<PAGE>
As filed with the Securities and Exchange Commission on January 16, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
________________
REGISTRATION STATEMENT
ON FORM S-1
UNDER
THE SECURITIES ACT OF 1933
________________
DOCUCORP INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 7372 75-2690838
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
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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:
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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
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of 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
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AMOUNT TO BE PROPOSED PROPOSED AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED(1) MAXIMUM OFFERING MAXIMUM AGGREGATE REGISTRATION FEE
REGISTERED PRICE PER UNIT(2) OFFERING PRICE (2)
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Common Stock,
par value $.01 per share................. 7,360,000 $5.00 $36,800,000 $10,856
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Subscription Rights (3).................. (3) --- --- ---
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(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 6,400,000 of the shares of Common
Stock described above.
________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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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 OR 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 JANUARY 16, 1998
PROSPECTUS
6,720,000 SHARES
DOCUCORP INTERNATIONAL, INC.
COMMON STOCK
(and Rights to acquire
up to 6,400,000 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 _____________, 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 6,400,000 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
2,720,000 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 _________________, 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 8.
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.
_______________________
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====================================================================================================================================
Underwriting
Assumed Underwriting Discount
Exercise Discount Paid by Selling Proceeds to the Proceeds to the
and Offer Price Paid by the Company Stockholders Company Selling Stockholders
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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
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Min. $600,000 Min. $408,000 Max. $19,400,000 Max. $13,192,000
Total.......... $33,600,000 Max. $1,336,000 Max. $952,000 Min. $18,664,000 Min. $12,648,000
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Total with Min. $600,000 Min. $632,000 Max. $19,400,000 Max. $16,168,000
Over-Allotment. $36,800,000 Max. $1,336,000 Max. $1,176,000 Min. $18,664,000 Min. $15,624,000
====================================================================================================================================
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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 6,720,000
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 6,400,000 shares which would then be
purchased by the Underwriters plus an additional 3% financial advisory fee on
all of the 6,720,000 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 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
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[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.]
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(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 __________, 1998. If there are
fewer than 32,000,000 Safeguard common shares outstanding on ___________, 1998,
we will grant fewer than 6,400,000 rights in the rights offering. If fewer than
6,400,000 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 6,400,000
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 53.7% 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 ______________, 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)/" and "DocuFlex/(R)/" are registered trademarks of the
Company. "Document Automation Platform/(R)/" and "DAP/(R)/" are registered
trademarks co-owned by the Company. Applications to register "DocuCorp/TM/" and
"Unleashing the Power of Documents/TM/" as tademarks 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."
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________________________________________________________________________________
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 approximately 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
approximately 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.
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________________________________________________________________________________
THE OFFERING
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Description of the Rights Offering....... If you hold Safeguard common shares on __________, 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 6,400,000 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 __________, 1998 and
ending on __________, 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
__________, 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 6,400,000 shares offered in the rights offering, we will be selling 3,680,000
shares and the selling stockholders will be selling 2,720,000 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.
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________________________________________________________________________________
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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 Symbols......................... During the period in which you can exercise your 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.
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________________________________________________________________________________
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
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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)
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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 -- -- --
Pro forma net income (loss)
per share (3).................... $ (1.41) $ 0.15 $ 0.06 $ 0.05
Pro forma weighted average
number of shares outstanding (3). 11,384 11,800 9,911 13,612
Supplemental pro forma net
income (loss) per share (3)...... $ (1.19) $ 0.15 $ 0.06 $ 0.05
Weighted average shares used in
the supplemental pro forma net
income (loss) per share
calculation (3).................. 13,418 13,834 9,911 15,208
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AS OF OCTOBER 31, 1997
--------------------------------
AS
ACTUAL ADJUSTED (4)
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(IN THOUSANDS)
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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
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(1) Includes the impact of non-recurring Merger-related charges of $21.4
million or $1.88 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) Pro forma net income (loss) 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 (i)
all shares of Class B common stock have been converted to shares of Common
Stock as of the date of issuance and (ii) all shares, options and warrants
issued subsequent to January 1997 at an exercise price less than the
exercise price of the rights offered hereby have been included in the
calculation as if they were outstanding for the entire period presented
using the treasury stock method and the exercise price of the rights
offered hereby. (See also the 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.)
(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.
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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
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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."
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."
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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 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
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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 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 48.8% 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 eleven 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 8,092,832 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 $40.5 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 858,535 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
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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."
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 prior to this offering 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"). 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)
8,092,832 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) 2,514,863
shares of Common Stock beneficially owned by certain other stockholders of the
Company, which are subject to Lock-Up Agreements prohibiting the sale
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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.
See "Management--Stock Options," "Shares Eligible For Future Sale--Stock Options
and Warrants" 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 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
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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 these types 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 __________, 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
__________, 1998 and ending at 5:00 p.m., New York City time, on __________,
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 __________, 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. 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
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__________, 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 __________, 1998
through __________, 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 798, Midtown Station, New
York, New York 10018, Attention: Reorganization Department, telephone number
(800) 973-1028.
HOW YOU CAN EXERCISE YOUR RIGHTS
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
__________, 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 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 __________, 1998. If the properly executed
documents are not received by 5:00 p.m. on __________, 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/Overnight:
ChaseMellon Stockholder Services, L.L.C. ChaseMellon Stockholder
Reorganization Department Services, L.L.C.
P.O. Box 798 Reorganization Department
Midtown Station 120 Broadway, 13th Floor
New York, New York 10018 New York, New York 10271
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 Mellon Bank N.A., who will serve as the
escrow agent of the Safeguard Escrow Account.
ChaseMellon will deliver certificates to you representing the Common Stock
purchased through the exercise of rights by __________, 1998. Until that date,
Mellon Bank N.A. 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.
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
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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 __________, 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 __________, 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 __________, 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.
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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, Mellon Bank N.A. 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 Mellon Bank N.A. 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; and (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. 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 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
-18-
<PAGE>
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.
-19-
<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 continues to explore prospective acquisition
opportunities, the Company does not currently have any acquisition commitments.
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.
-20-
<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 $.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)................... 51 108 148
Additional paid-in capital (2)........................................................ 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."
-21-
<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 prior to this offering 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) 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 934,828 shares of Common Stock as a result of the Merger in
consideration for its investment in FormMaker of approximately $9.2 million
or $2.83 per share of Common Stock (assuming that the warrants are
exercised). See "Certain Relationships and Related Transactions."
-22-
<PAGE>
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 $ -- $ --
Pro forma net income (loss) per
share (2)....................... $ (1.41) $ 0.06 $ 0.05
Pro forma weighted average
number of shares
outstanding (2)................. 11,384 9,911 13,612
Supplemental pro forma net
income (loss) per share (2)..... $ (1.19) $ 0.06 $ 0.05
Weighted average number of
shares used in the supplemental
pro forma net income (loss)
calculation (2)................. 13,418 9,911 15,208
</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 $1.88 per share.
(2) Pro forma net income (loss) 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 (i)
all shares of Class B common stock have been converted to shares of Common
Stock as of the date of issuance and (ii) all shares, options and warrants
issued subsequent to January 1997 at an exercise price less than the
exercise price of the rights offered hereby have been included in the
calculation as if they were outstanding for the entire period presented
using the treasury stock method and the exercise price of the rights
offered hereby. (See also the 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.)
-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)
REVENUES:
<S> <C> <C> <C> <C>
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)............................ $ 0.15
=======
Pro forma weighted average number of
shares outstanding(1)....................................... 11,800
=======
Supplemental pro forma net income per share(2)............... $ 0.15
=======
Weighted average number of shares
outstanding used in the supplemental pro
forma net income per share calculation(2)................... 13,834
=======
- ----------
(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 (i) all shares of Class B common
stock have been converted to shares of Common Stock as of the date of issuance and (ii) all shares, options and warrants issued
subsequent to January 1997 at an exercise price less than the exercise price of the rights offered hereby have been included in
the calculation as if they were outstanding for the entire period presented using the treasury stock method and the exercise
price of the rights offered hereby.
(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 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 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.
</TABLE>
-26-
<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.
-27-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND 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.
-28-
<PAGE>
RESULTS OF OPERATIONS
Historical Operating Results of the Company
- --------------------------------------------
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 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.
-29-
<PAGE>
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.
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
-30-
<PAGE>
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.
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
-31-
<PAGE>
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%.
-32-
<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>
-33-
<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>
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.
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.
-34-
<PAGE>
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.
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."
-35-
<PAGE>
<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
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. 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 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
-36-
<PAGE>
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, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share",
which is required to be adopted for fiscal periods ending after December 15,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating basic earnings per share, the dilutive effect
of stock options and warrants will be excluded. The computation of fully-diluted
earnings per share is not expected to be significantly different.
If the Company had computed earnings per share in accordance with the
provisions of SFAS 128 for the year ended July 31, 1997 and the three months
ended October 31, 1997, the basic and diluted earnings per share amounts would
be the same as earnings per share presented on the Consolidated Statements of
Operations.
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
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.
-37-
<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 approximately 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.
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.
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<PAGE>
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.
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
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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 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 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.
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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. 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 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
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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 intends to develop or acquire additional document management
products in the future.
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 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.
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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.
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 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.
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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 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.
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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 2,000,000 utility customers. Approximately 100,000 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. This DocuCorp customer has
indicated that it currently expects to implement similar document automation
solutions for a fifth utility company in early 1998, serving an additional
1,600,000 of its customers.
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.
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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, 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.
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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 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 1,700
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.
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<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.
