IMAGEMAX INC, 10-Q, 1999-05-17

IMAGEMAX INC
10-Q, 1999-05-17
BUSINESS SERVICES, NEC

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
-----------------------

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Transition Period From _________ to _________

Commission File Number 0-23077
----------------------

IMAGEMAX, INC.
(Exact name of Registrant as specified in its charter)

Pennsylvania 23-2865585
--------------- ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1100 E. Hector Street, Suite 396
Conshohocken, Pennsylvania 19428
-------------------------------------- --------
(Address of principal executive offices) (Zip Code)

(610) 832-2111
---------------
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No __

Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of May 7, 1999:

Common Stock, no par value 6,591,065
-------------------------- -----------
Class Number of Shares

<PAGE>

IMAGEMAX, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

Page
----
PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements (Unaudited)

Consolidated Statements of Operations............................. 1

Consolidated Balance Sheets....................................... 2

Consolidated Statements of Cash Flows............................. 3

Notes to Consolidated Financial Statements........................ 4

Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 7

PART II - OTHER INFORMATION

Item 2 - Changes in Securities and Use of Proceeds.................... 11

Item 6 - Exhibits and Reports on Form 8-K............................. 11

SIGNATURES................................................................ 12

<PAGE>

IMAGEMAX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share amounts)

Three Months
Ended March 31,
---------------
1999 1998
---- ----

Revenues:
Services ....................................... $ 12,512 $ 9,857
Products ....................................... 2,970 3,095
-------- --------
15,482 12,952
-------- --------
Cost of revenues:
Services ....................................... 7,442 6,469
Products ....................................... 1,851 2,033
Depreciation ................................... 426 339
-------- --------
9,719 8,841
-------- --------
Gross profit ................................ 5,763 4,111
Selling and administrative expenses ................. 4,397 3,285
Amortization of intangibles ......................... 449 300
Restructuring costs ................................. 827 --
-------- --------
Operating income ............................ 90 526
Interest expense .................................... 532 48
-------- --------
Income (loss) before income taxes ........... (442) 478
Income tax provision ................................ -- 258
-------- --------
Net income (loss) ................................... $ (442) $ 220
======== ========
Basic and diluted net income (loss) per share ....... $ (0.07) $ 0.04
======== ========
Shares used in computing basic and diluted net income
(loss) per share ............................... 6,498 5,546
======== ========

The accompanying notes are an integral part of these
financial statements.

<PAGE>

IMAGEMAX, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands except share amounts)

March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents .................................. $ 516 $ 736
Accounts receivable, net of allowance for doubtful
accounts of $385 and $600 as of March 31, 1999 and
December 31, 1998, respectively ........................ 10,304 11,801
Inventories ................................................ 2,049 2,185
Prepaid expenses and other ................................. 615 609
-------- --------

Total current assets ................................... 13,484 15,331

Property, plant and equipment, net ............................ 6,813 7,036
Intangibles, primarily goodwill, net .......................... 45,890 46,607
Other assets .................................................. 617 600
-------- --------

$ 66,804 $ 69,574
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Short-term debt and current portion of long-term debt ...... $ 19,616 $ 20,239
Accounts payable ........................................... 4,104 4,472
Accrued expenses ........................................... 4,752 5,248
Deferred revenue ........................................... 1,785 2,600
-------- --------

Total current liabilities .............................. 30,257 32,559
-------- --------

Long-term debt ................................................ 126 257
-------- --------

Other long-term liabilities ................................... 92 106
-------- --------

Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized, none issued ................................ -- --
Common stock, no par value, 40,000,000 shares authorized,
6,591,065 and 6,479,739 shares issued and outstanding
as of March 31, 1999 and December 31, 1998, respectively 52,764 52,645
Accumulated deficit ........................................ (16,435) (15,993)
-------- --------

Total shareholders' equity ............................. 36,329 36,652
-------- --------

$ 66,804 $ 69,574
======== ========
</TABLE>

The accompanying notes are an integral part of these
financial statements.

2
<PAGE>

IMAGEMAX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

Three Months
Ended March 31,
---------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ...................................................... $ (442) $ 220
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation and amortization ..................................... 875 639
Deferred income tax benefit ....................................... -- (17)
Changes in operating assets and liabilities, excluding
effect of businesses acquired and Southeast Group divestiture-
Accounts receivable, net ...................................... 1,497 (638)
Inventories ................................................... 136 (18)
Prepaid expenses and other .................................... (6) (23)
Other assets .................................................. (17) (16)
Accounts payable .............................................. (368) (317)
Accrued expenses .............................................. (620) (1,160)
Income tax payable ............................................ -- 174
Deferred revenue .............................................. (815) 203
------- -------

Net cash provided by (used in) operating activities ....... 240 (953)
------- -------

Cash flows from investing activities:
Proceeds from Southeast Group divestiture .................... 563 --
Payments for businesses acquired, net of cash acquired ....... -- (1,616)
Purchases of property and equipment .......................... (203) (421)
------- -------

Net cash provided by (used in) investing activities ....... 360 (2,037)
------- -------

Cash flows from financing activities:
Net borrowings (repayments) under line of credit ............. (563) 3,400
Payment of deferred financing costs .......................... (100) (552)
Proceeds from issuance of Common stock ....................... 34 --
Principal payments on debt and capital lease
obligations .............................................. (191) (85)
------- -------

Net cash provided by (used in) financing activities ....... (820) 2,763
------- -------

Net decrease in cash and cash equivalents ................................. (220) (227)
Cash and cash equivalents, beginning of period ............................ 736 1,310
------- -------

Cash and cash equivalents, end of period .................................. $ 516 $ 1,083
======= =======

Supplemental disclosures of cash flow information: Cash paid for:
Interest .......................................................... $ 536 $ 33
======= =======

Income taxes ...................................................... $ 13 $ 195
======= =======
</TABLE>

The accompanying notes are an integral part of these
financial statements.

<PAGE>
IMAGEMAX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BACKGROUND AND BASIS OF PRESENTATION:

ImageMax, Inc. ("ImageMax") was founded in November 1996 to become a
leading, national single source provider of integrated document management
solutions. On December 4, 1997, ImageMax sold 3,100,000 shares of its Common
stock in an initial public offering (the "Offering") at $12 per share, which
raised net proceeds to ImageMax of $30.5 million, net of offering costs of $6.7
million. Concurrent with the Offering, ImageMax began material operations with
the acquisition of 14 document management services companies. During 1998,
ImageMax acquired 13 additional document management services companies. These
acquisitions were accounted for using the purchase method of accounting.
Pursuant to a management and operational reorganization, the Company sold
operations in three locations (Charlotte, NC; Cayce, SC; and Cleveland, TN--the
"Southeast Group") in December 1998 and January 1999 and decided to close its
Indianapolis, IN business unit in March 1999. As of May 1, 1999, the Company
operated 16 business units in 14 states.

