<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 9, 1998
REGISTRATION NO. 333-37731
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
OHIO 7373 31-1451577
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
SUITE 250
4350 GLENDALE-MILFORD ROAD
CINCINNATI, OHIO 45241
(513) 786-8350
FAX: (513) 786-8363
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
TERRY L. THEYE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SUITE 700
8044 MONTGOMERY ROAD
CINCINNATI, OHIO 45336
(513) 792-2930
FAX: (513) 792-2932
(NAME, ADDRESS, AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
CHARLES F. HERTLEIN, JR., ESQ. TIMOTHY E. HOBERG, ESQ.
DINSMORE & SHOHL LLP TAFT, STETTINIUS & HOLLISTER LLP
1900 CHEMED CENTER 1800 STAR BANK CENTER
255 EAST FIFTH STREET 425 WALNUT STREET
CINCINNATI, OHIO 45202 CINCINNATI, OHIO 45202-3957
TELEPHONE: (513) 977-8315 TELEPHONE: (513) 357-9308
FAX: (513) 977-8141 FAX: (513) 381-0205
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
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. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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 this Form is a post-effective amendment filed pursuant to Rule 462(c)
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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 9, 1998
PROSPECTUS
2,600,000 SHARES
LOGO
SYNERGIS TECHNOLOGIES, INC.*
COMMON STOCK
------------------------
Of the 2,600,000 shares of common stock without par value (the "Common
Stock") offered hereby (the "Offering"), 1,850,000 shares are being sold by
Synergis Technologies, Inc. (the "Company" or "Synergis") and 750,000 shares are
being sold by MedPlus, Inc., a shareholder of the Company (the "Selling
Shareholder" or "MedPlus"). See "Principal and Selling Shareholders." The
Company will not receive any of the proceeds from the sale of the shares of
Common Stock by the Selling Shareholder. See "Use of Proceeds."
Prior to this offering there has been no public market for the Common
Stock. It is currently estimated that the initial offering price will be between
$11.00 and $13.00 per share. See "Underwriting" for more information relating to
the factors considered in determining the initial public offering price.
Application has been made to list the Common Stock on the American Stock
Exchange under the symbol "SYN."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) PROCEEDS TO
SELLING
SHAREHOLDER
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Per Share......................... $ $ $ $
- --------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $ $
==================================================================================================
</TABLE>
(1) For information regarding discounts, commissions and indemnification of the
Underwriters, see "Underwriting."
(2) Before deducting expenses of the Offering estimated at $2,000,000, which
will be borne proportionately by the Company and the Selling Shareholder
based upon the number of shares to be sold by each with up to a maximum of
$432,692 to be payable by the Selling Shareholder. All expenses of the
Offering in excess of $1,500,000 will be borne by the Company.
(3) The Company has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 390,000
additional shares of Common Stock solely to cover over-allotments, if any,
on the same terms and conditions as the shares offered hereby. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Shareholder will be $ , $ ,$ , and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are being offered severally by the Underwriters
named herein, subject to prior sale, when, as and if received and accepted by
them, subject to their right to reject orders in whole or in part or withdraw,
cancel or modify the offer without notice, and to certain other conditions. It
is expected that delivery of the certificates representing the shares of Common
Stock will be made on or about , 1998.
THE ROBINSON-HUMPHREY MCDONALD & COMPANY
COMPANY SECURITIES, INC.
, 1998
* The registrant intends to change its name from Universal Document Management
Systems, Inc. to Synergis Technologies, Inc. immediately prior to the
effectiveness of the Registration Statement of which this
Prospectus is a part.
<PAGE> 3
Synergis
Synergis
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SYNDICATE SHORT-COVERING TRANSACTIONS
AND THE IMPOSITION OF A PENALTY BID. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
Simultaneously with, and as a condition to, the closing of the Offering
made by this Prospectus, the Company will acquire, in separate transactions (the
"Acquisitions") in exchange for cash and shares of its Common Stock, nine design
automation and document management businesses (each a "Founding Company" and
collectively, along with the Company, the "Founding Companies"). Until
, 1998, the Company's name was Universal Document Management Systems,
Inc. ("UDMS") which itself has operated a document management work flow and
application software business. Unless the context otherwise indicates, all
references herein to the "Company" include all of the Founding Companies, and
references herein to "UDMS" shall mean Universal Document Management Systems,
Inc. prior to the effectiveness of the Acquisitions. The following summary is
qualified in its entirety by, and should be read in conjunction with, the more
detailed information appearing elsewhere in this Prospectus, including the
information set forth under "Risk Factors" and in the financial statements,
including the notes thereto. Unless otherwise indicated, all share, per share
and financial information set forth herein: (i) has been adjusted to give effect
to the Acquisitions and a 8,451.59-for-1 stock split to be effected immediately
prior to the Offering and a contribution to the capital of the Company by
MedPlus of 62,321 shares of the Company's Common Stock; (ii) assumes an initial
public offering price of $12.00 per share which is the midpoint of the range of
the anticipated public offering prices set forth on the cover page of this
Prospectus; and (iii) assumes no exercise of the Underwriters'
over-allotment option. In addition, all references to years, unless otherwise
noted, refer to the Company's fiscal year, which ends on December 31 of each
year.
The Company believes it will be the largest independent value added
reseller of design automation products and services in the United States.
Simultaneously with the closing of this Offering, the Company will acquire nine
established design automation and document management businesses with 21 offices
in 15 states. The Company will employ approximately 325 individuals, including
approximately 90 highly skilled technical personnel, will offer hardware and
software products from approximately 55 manufacturers, and will have access to
an installed customer base of approximately 34,000 businesses. On a pro forma
basis, the Company had revenues for the year ended December 31, 1996 and the
nine months ended September 30, 1997 of $48.8 million and $40.3 million,
respectively. Through the acquisition and integration of the Founding Companies,
the Company expects to expand geographic penetration of the existing businesses,
to capitalize on substantial cross-selling opportunities, to provide design
automation products and services on both a local and national basis, and to
establish a national customer service and support program.
The design automation industry consists of six market segments:
architecture, engineering and construction ("AEC"), mechanical design,
geographic information systems ("GIS"), process and power, facilities
management, and multi-media. It is estimated that the world-wide market for
computer aided design, computer aided manufacturing and computer aided
engineering ("CAD/CAM/CAE") hardware, software and services will be
approximately $23.5 billion in 1997. Local and regional value added resellers
have entered the industry in response to end users who want to obtain all
available products as well as receive related support and services from a single
source. In general, however, a value added reseller is able to provide certain
CAD/CAM/CAE and document management products only within one or a limited number
of these market segments, as the needs of each differ and each requires
specialized products and services. This has contributed to a high level of
fragmentation within the design automation channel.
The Company will offer a wide range of design automation products and
services including third-party software, proprietary software, professional
services, hardware and software maintenance, complementary document management
solutions and hardware. The Company's design automation software offerings will
provide CAD/CAM/CAE solutions primarily in the mechanical design, AEC and GIS
market segments, and secondarily in the other three design automation market
segments. The Company's professional services will include systems integration,
customization, installation, design engineering, training, process
re-engineering and call center and help desk support. For document management
applications, the Company will provide business process evaluation, workflow
analysis, implementation, planning and execution. On-site and in-house training,
technical support and service will also be offered. The Company's hardware
offerings will provide its customers with PCs, work stations and servers. The
Company believes that these integrated design products and services offerings
will enable the Company to become a single source provider for its customers on
a national basis.
3
<PAGE> 5
The Company expects to target two primary market segments: (1) corporate,
government and educational users of design automation products requiring
professional services to meet their enterprise needs, and to a lesser extent (2)
third-party channels that resell or license the Company's proprietary software
products. Key elements of the Company's business strategy are to:
- OFFER A SINGLE SOURCE FOR COMPLETE, INTEGRATED SOLUTIONS. The Company
intends to be a leading nationwide provider of a full range of design
automation products and services.
- ENHANCE HIGHER MARGIN PROFESSIONAL SERVICES AND SALES OF PROPRIETARY
SOFTWARE. While the Company intends to continue to offer a full range of
products and services, it expects to emphasize and expand its offerings
of professional services and proprietary software, which generally carry
higher margins than other product sales.
- FOCUS ON LARGE CLIENTS; EXPAND GEOGRAPHICALLY IN MAJOR METROPOLITAN
AREAS. The combined resources, technical expertise and geographic
diversity of the Founding Companies will enable the Company to focus
marketing efforts on a growing number of clients requiring national sales
and service capabilities. The Company intends to expand into selected
major metropolitan areas as national account relationships develop,
through both internal development and acquisitions of local and regional
resellers.
- CAPITALIZE UPON AND LEVERAGE SPECIFIC TECHNICAL EXPERTISE AND PRODUCT
OFFERINGS. The Company plans to leverage its diverse products and
services to expand its existing client relationships as well as target
new sales opportunities.
- ACHIEVE COST SAVINGS THROUGH CENTRALIZATION OF CERTAIN FUNCTIONS. The
Company believes that it will achieve significant economies of scale
through centralizing a number of general and administrative functions at
the corporate level and by reducing or eliminating redundant functions
and facilities at the Founding Companies.
- OPERATE WITH DECENTRALIZED, LOCAL MANAGEMENT. The Company believes the
experienced local management teams that exist at the Founding Companies,
with over 125 years combined experience in design automation and document
management, have a valuable understanding of their respective markets and
customers and that it can best capitalize upon these strengths through a
decentralized management strategy.
4
<PAGE> 6
THE OFFERING
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<S> <C>
COMMON STOCK OFFERED:
By the Company............................................. 1,850,000 shares
By the Selling Shareholder................................. 750,000 shares
Total Offering (1)......................................... 2,600,000 shares
COMMON STOCK TO BE OUTSTANDING AFTER THE OFFERING (2) (3).... 3,496,679 shares
</TABLE>
USE OF PROCEEDS..................... In connection with the Acquisitions of
the Founding Companies, the Company or
the Founding Companies will make
payments aggregating approximately
$22.2 million, consisting of $15.5
million representing the cash portion
of the purchase price, $4.7 million to
repay indebtedness of the Founding
Companies, $1.5 million to retire
preferred stock of one of the Founding
Companies, and $0.5 of expenses of the
Acquisitions. The net proceeds of the
Offering will provide $19.1 million for
these purposes. The balance of the cash
needs will be met from an estimated
$3.2 million expected to be on hand
after the Acquisitions, after giving
effect to $1.5 million in prepaid
Offering and Acquisition costs. See
"Use of Proceeds," "Dividend Policy"
and "Certain Transactions."
<TABLE>
<S> <C>
AMERICAN STOCK EXCHANGE SYMBOL............................... "SYN"
</TABLE>
(1) Assumes that the Underwriters' over-allotment option for up to 390,000
shares of Common Stock is not exercised. See "Underwriting."
(2) Includes 782,838 shares issued and outstanding immediately prior to the
effectiveness of the Registration Statement of which this Prospectus forms a
part, 750,000 of which will be sold by the Selling Shareholder as part of
the Offering, 863,841 shares to be issued as consideration in the
Acquisitions, and 1,850,000 shares being offered by the Company. Excludes
additional shares of Common Stock which may be issued pursuant to earn-out
arrangements with certain owners of the Founding Companies. See "Certain
Transactions -- The Acquisitions."
(3) Excludes 529,074 shares of Common Stock issuable upon the exercise of stock
options and warrants to be outstanding on the date of this Prospectus and
273,000 additional shares reserved for future issuance under the Company's
1997 Long-Term Incentive Plan. See "Certain Transactions" and
"Management -- Employment Agreements; Executive Compensation,"
"-- Directors' Compensation," and "-- Stock Options."
5
<PAGE> 7
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The Company will acquire the Founding Companies simultaneously with and as
a condition to the consummation of this Offering. DTI Technologies, Inc.
("DTI"), one of the Founding Companies, has been identified as the accounting
acquiror for financial statement presentation purposes. The Acquisitions will be
recorded using the purchase method of accounting. The Summary Unaudited Pro
Forma Combined Financial Data assume the consummation of the Acquisitions and
the completion of the Offering. See "Certain Transactions -- The Acquisitions"
as well as the financial statements and the notes thereto included elsewhere in
this Prospectus.
SUMMARY PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA(1):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -----------------------------
1996 1996 1997
------------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Dollars in thousands, except per share data
Total revenues................................... $ 48,789 $37,633 $40,339
Cost of revenues................................. 32,659 24,488 27,767
Selling, general and administrative
expenses(2).................................... 16,286 12,226 12,253
Amortization of goodwill and other identifiable
intangibles(3)................................. 944 692 718
------- ------- -------
Operating income (loss)........................ (1,100) 227 (399)
Interest income (expense), net(4)................ 58 57 (4)
Other income, net................................ 85 4 37
------- ------- -------
Income (loss) before income taxes................ (957) 288 (366)
Income tax expense (benefit)(5).................. (70) 343 86
------- ------- -------
Net income (loss)........................... $ (887) $ (55) $ (452)
======= ======= =======
Pro forma net loss per share(6).................. $ (0.25) $ (0.13)
======= =======
Shares used in computing pro forma net loss per
share(6)....................................... 3,559,000 3,559,000
============ =========
</TABLE>
SUMMARY PRO FORMA COMBINED BALANCE SHEET DATA(1):
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
------------------------------
UDMS PRO FORMA,
HISTORICAL AS ADJUSTED(7)
----------- --------------
(UNAUDITED)
<S> <C> <C>
Dollars in thousands
Cash and cash equivalents........................................... $ -- $ 79
Working capital (deficit)........................................... (1,228) 1,260
Goodwill and other identifiable intangibles, net.................... 887 27,547
Total assets........................................................ 3,433 42,065
Short-term debt and current maturities of long-term obligations..... 2,162 1,213
Long-term obligations less current maturities....................... -- 82
Shareholders' equity................................................ 193 29,454
</TABLE>
- ---------------
(1) The summary pro forma financial data of the Company as of and for the nine
months ended September 30, 1996 and 1997 and for the year ended December 31,
1996 are derived from the Unaudited Pro Forma Combined Financial Statements
that appear elsewhere in this Prospectus. The summary pro forma combined
statement of operations data and the summary pro forma combined balance
sheet data assume that the Acquisitions and Offering occurred on January 1,
1996, in the case of the summary pro
6
<PAGE> 8
forma statement of operations data, and as of September 30, 1997, in the
case of the summary pro forma combined balance sheet data. The summary pro
forma combined financial data are based on preliminary estimates, available
information and certain assumptions that management deems appropriate. The
summary pro forma combined financial data presented herein are not
necessarily indicative of the results the Company would have obtained had
such events actually occurred at the beginning of the period or of the
future results of the Company. The total estimated purchase price for
accounting purposes is $26.3 million, which consists of: (i) $12.0 million
of cash to be paid to the owners of the Founding Companies other than DTI
(accounting acquiror) upon the consummation of the Offering; (ii) the $13.8
million estimated fair value of 1,358,320 shares of Common Stock to be
issued to the owners of the Founding Companies other than DTI (accounting
acquiror); and (iii) estimated acquisition costs of $0.5 million. The
estimated purchase price is subject to purchase price adjustments related to
earn-out arrangements. The consideration paid to the Founding Companies was
determined by arm's length negotiation between UDMS and each Founding
Company, taking into account factors such as the historical financial and
operating results, management experience, levels and type of indebtedness
and future prospects of each Founding Company. Because pricing was
determined by negotiation between unrelated parties, the Company did not
believe obtaining appraisals of the Founding Companies was necessary or
beneficial. See "Certain Transactions -- The Acquisitions."
(2) Includes pro forma reductions in compensation to the owners of the Founding
Companies, to which they have agreed prospectively, in the amounts of
approximately $0.4 million for the year ended December 31, 1996 and $0.3
million in each of the nine month periods ended September 30, 1996 and 1997.
Excludes annual compensation of $0.7 million based upon employment
agreements with the Company's executive management and other costs
associated with being a public company. See "Management -- Employment
Agreements; Executive Compensation."
(3) Includes pro forma adjustments of $0.9 million, $0.7 million and $0.7
million for the year ended December 31, 1996 and for the nine month periods
ended September 30, 1996 and 1997, respectively, to amortization expense
related to the goodwill and other identifiable intangible assets recorded in
connection with the Acquisitions which was computed on the basis described
in Note 5(g) to the Pro Forma Combined Financial Statements. Approximately
$20.9 million of the intangible assets recorded in connection with the
Acquisitions consists of goodwill which represents the excess of the
aggregate purchase price of the Founding Companies over the fair value of
the net assets acquired.
(4) Includes pro forma adjustments of $0.2 million, $0.1 million and $0.2
million for the year ended December 31, 1996 and for the nine month periods
ended September 30, 1996 and 1997, respectively, to reflect the elimination
of historical interest expense in connection with the repayment of
interest-bearing debt of the Founding Companies from the estimated net
proceeds of the Offering which was computed on the basis described in Note
5(i) to the Pro Forma Combined Financial Statements.
(5) Includes pro forma adjustments to reflect the provisions for income taxes on
the pro forma combined results at effective tax rates of 37.7%, 43.2% and
36.2% for the year ended December 31, 1996, and the nine months ended
September 30, 1996 and 1997, respectively, before considering the
non-deductibility of approximately $0.7 million of annual goodwill
amortization.
(6) Computed on the basis described in Note 5(l) to the Pro Forma Combined
Financial Statements in which the shares used in computing pro forma net
income per share reflect options and warrants assumed outstanding under
Securities and Exchange Commission Staff Accounting Bulletin No. 83.
(7) Represents the pro forma combined balance sheet at September 30, 1997 after
giving effect to both the Acquisitions and the Offering, including the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
7
<PAGE> 9
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the factors listed below in
evaluating an investment in the shares of Common Stock offered hereby.
ABSENCE OF COMBINED OPERATING HISTORY; OPERATING LOSSES
Although each of the Founding Companies (including UDMS) has an individual,
independent operating history, they have not previously been operated as a
combined entity, and there can be no assurance that the Company will be able to
integrate successfully these businesses on an operational or other basis. In
connection with the Acquisitions, certain executives of the Founding Companies
will receive earn-outs and bonuses based upon the performance of such
executive's Founding Company. Such provisions may delay the integration by the
Company of the Founding Companies and, therefore, may adversely impact the
Company's business, financial condition, and results of operations. Also, the
Company's management group has been assembled only recently and there can be no
assurance that the management group will be able to oversee the combined entity
and effectively implement the Company's operating or growth strategies. In
addition, unfavorable economic conditions, including downturns in the economy
resulting in decreased sales by the Company, could adversely affect the
Company's future operating results. See "Management's Discussion and Analysis of
Pro Forma Financial Condition and Pro Forma Results of Operations" and
"-- Organization," "Management," and "Certain Transactions -- The Acquisitions."
For the year ended December 31, 1996 and for the nine months ended
September 30, 1997, the Company had operating losses on a pro forma basis of
approximately $1.1 million and $0.4 million, respectively. While the Company
anticipates operating income for the three months ended December 31, 1997, it
also will incur certain one-time expenses in connection with the Acquisitions
and the integration of the Founding Companies. There can be no assurance that
the Company will report a profit for that quarter or that the Company will
operate profitably in the future. See "Management's Discussion and Analysis of
Pro Forma Financial Condition and Pro Forma Results of Operations."
POTENTIAL INABILITY TO MANAGE INTEGRATION AND GROWTH
Certain of the Founding Companies have expanded significantly in the past
several years. In addition, the Founding Companies have not operated previously
as an integrated company. Each of these factors will place demands on the
Company's administrative, operational and financial resources. Any continued
growth of the Company's customer base and its services could place an additional
strain on the capacity, management and operations of the Company. The Company's
future performance and profitability will depend in part on its ability to
successfully integrate the Founding Companies, implement improved financial and
management systems, add capacity as and when needed and hire qualified personnel
to respond to changes in its business. The failure to integrate the Founding
Companies, implement such systems, add any capacity or hire such qualified
personnel may have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Pro Forma Financial Condition and Pro Forma Results of Operations."
DEPENDENCE ON AUTODESK
The Company estimates that it is certified as a value added reseller for
approximately 55 vendors, including Autodesk, Inc. ("Autodesk"). Each of these
vendors offers integrated suites of products containing numerous applications
and components, some of which may be sold individually. The Company offers
approximately ten suites of Autodesk products, and for the nine months ended
September 30, 1997, 38% of the Company's pro forma total revenue was from sales
of Autodesk products. There can be no assurance that the Company will continue
to be certified as a value added reseller for Autodesk, that the products of
Autodesk will continue to be accepted by the marketplace, or that Autodesk will
not significantly alter the costs to the Company of reselling its products.
Furthermore, Autodesk may revoke the Company's certification as a value added
reseller of Autodesk products with or without cause upon 30 to 90 days notice or
upon the occurrence of certain events, such as commencement of bankruptcy or
receivership proceedings and failure to perform any
8
<PAGE> 10
obligation under the Company's agreement including payment obligations which are
not remedied within 30 days. See "Business -- Products and Services" and
"Business -- Suppliers."
RISKS GENERALLY ASSOCIATED WITH ACQUISITIONS
A component of the Company's business strategy is to increase its revenues,
earnings and market share through the acquisition of additional companies with
similar or complementary businesses. However, there can be no assurance that it
will successfully be able to identify attractive acquisition candidates or to
negotiate acquisition transactions on economically acceptable terms with any
candidates which may be identified.
Acquisitions may involve a number of special risks, including adverse
short-term effects on the Company's operating results, including potential
dilution, diversion of management's attention to the assimilation of the
operations and personnel of the acquired companies, the potential inability to
integrate financial and management reporting systems, dependence on retention,
hiring and training of key personnel, risks associated with unanticipated
problems or legal liabilities and amortization of acquired intangible assets,
any or all of which could have a material adverse effect on the Company's
operations and financial performance. To the extent acquisitions are
consummated, there can be no assurance that they will ultimately be beneficial
to the Company's operations or that they will contribute to its growth.
Likewise, there can be no assurance that any completed acquisitions will produce
returns to the Company that will justify the Company's investment. See "Risk
Factors -- Possible Need for Additional Financing" and "Business -- Acquisition
Program."
The Company has assumed all rights and obligations related to a letter of
intent entered into on August 26, 1997 by and between Synergis Technologies,
Inc. ("Synergis--PA"), one of the Founding Companies, and Configured Systems,
Inc. ("Configured"). This non-binding letter of intent provides, in general,
that the Company has the right to acquire all of the outstanding shares of
Configured for approximately $450,000 within 30 days of completion of the
Offering. See "Certain Transactions -- Other Transactions."
DEPENDENCE ON TECHNICAL PERSONNEL
The Company's business involves the sale of computer software, hardware and
related services. Therefore, its success is dependent on its ability to recruit
and retain highly skilled technical personnel, including personnel trained in
software and hardware applications within a specialized industry. The computer
software industry is characterized by a high level of employee mobility, and the
market for such individuals in certain regions can be extremely competitive. If
the Company were unable to recruit and retain a sufficient number of skilled
technical employees, it could be forced to limit its growth or possibly curtail
its operations, which could result in a material adverse effect on the operating
results of the Company.
RISKS RELATED TO INTANGIBLE ASSETS
The Acquisitions will result in a significant increase in intangible
assets. Approximately $27.5 million, or 65.5%, of the Company's pro forma total
assets as of September 30, 1997 consisted of intangible assets arising from the
Acquisitions, of which approximately $20.9 million represents goodwill, which
will be amortized using an estimated life of 25 years, and approximately $1.1
million represents other intangible assets, which will be amortized over a
period of 10 years. Goodwill is an intangible asset that represents the excess
of the aggregate purchase price of the Founding Companies over the fair value of
net assets acquired. The amount of goodwill amortized in a particular period
constitutes a non-cash expense that reduces the Company's net income in that
period. The reduction in net income resulting from the amortization of goodwill
may have an adverse impact upon the market price of shares of the Company's
Common Stock. Additionally, there can be no assurance that the value of its
intangible assets will ever be realized by the Company. See "Management's
Discussion and Analysis of Pro Forma Financial Condition and Pro Forma Results
of Operations."
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PORTIONS OF OFFERING PROCEEDS PAYABLE TO AFFILIATES AND BENEFITS OF OFFERING TO
CURRENT SHAREHOLDERS
Approximately $15.5 million, or 81.2%, of the estimated net proceeds of the
Offering, will be used to pay the cash portion of the purchase price for the
Founding Companies. Approximately $1.5 million, or 7.9% of the estimated net
proceeds, of such amount will be paid to the Selling Shareholder related to
interest-bearing debt owed to the Selling Shareholder, which will own
approximately 1.0% of the Company's Common Stock following consummation of the
Acquisitions and the Offering. Of the approximately $15.5 million payable to the
shareholders of the Founding Companies, approximately $3.5 million, or 18.3% of
the estimated net proceeds of the Offering will be paid to Daniel B. Dolan,
Divisional President and a director of the Company, related to the Company's
acquisition of DTI, of which Mr. Dolan is the sole shareholder.
Simultaneously with the consummation of the Acquisitions, the Company will
repay interest-bearing debt of the Founding Companies of approximately $4.7
million (including the $1.5 million to the Selling Shareholder referred to
above), based upon indebtedness outstanding at September 30, 1997. In addition,
the Company will issue $0.6 million in Accumulated Adjustment Account ("AAA
Account") promissory notes ("AAA Notes") to shareholders of certain of the
Founding Companies in connection with termination of the Subchapter S status of
those Founding Companies and $0.2 million in AAA Notes related to personal taxes
payable by the shareholders of another of the Founding Companies on their AAA
Accounts. These AAA Notes will become obligations of the Company after the
Acquisitions and will be repaid out of the Company's cash flow or by borrowing
under a credit facility the Company plans to obtain. Numerous shareholders of
the Founding Companies will benefit indirectly from such repayments in the form
of releases from personal guarantees of portions of such indebtedness. Further,
the Company has entered into earn-out arrangements with certain shareholders of
the Founding Companies, pursuant to which such shareholders may receive payments
based upon the performance of their respective Founding Company. See "Risk
Factors -- Possible Need for Additional Financing," "Certain Transactions -- The
Acquisitions" and "Principal and Selling Shareholders."
Additionally, the Offering will create a public market for the Company's
Common Stock which will benefit the Company's management and existing
shareholders. Upon consummation of the Offering, the Company's executive
officers and directors will hold 291,667 shares of Common Stock, having an
aggregate value of $3,500,000 based on a per share initial public offering price
of $12.00, plus options and warrants for 223,074 shares of Common Stock having
exercise prices below the initial public offering price and an unrealized per
share value (assuming exercise at the public offering price) ranging between
$2.40 and $9.60. MedPlus will continue to own 32,838 shares of Common Stock
having an aggregate value of $394,056 based on a per share initial public
offering price of $12.00. See "Shares Eligible for Future Sale" and
"Underwriting."
COMPETITION
The design automation and document management businesses are extremely
competitive. Although the Company believes that only Rand Technology Corporation
("Rand") competes with a similar mix of services, many companies offer one or
more of the products and services offered by the Company. Some of these
competitors may be able to offer certain products or services at a lower price
than the Company. In addition, many potential customers of the Company may use
more than one supplier for design automation and document management products
and services. The Company may not be able to compete effectively against its
current competitors, and the Company cannot assure that additional competitors
with greater resources than the Company will not enter the industry and compete
effectively against the Company. To the extent that the Company is unable to
compete successfully against its existing and future competitors, its business,
operating results and financial condition will be materially adversely affected.
See "Business -- Competition."
POSSIBLE NEED FOR ADDITIONAL FINANCING
After application of the estimated net proceeds from the Offering and
making payments related to the Acquisitions, the Company expects that it will
have cash on hand, after giving effect to the prepaid Offering and costs of the
Acquisitions, of approximately $0.1 million. The Company expects to enter into
an agreement
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with a leader establishing a credit facility for working capital and
acquisitions (the "Credit Facility").The Company believes the cash generated
from operations and available under the Credit Facility will be sufficient to
support its current operations through 1998. The Company may need to seek
additional capital, however, if its expenses are higher than anticipated, if
less cash is generated from operations than is expected, or if the Company is
unable to obtain the Credit Facility.
The Company intends to finance future acquisitions by using cash from
operations, by issuing shares of Common Stock and through borrowings under the
Credit Facility. The Company believes that its cash flow from operations and its
contemplated Credit Facility will be sufficient to fund acquisition activity for
approximately twelve months following the Offering. However, no assurance can be
given that such financing sources will be adequate to fund such acquisition
activity, or that the Company will not need additional debt or equity financing
to implement successfully its acquisition strategy. There can be no assurance
that the Company will be able to obtain such financing if and when it is needed
or that, if available, such financing will be available on terms the Company
deems acceptable. If the Company does not have sufficient cash resources or
availability under the Credit Facility or if the Common Stock does not maintain
sufficient value or potential acquisition candidates are unwilling to accept
Common Stock as part of the consideration for the sale of their businesses, the
Company will be unable to implement successfully its acquisition strategy. See
"Use of Proceeds" and "Management's Discussion and Analysis of Pro Forma
Financial Condition and Pro Forma Results of Operations."
On December 2, 1997, the Company received a written proposal from Deutsche
Financial Services ("DFS"), pursuant to which DFS proposed to establish a
two-part credit facility, under which DFS would provide $10,000,000 for working
capital and $10,000,000 for acquisitions. The proposal from DFS does not
represent a commitment, and activation of the DFS credit facility is subject to
certain conditions, specifically, the satisfactory completion by DFS of a credit
review, field audit, reporting requirements, acceptance of documentation by DFS
and its counsel, and final approval by management of DFS. In addition to DFS,
the Company is negotiating with other lenders who may be able to provide
financing. There can be no assurance that the Company will be able to obtain the
Credit Facility or reach a definitive agreement with DFS, or in the alternative,
that the Company will be able to obtain other financing on terms and conditions
satisfactory to the Company.
The Company may substantially increase its level of indebtedness in the
future to finance its acquisition program. The degree to which the Company is
financially leveraged following such borrowings and the terms of the Company's
indebtedness could have important consequences to shareholders, including that
(i) the Company's ability to obtain additional financing in the future for
working capital and general corporate purposes, to make acquisitions, to fund
capital expenditures and to pay dividends may be impaired, (ii) a substantial
portion of the Company's cash flow from operations may have to be dedicated to
the payment of the principal of and interest on its indebtedness, (iii) certain
of the Company's borrowings may be at variable rates of interest, which will
expose the Company to the risk of increased interest rates, (iv) the Credit
Facility will contain certain financial and restrictive covenants which could
limit the ability of the Company to effect future debt or equity financings and
may otherwise restrict corporate activities, and (v) the Company may be more
highly leveraged than many of its competitors, which may place the Company at a
competitive disadvantage. See "Management's Discussion and Analysis of Pro Forma
Financial Condition and Pro Forma Results of Operations -- Liquidity and Capital
Resources" and "Business -- Acquisition Program."
ANTICIPATED DECLINE IN SOFTWARE PRICES AND MARGINS
Both the Company's licensed and proprietary software products will be
subject to price pressures over their life cycles which may result in price
declines and reductions in profit margins.
RAPID TECHNOLOGICAL CHANGE
The design automation and document management markets are characterized by
rapid technological change, changing customer needs, frequent new software and
hardware product introductions and evolving industry standards. The Company
believes that its future success will depend upon its ability to obtain
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enhancements to its licensed software and hardware product lines and to
introduce new proprietary software product lines that keep pace with
technological developments and emerging industry standards. The introduction of
competing products embodying new technologies and the emergence of new industry
standards could render the Company's existing licensed and proprietary product
lines obsolete and unmarketable. Accordingly, the Company anticipates that
significant amounts of future revenue will need to be derived from products and
product enhancements which either do not exist today or have not been sold in
large enough quantities to ensure market acceptance. If the Company is unable to
obtain and introduce product enhancements and new products in a timely and
cost-effective manner in response to changing market conditions or customer
requirements, the Company's business, operating results and financial condition
will be materially and adversely affected. In addition, it is possible that some
customers may defer purchases of existing products in anticipation of new
product releases.
PRODUCT DEFECTS
The Company's proprietary software products are highly complex and
sophisticated and could, from time to time, contain design defects or software
errors that are difficult to detect and correct. Any such defects, errors or
difficulties may cause delays in product introductions and shipments, result in
increased costs and diversion of development resources, require design
modifications or impair customer satisfaction with the Company's products.
PROTECTION OF INTELLECTUAL PROPERTY
The Company's products include or may include in the future certain
proprietary hardware and software. The Company has no patents and only one
copyright with respect to its proprietary products. For the most part, the
Company relies on the law of trade secrets, nondisclosure agreements with
employees and others, and restrictions incorporated into agreements with
customers to protect its proprietary products and information. Notwithstanding
these safeguards, it could be possible for competitors to obtain or imitate the
Company's proprietary software and hardware, and there is no assurance that the
Company could detect such violations or deter future violations. Furthermore,
enforcement of the Company's proprietary rights to its hardware and software may
be costly, time consuming or, in some situations, impossible. There can be no
assurance that the Company will be able to protect its proprietary information
adequately and to the extent that the Company has copyrighted software, that
competitors will not be able to develop similar technology independently.
PROPRIETARY TECHNOLOGY INFRINGEMENT
In the future, the Company may receive notices claiming that it is
infringing the proprietary rights of third parties and may become the subject of
infringement claims or legal proceedings by third parties with respect to
current or future products. Any such claim could be time consuming, result in
costly litigation, cause product shipment delays or force the Company to enter
into royalty or license agreements rather than dispute the merits of such claims
and have a material adverse effect on the Company's business, operating results
and financial condition.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock of the Company could be adversely
affected by the sale of substantial amounts of the Common Stock in the public
market following this Offering. Such sales also could make it more difficult for
the Company to issue or sell equity or equity-related securities in the future
at a time and price that it deems appropriate. The shares being sold in this
Offering will be freely tradable unless acquired by affiliates of the Company.
Simultaneously with the closing of this Offering, security holders of the
Founding Companies will receive, in the aggregate, approximately 863,841 shares
of Common Stock as a portion of the consideration for the Founding Companies.
The Selling Shareholder will hold, in the aggregate, an additional 32,838 shares
of Common Stock after giving effect to the 750,000 shares sold by the Selling
Shareholder in the Offering. None of these shares have been acquired in
transactions registered under the Securities Act of 1933, as amended
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(the "Securities Act"), and, accordingly, may not be sold except in transactions
registered under the Securities Act or pursuant to an exemption from
registration. In addition, shareholders of the Founding Companies have agreed
not to sell any shares of Common Stock owned by them at the time of consummation
of the Acquisitions for a period of one year following this Offering. After the
expiration of such one year period, all of such shares may be sold in accordance
with Rule 144 under the Securities Act, subject to the applicable volume,
holding period and other limitations of Rule 144. In addition, shareholders of
the Founding Companies have the right to demand registration of up to 50% of
their shares of Common Stock after one year, and up to 100% of their shares of
Common Stock after two years, subject to certain limitations. See "Description
of Capital Stock -- Registration Rights."
The Company, its directors and officers, the controlling shareholders of
each of the Founding Companies, the Selling Shareholder and Madison Financial
Group Ltd. (which has the right to acquire 5,422 shares of Common Stock from the
Selling Shareholder), have agreed not to offer or sell any shares of Common
Stock of the Company for a period of 180 days (the "Lockup Period") following
the date of this Prospectus without the prior written consent of The
Robinson-Humphrey Company, LLC, except that the Company may issue Common Stock
in connection with future acquisitions or pursuant to earn-out arrangements with
certain Founding Company shareholders and may offer and sell shares of Common
Stock pursuant to the Company's 1997 Long-Term Incentive Plan (the "Plan"). See
"Certain Transactions."
Prior to the consummation of this Offering, the Company will have
outstanding under the Plan options to purchase 141,000 shares of Common Stock,
and at or shortly following consummation of the Offering the Company anticipates
that it will issue options to purchase up to 306,000 additional shares of its
Common Stock under the Plan. The Company intends to register the shares issuable
upon exercise of options granted under the Plan and, therefore, such shares will
be eligible for immediate resale in the public market. See "Shares Eligible for
Future Sale" and "Management -- Stock Options."
Additionally, at the time of consummation of the Offering, the Company will
have issued warrants to purchase an aggregate of 82,074 shares of Common Stock.
The shares issuable upon exercise of these warrants will not be registered under
the Securities Act and, therefore, if and when issued upon warrant exercise, may
not be sold except in transactions registered under the Securities Act or
pursuant to an exemption from registration. See "Certain Transactions -- Other
Transactions."
CONTROL BY EXISTING SHAREHOLDERS
Following the completion of this Offering, members of the Board of
Directors, the shareholders of the Founding Companies, and MedPlus will
beneficially own approximately 29.0% of the outstanding shares of Common Stock
of the Company. The Company's Amended and Restated Articles of Incorporation
provide that there will be no cumulative voting. Although such directors and
other persons do not have any arrangements or understandings among themselves
with respect to the voting of the shares of Common Stock beneficially owned by
them, following the completion of the Offering, such persons may effectively be
able to control the affairs of the Company. See "Principal and Selling
Shareholders."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Founding Companies have in the past experienced, and the Company may
experience in the future, quarterly variations in revenues, operating income and
cash flow as a result of many factors, including anticipation of new technology
releases, the timing of customer orders, additional selling, general and
administrative expenses to acquire and support new business, the timing and
magnitude of required capital expenditures and changes in the revenue mix among
the Company's various product and service offerings or in the relative
contributions of the several Founding Companies. Additionally, certain types of
customer contracts may require the Company to incur costs in periods prior to
recognizing revenues under those contracts. Further, the Company must plan its
operating expenditures based on revenue forecasts, and a revenue shortfall below
such forecasts in any quarter would likely adversely affect the Company's
operating results for that quarter. In addition, because the anticipated
financial benefits of the combination of the Founding Companies may not be
generated immediately, the Company's initial results as a combined company may
reflect corporate overhead that exceeds the realized benefits. As a result of
the foregoing and other factors, the Company may experience material
fluctuations in its results of operations on a quarterly
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basis, which may contribute to volatility in the price of the Common Stock.
Given the possibility of such fluctuations, the Company believes that quarterly
comparisons of the results of its operations during any fiscal year may not be
meaningful and that results for any one fiscal quarter may not be indicative of
future performance. Furthermore, the Company will incur estimated non-cash
charges of $3.0 million and $1.9
million for acquired in-process research and development related to
Synergis-PA's NFM(3.1) and NFM(4.0) and UDMS' Step2000 products, respectively,
in the quarter in which the Acquisitions and closing of the Offering are
completed. Future results of operations could be adversely affected by similar
charges related to the write-off of in-process research and development in
conjunction with future acquisitions, to the extent that any in-process research
and development exists. See "Management's Discussion and Analysis of Pro Forma
Financial Condition and Pro Forma Results of Operations -- Financial Trends."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation and of the Ohio Revised Code (the "ORC"), together or separately,
could discourage potential acquisition proposals, delay or prevent a change in
control of the Company and limit the price that certain investors might be
willing to pay in the future for the Common Stock.
The Company's Amended and Restated Articles of Incorporation provide for
"blank check" Preferred Stock, which may be issued without shareholder approval
and may also inhibit a change in control of the Company.
In addition, Sections 1701.01 and 1701.831 of the ORC contain provisions
that require shareholder approval of any proposed "control share acquisition" of
any Ohio corporation at any of three ownership thresholds: 20%, 33 1/3%, and
50%; and Chapter 1704 of the ORC contains provisions that restrict certain
business combinations and other transactions between an Ohio corporation and
interested shareholders. See "Description of Capital Stock."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Company's
Common Stock. The initial public offering price was determined by negotiations
among the Company, the Selling Shareholder and the representatives of the
Underwriters, and may not be indicative of the market price for the Common Stock
after this Offering. See "Underwriting" for factors considered in determining
the initial public offering price. From time to time after this Offering, there
may be significant changes in general conditions in the economy or the
technology sector, or other developments affecting the Company or its
competitors, which could cause the market price of the Common Stock to fluctuate
substantially. The equity markets have, on occasion, experienced significant
price and volume fluctuations that have affected the market prices for many
companies' securities and that have often been unrelated to the operating
performance of those companies. Any such fluctuations that occur following
completion of this Offering may adversely affect the market price of the Common
Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
shares of Common Stock in the amount of $11.45 per share. See "Dilution."
FORWARD-LOOKING STATEMENTS
This Prospectus contains "forward-looking statements" which include
statements regarding the intent, belief or current expectations of the Company,
its directors or its executive officers with respect to, among other things: (i)
trends affecting the Company's financial condition or results of operations;
(ii) the Company's business and growth strategies; (iii) the use of the proceeds
to the Company of this Offering. Prospective investors are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those projected in the forward-looking statements as a result of various
factors. Important factors that could cause such differences are identified
under "Risk Factors" above.
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THE COMPANY
UDMS is both a Founding Company and the entity which is making the
Acquisitions of the other nine Founding Companies. Immediately prior to
effectiveness of the Registration Statement of which this Prospectus is a part,
UDMS changed its name to Synergis Technologies, Inc., a name previously used by
another of the Founding Companies, which is referred to in this Prospectus as
"Synergis-PA."
Throughout this Prospectus, reference is made to certain of the customers
and suppliers of the Company or the Founding Companies. For convenience
purposes, the following customers or suppliers are referred to as follows:
"Autodesk" refers to Autodesk, Inc.; "Bentley" refers to Bentley Systems, Inc.;
"Sun Microsystems" refers to Sun Microsystems, Inc.; "Tri-Star" refers to
Tri-Star Computer Company; "SDRC" refers to Structural Dynamics Research
Corporation; "Softdesk" refers to the Softdesk line of products sold by
Autodesk; "Microsoft" refers to Microsoft Corp.; "Hewlett-Packard" refers to
Hewlett-Packard Corporation; "Intergraph" refers to Intergraph Corporation; and
"Intel" refers to Intel Corporation. "Top Dealer" awards are given by Autodesk
to those dealers of Autodesk and Softdesk products which exceed quotas set by
Autodesk each year.
The Company believes it will be the largest independent value-added
reseller of design automation products and services in the United States.
