<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 23, 1998
REGISTRATION NO. 333-44427
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
AMENDMENT NO. 1
TO
REGISTRATION STATEMENT
ON FORM S-1
UNDER
THE SECURITIES ACT OF 1933
---------------
DOCUCORP INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7372 75-2690838
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
5910 NORTH CENTRAL EXPRESSWAY, SUITE 800
DALLAS, TEXAS 75206
(214) 891-6500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
MICHAEL D. ANDERECK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DOCUCORP INTERNATIONAL, INC.
5910 NORTH CENTRAL EXPRESSWAY, SUITE 800
DALLAS, TEXAS 75206
(214) 891-6500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C> <C> <C>
JAMES A. OUNSWORTH, ESQ. N. JEFFREY KLAUDER, ESQ. BRUCE H. HALLETT, ESQ. ROBERT H. STROUSE, ESQ.
SAFEGUARD SCIENTIFICS, INC. MORGAN, LEWIS & BOCKIUS LLP CROUCH & HALLETT, L.L.P. DRINKER BIDDLE & REATH LLP
800 THE SAFEGUARD BUILDING 2000 ONE LOGAN SQUARE 717 N. HARWOOD, SUITE 1400 1000 WESTLAKES DRIVE
435 DEVON PARK DRIVE PHILADELPHIA, PENNSYLVANIA 19103-6993 DALLAS, TEXAS 75201 SUITE 300
WAYNE, PENNSYLVANIA 19087 (215) 963-5694 (214) 922-4120 BERWYN, PENNSYLVANIA 19312-2409
(610) 293-0600 (610) 993-2213
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date this Registration Statement. If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share........ 7,460,000 $5.00 $37,300,000 $11,003.50
- -----------------------------------------------------------------------------------------------
Subscription
Rights(3)............. (3) -- -- --
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 640,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933.
(3) Evidencing the rights to subscribe for 6,500,000 of the shares of Common
Stock described above.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 23, 1998
PROSPECTUS
6,820,000 SHARES
DOCUCORP INTERNATIONAL, INC.
COMMON STOCK
(AND RIGHTS TO ACQUIRE
UP TO 6,500,000 OF SUCH SHARES)
DocuCorp International, Inc. is granting at no cost to the holders of common
shares of Safeguard Scientifics, Inc. transferable rights to purchase shares of
our Common Stock. Safeguard stockholders will receive one right for every five
Safeguard common shares that they own as of February 23, 1998. Each right will
entitle the holder to purchase one share of our Common Stock at an exercise
price of $5.00 per share. Up to 6,500,000 shares of our Common Stock will be
offered in the rights offering. Of these shares, we will be selling 3,680,000
shares and certain of our existing stockholders will be selling 2,820,000
shares. If any shares remain unsubscribed after the rights offering, the
Underwriters will purchase all such shares pursuant to a standby underwriting
agreement.
We will also be selling an additional 320,000 shares of our Common Stock to
certain persons selected by us. These persons may have a relationship with us,
Safeguard or one of Safeguard's other partnership companies.
The exercise period for the rights will expire at 5:00 p.m., New York City
time, on March 31, 1998. You may only exercise your rights if you purchase at
least 20 shares of our Common Stock through such exercise.
(Continued)
YOU SHOULD CAREFULLY CONSIDER THE INFORMATION REGARDING THE RISKS ASSOCIATED
WITH AN INVESTMENT IN OUR COMMON STOCK THAT ARE DISCUSSED UNDER THE CAPTION
"RISK FACTORS" BEGINNING ON PAGE 9.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
======================================================================================================
UNDERWRITING
UNDERWRITING DISCOUNT
EXERCISE DISCOUNT PAID BY PROCEEDS TO
AND PAID BY SELLING PROCEEDS TO THE SELLING
OFFER PRICE THE COMPANY STOCKHOLDERS THE COMPANY STOCKHOLDERS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Min. $0.15 Min. $0.15 Max. $4.85 Max. $4.85
Per Share............... $5.00 Max. $0.35 Max. $0.35 Min. $4.65 Min. $4.65
- ------------------------------------------------------------------------------------------------------
Min. $600,000 Min. $423,000 Max. $19,400,000 Max. $13,677,000
Total................... $34,100,000 Max. $1,336,000 Max. $987,000 Min. $18,664,000 Min. $13,113,000
- ------------------------------------------------------------------------------------------------------
Total with Min. $600,000 Min. $647,000 Max. $19,400,000 Max. $16,653,000
Over-Allotment......... $37,300,000 Max. $1,336,000 Max. $1,211,000 Min. $18,664,000 Min. $16,089,000
======================================================================================================
</TABLE>
The minimum underwriting discount assumes that all rights granted in the
rights offering are exercised and reflects the payment of a financial advisory
fee to the Underwriters equal to 3% of the exercise price on the 6,820,000
shares sold in this offering. In such a case, the minimum underwriting discount
would yield the maximum proceeds to us and to the selling stockholders. The
maximum underwriting discount assumes that none of the rights granted in the
rights offering are exercised and reflects the payment of an underwriting
discount of 4% of the exercise price on the 6,500,000 shares which would then
be purchased by the Underwriters plus an additional 3% financial advisory fee
on all of the 6,820,000 shares offered hereby. In such a case, the maximum
underwriting discount would yield the minimum proceeds to us and to the selling
stockholders.
The last row of the table assumes that the Underwriters have exercised their
option granted by certain of the selling stockholders to purchase an additional
640,000 shares of our Common Stock. The exercise of the over-allotment option
would yield additional proceeds to the selling stockholders and would require
the payment by the selling stockholders of both a 4% underwriting discount and
a 3% financial advisory fee on such shares.
Tucker Anthony Prudential Securities Incorporated
Incorporated
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
[A graphic appears under the heading "The Document Life Cycle" that depicts
the life of a document from left to right (i) beginning with the
creation/capture phase, which is depicted by a personal computer, with a
scanner and a word processor leading into the creation/capture phase from
above, (ii) moving to the publishing phase, which is depicted by a person
holding a document, with data flowing into the document from above, leading to
a high speed printer and printed customized documents below, and (iii) ending
with the storage/archive phase, which is depicted by a person holding a
document, leading to a disk representing imaging systems and a computer
terminal representing retrievable and viewable customized documents below.
Below the graphic is the following text: "DocuCorp offers a portfolio of
scalable high performance document automation software and services that
enable its customers to publish complex, high volume, customized documents.
The Company's products address all of the general phases of the document life
cycle: creation/capture, publishing, and storage/archive." In the upper left
hand corner of the page is the Company's logo, which includes their homepage
address on the worldwide web.]
<PAGE>
(Continued from cover page)
Once you exercise a right and we accept the exercise, you may not withdraw
the exercise. The shares of our Common Stock that are sold in the rights
offering will come first from the shares being issued by us, and then from the
shares being sold by the selling stockholders. If shares remain unsubscribed
for after the end of the rights exercise period, the first 300,000 of such
shares will be offered by us to certain other persons. These persons may have
a relationship with us, Safeguard or one of Safeguard's other partnership
companies. All shares not purchased by such persons after this offer and all
unsubscribed shares in excess of 300,000 will be purchased by the Underwriters
pursuant to a standby underwriting agreement.
There is no minimum number of shares that must be subscribed for in the
rights offering for it to be completed. The number of rights that will be
granted to the holders of Safeguard common shares is based upon the number of
Safeguard common shares that are outstanding on February 23, 1998. If there
are fewer than 32,500,000 Safeguard common shares outstanding on February 23,
1998, we will grant fewer than 6,500,000 rights in the rights offering. If
fewer than 6,500,000 rights are granted, we will offer the shares subject to
the rights which were not granted to Safeguard stockholders to certain persons
selected by us at a purchase price of $5.00 per share. In any event, all of
the 6,500,000 shares of our Common Stock offered in the rights offering will
be sold. However, this offering may be canceled by the Underwriters if certain
conditions are not satisfied. In that event, if you have made any payments to
the rights agent, ChaseMellon Stockholder Services, L.L.C., the full amount of
your payments will be promptly returned to you.
We will not receive any proceeds from the sale of shares by the selling
stockholders. After the completion of this offering, the selling stockholders
together will own approximately 49.7% of our Common Stock.
We have filed a Registration Statement with the SEC covering the rights and
the shares of Common Stock. Before this offering, our Common Stock has not
been listed on any stock exchange or The Nasdaq Stock Market. We have filed an
application to have the rights and our Common Stock approved for quotation on
the Nasdaq National Market under the symbols DOCCR and DOCC, respectively.
The Underwriters may engage in transactions involving the rights and the
Common Stock during and after the rights exercise period. As a result, the
Underwriters may realize profit in addition to the underwriting compensation
received for their participation in this offering. We expect that we will
deliver any remaining shares on or about April 9, 1998 at the offices of
Tucker Anthony Incorporated in New York, New York.
After this offering, we intend to send to all of our stockholders annual
reports containing financial statements that have been examined and reported
upon, with an opinion expressed by, the Company's independent auditors.
"Image Sciences(R)", "FormMaker(R)" and "DocuFlex(R)" are registered
trademarks of the Company. Applications to register "DocuCorp(TM)" and
"Unleashing the Power of Documents(TM)" as trademarks are pending. All other
product names referred to herein are the property of their respective owners.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK OF THE COMPANY, INCLUDING INITIATING BIDS OR EFFECTING PURCHASES ON THE
NASDAQ NATIONAL MARKET FOR THE PURPOSE OF PREVENTING OR RETARDING A DECLINE IN
THE MARKET PRICE OF THE COMMON STOCK. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements of the Company and the
Notes thereto included elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus (i) assumes no exercise of the
Underwriters' over-allotment option, (ii) assumes an exercise price of $5.00
per share, (iii) gives effect to a 6-for-5 split of the Common Stock effected
through a stock dividend declared on December 9, 1997 and (iv) assumes
conversion of all outstanding shares of Class B common stock into shares of
Common Stock. Unless the context otherwise requires, DocuCorp International,
Inc. and its subsidiaries are referred to collectively herein as "DocuCorp" or
the "Company." Unless the context otherwise requires, pro forma results of the
Company included herein refer to FormMaker Software, Inc. and Image Sciences,
Inc. on a combined basis, assuming that the merger of the two entities had
occurred on August 1, 1996.
THE COMPANY
DocuCorp International, Inc. ("DocuCorp" or the "Company") develops, markets
and supports a portfolio of open-architecture, enterprise-wide document
automation software products that enable its customers to produce complex, high
volume, customized documents. In addition, the Company provides document
automation consulting and applications integration services through a 145-
person service organization. The Company also provides document processing and
printing services which utilize the Company's software to provide solutions for
handling high volume, complex print, finish and mailing for customers who
outsource this activity.
DocuCorp software products support leading hardware platforms, operating
systems, printers and imaging systems. These products are designed to create,
publish and store documents such as insurance policies, utility statements,
telephone bills, bank and mutual fund statements, invoices, direct mail
correspondence, bills of lading and other customer oriented documents. The
Company currently has an installed base of more than 700 customers. The Company
believes it is the leading provider of document automation software and
services for the insurance industry to customers including Prudential Insurance
Company of America, Continental National Assurance (CNA) and American
International Group (AIG). More than half of the 200 largest insurance
companies in North America use the Company's software products and services,
including seven of the ten largest life and health insurance companies and nine
of the ten largest property and casualty insurance companies. The Company
believes it has also become a leading provider of document automation software
and services for companies in the utility industry, and that most of the new
adoptions of automated customer billing software during calendar 1997 were
licenses of the Company's products. Key utility customers include Southern
Company Services, Inc. and Consolidated Edison of New York, Inc. The Company
also has customers in the financial services, higher education,
telecommunications, and transportation industries, including Royal Bank
Financial Group, University of Texas, Polkomtel S.A., and Yellow Technology
Services, Inc.
Document automation is becoming increasingly important to corporations as
they endeavor to grow revenue, improve customer service and reduce costs.
Furthermore, certain current trends such as deregulation and consolidation in
industries such as insurance, utility and financial services and increased
computing power have accelerated the growth of the document automation
industry. DocuCorp intends to pursue a strategy for growth based upon the
following:
. leveraging existing relationships with its installed base of more than
700 customers;
. expanding its document automation consulting and integration services
and developing additional document processing and print outsourcing
relationships;
. developing additional customers in the insurance, utility, financial
services, higher education, telecommunications and transportation
industries;
. introducing new software products in calendar 1998 utilizing object-
oriented technology, with migration and upgrade paths for users of
existing products;
. developing additional customers in international markets by increasing
the number of its sales and professional services personnel domiciled
internationally; and
. pursuing acquisitions of other document publishing, management, work
flow or archival providers.
DocuCorp was organized and incorporated in Delaware in January 1997 in
connection with the merger (the "Merger") of FormMaker Software, Inc.
("FormMaker") and Image Sciences, Inc. ("Image Sciences"), which was
consummated on May 15, 1997. Prior to the Merger, Image Sciences and FormMaker
had been engaged in the document automation software and services industry
since 1982 and 1983, respectively. The Company's principal executive offices
are located at 5910 North Central Expressway, Suite 800, Dallas, Texas 75206,
and its telephone number is (214) 891-6500.
4
<PAGE>
RECENT DEVELOPMENTS
The Company recently announced its unaudited financial results for the period
ended January 31, 1998. Revenues for the quarter were approximately $11.2
million compared to actual revenues of $2.6 million for the corresponding
period last year. Pro forma combined revenues of the two companies that merged
on May 15, 1997, to create DocuCorp, were $9.7 million for the 1997 period. Net
income for the quarter was $768,000, or $0.06 per diluted share, compared to
net income of $467,000, or $0.08 per diluted share, for the corresponding
period last year. Pro forma combined net income for the 1997 period was
$386,000, or $0.03 per diluted share.
Revenues for the six months ended January 31, 1998 were approximately $22.1
million compared to $5.4 million actual a year earlier and $18.8 million pro
forma for the combined companies. Net income for the six month period was $1.5
million, or $0.11 per diluted share, compared with actual net income of $1.0
million, or $0.18 per diluted share, and pro forma combined net income of
$700,000, or $0.05 per diluted share, in the first half of fiscal 1997.
In February 1998, the Company entered into definitive agreements to acquire
all of the capital stock of EZPower Systems, Inc. ("EZPower") and Maitland
Software, Inc. ("Maitland"). EZPower develops, markets and supports document
management software products. DocuCorp will issue 650,000 shares of Common
Stock, repay $2.5 million of EZPower's indebtedness and pay certain contingent
cash consideration based on future performance. For the year ended December 31,
1997, EZPower had revenues of approximately $500,000 and a net loss of $2.0
million. Maitland has developed and recently commenced marketing the Transit
software product. This product is a data acquisition and transmittal program
which allows users the ability to more easily interface with document printing
and publishing software. DocuCorp will issue 170,000 shares of Common Stock as
consideration for the acquisition of Maitland, subject to certain repurchase
options by the Company. As a development stage company, the historical results
of Maitland and its tangible net assets are not significant. Both acquisitions
are scheduled to close in March 1998.
5
<PAGE>
THE OFFERING
Description of the Rights
Offering.................... If you hold Safeguard common shares on February
23, 1998, you will receive one right to purchase
our Common Stock for every five Safeguard common
shares you own. Fractional rights will be rounded
up to the next whole number in determining the
number of rights to be issued to Safeguard
stockholders. Each right entitles you to purchase
one share of our Common Stock at a purchase price
of $5.00. You must own at least 20 rights to be
eligible to exercise your rights. In other words,
if you own fewer than 96 Safeguard common shares,
you will receive fewer than 20 rights and you
will not be eligible to exercise your rights
unless you purchase additional rights in the
market. Together with the selling stockholders,
we are offering up to 6,500,000 shares of our
Common Stock for purchase through the exercise of
rights.
The Exercise Price of the
Rights...................... If you wish to exercise your rights to purchase
our Common Stock, the purchase price will be
$5.00 per share of Common Stock.
When You Can Exercise Your
Rights...................... The rights will only be exercisable from the
period beginning on February 24, 1998 and ending
on March 31, 1998 at 5:00 p.m., New York City
time.
How Your Rights Will be
Evidenced................... You will receive certificates that represent your
transferable rights.
Offer of Unsubscribed
Shares to Other
Purchasers................. In the event that not all of the rights are
exercised, we will offer the first 300,000
unsubscribed shares, and any shares of Common
Stock subject to rights that were not
distributed, to certain persons selected by us.
These persons may have a relationship with us,
Safeguard or one of Safeguard's other partnership
companies.
Obligations of the
Underwriters................ The Underwriters will purchase any shares offered
in the rights offering that have not been
purchased through the exercise of rights and have
not otherwise been sold by us by March 31, 1998
at the exercise price, less a 4% Underwriters'
discount and a 3% financial advisory fee. The
Underwriters will then offer these shares to the
public.
Number of Shares of Common
Stock Offered in the
Rights Offering............ Of the 6,500,000 shares offered in the rights
offering, we will be selling 3,680,000 shares and
the selling stockholders will be selling
2,820,000 shares.
Offer of Direct Shares to
Direct Purchasers.......... We are also offering up to 320,000 shares of our
Common Stock to certain persons selected by us.
These persons may have a relationship with us,
Safeguard or one of Safeguard's other partnership
companies.
6
<PAGE>
Common Stock to be
Outstanding After the
Offering................... After this offering, 14,762,475 shares of Common
Stock will be outstanding (not including
4,806,893 shares issuable upon the exercise of
outstanding stock options and warrants at a
weighted average exercise price of $2.10 per
share, of which options and warrants to purchase
3,444,751 shares of Common Stock were exercisable
as of October 31, 1997).
How We Intend to Use the
Proceeds.................... We will use the money received from the sale of
our shares for the repayment of outstanding debt,
vertical market and international expansion,
working capital, general corporate purposes and
capital expenditures. Proceeds may also be used
for acquisitions. We will not receive any
proceeds from the sale of our shares by the
selling stockholders.
Nasdaq National Market During the period in which you can exercise your
Symbols..................... rights, the rights will trade on the Nasdaq
National Market under the symbol DOCCR and the
Common Stock will trade under the symbol DOCCV on
a when-issued basis. After the expiration of the
rights period, the Common Stock will trade under
the symbol DOCC.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
YEAR ENDED JULY 31, JULY 31, 1997 OCTOBER 31,
------------------- ----------------------- --------------
1995 1996 ACTUAL(1) PRO FORMA(2) 1996 1997
--------- --------- --------- ------------ ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues.......... $ 10,814 $ 11,470 $ 17,503 $38,416 $2,824 $10,846
Operating income
(loss)................. 3,158 3,416 (17,460) 3,583 812 1,359
Income (loss) before
income taxes........... 3,186 3,656 (17,246) 2,893 907 1,203
Net income (loss)....... 2,003 2,321 (16,102) 1,714 577 719
Cash dividend declared
for preferred stock.... -- -- 2,808 -- -- --
Net income (loss) per
share(3):
Basic ................ $ 0.35 $ 0.37 $ (2.69) $ 0.09 $ 0.14
Diluted............... $ 0.25 $ 0.28 $ (2.69) $ 0.07 $ 0.10
Weighted average number
of shares
outstanding(3):
Basic ................ 5,674 6,202 5,981 6,472 5,133
Diluted............... 8,165 8,381 5,981 8,169 7,213
Pro forma net income
(loss) per share(3):
Basic................. $ (2.18) $ 0.16 $ 0.07
Diluted............... $ (2.18) $ 0.14 $ 0.06
Pro forma weighted
average number of
shares outstanding(3):
Basic................. 7,377 10,730 10,760
Diluted............... 7,377 12,689 12,840
Supplemental pro forma
net income (loss) per
share(3):
Basic................. $ (1.70) $ 0.17 $ 0.07
Diluted............... $ (1.70) $ 0.15 $ 0.06
Supplemental pro forma
weighted average number
of shares
outstanding(3):
Basic................. 9,412 12,764 12,356
Diluted............... 9,412 14,723 14,436
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1997
--------------------------
AS
ACTUAL ADJUSTED(4)
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital..................................... $ 900 $ 11,668
Total assets........................................ 31,021 41,597
Total debt(5)....................................... 7,362 337
Redeemable Class B common stock..................... 19,139 --
Stockholders' equity (deficit)...................... (6,812) 29,927
</TABLE>
- --------
(1) Includes the impact of non-recurring Merger-related charges of $21.4
million or $3.58 per share.
(2) Reflects certain pro forma adjustments related to the Merger. See
"Unaudited Pro Forma Combined Statement of Operations" and "Notes to
Unaudited Pro Forma Combined Statement of Operations."
(3) See Notes to the Company's Consolidated Financial Statements for the year
ended July 31, 1997 and the Interim Consolidated Financial Statements for
the three months ended October 31, 1997 regarding computations of net
income (loss) per share, pro forma net income (loss) per share and
supplemental pro forma net income (loss) per share calculations.
(4) The "As Adjusted" balances reflect (i) the automatic conversion of the
Company's Class B common stock to Common Stock and (ii) the sale by the
Company of 4,000,000 shares of Common Stock and the receipt and application
of approximately $17.6 million in estimated net proceeds from this
offering. See "Use of Proceeds" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
(5) As of December 31, 1997, total debt of the Company was approximately $6.3
million.
8
<PAGE>
RISK FACTORS
An investment in the rights and the shares of Common Stock offered hereby
involves a high degree of risk. Prospective investors should carefully
consider the following risk factors, as well as all other information in this
Prospectus, before investing in the shares of the Common Stock offered hereby.
This Prospectus contains certain forward-looking statements that involve risks
and uncertainties. Future events and the Company's actual results could differ
materially from the results reflected in these forward-looking statements.
Material factors that might cause such a difference are discussed in the
following risk factors.
SIGNIFICANT REVENUES FROM TWO INDUSTRIES
Approximately 70% of the Company's pro forma total revenues for the year
ended July 31, 1997 and 73% of the Company's total revenues for the three
months ended October 31, 1997 were derived from the insurance industry. Of
these revenues, 21% of pro forma total revenues for the year ended July 31,
1997 and 16% of total revenues for the three months ended October 31, 1997
were derived from one customer, Prudential Insurance Company of America.
Additionally, approximately 9% of the Company's pro forma total revenues for
the year ended July 31, 1997 and 19% of the Company's total revenues for the
three months ended October 31, 1997 were derived from the utility industry.
The Company's continued financial performance and its future growth will
depend upon its ability to continue to market its products successfully in the
insurance and utility industries and to enhance and market technologies for
distribution in other markets. This will require the Company to make
substantial product development and distribution channel investments. There
can be no assurance that the Company will be able to continue marketing its
products successfully in the insurance and utility industries or will be able
to successfully introduce new or existing products in markets other than the
insurance and utility industries. In addition, there can be no assurance that
the Company will continue to sell products and services to Prudential
Insurance Company of America at historical levels. Any significant decline in
revenues derived from Prudential Insurance Company of America could have a
material adverse effect on the Company's results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
TECHNOLOGICAL ADVANCES
The document automation industry has experienced and will continue to
experience rapid technological advances, changes in customer requirements, and
frequent new product introductions and enhancements. Development in both
software technology and hardware capability will require the Company to make
substantial product development investments. Any failure by the Company to
anticipate or respond adequately to technological developments and customer
requirements, or any significant delays in product development or
introduction, could have a material adverse effect on the Company's results of
operations. There can be no assurance that the Company's new products or
product enhancements intended to respond to technological change or evolving
customer requirements will achieve acceptance. See "Business--Product
Development."
PROSPECTIVE TERMINATION OF SIGNIFICANT THIRD-PARTY DISTRIBUTOR RELATIONSHIP
A substantial portion of the revenues of the Company's FormMaker subsidiary
have been generated from a marketing agreement with Policy Management Services
Corporation ("PMSC") under which such subsidiary granted PMSC the exclusive
right to market its proprietary Document Automation Platform (DAP) product
line in the property/casualty and life insurance industries. On a pro forma
combined basis, revenues from PMSC under the marketing agreement for the year
ended July 31, 1997 and revenues for the three months ended October 31, 1997
under such agreement were $10.3 million and $1.8 million, respectively. PMSC
is entitled to terminate the marketing agreement for any reason by providing
90 days' prior written notice. Unless terminated at an earlier date, the
Company intends to allow the marketing agreement to expire on December 31,
1999. Upon such termination or expiration, the Company will thereafter receive
no revenues from new licenses sold through PMSC, and maintenance revenues from
PMSC-sourced licensees will be eliminated over a two-year period. There can be
no assurance that the Company will be able to replace such revenues. See
"Business--Sales and Marketing--Relationship with Third-Party Distributor."
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ATTRACTION AND RETENTION OF TECHNICAL EMPLOYEES
The Company believes that its future success will depend in large part upon
its ability to attract, retain and motivate highly skilled employees,
particularly technical employees. The employees that are in highest demand are
software programmers, software developers, application integraters and
information technology consultants. These employees are likely to remain a
limited resource for the foreseeable future. There can be no assurance that
the Company will be able to attract and retain sufficient numbers of highly
skilled technical employees. The loss of a significant number of the Company's
technical employees could have a material adverse effect on the Company. See
"Business--Employees."
YEAR 2000 COMPLIANCE
Currently, there is significant uncertainty in the software industry and
among software users regarding the impact of the year 2000 on installed
software. For example, many customers historically captured only two digit
entries in the date code field and such two digit entries are used in the
software's forms selection features. Software database modifications, and/or
implementation modifications, are required to enable such software to
distinguish between 21st and 20th century dates. Current versions of the
Company's products are designed to be "Year 2000" compliant. The Company is in
the process of determining the extent to which the customized implementations
of its software products are Year 2000 compliant, as well as the impact of any
non-compliance on the Company and its customers. The Company does not
currently believe that the effects of any Year 2000 non-compliance in the
Company's installed base of software will result in any material adverse
impact on the Company's business or financial condition. There can be no
assurance that the Company will not be exposed to potential claims resulting
from system problems associated with the century change. Further, the Company
is unable to predict the impact, if any, on the Company as a result of its
customers being distracted from their document automation needs as their
attention is redirected or customer resources are diverted to becoming Year
2000 compliant.
COMPETITION
The market for the Company's document automation products is intensely
competitive. The Company faces competition from a broad range of competitors,
many of whom have greater financial, technical and marketing resources than
the Company. 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 from numerous software vendors,
including Document Sciences Corporation (which is majority owned by Xerox
Corporation ("Xerox")), M&I Data Services, Mobius Management Systems, Inc.,
Cincom Systems, Inc., and Group 1 Software, Inc. There can be no assurance
that the Company will be able to compete effectively with such entities. See
"Business--Competition."
NON-EXCLUSIVE PERPETUAL LICENSE
The Company's FormMaker subsidiary is a party to a license agreement with
PMSC under which FormMaker has granted PMSC a non-exclusive, perpetual,
royalty-free, worldwide license to use, execute, copy or license FormMaker's
DAP product line (and derivatives thereof) to third parties within the
insurance industry. Therefore, upon termination of the marketing agreement
between PMSC and FormMaker, PMSC will continue to have the right to use the
DAP product line and to compete directly with the Company in the insurance
industry. Given that PMSC has financial and other resources significantly
greater than the Company, if PMSC decides to compete with the Company, there
can be no assurance that the Company will be able to compete effectively with
PMSC. See "Business--Sales and Marketing--Relationship with Third-Party
Distributor."
FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced and may in the future continue to experience
fluctuations in its quarterly operating results due to the fact that sales
cycles, from initial evaluation to purchase, vary substantially from customer
to customer. Delays in the sales cycle frequently occur as a result of
competition, changes in customer
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personnel, overall budgets and spending priorities. The Company has typically
operated with little backlog for license revenues because software products
generally are shipped soon after orders are received. As a result, license
revenues in any quarter are substantially dependent on orders booked and
shipped in that quarter. The delay of customer orders for a small number of
licenses could adversely affect the license revenues for a given fiscal
quarter. The Company has historically earned a substantial portion of its
license revenues in the last weeks of any particular quarter, and has
historically experienced its highest license revenues in the fourth quarter of
its fiscal year. The failure to achieve such revenues in accordance with such
trends could have a material adverse effect on the Company's financial results
for each such period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations."
RISK OF SOFTWARE DEFECTS
Complex software products such 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. The Company's products have from time to
time contained software errors that were discovered after commercial
introduction. There can be no assurance that performance problems or errors
will not be discovered in the Company's products in the future. Any future
software defects discovered after shipment of the Company's products, if
material, could result in loss of revenues, delays in customer acceptance or
potential product liability. See "Business--Product Development."
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. There can
be no assurance that the Company's efforts will provide meaningful protection
for its proprietary technology against others who independently develop or
otherwise acquire substantially equivalent techniques or gain access to,
misappropriate or disclose the Company's proprietary technology. See
"Business--Intellectual Property, Trademarks and Proprietary Rights."
DEPENDENCE ON SINGLE FACILITY FOR CERTAIN SERVICES
The Company's print outsourcing operations are performed at its facility in
Atlanta, Georgia. Since the Company only has the capability to perform this
function at a single location, a fire, flood, earthquake, power loss, or other
event affecting the Company's Atlanta facility could cause a significant
interruption in the Company's operations. There can be no assurance that the
Company's contingency plans in the event of such interruption will prove to be
adequate. Any interruption in the operations at the Company's Atlanta facility
could have a material adverse effect on the Company's business, financial
condition or results of operations. See "Business--Facilities."
INTEGRATION OF OPERATING SUBSIDIARIES
The Company completed the Merger and subsequently commenced the integration
of the operations, facilities and management of Image Sciences and FormMaker.
Substantial integration of their respective products and services is expected
to continue throughout 1998. See "Business--Products and Services." The
Company may not be able to successfully complete this integration.
Additionally, the Merger could have a material adverse effect on the Company's
relationships with customers, distributors or suppliers. The operating history
of its subsidiaries on a stand-alone basis cannot necessarily be regarded as
indicative of the Company's prospects on a consolidated basis. Accordingly,
there can be no assurance that the Company will achieve growth in revenues, or
sustain revenues at a level consistent with the historical results of its
subsidiaries on a stand-alone basis.
DEPENDENCE ON KEY MANAGEMENT PERSONNEL
The Company believes that its continued success depends to a significant
extent upon the efforts and abilities of its senior management. In particular,
the loss of Michael D. Andereck, the Company's President and
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Chief Executive Officer, or any of the Company's other executive officers or
senior managers could have a material adverse effect on the Company. See
"Management."
CONTROL BY PRINCIPAL STOCKHOLDERS
After the completion of the offering, Safeguard, Xerox, Michael D. Andereck
and Technology Leaders II, L.P. ("Technology Leaders II"), the four largest
stockholders of the Company (collectively, the "Principal Stockholders"), will
beneficially own in the aggregate approximately 45.0% of the Company's
outstanding Common Stock. As a result, such stockholders will collectively
have the voting power to influence the election of the Board of Directors and
the approval of other matters presented for consideration by the stockholders.
The vote of the shares held by Technology Leaders II is controlled by the
majority vote of an executive committee comprised of ten voting members and
one non-voting member; the voting members include one person designated by a
wholly-owned subsidiary of Safeguard. See "Management," "Principal and Selling
Stockholders," "Certain Relationships and Related Transactions" and "Shares
Eligible for Future Sale."
BENEFITS OF OFFERING TO CURRENT STOCKHOLDERS
The offering will provide significant benefits to the current stockholders
of the Company, including the creation of a public market for the Common Stock
and the receipt of proceeds from the sale of Common Stock in the offering by
the selling stockholders. As a result, the Company's current stockholders will
generally have greater liquidity with respect to their investment in the
Common Stock and their holding of Common Stock will potentially have a greater
value. Furthermore, the Company intends to use approximately $3.4 million of
the estimated net proceeds to the Company to repay loans from Safeguard and
Technology Leaders II, both of whom are selling stockholders in this offering.
In addition, upon consummation of the offering, Safeguard will be relieved of
its obligation as guarantor of the Company's line of credit and Safeguard and
Technology Leaders II will be relieved of certain obligations to purchase
shares of Common Stock. The Principal Stockholders and the Company's other
executive officers and directors will beneficially own approximately 8.0
million shares of Common Stock after completion of this offering. Based on the
exercise price of $5.00, such shares owned will have an aggregate market value
of approximately $40.0 million. See "Use of Proceeds," "Principal and Selling
Stockholders" and "Certain Relationships and Related Transactions."
Safeguard beneficially owns 3,268,133 shares of the Company's Common Stock,
which were purchased at prices that were significantly below the exercise
price. Safeguard is selling 911,229 shares in the offering. Therefore, by
exercising their Rights, Safeguard shareholders will be purchasing shares of
the Company's Common Stock, which they already indirectly own through their
ownership of Safeguard common shares, at a purchase price significantly higher
than the price at which they were originally purchased by Safeguard. See
"Dilution."
BROAD DISCRETION IN APPLICATION OF PROCEEDS; ACQUISITION RISKS
The Company intends to use the net proceeds from this offering to reduce the
outstanding principal balance under its line of credit and certain other
indebtedness, and for continued vertical market and international expansion,
working capital, general corporate purposes and other capital expenditures. In
addition, a portion of the net proceeds may be used to make acquisitions.
Other than the repayment of debt, the Company has not specifically allocated
the net proceeds for any particular uses. Accordingly, the specific uses for a
substantial portion of the net proceeds will be at the complete discretion of
the Board of Directors of the Company and may be allocated from time to time
based upon a variety of circumstances. There can be no assurance that the
Company will deploy such funds in a manner that will enhance the financial
condition of the Company. Acquisitions present numerous risks, including
inaccurate assessment of the benefits to be provided by an acquired business,
the assumption of unexpected liabilities, significant transaction costs and
expenses, costs and expenses involved in the integration of the operations and
services of an acquired business, diversion of management's attention from
other business concerns and potential loss of key employees of the acquired
business. The realization of any of these risks could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Use of Proceeds."
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The Company has recently entered into agreements to acquire all of the
capital stock of EZPower Systems, Inc. and Maitland Software, Inc. For the
year ended December 31, 1997, EZPower had revenues of approximately $500,000
and a net loss of $2.0 million. As a development stage company, the historical
results of operations of Maitland and its tangible net assets are not
significant. There can be no assurance that the Company will effectively
assimilate these proposed acquisitions into its current business and generate
revenues and net income from the operation of these businesses. See
"Business--Prospective Acquisitions."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common Stock
or the rights, and there can be no assurance that an active public market will
develop or be sustained. The exercise price of the rights has been determined
solely by negotiations among the Company, the selling stockholders and the
Underwriters and does not necessarily reflect the price at which shares of
Common Stock may be sold in the public market during or after this offering.
See "The Offering--Why We are Selling Shares Through a Rights Offering" for a
discussion of the factors considered in determining the exercise price. The
public markets, in general, have from time to time experienced extreme price
and volume fluctuations, which have in some cases been unrelated to the
operating performance of particular companies, and the market for the
securities of software companies may be subject to greater price volatility
than the stock market in general. In addition, factors such as announcements
of new engagements by the Company's competitors or third parties;
announcements of fluctuations in the operating results of the Company or its
competitors; strategic alliances involving the Company's competitors; or
general market conditions in the document automation industry may have a
significant impact on the market price of the Common Stock.
DILUTION
The average price per share paid upon the original issuance by the Company
of Common Stock as of October 31, 1997 was $1.76. Purchasers of the Common
Stock in this offering will suffer immediate and substantial dilution of $2.97
in the net tangible book value per share of the Common Stock from the exercise
price of the rights. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
A substantial number of outstanding shares of Common Stock and shares of
Common Stock issuable upon exercise of outstanding stock options and warrants
will become eligible for future sale in the public market at various times. In
addition to the factors affecting the stock market in general and the market
for the Common Stock discussed above, sales of substantial amounts of Common
Stock in the public market, or the perception that such sales could occur,
could adversely affect the market price of the Common Stock. Upon completion
of this offering, the Company will have 14,762,475 shares of Common Stock
outstanding, excluding 4,806,893 shares of Common Stock subject to stock
options and warrants outstanding as of October 31, 1997, and any stock options
granted by the Company after October 31, 1997. Of these shares, the Common
Stock sold by the Company in this offering, except for certain shares
described below, will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Act"). An
aggregate of 820,000 shares of Common Stock are expected to be issued and sold
by the Company in connection with the acquisition of two businesses in private
transactions in reliance upon exemptions from registration under the Act and
are therefore deemed "restricted securities," as defined in Rule 144 under the
Act ("Rule 144"), which may not be sold publicly unless the shares are
registered under the Act or are sold under Rule 144. The issuance of
substantially all of the remaining 8,042,475 shares of Common Stock was
registered under the Act, and, subject to the Lock-Up Agreements described
below, such shares will be freely tradeable without restriction or further
registration under the Act.
Certain restrictions on shares of Common Stock are applicable to (i) any
shares of Common Stock purchased in this offering by affiliates of the
Company, which may generally only be sold in compliance with the limitations
of Rule 144 under the Act, except for the holding period requirements
thereunder, (ii)
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approximately 8.0 million shares of Common Stock beneficially owned by the
Principal Stockholders and the other executive officers and directors of the
Company, which are subject to lock-up agreements (the "Lock-Up Agreements")
prohibiting the sale or other disposition of such shares until 180 days after
the expiration date of the rights (the "Lock-Up Expiry Date") without the
prior written consent of Tucker Anthony Incorporated on behalf of the
Underwriters and (iii) approximately 2.5 million shares of Common Stock
beneficially owned by certain other stockholders of the Company, which are
subject to Lock-Up Agreements prohibiting the sale or other disposition of
such shares until the Lock-Up Expiry Date (or, with regard to approximately
300,000 of such shares, an earlier date agreed to by the Underwriters),
without the prior written consent of Tucker Anthony Incorporated on behalf of
the Underwriters. See "Shares Eligible For Future Sale."
It is anticipated that a registration statement (the "Form S-8 Registration
Statement") covering the Common Stock that may be issued pursuant to the
exercise of options granted by the Company will be filed and become effective
prior to the Lock-Up Expiry Date, and that shares of Common Stock that are so
acquired or offered thereafter pursuant to the Form S-8 Registration Statement
generally may be resold in the public market without restriction or
limitation. It is also anticipated that, promptly after the Lock-Up Expiry
Date, a registration statement covering the 820,000 shares of Common Stock
which are "restricted securities" will be filed and become effective, and that
these shares of Common Stock may be sold thereafter in the public market
without restriction or limitation. See "Management--Stock Options," "Shares
Eligible For Future Sale" and "Underwriting."
ANTI-TAKEOVER PROVISIONS
Shares of preferred stock may be issued by the Company in the future without
stockholder approval and upon such terms as the Board of Directors may
determine. The rights of the holders of the Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding stock of the Company and potentially prevent the
payment of a premium to stockholders in an acquisition transaction. There are
no shares of preferred stock outstanding and the Company has no present plans
to issue any shares of preferred stock. In addition, the Company's Certificate
of Incorporation, as amended, prohibits action by written consent of
stockholders in lieu of a meeting. This also could have the effect of making
it more difficult for a third party to acquire control of the Company and
potentially prevent the payment of a premium to the stockholders. See
"Description of Capital Stock."
REQUIREMENTS FOR LISTING SECURITIES ON THE NASDAQ NATIONAL MARKET; APPLICATION
OF THE PENNY STOCK RULES
The Company has applied with the Nasdaq National Market to have the Common
Stock and rights (the "Listed Securities") approved for listing (upon
completion of this offering with respect to the Common Stock and from the date
of this Prospectus through the expiration date with respect to the rights). If
the Company is unable to maintain the standards for continued listing, the
Listed Securities could be subject to delisting from the Nasdaq National
Market. Trading, if any, in the Listed Securities would thereafter be
conducted on the Nasdaq Small Cap Market. If, however, the Company did not
meet the requirements of the Nasdaq Small Cap Market, trading of the Listed
Securities would be conducted on an electronic bulletin board established for
securities that do not meet the Nasdaq listing requirements or in what is
commonly referred to as the "pink sheets." As a result, an investor may find
it more difficult to dispose of, or to obtain accurate quotations as to the
price of, the Company's securities.
In addition, if the Company's securities were delisted, they would be
subject to the so-called penny stock rules that impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally defined
as an investor with a net worth in excess of $1.0 million or annual income
exceeding $200,000, or $300,000 together with a spouse). For
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transactions covered by this rule, the broker-dealer must make a special
suitability determination for the purchaser and must have received the
purchaser's written consent to the transaction prior to sale. Consequently,
delisting, if it occurred, may affect the ability of broker-dealers to sell
the Company's securities and the ability of purchasers in this offering to
sell their securities in the secondary market.
The Securities and Exchange Commission has adopted regulations that define a
"penny stock" to be any equity security that has a market price (as defined in
the regulations) of less than $5.00 per share or an exercise price of less
than $5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules require the delivery, prior
to the transaction, of a disclosure schedule relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both
the broker-dealer and the registered representative, current quotations for
the securities and, if the broker-dealer is the sole market-maker, the broker-
dealer must disclose this fact and the broker-dealer's presumed control over
the market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. As a result, if the Common Stock is determined
to be "penny stock," an investor may find it more difficult to dispose of the
Company's Common Stock.
NO DIVIDENDS
To date, the Company has not paid any cash dividends on its Common Stock,
and does not expect to declare or pay any cash or other dividends in the
foreseeable future. In addition, the Company's credit agreement contains a
financial covenant that prohibits the payment of cash dividends. See "Dividend
Policy."
CANCELLATION OF RIGHTS OFFERING
If the conditions precedent to the sale to the Underwriters set forth in the
standby underwriting agreement are not satisfied, the Underwriters may elect,
on or before the sixth business day after the expiration date of the rights
(the "Closing Date"), to cancel the rights offering and the Company and the
selling stockholders will not have any obligations with respect to the rights.
Under such circumstances, the exercise price, without interest, will be
promptly returned. See "Underwriting." The Company has been advised by the
NASD that it is likely that trades in the rights and the when-issued shares of
Common Stock in the market would be canceled if the rights offering is not
consummated.
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THE OFFERING
WHY WE ARE SELLING SHARES THROUGH A RIGHTS OFFERING
We have agreed with Safeguard and the selling stockholders to make a rights
offering to holders of Safeguard common shares. This rights offering
represents the Company's initial public offering of its securities, although
it is different than a traditional public offering in that securities are
directed first to Safeguard shareholders and then to the general public. We
believe that this rights offering will provide several advantages over a
traditional initial public offering. This type of offering gives us the
opportunity to offer our Common Stock to investors who, as Safeguard
shareholders, already have some knowledge of our business. Our securities will
also be distributed to a broader, more stable shareholder base and
underwriting discounts and commissions will be less than if we pursued a
traditional initial public offering. In addition, Safeguard supports this type
of rights offering because it affords its shareholders the opportunity to
purchase shares before the shares are offered to the general public.
We determined the exercise price through negotiations with the selling
stockholders and the Underwriters. In making this determination, we considered
such factors as our future prospects and historical financial data, our
industry in general and our position in the industry; market valuations of the
securities of companies engaged in activities similar to ours; the quality of
our management team; and the advice of our Underwriters. We will also obtain
two independent appraisals to further support the determination of the final
exercise and offering price.
YOU CAN EXERCISE OR SELL YOUR RIGHTS
Until March 31, 1998, you may purchase one share of our Common Stock for
each right you receive, or you may sell your rights in the market. However,
you may not exercise rights for fewer than 20 shares of Common Stock in a
single account, unless you have previously exercised rights for at least 20
shares in the same account and you provide a letter to ChaseMellon stating
that you have already exercised at least 20 rights. If you hold Safeguard
common shares in multiple accounts, you must meet the minimum purchase
requirement for each account. You may, however, consolidate your rights into
one account. If you receive fewer than 20 rights, you should consider
purchasing enough additional rights to be eligible to exercise your rights or
selling your rights in the market. You should consult with your regular
investment advisor and carefully consider your alternatives.
IF THE NUMBER OF SAFEGUARD COMMON SHARES YOU OWN IS NOT DIVISIBLE BY FIVE
If the number of Safeguard common shares you own is not evenly divisible by
five, we will round up to the next highest whole number in calculating the
number of rights that you are entitled to receive. For example, if you hold 96
Safeguard common shares, you will receive 20 rights. If you are a nominee for
beneficial holders of Safeguard common shares, we will round the number of
rights that you will receive based upon the amount held by each beneficial
holder individually.
WHEN YOU CAN EXERCISE YOUR RIGHTS
You can exercise your rights at any time during the period beginning on
February 24, 1998 and ending at 5:00 p.m., New York City time, on March 31,
1998. After that date, you will not be able to exercise or transfer your
rights and they will be worthless. We do not intend to honor any rights
received for exercise by ChaseMellon after March 31, 1998, regardless of when
you sent your rights to ChaseMellon for exercise.
HOW YOU CAN TRANSFER YOUR RIGHTS
You may transfer all or a portion of your rights by endorsing and delivering
to ChaseMellon (at the addresses set forth below) your rights certificate. You
must properly endorse the certificate for transfer, your signature must be
guaranteed by a bank or securities broker and your certificate must be
accompanied by instructions to reissue the rights you want to transfer in the
name of the person purchasing the rights.
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ChaseMellon will reissue certificates for the transferred rights to the
purchaser, and will reissue a certificate for the balance, if any, to you if
it is able to do so before March 31, 1998. You will be responsible for the
payment of any commissions, fees and other expenses (including brokerage
commissions and any transfer taxes) incurred in connection with the purchase
or sale of your rights. We believe that a market for the rights may develop
during the period in which the rights may be exercised. To facilitate the
market, we have applied with the Nasdaq National Market to have the rights
approved for quotation for the period February 24, 1998 through March 31,
1998. We have reserved "DOCCR" as the Nasdaq symbol under which the rights
will trade. If you have any questions regarding the transfer of rights, you
should contact ChaseMellon at P.O. Box 3301, South Hackensack, NJ 07606,
Attention: Reorganization Department, telephone number (800) 223-6554.
HOW YOU CAN EXERCISE YOUR RIGHTS
On February 24, 1998, ChaseMellon will transfer a significant majority of
the rights to The Depository Trust Company, which in turn will credit the
rights, in its normal course of handling this type of transaction, to the
accounts of the participants (including brokers and dealers, banks, trust
companies and clearing corporations) for whom it holds Safeguard common
shares. The remainder will be transferred as soon as possible thereafter. You
may exercise your rights by completing and signing the election to purchase
form that appears on the back of each rights certificate. You must send the
completed and signed form, along with payment in full of the exercise price
for all shares that you wish to purchase, to ChaseMellon. ChaseMellon must
receive these documents and the payment by 5:00 p.m., New York City time, on
March 31, 1998. We do not intend to honor any exercise of rights received by
ChaseMellon after that date.
We will, however, accept your exercise if ChaseMellon has received on or
before March 31, 1998 full payment of the exercise price for shares to be
purchased through the exercise of rights, and has received a letter or
telegraphic notice from a bank, trust company or member firm of the New York
Stock Exchange or the American Stock Exchange setting forth your name, address
and taxpayer identification number, the number of shares you wish to purchase,
and guaranteeing that a properly completed and signed election to purchase
form will be delivered to ChaseMellon by 5:00 p.m., New York City time, on
April 3, 1998. If the properly executed documents are not received by 5:00
p.m. on April 3, 1998, we do not intend to accept your subscription.
We suggest, for your protection, that you deliver your rights to ChaseMellon
by overnight or express mail courier. If you mail your rights, we suggest that
you use registered mail. If you wish to exercise your rights, you should mail
or deliver your rights and payment for the exercise price to ChaseMellon as
follows:
By Mail By Hand: By Overnight:
Chase Mellon Shareholder ChaseMellon Shareholder ChaseMellon Shareholder
Services, L.L.C. Services, L.L.C. Services, L.L.C.
Reorganization Reorganization Reorganization
Department Department Department
P.O. Box 3301 120 Broadway--13th Floor 85 Challenger Road, Mail
South Hackensack, NJ New York, NY 10271 Drop Reorg.
07606 Ridgefield Park, NJ
07660
You must pay the exercise price in U.S. dollars by cash, check or money
order payable to the "Safeguard Escrow Account." Until this offering is
closed, your payment will be held in escrow by ChaseMellon, who will serve as
the escrow agent of the Safeguard Escrow Account.
Securities Transfer Corporation, the Company's transfer agent, will issue
certificates to you representing the Common Stock purchased through the
exercise of rights by April 9, 1998. Until that date, ChaseMellon will hold
all funds received in payment of the exercise price in escrow and will not
deliver any funds to us or to the selling stockholders until the shares of
Common Stock have been issued.
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<PAGE>
If you are a broker or depository who holds Safeguard common shares for the
account of others and you receive rights certificates for the account of more
than one beneficial owner, you should provide copies of this Prospectus to the
beneficial owners. You should also carry out their intentions as to the
exercise or transfer of their rights.
