Filed Pursuant to Rule 424(b)(4)
PROSPECTUS
3,100,000 SHARES
[IMAGEMAX LOGO]
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. 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 10 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.... | $12.00 | $0.84 | $11.16
Total(3)..... | $37,200,000 | $2,604,000 | $34,596,000
- -------------------------------------------------------------------------------
(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 $3,500,000.
(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 $42,780,000, $2,994,600 and $39,785,400, 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 December 9, 1997.
WILLIAM BLAIR & COMPANY JANNEY MONTGOMERY SCOTT INC.
THE DATE OF THIS PROSPECTUS IS DECEMBER 3, 1997
<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>
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. Combined
operating loss and combined net loss for the twelve-month period ended December
31, 1996 were $353,000 and $500,000, respectively, on a pro forma, as adjusted
basis. 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.
Including a non-recurring, non-cash special compensation charge of $2.2 million,
combined operating income and combined net loss for the nine months ended
September 30, 1997 were $83,000 and $1.1 million, respectively, on a pro forma,
as adjusted basis.
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
3
<PAGE>
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
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.................................... 5,537,436 shares(1)
Use of Proceeds............................... To fund the Acquisitions and for general
corporate purposes, including future
acquisitions. See "Use of Proceeds" and
"Certain Transactions."
Nasdaq National Market Symbol................. IMAG
</TABLE>
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(1) Includes 1,283,177 shares of Common Stock to be issued in connection with
the Acquisitions. 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 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, AS ADJUSTED
-------------------------------------------
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
Special compensation charge(5)............................ -- -- 2,235
Founding Companies' transaction costs(6).................. -- -- 332
Amortization of intangible assets(7)...................... 1,158 868 868
Operating income (loss)................................... (353) (146) 83
Interest income (expense), net(8)......................... 37 10 (5)
Income (loss) before income taxes......................... (316) (136) 78
Net loss(8)(9)............................................ $ (500) $ (314) $ (1,062)
Net loss per share........................................ $ (.09) $ (.06) $ (.20)
Shares used in computing pro forma net loss per
share(10)............................................... 5,346,935 5,346,935 5,346,935
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------
PRO FORMA
PRO FORMA COMBINED,
COMBINED(11) AS ADJUSTED(12)
------------ ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 2,881 $ 2,400
Working capital (deficit)................................. (26,322)(13) 5,163
Total assets.............................................. 50,924 48,456
Long-term debt, less current portion...................... 1,098 --
Shareholders' equity...................................... 10,530 41,126
</TABLE>
- ------------------
(1) The pro forma combined, as adjusted, 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").
(5) Represents a non-recurring, non-cash special compensation charge equivalent
to $0.42 per share recorded in the nine months ended September 30, 1997.
See Note 3 to ImageMax Financial Statements.
(6) Reflects non-recurring transaction costs incurred by the Founding Companies
in connection with the Acquisitions.
(7) 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.
(8) 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. Pro forma net loss would be
$1,049,000, $711,000 and $1,430,000 and the pro forma net loss per share
would be $0.23, $0.15 and $0.31, respectively, for the above periods. See
"Pro Forma Combined Financial Statements."
(9) 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 and the $2.2 million special compensation charge.
(10) Represents (i) 710,770 shares of Common Stock issued and outstanding at
September 30, 1997, (ii) 1,283,177 shares to be issued in the Acquisitions,
(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) 2,909,499 of the 3,100,000 shares
being sold in the Offering (at the initial public offering price of $12.00
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.
(11) The pro forma combined balance sheet data assume that the Acquisitions were
consummated on September 30, 1997.
(12) Adjusted for the sale of the 3,100,000 shares of Common Stock offered
hereby at the initial public offering price of $12.00 per share and the
application of the net proceeds therefrom and the repayment of certain
Founding Companies' indebtedness with cash acquired. See "Use of Proceeds."
(13) 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>
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(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.
8
<PAGE>
FOUNDING COMPANIES COMBINED RESULTS OF OPERATIONS
The combined results of operations of the Founding Companies for the
periods presented as fiscal years 1992, 1993, 1994, 1995, and 1996 and the nine
months ended September 30, 1996 and 1997 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 an 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 an historical basis:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEAR(1) SEPTEMBER 30,(2)
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $34,874 $37,978 $41,115 $39,482 $46,501 $32,402 $36,473
Cost of Revenues...................... 23,203 25,197 29,662 27,647 32,167 22,611 23,982
------- ------- ------- ------- ------- ------- -------
Gross profit........................ 11,671 12,781 11,453 11,835 14,334 9,791 12,491
Selling, general and administrative
expenses............................ 10,204 11,597 11,192 11,347 12,738 8,938 9,508
------- ------- ------- ------- ------- ------- -------
Operating income.................... 1,467 1,184 261 488 1,596 853 2,983
Interest expense...................... 605 423 725 861 998 708 725
------- ------- ------- ------- ------- ------- -------
Income (loss) before taxes............ 862 761 (464) (373) 598 145 2,258
Pro forma provision (benefit) for
income taxes (3).................... 433 393 (55) (14) 367 163 988
------- ------- ------- ------- ------- ------- -------
Pro forma net income (loss)........... $ 429 $ 368 $ (409) $ (359) $ 231 $ (18) $ 1,270
======= ======= ======= ======= ======= ======= =======
</TABLE>
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(1) The years presented are as follows: AMMCORP -- fiscal years ended July 31,
1993, 1994, 1995, 1996 and 1997; IDS -- fiscal years ended August 31, 1993,
1994, 1995, 1996 and 1997; Laser Graphics, I2 Solutions and OMI -- fiscal
years ended October 31, 1992, 1993, 1994, 1995 and 1996; IMS -- fiscal
years ended November 30, 1992, 1993, 1994, 1995 and 1996; TIMCO, DataLink
and DocuTech -- fiscal years ended December 31, 1992, 1993, 1994, 1995 and
1996; TPS -- fiscal years ended March 31, 1993, 1994, 1995, 1996 and 1997;
CodaLex and Spaulding -- fiscal years ended June 30, 1993, 1994, 1995, 1996
and 1997.
(2) Except for I2 Solutions for which the periods presented are for the nine
months ended July 31, 1996 and 1997.
(3) Several of the Founding Companies operated as "S corporations." This
adjustment reflects a pro forma adjustment for income taxes which would
have been recorded if all of the Founding Companies were "C corporations"
for the periods presented.
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.
9
<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, as adjusted, net loss for
the twelve-month period ended December 31, 1996 was $0.5 million. Pro forma
combined, as adjusted, net loss for the nine months ended September 30, 1997 was
$1.1 million, compared to a pro forma combined, as adjusted, net loss of $0.3
million in the comparable 1996 period. The net loss in the nine months ended
September 30, 1997 includes a $2.2 million non-recurring, non-cash special
compensation charge.
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
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acquired business. The process of integrating acquired businesses often involves
unforeseen liabilities, 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 64.5%, 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
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
44.0% of the then outstanding shares of Common Stock following the completion of
the Offering (40.6% 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 the Common Stock has been 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 was 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 $10.22 per share in the pro forma net tangible book value
per share of Common Stock (based upon the initial public offering price of
$12.00 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, the
Company will have outstanding an aggregate of 5,537,436 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, the Company will issue in
the Acquisitions, in the aggregate, 1,283,177 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) 1,283,177 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 permitting them to include their shares in certain future
registration statements filed by the Company. See "Shares Eligible for Future
Sale."
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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. The Bylaws
provide for the Board of Directors to be divided into three classes of directors
serving three-year staggered terms and that directors may be removed only for
cause. 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.
Combined operating loss and combined net loss for the twelve-month period ended
December 31, 1996 were $353,000 and $500,000, respectively, on a pro forma, as
adjusted basis. Including a non-recurring, non-cash special compensation charge
of $2.2 million, combined operating income and combined net loss for the nine
months ended September 30, 1997 were $83,000 and $1.1 million, respectively, on
a pro forma, as adjusted basis.
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.
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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-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
18
<PAGE>
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 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 1,283,177 shares of Common Stock. 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."
19
<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 approximately $31.1 million ($36.3 million if
the Underwriters' over-allotment option is exercised in full). Of this amount,
approximately $28.7 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) $2.8 million of indebtedness net of cash acquired (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.
20
<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 combined basis for the Founding Companies, (iii) 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 1,283,177 shares of
Common Stock in connection therewith, and (iv) 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 net proceeds therefrom. 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
---------------------------------------------------------
COMBINED PRO FORMA
IMAGEMAX FOUNDING PRO FORMA COMBINED,
HISTORICAL COMPANIES COMBINED AS ADJUSTED
---------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Short-term debt and current maturities of long-term $ -- $4,564 $ 4,281 $ --
obligations......................................
