- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED], FOR THE TRANSITION PERIOD FROM
_________ TO _________
COMMISSION FILE NUMBER 0-23077
IMAGEMAX, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
PENNSYLVANIA 23-2865585
- ------------------------------------------------------------ -------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
1100 E. HECTOR STREET, SUITE 396, CONSHOHOCKEN, PENNSYLVANIA 19428
- ------------------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 832-2111
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock (no par value per share)
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__. No _____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $6,888,699 as of March 29, 1999. On March 29, 1999 the
Registrant had outstanding 6,574,676 shares of Common Stock, no par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement (the "Definitive
Proxy Statement") to be filed with the Securities and Exchange Commission
relative to the Company's 1999 Annual Meeting of Shareholders are incorporated
by reference into Part III of this Annual Report on Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C> <C> <C>
PART I......................................................................................... 1
Item 1. Business................................................... 1
Item 2. Properties................................................. 14
Item 3. Legal Proceedings.......................................... 15
Item 4. Submission of Matters to a Vote of Security Holders........ 15
Item 4(a). Executive Officers of the Registrant....................... 15
PART II........................................................................................ 17
Item 5. Market for Registrant's Common Equity and Related
Shareholder
Matters.................................................... 17
Item 6. Selected Consolidated Financial Data....................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations...................................... 19
Item 8. Financial Statements and Supplementary Data................ 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 29
PART III....................................................................................... 30
Item 10. Directors and Executive Officers of Registrant............. 30
Item 11. Executive Compensation..................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and 30
Management.................................................
Item 13. Certain Relationships and Related Transactions............. 30
PART IV........................................................................................ 31
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 31
8-K........................................................
</TABLE>
i
<PAGE>
PART I
ITEM 1. BUSINESS
ImageMax, Inc. was founded in November 1996 to become a leading national,
single-source provider of integrated document management solutions. On December
4, 1997, ImageMax completed its initial public offering (the "Offering") of
3,100,000 shares of Common Stock, no par value per share (the "Common Stock"),
which generated net proceeds to ImageMax of approximately $30.5 million.
Concurrently with the Offering, the Company began material operations with the
acquisition of 14 document management service companies (the "Founding
Companies"). During the first eight months of 1998, the Company acquired an
additional 13 document management service companies (the "Acquired Businesses").
In December 1998 and January 1999, the Company sold operations in three
locations. Unless otherwise indicated, all references to "ImageMax" shall mean
ImageMax, Inc. prior to the acquisitions of the Founding Companies and all
references to the "Company" and its business refer to operations subsequent to
the Offering.
Prior to the Offering, ImageMax did not conduct any material operations. As
of March 9, 1999, the Company operated 17 business units in 14 states, employed
approximately 1,200 people and provided services and products to over 5,000
clients from 22 locations. The Company's services include micrographic and
electronic (digital) media conversion, data entry and indexing, document storage
and system integration. The Company also sells and supports document management
equipment and proprietary as well as third party open architecture digital
imaging and indexing software.
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 increasingly attractive
document management options. As a result, the Company believes the most
successful service providers are 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 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.
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 the Association for Information and Image Management International ("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 services for large
organizations are still performed in-house.
The Company believes that the continued growth of the document management
industry is driven by such principal factors as: (a) improvement of digital
technology (i.e., CD-ROM, computer networking and image-enabled software
applications) which has dramatically reduced the cost of imaging, storing,
indexing and retrieving documents while improving users' ability to manage
documents more efficiently; (b) greater focus by many organizations, especially
those in document-intensive industries such as health care, financial service
and engineering, on 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; (c) organizations' need to
manage the ever increasing volume of information facilitated by
document-generating technologies such as facsimile,
1
<PAGE>
high-speed printing, the Internet and computer networking; and (d) increased
outsourcing of document management services which allows organizations to focus
on core competencies and revenue generating activities, reduce fixed costs, and
gain access to new technologies without the risk and expense of near-term
obsolescence.
The Company believes it is one of the larger document service providers in
a highly fragmented industry. 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 of less than $10
million. The Company believes that many of the small businesses with which it
competes 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. 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 nationally integrated operations. The Company
believes that its geographic reach and broad capabilities will provide an
increasing competitive advantage.
BUSINESS STRATEGY
The Company's goal is to become a leading national, single source provider
of integrated document management solutions. To this end, the Company acquired
27 document management service companies from December 1997 to August 1998. In
September 1998, the Company shifted its primary focus from its acquisition
program to consolidate, integrate and build the management of the acquired
network of formerly independent business units. This process has the following
key elements:
Consolidate operations in selected markets. The Company will continue to
consolidate offices and functions in certain geographic markets to gain
economies of scale, coordinate sales and marketing efforts and streamline
reporting and controls. This will result in reducing redundant physical
locations and consolidating production and administrative functions among a
cluster of locations. The Company has completed or is currently consolidating
operations in California, Texas, Massachusetts and the Midwest.
Build an effective management structure. In September 1998, the Company
organized its business units into five groups along geographic/vertical market
lines and placed the focus of day-to-day management control in the hands of five
general managers from these business units. The group leaders have substantially
improved the coordination of technical skills, production capabilities and sales
activities between business units to better fulfill customer requirements. This
structure has enabled the Company to reduce spending and staffing at its
corporate headquarters.
Reduce the number of underperforming business units. In December 1998 and
January 1999, the Company sold three facilities in the Southeast, located in
Charlotte, NC, Cayce, SC and Cleveland, TN. The Company will sell or restructure
other underperforming operations that can not be improved quickly.
Enhance capabilities. While streamlining operations, the Company is
continuing to enhance its sales, marketing and technical capabilities. Upon
their acquisition, all business units adopt the ImageMax brand name. In meeting
client needs, the Company shares technical and production resources across
business units. The Company will continue to improve the skill base of its sales
force through such tools as an on line application database, specific vertical
market training programs and a hiring program emphasizing digital imaging. In
addition, the Company is extending across its operations marketing programs used
successfully by certain business units such as telemarketing, seminar selling
and internet marketing programs. Finally, the Company is partnering with
providers of document management software and certain related business services
in cross-marketing agreements. These programs enable the Company to be a
single-source provider of integrated document management solutions across its
network of business units.
2
<PAGE>
Form strategic partnerships. The Company is forming strategic partnerships
with providers of related business services as well as providers of document
management software and image processing hardware. For example, ImageMax
software is bundled with complementary document management software and with
certain scanning equipment. In March 1999, the Company announced a co-marketing
agreement with a unit of Kinko's, Inc. that provides document production
services. Also in March 1999, the Company signed a letter of intent to form a
strategic partnership with Pierce Leahy Corp. ("Pierce Leahy"), an international
data storage and management services company, which would entail a cross-selling
arrangement and a substantial investment by Pierce Leahy in the Company, among
other features. However, although the companies are seeking to complete the
agreement by April 30, 1999, there can be no assurance as to when such agreement
will be completed or whether such agreement will be completed at all. The terms
of this letter of intent are discussed more fully in Item 7 of this Annual
Report on Form 10-K.
SERVICES AND PRODUCTS
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 document management services that are
currently provided by the Company include:
MEDIA CONVERSION SERVICES
Media conversion is labor intensive and, particularly in the case of
digital imaging, requires increasingly sophisticated equipment and systems to
accomplish efficiently. By maintaining a large skilled labor pool, sufficient
production capacity and technical capability, the Company can provide a
responsive and cost effective outsource alternative to its customers.
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.
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 believes that digital image is becoming
the preferred format of storage for many organizations 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, the indexing of film for
computer-aided retrieval systems and computer output to microfilm ("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 less expensive 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
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
3
<PAGE>
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.
Products
The Company develops proprietary, open-architecture software products which
support electronic imaging and indexing services. In addition, the Company sells
and supports third-party software and 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-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. One of the Company's products, called ScanTRAX, was initially
developed for use by document management companies in their digital conversion
operations. Other Company products, such as FileTRAX, were developed for
marketing to end-users. The Company has also developed and markets a high-end
scanning and viewing software package for the aperture card market called
ImageMaxES. 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.
In addition to its proprietary software, the Company also sells and
supports third party document management software such as OTG, On-Base, ALOS and
FileMagic. These software products are marketed by the Company through a network
of more than 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 established partnering relationships with software and equipment providers
which enable the Company's software to be packaged and sold with their product
offerings.
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 business units provide extensive field
maintenance and repair services for the equipment they sell. Various business
units have specialized technical hardware and systems integration expertise
which is shared across the Company's operations. The Company also provides to
its clients a wide range of micrographic film products, digital media and other
graphic supplies. The Company has achieved certain purchasing efficiencies with
equipment and film suppliers and believes that it is an attractive dealer to
equipment manufacturers seeking to achieve broad geographic coverage with a
single company.
CLIENTS AND KEY MARKETS
The Company had a broad base of over 5,000 clients in the last year. No
single client accounted for more than 5% of pro forma combined revenues for
either the year ended December 31, 1998 or 1997. The Company's customers are not
concentrated in any specific geographic area, but are concentrated primarily in
the health care, financial services, and engineering industries, as well as
certain other vertical markets.
4
<PAGE>
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: litigation support, retail and transportation
markets, and government entities.
The Company believes that it has 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
Most sales efforts are conducted at the business unit level by the
Company's 62-person sales force. Efforts of the sales force are typically
supplemented by the sales activities of the business unit manager. This sale
force has succeeded in expanding its 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 has also leveraged existing client
relationships by cross-selling its services, products and expertise throughout
each client's organization. The Company believes that this strategy of pursuing
unvended accounts actively, in addition to competing for existing outsourced
business, will enable it to increase its market position. Methods such as
seminar selling, telemarketing and internet marketing also are employed by the
Company.
The Company is also obtaining larger and more complex digital conversion
and system sales by combining the capacity and technical capabilities of
multiple business units. For example, the Company has successfully pursued
projects which require offshore data entry and digital media conversion
capabilities. This activity has been fostered by cross-company meetings and
training, improved communications, in part fostered by the Company's intranet,
coordination among the group leaders and, more generally, an increased
familiarity among the business unit managers. The Company seeks to attract
customers away from smaller industry providers through its ability to offer a
broader range of solutions and products for companies' document management
needs.
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 local or
regional, 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 larger than the Company, have greater financial and
other resources and operate in broader geographic areas than the Company.
Additionally, other potential competitors may choose to enter the Company's
areas
5
<PAGE>
of operation in the future. As a result of this competitive environment, the
Company may lose clients or have difficulty in acquiring new clients and its
revenues and margins may be adversely affected.
The Company believes that the principal competitive factors in document
management services include the breadth, accuracy, speed, reliability and
security of service, technical expertise, industry specific knowledge and price.
The Company competes primarily on the basis of the breadth and quality of
service, technical expertise and industry specific knowledge, and believes that
it competes favorably with respect to these factors.
INTELLECTUAL PROPERTY
The Company regards certain of its software products, information and
know-how 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.
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, the Company can not be certain
that environmental liabilities will not have a material adverse effect on its
business, financial condition or results of operations.
EMPLOYEES
As of December 31, 1998, the Company had approximately 1,200 employees,
approximately 160 of whom were employed primarily in management and
administration. None of the Company's employees are subject to a collective
bargaining agreement, and the Company considers its relations with its employees
to be good.
6
<PAGE>
RISK FACTORS
You should carefully consider the following risks and uncertainties when
reading this Annual Report on Form 10-K. If any of the events described below
actually occur, the Company's business, financial condition or results of
operations could be materially adversely affected. Additional risks that the
Company does not yet know of or that the Company currently thinks are immaterial
may also impair the Company's business operations.
The Company has made forward-looking statements in this Annual Report on
Form 10-K including information concerning the possible or assumed future of its
operations and those proceeded by, followed by, or that include the words
"anticipates," "believes," "estimates," "expects" or similar expressions. You
should understand that the risk factors described below, in addition to those
risks and uncertainties discussed elsewhere in this document, could affect the
Company's future results and could cause those results to differ materially from
those expressed in the Company's forward-looking statements.
THE COMPANY HAS EXPERIENCED OPERATING LOSSES AND MAY NOT BE ABLE TO CONTINUE AS
A GOING CONCERN
The Company has incurred significant operating losses since the Offering
and has an accumulated deficit of $16.0 million as of December 31, 1998. For the
year ended December 31, 1998, the Company incurred a net loss of $8.4 million.
This loss includes restructuring costs (primarily severance payments related to
headcount reductions at its corporate office and a business unit and facility
costs associated with business unit consolidations) of $1.4 million and losses
on sales of underperforming business units of $5.0 million.
In March 1998 the Company entered into a five-year revolving credit
facility with a national bank (the "Credit Facility") to assist in the funding
of operating activities and future acquisitions. The Credit Facility was last
amended by the parties on November 16, 1998. As of December 31, 1998, there were
no funds available under the Credit Facility and the Company was in default of
several of its financial and other covenants. These events of default limit the
Company's working capital availability, impose additional interest on borrowed
funds, and permit the lenders to accelerate full repayment of all outstanding
principal and interest amounts. As a result, the Company's indebtedness of $20.1
million under the Credit Facility has been classified as short-term debt. The
Company is in ongoing discussions with its lenders and other parties concerning
a restructuring of its financing.
As of December 31, 1998, the Company had a working capital deficiency of
$17.2 million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
On March 29, 1999, the Company entered into a forbearance agreement with
the banks that are parties to its Credit Facility (the "Forbearance Agreement").
Pursuant to the Forbearance Agreement, the banks have agreed to forbear from
exercising their rights and remedies with respect to all existing defaults under
the Credit Facility until the earlier of June 30, 1999 or the occurrence of a
default under the Forbearance Agreement or an additional default under the
Credit Facility.
Under the terms of the Forbearance Agreement, the current interest rate on
the outstanding obligations under the Credit Facility increase by two percent
(2%) per annum. In addition, the Company is required to maintain a daily cash
balance in its accounts of at least $300,000 and the Company may not make
capital expenditures in excess of $50,000 without the prior consent of its
banks. The Company is also required to enter into definitive agreements in
connection with the Pierce Leahy strategic partnership no later than April 30,
1999. The Company incurred a fee of $100,000 under the Forbearance Agreement,
$50,000 of which was paid upon the execution of the Forbearance Agreement and
the other $50,000 to be paid upon its termination.
The Company's independent public accountants, Arthur Andersen LLP, have
stated in their audit report included in this Annual Report on Form 10-K that
the events of default under the Credit Facility raise substantial doubt about
the Company's ability to continue as a going concern. See page F-2. If the
Company is not able to favorably restructure its financing or if it continues to
incur significant
7
<PAGE>
operating losses, the Company may not be able to sustain its operations and
continue as a going concern.
THE COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ NATIONAL MARKET
On January 28, 1999, the Nasdaq Stock Market, Inc. ("Nasdaq") notified the
Company that the Common Stock was delisted from the Nasdaq National Market,
effective with the close of business, January 28, 1999, because of the Company's
inability to remain in compliance with certain maintenance standards required
for continued listing on the Nasdaq National Market. Presently, and since that
date, the Common Stock has been eligible to trade on the OTC Bulletin Board. The
delisting of the Common Stock from the Nasdaq National Market may substantially
reduce the liquidity of, and market for, such Common Stock.
THE COMPANY'S OFFICERS AND DIRECTORS AND SEVERAL EXISTING SHAREHOLDERS TOGETHER
HAVE SUBSTANTIAL CONTROL OVER THE COMPANY
As of March 29, 1999, the former shareholders of the Founding Companies and
Acquired Businesses and the other directors and executive officers of the
Company, and entities affiliated with them, beneficially own approximately 36.6%
of the outstanding shares of Common Stock of the Company 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 of the Company and to approve or
disapprove most matters submitted to a vote of shareholders.
In addition, on March 12, 1999, the Company and Pierce Leahy signed a
letter of intent to form a strategic partnership. Under the strategic
partnership arrangement, Pierce Leahy will purchase 3,144,000 shares of a new
series of ImageMax preferred stock, each share of which is convertible into one
share of Common Stock. Pierce Leahy will also receive two warrants that may be
exercised over the next four and five years, respectively, to purchase from the
Company 1,719,000 shares and 1,861,000 additional shares of preferred stock at
$4.00 and $5.00 per share, respectively. Pierce Leahy will have the right to
elect a majority of the Company's board of directors, subject to certain
conditions. If the strategic partnership is consummated, Pierce Leahy would
control the Company's board of directors. Further, if Pierce Leahy were to
convert its preferred stock into, and exercises its warrants to purchase, Common
Stock, it may have enough voting power to approve or disapprove most matters
submitted to a vote of shareholders.
SIGNIFICANT AMOUNTS OF ACQUIRED GOODWILL REDUCE THE COMPANY'S NET INCOME
As of December 31, 1998, $46.6 million, or 67.0%, of the Company's total
assets represented intangible assets arising from its acquisitions, of which
$45.9 million was goodwill and $0.7 million was acquired developed technology.
The Company amortizes goodwill over a period of 30 years and acquired developed
technology over a period of seven years. Goodwill is an intangible asset that
represents the difference between the total purchase price of these acquisitions
and the amount of this purchase price allocated to the fair value of the net
assets acquired. The amortization in a particular period represents a non-cash
expense that reduces the Company's net income in that period. In addition, as
was the case when the Company sold three locations in December 1998 and January
1999, if the Company sells or liquidates its assets, the Company cannot be sure
that the value of these intangible assets would be recovered. In addition, the
Company cannot be certain that it will be able to fully realize these intangible
assets over their amortization periods.
CHANGES IN TECHNOLOGY COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS
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
8
<PAGE>
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 current services and products offered by the Company use technologies
that are non-proprietary in nature. The Company cannot be certain that it will
be able to obtain the rights to use any newly developed technologies, that it
will be able to effectively implement these technologies on a cost-effective
basis or that these technologies will not ultimately render obsolete the
Company's role as a third party provider of document management services and
products.
THE COMPANY OPERATES IN A HIGHLY COMPETITIVE INDUSTRY
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 results from the in-house document handling
capability of businesses within the Company's target markets, referred to as the
"unvended" part of the market. These businesses may not increasingly outsource
their document management requirements and other businesses may develop
capabilities to keep in-house many of the document management services they
currently outsource. Many of the Company's competitors are larger than the
Company, have greater financial and other resources than the Company and operate
in broader geographic areas than the Company. Other companies may choose to
enter the document management services industry in the future. Further, if the
Company enters new geographic areas, it will likely encounter significant
competition from established competitors in each of these 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.
THE COMPANY MUST BE ABLE TO ATTRACT AND RETAIN KEY MANAGEMENT AND OTHER
PERSONNEL
The Company's operations depend on the performance of:
o its executive management team; and
o the senior management of its business units.
In September 1998 and November 1998, the Company's Chief Executive Officer
and Chief Operating Officer resigned from their employment with the Company, and
since September 1998, the Company has been operating under an Acting Chief
Executive Officer. In addition, if any of the executive management team or
senior management of the business units is 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.
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 this rate may increase in the future. In addition, California and
other states have increased or may increase their minimum wage above the federal
minimum. If the Company increases wages to remain competitive, its business,
financial condition and results of operations may be materially adversely
affected.
THE COMPANY DEPENDS ON SELECTED MARKETS FOR ITS REVENUES
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 these clients for the services offered by the Company.
Any such reduction in demand may have a material adverse effect on the Company's
business, financial condition and results of operations.
9
<PAGE>
THE COMPANY'S QUARTERLY RESULTS OF OPERATIONS MAY FLUCTUATE
The Company's results of operations may fluctuate in any given year, and
from quarter to quarter. Factors that may cause material fluctuations in
quarterly results of operations include:
o the gain or loss of significant clients;
o increases or reductions in the scope of services performed for
significant clients;
o the timing or completion of significant projects;
o the relative mix of higher and lower margin projects;
o changes in pricing strategies, capital expenditures and other costs
relating to the expansion of operations;
o the hiring or loss of personnel;
o other factors that may be outside of the Company's control;
o the timing and structure of acquisitions; and
o the timing and magnitude of costs related to acquisitions.
In addition, because the anticipated financial benefits of the combination
of the Founding Companies and the Acquired Businesses may not be generated
immediately, the Company's early 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 these
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'S BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED IF IT IS UNABLE TO
INTEGRATE THE BUSINESSES IT ACQUIRES OR EFFECTIVELY MANAGE ITS GROWTH.
The Company acquired the Acquired Businesses in 1998. The Company may not
achieve the anticipated benefits from its acquisitions unless the operations,
internal systems and controls of the Acquired Businesses are successfully
combined with those of the Company in a timely manner. In addition, the Company
cannot be certain that the operating results of the Company will match or exceed
the combined individual operating results achieved by the Founding Companies,
Acquired Businesses or additionally acquired companies prior to their
acquisition. A number of the Founding Companies and Acquired Businesses offer
different services, utilize different capabilities and technologies and target
different geographic markets and industries. These differences increase the risk
inherent in successfully completing their integration. In addition, the Company
cannot be certain 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. Any difficulties
encountered in the integration process could have an adverse impact on the
Company's business, financial condition and results of operations.
The integration of the Founding Companies and the Acquired Businesses and
any future acquisitions requires substantial attention from the Company's
management. The Company's rapid expansion during 1998 also has placed
significant demands on its executive and senior management and other resources.
With the addition of the Acquired Businesses, the Company's employees increased
from approximately 950 at December 31, 1997 to approximately 1,200 at December
31, 1998. In addition, the Company's executive and senior management has limited
experience managing a business of the Company's size or managing a public
company. If the Company is unable to manage its growth effectively, the
Company's business, financial condition and results of operations may be
materially and adversely affected.
10
<PAGE>
THE COMPANY WILL NEED ADDITIONAL FINANCING FOR FUTURE ACQUISITIONS
To the extent that the Company is able to acquire document management
services businesses, it will finance the acquisitions by:
o using cash from operations;
o issuing shares of Common Stock, debt or other securities; and
o borrowing under the Company's then-existing credit facilities.
In March 1998, the Company entered into the Credit Facility to assist in
the funding of future acquisitions and operating activities. As of December 31,
1998, there were no available funds under the Credit Facility. The Company will
need additional debt or equity financing in order to make any future
acquisitions. The Company cannot be sure that it will be able to obtain such
financing, if and when it is needed, or that, if available, this 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 acquire additional document management services companies. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company may substantially increase its level of indebtedness to finance
future acquisitions. The degree to which the Company is financially leveraged
following these borrowings and the terms of the Company's indebtedness could
have adverse effects on the Company's business, operations and financial
condition, including:
o impairing 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;
o causing the Company to dedicate a substantial portion of its cash
flow from operations to the payment of the principal of, and
interest on, its indebtedness;
o exposing the Company to variable rate interest risks;
o limiting the ability of the Company to effect future debt or equity
financings and otherwise restricting corporate activities; and
o placing the Company at a competitive disadvantage to those
competitors who are not as highly financially leveraged.
THE COMPANY MAY INCUR LIABILITY FOR BREACH OF CONFIDENTIALITY
A substantial portion of the Company's business involves the handling of
documents containing confidential and other sensitive information. The Company's
unauthorized disclosures of this type of information could result in liability
to the Company and could have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS RELATED TO ENVIRONMENTAL CONDITIONS
For part of its operations the Company uses chemical products that are
regulated under federal, state and local laws as hazardous substances and which
produce wastes that also 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 operations that would be likely to have a
material adverse effect on its business, financial condition or results of
operations. However, any environmental liabilities incurred by the Company under
these laws could have a material adverse effect on the Company's business,
financial condition and results of operations.
11
<PAGE>
PUBLIC SECTOR MARKET AND CONTRACTING RISKS
Though a modest portion of the Company's present business involves public
sector contracts, the Company anticipates growth in the portion of its business
coming from contracts with local, state and federal government agencies.
Business with governmental agencies may be easily terminated or lost because
public sector contracts generally:
o are subject to detailed regulatory requirements;
o are subject to public policies and funding priorities;
o may be conditioned upon the continuing availability of public funds,
o are subject to certain pricing constraints; and
o may be terminated for a variety of factors, including when it is in
the best interests of the particular governmental agency.
Loss or termination of significant public sector contracts due to these
factors or others unique to contracts with governmental entities may have a
material adverse effect on the Company's future business, financial condition
and results of operations.
THE PRICE OF THE COMMON STOCK IS SUBJECT TO SIGNIFICANT VOLATILITY
The market price for the Common Stock has been highly volatile. This
volatility may adversely affect the price of the Common Stock in the future.
Prices for the Common Stock will be determined by the marketplace and may be
influenced by many factors, including;
o the depth and liquidity of the trading market;
o investor perception of the Company;
o general economic and market conditions and trends;
o the Company's financial results;
o quarterly variations in the Company's financial results;
o changes in earnings estimates by analysts and reported earnings that
vary from such estimates;
o press releases by the Company or others; and
o developments affecting the Company or its industry.
The stock market has, on occasion, experienced extreme price and volume
fluctuations which have often been unrelated to the operating performance of the
affected companies.
PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS AND
PENNSYLVANIA LAW COULD DETER TAKEOVER ATTEMPTS
Some provisions of the Company's amended and restated articles of
incorporation (referred to as the "articles") and amended and restated bylaws
(referred to as 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 of the Company to be divided into
three classes of directors serving three-year staggered terms and that directors
may be removed only for cause.
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
Board of Directors of the Company has the power to determine the price and terms
under which preferred stock may be issued and to fix the terms. The ability of
the Board of Directors of the Company to issue one or more series of Preferred
Stock without shareholder approval, as well as certain applicable statutory
provisions under the Pennsylvania
12
<PAGE>
Business Corporation Law of 1988, as amended, 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 Common Stock,
which may be disadvantageous to the Company's shareholders who may otherwise
desire to participate in this type of transaction and receive a premium for
their shares.
The Pennsylvania Business Corporation Law contains a number of statutory
"anti-takeover" provisions applicable to the Company. One such provision
prohibits, subject to 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 (referred to as 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 Pennsylvania Business Corporation Law 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 Pennsylvania Business
Corporation Law expressly provides that directors do not violate their fiduciary
duties solely by relying on poison pills or the anti-takeover provisions of the
Pennsylvania Business Corporation Law.
In addition, under the terms of the letter of intent between the Company
and Pierce Leahy to form a strategic partnership, Pierce Leahy would be able to
control the Company's board of directors and have the right to convert the
securities acquired in the arrangement into a significant amount of Common
Stock. If the strategic partnership with Pierce Leahy is consummated, Pierce
Leahy may be able to delay or frustrate potential acquisition proposals or
changes in control of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Recent Developments."
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.