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<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
Sidney B. Landman (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.
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<PAGE>
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.
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.
Sidney B. Landman was elected as a director of the Company in May 1997. He
is the President and Chief Operating Officer of Xerox Engineering Systems. Mr.
Landman was previously the Vice President of Finance for the Production Systems
Group at Xerox (PSG) and before that, he served as Vice President, Finance and
Business Operations for Xerox Corporation's Xerox Production Systems Division.
Before joining Xerox in 1993, he was a senior financial executive in both
Fortune 500 and small company environments for the past 25 years. He holds a
B.A. in Economics and Finance from the City University of New York, and an MBA
in Finance from Loyola College of Baltimore.
John D. Loewenberg became a director of the Company in May 1997. He was
previously Chief Executive Officer and President of FormMaker. Before that he
served as Executive Vice President and Chief Administrative Officer of
Connecticut Mutual, a life insurance company, from May 1995 through March 1996.
Prior to joining Connecticut Mutual, Mr. Loewenberg served as Senior Vice
President of Aetna Life and Casualty, a multi-line insurer, and as Chief
Executive Officer of Aetna Information Technology, the information systems
company of Aetna Life and Casualty, from March 1989 to May 1995. Mr. Loewenberg
was Chairman of Precision Systems, Inc. until April 1996 and is currently a
member of the 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
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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 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 Sidney B. Landman, 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.
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.
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<PAGE>
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>
PERCENT OF
TOTAL
NUMBER OF OPTIONS REALIZABLE POTENTIAL VALUE AT
SHARES GRANTED TO ASSUMED ANNUAL RATE OF
UNDERLYING EMPLOYEES EXERCISE STOCK PRICE APPRECIATION FOR
OPTIONS IN FISCAL PRICE PER EXPIRATION OPTION TERM(1)
----------------------------
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
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<PAGE>
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 20,400 shares of the Company's Common
Stock to Mr. LeCrone.
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
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-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.
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<PAGE>
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 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 480,000
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.
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
employees at the
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<PAGE>
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.
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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<PAGE>
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 three 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 Sidney B. Landman), 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 Sidney B. Landman), 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>
NUMBER OF
SHARES
BENEFICIAL OWNERSHIP TO BE SOLD IN BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING THE OFFERING AFTER THE OFFERING
------------------------ ------------- ---------------------------
NUMBER NUMBER
NAMES OF SHARES PERCENTAGE OF SHARES PERCENTAGE
- ----- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Safeguard Scientifics, Inc. (1)..... 3,268,133 30.8% 858,535 2,409,598 16.5%
Xerox Corporation (2)............... 2,687,884 27.8 700,240 1,987,644 14.5
Michael D. Andereck (3)............. 1,747,020 17.4 455,129 1,291,891 9.2
Technology Leaders II (4)........... 1,519,475 15.2 313,495 1,205,980 8.6
Samuel W. Wilkes (5)................ 482,830 5.0 205,000 277,830 2.0
B. Bruce Dale (6)................... 182,366 1.9 -- 182,366 1.3
Milledge A. Hart, III (7)........... 181,020 1.8 -- 181,020 1.3
Hsi-Ming Lin (8).................... 144,073 1.5 -- 144,073 1.1
Arthur R. Spector (6)............... 123,724 1.3 -- 123,724 *
Kerry K. LeCrone (9)................ 71,590 * -- 71,590 *
John D. Loewenberg (6).............. 57,758 * -- 57,758 *
George F. Raymond (6)............... 36,000 * -- 36,000 *
Warren V. Musser (6)................ 6,000 * -- 6,000 *
Sidney B. Landman................... -- * -- -- *
All Directors and Named
Executive Officers as a
group (12 persons) (10)........... 3,149,740 29.0 660,129 2,489,611 16.8
Other selling
stockholders (11)................. 582,496 6.0 187,601 394,895 2.9
</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 9.5% 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.
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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 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 nine 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 or 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.
On or about February 1, 1998, DocuCorp will mail 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."
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
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."
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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 __________, 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."
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
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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, Dallas, Texas.
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. 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. 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 prior
to this offering purchased shares upon the exercise of options granted under the
Equity Compensation Plan are entitled to sell such shares without having to
comply with the public information, holding period, volume limitation or notice
provisions of Rule 144 and they may begin making such sales on the 90th day
after the date of this Prospectus. Rule 701 also permits the shares subject to
unexercised options granted under the Equity Compensation Plan to be sold upon
exercise without having to comply with the foregoing provisions of Rule 144. As
of October 31, 1997, approximately 25,000 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 8,092,832 shares of Common Stock after
the completion of this offering, have agreed with the Underwriters that
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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 2,514,863 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.
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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 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, earnings and
certain other financial and operating information of the Company in recent
periods; market valuations of the securities of companies engaged in
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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 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.
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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 who will beneficially own approximately
8,092,832 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 2,514,863 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.
-65-
<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.
-66-
<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-5
Consolidated Statements of Cash Flows for the years ended July 31, 1995, 1996 and 1997.......... F-6
Consolidated Statements of Changes in Stockholders' Equity for the years ended July 31, 1995,
1996 and 1997................................................................................ F-8
Notes to Consolidated Financial Statements...................................................... F-9
Interim Consolidated Balance Sheet (Unaudited) at October 31, 1997.............................. F-22
Interim Consolidated Statements of Operations (Unaudited) for the three months ended October
31, 1996 and 1997............................................................................ F-24
Interim Consolidated Statements of Cash Flows (Unaudited) for the three months ended October
31, 1996 and 1997............................................................................ F-25
Notes to Interim Consolidated Financial Statements (Unaudited) for the three months ended
October 31, 1996 and 1997.................................................................... F-26
FORMMAKER SOFTWARE, INC.
Report of Coopers & Lybrand L.L.P., Independent Accountants..................................... F-29
Consolidated Balance Sheets at December 31, 1995 and 1996....................................... F-30
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996...... F-31
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995
and 199...................................................................................... F-32
Consolidated Statements of Cash Flow for the years ended December 31, 1994, 1995 and 1996....... F-33
Notes to Consolidated Financial Statements...................................................... F-34
Interim Consolidated Balance Sheet (Unaudited) at March 31, 1997................................ F-47
Interim Consolidated Statements of Operations (Unaudited) for the three months ended March
31, 1996 and 1997............................................................................ F-48
Interim Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31,
1996 and 1997................................................................................ F-49
Notes to Interim Consolidated Financial Statements (Unaudited) for the three months ended
March 31, 1996 and 1997...................................................................... F-50
</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
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
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
DOCUCORP INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
JULY 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- ------------
<S> <C> <C>
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 $.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 $.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 $.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-4
<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)
=========== =========== ============
UNAUDITED PRO FORMA DATA (NOTE 1):
Pro forma net loss per share............... $(1.41)
============
Weighted average shares outstanding used
in the pro forma net loss per share
calculation............................... 11,383,941
============
Supplemental pro forma net loss per share.. $(1.19)
============
Weighted average shares outstanding used
in the supplemental pro forma net loss
per share calculation..................... 13,418,216
============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<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
----------- ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
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-7
<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, respectively. 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 receiva-
ble 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-8
<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.
F-9
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 life. Upon retirement or sale of an asset, the cost and accumulated
depreciation are removed from the accounts with any resulting gain or loss
included in income.
SOFTWARE
Costs of internally developed software are capitalized after the
technological feasibility of the software has been established. Research and
development costs incurred prior to the establishment of the technological
feasibility of a product are 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.
F-10
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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).
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Historical net loss per share has been excluded from the Company's
Consolidated Statements of Operations on the basis that it is irrelevant due to
the planned conversion of all outstanding Class B common stock on a one-for-one
basis concurrent with the effectiveness of the Company's initial public offering
(IPO). 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 (i) all shares of Class B common stock have been converted to
shares of Common Stock as of the date of issuance and (ii) all shares, options
and warrants issued subsequent to January 1997 at an exercise price less than
the IPO price have been included in the calculation as if they were outstanding
for the entire period presented using the treasury stock method and the IPO
price.
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.
F-11
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share",
which is required to be adopted for fiscal periods ending after December 15,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating basic earnings per share, the dilutive effect
of stock options and warrants will be excluded.
If the Company had computed net earnings per share in accordance with the
provisions of SFAS 128, the basic and diluted earnings per share amounts for the
year ended July 31, 1997 would be the same as earnings per share presented on
the Consolidated Statements of Operations.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
current year's financial statement presentation.
NOTE 2 - FIXED ASSETS
Fixed asset balances at July 31, 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.
F-12
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each issued and outstanding share of FormMaker common stock, and each
option or warrant to purchase common stock was exchanged for .6818 shares of
Company 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 acquire or 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 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
Net income per share -- $ .15
</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
</TABLE>
F-13
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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.
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>
F-14
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following at July 31:
<TABLE>
<CAPTION>
1996 1997
---- ----------
<S> <C> <C>
Revolving credit facility with bank ............................ $ 0 $5,471,634
Notes payable to Safeguard ..................................... 0 479,174
Subordinated notes payable to Safeguard, Technology Leaders II,
L.P., and TL Ventures Third Corp. .......................... 0 3,000,000
----- ----------
0 8,950,808
Less current portion of debt ................................... 0 (191,652)
----- ----------
$ 0 $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.
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%, 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%, 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.