Pro forma cash due Founding Companies.............. -- -- 25,430 --
------ ------ ------- -------
$ -- $4,564 $29,711 $ --
====== ====== ======= =======
Long-term obligations, less current maturities..... $ -- $2,318 $ 1,098 $ --
------ ------ ------- -------
Shareholders' equity:
Preferred Stock, no par value, 10,000,000 shares
authorized; 524,125 shares issued and
outstanding, ImageMax historical; no shares
issued or outstanding, pro forma combined and
pro forma combined, as adjusted................ 2,552 60 -- --
Common Stock, no par value, 40,000,000 shares
authorized; 710,770 shares issued and
outstanding, ImageMax historical; 2,437,436
shares issued and outstanding pro forma
combined (1); and 5,537,436 shares issued and
outstanding, pro forma combined, as
adjusted (1)................................... 1,475 1,095 17,115 48,211
Additional paid-in-capital....................... -- 1,293 -- --
Retained earnings (deficit)...................... (2,585) 3,390 (6,585) (7,085)
Treasury stock................................... -- (3,057) -- --
------ ------ ------- -------
Total shareholders' equity..................... 1,442 2,781 10,530 41,126
------ ------ ------- -------
Total capitalization......................... $1,442 $5,099 $11,628 $41,126
====== ====== ======= =======
</TABLE>
- ------------------
(1) Includes 1,283,177 shares of Common Stock to be issued in connection with
the Acquisitions. 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."
21
<PAGE>
DILUTION
The deficit in pro forma combined net tangible book value of the Company at
September 30, 1997 was $20.7 million or $8.50 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 $9.9
million or $1.78 per share. This represents an immediate increase in pro forma
combined net tangible book value of $10.28 per share to existing shareholders
and an immediate dilution of $10.22 per share to purchasers of Common Stock in
the Offering. The following table illustrates this pro forma dilution:
Initial public offering price per share.................. $12.00
Pro forma combined deficit in net tangible book
value per share before the Offering.............. $ (8.50)
Increase in pro forma combined net tangible book
value per share attributable to new investors.... 10.28
-------
Pro forma combined net tangible book value per share
after the Offering..................................... 1.78
------
Dilution per share to new investors...................... $10.22
======
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 20.8% $ 1,791,500 3.4% $ 1.55
Founding Companies' shareholders(1)........ 1,283,177 23.2 13,088,405 25.2 10.20
----------- ----- ----------- ------
2,437,436 44.0 14,879,905 28.6 6.10
New investors.............................. 3,100,000 56.0 37,200,000 71.4 12.00
----------- ----- ----------- ------
Total.................................. 5,537,436 100.0% $52,079,905 100.0%
=========== ===== =========== ======
</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.
22
<PAGE>
SELECTED FINANCIAL DATA
IMAGEMAX HISTORICAL AND PRO FORMA COMBINED
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 $2.6 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 $2.2 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 and the
Founding Companies, including the Notes thereto, appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PRO FORMA COMBINED(1) PRO FORMA COMBINED, AS ADJUSTED(1)
------------------------------------ ------------------------------------
YEAR NINE MONTHS ENDED YEAR NINE MONTHS ENDED
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
DECEMBER 31, --------------------- DECEMBER 31, ---------------------
1996 1996 1997 1996 1996 1997
------------ --------- --------- ------------ --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:(1)
Revenues:
Services............................... $ 31,553 $ 22,938 $ 27,172 $ 31,553 $ 22,938 $ 27,172
Products............................... 11,703 9,464 9,301 11,703 9,464 9,301
--------- --------- --------- --------- --------- ---------
43,256 32,402 36,473 43,256 32,402 36,473
--------- --------- --------- --------- --------- ---------
Cost of revenues:(2)
Services............................... 20,267 14,946 17,090 20,267 14,946 17,090
Products............................... 8,968 6,889 6,160 8,968 6,889 6,160
Depreciation........................... 1,408 1,061 1,029 1,408 1,061 1,029
--------- --------- --------- --------- --------- ---------
30,643 22,896 24,279 30,643 22,896 24,279
--------- --------- --------- --------- --------- ---------
Gross profit......................... 12,613 9,506 12,194 12,613 9,506 12,194
Selling, general, and administrative
expenses(3)............................ 11,198 8,326 8,218 11,198 8,326 8,218
Executive compensation(4)................ 610 458 458 610 458 458
Special compensation charge(5)........... -- -- 2,235 -- -- 2,235
Founding Companies' transaction
costs(6)............................... -- -- 332 -- -- 332
Amortization of intangible assets(7)..... 1,158 868 868 1,158 868 868
--------- --------- --------- --------- --------- ---------
Operating income (loss)................ (353) (146) 83 (353) (146) 83
Interest income (expense), net(8)........ (866) (643) (611) 37 10 (5)
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes...... (1,219) (789) (528) (316) (136) 78
Income tax provision (benefit)(9)........ (170) (78) 902 184 178 1,140
--------- --------- --------- --------- --------- ---------
Net loss(8).............................. $ (1,049) $ (711) $ (1,430) $ (500) $ (314) $ (1,062)
========= ========= ========= ========= ========= =========
Pro forma net loss per share............. $ (.23) $ (.15) $ (.31) $ (.09) $ (.06) $ (.20)
========= ========= ========= ========= ========= =========
Shares used in computing pro forma net
loss per share(10)..................... 4,598,269 4,598,269 4,598,269 5,346,935 5,346,935 5,346,935
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------------------
PRO FORMA
IMAGEMAX PRO FORMA COMBINED,
HISTORICAL COMBINED(11) AS ADJUSTED(12)
---------- ------------ ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $1,362 $ 2,881 $ 2,400
Working capital (deficit)................................. (550) (26,322)(13) 5,163
Total assets.............................................. 3,354 50,924 48,456
Long-term debt, less current portion...................... -- 1,098 --
Shareholders' equity...................................... 1,442 10,530 41,126
</TABLE>
23
<PAGE>
- ------------------
(1) The pro forma combined statement of operations data assume that the
Acquisitions were consummated on January 1, 1996. The pro forma combined,
as adjusted, statements of operations assume that the Acquisitions and the
Offering were consummated on January 1, 1996. Such data 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").
(5) Represents a non-recurring, non-cash special compensation charge equivalent
to $0.42 per share recorded in the nine months ended September 30, 1997.
See Note 3 to ImageMax Financial Statements.
(6) Reflects non-recurring transaction costs incurred by the Founding Companies
in connection with the Acquisitions.
(7) 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.
(8) Pro forma combined, as adjusted, operating results include adjustments 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."
(9) 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 and the $2.2 million special compensation charge.
(10) Represents (i) 710,770 shares of Common Stock issued and outstanding at
September 30, 1997, (ii) 1,283,177 shares to be issued in the Acquisitions,
(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) 2,909,499 of the 3,100,000
shares being sold in the Offering (at the initial public offering price of
$12.00 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.
(11) The pro forma combined balance sheet data assume that the Acquisitions were
consummated on September 30, 1997.
(12) Adjusted for the sale of the 3,100,000 shares of Common Stock offered
hereby at the initial public offering price of $12.00 per share and the
application of net proceeds therefrom and the repayment of certain Founding
Companies' indebtedness with cash acquired. See "Use of Proceeds."
(13) 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.
24
<PAGE>
FOUNDING COMPANIES COMBINED
The combined results of operations of the Founding Companies for the
periods presented as fiscal years 1992, 1993, 1994, 1995, and 1996 and the nine
months ended September 30, 1996 and 1997 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 an 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 an historical basis:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEAR(1) SEPTEMBER 30,(2)
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $34,874 $37,978 $41,115 $39,482 $46,501 $32,402 $36,473
Cost of revenues...................... 23,203 25,197 29,662 27,647 32,167 22,611 23,982
------- ------- ------- ------- ------- ------- -------
Gross profit........................ 11,671 12,781 11,453 11,835 14,334 9,791 12,491
Selling, general and administrative
expenses............................ 10,204 11,597 11,192 11,347 12,738 8,938 9,508
------- ------- ------- ------- ------- ------- -------
Operating income.................... 1,467 1,184 261 488 1,596 853 2,983
Interest expense, net................. 605 423 725 861 998 708 725
------- ------- ------- ------- ------- ------- -------
Income (loss) before taxes............ 862 761 (464) (373) 598 145 2,258
Pro forma provision (benefit) for
income taxes (3).................... 433 393 (55) (14) 367 163 988
------- ------- ------- ------- ------- ------- -------
Pro forma net income (loss)........... $ 429 $ 368 $ (409) $ (359) $ 231 $ (18) $ 1,270
======= ======= ======= ======= ======= ======= =======
</TABLE>
- ------------------
(1) The years presented are as follows: AMMCORP -- fiscal years ended July 31,
1993, 1994, 1995, 1996 and 1997; IDS -- fiscal years ended August 31, 1993,
1994, 1995, 1996 and 1997; Laser Graphics, I2 Solutions and OMI -- fiscal
years ended October 31, 1992, 1993, 1994, 1995 and 1996; IMS -- fiscal
years ended November 30, 1992, 1993, 1994, 1995 and 1996; TIMCO, DataLink
and DocuTech -- fiscal years ended December 31, 1992, 1993, 1994, 1995 and
1996; TPS -- fiscal years ended March 31, 1993, 1994, 1995, 1996 and 1997;
CodaLex and Spaulding -- fiscal years ended June 30, 1993, 1994, 1995, 1996
and 1997.