Simultaneously with the closing of this Offering, the Company will acquire nine
established design automation and document management businesses with 21 offices
located in the following states: California, Colorado, Connecticut, Georgia,
Kentucky, Massachusetts, Michigan, Missouri, New Hampshire, New Mexico, New
York, North Carolina, Ohio, Pennsylvania, and Virginia. The Company will employ
approximately 325 individuals, including approximately 90 highly skilled
technical personnel, will offer hardware and software products from
approximately 55 manufacturers, and will have access to an installed customer
base of approximately 34,000 businesses. On a pro forma basis, the Company had
revenues for the year ended December 31, 1996 and the nine months ended
September 30, 1997 of $48.8 million and $40.3 million, respectively. Through the
acquisition and integration of the Founding Companies, the Company expects to
expand geographic penetration of the existing businesses, to capitalize on
substantial cross-selling opportunities, to provide design automation products
and services on both a local and national basis and to establish a national
customer service and support program.
The Company will provide its customers with licensed and proprietary
CAD/CAM/CAE and related document management solutions. The Company will
complement those offerings with a wide range of sophisticated customer support
and consulting services including systems integration, customization, training,
process re-engineering and call center and help desk support. As a result, the
Company will offer the comprehensive products, professional services, support,
and training necessary for customers to implement and maintain complete,
state-of-the-art design automation systems and for the Company to become an
integral part of its customers' technology teams.
The design automation reseller industry has experienced rapid change from
direct selling by manufacturers to its present configuration of numerous local
and regional value added resellers. In 1990, ten geographically diverse local
and regional resellers formed G-10, Inc. ("G-10"). Originally formed as a
vehicle to achieve combined buying economies, G-10 evolved into a means of
sharing best practices and keeping abreast of industry trends. Periodically,
certain members would discuss combining their companies into a larger entity;
however, as a result of the lack of capital and the inability to find outside
management capable of leading a combined organization, most G-10 members today
remain independent businesses. Five of the Founding Companies are members of
this industry group.
In late 1996, certain G-10 members commenced discussions with UDMS and its
parent company, MedPlus, to facilitate the organization of a number of local and
regional resellers into a single business entity. During early 1997, Terry L.
Theye, former Chairman and Chief Executive Officer of The Future Now, Inc., a
national reseller of computer and consulting products, agreed to lead these
organizational efforts, which resulted in the formation of the Company.
The Company believes that by uniting value added resellers in diverse
geographic regions with an experienced management team, it will create a single
entity with the national presence, capital, human
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resources and name recognition required to serve more and larger organizations
while maintaining local focus and management. Additionally, the Company believes
that its ability to integrate certain document management solutions with more
traditional design automation tools, as well as its ability to offer access to
certain proprietary software, will be viewed positively by the growing number of
large and diverse users of these products.
Upon consummation of this Offering, the ten established businesses
described below will be combined to form the Company. For a description of the
transactions pursuant to which these businesses will be combined, see "Certain
Transactions -- The Acquisitions."
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC. Headquartered in Cincinnati,
Ohio, UDMS' primary focus is the development, marketing and support of document
management software, including Step2000, a leading object oriented document
management and workflow application. Founded in 1990, UDMS was acquired by
MedPlus in December 1995. UDMS' proprietary software is sold nationwide.
APPLIED SOFTWARE TECHNOLOGY, INC. ("Applied"). Headquartered in Atlanta,
Georgia, and with an office in Greensboro, North Carolina, Applied's primary
focus is the sale of design automation software solutions. From 1985 through
1996, Applied received Autodesk's award for Outstanding Achievement in Sales
from 1993 through 1996 it received Autodesk's award for Outstanding Achievement
in Education (Southeastern Region). Applied is an authorized Autodesk System
Center for mechanical design and AEC, and is Autodesk's exclusive representative
to the educational market in the states of Georgia and North Carolina. Applied
also is certified as a Microsoft Solutions Provider, participates with Sun
Microsystems in the Sun Competency 2000 program, and is an authorized Tri-Star
reseller. Applied markets a workflow enabled and electronic document management
system private-labeled from UDMS. Applied is an authorized reseller of SDRC
products. Applied was founded in 1982 and serves the southeastern region.
ACCESS CORPORATION ("ACCESS"). Headquartered in Cincinnati, Ohio, and with
facilities in Hebron, Kentucky and Irvine, California, ACCESS' primary focus is
nationwide service of hardware and software for its installed base of customers
and third parties. ACCESS develops and markets document management software and
is the sole North American distributor of the Cimage product line, a leading
document management software product. ACCESS also sells certain peripheral
products including plotters, scanners and printers. ACCESS was founded in 1963
and markets its services and products nationwide.
DTI TECHNOLOGIES, INC. ("DTI"). Headquartered in Bedford, New Hampshire,
DTI's primary focus is the sale of Autodesk design automation software and
related services. DTI is one of the leading New England providers of Autodesk
software, related technologies and services to that region's mechanical design,
AEC, GIS, and educational markets. DTI is an authorized Autodesk System Center
for mechanical design, AEC, GIS, data management and plant design, and is
Autodesk's exclusive representative to the educational market in the states of
Massachusetts, New Hampshire and Vermont. DTI has been a Top Dealer for Autodesk
for the past twelve years and was awarded the Autodesk Best Customer Service and
Support Award in 1996. Services offered by DTI include system installation,
software and hardware support, software development and customization, and
network installation, support and training. DTI is a certified Bentley reseller
and an authorized Tri-Star reseller. DTI was founded in 1984 and serves New
England and New York.
TECHNICAL SOFTWARE, INC. ("Technical Software"). Headquartered near
Cleveland, Ohio, Technical Software's primary focus is the sale of software,
hardware and related services for CAD, solid modeling, mapping, document
management, networking and scanning. Technical Software has been an Autodesk Top
Dealer for the last twelve years and a Softdesk Top Dealer for the last six
years and was awarded the Autodesk Best Customer Service and Support Award in
1991 and 1995. Technical Software is an authorized Autodesk System Center for
GIS and is Autodesk's exclusive representative to the educational market in the
state of Ohio. Technical Software is also a certified Bentley reseller. Founded
in 1982, Technical Software primarily serves Ohio.
SYNERGIS TECHNOLOGIES, INC. ("Synergis-PA"). Headquartered in Quakertown,
Pennsylvania, and with offices in Blue Bell and York, Pennsylvania,
Synergis-PA's primary focus is the sale of design automation software, including
Autodesk products and Network File Manager ("NFM"), its own proprietary document
management software developed for design automation. Synergis-PA also offers
systems integration, networking services, custom programming and training.
Synergis-PA has been an Autodesk Top Dealer from 1986
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through 1996 and was awarded the Autodesk Best Customer Service and Support
Award in 1992. Synergis-PA is an authorized Autodesk System Center for both
mechanical design and data management, and is Autodesk's exclusive
representative to the educational market in the states of Pennsylvania and New
Jersey. Synergis-PA was founded in 1985 and serves the Mid-Atlantic region.
MID-WEST CAD, INC. ("Mid-West CAD"). Headquartered in Lee's Summit,
Missouri, Mid-West CAD's primary focus is the sale of software, services and
hardware to AEC firms. Mid-West CAD is an authorized Autodesk System Center for
AEC and mechanical design. In 1996, Autodesk awarded Mid-West CAD the Ten Years
of Excellence Award for ten consecutive years of receiving Autodesk's Top Dealer
Award. Mid-West CAD also sells Bentley design automation software and is an
authorized reseller of Tri-Star, Hewlett-Packard and Intergraph hardware and
peripherals. Mid-West CAD was founded in 1985 and primarily serves Kansas and
Missouri.
CADD MICROSYSTEMS, INC. ("CADD Microsystems"). Headquartered in
Alexandria, Virginia, CADD Microsystems' primary focus is the sale of mechanical
design and AEC software and services. CADD Microsystems has been the top selling
Autodesk reseller to the federal government since 1991 and is an authorized
Autodesk System Center for AEC. From 1990 through 1996 CADD Microsystems
received Autodesk's Top Dealer Award and, in 1993, was awarded Autodesk's Best
Customer Service and Support Award. CADD Microsystems also offers systems
integration, project management and training. CADD Microsystems was founded in
1985 and primarily serves the Washington, D.C. metropolitan area, including
Virginia and Maryland.
DEVTRON, RUSSELL INC. ("Devtron Russell"). Headquartered in Gladwin,
Michigan, and with offices in Grand Rapids and Traverse City, Michigan, Devtron
Russell's primary focus is the sale of Autodesk products and related services.
In 1995, Autodesk awarded Devtron Russell the Ten Years of Excellence Award for
ten consecutive years of receiving Autodesk's annual Top Dealer Award. It is an
authorized Autodesk System Center for mechanical design. Founded in 1969,
Devtron Russell primarily serves Michigan.
COMPUTERS FOR DESIGN, INC. ("Computers for Design"). Headquartered near
Denver, Colorado, and with an office in Albuquerque, New Mexico, Computers for
Design's primary focus is the sale of CAD systems hardware, software and related
services to government and commercial customers primarily in the GIS market
segment. Computers for Design has received Autodesk's award for Outstanding
Sales and Service to Government. In 1996, Computers for Design was named to the
Bentley's Winner's Circle, an award given to the Bentley reseller in each
geographic area which has exceeded its quota by the largest margin. Computers
for Design commenced business in 1984 and primarily serves the Rocky Mountain
region.
The Company is an Ohio corporation. Its principal offices will be located
at 4350 Glendale-Milford Road, Cincinnati, Ohio 45241 and its telephone number
will be (513) 786-8350.
17
<PAGE> 19
USE OF PROCEEDS
In connection with the Acquisitions, the Company or the Founding Companies
will make the following payments totalling approximately $22.2 million:
<TABLE>
<S> <C>
Cash portion of the purchase price of the Founding Companies........... $ 15.5 million
Payment of indebtedness of the Founding Companies (including $1.5
million to be paid to the Selling Shareholder)....................... 4.7 million
Retirement of preferred stock of ACCESS................................ 1.5 million
Payment of the costs of the Acquisitions............................... 0.5 million
--------------
Total........................................................ $ 22.2 million
==============
</TABLE>
The net proceeds from the sale by the Company of 1,850,000 shares of Common
Stock offered hereby are estimated to be approximately $19.1 million, based upon
an assumed initial public offering price of $12.00 per share, after deducting
the estimated underwriting discount and offering expenses payable by the Company
($23.4 million if the Underwriters' over-allotment option is exercised in full).
The Company expects to have approximately $3.2 million of cash and prepaid
Offering and Acquisition costs after giving effect to the Acquisitions and
before receipt of the net proceeds of the Offering. This will result in total
available cash and prepaid Offering and Acquisition costs of approximately $22.3
million. Of this total, the $22.2 million referred to above will be paid in
connection with the Acquisitions, leaving approximately $0.1 million available
for working capital and general corporate purposes, which are expected to
include future acquisitions of companies operating in the technology sector. As
of the date of this Prospectus, the Company currently has no definitive
agreements with respect to any acquisitions other than of the Founding
Companies. See "Risk Factors -- Risks Generally Associated with Acquisitions."
Pending such uses, the Company intends to invest the net proceeds of the
Offering in short-term, investment-grade, interest-bearing instruments. The
Company intends to enter into the Credit Facility to assist in the funding of
future acquisitions and operating activities. The Company also may utilize
Common Stock to fund future acquisitions. There can be no assurance that the
Credit Facility or the Common Stock will be sufficient to fund the Company's
needs. See "Management's Discussion and Analysis of Pro Forma Financial
Condition and Pro Forma Results of Operations -- Liquidity and Capital
Resources."
Details of the expenses related to the Acquisitions are provided below:
Consummation of Acquisitions
The Company intends to use approximately $15.5 million of the estimated net
proceeds of the Offering to pay the cash portion of the purchase price for the
Founding Companies, all of which will be paid to former shareholders of the
Founding Companies. See "Certain Transactions -- Other Transactions."
Repayment of Indebtedness
In addition, approximately $4.7 million of the estimated net proceeds of
the Offering will be used to repay certain outstanding interest-bearing debt of
the Founding Companies, based on indebtedness outstanding as of September 30,
1997. See "Certain Transactions -- The Acquisitions." The following table
describes the
18
<PAGE> 20
outstanding indebtedness to be repaid as of September 30, 1997 and the purpose
for which such indebtedness was incurred:
<TABLE>
<CAPTION>
PURPOSE OF
PRINCIPAL AS OF SEPTEMBER 30, SEPTEMBER 30, DEBT
1997 1997 INCURRED INCURRED
------------------------------- INTEREST SINCE SINCE
Dollars in thousands SHORT TERM LONG TERM TOTAL RATE MATURITY OCTOBER 1, 1996 OCTOBER 1, 1996
---------- --------- ------ ------------- --------- --------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
UDMS
Line of Credit....... $ 630 $ -- $ 630 8.50% 1998 $630 Fund the Offering
and Acquisitions
Due to MedPlus....... 1,232 -- 1,232(1) 9.50% 1998 $832 (2)
Convertible
debentures to
MedPlus............ 300 -- 300 10.00% Demand -- Not Applicable
------ ------ ------
Total.......... $2,162 $ -- $2,162
DTI
Line of Credit....... $ 240 $ -- $ 240 10.50% Demand $240 Working capital
Notes Payable........ 117 776 893 10.75 1999-2003 -- Working capital
------ ------ ------
Total.......... $ 357 $ 776 $1,133
TECHNICAL SOFTWARE
Notes Payable........ $ 90 $ 97 $ 187 9.00-9.50% 1999-2000 $187 Working capital
MID-WEST CAD
Notes Payable........ $ 12 $ 7 $ 19 7.50-7.92% 1998-1999 -- Not Applicable
CADD MICROSYSTEMS
Line of Credit....... $ 40 $ -- $ 40 10.00% 2001 -- Not Applicable
Notes Payable........ 40 120 160 10.80% Demand -- Not Applicable
------ ------ ------
Total.......... $ 80 $ 120 $ 200
COMPUTERS FOR DESIGN
Line of Credit....... $ 80 $ -- $ 80 9.25% 1998 -- Not Applicable
Note Payable......... 58 -- 58 5.90% Demand $44 Capital expenditures
------ ------ ------
Total.......... $ 138 $ -- $ 138
APPLIED
Line of Credit....... 500 -- 500 9.50 1998 155 Working capital
Note Payable......... $ 92 $ 50 $ 142 14.5% 1997-1999 $-- Not Applicable
------ ------ ------
Total.......... $ 592 $ 50 $ 642
SYNERGIS -- PA
Note Payable......... $ 18 $ 81 $ 99 7.95-10.00% 1999-2002 -- Not Applicable
DEVTRON RUSSELL
Line of Credit....... 65 -- 65 10.00 Demand $65 Working capital
Notes Payable........ 18 64 82 8.70-11.50% 1998-1999 -- Not Applicable
------ ------ ------
Total.......... $ 83 $ 64 $ 147
------ ------ ------
Grand Total.... $3,532 $ 1,195 $4,727
====== ====== ======
</TABLE>
- ---------------
(1) Approximately $834 represents non-interest bearing amounts due to MedPlus
which will be repaid from the net proceeds of the Offering.
(2) The Due to MedPlus balance consists of amounts due for operating advances,
services and office space, accrued interest on the convertible debenture and
amounts due under the Reimbursement Agreement and tax-sharing agreement.
Expenses of the Acquisitions
The total costs of the Acquisitions are expected to be approximately $0.5
million, all of which will be paid by the Company.
19
<PAGE> 21
DIVIDEND POLICY
The Company has never paid cash dividends. For the foreseeable future, the
Company anticipates that any earnings will be retained for the operation and
expansion of its business, for additional acquisitions, and for general
corporate purposes and that it will not pay cash dividends. In addition, the
Company anticipates that any credit facility to which it becomes a party will
include restrictions on the ability of the Company to pay dividends without the
lender's consent.
Prior to consummation of the Acquisitions, certain of the Founding
Companies had elected to be treated as S Corporations under the Internal Revenue
Code of 1986, as amended (the "Code"). In general, an S Corporation is not
treated as a separate taxable entity, and an S Corporation's gains, income,
losses and separately stated tax items are taxed to its shareholders on a pro
rata basis. Certain of the Founding Companies have made periodic distributions
to their shareholders. The balance of taxed or taxable accumulated earnings
which have not been distributed is reflected in the AAA Account for each such
Founding Company. In connection with the Acquisitions, the S Corporation status
of those Founding Companies will terminate and, therefore, those Founding
Companies have made a distribution to their existing shareholders of the AAA
Notes in an aggregate principal amount estimated to equal approximately $0.6
million at the time of the Offering. The aggregate principal amount of the AAA
Notes will be approximately equal to the undistributed earnings in the AAA
Accounts on which such shareholders either have paid or will be required to pay
income taxes. The amount of the AAA Notes includes an estimate of taxable income
through the anticipated effective date of the Offering.
In addition, approximately $0.2 million will be distributed to the
shareholders of Synergis-PA in the form of AAA Notes related to the taxes
payable by such shareholders on the amounts included in the AAA Account for
Synergis-PA as of September 30, 1997.
The AAA Notes will become obligations of the Company at the time of the
closing of the Offering and will be repaid from the Company's cash flow or from
borrowings under the Company's proposed new Credit Facility. Following the
Acquisitions, the Company will be subject to federal and state income taxes.
20
<PAGE> 22
CAPITALIZATION
The following table sets forth the Company's (i) short-term debt, including
current maturities of long-term obligations and notes payable to shareholders;
(ii) long-term obligations, less current maturities; and (iii) capitalization at
September 30, 1997 (a) on a pro forma combined basis after giving effect to the
8,451.59-for-1 stock split to be effected immediately prior to Offering and a
contribution to the capital of the Company by MedPlus of 62,321 shares of the
Company's Common Stock and the consummation of the Acquisitions and the issuance
of 863,841 shares of Common Stock in connection therewith, and (b) as further
adjusted to effect the issuance and sale of the 1,850,000 shares of Common Stock
offered hereby and the application of the estimated net proceeds therefrom,
based on an initial public offering price of $12.00 per share. See "Use of
Proceeds." This table should be read in conjunction with "Management's
Discussion and Analysis of Pro Forma Financial Condition and Pro Forma Results
of Operations" and the Pro Forma Combined Financial Statements of the Company
and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
UDMS
Dollars in thousands HISTORICAL
---------- PRO FORMA
COMBINED
AS ADJUSTED
-----------
(UNAUDITED)
<S> <C> <C>
Short-term debt and current maturities of long-term obligations...... $ 2,162(1) $ 1,213(2)
======== =======
Long-term obligations less current maturities........................ -- 82(3)
Shareholders' equity:
Preferred stock, 100,000 shares authorized and none issued and
outstanding, pro forma combined as adjusted..................... --
Common stock, no par value, 850 shares authorized and 100 shares
issued and outstanding on a historical basis, and 10,000,000
shares authorized and 3,496,679 shares issued and outstanding,
pro forma combined as adjusted(4)(5)............................ -- 14
Additional paid-in capital......................................... 2,224 29,439
Retained earnings (accumulated deficit)............................ (2,003) 8
Treasury stock..................................................... -- (7)
Note receivable -- stock issuance.................................. -- --
Unearned stock warrants............................................ (28) --
-------- -------
Total shareholders' equity................................. 193 29,454
-------- -------
Total capitalization................................................. $ 193 $29,536
======== =======
</TABLE>
- ---------------
(1) Includes: (i) $630,000 payable under the line of credit, (ii) $1,232,000
payable to MedPlus under the Reimbursement Agreement dated May 28, 1997 and
(iii) $300,000 related to the debenture to MedPlus. See "Use of Proceeds"
and "Certain Transactions -- Other Transactions."
(2) Includes the current portion of capital leases and other long-term
obligations, including $0.8 million related to the AAA Notes, not being
repaid from the proceeds of the Offering at September 30, 1997.
(3) Includes the long-term portion of capital leases and other long-term
obligations not being repaid from the proceeds of the Offering at September
30, 1997.
(4) Includes 863,841 shares to be issued to the owners of the Founding
Companies.
(5) Excludes 529,074 shares of Common Stock issuable upon the exercise of stock
options and warrants to be outstanding on the date of this Prospectus and
273,000 additional shares reserved for future issuance under the Company's
1997 Long-Term Incentive Plan. See "Certain Transactions" and
"Management -- Employment Agreements; Executive Compensation,"
"-- Director's Compensation," and "-- Stock Options."
21
<PAGE> 23
DILUTION
The deficit in pro forma net tangible book value of the Company as of
September 30, 1997 was approximately $17.2 million, or $10.43 per share of
Common Stock, after giving effect to the Acquisitions. The deficit in net
tangible book value per share represents the amount of total tangible assets of
the Company reduced by the amount of total liabilities and divided by the number
of shares of Common Stock issued and outstanding after giving effect to the
Acquisitions. Net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in the Offering and the pro forma net tangible book value per share of
Common Stock immediately after completion of the Offering. After giving effect
to the sale of 1,850,000 shares of Common Stock by the Company and the
application of the estimated net proceeds therefrom as described under "Use of
Proceeds," the pro forma net tangible book value of the Company as of September
30, 1997 would have been approximately $1.9 million, or $0.55 per share. This
represents an immediate increase in pro forma net tangible book value of $10.97
per share as of September 30, 1997 to shareholders and an immediate dilution in
pro forma net tangible book value of $11.45 per share to new investors
purchasing Common Stock in the Offering. The following table illustrates this
dilution per share to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................ $12.00
------
Pro forma deficit in net tangible book value per share at September 30,
1997 after the Acquisitions and before the Offering...................... (10.43)
Increase per share attributable to sale of Common Stock in the Offering.... 10.97
------
Pro forma net tangible book value per share after the Offering............. 0.55
------
Dilution per share to new investors...................................... $11.45
======
</TABLE>
The following table sets forth, on a pro forma basis, giving effect to the
Acquisitions and the related transactions, the average price per share paid by
the existing shareholders and the new investors adjusted to give effect to the
sale by the Company of 1,850,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $12.00 per share, and before deducting
the estimated underwriting discount and offering expenses payable by the
Company:
<TABLE>
<CAPTION>
TOTAL SHARES PURCHASED CONSIDERATION PAID
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)........... 1,646,679 47.1% $10,293,000 31.7% $ 6.25
New investors...................... 1,850,000 52.9% 22,200,000 68.3% 12.00
--------- ----- ----------- -----
Total.................... 3,496,679 100.0% $32,493,000 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Total consideration paid by the existing shareholders represents: (i)
approximately $2.0 million paid by MedPlus related to its acquisition of
UDMS in December, 1995, including contingent consideration paid since the
date of acquisition of approximately $0.3 million; and (ii) the $8.3 million
estimated fair value of 863,641 shares of Common Stock issued to the
shareholders of the Founding Companies in the Acquisitions, which were
valued at a 20% discount from the initial offering price, or $9.60 per
share, based upon the fact that substantially all of the holders of these
shares will not have the right to demand registration of these shares by the
Company until one year after the consummation of the Offering and, in such
case, may only demand that the Company register up to 50% of the shares.
Beginning two years after the consummation of the Offering, the holders of
these shares may demand that the Company register 100% of these shares.
The foregoing computations assume no exercise of outstanding stock options
and warrants. Upon consummation of the Offering, there will be outstanding
options to purchase 306,000 shares of Common Stock at the initial public
offering price, options to purchase 141,000 shares of Common Stock at an
exercise price of $9.60 and warrants to purchase 46,484 shares of Common Stock
at a weighted-average exercise price of $3.19. In addition a further warrant was
issued to purchase 35,590 shares of Common Stock at the initial public offering
price. To the extent the holders exercise such options and warrants, the
dilution per share to new investors would be $11.46. See "Management -- Stock
Options" and "Certain Transactions -- Other Transactions."
22
<PAGE> 24
UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL DATA
The following Unaudited Selected Pro Forma Combined Financial Data for the
year ended December 31, 1996 and the nine months ended September 30, 1996 and
1997 gives effect to the Acquisitions and the consummation of this Offering and
the application of the estimated net proceeds therefrom as if these transactions
had occurred as of January 1, 1996. The Company will acquire the Founding
Companies simultaneously with and as a condition to the consummation of this
Offering. DTI, one of the Founding Companies, has been identified as the
accounting acquiror for financial statement presentation purposes. The
Acquisitions will be recorded using the purchase method of accounting. See
"Selected Financial Data," "Management's Discussion and Analysis of Pro Forma
Financial Condition and Pro Forma Results of Operations," "Certain Transactions"
and the Pro Forma Combined Financial Statements and the notes thereto included
elsewhere in this Prospectus.
The Unaudited Selected Pro Forma Combined Financial Data has been prepared
by the Company based, in part, on the historical financial statements of the
Founding Companies, which financial statements are included elsewhere in the
Prospectus, and adjusted for purposes of the Pro Forma Combined Financial
Statements, whereby the statement of operations information for the Founding
Companies has been presented for the year ended December 31, 1996 and for the
nine months ended September 30, 1996 and 1997 even though certain of the
Founding Companies possessed fiscal year-ends other than December 31, 1996. The
pro forma adjustments are based upon preliminary estimates, currently available
information and certain assumptions that management deems appropriate. The
preliminary estimates regarding allocation of the purchase price are subject to
uncertainties including, among others, the final Offering proceeds and the
corresponding number of shares issued to the Founding Company shareholders
exclusive of DTI (the accounting acquiror), as well as the final determination
of the fair value of the net assets acquired. In management's opinion, the
preliminary estimates regarding allocation of the purchase price of the Founding
Companies are not expected to materially differ from the final allocation. The
purchase price allocation will be finalized after the closing of the
Acquisitions. The Unaudited Selected Pro Forma Combined Financial Data presented
herein are not necessarily indicative of the results the Company would have
obtained had such events occurred at the beginning of the period, as assumed, or
of the future results of the Company, as a combined entity.
23
<PAGE> 25
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA(a)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
---------------------------
Dollars in thousands, except per share data 1996 1997
YEAR ENDED ----------- -----------
DECEMBER 31,
1996 (UNAUDITED) (UNAUDITED)
------------
(UNAUDITED)
<S> <C> <C> <C>
Total revenues......................................... $ 48,789 $37,633 $ 40,339
Costs of revenues...................................... 32,659 24,488 27,767
Selling, general and administrative expenses........... 16,286 12,226 12,253
Amortization of goodwill and other identifiable
intangibles.......................................... 944 692 718
---------- ------- ----------
Operating income (loss)................................ (1,100) 227 (399)
Interest income (expense), net......................... 58 57 (4)
Other income (expense), net............................ 85 4 37
---------- ------- ----------
Income (loss) before income taxes...................... (957) 288 (366)
Income tax expense (benefit)........................... (70) 343 86
---------- ------- ----------
Net income (loss)...................................... $ (887) $ (55) $ (452)
========== ======= ==========
Pro forma net loss per share........................... $ (0.25) $ (0.13)
========== ==========
Shares used in computing pro forma net loss per
share................................................ 3,559,000 3,559,000
========== ==========
</TABLE>
PRO FORMA COMBINED BALANCE SHEET DATA(a)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
------------------------------------------------------------------------------
ADJUSTMENTS
UDMS PRO FORMA ----------------------------- PRO FORMA
Dollars in thousands HISTORICAL COMBINED ACQUISITION OFFERING AS ADJUSTED
----------- ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents...... $ -- $ 1,708 $(17,081) $ 15,452 $ 79
Working capital (deficit)...... (1,228) 1,395 * * 1,260
Goodwill and other identifiable
intangibles, net............. 887 1,736 25,811 -- 27,547
Total assets................... 3,433 19,645 5,000 17,420 42,065
Short-term debt and current
maturities of long-term
obligations.................. 2,162 3,920 825 (3,532) 1,213
Long-term obligations less
current maturities........... -- 1,277 -- (1,195) 82
Shareholders' equity........... 193 2,811 7,564 19,079 29,454
</TABLE>
- ---------------
* Not meaningful
See accompanying notes to pro forma combined financial data.
24
<PAGE> 26
PRO FORMA COMBINED STATEMENTS OF OPERATIONS(a)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------
ACQUISITION OFFERING PRO FORMA,
Dollars in thousands, except per share data HISTORICAL ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues:
Hardware.................................... $ 9,859 $ 982(f) $ -- $10,841
Software.................................... 22,624 2,055(f) -- 24,679
Services, consulting and other.............. 12,902 367(f) -- 13,269
------- ------ ---- ---------
Total revenues....................... 45,385 3,404 -- 48,789
Costs and expenses:
Hardware.................................... 7,626 816(f) -- 8,442
Software.................................... 15,045 1,332(f) -- 16,377
Services, consulting and other.............. 7,518 322(f) -- 7,840
Selling and marketing....................... 7,214 408(f) -- 7,622
Amortization of goodwill and other
identifiable intangibles.................. 34 910(b) -- 944
General and administrative.................. 8,550 114(c),(f) -- 8,664
------- ------ ---- ---------
Total costs and expenses............. 45,987 3,902 -- 49,889
------- ------ ---- ---------
Operating loss................................ (602) (498) -- (1,100)
Other income (expense), net:
Interest.................................... (106) (20)(f) 184(d) 58
Other....................................... 85 -- -- 85
------- ------ ---- ---------
Income (loss) before income taxes............. (623) (518) 184 (957)
Income tax expense (benefit).................. 117 (261)(e) 74(e) (70)
------- ------ ---- ---------
Net income (loss)............................. $ (740) $ (257) $ 110 $ (887)
======= ====== ==== =========
Supplemental pro forma data:
Pro forma net loss per share................ $ (0.25)
=========
Pro forma weighted average shares
outstanding(g)............................ 3,559,000
=========
</TABLE>
See accompanying notes to pro forma combined financial data.
25
<PAGE> 27
PRO FORMA COMBINED STATEMENTS OF OPERATIONS(a), CONTINUED
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
-----------------------------------------------------
ACQUISITION OFFERING PRO FORMA,
Dollars in thousands ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
------- ----------- -----------
HISTORICAL (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ------- ----------- -----------
(UNAUDITED)
-----------
<S> <C> <C> <C> <C>
Total revenues:
Hardware................................. $ 7,284 $ 982 (f) $ -- $ 8,266
Software................................. 17,290 2,055 (f) -- 19,345
Services, consulting and other........... 9,655 367 (f) -- 10,022
------- ------ ----- -------
Total revenues................... 34,229 3,404 -- 37,633
Costs and expenses:
Hardware................................. 5,645 816 (f) -- 6,461
Software................................. 10,794 1,332 (f) -- 12,126
Services, consulting and other........... 5,579 322 (f) -- 5,901
Selling and marketing.................... 5,365 408 (f) -- 5,773
Amortization of goodwill and other
identifiable intangibles.............. 17 692 (b) -- 709
General and administrative............... 6,216 220 (c),(f) -- 6,436
------- ------ ----- -------
Total costs and expenses......... 33,616 3,790 -- 37,406
------- ------ ----- -------
Operating (loss)........................... 613 (386) -- 227
Other income (expense) net:
Interest................................. (51) (20) (f) 128(d) 57
Other.................................... 4 -- -- 4
------- ------ ----- -------
Income (loss) before income taxes.......... 566 (406) 128 288
Income tax expenses (benefit).............. 117 175 (e) 51(e) 343
------- ------ ----- -------
Net income (loss).......................... $ 449 $ (581) $ 77 $ (55)
======= ====== ===== =======
</TABLE>
See accompanying notes to pro forma combined financial data.
26
<PAGE> 28
PRO FORMA COMBINED STATEMENTS OF OPERATIONS(a), CONTINUED
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
----------------------------------------------------
ACQUISITION OFFERING PRO FORMA,
Dollars in thousands, except per share data HISTORICAL ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
---------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
------- ----------- -----------
<S> <C> <C> <C> <C>
Total Revenues:
Hardware......................................... $ 7,278 $ -- $ -- $ 7,278
Software......................................... 22,701 -- -- 22,701
Services, consulting and other................... 10,360 -- -- 10,360
-------- ----- ----- ----------
Total revenues............................ 40,339 -- -- 40,339
Costs and expenses:
Hardware......................................... 5,710 -- -- 5,710
Software......................................... 14,856 -- -- 14,856
Services, consulting & other..................... 7,201 -- -- 7,201
Selling and marketing............................ 5,822 -- -- 5,822
Amortization of goodwill and other identifiable
intangibles.................................... 65 653 (b) -- 718
General and administrative....................... 6,749 (318) (c) -- 6,431
-------- ----- ----- ----------
Total costs and expenses.................. 40,403 335 -- 40,738
-------- ----- ----- ----------
Operating loss..................................... (64) (335) -- (399)
Other income (expense), net:
Interest......................................... (165) -- 161(d) (4)
Other............................................ 37 -- -- 37
-------- ----- ----- ----------
Income (loss) before income taxes.................. (192) (335) 161 (366)
Income tax expense (benefit)....................... 71 (49) (e) 64(e) 86
-------- ----- ----- ----------
Net income (loss).................................. $ (263) $(286) $ 97 $ (452)
======== ===== ===== ==========
Supplemental pro forma data:
Pro forma net loss per share..................... $ (0.13)
==========
Pro forma weighted average shares
outstanding(g)................................. 3,559,000
==========
</TABLE>
See accompanying notes to pro forma combined financial data.
27
<PAGE> 29
NOTES TO PRO FORMA COMBINED FINANCIAL DATA
(a) Includes the effects of: (i) the sale of 1,850,000 shares of Common Stock at
an assumed initial public offering price of $12.00 per share, net of
expenses and underwriting discount, and after giving effect to $1.1 million
of prepaid Offering expenses for net proceeds of $19.1 million (ii) the use
of $15.5 million of the estimated net proceeds of the Offering to pay the
cash portion of the purchase price of the Founding Companies payable at
closing, including $3.5 million which is payable to the shareholder of DTI
(accounting acquiror); (iii) the issuance in the Acquisitions of 863,841
shares of Common Stock to the shareholders of the Founding Companies; (iv)
estimated costs of the Acquisitions of $0.5 million; (v) the elimination of
common stock, additional paid-in capital, retained earnings, treasury stock
and note receivable--stock issuance of the Founding Companies (exclusive of
DTI) as a result of the Acquisitions; (vi) the use of a portion of the
estimated net proceeds of the Offering to pay approximately $4.7 million in
interest-bearing debt originally incurred by the Founding Companies and
outstanding at September 30, 1997; and (vii) the use of $1.5 million in cash
and cash equivalents to repay the holders of ACCESS' preferred stock in
conjunction with the acquisition of ACCESS by UDMS.
(b) Includes pro forma adjustments of $0.9 million, $0.7 million and $0.7
million for the year ended December 31, 1996 and for the nine month periods
ended September 30, 1996 and 1997, respectively, to amortization expense
related to the goodwill and other identifiable intangible assets recorded in
connection with the Acquisitions as if they all occurred as of January 1,
1996. The goodwill is being amortized on a straight-line basis over an
estimated life of 25 years and the identifiable intangible assets are being
amortized over an estimated life of 10 years. The amortization period for
goodwill was determined by the Company with consideration given to the
reputation of each Founding Company, the length of each Founding Company's
operating history and the potential market in which the Founding Company
operates.
(c) Includes pro forma reductions in compensation to the owners of the Founding
Companies, to which they have agreed prospectively, in the amounts of
approximately $0.4 million for the year ended December 31, 1996 and $0.3
million in each of the nine months periods ended September 30, 1996 and
1997. Excludes annual compensation of $0.7 million based upon employment
agreements with the Company's executive management and other costs
associated with being a public company. See "Management--Employment
Agreements; Executive Compensation."
(d) Includes pro forma adjustments of $0.2 million, $0.1 million and $0.2
million for the year ended December 31, 1996 and for the nine month periods
ended September 30, 1996 and 1997, respectively, to reflect the elimination
of historical interest expense in connection with the repayment of
interest-bearing debt of the Founding Companies from the estimated net
proceeds of the Offering as described under "Use of Proceeds," as if the
Acquisitions and Offering had occurred as of January 1, 1996.
(e) Includes pro forma adjustments to reflect the provisions for income taxes
related on the pro forma combined results at effective tax rates of 37.7%,
43.2% and 36.2% before considering the non-deductibility of approximately
$0.5 million of annual goodwill amortization.
(f) Includes an adjustment to revenues, cost of revenues, selling, general and
administrative expenses, and interest expense related to DTI's acquisition
of ComputerSmith, Inc. ("ComputerSmith") on July 1, 1996, the effect of
which is to reflect DTI's results of operations as if such acquisition
occurred on January 1, 1996.
(g) The weighted average shares outstanding used to calculate pro forma net
income per share is based upon the estimated average number of shares of
Common Stock and common stock equivalents outstanding during the period
calculated as follows:
<TABLE>
<S> <C>
Shares issued in the formation of UDMS (adjusted for
8,451.59-for-1 stock split and the contribution to capital of
62,321 shares by the Selling Shareholder)....................... 782,838
Shares issued to the shareholders of the Founding Companies....... 863,841
Shares issued in the Offering..................................... 1,850,000
SAB No. 83 adjustment............................................. 62,321
---------
3,559,000
=========
</TABLE>
28
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA FINANCIAL CONDITION
AND PRO FORMA RESULTS OF OPERATIONS
SUMMARY
The Company believes it will be the largest independent value added
reseller of design automation products and services in the United States.
Simultaneously with the closing of this Offering, the Company will acquire nine
established design automation and document management businesses with 21 offices
in 15 states. The Company will employ approximately 325 individuals including
technical services engineers and consultants, will offer hardware and software
products from approximately 55 manufacturers, and will have access to an
installed customer base of approximately 34,000 businesses. On a pro forma
basis, the Company had revenues on a year ended December 31, 1996 and nine
months ended September 30, 1997 of $48.8 million and $40.3 million,
respectively.
Through the acquisition and integration of the Founding Companies, the
Company expects to expand geographic penetration of the existing businesses, to
capitalize on substantial cross-selling opportunities, to provide design
automation products and services on both a local and national basis and to
establish a national customer service and support program. The Founding
Companies have been operating independently. The Company intends to integrate
these businesses, their operations and administrative functions over a period of
time. Such integration may present opportunities to reduce costs through the
elimination of duplicate functions and through economies of scale, particularly
in obtaining greater volume discounts from suppliers, but may necessitate
additional costs and expenditures for corporate management and administration,
corporate expenses related to being a public company, systems integration,
employee relocation and potential facilities expansion. These various costs and
possible cost-savings may make comparison of future operating results with
historical results difficult. See "Management -- Employment Agreements;
Executive Compensation."
ORGANIZATION
Simultaneously with the closing of this Offering, UDMS will acquire the
other nine Founding Companies. The aggregate consideration to be paid by UDMS
for the Founding Companies for accounting purposes is $26.3 million which
consists of: (i) $12.0 million of cash to be paid to the shareholders of the
Founding Companies, other than DTI (accounting acquiror), (ii) the $13.8 million
estimated fair market value of 1,355,012 shares of Common Stock to be then held
by the shareholders of the Founding Companies, other than DTI (accounting
acquiror), and (iii) estimated costs of the Acquisitions of $0.5 million. The
estimated purchase price for the Founding Companies is subject to certain
purchase price adjustments at closing and earn-out arrangements. See "Certain
Transactions -- The Acquisitions."
The consummation of each of the Acquisitions is subject to customary
conditions, including the continuing accuracy as of the closing date of the
representations and warranties of the Founding Companies and UDMS, the
performance by each of them of all covenants in the agreements relating to the
Acquisitions and the nonexistence of a material adverse charge in the results of
operations, financial condition or business of each Founding Company.
OPERATIONS
Revenue and Cost Recognition
The Company recognizes revenues on the sale of third party hardware and
software products when the product is shipped or upon customer acceptance in
instances where the software and computer hardware is to be installed at the
customer location. Revenues from proprietary software license sales are
recognized when the product is shipped. Revenues from consulting, training or
other services are recognized as the related services are performed. Revenues
from prepaid customer support agreements are generally recognized ratably over
the life of the support agreement or, to a lesser extent, based upon contractual
hour utilization by the customer under the support agreement. Generally, the
Company does not bundle hardware and software sales whereby customer acceptance
of either the hardware of software components is conditioned upon the acceptance
of the total product solution. While to date the Founding Companies have not
experienced a significant amount of returned hardware or software products from
their customers that resulted in a material
29
<PAGE> 31
unfavorable financial impact, the Company does intend to record an appropriate
accrual for such product returns at the end of each financial period.
The Company's cost of revenues primarily includes the cost of hardware and
software products as well as compensation-related costs associated with
consulting and other services. The costs associated with hardware and software
sales are recorded at the time the sale is recorded. The costs associated with
consulting, training and other services are recorded as the services are
performed. The costs associated with customer support services are recorded as
incurred. The Company does not generally enter into long-term fixed-price
contracts. In addition, the Company does not provide product warranties beyond
the warranties provided by the manufacturers or computer software developers.
Capitalized Software Development Costs
With respect to the Company's proprietary products, it accounts for
software development costs in accordance with the provisions of Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed. Costs incurred in designing
and developing computer software products are expensed as research and
development until technological feasibility has been established. Technological
feasibility is established upon completion of a detail program design or, in its
absence, completion of a working model. Upon the achievement of technological
feasibility, software development costs are capitalized and subsequently
reported at the lower of unamortized cost or net realizable value. Annual
amortization expense is the greater of the amount computed, using the ratio of
the current year's revenues to the total of current and anticipated future
revenues, or the straight-line method over the remaining economic life of the
software, which does not exceed five years and three years for the UDMS and
Synergis-PA proprietary software products, respectively.
The Pro Forma Results of Operations include an acceleration of the
amortization of the remaining unamortized software development costs relative to
ACCESS' AS/400 EDMS software product. As a result of changes in technical
requirements and increased competition, current and projected revenue from this
product as it was then marketed was not sufficient to recover the remaining
unamortized capitalized costs, including maintenance and support, without
further substantial marketing and research and development expenditures. At that
time, ACCESS determined that it would not invest in additional marketing and
research and development efforts. The Pro Forma Results of Operations include
amortization and write-offs of $1.1 million related to this product in the year
ended December 31, 1996.
Acquisition, Offering and Internal Costs
The Company expects to incur substantial costs associated with the
Acquisitions, the Offering and other internal costs prior to the Offering. The
incremental direct costs associated with the Acquisitions, which include
primarily fees paid to outside consultants for accounting, legal, and due
diligence services, will be included in the cost of acquiring the Founding
Companies. The incremental direct costs associated with registering and issuing
equity securities, which also primarily include fees paid to outside consultants
for accounting and legal services and other direct costs, will be deducted from
the otherwise determinable fair value of the securities at the date of the
Offering. The incremental direct costs incurred by the Company associated with
the Acquisitions and the Offering are expected to approximate $0.5 million and
$1.5 million, respectively. Internal costs incurred prior to and associated with
the Acquisitions and the Offering, which represent indirect and general
expenses, have been deducted as incurred in determining net income or loss of
the period.