13
<PAGE>
ITEM 2. PROPERTIES
The Company's headquarters offices are in Conshohocken, Pennsylvania
occupying 2,955 square feet maintained under a lease expiring in February 2000.
In addition, as of December 31, 1998, the Company conducted operations through
one owned and 28 other leased facilities in 14 states containing, in the
aggregate, approximately 394,000 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
Hayward, CA 15,600 Document management operations, offices
Emeryville, CA 24,000 Warehouse
Sacramento, CA 6,000 Document management operations
Chesterton, IN* 41,000 Offices, document management operations
Chesterton, IN 11,000 Warehouse
Indianapolis, IN 8,000 Offices, document management operations
Retail, document management operations,
Monroe, LA 65,000 offices
Bossier City, LA 4,000 Offices
Stoughton, MA 47,000 Document management operations, offices
Saginaw, MI 20,000 Document management operations, offices
Minnetonka, MN 7,000 Document management operations, offices
Lincoln, NE 4,300 Document management operations, offices
Lincoln, NE 6,900 Warehouse, offices
Millwood, NY 1,000 Offices
Syracuse, NY 1,200 Warehouse
Syracuse, NY 9,000 Document management operations, offices
Dayton, OH 12,500 Document management operations, offices
Eugene, OR 11,400 Document management operations, offices
Eugene, OR 1,500 Warehouse
Eugene, OR 2,300 Document management operations, offices
Portland, OR 13,500 Document management operations, offices
Philadelphia, PA 2,000 Document management operations, offices
Dallas, TX 15,000 Document management operations, offices
Ft Worth, TX 8,000 Document management operations, offices
Houston, TX 20,000 Document management operations, offices
Houston, TX 5,000 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.
14
<PAGE>
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4(A) EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers and their respective ages and positions
are as follows:
NAME AGE POSITION
- ---- --- --------
Andrew R. Bacas........ 40 Acting Chief Executive Officer and Director
James D. Brown......... 41 Senior Vice President -- Finance, Chief
Financial Officer, Assistant Secretary and
Treasurer
ANDREW R. BACAS has been serving as the Company's Acting Chief Executive
Officer since September 1998. He is also a founder of the Company and has been a
director since its inception. Mr. Bacas joined GBL Capital Corporation in May
1997 and served as the Company's Senior Vice President -- Corporate Development
from August 1997 to September 1998, when he became Acting Chief Executive
Officer of the Company. 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.
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.
GROUP AND BUSINESS UNIT MANAGEMENT. Other significant management employees
of the Company are as follows:
Gary D. Blackwelder, age 42, served as President of I(2) Solutions,
one of the Founding Companies, from 1989 until its acquisition by the
Company. Mr. Blackwelder has managed the Company's Monroe, LA business unit
since December 1997. Mr. Blackwelder is the Group Leader for the Monroe,
LA, Houston, TX and Dallas, TX business units.
Blair Hayes, age 36, served as Vice President of Advanced Image
Management, Inc. from 1988 until its acquisition by the Company in 1998.
Mr. Hayes is a Group Leader for the Forest, VA, Chesterton, IN and Saginaw,
MI business units.
Rex Lamb, age 40, has managed the Company's Lincoln, Nebraska business
unit and has served as a director of the Company since December 1997. Mr.
Lamb founded DocuTech, Inc., a document management services company, in
1991 and served as its President from inception until its acquisition by
the Company in December 1997. Mr. Lamb co-founded DocuTech Data Systems,
Inc., a provider of open-architecture document-scanning software products,
in 1994 and served as its President since inception until its acquisition
by the Company in December 1997. Mr. Lamb has an undergraduate degree in
Education from the University of Nebraska. Mr. Lamb is the Group Leader for
the Lincoln, NE, Syracuse, NY and Minnetnka, MN business units.
15
<PAGE>
John E. Semasko, age 53, a director of the Company since December
1997. Mr. Semasko acquired Oregon Mico-Imaging, Inc., a document management
services company, in 1975 and served as its President from its inception
until its acquisition by the Company in December 1997. Mr. Semasko has an
undergraduate degree in Forestry from Rutgers University. Mr. Semasko is
the Group Leader for the Eugene, OR, Hayward, CA and Tempe, AZ business
units.
Mitchell J. Taube, age 42, has managed the Company's Millwood, New
York business unit since December 1997 and has served as a director of the
Company since June 1998. Mr. Taube is a director of Briarcliff Manor
Education Foundation and currently serves on the Service Company Executive
Committee of the Association for Information and Image Management
International. Mr. Taube has an undergraduate degree and an MBA from
Hofstra University. Mr. Taube is the Group Leader for the Millwood, NY,
Dayton, OH, Philadelphia, PA and Indianapolis, IN business units.
16
<PAGE>
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock formerly traded on the Nasdaq National Market
under the symbol "IMAG" and presently trades on the OTC Bulletin Board under the
same symbol. Shares of the Company's Common Stock were first traded publicly on
December 4, 1997. The following table sets forth, for the periods indicated, the
high and low bid prices per share of the Common Stock, as reported on the Nasdaq
National Market or the OTC Bulletin Board, as applicable, since the Offering in
December 1997.
HIGH LOW
---- ---
1997 Fourth Quarter
(from December 4, 1997).......................... $12 1/4 $9 7/8
1998 First Quarter................................. $11 5/8 $5 5/8
1998 Second Quarter................................ $8 1/2 $5
1998 Third Quarter................................. $6 $2
1998 Fourth Quarter................................ $2 11/16 $ 11/16
1999 First Quarter
(through March 29, 1999)......................... $1 5/8 $ 9/16
On March 29, 1999, the closing bid price for a share of Common Stock as
reported by the OTC Bulletin Board was $1.31 and the number of holders of record
of the Common Stock was 87. The over-the-counter market quotations reflect
inter-dealer prices, without retail markup, markdown or commission and may not
necessarily represent actual transactions.
On January 28, 1999, Nasdaq notified the Company that the Common Stock was
delisted from the Nasdaq National Market, effective with the close of business,
January 28, 1999, due to the Company's inability to remain in compliance with
certain maintenance standards required for continued listing on the Nasdaq
National Market. Presently, and since that date, the Common Stock has been
eligible to trade on the OTC Bulletin Board. The OTC Bulletin Board is operated
by the National Association of Securities Dealers as a forum for electronic
trading and quotation.
The Company has not paid any dividends since its inception and currently
intends to retain all earnings for use in its business. In addition, the Company
is subject to certain restrictions with respect to the payment of dividends on
its Common Stock, pursuant to the provisions contained in its credit facility.
The declaration and payment of dividends in the future will be determined by the
Company's Board of Directors in light of conditions then existing, including the
Company's earnings, financial condition, capital requirements and other factors.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
During the fourth quarter of 1998, the Company issued 115,836 shares of
Common Stock as partial earnout consideration for a prior acquisition of an
Acquired Business. The issuance of such securities did not involve underwriters
and was exempt from registration under the Securities Act by virtue of the
exemption provided by Section 4(2) thereof for transactions not involving any
public offering.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data presented below have
been derived from the Company's consolidated financial statements for each of
the periods indicated. The data set forth below is qualified by reference to and
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Consolidated Financial
Statements included as Items 7 and 8 in this Annual Report on Form 10-K.
17
<PAGE>
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED FROM INCEPTION
DECEMBER 31, (NOVEMBER 12, 1996)
--------------------- TO
1998 1997 DECEMBER 31, 1996
------- ------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Services.................................... $49,387 $ 2,344 $ --
Products.................................... 15,189 767 --
------- ------- ------
64,576 3,111 --
------- ------- ------
Cost of revenues:
Services.................................... 33,252 1,603 --
Products.................................... 10,587 524 --
Depreciation................................ 1,565 94 --
------- ------- ------
45,404 2,221 --
------- ------- ------
Gross profit.......................... 19,172 890 --
Selling and administrative expenses.............. 17,606 2,074 23
Amortization of intangibles...................... 1,482 112 --
Restructuring costs.............................. 1,387 -- --
Loss on sale of business units................... 4,995 -- --
Special compensation charge...................... -- 2,235 --
Acquired in-process research and development
charge......................................... -- 4,000 --
------- ------- ------
Operating loss........................ (6,298) (7,531) (23)
Interest expense................................. 2,133 8 --
------- ------- ------
Net loss......................................... $(8,431) $(7,539) $ (23)
======= ======= ======
Basic and diluted net loss per share............. $ (1.40) $ (8.13) $(0.04)
======= ======= ======
Basic and diluted weighted average number of
shares outstanding............................. 6,034 928 550
======= ======= ======
BALANCE SHEET DATA:
<CAPTION>
DECEMBER 31,
-------------------------------------------
1998 1997 1996
------- ------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................... $ 736 $ 1,310 $ 62
Working capital (deficiency)................ (17,228) 2,994 57
Intangible assets........................... 46,607 32,996 --
Total assets................................ 69,574 48,228 62
Total debt.................................. 20,496 593 --
Shareholders' equity........................ 36,652 40,018 57
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and related notes thereto and the "Selected Consolidated
Financial Data" set forth in Item 6 of this Annual Report on Form 10-K. Except
for the historical information contained herein, this and other sections of this
Annual Report on Form 10-K contain certain forward-looking statements that
involve substantial risks and uncertainties. When used in this Annual Report on
Form 10-K, 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 set forth in "Business -- Risk
Factors."
INTRODUCTION
ImageMax was founded in November 1996 to become a leading, national
single-source provider of integrated document management solutions. See
"Business." The Company's revenues are 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.
In connection with the Offering, the Company acquired 14 document
management service companies (the "Founding Companies"). Since the Offering
through December 31, 1998, the Company has acquired the Acquired Businesses. In
December 1998 and January 1999, the Company sold facilities in Charlotte, NC,
Cayce, SC, and Cleveland, TN (the "Southeast Group").
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 imaging and micrographic equipment
sold. Product revenues are derived from equipment sales and software sales and
support. Cost of revenues consists principally of the costs of products sold and
wages and related benefits, supplies, facilities and equipment expenses
associated with providing the Company's services. Selling and administrative
("S&A") expenses include salaries and related benefits associated with the
Company's executive and senior management, marketing and selling activities
(principally salaries and related costs), and financial and other administrative
expenses.
The Company has incurred significant operating losses since inception,
and as of December 31, 1998 had an accumulated deficit of $16.0 million. In
addition, as more fully described under "Liquidity and Capital Resources," the
Company is in default of its credit facility with its banks under which it has
borrowed $20.1 million, which raises substantial doubt about the ability of the
Company to continue as a going concern. See "Business -- Risk Factors" and
report of independent public accountants included in this Annual Report on Form
10-K.
HISTORICAL RESULTS OF OPERATIONS
Year Ended December 31, 1998
The results of operations for the year ended December 31, 1998 include the
revenues, cost of revenues and S&A expenses of the Founding Companies for the
entire year, and for Acquired Businesses from the dates of their acquisitions.
See results of historical operations for the year ended December 31, 1998
compared to supplemental pro forma, as adjusted, results of operations for the
year ended December 31, 1997 for a discussion of historical 1998 operating
results.
19
<PAGE>
Year ended December 31, 1997
The results of operations for the year ended December 31, 1997 include the
revenues, cost of revenues and S&A expenses for the Founding Companies only from
December 9, 1997, the date of their acquisitions.
Revenues and Cost of Revenues. Revenues and cost of revenues for the year
ended December 31, 1997 consisted entirely of the operating results of the
Founding Companies from December 9, 1997. Prior to the acquisitions of the
Founding Companies, the Company generated no operating revenues.
Selling and Administrative Expenses. S&A expenses amounted to $2.1 million
for the year ended December 31, 1997. These expenses consisted primarily of
Founding Companies' administrative expenses and of management fees paid to GBL
Capital Corporation, including $0.5 million pursuant to a management agreement.
Special Compensation Charge. In 1997, the Company sold a total of 259,135
shares of Common Stock to officers and directors of ImageMax and to certain
management personnel 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 Offering price of $12.00 per share).
Acquired In-process Research and Development Charge. In connection with
one of the Founding Companies, the Company incurred a one-time charge of $4.0
million for acquired in-process research and development relating to the value
of certain software development projects underway as of the acquisition.
From Inception to December 31, 1996
Selling and Administrative Expenses. S&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 Capital
Corporation and administrative expenses.
HISTORICAL RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND
SUPPLEMENTAL PRO FORMA, AS ADJUSTED, RESULTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996.
Prior to their acquisitions, the Founding Companies were managed throughout
1996 and 1997 as independent private companies, and their results of operations
reflect different tax structures (S corporations and C corporations) which
influenced, among other things, their historical levels of owners' compensation.
Certain former owners and key employees of the Founding Companies agreed to
certain reductions in their historical compensation subsequent to the Offering.
In July 1996, 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 of
accounting, one of the companies must be designated as the accounting acquiror.
In the Offering, ImageMax was identified as the accounting acquiror.
Accordingly, $33.1 million of goodwill relating to the Founding Companies has
been amortized as a non-cash charge to the statement of operations principally
over a 30-year period and developed technology of $0.8 million has been
amortized over a seven-year period. The annual pro forma impact of this
amortization expense in 1997 and 1996 was $1.2 million, of which $0.8 million is
non-deductible for tax purposes. This factor will tend to cause the effective
tax rate to be higher than the statutory rate.
20
<PAGE>
For purposes of discussion, the following table presents supplementary pro
forma, as adjusted, results of operations for the years ended December 31, 1997
and 1996 as if the acquisitions of the Founding Companies and the Offering
occurred on January 1, 1996. The supplemental pro forma, as adjusted, results do
not reflect the acquisition of the Acquired Businesses. The supplemental pro
forma, as adjusted, results 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. Management believes the following presentation is
informative in analyzing the business.
<TABLE>
<CAPTION>
SUPPLEMENTAL PRO FORMA, AS ADJUSTED,
HISTORICAL RESULTS FOR FOR THE YEAR ENDED DECEMBER 31,
THE YEAR ENDED ---------------------------------------
DECEMBER 31, 1998 1997 1996
---------------------- ------------------ ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Services.................. $49,387 76.5% $35,898 73.4% $31,553 72.9%
Products.................. 15,189 23.5 13,032 26.6 11,703 27.1
------- ----- ------- ----- ------- -----
64,576 100.0 48,930 100.0 43,256 100.0
------- ----- ------- ----- ------- -----
Cost of revenues:(1)
Services.................. 33,252 51.5 22,914 46.8 20,267 46.9
Products.................. 10,587 16.4 8,695 17.8 8,968 20.7
Depreciation.............. 1,565 2.4 1,317 2.7 1,408 3.3
------- ----- ------- ----- ------- -----
45,404 70.3 32,926 67.3 30,643 70.8
------- ----- ------- ----- ------- -----
Gross profit........ 19,172 29.7 16,004 32.7 12,613 29.2
Selling and administrative
expenses(2)(3)(4)............ 17,606 27.3 12,719 26.0 11,808 27.3
Amortization of
intangibles(6)............... 1,482 2.3 1,195 2.4 1,195 2.8
Restructuring costs............ 1,387 2.2 -- -- -- --
Loss on sale of business
units........................ 4,995 7.7 -- -- -- --
Special compensation
charge(5).................... -- -- 2,235 4.6 -- --
------- ----- ------- ----- ------- -----
Operating loss...... (6,298) (9.7) (145) (0.3) (390) (0.9)
Interest expense(7)............ 2,133 3.4 70 0.1 70 0.2
Interest income................ -- -- (94) (0.2) (98) (0.2)
------- ----- ------- ----- ------- -----
Loss before income
taxes............. (8,431) (13.1) (121) (0.2) (362) (0.8)
Income tax provision(8)........ -- -- 1,139 2.3 169 0.4
------- ----- ------- ----- ------- -----
Net loss....................... $(8,431) (13.1)% $(1,260) (2.6)% $ (531) (1.2)%
======= ===== ======= ===== ======= =====
</TABLE>
UNLESS OTHERWISE INDICATED, THE FOLLOWING FOOTNOTES APPLY ONLY TO THE
SUPPLEMENTAL PRO FORMA, AS ADJUSTED, OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996.
- ------------------
(1) Includes a pro forma adjustment to increase cost of revenues to reflect the
Company's new operating leases on facilities at certain Founding Companies.
(2) Reflects a pro forma reduction in compensation to the former owners of the
Founding Companies to which they have agreed prospectively.
(3) Includes compensation of $610,000 annually based upon employment agreements
with the Company's executive management.
(4) For 1997, includes non-recurring transaction costs of $742,000 incurred by
the Founding Companies in connection with their acquisitions.
21
<PAGE>
(5) For 1997, includes a non-recurring, non-cash special compensation charge.
See Note 10 to the Consolidated Financial Statements.
(6) Includes amortization on the $33.1 million of goodwill recorded as a result
of the acquisitions of the Founding Companies 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.
(7) Reflects adjustment for the elimination of interest expense resulting from
the repayment of debt paid from the net proceeds of the Offering.
(8) Reflects an estimated corporate income tax rate of 39.3% before considering
the non-deductibility of approximately $0.8 million of annual amortization
of intangible assets and the $2.2 million special compensation charge in
1997.
RESULTS OF HISTORICAL OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
COMPARED TO SUPPLEMENTAL PRO FORMA, AS ADJUSTED,
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
Revenues
Total Revenues. Revenues increased $15.6 million, or 31.9%, from $48.9
million in 1997 to $64.6 million in 1998. Service revenues increased 37.6% and
comprised 73.4% of total revenues in 1997 as compared to 76.5% in 1998. In 1998,
product revenues increased 16.6% and comprised 26.6% of total revenues in 1997
as compared to 23.5% in 1998. In 1998, the Southeast Group, which was sold in
December 1998 and January 1999, had total revenues of $6.5 million, comprised of
$3.7 million (57.3%) of service revenues and $2.8 million (42.7%) of product
revenues.
The increase in total revenues was comprised of decrease of $0.6 million
attributable to the Founding Companies and an increase of $16.2 million
attributable to the Acquired Businesses, which are not included in the year
ended December 31, 1997. The Founding Companies' decrease was primarily due to:
(1) a decrease in volume at the Massachusetts, Indiana, and South Carolina
business units; (2) an offsetting increase in off-shore data entry sales volume;
and (3) an offsetting increase in digital imaging sales volume.
Service Revenues. Service revenues increased $13.5 million, or 37.6%, from
$35.9 million in 1997 to $49.4 million in 1998. This increase was comprised of
an increase of $0.1 million attributable to the Founding Companies and an
increase of $13.4 million attributable to the Acquired Businesses, which are not
included in the year ended December 31, 1997. The Founding Companies' increase
was primarily due to: (1) a decrease in volume at the Massachusetts, Indiana,
and South Carolina business units; (2) an offsetting increase in off-shore data
entry sales volume; and (3) an offsetting increase at the Virginia business unit
attributable to several large digital conversion projects.
Product Revenues. Product revenues increased $2.2 million, or 16.6%, from
$13.0 million in 1997 to $15.2 million in 1998. This increase was comprised of a
decrease of $0.6 million attributable to the Founding Companies and an increase
of $2.8 attributable to the Acquired Businesses, which are not included in the
year ended December 31, 1997. The Founding Companies' decrease was primarily due
to a decrease in volume at the Massachusetts, South Carolina, and Virginia
business units and an offsetting increase in digital imaging sales volume.
Cost of Revenues
Cost of Services. Cost of services increased $10.3 million, or 45.1%, from
$22.9 million in 1997 to $33.3 million in 1998. As a percentage of service
revenues, cost of services amounted to 63.8% in 1997 as compared to 67.3% in
1998. In 1998, cost of services as a percentage of service revenues attributable
to the Founding Companies and Acquired Businesses amounted to 67.8% and 66.0%,
respectively. The increase in cost of services as a percentage of service
revenues of 3.5% was primarily due to an increase attributable to production
inefficiencies (such as high labor costs and rework) at the
22
<PAGE>
Massachusetts, South Carolina, and Virginia business units and an offsetting
decrease in service costs at most other locations, particularly in the
California and New York business units, due to a combination of improved media
conversion efficiency and larger off-shore data entry sales volumes.
Cost of Products. Cost of products decreased $1.9 million, or 21.8%, from
$8.7 million in 1997 to $10.6 million in 1998. As a percentage of product
revenues, cost of products amounted to 66.7% in 1997 as compared to 69.7% in
1998. In 1998, cost of products as a percentage of product revenues attributable
to the Founding Companies and Acquired Businesses amounted to 68.1% and 76.9%,
respectively. The increase in cost of products as a percentage of product
revenues of 3.0% was primarily due to an increase attributable to unfavorable
product mix at the Massachusetts, South Carolina, and Virginia business units
and an increase attributable to costs associated with the development of
software.
Depreciation. Depreciation increased $0.2 million, or 18.9%, from $1.3
million in 1997 to $1.5 million in 1998, due primarily to depreciation of
machinery and other capital equipment of the Acquired Businesses.
Gross Profit
As a result of higher service and product revenues as described above,
gross profit increased $3.2 million, or 19.8%, from $16.0 million in 1997 to
$19.2 million in 1998. In 1998, the Founding Companies experienced a decrease of
$1.7 million and a decline in gross profit percentage of 3.0% as compared to the
year ended December 3, 1997. In 1998, Acquired Businesses contributed $4.9
million of gross profit at a gross profit percentage of 30.1% and the former
Southeast Group had gross profit of $0.9 million and a gross profit percentage
of 13.9%.
The Founding Companies' gross profit percentage decline was primarily due
to: (1) higher service costs in the Massachusetts, South Carolina and Virginia
business units, primarily due to production inefficiencies (such as high labor
costs and rework); (2) an increase attributable to costs associated with the
development of software; and (3) an offsetting decrease in service costs at most
other locations, particularly in the California and New York business units, due
to a combination of improved media conversion efficiency and larger off-shore
data entry sales volumes.
Selling and Administrative Expenses (Including Executive Compensation and
Founding Companies' Transaction Costs)
For the year ended December 31, 1998, S&A expenses increased by $4.9
million, or 38.4%, as compared to the year ended December 31, 1997. This
increase is comprised of: $3.2 million in corporate expenses; $3.8 million
attributable to the Acquired Businesses; an offsetting decrease of $1.4 million
attributable to the Founding Companies; and an offsetting decrease of $0.7
million related to non-recurring transaction costs incurred by the Founding
Companies for the year ended December 31, 1997 in connection with their
acquisitions.
The increase in corporate expenses is primarily due to: (1) the staffing of
the Company's headquarters function; (2) the integration of technology; (3)
sales development costs; (4) increased travel and marketing expenses; and (5)
the costs associated with being a public company. In September 1998, the Company
began implementing a cost reduction plan that included headcount reductions at
the corporate office that will provide annual cost savings of approximately $0.8
million. Because the corporate office was formed at the end of 1997, pro forma
results for 1997 exclude the majority of corporate overhead expenses.
In 1997, the Founding Companies' incurred approximately $0.7 million of
transaction costs in connection with their acquisition by the Company, which
primarily consisted of outside accounting and legal fees. The Company also
incurred additional S&A expenses of $0.6 million for its corporate function in
1997, excluding executive management compensation. Corporate S&A expenses
included $0.3 million of Company formation costs (primarily audit and other
public company expenses) triggered by the Offering in December 1997. Excluding
Founding Companies' transaction' costs and
23
<PAGE>
corporate S&A expenses, S&A expenses and executive compensation amounted to
$10.7 million in 1997.
Amortization of Intangible Assets
Amortization of $1.2 million in 1997 consists of the estimated amortization
of intangible assets (principally goodwill) related to the acquisitions of the
Founding Companies, as though they had taken place on January 1, 1996.
Amortization of $1.5 million in 1998 includes amortization of intangible assets
(principally goodwill) of the Founding Companies and amortization of goodwill
associated with the Acquired Businesses.
Restructuring Costs and Loss on Sale of Business Units
For the year ended December 31, 1998, the Company recorded a restructuring
charge of $1.4 million, primarily for severance payments related to headcount
reductions at the corporate office and a business unit and facility costs
associated with business unit consolidations. In addition, the Company incurred
a loss of $5.0 million, related to the sales in December 1998 and January 1999
of facilities in Charlotte, NC, Cayce, SC and Cleveland, TN and represents the
difference between the net proceeds from the transactions and the net asset
value of these locations, including $4.2 million of goodwill.
Operating Loss
Operating loss increased by $6.3 million, from an operating loss of
$145,000 in 1997 to an operating loss of $6.3 million in 1998. In 1998, the
former Southeast Group incurred an operating loss of $0.7 million, or 10.2%, on
total revenues of $6.5 million. Excluding restructuring costs and loss on sale
of business units, operating income amounted to $84,000 in 1998.
Interest Income (Expense)
Interest income, net of interest expense, was $24,000 in 1997 as compared
to interest expense of $2.1 million in 1998. The increase in interest expense is
attributable to borrowings under the Credit Facility and the amortization and
write-off of the related debt financing costs.
Income Tax Provision
Due to the Company's loss position, no income tax provision was recognized
in 1998. In 1997, the pro forma income tax provision amounted to $1.1 million.
See "Supplemental Pro Forma, as adjusted, Results of Operations for the Year
Ended December 31, 1997 Compared to the Year Ended December 31, 1996" for
further discussion of the 1997 pro forma income tax provision.
Net Loss
Net loss amounted to $1.3 million in 1997 as compared to $8.4 million in
1998. Excluding restructuring costs and loss on sale of business units in 1998
and the special compensation charge in 1997, net loss amounted to $2.0 million
in 1998 and net income amounted to $1.0 million in 1997. The decrease in net
income of $3.0 million was primarily attributable to: (1) interest expense
attributable to borrowings under the Credit Facility used to finance the
Acquired Businesses, including the amortization of $0.9 million in related
financing costs, and for general corporate purposes; (2) an increase in S&A
expenses; (3) an increase in amortization attributable to the Acquired
Businesses; (4) an offsetting increase in gross profit; and (5) an offsetting
increase attributable to no income tax benefit.
24
<PAGE>
SUPPLEMENTAL PRO FORMA, AS ADJUSTED, RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Revenues
Total Revenues. Revenues increased $5.7 million, or 13.1%, from
approximately $43.3 million in 1996 to $48.9 million in 1997. Service revenues
increased 13.8% and comprised 72.9% of total revenues in 1996 as compared to
73.4% in 1997. Product revenues increased 11.4% and comprised 27.1% of total
revenues in 1996 as compared to 26.6% in 1997.