The accompanying unaudited consolidated financial statements include
the accounts of ImageMax and its subsidiaries (the "Company"). All material
intercompany balances and transactions have been eliminated in consolidation.
These financial statements have been prepared in conformity with principles of
accounting applicable to a going concern. These principles contemplate the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company has incurred significant operating losses since
inception, and as of March 31, 1999, had an accumulated deficit of $16.4
million. In addition, as more fully described in Note 5, ImageMax is in default
of its credit facility with its banks under which it has borrowings of $19.5
million. Management is currently in discussions with its banks concerning a
refinancing of the Company's debt. If the Company is not able to favorably
restructure its financing or if it continues to incur significant operating
losses, the Company may not be able to sustain its operations and continue as a
going concern. The consolidated balance sheet as of December 31, 1998 has been
derived from the Company's consolidated financial statements that have been
audited by the Company's independent public accountants. The Company's
independent public accountants, Arthur Andersen LLP, have stated in their audit
report included in the Company's Annual Report on Form 10-K for the year ending
December 31, 1998 that the events of default under the Company's credit facility
raise substantial doubt about the Company's ability to continue as a going
concern.

The unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
pursuant to rules and regulations of the Securities and Exchange Commission.
Accordingly, unaudited interim financial statements such as those in this report
allow certain information and footnotes required by generally accepted
accounting principles for year end financial statements to be excluded. The
Company believes all adjustments necessary for a fair presentation of these
interim financial statements have been included and are of a normal and
recurring nature. Interim results are not necessarily indicative of results for
a full year. These interim financial statements should be read in conjunction
with the Company's pro forma and historical financial statements and notes
thereto included in its Annual Report on Form 10-K for the year ending December
31, 1998.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

There were no changes in the accounting policies of the Company during
the periods presented. For a description of these policies, refer to Note 2 of
Notes to Consolidated Financial Statements of ImageMax, Inc. and Subsidiaries
included in the Company's Annual Report on Form 10-K for the year ending
December 31, 1998.

3. ACQUISITIONS AND DIVESTITURES:

In January 1999, the Company completed its divestiture of the Southeast
Group with the sale of the Cayce, SC and Cleveland, TN business units. As of
December 31,1998, the Company recorded a loss on the sale of these business
units as part of a total charge of $4,995,000, including a write off of
$4,229,000 in related goodwill. Revenues and operating losses, respectively, of
the former Southeast Group amounted to $113,000 and $15,000 for the three months
ended March 31, 1999 and $1,146,000 and $137,000 for the three months ended
March 31, 1998.

In March 1999, management decided to close the Company's
underperforming Indianapolis, IN business unit. The closing of this business
unit is expected to be completed in May 1999. As of March 31, 1999, the Company
recorded a loss relating to the

4
<PAGE>
3. DIVESTITURES (Continued):

closing of $557,000, primarily a write off in related goodwill of $300,000,
severance payments and lease termination costs. Revenues and operating losses,
respectively, of the former Indianapolis operation amounted to $379,000 and
$330,000 for the three months ended March 31, 1999 and $673,000 and $31,000 for
the three months ended March 31, 1998.

In the first eight months of 1998, the Company acquired 13 document
management services companies. The following unaudited pro forma information,
which excludes the results of the former Southeast Group and Indianapolis
operations, shows the results of the Company's operations in accordance with APB
No. 16, "Business Combinations," for the three months ended March 31, 1999 and
1998 as though the acquisitions had occurred as of January 1, 1998:

<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
1999 1998
---- ----
<S> <C> <C>
Total revenue .................................... $ 14,990,000 $ 15,128,000
Operating income ................................. $ 463,000 $ 1,420,000
Net income (loss) ................................ $ (96,000) $ 567,000
Basic and diluted net income (loss) per share .... $ (0.02) $ 0.09
</TABLE>

The pro forma results have been prepared for comparative purposes only
and are not necessarily indicative of the actual results of operations had these
acquisitions taken place as of January 1, 1998, or the results that may occur in
the future.

4. RESTRUCTURING COSTS:

For the three months ended March 31, 1999, the Company recorded a
restructuring charge of $827,000, primarily related to the closing of the
Indianapolis business unit and executive severance payments. As of March 31,
1999 and December 31, 1998, respectively, accrued restructuring charges
(classified as accrued expenses) amounted to $1,112,000 and $1,124,000, of which
$942,000 and $1,120,000 related to severance payments with the remaining amount
attributable primarily to lease termination costs.

5. LINE OF CREDIT AND LONG-TERM OBLIGATIONS:

On March 30, 1998, the Company entered into a credit facility,
providing a revolving line of credit of $30 million in borrowings (the "Credit
Facility"). This agreement was substantially amended in November 1998 as
described below. Under the initial terms of the Credit Facility, the Company
could borrow up to $25 million to finance future acquisitions and up to $5
million for working capital purposes. 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
was 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. Prior to amendment,
borrowing under the Credit Facility was 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. 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
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.

5
<PAGE>

its banks. The Company was also required to enter into definitive agreements in
connection with a letter of intent outlining a proposed strategic partnership
between the Company and an unaffiliated company (the "Proposed Transaction") no
later than April 30, 1999. In April 1999, the Company announced the termination
of the Proposed Transaction. As such, the Company was in default of the
Forbearance Agreement. Subsequent to this default, the Company has continued its
discussions with its banks concerning a refinancing of the Company's debt and
terms of forbearance. 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.

As of March 31, 1999 and through May 7, 1999, the Company had $19.5
million outstanding under the Credit Facility at an interest rate of 9.75%.
During the three months ended March 31, 1999, the Company made $563,000 in
principal repayments under the Credit Facility from proceeds received from the
Southeast Group divestiture.

In connection with the acquisition of certain businesses, the Company
assumed debt of approximately $600,000 (net of repayments from proceeds from the
Offering), representing notes payable, capital lease obligations and other
indebtedness. As of March 31, 1999, $205,000 was outstanding under this
indebtedness.

6. INCOME TAXES:

As of March 31, 1999, 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 special compensation,
acquired research and development charges, losses on the sale of business units
and goodwill amoritization. As of March 31, 1999, a valuation allowance was
established for the Company's tax benefit based upon the uncertainty of the
realizability of the associated deferred tax asset given the Company's losses to
date under the guidelines set forth in Statement of Financial Accounting
Standards ("SFAS") No. 109.