S Corporation Elections
Prior to consummation of the Acquisitions, certain of the Founding
Companies had elected to be treated as S Corporations under the Internal Revenue
Code of 1986, as amended (the "Code"). In general, an S Corporation is not
treated as a separate taxable entity, and an S Corporation's gains, income,
losses and separately stated tax items are taxed to its shareholders on a pro
rata basis. Certain of the Founding Companies have made periodic distributions
to their shareholders. The balance of taxed or taxable
30
<PAGE> 32
accumulated earnings which have not been distributed is reflected in the AAA
Account for each such Founding Company. In connection with the Acquisitions, the
S Corporation status of those Founding Companies will terminate and, therefore,
those Founding Companies have made a distribution to their existing shareholders
of the AAA Notes in an aggregate principal amount estimated to equal
approximately $0.6 million at the time of the Offering. The aggregate principal
amount of the AAA Notes will be approximately equal to the undistributed
earnings in the AAA Accounts, on which such shareholders either have paid or
will be required to pay income taxes.
In addition, approximately $0.2 million will be distributed to the
shareholders of Synergis-PA related to the taxes payable by such shareholders on
the amounts included in their AAA Account as of September 30, 1997.
The amount of the AAA Notes includes an estimate of taxable income through
the anticipated effective date of the Offering. The AAA Notes will become
obligations of the Company at the time of the closing of the Offering and will
be repaid from the Company's cash flow or from borrowings under the Company's
proposed new Credit Facility. Following the Acquisitions, the Company will be
subject to federal and state income taxes.
Net Operating Loss Carryforwards
As of the date of the Acquisitions and Offering, the Company had net
operating loss carryforwards for federal income tax purposes relative only to
UDMS. These net operating loss carryforwards, which are available to offset
future federal taxable income through 2009, approximated $1.0 million at
September 30, 1997.
Financial Trends
While each of the Founding Companies has operated its respective business
independently, the following significant financial trends have either been
incurred by one or more of the Founding Companies during the twelve months ended
September 30, 1997 or are expected to affect the Founding Companies' results of
operations over the next three to six month period:
- Release 13 of Autodesk's AutoCad product -- Several of the Founding
Companies' revenues and results of operations have been adversely
affected by the marketplace foregoing the purchase of Release 13 of
Autodesk's AutoCad product in anticipation of Release 14, which occurred
in June 1997. The Founding Companies believe Release 14 will be viewed
more favorably by the marketplace than Release 13 or competitor's
products as a result of significant performance and productivity
enhancements including streamlined user interface, new data sharing and
drawing tools and presentation capabilities. The Founding Companies
experienced improvement in revenues and results of operations as a result
of the favorable market acceptance of Release 14 in the third quarter of
1997.
- Competitive industry environment -- In part as a result of the decreased
revenues associated with Release 13, many of the Founding Companies faced
a more competitive environment with respect to the number of sales
opportunities available in the marketplace during the twelve months ended
September 30, 1997 and therefore with respect to the prices which could
be charged for their products. In addition, as a result of the decreased
number of software sales opportunities, the associated services and
consulting revenues were also adversely affected during the period. As a
result of the favorable market acceptance of Release 14, many of the
Founding Companies experienced a greater number of sales opportunities
and a greater per unit sales price subsequent to June 30, 1997.
- Software Vendor Discounts -- In light of the increasing competition faced
by many software developers, including Autodesk, several of the Founding
Companies have experienced a decrease in the available software vendor
discounts, and accordingly, their revenues and results of operations have
been adversely affected.
31
<PAGE> 33
PRO FORMA RESULTS OF OPERATIONS
The following discussions should be read in conjunction with the "Unaudited
Selected Pro Forma Combined Financial Data," the "Unaudited Selected Financial
Data of the Founding Companies" and the financial statements and related notes
appearing elsewhere in this Prospectus.
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------------
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 1996 1996 SEPTEMBER 30, 1997
Dollars in thousands, except per share ------------------ ---------------- ------------------
data AMOUNT % AMOUNT % AMOUNT %
--------- ----- ------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Total revenues........................ $48,789 100.0% $37,633 100.0% $40,339 100.0%
Cost of revenues...................... 32,659 66.9 24,488 65.1 27,767 68.8
Selling, general and administrative
expenses............................ 16,286 33.4 12,226 32.5 12,253 30.4
Amortization of goodwill and other
identifiable intangibles............ 944 1.9 692 1.8 718 1.8
--------- ----- ------- ----- --------- -----
Operating income (loss)............... (1,100) (2.2) 227 0.6 (399) (1.0)
Interest income, (expense), net....... 58 0.1 57 0.2 (4) --
Other income, net..................... 85 0.2 4 -- 37 0.1
--------- ----- ------- ----- --------- -----
Income (loss) before income taxes..... (957) (1.9) 288 0.8 (366) (0.9)
Income tax expense (benefit).......... (70) (0.1) 343 0.9 86 0.2
--------- ----- ------- ----- --------- -----
Net income (loss)..................... (887) (1.8)% $(55) (0.1)% (452) (1.1)%
========= ===== ======= ===== ========= =====
Pro forma net loss per share.......... $(0.25) $(0.13)
========= =========
Shares used in computing pro forma net
loss per share...................... 3,559,000 3,559,000
========= =========
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Revenues. Revenues increased to $40.3 million in the nine months ended
September 30, 1997 from $37.6 million in the nine months ended September 30,
1996, an increase of $2.7 million or 7.2%, primarily as a result of greater
system sales from ACCESS' Electronic Document Management Systems software and as
a result of greater service revenues related to hardware and software support to
ACCESS' installed base of customers and third party maintenance contracts.
Furthermore, greater software, services and consulting revenues resulted from
sales associated with Release 14 of Autodesk's AutoCAD product in the third
quarter of 1997 as compared to sales associated with Release 13 during the same
period of the prior year.
Cost of revenues. Cost of revenues increased to $27.8 million in the nine
months ended September 30, 1997 from $24.5 million in the nine months ended
September 30, 1996, an increase of $3.3 million, or 13.5%. This increase
resulted primarily from an increase in the cost of products sold due to greater
sales volumes and due to lower vendor discounts. In addition, as a percentage of
revenues, cost of revenues were greater in the nine months ended September 30,
1997 as compared to the same period of the prior year as a result of competitive
pricing conditions and under-utilization of certain of the Founding Companies
service and support personnel.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased slightly in the nine months ended September
30, 1997 from the nine months ended September 30, 1996, an increase of $0.1
million, or 0.2%. The increase was influenced by: (i) an increase in the general
and administrative expenses of UDMS related to the infrastructure costs
associated with the additional management personnel of the Company in
conjunction with the Acquisitions and the Offering; (ii) an increase in the
general and administrative expenses associated with DTI's acquisition of
ComputerSmith in July 1996; and
32
<PAGE> 34
(iii) a decrease in the general and administrative expenses of ACCESS, Applied
and Technical Software as a result of a decrease in the number of administrative
personnel and reductions in other administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
After application of the estimated net proceeds from the Offering and
making payments related to the Acquisitions, the Company expects that it will
have cash on hand, after giving effect to the prepaid Offering and Acquisition
costs, of approximately $0.1 million. The Company expects to enter into a new
Credit Facility which will provide for increased borrowing levels and which may
be used for general corporate purposes, including the financing of acquisitions.
The Company believes the cash generated from operations and available under the
new Credit Facility will be sufficient to support its current operations,
potential obligations relating to the earn-out arrangements and planned ordinary
capital expenditures and acquisitions through 1998. In the longer term, the
Company may require additional sources of liquidity to fund future growth or
acquisitions. Such sources of liquidity may include additional offerings or debt
financing.
On December 2, 1997, the Company received a written proposal from Deutsche
Financial Services ("DFS"), pursuant to which DFS proposed to establish a
two-part credit facility, under which DFS would provide $10,000,000 for working
capital and $10,000,000 for acquisitions. The proposal from DFS does not
represent a commitment, and activation of the DFS credit facility is subject to
certain conditions, specifically, the satisfactory completion by DFS of a credit
review, field audit, reporting requirements, acceptable of documentation by DFS
and its counsel, and final approval by management of DFS. In addition to DFS,
the Company is negotiating with other lenders who may be able to provide
financing. There can be no assurance that the Company will be able to obtain the
Credit Facility or reach a definitive agreement with DFS, or in the alternative,
that the Company will be able to obtain other financing on terms and conditions
satisfactory to the Company.
Effective May 28, 1997, UDMS entered into a Reimbursement Agreement with
MedPlus ("Reimbursement Agreement") under which MedPlus agreed to continue to
provide operational and administrative assistance to UDMS and to provide the
funds necessary to conduct the Acquisitions, the Offering and related
transactions. The Reimbursement Agreement provides for interest to accrue
monthly at a rate equal to the prime rate plus 1%. UDMS has agreed to reimburse
MedPlus for the amounts funded under the Reimbursement Agreement plus accrued
interest within thirty days following the Offering, or in the event the Offering
is not completed, if UDMS receives other third party financing.
INFLATION
The Company does not believe that inflation has had a material effect on
the operating results of the Founding Companies. However, there can be no
assurance that the Company's business will not be affected by inflation in the
future.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Founding Companies have in the past experienced, and the Company could
in the future experience, quarterly variations in revenues, operating income and
cash flow as a result of many factors, including the anticipation of an
introduction of new technology, the timing and magnitude of clients' purchases
of design automation solutions, the loss of a major client, additional selling,
general and administrative expenses to acquire and support new business, the
timing and magnitude of capital expenditures and changes in the revenue mix
among the Company's various design automation solution offerings or in the
relative contribution of the several Founding Companies. The Company must plan
its operating expenditures based on revenue forecasts, and a revenue shortfall
below such forecasts in any quarter would likely adversely affect the Company's
operating results for that quarter.
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<PAGE> 35
The following table sets forth certain unaudited quarterly pro forma
financial information for the periods shown:
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
DOLLARS IN THOUSANDS 1996 1996 1996 1996 1997 1997 1997
- ---------------------------- --------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Hardware.................. $ 3,134 $ 2,843 $ 2,287 $ 2,575 $ 1,994 $ 2,656 $ 2,627
Software.................. 7,020 6,462 5,864 5,334 5,921 6,893 9,887
Services, consulting and
other.................. 3,608 3,342 3,073 3,247 3,180 3,429 3,751
------- -------- ------- -------- ------- -------- -------
Total revenues.... 13,762 12,647 11,224 11,156 11,095 12,978 16,265
Costs and expenses:
Hardware.................. 2,457 2,287 1,717 1,981 1,658 2,092 1,960
Software.................. 4,560 3,757 3,809 4,251(1) 3,959 4,662 6,235
Services, consulting and
other.................. 1,892 1,980 2,029 1,939 1,981 2,577 2,643
Selling and marketing..... 1,981 2,123 1,668 1,849 1,736 1,889 2,196
General and
administrative......... 2,242 2,246 2,658 2,463 2,316 2,278 2,555(2)
------- -------- ------- -------- ------- -------- -------
Total costs and
expenses........ 13,132 12,393 11,881 12,483 11,650 13,498 15,589
------- -------- ------- -------- ------- -------- -------
Operating income(loss)...... 630 254 (657) (1,327) (555) (520) 676
Other income (expense), net:
Interest.................. 3 51 3 1 2 (2) (4)
Other..................... (82) 76 10 81 18 10 9
------- -------- ------- -------- ------- -------- -------
Income (loss) before income
taxes..................... $ 551 $ 381 $ (644) $ (1,245) $ (535) $ (512) $ 681
======= ======== ======= ======== ======= ======== =======
</TABLE>
- ---------------
(1) Includes $0.6 million related to the write-off of ACCESS' AS/400 EDMS
software product.
(2) Includes $0.3 million related to professional fees incurred by the Founding
Companies being acquired and supplemental corporate overhead expenses
incurred by UDMS associated with the Acquisitions.
SEASONALITY
Many of the Founding Companies experience seasonality with respect to
revenues, cost of revenues, operating income and cash flow. Specifically,
certain of the Founding Companies experience greater revenues in the three
months ended December 31 of each year in conjunction with various Autodesk
promotions during this period related to Autodesk's fiscal year-end.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. SFAS No.
128 is designed to simplify the existing computational guidelines for computing
earnings per share and provides for the elimination of primary Earnings Per
Share ("EPS") and replacing it with basic EPS, with the principal difference of
common stock equivalents not being considered in computing basic EPS. SFAS No.
128 is effective for the Company for the year ending December 31, 1997. The
effect of the adoption of this statement would not have a material effect on the
Company's pro forma loss per share.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants has recently issued Statement of Position ("SOP")
97-2, Software Revenue Recognition, which supercedes SOP 91-1, Software Revenue
Recognition. SOP 97-2 provides guidance on recognizing revenue on
34
<PAGE> 36
software transactions including arrangements which consist of multiple elements,
for example, additional software products, upgrades/enhancements, postcontract
customer support, or services, and arrangements to deliver software or software
systems which require significant production, modification, or customization of
software. SOP 97-2 will be effective for transactions entered into in fiscal
years beginning after December 15, 1997. The Company is currently completing its
review of SOP 97-2, but at present, it does not expect the implementation of SOP
97-2 to have a material effect on the Company's financial statements.
35
<PAGE> 37
SELECTED FINANCIAL DATA OF THE FOUNDING COMPANIES
The selected financial data of the Founding Companies are derived in part
from the more detailed financial statements and notes thereto included elsewhere
in this Prospectus. The balance sheet data as of December 31, 1995 and 1996, and
the statement of operations data for each of the years in the three-year period
ended December 31, 1996, for UDMS, DTI, Technical Software, Mid-West CAD, CADD
Microsystems and Computers for Design have been derived from the audited
financial statements included elsewhere herein. The balance sheet data as of
September 30, 1996 and 1997, and the statements of operations data for each of
the years in the three-year period ended September 30, 1997, for Applied,
Synergis-PA and Devtron Russell have been derived from the audited financial
statements included elsewhere herein. The balance sheet data as of April 30,
1996 and 1997, and the statement of operations data for each of the years in the
three-year period ended April 30, 1997, for ACCESS have been derived from the
audited financial statements included elsewhere herein.
The selected interim period financial data for the nine months ended
September 30, 1996 for UDMS, DTI, Technical Software, Mid-West CAD, CADD
Microsystems and Computers for Design have been derived from the unaudited
financial statements included elsewhere herein. The selected interim period
financial data for the nine months ended September 30, 1997 for UDMS, DTI,
Technical Software, Mid-West CAD, CADD Microsystems and Computers For Design
have been derived from the audited Financial Statements included elsewhere
herein. The selected interim period financial data for the six months ended
October 31, 1996 and 1997 for ACCESS has been derived from the unaudited
financial statements included elsewhere herein. Such selected financial data are
not necessarily indicative of the results to be expected for the full fiscal
year.
In the opinion of the Company, the unaudited interim period financial
statements of the Founding Companies reflect all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
position and results of operations of the Founding Companies for those periods
in accordance with generally accepted accounting principles. The Selected
Financial Data of the Founding Companies should be read in conjunction with the
financial statements and notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Prospectus. All Founding Companies have fiscal years ending December 31, with
the exception of Applied, Synergis-PA, and Devtron Russell, whose year ends are
September 30, and ACCESS, whose year end is April 30.
36
<PAGE> 38
STATEMENTS OF OPERATIONS DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
Dollars in thousands 1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
UDMS
Revenues...................... $ 214 $ 86 $ 487 $ 629 $ 1,100 $ 727 $ 833
Costs of software and
services................... -- -- -- 6 350 205 316
Research and development...... -- -- 96 72 114 85 137
Selling, general and
administrative expenses.... 201 278 345 2,016 746 458 887
Operating income (loss)....... 13 (192) 47 (1,465) (110) (21) (507)
Income (loss) before income
taxes...................... 9 (207) (13) (1,511) (141) (44) (543)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
Dollars in thousands 1994 1995 1996 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
DTI
Revenues................................... $ 2,224 $ 2,982 $ 5,751 $ 3,686 $ 7,736
Cost of revenues........................... 1,305 1,552 3,142 1,980 4,771
Selling, general and administrative
expenses................................ 944 1,192 2,726 1,699 2,855
Operating income (loss).................... (25) 238 (117) 7 110
Income (loss) before income taxes.......... (51) 217 (119) (17) 31
TECHNICAL SOFTWARE
Revenues................................... $ 6,752 $ 7,368 $ 5,689 $ 4,442 $ 4,722
Cost of software and hardware.............. 3,009 3,160 2,161 1,592 2,169
Selling, general and administrative
expenses................................ 3,702 3,963 3,594 2,740 2,395
Operating income (loss).................... 41 245 (66) 110 158
Income (loss) before income taxes.......... 89 237 (35) 117 168
MID-WEST CAD
Revenues................................... $ 2,607 $ 3,384 $ 3,366 $ 2,368 $ 2,477
Cost of revenues........................... 1,975 2,336 2,398 1,686 1,794
Selling, general and administrative
expenses................................ 654 945 964 694 640
Operating income (loss).................... (22) 103 4 (12) 43
Income (loss) before income taxes.......... (22) 105 2 (13) 43
CADD MICROSYSTEMS
Revenues................................... $ 2,879 $ 3,113 $ 3,094 $ 2,322 $ 2,285
Cost of revenues........................... 1,874 1,690 1,925 1,437 1,412
Selling, general and administrative
expenses................................ 1,276 1,247 1,176 910 788
Operating income (loss).................... (271) 176 (7) (25) 85
Income (loss) before income taxes.......... (288) 145 (45) (49) 56
COMPUTERS FOR DESIGN
Revenues................................... $ 1,926 $ 2,057 $ 2,142 $ 1,718 $ 1,462
Cost of revenues........................... 1,309 1,379 1,349 1,079 900
Selling, general and administrative
expenses................................ 599 692 745 555 524
Operating income (loss).................... 18 (14) 48 84 38
Income (loss) before income taxes.......... 19 (24) 40 79 28
</TABLE>
37
<PAGE> 39
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
-----------------------------
Dollars in thousands 1995 1996 1997
------- ------- -------
<S> <C> <C> <C> <C> <C>
APPLIED
Revenues................................... $ 8,114 $ 7,797 $ 7,748
Cost of revenues........................... 6,143 5,655 5,987
Selling, general and administrative
expenses................................ 1,989 1,927 2,226
Operating income (loss).................... (18) 215 (465)
Income (loss) before income taxes.......... (86) 167 (502)
SYNERGIS-PA
Revenues................................... $ 3,189 $ 4,899 $ 6,347
Cost of hardware and software.............. 2,052 3,195 4,410
Research and development................... 33 237 128
Selling, general and administrative
expenses................................ 993 1,310 1,708
Operating income........................... 111 157 101
Income before income taxes................. 109 158 106
DEVTRON RUSSELL
Revenues................................... $ 1,622 $ 2,781 $ 2,958
Cost of hardware and software.............. 1,136 2,010 2,077
Selling, general and administrative
expenses................................ 463 630 732
Operating income........................... 23 141 149
Income before income taxes................. 18 131 139
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
APRIL 30, OCTOBER 31,
----------------------------- ------------------
Dollars in thousands 1995 1996 1997 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
ACCESS
Revenues................................... $ 6,042 $ 8,704 $ 6,929 $ 3,203 $ 5,443
Cost of revenues........................... 3,689 5,394 5,433 2,278 4,006
Research and development................... 593 611 265 145 --
Selling, general and administrative
expenses................................ 1,528 2,433 2,369 1,102 1,395
Operating income (loss).................... 232 265 (1,138) (321) 42
Income (loss) before income taxes.......... 197 311 (1,051) (276) 59
</TABLE>
38
<PAGE> 40
BALANCE SHEET DATA
<TABLE>
<CAPTION>
AT FISCAL YEAR END
DECEMBER 31,
------------------- AT SEPTEMBER 30,
Dollars in thousands 1995 1996 1997
------- ------- ----------------
<S> <C> <C> <C>
UDMS
Cash and cash equivalents.............................. $ 124 $ -- $ --
Working capital (deficit).............................. (129) (621) (1,228)
Total assets........................................... 1,664 1,786 3,433
Long-term debt, including capital lease obligations,
less current portion................................ 300 -- --
Shareholder's equity (deficit)......................... (774) 674 193
DTI
Cash and cash equivalents.............................. $ 22 $ 111 $ 11
Working capital (deficit).............................. 119 (107) (87)
Total assets........................................... 1,346 2,990 3,260
Long-term debt, including capital lease obligations,
less current portion................................ 185 390 344
Shareholder's equity................................... 123 28 41
TECHNICAL SOFTWARE
Cash and cash equivalents.............................. $ 304 $ 301 $ 186
Working capital........................................ 316 84 389
Total assets........................................... 1,837 1,511 1,413
Long-term debt, including capital lease obligations,
less current portion................................ -- -- 97
Shareholder's equity................................... 686 441 610
MID-WEST CAD
Cash and cash equivalents.............................. $ 128 $ 48 $ 153
Working capital........................................ 178 99 158
Total assets........................................... 899 659 760
Long-term debt, including capital lease obligations,
less current portion................................ 11 16 7
Shareholders' equity................................... 270 269 299
CADD MICROSYSTEMS
Cash and cash equivalents.............................. $ 42 $ 75 $ 84
Working capital (deficit).............................. (174) (130) (80)
Total assets........................................... 1,068 738 771
Long-term debt, including capital lease obligations,
less current portion................................ 42 201 139
Shareholders' (deficit)................................ (83) (128) (59)
COMPUTERS FOR DESIGN
Cash and cash equivalents.............................. $ 4 $ 1 $ 2
Working capital (deficit).............................. (160) (154) (142)
Total assets........................................... 382 335 353
Long-term debt, including capital lease obligations,
less current portion................................ -- -- --
Shareholders' (deficit)................................ (90) (69) (68)
</TABLE>
39
<PAGE> 41
<TABLE>
<CAPTION>
AT FISCAL YEAR END
SEPTEMBER 30,
-----------------------------
Dollars in thousands 1996 1997
------------- -----------
<S> <C> <C>
APPLIED
Cash and cash equivalents....................................... $ 83 $ --
Working capital (deficit)....................................... (204) (796)
Total assets.................................................... 1,705 1,902
Long-term debt, including capital lease obligations, less
current portion.............................................. 159 52
Shareholders' (deficit)......................................... (188) (704)
SYNERGIS-PA
Cash and cash equivalents....................................... $ 282 $ 207
Working capital................................................. 486 344
Total assets.................................................... 1,394 1,730
Long-term debt, including capital lease obligations, less
current portion.............................................. 104 81
Shareholders' equity............................................ 561 623
DEVTRON RUSSELL
Cash and cash equivalents....................................... $ -- $ 3
Working capital................................................. 120 188
Total assets.................................................... 536 579
Long-term debt, including capital lease obligations, less
current portion.............................................. 72 64
Shareholder's equity............................................ 109 218
</TABLE>
<TABLE>
<CAPTION>
AT FISCAL YEAR END
APRIL 30,
------------------- AT OCTOBER 31,
Dollars in thousands 1996 1997 1997
------- ------- --------------
<S> <C> <C> <C>
ACCESS
Cash and cash equivalents................................ $ 2,072 $ 1,405 $ 1,896
Working capital.......................................... 2,925 2,664 2,549
Total assets............................................. 6,242 5,018 5,392
Redeemable preferred stock............................... 1,500 1,500 1,500
Shareholders' equity..................................... 2,586 1,535 1,573
</TABLE>
40
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussions should be read in conjunction with the Selected
Financial Data of the Founding Companies and the Financial Statements and
related notes appearing elsewhere in this Prospectus.
UDMS
Founded in 1990, UDMS was acquired by MedPlus in December 1995. UDMS
provides document management, workflow and application software and related
consulting services to customers in a variety of industries. The Company's
proprietary software, Step2000, is marketed nationwide.
Results of Operations
The following table sets forth certain financial data and such data as a
percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
Dollars in thousands 1995 1996
1994 --------------- NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
----------- ------------- 1996 1997
------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............... $487 100.0% $ 629 100.0% $1,100 100.0% $727 100.0% $ 833 100.0%
Cost of software and
services............. -- -- 6 1.0 350 31.8 205 28.2 316 38.0
Selling, general and
administrative
expenses............. 455 93.4 2,088 331.9 860 78.2 543 74.7 1,024 122.9
---- ------- ------ ---- -----
Total
operating
expenses.... 455 93.4 2,094 332.9 1,210 110.0 748 102.9 1,340 160.9
Operating income
(loss)............... 32 6.6 (1,465) (232.9) (110) (10.0) (21) (2.9) (507) (60.9)
Interest expense,
net.................. 45 9.3 86 13.7 31 2.8 23 3.2 36 4.3
Other expense (income),
net.................. -- -- (40) (6.4) -- -- -- -- -- --
---- ------- ------ ---- -----
Loss before income
taxes................ $(13) (2.7)% $(1,511) (240.2)% $(141) (12.8)% $(44) (6.1)% $ (543) (65.2)%
==== ======= ====== ==== =====
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Revenues. Revenues increased to $0.8 million in the nine months ended
September 30, 1997 from $0.7 million in the nine months ended September 30,
1996, an increase of $0.1 million, or 14.6%. The increase in revenue was
primarily from increases in software license sales and service contract revenues
due to the continued market acceptance and increased installation base of the
Step2000 product.
Cost of software and services. Cost of software and services increased to
$0.3 million in the nine months ended September 30, 1997 from $0.2 million in
the nine months ended September 30, 1996, an increase of $0.1 million, or 54.1%.
As a percentage of revenues, cost of software and services increased to 38.0% in
the nine months ended September 30, 1997 from 28.2% in the nine months ended
September 30, 1996. The percentage increase was primarily the result of
underutilization of consultants, and competitive pricing pressures related to
the Step2000 product and consulting services.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $1.0 million in the nine months ended
September 30, 1997 from $0.5 million in the nine months ended September 30,
1996, an increase of $0.5 million, or 88.2%. This increase primarily resulted
from: (1) modification of the sales force compensation structure from a
commission-based plan to a salary-based plan, (2) hiring of additional sales and
general and administrative personnel, (3) other investments in the marketing of
UDMS' software product and consulting services, and (4) the hiring of a new
senior management team in August 1997 to manage the Offering and the
Acquisitions. As a percentage of revenues, selling, general and administrative
expenses increased to 122.9% in the nine months ended September 30, 1997 from
74.7% in the nine months ended September 30, 1996.
41
<PAGE> 43
Comparison of 1996, 1995, and 1994 Results of Operations
Revenues. Revenues increased to $1.1 million in 1996 from $0.6 million in
1995 and $0.5 in 1994. The increase in revenues over the three year period was
primarily due to growth in customer consulting services, including three
substantial customers, as well as continued market acceptance of Step2000. For
the period December 14, 1995 to December 31, 1995, IBM and Document Imaging
Solutions, an Ohio based document management software reseller and integrator,
accounted for approximately 67% and 13% of total revenues, respectively. For the
year ended December 31, 1996, IBM and the Rockwell Space Systems Division of
Rockwell International accounted for approximately 42% and 14% of total
revenues, respectively.
Cost of software and services and selling, general and administrative
expenses. As a result of UDMS' method of accounting and reporting related to
operating expenses during 1995 and 1994, separate classification of cost of
software and services and selling, general and administrative expense was not
feasible during these years. On a combined basis, these expenses decreased to
$1.2 million in 1996 from $2.1 million in 1995 and increased from $0.5 million
in 1994. The substantial increase in 1995 relates to a charge of $1.5 million
related to the write-off of acquired in-process technology at the date of the
acquisition of UDMS by MedPlus. Excluding this charge, these expenses increased
over the three year period primarily as a result of increased consulting and
general and administrative expenses. As a percentage of revenues, these
expenses, excluding the charge related to the write-off of acquired in-process
technology, increased during the three-year period due to increases in UDMS'
cost of software and services and infrastructure-related expenses associated
with UDMS' planned growth.
Liquidity and Capital Resources
Since December 1995, UDMS' principal source of liquidity has been through
MedPlus. The following table sets forth selected information from UDMS'
statements of cash flows for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -----------------
Dollars in thousands 1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities................. $(299) $319 $(50) $ (14) $348
Net cash used in investing
activities........................... (60) (44) (214) (171) (700)
Net cash provided by (used in)
financing activities................. 367 (48) 140 85 352
</TABLE>
From January 1, 1994 through September 30, 1997, UDMS generated $0.3
million in net cash from operating activities. During this period, net losses
were adjusted to exclude the effects of non-cash charges related to the
write-off of acquired in-process technology in 1995. Net cash provided by
operating activities during fiscal year 1995 was also the result of timing of
collections of trade accounts receivable as well as the timing of payments of
accrued expenses during the year. Net cash provided by operating activities for
the nine months ended September 30, 1997 was primarily the result of an increase
in trade accounts payable and a payable to MedPlus.
Cash used in investing activities was attributable to amounts expended for
property and equipment to support UDMS' planned growth and costs related to the
Acquisitions and proposed Offering. The nine month period ended September 30,
1997 includes $0.4 million in costs related to the Acquisitions. Cash used for
investing activities during the periods also included charges related to the
capitalization of Step2000 software development costs.
Cash provided by financing activities included proceeds from the issuance
of convertible debentures, advances from MedPlus, borrowings on the line of
credit, and an increase in bank overdrafts. Cash provided in the nine month
period ended September 30, 1997 was offset by cash used for costs related to the
Offering of $1.0 million.
Since December 1995, UDMS' financing has been provided by MedPlus. UDMS has
also arranged for funding of its operations through various other borrowing
arrangements. International Business Machines, Inc.
42
<PAGE> 44
("IBM") advanced UDMS $0.2 million in funds under an IBM Assistance Agreement
dated July 12, 1992 ("Assistance Agreement") which was recorded as a liability.
Under the terms of this Assistance Agreement, the advances are to be repaid
through revenue participation whereby IBM receives 25% of all quarterly gross
revenue exceeding $0.1 million for product sales, standard licenses and
maintenance fees on certain hardware platforms as defined in the Assistance
Agreement. The outstanding obligation of $0.2 million has been included in
accrued expenses and other liabilities as of September 30, 1997.
During the year ended December 31, 1994, UDMS issued convertible debentures
totaling $0.4 to MedPlus and an individual investor. The debentures, with an
interest rate of 10% per annum payable at maturity, were unsecured obligations
which were scheduled to mature on December 31, 1995. The debentures were
convertible into shares of common stock of UDMS at a stated price per share, and
could be converted in their entirety or in portions from time to time until
maturity. In connection with the UDMS acquisition by MedPlus in December 1995,
$0.1 million of convertible debentures, which were held by the individual
investor, and interest accrued thereon were repaid. The remaining $0.3 million
debenture held by MedPlus was extended indefinitely by MedPlus and continues to
accrue interest at 10% per annum ($0.1 accrued at September 30, 1997). The
Company expects to repay this debenture within twelve months of the Offering.
MedPlus provides UDMS with various services including finance, human
resources, insurance administration, legal, marketing and office administration
as well as office space. MedPlus has also from time to time advanced funds to
UDMS for use in its operations. UDMS has paid to MedPlus or accrued a liability
for these costs based on the separate identification of such costs. To the
extent that the direct costs of services provided by MedPlus could not be
separately identified, a reasonable portion of the total cost of MedPlus is
allocated to UDMS using such objective factors and methodologies as are
available to UDMS and MedPlus. The cost of the services provided by MedPlus
described above, office space, operating advances and amounts due to MedPlus
under a tax-sharing agreement amounted to $0.9 million at September 30, 1997.
Effective May 28, 1997, UDMS entered into a Reimbursement Agreement with
MedPlus under which MedPlus agreed to continue to provide operational and
administrative assistance to UDMS and to provide the funds necessary to conduct
the Acquisitions, the Offering and related transactions. The Reimbursement
Agreement provides for interest to accrue monthly at a rate equal to the prime
rate plus 1% (9.5% at September 30, 1997). UDMS has agreed to reimburse MedPlus
for the amounts funded under the Reimbursement Agreement plus accrued interest
within thirty days following the Offering or in the event the Offering is not
completed, if UDMS receives other third party financing. As of September 30,
1997, UDMS had $0.2 million in amounts due to MedPlus under the Reimbursement
Agreement.
Effective September 9, 1997, UDMS and MedPlus entered into a line of credit
agreement with a bank for working capital and to fund the costs associated with
the Acquisitions and the Offering. The line of credit agreement allows for
borrowings of up to $1.5 million subject to a combined limit with MedPlus under
its separate $10.0 million revolving line of credit agreement. Borrowings under
the line of credit agreement bear interest at the bank's prime rate (8.5% at
September 30, 1997) and mature upon the earlier of March 31, 1998 or the
completion of the Offering. The line of credit agreement contains various
restrictive and financial covenants and is secured by all the tangible and
intangible assets of UDMS.
The line of credit requires UDMS to pay a $15,000 monthly commitment fee
through December 31, 1997 which then decreases to $10,000 a month until UDMS
receives a specified minimum capitalization or until maturity. The line of
credit also contains various restrictive and financial covenants and is secured
by all tangible and intangible assets of UDMS and MedPlus. Prior to entering
into the line of credit, UDMS and MedPlus entered into an agreement under which
the MedPlus agreed to act as co-borrower under the line of credit, and UDMS
agreed to repay the outstanding borrowings under the line of credit as soon as
possible following the Offering. The maximum amount available at September 30,
1997 under the line of credit was $1.5 million. The amount outstanding under the
line of credit at September 30, 1997, was $0.6 million. As of September 30,
1997, UDMS and MedPlus were in default of a covenant of the line of credit. On
November 14, 1997, the bank waived this event of default and amended the
covenant through March 31, 1998. The bank also required UDMS and MedPlus to
agree to a review of their accounts receivable and an audit by the bank.
43
<PAGE> 45
UDMS' financial statements have been prepared on a going concern basis
which contemplates the realization of assets and the settlement of liabilities
in the normal course of business. UDMS expects to incur additional costs in
connection with the Acquisitions and the Offering. There can be no assurance
that the Offering and the Acquisitions will be completed. UDMS' working capital,
available borrowing capacity on its line of credit, and cash flows from
operations will not be sufficient to continue future operations if the Offering
does not occur. In the event the Offering is not completed, management's plans
include a private financing of its operations and the Acquisitions until such
time as an Offering or other equity financing can be completed. There can be no
assurance, however, that the interim private financing will be completed, or if
completed that the definitive acquisition agreements can be renegotiated to
provide for consummation of the Acquisitions on terms available under the
private financing. UDMS is dependent upon the Offering or the private financing
to fund the Acquisitions and future operations.
DTI
Founded in 1984, DTI's primary focus is the sale of Autodesk design
automation software and related services primarily to the manufacturing industry
and educational institutions. DTI also provides other services including system
installation, software and hardware support, software development and
customization, network installation, support and training. DTI primarily serves
the New England region.
Results of Operations
The following table sets forth certain financial data and such data as a
percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------- ---------------------------------
Dollars in thousands 1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $2,224 100.0% $2,982 100.0% $5,751 100.0% $3,686 100.0% $7,736 100.0%
Cost of revenues........ 1,305 58.7 1,552 52.0 3,142 54.6 1,980 53.7 4,771 61.7
Selling, general and
administrative
expenses.............. 944 42.4 1,192 40.0 2,726 47.4 1,699 46.1 2,855 36.9
------ ------ ------ ------ ------
Total operating
expenses..... 2,249 101.1 2,744 92.0 5,868 102.0 3,679 99.8 7,626 98.6
Operating income
(loss)................ (25) (1.1) 238 8.0 (117) (2.0) 7 0.2 110 1.4
Interest expense, net... 26 1.2 30 1.0 67 1.2 42 1.1 99 1.3
Other expense (income),
net................... -- -- (9) (0.3) (65) (1.1) (18) (0.5) (20) (0.3)
------ ------ ------ ------ ------
Income (loss) before
income taxes.......... $ (51) (2.3)% $ 217 7.3% $ (119) (2.1)% $ (17) (0.5)% $ 31 0.4%
====== ====== ====== ====== ======
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Revenues. Revenues increased to $7.7 million in the nine months ended
September 30, 1997 from $3.7 million in the nine months ended September 30,
1996, an increase of $4.0 million, or 109.9%. The increase in revenues primarily
resulted from the sales generated from the expanded sales force and customer
base obtained from the acquisition of ComputerSmith, Inc. (ComputerSmith).
Cost of revenues. Cost of revenues, consisting of hardware, software and
support related expenses, increased to $4.8 million in the nine months ended
September 30, 1997 from $2.0 million in the nine months ended September 30,
1996, an increase of $2.8 million, or 141.0%, resulting from the acquisition of
ComputerSmith. As a percentage of revenues, cost of revenues increased to 61.7%
in the nine months ended September 30, 1997 from 53.7% in the nine months ended
September 30, 1996. The percentage increase resulted because the ComputerSmith
acquisition changed the product mix, incorporating lower margin hardware sales,
and sales to the AEC market which traditionally carries a lower margin due to
the maturity of the market and the current products.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $2.9 million in the nine months ended
September 30, 1997 from $1.7 million in the nine months ended September 30,
1996, an increase of $1.2 million, or 68.0%. This increase primarily resulted
from the additional personnel associated with the ComputerSmith acquisition. As
a percentage of revenues, selling, general and
44
<PAGE> 46
administrative expenses decreased to 36.9% in the nine months ended September
30, 1997 from 46.1% in the nine months ended September 30, 1996, primarily the
result of increased revenues during this period.
Comparison of 1996, 1995, and 1994 Results of Operations
Revenues. Revenues increased to $5.8 million in 1996 from $3.0 million in
1995 and $2.2 million in 1994. The increase in revenues over the three year
period was a result of the acquisition of ComputerSmith and increases related to
industry growth.
Cost of revenues. Cost of revenues increased to $3.1 million in 1996 from
$1.6 million in 1995 and $1.3 million in 1994, reflecting the ComputerSmith
acquisition and DTI's year-to-year growth in revenues. As a percentage of
revenues, cost of revenues increased to 54.6% in 1996 from 52.0% in 1995,
primarily due to an increase in the cost of products as well as overall lower
product sales prices due to competitive industry pricing pressures. As a
percentage of revenues, cost of hardware and software decreased to 52.0% in 1995
from 58.7% in 1994, primarily as a result of more favorable vendor discounts.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $2.7 million in 1996 from $1.2 million in
1995 and $0.9 million in 1994, reflecting the acquisition of ComputerSmith and
cost of additional administrative and infrastructure expenses associated with
DTI's growth. As a percentage of revenues, selling, general and administrative
expenses increased to 47.4% in 1996 from 40.0% in 1995 primarily the result of
increased administrative and infrastructure expenses associated with the
acquisition of ComputerSmith. As a percentage of revenues, selling, general and
administrative expenses decreased to 40.0% in 1995 from 42.4% in 1994, as a
result of increased revenues in 1995.
Liquidity and Capital Resources
DTI's principal source of liquidity has been borrowings under credit
facilities and capital leases. The following table sets forth selected
information from DTI's statements of cash flows for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER SEPTEMBER
31, 30,
--------------------- ------------
Dollars in thousands 1994 1995 1996 1996 1997
---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities..................................... $96 $109 $269 $210 $(70)
Net cash used in investing activities............ (6) (64) (69) (23) (71)
Net cash provided by (used in) financing
activities..................................... (53) (78) (111) (77) 41
</TABLE>
From January 1, 1994 through September 30, 1997, DTI generated $0.4 million
in net cash from operating activities, which was generated primarily from net
income and losses adjusted for non-cash charges.
Cash used in investing activities was attributable to purchases of property
and equipment partially reduced by cash acquired in the ComputerSmith
acquisition.
Financing activities primarily have included borrowings under various long
term debt arrangements, capital leases and DTI's line of credit. In 1994, 1995,
1996 and the nine months ended September 30, 1997, the proceeds from the
issuance of long-term debt and borrowings under the line of credit were offset
by the combination of repayments of previously issued long-term debt and
principal payments on capital lease obligations. In the nine months ended
September 30, 1997 borrowings under the line of credit exceeded the repayments.
In August 1996, DTI entered into a $0.2 million revolving line of credit
agreement and a $0.3 million term loan with a bank. In July 1997, the bank
increased the line of credit borrowing limit to $0.3 million. Interest accrues
at the prime rate plus 2.25% (10.75% at September 30, 1997), with the note
maturing in August 2003.
Prior to the line of credit agreement noted above, DTI entered into various
long-term debt arrangements in the form of notes payable to a bank requiring
monthly principal payments and maturing at different periods
45
<PAGE> 47
from September 1996 through August 2003. Interest on the notes payable accrue at
prime plus 2.25% (10.75% at September 30, 1997).
In January 1997, DTI converted certain accounts payable to a significant
supplier to a note payable in the amount of $0.4 million. The note bears
interest at 6.5% and is payable in eighteen monthly installments commencing on
June 30, 1997.
As of September 30, 1997, an aggregate total of $0.9 million was
outstanding under the revolving line of credit and long-term debt agreements.
The line of credit and notes payable to banks are secured by substantially all
of the company's assets and the personal guarantee of DTI's sole stockholder.
DTI's financial statements have been prepared assuming that DTI will
continue as a going concern. DTI has a net working capital deficiency that
raises substantial doubt about its ability to continue as a going concern.
TECHNICAL SOFTWARE
Founded in 1982, Technical Software's primary focus is the sale of software
and hardware solutions for CAD, solid modeling, mapping, document management,
networking and scanning. Services offered by Technical Software include
installation, customization, systems integration, productivity audits, training
and telephone support. Technical Software primarily serves Ohio.
Results of Operations
The following table sets forth certain financial data and such data as a
percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------- ----------------------------------
Dollars in thousands 1994 1995 1996 1996 1997
-------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $6,752 100.0% $7,368 100.0% $5,689 100.0% $4,442 100.0% $4,722 100.0%
Cost of software and
hardware............... 3,009 44.6 3,160 42.9 2,161 38.0 1,592 35.8 2,169 45.9
Selling, general and
administrative
expenses............... 3,702 54.8 3,963 53.8 3,594 63.2 2,740 61.7 2,395 50.7
------ ------ ------ ------ ------
Total operating
expenses........... 6,711 99.4 7,123 96.7 5,755 101.2 4,332 97.5 4,563 96.6
Operating income(loss)... 41 0.6 245 3.3 (66) (1.2) 110 2.5 158 3.3
Interest expense
(income), net.......... 4 0.1 (4) (0.1) 12 0.2 7 0.2 1 --
Other expense (income),
net.................... (52) (0.8) 12 (0.2) (43) (0.8) (14) (0.3) (12) (0.3)
------ ------ ------ ------ ------
Income (loss) before
income taxes........... $89 1.3% $237 3.2% $(35) (0.6)% $117 2.6% $169 3.6%
====== ====== ====== ====== ======
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Revenues. Revenues increased to $4.7 million in the nine months ended
September 30, 1997 from $4.4 million in the nine months ended September 30,
1996, an increase of $0.3 million, or 6.3%. The increase in revenues resulted
primarily from sales of AutoCAD Release 14 which was released in mid-1997.
