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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended July 31, 1997
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or
--- TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transitional period from _____________ to _____________
Commission File Number 00-1033864
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DocuCorp, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 74-2690838
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5910 North Central Expressway, Suite 800, Dallas, Texas 75206
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number; including area code (214) 891-6500
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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None -
Securities registered under Section 12(g) of the Exchange Act:
None
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(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 report), 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 (Section 229.405 of this chapter) 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.
---
As of September 30, 1997, 4,277,794 shares of DocuCorp, Inc. Class A
Common Stock, $.01 par value, were outstanding, and the aggregate market
price of the shares held by nonaffiliates was approximately $3,934,944.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Annual Report to Shareholders for
the fiscal year ended July 31, 1997 are incorporated by reference in Items 7
and 8 of Part II of this report.
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DOCUCORP, INC.
TABLE OF CONTENTS
FORM 10-K
July 31, 1997
PART I. Page
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Item 1. Business 1
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Managment's Discussion and Analysis of Financial
Condition and Results of Operation 17
Item 8. Financial Statements and Supplemental Data 17
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 17
PART III.
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners
and Management 23
Item 13. Certain Relationships and Related Transactions 25
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 27
Signatures 28
Index to Exhibits 31
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THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933,
AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED
IN THIS FORM 10-K, ARE FORWARD LOOKING STATEMENTS. SUCH STATEMENTS ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, WHICH INCLUDE BUT ARE NOT LIMITED
TO THOSE DISCUSSED IN THE SECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE
RESULTS." SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES, AMONG OTHERS AS
SET FORTH IN THIS FORM 10-K, MATERIALIZE, ACTUAL RESULTS MAY VARY MATERIALLY
FROM THOSE ESTIMATED, ANTICIPATED OR PROJECTED. ALTHOUGH THE COMPANY BELIEVES
THAT THE EXPECTATIONS REFLECTED BY SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE BASED ON INFORMATION CURRENTLY AVAILABLE TO THE COMPANY, NO
ASSURANCE CAN BE GIVEN THAT SUCH EXPECTATION WILL PROVE TO HAVE BEEN CORRECT.
CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ARE SET FORTH IN
THIS FORM 10-K, INCLUDING WITHOUT LIMITATION IN CONJUNCTION WITH THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K THAT ARE REFERRED TO
ABOVE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K AND ALL
SUBSEQUENT ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR
PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY
THESE CAUTIONARY STATEMENTS.
PART I
ITEM 1. BUSINESS
GENERAL
DocuCorp was incorporated on January 13, 1997 in connection with the
merger (the "Merger") of (i) ISI Merger Corp., a Texas corporation and
wholly-owned subsidiary of DocuCorp, Inc., a Delaware corporation (the
"Company"), with and into Image Sciences, Inc., a Texas corporation ("Image
Sciences"), and (ii) FormMaker Acquisition Corp., a Georgia corporation and
wholly-owned subsidiary of DocuCorp, with and into FormMaker Software, Inc.,
a Georgia corporation ("FormMaker"). The Merger was completed on May 15,
1997. The Merger was accounted for as an acquisition of FormMaker by Image
Sciences. The financial statements of Image Sciences are presented as
historical statements of the Company for periods prior to the Merger. As a
result of the Merger, the Company believes that it is a leading national
provider of document automation software and services to the insurance and
other document-intensive industries.
The Company develops, markets, installs, and supports software products
designed to automate the assembly and production of business forms and
documents. The Company's software and services offer solutions to the
challenges associated with enterprise-wide document production which emerged
with the rapid growth of laser printing and imaging technologies. The
Company's mainframe and client/server software
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products are utilized by some of the largest corporations in the insurance,
utilities, telecommunications, transportation, and financial services
industries.
The Company principally licenses its software products domestically and
internationally through a direct sales force and distributors.
PRODUCTS AND SERVICES
The Company's solutions enable high volume one-to-one publishing of
strategic customer communications on print, electronic, and archival media,
including the Internet. The Company software supports multiple hardware
platforms, operating systems, printers, and archival systems, thus enabling
enterprise-wide device-independent publishing. The Company also offers a
full range of services, including consulting, implementation, custom
development, print outsourcing, training, and electronic document library
development. The Company markets existing Image Sciences, FormMaker, and
Micro Dynamics, Ltd. ("Micro Dynamics") products and services. In addition,
the Company intends to develop new products for emerging electronic
publishing applications including the Internet. The Company's product and
service offerings can be classified in the following categories:
IMAGE SCIENCES DOCUFLEX PRODUCTS
PUBLISHING PRODUCTS
DOCUMERGE. DocuMerge is a scaleable, high performance product designed
for centralized and distributed enterprise-wide publishing of documents that
may be tailored for each recipient. DocuMerge applications include insurance
policies, bank statements, utility bills, bills of lading, and other
customized, high-volume documents that must be repeatedly produced under
tight deadlines. DocuMerge can be integrated with existing application
systems to automate high-volume merging, collating, assembling, printing, and
managing of complex documents. DocuMerge operates under MVS, VSE, Microsoft
Windows, IBM OS/2, and UNIX operating systems.
DOCUSOLVE. DocuSolve is an interactive forms fill, data editing, and
document collation application that runs under Microsoft Windows. DocuSolve
can be used as a stand-alone application for customizing large volumes of
documents, or as a product that can be tightly integrated with DocuMerge to
enable data and forms that are not available initially to DocuMerge to be
provided interactively by DocuSolve.
IMAGING AND ARCHIVING PRODUCTS
DOCUVIEW. DocuView includes the DocuView Client and DocuSave Server.
DocuView allows users to archive, retrieve, view, and reprint internally
generated documents utilizing their original resources (e.g., fonts) at a
fraction of the cost of traditional imaging systems. Documents are archived
in their native print stream formats rather than in large raster formats.
DocuView can be integrated with traditional imaging
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systems when necessary. The DocuView client operates under Microsoft Windows.
The DocuSave server operates under UNIX and IBM OS/2.
IMAGECREATE. ImageCreate is an imaging software product that converts
print datastreams into indexed documents for storage in leading imaging
systems. ImageCreate applications include indexing and archiving telephone
bills, insurance documents, and customer statements. ImageCreate accepts
documents in IBM Advanced Function Presentation ("AFP"), Xerox Metacode, and
3211 line printer data formats. The software then indexes and transforms them
into a format for storage in imaging systems such as Cirrus, FileNet,
ImagePlus, VisualInfo, KeyFile, Sigma, ViewStar, and WANG. Additionally,
ImageCreate comes with an API for custom storage and FAX Server integration.
ImageCreate operates under MVS, IBM OS/2, and UNIX operating systems.
I.R.I.S. I.R.I.S. is an imaging software product that converts images
from imaging systems to print datastreams. I.R.I.S. applications include the
conversion of scanned or archived images into print objects for inclusion in
bank statements, life insurance policies, and invoices. I.R.I.S. accepts
images from scanners, faxes or imaging systems and converts the images to a
format required by IBM AFP and Xerox Metacode printers. Also, I.R.I.S. comes
with an API to provide integration support with almost any imaging or
document management system. I.R.I.S. operates under MVS, IBM OS/2, and UNIX
operating systems.
UTILITY PRODUCTS
The Commander series of publishing utilities are tools that enable
customers to integrate existing industry-standard publishing and
communications products with the Company's products.
DOCUGRAPH. DocuGraph uses variable data to dynamically generate two and
three-dimensional graphs that can be incorporated into documents and printed
on high-speed Xerox or IBM laser printers. DocuGraph operates on MVS,
Microsoft Windows, IBM OS/2, and UNIX platforms.
DOCUWORD. DocuWord performs as a stand-alone multi-platform document
composition system, or in conjunction with DocuMerge to produce highly
personalized documents. DocuWord operates on MVS, Microsoft Windows, IBM
OS/2, and UNIX platforms.
PRINTCOMMANDER. PrintCommander is a print driver for Microsoft Windows
that allows the user to use Windows-based composition products for printing
on high-speed production Xerox Metacode and IBM AFP printers. PrintCommander
also enables the user to convert fonts, create forms, and normalize documents
for use with DocuMerge and DocuSolve.
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TAGCOMMANDER. TagCommander for Windows enables OLE-compatible Windows
composition tools to automate the insertion of variable data spaces for use
by DocuMerge and DocuSolve.
RULECOMMANDER. RuleCommander for Windows gives DocuMerge users an
easy-to-use graphical user interface to set up and maintain document assembly
rules for DocuMerge.
GRAFXCOMMANDER. GrafxCommander for Windows creates graphic print
resources for IBM AFP and Xerox Metacode printers from Windows applications,
and converts AFP and Metacode print resources for use by Windows applications.
COMMCOMMANDER. CommCommander provides peer-to-peer communication
capabilities between mainframe and client/server based Company applications.
FORMMAKER'S SOFTWARE TECHNOLOGY AND PRODUCTS
FORMMAKER'S DOCUMENT AUTOMATION PLATFORM ("DAP"). DAP software
technology enables end-users to share documents, pass data through systems,
maintain version control when revising or updating a form or document,
improve and create more efficient internal workflows, eliminate manual
assembly, document filing and document retrieval, and eliminate the necessity
of physical space to file and store paper documents. Key features of DAP
include graphical user interface to display electronic documents and support
data entry; automation of business procedures with "processing rules"; tools
for error checking, storage, handling and routing of incomplete transactions;
the ability to provide output fully sorted and collated; the support of
distributed, centralized and client/server document operations; the support
of multiple hardware platforms and operating systems; and the inclusion of
software tools for creating, editing, and maintaining electronic document
libraries.
The components of DAP may be generally described as follows:
ENTRY/DISPLAY MODULE. The display consists of an electronic document
image on the computer screen in WYSIWYG format, allowing fill-in of data
directly onto the document image. "Intelligent" features speed data and entry
and improve accuracy. These features are designed for non-technical data
entry personnel and include guidance of users from field to field, bypassing
fields that do not require the user's attention; format masks to
automatically assign values such as currency, commas or data formats;
automatic fill-in of repetitive data, such as a client's name, to reduce data
entry errors; and easy to use scripting language to perform calculations and
create pop-up messages. The Entry/Display module operates in stand-alone, LAN
or client/server environments under IBM OS/2 or Microsoft Windows.
WORK-IN PROCESS MODULE. The Work-in-Process module stores incomplete or
pending work for later completion, error correction, and electronic routing.
Work-in-
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Process operates in stand-alone, LAN or client/server configurations under
IBM OS/2 or Microsoft Windows. It also interfaces with cc:Mail and Microsoft
Mail.
PRINT/MERGE MODULE. The Print/Merge module provides hard copy printing
and data merge capabilities. This module prints individual forms or documents
and allows documents to be grouped into "sets." It supports both on-demand
and batch printing. Prior to printing, the Print/Merge module accesses the
selected documents and merges the electronic images with the variable data.
The module sequences the documents so that output is printed fully collated
by recipient and sorted in the correct document order. Print/Merge printer
support includes IBM AFP, Hewlett Packard PCL, Xerox Metacode, and
Postscript. The module operates in stand-alone, LAN, client/server, midrange,
and mainframe environments under UNIX, IBM AS/400, IBM OS/2, Microsoft
Windows or MVS operating systems.
ARCHIVE AND RETRIEVAL MODULE. The Archive and Retrieval module provides
permanent storage and retrieval for all documents which have been printed.
Data can be stored to a hard disk, optical disk or other media in compressed
format. The data is archived once for each transaction, while the document
image is stored just once. When the document is needed again, the system
retrieves the data, merges the document images with the Library Manager, and
displays the document for on-screen review, reprinting or importing into
another application. Archive functions in stand-alone, LAN, client/server,
midrange, and mainframe environments under UNIX, IBM AS/400, IBM OS/2,
Microsoft Windows or IBM MVS operating systems.
RULES PROCESSORS MODULE. The Rules Processor module manages the
execution of the other modules and gives DAP its flexibility. As the most
powerful system component, the Rules Processor executes rules which are
integrated specifically for a particular system. Rules may include when to
process a certain kind of job, how to define a particular document set, what
to do with a specific form or document and how to process a certain data
field. The module operates in workstation, mid-range, and mainframe
environments under IBM OS/2, Microsoft Windows, UNIX, IBM AS/400 or IBM MVS
operating systems.
MICRO DYNAMICS PRODUCTS
MICRO DYNAMICS MARS/NT. Micro Dynamics MARS/NT offers high volume
scanning of paper documents, indexing of documents in a database, and
document storage on high capacity devices (including Write Once Read Multiple
optical disks). Once documents are stored in the system, Micro Dynamics
MARS/NT allows flexible searching to locate documents from workstations
connected to servers by the network.
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MICRO DYNAMICS FREEFORM. Freeform is an optional component of Micro
Dynamics MARS/NT that offers high performance searching through the full text
of a document. Using optical character recognition, document images are
converted to document text. FreeForm then creates an index of every word in
each page of each document so any word or phrase in the collection can be
located instantly. FreeForm is used to quickly navigate through many kinds
of text documents (e.g., legal transcripts, contracts, collected
correspondence, and technical documentation).
PROFESSIONAL SERVICES
The Company offers a full range of services, including consulting,
implementation, custom development, education, training, and electronic
document library development. The Company's professional services group works
with clients to develop and define document automation strategies and to
provide a complete package of software customization and implementation
services. Educational training classes are available to assist customers
with implementing technology and applications. Educational offerings are
available in standardized and customized formats.
OUTSOURCING SERVICES
The Company offers document processing and print outsourcing services
which utilize the Company's software to provide customers a solution for
handling high volume, complex print, finish, and mailing requirements. The
Company operates a print production center in Atlanta which uses high volume
printers and mail handling equipment, and takes electronic output from
customers for printing of policies, billings, and other customer mailings,
and bundles the output for bulk mailings.
PRODUCT DEVELOPMENT
The Company has made substantial investments in research and product
development. The Company's product development efforts are focused on
enhancing and broadening its current software product offerings, as well as
developing new products to compliment existing products and provide
additional functionality. New product development efforts include the
integration of existing products with the Internet to provide an
enterprise-wide Internet solution, further development of systems for use in
industries such as utilities and financial services, and development of a new
generation of software products utilizing object oriented technology.
In fiscal 1997 and 1996, the Company incurred total software development
costs of approximately $3,152,000 and $2,385,000, respectively, of which the
Company capitalized approximately $997,000 and $534,000, respectively, and
expensed approximately $2,155,000 and $1,851,000, respectively. During fiscal
1997 and 1996, the Company charged to expense approximately $931,000 and
$814,000, respectively, related to the amortization of capitalized computer
software development costs.
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CUSTOMERS AND DISTRIBUTION
The Company markets its products through various channels, including
direct sales, marketing alliances, and distributors and organizes its sales
resources based upon the vertical industry markets being pursued by the
Company. The Company employs direct sales representatives that operate
primarily from Dallas, Texas and Atlanta, Georgia.
The Company generally markets to large and mid-size organizations that
have a need for integrated solutions for the production of insurance
policies, utility statements, telephone bills, invoices, bank statements,
credit card statements, direct mail, bills of lading, and many other document
publishing applications. Currently, the majority of the Company's revenue is
generated from the insurance industry. The Company intends to expand into
other markets including utilities, telecommunications, transportation, and
financial services. For the year ended July 31, 1997, 77% of the Company's
revenues were derived from customers in the insurance industry.
Outside of North America, the Company relies heavily on distributor
relationships to market its products. Distributor relationships are
established in Canada, Europe, South Africa, and Asia. The Company's most
significant international marketing alliance is with The Continuum Company
which markets to the insurance and financial services industries in Europe
and most of Asia.
FormMaker had historically marketed its DAP product to the insurance
industry through Policy Management Systems Corporation ("PMSC"). PMSC
provides a range of marketing, sales, implementation, outsourcing, and
support services.
A substantial portion of FormMaker's revenues are generated from a
marketing agreement with PMSC under which FormMaker (i) provides third-party
processing and software implementation services in the insurance industry,
(ii) has granted PMSC rights to use, execute, copy or license certain
proprietary DAP software, and (iii) has granted PMSC the exclusive right to
market FormMaker's proprietary software in the property/casualty and life
insurance industries. Under the terms of the marketing agreement and the
license agreement, PMSC is the sole third party distributor of FormMaker's
software products to the insurance industry. Revenues from PMSC under these
agreements for the period from the Merger date of May 15, 1997 through July
31, 1997 approximated $3,000,000. Beginning on January 1, 1998, PMSC can
unilaterally terminate the marketing agreement for any reason whatsoever by
providing 90 days prior written notice to FormMaker. Unless renewed or
terminated at an earlier date, the marketing agreement will terminate on
December 31, 1999. If the marketing agreement expires or is terminated,
FormMaker will receive no revenues from new licenses sold through PMSC and
maintenance revenues will be eliminated over a two year period. PMSC has
provided notice of termination of a processing agreement effective June 1998.
FormMaker has also entered into a license agreement with PMSC under
which FormMaker granted PMSC a non-exclusive, perpetual, royalty-free,
worldwide license to
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use, execute, copy or license FormMaker's software (and derivatives thereof)
to third parties within the insurance industry and such other industries in
which FormMaker from time to time operates. Therefore, upon termination of
the above-described marketing agreement and PMSC's exclusive rights
thereunder, PMSC will continue to have the right to use FormMaker's software
and to compete directly with the Company in the insurance industry.
EMPLOYEES
As of July 31, 1997, the Company had 290 employees. The Company believes
its future success will depend, in part, on its continued ability to attract
and retain highly qualified personnel in a competitive market for experienced
and talented software engineers and sales and marketing personnel. None of
the Company's employees are represented by a labor union or subject to a
collective bargaining agreement. The Company believes that its employee
relations are good.
COMPETITION
The market for the Company's document automation products is intensely
competitive, subject to rapid change, and significantly affected by new
product introductions and other market activities of industry participants.
The Company's software products are targeted at organizations that require
the ability to produce large quantities of customized and personalized
documents in paper or electronic form. The Company faces direct and indirect
competition from a broad range of competitors who offer a variety of products
and solutions to the Company's current and potential customers. The Company's
principal competition currently comes from (i) systems developed in-house by
the internal MIS departments of large organizations and (ii) direct
competition in a number of software vendors, including Document Sciences
Corporation (which is partially owned by Xerox Corporation ("Xerox")), M&I
DataServices, Inc., and Group 1 Software, Inc.