Safeguard will decide all questions as to the validity, form and eligibility
(including times of receipt, beneficial ownership and compliance with minimum
exercise provisions). The acceptance of subscription forms and the exercise
price also will be determined by Safeguard. Alternative, conditional or
contingent subscriptions will not be accepted. Safeguard reserves the absolute
right to reject any subscriptions not properly submitted. In addition,
Safeguard may reject any subscription if the acceptance of the subscription
would be unlawful. Safeguard also may waive any irregularities (or conditions)
in the subscription of shares of Common Stock, and its interpretation of the
terms (and conditions) of the rights offering shall be final and binding.
If you are given notice of a defect in your subscription, you will have five
business days after the giving of notice to correct it. You will not, however,
be allowed to cure any defect later than April 3, 1998. We are not obligated
to give you notification of defects in your subscription. We will not consider
an exercise to be made until all defects have been cured or waived. If your
exercise is rejected, your payment of the exercise price will be promptly
returned by ChaseMellon.
HOW YOU CAN OBTAIN ADDITIONAL INFORMATION
If you wish to receive additional copies of this Prospectus or additional
information concerning this offering, you should contact Greg Rush at Tucker
Anthony Incorporated, telephone number 617-725-1757, or Wayne Low at
Prudential Securities Incorporated, telephone number 212-778-4743.
EXPECTED EXERCISE OF RIGHTS BY SAFEGUARD CEO
Warren V. Musser, the Chairman and Chief Executive Officer of Safeguard (or
his assignees) is expected to exercise all rights distributed to him. As a
result, he (or his assignees) is expected to acquire approximately 560,000
shares of our Common Stock through the rights offering.
WHAT HAPPENS TO THE UNSUBSCRIBED SHARES
The first 300,000 shares of Common Stock that are not subscribed for at the
end of the rights exercise period will be offered at a price of $5.00 per
share to persons selected by us. These persons may have a relationship with
us, Safeguard or one of Safeguard's other partnership companies. We expect to
enter into agreements with these persons to purchase the unsubscribed shares
before the end of the rights exercise period. If there are less than 300,000
unsubscribed shares at the end of the rights exercise period, the number of
unsubscribed shares offered to each of these persons will be adjusted
accordingly.
To the extent that any unsubscribed shares remain unsold after the offer to
these persons, the Underwriters will purchase these shares pursuant to the
standby underwriting agreement. The Underwriters must purchase these shares no
later than April 9, 1998.
In connection with this offering, the Underwriters will receive a financial
advisory fee of 3% of the exercise price for each share of Common Stock being
offered in this offering, regardless of whether they purchase any shares in
this offering. In addition, if the Underwriters purchase any shares in this
offering or through the exercise of certain rights that are purchased in the
open market under certain circumstances, they may purchase the shares at the
exercise price less an underwriting discount of 4% of the exercise price,
subject to certain limitations. The Underwriters will offer shares of Common
Stock purchased by them to the public at prices which may vary from the
exercise price. The selling stockholders have granted to the Underwriters an
option to purchase an additional 640,000 shares of Common Stock to cover over-
allotments, if any, during the 20-day period beginning on March 31, 1998. The
Underwriters will be entitled to purchase these over-allotment shares at the
exercise price less the 3% financial advisory fee and the 4% underwriting
discount. See "Underwriting." We will not receive any proceeds from the sale
of any shares of Common Stock by the selling stockholders.
18
<PAGE>
We intend to supplement this Prospectus after the rights exercise period is
over to set forth the results of the rights offering, the transactions by the
Underwriters during the exercise period, the number of unsubscribed shares
purchased, if any, and any resale transactions.
WHAT HAPPENS IF THE RIGHTS OFFERING IS CANCELED
The Underwriters have the right to cancel the rights offering if certain
conditions are not satisfied or if certain circumstances exist prior to the
closing date of this offering. If you exercise rights and the rights offering
is canceled, ChaseMellon will promptly return to you, without interest, any
payment received in respect of the exercise price and you will not receive any
shares of our Common Stock. Along with the selling stockholders, we have
established an escrow account with ChaseMellon to hold funds received prior to
the closing date of this offering. The NASD has advised us that trades in the
rights and the when-issued shares of Common Stock in the market would be
canceled if this offering is not consummated.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
affecting holders of Safeguard common shares receiving rights in this
offering. In the opinion of Morgan, Lewis & Bockius LLP, the distribution of
the rights by the Company to holders of Safeguard common shares more likely
than not will constitute a taxable transaction under the Internal Revenue Code
of 1986, as amended (the "Code"), and may also be subject to state or local
income taxes. Because of the complexity of the provisions of the Code referred
to below and because tax consequences may vary depending upon the particular
facts relating to each holder of Safeguard common shares, such holders should
consult their own tax advisors concerning their individual tax situations and
the tax consequences of this offering under the Code and under any applicable
state, local or foreign tax laws.
Safeguard has been advised by Morgan, Lewis & Bockius LLP that, under
current interpretations of case law, the Code, and applicable regulations
thereunder, the federal income tax consequences applicable to holders of
Safeguard common shares receiving rights in this offering generally are as
follows:
DISTRIBUTION OF RIGHTS TO HOLDERS OF SAFEGUARD SHARES
The rights, representing the right to acquire shares of Common Stock from
the Company, can be considered as constituting "property" within the meaning
of Section 317(a) of the Code. The federal income tax consequences of a
distribution of the rights by the Company to holders of Safeguard common
shares, as determined under the Code and the regulations thereunder, are as
follows: (i) each noncorporate holder of Safeguard common shares will be
deemed to have received a distribution from Safeguard, generally taxable as
ordinary dividend income, in an amount equal to the fair market value (if any)
of the rights, as of the date of distribution, (ii) each corporate holder of
Safeguard common shares (other than foreign corporations and S corporations)
will be deemed to have received a distribution from Safeguard (generally
taxable as a dividend subject to the dividends received deduction for
corporations (generally 70%, but 80% under certain circumstances)) in an
amount equal to the fair market value (if any) of the rights, as of the date
of distribution, (iii) the tax basis of the rights in the hands of each holder
(whether corporate or noncorporate) of Safeguard common shares will be equal
to the fair market value (if any) of the rights as of the date of
distribution, and (iv) for purposes of (i)-(iii) above, the date of
distribution should be February 24, 1998. Because of the predominantly factual
nature of determining the fair market value, if any, of the rights, Morgan,
Lewis & Bockius LLP has expressed no opinion with respect to the fair market
value of the rights.
Since the fair market value of the rights will determine the amount of
taxable income deemed received by the holders of Safeguard common shares, the
determination of the fair market value of each right as of the date of
distribution is critical. The exercise price was determined through arms-
length negotiations among the Company, the selling stockholders and the
Underwriters. Based on these negotiations and the two independent
19
<PAGE>
appraisals which have been obtained, Safeguard's Board of Directors believes
that the per share value of Common Stock represented by the rights at the date
of the commencement of this offering approximates the exercise price, and that
the rights should have no value for federal income tax purposes. However, the
Internal Revenue Service is not bound by this determination. See "The
Offering--Why We Are Selling Shares Through a Rights Offering."
EXERCISE OF RIGHTS
Holders of rights, whether corporate or noncorporate, will recognize neither
gain nor loss upon the exercise of the rights. A holder of rights who receives
shares of Common Stock upon the exercise of the rights will acquire a tax
basis in such shares equal to the sum of the exercise price paid under this
offering and the tax basis (if any) of the holder of rights in the rights.
TRANSFER OF RIGHTS
The transferable nature of the rights will permit a holder of rights to sell
rights prior to exercise. Pursuant to Section 1234 of the Code, a rights
holder who sells rights prior to exercise will be entitled to treat the
difference between the amount received for the rights and the adjusted tax
basis (if any) of the holder of rights in the rights as a short-term capital
gain or capital loss, provided that Common Stock subject to the rights would
have been a capital asset in the hands of the holder had it been acquired by
him. The gain or loss so recognized will be short-term since the rights will
have been held for less than twelve months.
NON-EXERCISE OF RIGHTS
The income tax treatment applicable to holders of rights who fail to
exercise or transfer their rights prior to the expiration date also is set
forth in Section 1234 of the Code. Holders of rights who allow their rights to
lapse are deemed under the Code to have sold their rights on the date on which
the rights expire. Since upon such lapse no consideration will be received by
a holder of rights, and since the rights will have been held for less than
twelve months, a short-term capital loss equal to the tax basis (if any) in
the rights will be sustained by the holder on such lapse, provided that Common
Stock subject to the rights would have been a capital asset in the hands of
the holder had it been acquired by him.
20
<PAGE>
USE OF PROCEEDS
The minimum net proceeds to the Company from the sale of the 4,000,000
shares of Common Stock offered by the Company hereby are estimated to be
approximately $17.6 million after deducting estimated offering expenses
allocable to and payable by the Company and assuming that none of the rights
granted in the rights offering are exercised and the sale of all shares
pursuant to the standby underwriting agreement. Estimated offering expenses
include the maximum applicable non-accountable expense allowance to the
Underwriters, a financial advisory fee of 3% of the exercise price and an
underwriting discount of 4% of the exercise price. In the event more of the
shares of Common Stock offered hereby are sold pursuant to the exercise of
rights, the Company will not be obligated to pay the underwriting discount
with respect to such shares and will, therefore, realize an amount of net
proceeds greater than approximately $17.6 million. See "The Offering--What
Happens to the Unsubscribed Shares" and "Underwriting."
The Company intends to use a portion of the net proceeds from this offering
to repay amounts due to NationsBank, N.A. under its line of credit. As of
December 31, 1997, the Company had $2.6 million outstanding under its line of
credit. The $10.0 million line of credit, which was incurred to refinance
working capital borrowings by FormMaker, bears interest at rates which
generally approximate the bank's prime rate or the London Interbank rate. In
addition, (i) $3.0 million of the estimated net proceeds will be used to repay
approximately $2.0 million due to Safeguard, approximately $570,000 due to
Technology Leaders II, and approximately $460,000 due to TL Ventures Third
Corp., pursuant to three subordinated notes, which are due in full at the
earlier of the closing of a public offering yielding net proceeds to the
Company in excess of $13.0 million and May 15, 2000, and bear interest at the
prime lending rate plus 1.0% and (ii) approximately $399,000 will be used to
repay two notes due Safeguard which are due in monthly installments ending on
February 1, 2000 and bear interest at the prime lending rate plus 1.0%. The
remainder of the net proceeds will be used for continued vertical market and
international expansion, working capital, general corporate purposes and other
capital expenditures. The Company may also use a portion of the net proceeds
from this offering to expand its business through acquisitions. Although the
Company expects to complete the acquisition of two companies prior to the
closing of this offering and continues to explore prospective acquisition
opportunities, the Company does not currently have any commitments for
business acquisitions subsequent to the closing of this offering. See
"Business--Prospective Acquisitions." Other than the repayment of outstanding
indebtedness, the Company has not made any determination regarding the amounts
or timing of the use of any proceeds from this offering. See "Risk Factors--
Broad Discretion in Application of Proceeds; Acquisition Risks." The amounts
and the timing of any such use may vary significantly depending upon a number
of factors, including the Company's revenue growth, asset growth, cash flow
and acquisition activities. Pending such uses, the net proceeds of this
offering will be invested in short-term, investment-grade, interest-bearing
securities. The Company currently anticipates that the net proceeds to be
received by the Company from this offering, together with amounts available
under its existing line of credit, cash generated from operations and existing
cash balances will be sufficient to satisfy its operating cash needs for at
least 12 months following the consummation of this offering. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
DIVIDEND POLICY
To date, the Company has not paid or declared any cash dividends on its
Common Stock. The Company currently intends to retain future earnings for use
in its business and, therefore, does not anticipate paying or declaring any
cash dividends in the foreseeable future. The payment of future dividends, if
any, will depend among other things, on the Company's results of operations,
cash flows and financial condition and on such other factors as the Company's
Board of Directors may, in its discretion, consider relevant. In addition, the
Company's credit agreement with NationsBank, N.A. contains a financial
covenant that prohibits the payment of any dividends.
21
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of October 31, 1997, (ii) the capitalization giving pro forma effect to the
automatic conversion of the Class B common stock into Common Stock, and (iii)
the pro forma capitalization as adjusted to reflect the sale by the Company of
4,000,000 shares of Common Stock in this offering and the receipt and
application of approximately $17.6 million in estimated net proceeds from this
offering. This table should be read in conjunction with the Consolidated
Financial Statements of the Company and the Notes thereto and other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1997
------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, including current portion(1).... $ 7,362 $ 7,362 $ 337
Redeemable Class B common stock, 7,000,000
shares authorized at $.01 par value, 5,629,122
shares issued and outstanding and no shares
issued and outstanding pro forma and pro forma
as adjusted.................................... 19,139 0 0
Stockholders' equity (deficit):
Common Stock, par value $0.01 per share;
50,000,000 shares authorized and 5,133,353
shares issued and outstanding actual,
10,762,475 shares issued and outstanding pro
forma, and 14,762,475 shares issued and
outstanding pro forma as adjusted(2)(3)........ 51 108 148
Preferred Stock, par value $0.10 per share;
1,000,000 shares authorized and no shares
issued and outstanding actual, pro forma and
pro forma as adjusted.......................... 0 0 0
Additional paid-in capital...................... 4,902 23,984 41,544
Retained deficit................................ (11,694) (11,694) (11,694)
Notes receivable from stockholders.............. (71) (71) (71)
------- ------- -------
Total stockholders' equity (deficit).......... (6,812) 12,327 29,927
------- ------- -------
Total capitalization........................ $19,689 $19,689 $30,264
======= ======= =======
</TABLE>
- --------
(1) The "Pro Forma As Adjusted" long-term debt, including current portion,
reflects the repayment of (i) $3.6 million outstanding under the Company's
line of credit, (ii) $3.0 million of subordinated notes and (iii) $430,000
of notes payable from a portion of the net proceeds from this offering. As
of December 31, 1997, the Company's outstanding long-term debt, including
current portion, was approximately $6.3 million. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
(2) Excludes as of October 31, 1997, 4,806,893 shares of Common Stock issuable
upon the exercise of options and warrants at a weighted average exercise
price of $2.10 per share (of which options and warrants to purchase
3,444,751 shares were exercisable). See "Management--Stock Options."
(3) Excludes 820,000 shares of Common Stock proposed to be issued in
connection with proposed business acquisitions prior to the offering. See
"Business--Prospective Acquisitions."
22
<PAGE>
DILUTION
As of October 31, 1997, the Company had a deficit in net tangible book value
of approximately $6.8 million or $1.33 per share of Common Stock. Net tangible
book value per share of Common Stock represents the amount of the Company's
tangible assets less its total liabilities, divided by the total number of
shares of Common Stock outstanding. Upon the consummation of this offering,
5,629,122 shares of the Company's Class B common stock will automatically
convert into an equal number of shares of Common Stock, resulting in an
increase in net tangible book value of $19.1 million, or $2.48 per share as of
October 31, 1997. After giving effect to such increase, net tangible book
value would have been $12.3 million, or $1.15 per share, as of October 31,
1997. Without taking into account any changes in net tangible book value after
October 31, 1997, other than to give effect to the items described in Note 1
appearing immediately below the following table, the pro forma net tangible
book value of the Company as of October 31, 1997, would have been
approximately $29.9 million or $2.03 per share. This represents an immediate
increase in such pro forma net tangible book value of $0.88 per share to
existing stockholders and an immediate dilution of $2.97 per share to
investors purchasing Common Stock at the exercise price in this offering. New
stockholders that acquire Common Stock from the Underwriters at a price
greater than the exercise price will experience greater dilution. The
following table illustrates this per share dilution in net tangible book
value:
<TABLE>
<S> <C>
Exercise Price................................................. $5.00
Net tangible book value per share as of
October 31, 1997............................................. (1.33)
Increase per share attributable to
conversion of Class B common stock.......................... 2.48
Increase per share attributable to
new stockholders(1).......................................... 0.88
-----
Pro forma net tangible book
value per share as of October 31, 1997......................... 2.03
-----
Dilution per share to new stockholders......................... $2.97
=====
</TABLE>
- --------
(1) Reflects the sale by the Company of 4,000,000 shares of Common Stock and
the receipt of approximately $17.6 million in net proceeds from this
offering.
The following table sets forth, on a pro forma adjusted basis as of October
31, 1997 (after giving effect to the automatic conversion of the Class B
common stock), the number of shares of Common Stock issued by the Company, the
total consideration paid and the average price per share paid upon original
issuance to stockholders as of October 31, 1997 and by new investors before
deducting the Underwriters' discount, financial advisory fees and estimated
offering expenses:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders(1)(2)..... 10,762,475 72.9% $18,939,861 48.6% $1.76
New stockholders........ 4,000,000 27.1 20,000,000 51.4 5.00
---------- ----- ----------- -----
Total................. 14,762,475 100.0% $38,939,861 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Safeguard acquired 2,333,305 shares of Common Stock and warrants to
purchase 187,709 shares of Common Stock as a result of the Merger in
consideration for its investment in FormMaker of approximately $11.5
million or $4.55 per share of Common Stock (assuming that the warrants are
exercised). In addition, Safeguard has warrants to purchase an additional
747,118 shares of Common Stock at exercise prices ranging from $4.17 to
$4.25. See "Certain Relationships and Related Transactions."
(2) Excludes 820,000 shares of Common Stock at an imputed price of $5.00 per
share proposed to be issued in connection with proposed business
acquisitions prior to the offering. See "Business--Prospective
Acquisitions."
The foregoing tables assume no exercise of outstanding options and warrants.
As of October 31, 1997, there were outstanding options and warrants to
purchase an aggregate of 4,806,893 shares of Common Stock (of which 3,444,751
were exercisable) at a weighted average exercise price of $2.10 per share, and
the Company had an additional 142,800 shares of Common Stock available for
future grants and other issuances under its Equity Compensation Plan. See
"Management" and Note 7 to the Notes to the Consolidated Financial Statements
appearing elsewhere in this Prospectus.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and the Notes thereto included elsewhere in this Prospectus. The
Company was organized to effect the May 1997 merger of Image Sciences and
FormMaker. For accounting purposes, the Merger is treated as an acquisition of
FormMaker by Image Sciences. The statement of operations data for the year
ended July 31, 1997 and periods thereafter include the consolidated operations
of FormMaker beginning May 15, 1997. The financial statements of Image
Sciences are presented as historical statements of the Company for periods
prior to the Merger. The statement of operations data for the years ended July
31, 1993, 1994, 1995, 1996 and 1997, and the balance sheet data as of July 31,
1993, 1994, 1995, 1996 and 1997 have been derived from consolidated financial
statements of the Company which have been audited by Price Waterhouse LLP,
independent accountants. The statement of operations data for the three months
ended October 31, 1996 and 1997 and the balance sheet data as of October 31,
1997 have been derived from the Company's unaudited consolidated financial
statements which, in the opinion of management, include all significant,
normal and recurring adjustments necessary for a fair presentation of the
financial position and results of operations for such unaudited period.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED JULY 31, ENDED OCTOBER 31,
--------------------------------------- ------------------
1993 1994 1995 1996 1997(1) 1996 1997
------ ------- ------- ------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues.......... $9,320 $10,874 $10,814 $11,470 $ 17,503 $ 2,824 $ 10,846
Operating income
(loss)................. 2,655 3,546 3,158 3,416 (17,460) 812 1,359
Income (loss) before
income taxes........... 2,367 3,399 3,186 3,656 (17,246) 907 1,203
Net income (loss)....... 1,807 2,169 2,003 2,321 (16,102) 577 719
Cash dividend declared
for preferred stock.... $ -- $ -- $ -- $ -- $ 2,808 $ -- $ --
Net income (loss) per
share(2):
Basic................. $ 0.39 $ 0.41 $ 0.35 $ 0.37 $ (2.69) $ 0.09 $ 0.14
Diluted............... $ 0.22 $ 0.27 $ 0.25 $ 0.28 $ (2.69) $ 0.07 $ 0.10
Weighted average number
of shares
outstanding(2):
Basic................. 4,607 5,301 5,674 6,202 5,981 6,472 5,133
Diluted............... 8,296 8,114 8,165 8,381 5,981 8,169 7,213
Pro forma net income
(loss) per share(2):
Basic................. $ (2.18) $ 0.07
Diluted............... $ (2.18) $ 0.06
Pro forma weighted
average number of
shares outstanding(2):
Basic................. 7,377 10,760
Diluted............... 7,377 12,840
Supplemental pro forma
net income (loss) per
share(2):
Basic................. $ (1.70) $ 0.07
Diluted............... $ (1.70) $ 0.06
Supplemental pro forma
weighted average number
of shares
outstanding(2):
Basic................. 9,412 12,356
Diluted............... 9,412 14,436
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
AS OF JULY 31,
--------------------------------------- AS OF OCTOBER 31,
1993 1994 1995 1996 1997 1997
------ ------- ------- ------- ------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ (459) $ 1,930 $ 4,049 $ 5,640 $ 1,644 $ 900
Total assets............ 9,785 11,572 13,145 14,691 32,698 31,021
Total debt.............. 3,158 1,987 1,637 46 9,439 7,362
Redeemable Class B
common stock........... -- -- -- -- 19,119 19,139
Stockholders' equity
(deficit).............. $1,326 $ 3,545 $ 5,606 $ 8,037 $(7,520) $(6,812)
</TABLE>
- --------
(1) Includes the impact of non-recurring Merger-related charges of $21.4
million or $3.58 per share.
(2) See Notes to the Company's Consolidated Financial Statements for the year
ended July 31, 1997 and the Interim Consolidated Financial Statements for
the three months ended October 31, 1997 regarding computations of net
income (loss) per share, pro forma net income (loss) per share and
supplemental net income (loss) per share calculations.
25
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
The unaudited pro forma combined statement of operations presented
represents (i) the Company's audited historical results for the fiscal year
ended July 31, 1997 and (ii) FormMaker's unaudited financial results for the
period from August 1, 1996 through the date of the Merger, May 15, 1997. The
Company's historical financial results include the results of Image Sciences
for the period presented and the consolidated results of FormMaker from the
effective date of the Merger. The unaudited pro forma combined information
presented assumes the Merger occurred on August 1, 1996.
During a portion of the period presented, the Company, Image Sciences, and
FormMaker were not under common control or management and, as a result, the
unaudited pro forma combined statement of operations is not necessarily
indicative of or comparable to the operating results that would have occurred
had the Merger occurred as of or at the beginning of the period presented or
that will occur in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Selected Consolidated
Financial Data," the Consolidated Financial Statements of the Company and the
Notes thereto and the Consolidated Financial Statements of FormMaker and the
Notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1997
-------------------------------------------
PRO FORMA PRO FORMA
COMPANY FORMMAKER ADJUSTMENTS COMBINED
-------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES:
Professional services.............. $ 6,151 $14,677 $20,828
License............................ 4,092 4,061 8,153
Maintenance and other recurring.... 7,260 2,175 9,435
-------- ------- -------
Total revenues.................... 17,503 20,913 38,416
-------- ------- -------
EXPENSES:
Professional services.............. 3,999 12,548 16,547
Product development and support.... 4,956 2,355 $ (475)(A) 6,836
Selling, general and
administrative.................... 4,630 6,556 264 (B) 11,450
Merger-related charges............. 21,378 -- (21,378)(C) --
-------- ------- ------- -------
Total expenses.................... 34,963 21,459 (21,589) 34,833
-------- ------- ------- -------
Operating income (loss)............ (17,460) (546) 21,589 3,583
Other income (expense), net........ 214 (554) (350)(D) (690)
-------- ------- ------- -------
Income (loss) before income taxes.. (17,246) (1,100) 21,239 2,893
Provision for income taxes
(benefit)......................... (1,144) -- 2,323 (E) 1,179
-------- ------- ------- -------
Net income (loss).................. $(16,102) $(1,100) $18,916 $ 1,714
======== ======= ======= =======
Pro forma net income per share(1):
Basic............................. $ 0.16
=======
Diluted........................... $ 0.14
=======
Pro forma weighted average number
of shares outstanding(1):
Basic............................. 10,730
=======
Diluted........................... 12,689
=======
</TABLE>
See accompanying notes to unaudited pro forma combined statement of
operations.
26
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1997
---------------------------------------
PRO FORMA PRO FORMA
COMPANY FORMMAKER ADJUSTMENTS COMBINED
------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Supplemental pro forma net income per
share(2):
Basic................................. $ 0.17
======
Diluted............................... $ 0.15
======
Supplemental pro forma weighted average
number of shares outstanding(2):
Basic................................. 12,764
======
Diluted............................... 14,723
======
</TABLE>
- --------
(1) Pro forma net income per share has been computed using the weighted
average number of shares outstanding after giving retroactive effect to
the six-for-five stock split declared in December 1997 and assuming that
all shares of Class B common stock have been converted to shares of Common
Stock as of the date of issuance.
(2) Supplemental pro forma net income per share has been computed using the
weighted average number of shares of common stock used in the calculation
of pro forma net income per share, plus the number of shares that the
Company would need to repay (i) $5,471,634 due under the Company's line of
credit, (ii) $3,000,000 in subordinated notes due Safeguard Scientifics,
Inc. ("Safeguard"), Technology Leaders II, L.P., and TL Ventures Third
Corp. and (iii) $479,174 in notes due to Safeguard as of July 31, 1997.
For purposes of computing supplemental pro forma net income per share, the
pro forma net income for the fiscal year ended July 31, 1997 was increased
by $421,403 representing elimination of the related interest expense on
such debt and the associated tax effect, and the weighted average shares
outstanding used in the supplemental pro forma net income per share
calculation was increased by 2,034,275 shares which represents the
additional shares required to be sold to retire the debts.
See accompanying notes to unaudited pro forma combined statement of
operations.
27
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
The following pro forma adjustments are reflected in the unaudited pro forma
combined statement of operations.
(A) To adjust amortization expense of acquired completed technology over
the remaining estimated useful life of six years.
(B) To adjust amortization expense of goodwill over the remaining
expected period of benefit of ten years.
(C) The pro forma information does not include the effect of non-
recurring Merger-related charges for acquired in-process technology,
compensation charges and other Merger-related charges of $13.5 million,
$7.6 million, and $228,000, respectively. Accordingly, these amounts have
been eliminated from the Company's historical financial statements for the
year ended July 31, 1997.
(D) To record reduced interest income resulting from the $8.0 million
distribution to Image Sciences' stockholders concurrent with the Merger.
(E) To record the income tax effect of the above adjustments and combined
operations for the entire period presented.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS
Certain information contained herein may include "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 Prospectus, 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 "Risk Factors." Should one or more of these
risks or uncertainties, among others as set forth in this Prospectus,
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 expectations 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 Prospectus.
All forward-looking statements included in this Prospectus 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.
OVERVIEW
DocuCorp develops, markets and supports a portfolio of open-architecture,
enterprise-wide document automation software products that enable its
customers to produce complex, high volume, customized documents. In addition,
the Company provides document automation consulting and systems integration
services through a 145-person service organization. The Company also provides
document processing and printing services which utilize the Company's software
to provide solutions for handling high volume, complex print, finish and
mailing for customers who outsource this activity.
DocuCorp was formed in connection with the Merger. The Merger was treated as
an acquisition of FormMaker by Image Sciences, and 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 subsidiaries. Consolidated results of FormMaker and its
subsidiary 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 $21.4 million 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. Due to the lack of comparability of the results of
operations for periods prior to and subsequent to the Merger, supplemental
analysis of unaudited pro forma combined statement of operations information
of the Company has been included in the accompanying analysis.
The Company derives its revenues from license fees, recurring maintenance
fees, and professional services fees related to its software products. License
revenues are generally 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, print outsourcing,
contract programming, and education services.
RESULTS OF OPERATIONS
Historical Operating Results of the Company
Recent Operating Results
The Company recently announced its unaudited financial results for the
period ended January 31, 1998. For the three-month period ended January 31,
1998, the Company's revenues increased 330% over the same period in the prior
year to $11.2 million. Net income in the three months ended January 31, 1998
was $768,000 compared to $467,000 for the same period in the prior year.
Diluted net income per share in this period was $0.06 based on 13,024,853
weighted average shares outstanding. For the six months ended January 31,
1998, the
29
<PAGE>
Company's revenues increased 306% over the prior six month period to $22.1
million. Net income in the six months ended January 31, 1998 was $1.5 million
compared to $1.0 million for the same period of the previous year. Diluted net
income per share in this period was $0.11 based on 12,932,197 weighted average
shares outstanding.
Three Months Ended October 31, 1996 Compared to Three Months Ended October 31,
1997
Revenues. The inclusion of FormMaker's results for the three months ended
--------
October 31, 1997 was primarily responsible for the 284% increase in total
revenues. Professional services revenues increased significantly due to the
inclusion of FormMaker services in the three months ended October 31, 1997.
License revenues increased 51% due to the inclusion of FormMaker's license
revenues. Maintenance and other recurring revenues increased 63% as a result
of inclusion of FormMaker's maintenance revenue and an increased installed
customer base.
Backlog for the Company's products and services of approximately $25.0
million as of October 31, 1997, of which approximately $16.0 million is
scheduled to be satisfied within one year, is primarily comprised of recurring
software license and maintenance revenues for ongoing maintenance and support,
software implementation and consulting services, and print outsourcing
services. Software agreements for recurring license fees generally have non-
cancelable terms of up to five years. Annual maintenance contracts may
generally be terminated upon 30 days' notice; however, the Company has not
historically experienced material cancellations of such contracts. Software
implementation and consulting services backlog is principally performed under
time and material agreements of which some have cancellation provisions. Print
outsourcing services agreements generally provide that fees are charged on a
per transaction basis. The estimated future revenue with respect to software
implementation and print outsourcing services are based on management's
estimate of revenues over the remaining life of the respective contracts.
A subsidiary of the Company distributes the line of DAP software products,
which was acquired by the Company in connection with the Merger, to the
insurance industry in North America through PMSC. A substantial portion of the
subsidiary's revenues are generated from a marketing agreement with PMSC under
which the subsidiary has granted PMSC the exclusive right to market the DAP
software in the property/casualty and life insurance industries. Pro forma
revenues from PMSC under this agreement for the year ended July 31, 1997, and
revenues for the three-month period ended October 31, 1997 were approximately
$10.3 million and $1.8 million, respectively. PMSC can terminate the marketing
agreement by providing 90 days' prior written notice. Unless terminated at an
earlier date, the Company intends to allow the marketing agreement to expire
on December 31, 1999. Upon expiration or termination of the marketing
agreement, the Company will receive no revenues from new licenses sold through
PMSC, and maintenance revenues from PMSC-sourced licensees will be eliminated
over a two-year period.
In addition, PMSC has provided notice of termination of a print outsourcing
agreement, effective June 1998. Revenues from PMSC on a pro forma basis under
this agreement for the year ended July 31, 1997 and revenues for the three-
month period ended October 31, 1997 were approximately $5.3 million and $1.7
million, respectively. Although print outsourcing revenues will experience a
short-term decline, the Company does not anticipate any meaningful reduction
in operating income as a result of such termination.
The Company is unable to predict the impact, if any, on the Company's
revenues as a result of its customers being distracted from their document
automation needs as their attention is re-directed, or customer resources are
diverted, to becoming Year 2000 compliant.
Professional services expense. Professional services expense is composed
-----------------------------
primarily of personnel expenses related to both consulting and print
outsourcing services. The majority of the $4.7 million increase is due to the
inclusion of FormMaker personnel and related expenses during the three months
ended October 31, 1997. Postage and supplies expense of approximately $1.3
million for print outsourcing services also contributed to the increase. For
the three months ended October 31, 1996 and 1997, professional services
expense represented
30
<PAGE>
75% and 72% of professional services revenues, respectively. The decrease in
cost as a percentage of professional services revenue is primarily due to
economies of scale of the expanded services operations, higher profit margins
earned under a short-term print outsourcing agreement, and improved margins
due to a smaller percentage of services business being generated through
third-party distributors. The Company expects professional services expense to
increase, in order to meet additional resource requirements as professional
services revenues increase.
Product development and support expense. Product development and support
---------------------------------------
expense consists primarily of research and development efforts, amortization
of capitalized software costs, customer support, and other product support
costs. For the three-month period ended October 31, 1997, product development
and support expense increased 89% compared to the corresponding prior-year
period, largely due to development efforts related to operations acquired in
the Merger. The Company intends to accelerate development efforts, including
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 utility and financial services, and development of new
software products utilizing object-oriented technology, and with respect to
support of its existing product lines. Accordingly, expenditures in this area
are expected to increase.
Current versions of the Company's products are designed to be "Year 2000"
compliant. The Company is in the process of determining the extent to which
the customized implementations of its software products are Year 2000
compliant, as well as the impact of any non-compliance on the Company and its
customers. The Company does not currently believe that the effects of any Year
2000 non-compliance in the Company's installed base of software will result in
any material adverse impact on the Company's business or financial condition.
No assurance can be given that the Company will not be exposed to potential
claims resulting from system problems associated with the century change.
Selling and marketing expense. Selling and marketing expense increased 244%
-----------------------------
for the three-month period ended October 31, 1997 from the comparable prior-
year period. The increase in selling and marketing expense is primarily the
result of inclusion of operations acquired in the Merger and increased
commissions. Sales commissions increased due to additional revenues and a new
fiscal 1998 sales compensation plan that has been expanded to provide
compensation on all revenue types.
General and administrative expense. For the three-month period ended October
----------------------------------
31, 1997, general and administrative expense increased 195%. The increased
expense for the fiscal 1998 period resulted from inclusion of operations
acquired in the Merger and goodwill amortization as a result of the Merger.
Other income (expense), net. For the three-month period ended October 31,
---------------------------
1997, the 264% decrease in other income (expense) was due to a decrease in
interest income and a significant increase in interest expense. Interest
income decreased as a result of an $8.0 million cash distribution to
stockholders and certain option holders in connection with the Merger.
Interest expense increased significantly due to the assumption of debt and
capitalized leases in connection with the Merger.
Provision for income taxes. Effective tax rates for the three-months ended
--------------------------
October 31, 1996 and 1997 were approximately 36% and 40%, respectively. The
increase was due to the non-deductibility of goodwill amortization related to
the Merger. The Company used a portion of its net operating loss carryforwards
and outstanding tax credits to offset its current tax liability for the three
months ended October 31, 1996 and 1997.
Net income. Net income increased 25% for the three-month period ended
----------
October 31, 1997 from the comparable prior year period. The increase in net
income for the three-month period was primarily the result of a 284% increase
in revenues.
31
<PAGE>
Fiscal Year Ended July 31, 1996 Compared to Fiscal Year Ended July 31, 1997
Revenues. Total revenues increased 53% due primarily to the inclusion of
--------
FormMaker's results subsequent to the Merger. Professional services revenues
increased 651% principally due to the implementation of print outsourcing
operations acquired in the Merger. During the fourth quarter, license revenues
significantly declined which caused an overall 15% decrease in annual license
revenues as compared to the previous year. The Company believes 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's product strategies. The Company's consolidated product strategy
was announced subsequent to year end. Maintenance and other recurring revenues
increased 24% due to the inclusion of FormMaker's recurring maintenance
revenues since the Merger and an increased customer base. Inclusion of
FormMaker's results for the full period is expected to significantly increase
fiscal 1998 revenues.
Professional services expense. The majority of the increase in professional
-----------------------------
services expense is due to inclusion of FormMaker personnel associated with
both the professional and print outsourcing services areas subsequent to the
date of the Merger. Print outsourcing services incurred approximately $1.0
million in direct postage and supplies expense which further contributed to
the increase. Costs for professional services expense represented 80% and 65%
of professional services revenue for fiscal 1996 and 1997, respectively. The
decrease in cost as a percentage of professional services revenue is primarily
due to the inclusion of costs related to the Company's biennial user group
conference in 1996, higher profit margins earned under a short-term print
outsourcing agreement in 1997 and economies of scale of the significantly
expanded services operations.
Product development and support expense. Product development and support
---------------------------------------
expense consists primarily of research and development efforts, amortization
of capitalized software costs, customer support, and other product support
costs. Product development and support expense increased by 12% in fiscal
1997. Before capitalization and amortization, product development and support
expense increased 22%, primarily as a result of the development efforts
related to operations acquired in the Merger and the addition of 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 operations acquired in the Merger and
increased commissions. Sales commissions associated with increased sales
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 operations acquired in the Merger,
profit-based performance bonuses, and costs associated with the Merger.
Profit-based performance bonuses increased due to achievement of performance
and financial goals.
Merger-related charges. One-time Merger-related charges aggregating $21.4
----------------------
million consist of acquired in-process technology, compensation charges, and
other Merger-related charges. Acquired in-process technology of $13.5 million
was charged to expense on the closing date of the Merger. Merger-related
compensation and other related charges of approximately $7.9 million relate to
the repurchase of options and the creation of a new measurement date for
outstanding options converted to options to purchase Class B common stock.
Other income, net. Other income, net decreased 11% due primarily to
-----------------
increased interest expense charges. Interest income increased 15% due to
significant cash, cash equivalents, and short-term investments held by the
Company until $8.0 million was distributed in cash to stockholders and option
holders concurrent with the Merger. Interest expense increased 82% because of
debt assumed in the Merger.
Provision for income taxes (benefit). The Company's effective tax rate for
------------------------------------
the year ended July 31, 1996 was approximately 37%. The Company recorded a tax
benefit related to its net loss for the year ended July 31, 1997 of 7%. This
rate differs from the 1996 effective tax rate due primarily to the in-process
technology charge which was not deductible for tax purposes.
32
<PAGE>
Net income (loss). Non-recurring Merger-related charges of approximately
-----------------
$21.4 million resulted in a net loss of $16.1 million in 1997. Excluding
Merger-related charges, income before taxes increased 13% from 1996 primarily
as a result of increased revenues.
Fiscal Year Ended July 31, 1995 Compared to Fiscal Year Ended July 31, 1996
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.
Professional services expense. Professional services expense increased 39%,
-----------------------------
but remained constant at 80% of professional services revenue for fiscal 1995
and 1996. Professional services expense included an increase in expense
related to costs associated with the Company's biennial user group conference,
offset by 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 software costs, 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-
based 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 $212,000 as a result of a 60%
-----------------
increase in interest income due to a significant 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. Effective tax rates for the years ended July 31,
--------------------------
1995 and 1996 were approximately 37% each year. These rates differ from the
federal statutory rate due primarily to state income taxes. The Company used
the remainder of its net operating loss carryforward in fiscal 1995 and used a
portion of its outstanding tax credits to offset its current tax liability in
fiscal 1996.
Net income. Net income increased 16% due to the 6% increase in revenues and
----------
a $212,000 increase in other income, while expenses only increased 5%.
33
<PAGE>
Unaudited Pro Forma Combined Operating Results of the Company
- -------------------------------------------------------------
The following is a supplemental comparison of the unaudited pro forma
combined operating results of the Company assuming the acquisition of
FormMaker occurred on August 1, 1995. The supplemental information presented
below, expressed in dollars and as a percentage of total revenues for the
periods indicated, has been derived from the consolidated financial statements
of the Company and the consolidated financial statements of FormMaker. For
periods prior to May 15, 1997 the Company, Image Sciences, and FormMaker were
not under common control or management and, as a result, the selected
unaudited pro forma combined financial information is not necessarily
indicative of or comparable to the operating results that would have occurred
had the Merger occurred as of or at the beginning of the period presented or
that will occur in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JULY 31, OCTOBER 31,
------------------- ---------------------
1996 1997 1996 1997
PRO FORMA PRO FORMA PRO FORMA ACTUAL
--------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES:
Professional services............... $12,197 $20,828 $ 4,522 $ 6,688
License............................. 7,838 8,153 2,327 1,576
Maintenance and other recurring..... 7,292 9,435 2,173 2,582
------- ------- --------- ---------
Total revenues.................... 27,327 38,416 9,022 10,846
------- ------- --------- ---------
EXPENSES:
Professional services............... 10,536 16,547 3,480 4,842
Product development and support..... 6,017 6,836 1,626 1,878
Selling, general and
administrative..................... 10,127 11,450 3,091 2,767
------- ------- --------- ---------
Total expenses.................... 26,680 34,833 8,197 9,487
------- ------- --------- ---------
Operating income.................. 647 3,583 825 1,359
Other expense, net.................. 402 690 132 156
------- ------- --------- ---------
Income before income taxes........ 245 2,893 693 1,203
Provision for income taxes.......... 163 1,179 379 484
------- ------- --------- ---------
Net income........................ $ 82 $ 1,714 $ 314 $ 719
======= ======= ========= =========
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JULY 31, OCTOBER 31,
------------------- -----------------------
1996 1997 1996 1997
PRO FORMA PRO FORMA PRO FORMA ACTUAL
--------- --------- ---------- ---------
(AS A PERCENT OF TOTAL REVENUES)
<S> <C> <C> <C> <C>
REVENUES:
Professional services........... 44% 54% 50% 62%
License......................... 29 21 26 14
Maintenance and other
recurring...................... 27 25 24 24
--- --- --------- ---------
Total revenues................ 100 100 100 100
--- --- --------- ---------
EXPENSES:
Professional services........... 39 43 39 45
Product development and
support........................ 22 18 18 17
Selling, general and
administrative................. 37 30 34 26
--- --- --------- ---------
Total expenses................ 98 91 91 88
--- --- --------- ---------
Operating income.............. 2 9 9 12
Other expense, net.............. 1 2 1 1
--- --- --------- ---------
Income before income taxes.... 1 7 8 11
Provision for income taxes...... 1 3 4 4
--- --- --------- ---------
Net income.................... 0% 4% 4% 7%
=== === ========= =========
</TABLE>
Recent Operating Results
The Company recently announced its unaudited financial results for the
period ended January 31, 1998. For the three month period ended January 31,
1998, the Company's revenues increased 15% over the same period in the prior
year on a pro forma combined basis to $11.2 million. Net income in the three
months ended January 31, 1998 was $768,000. Pro forma diluted net income per
share in this period was $0.06 based on 13,024,857 weighted average shares
outstanding. For the six months ended January 31, 1998, the Company's revenues
increased 18% over the prior six month period on a pro forma combined basis to
$22.1 million. Net income in the six months ended January 31, 1998 was $1.5
million. Pro forma diluted net income per share in this period was $0.11 based
on 12,932,202 weighted average shares outstanding.
Three Months Ended October 31, 1996 (on a Pro Forma Basis) Compared to Three
Months Ended October 31, 1997
Revenues. Pro forma total revenues increased by 20% due primarily to a 48%
increase in professional services revenues. The increase in professional
services revenues, on a pro forma basis, was due to an increased penetration
of the utility market and significant print outsourcing revenues, including
approximately $450,000 of revenues related to one short-term contract,
generated during the three months ended October 31, 1997. Pro forma
maintenance and other recurring revenues increased by 19% due to an increase
in the Company's installed base of customers. Pro forma license revenues
decreased 32% due primarily to a decrease in license revenues generated
through PMSC. The decrease was partially offset by an increase in license
revenues generated from customers in the utility industry.
Professional services expense. The increase in professional services expense
of 39% on a pro forma basis is primarily due to increased personnel costs and
travel costs associated with expansion of professional services and direct
costs related to the increased print outsourcing services business.
Professional services expense, on a pro forma basis, represented 77% and 72%
of pro forma professional services revenues for the three months ended October
31, 1996 and 1997, respectively. The decrease in cost as a percentage of pro
forma professional services revenues was primarily due to economies of scale
of the expanded operations, the generation of a smaller percentage of business
through third-party distributors, and higher profit margins earned under a
short-term print outsourcing contract.
35
<PAGE>
Product development and support expense. For the three-month period ended
October 31, 1997, pro forma product development and support expense increased
15%, but decreased as a percent of pro forma revenues from 18% to 17% as the
combined companies continued to commit significant resources to development
efforts, including 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 utility and financial services, and development
of new software products utilizing object-oriented technology, and to support
their existing product lines.
Selling, general and administrative expense. Pro forma selling, general and
administrative expense for the three-month period ended October 31, 1997
decreased 10%. As a percentage of pro forma revenues, these expenses decreased
to 26% for the three months ended October 31, 1997 from 34% for the three
months ended October 31, 1996. The Company attributes the decrease in
aggregate expenses and expense as a percentage of revenues to the elimination
of certain financial and executive level personnel as a result of the Merger
and decreased commissions due to third parties because a smaller percentage of
revenues were generated through third-party distributors.
Provision for income taxes. The pro forma effective tax rates for the three
months ended October 31, 1996 and 1997 were approximately 55% and 40%,
respectively. These rates differ from the federal statutory rate because a
portion of goodwill amortization is not deductible for federal income tax
purposes. The effective tax rate decreased for the three months ended October
31, 1997 because the non-deductible goodwill amortization charges represented
a smaller portion of net income.
Net income. On a pro forma basis, net income increased 129% due primarily to
a 20% increase in revenue, partially offset by a 16% increase in expense.
Fiscal Year Ended July 31, 1996 (on a Pro Forma Basis) Compared to Fiscal Year
Ended July 31, 1997 (on a Pro Forma Basis)
Revenues. Revenues increased 41% on a pro forma basis due primarily to a 71%
increase in professional services revenues. Pro forma professional services
revenues increased due to significant increases in consulting and
implementation services to the insurance and utility industries. License
revenues increased by 4% on a pro forma basis as increases in license revenues
to the utility industry were mostly offset by a decline in revenues generated
though the PMSC relationship. Maintenance revenues increased 29% on a pro
forma basis due to an expanded number of customers utilizing the combined
companies' product offerings.
Professional services expense. Pro forma professional services expense
increased 57% due primarily to increased staffing and related costs as the
professional services organizations were expanded. Professional services
expense, on a pro forma basis, represented 86% and 79% of professional
services revenues for the years ended July 31, 1996 and 1997, respectively.
The decrease in cost as a percentage of professional service revenues is due
primarily to inclusion of costs related to the Company's biennial user group
conference in 1996, efficiencies achieved as the professional services
organization expanded and improved profit margins earned under a short-term
print outsourcing contract during the fourth quarter of fiscal 1997.
Product development and support expense. On a pro forma basis, product
development and support expense increased by 14% as the Company continued to
develop new technologies and enhance and update its existing product
offerings. As a percentage of pro forma revenues, product development and
support expense decreased to 18% for the year ended July 31, 1997 from 22% for
the year ended July 31, 1996 as a result of increased economies of scale from
combined operations.
Selling, general and administrative expense. Pro forma selling, general and
administrative expense increased 13%. As a percentage of pro forma revenues,
these expenses decreased to 30% for the year ended July 31, 1997 from 37% for
the year ended July 31, 1996 as a result of increased economies of scale from
higher revenues and the fourth quarter impact of combined operations. The
Company attributes the aggregate increase primarily to selling costs related
to a significant increase in revenues.
36
<PAGE>
Provision for income taxes. The pro forma effective tax rates for the years
ended July 31, 1996 and 1997 were approximately 67% and 41%, respectively.
These rates differ from the federal statutory rate due primarily to non-
deductible goodwill amortization. The non-deductible charges represented a
smaller portion of net income in fiscal 1997 which caused the pro forma
effective tax rate to decrease.
Net income. Net income on a pro forma basis increased by approximately $1.6
million due primarily to a 41% increase in revenues, partially offset by a 31%
increase in operating expenses and a 72% increase in other expense.
UNAUDITED QUARTERLY RESULTS
Set forth below are selected unaudited consolidated statements of operations
data for the quarter ended October 31, 1997 and the four quarters of fiscal
1997, on a pro forma basis, assuming the Merger had been completed on August
1, 1996. See "Unaudited Pro Forma Combined Statement of Operations."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
1996 1997 1997 1997 1997
PRO FORMA PRO FORMA PRO FORMA PRO FORMA ACTUAL
----------- ----------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total revenues.......... $9,022 $9,739 $9,255 $10,400 $10,846
Operating income........ 825 777 656 1,325 1,359
Income before income
taxes.................. 693 608 512 1,080 1,203
Net income.............. 314 386 325 689 719
</TABLE>
For periods prior to May 15, 1997, the Company, Image Sciences, and
FormMaker were not under common control or management and, as a result, the
unaudited pro forma combined statement of operations is not necessarily
indicative of or comparable to the operating results that would have occurred
had the Merger occurred as of or at the beginning of the period presented or
that will occur in the future. See "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations," "Selected
Consolidated Financial Data," the Financial Statements of the Company and the
Notes thereto and the Consolidated Financial Statements of FormMaker and the
Notes thereto, appearing elsewhere in this Prospectus. The Company has
experienced and may in the future continue to experience fluctuations in its
quarterly operating results due to the fact that sales cycles, from initial
evaluation to purchase, vary substantially from customer to customer.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1997, cash and cash equivalents were $1.4 million. Cash flow
generated by operations was $6.0 million in fiscal 1997 and $1.3 million in
the three months ended October 31, 1997. Cash flow provided by (used in)
investing activities was $5.5 million in fiscal 1997 and ($636,000) in the
three months ended October 31, 1997. Cash flow provided by investing
activities in fiscal 1997 was primarily related to the liquidation of short-
term investments to fund the $8.0 million distribution to security holders
concurrent with the Merger.