F-15
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Activity under all plans is summarized as follows:
F-16
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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>
F-17
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
Pro forma net loss per share:
As reported.................. (1.41)
As adjusted.................. (1.42)
</TABLE>
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
Warrants Price
Share
---------- --------
<S> <C> <C>
Warrants to Safeguard, Technology Leaders II,
L.P., and Technology Leaders II Offshore C.V...... 258,330 $ .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>
F-18
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES
<TABLE>
<CAPTION>
Deferred tax assets (liabilities) are comprised of the following at July 31:
1995 1996 1997
---------- ---------- ------------
<S> <C> <C> <C>
Gross deferred tax assets:
Deferred revenue...................................... $ 387,222 $ 261,500 $ 128,156
Loss carry forwards................................... 0 0 2,491,006
Tax credit carry forwards............................. 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>
<TABLE>
<CAPTION>
The provision (benefit) for income taxes charged to operations was as follows:
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>
F-19
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 carry
forwards.
At July 31, 1997, the Company had net operating loss carry forwards 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 carry
forwards. The tax credit carry forwards 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 carry forwards 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 outstanding common stock at
July 31, 1997. Interest expense related to notes payable to these parties
totaled $69,917 in 1997. The balance of this debt and other related party
transactions are also described elsewhere in the notes to consolidated financial
statements.
FormMaker has entered into various agreements with a major customer
("Policy Management Systems" or "PMSC") to provide certain 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
F-20
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
F-21
<PAGE>
DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma
October 31, 1997 (Note 6)
---------------- -------------
<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
============ ============
</TABLE>
F-22
<PAGE>
DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
OCTOBER 31, 1997 (NOTE 6)
---------------- ----------
<C> <C>
<S>
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
Obligations under capital leases................... 0 0
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 $.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 $.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-23
<PAGE>
DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended
October 31, 1997
---------------------
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
========== ===========
UNAUDITED PRO FORMA DATA:
Pro forma net income per share...................................... $0.06 $0.05
========= ===========
Weighted average shares outstanding used in the pro forma net income
per share calculation.............................................. 9,910,881 13,611,879
========= ==========
Supplemental pro forma net income per share......................... $0.06 $0.05
========= ===========
Weighted average shares outstanding used in the supplemental pro
forma net income per share calculation............................. 9,910,881 15,208,302
========= ===========
</TABLE>
F-24
<PAGE>
DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
October 31, 1997
-------------------------
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-25
<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>
F-26
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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").
NOTE 4 - PRO FORMA NET INCOME PER SHARE
Historical net income per share has been excluded from the Company's
Interim Consolidated Statements of Operations on the basis that it is irrelevant
due to the planned conversion of all outstanding Class B common stock on a one-
for-one basis concurrent with the effectiveness of the Company's initial public
offering (IPO). Pro forma net income 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 (i) all shares of Class B common stock have been converted to
shares of Common Stock as of the date of issuance and (ii) all shares, options
and warrants issued subsequent to January 1997 at an exercise price less than
the IPO price have been included in the calculation as if they were outstanding
for the entire period presented using the treasury stock method and IPO price.
NOTE 5 - 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 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 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 6 - 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.
F-27
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share",
which is required to be adopted for fiscal periods ending after December 15,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating basic earnings per share, the dilutive effect
of stock options and warrants will be excluded.
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-28
<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-29
<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 $.01 per share; 20,000,000 shares authorized,
no shares issued and outstanding at December 31, 1995 and 1996
Common Stock, par value $.01 per share; 20,000,000 shares authorized, 54,998 62,295
5,499,795 and 6,229,511 shares issued and outstanding at
December 31, 1995 and 1996, respectively............................
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
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-30
<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)
========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-31
<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 3,110,387
Stock warrants issued....... 1,030,956 10,310 $783,053 2,317,024
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-32
<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
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-33
<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.
F-34
<PAGE>
FORMMAKER SOFTWARE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 is 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 life.
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
F-35
<PAGE>
FORMMAKER SOFTWARE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
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.
F-36
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
========== ==========
Bad debt expense was $8,500, $151,853 and $0 for 1994, 1995 and 1996, respectively.
</TABLE>
F-37
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
F-38
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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% 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%.
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:
F-39
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1995 1996
----------- ------------
Deferred tax assets:
<S> <C> <C>
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 carry forwards for
U.S. tax purposes of approximately $6,350,000. The net operating loss carry
forwards generally expire in the years ending 2000 through 2011. At December 31,
1996, FormMaker had Research and Development (R&D) credit carry forwards of
approximately $212,000. The R&D credit carry forwards will generally expire in
the years ending 2006 through 2011. Due to ownership changes, a portion of
FormMaker's net operating loss carry forwards and R&D 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 carry forwards.
F-40
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
F-41
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-42
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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:
F-43
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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, 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 $.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.
F-44
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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").
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.
F-45
<PAGE>
FORMMAKER SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-46
<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 $.01 per share; 20,000,000
shares authorized, 6,229,511 shares issued and outstanding..... 62,296
Additional paid-in capital..................................... 7,312,516
Accumulated deficit............................................ (3,136,036)
Notes receivable - stockholders................................ (71,175)
------------
Total stockholders' equity................................. 4,167,600
------------
$17,914,795
============
</TABLE>
F-47
<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-48
<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
Net loss............................................... $ (255,270) $ (595,701)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation.................................... 202,096 254,372
Amortization of capitalized software............ 195,306 311,658
Amortization of goodwill........................ - 79,013
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
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-49
<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, Inc. ("DocuCorp"). The Merger was completed
on May 15, 1997, FormMaker's financial results will be included with DocuCorp
F-50
<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 approximately
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
INFORMATION 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
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE 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
IMPLICATION 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.................................... 8
The Offering.................................... 15
Federal Income Tax Consequences................. 18
Use of Proceeds................................. 20
Dividend Policy................................. 20
Capitalization.................................. 21
Dilution........................................ 22
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.................................... 28
Business........................................ 38
Management...................................... 49
Certain Relationships and Related Transactions.. 56
Principal and Selling Stockholders.............. 57
Description of Capital Stock.................... 59
Shares Eligible for Future Sale................. 61
Underwriting.................................... 63
Legal Matters................................... 65
Experts......................................... 65
Available Information........................... 65
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
DISTRIBUTION, 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.
6,720,000 SHARES
(AND RIGHTS TO ACQUIRE
UP TO 6,400,000 OF SUCH SHARES)
DOCUCORP INTERNATIONAL, INC.
COMMON STOCK
____________
PROSPECTUS
____________
TUCKER ANTHONY INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
, 1998
================================================================================
<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:
Securities and Exchange Commission registration fee.................. $10,856
NASD filing fee...................................................... *
Nasdaq filing fee.................................................... *
Printing and engraving expenses...................................... *
Legal fees and expenses.............................................. *
Accounting fees and expenses......................................... *
Blue Sky fees and expenses (including legal fees).................... *
Transfer agent and rights agent and registrar fees and expenses...... *
Miscellaneous........................................................ *
Total........................................................... $1,000,000
_______________________
*To be filed by amendment
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.
II-1
<PAGE>
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.
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:
Exhibit Number Description Page No.
-------------- ----------- --------
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.
II-2
<PAGE>
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)
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's
Registration 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)
II-3
<PAGE>
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).
24.1* Power of Attorney (included on signature page).
27.1* Financial Data Schedule.
____________________
* Filed herewith.
# To be filed by amendment.
(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
II-4
<PAGE>
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.
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>
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JULY 31, 1997, 1996 AND 1995
SCHEDULE II
<TABLE>
<CAPTION>
Additions
-----------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
(a) (a)(b)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Allowance for doubtful accounts $ 350,000 $ 363,556 ($188,556) $ 0 $ 525,000
Valuation allowance against
deferred tax assets $ 0 $1,392,817 $ 0 $ 0 $1,392,817
1996
Allowance for doubtful accounts $ 325,000 $ 350,131 ($325,131) $ 0 $ 350,000
1995
Allowance for doubtful accounts $ 325,000 $ 271,447 ($271,447) $ 0 $ 325,000
</TABLE>
(a) Such amounts include balances assumed in the acquisition of FormMaker
Software, Inc. See Notes to Consolidated Financial Statements for further
discussion.
(b) Such amounts relate to the utilization of the valuation and qualifying
accounts to specific items for which they were established in the accounts
receivable accounts.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Dallas, Texas on January 16, 1998.
DOCUCORP INTERNATIONAL, INC.
By: /s/ Michael D. Andereck
------------------------------
Michael D. Andereck
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael D. Andereck and Arthur R. Spector or
either of them acting alone, his or her true and lawful attorney-in-fact and
agent, with full power of substitution and revocation, for him or her and in his
or her name, place and stead, in any and all capacities, to sign (i) any and all
amendments (including post-effective amendments) to this Registration Statement
and to file the same with all exhibits thereto, and other documents in
connection therewith and (ii) any registration statement and any and all
amendments thereto, relating to the offer covered hereby filed pursuant to Rule
462(b) under the Securities Act of 1933, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or his or their substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
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 Executive Officer, January 16, 1998
- --------------------------------------- and Director (Principal Executive Officer)
Michael D. Andereck
/s/ Todd A. Rognes Senior Vice President, Finance (Principal
- --------------------------------------- Financial and Accounting Officer) January 16, 1998
Todd A. Rognes
/s/ Milledge A. Hart, III Chairman of the Board January 16, 1998
- ---------------------------------------
Milledge A. Hart, III
/s/ Sidney B. Landman Director January 16, 1998
- ---------------------------------------
Sidney B. Landman
/s/ John D. Loewenberg Director January 16, 1998
- ---------------------------------------
John D. Loewenberg
/s/ Warren V. Musser Director January 16, 1998
- ---------------------------------------
Warren V. Musser
/s/ George F. Raymond Director January 16, 1998
- ---------------------------------------
George F. Raymond
/s/ Arthur R. Spector Director January 16, 1998
- ---------------------------------------
Arthur R. Spector
</TABLE>
<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)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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's
Registration 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)
</TABLE>
<PAGE>
<TABLE>
<S> <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 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).