Service Revenues. Service revenues increased $4.3 million, or 13.8%, from
$31.6 million in 1996 to $35.9 million in 1997. This increase was primarily due
to: (1) $1.1 million resulting from increased utilization of excess media
conversion capacity at production facilities in the South Carolina and Arizona
business units; (2) $1.0 million resulting from the addition of several major
recurring media conversion accounts in the Virginia business unit; (3) $1.4
million resulting from sales force additions and several major projects at the
Company's off-shore data entry business unit; and (4) $0.4 million resulting
from a variety of projects in the Ohio business unit reflecting the development
of an in-house sales function established during 1996.
Product Revenues. Product revenues increased $1.3 million, or 11.4%, from
$11.7 million in 1996 to $13.0 million in 1997. This increase was primarily due
to $0.7 million resulting from unit volume increases in digital imaging software
sales to other document management companies and end-users and $0.6 million
resulting from unit volume increases in hardware sales (principally equipment)
in the Oregon and Louisiana business units.
Cost of Revenues
Cost of Services. Cost of services increased $2.6 million, or 13.1%, from
$20.3 million in 1996 to $22.9 million in 1997. As a percentage of service
revenues, cost of services amounted to 64.2% in 1996 as compared to 63.8% in
1997. The decrease in cost of services as a percentage of service revenues of
0.4% was primarily due to: (1) a decrease resulting from economies of scale and
improved conversion methods in the Ohio business unit; (2) a decrease resulting
from an increase in off-shore data entry revenue with principally fixed project
management costs; (3) a decrease resulting from a change in the sales mix to
higher margin digital imaging services in the Arizona business unit; (4) an
offsetting increase resulting from incrementally higher service costs on larger
revenue volumes in the Virginia business unit; and (5) an offsetting increase
resulting from a shift in service mix in the Massachusetts business unit.
Cost of Products. Cost of products decreased $0.3 million, or 3.0%, from
$9.0 million in 1996 to $8.7 million in 1997. As a percentage of product
revenues, cost of products amounted to 76.6% in 1996 as compared to 66.7% in
1997. The decrease in cost of products as a percentage of product revenues was
primarily due to: (1) a decrease resulting from higher product sales in the
Massachusetts and Oregon business units; (2) a shift in mix within software
sales, and to the low incremental cost of additional software sales spread over
an increased revenue base; and (3) an offsetting increase resulting from lower
product sales in the Arizona and Ohio business units.
Depreciation. Depreciation decreased $0.1 million, or 6.5%, from $1.4
million in 1996 to $1.3 million in 1997.
Gross Profit
As a result of the higher service and product revenues and a decline in
associated costs of services and products as described above, gross profit
increased $3.4 million, or 26.9%, from $12.6 million in 1996 to $16.0 million in
1997.
25
<PAGE>
Selling and Administrative Expenses (Including Executive Compensation and
Founding Companies' Transaction Costs)
In 1997, the Founding Companies incurred approximately $0.7 million of
transaction costs in connection with their acquisition by the Company, which
primarily consisted of outside accounting and legal fees. The Company also
incurred additional S&A expenses of $0.6 million for its corporate function in
1997, excluding executive management compensation, as compared to no material
expenses in 1996. Corporate S&A expenses included $0.3 million of Company
formation costs (primarily audit and other public company expenses) triggered by
the Offering in December 1997. Excluding Founding Company transaction costs and
corporate S&A expenses, S&A expenses and executive compensation amounted to
$10.7 million in 1997, a decline of $0.5 million from 1996. This decline is
primarily attributable to $0.2 million in non-recurring severance costs incurred
in 1996 and payroll and other cost reduction measures incurred by business unit
management to improve profitability. In 1996 and 1997, S&A expenses included
$650,000, for each year, of compensation costs associated with positions that
have been eliminated in connection with the acquisitions of the Founding
Companies.
Amortization of Intangible Assets
Amortization of $1.2 million in 1996 and 1997 consists primarily of the
estimated amortization of intangible assets (principally goodwill) related to
the acquisitions of the Founding Companies, as though they had taken place on
January 1, 1996.
Operating Loss
Operating loss was decreased by $245,000, from an operating loss of
$390,000, or 0.9% of total revenues, in 1996 to an operating loss of $145,000,
or 0.3% of total revenues, in 1997. Excluding the $2.2 million special
compensation charge, operating income amounted to $2.1 million, or 4.3% of the
total revenues, in 1997, an increase of $2.5 million as compared to 1996.
Interest Income (Expense)
Interest income, net of interest expense, was $28,000 in 1996 and $24,000
in 1997.
Income Tax Provision
The income tax provision increased $1.0 million in 1997 from $169,000 in
1996 to $1.1 million in 1997. Excluding the $2.2 million special compensation
charge, the effective tax rate for 1997 was 53.8%. Prior to their acquisitions,
the Founding Companies were operated as separate entities for tax purposes in
each year.
Net Loss
Net loss amounted to $0.5 million in 1996 as compared to $1.3 million in
1997. Excluding the $2.2 million special compensation charge, net income
amounted to $1.0 million in 1997, an increase of $1.5 million as compared to
1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash and cash equivalents of $0.7
million and a working capital deficiency of $17.2 million. The working capital
deficiency was largely a result of the classification of borrowings under the
Credit Facility as a current liability. In 1998, cash used in operating
activities was $0.2 million; cash used in investing activities was $19.2
million; and cash provided by financing activities was $18.8 million. To
continue its operations through the next 12 months, the Company will need
additional financing from sources other than funds received through operations.
26
<PAGE>
At December 31, 1997, the Company had cash and cash equivalents of $1.3
million and working capital of $3.0 million. Pursuant to the Offering, the
Company raised net proceeds of $30.5 million, substantially all of which was
used to fund the acquisitions of the Founding Companies, including the
retirement of Founding Companies' debt of $3.3 million (net of cash acquired).
In 1996, cash used in operating activities was $18,000. In 1997, cash provided
by operating activities was $186,000. From inception through the effective date
of the Offering (December 3, 1997), ImageMax had cash provided from financing
activities of $1.7 million raised from private equity financings.
On March 30, 1998, the Company entered into a credit facility with a bank
(the "Credit Facility"), providing a revolving line of credit of $30 million in
borrowings. This agreement was substantially amended in November 1998. Under the
original terms of the Credit Facility, the Company could borrow up to $25
million to finance future acquisitions and up to $5 million for working capital
purposes. Prior to the amendment, borrowings under the facility bore interest at
LIBOR or prime plus an applicable margin at the option of the Company. In
addition to interest and other customary fees, the Company is obligated to remit
a fee ranging from 0.2% to 0.375% per year on unused commitments. The Credit
Facility is secured by substantially all of the assets of the Company. The
Credit Facility is subject to certain financial covenants which pertain to
criteria such as minimum levels of cash flow, ratio of debt to cash flow, and
ratio of fixed charges to cash flow. Borrowing under the Credit Facility is
contingent upon the Company meeting certain financial ratios and other criteria.
The amendment to the Credit Facility dated November 16, 1998 amended
certain financial covenants for future periods, reduced the amount available
under the Credit Facility to the amount ($20.1 million) outstanding on November
6, 1998, changed the maturity date to December 1, 1999 from December 31, 2002,
required a $5.0 million principal repayment or commitments therefor by December
31, 1998, required all borrowings to bear a rate of prime plus an applicable
margin and changed other provisions.
As of December 31, 1998, the Company was in default of certain financial
and other covenants under the amended Credit Facility, including the requirement
for a $5.0 million principal repayment or commitments therefor. As a result, the
Company's indebtedness under the Credit Facility has been classified as
short-term debt. The Company is in ongoing discussions with its lenders and
other parties concerning a restructuring of its financing.
In connection with the Credit Facility, the Company incurred $904,000 of
lending and other customary fees, of which $100,000 is accrued for at December
31, 1998. These costs were initially capitalized and were amortized to interest
expense over the original term of the Credit Facility. At December 31, 1998, the
remaining unamortized costs of $0.8 million were written off and included in
interest expense.
On March 29, 1999, the Company entered into a forbearance agreement with
the banks that are parties to its Credit Facility (the "Forbearance Agreement").
Pursuant to the Forbearance Agreement, the banks have agreed to forbear from
exercising their rights and remedies with respect to all existing defaults under
the Credit Facility until the earlier of June 30, 1999 or the occurrence of a
default under the Forbearance Agreement or an additional default under the
Credit Facility.
Under the terms of the Forbearance Agreement, the current interest rate on
the outstanding obligations under the Credit Facility increases by two percent
(2%) per annum. In addition, the Company is required to maintain a daily cash
balance in its accounts of at least $300,000 and the Company may not make
capital expenditures in excess of $50,000 without the prior consent of its
banks. The Company is also required to enter into definitive agreements in
connection with the Pierce Leahy strategic partnership no later than April 30,
1999. The Company incurred a fee of $100,000 under the Forbearance Agreement,
$50,000 of which was paid upon the execution of the Forbearance Agreement and
the other $50,000 to be paid upon its termination.
Management is currently negotiating a new credit facility with its lenders
and other parties and has entered into a letter of intent for the sale of $7.9
million of preferred stock (see "Recent Developments"). Management believes that
the proceeds to be received from the preferred stock investment will allow the
Company to refinance amounts due under the Credit Facility. However, there can
be no assurance that the contemplated preferred stock investment will be
consummated or the Credit Facility will be refinanced.
The Company has halted its acquisition program, but continues to
selectively invest in equipment and technology to meet the needs of its
operations and to improve its operating efficiency.
27
<PAGE>
YEAR 2000 COMPLIANCE
At midnight on December 31, 1999, computer systems that use two digits to
represent the year are at risk of malfunction or failure. Many systems will
continue to run, but may interpret any date in the year '00 to be prior to any
date in the year '99, posing potential date comparison problems, or may fail to
recognize that the Year 2000, unlike 1900, is a leap year. Businesses and
systems that use a four-digit format to report and process dates later than
December 31, 1999 are often denoted as "Year 2000 compliant". While many systems
have no date comparison functions and operate in a date-independent mode, they
may have a date function.
If full system operation and correct display of dates subsequent to January
1, 2000 are possible, these systems may be denoted as "Year 2000 operationally
ready". Many systems and subsystems using two-digit dates will operate smoothly
until the end of their technological or economic life without regard to the
actual date. These systems are unaffected by whether it is 2000 or 1900, make no
"real-time" date comparisons and have no date display features. At the other
extreme are systems which will cease functioning or malfunction when an
unacceptable date is perceived (which in some cases could be during 1999). The
categories in which the Company faces potential exposure are as follows:
o Business Applications -- Includes proprietary software, all client/server
and desktop hardware and software used in routine business operations
including order processing, system design and documentation, procurement,
and production.
o Infrastructure/Embedded Systems -- Includes building facilities,
production equipment and systems, control systems and instrumentation.
o Telecommunications -- Includes voice, video and data switching systems
and network components.
o Business Relationships -- Includes proprietary software products licensed
to clients and the supply chain for the Company's products and service
providers including banks, insurance companies, payroll and pension plan
administrators, legal, accounting and consulting firms as well as public
utilities, telecommunications providers, transportation and overnight
delivery companies and local government services.
The Company recognizes that the Year 2000 problem is a serious,
enterprise-wide issue. The Company has formed a management team, with active
participation by representatives throughout the company, to address Year 2000
issues. Within each business unit, designated personnel are working to identify
potential Year 2000 issues in the Company's internal operations as well as the
products that it provides to its customers. In addition, the Company is
communicating with its suppliers to determine the extent to which the systems of
the suppliers are equipped to handle Year 2000 issues. Management believes that
appropriate personnel and resources have been assigned to this effort. Continued
diligence by the members of the Company's Year 2000 team and appropriate
monitoring by and support from senior management are intended to further enhance
the Company's efforts to ensure that its business will not be negatively
impacted by any Year 2000 issues in any material adverse respect.
The Company has completed Year 2000 compliance testing on certain of its
proprietary software products licensed to clients in accordance with standards
promulgated by the British Standards Institute ("BSI"). These standards address
that: (i) no value for current date will cause any interruption in operation;
(ii) date-based functionality must behave consistently for dates prior to,
during, and after year 2000; (iii) in all interfaces and data storage, the
century in any date must be specified either explicitly or by unambiguous
algorithms or inferencing rules; and (iv) year 2000 must be recognized as a leap
year. Certain software products licensed to clients have been found to comply
with these standards. Certain other proprietary software products licensed to
clients have not met the BSI Standards, in that such products operate on a
third-party platform that has been disclosed as not Year 2000 compliant. The
Company has developed and is continuing to develop upgraded versions of its
non-compliant products that will be made available to all clients. The Company
is currently testing upgraded versions, as they are developed, according to the
BSI Standards.
28
<PAGE>
An inventory of exposures of the Company's internal systems is currently in
process and operational steps necessary to deal with each exposure are being
developed. The Company believes it is on schedule to complete its remediation
efforts by September 30, 1999. The Company plans to modify or replace its
affected internal systems in a manner that will minimize any detrimental effects
on operations. The Company has not undertaken any contingency planning at this
time.
The Company believes that the cost of developing an inventory of potential
internal Year 2000 issues, the analysis of that inventory, and remediation of
any issues found to cause potential operational problems will not exceed
$100,000. While the Company presently believes that the ultimate outcome of any
such modifications or replacements will not have a material effect on the
Company's current financial position, liquidity or results of operations,
information developed as a result of the Company's continuing inventory and
analysis of issues may result in increased cost estimates and such costs could
have a material effect on results of operations.
In addition to working to make its own internal systems Year 2000 ready,
the Company has and will continue to survey its key suppliers to determine the
extent to which the systems of such suppliers are Year 2000 compliant and the
extent to which the Company could be affected by the failure of such third
parties to be Year 2000 compliant. The Company cannot presently estimate the
impact of the failure of such third parties to be Year 2000 compliant.
RECENT DEVELOPMENTS
On March 12, 1999, the Company and Pierce Leahy signed a letter of intent
to form a strategic partnership. Under the terms of the proposed strategic
partnership arrangement, Pierce Leahy will purchase 3,144,000 shares of a new
series of ImageMax preferred stock at $2.50 per share (for an aggregate purchase
price of $7.9 million). Each share of preferred stock is convertible into one
share of common stock and carries no dividend or liquidation preference. Pierce
Leahy will also receive two warrants that may be exercised over the next four
and five years to purchase from the Company 1,719,000 shares and 1,861,000
additional shares of preferred stock at $4.00 and $5.00 per share, respectively.
Pierce Leahy will have the right to elect a majority of the Company's Board of
Directors, subject to certain conditions. In the event that the Company
contemplates entering into any transaction involving a merger, consolidation,
other business combination or similar transaction, or the sale, disposal or
exchange of all or a substantial portion of the assets or capital stock of the
Company, Pierce Leahy will have a right of first refusal to enter into
substantially the same transaction; such right will last for so long as Pierce
Leahy has the right to designate any of the Company's Board of Directors.
The companies anticipate that the ability to cross-sell the Company's
digital imaging, micrographics and data entry services and Pierce Leahy's data
storage and management services will benefit both companies. In addition, the
companies anticipate cost savings by combining physical locations in certain
geographic areas, sharing document management expertise and transportation
systems, and utilizing Pierce Leahy's significant information services assets to
increase the efficiency of the Company's operations. Pierce Leahy will provide
certain management and administrative services to the Company.
The consummation of the strategic partnership is subject to due diligence,
the negotiation of a definitive purchase agreement, regulatory approval,
approval of the Board of Directors of both companies and consents of lenders of
both companies and other customary conditions. Although the companies are
seeking to complete the agreement by April 30, 1999, there can be no assurance
as to when such agreement will be completed or whether such agreement will be
completed at all. The Company has agreed to reimburse Pierce Leahy for its
expenses in connection with the proposed transaction if a definitive agreement
is not executed under certain circumstances.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth on pages F-1 through
F-20 hereto and is incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information contained under the caption "Election of Class II
Directors" and the information contained under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's definitive proxy
statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the caption "Executive Compensation" in the
Company's definitive proxy statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the caption "Stock Ownership of Principal
Shareholders and Management" in the Company's definitive proxy statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Certain Relationships and
Related Transactions" in the Company's definitive proxy statement is
incorporated herein by reference.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See Index to the Consolidated Financial Statements which begin on page F-1
of this Annual Report.
2. Financial Statement Schedules
See Schedule II -- Valuation and Qualifying Accounts on page F-20 of this
Annual Report.
3. Exhibits
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1* Agreement and Plan of Reorganization dated September 9,
1997, by and among the Company, DocuTech Data Systems, Inc.,
and Rex Lamb and Mark Creglow (including escrow agreement).
2.2* Asset Purchase Agreement dated September 9, 1997 by and
among the Company, Rex Lamb and Vicki Lamb (including escrow
agreement).
2.3* Agreement and Plan of Reorganization dated September 9,
1997, by and among the Company, Utz Medical Enterprises,
Inc., and David C. Utz, Jr. (including escrow agreement).
2.4* Agreement and Plan of Reorganization dated September 9, 1997
by and among Jane Semasko and John Semasko, Oregon
Micro-Imaging, Inc. and the Company (including escrow
agreement).
2.5* Asset Purchase Agreement dated September 9, 1997 by and
among Spaulding Company, Inc., Semco Industries, Inc., and
the Company (including escrow agreement).
2.6* Asset Purchase Agreement dated September 9, 1997 by and
among Total Information Management Corporation and the
Company (including escrow agreement).
2.7* Stock Purchase Agreement dated September 9, 1997 by and
among Ovidio Pugnale, Image Memory Systems, Inc. and the
Company (including escrow agreement).
2.8* Agreement and Plan of Reorganization dated September 9,
1997, by and among the Company, International Data Services
of New York, Inc., and Mitchell J. Taube and Ellen F.
Rothschild-Taube (including escrow agreement).
2.9* Stock Purchase Agreement dated September 9, 1997 by and
among David Crowder, TPS Micrographics, Inc. and the Company
(including escrow agreement).
2.10* Agreement and Plan of Reorganization dated September 11,
1997 by and among the Company, Image and Information
Solutions, Inc. and Gary Blackwelder (including escrow
agreement).
2.11* Agreement and Plan of Reorganization dated September 9, 1997
by and among Madeline Solomon, David C. Yezbak, CodaLex
Microfilming Corporation and the Company (including escrow
agreement).
2.12* Asset Purchase Agreement dated September 9, 1997 by and
among Imaging Information Industries, Inc., Gerald P.
Gorman, Theodore J. Solomon, Jr., Charles P. Yezbak, III,
David C. Yezbak and the Company (including escrow
agreement).
31
<PAGE>
EXHIBIT
NO. DESCRIPTION
------- -----------
2.13* Agreement and Plan of Reorganization dated September 9, 1997
by and among Gerald P. Gorman, Theodore J. Solomon, Theodore
J. Solomon, Jr., Charles P. Yezbak, III, David C. Yezbak,
Laser Graphics Systems & Services, Inc. and the Company
(including escrow agreement).
2.14* Asset Purchase Agreement dated September 9, 1997 by and
among DataLink Corporation, Judith E. DeMott, Geri E.
Davidson and the Company (including escrow agreement).
2.15 Asset Purchase Agreement, dated January 23, 1998, by and
among Integrated Information Services, L.L.C., Pettibone,
L.L.C and Heisley Holding, L.L.C. and ImageMax, Inc.
(incorporated by reference to Exhibit 2.1 of the Company's
8-K filed on February 3, 1998).
2.16 Asset Purchase Agreement, dated February 9, 1998, by and
among Document Management Group Inc., Theron Robinson and
ImageMax, Inc. (incorporated by reference to Exhibit 2.1 of
the Company's 8-K filed on February 24, 1998).
2.17 Asset Purchase Agreement, dated February 9, 1998, by and
among Image-Tec, Inc., Theron Robinson and Robert Robinson
and ImageMax, Inc. (incorporated by reference to Exhibit 2.2
of the Company's 8-K filed on February 24, 1998).
3.1* Amended and Restated Articles of Incorporation of the
Company.
3.2* Amended and Restated Bylaws of the Company.
4.1* Specimen Stock Certificate.
4.2* Shareholders Agreement between the Company and certain of
its shareholders dated November 19, 1996.
4.3* Amendment No. 1 to Shareholders Agreement dated November 19,
1996.
4.4* Form of Joinder to Shareholders Agreement executed by Bruce
M. Gillis, Sands Point Partners I, Wilblairco Associates,
Osage Venture Partners, Steven N. Kaplan, Brian K. Bergeron,
James M. Liebhardt, G. Stuart Livingston, III, Richard D.
Moseley, David C. Utz, Jr., Bruce M. Gillis, Custodian for
Claire Solomon Gillis, Bruce M. Gillis, Custodian for
Katherine Tessa Solomon Gillis, S. David Model, Andrew R.
Bacas, David C. Yezbak, Theodore J. Solomon, Walter F.
Gilbert, Carmen DiMatteo, Patrick M. D'Agostino, David L.
Crowder, James D. Brown and Mary M. Brown, JTWROS, Mitchell
S. Taube and Ellen F. Rothschild-Taube, JTWROS, John Semasko
and Jane Semasko, JTWROS, Wolfe F. Model and Renate H.
Model.
10.1*+ 1997 Incentive Plan.
10.2*+ 1997 Employee Stock Purchase Plan.
10.3*+ Management Agreement between GBL Capital Corporation and the
Company dated November 27, 1996.
10.4*+ Employment Agreement between the Company and Bruce M. Gillis
dated as of August 1, 1997.
10.5*+ Employment Agreement between the Company and James D. Brown
dated as of August 18, 1997.
10.6*+ Employment Agreement between the Company and S. David Model
dated as of August 18, 1997.
10.7*+ Employment Agreement between the Company and Andrew R. Bacas
dated as of August 1, 1997.
10.8+** Employment Agreement between the Company and John E. Semasko
dated as of September 9, 1997.
32
<PAGE>
EXHIBIT
NO. DESCRIPTION
------- -----------
10.9+** Employment Agreement between the Company and Rex Lamb dated
as of September 9, 1997.
10.10* Lease Agreement dated March 26, 1996 by and between Marlyn
D. Schwarz and Rex Lamb d/b/a DocuTech.
10.11* Lease Agreement dated February 24, 1992 by and between
Marlyn Schwarz d/b/a Old Cheney Plaza and Rex Lamb d/b/a
DocuTech.
10.12* Lease Agreement dated September 1, 1994 by and between
Jonstar Realty Corporation and Spaulding Company, Inc.
(renewed May 27, 1997).
10.13 [Intentionally left blank]
10.14* Lease dated September 1, 1995 by and between Robert S. Greer
and Elvera A. Greer and American Micro-Med Corporation.
10.15* Lease dated February 8, 1994 and Lease Rider dated as of
February 1, 1994 by and between Oporto Development Corp. and
International Data Services of New York, Inc.
10.16* Amendment of Lease dated June 6, 1996 between East Cobb Land
Development and Investment Co., L.P. and Imaging Information
Industries/David Yezbak, extended by letter dated July 16,
1997.
10.17 [Intentionally left blank]
10.18* Lease dated January 10, 1996 by and between
FinancialEnterprises III and TPS Imaging Solutions, Inc.
10.19* Lease Agreement dated March 31, 1995 by and between
Technical Publications Service, Inc. and TPS Micrographics,
Inc.
10.20* Standard Industrial Commercial MultiTenant Lease-Gross dated
June 20, 1994 by and between Northgate Assembly of God,
North Sacramento, d/b/a Arena Christian Center and Total
Information Management Corporation.
10.21* Lease dated January 26, 1981 and Extension of Lease dated
October, 1992 by and between Trader Vic's Food Products and
Total Information Management Corporation.
10.22* Standard Industrial Lease dated September 24, 1991 by and
between Charles F. Coss, Viola B. Coss, Tracey C. Quinn,
John Coss, Peter B. Coss, Elizabeth Coss, Tracey C. Quinn as
Trustee for Geoffrey C. Quinn and Elizabeth Coss, as Trustee
for Caitlin N. Shay and Total Information Management
Corporation extended by letter dated October 18, 1996 from
James Bunker to Peter Coss.
10.23* Lease dated January 1, 1993 between CSX Transportation, Inc.
and American Micro-Med Corporation.
10.24* Lease and Service Agreement dated September 4, 1997 and two
Addendums dated October 15, 1997 between American Executive
Centers, Inc. and the Company.
10.25** Credit Agreement by and among the Company and Subsidiaries
and CoreStates Bank, N.A., for itself and as Agent, and any
other Banks becoming Party, dated as of March 30, 1998.
10.26 Amendment No. 1 to Credit Agreement by and among the Company
and Subsidiaries and First Union National Bank (successor by
merger to CoreStates Bank, N.A.), for itself and as Agent,
and any other Banks becoming Party, dated as of March 30,
1998 (incorporated by reference to Exhibit 10.25 of the
Company's Form 10-K filed March 31, 1998, File No. 0-23077).
10.27 Amendment No. 2 to Credit Agreement by and among the Company
and Subsidiaries and First Union National Bank (successor by
merger to CoreStates Bank, N.A.), for itself and as Agent,
and any other Banks becoming Party, dated as of November 16,
1998).
33
<PAGE>
EXHIBIT
NO. DESCRIPTION
------- -----------
10.28 Master Demand Note, dated January 20, 1998, payable to First
Union National Bank (successor by merger to CoreStates Bank,
N.A.) (incorporated by reference to Exhibit 10.1 of the
Company's Form 8-K filed on February 3, 1998).
10.29 Security Agreement, dated January 20, 1998, between First
Union National Bank (successor by merger to CoreStates Bank,
N.A.) and the Company (incorporated by reference to Exhibit
10.2 of the Company's Form 8-K filed on February 3, 1998).
10.30 Forbearance Agreement dated March 29, 1999 by and among the
Company, First Union National Bank (successor by merger to
CoreStates Bank, N.A. ) and Commerce Bank, N.A.
10.31+ Amendment No. 1 dated as of October 1, 1998 to Employment
Agreement between the Company and James D. Brown dated as of
August 18, 1997.
10.32+ Separation Agreement by and between Bruce M. Gillis and the
Company dated September 18, 1998.
10.33+ Separation Agreement by and between Richard D. Moseley and
the Company dated September 30, 1998.
10.34+ Separation Agreement by and between David Model and the
Company dated November 9, 1998.
21 Subsidiaries.
23.1 Consent of Independent Public Accountants.
27 Financial Data Schedule (in electronic format only).
- ------------------
* Incorporated by reference to the designated exhibit of the Company's
Registration Statement on Form S-1 filed on September 12, 1997, as amended
(file number 333-35567).
**Incorporated by reference to the designated exhibit of the Company's Annual
Report on Form 10-K filed on March 30, 1998 (file number 0-23077).
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
None.