(2) Except for I2 Solutions for which the periods presented are for the nine
months ended July 31, 1996 and 1997.
(3) As discussed above, several of the Founding Companies operated as "S
Corporations". This adjustment reflects a pro forma adjustment for income
taxes which would have been recorded if all of the Founding Companies were
"C Corporations" for the periods presented.
25
<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
26
<PAGE>
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 compensation of $610,000 annually
based upon employment agreements with the Company's executive management (see
"Management - Employment Agreements"). The pro forma results include the
non-recurring, non-cash compensation charge of $2.2 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."
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.
Special Compensation Charge. In 1997, the Company sold a total of 259,135
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 $2.2 million, representing the difference
between the amount paid for the shares and the deemed value for accounting
purposes (based on the initial public offering price of $12.00 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."
27
<PAGE>
PRO FORMA COMBINED, AS ADJUSTED 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, as adjusted 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
Special compensation charge................................. -- -- 2,235 6.1
Founding Companies' transaction costs....................... -- -- 332 0.9
Amortization of intangibles................................. 868 2.7 868 2.3
------- ----- ------- -----
Operating income (loss)................................... (146) (0.5) 83 0.2
Interest expense............................................ 64 0.1 75 0.2
Interest income............................................. (74) (0.2) (70) (0.2)
------- ----- ------- -----
Income (loss) before income taxes......................... (136) (0.4) 78 0.2
Income tax provision........................................ 178 0.6 1,140 3.1
------- ----- ------- -----
Net loss.................................................... $ (314) (1.0)% $(1,062) (2.9)%
======= ===== ======= =====
</TABLE>
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
28
<PAGE>
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 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'
29
<PAGE>
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 include the non-recurring, non-cash compensation charge of
$2.2 million in the nine months ended September 30, 1997.
Special Compensation Charge
In 1997, ImageMax sold a total of 259,135 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, ImageMax
recorded a non-recurring, non-cash special compensation charge of approximately
$2.2 million, representing the difference between the amount paid for the shares
and the deemed value for accounting purposes (based on the initial public
offering price of $12.00 per share).
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 Loss
Operating income was $83,000 for the nine months ended September 30, 1997
compared to an operating loss of $146,000 for the nine months ended September
30, 1996. Excluding the $2.2 million special compensation charge, 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.
30
<PAGE>
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. Excluding the $2.2 million
special compensation charge, 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 Loss
Net loss was $1.1 million for the nine months ended September 30, 1997
compared to net loss of $0.3 million for the nine months ended September 30,
1996. Excluding the $2.2 million special compensation charge, 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 as adjusted basis, the
Company would have a cash balance of $2.4 million, working capital of $5.2
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
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
31
<PAGE>
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....................................... 9,928 24.1 10,311 26.1 12,938 27.8
------- ----- ------- ----- ------- -----
41,115 100.0 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.................................. 1,374 3.3 1,413 3.6 1,443 3.1
------- ----- ------- ----- ------- -----
29,662 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)..... 11,192 27.3 11,347 28.8 12,738 27.4
------- ----- ------- ----- ------- -----
Operating income................................ $ 261 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.
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
32
<PAGE>
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
percentage 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 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.
33
<PAGE>
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 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
34
<PAGE>
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.
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.
35
<PAGE>
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.
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.
36
<PAGE>
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.
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.
37
<PAGE>
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 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.
38
<PAGE>
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.
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.
39
<PAGE>
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%.
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.
40
<PAGE>
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 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.
41
<PAGE>
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>
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.
42
<PAGE>
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 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.
43
<PAGE>
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.
44
<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 1,234 37.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Operating income (loss)........... 298 8.2 375 9.3 (123) (3.1) 187 6.0 237 7.1
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% $ 222 6.7%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</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 37.1% 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.
45
<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>
46
<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
47
<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
48
<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.
49
<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 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.
50
<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.
51
<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>
52
<PAGE>
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 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.
53
<PAGE>
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.
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
54
<PAGE>
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.
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.
55
<PAGE>
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 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.
56
<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. Pro forma
combined, as adjusted, net loss for the twelve-month period ended December 31,
1996 was $0.5 million. Pro forma combined, as adjusted, net loss for the nine
months ended September 30, 1997 was $1.1 million, compared to a pro forma
combined, as adjusted, net loss of $0.3 million in the comparable 1996 period.
The net loss in the nine months ended September 30, 1997 includes a $2.2 million
non-recurring, non-cash special compensation charge.
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
57
<PAGE>
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.
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, and has
developed commercial software
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products for digital scanning and retrieval applications which the Company
licenses to other service providers and to end users. 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
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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 an additional 2,000,000 shares of its Common Stock
with the Commission under the Securities Act 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.
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<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>
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
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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.
INTELLECTUAL PROPERTY
The Company regards certain of the software products, information and
know-how of DDS as proprietary and relies primarily on a combination of
trademarks, copyrights, trade secrets and confidentiality agreements to protect
its proprietary rights. The Company's business is not materially dependent on
any patents and it does not believe that any of its other proprietary rights are
of any material value. 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
</TABLE>
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<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FOOTAGE PRINCIPAL USE(S)
- -------- -------------- ----------------
<S> <C> <C>
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.
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 are reimbursed for travel expenses incurred for each board and
committee meeting attended in person. 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 performance formulas or measures or
other specific criteria used to determine recipients of awards
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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 his capacity as an outside Director. 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 7,000 shares of Common Stock for an
aggregate purchase price of $84,000 each. As members of the initial executive
management group involved in founding and organizing the Company, Messrs.
Gillis, Model, Brown and Bacas are 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 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 such purchase price adjustments as of the closing date of
the Acquisitions will cause the cash portion of the consideration to vary. The
initial public offering price determined the number of shares of Common Stock to
be issued in connection with the Acquisitions.
AMMCORP. ImageMax will acquire the parent of AMMCORP by merger for
approximately $4.7 million, consisting of $0.5 million in cash, 77,917
shares of Common Stock (aggregate value: $935,004), 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 84,947 shares
of Common Stock (aggregate value: $1,019,364). 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.
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 41,667 shares of
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Common Stock (aggregate value: $500,004). 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 312,813 shares of Common Stock (aggregate value:
$3,753,756). 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 283,333 shares of Common Stock
(aggregate value: $3,399,996). 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 66,667 shares of Common Stock (aggregate value:
$800,004). 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 178,750 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 127,500 shares of Common
Stock (aggregate value: $1,530,000). 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 64,583 shares of Common Stock (aggregate value: $774,996).
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 45,000
shares of Common Stock (aggregate value: $540,000). 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. The initial public offering price determined
the amount of shares of Common Stock paid for each Acquisition. 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. 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.
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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 are considered promoters of the Company. See Note 6 to
ImageMax 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 28, 1997 giving pro forma effect to the
Acquisitions 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 12.1% 5.3%
Andrew R. Bacas(3).............................. 223,526 9.2 4.0
S. David Model(3)............................... 60,288 2.5 1.1
James D. Brown(3)............................... 33,845 1.4 *
Rex Lamb(4)..................................... 207,188 8.5 3.7
David C. Utz, Jr................................ 162,532 6.7 2.9
John E. Semasko(4).............................. 148,654 6.1 2.7
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............................. 283,333 11.6 5.1
Mitchell J. Taube(7)............................ 199,904 8.2 3.6
All executive officers and Directors as a group
(11 persons).................................. 1,144,174 46.9 20.7
</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. Percentage ownership before the
Offering is based upon 2,437,436 shares of Common Stock outstanding (giving
effect to the Acquisitions) immediately prior to the Offering. Percentage
ownership after the Offering is based upon 5,537,436 shares of Common Stock
to be outstanding upon completion of the Offering.
(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 7,000 shares that Messrs. Black and Hatch
each has indicated their intent to purchase in the Offering. Such shares
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.
(7) Includes 67,924 shares owned directly by Mr. Taube, 33,815 shares owned by
the Mitchell Taube 1997 Trust, 64,350 shares owned directly by Ellen
Rothschild-Taube, Mr. Taube's spouse, and 33,815 shares owned by the Ellen
Rothschild-Taube 1997 Trust.
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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 2,437,436 shares of Common Stock, including 1,283,177
shares to be issued in connection with the Acquisitions. Upon completion of the
Offering and the Acquisitions, the Company will have outstanding 5,537,436
shares of Common Stock (6,002,436 shares if the over-allotment option is
exercised in full). As of November 28, 1997, there were 25 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 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, and that Directors may be
removed only for cause. The Articles 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 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.