Cost of software and hardware. Cost of software and hardware increased to
$2.2 million in the nine months ended September 30, 1997 from $1.6 million in
the nine months ended September 30, 1996, an increase of $0.6 million, or 36.2%.
As a percentage of revenues, cost of software and hardware increased to 45.9% in
the nine months ended September 30, 1997 from 35.8% in the nine months ended
September 30, 1996. The percentage increase was primarily attributed to higher
product costs resulting from industry pricing pressures.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to $2.4 million in the nine months ended
September 30, 1997 from $2.7 million in the nine months ended September 30,
1996, a decrease of $0.3 million, or 12.6%. This decrease primarily resulted
from reductions in administrative personnel. As a percentage of revenues,
selling, general and administrative expenses decreased
46
<PAGE> 48
to 50.7% for the nine months ended September 30, 1997 from 61.7% for the nine
months ended September 30, 1996, due to the reductions.
Comparison of 1996, 1995, and 1994 Results of Operations
Revenues. Revenues decreased to $5.7 million in 1996 from $7.4 million in
1995 and $6.8 million in 1994. Revenue reached a high point in 1995 due to
Release 13 of Autodesk's AutoCad product in late fiscal year 1994 which provided
a full year of strong sales volume in 1995. The decrease in revenues from 1995
to 1996 was primarily due to Technical Software's discontinuance of one day
traveling seminars and many of its lower margin products.
Cost of software and hardware. Cost of software and hardware decreased to
$2.2 million in 1996 from $3.2 million in 1995 and $3.0 million in 1994,
reflective of the trend in revenues noted above. As a percentage of revenues,
cost of software and hardware decreased to 38.0% in 1996 from 42.9% in 1995,
primarily due to Technical Software's discontinuance of lower margin products.
Cost of software and hardware decreased to 42.9% in 1995 from 44.6% in 1994,
primarily due to Autodesk's Release 13 in 1995, facilitating higher sales prices
and more favorable vendor discounts.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to $3.6 million in 1996 from $4.0 million in
1995 and $3.7 million in 1994, reflecting the trend in revenues noted above. As
a percentage of revenues, selling, general and administrative expenses increased
to 63.2% in 1996 from 53.8% in 1995, primarily the result of increased expenses
as compared to decreased revenues. As a percentage of revenues, selling, general
and administrative expenses decreased to 53.8% in 1995 from 54.8% in 1994,
primarily the result of increased revenues.
Liquidity and Capital Resources
Technical Software's principal source of liquidity has been available
borrowings under credit facilities. The following table sets forth selected
information from Technical Software's statements of cash flows for the periods
indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ----------------
Dollars in thousands 1994 1995 1996 1996 1997
----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities................ $82 $126 $325 $151 $(37)
Net cash provided by (used in)
investing activities................ 38 (228) (44) (172) (19)
Net cash provided by (used in)
financing activities................ (154) 108 (285) 25 (59)
</TABLE>
From January 1, 1994 through September 30, 1997, Technical Software
generated $0.5 million in net cash from operating activities primarily from net
income adjusted for non-cash charges related to depreciation and amortization.
Cash used in investing activities was attributable to purchases of property
and equipment and investment securities, net of the proceeds from the sale of
investment securities.
Financing activities have included distributions paid to Technical
Software's sole shareholder and borrowing activity related to Technical
Software's lines of credit and notes payable to a bank. Net borrowings exceeded
repayments of the lines of credit in 1995 to fund: (i) additional working
capital required by the revenue growth of that fiscal year; (ii) purchases of
property and equipment; and (iii) distributions to Technical Software's sole
shareholder.
During 1995 and 1996, Technical Software had two revolving lines of credit
with banks that enabled it to borrow up to $0.9 million at interest rates
ranging from 1.5% above the banks' short term investment rate to 0.5% above
prime, subject to certain restrictions and borrowing levels as defined in the
agreements. These lines of credit matured in 1997 and Technical Software secured
a new $0.3 million line of credit with interest at
47
<PAGE> 49
0.5% plus prime (9.0% at September 30, 1997), which is not guaranteed by
Technical Software's sole shareholder. There were no borrowings on the line of
credit at September 30, 1997.
Technical Software also borrowed an additional $0.2 million in 1997 under
various long-term debt agreements with interest rates ranging from 9.0% to 1%
above prime (9.5% at September 30, 1997) to repay the previous lines of credit
and to purchase equipment under various long-term debt arrangements. As of
September 30, 1997, a total of $0.2 million was outstanding under these
agreements. The long-term debt agreements are payable in monthly installments
with maturity dates ranging from January 31, 1999 through February 15, 2000.
MID-WEST CAD
Founded in 1985, Mid-West CAD's primary focus is to provide software,
services and hardware to AEC firms. MidWest CAD services offered include
training, systems installation, technical support and consulting. Mid-West CAD
primarily serves Kansas and Missouri.
Results of Operations
The following table sets forth certain financial data and such data as a
percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------- ---------------------------------
Dollars in thousands 1994 1995 1996 1996 1997
-------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $2,607 100.0% $3,384 100.0% $3,365 100.0% $2,368 100.0% $2,477 100.0%
Cost of revenues........ 1,975 75.7 2,336 69.0 2,397 71.2 1,686 71.2 1,794 72.4
Selling, general and
administrative
expenses.............. 654 25.1 945 28.0 964 28.7 694 29.3 640 25.8
------ ------ ------ ------ ------
Total operating
expenses..... 2,629 100.8 3,281 97.0 3,361 99.9 2,380 100.5 2,434 98.3
Operating income
(loss)................ (22) (0.8) 103 3.0 4 0.1 (12) (0.5) 43 1.7
Interest expense, net... -- -- -- -- 4 0.1 4 0.2 -- --
Other expense (income),
net................... -- -- (2) (0.1) (2) -- (3) (0.1) -- --
------ ------ ------ ------ ------
Income (loss) before
income taxes.......... $(22) (0.8)% $105 3.1% $2 -- $(13) (0.5)% $43 1.7%
====== ====== ====== ====== ======
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Revenues. Revenues increased to $2.5 million in the nine months ended
September 30, 1997 from $2.4 million in the nine months ended September 30,
1996, an increase of $0.1 million or 4.6%. The increase in revenues resulted
primarily from an increase in AutoCAD sales to major accounts and the higher
demand for GIS Map products.
Cost of revenues. Cost of revenues, which primarily consists of hardware,
software and support related expenses, increased to $1.8 million in the nine
months ended September 30, 1997 from $1.7 million in the nine months ended
September 30, 1996, an increase of $0.1 million, or 6.4%. As a percentage of
revenues, cost of revenues increased slightly to 72.4% in the nine months ended
September 30, 1997 from 71.2% in the nine months ended September 30, 1996. The
percentage increase was primarily due to an increase in costs for Autodesk
products.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to $0.6 million in the nine months ended
September 30, 1997, from $0.7 million in the nine months ended September 30,
1996, a decrease of $0.1 million, or 7.8%. As a percentage of revenues, selling,
general and administrative expenses decreased to 25.8% in the nine months ended
September 30, 1997 from 29.3% in the nine months ended September 30, 1996,
primarily the result of lower outside labor costs and sales commission expenses.
48
<PAGE> 50
Comparison of 1996, 1995, and 1994 Results of Operations
Revenues. Revenues remained constant at $3.4 million in 1996 and in 1995
and increased from $2.6 million in 1994. The fluctuations in revenues over the
three year period were primarily due to Mid-West CAD's addition of new customers
as a result of a new sales representative.
Cost of revenues. Cost of revenues increased to $2.4 million in 1996 from
$2.3 million in 1995 and $2.0 million in 1994, reflective of the trend in
revenues noted above. As a percentage of revenues, cost of revenues increased to
71.2% in 1996 from 69.0% in 1995. As a percentage of revenues, cost of revenues
decreased to 69.0% in 1995 from 75.7% in 1994, primarily due to improved vendor
discounts.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $1.0 million in 1996 from $0.9 million in
1995 and $0.7 million in 1994, reflecting increased salaries and bonuses and
additional infrastructure expenses associated with Mid-West Cad's growth. As a
percentage of revenues, selling, general and administrative expenses increased
to 28.7% in 1996 from 28.0% in 1995 and 25.1% in 1994.
Liquidity and Capital Resources
Mid-West CAD's principal source of liquidity has been cash flows from
operating activities and limited long term debt arrangements. The following
table sets forth selected information from Mid-West CAD's statements of cash
flows for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER ENDED
31, SEPTEMBER 30,
---------------------- ----------------
Dollars in thousands 1994 1995 1996 1996 1997
---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities............................... $15 $167 $55 $ 39 $130
Net cash used in investing
activities............................... (44) (65) (142) (129) (13)
Net cash provided by (used in) financing
activities............................... 12 8 8 56 (12)
</TABLE>
From January 1, 1994 through September 30, 1997, Mid-West CAD generated
$0.4 million in net cash from operating activities. During this period, cash was
generated primarily from net income adjusted for the effects of non-cash charges
related to depreciation and amortization. The increase in operating cash
provided in 1995 and the nine months ended September 30, 1997 versus other
periods was primarily the result of increased net income.
Cash used in investing activities was attributable to purchases of property
and equipment while financing activities have included activity related to the
proceeds from issuance of long-term debt, net of the associated principal
payments thereunder.
Mid-West CAD has entered into long-term debt arrangements which include
notes payable at interest rates ranging from 7.50% to 7.92%. Each note payable
is secured by certain office equipment and is payable in monthly installments
with maturity dates between the period of July 1998 and September 1999. As of
September 30, 1997, a total of $20,000 was outstanding on these notes.
CADD MICROSYSTEMS
Founded in 1985, CADD Microsystems' primary focus is the sale of CAD and
AEC software and services including the Autodesk and Softdesk product lines.
CADD Microsystems has been the top selling Autodesk reseller to the federal
government since 1991. CADD Microsystems primarily serves the Washington D.C.
area including Virginia and Maryland.
49
<PAGE> 51
Results of Operations
The following table sets forth certain financial data and such data as a
percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------- ----------------------------------
1995 1996 1997
1994 --------------- --------------- 1996 ---------------
Dollars in thousands --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............. $2,879 100.0% $3,113 100.0% $3,094 100.0% $2,322 100.0% $2,285 100.0%
Cost of revenues...... 1,874 65.1 1,690 54.3 1,925 62.2 1,437 61.9 1,412 61.8
Selling, general and
administrative
expenses............ 1,276 44.3 1,247 40.0 1,176 38.0 910 39.2 788 34.5
------ ------ ------ ------ ------
Total
operating
expenses... 3,150 109.4 2,937 94.3 3,101 100.2 2,347 101.1 2,200 96.3
Operating income
(loss).............. (271) (9.4) 176 5.7 (7) (0.2) (25) (1.1) 85 3.7
Interest expense,
net................. 17 0.6 31 1.0 38 1.2 24 1.0 29 1.3
Other expense, net.... -- -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------
Income (loss) before
income taxes........ $(288) (10.0)% $145 4.7% $(45) (1.4)% $(49) (2.1)% $56 2.5%
====== ====== ====== ====== ======
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Revenues. Revenues remained constant at $2.3 million for the nine months
ended September 30, 1997 and the nine months ended September 30, 1996.
Cost of revenues. Cost of revenues remained constant at $1.4 million for
the nine months ended September 30, 1997 and for the nine months ended September
30, 1996. As a percentage of revenues, cost of revenues also remained constant
at 62.0% for nine months ended September 30, 1997 and the nine months ended
September 30, 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to $0.7 million in the nine months ended
September 30, 1997 from $0.9 million in the nine months ended September 30,
1996, a decrease of $0.2 million, or 13.4%. This decrease primarily resulted
from a decrease in sales and administrative personnel related expenses. As a
percentage of revenues, selling, general and administrative expenses decreased
to 34.5% in the nine months ended September 30, 1997 from 39.2% in the nine
months ended September 30, 1996, primarily the result of further cost reduction
efforts during the nine months ended September 30, 1997.
Comparison of 1996, 1995, and 1994 Results of Operations
Revenues. Revenues remained constant at $3.1 million in 1996 and 1995 and
increased from $2.9 million in 1994. The increase in revenue from 1994 to 1995
was the result of successful joint marketing programs with vendors as well as
the demand for Release 13 of Autodesk's AutoCad product. Revenues remained
constant between 1996 and 1995 due to CADD Microsystems' continued effort to
limit hardware sales and thereby improve profit margins.
Cost of revenues. Cost of revenues increased to $1.9 million in 1996 from
$1.7 million in 1995 after decreasing from $1.9 million in 1994. As a percentage
of revenues, revenues increased to 62.2% in 1996 from 54.3% in 1995, primarily
due to the result of competitive industry pricing pressures and less favorable
vendor discounts. As a percentage of revenues, revenues decreased to 54.3% in
1995 from 65.1% in 1994, primarily due to CADD Microsystems' de-emphasis on
selling lower margin hardware and an increase in software sales driven by
industry demand.
Selling, general and administrative expenses. Selling, general and
administrative expenses remained constant at $1.2 million in 1996 and in 1995
and decreased from $1.3 million in 1994. As a percentage of revenues, selling,
general and administrative expenses decreased to 38.0% in 1996 from 40.0% in
1995 and
50
<PAGE> 52
44.3% in 1994, primarily the result of reduction in administrative
personnel-related and other infrastructure expenses during the three-year
period.
Liquidity and Capital Resources
CADD Microsystems' principal source of liquidity has been available
borrowings under credit facilities, various long-term debt arrangements, and
capital leases. The following table sets forth selected information from CADD
Microsystems' statements of cash flows for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- --------------
Dollars in thousands 1994 1995 1996 1996 1997
---- ---- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities................................ $(53) $87 $(37) $(79) $84
Net cash used in investing
activities................................ (70) (8) (29) (14) (3)
Net cash provided by (used in) financing
activities................................ (43) (45) 99 103 (72)
</TABLE>
From January 1, 1994 through September 30, 1997, CADD Microsystems
generated $0.1 million in net cash from operating activities. The increase in
operating cash provided in 1995 and the nine months ended September 30, 1997
versus other periods was primarily the result of increased net income during the
period.
Cash used in investing activities was attributable to purchases of property
and equipment.
Financing activities have included long-term debt arrangements, repayments
related to capital leases, and a dividend paid to shareholders. The increase in
net cash provided by financing activities in 1996 and the nine months ended
September 30, 1996 versus other periods was primarily the result of CADD
Microsystems' receiving the proceeds of a new credit agreement with a financial
institution.
In August 1996, CADD Microsystems entered into a credit agreement with a
financial institution which provides for (i) a five year term loan in the amount
of approximately $0.2 million with principal and interest payments due monthly,
and (ii) a revolving line of credit due upon demand in an amount of up to $0.1
million. The term loan bears interest at prime plus 2.25% (10.75% at September
30, 1997), adjusted annually, while the borrowings under the line of credit bear
interest at prime plus 1.5% (10.0% at September 30, 1997), adjusted daily. The
credit agreement is collateralized by substantially all of the assets of CADD
Microsystems. The credit agreement contains covenants concerning the maintenance
of certain ratios including current ratio, net worth ratio, and debt service
coverage ratio. The company obtained a waiver from the financial institution at
September 30, 1997 for non-compliance with covenants concerning the maintenance
of these ratios.
COMPUTERS FOR DESIGN
Computers for Design's primary focus is on sales of design automation
software and services including software customization, training, and network
implementation and the sale of CAD systems to governmental and commercial
customers. Computers for Design primarily serves the Rocky Mountain region.
51
<PAGE> 53
Results of Operations
The following table sets forth certain financial data and such data as a
percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
YEAR ENDED DECEMBER 31,
-------------------------------------------------- --------------------------------
Dollars in thousands 1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $1,926 100.0% $2,058 100.0% $2,142 100.0% $1,718 100.0% $1,462 100.0%
Cost of revenues.......... 1,309 68.0 1,379 67.0 1,349 63.0 1,079 62.8 900 61.6
Selling, general and
administrative
expenses................ 599 31.1 693 33.7 745 34.8 555 32.3 524 35.8
------ ------ ------ ------ ------
Total operating
expenses....... 1,908 99.1 2,072 100.7 2,094 97.8 1,634 95.1 1,424 97.4
Operating income (loss)... 18 0.9 (14) (0.7) 48 2.2 84 4.9 38 2.6
Interest expense, net..... 11 0.5 14 0.6 12 0.5 9 0.5 10 0.6
Other expense (income),
net..................... (12) (0.6) (4) (0.2) (4) (0.2) (4) (0.2) -- --
------ ------ ------ ------ ------
Income (loss) before
income taxes............ $19 1.0% $(24) (1.1)% $40 1.9% $79 4.6% $28 2.0%
====== ====== ====== ====== ======
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Revenues. Revenues decreased to $1.5 million in the nine months ended
September 30, 1997 from $1.7 million in the nine months ended September 30,
1996, a decrease of $0.2 million, or 14.9%. The decrease in revenues resulted
primarily from a combination of limiting high dollar low margin hardware from
its product mix and lower sales earlier in the year in anticipation of AutoCAD
Release 14 in mid-1997.
Cost of revenues. Cost of revenues, which primarily consists of costs of
hardware, software, and support related expenses, decreased to $0.9 million in
the nine months ended September 30, 1997 from $1.1 million in the nine months
ended September 30, 1996, a decrease of $0.2 million, or 16.6%, resulting from
the decrease in sales. As a percentage of revenues, cost of revenues remained
relatively constant at 61.6% in the nine months ended September 30, 1997 and
62.8% in the nine months ended September 30, 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses remained relatively constant at $0.5 million for the
nine months ended September 30, 1997 and $0.6 million for the nine months ended
September 30, 1996. As a percentage of revenues, selling, general and
administrative expenses increased to 35.8% in the nine months ended September
30, 1997 from 32.3% in the nine months ended September 30, 1996, primarily the
result of lower revenues.
Comparison of 1996, 1995, and 1994 Results of Operations
Revenues. Revenues were $2.1 million in 1996 and 1995 and $1.9 million in
1994. The increase in revenues from 1994 to 1995 was primarily due to the
introduction of high dollar low margin hardware products.
Cost of revenues. Cost of revenues decreased to $1.3 million in 1996 from
$1.4 million in 1995 and remained constant at $1.3 million compared with 1994.
As a percentage of revenues, cost of revenues decreased to 63.0% in 1996 from
67.0% in 1995, primarily due to increased sales of high margin support and
service projects. As a percentage of revenues, cost of revenues decreased to
67.0% in 1995 from 68.0% in 1994.
Selling, general and administrative expenses. Selling, general and
administrative expenses remained constant at $0.7 million in 1996 and 1995 and
increased from $0.6 million in 1994, reflecting an increase in hardware-related
sales personnel in 1995. As a percentage of revenues, selling, general and
administrative expenses increased to 34.8% in 1996 from 33.7% in 1995 and from
31.1% in 1994, primarily the result of increases in the cost of infrastructure
expenses associated with Computers for Design's growth.
52
<PAGE> 54
Liquidity and Capital Resources
Computers for Design's principal source of liquidity has been cash flow
from operating activities and borrowings under credit facilities. The following
table sets forth selected information from Computers for Design's statements of
cash flows for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED SEPTEMBER ENDED
30, SEPTEMBER 30,
---------------------- -------------
Dollars in thousands 1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities..... $45 $33 $8 $20 $62
Net cash provided by (used in) investing
activities.................................. (16) (77) (7) 7 1
Net cash provided by (used in) financing
activities.................................. (12) 29 (5) (4) (62)
</TABLE>
From October 1, 1993 through September 30, 1997, Computers for Design
generated $0.1 million in cash from operating activities. During this period,
operating cash was generated primarily from net income adjusted for the effects
of non-cash charges related to depreciation and amortization.
Cash used in investing activities was attributable to the purchase of
equipment, payments and advances to related parties and restricted cash on an
escrow account.
Financing activities related to borrowings and repayments associated with
the revolving line of credit, repayments of capital lease obligations,
borrowings and repayments to shareholders and the purchase and retirement of
treasury stock.
Computers for Design has a revolving line of credit with a bank which
provides for maximum borrowings of $0.2 million limited to 70% of eligible
receivables, as defined. The line of credit matures on June 1, 1998, has
interest payable monthly at 1% over the prime rate (9.5% at September 30, 1997),
and is collateralized by accounts receivable, inventory, equipment and a general
assignment of all assets. McFall Konkel & Kimball Consulting Engineers, Inc.
(MKK), a 40% shareholder of Computers for Design, is the guarantor on the
revolving line of credit. MKK can reduce its maximum guarantee on the revolving
line of credit by one-third on May 31, 1997, May 31, 1998 and May 31, 1999.
Because the bank did not permit a reduction by MKK of its maximum guarantee
until the remaining shareholders executed personal guarantees on the revolving
line of credit, the guarantee on the revolving line of credit was not reduced to
$0.1 million until July 1997.
In July 1997, certain shareholders made loans to Computers for Design which
bear interest at 5.9% and are due in 2003. At September 30, 1997, $47,350 was
outstanding under these shareholder notes.
APPLIED
Founded in 1982, Applied's primary focus is the sale of design automation
software solutions. Applied also has developed and marketed proprietary software
products, including a computerized level/flow analysis model of municipal use.
Applied primarily serves the southeastern region.
The following Results of Operations and Liquidity and Capital Resources
reflect the historical consolidated financial statements of Applied as restated
to remove Applied's investment in an unconsolidated investee subsidiary and
certain capitalized software development costs. See the consolidated financial
statements and related notes thereto of Applied included elsewhere in this
Prospectus.
53
<PAGE> 55
Results of Operations
The following table sets forth certain financial data and such data as a
percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
Dollars in thousands 1995 1996 1997
--------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................................... $ 8,114 100.0% $7,797 100% $7,748 100.0%
Cost of revenues....................................... 6,144 75.7 5,654 72.5 5,987 77.3
Selling, general and administrative expenses........... 1,988 24.5 1,928 24.7 2,226 28.7
------- ------ ------
Total operating expenses...................... 8,132 100.2 7,582 97.2 8,213 106.0
Operating income (loss)................................ (18) (0.2) 215 2.8 (465) (6.0)
Interest expense, net.................................. 62 0.8 52 0.7 41 0.5
Other expense (income), net............................ 6 0.1 (4) -- (4) (0.1)
------- ------ ------
Income (loss) before income taxes...................... $(86) (1.1)% $167 2.1% $(502) (6.5)%
======= ====== ======
</TABLE>
Comparison of 1997, 1996, and 1995 Results of Operations
Revenues. Revenues decreased to $7.7 million in 1997 from $7.8 million in
1996 and $8.1 million in 1995. The decrease in revenues in 1996 was primarily
due to the decline in both unit volume and pricing of computer hardware.
Cost of revenues. Cost of revenues, which primarily consists of costs of
hardware, software and support related expenses, increased to $6.0 million in
1997 from $5.7 million in 1996 and decreased from $6.1 million in 1995. The
increase in costs in 1997 reflected less favorable vendor discounts on software
as compared to 1996, and the lower costs in 1996 as compared to 1995 were
primarily a result of the lower hardware sales. As a percentage of revenues,
cost of revenues increased to 77.3% in 1997 from 72.5% in 1996 and 75.7% in
1995. The increase in percentage in 1997 is reflective of the less favorable
vendor discounts on software. An improved product mix contributed to the
increase 1996 as compared to 1995 as the loss in lower margin hardware revenues
were partially offset by higher software margins.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $2.2 million in 1997 from $1.9 million in
1996 and $2.0 million in 1995, reflecting increased advertising and
merger-related legal expenses in 1997 versus 1996, and lower legal, insurance
and employee training expenses in 1996 as compared to 1995. As a percentage of
revenues, selling, general and administrative expenses increased to 28.7% in
1997 as compared to 24.7% in 1996 and 24.5% in 1995.
Liquidity and Capital Resources
Applied's principal source of liquidity has been available borrowings under
credit facilities. The following table sets forth selected information from
Applied's statements of cash flows for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
Dollars in thousands 1995 1996 1997
----- ---- -----
<S> <C> <C> <C>
Net cash provided by (used in) operating activities.............. $ 443 $109 $(310)
Net cash used in investing activities............................ (21) (75) (20)
Net cash provided by (used in) financing activities.............. (347) (40) 246
</TABLE>
From October 1, 1994 through September 30, 1997, Applied generated $0.2
million in net cash from operating activities. During this period, $0.4 million
of cash was used primarily as a result of the effect of net losses adjusted for
$0.2 million related to non-cash charges of depreciation and amortization. The
remaining cash generated in 1995 and 1996 was primarily from cash collections of
trade accounts receivable net of cash outflows related to reductions in accounts
payable and accrued expenses. In 1997 cash was provided by reductions of
inventory and increases in accounts payable and accrued expenses offset by
increases in trade accounts receivable.
54
<PAGE> 56
Cash used in investing activities was attributable to purchases of property
and equipment net of proceeds generated from the sale of property and equipment.
Financing activities have included repurchase of common stock and the
associated agreed upon annual distribution to a former shareholder, as well as
the borrowing activity related to Applied's line of credit and bank overdraft,
and payments on capital lease obligations. Net cash used by financing activities
also includes payments made related to the non-Reseller and Integration portion
of Applied which is not being acquired by UDMS. Payments not related to the
Reseller and Integration Business amounted to $0.6 million over the three year
period.
In January, 1994, Applied issued a note payable of $0.4 million to a former
stockholder bearing interest at 10% payable in ten equal semi-annual
installments through January 13, 1999. The note is secured by the treasury stock
of Applied and must be paid in full in the event of change in control. The
outstanding balance at September 30, 1997 was $0.1 million.
Applied has a line of credit agreement with a financial institution which
permits it to borrow up to $0.5 million. Borrowings under the line bear interest
at the prime rate plus 1% (9.5% at September 30, 1997), payable monthly. The
line is secured by accounts receivable and a personal guarantee of the
shareholders and matures January 15, 1998. At September 30, 1997, the line of
credit had a balance of $0.5 million. Applied's line of credit agreement
contains restrictive covenants which include the maintenance of minimum tangible
net worth, as defined, and certain financial ratios. As of September 30, 1997,
Applied was not in compliance with certain of these covenants and all
obligations due under the agreement have been included as current liabilities.
Applied has the ability to finance up to $0.5 million of its eligible
inventory under a financing agreement. The terms are interest free for the first
30 to 45 days, depending on vendor, and interest is charged thereafter at the
rate of prime plus 6%, plus an administrative fee. The specific inventory
financed is collateral under the financing agreement and the liability is
personally guaranteed by the shareholders. This inventory financing agreement
contains restrictive covenants which include the maintenance of minimum tangible
net worth, as defined, and certain financial ratios. As of September 30, 1997,
Applied was not in compliance with certain of these covenants. Included in
accounts payable at September 30, 1997 was $12,122 relating to such inventory
purchases.
Applied's financial statements have been prepared assuming that Applied
will continue as a going concern. Applied experienced a net loss in fiscal 1997,
has a net capital deficiency, and is in violation of certain debt covenants that
raise substantial doubt about its ability to continue as a going concern.
SYNERGIS-PA
Founded in 1985, Synergis-PA's primary focus is the sale of design
automation software, including Autodesk products and its own proprietary
document management software developed for design automation. Synergis-PA also
offers systems integration, networking services, custom programming and
training. Synergis-PA primarily serves the Mid-Atlantic region.
Results of Operations
The following table sets forth certain financial data and such data as a
percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
Dollars in thousands 1995 1996 1997
-------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................................... $3,189 100.0% $4,899 100.0% $6,347 100.0%
Cost of hardware and software.......................... 2,052 64.3 3,195 65.2 4,410 69.5
Selling, general and administrative expenses........... 1,026 32.2 1,547 31.6 1,836 28.9
------ ------ ------
Total operating expenses............................. 3,078 96.5 4,742 96.8 6,246 98.4
Operating income....................................... 111 3.5 157 3.2 101 1.6
Interest expense, net.................................. 21 0.7 8 0.2 2 --
Other expense (income), net............................ (19) (0.6) (9) (0.2) (7) (0.1)
------ ------ ------
Net income............................................. $109 3.4% $158 3.2% $106 1.7%
====== ====== ======
</TABLE>
55
<PAGE> 57
Comparison of 1997, 1996, and 1995 Results of Operations
Revenues. Revenues increased to $6.3 million in 1997 from $4.9 million in
1996 and $3.2 million in 1995. The increase in revenues is primarily due to
Synergis-PA's initiative to de-emphasize its hardware business and shift its
product mix to emphasize software, services and support. The benefits or
Synergis-PA's realignment were realized in 1997 and 1996 through increased
software, services and support sales.
Cost of hardware and software. Cost of hardware and software increased to
$4.4 million in 1997 from $3.2 million in 1996 and $2.1 million in 1995,
reflective of the trend in revenues noted above. As a percentage of revenues,
cost of revenues increased slightly in 1997 to 69.5% from 65.2% in 1996 and
64.3% in 1995. The increase is directly related to significant reductions in
Autodesk's rebate and marketing development programs, as well as certain AutoCAD
selling price reductions implemented by Synergis to rapidly gain market share
and eliminate competitors.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $1.8 million in 1997 from $1.5 million in
1996 and $1.0 million in 1995, due to the increase in sales and support
personnel required to support Synergis-PA's growth. Also included in the
expenses was $0.1 million in 1997 and $0.2 million in 1996 of research and
development costs for NFM(3.0), a document management software project. As a
percentage of revenues, selling, general and administrative expenses decreased
to 28.9% in 1997 from 31.6% in 1996, and 32.2% in 1995.
Liquidity and Capital Resources
Synergis-PA's principal source of liquidity has been available borrowings
under credit facilities and a note payable to a principal shareholder. The
following table sets forth selected information from Synergis-PA's statements of
cash flows for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
-----------------------
Dollars in thousands 1995 1996 1997
---- ---- -----
<S> <C> <C> <C>
Net cash provided by operating
activities............................................... $513 $102 $ 221
Net cash used in investing
activities............................................... (50) (92) (228)
Net cash used in financing
activities............................................... (201) (61) (68)
</TABLE>
From October 1, 1994 through September 30, 1997, Synergis-PA generated $0.8
million in net cash from operating activities. During this period, cash was
generated primarily from net income adjusted for the effects of non-cash charges
related to depreciation and amortization. The increase in operating cash
provided in 1995 versus other periods was primarily the result of increased cash
collections on trade receivables combined with increased accounts payable and
accrued expense net of the cash used to fund increased inventory purchases.
In 1995 and 1996 cash used in investing activities was attributable to
purchases of property and equipment. In 1997, net cash used included purchases
of property and equipment and $0.2 million in capitalized software development
costs for NFM(3.0), that had reached technical feasibility. The software became
available for general release in July 1997, at which time amortization
commenced.
Financing activities have included repayments related to Synergis-PA's
revolving line of credit, borrowings and principal payments under long term debt
arrangements, principal payments on capital leases, and dividends paid to
shareholders.
Synergis-PA has available a $0.4 million working capital line of credit
bearing interest at prime plus 1/2% (9% at September 30, 1997). In addition to
the line of credit agreement noted above, Synergis-PA's has entered into a long
term debt arrangement in the form of a 10% unsecured notes payable to a
principal shareholder due September 30, 2002. The note to the principal
shareholder is repayable immediately and in full in the event of a change in
control of the Company. Total obligations due on the note to the principal
shareholder at September 30, 1997 was $0.1 million.
56
<PAGE> 58
DEVTRON RUSSELL
Founded in 1969, Devtron Russell's primary focus is the sale of Autodesk
products and related services. In 1995 Devtron Russell received a top dealer
award from Autodesk for being a top dealer for ten consecutive years. Devtron
Russell primarily serves Michigan.
Results of Operations
The following table sets forth certain financial data and such data as a
percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------
1995 1996 1997
Dollars in thousands -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................................. $1,622 100.0% $2,782 100.0% $2,958 100%
Cost of hardware and software............................. 1,136 70.0 2,010 72.3 2,077 70.2
Selling, general and administrative expenses.............. 463 28.5 630 22.6 732 24.7
------ ------ ------
Total operating expenses......................... 1,599 98.5 2,640 94.9 2,809 95.0
Operating income.......................................... 23 1.5 142 5.1 149 5.0
Interest expense, net..................................... 9 0.6 10 0.4 12 0.4
Other income, net......................................... (4) (0.2) -- -- (2) (0.1)
------ ------ ------
Income before income taxes................................ $18 1.1% $132 4.7% $ 139 4.7%
====== ====== ======
</TABLE>
Comparison of 1997, 1996, 1995 Results of Operations
Revenues. Revenues increased to $3.0 million in 1997 from $2.8 million in
1996 and $1.6 million in 1995. The increase in revenues over the three year
period was primarily due to a good Michigan economy and a healthy general growth
in the design automation sector in the Michigan industrial market.
Cost of hardware and software. Cost of hardware and software increased to
$2.1 million in 1997 from $2.0 million in 1996 and $1.1 million in 1995,
reflecting the year-to-year revenue growth. As a percentage of revenues, cost of
hardware and software decreased slightly to 70.2% in 1997 from 72.3% in 1996 and
remained constant with 70.0% in 1995. The small percentage fluctuations relate
to normal business fluctuations in product mix and pricing.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $0.7 million in 1997 from $0.6 million in
1996 and $0.5 million in 1995. As a percentage of revenues, selling, general and
administrative expenses increased to 24.7% in 1997 from 22.6% in 1996, and
decreased from 28.5% in 1995, primarily the result of the readjustment of sales
efforts resulting from a more mature market for the AutoCAD product line.
Liquidity and Capital Resources
Devtron Russell's principal source of liquidity has been cash flows from
operating activities, borrowings under credit facilities, and various long-term
debt arrangements. The following table sets forth selected information from
Devtron Russell's statements of cash flows for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
----------------------
Dollars in thousands 1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net cash provided by (used in) operating
activities.................................................. $(78) $78 $12
Net cash used in investing
activities.................................................. (17) (27) (67)
Net cash provided by (used in) financing
activities.................................................. 76 (51) 59
</TABLE>
57
<PAGE> 59
From October 1, 1994 through September 30, 1997, Devtron Russell generated
limited positive cash flow for the period. During this period, operating cash
was generated primarily from net income adjusted for the effects of non-cash
charges related to depreciation and amortization and was offset by cash used to
fund growth in working capital.
Cash used in investing activities was attributable to the purchase of
property and equipment.
Financing activities have included borrowings and repayments related to
Devtron Russell's line of credit, proceeds from the issuance of long-term debt,
net of principal repayments, a loan advance to a shareholder, and bank overdraft
activity.
Devtron Russell has a $75,000 line of credit which bears interest at the
prime rate plus 1.5% per annum (10% at September 30, 1997) and is secured by all
the assets of Devtron Russell. Borrowings on the line of credit at September 30,
1997 was $65,000. In addition to the line of credit, Devtron Russell has certain
long-term debt arrangements with interest rates varying from 8.7% to 11.5%, each
secured by specific assets, including a building and vehicles, and payable in
monthly installments with maturity dates between May 1998 and November 1999.
ACCESS
Founded in 1963, ACCESS' primary focus is the service of hardware and
software for its installed base of customers and third parties. ACCESS also
markets document management software and is the sole North American distributor
of the Cimage product line, a leading document management product line.
Additionally, ACCESS sells certain peripheral products including plotters,
scanners and printers. ACCESS markets its products and services nationwide.
Results of Operations
The following table sets forth certain selected financial data and such
data as a percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, SIX MONTHS ENDED OCTOBER 31,
--------------------------------------------------- ----------------------------------
Dollars in thousands 1995 1996 1997 1996 1997
-------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $6,042 100.0% $8,704 100.0% $6,929 100.0% $3,203 100.0% $5,443 100.0%
Cost of revenues........... 3,689 61.1 5,394 62.0 5,433 78.4 2,278 71.1 4,006 73.6
Selling, general and
administrative
expenses................. 2,121 35.1 3,045 35.0 2,634 38.0 1,246 38.9 1,395 25.6
------ ------ ------ ------ ------
Total operating
expenses........ 5,810 96.2 8,439 97.0 8,067 116.4 3,524 110.0 5,401 99.2
Operating income (loss).... 232 3.8 265 3.0 (1,138) (16.4) (321) (10.0) 42 0.8
Interest expense (income),
net...................... 18 0.3 (53) (0.6) (77) (1.1) (39) (1.2) (26) (0.5)
Other expense (income),
net...................... 17 0.3 7 -- (10) (0.1) (6) (0.2) 9 0.2
------ ------ ------ ------ ------
Income (loss) before income
taxes.................... $197 3.2% $311 3.6% $(1,051) (15.2)% $(276) (8.6)% $59 1.1%
====== ====== ====== ====== ======
</TABLE>
ACCESS has in the past experienced, and could in the future experience,
quarterly variations in revenues, operating income and cash flow as a result of
many factors, including the volume of sales of its Electronic Document
Management Systems (EDMS) software and service sales related to hardware and
software support and fluctuations in its selling, general and administrative
expenses as a result of changes in personnel or other operating costs.
Six Months Ended October 31, 1997 Compared to Six Months Ended October 31,
1996
Revenues. Revenues increased to $5.4 million in the six months ended
October 31, 1997 from $3.2 million in the six months ended October 31, 1996, an
increase of $2.2 million, or 70.0%. The increase in revenues resulted primarily
from substantial sales to three customers related to ACCESS' EDMS software.
58
<PAGE> 60
ACCESS also recorded additional revenues as a result of the April 1997
acquisition of Graphic Systems Technology, Incorporated (GST), a company
providing third party maintenance to the prepress industry.
Cost of revenues. Cost of revenues, which primarily consists of costs of
software service expenses, increased to $4.0 million in the six months ended
October 31, 1997 from $2.3 million in the six months ended October 31, 1996, an
increase of $1.7 million, or 75.9%. As a percentage of revenues, cost of
revenues increased to 73.6% in the six months ended October 31, 1997 from 71.1%
in the six months ended October 31, 1996. The percentage increase was primarily
due to a change in ACCESS' product mix from higher margin mircographic hardware
services to lower margin third party services and as a result of the write-off
of unamortized capitalized software in 1997. It also included the affect of
decreased service margins resulting from ACCESS' expansion of the number of
field service representatives related to the acquisition of GST. During the six
month period ended October 31, 1997, this additional capacity was
under-utilized.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $1.4 million in the six months ended
October 31, 1997 from $1.2 million in the six months ended October 31, 1996, an
increase of $0.2 million, or 12.0%. As a percentage of revenues, selling,
general and administrative expenses decreased to 25.6% in the six months ended
October 31, 1997 from 38.9% in the six months ended October 31, 1996, primarily
the result of decreased expenses as compared to increased revenues.
Comparison of 1997, 1996, and 1995 Results of Operations
Revenues. Revenues decreased to $6.9 million in 1997 from $8.7 million in
1996 and increased from $6.0 million in 1995. The fluctuations in ACCESS'
revenues over the three year period were primarily due to the results of
revenues associated with EDMS software. System sales from EDMS operations were
$2.9 million, $3.8 million, and $1.3 million in fiscal years 1997, 1996 and
1995, respectively. The decrease between 1997 and 1996 was the result of a major
customer ordering a substantial non-cancelable software license in 1996. ACCESS
did not have a similar major EDMS order in fiscal 1997. In addition, revenues
decreased in 1997 as compared to 1996 as a result of lower service sales related
to hardware and software support to ACCESS' installed base of customers and
third-party maintenance contracts. Service sales were $4.0 million, $4.9 million
and $4.8 million in 1997, 1996 and 1995, respectively.
Cost of revenues. Cost of revenues remained constant at $5.4 million in
1997 and 1996 and increased from $3.7 million in 1995, reflective of the trend
in revenues noted above. In addition, in 1997 ACCESS accelerated and expensed
the remaining unamortized capitalized software balance of $0.7 million in the
third quarter of 1997. Accordingly, total amortization and write-off of
unamortized capitalized software balances was $0.7 million in 1995 and 1996 as
compared to $1.1 million ($0.22 per share) in 1997. As a percentage of revenues,
cost of revenues increased to 78.4% in 1997 from 62.0% in 1996 and 61.1% in
1995, primarily due to a change in ACCESS' product mix from higher margin
micrographic hardware services to lower margin third party services and as a
result of the write-off of unamortized capitalized software in 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to $2.6 million in 1997 from $3.0 million in
1996 and increased from $2.1 million in 1995. Lower research and development
expenses which were associated with Cimage Enterprise Systems, Ltd., providing
the software development services in fiscal year 1997, facilitated the
improvement. As a percentage of revenues, selling, general and administrative
expenses increased to 38.0% in 1997 from 34.9% in 1996, primarily the result of
decreased revenues in 1997. As a percentage of revenues, selling, general and
administrative expenses decreased slightly to 34.9% in 1996 from 35.1% in 1995.
59
<PAGE> 61
Liquidity and Capital Resources
ACCESS' principal source of liquidity has been cash flows from operating
activities. The following table sets forth selected information from ACCESS'
statements of cash flows for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED APRIL 30, OCTOBER 31,
------------------------- --------------
Dollars in thousands 1995 1996 1997 1996 1997
------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities................................ $1,047 $1,621 $(110) $(226) $ 510
Net cash used in investing
activities................................ (21) (308) (435) (54) (18)
Net cash used in financing activities....... (147) (125) (122) (118) --
</TABLE>
From May 1, 1994 through October 31, 1997, ACCESS generated $3.1 million in
net cash from operating activities. During this period, operating cash was
generated from income adjusted for non-cash charges such as depreciation,
amortization of capitalized software, deferred income taxes, and prepaid
maintenance contracts. Net cash used by operating activities from May 1, 1996
through April 30, 1997 was adversely effected by the changes in operating assets
resulting from cash payments of accrued liabilities, recognition of advances
from customers, and an increase in accounts receivable. Net cash provided during
the six months ended October 31, 1997 included a significant increase in accrued
royalties related to the sale of software in October.