34
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
PAGE
----
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Shareholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
Financial Statement Schedule:
II. Valuation and Qualifying Accounts................. F-20
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ImageMax, Inc.:
We have audited the accompanying consolidated balance sheets of ImageMax, Inc.
(a Pennsylvania Corporation) and Subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the years then ended and the period from inception (November 12,
1996) to December 31, 1996. These financial statements and schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and schedule
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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
ImageMax, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended and
the period from inception (November 12, 1996) to December 31, 1996, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company is in default of certain
financial and other covenants under its credit facility, which raises
substantial doubt about the ability of the Company to continue as a going
concern. Management's plans in regard to this matter are also described in Note
1. The accompanying financial statements do not include any adjustments relating
to the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable
to continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements and Financial Statement Schedule is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not a required part of the basic financial statements. This schedule has
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 16, 1999
F-2
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS - EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 736 $ 1,310
Accounts receivable, net of allowance for doubtful
accounts of $600 and $375, as of December 31, 1998
and 1997, respectively............................... 11,801 6,922
Inventories............................................ 2,185 1,997
Prepaid expenses and other............................. 609 527
------- -------
Total current assets............................. 15,331 10,756
Property, plant and equipment, net.......................... 7,036 4,381
Intangibles, primarily goodwill, net........................ 46,607 32,996
Other assets................................................ 600 95
------- -------
$69,574 $48,228
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term
debt................................................. $20,239 $ 251
Accounts payable....................................... 4,472 2,846
Accrued expenses....................................... 5,248 3,332
Deferred revenue....................................... 2,600 1,333
------- -------
Total current liabilities........................ 32,559 7,762
------- -------
Long-term debt.............................................. 257 342
------- -------
Other long-term liabilities................................. 106 106
------- -------
Commitments and contingencies (Note 12)
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized, none issued.............................. -- --
Common stock, no par value, 40,000,000 shares
authorized, 6,479,739 and 5,537,436 shares issued and
outstanding at December 31, 1998 and 1997,
respectively......................................... 52,645 47,580
Accumulated deficit.................................... (15,993) (7,562)
------- -------
Total shareholders' equity....................... 36,652 40,018
------- -------
$69,574 $48,228
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS - EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FROM INCEPTION
YEAR ENDED (NOVEMBER 12,
DECEMBER 31 1996) TO
--------------------- DECEMBER 31,
1998 1997 1996
---------- -------- --------------
<S> <C> <C> <C>
Revenues:
Services..................................... $ 49,387 $ 2,344 $ --
Products..................................... 15,189 767 --
---------- -------- --------
64,576 3,111 --
---------- -------- --------
Cost of revenues:
Services..................................... 33,252 1,603 --
Products..................................... 10,587 524 --
Depreciation................................. 1,565 94 --
---------- -------- --------
45,404 2,221 --
---------- -------- --------
Gross profit........................... 19,172 890 --
Selling and administrative expenses............... 17,606 2,074 23
Amortization of intangibles....................... 1,482 112 --
Restructing costs................................. 1,387 -- --
Loss on sale of business units.................... 4,995 -- --
Special compensation charge....................... -- 2,235 --
Acquired in-process research and development
charge.......................................... -- 4,000 --
---------- -------- --------
Operating loss......................... (6,298) (7,531) (23)
Interest expense.................................. 2,133 8 --
---------- -------- --------
Net loss.......................................... $ (8,431) $ (7,539) $ (23)
---------- -------- --------
---------- -------- --------
Basic and diluted net loss per share.............. $ (1.40) $ (8.13) $ (0.04)
---------- -------- --------
---------- -------- --------
Basic and diluted weighted average number of
shares outstanding.............................. 6,034,130 927,565 550,000
---------- -------- --------
---------- -------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS - EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------ ------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
-------- ------- --------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, NOVEMBER 12, 1996
(date of inception)................. -- $ -- -- $ -- $ -- $ --
Sales of Preferred and Common
stock............................ 126,924 73 550,000 7 -- 80
Net loss............................ -- -- -- -- (23) (23)
-------- ------- --------- ------- -------- -------
BALANCE, DECEMBER 31, 1996............ 126,924 73 550,000 7 (23) 57
Sales of Preferred and Common
stock............................ 316,565 2,479 160,770 1,468 -- 3,947
Sale of Common stock in initial
public offering, net of offering
costs............................ -- -- 3,100,000 30,465 -- 30,465
Issuance of Common stock for
acquisitions..................... -- -- 1,283,177 13,088 -- 13,088
Conversion of Preferred stock to
Common stock..................... (443,489) (2,552) 443,489 2,552 -- --
Net loss............................ -- -- -- -- (7,539) (7,539)
-------- ------- --------- ------- -------- -------
BALANCE, DECEMBER 31, 1997............ -- $ -- 5,537,436 $47,580 $ (7,562) $40,018
Issuance of Common stock for
acquisitions..................... -- -- 930,484 5,037 -- 5,037
Sale of Common stock................ -- -- 11,819 28 -- 28
Net loss............................ -- -- -- -- (8,431) (8,431)
-------- ------- --------- ------- -------- -------
BALANCE, DECEMBER 31, 1998............ -- $ -- 6,479,739 $52,645 $(15,993) $36,652
-------- ------- --------- ------- -------- -------
-------- ------- --------- ------- -------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FROM INCEPTION
YEAR ENDED (NOVEMBER 12,
DECEMBER 31, 1996) TO
----------------- DECEMBER 31,
1998 1997 1996
------- ------- ---------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss............................................ $(8,431) $(7,539) $(23)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Depreciation and amortization of
intangibles................................ 3,047 206 --
Loss on sale of business units................ 4,995 -- --
Amortization of deferred financing costs...... 904 -- --
Special compensation charge................... -- 2,235 --
Acquired in-process research and development
charge..................................... -- 4,000 --
Changes in operating assets and liabilities,
net of effect from acquisitions and
divestiture-
Accounts receivable, net................... (1,852) 42 --
Inventories................................ (104) (91) --
Prepaid expenses and other................. 46 (55) --
Other assets............................... (390) -- --
Accounts payable........................... 556 277 --
Accrued expenses........................... 159 1,046 5
Deferred revenue........................... 876 65 --
------- ------- ----
Net cash provided by (used in) operating
activities............................ (194) 186 (18)
------- ------- ----
Cash Flows from Investing Activities:
Purchases of businesses, net of cash acquired.... (16,483) (26,696) --
Purchases of property and equipment.............. (3,040) (90) --
Proceeds from business unit sold................. 350 -- --
------- ------- ----
Net cash used in investing activities.... (19,173) (26,786) --
------- ------- ----
Cash Flows from Financing Activities:
Net borrowings under line of credit.............. 20,100 -- --
Payment of deferred financing costs.............. (803) -- --
Principal payments on debt and capital lease
obligations................................... (532) (4,329) --
Proceeds from sales of Common and Preferred
stocks........................................ 28 32,177 80
------- ------- ----
Net cash provided by financing
activities............................ 18,793 27,848 80
------- ------- ----
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... (574) 1,248 62
Cash and Cash Equivalents, Beginning of Period........ 1,310 62 --
------- ------- ----
Cash and Cash Equivalents, End of Period.............. $ 736 $ 1,310 $ 62
------- ------- ----
------- ------- ----
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND LIQUIDITY:
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. ImageMax had conducted no
operations prior to acquiring certain businesses on December 9, 1997 and
completed a number of additional acquisitions in the first eight months of 1998,
as discussed in Note 3. Prior to their acquisition, these businesses had been
operating independently. Given the nature of ImageMax, it is subject to many
risks, including but not limited to, (i) the ability to obtain adequate
financing to fund operations and potential future acquisitions, (ii) a limited
combined operating history, (iii) the potential inability to manage growth, (iv)
risks generally associated with integrating acquisitions including
implementation, (v) possible fluctuations in quarterly results, (vi) reliance on
certain markets, and (vii) reliance on key personnel.
The accompanying consolidated financial statements have been prepared in
conformity with principles of accounting applicable to a going concern. These
principles contemplate the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has incurred
significant operating losses since inception, and as of December 31, 1998 had an
accumulated deficit of $16.0 million. In addition, as more fully described in
Note 7, ImageMax is in default of its credit facility with its banks under which
it has borrowed $20.1 million, which raises substantial doubt about the ability
of ImageMax to continue as a going concern. Management is currently negotiating
a new credit facility with other lenders and has entered into a letter of intent
for the sale of $7.9 million of preferred stock (see Note 16). Management
believes that the proceeds to be received from the preferred stock investment
will allow the Company to refinance amounts due under the credit facility. There
can be no assurance that the contemplated preferred stock investment will be
consummated or the credit facility will be refinanced. See report of independent
public accountants.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
ImageMax and its subsidiaries (the "Company"). All material intercompany
balances and transactions have been eliminated in consolidation.
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.
REVENUE RECOGNITION
Service and product revenues are recognized when the services are rendered
or products are shipped to customers. Deferred revenue represents payments for
services that are billed in advance of performance. No single customer exceeded
5% of revenues for any period presented.
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. The Company'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.
F-7
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Consulting, implementation and training revenues are recognized as the
services are performed. Maintenance revenues are recognized ratably over the
terms of the maintenance agreements.
CASH AND CASH EQUIVALENTS
The Company 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, 1998 and 1997, cash
equivalents primarily consisted of funds in money market accounts.
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. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets (see Notes 4 and 5). Leasehold improvements are amortized over the lesser
of their useful life or the term of the lease.
Upon sale or other disposition of assets, the cost and related accumulated
depreciation and amortization are removed from the respective accounts, and the
resulting gain or loss, if any, is included in operating results.
INTANGIBLES
Intangibles consist of goodwill and developed technology (see Note 5).
Goodwill, representing the excess of cost over the fair value of the net
tangible and identifiable intangible assets of acquired businesses (see Note 3),
is stated at cost and is amortized over the estimated life of principally 30
years. Developed technology represents costs paid for certain software
technology and is being amortized over 7 years (see Note 5).
SOFTWARE DEVELOPMENT COSTS
The Company 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 determined to be upon completion of a working model) and concludes
when the product is available for general release. For the periods represented,
such costs were immaterial. Costs incurred prior to the establishment of the
technological feasibility are charged to product development expense as
incurred.
INCOME TAXES
The Company 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.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its stock options.
The Company follows the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation," which permits pro forma disclosure of net loss and
loss per share using a fair value based method of accounting for employee stock
option plans in the accompanying notes to the financial statements.
F-8
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid cash for interest of $1,043,000 and $5,000 for the years
ended December 31, 1998 and 1997, respectively. There were no cash payments made
for interest for the period from inception (November 12, 1996) to December 31,
1996. The Company paid cash for income taxes of $175,000 for the year ended
December 31, 1998. There were no cash payments made for income taxes for the
year ended December 31, 1997 and the period from inception to December 31, 1996.
The following table displays the supplemental cash flow information for the
years ended December 31, 1998 and 1997 of the net non-cash assets acquired
relating to acquired businesses described in Note 3:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Fair value of assets acquired................... $ 24,873,000 $ 51,806,000
Liabilities assumed............................. (3,224,000) (10,972,000)
Fair value of Common stock issued............... (5,037,000) (13,088,000)
Cash acquired................................... (129,000) (1,050,000)
------------ ------------
Total consideration........................ $ 16,483,000 $ 26,696,000
------------ ------------
------------ ------------
</TABLE>
LOSS PER SHARE
The Company has presented loss per share pursuant to SFAS No. 128,
"Earnings Per Share," and the Securities and Exchange Commission Staff
Accounting Bulletin No. 98. Basic earnings per share ("Basic EPS") is computed
by dividing the net loss for each period by the weighted average number of
shares of Common stock outstanding for each period. Diluted earnings per share
("Diluted EPS") is computed by dividing net income (loss) for each period by the
weighted average number of shares of Common stock and Common stock equivalents
outstanding during each period. For all periods presented, Common stock
equivalents are not included, as their effect is antidilutive and, as such,
Basic EPS and Diluted EPS are the same.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, 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.
COMPREHENSIVE INCOME
The Company has reviewed SFAS No. 130, "Reporting Comprehensive Income,"
and has determined that for the years ended December 31, 1998 and 1997, no items
meeting the definition of comprehensive income as specified in SFAS No. 130
existed in the consolidated financial statements. As such, no disclosure is
necessary to comply with SFAS No. 130.
SEGMENT REPORTING
The Company has reviewed SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," and has determined that no further
disclosure is necessary to comply with SFAS No. 131 since the Company does not
operate in different segments.
F-9
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's financial
statements to conform with the current year presentation.
3. INITIAL PUBLIC OFFERING AND ACQUISITIONS:
On December 9, 1997, ImageMax sold 3,100,000 shares of its Common stock in
an initial public offering (the "Offering") at $12 per share which raised net
proceeds to ImageMax of $30,465,000 net of Offering costs.
Concurrent with the Offering, ImageMax began material operations with the
acquisition of 14 document management services companies (the "Founding
Companies"). These acquisitions were accounted for using the purchase method of
accounting.
For the acquisition of the Founding Companies, ImageMax had been identified
as the accounting acquiror for financial statement presentation purposes. The
total purchase price of the Founding Companies was $40.7 million, which
consisted of: (i) $27.1 million in cash paid to the sellers; (ii) 1,283,177
shares of Common stock issued to the sellers; and (iii) transaction costs of
$0.5 million. For purposes of computing the purchase price for accounting
purposes, the value of the Common stock issued to the sellers was determined
using an estimated fair value of $10.20 per share (or $13.1 million), which
represents a discount of 15% from the Offering price of $12.00, due to a
one-year restriction on the sale and transferability of the shares issued. Of
the total purchase price of $40.7 million, $4.0 million was allocated to
acquired in-process research and development and was charged to expense upon the
consummation of the acquisition of the Founding Companies. Acquired in-process
research and development reflects the value of development projects underway at
the time of the acquisition at one of the Founding Companies. In connection with
this transaction, all identifiable assets acquired, including intangible assets,
were assigned a portion of the cost of the acquired company based upon an
independent valuation.
During the first eight months of 1998, the Company acquired 13 additional
document management services companies (the "Acquired Businesses"). These
acquisitions also were accounted for using the purchase method of accounting.
The total purchase price of the Acquired Businesses was $21.5 million, which
consisted of: (i) $16.6 million in cash paid to sellers; (ii) 930,484 shares of
Common stock issued to sellers; and (iii) transaction costs of $0.7 million. For
purposes of computing the purchase price for accounting purposes, the value of
the Common stock issued to the sellers of $5.0 million was based on the market
price of the Common stock at the time of the transaction, less a discount of
15%, due to a one-year restriction on the sale and transferability of the shares
issued.
The following unaudited pro forma information shows the results of the
Company's operations in accordance with APB Opinion No. 16, "Business
Combinations," for the years ended December 31, 1998 and 1997 as though the
acquisitions of the Founding Companies and the Acquired Businesses had occurred
as of January 1, 1997. These results exclude certain business units which were
sold in December 1998 and January 1999 (see Note 15):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Total revenues.................................. $64,759,000 $63,340,000
Operating income (loss)......................... $ (124,000) $ 536,000
Net loss........................................ $(2,755,000) $ (998,000)
Basic and diluted net loss per share............ $ (0.44) $ (0.16)
</TABLE>
F-10
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INITIAL PUBLIC OFFERING AND ACQUISITIONS: -- (CONTINUED)
The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the actual results of operations had the
acquisition of the Founding Companies and the Acquired Businesses taken place as
of January 1, 1997, or the results that may occur in the future. The pro forma
results for the year ended December 31, 1998, do not reflect the $5.0 million
loss on the sale of business units. The pro forma results do not give effect to
the Offering and exclude any reductions in historical interest expense for the
year ended December 31, 1997. In addition, the pro forma results exclude the
$4.0 million acquired in-process research and development charge and the $0.5
million management fee paid to GBL Capital (see Note 13). Furthermore, the pro
forma results do not give effect to all cost savings or incremental costs which
may occur as a result of the integration and consolidation of the Founding
Companies and the Acquired Businesses.
4. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31
USEFUL LIVES -----------------------
(YEARS) 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
Building and improvements................. 8-40 $1,410,000 $1,223,000
Machinery and equipment................... 3-5 6,114,000 2,368,000
Furniture and office equipment............ 5 564,000 533,000
Transportation equipment.................. 5 489,000 351,000
---------- ----------
8,577,000 4,475,000
Less- Accumulated depreciation and
amortization............................ (1,541,000) (94,000)
---------- ----------
$7,036,000 $4,381,000
---------- ----------
---------- ----------
</TABLE>
As of December 31, 1998 and 1997, the Company had $200,000 and $264,000 in
equipment, net of accumulated amortization, financed under capital leases,
respectively. See Note 5 regarding long-lived assets impairment evaluation.
5. INTANGIBLE ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Goodwill......................................... $47,269,000 $32,288,000
Developed technology............................. 820,000 820,000
----------- -----------
48,089,000 33,108,000
Less- Accumulated amortization................... (1,482,000) (112,000)
----------- -----------
$46,607,000 $32,996,000
----------- -----------
----------- -----------
</TABLE>
Goodwill is amortized over principally 30 years and developed technology is
amortized over 7 years. The Company continually evaluates whether events or
circumstances have occurred that indicate that the remaining useful lives of the
intangibles assets should be revised or that the remaining balance of such
assets may not be recoverable. When the Company concludes it is necessary to
evaluate its long-lived assets, including intangibles, for impairment, the
Company will use an estimate of the related undiscounted cash flow as the basis
to determine whether impairment has occurred. If such a determination indicates
an impairment loss has occurred, the Company will utilize the valuation method
which measures fair value based on the best information available under the
circumstances.
In 1998, the Company wrote off $1,644,000 of goodwill related to a business
unit sold in December 1998 and $2,585,000 related to two business units sold in
January 1999 due to the impairment of the recoverability of the related goodwill
based on the proceeds to be received (see Note 15).
F-11
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INTANGIBLE ASSETS: -- (CONTINUED)
As of December 31, 1998, the Company believes that no revisions of the
remaining useful lives or write-downs of intangible assets are required;
however, the Company's continuing review of underperforming business units may
lead to write-downs in the future.
6. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Compensation and benefits......................... $1,096,000 $ 957,000
Professional fees................................. 361,000 956,000
Restructuring costs (Note 14)..................... 1,145,000 --
Other............................................. 2,646,000 1,419,000
---------- ----------
$5,248,000 $3,332,000
---------- ----------
---------- ----------
</TABLE>
7. LINE OF CREDIT:
On March 30, 1998, the Company entered into a credit facility with a bank
(the "Credit Facility") providing a revolving line of credit of $30 million in
borrowings. This agreement was substantially amended in November 1998. Under the
original terms of the Credit Facility, the Company could borrow up to $25
million to finance future acquisitions and up to $5 million for working capital
purposes. Prior to amendment, borrowings under the facility bore interest at
LIBOR or prime plus an applicable margin at the option of the Company. In
addition to interest and other customary fees, the Company is obligated to remit
a fee ranging from 0.2% to 0.375% per year on unused commitments. The Credit
Facility is secured by substantially all of the assets of the Company. The
Credit Facility is subject to certain financial covenants which pertain to
criteria such as minimum levels of cash flow, ratio of debt to cash flow, and
ratio of fixed charges to cash flow. Borrowing under the Credit Facility is
contingent upon the Company meeting certain financial ratios and other criteria.
An amendment to the Credit Facility dated November 16, 1998 amended certain
financial covenants for future periods, reduced the amount available under the
Credit Facility to the amount ($20.1 million) outstanding on November 6, 1998,
changed the maturity date to December 1, 1999 from December 31, 2002, required a
$5.0 million principal repayment or commitments therefor by December 31, 1998,
required all borrowings to bear a rate of prime plus an applicable margin and
changed other provisions.
As of December 31, 1998, the Company was in default of certain financial
and other covenants under the amended Credit Facility, including cash flow
ratios and the requirement for a $5.0 million principal repayment or commitments
therefor. Accordingly, all of the Company's indebtedness under the Credit
Facility is classified as short-term debt. The Company is in ongoing discussions
with its lenders and other parties concerning a restructuring of its financing
(see Note 1).
In connection with the Credit Facility, the Company incurred $904,000 of
lending and other customary fees of which $100,000 are accrued for at December
31, 1998. These costs were initially capitalized and amortized to interest
expense over the original term of the Credit Facility. At December 31, 1998, the
remaining unamortized costs of $803,000 were written off and included in
interest expense.
F-12
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT:
DECEMBER 31,
-------------------
1998 1997
-------- --------
Obligations under capital leases................ $242,000 $346,000
Notes payable................................... 154,000 247,000
-------- --------
396,000 593,000
Less- Current portion........................... (139,000) (251,000)
-------- --------
$257,000 $342,000
-------- --------
-------- --------
In connection with the acquisition of the Founding Companies (see Note 3),
the Company assumed approximately $4.9 million of notes payable, capital lease
obligations and other indebtedness. Of this amount, $4.3 million was repaid with
the net proceeds of the Offering. Debt assumed in connection with the
acquisition of the Acquired Businesses was not significant. Interest rates on
the outstanding obligations under capital leases range from 7.0% to 19.2% and
the weighted average interest rate on these obligations approximates 15.0% as of
December 31, 1998. Interest rates on the notes payable outstanding balances
range from 7.8% to 27.4% and the weighted average interest rate on these
balances approximates 10.0% as of December 31, 1998.
As of December 31, 1998, future scheduled principal payments on the
Company's notes payable and capital lease obligations are as follows:
1999.............................................. $139,000
2000.............................................. 120,000
2001.............................................. 82,000
2002.............................................. 50,000
2003.............................................. 5,000
--------
$396,000
========
9. INCOME TAXES:
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $3.6 million. The net operating
loss carryforward differs from the accumulated deficit principally due to
differences in the recognition of certain expenses for financial and income tax
reporting purposes, as well as, the nondeductibility of the special compensation
and acquired research and development charges, loss on the sale of business
units and goodwill amortization.
F-13
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES: -- (CONTINUED)
The components of income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-------------------------
1998 1997
---------- --------
<S> <C> <C>
Current:
Federal........................................... $ -- $ --
State............................................. -- --
---------- --------
-- --
---------- --------
Deferred:
Federal........................................... (1,455,000) (424,000)
State............................................. (398,000) (130,000)
---------- --------
(1,853,000) (554,000)
---------- --------
Valuation allowance................................. 1,853,000 554,000
---------- --------
$ -- --
---------- --------
</TABLE>
The reconciliation of the statutory federal income tax rate to the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-------------------------
1998 1997
---------- --------
<S> <C> <C>
Income tax rate..................................... (34.0)% (34.0)%
State income taxes, net of federal tax benefit...... (5.6) (5.8)
Nondeductible special compensation and acquired
in-process research and development charge........ -- 32.0
Nondeductible loss on sale of business units........ 12.0 --
Other nondeductible items........................... 1.8 --
Nondeductible goodwill amortization................. 3.8 0.5
Valuation reserve................................... 22.0 7.3
---------- --------
--% --%
========== ========
</TABLE>
The tax effect of temporary differences as established in accordance with SFAS
No. 109 that give rise to deferred taxes are as follows:
DECEMBER 31
-------------------------
1998 1997
---------- --------
Gross deferred tax assets:
Accruals and reserves not currently deductible.... $1,217,000 $446,000
Net operating loss carryforwards.................. 1,605,000 268,000
Other............................................. 420,000 --
Valuation allowance............................... (2,407,000) (554,000)
---------- --------
$ 835,000 $160,000
========== ========
Gross deferred tax liabilities:
Depreciation...................................... $ 356,000 $ 59,000
Goodwill amortization............................. 378,000 --
---------- --------
$ 734,000 $ 59,000
========== ========
F-14
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES: -- (CONTINUED)
At December 31, 1998, a valuation allowance was established for the
Company's tax benefit based upon the uncertainty of the realizability of the
associated deferred tax asset given the Company's losses to date under the
guidelines set forth in SFAS No. 109.
10. 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 126,924 shares
of Series A Convertible Preferred Stock ("Series A Preferred Stock") and 126,923
shares of Common stock to certain of its founders and a director of ImageMax,
for $75,000. Each share of Series A Preferred Stock is convertible into one
share of Common stock.
In April 1997, ImageMax sold 88,847 shares of Series A Preferred Stock to
certain of its founders and two additional accredited investors for $100,000.
In June 1997, ImageMax sold 97,308 shares of Common stock to certain of its
founders and two of its executive officers for $230,000. The related stock
subscription receivables were paid in full in July 1997.
In September 1997, ImageMax sold 227,719 shares of Series A Preferred Stock
and 63,462 shares of Common stock for total consideration for $1,082,000 and
$300,000, respectively, to certain of its founders and other accredited
investors.
In December 1997, ImageMax sold 3,100,000 shares of Common stock in the
Offering and issued 1,283,177 shares of Common stock in partial consideration
for the acquisition of the Founding Companies (see Note 3). In connection with
the Offering, all of the Series A Preferred Stock outstanding as of the date of
the Offering was converted into 443,489 shares Common stock.
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 Offering price).
During 1998, the Company issued 930,484 shares of Common stock in partial
consideration for the acquisition of the Acquired Businesses (see Note 3).
11. BENEFIT PLANS:
STOCK OPTION PLAN
The Company's 1997 Incentive Plan (the "Incentive Plan") provides for the
award of up to 600,000 shares of its Common stock to its employees, directors
and other individuals who perform services for the Company. The Incentive Plan
provides for granting of various stock based awards, including incentive and
non-qualified stock options, restricted stock and performance shares and units.
F-15
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. BENEFIT PLANS: -- (CONTINUED)
Options granted under the Incentive Plan are granted at fair market value at the
date of grant, generally vest in equal installments over three years, and expire
10 years after the date of grant.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------
AVAILABLE PRICE AGGREGATE
FOR GRANT SHARES PER SHARE PRICE
--------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1996............. -- -- $ -- $ --
Authorized........................... 600,000 -- -- --
Granted.............................. (367,500) 367,500 12.00 4,410,000
--------- --------- -----------
Balance, December 31, 1997............. 232,500 367,500 12.00 4,410,000
Granted.............................. (359,000) 359,000 2.19 - 12.00 1,419,375
Cancelled............................ 247,500 (247,500) 12.00 (2,970,000)
--------- --------- -----------
Balance, December 31, 1998............. 121,000 479,000 2.19 - 12.00 $ 2,859,375
========= ========= ===========
</TABLE>
As of December 31, 1998, options to purchase 40,000 shares were exercisable
at $12.00 per share with an aggregate exercise price of $480,000.