It is also possible that the Company will face competition from new
competitors. Moreover, as the market for document automation software
expands, current or potential competitors with significantly greater
resources than the Company, could attempt to enter or increase their presence
in the Company's market either independently or by acquiring or forming
strategic alliances with competitors of the Company or to otherwise increase
their focus on the industry. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves
or with third parties to increase the ability of their products to address
the needs of the Company's current and prospective customers, and it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. Increased competition may result in
price reductions, reduced gross margins, and loss of market share, any of
which could have a material adverse effect on the Company's business,
operating results, and financial condition. There can be no assurance that
the Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by
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the Company will not materially adversely affect its business, operating
results, and financial condition.
INTELLECTUAL PROPERTY, TRADEMARKS AND PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyright,
distribution, software license agreements, trademark and trade secret laws,
employee and third-party nondisclosure agreements, and other methods to
safeguard its software products. Despite these precautions, it may be
possible for unauthorized third parties to copy certain portions of the
Company's products or obtain and use information the Company regards as
proprietary. While the Company's competitive position may be affected by its
ability to protect its proprietary information, the Company believes that
trademark and copyright protections are less significant to the Company's
success than other factors, such as the knowledge, ability, and experience of
the Company's personnel, name recognition, and ongoing product development
and support.
The Company's software products are licensed to end-users on a "right to
use" basis pursuant to a license agreement, which is signed by the end-user
and the Company. The laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States.
As the number of software products in the industry increases and the
functionality of these products further overlap, the Company believes that
software programs will increasingly become subject to infringement claims.
There can be no assurance that third parties will not assert infringement
claims against the Company in the future with respect to current or future
products. Any such assertion could require the Company to enter into royalty
arrangements or result in costly litigation.
The Company also relies on certain software that it licenses from third
parties, including software that is integrated with internally developed
software and used in its products to perform key functions. There can be no
assurances that these third-party software licenses will continue to be
available to the Company on commercially reasonable terms, or that the
software will be appropriately supported, maintained or enhanced by the
licensors.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business, financial condition, and operating results may
be impacted by a number of factors, including but not limited to those set
forth below, any one of which could cause the Company's actual results to
vary materially from recent results or from the Company's anticipated future
results.
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INTEGRATION OF IMAGE SCIENCES AND FORMMAKER
The Company's limited operating history makes the prediction of future
operating results difficult, and the operating history of Image Sciences and
FormMaker cannot necessarily be regarded as indicative of the Company's
prospects on a consolidated basis. Accordingly, although both Image Sciences
and FormMaker have experienced revenue growth in recent years, there can be
no assurance that the Company will sustain such growth in revenues, if any,
or that the Company will be profitable on a quarterly or annual basis.
Furthermore, the Company may not be able to successfully complete the
integration of the operations, facilities, and management of Image Sciences
and FormMaker or realize any benefits from the Merger. Additionally, the
Merger could have an adverse effect on the Company's relationships with
customers, distributors or suppliers of Image Sciences or FormMaker.
INTEGRATION OF PRODUCTS
The Company continues to integrate certain of its products, if and where
practicable. However, the Company may not be able to accomplish such
integration in a timely manner and such integration may not be
technologically feasible. Moreover, the focus on possible product integration
efforts may have an adverse effect on the development of new product
offerings.
RELIANCE ON A MAJOR CLIENT RELATIONSHIP
A substantial portion of FormMaker's revenues have been generated from a
marketing agreement with PMSC under which FormMaker (i) provides third-party
processing and software implementation services in the insurance industry,
(ii) has granted PMSC rights to use, execute, copy or license certain
proprietary DAP software, and (iii) has granted PMSC the exclusive right to
market FormMaker's proprietary software in the property/casualty and life
insurance industries. Beginning on January 1, 1998, PMSC can unilaterally
terminate the marketing agreement for any reason whatsoever by providing 90
days prior written notice to FormMaker. Unless renewed or terminated at an
earlier date, the marketing agreement will terminate on December 31, 1999. If
the marketing agreement expires or is terminated, FormMaker will receive no
revenues from new licenses sold through PMSC and maintenance revenues will be
eliminated over a two year period. PMSC has provided notice of termination of
a processing agreement effective June 1998.
NON-EXCLUSIVE PERPETUAL LICENSE
FormMaker has also entered into a license agreement with PMSC under
which FormMaker granted PMSC a non-exclusive, perpetual, royalty-free,
worldwide license to use, execute, copy or license FormMaker's software (and
derivatives thereof) to third parties within the insurance industry and such
other industries in which FormMaker from time to time operates. Therefore,
upon termination of the above-described marketing
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agreement and PMSC's exclusive rights thereunder, PMSC will continue to have
the right to use FormMaker's software and to compete directly with the
Company in the insurance industry. Given that PMSC has financial and other
resources significantly greater than the Company, there can be no assurance
that the Company will be able to withstand competition from PMSC if PMSC
decided to compete directly with the Company.
DEPENDENCE UPON INSURANCE INDUSTRY
The majority of the Company's revenues is derived from the insurance
industry. The Company's future growth and financial performance will depend
in part upon its ability to continue to market its products successfully in
the insurance industry and to enhance and develop technologies for
distribution in markets other than the insurance market. This will require
the Company to make substantial product development and distribution channel
investments. It is uncertain that new products or product enhancements
intended for markets other than the insurance industry will achieve
acceptance.
RAPID TECHNOLOGICAL CHANGE
The document automation industry is characterized by rapid technological
advances, changes in customer requirements, and frequent new product
introductions and enhancements. Such developments will require the Company to
make substantial product development investments. Any failure by the Company
to anticipate or respond adequately to technology developments and customer
requirements or any significant delays in product development or
introduction, could result in a loss of competitiveness or revenue. In
addition, new products or product enhancements intended to respond to
technological change or evolving customer requirements may not achieve
acceptance.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of copyright and trademark laws,
employee and third-party nondisclosure agreements, and other methods to
protect its proprietary rights. Despite these precautions, it may be possible
for unauthorized third parties to copy certain portions of its products or to
obtain and use information that the Company regards as proprietary.
The Company's software products are licensed to end-users on a "right to
use" basis pursuant to a license agreement. Certain license provisions
protecting against unauthorized use, copying, transfer, and disclosure of the
licensed program may be unenforceable under the laws of certain jurisdictions
and foreign countries. In addition, the laws of some foreign countries do not
protect the proprietary rights to the same extent as do the laws of the
United States.
As the number of software products in the industry increases and the
functionality of these products further overlap, the Company believes that
software programs will
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increasingly become subject to infringement claims. Third parties may assert
infringement claims against the Company in the future with respect to current
or future products, which could require the Company to enter into royalty
arrangements or result in costly litigation.
The Company also relies on certain software that it licenses from third
parties, including software that is integrated with internally developed
software and used in its products to perform key functions. These third-party
software licenses may not continue to be available to the Company on
commercially reasonable terms and the related software may not continue to be
appropriately supported, maintained or enhanced by the licensors. The loss of
licenses to, or the inability to support, maintain, and enhance, any of such
software could result in increased costs, delays or reductions in product
shipments until equivalent software could be developed or licensed and
integrated.
RISK OF SOFTWARE DEFECTS
Software products as complex as those offered by the Company can contain
undetected errors or performance problems. Such defects are most frequently
found during the period immediately following introduction of new products or
enhancements to existing products. Despite extensive product testing prior to
introduction, the Company's products have in the past contained software
errors that were discovered after commercial introduction. There may be more
errors or performance problems that will be discovered in the future. Any
future software defects discovered after shipment of the Company's products
could result in loss of revenues or delays in customer acceptance.
ABSENCE OF PUBLIC MARKET
The Company does not currently intend to list its common stock on any
securities exchange or to seek approval for quotation through any automated
quotation system, nor is there any assurance that its common stock will be
eligible for listing on any market. Accordingly, there can be no assurance as
to the development of a trading market for the Company's common stock.
REDEMPTION OF CLASS B COMMON STOCK
The Company, Safeguard Scientifics (Delaware), Inc., a Delaware
corporation ("Safeguard Delaware"), Safeguard Scientifics, Inc., a
Pennsylvania corporation ("Safeguard"), Technology Leaders II L.P., a
Delaware limited partnership ("TL II"), and Technology Leaders II Offshore
C.V., a Netherlands Antilles limited partnership ("TL II Offshore," and
together with Safeguard Delaware and TL II, the "SG/TL Stockholders"), have
entered into a Liquidity Agreement dated January 15, 1997 (the "Liquidity
Agreement") pursuant to which the SG/TL Stockholders have agreed to subscribe
for a number of shares of the Company's Class A common stock at $4.08 per
share equal to the number of shares of the Company's Class B common stock to
be redeemed. If the SG/TL Stockholders do not perform their obligations under
the Liquidity Agreement to purchase an equal number of shares of the
Company's Class A common stock, the Company may be
12
<PAGE>
unable to meet its redemption obligation. If the SG/TL Stockholders do
subscribe for such shares, the SG/TL Stockholders will increase their
ownership and control of the Company. Safeguard Delaware has committed to
subscribe for 74% of the shares to be purchased under the Liquidity
Agreement, while Technology Leaders II and Technology Leaders II Offshore
(collectively "TL") have committed to subscribe for the remaining 26% of the
subscription obligation. Safeguard Delaware is a wholly-owned subsidiary of
Safeguard, a publicly traded company (NYSE symbol SFE). As of December 31,
1996, Safeguard had total assets of $936 million and net equity of $169
million, with revenues of $2.1 billion and net earnings of $20 million for
the year then ended. Safeguard Delaware had total assets and net equity of
$273 million and $249 million, respectively, as of December 31, 1996. TL is a
venture capital fund with total assets of $99 million and partner's capital
of $96 million.
ITEM 2. PROPERTIES
The Company leases approximately 23,000 square feet of office space in
Dallas, Texas for its corporate headquarters, including administrative,
sales, services, and product development. This lease expires April 30, 2005,
but may be terminated by the Company on May 31, 2000.
The Company's facility in Atlanta, Georgia, which is utilized for
administrative, sales, marketing, services, and product development
departments occupies approximately 55,000 square feet of office space. The
lease for this space expires on December 31, 2002.
The Company's print outsourcing facility is located in Atlanta, Georgia.
This facility occupies approximately 19,000 square feet under a lease which
expires on October 31, 2002.
The Company's staff in New Hampshire is located in a 1,700 square foot
facility in Bedford, New Hampshire. The lease for this facility expires on
February 28, 1998. The Company's staff in Maryland is located in Silver
Spring, Maryland. This facility occupies approximately 10,000 square feet
under a lease which expires December 31, 2001.
Office space is also leased in California for a sales office. The
Company believes that its existing office facilities and additional space
available to it are adequate to meet its requirements, and that in any event,
suitable additional or alternative space adequate to serve the Company's
foreseeable needs will be available on commercially reasonable terms.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In August 1992, a customer brought a lawsuit in the District Court of
Galveston County, Texas against Image Sciences, International Business
Machines Corp. ("IBM"), and IBM's sales manager seeking substantial actual
damages and punitive damages relating to the performance of its computer
system. Image Sciences was a subcontractor to an agreement between IBM and
such customer to provide a computer hardware and software system for image
processing, among other functions. The customer also signed a license
agreement with Image Sciences for certain image processing software. A
summary judgment, which was appealed, was granted in favor of Image Sciences
as to certain claims. The Court of Appeals reversed the summary judgment on
the fraud cause of action, but held that the plaintiff waived its claim of
negligence and gross negligence. The Texas Supreme Court denied a review and
the case has been sent back to the trial court. A trial date has been set
for June 1998. Image Sciences continues to deny any liability in this matter.
In December 1995, a former employee and her family filed a lawsuit in
the District Court of Dallas County, Texas against Image Sciences, certain
current and former officers of Image Sciences, IBM, and related parties,
alleging, among other claims, breach of a settlement agreement in a prior
lawsuit. The plaintiffs seek unspecified actual and punitive damages. Each
of the plaintiff's claims, other than the invasion of privacy and intentional
infliction of emotional distress claims, were arbitrated in October 1997.
Image Sciences moved for summary judgment on each of the claims before the
arbitrator and the arbitrator dismissed all claims except breach of
settlement agreement. The breach of settlement claim is pending the
arbitrator's ruling. The invasion of privacy and intentional infliction of
emotional distress claims are set for trial in January 1998.
The Company intends to continue to vigorously contest these claims and
believes that the resolution of such claims will not have a material adverse
effect on its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is not an established public trading market for the Company's
common stock.
As of September 30, 1997, there were approximately 90 holders of record
and beneficial holders of the Company's Class A common stock and 90 holders
of record and beneficial holders of the Company's Class B common stock.
The Company does not anticipate paying any cash dividends in the
foreseeable future. The Company currently intends to retain future earnings
to finance operations and the expansion of its business. Any future
determination to pay cash dividends will be at the discretion of the
Company's Board and will be dependent upon the Company's financial condition,
operating results, capital requirements and such other factors as the
Company's Board deems relevant. Further, the terms of the Company's revolving
credit facility restricts the ability of the Company to pay dividends.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the years ended July 31,
1997, 1996, 1995, 1994, and 1993 have been derived from the audited financial
statements of the Company. The following data should be read in conjunction
with, and are qualified by, reference to the Company's audited financial
statements and the notes thereto, included elsewhere in this Form 10-K.
<TABLE>
Years ended July 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
---------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total revenues $17,503 $11,470 $10,814 $10,874 $9,320
Operating income (loss) ($17,460)* $3,416 $3,158 $3,546 $2,655
Net income (loss) before income taxes ($17,246)* $3,656 $3,186 $3,399 $2,367
Net income (loss) ($16,102)* $2,321 $2,003 $2,169 $1,807
Net income (loss) per share ($3.19)* $0.33 $0.27 $0.29 $0.23
Weighted average number of
shares of common stock and
common stock equivalents 5,042* 7,084 7,478 7,465 7,723
Cash dividend declared for preferred stock $2,808 - 0 - - 0 - - 0 - - 0 -
</TABLE>
* After Merger related charges of $21,378. Without such charges operating
income, net income before income taxes, net income, net income per share, and
weighted average number of shares of common stock and common stock
equivalents would have been $3,918, $4,132, $2,598, $.34, and 7,607,
respectively.
<TABLE>
July 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (IN THOUSANDS)
Total assets $32,698 $14,691 $13,145 $11,572 $9,785
Total debt including obligations
under capital lease $9,439 $46 $1,637 $1,987 $3,158
Redeemable Class B common stock $19,119 - 0 - - 0 - - 0 - - 0 -
</TABLE>
In May 1997 the Company acquired FormMaker. Accordingly, FormMaker's
results of operations have been included in the Company's consolidated
financial data since the acquisition date. See Notes to Consolidated
Financial Statements for further discussion.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The information required by this item is set forth in the Company's 1997
Annual Report to Stockholders, which information is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in the Company's 1997
Annual Report to Stockholders, which information is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to each person
who serves as a director or an executive officer of the Company and their
ages as of October 20, 1997:
NAME AGE POSITION
- ---- --- --------
Milledge A. Hart, III (2) 63 Chairman of the Board
Michael D. Andereck 44 President, Chief Executive Officer and Director
B. Bruce Dale 34 Senior Vice President, Products
Kerry K. LeCrone 51 Senior Vice President, Services
Hsi-Ming Lin 41 Senior Vice President, Research and Development
Todd A. Rognes 34 Senior Vice President, Finance
Sidney B. Landman (1) 51 Director
John D. Loewenberg (2) 56 Director
Warren V. Musser (2) 69 Director
George F. Raymond (1) 60 Director
Arthur R. Spector (1) 56 Director
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Each director will hold office until the next annual meeting of
stockholders of the Company or until his successor has been elected and
qualified. Officers of the Company are elected by the Company's Board and
serve at the Board's discretion.
MILLEDGE A. HART, III was appointed Chairman of the Board of the Company
in May 1997. He served as a member of Image Sciences Board of Directors from
1985 to May 1997. Mr. Hart is founder and currently Chairman of the Board of
Hart Group, Inc., Rmax, Inc., and Axon, Inc. He also serves on the Board of
Directors of Home Depot and the Board of Regents of Southern Methodist
University (SMU). Mr. Hart served as President of Electronic Data Systems
from 1970 until his retirement in 1977.
MICHAEL D. ANDERECK has been President and Chief Executive Officer of
the Company since May 1997. Prior to such time he was President, Chief
Executive Officer and a director of Image Sciences. He joined Image Sciences
as Vice President-Finance in 1983 and was elected to the Board of Directors
and named Treasurer of Image Sciences shortly thereafter. In 1984, Mr.
Andereck assumed the position of President and Chief Executive Officer. From
1975 through 1983, Mr. Andereck was with KPMG Peat Marwick, where he dealt
extensively with initial and recurring registrations with the Securities and
Exchange Commission and attained the position of senior manager. Mr.
Andereck holds a Bachelor of Business Administration degree in Accounting and
Information Sciences from the University of North Texas.
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<PAGE>
B. BRUCE DALE has served as Senior Vice President of Product Development
of the Company since May 1997. He was Vice President of Product Development
of Image Sciences from 1994 through May 1997. Mr. Dale joined Image Sciences
in 1986 as a Client Services Custom Software Developer. Since 1988, Mr. Dale
held several management positions within Client Services, Marketing and
Product Development. In 1992, he was appointed Director of Product Direction.
Prior to joining Image Sciences, Mr. Dale received a Bachelor of Science
degree in Computer Science from Western Kentucky University.
KERRY K. LECRONE became Senior Vice President, Services of the Company
in May 1997. He was Senior Vice President, Technical and Processing Services
of FormMaker from March 1995 through May 1997. Between 1974 and 1990, Mr.
LeCrone served in various capacities for several insurance and financial
service businesses with primarily responsibilities for software development
and operations. In 1990, Mr. LeCrone co-founded Adam Investment Services, a
financial services company that became a leading retail investment management
organization with more than $1.0 billion in assets under management.