7. EARNINGS PER SHARE:

The Company has presented net income (loss) per share pursuant to SFAS
No. 128, "Earnings Per Share", which requires dual presentation of basic and
diluted earnings per share. Basic earnings per share ("Basic EPS") is computed
by dividing the net income (loss) for the period by the weighted average number
of shares of Common stock outstanding for the period. Diluted earnings per share
("Diluted EPS") is computed by dividing net income (loss) for the period by the
weighted average number of shares of Common stock and Common stock equivalents
outstanding during the period. For both periods presented, Common stock
equivalents are not included, as their effect is antidilutive and, as such,
Basic EPS and Diluted EPS are the same.

8. INTANGIBLE ASSETS:

The Company continually evaluates whether events or circumstances have
occurred that indicate that the remaining useful lives of intangibles assets
should be revised or that the remaining balance of such assets may not be
recoverable. When the Company concludes it is necessary to evaluate its long-
lived assets, including intangibles, for impairment, the Company will use an
estimate of the related undiscounted cash flow as the basis to determine whether
impairment has occurred. If such a determination indicates an impairment loss
has occurred, the Company will utilize the valuation method which measures fair
value based on the best information available under the circumstances. As of
March 31, 1999, the Company believes that no revisions of the remaining useful
lives or write-downs of intangible assets are required.

9. COMPREHENSIVE INCOME:

The Company has reviewed SFAS No. 130 and has determined that for the
quarters ended March 31, 1999 and 1998, 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.

10. SUBSEQUENT EVENTS:

In April 1999, the Company executed a $900,000 mortgage loan with a
lender relating to a Company-owned property that houses a business unit
operation. The Company received $869,000 in proceeds, net of closing costs, from
the transaction, of which $469,000 is being held in escrow by a bank with the
remaining $400,000 available for working capital purposes, subject to the terms
of the Forbearance Agreement. Interest on the loan is at the greater of 8.50% or
the U.S. Treasury rate plus 375 basis points (9.01 % at time of loan
origination). The loan carries a ten-year term (maturing May 2009), is secured
by the mortgaged property, and requires equal monthly repayments of principal
and interest of $10,000 beginning June 1, 1999.

6
<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Except for the historical information contained herein, this Report on
Form 10-Q contains certain forward-looking statements that involve substantial
risks and uncertainties. When used in this Report, the words "anticipate,"
"believe," "estimate," "expect", and similar expressions, as they relate to the
Company or its management, are intended to identify such forward-looking
statements. The Company's actual results, performance, or achievements could
differ materially from the results expressed in, or implied by, these
forward-looking statements. Factors that could cause or contribute to such
differences include those set forth in "Business--Risk Factors" as disclosed in
the Company's Annual Report on Form 10-K for the year ending December 31, 1998
and other ImageMax filings with the Securities and Exchange Commission, and
risks associated with the results of the continuing operations of ImageMax.
Accordingly, there is no assurance that the results in the forward-looking
statements will be achieved.

The Company's revenues consist of service revenues, which are
recognized as the related services are rendered, and product revenues, which are
recognized when the products are shipped to clients. Service revenues are
primarily derived from media conversion, storage and retrieval, imaging and
indexing of documents, and the service of imaging and micrographic equipment
sold. Product revenues are derived from equipment sales and software sales and
support. Cost of revenues consists principally of the costs of products sold and
wages and related benefits, supplies, facilities and equipment expenses
associated with providing the Company's services. Selling and administrative
("S&A") expenses include salaries and related benefits associated with the
Company's executive and senior management, marketing and selling activities
(principally salaries and related costs), and financial and other administrative
expenses.

Historical Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998

The results of operations for the three months ended March 31, 1999 and
1998 include the revenues, cost of revenues and S&A expenses of the companies
acquired in connection with the Offering from January 1, 1998, and for
acquisitions subsequent to the Offering from the date of their acquisition.
Acquisitions that were completed by March 31, 1998 and that conducted operations
during the three months ended March 31, 1999 are analyzed as "same-unit" results
for purposes of comparing historical results of operations.

Total revenues. For the three months ended March 31, 1999, total
revenues increased $2.5 million, or 19.5%, as compared to the corresponding
period in 1998. This increase was primarily due to a service revenue increase of
26.9% and an offsetting product revenue decrease of 4.0%. For the three months
ended March 31, 1999, service revenue and product revenue, respectively,
comprised 80.8% and 19.2% of total revenues, as compared to 76.1% and 23.9% in
the corresponding period in 1998.

The increase in total revenues was comprised of $4.0 million
attributable to acquisitions subsequent to March 31, 1998 and an offsetting
same-unit revenue decrease of $1.5 million. The same-unit revenue decrease was
primarily due to a decrease of $1.3 million in revenues attributable to the sale
of the Southeast Group units and volume declines related to the Indianapolis
business unit and a decline of $0.2 million in digital imaging software sales
attributable to the development and roll-out of upgraded software.

Gross profit. For the three months ended March 31, 1999, gross profit
increased by $1.7 million, or 40.2%, as compared to the corresponding period in
1998, while as a percentage of total revenues, gross profit increased to 37.2%
from 31.7%. These increases were primarily due to an increase of $1.6 million
(39.6% of revenues) attributable to acquisitions subsequent to March 31, 1998
and same-unit gross profit growth of $0.1 million (36.8% of revenues). Excluding
results of the former Southeast Group and Indianapolis operations, same-unit
gross profit growth was $0.5 million, primarily due to improved production
efficiencies in the Virginia business unit and an offsetting decline resulting
from a lower volume of digital imaging software sales.

Selling and administrative expenses. For the three months ended March
31, 1999, S&A expenses increased by $1.1 million, or 33.9%, as compared to the
corresponding period in 1998. This increase resulted from: (1) an increase of
$0.9 million attributable to acquisitions subsequent to March 31, 1998; (2) an
increase of $0.4 million in corporate expenses; and (3) an offsetting decrease
of $0.1 million in same-unit S&A expenses. The increase in corporate expenses
relates primarily to the staffing of the Company's headquarters function,
increased travel expenses and the costs associated with being a public company.
The Company estimates that restructuring costs attributable to the corporate
function recorded in the three months ended March 31, 1999 will provide an
annual reduction in corporate expenses of $150,000. Excluding the results of the
Southeast Group and Indianapolis operations, same-unit S&A increased $0.1
million, primarily due to costs relating to software development and support.