For purposes of the SFAS No. 123 disclosure requirements, the fair value of
each option grant is estimated on the date of the grant using the Black-Scholes
option pricing model using the following assumptions: weighted average risk free
interest rate of 4.4% and 6.0%, in 1998 and 1997, respectively, an expected life
of 5 and 7 years in 1998 and 1997, respectively, expected dividend yield of
zero, and an expected volatility of 40%.
The weighted average fair value of options granted during 1998 and 1997 is
estimated at $1.12 and $6.35, respectively. The Company's net loss would have
been increased and the following pro forma results would have been reported had
compensation cost been recorded for the fair value of the options granted:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net loss, as reported............................. $(8,431,000) $(7,539,000)
Pro forma net loss................................ $(8,829,000) $(7,588,000)
Basic and diluted loss per share, as reported..... $ (1.40) $ (8.13)
Pro forma basic and diluted loss per share........ $ (1.46) $ (8.18)
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
The Company provides for an Employee Stock Purchase Plan (the "Purchase
Plan") that allows all full-time employees of the Company, other than 5%
shareholders, temporary employees, and employees having less than six months of
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. The purchase
price of such shares is equal to 90% of the lower of the fair value of the share
on the first and last days of the quarterly period. Such shares are issued by
the Company from its authorized and unissued Common stock. A maximum of 250,000
shares of the Company's Common stock will be available for purchase under the
plan. 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 at their discretion. The Purchase Plan
is intended to comply with the requirements of Section 423 of the Internal
Revenue Code.
F-16
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. BENEFIT PLANS: -- (CONTINUED)
For the year ended December 31, 1998, employees purchased 30,566 shares
under the Purchase Plan of which 11,819 shares were issued in 1998.
12. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases operating facilities, office equipment and vehicles
under non-cancelable leases. Rent expense under operating leases for the years
ended December 31, 1998 and 1997 was $2,706,000 and $119,000, respectively. The
Company incurred no rent expense for the period from inception (November 12,
1996) to December 31, 1996. Future minimum lease payments under noncancelable
operating leases as of December 31, 1998 are as follows:
1999............................................ $1,858,000
2000............................................ 1,463,000
2001............................................ 1,181,000
2002............................................ 858,000
2003............................................ 366,000
2004 and thereafter............................. 1,121,000
----------
$6,847,000
==========
The Company leases operating facilities at prices which, in the opinion of
management, approximate market rates from entities which are owned by certain
shareholders and directors of the Company. Rent expense on these leases was
$582,000 and $64,000 for the years ended December 31, 1998 and 1997,
respectively.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into employment agreements with its Acting Chief
Executive Officer, Chief Financial Officer and Corporate Controller, that
provide for minimum annual compensation. In addition, the Company entered into
employment or consulting agreements with several management members of the
businesses acquired by the Company that provide for minimum annual compensation.
Future minimum compensation commitments under these agreements as of December
31, 1998 are as follows:
1999............................................ $2,262,000
2000............................................ 2,195,000
2001............................................ 458,000
2002............................................ 125,000
2003............................................ 125,000
----------
$5,165,000
==========
SEPARATION AGREEMENTS
During 1998, the Company and three of its former executive officers entered
into separation agreements upon termination of their employment with the
Company. The separation agreements provided $781,000 of compensation and
benefits, which has been charged to the statement of operations for the year
ended December 31, 1998 as restructuring costs (see Note 14).
F-17
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
In connection with the separation agreements and existing employment and
consulting agreements, should a change of control, as defined, occur within
certain specified periods, these agreements provide, among other things, that
the Company make payments of up to $1,253,000. The periods specified expire at
various dates through December 31, 2000. Should a change of control occur beyond
this date, the Company is not obligated to make any payments under these
agreements.
OTHER MATTERS
The Company is party to various claims arising in the ordinary course of
business. Although the ultimate outcome of these matters is presently not
determinable, management, after consultation with legal counsel, does not
believe that the resolution of these matters will have a material adverse effect
on the Company's consolidated financial position or results of operations.
The Company occasionally enters into agreements with its suppliers in the
normal course of business that require the Company to purchase minimum amounts
of inventory in future years in order to obtain favorable pricing. These
commitments at December 31, 1998 are not considered material.
13. RELATED-PARTY MANAGEMENT CONTRACT:
In November 1996, the Company entered into a management contract with GBL
Capital Corp. ("GBL"), an entity whose shareholders were also shareholders of
ImageMax. One GBL shareholder is the former Chief Executive Officer and another
is the current Chief Executive Officer of the Company. GBL was engaged to manage
the daily business operations of ImageMax. ImageMax paid GBL $5,000 upon
entering into the agreement and was 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 that date. Upon the closing of the Offering, the Company
paid GBL a fee of $500,000 in accordance with the terms of the management
contract. Such fees were, in effect, compensation to the officers of the
Company. The $500,000 was charged to the statement of operations for the year
ended December 31, 1997 as general and administrative expense upon the
consummation of the Offering.
14. RESTRUCTURING COSTS:
For the year ended December 31, 1998, the Company recorded restructuring
costs of $1,387,000, primarily for severance payments related to headcount
reductions at the corporate office and a business unit and facility costs
associated with business unit consolidations.
15. LOSS ON SALE OF BUSINESS UNITS:
For the year ended December 31, 1998, the Company recorded a loss on sale
of business units of $4,995,000, related to the sales in December 1998 and
January 1999 of facilities in Charlotte, NC, Cayce, SC and Cleveland, TN. The
loss represents the difference between the net proceeds from the transactions
and the net asset value of these locations, including $4,229,000 of goodwill
(see Note 5). For the year ended December 31, 1998, these business units
accounted for $6,496,000 and $660,000 of the Company's consolidated revenues and
operating loss, respectively.
16. RECENT DEVELOPMENT:
On March 12, 1999, the Company and Pierce Leahy Corp. ("Pierce Leahy"), an
international data storage and management services company, signed a letter of
intent to form a strategic partnership. Under terms of the proposed agreement,
Pierce Leahy will purchase 3,144,000 shares of a
F-18
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. RECENT DEVELOPMENT: -- (CONTINUED)
new series of the Company's preferred stock at $2.50 per share (for an aggregate
purchase price of $7.9 million). Each share of preferred stock is convertible
into one share of Common stock and carries no dividend or liquidation
preference. Pierce Leahy will also receive two warrants that may be exercised
over the next four and five years to purchase an additional 1,719,000 and
1,861,000 shares of preferred stock at $4.00 and $5.00 per share, respectively.
Pierce Leahy will have the right to elect a majority of the Company's Board of
Directors, subject to certain conditions. Certain transactions between the
companies would require approval by a two-thirds majority of the Board or a
majority of Board members not designated by Pierce Leahy. In the event that the
Company contemplates entering into any transaction involving a merger,
consolidation, other business combination or similar transaction, or the sale,
disposal or exchange of all or a substantial portion of the assets or capital
stock of the Company, Pierce Leahy will have a right of first refusal to enter
into substantially the same transaction; such right will last for so long as
Pierce Leahy has the right to designate any of the Company's Board of Directors.
The consummation of the strategic partnership is subject to due diligence,
the negotiation of a definitive purchase agreement, regulatory approval,
approval of the Board of Directors of both companies and consents of lenders of
both companies and other customary conditions. Although the companies are
seeking to complete the agreement by April 30, 1999, there can be no assurance
as to when such agreement will be completed or whether such agreement will be
completed at all. The Company has agreed not to initiate or solicit alternative
transactions before April 15, 1999. The Company has agreed to reimburse Pierce
Leahy for its expenses in connection with the proposed transaction if a
definitive agreement is not executed under certain circumstances.
F-19
<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE,
BEGINNING OF CHARGED TO RESERVE OF BALANCE,
DESCRIPTION YEAR EXPENSE ACQUISITIONS DEDUCTIONS END OF YEAR
----------- ------------ ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
1998........................... $375,000 $185,000 $150,000 $(110,000) $600,000
1997........................... $ -- -- 375,000 -- $375,000
</TABLE>
<TABLE>
<CAPTION>
BALANCE,
BEGINNING OF CHARGED TO BALANCE,
DESCRIPTION YEAR EXPENSE DEDUCTIONS END OF YEAR
----------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Restructuring accruals:
1998.................................. $-- $1,387,000 $(242,000) $1,145,000
</TABLE>
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IMAGEMAX, INC.
Dated: March 31, 1999 By: /s/ ANDREW R. BACAS
------------------------------
Andrew R. Bacas
Acting Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/S/ ANDREW R. BACAS Acting Chief Executive Officer March 31, 1999
- ----------------------------- (Principal Executive Officer)
Andrew R. Bacas
/s/ JAMES D. BROWN Senior Vice President-Finance, March 31, 1999
- ----------------------------- Chief Financial Officer, Assistant
James D. Brown Secretary and Assistant Treasurer
(Principal Financial and
Accounting Officer)
/s/ LEWIS E. HATCH, JR. Chairman of the Board of March 31, 1999
- ----------------------------- Directors
Lewis E. Hatch, Jr.
/s/ LENNOX K. BLACK Director March 31, 1999
- -----------------------------
Lennox K. Black
/s/ DAVID C. CARNEY Director March 31, 1999
- -----------------------------
David C. Carney
/s/ BRUCE M. GILLIS Director March 31, 1999
- -----------------------------
Bruce M. Gillis
/s/ STEVEN N. KAPLAN Director March 31, 1999
- -----------------------------
Steven N. Kaplan
/s/ REX LAMB Director March 31, 1999
- -----------------------------
Rex Lamb
/s/ JOHN E. SEMASKO Director March 31, 1999
- -----------------------------
John E. Semasko
/s/ MITCHELL J. TAUBE Director March 31, 1999
- -----------------------------
Mitchell J. Taube
</TABLE>
AMENDMENT NO. 2
TO CREDIT AGREEMENT
AMENDMENT NO. 2 dated as of November 16, 1998 by and among IMAGEMAX,
INC., a Pennsylvania corporation (the "Borrower"), the undersigned subsidiaries
of the Borrower (with the Borrower, the "Company Affiliates"), FIRST UNION
NATIONAL BANK (successor by merger to CORESTATES, BANK, N.A.) a national banking
association, for itself and as agent (the "Agent"), and COMMERCE BANK, N.A., a
national banking association (such banks collectively referred to the "Banks").
WHEREAS, the Borrower, the Company Affiliates, the Agent and the Banks
entered into a certain Credit Agreement dated as of March 30, 1998 (as amended
on the date hereof and hereafter, the "Credit Agreement"); and
WHEREAS, the Borrower has requested the Banks to make certain changes
to the Credit Agreement;
NOW THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto, intending to be legally bound, hereby agree as
follows:
1. Capitalized Terms. All capitalized terms used in this Amendment,
unless otherwise defined herein, shall have the meanings ascribed thereto in
the Credit Agreement.
2. Definition of Cash Flow. The definition of "Cash Flow" shall be
amended to insert after "net income" the following: "(excluding a pretax
restructuring charge of $925,000 taken by the Borrower in its fiscal quarter
ending September 30, 1998 and a pretax restructuring charge of up to $6,150,000
expected to be taken in Borrower's fiscal quarter ending December 31, 1998 with
respect to the sale of Borrower's Southeast Unit)."
<PAGE>
3. Definition of Termination Date. The definition of "Termination Date"
shall be amended to read in full as follows:
"Termination Date" means December 31, 1999.
4. Reduction of Facility. Section 2.01 (a) shall be amended to read in
full as follows, and Schedule 2.01 shall be amended to read in full as attached
hereto.
Section 2.01. Amount and Nature of Revolving Credit Facility.
(a) Subject to the terms and conditions of this Agreement, and in
particular Section 2.04 and 9.10, and to the other Loan Documents, and
in reliance upon the representations, warranties and covenants herein
and therein contained, each Bank severally (but not jointly) agrees to
make a Revolving Credit Facility available to Borrower and through the
Borrower, to each of its operating Subsidiaries, in an aggregate
principal amount not to exceed such Bank's Ratable Share of
$20,100,000, divided into;
(i) an acquisition facility not to exceed $15,390,000 (the
"Acquisition Facility"), and
(ii) a working capital facility not to exceed the lesser of
(A) $4,710,000 or (B) 80% of the amount of the Eligible Accounts
of the Company Affiliates (the "Working Capital Facility");
provided that, either (x) the Acquisition Facility shall be
reduced automatically to $10,390,000 on December 31, 1998, and the
total Revolving Credit Facility shall also be reduced accordingly, and
all Revolving Credit Advances in excess thereof shall be repaid in
full, or (y) on or before December 31, 1998, the Borrower shall repay
Revolving Credit Advances under the Acquisition Facility to the
maximum amount possible up to $5,000,000, and the Borrower shall
deliver to the Banks executed, unconditional agreements from third
parties in form and substance satisfactory to the Banks, providing for
the purchase of equity securities and/or the issuance of subordinated
debt of the Borrower for a total to be paid to the Borrower equal to
or greater than $5,000,000 minus the amount of Revolving Credit
Advances repaid under this subsection (y), and after December 31, 1998
the Acquisition Facility and the total Revolving Credit Facility shall
be reduced and the Revolving Credit Advances paid as set forth in
subsection (x) above on or before the date set forth for the
consummation of such agreements (which date shall be satisfactory to
the Banks in their sole discretion).
(the various limitations required in this subsection (a) being
herein referred to as the "Revolving Credit Limits").
-2-
<PAGE>
5. Increase in Base Rate. Section 4.01 (b)(i) shall be amended
effective on October 1, 1998, to provide that interest on Base Rate Loans will
be payable at an annual rate equal to the Base Rate plus .75% and conforming
changes shall be deemed made throughout the Loan Documents.
6. Increase in Applicable Margin. Section 4.01 (a) shall be amended to
read in full as follows, effective on October 1, 1998:
(a) The Applicable Margin for LIBOR Loans shall be equal to three and
one-half percent (3.5%).
7. Minimum Cash Flow. Section 9.01 shall be amended to change the
scheduled ratios as follows:
Fiscal Quarters Ending
in the Following Periods Amount
------------------------ ------
10/1/98 through 12/31/98 $5,700,000
1/l/99 through 6/30/99 5,700,000
7/1/99 through 9/30/99 6,250,000
thereafter 7,500,000
8. Ratio of Funded Debt to Cash Flow. Section 9.02 shall be amended to
change the scheduled ratios to read in full as follows:
Fiscal Quarters Ending
in the Following Periods Ratio
------------------------ -----
7/1/98 through 9/30/99 3.60 to 1.0
10/1/98 through 12/31/98 3.30 to 1.0
1/1/99 through 3/31/99 3.50 to 1.0
4/1/99 through 6/30/99 3.30 to 1.0
thereafter 3.00 to 1.0
-3-
<PAGE>
9. Cash Flow Coverage. Section 9.03 shall be amended to read in full as
follows:
Section 9.03. Cash Flow Coverage. The Company Affiliates will not
permit the ratio of Adjusted Cash Flow to Fixed Charges, for any period of
four consecutive fiscal quarters ending as set forth below, to be less than
the following ratios:
Fiscal Quarters Ending
In the Following Periods Ratio
------------------------ -----
10/01/98 through 12/31/98 1.20 to 1.0
01/01/99 through 03/31/99 1.00 to 1.0
04/01/99 through 06/30/99 1.00 to 1.0
thereafter 1.50 to 1.0
10. Minimum Capitalization. Section 9.04 shall be amended to add
thereto the following:
provided that, the dollar amount set forth in subsection (a) above
shall be reduced to $38,000,000 if and only if the entire Southeast Unit of the
Company Affiliates is sold in one transaction on or before December 31, 1998 and
the Borrower incurs restructuring charges with respect to such sale in its
fiscal quarter ended December 31, 1998 not to exceed $6,150,000.
11. Restriction on Acquisitions. Section 9.10 is hereby amended to read
in full as follows:
Section 9-10. Restriction on Acquisitions. No Company Affiliate shall
create or acquire any new Company Affiliate, acquire all or a substantial
portion of the assets or securities of any other Person, or assume or agree
to discharge the liabilities or obligations of any other Person, or agree
to do any of the foregoing (by merger, consolidation or otherwise).
12. Default. Section 10.01 (i) is hereby amended to read in full as
follows:
(i) The dissolution, merger, consolidation, or the sale or change in
control (as "control" is defined in Rule l2b-2 under the Securities
Exchange Act of 1934 as amended) of Borrower, or transfer of any
substantial portion of Borrower's assets, or if any agreement for such
dissolution, merger, consolidation, change in control, sale or transfer is
entered into by Borrower. There shall be conclusively presumed to have been
a change in control if any one of the Chief Executive Officer, Chief
Financial Officer or Chief Operating Officer of Borrower ceases to serve in
such capacity for whatever reason
-4-
<PAGE>
and is not replaced within sixty (60) days with a person reasonably
satisfactory to the Required Banks;
13. Fees. The Company Affiliates hereby confirm that (a) they will pay
to the Banks a restructuring fee of $150,000, payable $50,000 on the date
hereof, and $100,000 on January 2, 1999, provided that the latter payment shall
be waived if (i) the Acquisition Facility is reduced to $10,390,000 on December
31, 1998 and outstanding Revolving Credit Advances are equal to or less than the
Revolving Credit Limits, or (ii) the Banks receive the agreements described in
the proviso to Section 2.01 (a), (b) they will pay to the Agent collateral audit
fees promptly when billed. and (c) they will pay the legal fees of the Agent and
the Banks on the date hereof and thereafter as billed.
14. Representations and Covenants. The Company Affiliates certify that
all representations and warranties contained in the Credit Agreement including
without limitation the schedules thereto, are true, correct and complete on and
as of the date hereof, that there has been no material adverse change in the
Company Affiliates' consolidated operations, properties, or condition, financial
or otherwise, and that no Default or Event of Default is in existence on the
date hereof or will be in existence after giving effect hereto.
15. Ratification. Other than as specifically set forth herein, the
Company Affiliates hereby ratify and confirm the Credit Agreement and all other
Loan Documents, and confirms that (a) all of the foregoing remain in full force
and effect, (b) each of the foregoing is enforceable against each Company
Affiliate in accordance with its terms, and (c) no Company Affiliate has any
defense to its obligations, and no claims, relative to the Credit Agreement.
16. Miscellaneous. Article XII of the Credit Agreement is incorporated
herein by this reference and shall apply to this Amendment. Execution of this
Amendment shall not constitute an agreement by the Agent or any Bank to execute
any other amendment or
-5-
<PAGE>
modification of or waiver with respect to the Credit Agreement or any other Loan
Document. References to the Credit Agreement in any document relating thereto
shall be deemed to include this Amendment. This Amendment may be executed in
counterparts.
IN WITNESS WHEREOF, the Company Affiliates, the Agent and the Banks
have caused this Amendment to be duly executed and delivered as of the date and
year first above written.
FIRST UNION NATIONAL BANK, for itself and
as Agent
By: /s/ Kristen J. LaDow
---------------------------------
Name: Kristen J. LaDow
Title: Vice President
Address: Broad & Chestnut Streets
P.O. Box 7618
Philadelphia, PA 19101
With a copy to:
First Union National Bank
Meetinghouse Business Center
2240 Butler Pike
Plymouth Meeting, PA 19462
Attn: William Johnston
COMMERCE BANK, N.A.
By: /s/ Roger L. Bomgardner
-----------------------------
Name: Roger L. Bomgardner
Title: Vice President
Address:
1701 Route 70 East
Cherry Hill, NJ 09034
-6-
<PAGE>
IMAGEMAX, INC.
IMAGEMAX OF INDIANA, INC.
IMAGEMAX OF SOUTH CAROLINA, INC.
IMAGEMAX OF TENNESSEE, INC.
IMAGEMAX OF ARIZONA, INC.
IMAGEMAX OF NEBRASKA, INC.
IMAGEMAX OF OHIO, INC.
IMAGEMAX OF NEW YORK, INC.
IMAGEMAX OF OREGON, INC.
IMAGEMAX OF CALIFORNIA, INC.
IMAGEMAX OF VIRGINIA, INC.
AMMCORP ACQUISITION CORP.
IMAGEMAX OF DELAWARE, INC.
By: /s/ James D. Brown
---------------------------------
James D. Brown
Treasurer
Address: 1100 Hector Street
Suite 396
Conshohocken, PA 19428
Attn: President
-7-
<PAGE>
Exhibit 2.01
Banks and Ratable Shares
Revolving Credit
Facility
----------------
First Union National Bank, 13,400,000
Successor by merger to
CoreStates Bank, N.A.
Broad & Chestnut Streets
Philadelphia, PA 19101
Commerce Bank, N.A. 6,700,000
1701 Route 70 East
Cherry Hill, NJ 08034
----------
20,100,000
-8-
FORBEARANCE AGREEMENT
This Forbearance Agreement (this "Agreement"), dated this 29th day of
March, 1999, is by and among ImageMax, Inc. ("Borrower"), a Pennsylvania
corporation, the undersigned subsidiaries of Borrower (collectively, along with
Borrower, the "Company Affiliates"), First Union National Bank ("First Union"),
successor by merger to CoreStates Bank, N.A., a national bank, for itself and as
agent pursuant to the Credit Agreement described below (in such capacity, the
"Agent"), and Commerce Bank, N.A. ("Commerce"), a national bank and one of the
"Banks" under the Credit Agreement described below.
BACKGROUND
A. Pursuant to the terms and subject to the conditions set forth in that
certain Credit Agreement, dated as of March 30, 1998, among Borrower, the
undersigned subsidiaries of Borrower, Agent, for itself and in such capacity,
Commerce Bank, N.A. and any other banks becoming a party thereto, as amended
pursuant to that certain Amendment No. 1 to Credit Agreement dated as of June 9,
1998 among Company Affiliates, First Union and Agent, and that certain Amendment
No. 2 to Credit Agreement among Company Affiliates, First Union, Agent and
Commerce (as amended, the "Credit Agreement"), Banks established a revolving
credit facility for Company Affiliates pursuant to which Banks severally agreed,
subject to and in reliance on all of the provisions of the Credit Agreement and
the other Loan Documents referred to therein, to provide a revolving credit
facility up to Thirty Million ($30,000,000.00) Dollars (which revolving credit
facility has been decreased pursuant to, inter alia, the Second Amendment (as
decreased and amended, the "Revolving Credit"), pursuant to which Banks made
various loans, advances and extensions of credit (including extensions of credit
in the form of the issuance for the account of Borrower and/or other Company
Affiliates of various letters of credit), which indebtedness is further
evidenced by (i) a certain Revolving Credit Note dated as of March 30, 1998 in
the principal sum of Twenty-Five Million ($25,000,000.00) Dollars (in respect of
the Acquisition Facility) executed and delivered by Borrower to Agent for the
rateable benefit of each of the Banks and (ii) a certain Revolving Credit Note
dated as of March 30, 1998 in the principal sum of Five Million ($5,000,000.00)
Dollars (in respect of the Working Capital Facility) executed and delivered by
Borrower to Agent for the rateable benefit of each of the Banks (collectively,
the "Revolving Credit Note").
B. As collateral security for the Obligations (as defined in the Credit
Agreement), pursuant to the terms and subject to the conditions set forth in (i)
that certain Security and Pledge Agreement, dated as of March 30, 1998, executed
and delivered by Company Affiliates to Agent, (ii) that certain Trademark
Collateral Agreement, dated as of March 30, 1998, executed and delivered by
Borrower to Agent and (iii) that certain Copyright Collateral Agreement, dated
as of March 30, 1998, executed and delivered by Borrower to Agent (collectively,
along with each of the instruments, agreements and documents referred to in such
documents and the Chesterton Mortgage described below, the "Loan Documents"),
Company Affiliates granted to Agent for the rateable benefit of Banks, and Agent
holds liens on and security interests in, to and under all of Company
Affiliates' respective existing and future goods, equipment, furniture,
inventory,
<PAGE>
machinery, money, accounts, contracts, contract rights, general intangibles,
fixtures, instruments, documents and chattel paper, whether now owned or
hereafter acquired or arising, together with all replacements and substitutions
therefor and additions thereto and cash and noncash proceeds thereof
(collectively, along with the Chesterton Property described below, the
"Collateral").
C. To induce Banks to enter into the Credit Agreement, establish the
Revolving Credit and make various loans, advances and extensions of credit to or
for the benefit of Company Affiliates, pursuant to the terms and subject to the
conditions of that certain Surety Agreement dated as of March 30, 1998, by each
Company Affiliate (other than Borrower) to Agent (the "Surety Agreement"), each
such Company Affiliate guaranteed, as a surety, the Obligations.
D. As part of the Collateral, pursuant to the terms and subject to the
conditions set forth in that certain Mortgage and Security Agreement, dated
March 30, 1998, by ImageMax of Indiana, Inc., a Company Affiliate, as mortgagor,
and Agent, as mortgagee, Agent holds for the ratable benefit of the Banks a lien
on and security interest in and to certain real property, with improvements,
situate in Chesterton, Indiana (the "Chesterton Property"), all as more fully
described in such Mortgage and Security Agreement (the "Chesterton Mortgage")
which was filed with the County Recorder of Porter County, Indiana in Book 809,
at Page 59, et seq.
E. Borrower and the other Company Affiliates are in default of their
financing arrangements with Agent and Banks by virtue of, among other things,
the failure of Borrower to comply with the financial and certain other covenants
set forth in the Credit Agreement. A description of each of the existing
defaults under the Credit Agreement (collectively, the "Existing Defaults") is
attached to this Agreement as Exhibit "A" and hereby made a part hereof. Company
Affiliates have requested that Agent and Banks, among other things, forbear from
exercising their rights and remedies under the Credit Agreement, the other Loan
Documents and applicable law, and Agent and Banks agree to so forbear under the
terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, with the foregoing Background deemed incorporated
hereinafter by this reference and hereby made a part hereof, the parties hereto,
intending to be legally bound, hereby further covenant and agree as follows:
SECTION 1. DEFINITIONS.
1.1 Accounting Terms. All accounting terms not otherwise defined in this
Agreement shall have the meanings ascribed to such terms in accordance with
GAAP.
1.2 Capitalized Terms. All capitalized terms not otherwise defined in this
Agreement shall have the meanings ascribed to such terms in the Credit
Agreement.
2
<PAGE>
1.3 "Potential Default" means the occurrence of any event which, with the
passage of time or the giving of notice, or both, could constitute a Default.
SECTION 2. FORBEARANCE.