HSI-MING LIN was appointed Senior Vice President, Research and
Development of the Company in May 1997. He joined FormMaker in 1987 as
Manager of Development and is credited with developing FormMaker's current
technology. He became Senior Vice President, Research and Development of
FormMaker in January 1994, and in such capacity had responsibility for
designing, developing, and providing programming service. Prior to joining
FormMaker, Mr. Lin held various management and programming positions with
other software and service companies. Mr. Lin received a B.E. in Computer
Science from TamKang University, Taiwan, R.O.C. and a M.S. degree in
Information and Computer Science from Georgia Tech University.
TODD A. ROGNES was appointed Senior Vice President of Finance and
Treasurer of the Company in May 1997. He previously served as Vice President
of Finance and Administration and Treasurer of Image Sciences. Mr. Rognes
joined Image Sciences in 1986 as a Staff Accountant and was appointed
Controller in 1991. He was appointed Vice President of Finance and
Administration in 1994. Prior to joining Image Sciences, Mr. Rognes was a
staff accountant with IBP, Inc. Mr. Rognes holds a Bachelor of Business
Administration degree in Accounting from Iowa State University. Mr. Rognes
is a Certified Public Accountant.
SIDNEY B. LANDMAN was elected as a director of the Company in May 1997.
He is the President and Chief Operating Officer of Xerox Engineering Systems
at Xerox. Mr. Landman was previously the Vice President of Finance for the
Production Systems Group at Xerox (PSG) and before that, he served as Vice
President, Finance and Business Operations for Xerox Corporation's Xerox
Production Systems Division. Before joining Xerox in 1993, he was a senior
financial executive in both Fortune 500 and small company
19
<PAGE>
environments for the past 25 years. He holds a B.A. in Economics and Finance
from the City University of New York, and an MBA in Finance from Loyola
College of Baltimore.
JOHN D. LOEWENBERG became a director of the Company in May 1997. He was
previously Chief Executive Officer and President of FormMaker. Before that
he served as Executive Vice President and Chief Administrative Officer of
Connecticut Mutual, a life insurance company, from May 1995 through March
1996. Prior to joining Connecticut Mutual, Mr. Loewenberg served as Senior
Vice President of Aetna Life and Casualty, a multi-line insurer, and as Chief
Executive Officer of Aetna Information Technology, the information systems
company of Aetna Life and Casualty, from March 1989 to May 1995. Mr.
Loewenberg was Chairman of Precision Systems, Inc. until April 1996 and is
currently a member of the Board of CompuCom Systems, Inc., Diamond Technology
Partners Incorporated, Sanchez Computer Associates, Inc., and Imetrix. He is
also a trustee of several not for profit organizations.
WARREN V. MUSSER was elected as a director of the Company in May 1997.
He has been Chairman of the Board and Chief Executive Officer of Safeguard
since 1953. Mr. Musser is also the Chairman of the Board of Cambridge
Technology Partners (Massachusetts), Inc., a director of Coherent
Communications Systems Corporation and CompuCom, and a trustee of Brandywine
Realty Trust. Mr. Musser also serves on a variety of civic, educational, and
charitable Boards of Directors including the Board of Overseers of The
Wharton School of the University of Pennsylvania and serves as Vice
President/Development, Cradle Liberty Council, Boy Scouts of America, as Vice
Chairman of The Eastern Technology Council, and as Chairman of the
Pennsylvania Council on Economic Education.
GEORGE F. RAYMOND became a director of the Company in July 1997. He is
a private investor and software industry consultant. He is a director of BMC
Software Inc., a Houston based, publicly held software firm. He is also a
director of several privately held software companies. Mr. Raymond founded
Automatic Business Centers, Inc. ("ABC"), a payroll processing company in
1972, and sold the company to CIGNA in 1983. Mr. Raymond and other members
of ABC's management repurchased ABC in 1986 from CIGNA, and sold ABC to
Automatic Data Processing (ADP) in 1989. In 1986, Mr. Raymond was Chairman
of ITAA, the computer software and services trade association.
ARTHUR R. SPECTOR has been a director of the Company since May 1997.
From December 1995 through May 1997, he served as Chairman of the Board and a
director of FormMaker. Since January 1997, Mr. Spector has been a managing
director of TL Ventures LLC, a fund management company organized to manage
the day-to-day operations of TL Ventures III L.P. and TL Ventures III
Offshore L.P., which are recently organized venture capital partnerships
investing in tandem. Mr. Spector has also served as an executive officer of
several of TL Ventures III L.P.'s and TL Venture III Offshore L.P.'s
portfolio companies. From January 1995 through December 1996, Mr. Spector
served as Director of Acquisitions of Safeguard and since November 1994 has
been
20
<PAGE>
Chairman of the Board of USDATA Corporation, a multinational supplier of
applications development tools, distribution management software and
integration devices. He also serves as Chairman of the Board of HDS Network
Systems Inc., a manufacturer of network computers and a provider of desktop
computing services. From July 1992 until May 1995, Mr. Spector served as Vice
Chairman and Secretary of Casino & Credit Services, Inc. From October 1991
to December 1994, Mr. Spector was Chief Executive Officer and a director of
Perpetual Capital Corporation, a merchant banking organization. Mr. Spector
is a graduate of the Wharton School of the University of Pennsylvania.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Audit Committee's duties include engaging and
discharging the Company's independent auditors; reviewing and approving the
engagement of the auditors for audit and non-audit services requested;
reviewing with the independent accountants scope and timing of the audit and
non-audit services; reviewing the completed audit with the independent
accountants regarding their report, the conduct of the audit, accounting
adjustments, recommendations for improving internal accounting and auditing
procedures with the Company's financial staff; and initiating and supervising
any special investigations it deems necessary.
COMPENSATION COMMITTEE. The Compensation Committee's duties include
reviewing executive officer compensation and making recommendations to the
Board regarding same.
COMPLIANCE WITH SECTION 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the
executive officers and directors and persons who own more than 10% of a
registered class of an issuer's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission. This is not applicable to the Company's common stock, which is
not required to be registered under such act.
21
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to
its chief executive officer for services rendered to the Company in all
capacities from commencement of the Company's operations, May 15, 1997,
through the fiscal year ended July 31, 1997. No other executive officer
received renumeration in excess of $100,000 during this period.
SUMMARY COMPENSATION TABLE
<TABLE>
ANNUAL COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION (1)
--------------------------- ------ ----- ----------------
<S> <C> <C> <C>
Michael D. Andereck $46,875 $135,000 $2,447
President and Chief Executive Officer
</TABLE>
(1) Represents contributions to Image Sciences' 401(k) tax-qualified employee
savings and retirement plan.
During the fiscal year ended July 31, 1997 no options were granted to
the Company's chief executive officer. As of July 31, 1997 the Company's
chief executive officer held options to purchase 298,671 shares of the
Company's Class B common stock.
In January 1997, the Company entered into an employment agreement with
Michael D. Andereck providing for a base salary of $225,000 per year. The
employment agreement has an indefinite term and provides that the employee's
salary is to be reviewed annually by the Board of Directors. In addition to
base salary, the agreement allows for discretionary bonuses, participation in
any 401(K) plan and stock option plan maintained by the Company, and other
fringe benefits that the Company maintains for its top-level executives. The
agreement also contains severance provisions which, if triggered, entitle the
employee to monthly severance payments in an amount equal to the employee's
then-current monthly salary for a period of up to 12 months. The severance
payments are triggered by the occurrence of any of the following events:
termination of employment by the Company without cause, termination of
employment by the employee for good reason (which includes a material failure
of the Company to observe or perform any material term of the employment
agreement, the exclusion of the employee from participation in any new
compensation or benefit arrangement offered to similarly situated employees
or a reduction in the employee's level of responsibility, position, authority
or duties), resignation by the employee with 60 days notice, and total
disability. The employment agreement also provides a non-competition
provision prohibiting the employee from competing against the Company while
employed by the Company and for one year following the termination of
employment.
Each of Image Sciences and FormMaker had historically granted options
under stock option plans to its executive officers. Upon the occurrence of
the Merger, outstanding options under these plans were converted into options
to purchase common
22
<PAGE>
stock of the Company and the plans were canceled. At the time of the Merger,
the Company adopted the DocuCorp, Inc. 1997 Equity Compensation Plan. The
Equity Compensation Plan permits the grant of stock options, restricted stock
awards, stock appreciation rights, and performance units to employees,
nonemployees, directors, and key advisors of the Company. Such plan covers
an aggregate of 400,000 shares of Class A common stock and is administered by
the Compensation Committee of the Board of Directors. At July 31, 1997, no
options had been granted under the Plan.
COMPENSATION OF DIRECTORS. In August 1997, directors who are not also
employees of the Company received options to purchase 25,000 to 50,000 shares
of Class A common stock which vest over five years and are exercisable at the
fair market value on the date of grant. Additionally, the Company donates
$5,000 per year on behalf of each director to the charity(s) of his choice.
Directors are reimbursed for out-of-pocket expenses incurred for attendance
at board meetings.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of October 20,
1997, with respect to the beneficial ownership of common stock by each
current director, each nominee for director, each executive officer included
in the Summary Compensation Table, the directors and executive officers as a
group, and each stockholder known to management to own beneficially more than
5% of the common stock. Each of such stockholders has the sole voting and
investment power as to shares shown, unless otherwise noted. For purposes of
the following table, common stock is deemed to include Class A common stock,
Class B common stock, and options and warrants to purchase same.
SHARES BENEFICIALLY OWNED
NAME(1) SHARES(2) PERCENT
------- --------- -------
Safeguard Delaware 2,569,401 24
Xerox 2,259,903 21
Michael D. Andereck(4) 1,455,859 13
Technology Leaders II(3) 1,306,229 12
Milledge A. Hart, III 120,853 1
Arthur R. Spector 102,270 *
John D. Loewenberg 0 *
Warren V. Musser 0 *
Sidney B. Landman 0 *
George F. Raymond 0 *
All Directors, Named Executive Officer, and other
executive officers as a group (11 persons) 2,134,728 20
* Represents less than 1%
23
<PAGE>
(1) The address of Messrs. Andereck, Hart, Loewenberg, and Raymond is c/o
DocuCorp International, 5910 N. Central Expressway, Suite 800, Dallas, TX
75206. The address of Messrs. Spector and Musser and the address of
Safeguard Delaware and Technology Leaders II is c/o Safeguard Scientifics,
Inc., The Safeguard Building, 435 Devon Park Drive, Wayne, PA 19087. The
address of Xerox and Mr. Landman is P.O. Box 1600, Stamford, CT 06904.
Safeguard Delaware is a wholly-owned subsidiary of Safeguard and the
holder of a 4.4% limited partnership interest in Technology Leaders II.
(2) Includes 1,930,178 shares issuable pursuant to outstanding options and
warrants exercisable within 60 days.
(3) Technology Leaders II consists of Technology Leaders II L.P. and
Technology Leaders II Offshore C.V. Technology Leaders II Management L.P.,
a limited partnership, is the sole general partner of Technology Leaders
II L.P. and co-general partner of Technology Leaders II Offshore C.V.
Technology Leaders II L.P. and Technology Leaders II Offshore C.V. are
venture capital funds that are required by their governing documents to
make all investment, voting and disposition actions in tandem. Technology
Leaders II Management L.P. has sole authority and responsibility for all
investment, voting and disposition decisions for Technology Leaders II.
The general partners of Technology Leaders II Management, L.P. are (i)
Technology Leaders Management, Inc., a wholly-owned subsidiary of
Safeguard, (ii) Robert E. Keith, Gary J. Anderson, M.D., Ira M. Lubert and
Mark J. DeNino, and (iii) four other corporations (the "TLA Corporations")
owned by natural persons, one of whom is a director of Safeguard.
Technology Leaders II Management L.P. is managed by an executive
committee, by whose decisions the general partners have agreed to be
bound, which consists of ten voting members including (i) Warren V.
Musser, who is a designee of Technology Leaders Management, Inc., (ii) Mr.
Keith, Dr. Anderson, Mr. Lubert, Mr. DeNino, Christopher Moller, Ph.D.,
individually, and (iii) one designee of each of the TLA Corporations and
(as a non-voting member) Clayton S. Rose. Technology Leaders Management,
Inc. is the administrative manager of Technology Leaders II, subject to
the control and direction of the executive committee of Technology Leaders
II Management L.P. Mr. Keith is a director of Safeguard. Technology
Leaders Management, Inc. holds a 34% general partnership interest in
Technology Leaders II Management L.P.
(4) Includes beneficial ownership, of which 72,230 shares are held in a trust
which is not in Mr. Andereck's control. Mr. Andereck disclaims any
beneficial ownership as to such shares.
24
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company, Safeguard, and the SG/TL Stockholders entered into the
Liquidity Agreement providing that (i) Safeguard will use commercially
reasonable efforts to conduct and consummate an underwritten public offering of
rights to purchase shares of the Company's Class A common stock in which the
managing underwriter values the equity of the Company at $62.1 million or more,
(ii) the SG/TL Stockholders will purchase a certain number of shares of the
Company's Class A common stock if the Company is required to redeem shares of
the Company's Class B common stock, and guarantee an existing line of credit of
FormMaker (as amended), and (iii) the Company granted SG/TL Stockholders
warrants to purchase 610,000 shares of Class A common stock with an exercise
price of $5.00 per share and a term of three years. The SG/TL Stockholders also
received certain warrants to purchase 204,540 shares of the Company's Class A
common stock with an exercise price of $5.10 per share and a term of three
years as a result of its providing certain financing to FormMaker immediately
prior to the Merger.
Concurrently with the Merger, Safeguard, TL II, and TL Ventures Third Corp
loaned FormMaker $3,000,000 in the form of subordinated notes. The notes bear
interest at prime plus 1% and are due in full at the earlier of the closing of
a public offering yielding net proceeds to the Company in excess of $13,000,000
or May 15, 2000. These notes are unsecured obligations of the Company and are
subordinated to all senior debt.
As of October 20, 1997, FormMaker owes Safeguard $217,000 and $200,000
under two term notes. The term notes bear interest at prime plus 1% and are due
in monthly installments through January 1, 2000.
Pursuant to a stockholders agreement the Company's principal stockholders
have agreed to vote their shares in the Company in such a manner as to maintain
the election to the Company's Board of three designees of Xerox (currently
Michael D. Andereck, Milledge A. Hart, III, and Sidney B. Landman), three
designees of the SG/TL Stockholders (currently John D. Lowenberg, Arthur R.
Spector, and Warren V. Musser), and one independent designee (currently George
F. Raymond) mutually agreed upon by the other six.
Pursuant to an agreement between Michael D. Andereck and Xerox, the three
Xerox designees to the Company's Board will consist of a designee of Mr.
Andereck (currently Mr. Andereck), a designee of Xerox (currently Sidney B.
Landman), and a mutually acceptable designee of Xerox and Mr. Andereck
(currently Milledge A. Hart, III).
Pursuant to an agreement by and among the SG/TL Stockholders and Samuel M.
Wilkes (a former officer of the Company) dated January 15, 1997, the SG/TL
Stockholders granted to Mr. Wilkes the right to "tag-along" in any sale of the
Company's common stock by the SG/TL Stockholders.
Image Sciences and Xerox, a stockholder of the Company, entered into a
Cooperative Marketing Agreement in August 1994. Under the terms of the
agreement, Image Sciences and
25
<PAGE>
Xerox agreed to pay each other standard commissions on sales of each others
products resulting from successful referrals. This agreement may be
terminated by either party after 30 days written notice.
All future transactions between the Company and its officers, directors,
and principal stockholders or their affiliates will be on terms no less
favorable to the Company than may be obtained from unrelated third parties, and
any such transactions will be approved by a majority of the disinterested
directors of the Company.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following is a list of the consolidated financial statements which are
included in this Form 10-K or which are incorporated herein by reference.
1. Financial Statements:
Report of Independent Accountants
As of July 31, 1997 and 1996:
- Consolidated Balance Sheets
For the Years Ended July 31, 1997, 1996, and 1995:
- Consolidated Statements of Operations
- Consolidated Statements of Cash Flows
- Consolidated Statements of Changes in Stockholders' Equity
Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
Valuation and Qualifying Accounts
3. Exhibits:
See Exhibit Index beginning on page 31 of this Form 10-K.
(b) Reports on Form 8-K.
None.
27
<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.
DocuCorp, Inc.
- --------------------------------------
(Registrant)
/s/ Michael D. Andereck Date October 28, 1997
- -------------------------------------- ------------------------
Michael D. Andereck
President, Chief Executive Officer and
Director
28
<PAGE>
SIGNATURES (CONT.)
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 and on the dates indicated.
/s/ Michael D. Andereck Date October 28, 1997
- -------------------------------------- ---------------------------
Michael D. Andereck
President, Chief Executive Officer and
Director
(Principal Executive Officer)
/s/ Todd A. Rognes Date October 28, 1997
- -------------------------------------- ---------------------------
Todd A. Rognes
Senior Vice President, Finance
(Principal Financial Officer)
/s/ Milledge A. Hart, III Date October 28, 1997
- -------------------------------------- ---------------------------
Milledge A. Hart, III
Director
/s/ Sidney B. Landman Date October 28, 1997
- -------------------------------------- ---------------------------
Sidney B. Landman
Director
/s/ John D. Loewenberg Date October 28, 1997
- -------------------------------------- ---------------------------
John D. Loewenberg
Director
/s/ Warren V. Musser Date October 28, 1997
- -------------------------------------- ---------------------------
Warren V. Musser
Director
/s/ George F. Raymond Date October 28, 1997
- -------------------------------------- ---------------------------
George F. Raymond
Director
Date October 28, 1997
- -------------------------------------- ---------------------------
Arthur R. Spector
Director
29
<PAGE>
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JULY 31, 1997, 1996, AND 1995
SCHEDULE II
<TABLE>
Additions
------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
(a) (a)(b)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Allowance for doubtful accounts $350,000 $ 363,556 $(188,556) $0 $ 525,000
Valuation allowance against
deferred tax assets $ 0 $1,392,817 $ 0 $0 $1,392,817
1996
Allowance for doubtful accounts $325,000 $ 350,131 $(325,131) $0 $ 350,000
1995
Allowance for doubtful accounts $325,000 $ 271,447 $(271,447) $0 $ 325,000
</TABLE>
(a) Such amounts include balances assumed in the acquisition of FormMaker.