76
<PAGE>
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 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
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 has obtained directors and officers insurance coverage for
certain 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.
77
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 5,537,436 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 2,437,436 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,
contractual 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 55,374 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.
78
<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.............................. 990,000
Janney Montgomery Scott Inc................................. 660,000
BancAmerica Robertson Stephens.............................. 90,000
Bear, Stearns & Co. Inc..................................... 90,000
BT Alex. Brown Incorporated................................. 90,000
CIBC Oppenheimer Corp....................................... 90,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 90,000
Hambrecht & Quist LLC....................................... 90,000
NationsBanc Montgomery Securities, Inc...................... 90,000
PaineWebber Incorporated.................................... 90,000
Prudential Securities Incorporated.......................... 90,000
Smith Barney Inc............................................ 90,000
First Analysis Securities Corporation....................... 50,000
First of Michigan Corporation............................... 50,000
Friedman, Billings, Ramsey & Co., Inc....................... 50,000
Legg Mason Wood Walker, Incorporated........................ 50,000
McDonald & Company Securities, Inc.......................... 50,000
Mesirow Financial, Inc...................................... 50,000
Morgan Keegan & Company, Inc................................ 50,000
Needham & Company, Inc...................................... 50,000
Parker/Hunter Incorporated.................................. 50,000
The Robinson-Humphrey Company, LLC.......................... 50,000
Simmons & Company International............................. 50,000
---------
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 $0.46 per share. Additionally, the Underwriters may
allow, and such dealers may reallow, a concession not in excess of $0.10 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
79
<PAGE>
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 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 was 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 Company's September 1997 private equity 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.
80
<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
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 Securities Exchange Act of 1934. 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.
81
<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-18
Balance Sheets......................................... F-19
Statements of Operations............................... F-20
Statements of Shareholders' Equity..................... F-21
Statements of Cash Flows............................... F-22
Notes to Financial Statements.......................... F-23
FOUNDING COMPANIES:
UTZ MEDICAL ENTERPRISES, INC. (AMMCORP):
Report of Independent Public Accountants............... F-27
Consolidated Balance Sheets............................ F-28
Consolidated Statements of Operations.................. F-29
Consolidated Statements of Stockholders' Deficit....... F-30
Consolidated Statements of Cash Flows.................. F-31
Notes to Consolidated Financial Statements............. F-32
CODALEX MICROFILMING CORPORATION (CMC) AND IMAGING
INFORMATION INDUSTRIES, INC. (I(3)) (TOGETHER,
CODALEX):
Report of Independent Public Accountants............... F-38
Combined Balance Sheets................................ F-39
Combined Statements of Operations...................... F-40
Combined Statements of Stockholders' Equity
(Deficit)............................................ F-41
Combined Statements of Cash Flows...................... F-42
Notes to Combined Financial Statements................. F-43
LASER GRAPHICS SYSTEMS & SERVICES, INC. (LASER GRAPHICS),
AN AFFILIATE OF CODALEX:
Report of Independent Public Accountants............... F-47
Balance Sheets......................................... F-48
Statements of Operations............................... F-49
Statements of Stockholders' Equity (Deficit)........... F-50
Statements of Cash Flows............................... F-51
Notes to Financial Statements.......................... F-52
DATALINK CORPORATION (DATALINK):
Report of Independent Public Accountants............... F-56
Balance Sheets......................................... F-57
Statements of Operations............................... F-58
Statements of Stockholders' Equity..................... F-59
Statements of Cash Flows............................... F-60
Notes to Financial Statements.......................... F-61
DOCUTECH, INC. AND DOCUTECH DATA SYSTEMS, INC. (DOCUTECH)
Report of Independent Public Accountants............... F-66
Combined Balance Sheets................................ F-67
Combined Statements of Operations...................... F-68
Combined Statements of Stockholders' Equity............ F-69
Combined Statements of Cash Flows...................... F-70
Notes to Combined Financial Statements................. F-71
F-1
<PAGE>
PAGE
----
IMAGE & INFORMATION SOLUTIONS, INC. (I(2) Solutions):
Report of Independent Public Accountants............... F-77
Consolidated Balance Sheets............................ F-78
Consolidated Statements of Operations.................. F-79
Consolidated Statements of Stockholders' Equity........ F-80
Consolidated Statements of Cash Flows.................. F-81
Notes to Consolidated Financial Statements............. F-82
IMAGE MEMORY SYSTEMS, INC. (IMS):
Report of Independent Public Accountants............... F-87
Balance Sheets......................................... F-88
Statements of Operations............................... F-89
Statements of Shareholders' Equity..................... F-90
Statements of Cash Flows............................... F-91
Notes to Financial Statements.......................... F-92
INTERNATIONAL DATA SERVICES OF NEW YORK, INC. (IDS):
Report of Independent Public Accountants............... F-97
Balance Sheets......................................... F-98
Statements of Operations............................... F-99
Statements of Shareholders' Equity..................... F-100
Statements of Cash Flows............................... F-101
Notes to Financial Statements.......................... F-102
OREGON MICRO-IMAGING, INC. (OMI):
Report of Independent Public Accountants............... F-106
Balance Sheets......................................... F-107
Statements of Operations............................... F-108
Statements of Stockholders' Equity..................... F-109
Statements of Cash Flows............................... F-110
Notes of Financial Statements.......................... F-111
SEMCO INDUSTRIES, INC. (SPAULDING):
Report of Independent Public Accountants............... F-116
Consolidated Balance Sheets............................ F-117
Consolidated Statements of Operations.................. F-118
Consolidated Statements of Stockholders' Deficit....... F-119
Consolidated Statements of Cash Flows.................. F-120
Notes to Consolidated Financial Statements............. F-121
TOTAL INFORMATION MANAGEMENT CORPORATION (TIMCO):
Report of Independent Public Accountants............... F-126
Balance Sheets......................................... F-127
Statements of Operations............................... F-128
Statements of Stockholders' Equity..................... F-129
Statements of Cash Flows............................... F-130
Notes to Financial Statements.......................... F-131
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
--------- ------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............... $1,362 $ 2 $ 102 $ 294 $264 $1,383
Accounts receivable..................... -- 897 835 386 524 468
Inventories............................. -- 94 226 42 6 453
Prepaid expenses and other.............. -- 53 21 10 10 --
------ ------ ------ ------ ---- ------
Total current assets.................. 1,362 1,046 1,184 732 804 2,304
PROPERTY AND EQUIPMENT, net.............. 5 1,740 437 943 115 720
INTANGIBLES, primarily goodwill.......... -- 269 4 -- -- --
OTHER.................................... 1,987 86 -- 22 -- 139
------ ------ ------ ------ ---- ------
Total assets.......................... $3,354 $3,141 $1,625 $1,697 $919 $3,163
====== ====== ====== ====== ==== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt and current portion of
long-term debt........................ $ -- $2,856 $ 704 $ 81 $ 8 $ 81
Accounts payable........................ -- 368 547 141 79 130
Accrued expenses........................ 1,912 641 176 147 95 901
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
------ ------ ------ ------ ---- ------
DEFERRED INCOME TAXES.................... -- -- -- -- -- 3
LONG-TERM DEBT........................... -- 228 85 813 4 363
OTHER LONG-TERM LIABILITIES.............. -- -- -- -- -- --