Restructuring costs. For the three months ended March 31, 1999, the
Company recorded a restructuring charge of $0.8 million, primarily attributable
to the closing of the Indianapolis unit (totaling $0.6 million, including a
write-off in related goodwill of $0.3 million, severance payments, and lease
termination costs) and executive severance payments.
7
<PAGE>
Operating income. For the three months ended March 31, 1999, operating
income decreased by $0.4 million, or 82.9%, as compared to the corresponding
period in 1998. Excluding the impact of restructuring costs, operating income
increased $0.4 million, or 74.3%. This increase resulted from: (1) an increase
of $0.5 million attributable to acquisitions subsequent to March 31, 1998; (2)
an increase of $0.2 million in same-unit operating income; and (3) an offsetting
decrease of $0.3 million attributable to corporate expenses. Excluding the
impact of the Southeast Group and Indianapolis operations, same-unit operating
income growth amounted to $0.4 million.

Interest expense. For the three months ended March 31, 1999, interest
expense amounted to $0.5 million, including $0.1 million relating to bank fees
under the Forbearance Agreement, as compared to interest expense of $48,000 in
the corresponding period in 1998. The increase includes interest of $0.4 million
attributable to borrowings under the Credit Facility, which increased to $19.5
million as of March 31, 1999 as compared to $3.4 million as of March 31, 1998.

Income tax provision. For the three months ended March 31, 1999, due to
the Company's cumulative loss position, no income tax provision was recorded. As
of March 31, 1999, 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. In the three months ended March 31, 1998, the income tax
provision amounted to $0.3 million, an effective income tax rate of 54.0%.

Liquidity and Capital Resources

As of March 31, 1999 and December 31, 1998, respectively, the Company
had cash and cash equivalents of $0.5 million and $0.7 million, and a working
capital deficit of $16.8 million and $17.2 million. The working capital deficits
as of March 31, 1999 and December 31, 1998, respectively, were due to the
classification of borrowings under the Credit Facility of $19.5 million and
$20.1 million as current liabilities. To continue its operations through the
next 12 months, the Company will need additional financing from sources other
than funds received through operations. To that end, the Company is in
discussions with its banks that are parties to the Credit Facility concerning a
refinancing of the Company's debt. In addition, the Company has retained William
Blair & Company LLC as financial advisor to the Company's Board of Directors to
assist in evaluating the Company's strategic options.

For the three months ended March 31, 1999 net cash provided by
operating activities amounted to $0.2 million; net cash provided by investing
activities amounted to $0.4 million; and net cash used in financing activities
amounted to $0.8 million.

Net cash provided by operating activities primarily represents a
decrease in accounts receivable (due primarily to an increase in the rate of
cash collections) that was largely offset by payments to vendors and a reduction
in accrued expenses, including bank fees and the payment of severance and other
expenses relating to the Company's restructuring charges.

Net cash provided by investing activities represents proceeds from the
Southeast Group divestiture and the Company's investments in capital equipment
and technology. For the three months ended March 31, 1999, the Company made
capital expenditures of $0.2 million, principally production equipment and
computer hardware.

Net cash used in financing activities represents the repayment of
borrowings under the Credit Facility of $0.6 million, repayments of other debt
assumed in the acquisition of certain businesses of $0.2 million, and payment of
$0.1 million related to debt financing costs. The funds used to repay borrowings
under the Credit Facility were derived from proceeds received from the Southeast
Group divestiture.

On March 30, 1998, the Company entered into the Credit Facility,
providing a revolving line of credit of $30 million in borrowings. This
agreement was substantially amended in November 1998 as described below. Under
the initial terms of the Credit Facility, the Company could borrow up to $25
million to finance future acquisitions and up to $5 million for working capital
purposes. 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 was 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. Prior to amendment, borrowing under the
Credit Facility was contingent upon the Company meeting certain financial ratios
and other criteria.

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 was also required to enter into definitive agreements in
connection with a letter of intent outlining a proposed strategic partnership
between the Company and an unaffiliated company (the "Proposed Transaction") no
later than April 30, 1999. In April 1999, the Company announced the termination
of the Proposed Transaction. As such, the Company was in default of the
Forbearance Agreement. Subsequent to this default, the Company has continued its
discussions with its banks concerning a refinancing of the Company's debt and
terms of forbearance. The Company incurred a fee of $100,000 under the
Forbearance Agreement (recorded as interest expense in the three months ended
March 31, 1999), $50,000 of which was paid upon the execution of the Forbearance
Agreement and the other $50,000 to be paid upon its termination.

Subject to the terms of the Forbearance Agreement, the Company plans to
selectively invest in equipment and technology to meet the needs of its
operations and to improve its operating efficiency.

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 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. The Company 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.

9
<PAGE>

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.

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 parties to be Year 2000 compliant.

<PAGE>

PART II -- OTHER INFORMATION

ITEM 2. Changes in Securities and Use of Proceeds

On March 30, 1999, the Company issued 76,190 shares of Common Stock
(valued at $100,000 on the date of issuance) to COMSTOR, Inc. as partial earnout
consideration relating to the Company's acquisition of COMSTOR in 1998. The
issuance of Common Stock 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. Exhibits and Reports on Form 8-K

A. Exhibits:

10.30 Forbearance Agreement dated March 29, 1999 by and among the
Company, First Union National Bank (successor by merger with
CoreStates Bank, N.A.) and Commerce Bank, N.A. (incorporated
by reference to the designated exhibit in the Company's Annual
Report on Form 10-K filed March 31, 1999, File No. 0-23077).

10.35+ Separation Agreement by and between James D. Brown and the
Company dated as of April 30, 1999 (incorporated by reference
to the designated exhibit in the Company's report on Form
10-K/A filed April 30, 1999, File No. 0-23077).

10.36+ Employment Agreement by and between the Company and Mark P.
Glassman dated as of March 1, 1999, as amended by Amendment
No. 1 to Employment Agreement dated as of May 1, 1999.

27 Financial Data Schedule (filed in electronic format only.)

+ Management contract or compensatory plan or arrangement.

B. Reports on Form 8-K:

1. The Company filed a Form 8-K on February 1, 1999 reporting the delisting
of its Common Stock from the NASDAQ Stock Market.

2. The Company filed a Form 8-K on March 15, 1999 announcing a proposed
strategic partnership with Pierce Leahy Corp.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

IMAGEMAX, INC.

