, intends to integrate the Founding Companies and their
operations and administrative functions over a period of time. This integration
process may present opportunities to reduce costs through the elimination of
duplicative functions and through economies of scale, but will also necessitate
additional costs and expenditures for corporate management and administration
(including costs related to the hiring of additional management personnel),
corporate expenses related to being a public company, systems integration and
facilities expansion. These various costs and possible cost-savings may make
comparison of historical operating results not comparable to, or indicative of,
future performance.
The Company's revenues consist of service revenues which are generally
recognized as the related services are rendered, and product revenues which are
recognized when the products are shipped to clients. Service revenues are
primarily derived from media conversion, storage and retrieval, imaging and
indexing of documents, and the service of products sold. Product revenues are
derived from equipment sales and software sales and support. Cost of revenues
consists principally of the costs of products sold and wages and related
benefits, supplies, facilities and equipment expenses associated with providing
the Company's services. Selling, general and administrative ("SG&A") expenses
include salaries and related benefits associated with the Company's executive
and senior management, marketing and selling activities (principally salaries
and related costs), and financial and other administrative expenses. The pro
forma combined statement of operations data reflect the Compensation
Differential and the Rent Differential. Operating expenses in the pro forma
combined statement of operations include compensation costs and other costs at
the Founding Companies which have been eliminated or which will be eliminated in
connection with the Acquisitions, including the retirement of four senior
Founding Company executives and other identified head-count reductions totalling
approximately $0.5 million and $0.3 million for the nine months ended September
30, 1996 and 1997, respectively. The pro forma combined statement of operations
for the nine months ended September 30, 1997 also includes $0.3 million of
non-recurring transaction costs incurred by the Founding Companies. In addition,
the pro forma combined statements of operations include
24
<PAGE>
compensation of $610,000 annually based upon employment agreements with the
Company's executive management (see "Management - Employment Agreements"). The
pro forma results exclude the non-recurring, non-cash compensation charge of
$2.5 million in the nine months ended September 30, 1997. See Unaudited Pro
Forma Combined Financial Statements.
In July 1996, the Securities and Exchange Commission (the "Commission")
issued Staff Accounting Bulletin No. 97 ("SAB 97") relating to business
combinations immediately prior to an initial public offering. SAB 97 requires
that these combinations be accounted for using the purchase method of
acquisition accounting. Under the purchase method, one of the companies must be
designated as the accounting acquirer. In this transaction, ImageMax has been
identified as the accounting acquirer. Accordingly, the sum of $30.4 million
will be recorded as "goodwill" on the Company's balance sheet. Goodwill will be
amortized as a non-cash charge to the income statement principally over a
30-year period. The annual pro forma impact of this amortization expense is $1.2
million, of which $0.8 million is non-deductible for tax purposes. Accordingly,
the Company will have an effective tax rate higher than the statutory rate.
Prior to the issuance of SAB 97, goodwill and related amortization expense were
not required to be recorded for most business combinations similar to the
Acquisitions. See "Certain Transactions - Acquisition Transactions."
Upon consummation of the Acquisitions, the Company will incur a one-time
charge in the fourth quarter of 1997 against income of $4.5 million, consisting
of a $4.0 million charge for acquired in-process research and development
relating to certain software products acquired from DDS and a $0.5 million
non-recurring charge related to a fee payable in the fourth quarter. See
"Certain Transactions - Acquisitions Transactions."
PRO FORMA COMBINED RESULTS
Nine Months Ended September 30, 1997 Compared to the Nine Months Ended September
30, 1996
The following table sets forth the pro forma combined results of operations
for the nine months ended September 30, 1996 and September 30, 1997 and such
results as a percentage of total revenues (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
1996 1997
------------------- -------------------
<S> <C> <C> <C> <C>
Revenues
Services.................................................. $22,938 70.8% $27,172 74.5%
Products.................................................. 9,464 29.2 9,301 25.5
------- ----- ------- -----
32,402 100.0 36,473 100.0
------- ----- ------- -----
Cost of revenues
Services.................................................. 14,946 46.2 17,090 46.9
Products.................................................. 6,889 21.3 6,160 16.9
Depreciation.............................................. 1,061 3.2 1,029 2.8
------- ----- ------- -----
22,896 70.7 24,279 66.6
------- ----- ------- -----
Gross profit.............................................. 9,506 29.3 12,194 33.4
Selling, general and administrative expenses................ 8,326 25.7 8,218 22.5
Executive compensation...................................... 458 1.4 458 1.3
Founding Companies' transaction costs....................... -- -- 332 0.9
Amortization of intangibles................................. 868 2.7 868 2.3
------- ----- ------- -----
Operating income (loss)................................... (146) (0.5) 2,318 6.4
Interest expense............................................ 64 0.1 75 0.3
Interest income............................................. (74) (0.2) (70) (0.2)
------- ----- ------- -----
Income (loss) before income taxes......................... (136) (0.4) 2,313 6.3
Income tax provision........................................ 178 0.6 1,140 3.1
------- ----- ------- -----
Net income (loss)........................................... $ (314) (1.0)% $ 1,173 3.2%
======= ===== ======= =====
</TABLE>
25
<PAGE>
Revenues
Total Revenues. Total revenues increased approximately $4.1 million or
12.6% from approximately $32.4 million in the nine months ended September 30,
1996 to approximately $36.5 million in the nine months ended September 30, 1997.
Service revenues increased 18.5% and comprised 74.5% of total revenues in the
nine months ended September 30, 1997. Product revenues decreased 1.7% and
comprised 25.5% of total revenues in the nine months ended September 30, 1997.
Service Revenues. Service revenues increased approximately $4.2 million
from approximately $22.9 million in the nine months ended September 30, 1996 to
approximately $27.2 million in the nine months ended September 30, 1997. This
increase was largely due to: (i) an increase in the CodaLex Group revenues of
approximately $1.2 million primarily attributable to utilization of increased
conversion service capacity in the CodaLex facility in Columbia, South Carolina;
(ii) an increase in IDS revenues of approximately $1.4 million attributable to
additions made to the sales force and to new major offshore data entry projects;
(iii) an increase in TPS revenues of $0.8 million primarily attributable to the
addition of several major recurring micrographics and digital accounts; and (iv)
an increase in IMS revenues of approximately $0.4 million from a variety of
projects reflecting the development of an in-house sales function established in
1996.
Product Revenues. Product revenues decreased approximately $0.2 million
from approximately $9.5 million in the nine months ended September 30, 1996 to
$9.3 million in the nine months ended September 30, 1997. This decrease was
primarily due to: (i) a decrease in product revenues of $0.2 million at IMS and
$0.4 million at the CodaLex Group which, in each case, reflects a shift in sales
emphasis to service revenues; and (ii) a decrease in product revenues of
approximately $0.2 million at Spaulding. Such decrease was partially offset by
an increase in OMI product revenues of approximately $0.3 million and an
increase in DocuTech revenues of approximately $0.4 million attributable to
higher digital imaging software sales to other document management companies and
end-users. In each such case, fluctuations in product revenues were primarily a
result of fluctuations in unit volumes. The software sales increase at DocuTech
represents a 63.4% gain over its revenues from software sales in the nine months
ended September 30, 1996.
Cost of Revenues
Cost of Services. Cost of services increased approximately $2.1 million or
14.3% from approximately $14.9 million in the nine months ended September 30,
1996 to approximately $17.1 million in the nine months ended September 30, 1997.
Cost of services as a percentage of service revenues was 65.2% in the nine
months ended September 30, 1996 and 62.9% in the nine months ended September 30,
1997. Cost of services decreased as a percentage of service revenues primarily
because: (i) IMS's percentage declined from 83.5% to 56.1% due to economies of
scale and improved conversion methods; (ii) IDS's percentage declined from 78.2%
to 63.1% due to higher revenues and largely fixed project management costs; and
(iii) DataLink's percentage declined from 69.0% to 66.1% due to greater
conversion efficiencies obtained in a new facility and an increased sales mix to
higher margin digital imaging services. The percentage declines were partially
offset by an increased cost of services as a percentage of service revenues at
Spaulding from 62.1% to 66.6% due to an unfavorable shift in mix. Included in
the nine month periods ended September 30, 1996 and 1997 are approximately
$84,000 and $62,000, respectively, of compensation costs associated with
positions at Spaulding that will be eliminated in connection with that
Acquisition.
Cost of Products. Cost of products decreased approximately $0.7 million,
from approximately $6.9 million in the nine months ended September 30, 1996, to
approximately $6.2 million in the nine months ended September 30, 1997. Cost of
products as a percentage of product revenues was 72.8% in the nine months ended
September 30, 1996 and 66.2% in the nine months ended September 30, 1997. Cost
of products decreased as a percentage of product revenues primarily because: (i)
Spaulding's percentage decreased from 71.8% to 67.5% as a result of higher
product sales; and (ii) DocuTech's percentage decreased from 50.7% to 34.2%
primarily due to a favorable shift in mix within software
26
<PAGE>
sales and to the low incremental cost of additional software sales spread over
an increased revenue base.
Depreciation. Depreciation was approximately $1.1 million in the nine
months ended September 30, 1996 and $1.0 million in the nine months ended
September 30, 1997.
Gross Profit
As a result of the higher revenues and declining service and product cost
as a percentage of revenues described above, gross profit increased
approximately $2.7 million, or 28.3%, from approximately $9.5 million in the
nine months ended September 30, 1996 to approximately $12.2 million in the nine
months ended September 30, 1997. As a percentage of revenues, gross profit
increased from 29.3% in the nine months ended September 30, 1996 to 33.4% in the
nine months ended September 30, 1997. Gross profit reflects pro forma
adjustments which increased cost of revenues by $0.2 million for the nine month
periods ended September 30, 1996 and September 30, 1997. These pro forma
adjustments relate principally to the Rent Differential.
Selling, General and Administrative Expenses, Executive Compensation and
Founding Companies' Transaction Costs
SG&A expenses, executive compensation and Founding Companies' transaction
costs increased approximately $0.2 million, or 2.6%, from approximately $8.8
million in the nine months ended September 30, 1996 to approximately $9.0
million in the nine months ended September 30, 1997. As a percentage of total
revenues, SG&A expenses, executive compensation and Founding Companies'
transaction costs declined from 27.1% to 24.7%, largely as a result of cost
reductions at Spaulding and the proportion of SG&A expenses that remained
relatively fixed as revenues increased. The Founding Companies incurred
approximately $0.3 million of transaction costs in connection with the
Acquisitions in the nine months ended September 30, 1997, which primarily
consist of outside accounting and legal fees. Excluding these transaction costs,
SG&A expenses and executive compensation amounted to 23.8% of revenues in the
nine months ended September 30, 1997. At Spaulding, SG&A expenses declined
approximately $0.5 million, or 21.7%, from approximately $2.4 million in the
nine months ended September 30, 1996 to approximately $1.9 million in the nine
months ended September 30, 1997. The decrease reflects $0.2 million in
non-recurring severance costs in the nine months ended September 30, 1996 as
well as payroll, benefits and other cost reduction measures implemented by
management to improve profitability. In the nine months ended September 30,
1996, Spaulding's SG&A expenses included approximately $0.3 million in
compensation costs associated with positions that will be eliminated in
connection with the Acquisitions, including the retiring Chairman of the Board
and positions associated with a recently-closed office. In the nine months ended
September 30, 1997, these costs at Spaulding amounted to $129,000. At the other
Founding Companies, SG&A expenses for the nine months ended September 30, 1996
and 1997 included approximately $0.2 million and $146,000, respectively, of
costs that will be eliminated as a result of the Acquisitions, including an
administrative position, a consulting agreement with a relative of a Founder,
and certain pay reductions. The Company incurred additional SG&A expenses of
$0.3 million for the Company's corporate function in the nine months ended
September 30, 1997 as compared to no expenses in the prior period. Other net
increases in SG&A expenses amounting to approximately $0.2 million relate
primarily to additional commission expense and incremental administrative
payroll.
SG&A expenses reflect pro forma adjustments which reduced SG&A expenses as
reported by approximately $0.4 million for the nine months ended September 30,
1996 and approximately $1.1 million in the nine months ended September 30, 1997.
Pro forma adjustments for the Compensation Differential, which decreased SG&A
expenses, were approximately $0.4 million in the nine months ended September 30,
1996 and approximately $0.9 million in the nine months ended September 30, 1997.
The pro forma results exclude the non-recurring, non-cash compensation charge of
$2.5 million in the nine months ended September 30, 1997.
27
<PAGE>
Amortization of Intangible Assets
Amortization of approximately $0.9 million in the nine months ended
September 30, 1996 and 1997 consists primarily of the estimated amortization of
intangible assets related to the Acquisitions as though they had taken place on
January 1, 1996.
Operating Income
Operating income increased approximately $2.5 million from an operating
loss of $146,000 in the nine months ended September 30, 1996 to approximately
$2.3 million, or 6.4% of total revenues, in the nine months ended September 30,
1997.
Interest Income (Expense)
Interest income net of interest expense was income of $10,000 in the nine
months ended September 30, 1996 and expense of $5,000 in the nine months ended
September 30, 1997.
Income Tax Provision
The income tax provision increased approximately $1.0 million from $0.2
million in the nine months ended September 30, 1996 to approximately $1.1
million in the nine months ended September 30, 1997. The effective tax rate for
the nine months ended September 30, 1997 was 49.3%. In each period, the
effective tax rate exceeds the statutory rate primarily due to non-deductible
amortization of intangibles. As income before income taxes increases, the impact
of non-deductible amortization of intangibles on the effective tax rate will
tend to diminish. The Founding Companies were operated as separate entities for
tax purposes for all periods presented.
Net Income (Loss)
Net income increased approximately $1.5 million from a loss of
approximately $0.3 million in the nine months ended September 30, 1996 to income
of approximately $1.2 million, or 3.2% of total revenues, in the nine months
ending September 30, 1997.
PRO FORMA COMBINED LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements relate to the implementation of
its acquisition strategy and, to a lesser extent, working capital and capital
expenditures. The Company intends to fund these capital requirements primarily
through: (i) the net proceeds of the Offering; (ii) cash flow from operations;
(iii) borrowing under the Company's proposed Credit Facility; and (iv) the
issuance of Common Stock to the sellers of acquired businesses.
At September 30, 1997, on a pro forma combined basis, the Company would
have a cash balance of $5.8 million, working capital of $8.5 million and no
long-term debt outstanding. Cash balances of the Company will be invested in
short-term, interest-bearing investment grade securities.
Promptly following consummation of the Offering, the Company intends to
enter into the proposed Credit Facility, which is anticipated to provide up to
$30 million of available credit. There can be no assurance that such Credit
Facility will be obtained or that, if obtained, will be on terms that are
favorable to the Company or sufficient for the Company's needs. Additionally,
the Company intends to file a shelf Registration Statement for 2,000,000 shares
of Common Stock after consummation of the Offering for issuance to sellers of
acquired companies in connection with future acquisitions. The amount of capital
available for future acquisitions will depend in part on the willingness of
sellers to accept Common Stock as partial consideration.
The Company anticipates that it will make approximately $1.1 million of
capital expenditures for the Founding Companies during fiscal year ended
December 31, 1998, in addition to its anticipated acquisition and working
capital requirements. The Company believes that the capital sources described
28
<PAGE>
above will be sufficient to meet the Company's liquidity requirements for its
operations and acquisition program for at least 12 months following the
Offering.
RESULTS OF OPERATIONS -- COMBINED
The combined results of operations of the Founding Companies for the
periods presented as fiscal years 1994, 1995, and 1996 do not represent combined
results of operations presented in accordance with generally accepted accounting
principles, but are only a summation of the total revenues, cost of revenues,
and SG&A expenses (including historical intangible amortization) of the
individual Founding Companies on a historical basis. The combined results also
exclude the effect of pro forma adjustments and, therefore, may not be
indicative of the Company's post-combination results of operations for a number
of reasons, including the following: (i) the Founding Companies were not under
common control or management during the periods presented; (ii) the Founding
Companies had different fiscal year ends for the periods presented; (iii) the
Founding Companies used different tax structures ("S Corporations" or "C
Corporations") during the periods presented; (iv) the Company will incur
incremental costs related to its new corporate management and the costs of being
a public company; (v) the Company will use the purchase method of accounting to
record the Acquisitions, resulting in the recording and amortization of
goodwill; and (vi) the combined data do not reflect the Compensation
Differential, the Rent Differential or the potential benefits and cost savings
the Company expects to realize once ImageMax and the Founding Companies begin
operating as a combined entity.
The following table sets forth the combined results of operations of the
Founding Companies on a historical basis and such results as a percentage of
total revenues (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED (1)
-----------------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Services...................................... $31,187 75.9% $29,171 73.9% $33,563 72.2%
Product....................................... 9,929 24.1 10,311 26.1 12,938 27.8
------- ----- ------- ----- ------- -----
41,116 100.0 39,482 100.0 46,501 100.0
------- ----- ------- ----- ------- -----
Cost of Revenues
Services...................................... 20,863 50.7 19,089 48.3 21,558 46.4
Product....................................... 7,425 18.1 7,145 18.1 9,166 19.7
Depreciation.................................. 1,375 3.3 1,413 3.6 1,443 3.1
------- ----- ------- ----- ------- -----
29,663 72.1 27,647 70.0 32,167 69.2
------- ----- ------- ----- ------- -----
Gross profit.................................... 11,453 27.9 11,835 30.0 14,334 30.8
Selling, general and administrative expenses
(including intangible asset amortization)..... 11,193 27.3 11,347 28.8 12,738 27.4
------- ----- ------- ----- ------- -----
Operating income................................ $ 260 0.6% $ 488 1.2% $ 1,596 3.4%
======= ===== ======= ===== ======= =====
</TABLE>
- ------------------
(1) The years presented are as follows: AMMCORP - fiscal years ended July 31,
1995, 1996 and 1997; IDS - fiscal years ended August 31, 1995, 1996 and
1997; I(2)Solutions - fiscal years ended October 31, 1994, 1995 and 1996;
OMI - fiscal years ended October 31, 1994, 1995 and 1996; IMS - fiscal years
ended November 30, 1994, 1995 and 1996; TIMCO, DataLink and DocuTech -
fiscal years ended December 31, 1994, 1995 and 1996; TPS - fiscal years
ended March 31, 1995, 1996 and 1997; Spaulding - fiscal years ended June 30,
1995, 1996 and 1997. The CodaLex Group includes two accounting groups: (i)
CodaLex - fiscal years ended June 30, 1995, 1996 and 1997; and (ii) Laser
Graphics - fiscal years ended October 31, 1994, 1995 and 1996.
29
<PAGE>
Fiscal Year 1996 Compared to Fiscal Year 1995
Revenues
Total Revenues. Revenues increased approximately $7.0 million, or 17.8%,
from approximately $39.5 million for fiscal year 1995 to approximately $46.5
million for fiscal year 1996. Service revenues increased 15.1% and represented
72.2% of combined revenues in fiscal year 1996. Product revenues increased 25.5%
and represented 27.8% of combined revenues in fiscal year 1996.
Service Revenues. Service revenues increased approximately $4.4 million
from approximately $29.2 million for fiscal year 1995 to approximately $33.6
million for fiscal year 1996. This increase was largely due to: (i) an increase
in IDS revenues of approximately $1.4 million primarily attributable to
additions to the sales force and the addition of two large data entry projects
from a new and an existing customer; (ii) an increase in the CodaLex Group
revenues of approximately $0.8 million primarily attributable to the opening of
a new office in Atlanta and increased digital imaging services sales at Laser
Graphics; (iii) an increase in TPS revenues of approximately $0.6 million
primarily attributable to the addition of new client accounts; (iv) an increase
in TIMCO revenues of approximately $0.6 million primarily attributable to
increases in sales volume generated by three newly-hired sales representatives;
(v) an increase in OMI revenues of approximately $0.5 million primarily
attributable to growth in both digital imaging and micrographic services; and
(vi) an increase in DocuTech revenues of approximately $0.4 million primarily
attributable to growth in digital imaging services. There was an offsetting
decrease in revenues at IMS of approximately $0.6 million due primarily to the
termination of an outside sales agent.
Product Revenues. Product revenues increased approximately $2.6 million
from approximately $10.3 million for fiscal year 1995 to approximately $12.9
million for fiscal year 1996. This increase was largely due to: (i) an increase
in DocuTech revenues of approximately $0.9 million primarily attributable to
increases in software and related hardware product sales; (ii) an increase in
the CodaLex Group revenues of approximately $1.5 million primarily attributable
to increases in equipment sales through the new Atlanta office; (iii) an
increase in DataLink revenues of approximately $0.3 million primarily
attributable to increased sales of film and disk media; (iv) an increase in OMI
revenues of approximately $0.3 million primarily attributable to growth in
product sales; and (v) offsetting decreases in revenues at IMS and Spaulding of
$146,000 and $142,000, respectively as a result of sales force reductions at IMS
and reduced supplies demand by customers of Spaulding. In each case,
fluctuations in product revenues are primarily a result of fluctuating unit
volume.
Cost of Revenues
Cost of Services. Cost of services increased approximately $2.5 million or
12.9% from approximately $19.1 million for fiscal year 1995 and approximately
$21.6 million for fiscal year 1996. Cost of services as a percentage of service
revenues was 65.4% for fiscal year 1995 and 64.2% for fiscal year 1996. Cost of
services as a percentage of service revenues decreased primarily because: (i)
DocuTech's percentage declined from 56.1% to 40.1% due to higher revenues; (ii)
TPS's percentage declined from 68.1% to 62.6% due to increases in margins on
higher volume; (iii) TIMCO's percentage declined from 70.4% to 65.6% due to
increased employee productivity and reduced costs; (iv) Spaulding's percentage
declined from 65.4% to 62.9% due to cost reduction programs; and (v) DataLink's
percentage declined from 71.7% to 69.7% due to operating efficiencies obtained
when DataLink moved to a new facility. As offsets to these declines: (i) IMS's
percentage increased from 72.2% to 84.3% due to lower sales volume; (ii) OMI's
percent increased from 82.8% to 86.6% due to higher compensation expense; and
(iii) I(2)'s percentage increased from 39.8% to 42.9% due to higher training and
supply costs.
Cost of Products. Cost of products increased approximately $2.0 million or
28.3% from approximately $7.1 million for fiscal year 1995 to approximately $9.2
million for fiscal year 1996. Cost of products as a percentage of product
revenues was 69.3% for fiscal year 1995 and 70.8% for fiscal year 1996. Cost of
products as a percentage of product revenue increased because: (i) DocuTech's
percentage increased from 33.8% to 54.4% primarily due to higher software
production and support costs; (ii) TPS's percentage increased from 82.9% to
91.3% primarily due to product mix; and (iii) the CodaLex Group's percentage
increased from 66.9% to 74.9% primarily due to decreases in
30
<PAGE>
product margins at Laser Graphics. As an offset to these increases, IMS's
percentage decreased from 78.2% to 59.5% primarily due to lower volume offset by
higher software production costs.
Depreciation. Depreciation remained constant at approximately $1.4 million
for fiscal 1995 and 1996.
Gross Profit
As a result of a 17.8% increase in revenues and a 16.3% increase in cost of
revenues resulting from a more favorable mix of higher margin products, combined
gross profit increased approximately $2.5 million or 21.1% from approximately
$11.8 million for fiscal year 1995 to approximately $14.3 million for fiscal
year 1996. Gross profit as a percentage of revenues increased from 30.0% for
fiscal year 1995 to 30.8% for fiscal year 1996.
Selling General and Administrative Expenses.
SG&A expenses were approximately $11.3 million in fiscal year 1995 and
approximately $12.7 million in fiscal year 1996. As a percentage of combined
revenues, SG&A expenses decreased from 28.8% in fiscal year 1995 to 27.3% in
fiscal year 1996. SG&A administrative expenses increased $97,000 at OMI
primarily due to increases in owner's compensation and increases in selling
costs related to higher sales volume. SG&A costs increased approximately $0.5
million at IDS primarily due to owners' compensation expense. SG&A expenses
increased approximately $0.4 million at I(2) primarily due to owners'
compensation expense. SG&A expenses increased approximately $0.3 million at
DocuTech primarily due to increases in personnel, marketing, and software
development costs. SG&A costs increased approximately $0.2 million at the
CodaLex Group primarily due to adding staff personnel at the Atlanta location
and higher sales commission expenses. Overall, nine of the Founding Companies
reported increases in SG&A expenses from fiscal year 1995 to fiscal year 1996,
offset by a similar amount of decreases at the remaining three companies.
Fiscal Year 1995 Compared to Fiscal Year 1994
Revenues
Total Revenues. Revenues decreased approximately $1.6 million, or 4.0%,
from approximately $41.1 million for fiscal year 1994 to approximately $39.5
million for fiscal year 1995. Service revenues decreased approximately 6.5% and
represented 73.9% of combined revenues in fiscal year 1995. Product revenues
increased 3.8% and represented 26.1% of combined revenues in fiscal year 1995.
Service Revenues. Service revenues decreased approximately $2.0 million
from approximately $31.2 million for fiscal year 1994 to approximately $29.2
million for fiscal year 1995. This decrease was largely due to: (i) a decrease
at IDS of approximately $0.6 million due primarily to the completion of two
large projects in fiscal year 1995; (ii) a decrease in revenues at the CodaLex
Group of approximately $1.0 million due primarily to a shift in the mix to lower
margin product sales and diversion of management attention required by the
establishment of the Atlanta facility; and (iii) a decrease in revenues at
DataLink of approximately $0.3 million due primarily to the loss of three
significant COM customers. As offsets to these decreases: (i) AMMCORP's revenues
increased approximately $0.7 million, primarily attributable to the acquisition
of a document management business in Anderson, Indiana; (ii) TPS' revenues
increased approximately $0.3 million, primarily attributable to the addition of
several large service accounts from health care, financial and government
clients; (iii) TIMCO's revenues increased approximately $0.3 million, primarily
attributable to the acquisition of a document management company in northern
California in the middle of fiscal year 1994; and (iv) DocuTech's revenues
increased approximately $0.3 million, primarily due to increases in scanning
service revenues.
Product Revenues. Product revenues increased approximately $0.4 million
from approximately $9.9 million for fiscal year 1994 to approximately $10.3
million for fiscal year 1995. This increase was largely due to: (i) an increase
in IMS revenues of approximately $0.5 million primarily attributable to
increases in sales of large document scanning hardware; (ii) an increase in I(2)
Solutions' revenues of approximately $0.4 million primarily attributable to a
large equipment order; and (iii) an offsetting
31
<PAGE>
decrease in revenues at Spaulding of approximately $0.6 million as a result of
reduced regional demand for equipment. In each case, fluctuations in product
revenues are primarily a result of fluctuating unit volume.
Cost of Revenues
Cost of Services. Cost of services decreased approximately $1.8 million or
8.5% from approximately $20.9 million for fiscal year 1994 to approximately
$19.1 million for fiscal year 1995. Cost of services as a percentage of service
revenues was 66.9% for fiscal year 1994 and 65.4% for fiscal year 1995. The
dollar decrease was primarily due to: (i) a decrease in the Codalex Group cost
of services of approximately $0.7 million, with cost of services as a percentage
of service revenues increasing from 64.2% in fiscal year 1994 to 67.3% in fiscal
year 1995, primarily attributable to a decrease in sales volume without a
similar decrease in overhead costs; (ii) a decrease in IDS cost of services of
approximately $0.2 million, with cost of services as a percentage of service
revenues increasing from 56.2% in fiscal year 1994 to 67.2% in fiscal year 1995,
primarily attributable to decreases in margin on higher volume; and (iii) a
decrease in Datalink cost of services of approximately $0.3 million, with cost
of services as a percentage of service revenues decreasing from 61.6% in fiscal
year 1994 to 57.3% in fiscal year 1995, primarily attributable to reductions in
labor costs and production overhead.
Cost of Products. Cost of products decreased approximately $0.3 million or
3.8% from approximately $7.4 million for fiscal year 1994 to approximately $7.1
million for fiscal year 1995. Cost of products as a percentage of product
revenues was 74.8% for fiscal year 1994 and 69.3% for fiscal year 1995. The
major fluctuations in cost of products included (i) a decrease in Spaulding's
cost of products of approximately $0.6 million, with cost of products as a
percentage of product revenues decreasing from 67.8% in fiscal year 1994 to
63.8% in fiscal year 1995 primarily attributable to lower sales volume, (ii) an
increase in IMS cost of products of approximately $0.4 million, with cost of
products decreasing as a percentage of product revenues from 88.9% in fiscal
year 1994 to 78.2% in fiscal year 1995 primarily attributable to increases in
sales volume, (iii) an increase in I(2) Solutions cost of products of
approximately $0.2 million, with cost of product as a percentage of product
revenues decreasing from 83.9% in fiscal year 1994 to 76.1% in fiscal year 1995,
primarily attributable to higher volume of product sold and some pricing
improvement.
Depreciation. Depreciation was approximately $1.4 million for fiscal year
1994 and 1995.
Gross Profit
As a result of higher margins earned on product sales, combined gross
profit increased approximately $0.4 million or 3.3% from approximately $11.5
million for fiscal year 1994 to approximately $11.8 million for fiscal year
1995. Gross profit as a percentage of revenues increased from 27.9% for fiscal
year 1994 to 30.0% for fiscal year 1995.
Selling, General and Administrative Expenses
SG&A expenses increased approximately $0.2 million or 1.4% from
approximately $11.2 million in fiscal year 1994 to approximately $11.3 million
in fiscal year 1995. SG&A expenses increased approximately $0.5 million at TIMCO
primarily due to increases in one time expenses related to the retirement of the
former co-founder. Seven of the Founding Companies reported increases in SG&A
expenses from fiscal year 1994 to fiscal year 1995, offset by a decline in SG&A
expenses at OMI, I(2) Solutions, AMMCORP, IDS, and the CodaLex Group.
IMAGEMAX RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997
Selling, General and Administrative Expenses. SG&A expenses amounted to
approximately 0.3 million for the nine months ended September 30, 1997. These
expenses consist primarily of management fees paid to GBL Capital Corporation
("GBL") pursuant to a management agreement and administrative expenses.
32
<PAGE>
Special Compensation Charge. In 1997, the Company sold a total of 314,135
shares of Common Stock (including Common Stock issuable upon conversion of
Series A Preferred Stock sold) to officers and directors of ImageMax and to
certain management of the Founding Companies, at prices of $1.18, $2.36 and
$4.73 per share. As a result, the Company recorded a non-recurring, non-cash
compensation charge of approximately $2.5 million, representing the difference
between the amount paid for the shares and the estimated deemed value for
accounting purposes (based on an assumed initial public offering price of $13.00
per share).
From Inception to December 31, 1996
Selling, General and Administrative Expenses. SG&A expenses amounted to
$23,000 in the period from inception of ImageMax (November 12, 1996) to December
31, 1996. These expenses consist primarily of management fees paid to GBL and
administrative expenses.
ImageMax Liquidity and Capital Resources
From November 12, 1996 through September 30, 1997, ImageMax had negative
operating cash flows amounting to $88,000. Cash provided from financing
activities amounted to $1.7 million raised from private equity financings. At
September 30, 1997, ImageMax had a working capital deficit of $0.5 million and
cash and cash equivalents of $1.4 million. See "Use of Proceeds."
FOUNDING COMPANIES -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF HISTORICAL
FINANCIAL CONDITION AND RESULTS OF HISTORICAL OPERATIONS
The following discussion should be read in conjunction with the Founding
Companies' financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. The information presented below is based upon the
respective fiscal periods for each Founding Company and excludes all pro forma
adjustments. SG&A expenses include, where applicable, intangible asset
amortization.
AMMCORP RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31,
---------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Services............................................. $6,276 100.0% $5,550 100.0% $5,677 100.0%
------ ----- ------ ----- ------ -----
6,276 100.0 5,550 100.0 5,677 100.0
------ ----- ------ ----- ------ -----
Cost of revenues
Services............................................. 4,652 74.1 3,318 59.8 3,297 58.1
Depreciation......................................... 381 6.1 412 7.4 390 6.8
------ ----- ------ ----- ------ -----
5,033 80.2 3,730 67.2 3,687 64.9
------ ----- ------ ----- ------ -----
Gross profit........................................... 1,243 19.8 1,820 32.8 1,990 35.1
Selling, general and administrative expenses........... 1,835 29.2 1,593 28.7 1,818 32.0
------ ----- ------ ----- ------ -----
Operating income (loss)................................ (592) (9.4) 227 4.1 172 3.1
Interest expense (income).............................. 323 5.2 352 6.4 359 6.4
------ ----- ------ ----- ------ -----
Income (loss) before taxes............................. $ (915) (14.6)% $ (125) (2.3)% $ (187) 3.3%
====== ===== ====== ===== ====== =====
</TABLE>
Fiscal Year Ended July 31, 1997 Compared to Fiscal Year Ended July 31, 1996
Revenues. Revenues increased $127,000 or 2.3% from approximately $5.6
million for fiscal year ended July 31, 1996 to approximately $5.7 million for
fiscal year ended July 31, 1997. This increase was primarily due to higher box
storage fees.
33
<PAGE>
Cost of Revenues. Cost of revenues remained unchanged at approximately
$3.7 million during the comparable periods. Gross profit as a percentage of
revenues was approximately 32.8% for the fiscal year ended July 31, 1996 and
35.1% for fiscal year ended July 31, 1997, as a result of residual costs of the
closing of a document management facility located in Anderson, Indiana in August
1995 and increasing efficiencies achieved in AMMCORP's main facility over the
course of fiscal year 1996. The Anderson facility had been acquired from a third
party in March 1994.
Selling, General and Administrative Expenses. SG&A expenses increased $0.2
million or 14.1% from approximately $1.6 million for fiscal year ended July 31,
1996 to approximately $1.8 million for fiscal year ended July 31, 1997, and, as
a percentage of revenues, from 28.7% to 32.0% primarily due to the addition of
additional sales and digital imaging personnel.
Fiscal Year Ended July 31, 1996 Compared to Fiscal Year Ended July 31, 1995
Revenues. Revenues decreased approximately $0.7 million or 11.6% from
approximately $6.3 million for fiscal year ended July 31, 1995 to approximately
$5.6 million for fiscal year ended July 31, 1996. This decrease was primarily
due to the loss of customer accounts that occurred when AMMCORP closed the
Anderson, Indiana document management facility in August 1995.
Cost of Revenues. Cost of revenues decreased approximately $1.3 million,
or 25.9%, from approximately $5.0 million for the fiscal year ended July 31,
1995 to approximately $3.7 million for the fiscal year ended July 31, 1996. This
decrease was primarily due to lower production costs and the elimination of
overhead resulting from the closing of the Anderson facility. Gross profit as a
percentage of revenues was approximately 19.8% for the fiscal year ended July
31, 1995 and 32.8% for fiscal year ended July 31, 1996, as a result of the cost
savings related to closing the Anderson facility in August 1995.
Selling, General and Administrative Expenses. SG&A expenses decreased $0.2
million or 13.2% from approximately $1.8 million for fiscal year ended July 31,
1995 to approximately $1.6 million for fiscal year ended July 31, 1996, and, as
a percentage of revenues, from 29.2% to 28.7% as a result of cost savings
realized through closing the Anderson facility.
AMMCORP Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of AMMCORP (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31,
--------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net cash flow provided by operating activities.............. $152 $703 $553
Net cash flow (used in) investing activities................ (266) (162) (157)
Net cash provided by (used in) financing activities......... 106 (541) (373)
---- ---- ----
Increase (decrease) in cash and cash equivalents............ $ (8) $ -- $ 23
==== ==== ====
</TABLE>
From August 1, 1994 through July 31, 1997 AMMCORP generated approximately
$1.4 million in net cash from operating activities. Cash used in investing
activities was primarily for purchases of digital imaging and micrographics
processing equipment including equipment purchased as part of the Anderson
facility. Cash used in financing activities consisted primarily of payments on
long-term debt and non-compete contracts associated with the acquisition of
AMMCORP in 1988 by a company controlled by David C. Utz, Jr. As of July 31,
1997, the Company had a working capital deficit of $3.0 million. The Company
intends to pay down AMMCORP's debt simultaneous with the Acquisitions and,
therefore, AMMCORP believes that its acquisition will improve its working
capital position.
34
<PAGE>
CODALEX RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data for
CodaLex and such data as a percentage of revenues for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------------------------ ------------------------------
1995 1996 1997 1996 1997
-------------- -------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Services..................... $1,836 78.5% $ 755 54.8% $1,507 52.6% $341 52.6% $530 68.9%
Products..................... 504 21.5 622 45.2 1,358 47.4 307 47.4 239 31.1
------ ----- ------ ----- ------ ----- ---- ----- ---- -----
2,340 100.0 1,377 100.0 2,865 100.0 648 100.0 769 100.0
------ ----- ------ ----- ------ ----- ---- ----- ---- -----
Cost of revenues
Services..................... 1,178 50.3 508 36.9 1,012 35.3 228 35.1 400 52.0
Products..................... 329 14.1 416 30.2 1,016 35.5 252 38.9 169 22.0
Depreciation................. 44 1.9 47 3.4 64 2.2 12 1.9 10 1.3
------ ----- ------ ----- ------ ----- ---- ----- ---- -----
1,551 66.3 971 70.5 2,092 73.0 492 75.9 579 75.3
------ ----- ------ ----- ------ ----- ---- ----- ---- -----
Gross profit................... 789 33.7 406 29.5 773 27.0 156 24.1 190 24.7
Selling, general and
administrative expenses...... 748 31.9 551 40.0 761 26.6 100 15.5 198 25.7
------ ----- ------ ----- ------ ----- ---- ----- ---- -----
Operating income (loss)........ 41 1.8 (145) (10.5) 12 0.4 56 8.6 (8) (1.0)
Interest expense (income)...... 29 1.3 60 4.4 (7) (0.3) 3 0.4 11 1.4
------ ----- ------ ----- ------ ----- ---- ----- ---- -----
Income (loss) before taxes..... $ 12 0.5% $ (205) (14.9)% $ 19 0.7% $ 53 8.2% $(19) (2.4)%
====== ===== ====== ===== ====== ===== ==== ===== ==== =====
</TABLE>
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
Revenues. Revenues increased $121,000 or 18.7% from approximately $0.6
million for the three months ended September 30, 1996 to approximately $0.8
million for the three months ended September 30, 1997. This increase was
primarily due to increased service revenues offset by lower product sales,
primarily as a result of reduced product unit volume.
Cost of Revenues. Cost of revenues increased $87,000 or 17.7% from
approximately $0.5 million for the three months ended September 30, 1996 to
approximately $0.6 million for the three months ended September 30, 1997. This
increase was primarily due to higher sales volume primarily of services. Gross
profit as a percentage of revenues was 24.1% for the three months ended
September 30, 1996 and 24.7% for the three months ended September 30, 1997.
Selling, General and Administrative Expenses. SG&A expenses increased
$98,000 or 98.0% from $100,000 for the three months ended September 30, 1996 to
approximately $0.2 million for the three months ended September 30, 1997. This
increase was primarily due to professional fees incurred in connection with the
Acquisition and to an increase in sales commissions. As a percentage of
revenues, SG&A expenses increased from 15.5% to 25.7%.
Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996
Revenues. Revenues increased approximately $1.5 million or 108.1% from
approximately $1.4 million for fiscal year ended June 30, 1996 to approximately
$2.9 million for fiscal year ended June 30, 1997. Both service and product
revenues increased due to a full fiscal year's contribution to revenues from a
new facility in Atlanta as well as increased product unit sales.
Cost of Revenues. Cost of revenues increased approximately $1.1 million or
115.4% from approximately $1.0 million for the fiscal year ended June 30, 1996
to approximately $2.1 million for fiscal year ended June 30, 1997. This increase
was primarily due to higher sales volume in both services and products. Gross
profit as a percentage of revenues was 29.5% for fiscal year ended June 30, 1996
and 27.0% for the fiscal year ended June 30, 1997 primarily due to a shift in
the mix to lower margin product sales.
Selling, General and Administrative Expenses. SG&A expenses increased
approximately $0.2 million or 38.1% from approximately $0.6 million for fiscal
year ended June 30, 1996 to approximately $0.8 million for fiscal year ended
June 30, 1997. This increase was primarily due to
35
<PAGE>
adding personnel at the Atlanta location and an increase in sales commissions.
However, as a percentage of revenues, SG&A expenses decreased from 40.0% to
26.6%.
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
Revenues. Revenues decreased approximately $0.9 million or 41.2% from
approximately $2.3 million for fiscal year ended June 30, 1995 to approximately
$1.4 million for fiscal year ended June 30, 1996, primarily as a result of
reduced service revenues. This decrease was primarily due to a de-emphasis on
conversion service sales and the attention of management required in connection
with the establishment of operations in Atlanta in February 1995, partially
offset by increased product unit volumes.
Cost of Revenues. Cost of revenues decreased approximately $0.6 million or
37.4% from approximately $1.6 million for fiscal year ended June 30, 1995 to
approximately $1.0 million for fiscal year ended June 30, 1996. This decrease
was primarily due to decreases in sales volume in both services and products.
Gross profit as a percentage of revenues was 33.7% for fiscal year ended June
30, 1995 and 29.5% for fiscal year ended June 30, 1996 primarily due to the
decline in sales.
Selling, General and Administrative Expenses. SG&A expenses decreased
approximately $0.2 million or 26.3% from $0.7 million for fiscal year ended June
30, 1995 to $0.6 million for fiscal year ended June 30, 1996. This decrease was
primarily due to a reduction in sales force and other overhead. However, as a
percentage of revenues, SG&A expenses increased from 31.9% to 40.0% due to the
decline in sales.
CodaLex Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of CodaLex (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDED
JUNE 30, SEPTEMBER 30,
-------------------- ---------------
1995 1996 1997 1996 1997
---- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by (used in) operating activities.... $54 $(195) $ 47 $ 111 $ 92
Net cash flow (used in) investing activities................ (39) (30) (130) (107) (5)
Net cash provided by financing activities................... 7 218 83 29 (26)
--- ----- ----- ----- ----
Increase (decrease) in cash and cash equivalents............ $22 $ (7) $ -- $ 33 $ 61
=== ===== ===== ===== ====
</TABLE>
From July 1, 1994 through the three months ended September 30, 1997 CodaLex
used $2,000 in cash for operating activities. Cash used in investing activities
was primarily for purchases of digital imaging and micrographics processing
equipment relating to the establishment of operations in Atlanta. Cash used in
financing activities consisted primarily of proceeds from long-term debt. At
September 30, 1997, CodaLex had a working capital deficit of $0.4 million.
CodaLex will not pay stockholder and other related-party notes that are
currently due as long as cash flows from operations are not sufficient to fund
its obligations as they become due. The Company intends to pay down CodaLex's
related-party and other debt simultaneous with the Acquisitions and, therefore,
CodaLex believes that its acquisition will improve its working capital position.
36
<PAGE>
LASER GRAPHICS RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, NINE MONTHS ENDED JULY 31,
------------------------------- -------------------------------
1995 1996 1996 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Services........................................ $1,056 64.1% $1,132 46.3% $ 799 41.6% $ 985 75.0%
Products........................................ 592 35.9 1,315 53.7 1,122 58.4 329 25.0
------ ----- ------ ----- ------ ----- ------ -----
1,648 100.0 2,447 100.0 1,921 100.0 1,314 100.0
------ ----- ------ ----- ------ ----- ------ -----
Cost of revenues
Services........................................ 763 46.3 811 33.1 573 29.8 639 48.6
Products........................................ 440 26.7 986 40.3 843 43.9 243 18.6
Depreciation.................................... 28 1.7 34 1.4 21 1.1 28 2.1
------ ----- ------ ----- ------ ----- ------ -----
1,231 74.7 1,831 74.8 1,437 74.8 910 69.3
------ ----- ------ ----- ------ ----- ------ -----
Gross profit...................................... 417 25.3 616 25.2 484 25.2 404 30.7
Selling, general and administrative expenses...... 396 24.0 500 20.5 327 17.0 386 29.4
------ ----- ------ ----- ------ ----- ------ -----
Operating income.................................. 21 1.3 116 4.7 157 8.2 18 1.3
Interest expense (income)......................... 30 1.8 20 0.8 17 0.9 21 1.5
------ ----- ------ ----- ------ ----- ------ -----
Income (loss) before taxes........................ $ (9) (0.5)% $ 96 3.9% $ 140 7.3% $ (3) (0.2)%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Nine Months Ended July 31, 1997 Compared to Nine Months Ended July 31, 1996
Revenues. Revenues decreased approximately $0.6 million or 31.6% from
approximately $1.9 million for nine months ended July 31, 1996 to approximately
$1.3 million for nine months ended July 31, 1997. This decrease was primarily
due to a decrease in product unit volume and revenues of approximately $0.8
million related to the loss of the general manager and key sales people in
November 1996 partially offset by an increase in service revenues.
Cost of Revenues. Cost of revenues decreased approximately $0.5 million or
36.6% from approximately $1.4 million for nine months ended July 31, 1996 to
approximately $0.9 million for nine months ended July 31, 1997. This decrease
was primarily due to a decrease in sales volume, improved margins associated
with service revenues and, to a lesser extent, higher margins on products sold.
Gross profit as a percentage of revenues was 25.2% for nine months ended July
31, 1996 and 30.7% for nine months ended July 31, 1997.
Selling, General and Administrative Expenses. SG&A expenses increased
$59,000 or 18.0% from approximately $0.3 million for nine months ended July 31,
1996 to approximately $0.4 million for nine months ended July 31, 1997. As a
percentage of revenues, SG&A expenses increased from 17.0% to 29.4%. This
increase was primarily due to severance and other one time costs related to the
departure of the former general manager.
Fiscal Year Ended October 31, 1996 Compared to Fiscal Year Ended October 31,
1995
Revenues. Revenues increased approximately $0.8 million or 48.5% from
approximately $1.7 million for fiscal year ended October 31, 1995 to
approximately $2.4 million for fiscal year ended October 31, 1996. This result
was primarily due to increased product volume.
Cost of Revenues. Cost of revenues increased approximately $0.6 million or
48.7% from approximately $1.2 million for fiscal year ended October 31, 1995 to
approximately $1.8 million for fiscal year ended October 31, 1996. This increase
was primarily due to higher service volume. Gross profit as a percentage of
revenues was 25.3% for fiscal year ended October 31, 1995 and 25.2% for fiscal
year ended October 31, 1996.
Selling, General and Administrative Expenses. SG&A expenses increased $0.1
million or 26.3% from approximately $0.4 million for fiscal year ended October
31, 1995 to approximately $0.5 million for fiscal year ended October 31, 1996.
This increase was primarily due to higher commission expense. However, as a
percentage of revenues, SG&A expenses decreased from 24.0% to 20.5%.
37
<PAGE>
Laser Graphics Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of Laser Graphics (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
OCTOBER 31, JULY 31,
---------------- ----------------
1995 1996 1996 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net cash flow provided by (used in) operating activities.... $ 67 $ 92 $ 47 $ (16)
Net cash flow (used in) investing activities................ (14) (53) (51) (31)
Net cash provided by (used in) financing activities......... (40) (46) (11) 35
----- ----- ----- -----
Increase (decrease) in cash and cash equivalents............ $ 13 $ (7) $ (15) $ (12)
===== ===== ===== =====
</TABLE>
From November 1, 1994 through July 31, 1997 Laser Graphics generated
$143,000 in net cash from operating activities. Cash used in investing
activities was primarily for purchases of property, plant and equipment. Cash
used in financing activities consisted primarily of payments on bank debt and
capital leases. The Company intends to pay down Laser Graphics' debt
simultaneous with the Acquisitions, and therefore Laser Graphics believes that
its acquisition will improve its working capital position.
DATALINK RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ -------------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Services........................ $2,466 81.4% $2,152 79.9% $2,286 72.5% $1,761 70.3% $1,972 76.9%
Products........................ 562 18.6 540 20.1 865 27.5 744 29.7 592 23.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
3,028 100.0 2,692 100.0 3,151 100.0 2,505 100.0 2,564 100.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Cost of revenues
Services........................ 1,864 61.6 1,542 57.3 1,593 50.6 1,180 47.1 1,268 49.5
Products........................ 605 20.0 479 17.8 773 24.5 647 25.8 492 19.2
Depreciation.................... 191 6.2 205 7.6 218 6.9 161 6.5 157 6.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
2,660 87.8 2,226 82.7 2,584 82.0 1,988 79.4 1,917 74.8
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit...................... 368 12.2 466 17.3 567 18.0 517 20.6 647 25.2
Selling, general and
administrative expenses......... 331 10.9 339 12.6 467 14.8 327 13.0 405 15.8
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Operating income.................. 37 1.3 127 4.7 100 3.2 190 7.6 242 9.4
Interest expense (income)......... 46 1.6 52 1.9 105 3.4 74 3.0 90 3.5
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) before taxes........ $ (9) (0.3)% $ 75 2.8% $ (5) (0.2)% $ 116 4.6% $ 152 5.9%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Revenues. Revenues increased $58,000 or 2.3% from approximately $2.5
million for nine months ended September 30, 1996 to approximately $2.6 million
for nine months ended September 30, 1997. This increase was primarily due to
increased scanning service revenues, offset partially by decreases in product
unit volume.
Cost of Revenues. Cost of revenues decreased $72,000 or 3.5% from
approximately $2.0 million for nine months ended September 30, 1996 to
approximately $1.9 million for nine months ended September 30, 1997. This
decrease was primarily due to increased operating efficiencies obtained when
DataLink moved to a new facility in the spring of 1996. Gross profit as a
percentage of revenues was 20.6% for nine months ended September 30, 1996 and
25.2% for nine months ended September
38
<PAGE>
30, 1997. This increase was primarily due to a more favorable product and
service mix and increased operating efficiencies.
Selling, General and Administrative Expenses. SG&A expenses increased
$78,000 or 23.5% from approximately $0.3 million for the nine months ended
September 30, 1996 to approximately $0.4 million for the nine months ended
September 30, 1997. The increase is primarily due to professional fees incurred
in connection with the Acquisition. As a percentage of revenues, SG&A expenses
increased from 13.1% to 15.8%.
Fiscal Year Ended December 31, 1996 Compared to Fiscal Year Ended December 31,
1995
Revenues. Revenues increased approximately $0.5 million or 17.0% from
approximately $2.7 million for fiscal year ended December 31, 1995 to
approximately $3.2 million for fiscal year ended December 31, 1996. This
increase was primarily due to increases in digital imaging service and media
sales.
Cost of Revenues. Cost of revenues increased approximately $0.4 million or
16.1% from approximately $2.2 million for fiscal year ended December 31, 1995 to
approximately $2.6 million for fiscal year ended December 31, 1996. This
increase was primarily due to higher sales volume. Gross profit as a percentage
of revenues was 17.3% for fiscal year ended December 31, 1995 and 18.0% for
fiscal year ended December 31, 1996.
Selling, General and Administrative Expenses. SG&A expenses increased
$128,000 or 37.8% from $0.3 million for fiscal year ended December 31, 1995 to
$0.5 million for fiscal year ended December 31, 1996. As a percentage of
revenues, SG&A expenses increased from 12.6% to 14.8%. This increase was due to
increases in owners' compensation and the one-time costs associated with moving
to a new facility in the spring of 1996.
Fiscal Year Ended December 31, 1995 Compared to Fiscal Year Ended December 31,
1994
Revenues. Revenues decreased approximately $0.3 million or 11.1% from
approximately $3.0 million for fiscal year ended December 31, 1994 to
approximately $2.7 million for fiscal year ended December 31, 1995. This
decrease was primarily due to the loss of three service accounts.
Cost of Revenues. Cost of revenues decreased approximately $0.5 million or
16.3% from approximately $2.7 million for fiscal year ended December 31, 1994 to
approximately $2.2 million for fiscal year ended December 31, 1995. This
decrease was primarily due to decreases in labor costs and production overhead.
Gross profit as a percentage of revenues was 12.2% for fiscal year ended
December 31, 1994 and 17.3% for fiscal year ended December 31, 1995. This
increase was primarily due to increases in product gross margin.
Selling, General and Administrative Expenses. SG&A expenses were
approximately $0.3 million for both fiscal years ended December 31, 1994 and
December 31, 1995. However as a percentage of revenues, SG&A expenses increased
from 10.9% to 12.6%.
DataLink Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of DataLink (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- --------------
1994 1995 1996 1996 1997
----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities.............. $ 107 $ 217 $310 $296 $309
Net cash flow (used in) investing activities................ (238) (39) (99) (92) (36)
Net cash provided by (used in) financing activities......... 120 (135) (213) (94) (118)
----- ----- ---- ---- ----
Increase (decrease) in cash and cash equivalents............ $ (11) $ 43 $ (2) $110 $155
===== ===== ==== ==== ====
</TABLE>
39
<PAGE>
From January 1, 1994 through the nine months ended September 30, 1997
DataLink generated approximately $0.9 million in net cash from operating
activities. Cash used in investing activities was primarily for purchases of
digital imaging and micrographics processing equipment. Cash used in financing
activities consisted primarily of payments on or proceeds from long term debt
and distributions to stockholders. DataLink believes it has adequate cash flow
and financing alternatives available to it to fund its operations and capital
requirements for the foreseeable future.
DOCUTECH RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ -------------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Services........................ $ 600 100.0% $ 854 79.6% $1,249 53.8% $ 866 48.8% $ 869 40.1%
Products........................ -- -- 219 20.4 1,073 46.2 908 51.2 1,300 59.9
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
600 100.0 1,073 100.0 2,322 100.0 1,774 100.0 2,169 100.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Cost of revenues
Services........................ 377 62.8 479 44.6 501 21.6 340 19.2 405 18.7
Products........................ -- -- 74 6.9 584 25.2 500 28.2 434 20.0
Depreciation.................... 12 2.0 24 2.3 31 1.3 24 1.3 28 1.3
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
389 64.8 577 53.8 1,116 48.1 864 48.7 867 40.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit...................... 211 35.2 496 46.2 1,206 51.9 910 51.3 1,302 60.0
Selling, general and
administrative expenses......... 198 33.0 402 37.5 747 32.2 565 31.8 659 30.4
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Operating income.................. 13 2.2 94 8.7 459 19.7 345 19.5 643 29.6
Interest expense (income)......... 5 0.8 13 1.2 13 0.5 13 0.8 4 0.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) before taxes........ $ 8 1.4% $ 81 7.5% $ 446 19.2% $ 332 18.7% $ 639 29.5%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Revenues. Revenues increased approximately $0.4 million or 22.3% from
approximately $1.8 million for the nine months ended September 30, 1996 to
approximately $2.2 million for the nine months ended September 30, 1997. This
increase was primarily due to an increase in higher margin software product
sales.
Cost of Revenues. Cost of revenues were approximately $0.9 million for
both the nine months ended September 30, 1996 and September 30, 1997. Gross
profit as a percentage of revenues was 51.3% for the nine months ended September
30, 1996 and 60.0% for the nine months ended September 30, 1997. This increase
was primarily due to an increase in higher margin software product sales.
Selling, General and Administrative Expenses. SG&A expenses increased
$94,000 or 16.6% from approximately $0.6 million for the nine months ended
September 30, 1996 to approximately $0.7 million for the nine months ended
September 30, 1997. However, as a percentage of revenues, SG&A expenses
decreased from 31.9% to 30.4% primarily due to increased revenues.
Fiscal Year Ended December 31, 1996 Compared to Fiscal Year Ended December 31,
1995
Revenues. Revenues increased approximately $1.2 million or 116.4% from
approximately $1.1 million for fiscal year ended December 31, 1995 to
approximately $2.3 million for fiscal year ended December 31, 1996. This
increase was primarily due to increased unit volumes and sales of software and
related scanning hardware and increases in scanning services revenues.
Cost of Revenues. Cost of revenues increased approximately $0.5 million or
93.4% from approximately $0.6 million for fiscal year ended December 31, 1995 to
approximately $1.1 million for fiscal year ended December 31, 1996. This was
primarily due to increases in software costs attributable
40
<PAGE>
to higher software product sales and consists primarily of support personnel,
maintenance costs and third party royalties and costs of equipment attributable
to increased equipment sales volume. Gross profit as a percentage of revenues
was 46.2% for fiscal year ended December 31, 1995 and 51.9% for fiscal year
ended December 31, 1996. This increase was primarily due to an increase in
higher margin software products sales.
Selling, General and Administrative Expenses. SG&A expenses increased
approximately $0.3 million or 85.8% from approximately $0.4 million for fiscal
year ended December 31, 1995 to $0.7 million for fiscal year ended December 31,
1996. This increase was primarily due to increased investment in personnel and
marketing and development of new software products. However, as a percentage of
revenues, SG&A expenses decreased from 37.5% to 32.2%.
Fiscal Year Ended December 31, 1995 Compared to Fiscal Year Ended December 31,
1994
Revenues. Revenues increased approximately $0.5 million or 78.8% from
approximately $0.6 million for fiscal year ended December 31, 1994 to
approximately $1.1 million for fiscal year ended December 31, 1995. This
increase was primarily due to increases in scanning services revenue and the
initial commercial release of the DocuROM software product in 1995.
Cost of Revenues. Cost of revenues increased approximately $0.2 million or
48.3% from approximately $0.4 million for fiscal year ended December 31, 1994 to
approximately $0.6 million for fiscal year ended December 31, 1995. This
increase was primarily due to higher service volume and software product costs.
Gross profit as a percentage of revenues was 35.2% for fiscal year ended
December 31, 1994 and 46.2% for fiscal year ended December 31, 1995. This
increase was primarily due to higher margins generated from the release of the
DocuROM scanning software.
Selling, General and Administrative Expenses. SG&A expenses increased
approximately $0.2 million or 103.0% from approximately $0.2 million for fiscal
year ended December 31, 1994 to approximately $0.4 million for fiscal year ended
December 31, 1995. As a percentage of revenues, SG&A expenses increased from
33.0% to 37.5%. This increase was primarily due to increased investment in
personnel and marketing of new software products.
DocuTech Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of DocuTech (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ --------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities.............. $ 14 $113 $384 $282 $499
Net cash flow (used in) investing activities................ (22) (17) (31) (30) (25)
Net cash provided by (used in) financing activities......... 4 (88) (186) (83) (391)
---- ---- ---- ---- ----
Increase (decrease) in cash and cash equivalents............ $ (4) $ 8 $167 $169 $ 83
==== ==== ==== ==== ====
</TABLE>
From January 1, 1994 through the nine months ended September 30, 1997
DocuTech generated approximately $1.0 million in net cash from operating
activities. Cash used in investing activities was primarily for purchases of
property and equipment. Cash used in financing activities consisted primarily of
payments of dividends to stockholders and payments on long term debt. DocuTech
believes it has adequate cash flow and financing alternatives available to it to
fund its operations and capital requirements for the foreseeable future.
41
<PAGE>
I(2) SOLUTIONS RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, NINE MONTHS ENDED JULY 31,
------------------------------------------------ -------------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Services........................ $2,293 63.0% $2,303 57.4% $2,384 60.2% $1,839 58.6% $2,014 60.5%
Products........................ 1,345 37.0 1,710 42.6 1,575 39.8 1,298 41.4 1,316 39.5
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
3,638 100.0 4,013 100.0 3,959 100.0 3,137 100.0 3,330 100.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Cost of revenues
Services........................ 724 19.9 917 22.9 1,023 25.8 721 23.0 767 23.0
Products........................ 1,129 31.0 1,302 32.4 1,229 31.0 1,024 32.6 966 29.0
Depreciation.................... 159 4.4 155 3.9 157 4.0 120 3.8 126 3.8
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
2,012 55.3 2,374 59.2 2,409 60.8 1,865 59.4 1,859 55.8
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit...................... 1,626 44.7 1,639 40.8 1,550 39.2 1,272 40.5 1,471 44.2
Selling, general and
administrative expenses......... 1,328 36.5 1,264 31.5 1,673 42.3 1,085 34.6 1,204 36.2
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Operating income (loss)........... 298 8.2 375 9.3 (123) (3.1) 187 6.0 267 8.0
Interest expense (income)......... 45 1.2 (8) (0.2) 1 -- 7 0.2 15 0.4
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) before taxes........ $ 253 7.0% $ 383 9.5% $ (124) (3.1)% $ 180 5.7% $ 252 7.6%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Nine Months Ended July 31, 1997 Compared to Nine Months Ended July 31, 1996
Revenues. Revenues increased $193,000 or 6.2% from approximately $3.1
million for the nine months ended July 31, 1996 to approximately $3.3 million
for the nine months ended July 31, 1997. This increase was primarily due to
higher service revenues achieved through increased capacity associated with the
opening of a new facility.
Cost of Revenues. Cost of revenues remained the same at approximately $1.9
million for the nine months ended July 31, 1996 and the nine months ended July
31, 1997. Gross profit as a percentage of revenues was 40.5% for the nine months
ended July 31, 1996 and 44.2% for the nine months ended July 31, 1997.
Selling, General and Administrative Expenses. SG&A expenses increased from
approximately $1.1 million for the nine months ended July 31, 1996 to
approximately $1.2 million for the nine months ended July 31, 1997. As a
percentage of revenues, SG&A expenses increased from 34.6% for the nine months
ended July 31, 1996 to 36.2% for the nine months ended July 31, 1997. This
increase is primarily due to higher owner compensation expenses.
Fiscal Year Ended October 31, 1996 Compared to Fiscal Year Ended October 31,
1995
Revenues. Revenues were approximately $4.0 million for both fiscal years
ended October 31, 1995 and October 31, 1996 as a result of a slight increase in
service revenue offset by a slight decrease in product revenue.
Cost of Revenues. Cost of revenues were approximately $2.4 million for
both fiscal years ended October 31, 1995 and October 31, 1996. Gross profit as a
percentage of revenues was 40.8% for fiscal year ended October 31, 1995 and
39.2% for fiscal year ended October 31, 1996, primarily due to higher spending
for retraining of employees for scanning service operations and supply cost
increases.
Selling, General and Administrative Expenses. SG&A expenses increased
approximately $0.4 million or 32.3% from approximately $1.3 million for fiscal
year ended October 31, 1995 to approximately $1.7 million for fiscal year ended
October 31, 1996. As a percentage of revenues, SG&A expenses increased from
31.5% to 42.3%. This increase was primarily due to a $0.4 million increase in
owner's compensation.
42
<PAGE>
Fiscal Year Ended October 31, 1995 Compared to Fiscal Year Ended October 31,
1994
Revenues. Revenues increased approximately $0.4 million or 10.3% from
approximately $3.6 million for fiscal year ended October 31, 1994 to
approximately $4.0 million for fiscal year ended October 31, 1995. This increase
was primarily due to higher product sales connected to unit volumes.
Cost of Revenues. Cost of revenues increased approximately $0.4 million or
18.0% from approximately $2.0 million for fiscal year ended October 31, 1994 to
approximately $2.4 million for fiscal year ended October 31, 1995. Gross profit
as a percentage of revenues was 44.7% for fiscal year ended October 31, 1994 and
40.8% for fiscal year ended October 31, 1995. This decrease was primarily due to
lower margins earned on service revenues.
Selling, General and Administrative Expenses. SG&A expenses were
approximately $1.3 million for fiscal year ended October 31, 1994 and for fiscal
year ended October 31, 1995. However, as a percentage of revenues, SG&A expenses
decreased from 36.5% to 31.5%.
I(2) Solutions Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of I(2) Solutions (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
OCTOBER 31, JULY 31,
------------------- -----------
1994 1995 1996 1996 1997
---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities.............. $718 $426 $ 1 $283 $130
Net cash flow (used in) investing activities................ (193) (229) (179) (110) (140)
Net cash (used in) financing activities..................... (194) (33) (31) (12) (59)
---- ---- ----- ---- ----
Increase (decrease) in cash and cash equivalents............ $331 $164 $(209) $161 $(69)
==== ==== ===== ==== ====
</TABLE>
From November 1, 1993 through the nine months ended July 31, 1997, I(2)
Solutions generated approximately $1.3 million in net cash from operating
activities. Cash used in investing activities was primarily for purchases of
property, plant and equipment. Cash used in financing activities consisted
primarily of payments on long term debt. I(2) Solutions believes it has adequate
cash flow and financing alternatives available to it to fund its operations and
capital requirements for the foreseeable future.
IMS RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30, NINE MONTHS ENDED AUGUST 31,
------------------------------------------------ -------------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Services........................ $2,353 96.7% $2,532 82.1% $1,969 82.9% $1,489 80.1% $1,808 94.4%
Products........................ 81 3.3 551 17.9 405 17.1 369 19.9 107 5.6
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
2,434 100.0 3,083 100.0 2,374 100.0 1,858 100.0 1,915 100.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Cost of revenues
Services........................ 1,564 64.3 1,827 59.3 1,659 69.9 1,232 66.3 1,069 55.8
Products........................ 72 3.0 431 14.0 241 10.2 238 12.8 66 3.4
Depreciation.................... 141 5.8 112 3.6 96 4.0 65 3.5 53 2.8
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
1,777 73.0 2,370 76.9 1,996 84.1 1,535 82.6 1,188 62.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit...................... 657 27.0 713 23.1 378 15.9 323 17.4 727 38.0
Selling, general and
administrative expenses......... 616 25.3 708 23.0 580 24.4 479 25.8 405 21.2
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Operating income (loss)........... 41 1.7 5 0.1 (202) (8.5) (156) (8.4) 322 16.8
Interest expense (income)......... 32 1.3 29 0.9 35 1.5 26 1.4 25 1.3
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) before taxes........ $ 9 0.4% $ (24) (0.8)% $ (237) (10.0)% $ (182) (9.8)% $ 297 15.5%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
43
<PAGE>
Nine Months Ended August 31, 1997 Compared to Nine Months Ended August 31, 1996
Revenues. Revenues were approximately $1.9 million for both the nine
months ended August 31, 1996 and the nine months ended August 31, 1997. For the
nine months ended August 31, 1997 a $0.3 million increase in service revenues
was offset by a $0.3 million decline in product revenues primarily resulting
from lower unit volumes.
Cost of Revenues. Cost of revenues decreased approximately $0.3 million or
22.6% from approximately $1.5 million for the nine months ended August 31, 1996,
to approximately $1.2 million for the nine months ended August 31, 1997. This
decrease was primarily due to a decrease in equipment service contract costs and
lower conversion services employment levels. Gross profit as a percentage of
revenues was approximately 17.4% for the nine months ended August 31, 1996 and
38.0% for the nine months ended August 31, 1997. This increase was primarily due
to the foregoing cost reductions and the increased mix of higher margin scanning
services.
Selling, General and Administrative Expenses. SG&A expenses decreased
approximately $74,000 or 15.4% from approximately $0.5 million for the nine
months ended August 31, 1996 to approximately $0.4 million for the nine months
ended August 31, 1997. As a percentage of revenues, selling, general and
administrative expenses decreased from 25.8% to 21.2%.
Fiscal Year Ended November 30, 1996 Compared to Fiscal Year Ended November 30,
1995
Revenues. Revenues decreased approximately $0.7 million or 23.0% from
approximately $3.1 million for fiscal year ended November 30, 1995 to
approximately $2.4 million for fiscal year ended November 30, 1996. This
decrease was primarily due to the termination of an outside sales agent and
lower service volume.
Cost of Revenues. Cost of revenues decreased approximately $0.4 million or
15.8% from approximately $2.4 million for fiscal year ended November 30, 1995 to
approximately $2.0 million for fiscal year ended November 30, 1996. This
decrease was primarily due to lower sales volume offset by increased software
development costs related to the ImageMAX software product. Gross profit as a
percentage of revenues was approximately 23.1% for fiscal year ended November
30, 1995 and 15.9% for fiscal year ended November 30, 1996. This decrease was
primarily due to a decline in gross margin from services attributable to the
decrease in sales volume.
Selling, General and Administrative Expenses. SG&A expenses decreased
approximately $128,000 or 18.1% from approximately $0.7 million for fiscal year
ended November 30, 1995 to approximately $0.6 million for fiscal year ended
November 30, 1996. This decrease was primarily due to decreases in sales
commissions and lower contributions to the IMS profit-sharing plan. However, as
a percentage of revenues, SG&A expenses increased from 23.0% to 24.4%.
Fiscal Year Ended November 30, 1995 Compared to Fiscal Year Ended November 30,
1994
Revenues. Revenues increased approximately $0.6 million or 26.7% from
approximately $2.4 million for fiscal year ended November 30, 1994 to
approximately $3.1 million for fiscal year ended November 30, 1995. This
increase was primarily due to the addition of a large aperture card conversion
project and an increase in equipment sales.
Cost of Revenues. Cost of revenues increased approximately $0.6 million or
33.4% from approximately $1.8 million for fiscal year ended November 30, 1994 to
approximately $2.4 million in fiscal year ended November 30, 1995. This increase
was primarily due to increases in service labor costs. Gross profit as a
percentage of revenues was approximately 27.0% for fiscal year ended November
30, 1994 and 23.1% for fiscal year ended November 30, 1995. This decrease was
primarily due to a decline in service gross margin.
Selling, General and Administrative Expenses. SG&A expenses increased
approximately $92,000 or 14.9% from approximately $0.6 million for fiscal year
ended November 30, 1994 to approximately $0.7 million for fiscal year ended
November 30, 1995. This increase was primarily due
44
<PAGE>
to increases in sales commissions and an increased contribution to the IMS
profit-sharing plan. However, as a percentage of revenues, SG&A expenses
decreased from 25.3% to 23.0%.
IMS Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of IMS (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
NOVEMBER 30, AUGUST 31,
------------------------- --------------
1994 1995 1996 1996 1997
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by (used in) operating activities.... $ (12) $68 $67 $ 57 $239
Net cash flow provided by (used in) investing activities.... (125) (85) (13) (10) 11
Net cash provided by (used in) financing activities......... 137 17 (54) (35) (208)
----- --- --- ---- ----
Increase in cash and cash equivalents....................... $ -- $-- $-- $ 12 $ 42
===== === === ==== ====
</TABLE>
From December 1, 1993 through the nine months ended August 31, 1997 IMS
generated approximately $0.4 million in net cash from operating activities. Cash
generated from operating activities for the nine months ended August 31, 1997
increased as compared to the nine months ended August 31, 1996 due to an
increase in net income. Cash used in investing activities was primarily for
purchases of property, plant and equipment. Cash used in financing activities
consisted primarily of payments on long term debt. IMS believes it has adequate
cash flow and financing alternatives available to it to fund its operations and
capital requirements for the foreseeable future.
IDS RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Services.............................................. $1,776 100.0% $1,203 100.0% $2,652 100.0%
------ ----- ------ ----- ------ -----
1,776 100.0 1,203 100.0 2,652 100.0
------ ----- ------ ----- ------ -----
Cost of revenues
Services.............................................. 998 56.2 809 67.2 1,745 65.8
Depreciation.......................................... 11 0.6 14 1.2 17 0.7
------ ----- ------ ----- ------ -----
1,009 56.8 823 68.4 1,762 66.5
------ ----- ------ ----- ------ -----
Gross profit............................................ 767 43.2 380 31.6 890 33.5
Selling, general and administrative expenses............ 733 41.3 435 36.2 910 34.3
------ ----- ------ ----- ------ -----
Operating income (loss)................................. 34 1.9 (55) (4.6) (20) (0.8)
Interest expense (income)............................... 8 0.5 12 1.0 2 --
------ ----- ------ ----- ------ -----
Income (loss) before taxes.............................. $ 26 1.4% $ (67) (5.6)% $ (22) (0.8)%
====== ===== ====== ===== ====== =====
</TABLE>
Fiscal Year Ended August 31, 1997 Compared to Fiscal Year Ended August 31, 1996
Revenues. Service revenues increased approximately $1.4 million or 120.4%
from approximately $1.2 million for fiscal year ended August 31, 1996 to
approximately $2.7 million for fiscal year ended August 31, 1997. This increase
was primarily due to additions to the sales force and the addition of two large
data entry projects from a new and an existing client.
Cost of Revenues. Cost of revenues increased approximately $0.9 million or
114.1% from approximately $0.8 million for fiscal year ended August 31, 1996 to
approximately $1.8 million for fiscal year ended August 31, 1997. This increase
was primarily due to higher contract labor costs
45
<PAGE>
associated with higher volume. Gross profit as a percentage of revenues was
31.6% for fiscal year ended August 31, 1996 and 33.5% for fiscal year ended
August 31, 1997.
Selling, General and Administrative Expenses. SG&A expenses increased
approximately $0.5 million or 109.0% from approximately $0.4 million for fiscal
year ended August 31, 1996 to approximately $0.9 million for fiscal year ended
August 31, 1997. This increase was primarily due to increased owners'
compensation expense. As a percentage of revenues, SG&A expenses remained
relatively constant.
Fiscal Year Ended August 31, 1996 Compared to Fiscal Year Ended August 31, 1995
Revenues. Service revenues decreased approximately $0.6 million or 32.3%
from approximately $1.8 million for fiscal year ended August 31, 1995 to
approximately $1.2 million for fiscal year ended August 31, 1996. This decrease
was primarily due to the completion of two large projects in fiscal year ended
August 31, 1995.
Cost of Revenues. Cost of revenues decreased approximately $0.2 million or
18.4% from approximately $1.0 million for fiscal year ended August 31, 1995 to
approximately $0.8 million for fiscal year ended August 31, 1996. This decrease
was primarily due to lower contract labor costs associated with lower sales
volume. Gross profit as a percentage of revenues was 43.2% for fiscal year ended
August 31, 1995 and 31.6% for fiscal year ended August 31, 1996. This decline is
primarily due to the hiring of an additional project manager during fiscal year
ended August 31, 1996 in anticipation of future revenue growth and the
completion of two higher margin projects in fiscal year ended August 31, 1995.
Selling, General and Administrative Expenses. SG&A expenses decreased
approximately $0.3 million or 40.7% from approximately $0.7 million for fiscal
year ended August 31, 1995 to approximately $0.4 million for fiscal year ended
August 31, 1996. This decrease was primarily due to decreased owners'
compensation expense. As a percentage of revenues, SG&A expenses decreased from
41.3% to 36.2%.
IDS Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of IDS (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
------------------------------
1995 1996 1997
----- ------ -----
<S> <C> <C> <C>
Net cash flow provided by operating activities before owners
compensation.............................................. $750 $ 342 $629
==== ===== ====
Net cash flow provided by (used in) operating activities.... $199 $(185) $421
Net cash flow (used in) investing activities................ (18) (13) (23)
Net cash provided by (used in) financing activities......... (28) 57 (57)
---- ----- ----
Increase (decrease) in cash and cash equivalents............ $153 $(141) $341
==== ===== ====
</TABLE>
From September 1, 1994 through August 31, 1997, IDS generated approximately
$1.7 million in net cash from operating activities before owners' compensation.
Cash used in investing activities was for purchases of property and equipment.
Cash used in financing activities consisted primarily of net borrowings and
repayments of amounts due to stockholders and on the line of credit. IDS
believes it has adequate cash flow and financing alternatives available to fund
its operations and capital requirements for the foreseeable future.
46
<PAGE>
OMI RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, NINE MONTHS ENDED JULY 31,
------------------------------- -------------------------------
1995 1996 1996 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Services........................................ $1,779 59.9% $2,269 60.6% $1,689 57.5% $1,788 56.8%
Products........................................ 1,193 40.1 1,477 39.4 1,248 42.5 1,358 43.2
------ ----- ------ ----- ------ ----- ------ -----
2,972 100.0 3,746 100.0 2,937 100.0 3,146 100.0
------ ----- ------ ----- ------ ----- ------ -----
Cost of revenues
Services........................................ 1,473 49.5 1,964 52.4 1,423 48.5 1,458 46.3
Products........................................ 709 23.9 837 22.3 699 23.8 772 24.5
Depreciation.................................... 60 2.0 84 2.3 50 1.6 74 2.4
------ ----- ------ ----- ------ ----- ------ -----
2,242 75.4 2,885 77.0 2,172 73.9 2,304 73.2
------ ----- ------ ----- ------ ----- ------ -----
Gross profit...................................... 730 24.6 861 23.0 765 26.1 842 26.8
Selling, general and administrative expenses...... 591 19.9 688 18.4 508 17.3 528 16.8
------ ----- ------ ----- ------ ----- ------ -----
Operating income.................................. 139 4.7 173 4.6 257 8.8 314 10.0
Interest expense (income)......................... 49 1.7 18 0.5 16 0.6 15 0.5
------ ----- ------ ----- ------ ----- ------ -----
Income (loss) before taxes........................ $ 90 3.0% $ 155 4.1% $ 241 8.2% $ 299 9.5%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Nine Months Ended July 31, 1997 Compared to Nine Months Ended July 31, 1996
Revenues. Revenues increased approximately $0.2 million or 7.1% from
approximately $2.9 million for the nine months ended July 31, 1996, to
approximately $3.1 million for the nine months ended July 31, 1997. This
increase was primarily due to increased service and equipment sales and related
service contract and supply revenue.
Cost of Revenues. Cost of revenues increased $132,000 or 6.1% from
approximately $2.2 million for the nine months ended July 31, 1996 to
approximately $2.3 million for the nine months ended July 31, 1997. This
increase was due to higher sales volume. Gross profit as a percentage of
revenues was 26.1% for the nine months ended July 31, 1996 and 26.8% for the
nine months ended July 31, 1997.
Selling, General and Administrative Expenses. SG&A expenses were
approximately $0.5 million for both the nine months ended July 31, 1996 and
1997. As a percentage of revenues, SG&A expenses decreased from 17.3% to 16.8%.
Fiscal Year Ended October 31, 1996 Compared to Fiscal Year Ended October 31,
1995
Revenues. Revenues increased approximately $0.7 million or 26.0% from
approximately $3.0 million for fiscal year ended October 31, 1995 to
approximately $3.7 million for fiscal year ended October 31, 1996. This increase
was primarily due to increased unit sales of Canon micrographics and imaging
system sales, micrographic service sales increases and the growth of the
scanning operation.
Cost of Revenues. Cost of revenues increased approximately $0.6 million or
28.7% from approximately $2.2 million for fiscal year ended October 31, 1995 to
approximately $2.9 million for fiscal year ended October 31, 1996. This increase
was primarily due to higher cost or increased volume of equipment sales. Gross
profit as a percentage of revenues was 24.6% for fiscal year ended October 31,
1995 and 23.0% for fiscal year ended October 31, 1996.
Selling, General and Administrative Expenses. SG&A expenses increased
approximately $97,000 million or 16.4% from approximately $0.6 million for
fiscal year ended October 31, 1995 to approximately $0.7 million for fiscal year
ended October 31, 1996. As a percentage of revenues, SG&A expenses decreased
from 19.9% to 18.4%. This dollar increase was primarily due to increases in
owners' compensation expense.
47
<PAGE>
OMI Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of OMI (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
OCTOBER 31, JULY 31,
-------------- ----------------
1995 1996 1996 1997
---- ---- ----- -----
<S> <C> <C> <C> <C>
Net cash flow provided by operating activities.............. $197 $212 $ 94 $ 195
Net cash flow (used in) investing activities................ (117) (239) (104) (109)
Net cash provided by (used in) financing activities......... (80) 34 11 (93)
---- ---- ----- -----
Increase (decrease) in cash and cash equivalents............ $ -- $ 7 $ 1 $ (7)
==== ==== ===== =====
</TABLE>
From November 1, 1994 through the nine months ended July 31, 1997 OMI
generated $0.6 million in net cash from operating activities. Cash used in
investing activities was primarily for purchases of property, plant and
equipment. Cash used or provided by financing activities consisted primarily of
payments or draws on current lines of credit. OMI believes it has adequate cash
flow and financing alternatives available to it to fund its operations and
capital requirements for the foreseeable future.
SPAULDING RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------------------ -------------------------------
1995 1996 1997 1996 1997
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Services........................ $4,949 51.9% $4,748 54.5% $5,019 56.8% $1,251 57.1% $1,446 64.9%
Products........................ 4,590 48.1 3,956 45.5 3,814 43.2 938 42.9 782 35.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
9,539 100.0 8,704 100.0 8,833 100.0 2,189 100.0 2,228 100.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Cost of revenues
Services........................ 3,175 33.3 3,104 35.7 3,158 35.8 744 34.0 960 43.1
Products........................ 3,114 32.6 2,525 29.0 2,537 28.7 647 29.6 526 23.6
Depreciation.................... 182 1.9 192 2.2 179 2.0 40 1.8 51 2.3
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
6,471 67.8 5,821 66.9 5,874 66.5 1,431 65.4 1,537 69.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit...................... 3,068 32.2 2,883 33.1 2,959 33.5 758 34.6 691 31.0
Selling, general and
administrative expenses......... 2,826 29.7 3,018 34.7 2,631 29.8 637 29.1 604 27.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Operating income (loss)........... 242 2.5 (135) (1.6) 328 3.7 121 5.5 87 3.9
Interest expense (income)......... 144 1.5 147 1.6 207 2.3 47 2.1 47 2.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) before taxes........ $ 98 1.0% $ (282) (3.2)% $ 121 1.4% $ 74 3.4% $ 40 1.8%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
Revenues. Revenues remained unchanged at approximately $2.2 million during
the comparable periods with an increase in service revenues during the three
months ended September 30, 1997 offset by a decrease in product revenues.
Cost of Revenues. Cost of revenues increased $106,000 or 7.4% from
approximately $1.4 million in the three months ended September 30, 1996 to $1.5
million in the three months ended September 30, 1997. Gross profit as a
percentage of revenues was 34.6% for the three months ended September 30, 1996
and 31.0% for the three months ended September 30, 1997. This decrease is
primarily due to lower margins earned in the three months ended September 30,
1997 on a large service project.