24.1* Power of Attorney (included on signature page).
27.1* Financial Data Schedule.
</TABLE>
___________________
* Filed herewith.
# To be filed by amendment.
<PAGE>
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
OF
DOCUCORP, INC.
DOCUCORP, INC. (the "Corporation"), which is existing under and by virtue
of the Delaware General Corporation Law, does hereby certify as follows:
FIRST: The Board of Directors of the Corporation has adopted a resolution
-----
approving the following as an amendment to the Certificate of Incorporation of
the Corporation:
Article Third of the Certificate of Incorporation is amended to read
in its entirety as follows:
"THIRD: Capitalization. The total number of shares of stock that the
--------------
Corporation shall have authority to issue is 58,000,000 shares of
capital stock, consisting of 50,000,000 shares of Common Stock, par
value $0.01 per share (the 'Common Stock'), 7,000,000 shares of Class
B Common Stock, par value $0.01 per share (the 'Class B Common
Stock'), and 1,000,000 shares of Preferred Stock, par value $0.01 per
share (the 'Preferred Stock'). The Common Stock and the Class B
Common Stock are referred to herein collectively as the 'Common
Shares.' Upon conversion in accordance with the provisions of Section
A(4) hereof or the redemption in accordance with the provisions of
Section A(5) hereof of all issued and outstanding shares of Class B
Common Stock, the Common Stock shall thereafter be referred to as the
'Common Stock,' and all references herein to the Common Stock shall be
deemed to be so amended.
The voting powers, designations, preferences and relative,
participating, optional or other special rights and qualifications,
limitations or restrictions of the classes of stock of the Corporation
are as follows:
A. Common Shares. All Common Shares shall be identical and shall
-------------
entitle the holders thereof to the same rights and privileges, except
as otherwise provided herein.
(1) Voting Rights. Except as set forth herein or as other-wise
-------------
required by law, the holders of Common Shares shall be entitled to one
vote per share on each matter on which the stockholders of the
Corporation shall be entitled to
<PAGE>
vote. Any amendment of this Article Third shall require the approval
of a majority of the holders of the Common Stock and 75% of the
holders of the Class B Common Stock, voting as separate classes.
(2) Dividends. The Board of Directors of the Corporation may cause
---------
dividends or other distributions to be paid to the holders of Common
Shares out of funds legally available for the payment of dividends by
declaring an amount per share as a dividend or other distribution.
When and as dividends or other distributions are declared on any class
of Common Shares, whether payable in cash, property or shares of stock
of the Corporation, the holders of Common Shares shall be entitled to
share ratably, share for share, in such dividends; provided, however,
that if dividends are declared that are payable in Common Shares, or
options, warrants or rights to acquire Common Shares or securities
convertible into or exchangeable for Common Shares, the shares,
options, warrants, rights or securities so payable shall be payable in
shares of, or options, warrants or rights to acquire, or securities
convertible into or exchangeable for, Common Shares of the same class
upon which the dividend is paid.
(3) Liquidation Rights.
------------------
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation and after
payment shall have been made to the holders of shares of Preferred
Stock of the full amount to which they may be entitled, the holders of
Common Shares shall be entitled to share ratably according to the
number of Common Shares held by them in all assets of the Corporation
available for distribution to its stockholders.
(b) Neither a consolidation or merger of the Corporation with or into
any other corporation, nor a merger of any other corporation into the
Corporation, nor a reorganization of the Corporation, nor the purchase
or redemption of all or part of the outstanding shares of any class or
classes of the Corporation, nor a sale or transfer of all or any part
of its assets shall be considered a liquidation, dissolution or
winding up of the Corporation within the meaning of this Section A(3).
2
<PAGE>
(4) Conversion of Class B Common Stock.
----------------------------------
(a) Automatic Conversion. If, at any time prior to the Redemption
--------------------
Claim Period Expiration Date (as defined below), the Corporation
consummates an underwritten public offering of securities of the
Corporation in which the managing underwriter values the equity of the
Corporation at $62.1 million or more as of the pricing of the offering
and without taking into account any proceeds to be received from such
offering (subject to increase based upon equity issuances by the
Corporation other than as contemplated by the Agreement and Plan of
Merger among the Corporation, FormMaker Software, Inc. ('FSI'), Image
Sciences, Inc. ('ISI'), FormMaker Acquisition Corp. and ISI Merger
Corp. (the 'Merger Agreement') and the Liquidity Agreement among the
Corporation, Safeguard Scientifics (Delaware), Inc. ('Safeguard'),
Technology Leaders II L.P. ('TL II') and Technology Leaders II
Offshore C.V. ('TL II Offshore') (the 'Liquidity Agreement')) (a
'Qualified Public Offering'), each share of Class B Common Stock
issued and outstanding as of immediately prior to the sale of such
equity securities pursuant to the Qualified Public Offering (the
'Conversion Date') shall, ipso facto, automatically and without any
---- -----
action on the part of the holder thereof, be changed, converted and
reclassified into a share of Common Stock and all obligations on the
part of the Company to redeem shares of Class B Common Stock shall
cease (a 'Conversion Event'). Upon the occurrence of an Automatic
Conversion, all outstanding rights to acquire Class B Common Stock
shall convert into rights to acquire Common Stock.
(b) Reservation of Shares. The Corporation shall at all times
---------------------
reserve and keep available out of its authorized but unissued shares
of Common Stock or its treasury shares, solely for the purpose of
effecting a Conversion Event, such number of shares of Common Stock as
shall then be equal to the number of issued and outstanding shares of
Class B Common Stock plus the number of shares of Class B Common Stock
issuable upon the exercise, conversion or exchange of any outstanding
rights to acquire shares of Class B Common Stock.
(c) No Reissuance of Shares. Shares of Class B Common Stock that are
-----------------------
converted into shares of Common Stock
3
<PAGE>
pursuant to Section A(4)(a) may not be reissued.
(d) Delivery of New Certificates. Upon the occurrence of a Conversion
----------------------------
Event, each holder of certificates representing shares of Class B
Common Stock shall deliver and surrender all of such certificates to
the Corporation for cancellation after the Conversion Date, and shall
receive upon such delivery, surrender and cancellation, or as soon
thereafter as is practicable, in place thereof a certificate or
certificates for such number of shares of Common Stock into which such
holder's shares of Class B Common Stock were converted on the
Conversion Date. After the Conversion Date, no dividend or
distribution shall be paid upon, and no voting rights shall be
exercisable with respect to, any shares of Common Stock issuable upon
the conversion of any shares of Class B Common Stock that were
formerly represented by a certificate or certificates that have not be
surrendered to the Corporation in exchange for certificates
representing shares of Common Stock as contemplated by this Section
A(4)(d); but any such dividends or distributions shall be payable to
the holders of any such unsurrendered certificates, without interest,
upon the surrender of their outstanding certificates.
(e) Interim Rights. Until surrendered as provided in Section
--------------
A(4)(d), as of the Conversion Date, certificates formerly representing
shares of Class B Common Stock shall be treated for all corporate
purposes as representing solely the right to receive the shares of
Common Stock into which such shares of Class B Common Stock were
converted on the Conversion Date, and any dividends, distributions or
sale proceeds to which the holders of such unsurrendered certificates
may be entitled under Section A(4)(d) and Section A(4)(f), all upon
surrender of such certificates.
(f) Sale of Stock. If any stockholders of the Corporation shall
-------------
fail, within two years after the Conversion Date, to surrender
certificates formerly representing shares of Class B Common Stock held
by the stockholders prior to the Conversion Date, the shares of Common
Stock issued upon the occurrence of a Conversion Event shall be sold
by the Corporation, and the net proceeds of the sale shall be held for
the holders of the outstanding certificates formerly
4
<PAGE>
representing shares of Class B Common Stock, and be paid to them upon
the surrender of their outstanding certificates. From and after such
sale, the sole right of the holders of the unsurrendered outstanding
certificates representing shares of Class B Common Stock shall be the
right to collect the net sales proceeds held for their account,
without interest, together with the amounts, if any, payable under
Section A(4)(d).
(g) Stock Splits; Adjustments.
-------------------------
(i) If the Corporation shall in any manner subdivide (by stock
split, stock dividend or otherwise) or combine (by reverse stock split
or otherwise) the outstanding shares of Common Stock or the Class B
Common Stock, the outstanding shares of the other class of Common
Shares shall be proportionately subdivided or combined and effective
provision shall be made for the protection of all conversion and
redemption rights hereunder.