See Notes to Consolidated Financial Statements for further discussion.
(b) Such amounts relate to the utilization of the valuation and qualifying
accounts to specific items for which they were established in the accounts
receivable accounts.
30
<PAGE>
INDEX TO EXHIBITS
<TABLE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 Certificate of Incorporation. (filed as exhibit 3.1 to the Company's
Registration Statement on Form S-4 No. 333-22225 and incorporated herein
by reference)
3.2 Bylaws. (filed as exhibit 3.2 to the Company's Registration Statement on
Form S-4 No. 333-22225 and incorporated herein by reference)
10.1 Marketing Agreement between FormMaker Software, Inc. and Policy
Management Systems Corporation effective January 1, 1997. (filed as
exhibit 10.1 to the Company's Registration Statement on Form S-4 No.
333-22225 and incorporated herein by reference)
10.2 Cooperative Marketing Agreement between Image Sciences Inc. and Xerox
Corporation August 16, 1994. (filed as exhibit 10.2 to the Company's
Registration Statement on Form S-4 No. 333-22225 and incorporated herein
by reference)
10.3 Liquidity Agreement among the Registrant, Safeguard Scientifics
(Delaware), Inc., Safeguard Scientifics, Inc., Technology Leaders II,
L.P., and Technology Leaders II Offshore C.V. dated January 15, 1997.
(filed as exhibit 10.3 to the Company's Registration Statement on Form S-4
No. 333-22225 and incorporated herein by reference)
10.4 Voting and Lockup Agreement among Xerox Corporation, Michael D.
Andereck, Safeguard Scientifics (Delaware), Inc., Safeguard Scientifics,
Inc., Technology Leaders II, L.P., Technology Leaders II Offshore C.V.,
Joe Rose, Samuel M. Wilkes, and Arthur R. Spector dated January 15,
1997. (filed as exhibit 10.4 to the Company's Registration Statement on
Form S-4 No. 333-22225 and incorporated herein by reference)
10.5 Form of Stockholders Agreement. (filed as exhibit 10.5 to the Company's
Registration Statement on Form S-4 No. 333-22225 and incorporated herein
by reference)
10.6 Director Designation Agreement between Michael D. Andereck and Xerox
Corporation dated January 15, 1997. (filed as exhibit 10.6 to the
Company's Registration Statement on Form S-4 No. 333-22225 and
incorporated herein by reference)
10.7 Employment Agreement between Michael D. Andereck and the Registrant
dated January 15, 1997. (filed as exhibit 10.8 to the Company's
Registration Statement on Form S-4 No. 333-22225 and incorporated herein
by reference)
10.8 Employment Agreement between Samuel M. Wilkes and the Registrant dated
January 15, 1997. (filed as exhibit 10.9 to the Company's Registration
Statement on Form S-4 No. 333-22225 and incorporated herein by
reference)
10.9 Credit Agreement between FormMaker Software, Inc. and NationsBank of
Georgia, National Association dated as of December 20, 1995. (filed as
exhibit 10.10 to the Company's Registration Statement on Form S-4
No. 333-22225 and incorporated herein by reference)
10.10 License Agreement between FormMaker Software, Inc. and Policy
Management Systems Corporation effective October 29, 1993. (filed as
exhibit 10.11 to the Company's Registration Statement on Form S-4 No.
333-22225 and incorporated herein by reference)
10.11 Addendum No. 1 to the License Agreement between FormMaker Software,
Inc. and Policy Management Systems Corporation effective January 1,
1997. (filed as exhibit 10.12 to the Company's Registration Statement on
Form S-4 No. 333-22225 and incorporated herein by reference)
10.12* 1997 Equity Compensation Plan.
11.1* Statement regarding Computation of Per Share Earnings.
31
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
EXHIBIT NO. DESCRIPTION
13.1* 1997 Annual Report to Stockholders. (for EDGAR filing purposes only)
21.1* Subsidiaries of the Registrant.
27.1* Financial Data Schedule. (for EDGAR filing purposes only)
</TABLE>
- ----------------------
* Filed herewith.
32
<PAGE>
DOCUCORP, INC.
1997 EQUITY COMPENSATION PLAN
The purpose of the DocuCorp, Inc. 1997 Equity Compensation Plan (the
"Plan") is to provide (i) designated employees of DocuCorp, Inc. (the
"Company") and its subsidiaries, (ii) certain consultants and advisors who
perform services for the Company or its subsidiaries and (iii) non-employee
members of the Board of Directors of the Company (the "Board") with the
opportunity to receive grants of incentive stock options, nonqualified stock
options, stock appreciation rights, restricted stock and performance units.
The Company believes that the Plan will encourage the participants to
contribute materially to the growth of the Company, thereby benefitting the
Company's shareholders, and will align the economic interests of the
participants with those of the shareholders.
1. ADMINISTRATION
(a) COMMITTEE. The Plan shall be administered and interpreted by a
committee appointed by the Board (the "Committee"). Prior to the effective
date of an initial public offering of the Company's stock as described in
Section 21(b) (a "Public Offering"), the Board may exercise any power or
authority of the Committee under the Plan and, in such case, references to
the Committee hereunder, as they relate to Plan administration, shall be
deemed to include the Board as a whole. After a Public Offering, the
Committee shall consist of two or more persons appointed by the Board, all of
whom shall be "outside directors" as defined under section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code") and related Treasury
regulations and may be "non-employee directors" as defined under Rule 16b-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
However, notwithstanding anything in the Plan to the contrary, the Board must
ratify or approve any grants made to Non-Employee Directors. References in
the Plan to the "Committee" shall be deemed to include the Board, with
respect to ratification or approval of grants made to Non-Employee Directors.
(b) COMMITTEE AUTHORITY. The Committee shall have the sole authority to
(i) determine the individuals to whom grants shall be made under the Plan,
(ii) determine the type, size and terms of the grants to be made to each such
individual, (iii) determine the time when the grants will be made and the
duration of any applicable exercise or restriction period, including the
criteria for exercisability and the acceleration of exercisability and (iv)
deal with any other matters arising under the Plan.
(c) COMMITTEE DETERMINATIONS. The Committee shall have full power and
authority to administer and interpret the Plan, to make factual
determinations and to adopt or amend such rules,
<PAGE>
regulations, agreements and instruments for implementing the Plan and for the
conduct of its business as it deems necessary or advisable, in its sole
discretion. The Committee's interpretations of the Plan and all
determinations made by the Committee pursuant to the powers vested in it
hereunder shall be conclusive and binding on all persons having any interest
in the Plan or in any awards granted hereunder. All powers of the Committee
shall be executed in its sole discretion, in the best interest of the
Company, not as a fiduciary, and in keeping with the objectives of the Plan
and need not be uniform as to similarly situated individuals.
2. GRANTS
Awards under the Plan may consist of grants of incentive stock options as
described in Section 5 ("Incentive Stock Options"), nonqualified stock
options as described in Section 5 ("Nonqualified Stock Options") (Incentive
Stock Options and Nonqualified Stock Options are collectively referred to as
"Options"), restricted stock as described in Section 6 ("Restricted Stock"),
stock appreciation rights as described in Section 7 ("SARs"), and performance
units as described in Section 8 ("Performance Units") (hereinafter
collectively referred to as "Grants"). All Grants shall be subject to the
terms and conditions set forth herein and to such other terms and conditions
consistent with this Plan as the Committee deems appropriate and as are
specified in writing by the Committee to the individual in a grant instrument
(the "Grant Instrument") or an amendment to the Grant Instrument. The
Committee shall approve the form and provisions of each Grant Instrument.
Grants under a particular Section of the Plan need not be uniform as among
the grantees.
3. SHARES SUBJECT TO THE PLAN
(a) SHARES AUTHORIZED. Subject to the adjustment specified below, the
aggregate number of shares of Class A common stock of the Company ("Company
Stock") that may be issued or transferred under the Plan is 400,000 shares.
After a Public Offering, the maximum aggregate number of shares of Company
Stock that shall be subject to Grants made under the Plan to any individual
during any calendar year shall be 200,000 shares. The shares may be
authorized but unissued shares of Company Stock or reacquired shares of
Company Stock, including shares purchased by the Company on the open market
for purposes of the Plan. If and to the extent Options granted under the
Plan terminate, expire, or are canceled, forfeited, exchanged or surrendered
without having been exercised or if any shares of Restricted Stock or
Performance Units are forfeited, the shares subject to such Grants shall
again be available for purposes of the Plan.
(b) ADJUSTMENTS. If there is any change in the number or kind of shares
of Company Stock outstanding (i) by reason of a stock dividend, spinoff,
recapitalization, stock split, or combination or exchange of shares, (ii) by
reason of a merger, reorganization or consolidation in which the Company is
the surviving corporation, (iii) by reason of a reclassification or change in
par value, or (iv) by reason of any other extraordinary or unusual event
affecting the outstanding Company Stock as a class without the Company's
receipt of consideration, or if the value of outstanding shares of Company
Stock is substantially reduced as a result of a spinoff or the Company's
payment of an extraordinary dividend or distribution, the maximum number of
shares
-2-
<PAGE>
of Company Stock available for Grants, the maximum number of shares of
Company Stock that any individual participating in the Plan may be granted in
any year, the number of shares covered by outstanding Grants, the kind of
shares issued under the Plan, and the price per share or the applicable
market value of such Grants may be appropriately adjusted by the Committee to
reflect any increase or decrease in the number of, or change in the kind or
value of, issued shares of Company Stock to preclude, to the extent
practicable, the enlargement or dilution of rights and benefits under such
Grants; provided, however, that any fractional shares resulting from such
adjustment shall be eliminated. Any adjustments determined by the Committee
shall be final, binding and conclusive.
4. ELIGIBILITY FOR PARTICIPATION
(a) ELIGIBLE PERSONS. All employees of the Company and its subsidiaries
("Employees"), including Employees who are officers or members of the Board,
and members of the Board who are not Employees ("Non-Employee Directors")
shall be eligible to participate in the Plan. Consultants and advisors who
perform services to the Company or any of its subsidiaries ("Key Advisors")
shall be eligible to participate in the Plan if the Key Advisors render bona
fide services and such services are not in connection with the offer or sale
of securities in a capital-raising transaction.
(b) SELECTION OF GRANTEES. The Committee shall select the Employees,
Non-Employee Directors and Key Advisors to receive Grants and shall determine
the number of shares of Company Stock subject to a particular Grant in such
manner as the Committee determines. Employees, Key Advisors and Non-Employee
Directors who receive Grants under this Plan shall hereinafter be referred to
as "Grantees".
5. GRANTING OF OPTIONS
(a) NUMBER OF SHARES. The Committee shall determine the number of
shares of Company Stock that will be subject to each Grant of Options to
Employees, Non-Employee Directors and Key Advisors.
(b) TYPE OF OPTION AND PRICE.
(i) The Committee may grant Incentive Stock Options that are
intended to qualify as "incentive stock options" within the meaning of
section 422 of the Code or Nonqualified Stock Options that are not intended
so to qualify or any combination of Incentive Stock Options and Nonqualified
Stock Options, all in accordance with the terms and conditions set forth
herein. Incentive Stock Options may be granted only to Employees.
Nonqualified Stock Options may be granted to Employees, Non-Employee
Directors and Key Advisors.
(ii) The purchase price (the "Exercise Price") of Company Stock
subject to an Option shall be determined by the Committee and may be equal
to, greater than, or less than the Fair Market Value (as defined below) of a
share of Company Stock on the date the Option is granted;
-3-
<PAGE>
provided, however, that (x) the Exercise Price of an Incentive Stock Option
shall be equal to, or greater than, the Fair Market Value of a share of
Company Stock on the date the Incentive Stock Option is granted and (y) an
Incentive Stock Option may not be granted to an Employee who, at the time of
grant, owns stock possessing more than 10 percent of the total combined
voting power of all classes of stock of the Company or any parent or
subsidiary of the Company, unless the Exercise Price per share is not less
than 110% of the Fair Market Value of Company Stock on the date of grant.
(iii) If the Company Stock is publicly traded, then the Fair Market
Value per share shall be determined as follows: (x) if the principal trading
market for the Company Stock is a national securities exchange or the Nasdaq
National Market, the last reported sale price thereof on the relevant date or
(if there were no trades on that date) the latest preceding date upon which a
sale was reported, or (y) if the Company Stock is not principally traded on
such exchange or market, the mean between the last reported "bid" and "asked"
prices of Company Stock on the relevant date, as reported on Nasdaq or, if
not so reported, as reported by the National Daily Quotation Bureau, Inc. or
as reported in a customary financial reporting service, as applicable and as
the Committee determines. If the Company Stock is not publicly traded or, if
publicly traded, is not subject to reported transactions or "bid" or "asked"
quotations as set forth above, the Fair Market Value per share shall be as
determined by the Committee.
(c) OPTION TERM. The Committee shall determine the term of each Option.
The term of any Option shall not exceed ten years from the date of grant.
However, an Incentive Stock Option that is granted to an Employee who, at the
time of grant, owns stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the Company, or any parent
or subsidiary of the Company, may not have a term that exceeds five years
from the date of grant.
(d) EXERCISABILITY OF OPTIONS. Options shall become exercisable in
accordance with such terms and conditions, consistent with the Plan, as may
be determined by the Committee and specified in the Grant Instrument or an
amendment to the Grant Instrument. The Committee may accelerate the
exercisability of any or all outstanding Options at any time for any reason.
(e) TERMINATION OF EMPLOYMENT, DISABILITY OR DEATH.
(i) Except as provided below, an Option may only be exercised while
the Grantee is employed by the Company as an Employee, Key Advisor or member
of the Board. In the event that a Grantee ceases to be employed by the
Company for any reason other than a "disability" or death, any Option which
is otherwise exercisable by the Grantee shall terminate unless exercised
within 90 days after the date on which the Grantee ceases to be employed by
the Company (or within such other period of time as may be specified by the
Committee), but in any event no later than the date of expiration of the
Option term. Any of the Grantee's Options that are not otherwise exercisable
as of the date on which the Grantee ceases to be employed by the Company
shall terminate as of such date.
-4-
<PAGE>
(ii) In the event the Grantee ceases to be employed by the Company
because the Grantee is "disabled", any Option which is otherwise exercisable
by the Grantee shall terminate unless exercised within one year after the
date on which the Grantee ceases to be employed by the Company (or within
such other period of time as may be specified by the Committee), but in any
event no later than the date of expiration of the Option term. Any of the
Grantee's Options which are not otherwise exercisable as of the date on which
the Grantee ceases to be employed by the Company shall terminate as of such
date.
(iii) If the Grantee dies while employed by the Company or within 90
days after the date on which the Grantee ceases to be employed on account of
a termination of employment specified in Section 5(e)(i) above (or within
such other period of time as may be specified by the Committee), any Option
that is otherwise exercisable by the Grantee shall terminate unless exercised
within one year after the date on which the Grantee ceases to be employed by
the Company (or within such other period of time as may be specified by the
Committee), but in any event no later than the date of expiration of the
Option term. Any of the Grantee's Options that are not otherwise exercisable
as of the date on which the Grantee ceases to be employed by the Company
shall terminate as of such date.
(iv) For purposes of this Section 5(e) and Sections 6, 7 and 8:
(A) The term "Company" shall mean the Company and its parent and
subsidiary corporations.
(B) "Employed by the Company" shall mean employment or service as an
Employee, Key Advisor or member of the Board (so that, for purposes of
exercising Options and SARs and satisfying conditions with respect to
Restricted Stock and Performance Units, a Grantee shall not be considered
to have terminated employment or service until the Grantee ceases to be an
Employee, Key Advisor and member of the Board), unless the Committee
determines otherwise.
(C) "Disability" shall mean a Grantee's becoming disabled within the
meaning of section 22(e)(3) of the Code.
(f) EXERCISE OF OPTIONS. A Grantee may exercise an Option that has
become exercisable, in whole or in part, by delivering a notice of exercise
to the Company with payment of the Exercise Price. The Grantee shall pay the
Exercise Price for an Option as specified by the Committee (x) in cash, (y)
with the approval of the Committee, by delivering shares of Company Stock
owned by the Grantee (including Company Stock acquired in connection with the
exercise of an Option, subject to such restrictions as the Committee deems
appropriate) and having a Fair Market Value on the date of exercise equal to
the Exercise Price or (z) by such other method as the Committee may approve,
including after a Public Offering payment through a broker in accordance with
procedures permitted by Regulation T of the Federal Reserve Board. Shares of
Company Stock used to exercise an Option shall have been held by the Grantee
for the requisite period of time to avoid adverse accounting
-5-
<PAGE>
consequences to the Company with respect to the Option. The Grantee shall
pay the Exercise Price and the amount of any withholding tax due (pursuant to
Section 10) at the time of exercise.
(g) LIMITS ON INCENTIVE STOCK OPTIONS. Each Incentive Stock Option
shall provide that, if the aggregate Fair Market Value of the stock on the
date of the grant with respect to which Incentive Stock Options are
exercisable for the first time by a Grantee during any calendar year, under
the Plan or any other stock option plan of the Company or a parent or
subsidiary, exceeds $100,000, then the option, as to the excess, shall be
treated as a Nonqualified Stock Option. An Incentive Stock Option shall not
be granted to any person who is not an Employee of the Company or a parent or
subsidiary (within the meaning of section 424(f) of the Code).
6. RESTRICTED STOCK GRANTS
The Committee may issue or transfer shares of Company Stock to an
Employee, Non-Employee Director or Key Advisor under a Grant of Restricted
Stock, upon such terms as the Committee deems appropriate. The following
provisions are applicable to Restricted Stock:
(a) GENERAL REQUIREMENTS. Shares of Company Stock issued or transferred
pursuant to Restricted Stock Grants may be issued or transferred for
consideration or for no consideration, as determined by the Committee. The
Committee may establish conditions under which restrictions on shares of
Restricted Stock shall lapse over a period of time or according to such other
criteria as the Committee deems appropriate. The period of time during which
the Restricted Stock will remain subject to restrictions will be designated
in the Grant Instrument as the "Restriction Period."