Cash used in investing activities was primarily attributable to purchases
of property and equipment and cash expended for the acquisitions of businesses
in both fiscal years 1997 and 1996. ACCESS acquired the assets of GST in April
1997 and acquired CimSoft Incorporated in July 1995.
Financing activities have included dividends on the company's Class One
Preferred Stock, repayments on a bank line of credit, and payments related to
capital leases.
ACCESS' current line of credit of $0.4 million extends through April 7,
1998. Borrowings under the agreement bear interest at 1% over the prime rate.
Maximum availability is based upon levels (as set forth in the loan agreement)
of eligible accounts receivable. To secure any borrowing, ACCESS has pledged
accounts receivable, inventories, fixed assets, and general intangibles. The
agreement contains restrictive and other covenants which require ACCESS to
maintain certain levels of indebtedness to net worth, current ratio and cash
flow from operations. It also restricts new borrowings, capital expenditures,
and dividends on ACCESS' capital stock. ACCESS has not had activity relating to
the line of credit since 1995.
60
<PAGE> 62
BUSINESS
The Company believes it will be the largest independent value added
reseller of design automation products and services in the United States. The
Company will provide its customers with licensed and proprietary CAD/CAM/CAE and
complementary document management solutions. The Company will also offer a wide
range of sophisticated customer support and consulting services including
systems integration, customization, training, process re-engineering and call
center and help desk support.
As a single source provider, the Company will offer comprehensive
professional services, products, support, and training necessary to implement
and maintain complete, state-of-the-art design automation systems. The Company
also expects to expand its product portfolio by licensing or purchasing
additional and complementary products for resale to its customers. The Company
intends to provide its customers with the latest technology and services and to
become an integral part of the customer's technology team.
INDUSTRY OVERVIEW
The design automation industry consists of six market segments: mechanical
design, AEC, GIS, process and power, facilities management, and multi-media. The
U.S. Department of Commerce, International Trade Administration, has estimated
that the worldwide market for CAD/CAM/CAE hardware, software and services was
$20.5 billion for 1996 and will be approximately $23.5 billion in 1997.
Additionally, industry sources estimate that 1997 U.S. revenues for document
management software products will be $1.4 billion. These estimates do not
include expenditures for other related software products such as applications
for viewing, scanning, conversion, and computer output to laser disk. The design
automation services industry has experienced solid growth historically. In
particular, the mechanical software market has grown during the period 1994
through 1996 at an approximate 16.7% compound annual growth rate, and it is
estimated that this compound annual growth rate will continue through 2000. The
Company believes the design automation services industry will continue to record
solid growth over the next several years due to the strength of CAD/CAM/CAE
software sales, the emergence of Windows NT as an implementation platform and
the emergence of mid-range platforms, among other reasons. More specifically,
the Company believes that the revenues of design automation value added
resellers as a whole have been growing slower than the overall design automation
industry, while the larger value added resellers have been growing more rapidly
due to customer preferences favoring more integrated full-service solution
providers.
Originally, developers and most manufacturers sold their CAD/CAM/CAE
products directly to end users. More recently, design automation and document
management tools have become more complex, more developers have placed products
into the market, and demand for support and services has increased. Local and
regional value added resellers have entered the industry in response to end
users who wanted to obtain products and related support and services from a
single source. However, value added resellers generally provide CAD/CAM/CAE
products within limited geographic markets, serving one or a limited number of
design automation market segments, as the needs of these segments differ and
each requires specialized products and services. This has contributed to a high
level of fragmentation within the design automation channel. There are over
1,000 design automation value added resellers (including over 700 authorized to
resell Autodesk products) in North America. Additionally, there are more than
200 independent document management or client-server system integrators.
Recently, these local and regional resellers of design automation product
and service solutions have faced an increasingly difficult array of challenges.
First, these local and regional resellers are not authorized to offer the full
range of design automation solutions. This challenge is further complicated by
the industry trend towards an increase in the number of and competition among
design automation solutions. Second, the demand of customers for integration of
disparate technologies and multiple computing platforms, and for customization
and integration of available software solutions, has led to a heightened
challenge in assembling the qualified personnel with the highly technical skills
needed to provide these sophisticated professional services. Third, external
economic factors are causing larger organizations to focus on core competencies
and outsource various technological services, resulting in a further burden on
the local and regional reseller. Fourth, local and regional resellers have
limited access to capital and lack the national presence to serve clients who
need vendors that can provide a broad range of products and services in all of
their market segments and locations. These limitations have made it more
difficult for these local and regional resellers to
61
<PAGE> 63
expand their businesses beyond their current geographic areas and market segment
specializations, as well as to fully serve larger organizations.
Due to the fragmentation of the marketplace, large corporate users of
design automation products with needs in one or more market segments are forced
to use many disparate integrators to satisfy their product and support needs. As
a result, the quality of support the large corporate user receives and the price
it pays may vary dramatically from region to region depending upon the
integrator. Additionally, design automation users create and rely on large
volumes of documents which they need to manage effectively. The Company believes
that larger corporate clients would benefit by the consolidation of design
automation and document management hardware, software, support and services into
one national entity. Furthermore, the Company believes that its ability to offer
integrated document management solutions with security protocols will be of
significant value to corporate clients.
In response to these market conditions, the Company believes that by
uniting value added resellers in diverse geographic regions, it will create a
single entity with the national presence, capital, experienced executive team,
name recognition and products and services required to serve larger
organizations while maintaining local focus and management. Additionally, the
Company believes that its ability to integrate certain document management
solutions with more traditional design automation tools and certain proprietary
software will uniquely fulfill the needs of the growing number of large and
diverse users of these products.
BUSINESS STRATEGY
The Company believes it will be the largest independent value added
reseller of design automation products and services in the United States. The
Company expects to target two primary market segments: (1) corporate, government
and educational users of design automation products requiring professional
services to meet their enterprise needs, and, to a lesser extent, (2)
third-party channels that resell or license the Company's proprietary software
products. Key elements of the Company's business strategy are to:
Offer a Single Source for Complete, Integrated Solutions. The Company
intends to be a leading nationwide provider of a full range of design automation
products and services. The Company will supply the professional services,
products, support, and training necessary to implement and maintain complete,
state-of-the-art design automation systems. The Company is committed to
providing customers with the finest software and hardware products and services
on the market. As an authorized provider of many leading products in the
industry, including those manufactured by Autodesk, Bentley, SDRC, and
Intergraph, the Company will keep its customers in touch with the latest
technology and expects to become an integral part of the customer's technology
team. Moreover, the Company will provide products and professional services
tailored to its customers' needs by drawing upon the diverse resources of the
Founding Companies. The Company will also continue to acquire additional local
and regional companies to continue to build its national presence.
Enhance Higher Margin Professional Services and Sales of Proprietary
Software. As a technological leader in the design automation market, the
Company will be uniquely equipped with the resources and experience necessary to
provide state-of-the-art products and services on an enterprise wide basis to a
full range of corporate customers. For the nine months ended September 30, 1997,
56.3% of the Company's revenues on a pro forma basis were from software sales,
25.7% were from professional services, and 18.0% were from hardware sales. While
the Company intends to continue to offer a full range of products and services,
it expects to broaden its offerings of professional services and proprietary
software, which typically generate higher margins. Additionally, the Company
expects to form strategic alliances with other developers of proprietary
software and offer this proprietary software to its customers. As the only
reseller able to offer such developers national distribution, the Company
expects to be able to negotiate favorable terms for these rights.
Focus on Large Clients; Expand Geographically in Major Metropolitan
Areas. The combined resources, technical expertise and geographic diversity of
the Founding Companies will enable the Company to focus its marketing efforts on
clients requiring national sales and service capabilities. The Company intends
to expand into selected major metropolitan areas as national account
relationships develop, through both internal development and acquisitions of
local and regional resellers. The Company believes this expansion to new
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major metropolitan areas, as well as its intended expansion in those
metropolitan areas it now serves, will complement the Company's dual emphasis on
maintaining current local and regional customers as well as building its
national customer base. The Company will establish and implement national sales
and service policies, procedures and methodologies to maintain consistent
product and service offerings across the Company.
Capitalize Upon and Leverage Specific Technical Expertise and Product
Offerings. The Company plans to leverage its diverse products and services to
expand its existing client relationships as well as target new sales
opportunities. The Company also intends to leverage the expertise of certain of
the Founding Companies by creating teams to train both internal groups as well
as current and targeted customers. The Company expects that the breadth and
quality of products and services it can offer, coupled with the goodwill derived
from existing client relationships, will provide it with significant advantages
in marketing additional product and service solutions to such customers.
Additionally, the corporate coordination of the call center and help desk and
development and management of proprietary software will facilitate the ability
of each Founding Company to offer its customers the benefits of the best
products and practices of the other Founding Companies.
Achieve Cost Savings Through Centralization of Certain Functions. The
Company believes that it will achieve significant economies of scale through
centralizing a number of general and administrative functions at the corporate
level and by reducing or eliminating redundant functions and facilities at the
Founding Companies. Centralization of functions such as marketing, purchasing,
accounting and inventory control, together with Company-wide management
information systems and centralized development of product and services pricing
and methodologies, are expected to yield significant cost structure improvements
and efficiencies. The Company also expects to implement and administer
Company-wide employee benefits programs and insurance plans which it believes
will be more advantageous for employees than those currently in place at the
Founding Companies. These programs and plans will be designed to attract and
retain a talented work force as the Company continues to grow.
Operate With Decentralized, Local Management. The Company believes the
experienced local management teams with over 125 years of combined experience in
design automation and document management that exist at the Founding Companies
have a valuable understanding of their respective markets and customers and that
it can best capitalize upon these strengths through a decentralized management
strategy. Accordingly, the Founding Companies will retain responsibility for the
operations and profitability of their locations and will make most of the
day-to-day operating decisions within the policy guidelines established by the
Company. The performance of each local management team will, however, be
measured by clearly defined goals and expectations that will be tied directly to
incentive compensation. The Company believes this balance of local operational
autonomy with the centralization of certain general and administrative functions
will maintain the continued successful management of the branches, facilitate
direct contact with the customer at the branch level, and allow minimal staffing
at the corporate level.
OPERATIONS
Upon consummation of the Acquisitions, the Company intends to implement its
business strategy by supporting the successful, entrepreneurial culture of the
Founding Companies while simultaneously centralizing and maintaining certain
marketing, professional service, administrative support and planning activities.
The Company believes this approach will augment the branch managers' ability to
build local operations. Moreover, this structure will enhance potential cross
selling opportunities by allowing the Company to capitalize on the product,
service and customer expertise of each branch manager.
The Company intends to structure its operations into eight regions, which
will implement corporate strategy in the branches within their respective
regions. The Company expects this structure to maximize the dissemination of
best practices and product and service expertise across the Founding Companies.
Each of the regions will be responsible for selling design automation and
complementary document management software solutions and proprietary software,
and for providing professional services including systems integration,
consulting services, training, custom deployment, process re-engineering
support, and strategic hardware
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platforms support required for enterprise-wide operations. The Company
anticipates that there will be a national product manager in each of the
mechanical design, AEC and GIS market segments of design automation responsible
for sales of CAD/CAM/CAE solutions to that market segment. Furthermore, the
Company expects to have a national document management product manager. The
Company believes this approach will allow local management to focus on customer
sales and support while providing operations support and strategic vision at the
corporate level.
The Company expects to standardize and integrate the information systems of
the Founding Companies. A state-of-the-art distributed client-server based
system will be utilized to provide the Company with an integrated marketing,
sales and support management system. An initial customer database will be
developed by merging existing local office customer databases into the new
system. The Company's integrated marketing, sales and support management system
will also enable the telemarketing personnel in the call center to leverage
fully the Company's national marketing programs and strategy. Marketing and
telemarketing, and operations and services, will be coordinated and supported on
a national basis by the Senior Vice President of Business Development and
Marketing and the Senior Vice President of Operations and Service, respectively,
each of whom will report to the Chief Executive Officer.
PRODUCTS AND SERVICES
Historically, local and regional value added resellers specialized in
particular products or product lines. The Company will have the ability to offer
a wide range of design automation products and services including software,
professional services, proprietary software, hardware and software maintenance,
complementary document management solutions and hardware. This will enable the
Company to become a single source provider for its customers on a national
basis. Although many of the Company's products and services can be sold
separately, the Company anticipates an acceleration of the trend the Founding
Companies are experiencing in which customers are increasingly demanding an
integrated mix of services, software and hardware.
Software. The Company will offer a wide range of design automation
software that provides CAD/CAM/CAE solutions in the design automation market
segments. Among the leading design automation families of products are those
manufactured by Autodesk. Each of the Founding Companies, except ACCESS and
UDMS, is an authorized Autodesk reseller and each, except ACCESS, UDMS and
Computers for Design, is an Authorized Systems Center ("ASC") for one or more of
Autodesk's mechanical design, AEC, GIS, data management or plant design product
groups. To obtain this authorization a reseller must, among other things,
maintain a certain number of trained sales representatives and technicians and a
minimum sales volume. To be eligible for this authorization, the Founding
Company also must already have been designated as an Authorized Premier Support
Center in its particular market segment. Designated ASCs are published and
promoted by Autodesk through its support referral program. In addition, four of
the Founding Companies have been designated as educational authorized resellers,
which affords them the exclusive right to market and distribute Autodesk's
software to educational institutions within their territories, which currently
includes nine states.
The Company will continue to offer a full suite of design automation
products manufactured by Bentley, Intergraph, SDRC and others. These offerings
will further distinguish the Company in the marketplace from those resellers
that are limited in the number of products they offer. The Company will also
institute a program of evaluating potential additional product offerings as well
as re-evaluating current product offerings.
For the nine months ended September 30, 1997, software sales excluding
sales of proprietary software represented approximately 47.4% of the Company's
total revenues on a pro forma basis.
Professional Services. The Company intends to deliver effective solutions
for all its customers, from those with minimal needs to complex, large scale
computing environments for corporations, engineers, manufacturers, utilities,
government and educational institutions. The Company will be a multi-faceted
solutions integrator, will provide its clients with a wide range of
sophisticated customer support and consulting services, and will focus on
delivering high levels of customer satisfaction. Professional services will
include systems integration, customization, installation, design engineering,
training, process re-engineering and call
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center and help desk support. The Company also expects to provide these services
to its clients in technology intensive environments, such as architecture,
engineering, 2-D and 3-D modeling, GIS, facilities management, civil
engineering, process and power and scanning.
To complement these traditional service offerings, the Company will offer a
host of other expertises. These other offerings will include services such as
application, system and network analysis, evaluation and design. For
post-installation services, on-site and in-house training, technical support and
service will also be offered. For document management applications, the Company
will offer business process evaluation, workflow analysis, implementation,
planning and execution.
The Company will maintain a national call center and help desk by combining
the existing help desks, dispatch centers and telephone support of the Founding
Companies. The Company will build upon these established functions through
development of an integrated automated support system. A customer will be given
a single number to call and will be routed through menu selection to the
appropriate Founding Company that has the necessary expertise to respond to the
customer's needs from application assistance and product support to dispatch of
maintenance technicians. The call center and help desk personnel will have both
the application and technical skills required to provide quality support to the
Company's installed customer base and to facilitate additional sales of products
and services. This service will be made available to customers under maintenance
and support contracts which include access to the call center and help desk, as
well as to non-contracting customers who will be charged on a per call basis.
For the nine months ended September 30, 1997, professional services
represented 25.7% of the Company's total revenues on a pro forma basis.
Proprietary Software. The Company will also sell and support these
document management software products including Step2000, developed by UDMS, and
Network File Manager(3.0) ("NFM(3.0)"), developed by Synergis, as well as
Cimage, a document management software product currently distributed solely by
ACCESS in North America.
Cimage is a premier enterprise-wide document management, distribution and
retrieval system with security and access control, revision handling, storage
management, document structuring, document check-in and check-out, and audit
trail. This allows customers to reduce time for product introduction, improve
effectiveness, comply with statutory regulations and better manage product and
project life cycles.
Step2000 is a point and click object oriented document management and
workflow application builder which enables the automation of business processes
without programming. Step2000 is an open, distributed, client-server based
system which is highly scalable and effective for all sizes of installations,
from small work groups to multi-site, multidepartmental organizations.
NFM(3.0) is a document management solution allowing CAD work groups to
manage, track, view and secure engineering drawings and related documents.
NFM(3.0) is network independent, runs on most personal computers and provides a
streamlined, intuitive interface which gives the user both high functionality
and ease of use.
The Company believes these document management products will enable the
Company to offer customized document management solutions to clients of any
size. Furthermore, these offerings are capable of stand-alone use as well as
fully integrated use with a client's design automation systems.
For the nine months ended September 30, 1997, sales of proprietary software
represented 8.9% of the Company's total revenues on a pro forma basis.
Hardware. The Company will continue to provide its customers with PCs,
work stations, and servers primarily through sales of Sun Microsystems,
Hewlett-Packard and multiple Intel-based products. The Company also expects to
continue to sell certain peripheral products such as scanners, plotters and
printers as part of an integrated customer solution. Although the Company
intends to expand sales of high end hardware throughout the Company, it expects
that hardware sales will usually be supplied with sales of software and
services, although customer acceptance of hardware generally is not conditioned
upon customer acceptance of software, services or other hardware.
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For the nine months ended September 30, 1997, sales of hardware represented
18.0% of the Company's total revenues on a pro forma basis.
SALES AND MARKETING
The Company's sales and marketing staff initially will consist of
approximately 70 persons including management personnel with sales
responsibilities and experience. The sales staff has significant experience in
the sale of information technology products and services and a high level of
technical proficiency. The Company believes an emphasis on expanding and
developing its direct sales force will lead to better account penetration and
management, long term customer relationships and opportunities for additional
sales to its existing clients. It is expected that the Company's senior
engineers will often participate with the sales staff in pre-sale activities as
well as implementation of the customized solution. It is the Company's belief
that such participation will facilitate customized technology solutions for the
customer as well as more targeted sales presentations focusing on the customer's
return on investment.
In addition to supporting a direct sales force, the Company intends to
provide technical support and telemarketing services through a centralized call
center staffed with trained personnel on a 7-day a week 24-hour a day basis. The
Company believes that providing technical support services and focusing on
customer service will enhance its client relationships as well as generate
incremental sales.
The Company's marketing organization will develop the overall marketing
strategy including strategic product plans, public relations, sales material,
sales presentations, catalogue sales, and lead generation and fulfillment. They
also will be responsible for the Company's Internet strategy and will assist in
the cross-utilization throughout the Company of successful strategies developed
by one or more of the Founding Companies.
The Company expects to generate sales leads directly from manufacturers and
product and service suppliers, to be a team participant with other large systems
integrators on major projects for larger customers, and to develop alternate
channels to resell or license the Company's proprietary products and tools.
CUSTOMERS
The Company's clients represent a diverse range of businesses in terms of
both size and industry concentration. During 1996, the Founding Companies
provided products and/or services to over 12,000 customers nationwide.
Additionally, due to their reputations for delivering quality products and
services in their local markets, the Founding Companies have established client
relationships with over 34,000 customers during the history of their respective
organizations. Such clients represent primarily medium to larger sized
businesses and include Fortune 1000 corporations and professional firms as well
as government and educational institutions. The following is a partial
representative list of the Company's clients:
Allen Bradley
Allergan
Amoco Pipeline
Arco
Ashland Chemical
AT&T
Center for Design Control
Charles Schwab
Chrysler Technology Ctr.
Coca-Cola
Delta Airlines
Detroit Diesel
Digital Equipment Corp.
Dupont Merck
Ford Motor Company
Fujitsu
General Electric
Georgia Power
GTE
Hallmark Cards
Harvard University
IBM
Kimberly Clark
Komatsu
Los Alamos Labs
M & M Mars
Marathon Oil
M.I.T. Lincoln Labs
Mobil Oil
Northwest Airlines
Panasonic
Polaroid Corporation
Pratt & Whitney
Raytheon
Siemens
Sony
Sprint
Sun Microsystems
The Gillette Company
United Technologies
University of Georgia
University of North Carolina
Unocal
United Parcel Service
W.R. Grace Co.
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To date, the Founding Companies have worked with such clients in a limited
capacity and have at times been constrained from delivering a complete
multi-location design automation solution which includes hardware and software
as well as related integration and consulting services. The Company believes
that, following the consummation of the Acquisitions and this Offering, it will
be well positioned to respond to the full design automation needs of both its
current clients and prospective clients on a national basis. The Company intends
to combine strong, local management with an understanding of the dynamics of the
local market, and a national corporate infrastructure to deliver the most
comprehensive product and service offering to its clients.
SUPPLIERS
The Company expects to continue to purchase design automation software as
well as hardware and other related products directly from the approximately 55
manufacturers whose products the Founding Companies currently resell. In
general, a reseller must be authorized by a manufacturer to sell that
manufacturer's products. Each Founding Company has entered into separate
authorization agreements with certain of these manufacturers. Typically, these
authorizations provide that the Founding Company has been appointed, on a
non-exclusive basis, as an authorized dealer of specified products of the
manufacturer. Most of the authorization agreements, including those with
Autodesk, Bentley and Hewlett-Packard, provide that the manufacturer may
terminate the agreement with or without cause upon 30 to 90 days notice or
immediately upon the occurrence of certain events. The Founding Companies'
current arrangements with these major hardware manufacturers generally provide
protection against declines in the list price. Additionally, manufacturers of
hardware, software and related products permit resellers to pass through to
customers all warranties applicable to the manufacturers' products.
The two primary manufacturers of design automation software which the
Company resells are Autodesk, the leader in design automation software for the
workstation, and Bentley. Autodesk recently acquired Softdesk, a leading
developer of software enhancements for the AEC market. Each of the Founding
Companies, except for ACCESS and UDMS, is an authorized Autodesk reseller and,
except for ACCESS, UDMS and Computers for Design, each of the Founding Companies
has qualified as an Autodesk Authorized Systems Center ("ASC") for one or more
of Autodesk's product groups. Four of the Founding Companies are authorized
Bentley resellers.
The Autodesk ASC authorization is the highest level of recognition afforded
by Autodesk to a reseller and requires, among other things, that a reseller
maintain minimum volume requirements as well as a certain number of trained
sales representatives and technicians. Additionally, to achieve this
authorization, the Founding Company must already have been designated by
Autodesk as an Authorized Premier Support Center in the particular market
segment. These designated ASCs are published and promoted by Autodesk through
its support referral program.
The Company and Autodesk have entered into a letter agreement pursuant to
which Autodesk has consented to the assumption by the Company of all agreements
between each of the Founding Companies and Autodesk upon the consummation of the
Acquisitions. The Company anticipates entering into similar agreements with both
Cimage and Bentley. The Company also expects to enter into negotiations with
each of these suppliers upon the consummation of the Acquisitions and the
Offering concerning the ongoing relationship between the two companies.
The Company will also continue to resell certain hardware and peripheral
products, primarily those manufactured by Sun Microsystems, Hewlett-Packard and
Tri-Star. Sun Microsystems manufactures one of the leading UNIX-based
client-server platforms in design automation. Hewlett-Packard is the leading
manufacturer of printers and plotters for design automation and is expected to
continue to be one of the Company's primary suppliers of these peripheral
products. The Company also expects to continue to resell Tri-Star workstations
which are designed for the Intel-based high-end design automation user.
Autodesk, Bentley and Sun Microsystems recognize leading resellers through
various awards and award programs. Most of the Founding Companies have been
recognized by one or more of these suppliers as leading
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resellers through awards for meeting certain volume levels as well as excellence
in customer support and service.
INFORMATION SYSTEMS
Each of the Founding Companies currently has information technology systems
in place which the Company intends to maintain as it implements its two part
information system strategy upon consummation of the Acquisitions.
The first part of the strategy relates to the procedures governing the
combined entity immediately following the Acquisitions. Because two of the
Founding Companies, representing approximately 35% of the Company's revenue,
already use the same accounting and finance system, the Company will immediately
combine the accounting systems of those companies. Over the next three quarters,
the Company will consolidate the accounting systems of the Founding Companies
for reporting and control purposes. This will insure that the Company will have
accurate and complete accounting information and maintain essential accounting
controls. Furthermore, the Company will immediately centralize the cash
management function.
As part of the second stage of its strategy, the Company is reviewing the
existing sales information, marketing, communications services and other systems
at each of the Founding Companies. The expectation is to implement an overall
technology strategy which is cost effective, complements the Company's sales and
marketing strategies and is capable of supporting future growth. This overall
strategy will be characterized by an umbrella architecture, including uniform
platforms and operating systems. The Company intends to implement this longer
term strategy over the next six to twelve months, balancing the need for
enterprise wide consistent systems with the need to minimize and manage the
level of disruption of day-to-day operations.
ACQUISITION PROGRAM
The Company believes that, after the closing of the Offering, there will
remain significant opportunities to benefit from the ongoing industry
consolidation through additional acquisitions of other independent design
automation and document management businesses. As part of its strategic plan,
the Company expects to implement an active acquisition program designed to enter
additional markets, gain market share, and acquire additional products and
capabilities within existing markets. Although the Company is not at this time a
party to any agreements to make any particular acquisitions, it has assumed all
rights and obligations of Synergis-PA related to a non-binding letter of intent,
dated August 26, 1997, giving the Company the right to acquire all of the
outstanding shares of Configured Systems, Inc. for approximately $450,000 within
30 days of completion of the Offering. See "Risk Factors -- Risks Generally
Associated with Acquisitions" and "Certain Transactions -- Other Transactions."
Geographic Expansion Acquisitions. The Company generally expects to pursue
acquisitions based on a two tiered primary and supplementary acquisition
strategy, determined by the Company's existing presence in a particular
geographic market. A primary acquisition will be one which will create a
significant presence for the Company in the geographic market in which the
acquisition candidate is located. A supplementary acquisition will be one in
which the candidate is located in a market where the Company already has a
significant presence.
The Company intends to make primary acquisitions in targeted areas by
acquiring established local companies with strong market positions. In analyzing
potential primary acquisition candidates, the Company will look for experienced
and high quality management, a strong customer base and a history of
profitability. It is expected that potential primary acquisition candidates will
be similar in product and service offerings, as well as market position, to the
Founding Companies and will be located in major metropolitan areas. These
acquisitions will enable the Company to benefit from the operating leverage of
its existing businesses by acquiring additional market share and revenue in new
markets.
The second part of the Company's geographic expansion acquisition strategy,
supplemental acquisitions, will involve the acquisition of design automation and
document management companies that will either increase the Company's product
and service offerings in a particular geographic region or increase its share of
the market for those products and services it already offers in that region. In
making such acquisitions, the Company will evaluate the needs of the market and
focus on local companies which can bring the desired
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additional sales and services capabilities. In general, these acquisitions are
expected to be smaller than a primary acquisition.
Proprietary Software Acquisitions. To increase its proprietary product
offerings, margins and profitability, the Company expects to acquire, on a
limited basis, existing proprietary software through the acquisition of
complementary software companies or the acquisition or licensing of
complementary software products.
The Company believes it will be well received by other design automation
and document management product and services companies because of its strategy
of retaining the owners and management of acquired companies, its intent to
improve acquired companies' profitability by keeping day-to-day operational
decision making at the local level while achieving economies of scale through
centralization of general and administrative functions, its expected ability to
provide them with access to additional capital and its ability to offer owners
of potential acquisition candidates a combination of cash and equity in the
Company for their businesses.
COMPETITION
The design automation and document management reseller industry is highly
competitive, fragmented and served by numerous firms, many of which serve only
their respective local markets. Although the Company believes that only Rand
provides a mix of products and services similar to that of the Company,
competition will also come from participants in a variety of market segments,
including systems consulting and integration firms, professional service
divisions of computer equipment companies and software development and marketing
companies.
The Company expects its competitors will vary depending on the geographic
region. As there is no other company in both the design automation and document
management channel with national coverage with the exception of Rand, the
majority of the Company's competition is expected to come primarily from smaller
regional and local companies with a strong presence in their respective local
markets. The Company believes that its ability to compete effectively will
greatly depend on attracting and retaining the highest level of sales, service
and systems integration personnel. See "Risk Factors -- Competition."
PROPERTY AND FACILITIES
The Company has principal offices in various locations around the United
States, all but one of which are located on property leased by the Company. The
lease terms range from two years to ten years, with most lease terms being
either three or five years. Six of the Company's offices are leased on a
month-to-month basis. The Company considers all of its offices, which are
described in the following table, to be well-suited to its present and currently
anticipated future requirements. However, the Company does not believe that any
of the leases is material to the operation of the Company.
<TABLE>
<CAPTION>
AGGREGATE ANNUAL
LOCATION LEASED/OWNED FOUNDING COMPANY LEASE PAYMENT
------------------------------- ------------ --------------------- ----------------
<S> <C> <C> <C>
Irvine, CA..................... Leased ACCESS $ 44,957
Englewood, CO.................. Leased Computers for Design 53,543
Glastonbury, CT................ Leased DTI 36,970*
Atlanta, GA.................... Leased Applied 76,701
Hebron, KY..................... Leased ACCESS 58,656*
Boston, MA..................... Leased DTI 15,979
Gladwin, MI.................... Owned Devtron Russell 8,954
Grand Rapids, MI............... Leased Devtron Russell 5,820
Traverse City, MI.............. Leased Devtron Russell 3,000
Lee's Summit, MO............... Leased Mid-West CAD 54,180
Bedford, NH.................... Leased DTI 80,160
Albuquerque, NM................ Leased Computers for Design 5,100
Albany, NY..................... Leased DTI 10,800
Peekskill, NY.................. Leased DTI 8,230
Greensboro, NC................. Leased Applied 6,483
Beachwood, OH.................. Leased Technical Software 149,978
Cincinnati, OH................. Leased ACCESS 166,780
Leased UDMS 34,000
Quakertown, PA................. Leased Synergis-PA 85,809
</TABLE>
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<TABLE>
<CAPTION>
AGGREGATE ANNUAL
LOCATION LEASED/OWNED FOUNDING COMPANY LEASE PAYMENT
------------------------------- ------------ --------------------- ----------------
<S> <C> <C> <C>
York, PA....................... Leased Synergis-PA 8,714
Alexandria, VA................. Leased CADD Microsystems 98,094
</TABLE>
- ---------------
* Estimated based on partial years only.
LICENSES AND PROPRIETARY RIGHTS
To a significant degree, the Company's products consist of third party
software and hardware, which sometimes are integrated with the Company's
proprietary software. The Company does not hold any patents and holds only one
copyright with respect to its products. To the extent possible, the Company
attempts to protect its use of third party software and hardware with
contractual exclusivity and nondisclosure provisions. To protect its proprietary
product components, the Company relies upon the law of trade secrets,
nondisclosure agreements with employees and others and restrictions incorporated
into agreements with customers. The Company has federal trademark protection
covering the names of a number of the Founding Companies and software packages
and has copyright protection covering a systems integration proposal and network
file management software. In general, unauthorized use of any of these names or
systems constitutes a violation of the Company's trademarks, trade names or
copyrights. See "Risk Factors -- Protection of Intellectual Property."
The trademarks, trade names and copyrights owned by the Company are
summarized below:
<TABLE>
<CAPTION>
MARK, NAME, PROCESS OR LOGO FOUNDING COMPANY TYPE(1)
---------------------------------------------------- ------------------ -----------
<S> <C> <C>
"ACCESS"............................................ ACCESS trademark
"Applied Software".................................. Applied trademark
"ACADemic".......................................... Applied trademark
"ACADALOG"(2)....................................... Applied trademark
"CDMS".............................................. Applied trademark
"CDView"............................................ Applied trademark
9-block logo........................................ Applied trademark
"ComputerSmith"..................................... DTI trade name
"Synergis".......................................... Synergis-PA trademark
"Synergis Network File Manager"..................... Synergis-PA trademark
"The Supply Shop"................................... Technical Software trademark
"Software Helpline"................................. Technical Software trade name
Step2000(2)......................................... UDMS trademark
</TABLE>
- ---------------
(1) All listed trademarks are registered with the U.S. Patent and Trademark
Office. "Software Helpline" is a trade name registered with the State of
Ohio. "ComputerSmith" is a trade name registered with the State of New
Hampshire.
(2) An application covering this mark is pending with the U.S. Patent and
Trademark Office.
PERSONNEL
As of December 1, 1997, the Company employed approximately 325 persons on a
combined pro forma basis, approximately 305 of whom were employed on a full-time
basis (30 hours a week or more), including approximately 45 management
personnel. The Company considers approximately 90 of its employees to be highly
skilled technical personnel. The Company's continued success will depend on its
ability to attract and retain qualified management personnel and highly trained
technical personnel. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its employee relations to be good.
LITIGATION
There are no material legal proceedings pending or, to the best of
management's knowledge, threatened against the Company or any of the Founding
Companies.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of January 1, 1998
concerning each of the Company's directors and executive officers, including
persons who will become directors or executive officers following consummation
of this Offering:
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------------------- --- --------------------------------------
<S> <C> <C>
Terry L. Theye........................ 53 Chairman of the Board, Chief Executive
Officer and President
Thomas R. McLean...................... 45 Senior Vice President of Business
Development and Marketing
Scott D. Watkins...................... 48 Senior Vice President of Operations
and Services
Daniel B. Dolan(1).................... 51 Divisional President and Director
Bonnie L. Johnson..................... 49 Vice President, Secretary and General
Counsel
Jeffrey A. Pakrosnis.................. 34 Vice President and Chief Financial
Officer
Michael D. Theye...................... 31 Vice President of Corporate
Integration
William G. Kagler(1)(3)............... 65 Director
James B. Koons(1)(2)(3)............... 44 Director
Norma Skoog(1)(2)(3).................. 47 Director
Dennis J. Sullivan, Jr.(1)(2)......... 65 Director
</TABLE>
- ---------------
(1) Will become a director upon the closing of the Offering.
(2) Will become a member of the Audit Committee effective upon the closing of
the Offering.
(3) Will become a member of the Compensation Committee effective upon the
closing of the Offering.
Terry L. Theye has served as the Chief Executive Officer and President of
the Company since August 1997 and Chairman of the Board since October 1997. He
also serves as Chairman of Growth Management Advisors, Inc., a Cincinnati-based
consulting firm, which he founded in 1996. Prior to his positions with these
companies, Mr. Terry Theye was the Chairman and Chief Executive Officer of The
Future Now, Inc., a Cincinnati based national computer sales and consulting
company which he founded in 1978. The Future Now, Inc. was publicly traded from
1991 until its sale in August 1995. Mr. Theye is the father of Michael D. Theye.
Thomas R. McLean joined the Company as its Senior Vice President of
Business Development and Marketing in August 1997. From July to August 1997 he
was a consultant to UDMS through his position with Growth Management Advisors,
Inc. Prior to that he was Vice President -- Sales and Marketing of LanVision,
Inc., a Cincinnati-based provider of health information systems, beginning in
March 1996. From 1975 to March 1996, Mr. McLean served in various management
positions with Cincom Systems, Inc., a Cincinnati based software development
company, where he was Vice President -- Marketing, Product and Corporate
Planning beginning in 1989.
Scott D. Watkins will be the Senior Vice President of Operations and
Services of the Company. Mr. Watkins is the President, Chief Executive Officer
and Chief Operating Officer of ACCESS Corporation, one of the Founding
Companies. He has held these positions since 1989.
Daniel B. Dolan will be the Divisional President and a director of the
Company. Mr. Dolan has been President of DTI Technologies, Inc., one of the
Founding Companies, since he founded it in 1984.
Bonnie L. Johnson joined the Company as its Vice President, Secretary and
General Counsel in October 1997. From 1995 to September 1997 she was Vice
President, General Counsel and Corporate Secretary of DAP Products, Inc., an
Ohio based manufacturer of caulks, sealants and adhesives which is a wholly
owned
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subsidiary of Wassal PLC, a British holding company. Prior to that Ms. Johnson
served as Associate General Counsel for The United States Shoe Corporation, a
Cincinnati based manufacturer of footwear, a position she held from 1993 to
1995. From 1990 to 1992 she was Managing Attorney for Lenscrafters, Inc., a
subsidiary of The United States Shoe Corporation.
Jeffrey A. Pakrosnis joined the Company as its Vice President and Chief
Financial Officer in August 1997. From May to August 1997 he was a consultant to
UDMS through his position with Growth Management Advisors, Inc. From 1986 to May
1997 he was with the certified public accounting firm KPMG Peat Marwick LLP,
serving as senior manager in that firm's Information, Communications and
Entertainment practice from 1992 to 1997. Mr. Pakrosnis is a certified public
accountant.
Michael D. Theye joined the Company as its Vice President of Corporate
Integration in August 1997. From June to August 1997 he was a consultant to UDMS
through his position with Growth Management Advisors, Inc. Prior to that Mr.
Michael Theye was General Manager of Queen City Vending, Inc., a Cincinnati
based provider of food vending services, from 1995 to June 1997. From 1991 to
1995, Mr. Michael Theye served in various management positions with The Future
Now, Inc., including two years as Director of Operations. Mr. Michael Theye is
the son of Terry L. Theye.
William G. Kagler is the former President and Chief Executive Officer of
Skyline Chili, Inc., a Cincinnati based restaurant and frozen food firm, a
position he held from 1989 until 1992. From 1992 until 1995 he was Chairman of
the Executive Committee of the Board of Directors of Skyline Chili, Inc. Mr.
Kagler is also a director of The Ryland Group, Inc., Fifth Third Bancorp and
Union Central Life Insurance Co.
James B. Koons is the President of Confluence Enterprises, Inc., an Oregon
based real estate development company of which he is the sole principal. He has
held this position since 1989.
Norma Skoog founded Growth Management Advisors, Inc. in 1996 and serves as
its President. From 1992 to 1995, she was Vice President, Secretary and General
Counsel of The Future Now, Inc. Prior to that Ms. Skoog served as Vice President
and Secretary of The Kroger Co., a Cincinnati based national supermarket
company, a position she held from 1989 to 1992.
Dennis J. Sullivan, Jr., is an Executive Counselor at Dan Pinger Public
Relations, Inc., a position he has held since 1993. Prior to that he was
Executive Vice President and Chief Financial Officer of Cincinnati Bell, Inc.,
former President of Cincinnati Bell Telephone and served on the board of
Cincinnati Bell, Inc. and Cincinnati Bell Telephone Company for ten years. Mr.
Sullivan is also a director of Fifth Third Bancorp and ACCESS Corporation.
Although the positions of Chairman of the Board, Chief Executive Officer
and President are currently held by Mr. Terry Theye, the Company anticipates
that the size and complexity of its business operations after the Acquisitions
may require the creation of an additional executive position with the title of
President and Chief Operating Officer. This officer would be responsible for
management of the Company's day-to-day operations, and would report to Mr. Terry
Theye, as the Chairman of the Board and Chief Executive Officer.
EMPLOYMENT AGREEMENTS; EXECUTIVE COMPENSATION
Messrs. Terry Theye, McLean, Watkins, Dolan, Pakrosnis, and Michael Theye
and Ms. Johnson have each entered into an employment agreement with the Company,
effective as of the date of the Offering. The provisions of each of the
agreements are substantially similar. The salary and incentive compensation of
each position do, however, vary. Annual salaries for Messrs. Terry Theye,
McLean, Watkins, Dolan, Pakrosnis, and Michael Theye and Ms. Johnson are
$120,000, $120,000, $170,000, $150,000, $90,000 and $90,000, and $150,000,
respectively. Annual incentive compensation may also be paid to each of the
officers in amounts of up to $120,000, $120,000, $60,000, $100,000, $30,000 and
$30,000, and $20,000, respectively. The terms of the incentive compensation will
be based on achievement of profitability objectives for the Company, except that
the bonus for Mr. Dolan will be based on achievement of profitability objectives
for the divisional operations of the Company. Additionally, $30,000 of Mr.
McLean's incentive compensation through July 6, 1998 is guaranteed. Furthermore,
Mr. McLean has been granted a warrant (the "McLean Warrant") to
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purchase 4,226 shares of the Company's Common Stock at $2.37 per share. The
warrant is first exercisable on the closing date of the Offering and expires on
the fifth anniversary of the closing.
Mr. McLean's, Mr. Dolan's and Ms. Johnson's agreements are each for a three
year term, Messrs. Watkins and Pakrosnis' agreements are each for a two year
term and each of the other agreements is for a one year term. Each of the
agreements provides for severance pay in the event the agreement is terminated
by the Company without cause or by the officer with cause, as defined in each
agreement. The amount of the severance pay is one year of salary except that
Messrs. Dolan and Pakrosnis and Ms. Johnson will receive severance pay in such
an instance for the greater of the remaining term of the employment agreement or
one year. The agreements may also be terminated by the Company with cause, as
defined in the agreement, or by the officer without cause. In such cases, no
severance will be paid to the officer. Each of the agreements also includes an
agreement by the officer not to compete with the Company for one year after
termination of the agreement, except that Messrs. Dolan and Pakrosnis' and Ms.
Johnson's agreements provide, in general, that the non-compete extends for the
greater of the remaining term of the employment agreement or one year in the
event the officer is entitled to severance pay and for one year if the officer
is not entitled to severance pay. Mr. Terry Theye's agreement also provides that
he may continue to hold the position of Chairman of Growth Management Advisors,
Inc., although his intention is to devote such time and effort as is necessary
to assume and discharge those responsibilities commensurate with his position as
Chairman, C.E.O. and President of the Company.
Additionally, Mr. Watkins had entered into an Executive Retention Agreement
with ACCESS, which among other things, provided for certain benefits for Mr.
Watkins upon a change of control which resulted in the termination of his
employment or a decrease in his compensation or responsibilities. Mr. Watkins'
employment agreement with the Company specifically recognizes that the
acquisition of ACCESS is such a change of control and the Company has assumed
these obligations insofar as the acquisition of ACCESS and as to any subsequent
change of control for the two year term of the employment agreement. The
benefits that would be payable to Mr. Watkins upon such an occurrence would, in
general, include payment of his compensation and continuation of his benefits
for two years.
DIRECTORS' COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company receives an annual retainer of $12,000. All such non-employee
directors also receive a fee of $750 for each board meeting attended and $300
for each committee meeting attended (including meetings participated in by
telephone), except that chairs of committees receive $600 for each committee
meeting attended. Directors of the Company are reimbursed for expenses incurred
in attending meetings of the Board of Directors or committees and for other
expenses incurred in their capacity as directors of the Company. Each
non-employee director will receive an option to purchase 5,000 shares of Common
Stock upon election to the Board of Directors and thereafter will receive an
annual grant of an option to purchase 3,000 shares of Common Stock. One half of
each such option will vest six months after the date of grant and the remaining
half will vest on the first anniversary date of the date of grant.