48
<PAGE>
Selling, General and Administrative Expenses. SG&A expenses remained
unchanged at approximately $0.6 million during the comparable periods. During
the three months ended September 30, 1997, Spaulding incurred $73,000 of
professional fees in connection with the Acquisition which was more than offset
by lower compensation expenses. As a percentage of revenues, SG&A expenses
decreased 29.1% to 27.1%.
Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996
Revenues. Revenues increased $129,000 or 1.5% from approximately $8.7
million for fiscal year ended June 30, 1996 to approximately $8.8 million for
fiscal year ended June 30, 1997. This increase was due to higher service sales
partially offset by a decrease in product sales.
Cost of Revenues. Cost of revenues was approximately $5.8 million for
fiscal year ended June 30, 1996 and $5.9 million for fiscal year ended June 30,
1997. Gross profit as a percentage of revenues was approximately 33.1% for
fiscal year ended June 30, 1996 and 33.5% for fiscal year ended June 30, 1997.
Selling, General and Administrative Expenses. SG&A expenses decreased
$387,000 or 12.8% from approximately $3.0 million for fiscal year ended June 30,
1996 to approximately $2.6 million for fiscal year ended June 30, 1997. As a
percentage of revenues, SG&A expenses decreased from 34.7% to 29.8%. This
decrease was primarily due to lower medical claims experience and lower
employment levels.
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
Revenues. Revenues decreased $0.8 million or 8.8% from approximately $9.5
million for fiscal year ended June 30, 1995 to approximately $8.7 million for
fiscal year ended June 30, 1996. This decrease was primarily due to a $0.6
million decrease in micrographic equipment sales and service, a result of a
significant supplier withdrawing its equipment from the market.
Cost of Revenues. Cost of revenues decreased $0.6 million or 10.0% from
approximately $6.5 million for fiscal year ended June 30, 1995 to approximately
$5.8 million for fiscal year ended June 30, 1996. This decrease was primarily
due to decreased sales volume. Gross profit as a percentage of revenues was
32.2% for fiscal year ended June 30, 1995 and 33.1% for fiscal year ended June
30, 1996.
Selling, General and Administrative Expenses. SG&A expenses increased
$192,000 or 6.8% from approximately $2.8 million for fiscal year ended June 30,
1995 to approximately $3.0 million for fiscal year ended June 30, 1996. As a
percentage of revenues, SG&A expenses increased from 29.7% to 34.7%. This
increase was primarily due to severance costs and higher medical insurance
claims experience offset by lower employment levels.
Spaulding Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of Spaulding (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDED
JUNE 30, SEPTEMBER 30,
------------------------- ---------------
1995 1996 1997 1996 1997
---- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities.............. $337 $459 $ 273 $135 $ 393
Net cash flow (used in) investing activities................ (27) (131) (141) (20) (25)
Net cash (used in) financing activities..................... (238) (268) (188) (18) (171)
---- ---- ----- ---- -----
Increase (decrease) in cash and cash equivalents............ $ 72 $ 60 $ (56) $ 97 $ 197
==== ==== ===== ==== =====
</TABLE>
From July 1, 1994 through the three months ended September 30, 1997
Spaulding generated approximately $1.5 million in net cash from operating
activities. Cash generated from operations
49
<PAGE>
decreased for fiscal year ended June 30, 1997 as compared to fiscal year ended
June 30, 1996 due to increased working capital requirements. Cash used in
investing activities was primarily for purchases of property, plant and
equipment. Cash used in financing activities consisted primarily of purchases of
treasury stock and repayments of long-term debt. At June 30, 1997, Spaulding had
failed to meet certain financial covenants relating to a mortgage note payable
and therefore the note was due on demand. In September 1997 the mortgage note
was repaid. Spaulding believes it has adequate cash flow and financing
alternatives available to it to fund its operations and capital requirements for
the foreseeable future.
TIMCO RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ -------------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Services........................ $4,132 100.0% $4,420 100.0% $4,991 100.0% $3,609 100.0% $3,318 100.0%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
4,132 100.0 4,420 100.0 4,991 100.0 3,609 100.0 3,318 100.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Cost of revenues
Services........................ 3,025 73.2 3,110 70.3 3,276 65.6 2,376 65.8 2,096 63.2
Depreciation.................... 74 1.8 96 2.2 76 1.6 68 1.9 63 1.9
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
3,099 75.0 3,206 72.5 3,352 67.2 2,444 67.7 2,159 65.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit...................... 1,033 25.0 1,214 27.5 1,639 32.8 1,165 32.3 1,159 34.9
Selling, general and
administrative expenses......... 973 23.6 1,445 32.7 1,223 24.5 914 25.3 844 25.4
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Operating income (loss)........... 60 1.4 (231) (5.2) 416 8.3 251 7.0 315 9.5
Net interest (income) expense..... 47 1.1 57 1.3 99 2.0 76 2.1 43 1.3
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) before taxes........ $ 13 0.3% $ (288) (6.5)% $ 317 6.4% $ 175 4.9% $ 272 8.2%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Revenues. Service revenues decreased approximately $0.3 million or 8.1%
from approximately $3.6 million for the nine months ended September 30, 1996 to
approximately $3.3 million for the nine months ended September 30, 1997. This
decrease was primarily due to the loss of a major customer that was acquired by
a third-party buyer, partially offset by increased sales to other customers.
Cost of Revenues. Cost of service revenues decreased approximately $0.3
million or 11.7% from approximately $2.5 million for the nine months ended
September 30, 1996, to approximately $2.2 million for the nine months ended
September 30, 1997. Gross profit as a percentage of revenues was 32.3% for the
nine months ended September 30, 1996 and 34.9% for the nine months ended
September 30, 1997. This increase was primarily due to increased employee
productivity as well as reduced costs.
Selling, General and Administrative Expenses. SG&A expenses decreased
$70,000 or 7.7% from approximately $0.8 million for the nine months ended
September 30, 1996 to approximately $0.7 million for the nine months ended
September 30, 1997. However, as a percentage of revenues, SG&A expenses
increased from 25.4% to 22.4%. Lower legal costs related to the retirement of
TIMCO's co-founder were partially offset by professional fees incurred in
connection with the Acquisition.
Fiscal Year Ended December 31, 1996 Compared to Fiscal Year Ended December 31,
1995
Revenues. Service revenues increased approximately $0.6 million or 12.9%
from approximately $4.4 million for fiscal year ended December 31, 1995 to
approximately $5.0 million for fiscal year ended December 31, 1996. This
increase was primarily due to increases in sales volume generated by three newly
hired sales representatives and selective price increases.
50
<PAGE>
Cost of Revenues. Cost of service revenues increased approximately
$146,000 or 4.6% from approximately $3.2 million for fiscal year ended December
31, 1995 to approximately $3.4 million for fiscal year ended December 31, 1996.
This increase was primarily due to increases in employee costs associated with
higher sales volume. Gross profit as a percentage of revenues was 27.5% for
fiscal year ended December 31, 1995 and approximately 32.8% for fiscal year
ended December 31, 1996. This increase was primarily due to improved employee
productivity.
Selling, General and Administrative Expenses. SG&A expenses decreased $0.2
million or 15.4% from approximately $1.4 million for fiscal year ended December
31, 1995 to approximately $1.2 million for fiscal year ended December 31, 1996.
As a percentage of revenues, SG&A expenses decreased from 32.7% to 24.5%. This
decrease was primarily due to the expenses related to the retirement of TIMCO's
co-founder which occurred in fiscal year ended December 31, 1995. This was
partially offset by increased sales commissions in fiscal year ended December
31, 1996.
Fiscal Year Ended December 31, 1995 Compared to Fiscal Year Ended December 31,
1994
Revenues. Service revenues increased approximately $0.3 million or 7.0%
from approximately $4.1 million for fiscal year ended December 31, 1994 to
approximately $4.4 million for fiscal year ended December 31, 1995. This
increase was primarily due to the acquisition of a document management company
in northern California in May 1994.
Cost of Revenues. Cost of service revenues increased approximately
$107,000 or 3.5% from approximately $3.1 million for fiscal year ended December
31, 1994 to approximately $3.2 million for fiscal year ended December 31, 1995.
This increase was primarily due to increases in employee costs associated with
higher sales volume. Gross profit as a percentage of revenues was 25.0% for
fiscal year ended December 31, 1994 and 27.5% for fiscal year ended December 31,
1995.
Selling, General and Administrative Expenses. SG&A expenses increased
approximately $0.5 million or 48.5% from approximately $1.0 million for fiscal
year ended December 31, 1994 to approximately $1.4 million for fiscal year ended
December 31, 1995. As a percentage of revenues, SG&A expenses increased from
23.5% to 32.7%. This increase was primarily due to the one-time expenses related
to the retirement of the co-founder of the business and the costs associated
with the hiring of three additional sales people.
TIMCO Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of TIMCO (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ --------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities.............. $ 24 $ 90 $305 $268 $463
Net cash flow (used in) investing activities................ (323) (100) (120) (119) (58)
Net cash provided by (used in) financing activities......... 305 45 (219) (173) (387)
---- ---- ---- ---- ----
Increase (decrease) in cash and cash equivalents............ $ 6 $ 35 $(34) $(24) $ 18
==== ==== ==== ==== ====
</TABLE>
From January 1, 1994 through the nine months ended September 30, 1997 TIMCO
generated approximately $0.9 million in net cash from operating activities.
Increases in cash generated by operating activities for the nine months ended
September 30, 1997 as compared to the nine months ended September 30, 1996 were
due primarily to decreased working capital. Cash used in investing activities
was primarily for purchases of property, plant and equipment. Cash used in
financing activities consisted primarily of draw downs or payments on current
lines of credit and a distribution to shareholders for the nine months ended
September 30, 1997. TIMCO believes it has adequate cash flow and financing
alternatives available to it to fund its operations and capital requirements for
the foreseeable future.
51
<PAGE>
TPS RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------------------------ -------------------------------
1995 1996 1997 1996 1997
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Services........................ $1,539 69.0% $1,819 66.2% $2,428 69.7% $1,052 62.3% $1,568 69.4%
Products........................ 693 31.0% 928 33.8 1,056 30.3 637 37.7 692 30.6
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
2,232 100.0 2,747 100.0 3,484 100.0 1,689 100.0 2,260 100.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Cost of revenues
Services........................ 1,013 45.4 1,239 45.1 1,519 43.6 733 43.4 1,055 46.7
Products........................ 643 28.8 769 28.0 964 27.7 531 31.5 587 26.0
Depreciation.................... 47 2.1 68 2.5 96 2.7 34 2.0 54 2.3
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
1,703 76.3 2,076 75.6 2,579 74.0 1,298 76.9 1,696 75.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit...................... 529 23.7 671 24.4 905 26.0 391 23.1 564 25.0
Selling, general and
administrative expenses......... 531 23.8 604 22.0 799 23.0 310 18.4 454 20.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Operating income (loss)........... (2) (0.1) 67 2.4 106 3.0 81 4.7 110 4.9
Net interest (income) expense..... 5 0.2 69 2.5 87 2.5 43 2.5 54 2.4
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) before taxes........ $ (7) (0.3)% $ (2) (0.1)% $ 19 0.5% $ 38 2.2% $ 56 2.5%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Six Months Ended September 30, 1997 Compared to Six Months Ended September 30,
1996
Revenues. Revenues increased approximately $0.6 million or 33.9% from
approximately $1.7 million for the six months ended September 30, 1996 to
approximately $2.3 million for the six months ended September 30, 1997. This
increase was primarily due to the addition of two large service accounts and a
slight increase in product sales.
Cost of Revenues. Cost of revenues increased approximately $0.4 million or
30.7% from approximately $1.3 million for the six months ended September 30,
1996, to approximately $1.7 million for the six months ended September 30, 1997.
This increase was primarily due to increases in service revenues. Gross profit
as a percentage of revenues was 23.1% for the six months ended September 30,
1996 and 25.0% for the six months ended September 30, 1997.
Selling, General and Administrative Expenses. SG&A expenses increased
$144,000 or 46.3% from approximately $0.3 million for the six months ended
September 30, 1996 to $0.5 million for the six months ended September 30, 1997
primarily due to sales, technical and administrative staff increases. As a
percentage of revenues, SG&A expenses increased from 18.4% to 20.1%.
Fiscal Year Ended March 31, 1997 Compared to Fiscal Year Ended March 31, 1996
Revenues. Revenues increased approximately $0.7 million or 26.8% from
approximately $2.7 million for fiscal year ended March 31, 1996 to approximately
$3.5 million for fiscal year ended March 31, 1997. This increase was primarily
due to the addition of new service client accounts.
Cost of Revenues. Cost of revenues increased approximately $0.5 million or
24.2% from approximately $2.1 million for fiscal year ended March 31, 1996 to
approximately $2.6 million for fiscal year ended March 31, 1997. This increase
was primarily due to increases in service revenues. Gross profit as a percentage
of revenues was 24.4% for fiscal year ended March 31, 1996 and 26.0% for the
fiscal year ended March 31, 1997.
Selling, General and Administrative Expenses. SG&A expenses increased
approximately $0.2 million or 32.3% from approximately $0.6 million for fiscal
year ended March 31, 1996 to approximately $0.8 million for fiscal year ended
March 31, 1997. As a percentage of revenues, SG&A
52
<PAGE>
expenses increased from 22.0% to 23.0%. This increase was primarily due to
one-time expenses related to the start-up of the Richmond office and higher
employment levels.
Fiscal Year Ended March 31, 1996 Compared to Fiscal Year Ended March 31, 1995
Revenues. Revenues increased approximately $0.5 million or 23.0% from
approximately $2.2 million for fiscal year ended March 31, 1995 to approximately
$2.8 million for fiscal year ended March 31, 1996. This increase was primarily
due to the addition of several large service accounts and higher product
revenue.
Cost of Revenues. Cost of revenues increased approximately $0.4 million or
21.8% from approximately $1.7 million for fiscal year ended March 31, 1995 to
approximately $2.1 million for fiscal year ended March 31, 1996. This increase
was primarily due to increases in service and product revenues. Gross profit as
a percentage of revenues was 23.7% for fiscal year ended March 31, 1995 and
24.4% for fiscal year ended March 31, 1996.
Selling, General and Administrative Expenses. SG&A expenses increased
approximately $73,000 or 13.8% from approximately $0.5 million for fiscal year
ended March 31, 1995 to approximately $0.6 million for fiscal year ended March
31, 1996. This increase was primarily due to increased sales commission expenses
and promotion expenses related to new imaging services and systems. However, as
a percentage of revenues, SG&A expenses decreased from 23.8% to 22.0%.
TPS Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of TPS (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED
MARCH 31, SEPTEMBER 30,
------------------------- ---------------
1995 1996 1997 1996 1997
---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by (used in) operating activities.... $ 56 $(174) $104 $ 14 $ (99)
Net cash flow (used in) investing activities................ (58) (121) (139) (54) (13)
Net cash provided by financing activities................... 2 295 35 40 112
---- ----- ---- ---- -----
Increase (decrease) in cash and cash equivalents............ $ -- $ -- $ -- $ -- $ --
==== ===== ==== ==== =====
</TABLE>
From April 1, 1994 through the six months ended September 30, 1997 TPS used
$113,000 in net cash from operating activities. The growth experienced for
fiscal year ended March 31, 1997 required large increases in working capital.
Cash used in investing activities was primarily for purchases of property, plant
and equipment. Cash used in financing activities consisted primarily of
refunding of long term debt. TPS believes it has adequate cash flow and
financing alternatives available to it to fund its operations and capital
requirements for the foreseeable future.
53
<PAGE>
BUSINESS
ImageMax was founded in November 1996 to become a leading national,
single-source provider of integrated document management solutions. Prior to the
Offering, ImageMax has not conducted any operations. ImageMax has entered into
agreements to acquire the Founding Companies, simultaneously with and as a
condition to the consummation of the Offering. The Founding Companies, which
have been in business an average of over 20 years, have operations in 13 states,
employ over 950 people and provided services and products to over 5,000 clients
in the last year from 18 locations. The Company's pro forma combined revenues
for the twelve-month period ended December 31, 1996 were $43.3 million. Pro
forma combined revenues for the nine months ended September 30, 1997 were $36.5
million, an increase of 12.6% over the comparable 1996 period.
The Company's strategy is to work with clients to develop the best solution
to their document management needs, including solutions involving both
outsourced and in-house document capture, conversion, storage and retrieval. The
majority of current document management industry revenue is derived from the
management of film and paper media. However, advances in digital and other
technologies continue to provide organizations with increasing document
management options. As a result, the Company believes the most successful
service providers will be those that can offer a complete spectrum of document
management services and products encompassing solution design and expertise in
the management of digital, film and paper media. Accordingly, the Company has
initially targeted a broad variety of services and products, as well as
technical and vertical market expertise, in order to create a platform from
which it can become a leading national, single-source option for clients with
intensive document management needs. The Company's services include document
management consulting and systems integration, media conversion (consisting of
electronic imaging and micrographics), data indexing and offshore data entry,
information storage and retrieval, and document management system maintenance.
The Company's products include proprietary, open-architecture digital imaging
and indexing software, as well as document management systems and supplies.
MARKET AND INDUSTRY OVERVIEW
Document management businesses provide services and products to capture,
convert, index, store and retrieve documents, whether such documents exist on
paper, microfilm or digital media. Based on information made publicly available
by AIIM, the Company believes the U.S. market for document management services
and products exceeded $6.5 billion in 1996. The Company believes that this
market has been growing at an annual rate of approximately 11% since 1994. The
Company believes that there is a large unvended component of the service market
not contained in the AIIM data because most document management service for
large organizations are still performed in-house. The document management
services industry is highly fragmented. The Company estimates that there are
over 2,000 companies engaged in a wide variety of business-to-business services
and product sales and that a substantial majority of these companies are small
businesses, selling to a single geographic market, offering a limited range of
services or serving a limited number of client market segments.
The Company believes that the following principal factors will drive the
continued growth of the document management industry:
Technological Change. The improvement of digital technology (i.e.,
CD-ROM, personal computers and computer networking) has dramatically
reduced the cost of imaging, storing, indexing and retrieving documents
while improving users' ability to manage documents more efficiently. This
has resulted in many organizations developing new applications for these
documents. Often these applications entail enterprise-wide access to
documents that previously had been too costly or inconvenient to access
rapidly in multiple locations. Evolving technology has also resulted in a
greater need by end users for specialized expertise in both new and
traditional document management systems and in integrating such systems.
54
<PAGE>
Growth in Document Management Needs. Many organizations, especially
those in document-intensive industries such as health care, financial
service and engineering, have focused attention on their document
management processes and systems as part of a wider effort to manage their
information more efficiently in order to improve productivity,
competitiveness and client service. In addition, organizations must manage
the ever increasing volume of information facilitated by
document-generating technologies such as facsimile, high-speed printing,
the internet and computer networking.
Outsourcing. The Company believes that, while a majority of document
management services are currently being performed by large organizations
in-house, these organizations will increasingly outsource such services.
Outsourcing provides an organization with a means to improve the management
of its documents while allowing the organization to: (i) focus on its core
competencies and revenue generating activities; (ii) reduce fixed costs,
including labor and equipment; (iii) benefit from the expertise and
economies of scale of outside providers; and (iv) gain access to new
technologies without the risk and expense of near-term obsolescence. The
Company believes that, as businesses strive to improve competitiveness
through rapid access to information, service demands for outsourced
document management functions will outstrip the capabilities and geographic
coverage of smaller, capital constrained document management service
providers.
The Company believes the document management service industry is highly
fragmented. The Company believes there are over 2,000 companies serving the
document management needs of industry and government, with a majority of these
companies generating annual revenues less than $10 million. The Company believes
that many of the small businesses with which it competes are candidates for
consolidation because they presently lack the capital for expansion, cannot keep
abreast of rapidly changing technologies, are unable to effectively manage large
complex projects, have not developed marketing and sales programs, do not have
the volume buying power needed to negotiate favorable supply contracts, and are
unable to meet the needs of large, geographically dispersed customers. In
addition, increasing consolidation within two of the largest document-intensive
industries, financial services and health care, has provided an additional
impetus for document management companies to consolidate in order to grow with
their clients. The continuing migration from paper and film to digital media has
broken down many geographic barriers to the provision of document management
services and has increased client demands for integrated operations across the
nation. As a result, the Company believes that many owners of competing service
providers will be receptive to being acquired by a document management company
with a national presence, a solutions orientation and an integration strategy in
order to remain competitive and as a means of providing the owners of such firms
with liquidity.
COMPANY STRENGTHS
The Company believes that its acquisition and integration of the Founding
Companies create the following strengths:
Broad Service and Product Offerings. The Company provides clients
with a wide range of in-house and outsourced document management services
and products. Services include imaging, micrographics, data indexing,
electronic and film and paper storage and retrieval. Products include
software for scanning, indexing and retrieval applications as well as
systems and other equipment from leading document management hardware
manufacturers. The Company's core media conversion services are
complemented by its cost-effective offshore data entry capabilities. The
Company provides these services individually or in combination to provide
solutions to a wide range of clients' document management needs.
Technical Expertise. The Company has developed substantial technical
and systems expertise in the area of digital document management. Two of
the Founding Companies have developed commercial software products for
digital scanning and retrieval applications which the Company licenses to
other service providers and to end users. DocuROM is a scanning and
55
<PAGE>
retrieval software product for general, high-volume applications, and the
ImageMAX software is a product for engineering and other large format
document applications. The Company intends to capitalize on this base of
knowledge by establishing company-wide technology centers that will focus
on software product development, enhancement of systems integration
expertise and new product development such as data warehousing services and
inter/intranet document management solutions.
Diversified Client Base; Broad Geographic Coverage. The Company has
over 5,000 active clients in a range of vertical markets, including health
care, financial services and engineering. None of the Company's clients
accounted for more than 5% of its pro forma combined revenues for either
the year ended December 31, 1996 or the nine months ended September 30,
1997. With operations in the metropolitan markets of Atlanta, Boston,
Chicago, New York and San Francisco as well as several large regional
markets, the Company has an extensive service and product distribution
network in place and the ability to provide selected services and products
on a national basis.
Management Expertise. Senior management of the Founding Companies
includes well-known industry professionals with an average of 14 years of
experience in the industry. A program to share the best management
practices of the Founding Companies throughout the Company is currently
being established. Senior managements' substantial industry relationships
will also serve as a means of generating future acquisition candidates.
Acquisition execution and integration, operating and financial oversight
and strategic planning will be handled by the experienced executive
management team.
BUSINESS STRATEGY
The Company's goal is to become a leading national, single-source provider
of integrated document management solutions. The Company intends to implement a
business strategy focused on the following key elements:
Become a Leading Single-Source Provider. The Company intends to
become an industry leading single-source provider of integrated document
management solutions. Building upon the expertise of the Founding Companies
in a variety of digital, film and paper-based document management services
and products, the Company will seek to further develop consultative
relationships with clients to assess their document management needs and to
recommend and provide cost-effective combinations of services and products.
In many cases the Company will customize packages of services and products
for specific vertical markets such as health care, financial services and
engineering. As it broadens its geographic network, the Company will expand
national account coverage to service clients who wish to work with a single
vendor.
Capitalize on Business Integration. The Company will seek to achieve
internal revenue and margin growth by efficiently integrating the
operations of the Founding Companies and will seek additional growth by
effectively integrating future acquisitions. Strategic, operational and
financial planning will be directed by executive management in order to
articulate clear and common objectives, implement strategy and measure
performance. Key marketing activities will be conducted under the corporate
name in order to build a national brand. The centralization of
administration and acquisition support, and the integration of internal
financial, administrative, information and communications systems, are
intended to enable business unit management to devote increased resources
to business generation and client service.
Increase Sales and Marketing Efforts. The Company intends to hire
additional salespersons at the Founding Companies promptly after the
Offering and to expand a national account sales force at the corporate
level. Training of current and new salespersons will emphasize digital
imaging applications, and the Company intends to institute profit-based
sales compensation plans. The Company intends to leverage existing client
relationships by cross-selling additional services and products and by
coordinating and making available throughout the Company vertical market
expertise already developed within the organization. In addition, the
Company will seek to extend
56
<PAGE>
throughout its operations the marketing programs used by certain of the
Founding Companies, utilizing direct marketing, telemarketing, seminar
selling and internet marketing programs.
Make Selective Acquisitions. The document management industry is
highly fragmented. The Company estimates that there are over 2,000 document
management companies, a substantial majority of which generate annual
revenues of $10 million or less and provide limited service offerings and
sell to a single geographic market. An important element of the Company's
growth strategy is to make selected acquisitions to consolidate its
position as a provider of complete document management solutions.
Accordingly, the Company will continue its aggressive acquisition program
promptly following the Offering in order to increase geographic coverage
and market share, expand service and product capabilities, obtain key human
resources and technical expertise, and generate critical mass and economies
of scale nationally and in regional markets.
The Company believes that it will be a preferred acquiror of other
companies in the highly-fragmented document management industry as a result of
the Company's technical capabilities, the industry reputation of the Founding
Companies' management personnel, its solutions orientation and integration
strategy, the benefits expected to flow from the Company's integration strategy,
and the Company's financial capabilities and visibility as a public company.
Moreover, the Company believes that the relationships developed through its
licensing of software products and provision of offshore data entry services to
over 100 independent document management service providers yield a valuable
source of potential future acquisitions for the Company.
Based on its acquisition activities and contacts since its inception in
November 1996, the Company believes it is well positioned to continue its
acquisition program promptly following the Offering, under the direction of
Andrew R. Bacas, its Senior Vice President - Corporate Development and Bruce M.
Gillis, its Chief Executive Officer. As of the date of this Prospectus, the
Company has no commitments or agreements with respect to any acquisitions other
than of the Founding Companies.
As consideration for future acquisitions, the Company intends to use
various combinations of Common Stock, cash and notes, and to emphasize Common
Stock when continuing management is a key factor in the acquisition decision.
The Company plans to register initially an additional 2,000,000 shares of its
Common Stock with the Commission under the Securities Act promptly after
completion of the Offering for use in future acquisitions.
SERVICES AND PRODUCTS
The Company generates revenues from the sale of services and products.
Services accounted for approximately 74% of pro forma combined revenues for the
nine months ended September 30, 1997 and approximately 73% for the twelve months
ended December 31, 1996, with products accounting for the remainder.
Services
The Company offers a broad range of document management services across a
variety of media types and formats. This broad range of services, together with
the Company's technical capabilities and experience in selected vertical
markets, enables the Company to tailor document management solutions for its
clients based on their specific needs. The current document management services
that are currently provided in certain geographic locations through one or more
of the Founding Companies include:
Media Conversion Services
Digital Imaging. The Company's digital imaging services involve the
conversion of paper or microfilm documents into digital format through the
use of optical scanners and the conversion of computer output to digital
images typically stored on optical media or to microfilm. Once converted,
digital images can be returned for client use on a CD-ROM or optical disk
or stored by the Company in a data warehouse for subsequent retrieval and
distribution. The Company
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believes that digital images are becoming the preferred format of storage
due to benefits such as high speed retrieval, multiple indexing
capabilities and the ability to support and distribute digital, film or
paper output to multiple locations.
Micrographics. The Company performs micrographic services, including
the conversion of paper documents into microfilm images, indexing of film
for computer-aided retrieval systems and COM. Micrographic media are
selected as an alternative to paper or digital media for one or more of the
following reasons: (i) film archives are more accessible, longer-lived and
cheaper to store than paper; (ii) film is eye-readable and not subject to
technological obsolescence; (iii) converting paper to film is currently
more cost-effective than scanning paper for most documents where ease of
accessibility is not needed; and (iv) there is a large base of
organizations with existing film archives and reader-printer equipment.
Data Entry and Indexing. The creation of index files for the rapid
retrieval of images is a critical part of most value-added document
management solutions. The Company provides specialized indexing services to
a variety of clients for both film and digital-format documents. These
labor-intensive services are often contracted for outside the U.S. as a
means to utilize qualified personnel at generally lower cost than is
available domestically.
Storage and Retrieval Services
Digital Storage and Retrieval. Digital storage of documents enables
customers to retrieve large volumes of documents immediately, which would
not be possible using conventional filing systems. Digital storage on
CD-ROM, optical disk, magnetic disk or tape also allows for the rapid
distribution of archival information to multiple destinations and removes
the logistical burden and cost of storing paper documents. These storage
systems may reside in one or more locations, either within a client's
organization or at a Company-maintained data warehouse. Users may access
images via a client-server network, a modem or an intra/internet. Because
digitally-stored documents can be indexed according to several criteria, a
client can use simple but exacting computer search techniques to rapidly
access individual documents or groups of documents. The Company currently
provides a variety of services and proprietary software products that
support clients' digital storage and retrieval needs. See "- Products -
Software" below.
Film and Paper Storage and Retrieval. The Company manages the
archiving of client documents, including processing (i.e., indexing and
formatting), storage, retrieval, delivery and return to storage of
documents within a rapid time frame. Typical archival documents include
medical and legal case files, business records and financial transaction
documents. Service fees generally include billing for storage space, plus
activity charges for retrieval, delivery and return to storage, and
ultimately for document destruction. The Company currently maintains three
storage facilities in the Chicago area, the San Francisco Bay area, and in
Monroe, Louisiana. The Company may seek to enter a relationship with one or
more national providers of paper storage services in order to provide wider
geographic coverage.
The Company believes that client demand in the areas of document management
solution integration, data warehousing and facilities management is growing
rapidly, and the Company intends to expand its current capabilities in these
areas.
Products
The Company develops proprietary, open-architecture software products which
support electronic imaging and indexing services. In addition, the Company
offers a wide range of digital imaging, scanning and viewing hardware,
micrographic reader-printers, micrographic film and supplies and other
equipment.
Software. The Company develops, markets and supports a suite of
proprietary open-architecture software products that support and enhance
the scanning, indexing and retrieval of digital images for its own use and
for sale to other document management companies and end-
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users. Versions of these software products can be run on Microsoft
Windows-equipped networks or personal computers, and simplify the process
of scanning, indexing and retrieving electronic images of documents. The
DocuROM product was initially developed for use by document management
companies in their digital conversion operations. The ScanTRAX and FileTRAX
products were developed for marketing to end-users. These software products
are marketed by the Company through a network of approximately 70 other
document management companies acting as value-added resellers and also
directly through the Company's own sales force to end-users including, in
some cases, other document management companies.
The Company has also developed and markets ImageMAX software, a
high-end scanning and viewing software package for the aperture card
market. This product is utilized by both service companies and end-users to
convert and index micrographic images of large format documents (in the
form of 35 millimeter aperture cards) into digital images.
Hardware and Other Equipment. The Company maintains broker or dealer
relationships with a number of document management equipment suppliers,
including Bell & Howell, Canon, Kodak, Minolta, Photomatrix, 3M and Xerox.
These relationships allow the Company to provide clients with the latest
micrographic and digital image viewing, printing and conversion equipment.
Several of the Founding Companies provide extensive field maintenance and
repair services for the equipment they sell. Technical hardware expertise
is expected to be shared across the Company's operations following the
Offering. The Company expects that it will be able to achieve certain
purchasing efficiencies with equipment manufacturers and that it will be an
attractive dealer to equipment manufacturers seeking to achieve broad
geographic coverage with a single company. The Company also provides its
clients a wide range of micrographic film products, digital media and other
graphic supplies.
CLIENTS AND KEY MARKETS
The Company had a broad base of over 5,000 clients in the last year, none
of which accounted for more than 5% of pro forma combined revenues for either
the year ended December 31, 1996 or the nine months ended September 30, 1997.
The Company's clients are primarily in the health care, financial services and
engineering industries, as well as certain other vertical markets.
The major markets for document management services providers are
transaction-intensive industries in which the core business processes involve
documents or industries for which there are legal or regulatory considerations
requiring the processing and storage of documents in a controlled manner. While
maintaining its diversified client base, the Company intends to increase its
expertise in certain core vertical markets. An overview of the Company's major
target markets follows:
The Health Care Market: consists of health care providers, health care
insurers and pharmaceutical companies.
The Financial Services Market: consists of commercial banks, mortgage
banking companies, insurance companies, brokerage companies and credit card and
loan processing companies.
The Engineering Market: consists of manufacturers, architectural and
engineering consultants, utilities and telecommunications companies.
Other Vertical Markets: include the retail and transportation markets,
government entities and litigation support.
<TABLE>
<CAPTION>
REPRESENTATIVE CLIENTS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HEALTH CARE FINANCIAL SERVICES ENGINEERING OTHER VERTICAL MARKETS
- ---------------------------- ------------------------- -------------------------- ----------------------
Abbott Laboratories CIT Group The Boeing Company Avis Rent a Car, Inc.
Novartis AG First Union National Bank General Electric Company DHL International Ltd.
University of Nebraska Nordstrom Credit, Inc. General Motors Corporation Waste Management, Inc.
Medical Center Honeywell, Inc. State of California
Virginia Department of State of Louisiana
Health State of Mississippi
</TABLE>
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The Founding Companies have historically provided services to most of these
markets, as well as to governmental entities, universities and litigation
support clients. The Company believes that it will enjoy a national reputation
as a leading service provider for the engineering market, which utilizes
large-format drawings and aperture cards. In addition, the Company provides
document management services for a variety of non-industry-specific functions
including accounts receivable and payable processing, shipping, human resources
and management information systems reporting.
SALES AND MARKETING
Historically, the Company's sales efforts have been implemented separately
by each Founding Company. Sales efforts will initially be conducted by the
Company's 30-person sales force supplemented by the sales activities of the
Founding Companies' senior management. The Company plans to hire ten or more
additional local territory salespersons promptly after the Offering and to hire
a Vice President of Sales and Marketing as part of its national sales effort.
The Company will seek to attract customers away from smaller industry providers
through its ability to offer a broader range of solutions and products for
clients' document management needs. The Company will also leverage existing
client relationships by cross-selling its services, products and expertise
throughout each client's organization.
The Founding Companies have succeeded in expanding their client base by
pro-actively selling the benefits of outsourcing document management functions
to clients which, at the time, were in-house operators. The Company believes
that its proactive, solution-based approach can be broadly effective with
potential clients and will enable the Company to increase its market position.
In contrast to other market participants who traditionally have been reactive in
their approach to selling, the Company intends to pursue unvended accounts
actively in addition to competing for existing outsourced business. Methods such
as seminar selling, telemarketing and internet marketing that are utilized at
certain of the Founding Companies will be implemented at the Company.
The Company believes that its ability to attract and retain additional
clients will depend on its ability to offer the broad range of services and
products necessary to satisfy such clients' document management needs and
maintain a high level of customer satisfaction.
COMPETITION
The document management services industry is competitive. A significant
source of competition is the in-house document management capability of the
Company's target client base. Additionally, the Company competes with
single-market, independent document management companies. The Company's larger
competitors include Dataplex Corp. (a subsidiary of Affiliated Computer
Services, Inc.), F.Y.I. Incorporated, IKON Office Solutions and Lason, Inc. Many
of these competitors are presently larger than the Company and have greater
financial and other resources and operate in broader geographic areas than the
Company. Due to consolidation in the document management services industry,
there is significant competition in acquiring such businesses, and the prices
for attractive acquisition candidates may be bid up to higher levels,
particularly in cases where competitors with greater financial and other
resources than the Company compete for the same acquisition targets.
Additionally, other potential competitors may choose to enter the Company's
areas of operation in the future. Moreover, because the Company intends to enter
new geographic areas, the Company expects to encounter significant competition
from established competitors in each of such new areas. As a result of this
competitive environment, the Company may lose clients or have difficulty in
acquiring new clients and its revenues and margins may be adversely affected.
The Company believes that the principal competitive factors in document
management services include the breadth, accuracy, speed, reliability and
security of service, technical expertise, industry specific knowledge and price.
The Company competes primarily on the basis of the breadth and quality of
service, technical expertise and industry specific knowledge, and believes that
it competes favorably with respect to these factors.
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INTELLECTUAL PROPERTY
The Company regards certain of its software systems, information and
know-how underlying its services as proprietary and relies primarily on a
combination of contracts, trademarks, copyrights, trade secrets and
confidentiality agreements to protect its proprietary rights. The Company's
business is not materially dependent on any patents. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
obtain and use information that the Company regards as proprietary, and policing
unauthorized use of the Company's proprietary information may be difficult.
Litigation may be necessary for the Company to protect its proprietary
information and could result in substantial cost to, and diversion of efforts
by, the Company.
The Company does not believe that any of its proprietary rights infringe
the proprietary rights of third parties. Any infringement claims, whether with
or without merit, can be time consuming and expensive to defend or may require
the Company to enter into royalty or licensing agreements or cease the allegedly
infringing activities. The failure to obtain such royalty agreements, if
required, and the Company's involvement in such litigation could have a material
adverse effect on the Company's business, financial condition and results of
operations.
FACILITIES AND EQUIPMENT
The Company's headquarters offices are in Bala Cynwyd, Pennsylvania which
it maintains under a lease expiring in December 1997. The Company is presently
seeking a new site for its headquarters offices. In addition, the Company
conducts operations through one owned and 22 other leased facilities in 13
states containing, in the aggregate, approximately 341,000 square feet. The
Company's principal facilities are summarized in the following table:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FOOTAGE PRINCIPAL USE(S)
- -------- -------------- ----------------
<S> <C> <C>
Tempe, AZ 8,800 Document management operations, offices
Emeryville, CA 24,000 Document management operations, offices
Emeryville, CA 16,000 Warehouse
Sacramento, CA 6,000 Document management operations
Marietta, GA 3,200 Document management operations, offices
Chesterton, IN* 41,000 Offices, document management operations
Chesterton, IN 11,000 Warehouse
Monroe, LA 65,000 Retail, document management operations, offices
Shreveport, LA 4,000 Offices
Stoughton, MA 47,000 Document management operations, offices
Worcester, MA 4,800 Document management operations, offices
Lincoln, NE 4,300 Document management operations, offices
Lincoln, NE 6,900 Warehouse, offices
Millwood, NY 1,000 Offices
Dayton, OH 12,500 Document management operations, offices
Eugene, OR 11,400 Document management operations, offices
Eugene, OR 2,300 Warehouse
Portland, OR 13,500 Document management operations, offices
Portland, OR 2,200 Document management operations, offices
Cayce, SC 20,000 Document management operations, offices
Cleveland, TN 12,000 Document management operations, offices
Forest, VA 21,500 Document management operations, offices
Richmond, VA 1,300 Offices
</TABLE>
- ------------------
* owned facility
The Company believes that its properties are generally well maintained, in
good condition and adequate for its present needs, and that suitable additional
or replacement space will be available when needed. The Company owns or leases
under both operating and capital leases substantial computer, scanning and
imaging equipment which it believes to be adequate for its current needs.
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ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that: (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for hazardous substances and solid and liquid wastes; and
(ii) impose liability for the costs of cleaning up, and certain damages
resulting from, sites of past spills, disposal or other releases of solid and
liquid wastes.
The Company is not currently aware of any environmental conditions relating
to present or past waste generation at or from these facilities that would be
likely to have a material adverse effect on the business, financial condition or
results of operations of the Company. However, there can be no assurances that
environmental liabilities will not have a material adverse effect on the
business, financial condition or results of operations of the Company.
EMPLOYEES
On a pro forma combined basis, as of September 30, 1997, the Company had
approximately 950 employees, approximately 160 of whom were employed primarily
in management and administration. The Company considers its relations with its
employees to be good.
LEGAL PROCEEDINGS
The Company is from time to time a party to litigation arising in the
ordinary course of its business. The Company is not subject to any pending
material litigation.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers and Directors and their respective ages
and positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Bruce M. Gillis................... 40 Chief Executive Officer and Chairman of the
Board of Directors
S. David Model.................... 40 President and Chief Operating Officer
James D. Brown.................... 39 Senior Vice President - Finance, Chief Financial
Officer and Treasurer
Andrew R. Bacas................... 39 Senior Vice President - Corporate Development,
Secretary and Director
David C. Utz, Jr.................. 41 Director
Rex Lamb.......................... 39 Director*
John E. Semasko................... 52 Director*
Lennox K. Black................... 67 Director*
David C. Carney................... 60 Director*
Lewis E. Hatch, Jr................ 71 Director*
Steven N. Kaplan.................. 37 Director*
</TABLE>
- ------------------
* To be appointed by the Board of Directors to fill vacancies created by
enlarging the Board of Directors upon completion of the Offering.
Bruce M. Gillis is a founder of the Company and has been the Company's
Chief Executive Officer and Chairman of the Board since inception. From
September 1996 through the present, Mr. Gillis has been President of GBL, an
investment concern which has a management agreement with the Company. See
"Certain Transactions." Mr. Gillis has served as a director since 1989 of
Liebhardt Mills, Inc., a national bedding manufacturer, for which he has also
served as Vice President - Finance from 1989 to 1994. From 1994 to 1996, Mr.
Gillis was President of Villanova Investment Corp., a strategy consulting and
investment management company. From 1980 to 1983 and 1985 to 1988, Mr. Gillis
served as a consultant with McKinsey & Co., Inc., a global strategy consulting
firm. Mr. Gillis has an undergraduate degree in economics from Yale and an MBA
from Stanford University.
S. David Model has been the Company's President and Chief Operating Officer
since he joined the Company in August 1997. From 1987 to August 1997, Mr. Model
was employed by Teleflex Incorporated, a diversified manufacturer of automotive,
marine, industrial, aerospace and medical products, and has held several
management positions in various subsidiaries of Teleflex Incorporated's
Aerospace Group, from Sales and Engineering Manager of the Airfoil Management
Division to Executive Vice President, Airfoil Technologies International, LLC.
Mr. Model has an undergraduate degree in engineering from Yale University and an
MBA from the Wharton School of the University of Pennsylvania.
James D. Brown has been the Chief Financial Officer of the Company since he
joined the Company in August 1997. From March 1996 to August 1997, Mr. Brown was
the Chief Financial Officer of LMR Holdings, Inc., a textile component
manufacturer. In 1995, Mr. Brown was a consultant specializing in accounting
controls and financing. From 1990 to 1994, Mr. Brown was a controller and chief
financial officer of various operating companies of Joseph Littlejohn & Levy, a
merchant bank. Mr. Brown has an undergraduate degree in economics from Hamilton
College and a masters degree in accounting from New York University. Mr. Brown
is a certified public accountant.
Andrew R. Bacas is a founder of the Company and has been a Director since
inception. Mr. Bacas joined GBL in May 1997 and will serve as the Company's
Senior Vice President - Corporate
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Development after the Offering. From 1992 to May 1997, Mr. Bacas was an
Associate and later a Vice President - Corporate Finance of Simmons & Company
International, an investment bank to the international oil service and equipment
industry. From 1991 to 1992 Mr. Bacas was a Financial Analyst for the Upstream
Business Unit at Exxon Company, USA. From 1984 to 1991 Mr. Bacas was a Naval
Flight Officer in the United States Navy. Mr. Bacas has an undergraduate degree
in engineering from Yale University and an MBA from the Wharton School of the
University of Pennsylvania.
David C. Utz, Jr. has served as a member of the Board of Directors of the
Company since its inception in November 1996. Mr. Utz has been the Chairman of
the Board and Chief Executive Officer of AMMCORP since August 1988. Mr. Utz
previously worked in administrative and financial capacities for Fairview Health
System, a multi-hospital holding company, located in Minneapolis, Minnesota. Mr.
Utz has an undergraduate degree in Business Administration from the University
of Minnesota.
Rex Lamb founded DTI in 1991 and has served as its President since
inception. Mr. Lamb co-founded DDS in 1994 and has served as its President since
inception. Mr. Lamb has an undergraduate degree in Education from the University
of Nebraska. Following the Offering, Mr. Lamb will become a Director of the
Company.
John E. Semasko acquired OMI in 1975 and has served as its President since
its acquisition. Mr. Semasko has an undergraduate degree in Forestry from
Rutgers University. Following the Offering, Mr. Semasko will become a Director
of the Company.
Lennox K. Black has been the Chairman of Teleflex Incorporated since 1982
and served as Teleflex's Chief Executive Officer from 1982 to 1995. Mr. Black
currently serves as a director of Quaker Chemical Corporation, Pep Boys and the
Penn Virginia Corporation. Mr. Black has an undergraduate degree in Economics
from McGill University. Following the Offering, Mr. Black will become a Director
of the Company.
David C. Carney has been an Executive Vice President of Jefferson Health
System, a health care organization since 1996. From 1991 to 1995, Mr. Carney
served as the Chief Financial Officer of CoreStates Financial Corporation. From
1980 to 1991 he served as an area managing partner of Ernst & Young. Mr. Carney
currently serves as a director of CMAC Investment Corporation, AAA Mid-Atlantic
& Keystone Insurance Companies and the World Affairs Council. Mr. Carney has an
undergraduate degree from Temple University and is a graduate of the Advanced
Management Program at the Harvard Business School. Following the Offering, Mr.
Carney will become a Director of the Company.
Lewis E. Hatch, Jr. is the retired former Chairman and Chief Operating
Officer of Rusch International, an international medical device manufacturer.
Mr. Hatch is a director of Teleflex Incorporated and Park-Ohio Industries, Inc.
Mr. Hatch has an undergraduate degree from Ursinus College. Following the
Offering, Mr. Hatch will become a Director of the Company.
Steven N. Kaplan is the Leon Carroll Marshall Professor of Finance at the
University of Chicago Graduate School of Business. Dr. Kaplan joined the faculty
of the University of Chicago originally in 1988 as an Assistant Professor.
Previously, Dr. Kaplan was an associate at Booz Allen Hamilton, Inc. and an
analyst with Kidder Peabody & Company. Dr. Kaplan holds an A.B. degree in
Applied Mathematics, an A.M. and a Ph.D. in Business Economics from Harvard
University. Following the Offering, Dr. Kaplan will become a Director of the
Company.
FOUNDING COMPANY MANAGEMENT
The key executives of the Founding Companies are as follows:
Gary D. Blackwelder, age 41, has been President of I(2) Solutions
since 1989.
James E. Bunker, age 58, co-founded TIMCO in 1980 and has served as
its Chairman since that time.
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Mark Creglow, age 39, co-founded DDS in 1994 and has served as its
Vice President since inception. Prior to founding DDS, Mr. Creglow was
Regional Sales Manager for Distribution Management Systems, Inc.
David L. Crowder, age 41, has served as President of TPS since 1990
and has been with TPS for 19 years.
Judith K. DeMott, age 58, co-founded DataLink in 1984, and has served
as President since its inception.
Carmen DiMatteo, age 62, joined Spaulding in 1960 and has served as
its President since 1996.
Jeffry P. Kalmon, age 48, has served as President of TIMCO since 1996.
He joined TIMCO in 1984 as a sales representative.
Ovidio Pugnale, age 63, joined IMS's predecessor originally in 1980 as
General Manager and became IMS's President in 1986. Prior to joining IMS,
Mr. Pugnale served 26 years as an officer in the United States Air Force.
Ellen Rothschild-Taube, age 40, co-founded IDS in 1989 and has served
as IDS's Vice President since its inception.
Mary Jane Semasko, age 50, has served as Vice President of OMI since
its acquisition in 1975.
Theodore J. Solomon, age 73, has served as Chairman of the Board and
Chief Executive Officer of CMC, Laser Graphics and I(3) since 1992, 1994
and 1995, respectively.
Mitchell J. Taube, age 40, co-founded IDS in 1989 and has served as
IDS's President since its inception. Mr. Taube currently serves on the AIIM
Service Company Executive Committee.
David C. Yezbak, age 31, has served as President of CodaLex, Laser
Graphics and I(3) since 1995. Previously, he served as Vice President of
CodaLex from 1992 to 1995.
The Company's executive officers are appointed annually by, and serve at
the discretion of, the Board of Directors. The Board of Directors currently
consists of three members. The Company expects to appoint Messrs. Lamb, Semasko,
Black, Hatch and Carney and Dr. Kaplan to its Board of Directors following the
consummation of the Offering and, at that time, the Board of Directors will
include nine Directors divided into three classes as follows: Class I Directors
(Messrs. Gillis, Utz and Carney); Class II Directors (Messrs. Bacas, Semasko and
Hatch); and Class III Directors (Messrs. Lamb and Black and Dr. Kaplan). At each
annual meeting of shareholders, the appropriate number of Directors will be
elected for a three-year term to succeed the Directors of the same class whose
terms are then expiring. The initial terms of the Class I Directors, Class II
Directors and Class III Directors will be one, two and three years, respectively
and will expire upon the election and qualification of successor Directors at
the annual meetings of shareholders held in calendar years 1998, 1999 and 2000,
respectively. There is no family relationship between any Director or executive
officer of the Company.
BOARD COMMITTEES
Upon completion of the Offering, the Company intends to establish Audit and
Compensation Committees of the Board of Directors comprised of independent
directors. The Audit Committee will review the qualifications of the Company's
independent auditors, make recommendations to the Board of Directors regarding
the selection of independent auditors, review the scope, fees and results of any
audit and review non-audit services and related fees provided by the independent
auditors.
The Compensation Committee will be responsible for the administration of
all salary and incentive compensation plans, including the Stock Incentive Plans
and bonuses, for the executive officers and Directors who are or will become
employees of the Company.
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DIRECTOR COMPENSATION
Directors who are not employees of the Company are paid a fee of $500 for
each board and committee meeting attended in person and all directors are
reimbursed for travel expenses as incurred. It is anticipated that each of the
four Director nominees who are not employees of the Company will be appointed to
the Board of Directors and granted nonqualified stock options to purchase 20,000
shares of Common Stock upon completion of the Offering. It is anticipated that
such options will have a per share exercise price equal to the initial public
offering price and will vest in equal annual installments over three years.
EXECUTIVE COMPENSATION
The Company was incorporated in 1996 and neither conducted operations nor
paid any compensation in that year. The Company has utilized its initial
capitalization in 1997 to pay start-up expenses, primarily associated with
identifying and negotiating the Acquisitions. The Company anticipates that, for
1997, its most highly compensated executive officers and their annualized base
salaries will be: Mr. Gillis ($200,000); Mr. Model ($150,000); Mr. Brown
($130,000); and Mr. Bacas ($130,000) (collectively, the "Named Executive
Officers"). Each Named Executive Officer has entered into an employment
agreement with the Company commencing in August 1997. See "-Employment
Agreements."
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with the Named Executive
Officers in August 1997, the initial terms of which expire on December 31, 2000,
except for Mr. Gillis' agreement which expires on December 31, 2002. Mr. Gillis
will serve as Chief Executive Officer at a base annual salary of $200,000. Mr.
Model will serve as Chief Operating Officer at a base annual salary of $150,000.
Mr. Brown will serve as Chief Financial Officer at a base annual salary of
$130,000. Mr. Bacas will serve as Senior Vice President - Corporate Development
at a base annual salary of $130,000. The base annual salary of each of the Named
Executive Officers is subject to increases periodically at the discretion of the
Board, and each Named Executive Officer may receive an annual bonus as
determined by the Board. Each of the employment agreements provides for
customary benefits including life, health and disability insurance, 401(k) plan
participation and a car allowance. Each of the employment agreements futher
provides that if the employee is terminated without cause he is entitled to
severance pay of between six months' and one year's base salary and benefits. In
the event he is terminated in connection with a change of control (as defined
therein), he is entitled to receive 18 months' base salary and benefits.
STOCK INCENTIVE PLANS
1997 INCENTIVE PLAN
The Company's 1997 Incentive Plan (the "Incentive Plan") provides for the
award of up to 600,000 shares of its Common Stock (or options and other awards
with respect to 600,000 shares) to its employees, Directors, consultants and
other individuals who perform services for the Company.
The Board of Directors may appoint a committee ("Compensation Committee")
to administer the Incentive Plan. Under the terms of the Incentive Plan, the
Compensation Committee is required to be composed of two or more Directors. The
Compensation Committee has the authority to interpret the Incentive Plan and to
determine and designate the persons to whom options or awards shall be made and
the terms, conditions and restrictions applicable to each option or award
(including, but not limited to, the price, any restriction or limitation, any
vesting schedule or acceleration thereof, and any forfeiture restrictions).
The Incentive Plan contains provisions for granting various stock-based
awards, including incentive stock options, as defined in Section 422 of the
Code, nonqualified stock options (options that are not incentive stock options),
restricted stock, performance shares and performance units (as further described
below). The term of the Incentive Plan is ten years, subject to earlier
termination or amendment, but options and other rights may remain exercisable
after the Incentive Plan expires or is terminated.
The Compensation Committee has the power to select award recipients and
their allotments and to determine the price, term and vesting schedule for
awards granted. There are no predetermined
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performance formulas or measures or other specific criteria used to determine
recipients of awards under the Incentive Plan. The Company anticipates that
awards will be based generally upon the grantee's position and responsibilities,
the nature of services provided and accomplishments, the value of the services
to the Company, the present and potential contribution of the grantee to the
success of the Company, the anticipated number of years of service remaining and
other factors the Board and the Compensation Committee may deem relevant.
Pursuant to the Incentive Plan, upon the completion of the Offering,
nonqualified options to purchase an aggregate of 287,500 shares of Common Stock
at the initial public offering price set forth on the cover page of this
Prospectus will be granted to the Named Executive Officers as follows: Mr.
Gillis (100,000), Mr. Model (62,500), Mr. Brown (62,500) and Mr. Bacas (62,500).
Additionally, each of Messrs. Black, Hatch and Carney and Dr. Kaplan will
receive nonqualified options to purchase 20,000 shares of Common Stock at the
initial public offering price in their capacity as outside Directors. The grants
will vest in equal annual installments over three years.
Stock Options. The Incentive Plan provides for the grant of incentive
stock options to employees of the Company. The Incentive Plan also provides for
the grant of nonqualified stock options to employees of the Company, directors
of the Company, and consultants and other individuals who perform services for
the Company but are not employed by the Company. The exercise price of any
incentive stock option granted under the Incentive Plan may not be less than
100% of the fair market value of the Company's Common Stock on the date of grant
(110% of fair market value in the case of an option holder who is a 10% owner).
Options granted under the Incentive Plan may be exercised for cash or, in the
Compensation Committee's discretion, in exchange for shares of Common Stock
owned by the option holder having a fair market value on the date of exercise
equal to the option exercise price. The aggregate fair market value, determined
on the date of grant, of the shares with respect to which incentive stock
options are exercisable for the first time by an employee during any calendar
year may not exceed $100,000. Any option that does not meet the requirements or
limits applicable to incentive stock options is treated as a nonqualified stock
option.
Under the Incentive Plan, each option is exercisable for the full amount of
the shares subject to option or for any part thereof at such intervals or in
such installments as the Compensation Committee shall determine at the time it
grants the option. However, no option shall be exercisable with respect to any
shares of Common Stock later than ten years after the date of the grant of such
option (five years in the case of an incentive stock option granted to a 10%
owner). All options are nontransferable, except upon death, by the optionee. The
shares subject to expired options or terminated options which remain unexercised
become available for future grants.
If an optionee ceases to be employed by, or to render services to, the
Company for any reason other than death, disability or termination for cause,
any option exercisable on the date of such termination generally may be
exercised for a period of 90 days from the date of such termination or until the
expiration of the stated term of the option, whichever period is shorter. In the
event of termination of employment or service by reason of death or disability,
any option exercisable at the date of such termination generally may be
exercised for a period of one year from the date of termination or until the
expiration of the stated term of the option, whichever period is shorter. If a
participant's employment or service is terminated for cause, any option not
exercised prior to the date of such termination shall be immediately canceled.
In the event of a change of control (as defined in the Incentive Plan) of the
Company, the Incentive Plan provides that all outstanding options may, at the
Board of Director's election, become immediately exercisable. The Incentive Plan
allows the Compensation Committee to vary the foregoing exercisability and
cancellation terms in its discretion.
Restricted Stock. "Restricted Stock" represents shares of the Company's
Common Stock granted to an employee for no cash consideration, which will be
forfeited to the Company if the grantee ceases to be an employee of the Company
during a restriction period specified by the Compensation Committee at the time
it grants the Restricted Stock. In the event of death or disability, the
restrictions will lapse with respect to that percentage of Restricted Stock held
by the grantee that is equal to the percentage of the restriction period that
had elapsed as of the date of death or commencement of disability. The Board of
Directors may provide that, in the event of a change of control of the Company,
all restrictions on shares of Restricted Stock will lapse. Shares of Restricted
Stock that are forfeited become available for future grants.
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Performance Shares. A "Performance Share" is an award of the right to
receive stock at the end of a specified period upon the attainment of
performance goals specified by the Compensation Committee at the time of grant.
Performance Shares generally will be forfeited if the grantee ceases to be an
employee of the Company during the performance period for any reason other than
death, disability or retirement. In the event of death, disability or
retirement, the participant or his or her estate will be entitled to receive, at
the expiration of the performance period, a percentage of his or her Performance
Shares equal to the percentage of the performance period that had elapsed at the
time of death or commencement of disability, provided that the Compensation
Committee determines that the applicable performance goals have been met. In the
event of a change of control of the Company, the Board of Directors may provide
that all conditions applicable to each Performance Share award will terminate,
and the full number of shares of Common Stock subject to the Performance Share
award will be issued to the grantee. Performance Shares that are forfeited or
not delivered to the grantee become available for future grants.
Performance Units. A "Performance Unit" is an award of the right to
receive cash at the end of a specified period upon the attainment of performance
goals specified by the Compensation Committee at the time of the grant. The
amount payable under a Performance Unit is equal to the increase in value of a
Unit from the date of award to the date of attainment of the performance goals.
Performance Units generally will be forfeited if the grantee ceases to be an
employee of the Company during the performance period for any reason other than
death, disability or retirement. In the event of death, disability or
retirement, the grantee or his or her estate will be entitled to receive, at the
expiration of the performance period, a cash payment for a percentage of his or
her Performance Units equal to the percentage of the performance period that
elapsed at the time of death or commencement of disability, provided that the
Compensation Committee determines that the applicable performance goals have
been met. In the event of a change of control of the Company, the Board of
Directors may provide that all conditions applicable to the Performance Units
will terminate and a cash payment for the full amount of the Performance Units
will be made to the grantee.
EMPLOYEE STOCK PURCHASE PLAN
The Company has adopted an Employee Stock Purchase Plan (the "Purchase
Plan"), which will allow all full-time employees of the Company, other than 5%
shareholders, temporary employees, and employees having less than six months'
service with the Company, to purchase shares of the Company's Common Stock at a
discount from the prevailing market price at the time of purchase. Such shares
may either be issued by the Company from its authorized and unissued Common
Stock or purchased by the Company on the open market. A maximum of 250,000
shares of the Company's Common Stock will be available for purchase under the
Purchase Plan.
An eligible employee will be able to specify, before the commencement of
each quarterly period, an amount to be withheld from his or her paycheck and
credited to an account established for him or her (the "Participation Account").
Amounts in the Participation Account will be applied to the purchase of shares
of the Company's Common Stock on the last day of each quarterly period. The
price of such shares will be equal to 90% of the lower of the value of such
shares on the first and last days of the quarterly period. For this purpose, the
value shall be the closing price per share of the Company's Common Stock on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading or, if not listed or traded on any such exchange, on the
Nasdaq National Market or, if not listed or traded, the fair market value
determined by the Board of Directors. Only whole shares of Common Stock may be
purchased. Amounts withheld from an employee's paycheck and not applied to the
purchase of whole shares of Common Stock will, at the election of the employee,
either remain credited to the employee's Participation Account or be returned to
the employee.
Upon termination of an employee's employment for any reason, or upon a
leave of absence beyond 90 days, all amounts credited to such employee's
Participation Account shall be returned to him or her.
The Purchase Plan will be administered by the Board of Directors, which may
delegate responsibility to a committee of the Board. The Board of Directors may
amend or terminate the Purchase Plan. The Purchase Plan is intended to comply
with the requirements of Section 423 of the Code.
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CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
Since inception and prior to the Offering, the Company issued Common Stock
and Series A Preferred Stock (1,154,259 shares of Common Stock on an
as-converted basis) for an aggregate purchase price of approximately $1.8
million, including 727,340 shares of Common Stock (on an as-converted basis)
issued to persons who are officers or Director nominees of the Company as
follows: Bruce M. Gillis, Chief Executive Officer and Chairman of the Board,
purchased an aggregate of 295,448 shares (including 31,025 shares of Common
Stock underlying Series A Preferred Stock) for an aggregate purchase price of
$81,041; David Model, President and Chief Operating Officer, purchased an
aggregate of 68,750 shares (including 26,442 shares of Common Stock underlying
Series A Preferred Stock) for an aggregate purchase price of $225,000; James D.
Brown, Senior Vice President - Finance, Chief Financial Officer and Treasurer,
purchased an aggregate of 33,846 shares (including 8,461 shares of Common Stock
underlying Series A Preferred Stock) for an aggregate purchase price of
$100,000; Andrew R. Bacas, Senior Vice President - Corporate Development,
Secretary and Director, purchased an aggregate of 223,526 shares (including
35,257 shares of Common Stock underlying Series A Preferred Stock) for an
aggregate purchase price of $70,292; David C. Utz, Jr., a Director, purchased an
aggregate of 84,616 shares (including 42,308 shares of Common Stock underlying
Series A Preferred Stock), for an aggregate purchase price of $25,000; and John
E. Semasko, a Director nominee, purchased an aggregate of 21,154 shares of
Common Stock underlying Series A Preferred Stock for an aggregate purchase price
of $100,000. In addition, each of Messrs. Black and Hatch, Director nominees,
has indicated his intent to purchase 7,692 shares of Common Stock (based on an
assumed initial public offering price of $13.00 per share) for an aggregate
purchase price of $100,000 each. As members of the initial executive management
group, Messrs. Gillis, Model, Brown and Bacas may be considered promoters of the
Company. See "Management."
ACQUISITION TRANSACTIONS
The consideration to be paid for the Founding Companies was determined
through arm's-length negotiations among ImageMax and representatives of the
Founding Companies. The factors considered by the parties in determining the
consideration to be paid include, among others, the historical operating
results, the levels of indebtedness and the future prospects of the Founding
Companies.
The general terms of each of the Acquisitions (assuming (i) an initial
public offering price of $13.00 per share and (ii) purchase price adjustments
based on the net book value of assets, working capital and levels of
indebtedness, as applicable, existing as of September 30, 1997) are set forth
below. Any change in the initial public offering price will cause the number of
shares of Common Stock to be issued in connection with the Acquisitions to vary
and any change in such purchase price adjustments as of the closing date of the
Acquisitions will cause the cash portion of the consideration to vary.
AMMCORP. ImageMax will acquire the parent of AMMCORP by merger for
approximately $4.7 million, consisting of $0.5 million in cash, 71,923
shares of Common Stock (aggregate value: $934,999), and purchase price
adjustments of $0.3 million plus the assumption of approximately $3.0
million of outstanding debt. David C. Utz, Jr., a Director of the Company,
owns the parent of AMMCORP. In addition, ImageMax will assume $50,000 of
additional liabilities which will be repaid by the Company at the closing
of the Acquisition.
THE CODALEX GROUP. ImageMax will acquire the assets and assume
certain liabilities of I(3) and will acquire Laser Graphics and CMC by
merger for approximately $3.3 million, consisting of $1.4 million in cash,
the assumption of approximately $0.9 million of indebtedness and 78,412
shares of Common Stock (aggregate value: $1,019,356). In addition, the
Company will enter into five-year leases for two facilities with affiliates
of CodaLex, David C. Yezbak and Theodore J. Solomon or their affiliates.
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DATALINK. ImageMax will acquire the assets of DataLink and assume
certain of its liabilities for approximately $3.8 million, consisting of
$3.3 million in cash and 38,462 shares of Common Stock (aggregate value:
$500,006). In addition, ImageMax will assume approximately $0.2 million of
additional liabilities which will be repaid by the Company at the closing
of the Acquisition. In addition, the Company will enter into a five-year
lease for a facility with affiliates of DataLink, Judith K. DeMott and Geri
Davidson or their affiliates.
DOCUTECH. ImageMax will acquire the assets of DTI and assume certain
of its liabilities for approximately $2.7 million in cash. ImageMax will
acquire DDS by merger for approximately $6.5 million, consisting of $2.7
million in cash and 288,750 shares of Common Stock (aggregate value:
$3,753,750). Rex Lamb beneficially owns 100% of DTI and 51% of DDS. It is
contemplated that Mr. Lamb will be appointed to serve as a Director upon
completion of the Offering.
I(2) SOLUTIONS. ImageMax will acquire I(2) Solutions by merger for
approximately $5.4 million, consisting of $1.3 million in cash, purchase
price adjustments of $0.7 million and 261,538 shares of Common Stock
(aggregate value: $3,399,994). Included on I(2) Solutions closing balance
sheet will be approximately $0.8 million in cash. In addition, the Company
will enter into five-year leases for two facilities with an affiliate of
I(2) Solutions, Gary Blackwelder.
IMS. ImageMax will purchase all of the issued and outstanding stock
of IMS for approximately $3.1 million, consisting of approximately $2.1
million in cash, the assumption of approximately $0.2 million of
outstanding debt and 61,538 shares of Common Stock (aggregate value:
$799,994). In addition, the Company will enter into a five year lease for a
facility with an affiliate of IMS, Ovidio Pugnale.
IDS. ImageMax will acquire IDS by merger for approximately $3.9
million, consisting of $1.5 million in cash, purchase price adjustments of
$0.2 million and 165,000 shares of Common Stock (aggregate value:
$2,145,000).
OMI. ImageMax will acquire OMI by merger for approximately $3.0
million, consisting of approximately $1.4 million in cash, the assumption
of approximately $65,000 of outstanding debt and 117,692 shares of Common
Stock (aggregate value: $1,529,996). In addition, the Company will enter
into a five-year lease for a facility with John E. and Mary Jane Semasko or
their affiliates. John E. Semasko is the owner of OMI. It is contemplated
that Mr. Semasko will be appointed to serve as a Director upon completion
of the Offering. In addition, ImageMax will assume $115,000 of additional
liabilities which will be repaid by the Company at the closing of the
Acquisition.
SPAULDING. ImageMax will acquire the assets and assume certain
liabilities of Spaulding for $4.3 million in cash and purchase price
adjustments of $0.2 million.
TIMCO. ImageMax will acquire the assets and assume certain
liabilities of TIMCO for approximately $3.5 million, consisting of $2.7
million in cash and 59,615 shares of Common Stock (aggregate value:
$774,995).
TPS. ImageMax will purchase all of the issued and outstanding stock
of TPS for approximately $3.0 million, consisting of $1.6 million in cash,
the assumption of approximately $0.9 million of outstanding debt and 41,538
shares of Common Stock (aggregate value: $539,994). In addition, ImageMax
will assume $200,000 of additional liabilities which will be repaid by the
Company at the closing of the Acquisition.
The aggregate value of the Common Stock portion of the consideration for
each of the Acquisitions, and the portion of the consideration to be paid in
shares of Common Stock, is fixed. Accordingly, an increase or decrease in the
initial public offering price will cause the amount of shares of Common Stock
paid for each Acquisition to correspondingly decrease or increase, respectively.
The Company has agreed to repay approximately $5.5 million of indebtedness of
the Founding Companies, of which approximately $3.0 million is indebtedness of
AMMCORP, whose shareholder, David C.
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Utz, Jr., is a Director of the Company and approximately $0.1 million is
indebtedness of OMI, whose shareholder, John E. Semasko, is expected to become a
Director of the Company upon completion of the Offering.
The consummation of each Acquisition is subject to customary closing
conditions. These conditions include, among others, the continuing accuracy of
the representations and warranties of the Founding Companies, the principal
shareholders thereof and ImageMax on the closing date of the Acquisitions, the
performance by each of them of all covenants included in the agreements relating
to the Acquisitions and the non-existence of a material adverse change in the
results of operations, financial condition or business of each Founding Company.
There can be no assurance that the conditions to the closing of the Acquisitions
will be satisfied or waived or that the Acquisition agreements will not be
terminated prior to consummation.
MANAGEMENT CONTRACT
The Company entered into a management contract with GBL Capital Corporation
in November 1996 whereby GBL managed the operations of the Company for an
initial payment of $5,000 and a monthly fee ranging from $10,000 to $25,000
(aggregating $121,500 through July 31, 1997), plus expenses. The monthly fee
payments pursuant to the management contract were terminated on July 31, 1997.
The management contract requires the payment of $500,000 to GBL upon completion
of the Offering. Messrs. Gillis and Bacas are both owners and controlling
persons of GBL and may be considered promoters of the Company. See Note 6 to
ImageMax's Financial Statements.
FUTURE TRANSACTIONS
The Company has adopted a policy that it will not enter into any material
transaction in which a Company director or officer has a direct or indirect
financial interest, unless the transaction is determined by the Company's Board
of Directors to be fair as to the Company or is approved by a majority of the
Company's disinterested directors or by the Company's shareholders, as provided
for under Pennsylvania law.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of November 3, 1997 giving pro forma effect to the
Acquisitions (based on an assumed initial public offering price of $13.00 per
share) by: (i) each executive officer and Director and persons who will become a
Director upon consummation of the Offering; (ii) each person known by the
Company to beneficially own more than 5% of the Common Stock; and (iii) all
Directors and executive officers as a group. Each person named below has an
address in care of the Company's principal executive offices.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
------------------------------------------------
PERCENT
--------------------------------
NAME NUMBER BEFORE OFFERING AFTER OFFERING
- ---- --------- --------------- --------------
<S> <C> <C> <C>
Bruce M. Gillis(2).............................. 295,448 12.6% 5.4%
Andrew R. Bacas(3).............................. 223,526 9.5 4.1
S. David Model(3)............................... 60,288 2.6 1.1
James D. Brown(3)............................... 33,846 1.4 *
Rex Lamb(4)..................................... 191,250 8.1 3.5
David C. Utz, Jr................................ 156,539 6.7 2.9
John E. Semasko(4).............................. 138,846 5.9 2.6
Lennox K. Black(4)(5)........................... -- * *
David C. Carney(4)(6)........................... -- * *
Lewis E. Hatch, Jr.(4)(5)....................... -- * *
Steven N. Kaplan(4)(6).......................... 12,692 * *
Gary D. Blackwelder............................. 261,538 11.1 4.8
Mitchell J. Taube............................... 186,154 7.9 3.4
All executive officers and Directors as a group
(11 persons).................................. 1,112,435 47.6 20.5
</TABLE>
- ------------------
* Represents less than 1.0% of the outstanding shares of Common Stock.
(1) As used in this table, "beneficial ownership" means the sole or shared power
to vote or direct the voting of a security, or the sole or shared investment
power with respect to a security (i.e., the power to dispose, or direct the
disposition, of a security). A person is deemed as of any date to have
beneficial ownership of any security that such person has the right to
acquire within 60 days after such date.
(2) Excludes 100,000 shares issuable upon the exercise of stock options to be
granted on the date of this Prospectus which are not exercisable within 60
days of the date hereof.
(3) Excludes 62,500 shares issuable upon the exercise of stock options to be
granted on the date of this Prospectus which are not exercisable within 60
days of the date hereof.
(4) To be appointed as a Director to fill vacancies created by enlarging the
Board of Directors upon completion of the Offering.
(5) Excludes 20,000 shares issuable upon the exercise of stock options to be
granted on the date of this Prospectus which are not exercisable within 60
days of the date hereof. Excludes 7,692 shares (at an assumed initial public
offering price of $13.00 per share) that Messrs. Black and Hatch each has
indicated their intent to purchase in the Offering. Such shares, on an
individual basis, will represent less than 1.0% of the outstanding shares of
Common Stock after the Offering.
(6) Excludes 20,000 shares issuable upon the exercise of stock options to be
granted on the date of this Prospectus which are not exercisable within 60
days of the date hereof.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 40,000,000 shares
of Common Stock, no par value per share, and 10,000,000 shares of Preferred
Stock, no par value per share, of which 524,125 are shares of Series A Preferred
Stock convertible into 443,489 shares of Common Stock upon completion of the
Offering. Immediately prior to the consummation of the Offering, the Company
will have outstanding 2,338,727 shares of Common Stock, including 1,184,468
shares to be issued in connection with the Acquisition (based on an assumed
initial public offering price of $13.00 per share). Upon completion of the
Offering and assuming the issuance of 3,100,000 shares of Common Stock pursuant
to the Acquisitions, the Company will have outstanding 5,438,727 shares of
Common Stock (5,903,727 shares if the over-allotment option is exercised in
full), based on an assumed initial public offering price of $13.00 per share. As
of November 3, 1997, there were 21 record holders of Common Stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of shareholders and do not have cumulative voting
rights. Subject to applicable provisions of the BCL, shareholders holding a
majority of the shares of Common Stock constitute a quorum for the purposes of
convening a shareholders' meeting. Accordingly, a majority of the quorum may
elect all the directors standing for election. Holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared on the
Common Stock by the Board of Directors out of funds legally available therefor.
Upon the liquidation, dissolution or winding up of the Company, holders of
Common Stock are entitled to receive ratably the net assets of the Company
available for distribution after the payment of all debts and other liabilities
of the Company, subject to prior and superior rights of holders of Preferred
Stock. Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered hereby, when issued and paid for, will be, fully paid and nonassessable.
PREFERRED STOCK
After completion of the Offering, the Company may issue up to 9,475,875
shares of Preferred Stock in one or more series and to fix and determine the
relative rights, preferences and limitations of each class or series so
authorized without any further vote or action by the shareholders. The Board of
Directors may issue Preferred Stock with voting and conversion rights which
could adversely affect the voting power of the holders of Common Stock and have
the effect of delaying or preventing a change in the control of the Company. As
of the date of this Prospectus, no shares of Preferred Stock are outstanding.
The Company has no current intention to issue any shares of Preferred Stock.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES, BYLAWS AND PENNSYLVANIA LAW
Articles of Incorporation and Bylaws. The Bylaws provide that the Board of
Directors will be divided into three classes of directors, each class
constituting approximately one-third of the total number of directors and with
the classes serving staggered three year terms. The Bylaws provide that the
Company's shareholders may call a special meeting of shareholders only upon a
request of shareholders owning at least 50% of the Company's capital stock.
These provisions of the Articles and Bylaws could discourage potential
acquisition proposals and could delay, defer or prevent a change in control of
the Company. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Board of Directors and in the
policies formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of the
Company. These provisions are designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal. The provisions also are intended
to discourage certain tactics that may be used in proxy fights. However, such
provisions could have the effect of discouraging others from making tender
offers for the Company's shares and, as a consequence, they
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also may inhibit fluctuations in the market price of the Company's shares that
could result from actual or rumored takeover attempts. Such provisions also may
have the effect of preventing changes in the management of the Company.
Pennsylvania Anti-Takeover Laws. The BCL contains a number of statutory
"anti-takeover" provisions applicable to the Company. One of these BCL
provisions prohibits, subject to certain exceptions, a "business combination"
with a shareholder or group of shareholders (and certain affiliates and
associates of such shareholders) beneficially owning more than 20% of the voting
power of a public corporation (an "interested shareholder") for a five-year
period following the date on which the holder became an interested shareholder.
This provision may discourage open market purchases of a corporation's stock or
a non-negotiated tender or exchange offer for such stock and, accordingly, may
be considered disadvantageous by a shareholder who would desire to participate
in any such transaction. The BCL also provides that directors may, in
discharging their duties, consider the interests of a number of different
constituencies, including shareholders, employees, suppliers, customers,
creditors and the community in which it is located. Directors are not required
to consider the interests of shareholders to a greater degree than other
constituencies' interests. The BCL expressly provides that directors do not
violate their fiduciary duties solely by relying on poison pills or the anti-
takeover provisions of the BCL.
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS
The Company's Bylaws provide that a director shall not be liable to the
Company for monetary damages as such for any action taken or omitted unless the
director breaches or fails to perform a duty of his office and that breach or
failure to perform constitutes self-dealing, willful misconduct or recklessness.
This limitation does not apply to criminal liability or liability for the
payment of taxes. The Company believes that this provision will assist it in
securing and maintaining the services of directors who are not employees of the
Company. The Company's Bylaws also provide for indemnification of the Company's
directors and officers to the fullest extent permitted by law for expenses
(including attorneys' fees) incurred as a result of the officer's or director's
status as an officer or director of the Company.
The Company intends to purchase insurance to afford officers and directors
coverage for losses arising from claims based on breaches of duty, negligence,
error and other wrongful acts.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is StockTrans, Inc.,
Ardmore, Pennsylvania.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 5,438,727 shares of
Common Stock outstanding. Of these shares, the 3,100,000 shares sold in the
Offering will be freely tradable without restriction or further registration
under the Securities Act, except that any shares purchased by "affiliates" of
the Company, as that term is defined under the Securities Act ("Affiliates"),
may generally only be sold in compliance with the limitations of Rule 144
described below.
The remaining 2,338,727 shares of Common Stock are deemed "restricted
shares" under Rule 144. The number of shares of Common Stock available for sale
in the public market is limited by restrictions under the Securities Act,
contractural restrictions for one year after consummation of the Offering with
respect to shares issued in connection with the Acquisitions (except for
transfers to immediate family bound by such restrictions), and lock-up
agreements under which the holders of all shares issued prior to completion of
the Offering have agreed not to sell or otherwise dispose of any of their shares
publicly for a period of 180 days after the effective date of the Offering
without the prior written consent of William Blair & Company, L.L.C. Because of
these restrictions, on the date of this Prospectus, no shares other than the
3,100,000 shares offered hereby will be eligible for sale. Notwithstanding the
preceding, recipients of shares of Common Stock pursuant to the Acquisitions and
all current shareholders have been granted certain "piggyback" registration
rights permitting them to include their shares in certain future registration
statements filed by the Company.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after the Offering, a person (or persons whose shares are
aggregated) who has beneficially owned restricted shares for at least one year,
including a person who may be deemed an Affiliate of the Company, is entitled to
sell within any three-month period a number of shares of Common Stock that does
not exceed the greater of 1% of the then-outstanding shares of Common Stock
(approximately 54,387 shares after giving effect to the Offering) or the average
weekly trading volume of the Common Stock as reported through the Nasdaq
National Market during the four calendar weeks preceding such sale. Sales under
Rule 144 of the Securities Act are subject to certain restrictions relating to
manner of sale, notice and the availability of current public information about
the Company. In addition, under Rule 144(k) of the Securities Act, a person who
is not an Affiliate of the Company at any time 90 days preceding a sale, and who
has beneficially owned shares for at least two years, would be entitled to sell
such shares immediately following the Offering without regard to the volume
limitations, manner of sale provisions or notice or other requirements of Rule
144 of the Securities Act.
After consummation of the Offering, the Company intends to register on a
registration statement on Form S-8 a total of 850,000 shares of Common Stock
reserved for issuance under the Stock Incentive Plans and to register on a
registration statement a total of 2,000,000 shares of Common Stock for use as
consideration in future acquisitions. Such shares when issued and registered
will be eligible for resale in the public market.
75
<PAGE>
UNDERWRITING
The several Underwriters named below (the "Underwriters"), for whom William
Blair & Company, L.L.C. and Janney Montgomery Scott Inc. are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions set forth in the underwriting agreement by and among the
Company and the Representatives (the "Underwriting Agreement"), to purchase from
the Company, and the Company has agreed to sell to the Underwriters, the
respective number of shares of Common Stock (excluding the over-allotment
shares) set forth opposite each Underwriter's name below:
NUMBER
UNDERWRITERS OF SHARES
William Blair & Company, L.L.C..............................
Janney Montgomery Scott Inc.................................
---------
Total............................................ 3,100,000
=========
The nature of the Underwriters' obligations under the Underwriting
Agreement is such that all shares of Common Stock being offered, excluding
shares covered by the over-allotment option granted to the Underwriters, must be
purchased if any are purchased. In the event of a default by any Underwriter,
the Underwriting Agreement provides that, in certain circumstances, purchase
commitments of the nondefaulting Underwriters pertaining to the Underwriting
Agreement may be increased or such Underwriting Agreement may be terminated.
The Representatives have advised the Company that they propose to offer the
Common Stock to the public initially at the public offering price set forth on
the cover page of this Prospectus and to selected dealers at such price less a
concession of not more than $ per share. Additionally, the Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. After the initial public offering of the Common
Stock, the public offering price and other selling terms may be changed by the
Representatives.
The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional 465,000
shares of Common Stock at the same price per share to be paid by the
Underwriters for the other shares offered hereby. If the Underwriters purchase
any of such additional shares pursuant to this option, each Underwriter will be
committed to purchase such additional shares in approximately the same
proportion as set forth in the table above. The Underwriters may exercise the
option only for the purpose of covering over-allotments, if any, made in
connection with the distribution of the shares of Common Stock offered hereby.
The Company, the Company's directors and officers, and the existing
shareholders of the Company have agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities exercisable
for or convertible into Common Stock for a period of 180 days after
76
<PAGE>
the effective date of the Registration Statement of which this Prospectus is a
part without the written consent of William Blair & Company, L.L.C., except for
the sale by the Company of shares of Common Stock in the Offering, in the
Acquisitions and in other acquisition transactions (so long as the persons
receiving such Common Stock agree to be similarly restricted for the remainder
of the 180 day lock-up period). The recipients of shares of Common Stock
pursuant to the Acquisitions have agreed not to offer, sell or otherwise dispose
of such shares until one year after the closing of the Acquisitions. See "Shares
Eligible for Future Sale."