------ ------ ------ ------ ---- ------
Total liabilities..................... 1,912 4,283 1,637 1,182 295 1,478
------ ------ ------ ------ ---- ------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock......................... 2,552 -- -- -- -- --
Common stock............................ 1,475 1 150 40 10 31
Additional paid-in-capital.............. -- 98 -- -- -- --
Retained earnings (deficit)............. (2,585) (1,241) (162) 475 614 1,723
Treasury stock.......................... -- -- -- -- -- (69)
------ ------ ------ ------ ---- ------
Total shareholders' equity
(deficit)........................... 1,442 (1,142) (12) 515 624 1,685
------ ------ ------ ------ ---- ------
Total liabilities and shareholders'
equity (deficit).................... $3,354 $3,141 $1,625 $1,697 $919 $3,163
====== ====== ====== ====== ==== ======
<CAPTION>
HISTORICAL FINANCIAL STATEMENTS (NOTES 1 AND 2)
--------------------------------------------------
PRO FORMA PRO FORMA
IMS IDS OMI SPAULDING TIMCO TPS ADJUSTMENTS COMBINED
---- ---- ------ --------- ------ ------ ----------- ---------
(NOTE 3)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............... $ 47 $ 45 $ 1 $ 367 $ 31 $ -- $(1,017) $ 2,881
Accounts receivable..................... 484 521 340 1,273 900 809 -- 7,437
Inventories............................. 13 -- 400 514 60 139 -- 1,947
Prepaid expenses and other.............. 90 226 45 94 -- 61 -- 610
---- ---- ------ ------ ------ ------ ------- -------
Total current assets.................. 634 792 786 2,248 991 1,009 (1,017) 12,875
PROPERTY AND EQUIPMENT, net.............. 124 61 377 1,075 267 324 (1,628) 4,560
INTANGIBLES, primarily goodwill.......... -- -- -- -- 110 20 30,842 31,245
OTHER.................................... 67 -- -- 16 14 67 (154) 2,244
---- ---- ------ ------ ------ ------ ------- -------
Total assets.......................... $825 $853 $1,163 $3,339 $1,382 $1,420 $28,043 $50,924
==== ==== ====== ====== ====== ====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt and current portion of
long-term debt........................ $ 78 $ -- $ 29 $ -- $ 218 $ 509 $ (283) $ 4,281
Accounts payable........................ 103 291 124 384 51 340 -- 2,558
Accrued expenses........................ 286 362 179 2,683 339 159 (2,191) 5,689
Deferred revenue........................ -- -- 178 605 -- 32 -- 1,134
Pro forma cash due Founding Companies... -- -- -- -- -- -- 25,430 25,430
Other current liabilities............... -- -- -- -- -- -- -- 105
---- ---- ------ ------ ------ ------ ------- -------
Total current liabilities............. 467 653 510 3,672 608 1,040 22,956 39,197
---- ---- ------ ------ ------ ------ ------- -------
DEFERRED INCOME TAXES.................... -- 14 28 -- -- 13 -- 58
LONG-TERM DEBT........................... 111 -- 36 -- 144 534 (1,220) 1,098
OTHER LONG-TERM LIABILITIES.............. -- -- -- 41 -- -- -- 41
---- ---- ------ ------ ------ ------ ------- -------
Total liabilities..................... 578 667 574 3,713 752 1,587 21,736 40,394
---- ---- ------ ------ ------ ------ ------- -------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock......................... -- -- -- 60 -- -- (2,612) --
Common stock............................ 100 10 10 696 46 1 14,545 17,115
Additional paid-in-capital.............. -- -- -- 847 123 225 (1,293) --
Retained earnings (deficit)............. 430 176 579 178 461 157 (7,390) (6,585)
Treasury stock.......................... (283) -- -- (2,155) -- (550) 3,057 --
---- ---- ------ ------ ------ ------ ------- -------
Total shareholders' equity
(deficit)........................... 247 186 589 (374) 630 (167) 6,307 10,530
---- ---- ------ ------ ------ ------ ------- -------
Total liabilities and shareholders'
equity (deficit).................... $825 $853 $1,163 $3,339 $1,382 $1,420 $28,043 $50,924
==== ==== ====== ====== ====== ====== ======= =======
<CAPTION>
PRO FORMA
COMBINED,
POST MERGER AS
ADJUSTMENTS ADJUSTED
----------- ---------
(NOTE 4)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............... $ (481) $ 2,400
Accounts receivable..................... -- 7,437
Inventories............................. -- 1,947
Prepaid expenses and other.............. -- 610
------- -------
Total current assets.................. (481) 12,394
PROPERTY AND EQUIPMENT, net.............. -- 4,560
INTANGIBLES, primarily goodwill.......... -- 31,245
OTHER.................................... (1,987) 257
------- -------
Total assets.......................... $(2,468) $48,456
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt and current portion of
long-term debt........................ $(4,281) $ --
Accounts payable........................ -- 2,558
Accrued expenses........................ (2,150) 3,539
Deferred revenue........................ -- 1,134
Pro forma cash due Founding Companies... (25,430) --
Other current liabilities............... (105) --
------- -------
Total current liabilities............. (31,966) 7,231
------- -------
DEFERRED INCOME TAXES.................... -- 58
LONG-TERM DEBT........................... (1,098) --
OTHER LONG-TERM LIABILITIES.............. -- 41
------- -------
Total liabilities..................... (33,064) 7,330
------- -------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock......................... -- --
Common stock............................ 31,096 48,211
Additional paid-in-capital.............. -- --
Retained earnings (deficit)............. (500) (7,085)
Treasury stock.......................... -- --
------- -------
Total shareholders' equity
(deficit)........................... 30,596 41,126
------- -------
Total liabilities and shareholders'
equity (deficit).................... $(2,468) $48,456
======= =======
</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................................. 331 1,068 687 380 602 1,234 424 635
EXECUTIVE MANAGEMENT COMPENSATION......... -- -- -- -- -- -- -- --
SPECIAL COMPENSATION CHARGE............... 2,235 -- -- -- -- -- -- --
FOUNDING COMPANIES TRANSACTION COSTS...... -- 35 45 25 57 -- 12 27
AMORTIZATION OF INTANGIBLE ASSETS......... -- 177 -- -- -- -- -- --
---------- ------ ------ ------ ------ ------ ------ ------
Operating income (loss)................ (2,566) 60 346 242 643 237 399 212
INTEREST EXPENSE.......................... -- 243 60 91 4 75 25 --
INTEREST INCOME........................... (4) -- -- (1) -- (60) (1) (2)
---------- ------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes...... (2,562) (183) 286 152 639 222 375 214
INCOME TAX PROVISION (BENEFIT)............ -- 63 -- -- -- 96 -- 48
---------- ------ ------ ------ ------ ------ ------ ------
NET INCOME (LOSS)......................... $ (2,562) $ (246) $ 286 $ 152 $ 639 $ 126 $ 375 $ 166
========== ====== ====== ====== ====== ====== ====== ======
PRO FORMA NET LOSS PER SHARE
(Note 8)................................. $ (2.22)
==========
SHARES USED IN COMPUTING PRO FORMA NET
LOSS PER SHARE (Note 8).................. 1,154,259
==========
SUPPLEMENTAL PRO FORMA DATA (NOTE 9):
Operating income (loss), as reported..... $ (2,566) $ 60 $ 346 $ 242 $ 643 $ 237 $ 399 $ 212
Pro forma operating adjustments (Note
9)..................................... (357) 270 (4) 32 (81) 78 (8) 428
---------- ------ ------ ------ ------ ------ ------ ------
(2,923) 330 342 274 562 315 391 640
Pro forma amortization of intangibles.... -- 67 58 80 191 79 65 78
---------- ------ ------ ------ ------ ------ ------ ------
Pro forma operating income (loss)........ (2,923) 263 284 194 371 236 326 562
Pro forma net interest expense
(income)............................... (4) -- -- (1) -- (8) (1) (2)
---------- ------ ------ ------ ------ ------ ------ ------
Pro forma income (loss) before taxes..... (2,919) 263 284 195 371 244 327 564
Pro forma income tax provision
(benefit).............................. (285) 122 117 81 200 130 160 264
---------- ------ ------ ------ ------ ------ ------ ------
Pro forma net income (loss).............. $ (2,634) $ 141 $ 167 $ 114 $ 171 $ 114 $ 167 $ 300
========== ====== ====== ====== ====== ====== ====== ======
<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 (1,091) 8,218 --
EXECUTIVE MANAGEMENT COMPENSATION......... -- -- -- -- 458 458 --
SPECIAL COMPENSATION CHARGE............... -- -- -- -- -- 2,235 --
FOUNDING COMPANIES TRANSACTION COSTS...... 33 73 25 -- -- 332 --
AMORTIZATION OF INTANGIBLE ASSETS......... -- -- 21 -- 670 868 --
------ ------ ------ ------ ------- ---------- ------
Operating income (loss)................ 248 165 315 116 (334) 83 --
INTEREST EXPENSE.......................... 14 160 42 77 (110) 681 (606)
INTEREST INCOME........................... -- (2) -- -- -- (70) --
------ ------ ------ ------ ------- ---------- ------
Income (loss) before income taxes...... 234 7 273 39 (224) (528) 606
INCOME TAX PROVISION (BENEFIT)............ 97 -- 1 -- 597 902 238
------ ------ ------ ------ ------- ---------- ------
NET INCOME (LOSS)......................... $ 137 $ 7 $ 272 $ 39 $ (821) $ (1,430) $ 368
====== ====== ====== ====== ======= ========== ======
PRO FORMA NET LOSS PER SHARE
(Note 8)................................. $ (0.31)
==========
SHARES USED IN COMPUTING PRO FORMA NET
LOSS PER SHARE (Note 8).................. 4,598,269
==========
SUPPLEMENTAL PRO FORMA DATA (NOTE 9):
Operating income (loss), as reported..... $ 248 $ 165 $ 315 $ 116 $ -- $ 417 $ --