STOCK OPTIONS
In August 1997, the Board of Directors and the shareholder of the UDMS
adopted the Company's 1997 Long-Term Incentive Plan. The purpose of the Plan is
to provide directors, officers and employees with additional incentives by
increasing their ownership interests in the Company. Awards under the Plan may
include both non-qualified stock options and restricted stock ("Stock Awards").
The Compensation Committee of the Board of Directors administers the Plan.
This committee has discretion to determine the terms of a Stock Award, including
the number of shares subject to option, the post-termination exercise period,
the number of shares of restricted stock, the term and the vesting schedule of a
Stock Award. However, pursuant to the terms of the Plan and without any action
on the part of the Compensation Committee, directors who are not otherwise
employed by the Company automatically will
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receive annual option grants in an amount and subject to such terms as are
specified in the Plan. See "Management -- Directors' Compensation."
The maximum number of shares of Common Stock of the Company that may be
issued under the Plan is 720,000. The Plan will remain in effect until
terminated by the Board of Directors. The Plan may be amended by the Board of
Directors without the consent of the shareholders of the Company, except that
any amendment, although effective when made, will be subject to shareholder
approval if required by any federal or state law or regulation or by the rules
of any stock exchange or automated quotation system on which the Common Stock of
the Company may then be listed or quoted.
In August 1997, the Company granted options to purchase a total of 141,000
shares of Common Stock at an exercise price of $9.60 per share, which was
determined to be the fair market value of the Common Stock as of the date of
grant. Each such option is a non-qualified option and these options were granted
to certain of the officers of the Company. One half of each such option vests
six months after the date of grant or on the first business day following the
date of the Offering, whichever is later, and the remaining half vests on the
first anniversary date thereof. These options are exercisable for a period of
ten years from the date of grant.
Effective on the date of the Offering, the Company intends to grant options
to its executive officers who were not granted options in August 1997, all at an
exercise price equal to the initial public offering price per share. One half of
these options will vest six months after the date of grant and the remaining
half will vest one year thereafter.
Options to purchase 141,000 shares of Common Stock were outstanding prior
to the date of this Prospectus, including grants to executive officers as
follows: Mr. Terry Theye, 72,000 shares; Mr. McLean, 28,000 shares; Mr.
Pakrosnis, 18,000 shares; and Mr. Michael Theye, 18,000 shares. The exercise
price for all options previously granted is $9.60. Options to be granted on the
date of this Prospectus, at the initial public offering price, to executive
officers and directors, are as follows: Mr. Watkins, 28,000 shares; Mr. Dolan,
28,000 shares; Ms. Johnson, 5,400 shares; Mr. Kagler, 5,000 shares; Mr. Koons,
5,000 shares; Mr. Sullivan, 5,000 shares; and Ms. Skoog, 5,000 shares.
Additional options to be granted on the date of this Prospectus, at the initial
public offering price, to other employees of the Company, equal 224,600 shares
in the aggregate.
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CERTAIN TRANSACTIONS
THE ACQUISITIONS
Each of the Founding Companies has entered into a separate definitive
agreement to be acquired by the Company simultaneously with the closing of the
Offering. Of the nine Acquisitions, eight are structured as statutory mergers
pursuant to which the Founding Company will be merged into the Company and the
shareholders of the Founding Company will receive consideration in the form of a
combination of cash and Common Stock of the Company valued at the Offering
price. The remaining Acquisition, involving ACCESS, is structured as a purchase
of assets and assumption of liabilities with the consideration payable to the
seller consisting solely of cash. Except in the case of Synergis-PA, all Common
Stock issued in the Acquisitions will be issued on a "tax free" basis under
Section 368(c) of the Internal Revenue Code of 1986.
All of the acquisition agreements contain customary representations and
warranties, conditions to closing and other terms and conditions. All of the
transactions are conditioned upon the closing of the Offering, and the Company's
obligation to close with each Founding Company is conditioned both upon the
closing of the Offering and the closing of all of the Acquisitions or, if less
than all, such number of Acquisitions as to be sufficient for purposes of the
Offering in the judgment of the Company and the Underwriters. In addition, the
Company's obligation to consummate the Acquisitions is in each case subject to
the Company's completion and reasonable satisfaction with the results of due
diligence reviews of the Founding Companies.
The representations and warranties in the acquisition agreements are in
each case subject to a one year survival period, and specified former
shareholders of the Founding Companies (except ACCESS, a publicly held
corporation) will be subject to certain indemnification obligations in the event
of breaches of the representations and warranties. The indemnification
obligations of those shareholders of the Founding Companies subject to
indemnification obligations are, in general, limited to 50% of the consideration
paid by the Company.
To the extent the former shareholders of the Founding Companies receive
shares of the Company's Common Stock as a result of the Acquisitions, their
shares will be subject both to certain limitations on resale and to a
Registration Rights Agreement. See "Description of Capital Stock -- Registration
Rights" and "Shares Eligible for Future Sale."
The following table summarizes certain features of each of the
Acquisitions:
<TABLE>
<CAPTION>
COMMON STOCK COMPONENT OF
CONSIDERATION(2)
-----------------------------
VALUATION
TOTAL ACQUISITION CASH COMPONENT AT $12.00
FOUNDING COMPANY CONSIDERATION(1) OF CONSIDERATION PER SHARE NO. OF SHARES
- ----------------------------------- ----------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
ACCESS............................. $ 3,000,000 $ 3,000,000 $ -- --
Applied............................ 4,550,000 2,275,000 2,275,000 189,583
CADD Microsystems.................. 750,000 225,000 525,000 43,750
Computers for Design............... 630,000 302,400 327,600 27,300
DTI................................ 7,000,000 3,500,000 3,500,000 291,667
Synergis-PA........................ 5,000,000 4,000,000 1,000,000 83,333
Technical Software................. 1,217,000 608,500 608,500 50,708
Mid-West CAD....................... 2,300,000 1,150,000 1,150,000 95,833
Devtron Russell.................... 1,400,000 420,000 980,000 81,667
----------- ----------- ----------- ---------
Total.................... $25,847,000 $ 15,480,900 $10,366,100 863,841
=========== =========== =========== =========
</TABLE>
- ---------------
(1) Table does not include "earn-outs" or other contingent consideration payable
after the Acquisitions close which are based on future performance. The
consideration paid to the Founding Companies was determined by arm's length
negotiation between UDMS and each Founding Company, taking into account
factors such as the historical financial and operating results, management
experience, levels and type of indebtedness and future prospects of each
Founding Company. Because pricing was determined
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by negotiation between unrelated parties, the Company did not believe obtaining
appraisals of the Founding Companies was necessary or beneficial.
(2) In each case the number of shares is based on the total dollar portion of
the consideration payable in stock divided by the Offering price. The
numbers of shares in this table are based upon the mid-point of the
estimated price range of the Offering, or $12.00 per share. The actual
numbers of shares will not be determinable until final pricing of the
Offering occurs.
In addition, several of the Acquisitions contain contingent future
consideration features, as follows:
ACCESS. ACCESS is eligible to receive additional consideration based on
the performance of its hardware services business for the 12 month period ending
April 30, 1998. Its performance will be measured based on the gross profit of
that business. The following describes the additional consideration based on
varying levels of gross profit of the hardware services business:
<TABLE>
<CAPTION>
GROSS PROFIT ADDITIONAL CASH CONSIDERATION
---------------------------------------------------- -----------------------------
<S> <C>
Greater than $2,000,000............................. $ 1,000,000
$1,950,000 to $1,999,000............................ 800,000
$1,900,000 to $1,949,999............................ 600,000
$1,850,000 to $1,899,999............................ 400,000
$1,800,000 to $1,849,999............................ 200,000
Less than $1,800,000................................ --
</TABLE>
DTI. The sole shareholder of DTI, Daniel Dolan, is eligible to receive
additional shares of Common Stock based on a formula which depends on such
factors as: (i) DTI's actual revenue for its fiscal year ending December 31,
1997; (ii) DTI's initial total consideration of $7.0 million, which includes
shares of Common Stock at $12.00 per share; (iii) the initial public offering
price; (iv) the pro forma combined actual revenues of the Company for the year
ended December 31, 1997; and (v) the number of shares of the Company outstanding
immediately after the closing of the Offering. The formula essentially provides
that the higher the ratio of the initial public offering price as compared to
the quotient of the Company's consolidated pro forma revenues for the year
ending December 31, 1997 divided by the number of shares outstanding as of the
closing of the Offering and/or the lower the ratio of DTI's initial total
consideration as compared to DTI's actual revenue for its fiscal year ending
December 31, 1997, the higher the additional consideration to be received by Mr.
Dolan.
Technical Software. The sole shareholder of Technical Software, Greg
Malkin, is eligible to receive additional shares of Common Stock based on
Technical Software's results for each of the years ending December 31, 1997 and
December 31, 1998. Mr. Malkin will receive additional shares having a value
equal to five times Technical Software's earnings before income taxes less the
initial consideration paid in connection with the merger of Technical Software
into the Company.
Synergis-PA. The shareholders of Synergis-PA are eligible to receive
additional consideration in cash based on revenues generated by sales of its
NFM(3) document management software and its Tool Belt and Tool Bar Builder
software. Additional consideration based on revenues generated by sales of
NFM(3) shall be paid as follows:
<TABLE>
<CAPTION>
ADDITIONAL CASH CONSIDERATION
REVENUES AS A PERCENTAGE OF REVENUES
---------------------------------------------------- -----------------------------
<S> <C>
$1 to $3,200,000.................................... 33.3%
$3,200,001 to $8,200,000............................ 20.0
Over $8,200,000..................................... 10.0
</TABLE>
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Additional consideration based on revenues generated by sales of Tool Belt
and Tool Bar Building shall be paid as follows:
<TABLE>
<CAPTION>
ADDITIONAL CASH CONSIDERATION
REVENUES AS A PERCENTAGE OF REVENUES
---------------------------------------------------- -----------------------------
<S> <C>
$1 to $1,000,000.................................... 33.3%
$1,000,001 to $3,000,000............................ 20
Over $3,000,000..................................... 10
</TABLE>
CADD Microsystems. The shareholders of CADD Microsystems are eligible to
receive additional consideration to the extent that the operating income of CADD
Microsystems as of March 31, 1998 for the preceding one-year period multiplied
by a factor of five exceeds $750,000. The potential additional consideration
will be payable 30% in cash and 70% in the form of Common Stock valued at the
Offering price. In the event that the actual operating income multiplied by a
factor of five is less than $750,000, the shareholders of CADD Microsystems will
be required to refund the entire amount of the deficit in either cash or
surrender of Common Stock.
In the case of all Founding Companies, certain of the individuals currently
managing the Founding Companies will, as a condition to the Acquisitions, enter
into employment agreements with the Company, having terms ranging from one to
three years. Each employment agreement contains a non-competition provision
prohibiting the employee from competing during the term of the employment
agreement and at least one year thereafter. Additionally, each employment
agreement provides for severance pay unless the employee is terminated for cause
or the employee terminates the agreement without cause.
OTHER TRANSACTIONS
Growth Management Advisors, Inc. ("GMA"), a Cincinnati-based consulting
firm, has acted as an advisor to UDMS and the Company in connection with the
Offering and the Acquisitions. Two consulting agreements, each dated February
19, 1997, cover the services of the principals of GMA, Mr. Terry Theye and Ms.
Skoog. Mr. Terry Theye's agreement expired on August 1, 1997, at which time he
became an employee of the Company. Ms. Skoog's agreement expires at the closing
of the Offering. See "Management -- Employment Agreements; Executive
Compensation."
For services rendered by Mr. Terry Theye pursuant to his consulting
agreement prior to August 1997, he received $10,000 a month (which aggregated
$53,571 as of August 1, 1997) plus reimbursement of out-of-pocket expenses and
was granted a warrant to purchase 42,258 shares of Common Stock from the Company
at $3.27 per share (the "Theye Warrant"). The warrant is first exercisable on
the day prior to the closing date of the Offering and expires on the fifth
anniversary of the closing. Additionally, Mr. Terry Theye and MedPlus entered
into an agreement pursuant to which MedPlus will pay Mr. Terry Theye $500,000 if
the Offering is completed on or before March 31, 1998. The Company will not be
required to reimburse MedPlus for such payment.
For services rendered by Ms. Skoog pursuant to her consulting agreement
with UDMS, she received $5,000 a month for the months of February through June,
November and December 1997 and $10,000 a month, for the months of July through
October 1997 (which aggregated $71,818 as of December 31, 1997). Ms. Skoog also
is entitled to be reimbursed for expenses and was granted a warrant (the "Skoog
Warrant") to purchase 35,590 shares of the Company's Common Stock from the
Company at a price per share equal to the initial public offering price. The
warrant is first exercisable on the closing date of the Offering and expires on
the fifth anniversary of the closing. In the event the over-allotment option is
exercised by the Underwriters, the Company will issue an additional warrant to
Ms. Skoog to purchase a number of shares of Common Stock equal to 1% of the
number of shares purchased under the over-allotment option. Such warrant will
otherwise have the same terms and conditions as the Skoog Warrant. Additionally,
Ms. Skoog and the Company entered into an agreement pursuant to which Ms. Skoog
will be paid $60,000 by the Company if the Offering is completed on or before
March 31, 1998.
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Additionally, GMA and UDMS entered into consulting agreements covering the
services of certain GMA employees, Messrs. McLean, Pakrosnis and Michael Theye,
dated July 7, May 26 and June 1, 1997, respectively. Under these agreements, GMA
received consulting fees with respect to services rendered by Messrs. McLean,
Pakrosnis and Michael Theye in the amounts of $12,500, $7,500 and $7,500 a
month, respectively, and was reimbursed for out-of-pocket expenses. The total
amount of such payments to GMA as of August 1, 1997 was $44,532. These
agreements covered services in connection with the Offering and the Acquisitions
and expired on August 1, 1997. See "Management -- Employment Agreements;
Executive Compensation."
Immediately after the 8,451.59-for-1 stock split to be effected immediately
prior to the Offering, but prior to the Offering itself, MedPlus will contribute
to the capital of the Company 62,321 shares of its Common Stock. This
contribution offsets the dilution associated with options and warrants
outstanding as of the date of this Prospectus to purchase shares of Common Stock
of the Company. MedPlus will not receive any consideration in connection with
this contribution.
Madison Financial Group Ltd. ("Madison") has acted as an advisor to MedPlus
and the Company in connection with the Acquisitions and the Offering. In
exchange for Madison's services, MedPlus originally granted Madison a warrant
(the "Madison Warrant") to purchase up to 126,773.85 shares of the Company's
Common Stock from MedPlus for $3.67 per share. Subsequently, MedPlus, the
Company and Madison modified this arrangement to provide for the payment by
MedPlus to Madison of a sum equal to the net value of the Madison Warrant, and
the number of shares subject to the Madison Warrant was reduced to 5,422. The
President of MedPlus, Richard A. Mahoney, is a principal of Madison.
On November 12, 1997, the Company assumed all rights and obligations
related to the letter of intent entered into on August 26, 1997 by and between
Synergis--PA and Configured Systems, Inc. ("Configured"), a provider of Auto-CAD
based integrated systems solutions and a hardware reseller. This non-binding
letter of intent provides that the Company has the right to acquire all of the
outstanding shares of Configured for approximately $450,000. In addition, prior
to assuming all rights and obligations related to the letter of intent the
Company agreed to pay the majority shareholder of Synergis--PA $50,000 in
expense reimbursement associated with the Configured acquisition costs within 30
days after the consummation of the Offering. Furthermore, simultaneously with
the closing of the acquisition of Configured, the Company will remit to the
majority shareholder of Synergis--PA $100,000 plus shares of the Company's
Common Stock in an amount equal to $50,000 divided by the Offering price per
share.
In June 1994, prior to its acquisition of UDMS, MedPlus purchased from UDMS
a debenture in the principal amount of $299,500 with interest at 10% per annum,
which became due December 31, 1995 but has never been repaid and remains
outstanding in its entirety. As of September 30, 1997, a total of $97,133 had
accrued as interest expense under the debenture, none of which has been paid.
All outstanding principal and interest under the debenture is expected to be
repaid out of proceeds of the Offering. MedPlus has informed the Company that it
will not convert the debenture. See "Use of Proceeds."
UDMS was acquired and became a wholly-owned subsidiary of MedPlus in
December 1995, for a purchase price of $1,700,000 which consisted of cash of
$831,000 and 99,274 shares of MedPlus common stock valued at $869,000, plus
contingent consideration of $278,000 in cash, all of which has been paid by
MedPlus. MedPlus has financially supported UDMS since that time. As a
wholly-owned subsidiary of MedPlus, UDMS incurred various operational
intercompany payment obligations to its parent corporation which are reflected
in UDMS's financial statements. As of September 30, 1997, the total amount of
such inter-company payables was $1.2 million. All such inter-company payables
are expected to be repaid out of the proceeds of the Offering. See "Use of
Proceeds."
MedPlus also has advanced substantial funds to or for the benefit of the
Company in connection with the Acquisitions and the Offering to cover legal,
accounting and other transactional costs, as well as personnel and consulting
costs related to the Offering, such as the payments to GMA and Mr. Terry Theye
and Ms. Skoog described above. MedPlus and UDMS are parties to a Reimbursement
Agreement dated May 28, 1997 pursuant to which UDMS was obligated to reimburse
all such amounts to MedPlus upon completion of the Offering. In October 1997 the
Reimbursement Agreement was amended to provide that MedPlus would itself
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bear a proportion of the costs of this Offering equal to the number of shares to
be sold by MedPlus in the Offering as a percentage of the total shares sold in
the Offering, exclusive of the Underwriters' over-allotment option and not to
exceed $432,692. All expenses of the Offering in excess of $1,500,000 will be
borne by the Company. As of September 30, 1997 the total amount payable under
the Reimbursement Agreement, after giving effect to the amendment obligating
MedPlus to bear a proportion of the Offering and Acquisition expenses, was
approximately $0.2 million.
Shortly after UDMS was acquired by MedPlus in December 1995, UDMS purchased
all of the outstanding shares of another entity, HWB, Inc. ("HWB"), which had
been owned by the same individuals who had previously owned UDMS. HWB was the
owner of UDMS' principal software product, Step2000. The consideration payable
by UDMS for the HWB shares consisted entirely of certain contingent payment
obligations based on UDMS' financial performance over a three year period ending
December 31, 1998. In August 1997, in order to facilitate the Offering, the HWB
stock purchase agreement was amended by agreement of the parties thereto and
MedPlus. Among other terms, UDMS agreed to make a $390,000 cash payment to the
former HWB shareholders on or before January 1, 1998, and MedPlus agreed to make
a $390,000 capital contribution to UDMS in order to fund such payment. UDMS is
not and will not be obligated to reimburse MedPlus any portion of such amount.
Additionally, the amended agreement provides for (i) an extension of the period
during which additional consideration contingent on UDMS's future revenue in
connection with Step2000 could be earned from the year ending December 31, 1998
to the year ended December 31, 2000, (ii) a reduction of the maximum future
contingent consideration payable from $3,000,000 to $2,610,000 and (iii) UDMS
Common Stock to be issued as part of the contingent consideration rather than
MedPlus common stock. On December 10, 1997 the parties agreed to a further
amendment to the stock purchase agreement to indicate that the $390,000 cash
payment to the former HWB shareholder and the capital contribution shall be made
at the closing of the Offering.
As a subsidiary of MedPlus, UDMS provided its Step2000 software to MedPlus
which incorporated the product into certain of its healthcare-related products.
MedPlus expects to continue using Step2000 in its healthcare products after the
Offering. Accordingly, on August 28, 1997, UDMS and MedPlus entered into a
Reseller's Software License Agreement pursuant to which MedPlus may use and
resell Step2000 on a non-exclusive basis for healthcare related applications.
The agreement has a perpetual term and requires MedPlus to pay license fees in
accordance with UDMS' standard fee schedule. Other terms of the agreement are
similar to UDMS' standard reseller agreement.
Two of the Founding Companies will exclude certain assets from the effect
of the merger into the Company. Applied is distributing its ownership interest
in Rastarex International, a.s. and its Workflow Engine Code Base to its
shareholders. Similarly, Devtron Russell is distributing its Devbar software to
its shareholders.
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<PAGE> 81
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Company's Common Stock as of the date of this Prospectus, and
after giving effect to the Acquisitions and the Offering, by (i) all persons
known to the Company to be the beneficial owner of 5% or more thereof, (ii) each
director and nominee for director, (iii) each executive officer and (iv) all
executive officers, directors and director nominees as a group. The table also
includes shares subject to options outstanding as of the date of the Offering,
whether or not exercisable within 60 days after the date of the Offering.
<TABLE>
<CAPTION>
PRIOR TO OFFERING AFTER OFFERING
-------------------------- ------------------------
SHARES SHARES
BENEFICIALLY SHARES TO BENEFICIALLY
NAME OWNED(1) PERCENT BE SOLD OWNED(1) PERCENT
- --------------------------------- ------------ ------- --------- ------------ -------
<S> <C> <C> <C> <C> <C>
Daniel B. Dolan(2)(3)............ -- -- 319,667 9.1%
Bonnie L. Johnson................ -- -- 5,400(7) 0.2
William G. Kagler................ -- -- 5,000(7) 0.1
James B. Koons................... -- -- 5,000(7) 0.1
MedPlus, Inc.(4)(5).............. 782,838(4) 100.0% 750,000 32,838 0.9
Thomas R. McLean................. 32,226(6) -- 32,226(6) 0.9
Jeffrey A. Pakrosnis............. 18,000(7) -- 18,000(7) 0.5
Norma Skoog...................... -- -- 40,590(8) 1.1
Dennis J. Sullivan, Jr........... -- -- 5,000(7) 0.1
Michael D. Theye................. 18,000(7) -- 18,000(7) 0.5
Terry L. Theye................... 114,258(9) -- 114,258(9) 3.2
Scott D. Watkins................. -- -- 28,000(7) 0.8
All directors, nominees and
executive officers as a group
(11 persons)................... 182,484(10) 591,141 15.6
</TABLE>
- ---------------
(1) The persons named have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them, subject to
community property laws where applicable and the information contained in
other footnotes to this table.
(2) Consists of 291,667 shares to be received by Mr. Dolan as a result of the
Acquisitions and 28,000 shares he has the right to acquire under an option
granted to him under the Company's 1997 Long-Term Incentive Plan.
(3) Mr. Dolan's address is 10 Commerce Park North, Bedford, New Hampshire 03102
(4) Includes 5,422 shares which Madison has the right to acquire from MedPlus
under the Madison Warrant and reflects a contribution to the capital of the
Company of 62,321 shares of the Company's Common Stock.
(5) MedPlus' address is 8805 Governor's Hill Drive, Cincinnati, Ohio 45249.
(6) Consists of 4,226 shares Mr. McLean has the right to purchase from the
Company under the McLean Warrant and 28,000 shares he has the right to
acquire under an option granted to him under the Company's 1997 Long-Term
Incentive Plan.
(7) Consists entirely of shares which may be acquired pursuant to options
outstanding under the Company's 1997 Long-Term Incentive Plan.
(8) Consists of 35,590 shares Ms. Skoog has the right to purchase from the
Company under the Skoog Warrant and 5,000 shares she has the right to
acquire under an option granted to her under the Company's 1997 Long-Term
Incentive Plan. Does not include the shares, if any, which Ms. Skoog will
have the right to purchase under an additional warrant which will be issued
to Ms. Skoog if the over-allotment option is exercised.
(9) Consists of 42,258 shares Mr. Terry Theye has the right to acquire from the
Company under the Theye Warrant and 72,000 shares he has the right to
acquire under an option granted to him under the Company's 1997 Long-Term
Incentive Plan.
(10) Consists solely of shares which may be acquired upon the exercise of
various warrants and options.
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<PAGE> 82
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Amended and Restated Articles of Incorporation of the Company provide
for one class of 10,000,000 shares of Common Stock without par value. The
holders of shares of Common Stock have one vote per share. None of the shares
has preemptive or cumulative voting rights, is subject to mandatory redemption,
or is liable for assessments or further calls. None of the shares has any
conversion rights.
The holders of shares of Common Stock are entitled to dividends if, when
and as declared by the Board of Directors from funds legally available therefor
and, upon liquidation, to share pro rata in any distribution to shareholders.
The Company does not anticipate declaring or paying any cash dividends for the
foreseeable future.
PREFERRED STOCK
The Amended and Restated Articles of Incorporation authorize 100,000 shares
of preferred stock, none of which is issued or outstanding. Following
consummation of the Offering, all of the authorized shares of preferred stock
will be available for issue from time to time in series having such
designations, preferences and rights, qualifications, and limitations as the
Board of Directors may determine without any approval of shareholders. Preferred
stock could be given rights, including voting and/or conversion rights, which
would adversely affect the voting power and equity of holders of Common Stock
and could have preference over Common Stock with respect to dividend and
liquidation rights. Issuance of preferred stock could have the effect of acting
as an anti-takeover device to prevent a change of control of the Company.
INDEMNIFICATION AND PERSONAL LIABILITY OF DIRECTORS AND OFFICERS
The Company's Code of Regulations provides that each person who is made a
party to or is otherwise involved in any action, suit or proceeding by reason of
the fact that he is or was a director or officer of the Company shall be
indemnified and held harmless by the Company to the fullest extent authorized by
Ohio law against all expenses, liabilities and losses, including attorneys'
fees.
REGISTRATION RIGHTS
In connection with the Acquisitions, the Company will issue approximately
863,841 shares of its Common Stock to the shareholders of certain of the
Founding Companies in private placement transactions exempt from registration
under the Securities Act. Such shares will constitute "restricted shares" within
the meaning of the Securities Act. The Company and such shareholders will enter
into a registration rights agreement pursuant to which such shareholders will
have the right to demand, at the Company's expense, registration of 50% of such
shares under the Securities Act commencing one year after the closing of the
Offering and 100% of such shares commencing two years after the closing of the
Offering for purposes of permitting their resale into the market. See "Shares
Eligible for Future Sale."
CERTAIN STATUTORY PROVISIONS AFFECTING BUSINESS COMBINATIONS
Section 1701.831 of the Ohio Revised Code generally provides that certain
"control share acquisitions" of shares of an "issuing public corporation" may be
made only with the prior authorization of the shareholders of the corporation,
unless the articles or code of regulations of the corporation otherwise provide.
In addition, Chapter 1704 of the Ohio Revised Code may be viewed as having an
anti-takeover effect. This statute, in general, prohibits an "issuing public
corporation" (the definition of which would include the Company) from entering
into a "Chapter 1704 Transaction" with the beneficial owner (or affiliates of
such beneficial owner) of 10% or more of the outstanding shares of the
corporation (an "interested shareholder") for at least three years following the
date on which the interested shareholder attains such 10% ownership, unless the
board of directors of the corporation approves, prior to such person becoming an
interested shareholder, either the transaction or the acquisition of shares
resulting in a 10% or more ownership position. A "Chapter 1704 Transaction" is
broadly defined to include, among other things, a merger or consolidation with,
sale of
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<PAGE> 83
substantial assets to, or the receipt of a loan, guaranty or other financial
benefit (which is not proportionately received by all shareholders) by the
interested shareholder. Following the expiration of the three-year period, a
Chapter 1704 Transaction with the interested shareholder is permitted only if
either (i) the transaction is approved by the holders of at least two-thirds of
the voting power of the corporation (or such different proportion as is set
forth in the corporation's articles of incorporation), including a majority of
the outstanding shares excluding those owned by the interested shareholder, or
(ii) the business combination results in the shareholders other than the
interested shareholder receiving a prescribed "fair price" for their shares. One
significant effect of Chapter 1704 is to cause an interested shareholder to
negotiate with the board of directors of a corporation prior to becoming an
interested shareholder.
In addition, Section 1703.43 of the Ohio Revised Code requires a person or
entity that makes a proposal to acquire the control of a corporation to repay to
that corporation any profits made from trades in the corporation's stock within
18 months after making the control proposal.
TRANSFER AGENT
The Fifth Third Bank, Cincinnati, Ohio, will serve as transfer agent for
the Common Stock.
LISTING ON AMERICAN STOCK EXCHANGE
The Company has applied for listing of its Common Stock on the American
Stock Exchange upon completion of this Offering under the symbol "SYN."
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock could be adversely affected by the
sale of substantial amounts of Common Stock in the public market. Upon
consummation of the Offering, 3,496,679 shares of Common Stock will be issued
and outstanding. All of the 2,600,000 shares sold in the Offering, except for
shares acquired by affiliates of the Company, will be freely tradeable. None of
the remaining 896,679 shares was issued in a transaction registered under the
Securities Act and, accordingly, such shares may not be sold except in
transactions registered under the Securities Act or pursuant to an exemption
from registration, including the exemption contained in Rule 144 under the
Securities Act.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of the acquisition of restricted shares of Common
Stock from the Company or from any affiliate of the Company, the acquiror or
subsequent holder thereof may sell, within any three-month period commencing 90
days after the date of this Prospectus, a number of shares that does not exceed
the greater of 1% of the then outstanding shares of Common Stock, or the average
weekly trading volume of Common Stock on the Nasdaq National Market during the
four calendar weeks preceding the date on which notice of the proposed sale is
sent to the Commission. Sales under Rule 144 are also subject to certain manner
of sale provisions, notice requirements and the availability of current public
information about the Company. If two years have elapsed since the later of the
date of the acquisition of restricted shares of Common Stock from the Company or
any affiliate of the Company, a person who is not deemed to have been an
affiliate of the Company at any time for 90 days preceding a sale would be
entitled to sell such shares under Rule 144 without regard to the volume
limitations, manner of sale provisions or notice requirements. Of the 896,679
shares referred to above, 32,838 would be eligible for resale under Rule 144
ninety days after the date of this Prospectus without regard to the volume
limitations, manner of sale provisions or notice requirements and the remaining
shares would be eligible for resale under Rule 144 one year after the date of
this Prospectus in compliance with the volume limitations, manner of sale
provisions and notice requirements.
The Company, its directors and officers, the controlling shareholders of
each of the Founding Companies, the Selling Shareholder and Madison Financial
Group Ltd. have agreed not to, directly or indirectly, offer, issue, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities exercisable for or convertible or exchangeable into Common Stock (the
"Securities") for a period of 180 days after the date of this Prospectus (the
"Lockup Period") without the prior written consent of The Robinson-Humphrey
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<PAGE> 84
Company, LLC except that the Company may issue Common Stock in connection with
future acquisitions and in connection with the Founding Company Acquisitions and
may offer and sell shares of Common Stock pursuant to earn-out arrangements with
certain Founding Company shareholders and its 1997 Long-Term Incentive Plan (the
"Plan"). Essentially all of the 896,679 shares referred to in the previous
paragraph are subject to the Lockup Period. In addition, the owners of the
Founding Companies have agreed, subject to certain limited exceptions for
transfers to related parties, not to, directly or indirectly, offer, sell,
contract to sell or otherwise dispose of any securities of the Company for a
period of one year after the date of this Prospectus. After such period, all of
such shares will be eligible for sale in accordance with Rule 144 promulgated
under the Securities Act, subject to the volume, holding period and other
limitations of Rule 144. See "Underwriting."
The Company has authorized the issuance of shares of Common Stock in
accordance with the terms of the Plan. The maximum number of shares of Common
Stock that may be awarded pursuant to the Plan may not exceed 20% of the
aggregate number of shares of Common Stock outstanding at the time of
determination (which maximum will be 720,000 shares upon consummation of the
Offering). Options to purchase 447,000 shares will be outstanding under the Plan
after the Offering. Additionally, at the time of consummation of the Offering,
the Company will have issued warrants to purchase an aggregate of 82,074 shares
of Common Stock. The shares issuable upon exercise of these warrants will not be
registered under the Securities Act and, therefore, if and when issued upon
warrant exercise, may not be sold except in transactions registered under the
Securities Act or pursuant to an exemption from registration. See "Certain
Transactions -- Other Transactions."
The former shareholders of the Founding Companies, who will hold in the
aggregate 863,841 shares of Common Stock upon consummation of the Offering, have
certain demand registration rights with respect to their shares of Common Stock,
commencing one year after the Offering. See "Description of Capital Stock --
Registration Rights."
Prior to the Offering, there has been no established trading market for
Common Stock, and no predictions can be made as to the effect that sales of
Common Stock under Rule 144, pursuant to a registration statement or otherwise,
or the availability of shares of Common Stock for sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common Stock
in the public market, or the perception that such sales could occur, could
depress the prevailing market price. Such sales may also make it more difficult
for the Company to issue or sell equity securities or equity-related securities
in the future at a time and price that it deems appropriate. See "Risk
Factors -- Shares Eligible for Future Sale."
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<PAGE> 85
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a copy
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part, the Underwriters named below (the "Underwriters")
have, severally and not jointly, agreed, through The Robinson-Humphrey Company,
LLC and, the Representatives of the Underwriters (the "Representatives"), to
purchase from the Company, and the Company has agreed to sell to the
Underwriters, the aggregate number of shares of Common Stock set forth opposite
their respective names:
<TABLE>
<CAPTION>
NAME OF UNDERWRITERS NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
The Robinson-Humphrey Company, LLC ..................................
McDonald & Company Securities, Inc. .................................
---------
Total................................................................ 2,600,000
=========
</TABLE>
The Underwriters are committed to take and pay for all of the shares of
Common Stock offered hereby (other than those covered by the over-allotment
option described below), if any are purchased.
The Underwriters have advised the Company that they propose to offer all or
part of the Common Stock offered hereby directly to the public initially at the
price to the public set forth on the cover page of this Prospectus, that they
may offer shares to certain dealers at a price which represents a concession of
not more than $ per share, and that they may allow, and such dealers
may reallow, a concession of not more than $ per share to certain other
dealers. After the commencement of this Offering, the price to the public and
the concessions may be changed.
The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase up to an additional
390,000 shares of Common Stock at the initial public offering price. The
Underwriters may exercise this option only to cover over-allotments, if any. To
the extent the Underwriters exercise this option, each of the Underwriters will
have a firm commitment, subject to certain conditions, to purchase the same
percentage thereof as the percentage of the initial 2,600,000 shares to be
purchased by that Underwriter.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act, and to
contribute to payments the Underwriters may be required to make in respect
thereof.
MedPlus, the Company and its officers and directors, the controlling
shareholders of each of the Founding Companies, and Madison Financial Group Ltd.
have agreed not to, directly or indirectly, offer, issue, sell, contract to sell
or otherwise dispose of any shares of Common Stock or any securities exercisable
for or convertible into or exchangeable into Common Stock (the "Securities"),
for a period of 180 days after the date of this Prospectus without the prior
written consent of The Robinson-Humphrey Company, LLC except for the grant and
exercise of employee stock options under the Plan and except that the Company
may issue shares of Common Stock in connection with the Acquisitions, earn-out
arrangements with certain Founding Company shareholders and future acquisitions.
In addition, the owners of the Founding Companies have agreed not to, directly
or indirectly, offer, sell, contract to sell or otherwise dispose of any
Securities for a period of one year after the date of this Prospectus; after
such period, all of such shares will be eligible for sale in accordance with
Rule 144 subject to the volume, holding period and other limitations of Rule
144.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price has been determined by negotiations
between the Company and the Representatives. Among the factors considered in
such negotiations were the Company's pro forma results of operations and
financial condition, prospects for the Company and for the industry in which the
Company operates, the Company's capital
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<PAGE> 86
structure and the general condition of the securities market. The estimated
offering price set forth on the cover of this Prospectus is subject to change as
a result of market conditions and other factors. See "Risk Factors -- No Prior
Public Market; Possible Volatility of Stock Price."
The Representatives have informed the Company that the Underwriters do not
expect sales to discretionary accounts to exceed 5% of the total number of
shares offered hereby and that the Underwriters do not intend to confirm sales
of shares to any accounts over which they exercise discretionary authority.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934. Over-allotment involves syndicate
sales of Common Stock in excess of the offering size, which creates a syndicate
short position. Stabilizing transactions permit bids to purchase the Common
Stock so long as the stabilizing bids do not exceed a specified maximum.
Syndicate covering transactions involve purchases of Common Stock in the open
market after the distribution has been completed in order to cover syndicate
short positions. Penalty bids permit the Underwriters to reclaim a selling
concession from a syndicate member when the shares of Common Stock originally
sold by such syndicate member are purchased in a syndicate covering transaction
to cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the Common Stock
to be higher than it would otherwise be in the absence of such transactions.
None of the transactions described in this paragraph is required, and, if they
are undertaken, they may be discontinued at any time.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock being offered
hereby will be passed upon for the Company by Dinsmore & Shohl LLP, 1900 Chemed
Center, 255 East Fifth Street, Cincinnati, Ohio 45202. Certain legal matters
will be passed upon for the Underwriters by Taft, Stettinius & Hollister LLP,
1800 Star Bank Center, 425 Walnut Street, Cincinnati, OH 45202-3957.
EXPERTS
The financial statements included in this Prospectus related to UDMS as of
December 31, 1995 and 1996 and September 30, 1997, and for the period from
December 14, 1995 through December 31, 1995, the year ended December 31, 1996
and the nine months ended September 30, 1997, have been included herein and in
the registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere in this
Prospectus, and upon the authority of said firm as experts in accounting and
auditing.
The financial statements included in this Prospectus related to UDMS as of
December 31, 1993 and 1994 and December 13, 1995 and for the years ended
December 31, 1993 and 1994 and for the period from January 1, 1995 through
December 13, 1995, have been included herein and in the registration statement
in reliance upon the report of Clark, Schaefer, Hackett & Co., independent
certified public accountants, appearing elsewhere in this Prospectus, and upon
the authority of said firm as experts in accounting and auditing.
The financial statements included in this Prospectus related to Applied as
of September 30, 1996 and 1997, and for each of the years in the three-year
period ended September 30, 1997, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere in this
Prospectus, and upon the authority of said firm as experts in accounting and
auditing.
The financial statements of ACCESS as of April 30, 1996 and 1997, and for
each of the years in the three-year period ended April 30, 1997, included in
this Prospectus, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
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<PAGE> 87
The financial statements included in this Prospectus related to DTI as of
December 31, 1995 and 1996 and September 30, 1997, and for each of the years in
the three-year period ended December 31, 1996 and for the nine months ended
September 30, 1997, have been included herein and in the registration statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere in this Prospectus, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements included in this Prospectus related to Technical
Software as of December 31, 1995 and 1996 and September 30, 1997, and for each
of the years in the three-year period ended December 31, 1996 and the nine
months ended September 30, 1997, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere in this
Prospectus, and upon the authority of said firm as experts in accounting and
auditing.
The financial statements included in this Prospectus related to Synergis-PA
as of September 30, 1996 and 1997, and for each of the years in the three-year
period ended September 30, 1997, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere in this
Prospectus, and upon the authority of said firm as experts in accounting and
auditing.
The financial statements included in this Prospectus related to Mid-West
CAD as of December 31, 1995 and 1996 and September 30, 1997, and for each of the
years in the three-year period ended December 31, 1996 and the nine months ended
September 30, 1997, have been included herein and in the registration statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere in this Prospectus, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements included in this Prospectus related to CADD
Microsystems as of December 31, 1995 and 1996 and September 30, 1997, and for
each of the years in the three-year period ended December 31, 1996 and the nine
months ended September 30, 1997, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere in this
Prospectus, and upon the authority of said firm as experts in accounting and
auditing.
The financial statements included in this Prospectus related to Devtron
Russell as of September 30, 1996 and 1997, and for each of the years in the
three-year period ended September 30, 1997, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere in this
Prospectus, and upon the authority of said firm as experts in accounting and
auditing.
The financial statements included in this Prospectus related to Computers
for Design as of December 31, 1995 and 1996 and September 30, 1997, and for each
of the years in the three-year period ended December 31, 1996 and the nine
months ended September 30, 1997, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere in this
Prospectus, and upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, schedules and exhibits thereto the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus, which is included as part of the
Registration Statement, does not contain all the information contained in the
Registration Statement, certain portions of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement. Statements made in this
Prospectus as to the contents of any contract, agreement or other document are
not necessarily complete; with respect to each such contract, agreement or other
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<PAGE> 88
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement is qualified in its entirety by such reference. The Registration
Statement may be inspected, without charge, at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices at
Citicorp Center, 500 West Madison Street, Room 1400, Chicago, IL 60661, and 7
World Trade Center, Suite 1300, New York, NY 10048 or on the Internet at
http://www.sec.gov. Copies of such material also can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
The Company intends to furnish to its shareholders annual reports
containing audited consolidated financial statements audited by KPMG Peat
Marwick LLP, independent certified public accountants, and make available
quarterly reports containing unaudited consolidated financial statements for
each of the first three quarters of each fiscal year. Immediately after closing
of the Acquisitions and the Offering, the Company intends to change its fiscal
year-end to September 30.