There has been no public market for the shares of Common Stock prior to the
Offering. The initial public offering price for the Common Stock will be
determined by negotiations among the Company and the Representatives. Among the
factors to be considered in determining the initial public offering price are
prevailing market and economic conditions, revenues and earnings of the Company,
estimates of the Company's business potential and prospects, the present state
of the business operations of the Founding Companies, an assessment of the
Company's management and the consideration of the above factors in relation to
the market valuations of companies in related businesses.
The Company has agreed to indemnify the Underwriters and their controlling
persons against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments the Underwriters may be required to make in
respect thereof.
The Representatives have informed the Company that the Underwriters will
not confirm, without customer authorization, sales to their customer accounts as
to which they have discretionary authority.
Certain persons associated with an Underwriter purchased an aggregate of
63,462 shares of Common Stock for an aggregate purchase price of $300,000 in
connection with the September Financing. Under applicable National Association
of Securities Dealers, Inc. rules governing compensation to underwriters (the
"NASD Rules"), the difference between the price paid for such shares of Common
Stock and the initial public offering price may be deemed to be compensation to
the Underwriters. Pursuant to the NASD Rules, these unregistered securities
generally may not be sold, assigned, pledged or otherwise transferred for a
period of one year following the Offering.
In connection with the Offering, the Underwriters may purchase and sell
Common Stock in the open market. These transactions may include stabilizing and
over-allotment transactions and purchases to cover short positions created by
the Underwriters in connection with the Offering. Stabilizing transactions
consist of certain bids for, or the purchase of Common Stock on behalf of the
Underwriters for the purpose of stabilizing or retarding a decline in the market
price of the Common Stock. The Underwriters may over-allot or otherwise create a
short position in the Common Stock by selling a greater number of shares of
Common Stock than they are required to purchase from the Company pursuant to the
Underwriting Agreement. Syndicate covering transactions consist of certain bids
for, or the purchase of, Common Stock on behalf of the Underwriters to reduce a
short position incurred by the Underwriters in connection with the Offering. The
Underwriters also may impose a penalty bid, whereby selling concessions allowed
to broker-dealers in respect of the securities sold in the Offering may be
reclaimed by the Underwriters if such shares of Common Stock are repurchased by
the Underwriters in stabilizing or syndicate covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock, which may be higher than the price that might otherwise prevail in
the open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market or
otherwise.
77
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by Pepper, Hamilton & Scheetz LLP. Certain legal matters
will be passed upon for the Underwriters by Sonnenschein Nath & Rosenthal,
Chicago, Illinois.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
The Company is not currently subject to the information requirements of the
Securities and Exchange Act (the "Exchange Act"). As a result of the Offering,
the Company will be required to file reports and other information with the
Commission pursuant to the informational requirements of the Exchange Act. In
addition, the Company intends to furnish its shareholders with annual reports
containing audited financial statements examined by an independent public
accounting firm.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, with respect to the Common Stock offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus,
which is part of the Registration Statement, omits certain information,
exhibits, schedules and undertakings set forth in the Registration Statement.
For further information pertaining to the Company and the Common Stock,
reference is made to such Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents or
provisions of any documents referred to herein are not necessarily complete, and
in each instance, reference is made to the copy of the document filed as an
exhibit to the Registration Statement. The Registration Statement may be
inspected without charge at the office of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of the Registration Statement may be
obtained from the Commission at prescribed rates from the Public Reference
Section of the Commission at such address, and at the Commission's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. In addition, registration statements and certain other filings
made with the Commission through its Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system are publicly available through the Commission's site
on the Internet's World Wide Web, located at http://www.sec.gov. The
Registration Statement, including all exhibits thereto and amendments thereof,
has been filed with the Commission through EDGAR.
78
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
IMAGEMAX, INC. AND FOUNDING COMPANIES UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS:
Basis of Presentation.................................. F-3
Unaudited Pro Forma Combined Balance Sheet............. F-4
Unaudited Pro Forma Combined Statements of
Operations........................................... F-5
Notes to Unaudited Pro Forma Combined Financial
Statements........................................... F-8
IMAGEMAX, INC. (IMAGEMAX):
Report of Independent Public Accountants............... F-17
Balance Sheets......................................... F-18
Statements of Operations............................... F-19
Statements of Shareholders' Equity..................... F-20
Statements of Cash Flows............................... F-21
Notes to Financial Statements.......................... F-22
FOUNDING COMPANIES:
UTZ MEDICAL ENTERPRISES, INC. (AMMCORP):
Report of Independent Public Accountants............... F-26
Consolidated Balance Sheets............................ F-27
Consolidated Statements of Operations.................. F-28
Consolidated Statements of Stockholders' Deficit....... F-29
Consolidated Statements of Cash Flows.................. F-30
Notes to Consolidated Financial Statements............. F-31
CODALEX MICROFILMING CORPORATION (CMC) AND IMAGING
INFORMATION INDUSTRIES, INC. (I(3)) (TOGETHER,
CODALEX):
Report of Independent Public Accountants............... F-37
Combined Balance Sheets................................ F-38
Combined Statements of Operations...................... F-39
Combined Statements of Stockholders' Equity
(Deficit)............................................ F-40
Combined Statements of Cash Flows...................... F-41
Notes to Combined Financial Statements................. F-42
LASER GRAPHICS SYSTEMS & SERVICES, INC. (LASER GRAPHICS),
AN AFFILIATE OF CODALEX:
Report of Independent Public Accountants............... F-46
Balance Sheets......................................... F-47
Statements of Operations............................... F-48
Statements of Stockholders' Equity (Deficit)........... F-49
Statements of Cash Flows............................... F-50
Notes to Financial Statements.......................... F-51
DATALINK CORPORATION (DATALINK):
Report of Independent Public Accountants............... F-55
Balance Sheets......................................... F-56
Statements of Operations............................... F-57
Statements of Stockholders' Equity..................... F-58
Statements of Cash Flows............................... F-59
Notes to Financial Statements.......................... F-60
DOCUTECH, INC. AND DOCUTECH DATA SYSTEMS, INC. (DOCUTECH)
Report of Independent Public Accountants............... F-65
Combined Balance Sheets................................ F-66
Combined Statements of Operations...................... F-67
Combined Statements of Stockholders' Equity............ F-68
Combined Statements of Cash Flows...................... F-69
Notes to Combined Financial Statements................. F-70
F-1
<PAGE>
PAGE
----
IMAGE & INFORMATION SOLUTIONS, INC. (I(2) Solutions):
Report of Independent Public Accountants............... F-76
Consolidated Balance Sheets............................ F-77
Consolidated Statements of Operations.................. F-78
Consolidated Statements of Stockholders' Equity........ F-79
Consolidated Statements of Cash Flows.................. F-80
Notes to Consolidated Financial Statements............. F-81
IMAGE MEMORY SYSTEMS, INC. (IMS):
Report of Independent Public Accountants............... F-86
Balance Sheets......................................... F-87
Statements of Operations............................... F-88
Statements of Shareholders' Equity..................... F-89
Statements of Cash Flows............................... F-90
Notes to Financial Statements.......................... F-91
INTERNATIONAL DATA SERVICES OF NEW YORK, INC. (IDS):
Report of Independent Public Accountants............... F-96
Balance Sheets......................................... F-97
Statements of Operations............................... F-98
Statements of Shareholders' Equity..................... F-99
Statements of Cash Flows............................... F-100
Notes to Financial Statements.......................... F-101
OREGON MICRO-IMAGING, INC. (OMI):
Report of Independent Public Accountants............... F-105
Balance Sheets......................................... F-106
Statements of Operations............................... F-107
Statements of Stockholders' Equity..................... F-108
Statements of Cash Flows............................... F-109
Notes of Financial Statements.......................... F-110
SEMCO INDUSTRIES, INC. (SPAULDING):
Report of Independent Public Accountants............... F-115
Consolidated Balance Sheets............................ F-116
Consolidated Statements of Operations.................. F-117
Consolidated Statements of Stockholders' Deficit....... F-118
Consolidated Statements of Cash Flows.................. F-119
Notes to Consolidated Financial Statements............. F-120
TOTAL INFORMATION MANAGEMENT CORPORATION (TIMCO):
Report of Independent Public Accountants............... F-125
Balance Sheets......................................... F-126
Statements of Operations............................... F-127
Statements of Stockholders' Equity..................... F-128
Statements of Cash Flows............................... F-129
Notes to Financial Statements.......................... F-130
TPS MICROGRAPHICS, INC. (TPS):
Report of Independent Public Accountants............... F-135
Balance Sheets......................................... F-136
Statements of Operations............................... F-137
Statements of Stockholder's Deficit.................... F-138
Statements of Cash Flows............................... F-139
Notes to Financial Statements.......................... F-140
F-2
<PAGE>
IMAGEMAX, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to the acquisitions by ImageMax, Inc. ("ImageMax") of Utz Medical Enterprises,
Inc., the parent of AMMCORP, by merger, CMC by merger, Laser Graphics by merger,
I(3) by net asset acquisition, DDS by merger, DTI by net asset acquisition, I(2)
Solutions by merger, IMS by stock acquisition, IDS by merger, OMI by merger, TPS
by stock acquisition, DataLink by net asset acquisition, Spaulding (a
wholly-owned subsidiary of SEMCO Industries, Inc.) by net asset acquisition, and
TIMCO by net asset acquisition, (together, the "Founding Companies"). These
acquisitions (the "Acquisitions") will occur simultaneously with and as a
condition to the closing of ImageMax's initial public offering (the "Offering")
and will be accounted for using the purchase method of accounting. ImageMax has
been identified as the accounting acquirer for financial statement presentation
purposes.
The unaudited pro forma combined balance sheet as of September 30, 1997
gives effect to the Acquisitions and the Offering as if they had occurred on
September 30, 1997. The unaudited pro forma combined statements of operations
give effect to these transactions as if they had occurred on January 1, 1996.
ImageMax has preliminarily analyzed the savings that it expects to realize
from reductions in salaries and certain benefits to the owners of the Founding
Companies. To the extent the owners have agreed prospectively to reductions in
salary, bonuses and benefits, these reductions have been reflected in the pro
forma combined statements of operations (the "Compensation Differential"). With
respect to other potential cost savings, the statements include the compensation
costs associated with positions eliminated or which will be eliminated in
connection with the Acquisitions, including the retirement of former Senior
Founding Company executives and other identified head-count reductions totalling
approximately $650,000, $500,000 and $300,000 for the year ended December 31,
1996 and for the nine months ended September 30, 1996 and 1997, respectively.
The statements include compensation of $610,000 annually based upon employment
agreements with ImageMax's executive management, but exclude other costs
associated with being a public company. While not quantified, it is expected
that such other costs will be offset by the potential cost savings from
consolidating certain general and administrative functions at the Founding
Companies and the interest earned on the remaining proceeds of the Offering.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what
ImageMax's financial position or results of operations would actually have been
if such transactions in fact had occurred on those dates and is not necessarily
representative of ImageMax's financial position or results of operations for any
future period. Since the Founding Companies were not under common control or
management, historical combined results may not be comparable to, or indicative
of, future performance. The unaudited pro forma combined financial statements
should be read in conjunction with the other financial statements and notes
thereto included elsewhere in this Prospectus. See "Risk Factors" included
elsewhere herein.
F-3
<PAGE>
IMAGEMAX, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL FINANCIAL STATEMENTS (NOTES 1 AND 2)
-----------------------------------------------------------------------------
CODALEX I(2)
IMAGEMAX AMMCORP GROUP DATALINK DOCUTECH SOLUTIONS IMS IDS
--------- ------- ------- -------- -------- --------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............... $1,362 $ 2 $ 102 $ 294 $264 $1,383 $ 47 $ 45
Accounts receivable..................... -- 897 835 386 524 468 484 521
Inventories............................. -- 94 226 42 6 453 13 --
Prepaid expenses and other.............. -- 53 21 10 10 -- 90 226
------ ------ ------ ------ ---- ------ ---- ----
Total current assets.................. 1,362 1,046 1,184 732 804 2,304 634 792
PROPERTY AND EQUIPMENT, net.............. 5 1,740 437 943 115 720 124 61
INTANGIBLES, primarily goodwill.......... -- 269 4 -- -- -- -- --
OTHER.................................... 1,987 86 -- 22 -- 139 67 --
------ ------ ------ ------ ---- ------ ---- ----
Total assets.......................... $3,354 $3,141 $1,625 $1,697 $919 $3,163 $825 $853
====== ====== ====== ====== ==== ====== ==== ====
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt and current portion of
long-term debt........................ $ -- $2,856 $ 704 $ 81 $ 8 $ 81 $ 78 $ --
Accounts payable........................ -- 368 547 141 79 130 103 291
Accrued expenses........................ 1,912 641 176 147 95 901 286 362
Deferred revenue........................ -- 190 20 -- 109 -- -- --
Pro forma cash due Founding Companies... -- -- -- -- -- -- -- --
Other current liabilities............... -- -- 105 -- -- -- -- --
------ ------ ------ ------ ---- ------ ---- ----
Total current liabilities............. 1,912 4,055 1,552 369 291 1,112 467 653
------ ------ ------ ------ ---- ------ ---- ----
DEFERRED INCOME TAXES.................... -- -- -- -- -- 3 -- 14
LONG-TERM DEBT........................... -- 228 85 813 4 363 111 --
OTHER LONG-TERM LIABILITIES.............. -- -- -- -- -- -- -- --
------ ------ ------ ------ ---- ------ ---- ----
Total liabilities..................... 1,912 4,283 1,637 1,182 295 1,478 578 667
------ ------ ------ ------ ---- ------ ---- ----
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock......................... 2,719 -- -- -- -- -- -- --
Common stock............................ 1,567 1 150 40 10 1 100 10
Additional paid-in-capital.............. -- 98 -- -- -- -- -- --
Retained earnings (deficit)............. (2,844) (1,241) (162) 475 614 1,753 430 176
Treasury stock.......................... -- -- -- -- -- (69) (283) --
------ ------ ------ ------ ---- ------ ---- ----
Total shareholders' equity
(deficit)........................... 1,442 (1,142) (12) 515 624 1,685 247 186
------ ------ ------ ------ ---- ------ ---- ----
Total liabilities and shareholders'
equity (deficit).................... $3,354 $3,141 $1,625 $1,697 $919 $3,163 $825 $853
====== ====== ====== ====== ==== ====== ==== ====
<CAPTION>
------------------------------------ PRO FORMA
PRO FORMA PRO FORMA POST MERGER AS
OMI SPAULDING TIMCO TPS ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
------ --------- ------ ------ ----------- --------- ----------- ---------
(NOTE 3) (NOTE 4)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............... $ 1 $ 367 $ 31 $ -- $(1,017) $ 2,881 $ 2,902 $ 5,783
Accounts receivable..................... 340 1,273 900 809 -- 7,437 -- 7,437
Inventories............................. 400 514 60 139 -- 1,947 -- 1,947
Prepaid expenses and other.............. 45 94 -- 61 -- 610 -- 610
------ ------ ------ ------ ------- ------- ------- -------
Total current assets.................. 786 2,248 991 1,009 (1,017) 12,875 2,902 15,777
PROPERTY AND EQUIPMENT, net.............. 377 1,075 267 324 (1,628) 4,560 -- 4,560
INTANGIBLES, primarily goodwill.......... -- -- 110 20 30,842 31,245 -- 31,245
OTHER.................................... -- 16 14 67 (154) 2,244 (1,987) 257
------ ------ ------ ------ ------- ------- ------- -------
Total assets.......................... $1,163 $3,339 $1,382 $1,420 $28,043 $50,924 $ 915 $51,839
====== ====== ====== ====== ======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt and current portion of
long-term debt........................ $ 29 $ -- $ 218 $ 509 $ (283) $ 4,281 $(4,281) $ --
Accounts payable........................ 124 384 51 340 -- 2,558 -- 2,558
Accrued expenses........................ 179 2,683 339 159 (2,191) 5,689 (2,150) 3,539
Deferred revenue........................ 178 605 -- 32 -- 1,134 -- 1,134
Pro forma cash due Founding Companies... -- -- -- -- 25,430 25,430 (25,430) --
Other current liabilities............... -- -- -- -- -- 105 (105) --
------ ------ ------ ------ ------- ------- ------- -------
Total current liabilities............. 510 3,672 608 1,040 22,956 39,197 (31,966) 7,231
------ ------ ------ ------ ------- ------- ------- -------
DEFERRED INCOME TAXES.................... 28 -- -- 13 -- 58 -- 58
LONG-TERM DEBT........................... 36 -- 144 534 (1,220) 1,098 (1,098) --
OTHER LONG-TERM LIABILITIES.............. -- 41 -- -- -- 41 -- 41
------ ------ ------ ------ ------- ------- ------- -------
Total liabilities..................... 574 3,713 752 1,587 21,736 40,394 (33,064) 7,330
------ ------ ------ ------ ------- ------- ------- -------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock......................... -- 60 -- -- (2,779) -- -- --
Common stock............................ 10 696 46 1 14,742 17,374 34,479 51,853
Additional paid-in-capital.............. -- 847 123 225 (1,293) -- -- --
Retained earnings (deficit)............. 579 178 461 157 (7,420) (6,844) (500) (7,344)
Treasury stock.......................... -- (2,155) -- (550) 3,057 -- -- --
------ ------ ------ ------ ------- ------- ------- -------
Total shareholders' equity
(deficit)........................... 589 (374) 630 (167) 6,307 10,530 33,979 44,509
------ ------ ------ ------ ------- ------- ------- -------
Total liabilities and shareholders'
equity (deficit).................... $1,163 $3,339 $1,382 $1,420 $28,043 $50,924 $ 915 $51,839
====== ====== ====== ====== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
IMAGEMAX, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL FINANCIAL STATEMENTS (NOTES 1 AND 2)
---------------------------------------------------------------------------------
CODALEX I(2)
IMAGEMAX AMMCORP GROUP DATALINK DOCUTECH SOLUTIONS IMS IDS
--------- ------- ------- -------- -------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Services................................... $ -- $4,079 $2,709 $1,972 $ 869 $2,014 $1,860 $2,340
Products................................... -- -- 1,047 592 1,300 1,316 136 --
------- ------ ------ ------ ------ ------ ------ ------
-- 4,079 3,756 2,564 2,169 3,330 1,996 2,340
------- ------ ------ ------ ------ ------ ------ ------
COST OF REVENUES:
Services................................... -- 2,486 1,835 1,268 405 767 1,044 1,452
Products................................... -- -- 773 492 435 966 65 --
Depreciation............................... -- 253 70 157 27 126 52 14
------- ------ ------ ------ ------ ------ ------ ------
-- 2,739 2,678 1,917 867 1,859 1,161 1,466
------- ------ ------ ------ ------ ------ ------ ------
Gross profit............................. -- 1,340 1,078 647 1,302 1,471 835 874
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 2,825 1,068 687 380 602 1,204 424 635
EXECUTIVE MANAGEMENT COMPENSATION........... -- -- -- -- -- -- -- --
FOUNDING COMPANIES TRANSACTION COSTS........ -- 35 45 25 57 -- 12 27
AMORTIZATION OF INTANGIBLE ASSETS........... -- 177 -- -- -- -- -- --
------- ------ ------ ------ ------ ------ ------ ------
Operating income (loss).................. (2,825) 60 346 242 643 267 399 212
INTEREST EXPENSE............................ -- 243 60 91 4 75 25 --
INTEREST INCOME............................. (4) -- -- (1) -- (60) (1) (2)
------- ------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes........ (2,821) (183) 286 152 639 252 375 214
INCOME TAX PROVISION (BENEFIT).............. -- 63 -- -- -- 96 -- 48
------- ------ ------ ------ ------ ------ ------ ------
NET INCOME (LOSS)........................... $(2,821) $ (246) $ 286 $ 152 $ 639 $ 156 $ 375 $ 166
======= ====== ====== ====== ====== ====== ====== ======
PRO FORMA NET INCOME PER SHARE
(Note 8)...................................
SHARES USED IN COMPUTING PRO FORMA NET
INCOME PER SHARE (Note 8)..................
SUPPLEMENTAL PRO FORMA DATA (NOTE 9):
Operating income (loss), as reported....... $(2,825) $ 60 $ 346 $ 242 $ 643 $ 267 $ 399 $ 212
Pro forma operating adjustments (Note 9)... 2,137 270 (4) 32 (81) 48 (8) 428
------- ------ ------ ------ ------ ------ ------ ------
(688) 330 342 274 562 315 391 640
Pro forma amortization of intangibles...... -- 67 58 80 191 79 65 78
------- ------ ------ ------ ------ ------ ------ ------
Pro forma operating income (loss).......... $ (688) $ 263 $ 284 $ 194 $ 371 $ 236 $ 326 $ 562
======= ====== ====== ====== ====== ====== ====== ======
<CAPTION>
HISTORICAL FINANCIAL STATEMENTS (NOTES 1 AND 2)
---------------------------------------------------------------
PRO FORMA PRO FORMA POST MERGER
OMI SPAULDING TIMCO TPS ADJUSTMENTS COMBINED ADJUSTMENTS
------ --------- ------ ------ ----------- ---------- -----------
(NOTE 5) (NOTE 5)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Services................................... $1,806 $3,960 $3,318 $2,314 $ (69) $ 27,172 $ --
Products................................... 1,305 2,745 -- 889 (29) 9,301 --
------ ------ ------ ------ ------- ---------- ----
3,111 6,705 3,318 3,203 (98) 36,473
------ ------ ------ ------ ------- ---------- ----
COST OF REVENUES:
Services................................... 1,464 2,637 2,096 1,525 111 17,090 --
Products................................... 702 1,780 -- 796 151 6,160 --
Depreciation............................... 76 148 63 106 (63) 1,029 --
------ ------ ------ ------ ------- ---------- ----
2,242 4,565 2,159 2,427 199 24,279 --
------ ------ ------ ------ ------- ---------- ----
Gross profit............................. 869 2,140 1,159 776 (297) 12,194 --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 588 1,902 798 660 (3,555) 8,218 --
EXECUTIVE MANAGEMENT COMPENSATION........... -- -- -- -- 458 458 --
FOUNDING COMPANIES TRANSACTION COSTS........ 33 73 25 -- -- 332 --
AMORTIZATION OF INTANGIBLE ASSETS........... -- -- 21 -- 670 868 --
------ ------ ------ ------ ------- ---------- ----
Operating income (loss).................. 248 165 315 116 2,130 2,318 --
INTEREST EXPENSE............................ 14 160 42 77 (110) 681 (606)
INTEREST INCOME............................. -- (2) -- -- -- (70) --
------ ------ ------ ------ ------- ---------- ----
Income (loss) before income taxes........ 234 7 273 39 2,240 1,707 606
INCOME TAX PROVISION (BENEFIT).............. 97 -- 1 -- 597 902 238
------ ------ ------ ------ ------- ---------- ----
NET INCOME (LOSS)........................... $ 137 $ 7 $ 272 $ 39 $ 1,643 $ 805 $368
====== ====== ====== ====== ======= ========== ====
PRO FORMA NET INCOME PER SHARE
(Note 8)................................... $ 0.19
==========
SHARES USED IN COMPUTING PRO FORMA NET
INCOME PER SHARE (Note 8).................. 4,333,342
==========
SUPPLEMENTAL PRO FORMA DATA (NOTE 9):
Operating income (loss), as reported....... $ 248 $ 165 $ 315 $ 116 $ -- $ 188 $ --
Pro forma operating adjustments (Note 9)... (1) (41) 151 67 -- 2,998 --
------ ------ ------ ------ ------- ---------- ----
247 124 466 183 -- 3,186 --
Pro forma amortization of intangibles...... 54 81 59 56 -- 868 --
------ ------ ------ ------ ------- ---------- ----
Pro forma operating income (loss).......... $ 193 $ 43 $ 407 $ 127 $ -- $ 2,318 $ --
====== ====== ====== ====== ======= ========== ====
<CAPTION>
PRO FORMA
AS ADJUSTED
------------
<S> <C>
REVENUES:
Services................................... $ 27,172
Products................................... 9,301
----------
36,473
----------
COST OF REVENUES:
Services................................... 17,090
Products................................... 6,160
Depreciation............................... 1,029
----------
24,279
----------
Gross profit............................. 12,194
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 8,218
EXECUTIVE MANAGEMENT COMPENSATION........... 458
FOUNDING COMPANIES TRANSACTION COSTS........ 332
AMORTIZATION OF INTANGIBLE ASSETS........... 868
----------
Operating income (loss).................. 2,318
INTEREST EXPENSE............................ 75
INTEREST INCOME............................. (70)
----------
Income (loss) before income taxes........ 2,313
INCOME TAX PROVISION (BENEFIT).............. 1,140
----------
NET INCOME (LOSS)........................... $ 1,173
==========
PRO FORMA NET INCOME PER SHARE
(Note 8)................................... $ .24
==========
SHARES USED IN COMPUTING PRO FORMA NET
INCOME PER SHARE (Note 8).................. 4,985,956
==========
SUPPLEMENTAL PRO FORMA DATA (NOTE 9):
Operating income (loss), as reported....... $ 188
Pro forma operating adjustments (Note 9)... 2,998
----------
3,186
Pro forma amortization of intangibles...... 868
----------
Pro forma operating income (loss).......... $ 2,318
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
IMAGEMAX, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL FINANCIAL STATEMENTS (NOTES 1 AND 2)
--------------------------------------------------------------
CODALEX I(2)
IMAGEMAX AMMCORP GROUP DATALINK DOCUTECH SOLUTIONS
-------- ------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Services........................................ $ -- $4,081 $1,526 $1,762 $ 866 $1,839
Products........................................ -- -- 1,458 744 908 1,298
----- ------ ------ ------ ------ ------
-- 4,081 2,984 2,506 1,774 3,137
----- ------ ------ ------ ------ ------
COST OF REVENUES:
Services........................................ -- 2,599 983 1,180 380 721
Products........................................ -- -- 1,151 648 460 1,024
Depreciation.................................... -- 329 57 161 24 120
----- ------ ------ ------ ------ ------
-- 2,928 2,191 1,989 864 1,865
----- ------ ------ ------ ------ ------
Gross profit.................................. -- 1,153 793 517 910 1,272
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................................ -- 973 693 327 565 1,085
EXECUTIVE MANAGEMENT COMPENSATION................ -- -- -- -- -- --
AMORTIZATION OF INTANGIBLE ASSETS................ -- 162 1 -- -- --
----- ------ ------ ------ ------ ------
Operating income (loss)....................... -- 18 99 190 345 187
INTEREST EXPENSE................................. -- 250 54 75 13 72
INTEREST INCOME.................................. -- -- -- (1) -- (65)
----- ------ ------ ------ ------ ------
Income (loss) before income taxes............. -- (232) 45 116 332 180
INCOME TAX PROVISION (BENEFIT)................... -- 146 -- -- -- 68
----- ------ ------ ------ ------ ------
NET INCOME (LOSS)................................ $ -- $ (378) $ 45 $ 116 $ 332 $ 112
===== ====== ====== ====== ====== ======
PRO FORMA NET LOSS PER SHARE (NOTE 8)............
SHARES USED IN COMPUTING PRO FORMA NET LOSS PER
SHARE (NOTE 8)..................................
SUPPLEMENTAL PRO FORMA DATA (NOTE 9):
Operating income (loss), as reported............ $ -- $ 18 $ 99 $ 190 $ 345 $ 187
Pro forma operating adjustments (Note 9)........ (458) 269 (31) (10) (16) 73
----- ------ ------ ------ ------ ------
(458) 287 68 180 329 260
Pro forma amortization of intangibles........... -- 67 58 80 191 79
----- ------ ------ ------ ------ ------
Pro forma operating income (loss)............... $(458) $ 220 $ 10 $ 100 $ 138 $ 181
===== ====== ====== ====== ====== ======
<CAPTION>
HISTORICAL FINANCIAL STATEMENTS (NOTES 1 AND 2)
-----------------------------------------------------
PRO FORMA PRO FORMA
IMS IDS OMI SPAULDING TIMCO TPS ADJUSTMENTS COMBINED
------ ----- ------ --------- ------ ------ ----------- ----------
(NOTE 6)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Services........................................ $1,473 $ 941 $1,798 $3,608 $3,609 $1,506 $ (71) $ 22,938
Products........................................ 295 -- 986 2,918 -- 857 -- 9,464
------ ----- ------ ------ ------ ------ ------ ----------
1,768 941 2,784 6,526 3,609 2,363 (71) 32,402
------ ----- ------ ------ ------ ------ ------ ----------
COST OF REVENUES:
Services........................................ 1,230 698 1,434 2,239 2,376 1,004 102 14,946
Products........................................ 174 -- 525 2,016 -- 718 173 6,889
Depreciation.................................... 65 10 73 148 68 67 (61) 1,061
------ ----- ------ ------ ------ ------ ------ ----------
1,469 708 2,032 4,403 2,444 1,789 214 22,896
------ ----- ------ ------ ------ ------ ------ ----------
Gross profit.................................. 299 233 752 2,123 1,165 574 (285) 9,506
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................................ 495 326 518 2,393 880 486 (415) 8,326
EXECUTIVE MANAGEMENT COMPENSATION................ -- -- -- -- -- -- 458 458
AMORTIZATION OF INTANGIBLE ASSETS................ -- -- -- -- 34 -- 671 868
------ ----- ------ ------ ------ ------ ------ ----------
Operating income (loss)....................... (196) (93) 234 (270) 251 88 (999) (146)
INTEREST EXPENSE................................. 28 12 12 155 75 62 (91) 717
INTEREST INCOME.................................. (1) (2) -- (31) -- -- 26 (74)
------ ----- ------ ------ ------ ------ ------ ----------
Income (loss) before income taxes............. (223) (103) 222 (394) 176 26 (934) (789)
INCOME TAX PROVISION (BENEFIT)................... (47) -- 83 -- 1 -- (329) (78)
------ ----- ------ ------ ------ ------ ------ ----------
NET INCOME (LOSS)................................ $ (176) $(103) $ 139 $ (394) $ 175 $ 26 $ (605) $ (711)
====== ===== ====== ====== ====== ====== ====== ==========
PRO FORMA NET LOSS PER SHARE (NOTE 8)............ $ (.16)
==========
SHARES USED IN COMPUTING PRO FORMA NET LOSS PER
SHARE (NOTE 8).................................. 4,333,342
==========
SUPPLEMENTAL PRO FORMA DATA (NOTE 9):
Operating income (loss), as reported............ $ (196) $ (93) $ 234 $ (270) $ 251 $ 88 $ -- $ 853
Pro forma operating adjustments (Note 9)........ (8) 66 (14) (144) 87 55 -- (131)
------ ----- ------ ------ ------ ------ ------ ----------
(204) (27) 220 (414) 338 143 -- 722
Pro forma amortization of intangibles........... 65 78 54 81 59 56 -- 868
------ ----- ------ ------ ------ ------ ------ ----------
Pro forma operating income (loss)............... $ (269) $(105) $ 166 $ (495) $ 279 $ 87 $ -- $ (146)
====== ===== ====== ====== ====== ====== ====== ==========
<CAPTION>
POST MERGER PRO FORMA
ADJUSTMENTS AS ADJUSTED
----------- -----------
(NOTE 6)
<S> <C> <C>
REVENUES:
Services........................................ $ -- $ 22,938
Products........................................ -- 9,464
---- --------
-- 32,402
---- --------
COST OF REVENUES:
Services........................................ -- 14,946
Products........................................ -- 6,889
Depreciation.................................... -- 1,061
---- --------
-- 22,896
---- --------
Gross profit.................................. -- 9,506
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................................ -- 8,326
EXECUTIVE MANAGEMENT COMPENSATION................ -- 458
AMORTIZATION OF INTANGIBLE ASSETS................ -- 868
---- --------
Operating income (loss)....................... -- (146)
INTEREST EXPENSE................................. (653) 64
INTEREST INCOME.................................. -- (74)
---- --------
Income (loss) before income taxes............. 653 (136)
INCOME TAX PROVISION (BENEFIT)................... 256 178
---- --------
NET INCOME (LOSS)................................ $397 $ (314)
==== ========
PRO FORMA NET LOSS PER SHARE (NOTE 8)............ $ (.06)
========
SHARES USED IN COMPUTING PRO FORMA NET LOSS PER
SHARE (NOTE 8).................................. 4,985,956
========
SUPPLEMENTAL PRO FORMA DATA (NOTE 9):
Operating income (loss), as reported............ $ -- $ 853
Pro forma operating adjustments (Note 9)........ -- (131)
---- --------
-- 722
Pro forma amortization of intangibles........... -- 868
---- --------
Pro forma operating income (loss)............... $ -- $ (146)
==== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
IMAGEMAX, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL FINANCIAL STATEMENTS (NOTES 1 AND 2)
--------------------------------------------------------------
CODALEX I(2)
IMAGEMAX AMMCORP GROUP DATALINK DOCUTECH SOLUTIONS
-------- ------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Services....................................... $ -- $5,573 $2,404 $2,286 $1,249 $2,384
Products....................................... -- -- 1,653 865 1,073 1,575
----- ------ ------ ------ ------ ------
-- 5,573 4,057 3,151 2,322 3,959
----- ------ ------ ------ ------ ------
COST OF REVENUES:
Services....................................... -- 3,381 1,814 1,593 501 1,023
Products....................................... -- -- 1,193 773 584 1,229
Depreciation................................... -- 446 88 218 31 157
----- ------ ------ ------ ------ ------
-- 3,827 3,095 2,584 1,116 2,409
----- ------ ------ ------ ------ ------
Gross profit................................. -- 1,746 962 567 1,206 1,550
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES....................................... 23 1,419 1,082 467 747 1,673
EXECUTIVE MANAGEMENT COMPENSATION............... -- -- -- -- -- --
AMORTIZATION OF INTANGIBLE ASSETS............... -- 208 2 -- -- --
----- ------ ------ ------ ------ ------
Operating income (loss)...................... (23) 119 (122) 100 459 (123)
INTEREST EXPENSE................................ -- 344 76 107 16 95
INTEREST INCOME/OTHER........................... -- -- -- (2) (3) (94)
----- ------ ------ ------ ------ ------
Income (loss) before income taxes............ (23) (225) (198) (5) 446 (124)
INCOME TAX PROVISION (BENEFIT).................. -- 44 45 -- -- (59)
----- ------ ------ ------ ------ ------
NET INCOME (LOSS)............................... $ (23) $ (269) $ (243) $ (5) $ 446 $ (65)
===== ====== ====== ====== ====== ======
PRO FORMA NET LOSS PER SHARE (NOTE 8)...........
SHARES USED IN COMPUTING PRO FORMA NET LOSS PER
SHARE (NOTE 8).................................
SUPPLEMENTAL PRO FORMA DATA (NOTE 9):
Operating income (loss), as reported........... $ (23) $ 119 $ (122) $ 100 $ 459 $ (123)
Pro forma operating adjustments (Note 9)....... (610) 409 (37) 3 (39) 386
----- ------ ------ ------ ------ ------
(633) 528 (159) 103 420 263
Pro forma amortization of intangibles.......... -- 89 77 106 255 105
----- ------ ------ ------ ------ ------
Pro forma operating income (loss).............. $(633) $ 439 $ (236) $ (3) $ 165 $ 158
===== ====== ====== ====== ====== ======
<CAPTION>
HISTORICAL FINANCIAL STATEMENTS (NOTES 1 AND 2)
------------------------------------------------------
PRO FORMA PRO FORMA
IMS IDS OMI SPAULDING TIMCO TPS ADJUSTMENTS COMBINED
------ ------ ------ --------- ------ ------ ----------- ----------
(NOTE 7)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Services....................................... $1,935 $1,431 $2,385 $4,862 $4,991 $2,137 $ (84) $ 31,553
Products....................................... 357 -- 1,281 3,831 -- 1,078 (10) 11,703
------ ------ ------ ------ ------ ------ ------- ----------
2,292 1,431 3,666 8,693 4,991 3,215 (94) 43,256
------ ------ ------ ------ ------ ------ ------- ----------
COST OF REVENUES:
Services....................................... 1,564 1,017 1,996 2,583 3,276 1,371 148 20,267
Products....................................... 258 -- 748 3,044 -- 921 218 8,968
Depreciation................................... 84 15 107 190 76 77 (81) 1,408
------ ------ ------ ------ ------ ------ ------- ----------
1,906 1,032 2,851 5,817 3,352 2,369 285 30,643
------ ------ ------ ------ ------ ------ ------- ----------
Gross profit................................. 386 399 815 2,876 1,639 846 (379) 12,613
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES....................................... 604 518 675 3,017 1,181 752 (960) 11,198
EXECUTIVE MANAGEMENT COMPENSATION............... -- -- -- -- -- -- 610 610
AMORTIZATION OF INTANGIBLE ASSETS............... -- -- -- -- 42 -- 906 1,158
------ ------ ------ ------ ------ ------ ------- ----------
Operating income (loss)...................... (218) (119) 140 (141) 416 94 (935) (353)
INTEREST EXPENSE................................ 37 14 16 205 99 84 (129) 964
INTEREST INCOME/OTHER........................... (2) (2) 11 (32) -- -- 26 (98)
------ ------ ------ ------ ------ ------ ------- ----------
Income (loss) before income taxes............ (253) (131) 113 (314) 317 10 (832) (1,219)
INCOME TAX PROVISION (BENEFIT).................. (53) 5 37 -- -- -- (189) (170)
------ ------ ------ ------ ------ ------ ------- ----------
NET INCOME (LOSS)............................... $ (200) $ (136) $ 76 $ (314) $ 317 $ 10 $ (643) $ (1,049)
====== ====== ====== ====== ====== ====== ======= ==========
PRO FORMA NET LOSS PER SHARE (NOTE 8)........... $ (0.24)
==========
SHARES USED IN COMPUTING PRO FORMA NET LOSS PER
SHARE (NOTE 8)................................. 4,333,342
==========
SUPPLEMENTAL PRO FORMA DATA (NOTE 9):
Operating income (loss), as reported........... $ (218) $ (119) $ 140 $ (141) $ 416 $ 94 $ -- $ 582
Pro forma operating adjustments (Note 9)....... (9) 78 38 (181) 105 80 -- 223
------ ------ ------ ------ ------ ------ ------- ----------
(227) (41) 178 (322) 521 174 -- 805
Pro forma amortization of intangibles.......... 86 107 71 108 79 75 -- 1,158
------ ------ ------ ------ ------ ------ ------- ----------
Pro forma operating income (loss).............. $ (313) $ (148) $ 107 $ (430) $ 442 $ 99 $ -- $ (353)
====== ====== ====== ====== ====== ====== ======= ==========
<CAPTION>
POST MERGER PRO FORMA
ADJUSTMENTS AS ADJUSTED
----------- -----------
(NOTE 7)
<S> <C> <C>
REVENUES:
Services....................................... $ -- $ 31,553
Products....................................... -- 11,703
---- ----------
-- 43,256
---- ----------
COST OF REVENUES:
Services....................................... -- 20,267
Products....................................... -- 8,968
Depreciation................................... -- 1,408
---- ----------
-- 30,643
---- ----------
Gross profit................................. -- 12,613
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES....................................... -- 11,198
EXECUTIVE MANAGEMENT COMPENSATION............... -- 610
AMORTIZATION OF INTANGIBLE ASSETS............... -- 1,158
---- ----------
Operating income (loss)...................... -- (353)
INTEREST EXPENSE................................ (903) 61
INTEREST INCOME/OTHER........................... -- (98)
---- ----------
Income (loss) before income taxes............ 903 (316)
INCOME TAX PROVISION (BENEFIT).................. 354 184
---- ----------
NET INCOME (LOSS)............................... $549 $ (500)
==== ==========
PRO FORMA NET LOSS PER SHARE (NOTE 8)........... $ (.10)
==========
SHARES USED IN COMPUTING PRO FORMA NET LOSS PER
SHARE (NOTE 8)................................. 4,985,956
==========
SUPPLEMENTAL PRO FORMA DATA (NOTE 9):
Operating income (loss), as reported........... $ -- $ 582
Pro forma operating adjustments (Note 9)....... -- 223
---- ----------
-- 805
Pro forma amortization of intangibles.......... -- 1,158
---- ----------
Pro forma operating income (loss).............. $ -- $ (353)
==== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
IMAGEMAX, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
ImageMax was founded in November 1996 to become a leading national,
single-source provider of integrated document management solutions. ImageMax has
conducted no operations to date and will acquire the Founding Companies
concurrently with and as a condition of the closing of this Offering.
The historical financial statements reflect the financial position and
results of operations of the Founding Companies and were derived from the
respective Founding Companies' financial statements. The financial data for the
Founding Companies (excluding I(2) Solutions) included in the pro forma combined
balance sheet are as of September 30, 1997 and in the pro forma combined
statements of operations are for the year ended December 31, 1996 and for the
nine months ended September 30, 1996 and 1997. The financial data for I(2)
Solutions are as of July 31, 1997 and for the year ended October 31, 1996 and
the nine months ended July 31, 1996 and 1997. The historical financial data
included in the pro forma financial statements for DataLink, DocuTech and TIMCO
as of December 31, 1996 and for the year ended December 31, 1996 are derived
from audited financial statements appearing elsewhere in this Prospectus. The
historical financial data included in the pro forma combined financial
statements for I(2) Solutions as of October 31, 1996 and for the year ended
October 31, 1996 are also derived from audited financial statements appearing
elsewhere in this Prospectus. The additional historical financial data included
in the pro forma combined financial statements for DataLink, Docutech, TIMCO,
I(2) Solutions and the other Founding Companies have been derived from unaudited
financial statements. The audited historical financial statements included
elsewhere herein have been included in accordance with Securities and Exchange
Commission ("SEC") Regulation S-X, Rule 3-05.
2. ACQUISITION OF FOUNDING COMPANIES:
Concurrently with and as a condition to the closing of this Offering,
ImageMax will acquire by merger or purchase all of the outstanding capital stock
or substantially all of the net assets of the Founding Companies. The
acquisitions will be accounted for using the purchase method of accounting, with
ImageMax treated as the accounting acquirer.
The following table sets forth the consideration to be paid (assuming the
Acquisitions occurred on September 30, 1997) in (a) cash and (b) shares of
Common Stock to each of the Founding Companies or their shareholders. For
purposes of computing the estimated purchase price for accounting purposes, the
value of the shares is determined using an estimated fair value of $11.05 per
share (or $13.1 million), which represents a discount of 15% from the assumed
initial public offering price of $13.00 per share, due to the one-year
contractual restriction on the sale and transferability of the shares issued.
In addition, the shares have not been registered under the Securities Act of
1933, the holders have no demand registration rights and sales will be subject
to the volume and other limitations of Rule 144 under the Securities Act of
1933. If a 10% discount were used, annual pro forma goodwill amortization would
increase by approximately $25,000. The total estimated purchase price of $39.0
million for the Acquisitions includes $0.5 million of transaction costs and is
based upon preliminary estimates, subject to certain purchase price adjustments
at and following closing. Based on the estimated purchase price of $39.0
million, approximately $4.0 million will be allocated to acquired in-process
research and development and will be charged to expense upon the consummation of
the Acquisitions (see Note 2 of ImageMax Financial Statements). The remaining
amount of intangible assets of approximately $31.2 million includes
approximately $30.4 million of goodwill and $0.8 million of developed
technology.
F-8
<PAGE>
IMAGEMAX, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITION OF FOUNDING COMPANIES: -- (CONTINUED)
<TABLE>
<CAPTION>
ESTIMATED
SHARES OF FAIR VALUE
CASH COMMON STOCK OF SHARES
------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AMMCORP........................... $ 454 71,923 $ 795
CodaLex Group..................... 1,387 78,412 866
DataLink.......................... 3,250 38,462 425
DocuTech.......................... 5,446 288,750 3,191
I(2) Solutions.................... 1,264 261,538 2,890
IMS............................... 2,112 61,538 680
IDS............................... 1,520 165,000 1,823
OMI............................... 1,398 117,692 1,300
Spaulding......................... 4,295 -- --
Timco............................. 2,721 59,615 659
TPS............................... 1,583 41,538 459
------- --------- --------
$25,430 1,184,468 $ 13,088
======= ========= ========
</TABLE>
F-9
<PAGE>
IMAGEMAX, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. UNAUDITED PRO FORMA MERGER ADJUSTMENTS TO THE SEPTEMBER 30, 1997 BALANCE
SHEET:
The following table summarizes the unaudited pro forma merger combined
adjustments to the September 30, 1997 balance sheet (in thousands):
<TABLE>
<CAPTION>
PRO FORMA MERGER ADJUSTMENTS
----------------------------------------------------------
(A) (B) (C) (D) (E) TOTAL
ASSETS ------- ----- ------- ------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents........................... $ -- $ -- $ (367) $ (650) $ -- $(1,017)
Property and equipment, net......................... -- (663) (965) -- -- (1,628)
Intangibles, net.................................... -- (91) (1,954) 32,887 -- 30,842
Other............................................... -- -- (154) -- -- (154)
------- ----- ------- ------- ------ -------
Total assets.................................. $ -- $(754) $(3,440) $32,237 $ -- $28,043
======= ===== ======= ======= ====== =======
LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIT)
Current portion of long-term debt................... $ -- $ -- $ (283) $ -- $ -- $ (283)
Accounts payable and accrued expenses............... -- (34) (2,657) 500 -- (2,191)
Pro forma cash due Founding Companies............... 25,430 -- -- -- -- 25,430
------- ----- ------- ------- ------ -------
Total current liabilities..................... 25,430 (34) (2,940) 500 -- 22,956
Long-term debt, net of current maturities........... -- (720) (500) -- -- (1,220)
------- ----- ------- ------- ------ -------
Total liabilities............................. 25,430 (754) (3,440) 500 -- 21,736
------- ----- ------- ------- ------ -------
Shareholders' equity (deficit):
Preferred stock................................... -- -- -- (60) (2,719) (2,779)
Common stock...................................... -- -- -- 12,023 2,719 14,742
Additional paid-in capital........................ (25,430) -- -- 24,137 -- (1,293)
Retained earnings (deficit)....................... -- -- -- (7,420) -- (7,420)
Treasury stock.................................... -- -- -- 3,057 -- 3,057
------- ----- ------- ------- ------ -------
Total shareholders' equity (deficit).......... (25,430) -- -- 31,737 -- 6,307
------- ----- ------- ------- ------ -------
Total liabilities and shareholders' equity
(deficit).................................. $ -- $(754) $(3,440) $32,237 $ -- $28,043
======= ===== ======= ======= ====== =======
</TABLE>
- ------------------
(a) Reflects the liability for the cash portion of the consideration to be paid
to the Founding Companies or their shareholders in connection with the
Acquisitions, including estimated purchase price adjustments based primarily
on required amounts of shareholders' equity and working capital.
(b) Reflects the elimination of a previously capitalized lease, which will
become an operating lease upon the closing of one of the Acquisitions.
(c) Reflects assets excluded from net assets acquired in certain acquisitions
such as facilities and their related debt, liabilities related to deferred
and other compensation, a receivable from a shareholder, and specific cash
balances.
(d) Reflects the Acquisitions and the allocation of the purchase price using the
purchase method of accounting. The purchase price is estimated at $39.0
million, consisting of (i) $25.4 million in cash, (ii) 1,184,468 shares of
Common Stock valued at $11.05 per share (or $13.1 million) and (iii)
estimated transaction costs of $0.5 million (see Note 2). Also reflects non-
cash charges to retained earnings of $4.0 million for acquired in-process
research and development (see Note 2 to ImageMax Financial Statements) and a
$0.5 million non-recurring charge related to a fee payable in the fourth
quarter upon closing of the Offering.
(e) Reflects the conversion of Series A Preferred Stock into 443,489 shares of
Common Stock.
F-10
<PAGE>
IMAGEMAX, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. UNAUDITED PRO FORMA POST MERGER ADJUSTMENTS TO THE SEPTEMBER 30, 1997 BALANCE
SHEET:
The following table summarizes the unaudited pro forma post merger
adjustments (which reflects the Offering activity) to the balance sheet as of
September 30, 1997 (in thousands).
<TABLE>
<CAPTION>
PRO FORMA POST MERGER ADJUSTMENTS
------------------------------------------
(A) (B) (C) TOTAL
ASSETS ------- -------- ------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents................................... $34,316 $(25,930) $(5,484) $ 2,902
Other....................................................... (1,987) -- -- (1,987)
------- -------- ------- -------
Total assets.......................................... $32,329 $(25,930) $(5,484) $ 915
======= ======== ======= =======
LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIT)
Current portion of long-term debt........................... $ -- $ -- $(4,281) $(4,281)
Accrued expenses............................................ (1,650) (500) -- (2,150)
Pro forma cash due Founding Companies....................... -- (25,430) -- (25,430)
Payable to shareholder/affiliate............................ -- -- (105) (105)
------- -------- ------- -------
Total current liabilities............................. (1,650) (25,930) (4,386) (31,966)
Long-term debt, net of current maturities................... -- -- (1,098) (1,098)
------- -------- ------- -------
Total liabilities..................................... (1,650) (25,930) (5,484) (33,064)
------- -------- ------- -------
Shareholders' equity (deficit):
Preferred stock........................................... -- -- -- --
Common stock.............................................. 34,479 -- -- 34,479
Retained earnings (deficit)............................... (500) -- -- (500)
Treasury stock............................................ -- -- -- --
------- -------- ------- -------
Total shareholders' equity (deficit).................. 33,979 -- -- 33,979
------- -------- ------- -------
Total liabilities and shareholders' equity
(deficit).......................................... $32,329 $(25,930) $(5,484) $ 915
======= ======== ======= =======
</TABLE>
- ------------------
(a) Reflects the net cash of $34.3 million from the sale of 3,100,000 shares of
Common Stock, primarily net of estimated offering costs of $3.0 million (net
of cash previously paid of $0.3 million, based on an assumed initial public
offering price of $13.00 per share). Offering costs primarily consist of
underwriting discounts and commissions, accounting fees, legal fees and
printing expenses and a $0.5 million fee paid to an entity owned by two
ImageMax officers to be paid upon completion of the Offering. Such fee will
be charged to the statement of operations upon the consummation of the
Offering.
(b) Reflects the payment of the cash consideration for the Acquisitions,
including estimated transaction costs.
(c) Reflects the use of a portion of the net proceeds of the Offering to repay
debt incurred by the Founding Companies.
F-11
<PAGE>
IMAGEMAX, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS -- NINE
MONTHS ENDED SEPTEMBER 30, 1997:
The following table summarizes the unaudited pro forma combined statements
of operations adjustments for the nine months ended September 30, 1997 (in
thousands):
<TABLE>
<CAPTION>
POST MERGER
PRO FORMA ADJUSTMENTS TOTAL ADJUSTMENTS TOTAL POST
---------------------------------------------- PRO FORMA ------------ MERGER
(A) (B) (C) (D) (E) (F) ADJUSTMENTS (G) (H) ADJUSTMENTS
---- ------ ------ ----- ----- ----- ----------- ---- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $(98) $ -- $ -- $ -- $ -- $ -- $ (98) $ -- $ -- $ --
Cost of revenues......... (98) -- -- 297 -- -- 199 -- -- --
Selling, general and
administrative
expense................ -- (2,494) (1,044) (17) -- -- (3,555) -- -- --
Executive compensation... -- -- 458 -- -- -- 458 -- -- --
Amortization............. -- -- -- -- 670 -- 670 -- -- --
---- ------ ------ ----- ----- ----- ------ ---- ----- ----
Operating income
(loss).......... -- 2,494 586 (280) (670) -- 2,130 -- -- --
Interest income.......... -- -- -- -- -- -- -- -- -- --
Interest expense......... -- -- -- (110) -- -- (110) (606) -- (606)
---- ------ ------ ----- ----- ----- ------ ---- ----- ----
Income (loss)
before income
taxes........... -- 2,494 586 (170) (670) -- 2,240 606 -- 606
Income tax provision..... -- -- -- -- -- 597 597 -- 238 238
---- ------ ------ ----- ----- ----- ------ ---- ----- ----
Net income
(loss).......... $ -- $2,494 $ 586 $(170) $(670) $(597) $1,643 $606 $(238) $368
==== ====== ====== ===== ===== ===== ====== ==== ===== ====
</TABLE>
- ------------------
(a) Reflects the elimination of intercompany activity among the Founding
Companies.
(b) Reflects the elimination of the non-recurring, non-cash charge of $2.5
million related to the compensation for accounting purposes on shares of
Common and Preferred Stock purchased by certain officers, directors and
Founding Companies' management (see Note 3 of ImageMax Financial Statements
of ImageMax).
(c) Reflects the reduction in salaries, bonuses and benefits to the owners of
the Founding Companies and ImageMax's executive management from an aggregate
total of $2.1 million to $1.1 million to which they have contractually
agreed, partially offset by compensation of $457,500 based upon employment
agreements with ImageMax's executive management. The pro forma reductions
vary in each pro forma period as the Founding Companies owners' actual
compensation expenses are different in each pro forma period presented.
These reductions in salaries, bonuses and benefits are in accordance with
the terms of employment agreements to be entered into pursuant to the
Acquisitions. Such employment agreements are primarily for three years,
contain restrictions related to competition and provide severance upon
termination in certain circumstances.
(d) Reflects the reduction in depreciation at two of the Founding Companies'
facilities, the elimination of interest expense on a capital lease and an
increase in rent expense (Rent Differential), as a result of certain
facilities excluded from the purchase transactions and new operating leases
to be entered into upon the closing of the Acquisitions.
(e) Reflects the amortization of goodwill to be recorded as a result of the
Acquisitions, using an estimated life of principally 30 years, and the
amortization of acquired developed technology over a seven-year estimated
life. Excludes a charge for acquired in-process research and development of
$4.0 million (see Note 2).
(f) Reflects the incremental provision for federal and state income taxes based
on the effective tax rate that would have resulted on a C Corporation basis.
(g) Reflects the elimination of interest expense resulting from the reduction of
debt utilizing the net proceeds of the Offering (see Note 4, Adjustment
(c)). All interest expense is eliminated because all debt will be repaid
upon the closing of the Offering.
(h) Reflects the incremental provision for federal and state income taxes based
on the effective tax rate that would have resulted on a C Corporation basis.
F-12
<PAGE>
IMAGEMAX, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS -- NINE
MONTHS ENDED SEPTEMBER 30, 1996:
The following table summarizes the unaudited pro forma combined statements
of operations adjustments for the nine months ended September 30, 1996 (in
thousands):
<TABLE>
<CAPTION>
POST MERGER
PRO FORMA ADJUSTMENTS TOTAL ADJUSTMENTS TOTAL POST
----------------------------------- PRO FORMA ------------ MERGER
(A) (B) (C) (D) (E) ADJUSTMENTS (F) (G) ADJUSTMENTS
---- ----- ----- ----- ---- ----------- ---- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................... $(71) $ -- $ -- $ -- $ -- $ (71) $ -- $ -- $ --
Cost of revenues............ (71) -- 285 -- -- 214 -- -- --
Selling, general and
administrative expense.... -- (398) (17) -- -- (415) -- -- --
Executive officer
compensation.............. -- 458 -- -- -- 458 -- -- --
Amortization................ -- -- -- 671 -- 671 -- -- --
---- ----- ----- ----- ---- ------ ---- ----- ----
Operating income
(loss)............. -- (60) (268) (671) -- (999) -- -- --
Interest income............. -- 26 -- -- -- 26 -- -- --
Interest expense............ -- -- (91) -- -- (91) (653) -- (653)
---- ----- ----- ----- ---- ------ ---- ----- ----
Income (loss) before
income taxes....... -- (86) (177) (671) -- (934) 653 -- 653
Income tax provision
(benefit)................. -- -- -- -- (329) (329) -- 256 256
---- ----- ----- ----- ---- ------ ---- ----- ----
Net income (loss)..... $ -- $ (86) $(177) $(671) $329 $ (605) $653 $(256) $397
==== ===== ===== ===== ==== ====== ==== ===== ====
</TABLE>
- ------------------
(a) Reflects the elimination of intercompany activity among the Founding
Companies.
(b) Reflects the reduction in salaries, bonuses and benefits to the owners of
the Founding Companies from an aggregate total of $1.5 million to $1.1
million to which they have contractually agreed, partially offset by
compensation of $457,500 based upon the employment agreements with
ImageMax's executive management. These reductions in salaries, bonuses and
benefits are in accordance with the terms of employment agreements to be
entered into pursuant to the Acquisitions. Such employment agreements are
primarily for three years, contain restrictions related to competition and
provide severance upon termination in certain circumstances. The adjustment
also reflects a reduction in interest income due to the elimination of the
Spaulding employee stock ownership plan benefit upon the Acquisition.
(c) Reflects the reduction in depreciation at two of the Founding Companies'
facilities, the elimination of interest expense on a capital lease and the
Rent Differential as a result of certain facilities excluded from the
purchase transaction and new operating leases to be entered into upon the
closing of the Acquisitions.
(d) Reflects the amortization of goodwill to be recorded as a result of the
Acquisitions, using an estimated life of principally 30 years, and the
amortization of acquired developed technology over a seven-year estimated
life. Excludes a charge for acquired in-process research and development of
$4.0 million (see Note 2).
(e) Reflects the incremental provision for federal and state income taxes based
on the effective tax rate that would have resulted on a C Corporation basis.
(f) Reflects the elimination of interest expense resulting from the reduction of
debt from the net proceeds of the Offering (see Note 4, Adjustment (c)). All
interest expense is eliminated because all debt will be repaid upon the
closing of the Offering.
(g) Reflects the incremental provision for federal and state income taxes based
on the effective tax rate that would have resulted on a C Corporation basis.
F-13
<PAGE>
IMAGEMAX, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS -- YEAR
ENDED DECEMBER 31, 1996:
The following table summarizes the unaudited pro forma combined statements
of operations adjustments for the year ended December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
POST MERGER
PRO FORMA ADJUSTMENTS TOTAL ADJUSTMENTS TOTAL POST
---------------------------------- PRO FORMA ------------ MERGER
(A) (B) (C) (D) (E) ADJUSTMENTS (F) (G) ADJUSTMENTS
---- ---- ----- ----- ---- ----------- ---- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... $(94) $ -- $ -- $ -- $ -- $ (94) $ -- $ -- $ --
Cost of revenues............. (94) -- 379 -- -- 285 -- -- --
Selling, general and
administrative expenses.... -- (920) (40) -- -- (960) -- -- --
Executive compensation....... -- 610 -- -- -- 610 -- -- --
Amortization................. -- -- -- 906 -- 906 -- -- --
---- ---- ----- ----- ---- ----- ---- ----- ----
Operating income
(loss).............. -- 310 (339) (906) -- (935) -- -- --
Interest income.............. -- 26 -- -- -- 26 -- -- --
Interest expense............. -- -- (129) -- -- (129) (903) -- (903)
---- ---- ----- ----- ---- ----- ---- ----- ----
Income (loss) before
income taxes........ -- 284 (210) (906) -- (832) 903 -- 903
Income tax provisions
(benefit).................. -- -- -- -- (189) (189) -- 354 354
---- ---- ----- ----- ---- ----- ---- ----- ----
Net income (loss)...... $ -- $284 $(210) $(906) $189 $(643) $903 $(354) $549
==== ==== ===== ===== ==== ===== ==== ===== ====
</TABLE>
- ------------------
(a) Reflects the elimination of intercompany activity among the Founding
Companies.
(b) Reflects the reduction in salaries, bonuses and benefits to the owners of
the Founding Companies from an aggregate total of $2.3 million to $1.4
million to which they have contractually agreed, partially offset by
compensation of $610,000 based upon employment agreements with ImageMax's
executive management. These reductions in salaries, bonuses and benefits are
in accordance with the terms of employment agreements to be entered into
pursuant to the Acquisitions. Such employment agreements are primarily for
three years, contain restrictions related to competition and provide
severance upon termination in certain circumstances. The adjustment also
reflects the reduction in interest income due to the elimination of the
Spaulding employee stock ownership benefit plan upon the Acquisition.
(c) Reflects the reduction in depreciation at two of the Founding Companies'
facilities, the elimination of interest expense on capital leases and the
Rent Differential, as a result of certain facilities excluded from the
transactions and new operating leases to be entered into upon the closing of
the Acquisitions.
(d) Reflects the amortization of goodwill to be recorded as a result of the
Acquisitions, using an estimated life of principally 30 years, and the
amortization of acquired developed technology over a seven-year estimated
life. Excludes a charge for acquired in-process research and development of
$4.0 million (see Note 2).
(e) Reflects the incremental provision for federal and state income taxes based
on the effective tax rate that would have resulted on a C Corporation basis.
Exclude any income tax penalties (see Note 6 of the Financial Statements of
I(2) Solutions).
(f) Reflects the elimination of interest expense resulting from the reduction of
debt from the net proceeds of the Offering (see Note 4, Adjustment (c)). All
interest expense is eliminated because all debt will be repaid upon the
closing of the Offering.
(g) Reflects the incremental provision for federal and state income taxes based
on the effective tax rate that would have resulted on a C Corporation basis.
F-14
<PAGE>
IMAGEMAX, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. PRO FORMA NET INCOME (LOSS) PER SHARE
The shares used in computing pro forma net income (loss) per share includes
the following:
Outstanding shares of ImageMax Common Stock.............. 710,770
Common shares to be issued upon conversion of ImageMax
Series A Preferred Stock............................... 443,489
Shares issued to owners of the Founding Companies........ 1,184,468
Shares issued in the Offering necessary to pay the cash
portion of the Acquisitions' consideration (including
expenses).............................................. 1,994,615
---------
Pro Forma combined shares.............................. 4,333,342
Shares issued in the Offering, necessary to pay the
Founding Companies' indebtedness and expenses of the
Offering............................................... 652,614
---------
Pro Forma combined as adjusted shares.................. 4,985,956
=========
The remaining shares to be sold in the Offering have been excluded.
Outstanding options have been excluded since all such options are exercisable at
the Offering price.
F-15
<PAGE>
IMAGEMAX, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. PRO FORMA OPERATING ADJUSTMENTS
Included in the pro forma statements of operations is supplemental pro
forma data which allocates each pro forma adjustment to each Founding Company.
The following pro forma operating adjustments are presented to provide
additional information to better understand the pro forma adjustments
components:
<TABLE>
<CAPTION>
CODALEX I(2)
PRO FORMA OPERATING ADJUSTMENTS DESCRIPTION IMAGEMAX AMMCORP GROUP DATALINK DOCUTECH SOLUTIONS IMS IDS OMI
- ------------------------------------------- --------- ------- ------- -------- -------- --------- --- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1997
1. Elimination of Intercompany Activity
(Note 5, adjustment (a))............. $ -- $ 28 $ -- $ 7 $(60) $ -- $-- $(38) $ --
2. Special Compensation Charge (Note 5,
adjustment (b))...................... 2,494 -- -- -- -- -- -- -- --
3. Compensation Differential (Note 5,
adjustment (c))...................... (357) 65 (3) 68 (21) 137 (8) 463 10
4. Rent Differential (Note 5, adjustment
(d))................................. -- -- (1) (43) -- (89) -- 3 (11)
5. Elimination of Intangible Amortization
(Note 5, adjustment (e))............. -- 177 -- -- -- -- -- -- --
------- ---- ---- ---- ---- ---- --- ---- ----
$ 2,137 $270 (4) $ 32 $(81) $ 48 $(8) $428 $ (1)
======= ==== ==== ==== ==== ==== === ==== ====
NINE MONTHS ENDED SEPTEMBER 30, 1996
1. Elimination of Intercompany Activity
(Note 6, adjustment (a))............. $ -- $ -- $ -- $ -- $(23) $ -- $-- $(48) $ --
2. Compensation Differential (Note 6,
adjustment (b))...................... (458) 107 (18) 39 7 127 (8) 111 --
3. Rent Differential (Note 6, adjustment
(c))................................. -- -- (14) (49) -- (54) -- 3 (14)
4. Elimination of Intangible Amortization
(Note 6, adjustment (d))............. -- 162 1 -- -- -- -- -- --
------- ---- ---- ---- ---- ---- --- ---- ----
$ (458) $269 $(31) $(10) $(16) $ 73 $(8) $ 66 $(14)
======= ==== ==== ==== ==== ==== === ==== ====
YEAR ENDED DECEMBER 31, 1996
1. Elimination of Intercompany Activity
(Note 7, adjustment (a))............. $ -- $ -- $ -- $ -- $(33) $ -- $-- $(61) $ --
2. Compensation Differential (Note 7,
adjustment (b))...................... (610) 201 (22) 66 (6) 442 (9) 135 57
3. Rent Differential (Note 7, adjustment
(c))................................. -- -- (17) (63) -- (56) -- 4 (19)
4. Elimination of Intangible Amortization
(Note 7, adjustment (d))............. -- 208 2 -- -- -- -- -- --
------- ---- ---- ---- ---- ---- --- ---- ----
$ (610) $409 $(37) $ 3 $(39) $386 (9) $ 78 $ 38
======= ==== ==== ==== ==== ==== === ==== ====
<CAPTION>
PRO FORMA OPERATING ADJUSTMENTS DESCRIPTION SPAULDING TIMCO TPS TOTAL
- ------------------------------------------- --------- ----- ---- -------
<S> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1997
1. Elimination of Intercompany Activity
(Note 5, adjustment (a))............. $ -- $ 3 $60 $ --
2. Special Compensation Charge (Note 5,
adjustment (b))...................... -- -- -- 2,494
3. Compensation Differential (Note 5,
adjustment (c))...................... 98 127 7 586
4. Rent Differential (Note 5, adjustment
(d))................................. (139) -- -- (280)
5. Elimination of Intangible Amortization
(Note 5, adjustment (e))............. -- 21 -- 198
----- ---- --- -------
(41) $151 $67 $ 2,998
===== ==== === =======
NINE MONTHS ENDED SEPTEMBER 30, 1996
1. Elimination of Intercompany Activity
(Note 6, adjustment (a))............. $ -- $ 23 $48 $ --
2. Compensation Differential (Note 6,
adjustment (b))...................... (4) 30 7 (60)
3. Rent Differential (Note 6, adjustment
(c))................................. (140) -- -- (268)
4. Elimination of Intangible Amortization
(Note 6, adjustment (d))............. -- 34 -- 197
----- ---- --- -------
$(144) $ 87 $55 $ (131)
===== ==== === =======
YEAR ENDED DECEMBER 31, 1996
1. Elimination of Intercompany Activity
(Note 7, adjustment (a))............. $ -- $ 23 $71 $ --
2. Compensation Differential (Note 7,
adjustment (b))...................... 7 40 9 310
3. Rent Differential (Note 7, adjustment
(c))................................. (188) -- -- (339)
4. Elimination of Intangible Amortization
(Note 7, adjustment (d))............. -- 42 -- 252
----- ---- --- -------
$(181) $105 $80 $ 223
===== ==== === =======
</TABLE>
F-16
<PAGE>
After the reverse stock split discussed in Note 8 to the Financial Statements is
effected, we will be in a position to render the following report.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
October 24, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ImageMax, Inc.:
We have audited the accompanying balance sheets of ImageMax, Inc. (a
Pennsylvania Corporation) as of December 31, 1996 and June 30, 1997 and the
related statements of operations, shareholders' equity and cash flows for the
period from inception (November 12, 1996) to December 31, 1996 and the six
months ended June 30, 1997. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ImageMax, Inc. as of
December 31, 1996 and June 30, 1997 and the results of its operations and its
cash flows for the period from inception (November 12, 1996) to December 31,
1996 and the six months ended June 30, 1997 in conformity with generally
accepted accounting principles.
Philadelphia, Pa.,
September 11, 1997 (except with
respect to the matter discussed
in Note 8 as to which the
date is , 1997)
F-17
<PAGE>
IMAGEMAX, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 JUNE 30, 1997 1997
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS......................... $61,647 $ 14,973 $1,361,682
STOCK SUBSCRIPTION RECEIVABLE..................... -- 230,000 --
PROPERTY AND EQUIPMENT............................ -- -- 4,707
DEFERRED OFFERING COSTS........................... -- 24,802 1,986,816
------- ---------- ----------
$61,647 $ 269,775 $3,353,205
======= ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
ACCRUED EXPENSES.................................. $ 4,781 $ 45,066 $1,911,721
------- ---------- ----------
SHAREHOLDERS' EQUITY:
Series A Preferred Stock, no par value,
10,000,000 shares authorized, 150,000,
255,000 and 524,185 shares issued and
outstanding at December 31, 1996, June 30,
1997 and September 30, 1997.................. 73,500 578,500 2,719,000
Common Stock, no par value, 40,000,000 shares
authorized, 550,000, 647,308 and 710,770
shares issued and outstanding at December 31,
1996, June 30, 1997 and September 30, 1997... 6,500 1,271,500 1,566,500
Accumulated deficit............................. (23,134) (1,625,291) (2,844,016)
------- ---------- ----------
Total shareholders' equity................ 56,866 224,709 1,441,484
------- ---------- ----------
$61,647 $ 269,775 $3,353,205
======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE>
IMAGEMAX, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FROM
INCEPTION
(NOVEMBER 12, SIX MONTHS NINE MONTHS
1996) TO ENDED ENDED
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997
------------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... $ 23,274 $ 167,597 $ 330,916
SPECIAL COMPENSATION CHARGE..................... -- 1,435,000 2,494,000
INTEREST INCOME................................. (140) (440) (4,034)
-------- ----------- -----------
NET LOSS........................................ $(23,134) $(1,602,157) $(2,820,882)
======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE>
IMAGEMAX, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK COMMON STOCK TOTAL
--------------------- --------------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY
-------- ---------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, NOVEMBER 12, 1996
(date of inception)........... -- $ -- -- $ -- $ -- $ --
Sales of Preferred and Common
Stock....................... 150,000 73,500 550,000 6,500 -- 80,000
Net loss...................... -- -- -- -- (23,134) (23,134)
-------- ---------- -------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1996...... 150,000 73,500 550,000 6,500 (23,134) 56,866
Sales of Preferred and Common
Stock....................... 105,000 505,000 97,308 1,265,000 -- 1,770,000
Net loss...................... -- -- -- -- (1,602,157) (1,602,157)
-------- ---------- -------- ---------- ----------- ----------
BALANCE, JUNE 30, 1997.......... 255,000 578,500 647,308 1,271,500 (1,625,291) 224,709
Sales of Preferred and Common
Stock (unaudited)........... 269,125 2,140,500 63,462 295,000 -- 2,435,500
Net loss (unaudited).......... -- -- -- -- (1,218,725) (1,218,725)
-------- ---------- -------- ---------- ----------- ----------
BALANCE, SEPTEMBER 30, 1997
(UNAUDITED)................... 524,125 $2,719,000 710,770 $1,566,500 $(2,844,016) $1,441,484
======== ========== ======== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
IMAGEMAX, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FROM INCEPTION
(NOVEMBER 12,
1996) TO SIX MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997 SEPTEMBER 30, 1997
----------------- ---------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................. $(23,134) $(1,602,157) $(2,820,882)
Special compensation charge........... -- 1,435,000 2,494,000
Change in accrued expenses............ 4,781 40,285 256,940
-------- ----------- -----------
Net cash used in operating
activities...................... (18,353) (126,872) (69,942)
-------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment... -- -- (4,707)
Increase in deferred acquisition
costs.............................. -- (24,802) (336,816)
-------- ----------- -----------
Net cash used in operating
activities...................... -- (24,802) (341,523)
-------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of Common and
Preferred Stock.................... 80,000 105,000 1,711,500
-------- ----------- -----------
NET INCREASE (DECREASED) IN CASH........ 61,647 (46,674) 1,300,035
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................ -- 61,647 61,647
-------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD................................ $ 61,647 $ 14,973 $ 1,361,682
======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
IMAGEMAX, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
1. BACKGROUND:
ImageMax Inc. ("ImageMax") was incorporated in Pennsylvania on November 12,
1996. ImageMax was formed to become a leading national, single-source provider
of integrated document management solutions (see Note 2).
ImageMax has conducted no operations to date and has entered into
agreements to acquire certain businesses discussed in Note 2. These businesses
have been operating independently, and ImageMax may not be able to successfully
integrate these businesses and their operations, employees and management. Given
the nature of ImageMax, it is and will be subject to many risks, including but
not limited to, (i) an absence of combined operating history, (ii) the potential
inability to manage growth, (iii) risks generally associated with acquisitions
including the implementation of other acquisitions, (iv) possible fluctuations
in quarterly results, (v) reliance on certain markets, and (vi) reliance on key
personnel.
2. ACQUISITIONS AND PUBLIC OFFERING:
In September 1997, ImageMax entered into agreements to acquire Utz Medical
Enterprises, Inc., the parent of AMMCORP, by merger, CMC by merger, Laser
Graphics by merger, I(3) by net asset acquisition, DDS by merger, DTI by net
asset acquisition, I(2) Solutions by merger, IMS by stock acquisition, IDS by
merger, OMI by merger, TPS by stock acquisition, DataLink by net asset
acquisition, Spaulding (a wholly-owned subsidiary of SEMCO Industries, Inc.) by
net asset acquisition, and TIMCO by net asset acquisition (together, the
"Founding Companies"). These acquisitions (the "Acquisitions") will occur
simultaneously with the closing of ImageMax's initial public offering (the
"Offering") and will be accounted for using the purchase method of accounting.
ImageMax has been identified as the accounting acquirer for financial statement
presentation purposes. The estimated total purchase price of the Founding
Companies is $39.0 million, which consists of: (i) $25.4 million in cash to be
paid to the Founding Companies or their shareholders (the "Sellers") upon the
consummation of the Offering; (ii) the $13.1 million estimated fair value of
1,184,468 shares of Common Stock to be issued to the Sellers; and (iii)
estimated transaction costs of $0.5 million. For purposes of computing the
estimated purchase price for accounting purposes, the value of the shares is
determined using an estimated fair value of $11.05 per share (or $13.1 million),
which represents a discount of 15% from the assumed initial public offering
price of $13.00, due to the one-year restrictions on the sale and
transferability of the shares issued. In addition, the shares have not been
registered under the Securities Act of 1933, the holders have no demand
registration rights and sales will be subject to the volume and other
limitations of Rule 144 under the Securities Act of 1933. If a 10% discount were
used, annual pro forma goodwill amortization would increase by $25,000. The
total estimated purchase price of $39.0 million for the Acquisitions is based
upon preliminary estimates and is subject to certain purchase price adjustments
at and following closing. Based on the estimated purchase price of $39.0
million, approximately $4.0 million will be allocated to acquired in-process
research and development and will be charged to expense upon the consummation of
the Acquisitions. The remaining amount of intangible assets of approximately
$31.2 million includes approximately $30.4 million of goodwill and $800,000 of
developed technology.
Acquired in-process research and development reflects the value of DDS's
development projects underway at the time of the acquisition. In connection with
the DDS transaction, all identifiable assets
F-22
<PAGE>
IMAGEMAX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
2. ACQUISITIONS AND PUBLIC OFFERING: -- (CONTINUED)
acquired, including intangible assets, were assigned a portion of the cost of
the acquired company based on an independent valuation.
As of the acquisition date, DDS had a number of development efforts
underway. The allocation included the evaluation of each development project to
determine if technological feasibility had been achieved and if there were any
alternative future uses. Based on this analysis, it has been determined that
technological feasibility has not been achieved and that alternative uses of
this developmental technology do not exist. The technology acquired will require
substantial additional development by ImageMax.
3. SHAREHOLDERS' EQUITY:
In November 1996, ImageMax issued 423,077 shares of Common Stock to its
founding shareholders for $5,000. In November 1996, ImageMax sold 150,000 shares
of Series A Convertible Preferred Stock (Series A Preferred Stock) and 126,923
shares of common stock to certain of its founders and to David C. Utz Jr., a
director of ImageMax, for $75,000. Each share of Series A Preferred Stock is
convertible into 0.846154 shares of Common Stock. All shares of Series A
Preferred Stock are required to convert to Common Stock upon the closing of the
Offering.
In April 1997, ImageMax sold 105,000 shares of Series A Preferred Stock to
certain of its founders and two additional accredited investors for $105,000.
In June 1997, ImageMax sold 97,308 shares of Common Stock to certain of its
founders and its President and Chief Operating Officer and Senior Vice
President--Finance, Chief Financial Officer, and Treasurer for $230,000. The
related stock subscription receivables were paid in full in July 1997.
In September 1997, ImageMax sold 269,125 shares of Series A Preferred Stock
and 63,462 shares of Common Stock for total consideration of $1,081,500 and
$300,000, respectively, to certain of its founders and other accredited
investors.
In 1997, ImageMax sold a total of 314,135 shares of Common Stock (including
shares of Common Stock to be issued upon conversion of the Preferred Stock) at
prices of $1.18, $2.36 and $4.73 per share to officers, directors and certain
management of the Founding Companies. As a result, ImageMax recorded a
non-recurring non-cash compensation charge of $2,494,000, representing the
difference between the amount paid for the shares and an estimated deemed value
for accounting purposes of $13.00 per share (based on the assumed initial public
offering price).
4. 1997 INCENTIVE PLAN:
ImageMax's 1997 Incentive Plan (the Plan) provides for the award of up to
600,000 shares of its Common Stock to its employees, directors, consultants and
other individuals who perform services for ImageMax. The Plan provides for
granting of various stock based awards, including incentive and non-qualified
stock options, restricted stock and performance shares and units. Upon
completion of the Offering, non-qualified options to purchase an aggregate of
367,500 shares of Common Stock at the Offering price will be granted to
ImageMax's four executive officers and four outside directors. These grants will
vest in equal installments over three years.
F-23
<PAGE>
IMAGEMAX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
5. EMPLOYMENT AGREEMENTS:
ImageMax has entered into employment agreements with its Chief Executive
Officer, President and Chief Operating Officer, Senior Vice President--Finance,
Chief Financial Officer and Treasurer, and Senior Vice President--Corporate
Development that provide for a minimum annual compensation of $610,000 plus
bonuses. In addition, in connection with the Closing of the Acquisitions,
ImageMax will enter into employment agreements with several management members
of the Founding Companies that provide for minimum annual compensation of $1.4
million plus bonuses.
6. RELATED-PARTY MANAGEMENT CONTRACT:
In November 1996, ImageMax entered into a management contract with GBL
Capital Corp. ("GBL"), an entity whose shareholders are also shareholders of
ImageMax. Two of GBL shareholders are officers of ImageMax. GBL was engaged to
manage the daily business operations of ImageMax. ImageMax paid GBL $5,000 upon
entering into the agreement and is required to pay monthly fees ranging from
$10,000 to $25,000. The monthly fee payments were terminated on July 31, 1997
when the two officers of ImageMax began to be paid directly by ImageMax. GBL
services were ceased at the date. Upon the closing of an initial public
offering, ImageMax is required to pay GBL a fee of $500,000. Such fees are, in
effect, compensation to the officers of ImageMax. The $500,000 will be charged
to the statement of operations upon the consummation of the Offering.
7. ACCRUED EXPENSES:
Accrued expenses principally consist of professional fees related to the
Offering and Acquisitions.
8. SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reverse Stock Split
ImageMax effected a 0.846154 for 1 reverse stock split on ,
1997. All references in the accompanying financial statements to the number of
shares and per-share amounts have been retroactively restated to reflect the
reverse stock split.
Cash and Cash Equivalents
ImageMax considers highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash equivalents are carried at
cost, which approximates market value. At December 31, 1996 and June 30, 1997
and September 30, 1997, cash equivalents primarily consisted of funds in a money
market account.
F-24
<PAGE>
IMAGEMAX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
8. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Deferred Offering Costs
ImageMax has deferred all costs of raising capital. These costs will be
offset against capital generated by the Offering.
Income Taxes
ImageMax follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
Under this method, deferred income taxes are recorded based upon differences
betweeen the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
ImageMax has recorded a full valuation allowance against all deferred tax
assets due to the uncertainty of ultimate realizability. Accordingly, no income
tax benefits have been recorded for current year losses.
Long-Lived Assets
ImageMax follows SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in the event
that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future cash
flows associated with the asset is compared to the assets' carrying amount to
determine if a write-down to market value or discounted cash flow value is
necessary.
Accounting for Stock-Based Compensation
ImageMax follows SFAS No. 123, "Accounting for Stock-Based Compensation,"
which permits, but does not require, a fair value-based method of accounting for
employee stock option plans which results in compensation expense recognition
when stock options are granted. As permitted by SFAS No. 123, ImageMax will
provide pro forma disclosure of net income and earnings per share, as
applicable, in the notes to future financial statements.
Earnings per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share". This statement supersedes APB Option No. 15,
"Earnings per Share" and simplifies the computation of earnings per share
("EPS"). Primary EPS is replaced with a presentation of basic EPS. Basic EPS
includes no dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Fully diluted EPS is replaced with diluted EPS. Diluted EPS reflects the
potential dilution if certain securities are converted. SFAS No. 128 requires
dual presentation of basic and diluted EPS by entities that issue any securities
other than ordinary common stock. SFAS No. 128 will be effective for financial
statements for both interim and annual periods ending after December 15, 1997,
and requires retroactive restatement of all EPS data presented. ImageMax plans
to adopt the statement on December 31, 1997. ImageMax does not expect the effect
of adopting SFAS No. 128 to have a material impact on its EPS calculations, and,
if adopted currently, SFAS No. 128 would not have a material impact on
ImageMax's reported EPS.