2.1 Forbearance Period; Terminating Events. Agent and Banks agree to
forbear from exercising their rights and remedies under the Loan Documents and
applicable law which Agent and Banks are entitled to exercise as a result of the
occurrence of the Existing Defaults during the period (the "Forbearance Period")
commencing on the Effective Date of this Agreement and ending on the earlier of
(i) June 30, 1999 or (ii) the date on which any Terminating Event (as
hereinafter defined) occurs (the "Forbearance Termination Date"). For the
purposes of this Agreement, the term "Terminating Event" shall mean the
occurrence of any Default or Potential Default under any of the Loan Documents,
other than one of the Existing Defaults, or the occurrence of any breach of
warranty or representation or covenant set forth in this Agreement or the
occurrence of any default, violation or event of default (howsoever defined)
under any of the instruments, agreements or documents executed and/or delivered
pursuant to this Agreement.
2.2 Suspension of Revolving Credit; and Elimination of LIBOR Loans.
(A) Availability under the Revolving Credit is hereby suspended. Without
the prior written consent of Agent, which consent may be withheld in Agent's
sole and absolute discretion, no further loans, advances or extensions of
credit (including, without limitation, the issuance of any Letters of Credit
and the honoring of checks for which there are insufficient and/or
uncollected funds) shall be considered or made. Notwithstanding the foregoing
and anything else to the contrary set forth in the Loan Documents, to the
extent Agent makes further loans, advances or extensions of credit to or for
the benefit of Company Affiliates, including the honoring of overdrafts drawn
on accounts of any Company Affiliate, any such extensions of credit shall be
deemed to be Revolving Credit Advances for all purposes under the Credit
Agreement and as having been made by Agent for the purposes of preserving and
protecting the Collateral and collecting and enforcing the Obligations
pursuant to Section 11 of the Credit Agreement.
(B) During the Forbearance Period, interest shall accrue on the
outstanding principal balance of the Obligations at the Base Rate plus two
(2%) percent per annum, with changes in the Base Rate to be effective
immediately, and no further LIBOR Loans shall be available to Company
Affiliates. Upon the occurrence of any Terminating Event, notwithstanding the
foregoing, interest on the outstanding principal balance of the Obligations
shall accrue and be payable, on demand, at the Base Rate plus two and a half
(2 1/2%) percent per annum, with changes in such Base Rate to be effective
immediately.
3
<PAGE>
SECTION 3. WARRANTIES AND REPRESENTATIONS.
3.1 Reaffirmation of Warranties and Representations. Except as qualified
in Schedule 3.1 attached hereto and hereby made a part hereof, Company
Affiliates hereby severally and collectively reaffirm and restate each of the
warranties and representations set forth in the Credit Agreement and the
other Loan Documents as if each such warranty and representation were set
forth at length herein.
3.2 Additional Warranties and Representations. To induce Agent and Banks
to enter into this Agreement, in addition to the representations and
warranties set forth in the Loan Documents and the other instruments,
agreements and documents otherwise referred to herein, Company Affiliates
severally and collectively represent and warrant to Agent and Banks that:
(A) Each Company Affiliate has the power, authority and capacity to
enter into and perform its liabilities and obligations under this Agreement
and all related instruments, agreements and documents, and to incur the
indebtedness herein and therein provided for, and has taken all proper and
necessary corporate action to authorize the execution, delivery and
performance of this Agreement and related instruments, agreements and
documents;
(B) This Agreement is valid, binding and enforceable against Company
Affiliates in accordance with its terms;
(C) No consent, approval or authorization of, or filing, registration or
qualification with, any person or entity (including, without limitation, any
shareholder or creditor of any Company Affiliates) is required to be obtained
by any Company Affiliate in connection with the execution and delivery of
this Agreement or any related instrument, agreement or document, or
undertaking or performance of any obligation hereunder or thereunder; and
(D) Borrower has executed a letter of intent (the "PLC Letter of
Intent") with Pierce Leahy Corp. ("PLC") pursuant to which PLC will purchase
from Borrower a newly created class of convertible preferred stock on or
before the Forbearance Termination Date, the proceeds of which sale will be
used by Borrower, together with the proceeds of loans obtained by Company
Affiliates on or before the Forbearance Termination Date from lenders (which
may include Banks) refinancing, in part, the Obligations, to pay and satisfy
in full all Obligations. The PLC Letter of Intent is attached to this
Agreement as Exhibit "B."
SECTION 4. BORROWER'S ADDITIONAL COVENANTS.
4.1 Additional Affirmative Covenants. In addition to the affirmative
covenants set forth in the Loan Documents and the agreements and documents
executed and/or delivered to Agent and Banks concurrently herewith, Company
Affiliates covenant and agree with Agent and Banks that, so long as any of
the Obligations remain unsatisfied and outstanding, they will comply with the
following covenants:
4
<PAGE>
(A) Company Affiliates will furnish to Banks (or cause to be furnished
to Banks) such data and information (financial or otherwise) as Banks may
reasonably request to be informed of each Company Affiliate's respective
status and affairs including, without limitation:
(1) The statements, reports, certificates and notices to be furnished
to Agent pursuant to the Credit Agreement and the other Loan Documents
including, without limitation, Section 8 of the Credit Agreement;
(2) By 5:00 p.m. on each Monday during the Forbearance Period (a) a
certification by Borrower of weekly collections of Company Affiliates for the
calendar week ending the Friday prior to such Monday, (b) a certification as
to the amount of cash held by Company Affiliates (and where held, including
account numbers) for each day during such prior week, and (c) an eight (8)
week rolling cash flow forecast report for Company Affiliates, together with
a reconciliation of actual results for the prior week to what had been
forecast for such week in the eight (8) week cash flow forecast; and (c)
copies of any amendments or modifications or proposed amendments or
modifications to the PLC Letter of Intent and notice to Agent of any
inability or anticipated inability of Company Affiliates to comply with all
terms and conditions set forth in this Agreement;
(B) Company Affiliates will, when requested to do so, make available for
inspection by duly authorized representatives of Agent and Banks any of its
books and records (wherever located), and will furnish to Agent (or cause to
be furnished to Agent and Banks) any information regarding its business
affairs and condition (financial and otherwise) within a reasonable time
after request therefor. Agent may at any time and from time to time without
notice to any Company Affiliate have complete access to all of Company
Affiliates' premises for the purposes of inspecting, examining, verifying and
auditing the Collateral and Company Affiliates' books and records and
otherwise conducting field examinations with respect to the Collateral and
Company Affiliates' books and records. The out-of-pocket cost and expense
associated with such field and other examinations shall be borne by Company
Affiliates;
(C) Refinance the Chesterton Property for a net sum of not less than
Eight Hundred Sixty-Nine Thousand ($869,000.00) Dollars (the "Chesterton
Proceeds"). Subject to satisfaction of all conditions precedent, and absent
the existence of any Terminating Event, such refinancing is hereby approved
and consented to by Banks and Banks agree to release Chesterton Mortgage in
connection with such refinancing, provided Four Hundred Thousand Dollars
($400,000.00) of the Chesterton Proceeds (the "Chesterton Retention Amount")
are deposited with Agent as part of the Collateral for the Obligations.
Company Affiliates may retain and utilize the remaining portion of the
Chesterton Proceeds for working capital purposes in the ordinary course of
their business. Upon execution of the definitive purchase agreement with PLC
contemplated in the PLC Letter of Intent, absent the existence of any
Terminating Event, Agent, on behalf of Banks, shall release the Chesterton
Retention Amount for the retention and utilization by Company Affiliates for
working capital purposes in the ordinary course of their business.
5
<PAGE>
(D) On or before April 30, 1999, Borrower and PLC shall execute and
exchange such instruments, agreements and documents as may be necessary to
effectuate the intents and objects of such parties as set forth in the PLC
Letter of Intent; all such instruments, agreements and documents shall be in
form, scope and substance acceptable to Agent, Banks and their respective
counsel, with no due diligence contingencies, it being understood,
acknowledged and agreed by Borrower and the Company Affiliates that any such
due diligence which PLC may desire to conduct in connection with the
transactions identified in the PLC Letter of Intent shall be conducted prior
to April 30, 1999;
(E) On or before June 30, 1999, Company Affiliates shall have obtained a
commitment for refinancing of the Obligations at a level sufficient, along
with the proceeds of the investment by PLC in Borrower pursuant to the PLC
Letter of Intent, to pay and satisfy in full all Obligations on or before the
Forbearance Termination Date;
(F) On or before June 30, 1999, Borrower and PLC shall close under the
instruments, agreements and documents entered into pursuant to the PLC Letter
of Intent, Company Affiliates shall have obtained alternative financing in
such amount, when added to the proceeds of the sale by Borrower of
convertible preferred stock to PLC, that will be sufficient to, and will be
used to satisfy in full, the Obligations, and the Obligations shall be paid
and satisfied in full; and
(G) During the Forbearance Period, Company Affiliates shall comply with
the following additional financial covenants:
(1) Company Affiliates shall have cumulative, average, weekly
collections of not less than One Million ($1,000,000.00) Dollars, commencing
as of the date hereof;
(2) Company Affiliates shall, on a daily basis, have cash on hand of
not less than Three Hundred Thousand ($300,000.00) Dollars;
(3) Capital Expenditures of Company Affiliates shall not exceed in
the aggregate the sum of Fifty Thousand ($50,000.00) Dollars; and
(4) Borrower and the Company Affiliates shall remit to Agent for the
ratable benefit of Banks all proceeds of the sale or disposition of Collateral
(except proceeds arising in the ordinary course of Company Affiliates'
business, which proceeds shall be used for working capital purposes in the
ordinary course of such business); provided, however, that absent the existence
of any Terminating Event, Borrower may use the proceeds from the refinancing of
the Chesterton Property as set forth in Paragraph 4.1(C) of this Agreement and
payments made on account of a certain promissory note executed and delivered by
Document Imaging of South Carolina, LLC to ImageMax of South Carolina, Inc. and
ImageMax, Inc. in the amount of Sixty-Eight Thousand ($68,000.00) Dollars per
month (for three (3) months) in the ordinary course of
6
<PAGE>
Company Affiliates' business for working capital purposes. Other proceeds of
sales of Collateral shall be applied by Agent and Banks in reduction of the
Obligations in such order and manner as Agent and Banks may determine in their
exclusive discretion.
SECTION 5. CONDITIONS PRECEDENT.
This Agreement is subject to the following conditions precedent (all
instruments, agreements and documents to be in form and substance satisfactory
to Banks and their counsel):
5.1 Documents Required for Closing. Borrower shall have duly executed
and/or delivered (or caused to be duly executed and/or delivered) to Banks
the following:
(A) A certified (as of the date of this Agreement) copy of
resolutions of each Company Affiliate's Board of Directors authorizing
the execution, delivery and performance of this Agreement and each other
document to be executed and/or delivered pursuant hereto and any other
instrument, agreement or document referred to herein;
(B) Certified copies of each Company Affiliate's articles or
certificate of incorporation and by-laws;
(C) A certificate (dated the date of this Agreement) of each Company
Affiliate's corporate secretary as to the incumbency and specimen signatures
of the officers of Borrower executing this Agreement and each other document
to be executed and/or delivered pursuant hereto or thereto;
(D) Payment of Banks' reasonable expenses (including legal fees and
disbursements of counsel) in connection with the preparation and negotiation
of this Agreement and a closing hereunder;
(E) In consideration of the agreement of Banks to forbear pursuant to
this Agreement, Company Affiliates acknowledge that Banks, upon execution and
exchange of this Agreement, have earned a forbearance fee in the amount of
One Hundred Thousand ($100,000.00) Dollars (which fee shall be deemed part of
the Obligations secured by the Collateral) payable to Agent for ratable
benefit of Banks as follows: Fifty Thousand ($50,000.00) Dollars upon
execution and exchange of this Agreement; and Fifty Thousand ($50,000.00)
Dollars on the Forbearance Termination Date; and
(F) Such other instruments, agreements and documents as may be
required by Banks and/or their counsel.
7
<PAGE>
SECTION 6. CONFIRMATION OF EXISTING INDEBTEDNESS AND RATIFICATION OF LOAN
DOCUMENTS.
6.1 Confirmation of Obligations. Company Affiliates hereby
unconditionally acknowledge and confirm that: the unpaid principal
indebtedness of Company Affiliates to Banks evidenced by the Loan Documents
is as set forth on Exhibit "C;" interest on such principal obligations has
been paid through the date(s) set forth on Exhibit C; and the foregoing
indebtedness, together with continually accruing interest and related costs,
fees and expenses is, as of the date hereof, owing without claim,
counterclaim, right of recoupment, defense or set-off of any kind or of any
nature whatsoever.
6.2 Ratification of Financing Agreements. Company Affiliates hereby
unconditionally ratify and confirm and reaffirm in all respect and without
condition, all of the terms, covenants and conditions set forth in the Loan
Documents and agree that they remain unconditionally liable to Banks in
accordance with the respective terms, covenants and conditions of such
instruments, agreements and documents, and that all liens and security
interests and pledges encumbering the Collateral and the Chesterton Property
created pursuant to and/or referred to in the Loan Documents continue
unimpaired and in full force and effect, and secure and shall continue to
secure all of the Obligations, as the same may be modified by the terms of
this Agreement. As part of the Collateral, each Obligor hereby reaffirms its
prior grant and grants to Agent a lien on and a security interest in and to
all of such Obligor's existing and future investment property.
SECTION 7. MISCELLANEOUS.
7.1 Integrated Agreement. This Agreement and all of the instruments,
agreements and documents executed and/or delivered in conjunction with this
Agreement shall be effective upon the date of execution hereof and thereof by
all parties hereto and thereto, and shall be deemed incorporated into and
made a part of the Loan Documents. All such instruments, agreements and
documents, and this Agreement, shall be construed as integrated and
complementary of each other, and as augmenting and not restricting Agent's
and Banks' rights, remedies, benefits and security. If, after applying the
foregoing, an inconsistency still exists, the provisions of this Agreement
shall constitute an Agreement thereto and shall govern and control.
7.2 Disgorgement. If any Bank is, for any reason, compelled to surrender
or disgorge any payment, interest or other consideration described hereunder
to any person or entity because the same is determined to be void or voidable
as a preference, fraudulent conveyance, impermissible set-off or for any
other reason, such Obligation or part thereof intended to be satisfied by
virtue of such payment, interest or other consideration shall be revived and
continue as if such payment, interest or other consideration had not been
received by such Bank, and Company Affiliates shall be liable to, and shall
indemnify, defend (engaging counsel acceptable to such Bank) and hold such
Bank harmless for, the amount of such payment or interest
8
<PAGE>
surrendered or disgorged. The provisions of this Paragraph shall survive
execution and exchange or this Agreement.
7.3 No Defenses; Reliance. Company Affiliates hereby confirm and
reconfirm that there are no existing defenses, claims, counterclaims or
rights of recoupment or set-off against Agent and/or Banks in connection with
the negotiation, preparation, execution, performance or any other matters
relating to the Loan Documents or this Agreement. It is hereby and thereby
further acknowledged and agreed that notwithstanding anything to the contrary
set forth in this Agreement, Banks have and shall have no obligation to
further amend the Loan Documents, or otherwise further restructure the
Obligations, and that neither Banks nor their representatives have made any
agreements with, or commitments or representations or warranties to, Company
Affiliates (either in writing or orally) other than as expressly stated in
this Agreement. Nothing contained in this Agreement, or any compliance with
the terms of this Agreement or any of the instruments, agreements or
documents referred to in this Agreement, shall impose any obligation on the
part of Agent or Banks to consummate a further restructure of the
Obligations.
7.4 No Contest. In consideration of this Agreement, Company Affiliates
hereby agree that they will not contest the exercise of Agent's or Banks'
rights to foreclose or otherwise take action with respect to the liens on and
security interests of Agent in and to the Collateral, the Loan Documents and
collateral security described in this Agreement, or contest the appointment
of any receiver in connection of the operation of any of such property and
assets.
7.5 Release. In consideration of the accommodations being made available
by Banks to or for the benefit of Company Affiliates under this Agreement,
including, without limitation, the forbearance on the part of Banks, Company
Affiliates, for themselves and their respective heirs, personal
representatives, agents, employees, successors and assigns, do hereby remise,
release and forever discharge Agent, Banks and their respective agents,
employees, representatives, officers, successors and assigns of and from any
and all claims, counterclaims, demands, actions and causes of action of any
nature whatsoever, whether at law or in equity, including, without
limitation, any of the foregoing arising out of or relating to the
transactions described in this Agreement, which against Agent, Banks or their
respective agents, employees, representatives, officers, successors or
assigns, or any of them, any Obligor has or hereafter can or may have for or
by reason of any cause, matter or thing whatsoever, from the beginning of the
world to the date of this Agreement; provided, however, that this provision
shall not release claims resulting from acts of gross negligence or wilful
misconduct of Banks.
7.6 No Coercion. Company Affiliates hereby represent and warrant that
they are fully aware of the terms set forth in this Agreement and have
voluntarily, and without coercion or duress of any kind, entered into this
Agreement intending to be legally bound by its terms.
7.7 Banks Reliance. Company Affiliates expressly understand and further
agree that Agent and Banks are relying on all terms, covenants, conditions,
warranties and representations set forth in this Agreement including, without
limitation, Agent's and Banks' right to terminate
9
<PAGE>
the Forbearance Period at any time upon the occurrence of a Terminating
Event, as a material inducement to Agent and Banks to enter into this
Agreement.
7.8 Debit Authorization. Each Company Affiliate hereby irrevocably
authorizes Agent and Banks to charge any deposit account of any Company
Affiliate maintained at any Bank for all or any part of any amount due under
the Loan Documents and this Agreement including, without limitation,
principal, interest, late charges, fees and expenses reimbursable to Agent
and Banks (including reasonable legal fees).
7.9 Expenses of Agent and Banks. Company Affiliates will pay all
expenses, including the reasonable fees and expenses of legal counsel for
Agent and Banks, incurred in connection with the preparation, negotiation,
administration, amendment, modification or enforcement of this Agreement, the
Credit Agreement, the other Loan Documents, the collection or attempted
collection of the Obligations and Agent's and Banks' rights hereunder and
under the instruments, agreements and documents referred to herein, and in
any proceedings (including, without limitation, bankruptcy or other
insolvency proceedings) brought or threatened to enforce payment of any of
the Obligations.
7.10 Applicable Law. This Agreement shall be governed by the laws of the
Commonwealth of Pennsylvania, without giving effect to principles of
conflicts of laws.
7.11 Jury Trial Waiver. COMPANY AFFILIATES HEREBY IRREVOCABLY WAIVE
TRIAL BY JURY AND ANY RIGHT THERETO, AND CONSENT TO THE JURISDICTION OF THE
COURTS OF PHILADELPHIA COUNTY, PENNSYLVANIA, AND AGREE NOT TO RAISE ANY
OBJECTION TO SUCH JURISDICTION, OR TO THE LAYING OF THE VENUE IN SUCH
COMMONWEALTH, AND FURTHER AGREE THAT SERVICE OF PROCESS MAY BE DULY EFFECTED
UPON THEM BY SERVICE IN ACCORDANCE WITH THE PROVISIONS OF THE UNIFORM
INTERSTATE AND INTERNATIONAL PROCEDURE ACT.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Forbearance
Agreement to be duly executed and exchanged as of the day and year first
above written.
IMAGEMAX, INC.
IMAGEMAX OF INDIANA, INC.
IMAGEMAX OF SOUTH CAROLINA, INC.
IMAGEMAX OF TENNESSEE, INC.
IMAGEMAX OF ARIZONA, INC.
IMAGEMAX OF OHIO, INC.
IMAGEMAX OF VIRGINIA, INC.
AMMCORP ACQUISITION CORP.
Attest: IMAGEMAX OF DELAWARE, INC.
By: /s/ Mark P. Glassman By: /s/ Lewis E. Hatch, Jr.
------------------------------- -------------------------------
Name: Name:
Title: Title:
(Corporate Seal) Address: 1100 Hector Street
Suite 396
Conshohocken, PA 19428
Attn: President
FIRST UNION NATIONAL BANK, successor
by merger to CORESTATES BANK, N.A.
for itself and as Agent
By: /s/ Beth Styer
--------------------------------
Name:
Title:
Address: 123 S. Broad Street
Philadelphia, PA 19109
[Signature Lines Continued]
11
<PAGE>
With a copy to: Klehr, Harrison, Harvey,
Branzburg & Ellers LLP
1401 Walnut Street
Philadelphia, PA 19102-3163
Attn: Donald M. Harrison
Richard S. Roisman
COMMERCE BANK, N.A.
By: /s/ Bob Fales
--------------------------------
Name:
Title:
Address: 1701 Route 70 East
Cherry Hill, NJ 08034
12
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
AMENDMENT NO. 1, dated as of October 1, 1998 (the "Amendment"), to
Employment Agreement dated as of August 18, 1997 (the "Employment Agreement"),
between ImageMax, Inc., a Pennsylvania corporation (the "Company") and James D.
Brown, a resident of Pennsylvania (the "Employee"); all capitalized terms not
defined herein shall have the meaning set forth in the Employment Agreement.
WHEREAS, the Company desired to employ Employee and Employee desired to be
employed by the Company upon the terms and conditions set forth in the
Employment Agreement; and
WHEREAS, the Company and the Employee desire to amend certain terms and
conditions of the Employment Agreement as further set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and obligations
contained herein, and intending to be legally bound, the parties, subject to the
terms and conditions set forth herein, agree as follows:
SECTION 1. Amendment to Section 9.6. Section 9.6(d) of the Employment
Agreement is amended and restated in its entirety as follows:
"(d) In the event of termination of Employee's employment hereunder
pursuant to clause (iii) in Section 9.7(a) above, Employee shall be entitled to
receive all accrued but unpaid (as of the effective date of such termination)
Base Salary and Benefits. In addition, in such case Employee shall be entitled
to receive Base Salary and Benefits for the thirty (30) months following the
effective date of such termination (the "Additional Amount"). Employee, at his
sole option, may receive the Additional Amount paid either (i) monthly for
thirty (30) months, or (ii) in one payment on the effective date of such
termination, in which case the value of the Benefits otherwise payable will be
monetized, and such payment of the Additional Amount will be discounted at the
then current Federal Short Term Rate as defined in the Internal Revenue Code of
1986, as amended."
SECTION 2. Employment Agreement as Amended. The terms "Agreement" and
"Employment Agreement" as used in the Employment Agreement shall be deemed to
refer to the Employment Agreement as amended hereby. This Amendment shall be
effective as of the date hereof and, except as set forth herein, the Employment
Agreement shall remain in full force and effect and be otherwise unaffected
hereby.
SECTION 3. Benefits of this Amendment. Nothing in this Amendment shall be
construed to give to any Person other than the Company and Employee any legal or
equitable right, remedy or claim under this Amendment; but this Amendment shall
be for the sole and exclusive benefit of the Company and the Employee.
<PAGE>
SECTION 4. Governing Law. This Amendment shall be governed by, and
construed in accordance with, the laws of the Commonwealth of Pennsylvania
applicable to contracts executed in and to be performed entirely in such state.
SECTION 5. Counterparts. This Amendment may be executed (including by
facsimile) in one or more counterparts and by the different parties hereto in
separate counterparts, each of which when executed shall be deemed to be an
original, but all of which taken together shall constitute one and the same
instrument.
SECTION 6. Descriptive Headings. The headings contained in this Amendment
are for descriptive purposes only and shall not affect in any way the meaning or
interpretation of this Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed, all as of the date first above written.
IMAGEMAX, INC.
By: /s/ Lewis E. Hatch, Jr.
-------------------------
Name: Lewis E. Hatch, Jr.
/s/ James D. Brown
-------------------------
James D. Brown
2
- --------------------------------------------------------------------------------
SEPARATION AGREEMENT
- --------------------------------------------------------------------------------
THIS SEPARATION AGREEMENT ("Agreement") is made by and between Bruce M.
Gillis ("Gillis"), together with each and every dependent, heir, agent,
executor, legal representative, successor and assign of Gillis, and ImageMax,
Inc., a Pennsylvania corporation ("Parent"), and its subsidiaries (the Parent
and its subsidiaries are collectively referred to as the "Company"), together
with each and every of their predecessors, successors (by merger or otherwise),
assigns, parents, subsidiaries, affiliates, divisions, directors, officers,
employees, attorneys, accountants and agents, whether past, present or former.
WHEREAS, Gillis and the Company have agreed that he should resign his
employment with the Company and his membership on all Boards of Directors of the
Company, except for the Board of Directors of the Parent; and
WHEREAS, Gillis and the Parent, on its own behalf and on behalf of each
Company, desire to set forth herein their entire understanding and agreement
regarding such resignation.
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth, each of Gillis and the Parent, on its own behalf and on behalf of each
Company, acting of his and its own free will, and intending to be legally and
irrevocably bound hereby, agree as follows:
1. Resignation. Gillis hereby resigns all employment, Board of Director and
other positions with the Company, except only for his membership on the Board of
Directors of Parent, effective on September 18, 1998. Except as otherwise set
forth herein, the Employment Agreement between the Parent and Gillis dated
August 1, 1997, a copy of which is attached hereto as Exhibit A (the "Employment
Agreement"), and the Term of the Employment Agreement (as that term is used
therein), shall terminate as of September 18, 1998.
2. Payments.
(a) Severance. The Company agrees to pay Gillis the sum of Three Hundred
Thousand Dollars ($300,000.00), subject to all applicable federal, state and
local tax (the "Severance Payment"), one-third of such amount to be paid by
check on September 21, 1998, one-third of such amount to be paid by check on
March 18, 1999 and the remaining one-third of such amount to be paid by check on
September 18, 1999. Notwithstanding the foregoing, any unpaid portion of the
Severance Payment shall be paid to Gillis by the Parent or
<PAGE>
the Successor Entity (as defined below), as the case may be, upon the completion
of a Change of Control or Sale of the Parent (each as defined below).
(b) Board. While he is a member of the Board of Directors of the Parent,
Gillis will receive all benefits and compensation for services in such capacity
as is received by the other members of the Board of Directors of the Parent who
are not employees of the Parent ("Outside Directors") in their capacity as such;
provided, however, that prior to September 18, 1999, Gillis will not be entitled
to any cash compensation for services as a member of the Board of Directors of
Parent, except for cash payments on account of meeting fees if and to the extent
that such payments are made to other Outside Directors in their capacity as
such.