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<PAGE> 89
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PRO FORMA COMBINED FINANCIAL STATEMENTS
Basis of Presentation........................................................... F-4
Unaudited Pro Forma Combined Balance Sheet as of September 30, 1997............. F-5
Unaudited Pro Forma Combined Statement of Operations for the Year Ended December
31, 1996....................................................................... F-6
Unaudited Pro Forma Combined Statement of Operations for the Nine Months Ended
September 30, 1996............................................................. F-7
Unaudited Pro Forma Combined Statement of Operations for the Nine Months Ended
September 30, 1997............................................................. F-8
Notes to Pro Forma Combined Financial Statements................................ F-9
HISTORICAL FINANCIAL STATEMENTS:
UDMS
Independent Auditors' Report.................................................... F-15
Balance Sheets as of December 31, 1995 and 1996, and September 30, 1997......... F-16
Statements of Operations for the Period from December 14, 1995 to December 31,
1995, Year Ended December 31, 1996, and Nine Months Ended September 30, 1996
(unaudited) and 1997........................................................... F-17
Statements of Stockholder's Equity for the Period from December 14, 1995 to
December 31, 1995, Year Ended December 31, 1996, and Nine Months Ended
September 30, 1997............................................................. F-18
Statements of Cash Flows for the Period from December 14, 1995 to December 31,
1995, Year Ended December 31, 1996, and Nine Months Ended September 30, 1996
(unaudited) and 1997........................................................... F-19
Notes to Financial Statements................................................... F-20
UDMS
Independent Auditors' Report.................................................... F-33
Balance Sheets as of December 31, 1993 and 1994 and December 13, 1995........... F-34
Statements of Operations for the Years Ended December 31, 1993 and 1994 and for
the Period from January 1, 1995 to December 13, 1995........................... F-35
Statements of Stockholders' Deficit for the Years ended December 31, 1993 and
1994 and for the Period from January 1, 1995 to December 13, 1995.............. F-36
Statements of Cash Flows for the Years Ended December 31, 1993 and 1994 and for
the Period from January 1, 1995 to December 13, 1995........................... F-37
Notes to Financial Statements................................................... F-38
APPLIED
Independent Auditors' Report.................................................... F-43
Consolidated Balance Sheets (Restated) as of September 30, 1996 and 1997........ F-44
Consolidated Statements of Operations (Restated) for the Years Ended September
30, 1995, 1996 and 1997........................................................ F-45
Consolidated Statements of Stockholders' Equity (Deficit) (Restated) for the
Years ended September 30, 1995, 1996 and 1997.................................. F-46
Consolidated Statements of Cash Flows (Restated) for the Years Ended September
30, 1995, 1996 and 1997........................................................ F-47
Notes to Consolidated Financial Statements (Restated)........................... F-48
ACCESS
Independent Auditors' Report.................................................... F-53
Balance Sheets as of April 30, 1996 and 1997, and October 31, 1997
(unaudited).................................................................... F-54
Statements of Operations for the Years Ended April 30, 1995, 1996 and 1997, and
Six Months Ended October 31, 1996 (unaudited) and 1997 (unaudited)............. F-55
</TABLE>
F-1
<PAGE> 90
<TABLE>
<S> <C>
Statements of Capital Stock and Other Stockholders' Equity for the Years ended
April 30, 1995, 1996 and 1997, and Six Months Ended October 31, 1997
(unaudited).................................................................... F-56
Statements of Cash Flows for the Years Ended April 30, 1995, 1996 and 1997, and
Six Months Ended October 31, 1996 (unaudited) and 1997 (unaudited)............. F-57
Notes to Financial Statements................................................... F-58
DTI
Independent Auditors' Report.................................................... F-65
Balance Sheets as of December 31, 1995 and 1996, and September 30, 1997......... F-66
Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996,
and Nine Months Ended September 30, 1996 (unaudited) and 1997.................. F-67
Statements of Stockholder's Equity for the Years ended December 31, 1994, 1995
and 1996, and Nine Months Ended September 30, 1997............................. F-68
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996,
and Nine Months Ended September 30, 1996 (unaudited) and 1997.................. F-69
Notes to Financial Statements................................................... F-70
TECHNICAL SOFTWARE
Independent Auditors' Report.................................................... F-77
Balance Sheets as of December 31, 1995 and 1996, and September 30, 1997......... F-78
Statements of Earnings and Retained Earnings for the Years Ended December 31,
1994, 1995 and 1996, and Nine Months Ended September 30, 1996 (unaudited) and
1997........................................................................... F-79
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996,
and Nine Months Ended September 30, 1996 (unaudited) and 1997.................. F-80
Notes to Financial Statements................................................... F-81
SYNERGIS-PA
Independent Auditors' Report.................................................... F-85
Balance Sheets as of September 30, 1996 and 1997................................ F-86
Statements of Operations for the Years Ended September 30, 1995, 1996 and
1997........................................................................... F-87
Statements of Shareholders' Equity for the Years ended September 30, 1995, 1996
and 1997....................................................................... F-88
Statements of Cash Flows for the Years Ended September 30, 1995, 1996 and
1997........................................................................... F-89
Notes to Financial Statements................................................... F-90
MID-WEST CAD
Independent Auditors' Report.................................................... F-95
Balance Sheets as of December 31, 1995 and 1996, and September 30, 1997......... F-96
Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996,
and Nine Months Ended September 30, 1996 (unaudited) and 1997.................. F-97
Statements of Stockholders' Equity for the Years ended December 31, 1994, 1995
and 1996, and Nine Months Ended September 30, 1997............................. F-98
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996,
and Nine Months Ended September 30, 1996 (unaudited) and 1997.................. F-99
Notes to Financial Statements................................................... F-100
CADD MICROSYSTEMS
Independent Auditors' Report.................................................... F-104
Balance Sheets as of December 31, 1995 and 1996, and September 30, 1997......... F-105
Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996,
and Nine Months Ended September 30, 1996 (unaudited) and 1997.................. F-106
Statements of Stockholders' Equity (Deficit) for the Years ended December 31,
1994, 1995 and 1996, and Nine Months Ended September 30, 1997.................. F-107
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996,
and Nine Months Ended September 30, 1996 (unaudited) and 1997.................. F-108
Notes to Financial Statements................................................... F-109
</TABLE>
F-2
<PAGE> 91
<TABLE>
<S> <C>
DEVTRON, RUSSELL
Independent Auditors' Report.................................................... F-113
Balance Sheets as of September 30, 1996 and 1997................................ F-114
Statements of Operations for the Years Ended September 30, 1995, 1996 and
1997........................................................................... F-115
Statements of Stockholders' Equity for the Years ended September 30, 1995, 1996
and 1997....................................................................... F-116
Statements of Cash Flows for the Years Ended September 30, 1995, 1996 and
1997........................................................................... F-117
Notes to Financial Statements................................................... F-118
COMPUTERS FOR DESIGN
Independent Auditors' Report.................................................... F-122
Balance Sheets as of December 31, 1995 and 1996, and September 30, 1997......... F-123
Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996,
and Nine Months Ended September 30, 1996 (unaudited) and 1997.................. F-124
Statements of Stockholders' Deficit for the Years ended December 31, 1994, 1995
and 1996, and Nine Months Ended September 30, 1997............................. F-125
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996,
and Nine Months Ended September 30, 1996 (unaudited) and 1997.................. F-126
Notes to Financial Statements................................................... F-127
</TABLE>
F-3
<PAGE> 92
SYNERGIS TECHNOLOGIES, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
(UNAUDITED)
The following unaudited pro forma combined financial statements give effect
to the acquisitions by UDMS, a Founding Company, of (i) DTI, (ii) ACCESS, (iii)
Applied, (iv) Technical Software, (v) Devtron Russell, (vi) Synergis-PA, (vii)
Mid-West CAD, (viii) CADD Microsystems, and (ix) Computers For Design. The
Acquisitions will occur simultaneously with the closing of the Offering and will
be accounted for using the purchase method with DTI being treated as the
accounting acquiror. The unaudited pro forma combined financial statements also
give effect to the issuance of Common Stock by UDMS to shareholders of the
Founding Companies upon the effectiveness of the Offering. These statements are
based on the historical financial statements of UDMS and the Founding Companies
included elsewhere in this Prospectus and the estimates and assumptions set
forth below and in the notes to the unaudited pro forma combined financial
statements.
The unaudited pro forma combined balance sheet gives effect to the
Acquisitions and the Offering as if they had occurred on September 30, 1997. The
unaudited pro forma combined statements of operations give effect to these
transactions as if they occurred on January 1, 1996.
The pro forma adjustments are based upon preliminary estimates, currently
available information and certain assumptions that management deems appropriate.
In management's opinion, the preliminary estimates regarding allocation of the
purchase price of the Founding Companies are not expected to materially differ
from the final allocation. The purchase price allocation will be finalized after
the closing of the Acquisitions. The unaudited pro forma combined financial data
presented herein are not necessarily indicative of the results that UDMS and the
other Founding Companies, as a combined entity, would have obtained had such
events occurred at the beginning of the period, as assumed, or of the future
results of the Company. The unaudited pro forma combined financial statements
should be read in conjunction with the other financial statements and notes
thereto included elsewhere in this Prospectus.
F-4
<PAGE> 93
SYNERGIS TECHNOLOGIES, INC.
PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FOUNDING COMPANIES -- HISTORICAL
----------------------------------------------------------------------------
TECHNICAL DEVTRON MID-WEST
Dollars in thousands UDMS DTI ACCESS APPLIED SOFTWARE RUSSELL SYNERGIS-PA CAD
- ---------------------------------------------------- ------- ------ ------- ------- --------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ -- $ 11 $1,062 $ -- $ 186 $ 3 $ 207 153
Receivables, net of allowances..................... 484 1,767 3,089 1,561 730 249 1,031 269
Inventories, net of allowances..................... -- 289 147 56 180 213 105 144
Deferred income taxes.............................. -- 155 48 -- -- -- -- --
Deferred acquisition and offering costs............ 1,500 -- -- -- -- -- -- --
Other current assets............................... 28 74 96 140 -- 20 27 15
------- ------ ------ ------ ------- ----- ------- ----
Total Current Assets......................... 2,012 2,296 4,442 1,757 1,096 485 1,370 581
Fixed assets, net................................... 120 326 210 137 303 94 180 167
Capitalized software development, net............... 409 -- -- -- -- -- 171 --
Goodwill and other identifiable intangible assets... 887 606 243 -- -- -- -- --
Deferred income taxes............................... -- -- 549 -- -- -- -- --
Other assets........................................ 5 32 -- 8 14 -- 9 12
------- ------ ------ ------ ------- ----- ------- ----
Total Assets........................................ $ 3,433 $3,260 $5,444 $1,902 $ 1,413 $ 579 $ 1,730 $760
======= ====== ====== ====== ======= ===== ======= ====
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Lines of credit.................................... $ 630 $ 240 $ -- $ 500 $ -- $ 65 $ -- $ --
Long-term debt, current portion.................... -- 393 -- 92 90 18 18 12
Capital leases, current portion.................... -- 45 -- 16 -- -- -- --
Trade accounts payable............................. 709 1,309 175 1,478 382 182 870 239
Taxes payable...................................... -- -- 28 -- -- -- -- --
Due to affiliate................................... 1,232 -- -- -- -- -- -- --
Accrued expenses................................... 172 300 1,290 240 125 21 -- 75
Deferred revenue................................... 197 96 300 227 109 11 61 98
Debenture payable to affiliate..................... 300 -- -- -- -- -- -- --
Other current liabilities.......................... -- -- -- -- -- -- 77 --
------- ------ ------ ------ ------- ----- ------- ----
Total Current Liabilities.................... 3,240 2,383 1,793 2,553 706 297 1,026 424
Long-term debt...................................... -- 822 -- 50 97 64 81 7
Capital leases...................................... -- 14 -- 3 -- -- -- --
Deferred revenue.................................... -- -- 492 -- -- -- -- --
Deferred income taxes............................... -- -- -- -- -- -- -- --
Other long-term liabilities......................... -- -- -- -- -- -- -- 30
------- ------ ------ ------ ------- ----- ------- ----
Total Liabilities............................ 3,240 3,219 2,285 2,606 803 361 1,107 461
------- ------ ------ ------ ------- ----- ------- ----
Manditorily redeemable preferred stock.............. -- -- 1,500 -- -- -- -- --
------- ------ ------ ------ ------- ----- ------- ----
Shareholders' Equity (Deficit):
Common stock....................................... -- 14 488 37 1 2 1 10
Additional paid-in capital......................... 2,224 26 10,658 25 -- -- 39 34
Retained earnings (accumulated deficit)............ (2,003) 8 (9,472) (359) 609 216 583 255
Treasury stock, at cost............................ -- (7) (15) (407) -- -- -- --
Note receivable-stock issuance..................... -- -- -- -- -- -- -- --
Unearned compensation.............................. (28) -- -- -- -- -- -- --
------- ------ ------ ------ ------- ----- ------- ----
Total Shareholders' Equity (Deficit)......... 193 41 1,659 (704) 610 218 623 299
------- ------ ------ ------ ------- ----- ------- ----
Total Liabilities and Stockholder's Equity.......... $ 3,433 $3,260 $5,444 $1,902 $ 1,413 $ 579 $ 1,730 $760
======= ====== ====== ====== ======= ===== ======= ====
<CAPTION>
PRO FORMA
ACQUISITIONS PRO
CADD COMPUTERS AND OFFERING FORMA
Dollars in thousands MICROSYSTEMS FOR DESIGN COMBINED ADJUSTMENTS SYNERGIS
- ---------------------------------------------------- ------------ ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 84 $ 2 $ 1,708 $ (1,629)(a)(b)(d)(e) $ 79
Receivables, net of allowances..................... 407 267 9,854 -- 9,854
Inventories, net of allowances..................... 110 4 1,248 -- 1,248
Deferred income taxes.............................. -- -- 203 287(b) 490
Deferred acquisition and offering costs............ -- -- 1,500 (1,500)(a)(b) --
Other current assets............................... 10 7 417 -- 417
------ ---- ------- -------- -------
Total Current Assets......................... 611 280 14,930 (2,842) 12,088
Fixed assets, net................................... 158 42 1,737 -- 1,737
Capitalized software development, net............... -- -- 580 -- 580
Goodwill and other identifiable intangible assets... -- -- 1,736 25,811(b) 27,547
Deferred income taxes............................... -- -- 549 (549)(b) --
Other assets........................................ 2 31 113 -- 113
------ ---- ------- -------- -------
Total Assets........................................ $ 771 $353 $19,645 $ 22,420 $42,065
====== ==== ======= ======== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Lines of credit.................................... $ 40 $ 80 $ 1,555 $ (1,555)(d) $ --
Long-term debt, current portion.................... 40 58 721 380(d)(f) 1,101
Capital leases, current portion.................... 43 8 112 -- 112
Trade accounts payable............................. 422 231 5,997 -- 5,997
Taxes payable...................................... -- 4 32 -- 32
Due to affiliate................................... -- -- 1,232 (1,232)(d) --
Accrued expenses................................... 64 37 2,324 -- 2,324
Deferred revenue................................... 82 -- 1,181 -- 1,181
Debenture payable to affiliate..................... -- -- 300 (300)(d) --
Other current liabilities.......................... -- 4 81 -- 81
------ ---- ------- -------- -------
Total Current Liabilities.................... 691 422 13,535 (2,707) 10,828
Long-term debt...................................... 120 -- 1,241 (1,195)(d) 46
Capital leases...................................... 19 -- 36 -- 36
Deferred revenue.................................... -- -- 492 -- 492
Deferred income taxes............................... -- -- -- 1,179(b) 1,179
Other long-term liabilities......................... -- -- 30 -- 30
------ ---- ------- -------- -------
Total Liabilities............................ 830 422 15,334 (2,723) 12,611
------ ---- ------- -------- -------
Manditorily redeemable preferred stock.............. -- -- 1,500 (1,500)(e) --
------ ---- ------- -------- -------
Shareholders' Equity (Deficit):
Common stock....................................... -- -- 553 (539)(c) 14
Additional paid-in capital......................... 27 -- 13,033 16,406(a)(b)(c) 29,439
Retained earnings (accumulated deficit)............ (86) (58) (10,307) 10,315(b)(c)(f) 8
Treasury stock, at cost............................ -- -- (429) 422(c) (7)
Note receivable-stock issuance..................... -- (11) (11) 11(c) --
Unearned compensation.............................. -- -- (28) 28 --
------ ---- ------- -------- -------
Total Shareholders' Equity (Deficit)......... (59) (69) 2,811 26,643 29,454
------ ---- ------- -------- -------
Total Liabilities and Stockholder's Equity.......... $ 771 $353 $19,645 $ 22,420 $42,065
====== ==== ======= ======== =======
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-5
<PAGE> 94
SYNERGIS TECHNOLOGIES, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FOUNDING COMPANIES -- HISTORICAL
---------------------------------------------------------------------------------
TECHNICAL DEVTRON MID-WEST
Dollars in Thousands UDMS DTI ACCESS APPLIED SOFTWARE RUSSELL SYNERGIS-PA CAD
- ----------------------------------------------- ------ ------ ------ ------- --------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Hardware..................................... $ -- $1,161 $ 123 $3,306 $ 559 $1,589 $ 978 $1,215
Software..................................... 398 3,885 2,819 3,217 3,563 1,286 3,439 1,283
Services, consulting and other............... 702 705 5,067 1,289 1,566 229 902 868
----- ------ ----- ------ ------- ------ ------- ------
Total revenues......................... 1,100 5,751 8,009 7,812 5,688 3,104 5,319 3,366
Costs and expenses:
Hardware..................................... -- 730 90 2,656 351 1,279 705 1,006
Software..................................... 57 2,316 2,818 2,126 1,811 981 2,342 879
Services, consulting and other............... 293 755 3,033 875 783 50 465 514
Selling and marketing........................ 260 903 1,528 1,054 1,043 208 627 711
General and administrative................... 600 1,164 1,470 905 1,767 412 973 252
----- ------ ----- ------ ------- ------ ------- ------
Total costs and expenses............... 1,210 5,868 8,939 7,616 5,755 2,930 5,112 3,362
----- ------ ----- ------ ------- ------ ------- ------
Operating income (loss)........................ (110) (117) (930) 196 (67) 174 207 4
Other income (expense), net:
Interest..................................... (31) (67) 124 (49) (11) (10) (8) (4)
Other........................................ -- 65 (42) 4 43 -- 9 2
----- ------ ----- ------ ------- ------ ------- ------
Income (loss) before income taxes.............. (141) (119) (848) 151 (35) 164 208 2
Income tax expenses (benefit).................. -- (24) 94 -- -- 37 -- 4
----- ------ ----- ------ ------- ------ ------- ------
Net income (loss).............................. $(141) $ (95) $(942) $ 151 $ (35) $ 127 $ 208 $ (2)
===== ====== ===== ====== ======= ====== ======= ======
Pro forma net loss per share...................
Pro forma weighted average shares
outstanding(l)...............................
<CAPTION>
PRO FORMA
ACQUISITIONS
CADD COMPUTERS AND OFFERING PRO FORMA
Dollars in Thousands MICROSYSTEMS FOR DESIGN COMBINED ADJUSTMENTS SYNERGIS
- ----------------------------------------------- ------------ ---------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Hardware..................................... $ 298 $ 630 $ 9,859 $ 982(k) $10,841
Software..................................... 1,663 1,071 22,624 2,055(k) 24,679
Services, consulting and other............... 1,133 441 12,902 367(k) 13,269
------ ------ ------- -------- ------
Total revenues......................... 3,094 2,142 45,385 3,404 48,789
Costs and expenses:
Hardware..................................... 268 541 7,626 816(k) 8,442
Software..................................... 1,005 710 15,045 1,332(k) 16,377
Services, consulting and other............... 652 98 7,518 322(k) 7,840
Selling and marketing........................ 632 248 7,214 408(k) 7,622
General and administrative................... 544 497 8,584 1,024(g)(h)(k) 9,608
------ ------ ------- -------- ------
Total costs and expenses............... 3,101 2,094 45,987 3,902 49,889
------ ------ ------- -------- ------
Operating income (loss)........................ (7) 48 (602) (498) (1,100)
Other income (expense), net:
Interest..................................... (38) (12) (106) 164(i)(k) 58
Other........................................ -- 4 85 -- 85
------ ------ ------- -------- ------
Income (loss) before income taxes.............. (45) 40 (623) (334) (957)
Income tax expenses (benefit).................. -- 6 117 (187) (g)(h)(i)(j) (70)
------ ------ ------- -------- ------
Net income (loss).............................. $ (45) $ 34 $ (740) $ (147) $ (887)
====== ====== ======= ======== ======
Pro forma net loss per share................... $ (0.25)
=======
Pro forma weighted average shares
outstanding(l)............................... 3,559,000
=========
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-6
<PAGE> 95
SYNERGIS TECHNOLOGIES, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FOUNDING COMPANIES -- HISTORICAL
-------------------------------------------------------------------------------
TECHNICAL DEVTRON MID-WEST
Dollars in Thousands UDMS DTI ACCESS APPLIED SOFTWARE RUSSELL SYNERGIS-PA CAD
- ------------------------------------------------- ---- ------ ------ ------- --------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Hardware....................................... $-- $ 760 $ 39 $2,600 $ 365 $1,103 $ 751 $ 855
Software....................................... 286 2,544 2,450 2,728 2,829 988 2,578 879
Services, consulting and other................. 441 382 4,034 971 1,247 162 562 635
---- ------ ----- ------ ------- ------ ------- ------
Total revenues........................... 727 3,686 6,523 6,299 4,441 2,253 3,891 2,369
Costs and expenses:
Hardware....................................... -- 462 29 2,078 256 890 516 716
Software....................................... 43 1,466 1,785 1,780 1,337 791 1,743 587
Service, consulting and other.................. 162 477 2,347 666 624 36 327 384
Selling and marketing.......................... 136 618 1,175 834 776 156 479 507
General and administrative..................... 407 656 1,201 638 1,339 311 713 187
---- ------ ----- ------ ------- ------ ------- ------
Total costs and expenses................. 748 3,679 6,537 5,996 4,332 2,184 3,778 2,381
---- ------ ----- ------ ------- ------ ------- ------
Operating income (loss).......................... (21) 7 (14) 303 109 69 113 (12)
Other income (expense), net:
Interest....................................... (23) (42) 107 (37) (6) (8) (5) (4)
Other.......................................... -- 18 (47) 4 14 -- 9 2
---- ------ ----- ------ ------- ------ ------- ------
Income (loss) before income taxes................ (44) (17) 46 270 117 61 117 (14)
Income tax expense (benefit)..................... -- -- 94 -- -- 12 -- (3)
---- ------ ----- ------ ------- ------ ------- ------
Net income (loss)................................ $(44) $ (17) $ (48) $ 270 $ 117 $ 49 $ 117 $ (11)
==== ====== ===== ====== ======= ====== ======= ======
<CAPTION>
PRO FORMA
ACQUISITIONS
CADD COMPUTERS AND OFFERING PRO FORMA
Dollars in Thousands MICROSYSTEMS FOR DESIGN COMBINED ADJUSTMENTS SYNERGIS
- ------------------------------------------------- ------------ ---------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Hardware....................................... $ 211 $ 600 $ 7,284 $ 982(k) $ 8,266
Software....................................... 1,237 771 17,290 2,055(k) 19,345
Services, consulting and other................. 874 347 9,655 367(k) 10,022
------ ------ ------- ------ -------
Total revenues........................... 2,322 1,718 34,229 3,404 37,633
Costs and expenses:
Hardware....................................... 200 498 5,645 816(k) 6,461
Software....................................... 749 513 10,794 1,332(k) 12,126
Service, consulting and other.................. 488 68 5,579 322(k) 5,901
Selling and marketing.......................... 503 181 5,365 408(k) 5,773
General and administrative..................... 407 374 6,233 912(g)(h)(k) 7,145
------ ------ ------- ------ -------
Total costs and expenses................. 2,347 1,634 33,616 3,790 37,406
------ ------ ------- ------ -------
Operating income (loss).......................... (25) 84 613 (386) 227
Other income (expense), net:
Interest....................................... (24) (9) (51) 108(i)(k) 57
Other.......................................... -- 4 4 -- 4
------ ------ ------- ------ -------
Income (loss) before income taxes................ (49) 79 566 (278) 288
Income tax expense (benefit)..................... -- 14 117 226(g)(h)(i)(j) 343
------ ------ ------- ------ -------
Net income (loss)................................ $ (49) $ 65 $ 449 $ (504) $ (55)
====== ====== ======= ====== =======
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-7
<PAGE> 96
SYNERGIS TECHNOLOGIES, INC.
PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FOUNDING COMPANIES -- HISTORICAL
--------------------------------------------------------------------------------
TECHNICAL DEVTRON MID-WEST
Dollars in Thousands UDMS DTI ACCESS APPLIED SOFTWARE RUSSELL SYNERGIS-PA CAD
- ------------------------------------------------- ----- ------ ------ ------- --------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Hardware....................................... $ -- $1,287 $ 157 $2,533 $ 337 $1,204 $ 1,003 $ 513
Software....................................... 365 5,424 3,174 2,719 3,316 737 3,339 1,324
Services, consulting and other................. 468 1,025 4,232 983 1,069 166 577 640
----- ------ ----- ------ ------- ------ ------- ------
Total revenues........................... 833 7,736 7,563 6,235 4,722 2,107 4,919 2,477
Costs and expenses:
Hardware....................................... -- 880 120 2,164 218 961 748 419
Software....................................... 66 3,777 1,629 1,980 1,951 537 2,240 968
Services, consulting and other................. 250 802 3,478 710 608 46 496 407
Selling and marketing.......................... 343 889 1,181 858 700 175 707 450
General and administrative..................... 681 1,278 840 881 1,086 344 721 190
----- ------ ----- ------ ------- ------ ------- ------
Total costs and expenses................. 1,340 7,626 7,248 6,593 4,563 2,063 4,912 2,434
----- ------ ----- ------ ------- ------ ------- ------
Operating income (loss).......................... (507) 110 315 (358) 159 44 7 43
Other income (expense), net:
Interest....................................... (36) (99) 46 (29) (1) (9) 1 --
Other.......................................... -- 20 (6) 4 11 2 7 --
----- ------ ----- ------ ------- ------ ------- ------
Income (loss) before income taxes................ (543) 31 355 (383) 169 37 15 43
Income tax expense (benefit)..................... -- (18) 64 -- -- 7 -- 13
----- ------ ----- ------ ------- ------ ------- ------
Net income (loss)................................ $(543) $ 49 $ 291 $ (383) $ 169 $ 30 $ 15 $ 30
===== ====== ===== ====== ======= ====== ======= ======
Pro forma net loss per share.....................
Pro forma weighted average shares
outstanding(l).................................
<CAPTION>
PRO FORMA
ACQUISITIONS
CADD COMPUTERS AND OFFERING PRO FORMA
Dollars in Thousands MICROSYSTEMS FOR DESIGN COMBINED ADJUSTMENTS SYNERGIS
- ------------------------------------------------- ------------ ---------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Hardware....................................... $ 130 $ 114 $ 7,278 $ -- $ 7,278
Software....................................... 1,312 991 22,701 -- 22,701
Services, consulting and other................. 843 357 10,360 -- 10,360
------ ------ ------- ------ -------
Total revenues........................... 2,285 1,462 40,339 -- 40,339
Costs and expenses:
Hardware....................................... 97 103 5,710 -- 5,710
Software....................................... 965 743 14,856 -- 14,856
Services, consulting and other................. 350 54 7,201 -- 7,201
Selling and marketing.......................... 350 169 5,822 -- 5,822
General and administrative..................... 438 355 6,814 335(g)(h) 7,149
------ ------ ------- ------ -------
Total costs and expenses................. 2,200 1,424 40,403 335 40,738
------ ------ ------- ------ -------
Operating income (loss).......................... 85 38 (64) (335) (399)
Other income (expense), net:
Interest....................................... (29) (9) (165) 161(i) (4)
Other.......................................... -- (1) 37 -- 37
------ ------ ------- ------ -------
Income (loss) before income taxes................ 56 28 (192) (174) (366)
Income tax expense (benefit)..................... -- 5 71 15(g)(h)(i)(j) 86
------ ------ ------- ------ -------
Net income (loss)................................ $ 56 $ 23 $ (263) $ (189) $ (452)
====== ====== ======= ====== =======
Pro forma net loss per share..................... $ (0.13)
=======
Pro forma weighted average shares
outstanding(l)................................. 3,559,000
=========
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-8
<PAGE> 97
SYNERGIS TECHNOLOGIES, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. UDMS AND FOUNDING COMPANIES BACKGROUND
UDMS has been a wholly-owned subsidiary of MedPlus since its acquisition by
MedPlus in December 1995. UDMS intends to change its name to Synergis
Technologies, Inc. immediately prior to the effectiveness of the Registration
Statement of which this Prospectus is a part. The Company was formed to be the
largest independent value added reseller of design automation and document
management products and services in the United States. Simultaneously with, and
as a condition to, the closing of the offering made by this Prospectus, UDMS
will acquire, in separate transactions in exchange for cash and shares of its
Common Stock, nine design automation and document management businesses. Each of
the Founding Companies and UDMS have had individual, independent operating
histories since their respective formations. See "Risk Factors," "Certain
Transactions" and page F-4 for additional information.
2. HISTORICAL FINANCIAL STATEMENTS
The historical financial statements represent the financial position and
results of operations for the Founding Companies and were derived from the
respective financial statements where indicated. All Founding Companies have
December 31 year ends, except for Applied, Synergis-PA, Devtron Russell and
ACCESS. Applied, Synergis-PA and Devtron Russell have September 30 year ends
while ACCESS has an April 30 year end. However, for purposes of the Pro Forma
Combined Financial Statements, the balance sheet and statements of operations
information for ACCESS, Applied, Synergis-PA and Devtron Russell are as of
September 30, 1997 and for the year ended December 31, 1996 and the nine months
ended September 30, 1996 and 1997. At September 30, 1997, UDMS' balance sheet
included $1.5 million of deferred acquisition and initial public offering costs
which consists of $0.4 million and $1.1 million of deferred acquisition costs
and deferred public offering costs, respectively. See the UDMS historical
financial statements contained elsewhere herein.
3. ACQUISITION OF OPERATING BUSINESSES
Simultaneously with the closing of the Offering, UDMS will acquire by
merger all of the Founding Companies other than ACCESS and will acquire the net
assets of ACCESS. The Acquisitions will be accounted for using the purchase
method with DTI being treated as the accounting acquiror. The total estimated
purchase price for accounting purposes is $26.3 million, which consists of: (i)
$12.0 million of cash to be paid to the shareholders of the Founding Companies,
other than DTI (accounting acquiror) upon consummation of the Offering; (ii) the
$13.8 million estimated fair value of 1,355,012 shares of Common Stock to be
then held by to the shareholders of the Founding Companies, other than DTI
(accounting acquiror); and (iii) estimated acquisition costs of $0.5 million.
The estimated purchase price for the Acquisitions is subject to certain earn-out
arrangements. See "Certain Relationships and Related Party Transactions."
The 572,174 shares of the Company's Common Stock to be issued to the
shareholders of the Founding Companies, other than UDMS and DTI (accounting
acquiror), were valued at a 20% discount from the initial offering price, or
$9.60 per share. This discount was based upon the fact that substantially all of
the holders of these shares will not have the right to demand registration of
these shares by the Company until one year after the consummation of the
Offering and, in such case, may only demand that the Company register up to 50%
of the registrable common shares. Beginning two years after the consummation of
the Offering, the holders of these shares may demand that the Company register
100% of these registrable common shares. In addition, each holder agrees in
connection with any registration of any of the Company's securities that, upon
the request of the Company or the underwriters managing any underwritten
offering of the Company's securities, he, she or it will not sell, make any
short sale of, loan, grant any option for the purchase of, or otherwise dispose
of any securities of the Company (other than the securities included in the
registration) without the
F-9
<PAGE> 98
prior written consent of the Company or such underwriters for such a period of
time not to exceed 180 days from the effective date of such registration. The
782,838 shares of the Company's Common Stock to be held by the shareholder of
UDMS prior to its sale of 750,000 shares in the Offering were valued at $12.00
per share, as these shares are otherwise unrestricted, less estimated
registration costs applicable to these shares of approximately $1.1 million.
The estimated total purchase price for accounting purposes of $26.3 million
of the Acquisitions has been allocated to the assets acquired and liabilities
assumed. Based upon management's preliminary analysis, it is anticipated that
the historical carrying value of the Founding Companies' assets and liabilities
will approximate fair value. While the Founding Companies have no long-term
client contracts and client relationships can be cancelled by the clients upon
relatively short notice, and while most of the Company's employees are not
subject to employment agreements or otherwise prohibited from seeking employment
elsewhere in industry, management has allocated approximately $1.1 million of
the purchase price to identifiable intangible assets of the Founding Companies
based on the length of time these companies have been in business and in light
of the significant number of customers that these companies possess. In
addition, approximately $3.0 million and $1.9 million of in-process research and
development related to Synergis-PA's NFM(3.1) and NFM(4.0) and UDMS' Step2000
products, respectively, will be charged to expense upon the consummation of the
Acquisitions and has been excluded from the pro forma combined statements of
operations. The remaining excess purchase price of approximately $20.9 million
represents goodwill.
In addition to the purchase price discussed above, the ACCESS, CADD
Microsystems, DTI, and Technical Software acquisitions have certain earn-out
provisions based upon 1997 and/or 1998 profitability and revenue goals. The
earn-out provisions will be recorded in accordance with Emerging Issues Task
Force Bulletin No. 95-8, "Accounting for Contingent Consideration Paid to the
Shareholders of an Acquired Company." If these earn-out provisions are achieved
there will be additional purchase price allocated to goodwill, except in the
case of DTI for which no adjustment will be required since it is being treated
as the accounting acquiror. The pro forma combined financial statements include
no adjustments relating to the earn-out provisions.
In addition, certain of the employment agreements related to certain
officers and key employees of the Company contain incentive compensation
arrangements based upon the attainment of financial or other objectives. Such
incentive compensation payments could be significant.
4. PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Represents the sale of 1,850,000 shares of Common Stock at an assumed
initial public offering price of $12.00 per share, net of expenses and
underwriting discount, for estimated net proceeds of $19.1 million,
after giving effect to the payment by MedPlus of $1.1 million in
offering-related expenses, which is included in the amount Due to
Affiliate and Deferred Acquisition and Offering Costs as of September
30, 1997.
(b) Represents a pro forma adjustment to reflect the Acquisitions,
including: (i) the use of $12.0 million of the estimated net proceeds
of the Offering to pay the cash portion of the purchase price of the
Founding Companies payable at closing; (ii) the $13.8 million estimated
fair value of 1,355,012 shares of Common Stock to be then held by the
shareholders of the Founding Companies, other than DTI (accounting
acquiror); (iii) the use of $3.5 million to pay the shareholder of DTI
as a result of the acquisition of DTI; and (iv) estimated acquisition
costs of $0.5 million, after giving effect to prepaid acquisition costs
of $0.4 million, which is included in the amount Due to Affiliate and
Deferred Acquisition and Offering Costs as of September 30, 1997.
(c) Represents the elimination of common stock, additional paid-in capital,
retained earnings, treasury stock and note receivable-stock issuance of
the Founding Companies (exclusive of DTI) as a result of the
Acquisitions.
F-10
<PAGE> 99
(d) Represents the use of a portion of the estimated net proceeds of the
Offering to pay approximately $4.7 million in interest-bearing debt
originally incurred by the Founding Companies and outstanding at
September 30, 1997.
(e) Represents a pro forma adjustment to reflect the payment of $1.5
million by ACCESS to the holder of its preferred stock in connection
with the sale of assets and assumption of liabilities of ACCESS by the
Company and the liquidation and dissolution of ACCESS.
(f) Represents: (i) the issuance of AAA Notes to the shareholder of
Technical Software related to approximately $0.6 million in Technical
Software's accumulated adjustment account as of September 30, 1997, and
(ii) the issuance of AAA Notes to the shareholders of Synergis-PA of
approximately $0.2 million related to the taxes payable by the
shareholders of amounts included in their accumulated adjustment
account as of September 30, 1997.
A summary of the unaudited pro forma combined balance sheet adjustments
(a), (b), (c), (d), (e) and (f) is as follows:
<TABLE>
<CAPTION>
DEBIT (CREDIT)
--------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
--------------------------------------------------------------------
BALANCE SHEET ACCOUNTS (a) (b) (c) (d) (e) (f) TOTAL
- ----------------------------------------- -------- -------- ------- ------- ------- ----- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash..................................... $ 20,179 $(15,581) $ -- $(4,727) $(1,500) $ -- $ (1,629)
Deferred income taxes -- current......... -- 287 -- -- -- -- 287
Deferred acquisition and offering
costs.................................. (1,100) (400) -- -- -- -- (1,500)
Goodwill and other identifiable
intangible assets...................... -- 25,811 -- -- -- -- 25,811
Deferred income taxes -- noncurrent...... -- (549) -- -- -- -- (549)
Lines of credit.......................... -- -- -- 1,555 -- -- 1,555
Current long-term debt................... -- -- -- 445 -- (825) (380)
Due to affiliate......................... -- -- -- 1,232 -- -- 1,232
Debenture payable to affiliate........... -- -- -- 300 -- -- 300
Deferred income taxes.................... -- (1,179) -- -- -- -- (1,179)
Long-term debt........................... -- -- -- 1,195 -- -- 1,195
Preferred stock.......................... -- -- -- -- 1,500 -- 1,500
Common stock............................. -- -- 539 -- -- -- 539
Additional paid-in capital............... (19,079) (10,334) 13,007 -- -- -- (16,406)
Retained earnings........................ -- (825) (10,315) -- -- 825 (10,315)
Note receivable -- stock issuance........ -- -- (11) -- -- -- (11)
Treasury stock, at cost.................. -- -- (422) -- -- -- (422)
Unearned compensation.................... -- -- (28) -- -- -- (28)
------- ------- ------ ------ ---- ------ ----
$ -- $ (2,770) $ 2,770 $ -- $ -- $ -- $ --
======= ======= ====== ====== ==== ====== ====
</TABLE>
5. PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
(g) Includes additional amortization expense related to identifiable
intangible assets and goodwill recorded in connection with the
Acquisitions as if the Acquisitions all occurred as of January 1, 1996.
The goodwill is being amortized on a straight-line basis over an
estimated life of 25 years. The identifiable intangible assets are
being amortized on a straight-line basis over an estimated life of 10
years. The amortization periods were determined by the Company with
consideration given to the reputation of each Founding Company, the
length of each Founding Company's operating history and the potential
market in which the Founding Company operates. Excludes non-recurring
charges for acquired in-process research and development of
approximately $3.0 million and $1.9 million related to Synergis-PA's
NFM(3.1) and NFM (4.0) and UDMS' Step2000 products, respectively.
(h) Includes pro forma reductions in compensation to the owners of the
Founding Companies to which they have agreed prospectively in the
amounts of approximately $0.4 million for the year ended December 31,
1996 and $0.3 million in each of the nine months periods ended
September 30, 1996
F-11
<PAGE> 100
and 1997. Excludes compensation of $0.7 million annually based upon
employment agreements with the Company's executive management and other
costs associated with being a public Company. See
"Management--Employment Agreements; Executive Compensation."
(i) Includes a pro forma adjustment to reflect the elimination of
historical interest expense in connection with the payment of
interest-bearing debt of the Founding Companies from the estimated net
proceeds of the Offering (see adjustment (d)) as described under "Use
of Proceeds," as if the Acquisitions and Offering had occurred as of
January 1, 1996.
(j) Includes a pro forma adjustment to reflect the provision for income
taxes on the pro forma combined results at effective tax rates of
37.7%, 43.2% and 36.2% for the year ended December 31, 1996, and the
nine months ended September 30, 1996 and 1997, respectively, before
considering the non-deductibility of approximately $0.7 million of
annual goodwill amortization.
(k) Includes an adjustment to revenues, cost of revenues, selling, general
and administrative expenses, and interest expense related to DTI's
acquisition of ComputerSmith on July 1, 1996, the effect of which is to
reflect DTI's results of operations as if such acquisitions occurred on
January 1, 1996. The historical results of DTI for all periods
presented subsequent to July 1, 1996 include the results of operations
related to Computersmith.
(l) The weighted average shares outstanding used to calculate pro forma net
income per share is based upon the estimated average number of shares
of Common Stock and common stock equivalents outstanding during the
period calculated as follows:
<TABLE>
<S> <C>
Shares issued in the formation of UDMS (adjusted for
8,451.59-for-1 stock split and the contribution to capital of
62,321 shares by the Selling Shareholder)....................... 782,838
Shares issued to the shareholders of the Founding Companies....... 863,841
Shares issued in the Offering..................................... 1,850,000
SAB No. 83 adjustment............................................. 62,321
---------
3,559,000
=========
</TABLE>
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, warrants and options for Common Stock issued during twelve months
immediately preceding the Offering date (using the treasury stock method and an
assumed initial public offering price per share of $12.00) have been included in
the calculation of Common Stock as if they were outstanding for the entire
period presented.
The Company has entered into employment agreements with certain of its
officers which provide for total minimum annual compensation, including
guaranteed incentive compensation amounts, of $0.7 million. This amount has been
excluded from pro forma adjustment 5(h).
In addition, UDMS is in the process of hiring other corporate staff. Also,
certain corporate expenses will be incurred subsequent to the Offering related
to operating as a public company, and in managing the Founding Companies, which
to this date have operated as autonomous businesses. These additional expenses
(which will be significant) have not been reflected in the accompanying pro
forma statements of operations. The effect of these additional expenses and
related benefits is not currently estimable as the Acquisitions have not been
consummated and the expected synergies of combining the Founding Companies are
not specifically quantifiable at this time. See "Management -- Employment
Agreements; Executive Compensation."