F-25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Utz Medical Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Utz Medical
Enterprises, Inc. (a Minnesota corporation) and subsidiary as of July 31, 1996
and 1997 and the related consolidated statements of operations, stockholder's
deficit and cash flows for each of the three years in the period ended July 31,
1997. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Utz Medical Enterprises,
Inc. and subsidiary as of July 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
July 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
October 24, 1997
F-26
<PAGE>
UTZ MEDICAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31,
-----------------------
1996 1997
<S> <C> <C>
---------- ----------
ASSETS
------
CURRENT ASSETS:
Cash...................................................... $ 2,038 $ 25,596
Accounts receivable, net of reserves of $59,279 and
$73,987................................................ 884,125 886,945
Income tax receivable..................................... 178,823 --
Inventories............................................... 78,790 112,532
Prepaid expenses and other................................ 25,773 34,437
Deferred income taxes..................................... 22,111 35,057
---------- ----------
Total current assets................................... 1,191,660 1,094,567
PROPERTY AND EQUIPMENT, net................................. 1,990,040 1,785,257
DEFERRED INCOME TAXES....................................... 66,386 86,123
INTANGIBLE ASSETS........................................... 505,239 297,424
---------- ----------
$3,753,325 $3,263,371
========== ==========
LIABILITIES AND
STOCKHOLDER'S DEFICIT
---------------------
CURRENT LIABILITIES:
Revolving promissory note................................. $ 928,000 $ 982,000
Current portion of long-term debt......................... 552,986 509,162
Bank overdrafts........................................... 17,409 --
Accounts payable.......................................... 407,945 340,365
Accrued expenses.......................................... 628,937 760,007
Deferred revenue.......................................... 103,580 126,471
---------- ----------
Total current liabilities.............................. 2,638,857 2,718,005
---------- ----------
LONG-TERM DEBT.............................................. 1,948,540 1,615,809
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDER'S DEFICIT:
Common stock, par value of $.01 per share; 10,000,000
shares authorized, 90,000 shares issued and
outstanding............................................ 900 900
Additional paid in capital................................ 98,100 98,100
Accumulated deficit....................................... (933,072) (1,169,443)
---------- ----------
Total stockholder's deficit............................ (834,072) (1,070,443)
---------- ----------
$3,753,325 $3,263,371
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
UTZ MEDICAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
SERVICE REVENUES.................................. $6,275,993 $5,550,268 $5,676,945
---------- ---------- ----------
COST OF SERVICE REVENUES.......................... 4,652,182 3,318,172 3,297,139
DEPRECIATION...................................... 380,324 412,565 389,379
---------- ---------- ----------
5,032,506 3,730,737 3,686,518
---------- ---------- ----------
Gross profit................................. 1,243,487 1,819,531 1,990,427
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES......................... 1,652,163 1,383,387 1,575,991
IMAGEMAX TRANSACTION COSTS........................ -- -- 35,000
AMORTIZATION OF INTANGIBLE ASSETS................. 183,487 209,312 207,815
---------- ---------- ----------
Operating income (loss)...................... (592,163) 226,832 171,621
INTEREST EXPENSE.................................. 328,477 362,948 358,789
INTEREST INCOME................................... (5,485) (11,090) (125)
---------- ---------- ----------
Loss before income taxes..................... (915,155) (125,026) (187,043)
INCOME TAX EXPENSE (BENEFIT)...................... (222,640) 78,664 49,328
---------- ---------- ----------
NET LOSS.......................................... $ (692,515) $ (203,690) $ (236,371)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
UTZ MEDICAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
----------------- ADDITIONAL EARNINGS
SHARES AMOUNT PAID IN CAPITAL (DEFICIT) TOTAL
------ -------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE, JULY 31, 1994..................... 90,000 900 98,100 8,133 107,133
Dividends................................ -- -- -- (45,000) (45,000)
Net loss................................. -- -- -- (692,515) (692,515)
------ -------- ------- ------------ -----------
BALANCE, JULY 31, 1995..................... 90,000 900 98,100 (729,382) (630,382)
Net loss................................. -- -- -- (203,690) (203,690)
------ -------- ------- ------------ -----------
BALANCE, JULY 31, 1996..................... 90,000 900 98,100 (933,072) (834,072)
Net loss................................. -- -- -- (236,371) (236,371)
------ -------- ------- ------------ -----------
BALANCE, JULY 31, 1997..................... 90,000 $ 900 $98,100 $ (1,169,443) $(1,070,443)
====== ======== ======= ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
UTZ MEDICAL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $(692,515) $(203,690) $(236,371)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization............... 563,811 621,877 597,194
Loss on sale of property and equipment...... 3,054 30,499 5,347
Provision for loss on accounts receivable... 33,569 (10,151) 34,708
Deferred income tax benefit................. (60,855) (42,319) (32,683)
Change in operating assets and liabilities-
Accounts receivable...................... (106,840) 160,989 (37,528)
Income tax receivable.................... (178,823) -- 178,823
Inventories.............................. 68,455 61,095 (33,742)
Prepaid expenses and other............... 51,429 2,322 (8,663)
Accounts payable......................... 348,320 (88,110) (67,580)
Accrued expenses......................... 107,269 195,939 131,070
Deferred revenue......................... 15,440 (25,412) 22,891
--------- --------- ---------
Net cash provided by operating
activities.......................... 152,314 703,039 553,466
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............... (291,721) (179,246) (163,021)
Proceeds on sale of property and equipment........ 25,200 17,344 6,400
--------- --------- ---------
Net cash used in investing
activities.......................... (266,521) (161,902) (156,621)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds on revolving promissory note......... 110,000 128,499 54,000
Proceeds from long-term debt...................... 319,479 115,591 53,419
Payments on long-term debt........................ (545,761) (501,387) (463,297)
Increase (decrease) in bank overdrafts............ 267,165 (283,807) (17,409)
Dividends to stockholders......................... (45,000) -- --
--------- --------- ---------
Net cash provided by (used in)
financing activities................ 105,883 (541,104) (373,287)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH..................... (8,324) 33 23,558
CASH, BEGINNING OF PERIOD........................... 10,329 2,005 2,038
--------- --------- ---------
CASH, END OF PERIOD................................. $ 2,005 $ 2,038 $ 25,596
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
UTZ MEDICAL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
Utz Medical Enterprises, Inc. and its wholly owned subsidiary, American
Micro-Med Corporation, operate under the trade name of AMMCORP Records
Management ("AMMCORP"). AMMCORP is located in Chesterton, Indiana and offers
document conversion and management solutions to customers predominantly in the
healthcare industry through various methods of document imaging technologies.
AMMCORP also provides offsite storage and retrieval services.
AMMCORP has a working capital and stockholder's deficit as of July 31,
1997. In the last three years, AMMCORP has generated net cash provided by
operations of approximately $1.4 million and repaid debt, net of proceeds of
$0.7 million. In October 1997, AMMCORP entered into forbearance agreements with
its principal outside debt holders (see Note 5) which cures its covenant
defaults through August 1, 1998. AMMCORP believes its fiscal 1998 operating
results will provide sufficient cash to satisfy its obligations when they become
due.
In September 1997, AMMCORP and its stockholder entered into a merger
agreement with ImageMax, Inc. ("ImageMax") which would close upon the
consummation of the initial public offering of the common stock of ImageMax.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of Utz Medical
Enterprises, Inc. and its wholly owned Subsidiary. The financial statements
reflect the elimination of all significant intercompany accounts and
transactions.
Inventories
Inventories represent materials used in the filming and scanning process
and are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are recorded at cost. Additions and improvements are
capitalized and repairs and maintenance are charged to expense as incurred.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements and capital leases are
depreciated over the lesser of their useful life or the lease term.
Intangible Assets
Intangible assets primarily consist of capitalized non-compete obligations
which are being amortized over five and ten-year periods. Related accumulated
amortization as of July 31, 1996 and 1997 was $1,158,947 and $1,366,762,
respectively.
Revenue Recognition
Revenue is recognized when the related services are rendered. Deferred
revenue represents services billed in advance of performance.
F-31
<PAGE>
UTZ MEDICAL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Income Taxes
AMMCORP accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and income tax basis of assets and
liabilities measured using enacted income tax rates and laws that are expected
to be in effect when the differences reverse.
Supplemental Cash Flow Information
AMMCORP paid cash for interest for the years ended July 31, 1995, 1996 and
1997 of $329,346, $265,448 and $262,776, respectively. AMMCORP financed
equipment purchases with capital leases in the amount of $236,180 and $33,322
for the years ended July 31, 1996 and 1997, respectively. There were no cash
payments made for income taxes in the periods presented.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued expenses are
reflected in the financial statements at fair value due to their short-term
nature. The carrying amount of long-term debt and capital lease obligations
approximates fair value on the balance sheet dates.
Long-Lived Assets
AMMCORP follows SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of." Accordingly, in the event
that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the assets is compared to the assets'
carrying amount to determine if a write-down to market value or discounted cash
flow value is necessary.
3. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
ESTIMATED JULY 31,
USEFUL LIVES -----------------------
YEARS 1996 1997
------------ ---------- ----------
<S> <C> <C> <C>
Filming and scanning equipment..................... 3-5 $1,707,405 $1,791,302
Furniture and office equipment..................... 5 366,465 420,534
Vehicles........................................... 5 221,440 257,829
Building and building improvements................. 8-40 1,599,829 1,599,829
Land and land improvements......................... 15 88,693 88,693
---------- ----------
3,983,832 4,158,187
Less-Accumulated depreciation and amortization..... (1,993,792) (2,372,930)
---------- ----------
$1,990,040 $1,785,257
========== ==========
</TABLE>
As of July 31, 1996 and 1997, AMMCORP had $221,088 and $209,898, in
equipment, net of accumulated amortization financed under capital leases. In
March 1994, AMMCORP commenced
F-32
<PAGE>
UTZ MEDICAL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT: -- (CONTINUED)
operations in Anderson, Indiana through the acquisition of $525,000 in filming
equipment and $50,000 in filming related inventory. AMMCORP paid an additional
$100,000 in connection with a non-compete agreement with the seller. In October
1995, the Anderson Facility was closed and the related non-compete asset was
charged to expense. The filming equipment was relocated to the AMMCORP
Chesterton, Indiana facility and was fully depreciated as of March 1997.
4. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
JULY 31,
--------------------
1996 1997
-------- ---------
<S> <C> <C>
Accrued compensation.................................... $232,540 $265,098
Accrued interest........................................ 110,748 206,761
Accrued income taxes.................................... 155,784 216,180
Other................................................... 129,865 71,968
-------- --------
$628,937 $760,007
======== ========
</TABLE>
5. DEBT:
Revolving Promissory Note
On February 1, 1996, AMMCORP renewed its revolving promissory note (the
"Note") with the bank. AMMCORP can borrow up to $1,000,000 under the Note and
interest is due monthly at prime plus 2.5%. The outstanding principal balance
and all unpaid interest are due on March 31, 1998.
The highest amount outstanding under the Note was$1,000,000 for the years
ended July 31, 1996and 1997, and average borrowings under the Note were $900,347
and $959,154, respectively. The weighted average interest rates on the Note were
10.54% and 11.02% for the years ended July 31, 1996 and 1997 respectively.
F-33
<PAGE>
UTZ MEDICAL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT: -- (CONTINUED)
Long-Term Debt
<TABLE>
<CAPTION>
JULY 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Term note payable to bank in monthly installments of $9,197
including interest at 7.75% until September 15, 1998, at
which time the monthly installments will be adjusted to
reflect an interest rate of 3% plus the monthly average
yield on five-year U.S. Treasury securities, payments are
due through September, 2003............................... $ 605,278 $ 540,179
Term note payable to bank in monthly installments of
$14,450, including interest at prime plus 1.50%, through
March, 1998............................................... 300,102 149,833
Term note payable to bank in monthly installments of $6,700,
including interest at prime plus 1.25%, through December,
1997...................................................... 81,591 28,199
Term note payable to bank in monthly installments of $7,230,
including interest at prime plus 1.50%, through December,
1998...................................................... 187,067 115,736
Term note payable to bank in monthly installments of $4,666,
including interest at prime plus 1.50%, through January,
1997...................................................... 32,430 --
Note payable to former stockholder in monthly installments
of $18,558, including interest at 10%, through August,
1998...................................................... 601,730 601,730
Note payable to former stockholder in bi-weekly installments
of $3,185, including interest at 10%, through October,
1999...................................................... 291,469 291,469
Vehicle loans payable in monthly installments ranging from
$340 to $1,140, with interest ranging from 7.99% to
10.50%, through November, 2000............................ 85,089 108,726
Capital lease obligations................................... 217,620 213,038
Other....................................................... 99,150 76,061
---------- ----------
552,986 2,124,971
Less-Current portion........................................ (2,205,696) (509,162)
---------- ----------
$1,948,540 $1,615,809
========== ==========
</TABLE>
As of July 31, 1997, stated maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JULY 31,
--------------------
<S> <C>
1998.................................. $ 509,162
1999.................................. 1,083,732
2000.................................. 164,854
2001.................................. 134,325
2002.................................. 106,747
Thereafter............................ 126,151
----------
$2,124,971
==========
</TABLE>
The term notes and revolving promissory note payable to the bank are under
a master loan agreement. Under this agreement, AMMCORP is subject to various
financial and non-financial covenants. In addition, the two notes payable to
former stockholders also contain various covenants. In October 1997, AMMCORP and
the bank entered into a forbearance agreement which cured the financial covenant
defaults through August 1, 1998. In addition, in October 1997, AMMCORP and the
former stockholders entered into forbearance agreements which waived the
covenant defaults through August 1, 1998 and waived substantially all of the
principal payments through that date.
F-34
<PAGE>
UTZ MEDICAL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT: -- (CONTINUED)
The term notes, revolving promissory note, and notes payable to former
stockholders are personally guaranteed by the stockholder of AMMCORP.
6. COMMITMENTS AND CONTINGENCIES:
AMMCORP leases a warehouse under a noncancelable operating lease. Rent
expense for all operating leases for the year ended July 31, 1997 was $31,000.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING JULY 31,
--------------------
<S> <C>
1998.................................... $ 33,400
1999.................................... 35,800
2000.................................... 38,200
2001.................................... 3,200
--------
$110,600
========
</TABLE>
AMMCORP is party to various claims and other matters arising in the normal
course of business. In the opinion of management, the outcome of these matters
will not have a material adverse effect on AMMCORP'S financial position or
results of operations.
7. INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------------
1995 1996 1997
--------- -------- --------
<S> <C> <C> <C>
Current:
Federal..................................... $(139,899) $104,765 $ 85,908
State....................................... (21,656) 16,218 13,298
--------- -------- --------
Total.................................... (161,555) 120,983 99,206
--------- -------- --------
Deferred:
Federal..................................... (52,698) (36,646) (43,192)
State....................................... (8,387) (5,673) (6,686)
--------- -------- --------
Total.................................... (61,085) (42,319) (49,878)
--------- -------- --------
$(222,640) $ 78,664 $ 49,328
========= ======== ========
</TABLE>
The reconciliation of the statutory federal income tax rate to AMMCORP'S
effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate.................. (34.0)% (34.0)% (34.0)%
State income taxes, net of federal tax benefit..... (3.3) (3.3) (3.3)
Nondeductible expenses............................. 13.0 100.2 63.7
----- ----- -----
(24.3)% 62.9 % 26.4 %
===== ===== =====
</TABLE>
The tax effect of temporary differences as established in accordance with
SFAS No. 109 that give rise to deferred income taxes are as follows:
F-35
<PAGE>
UTZ MEDICAL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES: -- (CONTINUED)
<TABLE>
<CAPTION>
JULY 31,
------------------
1996 1997
------- --------
<S> <C> <C>
Gross deferred tax assets:
Depreciation and amortization.................. $66,386 $ 86,123
Accruals and reserves not currently
deductible.................................. 22,111 35,057
------- --------
$88,497 $121,180
======= ========
</TABLE>
AMMCORP did not have any valuation allowances against deferred income tax
assets at July 31, 1996 and 1997, as it believes it is more likely than not that
the deferred tax assets will be realized.
8. EMPLOYEE BENEFIT PLAN:
AMMCORP sponsors a defined contribution plan, the "AMMCORP 401(k)
Profit-Sharing Plan" (the "Plan") which covers substantially all of AMMCORP'S
employees subject to certain eligibility requirements, as defined. The Plan
provides for discretionary profit sharing and employer matching contributions
based on a percentage of employee salary deferrals. AMMCORP made matching
contributions of $2,400 in the year ended July 31, 1995. There have been no
profit sharing contributions to the Plan.
F-36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Codalex Microfilming Corporation and
Imaging Information Industries, Inc.:
We have audited the accompanying combined balance sheets of Codalex
Microfilming Corporation (a South Carolina corporation) and Imaging Information
Industries, Inc. (a South Carolina Corporation) as of June 30, 1996 and 1997,
and the related combined statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended June
30, 1997. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Codalex
Microfilming Corporation and Imaging Information Industries, Inc. as of June 30,
1996 and 1997, and the combined results of their operations and their cash flows
for each of the three years in the period ended June 30, 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Columbia, South Carolina,
August 29, 1997
F-37
<PAGE>
CODALEX MICROFILMING CORPORATION AND
IMAGING INFORMATION INDUSTRIES, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------- SEPTEMBER 30,
1996 1997 1997
-------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents........................ $ 41,057 $ 40,902 $ 101,756
Accounts receivable, net of allowance for
doubtful accounts of $32,200, $37,000 and
$25,750....................................... 219,208 559,111 326,817
Due from affiliates.............................. 31,781 112,756 168,406
Inventories...................................... 132,497 160,867 167,568
Prepaid expenses and other....................... 9,149 5,807 5,607
-------- ---------- ----------
Total current assets.......................... 433,692 879,443 770,154
PROPERTY AND EQUIPMENT, net........................ 185,731 260,332 255,490
-------- ---------- ----------
$619,423 $1,139,775 $1,025,644
======== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------
CURRENT LIABILITIES:
Line of credit................................... $121,158 $ 142,721 $ 142,721
Current portion of long term debt................ 322,142 393,811 371,318
Accounts payable................................. 152,436 306,304 323,371
Due to affiliates................................ 11,185 129,869 105,316
Accrued expenses................................. 102,421 186,723 138,252
Deferred revenue................................. -- 33,248 20,000
-------- ---------- ----------
Total current liabilities..................... 709,342 1,192,676 1,100,978
-------- ---------- ----------
LONG-TERM DEBT..................................... 11,335 29,634 26,412
-------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY (DEFICIT):
CMC common stock, $1 par value, 100,000 shares
authorized, 10,000 shares issued and
outstanding................................... 10,000 10,000 10,000
I(3) common stock, no par value, 200,000 shares
authorized, 90,510 shares issued and
outstanding................................... 138,750 138,750 138,750
Accumulated deficit.............................. (250,004) (231,285) (250,496)
-------- ---------- ----------
Total stockholders' equity (deficit).......... (101,254) (82,535) (101,746)
-------- ---------- ----------
$619,423 $1,139,775 $1,025,644
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-38
<PAGE>
CODALEX MICROFILMING CORPORATION AND
IMAGING INFORMATION INDUSTRIES, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED JUNE 30, ENDED SEPTEMBER 30,
------------------------------------ --------------------
1995 1996 1997 1996 1997
---------- ---------- ---------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Services.................................... $1,836,118 $ 755,085 $1,507,270 $341,016 $ 530,204
Products.................................... 503,609 622,181 1,357,845 307,383 239,080
---------- ---------- ---------- -------- ---------
2,339,727 1,377,266 2,865,115 648,399 769,284
---------- ---------- ---------- -------- ---------
COST OF REVENUES:
Services.................................... 1,177,764 507,561 1,011,894 228,233 399,981
Products.................................... 329,149 416,104 1,016,164 252,011 169,155
Depreciation................................ 43,698 47,211 64,338 12,000 10,203
---------- ---------- ---------- -------- ---------
1,550,611 970,876 2,092,396 492,244 579,339
---------- ---------- ---------- -------- ---------
Gross profit.............................. 789,116 406,390 772,719 156,155 189,945
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.................................... 730,356 549,435 758,900 99,951 152,301
IMAGEMAX TRANSACTION COSTS.................... -- -- -- -- 45,317
AMORTIZATION.................................. 18,029 1,877 1,730 144 200
---------- ---------- ---------- -------- ---------
Operating income (loss)................... 40,731 (144,922) 12,089 56,060 (7,873)
OTHER (INCOME) EXPENSE:
Interest expense............................ 29,082 60,472 53,370 3,135 11,338
Management fee.............................. -- -- (60,000) -- --
---------- ---------- ---------- -------- ---------
Income (loss) before income taxes......... 11,649 (205,394) 18,719 52,925 (19,211)
INCOME TAXES.................................. -- -- -- -- --
---------- ---------- ---------- -------- ---------
NET INCOME (LOSS)............................. $ 11,649 $ (205,394) $ 18,719 $ 52,925 $ (19,211)
========== ========== ========== ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE>
CODALEX MICROFILMING CORPORATION AND
IMAGING INFORMATION INDUSTRIES, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------ TOTAL
CMC I(3) STOCKHOLDERS'
---------------- ----------------- ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT DEFICIT (DEFICIT)
------ ------- ------ -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1994.................. 10,000 $10,000 -- $ 20,000 $ (56,259) $ (26,259)
Issuance of common stock.............. -- -- 90,510 45,000 -- 45,000
Net income............................ -- -- -- -- 11,649 11,649
------ ------- ------ -------- --------- ---------
BALANCE, JUNE 30, 1995.................. 10,000 10,000 90,510 65,000 (44,610) 30,390
Paid-in capital for previously issued
stock............................... -- -- -- 73,750 -- 73,750
Net loss.............................. -- -- -- -- (205,394) (205,394)
------ ------- ------ -------- --------- ---------
BALANCE, JUNE 30, 1996.................. 10,000 10,000 90,510 138,750 (250,004) (101,254)
Net income............................ -- -- -- -- 18,719 18,719
------ ------- ------ -------- --------- ---------
BALANCE, JUNE 30, 1997.................. 10,000 10,000 90,510 138,750 (231,285) (82,535)
Net loss (unaudited).................. -- -- -- -- (19,211) (19,211)
------ ------- ------ -------- --------- ---------
BALANCE, SEPTEMBER 30, 1997
(UNAUDITED)........................... 10,000 $10,000 90,510 $138,750 $(250,496) $(101,746)
====== ======= ====== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE>
CODALEX MICROFILMING CORPORATION AND
IMAGING INFORMATION INDUSTRIES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
-------------------------------- ---------------------
1995 1996 1997 1996 1997
-------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 11,649 $(205,394) $ 18,719 $ 52,925 $ (19,211)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities-
Depreciation and amortization............. 61,727 49,088 66,068 12,144 10,403
(Gain) loss on sale of equipment.......... -- (4,832) 19,273 -- --
Change in operating assets and
liabilities:
Accounts receivable.................... (60,523) 97,597 (339,903) (122,505) 232,294
Inventories............................ (11,166) (98,126) (28,370) 23,177 (6,701)
Prepaid expenses and other assets...... (4,802) (3,385) 1,612 -- --
Net due to/from affiliates............. (52,039) 31,443 37,709 (11,629) (80,203)
Accounts payable and accrued
expenses............................. 109,648 (60,976) 238,170 156,441 (31,404)
Deferred revenue....................... -- -- 33,248 -- (13,248)
-------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities............... 54,494 (194,585) 46,526 110,553 91,930
-------- --------- --------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment........... (38,926) (30,260) (130,017) (106,575) (5,361)
-------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt............................ -- 153,932 121,980 48,646 --
Principal payments on debt.................... (38,207) (10,141) (38,644) (20,040) (25,715)
Capital contributions......................... 45,000 73,750 -- -- --
-------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities............... 6,793 217,541 83,336 28,606 (25,715)
-------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... 22,361 (7,304) (155) 32,584 60,854
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD........................................ 26,000 48,361 41,057 41,057 40,902
-------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD........ $ 48,361 $ 41,057 $ 40,902 $ 73,641 $ 101,756
======== ========= ========= ========= =========
SUPPLEMENTAL DATA:
Cash paid for interest...................... $ 8,000 $ 56,000 $ 24,000 $ -- $ 4,600
======== ========= ========= ========= =========
NONCASH FINANCING TRANSACTION:
Equipment financed through capital leases... $ -- $ -- $ 28,195 $ -- $ 28,195
======== ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE>
CODALEX MICROFILMING CORPORATION AND
IMAGING INFORMATION INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30 AND FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
1. BACKGROUND:
Codalex Microfilming Corporation ("CMC") and Imaging Information
Industries, Inc. ("I(3)") (collectively, "Codalex") provide micrographic and
electronic imaging services and sell certain imaging and scanning equipment to
businesses primarily in South Carolina and Georgia. Codalex's customer base
includes hospitals, commercial enterprises and a limited number of government
institutions. CMC is located in Columbia, South Carolina, and was purchased in
July 1992. Imaging is located in Atlanta, Georgia, and was founded in February
1995.
The combined companies had net income of approximately $19,000 in 1997,
resulting in a stockholders' deficit of approximately $83,000 at June 30, 1997.
The working capital deficit at June 30, 1997 was approximately $313,000. In
management's opinion, the cash flow requirements for fiscal 1998 will be funded
through improvement in operations. Codalex will not pay the stockholder and
other related-party notes that are currently due if cash flows from operations
are not sufficient to fund its obligations as they become due.
CMC and its stockholders intend to enter into a merger agreement with
ImageMax, Inc. (ImageMax) and I(3) and its stockholders intend to enter a net
asset acquisition agreement with ImageMax both of which would close upon the
consummation of the initial public offering of the common stock of ImageMax (see
Note 8).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements as of September 30, 1997 and for the three months
ended September 30, 1996 and 1997 are unaudited and, in the opinion of the
management of Codalex, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the results for
those interim periods. The results of operations for the three months ended
September 30, 1997 are not necessarily indicative of the results to be expected
for the full year.
Basis of Presentation
Codalex is controlled and managed through common ownership. Accordingly,
the financial statements have been combined and reflect the elimination of all
significant intercompany accounts and transactions.
Cash and Cash Equivalents
Codalex considers highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash equivalents are carried at
cost, which approximates market value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories only represent microfiche viewing and imaging equipment, and
production and related supplies.
Property and Equipment
Property and equipment are recorded at cost. Additions and improvements are
capitalized and repairs and maintenance are charged to expense as incurred.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets.
F-42
<PAGE>
CODALEX MICROFILMING CORPORATION AND
IMAGING INFORMATION INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30 AND FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Revenue Recognition
Service and product revenues are recognized when the services are rendered
or products are shipped to Codalex's customers. Deferred revenue represents
payments for services that are billed in advance of performance. No single
customer exceeded 10% of revenues for any year presented.
Income Taxes
Imaging has elected to be taxed under Subchapter S of the Internal Revenue
Code. Accordingly, all taxable income or loss of Imaging is included in the
stockholders' individual income tax returns.
CMC is a C corporation and income tax expense is provided in Codalex's
financial statements. Deferred income tax liabilities and assets are determined
based on the difference between the financial statement and income tax bases of
assets and liabilities that will result in taxable or deductible amounts in the
future using enacted income tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred income tax assets to the amount
expected to be realized. Deferred tax assets resulting from nondeductible
reserves and net operating losses have offset deferred tax liabilities related
to accelerated depreciation for tax reporting in the accompanying financial
statements. Income tax expense on fiscal 1997 earnings was offset by the
remaining net operating loss carryforwards.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued expenses are
reflected in the financial statements at fair value due to their short-term
nature. The carrying amount of long-term debt approximates fair value on the
balance sheet dates.
Long-Lived Assets
Codalex follows Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of." Accordingly, in the event that facts and circumstances indicate
that property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the assets is
compared to the assets' carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary.
F-43
<PAGE>
CODALEX MICROFILMING CORPORATION AND
IMAGING INFORMATION INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30 AND FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
ESTIMATED JUNE 30,
USEFUL LIVES ------------------- SEPTEMBER 30,
YEARS 1996 1997 1997
------------ -------- -------- -------------
<S> <C> <C> <C> <C>
Scanning and imaging equipment..... 7 $236,188 $365,329 $366,340
Furniture and office equipment..... 7 15,443 22,098 26,332
Automobiles........................ 5 74,749 35,772 35,773
-------- -------- --------
326,380 423,199 428,445
Less--Accumulated depreciation..... (140,649) (162,867) (172,955)
-------- -------- --------
$185,731 $260,332 $255,490
======== ======== ========
</TABLE>
As of June 30, 1997, Codalex had approximately $28,000 in equipment, net of
accumulated depreciation, financed under capital leases with a related party.
4. DEBT:
At June 30, 1997, Codalex had a line of credit agreement with a bank which
provides for borrowings of up to $175,000, based on eligible accounts
receivable. The line bears interest at the bank prime rate plus 0.75% and
expires on May 15, 1998. The line of credit is secured by substantially all of
Codalex's assets and a personal guarantee by Codalex's stockholders.
Other long term debt is as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------- SEPTEMBER 30,
1996 1997 1997
-------- -------- -------------
<S> <C> <C> <C>
Unsecured demand notes payable to
related parties accruing interest
at 12% annually.................... $251,426 $285,839 $284,907
Commercial term note bearing interest
at 9.5%, collateralized by a
security agreement with Imaging;
payments in monthly installments of
$2,869 through January 1999........ 62,500 50,503 40,918
Other various notes payable to
banks.............................. 19,551 58,908 48,547
Obligations under capital leases with
related parties.................... -- 28,195 23,358
-------- -------- --------
333,477 423,445 397,730
Less--Current portion................ (322,142) (393,811) (371,318)
-------- -------- --------
$ 11,335 $ 29,634 $ 26,412
======== ======== ========
</TABLE>
Future maturities of debt at June 30, 1997, are $536,532 in 1998 and
$29,634 in 1999. Codalex is in compliance with all covenants related to their
debt as of June 30, 1997.
F-44
<PAGE>
CODALEX MICROFILMING CORPORATION AND
IMAGING INFORMATION INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30 AND FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
5. ACCRUED EXPENSES:
Accrued expenses are as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------- SEPTEMBER 30,
1996 1997 1997
-------- -------- -------------
<S> <C> <C> <C>
Interest............................. $ 61,518 $ 90,628 $ 96,628
Payroll and related taxes............ 33,328 84,814 20,819
Other................................ 7,575 11,281 20,805
-------- -------- --------
$102,421 $186,723 $138,252
======== ======== ========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
Codalex leases office space under two noncancelable operating leases. One
of these leases expires July 31, 1998, and requires future minimum lease
payments of approximately $16,000 in 1998. The other lease expires November 1,
2008, subject to rent negotiations at October 31, 1998. The future minimum lease
payments through 2008 are $89,000 per year. The lessor of both leases is the
majority stockholder of Codalex. Rent expense for all operating leases for the
years ended June 30, 1995, 1996 and 1997 was $86,000, $92,000 and $94,000,
respectively.
Codalex is party to various claims and other matters arising in the normal
course of business. In the opinion of management, the outcome of these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
7. OTHER RELATED-PARTY TRANSACTIONS:
Codalex is controlled through common ownership, as previously stated. The
same ownership has controlling interest in two similar electronic storage
companies, Laser Graphics Systems & Services ("Laser Graphics") and Microfilm
World. Laser Graphics is located in Cleveland, Tennessee, and Microfilm World is
in Charlotte, North Carolina. All four companies have some overlapping resources
and services. Generally, their geographic regions divide the sales territories.
CMC, I(3) and Laser Graphics are to be included in the purchase transaction
described in Note 1. Revenues included in the accompanying financial statements
from Microfilm World and Laser Graphics for the year ended June 30, 1995, 1996
and 1997 and the three months ended September 30, 1996 and 1997, are
approximately $33,000 and $0, $0 and $8,000, $50,000, $48,000, $14,000 and
$15,000, $55,000 and $18,275 respectively. The pricing for these services is
established at prevailing market rates at the time of performance. For the year
ended June 30, 1997, Codalex charged Laser Graphics a $60,000 management fee for
reimbursement of certain shared services which began in fiscal 1997.
8. SALE OF THE BUSINESS (UNAUDITED):
In September 1997, CMC and I(3) and its stockholders entered into the
agreements discussed in Note 1 with ImageMax.
F-45
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Laser Graphics Systems & Services, Inc.:
We have audited the accompanying balance sheets of Laser Graphics Systems &
Services, Inc. (a Tennessee corporation) as of October 31, 1995 and 1996 and
July 31, 1997, and the related statements of operations, stockholders' equity
(deficit) and cash flows for each of the two years in the period ended October
31, 1996 and the nine-month period ended July 31, 1997. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Laser Graphics Systems &
Services, Inc. as of October 31, 1995 and 1996 and July 31, 1997, and the
results of its operations and its cash flows for each of the two years in the
period ended October 31, 1996 and the nine-month period ended July 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Columbia, South Carolina,
August 19, 1997
F-46
<PAGE>
LASER GRAPHICS SYSTEMS & SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
------------------- JULY 31,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 18,946 $ 12,172 $ 305
Accounts receivable, net of allowance for doubtful
accounts of $6,000............................... 173,564 203,377 209,585
Inventories......................................... 50,179 50,385 58,388
Due from affiliates................................. 5,915 61,842 98,301
Prepaid expenses and other.......................... 7,495 12,365 11,920
-------- -------- --------
Total current assets.......................... 256,099 340,141 378,499
PROPERTY AND EQUIPMENT, net........................... 163,940 182,676 185,354
OTHER ASSETS.......................................... 6,308 4,731 4,455
-------- -------- --------
$426,347 $527,548 $568,308
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Line of credit...................................... $ 82,518 $ 54,243 $122,834
Current maturities of long-term debt................ 62,443 74,818 61,686
Book overdrafts..................................... -- 30,265 53,104
Accounts payable.................................... 147,110 107,608 138,730
Due to affiliates................................... 5,682 74,662 71,482
Accrued expenses and other.......................... 25,993 69,334 49,824
-------- -------- --------
Total current liabilities..................... 323,746 410,930 497,660
-------- -------- --------
LONG-TERM DEBT........................................ 111,937 76,336 33,140
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, no par value, 2,000 shares authorized
1,000, 670, and 670 shares issued and outstanding
for 1995, 1996 and 1997,respectively, net of loan
from stockholders................................ -- -- --
Retained earnings (accumulated deficit)............. (9,336) 40,282 37,508
-------- -------- --------
Total stockholders' equity (deficit)................ (9,336) 40,282 37,508
-------- -------- --------
$426,347 $527,548 $568,308
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<PAGE>
LASER GRAPHICS SYSTEMS & SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31, JULY 31,
----------------------- -------------------------
1995 1996 1996 1997
---------- ---------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Services............................ $1,055,815 $1,131,629 $ 799,295 $ 984,908
Products............................ 592,555 1,315,050 1,121,430 328,652
---------- ---------- ---------- ----------
1,648,370 2,446,679 1,920,725 1,313,560
---------- ---------- ---------- ----------
COST OF REVENUES:
Services............................ 763,038 810,657 573,090 638,639
Products............................ 440,416 986,288 843,073 243,489
Depreciation........................ 27,984 33,957 20,925 28,263
---------- ---------- ---------- ----------
1,231,438 1,830,902 1,437,088 910,391
---------- ---------- ---------- ----------
Gross profit..................... 416,932 615,777 483,637 403,169
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 396,366 499,839 327,330 385,367
---------- ---------- ---------- ----------
Operating income.................... 20,566 115,938 156,307 17,802
INTEREST EXPENSE, net................. 29,902 19,995 16,730 20,576
---------- ---------- ---------- ----------
Income (loss) before income
taxes......................... (9,336) 95,943 139,577 (2,774)
INCOME TAXES.......................... -- 21,655 29,311 --
---------- ---------- ---------- ----------
NET INCOME (LOSS)..................... $ (9,336) $ 74,288 $ 110,266 $ (2,774)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-48
<PAGE>
LASER GRAPHICS SYSTEMS & SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK EARNINGS STOCKHOLDERS'
--------------- (ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT) (DEFICIT)
------ ------ ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1994...................... -- $ -- $ -- $ --
Issuance of 1,000 shares common stock........ 1,000 1,000 -- 1,000
Loan to stockholders......................... -- (1,000) -- (1,000)
Net loss..................................... -- -- (9,336) (9,336)
----- ------ ------- -------
BALANCE, OCTOBER 31, 1995...................... 1,000 -- (9,336) (9,336)
Purchase of 330 shares of common stock....... (330) (330) (24,670) (25,000)
Writeoff of loan to stockholder related to
purchase.................................. -- 330 -- 330
Net income................................... -- -- 74,288 74,288
----- ------ ------- -------
BALANCE, OCTOBER 31, 1996...................... 670 -- 40,282 40,282
Net loss..................................... -- -- (2,774) (2,774)
----- ------ ------- -------
BALANCE, JULY 31, 1997......................... 670 $ -- $37,508 $37,508
===== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-49
<PAGE>
LASER GRAPHICS SYSTEMS & SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
OCTOBER 31, ENDED JULY 31,
----------------- ---------------------
1995 1996 1996 1997
------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(9,336) $74,288 $110,266 $(2,774)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation and amortization......................... 29,561 35,534 26,650 29,446
Change in operating assets and liabilities-
Accounts receivable................................ 46,475 (29,813) (61,238) (6,208)
Inventories........................................ (9,806) (206) (4,535) (8,003)
Due to/from affiliates, net........................ (233) 13,053 233 (39,639)
Prepaid expenses and other assets.................. (4,195) (4,870) (30,910) (462)
Accounts payable and accrued expenses and other.... 14,899 3,839 6,720 11,612
------- ------- -------- -------
Net cash provided by (used in) operating
activities..................................... 67,365 91,825 47,186 (16,028)
------- ------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Organizational costs paid................................. (7,885) -- -- --
Purchases of property and equipment....................... (5,685) (52,693) (51,040) (30,941)
------- ------- -------- -------
Net cash used in investing activities............ (13,570) (52,693) (51,040) (30,941)
------- ------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of stock......................................... -- (24,670) (24,670) --
Net borrowings (payments) on line of credit............... (12,864) (28,275) (43,779) 68,591
Bank overdraft............................................ -- 30,265 62,413 22,839
Proceeds from long-term debt.............................. -- 45,395 45,395 4,796
Principal payments on capital lease obligations........... (24,234) (26,852) (21,894) (21,711)
Principal payments on long-term debt...................... (3,364) (41,769) (28,091) (39,413)
------- ------- -------- -------
Net cash (used in) provided by financing
activities..................................... (40,462) (45,906) (10,626) 35,102
------- ------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................................... 13,333 (6,774) (14,480) (11,867)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 5,613 18,946 18,946 12,172
------- ------- -------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $18,946 $12,172 $ 4,466 $ 305
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-50
<PAGE>
LASER GRAPHICS SYSTEMS & SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED JULY 31, 1996 IS UNAUDITED.)
1. BACKGROUND:
Laser Graphics Systems & Services, Inc., ("Laser Graphics"), provides
document imaging and storage services and distributes document imaging supplies
and equipment to businesses primarily in Tennessee, Northwest Georgia, and
Southwest Virginia. Laser Graphics' customers include commercial enterprises, a
limited number of governmental institutions and hospitals.
Laser Graphics and its stockholders intend to enter into a merger agreement
with ImageMax, Inc. ("ImageMax") which would close upon the consummation of the
initial public offering of the common stock of ImageMAX (see Note 7).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the nine months ended July 31, 1996 are
unaudited and, in the opinion of management of Laser Graphics, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results for that interim period. The results of
operations for the nine months ended July 31, 1996 and 1997 are not necessarily
indicative of the results to be expected for the full year.
Cash and Cash Equivalents
Laser Graphics considers highly liquid investments with original maturities
of three months or less to be cash equivalents. Cash equivalents are carried at
cost, which approximates market value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories only represent microfiche viewing and imaging equipment,
production and related supplies.
Property and Equipment
Property and equipment are recorded at cost. Additions and improvements are
capitalized and repairs and maintenance are charged to expense as incurred.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are depreciated over the
lesser of their useful life or the term of the lease.
Revenue Recognition
Revenue is recognized when services are rendered or when products are
shipped to customers. Laser Graphics had three customers with revenues of 18%,
17% and 10% of its total revenues, for the year ended October 31, 1996. Accounts
receivable as of October 31, 1996, for these customers were approximately $0,
$17,000 and $35,000. No other customer exceeded 10% for any of the other periods
presented.
Income Taxes
Laser Graphics is a C corporation. Deferred income tax liabilities and
assets are determined based on the difference between the financial statement
and income tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future using enacted income tax rates in effect for
the year in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred income
tax assets to the amount expected to be realized. Laser Graphics has a net
deferred tax liability of approximately $6,000 at July 31, 1997, as a result of
accelerated depreciation for tax reporting purposes in excess of net deferred
tax assets due to the nondeductible allowance for doubtful accounts.
F-51
<PAGE>
LASER GRAPHICS SYSTEMS & SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JULY 31, 1996 IS UNAUDITED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Supplemental Cash Flow Information
For the years ended October 31, 1995, 1996 and for the nine months ended
July 31, 1996 and 1997, Laser Graphics paid interest of approximately $32,000,
$24,000 $17,000, and $12,000, respectively. For the nine months ended July 31,
1997, Laser Graphics paid income taxes of $12,000.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued expenses are
reflected in the financial statements at fair value due to their short-term
nature. The carrying amount of long-term debt approximates fair value on the
balance sheet dates.
Long-Lived Assets
Laser Graphics follows Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of." Accordingly, in the event that facts and circumstances indicate
that property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the assets is
compared to the assets' carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary.
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
ESTIMATED OCTOBER 31,
USEFUL LIVES ------------------- JULY 31,
(IN YEARS) 1995 1996 1997
------------ -------- -------- --------
<S> <C> <C> <C> <C>
Equipment........................... 5-7 $159,143 $200,602 $214,636
Office furniture and fixtures....... 7 20,124 26,874 29,111
Vehicles............................ 5 12,656 17,140 15,607
Leasehold improvements.............. 15 -- -- 12,921
-------- -------- --------
191,923 244,616 272,275
Less--Accumulated depreciation and
amortization........................ (27,983) (61,940) (86,921)
-------- -------- --------
$163,940 $182,676 $185,354
======== ======== ========
</TABLE>
As of October 31, 1995 and 1996 and July 31, 1997, Laser Graphics had
approximately $67,000, $55,000 and $47,000, respectively, in equipment, net of
accumulated depreciation, financed under capital leases.
4. LONG-TERM DEBT:
Laser Graphics has a line of credit with a bank. The line of credit
provides for a maximum borrowing of 70% of the Company's current accounts
receivable which is computed at the end of each
F-52
<PAGE>
LASER GRAPHICS SYSTEMS & SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JULY 31, 1996 IS UNAUDITED.)
4. LONG-TERM DEBT: -- (CONTINUED)
calendar quarter. The line of credit bears interest at 9.25% per year and
expires in December 1997. The line is secured by all of Laser Graphics' assets
and is personally guaranteed by the majority stockholder.
Other long-term debt is as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------- JULY 31,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Note payable to a related-party partnership in
monthly installments of $2,965 including
interest at 12%, through June 1998,
unsecured................................... $ 80,863 $ 53,511 $ 30,743
Term loan payable to a bank in monthly
installments of $616, plus interest at 8.5%,
through February 2001, collateralized by
accounts receivable, inventory, and
equipment................................... -- 27,983 24,319
Term loan payable to a bank in monthly
installments of $218, plus interest at 8.5%,
through February 1999, collateralized by a
vehicle..................................... -- -- 3,862
Other term loans.............................. 9,053 12,048 --
Obligations under capitalized leases.......... 84,464 57,612 35,902
-------- -------- --------
174,380 151,154 94,826
Less--Current portion......................... (62,443) (74,818) (61,686)
-------- -------- --------
$111,937 $ 76,336 $ 33,140
======== ======== ========
</TABLE>
As of July 31, 1997, maturities of long-term debt, including capital
leases, are as follows:
<TABLE>
<S> <C>
1998............................... $61,686
1999............................... 20,427
2000............................... 6,584
2001............................... 6,129
-------
$94,826
=======
</TABLE>
Laser Graphics was in compliance with all debt covenants or had obtained
waivers as of July 31, 1997.
5. COMMITMENTS AND CONTINGENCIES:
Laser Graphics leases office space under noncancellable operating leases
from a related party partnership. Rent expense for all operating leases for the
years ended October 31, 1995 and 1996 and the nine months ended July 31, 1996
and 1997 was approximately $42,000, $42,000, $33,000, and $44,000, respectively.
Future minimum lease payments under noncancellable operating leases are
approximately $61,000 in fiscal 1998.
Laser Graphics is party to various claims and other matters arising in the
normal course of business. In the opinion of management, the outcome of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
F-53
<PAGE>
LASER GRAPHICS SYSTEMS & SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JULY 31, 1996 IS UNAUDITED.)
6. RELATED-PARTY TRANSACTIONS:
For the year ended October 31, 1996, and the nine-month period ended July
31, 1997, Laser Graphics had sales to related parties of approximately $76,000,
and $90,000, respectively, and had purchases from related parties for the same
periods of $130,000, and $9,000, respectively. The pricing for these services is
established at prevailing market rates at the time of performance. Additionally,
Codalex charged Laser Graphics a $60,000 management fee for reimbursement of
certain shared services for the year ended October 31, 1996.
The stockholders of the Company also have controlling interest in three
similar document storage companies: Codalex in Columbia, SC, Microfilm World in
Charlotte, NC, and Imaging Information Industries in Atlanta, GA. All four
companies have some overlapping resources and services. Generally, their
geographic regions divide the sales territories. Codalex, Imaging and Laser
Graphics are to be included in the purchase transaction described in Note 1.
7. SALE OF THE BUSINESS (UNAUDITED):
In September 1997, Laser Graphics and its stockholders entered into a
definitive merger agreement with ImageMax (see Note 1).
F-54
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To DataLink Corporation:
We have audited the accompanying balance sheets of DataLink Corporation (an
Arizona corporation) as of December 31, 1995 and 1996 and June 30, 1997 and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996 and the six month
period ended June 30, 1997. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DataLink Corporation as of
December 31, 1995 and 1996 and June 30, 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996 and the six month period ended June 30, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
August 8, 1997
F-55
<PAGE>
DATALINK CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30, SEPTEMBER 30,
1995 1996 1997 1997
---------- ---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............ $ 140,607 $ 138,547 $ 268,042 $ 293,551
Accounts receivable.................. 367,402 320,514 358,247 386,623
Notes receivable from stockholders... -- 20,000 10,000 10,000
Inventories.......................... 36,455 26,805 37,161 41,554
Prepaid expenses and other........... 4,924 194 900 47
---------- ---------- ---------- ----------
Total current assets........ 549,388 506,060 674,350 731,775
PROPERTY AND EQUIPMENT, net............ 469,219 1,063,357 979,391 943,202
OTHER ASSETS........................... 4,903 16,417 30,615 22,631
---------- ---------- ---------- ----------
$1,023,510 $1,585,834 $1,684,356 $1,697,608
========== ========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit...................... $ -- $ 20,000 $ -- $ --
Current portion of long-term debt.... 135,272 121,764 83,954 80,671
Accounts payable..................... 80,648 119,635 113,062 141,420
Accrued expenses..................... 70,252 91,637 128,627 147,179
---------- ---------- ---------- ----------
Total current liabilities... 286,172 353,036 325,643 369,270
---------- ---------- ---------- ----------
LONG-TERM DEBT......................... 268,588 149,490 113,121 92,880
---------- ---------- ---------- ----------
CAPITALIZED LEASE OBLIGATION TO
RELATED-PARTY (Note 9)............... -- 720,000 720,000 720,000
---------- ---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $100 par
value, 50,000 shares authorized,
none issued and outstanding....... -- -- -- --
Common stock, $1 par value, 100,000
shares authorized, 40,000 shares
issued and outstanding............ 40,000 40,000 40,000 40,000
Retained earnings.................... 428,750 323,308 485,592 475,458
---------- ---------- ---------- ----------
Total stockholders'
equity.................... 468,750 363,308 525,592 515,458
---------- ---------- ---------- ----------
$1,023,510 $1,585,834 $1,684,356 $1,697,608
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-56
<PAGE>
DATALINK CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------------------------------ ---------- -----------------------
1994 1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Services..................... $2,465,387 $2,151,498 $2,286,122 $1,284,596 $1,761,461 $1,971,885
Products..................... 562,313 540,117 865,183 427,432 744,136 592,338
---------- ---------- ---------- ---------- ---------- ----------
3,027,700 2,691,615 3,151,305 1,712,028 2,505,597 2,564,223
---------- ---------- ---------- ---------- ---------- ----------
COST OF REVENUES:
Services..................... 1,864,429 1,541,790 1,592,764 795,957 1,179,793 1,268,486
Products..................... 604,431 479,249 773,632 356,570 647,396 492,487
Depreciation................. 190,647 204,348 217,967 103,847 161,026 156,680
---------- ---------- ---------- ---------- ---------- ----------
2,659,507 2,225,387 2,584,363 1,256,374 1,988,215 1,917,653
---------- ---------- ---------- ---------- ---------- ----------
Gross profit.......... 368,193 466,228 566,942 455,654 517,382 646,570
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES...... 331,657 339,246 466,772 232,037 327,785 379,859
IMAGEMAX TRANSACTION COSTS..... -- -- -- -- -- 25,000
---------- ---------- ---------- ---------- ---------- ----------
Operating income...... 36,536 126,982 100,170 223,617 189,597 241,711
INTEREST EXPENSE............... 46,416 52,226 107,058 62,199 74,516 91,299
INTEREST INCOME................ (1,366) (166) (1,446) (866) (1,019) (1,738)
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS).............. $ (8,514) $ 74,922 $ (5,442) $ 162,284 $ 116,100 $ 152,150
========== ========== ========== ========== ========== ==========
PRO FORMA DATA (UNAUDITED):
Historical net income
(loss)..................... $ (8,514) $ 74,922 $ (5,442) $ 162,284 $ 116,100 $ 152,150
Pro forma income tax expense
(benefit).................. (1,955) 32,454 2,392 65,817 48,691 61,955
---------- ---------- ---------- ---------- ---------- ----------
Pro forma net income
(loss)..................... $ (6,559) $ 42,468 $ (7,834) $ 96,467 $ 67,409 $ 90,195
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-57
<PAGE>
DATALINK CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------- RETAINED EQUITY
SHARES AMOUNT EARNINGS TOTAL
------ ------- --------- --------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993...................... 40,000 $40,000 $362,342 $402,342
Net loss...................................... -- -- (8,514) (8,514)
------ ------- -------- --------
BALANCE, DECEMBER 31, 1994...................... 40,000 40,000 353,828 393,828
Net income.................................... -- -- 74,922 74,922
------ ------- -------- --------
BALANCE, DECEMBER 31, 1995...................... 40,000 40,000 428,750 468,750
Distributions to stockholders................. -- -- (100,000) (100,000)
Net loss...................................... -- -- (5,442) (5,442)
------ ------- -------- --------
BALANCE, DECEMBER 31, 1996 40,000 40,000 323,308 363,308
Net income.................................... -- -- 162,284 162,284
------ ------- -------- --------
BALANCE, JUNE 30, 1997.......................... 40,000 40,000 485,592 525,592
Net loss (unaudited).......................... -- -- (10,134) (10,134)
------ ------- -------- --------
BALANCE, SEPTEMBER 30, 1997
(UNAUDITED)................................... 40,000 $40,000 $475,458 $515,458
====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-58
<PAGE>
DATALINK CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------------------------------ ---------- ---------------------
1994 1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (8,514) $ 74,922 $ (5,442) $ 162,284 $ 116,100 152,150
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities-
Depreciation and
amortization................ 190,647 204,348 217,967 103,847 161,026 156,680
Loss (gain) on sale of fixed
assets...................... -- (2,455) 7,304 -- (1,017) --
Changes in operating assets and
liabilities-
Accounts receivable......... (74,019) 21,090 46,888 (37,733) 12,289 (66,109)
Inventories................. (4,607) (7,130) 9,650 (10,356) (13,987) (14,749)
Prepaid expenses and
other..................... (3,875) (2,126) (26,784) (4,905) (19,513) 3,933
Accounts payable............ 45,529 (76,365) 38,987 (6,573) 16,437 21,785
Accrued expenses............ (38,264) 4,566 21,385 36,990 25,088 55,542
---------- ---------- ---------- ---------- ---------- --------
Net cash provided by
operating activities.... 106,897 216,850 309,955 243,554 296,423 309,232
---------- ---------- ---------- ---------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment........................ (237,532) (47,613) (119,790) (19,880) (97,172) (36,525)
Proceeds from disposition of
equipment........................ -- 8,965 20,381 -- 5,268 --
---------- ---------- ---------- ---------- ---------- --------
Net cash used in investing
activities.............. (237,532) (38,648) (99,409) (19,880) (91,904) (36,525)
---------- ---------- ---------- ---------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on
lines of credit.................. 90,000 (90,000) 20,000 (20,000) -- (20,000)
Proceeds from long-term debt....... 126,180 250,000 15,109 -- 15,109 --
Repayment of long-term debt........ (95,796) (295,047) (147,715) (74,179) (109,549) (97,703)
Distributions to stockholders...... -- -- (100,000) -- -- --
---------- ---------- ---------- ---------- ---------- --------
Net cash provided by (used
in) financing
activities.............. 120,384 (135,047) (212,606) (94,179) (94,440) (117,703)
---------- ---------- ---------- ---------- ---------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (10,251) 43,155 (2,060) 129,495 110,079 155,004
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.......................... 107,703 97,452 140,607 138,547 140,607 138,547
---------- ---------- ---------- ---------- ---------- --------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................. $ 97,452 $ 140,607 $ 138,547 $ 268,042 $ 250,686 $293,551
========== ========== ========== ========== ========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-59
<PAGE>
DATALINK CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
1. BACKGROUND:
DataLink Corporation ("DataLink") is an Arizona corporation with
administrative offices located in Tempe, Arizona. DataLink's product line
includes computer output microfilm, source document microfilming, imaging
systems, data entry services, customized data processing services and customer
programming services.
DataLink intends to enter into a net asset acquisition agreement with
ImageMax, Inc. ("ImageMax") which would close upon the consummation of the
initial public offering of the common stock of ImageMax.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
September 30, 1996 and 1997 Financial Statements
The financial statements as of September 30, 1997 and for the nine months
ended September 30, 1996 and 1997 are unaudited and, in the opinion of
management of DataLink, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the results for
those interim periods. The results of operations for the nine months ended
September 30, 1997 are not necessarily indicative of the results to be expected
for the full year.
Cash and Cash Equivalents
DataLink considers highly liquid investments with original maturities of
three months or less to be cash equivalents. At the balance sheet dates, cash
equivalents were composed primarily of money market funds. Cash equivalents are
carried at cost, which approximates market value. DataLink maintains cash
accounts, which, at times may exceed federally insured limits. DataLink believes
that they are not exposed to any significant risks on their cash accounts.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories are primarily comprised of microfilm, microfiche and related
supplies.
Property and Equipment
Property and equipment are recorded at cost. Additions and improvements are
capitalized and repairs and maintenance are charged to expense as incurred.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements and capital lease assets are
depreciated over the lesser of their useful life or the term of the lease.
Revenue Recognition
Revenue is recognized when the services are rendered or the products are
shipped to customers.
Income Taxes
DataLink has elected to be taxed under Subchapter S of the Internal Revenue
Code, and, accordingly, the taxable income or loss of DataLink is included in
the stockholders' individual tax returns.
F-60
<PAGE>
DATALINK CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
DataLink reports certain income and expense items for income tax purposes
on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to depreciation and the accounting
treatment of a capitalized related party lease. The cumulative amount of these
differences at December 31, 1996 was approximately $75,000. If the S Corporation
status were terminated, a deferred income tax liability related to these
cumulative differences would need to be recorded.
For informational purposes, the accompanying statements of operations
include an unaudited pro forma adjustment for income taxes which would have been
recorded if DataLink had not been an S Corporation, based on the tax laws in
effect during the respective periods. The differences between the federal
statutory income tax rate and the pro forma income tax rate primarily relate to
state income taxes and expenses not deductible for tax purposes.
Supplemental Cash Flow Information
For the years ended December 31, 1994, 1995 and 1996, the six month period
ended June 30, 1997, and the nine month periods ended September 30, 1996 and
1997, DataLink paid interest of $46,416, $52,226, $78,223, $58,823, $55,310 and
$80,940, respectively. Capital lease obligations of $720,000 were incurred on a
related-party facility lease entered into in the year ended December 31, 1996,
the six month period ended June 30, 1996 and the nine month period ended
September 30, 1997.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued expenses are
reflected in the financial statements at fair value due to their short-term
nature. The carrying amount of long-term debt and capital lease obligations
approximates fair value at the balance sheet dates.
Long-Lived Assets
DataLink follows Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of." Accordingly, in the event that facts and circumstances indicate
that property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the assets is
compared to the assets' carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary.
F-61
<PAGE>
DATALINK CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------- JUNE 30, SEPTEMBER 30,
(YEARS) 1995 1996 1997 1997
------------ ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Building (related-party
capital lease)............. 20 $ -- $ 720,000 $ 720,000 $ 720,000
Scanning and filming
equipment.................. 5-7 925,649 853,817 857,475 867,373
Furniture and office
equipment.................. 5-7 208,827 208,370 218,073 224,338
Leasehold improvements....... 5-20 9,715 29,402 29,402 29,402
Purchased software........... 5 48,829 51,100 57,620 58,101
---------- ---------- ---------- ----------
1,193,020 1,862,689 1,882,570 1,899,214
Less-Accumulated depreciation
and amortization........... (723,801) (799,332) (903,179) (956,012)
---------- ---------- ---------- ----------
$ 469,219 $1,063,357 $ 979,391 $ 943,202
========== ========== ========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1994, 1995 and 1996,
the six months ended June 30, 1997 and the nine month periods ended September
30, 1996 and 1997 was $190,647, $204,348, $217,967, $103,847, $161,026 and
$156,680, respectively. As of December 31, 1995 and 1996, June 30, 1997 and
September 30, 1997, DataLink had $88,487, $737,647, $672,000, and $663,000 in
capital lease property, net of accumulated amortization.
4. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30, SEPTEMBER 30,
1995 1996 1997 1997
------- ------- --------- -------------
<S> <C> <C> <C> <C>
Accrued payroll and commissions...... $39,306 $35,086 $ 48,188 $ 21,173
Accrued vacation..................... 10,189 16,618 18,000 33,036
Accrued sales tax.................... 13,473 10,771 21,851 17,929
Accrued interest..................... -- 28,835 37,211 39,194
Other................................ 7,284 327 3,377 35,847
------- ------- -------- --------
$70,252 $91,637 $128,627 $147,179
======= ======= ======== ========
</TABLE>
5. LINES OF CREDIT:
DataLink has a credit facility with a bank providing for a $250,000
revolving line of credit ("Revolver"), a $50,000 equipment line of credit
("Equipment Line"), and two term loans (see Note 6). The borrowings under the
Revolver are secured by substantially all of the assets of DataLink. Advances
under the line bear interest at prime plus 1% (9.5% at September 30, 1997). The
availability under the Revolver is restricted by the borrowing base, as defined.
The Revolver expires on June 30, 1998. The highest amount outstanding under the
Revolver for the year ended December 31, 1996 and the six months ended June 30,
1997 was $20,000 and the average amount outstanding was $14,167 and $20,000,
respectively. The weighted average interest rate on the Revolver for the year
ended December 31, 1996, and the six months ended June 30, 1997 was 9.27% and
9.38%, respectively. There were no amounts outstanding under the Revolver in
1995 or during the three months ended September 30, 1997.
The Equipment Line is used to finance the purchase of equipment by
DataLink. Borrowings are secured by the assets purchased and availability under
the line is limited by the borrowing base, as defined. Advances under the line
bear interest at prime plus 1.5% (10% at September 30, 1997). For
F-62
<PAGE>
DATALINK CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
5. LINES OF CREDIT: -- (CONTINUED)
the years ended December 31, 1994, 1995 and 1996, the six months ended June 30,
1997 and the nine months ended September 30, 1996 and 1997, there were no
amounts outstanding under the line. The line matures on June 30, 1998. The
credit facility requires, among other things, DataLink to meet specified
financial ratios and imposes restrictions on the sales of property.
6. LONG-TERM DEBT (EXCLUDING CAPITALIZED LEASE OBLIGATION TO RELATED PARTY (SEE
NOTE 9)):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30, SEPTEMBER 30,
1995 1996 1997 1997
-------- -------- --------- -------------
<S> <C> <C> <C> <C>
Bank loan, monthly principal and interest payments
of $5,498, interest at prime plus 1.5% (10% at
September 30, 1997), matures on March 31,
2000............................................ $218,516 $172,174 $147,265 $134,103
Bank loan, monthly principal payments of $3,283,
plus interest at prime plus 2% (10.5% at
September 30, 1997), matures on June 1, 1998.... 98,491 59,095 39,070 29,548
Other............................................. -- 12,326 10,740 9,900
Capitalized lease, monthly principal and interest
payments of $5,333, final payment of $23,340 due
on February 25, 1997............................ 86,853 27,659 -- --
-------- -------- -------- --------
403,860 271,254 197,075 173,551
Less-Current portion.............................. (135,272) (121,764) (83,954) (80,671)
-------- -------- -------- --------
$268,588 $149,490 $113,121 $ 92,880
======== ======== ======== ========
</TABLE>
As of December 31, 1996, maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1997...................................... $121,764
1998...................................... 80,034
1999...................................... 66,977
2000...................................... 2,479
--------
$271,254
========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
DataLink leases vehicles and office equipment under noncancelable operating
leases. Rent expense under operating leases for the years ended December 31,
1994, 1995 and 1996, the six month period ended June 30, 1997 and the nine month
periods ended September 30, 1996 and 1997 was $109,519, $119,626, $80,555,
$14,982 $68,420 and $18,899, respectively. Future minimum lease payments under
noncancelable operating leases as of December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997....................................... $25,199
1998....................................... 23,708
1999....................................... 3,231
-------
$52,138
=======
</TABLE>
DataLink is party to various claims and other matters arising in the normal
course of business. In the opinion of management, the outcome of these matters
will not have a material adverse effect on DataLink's financial position or
results of operations.
F-63
<PAGE>
DATALINK CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
8. MAJOR CUSTOMERS:
For the years ended December 31, 1994, 1995 and 1996 and the nine months
ended September 30, 1997, one customer accounted for 10%, 11%, 10% and 10% of
total revenues, respectively. For the year ended December 31, 1994 and the nine
month periods ended September 30, 1996 and 1997, DataLink had another customer
which accounted for 11%, 9% and 14%, respectively, of total revenues. The loss
of one or more of these major clients could have a materially adverse effect on
DataLink's business.
9. RELATED-PARTY TRANSACTIONS:
Leasing Transactions
In March 1996, DataLink entered into a lease on its office facility with an
entity whose stockholders are also the stockholders of DataLink. The lease is
accounted for as a capital lease and has a term of 20 years. The implicit
interest rate of the lease is 13.6%. A security deposit on the building of
$15,000 is recorded in other assets as of December 31, 1996, June 30, 1997 and
September 30, 1997.
At December 31, 1996, the future minimum lease payments under the capital
lease are as follows:
<TABLE>
<S> <C>
1997.................................... $ 85,578
1998.................................... 89,988
1999.................................... 92,613
2000.................................... 97,239
2001.................................... 100,940
2002 and thereafter..................... 1,840,202
----------
Total minimum lease payments............ 2,306,560
Less- Amounts representing interest..... (1,586,560)
----------
Net minimum principal payments.......... $ 720,000
==========
</TABLE>
Due to the payment timing and the implicit interest rate, no principal
payments will be made for several years. As a result, the entire related party
capital lease is classified as long-term. DataLink expects to restructure the
lease as an operating lease in connection with the sale of the business (see
Notes 1 and 10).
Notes Receivable
On June 30, 1997, DataLink issued a $10,000 note to an entity whose
stockholders are also the stockholders of DataLink. The note matures December
31, 1997, with interest due monthly at an annual rate of 9.5%. On April 15,
1996, DataLink issued a $20,000 note to the same entity. The note matured on
June 30, 1997, with interest due monthly at a rate equivalent to the rate under
the Revolver (see Note 5).
10. SALE OF BUSINESS (UNAUDITED):
In September 1997, DataLink and its stockholders entered into a net asset
acquisition agreement with ImageMax (see Note 1).
F-64
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To DocuTech, Inc. and DocuTech Data Systems, Inc.:
We have audited the accompanying combined balance sheets of DocuTech, Inc.
and DocuTech Data Systems, Inc. (Nebraska corporations) as of December 31, 1995
and 1996 and June 30, 1997 and the related combined statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996 and the six months ended June 30, 1997. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DocuTech, Inc. and DocuTech
Data Systems, Inc. as of December 31, 1995 and 1996 and June 30, 1997 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 and the six months ended June 30, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
August 1, 1997
F-65
<PAGE>
DOCUTECH, INC. AND DOCUTECH DATA SYSTEMS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30, SEPTEMBER 30,
1995 1996 1997 1997
-------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash..................................... $ 13,585 $181,065 $152,427 $264,246
Accounts receivable, net of reserves of
$16,200 and $30,000 on June 30, and
September 30, 1997, respectively...... 93,171 235,474 520,315 523,534
Inventories.............................. -- 23,470 5,678 5,678
Prepaid expenses and other............... 5,336 8,331 14,301 9,582
Advances to stockholder.................. 30,609 -- -- --
-------- -------- -------- --------
Total current assets............... 142,701 448,340 692,721 803,040
PROPERTY AND EQUIPMENT, net................ 101,462 118,295 113,849 115,113
-------- -------- -------- --------
$244,163 $566,635 $806,570 $918,153
======== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit........................... $ 37,000 $ -- $ -- $ --
Current portion of long-term debt........ 69,758 25,015 10,184 8,487
Accounts payable......................... 14,759 67,366 59,112 77,731
Accrued expenses......................... 37,722 52,979 104,323 94,993
Deferred revenue......................... 50,522 58,214 108,716 109,370
-------- -------- -------- --------
Total current liabilities.......... 209,761 203,574 282,335 290,581
-------- -------- -------- --------
LONG-TERM DEBT............................. 20,225 9,103 5,041 3,543
-------- -------- -------- --------
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY:
Common stock (DocuTech, Inc.), $1 par
value, 300 shares authorized, issued
and outstanding....................... 300 300 300 300
Common stock (DocuTech Data Systems,
Inc.), $1 par value, 10,000 shares
authorized, issued and outstanding.... 10,000 10,000 10,000 10,000
Retained earnings........................ 3,877 343,658 508,894 613,729
-------- -------- -------- --------
Total stockholders' equity......... 14,177 353,958 519,194 624,029
-------- -------- -------- --------
$244,163 $566,635 $806,570 $918,153
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-66
<PAGE>
DOCUTECH, INC. AND DOCUTECH DATA SYSTEMS, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------- JUNE 30, -----------------------
1994 1995 1996 1997 1996 1997
-------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Services.................. $599,793 $ 853,786 $1,248,631 $ 580,248 $ 866,016 $ 868,685
Products.................. -- 60,087 317,544 202,716 278,520 271,279
Software.................. -- 159,111 756,308 623,731 629,688 1,029,219
-------- ---------- ---------- ---------- ---------- ----------
Total revenues....... 599,793 1,072,984 2,322,483 1,406,695 1,774,224 2,169,183
-------- ---------- ---------- ---------- ---------- ----------
COST OF REVENUES:
Cost of services.......... 376,573 479,029 500,711 267,429 340,137 405,012
Cost of products.......... -- 52,250 276,125 176,275 242,110 233,165
Cost of software.......... -- 21,744 308,614 97,010 257,844 201,890
Depreciation.............. 11,806 24,430 31,474 17,570 23,728 27,596
-------- ---------- ---------- ---------- ---------- ----------
388,379 577,453 1,116,924 558,284 863,819 867,663
-------- ---------- ---------- ---------- ---------- ----------
Gross profit......... 211,414 495,531 1,205,559 848,411 910,405 1,301,520
PRODUCT DEVELOPMENT
EXPENSES.................. -- 127,032 161,414 94,874 136,522 124,590
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES... 198,807 274,262 585,564 284,381 428,727 477,435
IMAGEMAX TRANSACTION
COSTS..................... -- -- -- -- -- 56,864
-------- ---------- ---------- ---------- ---------- ----------
Operating income..... 12,607 94,237 458,581 469,156 345,156 642,631
INTEREST EXPENSE............ 4,178 13,126 15,848 2,539 13,464 3,267
INTEREST INCOME............. -- -- (3,248) -- -- --
-------- ---------- ---------- ---------- ---------- ----------
NET INCOME.................. $ 8,429 $ 81,111 $ 445,981 $ 466,617 $ 331,692 $ 639,364
======== ========== ========== ========== ========== ==========
PRO FORMA DATA (UNAUDITED)
Historical net income..... $ 8,429 $ 81,111 $ 445,981 $ 466,617 $ 331,692 $ 639,364
Pro forma income taxes.... 3,372 32,444 178,392 186,647 132,677 255,746
-------- ---------- ---------- ---------- ---------- ----------
PRO FORMA NET INCOME........ $ 5,057 $ 48,667 $ 267,589 $ 279,970 $ 199,015 $ 383,618
======== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-67
<PAGE>
DOCUTECH, INC. AND DOCUTECH DATA SYSTEMS, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DOCUTECH DATA
DOCUTECH, INC. SYSTEMS, INC.
--------------- ----------------
COMMON STOCK COMMON STOCK
--------------- ---------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
------ ------ ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994............. 300 $300 -- $ -- $(19,063) $(18,763)
Net income...................... -- -- -- -- 8,429 8,429
--- ---- ------ ------- -------- --------
BALANCE, DECEMBER 31, 1994........... 300 300 -- -- (10,634) (10,334)
Dividends to stockholders....... -- -- -- -- (66,600) (66,600)
Issuance of common stock........ -- -- 10,000 10,000 -- 10,000
Net income...................... -- -- -- -- 81,111 81,111
--- ---- ------ ------- -------- --------
BALANCE, DECEMBER 31, 1995........... 300 300 10,000 10,000 3,877 14,177
Dividends to stockholders....... -- -- -- -- (106,200) (106,200)
Net income...................... -- -- -- -- 445,981 445,981
--- ---- ------ ------- -------- --------
BALANCE, DECEMBER 31, 1996........... 300 300 10,000 10,000 343,658 353,958
Dividends to stockholders....... -- -- -- -- (301,381) (301,381)
Net income...................... -- -- -- -- 466,617 466,617
--- ---- ------ ------- -------- --------
BALANCE, JUNE 30, 1997............... 300 300 10,000 10,000 508,894 519,194
Dividends to stockholders
(unaudited).................. -- -- -- -- (67,912) (67,912)
Net income (unaudited).......... -- -- -- -- 172,747 172,747
--- ---- ------ ------- -------- --------
BALANCE SEPTEMBER 30, 1997
(UNAUDITED)........................ 300 $300 10,000 $10,000 $613,729 $624,029
=== ==== ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-68
<PAGE>
DOCUTECH, INC. AND DOCUTECH DATA SYSTEMS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------------------------- JUNE 30, -------------------
1994 1995 1996 1997 1996 1997
-------- ------- -------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 8,429 $81,111 $445,981 $466,617 $331,692 $639,364
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation................................ 11,806 24,430 31,474 17,570 23,728 27,596
Loss on disposal of equipment -- -- 418 -- 418 --
Change in operating assets and liabilities-
Accounts receivable...................... (12,546) (58,858) (142,303) (284,841) (180,109) (288,060)
Inventories.............................. -- -- (23,470) 17,792 -- 17,792
Prepaid expenses and other............... 4,267 4,266 (2,995) (5,970) 2,836 (1,251)
Accounts payable......................... 16,077 (11,419) 52,607 (8,254) 33,253 10,365
Accrued expenses......................... (14,280) 23,028 15,257 51,344 73,959 42,014
Deferred revenue......................... -- 50,522 7,692 50,502 (3,394) 51,156
-------- ------- -------- -------- -------- --------
Net cash provided by operating
activities........................... 13,753 113,080 384,661 304,760 282,383 498,976
-------- ------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............. (22,317) (16,897) (31,025) (13,124) (29,826) (24,414)
-------- ------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit... 39,000 (2,000) (37,000) -- (37,000) --
Proceeds from long-term debt.................... 36,569 30,000 -- -- -- --
Repayments of long-term debt.................... (63,405) (29,203) (73,565) (18,893) (42,271) (22,088)
Advances to stockholders........................ -- (30,609) (3,953) -- (3,953) --
Repayment of officer loans...................... (7,684) -- -- -- -- --
Issuance of common stock........................ -- 10,000 -- -- -- --
Dividends to stockholders....................... -- (66,600) (71,638) (301,381) -- (369,293)
-------- ------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities................. 4,480 (88,412) (186,156) (320,274) (83,224) (391,381)
-------- ------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH................... (4,084) 7,771 167,480 (28,638) 169,333 83,181
CASH, BEGINNING OF PERIOD......................... 9,898 5,814 13,585 181,065 13,585 181,065
-------- ------- -------- -------- -------- --------
CASH, END OF PERIOD............................... $ 5,814 $13,585 $181,065 $152,427 $182,918 $264,246
======== ======= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-69
<PAGE>
DOCUTECH, INC. AND DOCUTECH DATA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
1. BACKGROUND:
DocuTech, Inc. ("DTI"), a service bureau, and DocuTech Data Systems, Inc.
("DDS"), a provider of open-architecture document scanning software products,
operate jointly as DocuTech ("DocuTech") in Lincoln, Nebraska. DTI provides
document microfilming and imaging services. DDS markets its DocuROM, FileTRAX
and other scanning and electronic image management software nationally to both
end users and service bureaus. DDS presently has more than 70 service bureaus
acting as value-added resellers ("VARs") for its software products.
DDS and its stockholders intend to enter into a merger agreement with
ImageMax, Inc. (ImageMax) and DTI and its stockholders intend to enter a net
asset acquisition agreement with ImageMax which would both close upon the
consummation of the initial public offering of the common stock of ImageMax.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The combined financial statements as of September 30, 1997 and for the nine
months ended September 30, 1996 and 1997 are unaudited and, in the opinion of
the management of DocuTech, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
position and results of operations for those interim periods. The results of
operations for the nine months ended September 30, 1997 are not necessarily
indicative of the results to be expected for any other interim period or the
entire year.
Basis of Presentation
The combined financial statements include the accounts of DTI and DDS, both
of which are controlled by the same majority stockholder. The financial
statements reflect the elimination of all significant intercompany accounts and
transactions.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories at December 31, 1996 consist of scanning equipment which was
sold to a customer in March 1997.
Property and Equipment
Property and equipment are recorded at cost. Additions and improvements are
capitalized and repairs and maintenance are charged to expenses as incurred.
Property and equipment capitalized under capital leases are recorded at the
lesser of the present value of the minimum lease payments or the fair market
value of the property. Depreciation is provided using the straight-line method
over the estimated useful lives of the related assets or the lease term,
whichever is shorter.
Software Development Costs
In accordance with Statement of Financial Accounting Standards (SFAS) No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," DocuTech capitalizes certain costs incurred to internally
develop software which is licensed to customers. Capitalization of such software
development costs begins upon the establishment of technological feasibility
(typically
F-70
<PAGE>
DOCUTECH, INC. AND DOCUTECH DATA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
determined to be upon completion of a working model) and concludes when the
product is available for general release. For the years ended December 31, 1995
and 1996, and the nine months ended September 30, 1997, such costs were
immaterial. Costs incurred prior to the establishment of technological
feasibility are charged to product development expense as incurred.
Revenue Recognition
Service revenue includes document microfilming and imaging services.
Service revenue is recognized as the services are performed. Product revenue is
recognized when the products are shipped to customers.
Software revenue includes software licensing fees, consulting,
implementation, training and maintenance. Depending on contract terms and
conditions, software license fees are recognized upon delivery of the product if
no significant vendor obligations remain and collection of the resulting
receivable is deemed probable. DocuTech's software licensing agreements provide
for customer support (typically 90 days) as an accommodation to purchasers of
its products. The portion of the license fee associated with customer support is
unbundled from the license fee and is recognized ratably over the warranty
period as maintenance revenue.
Consulting, implementation and training revenues are recognized as the
services are performed. Maintenance revenues are recognized ratably over the
terms of the maintenance agreements. Deferred revenue represents billed software
maintenance for future periods.
Income Taxes
DocuTech has elected to be taxed under Subchapter S of the Internal Revenue
Code, and, accordingly, the taxable income of the Company is included in the
stockholders' individual tax returns.
DocuTech reports certain income and expense items for income tax purposes
on a different basis than that reflected in the accompanying combined financial
statements. The primary timing differences are due to revenue and accruals not
currently reflected as income or deductible for tax purposes, respectively. The
cumulative amount of these differences at June 30, 1997 was approximately
$97,000. If the S Corporation status were terminated, then a deferred income tax
asset related to these cumulative differences would need to be recorded.
For informational purposes, given the pending sale of the business, the
accompanying combined statements of operations include an unaudited pro forma
adjustment for income taxes which would have been recorded if DocuTech had not
been an S Corporation, based on the tax laws in effect during the respective
periods. The differences between the federal statutory income tax rate and the
pro forma income tax rate primarily relates to state income taxes and expenses
not deductible for tax purposes.
Supplemental Cash Flow Information
For the years ended December 31, 1994, 1995 and 1996, for the six months
ended June 30, 1997 and for the nine months ended September 30, 1996 and 1997,
DocuTech paid interest of $4,013, $12,525, $15,085, $2,694, $13,358, and $3,267
respectively. Capital lease obligations of $36,000, $25,022, $17,700, $0,
$17,700 and $0 were incurred on equipment leases entered into in 1994, 1995,
1996, the six months ended June 30, 1997 and the nine months ended September 30,
1996 and 1997, respectively.
F-71
<PAGE>
DOCUTECH, INC. AND DOCUTECH DATA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued expenses are
reflected in the combined financial statements at fair value due to their
short-term nature. The carrying amount of long-term debt approximates fair value
on the balance sheet dates.
Long-Lived Assets
DocuTech follows SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of." Accordingly, in the event
that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the assets is compared to the assets'
carrying amount to determine if a write-down to market value or discounted cash
flow value is necessary.
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ------------------- JUNE 30, SEPTEMBER 30,
(YEARS) 1995 1996 1997 1997
------------ -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Scanning and filming
equipment............. 5-7 $121,820 $152,606 $159,614 $159,614
Furniture and office
equipment............. 7 964 6,713 6,713 6,713
Computers and related
equipment............. 5 30,689 42,879 48,995 55,485
Vehicles................. 5 3,000 -- -- 4,800
-------- -------- -------- --------
156,473 202,198 215,322 226,612
Less- Accumulated
depreciation.......... (55,011) (83,903) (101,473) (111,499)
-------- -------- -------- --------
$101,462 $118,295 $113,849 $115,113
======== ======== ======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1994, 1995 and 1996,
for the six months ended June 30, 1997 and for the nine months ended September
30, 1996 and 1997, was $11,806, $24,430, $31,474, $17,570, $23,728 and $27,596,
respectively. As of December 31, 1995 and 1996, June 30, 1997 and September 30,
1997, DocuTech had $31,844, $22,573, $15,251 and $11,590, respectively, in
property, net of accumulated amortization, financed under capital leases.
F-72
<PAGE>
DOCUTECH, INC. AND DOCUTECH DATA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
4. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30, SEPTEMBER 30,
1995 1996 1997 1997
------- ------- -------- -------------
<S> <C> <C> <C> <C>
Accrued payroll and commissions...... $22,128 $24,573 $ 71,555 $ 34,848
Accrued professional fees............ 6,000 12,000 15,000 15,000
Accrued severance.................... -- -- -- 33,388
Other................................ 9,594 16,406 17,768 11,757
------- ------- -------- --------
$37,722 $52,979 $104,323 $ 94,993
======= ======= ======== ========
</TABLE>
5. LINE OF CREDIT:
DocuTech has a line of credit with a bank. The line of credit provides for
a maximum borrowing of 70% the Company's accounts receivable which is computed
at the end of each calendar quarter. The line of credit bears interest at 9.25%
per year. The line is secured by all of DocuTech's assets and is personally
guaranteed by the majority stockholder. The highest outstanding balance was
$40,000 and $37,000 during 1995 and 1996, respectively. The average outstanding
balance was $38,000 and $13,750 during 1995 and 1996, respectively. The line was
not used during the nine months ended September 30, 1997.
6. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30, SEPTEMBER 30,
1995 1996 1997 1997
------- ------- -------- -------------
<S> <C> <C> <C> <C>
Term loan payable to a bank in monthly
installments of $801 including
interest at 9.5%, through May
1997............................... $16,708 $ 7,806 $ -- $ --
Term loan payable to a bank in two
semi-annual installments of
$15,000, plus interest at 9.5%,
through October 1996............... 30,000 -- -- --
1Obligations under capital leases (see
Note 7)............................ 43,275 26,312 15,225 12,030
------- ------- ------- -------
89,983 34,118 15,225 12,030
Less- Current portion................. (69,758) (25,015) (10,184) (8,487)
------- ------- ------- -------
$20,225 $ 9,103 $ 5,041 $ 3,543
======= ======= ======= =======
</TABLE>
7. COMMITMENTS:
DocuTech leases vehicles and office space under noncancelable operating
leases. Rent expense for all operating leases for the years ended December 31,
1994, 1995 and 1996, for the six months ended June 30, 1997 and for the nine
months ended September 30, 1996 and 1997 was $50,472, $72,869, $75,177, $65,076,
$65,680 and $91,739, respectively. DocuTech also finances equipment purchases
through capital leases.