BY: /S/ ANDREW R. BACAS May 17, 1999
------------------- ------------
Andrew R. Bacas Date
Acting Chief Executive Officer

BY: /S/ MARK P. GLASSMAN May 17, 1999
-------------------- ------------
Mark P. Glassman Date
Chief Financial Officer and Principal Accounting Officer

AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT

AMENDMENT NO. 1, dated as of May 1, 1999 (the "Amendment"), to Employment
Agreement dated as of March 1, 1999 (the "Employment Agreement"), between
ImageMax, Inc., a Pennsylvania corporation (the "Company") and Mark P. Glassman,
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 1. Section 1 of the Employment Agreement is
amended and restated in its entirety as follows:

"1. Employment and Term. The Company hereby employs Employee and
Employee hereby accepts employment with the Company, as Chief Financial Officer
(such position, Employee's "Position") for a period commencing on the date
hereof and continuing until March 1, 2001, subject to the provisions of Section
9 hereof (as may be extended from time to time by mutual consent of Employer and
Employee, the "Term")."

SECTION 2. Amendment to Section 4. Section 4 of the Employment Agreement is
amended by replacing the first two sentences thereof with the following:

"The Company shall pay Employee, and Employee hereby agrees to accept,
as compensation for all services rendered hereunder and for Employee's covenant
not to compete as provided for in Section 8 hereof, an initial base salary at
the annual rate of One Hundred Five Thousand Dollars ($105,000) (as the same may
hereafter be increased, the "Base Salary") which shall continue as such for the
remainder of the Term unless otherwise increased pursuant to this Section 4 of
this Agreement."

SECTION 3. 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.

<PAGE>

SECTION 4. 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.

SECTION 5. 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 6. 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 7. 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/ Andrew Bacas
-------------------------------
Andrew Bacas, Acting Chief
Executive Officer

/s/ Mark P. Glassman
--------------------------------
Mark P. Glassman

2
<PAGE>

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT is made as of the 1st day of March, 1999 by and
between Mark P. Glassman, a resident of Pennsylvania (the "Employee"), and
ImageMax Inc., a corporation organized and existing under the laws of the
Commonwealth of Pennsylvania (the "Company").

WHEREAS, the Company desires to employ Employee and Employee desires to be
employed by the Company for a period of time in the future upon the terms and
conditions hereinafter set forth.

1. Employment and Term. The Company hereby employs Employee and Employee
hereby accepts employment with the Company, as Chief Administrative and
Accounting Officer (such position, Employee's "Position") for a period
commencing on the date hereof and continuing until March 1, 2001, subject to the
provisions of Section 9 hereof (as may be extended from time to time by mutual
consent of Employer and Employee, the "Term").

2. Duties. During the Term, Employee shall serve the Company faithfully and
to the best of his ability and shall devote his full time, attention, skill and
efforts to the performance of the duties required by or appropriate for his
Position. Employee agrees to assume such duties and responsi bilities as may be
customarily incident to such position.

3. Other Business Activities. During the Term, Employee will not, without
the prior written consent of the Company, directly or indirectly engage in any
other business activities or pursuits whatsoever, except activities in
connection with any charitable or civic activities, personal

<PAGE>

investments and serving as an executor, trustee or in other similar fiduciary
capacity; provided, however, that such activities do not interfere with his
performance of his responsibilities and obligations pursuant to this Agreement.

4. Compensation. The Company shall pay Employee, and Employee hereby agrees
to accept, as compensation for all services rendered hereunder and for
Employee's covenant not to compete as provided for in Section 8 hereof, an
initial base salary at the annual rate of Ninety-Five Thousand Dollars ($95,000)
(as the same may hereafter be increased, the "Base Salary"). Base Salary shall
increase to One Hundred Thousand Dollars ($100,000) on November 9, 1999 and
shall continue as such for the remainder of the Term unless otherwise increased
pursuant to this Section 4 of this Agreement. The Base Salary shall be inclusive
of all applicable income, social security and other taxes and charges which are
required by law to be withheld by the Company or which are requested to be
withheld by Employee, and which shall be withheld and paid in accordance with
the Company's normal payroll practice for its similarly situated employees from
time to time in effect. Increases in the Base Salary may be granted from time to
time at the sole discretion of the Company in accordance with customary
procedures in effect for similarly situated employees of the Company. In
addition to the Base Salary, commencing with fiscal year 1999, the Company shall
pay Employee, within 30 days after receipt of the final audit for each fiscal
year, such bonus (the "Bonus") as the Board of Directors of the Company shall
determine in its absolute discretion. Such Bonus shall be based on the
guidelines established in advance of each fiscal year, in the absolute
discretion of the Board of Directors, including, but not limited to, the results
of the Company's operations, achievement of business unit targets, if
applicable, individual performance as compared to specific management objectives
set prior to each fiscal year, and the Company's Chief Executive Officer's
subjective assessment of Employee's performance. Accrual of any Bonus on the
financial books and records of the Company for Employee shall in no way obligate
the

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<PAGE>

Company to pay a Bonus if Employee is terminated hereunder for any reason.
Payment of Bonus upon termination of Employee is at the sole discretion of the
Company.

5. Benefits and Expenses. Employee shall be eligible for those benefits
provided to similarly situated employees of the Company, which shall include
twenty (20) business days vacation per year and those benefits to be set forth
from time to time in the Company's employee handbook (collectively, "Benefits").

6. Confidentiality. Employee recognizes and acknowledges that the
Proprietary Information (as hereinafter defined) is a valuable, special and
unique asset of the Business of the Company. As a result, both during the Term
and thereafter, Employee shall not, without the prior written consent of the
Company, for any reason, either directly or indirectly, divulge to any
third-party or use for his own benefit, or for any purpose other than the
exclusive benefit of the Company, any confidential, proprietary, business and
technical information or trade secrets of the Company or of any subsidiary or
affiliate of the Company ("Proprietary Information") revealed, obtained or
developed in the course of his employment with the Company. Nothing herein
contained shall restrict Employee's ability to make such disclosures as may be
necessary or appropriate to the effective and efficient discharge of the duties
required by or appropriate for his Position or as such disclosures may be
required by law; and further provided, that nothing herein contained shall
restrict Employee from divulging or using for his own benefit or for any other
purpose any Proprietary Information that is readily available to the general
public so long as such information did not become available to the general
public as a direct or indirect result of Employee's breach of this Section 6.
Failure by the Company to mark any of the Proprietary Information as
confidential or proprietary shall not affect its status as Proprietary
Information under the terms of this Agreement.