(ii) In case of any reorganization, reclassification or change
of Common Stock (other than a change in par value as a result of a
subdivision or combination, or a change from par value to no par
value), or in case of any consolidation of the Corporation with one or
more other corporations or a merger of the Corporation with another
corporation (other than a merger in which the Corporation is the
continuing corporation and which does not result in any
reclassification or change or outstanding shares of Common Stock), or
in case of any sale, lease or other disposition to another corporation
(other than a wholly-owned subsidiary of the Corporation) of all or
substantially all the assets of the Corporation, each holder of shares
of Class B Common Stock shall have the right at any time thereafter,
if and so long as the conversion right hereunder with respect to such
shares of Class B Common Stock would exist had such event not
occurred, to convert such shares of Class B Common Stock into the kind
and amount of shares of stock and other securities and property
(including cash) receivable upon such reorganization,
reclassification, change, consolidation, merger, sale, lease or other
disposition by a holder of the number of shares of Common Stock into
which such shares of Class B Common Stock could have been converted
had such reorganization, reclassification, change, consolidation,
merger, sale, lease or other disposition not occurred. In the event
of such a reorganization, reclassification, change, consolidation,
merger, sale, lease
5
<PAGE>
or other disposition, effective provision shall be made in the
certificate or articles of incorporation of the resulting or surviving
corporation, as the case may be, or otherwise for the protection of
the conversion rights of the shares of Class B Common Stock, as nearly
as reasonably may be, into any such other shares of stock and other
securities and property deliverable upon conversion, exchange or other
disposition of the shares of Common Stock into which such shares of
Class B Common Stock could have been converted had such event not
occurred. In the case of any of the actions specified in this Section
A(4)(g), the holders of 75% of the shares of Class B Common Stock may
approve a treatment of such class in connection with any such action
that differs from the treatment specified in this Section A(4)(g), and
such differing treatment, if otherwise approved by all other classes
of stockholders that may be required to take action thereon pursuant
to law or the applicable certificate or articles of incorporation, as
the case may be, shall be binding upon all holders of the shares of
the Class B Common Stock as so approved by the affirmative vote of
holders of 75% of the Class B Common Stock.
(5) Redemption of Class B Common Stock.
----------------------------------
(a) Notice of Redemption Rights. If a Qualified Public Offering is
---------------------------
not consummated by the Corporation on or before January 31, 1998 (the
'Offering Period Termination Date'), within five business days of the
Offering Period Termination Date, the Corporation shall mail to all
holders of issued and outstanding shares of Class B Common Stock as of
the close of business on the Offering Period Termination Date, by
first class mail, postage prepaid, to the last address for each such
holder as indicated in the stock register of the Corporation, a notice
(the 'Redemption Notice') stating:
(i) that the Corporation shall redeem any issued and outstanding
shares of Class B Common Stock for which a redemption claim (a
'Redemption Claim') complying with the provisions of Section A(5)(d)
is made by the holder thereof (the 'Redemption Shares') during the
period of time (the 'Redemption Claim Period') beginning on the first
day
6
<PAGE>
after the Offering Period Termination Date and ending on February 1,
1999 (the 'Redemption Claim Period Expiration Date'), provided that a
Conversion Event has not occurred,
(ii) the Redemption Price (as defined below), and
(iii) the Redemption Claim Period Expiration Date.
(b) Redemption Price.
----------------
(i) The Corporation shall pay the 'Redemption Price' (as
defined below) for each Redemption Share for which a Redemption Claim
has been received during the Redemption Claim Period that complies
with Section A(5)(d). The Redemption Price shall be mailed by the
Corporation to the holders of Redemption Shares, by first class mail,
postage prepaid, no later than 60 days after receiving a Redemption
Claim complying with Section A(5)(d). The Corporation shall issue
shares of Common Stock under the Liquidity Agreement for cash in order
to fund its obligation to pay the Redemption Price. In no event shall
the Corporation amend or terminate the Liquidity Agreement in any
manner which would adversely affect the right of the holders of Class
B Common Stock to receive the Redemption Price, without the prior
consent of the holders of 75% of the Class B Common Stock. Upon any
issuance of Common Stock for cash pursuant to the Liquidity Agreement,
the Corporation shall segregate the cash proceeds therefrom and shall
hold the same in trust solely for the payment of the Redemption Price
(it being acknowledged that the holders of the Class B Common Stock
shall have, and are hereby granted, a security interest in such
proceeds to secure the performance of the Corporation's obligation to
timely pay the Redemption Price).
(ii) As used herein, 'Redemption Price' shall mean the sum of
$3.45 per share in cash; provided, however, that if the increase of
pro forma combined revenues of ISI and consolidated FSI for the 12
month period ending July 31, 1997 over pro forma combined revenues of
ISI and consolidated FSI for the 12 month period ending July 31, 1996
exceeds 20%, then the Redemption Price shall be increased to $4.08 per
share in cash.
7
<PAGE>
(iii) Notwithstanding any other provision of this Certificate of
Incorporation, (A) the Corporation's maximum redemption obligation
hereunder shall not exceed the result of (1) 6,100,000 ( the 'Maximum
B Shares'), multiplied by (2) $3.45 or $4.08, whichever is applicable
under subparagraph (ii) of this Section A(5)(b) (such result is
referred to herein as the 'Maximum Redemption Obligation'), and (B) if
as of the close of business on the Offering Period Termination Date,
the sum of the number of shares of Class B Common Stock outstanding
and the total number of shares of Class B Common Stock that are
issuable pursuant to outstanding rights exceeds the Maximum B Shares,
the Redemption Price for each share of Class B Common Stock shall be
reduced to the extent necessary so that it does not exceed the
quotient of the Maximum Redemption Obligation divided by the Maximum B
Shares. If the Corporation shall in any manner subdivide (by stock
split, stock dividend or otherwise) or combine (by reverse stock split
or otherwise) the outstanding shares of Class B Common Stock, the
Redemption Price shall be appropriately adjusted to account for the
change in the number of shares.
(c) Effect of Non-Redemption. Subject to the last paragraph of
------------------------
Section A(5)(d), in the event that a holder of shares of Class B
Common Stock does not prior to the Redemption Claim Period Expiration
Date redeem such shares, redeems only a portion of such shares prior
to the Redemption Claim Period Expiration Date or fails to comply with
the provisions of Section A(5)(d) with respect to Redemption Claims,
all shares of Class B Common Stock held by such holder as of the
Redemption Claim Expiration Date shall be automatically converted into
shares of Common Stock in accordance with the provisions of Section
A(4).
(d) Redemption Claims. The Corporation shall not be obligated to
-----------------
redeem issued and outstanding shares of Class B Common Stock during
the Redemption Claim Period unless the holder thereof submits to the
Corporation a written Redemption Claim containing the information
specified below, accompanied by the certificate or certificates, or an
affiliate of loss if such certificate or certificates have been lost
or destroyed, evidencing the Redemption Shares, by means of first
class mail, overnight
8
<PAGE>
delivery service or hand delivery, which Redemption Claim must be
received by the Corporation at its principal executive office by no
later than 5:00 p.m., Eastern time, on the Redemption Claim Expiration
Date. The Redemption Claim shall provide the following information:
(i) notice to the Corporation that the holder intends to
redeem all or a portion of the shares of Class B Common Stock owned of
record by such holder,
(ii) the number of shares of Class B Common Stock owned of
record by such holder,
(iii) if less than all the shares of Class B Common Stock owned
of record by such holder are to be redeemed, the number of shares and
the certificate numbers thereof which are to be redeemed,
(iv) if less than all the shares of Class B Common Stock owned
of record by such holder are to be redeemed, if applicable, the name
in which a certificate for the remaining shares of Class B Common
Stock not being redeemed shall be issued and an acknowledgment that
the holder of record of such shares shall be responsible for all
transfer taxes with respect to such transfer,
(v) the name of the person and address to which the Redemption
Price for the Redemption Shares shall be mailed by the Corporation,
and if such person is not the record holder of the Redemption Shares,
authorization to the Corporation to pay the Redemption Price to such
person, and
(vi) the federal tax identification number for the person
receiving the Redemption Price for tax reporting purposes.
If the Redemption Claim is defective in any material respect, the
Corporation shall set aside an amount in cash equal to the Redemption
Price multiplied by the number of Redemption Shares represented by the
certificate or certificates, or affidavit of loss, submitted with the
Redemption Claim until such time as the defect in the notice is cured.
9
<PAGE>
(e) Effect of Redemption. On and after the redemption of Redemption
--------------------
Shares pursuant to Section A(5), all rights, privileges and
preferences with respect to the Redemption Shares, except the right to
receive the Redemption Price for the Redemption Shares as provided in
Section A(5), shall cease, and such shares shall no longer be deemed
to be outstanding, on the condition that the Corporation mails or
irrevocably deposits or sets aside cash in an amount equal to the
Redemption Price for the Redemption Shares. Notwithstanding anything
herein to the contrary, the Corporation shall not be obligated to
redeem any Redemption Shares during the Redemption Claim Period to the
extent that the redemption thereof would violate any law, statute,
rule, regulation, policy or guideline promulgated by any federal,
state, local or foreign governmental authority applicable to the
Corporation, provided that the Corporation shall redeem such shares as
soon as permitted by applicable laws, statutes, rules, regulations,
policies and guidelines.
(f) No Reissuance. Shares of Class B Common Stock redeemed by the
-------------
Corporation shall be canceled, and shall not be reissued by the
Corporation.
(g) No Issuance During Redemption Claim Period. Not-withstanding any
------------------------------------------
other provision of this Certificate of Incorporation, during the
Redemption Claim Period, except pursuant to securities, stock options
or other rights that are outstanding at the beginning of the
Redemption Claim Period, the Corporation shall not issue any shares of
Class B Common Stock nor any securities, stock options or other rights
that are convertible into or exercisable or exchangeable for any
shares of Class B Common Stock, nor shall the Corporation take any
other action that may result in the issuance of any shares of Class B
Common Stock in connection with a stock dividend, stock split or
otherwise.