Working capital was $1.6 million at July 31, 1997, compared with $900,000 at
October 31, 1997. The decrease in working capital was primarily due to
repayments made on the Company's long-term revolving credit facility.
In connection with the Merger, the Company assumed a $10.0 million revolving
credit facility from FormMaker, of which $6.4 million was available at October
31, 1997. At October 31, 1997, borrowings under this credit facility totaled
$3.6 million at a weighted average interest rate of 7.8%.
The credit facility was renegotiated in September 1997. Under the new
agreement, $3.5 million bears interest at the bank's prime rate less 0.25%, or
8.25% as of October 31, 1997. The remaining $6.5 million bears interest at the
bank's prime rate of 8.50% as of October 31, 1997 and is collateralized by
substantially all of the Company's assets. Approximately $6.5 million of the
credit facility may be converted in September 1998 into a
37
<PAGE>
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 is
payable in twenty-four monthly installments. The $3.5 million portion of the
credit facility is due and payable in March 1999. Borrowings under the credit
facility are utilized primarily for working capital.
In addition, Safeguard, Technology Leaders II and Technology Ventures Third
Corp. loaned the Company $3.0 million in the form of subordinated notes
concurrent with the Merger. The notes bear interest at prime plus 1.0%, or
9.5% as of October 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 $13.0
million and May 15, 2000. The notes are unsecured obligations of the Company
and are subordinated to all senior debt.
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 1.0%, or 9.5% as of October 31, 1997.
The Company's liquidity needs will arise primarily from funding the
continued development, enhancement, and support of its software offerings, and
the selling and marketing costs associated principally with continued entry
into new vertical and international markets. The Company's business is not
capital intensive and capital expenditures in any given year are ordinarily
not significant.
The Company currently anticipates that the net proceeds received by the
Company from this offering, together with amounts available under its existing
credit facility, cash generated from operations and existing cash balances
will be sufficient to satisfy its operating cash needs for at least twelve
months following this offering.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (FAS 128), was issued. FAS 128 specifies the computation,
presentation and disclosure requirements for earnings per share ("EPS") for
entities with publicly held common stock or potential common stock. FAS 128
simplifies the standards for computing EPS previously found in Accounting
Principles Board Opinion No. 15, "Earnings per Share" (APB 15), and makes them
comparable to international EPS standards. It replaces presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the statements of operations for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. FAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods; earlier application is not permitted. FAS 128 requires
restatement of all prior-period EPS data presented. The Company adopted FAS
128 as of and for the period ended January 31, 1998.
Also during 1997, the FASB issued pronouncements relating to the
presentation and disclosure of information related to the Company's capital
structure, comprehensive income and segment data. The Company is required to
adopt the provisions relating to capital structure for the year ending July
31, 1998, if applicable, and the provisions of the other pronouncements, if
applicable, for the year ending July 31, 1999. The adoption of these
pronouncements will not have an impact on the Company's financial position and
results of operations but may change the presentation of certain of the
Company's financial statements and related notes and data thereto.
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position No. 97-2, Software Revenue Recognition ("SOP 97-2") that
supersedes Statement of Position No. 91-1, "Software Revenue Recognition." SOP
97-2 is effective for transactions entered into in fiscal years beginning
after December 15, 1997. The Company believes the adoption of this statement
will not have a material effect on the Company's financial position or results
of operations.
38
<PAGE>
BUSINESS
GENERAL
DocuCorp develops, markets and supports a portfolio of open-architecture,
enterprise-wide document automation software products that enable its
customers to produce complex, high volume, customized documents. In addition,
the Company provides document automation consulting and applications
integration services through a 145-person service organization. The Company
also provides document processing and printing services which utilize the
Company's software to provide solutions for handling high volume, complex
print, finish and mailing for customers who outsource this activity.
DocuCorp software products support leading hardware platforms, operating
systems, printers and imaging systems. These products are designed to create,
publish and store documents such as insurance policies, utility statements,
telephone bills, bank and mutual fund statements, invoices, direct mail
correspondence, bills of lading and other customer oriented documents. The
Company currently has an installed base of more than 700 customers. The
Company believes it is the leading provider of document automation software
and services for the insurance industry to customers including Prudential
Insurance Company of America, Continental National Assurance (CNA) and
American International Group (AIG). More than half of the 200 largest
insurance companies in North America use the Company's software products and
services, including seven of the ten largest life and health insurance
companies and nine of the ten largest property and casualty insurance
companies. The Company believes it has also become a leading provider of
document automation software and services for companies in the utility
industry, and that most of the new adoptions of automated customer billing
software during calendar 1997 were licenses of the Company's products. Key
utility customers include Southern Company Services, Inc. and Consolidated
Edison of New York, Inc. The Company also has customers in the financial
services, higher education, telecommunications, and transportation industries,
including Royal Bank Financial Group, University of Texas, Polkomtel S.A., and
Yellow Technology Services, Inc.
DOCUMENT AUTOMATION INDUSTRY
Document automation is critical to corporations as they endeavor to increase
revenue, improve customer service and reduce costs. Companies can increase
revenue by using document automation to produce high volume one-to-one
documents such as customer statements that cross-sell additional products and
services. Document automation enables companies to provide better customer
service by:
. creating more attractive, easier to read documents,
. producing more accurate documents,
. minimizing the time it takes to produce and deliver documents, and
. providing customer service personnel with immediate access to the
electronically archived documents.
At the same time, document automation reduces the cost of personnel,
printing, and storage.
Certain recent trends have accelerated the growth of the document automation
industry. Deregulation of industries such as insurance, utility and financial
services has resulted in increased competition and caused participants in such
industries to focus more closely on customer service. This has increased the
demand for documents with greater customization to create one-to-one documents
personalized to each customer with more visual appeal. Rapid technological
advances such as client/server architecture and the Internet, emergence of the
WindowsNT operating systems, and evolving standards such as Microsoft's
Active-X, Microsoft's ODBC and Sun Microsystems' Java have expanded the
benefits that businesses can derive from document automation. Additionally,
the emergence of call centers has increased the demand for access to and
automation of customer communications. As a result, an increasing number of
companies are employing innovative comprehensive document automation
processes.
39
<PAGE>
The same advances that have enhanced the benefits of document automation,
however, have rendered the development and implementation of document
automation products increasingly complex. As a consequence, businesses are
increasingly outsourcing some of their document automation requirements to
skilled and experienced providers such as the Company.
THE DOCUMENT LIFE CYCLE
The Company believes that the life cycle of a document is divided into three
general phases (creation/capture, publishing and storage/archive), linked
together by document management and workflow software. The Company believes
that its expertise in all phases of the document life cycle constitutes an
important competitive advantage.
The Company's view of the document life cycle is illustrated in the
following diagram:
[A graphic appears under the heading "The Document Life Cycle" that depicts
the life of a document from left to right (i) beginning with the
creation/capture phase, which is depicted by a personal computer, with a
scanner and a word processor leading into the creation/capture phase from
above, (ii) moving to the publishing phase, which is depicted by a person
holding a document, with data flowing into the document from above, leading to
a high speed printer and printed customized documents below, and (iii) ending
with the storage/archive phase, which is depicted by a person holding a
document, leading to a disk representing imaging systems and a computer
terminal representing retrievable and viewable customized documents below.]
DOCUMENT MANAGEMENT AND WORKFLOW SOFTWARE LINKS THE CREATION/CAPTURE,
PUBLISHING AND STORAGE/ARCHIVE PHASES OF THE DOCUMENT LIFE CYCLE.
Creation/Capture
In this phase of the life cycle, documents are rendered in a digital form.
Documents can be created by using word processing software packages or tools
such as Microsoft Word, Elixir and Corel that have been designed specifically
to facilitate the composition of commonly used documents such as letters and
forms. Today, documents are created by employees throughout an organization
from the central or home office, in branch offices or in remote locations.
40
<PAGE>
Alternatively, existing paper documents that were created on a typewriter or
other non-electronic source or that came into the organization from third
parties can be input into the organization's computer network by means of
scanning devices. Scanning devices convert paper documents into a digitized
format. Scanned documents are generally stored and managed separately from
documents created by word processors or other internal applications,
principally because their formats are different. The Company's products create
forms from both of these sources.
Once a document is in digital form, it is then readily available for common
applications such as transmission over E-mail, storage on local computers and
printing on desktop printers. Documents vary significantly in complexity,
ranging from simple letters or forms to multi-page forms, brochures or
booklets containing text, charts and statistical tables requiring
sophisticated pagination. The digitized form can also be used for more
complex, high-volume publishing applications such as insurance policies and
billing statements. The Company's products create or prepare digitized forms
that can accept variable data and output to high-speed printers.
Publishing
In this phase of the life cycle, appropriate digital data and forms are
selected from multiple sources and formats. The information is dynamically
assembled into complex documents. Variable data is integrated through software
to produce customized documents which are then simultaneously printed for
customer distribution and archived as corporate assets for future use. The
Company focuses its publishing software products and services exclusively on
these customized and high volume publishing activities. While the basic
logistical procedures are generally similar in every publishing activity, in
customized and high volume publishing activities software is required to
coordinate large amounts of variable information such as customer name,
transaction history, and dynamically generated graphs. The Company has
developed software logic that allows its products to attain what it believes
to be one of the highest volume capabilities available in the market today.
Storage/Archive
In the storage/archive phase of the life cycle, the document is stored in
either a digitized or electronic print format for future use. Documents and
information are presented most efficiently through software to storage devices
that range in their sophistication from local computer disk drives to complex
computer storage equipment having varying capacity and data accessing
capabilities. The Company has developed products that enable an organization
to automatically index documents as they enter storage and place the documents
in an archived format to permit expedient retrieval, viewing and reprint.
Furthermore, the Company's products accept data in both digital and print
stream format, and support leading imaging systems such as FileNET and IBM's
Visual Info.
Management and Workflow Software
Underlying all three phases of the document life cycle is the requirement to
manage the way in which documents and data move within the life cycle and
throughout the corporation. This is currently accomplished within
organizations through various E-mail software products like Lotus cc:mail,
groupware like Lotus Notes by IBM, network software like Novell NetWare,
document management software like Documentum and workflow products like
FileNET. Externally, organizations are increasingly using the Internet to
transmit such correspondence. To date, these systems are primarily
departmental in nature and are an incomplete way to manage enterprise-wide
documents and publications. The Company currently provides products for
document routing, network and host connectivity and Internet access, and
intends to develop or acquire document management and workflow companies,
products or technology in the future.
GROWTH STRATEGY
The Company's strategy for growth consists of the following:
Leveraging Existing Customer Relationships. The Company has an installed
------------------------------------------
base of approximately 700 customers. Increasingly, the Company's customers are
expanding or upgrading their document automation solutions, which provides a
market for additional products and services from the Company. Most of the
Company's large insurance customers originally licensed software, but
contracted for few services. Since the
41
<PAGE>
Company has substantially expanded its services capacity, it anticipates that
the existing customer base could be a significant source of future services
revenue for the Company. Recently introduced and planned products and services
can also be provided to the Company's current customers as follow-on sales.
Expanding Professional Services. The Company is expanding its document
-------------------------------
automation consulting and applications integration services to assist with new
and existing document automation applications. The Company also is pursuing
outsourcing of customers' document automation operations with on-site Company
personnel or through processing of customers' documents at the Company's
Atlanta processing and print facility.
Entering New Vertical Markets. The Company believes it is the leading
-----------------------------
provider of document automation software and services for the insurance
industry and has become a leader in the utility industry. The Company is
targeting vertical market expansion in the financial services, higher
education, telecommunications, and transportation industries, in each of which
customers have previously purchased and installed the Company's software.
These industries, like insurance and utility, have an increasing need for
customized documents to be produced in very large volumes in order to
communicate effectively with their customers.
Developing and Enhancing New Technologies. The Company's product development
-----------------------------------------
efforts are focused on developing new products as well as enhancing and
broadening its current software product offerings. New DocuCorp products and
solutions will continue to emphasize state-of-the-art object-oriented
technologies, WindowsNT platform development, and intranet/Internet
capabilities and enablement. During calendar 1998, the Company expects to
introduce new software products utilizing object-oriented platform independent
technology, with migration and upgrade paths for users of existing products.
Expanding Internationally. Approximately 4% of the Company's pro forma
-------------------------
combined revenues came from customers outside of North America in fiscal 1997.
DocuCorp plans to expand its international customer base primarily by
cultivating its international distribution alliance and through direct sales.
The Company also intends to leverage its existing international customer base,
particularly by selling professional services to customers who previously have
licensed software from the Company. DocuCorp intends to continue increasing
the number of sales and services professionals domiciled internationally.
Pursuing Acquisitions and Strategic Alliances. The Company intends to pursue
---------------------------------------------
acquisitions of other document production, management, workflow and archival
companies, products or technologies. See "--Prospective Acquisitions." In
addition, as the Company expands in its targeted vertical markets, the Company
intends to enter into additional strategic alliances for sales and marketing
in such markets. The Company believes that new technical skills, expanded
product functionality, a broader client base, and an expanded geographic
presence may result from these activities.
PRODUCTS AND SERVICES
The Company offers a portfolio of scalable, high performance document
automation software products. The Company also has one of the largest
professional services organizations in the industry, and the facilities to
outsource document production using the Company's technology and expertise.
Document Automation Software
The Company implements document automation software products that enable
customers to produce high- volume, customized documents. The Company's
software solutions include multi-platform, enterprise-wide processing products
addressing each phase of the life cycle of a document. The Company's
philosophy of open architecture and support of industry standards enables its
customers to select software and hardware from other leading vendors and
integrate them with DocuCorp products.
Currently, the Company offers two different product lines, each of which
addresses all phases of the document life cycle. One product line, based on
the Company's DocuFlex architecture, is best suited for those
42
<PAGE>
customers who require high-volume document assembly and production at
extremely high speed. The second product line, based on the Company's Document
Automation Platform (DAP) architecture, features the ability to easily add
customized enhancements and offers greater flexibility for volume document
assembly and production. These two product lines have been organized into the
following four primary categories, each comprised of either a DocuFlex or DAP
line of products. During calendar 1998, the Company expects to introduce new
software products utilizing object-oriented platform-independent technology,
with migration and upgrade paths for users of existing products.
DocuCorp Creation Solutions. With DocuCorp Creation Solutions, document
components (forms, graphs, charts, text) can be created either entirely with
the Company's products or more typically by using other leading composition or
word processing software, such as Microsoft Word, integrated with DocuCorp
Creation Solutions. The Company's open architecture supports a broad range of
document creation and capture solutions. DocuCorp Creation Solutions run
primarily on personal computers under Microsoft Windows. License revenues from
the Company's software products in the Creation Solutions category accounted
for approximately 8% and 5% of the Company's total license revenues in fiscal
1997 (on a pro forma basis) and the quarter ended October 31, 1997,
respectively.
DocuCorp Publishing Solutions. DocuCorp Publishing Solutions are designed to
handle production of large volumes of documents, large numbers of forms,
complex document assembly requirements, customization of each document,
multiple recipients with unique requirements, and interfacing with existing
databases and application programs. DocuCorp Publishing Solutions have the
flexibility to dynamically compose highly tailored documents, each based on
custom publishing rules such as unique pagination. Alternatively, the
Company's products attain industry leading throughput by utilizing the
Company's proprietary software logic encompassing print-ready images to be
merged with variable data for high-volume complex documents like complete
insurance policies. DocuCorp Publishing Solutions provide forms fill, data
merge, document assembly, dynamic formatting and graph generation, centralized
and decentralized printing on most leading laser printers, interactive and
batch processing and electronic output and a variety of other features and
functions. DocuCorp Publishing Solutions run on mainframes primarily under
MVS, and on client/server platforms under Microsoft WindowsNT, Microsoft
Windows, IBM OS/2, and UNIX. License revenues from the Company's software
products in the Publishing Solutions category accounted for approximately 63%
and 57% of the Company's total license revenues in fiscal 1997 (on a pro forma
basis) and the quarter ended October 31, 1997, respectively.
DocuCorp Archival Solutions. DocuCorp Archival Solutions store published
documents electronically so that they can be viewed, used and reused
throughout the organization. Retrieval features enable immediate access to
documents for applications like processing claims, referencing enterprise-wide
legal or regulatory documentation, or speeding customer service operations at
call centers. DocuCorp Archival Solutions can be implemented as stand-alone
systems or integrated with leading imaging systems such as FileNET. DocuCorp
Archival viewing software runs under Windows, and Archival server software
runs on MVS, IBM OS/2, and UNIX. License revenues from the Company's software
products in the Archival Solutions category accounted for approximately 21%
and 30% of the Company's total license revenues in fiscal 1997 (on a pro forma
basis) and the quarter ended October 31, 1997, respectively.
DocuCorp Management Products. DocuCorp Management Products currently provide
Internet document services, network and host connectivity, and document
routing. As enterprises expand, there is a greater need for control over
documents and the ability to move documents across the enterprise. License
revenues from the Company's software products in the Management Products
category accounted for approximately 8% of the Company's total license
revenues in both fiscal 1997 (on a pro forma basis) and the quarter ended
October 31, 1997. The Company's proposed acquisition of EZPower Systems, Inc.
is intended to significantly expand the Company's offering of Management
Products. See "--Prospective Acquisitions."
As an additional service to its customers, the Company also provides the
tools and utility programs to customize, interface, maintain, and develop
DocuCorp document automation implementations. The latest object-oriented
technologies, including use of Active-X, Java, ODBC and Visual Basic
compatibility, make it easier to
43
<PAGE>
customize installations and interfaces. The Company has not generated, nor
does it anticipate that it will generate, material revenues from these tools
and utility programs.
Professional Services
- ---------------------
The Company offers both document automation consulting and applications
integration together with print outsourcing services to its customers. At
December 31, 1997, the Company employed approximately 145 professional service
personnel, which represents one of the largest services organization in the
document automation software industry. The Company's professional services
personnel have experience across many industries and document automation
applications.
Consulting. The Company offers a broad range of consulting services related
to document automation. A majority of the Company's professional services
consulting revenues are derived from implementation, integration and custom
development of the Company's software products. The Company also derives
professional services consulting revenues from education and training
services, 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. Training classes are available to
assist clients with implementing technology and applications. Educational
offerings are available in standardized and customized formats. A substantial
majority of the Company's consulting services are related to DocuCorp
Publishing Solutions. Consulting services accounted for approximately 36% of
the Company's total revenues in both fiscal 1997 (on a pro forma basis) and
the quarter ended October 31, 1997.
Print Outsourcing Services. The Company offers document processing and print
outsourcing services which utilize the Company's software to provide solutions
for handling high volume, complex print, finish, and mailing requirements. The
Company operates a print production center in Atlanta which, using data
received electronically from customers, employs high volume printers and mail
handling equipment to produce insurance policies, billings and other customer
mailings, and bundles the output for bulk mailings. A portion of these
services have historically been performed pursuant to a processing agreement
which has now been terminated. See "--Sales and Marketing--Relationship with
Third-Party Distributor." Print outsourcing accounted for approximately 18%
and 26% of the Company's total revenues in fiscal 1997 (on a pro forma basis)
and the quarter ended October 31, 1997, respectively.
PROSPECTIVE ACQUISITIONS
On February 12, 1998, the Company entered into a definitive agreement to
acquire all of the capital stock of EZPower Systems, Inc. ("EZPower"). Since
1994, EZPower has been engaged in the development, marketing and support of
document management software products primarily organized around the
PowerOffice product line. The PowerOffice software product line is used to
build content-rich applications and develop solutions for intranet document
management and web content management. PowerOffice provides a single
consistent interface which can be deployed on the intranet, internet, and
traditional Windows client/server environments, allowing authorized users to
access vital data and documents. EZPower has 18 employees and is based in
Philadelphia, Pennsylvania. Closing of the acquisition is scheduled for March
1998. Pursuant to the acquisition agreement, DocuCorp will issue 650,000
shares of Common Stock and repay approximately $2.5 million of EZPower's
indebtedness as consideration for the capital stock of EZPower. In addition,
DocuCorp will pay as a contingent purchase price a maximum additional amount
of $1.0 million based upon the revenues and income before taxes of EZPower for
the 12 months ending January 31, 1999 and $1.0 million based upon such items
for the 24 months ending January 31, 2000. The three principal executive
officers of EZPower will enter into employment agreements with DocuCorp. For
the year ended December 31, 1997, EZPower had revenues of approximately
$500,000 and a net loss of $2.0 million.
On February 18, 1998, the Company entered into a definitive agreement to
acquire all of the capital stock of Maitland Software, Inc. ("Maitland"), a
corporation which has developed and has recently commenced the marketing of
the Transit software product. The Transit product is a data acquisition and
transmittal program
44
<PAGE>
which allows users to more easily interface with document printing and
publishing software. The Company intends to incorporate Transit into its
DocuCorp Publishing Solutions as well as to market Transit as a stand-alone
product. Closing of the acquisition is scheduled for March 1998 and is subject
to the completion of DocuCorp's due diligence investigation and the execution
of employment agreements by the two developers of the Transit product, each of
whom will be granted options to purchase 25,000 shares of Common Stock at an
exercise price of $5.00 per share. Pursuant to the acquisition agreement, the
Company will issue 170,000 shares of Common Stock as consideration for the
capital stock of Maitland. The Company has the right to repurchase 100,000
shares of Common Stock upon the determination of the cumulative licensing and
maintenance revenues from the sales of the Transit product for the 42 months
ending July 31, 2001. The price for each share purchased under such
circumstances will be $3.00 if such cumulative revenues are $3.0 million or
less, $5.00 if such cumulative revenues exceed $3.0 million but are less than
or equal to $6.0 million and $15.00 if such cumulative revenues exceed $6.0
million. As a development stage company, the historical results of operation
of Maitland and its tangible net assets are not significant.
PRODUCT DEVELOPMENT
The Company has made and expects to continue to make substantial investments
in research and product development. Product development efforts increased
substantially in the first quarter of fiscal 1998 as a result of the Merger.
During the second half of calendar 1998, the Company expects to introduce new
software products utilizing object-oriented technology, with migration and
upgrade paths for users of existing products. Other new product development
efforts include the integration of existing products with the Internet to
provide access to documents through the Internet and further development of
systems for use in vertical industries such as utility and financial services.
The Company has committed substantial resources to product development.
Historically, the Company has made new releases of software approximately
every 12 months. As of December 31, 1997, the Company employed approximately
65 technical personnel engaged in product development. The product development
process is a cooperative effort between customers and the Company. Early
review of functionality specifications, prototypes and demonstrations allows
for the incorporation of customer suggestions and comments in parallel with
management review of the process internally. DocuCorp has a formal planning
process for new software products as well as software upgrades and maintenance
releases to ensure product quality, timeliness of releases and meeting or
exceeding customer expectations. In fiscal 1996, fiscal 1997, and the first
quarter of fiscal 1998, the Company's software development expenses were
approximately $2.4 million, $3.2 million, and $1.5 million, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
CUSTOMERS
The Company generally markets to large and mid-size organizations that have
a need for integrated solutions for the high volume production of customized
documents. Currently, the majority of the Company's revenue is generated from
the insurance industry. Approximately 70% of the Company's pro forma total
revenues for the year ended July 31, 1997 and 73% of total revenues for the
three months ended October 31, 1997 were derived from the insurance industry.
Of these revenues, 21% of pro forma total revenues for the year ended July 31,
1997 and 16% of total revenues for the three months ended October 31, 1997
were derived from one customer, Prudential Insurance Company of America. Over
half of the largest 200 insurance companies in North America use the Company's
products and services, including seven of the ten largest life and health
insurance companies and nine of the ten largest property and casualty
insurance companies. The Company believes it has the largest installed
document automation customer base in the insurance industry. During calendar
1997, 14 utility companies in North America licensed the Company's products.
In addition to the insurance and utility industries, the Company is targeting
vertical markets including the financial services, higher education,
telecommunications and transportation markets, in each of which industry
customers have purchased and installed the Company's software. Unlike many
other software vendors, the Company's principal contact at customer
organizations is generally not an MIS or information technology officer, but
rather the customer service
45
<PAGE>
or marketing departments that will use the Company's products. As a result,
the Company does not always compete with other technological priorities being
considered by a customer's MIS department.
Set forth below is a representative list of customers of the Company in the
various industries in which the Company markets its products and services:
INSURANCE
---------
Prudential Insurance Company of America
American International Group (AIG)
Continental National Assurance (CNA)
UTILITY
-------
Southern Company Services, Inc.
Consolidated Edison of New York, Inc.
FINANCIAL SERVICES
------------------
Royal Bank Financial Group
ABN-AMRO Bank N.V.
HIGHER EDUCATION
----------------
University of Texas
San Francisco State University
TELECOMMUNICATIONS
------------------
Polkomtel S.A.
Airtel
TRANSPORTATION
--------------
Yellow Technology Services, Inc.
Wisconsin Department of Transportation
REPRESENTATIVE CUSTOMER APPLICATIONS
Set forth below are representative customer applications of the Company's
products and services by the Company's customers:
Insurance Policy Production. One of the largest property and casualty
---------------------------
insurance companies in the Midwest uses DocuCorp software to automate its
policy production for Commercial Automobile, Umbrella Liability, Personal
Lines, and other lines of business. The customer initially licensed one copy
of the DocuCorp Publishing Solutions in 1986, primarily because the software
was capable of assembling and printing large volumes of documents, which
resulted in significant cost savings. The cost savings were realized
principally through reduction of third-party printing costs, personnel,
inventory of obsolete forms, and warehouse space. In 1993, the customer
expanded its license to a North American enterprise-wide license for DocuCorp
Creation, Publishing and Archival Solutions and Management Products. Today,
the customer uses DocuCorp document automation software enterprise-wide,
generating hundreds of millions of insurance policy pages annually. DocuCorp's
open architecture enables the customer to use many forms-composition and word
processing packages to develop thousands of template forms and to maintain
multiple large electronic forms libraries in its mainframe computer. Insurance
policies created by DocuCorp software are printed on Xerox, IBM and Hewlett
Packard printers and inserted into envelopes using Gunther International
finishing equipment (which reads and relies on bar codes generated by DocuCorp
Publishing Solutions).
Insurance Consulting and Print Outsourcing. One of the largest insurance
------------------------------------------
companies in the United States uses DocuCorp Creation, Publishing and Archival
Solutions and Management products to automate its customer communications. The
implementation, customization, and integration of each application has been
performed by DocuCorp's professional services personnel located at the
customer's site. Additionally, the customer uses
46
<PAGE>
DocuCorp's Print Center in Atlanta to process, print, and mail selected
correspondence. DocuCorp's professional services personnel regularly modify
customized software that enables access to variable data, and create or modify
forms for new documents. Print volumes vary significantly, but have been as
high as 300,000 pages per day.
Utility Bill Production. One of the largest utility holding companies in the
-----------------------
United States uses DocuCorp software and services not only to automate its
customer billing statement production, but to individualize each statement for
its customers. The utility company uses DocuCorp Creation Solutions to create
and edit the format for the billing statement, DocuCorp Publishing Solutions
to assemble and print the documents, DocuCorp Archival Solutions to store and
access the documents, and DocuCorp Management Products for internally routing
documents. This DocuCorp customer produces and archives its customer billing
statements and documents for four different power companies, serving
approximately 3.5 million utility customers. Approximately 220,000 documents
are produced nightly, including residential bills, industrial bills,
commercial summary bills, large print bills, Braille bills, foreign mail
bills, postcards, refund checks, and collection correspondence.
Transportation Invoices and Bills of Lading. A major trucking company
-------------------------------------------
creates invoice forms using Microsoft Word, and uses DocuCorp Creation
Solutions to enable the digitized forms to accept variable data and print on
high-speed Xerox printers. The customer uses DocuCorp Publishing Solutions to
produce customized invoices, and to assemble the invoices with the appropriate
supporting bills of lading. The bills of lading are captured through scanners
and stored and managed in a FileNET imaging system. DocuCorp software
retrieves the appropriate digitized images from the FileNET system, converts
them into a format that can be printed on high-speed Xerox printers, and
matches bills of lading with the related invoice for printing. Cash
collections are accelerated by reducing the processing time for invoices and
bills of lading from 10 days to 1 day. Inquiries and disputes are reduced by
incorporating the supporting bills of lading with the invoices. In addition,
costs are reduced by automating the billing process. DocuCorp was selected to
implement the automated document system because its software products can
handle the high volume and disparate document formats (i.e. word-processed
invoices and scanned bills of lading) required for the application.
SALES AND MARKETING
General
- -------
The Company markets its products through various distribution channels,
including direct sales, marketing alliances and distributors. Its sales
resources are organized based upon vertical industry markets. At December 31,
1997, the Company employed 24 direct sales and support representatives who
operate primarily from Dallas and Atlanta. Sales representatives are
compensated principally on a commission basis.
In the United States, the Company markets its products and services
primarily through a direct sales force. Outside of the United States, the
Company relies principally on distributor relationships to market its
products. Distributor relationships are established in Canada, Europe, South
Africa, and Asia. The Company's most significant international distributor
relationship is with Continuum (Europe) Limited, which markets to the
insurance and financial services industries in Europe and most of Asia.
DocuCorp plans to expand its international customer base primarily by
cultivating its international distribution alliances and through increasing
the number of its direct sales and services personnel domiciled
internationally.
In addition, the Company intends to increase both its product offerings and
vertical markets served through marketing, sales and distribution and
development relationships with other companies. Formal and informal marketing
and sales partnerships currently exist with Xerox, Andersen Consulting,
Continuum (Europe) Limited, PMSC, FileNET Corporation, American Management
Systems (AMS), SCT Utility Systems, UMS Inc. and Crain-Drummond, Inc. These
relationships provide sales leads for the Company's products and services and
help extend the Company's sales coverage and networking capabilities.
Historically, the Company's DocuFlex product line was licensed to customers
on a product-by-product basis. In contrast, the entire DAP product line was
licensed by customers under one comprehensive software license. The Company's
current product marketing methodology represents a change, effective February
1, 1998,
47
<PAGE>
from these prior practices. The Company's customers generally license the
Company's software products for an upfront license fee. Initial license fees
typically range from $75,000 to $250,000. Most customers also enter into
maintenance agreements with the Company, which typically provide for annual
maintenance fees ranging from 15% to 25% of current license fees. Customers
who enter maintenance agreements are entitled to software upgrades, software
problem resolutions, and use of the Company's "hotline" providing technical
assistance to the software user. The Company generally charges customers for
consulting services on a time and materials basis, although certain service
assignments are performed on a fixed charge basis. Print outsourcing services
are charged on a transaction fee basis.
Relationship with Third-Party Distributor
- -----------------------------------------
A subsidiary of the Company distributes DAP software products to the
insurance industry in North America through a marketing agreement with PMSC. A
substantial portion of the subsidiary's revenues are generated pursuant to
this agreement. Additionally, the subsidiary has granted PMSC the exclusive
right to market the DAP software in the property/casualty and life insurance
industries. On a pro forma combined basis, revenues from PMSC under this
agreement for the year ended July 31, 1997 and revenues for the three-month
period ended October 31, 1997 were $10.3 million and $1.8 million,
respectively. PMSC can terminate the marketing agreement for any reason by
providing 90 days' prior written notice. Unless terminated at an earlier date,
the Company intends to allow the marketing agreement to expire on December 31,
1999. When the marketing agreement expires or is terminated, the Company will
receive no revenues from new licenses sold through PMSC, and maintenance
revenues from PMSC-sourced licensees will be eliminated over a two-year
period. PMSC has provided notice of termination of a print outsourcing
agreement, effective June 1998. On a pro forma combined basis, revenues from
PMSC under the print outsourcing agreement for the year ended July 31, 1997
and revenues for the three-month period ended October 31, 1997 were $5.3
million and $1.7 million, respectively. Although print outsourcing revenues
will experience a short-term decline, the Company does not anticipate any
meaningful reduction in operating income as a result of such termination.
PMSC also has a non-exclusive, perpetual, royalty-free, worldwide license to
use, execute, copy, or license the DAP software (and derivatives thereof) to
third parties. Upon termination of the above-described marketing agreement,
PMSC will continue to have the right to use the DAP software and to compete
directly with the Company in the insurance industry. PMSC does not have any
rights with respect to the Company's existing products other than DAP. Since
the Company's future generations of products will be open architecture systems
not based upon the DAP product, PMSC will similarly have no rights with
respect to future software products developed by the Company.
COMPETITION
The market for document automation products and services is intensely
competitive, subject to rapid change, and significantly affected by new
product introductions and other market activities of industry participants.
The Company faces direct and indirect competition from a broad range of
competitors, many of whom have greater financial, technical and marketing
resources than the Company. 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 from numerous software
vendors, including Document Sciences Corporation (which is majority owned by
Xerox), M&I Data Services, Mobius Management Systems, Inc., Cincom Systems,
Inc. and Group 1 Software, Inc. The Company believes that the principal
competitive factors in the document automation software market are product
performance and functionality, ease of use, multi-platform offerings, product
and company reputation, quality of customer support and service, and price.
The degree of competition varies significantly with the stage of the document
life cycle being addressed and by vertical market.
The Company may also face competition from new entrants into the document
automation software industry. As the market for document automation software
continues to develop, current or potential competitors with significantly
greater resources than the Company could attempt to enter or increase their
presence in the market either independently or by acquiring or forming
strategic alliances with competitors of the Company or
48
<PAGE>
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.
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 not material to the Company's success.
The Company's software products are licensed to end-users on a "right to
use" basis pursuant to license agreements. 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 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 overlaps, the Company believes that
software programs will 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 use, or the inability of licensors 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.
FACILITIES
The Company leases approximately 23,000 square feet of office space in
Dallas, Texas, for its corporate headquarters, including administration,
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
administration, sales, professional services, and product development,
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 an approximately 4,500
square foot facility in Bedford. The lease for this facility expires on
December 31, 1999. The Company's staff in Maryland is located in an
approximately 10,000 square foot facility in Silver Spring. The lease for this
facility expires on 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.
49
<PAGE>
EMPLOYEES
As of December 31, 1997, the Company had approximately 285 employees, of
which approximately 145 were engaged in professional services, 80 in product
development and customer support, 30 in sales and marketing and 30 in finance,
administration, human resources, and internal systems support. 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.
LEGAL PROCEEDINGS
In August 1992, a customer brought a lawsuit in the District Court of
Galveston County, Texas, against the Company, 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. The
Company 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 the Company
for certain image processing software. Summary judgment, which was appealed,
was granted in favor of the Company as to certain claims. The Court of Appeals
reversed the grant of 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.
In December 1995, a former employee and her family filed a lawsuit in the
District Court of Dallas County, Texas, against the Company, certain officers
and former officers of the Company, 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. The
Company moved for summary judgment on each of the claims before the
arbitrator, and the arbitrator dismissed all claims except for breach of the
settlement agreement, which claim is awaiting the arbitrator's ruling. The
invasion of privacy and intentional infliction of emotional distress claims
are set for trial in April 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.
50
<PAGE>
MANAGEMENT
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 December 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Milledge A. Hart, III(1)... 63 Chairman of the Board
Michael D. Andereck........ 45 President, Chief Executive Officer and Director
B. Bruce Dale.............. 34 Senior Vice President, Products
Kerry K. LeCrone........... 52 Senior Vice President, Services
Hsi-Ming Lin............... 41 Senior Vice President, Research and Development
Todd A. Rognes............. 34 Senior Vice President, Finance
Anshoo S. Gupta(2)......... 51 Director
John D. Loewenberg(1)...... 57 Director
Warren V. Musser(1)........ 71 Director
George F. Raymond(2)....... 60 Director
Arthur R. Spector(2)....... 57 Director
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit 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. 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 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.
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 primary 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.
51
<PAGE>
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. 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 an 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 promoted to 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.
Anshoo S. Gupta was elected as a director of the Company in February 1998.
He has been a Senior Vice President of the Production Systems Group at Xerox
since 1996. From 1969 through 1996, he has held a series of financial,
marketing and planning managerial positions at Xerox. Mr. Gupta holds a
masters' degree in both electrical engineering and business administration
from the University of Rochester.
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 Boards 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 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
52
<PAGE>
served as Director of Acquisitions of Safeguard and since November 1994 has
been 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 Neoware
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.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee
The Board of Directors of the Company has appointed an Audit Committee,
which currently consists of Anshoo S. Gupta, George F. Raymond and Arthur R.
Spector. The Audit Committee's duties include engaging and discharging the
Company's independent accountants; reviewing and approving the engagement of
the independent accountants for audit and non-audit services requested;
reviewing with the independent accountants the 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 Board of Directors of the Company has also appointed a Compensation
Committee which currently consists of Milledge A. Hart, III, John D.
Loewenberg and Warren V. Musser. The Compensation Committee's duties include
reviewing and making recommendations to the Board of Directors regarding
compensation and benefit plan matters, including executive officer
compensation, director compensation, employee stock option grants, 401(k) plan
matters, employee stock purchase plan matters and other defined benefit plan
matters.
53
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
paid or accrued by the Company or its predecessors during the fiscal year
ended July 31, 1997 with respect to the Company's Chief Executive Officer and
its other most highly compensated executive officers as of July 31, 1997
(collectively, the "Named Officers"). The table below includes compensation
information for the predecessors of the Company prior to May 15, 1997, the
date of the Merger.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
- --------------------------- -------------------
<S> <C> <C>
Michael D. Andereck(1)..................................... $ 225,000 $ 185,000
President and Chief Executive Officer
B. Bruce Dale(1)........................................... 100,000 40,000
Senior Vice President, Products
Kerry K. LeCrone........................................... 115,417 70,100
Senior Vice President, Services
Hsi-Ming Lin............................................... 123,250 38,704
Senior Vice President, Research and Development
Samuel M. Wilkes(2)........................................ 153,750 61,870
Former Senior Vice President, Sales and Marketing
</TABLE>
- --------
(1) Excludes compensation reported to Mr. Andereck and Mr. Dale of $1,962,318
and $132,235, respectively, relating to the repurchase of employee stock
options in connection with the Merger.
(2) Mr. Wilkes resigned as Senior Vice President, Sales and Marketing
effective October 1997.
The following table provides information on stock options granted by the
Company in fiscal 1997 to the Named Officers. The table below includes option
grants by the predecessors of the Company prior to May 15, 1997, the date of
the Merger.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF
TOTAL REALIZABLE POTENTIAL VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL RATE OF
SHARES GRANTED TO STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(1)
OPTIONS IN FISCAL PRICE PER EXPIRATION ------------------------------
NAME GRANTED YEAR SHARE DATE 5% 10%
- ---- ---------- ---------- --------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Kerry K. LeCrone(2)..... 24,545 16.2% $3.40 1/16/2007 $ 52,483 $ 133,002
Hsi-Ming Lin(2)......... 16,363 10.8 3.40 1/16/2007 34,988 88,668
</TABLE>
- --------
(1) The amounts shown are calculated assuming that the market value of the
Common Stock was equal to the exercise price per share as of the date of
grant of the options. This value is the approximate price per share at
which shares of the Common Stock would have been sold in private
transactions on or about the date on which the options were granted. The
dollar amounts under these columns assume a compounded annual market price
increase for the underlying shares of the Common Stock from the date of
grant to the end of the option term of 5% and 10%. This format is
prescribed by the Securities and Exchange Commission and is not intended
to forecast future appreciation of shares of the Common Stock. The actual
value, if any, a Named Officer may realize, will depend on the excess of
the market price for shares of the Common Stock on the date the option is
exercised over the exercise price. Accordingly, there is no assurance that
the value realized by a Named Officer will be at or near the value
estimated above.
(2) Represents options granted to Mr. LeCrone and Mr. Lin by FormMaker prior
to the effective date of the Merger. On August 1, 1997, the Company
granted options to purchase an additional 20,454 shares of the Company's
Common Stock to Mr. LeCrone.
54
<PAGE>
The following table sets forth information concerning options exercised
during fiscal 1997 and the number and the hypothetical value of certain
unexercised options of the Company held by the Named Officers as of July 31,
1997. This table is presented solely for the purposes of complying with the
Securities and Exchange Commission rules and does not necessarily reflect the
amounts the optionees will actually receive upon any sale of the shares
acquired upon exercise of the options.
AGGREGATE OPTION EXERCISES AND LAST FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-
SHARES OPTIONS AT MONEY OPTIONS AT
ACQUIRED JULY 31, 1997 JULY 31, 1997(1)
ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael D. Andereck(2).. 681,707 $1,962,318 358,405 -- $1,788,442 $ --
B. Bruce Dale(2)........ 45,938 132,235 182,366 55,126 873,587 232,171
Kerry K. LeCrone........ 818 -- 40,090 49,036 64,143 78,457
Hsi-Ming Lin............ -- -- 40,908 22,500 65,453 36,000
Samuel M. Wilkes........ -- -- 71,590 -- 114,543 --
</TABLE>
- --------
(1) Assumes, for presentation purposes only, a per share fair market value of
$5.00.
(2) Shares acquired on exercise, and value received, is based on the
repurchase of such shares by the Company concurrent with the Merger.
EMPLOYMENT AGREEMENTS
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 Mr. Andereck's
salary is to be reviewed annually by the Board of Directors. Effective August
1, 1997, the Board of Directors increased Mr. Andereck's annual base salary to
$275,000. 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 Mr. Andereck to monthly severance payments in an amount
equal to Mr. Andereck'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 Mr. Andereck 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 Mr. Andereck from participation in any
new compensation or benefit arrangement offered to similarly situated
employees or a reduction in Mr. Andereck's level of responsibility, position,
authority or duties), resignation by Mr. Andereck with 60 days' notice, and
total disability. The employment agreement also provides a non-competition
provision prohibiting Mr. Andereck from competing against the Company while
employed by the Company and for one year following the termination of payments
to Mr. Andereck.
The Company is also a party to an employment agreement with Samuel M.
Wilkes, former Senior Vice President, Sales and Marketing, of the Company.
Under the agreement, the Company is obligated to pay an aggregate of $157,500
in severance to Mr. Wilkes in monthly installments ending April 1998. Mr.
Wilkes is subject to a non-competition provision prohibiting him from
competing against DocuCorp until October 1999.
STOCK OPTIONS
The Company has adopted the Equity Compensation Plan pursuant to which it
has awarded and may in the future award stock options and equity compensation
awards to its employees, officers, non-employee directors and certain
independent contractors. Additionally, each of Image Sciences and FormMaker
had historically granted options under stock option plans to its executive
officers and employees. Upon the occurrence of the
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Merger, outstanding options under these plans were converted into options to
purchase Common Stock of the Company. No further options will be granted under
the Image Sciences and FormMaker stock option plans.
The Equity Compensation Plan provides for the issuance to employees, non-
employee directors and eligible independent contractors of up to 600,000
shares of Common Stock pursuant to the grant of incentive stock options
("ISOs"), non-qualified stock options ("NQSOs"), Stock Appreciation Rights
("SARs"), restricted stock and performance units. The Equity Compensation Plan
is administered by the Compensation Committee of the Board of Directors (the
"Committee"). Upon the completion of this offering, the Committee will consist
of two or more "outside directors" as defined under section 162(m) of the Code
and who also may be "non-employee directors" as defined under Rule 16(b)(3) of
the Exchange Act. Subject to the provisions of the Equity Compensation Plan,
the Committee has the authority to determine to whom stock options and other
equity compensation awards will be granted and the terms of any such award,
including the number of shares subject to, and the vesting provisions of, the
award. Subject to the terms of the Equity Compensation Plan, the Committee may
also amend the terms of any outstanding award.
As of October 31, 1997, options to purchase a total of 3,448,391 shares of
Common Stock at a weighted average exercise price per share of $1.62 were
outstanding. Of these options, options to purchase 2,086,249 shares of Common
Stock were fully vested and exercisable as of October 31, 1997. As of October
31, 1997, the Company had an additional 142,800 shares of Common Stock
available for future grants under the Equity Compensation Plan. On February
18, 1998, the Board of Directors increased the number of shares of Common
Stock available for future option grants by 120,000 shares. Therefore, as of
the date hereof, the Company had an additional 262,800 shares of Common Stock
available for future grant under the Equity Compensation Plan.
The option price per share of Common Stock under the Equity Compensation
Plan is determined by the Committee at the time of each grant, provided,
however, that the option price per share for any ISO shall not be less than
100% of the fair market value of the Common Stock at the time of the grant. If
a person who owns 10% or more of the Company's Common Stock (a "10%
Stockholder") is granted an ISO, the exercise price shall not be less than
110% of the fair market value on the date of grant. The term of each stock
option may not exceed 10 years and in the case of a 10% Stockholder, the term
may not exceed five years. Stock options shall be exercisable at such time or
times as shall be determined by the Committee. Payment for the exercise of an
option shall be made by cash, check or other instrument as the Committee may
accept, including, in the discretion of the Committee, unrestricted Common
Stock of the Company. The Committee may also allow an option holder to elect
to cash out the excess of the fair market value over the option price of all
or a portion of a stock option. The Committee may also grant, in its sole
discretion, a "cashless exercise" feature for the exercise of stock options.
The Board of Directors may amend or revise the terms of the Equity
Compensation Plan in any manner whatsoever provided that certain amendments of
the Equity Compensation Plan are subject to stockholder approval. Unless
sooner terminated, the Equity Compensation Plan will terminate in 2007.
Under Section 162(m) of the Code, the Company may be precluded from claiming
a federal income tax deduction for total remuneration in excess of $1.0
million paid to the Chief Executive Officer or to any of the other four most
highly compensated officers in any one year. Total remuneration would include
amounts received upon the exercise of stock options granted under the Equity
Compensation Plan. An exception does exist, however, for "performance-based
compensation," including amounts received upon the exercise of stock options
pursuant to a plan approved by stockholders that meets certain requirements.
The Equity Compensation Plan is intended to meet the requirements of Treasury
Regulation section 1.162-27(f), and the options and other awards granted under
the Equity Compensation Plan are intended to meet the requirements of
"performance-based compensation."
EMPLOYEE STOCK PURCHASE PLAN
The Company has adopted the 1997 Employee Stock Purchase Plan (the "Stock
Purchase Plan"). The purpose of the Stock Purchase Plan is to provide
employees of the Company with an opportunity to purchase Common Stock through
accumulated payroll deductions and therefore encourage an increased ownership
among
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employees at the Company. All employees are eligible to participate in the
Stock Purchase Plan, subject to certain nominal length of service criteria. An
aggregate of 600,000 shares of Common Stock have been reserved for issuance
upon purchases pursuant to the Stock Purchase Plan.
The Stock Purchase Plan consists of a series of offering periods, initially
each of six months' duration. In order to participate, eligible employees are
required to complete an enrollment form which authorizes specified levels of
payroll deductions during the offering period not to exceed 10% of an
employee's compensation in any payroll period. Deductions are further limited
to an aggregate of $21,250 per year, to the extent necessary, for any one
participant. Such deductions are used to purchase shares of Common Stock at
the price equal to 85% of their fair market value. Purchases are made at the
end of each offering period. No employee shall be permitted to purchase more
than 3,000 shares in any offering period.
The Stock Purchase Plan is administered by the Board of Directors. The
Company maintains an account for each participant in which payroll deductions,
share purchases, and cash balances are noted and periodically reported to
participants. The participants in the Stock Purchase Plan may withdraw at any
time. Similarly, the Board of Directors may at any time and for any reason
amend or terminate the Stock Purchase Plan. If not sooner terminated, the
Stock Purchase Plan will terminate on its tenth anniversary.
COMPENSATION OF DIRECTORS
In August 1997, directors who are not also employees of the Company received
options to purchase 30,000 to 60,000 shares of Common Stock at an exercise
price of $3.40 per share. The options vest over a five year period. Certain of
the directors have assigned their rights to all or a portion of these options
to their employer or to affiliates thereof. 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Milledge A. Hart, III, Warren
V. Musser and John D. Loewenberg. There are currently no compensation
committee interlocks with other entities or insider participation on the
Compensation Committee.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company, Safeguard and Technology Leaders II entered into a Liquidity
Agreement pursuant to which (i) Safeguard agreed to use commercially
reasonable efforts to conduct and consummate an underwritten public offering
of rights to purchase shares of the Company's Common Stock, (ii) Safeguard and
Technology Leaders II agreed to purchase a certain number of shares of the
Company's Common Stock if the Company is required to redeem shares of the
Company's Class B common stock, and guarantee certain indebtedness of
FormMaker, and (iii) the Company granted Safeguard and Technology Leaders II
warrants to purchase 732,000 shares of Common Stock with an exercise price of
$4.17 per share and a term of three years.
Concurrently with the Merger, Safeguard, Technology Leaders II and TL
Ventures Third Corp loaned FormMaker $3.0 million in the form of subordinated
notes. The notes bear interest at prime plus 1.0% and are due in full at the
earlier of the closing of a public offering yielding net proceeds to the
Company in excess of $13.0 million and May 15, 2000. These notes are unsecured
obligations of the Company and are subordinated to all senior debt. As of
December 31, 1997, the Company owed Safeguard $399,000 under two term notes.