Pro forma operating adjustments (Note
9)..................................... (1) (41) 151 67 -- 534 --
------ ------ ------ ------ ------- ---------- ------
247 124 466 183 -- 951 --
Pro forma amortization of intangibles.... 54 81 59 56 -- 868 --
------ ------ ------ ------ ------- ---------- ------
Pro forma operating income (loss)........ 193 43 407 127 -- 83 --
Pro forma net interest expense
(income)............................... -- (2) -- 23 -- 5 --
------ ------ ------ ------ ------- ---------- ------
Pro forma income (loss) before taxes..... 193 45 407 104 -- 78 --
Pro forma income tax provision
(benefit).............................. 97 21 170 63 -- 1,140 --
------ ------ ------ ------ ------- ---------- ------
Pro forma net income (loss).............. $ 96 $ 24 $ 237 $ 41 $ -- $ (1,062) $ --
====== ====== ====== ====== ======= ========== ======
<CAPTION>
PRO FORMA
COMBINED,
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
SPECIAL COMPENSATION CHARGE............... 2,235
FOUNDING COMPANIES TRANSACTION COSTS...... 332
AMORTIZATION OF INTANGIBLE ASSETS......... 868
----------
Operating income (loss)................ 83
INTEREST EXPENSE.......................... 75
INTEREST INCOME........................... (70)
----------
Income (loss) before income taxes...... 78
INCOME TAX PROVISION (BENEFIT)............ 1,140
----------
NET INCOME (LOSS)......................... $ (1,062)
==========
PRO FORMA NET LOSS PER SHARE
(Note 8)................................. $ (0.20)
==========
SHARES USED IN COMPUTING PRO FORMA NET
LOSS PER SHARE (Note 8).................. 5,346,935
==========
SUPPLEMENTAL PRO FORMA DATA (NOTE 9):
Operating income (loss), as reported..... $ 417
Pro forma operating adjustments (Note
9)..................................... 534
----------
951
Pro forma amortization of intangibles.... 868
----------
Pro forma operating income (loss)........ 83
Pro forma net interest expense
(income)............................... 5
----------
Pro forma income (loss) before taxes..... 78
Pro forma income tax provision
(benefit).............................. 1,140
----------
Pro forma net income (loss).............. $ (1,062)
==========
</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).................................. 1,154,259
==========
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
Pro forma net interest expense (income)......... -- -- -- (1) -- (19)
---------- ------ ------ ------ ------ ------
Pro forma income (loss) before taxes............ (458) 220 10 101 138 200
Pro forma income tax provision (benefit)........ (215) 121 15 48 122 126
---------- ------ ------ ------ ------ ------
Pro forma net income (loss)..................... $ (243) $ 99 $ (5) $ 53 $ 16 $ 74
========== ====== ====== ====== ====== ======
<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)............ $ (.15)
=========
SHARES USED IN COMPUTING PRO FORMA NET LOSS PER
SHARE (NOTE 8).................................. 4,598,269
=========
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)
Pro forma net interest expense (income)......... (1) (2) -- (5) (1) 19 -- (10)
------ ----- ------ ------ ------ ------ ----- ---------
Pro forma income (loss) before taxes............ (268) (103) 166 (490) 280 68 -- (136)
Pro forma income tax provision (benefit)........ (92) (9) 99 (225) 132 56 -- 178
------ ----- ------ ------ ------ ------ ----- ---------
Pro forma net income (loss)..................... $ (176) $ (94) $ 67 $ (265) $ 148 $ 12 $ -- $ (314)
====== ===== ====== ====== ====== ====== ===== =========
<CAPTION>
PRO FORMA
POST MERGER COMBINED,
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).................................. 5,346,935
=========
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)
Pro forma net interest expense (income)......... -- (10)
----- ---------
Pro forma income (loss) before taxes............ -- (136)
Pro forma income tax provision (benefit)........ -- 178
----- ---------
Pro forma net income (loss)..................... $ -- $ (314)
===== =========
</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)............ $ (.02)
=========
SHARES USED IN COMPUTING PRO FORMA NET LOSS PER
SHARE (NOTE 8).................................. 1,154,259
=========
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
Pro forma net interest expense (income)......... -- -- -- (2) (3) (33)
--------- ------ ------ ------ ------ ------
Pro forma income (loss) before taxes............ (633) 439 (236) (1) 168 191
Pro forma income tax provision (benefit)........ (312) 232 (94) 1 161 142
--------- ------ ------ ------ ------ ------
Pro forma net income (loss)..................... $ (321) $ 207 $ (142) $ (2) $ 7 $ 49
========= ====== ====== ====== ====== ======
<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)............ $ (0.23)
=========
SHARES USED IN COMPUTING PRO FORMA NET LOSS PER
SHARE (NOTE 8).................................. 4,598,269
=========
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)
Pro forma net interest expense (income)......... (2) (2) 11 (6) -- -- -- (37)
------ ------ ------ ------ ------ ------ ----- ---------
Pro forma income (loss) before taxes............ (311) (146) 96 (424) 442 99 -- (316)
Pro forma income tax provision (benefit)........ (106) (17) 78 (203) 219 83 -- 184
------ ------ ------ ------ ------ ------ ----- ---------
Pro forma net income (loss)..................... $ (205) $ (129) $ 18 $ (221) $ 223 $ 16 $ -- $ (500)
====== ====== ====== ====== ====== ====== ===== =========
<CAPTION>
PRO FORMA
POST MERGER COMBINED,
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)............ $ (.09)
=========
SHARES USED IN COMPUTING PRO FORMA NET LOSS PER
SHARE (NOTE 8).................................. 5,346,935
=========
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)
Pro forma net interest expense (income)......... -- (37)
----- ---------
Pro forma income (loss) before taxes............ -- (316)
Pro forma income tax provision (benefit)........ -- 184
----- ---------
Pro forma net income (loss)..................... $ -- $ (500)
===== =========
</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 a fair value of $10.20 per share (or
$13.1 million), which represents a discount of 15% from the initial public
offering price of $12.00 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. Approximately
$18.2 million of the intangibles, net, is not deductible for tax purposes and
therefore no tax benefit will be recorded for financial reporting purposes.
Accordingly, no deferred taxes will be recorded in purchase accounting.
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>
TOTAL
ESTIMATED
ESTIMATED PURCHASE PRICE
SHARES OF FAIR VALUE FOR ACCOUNTING
CASH COMMON STOCK OF SHARES PURPOSES(1)
------- ------------ ---------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AMMCORP.................... $ 454 77,917 $ 795 $ 1,249
CodaLex Group.............. 1,387 84,947 866 2,253
DataLink................... 3,250 41,667 425 3,675
DocuTech................... 5,446 312,813 3,191 8,637
I(2) Solutions............. 1,264 283,333 2,890 4,154
IMS........................ 2,112 66,667 680 2,792
IDS........................ 1,520 178,750 1,823 3,343
OMI........................ 1,398 127,500 1,300 2,698
Spaulding.................. 4,295 -- -- 4,295
Timco...................... 2,721 64,583 659 3,380
TPS........................ 1,583 45,000 459 2,042
------- --------- -------- -------
$25,430 1,283,177 $ 13,088 $38,518
======= ========= ======== =======
</TABLE>
- ------------------
(1) Excludes $0.5 million of transaction costs.
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) (2,552) (2,612)
Common stock...................................... -- -- -- 11,993 2,552 14,545
Additional paid-in capital........................ (25,430) -- -- 24,137 -- (1,293)
Retained earnings (deficit)....................... -- -- -- (7,390) -- (7,390)
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 and liabilities (i.e. net liabilities) excluded from net
assets acquired in certain acquisitions such as facilities and their
related debt, liabilities related to deferred and other compensation, other
assets, and specific cash balances. The net liabilities excluded of
$1,954,000 results in a reduction of intangibles, net, otherwise recorded
in (d) below.
(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) 1,283,177 shares of
Common Stock valued at $10.20 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. The $0.6
million credit to cash reflects a purchase price adjustment based upon
minimum required cash levels under the agreements for the Acquisitions. The
$0.5 million credit to accounts payable relates to the fee payable
discussed above. The entries to shareholders' equity (deficit) reflect the
elimination of the Founding Companies' (deficit) equity balances (preferred
stock, Common Stock, retained earnings (deficit) and treasury stock) and
the issuance of common stock in connection with the Acquisitions. The
retained earnings (deficit) adjustment also includes the $4.0 million
acquired in-process research and development charge and the $0.5 million
non-recurring charge discussed above. The debit to intangibles reflects the
application of purchase accounting, taking into consideration the fair
value of net assets acquired.