(c) Change of Control. In addition to the Severance Payment, upon the
completion of a Sale of the Parent or a Change of Control (each as defined
below) prior to September 18, 2000, the Parent or the successor to all or
substantially all of the Parent's assets, capital stock or business (the
"Successor Entity"), as the case may be, shall pay to Gillis by check the sum of
One Hundred Fifty Thousand Dollars ($150,000), subject to all applicable
federal, state and local tax. For purposes of this Agreement: (i) a "Change of
Control" means the sale, transfer, assignment or other disposition (including by
merger or consolidation) by stockholders of the Parent, in one transaction or a
series of related transactions, of more than fifty percent (50%) of the voting
power represented by the then outstanding stock of the Parent to one or more
Persons, other than (A) any such sales, transfers, assignments or other
dispositions by such stockholders to their respective Affiliates or (B) any such
transaction effected primarily to reincorporate the Parent in another
jurisdiction; (ii) "Affiliate" means, with respect to any stockholder of the
Parent, (W) any Person directly or indirectly controlling, controlled by or
under common control with such stockholder, (X) any Person owning or controlling
ten percent (10%) or more of the outstanding voting securities of such
stockholder, (Y) any officer, director or general partner of such stockholder,
or (Z) any Person who is an officer, director, general partner, trustee or
holder of ten percent (10%) or more of the outstanding voting securities of any
Person described in clauses (W) through (Y) of this sentence; (iii) "Person"
means an individual, partnership, corporation, joint venture, association,
trust, unincorporated association, other entity or association; and (iv) "Sale
of the Parent" means a sale, transfer, assignment or other disposition
(including by merger or consolidation) of all of the outstanding stock of the
Parent, or of all or substantially all of the assets of the Parent, or a
liquidation or dissolution of the Parent; provided, however, that a "Sale of the
Parent" shall not include the consummation of a public offering of common stock
of the Parent pursuant to a registration statement or any transaction effected
primarily to reincorporate the Parent in another jurisdiction.
(d) Expense Reimbursement. The Company agrees to reimburse Gillis in
accordance with its existing business practices for his reasonable business
expenses related to the Company prior to September 18, 1998 which have not yet
been reimbursed (the "Non-Reimbursed Expenses"). Within forty-five (45) days of
the execution hereof, Gillis agrees
-2-
<PAGE>
to submit to James D. Brown, the Chief Financial Officer of the Company, the
appropriate expense reports reflecting such expenses. Once such reports are
processed, the Company will promptly reimburse Gillis for the Non-Reimbursed
Expenses.
3. Option Continuation. The Company hereby agrees that the option to
purchase 100,000 shares of common stock of the Company granted to Gillis as of
December 9, 1997 pursuant to a Non-Qualified Stock Option Agreement (the "Option
Agreement") shall, notwithstanding terms in the Option Agreement or the
Company's 1997 Incentive Plan to the contrary, vest in full on September 18,
1998 and be exercisable thereafter in accordance with the Option Agreement until
(i) December 8, 2002, (ii) a Change of Control or (iii) the Sale of the Parent,
whichever first occurs.
4. Board Committee. The Company hereby agrees that if, while Gillis is a
member of the Board of Directors of Parent, such Board of Directors forms a
committee thereof to consider a potential Sale of the Parent or Change of
Control, Gillis shall be appointed to such committee.
5. Medical Benefit Continuation. For the period September 18, 1998 to
September 17, 1999, the Company will provide Gillis and his family full coverage
under the Company group medical plan subject to the requirements of the medical
plan. Gillis agrees to pay directly or to the Company for such coverage an
amount equal to any required employee contribution to the medical plan premium.
Gillis' statutory rights under COBRA to continue participation in the Company's
group medical coverage for a period of up to eighteen (18) months, at his own
cost, shall begin on September 18, 1999. The Company's obligation to continue
medical coverage will cease if Gillis becomes eligible to participate in a
comparable medical plan with a new employer. In this case, Gillis agrees to
immediately provide written notification of this fact to the Vice President of
Human Resources of the Company and the (acting) Chief Executive Officer of the
Company. If the Company is unable to continue medical coverage under its group
medical plan as required by this paragraph 5 due to requirements of such plan,
the Company shall pay to Gillis an amount equal to the costs which the Company
would have incurred had it been able to provide such coverage.
6. Attorneys' Fees. Upon presentation of appropriate invoices, the Company
agrees to reimburse Gillis for all reasonable attorneys' fees incurred on or
prior to September 25, 1998 in connection with Gillis' separation from
employment and the negotiation of this Agreement in a sum not to exceed Ten
Thousand Dollars ($10,000.00).
7. Return of Gillis' Personal Property. The Company agrees to return to
Gillis, within five (5) business days of the execution of this Agreement, his
personal property, if any, within its possession or control. Gillis expressly
agrees that the Company may retain copies of any information embodied by, or
contained in, the property turned over to Gillis under the
-3-
<PAGE>
terms of this paragraph if the Company reasonably believes that the information
serves its business needs.
8. Return of Company Property. Gillis agrees to return to the Company,
within five (5) business days of the execution of this Agreement, all Company
property in his possession or control. Gillis further agrees that he will not
make, retain or remove any copies of any of the foregoing, except with respect
to documents related to his role as a member of the Board of Directors of
Parent, which he may retain. Notwithstanding the foregoing, Gillis shall retain
the use of a Company owned laptop computer, e-mail address and one copy of
DocuROM software (including fully paid maintenance and support of the DocuROM
software) while he remains a member of the Board of Directors of Parent, after
which he will promptly return such items to the Company.
9. Mutual Release of Claims. Gillis hereby completely remises, releases,
relinquishes, waives and forever discharges the Company, together with each and
every of their predecessors, successors (by merger or otherwise), assigns,
parents, subsidiaries, affiliates, divisions, directors, officers, employees,
attorneys, accountants and agents, whether past, present or former of and from
all manner of actions, causes of action, suits, debts, dues, accounts, bonds,
covenants, contracts, agreements, judgments, claims, liabilities and demands
whatsoever, in law or in equity, known or unknown, in tort, contract, by
statute, negligence (whether by contribution or indemnification) or any other
basis for relief, compensatory, punitive or other damages, expenses (including
attorneys' fees), reimbursements or costs of any kind which Gillis ever had, now
has or may have, for or by reason of any cause, matter or thing whatsoever,
arising out of or in any way related to the Company or his employment with the
Company, his membership on any Boards of Directors of the Company or the
termination of that employment and membership; provided, however, that nothing
contained herein shall release the Company from its obligations under this
Agreement, the Parent's registration rights obligations arising out of the
Shareholders' Agreement dated as of November 19, 1996, as amended, the Parent's
obligations under the Option Agreement and the Company's obligations to
indemnify Gillis from acts and omissions as a director and officer of the
Company to the fullest extent permissible by law. Gillis agrees that he has
executed this Release on his own behalf, and also on behalf of his dependents,
heirs, agents, executors, legal representatives, successors and assigns. This
Release includes, but is not limited to, a release of any rights or claims he
may have for, or pursuant to, the Pennsylvania Wage Payment and Collection Law
or any other state or local wage payment statute, the Age Discrimination in
Employment Act (ADEA), Title VII of the Civil Rights Act of 1964, as amended,
the Americans with Disabilities Act (ADA), the Employer Retirement and Income
Security Act (ERISA), any other federal, state or local laws or regulations
prohibiting employment discrimination, breach of any express or implied
contract, wrongful termination or any other tort claims, including claims for
attorneys' fees, whether based on common law or otherwise. Gillis understands,
however, that by signing this Release, he does not waive rights to: (a) any
claims arising under any applicable worker's compensation laws; (b) any claims
which
-4-
<PAGE>
the law states may not be waived; or (c) his vested rights, if any, under the
regular employment benefit plans of the Company, in effect as of the date of
this Agreement.
The Parent, on its own behalf and on behalf of each Company, hereby
completely remises, releases, relinquishes, waives and forever discharges Gillis
and his dependents, heirs, agents, executors, legal representatives, successors
and assigns, of and from all manner of actions, causes of action, suits, debts,
dues, accounts, bonds, covenants, contracts, agreements, judgments, claims,
liabilities and demands whatsoever, in law or equity, known or unknown, in tort,
contract, by statute, negligence (whether by contribution or indemnification) or
any other basis for relief, compensatory, punitive or other damages, expenses
(including attorney's fees), reimbursements or costs of any kind which the
Company ever had, now has or may have, for or by reason of any cause, matter or
thing whatsoever, arising out of or in any way related to the Company or his
employment with the Company, his membership on any Boards of Directors of the
Company or the termination of that employment and membership; provided however,
that nothing contained herein shall release Gillis from: (i) his obligations
under this Agreement; (ii) his obligations under Sections 6 (confidentiality), 7
(ownership of proprietary information, as amended in paragraph 10 of this
Agreement) and 20 (specific performance) of the Employment Agreement; and (iii)
so long as Gillis remains a member of the Board of Directors of Parent, his
obligations under Section 8 (non-competition) of the Employment Agreement (as
amended and restated in paragraph 11 of this Agreement.) The Parent agrees that
it has executed this Release on its own behalf and on behalf of each Company,
and also on behalf of each and every of their predecessors, successors (by
merger or otherwise), assigns, parents, subsidiaries, affiliates, divisions,
directors, officers, employees, attorneys, accountants and agents, whether past,
present or former.
10. Amendment of Definition of Confidential Information in Employment
Agreement. Section 7 of the Employment Agreement is hereby amended so that the
term "Confidential Information" does not include "ideas for marketing programs,"
except for those "ideas for marketing programs" that have been, on or prior to
September 18, 1998, reduced to writing.
11. Amendment and Restatement of Covenant Not to Compete in Employment
Agreement. Section 8 of the Employment Agreement is hereby amended and restated
as follows:
"8. Covenant Not to Compete. The Employee shall not, until September 18,
1999 (the "Restricted Period"), do any of the following directly or indirectly
without the prior written consent of the Parent:
(a) compete with the Company or any of its respective affiliates or
subsidiaries, or any of their respective successors or assigns, whether now
existing or hereafter created or acquired (collectively, the "Related
Companies"), in any document management
-5-
<PAGE>
business conducted during the Term or, as of September 18, 1998, contemplated to
be conducted (as has been determined by the Board) or in any other business
conducted by the Company in which the Employee is or has been actively engaged
(the "Restricted Business") within any geographic area located within the United
States of America, its possessions or territories (the "Restricted Area");
(b) become interested (whether as owner, stockholder, lender, partner,
co-venturer, director, officer, employee, agent, consultant or otherwise) in any
person, firm, corporation, association or other entity that competes with the
Related Companies in the Restricted Business within the Restricted Area, if such
interest would constitute a violation of Section 8(a) hereof; provided, that
nothing contained in this Section 8(b) shall prohibit Employee from owing, as a
passive investor, not more than five percent (5%) of the outstanding securities
of any class of any publicly-traded securities of any publicly held company
listed on a well- recognized national securities exchange or on an interdealer
quotation system of the National Association of Securities Dealers, Inc;
(c) influence or attempt to influence any supplier or customer of the
Company or any of the Related Companies to terminate or modify any written or
oral agreement or course of dealing with the Company or the Related Companies;
or
(d) influence or attempt to influence any person (other than a family
member) to either (i) terminate or modify his employment, consulting, agency,
distributorship or other arrangement with the Company or any of the Related
Companies, or (ii) employ or retain, or arrange to have any other person or
entity employ or retain, any person who has been employed or retained by the
Company or any of the Related Companies as an employee, consultant, agent or
distributor of the Company or the Related Companies at any time during the one
year period immediately preceding September 18, 1998."
12. Press Release; Non-Defamation. The parties agree to the press release
attached as Exhibit B hereto. Each party further agrees not to intentionally
defame the other with respect to matters arising prior to the date of the
execution of this Agreement.
13. Arbitration of Disputes Under this Agreement. The parties agree that
any and all disputes arising out of the performance or breach of this Agreement
or any promise or covenant herein shall be resolved by submission to final and
binding arbitration by a panel of three arbitrators in Philadelphia,
Pennsylvania, under, and in accordance with, the Individual Employment Rules and
Procedures of the American Arbitration Association. In any such proceeding, the
prevailing party shall be entitled to an award of reasonable attorneys' fees,
cost and expenses.
14. Governing Law; Enforcement. This Agreement shall be governed by and
construed and enforced under the laws of the Commonwealth of Pennsylvania. All
remedies at
-6-
<PAGE>
law and equity shall be available for the enforcement of this Agreement
incorporated by reference herein. This Agreement may be pleaded as a full bar to
the enforcement of any claim in any way related to or arising out of Gillis'
employment or other positions with the Company and/or the termination thereof.
15. Review and Counsel. Gillis hereby acknowledges that, in connection with
this Agreement, he is acting of his own free will, that he has been afforded
ample opportunity to read and review the terms of this Agreement, that he has
read and reviewed the terms of this Agreement, that he has been represented by
counsel of his own selection and has relied upon the advice of such counsel in
connection with this Agreement and that he is voluntarily entering into this
Agreement with full knowledge of its provisions and effects.
16. Contractual Effect. The parties understand and acknowledge that the
terms of this Agreement are contractual and not a mere recital. Consequently,
they expressly consent that this Agreement shall be given full force and effect
according to each and all of its express terms and provisions, and that it shall
be binding upon the respective parties as well as their dependents, heirs,
executors, legal representatives, successors and assigns.
17. Notices. All notices, requests, payments, acknowledgments and other
communications hereunder to a party shall be in writing and shall be deemed to
have been duly given when delivered by hand, deposited with a recognized
overnight courier for next day delivery or telecopied to such party at his or
its address set forth below or such other address as such party may specify by
notice to the other party hereto.
If to Gillis, to:
Bruce M. Gillis
331 Aubrey Road
Wynnewood, PA 19096
Telecopier: (610) 645-9707
With a copy to:
Ballard Spahr Andrews & Ingersoll, LLP
1735 Market Street, 51st Floor
Philadelphia, PA 19103
Telecopier: (215) 864-8999
Attention: Justin P. Klein, Esquire
-7-
<PAGE>
If to the Company, to:
ImageMax, Inc.
1100 Hector Street
Suite 396
Conshohocken, PA 19428
Attention: Chairman
With a copy to:
Pepper Hamilton LLP
3000 Two Logan Square
18th and Arch Streets
Philadelphia, PA 19103
Telecopier: (215) 981-4750
Attention: Barry M. Abelson, Esquire
18. Entire Agreement; Etc. This Agreement represents the entire
understanding of the parties hereto with reference to the subject matters hereof
and supersedes any and all other oral or written agreements heretofore or
contemporaneously made.
19. Headings. The descriptive headings of the Paragraphs of this Agreement
are inserted for convenience only, do not constitute a part of this Agreement
and shall not affect in any way the meaning or interpretation of this Agreement.
20. Counterparts and Facsimile Signatures. This Agreement may be delivered
by telecopied signatures and executed in several counterparts, each of which
shall be deemed to be an original, and all of which together shall be deemed to
be one and the same instrument.
[blank to end of page]
-8-
<PAGE>
21. Severability. If any term, provision, covenant or restriction contained
in this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void, unenforceable or against public or regulatory
policy, the remainder of the terms, provisions, covenants and restrictions
contained in this Agreement shall remain in full force and effect and shall in
no way be affected, impaired or invalidated.
IN WITNESS WHEREOF, Gillis and the Parent, on its own behalf and on behalf
of each Company, each acknowledge that they are acting of their own free will,
that they have had a sufficient opportunity to read and review the terms of this
Agreement, they have each received the advice of their respective counsel with
respect hereto, and that they have voluntarily caused the execution of this
Agreement and by reference herein as of the day and year set forth below.
/s/ Bruce M. Gillis Witness:
- ------------------------------------ -------------------------------
Bruce M. Gillis
Date:September 18, 1998
On behalf of IMAGEMAX, INC.:
By: /s/ Lewis E. Hatch, Jr.
--------------------------------
Name: Lewis E. Hatch, Jr.
By: /s/ Andrew Bacas
--------------------------------
Name: Andrew Bacas
Date:September 18, 1998
-9-
SEPARATION AGREEMENT
THIS SEPARATION AGREEMENT ("Agreement") is made by and between Richard D.
Moseley ("Moseley"), together with each and every dependent, heir, agent,
executor, legal representative, successor and assign of Moseley, and ImageMax,
Inc., a Pennsylvania corporation ("Parent"), and its subsidiaries (the Parent
and its subsidiaries collectively referred as the "Company"), together with each
and every of their predecessors, successors (by merger or otherwise), assigns,
parents, subsidiaries, affiliates, divisions, directors, officers, employees,
attorneys, accountants and agents, whether past, present or former.
WHEREAS, Moseley and the Company have agreed that he should resign his
employment with the Company; and
WHEREAS, Moseley and the Parent, on its own behalf and on behalf of each
Company, desire to set forth herein their entire understanding and agreement
regarding such resignation.
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth, Moseley and the Parent, on its own behalf and on behalf of each Company,
acting of his and its own free will, and intending to be legally and irrevocably
bound hereby, agree as follows:
1. Resignation. Moseley hereby resigns his employment, effective on
September 28, 1998; provided, however, until October 28, 1998, Moseley shall
continue to provide transition services to the Company in connection with the
projects on which he is working as of the date hereof (the "Transition
Services"). Except as otherwise set forth herein, the Employment Agreement
between the Parent and Moseley dated April 15, 1998, a copy of which is attached
hereto as Exhibit A (the "Employment Agreement") and the Term of the Employment
Agreement (as that term is used therein), shall terminate as of September 28,
1998.
2. Severance Payments. The Company agrees to pay Moseley (collectively
referred to as the "Severance Payments"):
(a) Twenty-One Thousand Six Hundred Sixty-Seven Dollars ($21,667),
subject to all applicable federal, state and local tax, to be paid by check on
September 28, 1998;
(b) Subject to the reasonable satisfactory completion of the Transition
Services as determined by Andrew Bacas (acting Chief Executive Officer), Ten
Thousand Eight-Hundred Thirty-Three Dollars ($10,833), subject to all applicable
federal, state and local tax, to
<PAGE>
be paid by check on upon completion of the Transition Services; provided,
however, that notwithstanding anything in this subparagraph 2(a) to the
contrary, such amount shall be immediately paid to Moseley if Andrew Bacas is no
longer the acting Chief Executive Officer of the Company;
(c) Subject to Section 15 below, on December 28, 1998, the sum of
Thirty-Two Thousand Five Hundred Dollars ($32,500.00) subject to all applicable
federal, state and local tax, to be paid by check on December 28, 1998;
(d) Subject to Section 15 below, beginning March 28, 1999 and continuing
on the 28th day of each month thereafter until September 28, 1999, the sum of
Sixty-Five Thousand Dollars ($65,000.00), in six (6) equal installments of
$10,833.33 each, subject to all applicable federal, state and local tax; and
(e) Five Thousand Dollars ($5,000.00), subject to all applicable
federal, state and local tax, to be paid by check on September 28, 1998 in lieu
of ten (10) days accrued vacation.
3. Change of Control. In addition to the applicable Severance Payments, the
completion of a Sale of the Parent or a Change of Control (each as defined
below) prior to September 28, 2000, the Parent or the successor to all or
substantially all of the Parent's assets, capital stock or business (the
"Successor Entity"), as the case may be, shall pay to Moseley by check the sum
of Sixty-Five Thousand Dollars ($65,000.00), subject to all applicable federal,
state and local tax. For purposes of this Agreement: (i) a "Change of Control"
means the sale, transfer, assignment or other disposition (including by merger
or consolidation) by stockholders of the Parent, in one transaction or a series
of related transactions, of more than fifty percent (50%) of the voting power
represented by the then outstanding stock of the Parent to one or more Persons,
other than (A) any such sales, transfers, assignments or other dispositions by
such stockholders to their respective Affiliates or (B) any such transaction
effected primarily to reincorporate the Parent in another jurisdiction; (ii)
"Affiliate" means, with respect to any stockholder of the Parent, (W) any Person
directly or indirectly controlling, controlled by or under common control with
such stockholder, (X) any Person owning or controlling ten percent (10%) or more
of the outstanding voting securities of such stockholder, (Y) any officer,
director or general partner of such stockholder, or (Z) any Person who is an
officer, director, general partner, trustee or holder of ten percent (10%) or
more of the outstanding voting securities of any Person described in clauses (W)
through (Y) of this sentence; (iii) "Person" means an individual, partnership,
corporation, joint venture, association, trust, unincorporated association,
other entity or association; and (iv) "Sale of the Parent" means a sale,
transfer, assignment or other disposition (including by merger or consolidation)
of all of the outstanding stock of the Parent, or of all or substantially all of
the assets of the Parent, or a liquidation or dissolution of the Parent;
provided, however, that a "Sale of the Parent" shall not include the
consummation of a public offering of
-2-
<PAGE>
common stock of the Parent pursuant to a registration statement or any
transaction effected primarily to reincorporate the Parent in another
jurisdiction.
4. Relocation Expenses. The Company agrees to pay Moseley the sum of Twenty
Thousand Dollars ($20,000.00) (the "Base Relocation Expense Payment"), plus any
reasonable expenses associated with his relocation and the sale of his home in
Indiana, including any loss on the sale of such home (together with the Base
Relocation Expense Payment, the "Aggregate Relocation Expense Payment"). The
Aggregate Relocation Expense Payment shall not exceed Thirty-Five Thousand
Dollars ($35,000.00). The Company shall pay the Base Relocation Expense Payment
by check on September 28, 1998. Moseley agrees to submit to James D. Brown, the
Chief Financial Officer of the Company, all receipts or documentation reflecting
the reasonable expenses associated with his relocation and sale of his home in
Indiana, including any loss on the sale of such home. Once such reports are
processed, the Company will promptly reimburse the remaining unpaid portion of
the Aggregate Relocation Expense Payment.
5. Out Placement Service Expenses. The Company agrees to pay the reasonable
expenses associated with Moseley's use of an out placement service to secure
employment. However, such payment shall be subject to review by James D. Brown,
the Chief Financial Officer of the Company or such other officer as the Company
so determines, and shall not exceed Fifteen Thousand Dollars ($15,000.00).
6. Business Expense Reimbursement. The Company agrees to reimburse Moseley
in accordance with its existing business practices for his reasonable business
expenses related to the Company prior to September 28, 1998 which have not yet
been reimbursed (the "Non-Reimbursed Expenses"). Within ten (10) days of the
execution hereof, Moseley agrees to submit to James D. Brown, the Chief
Financial Officer of the Company, the appropriate expense reports reflecting
such expenses. Once such reports are processed, the Company will promptly
reimburse Moseley for the Non-Reimbursed Expenses.
7. Option Continuation. The Company hereby agrees that the option to
purchase 50,000 shares of common stock of the Company granted to Moseley as of
April 15, 1998 pursuant to a Non-Qualified Stock Option Agreement (the "Option
Agreement") shall, notwithstanding terms in the Option Agreement or the
Company's 1997 Incentive Plan to the contrary, vest according to the existing
vesting schedule set forth in the Option Agreement and the portion so vested
shall be exercisable in accordance with the Option Agreement until (i) April 15,
2003, (ii) a Change of Control or (iii) the Sale of the Parent, whichever first
occurs.
8. Medical Benefit Continuation. The Company agrees to continue paying for
a period of one year, beginning on September 28, 1998, Moseley's group medical
coverage through his former employer which he retained upon separation from his
former employer pursuant to his statutory rights under COBRA. The Company's
obligation to continue paying for such medical coverage under Moseley's former
employer group medical plan will cease if
-3-
<PAGE>
Moseley becomes eligible to participate in a comparable medical plan with a new
employer. In this case, Moseley agrees to immediately provide written
notification of this fact to the Vice President of Human Resources of the
Company and the (acting) Chief Executive Officer of the Company.
9. Attorneys' Fees. Upon presentation of appropriate invoices, the Company
agrees to reimburse Moseley for all reasonable attorneys' fees incurred on or
prior to October 2, 1998 in connection with Moseley's separation from employment
and the negotiation of this Agreement, in a sum not to exceed Three Thousand
Dollars ($3,000.00).
10. Return of Moseley's Personal Property. The Company agrees to return to
Moseley, within five (5) business days of the execution of this Agreement, his
personal property, if any, within its possession or control. Moseley expressly
agrees that the Company may retain copies of any information embodied by, or
contained in, the property turned over to Moseley under the terms of this
paragraph if the Company reasonably believes that the information serves its
business needs.
11. Return of Company Property. Moseley agrees to return to the Company,
within five (5) business days of the execution of this Agreement, all Company
property in his possession or control. Moseley further agrees that he will not
make, retain or remove any copies of any of the foregoing. Notwithstanding the
foregoing, Moseley shall: permanently retain the Company owned laptop computer
in his possession at the time of this Agreement; and shall retain one copy of
DocuROM software (including fully paid maintenance and support of the DocuROM
software) until September 28, 1999, after which he will promptly return such
software to the Company.
12. Use of Office Infrastructure. The Company agrees to allow Moseley the
reasonable use of the Company's offices, including support infrastructure (e.g.,
photocopying, phone access, and secretarial access) until April 28, 1999, such
usage to be utilized during the Company's regular business hours. Moseley shall
not be responsible for the reasonable payment of any such usage, which may be
terminated by the Company at any time by payment to Moseley of the sum of Five
Hundred Dollars ($500.00).
13. Mutual Release of Claims. Moseley hereby completely remises, releases,
relinquishes, waives and forever discharges the Company, together with each and
every of their predecessors, successors (by merger or otherwise), assigns,
parents, subsidiaries, affiliates, divisions, directors, officers, employees,
attorneys, accountants and agents, whether past, present or former of and from
all manner of actions, causes of action, suits, debts, dues, accounts, bonds,
covenants, contracts, agreements, judgments, claims, liabilities and demands
whatsoever, in law or in equity, known or unknown, in tort, contract, by
statute, negligence (whether by contribution or indemnification) or any other
basis for relief, compensatory, punitive or other damages, expenses (including
attorneys' fees), reimbursements or costs of any kind which Moseley ever had,
now has or may have, for or by reason of any cause, matter or thing whatsoever,
arising out of or in any
-4-
<PAGE>
way related to the Company or his employment with the Company, or the
termination of that employment; provided, however, that nothing contained herein
shall release the Company from its obligations under this Agreement, the
Parent's registration rights obligations arising out of the Shareholders'
Agreement dated as of November 19, 1996, as amended (the "Shareholders'
Agreement"), or the Parent's obligations under the Option Agreement. Moseley
agrees that he has executed this Release on his own behalf, and also on behalf
of his dependents, heirs, agents, executors, legal representatives, successors
and assigns. This Release includes, but is not limited to, a release of any
rights or claims he may have for, or pursuant to, the Pennsylvania Wage Payment
and Collection Law or any other state or local wage payment statute, the Age
Discrimination in Employment Act (ADEA), Title VII of the Civil Rights Act of
1964, as amended, the Americans with Disabilities Act (ADA), the Employer
Retirement and Income Security Act (ERISA), any other federal, state or local
laws or regulations prohibiting employment discrimination, breach of any express
or implied contract, wrongful termination or any other tort claims, including
claims for attorneys' fees, whether based on common law or otherwise. Moseley
understands, however, that by signing this Release, he does not waive rights to:
(a) any claims arising under any applicable worker's compensation laws; (b) any
claims which the law states may not be waived; or (c) his vested rights, if any,
under the regular employment benefit plans of the Company, in effect as of the
date of this Agreement.