The term notes bear interest at prime plus 1.0% and are due in monthly
installments through January 1, 2000. A portion of the net proceeds from this
offering will be used to repay both the subordinated notes and term notes. In
connection with these notes, Safeguard and Technology Leaders II also received
certain warrants to purchase 245,448 shares of the Company's Common Stock with
an exercise price of $4.25 per share and a term of seven years. See "Use of
Proceeds."
Pursuant to a Stockholders' Agreement, Safeguard, Technology Leaders II and
Xerox have agreed to vote their shares of Common Stock and Class B common
stock of 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 Anshoo S. Gupta), three designees of Safeguard and
Technology Leaders II (currently John D. Loewenberg, 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 Anshoo S. Gupta), and a mutually acceptable
designee of Xerox and Mr. Andereck (currently Milledge A. Hart, III). Both of
these agreements shall terminate upon the consummation of this offering.
The Company and Xerox, a stockholder of the Company, entered into a
Cooperative Marketing Agreement in August 1994. Under the terms of the
agreement, the Company and Xerox agreed to pay each other standard commissions
on sales of each other's products resulting from successful referrals. This
agreement may be terminated by either party after 30 days' written notice. The
Company and Xerox entered into a Cooperative Marketing Agreement for the
utility industry in April 1997. Under the terms of the agreement, Xerox and
DocuCorp will work together to offer flexible, cost-effective solutions for
producing customized documents such as billing and correspondence.
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.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of the date of this Prospectus and as
adjusted to reflect the sale of the shares offered thereby by (i) each Selling
Stockholder; (ii) each person known to own beneficially 5% or more of the
outstanding shares of Common Stock; (iii) each director of the Company; (iv)
each Named Executive Officer; and (v) all executive officers and directors as
a group. Unless otherwise noted below, each of such stockholders has sole
voting and investment power as to shares shown, except to the extent authority
is shared by spouses under applicable law.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING NUMBER OF AFTER THE OFFERING
---------------------- SHARES --------------------
NUMBER TO BE SOLD IN NUMBER
NAMES OF SHARES PERCENTAGE THE OFFERING OF SHARES PERCENTAGE
----- ---------- ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Safeguard Scientifics,
Inc.(1)................ 3,268,133 27.9% 911,229 2,356,904 15.0%
Xerox Corporation(2).... 2,687,884 25.0% 700,240 1,987,644 13.5%
Michael D. Andereck(3).. 1,747,020 15.7% 455,129 1,291,891 8.5%
Technology Leaders
II(4).................. 1,519,475 13.7% 313,495 1,205,980 8.0%
Samuel W. Wilkes(5)..... 482,830 4.5% 205,000 277,830 1.9%
B. Bruce Dale(6)........ 182,366 1.7% -- 182,366 1.2%
Milledge A. Hart,
III(7)................. 181,020 1.7% -- 181,020 1.2%
Hsi-Ming Lin(8)......... 144,073 1.3% -- 144,073 1.0%
Arthur R. Spector(6).... 123,724 1.1% -- 123,724 *
Kerry K. LeCrone(9)..... 71,590 0.7% -- 71,590 *
John D. Loewenberg(6)... 57,758 0.5% -- 57,758 *
George F. Raymond(6).... 36,000 * -- 36,000 *
Warren V. Musser(6)..... 6,000 * -- 6,000 *
Anshoo S. Gupta......... -- -- -- -- --
All Directors and Named
Executive Officers as a
group (12
persons)(10)........... 3,149,740 26.4% 660,129 2,489,611 15.6%
Other selling
stockholders(11)....... 653,773 6.1% 234,907 418,866 2.8%
</TABLE>
- --------
* Represents less than 1%
(1) The shares are held of record by Safeguard Scientifics (Delaware), Inc.,
a wholly-owned subsidiary of Safeguard. Includes 934,828 shares of Common
Stock issuable pursuant to exercisable warrants and also includes 136,852
shares of Common Stock transferred by Safeguard to certain of its
employees pursuant to a long-term incentive plan (the "LTIP"). Safeguard
will continue to exercise voting control of these shares until the
occurrence of certain vesting requirements. The largest stockholder of
Safeguard is Warren V. Musser, the chairman and chief executive officer
of Safeguard, who is the record holder of approximately 9.0% of the total
Safeguard common shares outstanding. See "Certain Relationships and
Related Transactions." The stockholder's address is 800 The Safeguard
Building, 435 Devon Park Drive, Wayne, Pennsylvania 19087.
(2) Includes 6,000 shares of Common Stock issuable pursuant to exercisable
stock options. The stockholder's address is P.O. Box 1600, Stamford,
Connecticut 06904.
(3) Includes 358,405 shares of Common Stock issuable pursuant to exercisable
stock options. Also includes beneficial ownership, of which 86,676 shares
are held in a trust which is not in Mr. Andereck's control. Mr. Andereck
disclaims any beneficial ownership as to such shares. The stockholder's
address is c/o DocuCorp, 5910 N. Central Expressway, Suite 800, Dallas,
Texas 75206.
(4) Includes 300,950 shares of Common Stock issuable pursuant to exercisable
warrants. 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
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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. The stockholder's address is c/o Safeguard Scientifics,
Inc., The Safeguard Building, 435 Devon Park Drive, Wayne, Pennsylvania
19087.
(5) Includes 71,590 shares of Common Stock issuable pursuant to exercisable
stock options.
(6) Represents shares of Common Stock issuable pursuant to exercisable stock
options and/or warrants.
(7) Includes 157,346 shares of Common Stock issuable pursuant to exercisable
stock options.
(8) Includes 40,908 shares of Common Stock issuable pursuant to exercisable
stock options.
(9) Includes 40,090 shares of Common Stock issuable pursuant to exercisable
stock options.
(10) Includes 1,183,745 shares Common Stock issuable pursuant to exercisable
stock options.
(11) Represents the ownership of shares by 11 stockholders of the Company who
are selling shares of Common Stock in this offering. None of such
stockholders (i) currently owns more than 1.7% of the outstanding Common
Stock prior to the offering, (ii) will own more than 1.0% of the
outstanding Common Stock after the offering or (iii) is selling more than
2.0% of the total number of shares being sold by all selling stockholders
in this offering.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 58,000,000 shares
consisting of 50,000,000 shares of Common Stock, par value $0.01 per share,
and 7,000,000 shares of Class B common stock, par value $0.01 per share, and
1,000,000 shares of Preferred Stock, par value $0.10 per share. As of October
31, 1997, there were 5,133,353 shares of Common Stock, 5,629,122 shares of
Class B common stock and no shares of Preferred Stock issued and outstanding.
COMMON STOCK
Holders of Common Stock and Class B common stock are entitled to one vote
for each share held of record on all matters to be voted on by the
stockholders and do not have cumulative voting rights. The election of
directors is determined by a plurality of the votes cast. Amendments to the
Company's Certificate of Incorporation (the "Certificate") require the
approval of the holders of a majority of the Common Stock and, depending upon
the provision thereof amended, either a majority and 75% of the Class B common
stock. Except as otherwise required by law and as may be required by the terms
of the Preferred Stock, all other matters are determined by a majority of the
votes cast. The holders of Common Stock and Class B common stock are entitled
to receive dividends when, as and if declared by the Company's Board of
Directors out of funds legally available for the payment thereof, subject to
any preferential dividend rights of outstanding Preferred Stock. Upon the
liquidation, dissolution or winding up of the Company, holders of Common Stock
and Class B common stock are entitled to receive ratably the net assets of the
Company available for distribution after preferred distributions, if any, to
the holders of Preferred Stock. The shares of Common Stock that will be
outstanding upon the consummation of the offering will be, when issued and
paid for, fully paid and nonassessable. The rights, preferences and privileges
of holders of Common Stock are subject to, and may be adversely affected by,
the rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future. See "Risk Factors--Anti-
Takeover Provisions" and "--Preferred Stock."
Holders of Common Stock and Class B common stock do not have any preemptive
or subscription rights, and holders of Common Stock do not have any redemption
or conversion rights. Upon consummation of the offering, each issued and
outstanding share of Class B common stock will be automatically converted into
a share of Common Stock and all redemption obligations on the part of DocuCorp
with respect to the Class B common stock, described below, will cease.
As of February 1, 1998, DocuCorp mailed to each holder of Class B common
stock a notice regarding such holder's right to redeem his or her Class B
common stock. DocuCorp will pay the sum of $3.40 per share (the "Redemption
Price"), upon receipt of the certificate or certificates evidencing such
shares of Class B common stock, within 60 days of receiving a claim notice, to
a holder of Class B common stock from such holder providing the following
information: (i) such holder's intention to redeem all or a portion of his or
her shares; (ii) the number of shares of Class B common stock owned of record
by such holder; (iii) the name and address of the person to whom the
Redemption Price should be mailed; and (iv) the federal tax identification
number of the person receiving payment of the Redemption Price. Safeguard and
Technology Leaders II have agreed in the Liquidity Agreement to subscribe for
a number of shares of Common Stock at the Redemption Price equal to the number
of shares of Class B common stock in order to fund the redemption of Class B
common stock. See "Certain Relationships and Related Transactions." As of the
date of this Prospectus, no shares of Class B common stock had been presented
for redemption.
PREFERRED STOCK
DocuCorp has authorized 1,000,000 shares of Preferred Stock which the
Company's Board has discretion to issue in such series and with such
preferences and rights as it may designate without the approval of the holders
of Common Stock. Such preferences and rights may be superior to those of the
holders of Common Stock. For example, the holders of Preferred Stock may be
given a preference in payment upon liquidation of DocuCorp, or for the payment
or accumulation of dividends before any distributions are made to the holders
of
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Common Stock. As of the date of this Prospectus, no Preferred Stock has been
designated or issued by the Company, and the Company has no plans, agreements
or understandings for the issuance of Preferred Stock. For a description of
the possible anti-takeover effects of the Preferred Stock, see "Risk Factors--
Anti-Takeover Provisions" and "--Certain Anti-Takeover Provisions."
RIGHTS
The Company is granting on the date hereof the rights to the holders of
Safeguard common shares. The rights, subject to minimum exercise requirements,
are each exercisable for one share of Common Stock at an exercise price of
$5.00 per share. Persons may not exercise rights for fewer than 20 shares of
Common Stock. For purposes of this offering, a person that holds Safeguard
common shares in multiple accounts must meet the 20 share minimum purchase
requirement in each account. Accordingly, persons holding fewer than 20 rights
in an account should consider the advisability of consolidating their rights
in one account, selling rights, or purchasing additional rights to comply with
the minimum exercise requirements of this offering. Rights may be transferred,
in whole or in part, by endorsing and delivering to ChaseMellon a rights
certificate that has been properly endorsed for transfer, with instructions to
reissue the rights, in whole or in part, in the name of the transferee.
ChaseMellon will reissue certificates for the transferred rights to the
transferee, and will reissue a certificate for the balance, if any, to the
holder of the rights, in each case to the extent it is able to do so prior to
the expiration date of the rights. This offering will terminate and the rights
will expire at 5:00 p.m., New York City time, on the expiration date, which is
March 31, 1998. After the expiration date of the rights, unexercised rights
will be null and void. For more information about the rights and the offering
process, reference should be made to "The Offering" and to "Risk Factors--
Cancellation of Rights Offering."
LIMITATION ON LIABILITY
The Certificate of Incorporation of the Company limits or eliminates the
liability of the Company's directors or officers to the Company or its
stockholders for monetary damages to the fullest extent permitted by the
Delaware General Corporation Law, as amended (the "DGCL"). The DGCL provides
that a director of DocuCorp shall not be personally liable to DocuCorp or its
stockholders for monetary damages for a breach of fiduciary duty as a
director, except for liability: (i) for any breach of such person's duty of
loyalty; (ii) for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law; (iii) for the payment of unlawful
dividends and certain other actions prohibited by Delaware corporate law; and
(iv) for any transaction resulting in receipt by such person of an improper
personal benefit.
DocuCorp has directors' and officers' liability insurance to provide its
directors and officers and the directors and officers of FormMaker and Image
Sciences with insurance coverage for losses arising from claims based on
breaches of duty, negligence, error and other wrongful acts. See "Business--
Legal Proceedings" for a discussion of pending litigation.
CERTAIN ANTI-TAKEOVER PROVISIONS
The ability of the Company's Board to establish the rights of, and to issue,
substantial amounts of Preferred Stock without the need for stockholder
approval, upon such terms and conditions, and having such rights, privileges
and preferences as the DocuCorp Board may determine in the exercise of its
business judgment, may, among other things, be used to create voting
impediments with respect to changes in control of DocuCorp or to dilute the
stock ownership of holders of Common Stock seeking to obtain control of
DocuCorp. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions, financings and other corporate
transactions, may have the effect of discouraging, delaying or preventing a
change in control of DocuCorp. DocuCorp has no present plans to issue any
shares of Preferred Stock. In addition, the Company's Certificate of
Incorporation, as amended, prohibits action by written consent of stockholders
in lieu of a meeting, which could also have the effect of making it more
difficult for a third party to acquire control of the Company. See "Risk
Factors--Anti-Takeover Provisions," "--Common Stock" and "--Preferred Stock."
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SECTION 203 OF DELAWARE GENERAL CORPORATION LAW
Section 203 of the DGCL prohibits certain business combinations between a
Delaware corporation and an "interested stockholder," which is defined as a
person who, together with any affiliates or associates of such person,
beneficially owns, directly or indirectly, 15% or more of the outstanding
voting shares of a Delaware corporation. For purposes of Section 203, business
combinations are defined broadly to include mergers, consolidations, sales or
other dispositions of assets having an aggregate value in excess of 10% of the
consolidated assets of the corporation, and certain transactions that would
increase the interested stockholder's proportionate share ownership in the
corporation. Section 203 prohibits any such business combination for a period
of three years commencing on the date the interested stockholder becomes an
interested stockholder, unless: (i) the business combination is approved by
the corporation's board of directors prior to the date the interested
stockholder becomes an interested stockholder; (ii) the interested stockholder
acquired at least 85% of the voting stock of the corporation (other than stock
held by directors who are also officers or by certain employee stock plans) in
the transaction in which it becomes an interested stockholder; or (iii) the
business combination is approved by a majority of the board of directors and
by the affirmative vote of two-thirds of the outstanding voting stock that is
not owned by the interested stockholder. See "Risk Factors--Anti-Takeover
Provisions."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Securities Transfer
Corporation, 16910 Dallas Parkway, Suite 100, Dallas, Texas 75248.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 14,762,475 shares of
Common Stock outstanding, excluding 4,806,893 shares of Common Stock subject
to stock options and warrants outstanding as of October 31, 1997 and any stock
options granted by the Company after October 31, 1997. Of these shares, the
Common Stock sold in this offering, except for certain shares described below,
will be freely tradeable without restriction or further registration under the
Act. An aggregate of 820,000 shares of Common Stock are expected to be issued
and sold by the Company in connection with the acquisition of two businesses
in private transactions in reliance upon exemption from registration under the
Act and are therefore deemed "restricted securities," as defined in Rule 144,
which may not be sold publicly unless the shares are registered under the Act
or sold under Rule 144. The issuance of substantially all of the remaining
8,042,475 shares of Common Stock was registered under the Act, and, subject to
the Lock-Up Agreements described below, such shares will be freely tradeable
without restriction or further registration under the Act. See "Risk Factors--
Shares Eligible for Future Sale."
STOCK OPTIONS AND WARRANTS
As of October 31, 1997, there were outstanding options and warrants to
purchase an aggregate of 4,806,893 shares of Common Stock (of which 3,444,751
were exercisable at October 31, 1997) at a weighted average exercise price of
$2.10 per share. As of October 31, 1997, the Company had an additional 142,800
shares of Common Stock available for future grant under the Equity
Compensation Plan. On February 18, 1998, the Board of Directors increased the
number of shares of Common Stock available for future option grants by 120,000
shares. Therefore, as of the date hereof, the Company had an additional
262,800 shares of Common Stock available for future grant under the Equity
Compensation Plan. The holders of options which are presently exercisable to
purchase a total of 1,183,745 shares are subject to Lock-Up Agreements, which
restrict, until after the Lock-Up Expiry Date (without the prior written
consent of Tucker Anthony Incorporated), the holders' ability to sell or
otherwise dispose of Common Stock acquired upon the exercise of such options.
See "Management--Equity Compensation Plan."
The Company issued options and underlying shares of Common Stock to
employees of the Company who were not executive officers and directors of the
Company pursuant to Rule 701. Under Rule 701, employees of the Company who
acquire shares upon the exercise of stock options granted prior to May 15,
1997 are entitled to sell such shares without having to comply with the public
information, holding period, volume limitation or
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notice provisions of Rule 144 and they may resell their shares without
restriction or further registration under the Act. Rule 701 also permits the
shares subject to unexercised options granted prior to May 15, 1997 to be sold
upon exercise without having to comply with the foregoing provisions of Rule
144. As of October 31, 1997, approximately 2,848,084 shares of Common Stock
were eligible for sale under Rule 701 by Company employees (subject to
applicable vesting provisions).
It is anticipated that a Registration Statement on Form S-8 covering the
Common Stock that may be issued pursuant to the options granted under the
Equity Compensation Plan will be filed prior to the Lock-Up Expiry Date and
that shares of Common Stock that are so acquired and offered thereafter
pursuant to this Registration Statement generally may be resold in the public
market without restriction or limitation, except in the case of affiliates of
the Company, whom generally may only resell such shares in accordance with
each provision of Rule 144, other than the holding period requirement.
LOCK-UP AGREEMENTS
The Principal Stockholders and each other executive officer and director of
the Company, who will beneficially own approximately 8.0 million shares of
Common Stock after the completion of this offering, have agreed with the
Underwriters that they will not sell or otherwise dispose of any shares of
Common Stock until after the Lock-Up Expiry Date, without the prior written
consent of Tucker Anthony Incorporated on behalf of the Underwriters. In
addition, certain other stockholders of the Company, who will beneficially own
approximately 2.5 million shares of Common Stock after the completion of this
offering, have agreed with the Underwriters that they will not sell or
otherwise dispose of any shares of Common Stock until the Lock-Up Expiry Date
(or, with regard to approximately 300,000 of such shares, an earlier date
agreed to by the Underwriters), without the prior written consent of Tucker
Anthony Incorporated on behalf of the Underwriters.
REGISTRATION RIGHTS
Pursuant to agreements entered into by the Company, the holders of 820,000
shares of Common Stock have the right to request that the Company file, after
the Lock-Up Expiry Date, a registration statement to register all of their
shares. The Company anticipates that the holders will exercise this right
promptly after the Lock-Up Expiry Date. Notwithstanding the foregoing, the
holders of approximately 495,000 of such shares have agreed not to resell such
shares without the consent of the Company. This contractual restriction
expires at various dates from February 2000 to October 2001.
64
<PAGE>
UNDERWRITING
The Company, the Selling Stockholders and the Underwriters have entered into
the Standby Underwriting Agreement on the date hereof, pursuant to which the
Underwriters are required, subject to certain terms and conditions (all of
which are set forth below), to purchase the Excess Unsubscribed Shares in
accordance with the percentages set forth below. If all of the Rights are
exercised, or if the number of Unsubscribed Shares is 300,000 or less, there
will be no Excess Unsubscribed Shares and the Underwriters will not be
required to purchase any shares of Common Stock.
<TABLE>
<CAPTION>
UNDERWRITERS % OF UNDERWRITER SHARES
------------ -----------------------
<S> <C>
Tucker Anthony Incorporated.......................... 50%
Prudential Securities Incorporated................... 50%
</TABLE>
The Underwriters have agreed, subject to the condition that the Company and
the Selling Stockholders comply with their respective obligations under the
Standby Underwriting Agreement and subject to the Underwriters' right to
terminate their obligations under the Standby Underwriting Agreement (as
specified below), to purchase all of the Excess Unsubscribed Shares. The
Company will pay the Underwriters the Financial Advisory Fee equal to 3% of
the exercise price per share for each share of Common Stock included in the
offering. The Financial Advisory Fee is for services and advice rendered in
connection with the structuring of the offering, valuation of the business of
the Company, and financial advice to the Company before and during the
offering. An additional fee of 4% of the exercise price per share will be paid
to the Underwriters (i) for each share of Common Stock purchased by the
Underwriters pursuant to the Standby Underwriting Agreement and (ii) for each
share of Common Stock purchased upon the Underwriters' exercise of Rights if
such Rights were purchased by the Underwriters at a time when the Common Stock
was trading (on a "when issued" basis) at a per share price of less than 120%
of the Exercise Price or if the Underwriters purchase such Rights with
Safeguard's prior written acknowledgment that it would be entitled to receive
the Underwriting Discount for Common Stock purchased pursuant to the exercise
of such Rights. In addition, the Company has agreed to pay the Underwriters a
non-accountable expense allowance in the aggregate amount of $200,000,
provided, however, such non-accountable expense allowance shall be reduced to
$100,000 or zero if, on the Expiration Date, the closing price for the Common
Stock traded on a "when issued" basis is at least $7.25 per share or greater
than $8.25 per share, respectively. The selling stockholders have granted to
the Underwriters a 20-day option commencing on the Expiration Date to purchase
a maximum of 640,000 additional shares of Common Stock at a per share price
equal to the Exercise Price less the Financial Advisory Fee and the
Underwriting Discount. The Underwriters may exercise such option in whole or
in part only to cover over-allotments made in connection with the sale of
shares of Common Stock by the Underwriters.
Prior to the Expiration Date, the Underwriters may offer shares of Common
Stock on a when-issued basis, including shares to be acquired through the
purchase and exercise of Rights, at prices set from time to time by the
Underwriters. It is not contemplated that the offering price set on any
calendar day will be increased independently by the Underwriters more than
once during such day. After the Expiration Date, the Underwriters may offer
shares of Common Stock, whether acquired pursuant to the Standby Underwriting
Agreement, the exercise of the Rights or the purchase of Common Stock in the
market, to the public at a price or prices to be determined. The Underwriters
may thus realize profits or losses independent of the Underwriting Discount
and the Financial Advisory Fee. Shares of Common Stock subject to the Standby
Underwriting Agreement will be offered by the Underwriters when, as and if
sold to, and accepted by, the Underwriters and will be subject to their right
to reject orders in whole or in part.
Prior to this offering there has been no public market for the Common Stock
or the rights. Consequently, the exercise price was determined by negotiations
among the Company, the selling stockholders and the Underwriters. In
determining the exercise price, the Underwriters, the selling stockholders and
the Board of Directors of the Company considered such factors as the future
prospects and historical growth rate in revenues and earnings of the Company,
its industry in general and the Company's position in its industry; revenues,
65
<PAGE>
earnings and certain other financial and operating information of the Company
in recent periods; market valuations of the securities of companies engaged in
activities similar to those of the Company; the management of the Company;
and, with respect to the Company, the advice of the Underwriters.
The Underwriters will be prohibited from engaging in any market making
activities with respect to the Company's when-issued Common Stock and Common
Stock until the Underwriters have completed their participation in the
distribution of shares offered hereby. As a result, the Underwriters may be
unable to provide a market for the Company's when-issued Common Stock and
Common Stock should it desire to do so, during certain periods while the
Rights are exercisable.
In connection with this offering, the Underwriters and certain selling group
members may engage in stabilizing, syndicate covering transactions or other
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. A "syndicate covering transaction" is the placing of any bid
or the effecting of any purchase on the behalf of the Underwriters to reduce a
short position created in connection with this offering. After the opening of
quotations for the Common Stock on the Nasdaq National Market, stabilizing
bids for the purpose of preventing or retarding a decline in the market price
may be initiated by the Underwriters or selling group members in any market at
a price no higher that the last independent transaction price for the Common
Stock and then maintained, reduced or raised to follow the independent market.
Such transactions may stabilize the market price of the Common Stock at a
level above that which might otherwise prevail and, if commenced, may be
discontinued at any time.
The Underwriters have informed the Company that the Underwriters do not
intend to confirm sales of shares of the rights or the Common Stock to any
accounts over which they exercise discretionary authority.
An affiliate of Tucker Anthony Incorporated, Tucker Anthony Holdings, has a
$1.0 million investment in Technology Leaders II, a venture capital fund which
currently owns approximately 15.2% of the Common Stock. The investment
represents approximately 0.9% of the $112.6 million which has been invested in
such fund.
The Company and the selling stockholders have agreed to indemnify the
Underwriters against certain liabilities arising out of or based upon
misstatements or omissions in this Prospectus or the Registration Statement of
which this Prospectus is a part and certain other liabilities, including
liabilities under the Act, and to contribute to certain payments that the
Underwriters may be required to make.
The Underwriters may terminate their obligations under the Standby
Underwriting Agreement (i) if any calamitous domestic or international event
or act or occurrence has disrupted or, in the Underwriters' opinion, will in
the immediate future materially disrupt, the general securities market in the
United States; (ii) if trading in the Common Stock (on a when-issued basis)
shall have been suspended by the Commission or Nasdaq; (iii) if trading on the
New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market or in the over-the-counter market shall have been suspended, or minimum
or maximum prices for trading shall have been fixed, or maximum ranges for
prices for securities shall have been required on the over-the-counter market
by the NASD or by order of the Commission or any other government authority
having jurisdiction; (iv) if the United States shall have become involved in a
war or major hostilities which, in the Underwriters' opinion, will affect the
general securities market in the United States; (v) if a banking moratorium
has been declared by a New York, Massachusetts, Pennsylvania, Illinois or
federal authority; (vi) if a moratorium in foreign exchange trading has been
declared; (vii) if the Company shall have sustained a loss material to the
Company by fire, flood, accident, hurricane, earthquake, theft, sabotage or
other calamity or malicious act, whether or not such loss shall have been
insured, or from any labor dispute or any legal or governmental proceeding;
(viii) if there shall be such material adverse market conditions (whether
occurring suddenly or gradually between the date of this Prospectus and the
closing of the offering) affecting markets generally or technology issues
particularly as in the Underwriters' reasonable judgment would make it
inadvisable to proceed with the offering, sale or delivery of the shares of
Common Stock offered hereby; (ix) if there shall have been such material
adverse change, or any development involving a prospective material adverse
change (including a change in management or control of the Company), in the
condition (financial or otherwise), business prospects, net worth or results
of operations
66
<PAGE>
of the Company since July 31, 1997 or (x) the Other Purchasers fail to
purchase their aggregate allotment of Unsubscribed Shares, which in no event
will involve more than 300,000 shares of Common Stock. The Underwriters,
however, may elect to purchase all, but not less than all, Unsubscribed Shares
in the event the Other Purchasers fail to purchase any of the Unsubscribed
Shares which they are obligated to purchase.
The Company has agreed that, without the prior written consent of the
Underwriters, it will not offer, sell, grant any option for the sale of, or
otherwise dispose of any shares of Common Stock (or securities convertible
into shares of Common Stock) (collectively, the "Securities") acquired in the
Rights offering or held by it as of the date hereof until after the Lock-Up
Expiry Date, other than (i) Common Stock to be sold in the offering, and (ii)
Company option issuances and sales of Common Stock pursuant to the Stock
Option Plan and (iii) Securities issued as consideration for an acquisition if
the party being issued the Securities agrees not to transfer, sell, offer for
sale, contract or otherwise dispose of such Securities until after the Lock-Up
Expiry Date. The Principal Stockholders and each director and executive
officer of the Company, who will beneficially own approximately 8.0 million
shares of Common Stock after the completion of the offering, have agreed with
the Underwriters that they will not sell or otherwise dispose of any shares of
Common Stock (other than shares of Common Stock sold in the offering) until
after the Lock-Up Expiry Date without the prior written consent of Tucker
Anthony Incorporated on behalf of the Underwriters. In addition, certain other
stockholders of the Company, who will beneficially own approximately 2.5
million shares of Common Stock after the completion of this offering, have
agreed with the Underwriters that they will not sell or otherwise dispose of
any shares of Common Stock until the Lock-Up Expiry Date (or, with regard to
approximately 300,000 of such shares, an earlier date agreed to by the
Underwriters), without the prior written consent of Tucker Anthony
Incorporated on behalf of the Underwriters.
LEGAL MATTERS
The validity of the rights and shares of Common Stock offered hereby will be
passed upon for the Company by Morgan, Lewis & Bockius LLP, Philadelphia,
Pennsylvania. Certain legal matters in connection with this offering are being
passed upon for the Underwriters by Drinker Biddle & Reath LLP, Philadelphia,
Pennsylvania.
EXPERTS
The consolidated financial statements of the Company as of July 31, 1996 and
1997 and for each of the three years in the period ended July 31, 1997
included in this Prospectus have been so included in reliance upon the report
of Price Waterhouse LLP, independent accountants, given upon their authority
as experts in accounting and auditing.
The consolidated balance sheets of FormMaker as of December 31, 1995 and
1996 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1996, included in this Prospectus, have been included herein in
reliance on the report, which includes an explanatory paragraph regarding the
restatement of the 1995 and 1996 financial statements, of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
This Prospectus, which constitutes a part of a Registration Statement on
Form S-1 (including all amendments thereto, the "Registration Statement")
filed by the Company with the Securities and Exchange Commission under the
Act, omits certain of the information set forth in the Registration Statement.
Reference is hereby made to the Registration Statement and to the exhibits
thereto for further information with respect to the Company and the securities
offered hereby. Copies of the Registration Statement and the exhibits thereto
are on file at the offices of the Securities and Exchange Commission and may
be obtained upon payment of the prescribed fee or may be examined without
charge at the public reference facilities of the Securities and Exchange
Commission described below.
67
<PAGE>
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents, and each statement is qualified in
its entirety by reference to the copy of the applicable document filed with
the Securities and Exchange Commission.
The Company is subject to certain of the informational reporting
requirements of the Securities Exchange Act of 1934, as amended and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission. Such reports and other information can be inspected
and copied at the public reference facility maintained by the Securities and
Exchange Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549-1004 and at the regional offices of the Securities and Exchange
Commission located at Seven World Trade Center, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials may also be obtained in person from the Public Reference Section of
the Securities and Exchange Commission at its principal office located at 450
Fifth Street, N.W., Washington, D.C. 20549-1004 at prescribed rates.
Additionally, such material may be obtained at the web site the Securities and
Exchange Commission maintains at http:www.sec.gov which contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Securities and Exchange Commission.
68
<PAGE>
DOCUCORP INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DOCUCORP INTERNATIONAL, INC.
Report of Price Waterhouse LLP, Independent Accountants................. F-2
Consolidated Balance Sheets at July 31, 1996 and 1997................... F-3
Consolidated Statements of Operations for the years ended July 31, 1995,
1996 and 1997.......................................................... F-4
Consolidated Statements of Cash Flows for the years ended July 31, 1995,
1996 and 1997.......................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the years
ended July 31, 1995, 1996 and 1997..................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Interim Consolidated Balance Sheets (Unaudited) at October 31, 1997..... F-19
Interim Consolidated Statements of Operations (Unaudited) for the three
months ended October 31, 1996 and 1997................................. F-20
Interim Consolidated Statements of Cash Flows (Unaudited) for the three
months ended October 31, 1996 and 1997................................. F-21
Notes to Interim Consolidated Financial Statements (Unaudited) for the
three months ended October 31, 1996 and 1997........................... F-22
FORMMAKER SOFTWARE, INC.
Report of Coopers & Lybrand L.L.P., Independent Accountants............. F-25
Consolidated Balance Sheets at December 31, 1995 and 1996............... F-26
Consolidated Statements of Operations for the years ended December 31,
1994, 1995 and 1996.................................................... F-27
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996....................................... F-28
Consolidated Statements of Cash Flow for the years ended December 31,
1994, 1995 and 1996.................................................... F-29
Notes to Consolidated Financial Statements.............................. F-30
Interim Consolidated Balance Sheet (Unaudited) at March 31, 1997........ F-40
Interim Consolidated Statements of Operations (Unaudited) for the three
months ended March 31, 1996 and 1997................................... F-41
Interim Consolidated Statements of Cash Flows (Unaudited) for the three
months ended March 31, 1996 and 1997................................... F-42
Notes to Interim Consolidated Financial Statements (Unaudited) for the
three months ended March 31, 1996 and 1997............................. F-43
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
DocuCorp International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity present fairly, in all material respects, the financial position of
DocuCorp International, Inc. and its subsidiaries at July 31, 1996 and 1997
and the results of their operations and their cash flows for each of the three
years in the period ended July 31, 1997, in conformity with generally accepted
accounting principles. 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, except as to
Note 10, which is as of December 9,
1997 and Note 11, which is as of
January 31, 1998
F-2
<PAGE>
DOCUCORP INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
JULY 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................... $ 1,909,016 $ 2,869,458
Short-term investments.............................. 5,308,806 0
Accounts receivable, net of allowance of $350,000
and $525,000, respectively......................... 4,105,652 9,010,784
Current portion of deferred taxes................... 399,468 380,925
Income tax refund receivable........................ 0 503,888
Other current assets................................ 187,193 553,977
----------- -----------
Total current assets.............................. 11,910,135 13,319,032
Fixed assets, net of accumulated depreciation of
$1,419,206 and $1,983,864, respectively.............. 783,328 3,087,578
Software, net of accumulated amortization of
$4,466,514 and $5,397,344, respectively.............. 1,941,679 7,408,113
Deferred taxes........................................ 0 1,029,473
Goodwill, net of accumulated amortization of
$160,522............................................. 0 7,544,535
Other assets.......................................... 55,586 309,434
----------- -----------
$14,690,728 $32,698,165
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.................................... $ 323,044 $ 1,164,012
Accrued liabilities:
Accrued compensation............................... 700,050 1,142,199
Other.............................................. 278,857 1,532,300
Income taxes payable................................ 655,264 412,000
Current portion of long-term debt................... 0 191,652
Current portion of obligations under capital
leases............................................. 45,967 454,199
Deferred revenue.................................... 4,267,113 6,778,212
----------- -----------
Total current liabilities......................... 6,270,295 11,674,574
----------- -----------
Obligations under capital leases.................... 0 33,993
Deferred taxes...................................... 383,070 0
Long-term debt...................................... 0 8,759,156
Other long-term liabilities......................... 0 631,748
Redeemable Class B common stock, 7,000,000 shares
authorized at $0.01 par value, 5,623,229 shares
issued and outstanding at redemption value......... 0 19,118,978
Stockholders' equity (deficit):
Preferred stock, 3,000,000 and 1,000,000 shares
authorized at $0.10 par value, $1.00 liquidation
value, 2,020,373 shares issued and outstanding at
July 31, 1996...................................... 202,037 0
Common stock, 20,000,000 shares authorized at $0.01
par value, 4,048,000 and 5,133,353 shares issued
and outstanding, respectively...................... 40,480 51,334
Additional paid-in capital.......................... 1,298,442 4,912,649
Retained earnings (deficit)......................... 6,496,404 (12,413,092)
Notes receivable from stockholders.................. 0 (71,175)
Total stockholders' equity (deficit).............. 8,037,363 (7,520,284)
----------- -----------
$14,690,728 $32,698,165
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DOCUCORP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ---------- ------------
<S> <C> <C> <C>
REVENUES
Professional services................... $ 587,118 $ 819,034 $ 6,150,625
License................................. 4,806,888 4,793,031 4,092,491
Maintenance and other recurring......... 5,419,945 5,858,256 7,259,702
----------- ---------- ------------
Total revenues........................ 10,813,951 11,470,321 17,502,818
----------- ---------- ------------
EXPENSES
Professional services................... 471,783 655,911 3,999,504
Product development and support......... 3,952,066 4,405,932 4,955,617
Selling and marketing................... 1,950,588 1,665,961 2,246,270
General and administrative.............. 1,281,742 1,326,141 2,383,233
Merger related charges.................. 0 0 21,377,855
----------- ---------- ------------
Total expenses........................ 7,656,179 8,053,945 34,962,479
----------- ---------- ------------
Operating income (loss)............... 3,157,772 3,416,376 (17,459,661)
Other income............................ 28,148 239,904 213,874
----------- ---------- ------------
Income (loss) before income taxes..... 3,185,920 3,656,280 (17,245,787)
Provision for income taxes (benefit).... 1,183,000 1,335,000 (1,144,000)
----------- ---------- ------------
Net income (loss)..................... $ 2,002,920 $2,321,280 $(16,101,787)
=========== ========== ============
Net income (loss) per share:
Basic................................... $ 0.35 $ 0.37 $ (2.69)
=========== ========== ============
Diluted................................. $ 0.25 $ 0.28 $ (2.69)
=========== ========== ============
Weighted average shares outstanding used
in the net income (loss) per share
calculation:
Basic................................... 5,673,510 6,201,684 5,980,718
=========== ========== ============
Diluted................................. 8,165,273 8,381,170 5,980,718
=========== ========== ============
Unaudited pro forma data (Note 1):
Pro forma basic and diluted net loss per
share.................................. $ (2.18)
============
Weighted average shares outstanding used
in the pro forma basic and diluted net
loss per share calculation............. 7,377,271
============
Supplemental pro forma basic and diluted
net loss per share..................... $ (1.70)
============
Weighted average shares outstanding used
in the supplemental pro forma basic and
diluted net loss per share
calculation............................ 9,411,546
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DOCUCORP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1995 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................... $2,002,920 $2,321,280 $(16,101,787)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Charge for acquired in-process
technology.......................... 0 0 13,500,000
Stock option compensation expense.... 53,271 49,988 7,698,143
Depreciation......................... 324,699 363,931 573,645
Amortization of capitalized
software............................ 736,224 813,832 930,829
Amortization of goodwill............. 0 0 160,522
Increase (decrease) in allowance for
doubtful accounts................... 0 25,000 (63,363)
Changes in assets and liabilities,
net of effects from acquisition:
(Increase) decrease in accounts
receivable........................ 52,304 (22,131) (76,411)
(Increase) decrease in income tax
refund receivable................. 174,467 222,033 (503,888)
(Increase) decrease in deferred tax
assets............................ 121,390 (56,113) (1,010,930)
Increase in other assets........... (1,615) (74,642) (23,340)
Decrease in accounts payable....... (91,648) (96,939) (174,940)
Increase (decrease) in accrued
liabilities....................... (370,201) 71,701 432,989
Increase (decrease) in income taxes
payable........................... 440,231 65,033 (243,264)
Increase (decrease) in deferred
revenue........................... (272,983) 438,841 1,326,875
Increase (decrease) in deferred tax
liabilities....................... 156,912 226,158 (383,070)
---------- ---------- ------------
Total adjustments.................. 1,323,051 2,026,692 22,143,797
---------- ---------- ------------
Net cash provided by operating
activities........................ 3,325,971 4,347,972 6,042,010
---------- ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Purchase) sale of short-term
investments, net...................... (1,500,000) (2,308,806) 5,308,806
Purchase of fixed assets............... (333,073) (356,017) (547,301)
Development of software................ (667,924) (533,649) (997,263)
Net cash acquired in business
combination........................... 0 0 1,714,416
---------- ---------- ------------
Net cash (used in) provided by
investing activities.............. (2,500,997) (3,198,472) 5,478,658
---------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt...................... (258,801) (1,534,430) (2,448,011)
Principal payments under capital lease
obligations........................... (91,128) (56,388) (148,361)
Purchase of tendered stock, and
options............................... (84,375) 0 (5,192,293)
Preferred stock dividend............... 0 0 (2,807,709)
Proceeds from exercise of warrants and
options............................... 89,369 45,432 15,644
Proceeds from sale of warrants......... 0 0 6,100
Tax benefit related to non-qualified
stock option activity................. 0 14,922 14,404
---------- ---------- ------------
Net cash used in financing
activities........................ (344,935) (1,530,464) (10,560,226)
---------- ---------- ------------
Net increase (decrease) in cash and cash
equivalents............................. 480,039 (380,964) 960,442
Cash and cash equivalents at beginning of
year.................................... 1,809,941 2,289,980 1,909,016
---------- ---------- ------------
Cash and cash equivalents at end of
year.................................... $2,289,980 $1,909,016 $ 2,869,458
========== ========== ============
</TABLE>
See non-cash activities disclosed in Note 3.
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DOCUCORP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
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 $38,122 $(281,602) $ 1,413,795 $ 2,172,204 $ 0 $ 3,544,556
Exercise of warrants to
purchase 24,097 shares
of common stock........ 241 (102) 139
Exercise of stock option
to purchase 472,385
shares of common
stock.................. 4,724 84,506 89,230
Purchase and retirement
of 117,013 shares of
common stock........... (1,170) (83,205) (84,375)
Retirement of 697,374
shares of treasury
stock.................. (6,973) 281,602 (274,629) 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 34,944 0 1,193,636 4,175,124 0 5,605,741
Exercise of warrants to
purchase 329,735 shares
of common stock........ 3,298 (1,396) 1,902
Exercise of stock
options to purchase
223,798 shares of
common stock........... 2,238 41,292 43,530
Compensation expense
related to non-
qualified stock
options................ 49,988 49,988
Tax benefits 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 40,480 0 1,298,442 6,496,404 0 8,037,363
Exercise of stock
options to purchase
34,339 and 520 shares
of common stock and
Class B common stock,
espectively............ 343 13,538 13,881
Payment of preferred
stock dividend......... (2,807,709) (2,807,709)
Purchase of 865,513
shares of tendered
common stock........... (8,656) (2,487,749) (2,496,405)
Conversion of Image
Sciences common stock
and preferred stock to
5,622,709 shares of
Class B common stock... (202,037) (31,981) (18,883,193) (19,117,211)
Conversion of FormMaker
common stock to
5,114,789 shares of
common stock........... 51,148 19,948,852 20,000,000
Assumption of notes
receivable from
stockholders........... (71,175) (71,175)
Sale of warrants to
purchase 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 $51,334 $ 0 $ 4,912,649 $(12,413,092) $(71,175) $(7,520,284)
======== ======= ========= =========== ============ ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DocuCorp International, Inc. ("DocuCorp" or 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 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
document automation software designed to enable customers to produce high
volume, customized documents. The Company also provides consulting and print
outsourcing services to its customers. The majority of the Company's business
is currently derived from companies in the insurance and utility industries.
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
related to products still in the testing phase is deferred until formal
acceptance of the product by the purchaser.
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 print 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 $134,510, $227,113, and $172,572 in 1995,
1996, and 1997, respectively.
ACCOUNTS RECEIVABLE
Included in accounts receivable at July 31, 1996 and 1997 are unbilled
amounts of $1,833,640 and $1,776,322, respectively. Such amounts have been
recognized as revenue 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.
F-7
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Amortization of assets recorded under capital leases is included in
depreciation expense. Estimated service lives are as follows:
<TABLE>
<S> <C>
Computer equipment............................................. 4-5 years
Furniture and fixtures......................................... 5 years
Leasehold improvements......................................... life of lease
Leased equipment under capital leases.......................... 3-5 years
</TABLE>
Repairs and maintenance are expended as incurred. Major renewals and
betterments are capitalized and depreciated over the assets' remaining
estimated service lives. 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 expended 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 1995, 1996, and 1997, the Company charged to expense
$1,426,391, $1,851,516, and $2,155,435, 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).
STOCK SPLIT
In December 1997, the Company declared a six-for-five stock split effected
in the form of a stock dividend to stockholders of record on December 9, 1997.
All references in the consolidated financial statements to shares, share
prices, per share amounts, and stock plans have been retroactively adjusted
for the six-for-five stock split (see also Note 10).
NET INCOME (LOSS) PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 simplifies the standards for
computing EPS previously found in Accounting Principles Board No. 15,
"Earnings per Share" ("APB 15"), and makes them comparable to international
EPS standards by replacing the presentation of primary EPS with a presentation
of basic EPS. The provisions and disclosure
F-8
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
requirements for SFAS 128 were required to be adopted for interim and annual
periods ending after December 15, 1997, with restatement of EPS for prior
periods. Accordingly, EPS data for all periods presented has been restated to
reflect the computation of EPS in accordance with the provisions of SFAS 128.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share has been computed using the weighted average
number of common shares outstanding after giving retroactive effect to the
six-for-five stock split declared in December 1997 (see Note 10) and assuming
that all shares of Class B common stock have been converted on a one-for-one
basis to shares of Common Stock as of the date of issuance.
SUPPLEMENTAL PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Supplemental pro forma net loss per share has been computed using the
weighted average number of shares of common stock used in the calculation of
pro forma net loss per share, plus the number of shares that the Company would
need to repay (i) $5,471,634 due under the Company's line of credit, (ii)
$3,000,000 in subordinated notes due Safeguard Scientifics, Inc.
("Safeguard"), Technology Leaders II, L.P., and TL Ventures Third Corp. and
(iii) $479,174 in notes due to Safeguard as of July 31, 1997. For purposes of
computing supplemental pro forma net loss per share, the pro forma net loss
for the fiscal year ended July 31, 1997 was reduced by $113,230 representing
elimination of the related interest expense on such debt and the associated
tax effect, and the weighted average shares outstanding used in the
supplemental pro forma net loss per share calculation was increased by
2,034,275 shares which represents the additional shares required to be sold to
retire the debts.
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 1996 and 1997 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 DocuCorp 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,
1996 and 1997, and the reported amounts of revenues and expenses for the
periods then ended. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year's financial statement presentation.
F-9
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--FIXED ASSETS
Fixed asset balances at July 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Computer equipment................................... $1,948,066 $3,753,129
Furniture and fixtures............................... 179,619 1,120,771
Leasehold improvements............................... 74,849 197,542
---------- ----------
2,202,534 5,071,442
Less accumulated depreciation........................ (1,419,206) (1,983,864)
---------- ----------
$ 783,328 $3,087,578
========== ==========
</TABLE>
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 0.6818 shares of Company
Common Stock and options or warrants to purchase Company 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 invested as of July 31, 1997 was exchanged for options
to purchase 1.4446 shares of Company 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 acquiror in the Merger and purchase accounting is not required
related to the conversion of Image Sciences common stock and preferred stock
into Company Common Stock. The financial statements of Image Sciences are
presented as historical statements of the Company for periods prior to the
Merger.
F-10
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following unaudited pro forma information for fiscal 1996 and 1997
presents a summary of consolidated results of operations of Image Sciences and
FormMaker as if the merger 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.
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Revenues............................................ $27,327,000 $38,416,000
Net income.......................................... $ 82,000 $ 1,714,000
Basic net income per share.......................... $ 0.01 $ 0.16
Diluted net income per share........................ $ 0.01 $ 0.14
</TABLE>
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:
<TABLE>
<S> <C>
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
===========
</TABLE>
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, 1996 and
1997 as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Computer equipment....................................... $214,852 $468,551
Office equipment......................................... 0 326,042
-------- --------
214,852 794,593
Less accumulated depreciation............................ (190,249) (95,820)
-------- --------
$ 24,603 $698,773
======== ========
</TABLE>
Certain other equipment leases and the Company's obligation under leases for
office space are treated as operating leases and the rentals are expended as
incurred. Rent expense on these operating leases for the years ended July 31,
1995, 1996, and 1997 totaled $343,010, $383,438, and $926,344, respectively.
Generally, the Company's leases provide for renewals for various periods at
stipulated rates.
F-11
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease obligations on leases in effect at July 31, 1997 are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
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
=========
</TABLE>
NOTE 5--LONG-TERM DEBT
Long-term debt consists of the following at July 31, 1997:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Revolving credit facility with bank............................ $5,471,634
Notes payable to Safeguard..................................... 479,174
Subordinated notes payable to Safeguard, Technology Leaders II,
L.P., and TL Ventures Third Corp. ............................ 3,000,000
----------
8,950,808
Less current portion of debt................................... (191,652)
----------
$8,759,156
==========
</TABLE>
In connection with the Merger, the Company assumed a $10,000,000 revolving
credit facility ("Credit Facility") with a bank which was guaranteed by
Safeguard, FormMaker's largest stockholder. Effective September 1997, the
Credit Facility was renegotiated. The maximum amount available under this
Credit Facility is $10,000,000, and repayment of $3,500,000 is guaranteed by
Safeguard. Under the Credit Facility, the Company is required to maintain
certain financial covenants. Amounts outstanding under this Credit Facility
bear interest at variable rates determined by various provisions of the Credit
Facility. 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 Facility 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 Facility
guaranteed by Safeguard bears interest at the bank's prime rate less 0.25%, or
8.25% at July 31, 1997. The remaining balance of the Credit Facility bears
interest at prime, or 8.50% at July 31, 1997. Amounts outstanding under this
Credit Facility are collateralized by substantially all of the Company's
assets. Interest is payable monthly under this Credit Facility. $6,500,000 of
the Credit Facility 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.
F-12
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Facility 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 1.00%, or 9.50% as of July 31, 1997.