(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................................... $30,933 $(25,930) $(5,484) $ (481)
Other....................................................... (1,987) -- -- (1,987)
------- -------- ------- -------
Total assets.......................................... $28,946 $(25,930) $(5,484) $(2,468)
======= ======== ======= =======
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.............................................. 31,096 -- -- 31,096
Retained earnings (deficit)............................... (500) -- -- (500)
Treasury stock............................................ -- -- -- --
------- -------- ------- -------
Total shareholders' equity (deficit).................. 30,596 -- -- 30,596
------- -------- ------- -------
Total liabilities and shareholders' equity
(deficit).......................................... $28,946 $(25,930) $(5,484) $(2,468)
======= ======== ======= =======
</TABLE>
- ------------------
(a) Reflects the net cash of $30.9 million from the sale of 3,100,000 shares of
Common Stock, primarily net of estimated offering costs of $3.5 million
(net of cash previously paid of $0.3 million, based on an initial public
offering price of $12.00 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 proceeds of the Offering, excluding
cash acquired, 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) ADJUSTMENTS (f) (g) ADJUSTMENTS
---- ------ ----- ----- ----- ----------- ---- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $(98) $ -- $ -- $ -- $ -- $ (98) $ -- $ -- $ --
Cost of revenues................ (98) -- 297 -- -- 199 -- -- --
Selling, general and
administrative expense........ -- (1,044) (17) -- -- (1,091) -- -- --
Executive compensation.......... -- 458 -- -- -- 458 -- -- --
Amortization.................... -- -- -- 670 -- 670 -- -- --
---- ------ ----- ----- ----- ------ ---- ----- ----
Operating income (loss)... -- 586 (280) (670) -- (334) -- -- --
Interest income................. -- -- -- -- -- -- -- -- --
Interest expense................ -- -- (110) -- -- (110) (606) -- (606)
---- ------ ----- ----- ----- ------ ---- ----- ----
Income (loss) before
income taxes........... -- 586 (170) (670) -- (224) 606 -- 606
Income tax provision............ -- -- -- -- 597 597 -- 238 238
---- ------ ----- ----- ----- ------ ---- ----- ----
Net income (loss)......... $ -- $ 586 $(170) $(670) $(597) $ (821) $606 $(238) $368
==== ====== ===== ===== ===== ====== ==== ===== ====
</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 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.
(c) 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.
(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. Included in goodwill is $820,000 which will be amortized over 15
years. 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 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.
(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-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...... -- (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. Included in goodwill is $820,000 which will be amortized over 15
years. 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. Included in goodwill is $820,000 which will be amortized over 15
years. 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........ 1,283,177
Shares issued in the Offering before underwriters'
discount, necessary to pay the cash portion of the
Acquisitions' consideration (including expenses)....... 2,160,833
---------
Pro Forma combined shares.............................. 4,598,269
Shares issued in the Offering before underwriters'
discount, necessary to pay the Founding Companies'
indebtedness excluding cash acquired and expenses of
the Offering........................................... 748,666
---------
Pro Forma combined as adjusted shares.................. 5,346,935
=========
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. See Note 8 of ImageMax, Inc. financial statements for number
of shares used in the calculation of pro forma net loss per share for ImageMax,
Inc.
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. Compensation Differential (Note 5,
adjustment (b))...................... (357) 65 (3) 68 (21) 137 (8) 463 10
3. Rent Differential (Note 5, adjustment
(c))................................. -- -- (1) (43) -- (59) -- 3 (11)
4. Elimination of Intangible Amortization
(Note 5, adjustment (d))............. -- 177 -- -- -- -- -- -- --
------- ---- ---- ---- ---- ---- --- ---- ----
$ (357) $270 (4) $ 32 $(81) $ 78 $(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. Compensation Differential (Note 5,
adjustment (b))...................... 98 127 7 586
3. Rent Differential (Note 5, adjustment
(c))................................. (139) -- -- (250)
4. Elimination of Intangible Amortization
(Note 5, adjustment (d))............. -- 21 -- 198
----- ---- --- -------
$ (41) $151 $67 $ 534
===== ==== === =======
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>
IMAGEMAX, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. PRO FORMA OPERATING ADJUSTMENTS -- (CONTINUED)
A reconciliation of the gross compensation to contractual compensation
which results in the above Compensation Differential is as follows:
<TABLE>
<CAPTION>
CODALEX I(2)
PRO FORMA COMPENSATION ADJUSTMENTS DESCRIPTION IMAGEMAX AMMCORP GROUP DATALINK DOCUTECH SOLUTIONS IMS IDS
- ---------------------------------------------- --------- ------- ------- -------- -------- --------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1997
Gross Compensation.................... $101 $140 $ 72 $ 96 $174 $231 $ 78 $583
Compensation Differential............. 357 (65) 3 (68) 21 (137) 8 (463)
---- ---- ---- ---- ---- ---- ---- ----
Contractual Compensation.............. $458 $ 75 $ 75 $ 28 $195 $ 94 $ 86 $120
==== ==== ==== ==== ==== ==== ==== ====
NINE MONTHS ENDED SEPTEMBER 30, 1996
Gross Compensation.................... $ -- $182 $ 57 $ 67 $202 $221 $ 78 $231
Compensation Differential............. 458 (107) 18 (39) (7) (127) 8 (111)
---- ---- ---- ---- ---- ---- ---- ----
Contractual Compensation.............. $458 $ 75 $ 75 $ 28 $195 $ 94 $ 86 $120
==== ==== ==== ==== ==== ==== ==== ====
YEAR ENDED DECEMBER 31, 1996
Gross Compensation.................... $ -- $301 $ 78 $104 $254 $567 $106 $295
Compensation Differential............. 610 (201) 22 (66) 6 (442) 9 (135)
---- ---- ---- ---- ---- ---- ---- ----
Contractual Compensation.............. $610 $100 $100 $ 38 $260 $125 $115 $160
==== ==== ==== ==== ==== ==== ==== ====
<CAPTION>
PRO FORMA COMPENSATION ADJUSTMENTS DESCRIPTION OMI SPAULDING TIMCO TPS TOTAL
- ---------------------------------------------- ---- --------- ----- ---- ------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1997
Gross Compensation.................... $111 $173 $277 $61 $2,097
Compensation Differential............. (10) (98) (127) (7) (586)
---- ---- ---- --- ------
Contractual Compensation.............. $101 $ 75 $150 $54 $1,511
==== ==== ==== === ======
NINE MONTHS ENDED SEPTEMBER 30, 1996
Gross Compensation.................... $101 $ 71 $180 $62 $1,452
Compensation Differential............. -- 4 (30) (7) 60
---- ---- ---- --- ------
Contractual Compensation.............. $101 $ 75 $150 $55 $1,512
==== ==== ==== === ======
YEAR ENDED DECEMBER 31, 1996
Gross Compensation.................... $192 $107 $240 $89 $2,333
Compensation Differential............. (57) (7) (40) (9) (310)
---- ---- ---- --- ------
Contractual Compensation.............. $135 $100 $200 $80 $2,023
==== ==== ==== === ======
</TABLE>
F-17
<PAGE>
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.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
September 11, 1997 (except with
respect to the matter discussed
in Note 8 as to which the
date is November 26, 1997)
F-18
<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.................. 73,500 544,500 2,552,000
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 1,174,500 1,474,500
Accumulated deficit............................. (23,134) (1,494,291) (2,585,016)
------- ---------- ----------
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-19
<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..................... -- 1,304,000 2,235,000
INTEREST INCOME................................. (140) (440) (4,034)
---------- ----------- -----------
NET LOSS........................................ $ (23,134) $(1,471,157) $(2,561,882)
========== =========== ===========
PRO FORMA NET LOSS PER SHARE (Note 8)
(unaudited)................................... $ (.02) $ (1.27) $ (2.22)
========== =========== ===========
SHARES USED IN COMPUTING PRO FORMA NET LOSS PER
SHARE (Note 8) (unaudited).................... 1,154,259 1,154,259 1,154,259
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<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....................... 105,000 471,000 97,308 1,168,000 -- 1,639,000
Net loss...................... -- -- -- -- (1,471,157) (1,471,157)
-------- ---------- -------- ---------- ----------- ----------
BALANCE, JUNE 30, 1997.......... 255,000 544,500 647,308 1,174,500 (1,494,291) 224,709
Sales of Preferred and Common
Stock (unaudited)........... 269,125 2,007,500 63,462 300,000 -- 2,307,500
Net loss (unaudited).......... -- -- -- -- (1,090,725) (1,090,725)
-------- ---------- -------- ---------- ----------- ----------
BALANCE, SEPTEMBER 30, 1997
(UNAUDITED)................... 524,125 $2,552,000 710,770 $1,474,500 $(2,585,016) $1,441,484
======== ========== ======== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<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) $(1,471,157) $(2,561,882)
Special compensation charge........... -- 1,304,000 2,235,000
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-22
<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
1,283,177 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 $10.20 per share (or $13.1 million),
which represents a discount of 15% from the initial public offering price of
$12.00, 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 acquired, including intangible
assets, were assigned a portion of the cost of the acquired company based on an
independent valuation.
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)
2. ACQUISITIONS AND PUBLIC OFFERING: -- (CONTINUED)
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 259,135 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 $2,235,000, representing the
difference between the amount paid for the shares and the deemed value for
accounting purposes of $12.00 per share (the 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.
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.
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)
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 November 26,
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.
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.
F-25
<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)
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.