The Parent, on its own behalf and on behalf of each Company, hereby
completely remises, releases, relinquishes, waives and forever discharges
Moseley and his dependents, heirs, agents, executors, legal representatives,
successors and assigns, of and from all manner of actions, causes of action,
suits, debts, dues, accounts, bonds, covenants, contracts, agreements,
judgments, claims, liabilities and demands whatsoever, in law or equity, known
or unknown, in tort, contract, by statute, negligence (whether by contribution
or indemnification) or any other basis for relief, compensatory, punitive or
other damages, expenses (including attorney's fees), reimbursements or costs of
any kind which the Company ever had, now has or may have, for or by reason of
any cause, matter or thing whatsoever, arising out of or in any way related to
the Company or his employment with the Company, or the termination of that
employment; provided however, that nothing contained herein shall release
Moseley from: (i) his obligations under this Agreement; (ii) his obligations
under Sections 6 (confidentiality), 7 (ownership of proprietary information) and
20 (specific performance) of the Employment Agreement; and (iii) his obligations
under Section 8 (non-competition) of the Employment Agreement (as amended and
restated in paragraph 14 of this Agreement.) The Parent agrees that it has
executed this Release on its own behalf and on behalf of each Company, and also
on behalf of each and every of their predecessors, successors (by merger or
otherwise), assigns, parents, subsidiaries, affiliates, divisions, directors,
officers, employees, attorneys, accountants and agents, whether past, present or
former.
14. Amendment and Restatement of Covenant Not to Compete in Employment
Agreement. Section 8 of the Employment Agreement is hereby amended and restated
as follows:
-5-
<PAGE>
"8. Covenant Not to Compete. The Employee shall not, until September 28,
1999 (the "Restricted Period"), do any of the following directly or indirectly
without the prior written consent of the Parent:
(a) compete with the Company or any of its respective affiliates or
subsidiaries, or any of their respective successors or assigns, whether now
existing or hereafter created or acquired (collectively, the "Related
Companies"), in any document management business conducted during the Term or,
as of September 28, 1998, contemplated to be conducted (as has been determined
by the Board) or in any other business conducted by the Company in which the
Employee is or has been actively engaged (the "Restricted Business") within any
geographic area located within the United States of America, its possessions or
territories (the "Restricted Area");
(b) become interested (whether as owner, stockholder, lender, partner,
co-venturer, director, officer, employee, agent, consultant or otherwise) in any
person, firm, corporation, association or other entity that competes, with the
Related Companies in the Restricted Business within the Restricted Area; if such
interest would constitute a violation of Section 8(a) hereof; provided, however,
that nothing contained in this Section 8(b) shall prohibit Employee from (i)
owning, as a passive investor, not more than five percent (5%) of the
outstanding securities of any class of any publicly-traded securities of any
publicly held company listed on a well-recognized national securities exchange
or on an interdealer quotation system of the National Association of Securities
Dealers, Inc., (ii) becoming employed by or consulting to any person, firm,
corporation, association or other entity that has annualized gross revenue of
less than Five Million Dollars ($5,000,000) as of the end of the calendar month
preceding the commencement date of such employment or consulting; or (c)
consulting to any person, firm, corporation, association or other entity that
has annualized gross revenue of less than One Hundred Million Dollars
($100,000,000) as of the end of the calendar month preceding the commencement of
such consulting, so long as Moseley's gross compensation for such consulting
does not exceed One Hundred Thousand Dollars ($100,000) prior to September 28,
1999.
(c) influence or attempt to influence any supplier, customer or
potential customer of the Company or any of the Related Companies to terminate
or modify any written or oral agreement or course of dealing with the Company or
the Related Companies; or
(d) influence or attempt to influence any person (other than a family
member) to either (i) terminate or modify his employment, consulting, agency,
distributorship or other arrangement with the Company or any of the Related
Companies, or (ii) employ or retain, or arrange to have any other person or
entity employ or retain, any person who has been employed or retained by the
Company or any of the Related Companies as an employee, consultant, agent or
distributor of the Company or the Related Companies at any time during the one
year period immediately preceding September 28, 1998."
-6-
<PAGE>
15. Release of Covenant Not to Compete. The Company agrees to release
Moseley from his Covenant Not to Compete set forth in Section 8 of his
Employment Agreement (as restated in paragraph 14 of this Agreement); provided,
however that Moseley agrees in writing to forfeit the unpaid Severance Payments
set forth in paragraphs 2(b), (c) and (d) of this Agreement and further payments
of out placement service expenses under paragraph 5 of this Agreement after such
date. Such forfeiture shall not affect Moseley's other rights and obligations
under this Agreement or Moseley's rights and the Company's obligations under the
Shareholders' Agreement or the Option Agreement.
16. Non-Defamation. Each party further agrees not to intentionally defame
the other with respect to matters arising prior to the date of the execution of
this Agreement.
17. Arbitration of Disputes Under this Agreement. The parties agree that
any and all disputes arising out of the performance or breach of this Agreement
or any promise or covenant herein shall be resolved by submission to final and
binding arbitration by a panel of three arbitrators in Philadelphia,
Pennsylvania, under, and in accordance with, the Individual Employment Rules and
Procedures of the American Arbitration Association. In any such proceeding, the
prevailing party shall be entitled to an award of reasonable attorneys' fees,
cost and expenses.
18. Governing Law; Enforcement. This Agreement shall be governed by and
construed and enforced under the laws of the Commonwealth of Pennsylvania. All
remedies at law and equity shall be available for the enforcement of this
Agreement incorporated by reference herein. This Agreement may be pleaded as a
full bar to the enforcement of any claim in any way related to or arising out of
Moseley's employment or other positions with the Company and/or the termination
thereof.
19. Review and Counsel. Moseley hereby acknowledges that, in connection
with this Agreement, he is acting of his own free will, that he has been
afforded ample opportunity to read and review the terms of this Agreement, that
he has read and reviewed the terms of this Agreement, that he has been
represented by counsel of his own selection and has relied upon the advice of
such counsel in connection with this Agreement and that he is voluntarily
entering into this Agreement with full knowledge of its provisions and effects.
20. Contractual Effect. The parties understand and acknowledge that the
terms of this Agreement are contractual and not a mere recital. Consequently,
they expressly consent that this Agreement shall be given full force and effect
according to each and all of its express terms and provisions, and that it shall
be binding upon the respective parties as well as their dependents, heirs,
executors, legal representatives, successors and assigns.
21. Notices. All notices, requests, payments, acknowledgments and other
communications hereunder to a party shall be in writing and shall be deemed to
have been duly
-7-
<PAGE>
given when delivered by hand, deposited with a recognized overnight courier for
next day delivery or telecopied to such party at his or its address set forth
below or such other address as such party may specify by notice to the other
party hereto.
If to Moseley, to:
Richard D. Moseley
510 East 75th Street
Indianapolis, IN 46240
If to the Company, to:
ImageMax, Inc.
1100 Hector Street
Suite 396
Conshohocken, PA 19428
Attention: Chairman
With a copy to:
Pepper Hamilton LLP
3000 Two Logan Square
18th and Arch Streets
Philadelphia, PA 19103
Telecopier: (215) 981-4750
Attention: Barry M. Abelson, Esquire
22. Entire Agreement; Etc. This Agreement represents the entire
understanding of the parties hereto with reference to the subject matters hereof
and supersedes any and all other oral or written agreements heretofore or
contemporaneously made.
23. Headings. The descriptive headings of the Paragraphs of this Agreement
are inserted for convenience only, do not constitute a part of this Agreement
and shall not affect in any way the meaning or interpretation of this Agreement.
-8-
<PAGE>
24. Counterparts and Facsimile Signatures. This Agreement may be delivered
by telecopied signatures and executed in several counterparts, each of which
shall be deemed to be an original, and all of which together shall be deemed to
be one and the same instrument.
25. Severability. If any term, provision, covenant or restriction contained
in this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void,
<PAGE>
unenforceable or against public or regulatory policy, the remainder of the
terms, provisions, covenants and restrictions contained in this Agreement shall
remain in full force and effect and shall in no way be affected, impaired or
invalidated.
IN WITNESS WHEREOF, Moseley and the Parent, on its own behalf and on behalf
of each Company, each acknowledge that they are acting of their own free will,
that they have had a sufficient opportunity to read and review the terms of this
Agreement, they have each received the advice of their respective counsel with
respect hereto, and that they have voluntarily caused the execution of this
Agreement and by reference herein as of the day and year set forth below.
/s/ Richard D. Moseley Witness: /s/ Patricia K. McLaughlin
- -------------------------------------- --------------------------
Richard D. Moseley
Date: September 30, 1998
---------------------------------
On behalf of IMAGEMAX, INC.:
By: /s/ Lewis E. Hatch, Jr.
-----------------------------------
Name: Lewis E. Hatch, Jr.
By: /s/ Andrew Bacas
-----------------------------------
Name: Andrew Bacas
Date: September 30, 1998
---------------------------------
-9-
SEPARATION AGREEMENT
THIS SEPARATION AGREEMENT ("Agreement") is made by and between S. David
Model ("Model"), together with each and every dependent, heir, agent, executor,
legal representative, successor and assign of Model, and ImageMax, Inc., a
Pennsylvania corporation ("Parent"), and its subsidiaries (the Parent and its
subsidiaries are collectively referred to as the "Company"), together with each
and every of their predecessors, successors (by merger or otherwise), assigns,
parents, subsidiaries, affiliates, divisions, directors, officers, employees,
attorneys, accountants and agents, whether past, present or former.
WHEREAS, Model and the Company have agreed that he should resign his
employment with the Company; and
WHEREAS, Model and the Parent, on its own behalf and on behalf of each
Company, desire to set forth herein their entire understanding and agreement
regarding such resignation.
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth, each of Model and the Parent, on its own behalf and on behalf of each
Company, acting of his and its own free will, and intending to be legally and
irrevocably bound hereby, agree as follows:
1. Resignation. Model hereby resigns all employment, Board of Director and
other positions with the Company, effective on November 9, 1998. Except as
otherwise set forth herein, the Employment Agreement between the Parent and
Model dated August 18, 1997, a copy of which is attached hereto as Exhibit A
(the "Employment Agreement"), and the Term of the Employment Agreement (as that
term is used therein), shall terminate as of November 9, 1998.
2. Payments.
(a) Severance. The Company agrees to pay Model the sum of Two Hundred
Twenty Five Thousand Dollars ($225,000.00), subject to all applicable federal,
state and local tax (the "Severance Payment"), to be paid by check in 36 equal
payments commencing on November 15, 1998 and continuing on the first and
fifteenth days of each calendar month thereafter until May 1, 2000, when the
last payment will be due. Notwithstanding the foregoing, any unpaid portion of
the Severance Payment shall be paid to Model by the Parent or the Successor
Entity (as defined below), as the case may be, upon the completion of a Change
of Control or Sale of the Parent (each as defined below).
<PAGE>
(b) Change of Control. In addition to the Severance Payment, upon the
completion of a Sale of the Parent or a Change of Control (each as defined
below) prior to November 9, 2000, the Parent or the successor to all or
substantially all of the Parent's assets, capital stock or business (the
"Successor Entity"), as the case may be, shall pay to Model by check the sum of
Three Hundred Seventy Five Thousand Dollars ($375,000), subject to all
applicable federal, state and local tax. For purposes of this Agreement: (i) a
"Change of Control" means the sale, transfer, assignment or other disposition
(including by merger or consolidation) by stockholders of the Parent, in one
transaction or a series of related transactions, of more than fifty percent
(50%) of the voting power represented by the then outstanding stock of the
Parent to one or more Persons, other than (A) any such sales, transfers,
assignments or other dispositions by such stockholders to their respective
Affiliates or (B) any such transaction effected primarily to reincorporate the
Parent in another jurisdiction; (ii) "Affiliate" means, with respect to any
stockholder of the Parent, (W) any Person directly or indirectly controlling,
controlled by or under common control with such stockholder, (X) any Person
owning or controlling ten percent (10%) or more of the outstanding voting
securities of such stockholder, (Y) any officer, director or general partner of
such stockholder, or (Z) any Person who is an officer, director, general
partner, trustee or holder of ten percent (10%) or more of the outstanding
voting securities of any Person described in clauses (W) through (Y) of this
sentence; (iii) "Person" means an individual, partnership, corporation, joint
venture, association, trust, unincorporated association, other entity or
association; and (iv) "Sale of the Parent" means a sale, transfer, assignment or
other disposition (including by merger or consolidation) of all of the
outstanding stock of the Parent, or of all or substantially all of the assets of
the Parent, or a liquidation or dissolution of the Parent; provided, however,
that a "Sale of the Parent" shall not include the consummation of a public
offering of common stock of the Parent pursuant to a registration statement or
any transaction effected primarily to reincorporate the Parent in another
jurisdiction.
(c) Expense Reimbursement. The Company agrees to reimburse Model in
accordance with its existing business practices for his reasonable business
expenses related to the Company prior to November 9, 1998 which have not yet
been reimbursed (the "Non-Reimbursed Expenses"). Within thirty (30) days of the
execution hereof, Model agrees to submit to James D. Brown, the Chief Financial
Officer of the Company, the appropriate expense reports reflecting such
expenses. Once such reports are processed, the Company will promptly reimburse
Model for the Non-Reimbursed Expenses.
(d) Consulting Arrangement. The Company may retain Model as a consultant
for assistance in certain operations of the Company. The Company shall pay Model
for such consulting services, and Model hereby agrees to accept, as compensation
a per diem rate of five hundred dollars ($500). All amounts will be paid
semi-monthly upon Model's submission of an itemized invoice to the Company for
services rendered. In addition, the Company shall reimburse Model for reasonable
travel expenses incurred in connection with the performance of such consulting
services, to the extent consistent with the Company's general
-2-
<PAGE>
expense reimbursement policy as may be in effect from time to time. Either Model
or the Company may terminate such consulting arrangement at any time by the
giving of notice to the other party, at which time no further amounts (except
accrued consulting fees and reimbursable expenses) shall be payable to Model.
3. Benefits Continuation. For the period November 9, 1998 to May 8, 2000,
the Company will provide Model and his family full coverage under the Company
group medical plan subject to the requirements of the medical plan, and any
other Company employee benefits Model is eligible for on the date hereof. Model
agrees to pay directly or to the Company for the medical coverage an amount
equal to any required employee contribution to the medical plan premium. Model's
statutory rights under COBRA to continue participation in the Company's group
medical coverage for a period of up to eighteen (18) months, at his own cost,
shall begin on May 9, 2000. The Company's obligation to continue medical
coverage will cease if Model becomes eligible to participate in a comparable
medical plan with a new employer. In that case, Model agrees to immediately
provide written notification of that fact to the Vice President of Human
Resources of the Company and the (acting) Chief Executive Officer of the
Company. If the Company is unable to continue medical coverage under its group
medical plan as required by this paragraph 3 due to requirements of such plan,
the Company shall pay to Model an amount equal to the cost of premiums which the
Company would have incurred had it not been prohibited from providing such
coverage.
4. Return of Company Property. Model agrees to return to the Company,
within five (5) business days of the execution of this Agreement, all Company
property in his possession or control. Model further agrees that he will not
make, retain or remove any copies of any of the foregoing.
5. Mutual Release of Claims. Model hereby completely remises, releases,
relinquishes, waives and forever discharges the Company, together with each and
every of their predecessors, successors (by merger or otherwise), assigns,
parents, subsidiaries, affiliates, divisions, directors, officers, employees,
attorneys, accountants and agents, whether past, present or former of and from
all manner of actions, causes of action, suits, debts, dues, accounts, bonds,
covenants, contracts, agreements, judgments, claims, liabilities and demands
whatsoever, in law or in equity, known or unknown, in tort, contract, by
statute, negligence (whether by contribution or indemnification) or any other
basis for relief, compensatory, punitive or other damages, expenses (including
attorneys' fees), reimbursements or costs of any kind which Model ever had, now
has or may have, for or by reason of any cause, matter or thing whatsoever,
arising out of or in any way related to the Company or his employment with the
Company, his membership on any Board of Directors of the Company or the
termination of that employment or membership; provided, however, that nothing
contained herein shall release the Company from its obligations under this
Agreement, the Parent's registration rights obligations arising out of the
Shareholders' Agreement dated as of November 19, 1996, as amended (the
"Shareholders' Agreement"), and the Company's obligations to indemnify Model
from acts and omissions as a director and officer
-3-
<PAGE>
of the Company to the fullest extent permissible by law. Model agrees that he
has executed this Release on his own behalf, and also on behalf of his
dependents, heirs, agents, executors, legal representatives, successors and
assigns. This Release includes, but is not limited to, a release of any rights
or claims he may have for, or pursuant to, the Pennsylvania Wage Payment and
Collection Law or any other state or local wage payment statute, the Age
Discrimination in Employment Act (ADEA), Title VII of the Civil Rights Act of
1964, as amended, the Americans with Disabilities Act (ADA), the Employee
Retirement Income Security Act of 1974, as amended, (ERISA), any other federal,
state or local laws or regulations prohibiting employment discrimination, breach
of any express or implied contract, wrongful termination or any other tort
claims, including claims for attorneys' fees, whether based on common law or
otherwise. Model understands, however, that by signing this Release, he does not
waive rights to: (a) any claims arising under any applicable worker's
compensation laws; (b) any claims which the law states may not be waived; or (c)
his vested rights, if any, under the Company's 401(k) plan, in effect as of the
date of this Agreement.
The Parent, on its own behalf and on behalf of each Company, hereby
completely remises, releases, relinquishes, waives and forever discharges Model
and his dependents, heirs, agents, executors, legal representatives, successors
and assigns, of and from all manner of actions, causes of action, suits, debts,
dues, accounts, bonds, covenants, contracts, agreements, judgments, claims,
liabilities and demands whatsoever, in law or equity, known or unknown, in tort,
contract, by statute, negligence (whether by contribution or indemnification) or
any other basis for relief, compensatory, punitive or other damages, expenses
(including attorney's fees), reimbursements or costs of any kind which the
Company ever had, now has or may have, for or by reason of any cause, matter or
thing whatsoever, arising out of or in any way related to the Company or his
employment with the Company, his membership on any Boards of Directors of the
Company or the termination of that employment and membership; provided however,
that nothing contained herein shall release Model from: (i) his obligations
under this Agreement; (ii) his obligations under Sections 6 (confidentiality), 7
(ownership of proprietary information) and 20 (specific performance) of the
Employment Agreement; and (iii) his obligations under Section 8
(non-competition) of the Employment Agreement (as amended and restated in
paragraph 6 of this Agreement). The Parent agrees that it has executed this
Release on its own behalf and on behalf of each Company, and also on behalf of
each and every of their predecessors, successors (by merger or otherwise),
assigns, parents, subsidiaries, affiliates, divisions, directors, officers,
employees, attorneys, accountants and agents, whether past, present or former.
6. Amendment and Restatement of Covenant Not to Compete in Employment
Agreement. Section 8 of the Employment Agreement is hereby amended and restated
as follows:
"8. Covenant Not to Compete. The Employee shall not, until November 9, 1999
(the "Restricted Period"), do any of the following directly or indirectly
without the prior written consent of the Parent:
-4-
<PAGE>
(a) compete with the Company or any of its respective affiliates or
subsidiaries, or any of their respective successors or assigns, whether now
existing or hereafter created or acquired (collectively, the "Related
Companies"), in any document management business conducted during the Term or,
as of November 9, 1998, contemplated to be conducted (as has been determined by
the Board) or in any other business conducted by the Company in which the
Employee is or has been actively engaged (the "Restricted Business") within any
geographic area located within the United States of America, its possessions or
territories (the "Restricted Area");
(b) become interested (whether as owner, stockholder, lender, partner,
co-venturer, director, officer, employee, agent, consultant or otherwise) in any
person, firm, corporation, association or other entity that competes, with the
Related Companies in the Restricted Business within the Restricted Area; if such
interest would constitute a violation of Section 8(a) hereof; provided, however,
that nothing contained in this Section 8(b) shall prohibit Employee from owning,
as a passive investor, not more than five percent (5%) of the outstanding
securities of any class of any publicly-traded securities of any publicly held
company listed on a well-recognized national securities exchange or on an
interdealer quotation system of the National Association of Securities Dealers,
Inc.
(c) influence or attempt to influence any supplier, customer or
potential customer of the Company or any of the Related Companies to terminate
or modify any written or oral agreement or course of dealing with the Company or
the Related Companies; or
(d) influence or attempt to influence any person (other than a family
member) to either (i) terminate or modify his employment, consulting, agency,
distributorship or other arrangement with the Company or any of the Related
Companies, or (ii) employ or retain, or arrange to have any other person or
entity employ or retain, any person who has been employed or retained by the
Company or any of the Related Companies as an employee, consultant, agent or
distributor of the Company or the Related Companies at any time during the one
year period immediately preceding November 9, 1998.
7. Non-Defamation. Each party agrees not to intentionally defame the other
with respect to matters arising prior to the date of the execution of this
Agreement.
8. Arbitration of Disputes Under this Agreement. The parties agree that any
and all disputes arising out of the performance or breach of this Agreement or
any promise or covenant herein shall be resolved by submission to final and
binding arbitration by a panel of three arbitrators in Philadelphia,
Pennsylvania, under, and in accordance with, the Individual Employment Rules and
Procedures of the American Arbitration Association. In any such proceeding, the
prevailing party shall be entitled to an award of reasonable attorneys' fees,
cost and expenses.
-5-
<PAGE>
9. Governing Law; Enforcement. This Agreement shall be governed by and
construed and enforced under the laws of the Commonwealth of Pennsylvania. All
remedies at law and equity shall be available for the enforcement of this
Agreement incorporated by reference herein. This Agreement may be pleaded as a
full bar to the enforcement of any claim in any way related to or arising out of
Model's employment or other positions with the Company and/or the termination
thereof.
10. Review and Counsel. Model hereby acknowledges that, in connection with
this Agreement, he is acting of his own free will, that he has been afforded
ample opportunity to read and review the terms of this Agreement, that he has
read and reviewed the terms of this Agreement, that he has been represented by
counsel of his own selection and has relied upon the advice of such counsel in
connection with this Agreement and that he is voluntarily entering into this
Agreement with full knowledge of its provisions and effects.
11. Contractual Effect. The parties understand and acknowledge that the
terms of this Agreement are contractual and not a mere recital. Consequently,
they expressly consent that this Agreement shall be given full force and effect
according to each and all of its express terms and provisions, and that it shall
be binding upon the respective parties as well as their dependents, heirs,
executors, legal representatives, successors and assigns.
12. Notices. All notices, requests, payments, acknowledgments and other
communications hereunder to a party shall be in writing and shall be deemed to
have been duly given when delivered by hand, deposited with a recognized
overnight courier for next day delivery or telecopied to such party at his or
its address set forth below or such other address as such party may specify by
notice to the other party hereto.
If to Model, to:
S. D. Model
21 Roundhill Rd.
Granby, CT 06035
If to the Company, to:
ImageMax, Inc.
1100 Hector Street
Suite 396
Conshohocken, PA 19428
Attention: Chairman
-6-
<PAGE>
13. Entire Agreement; Etc. This Agreement represents the entire
understanding of the parties hereto with reference to the subject matters hereof
and supersedes any and all other oral or written agreements heretofore or
contemporaneously made.
14. Headings. The descriptive headings of the Paragraphs of this Agreement
are inserted for convenience only, do not constitute a part of this Agreement
and shall not affect in any way the meaning or interpretation of this Agreement.
15. Counterparts and Facsimile Signatures. This Agreement may be delivered
by telecopied signatures and executed in several counterparts, each of which
shall be deemed to be an original, and all of which together shall be deemed to
be one and the same instrument.
[blank to end of page]
-7-
<PAGE>
16. Severability. If any term, provision, covenant or restriction contained
in this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void, unenforceable or against public or regulatory
policy, the remainder of the terms, provisions, covenants and restrictions
contained in this Agreement shall remain in full force and effect and shall in
no way be affected, impaired or invalidated.
IN WITNESS WHEREOF, Model and the Parent, on its own behalf and on behalf
of each Company, each acknowledge that they are acting of their own free will,
that they have had a sufficient opportunity to read and review the terms of this
Agreement, they have each received the advice of their respective counsel with
respect hereto, and that they have voluntarily caused the execution of this
Agreement and by reference herein as of the day and year set forth below.
/s/ S. David Model Witness: /s/ Sara Model
- --------------------------------------- --------------------------
S. David Model
Date: November 9, 1998
----------------
On behalf of IMAGEMAX, INC.:
By: /s/ Lewis E. Hatch, Jr.
-------------------------------
Name: Lewis E. Hatch, Jr.
By: /s/ Andrew Bacas
-------------------------------
Name: Andrew Bacas
Date: November 9, 1998
----------------
-8-
Exhibit 21 Subsidiaries of the Registrant
- ---------- -------------------------------
Company State of Incorporation
- ------- ----------------------
ImageMax of Virginia, Inc. Virginia
ImageMax of South Carolina, Inc. Pennsylvania
ImageMax of Arizona, Inc. Pennsylvania
ImageMax of Ohio, Inc. Ohio
Ammcorp Acquisition Corp. Pennsylvania
ImageMax of Indiana, Corp. Indiana
ImageMax of Delaware, Inc. Delaware
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed Form S-8
Registration Statement (File No. 333-46463) filed with the Securities and
Exchange Commission on February 17, 1997.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 736,000
<SECURITIES> 0
<RECEIVABLES> 12,401,000
<ALLOWANCES> (610,000)
<INVENTORY> 2,185,000
<CURRENT-ASSETS> 15,331,000
<PP&E> 8,577,000
<DEPRECIATION> (1,541,000)
<TOTAL-ASSETS> 69,574,000
<CURRENT-LIABILITIES> 32,559,000
<BONDS> 0
0
0
<COMMON> 52,645,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 36,652,000
<SALES> 0
<TOTAL-REVENUES> 64,576,000
<CGS> 45,404,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 25,470,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,133,000
<INCOME-PRETAX> (8,431,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,431,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,431,000)
<EPS-PRIMARY> (1.40)
<EPS-DILUTED> (1.40)
</TABLE>