B. Preferred Stock. The Board of Directors of the Corporation shall
---------------
have the full authority permitted by law to fix by resolution, full,
limited or no voting powers and such designations, preference and
relative, participating, optional or other special rights and
qualifications, limitations or restrictions of any series of Preferred
Stock that may be desired."
10
<PAGE>
SECOND: That thereafter shareholders of the Corporation entitled to vote
------
on the proposed amendment approved the proposed amendment by a written consent
executed by the holders of the necessary number of shares of common stock in
accordance with Section 228 of the Delaware General Corporation Law.
THIRD: That this amendment was duly adopted in accordance with the
-----
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
FOURTH: That this Certificate of Amendment shall be effective upon the
------
filing hereof.
The undersigned, being the President of the Corporation, for the purpose of
amending the Certificate of Incorporation of said corporation pursuant to the
Delaware General Corporation Law, does make this certificate, hereby declaring
and certifying that this is his act and deed and the facts herein stated are
true, and accordingly has hereunto set his hand this 15th day of January, 1998.
DOCUCORP, INC.
By: /s/Michael D. Andereck
-------------------------------------------
Michael D. Andereck
President
11
<PAGE>
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
OF
DOCUCORP, INC.
DOCUCORP, INC. (the "Corporation"), which is existing under and by virtue
of the Delaware General Corporation Law, does hereby certify as follows:
FIRST: The Board of Directors of the Corporation has adopted a resolution
-----
approving the following amendments to ARTICLE FIRST and ARTICLE ELEVENTH to the
Certificate of Incorporation of the Corporation, to be amended in their
entirety:
Article First of the Certificate of Incorporation is amended to read
in its entirety as follows:
"FIRST: Name. The name of the corporation is DocuCorp International,
----
Inc. (the 'Corporation')."
Article Eleventh of the Certificate of Incorporation is amended to
read in its entirety as follows:
"ELEVENTH: No action shall be taken by the stockholders of the
Corporation except at an annual or special meeting of stockholders
called in accordance with the Bylaws, and no action shall be taken by
the stockholders by written consent in lieu of a meeting."
SECOND: That thereafter shareholders of the Corporation entitled to vote
------
on the proposed amendment approved the proposed amendment by a written consent
executed by the holders of the necessary number of shares of common stock in
accordance with Section 228 of the Delaware General Corporation Law.
THIRD: That this amendment was duly adopted in accordance with the
-----
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
FOURTH: That this Certificate of Amendment shall be effective upon the
------
filing hereof.
<PAGE>
The undersigned, being the President of the Corporation, for the purpose of
amending the Certificate of Incorporation of said corporation pursuant to the
Delaware General Corporation Law, does make this certificate, hereby declaring
and certifying that this is his act and deed and the facts herein stated are
true, and accordingly has hereunto set his hand this 16th day of January, 1998.
DOCUCORP, INC.
By: /s/Michael D. Andereck
---------------------------------
Michael D. Andereck
President
2
<PAGE>
DOCUCORP INTERNATIONAL
1997 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1997 Employee Stock Purchase
Plan of DocuCorp International.
1. Purpose. The purpose of the Plan is to provide Employees of the
Company and its Designated Subsidiaries with an opportunity to
purchase Common Stock of the Company through accumulated payroll
deductions. It is the intention of the Company to have the Plan
qualify as an "Employee Stock Purchase Plan" under Section 423 of the
Internal Revenue Code of 1986, as amended. The provisions of the Plan,
accordingly, shall be construed so as to extend and limit
participation in a manner consistent with the requirements of that
section of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" shall mean the Class A Common Stock of the
Company.
(d) "Company" shall mean DocuCorp Inc. (also doing business as
DocuCorp International), a Delaware corporation, and any
Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings
and sales commissions, overtime pay and cash bonuses.
(f) "Designated Subsidiaries" shall mean the Subsidiaries which have
been designated by the Board from time to time in its sole
discretion as eligible to participate in the Plan.
(g) "Employee" shall mean any Employee of the Company for tax
purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any
calendar year. For purposes of the Plan, the employment
relationship shall be treated as continuing intact while the
individual is on sick leave or other leave of absence approved by
the Company. Where the period of leave exceeds 90 days and the
individual's right to reemployment is not guaranteed either by
statute or by contract, the employment relationship will be
deemed to have terminated on the 91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each Offering
Period.
(i) "Exercise Date" shall mean the last day of each Offering Period.
(j) "Fair Market Value" shall mean, as of any date, the value of
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without
limitation The NASDAQ National Market or the NASDAQ Small
Cap Market of The NASDAQ Stock Market, its Fair Market Value
shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such
exchange or system for the last market trading day prior to
the time of determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable,
or;
1
<PAGE>
(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its
Fair Market Value shall be the mean of the closing bid and
asked prices for the Common Stock on the date of such
determination, as reported in The Wall Street Journal or
such other source as the Board deems reliable, or;
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in
good faith by the Board.
(k) "Offering Period" shall mean a period of approximately six (6)
months, commencing on an Enrollment Date and terminating on an
Exercise Date. The first Offering Period shall commence on the
first Trading Day following January 1, 1998 and shall terminate
on the last Trading Day of the sixth month following the
commencement of the Offering Period. Thereafter, Offering Periods
shall commence on the first Trading Day following termination of
the prior Offering Period and shall terminate on the last Trading
Day of the sixth month following commencement of such Offering
Period.
(l) "Parent" shall mean any corporation, domestic or foreign, in an
unbroken chain of corporations ending with the Company if each
corporation in the chain (other than the Company) owns stock
possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in the chain.
(m) "Plan" shall mean this 1997 Employee Stock Purchase Plan.
(n) "Purchase Price" shall mean an amount equal to not less than 85%
of the Fair Market Value of a share of Common Stock on the
Enrollment Date or on the Exercise Date, whichever is lower. If
the Enrollment Date shall fall on a Saturday, Sunday, or other
legal holiday, the Fair Market Value shall be determined as of
the Trading Day immediately preceding the Enrollment Date.
(o) "Reserves" shall mean the number of Shares covered by each option
under the Plan which have not yet been exercised and the number
of Shares which have been authorized for issuance under the Plan
but not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the
Company or a Subsidiary, whether or not such corporation now
exists or is hereafter organized or acquired by the Company or a
Subsidiary.
(q) "Trading Day" shall mean a day on which national stock exchanges
and The NASDAQ Stock Market are open for trading.
(r) "Shares" shall mean shares of Common Stock pursuant to the Plan.
3. Eligibility.
(a) Any Employee (as defined in Section 2(g)), who shall be employed
by the Company on a given Enrollment Date shall be eligible to
participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the
extent, immediately after the grant, such Employee (or any other
person whose stock would be attributed to such Employee pursuant
to Section 424(d) of the Code) would own capital stock and/or
hold outstanding options to purchase such stock possessing five
percent (5%) or more of the total combined voting power or value
of all classes of the capital stock of the Company or of any
Parent, Subsidiary, or (ii) to the extent his or her rights to
purchase stock under all Employee stock purchase plans (as
defined in Section 423(b) of the Code) of the Company and any
Parent or its subsidiaries will not accrue at a rate which
exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock
(determined at the Fair Market Value of
2
<PAGE>
the shares at the time such option is granted) for each calendar
year in which such option is outstanding at any time. The accrual
of rights to purchase stock shall be determined in accordance
with Section 423(b)(8) of the Code.
4. Offering Periods. The Plan shall be implemented by consecutive
Offering Periods. The Board shall have the power to change the
duration of Offering Periods (including the commencement dates
thereof) with respect to future offerings without shareholder approval
if such change is announced at least fifteen (15) days prior to the
scheduled beginning of the first Offering Period to be affected
thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing an enrollment agreement authorizing payroll deductions
in the form of Exhibit A to this Plan and filing it with the
Company's Human Resources office not later than one day prior to
the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last
payroll in the Offering Period to which such authorization is
applicable, unless sooner terminated by the participant as
provided in Section 10 hereof.
6. Payroll Deductions.
(a) At the time a participant files his or her enrollment agreement,
he or she shall elect to have payroll deductions made on each pay
day during an Offering Period in an amount not exceeding ten
percent (10%) of the Compensation which he or she receives on
each pay day during the Offering Period.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and will be withheld in
whole percentages only. A participant may not make any additional
payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, but may not otherwise
increase or decrease the rate of his or her payroll deductions
during the Offering Period. A participant's enrollment agreement
shall remain in effect for successive Offering Periods unless
terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be decreased to 0% at such
time during any Offering Period which is scheduled to end during
the current calendar year (the "Current Offering Period") that
the aggregate of all payroll deductions which were previously
used to purchase stock under the Plan in a prior Offering Period
which ended during that calendar year plus all payroll deductions
accumulated with respect to the Current Offering Period equal
$21,250. Payroll deductions shall recommence at the rate provided
in such participant's enrollment agreement at the beginning of
the first Offering Period which is scheduled to end in the
following calendar year, unless terminated by the participant as
provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under
the Plan is disposed of, the participant must make adequate
provision for the Company's federal, state, or other tax
withholding obligations, if any, which arise upon the exercise of
the option or the disposition of the Common Stock. At any time,
the Company may, but will not be obligated to, withhold from the
participant's Compensation the amount necessary for the Company
to meet applicable withholding obligations, including any
3
<PAGE>
withholding required to make available to the Company any tax
deductions or benefits attributable to sale or early disposition
of Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be
granted an option to purchase on the Exercise Date of such Offering
Period (at the applicable Purchase Price) up to a number of shares of
the Company's Common Stock determined by dividing such Employee's
payroll deductions accumulated prior to such Exercise Date, inclusive
of interest, and retained in the participant's account as of the
Exercise Date by the applicable Purchase Price. During a six month
Offering Period no Employee shall be permitted to purchase, more than
3,000 shares (or such lesser number determined by the Board);
provided, however, that such limit shall be adjusted proportionately
in the event of an Offering Period longer than six months. All such
purchases shall also be subject to the limitations set forth in
Sections 3(b) and 11 hereof. Exercise of the option shall occur as
provided in Section 8 hereof, unless the participant has withdrawn
pursuant to Section 10 hereof, and shall expire on the last day of the
Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in Section 10 hereof, his or her option for the purchase of
shares shall be exercised automatically on the Exercise Date, and the
maximum number of full shares subject to option shall be purchased for
such participant at the applicable Purchase Price with the accumulated
payroll deductions in his or her account. No fractional shares shall
be purchased; any payroll deductions accumulated in a participant's
account which are not sufficient to purchase a full share shall be
carried over in the participant's account into the next Offering
Period. During a participant's lifetime, a participant's option to
purchase shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on which
a purchase of shares occurs, the shares shall be credited to an
account in the participant's name under the Plan. Certificates for
shares shall not be issued and delivered to a participant unless
requested by such participant; provided, however, that prior to a
participant's withdrawal from the Plan such request may be made (i)
not more than once per year and (ii) only with respect to shares
purchased on an Exercise Date at least two years prior to the date of
such request.