(b) NUMBER OF SHARES. The Committee shall determine the number of
shares of Company Stock to be issued or transferred pursuant to a Restricted
Stock Grant and the restrictions applicable to such shares.
(c) REQUIREMENT OF EMPLOYMENT. If the Grantee ceases to be employed by
the Company (as defined in Section 5(e)) during a period designated in the
Grant Instrument as the Restriction Period, or if other specified conditions
are not met, the Restricted Stock Grant shall terminate as to all shares
covered by the Grant as to which the restrictions have not lapsed, and those
shares of Company Stock must be immediately returned to the Company. The
Committee may, however, provide for complete or partial exceptions to this
requirement as it deems appropriate.
(d) RESTRICTIONS ON TRANSFER AND LEGEND ON STOCK CERTIFICATE. During
the Restriction Period, a Grantee may not sell, assign, transfer, pledge or
otherwise dispose of the shares of Restricted Stock except to a Successor
Grantee under Section 11(a). Each certificate for a share of Restricted
Stock shall contain a legend giving appropriate notice of the restrictions in
the Grant. The Grantee shall be entitled to have the legend removed from the
stock certificate covering the shares subject to restrictions when all
restrictions on such shares have lapsed. The Committee may determine that
the Company will not issue certificates for shares of Restricted Stock until
all
-6-
<PAGE>
restrictions on such shares have lapsed, or that the Company will retain
possession of certificates for shares of Restricted Stock until all
restrictions on such shares have lapsed.
(e) RIGHT TO VOTE AND TO RECEIVE DIVIDENDS. Unless the Committee
determines otherwise, during the Restriction Period, the Grantee shall have
the right to vote shares of Restricted Stock and to receive any dividends or
other distributions paid on such shares, subject to any restrictions deemed
appropriate by the Committee.
(f) LAPSE OF RESTRICTIONS. All restrictions imposed on Restricted Stock
shall lapse upon the expiration of the applicable Restriction Period and the
satisfaction of all conditions imposed by the Committee. The Committee may
determine, as to any or all Restricted Stock Grants, that the restrictions
shall lapse without regard to any Restriction Period.
7. STOCK APPRECIATION RIGHTS
(a) GENERAL REQUIREMENTS. The Committee may grant stock appreciation
rights ("SARs") to an Employee, Non-Employee Director or Key Advisor
separately or in tandem with any Option (for all or a portion of the
applicable Option). Tandem SARs may be granted either at the time the Option
is granted or at any time thereafter while the Option remains outstanding;
provided, however, that, in the case of an Incentive Stock Option, SARs may
be granted only at the time of the Grant of the Incentive Stock Option. The
Committee shall establish the base amount of the SAR at the time the SAR is
granted. Unless the Committee determines otherwise, the base amount of each
SAR shall be equal to the per share Exercise Price of the related Option or,
if there is no related Option, the Fair Market Value of a share of Company
Stock as of the date of Grant of the SAR.
(b) TANDEM SARS. In the case of tandem SARs, the number of SARs granted
to a Grantee that shall be exercisable during a specified period shall not
exceed the number of shares of Company Stock that the Grantee may purchase
upon the exercise of the related Option during such period. Upon the
exercise of an Option, the SARs relating to the Company Stock covered by such
Option shall terminate. Upon the exercise of SARs, the related Option shall
terminate to the extent of an equal number of shares of Company Stock.
(c) EXERCISABILITY. An SAR shall be exercisable during the period
specified by the Committee in the Grant Instrument and shall be subject to
such vesting and other restrictions as may be specified in the Grant
Instrument. The Committee may accelerate the exercisability of any or all
outstanding SARs at any time for any reason. SARs may only be exercised
while the Grantee is employed by the Company or during the applicable period
after termination of employment as described in Section 5(e). A tandem SAR
shall be exercisable only during the period when the Option to which it is
related is also exercisable.
(d) VALUE OF SARS. When a Grantee exercises SARs, the Grantee shall
receive in settlement of such SARs an amount equal to the value of the stock
appreciation for the number of SARs exercised, payable in cash, Company Stock
or a combination thereof. The stock appreciation
-7-
<PAGE>
for an SAR is the amount by which the Fair Market Value of the underlying
Company Stock on the date of exercise of the SAR exceeds the base amount of
the SAR as described in Subsection (a).
(e) FORM OF PAYMENT. The Committee shall determine whether the
appreciation in an SAR shall be paid in the form of cash, shares of Company
Stock, or a combination of the two, in such proportion as the Committee deems
appropriate. For purposes of calculating the number of shares of Company
Stock to be received, shares of Company Stock shall be valued at their Fair
Market Value on the date of exercise of the SAR. If shares of Company Stock
are to be received upon exercise of an SAR, cash shall be delivered in lieu
of any fractional share.
8. PERFORMANCE UNITS
(a) GENERAL REQUIREMENTS. The Committee may grant performance units
("Performance Units") to an Employee or Key Advisor. Each Performance Unit
shall represent the right of the Grantee to receive an amount based on the
value of the Performance Unit, if performance goals established by the
Committee are met. A Performance Unit shall be based on the Fair Market
Value of a share of Company Stock or on such other measurement base as the
Committee deems appropriate. The Committee shall determine the number of
Performance Units to be granted and the requirements applicable to such
Units.
(b) PERFORMANCE PERIOD AND PERFORMANCE GOALS. When Performance Units
are granted, the Committee shall establish the performance period during
which performance shall be measured (the "Performance Period"), performance
goals applicable to the Units ("Performance Goals") and such other conditions
of the Grant as the Committee deems appropriate. Performance Goals may
relate to the financial performance of the Company or its operating units,
the performance of Company Stock, individual performance, or such other
criteria as the Committee deems appropriate.
(c) PAYMENT WITH RESPECT TO PERFORMANCE UNITS. At the end of each
Performance Period, the Committee shall determine to what extent the
Performance Goals and other conditions of the Performance Units are met and
the amount, if any, to be paid with respect to the Performance Units.
Payments with respect to Performance Units shall be made in cash, in Company
Stock, or in a combination of the two, as determined by the Committee.
(d) REQUIREMENT OF EMPLOYMENT. If the Grantee ceases to be employed by
the Company (as defined in Section 5(e)) during a Performance Period, or if
other conditions established by the Committee are not met, the Grantee's
Performance Units shall be forfeited. The Committee may, however, provide
for complete or partial exceptions to this requirement as it deems
appropriate.
9. QUALIFIED PERFORMANCE-BASED COMPENSATION.
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<PAGE>
(a) DESIGNATION AS QUALIFIED PERFORMANCE-BASED COMPENSATION. After a
Public Offering, the Committee may determine that Performance Units or
Restricted Stock granted to an Employee shall be considered "qualified
performance-based compensation" under Section 162(m) of the Code. The
provisions of this Section 9 shall apply to Grants of Performance Units and
Restricted Stock that are to be considered "qualified performance-based
compensation" under Section 162(m) of the Code.
(b) PERFORMANCE GOALS. When Performance Units or Restricted Stock that
are to be considered "qualified performance-based compensation" are granted,
the Committee shall establish in writing (i) the objective performance goals
that must be met in order for restrictions on the Restricted Stock to lapse
or amounts to be paid under the Performance Units, (ii) the Performance
Period during which the performance goals must be met, (iii) the threshold,
target and maximum amounts that may be paid if the performance goals are met,
and (iv) any other conditions, including without limitation provisions
relating to death, disability, other termination of employment or Change of
Control, that the Committee deems appropriate and consistent with the Plan
and Section 162(m) of the Code. The performance goals may relate to the
Employee's business unit or the performance of the Company and its
subsidiaries as a whole, or any combination of the foregoing. The Committee
shall use objectively determinable performance goals based on one or more of
the following criteria: stock price, earnings per share, net earnings,
operating earnings, return on assets, shareholder return, return on equity,
growth in assets, unit volume, sales, market share, or strategic business
criteria consisting of one or more objectives based on meeting specified
revenue goals, market penetration goals, geographic business expansion goals,
cost targets or goals relating to acquisitions or divestitures.
(c) ESTABLISHMENT OF GOALS. The Committee shall establish the
performance goals in writing either before the beginning of the Performance
Period or during a period ending no later than the earlier of (i) 90 days
after the beginning of the Performance Period or (ii) the date on which 25%
of the Performance Period has been completed, or such other date as may be
required or permitted under applicable regulations under Section 162(m) of
the Code. The performance goals shall satisfy the requirements for
"qualified performance-based compensation," including the requirement that
the achievement of the goals be substantially uncertain at the time they are
established and that the goals be established in such a way that a third
party with knowledge of the relevant facts could determine whether and to
what extent the performance goals have been met. The Committee shall not
have discretion to increase the amount of compensation that is payable upon
achievement of the designated performance goals.
(d) MAXIMUM PAYMENT. If Restricted Stock, or Performance Units measured
with respect to the fair market value of Company Stock, are granted, not more
than 200,000 shares of Company Stock may be granted to an Employee under the
Performance Units or Restricted Stock for any Performance Period. If
Performance Units are measured with respect to other criteria, the maximum
amount that may be paid to an Employee with respect to a Performance Period
is $500,000.
(e) ANNOUNCEMENT OF GRANTS. The Committee shall certify and announce
the results for each Performance Period to all Grantees immediately following
the announcement of the Company's
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<PAGE>
financial results for the Performance Period. If and to the extent that the
Committee does not certify that the performance goals have been met, the
grants of Restricted Stock or Performance Units for the Performance Period
shall be forfeited.
10. WITHHOLDING OF TAXES
(a) REQUIRED WITHHOLDING. All Grants under the Plan shall be subject to
applicable federal (including FICA), state and local tax withholding
requirements. The Company shall have the right to deduct from all Grants
paid in cash, or from other wages paid to the Grantee, any federal, state or
local taxes required by law to be withheld with respect to such Grants. In
the case of Options and other Grants paid in Company Stock, the Company may
require the Grantee or other person receiving such shares to pay to the
Company the amount of any such taxes that the Company is required to withhold
with respect to such Grants, or the Company may deduct from other wages paid
by the Company the amount of any withholding taxes due with respect to such
Grants.
(b) ELECTION TO WITHHOLD SHARES. If the Committee so permits, a Grantee
may elect to satisfy the Company's income tax withholding obligation with
respect to an Option, SAR, Restricted Stock or Performance Units paid in
Company Stock by having shares withheld up to an amount that does not exceed
the Grantee's applicable marginal tax rate for federal (including FICA),
state and local tax liabilities. The election must be in a form and manner
prescribed by the Committee and shall be subject to the prior approval of the
Committee.
11. TRANSFERABILITY OF GRANTS
(a) NONTRANSFERABILITY OF GRANTS. Except as provided below, only the
Grantee may exercise rights under a Grant during the Grantee's lifetime. A
Grantee may not transfer those rights except by will or by the laws of
descent and distribution or, with respect to Grants other than Incentive
Stock Options, if permitted in any specific case by the Committee, pursuant
to a domestic relations order (as defined under the Code or Title I of the
Employee Retirement Income Security Act of 1974, as amended, or the
regulations thereunder). When a Grantee dies, the personal representative or
other person entitled to succeed to the rights of the Grantee ("Successor
Grantee") may exercise such rights. A Successor Grantee must furnish proof
satisfactory to the Company of his or her right to receive the Grant under
the Grantee's will or under the applicable laws of descent and distribution.
(b) TRANSFER OF NONQUALIFIED STOCK OPTIONS. Notwithstanding the
foregoing, the Committee may provide, in a Grant Instrument, that a Grantee
may transfer Nonqualified Stock Options to family members or other persons or
entities according to such terms as the Committee may determine; provided
that the Grantee receives no consideration for the transfer of an Option and
the transferred Option shall continue to be subject to the same terms and
conditions as were applicable to the Option immediately before the transfer.
12. RIGHT OF FIRST REFUSAL
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<PAGE>
(a) OFFER. Prior to a Public Offering, if at any time an individual
desires to sell, encumber, or otherwise dispose of shares of Company Stock
distributed to him under this Plan, the individual shall first offer the
shares to the Company by giving the Company written notice disclosing: (a)
the name of the proposed transferee of the Company Stock; (b) the certificate
number and number of shares of Company Stock proposed to be transferred or
encumbered; (c) the proposed price; (d) all other terms of the proposed
transfer; and (e) a written copy of the proposed offer. Within 60 days after
receipt of such notice, the Company shall have the option to purchase all or
part of such Company Stock at the then current Fair Market Value (as defined
in Section 5(b)) and may pay such price in installments over a period not to
exceed four years, at the discretion of the Committee.
(b) SALE. In the event the Company (or a shareholder, as described
below) does not exercise the option to purchase Company Stock, as provided
above, the individual shall have the right to sell, encumber, or otherwise
dispose of his shares of Company Stock on the terms of the transfer set forth
in the written notice to the Company, provided such transfer is effected
within 15 days after the expiration of the option period. If the transfer is
not effected within such period, the Company must again be given an option to
purchase, as provided above.
(c) PASS THROUGH OF RIGHTS. The Board, in its sole discretion, may
waive the Company's right of first refusal pursuant to this Section 12. If
the Company's right of first refusal or repurchase right is so waived, the
Board may, in its sole discretion, pass through such right to the remaining
shareholders of the Company in the same proportion that each shareholder's
stock ownership bears to the stock ownership of all the shareholders of the
Company, as determined by the Board. To the extent that a shareholder has
been given such right and does not purchase his or her allotment, the other
shareholders shall have the right to purchase such allotment on the same
basis.
(d) PUBLIC OFFERING. On and after a Public Offering, the Company shall
have no further right to purchase shares of Company Stock under this Section
12, and its limitations shall be null and void.
(e) SHAREHOLDER'S AGREEMENT. Notwithstanding the foregoing, the
Committee may require that a Grantee execute a shareholder's agreement, with
such terms as the Committee deems appropriate, with respect to any Company
Stock distributed pursuant to this Plan, in which case the provisions of this
Section 12 shall not apply to such Company Stock.
13. CHANGE OF CONTROL OF THE COMPANY
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<PAGE>
As used herein, a "Change of Control" shall be deemed to have occurred if:
(a) Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) (other than the following persons: Michael D. Andereck,
Xerox Corporation, Safeguard Delaware and Technology Leaders II) becomes a
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 51% or more
of the voting power of the then outstanding securities of the Company; or
(b) The shareholders of the Company approve (or, if shareholder approval
is not required, the Board approves) an agreement providing for (i) the
merger or consolidation of the Company with another corporation where the
shareholders of the Company, immediately prior to the merger or
consolidation, will not beneficially own, immediately after the merger or
consolidation, shares entitling such shareholders to 51% or more of all votes
to which all shareholders of the surviving corporation would be entitled in
the election of directors (without consideration of the rights of any class
of stock to elect directors by a separate class vote), (ii) the sale or other
disposition of all or substantially all of the assets of the Company, or
(iii) a liquidation or dissolution of the Company.
14. CONSEQUENCES OF A CHANGE OF CONTROL
(a) NOTICE AND ACCELERATION. Upon a Change of Control, unless the
Committee determines otherwise, (i) the Company shall provide each Grantee
with outstanding Grants written notice of such Change of Control, (ii) all
outstanding Options and SARs shall automatically accelerate and become fully
exercisable, (iii) the restrictions and conditions on all outstanding
Restricted Stock shall immediately lapse, and (iv) Grantees holding
Performance Units shall receive a payment in settlement of such Performance
Units, in an amount determined by the Committee, based on the Grantee's
target payment for the Performance Period and the portion of the Performance
Period that precedes the Change of Control.
(b) ASSUMPTION OF GRANTS. Upon a Change of Control where the Company is
not the surviving corporation (or survives only as a subsidiary of another
corporation), unless the Committee determines otherwise, all outstanding
Options and SARs that are not exercised shall be assumed by, or replaced with
comparable options or rights by, the surviving corporation.
(c) OTHER ALTERNATIVES. Notwithstanding the foregoing, subject to
subsection (d) below, in the event of a Change of Control, the Committee may
take one or both of the following actions: the Committee may (i) require that
Grantees surrender their outstanding Options and SARs in exchange for a
payment by the Company, in cash or Company Stock as determined by the
Committee, in an amount equal to the amount by which the then Fair Market
Value of the shares of Company Stock subject to the Grantee's unexercised
Options and SARs exceeds the Exercise Price of the Options or the base
amount of the SARs, as applicable, or (ii) after giving Grantees an
opportunity to exercise their outstanding Options and SARs, terminate any or
all unexercised Options and SARs at such time as the Committee deems
appropriate. Such surrender or termination
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<PAGE>
shall take place as of the date of the Change of Control or such other date
as the Committee may specify.
(d) LIMITATIONS. Notwithstanding anything in the Plan to the contrary,
in the event of a Change of Control, the Committee shall not have the right
to take any actions described in the Plan (including without limitation
actions described in Subsection (c) above) that would make the Change of
Control ineligible for pooling of interests accounting treatment or that
would make the Change of Control ineligible for desired tax treatment if, in
the absence of such right, the Change of Control would qualify for such
treatment and the Company intends to use such treatment with respect to the
Change of Control.
15. REQUIREMENTS FOR ISSUANCE OR TRANSFER OF SHARES
(a) SHAREHOLDER'S AGREEMENT. The Committee may require that a Grantee
execute a shareholder's agreement, with such terms as the Committee deems
appropriate, with respect to any Company Stock distributed pursuant to this
Plan.
(b) LIMITATIONS ON ISSUANCE OR TRANSFER OF SHARES. No Company Stock
shall be issued or transferred in connection with any Grant hereunder unless
and until all legal requirements applicable to the issuance or transfer of
such Company Stock have been complied with to the satisfaction of the
Committee. The Committee shall have the right to condition any Grant made to
any Grantee hereunder on such Grantee's undertaking in writing to comply with
such restrictions on his or her subsequent disposition of such shares of
Company Stock as the Committee shall deem necessary or advisable as a result
of any applicable law, regulation or official interpretation thereof, and
certificates representing such shares may be legended to reflect any such
restrictions. Certificates representing shares of Company Stock issued or
transferred under the Plan will be subject to such stop-transfer orders and
other restrictions as may be required by applicable laws, regulations and
interpretations, including any requirement that a legend be placed thereon.