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<PAGE>

7. Property.

(a) All right, title and interest in and to Proprietary Information
shall be and remain the sole and exclusive property of the Company. During the
Term, Employee shall not remove from the Company's offices or premises any
documents, records, notebooks, files, correspondence, reports, memoranda or
similar materials of or containing Proprietary Information, or other materials
or property of any kind belonging to the Company unless necessary or appropriate
in accordance with the duties and responsibilities required by or appropriate
for his Position and, in the event that such materials or property are removed,
all of the foregoing shall be returned to their proper files or places of
safekeeping as promptly as possible after the removal shall serve its specific
purpose. Employee shall not make, retain, remove and/or distribute any copies of
any of the foregoing for any reason whatsoever except as may be necessary in the
discharge of his assigned duties and shall not divulge to any third person the
nature of and/or contents of any of the foregoing or of any other oral or
written information to which he may have access or with which for any reason he
may become familiar, except as disclosure shall be necessary in the performance
of his duties or as otherwise permitted pursuant to Section 6 hereof; and upon
the termination of his employment with the Company, he shall leave with or
return to the Company all originals and copies of the foregoing then in his
possession, whether prepared by Employee or by others.

(b) (i) Employee agrees that all right, title and interest in and to
any innovations, designs, systems, analyses, ideas for marketing programs, and
all copyrights, patents, trademarks and trade names, or similar intangible
personal property which have been or are developed or created in whole or in
part by Employee (1) at any time and at any place while the Employee is employed
by Company and which, in the case of any or all of the foregoing, are related to
and used in connection with the Business of the Company, (2) as a result of
tasks assigned to Employee by the Company, or (3)

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<PAGE>

from the use of premises or personal property (whether tangible or intangible)
owned, leased or contracted for by the Company (collectively, the "Intellectual
Property"), shall be and remain forever the sole and exclusive property of the
Company. The Employee shall promptly disclose to the Company all Intellectual
Property, and the Employee shall have no claim for additional compensation for
the Intellectual Property.

(ii) The Employee acknowledges that all the Intellectual Property that
is copyrightable shall be considered a work made for hire under United States
Copyright Law. To the extent that any copyrightable Intellectual Property may
not be considered a work made for hire under the applicable provisions of the
United States Copyright Law, or to the extent that, notwithstanding the
foregoing provisions, the Employee may retain an interest in any Intellectual
Property that is not copyrightable, the Employee hereby irrevocably assigns and
transfers to the Company any and all right, title, or interest that the Employee
may have in the Intellectual Property under copyright, patent, trade secret and
trademark law, in perpetuity or for the longest period otherwise permitted by
law, without the necessity of further consideration. The Company shall be
entitled to obtain and hold in its own name all copyrights, patents, trade
secrets, and trademarks with respect thereto.

(iii) Employee further agrees to reveal promptly all information
relating to the same to an appropriate officer of the Company and to cooperate
with the Company and execute such documents as may be necessary or appropriate
(1) in the event that the Company desires to seek copyright, patent or trademark
protection, or other analogous protection, thereafter relating to the
Intellectual Property, and when such protection is obtained, to renew and
restore the same, or (2) to defend any opposition proceedings in respect of
obtaining and maintaining such copyright, patent or trademark protection, or
other analogous protection.

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<PAGE>

(iv) In the event the Company is unable after reasonable effort to
secure Employee's signature on any of the documents referenced in Section
7(b)(iii) hereof, whether because of Employee's physical or mental incapacity or
for any other reason whatsoever, Employee hereby irrevocably designates and
appoints the Company and its duly authorized officers and agents as Employee's
agent and attorney-in-fact, to act for and in his behalf and stead to execute
and file any such documents and to do all other lawfully permitted acts to
further the prosecution and issuance of any such copyright, patent or trademark
protection, or other analogous protection, with the same legal force and effect
as if executed by Employee.

8. Covenant not to Compete. The Employee shall not, during the Term,
including any extensions of the Term, and for a period of one (1) year
thereafter (the "Restricted Period"), do any of the following directly or
indirectly without the prior written consent of the Company:

(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 the date of this Agreement, 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;
provided, however, 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

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<PAGE>

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 the termination of Employee's employment
hereunder.

9. Termination. Employee's employment hereunder may be terminated during
the Term upon the occurrence of any one of the events described in this Section
9. Upon termination, Employee shall be entitled only to such compensation and
benefits as described in this Section 9.

9.1. Termination for Disability.

(a) In the event of the disability of the Employee such that Employee
is unable to perform his duties and responsibilities hereunder to the full
extent required by this Agreement by reasons of illness, injury or incapacity
for a period of more than ninety (90) consecutive days or more than one hundred
twenty (120) days, in the aggregate, during any seven hundred thirty (730) day
period ("Disability"), Employee's employment hereunder may be terminated by the
Company by notice to Employee pursuant to a determination by the Chief Executive
Officer.

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<PAGE>

(b) In the event of a termination of Employee's employment hereunder
pursuant to Section 9.1(a), Employee will be entitled to receive all accrued and
unpaid (as of the date of such termination) Base Salary and Benefits and other
forms of compensation and benefits payable or provided in accordance with the
terms of any then existing compensation or benefit plan or arrangement ("Other
Compensation"), including payment prescribed under any disability or life
insurance plan or arrangement in which he is a participant or to which he is a
party as an employee of the Company. Except as specifically set forth in this
Section 9.1(b), the Company shall have no liability or obligation to Employee
for compensation or benefits hereunder by reason of such termination.

(c) For purposes of this Section 9.1, except as hereinafter provided,
the determination as to whether Employee is Disabled shall be made by a licensed
physician selected by Employee and shall be based upon a full physical
examination and good faith opinion by such physician. In the event that the
Chief Executive Officer s disagrees with such physician's conclusion, the Chief
Executive Officer may require that Employee submit to a full physical
examination by another licensed physician selected by Employee and approved by
the Company. If the two opinions shall be inconsistent, a third opinion shall be
obtained after full physical examination by a third licensed physician selected
by Employee and approved by the Company. The majority of the three opinions
shall be conclusive.

9.2. Termination by Death. In the event that Employee dies during the Term,
Employee's employment hereunder shall be terminated thereby and the Company
shall pay to Employee's executors, legal representatives or administrators an
amount equal to the accrued and unpaid portion of his Base Salary, Benefits and
Other Compensation through the end of the month in which he dies. Except as
specifically set forth in this Section 9.2, the Company shall have no liability
or obligation hereunder to Employee's executors, legal representatives,
administrators, heirs or assigns or any other person claiming under or through
him by reason of Employee's death, except that Employee's executors,

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<PAGE>

legal representatives or administrators will be entitled to receive the payment
prescribed under any death or disability benefits plan in which he is a
participant as an employee of the Company, and to exercise any rights afforded
under any compensation or benefit plan then in effect.