F-73
<PAGE>
DOCUTECH, INC. AND DOCUTECH DATA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
7. COMMITMENTS: -- (CONTINUED)
Future minimum lease payments under DocuTech's leases as of June 30, 1997
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1997................................................. $ 7,241 $ 43,849
1998................................................. 9,079 26,732
1999................................................. 1,548 --
------- --------
17,868 $ 70,581
========
Less-Amount representing interest.................... (2,643)
-------
Present value of future minimum principal lease
payments........................................... 15,225
Less-Current portion................................. (10,184)
-------
$ 5,041
=======
</TABLE>
8. RELATED-PARTY TRANSACTIONS:
During the year ended December 31, 1995 and the nine months ended September
30, 1996, DocuTech advanced $30,609 and $3,953, respectively to the sole
stockholder of DTI and his wife. These advances totalling $34,562 were declared
a dividend in December 1996.
In July 1997, DocuTech agreed to a severance arrangement with an employee
who is also a 10% stockholder of DDS. DocuTech agreed to a severance payment of
approximately $40,000, payable in five equal monthly installments, beginning on
August 30, 1997. DocuTech recognized the $40,000 as an expense in third quarter
of 1997. The unpaid portion is included in accrued expenses in the accompanying
September 30, 1997 combined balance sheet.
F-74
<PAGE>
DOCUTECH, INC. AND DOCUTECH DATA SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
9. SEGMENT DATA:
DocuTech operates in two business segments. The following table presents
information about DocuTech's operations by segment:
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED DECEMBER 31, ENDED
---------------------------------- JUNE 30,
1994 1995 1996 1997
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Service Bureau....................................... $599,793 $ 853,786 $1,248,631 $ 580,248
Software Products.................................... -- 219,198 1,073,852 826,447
-------- ---------- ---------- ----------
$599,793 $1,072,984 $2,322,483 $1,406,695
======== ========== ========== ==========
Net Income (Loss):
Service Bureau....................................... $ 8,429 $ 86,184 $ 415,709 $ 206,781
Software Products.................................... -- (5,073) 30,272 259,836
-------- ---------- ---------- ----------
$ 8,429 $ 81,111 $ 445,981 $ 466,617
======== ========== ========== ==========
Identifiable Assets:
Service Bureau....................................... $ -- $ 220,511 $ 354,779 $ 282,978
Software Products.................................... -- 23,652 211,856 523,592
-------- ---------- ---------- ----------
$ -- $ 244,163 $ 566,635 $ 806,570
======== ========== ========== ==========
Property and Equipment Additions (including capital lease
additions):
Service Bureau....................................... $ 58,317 $ 39,033 $ 37,224 $ 5,978
Software Products.................................... -- 2,886 11,501 7,146
-------- ---------- ---------- ----------
$ 58,317 $ 41,919 $ 48,725 $ 13,124
======== ========== ========== ==========
Depreciation Expense:
Service Bureau....................................... $ 11,806 $ 24,142 $ 29,966 $ 15,994
Software Products.................................... -- 288 1,508 1,576
-------- ---------- ---------- ----------
$ 11,806 $ 24,430 $ 31,474 $ 17,570
======== ========== ========== ==========
</TABLE>
10. SUBSEQUENT EVENT (UNAUDITED):
In September 1997, DTI and DDS and their stockholders entered into the
agreements discussed in Note 1 with ImageMax.
F-75
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Image & Information Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Image &
Information Solutions, Inc. (a Louisiana corporation) as of October 31, 1995 and
1996 and July 31, 1997 and the related consolidated statements of operations,
stockholder's equity and cash flows for each of the three years in the period
ended October 31, 1996 and for the nine months ended July 31, 1997. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Image & Information
Solutions, Inc. as of October 31, 1995 and 1996 and July 31, 1997 and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1996 and for the nine months ended July 31, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Jackson, Mississippi,
October 10, 1997.
F-76
<PAGE>
IMAGE & INFORMATION SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------- JULY 31,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents....................... $1,530,159 $1,320,832 $1,252,026
Certificates of deposit......................... 119,557 127,352 131,073
Accounts receivable............................. 368,442 337,243 468,043
Inventory....................................... 436,208 399,708 453,338
---------- ---------- ----------
Total current assets...................... 2,454,366 2,185,135 2,304,480
---------- ---------- ----------
PROPERTY AND EQUIPMENT, net....................... 733,436 725,860 719,256
RECEIVABLE FROM STOCKHOLDER....................... 89,080 119,080 139,330
---------- ---------- ----------
$3,276,882 $3,030,075 $3,163,066
========== ========== ==========
LIABILITIES AND
STOCKHOLDER'S EQUITY
--------------------
CURRENT LIABILITIES:
Current portion of long-term debt............... $ 60,286 $ 77,105 $ 81,446
Accounts payable................................ 258,338 190,950 129,514
Accrued expenses................................ 216,040 155,290 191,675
Taxes payable................................... 667,844 648,176 708,847
---------- ---------- ----------
Total current liabilities................. 1,202,508 1,071,521 1,111,482
---------- ---------- ----------
LONG-TERM DEBT, net of current portion............ 474,329 426,582 363,211
---------- ---------- ----------
DEFERRED TAXES PAYABLE............................ 6,176 2,761 2,761
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
(Notes 5 and 6)
STOCKHOLDER'S EQUITY:
Common stock, no par value, stated value $3.33
per share, 25,000 shares authorized, 300
shares issued................................ 1,000 1,000 1,000
Treasury stock, 200 shares, at cost............. (68,682) (68,682) (68,682)
Retained earnings............................... 1,661,551 1,596,893 1,753,294
---------- ---------- ----------
Total stockholders' equity................ 1,593,869 1,529,211 1,685,612
---------- ---------- ----------
$3,276,882 $3,030,075 $3,163,066
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-77
<PAGE>
IMAGE & INFORMATION SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31, JULY 31,
------------------------------------ ------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Services................ $2,292,478 $2,302,910 $2,383,522 $1,839,345 $2,014,104
Products................ 1,345,227 1,710,397 1,575,118 1,298,135 1,316,370
---------- ---------- ---------- ---------- ----------
3,637,705 4,013,307 3,958,640 3,137,480 3,330,474
---------- ---------- ---------- ---------- ----------
COST OF REVENUES:
Services................ 724,157 917,331 1,022,868 721,310 767,154
Products................ 1,129,297 1,302,406 1,228,915 1,024,455 965,719
Depreciation............ 158,693 154,715 156,675 120,124 126,585
---------- ---------- ---------- ---------- ----------
2,012,147 2,374,452 2,408,458 1,865,889 1,859,458
---------- ---------- ---------- ---------- ----------
Gross profit......... 1,625,558 1,638,855 1,550,182 1,271,591 1,471,016
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES................ 1,327,397 1,264,394 1,672,745 1,084,511 1,203,961
---------- ---------- ---------- ---------- ----------
Operating income
(loss)............ 298,161 374,461 (122,563) 187,080 267,055
INTEREST EXPENSE.......... 97,326 88,815 95,101 72,305 75,126
INTEREST INCOME........... (52,184) (97,611) (93,221) (65,716) (60,333)
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes...... 253,019 383,257 (124,443) 180,491 252,262
INCOME TAXES.............. 101,667 143,725 (59,785) 68,587 95,861
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)......... $ 151,352 $ 239,532 $ (64,658) $ 111,904 $ 156,401
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-78
<PAGE>
IMAGE & INFORMATION SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- RETAINED TREASURY STOCKHOLDER'S
SHARES AMOUNT EARNINGS STOCK EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, NOVEMBER 1, 1993............ 300 $1,000 $1,270,667 $(68,682) $1,202,985
Net income......................... -- -- 151,352 -- 151,352
----- ------ ---------- -------- ----------
BALANCE, OCTOBER 31, 1994............ 300 1,000 1,422,019 (68,682) 1,354,337
Net income......................... -- -- 239,532 -- 239,532
----- ------ ---------- -------- ----------
BALANCE, OCTOBER 31, 1995............ 300 1,000 1,661,551 (68,682) 1,593,869
Net loss........................... -- -- (64,658) -- (64,658)
----- ------ ---------- -------- ----------
BALANCE, OCTOBER 31, 1996............ 300 1,000 1,596,893 (68,682) 1,529,211
Net income......................... -- -- 156,401 -- 156,401
----- ------ ---------- -------- ----------
BALANCE, JULY 31, 1997............... 300 $1,000 $1,753,294 $(68,682) $1,685,612
===== ====== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-79
<PAGE>
IMAGE & INFORMATION SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31, JULY 31,
------------------------------------ ------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................ $ 151,352 $ 239,532 $ (64,658) $ 111,904 $ 156,401
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities-
Depreciation......................... 158,693 154,715 156,675 120,124 126,585
Provision for loss on accounts
receivable........................ 71,191 59,798 105,491 79,118 25,000
Provision for deferred income
taxes............................. (38,754) (3,959) (3,415) -- --
Change in operating assets and
liabilities-
Accounts receivable............... (44,520) (110,645) (74,292) (116,727) (155,800)
Inventories....................... 15,081 (56,826) 36,500 167,174 (52,485)
Accounts payable.................. 129,479 (22,537) (67,388) (118,885) (61,436)
Accrued expenses.................. 112,822 (1,234) (60,750) (46,532) 36,385
Taxes payable..................... 162,688 173,333 (19,668) 92,055 60,671
Net changes in other assets and
liabilities..................... -- (6,351) (7,795) (5,160) (4,866)
---------- ---------- ---------- ---------- ----------
Net cash provided by operating
activities.................... 718,032 425,826 700 283,071 130,455
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increases in receivables from
stockholder............................ (30,298) (29,399) (30,000) (22,500) (20,250)
Purchases of property and equipment...... (162,501) (199,170) (149,099) (87,478) (119,981)
---------- ---------- ---------- ---------- ----------
Net cash used in investing
activities.................... (192,799) (228,569) (179,099) (109,978) (140,231)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............. 566,169 14,311 36,376 36,376 --
Principal payments on long-term debt..... (760,584) (47,576) (67,304) (48,408) (59,030)
---------- ---------- ---------- ---------- ----------
Net cash used in financing
activities.................... (194,415) (33,265) (30,928) (12,032) (59,030)
---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. 330,818 163,992 (209,327) 161,061 (68,806)
CASH AND CASH EQUIVALENTS, beginning of
period................................... 1,035,349 1,366,167 1,530,159 1,530,159 1,320,832
---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period... $1,366,167 $1,530,159 $1,320,832 $1,691,220 $1,252,026
========== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Cash paid for-
Income taxes........................... $ 9,133 $ 18,924 $ 17,456 $ 12,986 $ 75,199
========== ========== ========== ========== ==========
Interest............................... $ 54,536 $ 39,650 $ 36,545 $ 28,655 $ 24,653
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-80
<PAGE>
IMAGE & INFORMATION SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED JULY 31, 1996 IS UNAUDITED.)
1. BACKGROUND:
Image & Information Solutions, Inc. (formerly Microfilm Supply, Inc.)
("I(2) Solutions") was incorporated in Louisiana on October 8, 1974. I(2)
Solutions provides data and information conversion services ranging from optical
disk scanning/imaging to microfilm processing. I(2) Solutions is also an
authorized Minolta and Kodak dealer, selling various microfilm and microfiche
readers as well as other related equipment.
During September 1997, I(2) Solutions and its stockholder entered into a
merger agreement with ImageMax, Inc. ("ImageMax") which will close upon the
consummation of the initial public offering of the common stock of ImageMax.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Consolidated Financial Statements
The consolidated financial statements for the nine months ended July 31,
1996 are unaudited and, in the opinion of management of I(2) Solutions, include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the results for those interim periods. The results of
operations for the nine months ended July 31, 1997 are not necessarily
indicative of the results to be expected for the full year.
Principles of Consolidation
The consolidated financial statements include the results of I(2) Solutions
and its subsidiary. All intercompany transactions have been eliminated from the
accompanying consolidated financial statements.
Cash and Cash Equivalents
I(2) Solutions considers highly liquid investments with original maturities
of three months or less to be cash equivalents. Cash equivalents are carried at
cost, which approximates market value.
Accounts Receivable
Accounts receivable are stated net of an allowance for uncollectible
accounts of $25,000 at July 31, 1997.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories primarily represent microfiche viewing and imaging equipment
and production and related supplies.
Property and Equipment
Property and equipment are recorded at cost. Additions and improvements are
capitalized and repairs and maintenance are charged to expenses as incurred.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are depreciated over the
lesser of their useful life or the term of the lease.
F-81
<PAGE>
IMAGE & INFORMATION SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JULY 31, 1996 IS UNAUDITED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Revenue Recognition
Revenue is recognized when the services are rendered or the products
shipped to customers.
Income Taxes
I(2) Solutions accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities and are measured using enacted tax rates that are expected to be in
effect when the differences reverse. See Note 6.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued expenses are
reflected in the consolidated financial statements at fair value due to the
short-term nature of those instruments. The carrying amount of long-term debt
approximates fair value on the balance sheet dates.
Long-Lived Assets
I(2) Solutions follows SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the assets is compared to the assets'
carrying amount to determine if a write-down to market value or discounted cash
flow value is necessary.
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
ESTIMATED OCTOBER 31,
USEFUL LIVES ----------------------- JULY 31,
YEARS 1995 1996 1997
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Scanning and filming equipment.......... 5-7 $1,159,060 $1,270,910 $1,388,074
Furniture and office equipment.......... 5-7 81,116 81,116 82,434
Autos................................... 5 163,590 177,981 159,041
Building and building improvements...... 30 644,847 661,061 661,061
Land.................................... 124,809 124,809 126,809
---------- ---------- ----------
2,173,422 2,315,877 2,417,419
Less- Accumulated depreciation.......... (1,439,986) (1,590,017) (1,698,163)
---------- ---------- ----------
$ 733,436 $ 725,860 $ 719,256
========== ========== ==========
</TABLE>
F-82
<PAGE>
IMAGE & INFORMATION SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JULY 31, 1996 IS UNAUDITED.)
4. LONG-TERM DEBT:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------- JULY 31,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Term loan payable to a bank in monthly
installments of $7,515 including interest at
7.97%, through April 2002, secured by real
estate...................................... $457,282 $402,157 $357,661
Term loan payable to a bank in monthly
installments of $490 including interest at
7.75% through February 1999, secured by
automobiles................................. -- 12,111 8,303
Term loan payable to a bank in monthly
installments of $645 including interest at
7.75% through February 1999, secured by
automobiles................................. -- 15,948 10,935
Term loan payable to a bank in monthly
installments of $455 including interest at
8.9% through July 1998, secured by
automobiles................................. 12,907 8,427 4,793
Note payable to former stockholder in varying
monthly installments of $417 to $883 through
March 2009 without interest, interest
imputed on present value at 8%.............. 64,426 65,044 62,965
-------- -------- --------
534,615 503,687 444,657
Less- Current portion......................... (60,286) (77,105) (81,446)
-------- -------- --------
$474,329 $426,582 $363,211
======== ======== ========
</TABLE>
As of October 31, 1996, maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31,
- -----------------------
<S> <C>
1997.................................... $ 77,105
1998.................................... 86,736
1999.................................... 80,784
2000.................................... 83,126
2001.................................... 90,000
Thereafter.............................. 85,936
--------
$503,687
========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
I(2) Solutions leases certain office space (See Note 8) and certain
equipment under noncancelable operating leases. Rent expense for the years ended
October 31, 1994, 1995 and 1996, was $90,245, $74,054 and $59,943, respectively.
Future minimum lease payments as of July 31, 1997 are as follows:
<TABLE>
<S> <C>
1997..................................... $13,081
1998..................................... 17,324
1999..................................... 3,872
-------
$34,277
=======
</TABLE>
F-83
<PAGE>
IMAGE & INFORMATION SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JULY 31, 1996 IS UNAUDITED.)
5. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
I(2) Solutions is party to various claims and other matters arising in the
normal course of business. In the opinion of management, the outcome of these
matters will not have a material adverse effect on I(2) Solutions' financial
position or results of operations. See Note 6 regarding Income Taxes.
6. INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------ JULY 31,
1994 1995 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Current Provision (Benefit):
Federal............................. $123,207 $123,559 $(54,188) $81,482
State............................... 17,214 24,125 (2,182) 14,379
Deferred Provision (Benefit):
Federal............................. (32,941) (3,365) (2,903) --
State............................... (5,813) (594) (512) --
-------- -------- -------- -------
$101,667 $143,725 $(59,785) $95,861
======== ======== ======== =======
</TABLE>
The reconciliation of the statutory Federal income tax rate to I(2)
Solutions' effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------ JULY 31,
1994 1995 1996 1997
---- ---- ---- --------
<S> <C> <C> <C> <C>
Income tax rate................................... 34% 34% 34% 34%
State income taxes, net of federal tax benefit.... 4 4 4 4
Non deductible expense............................ 2 -- 10 --
-- -- -- --
40% 38% 48% 38%
== == == ==
</TABLE>
The tax effect of temporary differences as established in accordance with
SFAS No. 109 that give rise to deferred taxes are as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------- JULY 31,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Gross deferred tax assets:
Accruals and reserves not currently
deductible............................... $ 51,905 $ 67,790 $ 67,790
Gross deferred tax liability:
Book/tax difference of accounts
receivable............................... (58,081) (70,551) (70,551)
-------- -------- --------
Net deferred tax liability:................. $ 6,176 $ 2,761 $ 2,761
======== ======== ========
</TABLE>
I(2) Solutions did not have any valuation allowances against deferred tax
assets at July 31, 1997, as it believes it is more likely than not that the
deferred tax assets will be realized.
During 1997 I(2) Solutions filed amended Federal and state tax returns
which resulted in the payment of additional income taxes and interest
attributable to the year ended October 31, 1996 and certain prior years. The
accompanying consolidated financial statements reflect the income tax expense
and related interest attributable to the respective periods. As of October 31,
1995 and 1996 and July 31, 1997, income taxes payable included interest payable
of $87,000, $140,000, and $187,000, respectively. The accompanying consolidated
financial statements do not reflect any provision for
F-84
<PAGE>
IMAGE & INFORMATION SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED JULY 31, 1996 IS UNAUDITED.)
6. INCOME TAXES: -- (CONTINUED)
penalties or related interest that may be incurred as a result of these
additional tax payments. These taxes, interest and penalties could range from $0
to approximately $600,000.
7. EMPLOYEE INCENTIVE PLANS:
I(2) Solutions maintains a 401(k) Plan for benefit of its employees. Under
provisions of the Plan, I(2) Solutions matches 100% of employees' total
contributions to the Plan, subject to Internal Revenue Service limitations.
Total expense recorded by I(2) Solutions related to the Plan was $42,000,
$39,000 and $49,000 for the years ended October 31, 1994, 1995 and 1996.
During the fiscal year ended October 31, 1996 and the nine month period
ended July 31, 1997, I(2) Solutions paid discretionary bonuses to the
stockholder totaling approximately $419,000 in 1996 and $162,000 in 1997. These
bonuses were paid throughout 1996 and 1997, with the majority of payments
occurring in the fourth quarter of fiscal 1996 and the first quarter of fiscal
1997.
8. RELATED-PARTY TRANSACTIONS:
I(2) Solutions rents office space in Bossier City, Louisiana, from an
educational trust fund benefiting the stockholder's children. Rent payments to
the trust fund totaled $74,000, $71,000 and $42,000 for the years ended October
31, 1994, 1995 and 1996. I(2) Solutions also rents certain other space from the
stockholder's parents; rental payments pursuant to this agreement totaled
$12,000 for each of the years ended October 31, 1994, 1995 and 1996.
In February 1997 I(2) Solutions moved the documents imaging portion of its
operations to a newly constructed building adjacent to its then existing Monroe,
Louisiana facility. The newly constructed building is owned by the I(2)
Solutions stockholder. Through July 31, 1997 the stockholder has not charged
I(2) Solutions any rent.
In 1993 I(2) Solutions entered into a split-dollar life insurance agreement
with the stockholder. Under the terms of agreement, I(2) Solutions paid premiums
on life insurance policies covering the stockholder and his father. These
premiums paid have been recorded as a receivable and are included in Receivable
from Stockholder in the accompanying consolidated financial statements. I(2)
Solutions maintains an assignment of the cash surrender value of the policies as
collateral for the premiums paid.
F-85
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Image Memory Systems, Inc.:
We have audited the accompanying balance sheets of Image Memory Systems,
Inc. (an Ohio corporation) as of November 30, 1995 and 1996 and August 31, 1997
and the related statements of operations, shareholder's equity and cash flows
for each of the three years in the period ended November 30, 1996 and the nine
months ended August 31, 1997. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Image Memory Systems, Inc.
as of November 30, 1995 and 1996 and August 31, 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
November 30, 1996 and the nine months ended August 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
October 15, 1997
F-86
<PAGE>
IMAGE MEMORY SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------- AUGUST 31,
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash................................................ $ 656 $ 134 $ 41,881
Accounts receivable, net of reserves of $18,175,
$4,700 and $4,700................................ 549,189 322,960 392,384
Inventories......................................... 77,704 10,775 9,748
Deferred tax asset.................................. 2,170 21,394 21,394
Prepaid expenses and other.......................... 16,122 47,288 32,255
-------- -------- --------
Total current assets.......................... 645,841 402,551 497,662
PROPERTY AND EQUIPMENT, net........................... 233,849 167,287 123,142
OTHER ASSETS.......................................... 74,856 75,185 73,295
-------- -------- --------
$954,546 $645,023 $694,099
======== ======== ========
LIABILITIES AND
SHAREHOLDER'S EQUITY
--------------------
CURRENT LIABILITIES:
Line of credit...................................... $ 40,000 $137,000 $ --
Current portion of long-term debt................... 331,233 107,290 89,289
Accounts payable.................................... 140,689 103,766 61,111
Distributions payable............................... -- -- 106,383
Accrued expenses and other.......................... 145,151 98,085 101,587
-------- -------- --------
Total current liabilities..................... 657,073 446,141 358,370
-------- -------- --------
LONG-TERM DEBT........................................ 72,381 161,042 107,738
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDER'S EQUITY:
Common stock, no par value, 750 shares authorized,
100 shares issued and 33.5 shares outstanding.... 100,000 100,000 100,000
Retained earnings................................... 408,496 221,244 411,395
Treasury stock...................................... (283,404) (283,404) (283,404)
-------- -------- --------
Total shareholder's equity.................... 225,092 37,840 227,991
-------- -------- --------
$954,546 $645,023 $694,099
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-87
<PAGE>
IMAGE MEMORY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED NOVEMBER 30, AUGUST 31,
------------------------------------ ------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Services.................... $2,352,885 $2,532,476 $1,968,908 $1,488,953 $1,807,550
Products.................... 80,998 550,778 405,029 368,933 107,382
---------- ---------- ---------- ---------- ----------
2,433,883 3,083,254 2,373,937 1,857,886 1,914,932
---------- ---------- ---------- ---------- ----------
COST OF REVENUES:
Services.................... 1,563,701 1,826,755 1,659,297 1,231,501 1,069,123
Products.................... 72,264 431,319 240,863 238,496 66,444
Depreciation................ 140,639 112,406 95,349 64,566 52,428
---------- ---------- ---------- ---------- ----------
1,776,604 2,370,480 1,995,509 1,534,563 1,187,995
---------- ---------- ---------- ---------- ----------
Gross profit................ 657,279 712,774 378,428 323,323 726,937
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES..... 616,507 707,928 580,731 479,308 393,588
IMAGEMAX TRANSACTION COSTS.... -- -- -- -- 11,585
---------- ---------- ---------- ---------- ----------
Operating income (loss)..... 40,772 4,846 (202,303) (155,985) 321,764
INTEREST EXPENSE.............. 31,635 30,942 35,983 26,035 26,300
INTEREST INCOME............... (267) (1,871) (1,598) (404) (1,070)
---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes.................... 9,404 (24,225) (236,688) (181,616) 296,534
INCOME TAXES (BENEFIT)........ 2,424 (5,341) (49,436) (37,958) --
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)............. $ 6,980 $ (18,884) $ (187,252) $ (143,658) $ 296,534
========== ========== ========== ========== ==========
PRO FORMA DATA
(UNAUDITED):
Historical net income....... $ 296,534
Pro forma income tax
expense.................. 115,506
----------
PRO FORMA NET INCOME........ $ 181,028
==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-88
<PAGE>
IMAGE MEMORY SYSTEMS, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------- RETAINED TREASURY
SHARES AMOUNT EARNINGS STOCK TOTAL
------ -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, NOVEMBER 30, 1993........... 100 $100,000 $421,405 $(283,404) $ 238,001
Net income......................... -- -- 6,980 -- 6,980
--- -------- -------- --------- ---------
BALANCE, NOVEMBER 30, 1994........... 100 100,000 428,385 (283,404) 244,981
Net loss........................... -- -- (18,884) -- (18,884)
Dividends.......................... -- -- (1,005) -- (1,005)
--- -------- -------- --------- ---------
BALANCE, NOVEMBER 30, 1995........... 100 100,000 408,496 (283,404) 225,092
Net loss........................... -- -- (187,252) -- (187,252)
--- -------- -------- --------- ---------
BALANCE, NOVEMBER 30, 1996........... 100 100,000 221,244 (283,404) 37,840
Net income......................... -- -- 296,534 -- 296,534
Shareholder distribution........... -- -- (106,383) -- (106,383)
--- -------- -------- --------- ---------
BALANCE, AUGUST 31, 1997............. 100 $100,000 $411,395 $(283,404) $ 227,991
=== ======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-89
<PAGE>
IMAGE MEMORY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED NOVEMBER 30, AUGUST 31,
------------------------------- ----------------------
1994 1995 1996 1996 1997
-------- -------- --------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ 6,980 $(18,884) $(187,252) $(143,658) $296,534
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities-
Depreciation and amortization.............. 144,790 118,428 101,722 67,753 57,208
Deferred tax benefit....................... (16,448) (2,980) (21,502) (52,300) --
Gain on sale of assets..................... -- -- -- -- (18,895)
Changes in operating assets and
liabilities-
Accounts receivable..................... (162,099) (65,733) 226,229 170,967 (69,424)
Inventories............................. (10,504) (50,887) 66,929 64,227 1,027
Prepaid expenses and other.............. (38,382) (5,058) (37,868) (48,686) 12,143
Accounts payable........................ 58,636 33,574 (36,923) 16,424 (42,655)
Accrued expenses........................ 4,966 59,113 (44,788) (17,314) 3,502
-------- -------- --------- --------- --------
Net cash provided by (used in)
operating activities................ (12,061) 67,573 66,547 57,413 239,440
-------- -------- --------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............ (144,754) (84,648) (13,376) (10,124) (14,688)
Sale of property and equipment................. 19,250 -- -- -- 25,300
-------- -------- --------- --------- --------
Net cash provided by (used in)
investing activities................ (125,504) (84,648) (13,376) (10,124) 10,612
-------- -------- --------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from bank facilities.............. 137,293 17,840 -- -- --
Net payments on bank facilities................ -- -- (53,693) (35,490) (208,305)
Dividends to shareholder....................... -- (1,005) -- -- --
-------- -------- --------- --------- --------
Net cash provided by (used in)
financing
activities.......................... 137,293 16,835 (53,693) (35,490) (208,305)
-------- -------- --------- --------- --------
NET INCREASE (DECREASE) IN CASH.................. (272) (240) (522) 11,799 41,747
CASH, BEGINNING OF PERIOD........................ 1,168 896 656 656 134
-------- -------- --------- --------- --------
CASH, END OF PERIOD.............................. $ 896 $ 656 $ 134 $ 12,455 $ 41,881
======== ======== ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-90
<PAGE>
IMAGE MEMORY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED AUGUST 31, 1996 IS UNAUDITED.)
1. BACKGROUND:
Image Memory Systems, Inc. (IMS) is an Ohio corporation located in Dayton,
Ohio. IMS offers total conversion and document management solutions and services
through various methods of document imaging technology.
IMS and its shareholder intend to enter into a stock acquisition agreement
with ImageMax, Inc. ("ImageMax") which would close upon the consummation of the
initial public offering of the common stock of ImageMax.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The financial statements for the nine months ended August 31, 1996 are
unaudited and, in the opinion of management, include all adjustments (consisting
only of normal recurring adjustments) necessary for the fair presentation of the
results for those interim periods. The results of operations for the nine months
ended August 31, 1997 are not necessarily indicative of the results to be
expected for the full fiscal year.
Inventories
Inventories represent materials used in the filming and scanning process
and are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are recorded at cost. Additions and improvements are
capitalized and repairs and maintenance are charged to expense as incurred.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are depreciated over the
lesser of their useful life or the term of the lease.
Revenue Recognition
Revenue is recognized when the related services are rendered or the
products are shipped to IMS's customers. For the nine months ended August 31,
1997, IMS had one customer that accounted for approximately 11% of revenues.
Income Taxes
IMS accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and income tax basis of assets and
liabilities measured using enacted income tax rates and laws that are expected
to be in effect when the differences reverse.
Effective December 1, 1996, IMS elected to be taxed under Subchapter S of
the Internal Revenue Code. On August 22, 1997 IMS elected to reverse the
Subchapter S election and be taxed as a C Corporation as of that date.
Accordingly, the taxable income and loss of IMS will be included in the
shareholder's individual tax return for the period from December 1, 1996 to
August 22, 1997. Income tax expense for the period from August 23, 1997 to
August 31, 1997 was immaterial.
F-91
<PAGE>
IMAGE MEMORY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED AUGUST 31, 1996 IS UNAUDITED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Supplemental Cash Flow Information
IMS paid cash for interest for the years ended November 30, 1994, 1995 and
1996, and the nine months ended August 31, 1996 and 1997, of $31,263, $30,266,
$37,482, $26,035 and $26,300, respectively. IMS paid cash for income taxes for
the years ended November 30, 1994, 1995 and 1996, and the nine months ended
August 31, 1996 and 1997, of $3,663, $5,325, $2,596, $2,596 and $1,715,
respectively. For the years ended November 30, 1994, 1995 and 1996, and the nine
months ended August 31, 1996 and 1997, IMS financed equipment purchases with
capital leases in the amount of $0, $6,850, $15,411, $15,411 and $0,
respectively. During the nine months ended August 31, 1997, IMS made a
distribution to the shareholder of $106,383 for taxes (See Note 6).
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued expenses are
reflected in the financial statements at fair value due to their short-term
nature. The carrying amount of long-term debt approximates fair value on the
balance sheet dates.
Long-Lived Assets
IMS follows SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of." Accordingly, in the event
that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the assets is compared to the assets'
carrying amount to determine if a write-down to market value or discounted cash
flow value is necessary.
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
ESTIMATED NOVEMBER 30,
USEFUL LIVES --------------------- AUGUST 31,
(YEARS) 1995 1996 1997
------------ --------- --------- ----------
<S> <C> <C> <C> <C>
Scanning and filming equipment............. 5-7 $ 774,608 $ 798,189 $785,079
Furniture and office equipment............. 5-7 74,623 79,829 79,829
Leasehold improvements..................... 15 42,713 42,713 42,713
Vehicles................................... 5 17,972 17,972 5,300
--------- --------- --------
909,916 938,703 912,921
Less- Accumulated depreciation............. (676,067) (771,416) 789,779
--------- --------- --------
$ 233,849 $ 167,287 $123,142
========= ========= ========
</TABLE>
As of November 30, 1995 and 1996, and August 31, 1997, IMS had property net
of accumulated depreciation in the amount of $6,850, $17,810 and $14,402,
respectively, financed under capital leases.
F-92
<PAGE>
IMAGE MEMORY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED AUGUST 31, 1996 IS UNAUDITED.)
4. DEBT:
Line of Credit
IMS had a line of credit in fiscal 1995 and 1996 which provided for maximum
borrowings of $150,000 and $200,000, respectively, at the bank's prime rate plus
.75%. In February 1997, IMS entered into a new line of credit agreement which
provides for maximum borrowings of $250,000 through May 1998 at the bank's prime
rate plus .75%. The highest outstanding balance was $150,000, $200,000 and
$205,000 during fiscal 1995 and 1996 and the nine months ended August 31, 1997,
respectively. Average borrowings under the line were $76,000, $116,000 and
$143,000 during fiscal 1995 and 1996 and the nine months ended August 31, 1997,
respectively. The weighted average interest rate on the line of credit was 9.02%
during fiscal 1995 and 1996 and 9.25% for the nine months ended August 31, 1997.
Long-Term Debt
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------- AUGUST 31,
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
Note payable to bank, payable in monthly installments
of $8,000 plus interest at the bank's prime rate
plus 1% (9.75% and 9.25% at November 30, 1995 and
1996, respectively), note was refinanced in February
1997 (see below).................................... 136,645 210,459 --
Note payable to bank, payable in monthly installments
of $1,250 including interest at the bank's prime
rate plus 1% (9.75% at November 30, 1995) through
June 1996........................................... 7,500 -- --
Note payable to bank, payable in full plus interest at
the bank's prime rate plus 1% (9.75% at November 30,
1995) in January 1996............................... 200,000 -- --
Term note payable to bank, payable in monthly
installments of $5,333 plus interest at the bank's
prime rate plus .75% (9.25% at August 31, 1997)
through February 2000............................... -- -- 165,334
Note payable to lender, payable in monthly
installments of $1,355 including interest at 4%
through June 1998................................... 39,838 24,902 13,304
Other................................................. 19,631 32,971 18,389
-------- -------- --------
403,614 268,332 197,027
Less- Current portion................................. (331,233) (107,290) (89,289)
-------- -------- --------
$ 72,381 $161,042 $107,738
======== ======== ========
</TABLE>
In February 1997, IMS entered into a $192,000 term note due to a new bank.
Proceeds from the increased line and the term note were used to refinance the
existing notes payable with the remainder to be used for working capital
purposes.
Based on the terms of the new note payable, maturities on long term debt as
of November 30, 1996, are $107,290, $78,074, $67,766 and $15,202 in fiscal 1997,
1998, 1999 and 2000, respectively.
F-93
<PAGE>
IMAGE MEMORY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED AUGUST 31, 1996 IS UNAUDITED.)
5. COMMITMENTS AND CONTINGENCIES:
IMS leases office space from its sole shareholder under a noncancelable
operating lease. Rent expense for all operating leases for the years ended
November 30, 1994, 1995 and 1996, and the nine months ended August 31, 1997 was
$86,400, $86,400, $86,400 and $66,430, respectively. Future minimum lease
payments under noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1997...................................... $ 89,008
1998...................................... 90,312
1999...................................... 87,704
2000...................................... 86,400
2001...................................... 86,400
--------
$439,824
========
</TABLE>
IMS is party to various claims and other matters arising in the normal
course of business. In the opinion of management, the outcome of these matters
will not have a material adverse effect on IMS's financial position or results
of operations.
6. INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Current:
Federal........................................ $ 3,850 $(1,510) $(29,561)
State.......................................... 2,171 (852) (16,672)
------- ------- --------
Total....................................... 6,021 (2,362) (46,233)
------- ------- --------
Deferred:
Federal........................................ (2,300) (1,905) (2,048)
State.......................................... (1,297) (1,074) (1,155)
------- ------- --------
Total....................................... (3,597) (2,979) (3,203)
------- ------- --------
$ 2,424 $(5,341) $(49,436)
======= ======= ========
</TABLE>
The reconciliation of the statutory federal income tax rate to IMS's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
---------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Income tax rate..................................... 34.0% (34.0)% (34.0)%
Reduction due to graduated federal tax rates........ (19.0) 19.0 19.0
State income taxes, net of federal tax benefit...... 6.6 (6.6) (6.6)
Nondeductible expenses.............................. 4.2 (0.4) 0.7
----- ----- -----
25.8% (22.0)% (20.9)%
===== ===== =====
</TABLE>
F-94
<PAGE>
IMAGE MEMORY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED AUGUST 31, 1996 IS UNAUDITED.)
6. INCOME TAXES: -- (CONTINUED)
The tax effect of temporary differences as established in accordance with
SFAS No. 109 that give rise to deferred taxes are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------- AUGUST 31,
1995 1996 1997
------- ------- ----------
<S> <C> <C> <C>
Gross deferred tax assets:
Accruals and reserves not currently
deductible....................... $ 2,170 $ 3,094 $ 3,094
Net operating loss carryforwards.... -- 18,300 18,300
------- ------- -------
2,170 21,394 21,394
Gross deferred tax liability:
Other............................... (3,142) (864) (864)
------- ------- -------
$ (972) $20,530 $20,530
======= ======= =======
</TABLE>
IMS did not have any valuation allowances against deferred tax assets at
November 30, 1995 and 1996 and August 31, 1997, as it believes it is more likely
than not that the deferred tax assets will be realized.
7. PROFIT SHARING AND EMPLOYEE BENEFIT PLAN:
IMS has a profit sharing plan that covers all qualified employees and
provides for discretionary profit sharing contributions by IMS. Contributions
for the years ended November 30, 1994, 1995 and 1996, and the nine months ended
August 31, 1996 and 1997, were $7,500, $20,000, $0, $0 and $15,000,
respectively.
In addition, IMS sponsors a 401(k) plan that covers all eligible full-time
employees. In fiscal 1994 and 1995, IMS made matching contributions of 30% of
participant pre-tax contributions, up to a maximum of $300. During the first
eight months of fiscal year 1996, IMS made matching contributions of 50% of
participants' pre-tax contributions up to a maximum of $500. Subsequent to July
1996, IMS discontinued matching contributions to the plan. IMS's matching
contributions for the years ended November 30, 1994, 1995 and 1996, and the nine
months ended August 31, 1996 and 1997, were $7,342, $8,110, $12,281, $12,281 and
$0, respectively.
8. RELATED-PARTY TRANSACTIONS:
The sole shareholder of IMS periodically makes advances to IMS in the form
of interest bearing notes. Included in the accompanying balance sheets are notes
payable to the shareholder in the amount of $930, $11,847 and $3,032 at November
30, 1995 and 1996, and August 31, 1997, respectively.
9. SALE OF BUSINESS (UNAUDITED):
In September 1997, IMS and its shareholder entered into a definitive stock
acquisition agreement with ImageMax (see Note 1).
F-95
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To International Data Services of New York, Inc.:
We have audited the accompanying balance sheets of International Data Services
of New York, Inc. (a New York corporation) as of August 31, 1996 and 1997 and
the related statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended August 31, 1997. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Data Services of
New York, Inc. as of August 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
October 8, 1997
F-96
<PAGE>
INTERNATIONAL DATA SERVICES OF NEW YORK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31,
---------------------
1996 1997
-------- ----------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents................................. $ 36,079 $ 377,638
Accounts receivable, net of reserves of $18,337 and
$54,661................................................ 315,419 567,432
Deferred income taxes..................................... 5,295 223,641
Prepaid income taxes...................................... 7,080 --
-------- ----------
Total current assets................................... 363,873 1,168,711
PROPERTY AND EQUIPMENT, net............................... 58,326 63,777
OTHER ASSETS.............................................. 2,110 2,110
-------- ----------
$424,309 $1,234,598
======== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
CURRENT LIABILITIES:
Line of credit............................................ $ 25,000 $ --
Accounts payable.......................................... 155,444 266,120
Accrued expenses.......................................... 29,978 30,000
Accrued compensation...................................... 55,175 622,070
Due to shareholders....................................... 31,641 --
Income taxes payable...................................... -- 195,554
-------- ----------
Total current liabilities.............................. 297,238 1,113,744
-------- ----------
DEFERRED INCOME TAXES....................................... 10,814 13,721
-------- ----------
COMMITMENTS (Note 5)
SHAREHOLDERS' EQUITY:
Common stock, no par value, 200 shares authorized, 100
shares issued and outstanding.......................... 10,000 10,000
Retained earnings......................................... 106,257 97,133
-------- ----------
Total shareholders' equity................................ 116,257 107,133
-------- ----------
$424,309 $1,234,598
======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-97
<PAGE>
INTERNATIONAL DATA SERVICES OF NEW YORK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES.......................................... $1,775,549 $1,203,083 $2,651,988
---------- ---------- ----------
COST OF REVENUES:
Cost of services................................ 997,874 809,424 1,745,119
Depreciation.................................... 11,044 13,847 17,831
---------- ---------- ----------
Total cost of revenues....................... 1,008,918 823,271 1,762,950
---------- ---------- ----------
Gross profit.............................. 766,631 379,812 889,038
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES...... 732,560 435,238 882,834
IMAGEMAX TRANSACTION COSTS........................ -- -- 27,000
---------- ---------- ----------
Operating income (loss)................... 34,071 (55,426) (20,796)
INTEREST EXPENSE.................................. 12,177 15,724 3,793
INTEREST INCOME................................... (3,756) (3,796) (2,660)
---------- ---------- ----------
Income (loss) before income taxes......... 25,650 (67,354) (21,929)
INCOME TAX PROVISION (BENEFIT).................... 6,027 -- (12,805)
---------- ---------- ----------
NET INCOME (LOSS)................................. $ 19,623 $ (67,354) $ (9,124)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-98
<PAGE>
INTERNATIONAL DATA SERVICES OF NEW YORK, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------- RETAINED TOTAL
SHARES AMOUNT EARNINGS EQUITY
------ ------- -------- --------
<S> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1994......................... 100 $10,000 $153,988 $163,988
Net income..................................... -- -- 19,623 19,623
--- ------- -------- --------
BALANCE, AUGUST 31, 1995......................... 100 10,000 173,611 183,611
Net loss....................................... -- -- (67,354) (67,354)
--- ------- -------- --------
BALANCE, AUGUST 31, 1996......................... 100 10,000 106,257 116,257
Net loss....................................... -- -- (9,124) (9,124)
--- ------- -------- --------
BALANCE, AUGUST 31, 1997......................... 100 $10,000 $ 97,133 $107,133
=== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-99
<PAGE>
INTERNATIONAL DATA SERVICES OF NEW YORK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31,
------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 19,623 $(67,354) $ (9,124)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation........................................... 11,044 13,847 17,831
Provision for loss on accounts receivable.............. -- 18,439 37,810
Deferred income taxes.................................. (12,375) 54,035 (215,439)
Change in operating assets and liabilities-
Accounts receivable.................................. 103,231 56,762 (289,823)
Prepaid income taxes................................. -- (7,080) 7,080
Prepaid expenses and other........................... 13,459 3,633 --
Other assets......................................... 13,035 -- --
Accounts payable..................................... (51,235) 33,437 110,676
Accrued expenses..................................... 11,875 10,565 22
Accrued compensation................................. 81,424 (244,146) 566,895
Income taxes payable................................. 8,684 (57,348) 195,554
-------- -------- --------
Net cash provided by (used in) operating activities....... 198,765 (185,210) 421,482
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (17,752) (13,252) (23,282)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments on) line of credit.............. -- 25,000 (25,000)
Net borrowings (repayments) of amounts due to
shareholders........................................... (28,000) 31,641 (31,641)
-------- -------- --------
Net cash provided by (used in) financing activities.... (28,000) 56,641 (56,641)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 153,013 (141,821) 341,559
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 24,887 177,900 36,079
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $177,900 $ 36,079 $377,638
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-100
<PAGE>
INTERNATIONAL DATA SERVICES OF NEW YORK, INC.
NOTES TO FINANCIAL STATEMENTS
1. BACKGROUND:
International Data Services of New York, Inc. ("IDS"), a New York
corporation, is a provider of offshore data entry services for the indexing of
microfilm and scanned documents, litigation support and other traditional data
entry services including addresses and full text. IDS maintains no production
facilities in the United States. The production work is subcontracted
principally to foreign companies located in Jamaica, India, Zimbabwe and the
Philippines. All IDS transactions are denominated in United States Dollars.
In September, 1997, IDS and its shareholders entered into a merger
agreement with ImageMax, Inc. ("ImageMax") which would close upon consummation
of the initial public offering of the common stock of ImageMax.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
IDS considers highly liquid investments with original maturities of three
months or less to be cash equivalents. Cash equivalents are carried at cost,
which approximates market value. At August 31, 1996 and 1997, IDS had $36,520
and $147,280 invested in a money market account.
Property and Equipment
Property and equipment are recorded at cost. Additions and improvements are
capitalized and repairs and maintenance are charged to expenses as incurred.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets.
Revenue Recognition
Service revenue is recognized as the services are performed.
Concentration Risks
For the year ended August 31, 1995, IDS had two customers that accounted
for 20% and 31% of revenues, respectively. For the year ended August 31,1996,
IDS had two customers that accounted for 13% and 11% of revenues, respectively.
For the year ended August 31, 1997, IDS had three customers that each accounted
for 14%, 14% and 14% of revenues, respectively. For the years ended August 31,
1995, 1996 and 1997, IDS had three service providers which accounted for 92%,
98% and 98%, respectively of sub-contracted production work.
Income Taxes
IDS accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and income tax basis of assets and
liabilities measured using enacted income tax rates and laws that are expected
to be in effect when the differences reverse.
F-101
<PAGE>
INTERNATIONAL DATA SERVICES OF NEW YORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Supplemental Cash Flow Information
For the years ended August 31, 1995, 1996 and 1997, IDS paid interest of
$302, $724, and $668 and income taxes of $9,718, $10,393, and $0, respectively.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued expenses are
reflected in the financial statements at fair value due to the short-term nature
of those instruments.
Long-Lived Assets
IDS follows SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of." Accordingly, in the event
that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the assets is compared to the assets'
carrying amount to determine if a write-down to market value or discounted cash
flow value is necessary.
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
ESTIMATED AUGUST 31,
USEFUL LIVES -----------------
YEARS 1996 1997
------------ ------- -------
<S> <C> <C> <C>
Computer equipment.............................. 5 $40,129 $60,450
Furniture and office equipment.................. 7 32,904 35,865
Leasehold improvements.......................... 10 26,027 26,027
------- -------
99,060 122,342
Less--Accumulated depreciation.................. (40,734) (58,565)
------- -------
$58,326 $63,777
======= =======
</TABLE>
Depreciation expense for the years ended August 31, 1995, 1996 and 1997 was
$11,044, $13,847 and $17,831, respectively.
4. LINE OF CREDIT:
IDS maintains a line of credit with a maximum borrowing available
thereunder of $50,000. The line of credit bears interest at 1% over the bank's
base (9.25% at August 31, 1996 and 1997). Borrowings under the line are secured
by all of IDS's assets. The highest and average outstanding balance was $0,
$25,000 and $25,000 during fiscal 1995, 1996 and 1997, respectively.
F-102
<PAGE>
INTERNATIONAL DATA SERVICES OF NEW YORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS:
IDS leases office space under noncancelable operating leases. Rent expense
for all operating leases for the years ended August 31, 1995, 1996 and 1997 was
$16,320 each year. Future minimum lease payments under noncancelable operating
leases as of August 31, 1997 are as follows:
<TABLE>
<S> <C>
1998....................................... $16,320
1999....................................... 5,520
-------
$21,840
=======
</TABLE>
6. INCOME TAXES:
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
Current:
Federal.................................... $ 11,089 $(41,682) $ 154,927
State...................................... 7,312 (27,483) 47,707
-------- -------- ----------
18,401 (69,165) 202,634
-------- -------- ----------
Deferred:
Federal.................................... (7,457) 41,682 (165,967)
State...................................... (4,917) 27,483 (49,472)
-------- -------- ----------
Total...................................... (12,374) 69,165 (215,439)
-------- -------- ----------
$ 6,027 $ -- $ (12,805)
======== ======== ==========
</TABLE>
The reconciliation of the statutory federal income tax rate to IDS's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate....................... 34.0% 34.0% 34.0%
Effect of graduated federal income tax rates............ (19.0) (19.0) (18.7)
State income taxes, net of federal tax benefit.......... 7.7 7.7 7.7
Nondeductible expenses and interest..................... 0.8 -- (6.0)
Losses benefited (not benefited)........................ -- (22.7) 41.4
----- ----- -----
23.5% --% 58.4%
===== ===== =====
</TABLE>
F-103
<PAGE>
INTERNATIONAL DATA SERVICES OF NEW YORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES: -- (CONTINUED)
Deferred taxes are determined based upon the estimated future tax effects
of differences between the financial statements and income tax basis of assets
and liabilities given the provisions of the enacted tax laws. The tax effect of
temporary differences as established in accordance with SFAS No. 109 that gives
rise to deferred taxes are as follows:
<TABLE>
<CAPTION>
AUGUST 31,
------------------
1996 1997
------- --------
<S> <C> <C>
Current deferred tax assets:
Accruals and reserves not currently deductible......... $ 5,295 $223,641
Operating loss carryforwards........................... 15,131 --
Valuation reserve...................................... (15,131) --
------- --------
5,295 223,641
Non-current deferred tax liability:
Differences in book/tax depreciation................... (10,814) (13,721)
------- --------
Net deferred tax asset (liability)..................... $(5,519) $209,920
======= ========
</TABLE>
7. EMPLOYEE BENEFIT PLAN:
IDS maintains a simplified employee pension. IDS contributed to the
shareholders and its employees $50,000, $44,000 and $59,200 for the years ended
August 31, 1995, 1996 and 1997.
8. RELATED-PARTY TRANSACTIONS:
Leasing Transactions
The shareholders receive $300 monthly to rent office space attached to
their home. Included in property and equipment at August 31, 1997 is $26,027 of
leasehold improvements on this office space.
F-104
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Oregon Micro-Imaging, Inc.:
We have audited the accompanying balance sheets of Oregon Micro-Imaging,
Inc. (an Oregon Corporation) as of October 31, 1995 and 1996 and July 31, 1997,
and the related statements of operations, stockholders' equity and cash flows
for each of the two years in the period ended October 31, 1996 and for the nine
months ended July 31, 1997. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Oregon Micro-Imaging, Inc.
as of October 31, 1995 and 1996 and July 31, 1997, and the results of its
operations and its cash flows for each of the two years in the period ended
October 31, 1996 and the nine months ended July 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
August 15, 1997
F-105
<PAGE>
OREGON MICRO-IMAGING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
------------------- JULY 31,
1995 1996 1997
ASSETS -------- -------- ----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 268 $ 7,751 $ 711
Accounts receivable................................ 238,866 200,143 349,959
Inventories........................................ 258,996 266,507 407,062
Prepaid expenses................................... -- 1,988 --
Deferred income taxes.............................. 51,963 51,963 44,794
-------- -------- ----------
Total current assets............................ 550,093 528,352 802,526
PROPERTY AND EQUIPMENT, net.......................... 181,473 335,229 370,624
-------- -------- ----------
$731,566 $863,581 $1,173,150
======== ======== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit..................................... $ 87,000 $ 83,000 $ --
Bank overdraft..................................... 57,715 -- 58,936
Current portion of long-term debt.................. 18,701 24,026 28,978
Accounts payable................................... 48,205 59,331 106,081
Accrued expenses................................... 9,949 2,649 27,846
Accrued profit sharing............................. 33,829 58,168 63,181
Deferred revenue................................... 178,000 178,000 178,000
Income taxes payable............................... 15,412 34,288 108,421
-------- -------- ----------
Total current liabilities....................... 448,811 439,462 571,443
-------- -------- ----------
LONG-TERM DEBT....................................... 23,254 56,641 42,046
-------- -------- ----------
DEFERRED INCOME TAXES................................ 14,541 19,347 25,129
-------- -------- ----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Common stock, no par value, 500 shares authorized,
405 shares issued and outstanding............... 10,125 10,125 10,125
Retained earnings.................................. 234,835 338,006 524,407
-------- -------- ----------
Total stockholders' equity...................... 244,960 348,131 534,532
-------- -------- ----------
$731,566 $863,581 $1,173,150
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-106
<PAGE>
OREGON MICRO-IMAGING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31, JULY 31,
----------------------- ------------------------
1995 1996 1996 1997
---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Services............................ $1,779,085 $2,269,098 $1,688,506 $1,787,633
Products............................ 1,193,089 1,476,537 1,248,022 1,358,424
---------- ---------- ---------- ----------
2,972,174 3,745,635 2,936,528 3,146,057
---------- ---------- ---------- ----------
COST OF REVENUES:
Services............................ 1,473,136 1,963,539 1,422,611 1,457,614
Products............................ 709,669 836,852 698,583 772,471
Depreciation........................ 59,502 84,012 50,071 74,147
---------- ---------- ---------- ----------
2,242,307 2,884,403 2,171,265 2,304,232
---------- ---------- ---------- ----------
Gross profit..................... 729,867 861,232 765,263 841,825
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 591,300 688,083 508,675 495,306
IMAGEMAX TRANSACTION COSTS............ -- -- -- 32,706
---------- ---------- ---------- ----------
Operating income................. 138,567 173,149 256,588 313,813
INTEREST EXPENSE...................... 21,468 17,020 13,785 14,513
LOSS ON SALE OF EQUIPMENT............. 27,427 1,620 1,620 --
---------- ---------- ---------- ----------
Income before income taxes....... 89,672 154,509 241,183 299,300
INCOME TAXES.......................... 24,192 51,338 79,258 112,899
---------- ---------- ---------- ----------
NET INCOME............................ $ 65,480 $ 103,171 $ 161,925 $ 186,401
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-107
<PAGE>
OREGON MICRO-IMAGING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1994........................ 405 $10,125 $169,355 $179,480
Net income..................................... -- -- 65,480 65,480
--- ------- -------- --------
BALANCE, OCTOBER 31, 1995........................ 405 10,125 234,835 244,960
Net income..................................... -- -- 103,171 103,171
--- ------- -------- --------
BALANCE, OCTOBER 31, 1996........................ 405 10,125 338,006 348,131
Net income..................................... -- -- 186,401 186,401
--- ------- -------- --------
BALANCE, JULY 31, 1997........................... 405 $10,125 $524,407 $534,532
=== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-108
<PAGE>
OREGON MICRO-IMAGING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
OCTOBER 31, JULY 31,
------------------- ----------------------
1995 1996 1996 1997
-------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 65,480 $103,171 $161,925 $186,401
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation.......................................... 59,502 84,012 50,071 74,147
Losses from property and equipment disposals.......... 27,427 1,620 1,620 --
Deferred income taxes................................. -- 4,806 4,806 12,951
Change in operating assets and liabilities-
Accounts receivable................................ 5,621 38,723 (95,582) (149,816)
Inventories........................................ 14,180 (7,511) (140,788) (140,555)
Prepaid expenses................................... -- (1,988) -- 1,988
Bank overdraft..................................... 4,885 (57,715) 164 58,936
Accounts payable................................... (25,206) 11,126 (8,223) 46,750
Accrued expenses................................... 4,682 (7,300) 61,102 5,012
Accrued profit sharing............................. 33,829 24,339 9,432 25,198
Income taxes payable............................... 6,650 18,876 49,611 74,133
-------- -------- -------- --------
Net cash provided by operating activities........ 197,050 212,159 94,138 195,145
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (117,490) (239,388) (103,658) (109,542)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. -- 38,712 26,915 --
Principal payments on long-term debt...................... (2,612) -- -- (9,643)
Principal payments on line of credit...................... (77,000) (4,000) (16,000) (83,000)
-------- -------- -------- --------
Net cash provided by (used in) financing
activities..................................... (79,612) 34,712 10,915 (92,643)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (52) 7,483 1,395 (7,040)
CASH AND CASH EQUIVALENTS,
Beginning of Period....................................... 320 268 268 7,751
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS,
End of Period............................................. $ 268 $ 7,751 $ 1,663 $ 711
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-109
<PAGE>
OREGON MICRO-IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED
JULY 31, 1996 IS UNAUDITED.)
1. BACKGROUND:
Oregon Micro-Imaging, Inc. ("OMI") was incorporated on December 9, 1980.
OMI provides microfilming and scanning services, microfilm processing, and sales
and servicing of micrographic and optical imaging equipment and supplies. The
principal markets for OMI's products and services are the Eugene and Portland,
Oregon metropolitan areas. Canon and Fuji are major suppliers of the equipment
sold and used by OMI.
OMI and its stockholders intend to enter into a merger agreement with
ImageMax, Inc. ("ImageMax") which would close upon the consummation of the
initial public offering of the common stock of ImageMax.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements for the nine months ended July 31, 1996 are
unaudited and, in the opinion of management of OMI, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results for that interim period. The results of operations
for the nine months ended July 31, 1996 and 1997 are not necessarily indicative
of the results to be expected for the full year.
Cash and Cash Equivalents
OMI considers highly liquid investments with original maturities of three
months or less to be cash equivalents. Cash equivalents are carried at cost,
which approximates market value.
Inventories
Inventories are stated at the lower of cost or market value, determined on
a first-in, first-out basis.
Property and Equipment
Property and equipment are recorded at cost. Additions and improvements are
capitalized and repairs and maintenance are charged to expense as incurred.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are depreciated over the
lesser of their useful life or the term of the lease.
Revenue Recognition
Revenue is recognized when the services are rendered or products are
shipped to customers. Deferred revenue represents billings in advance of
providing services to OMI's monthly service customers.
Income Taxes
OMI accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and income
F-110
<PAGE>
OREGON MICRO-IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
JULY 31, 1996 IS UNAUDITED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
tax basis of assets and liabilities measured using enacted income tax rates and
laws that are expected to be in effect when the differences reverse.
Supplemental Cash Flow Information
For the years ended October 31, 1995, 1996 and for the nine months ended
July 31, 1996 and 1997, OMI paid interest of $21,468, $17,020, $13,785 and
$14,513, respectively. For the years ended October 31, 1995 and 1996 and the
nine months ended July 31, 1996 and 1997, OMI paid income taxes of $17,542,
$32,462, $29,647 and $38,766, respectively.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Cash, accounts receivable and accounts payable are reflected in the
financial statements at fair value due to their short-term nature. The carrying
amount of long-term debt approximates fair value on the balance sheet dates.
Long-Lived Assets
OMI follows SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of." Accordingly, in the event
that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the assets is compared to the assets'
carrying amount to determine if a write-down to market value or discounted cash
flow value is necessary.
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
ESTIMATED OCTOBER 31,
USEFUL LIVES ------------------- JULY 31,
YEARS 1995 1996 1997
------------ -------- -------- --------
<S> <C> <C> <C> <C>
Scanning and filming equipment.............. 5-7 $182,973 $329,988 $377,578
Furniture and office equipment.............. 5-7 324,760 156,283 207,363
Leasehold improvements...................... 5-10 36,043 39,481 39,481
Vehicles.................................... 5 91,524 152,017 162,888
-------- -------- --------
635,300 677,769 787,310
Less-Accumulated depreciation and
amortization.............................. (453,827) (342,540) (416,686)
-------- -------- --------
$181,473 $335,229 $370,624
======== ======== ========
</TABLE>
F-111
<PAGE>
OREGON MICRO-IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
JULY 31, 1996 IS UNAUDITED.)
4. LONG-TERM DEBT:
OCTOBER 31,
----------------- JULY 31,
1995 1996 1997
------- ------- --------
Promissory note with interest at 9.25%, due
$292.54 monthly including interest until June
1999, secured by all Key Bank accounts and a
lien on equipment.............................. $ -- $ 8,249 $ 6,130
Promissory note with interest at 8.5%, due
$576.78 monthly including interest until
January 2002, secured by related vehicle....... -- 25,823 19,523
Promissory note with variable interest at 10.50%,
due $416.67 monthly, plus interest until
January 15, 1999, collateralized by accounts
receivable, inventory and equipment............ 16,250 11,250 7,917
Promissory note with 9.75% interest, due $375.38
monthly including interest until October 13,
2001, secured by related vehicle............... -- 17,699 13,199
Promissory note with 9.25% interest, due $239.87
monthly including interest until December 1,
1998, secured by related vehicle............... -- 5,618 3,797
Promissory note with variable interest at 9.5%,
due $306.38 monthly, including interest until
June 1998, collateralized by related
vehicle........................................ 7,408 4,313 1,787
Promissory note with variable interest at 9.25%,
due $230.36 monthly, including interest until
January 15, 1999, collateralized by accounts
receivable, inventory and equipment............ 9,654 7,715 5,718
Lease payable with institution, payable in
monthly installments of $505, including
interest, maturing June 30, 2000, secured by
related equipment.............................. -- -- 12,953
Note payable to bank, repaid in 1996............. 4,476 -- --
Note payable to bank, repaid in 1996............. 4,167 -- --
------- ------- -------
41,955 80,667 71,024
Less-Current portion............................. (18,701) (24,026) (28,978)
------- ------- -------
$23,254 $56,641 $42,046
======= ======= =======
As of July 31, 1997, maturities of long-term debt are as follows:
FOR THE PERIOD ENDING OCTOBER 31,
- ---------------------------------
1997..................................... $ 7,934
1998..................................... 28,351
1999..................................... 20,870
2000..................................... 10,065
2001..................................... 3,804
-------
$71,024
=======
F-112
<PAGE>
OREGON MICRO-IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
JULY 31, 1996 IS UNAUDITED.)
OMI has a $250,000 line of credit line with a bank. The line bears interest
at 10% as of July 31, 1997. This line of credit is secured by a security
interest in all accounts receivable, inventories and equipment. Average
borrowings were $133,458, $116,458 and $84,667 and the maximum borrowings
outstanding were $226,000, $173,000 and $206,000 during the years ended October
31, 1995 and 1996 and the nine months ended July 31, 1997, respectively.
5. COMMITMENTS AND CONTINGENCIES:
OMI leases office space from OMI's stockholders under noncancelable
operating leases. Rent expense for all operating leases for the years ended
October 31, 1995 and 1996 and the nine month periods ended July 31, 1996 and
1997 was $194,142, $211,805, $152,427 and $177,515, respectively. Future minimum
lease payments at July 31, 1997 under noncancelable operating leases are as
follows:
YEAR ENDING OCTOBER 31,
- -----------------------
1997.................................. $ 204,232
1998.................................. 212,343
1999.................................. 220,429
2000.................................. 224,224
2001.................................. 157,935
Thereafter............................ 96,000
----------
$1,115,163
==========
OMI is party to various claims and other matters arising in the normal
course of business. In the opinion of management, the outcome of these matters
will not have a material adverse effect on OMI's financial position or results
of operations.
6. INCOME TAXES:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
OCTOBER 31, ENDED
----------------- JULY 31,
1995 1996 1997
------- ------- -----------
<S> <C> <C> <C>
Current provision:
Federal....................................... $19,584 $39,885 $ 89,427
State......................................... 4,608 6,647 10,521
------- ------- --------
24,192 46,532 99,948
Deferred provision.............................. -- 4,806 12,951
------- ------- --------
$24,192 $51,338 $112,899
======= ======= ========
</TABLE>
F-113
<PAGE>
OREGON MICRO-IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
JULY 31, 1996 IS UNAUDITED.)
6. INCOME TAXES: -- (CONTINUED)
The reconciliation of the statutory federal income tax rate to OMI's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
OCTOBER 31, ENDED
----------- JULY 31,
1995 1996 1997
---- ---- -----------
<S> <C> <C> <C>
Income tax rate....................................... 34% 34% 34%
Reduction due to graduated federal tax rates.......... (12) (6) --
State income taxes, net of federal tax benefit........ 4 4 4
Nondeductible expenses, principally meals and
entertainment....................................... 1 1 --
--- --- ---
27% 33% 38%
=== === ===
</TABLE>
The tax effect of temporary differences as established in accordance with
SFAS No. 109 that give rise to deferred taxes are as follows:
OCTOBER 31,
----------------- JULY 31,
1995 1996 1997
------- ------- --------
Gross deferred tax asset:
Deferred revenue............................... $67,640 $67,640 $67,640
======= ======= =======
Gross deferred tax liabilities:
Inventory capitalization....................... $15,677 $15,677 $22,846
Property, plant and equipment.................. 14,541 19,347 25,129
------- ------- -------
$30,218 $35,024 $47,975
======= ======= =======
OMI did not have any valuation allowances against deferred tax assets at
July 31, 1997, as it believes it is more likely than not that the deferred tax
asset will be realized.
7. EMPLOYEE BENEFIT PLAN:
OMI sponsors a profit sharing 401(k) plan covering all eligible employees,
as defined. OMI may make a discretionary matching contribution equal to a
percentage of each employee's contribution. In addition a discretionary amount
determined by OMI is contributed. Contributions to this plan totaled $41,800,
$63,438 and $50,304 for the years ending October 31, 1995 and 1996 and for the
nine months ending July 31, 1997, respectively.
8. RELATED-PARTY TRANSACTIONS:
Leasing Transactions
OMI leases office and production space and computer equipment from its sole
stockholders and officers under operating leases which expire August 2003 and
May 2001 (see Note 5). Total rent expense was $176,266, $189,126, $134,147 and
$152,058 for the years ended October 31, 1995 and 1996 and for the nine months
ended July 31, 1996 and 1997, respectively.
9. SALE OF THE BUSINESS (UNAUDITED):
In September, 1997, OMI and its stockholders entered a merger agreement
with ImageMax (see Note 1).
F-114
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Semco Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Semco
Industries, Inc. (a Massachusetts corporation) and Subsidiary as of June 30,
1996 and 1997, and the related consolidated statements of operations,
stockholders' deficit and cash flows for each of the three years in the period
ended June 30, 1997. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Semco Industries, Inc. and
Subsidiary as of June 30, 1996 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1997
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
August 20, 1997
F-115
<PAGE>
SEMCO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------- SEPTEMBER 30,
1996 1997 1997
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 225,206 $ 169,645 $ 366,942
Accounts receivable, net of reserves of $34,790,
$25,000 and $25,000.......................... 1,423,406 1,544,468 1,273,617
Inventories..................................... 568,881 580,291 513,693
Prepaid expenses and other...................... 157,945 98,635 94,027
---------- ---------- ----------
Total current assets......................... 2,375,438 2,393,039 2,248,279
PROPERTY, PLANT AND EQUIPMENT, net................ 1,151,463 1,100,562 1,074,966
OTHER............................................. 150,090 136,109 16,061
---------- ---------- ----------
$3,676,991 $3,629,710 $3,339,306
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Note payable.................................... $ 243,333 $ 171,333 $ --
Accounts payable................................ 428,536 512,687 384,280
Accrued expenses................................ 420,476 399,195 412,489
Deferred revenue................................ 671,131 624,149 604,857
---------- ---------- ----------
Total current liabilities.................... 1,763,476 1,707,364 1,401,626
---------- ---------- ----------
DEFERRED REVENUE.................................. 45,889 42,678 41,358
---------- ---------- ----------
DEFERRED COMPENSATION............................. 2,287,795 2,294,614 2,271,243
---------- ---------- ----------
COMMITMENTS (Note 6)
STOCKHOLDERS' DEFICIT:
Preferred stock, $100 par value, 620 shares
authorized, 596 shares issued and 360 shares
outstanding.................................. 59,600 59,600 59,600
Common stock, $10 par value, 100,000 shares
authorized, 69,649 shares issued and 47,937
shares, 46,653 shares and 46,653 shares
outstanding.................................. 696,490 696,490 696,490
Additional paid-in capital...................... 846,846 846,846 846,846
Retained earnings............................... 68,088 137,510 177,535
Less--Treasury stock, 21,948 shares, 23,232
shares and 23,232 shares at cost............. (2,091,193) (2,155,392) (2,155,392)
---------- ---------- ----------
Total stockholders' deficit.................. (420,169) (414,946) (374,921)
---------- ---------- ----------
$3,676,991 $3,629,710 $3,339,306
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-116
<PAGE>
SEMCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------ -----------------------
1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Services................. $4,949,198 $4,748,049 $5,019,595 $1,250,629 $1,446,052
Products................. 4,590,194 3,956,036 3,813,793 938,588 781,799
---------- ---------- ---------- ---------- ----------
9,539,392 8,704,085 8,833,388 2,189,217 2,227,851
---------- ---------- ---------- ---------- ----------
COST OF REVENUES:
Services................. 3,175,226 3,103,278 3,158,482 744,459 959,794
Products................. 3,114,221 2,524,975 2,536,380 646,939 526,473
Depreciation and
amortization.......... 181,689 192,370 178,945 40,001 50,573
---------- ---------- ---------- ---------- ----------
6,471,136 5,820,623 5,873,807 1,431,399 1,536,840
---------- ---------- ---------- ---------- ----------
Gross profit.......... 3,068,256 2,883,462 2,959,581 757,818 691,011
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES................. 2,826,643 3,018,421 2,631,676 636,907 530,725
IMAGEMAX TRANSACTION
COSTS.................... -- -- -- -- 73,000
---------- ---------- ---------- ---------- ----------
Operating income
(loss)............. 241,613 (134,959) 327,905 120,911 87,286
INTEREST EXPENSE........... 205,467 209,933 212,207 48,517 47,261
INTEREST INCOME............ (61,647) (63,365) (5,262) (1,717) --
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS).......... $ 97,793 $ (281,527) $ 120,960 $ 74,111 $ 40,025
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-117
<PAGE>
SEMCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
NOTE
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
---------------- ----------------- PAID-IN RETAINED FROM TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ESOP STOCK
------ ------- ------ -------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1994........... 596 $59,600 69,649 $696,490 $846,846 $404,869 $(947,562) $(1,029,631)
Dividends...................... -- -- -- -- -- (91,108) -- --
Purchase of treasury stock..... -- -- -- -- -- -- -- (4,545)
Receipt of principal payment on
note receivable.............. -- -- -- -- -- -- 24,779 --
Net income..................... -- -- -- -- -- 97,793 -- --
--- ------- ------ -------- -------- -------- --------- -----------
BALANCE, JUNE 30, 1995........... 596 59,600 69,649 696,490 846,846 411,554 (922,783) (1,034,176)
Dividends...................... -- -- -- -- -- (61,939) -- --
Purchase of treasury stock..... -- -- -- -- -- -- -- (1,057,017)
Receipt of principal payment on
note receivable.............. -- -- -- -- -- -- 922,783 --
Net loss....................... -- -- -- -- -- (281,527) -- --
--- ------- ------ -------- -------- -------- --------- -----------
BALANCE, JUNE 30, 1996........... 596 59,600 69,649 696,490 846,846 68,088 -- (2,091,193)
Dividends...................... -- -- -- -- -- (51,538) -- --
Purchase of treasury stock..... -- -- -- -- -- -- -- (64,199)
Net income..................... -- -- -- -- -- 120,960 -- --
--- ------- ------ -------- -------- -------- --------- -----------
BALANCE, JUNE 30, 1997........... 596 59,600 69,649 696,490 846,846 137,510 -- (2,155,392)
Net income (unaudited)......... -- -- -- -- -- 40,025 -- --
--- ------- ------ -------- -------- -------- --------- -----------
BALANCE, SEPTEMBER 30, 1997
(UNAUDITED).................... 596 $59,600 69,649 $696,490 $846,846 $177,535 $ -- $(2,155,392)
=== ======= ====== ======== ======== ======== ========= ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE, JUNE 30, 1994........... $ 30,612
Dividends...................... (91,108)
Purchase of treasury stock..... (4,545)
Receipt of principal payment on
note receivable.............. 24,779
Net income..................... 97,793
----------
BALANCE, JUNE 30, 1995........... 57,531
Dividends...................... (61,939)
Purchase of treasury stock..... (1,057,017)
Receipt of principal payment on
note receivable.............. 922,783
Net loss....................... (281,527)
----------
BALANCE, JUNE 30, 1996........... (420,169)
Dividends...................... (51,538)
Purchase of treasury stock..... (64,199)
Net income..................... 120,960
----------
BALANCE, JUNE 30, 1997........... (414,946)
Net income (unaudited)......... 40,025
----------
BALANCE, SEPTEMBER 30, 1997
(UNAUDITED).................... $ (374,921)
==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-118
<PAGE>
SEMCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
-------------------------------- ---------------------
1995 1996 1997 1996 1997
-------- ---------- -------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 97,793 $ (281,527) $120,960 $ 74,111 $ 40,025
Adjustments to reconcile net income (loss) to
net cash provided by operating activities-
Depreciation and amortization............. 181,689 192,370 178,945 40,001 50,573
(Gain) loss on sale or retirement of
property and equipment................. (80,897) (13,834) 13,182 2,680 --
Changes in operating assets and
liabilities-
Accounts receivable.................... 188,845 70,119 (121,062) 225,305 270,851
Inventories............................ 88,329 201,090 (11,410) (121,069) 66,598
Prepaid expenses and other............. (4,592) 114,753 59,310 32,252 4,608
Other assets........................... (24,731) 62,484 13,981 13,981 120,048
Accounts payable and accrued
expenses............................. 6,410 135,697 62,870 (89,040) (115,113)
Deferred revenue....................... (107,640) (28,616) (50,193) (44,770) (20,612)
Deferred compensation.................. (7,882) 6,327 6,819 1,476 (23,371)
-------- ---------- -------- ---------- --------
Net cash provided by operating
activities......................... 337,324 458,863 273,402 134,927 393,607
-------- ---------- -------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........... (142,054) (130,568) (141,226) (19,470) (24,977)
Proceeds from disposals of property and
equipment................................... 115,500 -- -- -- --
-------- ---------- -------- ---------- --------
Net cash used in investing
activities......................... (26,554) (130,568) (141,226) (19,470) (24,977)
-------- ---------- -------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock................... (4,545) (1,057,017) (64,199) -- --
Payments on note payable...................... (168,000) (72,000) (72,000) (18,000) (171,333)
Dividends paid................................ (91,108) (61,939) (51,538) -- --
Payments on note receivable from ESOP......... 24,779 922,783 -- -- --
-------- ---------- -------- ---------- --------
Net cash used in financing
activities......................... (238,874) (268,173) (187,737) (18,000) (171,333)
-------- ---------- -------- ---------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... 71,896 60,122 (55,561) 97,457 197,297
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD........................................ 93,188 165,084 225,206 225,206 169,645
-------- ---------- -------- ---------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD........ $165,084 $ 225,206 $169,645 $ 322,663 $366,942
======== ========== ======== ========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-119
<PAGE>
SEMCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
1. BACKGROUND:
Semco Industries, Inc., which does business through its wholly owned
subsidiary Spaulding Company (together "Spaulding"), is incorporated in
Massachusetts and provides data and information conversion services ranging from
CD-ROM scanning/imaging to microfilm processing. Spaulding is also an equipment
dealer, selling various microfilm/microfiche readers and other related
equipment.
Semco Industries, Inc. intends to enter into a net asset acquisition
agreement with ImageMax, Inc. ("ImageMax") which would close upon the
consummation of the initial public offering.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements as of September 30, 1997 and for the three months
ended September 30, 1996 and 1997 are unaudited and, in the opinion of the
management of Spaulding, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the of the results
for those interim periods. The results of operations for the three months ended
September 30, 1997 are not necessarily indicative of the results to be expected
for the full year.
Principles of Consolidation
The consolidated financial statements include the accounts of Semco
Industries, Inc. and Spaulding Company, its wholly owned subsidiary. All
material intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
Spaulding considers highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash equivalents are carried at
cost, which approximates market value. At September 30, 1997, Spaulding had
$150,000 invested in a certificate of deposit account.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories primarily represent microfiche viewing and imaging
equipment, service parts and related supplies.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Additions and
improvements are capitalized and repairs and maintenance are charged to expense
as incurred. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized over
the lesser of their useful life or the term of the lease.
Other Assets
Other assets consist of the net cash surrender value of life insurance
policies on current and former executives of Spaulding. The face value of the
policies at June 30, 1997 and September 30, 1997 is $1,043,000.
F-120
<PAGE>
SEMCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Revenue Recognition
Revenue is recognized when services are rendered or as products are shipped
to customers. Deferred revenue represents payments from customers with service
contracts. Service contract revenues are recognized ratably over the term of the
contract.
Income Taxes
Spaulding accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates that are expected to be in
effect when the differences reverse.
Supplemental Cash Flow Information
For the years ended June 30, 1995, 1996 and 1997 and for the three months
ended September 30, 1996 and 1997, Spaulding paid interest of $205,467, $209,933
$212,207, $48,517 and $47,261, respectively. For the years ended June 30, 1995,
1996 and 1997 and for the three months ended September 30, 1996 and 1997,
Spaulding paid income taxes of $3,520, $1,350, $5,256, $4,300, and $3,700,
respectively.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
For certain of Spaulding's financial instruments including accounts
receivable, accounts payable and accrued expenses, management believes that the
carrying amounts approximate fair value due to their short-term maturities. The
carrying amount of the note payable approximates fair value on the balance sheet
dates.
Concentration Risks
Spaulding purchases materials and equipment from various suppliers. For the
years ended June 30, 1995, 1996 and 1997 and for the three months ended
September 30, 1996 and 1997, Spaulding had three suppliers which accounted for
67%, 64%, 65%, 68%, and 54%, respectively, of total purchases. For the three
months ended September 30, 1997, Spaulding had one customer that accounted for
14% of revenues.
Long-Lived Assets
Spaulding follows SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash
F-121
<PAGE>
SEMCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
flows associated with the assets is compared to the assets' carrying amount to
determine if a write-down to market value or discounted cash flow value is
necessary.
3. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
ESTIMATED JUNE 30,
USEFUL LIVES ----------------------- SEPTEMBER 30,
YEARS 1996 1997 1997
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Land.................................... -- $ 166,059 $ 166,059 $ 166,059
Building and improvements............... 15-40 927,169 927,169 927,168
Computer and computer production
equipment............................. 5 1,232,433 1,308,561 1,317,418
Furniture and office equipment.......... 5-7 394,250 448,402 448,949
Leasehold improvements.................. 3-5 185,458 192,339 189,934
---------- ---------- ----------
2,905,369 3,042,530 3,049,528
Less--Accumulated depreciation (1,753,906) (1,941,968) (1,974,562)
---------- ---------- ----------
$1,151,463 $1,100,562 $1,074,966
========== ========== ==========
</TABLE>
4. NOTE PAYABLE:
At June 30, 1997, Spaulding had a mortgage note payable to a bank with
interest at 9.5%. Spaulding had failed to meet certain financial covenants as
specified in the note, therefore, the Note was due on demand. In September 1997,
the mortgage was repaid.
5. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
JUNE 30,
------------------- SEPTEMBER 30,
1996 1997 1997
-------- -------- -------------
<S> <C> <C> <C>
Accrued payroll.............................. $ 49,965 $116,588 $ 62,109
Accrued vacation............................. 116,552 121,640 112,217
Accrued severance............................ 169,676 127,411 107,990
Accrued professional fees.................... 3,811 24,486 100,727
Other........................................ 80,472 9,070 29,446
-------- -------- --------
$420,476 $399,195 $412,489
======== ======== ========
</TABLE>
F-122
<PAGE>
SEMCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
6. COMMITMENTS:
Spaulding leases office space and certain equipment under noncancelable
operating leases. Rent expense for all operating leases for the years ended June
30, 1995, 1996 and 1997 and the three months ended September 30, 1996 and 1997,
was $33,600, $41,992, $57,810, $10,498 and $12,632, respectively. Future minimum
lease payments under noncancelable operating leases are as follows:
YEAR ENDING JUNE 30,
- --------------------
1998..................................... $39,577
1999..................................... 27,168
2000..................................... 27,168
2001..................................... 4,528
-------
$98,441
=======
Spaulding has arrangements with several of its former executives whereby
upon the individual's retirement, Spaulding makes monthly payments to the
executive or his designated beneficiary. Deferred compensation represents the
present value of these estimated future payments to be made under such
arrangements. Payments are currently $265,000 per year and are subject to
adjustment in the event of death of the recipient.
Spaulding has entered into agreements with one of its officers and a
consultant which provide for an aggregate bonus of $200,000 to be paid in the
event of a sale of substantially all of Spaulding's net assets.
7. INCOME TAXES:
The components of the provision for income taxes are as follows:
YEAR ENDED JUNE 30,
------------------------------
1995 1996 1997
-------- -------- --------
Current Provision:
Federal..................................... $ 40,516 $ -- $ 41,648
State....................................... 12,509 -- 12,858
-------- -------- --------
53,025 -- 54,506
Utilization of net operating loss
carryforwards............................ (53,025) -- (54,506)
-------- -------- --------
-- -- --
-------- -------- --------
Deferred Provision (Benefit):
Federal..................................... (2,733) (78,933) 3,264
State....................................... (854) (24,370) 1,008
-------- -------- --------
(3,587) (103,303) 4,272
Less--Valuation allowance................... 3,587 103,303 (4,272)
-------- -------- --------
-- -- --
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
There is no current income tax provision for the years ended June 30, 1995,
1996 and 1997 as taxable income, if any, was offset by net operating loss
carryforwards. In addition, there is no deferred income tax provision as the net
deferred tax asset has been fully reserved for all periods presented as
realization is uncertain.
F-123
<PAGE>
SEMCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
7. INCOME TAXES: -- (CONTINUED)
The tax effect of temporary differences as established in accordance with
SFAS No. 109 that give rise to deferred taxes are as follows:
JUNE 30,
-----------------------
1996 1997
---------- ----------
Gross deferred tax assets:
Net operating loss carryforwards................... $1,702,000 $1,654,000
Deferred compensation.............................. 921,000 924,000
Accruals and reserves not currently deductible..... 201,000 202,000
---------- ----------
2,824,000 2,780,000
========== ==========
Gross deferred tax liability:
Depreciation....................................... (39,000) (37,000)
Other.............................................. (4,000) (4,000)
---------- ----------
(43,000) (41,000)
Less--Valuation allowance.......................... (2,781,000) (2,739,000)
---------- ----------
Net deferred tax asset.......................... $ -- $ --
========== ==========
At June 30, 1997, the Company has a net operating loss carryforward
available for income tax purposes of approximately $1,400,000, which begins to
expire in 2006.