Concurrent with the Merger, Safeguard, Technology Leaders II, L.P., and TL
Ventures Third Corp. loaned the Company $3,000,000 in the form of subordinated
notes. The notes bear interest at prime plus 1.00%, 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 $235,407, $183,508, and $175,339 for the years ended July 31, 1995,
1996, and 1997, 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 $3.40 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 Common Stock, at a price of $3.40 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 Common 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 reduced authorized shares of preferred stock to 1,000,000
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 480,000 shares for
issuance as of July 31, 1997. Options generally expire ten years from the date
of grant.
F-13
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Activity under all plans is summarized as follows:
<TABLE>
<CAPTION>
SHARES UNDER
OUTSTANDING OPTIONS
----------------------------
OUTSTANDING WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Balances at July 31, 1994.......................... 3,701,642 $ .15
Granted.......................................... 500,121 .58
Exercised........................................ (472,385) .19
Expired.......................................... (425,059) .14
--------- -----
Balances at July 31, 1995.......................... 3,304,319 .21
Granted.......................................... 336,302 .73
Exercised........................................ (223,798) .19
Expired.......................................... (399,750) .08
--------- -----
Balances at July 31, 1996.......................... 3,017,073 .29
Exercised........................................ (34,859) .45
Expired.......................................... (47,845) .59
Purchase of Options.............................. (937,357) .01
FormMaker options assumed........................ 973,116 3.43
--------- -----
Balances at July 31, 1997.......................... 2,970,128 $1.40
========= =====
</TABLE>
Outstanding options at July 31, 1997 include options to purchase 1,627,612
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 Common Stock. Options to purchase 428,736
shares of 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 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 1996 and 1997 was $0.73 and $3.40, respectively. The
fair value of the Company's stock-based awards 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:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Expected life (years)........... 3.25 1.75
Risk-free interest rate......... 5.90% 5.75%
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1997
---------- ------------
<S> <C> <C>
Net income (loss):
As reported...................................... $2,321,280 $(16,101,787)
As adjusted...................................... $2,143,767 $(16,119,086)
Net income (loss) per share:
As reported
Basic........................................... $ 0.37 $ (2.69)
Diluted......................................... $ 0.28 $ (2.69)
As adjusted
Basic........................................... $ 0.35 $ (2.70)
Diluted......................................... $ 0.26 $ (2.70)
</TABLE>
F-14
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
WARRANTS
During 1996, warrants to purchase 329,735 shares of common stock were
exercised and warrants to purchase 2,608 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 626,502 shares of Common Stock based on FormMaker's
exchange ratio.
Warrants to purchase 732,000 shares of 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:
<TABLE>
<CAPTION>
EXERCISE
PRICE
WARRANTS SHARE
--------- --------
<S> <C> <C>
Warrants to Safeguard, Technology Leaders II, L.P., and
Technology Leaders II Offshore C.V........................ 258,330 $0.03
Warrants to a director of the Company...................... 122,724 $3.40
Warrants to Safeguard, Technology Leaders II, L.P., and TL
Venture Third Corp........................................ 245,448 $4.25
Warrants to Safeguard, Technology Leaders II, L.P. and
Technology Leaders II Offshore C.V........................ 732,000 $4.17
---------
Total.................................................. 1,358,502
=========
</TABLE>
NOTE 8--INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following at July 31:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
Gross deferred tax assets:
Deferred revenue............................. $387,222 $261,500 $ 128,156
Loss carryforwards........................... 0 0 2,491,006
Tax credit carryforwards..................... 419,129 247,531 426,484
Accounts receivable allowance................ 110,500 119,000 178,500
Deferred lease costs......................... 0 0 204,594
Compensation expense related to stock
options..................................... 0 58,323 1,751,614
Other........................................ 82,484 77,993 290,794
-------- -------- ----------
999,335 764,347 5,471,148
-------- -------- ----------
Gross deferred tax liabilities:
Capitalized software......................... (755,433) (660,171) (2,518,759)
Other........................................ (57,459) (87,778) (149,174)
-------- -------- ----------
(812,892) (747,949) (2,667,933)
-------- -------- ----------
Net.......................................... 186,443 16,398 2,803,215
Less valuation allowance..................... 0 0 (1,392,817)
-------- -------- ----------
Net deferred tax asset....................... $186,443 $ 16,398 $1,410,398
======== ======== ==========
</TABLE>
F-15
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision (benefit) for income taxes charged to operations was as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Current tax expense:
U.S. Federal........................... $ 778,000 $1,048,000 $ 185,000
State, local & foreign................. 75,000 125,000 65,000
---------- ---------- -----------
Total current........................ 853,000 1,173,000 250,000
---------- ---------- -----------
Deferred tax expense (benefit):
U.S. Federal........................... 330,000 162,000 (1,394,000)
State, local & foreign................. 0 0 0
---------- ---------- -----------
Total deferred....................... 330,000 162,000 (1,394,000)
---------- ---------- -----------
Total provision (benefit)............ $1,183,000 $1,335,000 $(1,144,000)
========== ========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Statutory U.S. tax rates............... $1,083,213 $1,243,135 $(5,863,568)
Increase (decrease) in rates resulting
from:
Nondeductible items:
In-process technology................ 0 0 4,590,000
Other................................ 34,550 16,173 41,375
State, local and foreign taxes (net).. 49,500 82,500 42,900
Other................................. 15,737 (6,808) 45,293
---------- ---------- -----------
Effective tax rates.................... $1,183,000 $1,335,000 $(1,144,000)
========== ========== ===========
</TABLE>
Income taxes currently payable for the years ended July 31, 1995, 1996, and
1997 were reduced by approximately $170,000, $170,000, and $160,000,
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 $290,000,
$700,000 and $640,000 during the years ended July 31, 1995, 1996, and 1997,
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
F-16
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Corporation" or "PMSC") to provide certain print
outsourcing services and to grant to 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 print
outsourcing 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.
NOTE 10--STOCK SPLIT
In December 1997, the Company approved the declaration of a six-for-five
stock split of the outstanding Common Stock and Class B common stock effected
in the form of a dividend to stockholders of record as of December 9, 1997.
Concurrently, the number of shares of Common Stock the Company is authorized
to issue was increased from 20 million to 50 million. As stated in Note 1, the
financial statements have been adjusted retroactively for the six-for-five
split.
NOTE 11--NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share has been computed in accordance with SFAS
128 using the weighted average number of common shares outstanding after
giving retroactive effect to the six-for-five stock split effected in December
1997. The provisions and disclosure requirements for SFAS 128 were required to
be adopted for interim and annual periods ending after December 15, 1997, with
restatement of EPS for prior periods.
Diluted net income (loss) per share gives effect to all dilutive potential
common shares that were outstanding during the period. The Company had a net
loss for the year ended July 31, 1997; therefore, none of the options or
warrants outstanding at period end were included in the diluted net loss per
share calculation for the year ended July 31, 1997, since they were anti-
dilutive. Options outstanding as of July 31, 1997 which were not included in
the computation of diluted EPS were as follows:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PRICE
OPTIONS PER SHARE EXPIRATION DATE
--------- ----------- ---------------
<S> <C> <C>
944,003 $0.01 2000-2006
772,631 $.24-$.63 1999-2006
324,831 $.73-$1.04 2000-2006
865,410 $3.02-$4.25 2006-2007
63,253 $5.66-$7.54 1998-2000
</TABLE>
F-17
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the basic and diluted net income per share
computation for the year ended July 31:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Net income........................................... $2,002,920 $2,321,280
========== ==========
BASIC
Weighted average number of shares outstanding........ 5,673,510 6,201,684
========== ==========
Net income per share................................. $ 0.35 $ 0.37
========== ==========
DILUTED
Weighted average number of shares outstanding........ 5,673,510 6,201,684
Additional weighted average shares from assumed
exercise of diluted stock options and warrants, net
of shares to be repurchased with exercise proceeds.. 2,491,763 2,179,486
---------- ----------
Weighted average number of shares outstanding used in
the diluted net income per share calculation........ 8,165,273 8,381,170
========== ==========
Net income per share................................. $ 0.25 $ 0.28
========== ==========
</TABLE>
F-18
<PAGE>
DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
OCTOBER 31, 1997 (NOTE 7)
---------------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 1,442,947 $ 1,442,947
Accounts receivable, net of allowance of
$550,000...................................... 9,079,655 9,079,655
Current portion of deferred taxes.............. 229,259 229,259
Income tax refund receivable................... 362,966 362,966
Other current assets........................... 1,001,598 1,001,598
----------- -----------
Total current assets:........................ 12,116,425 12,116,425
Fixed assets, net of accumulated depreciation
$2,320,187.................................... 2,950,537 2,950,537
Software, net of accumulated amortization
$5,802,298.................................... 7,439,435 7,439,435
Deferred taxes................................. 870,595 870,595
Goodwill, net of accumulated amortization...... 7,351,908 7,351,908
Other assets................................... 292,051 292,051
----------- -----------
$31,020,951 $31,020,951
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................... $ 702,555 $ 702,555
Accrued liabilities:
Accrued compensation.......................... 710,833 710,833
Other......................................... 1,631,173 1,631,173
Income taxes payable........................... 434,904 434,904
Current portion of long-term debt.............. 191,652 191,652
Current portion of obligations under capital
leases........................................ 337,362 337,362
Deferred revenue............................... 7,207,649 7,207,649
----------- -----------
Total current liabilities.................... 11,216,128 11,216,128
Long-term debt................................. 6,832,609 6,832,609
Other long-term liabilities.................... 645,608 645,608
Redeemable Class B Common Stock, 7,000,000
shares authorized at $0.01 par value,
5,629,122 and 0 shares issued and outstanding
at redemption value, respectively............. 19,139,015 0
Stockholders' equity (deficit):
Common Stock, 20,000,000 shares authorized at
$0.01 par value, 5,133,353 and 10,762,475
shares issued and outstanding, respectively... 51,334 107,625
Additional paid-in capital..................... 4,901,319 23,984,043
Retained deficit............................... (11,693,887) (11,693,887)
Notes receivable from stockholders............. (71,175) (71,175)
----------- -----------
Total stockholders' equity (deficit)......... (6,812,409) 12,326,606
----------- -----------
$31,020,951 $31,020,951
=========== ===========
</TABLE>
F-19
<PAGE>
DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
----------------------
1996 1997
---------- -----------
<S> <C> <C>
REVENUES
Professional services............................... $ 195,870 $ 6,688,010
License............................................. 1,043,687 1,575,817
Maintenance and other recurring..................... 1,583,980 2,582,446
---------- -----------
Total revenues.................................... 2,823,537 10,846,273
========== ===========
EXPENSES
Professional services............................... 146,286 4,841,694
Product development and support..................... 995,476 1,878,499
Selling and marketing............................... 405,241 1,395,100
General and administrative.......................... 464,908 1,371,863
---------- -----------
Total expenses.................................... 2,011,911 9,487,156
---------- -----------
Operating income.................................. 811,626 1,359,117
Other income (expense), net......................... 95,314 (155,912)
---------- -----------
Income before income taxes........................ 906,940 1,203,205
Provision for income taxes.......................... 330,000 484,000
---------- -----------
Net income........................................ $ 576,940 $ 719,205
========== ===========
Net income per share:
Basic............................................... $ 0.09 $ 0.14
========== ===========
Diluted............................................. $ 0.07 $ 0.10
========== ===========
Weighted average shares outstanding used in the net
income per share calculation:
Basic............................................... 6,472,359 5,133,353
========== ===========
Diluted............................................. 8,168,623 7,212,945
========== ===========
Unaudited pro forma data:
Pro forma net income per share:
Basic.............................................. $ 0.07
===========
Diluted............................................ $ 0.06
===========
Pro forma weighted average shares outstanding:
Basic.............................................. 10,759,954
===========
Diluted............................................ 12,839,546
===========
Supplemental pro forma net income per share:
Basic.............................................. $ 0.07
===========
Diluted............................................ $ 0.06
===========
Supplemental pro forma weighted average shares
outstanding:
Basic.............................................. 12,356,377
===========
Diluted............................................ 14,435,965
===========
</TABLE>
F-20
<PAGE>
DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
-----------------------
1996 1997
---------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income.......................................... $ 576,940 $ 719,205
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock option compensation expense.................. 12,380 5,327
Depreciation....................................... 100,889 336,323
Amortization of capitalized software............... 198,315 404,954
Amortization of goodwill........................... 0 192,627
Increase in allowance for doubtful accounts........ 0 25,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable......... 360,858 (93,871)
Decrease in income tax refund receivable........... 0 140,922
Decrease in deferred tax assets.................... 78,996 310,544
(Increase) decrease in other assets................ 70,887 (430,238)
Decrease in accounts payable....................... (101,072) (461,457)
Decrease in accrued liabilities.................... (191,176) (332,493)
Increase (decrease) in income taxes payable........ (278,748) 22,904
Increase in deferred revenue....................... 117,162 429,437
Increase in deferred tax liabilities............... 187,004 0
Increase in other long-term liabilities............ 0 13,860
---------- -----------
Total adjustments................................. 555,495 563,839
---------- -----------
Net cash provided by operating activities......... 1,132,435 1,283,044
---------- -----------
Cash flows from investing activities
Sale of short-term investments, net................ 308,806 0
Purchase of fixed shares........................... (104,660) (199,282)
Development of software............................ (139,373) (436,276)
---------- -----------
Net cash (used in) provided by investing
activities....................................... 64,773 (635,558)
---------- -----------
Cash flows from financing activities
Repayment of debt.................................. 0 (1,926,547)
Principal payments under capital lease
obligations....................................... (15,103) (150,830)
Proceeds from exercise of options.................. 0 3,380
---------- -----------
Net cash used in financing activities............. (15,103) (2,073,997)
---------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... 1,182,105 (1,426,511)
Cash and cash equivalents at beginning of period... 1,909,016 2,869,458
---------- -----------
Cash and cash equivalents at end of period......... $3,091,121 $ 1,442,947
========== ===========
</TABLE>
F-21
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited Interim Consolidated Financial Statements include
the accounts of DocuCorp International, Inc. and its subsidiaries
(collectively, the "Company").
The financial information presented should be read in conjunction with the
Company's annual consolidated financial statements for the year ended July 31,
1997. The foregoing unaudited consolidated financial statements reflect all
adjustments (all of which are of a normal recurring nature) which are, in the
opinion of management, necessary for a fair presentation of the results of the
interim periods. The results for interim periods are not necessarily
indicative of results to be expected for the year.
NOTE 2--BUSINESS ACQUISITION
On January 15, 1997, Image Sciences, Inc. ("Image Sciences") entered into an
Agreement and Plan of Merger (the "Merger") with FormMaker Software, Inc.
("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. Concurrent with the closing of the
Merger, Image Sciences distributed approximately $8,000,000 via (i) a tender
offer to its common stockholders and certain holders of options to purchase
common stock and (ii) a dividend to its preferred stockholder.
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 acquiror in the Merger and purchase accounting is not required
related to the conversion of Image Sciences common stock and preferred stock
into Company common stock. The financial statements of Image Sciences are
presented as historical statements of the Company for periods prior to the
Merger. The excess of the purchase price over the fair value of the net
identifiable assets acquired of $7,705,057 has been recorded as goodwill and
is being amortized on a straight-line basis over ten years.
The following unaudited pro forma information for the three months ended
October 31, 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 1997. 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 1997. 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31, 1996
------------------
<S> <C>
Revenues.................. $9,002,000
Net income................ 314,000
</TABLE>
NOTE 3--LONG-TERM DEBT
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 facility is $10,000,000, and repayment of $3,500,000 is
guaranteed by Safeguard. Under the credit facility, the Company is required to
maintain certain financial covenants. Amounts outstanding under this credit
facility bear interest at variable rates determined by various provisions of
the credit facility. These rates generally approximate or equal the bank's
prime rate or the London Interbank Rate ("LIBOR").
F-22
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 4--NET INCOME (LOSS) PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 simplifies the standards for
computing EPS previously found in Accounting Principles Board No. 15,
"Earnings per Share" ("APB 15"), and makes them comparable to international
EPS standards by replacing the presentation of primary EPS with a presentation
of basic EPS. The provisions and disclosure requirements for SFAS 128 were
required to be adopted for interim and annual periods ending after December
15, 1997, with restatement of EPS for prior periods. Accordingly, EPS data for
all periods presented has been restated to reflect the computation of EPS in
accordance with the provisions of SFAS 128.
The following table sets forth the basic and diluted net income per share
computation for the three months ended October 31:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Net income............................................... $ 576,940 $ 719,205
========== ==========
BASIC
Weighted average number of shares outstanding............ 6,472,359 5,133,353
========== ==========
Net income per share..................................... $ 0.09 $ 0.14
========== ==========
DILUTED
Weighted average number of shares outstanding ........... 6,472,359 5,133,353
Additional weighted average shares from assumed exercise
of diluted stock options and warrants, net of shares to
be repurchased with exercise proceeds................... 1,696,264 2,079,592
---------- ----------
Weighted average number of shares outstanding used in the
diluted net income per share calculation................ 8,168,623 7,212,945
========== ==========
Net income per share..................................... $ 0.07 $ 0.10
========== ==========
</TABLE>
NOTE 5--PRO FORMA NET INCOME PER SHARE
Pro forma basic net income per share has been computed in accordance with
SFAS 128 using the weighted average number of common shares outstanding after
giving retroactive effect to the six-for-five stock split declared in December
1997 (see Note 9) and assuming that all shares of Class B common stock have
been converted to shares of Common Stock as of the date of issuance. Pro forma
diluted net income per share gives effect to all dilutive potential common
shares that were outstanding during the period.
The following table sets forth the pro forma basic and diluted net income
per share computation for the three months ended October 31, 1997:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
OCTOBER 31,
1997
------------
<S> <C>
Net income...................................................... $ 719,205
==========
BASIC
Weighted average number of shares outstanding................... 10,759,954
==========
Net income per share............................................ $ 0.07
==========
</TABLE>
F-23
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
OCTOBER 31, 1997
----------------
<S> <C>
DILUTED
Weighted average number of shares outstanding.............. 10,759,954
Additional weighted average shares from assumed exercise of
dilutive stock options and warrants, net of shares to be
repurchased with exercise proceeds........................ 2,079,592
-----------
Weighted average number of shares outstanding used in the
diluted net income per share calculation.................. 12,839,546
===========
Net income per share....................................... $ 0.06
===========
</TABLE>
NOTE 6--SUPPLEMENTAL PRO FORMA NET INCOME PER SHARE
Supplemental pro forma net income per share has been computed using the
weighted average number of shares of common stock used in the calculation of
pro forma net income per share, plus the number of shares that the Company
would use to repay (i) $3,593,000 due under the Company's line of credit, (ii)
$3,000,000 in subordinated notes due Safeguard, Technology Leaders II, L.P.,
and TL Ventures Third Corp. and (iii) $431,261 in notes to due to Safeguard as
of October 31, 1997. For purposes of computing supplemental pro forma net
income per share, the pro forma basic and diluted net income for the three
months ended October 31, 1997 was increased by $115,651 representing
elimination of the related interest expense on such debt and the associated
tax effect, and the weighted average shares outstanding used in the
supplemental pro forma basic and diluted net income per share calculation was
increased by 1,596,423 shares which represents the additional shares required
to be sold to retire the debt.
NOTE 7--PRO FORMA BALANCE SHEET
All outstanding shares of Class B common stock will be converted on a one-
for-one basis to Common Stock concurrent with the consummation of the
Company's planned initial public offering. Accordingly, the pro forma balance
sheet at October 31, 1997 gives effect to the conversion of the 5,629,122
shares of Class B common stock to 5,629,122 shares of Common Stock as if such
conversion had occurred as of the balance sheet date.
NOTE 8--MAJOR CUSTOMERS
For the three months ended October 31, 1997, one customer accounted for
approximately $1.7 million of the Company's total revenues.
NOTE 9--STOCK SPLIT
In December 1997, the Company approved the declaration of a six-for-five
stock split of the outstanding Common Stock and Class B common stock effected
in the form of a dividend to stockholders of record as of December 9, 1997.
Concurrently, the number of shares of Common Stock the Company is authorized
to issue was increased from 20 million to 50 million. As stated in Note 1, the
financial statements have been adjusted retroactively for the six-for-five
split.
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
FormMaker Software, Inc.:
We have audited the accompanying consolidated balance sheets of FormMaker
Software, Inc. as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of FormMaker's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FormMaker
Software, Inc. as of December 31, 1995 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As further discussed in Note 17 to the consolidated financial statements,
FormMaker has restated its 1995 and 1996 financial statements to revise its
accounting for the recognition of revenue relating to the sale of certain
software licenses to a reseller.
Coopers & Lybrand L.L.P.
Atlanta, Georgia
January 30, 1997, except for Notes
15 and 17, as to which the date is
April 11, 1997
F-25
<PAGE>
FORMMAKER SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 2,163,548 $ 4,925
Receivables, net.................................. 2,678,508 4,935,067
Notes receivable.................................. 66,591 85,864
Prepaid expenses.................................. 119,743 302,584
Other current assets.............................. 59,868 212,452
----------- -----------
Total current assets............................ 5,088,258 5,540,892
Property and equipment, net......................... 2,174,891 2,599,439
Computer software development costs, net of
accumulated amortization of $1,456,781 and
$2,591,020 at December 31, 1995 and 1996,
respectively....................................... 2,422,521 4,777,732
Deferred income tax asset........................... 420,000 420,000
Goodwill, net of accumulated amortization of
$282,445........................................... -- 4,282,281
Other assets........................................ 31,164 80,687
----------- -----------
Total assets.................................... $10,136,834 $17,701,031
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to a bank........................... $ -- $ 6,083,703
Current portion of notes payable to stockholder... -- 225,000
Current portion of capital lease obligations...... 633,512 610,648
Accounts payable.................................. 808,508 1,434,659
Other accrued liabilities......................... 833,338 1,333,029
Accrued salaries.................................. 165,234 770,983
Payable to customer............................... 2,100,000 89,989
Income taxes payable.............................. -- 329,464
Deferred revenue.................................. 882,326 895,006
----------- -----------
Total current liabilities....................... 5,422,918 11,772,481
Notes payable to stockholder, less current portion.. -- 400,000
Capital lease obligations, less current portion..... 875,999 258,540
Other liabilities................................... 403,044 506,708
----------- -----------
Total liabilities............................... 6,701,961 12,937,729
----------- -----------
Commitments and contingencies Stockholders' equity:
Preferred stock, par value $0.01 per share;
20,000,000 shares authorized, no shares issued and
outstanding at December 31, 1995 and 1996 Common
Stock, par value $0.01 per share; 20,000,000 shares
authorized, 5,499,795 and 6,229,511 shares
issuedand outstanding at December 31, 1995 and
1996, respectively................................. 54,998 62,295
Common Stock warrants............................... 783,053 783,053
Additional paid-in capital.......................... 4,307,322 6,529,463
Accumulated deficit................................. (1,639,325) (2,540,334)
Notes receivable -- stockholders.................... (71,175) (71,175)
----------- -----------
Total stockholders' equity...................... 3,434,873 4,763,302
----------- -----------
Total liabilities and stockholders' equity...... $10,136,834 $17,701,031
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<PAGE>
FORMMAKER SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
---------- ----------- ----------
<S> <C> <C> <C>
Revenues:
Software licenses....................... $1,699,718 $ 2,607,595 $5,122,294
Maintenance and other recurring......... 418,152 787,466 2,066,801
Processing services..................... 3,039,177 4,645,420 4,555,189
Professional services and other......... 2,262,145 5,699,287 8,713,797
---------- ----------- ----------
Total revenues........................ 7,419,192 13,739,768 20,458,081
========== =========== ==========
Operating expenses:
Processing services..................... 2,614,660 4,148,732 4,316,891
Professional services and other......... 1,580,199 4,222,986 7,247,600
Research and product development........ 549, 531 1,253,833 2,238,897
Sales and marketing..................... 843,046 1,578,304 3,294,496
General and administrative.............. 924,062 3,485,702 3,560,405
Goodwill amortization................... -- -- 282,445
---------- ----------- ----------
Total operating expenses.............. 6,511,498 14,689,557 20,940,734
---------- ----------- ----------
Operating income (loss)............... 907,694 (949,789) (482,653)
Interest expense, net..................... (216,659) (324,726) (418,356)
---------- ----------- ----------
Income (loss) before income tax
benefit................................ 691,035 (1,274,515) (901,009)
Income tax benefit--deferred.............. 160,000 260,000 --
---------- ----------- ----------
Net income (loss)..................... $ 851,035 $(1,014,515) $ (901,009)
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE>
FORMMAKER SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
COMMON STOCK COMMON ADDITIONAL
------------------- STOCK PAID-IN ACCUMULATED NOTES STOCKHOLDERS'
SHARES AMOUNT WARRANTS CAPITAL DEFICIT RECEIVABLE EQUITY
---------- ------- -------- ----------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 4,475,069 $44,751 $1,238,082 $(1,475,845) $ (193,012)
One-for-two reverse
Common Stock split, no
change in par value,
retroactively stated.. (2,237,534) (22,375) 22,375
Stock Options
exercised............. 70,250 702 703 1,405
Net income............. 851,035 851,035
---------- ------- -------- ---------- ----------- -------- ----------
Balance, December 31,
1994................... 2,307,785 23,078 1,261,160 (624,810) 659,428
Stock options
exercised............. 575,619 5,756 249,992 255,748
Stock warrants
exercised............. 1,585,435 15,854 479,146 495,000
Common Stock and Common
Stock warrants
issued................ 1,030,956 10,310 $783,053 2,317,024 3,110,387
Notes receivable issued
in conjunction with
Common Stock options
exercised............. $(71,175) (71,175)
Net loss............... (1,014,515) (1,014,515)
---------- ------- -------- ---------- ----------- -------- ----------
Balance, December 31,
1995................... 5,499,795 54,998 783,053 4,307,322 (1,639,325) (71,175) 3,434,873
Stock options
exercised............. 40,836 408 3,988 4,396
Common Stock issued.... 688,880 6,889 2,218,153 2,225,042
Net loss............... (901,009) (901,009)
---------- ------- -------- ---------- ----------- -------- ----------
Balance, December 31,
1996................... 6,229,511 $62,295 $783,053 $6,529,463 $(2,540,334) $(71,175) $4,763,302
========== ======= ======== ========== =========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE>
FORMMAKER SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
---------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income........................ $ 851,035 $(1,014,515) $ (901,009)
Adjustments to reconcile net (loss)
income to net cash provided by operating
activities:
Bad debt expense......................... 8,500 151,853
(Gain) loss on disposal of property and
equipment............................... (533) 2,030
Depreciation and amortization of
property and equipment.................. 221,822 505,876 924,208
Amortization of computer software
development costs....................... 311,841 518,989 1,134,239
Deferred income taxes.................... (160,000) (260,000)
Amortization of goodwill................. 282,444
Long-term deferred rent liability........ 398,908 79,240
Compensation expense associated with
Common Stock grant...................... 14,500
Changes in operating assets and
liabilities:
(Increase) in receivables................ (1,302,135) (1,150,855) (2,154,995)
(Increase) in prepaid expenses........... (44,524) (74,930) (26,793)
(Increase) decrease in other current
assets.................................. 2,215 (25,102) (219,030)
(Increase) decrease in other assets...... 29,550 (19,352) (49,523)
Increase in accounts payable............. 207,199 442,341 570,041
(Decrease) increase in other accrued
liabilities............................. 458,074 356,475 (384,827)
(Decrease) increase in accrued
salaries................................ (4,049) 95,623 605,749
(Decrease) increase in payable to
customer................................ 2,100,000 (2,010,011)
(Decrease) increase in deferred
revenue................................. 23,826 806,347 (601,369)
(Decrease) increase in other
liabilities............................. (4,512) 25,864
---------- ----------- ----------
Net cash (used in) provided by
operating activities.................. 602,821 2,843,676 (2,725,772)
---------- ----------- ----------
Cash flows from investing activities:
Proceeds from disposition of property
and equipment........................... 7,298 68,883
Expenditures for property and
equipment............................... (194,955) (428,781) (1,228,188)
Capitalization of computer software
development costs....................... (813,478) (1,366,308) (2,413,788)
Acquisition of Micro Dynamics, Ltd., net
of cash acquired........................ (959,379)
---------- ----------- ----------
Net cash used in investing activities.. (1,001,135) (1,726,206) (4,601,355)
---------- ----------- ----------
Cash flows from financing activities:
Principal repayments of capital lease
obligations............................. (85,401) (490,023) (640,323)
Proceeds from borrowings on notes
payable to bank......................... 13,962,703
Principal repayments of notes payable to
a bank.................................. (500,000) (8,139,000)
Proceeds from borrowings on note payable
to stockholder.......................... 1,061,000 355,000
Principal repayments on note payable to
stockholder............................. (381,000) (2,348,011)
Advances to stockholders................. (172,000)
Principal repayments on note due from
stockholder............................. 274,000
Advances to employees.................... (66,591) (19,273)
Issuance of Common Stock and warrants.... 1,405 3,638,003
Issuance of Common Stock under stock
option plans............................ 184,573 4,397
Repurchase of Common Stock............... (47,116)
---------- ----------- ----------
Net cash provided by financing
activities............................ 424,004 999,835 5,168,504
---------- ----------- ----------
(Decrease) increase in cash............... 25,690 2,117,305 (2,158,623)
Cash and cash equivalents at beginning of
the year................................. 20,553 46,243 2,163,548
---------- ----------- ----------
Cash and cash equivalents at end of the
year..................................... $ 46,243 $ 2,163,548 $ 4,925
========== =========== ==========
Supplemental disclosure of cash flow
information..............................
Cash paid for interest................... $ 84,622 $ 516,282 $ 406,293
Noncash investing activities:
Execution of capitalized leases........ $ 839,000 $ 1,131,507
Noncash financing activities:
Issuance of Common Stock to satisfy an
accrued expense obligation............ $ 125,000
Issuance of Common Stock for notes
receivable............................ $ 71,175
Issuance of Common Stock relating to the
acquisition of Micro Dynamics, Ltd...... $1,893,800
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND:
FormMaker Software, Inc. ("FormMaker") is engaged in developing, marketing
and supporting multi- platform document automation and imaging software for
use in document intensive industries. FormMaker also provides third-party
processing and professional services.
FormMaker is headquartered, and also operates a processing facility, in
Atlanta, Georgia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation
The consolidated financial statements include the accounts of FormMaker
Software, Inc. and its majority owned subsidiary, Micro Dynamics, Ltd.
("MDL"). As further discussed in Note 3, FormMaker acquired MDL on May 17,
1996. All significant intercompany accounts and transactions have been
eliminated.
Revenue Recognition
FormMaker recognizes software licensing and maintenance revenue in
accordance with the American Institute of Certified Public Accountants
Statement of Position No. 91-1, "Software Revenue Recognition" ("SOP 91-1").
Under SOP 91-1, FormMaker recognizes software license revenue upon product
delivery and contract signing provided that no significant obligations remain
and collection of related receivables is determined by management to be
probable. Revenue from the sale of licenses to resellers is deferred until the
resellers have sold the licenses to end users. Revenue from maintenance
contracts and maintenance revenue that is packaged with license fees is
recognized ratably over the term of the agreements. Revenue related to third-
party processing and professional services, such as training and consulting,
is recognized as the services are performed.
Capitalized Computer Software Development Costs
Research and product development expenditures, except as described below,
are charged to expense as incurred. Development costs of software to be sold
are charged to research and product development expense until technological
feasibility is established, after which, remaining computer software
development costs are capitalized and amortized in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" (SFAS 86). Management
periodically evaluates the recoverability of the computer software development
costs based on a comparison of undiscounted projected license revenues to the
capitalized computer software development costs, net of amortization. The
excess of capitalized costs, net of amortization, over undiscounted projected
license revenues are expensed at the time of determination by management.
Computer software development costs are amortized using the more rapid of the
straight-line method over four years or the ratio of current to future gross
revenues method as set forth in SFAS 86.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
purchased with original maturities of three months or less.
Property and Equipment
Property and equipment is stated at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets. Property and equipment
under capital lease is recorded at the lower of present value of future
F-30
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
minimum lease payments or fair value at the inception of the lease and
amortized on a straight-line basis over the term of the lease or the asset's
estimated useful life, whichever is shorter. When property and equipment are
retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts and any related gain or loss is
recognized. Repairs and maintenance are expensed as incurred. Major renewals
and betterments are capitalized and depreciated over the assets' estimated
service lives.
Goodwill
The excess of the purchase price of MDL over the fair value of identifiable
assets and liabilities, totaling $4,564,726, was assigned to goodwill.
Goodwill is being amortized on a straight-line basis over ten years. Goodwill
is evaluated for impairment based on the historic and estimated future
profitability of the business unit to which it relates.
Income Taxes
The benefit for income taxes and corresponding balance sheet accounts are
determined in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (SFAS 109). Under SFAS 109, deferred tax
liabilities and assets are determined based on the temporary differences
between the tax bases of certain assets and liabilities and their carrying
amounts for financial reporting purposes.
Preferred Stock
At December 31, 1996, 20,000,000 shares of preferred stock are authorized
with no preferred shares outstanding. The Board of Directors of FormMaker is
authorized to issue preferred stock at any time, in one or more series and to
determine all of the designations, preferences, and rights of such stock.
Common Stock Split
In May 1996, a meeting of the stockholders was held authorizing a one-for-
two reverse Common Stock split. No changes in Common Stock par value or
authorized shares were effected as a result of this split. For all years
presented herein, all share and per share data, including stock options and
stock warrants, have been restated to reflect this stock split.
Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable, notes payable and accounts payable at
December 31, 1996 approximate their fair value because of the short-term
maturity of the financial instruments or because of the variable interest
rates with respect to notes payable.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year's financial statement presentation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
F-31
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. SIGNIFICANT TRANSACTIONS:
Recapitalization of FormMaker
On December 20, 1995, FormMaker entered into a transaction with a group of
new stockholders: Safeguard Scientifics, Inc. ("SSI"), Technology Leaders II,
L.P. and Technology Leaders II Offshore C.V. (all three entities referred to
collectively herein as the "New Stockholders"). In exchange for $3,333,333 of
cash, 955,956 new shares of FormMaker's Common Stock and seven-year Common
Stock warrants allowing the holder to purchase an additional 465,747 shares of
FormMaker's Common Stock were issued. (See Note 13 for further information
regarding the seven-year Common Stock warrants.) In addition, the New
Stockholders acquired 785,335 shares of FormMaker's Common Stock from existing
stockholders. The New Stockholders also purchased a Common Stock warrant from
an existing stockholder and immediately exercised the warrant to receive
1,585,435 shares of FormMaker's Common Stock in exchange for $495,000. At
December 31, 1996, the New Stockholders owned 62% of FormMaker's outstanding
Common Stock. At December 31, 1996, SSI owned 46% of FormMaker's outstanding
Common Stock.
Acquisition of Micro Dynamics, Ltd.
On May 17, 1996, FormMaker acquired 99.89% of the outstanding shares of
Common Stock of Micro Dynamics, Ltd. ("MDL") for $3,225,270. FormMaker issued
653,033 shares of Common Stock valued at $2.90 per share in exchange for
4,029,417 shares of MDL stock valued at $0.47 per share. FormMaker also paid
cash of $947,232 in exchange for 2,015,388 shares of MDL Common Stock. Also,
in connection with this transaction FormMaker issued options, with an assigned
fair value of $206,584, for 234,604 shares of FormMaker's Common Stock to
former MDL option holders. Transaction costs were $177,624. This transaction
was accounted for under the purchase method of accounting. Accordingly, the
results of MDL's operations are included in the consolidated statements of
operations of FormMaker for the period from May 17, 1996 through December 31,
1996. Prior to this transaction, approximately 52% of the outstanding capital
stock of MDL was owned by SSI. SSI did not receive any cash in this
transaction, only shares.
The following unaudited pro forma information presents a summary of
consolidated results of operations of FormMaker and MDL as if the acquisition
had occurred on January 1 of each year presented.
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Revenues......................................... $ 18,086,133 $ 21,293,716
Net loss......................................... $ (1,247,163) $ (2,089,026)
</TABLE>
Such pro forma amounts are not necessarily indicative of what the actual
results might have been had the acquisition occurred at the beginning of each
year.
4. RECEIVABLES:
Receivables at December 31, 1995 and 1996 consist of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Trade accounts receivable............................ $2,755,929 $4,415,567
Unbilled receivables................................. 46,802 575,380
Other receivables.................................... 25,777 25,306
---------- ----------
2,828,508 5,016,253
Less allowance for doubtful accounts................. (150,000) (81,186)
---------- ----------
$2,678,508 $4,935,067
========== ==========
</TABLE>
F-32
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Bad debt expense was $8,500, $151,853 and $0 for 1994, 1995 and 1996,
respectively.
5. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1995 and 1996, consists of the
following:
<TABLE>
<CAPTION>
DEPRECIABLE
LIVES IN
1995 1996 YEARS
----------- ----------- -----------
<S> <C> <C> <C>
Computer equipment and purchased
software............................... $ 851,202 $ 1,634,816 3
Office furniture and equipment.......... 304,084 869,226 7
Computer equipment under capital lease.. 1,638,388 1,638,388 3-5
Office furniture and equipment under
capital lease.......................... 445,324 445,324 7
----------- -----------
3,238,998 4,587,754
Less accumulated depreciation and
amortization........................... (1,064,107) (1,988,315)
----------- -----------
$ 2,174,891 $ 2,599,439
=========== ===========
</TABLE>
FormMaker executed capital leases with values of $839,000, $1,131,507 and $0
in 1994, 1995 and 1996, respectively, representing noncash financing
activities. Accumulated amortization on computer equipment under capital lease
was $483,776 and $988,701 at December 31, 1995 and 1996, respectively.
Accumulated amortization on office furniture and equipment under capital lease
was $31,809 and $95,426 at December 31, 1995 and 1996, respectively.
Substantially all of FormMaker's property and equipment is pledged as
collateral under various borrowing arrangements.
Depreciation and amortization expense for 1994, 1995 and 1996, including
amortization on property and equipment under capital lease, was $221,822,
$505,876 and $924,208, respectively.
As of December 1, 1995, FormMaker reevaluated its computer equipment and
purchased software and changed their estimated useful lives to approximately
three years from five years.
6. COMPUTER SOFTWARE DEVELOPMENT COSTS:
During 1994, 1995 and 1996, FormMaker charged to expense $311,841, $518,989
and $1,134,239, respectively, relating to the amortization of capitalized
computer software development costs. Such amortization is included in research
and product development on the consolidated statements of operations. As of
December 1, 1995, FormMaker reevaluated its amortization policy for
capitalized computer software development costs and changed the amortization
period for these costs to four years from five years.
During 1994, 1995 and 1996, FormMaker charged to expense $57,037, $418,097
and $632,222, respectively, in research and development costs. Such expense is
included in research and product development on the consolidated statements of
operations.
7. NOTES PAYABLE TO A BANK:
On December 20, 1995, FormMaker entered into a new revolving credit facility
with a bank (the "Lender"). The maximum amount available under this credit
arrangement is $10,000,000. As of December 31, 1995 and 1996, $0 and
$6,083,703 of this credit arrangement was utilized, respectively. 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 Lender's Prime Rate or the London Interbank
Rate (LIBOR). At December 31, 1996, the balance consisted of $4,083,703
outstanding on a line of credit bearing
F-33
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
interest at 8.25% and two $1,000,000 LIBOR notes, each bearing interest at
7.50%. The weighted average interest rate on the revolving credit facility was
8.00% at December 31, 1996.
Interest is payable monthly. The revolver has a provision allowing for
FormMaker to convert the obligation as of December 20, 1997 into a term loan
provided that FormMaker has given the Lender thirty days' written notice, has
not defaulted, and has not experienced a material and adverse change to its
business and operations. The principal balance of the term loan shall be
repaid in twenty-four consecutive installments due the first day of each
month, beginning January 1, 1998. The first twenty-three such installments
shall each be in an amount equal to 1/36th of the initial principal balance of
the term loan and the final installment shall be equal to the remaining
principal balance of the term loan.
Amounts outstanding under this credit arrangement are collateralized by
substantially all of FormMaker's assets and repayment is guaranteed by the New
Stockholders.
8. NOTE PAYABLE TO STOCKHOLDER:
In connection with the acquisition of MDL, as discussed in Note 3, FormMaker
assumed notes payable to SSI in the amounts of $350,000 and $275,000. At
December 31, 1996, these notes bear interest at 9.25%. During 1996, FormMaker
incurred $37,475 in interest expense on these notes. These notes were amended
on January 10, 1997. Under the amended terms, an initial payment of $50,000
was made in January 1997. Monthly principal payments of approximately $16,000
plus accrued interest are due for thirty-six months commencing February 1,
1997. These notes bear interest at prime plus 1.00%.
9. INCOME TAXES:
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1995 and 1996 are as
follows:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward..................... $1,638,836 $ 2,603,766
Research and development credit carryforward........ 160,802 212,102
Other............................................... 244,357 255,095
---------- -----------
Total deferred tax assets......................... 2,043,995 3,070,963
---------- -----------
Deferred tax liabilities:
Capitalized computer software costs................. 920,558 1,424,954
Property and equipment depreciation differences..... 57,075 39,949
---------- -----------
Total deferred tax liabilities.................... 977,633 1,464,903
---------- -----------
Net deferred tax assets, before valuation allowance... 1,066,362 1,606,060
Less: valuation allowance............................. (646,362) (1,186,060)
---------- -----------
Net deferred tax asset................................ $ 420,000 $ 420,000
========== ===========
</TABLE>
At December 31, 1996, FormMaker had net operating loss carryforwards for
U.S. tax purposes of approximately $6,350,000. The net operating loss
carryforwards generally expire in the years ending 2000 through 2011. At
December 31, 1996, FormMaker had Research and Development (R&D) credit
carryforwards of approximately $212,000. The R&D credit carryforwards will
generally expire in the years ending 2006 through 2011. Due to ownership
changes, a portion of FormMaker's net operating loss carryforwards and R&D
F-34
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
credit is subject to an annual cumulative limitation with respect to the
amount which may be utilized in any one year. FormMaker believes realization
of the net deferred tax asset to be more likely than not.
During 1994, FormMaker recognized an income tax benefit of $160,000 on
income before income tax benefit of $691,035. This benefit resulted from the
recognition of net operating loss carryforwards.
10. DEFINED CONTRIBUTION PENSION PLAN:
FormMaker sponsors a defined contribution 401(k) pension plan covering
substantially all employees of FormMaker. Employees can contribute a maximum
of 15% of their salary to the plan. Employer matches are made at FormMaker's
discretion. FormMaker recognized expense under the 401(k) plan of
approximately $0, $19,754 and $59,027 during 1994, 1995 and 1996,
respectively.
11. COMMITMENTS AND CONTINGENCIES:
FormMaker leases office space and equipment under noncancelable capital and
operating lease agreements. The aggregate minimum noncancelable lease payments
at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- -----------
<S> <C> <C>
1997...................................................... $675,890 $ 2,006,000
1998...................................................... 263,313 2,089,000
1999...................................................... 2,185,000
2000...................................................... 1,865,000
2001...................................................... 1,291,000
Thereafter................................................ 1,191,000
-------- -----------
Total minimum lease payments.............................. 939,203 $10,627,000
===========
Less amount representing interest......................... 70,015
--------
Present value of net minimum capital lease payments....... 869,188
Less current portion of capital lease obligations......... 610,648
--------
Noncurrent portion of capital lease obligations........... $258,540
========
</TABLE>
The capital leases principally carry a weighted average imputed interest
rate of 10.50%. Rent expense for the years ended December 31, 1994, 1995 and
1996 was $216,844, $891,502 and $940,799, respectively.
12. COMMON STOCK OPTIONS:
FormMaker has adopted two non-qualified Common Stock option plans and one
incentive stock option plan: FormMaker Software, Inc. 1989 Non-Qualified Stock
Option Plan for Key Employees (the "1989 Plan"), FormMaker Software, Inc. 1990
Non-Qualified Stock Option Plan for Non-Employee Directors (the "1990 Plan"),
and the FormMaker Software, Inc. 1996 Equity Compensation Plan (the "1996
Plan") for the benefit of certain employees and directors of FormMaker.
Options are granted at the discretion of the Board of Directors, its
committee or the plan administrator as stated in the plan documents. Each
option granted under the Plans entitles the optionee to purchase one share of
FormMaker's Common Stock.
F-35
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FormMaker Software, Inc. 1989 Non-Qualified Stock Option Plan for Key
Employees
The 1989 Plan authorized the issuance, pursuant to the exercise of options
granted, of up to 750,000 shares of Common Stock. Options granted under the
1989 Plan vested equally over the three year period following the date of
grant. At the date of issuance, the options' exercise price equaled or
exceeded the estimated fair value of FormMaker's common shares. A total of
583,750 options granted under the 1989 Plan have been exercised. At December
31, 1996, 166,250 options were outstanding under the 1989 Plan. The maximum
term of options granted under this plan is 10 years.
FormMaker Software, Inc. 1990 Non-Qualified Stock Option Plan for Non-
Employee Directors
The 1990 Plan authorized the issuance, pursuant to the exercise of options
granted, of up to 250,000 shares of Common Stock. Options granted under the
1990 plan were fully vested at the time of grant. At the date of issuance, the
options' exercise price equaled or exceeded the estimated fair value of
FormMaker's common shares. A total of 105,000 options granted under the 1990
Plan have been exercised. At December 31, 1996, no options were outstanding
under the 1990 Plan.
FormMaker Software, Inc. 1996 Equity Compensation Plan
The 1996 Plan authorized the issuance, pursuant to the exercise of options
granted, of up to 1,066,206 shares of Common Stock. The options issued under
the 1996 Plan generally vest equally over a four year period. At the date of
issuance, the options' exercise price equaled or exceeded the estimated fair
value of FormMaker's common shares, except for 141,649 options issued to
former MDL option holders in connection with FormMaker's acquisition of MDL.
The exercise price of options issued under the 1996 Plan ranged from $0.62 to
$4.63. At December 31, 1996, 755,189 options were outstanding under the 1996
Plan; 141,664 of which were exercisable. The maximum term of options granted
under this plan is 10 years.
Other outstanding options
FormMaker issued an additional 92,955 stock options during 1996 in
connection with the Micro Dynamics, Ltd. acquisition that are not covered
under the existing stock option plans. All of these options are fully vested
and have an exercise price ranging from $2.47 to $6.17. In addition, 5,000
stock options are outstanding that were issued in connection with a 1988
business acquisition. These options are fully vested and have an exercise
price of $0.20 per share and do not expire.
At December 31, 1996, FormMaker has three stock-based compensation plans, as
described above. FormMaker applies APB Opinion 25 and related interpretations
in accounting for its plans. No compensation cost has been recognized for its
fixed stock option plans. Had compensation cost for FormMaker's stock-based
plans been determined based on the fair value at the grant dates, consistent
with SFAS No. 123, "Accounting for Stock- Based Compensation," FormMaker's net
loss would have been increased by a pro forma amount of $0 and $75,647 in 1995
and 1996, respectively, to a net loss of $1,014,515 and $976,656,
respectively. For purposes of computing these pro forma amounts, the Black-
Scholes option-pricing model was used with a risk-free interest rate
assumption of 5.2% for 1995 and 6.2% to 6.5% for 1996, and an estimated option
life assumption of five years for both 1995 and 1996.
F-36
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of FormMaker's three fixed stock option plans as of
December 31, 1994, 1995 and 1996 and changes during the years ending on those
dates is presented below.
<TABLE>
<CAPTION>
1996 PLAN 1990 PLAN 1989 PLAN
------------------- ------------------ -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December
31, 1993............... 95,000 $0.02 564,334 $0.51
Granted............... 10,000 $0.02
Exercised............. (70,000) $0.02
Forfeited or expired.. (108,334) $0.51
------- --------
Outstanding at December
31, 1994............... 35,000 $0.02 456,000 $0.51
Granted............... 163,000 $3.48
Exercised............. (448,750) $0.51
Forfeited or expired.. (2,500) $0.50
------- --------
Outstanding at December
31, 1995............... 35,000 $0.02 167,750 $3.41
Granted............... 967,383 $3.20
Exercised............. (35,000) $0.02 (1,500) $0.50
Forfeited or expired.. (212,194) $3.26
-------- ------- --------
Outstanding at December
31, 1996............... 755,189 $3.18 -- $ -- 166,250 $3.42
======== ======= ========
Options Exercisable at
December 31, 1996...... 141,664 166,250
</TABLE>
The weighted average grant-date fair value of options granted was $0 and
$0.71 for the years ended December 31, 1995 and 1996, respectively.