9.3. Termination By Company for Cause.

(a) The Company may terminate Employee's employment hereunder at any
time for "cause" upon written notice to Employee based upon a good faith
determination by the Chief Executive Officer. The good-faith nature of the
determination shall not in and of itself mean that "cause" exists. For purposes
of this Agreement, "cause" shall mean: (i) any breach by Employee of any of his
obligations under Sections 6, 7 or 8 of this Agreement, (ii) gross incompetence
in the performance by Employee of the duties required by or appropriate for his
Position, (iii) a material violation of the Company's employee policies, as may
be amended from time to time, or (iv) other conduct of Employee involving any
type of disloyalty to the Company or willful misconduct with respect to the
Company, including without limitation fraud, embezzlement, theft or proven
dishonesty in the course of his employment or conviction of a felony.

(b) In the event of a termination of Employee's employment hereunder
pursuant to Section 9.3(a), Employee shall be entitled to receive all accrued
but unpaid (as of the effective date of such termination) Base Salary, Benefits
and other Compensation. All Base Salary and Benefits shall cease at the time of
such termination, subject to the terms of any benefit or compensation plan then
in force and applicable to Employee. Except as specifically set forth in this
Section 9.3, the Company shall have no liability or obligation hereunder by
reason of such termination.

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<PAGE>

9.4. Termination By Company Without Cause.

(a) The Company may terminate Employee's employment hereunder at any
time, for any reason, without cause, effective upon the date designated by the
Company upon written notice to Employee.

(b) In the event of a termination of Employee's employment hereunder
pursuant to Section 9.4(a), Employee shall be entitled to receive all accrued
but unpaid (as of the effective date of such termination) Base Salary, Benefits
and other Compensation, plus either (i) if such termination is prior to the last
twelve months of the Term, continuation of the current Base Salary plus Benefits
(including vesting of options and other Benefits) for one year, or (ii) if such
termination is in the last twelve-month period of the Term, continuation of the
Base Salary plus continuation of Benefits (including vesting of options and
other Benefits) for the greater of (x) the remaining portion of the Term, or (y)
six months. Except as specifically set forth in this Section 9.4, the Company
shall have no liability or obligation hereunder by reason of such termination.

9.5. Termination By Employee

(a) Employee may terminate Employee's employment hereunder at any time
effective upon the date designated by Employee in written notice of the
termination of his employment hereunder pursuant to this Section 9.5(a) (the
"Request Date"); provided that, such date shall be at least sixty (60) days
after the date of such notice. Notwithstanding the foregoing, upon receipt by
the Company of such written notice of termination, the Company in its sole
discretion, may deem such termination effective immediately (the "Accelerated
Termination Date"). In the event the parties mutually agree to an alternative
date of termination, that date shall be considered the Request Date.

(b) In the event of a termination of Employee's employment hereunder
pursuant to Section 9.5(a) hereof, Employee shall be entitled to receive all
accrued but unpaid (as of the earlier of the Request Date or the Accelerated
Termination Date), Base Salary and Benefits. If

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<PAGE>

the Company does not terminate the Employee immediately upon receipt of the
termination notice and Employee performs his duties in a satisfactory manner, as
determined in the sole discretion of the Company, until the Request Date,
Employee shall also be entitled to an amount equal to one month's Base Salary
(in effect at such time). In addition, in the event of a termination of
Employee's employment pursuant to Section 9.5(a) at the end of the Term upon
sixty (60) prior written notice and upon the satisfactory completion, in the
sole discretion of the Company, of Employee's duties during the 60-day period
after receipt of such termination notice, Employee shall be entitled to receive
an amount equal to one month's Base Salary (in effect at such time) multiplied
by the number of the complete 12-month periods of service completed prior to
giving notice of termination. Except as specifically set forth in this Section
9.5(b), all Base Salary, Benefits and Bonuses shall cease at the time of such
termination, subject to the terms of any benefit or compensation plan then in
force and applicable to Employee. Except as specifically set forth in this
Section 9.5, the Company shall have no liability or obligation hereunder by
reason of such termination.

9.6. Sale of Company/Change of Control.

(a) If there is a Sale of the Company or a Change of Control during
the Term, then the Company or the successor to all or substantially all of the
Company's assets, capital stock or business (the "Successor Entity"), as the
case may be, must offer Employee employment pursuant to a written contract offer
(the "Offer") within five (5) days of such Sale of the Company or Change of
Control. Employee shall, within fifteen (15) days after receipt of such Offer,
either (i) accept the terms of the Offer, such acceptance indicated by return of
a copy of the Offer duly executed, (ii) elect in writing, provided to the
Company or the Successor Entity, as the case may be, to remain employed under
this Agreement for the remainder of the Term, or (iii) elect to terminate
Employee's employment

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<PAGE>

hereunder upon sixty (60) days prior notice, such termination to be effective at
the expiration of said sixty (60) day period, or sooner, if desired by the
Company or the Successor Entity.

(b) For purposes of this Section 9.6, (i) a "Change of Control" means
the sale, transfer, assignment or other disposition (including by merger or
consolidation) by stockholders of the Company, 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 Company to one or more Persons,
other than (i) any such sales, transfers, assignments or other dispositions by
such stockholders to their respective Affiliates, (ii) any such transaction
effected primarily to reincorporate the Company in another jurisdiction or (iii)
any transaction in connection with the simultaneous acquisition of document
management companies and the initial public offering of the common stock of the
Company or its affiliate; (ii) "Affiliate" means, with respect to any
stockholder of the Company, (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; and (iii) "Person" means an individual, partnership, corporation,
joint venture, association, trust, unincorporated association, other entity or
association.

(c) For purposes of this Section 9.6, a "Sale of the Company" means a
sale, transfer, assignment or other disposition (including by merger or
consolidation), of all of the outstanding stock of the Company, or of all or
substantially all of the assets of the Company, a liquidation or dissolution of
the Company. A "Sale of the Company" shall not include the consummation

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<PAGE>

of a public offering of Common Stock of the Company or its affiliate pursuant to
a registration statement or any transaction effected primarily to reincorporate
the Company in another jurisdiction.

(d) In the event of termination of Employee's employment hereunder
pursuant to clause (iii) in Section 9.6(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 eighteen (18) 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
eighteen (18) 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.

(e) In the event Employee chooses to continue employment hereunder
pursuant to clause (ii) in Section 9.6(a) above and Employee's employment is
thereafter terminated prior to the expiration of the Term for any reason other
than Death, Disability or termination pursuant to Section 9.2(a)(iv), Employee
shall be entitled to receive all the benefits and compensation referred to in
Section 9.6(d) above. In the event Employee chooses to continue employment
hereunder pursuant to clause (ii) in Section 9.6(a) above, at the expiration of
the Term, Employee shall be entitled to receive an amount equal to two month's
Base Salary (in effect at such time) multiplied by the number of complete
12-month periods of service completed prior to such termination.