8. RETIREMENT PLANS:
Spaulding maintains a trusted profit sharing plan (Section 401(k)) to
provide retirement benefits for qualified employees. Employer contributions are
made at the discretion of Spaulding. No Spaulding contributions were made during
the years ended June 30, 1995, 1996 and 1997.
In fiscal 1988, Spaulding established an employee stock ownership plan
("ESOP") for qualified employees. Spaulding guaranteed the debt of the ESOP,
which has been fully repaid. Contributions are made by Spaulding on a
discretionary basis and were $42,522, $42,522 and $0 for the years ended June
30, 1995, 1996 and 1997, respectively.
9. SALE OF THE BUSINESS (UNAUDITED):
In September 1997, Semco Industries, Inc. entered into an agreement with
ImageMax providing for the sale of certain net assets of Spaulding Company to
ImageMax (see Note 1).
F-124
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Total Information Management Corporation:
We have audited the accompanying balance sheets of Total Information
Management Corporation (a California corporation) as of December 31, 1995 and
1996 and June 30, 1997, and the related statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996 and the six months ended June 30, 1997. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Total Information Management
Corporation as of December 31, 1995 and 1996 and June 30, 1997, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996 and the six months ended June 30, 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
August 8, 1997
F-125
<PAGE>
TOTAL INFORMATION MANAGEMENT CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30, SEPTEMBER 30,
1995 1996 1997 1997
ASSETS ---------- ---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............ $ 47,098 $ 13,009 $ 34,927 $ 30,602
Accounts receivable.................. 692,036 911,650 748,655 899,653
Prepaid expenses and other........... 61,676 60,000 60,185 60,460
---------- ---------- ---------- ----------
Total current assets.............. 800,810 984,659 843,767 990,715
PROPERTY AND EQUIPMENT, net............ 422,902 271,630 270,138 266,568
INTANGIBLE ASSETS...................... 110,395 147,158 130,453 124,768
---------- ---------- ---------- ----------
$1,334,107 $1,403,447 $1,244,358 $1,382,051
========== ========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit....................... $ 366,792 $ 230,793 $ 10,793 $ 140,000
Current portion of long-term debt.... 63,776 95,150 81,949 78,329
Accounts payable..................... 84,328 66,303 91,671 72,784
Accrued payroll...................... 97,015 96,825 89,003 94,512
Other accrued expenses............... 24,223 35,672 38,290 143,109
Current portion of deferred
compensation...................... 45,550 197,271 185,434 179,516
---------- ---------- ---------- ----------
Total current liabilities......... 681,684 722,014 497,140 708,250
---------- ---------- ---------- ----------
LONG-TERM DEBT......................... 340,067 225,475 190,704 144,094
---------- ---------- ---------- ----------
DEFERRED COMPENSATION.................. 173,775 -- -- --
---------- ---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock, $4.17 par value, 20,000
shares authorized, 11,000 shares
issued and outstanding............ 45,870 45,870 45,870 45,870
Additional paid-in capital........... 123,130 123,130 123,130 123,130
Retained earnings (deficit).......... (30,419) 286,958 387,514 360,707
---------- ---------- ---------- ----------
Total stockholders' equity........ 138,581 455,958 556,514 529,707
---------- ---------- ---------- ----------
$1,334,107 $1,403,447 $1,244,358 $1,382,051
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-126
<PAGE>
TOTAL INFORMATION MANAGEMENT CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------------------------------ ---------- -----------------------
1994 1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Services and storage.......... $4,131,740 $4,420,111 $4,991,198 $2,159,688 $3,609,337 $3,318,242
---------- ---------- ---------- ---------- ---------- ----------
COST OF REVENUES:
Cost of services and
storage..................... 3,024,956 3,110,439 3,275,708 1,393,709 2,376,021 2,095,845
Depreciation.................. 73,659 95,690 76,104 41,897 68,266 63,403
---------- ---------- ---------- ---------- ---------- ----------
3,098,615 3,206,129 3,351,812 1,435,606 2,444,287 2,159,248
---------- ---------- ---------- ---------- ---------- ----------
Gross profit................ 1,033,125 1,213,982 1,639,386 724,082 1,165,050 1,158,994
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES....... 941,720 1,369,953 1,180,651 480,794 880,852 798,542
IMAGEMAX TRANSACTION COSTS...... -- -- -- -- -- 25,000
AMORTIZATION.................... 31,708 75,325 42,620 16,703 33,681 20,891
---------- ---------- ---------- ---------- ---------- ----------
Operating income
(loss).................... 59,697 (231,296) 416,115 226,585 250,517 314,561
INTEREST EXPENSE................ 46,726 56,755 98,738 28,029 75,599 42,812
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)............... $ 12,971 $ (288,051) $ 317,377 $ 198,556 $ 174,918 $ 271,749
========== ========== ========== ========== ========== ==========
PRO FORMA DATA (UNAUDITED):
Historical net income
(loss).................... $ 12,971 $ (288,051) $ 317,377 $ 198,556 $ 174,918 $ 271,749
Pro forma income tax expense
(benefit)................. 5,206 (115,618) 127,389 79,696 70,209 109,736
---------- ---------- ---------- ---------- ---------- ----------
Pro forma net income
(loss).................... $ 7,765 $ (172,433) $ 189,988 $ 118,860 $ 104,709 $ 162,013
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-127
<PAGE>
TOTAL INFORMATION MANAGEMENT CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
---------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993.......... 11,400 $47,537 $137,463 $261,761 $446,761
Net income........................ -- -- -- 12,971 12,971
Distributions..................... -- -- -- (17,100) (17,100)
Repurchase of common stock........ (400) (1,667) (14,333) -- (16,000)
------ ------- -------- -------- --------
BALANCE, DECEMBER 31, 1994.......... 11,000 45,870 123,130 257,632 426,632
Net loss.......................... -- -- -- (288,051) (288,051)
------ ------- -------- -------- --------
BALANCE, DECEMBER 31, 1995.......... 11,000 45,870 123,130 (30,419) 138,581
Net income........................ -- -- -- 317,377 317,377
------ ------- -------- -------- --------
BALANCE, DECEMBER 31, 1996.......... 11,000 45,870 123,130 286,958 455,958
Net income........................ -- -- -- 198,556 198,556
Distributions..................... -- -- -- (98,000) (98,000)
------ ------- -------- -------- --------
BALANCE, JUNE 30, 1997.............. 11,000 45,870 123,130 387,514 556,514
------ ------- -------- -------- --------
Net income (Unaudited)............ -- -- -- 73,193 73,193
Distributions (Unaudited)......... -- -- -- (100,000) (100,000)
------ ------- -------- -------- --------
BALANCE, SEPTEMBER 30, 1997
(Unaudited)....................... 11,000 $45,870 $123,130 $360,707 $529,707
====== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-128
<PAGE>
TOTAL INFORMATION MANAGEMENT CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------------------------- ---------- -------------------
1994 1995 1996 1997 1996 1997
-------- --------- -------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................... $ 12,971 $(288,051) $317,377 $198,556 $174,918 $271,749
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities-
Depreciation and amortization... 105,367 171,015 118,724 58,600 101,947 84,294
Loss (gain) on sale of property
and equipment................ (5,847) (1,428) 115,457 -- 115,457 --
Change in operating assets and
liabilities-
Accounts receivable.......... (199,599) 25,601 (219,614) 162,995 (142,709) 11,997
Prepaid expenses and other... 5,802 (1,676) 1,676 (185) (21,423) 1,039
Accounts payable............. 70,042 (13,321) (18,025) 25,368 30,807 6,481
Accrued payroll-related
liabilities................ 28,015 (21,008) (190) (7,822) 8,468 (2,313)
Other accrued expenses....... 7,556 (166) 11,449 2,618 17,174 107,437
Deferred compensation........ -- 219,325 (22,054) (11,837) (16,540) (17,755)
-------- --------- -------- -------- -------- --------
Net cash provided by
operating activities..... 24,307 90,291 304,800 428,293 268,099 462,929
-------- --------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment......................... (328,536) (15,221) (52,699) (40,403) (39,698) (58,341)
Proceeds from sales of property and
equipment......................... 5,847 10,313 12,410 -- -- --
Payment for other assets............ -- (95,009) (79,383) -- (79,383) --
-------- --------- -------- -------- -------- --------
Net cash used in investing
activities............... (322,689) (99,917) (119,672) (40,403) (119,081) (58,341)
-------- --------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt........ 180,140 113,000 40,000 -- -- --
Principal payments on long-term
debt.............................. (96,687) (50,677) (123,218) (47,972) (95,370) (98,202)
Distributions....................... (17,100) -- -- (98,000) -- (198,000)
Proceeds from line of credit........ 254,380 -- -- -- -- --
Repurchase of common stock.......... (16,000) -- -- -- -- --
Payments under line of credit, net.. -- (17,588) (135,999) (220,000) (77,999) (90,793)
-------- --------- -------- -------- -------- --------
Net cash provided by (used
in) financing
activities............... 304,733 44,735 (219,217) (365,972) (173,369) (386,995)
-------- --------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................... 6,351 35,109 (34,089) 21,918 (24,351) 17,593
CASH AND CASH EQUIVALENTS, beginning
of period........................... 5,638 11,989 47,098 13,009 47,098 13,009
-------- --------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, end of
period.............................. $ 11,989 $ 47,098 $ 13,009 $ 34,927 $ 22,747 $ 30,602
======== ========= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-129
<PAGE>
TOTAL INFORMATION MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
1. BACKGROUND:
Total Information Management Corporation ("TIMCO") was incorporated on
December 22, 1980. TIMCO provides document management services to customers in
the San Francisco Bay Area, Sacramento, and San Jose including document and data
conversion services, records management services; namely active storage and
maintenance of documents and files and archival storage of inactive documents.
TIMCO and its stockholders intend to enter into a net asset agreement with
ImageMax, Inc. ("ImageMax") which would close the consummation of the initial
public offering of the common stock of ImageMax.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements as of September 30, 1997 and for the nine months
ended September 30, 1996 and 1997 are unaudited and, in the opinion of
management of TIMCO, include all adjustments (consisting only of normal
recurring adjustments) necessary for fair presentation of the results for those
interim periods. The results of operations for the nine months ended September
30, 1996 and 1997 are not necessarily indicative of the results to be expected
for the full year.
Cash and Cash Equivalents
TIMCO considers highly liquid investments with original maturities of three
months or less to be cash equivalents. Cash equivalents are carried at cost,
which approximates market value.
Property and Equipment
Property and equipment are recorded at cost. Additions and improvements are
capitalized and repairs and maintenance are charged to expense as incurred.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are depreciated over the
lesser of their useful lives or the terms of the leases.
Intangible Assets
Intangible assets consist of goodwill and noncompete agreements and are
amortized on a straight-line basis over fifteen and three years, respectively.
Revenue Recognition
Revenue is recognized when the services are rendered, or products are
shipped.
Income Taxes
TIMCO has elected to be taxed under Subchapter S of the Internal Revenue
Code, and accordingly, all taxable income and loss of TIMCO is included in the
stockholders' individual tax returns.
F-130
<PAGE>
TOTAL INFORMATION MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
TIMCO reports certain income and expense items for income tax purposes on a
different basis rather than that reflected in the accompanying financial
statements. The primary differences are due to revenue recognition and accruals
not currently deductible for tax purposes. The cumulative amount of these
differences at September 30, 1997 was approximately $287,000. If the S
Corporation status is terminated, then a deferred income tax liability related
to these cumulative differences would need to be reflected in the accompanying
financial statements.
For informational purposes, the accompanying statements of operations
include an unaudited pro forma adjustment for income taxes which would have been
recorded if TIMCO had not been an S Corporation, based on the tax laws in effect
during the respective periods. The differences between the federal statutory
income tax rate and the pro forma income tax rate primarily relates to state
income taxes and expenses not deductible for tax purposes.
Supplemental Cash Flow Information
For the years ended December 31, 1994, 1995 and 1996, the six months ended
June 30, 1997, and the nine months ended September 30, 1996 and 1997. TIMCO paid
interest of $46,726, $56,755, $98,738, $28,029, $75,599 and $42,812,
respectively. During 1994, TIMCO issued a note payable totaling $100,000 in
exchange for the purchase of fixed assets.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued expenses are
reflected in the financial statements at fair value due to their short-term
nature. The carrying amount of long-term debt approximates fair value on the
balance sheet dates.
Concentration of Business Risk
TIMCO lost a major client during 1996 which accounted for 10% of TIMCO's
sales in 1996. Management plans to replace the lost client's work with new
customers.
Long-Lived Assets
TIMCO follows Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of." Accordingly, in the event that facts and circumstances indicate
that property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the assets is
compared to the assets' carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary.
F-131
<PAGE>
TOTAL INFORMATION MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ------------------- JUNE 30, SEPTEMBER 30,
(YEARS) 1995 1996 1997 1997
------------ -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Production equipment................. 5-7 $658,379 $507,000 $543,731 $561,668
Furniture and fixtures............... 5-12 8,543 8,543 8,543 8,543
Leasehold improvements............... 5-10 150,930 182,587 184,739 184,739
Vehicles............................. 3-5 100,446 100,446 99,446 99,446
Machinery and equipment.............. 5-7 37,820 42,416 44,226 44,226
-------- -------- -------- --------
956,118 840,992 880,685 898,622
Less-Accumulated depreciation........ (533,216) (569,362) (610,547) (632,054)
-------- -------- -------- --------
$422,902 $271,630 $270,138 $266,568
======== ======== ======== ========
</TABLE>
4. LINE OF CREDIT:
TIMCO has a $400,000 line of credit with a bank expiring June 23, 1998,
subject to renewal. Borrowings under the line of credit bear interest at the
bank's prime rate plus 2.5% and are collateralized by all accounts and general
intangibles. The line of credit agreement requires TIMCO to maintain certain
financial ratios. At September 30, 1997 TIMCO was in compliance with all of the
financial ratios. The line of credit is classified as a current liability in the
accompanying financial statements. Average borrowings were $364,272, $341,708,
$47,172 and $55,535 and the maximum borrowings outstanding were $400,000,
$398,793, $230,793 and $230,793 during the years ended December 31, 1995 and
1996, the six months ended June 30, 1997, and the nine months ended September
30, 1997, respectively.
5. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30, SEPTEMBER 30,
1995 1996 1997 1997
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Note payable-Small Business Administration; due
December 1, 2001, interest at prime plus 2.5%,
monthly payments of principal and interest of
$3,346, secured by accounts receivable and
equipment....................................... $180,408 $155,767 $145,136 $139,539
Note payable-bank; due October 17, 1999, interest
at prime plus 2.5%, monthly principal payments
of $1,112, secured by accounts receivable and
equipment....................................... -- 37,776 31,104 --
Note payable; due April 1999, monthly principal
and interest payments of $1,942, secured by
autos........................................... 66,435 49,605 40,477 35,722
Note payable-related party, no expiration date,
interest at 8%, unsecured....................... 20,000 -- -- --
Note payable-Kalmon; a related party; no
expiration date, interest at 8% per annum,
unsecured....................................... 40,000 7,027 -- --
Note payable-Roger Blue; a related party; due
February 1, 1999, interest at 10% per annum,
principal and interest payments of $1,710 per
month, secured by assets of the Company......... 53,000 38,450 29,936 24,162
Note Payable; due August 1, 1999 at $1,000 per
month, without interest, unsecured.............. 44,000 32,000 26,000 23,000
-------- -------- -------- --------
403,843 320,625 272,653 222,423
</TABLE>
F-132
<PAGE>
TOTAL INFORMATION MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
5. LONG-TERM DEBT: -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30, SEPTEMBER 30,
1995 1996 1997 1997
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Less-Current portion.............................. (63,776) (95,150) (81,949) (78,329)
-------- -------- -------- --------
$340,067 $225,475 $190,704 $144,094
======== ======== ======== ========
</TABLE>
As of December 31, 1996, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
1997.............................. $ 95,150
1998.............................. 94,901
1999.............................. 63,066
2000.............................. 35,786
2001.............................. 31,722
--------
$320,625
========
6. COMMITMENTS AND CONTINGENCIES:
TIMCO leases its office building, storage buildings and certain office and
production equipment under operating leases. While all of the agreements provide
for minimum lease payments, some provide for additional costs for utilities and
maintenance of the properties. Future minimum lease payments required under
operating leases as of December 31, 1996 are as follows:
1997.............................. $217,020
1998.............................. 212,549
1999.............................. 175,732
2000.............................. 118,560
2001.............................. 100,560
--------
$824,421
========
TIMCO is party to various claims and other legal matters arising in the
normal course of business. In the opinion of management, the outcome of these
matters will not have a material adverse effect on TIMCO's financial position or
results of operations.
7. RELATED-PARTY TRANSACTIONS:
During late 1995, TIMCO entered into a severance agreement with TIMCO's
former President. The terms of the severance agreement provide for payments of
$4,187 per month for the first thirty-two months, $3,687 per month for the next
sixteen months and $5,250 per month for the last twelve months. TIMCO recorded a
compensation charge of $219,326 in the year ended December 31, 1995,
representing the present value of these severance payments.
As part of the severance agreement, if at any time prior to January 1,
1998, TIMCO sells 100% of its operating assets and the sales price is in excess
of $1.5 million, TIMCO shall pay $100,000 as a deferred bonus to the former
President and all remaining payments under the severance agreement will be
accelerated and due within thirty days from the date of sale. As a result of
entering into the asset purchase agreement with ImageMax (see Note 8), TIMCO
recorded a $100,000 compensation charge in September 1997.
F-133
<PAGE>
TOTAL INFORMATION MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
7. RELATED-PARTY TRANSACTIONS: -- (CONTINUED)
On January 2, 1996, TIMCO's President purchased 2,400 shares of TIMCO's
stock from TIMCO's former President for the total consideration of $108,000
including a promissory note of $75,027, payable in forty-eight monthly payments
of $1,563 commencing February 1, 1996. The balance of the note on December 31,
1996 was $57,834. TIMCO has guaranteed full performance of this note.
8. SALE OF THE BUSINESS (UNAUDITED):
In September, 1997, TIMCO and its stockholders entered into an asset
purchase agreement with ImageMax (see Note 1).
F-134
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TPS Micrographics, Inc.:
We have audited the accompanying balance sheets of TPS Micrographics, Inc.
(a Virginia corporation) as of March 31, 1996 and 1997, and the related
statements of operations, stockholder's deficit and cash flows for each of the
three years in the period ended March 31, 1997. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TPS Micrographics, Inc. as
of March 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1997 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
August 13, 1997
F-135
<PAGE>
TPS MICROGRAPHICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------- SEPTEMBER 30,
1996 1997 1997
ASSETS -------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Accounts receivable, net of reserves of $37,193,
$31,499 and $30,711........................... $457,081 $ 711,142 $ 808,850
Inventories...................................... 173,276 151,374 138,897
Prepaid expenses and other....................... 11,165 18,813 44,787
Deferred income taxes............................ 10,474 16,041 16,041
-------- ---------- ----------
Total current assets....................... 651,996 897,370 1,008,575
PROPERTY AND EQUIPMENT, net........................ 204,206 362,378 324,375
RECEIVABLE FROM STOCKHOLDER........................ 34,750 43,263 66,536
OTHER.............................................. 28,548 22,448 19,399
-------- ---------- ----------
$919,500 $1,325,459 $1,418,885
======== ========== ==========
LIABILITIES AND
STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Bank overdraft................................... $ 41,569 $ 11,836 $ 90,544
Line of credit................................... 250,000 236,000 350,000
Current portion of long-term debt................ 52,502 178,517 125,972
Current portion of capitalized lease
obligations................................... 10,575 32,890 32,977
Accounts payable................................. 130,737 232,279 248,695
Accrued expenses................................. 68,688 135,040 158,793
Deferred revenue................................. 52,269 124,994 32,257
-------- ---------- ----------
Total current liabilities.................. 606,340 951,556 1,039,238
-------- ---------- ----------
LONG-TERM DEBT..................................... 512,170 489,856 478,303
-------- ---------- ----------
CAPITALIZED LEASE OBLIGATIONS...................... 10,702 72,453 55,691
-------- ---------- ----------
DEFERRED INCOME TAXES.............................. 2,326 12,608 12,608
-------- ---------- ----------
COMMITMENTS (NOTE 6)
STOCKHOLDER'S DEFICIT:
Common stock, $10 par value, 200 shares
authorized, 100 shares issued and 25 shares
outstanding................................... 1,000 1,000 1,000
Additional paid-in capital....................... 225,464 225,464 225,464
Retained earnings................................ 111,498 122,522 156,581
Less--Treasury stock, 75 shares at cost.......... (550,000) (550,000) (550,000)
-------- ---------- ----------
Total stockholder's deficit................ (212,038) (201,014) (166,955)
-------- ---------- ----------
$919,500 $1,325,459 $1,418,885
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-136
<PAGE>
TPS MICROGRAPHICS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------------ -----------------------
1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Services................. $1,538,699 $1,819,451 $2,428,121 $1,052,051 $1,568,578
Products................. 693,677 927,648 1,055,714 637,237 691,917
---------- ---------- ---------- ---------- ----------
2,232,376 2,747,099 3,483,835 1,689,288 2,260,495
---------- ---------- ---------- ---------- ----------
COST OF REVENUES:
Services................. 1,013,204 1,239,229 1,519,645 732,698 1,055,100
Products................. 642,934 768,917 963,854 531,326 587,324
Depreciation and
amortization.......... 47,356 67,626 95,687 33,779 53,772
---------- ---------- ---------- ---------- ----------
1,703,494 2,075,772 2,579,186 1,297,803 1,696,196
---------- ---------- ---------- ---------- ----------
Gross profit.......... 528,882 671,327 904,649 391,485 564,299
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES................. 530,917 604,548 798,642 310,620 454,678
---------- ---------- ---------- ---------- ----------
Operating income
(loss)............. (2,035) 66,779 106,007 80,865 109,621
INTEREST EXPENSE........... 4,788 68,855 87,274 42,573 53,920
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes....... (6,823) (2,076) 18,733 38,292 55,701
INCOME TAXES (BENEFIT)..... (3,509) (405) 7,709 15,757 21,642
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS).......... $ (3,314) $ (1,671) $ 11,024 $ 22,535 $ 34,059
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-137
<PAGE>
TPS MICROGRAPHICS, INC.
STATEMENTS OF STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN RETAINED TREASURY STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS STOCK DEFICIT
------ ------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31,
1994....................... 100 $1,000 $225,464 $116,483 $ -- $ 342,947
Purchase of treasury
stock................ -- -- -- -- (550,000) (550,000)
Net loss................ -- -- -- (3,314) -- (3,314)
--- ------ -------- -------- --------- ---------
BALANCE, MARCH 31,
1995....................... 100 1,000 225,464 113,169 (550,000) (210,367)
Net loss................ -- -- -- (1,671) -- (1,671)
--- ------ -------- -------- --------- ---------
BALANCE, MARCH 31,
1996....................... 100 1,000 225,464 111,498 (550,000) (212,038)
Net income.............. -- -- -- 11,024 -- 11,024
--- ------ -------- -------- --------- ---------
BALANCE, MARCH 31,
1997....................... 100 1,000 225,464 122,522 (550,000) (201,014)
Net income
(unaudited).......... -- -- -- 34,059 -- 34,059
--- ------ -------- -------- --------- ---------
BALANCE, SEPTEMBER 30, 1997
(UNAUDITED)................ 100 $1,000 $225,464 $156,581 $(550,000) $(166,955)
=== ====== ======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-138
<PAGE>
TPS MICROGRAPHICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------ -------------------
1995 1996 1997 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ (3,314) $ (1,671) $ 11,024 $ 22,535 $ 34,059
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation and amortization.................. 47,356 67,626 95,687 33,779 53,772
Deferred income taxes (benefit)................ (5,300) (2,848) 4,715 -- --
Changes in operating assets and liabilities-
Accounts receivable......................... 216,492 (66,946) (254,061) (90,864) (97,708)
Inventories................................. (42,314) (86,861) 21,902 43,207 12,477
Prepaid expenses and other.................. (11,520) (9,645) (16,161) (10,717) (49,247)
Accounts payable and accrued expenses....... (164,458) (106,648) 167,894 41,062 40,169
Deferred revenue............................ 19,288 32,981 72,725 (25,277) (92,737)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities.............................. 56,230 (174,012) 103,725 13,725 (99,215)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net........... (58,054) (89,950) (139,205) (54,137) (12,720)
Acquisition of customer list....................... -- (30,500) -- -- --
-------- -------- -------- -------- --------
Net cash used in investing activities..... (58,054) (120,450) (139,205) (54,137) (12,720)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit... -- 250,000 (14,000) -- 114,000
Bank overdraft..................................... 5,142 36,427 (29,733) 34,991 78,708
Proceeds from long-term debt....................... -- 32,000 137,000 37,000 --
Payments on long-term debt and capitalized lease
obligations...................................... (3,318) (23,965) (57,787) (31,579) (80,773)
-------- -------- -------- -------- --------
Net cash provided by financing
activities.............................. 1,824 294,462 35,480 40,412 111,935
-------- -------- -------- -------- --------
NET INCREASE IN CASH................................. -- -- -- -- --
CASH, BEGINNING OF PERIOD............................ -- -- -- -- --
-------- -------- -------- -------- --------
CASH, END OF PERIOD.................................. $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-139
<PAGE>
TPS MICROGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
1. BACKGROUND:
TPS Micrographics, Inc. ("TPS") was incorporated in Virginia on August 24,
1990. TPS provides data and information conversion services ranging from CD-ROM
scanning/imaging to microfilm processing. TPS is also an authorized Canon
dealer, selling various microfilm/microfiche readers and other related
equipment.
TPS and its stockholder intend to enter into a stock acquisition agreement
with ImageMax, Inc. ("ImageMax") which would close upon the consummation of the
initial public offering of the common stock of ImageMax.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements as of September 30, 1997 and for the six months
ended September 30, 1996 and 1997 are unaudited and, in the opinion of the
management of TPS, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results for those interim
periods. The results of operations for the six months ended September 30, 1997
are not necessarily indicative of the results to be expected for the full year.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories primarily represent microfiche viewing and imaging
equipment, production and related supplies.
Property and Equipment
Property and equipment are recorded at cost. Additions and improvements are
capitalized and repairs and maintenance are charged to expense as incurred.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized over the lesser
of their useful life or the term of the lease.
Other Assets
Other assets consist of an acquired customer list which is being amortized
on a straight-line basis over five years. Amortization expense was $1,952 and
$6,100 for the years ended March 31, 1996 and 1997, respectively, and
accumulated amortization was $8,052 at March 31, 1997.
Revenue Recognition
Revenue is recognized when the services are rendered or products are
shipped to customers. Deferred revenue represents payments for customer storage
and certain services which are billed in advance of performance.
Income Taxes
TPS accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets
F-140
<PAGE>
TPS MICROGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
and liabilities and are measured using enacted tax rates that are expected to be
in effect when the differences reverse.
Supplemental Cash Flow Information
For the years ended March 31, 1995, 1996 and 1997, TPS paid interest of
$4,788, $68,855 and $87,274, respectively. For the years ended March 31, 1995,
1996 and 1997, TPS paid income taxes of $1,791, $2,443 and $2,994, respectively.
Capital lease obligations of $16,542, $14,690 and $108,554 were incurred on
equipment leases entered into in 1995, 1996 and 1997, respectively. In fiscal
1995, TPS purchased 75 shares of its common stock for $550,000 through the
issuance of debt (see Note 4).
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
For certain of TPS' financial instruments including accounts receivable,
accounts payable and accrued expenses, management believes that the carrying
amounts approximate fair value due to their short-term maturities. The carrying
amount of long-term debt approximates fair value on the balance sheet dates.
Long-Lived Assets
TPS follows SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of." Accordingly, in the event
that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the assets is compared to the assets'
carrying amount to determine if a write-down to market value or discounted cash
flow value is necessary.
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
ESTIMATED MARCH 31,
USEFUL LIVES ------------------- SEPTEMBER 30,
YEARS 1996 1997 1997
------------ -------- -------- -------------
<S> <C> <C> <C> <C>
Scanning and filming equipment..... 5-7 $311,487 $490,406 $514,100
Furniture and office equipment..... 5-7 39,905 61,913 63,374
Delivery equipment................. 5 76,786 123,618 111,183
-------- -------- --------
428,178 675,937 688,657
Less- Accumulated depreciation..... (223,972) (313,559) (364,282)
-------- -------- --------
$204,206 $362,378 $324,375
======== ======== ========
</TABLE>
F-141
<PAGE>
TPS MICROGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
3. PROPERTY AND EQUIPMENT: -- (CONTINUED)
Depreciation expense for the years ended March 31, 1995, 1996 and 1997 was
$47,356, $65,674, $89,587, respectively. As of March 31, 1997, TPS had $126,958
in property and equipment, net of accumulated amortization, financed under
capital leases.
4. DEBT FINANCING:
<TABLE>
<CAPTION>
MARCH 31,
------------------- SEPTEMBER 30,
1996 1997 1997
-------- -------- -------------
<S> <C> <C> <C>
Note payable, interest at 8.5%, due in monthly
installments of principal and interest of $5,416
through April 2010................................. $532,672 $512,170 $501,249
Notes payable to bank, interest at prime plus 1%, due
in monthly installments of principal and interest
of $6,667.......................................... -- 100,000 79,997
Notes payable, interest at 8%, due in monthly
installments of principal and interest of $5,828
through March 1998................................. 32,000 56,203 23,029
-------- -------- --------
564,672 668,373 604,275
Less- Current portion................................ (52,502) (178,517) (125,972)
-------- -------- --------
$512,170 $489,856 $478,303
======== ======== ========
</TABLE>
At March 31, 1997, TPS has a line of credit agreement with a bank which
provides for borrowings of up to $450,000. The line bears interest at the prime
rate plus 1% and is made available at the bank's discretion. The line of credit
is secured by substantially all of TPS' assets and the personal guarantee of the
stockholder.
The note payable with an outstanding principal of $512,170 at March 31,
1997 is collateralized by the outstanding common stock of TPS. The other notes
payable are secured by accounts receivable, equipment and the personal guarantee
of the stockholder.
As of March 31, 1997, maturities of long-term debt are as follows:
1998...................................... $178,517
1999...................................... 24,286
2000...................................... 26,432
2001...................................... 28,770
2002...................................... 31,315
Thereafter................................ 379,053
--------
$668,373
========
F-142
<PAGE>
TPS MICROGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
5. CAPITALIZED LEASE OBLIGATIONS:
TPS leases certain property and equipment under capitalized leases with
interest ranging from 7% to 18%. Future minimum lease payments as of March 31,
1997 are as follows:
1998...................................... $ 43,323
1999...................................... 40,560
2000...................................... 27,154
2001...................................... 13,706
--------
Total minimum lease payments.............. 124,743
Less- Amount representing interest........ (19,400)
--------
Present value of minimum lease payments... 105,343
Less- Current portion..................... (32,890)
--------
$ 72,453
========
6. COMMITMENTS:
TPS leases office space and certain equipment under noncancelable operating
leases. Rent expense for the years ended March 31, 1995, 1996 and 1997 was
$63,222, $83,298 and $90,564, respectively. Future minimum lease payments are as
follows:
1998...................................... $115,709
1999...................................... 105,431
2000...................................... 17,721
--------
$238,861
========
7. INCOME TAXES:
The components of the provision for income taxes are as follows:
YEAR ENDED MARCH 31,
---------------------------
1995 1996 1997
------- ------- -------
Current Provision:
Federal......................................... $ 1,155 $ 1,745 $ 2,153
State........................................... 636 698 841
------- ------- -------
1,791 2,443 2,994
------- ------- -------
Deferred Provision:
Federal......................................... (4,505) (2,421) 4,008
State........................................... (795) (427) 707
------- ------- -------
(5,300) (2,848) 4,715
------- ------- -------
$(3,509) $ (405) $ 7,709
======= ======= =======
F-143
<PAGE>
TPS MICROGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
7. INCOME TAXES: -- (CONTINUED)
The tax effect of temporary differences as established in accordance with
SFAS No. 109 that give rise to deferred taxes are as follows:
MARCH 31,
-------------------
1996 1997
-------- --------
Gross deferred tax assets for accruals and reserves not
currently deductible.................................... $10,474 $16,041
Gross deferred tax liability for differences in basis of
property and equipment.................................. (2,326) (12,608)
------- -------
$ 8,148 $ 3,433
======= =======
TPS did not have any valuation allowances against deferred tax assets at
March 31, 1997, as it believes it is more likely than not that the deferred tax
assets will be realized.
8. PROFIT SHARING PLAN:
Effective November 30, 1996, TPS terminated its trusteed profit sharing
plan for qualified employees. Upon termination, participants in the plan became
fully vested in TPS' contributions and all plan assets were distributed to the
plan participants. TPS did not make any contributions to the plan for the years
ended March 31, 1995, 1996 and 1997.
9. STOCKHOLDER RECEIVABLE:
At March 31, 1996 and 1997, TPS had a receivable due from its sole
stockholder of $34,750 and $43,263, respectively. The receivable has no fixed
repayment schedule and bears interest at 5%.
10. SALE OF THE BUSINESS (UNAUDITED):
In September 1997, TPS and its stockholder entered into a stock purchase
agreement with ImageMax (see Note 1).
F-144
<PAGE>
[PHOTOGRAPHS DEPICTING VARIOUS OPERATIONS OF CERTAIN OF THE FOUNDING COMPANIES.]
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary...................... 3
Risk Factors............................ 9
The Company............................. 16
Use of Proceeds......................... 19
Dividend Policy......................... 19
Capitalization.......................... 20
Dilution................................ 21
Selected Financial Data................. 22
Management's Discussion and Analysis
of Financial Condition and Results of
Operations............................ 24
Business................................ 54
Management.............................. 63
Certain Transactions.................... 69
Principal Shareholders.................. 72
Description of Capital Stock............ 73
Shares Eligible for Future Sale......... 75
Underwriting............................ 76
Legal Matters........................... 78
Experts................................. 78
Additional Information.................. 78
Index to Financial Statements........... F-1
------------------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS 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.
================================================================================
================================================================================
3,100,000 SHARES
COMMON STOCK
------------------------
PROSPECTUS
, 1997
------------------------
WILLIAM BLAIR & COMPANY
JANNEY MONTGOMERY SCOTT INC.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemized statement of all estimated
expenses, all of which will be paid by the Company, in connection with the
issuance and distribution of the securities being registered:
NATURE OF EXPENSE AMOUNT
----------------- ----------
SEC Registration Fee........................................ $ 15,124
Nasdaq National Market Listing Fee.......................... 31,097
NASD Filing Fee............................................. 5,491
Printing and engraving fees................................. *
Registrant's counsel fees and expenses...................... *
Accounting fees and expenses................................ *
Blue Sky filing fees and expenses and counsel fees.......... *
Transfer agent and registrar fees........................... *
Miscellaneous............................................... *
----------
TOTAL..................................................... $2,950,000
==========
- ------------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Sections 1741-1747 of the BCL, Article XIV of the Company's
Bylaws provides that the Company shall, in the case of directors and officers,
and may, in the case of employees and agents, indemnify any such person who is
or was a party (other than a party acting on his or her own behalf) or who is
threatened to be made such a party, to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (including actions brought by or in the right of the Company where
certain standards of conduct have been met), by reason of the fact that such
person is or was a director or officer of the Company, or is or was serving at
the request of the Company on behalf of another enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action if
he or she met certain requisite standards of conduct. In all such cases, the
Company shall indemnify any such person against all such expenses actually and
reasonably incurred by him or her in connection with any such action to the
extent that such person has been successful on the merits or in defense of any
such action. The indemnification provisions of the Bylaws are non-exclusive.
Pursuant to Section 1713 of the BCL, Article IV, Section 4.16 of the
Company's Bylaws provides that a director shall not be liable to the Company for
monetary damages as such for any action taken or omitted unless the director
breaches or fails to perform a duty of his office and that breach or failure to
perform constitutes self-dealing, willful misconduct or recklessness. This
limitation does not apply to criminal liability or liability for the payment of
taxes. The Company believes that the provisions will assist it in securing and
maintaining the services of directors who are not employees of the Company.
The Company intends to procure insurance, which would afford officers and
directors insurance coverage for losses arising from claims based on breaches of
duty, negligence, error and other wrongful acts, including liabilities under the
Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In November 1996 the Company sold 423,077 shares of Common Stock to its
founding shareholders for an aggregate consideration of $5,000. Following
initial funding in November 1996, the Company sold 150,000 shares of convertible
preferred stock convertible into 126,923 shares of
II-1
<PAGE>
Common Stock upon completion of the Offering and 126,923 shares of common stock
to certain of its founding shareholders, to David C. Utz, Jr., a director, and
to Brian K. Bergeron, an accredited investor, for an aggregate consideration of
$75,000.
In April 1997 the Company sold 105,000 shares of convertible preferred
stock convertible into 88,845 shares of Common Stock upon completion of the
Offering to certain of its founding shareholders and two additional accredited
investors for an aggregate consideration of $105,000.
In June 1997 the Company sold 97,308 shares of Common Stock to certain of
its founding shareholders and its Chief Operating and Chief Financial Officers
for an aggregate consideration of $230,000.
On September 11, 1997 the Company sold 63,462 shares of Common Stock to an
accredited investor for an aggregate consideration of $300,000 and 269,125
shares of convertible preferred stock convertible into 227,721 shares of Common
Stock upon completion of the Offering to 17 accredited investors for an
aggregate consideration of $1,076,500.
On September 9 and September 11, 1997, the Company entered into 14
acquisition agreements pursuant to which it agreed to issue an aggregate of
1,184,468 shares of Common Stock for an aggregate purchase price of $15,397,746
(based on an assumed initial public offering price of $13.00 per share) as
partial consideration for the Founding Companies.
The foregoing described issuances of securities did not involve
underwriters and were exempt from registration under the Securities Act by
virtue of the exemption provided by Section 4(2) thereof for transactions not
involving any public offering.
ITEM 16. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
1 -- Form of Underwriting Agreement by and between the Company
and the Underwriters.
2.1 -- Agreement and Plan of Reorganization dated September 9,
1997, by and among the Company, DocuTech Data Systems, Inc.,
and Rex Lamb and Mark Creglow (including escrow agreement).*
2.2 -- Asset Purchase Agreement dated September 9, 1997 by and
among the Company Rex Lamb and Vicki Lamb (including escrow
agreement).*
2.3 -- Agreement and Plan of Reorganization dated September 9,
1997, by and among the Company, Utz Medical Enterprises,
Inc., and David C. Utz, Jr. (including escrow agreement).*
2.4 -- Agreement and Plan of Reorganization dated September 9, 1997
by and among Jane Semasko and John Semasko, Oregon
Micro-Imaging, Inc. and the Company (including escrow
agreement).*
2.5 -- Asset Purchase Agreement dated September 9, 1997 by and
among Spaulding Company, Inc., Semco Industries, Inc., and
the Company (including escrow agreement).*
2.6 -- Asset Purchase Agreement dated September 9, 1997 by and
among Total Information Management Corporation and the
Company (including escrow agreement).*
2.7 -- Stock Purchase Agreement dated September 9, 1997 by and
among Ovidio Pugnale, Image Memory Systems, Inc. and the
Company (including escrow agreement).*
2.8 -- Agreement and Plan of Reorganization dated September 9,
1997, by and among the Company, International Data Services
of New York, Inc., and Mitchell J. Taube and Ellen F.
Rothschild-Taube (including escrow agreement).*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
2.9 -- Stock Purchase Agreement dated September 9, 1997 by and
among David Crowder, TPS Micrographics, Inc. and the Company
(including escrow agreement).*
2.10 -- Agreement and Plan of Reorganization dated September 11,
1997 by and among the Company, Image and Information
Solutions, Inc. and Gary Blackwelder (including escrow
agreement).*
2.11 -- Agreement and Plan of Reorganization dated September 9, 1997
by and among Madeline Solomon, David C. Yezbak, CodaLex
Microfilming Corporation and the Company (including escrow
agreement).*
2.12 -- Asset Purchase Agreement dated September 9, 1997 by and
among Imaging Information Industries, Inc., Gerald P.
Gorman, Theodore J. Solomon, Jr., Charles P. Yezbak, III,
David C. Yezbak and the Company (including escrow
agreement).*
2.13 -- Agreement and Plan of Reorganization dated September 9, 1997
by and among Gerald P. Gorman, Theodore J. Solomon, Theodore
J. Solomon, Jr., Charles P. Yezbak, III, David C. Yezbak,
Laser Graphics Systems & Services, Inc. and the Company
(including escrow agreement).*
2.14 -- Asset Purchase Agreement dated September 9, 1997 by and
among DataLink Corporation, Judith E. DeMott, Geri E.
Davidson and the Company (including escrow agreement).*
3.1 -- Amended and Restated Articles of Incorporation of the
Company.**
3.2 -- Bylaws of the Company.**
4.1 -- Specimen Stock Certificate.**
4.2 -- Shareholders Agreement between the Company and certain of
its shareholders dated November 17, 1996, as amended.**
5.1 -- Opinion of Pepper, Hamilton & Scheetz LLP.**
10.1 -- Form of 1997 Incentive Plan.
10.2 -- Form of 1997 Employee Stock Purchase Plan.
10.3 -- Management Agreement between GBL Capital Corporation and the
Company dated November 27, 1996.**
10.4 -- Employment Agreement between the Company and Bruce M. Gillis
dated as of August 1, 1997.*
10.5 -- Employment Agreement between the Company and James D. Brown
dated as of August 18, 1997.*
10.6 -- Employment Agreement between the Company and S. David Model
dated as of August 18, 1997.*
10.7 -- Employment Agreement between the Company and Andrew R. Bacas
dated as of August 1, 1997.*
10.8 -- Form of Employment Agreement between the Company and John E.
Semasko.*
10.9 -- Form of Employment Agreement between the Company and Rex
Lamb.*
10.10 -- Lease Agreement dated March 26, 1996 by and between Marlyn
D. Schwarz and Rex Lamb d/b/a DocuTech.*
10.11 -- Lease Agreement dated February 24, 1992 by and between
Marlyn Schwarz d/b/a Old Cheney Plaza and Rex Lamb d/b/a
DocuTech.*
10.12 -- Lease Agreement dated September 1, 1994 by and between
Jonstar Realty Corporation and Spaulding Company, Inc.
(renewed May 27, 1997).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
10.13 -- [Intentionally left blank]
10.14 -- Lease dated September 1, 1995 by and between Robert S. Greer
and Elvera A. Greer and American Micro-Med Corporation.*
10.15 -- Lease dated February 8, 1994 and Lease Rider dated as of
February 1, 1994 by and between Oporto Development Corp. and
International Data Services of New York, Inc.*
10.16 -- Amendment of Lease dated June 6, 1996 between East Cobb Land
Development and Investment Co., L.P. and Imaging Information
Industries/David Yezbak, extended by letter dated July 16,
1997.*
10.17 -- [Intentionally left blank]
10.18 -- Lease dated January 10, 1996 by and between Financial
Enterprises III and TPS Imaging Solutions, Inc.*
10.19 -- Lease Agreement dated March 31, 1995 by and between
Technical Publications Service, Inc. and TPS Micrographics,
Inc.*
10.20 -- Standard Industrial Commercial MultiTenant Lease-Gross dated
June 20, 1994 by and between Northgate Assembly of God,
North Sacramento, d/b/a Arena Christian Center and Total
Information Management Corporation.*
10.21 -- Lease dated January 26, 1981 and Extension of Lease dated
October, 1992 by and between Trader Vic's Food Products and
Total Information Management Corporation.
10.22 -- Standard Industrial Lease dated September 24, 1991 by and
between Charles F. Coss, Viola B. Coss, Tracey C. Quinn,
John Coss, Peter B. Coss, Elizabeth Coss, Tracey C. Quinn as
Trustee for Geoffrey C. Quinn and Elizabeth Coss, as Trustee
for Caitlin N. Shay and Total Information Management
Corporation extended by letter dated October 18, 1996 from
James Bunker to Peter Coss.*
10.23 -- Lease dated January 1, 1993 between CSX Transportation, Inc.
and American Micro-Med Corporation.*
10.24 -- Lease and Service Agreement dated September 4, 1997 and two
Addendums dated October 15, 1997 between American Executive
Centers, Inc. and the Company.
21 -- Subsidiaries.*
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Pepper, Hamilton & Scheetz LLP (included in
Exhibit 5.1)**.
23.3 -- Consent of Rex Lamb.*
23.4 -- Consent of John E. Semasko.*
23.5 -- Consent of Steven N. Kaplan.*
23.6 -- Consent of Lennox K. Black.
23.7 -- Consent of Lewis E. Hatch, Jr.
23.8 -- Consent of David C. Carney.
24 -- Powers of Attorney.*
27 -- Financial Data Schedule (in electronic format only).
</TABLE>
- ------------------
* Previously filed.
** To be filed by Amendment.
II-4
<PAGE>
(B) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
None.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes to provide to the
Underwriters at the Closing specified in the underwriting agreement,
certificates in such denomination and registered in such names or required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant 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 registrant 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 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.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, 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 Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Philadelphia, Commonwealth of Pennsylvania, on the 4th day of November, 1997.
IMAGEMAX, INC.
By: /s/ BRUCE M. GILLIS
----------------------------------
Bruce M. Gillis
Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ BRUCE M. GILLIS Chief Executive Officer; Director November 4, 1997
- --------------------------------- (principal executive officer)
Bruce M. Gillis
/s/ JAMES D. BROWN Chief Financial Officer November 4, 1997
- --------------------------------- (principal financial officer and
James D. Brown principal accounting officer)
/s/ ANDREW R. BACAS Director November 4, 1997
- ---------------------------------
Andrew R. Bacas
* Director November 4, 1997
- ---------------------------------
David C. Utz, Jr.
*By /s/ BRUCE M. GILLIS November 4, 1997
- ---------------------------------
Bruce M. Gillis, attorney-in-fact
pursuant to power of attorney
previously filed with this
registration statement
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
1 -- Form of Underwriting Agreement by and between the Company
and the Underwriters.
10.1 -- Form of 1997 Incentive Plan.
10.2 -- Form of 1997 Employee Stock Purchase Plan.
10.12 -- Lease Agreement dated September 1, 1994 by and between
Jonstar Realty Corporation and Spaulding Company, Inc.
(renewed May 27, 1997).
10.21 -- Lease dated January 26, 1981 and Extension of Lease dated
October, 1992 by and between Trader Vic's Food Products and
Total Information Management Corporation.
10.24 -- Lease and Service Agreement dated September 4, 1997 and two
Addendums dated October 15, 1997 between American Executive
Centers, Inc. and the Company.
23.1 -- Consent of Arthur Andersen LLP.
23.6 -- Consent of Lennox K. Black.
23.7 -- Consent of Lewis E. Hatch, Jr.
23.8 -- Consent of David C. Carney.
27 -- Financial Data Schedule (in electronic format only).
EXHIBIT 1
IMAGEMAX, INC.
3,100,000 Shares Common Stock(1)
UNDERWRITING AGREEMENT
November ___, 1997
William Blair & Company, L.L.C.
Janney Montgomery Scott Inc.
As Representatives of the Several
Underwriters Named in Schedule A
c/o William Blair & Company, L.L.C.
222 West Adams Street
Chicago, Illinois 60606
Ladies and Gentlemen:
SECTION 1. Introductory. ImageMAX, Inc., a Pennsylvania corporation
("Company"), has an authorized capital stock consisting of 10,000,000 shares of
Preferred Stock, no par value per share, of which _________ shares of Series A
Convertible Preferred Stock were outstanding as of ___________, 1997 and
40,000,000 shares of Common Stock, no par value per share ("Common Stock"), of
which ________ shares were outstanding as of such date. The Company proposes to
issue and sell 3,100,000 shares of its authorized but unissued Common Stock to
the several underwriters named in Schedule A as it may be amended by the Pricing
Agreement hereinafter defined ("Underwriters"), who are acting severally and not
jointly. Such total of 3,100,000 shares of Common Stock proposed to be sold by
the Company is hereinafter referred to as the "Firm Shares." In addition, the
Company proposes to grant to the Underwriters an option to purchase up to
465,000 additional shares of Common Stock ("Option Shares") as provided in
Section 4 hereof. The Firm Shares and, to the extent such option is exercised,
the Option Shares, are hereinafter collectively referred to as the "Shares."
You have advised the Company that the Underwriters propose to make a public
offering of their respective portions of the Shares as soon as you deem
advisable after the registration statement hereinafter referred to becomes
effective, if it has not yet become effective, and the Pricing Agreement
hereinafter defined has been executed and delivered.
Prior to the purchase and public offering of the Shares by the several
Underwriters, the Company and the Representatives, acting on behalf of the
several Underwriters, shall enter into an agreement substantially in the form of
Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may take the
form of an exchange of any standard form of written telecommunication between
the Company and the Representatives and shall specify such applicable
information as is indicated in Exhibit A hereto. The offering of the Shares will
be governed by this Agreement, as supplemented by the Pricing Agreement.
- ---------------
(1) Plus an option to acquire up to 465,000 additional shares from the
Company to cover overallotments.
<PAGE>
From and after the date of the execution and delivery of the Pricing Agreement,
this Agreement shall be deemed to incorporate the Pricing Agreement.
The Company hereby confirms its agreement with the Underwriters as follows:
SECTION 2. Representations and Warranties of the Company. The Company
represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-35567) and a
related preliminary prospectus with respect to the Shares have been
prepared and filed with the Securities and Exchange Commission
("Commission") by the Company in conformity with the requirements of the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "1933 Act;" unless indicated to
the contrary, all references herein to specific rules are rules promulgated
under the 1933 Act); and the Company has so prepared and has filed such
amendments thereto, if any, and such amended preliminary prospectuses as
may have been required to the date hereof. If the Company has elected not
to comply with Rule 430A, the Company has prepared and will promptly file
an amendment to the registration statement and an amended prospectus. If
the Company has elected to rely upon Rule 430A, it will prepare and file a
prospectus pursuant to Rule 424(b) that discloses the information
previously omitted from the Prospectus in reliance upon Rule 430A. There
have been or will promptly be delivered to you three signed copies of such
registration statement and amendments, three copies of each exhibit filed
therewith, and conformed copies of such registration statement and
amendments (but without exhibits) and of the related preliminary prospectus
or prospectuses and final forms of prospectus for each of the Underwriters.
Such registration statement (as amended, if applicable) at the time it
becomes effective and the prospectus constituting a part thereof (including
the information, if any, deemed to be part thereof pursuant to Rule 430A(b)
and/or Rule 434), as from time to time amended or supplemented, are
hereinafter referred to as the "Registration Statement," and the
"Prospectus," respectively, except that if any revised prospectus shall be
provided to the Underwriters by the Company for use in connection with the
offering of the Shares which differs from the Prospectus on file at the
Commission at the time the Registration Statement became or becomes
effective (whether or not such revised prospectus is required to be filed
by the Company pursuant to Rule 424(b)), the term Prospectus shall refer to
such revised prospectus from and after the time it was provided to the
Underwriters for such use. If the Company elects to rely on Rule 434, all
references to "Prospectus" shall be deemed to include, without limitation,
the form of prospectus and the term sheet, taken together, provided to the
Underwriters by the Company in accordance with Rule 434 ("Rule 434
Prospectus"). Any registration statement (including any amendment or
supplement thereto or information which is deemed part thereof) filed by
the Company under Rule 462(b) ("Rule 462(b) Registration Statement") shall
be deemed to be part of the "Registration Statement" as defined herein, and
any prospectus (including any amendment or supplement thereto or
information which is
2
<PAGE>
deemed part thereof) included in such registration statement shall be
deemed to be part of the "Prospectus," as defined herein, as appropriate.
The Securities Exchange Act of 1934, as amended, and the rules and
regulations of the Commission thereunder are hereinafter collectively
referred to as the "Exchange Act."
(b) The Commission has not issued any order preventing or suspending
the use of any preliminary prospectus, and each preliminary prospectus has
conformed in all material respects with the requirements of the 1933 Act
and, as of its date, has not included any untrue statement of a material
fact or omitted to state a material fact necessary to make the statements
therein not misleading; and when the Registration Statement became or
becomes effective, and at all times subsequent thereto, up to the First
Closing Date or the Second Closing Date hereinafter defined, as the case
may be, the Registration Statement, including the information deemed to be
part of the Registration Statement at the time of effectiveness pursuant to
Rule 430A(b), if applicable, and the Prospectus and any amendments or
supplements thereto, contained or will contain all statements that are
required to be stated therein in accordance with the 1933 Act and in all
material respects conformed or will in all material respects conform to the
requirements of the 1933 Act, and neither the Registration Statement nor
the Prospectus, nor any amendment or supplement thereto, included or will
include any untrue statement of a material fact or omitted or will omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that the Company
makes no representation or warranty as to information contained in or
omitted from any preliminary prospectus, the Registration Statement, the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by or on
behalf of any Underwriter through the Representatives specifically for use
in the preparation thereof.
(c) The Company, its subsidiaries and the Founding Companies (as
defined in the Registration Statement) have been duly incorporated and are
validly existing as corporations in good standing under the laws of their
respective places of incorporation, with the corporate power and authority
to own their properties and conduct their business as described in the
Prospectus; the Company, each of the subsidiaries and each of the Founding
Companies are duly qualified to do business as foreign corporations under
the corporation law of, and are in good standing as such in, each
jurisdiction in which they own or lease properties, have an office, or in
which business is conducted and such qualification is required except in
any such case where the failure to so qualify or be in good standing would
not have a material adverse effect upon the condition (financial or
otherwise), business, assets or results of operations of the Company, its
subsidiaries and the Founding Companies taken as a whole, upon the
Company's ability to perform its obligations under this Agreement, upon the
Company's or any Founding Company's ability to perform its obligations
under the agreements relating to the acquisition of the Founding Companies
(the "Acquisition Agreements"), or upon the validity or consummation of the
transactions contemplated hereby or thereby (a "Material Adverse Effect");
and no proceeding of
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which the Company has knowledge has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit
or curtail, such power and authority or qualification.
(d) The Company owns, directly or indirectly, 100 percent of the
issued and capital stock of each of its subsidiaries set forth in Exhibit
21 of the Registration Statement, free and clear of any claims, liens,
encumbrances or security interests and all of such capital stock has been
duly authorized and validly issued and is fully paid and nonassessable.
Except as set forth in Exhibit 21 of the Registration Statement, the
Company has no subsidiaries and does not control, directly or indirectly,
any other corporation, partnership, limited liability company, joint
venture, association or other entity.
(e) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct. The issued and outstanding shares of
capital stock of the Company as set forth in the Prospectus have been duly
authorized and validly issued, are fully paid and nonassessable, and
conform to the description thereof contained in the Prospectus in all
material respects; and except as described in the Prospectus, there is no
commitment, plan or arrangement to issue, and no outstanding option,
warrant or other right calling for the issuance of, any share of capital
stock of the Company, any subsidiary or any of the Founding Companies; and
except as described in the Prospectus, there is outstanding no security or
other instrument that by its terms is convertible into or exchangeable for
capital stock of the Company, any subsidiary or any of the Founding
Companies, and there is no commitment, plan or arrangement to issue such a
security or instrument.
(f) The Shares to be sold by the Company have been duly authorized and
when issued, delivered and paid for pursuant to this Agreement, will be
validly issued, fully paid and nonassessable, and will conform in all
material respects to the description thereof contained in the Prospectus.
(g) The making and performance by the Company of this Agreement and
the Pricing Agreement have been duly authorized by all necessary corporate
action and (i) will not violate any provision of the Company's charter or
bylaws and (ii) will not result in the breach, or be in contravention, of
any provision of any agreement, franchise, License (as hereinafter
defined), indenture, mortgage, deed of trust, or other instrument to which
the Company, any subsidiary or any of the Founding Companies is a party or
by which the Company, any subsidiary, any Founding Company or the property
of any of them may be bound or affected, or any order, rule or regulation
applicable to the Company, any subsidiary or any Founding Company of any
court (foreign, federal, state, local or otherwise), arbitration or other
alternative dispute forum, foreign, federal, state, local or other
government or governmental department, agency, board, commission, bureau or
instrumentality or other regulatory authority (collectively, "Governmental
Authority") having jurisdiction over the Company, any subsidiary or any
Founding Company or any of their
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respective properties, or any order of any Governmental Authority entered
in any proceeding to which the Company, any subsidiary or any Founding
Company was or is now a party or by which it is bound, except with respect
to all matters referenced in this Section 2(g)(ii), for breaches or
contraventions which either singly or in the aggregate would not have a
Material Adverse Effect. No consent, approval, authorization or other order
of any Governmental Authority is required for the execution and delivery of
this Agreement or the Pricing Agreement or the consummation of the
transactions contemplated herein or therein, except for compliance with the
1933 Act and state securities laws applicable to the public offering of the
Shares by the several Underwriters and clearance of such offering with the
National Association of Securities Dealers, Inc. ("NASD"). This Agreement
has been duly executed and delivered by the Company.
(h) The accountants who have expressed their opinions with respect to
the financial statements and schedules included in the Registration
Statement are independent accountants as required by the 1933 Act.
(i) The financial statements and schedules of the Company included in
the Registration Statement, including the notes thereto, present fairly the
financial position of the Company as of the respective dates of such
financial statements, and the results of operations and cash flows of the
Company for the respective periods covered thereby, all in conformity with
generally accepted accounting principles consistently applied throughout
the periods involved, except as disclosed in the Prospectus; the financial
statements and schedules of the Founding Companies included in the
Registration Statement, including the notes thereto, present fairly the
financial position of the Founding Companies as of the respective dates of
such financial statements, and the consolidated results of operations and
cash flows of the Founding Companies for the respective periods covered
thereby, all in conformity with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
in the Prospectus; and the supporting schedules included in the
Registration Statement present fairly the information required to be stated
therein. The financial information set forth in the Prospectus under the
captions "Summary Pro Forma Combined Financial Data," "Summary Individual
Founding Company Financial Data" and "Selected Pro Forma Combined Financial
Data" presents fairly on the basis stated in the Prospectus, the
information set forth therein; and the pro forma financial statements and
other pro forma information included in the Prospectus present fairly the
information shown therein, have been prepared in accordance with generally
accepted accounting principles and the Commission's rules and guidelines
with respect to pro forma financial statements and other pro forma
information, have been properly compiled on the pro forma basis described
therein, and, in the opinion of the Company, the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate under the circumstances. The Company and each of the Founding
Companies has adopted a system of internal accounting controls sufficient
to provide reasonable assurances that (i) transactions are executed in
accordance with management's general
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or specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with 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 authorization; 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.
(j) None of the Company, its subsidiaries or any of the Founding
Companies is in violation of its charter or bylaws or in default under any
consent decree, order, writ, judgment, award or injunction of any
Governmental Authority, or in default with respect to any material
provision of any lease, loan agreement, note, franchise, License (as
hereinafter defined), permit or other contract obligation to which it is a
party; and there does not exist any state of facts which constitutes an
event of default as defined in such documents or which, with notice or
lapse of time or both, would constitute such an event of default, in each
case, except for defaults which neither singly nor in the aggregate would
have a Material Adverse Effect.
(k) There are no material legal or governmental proceedings pending,
or to the Company's knowledge, threatened to which the Company, any
subsidiary or any Founding Company is or may be a party or of which
material property owned or leased by the Company, any subsidiary or any
Founding Company is or may be the subject, or which are related to
environmental or discrimination matters which are not disclosed in the
Prospectus, or which question the validity of this Agreement or the Pricing
Agreement or any Acquisition Agreement or any action taken or to be taken
pursuant hereto or thereto.
(l) Except as described in the Prospectus, there are no holders of
securities of the Company, any subsidiary or any Founding Company having
rights to registration thereof, preemptive rights or rights of first
refusal to purchase securities from the Company. All such holders of
registration rights have waived such rights with respect to the offering
being made by the Prospectus.
(m) The Company, each subsidiary and each Founding Company have good
and marketable title to all the properties and assets reflected as owned in
the financial statements hereinabove described (or elsewhere in the
Prospectus), subject to no lien, mortgage, pledge, charge or encumbrance of
any kind except those, if any, reflected in such financial statements (or
elsewhere in the Prospectus) or which are not material to the Company, its
subsidiaries and the Founding Companies taken as a whole. The Company, each
of its subsidiaries and each of the Founding Companies hold their
respective leased properties which are material to the Company, its
subsidiaries and the Founding Companies taken as a whole under valid and
binding leases.
(n) The Company has not taken and will not take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected
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to cause or result, under the Exchange Act or otherwise, in stabilization
or manipulation of the price of any security of the Company to facilitate
the sale or resale of the Shares.
(o) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as
contemplated by the Prospectus, the Company, its subsidiaries and the
Founding Companies taken as a whole, have not incurred any material
liabilities or obligations, direct or contingent, nor entered into any
material transactions not in the ordinary course of business and there has
not been any material adverse change in their condition (financial or
otherwise), business, assets, or results of operations nor any material
change in their capital stock, short-term debt or long-term debt. Except as
disclosed in writing to the Representatives prior to the date hereof, none
of the Company, the subsidiaries or the Founding Companies has received
notice (either formally or informally) of the termination or anticipated
termination of one or more customer projects or relationships currently
maintained by the Company, any of its subsidiaries or any of the Founding
Companies, which termination(s) could, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
(p) There is no material document of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
an exhibit to the Registration Statement which is not described or filed as
required. No transaction has occurred between or among the Company and any
of its officers or directors or any affiliate or affiliates of any such
officer or director that is required to be described in and is not
described in the Registration Statement and the Prospectus.
(q) The Company, its subsidiaries and the Founding Companies own and
possess all right, title and interest in and to, or has duly licensed from
third parties a valid, enforceable right to use, all patents, patent
rights, trade secrets, inventions, know-how, trademarks, trade names,
copyrights, service marks and other proprietary rights ("Trade Rights")
material to the business of the Company, its subsidiaries and the Founding
Companies taken as a whole. None of the Company, its subsidiaries or the
Founding Companies has received any notice of infringement,
misappropriation or conflict from any third party as to such material Trade
Rights which has not been resolved or disposed of and neither the Company,
its subsidiaries or the Founding Companies has infringed, misappropriated
or otherwise conflicted with material Trade Rights of any third parties,
which infringement, misappropriation or conflict would have a Material
Adverse Effect.
(r) The conduct of the business of the Company, its subsidiaries and
the Founding Companies is in compliance in all respects with applicable
foreign, federal, state, local and other laws and regulations, except where
the failure to be in compliance would not have a Material Adverse Effect.
The Company has no knowledge of, nor has the Company received notice of,
any violation or alleged
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violation by the Company, any of its subsidiaries or any of the Founding
Companies of any such laws or regulations.
(s) All offers and sales of the Company's, each of its subsidiaries'
and each of the Founding Companies' capital stock prior to the date hereof
were at all relevant times exempt from the registration requirements of the
1933 Act and were duly registered or the subject of an available exemption
from the registration requirements of applicable state securities laws; all
offers and sales of the Company's capital stock pursuant to the Acquisition
Agreements will at all relevant times be exempt from the registration
requirements of the 1933 Act and duly registered or the subject of an
available exemption from the registration requirements of applicable state
securities laws;
(t) The Company, each of its subsidiaries and each of the Founding
Companies have filed all necessary foreign, federal and state income,
franchise, value-added, sales and use and similar tax returns and have paid
all taxes shown as due thereon, and there is no tax deficiency that has
been, or to the knowledge of the Company might be, asserted against the
Company, any of its subsidiaries, any of the Founding Companies or any of
their respective properties or assets that would or could be expected to
have a Material Adverse Effect.
(u) A registration statement relating to the Common Stock has been
declared effective by the Commission pursuant to the Exchange Act and the
Common Stock is duly registered thereunder. The Shares have been approved
for listing on the Nasdaq National Market, subject to notice of issuance or
sale of the Shares, as the case may be.
(v) The Company, each of its subsidiaries and each of the Founding
Companies are not, and do not intend to conduct their respective businesses
in a manner in which any of them would become, an "investment company" as
defined in Section 3(a) of the Investment Company Act of 1940, as amended
("Investment Company Act").
(w) The Company confirms as of the date hereof that neither the
Company nor any of the Founding Companies does business with the government
of Cuba or with any person or affiliate located in Cuba within the meaning
of Section 517.075, Florida Statutes;
(x) The Company, each of its subsidiaries and each of the Founding
Companies has obtained all licenses, permits, certificates, authorizations,
approvals or consents (collectively, the "Licenses") required by any
Governmental Authority to properly and legally operate or conduct the
business in which it is engaged on the date hereof and which are necessary
or desirable for the successful conduct of its business as conducted and as
proposed to be conducted. Each License has been duly obtained, is valid and
in full force and effect, is renewable by its terms or in the
8
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ordinary course of business without the need to comply with any special
qualifications or procedures or to pay any amount other than routine filing
fees. None of the Company, its subsidiaries and the Founding Companies (i)
is subject to any pending or threatened administrative or judicial
proceeding to revoke, cancel or declare any License granted to it invalid
in any respect, (ii) is acting outside the scope and authority granted to
it pursuant to any such License, or otherwise is in default or in violation
with respect to any such License, and no event has occurred which
constitutes, or with due notice or lapse of time or both may constitute, a
default by it or a violation of, any License and (iii) has permitted any
License granted to it to lapse since its original effective date, except
where such lapse did not have a Material Adverse Effect. The Company, its
subsidiaries and the Founding Companies have completed and submitted, on a
timely basis, all reports and filings associated with their businesses as
are required by any Governmental Authority.
(y) The Company, its subsidiaries and each of the Founding Companies
are insured by insurers of recognized financial responsibility against such
losses and risks and in such amounts as is reasonable for the conduct of
their businesses and the value of their properties and as is customary in
the businesses in which they are engaged.
(z) The consummation of the acquisitions of the Founding Companies
(the "Acquisitions") and the execution, delivery and performance of all
documents and instruments executed and delivered in connection therewith
were authorized by all necessary corporate action on the part of Company
and the Founding Companies; the Acquisition Agreements are legal, valid and
binding agreements of the Company, the Founding Companies and other parties
thereto except as enforceability of the same may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights and by the exercise of judicial discretion in accordance
with general principles applicable to equitable and similar remedies and
except with respect to those provisions relating to indemnities for
liabilities arising under the 1933 Act; all consents, approvals,
authorizations, orders, licenses, certificates, permits, registrations or
qualifications required to be obtained in connection with the Acquisitions
have been obtained, other than such consents, approvals, authorizations,
orders, licenses, certificates, permits, registrations or qualifications
which, individually or in the aggregate, would not have a Material Adverse
Effect; the consummation of the Acquisitions will not (i) conflict with or
result in a breach or violation of any of terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company, any of the
subsidiaries or any of the Founding Companies was or is bound or to which
any of the property or assets of the Company, any of the subsidiaries or
any of the Founding Companies was or is subject, (ii) result in any
violation of the provisions of the charter or by-laws of the Company, any
of the subsidiaries or any of the Founding Companies or (iii) result in any
violation of the provisions of any statute or any order, rule or regulation
of any court or governmental agency or body having jurisdiction over the
Company, the subsidiaries or any of the Founding Companies or any of their
properties, other than,
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in the case of clauses (i) and (iii) above, such conflicts, breaches,
violations or defaults that, individually or in the aggregate, would not
have a Material Adverse Effect.
SECTION 3. Representations and Warranties of the Underwriters. The
Representatives, on behalf of the several Underwriters, represent and warrant to
the Company that the information set forth (a) on the cover page of the
Prospectus with respect to price, underwriting discount and terms of the
offering and (b) under "Underwriting" in the Prospectus was furnished to the
Company by and on behalf of the Underwriters for use in connection with the
preparation of the Registration Statement and is correct and complete in all
material respects.
SECTION 4. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters named in Schedule A hereto, and the Underwriters agree, severally
and not jointly, to purchase 3,100,000 Firm Shares from the Company at the price
per share set forth in the Pricing Agreement. The obligation of each Underwriter
to the Company shall be to purchase from the Company that number of Shares set
forth opposite the name of such Underwriter in Schedule A hereto. The initial
public offering price and the purchase price shall be set forth in the Pricing
Agreement.
At 9:00 A.M., Chicago Time, on the fourth business day, if permitted under
Rule 15c6-1 under the Exchange Act, (or the third business day if required under
Rule 15c6-1 under the Exchange Act or unless postponed in accordance with the
provisions of Section 12) following the date the Registration Statement becomes
effective (or, if the Company has elected to rely upon Rule 430A, the fourth
business day, if permitted under Rule 15c6-1 under the Exchange Act, (or the
third business day if required under Rule 15c6-1 under the Exchange Act) after
execution of the Pricing Agreement), or such other time not later than ten
business days after such date as shall be agreed upon by the Representatives and
the Company, the Company will deliver to you at the offices of counsel for the
Underwriters or through the facilities of The Depository Trust Company for the
accounts of the several Underwriters, certificates representing the Firm Shares
to be sold by it, against payment of the purchase price therefor by delivery of
federal or other immediately available funds, by wire transfer, to the Company.
Such time of delivery and payment is herein referred to as the "First Closing
Date." The certificates for the Firm Shares so to be delivered will be in such
denominations and registered in such names as you request by notice to the
Company prior to 10:00 A.M., Chicago Time, on the second business day preceding
the First Closing Date, and will be made available at the Company's expense for
checking and packaging by the Representatives at 10:00 A.M., Chicago Time, on
the business day preceding the First Closing Date. Payment for the Firm Shares
so to be delivered shall be made at the time and in the manner described above
at the offices of counsel for the Underwriters.
In addition, on the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby
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grants an option to the several Underwriters to purchase, severally and not
jointly, up to an aggregate of 465,000 Option Shares, at the same purchase price
per share to be paid for the Firm Shares, for use solely in covering any
overallotments made by the Underwriters in the sale and distribution of the Firm
Shares. The option granted hereunder may be exercised at any time (but not more
than once) within 30 days after the date of the initial public offering upon
notice by you to the Company setting forth the aggregate number of Option Shares
as to which the Underwriters are exercising the option, the names and
denominations in which the certificates for such shares are to be registered and
the time and place at which such certificates will be delivered. Such time of
delivery (which may not be earlier than the First Closing Date), being herein
referred to as the "Second Closing Date," shall be determined by you, but if at
any time other than the First Closing Date, shall not be earlier than three nor
later than 10 full business days after delivery of such notice of exercise. The
number of Option Shares to be purchased by each Underwriter shall be determined
by multiplying the number of Option Shares to be sold by the Company pursuant to
such notice of exercise by a fraction, the numerator of which is the number of
Firm Shares to be purchased by such Underwriter as set forth opposite its name
in Schedule A and the denominator of which is the total number of Firm Shares
(subject to such adjustments to eliminate any fractional share purchases as you
in your absolute discretion may make). Certificates for the Option Shares will
be made available at the Company's expense for checking and packaging at 10:00
A.M., Chicago time, on the business day preceding the Second Closing Date. The
manner of payment for and delivery of the Option Shares shall be the same as for
the Firm Shares as specified in the preceding paragraph.
You have advised the Company that each Underwriter has authorized you to
accept delivery of its Shares, to make payment and to receipt therefor. You,
individually and not as the Representatives of the Underwriters, may make
payment for any Shares to be purchased by any Underwriter whose funds shall not
have been received by you by the First Closing Date or the Second Closing Date,
as the case may be, for the account of such Underwriter, but any such payment
shall not relieve such Underwriter from any obligation hereunder.
SECTION 5. Covenants of the Company. The Company covenants and agrees that:
(a) The Company will advise you promptly of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or of the institution of any proceedings for that
purpose, or of any notification of the suspension of qualification of the
Shares for sale in any jurisdiction or the initiation or threatening of any
proceedings for that purpose, and will also advise you promptly of any
request of the Commission for amendment or supplement of the Registration
Statement, of any preliminary prospectus or of the Prospectus, or for
additional information.
(b) The Company will give you notice of its intention to file or
prepare any amendment to the Registration Statement (including any
post-effective amendment) or any Rule 462(b) Registration Statement or any
amendment or supplement to the
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Prospectus (including any revised prospectus which the Company proposes for
use by the Underwriters in connection with the offering of the Shares which
differs from the prospectus on file at the Commission at the time the
Registration Statement became or becomes effective, whether or not such
revised prospectus is required to be filed pursuant to Rule 424(b) and any
term sheet as contemplated by Rule 434) and will furnish you with copies of
any such amendment or supplement a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file any such
amendment or supplement or use any such prospectus to which you or counsel
for the Underwriters shall reasonably object.
(c) If the Company elects to rely on Rule 434 of the 1933 Act, the
Company will prepare a term sheet that complies with the requirements of
Rule 434. If the Company elects not to rely on Rule 434, the Company will
provide the Underwriters with copies of the form of prospectus, in such
numbers as the Underwriters may reasonably request, and file with the
Commission such prospectus in accordance with Rule 424(b) of the 1933 Act
by the close of business in New York City on the second business day
immediately succeeding the date of the Pricing Agreement. If the Company
elects to rely on Rule 434, the Company will provide the Underwriters with
copies of the form of Rule 434 Prospectus, in such numbers as the
Underwriters may reasonably request, by the close of business in New York
on the business day immediately succeeding the date of the Pricing
Agreement.
(d) If at any time when a prospectus relating to the Shares is
required to be delivered under the 1933 Act any event occurs as a result of
which the Prospectus, including any amendments or supplements, would
include an 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, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend or
supplement the Prospectus, including any amendments or supplements thereto
and including any revised prospectus which the Company proposes for use by
the Underwriters in connection with the offering of the Shares which
differs from the prospectus on file with the Commission at the time of
effectiveness of the Registration Statement, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) to comply with
the 1933 Act, the Company promptly will advise you thereof and will
promptly prepare and file with the Commission an amendment or supplement
(in form and substance satisfactory to counsel for the Underwriters) which
will correct such statement or omission or an amendment which will effect
such compliance; and, in case any Underwriter is required to deliver a
prospectus nine months or more after the effective date of the Registration
Statement, the Company upon request, but at the expense of such
Underwriter, will prepare promptly such prospectus or prospectuses as may
be necessary to permit compliance with the requirements of Section 10(a)(3)
of the 1933 Act.
(e) None of the Company, any of its subsidiaries or any of the
Founding Companies will, prior to the earlier of the Second Closing Date or
termination or
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expiration of the option relating to the Option Shares, incur any liability
or obligation, direct or contingent, or enter into any material
transaction, other than in the ordinary course of business, except as
contemplated by the Prospectus.
(f) None of the Company, any of its subsidiaries or any of the
Founding Companies will acquire any capital stock of the Company prior to
the earlier of the Second Closing Date or termination or expiration of the
option relating to the Option Shares nor will the Company, any of its
subsidiaries or any of the Founding Companies declare or pay any dividend
or make any other distribution upon the Common Stock payable to
shareholders of record on a date prior to the earlier of the Second Closing
Date or termination or expiration of the option relating to the Option
Shares, except in either case as contemplated by the Prospectus.
(g) As soon as practicable, but in any event not later than 15 months
after the effective date of the Registration Statement, the Company will
make generally available to its security holders an earnings statement
(which need not be audited) covering a period of at least 12 months
beginning after the effective date of the Registration Statement, which
will satisfy the provisions of the last paragraph of Section 11(a) of the
1933 Act.
(h) During such period as a prospectus is required by law to be
delivered in connection with offers and sales of the Shares by an
Underwriter or dealer, the Company will furnish to you at its expense,
subject to the provisions of subsection (d) hereof, copies of the
Registration Statement, the Prospectus, each preliminary prospectus and all
amendments and supplements to any such documents in each case as soon as
available and in such quantities as you may reasonably request, for the
purposes contemplated by the 1933 Act.
(i) The Company will cooperate with the Underwriters in qualifying or
registering the Shares for sale under the state or province securities laws
of such jurisdictions as you designate, and will continue such
qualifications in effect so long as reasonably required for the
distribution of the Shares. In connection with such qualification or
registration of the Shares, the Company shall not be required to qualify as
a foreign corporation or to file a general consent to service of process in
any such jurisdiction where it is not currently qualified or where it would
be subject to taxation as a foreign corporation.
(j) During the period of five years hereafter, the Company will
furnish you with a copy (i) as soon as practicable after the filing
thereof, of each report filed by the Company with the Commission, any
securities exchange or the NASD, (ii) as soon as practicable after the
release thereof, of each material press release in respect of the Company,
(iii) as soon as available, of each report of the Company mailed to
shareholders and (iv) any additional information of a public nature
concerning the Company or its business that you may reasonably request.
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(k) The Company will use the net proceeds received by it from the sale
of the Shares being sold by it in all material respects in the manner
specified in the Prospectus.
(l) If, at the time of effectiveness of the Registration Statement,
any information shall have been omitted therefrom in reliance upon Rule
430A and/or Rule 434, then immediately following the execution of the
Pricing Agreement, the Company will prepare, and file or transmit for
filing with the Commission in accordance with such Rule 430A, Rule 424(b)
and/or Rule 434, copies of an amended Prospectus, or, if required by such
Rule 430A and/or Rule 434, a post-effective amendment to the Registration
Statement (including an amended Prospectus), containing all information so
omitted. If required, the Company will prepare and file, or transmit for
filing, a Rule 462(b) Registration Statement not later than the date of the
execution of the Pricing Agreement. If a Rule 462(b) Registration Statement
is filed, the Company shall make payment of, or arrange for payment of, the
additional registration fee owing to the Commission required by Rule 111.
(m) The Company will comply with all registration, filing and
reporting requirements of the Exchange Act and the Nasdaq National Market
which may from time to time be applicable to the Company and will file with
the Commission in a timely manner all reports on Form SR required by Rule
463 and will furnish you copies of any such reports as soon as practicable
after the filing thereof.
(n) The Company agrees not to sell, contract to sell or otherwise
dispose of, or file a registration statement with the Commission with
respect to, any Common Stock or securities convertible into Common Stock
for a period of 180 days after this Agreement becomes effective without the
prior written consent of William Blair & Company, L.L.C., except (i) in
connection with the offering of the Shares, (ii) in connection with the
acquisition of the Founding Companies on the terms described in the
Registration Statement, (iii) in connection with an acquisition by the
Company of another entity pursuant to which the Company sells, transfers or
issues any of its shares of Common Stock to a third party as part or all of
the purchase price for such entity; provided, however, that prior to any
sale or transfer, such third party shall have agreed in writing with
William Blair & Company, L.L.C., that it will not sell, contract to sell or
otherwise dispose of, or exercise any registration rights with respect to,
any Common Stock or securities convertible into Common Stock for the
remainder of the 180 days after the date this Agreement becomes effective
without the prior written consent of William Blair & Company, L.L.C., (iv)
the filing of a shelf registration statement by the Company registering an
additional 2,000,000 shares of Common Stock for use by the Company as
consideration in future acquisitions, and (v) the filing by the Company of
a registration statement on Form S-8 registering up to an additional
850,000 shares of Common Stock issuable upon the exercise of options
granted under the Company's existing equity incentive plans. At or before
the time the Pricing Agreement is executed, the Company shall delivered to
you a letter substantially in the form of Exhibit B hereto from each of
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the Company's officers, directors, shareholders and each former shareholder
of a Founding Company to whom shares of Common Stock are being issued in
connection with the Acquisitions in which each such person agrees not to
offer, sell, contract to sell or otherwise dispose of any Common Stock or
any securities exercisable for or convertible into Common Stock for a
period of 180 days after the date of such letter without the prior written
consent of William Blair & Company, L.L.C.
(o) The Company will promptly deliver to the Representatives copies of
all correspondence to and from, and all documents issued to and by, the
Commission in connection with the registration of the Shares under the 1933
Act.
(p) Prior to the First Closing Date, neither the Company nor any
Founding Company will issue any press release or other communication to the
public, directly or indirectly, with respect to the Company, any of its
subsidiaries or any of the Founding Companies or with respect to the
financial condition, results of operations, business, properties, assets or
liabilities of any of them, or the offering of the Shares, without your
prior consent, which consent shall not be unreasonably withheld.
(p) All of the issued and outstanding shares of Series A Convertible
Preferred Stock will be converted into shares of Common Stock on or before
the First Closing Date as described in the Prospectus.
(q) All conditions to the closings of the Acquisitions of the Founding
Companies have been satisfied or waived, and the Company intends to
complete all such closings on the First Closing Date simultaneously with
the closing of the initial public offering of the Firm Shares. The Company
will promptly notify the Underwriters of the occurrence of any event which
may result in the non-consummation of any of the Acquisitions on the
Closing Date.
(r) Unless the Company and you agree otherwise in writing, promptly
after the First Closing Date, the Company will file a shelf registration
statement with the Registration Statement registering an additional
2,000,000 shares of Common Stock for use by the Company as consideration in
future acquisitions, and the Company will use its best efforts to cause
such registration statement to be declared effective by the Commission as
soon as practicable thereafter.