16. AMENDMENT AND TERMINATION OF THE PLAN
(a) AMENDMENT. The Board may amend or terminate the Plan at any time;
provided, however, that the Board shall not amend the Plan without
shareholder approval if such approval is required by Section 162(m) of the
Code.
(b) TERMINATION OF PLAN. The Plan shall terminate on the day
immediately preceding the tenth anniversary of its effective date, unless the
Plan is terminated earlier by the Board or is extended by the Board with the
approval of the shareholders.
(c) TERMINATION AND AMENDMENT OF OUTSTANDING GRANTS. A termination or
amendment of the Plan that occurs after a Grant is made shall not materially
impair the rights of a Grantee unless
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<PAGE>
the Grantee consents or unless the Committee acts under Section 22(b). The
termination of the Plan shall not impair the power and authority of the
Committee with respect to an outstanding Grant. Whether or not the Plan has
terminated, an outstanding Grant may be terminated or amended under Section
22(b) or may be amended by agreement of the Company and the Grantee
consistent with the Plan.
(d) GOVERNING DOCUMENT. The Plan shall be the controlling document. No
other statements, representations, explanatory materials or examples, oral or
written, may amend the Plan in any manner. The Plan shall be binding upon
and enforceable against the Company and its successors and assigns.
17. FUNDING OF THE PLAN
This Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Grants under this Plan. In no event
shall interest be paid or accrued on any Grant, including unpaid installments
of Grants.
18. RIGHTS OF PARTICIPANTS
Nothing in this Plan shall entitle any Employee, Key Advisor,
Non-Employee Director or other person to any claim or right to be granted a
Grant under this Plan. Neither this Plan nor any action taken hereunder
shall be construed as giving any individual any rights to be retained by or
in the employ of the Company or any other employment rights.
19. NO FRACTIONAL SHARES
No fractional shares of Company Stock shall be issued or delivered
pursuant to the Plan or any Grant. The Committee shall determine whether
cash, other awards or other property shall be issued or paid in lieu of such
fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.
20. HEADINGS
Section headings are for reference only. In the event of a conflict
between a title and the content of a Section, the content of the Section
shall control.
21. EFFECTIVE DATE OF THE PLAN.
(a) EFFECTIVE DATE. Subject to the approval of the Company's
shareholders, the Plan shall be effective on May 14, 1997.
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<PAGE>
(b) PUBLIC OFFERING. The provisions of the Plan that refer to a Public
Offering, or that refer to, or are applicable to persons subject to, section
16 of the Exchange Act or section 162(m) of the Code, shall be effective, if
at all, upon the initial registration of the Company Stock under section
12(g) of the Exchange Act, and shall remain effective thereafter for so long
as such stock is so registered.
22. MISCELLANEOUS
(a) GRANTS IN CONNECTION WITH CORPORATE TRANSACTIONS AND OTHERWISE.
Nothing contained in this Plan shall be construed to (i) limit the right of
the Committee to make Grants under this Plan in connection with the
acquisition, by purchase, lease, merger, consolidation or otherwise, of the
business or assets of any corporation, firm or association, including Grants
to employees thereof who become Employees of the Company, or for other proper
corporate purposes, or (ii) limit the right of the Company to grant stock
options or make other awards outside of this Plan. Without limiting the
foregoing, the Committee may make a Grant to an employee of another
corporation who becomes an Employee by reason of a corporate merger,
consolidation, acquisition of stock or property, reorganization or
liquidation involving the Company or any of its subsidiaries in substitution
for a stock option or restricted stock grant made by such corporation. The
terms and conditions of the substitute grants may vary from the terms and
conditions required by the Plan and from those of the substituted stock
incentives. The Committee shall prescribe the provisions of the substitute
grants.
(b) COMPLIANCE WITH LAW. The Plan, the exercise of Options and SARs and
the obligations of the Company to issue or transfer shares of Company Stock
under Grants shall be subject to all applicable laws and to approvals by any
governmental or regulatory agency as may be required. With respect to
persons subject to section 16 of the Exchange Act, it is the intent of the
Company that the Plan and all transactions under the Plan comply with all
applicable provisions of Rule 16b-3 or its successors under the Exchange Act.
The Committee may revoke any Grant if it is contrary to law or modify a
Grant to bring it into compliance with any valid and mandatory government
regulation. The Committee may also adopt rules regarding the withholding of
taxes on payments to Grantees. The Committee may, in its sole discretion,
agree to limit its authority under this Section.
(c) GOVERNING LAW. The validity, construction, interpretation and
effect of the Plan and Grant Instruments issued under the Plan shall
exclusively be governed by and determined in accordance with the law of State
of Delaware.
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<PAGE>
EXHIBIT 11.1
DocuCorp, Inc.
Computation of Earnings Per Share
<TABLE>
1997 1996 1995
- --------------------------------------------- ------------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) ($16,101,787) $2,321,280 $2,002,920
------------- ---------- ----------
------------- ---------- ----------
Weighted average common shares outstanding 5,041,689 4,948,866 4,594,059
Weighted average common share equivalents:
Options and other common share equivalents -0-(a) 2,135,563 2,884,213
------------- ---------- ----------
Weighted average number of common shares and
common share equivalents outstanding 5,041,689 7,084,429 7,478,272
------------- ---------- ----------
------------- ---------- ----------
Net income (loss) per common share ($3.19) $0.33 $0.27
------------- ---------- ----------
------------- ---------- ----------
</TABLE>
(a) Common stock equivalents are not included in the income (loss) per share
calculation in a period in which a net loss is incurred since their
inclusion would be antidilutive
<PAGE>
EXHIBIT 13.1
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain information contained herein may include forward-looking statements
that involve risks and uncertainties. The Company's actual results may
differ materially from those discussed in the forward-looking statements.
Potential risks and uncertainties include, but are not limited to,
integration of Image Sciences and FormMaker and their respective products,
reliance on a major client relationship, dependence upon the insurance
industry, fluctuations in operating results, and the timely development and
acceptance of new products and services. Consequently, the actual results
realized by the Company could differ materially from the statements made
herein. Readers of this report are cautioned not to place undue reliance on
the forward-looking statements made herein.
OVERVIEW
The Company provides software, technologies, services, and outsourcing to
insurance, financial services, utilities, telecommunications, transportation,
government, education, and other enterprises and industries. The Company was
incorporated in Delaware in January 1997 in connection with the Merger of
Image Sciences and FormMaker. The Merger was treated as an acquisition of
FormMaker by Image Sciences; accordingly the Merger transaction was recorded
under the purchase method of accounting.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Image Sciences, FormMaker, and
Micro Dynamics, Ltd. Results of FormMaker and Micro Dynamics, Ltd. are
included from the effective date of the Merger, May 15, 1997. As described in
the footnotes to the consolidated financial statements, the Company incurred
one-time charges aggregating $21,377,855 in connection with the Merger,
primarily related to acquired in-process technology and compensation charges
related to the repurchase and remeasurement of certain employee stock options.
RESULTS OF OPERATIONS
The following table sets forth selected data of the Company expressed as a
percentage of total revenues for the periods indicated:
1997 1996 1995
---- ---- ----
REVENUES
Professional services 35% 7% 5%
License 23 42 45
Maintenance & other recurring 42 51 50
---- ---- ----
Total revenues 100 100 100
---- ---- ----
EXPENSES
Professional services 23 6 4
Product development & support 28 38 37
Selling & marketing 13 14 18
General & administrative 14 12 12
Merger related charges 122 0 0
---- ---- ----
Total expenses 200 70 71
---- ---- ----
Operating income (loss) (100) 30 29
Other income 1 2 0
---- ---- ----
Income (loss) before taxes (99) 32 29
Provision for income taxes (benefit) (7) 12 11
---- ---- ----
Net income (loss) (92%) 20% 18%
---- ---- ----
---- ---- ----
FISCAL YEAR ENDED JULY 31, 1997 COMPARED TO FISCAL YEAR ENDED JULY 31, 1996
REVENUES
The Company derives its revenues from license fees, recurring maintenance
fees, and professional services related to its software products. License
revenues are derived from perpetual and term licenses of software products.
Maintenance and other recurring revenues consist primarily of recurring
license fees and annual maintenance contracts. Professional services
revenues include fees for consulting, implementation, contract programming
projects, and education services.
Total revenues increased 53% due primarily to the inclusion of FormMaker's
results since the Merger date, May 15, 1997. Professional services increased
651% which is largely due to a significant amount of implementation and
processing services revenues generated since the Merger date. During the
fourth quarter license revenues significantly declined which caused an
overall 15% decrease in annual license revenues as compared to the previous
year. This decline is attributable to the impact of the Merger on customer
buying decisions which may have been delayed pending the integration of Image
Sciences and FormMaker operations. Maintenance and other recurring revenues
increased 24% due to the inclusion of FormMaker's recurring maintenance
revenue since the Merger date and an increased customer base. Inclusion of
FormMaker's results for the full period should significantly increase fiscal
1998 revenues.
<PAGE>
Backlog for the Company's products and services is primarily comprised of
recurring software license and maintenance revenues for ongoing maintenance
and support, software implementation and consulting services, and processing
services. Recurring license and maintenance revenue backlog, which consists
of recurring software license fees and annual maintenance contracts, was
approximately $14,000,000 at July 31, 1997. Software agreements for recurring
license fees generally have non-cancelable terms of up to five years. In the
event of PMSC's termination of the marketing agreement between FormMaker and
PMSC, recurring software license fees related to PMSC sub-license agreements
would be eliminated over a two year period. Annual maintenance contracts may
generally be terminated upon a 30 day notice period; however, the Company has
not historically experienced material cancellations of such contracts.
Software implementation and consulting services backlog, which is principally
performed under time and material agreements of which some have cancellation
provisions, was approximately $3,700,000 at July 31, 1997. In the event of
cancellation of any of the agreements, there would be no impact on revenue
recognition because revenue is recognized as services are performed.
Processing services agreements generally provide that fees are charged on a
per transaction basis. The processing services backlog totaled
approximately $9,100,000 at July 31, 1997. The estimated future revenue with
respect to software implementation and processing services are based on
management's estimate of revenues over the remaining life of the respective
contracts.
PROFESSIONAL SERVICES EXPENSE
Professional services expense is composed primarily of personnel expenses
related to professional services and processing services. The majority of
the increase is due to inclusion of FormMaker personnel associated with both
the professional and processing services areas since the date of the Merger.
Processing services incurred approximately $1,000,000 in direct postage and
supplies expense which further attributed to the increase. Costs for
professional services expense, represented 65% and 80% of professional
services revenue for fiscal 1997 and 1996, respectively. The decrease in
cost as a percentage of professional services revenue is primarily due to
economies of scale of the significantly expanded services operations.
PRODUCT DEVELOPMENT AND SUPPORT EXPENSE
The Company continues to commit significant resources to development and
support activities. Product development and support expense consists
primarily of research and development efforts, amortization of capitalized
software development costs, customer support, and other product support
costs. An increase of 12% in product development and support expense was
incurred in fiscal 1997. Before capitalization and amortization, product
development and support expense increased 22%, primarily as a result of the
inclusion of FormMaker's operations since the date of the Merger and
significant resources focused on research activities to expand the Company's
product offerings.
SELLING AND MARKETING EXPENSE
Selling and marketing expense increased 35% primarily as a result of
inclusion of FormMaker's operations since the date of the Merger and
increased commissions. Sales commissions increased principally as a result
of commissions on professional services contracts executed subsequent to the
date of the Merger.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense increased 80% due primarily to inclusion
of FormMaker's operations since the date of the Merger, profit-based
performance bonuses, and costs associated with the Merger. Profit-based
performance bonuses increased due to achievement of management performance
and financial goals. Goodwill amortization of $160,522 was recorded in
fiscal 1997 related to the Merger.
MERGER RELATED CHARGES
One-time Merger related charges consist of acquired in-process technology,
compensation charges, and other Merger related charges. Acquired in-process
technology of $13,500,000 represents the present value of the estimated cash
flows expected to be generated by FormMaker's in-process technology which was
charged to expense on the closing date of the Merger. Compensation and other
merger related charges of approximately $7,900,000 relate to the repurchase
of options to purchase common stock and the creation of a new measurement
date for outstanding options to purchase common stock converted to options to
purchase Class B redeemable common stock. These non-recurring charges are
solely related to the Merger and the $8,000,000 cash
<PAGE>
distribution to stockholders and option holders in May 1997.
OTHER INCOME, NET
Other income, net decreased 11% due to increased interest expense charges.
Interest income increased 15% due to significant cash, cash equivalents, and
short-term investments held by the Company until $8,000,000 was distributed
in cash to stockholders and option holders in May 1997. Interest expense
increased 82% because of debt assumed in the Merger.
PROVISION FOR INCOME TAXES (BENEFIT)
The income tax provision (benefit) was calculated utilizing the Federal
income tax rates for corporations. The Company's effective tax rates for the
years ended July 31, 1997 and 1996 were approximately 7% and 37%,
respectively. The decrease in the Company's effective tax rate in 1997 was
due primarily to the in-process technology charge which was not deductible
for tax purposes.
NET INCOME (LOSS)
The 794% decrease in profitability is the result of approximately $21,400,000
in non-recurring Merger related charges. Excluding Merger related charges,
income before taxes increased 13% primarily as a result of increased revenues.
FISCAL YEAR ENDED JULY 31, 1996 COMPARED TO FISCAL YEAR ENDED JULY 31, 1995
REVENUES
Total revenues increased 6% primarily as a result of increased maintenance
revenues and professional services revenues. Maintenance revenues increased
8% in fiscal 1996 due to an expanding customer base and retention of existing
customers. Professional services revenues increased 40% as a result of a
significant increase in consulting revenues and revenue generated from the
Company's biennial user group conference. License revenues decreased
slightly due to a decrease in international software license revenues,
partially offset by an 8% increase in North American license revenues. The
Company terminated its most significant European distributor agreement in
fiscal 1995, and did not replace the European distributor until fiscal 1996.
The new distribution agreement with The Continuum Company did not generate
material revenues during fiscal 1996.
PROFESSIONAL SERVICES EXPENSE
Professional services expense increased 39% which was primarily attributable
to the cost associated with the Company's biennial user group conference and
costs associated with expanding the Company's consulting services. Costs for
professional services expense, before the effect of the biennial user group
conference held in fiscal 1996, represented 75% and 80% of professional
services revenue for fiscal 1996 and 1995, respectively. The decrease in
cost as a percentage of professional services revenue is primarily due to
more efficient management of the Company's consulting resources.
PRODUCT DEVELOPMENT AND SUPPORT EXPENSE
The 11% increase in product development and support expense was a result of
increased staffing, a decrease in capitalizable development efforts, an
increase in software amortization, and costs related to a continued focus on
customer support of the Company's expanding customer base. Product
development and support expense before capitalization and amortization
increased 6% as a result of increased staffing to sustain new product
development and to enhance and maintain existing products. Software
capitalization decreased due to increased research of new technologies, and
focusing development efforts on more efficient methods of maintaining
existing products. These efforts are not eligible for capitalization.
Amortization of capitalized software increased due to the release of several
new client/server products at the end of fiscal 1995.
SELLING AND MARKETING EXPENSE
Selling and marketing expense decreased 15% primarily as a result of
decreased staffing and related travel costs. The decreased staffing relates
to several unfilled sales and sales management positions. These decreases
were partially offset by an increase in international expatriate expenses. In
September 1995, the Company transferred one employee to the United Kingdom to
assume a sales support function.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense increased 3% as a result of increases in
corporate office rent and profit sharing bonuses, partially offset by
decreased legal costs. Rent expense increased due to the renegotiation of the
Company's corporate office lease, which included an approximate 3,000 square
feet expansion. Profit based bonuses increased due to a 15% increase in net
income before taxes. Legal costs associated with two outstanding lawsuits
decreased significantly.
OTHER INCOME, NET
Other income, net increased $211,757 as a result of a 60% increase in
interest income due to a significant
<PAGE>
increase in cash, cash equivalents, and short-term investments.
Additionally, interest expense decreased 48% because of the scheduled January
1996 principal installment payment and the March 1996 retirement of all
outstanding subordinated debentures.
PROVISION FOR INCOME TAXES
The income tax provisions were calculated utilizing Federal income tax rates
for corporations. Effective tax rates for the years ended July 31, 1996 and
1995 were approximately 37% each year. These rates differ from the Federal
statutory rate due primarily to state income taxes. The Company used a
portion of its outstanding tax credits to offset its current tax liability in
fiscal 1996. The remaining net operating loss carryforward was also used in
fiscal 1995.
NET INCOME
Profitability increased 16% due to the 6% increase in revenues and an
approximate $200,000 increase in other income, while expenses only increased
5%.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1997, the Company's principal sources of liquidity consisted of
cash and cash equivalents of $2,869,458. $4,528,366 was available under the
Company's $10,000,000 revolving credit facility at July 31, 1997.
Cash and cash equivalents increased $960,442 due to various operating,
investing, and financing activities. Cash flows from operating activities
were $6,042,010 primarily as the result of profitable operations before the
one-time Merger related charges for acquired in-process technology of
$13,500,000 and stock option compensation expense of $7,698,143. Cash flows
from investing activities generated $5,478,658 in cash principally from the
sale of short-term investments of $5,308,806 and net cash acquired in the
Merger of $1,714,416. Cash flows from financing activities used $10,560,226
of cash primarily for the purchase of stock and options for $5,192,293,
payment of a preferred stock dividend of $2,807,709, and repayment of
$2,448,011 of debt.
Working capital was $1,644,458 at July 31, 1997, compared with $5,639,840 at
July 31, 1996. The decrease in working capital is primarily the result of
the preferred stock dividend and purchase of stock and options.
In connection with the Merger, the Company assumed a $10,000,000 revolving
credit facility from FormMaker. At July 31, 1997, borrowings under this
credit facility totaled $5,471,634 bearing interest at a weighted average
rate of 8.02%. The credit facility was renegotiated in September 1997.
Under the new agreement, $3,500,000 bears interest at the bank's prime rate
less .25%, or 8.25% as of July 31, 1997, and is guaranteed by Safeguard. The
remaining $6,500,000 bears interest at the bank's prime rate of 8.50% as of
July 31, 1997 and is collateralized by substantially all of the Company's
assets. Borrowings under the credit facility are utilized primarily for
working capital.