(f) If this Agreement is assumed by any Successor Entity, any payments
set forth herein shall be the obligation of such Successor Entity. Except as
specifically set forth in this Section 9.6, (i) all Base Salary, Benefits and
Bonuses shall cease at the time of such termination, subject to the terms of any
benefit or compensation plans then in force and applicable to

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<PAGE>

Employee, and (ii) the Company shall have no liability or obligation hereunder
by reason of such termination.

(g) If the Successor Entity fails to make the Offer, Employee shall be
entitled to receive all of the benefits and compensation referred to in Section
9.6(d) above.

10. Other Agreements. Employee represents and warrants to the Company that:

(a) There are no restrictions, agreements or understandings whatsoever
to which Employee is a party which would prevent or make unlawful Employee's
execution of this Agreement or Employee's employment hereunder, or which is or
would be inconsistent or in conflict with this Agreement or Employee's
employment hereunder, or would prevent, limit or impair in any way the
performance by Employee of his obligations hereunder,

(b) That Employee's execution of this Agreement and Employee's
employment hereunder shall not constitute a breach of any contract, agreement or
understanding, oral or written, to which Employee is a party or by which
Employee is bound, and

(c) That Employee is free to execute this Agreement and to enter into
the employ of the Company pursuant to the provisions set forth herein.

(d) In the event that they are still in effect, that Employee shall
disclose the existence and terms of the restrictive covenants set forth in this
Agreement to any employer that the Employee may work for during the term of this
Agreement (which employment is not hereby authorized) or after the termination
of the Employee's employment at the Company.

11. Survival of Provisions. The provisions of this Agreement set forth in
Sections 6, 7, 8, 9 and 20 hereof shall survive the termination of Employee's
employment hereunder.

12. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the Company and Employee and their respective successors,
executors, administrators,

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<PAGE>

heirs and/or permitted assigns; provided, however, that neither Employee nor the
Company may make any assignments of this Agreement or any interest herein, by
operation of law or otherwise, without the prior written consent of the other
party hereto, except that, without such consent, the Company may assign this
Agreement to an Affiliate or any successor to all or substantially all of its
assets and business by means of liquidation, dissolution, merger, consolidation,
transfer of assets, or otherwise, provided that such successor assumes in
writing all of the obligations of the Company under this Agreement, subject,
however, to Employee's rights as to termination as provided in Section 9.6
hereof.

13. Notice. Any notice or communication required or permitted under this
Agreement shall be made in writing and sent by certified or registered mail,
return receipt requested, addressed as follows:

If to Employee:

Mark P. Glassman
501 Ehret Road
Fairless Hills, PA 19030

If to Company:

Andrew Bacas
ImageMax, Inc.
1100 East Hector Street, Suite 396
Conshohocken, Pennsylvania 19428

or to such other address as either party may from time to time duly
specify by notice given to the other party in the manner specified above.

14. Entire Agreement; Amendments. This Agreement contains the entire
agreement and understanding of the parties hereto relating to the subject matter
hereof, and merges and supersedes all prior and contemporaneous discussions,
agreements and understandings of every nature between the parties hereto
relating to the employment of Employee with the Company. This Agreement may not
be changed or modified, except by an Agreement in writing signed by each of the
parties hereto.

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<PAGE>

15. Waiver. The waiver of the breach of any term or provision of this
Agreement shall not operate as or be construed to be a waiver of any other or
subsequent breach of this Agreement.

16. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the Commonwealth of Pennsylvania.

17. Invalidity. In case any one or more of the provisions contained in this
Agreement shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
the validity of any other provision of this Agreement, and such provision(s)
shall be deemed modified to the extent necessary to make it enforceable.

18. Section Headings. The section headings in this Agreement are for
convenience only; they form no part of this Agreement and shall not affect its
interpretation.

19. Number of Days. In computing the number of days for purposes of this
Agreement, all days shall be counted, including Saturdays, Sundays and legal
holidays; provided, however, that if the final day of any time period falls on a
Saturday, Sunday or day which is a holiday in Philadelphia, Pennsylvania, then
such final day shall be deemed to be the next day which is not a Saturday,
Sunday or legal holiday.

20. Specific Enforcement; Extension of Period.

(a) Employee acknowledges that the restrictions contained in Sections
6, 7, and 8 hereof are reasonable and necessary to protect the legitimate
interests of the Company and its affiliates and that the Company would not have
entered into this Agreement in the absence of such restrictions. Employee also
acknowledges that any breach by him of Sections 6, 7, or 8 hereof will cause
continuing and irreparable injury to the Company for which monetary damages
would not be an adequate remedy. The Employee shall not, in any action or
proceeding to enforce any of the provisions of this

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<PAGE>

Agreement, assert the claim or defense that an adequate remedy at law exists. In
the event of such breach by Employee, the Company shall have the right to
enforce the provisions of Sections 6, 7, and 8 of this Agreement by seeking
injunctive or other relief in any court, and this Agreement shall not in any way
limit remedies of law or in equity otherwise available to the Company. If an
action at law or in equity is necessary to enforce or interpret the terms of
this Agreement, the prevailing party shall be entitled to recover, in addition
to any other relief, reasonable attorneys' fees, costs and disbursements. In the
event that the provisions of Sections 6, 7, or 8 hereof should ever be
adjudicated to exceed the time, geographic, or other limitations permitted by
applicable law in any applicable jurisdiction, then such provisions shall be
deemed reformed in such jurisdiction to the maximum time, geographic, or other
limitations permitted by applicable law.

(b) In the event that Employee shall be in breach of any of the
restrictions contained in Section 8 hereof, then the Restricted Period shall be
extended for a period of time equal to the period of time that Employee is in
breach of such restriction.

21. Arbitration. In the event that the parties are unable to resolve any
disputes arising hereunder, such dispute shall be submitted for a binding
determination by a neutral third party designated by the President of the
Philadelphia office of the American Arbitration Association.

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<PAGE>

22. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which
together shall be deemed to be one and the same instrument.

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
the day and year first written above.

IMAGEMAX, INC.

By: /s/ Andrew R. Bacas
--------------------------------
Title: Acting Chief
Executive Officer

/s/ Mark P. Glassman
------------------------------------
Mark P. Glassman

-18-

<ARTICLE> 5

<S> <C> <C>
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<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
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