SECTION 6. Payment of Expenses. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective as to
all of its provisions or is terminated, the Company agrees to pay (i) all costs,
fees and expenses (other than legal fees and disbursements of counsel for the
Underwriters and the expenses incurred by the Underwriters) incurred in
connection with the performance of the Company's obligations hereunder,
including without limiting the generality of the foregoing, all fees and
expenses of legal counsel for the Company and of the Company's independent
accountants, all costs and expenses incurred in connection with the preparation,
printing, filing and distribution of the Registration Statement, each
preliminary prospectus and the Prospectus (including all
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exhibits and financial statements) and all amendments and supplements provided
for herein, this Agreement, the Pricing Agreement and the blue sky memorandum,
(ii) all costs, fees and expenses (including reasonable legal fees and
disbursements of counsel for the Underwriters) incurred by the Underwriters in
connection with qualifying or registering all or any part of the Shares for
offer and sale under applicable state or province securities laws, including the
preparation of a blue sky memorandum relating to the Shares and clearance of
such offering with the NASD; (iii) all fees and expenses of the Company's
transfer agent, printing of the certificates for the Shares and all transfer
taxes, if any, with respect to the sale and delivery of the Shares to the
several Underwriters; and (iv) all costs, fees and expenses incurred in
connection with the Acquisitions and the performance of the Company's
obligations under the Acquisition Agreements, including without limiting the
generality of the foregoing, all fees and expenses of legal counsel for the
Company and of the Company's independent accountants.
SECTION 7. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm Shares
on the First Closing Date and the Option Shares on the Second Closing Date shall
be subject to the accuracy of the representations and warranties on the part of
the Company herein set forth (including those representations and warranties
which relate to the Company's subsidiaries and the Founding Companies) as of the
date hereof and as of the First Closing Date or the Second Closing Date, as the
case may be, to the accuracy of the statements of officers of the Company made
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective either
prior to the execution of this Agreement or not later than 1:00 P.M.,
Chicago Time, on the first full business day after the date of this
Agreement, or such later time as shall have been consented to by you but in
no event later than 1:00 P.M., Chicago Time, on the third full business day
following the date hereof; and prior to the First Closing Date or the
Second Closing Date, as the case may be, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending
or, to the knowledge of the Company or you, shall be contemplated by the
Commission. If the Company has elected to rely upon Rule 430A and/or Rule
434, the information concerning the initial public offering price of the
Shares and price-related information shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) within the prescribed period
and the Company will provide evidence satisfactory to the Representatives
of such timely filing (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with
the requirements of Rules 430A and 424(b)). If a Rule 462(b) Registration
Statement is required, such Registration Statement shall have been
transmitted to the Commission for filing and become effective within the
prescribed time period and, prior to the First Closing Date, the Company
shall have provided evidence of such filing and effectiveness in accordance
with Rule 462(b).
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(b) The Shares shall have been qualified for sale under the state or
province securities laws of such jurisdictions as shall have been specified
by the Representatives.
(c) The legality and sufficiency of the authorization, issuance and
sale or transfer and sale of the Shares hereunder, the validity and form of
the certificates representing the Shares, the execution and delivery of
this Agreement and the Pricing Agreement, and all corporate proceedings and
other legal matters incident thereto, and the form of the Registration
Statement and the Prospectus (except financial statements) shall have been
approved by counsel for the Underwriters exercising reasonable judgment.
(d) You shall not have advised the Company that the Registration
Statement or the Prospectus or any amendment or supplement thereto,
contains an untrue statement of fact, which, in the opinion of counsel for
the Underwriters, is material or omits to state a fact which, in the
opinion of such counsel, is material and is required to be stated therein
or necessary to make the statements therein not misleading.
(e) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred any change, or any development involving a
prospective change, in or affecting particularly the business or properties
of the Company, its subsidiaries or the Founding Companies taken as a
whole, whether or not arising in the ordinary course of business, which, in
the judgment of the Representatives, makes it impractical or inadvisable to
proceed with the public offering or purchase of the Shares as contemplated
hereby.
(f) There shall have been furnished to you, as Representatives of the
Underwriters, on the First Closing Date or the Second Closing Date, as the
case may be, except as otherwise expressly provided below:
(i) An opinion of Pepper, Hamilton & Scheetz LLP, counsel for the
Company, addressed to the Underwriters and dated the First Closing
Date or the Second Closing Date, as the case may be, to the effect
that:
(1) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
Commonwealth of Pennsylvania with corporate power and authority
to own its properties and conduct its business as described in
the Prospectus; and the Company has been duly qualified to do
business as a foreign corporation under the corporation law of,
and is in good standing as such in, every jurisdiction where the
ownership or leasing of property or the conduct of its business
requires such qualification, except where the failure so to
qualify would not have a Material Adverse Effect;
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(2) an opinion to the same general effect as clause (1) of
this subparagraph (i) in respect of each Founding Company and
each direct and indirect subsidiary of the Company;
(3) the authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein, and such capital
stock conforms as to legal matters in all material respects to
the description thereof in the Registration Statement and
Prospectus; the issued and outstanding capital stock of the
Company has been duly authorized and validly issued and is fully
paid and nonassessable and free of statutory preemptive rights;
except as described in the Prospectus, to such counsel's
knowledge, there are no options, warrants or other rights to
purchase, agreements or other obligations to issue or other
rights to convert any obligations into any shares of capital
stock of or other ownership interests in the Company;
(4) the issued and outstanding capital stock of each
subsidiary of the Company and each Founding Company has been duly
authorized, validly issued and is fully paid and nonassessable
and free of statutory preemptive rights; the Company owns
directly or indirectly 100 percent of the outstanding capital
stock of each subsidiary, and to such counsel's knowledge, such
stock is owned free and clear of any claims, liens, encumbrances
or security interests; and, upon consummation of the Acquisitions
of Image Memory Systems, Inc., Laser Graphics Systems & Services,
Inc. and Codalex Microfilming Corporation pursuant to the
respective Acquisition Agreements, the Company will own directly
or indirectly 100 percent of the outstanding capital stock of
each such Founding Company, and to such counsel's knowledge, such
stock will be owned free and clear of any claims, liens,
encumbrances or security interests; except as contemplated by the
Acquisition Agreements, there are outstanding no options,
warrants or other rights to purchase, agreements or other
obligations to issue, or other rights to convert any obligations
into any shares of capital stock of or other ownership interests
in any of the Company's subsidiaries or the Founding Companies.
(5) the certificates for the Shares to be delivered
hereunder are in due and proper form, and when duly countersigned
by the Company's transfer agent and delivered to you or upon your
order against payment of the agreed consideration therefor in
accordance with the provisions of this Agreement and the Pricing
Agreement, the Shares represented thereby will be duly authorized
and validly issued, fully paid and nonassessable and to such
counsel's knowledge will be free of any pledge, lien,
encumbrance, claim or preemptive rights of, or rights
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of first refusal in favor of, shareholders with respect to any of
the Shares or the issuance or sale thereof, pursuant to the
articles of incorporation or bylaws of the Company and to such
counsel's knowledge there are no contractual preemptive rights,
rights of first refusal, rights of co-sale or other similar
rights which exist with respect to any of the Shares or the
issuance and sale thereof; and the Shares to be sold hereunder
have been duly and validly authorized and qualified for inclusion
on the Nasdaq National Market, subject to notice of issuance;
(6) the Registration Statement has become effective under
the 1933 Act, and, to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been
instituted or are pending or contemplated under the 1933 Act, and
the Registration Statement (including the information deemed to
be part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b) and/or Rule 434, if
applicable), the Prospectus and each amendment or supplement
thereto (except for the financial statements and other
statistical or financial data included therein as to which such
counsel need express no opinion) comply as to form in all
material respects with the requirements of the 1933 Act; the
statements in the Registration Statement and the Prospectus
summarizing statutes, rules and regulations are accurate and
fairly and correctly present the information required to be
presented by the 1933 Act or the rules and regulations
thereunder, in all material respects and such counsel does not
know of any statutes, rules and regulations required to be
described or referred to in the Registration Statement or the
Prospectus that are not described or referred to therein as
required; and such counsel does not know of any legal or
governmental proceedings pending or threatened required to be
described in the Prospectus which are not described as required,
nor of any contracts or documents of a character required to be
described in the Registration Statement or Prospectus or to be
filed as exhibits to the Registration Statement which are not
described or filed, as required;
(7) the statements under the captions "Risk Factors --
Effect of Certain Charter, Bylaw and Statutory Provisions,"
"Management -- Employment Agreements," "Management -- Stock
Incentive Plans," "Certain Transactions -- Acquisition
Transactions," "Certain Transactions -- Management Contract,"
"Description of Capital Stock" and "Shares Eligible for Future
Sale" in the Prospectus, insofar as such statements constitute a
summary of documents referred to therein or matters of law, are
accurate summaries and fairly and correctly present, in all
material respects, the information required to be disclosed with
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<PAGE>
respect to such documents and matters by the 1933 Act and the
rules and regulations thereunder;
(8) this Agreement and the Pricing Agreement and the
performance of the Company's obligations hereunder and thereunder
have been duly authorized by all necessary corporate action and
this Agreement and the Pricing Agreement have been duly executed
and delivered by and on behalf of the Company, and are legal,
valid and binding agreements of the Company, except as
enforceability of the same may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights and by the exercise of judicial
discretion in accordance with general principles applicable to
equitable and similar remedies and except as to those provisions
relating to indemnities for liabilities arising under the 1933
Act as to which no opinion need be expressed; and no approval,
authorization or consent of any Governmental Authority is
necessary in connection with the issue or sale of the Shares by
the Company pursuant to this Agreement (other than under the 1933
Act, applicable state or province securities laws and the rules
of the NASD) or the consummation by the Company of any other
transactions contemplated hereby;
(9) to such counsel's knowledge, none of the Company, its
subsidiaries or the Founding Companies is in violation of its
charter or is in breach of, or in default under (nor has any
event occurred which, with notice, lapse of time or both would
constitute a breach of, or default under) any indenture, lease,
credit agreement or other agreement or instrument to which the
Company, any of its subsidiaries or any of the Founding Companies
is a party or by which their respective properties may be bound
or affected, where such violation or breach or default could have
a Material Adverse Effect;
(10) the execution, delivery and performance of this
Agreement, the issuance and sale of the Shares, and the
consummation of the transactions herein contemplated by the
Company, will not contravene any of the provisions of, or result
in a default under, any agreement, franchise, License, indenture,
mortgage, deed of trust, or other instrument known to such
counsel, of the Company, any of its subsidiaries or any of the
Founding Companies or by which the property of any of them is
bound and which contravention or default would have a Material
Adverse Effect, violate any of the provisions of the charter or
bylaws of the Company, any of its subsidiaries or any of the
Founding Companies; or so far as is known to such counsel,
violate
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any statute, order, rule or regulation of any Governmental
Authority having jurisdiction over the Company, any of its
subsidiaries or any of the Founding Companies;
(11) except as disclosed in the Prospectus, to such
counsel's knowledge no person has the right, contractual or
otherwise, to cause the Company, any of its subsidiaries or any
of the Founding Companies to issue, or register pursuant to the
1933 Act, any shares of capital stock of the Company, any of its
subsidiaries or any of the Founding Companies, upon the issue and
sale of the Shares to be sold by the Company to the Underwriters
pursuant to this Agreement;
(12) all offers and sales of the Company's, each of its
subsidiaries' and, to such counsel's knowledge, each of the
Founding Companies' capital stock prior to the date hereof were
at all relevant times exempt from the registration requirements
of the 1933 Act and were duly registered or the subject of an
available exemption from the registration requirements of
applicable state securities laws; the offer and sale of
securities in the Acquisitions, in the absence of the public
offering contemplated by the Registration Statement (the
"Offering"), would be exempt from the registration provisions of
Section 5 of the 1933 Act by virtue of the exemption from
registration provided by Section 4(2) of the 1933 Act. Moreover,
such counsel is familiar with the reasoning set forth in the
requests for the no-action letters issued by the Commission with
respect to Black Box Incorporated (SEC no-action letter dated
June 26, 1990) and Verticom, Inc. (SEC no-action letter dated
February 12, 1986), and with the Commission staff's favorable
responses to both such requests, in both of which instances the
Commission staff indicated that it would take no enforcement
action concerning the integration of a private offering with a
subsequent public offering in certain circumstances. In Black
Box, the Commission staff relied upon Rule 152 under the 1933 Act
to reach the position that certain private placements made
pursuant to agreements entered into prior to the filing of a
registration statement under the 1933 Act relating to a public
offering, as to the consummation of which private placements the
issuer had represented to the Commission staff that the
obligations of the parties thereto were subject only to the
satisfaction of conditions which were not within such parties'
control, would not be required to be integrated with such
subsequent public offering. In Verticom, the Commission staff
similarly relied upon Rule 152 to arrive at the position that,
notwithstanding Verticom's contemplation of a public offering at
the time that it effected a private offering that it believed to
be exempt pursuant to Section 4(2) of the 1933 Act, such private
offering concluded prior to the filing of a registration
statement under the 1933 Act relating to the public offering need
not be
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integrated with such later registered public offering. The
Company entered to Acquisition Agreements on September 9, 1997
and September 11, 1997; in each such Acquisition Agreement, the
only material condition to the consummation of the subject
Acquisition was the consummation of the Offering; and no such
Acquisition Agreement was subject to renegotiation following
September 11, 1997. The Registration Statement was initially
filed by the Company with the Commission on September 12, 1997.
Based upon such facts, Rule 152 and the reasoning adopted by the
Commission in the Black Box and Verticom letters, such counsel is
of the opinion that the exemption from registration of the offer
and sale of securities in the Acquisitions provided by Section
4(2) under the 1933 Act is not vitiated by the filing of the
Registration Statement, the Offering or the consummation of the
Offering upon effectiveness thereof and the offer and sale of
securities in the Acquisitions are exempt from registration under
all applicable state securities laws or Blue Sky laws;
(13) Assuming the application of the net proceeds from the
sale of the Shares as described in the Prospectus under the
caption "Use of Proceeds," none of the Company, its subsidiaries
or the Founding Companies is an "investment company" or a person
"controlled by" an "investment company" within the meaning of the
Investment Company Act;
(14) The Company, its subsidiaries and the Founding
Companies own and possess all right, title and interest in and
to, or has duly licensed from third parties a valid, enforceable
right to use, all Trade Rights described in the Prospectus as
being owned or licensed by them or any of them or necessary for
the conduct of their respective businesses, and such counsel is
not aware of any claim to the contrary or any challenge of any
other person to the rights of the Company, the subsidiaries and
the Founding Companies with respect to the foregoing; and
(15) The consummation of the Acquisitions and the execution,
delivery and performance of all documents and instruments
executed and delivered in connection therewith were authorized by
all necessary corporate action on the part of Company and the
Founding Companies; the Acquisition Agreements are legal, valid
and binding agreements of the Company, the Founding Companies and
other parties thereto except as enforceability of the same may be
limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting creditors' rights and by the
exercise of judicial discretion in accordance with general
principles applicable to equitable and similar remedies and
except with respect to those provisions relating to indemnities
for
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liabilities arising under the 1933 Act, as to which no opinion
need be expressed; all consents, approvals, authorizations,
orders, licenses, certificates, permits, registrations or
qualifications required to be obtained in connection with the
consummation of the Acquisitions have been obtained, other than
such consents, approvals, authorizations, orders, licenses,
certificates, permits, registrations or qualifications which,
individually or in the aggregate, would not have a Material
Adverse Effect; the consummation of the Acquisitions will not (i)
conflict with or result in a breach or violation of any of terms
or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company, any of its
subsidiaries or any of the Founding Companies was or is bound or
to which any of the property or assets of the Company, any of its
subsidiaries or any of the Founding Companies was or is subject,
(ii) result in any violation of the provisions of the charter or
by-laws of the Company, any of its subsidiaries or any of the
Founding Companies or (iii) result in any violation of the
provisions of any statute or any order, rule or regulation of any
Governmental Authority having jurisdiction over the Company, any
of its subsidiaries or any of the Founding Companies or any of
their properties, other than, in the case of clauses (i) and
(iii) above, such conflicts, breaches, violations or defaults
that, individually or in the aggregate, would not have a Material
Adverse Effect.
In addition, such counsel shall advise the Underwriters that
they have participated in the preparation of the Registration
Statement and the Prospectus and in conferences with officers and
other representatives of the Company, representatives of the
independent public accountants for the Company, and the
Underwriters' representatives and counsel at which the contents
of the Registration Statement, the Prospectus and related matters
were discussed and, although such counsel has not passed upon or
assumed any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration
Statement or the Prospectus, and although, except as otherwise
may be expressly provided in their opinion, such counsel has not
undertaken to verify independently the accuracy or completeness
of the statements in the Registration Statement and the
Prospectus and, therefore, would not necessarily have become
aware of any material misstatement of fact or omission to state a
material fact, on the basis of and subject to the foregoing such
counsel does not believe that either the Registration Statement,
as of its effective date, or the Prospectus, as of its date of
issue (other than the financial statements, notes or schedules
thereto and other financial or statistical data and supplemental
schedules included therein or omitted therefrom, as to which such
counsel need express no belief), contained
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or contains any untrue statement of a material fact or omitted or
omits to state any 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.
In rendering such opinion, such counsel may state that they
are relying upon the certificate of Stock Trans, Inc., the
transfer agent for the Common Stock, as to the number of shares
of Common Stock at any time or times outstanding. Such counsel
may also rely upon the opinions of competent local counsel
satisfactory to counsel to the Underwriters as to legal matters
in jurisdictions other than those in which they are domiciled and
Delaware (provided that such counsel shall state in their opinion
that they have examined such other opinions and believe that they
and the Underwriters are justified in relying on such other
opinions) and, as to factual matters, on certificates of officers
of the Company and of state or province officials, in which case
their opinion is to state that they are so doing and copies of
such opinions or certificates are to be attached to the opinion
unless such opinions or certificates (or, in the case of
certificates, the information therein) have been furnished to the
Representatives in other form.
(ii) An opinion of counsel of each Founding Company addressed to the
Underwriters and in the form required pursuant to the Acquisition Agreement
to which such Founding Company is a party.
(iii) Such opinion or opinions of Sonnenschein Nath & Rosenthal,
counsel for the Underwriters, dated the First Closing Date or the Second
Closing Date, as the case may be, with respect to the incorporation of the
Company, the validity of the Shares to be sold by the Company, the
Registration Statement and the Prospectus and other related matters as you
may reasonably require, and the Company shall have furnished to such
counsel such documents and shall have exhibited to them such papers and
records as they may reasonably request for the purpose of enabling them to
pass upon such matters.
(iv) A certificate of the chief executive officer and the principal
financial officer of the Company, dated the First Closing Date or the
Second Closing Date, as the case may be, to the effect that:
(1) the representations and warranties of the Company set forth
in Section 2 of this Agreement are true and correct as of the date of
this Agreement and as of the First Closing Date or the Second Closing
Date, as the case may be, 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; and
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(2) the Commission has not issued an order preventing or
suspending the use of the Prospectus or any preliminary prospectus
filed as a part of the Registration Statement or any amendment
thereto; no stop order suspending the effectiveness of the
Registration Statement has been issued; and to the knowledge of the
respective signers, no proceedings for that purpose have been
instituted or are pending or contemplated under the 1933 Act.
The delivery of the certificate provided for in this subparagraph
shall be and constitute a representation and warranty of the Company as to
the facts required in the immediately foregoing clauses (1) and (2) of this
subparagraph to be set forth in such certificate.
(v) At the time the Pricing Agreement is executed and also on the
First Closing Date or the Second Closing Date, as the case may be, there
shall be delivered to you a letter addressed to you, as Representatives of
the Underwriters, from Arthur Andersen LLP, independent accountants, the
first one to be dated the date of the Pricing Agreement, the second one to
be dated the First Closing Date and the third one (in the event of a second
closing) to be dated the Second Closing Date, to the effect set forth in
Schedule B. There shall not have been any change or decrease specified in
the letters referred to in this subparagraph which makes it impractical or
inadvisable in the judgment of the Representatives to proceed with the
public offering or purchase of the Shares as contemplated hereby.
(vi) At or before the time the Pricing Agreement is executed, there
shall be delivered to you a letter substantially in the form of Exhibit B
hereto from each of the Company's officers, directors, shareholders and
each former shareholder of a Founding Company to whom shares of Common
Stock are being issued in connection with the Acquisitions in which each
such person agrees not to offer, sell, contract to sell or otherwise
dispose of any Common Stock or any securities exercisable for or
convertible into Common Stock for a period of 180 days after the date of
such letter without the prior written consent of William Blair & Company,
L.L.C.
(viii) Such further certificates and documents as you may reasonably
request.
(g) All of the issued and outstanding shares of Series A Convertible
Preferred Stock shall have been converted into shares of Common Stock as
described in the Prospectus.
(h) Each of the Acquisitions shall have been completed upon the terms set
forth in the Prospectus simultaneously with the closing of the purchase of the
Firm Shares by the Underwriters.
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All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to you and
to Sonnenschein Nath & Rosenthal, counsel for the Underwriters, which approval
shall not be unreasonably withheld. The Company shall furnish you with such
manually signed or conformed copies of such opinions, certificates, letters and
documents as you request.
If any condition to the Underwriters' obligations hereunder to be satisfied
prior to or at the First Closing Date is not so satisfied, this Agreement at
your election will terminate upon notification to the Company without liability
on the part of any Underwriter or the Company, except for the expenses to be
paid or reimbursed by the Company pursuant to Sections 6 and 8 hereof and except
to the extent provided in Section 10 hereof.
SECTION 8. Reimbursement of Underwriters' Expenses. If the sale to the
Underwriters of the Shares on the First Closing Date is not consummated because
any condition of the Underwriters' obligations hereunder is not satisfied or
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein or to comply with any provision hereof, unless such
failure to satisfy such condition or to comply with any provision hereof is due
to the default or omission of any Underwriter, the Company agrees to reimburse
you and the other Underwriters upon demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
reasonably incurred by you and them in connection with the proposed purchase and
sale of the Shares. Any such termination shall be without liability of any party
to any other party except that the provisions of this Section, Section 6 and
Section 10 shall at all times be effective and shall apply.
SECTION 9. Effectiveness of Registration Statement. You and the Company
will use your and its best efforts to cause the Registration Statement to become
effective, if it has not yet become effective, and to prevent the issuance of
any stop order suspending the effectiveness of the Registration Statement and,
if such stop order be issued, to obtain as soon as possible the lifting thereof.
SECTION 10. Indemnification. (a) The Company agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of the 1933 Act or the Exchange Act against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter or
such controlling person may become subject under the 1933 Act, the Exchange Act
or other foreign, federal or state statutory law or regulation, at common law or
otherwise (including in settlement of any litigation if such settlement is
effected with the written consent of the Company), insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, including the information deemed
to be part of the Registration Statement at the time of effectiveness pursuant
to Rule 430A and/or Rule 434, if applicable, any preliminary prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading;
26
<PAGE>
and will reimburse each Underwriter and each such controlling person for any
legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company will not
be liable in any such case to the extent that (i) 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 the Registration
Statement, any preliminary prospectus, the Prospectus or any amendment or
supplement thereto in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any Underwriter through the
Representatives, specifically for use therein; or (ii) if such statement or
omission was contained or made in any preliminary prospectus and corrected in
the Prospectus and (1) any such loss, claim, damage or liability suffered or
incurred by any Underwriter (or any person who controls any Underwriter)
resulted from an action, claim or suit by any person who purchased Shares which
are the subject thereof from such Underwriter in the offering and (2) such
Underwriter failed to deliver or provide a copy of the Prospectus to such person
at or prior to the confirmation of the sale of such Shares in any case where
such delivery is required by the 1933 Act. In addition to its other obligations
under this Section 10(a), the Company agrees that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
or omission, described in this Section 10(a), it will reimburse the Underwriters
on a monthly basis for all reasonable legal and other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse the Underwriters for such expenses and the possibility
that such payments might later be held to have been improper by a court of
competent jurisdiction. This indemnity agreement will be in addition to any
liability which the Company may otherwise have.
(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of the 1933 Act or the Exchange Act, against any losses, claims, damages or
liabilities to which the Company, or any such director, officer or controlling
person may become subject under the 1933 Act, the Exchange Act or other foreign,
federal or state statutory law or regulation, at common law or otherwise
(including in settlement of any litigation, if such settlement is effected with
the written consent of such Underwriter), insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue or alleged untrue statement of any material fact contained in
the Registration Statement, any preliminary prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each 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 the Registration
Statement, any preliminary prospectus, the Prospectus, or any amendment or
supplement thereto in reliance upon and in conformity with Section 3 of this
Agreement or any other written information furnished to the Company by such
Underwriter through the Representatives specifically for use in the
27
<PAGE>
preparation thereof; and will reimburse any legal or other expenses reasonably
incurred by the Company, or any such director, officer or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or action. In addition to their other obligations under this Section
10(b), the Underwriters agree that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in this Section 10(b), they will reimburse the Company on a monthly
basis for all reasonable legal and other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Underwriters' obligation to reimburse
the Company for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party except to the extent that
the indemnifying party was prejudiced by such failure to notify. In case any
such action is brought against any indemnified party, and it notifies an
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate in, and, to the extent that it may wish, jointly with
all other indemnifying parties similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party; provided, however,
if the defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, or the indemnified and indemnifying parties may have
conflicting interests which would make it inappropriate for the same counsel to
represent both of them, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defense and otherwise to
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of its election so to assume the defense of such action and approval by
the indemnified party of counsel, the indemnifying party will not be liable to
such indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed such counsel in
connection with the assumption of legal defense in accordance with the proviso
to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel, approved by the Representatives in the case of paragraph (a)
representing all indemnified parties not having different or additional defenses
or potential conflicting interest among themselves who are parties to such
action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of
28
<PAGE>
the action or (iii) the indemnifying party has authorized the employment of
counsel for the indemnified party at the expense of the indemnifying party. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party, unless such settlement
includes an unconditional release of such indemnified party from all liability
arising out of such proceeding.
(d) If the indemnification provided for in this Section is unavailable to
an indemnified party under paragraphs (a) or (b) hereof in respect of any
losses, claims, damages or liabilities referred to therein, then each applicable
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Underwriters from the offering of the Shares 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 which resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The respective relative benefits received by the Company and the
Underwriters shall be deemed to be in the same proportion in the case of the
Company, as the total price paid to the Company for the Shares by the
Underwriters (net of underwriting discount but before deducting expenses), and
in the case of the Underwriters as the underwriting discount received by them
bears to the total of such amounts paid to the Company and received by the
Underwriters as underwriting discount in each case as contemplated by the
Prospectus. The relative fault of the Company and the Underwriters shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Company or by the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The amount paid or payable by a
party as a result of the losses, claims, damages and liabilities referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any action
or claim.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section, no Underwriter shall be required
to contribute any amount in excess of the amount by which the total price at
which the Shares underwritten by it and distributed to the public were offered
to the public exceeds the amount of any damages which 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
29
<PAGE>
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this Section are several in proportion to
their respective underwriting commitments and not joint.
(e) The provisions of this Section shall survive any termination of this
Agreement.
SECTION 11. Default of Underwriters. It shall be a condition to the
agreement and obligation of the Company to sell and deliver the Shares
hereunder, and of each Underwriter to purchase the Shares hereunder, that,
except as hereinafter in this paragraph provided, each of the Underwriters shall
purchase and pay for all Shares agreed to be purchased by such Underwriter
hereunder upon tender to the Representatives of all such Shares in accordance
with the terms hereof. If any Underwriter or Underwriters default in their
obligations to purchase Shares hereunder on the First Closing Date and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed to purchase does not exceed 10 percent of the total number of
Shares which the Underwriters are obligated to purchase on the First Closing
Date, the Representatives may make arrangements satisfactory to the Company for
the purchase of such Shares by other persons, including any of the Underwriters,
but if no such arrangements are made by such date the nondefaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Shares which such defaulting Underwriters agreed but
failed to purchase on such date. If any Underwriter or Underwriters so default
and the aggregate number of Shares with respect to which such default or
defaults occur is more than the above percentage and arrangements satisfactory
to the Representatives and the Company for the purchase of such Shares by other
persons are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any nondefaulting Underwriter or the
Company, except for the expenses to be paid by the Company pursuant to Section 6
hereof and except to the extent provided in Section 10 hereof.
In the event that Shares to which a default relates are to be purchased by
the nondefaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right to postpone the First
Closing Date for not more than seven business days in order that any necessary
changes in the Registration Statement, Prospectus and any other documents, as
well as any other arrangements, may be effected. As used in this Agreement, the
term "Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from liability for
its default.
SECTION 12. Effective Date. This Agreement shall become effective
immediately as to Sections 6, 8, 10 and 13 and as to all other provisions at
10:00 A.M., Chicago time, on the day following the date upon which the Pricing
Agreement is executed and delivered, unless such a day is a Saturday, Sunday or
holiday (and in that event this Agreement shall become effective at such hour on
the business day next succeeding such Saturday, Sunday or holiday); but this
Agreement shall nevertheless become effective at such earlier time after the
Pricing Agreement is executed and delivered as you may determine on and by
notice to the Company or by release of any Shares for sale to the public. For
the purposes of this
30
<PAGE>
Section, the Shares shall be deemed to have been so released upon the release
for publication of any newspaper advertisement relating to the Shares or upon
the release by you of telegrams (i) advising Underwriters that the Shares are
released for public offering, or (ii) offering the Shares for sale to securities
dealers, whichever may occur first.
SECTION 13. Termination. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to you
or by you by notice to the Company at any time prior to the time this
Agreement shall become effective as to all its provisions, and any such
termination shall be without liability on the part of the Company to any
Underwriter (except for the expenses to be paid or reimbursed pursuant to
Section 6 hereof and except to the extent provided in Section 10 hereof) or
of any Underwriter to the Company.
(b) This Agreement may also be terminated by you prior to the First
Closing Date, and the option referred to in Section 4, if exercised, may be
cancelled at any time prior to the Second Closing Date, if (i) trading in
securities on the New York Stock Exchange shall have been suspended or
minimum prices shall have been established on such exchange, or (ii) a
banking moratorium shall have been declared by Illinois, New York, or
United States authorities, or (iii) there shall have been any change in
financial markets or in political, economic or financial conditions which,
in the opinion of the Representatives, either renders it impracticable or
inadvisable to proceed with the offering and sale of the Shares on the
terms set forth in the Prospectus or materially and adversely affects the
market for the Shares, or (iv) there shall have been an outbreak of major
armed hostilities between the United States and any foreign power which in
the opinion of the Representatives makes it impractical or inadvisable to
offer or sell the Shares. Any termination pursuant to this paragraph (b)
shall be without liability on the part of any Underwriter to the Company or
on the part of the Company to any Underwriter (except for expenses to be
paid or reimbursed pursuant to Section 6 hereof and except to the extent
provided in Section 10 hereof).
SECTION 14. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, principals, members, officers or
directors or any controlling person, as the case may be, and will survive
delivery of and payment for the Shares sold hereunder.
SECTION 15. Notices. All communications hereunder will be in writing and,
if sent to the Underwriters will be mailed, delivered, telecopied or telegraphed
and confirmed to you c/o William Blair & Company, L.L.C., 222 West Adams Street,
Chicago, Illinois 60606, Attn: Mark G. Brady, Fax (312) 368-9418, with a copy to
Michael M. Froy,
31
<PAGE>
Esquire, Sonnenschein Nath & Rosenthal, 8000 Sears Tower, Chicago, Illinois
60606, Fax (312) 876-7934, if sent to the Company will be mailed, delivered or
telegraphed and confirmed to the Company at its corporate headquarters with a
copy to Barry M. Abelson, Esquire, Pepper, Hamilton & Scheetz LLP, 3000 Two
Logan Square, Eighteenth and Arch Streets, Philadelphia, Pennsylvania
19103-2799, Fax (215) 981-4750.
SECTION 16. Successors. This Agreement and the Pricing Agreement will inure
to the benefit of and be binding upon the parties hereto and their respective
successors, personal representatives and assigns, and to the benefit of the
officers and directors and controlling persons referred to in Section 10, and no
other person will have any right or obligation hereunder. The term "successors"
shall not include any purchaser of the Shares as such from any of the
Underwriters merely by reason of such purchase.
SECTION 17. Representation of Underwriters. You will act as Representatives
for the several Underwriters in connection with this financing, and any action
under or in respect of this Agreement taken by you will be binding upon all the
Underwriters.
SECTION 18. Partial Unenforceability. If any section, paragraph or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, such determination shall not affect the validity or
enforceability of any other section, paragraph or provision hereof.
SECTION 19. Information Provided by Underwriters. The Company and the
Underwriters acknowledge and agree that the only information furnished or to be
furnished by any Underwriter to the Company for inclusion in any Prospectus or
the Registration Statement consists of the information set forth in the last
paragraph on the front cover page of the Prospectus (insofar as such information
relates to the Underwriters), the legend required by Item 502(d) of Regulation
S-K under the Act and the information under the caption "Underwriting" in the
Prospectus.
SECTION 20. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
SECTION 21. Applicable Law. This Agreement and the Pricing Agreement shall
be governed by and construed in accordance with the laws of the State of
Illinois.
[This space intentionally left blank.]
32
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicates hereof, whereupon it will
become a binding agreement among the Company and the several Underwriters
including you, all in accordance with its terms.
Very truly yours,
IMAGEMAX, INC.
By:
----------------------------------
Chief Executive Officer
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
WILLIAM BLAIR & COMPANY, L.L.C.
JANNEY MONTGOMERY SCOTT INC.
Acting as Representatives of the
several Underwriters named in
Schedule A.
WILLIAM BLAIR & COMPANY, L.L.C.
By:
-------------------------
A Principal
33
<PAGE>
SCHEDULE A
Number of Firm
Shares to be
Underwriter Purchased
- ----------- ---------
William Blair & Company, L.L.C. ............................
Janney Montgomery Scott Inc.................................
---------
TOTAL ...................................................... 3,100,000
=========
<PAGE>
SCHEDULE B
Comfort Letter for ImageMAX, Inc.
To Be Delivered by Arthur Andersen LLP
(1) They are independent public accountants with respect to the Company,
its subsidiaries and the Founding Companies within the meaning of the 1933 Act.
(2) In their opinion the financial statements and schedules of the Company
and the Founding Companies included in the Registration Statement and the
financial statements of the Company and the Founding Companies from which the
information presented under the captions "Summary Pro Forma Combined Financial
Data," "Summary Individual Founding Company Financial Data" and "Selected Pro
Forma Combined Financial Data" has been derived which are stated therein to have
been examined by them comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act.
(3) On the basis of specified procedures (but not an examination in
accordance with generally accepted auditing standards), including inquiries of
certain officers of the Company and the Founding Companies responsible for
financial and accounting matters as to transactions and events subsequent to the
end of the most recently completed fiscal year of such entity, a reading of
minutes of meetings of the shareholders and directors of the Company and the
Founding Companies since the end of the most recently completed fiscal year of
such entity, a reading of the latest available interim unaudited financial
statements of the Company and the Founding Companies (with an indication of the
date thereof) and other procedures as specified in such letter, nothing came to
their attention which caused them to believe that (i) the unaudited financial
statements of the Company and the Founding Companies included in the
Registration Statement do not comply as to form in all material respects with
the applicable accounting requirements of the 1933 Act or that such unaudited
financial statements are not fairly presented in accordance with generally
accepted accounting principles applied on a basis substantially consistent with
that of the audited financial statements included in the Registration Statement,
(ii) the amounts in "Summary Pro Forma Combined Financial Data," "Summary
Individual Founding Company Financial Data" and "Selected Pro Forma Combined
Financial Data" included in the Prospectus do not agree with or are not
derivable from the corresponding amounts in the audited financial statements or
unaudited financial statements (as applicable) from which such amounts were
derived, and (iii) at a specified date not more than five days prior to the date
thereof in the case of the first letter and not more than two business days
prior to the date thereof in the case of the second and third letters, there was
any change in the capital stock or long-term debt or short-term debt (other than
normal payments) of the Company and the Founding Companies on a basis or any
decrease in net current assets or shareholders' equity as compared with amounts
shown on the latest unaudited balance sheet of the Company or the relevant
Founding Company (as applicable) included in the Registration Statement or for
the period from the date of such balance sheet to a date not more than five days
prior to the date
<PAGE>
thereof in the case of the first letter and not more than two business days
prior to the date thereof in the case of the second and third letters, there
were any decreases, as compared with the corresponding period of the prior year,
in net sales, income before income taxes or in the total or per share amounts of
net income except, in all instances, for changes or decreases which the
Prospectus discloses have occurred or may occur or which are set forth in such
letter.
(4) On the basis of reading the pro forma information included in the
Prospectus, carrying out specified procedures, inquiries of certain officials of
the Company and the Founding Companies who have responsibility for financial and
accounting matters, and proving the arithmetic accuracy of the application of
the pro forma adjustments to the historical amounts, nothing came to their
attention which caused them to believe that the pro forma financial information
does not comply in all material respects with the applicable accounting
requirements of Rule 11-02 of Regulation S-X and the pro forma adjustments have
not been properly applied to the historical amounts in the compilation of such
information.
(5) They have carried out specified procedures, which have been agreed to
by the Representatives, with respect to certain information in the Prospectus
specified by the Representatives, and on the basis of such procedures, they have
found such information to be in agreement with the general accounting records of
the Company and the Founding Companies.
<PAGE>
EXHIBIT A
IMAGEMAX, INC.
3,100,000 Shares Common Stock(1)
PRICING AGREEMENT
_______, 1997
William Blair & Company, L.L.C.
Janney Montgomery Scott Inc.
As Representatives of the Several
Underwriters
c/o William Blair & Company, L.L.C.
222 West Adams Street
Chicago, Illinois 60606
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement dated ____________, 1997
(the "Underwriting Agreement") relating to the sale by the Company and the
purchase by the several Underwriters for whom William Blair & Company and Janney
Montgomery Scott Inc. are acting as representatives (the "Representatives"), of
the above Shares. All terms herein shall have the definitions contained in the
Underwriting Agreement except as otherwise defined herein.
Pursuant to Section 4 of the Underwriting Agreement, the Company agrees
with the Representatives as follows:
1. The initial public offering price per share for the Shares shall be
$__________.
2. The purchase price per share for the Shares to be paid by the several
Underwriters shall be $_________, being an amount equal to the initial public
offering price set forth above less $________ per share.
- --------------
(1) Plus an option to acquire up to 465,000 additional shares from the
Company to cover overallotments.
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicates hereof, whereupon it will
become a binding agreement among the Company and the several Underwriters,
including you, all in accordance with its terms. This Agreement may be executed
in two or more counterparts, each of which shall be deemed an original and all
of which together shall be considered one and the same agreement.
Very truly yours,
IMAGEMAX, INC.
By:
---------------------------
Chief Executive Officer
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
WILLIAM BLAIR & COMPANY, L.L.C.
JANNEY MONTGOMERY SCOTT INC.
Acting as Representatives of the
several Underwriters named in
Schedule A.
WILLIAM BLAIR & COMPANY, L.L.C.
By:
----------------------
A Principal
<PAGE>
EXHIBIT B
________, 1997
William Blair & Company, L.L.C.
Janney Montgomery Scott Inc.
As Representatives of the Several
Underwriters
c/o William Blair & Company
222 West Adams Street
Chicago, Illinois 60606
Ladies and Gentlemen:
This letter is being delivered to you in connection with the proposed
Underwriting Agreement (the "Underwriting Agreement") among ImageMAX, Inc., a
Pennsylvania corporation (the "Company"), and each of you as representatives of
a group of Underwriters named therein, relating to an underwritten public
offering of Common Stock, no par value (the "Common Stock"), of the Company.
In order to induce you and the other Underwriters to enter into the
Underwriting Agreement, the undersigned agrees not to directly or indirectly
offer, sell, contract to sell or otherwise dispose of any Common Stock or
securities exercisable for or convertible into Common Stock for a period of 180
days after the effective date of the Registration Statement (as defined in the
Underwriting Agreement) without the prior written consent of William Blair &
Company, L.L.C., except, in each case, for (i) bona fide gifts to immediate
family members who agree in writing to be bound by the terms of this Agreement
(or trusts for the benefits of such stockholder or family members, the trustees
of which so agree to be bound), and (ii) the conversion of Series A Convertible
Preferred Stock upon the consummation of the offering contemplated by the
Underwriting Agreement.
If for any reason the Underwriting Agreement shall be terminated prior to
the First Closing Date (as defined in the Underwriting Agreement), the agreement
set forth above shall likewise be terminated.
Very truly yours,
[Signature of officer, director or
shareholder of the Company or a
Founding Company]
[Name and address]
IMAGEMAX, INC.
1997 INCENTIVE PLAN
SECTION 1. Purpose; Definitions. The purpose of the ImageMax,
Inc. 1997 Incentive Plan (the "Plan") is to offer to certain employees,
Associates and Directors of ImageMax, Inc. (the "Company"), a Pennsylvania
corporation and its subsidiaries, equity interests in the Company, options to
acquire equity interests in the Company, and other performance-based incentive
awards, thereby attracting, retaining and motivating such persons, and
strengthening the mutuality of interests between such persons and the Company's
shareholders.
For purposes of the Plan, the following initially capitalized
words and phrases shall be defined as set forth below, unless the context
clearly requires a different meaning:
a. "Affiliate" means, with respect to a person or entity, a
person that directly or indirectly controls, or is controlled by, or is under
common control with such person or entity.
b. "Associate" means a consultant, contractor or other
provider of services to the Company.
c. "Board" means the Board of Directors of the Company, as
constituted from time to time.
d. "Cause" occurs when the Participant, as determined by the
Board:
(i) has engaged in any type of disloyalty to the Company,
including without limitation, fraud, embezzlement,
theft, or dishonesty in the course of his employment
or engagement, or has otherwise breached any
fiduciary duty owed to the Company;
(ii) has been convicted of a felony;
(iii) has disclosed trade secrets or confidential
information of the Company; or
(iv) has breached any agreement with or duty to the
Company in respect of confidentiality,
non-disclosure, non-competition or otherwise.
e. "Change of Control" means:
(i) the acquisition in one or more transactions by any
"Person" (as the term person is used for purposes of
Sections 13(d) or 14(d) of the Exchange Act) of
"Beneficial ownership" (within the meaning of
-1-
<PAGE>
Rule 13d-3 promulgated under the Exchange Act) of
twenty-five percent (25%) or more of the combined
voting power of the Company's then outstanding voting
securities (the "Voting Securities"), provided that
for purposes of this clause (i) Voting Securities
acquired directly from the Company by any Person
shall be excluded from the determination of such
Person's Beneficial ownership of Voting Securities
(but such Voting Securities shall be included in the
calculation of the total number of Voting Securities
then outstanding); or
(ii) approval by shareholders of the Company of:
(A) a merger, reorganization or consolidation
involving the Company if the shareholders of the
Company immediately before such merger,
reorganization or consolidation do not or will
not own directly or indirectly immediately
following such merger, reorganization or
consolidation, more than fifty percent (50%) of
the combined voting power of the outstanding
voting securities of the company resulting from
or surviving such merger, reorganization or
consolidation in substantially the same
proportion as their ownership of the Voting
Securities outstanding immediately before such
merger, reorganization or consolidation; or
(B) a complete liquidation or dissolution of the
Company;
(C) an agreement for the sale or other disposition
of all or substantially all of the assets of the
Company; or
(iii) acceptance by shareholders of the Company of shares
in a share exchange if the shareholders of the
Company immediately before such share exchange do not
or will not own directly or indirectly immediately
following such share exchange more than fifty percent
(50%) of the combined voting power of the outstanding
voting securities of the entity resulting from or
surviving such share exchange in substantially the
same proportion as their ownership of the Voting
Securities outstanding immediately before such share
exchange.
f. "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto.
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g. "Committee" shall mean the Committee appointed by the Board
in accordance with Section 2 of the Plan, if one is appointed, in which event in
connection with this Plan, the Committee shall possess all of the power and
authority of, and shall be authorized to take any and all actions required to be
taken hereunder by, and make any and all determinations required to be taken
hereunder by, the Board.
h. "Director" means a member of the Board.
i. "Disability" shall mean a disability of an employee or a
Director which renders such employee or Director unable to perform the full
extent of his duties and responsibilities by reason of his illness or incapacity
which would entitle that employee or Director to receive Social Security
Disability Income under the Social Security Act, as amended, and the regulations
promulgated thereunder. "Disabled" shall mean having a Disability. The
determination of whether a Participant is Disabled shall be made by the Board,
whose determination shall be conclusive; provided that,
(i) if a Participant is bound by the terms of an
employment agreement between the Participant and the
Company, whether the Participant is "Disabled" for
purposes of the Plan shall be determined in
accordance with the procedures set forth in said
employment agreement, if such procedures are therein
provided; and
(ii) a Participant bound by such an employment agreement
shall not be determined to be Disabled under the Plan
any earlier than he would be determined to be
disabled under his employment agreement.
j. "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
k. "Fair Market Value" means, as of any date: (i) the closing
price of the Shares as reported on the principal nationally recognized stock
exchange on which the Shares are traded on such date, or if no Share prices are
reported on such date, the closing price of the Shares on the next preceding
date on which there were reported Share prices; or (ii) if the Shares are not
listed or admitted to unlisted trading privileges on a nationally recognized
stock exchange, the closing price of the Shares as reported by The NASDAQ Stock
Market on such date, or if no Share prices are reported on such date, the
closing price of the Shares on the next preceding date on which there were
reported Share prices; or (3) if the Shares are not listed or admitted to
unlisted trading privileges on a nationally recognized stock exchange or traded
on The NASDAQ Stock Market, then the Fair Market Value shall be determined by
the Board acting in its discretion, which determination shall be conclusive.
l. "Incentive Stock Option" means any Option intended to be
and designated as an "Incentive Stock Option" within the meaning of Section 422
of the Code.
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m. "Long-Term Performance Award" or "Long-Term Award" means an
award made pursuant to Section 8 hereof that is payable in cash and/or Shares
(including Restricted Stock, Performance Shares and Performance Units) in
accordance with the terms of the grant, based on Company, business unit and/or
individual performance, in each case as determined by the Committee and as set
forth in the grant letter.
n. "Non-Employee Director" shall have the meaning set forth in
Rule 16b-3(b)(3)promulgated by the Securities and Exchange Commission under the
Exchange Act, or any successor definition adopted by the Securities and Exchange
Commission; provided, however, that the Board or the Committee may, in its sole
discretion, substitute the definition of "outside director" provided in the
regulations under Section 162(m) of the Code in place of the definition of
Non-Employee Director contained in the Exchange Act.
o. "Non-Qualified Stock Option" means any Option that is not
an Incentive Stock Option.
p. "Participant" means an employee, Director, or Associate of
the Company or a Subsidiary to whom an award is granted pursuant to the Plan.
q. "Performance Share" means an award made pursuant to Section
9 hereof of the right to receive Shares at the end of a specified performance
period.
r. "Performance Unit" means an award made pursuant to Section
10 hereof of the right to receive cash at the end of a specified performance
period.
s. "Restricted Stock" means an award of Shares that is subject
to restrictions pursuant to Section 7 hereof.
t. "Retirement" means termination of the employment of a
Participant with the Company, an Affiliate (including parent) or a Subsidiary
other than (i) a termination effected at the direction of the Company or parent
(whether or not the Company effects such termination for Cause), (ii)
termination on account of Disability, or (iii) termination on account of death.
With respect to a Director who is not also an employee of the Company,
Retirement shall occur at such time as the individual ceases to be a Director.
u. "Rules" means Section 16 of the Exchange Act and the
regulations promulgated thereunder.
v. "SAR" means a share appreciation right granted under the
Plan and described in Section 6 hereof.
w. "Securities Broker" means a registered securities broker
acceptable to the Company who agrees to effect the cashless exercise of an
Option pursuant to Section 5(l) hereof.
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x. "Share" means a share of stock of the Company, subject to
substitution or adjustment as provided in Section 3(c) hereof.
y. "Stock Option" or "Option" means any option to purchase
Shares (including Restricted Stock, if the Committee so determines) granted
pursuant to Section 5 hereof.
z. "Subsidiary" means, in respect of the Company or parent, a
subsidiary company, whether now or hereafter existing, as defined in Sections
424(f) and (g) of the Code.
SECTION 2. Administration. The Plan shall be administered by
the Board. The Board may at any time by a unanimous vote, with each member
voting, appoint a Committee consisting of not less than two Directors to
administer the Plan on behalf of the Board, subject to such terms and conditions
as the Board may prescribe. Members of the Committee shall serve for such period
of time as the Board may determine. Members of the Board or the Committee who
are eligible for awards or have been granted awards may vote on any matters
affecting the administration of the Plan or any awards pursuant to the Plan,
except that no such member shall act upon an award to himself or herself, but
any such member may be counted in determining the existence of a quorum at any
meeting of the Board or Committee during which action is taken with respect to
an award to himself or herself.
If a Committee is appointed, all references to actions to be
taken by the Board in the administration of the Plan shall be construed as
references to the Committee.
From time to time the Board may increase the size of the
Committee and appoint additional members thereto (provided such new members are
Non-Employee Directors), remove members (with or without cause) and appoint new
members in substitution therefor, fill vacancies however caused, or remove all
members of the Committee and thereafter directly administer the Plan.
The Board shall have full authority to grant to eligible
persons under Section 4: (i) Options, (ii) SARs, (iii) Restricted Stock, (iv)
Long-Term Performance Awards, (v) Performance Shares and/or (vi) Performance
Units. In particular, the Board shall have the authority:
a. to select the persons to whom Options, SARs, Restricted
Stock, Long-Term Performance Awards, Performance Shares and Performance Units
may from time to time be granted hereunder;
b. to determine whether and to what extent Incentive Stock
Options, Non-Qualified Stock Options, SARs, Restricted Stock, Long-Term
Performance Awards, Performance Shares and Performance Units, or any combination
thereof, are to be granted hereunder;
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c. to determine the number of Shares, if any, to be covered by
each such award granted hereunder;
d. to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder, including, but not
limited to, the Share price and any restriction or limitation, any vesting
provisions, or any vesting acceleration or forfeiture waiver regarding any
Option or other award and/or the Shares relating thereto, or the length of the
period following termination of employment of any Participant during which any
Option or SAR may be exercised (which, in the case of an Incentive Stock Option,
shall be no longer than one year in the case of the termination of employment of
a Participant by reason of death or Disability, or three months in the case of
the termination of employment of a Participant for any reason other than death
or Disability), based on such factors as the Board shall determine, in its sole
discretion;
e. to determine whether and under what circumstances an Option
may be exercised without a payment of cash under Section 5(l); and
f. to determine whether, to what extent and under what
circumstances Shares and other amounts payable with respect to an award under
the Plan may be deferred either automatically or at the election of the
Participant.
The Board shall have the authority to adopt, alter and repeal
such administrative rules, guidelines and practices governing the Plan as it
shall, from time to time, deem advisable; to interpret the terms and provisions
of the Plan and any award issued under the Plan (and any agreements relating
thereto); to amend the terms of any agreement relating to any award issued under
the Plan, provided that the Participant consents to such amendment; and to
otherwise supervise the administration of the Plan. The Board may correct any
defect, supply any omission or reconcile any inconsistency in the Plan or in any
award granted in the manner and to the extent it shall deem necessary to carry
out the intent of the Plan.
All decisions made by the Board pursuant to the provisions of
the Plan shall be final and binding on all persons, including the Company and
Participants. No member of the Board shall be liable for any good faith
determination, act or failure to act in connection with the Plan or any award
made under the Plan.
SECTION 3. Shares Subject to the Plan.
a. Shares Subject to the Plan. The Shares to be subject or
related to awards under the Plan shall be authorized and unissued Shares of the
Company, whether or not previously issued and subsequently acquired by the
Company. The maximum number of Shares that may be the subject of awards under
the Plan is 600,000, or such lesser amount as the Board shall determine, and the
Company shall reserve for the purposes of the Plan, out of its authorized and
unissued Shares, such number of Shares. Notwithstanding the foregoing, no
individual shall
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receive, over the term of the Plan, awards for more than an aggregate of 150,000
Shares, or SARs with respect to such Shares, authorized for grant under the
Plan.
b. Effect of the Expiration or Termination of Awards. If and
to the extent that an award made under the Plan expires, terminates or is
canceled or forfeited for any reason without having been exercised in full, the
Shares associated with the expired, terminated, canceled or forfeited portion of
the award shall again become available for award under the Plan.
c. Other Adjustment. In the event of any merger,
reorganization, consolidation, recapitalization, Share distribution or dividend,
Share split or combination, or other change in entity structure affecting the
Shares, such substitution or adjustment shall be made in the aggregate number,
type and issuer of the securities reserved for issuance under the Plan, in the
number and Option price of securities subject to outstanding Options granted
under the Plan and in the number and price of securities subject to other awards
made under the Plan, as may be determined to be appropriate by the Board in its
sole discretion, provided that the number of securities subject to any award
shall always be a whole number. The Board, in its sole discretion, shall make
appropriate equitable anti-dilution adjustments to the number of
then-outstanding SARs, and to the Fair Market Value upon which the value of such
SARs is based.
SECTION 4. Eligibility. Employees, Directors and Associates of
the Company or its Subsidiaries are eligible to be granted awards under the
Plan. Directors who are not employees of the Company or a Subsidiary are
eligible to be granted awards under the Plan, but are not eligible to be granted
Incentive Stock Options.
SECTION 5. Options. Options granted under the Plan may be of
two types: (i) Incentive Stock Options or (ii) Non-Qualified Stock Options.
Options may be granted alone, in addition to or in tandem with other awards
granted under the Plan. Any Option granted under the Plan shall be in such form
as the Board may from time to time approve.
The Board shall have the authority to grant any Participant
eligible under Section 4 Incentive Stock Options, Non-Qualified Stock Options,
or both types of Options (in each case with or without SARs). To the extent that
any Option does not qualify as an Incentive Stock Option, it shall constitute a
separate Non-Qualified Stock Option.
Options granted under the Plan shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Board shall deem
appropriate; provided, however, that the provisions of Option awards need to be
the same with respect to each Participant:
a. Option Price. The exercise price per Share purchasable
under a Non-Qualified Stock Option shall be determined by the Board. The
exercise price per Share purchasable under an Incentive Stock Option shall be
100% of the Fair Market Value of the Share on the date of the grant. However,
any Incentive Stock Option granted to any Participant
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who, at the time the Option is granted, owns more than 10% of the voting power
of all classes of shares of the Company or of a Subsidiary shall have an
exercise price per Share of not less than 110% of Fair Market Value per Share on
the date of the grant.
b. Option Term. The term of each Option shall be fixed by the
Board, but no Option shall be exercisable more than ten years after the date the
Option is granted. However, any Incentive Stock Option granted to any
Participant who, at the time such Option is granted, owns more than 10% of the
voting power of all classes of shares of the Company or of a Subsidiary may not
have a term of more than five years. No Option may be exercised by any person
after expiration of the term of the Option.
c. Exercisability. Options shall vest and be exercisable at
such time or times and subject to such terms and conditions as shall be
determined by the Board at the time of grant. If the Board provides, in its
discretion, that any Option is exercisable only in installments, the Board may
waive such installment exercise provisions at any time at or after grant, in
whole or in part, based on such factors as the Board shall determine, in its
sole discretion.
d. Method of Exercise. Subject to the exercise provisions
under Section 5(c) and the termination provisions set forth in Sections 5(f)
through (i), Options may be exercised in whole or in part at any time and from
time to time during the term of the Option, by giving written notice of exercise
to the Company specifying the number of Shares to be purchased. Such notice
shall be accompanied by payment in full of the purchase price, either by
certified or bank check, or such other instrument as the Board may accept. As
determined by the Board, in its sole discretion, at or after grant, payment in
full or in part of the exercise price of an Option may be made in the form of
unrestricted Stock based on the Fair Market Value of the Shares on the date the
Option is exercised; provided, however, that, in the case of an Incentive Stock
Option, the right to make a payment in the form of already owned Shares may be
authorized only at the time the Option is granted.
No Shares shall be issued upon exercise of an Option until
full payment therefor has been made. A Participant shall not have the right to
distributions or dividends or any other rights of a shareholder with respect to
Shares subject to the Option until the Participant has given written notice of
exercise, has paid in full for such Shares, and, if requested, has given the
representation described in Section 13(a) hereof.
e. Non-transferability of Options. No Option shall be
transferable by the Participant otherwise than by will or by the laws of descent
and distribution, and all Options shall be exercisable, during the Participant's
lifetime, only by the Participant or, in the event of his Disability, by his
personal representative.
f. Termination by Reason of Death. Subject to Section 5(i), if
a Participant's service with the Company or any Subsidiary terminates by reason
of death, any Option held by such Participant may thereafter be exercised, to
the extent then exercisable or on such accelerated
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basis as the Board may determine at or after grant, by the legal representative
of the estate or by the legatee of the Participant under the will of the
Participant, for a period expiring (i) at such time as may be specified by the
Board at or after the time of grant, or (ii) if not specified by the Board, then
one year from the date of death, or (iii) if sooner than the applicable period
specified under (i) or (ii) above, then upon the expiration of the stated term
of such Option.
g. Termination by Reason of Disability. Subject to Section
5(i), if an Participant's service with the Company or any Subsidiary terminates
by reason of Disability, any Option held by such Participant may thereafter be
exercised by the Participant or his personal representative, to the extent it
was exercisable at the time of termination, or on such accelerated basis as the
Board may determine at or after grant, for a period expiring (i) at such time as
may be specified by the Board at or after the time of grant, or (ii) if not
specified by the Board, then one year from the date of termination of service,
or (iii) if sooner than the applicable period specified under (i) or (ii) above,
then upon the expiration of the stated term of such Option.
h. Termination for Cause. If the Participant's employment is
terminated for Cause, any Option held by such Participant shall immediately
expire.
i. Other Termination. Subject to Section 5(i), if a
Participant's service with the Company or any Subsidiary terminates for any
reason other than death or Disability, any Option held by such Participant may
thereafter be exercised by the Participant, to the extent it was exercisable at
the time of such termination or on such accelerated basis as the Board may
determine at or after the time of grant, for a period expiring (i) at such time
as may be specified by the Board at or after the time of grant, or (ii) if not
specified by the Board, then ninety (90) days from the date of termination of
service, or (iii) if sooner than the applicable period specified under (i) or
(ii) above, then upon the expiration of the stated term of such Option.
j. Change of Control. In the event of a Change of Control, the
Board may, in its sole discretion, cause all outstanding Options to immediately
become fully exercisable.
k. Incentive Stock Option Limitations. To the extent required
for "incentive stock option" status under Section 422 of the Code, the aggregate
Fair Market Value (determined as of the time of grant) of the Shares with
respect to which Incentive Stock Options are exercisable for the first time by
the Participant during any calendar year under the Plan and/or any other plan of
the Company or any Subsidiary shall not exceed $100,000. For purposes of
applying the foregoing limitation, Incentive Stock Options shall be taken into
account in the order granted.
l. Cashless Exercise. The Company may, in the sole discretion
of the Board, cooperate in a "cashless exercise" of an Option. The cashless
exercise shall be effected by the Participant delivering to the Securities
Broker instructions to sell a sufficient number of Shares to cover the costs and
expenses associated therewith.
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SECTION 6. Share Appreciation Rights.
a. Grant. SARs may be granted alone ("Stand-Alone SARs") or in
conjunction with all or part of any Option granted under the Plan ("Tandem
SARs"). In the case of a Non-Qualified Stock Option, a Tandem SAR may be granted
either at or after the time of the grant of such Option. In the case of an
Incentive Stock Option, a Tandem SAR may be granted only at the time of the
grant of such Option.
b. Exercise.
(i) Tandem SARs. A Tandem SAR or applicable portion
thereof shall terminate and no longer be exercisable
upon the termination or exercise of the related
Option or portion thereof, except that, unless
otherwise determined by the Board, in its sole
discretion at the time of grant, a Tandem SAR granted
with respect to less than the full number of Shares
covered by a related Option shall be reduced only
after such related Option is exercised or otherwise
terminated with respect to the number of Shares not
covered by the Tandem SAR.
A Tandem SAR may be exercised by a Participant by surrendering
the applicable portion of the related Option, only at such time or times and to
the extent that the Option to which such Tandem SAR relates shall be exercisable
in accordance with the provisions of Section 5 and this Section 6. Options which
have been so surrendered, in whole or in part, shall no longer be exercisable to
the extent the related Tandem SARs have been exercised.
Upon the exercise of a Tandem SAR, a Participant shall be
entitled to receive, upon surrender to the Company of all (or a portion) of an
Option in exchange for cash and/or Shares, an amount equal to the excess of (A)
the Fair Market Value, as of the date such Option (or such portion thereof) is
surrendered, of the Shares covered by such Option (or such portion thereof) over
(B) the aggregate exercise price of such Option (or such portion thereof).
Upon the exercise of a Tandem SAR, the Option or part thereof
to which such Tandem SAR is related, shall be deemed to have been exercised for
the purpose of the limitation set forth in Section 3 of the Plan on the number
of Shares to be issued under the Plan, but only to the extent of the number of
Shares issued under the Tandem SAR at the time of exercise based on the value of
the Tandem SAR at such time.
A Tandem SAR may be exercised only if and when the Fair Market
Value of the Shares subject to the Option exceeds the exercise price of such
Option.
(ii) Stand-Alone SARs. A Stand-Alone SAR may be exercised
by a Participant giving notice of intent to exercise
to the Company, provided that all or a portion of
such Stand-Alone SAR shall have become vested and
exercisable as of the date of exercise.
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Upon the exercise of a Stand-Alone SAR, a Participant shall be
entitled to receive, in either cash and/or Shares, an amount equal to the
excess, if any, of (A) the Fair Market Value, as of the date such SAR (or
portion of such SAR) is exercised, of the Shares covered by such SAR (or portion
of such SAR) over (B) the Fair Market Value of the Shares covered by such SAR
(or a portion of such SAR) as of the date such SAR (or a portion of such SAR)
was granted.
c. Terms and Conditions. SARs shall be subject to such terms
and conditions, not inconsistent with the provisions of the Plan, as shall be
determined from time to time by the Board, in its sole discretion; provided,
however, that the provisions of SAR awards need not be the same with respect to
each Participant. Such terms and conditions include the following:
(i) Non-Transferability. No SAR shall be transferable by
the Participant otherwise than by will or by the laws
of descent and distribution and all SARs shall be
exercisable, during the Participant's lifetime, only
by the Participant or, in the event of his
Disability, by his personal representative.
(ii) Term of SAR. The term of each SAR shall be fixed by
the Board, provided that the term of a Tandem SAR
shall be determined by the terms of the applicable
Option, and provided further that the term of a
Stand-Alone SAR shall be ten (10) years, unless
another term is specified by the Board.
(iii) Exercisability. SARs shall vest and be exercisable at
such time or times and subject to such terms and
conditions as shall be determined by the Board at the
time of grant, provided that the term of a Tandem SAR
shall be determined by the terms of the applicable
Option. A Participant shall not have any rights as a
shareholder with respect to any SAR.
(iv) Termination of Employment. Unless otherwise specified
in the terms of an award, SARs shall be subject to
the terms of Sections 5(f)-(i) with respect to
exercise upon termination of employment.
(v) Change of Control. In the event of a Change of
Control, the Board may, in its sole discretion, cause
all outstanding SARs to immediately become fully
exercisable.
SECTION 7. Restricted Stock.
a. Administration. Restricted Stock may be issued either alone
or in addition to other awards granted under the Plan. The Board shall determine
the persons to whom, and the
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time or times at which, grants of Restricted Stock will be made, the number of
Shares to be awarded, the price (if any) to be paid by the recipient of
Restricted Stock, the time or times within which such awards may be subject to
forfeiture, and all other conditions of the awards.
The Board may condition the vesting of Restricted Stock upon
the attainment of specified performance goals or such other factors as the Board
may determine, in its sole discretion, at the time of the award.
The provisions of Restricted Stock awards need not be the same
with respect to each Participant.
b. Awards and Certificates. The prospective recipient of a
Restricted Stock award shall not have any rights with respect to such award,
unless and until such recipient has executed an agreement evidencing the award
and has delivered a fully executed copy thereof to the Company, and has
otherwise complied with the applicable terms and conditions of such award. The
purchase price for Restricted Stock may be zero.
Each Participant receiving a Restricted Stock award shall be
issued a share certificate in respect of such Restricted Stock. Such certificate
shall be registered in the name of such Participant, and shall bear an
appropriate legend referring to the terms, conditions, and restrictions
applicable to such award, substantially in the following form:
"The transferability of this certificate and the shares represented hereby
are subject to the terms and conditions (including forfeiture) of the
ImageMax, Inc. 1997 Incentive Plan and an Agreement entered into between
the registered owner and ImageMax, Inc. Copies of such Plan and Agreement
are on file in the principal offices of ImageMax, Inc. and will be made
available to any Shareholder without charge upon request to the Secretary
of the Company."
The Board shall require that the share certificates evidencing
Restricted Stock be held in custody by the Company until the restrictions
thereon shall have lapsed, and that, as a condition of any Restricted Stock
award, the Participant shall have delivered to the Company a share power,
endorsed in blank, relating to the Shares covered by such award.
c. Restrictions and Conditions. The Restricted Stock awarded
pursuant to this Section 7 shall be subject to the following restrictions and
conditions:
(i) During a period set by the Board commencing with the
date of such award (the "Restriction Period"), the
Participant shall not be permitted to sell, transfer,
pledge, assign or otherwise encumber Restricted Stock
awarded under the Plan. The Board, in its sole
discretion, may provide for the lapse of such
restrictions in installments and may accelerate or
waive such restrictions in whole or in part, based on
service, performance and/or such other factors or
criteria as the Board may determine, in its sole
discretion.
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(ii) Except as provided in this paragraph (ii) and Section
7(c)(i), once the Participant has been issued a
certificate or certificates for Restricted Stock, the
Participant shall have, with respect to the
Restricted Stock, all of the rights of a shareholder
of the Company, including the right to vote the
Shares, and the right to receive any cash
distributions or dividends. The Board, in its sole
discretion, as determined at the time of award, may
permit or require the payment of cash distributions
or dividends to be deferred and, if the Board so
determines, reinvested in additional Restricted Stock
to the extent Shares are available under Section 3 of
the Plan.
(iii) Subject to the applicable provisions of the award
agreement and this Section 7, upon termination of a
Participant's service with the Company for reasons
other than death or Disability during the Restriction
Period, all Restricted Stock still subject to
restriction shall be forfeited by the Participant.
Subject to the provisions of the Plan, the Board, in
its sole discretion, may provide for the lapse of
such restrictions in installments and may waive such
restrictions, in whole or in part, at any time, based
on such factors as the Board shall deem appropriate
in its sole discretion. Upon the death or Disability
of a Participant during the Restriction Period,
restrictions will lapse with respect to a percentage
of the Restricted Stock award granted to the
Participant that is equal to the percentage of the
Restriction Period that has elapsed as of the date of
death or the date on which such Disability commenced
(as determined by the Board in its sole discretion),
and a share certificate or share certificates
representing such Shares, without bearing the
restrictive legend described in Section 7(b), shall
be delivered by the Company to the Participant or the
Participant's estate, as the case may be, in exchange
for the share certificate or share certificates that
contain such restrictive legend.
(iv) In the event of hardship or other special
circumstances of a Participant whose service with the
Company is involuntarily terminated (other than for
Cause), the Board may, in its sole discretion, waive
in whole or in part any or all remaining restrictions
with respect to such Participant's Restricted Stock,
based on such factors as the Board may deem
appropriate.
(v) If and when the Restriction Period expires without a
prior forfeiture of the Restricted Stock subject to
such Restriction Period, the certificates for such
Shares, without bearing the restrictive legend
described in Section 7(b), shall be promptly
delivered by the Company to the Participant, in
exchange for the share certificate or share
certificates that contain such restrictive legend.
(vi) In the event of a Change of Control, the Board, in
its sole discretion, may cause all Restricted Stock
remaining subject to forfeiture to immediately cease
to be subject to forfeiture and a share certificate
or shares certificates representing such Shares,
without bearing the restrictive legend described in
Section 7(b), shall be issued by the Company and
delivered to the Participant, in exchange for the
share certificate or share certificates that contain
such restrictive legend.
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SECTION 8. Long-Term Performance Awards.
a. Awards and Administration. Long-Term Performance Awards may
be awarded either alone or in addition to other awards granted under the Plan.
Prior to award of a Long-Term Performance Award, the Board shall determine the
nature, length and starting date of the performance period (the "performance
period") for each Long-Term Performance Award. Performance periods may overlap
and Participants may participate simultaneously with respect to Long-Term
Performance Awards that are subject to different performance periods and/or
different performance factors and criteria. Prior to award of a Long-Term
Performance Award, the Board shall determine the performance objectives to be
used in awarding Long-Term Performance Awards and determine the extent to which
such Long-Term Performance Awards have been earned. Performance objectives may
vary from Participant to Participant and between groups of Participants and
shall be based upon such Company, business unit and/or individual performance
factors and criteria as the Board may deem appropriate, including, but not
limited to, earnings per Share or return on equity.
At the beginning of each performance period, the Board shall
determine for each Long-Term Performance Award subject to such performance
period the range of dollar values or number of Shares to be awarded to the
Participant at the end of the performance period if and to the extent that the
relevant measure(s) of performance for such Long-Term Performance Award is (are)
met. Such dollar values or number of Shares may be fixed or may vary in
accordance with such performance and/or other criteria as may be specified by
the Board, in its sole discretion.
b. Adjustment of Awards. In the event of special or unusual
events or circumstances affecting the application of one or more performance
objectives to a Long-Term Performance Award, the Board may revise the
performance objectives and/or underlying factors and criteria applicable to the
Long-Term Performance Awards affected, to the extent deemed appropriate by the
Board, in its sole discretion, to avoid unintended windfalls or hardship.
c. Termination of Service. Unless otherwise provided in the
applicable award agreements, if a Participant terminates service with the
Company during a performance period because of death, Disability or Retirement,
such Participant (or his estate) shall be entitled to a payment with respect to
each outstanding Long-Term Performance Award at the end of the applicable
performance period:
(i) based, to the extent relevant under the terms of the
award, upon the Participant's performance for the
portion of such performance period ending on the date
of termination and the performance of the applicable
business unit(s) for the entire performance period,
and
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<PAGE>
(ii) pro-rated, where deemed appropriate by the Board, for
the portion of the performance period during which
the Participant was employed by or served on the
Board of the Company, all as determined by the Board,
in its sole discretion.
However, the Board may provide for an earlier payment in
settlement of such award in such amount and under such terms and conditions as
the Board deems appropriate, in its sole discretion.
Except as otherwise determined by the Board, if a Participant
terminates service with the Company during a performance period for any other
reason, then such Participant shall not be entitled to any payment with respect
to the Long-Term Performance Awards subject to such performance period, unless
the Board shall otherwise determine, in its sole discretion.
In the event of a Change of Control, the Board may, in its
sole discretion, cause all conditions applicable to a Long-Term Performance
Award to immediately terminate and a share certificate or share certificates
representing Shares subject to such award, or cash, as the case may be, to be
issued and/or delivered to the Participant.
d. Form of Payment. The earned portion of a Long-Term
Performance Award may be paid currently or on a deferred basis, together with
such interest or earnings equivalent as may be determined by the Board, in its
sole discretion. Payment shall be made in the form of cash or whole Shares,
including Restricted Stock, either in a lump sum payment or in annual
installments commencing as soon as practicable after the end of the relevant
performance period, all as the Board shall determine at or after grant. If and
to the extent a Long-Term Performance Award is payable in Shares and the full
amount of such value is not paid in Shares, then the Shares representing the
portion of the value of the Long-Term Performance Award not paid in Shares shall
again become available for award under the Plan, subject to Section 3(b). A
Participant whose Long-Term Performance Award is payable in Shares or Restricted
Stock shall not have any rights as a shareholder until such share certificate or
share certificates have been issued to such Participant, and, if requested, the
Participant has given the representation described in Section 13(a) hereof.
Prior to any payment, the Board shall certify that all of the performance goals
or other material terms of the award have been met.
SECTION 9. Performance Shares.
a. Awards and Administration. The Board shall determine the
persons to whom and the time or times at which Performance Shares shall be
awarded, the number of Performance Shares to be awarded to any such person, the
duration of the period (the "performance period") during which, and the
conditions under which, receipt of the Shares will be deferred, and the other
terms and conditions of the award in addition to those set forth below.
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<PAGE>
The Board may condition the receipt of Shares pursuant to a
Performance Share award upon the attainment of specified performance goals or
such other factors or criteria as the Board shall determine, in its sole
discretion.
The provisions of Performance Share awards need not be the
same with respect to each Participant, and such awards to individual
Participants need not be the same in subsequent years.
b. Terms and Conditions. Performance Shares awarded pursuant
to this Section 9 shall be subject to the following terms and conditions and
such other terms and conditions, not inconsistent with the terms of this Plan,
as the Board shall deem desirable:
(i) Conditions. The Board, in its sole discretion, shall
specify the performance period during which, and the
conditions under which, the receipt of Shares covered
by the Performance Share award will be deferred.
(ii) Share Certificate. At the expiration of the
performance period, if the Board, in its sole
discretion, determines that the conditions specified
in the Performance Share agreement have been
satisfied, a share certificate or share certificates
evidencing the number of Shares covered by the
Performance Share award shall be issued and delivered
to the Participant. A Participant shall not be deemed
to be the holder of Shares, or to have the rights of
a holder of Shares, with respect to the Performance
Shares unless and until a share certificate or share
certificates evidencing such Shares are issued to
such Participant.
(iii) Death, Disability or Retirement. Subject to the
provisions of the Plan, if a Participant terminates
service with the Company during a performance period
because of death, Disability or Retirement, such
Participant (or his estate) shall be entitled to
receive, at the expiration of the performance period,
a percentage of Performance Shares that is equal to
the percentage of the performance period that had
elapsed as of the date of termination, provided that
the Board, in its sole discretion, determines that
the conditions specified in the Performance Share
agreement have been satisfied. In such event, a share
certificate or share certificates evidencing such
Shares shall be issued and delivered to the
Participant or the Participant's estate, as the case
may be.
(iv) Termination of Service. Unless otherwise determined
by the Board at the time of grant, the Performance
Shares will be forfeited upon a termination of
service during the performance period for any reason
other than death, Disability or Retirement.
(v) Change of Control. In the event of a Change of
Control, the Board may, in its sole discretion, cause
all conditions applicable to the Performance Shares
to immediately terminate and a share certificate or
share certificates evidencing Shares subject to the
Share award to be issued and delivered to the
Participant.
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<PAGE>
SECTION 10. Performance Units.
a. Awards and Administration. The Board shall determine the
persons to whom and the time or times at which Performance Units shall be
awarded, the number of Performance Units to be awarded to any such person, the
duration of the period (the "performance period") during which, and the
conditions under which, a Participant's right to Performance Units will be
vested, the ability of Participants to defer the receipt of payment of such
Performance Units, and the other terms and conditions of the award in addition
to those set forth below.
A Performance Unit shall have a dollar value, which shall be
set from time to time by the Board.
The Board may condition the vesting of Performance Units upon
the attainment of specified performance goals or such other factors or criteria
as the Board shall determine, in its sole discretion.
The provisions of Performance Unit awards need not be the same
with respect to each Participant, and such awards to individual Participants
need not be the same in subsequent years.
b. Terms and Conditions. Performance Units awarded pursuant to
this Section 10 shall be subject to the following terms and conditions and such
other terms and conditions, not inconsistent with the terms of this Plan, as the
Board shall deem desirable:
(i) Conditions. The Board, in its sole discretion, shall
specify the performance period during which, and the
conditions under which, the Participant's right to
Performance Units will be vested.
(ii) Vesting. At the expiration of the performance period,
the Board, in its sole discretion, shall determine
the extent to which the performance goals have been
achieved, and the percentage of the Performance Units
of each Participant that have vested.
(iii) Death, Disability or Retirement. Subject to the
provisions of this Plan, if a Participant terminates
service with the Company during a performance period
because of death, Disability or Retirement, such
Participant (or the Participant's estate) shall be
entitled to receive, at the expiration of the
performance period, a cash distribution equal to the
value of a percentage of Performance Units that is
equal to the percentage of the performance period
that had elapsed as of the date of termination,
provided that the Board, in its sole discretion,
determines that the conditions specified in the
Performance Unit agreement have been satisfied, and
payment thereof shall be made to the Participant or
the Participant's estate, as the case may be.
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<PAGE>
(iv) Termination of Service. Unless otherwise determined
by the Board at the time of grant, the Performance
Units will be forfeited upon a termination of service
during the performance period for any reason other
than death, Disability or Retirement.
(v) Change of Control. In the event of a Change of
Control, the Board may, in its sole discretion, cause
all conditions applicable to Performance Units to
immediately terminate and cash representing the full
amount of such award to be paid to the Participant.
SECTION 11. Amendments and Termination. The Board may amend,
alter or discontinue the Plan at any time, but no amendment, alteration or
discontinuation shall be made which would impair the rights of a Participant
with respect to an Option, SAR, Restricted Stock, Long-Term Performance Award,
Performance Share or Performance Unit which has been granted under the Plan,
without the Participant's consent, or which, without the approval of such
amendment within one year (365 days) of its adoption by the Board, by a majority
of the votes cast at a duly held shareholder meeting at which a quorum
representing a majority of the Company's outstanding voting shares is present
(either in person or by proxy), would:
a. except as expressly provided in the Plan, increase the
total number of Shares reserved for the purposes of the Plan;
b. change the persons or class of persons eligible to
participate in the Plan; or
c. extend the maximum Option term under Section 5(b) of the
Plan.
The Board may substitute new Options for previously granted
Options, including previously granted Options having higher exercise prices.
Subject to the above provisions, the Board shall have broad
authority to amend the Plan to take into account changes in applicable tax laws
and accounting rules, as well as other developments.
SECTION 12. Unfunded Status of Plan. The Plan is intended to
constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Participant by the Company, nothing
contained herein shall give any such Participant any rights that are greater
than those of a general creditor of the Company. In its sole discretion, the
Board may authorize the creation of trusts or other arrangements to meet the
obligations created under the Plan to deliver Shares or payments in lieu of
Shares or with respect to awards hereunder.
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<PAGE>
SECTION 13. General Provisions.
a. The Board may require each person acquiring Shares or a
Share-based award under the Plan to represent to and agree with the Company in
writing that the Participant is acquiring the Shares or Share-based award for
investment purposes and without a view to distribution thereof and as to such
other matters as the Board believes are appropriate to ensure compliance with
applicable Federal and state securities laws. The certificate evidencing such
award and any securities issued pursuant thereto may include any legend which
the Board deems appropriate to reflect any restrictions on transfer and
compliance with securities laws.
All certificates for Shares or other securities delivered
under the Plan shall be subject to such share-transfer orders and other
restrictions as the Board may deem advisable under the rules, regulations, and
other requirements of the Securities Act of 1933, as amended, the Exchange Act,
any stock exchange upon which the Shares are then listed, and any other
applicable Federal or state securities laws, and the Board may cause a legend or
legends to be put on any such certificates to make appropriate reference to such
restrictions.
b. Nothing contained in the Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to shareholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases.
c. The adoption of the Plan shall not confer upon any employee
of the Company or a Subsidiary any right to continued employment with the
Company or such Subsidiary, nor shall it interfere in any way with the right of
the Company or such Subsidiary to terminate the employment of any of its
employees at any time.
d. No later than the date as of which an amount first becomes
includable in the gross income of the Participant for Federal income tax
purposes with respect to any award under the Plan, the Participant shall pay to
the Company, or make arrangements satisfactory to the Board regarding the
payment, of any Federal, state or local taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the Board,
the minimum required withholding obligations may be settled with Shares,
including Shares that are part of the award that gives rise to the withholding
requirement. The obligations of the Company under the Plan shall be conditional
on such payment or arrangements and the Company shall, to the extent permitted
by law, have the right to deduct any such taxes from any payment of any kind
otherwise due to the Participant.
e. At the time of grant of an award under the Plan, the Board
may provide that the Shares received as a result of such grant shall be subject
to a right of first refusal, pursuant to which the Participant shall be required
to offer to the Company any Shares that the Participant wishes to sell, with the
price being the then Fair Market Value of the Shares, subject to such other
terms and conditions as the Board may specify at the time of grant.
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<PAGE>
f. The reinvestment of distributions or dividends in
additional Restricted Stock (or in other types of Plan awards) at the time of
any distribution or dividend payment shall only be permissible if sufficient
Shares are available under Section 3 of the Plan for such reinvestment (taking
into account then outstanding Options and other Plan awards).
g. The Board shall establish such procedures as it deems
appropriate for a Participant to designate a beneficiary to whom any amounts
payable in the event of the Participant's death are to be paid.
h. The Plan and all awards made and actions taken thereunder
shall be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania.
SECTION 14. Effective Date of Plan. This Plan shall become
effective on the date that it is adopted by the Board; provided, however, that
it shall not be an Incentive Stock Option Plan if it is not approved, within one
year (365 days) of its adoption by the Board, by a majority of the votes cast at
a duly held shareholder meeting at which a quorum representing a majority of
Company's outstanding voting shares is present, either in person or by proxy.
The Board may make awards hereunder prior to approval of the Plan; provided,
however, that any and all Incentive Stock Options so awarded automatically shall
be converted into Non-Qualified Stock Options if the Plan is not approved by
shareholders within 365 days of its adoption.
SECTION 15. Term of Plan. No Option, SAR, Restricted Stock,
Long-Term Performance Award, Performance Share or Performance Unit shall be
granted pursuant to the Plan on or after the tenth (10th) anniversary of the
date of shareholder approval of the Plan, but awards granted prior to such tenth
(10th) anniversary may extend beyond that date.