10. Withdrawal; Termination of Employment.
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to
exercise his or her option under the Plan at any time up to two
weeks prior to any Exercise Date by giving written notice to the
Company in the form of Exhibit A to this Plan. All of the
participant's payroll deductions credited to his or her account
will be paid to such participant promptly after receipt of notice
of withdrawal, such participant's option for the Offering Period
will be automatically terminated, and no further payroll
deductions for the purchase of shares will be made during the
Offering Period. If a participant withdraws from an Offering
Period, payroll deductions will not resume at the beginning of
the succeeding Offering Period unless the participant delivers to
the Company a new enrollment agreement.
(b) Upon a participant's ceasing to be an Employee (as defined in
Section 2(g) hereof) for any reason, he or she will be deemed to
have elected to withdraw from the Plan and the payroll deductions
credited to such participant's account during the Offering Period
but not yet used to exercise the option will be returned to such
participant or, in the case of his or her death, to the person or
persons entitled thereto under Section 13 hereof, and such
participant's option will be automatically terminated. The
preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be
treated as continuing to be an Employee for the participant's
customary number of hours per week of employment during the
period in which the participant is subject to such payment in
lieu of notice.
4
<PAGE>
(c) A participant's withdrawal from an Offering Period will not have
any effect upon his or her eligibility to participate in any
similar plan which may hereafter be adopted by the Company or in
succeeding Offering Periods which commence after the termination
of the Offering Period from which the participant withdraws.
11. Stock.
(a) The maximum number of shares of the Company's Common Stock which
shall be made available for sale under the Plan shall be five
hundred thousand (500,000) shares, subject to adjustment upon
changes in capitalization of the Company as provided in Section
18 hereof. Shares issuable under the Plan shall be Treasury
Shares. If on a given Exercise Date the number of shares with
respect to which options are to be exercised exceeds the number
of shares then available under the Plan, the Company shall make a
pro rata allocation of the shares remaining available for
purchase in as uniform a manner as shall be practicable and as it
shall determine to be equitable.
(b) The participant will have no interest or voting right in shares
covered by his or her option until such option has been
exercised.
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the
participant and his or her spouse.
12. Administration.
(a) Administrative Body. The Plan shall be administered by the Board
or a committee of members of the Board appointed by the Board.
The Board or its committee shall have full and exclusive
discretionary authority to construe, interpret and apply the
terms of the Plan, to determine eligibility and to adjudicate all
disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the
full extent permitted by law, be final and binding upon all
parties.
(b) Rule 16b-3 Limitations. Notwithstanding the provisions of
Subsection (a) of this Section 12, in the event that Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as
amended, or any successor provision ("Rule 16b-3") provides
specific requirements for the administrators of plans of this
type, the Plan shall be administered only by such a body and in
such a manner as shall comply with the applicable requirements of
Rule 16b-3.
13. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's
account under the Plan in the event of such participant's death
subsequent to an Exercise Date on which the option is exercised
but prior to delivery to such participant of such shares and
cash. In addition, a participant may file a written designation
of a beneficiary who is to receive any cash from the
participant's account under the Plan in the event of such
participant's death prior to exercise of the option. If a
participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to
be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such
participant's death, the Company shall deliver such shares and/or
cash to the executor or administrator of the estate of the
participant, or if no such executor or administrator has been
appointed (to the knowledge of the Company), the Company, in its
discretion, may deliver such shares and/or cash to the spouse or
to any one or more dependents or relatives of the participant, or
if no spouse, dependent or relative is known to the Company, then
to such other person as the Company may designate.
5
<PAGE>
14. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise
of an option or to receive shares under the Plan may be assigned,
transferred, pledged or otherwise disposed of in any way (other
than by will, the laws of descent and distribution or as provided
in Section 13 hereof) by the participant. Any such attempt at
assignment, transfer, pledge or other disposition shall be
without effect, except that the Company may treat such act as an
election to withdraw funds from an Offering Period in accordance
with Section 10 hereof. Shares of Common Stock acquired through
exercise of options granted pursuant to this Plan may not be sold
or otherwise transferred until at least twelve (12) months after
the Exercise Date. The Company shall have the right to place a
legend on all stock certificates delivered pursuant to this Plan
setting forth the restriction on transferability of such shares.
15. Use of Funds. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any
corporate purpose, and the Company shall not be obligated to
segregate such payroll deductions.
16. Reports. Individual accounts will be maintained for each
participant in the Plan. Statements of account will be given to
participating Employees at least annually, which statements will
set forth the amounts of payroll deductions, the Purchase Price,
the number of shares purchased and the remaining cash balance, if
any.
17. Adjustments Upon Changes in Capitalization; Dissolution;
Liquidation; Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the stockholders of the Company, the Reserves as well as the
price per share of Common Stock covered by each option under
the Plan which has not yet been exercised, shall be
proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any
other increase or decrease in the number of shares of Common
Stock effected without receipt of consideration by the
Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration". Such
adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect,
and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock
subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering
Period shall terminate immediately prior to the consummation
of such proposed action, unless otherwise provided by the
Board.
(c) Merger or Asset Sale. In the event of a proposed sale of all
or substantially all of the assets of the Company, or the
merger of the Company with or into another corporation, the
Offering Period then in progress shall be shortened by
setting a new Exercise Date (the "New Exercise Date"). The
New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each
participant in writing, at least ten (10) business days
prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New
Exercise Date, unless prior to such date the participant has
withdrawn from the Offering Period as provided in Section 10
hereof.
6
<PAGE>
18. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and for any
reason amend or terminate the Plan. Except as provided in Section
17 hereof, no such termination can affect options previously
granted. Except as provided in Section 17 hereof, no amendment
may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent
necessary to comply with Rule 16b-3 or under Section 423 of the
Code (or any successor rule or provision or any other applicable
law or regulation), the Company shall obtain shareholder approval
in such a manner and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely
affected," the Board (or its committee) shall be entitled to
change the Offering Periods (provided no Offering Period may be
more than seven (7) months), limit the frequency and/or number of
changes in the amount withheld during an Offering Period,
establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in
excess of the amount designated by a participant in order to
adjust for delays or mistakes in the Company's processing of
properly completed withholding elections, establish reasonable
waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of
Common Stock for each participant properly correspond with
amounts withheld from the participant's Compensation, and
establish such other limitations or procedures as the Board (or
its committee) determines in its sole discretion advisable which
are consistent with the Plan.
19. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have
been duly given when received in the form specified by the Company at
the location, or by the person, designated by the Company for the
receipt thereof.
20. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the
issuance and delivery of such shares pursuant thereto shall comply
with all applicable provisions of law, domestic or foreign, including,
without limitation, the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange
upon which the shares may then be listed, and shall be further subject
to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time
of any such exercise that the shares are being purchased only for
investment and without any present intention to sell or distribute
such shares if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned applicable
provisions of law.
21. Repurchase of Shares. On each Exercise Date, the Company shall offer
to repurchase Shares issued pursuant to the Plan which were owned for
a minimum of twelve (12) months as of such Exercise Date ("Eligible
Shares") by the Employee who initially purchased such Shares under the
Plan. On such Exercise Date, the Employee must be currently employed
with the Company (whether or not such Employee is then a participant
in the Plan) for such Employee's Shares to be subject to the
Repurchase of Shares under this Section 21. Pursuant to this offer,
the Company shall accept for repurchase all Eligible Shares tendered
by such persons within 30 days after the Exercise Date (such 30 day
period being referred to as the "Repurchase Period"). The price at
which Eligible Shares will be repurchased shall be equal to the
Purchase Price applicable to the Offering Period ending on such
Exercise Date. In no event will the Company be required to repurchase
Eligible Shares having a Fair Market Value of more than $125,000 in
the aggregate for any Repurchase Period. In the event that Eligible
Shares exceeding such Fair Market Value are tendered for repurchase,
then Eligible Shares will be accepted for repurchase from participants
on a pro rata basis (with appropriate adjustment to avoid fractional
shares) in accordance with the number of Eligible Shares tendered by
participants in
7
<PAGE>
such Repurchase Period. At such time as the Common Stock is listed on
an established market system or national stock exchange (as described
in Section 2 (j) (1)), the Company will discontinue repurchases in
accordance with this Section 21.
22. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of
ten (10) years unless sooner terminated under Section 18 hereof.
8
<PAGE>
EXHIBIT A
DOCUCORP INTERNATIONAL
1997 EMPLOYEE STOCK PURCHASE PLAN
ENROLLMENT AGREEMENT
_____ Original Application
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
_____ Stop Payroll Deduction
1. _____________________________________ hereby elects to participate in the
DocuCorp International 1997 Employee Stock Purchase Plan (the "Plan") and
subscribes to purchase shares of the Company' s Common Stock in accordance
with this Enrollment Agreement and the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my gross Compensation (not to exceed ten (10)%) beginning on the
first payday after the Grant Date and on each payday thereafter until the
Exercise Date, as determined by the Board, in accordance with the Employee
Stock Purchase Plan. (Please note that no fractional percentages are
permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Company's Common Stock at the applicable Purchase
Price determined in accordance with the Plan. I further understand that I
may withdraw all but not less than all the payroll deductions credited to
my account and not yet used to exercise my option under the Plan at any
time up to two weeks prior to the Exercise Date by giving written notice to
the Company.
4. I have received a copy of the complete "1997 Employee Stock Purchase Plan".
I understand that my participation in the Plan is in all respects subject
to the terms of the Plan. I understand that the grant of the option by the
Company under this Enrollment Agreement is subject to obtaining shareholder
approval of the Plan.
5. Shares purchased for me under the Plan should be issued in the name(s) of
____________________________ (Employee or Employee and Spouse Only).
6. I understand that I may not sell or otherwise transfer shares of Common
Stock purchased pursuant to this Plan until at least twelve (12) months
after the Exercise Date in which the stock was purchased and that the
Company shall have the right to place a legend on all stock certificates
representing such shares setting forth the restriction on transferability
of such shares.
7. I understand that if I dispose of any shares received by me pursuant to the
Plan within two (2) years after the Enrollment Date, I will be treated for
federal income tax purposes as having received ordinary income at the time
of such disposition in an amount equal to the excess of the Fair Market
Value of the shares at the time such shares were purchased by me over the
price which I paid for the shares. Any gains received in excess of the fair
market value at the time such shares were purchased will be subject to
capital gains tax. I hereby agree to notify the Company in writing within
30 days after the date of any disposition of shares and I will make
adequate provision for Federal, state or other tax withholding obligations,
if any, which arise upon the disposition of the Common Stock. The Company
may, but will not be obligated to, withhold from my Compensation the amount
necessary to meet any applicable withholding obligation including any
withholding necessary to make available to the Company any tax deductions
or benefits attributable to sale or early disposition of Common Stock by
me. If I dispose of such shares at any time after the expiration of the 2-
year holding period, I understand that I will be treated for federal income
tax purposes as having received income only at the time of such
disposition, and that such income will be taxed as ordinary income only to
the extent of an amount equal to the lesser of (1) the excess of the Fair
Market Value of the shares at the time of such
9
<PAGE>
disposition over the purchase price which I paid for the shares, or (2) 15%
of the Fair Market Value of the shares on the first day of the Offering
Period. The remainder of the gain, if any, recognized on such disposition
will be taxed as capital gain. The federal income tax consequences
described above are based on the current provisions of the federal income
tax laws. There can be no assurance, however, that any such provisions will
not change in the future, either retrospectively or prospectively,
resulting in changes in such tax consequences. The above discussion
addresses only the federal income tax consequences relating to the Plan,
and does not address any relevant state or local income tax consequences.
Employees participating in the Plan are urged to consult their own tax
advisors for additional information.
8. I understand that if I tender shares for repurchase pursuant to Section 21
of the Plan, I will be deemed to have made the following representations to
the Company at the time of repurchase:
(a) I am the lawful owner of the shares to be repurchased, free and
clear of all liens, claims and encumbrances of every kind.
(b) I am capable of making an informed decision with respect to the
sales of such shares and have had access to such information, or
opportunity to ask such questions, as I have deemed necessary
with respect to the value of such shares and to the business,
prospects and operations of the Company.
(c) I have made my own analysis and decision to tender shares for
repurchase, and have not relied upon any representation, warranty
or statement by the Company (including but not limited to matters
relating to the tax consequences of such repurchase) in reaching
such decision.
9. I hereby agree to be bound by the terms of the Plan. The effectiveness of
this Enrollment Agreement is dependent upon my eligibility to participate
in the Plan.
10. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the Plan:
NAME: __________________________________________________
(Please print) (First) (Middle) (Last)
Relationship
__________________________________________________
__________________________________________________
(Address)
NAME: __________________________________________________
(Please print) (First) (Middle) (Last)
Relationship
________________________________________________
________________________________________________
(Address)
Employee's Social
Security Number:
________________________________________________
Employee's Address:
________________________________________________
________________________________________________
10
<PAGE>
I UNDERSTAND THAT THIS ENROLLMENT AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated: ___________________________________
Signature of Employee ___________________________________
Spouse's Signature
(If beneficiary other than spouse) ___________________________________
THIS FORM MUST BE SUBMITTED TO THE EMPLOYEE'S RESPECTIVE HUMAN RESOURCES
DEPARTMENT.
11
<PAGE>
EXHIBIT 11.1
DocuCorp International, Inc.
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Year Ended Three Months Ended
July 31, October 31,
------------- ------------------------------
1997 1996 1997
- ------------------------------------------------------------- ------------- ------------ --------------
<S> <C> <C> <C>
PRO FORMA NET INCOME (LOSS) PER SHARE:
Net income (loss) ($16,101,787) $576,940 $719,205
============= ========== ==========
Weighted average pro forma shares outstanding 6,050,027 5,158,218 5,133,353
Assumed conversion of Class B common stock into Common
Stock on date of issuance 1,186,501 -0- 5,629,122
Application of SAB 83 for common stock, stock options
and warrants issued subsequently to January 15, 1997 4,147,413 4,752,663 2,849,404
------------- ---------- ----------
Weighted average shares outstanding used in the pro forma
net income (loss) per share calculation 11,383,941 9,910,881 13,611,879
============= ========== ==========
Pro forma net income (loss) per share ($1.41) $0.06 $0.05
============= ========== ==========
SUPPLEMENTAL PRO FORMA NET INCOME (LOSS) PER
SHARE:
Net Income (loss) ($16,101,787) $576,940 $719,205
Pro forma interest expense adjustment reflecting repurchase
of debt with proceeds from offering, net of taxes 113,230 780 115,651
------------- ---------- ----------
Supplemental pro forma net income (loss) ($15,988,557) $577,720 $834,856
============= ========== ==========
Weighted average pro forma shares outstanding 6,050,027 5,158,218 5,133,353
Assumed conversion of Class B common stock into Common
Stock on date of issuance 1,186,501 -0- 5,629,122
Application of SAB 83 for common stock, stock options and
warrants issued subsequent to January 15, 1997 4,147,413 4,752,663 2,849,404
------------- ---------- ----------
Assumed issuance of shares needed to repurchase debt
outstanding during the period 2,034,275 -0- 1,596,423
------------- ---------- ----------
Weighted average shares outstanding used in the supplemental
pro forma net income (loss) per share calculation 13,418,216 9,910,881 15,208,302
============= ========== ==========
Supplemental pro forma net income (loss) per share ($1.19) $0.06 $0.05
============= ========== ==========
</TABLE>
<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, 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
January 16, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 of our
reports dated January 30, 1997 and April 11, 1997, which include an explanatory
paragraph regarding the restatement of the 1995 and 1996 financial statements,
on our audits of the consolidated financial statements and financial statement
schedules of FormMaker Software, Inc. We also consent to the reference to our
firm under the caption "Experts".
Coopers & Lybrand L.L.P.
Atlanta, Georgia
January 16, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> JUL-31-1997 JUL-31-1997
<PERIOD-START> AUG-01-1996 AUG-01-1997
<PERIOD-END> JUL-31-1997 OCT-31-1997
<CASH> 2,869,458 1,442,947
<SECURITIES> 0 0
<RECEIVABLES> 9,535,784 9,629,655
<ALLOWANCES> 525,000 550,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 13,319,032 12,116,425
<PP&E> 5,071,442 5,270,724
<DEPRECIATION> 1,983,864 2,320,187
<TOTAL-ASSETS> 32,698,165 31,020,951
<CURRENT-LIABILITIES> 11,674,574 11,216,128
<BONDS> 8,793,149 6,832,609
19,118,978 19,139,015
0 0
<COMMON> 51,334 51,334
<OTHER-SE> (7,571,618) (6,863,743)
<TOTAL-LIABILITY-AND-EQUITY> 32,698,165 31,020,951
<SALES> 11,352,193 4,158,263
<TOTAL-REVENUES> 17,502,818 10,846,273
<CGS> 4,955,617 1,878,499
<TOTAL-COSTS> 8,955,121 6,720,193
<OTHER-EXPENSES> 26,007,358 2,766,963
<LOSS-PROVISION> 363,556 25,000
<INTEREST-EXPENSE> 171,562 175,229
<INCOME-PRETAX> (17,245,787) 1,203,205
<INCOME-TAX> (1,144,000) 484,000
<INCOME-CONTINUING> (16,101,787) 719,205
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (16,101,787) 719,205
<EPS-PRIMARY> (1.41) .05
<EPS-DILUTED> (1.41) .05
</TABLE>