In addition, stockholders loaned the Company $3,000,000 in the form of
subordinated notes concurrent with the Merger. The notes bear interest at
prime plus 1%, or 9.50% as of July 31, 1997, and are due in full at the
earlier of the closing of a public offering yielding net proceeds to the
Company in excess of $13,000,000 or May 15, 2000. The notes are unsecured
obligations of the Company and are subordinated to all senior debt.
The Company's liquidity needs will arise primarily from funding the continued
enhancement, development and support of its software offerings and the
selling and marketing costs associated principally with continued entry into
new vertical and international markets.
Capital expenditures are generally not material. Management believes that
the Company's cash and availability under its credit facility will be
sufficient to meet cash flow requirements for fiscal 1998.
Historically, a significant portion of FormMaker's revenues have been derived
from FormMaker's marketing agreement with PMSC. There can be no assurances
that such revenues will continue at historical levels. In the event that
PMSC generated revenues decrease or the PMSC marketing agreement is
otherwise terminated as provided by its terms; then the Company's liquidity
requirements would be increased accordingly. Although management believes
that any such additional liquidity requirements would be short-term in
nature, there can be no assurance that additional capital would not be
required.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
- ------------------------------------------------------------------------------
2001 Ross Avenue, Suite 1800 Telephone 214 754 7900
Dallas, Texas 75201
[LOGO]
PRICE WATERHOUSE LLP
To the Board of Directors and Stockholders
of DOCUCORP INC.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and stockholders' equity
present fairly, in all material respects, the financial position of DOCUCORP,
INC. and its subsidiaries at July 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended July 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Dallas, Texas
September 26, 1997
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
- -----------------------------------------------------------------------------------------
Years ended July 31 1997 1996
- ----------------------------------------------------------- ------------ -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,869,458 $ 1,909,016
Short-term investments 0 5,308,806
Accounts receivable, net of allowance
of $525,000 and $350,000, respectively 9,010,784 4,105,652
Current portion of deferred taxes 380,925 399,468
Income tax refund receivable 503,888 0
Other current assets 553,977 187,193
------------ -----------
Total current assets 13,319,032 11,910,135
Fixed assets, net of accumulated depreciation
of $1,983,864 and $1,419,206, respectively 3,087,578 783,328
Software, net of accumulated amortization of $5,397,344
and $4,466,514, respectively 7,408,113 1,941,679
Deferred taxes 1,029,473 0
Goodwill, net of accumulated amortization 7,544,535 0
Other assets 309,434 55,586
------------ -----------
$ 32,698,165 $14,690,728
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 1,164,012 $ 323,044
Accrued liabilities:
Accrued compensation 1,142,199 700,050
Other 1,532,300 278,857
Income taxes payable 412,000 655,264
Current portion of long-term debt 191,652 0
Current portion of obligations under capital leases 454,199 45,967
Deferred revenue 6,778,212 4,267,113
------------ -----------
Total current liabilities 11,674,574 6,270,295
Obligations under capital leases 33,993 0
Deferred taxes 0 383,070
Long-term debt 8,759,156 0
Other long-term liabilities 631,748 0
Redeemable Class B common stock, 7,000,000 shares authorized
at $.01 par value, 4,686,024 shares issued and outstanding
at redemption value 19,118,978 0
Stockholders' equity (deficit):
Preferred stock, 3,000,000 shares authorized at $.10 par
value, $1.00 liquidation value, 2,020,373 shares issued
and outstanding at July 31, 1996 0 202,037
Class A common stock, 20,000,000 shares authorized at
$.01 par value, 4,277,794 and 3,373,333 shares issued
and outstanding, respectively 42,778 33,733
Additional paid-in capital 4,921,205 1,305,189
Retained earnings (deficit) (12,413,092) 6,496,404
Notes receivable from stockholders (71,175) 0
------------ -----------
Total stockholders' equity (deficit) (7,520,284) 8,037,363
------------ -----------
$ 32,698,165 $14,690,728
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
- --------------------------------------------------------------------------------------
Years ended July 31 1997 1996 1995
- -------------------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
REVENUES
Professional services $ 6,150,625 $ 819,034 $ 587,118
License 4,092,491 4,793,031 4,806,888
Maintenance and other recurring 7,259,702 5,858,256 5,419,945
------------ ----------- -----------
Total revenues 17,502,818 11,470,321 10,813,951
------------ ----------- -----------
EXPENSES
Professional services 3,999,504 655,911 471,783
Product development and support 4,955,617 4,405,932 3,952,066
Selling and marketing 2,246,270 1,665,961 1,950,588
General and administrative 2,383,233 1,326,141 1,281,742
Merger related charges 21,377,855 0 0
------------ ----------- -----------
Total expenses 34,962,479 8,053,945 7,656,179
------------ ----------- -----------
Operating income (loss) (17,459,661) 3,416,376 3,157,772
Other income 213,874 239,904 28,148
------------ ----------- -----------
Income (loss) before income taxes (17,245,787) 3,656,280 3,185,920
Provision for income taxes (benefit) (1,144,000) 1,335,000 1,183,000
------------ ----------- -----------
Net income (loss) $(16,101,787) $ 2,321,280 $ 2,002,920
------------ ----------- -----------
------------ ----------- -----------
Net income (loss) per share of common stock $ (3.19) $ 0.33 $ 0.27
------------ ----------- -----------
------------ ----------- -----------
Weighted average number of shares of
common stock and common stock
equivalents outstanding 5,041,689 7,084,429 7,478,272
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
Years ended July 31 1997 1996 1995
- ------------------------------------------------------- ------------ ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ($16,101,787) $2,321,280 $2,002,920
Adjustments to reconcile net income to
net cash provided by operating activities:
Charge for acquired in-process technology 13,500,000 0 0
Stock option compensation expense 7,698,143 49,988 53,271
Depreciation 573,645 363,931 324,699
Amortization of capitalized software 930,829 813,832 736,224
Amortization of goodwill 160,522 0 0
Increase (decrease) in allowance for doubtful
accounts (63,363) 25,000 0
Changes in assets and liabilities, net of effects
from acquisition:
(Increase) decrease in accounts receivable (76,411) (22,131) 52,304
(Increase) decrease in income tax refund
receivable (503,888) 222,033 174,467
(Increase) decrease in deferred tax assets (1,010,930) (56,113) 121,390
Increase in other assets (23,340) (74,642) (1,615)
Decrease in accounts payable (174,940) (96,939) (91,648)
Increase (decrease) in accrued liabilities 432,989 71,701 (370,201)
Increase (decrease) in income taxes payable (243,264) 65,033 440,231
Increase (decrease) in deferred revenue 1,326,875 438,841 (272,983)
Increase (decrease) in deferred tax liabilities (383,070) 226,158 156,912
----------- ---------- ----------
Total adjustments 22,143,797 2,026,692 1,323,051
----------- ---------- ----------
Net cash provided by operating activities 6,042,010 4,347,972 3,325,971
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Purchase) sale of short-term investments, net 5,308,806 (2,308,806) (1,500,000)
Purchase of fixed assets (547,301) (356,017) (333,073)
Development of software (997,263) (533,649) (667,924)
Net cash acquired in business combination 1,714,416 0 0
----------- ---------- ----------
Net cash (used in) provided by investing
activities 5,478,658 (3,198,472) (2,500,997)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt (2,448,011) (1,534,430) (258,801)
Principal payments under capital lease obligations (148,361) (56,388) (91,128)
Purchase of tendered stock, and options (5,192,293) 0 (84,375)
Preferred stock dividend (2,807,709) 0 0
Proceeds from exercise of warrants and options 15,644 45,432 89,369
Proceeds from sale of warrants 6,100 0 0
Tax benefit related to non-qualified stock option
activity 14,404 14,922 0
----------- ---------- ----------
Net cash used in financing activities (10,560,226) (1,530,464) (344,935)
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 960,442 (380,964) 480,039
Cash and cash equivalents at beginning of year 1,909,016 2,289,980 1,809,941
----------- ---------- ----------
Cash and cash equivalents at end of year $2,869,458 $1,909,016 $2,289,980
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See non-cash activities disclosed in Note 3.
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
<TABLE>
Class A Additional Retained
Preferred Common Treasury Paid-in Earnings Notes
Stock Stock Stock Capital (Deficit) Receivable Total
--------- -------- --------- ---------- --------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1994 $ 202,037 $ 31,768 $(281,602) $ 1,420,149 $ 2,172,204 $ 0 $ 3,544,556
Exercise of warrants to purchase
20,081 shares of common stock 201 (62) 139
Exercise of stock options to purchase
393,654 shares of common stock 3,937 85,293 89,230
Purchase and retirement of 97,511
shares of common stock (975) (83,400) (84,375)
Retirement of 581,145 shares
of treasury stock (5,811) 281,602 (275,791) 0
Compensation expense related to
non-qualified stock options 53,271 53,271
Net income 2,002,920 2,002,920
-------- -------- -------- ----------- ------------- --------- ------------
Balance at July 31, 1995 202,037 29,120 0 1,199,460 4,175,124 0 5,605,741
Exercise of warrants to purchase
274,779 shares of common stock 2,748 (846) 1,902
Exercise of stock options to purchase
186,498 shares of common stock 1,865 41,665 43,530
Compensation expense related to
non-qualified stock options 49,988 49,988
Tax benefit related to exercise of
non-qualified stock options 14,922 14,922
Net income 2,321,280 2,321,280
-------- -------- -------- ----------- ------------- --------- ------------
Balance at July 31, 1996 202,037 33,733 0 1,305,189 6,496,404 0 8,037,363
Exercise of stock options to purchase
28,616 and 433 shares of Class A and
Class B common stock, respectively 286 13,595 13,881
Payment of preferred stock dividend (2,807,709) (2,807,709)
Purchase of 721,261 shares of tendered
common stock (7,213) (2,489,192) (2,496,405)
Conversion of Image Sciences common
stock and preferred stock to 4,685,591
shares of Class B common stock (202,037) (26,651) (18,888,523) (19,117,211)
Conversion of FormMaker common
stock to 4,262,324 shares of Class
A common stock 42,623 19,957,377 20,000,000
Assumption of notes receivable from
stockholders (71,175) (71,175)
Sale of warrants to purchase Class A
common stock 6,100 6,100
Compensation expense related to
non-qualified stock options 5,002,255 5,002,255
Tax benefit related to exercise of
non-qualified stock options 14,404 14,404
Net loss (16,101,787) (16,101,787)
-------- -------- -------- ----------- ------------- --------- ------------
Balance at July 31, 1997 $ 0 $ 42,778 $ 0 $ 4,921,205 $(12,413,092) $(71,175) $(7,520,284)
-------- -------- -------- ----------- ------------- --------- ------------
-------- -------- -------- ----------- ------------- --------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DocuCorp, Inc. (doing business as DocuCorp International, the "Company"), a
Delaware corporation was organized on January 13, 1997 in connection with the
acquisition of FormMaker Software, Inc. ("FormMaker") by Image Sciences, Inc.
("Image Sciences") (the "Merger"). The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries, Image Sciences, FormMaker, and Micro Dynamics, Ltd. Results of
FormMaker and Micro Dynamics, Ltd. are included from the effective date of the
Merger, May 15, 1997. As described in Note 3, the Company incurred one-time
charges aggregating $21,377,855 in connection with the Merger, primarily
related to acquired in-process technology and compensation charges. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The Company's business includes developing, marketing, and supporting computer
software designed to automate the process of storing, managing, and printing
business forms and documents. The Company also provides professional services
and outsourcing of processing and printing. The majority of the Company's
business is currently derived from companies in the insurance industry.
REVENUE RECOGNITION
Revenue from licensing of standard software is recognized upon shipment of the
software. Revenue from software licenses which include a cancellation clause is
recognized upon expiration of the cancellation period. Revenue derived from the
development and installation of software packages under long-term contracts is
recognized on a percentage-of-completion basis. Revenue related to products
still in the testing phase is deferred until formal acceptance of the product
by the purchaser. Anticipated losses, if any, on uncompleted contracts are
recognized in the period in which such losses are determined.
Revenue from maintenance contracts, and maintenance revenue that is packaged
with license fees, is recognized ratably over the term of the agreements. The
Company records deferred revenue for maintenance amounts invoiced prior to
revenue recognition. Revenue related to outsourcing and professional services,
such as training and consulting, is recognized as the services are performed.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents, including certificates
of deposit, repurchase agreements and treasury bills. Cash equivalents are
stated at cost, which approximates fair market value.
SHORT-TERM INVESTMENTS
The Company has the intent and ability to hold short-term investments to
maturity; consequently, such investments are carried at cost which approximates
fair market value as determined by the stated interest rates. As of July 31,
1996, the Company's short-term investments consisted of commercial paper
investments and treasury bills with original terms of 180 days. Interest income
from such investments was $172,572, $227,113, and $134,510 in 1997, 1996, and
1995, respectively.
ACCOUNTS RECEIVABLE
Included in accounts receivable at July 31, 1997 and 1996 are unbilled amounts
of $1,776,322 and $1,833,640, respectively. Such amounts have been recognized
as revenue under the percentage of completion method or upon execution of the
contract and shipment of the software, but prior to required payment terms.
FIXED ASSETS, DEPRECIATION, AND AMORTIZATION
Property and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed over the estimated
service lives using the straight line method for all assets.
<PAGE>
- --------------------------------------------------------------------------------
Amortization of assets recorded under capital leases is included in
depreciation expense. Estimated service lives are as follows:
Computer equipment 4-5 years
Furniture and fixtures 5 years
Leasehold improvements life of lease
Leased equipment under capital leases 3-5 years
Repairs and maintenance are expensed as incurred. Major renewals and
betterments are capitalized and depreciated over the assets remaining estimated
service life. Upon retirement or sale of an asset, the cost and accumulated
depreciation are removed from the accounts with any resulting gain or loss
included in income.
SOFTWARE
Costs of internally developed software are capitalized after the technological
feasibility of the software has been established. Research and development
costs incurred prior to the establishment of the technological feasibility of a
product are expensed as incurred. The cost of capitalized software is amortized
on a straight-line basis over its estimated useful life, generally four to six
years or the ratio of current revenues to current and anticipated revenues from
the software, whichever provides the greater amortization. During 1997, 1996,
and 1995, the Company charged to expense $2,155,435, $1,851,516, and
$1,426,391, respectively, for research and development costs. Such expense is
included in product development and support on the Consolidated Statements of
Operations.
GOODWILL
Goodwill is amortized on a straight-line basis over ten years. The carrying
value of goodwill is evaluated periodically in relation to the operating
performance and anticipated future undiscounted net cash flows of the related
business. In the event that assets are found to be carried at amounts which
are in excess of estimated gross future cash flows, then the intangible assets
are adjusted for impairment to a level commensurate with a discounted cash flow
analysis of the underlying assets.
INCOME TAXES
Income taxes are presented pursuant to Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes" (see also Note 8).
EARNINGS PER SHARE
Earnings per share are computed using the weighted average number of shares of
common stock and common stock equivalents outstanding during the period. The
earnings per share computation is based on the assumption that outstanding
options and warrants to purchase common stock with exercise prices below fair
market value were exercised, unless antidilutive, and the proceeds were used to
repurchase outstanding common stock.
STOCK-BASED COMPENSATION
During 1997, the Company adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, ("SFAS 123"), "Accounting for Stock-
Based Compensation." In accordance with the provisions of SFAS 123, the
Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its employee stock option plans. Note 7
contains a summary of the pro forma effects on reported net income and earnings
per share for fiscal 1997 and 1996 based on the fair value of options and
shares as prescribed by SFAS 123.
CONVERSION OF IMAGE SCIENCES STOCK, OPTIONS, AND WARRANTS
All references in the consolidated financial statements to shares, share
prices, per share amounts and stock plans have been adjusted retroactively for
the conversion of Image Sciences common stock, preferred stock, and options or
warrants to purchase common stock based on the Merger exchange ratios set forth
in Note 3.
MANAGEMENT ESTIMATES
The preparation of the Company's financial statements, in accordance 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 July 31, 1997
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
- --------------------------------------------------------------------------------
and 1996, and the reported amounts of revenues and expenses for the periods
then ended. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share",
which is required to be adopted for fiscal years ending after December 15,
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and warrants will be excluded.
If the Company had computed net earnings per share in accordance with the
provisions of SFAS 128, basic earnings per share would have been $.45 and $.42
for the years ended July 31, 1996 and 1995, respectively. Weighted average
shares outstanding under the basic earnings per share computation would have
been 5,168,070 and 4,727,925 for the years ended July 31, 1996 and 1995,
respectively. Diluted earnings per share for the years ended July 31, 1996 and
1995 would not have been significantly different from the earnings per share
presented on the Consolidated Statements of Operations. For the year ended
July 31, 1997, the basic and diluted earnings per share amounts would be the
same as earnings per share presented on the Consolidated Statements of
Operations.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year's financial statement presentation.
NOTE 2 - FIXED ASSETS
Fixed asset balances at July 31, 1997 and 1996 are as follows:
1997 1996
----------- -----------
Computer equipment $ 3,753,129 $ 1,948,066
Furniture and fixtures 1,120,771 179,619
Leasehold improvements 197,542 74,849
----------- -----------
5,071,442 2,202,534
Less accumulated depreciation (1,983,864) (1,419,206)
----------- -----------
$ 3,087,578 $ 783,328
----------- -----------
----------- -----------
NOTE 3 - MERGER OF IMAGE SCIENCES AND FORMMAKER
On January 15, 1997, Image Sciences entered into an Agreement and Plan of
Merger with FormMaker, pursuant to which the stockholders of Image Sciences and
FormMaker agreed to exchange their shares for common stock of the Company. The
Merger was completed on May 15, 1997.
Each issued and outstanding share of FormMaker common stock, and each option or
warrant to purchase common stock was exchanged for .6818 shares of Company
Class A common stock and options or warrants to purchase Company Class A common
stock. Each issued and outstanding share of Image Sciences common stock and
each option to purchase common stock that was vested as of July 31, 1997, was
exchanged for 1.4446 shares of Company Class B common stock and options to
purchase Class B common stock. Each issued and outstanding Image Sciences
option to purchase common stock that was unvested as of July 31, 1997 was
exchanged for options to purchase 1.4446 shares of Company Class A common
stock. Each issued and outstanding share of Image Sciences preferred stock was
exchanged for 1.029 shares of Company Class B common stock.