Executed this ____ day of __________________, 1997.
IMAGEMAX, INC.
Attest: _________________________ By: ____________________________
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IMAGEMAX, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose.
The ImageMax, Inc. 1997 Employee Stock Purchase Plan (the
"Plan") is intended to encourage and facilitate the purchase of Shares of the
Common Stock of ImageMax, Inc. (the "Company"), by employees of the Company and
any Participating Companies, thereby providing employees with a personal stake
in the Company and a long range inducement to remain in the employ of the
Company and Participating Companies. It is the intention of the Company that the
Plan qualify as an "employee stock purchase plan" within the meaning of Section
423 of the Code.
2. Definitions.
(a) "Account" means a bookkeeping account established by the Committee
on behalf of a Participant to hold Payroll Deductions.
(b) "Approved Leave of Absence" means a leave of absence that has been
approved by the applicable Participating Company in such a manner as the Board
may determine from time to time.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the Committee appointed pursuant to section 14 of
the Plan.
(f) "Company" means ImageMax, Inc.
(g) "Compensation" means an Employee's cash compensation payable for
services to a Participating Company.
(h) "Election Form" means the form acceptable to the Committee which an
Employee shall use to make an election to purchase Shares through Payroll
Deductions pursuant to the Plan.
(i) "Eligible Employee" means an Employee who meets the requirements
for eligibility under section 3 of the Plan.
(j) "Employee" means a person who is an employee of a Participating
Company.
(k) "Fair Market Value" means the closing price per Share on the
principal national securities exchange on which the shares are listed or
admitted to trading or, if not listed or traded on any such exchange, on the
National Market System of the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), or if not listed or traded on any such
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<PAGE>
exchange or system, the fair market value as reasonably determined by the Board,
which determination shall be conclusive.
(l) "Five Percent Owner" means an Employee who, with respect to a
Participating Company, is described in section 423(b) of the Code.
(m) "Offering" means an offering of Shares to Eligible Employees
pursuant to the Plan.
(n) "Offering Commencement Date" means the first day of each January 1,
April 1, July 1 and October 1 beginning on or after adoption of the Plan by the
Board, until the Plan Termination Date, provided that the first Offering
Commencement Date may be delayed until the first day of the second month after
adoption of the Plan, if necessary to permit Participants to make elections in
accordance with section 3(e) of the Plan.
(o) "Offering Period" means the period extending from an Offering
Commencement Date through the following Offering Termination Date.
(p) "Offering Termination Date" means the last day of each March, June,
September and December following an Offering Commencement Date.
(q) "Option Price" means 90 percent of the lesser of: (1) the Fair
Market Value per Share on the Offering Commencement Date, or if such date is not
a trading day, then on the next trading day thereafter or (2) the Fair Market
Value per Share on the Offering Termination Date, or if such date is not a
trading day, then on the next trading day thereafter.
(r) "Participant" means an Employee who meets the requirements for
eligibility under section 3 of the Plan and who has timely delivered an Election
Form to the Committee.
(s) "Participating Company" means, as provided in Schedule A, the
Company and subsidiaries of the Company, within the meaning of section 424(f) of
the Code, if any, that are approved by the Board from time to time and whose
employees are designated as Employees by the Board.
(t) "Payroll Deductions" means amounts withheld from a Participant's
Compensation pursuant to the Plan, as described in section 5 of the Plan.
(u) "Plan" means ImageMax, Inc. 1997 Employee Stock Purchase Plan, as
set forth in this document, and as may be amended from time to time.
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<PAGE>
(v) "Plan Termination Date" means the earlier of:
(1) The Offering Termination Date for the Offering in which
the maximum number of Shares specified in section 5 of the Plan
have been issued pursuant to the Plan; or
(2) The date as of which the Board chooses to terminate the Plan as
provided in section 15 of the Plan.
(w) "Shares" means shares of Common Stock of the Company.
(x) "Successor-in-Interest" means the Participant's executor or
administrator, or such other person or entity to whom the Participant's rights
under the Plan shall have passed by will or the laws of descent and
distribution.
(y) "Termination Form" means the form acceptable to the Committee which
an Employee shall use to withdraw from an Offering pursuant to section 8 of the
Plan.
3. Eligibility and Participation.
(a) Initial Eligibility. Except as provided in section 3(b) of the
Plan, each Employee shall be eligible to participate in the Plan.
(b) Ineligibility. An Employee shall not be eligible to participate in
the Plan if such Employee:
(1) Is a Five Percent Owner;
(2) Is a temporary Employee;
(3) Has been employed by a Participating Company on a full-time
basis for less than a 6-consecutive-month period ending on the last day of the
month immediately preceding the effective date of an election to purchase Shares
pursuant to the Plan;
(4) Has not customarily worked more than 20 hours per week during a
24-consecutive-month period ending on the last day of the month immediately
preceding the effective date of an election to purchase Shares pursuant to the
Plan; or
(5) Is restricted from participating under section 3(d) of the
Plan.
(c) Leave of Absence. For purposes of participation in the Plan, an
Employee on an Approved Leave of Absence shall be deemed to be an Employee for
the first 90 days of such Approved Leave of Absence and such Employee's
employment shall be deemed to have
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<PAGE>
terminated for purposes of participation under the Plan at the close of business
on the 90th day of such Approved Leave of Absence unless such Employee shall
have returned to regular non-temporary employment before the close of business
on such 90th day. Termination by the Participating Company of an Employee's
Approved Leave of Absence, other than termination or return to non-temporary
employment, shall terminate an Employee's employment for all purposes of the
Plan and shall terminate such Employee's participation in the Plan and the right
to exercise any option. An Approved Leave of Absence shall be considered active
employment for purposes of sections 3(b)(3) and 3(b)(4) of the Plan.
(d) Restrictions on Participation. Notwithstanding any provisions of
the Plan to the contrary, no Employee shall be granted an option to participate
in the Plan if:
(1) Immediately after the grant, such Employee would be a Five
Percent Owner; or
(2) Such option would permit such Employee's rights to purchase
stock under all employee stock purchase plans of the Participating Companies
which meet the requirements of section 423(b) of the Code to accrue at a rate
which exceeds $25,000 in fair market value (as determined pursuant to section
423(b)(8) of the Code) for each calendar year in which such option is
outstanding.
(e) Commencement of Participation. An Employee who meets the
eligibility requirements of sections 3(a) and 3(b) of the Plan and whose
participation is not restricted under section 3(d) of the Plan shall become a
Participant by completing an Election Form and filing it with the Committee on
or before the 15th day of month immediately preceding the Offering Commencement
Date for the first Offering to which such Election Form applies. Payroll
Deductions for a Participant shall commence on the applicable Offering
Commencement Date when his or her authorization for Payroll Deductions becomes
effective, and shall end on the Plan Termination Date, unless sooner terminated
by the Participant pursuant to section 8 of the Plan.
4. Shares Per Offering.
The Plan shall be implemented by a series of Offerings that shall
terminate on the Plan Termination Date. Offerings shall be made with respect to
Compensation payable for each calendar month of the Company's fiscal year for
the period commencing with the first day of the month first occurring on or
after adoption of the Plan by the Board and ending with the Plan Termination
Date. Shares available for any Offering shall be the difference between the
maximum number of Shares that may be issued under the Plan, as determined
pursuant to section 10(a) of the Plan, for all of the Offerings, less the actual
number of Shares purchased by Participants pursuant to prior Offerings. If the
total number of Shares for which options are exercised on any Offering
Termination Date exceeds the maximum number of Shares available, the Committee
shall make a pro rata allocation of Shares available for delivery and
distribution in
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<PAGE>
as nearly a uniform manner as practicable, and as it shall determine to be fair
and equitable, and the unapplied Account balances shall be returned to
Participants as soon as practicable following the Offering Termination Date.
5. Payroll Deductions.
(a) Amount of Payroll Deductions. An Eligible Employee who wishes to
participate in the Plan shall file an Election Form with the Committee at least
15 days before the Offering Commencement Date for the first Offering for which
such Election Form is effective on which he or she may elect to have Payroll
Deductions of such amounts designated by the Committee on the Election Form from
time to time made from his or her Compensation on each regular payday during the
time he or she is a Participant in the Plan, provided that the rules established
by the Committee shall be consistent with section 423(b)(5) of the Code.
(b) Participants' Accounts. All Payroll Deductions with respect to a
Participant pursuant to section 5(a) of the Plan shall be credited to the
Participant's Account under the Plan.
(c) Changes in Payroll Deductions. A Participant may discontinue his
participation in the Plan as provided in section 8(a) of the Plan, but no other
change can be made during an Offering, including, but not limited to, changes in
the amount of Payroll Deductions for such Offering. A Participant may change the
amount of Payroll Deductions for subsequent Offerings by giving written notice
of such change to the Committee on or before the 15th day of the month
immediately preceding the Offering Commencement Date for the Offering for which
such change is effective.
(d) Leave of Absence. A Participant who goes on an Approved Leave of
Absence before the Offering Termination Date after having filed an Election Form
with respect to such Offering may:
(1) Withdraw the balance credited to his or her Account pursuant to
section 8(b) of the Plan;
(2) Discontinue contributions to the Plan but remain a Participant
in the Plan through the Offering Termination Date;
(3) Remain a Participant in the Plan during such Approved Leave of
Absence through the Offering Termination Date and continue the authorization for
the Participating Company to make Payroll Deductions for each payroll period out
of continuing payments to such Participant, if any.
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<PAGE>
6. Granting of Options.
On each Offering Termination Date, each Participant shall be deemed to
have been granted an option to purchase a minimum of one (1) Share and a maximum
number of Shares that shall be a number of whole Shares equal to the quotient
obtained by dividing the balance credited to the Participant's Account as of the
Offering Termination Date, by the Option Price.
7. Exercise of Options.
(a) Automatic Exercise. With respect to each Offering, a Participant's
option for the purchase of Shares granted pursuant to section 6 of the Plan
shall be deemed to have been exercised automatically on the Offering Termination
Date applicable to such Offering.
(b) Fractional Shares and Minimum Number of Shares. Fractional Shares
shall not be issued under the Plan. Amounts credited to an Account remaining
after the application of such Account to the exercise of options for a minimum
of one (1) full Share shall be credited to the Participant's Account for the
next succeeding Offering, or, at the Participant's election, returned to the
Participant as soon as practicable following the Offering Termination Date,
without interest.
(c) Transferability of Option. No option granted to a Participant
pursuant to the Plan shall be transferable other than by will or by the laws of
descent and distribution, and no such option shall be exercisable during the
Participant's lifetime other than by the Participant.
(d) Delivery of Certificates for Shares. The Company shall deliver
certificates for Shares acquired on the exercise of options during an Offering
Period as soon as practicable following the Offering Termination Date.
8. Withdrawals.
(a) Withdrawal of Account. A Participant may elect to withdraw the
balance credited to the Participant's Account by providing a Termination Form to
the Committee at any time before the Offering Termination Date applicable to any
Offering.
(b) Amount of Withdrawal. A Participant may withdraw all, but not less
than all, of the amounts credited to the Participant's Account by giving a
Termination Form to the Committee. All amounts credited to such Participant's
Account shall be paid as soon as practicable following the Committee's receipt
of the Participant's Termination Form, and no further Payroll Deductions will be
made with respect to the Participant.
(c) Effect of Withdrawal on Subsequent Participation. A Participant who
elects to withdraw from an Offering pursuant to section 8(a) of the Plan shall
be deemed to have elected
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<PAGE>
not to participate in each of the four succeeding Offerings following the date
on which the Participant gives a Termination Form to the Committee.
(d) Termination of Employment. Upon termination of a Participant's
employment for any reason other than death, including termination due to
disability or continuation of a leave of absence beyond 90 days, all amounts
credited to such Participant's Account shall be returned to the Participant. In
the event of a Participant's (1) termination of employment due to death or (2)
death after termination of employment but before the Participant's Account has
been returned, all amounts credited to such Participant's Account shall be
returned to the Participant's Successor-in-Interest.
(e) Leave of Absence. A Participant who is on an Approved Leave of
Absence shall, subject to the Participant's election pursuant to section 5(d) of
the Plan, continue to be a Participant in the Plan until the end of the first
Offering ending after commencement of such Approved Leave of Absence. A
Participant who has been on an Approved Leave of Absence for more than 90 days
shall not be eligible to participate in any Offering that begins on or after the
commencement of such Approved Leave of Absence so long as such leave of absence
continues.
9. Interest.
No interest shall be paid or allowed with respect to amounts paid into
the Plan or credited to any Participant's Account.
10. Shares.
(a) Maximum Number of Shares. No more than [____________] Shares may be
issued under the Plan. Such Shares may be unissued shares or treasury shares of
the Company. The number of Shares available for any Offering and all Offerings
shall be adjusted if the number of outstanding Shares of the Company is
increased or reduced by split-up, reclassification, stock dividend or the like.
All Shares issued pursuant to the Plan shall be validly issued, fully paid and
nonassessable.
(b) Participant's Interest in Shares. A Participant shall have no
interest in Shares subject to an option until such option has been exercised.
(c) Registration of Shares. Shares to be delivered to a Participant
under the Plan shall be registered in the name of the Participant.
(d) Restrictions on Exercise. The Board may, in its discretion, require
as conditions to the exercise of any option such conditions as it may deem
necessary to assure that the exercise of options is in compliance with
applicable securities laws.
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<PAGE>
11. Expenses.
The Participating Companies shall pay all fees and expenses incurred
(excluding individual Federal, state, local or other taxes) in connection with
the Plan. No charge or deduction for any such expenses will be made to a
Participant upon the termination of his or her participation under the Plan or
upon the distribution of certificates representing Shares purchased with his or
her contributions.
12. Taxes.
The Participating Companies shall have the right to withhold from each
Participant's Compensation an amount equal to all Federal, state, city or other
taxes as the Participating Companies shall determine are required to be withheld
by them. In connection with such withholding, the Participating Companies may
make any such arrangements as are consistent with the Plan as it may deem
appropriate, including the right to withhold from Compensation paid to a
Participant other than in connection with the Plan.
13. Plan and Contributions Not to Affect Employment.
The Plan shall not confer upon any Eligible Employee any right to
continue in the employ of the Participating Companies.
14. Administration.
The Plan shall be administered by the Board, which may delegate
responsibility for such administration to a committee of the Board (the
"Committee"). If the Board fails to appoint the Committee, any references in the
Plan to the Committee shall be treated as references to the Board. The Board, or
the Committee, shall have authority to interpret the Plan, to prescribe, amend
and rescind rules and regulations relating to it, and to make all other
determinations deemed necessary or advisable in administering the Plan, with or
without the advice of counsel. The determinations of the Board or the Committee
on the matters referred to in this paragraph shall be conclusive and binding
upon all persons in interest.
15. Amendment and Termination.
The Board may terminate the Plan at any time and may amend the Plan
from time to time in any respect; provided, however, that upon any termination
of the Plan, all Shares or Payroll Deductions (to the extent not yet applied to
the purchase of Shares) under the Plan shall be distributed to the Participants,
provided further, that no amendment to the Plan shall affect the right of a
Participant to receive his or her proportionate interest in the Shares or his or
her Payroll Deductions (to the extent not yet applied to the purchase of Shares)
under the Plan, and provided further that the Company may seek shareholder
approval of an amendment to the Plan if such approval is determined to be
required by or advisable under the regulations of the Securities or
-8-
<PAGE>
Exchange Commission or the Internal Revenue Service, the rules of any stock
exchange or system on which the Shares are listed or other applicable law or
regulation.
16. Effective Date.
The Plan shall be effective on the date it is adopted by the Board,
subject to approval by the Company's shareholders within one year of the
adoption of the Plan by the Board. Any option granted before the approval of the
Plan by the Company's shareholders shall be expressly conditioned upon such
approval, and no Share certificates shall be issued until such approval. If
shareholder approval is not received within 12 months before or after the date
of the initial adoption of the Plan by the Board, no Share certificates shall be
issued with respect to any automatic exercises which may have occurred pursuant
to section 7 of the Plan, and all amounts credited to Participants' Accounts
with respect to such Shares shall be returned to Participants as soon as
administratively practicable.
17. Government and Other Regulations.
(a) In General. The purchase of Shares under the Plan shall be subject
to all applicable laws, rules and regulations, and to such approvals by any
governmental agencies as may be required.
(b) Securities Law. The Committee shall have the power to make each
grant under the Plan subject to such conditions as it deems necessary or
appropriate to comply with the then-existing requirements of the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended,
including Rule 16b-3 (or any similar rule) of the Securities and Exchange
Commission.
18. Non-Alienation.
No Participant shall be permitted to assign, alienate, sell, transfer,
pledge or otherwise encumber his interest under the Plan prior to the
distribution to him of Share certificates. Any attempt at assignment,
alienation, sale, transfer, pledge or other encumbrance shall be void and of no
effect.
19. Notices.
Any notice required or permitted hereunder shall be sufficiently given
only if delivered personally, telecopied, or sent by first class mail, postage
prepaid, and addressed:
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<PAGE>
If to the Company:
Secretary
ImageMax, Inc.
715 Matson's Ford Road
Villanova, PA 19085
Or any other address provided pursuant to written notice.
If to the Participant:
At the address on file with the Company from time to time, or to such
other address as either party may hereafter designate in writing by
notice similarly given by one party to the other.
20. Successors.
The Plan shall be binding upon and inure to the benefit of any
successor, successors or assigns of the Company.
21. Severability.
If any part of this Plan shall be determined to be invalid or void in
any respect, such determination shall not affect, impair, invalidate or nullify
the remaining provisions of this Plan which shall continue in full force and
effect.
22. Acceptance.
The election by any Eligible Employee to participate in this Plan
constitutes his or her acceptance of the terms of the Plan and his or her
agreement to be bound hereby.
23. Applicable Law.
This Plan shall be construed in accordance with the laws of the
Commonwealth of Pennsylvania, to the extent not preempted by applicable Federal
law.
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<PAGE>
IN WITNESS WHEREOF, the foregoing Plan is adopted this ___ day of
______________, 1997.
IMAGEMAX, INC.
ATTEST: ________________________ By: _______________________________
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<PAGE>
SCHEDULE A
Participating Companies
ImageMax, Inc.
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LEASE AGREEMENT
Lease Agreement made this first day of September, 1994, between
JONSTAR REALTY CORPORATION (hereinafter referred to as "Landlord") and SPAULDING
COMPANY, INC. (hereinafter referred to as "Tenant").
1. PREMISES: The Landlord hereby leases to the Tenant 4800 square feet of
space located in the "office building" at 1075 Southbridge Street, Worcester,
Massachusetts. The 4800 square feet are in the front portion of the building and
said space is further identified by a diagram attached hereto and incorporated
herein by reference which shows the location of the demised premises in the
building. The Tenant shall have, as appurtenant to the Premises, the
non-exclusive right and easement to use in common with others entitled thereto:
(1) common walkways, driveways, lobbies, halls, ramps in the office area and
stairways; (2) the parking facility, as provided in Section 14 of this Lease;
(3) pipes, ducts, conduits, wires, utility lines, sewerage system and
appurtenant equipment serving the Premises; and (4) the common toilets adjacent
to the premises and shown on the attached diagram. The Landlord shall not alter
any common areas so as to interfere with the Tenant's use of the Premises.
2. TENANT'S ACCEPTANCE OF PROPERTY: At the commencement of the term, the
Tenant shall accept the building, improvements and any equipment on or in the
leased property in their condition as of the date of this Lease.
3. TERM: The term of this Lease shall be for three (3) years commencing on
September 1, 1994 and ending August 30, 1997, both dates inclusive, unless
sooner terminated as herein provided.
4. RENT: For the three (3) years of the Lease the Tenant shall pay to the
Landlord as rent the sum of $25,920.00 annually payable in monthly installments
of $2,160.00, in advance, on the first day of each month throughout the term of
the Lease beginning September 1, 1994. In year (2) of this Lease the Tenant
shall pay an increase based on the CPI as described in section #6 of this Lease.
5. TAXES: COVENANT TO PAY TAXES AND ASSESSMENTS. The Landlord shall pay all
taxes, real estate, general or special, all public rates, dues and special
assessments of every kind which shall become due and payable or which are to be
assessed against or levied upon said real estate or improvements thereon during
the term of this Lease.
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In addition to the base rent as provided for in paragraph 4, the Tenant
shall pay during the term of this Lease, an amount equal to 2.6 per cent of
the real estate taxes and 2.6 per cent of any new assessment levied upon the
land and buildings of which the Demised Premises are a part. With each monthly
rental payment the Tenant shall pay one-twelfth (1/12) of its 2.6 per cent share
of the assessed real estate taxes. In no event, however, shall the tenant's
annual obligation for taxes during the term of this Lease increase by more than
one cent per square foot per year. At any time a new tax rate and/or a new
evaluation is set resulting in a change in the taxes, the Landlord shall notify
the Tenant of any increase or decrease in taxes. If the taxes are increased,
then the Tenant shall pay its proportionate share in a lump sum from September
1st and then shall pay its proportionate share with the monthly payments as
outlined above. Said lump sum shall be paid within thirty (30) days after the
Tenant receives written notice of the amount from the Landlord. In the event
that the taxes are decreased, then the Tenant shall take a credit off its
monthly rental payments.
Promptly after the receipt by the Landlord of the bill for taxes assessed
on the taxable area of which the Demised Premises are a part, the Landlord shall
advise the Tenant of the amount thereof and furnish the computation of the
Tenant's lump sum and pro rata share together with a copy of the tax bill
6. OPTION TO RENEW: The Tenant shall, provided it is not in default in any
of the terms and conditions of this Lease, have the option to renew this Lease
for an additional period of three (3) years from September 1, 1997, ending
August 31, 2000, upon the same terms and conditions in this Lease except the
annual base rental for the Demised Premises shall be calculated as follows, and
provided that Tenant shall give Landlord notice in writing of its intention to
exercise such option, no later than ninety (90) days prior to the expiration of
this Lease.
A. For the extended term of the Lease commencing September 1, 1997 the base
annual rent which the Tenant shall pay shall be equal to the base annual rent
for the year Sept 96 through August 1997 plus any increase as determined in
accordance with the provisions (B) of this article.
B(1). As promptly as practical after the end of the initial three year term
of this Lease, the Landlord shall compute the increase, if any, in the cost of
living for the preceding three year period based upon the "Revised Consumers
Price Index- Cities (1967=100)", the Index published by the Bureau of Labor
Statistics of the United States Department of Labor.
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<PAGE>
B(2). The Index number indicated in the column for the City of Boston,
entitled "all items" for the month of September, 1996, shall be the "base Index
number" and the corresponding Index number for the month of August, 1997 shall
be the "current Index number".
B(3). The current Index number shall be divided by the base Index number.
From the quotient thereof, there shall be subtracted the integer 1, and any
resulting positive number shall be deemed to be the percentage of increase in
the cost of living.
B(4). The percentage of increase multiplied by the 97=98 annual rent shall
be the increase required to be determined by subdivision (A) of this clause and
this increase shall be added to the base rent to determine the new rent. In no
event shall the annual rent during the option period be less than the beginning
base rent. In any one year the increase shall not exceed 3%.
7. COVENANT TO KEEP THE LEASED PREMISES INSURED: Tenant agrees to save
harmless and indemnify from Landlord from all claims or damage to or of any
person or property while on the Demised Premises (unless arising from any
omission, fault or negligence of Landlord) and from all claims or damage to or
of any person or property anywhere on Landlord's Land or the Parking Area which
may be occasioned by any omission, fault, neglect or other misconduct of
Tenant. Tenant agrees to maintain in responsible companies qualified to do
business in Massachusetts and in good standing therein insuring Landlord as well
as Tenant against all claims for injury to or death of persons or damage to
property on or about the Premises or arising out of the use of the Premises
comprehensive general liability with single limit of not less than Five Hundred
Thousand ($500,000.00) Dollars and property damage insurance with limits of not
less than Five Hundred Thousand ($500,000.00) Dollars and workmen's compensation
insurance with statutory limits covering all of the Tenant's employees working
in the Demised Premises; and to deposit promptly with Landlord certificates for
such insurance, and all renewals thereof, bearing the endorsement that the
policies will not be cancelled until after ten (10) days' written notice to
Landlord. Landlord shall be named in the insurance policy as the Loss Payee for
damages to the Demised Premises.
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<PAGE>
Insofar as, and to the extent that, the following provision may be
effective without invalidating or making it impossible to secure insurance
coverage obtainable from responsible insurance companies (even though extra
premium may result therefrom), the Landlord and the Tenant mutually agree that,
with respect to any hazard which is covered by insurance then being carried by
them, respectively, the one carrying such insurance and suffering such loss
releases the other of and from any and all claims with respect to such loss; and
they further mutually agree that their respective insurance companies shall have
no right of subrogation against the other on account thereof. In the event that
extra premium is payable by either party as a result of this provision, the
other party shall reimburse the party paying such extra premium. Each party
shall obtain endorsements to all insurance policies obtained pursuant to this
Lease reflecting this non-subrogation agreement and shall provide copies of such
endorsements to the other party. If, at the request of one party, this release
and non-subrogation provision is waived then the obligation of reimbursement
shall cease for such period of time as such waiver shall be effective. If the
release of either party provided above shall contravene any law with respect to
exculpatory agreements, the liability of the party for whose benefit such
release was intended shall remain but shall be secondary to that of the other
party's insurer.
The landlord shall procure, keep in force, and pay for a policy of
insurance upon the building and its fixtures and other equipment insuring
against all risks of physical loss or damage under special extended coverage
endorsements in use by the Insurance Service Office of Massachusetts and in any
event in an amount at least equal to the full replacement value of the property
insured, subject to appropriate coinsurance requirements, as well as insurance
against breakdown of boilers and other machinery as customarily insured against,
and to supply to the tenant from time to time certificates of all such insurance
issued by or on behalf of the insurers named therein by a duly authorized agent.
8. PROHIBITION AGAINST UNLAWFUL, DISREPUTABLE OR EXTRA HAZARDOUS
USE-ENFORCEMENT AGAINST SUBTENANTS: The Tenant may use and occupy the leased
property for any lawful purposes, except that the Tenant shall not use or occupy
nor permit the leased property or any part thereof to be used or occupied for
any unlawful business, use or purpose, nor for any business use, or purpose or
in any manner which is in violation of any present or future governmental laws,
regulations or codes.
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<PAGE>
The Tenant shall promptly after the discovery of any such unlawful,
disreputable or extra hazardous use take all necessary steps to compel the
discontinuance of such use and to oust and remove any subtenants, occupants or
other persons guilty of such unlawful, disreputable or extra hazardous use. The
Tenant shall indemnify the Landlord against all costs, expenses, liabilities,
losses, damages, injunctions, suits, fines, penalties, claims and demands,
including reasonable counsel fees, arising out of any violations of or default
in these covenants.
9. COVENANT OF QUIET ENJOYMENT: The Tenant, upon payment of the rent herein
set forth and upon the performance of all the terms of this Lease, shall at all
times during the term peaceably and quietly enjoy the leased property without
any disturbance from the Landlord or from any other person claiming through, by
or under the Landlord. The foregoing covenant of quiet enjoyment is in addition
to and not in lieu of the tenant's rights of quiet enjoyment under common law.
10. CONSTRUCTION: Tenant may make changes within the Demised Premises in
plumbing, electrical, erecting or removing partitions, etc., after receiving
prior written approval of the Landlord. Said approval shall not be unreasonably
withheld. All expenditures for said changes shall be paid by Tenant.
11. UTILITIES AND MAINTENANCE: The Landlord shall maintain and furnish the
proper heating equipment and system to provide heat to the leased premises at a
temperature which is usual and customary for the operation in a comfortable
manner of the Tenant's business. In addition to the base rent as provided in
Paragraph 4, the Tenant shall pay during the term of this Lease 66.6 per cent of
the cost to heat the office portion of the building.
With the exception of electricity and heat, the Tenant shall pay for all
utilities it uses or consumes in the leased premises directly to the authority
charged with the collection thereof. For the purposes of this Lease Agreement,
water and sewer shall not be considered a utility.
5
<PAGE>
The Tenant shall have the exclusive use of an air conditioner. The
electricity to operate the air conditioning apparatus shall be separately
metered and the Tenant shall pay the Landlord directly, at Mass. Electric's rate
which the Tenant would otherwise pay, for said usage. The Landlord shall install
a meter to monitor the electricity used by the Tenant in addition to that which
is consumed in operating the air conditioning apparatus, and the Tenant shall
pay the Landlord directly, at Mass. Electric's rate which Tenant would otherwise
pay, for usage. The Tenant shall pay its share of electricity within thirty (30)
days of receipt of a bill for same from Landlord, which bill shall include a
copy of the bill received by the landlord from the authority in charge of
collecting for such usage.
The Landlord shall be responsible for snow removal from the driveway and
parking areas now in existence or contemplated by this Lease.
The Landlord shall maintain the present sprinkler system in good repair and
condition.
Tenant may place a metal rubbish container on the Northerly side of the
building and such container may be emptied and serviced as necessary.
Janitorial services required in the common areas of the building are the
responsibility of Tenant. These costs will be shared on a proportional basis
with any and all future tenants of the office area that includes the Spaulding
space. Common areas is only meant to reference areas internal to the building.
12. LANDLORD'S CONSENT REQUIRED TO ASSIGN OR SUBLET: The Tenant shall not
assign or sublet the Lease nor sublet or permit the leased property or any part
thereof to be used by others, without the prior written consent of the Landlord
in each instance. Said permission and consent shall not be unreasonably denied.
If this Lease is assigned by the Tenant, or if the leased property or any part
thereof is sublet by the Tenant or occupied by anybody other than the Tenant,
the Landlord may, after default by the Tenant, collect rent from the assignee,
subtenant or occupant and apply same to the rent herein reserved. No such
assignment, subletting, occupancy or collection shall be deemed a waiver of this
covenant or the acceptance of the assignee, subtenant or occupant as Tenant, or
a release of the Tenant from the further performance by the Tenant of the
covenants of this Lease. The consent by the Landlord to an assignment or
subletting shall not be construed to relieve the Tenant from obtaining the
consent in writing of the Landlord to any further assignment or subletting.
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<PAGE>
13. LANDLORD'S RIGHT TO ENTER: To permit Landlord and its agents to examine
the Demised Premises at reasonable times and to show the Demised Premises to
prospective purchasers, lenders and tenants, and to permit Landlord and its
agents to enter the Demised Premises to make such repairs and replacements as
Landlord is required, or may elect, to make. The Landlord's right to enter for
the purpose of showing prospective tenants the premises is limited to the final
year of the Lease, or the option period if applicable. The Landlord will provide
prior notification thirty-six hours before any entry, and will restrict such
entry to regular business hours.
14. PARKING SPACES: In addition to the parking space located on the
northerly side of the building mentioned in Paragraph 1 of this Lease Agreement,
Landlord grants to Tenant the right to use sufficient parking for all of its
employees working at the premises, which may vary from time to time, on the
southerly side (Auburn) of the building. The use of the parking facilities shall
at all times be subject to such reasonable rules and regulations as the Landlord
may promulgate uniformly for all the Landlord's tenants. The Landlord reserves
the right to alter or vary the size and location of the parking area provided
that at all times the Tenant shall have sufficient parking for all of its
employees working at the Premises, which may vary from time to time. The Tenant
shall always be provided one parking space in the front (south side) of the
building, available for visitor use.
15. TRASH REMOVAL: Tenant shall keep and maintain the Demised Premises and
other areas adjacent to the Demised Premises clean and free from rubbish, trash
and garbage, store all trash within the Demised Premises or the rubbish
container adjacent to the building provided for in Section 11 of this Lease, and
be responsible for regular removal of same.
16. FIRE OR OTHER CASUALTY:
A. DEFINITION OF "SUBSTANTIAL DAMAGE" AND "PARTIAL DAMAGE."
The term "substantial damage" as used herein, shall refer to damage which
is of such a character that the same cannot, in the opinion of a licensed
certified architect, be reasonably expected to be repaired within fourty-five
(45) days from the time that such work would commence. Any damage which is not
"substantial damage" is "partial damage."
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<PAGE>
B. PARTIAL DAMAGE TO THE BUILDING.
If during the Lease Term there shall be partial damage to the Building by
fire or other casualty, the Landlord shall promptly proceed to restore the
Building to substantially the condition in which it was immediately prior to the
occurrence of such damage and shall diligently pursue such restoration.
C. SUBSTANTIAL DAMAGE TO THE BUILDING.
If during the Lease Term there shall be substantial damage to the Building
by fire or other casualty and if such damage shall unreasonably interfere with
the Tenant's use of the Premises as contemplated by this Lease, the Landlord
shall promptly and diligently proceed to restore, or cause to be restored, the
Building to substantially the same condition in which it was immediately prior
to the occurrence of such damage, unless the Landlord or the Tenant, within
thirty (30) days after the occurrence of such damage, shall give notice to the
other party of its election to terminate this Lease. If either party shall give
such notice, then this Lease shall terminate as of the date of such notice with
the same force and effect as if such date were the date originally established
as the expiration date hereof.
D. SUBSTANTIAL DAMAGE TO THE PREMISES
If during the Lease Term there shall be substantial damage to the Premises
by fire or other casualty, then Tenant may elect to terminate this Lease by
written notice of such election to the Landlord within thirty (30) days after
the occurrence of such damage. If such notice shall be given, then this Lease
shall terminate as of the date of such notice with the same force and effect as
if such date were the date originally established as the expiration date hereof.
E. ABATEMENT OF RENT.
If during the Lease Term the Building or the Premises shall be damaged by
fire or other casualty and if such damage shall interfere with the Tenant's use
of the Premises as contemplated by this Lease, the Rent and all other charges
payable hereunder, or a fair and just proportion thereof, according to the
nature and extent of such loss of use, shall be suspended or abated until the
building or the Premises, as the case may be, are restored as provided in this
provision.
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17. EMINENT DOMAIN:
A. RIGHTS OF TERMINATION FOR TAKING.
If the Building, the Land or a portion thereof shall be taken by
condemnation or right of eminent domain (including a temporary taking) and if
such taking shall be such as in the ordinary course would interfere with the
Tenant's use of the Premises for the purpose leases hereunder (including,
without limitation, interference with the use of Tenant's parking spaces), the
Tenant shall have the right to terminate this Lease by notice to the Landlord of
its desire to do so, provided that such notice is given not later than thirty
(30) days after the effective date of such taking.
Should any part of the Building, the Land or any portion thereof be so
taken and should this Lease not be terminated in accordance with the foregoing
provisions, the Landlord shall with all reasonable diligence, restore the
Building to an architectural unit that is reasonably suitable to the uses of the
Tenant and to the extent applicable, provide replacement parking facilities
substantially equal in size and, to the extent possible, accessibility, to those
parking facilities taken. If the Landlord shall not have completed such
restoration work to the extent necessary to enable the Tenant to use the
Premises for the purposes and in the manner contemplated by this Lease by the
expiration of ninety (90) days after the effective date of such taking, then the
Tenant may terminate this Lease by notice to the Landlord with the same force
and effect as if such date were the date originally established as the
expiration date hereof.
B. ABATEMENT OF RENT.
In the event of a taking described in Section 17(A), the Rent and all other
charges payable hereunder, or a fair and just proportion thereof according to
the nature and extent of the Tenant's loss of use shall be suspended or abated
until the Premises are restored as provided in this provision.
C. AWARD.
The Landlord shall have the right to recover for damages to the Building
and the Land and the Leasehold interest hereby created, and to compensation
accrued or hereafter to accrue by such taking. Nothing contained herein,
however, shall be construed to prevent the Tenant from prosecuting in any
condemnation proceeding a claim for the value of the Tenant's trade fixtures and
for relocation expenses.
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18. SUBORDINATION: The Tenant agrees that upon request of the Landlord, or
the holder of the Landlord's interest, the Tenant will subordinate this Lease to
any mortgage now or hereafter placed against the land or building of which the
Demised Premises are a part. This clause shall be self-operative and no further
instrument of subordination shall be required by any mortgagee. In confirmation
of such subordination, Tenant shall execute promptly any document that Landlord
may request. Tenant hereby constitutes and appoints Landlord the Tenant's
attorney-in-fact to execute any such document or documents for and on behalf of
Tenant.
19. DEFAULT: In the event that during the term of this Lease (regardless of
the pendency of any bankruptcy, reorganization, receivership, insolvency or
other proceeding, in law or in equity or before any administrative tribunal,
which has prevented or might prevent compliance by Tenant with the term of this
Lease).
(A) Tenant shall default in the payment of any installment of rent or other
sum herein specified to be paid by the Tenant and such default shall continue
for thirty (30) days after written notice of payment due.
(B) Tenant shall default in the observance or performance of any of
Tenant's covenants, agreements, or obligations hereunder, and such default shall
not be cured within thirty (30) days after the Landlord shall have given to
Tenant written notice specifying such default or defauts, provided however, that
if a failure under the Lease is of such a nature that it cannot be cured with
thirty days, there shall be no default so long as the tenant shall commence the
curing of the failure within such thirty-day period and shall thereafter
promptly and diligently complete the curing of the same, or
(C) without further possibility of appeal or review,
1. Tenant is adjudicated a bankrupt or insolvent, or
2. A receiver is appointed for all or substantially all of the Tenant's
business or assets on the ground of Tenant's insolvency, or
3. A trustee is appointed for Tenant after a petition has been filed
for Tenant's reorganization under the Bankruptcy act of the United
States, known as the Chandler Act, or any future law of the United
States having the same general purpose, or
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<PAGE>
4. Tenant shall make an assignment for the benefit of its creditors.
Then in any such event this Lease may be cancelled and
terminated and in which event neither the Tenant nor any person claiming through
or under the Tenant by virtue of any statute or of any order of any court shall
be entitled to possession or to remain in possession of the leased premises but
shall forthwith quit and surrender the premises and Landlord, in addition to the
other rights and remedies the Landlord has by virtue of any other provisions
herein or elsewhere in this Lease contained or by virtue of any statute or rule
of law, may retain as liquidated damages any rent monies received by it from the
Tenant or others in behalf of the Tenant.
The Landlord may, at its option, relet the Lease property or any part
thereof, as the agent of the Tenant, and the Tenant shall pay the Landlord the
difference between the rent hereby reserved and agreed to be paid by the Tenant
for the portion of the term remaining at the time of reentry or repossession and
the amount, if any, received or to be received under such reletting for such
portion of the term. The Landlord shall make every reasonable effort to relet
the Premises so as to minimize Tenant's damages.
20. LANDLORD'S RIGHT TO CURE DEFAULTS: Following thirty (30) days prior
written notice to Tenant, Landlord shall have the right, but not the obligation,
to cure any default by Tenant under this Lease, and whenever Landlord so elects,
all costs and expenses incurred by Landlord, including reasonable attorney's
fees, in curing a default shall be paid by Tenant to Landlord on demand,
together with interest thereon at the highest rate permitted by law, provided
however that no notice to Tenant shall be required in case of emergency or to
protect the real estate or Landlord's interest therein or prevent injury to
persons or property.
21. EFFECT QF WAIVERS OF DEFAULT: No consent or waiver, express or implied,
by Landlord to or of any breach of any covenant, condition or obligation of
Tenant shall be construed as a consent or waiver to or of any other breach of
the same or any other covenant, condition or obligation.
22. SECURITY DEPOSIT: The Tenant shall pay $1,041.67 to the Landlord as a
security deposit. Said amount shall be returned to the Tenant at the expiration
of the Lease providing Tenant shall not then in any way be in default in the
performance of any of the terms, conditions, covenants and agreements of this
Lease.
11
<PAGE>
23. SURRENDER IN AS GOOD A CONDITION AS AT BEGINNING OF LEASE TERM: The
Tenant shall on the last day of the term, or upon the sooner termination of the
Lease, peaceably and quietly surrender the leased property in as good condition
and repair as at the commencement of the term, with the reasonable or natural
wear and tear and damage by casualty excepted.
24. TENANT MAY REMOVE TRADE FIXTURES: The Tenant has the right to remove
any trade fixtures which it installed at its own expense, if it can be done
without damaging the realty at the end of the Lease.
25. TERMS INURE FOR BENEFIT OF HEIRS: Heirs, successors and assigns of the
Parties shall be bound by the terms and conditions of this Agreement.
26. BROKERAGE: Landlord and Tenant agree to indemnify each other if a claim
is brought claiming that it is owed a commission as a result if its dealing with
the Landlord or Tenant.
27. SIGNS: Tenant shall have the right to erect a sign after receiving
written permission from the Landlord. Said permission shall not be unreasonably
denied.
28. REPAIRS: The Landlord will keep in good order, condition and repair the
plumbing, electrical, lighting, heating, air conditioning and other mechanical
equipment of the building, the heat pumps serving the premises, the roof and
exterior of the building, the structural elements of the building and of the
premises, and all common areas (including, without limitation, the parking
facilities on the land) and all utility lines, wires, pipes, ducts and conduits
and appurtenant equipment serving the building, shall keep any basement of the
building dry and watertight, and shall be responsible for all other repairs
except those required to be made by the tenant.
29. WARRANTIES: It is agreed that no warranties or representations, either
express or implied in law or in fact, have been made by Landlord, except as
specifically herein stated. The Landlord warrants that it has full right and
lawful authority to enter into this Lease, that it has good and marketable
record title to the premises, and there is no deed restriction against the use
of the premises for the tenant's proposed purposes.
30. APPLICABLE LAW AND CONSTRUCTION: This Lease shall be governed and
construed in accordance with the laws of the Commonwealth of Massachusetts.
12
<PAGE>
IN WITNESS WHEREOF the parties have hereunto affixed their hands and seals in
execution hereof the day and year first above written.
TENANT: LANDLORD:
- ------- ---------
SPAULDING COMPANY, INC. JONSTAR REALTY CORPORATION
By /s/ Carmen DiMatteo By /s/ Alan R. Starr
--------------------------- ------------------------------
Signed, sealed and delivered in the presence of:
/s/ Eugene Pawlowski /s/
--------------------------- ------------------------------
13
<PAGE>
[DESCRIPTON OF WORCESTER FACILITY FLOOR PLAN]
<PAGE>
[SPAULDING LETTERHEAD]
May 27, 1997
Mr. Alan R. Starr
President
Jonstar Realty Corporation
1075 Southbridge Street
Worcester, MA 01610
Dear Mr. Starr:
Thank you for your time in discussing our continuation of tenancy at 1075
Southbridge Street, Worcester, MA 0160 and the rental fee. We wish to exercise
our lease option to renew as follows:
o Year 1 September 1, 1997 to August 31, 1998.
Rent to be payable in monthly installments on the first day of
each month of $2,263.78, plus the increase specified in the
lease based on the CPI and calculated by the landlord.
o Year 2 September 1, 1998 to August 31, 1999.
Rent to change per the lease agreement based on the CPI
Adjustment.
o Year 3 September 1, 1999 to August 31, 2000.
Rent to change per the lease agreement based on the CPI
Adjustment.
Sincerely, N.B. Delivered by hand on
May 27, 1997
by:
/s/ Eugene Pawlowski /s/ Eugene Pawlowski
- ------------------------ -----------------------------------
Eugene Pawlowski Eugene Pawlowski
Vice President
EP/ksf
MICROFILM PRODUCTS DIVISION & SERVICES
INFORMATION & IMAGE MANAGEMENT SYSTEMS & SERVICES
OPTICAL DISC SYSTEMS & SERVICES
ELECTRONIC IMAGING & AUDIO VISUAL PRODUCTS DIVISION
DRAFTING & ENGINEERING PRODUCTS DIVISION
EXTENSION OF LEASE
This extension of lease is made on October __, 1992 between TRADER
VIC'S FOOD PRODUCTS, a California corporation, ("Lessor") and TOTAL INFORMATION
MANAGEMENT CORPORATION, a California corporation ("Lessee"), who agree as
follows:
1. Recitals. This extension of lease is made with reference to the
following facts and objectives:
a. Lessor and Lessee entered into a written lease dated January 26,
1981 ("the lease"), in which Lessor leased to Lessee, and Lessee leased
from Lessor, premises located in the City of Emeryville, County of Alameda,
California, consisting of approximately 16,025 square feet in the building
located at 1545 Park Avenue, Emeryville, CA.
b. The term of the lease expires March 31, 1993.
c. The parties desire to extend the term of the lease for an
additional period of twelve (12) years.
2. Extension of Term. The term if the lease shall be extended for an
additional period of seven (7) years from and after April 1, 1993, so that the
term of the lease shall extend to and including March 31, 2000.
3. Monthly Rent. The monthly rent for the existing lease shall be
amended so that, effective November 1, 1992, the monthly rent shall be Five
Thousand Five Hundred ($6,000). The monthly rent effective at the commencement
of the extension term of the lease shall be Five Thousand Five Hundred ($6,000),
and shall be adjusted in accordance with the computations based upon the
Consumer Price Index, all Urban Consumers for the San Francisco/Oakland Bay
Area, based upon the 1967=100 (as revised) index, which is compiled and
published by the United States Department of Labor, Bureau of Labor Statistics
or any successor index thereto, with the first adjustment to become effective
April 1, 1996, the second adjustment to become effective April 1, 1999, and a
final adjustment to become effective April 1, 2002. The basic index figure used
as a basis for said adjustments shall be the last index published prior to
commencing the extension term of the lease (herein called the "base period"). On
each of the effective dates hereinabove set forth, the index figure for the
immediately preceding period shall be consulted and the monthly rental for the
remaining term of the lease shall be adjusted by an amount equal to the
percentage increase in the index figure in comparison with the index figure for
the base period, provided, however, any increase in the rent may be further
increased at the subsequent effective increase date. In no event shall the
rental increase be less than Five Hundred Dollars ($500.00) or more than
<PAGE>
Seven Hundred Fifty Dollars ($750.00) per month for each rental increase date.
The following formula shall be used to determine the increase for the Consumer
Price Index:
A - B x 100 = % change
-----
B
A. = The latest published index role of the Consumer Price Index
for All Urban Consumers, published by the Bureau of Labor
Statistics for the San Francisco/Oakland area (1967=100 as
revised) (CPI).
B. = The CPI index rate for the period immediately preceding the
commencement of the extension term of the lease.
4. Effectiveness of Lease. Except as set forth in this extension of
lease, all the provisions of the lease shall remain unchanged and in full force
and effect.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Extension of
Lease, the date and year first above written.
LESSOR LESSEE
TRADER VIC'S FOOD PRODUCTS TOTAL INFORMATION
MANGEMENT CORPORATION
By: [ILLEGILBLE] By: /s/ James E. Bunker
----------------------------
James E. Bunker
By: -----------------------
By: /s/ Roger E. Blue
---------------------------
Roger E. Blue
<PAGE>
DAMON RAIKE AND o COMPANY COMMERCIAL AND INDUSTRIAL REAL ESTATE
Raike 120 MONTGOMERY STREET, SAN FRANCISCO, CALIF. 94108, (415) 397-3444
- ---------------------------------------------------------------------------
Parties This Lease, executed in duplicate this 26th day of January,
1981 by and between TRADER VIC'S FOOD PRODUCTS, a California
corporation,
and TOTAL INFORMATION MANAGEMENT CORPORATION, a California
corporation,
hereinafter called respectively Lessor and Lessee, without regard
to number or gender,
Use WITNESSETH: That Lessor hereby leases to Lessee, and Lessee hires
from Lessor, for the purpose of conducting therein storage and
processing of information and related uses
Premises and for no other purpose, without the written consent of Lessor
first had and obtained those certain premises with the
appurtenances thereto, situated in the City of Emeryville, State
of California, and more particularly described as follows,
to-wit:
An approximately 16,025 square foot portion of that property
commonly knows as 1545 Park Avenue, Emeryville, California, as
outlined in red on attached Exhibit "A".
Term The term shall be for 12 years, commencing on the 1st day of
April, 1981, and ending on the 31st day of March, 1993, at a
rental payable in lawful money of the United States of America,
which Lessee agrees to pay Lessor, without deduction or offset,
at 1545 Park Avenue, Emeryville, California, or such place or
places as may be designated in writing from time to time by
Lessor, in advance, installments as follow:
The monthly rental upon commencing the lease shall be Four
Thousand Two Hundred Fifty Dollars, ($4,250.00) and shall be
adjusted in accordance with the computations based upon the
Consumer Price Index, all Urban Consumers for the San
Francisco/Oakland Bay Area, based upon the 1967=100 (as revised)
index, which is compiled and published by the United States
Department of Labor, Bureau of Labor Statistics or any successor
index thereto, with the first adjustment to become effective
April 1, 1984, the second adjustment to become effective April 1,
1987, and a final adjustment to become effective April 1, 1990.
The basic index figure used as a basis for said adjustments shall
be the last index published prior to commencing the lease (herein
called the "base period"). On each of the effective dates
hereinabove set forth, the index figure for the immediately
preceding period shall be consulted and the monthly rental for
the remaining term of the lease shall be adjusted by an amount
equal to the percentage increase in the index figure in
comparison with the index figure for the base period, provided,
however, any increase in the rent may be further increased at the
subsequent effective increase date. In on event shall the rental
increase be less than Five Hundred Dollars, ($500.00) for each
rental increase date. The following formula shall be used to
determine the increase for the Consumer Price Index:
A - B x 100 = % change
-----
B
A. = The latest published index role of the Consumer Price
Index for All Urban Consumers, published by the Bureau
of Labor Statistics for the San Francisco/Oakland area
(1967=100 as revised) (CPI)
B. = The CPI index rate for the period immediately
preceding the commencement of the lease term.
It is further mutually agreed between the parties as follows:
1. Subject to the provisions of Paragraph 35, Lessor
acknowledges receipt from Lessee of the sum of Five Thousand Five
Hundred Dollars ($5,500.00) as security for the full and faithful
performance of Lessee's obligations hereunder.
Delivery of 2. In the event of the inability of Lessor, for any reason
Possession whatsoever, to deliver possession of the premises at the time of
the commencement of the term of this lease, neither Lessor nor
Damon Raike & Co. shall be liable for any damage caused thereby,
nor shall this lease thereby become void or voidable, nor shall
the term herein specified be in any way extended, but in that
event there shall be no rental payable for the period between the
commencement of the said term and the time when Lessor can
deliver possession.
<PAGE>
Uses Pro- 3. Lessee shall not allow any use to be made of the premises
hibited which will either increase present noise levels or unreasonably
affect traffic patterns. Lessee shall not use, or permit said
premises, or any part thereof, to be used for any purpose or
purposes other than the purpose or purposes for which the said
premises are hereby leased; and no use shall be made or permitted
to be made of the said premises, nor acts done, which will
increase the existing rate of insurance upon the building in
which said premises may be located, or cause a cancellation of
any insurance policy covering said building, or any part thereof,
nor shall Lessee sell, or permit to be kept, used, or sold, in or
about said premises, any articles which may be prohibited by the
standard form of fire insurance policies. Lessee shall, at his
sole cost and expense, comply with any and all requirements of
any insurance organization or company pertaining to said
premises, which requirements are necessary for the maintenance of
reasonable fire and public liability insurance, covering said
building and appurtenances.
Lessee shall not commit, or be committed, any waste upon
said premises, or any nuisance, or other act or thing which may
disturb the quiet enjoyment of any other tenant in the building
in which the demised premises may be located, or in any way
obstruct, interfere with, injure or annoy them, or do or permit
to be done anything in any way tending to disturb the occupants
of neighboring property or tending to injure the reputation or
appearance of the building.
Lessee shall not conduct or permit to be conducted any sale
by auction on or from said premises.
Alterations
Abandonment 5. Lessee shall not vacate or abandon the premises at any
time during the term; and if Lessee shall abandon, vacate or
surrender said premises, or be dispossessed by process of law, or
otherwise, any personal property belonging to Lessee and left on
the premises shall, at the option of Lessor, be deemed to be
abandoned.
Repairs 6. Lessee shall, at his sole cost, keep and maintain said
premises and appurtenances and every part thereof (excepting
exterior walls and roofs which Lessor agrees to repair),
including, without limitation, glazing, sidewalks adjacent to
said premises, plumbing, heating and sewer facilities, any store
front, and the interior of the premises, in good and sanitary
order, condition and repair, hereby waiving all right to make
repairs at the expense of Lessor. By entry hereunder, Lessee
accepts the premises as being in good and sanitary order,
condition and repair, and agrees on the last day of said term, or
sooner termination of this lease, to surrender unto Lessor all
and singular said premises with said appurtenances in the same
condition as when received, reasonable use and wear thereof and
damage by fire, act of God or by the elements excepted, and to
remove all of Lessee's signs from said premises.
Lessee shall have all passenger and/or freight elevators
now on or hereafter constructed upon the premises, and all
elevators, including sidewalk elevators, actually used by Lessee
in connection with the premises, whether on the premises or not,
regularly inspected, and shall keep the same in good running
order and in perfect repair and condition and keep same covered
during the term hereof by permit and license to operate by the
Industrial Accident Commission of the State of California, and by
any other public authority from which a license or permit is or
may be required, at the sole cost and expense of Lessee.
In the event that the provisions of any law, ordinance, or
rule now in force or hereafter enacted by Municipal, State, or
National Authority, requires, by reason of Lessee's use of the
premises, any alterations, additions, repairs or acts of any kind
to be done in connection with the premises or any part thereof,
the same shall be done at the sole cost and expense of Lessee.
Free from 7. Lessee shall keep the demised premises and the property
Liens on which the demised premises are located, free from any liens
arising out of any work performed, materials furnished, or
obligations incurred by Lessee.
Compliance 8. Lessee shall, at his sole cost and expense, comply with
with all of the requirements of all Municipal, State, and Federal
Govern- Authorities now in force, or which may hereafter be in force,
ment pertaining to the use of said premises, and shall faithfully
Regulations observe in the use of the premises all Municipal ordinances and
State and Federal Statutes now in force or which may hereafter be
in force. The judgment of any court of competent jurisdiction, or
the admission of Lessee in any action or proceeding against
Lessee, whether Lessor be a party thereto or not, that Lessee has
violated any such ordinance or statute in the use of the
premises, shall be conclusive of that fact between Lessor and
Lessee.
Hold 9. Lessee, as a material part of the consideration to be
Harmless rendered to Lessor, hereby waivers all claims against Lessor for
damages to goods, wares and merchandise, and all other personal
property in, upon or about said premises and for injuries to
persons in or about said premises, from any cause arising at any
time, and Lessee will save, defend, and hold Lessor exempt and
harmless from any damage or injury, occurring in, on, or about
the demised premises, to any person, or to the goods, wares, and
merchandise and all other personal property of any person arising
from any cause whatsoever.
Advertise- 10. Lessor reserves the exclusive right to the roof, and to
ments all exterior walls or parts of the premises, and access thereto,
and and the same are not covered by this lease, and Lessee agrees
Signs that no signs, advertisements or notices whatsoever shall be
inscribed, painted, affixed or displayed on, to or in any part of
the outside or inside, or on the roof of the premises, without
the written consent of Lessor. Any signs so placed on the
premises shall be so placed upon the understanding and agreement
that Lessee will remove same at the termination of the tenancy
herein created and repair any damage or injury to the premises
caused thereby, and if not so removed by Lessee then Lessor may
have same so removed at Lessee's expense.
Utilities 11. Lessee shall pay promptly, as the same may become due,
all bills for water, gas, heat, light, power, telephone service
and all other services supplied to the said premises, as more
fully set forth in paragraph 37 herof.
Entry by 12. Lessee shall permit Lessor and/or his agents to enter
Lessor into and upon said premises at all reasonable times for the
purpose of inspecting the same or for the purpose of maintaining
the building in which said premises are situated, or for the
purpose of making repairs, alterations or additions to any
portion of said building, including the erection and maintenance
of such scaffolding, canopies, fences and props as may be
required, or for the purpose of posting notices of
nonresponsibility, or for the purpose of placing upon the
property in which the said premises are located any usual or
ordinary "for sale" signs, without any rebate of rent and without
any liability to Lessee for any loss of occupancy or quiet
enjoyment of the premises thereby occasioned, and shall permit
Lessor and his agents, at any time within ninety days prior to
the expiration of this lease, to place upon said premises any
usual or ordinary "to let" or "to lease" signs and to exhibit the
premises to prospective tenants at reasonable hours.
Destruction 13. In the event of a partial destruction of the premises
of Premises during the said term, from any cause, other than ordinary wear
and tear, Lessor shall forthwith repair the same, provided such
repairs can be made within ninety (90) days under the then
existing laws and regulations. Such partial destruction shall in
no wise annul or void this lease, except that the Lessee shall be
entitled to a proportionate reduction of rent while such repairs
are being made, such reduction to be based upon the extent to
which the making of such repairs shall interfere with the
business carried on by the Lessee in the said premises. If such
repairs cannot be made within ninety (90) days, Lessor may, at
his option, make same within a reasonable time, this lease
continuing in full force and effect and the rent to be
proportionately reduced as aforesaid. In the event that Lessor
shall elect not to make such repairs which cannot be made within
ninety (90) days, Lessor shall give Lessee prompt written notice
of such election, and thereupon this lease may be terminated at
the option of either party by notice in writing to the other
within five (5) days after the giving or receiving of such
notice. In respect to any partial destruction which Lessor is
obligated to repair or may elect to repair under the terms of
this paragraph, the Provisions of Section 1932, Subdivision 2,
and of Section 1933, Subdivision 4, of the Civil Code of the
State of California are waived hereby by Lessee. In the event
that the building in which the demised premises are situated by
destroyed to the extent of not less that 33 1/3% of the
replacement cost thereof, Lessor may elect to terminate this
lease, whether the demised premises be injured or not. A total
destruction of the premises,
<PAGE>
or of the building in which said premises are situated shall
terminate this lease. In the event of any dispute between
Lessor and Lessee relative to the provisions of this paragraph,
they shall each select an arbitrator, the two arbitrators so
selected shall select a third arbitrator, and the three
arbitrators so selected shall hear and determine the controversy,
and their decision thereon shall be final and binding upon both
Lessor and Lessee, who shall bear the cost of such arbitration
equally between them.
Asssignment 14. Lessee shall not assign this lease, or any interest
and therein, and shall not sublet the said premises or any part
Subletting thereof, or any right or privilege appurtenant thereto, or permit
or suffer any other person (the agents and servants of Lessee
excepted) to occupy or use the said premises, or any portion
thereof, without the written consent of Lessor first had and
obtained, which consent shall not be unreasonably withheld, and
consent to one assignment, subletting, occupation or use by any
other person, shall not be deemed to be a consent to any
subsequent assignment, subletting, occupation or use by another
person. Any such assignment, subletting, occupation or use
without such consent shall be void, and shall at the option of
Lessor, terminate this lease. Any and all amounts over the then
prevailing rent received in connection with any assignment or
sublease shall be paid to Lessor.
Insolvency or 15. The appointment of a receiver (except a receiver
Bankruptcy contemplated by paragraph 19 hereof) to take possession of all or
substantially all of the assets of Lesee or of the operations of
Lessee in the demised premises, or a general assignment by Lessee
for the benefit of creditors, of the filing of proceedings in
insolvency or bankruptcy by or against Lessee shall at the option
of Lessor constitute a repudiation of this lease by Lessee, such
option to be exercised by Lessor within thirty (30) days from
receipt of actual notice of any of the aforesaid events, and
should such option be exercised, Lessee shall forthwith pay to
Lessor the amount, if any, by which the remainder of the rent
reserved hereunder exceeds the then reasonable value of the
remainder of the term of this lease.
Default 16. In the event of any breach of this lease by Lessee, the
Lessor shall have, in addition to any other rights or remedies,
those rights and remedies provided by Section 1951.2 and Section
1951.4 of the Civil Code of the State of California. This lease
shall not terminate, even though Lessee has breached this lease
and abandoned the property, unless Lessor notifies Lessee in
writing that this lease and Lessee's right of possession are
terminated, the right to terminate Lessee's right to possession
of the premises by any lawful means, in addition to ???????????
Any breach of the agreements and covenants in this lease
shall be a default under this lease and shall give Lessor the
rights and remedies as set forth in this paragraph. In addition,
the following acts or occurrences shall constitute a default
under this lease and give Lessor the rights set forth in this
paragraph. If Lessee, or if Lessee be a partnership, then if
Lessee or any member of such partnership shall file any petition
or institute any proceeding under the bankruptcy act, either as
such act now exists or under any amendment thereof which may
hereafter be enacted, or under any other act or acts, state or
federal, dealing with or relating to the subject of bankruptcy or
insolvency, or under any such amendment of any such act or acts,
either as a bankrupt, or as an insolvent, or as a debtor, or in
any similar capacity, or if any such petition or any such
proceeding of the same or similar kind or character be filed or
be instituted or taken against Lessee, or if Lessee be a
partnership, against Lessee or any member of the partnership, or
if any receiver of the business or of the property or assets of
the Lessee shall be appointed by any court except a receiver
appointed at the instance or request of Lessor, or if the Lessee
shall make a general or any assignment for the benefit of his
creditors, or if the Lessee shall abandon or vacate the premises,
or if the Lessee shall otherwise, in any manner whatever, become
unable to pay the rent herein specified or to perform any of the
terms, covenants or conditions herein by him to be kept or
performed.
Unless the aforementioned election to terminate is made by
Lessor, the Lessor shall retain all rights and remedies under the
lease, including the right to recover rent as it may become due
under the lease and Lessee shall be liable for all attorneys'
fees and costs incurred by Lessor by reason of Lessee's breach.
In no event shall the following actions by Lessor or its agents,
either before or after any abandonment of the premises by Lessee,
constitute a termination of this lease:
1. Acts of maintenance or preservation or efforts to relet
the property.
2. Appointment of a receiver upon initiative of the Lessor
to protect Lessor's interest under the lease.
3. The consenting to any subletting of the premises or
assignment of this lease by Lessee pursuant to Paragraph 14.
4. The removal from the premises of any or all equipment,
fixtures and personal property thereon or therein in order to
facilitate the reletting of the premises.
Upon termination of this lease, Lessor shall have, without
liability to Lessee, the immediate right to reenter the premises,
remove all persons and properties therefrom and to place such
properties in storage for the account of and at the expense of
Lessee. Upon such removal, Lessor shall notify Lessee that such
property has been placed in storage and that in the event that
Lessee does not pay the cost of storing such property, Lessor may
sell any or all of such property, at private or public sale, at
any time the storage charges are ninety days delinquent. Such
sale may be in such manner and at such times and places as
Lessor, in his sole discretion, may deem proper without notice to
Lessee or any demand upon Lessee for the payment of any part of
such charges or the removal of any such property and shall apply
the proceeds of such sale first, to the cost and expenses of such
sale, including reasonable attorneys' fees actually incurred;
second, to the payment of the costs of or charges for storing any
such property; third, to the payment of any other sums of money
which may be then or thereafter due to the Lessor from the Lessee
under the terms of this lease; fourth, the balance, if any, to
Lessee.
If Lessor terminates this lease, Lessee shall pay to Lessor
and be liable for:
1. All rents and other charges due and unpaid at the
time of termination, together with interest thereon accrued
from the date each such sum became due at the rate of ten
percent (10%) per annum; and
2. All rents and other charges which become due between
the time of termination and the time of award (as
hereinafter defined), less any rents and other charges that
Lessee proves: (i) Lessor has actually received from
reletting the premises, or (ii) Lessor could have obtained
in reletting the premises by acting reasonably in the
circumstances then prevailing, together with interest
thereon accrued from the date each such sum became due at
the rate of ten percent (10%) per annum; and
3. The difference, if any, between (A) all rents and
other charges for the balance of the term of this lease, and
(B) any rents and other charges that Lessee proves: (i)
Lessor will receive by reason of the reletting of the
premises, or (ii) Lessor could obtain in reletting the
premises by acting reasonably in the circumstances then
prevailing, which difference shall be discounted to present
value at the time of award at the discount rate of the
Federal Reserve Bank of San Francisco in effect at the time
of award plus one percent (1%); and
4. All costs, expenses and losses Lessor incurs by
reason of Lessee's breach of this lease, including, without
limitation, the following: (i) all expenses for repairing or
restoring the premises, (ii) all expenses for altering,
remodeling, or otherwise improving the premises for the
purposes of reletting, (iii) all brokers' fees, advertising
costs and other expenses of reletting the premises, (iv) all
expenses in retaking possession of the premises, and
(v) reasonable attorneys' fees and court costs; and
5. As used in subparagraph B hereof, the term "time of
award" shall mean the time of entry of a judgment or award
against Lessee in an action or proceeding arising out of
Lessee's breach of this lease.
Notwithstanding that Lessor elects, after a breach of this
lease by Lessee, to continue this lease in full force and effect,
Lessor may at any time thereafter elect to terminate this lease
for such breach or any other breach.
Lessee hereby waives all claim for damages that may be
caused by Lessor's re-entering and taking possession of the
premises or removing and storing furniture and property, as
herein provided, and will save Lessor harmless from loss, costs
or damages occasioned Lessor thereby, and no such re-entry shall
be considered or construed to be a forcible entry as the same is
defined in the Code of Civil Procedure of the State of
California.
The rights, privileges, elections and remedies of Lessor in
this Paragraph 16 are cumulative and not alternative.
<PAGE>
Surrender 17. The voluntary or other surrender of this lease by
of Lease Lessee, ora mutual cancellation thereof, shall not work a merger,
and shall, at the option of Lessor, terminate all or any existing
subleases or subtenancies, or may, at the option of Lessor,
operate as an assignment to him of any or all such subleases or
subtenancies.
Attorney's 18. In case either party shall bring suit, declaratory or
Fees otherwise, to enforce or interpret the terms of this lease, the
prevailing party shall be entitled to a reasonable attorney's fee
which shall be determined by the court and taxed as part of the
cost of such action.
Receiver 19. If a receiver be appointed at the instance of the Lessor
on Behalf in any action arising under this lease, or otherwise, to take
of Lessor possession of said premises and/or to collect the rents and
profits derived therefrom, the receiver may, if it be necessary
or convenient in order to collect such rents and profits, conduct
the business of the Lessee then being carried on in said
premises, and may take possession of any personal property
belonging to the Lessee and used in the conduct of such business,
and may use the same in conducting such business on the premises,
without compensation to the Lessee for such use. Neither the
application for the appointment of a receiver nor the appointment
of a receiver shall be construed as an election on Lessor's part
to terminate this lease unless a written notice of such intention
is given to the Lessee.
Notices 20. All notices to be given to Lessee may be given in
writing personally or by depositing the same in the United States
mail, postage prepaid, and addressed to Lessee at the said
premises,whether or not Lessee has departed from, abandoned or
vacated the premises.
Waiver 21. The waiver by Lessor of any breach of any term, covenant
or condition herein contained shall not be deemed to be a waiver
of such term, covenant or condition or any subsequent breach of
the same or any other term, covenant or condition herein
contained. The subsequent acceptance of rent hereunder by Lessor
shall not be deemed to be a waiver of any preceding breach by
Lessee of any term, covenant or condition of this lease, other
the n the failure of Lessee to pay the particular rental so
accepted, regardless of Lessor's knowledge of such preceding
breach at the time of acceptance of such rent.
Holding 22. Any holding over after the expiration of the said term,
Over with the consent of the Lessor, shall be construed to be a
tenancy from month to month, and shall otherwise be on the terms
and conditions herein specified, so far as applicable.
<PAGE>
Successors 23. The covenants and conditions herein contained shall,
and Assigns subject to the provision as to assignment, apply to an bind the
heirs, successors, executors, administrators and assigns of all
of the parties hereto; and all of the parties hereto shall be
jointly and severally liable hereunder.
Time 24. Time is of the essence of this lease.
Marginal 25. The marginal captions of the Lease are for convenience
Captions only and shall not be deemed in any manner to limit, construe or
interpret the terms and provisions hereof.
See attached paragraphs 26-40 the terms of which are incorporated herein by
reference as if fully set forth.
IN WITNESS WHEREOF, Lessor and Lessee have executed these presents, the date and
year first above written.
LESSOR LESSEE
TRADER VIC'S FOOD PRODUCTS, TOTAL INFORMATION MANAGEMENT
CORPORATION
By:
James E. Bunker
By: /s/ Victor J. Bergeron, III By:
---------------------------
Victor J. Bergeron, III Roger E. Blue
[LOGO]
LEASE AND SERVICE AGREEMENT
This Lease is made on September 4, 1997, between American Executive Centers,
Inc., ("AEC") a Pennsylvania corporation, and Docunet, a PA Corporation
(corporation/partnership/sole proprietorship) ("Tenant"). In consideration of
the performances of the covenants contained herein and intending to be legally
bound, the parties hereto agree as follows:
1. Leased Premises:
A floor plan of AEC's leased premises at Two Bala Plaza is attached as Exhibit
A. Subject to the terms and conditions set forth in this Agreement, AEC agrees
to Lease and Tenant agrees to rent:
(a) On an exclusive basis, office number #25 & #51.
(b) On a non-exclusive (shared) basis, all other common areas
designated on the floor plan.
(c) On a non-exclusive basis, the services described in Exhibits B-1
and B-2.
2. Use:
The leased premises may be used by the Tenant as an office for general business
use and no other purpose. Tenant acknowledges that AEC leases the premises
pursuant to a lease with its landlord and that this lease is subject and
subordinate thereto. Tenant will be provided with sixty days' written notice
regarding any changes in AEC's lease status with its landlord. A copy of said
lease is available at landlord's office for inspection and copying by Tenant.
Tenant agrees to comply with all rules and regulations established for the
building from time to time and to observe all terms and conditions of said Lease
applicable to the premises. The Tenant will not offer any service to other
Tenants of AEC which AEC offers. AEC reserves the right by written notice to the
Tenant to add or change any rule or regulation at any time when in AEC's
judgment it is necessary for the best interests of its Tenants or to comply with
AEC's lease in the building. AEC has the right to modify the non-exclusive areas
of the leased premises. The Tenant will not alter any lock on any door of the
leased premises without the written consent of AEC.
3. Term:
(a) The term of this Lease will be 3 months beginning on September
1, 1997 (commencement date) and ending on November 30, 1997
(termination date).
(b) If AEC cannot deliver possession of the leased premises to the
Tenant on the commencement date, this contract will not be
void or voidable nor will AEC be liable for any losses
resulting, but rent will be abated until possession is
delivered.
(c) Either party may terminate this Lease at the expiration of the
stated term with sixty days prior written notice, (termination
notice period commences on the first day of the following
month after termination notice is received), otherwise this
Lease renews for the same period of time as the original term
under the then current terms and conditions and the rental
rate shall be the current rate being charged for like space.
<PAGE>
4. Rent and Additional Rent:
In consideration of the facilities and services described in Exhibit B-1.
(a) The Tenant agrees to pay AEC a base rent for the leased
premises of $1,981.00 per month payable in advance and without
demand plus the amount due for the fractional month, if any.
(b) The Tenant agrees to pay as additional rent the amount of
Exhibit B-2 Services utilized.
(c) The Tenant agrees to pay all rents on or before the first day
of the month.
(d) Time is of the essence in the payment of all rents. In the
event that the Tenant fails to pay any rent within five days
of the due date, AEC may:
(1) charge the Tenant a late fee of $75.00 per office
for each and every month in which Tenant is
delinquent until the balance is paid and
(2) issue a written notice to the Tenant stating that Tenant
is in default of this lease;
(3) terminate all Exhibit B-1, B-2 services upon twenty-four
hours prior notice to the Tenant.
(e) AEC may exercise its rights under all sections of this Lease
as many times as necessary, and the exercise of one right
shall not prevent AEC from exercising the same right again,
nor any other right, as AEC shall choose.
(f) Tenant agrees to compensate AEC $75.00 for each occasion that
a rent or security deposit check is returned by the Tenant's
bank for insufficient funds.
(g) Rents and bills for services shall be paid to: American
Executive Centers, Inc., 900 East Eighth Avenue, Suite 300,
King of Prussia, PA 19406 or other address that AEC designates
in writing.
5. Security Deposit:
Concurrent with the execution of this Lease, the Tenant has agreed to deposit
$2,971.50 as security for the full performance of this Lease and for the cost of
any repairs in excess of normal wear and tear. The Tenant agrees to restore,
upon demand, the full security deposit at any time during the Lease if amounts
are used to cure any default, or restore the premises. The security deposit
balance will be returned within 60 days after Tenant has paid all rents and
additional rents due under the lease and after the Tenant has vacated and left
the premises in its original condition. The Tenant is responsible for all
damages to AEC premises, normal wear and tear excepted. Tenant agrees not to use
the security deposit to pay the last month's rent.
6. Hold Harmless:
AEC is not obligated to carry insurance on the Tenant's personal or business
property. AEC will not be liable to the Tenant or any other person for any
damages on account of loss, damage or theft to any personal or business property
of Tenant, its employees, agents or invitees.
7. Hiring of Employees:
The Tenant will not hire an AEC employee during the Lease term or extension or
renewal hereof and 90 days thereafter. The Tenant agrees to pay AEC $5,000 for
each breach of this provision.
<PAGE>
8. Default and Landlord's Remedies:
Any of the following shall constitute an event of default by the Tenant:
(a) Failure to perform any requirement of this Lease when such
performance is due or pay any sum of money when due and such
failure shall continue for ten (10) days after the date of
written notice from AEC to Tenant specifying the nature of said
default.
(b) Any removal or attempt to remove any of the Tenant property
from the leased premises, other than in the ordinary course of
business, without having first paid all amounts due, or
amounts that will become due under this Lease.
(c) A declaration of bankruptcy, insolvency, or other
reorganization or filing for protection from creditors.
9. If Tenant shall default on this lease, AEC may, without further notice:
(a) Terminate this lease effective immediately, by written notice
to the Tenant. Upon such termination (i) Tenant shall have no
further right to avoid the termination by payment
of any sum due or by performance of any condition, term or
covenant broken and (ii) the rent for the entire unexpired term
of this lease, together with all other charges, payments, costs
and expenses incurred including collection expenses of up to
25% of the amount due shall be immediately due and payable by
the Tenant.
(b) Re-enter and take possession of the leased premises, remove
all persons and property therefrom, all without being liable
to prosecution or for damages.
(c) Re-let the leased premises to prospective Tenants that AEC
deems fit.
(d) Impound the Tenant's property and sell it, applying the
proceeds to any rent due or to become due by the expiration of
the term of this lease, and any other charges, including the
costs of collection.
10. Prohibition against assignment or sublease:
Tenant may not assign its interest in this lease or sublet the leased premises
without the express written consent of AEC, which will not be unreasonably
withheld.
11. Guarantee:
(The Provisions of this paragraph are only in force if the Tenant has been in
existence for less that 5 years.) For good and valuable consideration, and to
induce AEC to lease certain office space to Tenant, the undersigned, jointly and
severally, guarantee unconditionally two months rent and additional rent of all
sums now and hereafter owed to AEC by Tenant, and for the full and prompt
performance by Tenant of all other requirements of the lease. The undersigned
promise to remain bound by this guaranty, notwithstanding any waiver, release,
discharge, or extension by AEC. In the event of default, AEC shall not be
required to proceed first against the Tenant but may seek payment directly from
the undersigned.
12. Miscellaneous:
(a) If either party has given notice to the other to terminate
this Lease or if the Tenant is in default under this Lease,
AEC will have the right to show the leased premises to
prospective Tenants. AEC will have the right to inspect the
leased premises, at reasonable times.
(b) This Lease contains the entire Agreement between AEC and
Tenant.
(c) Any provision of this Lease which proves to be invalid or
illegal will in no way affect
<PAGE>
any other provisions of this Lease which will remain in full
force.
(d) AEC will have the right at any time during the lease term,
upon giving the Tenant 30 days written notice, to relocate the
Tenant at AEC's expense, to space of comparable square footage
within the suite. Should the Tenant refuse to relocate at the
end of the 30 day period, AEC will have the right to terminate
this Lease effective immediately, without further notice to
the Tenant. If the Lease is canceled, there will be no further
obligation on the part of either party, except the Tenant will
pay all rents and charges when due as set forth in the Lease
Terms and Exhibits B-1 and B-2.
(e) On month to month leases, AEC has the right to show the leased
premises during all normal business hours on any day.
(f) AEC retains the right to cancel this Agreement at any time,
with the payment of one month's rent to the Tenant, if in
AEC's opinion it is in the best interests of AEC or its
Tenants.
(g) The Tenant agrees to only use the local and long distance
telephone services provided by AEC, when making telephone
calls within the leased premises. The rates are comparable to
the local Bell and AT&T direct distance dialing rates plus
applicable federal and state taxes. All fractional charges are
rounded up to the nearest cent. The Tenant agrees to pay AEC
the monthly charges attributed to their local and long
distance usage upon presentation of a standard detailed
statement of usage.
(h) Any holdover tenancy period which exists after receipt of a
valid termination notice will be billed on a month to month
basis.
(i) AEC reserves the right to regulate smoking if necessary for
the benefit of all tenants.
(j) If Tenant has power requirements in addition to a standard
office provision, AEC reserves the right to separately meter
and charge for electrical installation and consumption.
(k) Tenant acknowledges that AEC, as part of maintaining a high
quality professional business environment, provides a standard
furniture package in each office. Any additional requirements
excluding electronic equipment must be pre-approved by AEC, to
maintain the integrity of the decor of our suite and business
environment.
In witness whereof, the parties, intending to be legally bound and having
authority to do so have caused this Lease to be duly executed on the year and
day first written above.
Lessor: Lessee:
American Executive Centers, Inc. Docunet
------------------------------------
Print Tenant Name
by: /s/ R. Michael Dugan by: /s/ S. David Model
------------------------------------ ---------------------------------
Signature Signature
by: by: David Model
------------------------------------ --------------------------------
Print Signature Print Signature
<PAGE>
President
- ---------------------------------------- ------------------------------------
Title Title
<PAGE>
ADDENDUM
ADD AN OFFICE TO EXISTING LEASE
This addendum dated October 15, 1997 amends the lease and service agreement
between American Executive Centers ("AEC") and DOCUNET ("Tenant") dated
September 4, 1997.
In addition to the rental of office(s) #25 & #51, tenant agrees to rent office
#52 at a monthly rental rate of $1,073.00 effective date October 16, 1997.
Total security deposit will be increased by $1,609.50.
Termination date will coincide with the termination of office #25 & #51.
All other terms and conditions of the attached referenced lease apply.
In witness whereof, the parties, intending to be legally bound and having
authority to do so have caused this Lease to be duly executed on the year and
day first written above.
Lessor: Lessee:
American Executive Centers, Inc. DOCUNET
-------------------------------------
Print Tenant Name
by: /s/ R. Michael Dugan by: /s/ James D. Brown
----------------------------------- ----------------------------------
Signature Signature
by: by: James D. Brown
------------------------------------ ----------------------------------
Print Signature Print Signature
- --------------------------------------- ----------------------------------
Title Title: Chief Financial Officer
<PAGE>
ADDENDUM
CHANGE LEASE TERM
This addendum dated October 15, 1997 amends the lease and service agreement
between American Executive Centers ("AEC") and DOCUNET ("Tenant") dated
September 4, 1997.
Tenant hereby agrees to change the existing lease term to month - months. The
Termination Date is now changed from November 30, 1997, as originally stated in
the referenced lease and service agreement to December 31, 1997. The new monthly
rental rate will be $3,330.00. Security Deposit will be increased by -0-.
All other terms and conditions of the attached referenced lease will apply.
In witness whereof, the parties, intending to be legally bound and having
authority to do so have caused this Lease to be duly executed on the year and
day first written above.
Lessor: Lessee:
American Executive Centers, Inc. DOCUNET
--------------------------------------
Print Tenant Name
by: /s/ R. Michael Dugan by: /s/ James D. Brown
----------------------------------- ----------------------------------
Signature Signature
by: by: James D. Brown
----------------------------------- ----------------------------------
Print Signature Print Signature
----------------------------------- ----------------------------------
Title Title: Chief Financial Officer
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this S-1
Registration Statement.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
November 4, 1997
I, Lennox K. Black, hereby consent to being named in the Form S-1 of
ImageMAX, Inc., as a director of ImageMAX, Inc., to be elected upon completion
of the Offering, and the disclosures relating thereto.
/s/ Lennox K. Black
----------------------------
Lennox K. Black
I, Lewis E. Hatch, Jr., hereby consent to being named in the Form S-1 of
ImageMAX, Inc., as a director of ImageMAX, Inc., to be elected upon completion
of the Offering, and the disclosures relating thereto.
/s/ Lewis E. Hatch
----------------------------
Lewis E. Hatch, Jr.
I, David C. Carney, hereby consent to being named in the Form S-1 of
ImageMAX, Inc., as a director of ImageMAX, Inc., to be elected upon completion
of the Offering, and the disclosures relating thereto.
/s/ David C. Carney
------------------------
David C. Carney
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<CURRENCY> US Dollars
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> NOV-12-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<EXCHANGE-RATE> 1 1
<CASH> 61,647 1,361,682
<SECURITIES> 0 0
<RECEIVABLES> 0 0
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<INVENTORY> 0 0
<CURRENT-ASSETS> 61,647 1,361,682
<PP&E> 0 0
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<TOTAL-ASSETS> 61,647 3,353,205
<CURRENT-LIABILITIES> 4,781 1,911,721
<BONDS> 0 0
0 0
73,500 2,719,000
<COMMON> 6,500 1,566,500
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 61,647 3,353,205
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<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 23,274 2,820,882
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (23,134) (2,820,882)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (23,134) (2,820,882)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (23,134) (2,820,882)
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