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ----------------------
WEIGHTED-
AVERAGE WEIGHTED- NUMBER WEIGHTED-
NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE AT EXERCISE
EXERCISE PRICES AT 12/31/96 LIFE PRICE 12/31/96 PRICE
- --------------- ------------ ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
1996 Plan
$0.62............. 86,706 9.38 $0.62 86,706 $0.62
$3.48............. 648,871 9.17 $3.48 47,371 $3.48
$4.63............. 19,612 9.38 $4.63 7,587 $4.63
------- -------
755,189 141,664
======= =======
1989 Plan
$0.50............. 3,250 5.27 $0.50 3,250 $0.50
$3.48............. 163,000 8.98 $3.48 163,000 $3.48
------- -------
166,250 166,250
======= =======
</TABLE>
13. COMMON STOCK WARRANTS:
In June 1991, FormMaker issued a Warrant to Purchase Common Stock (the
"Warrant") to a stockholder in connection with the stockholder's pledge of
securities to collateralize a revolving credit facility with a bank. The
Warrant entitled the stockholder to acquire, for $495,000, the number of
shares of Common Stock, which,
F-37
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
when combined with the shares of Common Stock previously issued to the
stockholder, would equal immediately following the exercise in full of the
Warrant a 40% interest in the Common Stock of FormMaker pursuant to the terms
and conditions set forth in the Warrant document.
On December 20, 1995, the Warrant was sold by N.G. Wade Investment Company
to SSI for approximately $5,517,000 or $3.48 per share. The Warrant was
immediately exercised and SSI received 1,585,435 of FormMaker's Common Stock
in exchange for $495,000.
Under the terms of FormMaker's recapitalization, FormMaker issued seven-year
warrants to the New Stockholders. These warrants originally allowed the New
Stockholders to purchase an aggregate of 372,823 shares of Common Stock,
exercisable at a purchase price of $0.0l per share. Subsequent to December 31,
1995, a portion of the warrants allowing the New Stockholders to purchase
57,076 shares of Common Stock were exchanged for new warrants allowing the New
Stockholders to purchase 150,000 shares of Common Stock at a purchase price of
$3.48 per share. This transaction was effective as of the date of the
recapitalization and has been given retroactive treatment in the 1995
financial statements.
14. RELATED PARTY TRANSACTIONS:
FormMaker maintains a service agreement with SSI whereby FormMaker receives
various administrative and consulting services in exchange for a fee. During
1996, FormMaker paid a total of $74,661 to SSI for these services. At December
31, 1996, FormMaker had $11,430 in accounts receivable and $253,396 in
accounts payable and accrued expenses with respect to SSI. Other related party
transactions are also described elsewhere in the Notes to these consolidated
financial statements.
15. RISK CONCENTRATIONS:
FormMaker has entered into various agreements with a major customer ("Policy
Management Systems Corporation" or "PMSC") to provide certain third-party
processing services and to grant PMSC certain rights to market FormMaker's
proprietary software. Revenue for 1994, 1995 and 1996 includes $3,039,117,
$4,645,420 and $4,555,189, respectively, from providing third-party processing
services to PMSC. Additionally, revenue of $3,233,233, $5,041,717 and
$8,946,234 has been recognized by FormMaker in 1994, 1995 and 1996,
respectively, as a result of sublicensing by PMSC of FormMaker's proprietary
software and related implementation services. At December 31, 1995 and 1996,
$2,096,000 and $1,438,247, respectively, due from PMSC was included in trade
accounts receivable. At December 31, 1995 and 1996, $2,100,000 and $89,989,
respectively, due to PMSC was included in payable to customer.
In January 1997, FormMaker and PMSC amended their marketing agreement,
whereby, beginning January 1, 1998, PMSC can unilaterally terminate the
marketing agreement for any reason whatsoever by providing 90 days' prior
written notice to FormMaker. In addition, PMSC may terminate the agreement as
a result of the merger transaction expected to close in April 1997 (see Note
16) by providing 10 days' prior written notice to FormMaker. Unless renewed or
terminated at an earlier date, the marketing agreement will terminate on
December 31, 1999.
On October 13, 1995, FormMaker and PMSC entered into an amendment to their
marketing agreement, whereby, PMSC purchased software licenses for inventory
and prospective sublicensing to end users in the amount of $2 million. Under
this Amendment PMSC was to receive credit in the amount of $2.6 million
against amounts which would otherwise have been due FormMaker on future
licenses. FormMaker recorded $2 million in license fee revenue with respect to
this transaction (the "October Transaction").
F-38
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On December 31, 1995, FormMaker and PMSC agreed to further amend their
marketing agreement generally to provide for (a) the return of $1 million in
inventory purchased as the result of the October 13, 1995 amendment and the
elimination of the related $600,000 credit, (b) the elimination of PMSC's
"exclusive" right to market and sublicense FormMaker's software within a
particular segment of an industry and (c) the elimination of $750,000 in
credits which were to be applied against future service billings. As a result
of this amendment FormMaker paid $2.1 million to PMSC on January 3, 1996.
FormMaker recorded, in its 1995 financial statements, $1.6 million as a
reduction in revenue, $589,018 as a credit to deferred revenue (see Note 17)
and a charge to general and administrative expense in the amount of $1.1
million as a result of this latter amendment.
For the foreseeable future, it is anticipated that a significant portion of
FormMaker's revenues will be derived from the licensing and maintaining of its
software products. Certain of FormMaker's document automation competitors may
have greater financial, technical, marketing and other resources than
FormMaker. FormMaker believes that its line of products currently have
distinctive features which make these products competitive.
However, FormMaker's failure to compete effectively could have a material
adverse effect on its financial condition and results of operations.
FormMaker's software development is largely dependent upon certain key
employees. Loss of services of these key employees could have a material
adverse effect on FormMaker's business and prospects.
Substantially all of the end users of FormMaker's software and services are
in the insurance industry.
16. SUBSEQUENT EVENT:
On January 15, 1997, FormMaker and Image Sciences, Inc. ("ISI") entered into
an Agreement and Plan of Merger ("Merger Agreement"). The Merger Agreement
contemplates the merger of FormMaker and ISI into a newly formed holding
company, DocuCorp International, Inc. ("DocuCorp") via a stock-for-stock
transaction. Under the merger, ISI stockholders would receive approximately
52% of DocuCorp's shares and FormMaker's stockholders would receive the
remaining 48% of DocuCorp's shares. Completion of the merger is subject to
certain conditions and is expected to close in April 1997. The merger would be
recorded under the purchase method of accounting, and ISI would be treated as
the accounting acquiror.
17. RESTATEMENT:
To conform FormMaker's accounting for the PMSC October Transaction (Note 15)
with FormMaker's revenue recognition policy described in Note 2, FormMaker has
restated its 1995 and 1996 financial statements, as of April 11, 1997. The
October Transaction involved the advance sale of software licenses to PMSC for
subsequent sublicensing to end-users. The restatement had the effect of
deferring revenue recognition on this sale until PMSC sold the licenses to
end-users. The restatement decreased 1995 software license revenue and
increased the 1995 loss by $589,018. At December 31, 1995, $589,018 of
additional deferred revenue has been reflected on the balance sheet. With
respect to 1996, revenues have been increased and the net loss has been
reduced by $589,018.
F-39
<PAGE>
FORMMAKER SOFTWARE, INC.
INTERIM CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1997
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 58,573
Receivables, net................................................ 5,009,064
Other current assets............................................ 418,023
-----------
Total current assets.......................................... 5,485,660
Property and equipment, net....................................... 2,443,031
Computer software development costs, net.......................... 5,298,244
Deferred income tax asset......................................... 420,000
Goodwill, net of accumulated amortization......................... 4,203,268
Other assets...................................................... 64,592
-----------
Total assets.................................................. $17,914,795
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to a bank......................................... $ 7,566,705
Current portion of notes payable to stockholder................. 192,652
Current portion of capital lease obligations.................... 562,603
Accounts payable................................................ 1,565,363
Accrued liabilities............................................. 1,810,334
Deferred revenue................................................ 947,895
-----------
Total current liabilities..................................... 12,645,552
Notes payable to stockholder, less current portion................ 350,406
Capital lease obligations, less current portion................... 139,803
Other long-term liabilities....................................... 611,434
-----------
Total liabilities............................................. 13,747,195
-----------
Stockholders' equity:
Common Stock, par value $0.01 per share; 20,000,000 shares
authorized, 6,229,511 shares issued and outstanding............ 62,295
Additional paid-in capital...................................... 7,312,516
Accumulated deficit............................................. (3,136,036)
Notes receivable--stockholders.................................. (71,175)
-----------
Total stockholders' equity.................................... 4,167,600
-----------
Total liabilities and stockholders' equity.................... $17,914,795
===========
</TABLE>
F-40
<PAGE>
FORMMAKER SOFTWARE, INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
REVENUES
License............................................... $ 679,606 $ 961,649
Maintenance and other recurring...................... 351,180 741,561
Professional services & other........................ 2,442,025 4,562,324
---------- ----------
Total revenues..................................... 3,472,811 6,265,534
---------- ----------
EXPENSES
Professional services & other......................... 2,394,036 3,932,613
Product development and support....................... 178,098 663,057
Sales and marketing................................... 555,809 1,104,924
General and administrative............................ 542,486 966,833
---------- ----------
Total operating expenses........................... 3,670,429 6,667,427
---------- ----------
Operating loss..................................... (197,618) (401,893)
Interest expense, net................................. (57,652) (191,758)
---------- ----------
Loss before income taxes........................... (255,270) (593,651)
Provision for income taxes............................ 0 2,050
---------- ----------
Net loss........................................... $ (255,270) $ (595,701)
========== ==========
</TABLE>
F-41
<PAGE>
FORMMAKER SOFTWARE, INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1996 1997
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES.................. $ (255,270) $ (595,701)
Net loss.............................................
Adjustments to reconcile net loss to net cash
provided by operating activities: 202,096 254,372
Depreciation........................................ 195,306 311,658
Amortization of capitalized software................ -- 79,013
Amortization of goodwill............................
Changes in assets and liabilities:
Increase in accounts receivable.................... (168,193) (73,997)
(Increase) decrease in other assets................ (132,711) 198,972
Increase (decrease) in accounts payable............ (2,278,772) 40,715
Increase (decrease) in accrued liabilities......... (371,797) (293,679)
Decrease in income taxes payable................... -- (329,464)
Increase (decrease) in deferred revenue............ (39,391) 52,889
Increase in other liabilities...................... 150,921 104,726
----------- ----------
Total adjustments................................. (2,442,541) 345,205
----------- ----------
Net cash used in operating activities............. (2,697,811) (250,496)
----------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment................... (191,027) (97,964)
Development of software.............................. (426,336) (832,170)
----------- ----------
Net cash used in investing activities............. (617,363) (930,134)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings on notes payable to bank.... 1,361,702 1,483,002
Principal payments under notes payable to
stockholders........................................ -- (81,942)
Principal payments under capital lease obligations... (169,255) (166,782)
Proceeds from exercise of stock options.............. 125,750 --
----------- ----------
Net cash provided by financing activities......... 1,318,197 1,234,278
----------- ----------
Net increase (decrease) in cash and cash equivalents.. (1,996,977) 53,648
Cash and cash equivalents at beginning of the period.. 2,163,548 4,925
----------- ----------
Cash and cash equivalents at end of the period........ $ 166,571 $ 58,573
=========== ==========
</TABLE>
F-42
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
FormMaker Software, Inc. ("FormMaker") is engaged in developing, marketing
and supporting multi-platform document automation and imaging software for use
in document intensive industries. FormMaker also provides third-party
processing and professional services.
The unaudited statements included herein have been prepared by FormMaker
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements, and should be read in conjunction with the audited
financial statements of FormMaker for the year ended December 31, 1996. In the
opinion of management, the accompanying unaudited financial statements reflect
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of FormMaker's financial condition at March
31, 1997 and for the three month period ended March 31, 1996 and 1997. The
interim results presented herein are not necessarily representative of the
results that may be expected for any future period.
NOTE 2--SUBSEQUENT EVENT
On January 15, 1997, FormMaker entered into an Agreement and Plan of Merger
("the Merger") with Image Sciences, pursuant to which the stockholders of
FormMaker and Image Sciences agreed to exchange their shares for common stock
of a newly created company, DocuCorp International, Inc. ("DocuCorp"). The
Merger was completed on May 15, 1997. FormMaker's financial results will be
included with DocuCorp.
F-43
<PAGE>
[A graphic appears under the heading "Unleashing the Power of Documents"
that depicts a person holding a door from which a stream of letters and
numbers is flowing from left to right. As the letters and numbers flow, they
transform from a random stream of letters and numbers into organized text and
data. Below the graphic is the following text "DocuCorp has an installed base
of more than 700 customers, including seven of the ten largest life insurance
companies, nine of the ten largest property and casualty insurance companies,
and many of the largest utility companies in the United States. The Company
also provides document automation products and services to the financial
services, higher education, telecommunications, and transportation
industries." In the upper right hand corner of the page is the Company's logo,
which includes their homepage address on the worldwide web.]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR ANY UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY
OTHER THAN THE SECURITIES COVERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE
AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH AN OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLI-
CATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE
DATES AS OF WHICH INFORMATION IS FURNISHED OR THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 9
The Offering............................................................. 16
Federal Income Tax Consequences.......................................... 19
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Consolidated Financial Data..................................... 24
Unaudited Pro Forma Combined Statement of Operations..................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29
Business................................................................. 39
Management............................................................... 51
Certain Relationships and Related Transactions........................... 58
Principal and Selling Stockholders....................................... 59
Description of Capital Stock............................................. 61
Shares Eligible for Future Sale.......................................... 63
Underwriting............................................................. 65
Legal Matters............................................................ 67
Experts.................................................................. 67
Available Information.................................................... 67
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
UNTIL , 1998 (25 DAYS AFTER THE DATE HEREOF), ALL DEALERS EFFECTING
TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRI-
BUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6,820,000 SHARES
(AND RIGHTS TO ACQUIRE
UP TO 6,500,000 OF SUCH SHARES)
DOCUCORP INTERNATIONAL, INC.
COMMON STOCK
----------------
PROSPECTUS
----------------
, 1998
Tucker Anthony
Incorporated
Prudential Securities
Incorporated
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses (other than underwriting discounts and commissions
and underwriters' non- accountable expense allowance) payable in connection
with this offering of the rights and the sale of the Common Stock offered
hereby are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.......... $ 11,004
NASD filing fee.............................................. 4,230
Nasdaq filing fee............................................ 88,500
Printing and engraving expenses.............................. 100,000
Legal fees and expenses...................................... 300,000
Accounting fees and expenses................................. 100,000
Blue Sky fees and expenses (including legal fees)............ 15,000
Transfer agent and rights agent and registrar fees and
expenses.................................................... 25,000
Miscellaneous................................................ 356,266
----------
Total.................................................... $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation permits indemnification to the
fullest extent permitted by Delaware law. The Registrant's By-laws require the
Registrant to indemnify any person who was or is an authorized representative
of the Registrant, and who was or is a party or is threatened to be made a
party to any corporate proceeding, by reason of the fact that such person was
or is an authorized representative of the Registrant, against expenses,
judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such third party
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in, or not opposed to, the best interests of the
Registrant and, with respect to any criminal third party proceeding (including
any action or investigation which could or does lead to a criminal third party
proceeding) had no reasonable cause to believe such conduct was unlawful. The
Registrant shall also indemnify any person who was or is an authorized
representative of the Registrant and who was or is a party or is threatened to
be made a party to any corporate proceeding by reason of the fact that such
person was or is an authorized representative of the Registrant, against
expenses actually and reasonably incurred by such person in connection with
the defense or settlement of such corporate action if such person acted in
good faith and in a manner reasonably believed to be in, or not opposed to,
the best interests of the Registrant, except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the Registrant unless and only to the
extent that the Delaware Court of Chancery or the court in which such
corporate proceeding was pending shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such authorized representative is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper. Such indemnification is mandatory under the Registrant's
By-laws as to expenses actually and reasonably incurred to the extent that an
authorized representative of the Registrant has been successful on the merits
or otherwise in defense of any third party or corporate proceeding or in
defense of any claim, issue or matter therein. The determination of whether an
individual is entitled to indemnification may be made by a majority of
disinterested directors, independent legal counsel in a written legal opinion
or the stockholders. Delaware law also permits indemnification in connection
with a proceeding brought by or in the right of the Registrant to procure a
judgment in its favor. Insofar as indemnification for liabilities arising
under the Act may be permitted to directors, officers or persons controlling
the Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in that Act and is
therefore unenforceable. The Registrant expects to obtain a directors and
officers liability insurance policy prior to the effective date of this
Registration Statement.
II-1
<PAGE>
The Standby Underwriting Agreement provides that the Underwriters are
obligated, under certain circumstances, to indemnify directors, officers and
controlling persons of the Registrant against certain liabilities, including
liabilities under the Act. Reference is made to Section 8 of the form of
Standby Underwriting Agreement which will be filed by amendment as Exhibit 1.1
hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this registration statement, the
Registrant has issued the following securities that were not registered under
the Act:
From May 15, 1997 through October 31, 1997, the Registrant issued an
aggregate of 24,977 shares of its Common Stock and Class B Common Stock upon
exercise of previously granted stock options at exercise prices ranging from
$0.01 to $0.76 per share. The issuance of the shares was exempt from
registration under the Act pursuant to Rule 701.
From May 15, 1997 through October 31, 1997, the Registrant has granted stock
options to purchase an aggregate of 612,000 shares of Common Stock at an
exercise price of $3.40 per share. The grants of such options did not
constitute a sale under the Act. A registration statement on Form S-8 will be
filed in connection with the ultimate issuance of the shares of Common Stock
upon exercise of such options.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
- ------- ----------- --------
<S> <C> <C>
1.1# Form of Standby Underwriting Agreement.
3.1 Certificate of Incorporation of the Company. (Filed as exhibit 3.1 to
the Company's Registration Statement on Form S-4, as amended, #333-
22225, and incorporated by reference herein)
3.2* Amendments to Certificate of Incorporation of the Company
3.3 By-laws of the Company. (Filed as exhibit 3.2 to the Company's
Registration Statement on Form S-4, as amended, #333-22225, and
incorporated by reference herein)
5.1# Opinion of Morgan, Lewis & Bockius LLP.
8.1# Opinion of Morgan, Lewis & Bockius LLP regarding tax matters.
10.1* DocuCorp International 1997 Employee Stock Purchase Plan
10.2 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, as
amended, #333-22225)
10.3 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, as amended, #333-22225, and
incorporated by reference herein)
10.4 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, as amended, #333-22225, and incorporated by reference herein)
</TABLE>
II-2
<PAGE>
10.5 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 A. 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, as amended, #333-22225, and
incorporated by reference herein)
10.6 Form of Stockholders' Agreement. (Filed as exhibit 10.5 to the Company's
Registration Statement on Form S-4, as amended, #333-22225, and
incorporated by reference herein)
10.7 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, as amended, #333-22225,
and incorporated by reference herein)
10.8 Co-Sale Agreement among Safeguard Scientifics (Delaware), Inc.,
Technology Leaders II L.P., Technology Leaders II Offshore C.V. and
Samuel M. Wilkes dated January 15, 1997. (Filed as exhibit 10.7 to the
Company's Registration Statement on Form S-4, as amendment #333-22225,
and incorporated by reference herein)
10.9 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, as amended, #333-22225, and
incorporated by reference herein)
10.10 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, as amended, #333-22225, and incorporated by
reference herein)
10.11 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'sRegistration Statement on Form S-4, as
amended, #333-22225, and incorporated by reference herein)
10.12 License Agreement between FormMaker Software, Inc. and NationsBank of
Georgia, National Association dated as of December 20, 1995, (Filed as
exhibit 10.11 to the Company's Registration Statement on Form S-4, as
amended, #333-22225, and incorporated by reference herein)
10.13 Addendum No. 1 to the License Agreement between FormMaker Software, Inc.
and Policy Management Systems Corporation effective October 29, 1993
(Filed as exhibit 10.12 to the Company's Registration Statement on Form
S-4, as amended, #333-22225, and incorporated by reference herein)
10.14 1997 Equity Compensation Plan (Filed as exhibit 10.12 to the Company's
Annual Report on Form 10-K, #00-1033864, and incorporated by reference
herein)
11.1# Statement re computation of per share earnings.
23.1# Consent of Price Waterhouse LLP.
23.2# Consent of Coopers & Lybrand L.L.P.
23.3# Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit 5.1).
23.4# Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit 8.1).
II-3
<PAGE>
24.1* Power of Attorney (included on signature page).
27.1* Financial Data Schedule.
- --------
# Filed herewith.
* Previously filed
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are either included in
the financial statements or are not required under the related instructions or
are inapplicable, and therefore have been omitted.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement; and
(iv) To reflect the results of this offering.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-4
<PAGE>
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the standby underwriting agreement
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Act, the information omitted
from the form of prospectus filed as part of a registration statement in
reliance upon Rule 430A and contained in the form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be
deemed to be part of this registration statement as of the time it was
declared effective; and (3) that for the purpose of determining any liability
under the Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to supplement the prospectus,
after the expiration of the subscription period, to set forth the results of
the subscription offer, the transactions by the underwriters during the
subscription period, the amount of unsubscribed securities to be purchased by
the underwriters, and the terms of any subsequent reoffering thereof. If any
public offering by the underwriters is to be made on terms differing from
those set forth on the cover page of the prospectus, a post-effective
amendment will be filed to set forth the terms of such offering.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in Dallas,
Texas on February 23, 1998.
Docucorp International, Inc.
By: /s/ Michael D. Andereck
---------------------------------
Michael D. Andereck
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title(s) Date
---------- -------- ----
<S> <C> <C>
/s/ Michael D. Andereck President and Chief February 23, 1998
- ------------------------------------- Executive Officer,
Michael D. Andereck and Director
(Principal
Executive Officer)
/s/ Todd A. Rognes Senior Vice February 23, 1998
- ------------------------------------- President, Finance
Todd A. Rognes (Principal
Financial and
Accounting Officer)
* Chairman of the
- ------------------------------------- Board
Milledge A. Hart, III
/s/ Anshoo S. Gupta Director February 23, 1998
- -------------------------------------
Anshoo S. Gupta
* Director
- -------------------------------------
John D. Loewenberg
* Director
- -------------------------------------
Warren V. Musser
* Director
- -------------------------------------
George F. Raymond
* Director
- -------------------------------------
Arthur R. Spector
*By: /s/ Michael D. Andereck February 23, 1998
---------------------------
Michael D. Andereck
As Attorney-in-Fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
- ------- ----------- --------
<S> <C> <C>
1.1# Form of Standby Underwriting Agreement.
3.1 Certificate of Incorporation of the Company. (Filed as exhibit 3.1 to
the Company's Registration Statement on Form S-4, as amended, #333-
22225, and incorporated by reference herein)
3.2* Amendments to Certificate of Incorporation of the Company
3.3 By-laws of the Company. (Filed as exhibit 3.2 to the Company's
Registration Statement on Form S-4, as amended, #333-22225, and
incorporated by reference herein)
5.1# Opinion of Morgan, Lewis & Bockius LLP.
8.1# Opinion of Morgan, Lewis & Bockius LLP regarding tax matters.
10.1* DocuCorp International 1997 Employee Stock Purchase Plan
10.2 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, as
amended, #333-22225)
10.3 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, as amended, #333-22225, and
incorporated by reference herein)
10.4 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, as amended, #333-22225, and incorporated by reference herein)
10.5 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 A. 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, as amended, #333-22225, and
incorporated by reference herein)
10.6 Form of Stockholders' Agreement. (Filed as exhibit 10.5 to the Company's
Registration Statement on Form S-4, as amended, #333-22225, and
incorporated by reference herein)
10.7 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, as amended, #333-22225,
and incorporated by reference herein)
10.8 Co-Sale Agreement among Safeguard Scientifics (Delaware), Inc.,
Technology Leaders II L.P., Technology Leaders II Offshore C.V.and
Samuel M.Wilkes dated January 15, 1997. (Filed as exhibit 10.7 to the
Company's Registration Statement on Form S-4, as amended, #333-22225,
and incorporated by reference herein)
10.9 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, as amended, #333-22225, and
incorporated by reference herein)
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
- ------- ----------- --------
<S> <C> <C>
10.13 Addendum No. 1 to the License Agreement between FormMaker Software, Inc.
and Policy Management Systems Corporation effective October 29, 1993
(Filed as exhibit 10.12 to the Company's Registration Statement on Form
S-4, as amended, #333-22225, and incorporporated by reference herein)
10.14 1997 Equity Compensation Plan (Filed as exhibit 10.12 to the Company's
Annual Report on Form 10-K, #00-1033864, and incorporated by reference
herein)
11.1# Statement re computation of per share earnings.
23.1# Consent of Price Waterhouse LLP.
23.2# Consent of Coopers & Lybrand L.L.P.
23.3# Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit 5.1).
23.4# Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit 8.1).
24.1* Power of Attorney (included on signature page).
27.1* Financial Data Schedule.
</TABLE>
- --------
# Filed herewith.
* Previously filed.
II-8
<PAGE>
EXHIBIT 1.1
Draft Dated 2/20/98
-------------------
DOCUCORP INTERNATIONAL, INC.
6,820,000 Shares of Common Stock
($.01 Par Value Per Share)
Standby Underwriting Agreement
------------------------------
February 24, 1998
Tucker Anthony Incorporated
One Beacon Street, 6th Floor
Boston, MA 02108
Prudential Securities Incorporated
One New York Plaza
New York, NY 10292
Ladies and Gentlemen:
Docucorp International, Inc., a Delaware corporation (the "Company"),
Safeguard Scientifics (Delaware), Inc., a Delaware corporation ("Safeguard
(DE)"), Safeguard Scientifics, Inc., a Pennsylvania corporation ("Safeguard
(PA)" and, together with Safeguard (DE), "Safeguard") and Xerox Corporation
("Xerox"), Michael D. Andereck ("Andereck"), Technology Leaders II ("TL II") and
Technology Leaders II Offshore CV ("Offshore") and certain other stockholders of
the Company identified on Schedule D hereto (together with Safeguard, the
"Selling Stockholders") hereby confirm their respective agreements with you with
respect to:
(i) the proposed distribution by the Company to the Safeguard
Shareholders of up to an aggregate of 6,500,000 rights (the "Rights") (which
represent 3,680,000 shares of the Company's common stock, $.01 par value per
share (the "Common Stock"), to be sold by the Company upon the exercise of
3,680,000 of such Rights and an aggregate of 2,820,000 shares of Common Stock
being sold by the Selling Stockholders upon exercise of 2,820,000 Rights in the
respective amounts set forth on Schedule D hereto), with (A) each Right
entitling the holder thereof to purchase at any time prior to the Expiration
Date, at a subscription price of $5.00 per share, one share of Common Stock of
the Company, and (B) Rights being distributed on the basis of one Right
<PAGE>
for each five shares of Safeguard Stock held (with the holder of a number of
shares of Safeguard Stock not evenly divisible by five entitled to receive the
next higher whole number of Rights);
(ii) the proposed sale of all Unsubscribed Shares by the Company and
the Selling Stockholders, acting severally and not jointly, with:
(A) the Other Purchasers Standby Shares being deemed to be
Company Unsubscribed Shares to be sold pursuant to the Other
Purchasers Standby Purchase Agreements; and
(B) all Excess Unsubscribed Shares to be sold to and purchased by
the Underwriters, severally and not jointly, in accordance with the
terms and conditions of this Agreement; and
(iii) the proposed sale by the Company to the Other Purchasers of the
Undistributed Shares; and
(iv) the grant by the Selling Stockholders to the Underwriters of an
option described in Section 3(b) hereof to purchase additional shares of Common
------------
Stock for the purpose of covering over-allotments, if any.
The parties acknowledge that concurrently with the Offering of the
Rights, the Company intends to offer and sell to the Direct Purchasers the
Direct Shares for purchase at a subscription price of $5.00 per share. The
parties also acknowledge that, except as set forth in Section 7, the Direct
---------
Shares shall not be deemed to be Shares for purposes of this Agreement and are
not otherwise a part of this Agreement.
-2-
<PAGE>
1. Certain Definitions. The following terms shall, when used in this
-------------------
agreement, have the following meanings:
"Act" means the Securities Act of 1933, as amended.
"Adverse Claim" means the term as used in Section 8-302 of the Delaware
Uniform Commercial Code.
"Application" means the application described in Section 9(a)(i)(B) hereof.
------------------
"Associated Person Lock-Ups" means the agreements, acceptable in form and
substance to the Underwriters, pursuant to which each of the Company's officers,
directors and principal stockholders listed in Schedule A attached hereto has
----------
agreed not to, without the prior written consent of the Underwriters, transfer,
sell, offer for sale, contract to sell or otherwise dispose of any shares of
Common Stock or any securities exercisable or exchangeable for or convertible
into shares of Common Stock or with respect to which such person has the power
of disposition during a period commencing on the date the Registration Statement
is declared effective by the Commission and ending 180 days following the
Expiration Date, except as otherwise permitted in the Associated Person Lock-
Ups.
"Bona Fide Purchaser" means the term as defined in Section 8-302 of the
Delaware Uniform Commercial Code.
"Closing" means 10:00 a.m., New York City time on the seventh business day
after the Expiration Date (or the first business day thereafter), or at such
other time on the same or such other date, not later than June 30, 1998, as
shall be agreed to by the Company, the Selling Stockholders and the
Underwriters.
"Closing Date" means the time and date of payment for and delivery of the
Excess Unsubscribed Shares.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the shares of Common Stock, $.01 par value per share,
of the Company.
"Company Unsubscribed Shares" means the shares of Common Stock which had
been offered by the Company pursuant to the Rights but which were not acquired
through the exercise of Rights on or prior to the Expiration Date (after taking
into account the agreement of the Company and the Selling Stockholders that the
560,000 shares of Common Stock that are expected to be sold
-3-
<PAGE>
to Warren V. Musser upon exercise of the Musser Rights shall be deemed to be
sold by the Company).
"Controlling Person" means a person who controls the Underwriters, the
Company or the Selling Stockholders within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act.
"Direct Purchasers" means the certain persons selected by the Company to
whom the Direct Shares are being offered.
"Direct Shares" means the 320,000 shares of Common Stock offered to the
Direct Purchasers.
"Disagreement" means the term as used in Item 304 of Regulation S-K of the
Rules and Regulations.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Agent" means the escrow agent named in the Rights Agent Agreement.
"Excess Unsubscribed Shares" means all of the Unsubscribed Shares other
than the Other Purchasers Standby Shares.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Price" means the subscription price of $5.00 per share.
"Expiration Date" means 5:00 p.m., New York City time, on March 31, 1998 or
such later date as may be agreed upon by the Underwriters and the Company.
"Intellectual Property" means all patents, trademarks, service marks, trade
names, copyrights, inventions, trade secrets, proprietary techniques, including,
without limitation, all software service codes, processes and substances,
technology and know-how necessary to conduct (or used to conduct) the business
now operated or proposed to be operated by the Company as described in the
Prospectus.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"Material Adverse Effect" means a material adverse effect on the condition,
financial or otherwise, or on the earnings, business affairs, financial
position, value, operations, properties, results of operation or business of the
Company and its Subsidiaries taken as a whole.
"Musser Group" means Warren V. Musser and/or his assignees.
-4-
<PAGE>
"Musser Lock-Up" means the agreement of the Musser Group not to, without
the prior written consent of the Underwriters, transfer, sell, offer for sale,
contract to sell or otherwise dispose of any shares of Common Stock acquired by
the Musser Group upon exercise of the Musser Rights or any securities
exercisable or exchangeable for or convertible into Common Stock (including the
Musser Rights) owned on the date hereof or acquired through the rights offering
or with respect to which the Musser Group has the power of disposition during a
period commencing on the date the Registration Statement is declared effective
and ending 180 days after the Expiration Date; provided, however, that the
Musser Group may transfer, sell, offer for sale, contract to sell or otherwise
dispose of up to 280,000 shares of Common Stock without the prior written
consent of the Underwriters.
"Musser Rights" means all Rights granted to the Musser Group as a
shareholder of Safeguard (PA).
"NASD" means the National Association of Securities Dealers, Inc.
"Offering" means the public offering of the Excess Unsubscribed Shares as
set forth in the Prospectus; provided that the Offering shall also include the
Other Purchasers Standby Shares purchased by the Underwriters, if any.
"Option Closing Date" means the time of delivery of any of the Option
Shares."
"Option Shares" means any and all shares of Common Stock to be purchased by
the Underwriters pursuant to the option described in Section 3(b) of this
------------
Agreement.
"Other Purchasers" means certain persons selected by the Company.
"Other Purchasers Standby Purchase Agreement" means the agreements between
the Company and the Other Purchasers to be entered into after the date hereof
and obligating the Other Purchasers to purchase from the Company up to 300,000
Other Purchasers Standby Shares on the Closing Date at a price of $5.00 per
share.
"Other Purchasers Standby Shares" means that number of Unsubscribed Shares
purchased by the Other Purchasers pursuant to the Other Purchasers Standby
Purchase Agreement.
"Other Selling Stockholders" means the Selling Stockholders, excluding
Safeguard, TL II and Offshore.
"Preliminary Prospectus" means each prospectus subject to completion filed
with the Registration Statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration Statement
or any amendment thereto at the time of the Registration Statement was or is
declared effective).
"Price Waterhouse" means Price Waterhouse, LLP.
-5-
<PAGE>
"Prospectus" means the prospectus first filed with the Commission pursuant
to Rule 424(b) under the Act, or, if no prospectus is required to be filed
pursuant to said Rule 424(b), the prospectus included in the Registration
Statement. For purposes of Sections 2 and 8(d)(v) hereof, all references to the
----------------------
"Prospectus" are deemed to include, in the alternative, the most recent
Preliminary Prospectus if the Prospectus is not in existence.
"Provided Information" means the statements made in the third paragraph
preceding the stabilization legend on the inside of the front cover page, the
stabilization legend on the inside of the front cover page and the third and
sixth paragraph under the heading "UNDERWRITING" in the Prospectus (and the same
paragraphs and stabilization legend in any Preliminary Prospectus).
"Registration Statement" means the registration statement described in
Section 2(a)(i) hereof.
- ---------------
"Reportable Event" means the term as used in Item 304 of Regulation S-K of
the Rules and Regulations.
"Rights Agent" means ChaseMellon Shareholder Services, L.L.C.
"Rights Agent Agreement" means the agreement in the form previously
approved by the Underwriters, dated the date hereof, by and among the Company,
the Escrow Agent and ChaseMellon Shareholder Services, L.L.C., as Rights Agent.
"Rules and Regulations" means the rules and regulations adopted by the
Commission under either the Act or the Exchange Act.
"Safeguard Shareholders" means the holders of record of Safeguard (PA)
Stock as of February 23, 1998.
"Safeguard Stockholders" means Safeguard, TL II and Offshore.
"Safeguard Stock" means the common shares, $.10 par value per share, of
Safeguard (PA).
"Selling Stockholders Unsubscribed Shares" means the shares of Common Stock
which had been offered by the Selling Stockholders pursuant to the Rights but
which were not acquired through exercise of the Rights on or prior to the
Expiration Date (after taking into account the agreement of the Company and the
Selling Stockholders that the 560,000 shares of Common Stock that are expected
to be sold to Warren V. Musser upon exercise of the Musser Rights shall be
deemed to be sold by the Company).
"Shares" means the Option Shares, the Excess Unsubscribed Shares to be
purchased by the Underwriters and the Other Purchasers Standby Shares purchased
by the Underwriters, if any, pursuant to Section 3.
---------
-6-
<PAGE>
"Significant Subsidiary" means the term as defined in Rule 405 of the Rules
and Regulations.
"Subsidiary" means the term as defined in Rule 405 of the Rules and
Regulations and includes all of the entities set forth in Schedule B hereto.
"Transfer Agent and Registrar" means the transfer agent and registrar
described in Section 6(a)(ix) hereof.
----------------
"Underwriters" means Tucker Anthony Incorporated and Prudential Securities
Incorporated.
"Underwriters' Counsel" means Drinker Biddle & Reath LLP.
"Undistributed Shares" means 6,500,000 shares of Common Stock less those
shares of Common Stock that had been offered by the Company and the Selling
Stockholders pursuant to the Rights if Rights to purchase fewer than 6,500,000
shares of Common Stock are granted to holders of the Safeguard Stock.
"Unsubscribed Shares" means the Selling Stockholders Unsubscribed Shares,
the Company Unsubscribed Shares and the Undistributed Shares.
2. Representations and Warranties of the Company and the Selling
-------------------------------------------------------------
Stockholders.
- ------------
(a) The Company represents and warrants to, and agrees with, the
Underwriters as follows:
(i) The Company has filed with the Commission a registration
statement on Form S-1 (No. 333-44427), including a prospectus subject to
completion, for the registration of the Rights, the shares of Common Stock
subject to the Rights, the Direct Shares and the Option Shares under the
Act, and have filed with the Commission one or more amendments thereto.
After the execution of this Agreement, the Company will file with the
Commission either (A) if such registration statement, as it may have been
amended, has been declared by the Commission to be effective under the Act
as of the time of effectiveness of this Agreement, a prospectus in the form
most recently included in an amendment to such registration statement (or,
if no such amendment shall have been filed, in such registration
statement), with such changes or insertions as are required by Rule 430A
under the Act or permitted by Rule 424(b) under the Act and as have been
provided to and approved by the Underwriters prior to the execution of this
Agreement, or (B) if such registration statement, as it may have been
amended, has not been declared by the Commission to be effective under the
Act as of the time of effectiveness of this Agreement, an amendment to such
registration statement, including a form of prospectus, a copy of which
amendment has been furnished to and approved by the Underwriters prior to
the execution of this Agreement;
-7-
<PAGE>
(ii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or any part thereof and,
to the best knowledge of the Company, no proceedings for a stop order have
been instituted or are pending or threatened. When any Preliminary
Prospectus was filed with the Commission, it contained all statements
required to be stated therein in accordance with, and complied in all
material respects with the requirements of, the Act and the Rules and
Regulations except to the extent that such Preliminary Prospectus did not
contain any such required statements, or did not so comply, in a manner
corrected in the Prospectus. When the Registration Statement or any
amendment thereto was (or is) declared effective, it (A) contained (or will
contain) all statements required to be stated therein in accordance with,
and complied in all material respects (or will comply in all material
respects) with the requirements of, the Act and the Rules and Regulations
and (B) did not or will not include any untrue statement of a material fact
or omit to state any material fact necessary to make the statements therein
not misleading. When the Prospectus or any amendment or supplement thereto
is filed pursuant to Rule 424(b) (or, if the Prospectus or such amendment
or supplement is not required to be so filed, when the Registration
Statement or the amendment thereto containing such amendment or supplement
to the Prospectus was or is declared effective) and on the Closing Date and
any Option Closing Date, the Prospectus, as amended or supplemented at any
such time, (A) contained or will contain all statements required to be
stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the Rules and
Regulations and (B) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading. The foregoing provisions of this paragraph (ii)
do not apply to the Provided Information;
(iii) The Company and each of the Subsidiaries are corporations
duly organized, validly existing and in good standing under the laws of
their respective jurisdictions of incorporation, are duly qualified to
transact business and are in good standing as foreign corporations in each
jurisdiction in which their respective ownership or leasing of any
properties or the character or conduct of their respective operations
requires such qualification, except where failures to be so qualified,
individually or in the aggregate, would not result in a Material Adverse
Effect. Other than the Subsidiaries listed on Schedule B hereto, the
----------
Company does not own any stock of or other equity in, or otherwise control
directly or indirectly, any corporation, firm, partnership, trust, joint
venture or other business entity;
(iv) The Company and each of the Subsidiaries have all requisite
power and authority (corporate and other), and have obtained and currently
maintains in full force and effect and are operating in compliance with any
and all authorizations, approvals, orders, licenses, certificates,
franchises and permits of and from all governmental or regulatory officials
and bodies (including those having jurisdiction over environmental or
similar matters) necessary or required to own or lease their respective
properties and conduct their respective business as described in the
Registration Statement, the Prospectus and any
-8-
<PAGE>
amendment or supplement thereto, except where the failure to so maintain or
operate would not result in a Material Adverse Effect. The Company and each
of the Subsidiaries are and have been doing business in compliance with all
such authorizations, approvals, orders, licenses, certificates, franchises
and permits and all federal, state, local and foreign laws, rules and
regulations (including without limitation those relating to employment
matters and the payment of taxes) except as disclosed in the Prospectus and
except where failures to be in compliance, individually or in the
aggregate, would not result in a Material Adverse Effect. Neither the
Company nor any of the Subsidiaries has received any notice or notices of
proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise or permit
that if the subject of unfavorable decisions, rulings or findings, would,
individually or in the aggregate, result in a Material Adverse Effect;
(v) The Company has duly executed and delivered the Rights Agent
Agreement. The shares of Common Stock to be sold by the Company and the
Selling Stockholders hereunder and upon the exercise of the Rights are
subject to the rights and interests of the Underwriters and the Rights
Agent hereunder and under the Rights Agent Agreement. Except to the extent
otherwise provided therein, the arrangements for custody or reservation and
delivery of the certificates for such shares, made by the Company hereunder
and under the Rights Agent Agreement, are irrevocable, and are not subject
to termination by any acts of the Company, the Selling Stockholders or by
operation of law;
(vi) The Company has all requisite power and authority (corporate
and other) to enter into this Agreement, the Other Purchasers Standby
Purchase Agreements and the Rights Agent Agreement, and to consummate the
transactions provided for herein and therein; and this Agreement, the Other
Purchasers Standby Purchase Agreements and the Rights Agent Agreement have
each been duly authorized by the Company. Each of this Agreement and the
Rights Agent Agreement have been and the Other Purchasers Standby Purchase
Agreements will be prior to the Closing Date duly executed and delivered by
the Company. Each of this Agreement and the Rights Agent Agreement
constitutes and the Other Purchasers Standby Purchase Agreements will
constitute prior to the Closing Date, assuming due authorization, execution
and delivery by the other parties to such agreements, the legal, valid and
binding obligation of the Company enforceable against the Company in
accordance with their respective terms, subject to the effect of general
principles of equity (including standards of materiality, good faith, fair
dealing and reasonableness) whether applied by a court of law or equity,
and except as rights to indemnity and contribution hereunder may be limited
by applicable law, statutory duties or public policy. The Company's
execution and delivery of this Agreement, the Other Purchasers Standby
Purchase Agreements and the Rights Agent Agreement, its performance of its
obligations hereunder and thereunder, the consummation of the transactions
contemplated hereby and thereby by it, and its conduct of its business as
described in the Registration Statement, the Prospectus and any amendment
or supplement thereto, will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, or result in the
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<PAGE>
creation or imposition of any material liens, charges, claims,
encumbrances, pledges, security interests, defects or other like
restrictions or material equities of any kind whatsoever upon, any right,
property or assets (tangible or intangible) of the Company or any of the
Subsidiaries pursuant to the terms of (A) the charter or bylaws, each as
amended to date, of the Company or any of the Subsidiaries, (B) any lease,
license, permit, contract, indenture, mortgage, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement
(including any related to indebtedness) or any other agreement or
instrument to which the Company or any of the Subsidiaries is a party or by
which the Company or any of the Subsidiaries is or by which any of them may
be bound or to which any of their respective properties or assets (tangible
or intangible) is or may be subject, except to the extent that any such
conflict, breach, violation or default, individually or in the aggregate,
does not and would not result in a Material Adverse Effect and does not and
would not interfere with the Offering or (C) any statute, judgment, decree,
order, rule or regulation applicable to the Company or any of the
Subsidiaries or any of their respective activities or properties adopted or
issued by an arbitrator, court, regulatory body or administrative agency or
other governmental agency or body (including those having jurisdiction over
environmental or similar matters), domestic or foreign, having jurisdiction
over the Company or any of the Subsidiaries or of their respective
activities or properties (other than such as may be required under state
securities or "Blue Sky" laws and such as may be required by the by-laws
and rules of the NASD in connection with the purchase and distribution of
the Shares by the Underwriters);
(vii) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required in
connection with the offer, issuance and sale of the shares of Common Stock
to be sold by the Company hereunder or upon exercise of the Rights, the
Company's performance of its obligations hereunder, or the consummation by
the Company of the other transactions contemplated hereby, except (A) such
as may be required under the state securities or "Blue Sky" laws of any
jurisdiction or as may be required by the by-laws and rules of the NASD in
connection with the purchase and distribution of the Shares by the
Underwriters, (B) any filing of the Prospectus pursuant to Rule 424(b) or
430A of the Rules and Regulations and, if the Registration Statement has
not been declared effective, an order of the Commission declaring the
Registration Statement effective under the Act, and (C) such other
approvals as have been obtained and remain in full force and effect;
(viii) The authorized, issued and outstanding capital stock of
the Company is set forth, and conforms to the description thereof
contained, in the Registration Statement, the Prospectus, and any amendment
or supplement thereto. All of the issued shares of capital stock of the
Company, including the shares to be sold by the Selling Stockholders, have
been duly authorized and validly issued, and are fully paid and
nonassessable; the holders thereof have no rights of rescission against the
Company with respect thereto and are not subject to personal liabilities
solely by reason of being such holders (except to the extent that as a
result of acquiring a substantial number of shares of
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<PAGE>
Common Stock a holder may be subject to claims of personal liability as an
affiliate or control person of the Company, as to which no representation
is made hereby); and none of such shares have been issued in violation of
the preemptive rights of any security holders of the Company arising as a
matter of law or under or pursuant to the Company's Certificate of
Incorporation, as amended, the Company's By-Laws, as amended, or any
agreement or instrument to which the Company is a party or by which it is
bound. The shares of Common Stock offered by the Company and to be sold
upon the exercise of the Rights or pursuant to this Agreement and the Other
Purchasers Standby Purchase Agreements have been duly authorized and at the
Closing Date, after payment therefor in accordance herewith or in
accordance with the terms and conditions of the Rights (as the case may
be), will be validly issued, fully paid and nonassessable and not subject
to any Adverse Claim, with no personal liability attaching to the holder
solely as a result of the ownership thereof (except to the extent that as a
result of acquiring a substantial number of shares of Common Stock a holder
may be subject to claims of personal liability as an affiliate or control
person of the Company, as to which no representation is made hereby). Upon
the issuance and delivery pursuant to this Agreement and the Rights Agent
Agreement of the Shares to be sold by the Company, assuming that each of
the Underwriters is a Bona Fide Purchaser, the Underwriters will acquire
good and marketable title to the Shares free and clear of any liens,
charges, claims, preemptive rights, encumbrances, pledges, security
interests, defects or other like restrictions or like material equity of
any kind whatsoever. The shares of Common Stock offered by the Company and
to be sold upon the exercise of the Rights or pursuant to this Agreement or
the Other Purchasers Standby Purchase Agreements will conform to the
description thereof contained in the Prospectus. There are no preemptive or
other rights to subscribe for or to purchase nor any restriction upon the
voting or transfer of, any shares of Common Stock pursuant to the Company's
Certificate of Incorporation or By-Laws, each as amended to date, or
pursuant to any agreement among stockholders to which the Company is a
party, by which it is bound or of which it has knowledge, and the Shares to
be sold by the Company are not otherwise subject to any preemptive or other
similar rights of any security holder. The Company is not a party to or
bound by any instrument, agreement or other arrangement providing for it to
issue any capital stock, rights, warrants, options or other securities,
except for this Agreement and as described in the Prospectus. Except as
described in the Prospectus with respect to Common Stock that may be
registered by the Company in a registration statement on Form S-8, no
holder of any securities of the Company has the right to include any
securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company during a period
commencing on the date the Registration Statement is declared effective by
the Commission and ending 180 days following the Expiration Date or to
require the Company to file a registration statement under the Act during
such period. All of the (i) Rights and (ii) outstanding shares of Common
Stock and all of the shares of Common Stock to be issued by the Company as
contemplated herein have been approved for quotation upon notice of
issuance on the Nasdaq National Market of the Nasdaq Stock Market;
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<PAGE>
(ix) The consolidated financial statements and schedules of the
Company included in the Registration Statement, the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) and
any amendment or supplement thereto fairly present the consolidated
financial position and results of operations of the Company as of the dates
and for the periods therein specified. Such financial statements and
schedules have been prepared in accordance with generally accepted
accounting principles as in effect in the United States and as consistently
applied throughout the periods involved and in accordance with the Rules
and Regulations. The selected consolidated financial data set forth under
the caption "SELECTED CONSOLIDATED FINANCIAL DATA" in the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary
Prospectus) fairly present, on the basis stated therein, the information
included therein. The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (A) transactions
are executed in accordance with management's general or specific
authorizations; (B) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (C) access to
assets is permitted only in accordance with management's general or
specific authorization; and (D) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences. The Company's internal
accounting controls are designed to cause the Company to comply in all
material respects with the Foreign Corrupt Practices Act of 1977, as
amended. Price Waterhouse, whose reports are filed with the Commission as
a part of the Registration Statement, are independent auditors as required
by the Act and the Rules and Regulations. Since January 1, 1994, Price
Waterhouse has been the only public accountants engaged by the Company, and
the Company has not had any Disagreement with Price Waterhouse, and has not
experienced any Reportable Event since that date. Since January 1, 1994,
Coopers & Lybrand has been the only public accountants engaged by FormMaker
Software, Inc. ("FormMaker"), and FormMaker has not had any Disagreement
with Coopers & Lybrand, and has not experienced any Reportable Event since
that date;
(x) The Company and each of the Subsidiaries have filed all
federal, state, local and foreign tax returns that are required to be filed
by them or have duly requested extensions thereof, except in any case in
which the failure so to file, individually or in the aggregate, would not
have a Material Adverse Effect. The Company and each of the Subsidiaries
have paid all taxes required to be paid by them and all other assessments,
fines or penalties, if any, levied against them, to the extent that any of
the foregoing are due and payable, except for (A) any such assessment, fine
or penalty that is currently being contested in good faith or (B) any case
in which the failure so to pay, individually or in the aggregate, would not
have a Material Adverse Effect;
(xi) No transfer tax, stamp duty or other similar tax is payable
by or on behalf of the Underwriters in connection with the issuance by the
Company, or the purchase by the Underwriters, of the Shares to be sold by
the Company;
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<PAGE>
(xii) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property
stated in the Prospectus to be owned or leased by it, free and clear of all
liens, charges, claims, encumbrances, pledges, security interests, defects
or other like restrictions or like equities of any kind whatsoever, other
than (A) liens for taxes not yet due and payable, (B) liens as described or
referred to in the Prospectus, and (C) liens that are not material in
amount in relation to the business of the Company and which do not
interfere with the Offering;
(xiii) Except as disclosed in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
the Company and each of the Subsidiaries own or possess adequate licenses
or other rights, in each case free of fees, charges or royalties payable
after the date hereof, to use the Intellectual Property, except where the
lack thereof would not result in a Material Adverse Effect. Except as
disclosed in the Prospectus, neither the Company nor any of the
Subsidiaries has received any notice of infringement of or conflict with
(and does not know of any such infringement of or conflict with) rights or
claims of others with respect to the Intellectual Property, any of the
activities engaged in, or proposed to be engaged in, by the Company or any
challenge to the ownership or right of the Company with respect to the
Intellectual Property which could result in a Material Adverse Effect or
which could have a material adverse effect on the development, marketing or
sale of any of the Company's existing or contemplated products, services or
processes as described in the Prospectus. None of the products, services
or processes of the Company or any of the Subsidiaries referred to in such
Prospectus and relating to the business of the Company or any of the
Subsidiaries now operated or proposed to be operated by any of them as
described in such Prospectus infringes or conflicts with any right or
patent, or with any discovery, invention, product or process which is the
subject of any patent application known to the Company, in a manner which
would result in a Material Adverse Effect;
(xiv) The Company and each of the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the business in
which they are engaged, and the Company has no reason to believe that it or
any of the Subsidiaries will not be able to renew their respective existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue their
respective business at a cost that would not result in a Material Adverse
Effect;
(xv) Neither the Company nor any of the Subsidiaries is in breach
of, or in default under, any term, covenant or provision of any license,
permit, contract, indenture, mortgage, installment sale agreement, lease,
deed of trust, voting trust agreement, stockholders agreement, note, loan
or credit agreement, or any other agreement or instrument evidencing an
obligation for borrowed money, or any other agreement or instrument to
which it is a party or by which it may be bound or to which any of its
property or assets (tangible or intangible) is subject or affected, except
as disclosed in the Registration Statement and
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<PAGE>
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and except as to defaults that (A) individually or
in the aggregate would not have a Material Adverse Effect and (B) would not
interfere with the Offering. Neither the Company nor any of the
Subsidiaries is in violation of any term or provision of its charter or
bylaws, each as amended to date;
(xvi) Other than as disclosed in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
there is not pending or, to the Company's knowledge, threatened against the
Company or any of the Subsidiaries or involving the properties or business
of the Company or any of the Subsidiaries (or, to the Company's knowledge,
any circumstance that may give rise to the same), any action, suit,
proceeding, investigation, litigation or governmental proceeding (including
those having jurisdiction over environmental or similar matters), domestic
or foreign, that (A) is required to be disclosed in the Registration
Statement and is not so disclosed, (B) questions the validity of the
capital stock of the Company or the validity or enforceability of this
Agreement, (C) questions the validity of any action taken or to be taken by
the Company pursuant to or in connection with this Agreement, or (D) could
materially adversely affect the present or prospective ability of the
Company to perform its obligations under this Agreement or result in a
Material Adverse Effect. Any such proceedings summarized in the Prospectus
are accurately summarized in all material respects;
(xvii) Subsequent to the respective dates as of which
information is set forth in the Registration Statement and Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary
Prospectus), and except as may otherwise be indicated or contemplated
herein or therein, neither the Company nor any of the Subsidiaries has (A)
issued any securities other than the Rights, the shares of Common Stock to
be sold by the Company upon the exercise of the Rights, the Shares to be
sold by the Company pursuant to this Agreement and shares of Common Stock
issuable upon the exercise of stock options disclosed in the Prospectus as
outstanding as of the date hereof, (B) incurred any liability or
obligation, direct or contingent, for borrowed money, (C) entered into any
transaction other than in the ordinary course of business, (D) declared or
paid any dividend or made any other distribution on or in respect of its
capital stock, or (E) entered into any transactions with any affiliate,
including, without limitation, the Selling Stockholders or their respective
affiliates;
(xviii) The Company and each of the Subsidiaries have
satisfactory employer-employee relationships with their respective
employees. No labor or other dispute with the employees of the Company or
any of the Subsidiaries exists, or, to the best knowledge of the Company,
is imminent;
(xix) Except as disclosed in the Registration Statement or the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), each employee benefit plan, within the meaning of
Section 3(3) of ERISA that is maintained, administered or contributed to by
the Company or any of its affiliates for employees or
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<PAGE>
former employees of the Company and its affiliates has been maintained in
compliance with its terms and the requirements of any applicable statutes,
orders, rules and regulations, including but not limited to ERISA and the
Code; no prohibited transaction, within the meaning of Section 406 of ERISA
or Section 4975 of the Code has occurred with respect to any such plan
excluding transactions effected pursuant to a statutory or administrative
exemption; and for each such plan which is subject to the funding rules of
Section 412 of the Code or Section 302 of ERISA no "accumulated funding
deficiency" as defined in Section 412 of the Code has been incurred,
whether or not waived, and the fair market value of the assets of each such
plan (excluding for these purposes accrued but unpaid contributions)
exceeded the present value of all benefits accrued under such plan
determined using reasonable actuarial assumptions;
(xx) The minute books of the Company and each of the Subsidiaries
made available to Underwriters' Counsel, (A) contain minutes and consents
from all meetings and actions of the Company's stockholders, board of
directors, and the committees of such board since the respective dates of
organization of the Company and (B) reflect all transactions referred to in
such minutes accurately in all material respects;
(xxi) All agreements filed as exhibits to the Registration
Statement to which the Company or any of the Subsidiaries is a party or by
which the Company or any of the Subsidiaries may be bound or to which any
of their respective assets, properties or businesses may be subject have
been duly and validly authorized, executed and delivered by the Company or
such Subsidiary, as appropriate, and constitute the legal, valid and
binding agreements of the Company or such Subsidiary, as appropriate,
enforceable in accordance with their respective terms, subject in each case
to the effect of general principles of equity (including standards of
materiality, good faith, fair dealing and reasonableness) whether applied
by a court of law or equity and except as rights to indemnity and
contribution under this Agreement may be limited by applicable law,
statutory duties or public policy. The descriptions in the Registration
Statement, the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus) and any amendment or supplement
thereto, of agreements, whether written or oral, and of other documents are
accurate and fairly present the information required to be shown with
respect thereto by Form S-1 under the Act. There are no agreements, whether
written or oral, or other documents that are required by the Act or the
Rules and Regulations to be described in the Registration Statement or
filed as exhibits to the Registration Statement that are not described or
filed as required;
(xxii) Neither the Company nor any of its officers, directors,
or affiliates (within the meaning of the Rules and Regulations) has taken
or will take, directly or indirectly, any action designed to or that has
constituted or that might reasonably be expected to cause or result in
stabilization or manipulation of the price of the Common Stock or the
Rights in violation of Regulation M under the Exchange Act;
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<PAGE>
(xxiii) There are no claims, payments, issuances, arrangements
or understandings for services in the nature of a finder's, advisory or
origination fee or otherwise, either with respect to the sale of the shares
of Common Stock to be sold by the Company upon exercise of the Rights, the
sale of the Shares hereunder or with respect to the proceeds received by
the Company from such sales. Other than as reflected in this Agreement,
there are no other arrangements, agreements, understandings, payments or
issuances with respect to the Company or, to the Company's knowledge, any
of its officers, directors, or affiliates that may constitute
"underwriter's compensation," as determined by the NASD;
(xxiv) The Company has delivered or caused to be delivered to
the Underwriters the Associated Person Lock-Ups;
(xxv) All of the Rights have been duly authorized, and, when
issued and distributed as set forth in the Prospectus, will be legally
issued and valid and binding obligations of the Company having the rights
summarized in the Prospectus; and none of such Rights will have been issued
in violation of the preemptive rights of any security holders of the
Company arising as a matter of law or under or pursuant to the Company's
Certificate of Incorporation, as amended, the Company's By-Laws, as
amended, or any agreement or instrument to which the Company is a party or
by which it is bound.