Pro Forma Net Loss Per Share
The shares used in computing pro forma net loss per share include 710,770
outstanding shares of Common Stock and 443,489 shares (effected for the 0.846154
for 1 reverse stock split) to be issued upon conversion of the 524,125
outstanding shares of Series A Preferred Stock. Pursuant to the requirements of
the Securities and Exchange Commission, these shares represent those common
stock equivalents issued by the Company during the 12 months immediately
preceding the Offering. Pro forma net loss per share was calculated by dividing
historical net loss by the as converted outstanding shares of Common Stock.
F-26
<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-27
<PAGE>
UTZ MEDICAL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31,
-----------------------
1996 1997
ASSETS ---------- ----------
<S> <C> <C>
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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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:
JULY 31,
--------------------
1996 1997
-------- ---------
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
======== ========
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, 1996 and 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-34
<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:
YEAR ENDING JULY 31,
--------------------
1998.................................. $ 509,162
1999.................................. 1,083,732
2000.................................. 164,854
2001.................................. 134,325
2002.................................. 106,747
Thereafter............................ 126,151
----------
$2,124,971
==========
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-35
<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:
YEAR ENDING JULY 31,
--------------------
1998.................................... $ 33,400
1999.................................... 35,800
2000.................................... 38,200
2001.................................... 3,200
--------
$110,600
========
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:
YEAR ENDED JULY 31,
-------------------------------
1995 1996 1997
--------- -------- --------
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
========= ======== ========
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-36
<PAGE>
UTZ MEDICAL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES: -- (CONTINUED)
JULY 31,
------------------
1996 1997
------- --------
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
======= ========
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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-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.)
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-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.)
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:
JUNE 30,
------------------- SEPTEMBER 30,
1996 1997 1997
-------- -------- -------------
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
======== ======== ========
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-45
<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:
JUNE 30,
------------------- SEPTEMBER 30,
1996 1997 1997
-------- -------- -------------
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
======== ======== ========
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-46
<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-47
<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-48
<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-49
<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-50
<PAGE>
LASER GRAPHICS SYSTEMS & SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
OCTOBER 31, ENDED JULY 31,
----------------- ---------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
------- ------- -------- -------
<CAPTION>
(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-51
<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-52
<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-53
<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:
OCTOBER 31,
------------------- JULY 31,
1995 1996 1997
-------- -------- --------
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
======== ======== ========
As of July 31, 1997, maturities of long-term debt, including capital
leases, are as follows:
1998............................... $61,686
1999............................... 20,427
2000............................... 6,584
2001............................... 6,129
-------
$94,826
=======
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-54
<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-55
<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.,
October 3, 1997
F-56
<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-57
<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-58
<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-59
<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-60
<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.
In September 1997, DataLink entered 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-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.)
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-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.)
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-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.)
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:
1997...................................... $121,764
1998...................................... 80,034
1999...................................... 66,977
2000...................................... 2,479
--------
$271,254
========
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:
1997....................................... $25,199
1998....................................... 23,708
1999....................................... 3,231
-------
$52,138
=======
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-64
<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:
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
==========
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 enter into a new
lease in connection with the sale of the business (see Notes 1 and 10). This
lease is expected to have a term of five years and will be accounted for as an
operating lease.
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).
F-65
<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.,
October 13, 1997
F-66
<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-67
<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-68
<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-69
<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-70
<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.
In September 1997, DDS and its stockholders entered into a merger agreement
with ImageMax, Inc. (ImageMax) and DTI and its stockholders entered into 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-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)
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-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.)
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-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.)
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 -- -- --
Obligations 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-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.)
7. COMMITMENTS: -- (CONTINUED)
Future minimum lease payments under DocuTech's leases as of June 30, 1997
are as follows:
CAPITAL OPERATING
LEASES LEASES
------- ---------
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
=======
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-75
<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
YEAR ENDED DECEMBER 31, ENDED
---------------------------------- JUNE 30,
<S> <C> <C> <C> <C>
1994 1995 1996 1997
-------- ---------- ---------- ----------
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>
F-76
<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-77
<PAGE>
IMAGE & INFORMATION SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------- JULY 31,
1995 1996 1997
ASSETS ---------- ---------- ----------
<S> <C> <C> <C>
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 31,000
Treasury stock, 200 shares, at cost............. (68,682) (68,682) (68,682)
Retained earnings............................... 1,661,551 1,596,893 1,723,294
---------- ---------- ----------
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-78
<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 1,233,961
---------- ---------- ---------- ---------- ----------
Operating income
(loss)............ 298,161 374,461 (122,563) 187,080 237,055
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) 180,491 222,262
INCOME TAXES.............. 101,667 143,725 (59,785) 68,587 95,861
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)......... $ 151,352 $ 239,532 $ (64,658) $ 111,904 $ 126,401
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-79
<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
Rent expense capital contribution
(Note 8)....................... -- 30,000 -- -- 30,000
Net income........................ -- -- 126,401 -- 126,401
----- ------- ---------- -------- ----------
BALANCE, JULY 31, 1997.............. 300 $31,000 $1,723,294 $(68,682) $1,685,612
===== ======= ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-80
<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 $ 126,401
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) -- --
Rent expense capital contribution.... -- -- -- -- 30,000
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-81
<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-82
<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-83
<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:
OCTOBER 31,
------------------- JULY 31,
1995 1996 1997
-------- -------- --------
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
======== ======== ========
As of October 31, 1996, maturities of long-term debt are as follows:
YEAR ENDING OCTOBER 31,
- -----------------------
1997.................................... $ 77,105
1998.................................... 86,736
1999.................................... 80,784
2000.................................... 83,126
2001.................................... 90,000
Thereafter.............................. 85,936
--------
$503,687
========
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:
1997..................................... $13,081
1998..................................... 17,324
1999..................................... 3,872
-------
$34,277
=======
F-84
<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 5
-- -- -- --
40% 38% 48% 43%
== == == ==
</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 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
======== ======== ========
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-85
<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. The fair value of the building rent of $30,000 was
recorded as an expense and a corresponding deemed capital contribution.
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-86
<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-87
<PAGE>
IMAGE MEMORY SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------- AUGUST 31,
1995 1996 1997
ASSETS -------- -------- ----------
<S> <C> <C> <C>
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-88
<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-89
<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-90
<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-91
<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-92
<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-93
<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-94
<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:
1997...................................... $ 89,008
1998...................................... 90,312
1999...................................... 87,704
2000...................................... 86,400
2001...................................... 86,400
--------
$439,824
========
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-95
<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:
NOVEMBER 30,
-------------------- AUGUST 31,
1995 1996 1997
------- ------- ----------
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
======= ======= =======
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-96
<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-97
<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-98
<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-99
<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-100
<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-101
<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-102
<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-103
<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:
1998....................................... $16,320
1999....................................... 5,520
-------
$21,840
=======
6. INCOME TAXES:
The provision (benefit) for income taxes is as follows:
YEAR ENDED AUGUST 31,
--------------------------------
1995 1996 1997
-------- -------- ----------
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)
======== ======== ==========
The reconciliation of the statutory federal income tax rate to IDS's
effective income tax rate is as follows:
YEAR ENDED AUGUST 31,
---------------------
1995 1996 1997
----- ----- -----
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%
===== ===== =====
F-104
<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:
AUGUST 31,
------------------
1996 1997
------- --------
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
======= ========
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-105
<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-106
<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-107
<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-108
<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-109
<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-110
<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-111
<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-112
<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-113
<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-114
<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-115
<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-116
<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-117
<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-118
<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-119
<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-120
<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-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)
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-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.)
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-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.)
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-124
<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-125
<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,
September 26, 1997
F-126
<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-127
<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-128
<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-129
<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-130
<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.
In September 1997, TIMCO and its stockholders entered 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-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.)
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-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.)
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
Less-Current portion.............................. (63,776) (95,150) (81,949) (78,329)
-------- -------- -------- --------
$340,067 $225,475 $190,704 $144,094
======== ======== ======== ========
</TABLE>
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.)
5. LONG-TERM DEBT: -- (CONTINUED)
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.
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.
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............................ 10
The Company............................. 17
Use of Proceeds......................... 20
Dividend Policy......................... 20
Capitalization.......................... 21
Dilution................................ 22
Selected Financial Data................. 23
Management's Discussion and Analysis
of Financial Condition and Results of
Operations............................ 26
Business................................ 57
Management.............................. 66
Certain Transactions.................... 72
Principal Shareholders.................. 75
Description of Capital Stock............ 76
Shares Eligible for Future Sale......... 78
Underwriting............................ 79
Legal Matters........................... 81
Experts................................. 81
Additional Information.................. 81
Index to Financial Statements........... F-1
------------------------
UNTIL DECEMBER 29, 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
[logo of IMAGEMAX]
COMMON STOCK
----------------------------
PROSPECTUS
December 3, 1997
----------------------------
WILLIAM BLAIR & COMPANY
JANNEY MONTGOMERY SCOTT INC.
================================================================================