Concurrent with the closing of the Merger, Image Sciences (i) repurchased
common stock and options to purchase common stock from certain stockholders for
an aggregate purchase price of $5,192,293 and (ii) paid its preferred
stockholder a cash dividend of $2,807,709. The Company recognized compensation
expense related to the repurchase of options to purchase common stock discussed
above, and related to the creation of a new measurement date for outstanding
options to purchase Image Sciences common stock deemed to be converted to
options to purchase Company Class B common stock upon consummation of the
Merger.
The Merger was treated as an acquisition of FormMaker by Image Sciences;
accordingly, the Merger transaction was recorded under the purchase method of
accounting. For historical accounting purposes, Image Sciences is considered
to be the acquirer in the Merger and purchase accounting is not required
related to the conversion of Image Sciences common stock and preferred stock
into Company
<PAGE>
- --------------------------------------------------------------------------------
common stock. The financial statements of Image Sciences are presented as
historical statements of the Company for periods prior to the Merger.
The following unaudited pro forma information for fiscal 1997 and 1996 presents
a summary of consolidated results of operations of Image Sciences and FormMaker
as if the acquisition had occurred at the beginning of fiscal 1996. Such pro
forma amounts are not necessarily indicative of what the actual results might
have been had the Merger occurred at the beginning of fiscal 1996. The
unaudited pro forma amounts exclude non-recurring charges recorded in the year
ended July 31, 1997 for acquired in-process technology, compensation charges,
and other Merger related costs of $13,500,000, $7,649,740, and $228,115,
respectively.
1997 1996
----------- -----------
Revenues $38,416,000 $27,327,000
Net income $ 1,714,000 $ 82,000
Net income per share $ .16 $ .01
The aggregate purchase price, including direct acquisition costs, was
$20,374,630 which has been allocated to the fair value of the net identifiable
assets acquired, including in-process technology. Acquired in-process
technology represents the present value of the estimated cash flows expected to
be generated by FormMaker in-process technology. The value of the in-process
technology was charged to operations on the closing date of the Merger. The
purchase price was allocated as follows:
Fixed assets $2,330,594
Capitalized software 5,400,000
Goodwill and other intangible assets 7,705,057
In-process technology 13,500,000
Net liabilities acquired (8,632,196)
Notes receivables from stockholders 71,175
-----------
$20,374,630
-----------
-----------
NOTE 4 - LEASE COMMITMENTS
The Company leases computer equipment under noncancelable leases which are
classified as capital leases and included in fixed assets at July 31, 1997 and
1996 as follows:
1997 1996
-------- ---------
Computer equipment $468,551 $ 214,852
Office equipment 326,042 0
-------- ---------
794,593 214,852
Less accumulated depreciation (95,820) (190,249)
-------- ---------
$698,773 $24,603
-------- ---------
-------- ---------
Certain other equipment leases and the Company's obligation under leases for
office space are treated as operating leases and the rentals are expensed as
incurred. Rent expense on these operating leases for the years ended July 31,
1997, 1996, and 1995 totaled $926,344, $383,438, and $343,010, respectively.
Generally, the Company's leases provide for renewals for various periods at
stipulated rates.
Future minimum lease obligations on leases in effect at July 31, 1997 are as
follows:
Capital Operating
Leases Leases
--------- -----------
1998 $ 472,959 $ 2,636,088
1999 34,525 2,750,467
2000 2,816,022
2001 1,941,970
2002 1,737,236
Thereafter 1,343,205
--------- -----------
Minimum lease payments 507,484 $13,224,988
-----------
-----------
Less amount representing interest (19,292)
---------
Present value of minimum lease
payments 488,192
Less current portion (454,199)
---------
Obligations under capital leases $ 33,993
---------
---------
The future minimum lease obligations for operating leases assumes that the
Company does not exercise its option to terminate its office lease for its
corporate headquarters in 2000. If the office lease is terminated in 2000, a
penalty is due at that time and no further obligations would exist after the
year ended July 31, 2000 under this office lease.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
- -------------------------------------------------------------------------------
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following at July 31:
1997 1996
---------- ----------
Revolving credit facility with bank $5,471,634 $0
Notes payable to Safeguard 479,174 0
Subordinated notes payable to
Safeguard, Technology
Leaders II, L.P., and TL
Ventures Third Corp. 3,000,000 0
---------- ----------
8,950,808 0
Less current portion of debt (191,652) 0
---------- ----------
$8,759,156 $0
---------- ----------
---------- ----------
In connection with the Merger, the Company assumed a $10,000,000 revolving
credit facility with a bank which was guaranteed by Safeguard Scientifics,
Inc. ("Safeguard"), FormMaker's largest stockholder. Effective September
1997, the revolving credit facility was renegotiated. The maximum amount
available under this credit arrangement is $10,000,000, and repayment of
$3,500,000 is guaranteed by Safeguard. Under the credit arrangement, the
Company is required to maintain certain financial covenants. Amounts
outstanding under this credit arrangement bear interest at variable rates
determined by various provisions of the credit arrangement. These rates
generally approximate or equal the bank's prime rate or the London Interbank
Rate ("LIBOR"). At July 31, 1997, the outstanding balance under the credit
arrangement consisted of $2,471,634 drawn under a line of credit bearing
interest at 8.50% and LIBOR notes aggregating $3,000,000, bearing interest at
7.68%. The weighted average interest rate on the revolving credit facility
was 8.02% at July 31, 1997. Upon renegotiation in September 1997, the portion
of the credit arrangement guaranteed by Safeguard bears interest at the
bank's prime rate less .25%, or 8.25%. The remaining balance of the credit
arrangement bears interest at prime, or 8.50%. Amounts outstanding under this
credit arrangement are collateralized by substantially all of the Company's
assets.
Interest is payable monthly under this credit arrangement. $6,500,000 of the
credit arrangement may be converted in September 1998 into a term loan
provided that the Company has given the bank thirty days written notice and
is not in default.
The principal balance of the term loan shall be repaid in twenty-four
consecutive installments due the first day of each month. The $3,500,000
portion of the credit arrangement guaranteed by Safeguard is due and payable
in March 1999.
In connection with the Merger, the Company assumed two notes payable to
Safeguard, in the original amounts of $350,000 and $275,000. Monthly
principal payments aggregating approximately $16,000 plus accrued interest
are due for thirty-six months commencing February 1, 1997. These notes bear
interest at prime plus 1%, or 9.50% as of July 31, 1997.
Concurrent with the Merger, stockholders loaned the Company $3,000,000 in the
form of subordinated notes. The notes bear interest at prime plus 1%, or
9.50% as of July 31, 1997, and are due in full at the earlier of the closing
of a public offering yielding net proceeds to the Company in excess of
$13,000,000 or May 15, 2000. The notes are unsecured obligations of the
Company and are subordinated to all senior debt.
The Company made interest payments, principally related to long-term debt,
totaling $175,339, $183,508, and $235,407 for the years ended July 31, 1997,
1996, and 1995, respectively.
NOTE 6 - REDEEMABLE CLASS B COMMON STOCK
Class B common stock of the Company may be redeemed, at the option of the
holder, if the Company does not consummate by January 31, 1998 an
underwritten public offering of securities in which the managing underwriter
values the equity of the Company at $62,100,000 or more. This redemption
option is exercisable from February 1, 1998 through February 1, 1999 at $4.08
per share. Safeguard, Technology Leaders II, L.P., and Technology Leaders II
Offshore C.V. have agreed, under the terms of a liquidity agreement (the
"Liquidity Agreement"), to fund the redemption of the Class B common stock by
subscribing for a number of shares of Class A common stock, at a price of
$4.08 per share, equal to the number of shares of Class B common stock
redeemed. Each issued and outstanding share of the Company's Class B common
stock will automatically be converted into a share of the Company's Class A
common
<PAGE>
stock at the earlier of a public offering as described above or February 1,
1999.
NOTE 7 - STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK
All outstanding Image Sciences preferred stock was exchanged for the
Company's Class B common stock pursuant to the Merger. Concurrent with the
Merger, the Company authorized 1,000,000 shares of preferred stock which the
board of directors of the Company may issue with such preferences and rights
as it may designate. As of July 31, 1997, there were no issued or outstanding
shares of preferred stock.
STOCK OPTIONS
The Company provides equity incentives to employees and directors by means of
incentive stock options and non-qualified stock options which historically
have been provided under various stock option plans. The Company now issues
options from the 1997 Equity Compensation Plan. Stock options generally vest
over a period of three to five years. The Company may grant non-qualified
stock options at an option price per share determined by the board of
directors. Under this plan, the Company has reserved 400,000 shares for
issuance as of July 31, 1997. Options generally expire ten years from the
date of grant.
Activity under all plans is summarized as follows:
Shares Under
Outstanding Options
------------------------------
Weighted-
Average
Outstanding Exercise
Options Price
--------- ---------
Balances at July 31, 1994 3,084,702 $.18
Granted 416,767 .69
Exercised (393,654) .23
Expired (354,216) .17
--------- ---------
Balances at July 31, 1995 2,753,599 .25
Granted 280,252 .87
Exercised (186,498) .23
Expired (333,125) .09
--------- ---------
Balances at July 31, 1996 2,514,228 .35
Exercised (29,049) .54
Expired (39,871) .71
Purchase of options (781,131) .01
FormMaker options assumed 810,930 4.11
--------- ---------
Balances at July 31, 1997 2,475,107 $1.68
--------- ---------
--------- ---------
Outstanding options at July 31, 1997 include options to purchase 1,356,343
shares of Class B common stock which, upon exercise, may be redeemed in
accordance with the terms of the Class B common stock. Such options are
fully vested at July 31, 1997. All remaining outstanding options at July 31,
1997 are options to purchase shares of Class A common stock. Options to
purchase 357,280 shares of Class A common stock are vested at July 31, 1997.
STOCK-BASED COMPENSATION
Pursuant to SFAS 123, the Company is required to report pro forma information
regarding net income (loss) and net income (loss) per share for awards
granted or modified in fiscal years 1996 and thereafter as if the Company had
accounted for its stock-based awards to employees under the fair value method
of SFAS 123. The weighted average fair value of options granted during
fiscal 1997 and 1996 was $4.08 and $.87, respectively. The fair value of the
Company's stock-based awards
<PAGE>
to employees was estimated using the Black-Scholes option pricing model. The
Black-Scholes model requires the input of various assumptions. The fair value
of the Company's stock-based awards to employees was estimated assuming no
expected dividends or volatility and the following weighted-average
assumptions:
1997 1996
------ ------
Expected life (years) 1.75 3.25
Risk-free interest rate 5.75% 5.90%
For pro forma purposes, the estimated fair value of the Company's stock-based
awards to employees is amortized over the options' vesting period. The
Company's pro forma information for the years ended July 31 is as follows:
1997 1996
------------- ----------
Net income (loss):
As reported ($16,101,787) $2,321,280
Pro forma (16,119,086) 2,143,767
Net income (loss) per share:
As reported ($3.19) $.33
Pro forma (3.20) .30
WARRANTS
During 1996, warrants to purchase 274,779 shares of common stock were
exercised and warrants to purchase 2,173 shares of common stock expired.
In connection with the Merger, the Company assumed warrants with a seven year
term held by stockholders and a director of FormMaker to purchase common
stock. Additional warrants with a three year term were issued by FormMaker to
stockholders immediately prior to the Merger in connection with $3,000,000 of
subordinated notes (see also Note 5). All of the above warrants were
converted into warrants to purchase 522,085 shares of Class A common stock
based on FormMaker's exchange ratio.
Warrants to purchase 610,000 shares of Class A common stock were sold to
stockholders for $6,100 in connection with the stockholders obligations under
the Liquidity Agreement. These warrants have a three year term.
The following warrants are outstanding as of July 31, 1997:
Exercise Price
Warrants Per Share
-------- --------------
Warrants to Safeguard,
Technology Leaders II, L.P.,
and Technology Leaders II
Offshore C.V. 215,275 $.03
Warrants to a director of the
Company 102,270 $4.08
Warrants to Safeguard,
Technology Leaders II, L.P.,
and TL Venture Third Corp. 204,540 $5.10
Warrants to Safeguard,
Technology Leaders II, L.P.,
and Technology Leaders II
Offshore C.V. 610,000 $5.00
---------
Total 1,132,085
---------
---------
NOTE 8 - INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following at July 31:
1997 1996 1995
---------- ---------- ----------
Gross deferred tax assets:
Deferred revenue $128,156 $261,500 $387,222
Loss carryforwards 2,491,006 0 0
Tax credit carryforwards 426,484 247,531 419,129
Accounts receivable allowance 178,500 119,000 110,500
Deferred lease costs 204,594 0 0
Compensation expense related
to stock options 1,751,614 58,323 0
Other 290,794 77,993 82,484
---------- -------- --------
5,471,148 764,347 999,335
---------- -------- --------
Gross deferred tax liabilities:
Capitalized software (2,518,759) (660,171) (755,433)
Other (149,174) (87,778) (57,459)
---------- -------- --------
(2,667,933) (747,949) (812,892)
---------- -------- --------
Net 2,803,215 16,398 186,443
---------- -------- --------
Less valuation allowance (1,392,817) 0 0
---------- -------- --------
Net deferred tax asset $1,410,398 $16,398 $186,443
---------- -------- --------
---------- -------- --------
<PAGE>
The provision (benefit) for income taxes charged to operations was as follows:
1997 1996 1995
----------- ---------- ----------
Current tax expense:
U.S. federal $185,000 $1,048,000 $778,000
State, local & foreign 65,000 125,000 75,000
----------- ---------- ----------
Total current 250,000 1,173,000 853,000
----------- ---------- ----------
Deferred tax expense:
U.S. federal (1,394,000) 162,000 330,000
State, local & foreign 0 0 0
----------- ---------- ----------
Total deferred (1,394,000) 162,000 330,000
----------- ---------- ----------
Total provision
(benefit) ($1,144,000) $1,335,000 $1,183,000
----------- ---------- ----------
----------- ---------- ----------
The provision (benefit) for income taxes differs from the amount of income
taxes determined by applying the applicable U.S. statutory federal income tax
rate to pre-tax income as a result of the following differences:
1997 1996 1995
----------- ---------- ----------
Statutory U.S. tax rates ($5,863,568) $1,243,135 $1,083,213
Increase (decrease)
in rates resulting from:
Nondeductible items:
In-process technology 4,590,000 0 0
Other 41,375 16,173 34,550
State, local and foreign taxes (net) 42,900 82,500 49,500
Other 45,293 (6,808) 15,737
----------- ---------- ----------
Effective tax rates ($1,144,000) $1,335,000 $1,183,000
----------- ---------- ----------
----------- ---------- ----------
Income taxes currently payable for the years ended July 31, 1997, 1996, and
1995 were reduced by approximately $160,000, $170,000, and $170,000,
respectively through the utilization of net operating loss and tax credit
carryforwards.
At July 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $7,300,000 that generally expire
in the years ending 2000 through 2012.
The Company has approximately $426,000 of research and development tax
credit, investment tax credit, and alternative minimum tax credit
carryforwards. The tax credit carryforwards generally expire in the years
ending 2006 through 2012.
Due to ownership changes, a portion of the Company's net operating loss and
tax credit carryforwards is subject to an annual cumulative limitation with
respect to the amounts which may be utilized in any one year. The Company
believes realization of the net deferred tax asset, net of valuation
allowance, to be more likely than not.
The Company made estimated and regular income tax payments of $640,000,
$700,000 and $290,000 during the years ended July 31, 1997, 1996, and 1995,
respectively.
NOTE 9 - MAJOR CUSTOMERS AND RELATED PARTY TRANSACTIONS
Safeguard and, in the aggregate, Technology Leaders II, L.P., Technology
Leaders II Offshore C.V., and TL Ventures Third Corp., own approximately 20%
and 10%, respectively, of the Company's fully diluted outstanding common
stock at July 31, 1997. Interest expense related to notes payable to these
parties totaled $69,917 in 1997. The balance of this debt and other related
party transactions are also described elsewhere in the notes to consolidated
financial statements.
FormMaker has entered into various agreements with a major customer (Policy
Management Systems or "PMSC") to provide certain processing services and to
grant PMSC certain marketing and licensing rights to FormMaker's software.
Revenues of $2,998,813 from PMSC were recognized by the Company from the date
of the Merger through July 31, 1997 under the terms of these agreements.
Effective May 1997, PMSC provided 12 months termination notice of its
agreement with FormMaker regarding processing services. The marketing
agreement expires on December 31, 1999; however, PMSC can unilaterally
terminate the marketing agreement with FormMaker beginning January 1, 1998 by
providing 90 days' prior written notice.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
- - Image Sciences, Inc.
Texas
100% owned
- - FormMaker Software, Inc.
Georgia
100% owned
- - Micro Dynamics, Ltd.
Delaware
99.9% owned by FormMaker Software, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 2,869,458
<SECURITIES> 0
<RECEIVABLES> 9,535,784
<ALLOWANCES> 525,000
<INVENTORY> 0
<CURRENT-ASSETS> 13,319,032
<PP&E> 5,071,442
<DEPRECIATION> 1,983,864
<TOTAL-ASSETS> 32,698,165
<CURRENT-LIABILITIES> 11,674,574
<BONDS> 8,793,149
19,118,978
0
<COMMON> 42,778
<OTHER-SE> (7,563,062)
<TOTAL-LIABILITY-AND-EQUITY> 32,698,165
<SALES> 11,352,193
<TOTAL-REVENUES> 17,502,818
<CGS> 4,955,617
<TOTAL-COSTS> 8,955,121
<OTHER-EXPENSES> 26,007,358
<LOSS-PROVISION> 363,556
<INTEREST-EXPENSE> 171,562
<INCOME-PRETAX> (17,245,787)
<INCOME-TAX> (1,144,000)
<INCOME-CONTINUING> (16,101,787)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,101,787)
<EPS-PRIMARY> (3.19)
<EPS-DILUTED> 0
</TABLE>