(xxvi) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
there has not been any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
general affairs, business, prospects, management, financial position,
stockholders' equity or results of operations of the Company otherwise than
as set forth or contemplated in the Prospectus;
(xxvii) No relationship, direct or indirect, exists between or
among the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company or Safeguard, on the
other hand, which is required by the Act to be described in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) which is not so
described;
(xxviii) The Company is not and, after giving effect to the
Offering, will not be an "investment company" or entity "controlled" by an
"investment company," as such terms are defined in the Investment Company
Act;
(xxix) The Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida), relating to
doing business with the Government of Cuba or with any person or affiliate
located in Cuba;
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<PAGE>
(xxx) To the best of the Company's knowledge, no Unsubscribed
Shares or Direct Shares have been sold to any person listed in Section IM-
2110-1(b)(3)-(8) of the NASD's Conduct Rules; and
(xxxi) The Company has filed with the Commission all forms,
reports and other documents required to be filed by it under the Act or
the Exchange Act since January 1, 1997. Such forms, reports and other
documents, at the time filed, (a) did not contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading and (b) complied in all material respects
with the applicable requirements of the Act or the Exchange Act, as
applicable.
(b) Each Selling Stockholder severally represents and warrants to,
and agrees with, the Underwriters as follows:
(i) The Selling Stockholder has delivered certificates in
negotiable form for the shares of Common Stock to be sold by him or it upon
the exercise of the Rights and pursuant to this Agreement to the Company to
be placed in custody for delivery pursuant to the terms of the Rights Agent
Agreement and this Agreement. The shares represented by the certificates
so held in custody for the Selling Stockholder are subject to the interests
hereunder of the Underwriters, the Company and the Rights Agent under the
Rights Agent Agreement. The arrangements for custody and delivery of such
certificates are, to the extent provided hereunder, irrevocable, and are
not subject to termination by any acts of the Selling Stockholder, or by
operation of law;
(ii) The Selling Stockholder has the capacity and legal right to
enter into this Agreement and to sell, transfer and deliver the Shares
proposed to be sold by him or it hereunder and the shares of Common Stock
to be sold by him or it upon the exercise of the Rights. This Agreement
has been executed and delivered by the Selling Stockholder and, assuming
due authorization, execution and delivery by the other respective parties
hereto, constitutes the legal, valid and binding obligation of the Selling
Stockholder enforceable against the Selling Stockholder in accordance with
its terms, subject to the effect of general principles of equity (including
standards of materiality, good faith, fair dealing and reasonableness)
whether applied by a court of law or equity, and except as rights of
indemnity and contribution hereunder may be limited by applicable law,
statutory duties or public policy;
(iii) The execution and delivery of this Agreement and the
performance by the Selling Stockholder of his or its obligations hereunder
will not conflict with or result in a breach or violation of any of the
terms and provisions of, or constitute a default under (A) any charter
documents, including articles or certificates of incorporation, partnership
agreements or by-laws, of the Selling Stockholder, as amended to date, (B)
any lease, permit, license, contract, indenture, mortgage, deed of trust,
voting trust agreement, shareholders agreement, note, loan or credit
agreement or any other agreement or instrument to which the
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Selling Stockholder is a party or by which he or it is or may be bound or
to which any of his or its properties or assets (tangible or intangible) is
or may be subject, or any indebtedness, except to the extent that any such
conflict, breach, violation or default, individually or in the aggregate,
does not and would not interfere with the Offering or (C) any statute,
judgment, decree, order, rule or regulation applicable to the Selling
Stockholder or any of his activities or properties adopted or issued by any
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including those having jurisdiction over
environmental or similar matters), domestic or foreign, having jurisdiction
over the Selling Stockholder or any of his or its activities or properties.
No consent, approval, authorization or order of, or filing with, any
governmental agency or body or any court is required for the consummation
by the Selling Stockholder of the transactions contemplated herein, except
(A) such as may be required under the state securities or "Blue Sky" laws
of any jurisdiction or as may be required by the by-laws of the NASD in
connection with the purchase and distribution of the Shares by the
Underwriters, (B) any filing of the Prospectus pursuant to Rule 424(b) or
430A of the Rules and Regulations and, if the Registration Statement has
not been declared effective, an order of the Commission declaring the
Registration Statement effective under the Act, and (C) such other
approvals as have been obtained and remain in full force and effect;
(iv) The Selling Stockholder has, and on the Closing Date will
have, good and marketable title to the Shares proposed to be sold by the
Selling Stockholder hereunder and the shares of Common Stock to be sold
upon the exercise of the Rights, and none of such shares will be subject to
any Adverse Claim. Upon delivery of and payment for the Shares to be sold
by the Selling Stockholder hereunder, assuming that each of the
Underwriters is a Bona Fide Purchaser, the Underwriters will acquire good
and marketable title thereto free and clear of any liens, charges, claims,
preemptive rights, encumbrances, pledges, security interests, voting
trusts, defects or other like restrictions or other like material equity of
any kind whatsoever;
(v) To the best knowledge of the Selling Stockholder, the
Commission has not issued any order preventing or suspending the use of any
Preliminary Prospectus or any part thereof and, to the best knowledge of
the Selling Stockholder, no proceedings for a stop order have been
instituted or are pending or threatened.
(vi) The Selling Stockholder has not (a) made or caused to be
effected any transaction, directly or indirectly, designed to or that has
constituted or that might reasonably be expected to cause or result in
stabilization of the price of the Common Stock or the Rights, (b) taken or
will take, directly or indirectly, any action designed to or that has
constituted or that might reasonably be expected to cause or result in
manipulation of the price of the Common Stock or the Rights in violation of
Regulation M under the Exchange Act, or (c) failed to comply with the Act
or the Rules and Regulations in order to effect the transactions
contemplated hereby.
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<PAGE>
(vii) No facts have come to the Selling Stockholder's attention
that cause such Selling Stockholder to believe that (y) the Registration
Statement, at the time it was declared effective by the Commission,
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or (z) the Prospectus, as of its date or
the Closing Date, contained or contains an untrue statement of a material
fact or omitted or omits to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(c) Safeguard represents and warrants to, and agrees with, the
Underwriters as follows:
(i) To the best knowledge of Safeguard, the Commission has
not issued any order preventing or suspending the use of any Preliminary
Prospectus or any part thereof and, to the best knowledge of Safeguard, no
proceedings for a stop order have been instituted or are pending or
threatened. When any Preliminary Prospectus was filed with the Commission,
it contained all statements required to be stated therein in accordance
with, and complied in all material respects with the requirements of, the
Act and the Rules and Regulations except to the extent that such
Preliminary Prospectus did not contain any such required statements, or did
not so comply, in a manner corrected in the Prospectus. To the best
knowledge of Safeguard, when the Registration Statement (or any amendment
thereto) was (or is) declared effective, it (A) contained (or will contain)
all statements required to be stated therein in accordance with, and
complied in all material respects (or will comply in all material respects)
with the requirements of, the Act and the Rules and Regulations and (B) did
not or will not include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not
misleading. To the best knowledge of Safeguard, when the Prospectus or any
amendment or supplement thereto is filed pursuant to Rule 424(b) (or, if
the Prospectus or such amendment or supplement is not required to be so
filed, when the Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectus was or is declared
effective) and on the Closing Date and any Option Closing Date, the
Prospectus, as amended or supplemented at any such time, (A) contained or
will contain all statements required to be stated therein in accordance
with, and complied or will comply in all material respects with the
requirements of, the Act and the Rules and Regulations and (B) did not or
will not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
foregoing provisions of this paragraph (i) do not apply to the Provided
Information;
(ii) To the best knowledge of Safeguard, the descriptions in
the Registration Statement, the Prospectus and any amendment or supplement
thereto of
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<PAGE>
agreements, whether written or oral, and of other documents are
accurate and fairly present the information required to be shown with
respect thereto by Form S-1 under the Act. To the best knowledge of
Safeguard, there are no agreements, whether written or oral, or other
documents that are required by the Act or the Rules and Regulations to be
described in the Registration Statement or filed as exhibits to the
Registration Statement that are not described or filed as required;
(iii) Safeguard has not (a) made or caused to be effected any
transaction, directly or indirectly, designed to or that has constituted or
that might reasonably be expected to cause or result in stabilization of
the price of the Common Stock or the Rights, (b) taken or will take,
directly or indirectly, any action designed to or that has constituted or
that might reasonably be expected to cause or result in manipulation of the
price of the Common Stock or the Rights in violation of Regulation M under
the Exchange Act, or (c) failed to comply with the Act or the Rules and
Regulations in order to effect the transactions contemplated hereby; and
(iv) To the best of Safeguard's knowledge, no Unsubscribed
Shares or Direct Shares have been sold to any person listed in Section IM-
2110-1(b)(3)-(8) of the NASD's Conduct Rules.
3. Purchase, Sale and Delivery of the Shares.
-----------------------------------------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, and subject to the terms and conditions herein set
forth, the Company agrees to issue and the Company and the Selling Stockholders
agree, severally and not jointly, to sell to the Underwriters, and the
Underwriters agree, severally and not jointly, to purchase in the percentages
set forth in Schedule C hereto, all of the Excess Unsubscribed Shares at a price
of $5.00 per share.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained and upon not less than two business
days' notice from the Underwriters, for a period of 20 days after the Expiration
Date, Safeguard, Xerox and Andereck agree to sell to the Underwriters all or
part of up to 640,000 Option Shares at a purchase price of $5.00 per share for
the sole purpose of covering over-allotments that may be made in connection with
the offering and distribution of the shares of Common Stock. The Underwriters
may exercise their option to purchase all or any portion of the Option Shares
from the Company up to two times, provided that the aggregate number of Option
--------
Shares purchased by the Underwriters shall not exceed 640,000. Delivery of the
Option Shares shall be made concurrently with payment therefor. Option Shares
may be purchased by the Underwriters only for the purpose of covering over-
allotments that may be made in connection with the offering and distribution of
the shares of Common Stock. No Option Shares shall be delivered unless the
Excess Unsubscribed Shares (if any are purchased by the Underwriters) shall be
simultaneously delivered or shall theretofore have been delivered as herein
provided.
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<PAGE>
(c) Payment of the respective aggregate purchase prices of the Excess
Unsubscribed Shares purchased from the Company and the Selling Stockholders
shall be made by the Underwriters on the Closing Date by wire transfer payable
to or upon the order of the Company and the Selling Stockholders at the offices
of Tucker Anthony Incorporated at One Beacon Street, 6th Floor, Boston,
Massachusetts 02108, or at such other place as shall be agreed upon by the
Underwriters and the Company, upon delivery of certificates (in form and
substance satisfactory to the Underwriters) representing the Excess Unsubscribed
Shares to the Underwriters. Delivery and payment for the Excess Unsubscribed
Shares shall be made at the Closing. In addition, in the event that any or all
of the Option Shares are purchased by the Underwriters, payment of the purchase
price for, and delivery of certificates for, such Option Shares shall be made at
the above mentioned office or at such other place as shall be agreed upon by the
Underwriters and the Company, on each Option Closing Date as specified in the
notice from the Underwriters to the Company. Certificates for the Excess
Unsubscribed Shares and the Option Shares, if any, shall be in definitive, fully
registered form, shall bear no restrictive legends and shall be in such
denominations and registered in such names as the Underwriters may request in
writing at least two business days prior to the Closing Date or the relevant
Option Closing Date, as the case may be. The certificates for the Excess
Unsubscribed Shares and the Option Shares, if any, shall be made available to
the Underwriters at such office or such other place as the Underwriters may
designate for inspection, checking and packaging not later than 9:30 a.m., New
York City time, on the last business day prior to the Closing Date or the
relevant Option Closing Date, as the case may be.
(d) Delivery of certificates representing the shares of Common Stock
to be sold pursuant to the exercise of the Rights, and the payment of the
subscription price therefor to the Company and the Selling Stockholders shall be
made at the Closing on the Closing Date pursuant to the Rights Agent Agreement,
irrespective of whether or not any Excess Unsubscribed Shares are to be
purchased by the Underwriters at such Closing.
4. Public Offering of the Excess Unsubscribed Shares.
-------------------------------------------------
As soon after the Registration Statement becomes effective as the
Underwriters deem advisable, the Underwriters shall make the Offering.
5. Registration of Common Stock in Certain States.
----------------------------------------------
(a) On the basis of the representations, warranties and covenants
herein contained, but subject to the terms and conditions herein set forth, the
Underwriters will act (or at their expense, will cause another broker-dealer
registered in such state to act) as the agent of the Company and the Selling
Stockholders to effect the offering of the Rights and the sale of the shares of
Common Stock upon exercise thereof or pursuant to the Other Purchasers Standby
Purchase Agreements in the States of Arizona, Florida, Nebraska, New Hampshire,
New Jersey, New York, North Dakota and Texas,
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<PAGE>
such states being those states in which applicable state law requires that a
registered broker-dealer effect the offering of the Rights or the shares of
Common Stock purchasable upon exercise thereof or pursuant to the Other
Purchasers Standby Purchase Agreements. The Underwriters may delegate their
obligations under the immediately preceding sentence through another registered
broker-dealer satisfactory to them in states where the Underwriters are not
registered as such. The Underwriters shall not be liable under this Section
-------
5(a), except for gross negligence, lack of good faith and for their obligations
- ----
expressly assumed hereunder.
(b) The Company will deliver to the Underwriters, on or before the
day the Registration Statement becomes effective, a "Blue Sky Memorandum"
(herein so called), prepared by Morgan, Lewis & Bockius LLP relating to the
securities or Blue Sky laws of any jurisdictions in which the transfer of the
Rights or the offer and sale of the Common Stock is required to be qualified or
registered, which will set forth the circumstances under which said transfer or
offers and sales may be made and advising that the appropriate action, if any,
will be taken in each of such jurisdictions so as to permit the transfer of the
Rights and the offer and sale of the Common Stock (whether upon or in connection
with the exercise of Rights, as part of the public offering of the Shares by the
Underwriters or pursuant to the Other Purchasers Standby Purchase Agreements) to
the persons resident in the jurisdictions indicated in such survey. Such Blue
Sky Memorandum may be based upon qualification of the Rights and the Common
Stock as necessary with appropriate persons in such jurisdictions and an
examination of the statutes and regulations, if any, of such jurisdictions as
reported in standard compilations and upon interpretive advice obtained from
representatives of certain securities commissions and such local counsel as may
be necessary. Such Blue Sky Memorandum will be furnished only for the
Underwriters' general information and guidance rather than as an opinion of
counsel with regard to the laws of the jurisdictions referred to therein.
6. Covenants of the Company and the Selling Stockholders.
-----------------------------------------------------
(a) The Company covenants and agrees with the Underwriters as
follows:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto, to become effective as promptly as
possible. Unless required by law, the Company will not file with the
Commission the prospectus or amendment referred to in the second sentence
of Section 2(a)(i) hereof, any amendment or supplement to such prospectus,
---------------
any amendment to the Registration Statement, or any document under the
Exchange Act before termination of the offering of the Shares by the
Underwriters of which the Underwriters shall not previously have been
advised and furnished with a copy, or to which the Underwriters shall have
reasonably objected by notice to the Company in writing after having been
provided a copy thereof, or which is not in compliance with the Act, the
Exchange Act or the Rules and Regulations. During the time when a
prospectus relating to the Shares is required to be delivered under the
Act, the Company will comply with all requirements imposed upon it by the
Act and the Rules and Regulations to the extent necessary to permit the
continuance of sales of or dealings in the Shares in accordance with the
provisions hereof and of the
-22-
<PAGE>
Prospectus, as amended or supplemented. The Company will prepare and file
with the Commission, promptly upon the reasonable request by the
Underwriters or Underwriters' Counsel, any amendments to the Registration
Statement or amendments or supplements to the Prospectus that may be
necessary or advisable in connection with the distribution of the Shares by
the Underwriters, and will use its best efforts to cause the same to be
filed with the Commission as promptly as possible;
(ii) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Underwriters, with a confirmation in
writing, of (A) the time when the Registration Statement or any amendment
thereto has been filed or declared effective or the Prospectus or any
amendment or supplement thereto has been filed, (B) the issuance by the
Commission of any stop order, or of the initiation or threatening of any
proceeding, suspending the effectiveness of the Registration Statement or
any amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, (C) the issuance by any state securities commission of any notice
of any proceedings for the suspension of the qualification of the Shares
for offering or sale in any jurisdiction or of the initiation, or the
threatening, of any proceeding for that purpose, (D) the receipt of any
comments from the Commission, and (E) any request by the Commission for any
amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for additional information. The Company will use its
best efforts to prevent the issuance of any such order or the imposition of
any such suspension and, if any such order is issued or suspension is
imposed, to obtain the withdrawal thereof as promptly as possible;
(iii) If required, the Company will file the Prospectus and any
amendment or supplement thereto with the Commission in the manner and
within the time period required by Rule 424(b) and Rule 430A(a)(3) of the
Rules and Regulations;
(iv) The Company will arrange for the qualification of the
shares of Common Stock for offering and sale under the securities or "Blue
Sky" laws of such jurisdictions in which recipients of Rights and the Other
Purchasers are resident and such jurisdictions as the Underwriters may
reasonably designate and will continue such qualifications in effect for as
long as may be necessary to complete the distribution of the shares of
Common Stock, provided, however, that in connection therewith the Company
-------- -------
shall not be required to qualify as a foreign corporation or to execute a
general consent to service of process in any jurisdiction;
(v) If, at any time when a prospectus relating to the Shares
is required to be delivered under the Act, any event occurs as a result of
which, in the opinion of the Company or counsel for the Company, the
Prospectus, as then amended or supplemented, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading, or if it
is otherwise necessary
-23-
<PAGE>
at any time to amend or supplement the Prospectus to comply with the Act or
the Rules and Regulations, the Company will promptly notify the
Underwriters thereof and, subject to Section 6(a)(i) hereof, prepare and
---------------
file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance. If, at any
time when a prospectus relating to the Shares is required to be delivered
under the Act, any event occurs as a result of which, in the opinion of the
Underwriters or Underwriters' Counsel, the Prospectus, as then amended or
supplemented, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, the Underwriters will promptly notify
the Company thereof and the Company will, subject to Section 6(a)(i)
---------------
hereof, prepare and file with the Commission, at the Company's expense, an
amendment to the Registration Statement or an amendment or supplement to
the Prospectus that corrects such statement or omission or effects such
compliance. The Company will furnish to the Underwriters and dealers (whose
names and addresses shall be furnished to the Company by the Underwriters)
to which Shares may have been sold on behalf of the Underwriters and to any
other dealers upon request, a reasonable number of copies of any amendment
or supplement prepared pursuant to this paragraph (v);
(vi) The Company will furnish to each of the Underwriters and
to Underwriters' Counsel, without charge, a signed copy of the registration
statement originally filed with respect to the Shares and each amendment
thereto. So long as the Underwriters or any dealer is required by the Act
or the Rules and Regulations to deliver a prospectus, the Company will also
furnish as many copies of each Preliminary Prospectus or the Prospectus or
any amendment or supplement thereto as the Underwriters may reasonably
request.
(vii) As soon as practicable after the effective date of the
Registration Statement, the Company will make generally available to its
security holders, in the manner specified in Rule 158(b) of the Rules and
Regulations, and to the Underwriters an earnings statement that will be in
the detail required by, and will otherwise comply with, the provisions of
Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations;
(viii) For a period of five years following the date hereof, the
Company will furnish to its stockholders, as soon as practicable, annual
reports (including financial statements audited by independent public
accountants) and will deliver to the Underwriters unaudited quarterly
reports of earnings (through delivery of the Company's quarterly reports
filed with the Commission on Form 10-Q or Form 10-QSB) and the following:
(A) concurrently with furnishing quarterly reports, if
any, to the stockholders, statements of income of the Company for each
quarter in the form furnished to the Company's stockholders;
-24-
<PAGE>
(B) concurrently with furnishing such annual reports to
its stockholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations,
stockholders equity, and cash flows of the Company for such fiscal
year, accompanied by a copy of the certificate thereon of independent
public accountants;
(C) as soon as they are available, copies of all
reports (financial or other) mailed to its stockholders;
(D) as soon as they are available, copies of all
reports (other than preliminary proxy materials) and financial
statements furnished to or filed with the Commission, the NASD or
Nasdaq which are available to the public;
(E) as soon as they are available every press release
and every material news item or article of interest to the financial
community in respect of the Company or its affairs that is released or
prepared by the Company; and
(F) any additional information of a public nature
concerning the Company that the Underwriters may reasonably request
from time to time;
(ix) The Company will maintain a Transfer Agent and Registrar
for the shares of Common Stock. Effective as of the Closing Date, the
Company will cause the Transfer Agent for the shares of Common Stock to
make appropriate "stop transfer" restrictions in its records relating to
the certificates representing all shares of Common Stock subject to
restrictions under the agreements described in Sections 2(a)(xxiv), 2(b)(i)
----------------------------
and 6(b)(i) hereof;
-----------
(x) During the period commencing on the date the Registration
Statement is declared effective by the Commission and ending 180 days after
the Expiration Date, the Company, will not, without the prior written
consent of the Underwriters, (A) directly or indirectly, transfer, sell,
offer for sale, contract for sale, grant any option for the sale of, or
otherwise dispose of (or announce any transfer, sale, offer for sale,
contract for sale, grant of any option for sale of, or other disposition
of) any shares of Common Stock, or other securities convertible into, or
exercisable or exchangeable for, shares of Common Stock (except as
contemplated by this Agreement) or (B) file any registration statement
relating to any such securities with the Commission or any other authority
except as contemplated herein, provided, however, that (1) the Company may
-------- -------
grant or issue securities pursuant to any employee stock option plan or
stock purchase plan or outstanding stock options described in the
Prospectus and, commencing after the Closing Date, may file a registration
statement on Form S-8 with respect to such plans and (2) the Company may
issue shares of Common Stock, or other securities convertible into, or
exercisable or exchangeable for shares of Common Stock, as consideration
for any acquisition by the Company so long as the party being issued such
securities signs an agreement, acceptable in form
-25-
<PAGE>
and substance to the Underwriters, that such party will not transfer, sell,
offer for sale, contract to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or
exchangeable for shares of Common Stock owned by such party or with respect
to which such party has the power of disposition during a period commencing
on the date of issuance of such securities and ending 180 days following
the Expiration Date;
(xi) The Company will apply the net proceeds from the sale of
the Common Stock sold by it in the manner set forth under "USE OF PROCEEDS"
in the Prospectus. Except as described in the Prospectus, no portion of the
net proceeds will be used directly or indirectly to acquire any securities
issued by the Company;
(xii) The Company will furnish to the Underwriters as early as
practicable prior to each of the date hereof, the Closing Date and each
Option Closing Date, if any, but no later than two full business days prior
thereto, a copy of the latest available unaudited interim financial
statements of the Company (which in each case shall not be earlier than the
last day of the preceding month, unless such month-end shall be less than
three business days prior to the date such statements are to be delivered)
that have been read by the Company's independent public accountants, as
stated in their letter to be furnished pursuant to Section 8(j) hereof;
------------
(xiii) The Company will cause the Shares and the Rights to be
approved for quotation on the Nasdaq National Market and will use its
reasonable commercial efforts to maintain such approvals;
(xiv) The Company will file and cause to become effective prior
to the Closing Date a registration statement with respect to the Common
Stock pursuant to Section 12(g) of the Exchange Act and will use its best
efforts to maintain such registration;
(xv) The Company will apply the net proceeds from the sale of
the shares of Common Stock sold by it and conduct its operations in a
manner that will not subject it to registration as an investment company
under the Investment Company Act of 1940, as amended; and
(xvi) The Company will furnish, without charge, to the
Underwriters and Underwriters' Counsel within four months of the Closing
Date such number of closing binders as the Underwriters and Underwriters'
Counsel may reasonably request.
(b) Each Selling Stockholder covenants and agrees with the
Underwriters as follows:
(i) During the period commencing on the date the Registration
Statement is declared effective by the Commission and ending 180 days after
the Expiration Date, the Selling Stockholder will not, without the prior
written consent of the Underwriters,
-26-
<PAGE>
directly or indirectly, transfer, sell, offer for sale, contract for sale,
grant any option for the sale of or otherwise dispose of any shares of
Common Stock or other securities convertible into, or exercisable or
exchangeable for, shares of Common Stock except as contemplated in this
Agreement;
(ii) The Selling Stockholder will pay all applicable state
transfer taxes, if any, involved in the transfer to the Underwriters of the
Shares to be purchased by the Underwriters from such Selling Stockholder;
and
(iii) The Company and the Selling Stockholders covenant and
agree with each other and covenant and agree with the Underwriters that the
Other Purchasers Standby Shares to be sold and the 560,000 shares of Common
Stock that are expected to be sold to the Musser Group upon exercise of the
Musser Rights shall be deemed to be sold by the Company.
(c) Safeguard covenants and agrees with the Underwriters that during
the period commencing on the date the Registration Statement is declared
effective by the Commission and ending 180 days after the Expiration Date,
Safeguard will not, without the prior written consent of the Underwriters,
directly or indirectly, transfer, sell, offer for sale, contract for sale, grant
any option for the sale of or otherwise dispose of any shares of Common Stock or
other securities convertible into, or exercisable or exchangeable for, shares of
Common Stock except (A) as contemplated in this Agreement or (B) pursuant to
grants or sales of such shares to employees of Safeguard or its subsidiaries,
provided that such transferees agree to be bound by the restrictions contained
in this paragraph.
7. Payment of Expenses; Fees.
-------------------------
(a) As compensation to the Underwriters for their services in
connection with the transactions contemplated by this Agreement and their
commitment hereunder, the Company and the Selling Stockholders hereby agree,
jointly and severally, to pay to the Underwriters, by wire transfer, on the
seventh business day following the Expiration Date, an amount equal to the sum
of (i) 3% of the Exercise Price for each share of Common Stock subject to
Rights, (ii) 3% of the subscription price for each Direct Share and each
Undistributed Share sold to the Direct Purchasers, and (iii) an additional fee
of 4% of the Exercise Price for each share (other than the Option Shares)
purchased by the Underwriters pursuant to Section 3(a) of this Agreement or upon
------------
the exercise of Rights by the Underwriters if such Rights were purchased by the
Underwriters at a time when the Common Stock was trading (on a "when-issued"
basis) at a per share price of less than $6.00 or with the prior acknowledgement
of Safeguard that the Underwriters would be entitled to receive such
compensation pursuant to the exercise of such Rights. As compensation to the
Underwriters for their commitment hereunder, the Company hereby agrees to pay
the Underwriters, by wire transfer, on each Option Closing Date an amount equal
to 7% of the Exercise Price for each Option Share purchased on such date by the
Underwriters. As additional compensation to the Underwriters for their
commitment hereunder, the Company shall reimburse the Underwriters, by wire
transfer on the
-27-
<PAGE>
sixth business day following the Expiration Date, for a non-accountable expense
allowance of (i) $200,000 if, on the Expiration Date, the closing price for the
--------
Common Stock was trading (on a "when-issued" basis) at a per share price of less
than $7.25, (ii) $100,000 if, on the Expiration Date, the closing price for the
----- --------
Common Stock was trading (on a "when-issued basis) at a per share price equal to
or greater than $7.25 but less than or equal to $8.25 or (iii) no expense
----- -----
allowance if, on the Expiration Date, the closing price for the Common Stock was
trading (on a "when-issued" basis) at a per share price greater than $8.25.
-----
(b) The Company hereby agrees to pay all expenses and fees incident to
the performance of the obligations by the Company and the Selling Stockholders
under this Agreement, including all expenses and fees of the Company and the
Selling Stockholders incurred in connection with or by (i) the engagement of
accountants, counsel for the Company and the Selling Stockholders, the Rights
Agent and the Transfer Agent and Registrar for the Common Stock, (ii)
preparation, duplication, printing, filing and distribution of the registration
statement originally filed with respect to the Shares and any amendments
thereto, any Preliminary Prospectus and the Prospectus and any amendments and
supplements thereto and related documents used in connection with the Offering,
including in each case the cost of all copies supplied to the Underwriters in
quantities as hereinabove stated, (iii) the printing, engraving, issuance and
delivery of certificates representing the Rights and the Shares, (iv) the
qualification of the Shares under state securities or "Blue Sky" laws, including
filing fees, costs of printing and mailing of a "Preliminary Blue Sky
Memorandum" and "Final Blue Sky Memorandum" and disbursements and fees of
Underwriters' Counsel in connection with the review of such materials (which
shall be paid at the Closing), (v) the approval of the Common Stock and Rights
for quotation on the Nasdaq National Market, (vi) the filing fees of the
Underwriters in connection with any filings required to be made with the NASD,
(vii) travel and out of pocket expenses of the Company in connection with
meetings with prospective investors in the Shares (other than such expenses as
shall have been specifically approved in writing by the Underwriters to be paid
for by the Underwriters), and (viii) any expenses incurred by the Company in
connection with a "road show" presentation to potential investors.
(c) If this Agreement is terminated by the Underwriters in accordance
with the provisions of Section 8, Sections 12(a)(ii), (a)(vii) or (a)(viii), or
--------- -----------------------------------------
Section 13, the Company agrees to reimburse and indemnify the Underwriters for
- ----------
all of their reasonable accountable out-of-pocket expenses, including the
reasonable fees and disbursements of Underwriters' Counsel and any of the state
securities, "Blue Sky" and NASD fees and expenses identified in Sections
--------
7(b)(iv) and 7(b)(vi) above, that shall have been incurred by them in connection
- ---------------------
with the proposed purchase and sale of the Shares.
8. Conditions of the Underwriters' Obligations.
-------------------------------------------
The obligations of the Underwriters to purchase and pay for the Shares
shall be subject, in their sole discretion, to the accuracy of the
representations and warranties of the Company and the Selling Stockholders
herein as of the date hereof and as of the Closing Date, as if they had been
made on and as of the Closing Date, to the accuracy on and as of the Closing
Date of the
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<PAGE>
statements of the officers of the Company and the Selling Stockholders made in
certificates delivered pursuant to the provisions hereof, to the performance by
the Company and the Selling Stockholders on and as of the Closing Date of their
respective covenants and obligations hereunder, and to the following further
conditions:
(a) If the Registration Statement or any amendment thereto filed prior
to the Closing Date has not been declared effective as of the time of execution
hereof, the Registration Statement or such amendment shall have been declared
effective not later than the first full business day next following the date
hereof or such later date and time as shall have been consented to in writing by
the Underwriters. If required, the Prospectus shall have been timely filed with
the Commission in accordance with Rule 424(b) of the Rules and Regulations. If
required, any amendment or supplement to the Prospectus shall have been filed in
accordance with Rule 424(c) under the Act. No stop order suspending the
effectiveness of the Registration Statement or any amendment thereto shall have
been issued and no proceedings for that purpose shall have been instituted or,
to the knowledge of the Company, the Selling Stockholders or the Underwriters,
shall be contemplated by the Commission. The Company shall have complied, to
the reasonable satisfaction of the Underwriters and Underwriters' Counsel, with
any request of the Commission for additional information (to be included in the
Registration Statement, the Prospectus or otherwise).
(b) The Underwriters shall not have advised the Company or any of the
Selling Stockholders that, in the opinion of the Underwriters or Underwriters'
Counsel, (i) the Registration Statement, or any amendment thereto, includes an
untrue statement of a material fact or omits to state a material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading or (ii) the Prospectus, or any amendment or supplement
thereto, includes an untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(c) The Underwriters shall have received from Underwriters' Counsel an
opinion dated the Closing Date, with respect to the issuance and sale of the
Shares, the Registration Statement, the Prospectus and such other related
matters as the Underwriters reasonably may request. Underwriters' Counsel shall
have received from the Company and the Selling Stockholders such papers and
information as they may request to enable them to review or pass upon such
matters or in order to evidence the accuracy, completeness or satisfaction of
any of the representations, warranties, or covenants of the Company or any of
the Selling Stockholders contained herein.
(d) The Underwriters shall have received from Crouch & Hallett, LLP,
counsel to the Company, an opinion, on or prior to the date Rights certificates
and Prospectuses are first mailed to Safeguard Shareholders and on the Closing
Date, dated the respective dates thereof and in form and substance satisfactory
to Underwriters' Counsel, to the effect that:
(i) The Company and each of the Subsidiaries are duly
incorporated, validly existing and in good standing under the laws of their
respective jurisdictions of
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organization and are duly qualified to transact business as foreign
corporations and are in good standing in each jurisdiction in which the
Company has represented to such counsel that they own or lease property;
(ii) The Company and each of the Subsidiaries have all requisite
corporate power and authority necessary or required to own or lease their
respective properties and conduct its businesses as described in the
Registration Statement and the Prospectus;
(iii) The Company has all requisite power and authority
(corporate and other) to enter into this Agreement, the Rights Agent
Agreement and the Other Purchasers Standby Purchase Agreements and to
consummate the transactions provided for herein and therein; and this
Agreement, the Other Purchasers Standby Purchase Agreements and the Rights
Agent Agreement have each been duly authorized, executed and delivered by
the Company. Each of this Agreement, assuming due authorization, execution
and delivery by the Underwriters, and each of the Other Purchasers Standby
Purchase Agreements, and the Rights Agent Agreement, assuming due
authorization, execution and delivery by the parties thereto other than the
Company, constitutes the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium, arrangement or similar laws affecting
creditors' rights generally or by general principles of equity (including
standards of materiality, good faith, fair dealing and reasonableness)
whether applied by a court of law or equity, and except as rights to
indemnity and contribution hereunder may be limited by applicable law,
statutory duties or public policy (provided that as of the first date of
the opinion only, such opinion need not express any opinion set forth above
with respect to the Other Purchaser Standby Purchase Agreements that have
not theretofore been executed and delivered). The Company's execution and
delivery of this Agreement, the Other Purchasers Standby Purchase
Agreements and the Rights Agent Agreement, its performance of its
obligations hereunder and thereunder and the consummation of the
transactions contemplated hereby and thereby do not and will not conflict
with or result in a breach or violation of any of the terms or provisions
of, or constitute a default under, or result in the creation or imposition
of any liens, charges, claims, encumbrances, pledges, security interests,
defects or other like restrictions or equities of any kind whatsoever upon,
any right, property or asset (tangible or intangible) of the Company or any
of the Subsidiaries pursuant to the terms of (A) the charter or bylaws,
each as amended through the date of the opinion, of the Company and each of
the Subsidiaries, (B) any material lease, permit, license, contract,
indenture, mortgage, deed of trust, voting trust agreement, stockholders
agreement, note, loan or credit agreement or any other agreement or
instrument known to such counsel to which the Company or any of the
Subsidiaries is a party or by which any of them is or may be bound or to
which any of their respective properties or assets (tangible or intangible)
is or may be subject, or any indebtedness, except that such counsel need
not express an opinion with respect to any violation based upon any
covenant of a financial or numerical nature or that requires arithmetic
computation and such
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counsel has not otherwise known of or had reason to expect the occurrence
of such default, or (C) to the knowledge of Company counsel, any statute,
rule, regulation, judgment, decree or order applicable to the Company or
any of the Subsidiaries or any of their respective activities or properties
adopted or issued by an arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including those
having jurisdiction over environmental or similar matters), domestic or
foreign, having jurisdiction over the Company or any of the Subsidiaries or
any of their respective activities or properties (other than such as may be
required under state securities or "Blue Sky" laws and such as may be
required by the by-laws and rules of the NASD in connection with the
purchase and distribution of the Shares by the Underwriters);
(iv) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or, to such counsel's knowledge, any
court is required in connection with the issuance of the shares of Common
Stock to be sold by the Company, the Company's performance of its
obligations hereunder, the Offering, or the consummation by the Company of
the other transactions contemplated hereby, except such as may be required
under the state securities or "Blue Sky" laws of any jurisdiction or as may
be required by the by-laws and rules of the NASD in connection with the
purchase and distribution of the Shares by the Underwriters and except such
other approvals as have been obtained and remain in full force and effect.
Upon the effectiveness of the Registration Statement, the Common Stock will
be registered pursuant to Section 12(g) of the Exchange Act, and will be
included in the Nasdaq National Market;
(v) At the date or dates indicated in the Prospectus, the
authorized, issued and outstanding capital stock of the Company was as set
forth therein, and conformed as to legal matters, to the extent that it
constitutes matters of law or legal conclusions, to the description thereof
contained therein under the captions "CAPITALIZATION" and "DESCRIPTION OF
CAPITAL STOCK." All of the issued shares of Common Stock of the Company
(including the Shares sold by the Selling Stockholders) have been duly
authorized and validly issued, and are fully paid and non-assessable; the
holders thereof are not subject to personal liabilities solely by reason of
holding such shares; and none of such shares have been issued in violation
of the preemptive rights of any security holders of the Company known to
Company counsel. The shares of Common Stock issuable to Safeguard, TL II
and Offshore upon redemption of the Class B Common Stock of the Company
have been duly authorized and reserved for issuance, and upon issuance and
delivery against payment therefor will be validly issued, fully paid and
nonassessable. The Shares to be sold by the Company have been duly
authorized and, when paid for in accordance herewith, will be validly
issued, fully paid and non-assessable, and with no personal liability
resulting solely from the ownership thereof. Upon the issuance and
delivery pursuant to this Agreement of the Shares to be sold by the Company
to the Underwriters, assuming the Underwriters do not have knowledge of any
Adverse Claim, the Underwriters will acquire good and marketable title to
such Shares free and clear of any liens, charges, claims, encumbrances,
pledges, security interests, defects or other like restrictions or like
equities of any kind whatsoever.
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Except as described in the Prospectus, there are no preemptive or other
rights to subscribe for or to purchase, nor any restriction upon the voting
or transfer of, any shares of Common Stock pursuant to the Company's
Certificate of Incorporation or By-Laws, each as amended to date, or
pursuant to any agreement among stockholders to which the Company is a
party or of which it has knowledge, and the Shares to be sold by the
Company are not subject to any preemptive or other similar rights of any
security holder. The Company is not a party to or bound by any instrument,
agreement or other arrangement known to such counsel providing for it to
issue any capital stock, rights, warrants, options or other securities,
except for this Agreement and as described in the Prospectus. Except as
described in the Prospectus, no holder of any securities of the Company or
of any options, warrants or other convertible or exchangeable securities of
the Company which are exercisable for or convertible or exchangeable for
securities of the Company has any right (which has not been waived) to
include any securities issued by the Company in the Registration Statement
or any registration statement to be filed by the Company within the period
commencing on the date the Registration Statement is declared effective by
the Commission and ending 180 days after the Expiration Date or to require
the Company to file a registration statement under the Act during such
period. Based on the form of specimen certificate provided to such counsel,
the certificates representing the Shares are in due and proper form;
(vi) The Registration Statement has become effective under the
Act. Any required filing of the Prospectus pursuant to Rule 424(b) and
430A(a)(3) of the Rules and Regulations has been made in accordance with
the time period required thereby. To such counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement has been
issued, and no proceedings for that purpose have been instituted or are
pending or threatened, by the Commission;
(vii) At the time the Registration Statement was declared
effective by the Commission, the Registration Statement and the Prospectus
and any amendment or supplement thereto (other than the financial
statements, and notes thereto, the financial schedules, and the other
financial and statistical data included in the Registration Statement or
the Prospectus or omitted therefrom, as to which such counsel need express
no opinion) complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations;
(viii) The statements contained in the Prospectus under the
captions "PROSPECTUS SUMMARY," "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCAL CONDITION AND RESULTS OF OPERATION," "BUSINESS,"
"MANAGEMENT" AND "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS," are
accurate, complete and fair insofar as they relate to contracts and
documents described therein. To such counsel's knowledge, there are no
contracts or other documents of a character required to be filed as
exhibits to the Registration Statement or required to be described in the
Registration Statement or the Prospectus that were not filed or disclosed
as required;
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(ix) Except as disclosed in the Prospectus, to such counsel's
knowledge, there is not pending or threatened or contemplated against the
Company, or involving the properties or business of the Company, any
action, suit, proceeding, inquiry, investigation, litigation or
governmental proceeding (including those having jurisdiction over
environmental or similar matters), domestic or foreign, that (A) is
required to be disclosed in the Registration Statement and is not so
disclosed, (B) questions the validity of the capital stock of the Company
or the validity or enforceability of this Agreement, (C) questions the
validity of any action taken or to be taken by the Company pursuant to or
in connection with this Agreement, or (D) could materially adversely effect
the present or prospective ability of the Company to perform its
obligations under this Agreement or result in a Material Adverse Effect;
(x) The Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act, nor, by receipt of the proceeds from its sale by it
of the Shares pursuant to this Agreement, will the Company become or be
deemed to be an "investment company" under such Act;
(xi) No transfer taxes are required to be paid in connection
with the sale and delivery of the Common Stock by the Company to the
Underwriters hereunder;
(xii) The certificates evidencing the Rights to be distributed
to the Safeguard Shareholders and the shares of Common Stock to be
delivered hereunder are in due and proper form under Delaware law;
(xiii) All of the Rights have been duly authorized and validly
issued, and, when issued and distributed as set forth in the Prospectus,
will be legally issued and valid and binding obligations of the Company
having the rights summarized in the Prospectus; and none of such Rights
will have been issued in violation of the preemptive rights of any security
holders of the Company arising as a matter of law or under or pursuant to
the Company's Certificate of Incorporation, as amended, the Company's By-
Laws, as amended, or any agreement or instrument to which the Company is a
party or by which it is bound.
In addition, such opinion shall contain statements substantially
to the following effect:
In the course of the preparation by the Company and its
counsel of the Registration Statement and the Prospectus, such
counsel attended conferences with certain of the officers of, and
the independent public accountants for, the Company, at which the
Registration Statement and the Prospectus were discussed (some of
which were attended by representatives of the Underwriters).
Between the date of effectiveness of the Registration Statement
and the Closing Date, such counsel attended (if applicable)
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additional conferences with certain of the officers of, and the
independent public accountants for, the Company, at which the
contents of the Registration Statement and the Prospectus were
discussed. Given the limitations inherent in the independent
verification of factual matters and the character of
determinations involved in the registration process, such counsel
is not passing upon and does not assume any responsibility for
the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus (other
than as set forth in the first sentence of paragraph (v) and as
set forth in paragraph (viii) above). Subject to the foregoing
and on the basis of the information such counsel gained in the
performance of the services referred to above, including
information obtained from officers and other representatives of
the Company, no facts have come to such counsel's attention that
cause such counsel to believe (except that such counsel need not
express any opinion or belief with respect to the financial
statements, schedule and the notes thereto and other financial
and statistical data included therein) that (y) the Registration
Statement, at the time it was declared effective by the
Commission, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (z)
the Prospectus, as of its date or the Closing Date, contained or
contains an untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading,
provided such counsel need not express any belief as to the
contents of the eighth paragraph under the heading "UNDERWRITING"
in the Prospectus.
In rendering such opinions, such counsel may rely as to matters
of fact, to the extent they deem proper, on the representations and warranties
of the Company and the Selling Stockholders contained in this Agreement and on
certificates and written statements of the Company or responsible officers of
the Company and certificates or other written statements of officers of
departments of various jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company, provided that copies of any
--------
such statements or certificates shall be delivered to Underwriters' Counsel if
requested.
References to the Prospectus and the Registration Statement in this
Section shall include any amendment or supplement thereto at the date of such
opinion.
(e) The Underwriters shall have received from Crouch & Hallett, LLP,
counsel to the Other Selling Stockholders, and from company counsel with respect
to Xerox, an opinion, on or prior to the date Rights certificates and
Prospectuses are first mailed to Safeguard Shareholders and on the
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Closing Date, dated the respective dates thereof and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) Each Other Selling Stockholder has the legal right and
power to enter into this Agreement and each Other Selling Stockholder has
the requisite capacity and legal right to sell, transfer and deliver
hereunder the Shares proposed to be sold hereunder. This Agreement has been
executed and delivered by each of the Other Selling Stockholders. This
Agreement, assuming due authorization, execution and delivery by the
Underwriters constitutes the legal, valid, and binding obligations of each
Other Selling Stockholder enforceable against each Other Selling
Stockholder in accordance with its terms, subject to the effect of general
principles of equity (including standards of materiality, good faith, fair
dealing and reasonableness) whether applied by a court of law or equity and
except as rights to indemnity and contribution hereunder or thereunder may
be limited by applicable law, statutory duties or public policy;
(ii) The execution and delivery of this Agreement, the
performance by each Other Selling Stockholder of its obligations hereunder
will not conflict with or result in a breach or violation of any of the
terms and provisions of, or constitute a default under, or result in the
creation or imposition of any liens, charges, claims, encumbrances,
pledges, security interests, defects or other like restrictions or equities
of any kind whatsoever upon, any right, property or (tangible or
intangible) of each of the Other Selling Stockholders pursuant to the terms
of (A) any material lease, permit, license, contract, indenture, mortgage,
deed of trust, voting trust agreements, stockholders agreement, note, loan
or credit agreement (including any related to indebtedness) or any other
agreement or instrument known to such counsel to which any Other Selling
Stockholder is a party or by which he or it is or may be bound or to which
any of his or its respective properties or assets (tangible or intangible)
is or may be subject, or (B) any statute, judgment, decree, order, rule or
regulation, known to such counsel, applicable to any Other Selling
Stockholder or any of his or its respective activities or properties
adopted or issued by any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including those
having jurisdiction over environmental or similar matters), having
jurisdiction over any Other Selling Stockholder or any of his or its
respective activities or properties, in each case except where such breach,
violation or default would not (i) affect the enforceability of this
Agreement, or (ii) affect the Offering or the sale of the Common Stock
contemplated hereby. To such counsel's knowledge, no consent, approval,
authorization or order of, or filing with, any governmental agency or body
or any court is required for the consummation by any Other Selling
Stockholder of the transactions contemplated herein, except such as may be
required under the state securities or "Blue Sky" laws of any jurisdiction
or as may be required by the by-laws and rules of the NASD in connection
with the purchase and distribution of the Shares by the Underwriters and
except such other approvals as have been obtained and remain in full force
and effect;
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(iii) To such counsel's knowledge, each Other Selling
Stockholder has title to the Shares proposed to be sold by such Other
Selling Stockholder hereunder free of any adverse claims and upon delivery
of and payment for such Shares hereunder, assuming that each Underwriter
does not have any notice of an adverse claim, such Underwriter will be a
protected purchaser (as defined in Section 8-303 of the Uniform Commercial
Code as in effect in the State of Delaware).
In rendering such opinions, such counsel may rely as to matters
of fact, to the extent they deem proper, on the representations and warranties
of the Company and the Other Selling Stockholders contained in this Agreement
and on certificates and written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company, provided that copies of any such statements or
--------
certificates shall be delivered to Underwriters' Counsel if requested.
References to the Prospectus and the Registration Statement in this
Section shall include any amendment or supplement thereto at the date of such
opinion.
(f) The Underwriters shall have received from Morgan, Lewis & Bockius
LLP, counsel to the Safeguard Stockholders, an opinion, on or prior to the date
Rights certificates and Prospectuses are first mailed to Safeguard Shareholders
and on the Closing Date, dated the respective dates thereof and in form and
substance satisfactory to Underwriters' Counsel, to the effect that:
(i) Each Safeguard Stockholder has the legal right and power
to enter into this Agreement and each Safeguard Stockholder has the
requisite capacity and legal right to sell, transfer and deliver hereunder
the Shares proposed to be sold hereunder. This Agreement has been executed
and delivered by each of the Safeguard Stockholders. This Agreement,
assuming due authorization, execution and delivery by the Underwriters
constitutes the legal, valid, and binding obligations of each Safeguard
Stockholder enforceable against each Safeguard Stockholder in accordance
with its terms, subject to the effect of general principles of equity
(including standards of materiality, good faith, fair
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dealing and reasonableness) whether applied by a court of law or equity and
except as rights to indemnity and contribution hereunder or thereunder may
be limited by applicable law, statutory duties or public policy;
(ii) To such counsel's knowledge, the execution and delivery of
this Agreement, the performance by each Safeguard Stockholder of its
obligations hereunder will not conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a default
under, or result in the creation or imposition of any liens, charges,
claims, encumbrances, pledges, security interests, defects or other like
restrictions or equities of any kind whatsoever upon, any right, property
or (tangible or intangible) of each of the Safeguard Stockholders pursuant
to the terms of (A) any material lease, permit, license, contract,
indenture, mortgage, deed of trust, voting trust agreements, stockholders
agreement, note, loan or credit agreement (including any related to
indebtedness) or any other agreement or instrument to which any Safeguard
Stockholder is a party or by which he or it is or may be bound or to which
any of his or its respective properties or assets (tangible or intangible)
is or may be subject, or (B) any statute, judgment, decree, order, rule or
regulation, known to such counsel, applicable to any Safeguard Stockholder
or any of his or its respective activities or properties adopted or issued
by any arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including those having jurisdiction over
environmental or similar matters), having jurisdiction over any Safeguard
Stockholder or any of his or its respective activities or properties, in
each case except where such breach, violation or default would not (i)
affect the enforceability of this Agreement, or (ii) affect the Offering or
the sale of the Common Stock contemplated hereby. To such counsel's
knowledge, no consent, approval, authorization or order of, or filing with,
any governmental agency or body or any court is required for the
consummation by any Safeguard Stockholder of the transactions contemplated
herein, except such as may be required under the state securities or "Blue
Sky" laws of any jurisdiction or as may be required by the by-laws and
rules of the NASD in connection with the purchase and distribution of the
Shares by the Underwriters and except such other approvals as have been
obtained and remain in full force and effect;
(iii) To such counsel's knowledge, each Safeguard Stockholder
has title to the Shares proposed to be sold by such Safeguard Stockholder
hereunder free of any adverse claims and upon delivery of and payment for
such Shares hereunder, assuming that each Underwriter does not have any
notice of an adverse claim, such Underwriter will be a protected purchaser
(as defined in Section 8-303 of the Uniform Commercial Code as in effect in
the State of Delaware); and
(iv) The descriptions in the Registration Statement, the
Prospectus and any amendment or supplement thereto of agreements, whether
written or oral, and of other documents to which each Safeguard Stockholder
or any of its affiliates (other than the Company) is a party are accurate
and fairly present the information required to be shown with respect
thereto. To such counsel's knowledge, there are no agreements, whether
written
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or oral, or other documents to which each Safeguard Stockholder or any of
its affiliates (other than the Company) is a party of a character that are
required by the Act or the Rules and Regulations to be described in the
Registration Statement or filed as exhibits to the Registration Statement
that are not described or filed as required.
In addition, such opinion shall contain statements substantially
to the following effect:
In the course of the preparation by the Company and its
counsel of the Registration Statement and the Prospectus, such
counsel attended conferences with certain of the officers of, and
the independent public accountants for, the Company, at which the
Registration Statement and the Prospectus were discussed (some of
which were attended by representatives of the Underwriters).
Given the limitations inherent in the independent verification of
factual matters and the character of determinations involved in
the registration process, such counsel is not passing upon and
does not assume any responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration
Statement and the Prospectus. Subject to the foregoing and on
the basis of the information such counsel gained in the
performance of the services referred to above, including
information obtained from officers and other representatives of
the Company, no facts have come to such counsel's attention that
cause such counsel to believe (except that such counsel need not
express any opinion or belief with respect to the financial
statements, selected financial data schedule and the notes
thereto and other financial and statistical data included
therein) that (y) the Registration Statement, at the time it was
declared effective by the Commission, contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or (z) the Prospectus, as of its date or
the Closing Date, contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which
they were made, not misleading, provided such counsel need not
express any belief as to the contents of the eighth paragraph
under the heading "UNDERWRITING" in the Prospectus.
In rendering such opinions, such counsel may rely as to matters
of fact, to the extent they deem proper, on the representations and warranties
of the Company and the Safeguard Stockholders contained in this Agreement and on
certificates and written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company, provided that copies of any such statements or
--------
certificates shall be delivered to Underwriters' Counsel if requested.
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The Underwriters are entitled to rely on the opinion of such firm,
filed as an exhibit to the Registration Statement, as to the matters discussed
in the Prospectus under the heading "FEDERAL INCOME TAX CONSEQUENCES" in the
Prospectus.
References to the Prospectus and Registration Statement in this
Section shall include any amendment or supplement thereto at the date of such
opinion.
(g) The Underwriters shall have received a certificate, dated the
Closing Date and in form and substance satisfactory to the Underwriters, of the
Company signed by each of the Chief Executive Officer and Chief Financial
Officer of the Company to the effect that each of such officers has carefully
examined the Registration Statement, the Prospectus and this Agreement and, to
his best knowledge, that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date,
and the Company has complied in all material respects with all agreements
and covenants and satisfied all conditions contained in this Agreement on
its part to be performed or satisfied at or prior to the Closing Date;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose
have been instituted or are pending or, to the best of such officers'
knowledge, are contemplated or threatened by the Commission; and
(iii) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, (A) there has
been no material adverse change, or development involving a prospective
material adverse change (including a change in management or control of the
Company), in the condition (financial or otherwise), business prospects,
net worth or results of operations of the Company and the Subsidiaries, on
a consolidated basis, except in each case as described in or contemplated
by the Prospectus; (B) neither the Company nor any of the Subsidiaries has
entered into any transactions not in the ordinary course of business; (C)
neither the Company nor any of the Subsidiaries has incurred any material
liabilities or obligations, direct or contingent, other than as disclosed
in the Registration Statement and the Prospectus; (D) neither the Company
nor any of the Subsidiaries has sustained a loss material to the Company
and the Subsidiaries, on a consolidated basis, by fire, flood, accident,
hurricane, earthquake, theft, sabotage or other calamity or malicious act,
whether or not such loss shall have been insured, or from any labor dispute
or from any legal or governmental proceeding; (E) no action, suit or
proceeding, at law or in equity, has been filed or, to the knowledge of
such officer, is threatened against the Company or any of the Subsidiaries
or affecting any of their respective properties or businesses before or by
any court or federal, state or foreign commission, board or other
administrative agency that (1) alleges that the conduct of such business as
currently conducted or as proposed to be conducted infringes on any
trademarks, service marks,
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copyrights, service names, trade names, patents, patent applications or
trade secrets currently held by any third party and (2) has had as of the
date of such certificate or, if pending and if decided unfavorably, is
likely to have a Material Adverse Effect; and (F) there has not occurred
any other event required to be set forth in the Prospectus that has not
been so set forth.
Except as otherwise provided in clause (iii)(A) above, references to
the Prospectus and Registration Statement in this Section 8(g) shall include any
------------
amendment or supplement thereto at the date of such opinion.
(h) The Underwriters shall have received a certificate, dated the
Closing Date, of the Chairman and the Vice President and General Counsel of
Safeguard (PA) to the effect that such officers have carefully examined the
Registration Statement, the Prospectus and this Agreement and that the
representations and warranties of Safeguard in this Agreement are true and
correct on and as of the Closing Date, and that Safeguard has complied with all
agreements and satisfied all conditions on its part to be performed or satisfied
at or prior to the Closing Date.
(i) The Underwriters shall have received a certificate, dated the
Closing Date, from each Selling Stockholder to the effect that such Selling
Stockholder has carefully examined the Registration Statement, the Prospectus
and this Agreement and that the representations and warranties of the Selling
Stockholder in this Agreement are true and correct on and as of the Closing
Date, and that the Selling Stockholder has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied at or prior to
the Closing Date.
(j) The Underwriters shall have received from Price Waterhouse a
letter dated, respectively, the date hereof and the Closing Date, in form and
substance satisfactory to the Underwriters and Underwriters' Counsel, with
respect to matters set forth below:
(i) confirming that they are and were independent public
accountants with respect to the Company or FormMaker, as applicable,
within the meaning of the Act and the Rules and Regulations;
(ii) stating that it is their opinion that the audited financial
statements and schedules examined by them and included in the
Registration Statement and the Prospectus comply as to form in all
material respects with the applicable accounting requirements of the
Act and the Rules and Regulations;
(iii) stating that, on the basis of certain procedures which
included a reading of the latest available unaudited interim
consolidated financial statements of the Company (with an indication
of the date of the latest available unaudited interim financial
statements), a reading of the latest available minutes of meetings and
actions of the stockholders and board of directors and the various
committees of the board of directors of the Company, inquiries of
officers and other employees of the
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Company responsible for financial and accounting matters and other
specified procedures and inquiries, nothing came to their attention
that caused them to believe that (A) the unaudited consolidated
financial statements, if any, and schedules of the Company included in
the Registration Statement and the Prospectus do not comply as to form
in all material respects with the applicable accounting requirements
of the Act and the Rules and Regulations or are not fairly presented
in conformity with generally accepted accounting principles applied on
a basis substantially consistent with that of the audited consolidated
financial statements of the Company included in the Registration
Statement and the Prospectus, (B) at a specified date not more than
five days prior to the date of such letter, there was any change in
the capital stock or long-term debt of the Company, or any decrease in
the stockholders' equity, or net current assets of the Company, in
each case, as compared with amounts shown in the July 31, 1997
consolidated balance sheet included in the Registration Statement and
the Prospectus, except for changes set forth in such letter, and (C)
during the period from July 31, 1997 to such specified date, there was
any decrease in consolidated revenues, income before income taxes, or
net income, or any decrease in net income per common share of the
Company, in each case as compared with the corresponding period on a
pro forma basis beginning August 1, 1996, except for changes set forth
in such letter;
(iv) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements
and other financial information pertaining to the Company set forth in
the Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the
general accounting records, including work sheets, of the Company with
the results obtained from the application of specified readings,
inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted
auditing standards) set forth in the letter and found them to be in
agreement; and
(v) statements as to such other matters incident to the
transaction contemplated hereby as the Underwriters may reasonably
request.
In the event that the letter referred to above set forth any such
changes, decreases or increases, it shall be a further condition of the
obligations of the Underwriters that (A) such letter shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Underwriters deem such explanation unnecessary, and (B) such changes, decreases
or increases do not, in the sole judgment of the Underwriters, make it
impractical or inadvisable to proceed with the purchase and delivery of the
Shares as contemplated by the registration statement originally filed with
respect to the Shares, as amended as of the date hereof.
-41-
<PAGE>
References to the Registration Statement and the Prospectus in this
Section 8(j) with respect to the letter referred to above shall include any
- ------------
amendment or supplement thereto at the date of such letter.
(k) The Associated Person Lock-Ups with respect to each person listed
on Schedule A annexed hereto and the Musser Lock-Up shall be in full force and
effect.
(l) The outstanding shares of Common Stock and the shares of Common
Stock to be issued by the Company as contemplated by this Agreement shall have
been approved for quotation on the Nasdaq National Market (upon notice of
issuance in the case of the latter shares).
(m) No order suspending the sale of the Shares in any jurisdiction
designated by the Underwriters pursuant to Section 6(a)(iv) hereof shall be in
----------------
effect on the Closing Date and no proceedings for that purpose shall have been
instituted or, to the knowledge of the Company or the Underwriters, shall be
contemplated.
(n) On or prior to the date that Rights certificates are first mailed
to Safeguard Shareholders and on the Closing Date, dated the respective dates
thereof and in form and substance satisfactory to Underwriters' Counsel, the
Company shall furnish to the Underwriters such information, certificates and
documents as either of the Underwriters may reasonably request.
If any condition of the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date is not so fulfilled, the Underwriters
may terminate this Agreement or, if the Underwriters so elect, they may waive
any such conditions that have not been fulfilled or extend the time for their
fulfillment. In the event the Underwriters so elect to terminate this
Agreement, all Rights and the Other Purchasers Standby Purchase Agreements shall
become immediately null and void and the Company shall cause the Escrow Agent
under the Rights Agent Agreement to promptly return to the subscribers any
payments received by the Escrow Agent in respect of the exercise price relating
thereto. All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Underwriters and
Underwriters' Counsel. The Company shall furnish to the Underwriters such
conformed copies of such opinions, certificates, letters and documents in such
quantities as the Underwriters and Underwriters' Counsel shall reasonably
request.
The obligations of the Underwriters to purchase and pay for any Option
Shares after having exercised an option set forth in Section 3(b) hereof shall
------------
be subject, in their discretion, to each of the foregoing conditions of this
Section 8 to purchase the Excess Unsubscribed Shares, with all references to the
- ---------
Excess Unsubscribed Shares and the Closing Date being deemed to refer to such
Option Shares and the related Option Closing Date, respectively.
-42-
<PAGE>
9. Indemnification.
---------------
(a) The Company and the Selling Stockholders, jointly and severally,
agree to indemnify and hold harmless each of the Underwriters and each person,
if any, who is a Controlling Person with respect to either of the Underwriters
against any and all losses, claims, damages, expenses and liabilities, joint or
several (and actions in respect thereof), whatsoever (including any and all
reasonable expenses incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever), as such are
incurred, (i) to which the Underwriters or such Controlling Person may become
subject under the Act, the Exchange Act or any other statute or at common law or
otherwise or under the laws of foreign countries, arising out of or based upon
any untrue statement or alleged untrue statement of a material fact contained
(A) in any Preliminary Prospectus, the Registration Statement or the Prospectus
(as from time to time amended and supplemented) or (B) in any application or
other document or written communication (in this Section 9 collectively called
---------
"Application") executed by the Company or the Selling Stockholders or based upon
written information furnished by the Company or the Selling Stockholders in any
jurisdiction in order to qualify the Common Stock under the securities laws
thereof or filed with the Commission, any state securities commission or agency,
the Nasdaq National Market or any other securities exchange, or the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made, unless such statement or omission was
made in reliance upon, and in strict conformity with, the Provided Information
or (ii) to which the Underwriters or such Controlling Person may become liable
to any party which relate to, or arise out of, the Underwriters' or such
Controlling Person's consummation of the transactions contemplated hereby or the
Underwriters' or such Controlling Person's role in connection herewith
(including without limitation as a result of any breach of any representation or
warranty made by the Company or the Selling Stockholders); provided, however,
that (i) neither the Company nor the Selling Stockholders shall be responsible
for any losses, claims, damages, expenses or liabilities that are finally
judicially determined to have resulted primarily from the gross negligence or
intentional or reckless misconduct of the Underwriters or such Controlling
Person; (ii) an Other Selling Stockholder shall be liable to the extent, and
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by such Other Selling Stockholder
specifically for use therein, except that each Other Selling Stockholder shall
be liable for its representations and warranties made in Section 2(b) hereto;
------------
and (iii) no Other Selling Stockholder shall be liable hereunder in an amount
which exceeds the net proceeds received by such Other Selling Stockholder from
the sale of such Other Selling Stockholder's Shares. The indemnity agreement
contained in this Section 9(a) with respect to any Preliminary Prospectus shall
------------
not inure to the benefit of the Underwriters and such Controlling Person with
respect to a person asserting any such losses, claims, damages, liabilities or
expenses who purchased the Shares if at or prior to the written confirmation of
the sale of such Shares a copy of the Prospectus (or the Prospectus
as amended or supplemented) was not sent or delivered to such person and the
untrue statement contained in, or omission of a material fact from, such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus
-43-
<PAGE>
as amended or supplemented). The indemnity agreements in this Section 9(a) shall
------------
be in addition to any liability that the Company or the Selling Stockholders may
have at common law or otherwise.
(b) The Underwriters agree to indemnify and hold harmless the Company,
each of its directors, each of its officers who has signed the Registration
Statement, the Selling Stockholders and each other Controlling Person, if any,
who controls the Company or the Selling Stockholders, to the same extent as the
foregoing indemnity from the Company and the Selling Stockholders to the
Underwriters but only with respect to statements made in, or omissions from, any
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any Application made in reliance
upon, and in strict conformity with, the Provided Information.
(c) Promptly after receipt by any indemnified party or parties under
this Section 9 of notice of the commencement of any action, suit or proceeding,
---------
such indemnified party shall, if a claim in respect thereof is to be made
against one or more indemnifying parties under this Section 9, notify each party
---------
against whom indemnification is to be sought in writing of the commencement
thereof (but the failure so to notify an indemnifying party or parties shall not
relieve it from any liability that it may have under this Section 9 except to
---------
the extent that it has been prejudiced in any material respect by such failure
or from any liability that it may have otherwise). In case any such action is
brought against any indemnified party or parties, and it notifies the
indemnifying party or parties of the commencement thereof, the indemnifying
party or parties will be entitled to participate therein, and to the extent it
may elect, by written notice delivered to the indemnified party or parties
promptly after receiving the aforesaid notice from such indemnified party or
parties, to assume the defense thereof with counsel reasonably satisfactory to
such indemnified party or parties. Notwithstanding the foregoing, the
indemnified party or parties shall have the right to employ its or their own
counsel in any such case but the fees and expenses of such counsel shall be at
the expense of such indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by the indemnifying party in
connection with the defense of such action, (ii) the indemnifying party shall
not have employed counsel reasonably satisfactory to such indemnified party or
parties to have charge of the defense of such action within a reasonable time
after notice to the indemnifying party or parties of commencement of the action,
or (iii) such indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or them that are different from or
additional to those available to one or all of the indemnifying parties (in
which case the indemnifying party shall not have the right to assume the defense
of such action on behalf of the indemnified party or parties), in any of which
events such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
Anything in this Section 9 to the contrary notwithstanding, an indemnifying
---------
party shall not be liable for any settlement of any claim or action effected
without its written consent; provided, however, that such consent was not
-------- -------
unreasonably withheld.
-44-
<PAGE>
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this Section 9, but it is judicially determined (by the entry of a final
---------
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 9 provide for indemnification in such
---------
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
action in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Shares or (B) if the allocation provided by clause (A) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (A) above but also the relative
fault of each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages, expenses or liabilities, as well
as any other relevant equitable considerations. In any case where either the
Company and/or the Selling Stockholders are the contributing parties and the
Underwriters are the indemnified parties, the relative benefits received by the
Company and/or the Selling Stockholders, on the one hand (treated collectively
as one person for this purpose), and the Underwriters, on the other, shall be
deemed to be in the same proportion as the total proceeds from the offering of
the Shares and the shares of Common Stock sold upon exercise of the Rights (net
of underwriting discounts and other commissions paid to the Underwriters but
before deducting the other expenses incurred by the Company and the Selling
Stockholders in connection with the sale of the Shares) bear to the total
underwriting discounts and other commissions received by the Underwriters
hereunder, in each case as set forth in the table on the cover page of the
Prospectus. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact related to information
supplied by the Company and the Selling Stockholders (treated collectively, as
one person for this purpose) or by the Underwriters, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, expenses or liabilities (or
actions in respect thereof) referred to above in this Section 9(d) shall be
------------
deemed to include any legal or other expense reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 9(d) the Underwriters
------------
shall not be required to contribute any amount in excess of the underwriting
discount and other commissions applicable to the Shares purchased by the
Underwriters hereunder. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 9, each person, if any, who
---------
controls the Company or any Selling Stockholder within the meaning of the Act,
each officer of the Company who has signed the Registration Statement, and each
director of the Company shall have the same rights to contribution as the
Company and the Selling Stockholders, subject in each case to this Section 9(d).
------------
Any party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect to
which a claim for
-45-
<PAGE>
contribution may be made against another party or parties under this Section
-------
9(d), notify such party or parties from whom contribution may be sought, but the
- ----
omission so to notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any obligation it or they may
have hereunder or otherwise than under this Section 9(d), but only to the extent
------------
that such party or parties were not adversely affected by such omission. The
contribution agreement set forth above shall be in addition to any liabilities
which any indemnifying party may have at common law or otherwise.
10. Representations and Agreements to Survive Delivery.
--------------------------------------------------
All representations, warranties, agreements and covenants contained in this
Agreement or contained in certificates of each of the officers of the Company or
of each Selling Stockholder submitted pursuant hereto, shall be deemed to be
representations, warranties, agreements and covenants at the Closing Date and
the Option Closing Date, as the case may be, and such representations,
warranties, agreements and covenants of the Underwriters, the Company and each
Selling Stockholder, and the indemnity agreements contained in Section 9 hereof,
---------
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Underwriters, the Company and each
Selling Stockholder, or any Controlling Person, and shall survive termination of
this Agreement or the issuance and delivery of the Shares to the Underwriters,
provided that to the extent any such representations, warranties, agreements or
- --------
covenants are expressly waived in writing by the Underwriters, the survival of
the same shall be as set forth in such waiver, or, if not so set forth, as
provided in this Section 10.
----------
11. Effective Date.
--------------
This Agreement shall become effective at 9:00 a.m., New York time, on
the next full business day following the date hereof or upon the commencement of
the Rights Offering, whichever is earlier; provided, however, that the
-------- -------
provisions of Sections 6, 7, 9, 10 and 12 of this Agreement shall at all times
---------------------------
be effective.
12. Termination.
-----------
(a) Subject to subsection (c) of this Section 12, the Underwriters
----------
shall have the right to terminate this Agreement (i) if any calamitous domestic
or international event or act or occurrence has disrupted the general securities
market in the United States; (ii) if trading in the Common Stock (on a when-
issued basis) shall have been suspended by the Commission or the Nasdaq National
Market; (iii) if trading on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market or in the over-the-counter market shall
have been suspended, or minimum or maximum prices for trading shall have been
fixed, or maximum ranges for prices for securities shall have been required on
the over-the-counter market by the NASD or by order of the Commission or any
other government authority having jurisdiction; (iv) if the United States shall
have become involved in a war or major hostilities which, in the Underwriters'
opinion, affects the general securities market in the United States; (v) if a
banking moratorium has been
-46-
<PAGE>
declared by any New York, Massachusetts, Texas, Pennsylvania or federal
authority; (vi) if a moratorium in foreign exchange trading (with respect to a
foreign exchange on which the Company's securities are traded) has been
declared; (vii) if the Company shall have sustained a loss material to the
Company by fire, flood, accident, hurricane, earthquake, theft, sabotage or
other calamity or malicious act, whether or not such loss shall have been
insured, or from any labor dispute or any legal or governmental proceeding;
(viii) if, in the reasonable judgment of the Underwriters, there shall have been
such material adverse change, or any development involving a prospective
material adverse change in the financial condition, net worth or results of
operations of the Company since July 31, 1997 or in the business prospects or
conditions of the Company since the date of this Prospectus, or that materially
and adversely impacts this Agreement; or (ix) on any date commencing on the date
hereof and ending on the Closing Date, if there shall be such material adverse
market conditions (whether occurring suddenly or gradually between the date
hereof and the Closing Date) affecting the markets generally as in the
Underwriters' reasonable judgment would make it inadvisable to proceed with the
offering, sale or delivery of the Shares.
(b) If the Underwriters elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 12, they
----------
shall so notify the Company on the same day as such election is made by
telephone or telegram, confirmed by letter.
(c) Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement
(including pursuant to Section 13 hereof), and whether or not this Agreement is
----------
otherwise carried out, the provisions of Section 7 and Section 9 shall not be in
--------- ---------
any way affected by such election or termination or failure to carry out the
terms of this Agreement or any part hereof.
13. Default by the Company or the Selling Stockholders.
--------------------------------------------------
If the Company or the Selling Stockholders shall fail to sell and deliver
to the Underwriters the Excess Unsubscribed Shares to be sold and delivered by
the Company or the Selling Stockholders at the Closing Date or the Option Shares
to be sold and delivered by the Company at any Option Closing Date under the
terms of this Agreement, then the Underwriters may at their option, by written
notice to the Company and Selling Stockholders either (a) terminate this
Agreement without any liability on the part of any non-defaulting party other
than pursuant to Section 12 or (b) purchase the Shares which the Company and the
Selling Stockholders have agreed to sell and deliver in accordance with the
terms hereof. In the event of a failure of the Selling Stockholders to sell and
deliver as referred to in this Section, either the Underwriters or the Company
shall have the right to postpone the Closing Date or the Option Closing Date, as
the case may be, for a period not exceeding seven business days in order that
the necessary changes in the Registration Statement, Prospectus and any other
documents, as well as any other arrangements, as may be effected. No action
taken pursuant to this Section shall relieve the Company or the Selling
Stockholders from liability in respect of such default.
-47-
<PAGE>
14. Notices.
-------
All notices and communications hereunder may be mailed or transmitted by
any standard form of telecommunication and, except as herein otherwise
specifically provided, shall be in writing and shall be deemed to have been duly
given when delivered to a notice party hereto at the address specified herein or
at the address subsequently communicated in writing by the notice parties.
Notices to the Underwriters shall be directed to the Underwriters in care of
Tucker Anthony Incorporated, One Beacon Street, 6th Floor, Boston, MA 02108;
Attention: William Roman, and Prudential Securities Incorporated, One New York
Plaza, New York, NY 10292; Attention: Edward Smith, with a copy to Drinker
Biddle & Reath LLP, 1000 Westlakes Drive, Suite 300, Berwyn, Pennsylvania 19312,
Attention: Walter J. Mostek, Jr., Esq. Notices to the Company shall be
directed to the address of the Company as set forth on the facing page to the
Registration Statement, with a copy to Morgan, Lewis and Bockius LLP, 2000 One
Logan Square, Philadelphia, Pennsylvania, Attention: N. Jeffrey Klauder, Esq.
Notices to Safeguard shall be directed to Safeguard Scientifics, Inc., 800 The
Safeguard Building, 435 Devon Park Drive, Wayne, Pennsylvania 19087, Attention:
James A. Ounsworth, Esq., with a copy to Morgan, Lewis and Bockius LLP, 2000 One
Logan Square, Philadelphia, Pennsylvania 19103, Attention: N. Jeffrey Klauder,
Esq. In each case a party may change its address for notice hereunder by a
written communication to the other parties.
15. Parties.
-------
This Agreement shall inure solely to the benefit of, and shall be binding
upon, the Underwriters, the Company and the Selling Stockholders and the
Controlling Persons, and their respective successors, legal representatives and
assigns, and no other person shall have or be construed to have any legal or
equitable right, remedy or claim under or in respect of or by virtue of this
Agreement or any provisions herein contained. No purchaser of Shares from the
Underwriters shall be deemed to be a successor by reason merely of such
purchase.
16. Construction.
------------
This Agreement shall be governed by the laws of the State of New York
without giving effect to the choice of law or conflict of laws principles
thereof. The word "including" as used herein shall not be construed so as to
exclude any other thing not referred to or described.
17. Counterparts.
------------
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original and all of which taken together shall be
deemed to be one and the same instrument.
-48-
<PAGE>
18. Entire Agreement.
----------------
This Agreement contains the entire agreement between the parties hereto in
connection with the subject matter hereof.
If the foregoing correctly sets forth the understanding among the
Underwriters, the Company and the Selling Stockholders, please so indicate in
the space provided below for that purpose, thereupon this letter shall
constitute a binding agreement among us.
Very truly yours,
DOCUCORP INTERNATIONAL, INC.
By:
----------------------------------------------------
Name:
Title:
-49-
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
By:
----------------------------------------------------
Name:
Title:
SAFEGUARD SCIENTIFICS (DELAWARE), INC.
By:
----------------------------------------------------
Name:
Title:
-------------------------------------------------------
Michael D. Andereck
TECHNOLOGY LEADERS II, LP
By: Technology Leaders II Management LP, its
general partner
By: Technology Leaders Management, Inc., a
general partner
By:
----------------------------------------------------
Name:
Title:
TECHNOLOGY LEADERS II OFFSHORE C.V.
By: Technology Leaders II Management LP, a
general partner
By: Technology Leaders Management, Inc., a
general partner
By:
----------------------------------------------------
Name:
Title:
-50-
<PAGE>
XEROX CORPORATION
By:
----------------------------------------------------
Name:
Title:
OTHER SELLING STOCKHOLDERS
By: Michael D. Andereck and James A. Ounsworth
pursuant to a Custody Agreement and Power of
Attorney granted February __, 1998
-------------------------------------------------------
Michael D. Andereck
-------------------------------------------------------
James A. Ounsworth
Confirmed and accepted
as of the date first
above written:
TUCKER ANTHONY INCORPORATED PRUDENTIAL SECURITIES
INCORPORATED
By: By:
------------------------- -------------------------
Name: Name:
Title: Title:
-51-
<PAGE>
Schedule A
Associated Person Lock-Ups
Name
- ----
Safeguard Scientifics, Inc. Business Capital Corporation
Safeguard Scientifics (Delaware), Inc. Timothy Larson
Xerox Corporation Mark E. Goetting
Michael D. Andereck Jim Lee
Technology Leaders II, LP Mark Weldon
Technology Leaders II Offshore CV Charlie Herlong
Bobby Bruce Dale Lonnie Z. Mallory Trust Number
Milledge A. Hart III Leroy Elmore Trust
Hsi-Ming Lin Roger Monroe
Arthur R. Spector Carolyn N. Taylor
Todd A. Rognes Mark D. Schooler
Kerry LeCrone John D. Loewenberg
John D. Loewenberg John B. Bennison
George F. Raymond Jack Maddox
Warren V. Musser TL Venture Third Corp.
Sidney B. Landman Paul J. Martin
George F. Raymond DW McArthur, III
Patricia M. White Garry Taylor
Tevia Weiner McLaren Lyle Wise
Samuel M. Wilkes III Roy E. Dempster
Malcolm K. Brachman Revocable Yogesh Karambaya
Wade Securities, Inc. Donald L. House
Joe A. Rose Scott Griesser
J.E.R. Chifton, III William R. Hole
Mary Beth Hurley Trust Alice Marie Garrison
Leroy Bates
Elliott Tucker
R. Lee Morris
Joseph W. Manley
Kenneth Neisman
William E. Weatherford
Alfred R. Pipkins
Sandra T. Levin
James Mitchell Meyer
James R. Skinner
Martin H. Van Horn, Jr.
-52-
<PAGE>
Schedule B
List of Subsidiaries
FormMaker Software, Inc.
Image Sciences, Inc.
Micro Dynamics, Ltd.
EZPS Acquisition Corp.
EZPower Systems, Inc. (as of the Closing Date)
Maitland Software, Inc. (as of the Closing Date)
-53-
<PAGE>
Schedule C
Name of Underwriters % of Underwriter Shares
- -------------------- -----------------------
Tucker Anthony Incorporated 50%
Prudential Securities Incorporated 50%
-54-
<PAGE>
Schedule D
Number of Shares
To Be Sold In
Name of Stockholder The Offering
- ------------------- ----------------
Safeguard Scientifics, Inc. 911,229
Xerox Corporation 700,240
Michael D. Andereck 455,129
Technology Leaders II 313,495
Samuel W. Wilkes 205,000
Elliot Tucker 50,000
William E. Weatherform 20,000
James Lee 20,000
Mark Weldon 12,000
Roger Monroe 1,690
Radnor Venture Partners LP 47,356
James E. Cayne 36,406
Patricia M. White 4,000
Joseph W. Manley 5,800
Alice Marie Garrison 19,558
Mark D. Schooler 18,097
-55-
<PAGE>
Exhibit 5.1
February 20, 1998
DocuCorp International, Inc.
5910 North Central Expressway, Suite 800
Dallas, TX 75206
Re: Registration Statement on Form S-1
(File No. 333-44427)
--------------------
Ladies and Gentlemen:
We have acted as counsel to DocuCorp International, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of the subject
registration statement on Form S-1 (the "Registration Statement") filed with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Act"), to register the public offering of up to
7,460,000 shares of common stock, par value $.01 per share, of the Company (the
"Common Stock"), which includes (i) 640,000 shares purchasable by the
underwriters from the Selling Stockholders, solely for the purpose of covering
overallotments, (ii) 6,500,000 shares issuable or transferable upon the exercise
of rights (the "Company Rights") to purchase the Common Stock of the Company
granted by the Company and certain selling stockholders to the shareholders of
Safeguard Scientifics, Inc. and (iii) 320,000 shares purchasable by certain
persons selected by the Company from the Selling Stockholders (collectively, the
"Offering"). In connection herewith, we have examined such records, documents,
statutes and decisions as we have deemed relevant.
In our opinion, (i) the shares of Common Stock to be sold by the
Company, when issued, sold and delivered as contemplated in the Registration
Statement, will be legally issued, fully paid and nonassessable shares of the
Common Stock of the Company, (ii) the shares of Common Stock to be sold by the
Selling Stockholders as contemplated in the Registration Statement are legally
issued, fully paid and nonassessable shares of the Common Stock of the Company
and (iii) the Rights, when issued and distributed as contemplated in the
Registration Statement, will be legally issued and valid and binding obligations
of the Company having the rights summarized in the Registration Statement.
<PAGE>
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement and to all references to our firm in the Registration
Statement. In giving such consent, we do not hereby admit that we are acting
within the category of person whose consent is required under Section 7 of the
Act and rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
<PAGE>
Exhibit 8.1
February 20, 1998
Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, Pennsylvania 19087
Re: Offering of Rights to Purchase Shares of Common Stock of
DocuCorp International, Inc.
--------------------------------------------------------
Ladies and Gentlemen:
You have requested our opinion regarding certain federal income tax
aspects of the grant by DocuCorp International, Inc. (the "Company") of rights
(the "Rights") to purchase shares of the Company's Common Stock (the
"Offering"), all as described in the Registration Statement on Form S-1 (File
No. 333-44427), as amended, filed with the Securities and Exchange Commission on
the date hereof (the "Registration Statement"). This opinion also confirms the
opinion set forth in "Federal Income Tax Consequences" in the Registration
Statement. This opinion is based upon our review of the Registration Statement
and our assumption that the Offering will take place in accordance with the
description included in the Registration Statement.
Opinion
-------
Based on the foregoing and on the Internal Revenue Code of 1986, as
amended (the "Code"), the regulations promulgated thereunder, and judicial and
administrative interpretations thereof, all as in effect on the date of this
letter, it is our opinion that the statements of law and conclusions of law
included in the Registration Statement under the heading "The Offering--Federal
Income Tax Consequences" are, in all material respects, true, correct and
complete. No opinion is expressed regarding any statements, assumptions or
opinions regarding factual matters (including, without limitation, the value of
the Rights) contained in the Registration Statement.
Should any of the facts, assumptions or understandings referred to
above prove incorrect, please let us know so that we may consider the effect, if
any, on our opinion. No assurances can be given that any of the foregoing
authorities will not be modified, revoked, supplemented, revised, reversed or
overruled or that any such modification, revocation, supplementation, revision,
reversal or overruling will not adversely affect the opinion set forth above.
<PAGE>
We understand that this opinion is to be used in connection with the
registration of the Rights and the Company's Common Stock pursuant to the
Securities Act of 1933, as amended. We consent to the filing of this opinion in
connection with and as a part of the Registration Statement on Form S-1 and
amendments thereto. We also hereby consent to the reference to our firm under
the caption "Legal Matters" in the Registration Statement. In giving such
consents, however, we do not thereby admit that we are acting within the
category of persons whose consent is required under Section 7 of the Act and the
rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
<PAGE>
EXHIBIT 11.1
DocuCorp International, Inc.
Computation of Earnings per Share
<TABLE>
<CAPTION>
Three Months Ended
Year Ended July 31, October 31,
----------------------------------------------------------------- ------------------------
1993 1994 1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET INCOME (LOSS) PER SHARE:
BASIC
Net income (loss) $ 1,807,077 $ 2,169,470 $ 2,002,920 $ 2,321,280 $ (16,101,787) $ 576,940 $ 719,205
=========== =========== =========== =========== ============= =========== ===========
Weighted average shares outstanding
used in the basic net income (loss)
per share calculation 4,606,772 5,300,745 5,673,510 6,201,684 5,980,718 6,472,359 5,133,353
=========== =========== =========== =========== ============= =========== ===========
Net income (loss) per share $ 0.39 $ 0.41 $ 0.35 $ 0.37 $(2.69) $ 0.09 $ 0.14
=========== =========== =========== =========== ============= =========== ===========
DILUTED
Net income (loss) $ 1,807,077 $ 2,169,470 $ 2,002,920 $ 2,321,280 $ (16,101,787) $ 576,940 $ 719,205
=========== =========== =========== =========== ============= =========== ===========
Weighted average shares outstanding 4,606,772 5,300,745 5,673,510 6,201,684 5,980,718 6,472,359 5,133,353
Additional weighted average shares
from assumed exercise of dilutive
stock options and warrants, net of
shares to be repurchased with
exercise proceeds 3,688,786 2,813,245 2,491,763 2,179,486 - 1,696,264 2,079,592
----------- ----------- ----------- ----------- ------------- ----------- -----------
Weighted average shares outstanding
used in the diluted net income (loss)
per share calculation 8,295,558 8,113,990 8,165,273 8,381,170 5,980,718 8,168,623 7,212,945
=========== =========== =========== =========== ============= =========== ===========
Net income (loss) per share $ 0.22 $ 0.27 $ 0.25 $ 0.28 $(2.69) $ 0.07 $ 0.10
=========== =========== =========== =========== ============= =========== ===========
</TABLE>
Page 1
<PAGE>
EXHIBIT 11.1
DocuCorp International, Inc.
Computation of Earnings per Share
(continued)
<TABLE>
<CAPTION>
Year Ended Three Months Ended
July 31, October 31,
1997 1997
--------------- -------------
<S> <C> <C>
PRO FORMA NET INCOME (LOSS) PER SHARE:
BASIC
Net Income (loss) $ (16,101,787) $ 719,205
=============== =============
Weighted average shares outstanding used in the basic
pro forma net income (loss) per share calculation 7,377,271 10,759,954
=============== =============
Pro forma net income (loss) per share ($2.18) $0.07
=============== =============
DILUTED
Net income (loss) $ (16,101,787) $ 719,205
=============== =============
Weighted average pro forma shares outstanding 7,377,271 10,759,954
Additional weighted average shares from assumed
exercise of dilutive stock options and warrants,
net of shares to be repurchased with exercise
proceeds -- 2,079,592
--------------- -------------
Weighted average shares outstanding used in the diluted
pro forma net income (loss) per share calculation 7,377,271 12,839,546
=============== =============
Pro forma net income (loss) per share ($2.18) $0.06
=============== =============
SUPPLEMENTAL PRO FORMA NET INCOME (LOSS)
PER SHARE:
BASIC
Net income (loss) $ (16,101,787) $ 719,205
Pro forma interest expense adjustment reflecting
repurchase of debt with proceeds from offering,
net of tax 113,230 115,651
--------------- -------------
Supplemental pro forma net income (loss) $ (15,988,557) $ 834,856
=============== =============
Weighted average pro forma shares outstanding 7,377,271 10,759,954
Assumed issuance of shares needed to repurchase debt 2,034,275 1,596,423
--------------- -------------
Weighted average shares outstanding used in the basic
supplemental pro forma net income (loss) per
share calculation 9,411,546 12,356,377
=============== =============
Supplemental pro forma net income (loss) per share ($1.70) $0.07
=============== =============
DILUTED
Net income (loss) $ (16,101,787) $ 719,205
Pro forma interest expense adjustment reflecting
repurchase of debt with proceeds from offering,
net of tax 113,230 115,651
--------------- -------------
Supplemental pro forma net income (loss) $ (15,988,557) $ 834,856
=============== =============
Weighted average pro forma shares outstanding 7,377,271 10,759,950
Additional weighted average shares from assumed
exercise of dilutive stock options and warrants,
net of shares to be repurchased with exercise
proceeds -- 2,079,592
Assumed issuance of shares needed to repurchase debt 2,034,275 1,596,423
--------------- -------------
Weighted average shares outstanding used in the diluted
supplemental pro forma net income (loss) per share
calculation 9,411,546 14,435,965
=============== =============
Supplemental pro forma net income (loss) per share ($1.70) $0.06
=============== =============
</TABLE>
Page 2
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated September 26, 1997,
except as to the stock split described in Note 10 which is as of December 9,
1997, and the net loss per share described in Note 11, which is as of January
31, 1998 relating to the financial statements of DocuCorp International, Inc.,
which appears in such Prospectus. We also consent to the application of such
report to the Financial Statement Schedules for the three years ended July 31,
1997 listed under Item 16(b) of this Registration Statement when such schedules
are read in conjunction with the financial statements referred to in our report.
The audits referred to in such report also included these schedules. We also
consent to the references to us under the headings "Experts" and "Selected
Consolidated Financial Data" in such Prospectus. However, it should be noted
that Price Waterhouse LLP has not prepared or certified such "Selected
Consolidated Financial Data."
PRICE WATERHOUSE LLP
Dallas, Texas
February 20, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 of our
report dated January 30, 1997 and April 11, 1997, which includes an explanatory
paragraph regarding the restatement of the 1995 and 1996 financial statements,
on our audits of the consolidated financial statements of FormMaker Software,
Inc. We also consent to the reference of our firm under the caption
"Experts".
Coopers & Lybrand L.L.P.
Atlanta, Georgia
February 20, 1998