F-12
<PAGE> 101
A summary of the unaudited pro forma Combined Statements of Operations
adjustments (g), (h), (i), (j), (k) and (l) for the year ended December 31, 1996
and nine months ended September 30, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
DEBIT (CREDIT)
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
- ------------------------------------------- -----------------------------------------------------------------
STATEMENT OF OPERATIONS ACCOUNTS (G) (H) (I) (J) (K) TOTAL
- ------------------------------------------- ------ ------ ------ ------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Hardware revenues.......................... $ -- $ -- $ -- $ -- $ (982) $ (982)
Software revenues.......................... -- -- -- (2,055) (2,055)
Services, consulting and other revenues.... -- -- -- -- (367) (367)
Hardware costs............................. -- -- -- -- 816 816
Software costs............................. -- -- -- -- 1,332 1,332
Services, consulting and other costs....... -- -- -- -- 322 322
Selling and marketing...................... -- -- -- -- 408 408
General and administrative................. 910 (424) -- -- 538 1,024
Interest expense, net...................... -- -- (184) -- 20 (164)
Other expense, net......................... -- -- -- -- -- --
Income tax expense (benefit)............... (67) 170 74 (364) -- (187)
------ ------ ------ ------ ------- ------
$ 843 $ (254) $ (110) $ (364) $ 32 $ 147
====== ====== ====== ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
DEBIT (CREDIT)
----------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1996 PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
- ------------------------------------------- ----------------------------------------------------------------
STATEMENT OF OPERATIONS ACCOUNTS (g) (h) (i) (j) (k) TOTAL
- ------------------------------------------- ----- ------ ------ ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Hardware revenues.......................... $ -- $ -- $ -- $ -- $ (982) $ (982)
Software revenues.......................... -- -- -- -- (2,055) (2,055)
Services, consulting and other revenues.... -- -- -- -- (367) (367)
Hardware costs............................. -- -- -- -- 816 816
Software costs............................. -- -- -- -- 1,332 1,332
Services, consulting and other costs....... -- -- -- -- 322 322
Selling and marketing...................... -- -- -- -- 408 408
General and administrative................. 692 (318) -- -- 538 912
Interest expense, net...................... -- -- (128) -- 20 (108)
Other expense, net......................... -- -- -- -- -- --
Income tax expense (benefit)............... (50) 127 51 98 -- 226
----- ------ ------ ------ ------- -------
$ 642 $ (191) $ (77) $ 98 $ 32 $ 504
===== ====== ====== ====== ======= =======
</TABLE>
F-13
<PAGE> 102
<TABLE>
<CAPTION>
DEBIT (CREDIT)
---------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1997 PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
- ------------------------------------------- ---------------------------------------------------------------
STATEMENT OF OPERATIONS ACCOUNTS (g) (h) (i) (j) (k) TOTAL
- ------------------------------------------- ---- ------ ------ ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Hardware revenues.......................... $ -- $ -- $ -- $ -- $ -- $ --
Software revenues.......................... -- -- -- -- -- --
Services, consulting and other revenues.... -- -- -- -- -- --
Hardware costs............................. -- -- -- -- -- --
Software costs............................. -- -- -- -- -- --
Services, consulting and other costs....... -- -- -- -- -- --
Selling and marketing...................... -- -- -- -- -- --
General and administrative................. 653 (318) -- -- -- 335
Interest expense, net...................... -- -- (161) -- -- (161)
Other expense, net......................... -- -- -- -- -- --
Income tax expense (benefit)............... (50) 127 64 (126) -- 15
---- ------ ------ ------ ------- -------
$603 $ (191) $ (97) $ (126) $ -- $ 189
==== ====== ====== ====== ======= =======
</TABLE>
6. PRO FORMA COMBINED STATEMENTS OF OPERATIONS SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies have been reflected in the
Company's pro forma combined statements of operations:
Revenue and Cost Recognition
The Company recognizes revenues on the sale of third party hardware and
software products when the product is shipped or upon customer acceptance in
instances where the software and computer hardware is to be installed at the
customer location. Revenues from proprietary software license sales are
recognized when the product is shipped. Revenues from consulting, training or
other services are recognized as the related services are performed. Revenues
from prepaid customer support agreements are generally recognized ratably over
the life of the support agreement or, to a lesser extent, based upon contractual
hour utilization by the customer under the support agreement. Generally, the
Company does not bundle hardware and software sales whereby customer acceptance
of either the hardware of software components is conditioned upon the acceptance
of the total product solution. While to date the Company has not experienced a
significant amount of returned hardware or software products from its customers
that resulted in a material unfavorable financial impact, it does intend to
record an appropriate accrual for such product returns at the end of each
financial period.
The Company's cost of revenues primarily includes the cost of hardware and
software products as well as compensation-related costs associated with
consulting and other services. The costs associated with hardware and software
sales are recorded at the time the sale is recorded. The costs associated with
consulting, training and other services are recorded as the services are
performed. The costs associated with customer support services are recorded as
incurred. The Company does not generally enter into long-term fixed-price
contracts. In addition, the Company does not provide product warranties beyond
the warranties provided by the manufacturers or computer software developers.
Concentration of Credit Risk
No customer represented more than 5% of the Company's pro forma revenues in
any period presented.
Inventories
Inventories, which consist of purchased software and computer hardware, are
generally stated at the lower of cost or market and cost is determined by the
first-in, first-out (FIFO) method.
F-14
<PAGE> 103
Capitalized Software Development Costs
With respect to the Company's proprietary products, it accounts for
software development costs in accordance with the provisions of Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed. Costs incurred in designing
and developing computer software products are expensed as research and
development until technological feasibility has been established. Technological
feasibility is established upon completion of a detail program design or, in its
absence, completion of a working model. Upon the achievement of technological
feasibility, software development costs are capitalized and subsequently
reported at the lower of unamortized cost or net realizable value. Annual
amortization expense is the greater of the amount computed, using the ratio of
the current year's revenues to the total of current and anticipated future
revenues, or the straight-line method over the remaining economic life of the
software, which does not exceed five years and three years for the UDMS and
Synergis -- PA proprietary software products, respectively.
The pro forma results of operations include an acceleration of the
amortization of the remaining unamortized software development costs relative to
ACCESS' AS/400 EDMS software product. As a result of changes in technical
requirements and increased competition, current and projected revenue from this
product as it was marketed currently was not sufficient to recover the remaining
unamortized capitalized costs, including maintenance and support, without
further substantial marketing and research and development expenditures. At this
time, ACCESS determined that it would not invest in additional marketing and
research and development efforts. The pro forma results of operations include
amortization and write-offs of $1.3 million related to this product in the year
ended December 31, 1996.
Property and Equipment
Property and equipment are stated at cost. Depreciation on office equipment
and furniture and fixtures is calculated on the straight-line method over the
estimated useful lives of the assets, which range from 3-10 years. Leasehold
improvements are amortized on the straight-line method over the shorter of the
lease term or estimated useful life of the asset.
F-15
<PAGE> 104
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Universal Document Management Systems, Inc.:
We have audited the accompanying balance sheets of Universal Document
Management Systems, Inc. (a wholly-owned subsidiary of MedPlus, Inc.) as of
December 31, 1995 and 1996 and September 30, 1997, and the related statements of
operations, stockholder's equity, and cash flows for the period December 14,
1995 to December 31, 1995, the year ended December 31, 1996 and the nine months
ended September 30, 1997. 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of Universal Document
Management Systems, Inc. as of December 31, 1995 and 1996 and September 30,
1997, and the results of its operations and its cash flows for the period
December 14, 1995 to December 31, 1995, the year ended December 31, 1996 and the
nine months ended September 30, 1997, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that
Universal Document Management Systems, Inc. will continue as a going concern. As
discussed in Note 3 to the financial statements, Universal Document Management
Systems, Inc. has suffered losses from operations that raise substantial doubt
about its ability to continue as a going concern. The Company's plans in regard
to these matters are also described in Note 3. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
November 22, 1997
Cincinnati, Ohio
F-16
<PAGE> 105
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDPLUS, INC.)
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1997
------------------- -----------------------
1995 1996 ACTUAL PRO FORMA
------- ------- ------- (NOTE 2)
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash............................................ $ 124 $ -- $ -- $ --
Trade accounts receivable, net of allowance for
doubtful accounts............................ 296 453 484 484
Prepaid expenses and other current assets....... 11 17 28 28
Deferred acquisition and initial public offering
costs........................................ -- -- 1,500 1,500
Total current assets.................... 431 470 2,012 2,012
Excess of cost over fair value of net assets
acquired, net of accumulated amortization....... 1,036 968 887 887
Capitalized software development costs, net of
accumulated amortization........................ 159 262 409 409
Property and equipment, net of accumulated
depreciation.................................... 33 79 120 120
Other assets...................................... 5 7 5 5
------- ------- ------- ------
$ 1,664 $ 1,786 $ 3,433 $ 3,433
======= ======= ======= ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Bank overdraft.................................. $ -- $ 1 $ 93 $ 93
Line of credit.................................. -- -- 630 630
Accounts payable................................ 51 61 616 616
Payable to MedPlus, Inc......................... 99 400 1,232 1,232
Accrued expenses and other liabilities.......... 281 216 172 172
Deferred revenue................................ 129 113 197 197
Convertible debenture payable to MedPlus,
Inc.......................................... -- 300 300 300
------- ------- ------- ------
Total current liabilities............... 560 1,091 3,240 3,240
Deferred revenue.................................. 30 21 -- --
Convertible debenture payable to MedPlus, Inc..... 300 -- -- --
------- ------- ------- ------
Total liabilities....................... 890 1,112 3,240 3,240
------- ------- ------- ------
Stockholder's equity:
Common stock, no par value, authorized 850
shares; 100 issued and outstanding at September
30, 1997 and December 31, 1996, 1 issued and
outstanding at December 31, 1995, and pro forma
782,838 shares outstanding...................... -- -- -- --
Additional paid-in capital...................... 2,093 2,134 2,224 2,614
Unearned stock warrants......................... -- -- (28) (28)
Accumulated deficit............................. (1,319) (1,460) (2,003) (2,393)
------- ------- ------- ------
Total stockholder's equity.............. 774 674 193 193
------- ------- ------- ------
Commitments and contingencies.....................
------- ------- ------- ------
$ 1,664 $ 1,786 $ 3,433 $ 3,433
======= ======= ======= ======
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE> 106
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDPLUS, INC.)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED
DECEMBER 14 TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -----------------------
1995 1996 1996 1997
-------------- ------------ ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Software license sales.................. $ 154 $ 398 $ 286 $ 365
Service and consulting revenues......... 28 702 441 468
------- ----- --- ----
Total revenues.................. 182 1,100 727 833
------- ----- --- ----
Costs and expenses:
Cost of software license sales.......... 2 57 43 66
Cost of service and consulting
revenues............................. 4 293 162 250
Selling and marketing................... 3 260 136 343
Research and development................ 4 114 85 137
General and administrative.............. 9 486 322 544
Acquired in process technology.......... 1,466 -- -- --
------- ----- --- ----
Total costs and expenses........ 1,488 1,210 748 1,340
------- ----- --- ----
Operating income (loss)......... (1,306) (110) (21) (507)
------- ----- --- ----
Other income (expense).................... 40 (31) (23) (36)
------- ----- --- ----
Loss before income taxes........ (1,266) (141) (44) (543)
Income taxes.............................. 53 -- -- --
------- ----- --- ----
Net loss........................ $ (1,319) $ (141) $ (44) $ (543)
======= ===== === ====
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE> 107
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDPLUS, INC.)
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNEARNED TOTAL
---------------- PAID-IN STOCK ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT CAPITAL WARRANTS DEFICIT EQUITY
------ ------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 14, 1995........ -- $ -- $ -- $ -- $ -- $ --
Capital contribution................. 1 -- 2,093 -- -- 2,093
Net loss............................. -- -- -- -- (1,319) (1,319)
--- ------- ------ ---- ------- -------
Balances at December 31, 1995........ 1 -- 2,093 -- (1,319) 774
Capital contribution................. -- -- 41 -- -- 41
Stock dividend....................... 99 -- -- -- -- --
Net loss............................. -- -- -- -- (141) (141)
--- ------- ------ ---- ------- -------
Balances at December 31, 1996........ 100 -- 2,134 -- (1,460) 674
Stock warrants issued to third party
service providers and employee..... -- -- 90 (90) -- --
Amortization of unearned stock
warrants........................... -- -- -- 62 -- 62
Net loss............................. -- -- -- -- (543) (543)
--- ------- ------ ---- ------- -------
Balances at September 30, 1997....... 100 $ -- $2,224 $(28) $(2,003) $ 193
=== ======= ====== ==== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE> 108
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDPLUS, INC.)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED
DECEMBER 14 TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -----------------------
1995 1996 1996 1997
-------------- ------------ ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................... $ (1,319) $ (141) $ (44) $ (543)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Acquired in process technology..... 1,466 -- -- --
Amortization of excess of cost over
fair value of net assets
acquired........................ 6 109 81 81
Amortization of capitalized
software development costs...... 2 54 41 64
Amortization of unearned stock
warrant......................... -- -- -- 2
Depreciation....................... -- 11 10 17
Provision for loss on doubtful
accounts........................ -- 39 -- 17
Changes in operating assets and
liabilities:
Trade accounts receivable....... (167) (196) (154) (48)
Prepaid expenses and other
assets........................ (7) (8) (12) (10)
Accounts payable, accrued
expenses and other
liabilities................... (62) (56) (57) 512
Payable to MedPlus, Inc......... 53 162 109 195
Deferred revenue................ 45 (24) 12 61
-------- ------ ----- -------
Net cash provided by (used in)
operating activities....... 17 (50) (14) 348
-------- ------ ----- -------
Cash flows from investing activities:
Capitalization of software development
costs................................ (5) (157) (129) (211)
Purchases of property and equipment..... -- (57) (42) (57)
Cash acquired in Universal merger....... 112 -- -- --
Acquisition costs....................... -- -- -- (432)
-------- ------ ----- -------
Net cash provided by (used in)
investing activities....... 107 (214) (171) (700)
-------- ------ ----- -------
Cash flows from financing activities:
Advances from MedPlus, Inc.............. -- 139 85 637
Borrowings on line of credit............ -- -- -- 630
Increase in bank overdraft.............. -- 1 -- 92
Initial public offering costs........... -- -- -- (1,007)
-------- ------ ----- -------
Net cash provided by financing
activities................. -- 140 85 352
-------- ------ ----- -------
Net increase (decrease) in cash and cash
equivalents............................. 124 (124) (100) --
Cash, beginning of period................. -- 124 124 --
-------- ------ ----- -------
Cash, end of period....................... $ 124 $ -- $ 24 $ --
======== ====== ===== =======
Cash paid during the period for
interest................................ $ -- $ 23 $ 22 $ 11
======== ====== ===== =======
</TABLE>
See accompanying notes to financial statements
F-20
<PAGE> 109
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDPLUS, INC.)
NOTES TO FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
1. DESCRIPTION OF BUSINESS
Universal Document Management Systems, Inc. (the "Company") provides
workflow, document management, and application software and related consulting
services to customers in a variety of industries. The Company is a wholly-owned
subsidiary of MedPlus, Inc. ("MedPlus") and maintains all of its operations,
including its headquarters, in Cincinnati, Ohio.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The Company, formerly known as MedPlus Acquisition Corp., was incorporated
in December 1995 and is the successor to Universal Document Management Systems,
Inc. ("Universal") and HWB, Inc. ("HWB") which began business in 1990. Universal
was a developer of document and work flow management software and HWB was the
owner and licensor of the principal software product of Universal. On December
14, 1995, Universal merged into the Company with the Company as the surviving
corporation, in a transaction accounted for by the purchase method for business
combinations. On the same date, in a separate transaction, the Company acquired
all of the outstanding shares of HWB. Subsequent to the acquisition, HWB was
liquidated and the Company changed its name. The accompanying financial
statements reflect the results of operations of the Company from December 14,
1995. Prior to that date, the Company had no operations.
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect certain 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.
(c) CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed. Costs incurred in designing and developing computer software products
are expensed as research and development until technological feasibility has
been established. Technological feasibility is established upon completion of a
detail program design or, in its absence, completion of a working model. Upon
the achievement of technological feasibility, software development costs are
capitalized and subsequently reported at the lower of unamortized cost or net
realizable value.
Annual amortization expense is the greater of the amount computed, using
the ratio of the current year's revenues to the total of current and anticipated
future revenues, or the straight-line method over the remaining economic life of
the software, which does not exceed five years.
F-21
<PAGE> 110
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDPLUS, INC.)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or estimated useful life of the asset. The estimated
useful lives are as follows:
<TABLE>
<S> <C>
Office equipment...................................... 5-7 years
Furniture and fixtures................................ 5 years
Leasehold improvements................................ 5-7 years
</TABLE>
(e) EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess of the cost over fair value of net assets acquired from business
acquisitions is being amortized on the straight-line method over the expected
periods to be benefited, which is ten years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the intangible balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operations. The amount
of the intangible impairment, if any, is measured based on the present value of
projected future operating cash flows using a discount rate reflecting the
Company's average cost of funds. The assessment of the recoverability of the
intangible asset will be impacted if projected future operating cash flows are
not achieved.
(f) INCOME TAXES
The provisions for income taxes are accounted for in accordance with SFAS
No. 109, Accounting for Income Taxes. Under the asset and liability method of
SFAS No. 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as well as operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.
(g) REVENUE RECOGNITION
Revenues from software license sales are recognized when the product is
shipped. Revenues from consulting are recognized as the related services are
performed. Revenues from prepaid customer support agreements or other service
agreements are recognized ratably over the lives of the agreements.
(h) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair value of financial
instruments are made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair value
amounts have been determined by the Company using available market information
and appropriate valuation methodologies.
Cash, trade accounts receivable and accounts payable -- The carrying
amounts of these items are a reasonable estimate of their fair value due to the
short-term maturity of these instruments.
Accrued expenses and other liabilities -- The IBM Assistance Agreement, the
primary component of accrued expenses and other liabilities, has a carrying
amount of $174 and a fair value of $147 as of December 31, 1996 and a carrying
amount of $159 and a fair value of $142 as of September 30, 1997.
Convertible debenture -- The fair value of the convertible debenture is not
determinable. The convertible debenture is held by MedPlus, accrues interest at
10% per annum and does not have a definitive maturity date. As discussed in note
10, the Company expects to repay this debenture to MedPlus within twelve months
of the
F-22
<PAGE> 111
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDPLUS, INC.)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
IPO date. However, given the lack of a definitive maturity date, it is not
practical to estimate the fair value of the convertible debenture.
(i) STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with the
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. APB Opinion
No. 25 requires companies to record compensation expense on the date of grant
only if the current market price or fair value of the underlying stock exceeded
the exercise price. The Company has elected to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
(j) SUPPLEMENTAL CASH FLOW INFORMATION
The following are non-cash transactions and, accordingly, are not presented
in the Statements of Cash Flows:
In December 1995 and April 1996, MedPlus issued 99,274 and 14,249
shares of MedPlus common stock, valued at $869 and $161, respectively, and
cash of $831 and $117, respectively, to the shareholders of Universal in
connection with the merger of Universal. These distributions, along with
professional fees related to the merger of $115 and $41, comprised MedPlus'
capital contribution to the Company (note 5).
In December 1995, $40 was forgiven on the IBM Assistance Agreement
which is included in accrued expenses and other liabilities (note 9).
In 1997, the Company granted to a member of management a warrant to
acquire a number of common shares of the Company up to an amount equivalent
to .5% of the common shares of the Company outstanding prior to an initial
public offering. The excess of the fair market value per share of the
Company's common stock on the date of grant over the exercise price per
share of this warrant of $30 has been recorded as an unearned stock warrant
(note 13c).
In 1997, the Company granted to a principal of a consulting firm a
warrant to acquire a number of common shares of the Company up to an amount
equivalent to 5% of the common shares of the Company on the date of grant.
The fair market value of this warrant at the date of grant was
approximately $60 (note 14a).
The Company did not make any cash payments for income taxes in any of the
periods presented in accordance with the Company's tax-sharing arrangement with
MedPlus.
(k) INTERIM FINANCIAL INFORMATION
The financial statements for the nine months ended September 30, 1996 are
unaudited; however, in the opinion of management, all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of the financial
statements for the interim periods have been included. The results for the
interim periods are not necessarily indicative of the results to be achieved for
the full fiscal year.
F-23
<PAGE> 112
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDPLUS, INC.)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(l) UNAUDITED INTERIM PRO FORMA FINANCIAL INFORMATION
The unaudited interim pro forma financial information as of September 30,
1997 gives effect to: (i) the 8,451.59-for-1 stock split to be effected
immediately prior to the initial public offering ("IPO"); (ii) a contribution to
the capital of the Company by MedPlus of 62,321 shares of the Company's common
stock; (iii) a $390 cash payment to the former HWB shareholders at the closing
of the IPO; and (iv) a $390 capital contribution by MedPlus to the Company to
fund such payment to the former HWB shareholders.
3. LIQUIDITY AND GOING CONCERN MATTERS
The Company's financial statements for the period from January 1, 1997 to
September 30, 1997 have been prepared on a going concern basis which
contemplates the realization of assets and the settlement of liabilities in the
normal course of business. The Company expects to incur additional expenditures
in connection with its initial public offering and acquisitions of certain
companies described in note 4. There can be no assurance that the initial public
offering and acquisitions described in note 4 will be completed. The Company's
working capital, available borrowing capacity on its line of credit, and cash
flows from operations will not be sufficient to continue future operations if
the initial public offering does not occur. In the event the initial public
offering is not completed, management's plans include a private financing of its
operations and acquisitions until such time as an initial public offering or
other equity financing can be completed. There can be no assurance, however,
that the interim private financing will be completed, or if completed that the
definitive acquisition agreements can be renegotiated to provide for
consummation of the acquisitions on terms available under the private financing.
The Company is dependent upon the initial public offering described in note 4 or
the private financing to fund the pending acquisitions and future operations.
4. ACQUISITIONS AND INITIAL PUBLIC OFFERING
(a) SUMMARY OF TRANSACTIONS
In September and October 1997, the Company entered into definitive
acquisition agreements to acquire substantially all of the net assets of the
following companies, collectively referred to as the Founding Companies:
<TABLE>
<S> <C>
ACCESS Corporation DTI Technologies, Inc.
Applied Software Technology, Inc. Mid-West CAD, Inc.
CADD Microsystems, Inc. Synergis Technologies, Inc.
Computers for Design, Inc. Technical Software, Inc.
Devtron, Russell Inc.
</TABLE>
The acquisitions of the Founding Companies ("Acquisitions") will occur as
separate transactions simultaneously with the closing of the Company's IPO and
will be accounted for using the purchase method for business combinations, with
DTI Technologies, Inc. as accounting acquiror.
As of September 30, 1997, the Company has capitalized approximately $1,500
of direct, incremental costs related to the Acquisitions for accountants',
attorneys' and consultants' fees (i.e., "transaction costs") that will become
part of the purchase price of the Founding Companies upon consummation of the
Acquisitions or charged against the proceeds of the IPO. In the event that any
or all of the Acquisitions are not consummated, then a portion or all of these
costs will be charged to expense in the period that decision is made.
(b) LETTER OF INTENT
On November 12, 1997, the Company assumed all rights and obligations
related to the letter of intent entered into on August 26, 1997 by and between
Synergis Technologies, Inc. ("Synergis") and Configured
F-24
<PAGE> 113
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDPLUS, INC.)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Systems, Inc. ("Configured"), a provider of Auto-CAD based integrated systems
solutions and a hardware reseller, whereby the Company has the right to acquire
all of the outstanding shares of Configured for approximately $450. In addition,
prior to assuming all rights and obligations related to the letter of intent,
the Company agreed to pay the majority shareholder of Synergis $50 in expense
reimbursement associated with the Configured acquisition costs within 30 days
after the consummation of the IPO. Furthermore, simultaneously with the closing
of the acquisition of Configured, the Company will remit to the majority
shareholder of Synergis $100 plus shares of the Company's common stock in an
amount equal to $50 divided by the IPO price per share.
5. UNIVERSAL AND HWB ACQUISITIONS
Total consideration for the acquisition of Universal was $1,700 which
consisted of cash of $831 and 99,274 shares of MedPlus common stock valued at
$869. The Universal acquisition agreement also provided for additional
consideration contingent upon future revenue performance of the Company for the
period from December 14, 1995 to December 31, 1995. The contingent consideration
earned during this period was $278 which was accounted for as an additional cost
of acquiring Universal.
The consideration for the acquisition of HWB consists of consideration
contingent upon the future revenue performance of the Company's principal
software product for the period from December 14, 1995 to December 31, 1998,
which, if earned, would be accounted for as an additional cost of acquiring HWB.
No contingent consideration related to the acquisition of HWB was earned in 1995
or 1996. Maximum future potential payments under the HWB acquisition agreement
for the remaining two year period ending December 31, 1998 total $3,000.
On August 14, 1997, the Company and the former stockholders of HWB amended
the HWB Stock Purchase Agreement dated December 29, 1995. The amended agreement,
which becomes effective only if the IPO occurs, provides for the following:
(i) a $390 payment on the IPO date to the former stockholders;
(ii) extension of the period during which additional consideration
contingent on the future revenue performance of the Company could
be earned for the eleven month period ending December 31, 1998 to
the year ending December 31, 2000;
(iii) reduction of the maximum future potential payments for contingent
consideration from $3,000 to $2,610;
(iv) allows the Company's common stock to be issued as part of the
contingent consideration payments rather than MedPlus common
stock; and
(v) defines the audited net revenues used to measure the contingent
consideration payable.
The $390 payment due on the IPO date will be funded by a capital
contribution from MedPlus either in the form of cash or a short-term note
receivable.
The consideration for the acquisitions of Universal and HWB was paid for by
MedPlus on behalf of the Company.
The purchase price for the acquired companies has been allocated to the
identifiable tangible and intangible assets acquired based on their estimated
fair values as determined by an independent third party. Acquired in-process
technology related to Universal and HWB has been expensed at the date of
acquisition. The excess of cost over fair value of net assets acquired is being
amortized on the straight-line method over ten years. To determine the fair
market value of the acquired in-process technology, the Company utilized the
income approach which focuses on the income-producing capability of the assets
acquired and best represents
F-25
<PAGE> 114
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDPLUS, INC.)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
the present value of the future economic benefits expected to be derived from
these assets. Technological feasibility for the acquired in-process technology
had not been reached based on design and development activities in place,
requiring further refinement and testing. The development activities required to
complete the acquired in-process technology include validation, quality
assurance programs and beta test. The acquired technology represents unique and
emerging technology, the application of which is limited to the Company's
workflow and document management software strategy. Accordingly, the acquired
technology has no alternative future use. The total amount of acquired
in-process technology that was charged to the results of operations at the date
of acquisition was $1,466.
The following unaudited pro forma data presents the results of operations
as if the acquisitions of Universal and HWB had occurred at the beginning of
1995. This summary is provided for information purposes only. It does not
necessarily reflect the actual results that would have occurred had the
acquisitions been made as of that date or of results that may occur in the
future.
<TABLE>
<S> <C>
Revenues........................................................ $ 630
Net loss........................................................ (1,700)
</TABLE>
Amortization of excess of cost over fair value of net assets acquired
amounted to $6 for the period December 14, 1995 to December 31, 1995 and $109
for the year ended December 31, 1996, and $81 for the nine months ended
September 30, 1997. Accumulated amortization of excess of cost over fair value
of net assets acquired was $6 and $115 at December 31, 1995 and 1996,
respectively, and $196 at September 30, 1997.
6. ALLOWANCE FOR TRADE ACCOUNTS RECEIVABLE
The activity in the allowance for doubtful accounts for trade accounts
receivable for the period December 14, 1995 to December 31, 1995 and the year
ended December 31, 1996, and the nine months ended September 30, 1997 was as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period....................... $7 $ 7 $ 15
Charged to expense................................... 0 39 17
Charged to other accounts............................ 0 0 0
Deductions/write-offs................................ 0 (31) (17)
--
---- ----
Balance at end of period............................. $7 $ 15 $ 15
== ==== ====
</TABLE>
7. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Amortization of capitalized software development costs amounted to $2 for
the period December 14, 1995 to December 31, 1995, $54 for the year ended
December 31, 1996 and $64 for the nine months ended September 30, 1997.
Accumulated amortization of capitalized software development costs was $2 and
$56 at December 31, 1995 and 1996, respectively, and $120 at September 30, 1997.
F-26
<PAGE> 115
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDPLUS, INC.)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
8. PROPERTY AND EQUIPMENT
Net property and equipment is comprised of the following at December 31,
1995 and 1996 and September 30, 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Office equipment...................................... $33 $65 $112
Furniture and fixtures................................ -- 20 30
Leasehold improvements................................ -- 5 5
--- --- ----
Less: Accumulated depreciation........................ -- (11) (27)
--- --- ----
$33 $79 $120
=== === ====
</TABLE>
9. IBM ASSISTANCE AGREEMENT
IBM Corporation ("IBM") advanced Universal $200 in funds under the terms of
an IBM Assistance Agreement dated July 12, 1992 ("Assistance Agreement"). Under
the Assistance Agreement, Universal invoiced IBM established amounts as
specified milestones were achieved. The $200 received under the agreement was
recorded as a liability. The agreed upon pay back amount totaled $240. This
additional $40 had been accrued as interest expense through December 13, 1995.
Under the original terms of the Assistance Agreement, $240 was to be repaid
through revenue participation whereby IBM received: (a) 100% of worldwide gross
revenue received with respect to product for sale or standard licenses,
including maintenance fees, of quarterly revenue between $112 and $150 or annual
revenue of $450 to $600, whichever was greater; (b) thereafter 25% of all
worldwide gross revenue received until IBM had recovered $240. For periods
thereafter ten percent of all IBM generated worldwide gross revenue received
would be paid to IBM as a royalty.
The Company and IBM amended the Assistance Agreement in December 1995. In
connection with the amendment, $40 of the pay back amount was forgiven and
recorded by the Company as other income during the period December 14, 1995 to
December 31, 1995. Under the terms of the amended Assistance Agreement, $200 is
to be repaid through revenue participation whereby IBM receives 25% of all
quarterly gross revenue exceeding $100 for product sales, standard licenses and
maintenance fees on certain hardware platforms as defined in the Assistance
Agreement.
At December 31, 1995 and 1996 and September 30, 1997, the Company's
liability to IBM of $188, $174 and $159, respectively, was included with accrued
expenses and other liabilities.
10. CONVERTIBLE DEBENTURE
During the year ended December 31, 1994, Universal issued convertible
debentures totaling $400 to MedPlus and an individual investor. The debentures,
with an interest rate of 10% per annum payable at maturity, were unsecured
obligations of the Company which were scheduled to mature on December 31, 1995.
The debentures were convertible into shares of common stock of Universal at a
stated price per share, and could be converted in entirety or in portion from
time to time until maturity.
In connection with the Company's acquisition of Universal on December 14,
1995, $100 of convertible debentures, which were held by the individual
investor, and interest accrued thereon were repaid. The remaining $300 debenture
held by MedPlus was extended indefinitely by MedPlus and continues to accrue
interest at 10% per annum. The Company expects to repay this debenture within
twelve months of the IPO date. Interest expense of $29 and $22 has been included
in the Statement of Operations for the year ended December 31, 1996 and the nine
months ended September 30, 1997, respectively.
F-27
<PAGE> 116
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDPLUS, INC.)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
11. INCOME TAXES
The provision for income taxes of the Company for Federal and state income
taxes has been calculated as if the Company were a stand-alone corporation
filing separate tax returns.
The Company has entered into a tax-sharing agreement with MedPlus to
provide for: i) the allocation of payments of taxes for periods during which the
Company and MedPlus are included in the same consolidated group for Federal
income tax purposes; ii) the allocation of responsibility for the filing of tax
returns; iii) the conduct of tax audits and the handling of tax controversies;
and iv) various related matters. For periods during which the Company is
included in aforementioned returns, the Company will be required to pay to
MedPlus its allocable portion of the consolidated Federal income tax and state
tax liability and will also be required to pay MedPlus for its allocable share
of any tax benefit attributable to the use of MedPlus' losses.
Income tax expense attributable to income from operations for the period
December 14, 1995 to December 31, 1995 and the year ended December 31, 1996, and
the nine months ended September 30, 1997 was as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal:
Current............................................ $53 $-- $--
Deferred........................................... -- -- --
--- --- ---
53 -- --
--- --- ---
State and Local:
Current............................................ -- -- --
Deferred........................................... -- -- --
--- --- ---
-- -- --
--- --- ---
$53 $-- $--
=== === ===
</TABLE>
Income tax benefit differs from the amounts computed by applying the
Federal statutory rate to loss before income taxes for the period December 14,
1995 to December 31, 1995 and the year ended December 31, 1996, and the nine
months ended September 30, 1997 as a result of the following:
<TABLE>
<CAPTION>
1995 1996 1997
----- ---- -----
<S> <C> <C> <C>
Computed "expected" tax benefit................. $(430) $(45) $(184)
Acquired in-process technology.................. 498 -- --
Change in valuation allowance................... (18) 5 161
Meals and entertainment......................... -- 3 4
Amortization of excess of cost over fair value
of
net assets acquired........................... 2 34 28
Other........................................... 1 3 (9)
----- ---- -----
$ 53 $ -- $ --
===== ==== =====
</TABLE>
F-28
<PAGE> 117
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDPLUS, INC.)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The significant components of deferred income tax expense (benefit)
attributable to income from operations for the period December 14, 1995 to
December 31, 1995 and the year ended December 31, 1996, and the nine months
ended September 30, 1997 was as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- -----
<S> <C> <C> <C>
Deferred tax expense (benefit) (exclusive of the
change in valuation allowance).................. $ 18 $(6) $(161)
Increase in the beginning-of-the-period balance of
the valuation allowance for deferred taxes...... (18) 6 161
---- --- -----
$ -- $-- $ --
==== === =====
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1995 and 1996 and the nine
months ended September 30, 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- -----
<S> <C> <C> <C>
Deferred tax assets:
Accrued expenses................................. $ 3 $ 5 $ 5
Net operating loss carryforward.................. 20 116 355
Deferred revenue in excess of one year........... -- 19 11
Other............................................ 55 35 22
---- ---- -----
Total gross deferred tax assets............... 78 175 393
Less: valuation allowance........................ (78) (83) (244)
---- ---- -----
Net deferred tax assets....................... -- 92 149
---- ---- -----
Deferred tax liabilities:
Capitalized software development costs........... -- (88) (141)
Property and equipment........................... -- (4) (8)
---- ---- -----
Total gross deferred tax liabilities.......... -- (92) (149)
---- ---- -----
Net deferred income taxes.......................... $ -- $ -- $ --
==== ==== =====
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible.
At September 30, 1997, the Company has net operating loss carryforwards for
Federal income tax purposes of approximately $986 which are available to offset
future Federal taxable income, if any, through 2012.
12. BANK AGREEMENTS
On September 9, 1997, the Company and MedPlus entered into a line of credit
agreement ("Universal Line of Credit") with a bank to fund the costs associated
with the Company's Acquisitions and IPO discussed in Note 4 and for working
capital. The Universal Line of Credit allows for maximum borrowings of up to
$1,500 subject to a combined borrowing limit with MedPlus's separate $10,000
revolving line of credit agreement ("MedPlus Line of Credit") based on defined
net worth and collateral formulas. Borrowings under the Universal Line of Credit
bear interest at the bank's prime rate (8.50% at September 30, 1997) and mature
upon the earlier of March 31, 1998 or the completion of the Company's IPO.
F-29
<PAGE> 118
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDPLUS, INC.)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The Universal Line of Credit requires the Company to pay a $15 monthly
commitment fee through December 31, 1997 which then decreases to $10 a month
until the Company receives a specified minimum capitalization or maturity. The
Universal Line of Credit also contains various restrictive and financial
covenants and is secured by all tangible and intangible assets of the Company
and MedPlus. Prior to entering into the Universal Line of Credit, the Company
and MedPlus entered into an agreement under which MedPlus agreed to act as
co-borrower under the Universal Line of Credit, and the Company agreed to repay
the outstanding borrowings under the Universal Line of Credit as soon as
possible following its IPO.
The maximum amount available at September 30, 1997 under the Universal Line
of Credit was $1,500. The amount outstanding under the Universal Line of Credit
at September 30, 1997 was $630.
As of September 30, 1997, the Company and MedPlus were in default of a
covenant of the Universal Line of Credit. On November 14, 1997, the bank waived
this event of default and amended the covenant through March 31, 1998. The bank
also required the Company and MedPlus to agree to a review of their accounts
receivable and an audit by the bank.
13. STOCKHOLDER'S EQUITY, STOCK OPTIONS AND STOCK WARRANT
(a) STOCK DIVIDEND AND STOCK SPLIT
Effective August 30, 1996, the Company's Board of Directors authorized a
stock dividend of 99 shares which were issued to MedPlus.
In conjunction with the Acquisitions, the Company intends to effect a
8,451.59-for-1 stock split to be effective immediately prior to the Acquisitions
and IPO.
(b) STOCK OPTIONS
In connection with the IPO, the Company adopted the 1997 Long-Term
Incentive Plan ("Plan"). The Plan provides for the grant of stock-based
incentives to directors, officers and employees in the form of non-qualified
stock options or restricted stock. The maximum number of shares that may be
issued under the Plan is 720,000 shares.
Under the terms of the Plan, options may not be granted at less than fair
market value on the date of grant. Options granted under the Plan are
exercisable in installments; however, no options are exercisable later than 10
years from the date of grant.
In August 1997, the Company granted to the Chief Executive Officer, Chief
Financial Officer and other members of management options to purchase 141,000
shares of common stock at $9.60 per share. Of the options granted, one half will
vest six months after the date of grant or on the first business day following
the IPO, whichever is later and the remaining half will vest on the anniversary
date thereof.
In addition, upon the effective date of the IPO, the Company expects to
grant to other employees of the Company options to purchase 286,000 shares of
common stock at the IPO price. Of the options granted, one half will vest six
months after the date of grant and the remaining half will vest one year
thereafter.
The per share fair value of the stock options granted in August 1997 was
$3.17 on the date of grant using the Black Scholes option-pricing model with the
following weighted average assumptions: expected dividend yield 0%, risk-free
interest rate of 6.25%, expected volatility of 38%, and an expected life of 3
years.
The Company applies APB Opinion No. 25 in accounting for the Plan;
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
F-30
<PAGE> 119
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDPLUS, INC.)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Company's actual net loss of $543 for the nine months ended September 30, 1997
would have been increased to a pro forma net loss of $590.
At September 30, 1997, there were 141,000 options outstanding at an
exercise price of $9.60 per share and a remaining contractual life of 9.8 years.
No options were exercisable at September 30, 1997.
(c) STOCK WARRANT
The Company granted a warrant to the Senior Vice President of Business
Development and Marketing to purchase a number of common shares of the Company's
common stock up to an amount equivalent to .5% of the shares of the Company's
common stock outstanding prior to the IPO (4,226 shares post-stock split) at an
exercise price of $2.37 per share post-stock split, assuming a per share IPO
price of $12.00. As the exercise price per share of the warrant is less than the
common stock per share fair value of $9.60, the Company has recorded the excess
of the fair value over the exercise price of approximately $30 as an unearned
stock warrant. This amount is being recorded as compensation expense over the
Senior Vice President's term of employment which began in August 1997.
14. COMMITMENTS
(a) CONSULTING AGREEMENTS AND STOCK WARRANTS
The Company has entered into agreements with two consulting firms, Growth
Management Advisors, Inc. ("GMA") and Madison Financial Group, Ltd. ("Madison")
to assist it in the identification and recruitment of certain software resellers
and integrators that the Company may acquire or combine with, and to assist the
Company in an IPO of the combined companies. The acquisition of or combination
with these resellers and integrators would be concurrent with and contingent
upon a successful IPO. The consulting agreement, effective September 1, 1996,
with Madison provides for a consulting fee of $50 plus out of pocket expenses.
The consulting agreements with GMA, effective during various dates during 1997,
provide for monthly fees based on the GMA personnel involved plus reasonable
business expenses.
The consulting agreements also grant a principal of GMA a warrant to
acquire a number of common shares of the Company up to an amount equivalent to
5% of the common shares of the Company outstanding prior to an IPO of the
Company stock. The GMA warrants expire five years from the date of the IPO. The
warrants will cease to be effective if the IPO is not completed. The fair value
of the GMA warrant of $60 has been capitalized as acquisition costs based on the
services being provided. The warrant was recorded at its fair value on its date
of grant.
Another consulting agreement grants an additional principal of GMA a
warrant to acquire a number of common shares of the Company up to an amount
equivalent to 1% of the common shares of the Company outstanding after the IPO.
This warrant expires three years from the date of the IPO and has an exercise
price equivalent to the IPO price.
(b) EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with three employees
that generally provide annual salary and discretionary or performance bonuses.
These contracts were effective December 14, 1995 and expire December 31, 1998.
In 1996, MedPlus granted stock options to one of these employees and to two
other employees of the Company.
In connection with the IPO, the Company has entered into employment
agreements with certain members of its executive management group that commence
on the effective date of the IPO. The provisions of each of the agreements are
substantially similar. The salary and incentive compensation for each position
do, however, vary. Aggregate maximums of annual salaries and incentive
compensation of the executive
F-31
<PAGE> 120
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDPLUS, INC.)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
management group approximate $570 and $320, respectively. Three of the
agreements are for a three year term; two are for a two year term and the
remaining agreements are for a period of one year. Each of the agreements
provides for severance pay in the event the agreement is terminated by the
Company without cause or by the executive with cause, as defined in the
agreement.
15. RELATED PARTY TRANSACTIONS
(a) REIMBURSEMENT AGREEMENT WITH MEDPLUS
In connection with the Company's efforts to acquire a number of CAD
resellers and/or other companies whose business may complement that of the
Company and conduct an IPO of the Company's common stock concurrently with the
Acquisitions, the Company entered into a Reimbursement Agreement with MedPlus
effective May 28, 1997 ("Reimbursement Agreement") under which MedPlus agreed to
continue to provide operational and administrative assistance ("Services") to
the Company and to provide the funds necessary ("Funding") to conduct the
Acquisitions, IPO and related transactions. The Reimbursement Agreement provides
for interest to accrue monthly at a rate equal to the prime rate plus 1% (9.50%
at September 30, 1997) on the Funding and the value of the Services. The Company
agreed to reimburse MedPlus for the amounts funded under the Reimbursement
Agreement within thirty days following an IPO of the Company's common stock or
in the event the IPO is not conducted, the Company's receipt of third party
financing. As of September 30, 1997, the Company had $248 in amounts due to
MedPlus under the Reimbursement Agreement.
In connection with the closing of the IPO, however, MedPlus has agreed to
fund its proportionate share of the IPO costs based upon the number of shares to
be sold by the Company and MedPlus with up to a maximum of $433 to be payable by
MedPlus.
(b) OTHER TRANSACTIONS WITH MEDPLUS
MedPlus provides the Company with various services including finance, human
resources, insurance administration, legal, marketing and office administration
as well as office space. The Company has paid to MedPlus or recorded a liability
for the cost of these services and office space to MedPlus based either on the
separate identification of such costs, or, to the extent that the direct costs
of services provided by MedPlus could not be separately identified, on the
Company's allocable portion of the total cost to MedPlus for such services using
such objective factors and methodologies as are available to the Company and
MedPlus. The cost of such services and office space for the year ended December
31, 1996 and nine months ended September 30, 1997 were $133 and $138,
respectively. No costs were allocated to the Company for the period December 14,
1995 to December 31, 1995.
As noted above, MedPlus provides office space to the Company. As part of
this arrangement, MedPlus has required the Company to enter into a noncancelable
operating lease for a portion of the total space occupied by MedPlus and the
Company. This lease is with a third party lessor and is guaranteed by MedPlus.
The Company's commitments to the lessor under this agreement are as follows:
1997 -- $16; 1998 -- $64; 1999 -- $65; 2000 -- $66; and 2001 and
thereafter -- $100.
MedPlus, however, currently makes the payments under the lease on behalf of
the Company and only allocates rent to the Company based on the portion of the
facilities used by the Company. Rent expense of $34 and $42 for the year ended
December 31, 1996 and nine months ended September 30, 1997, respectively, are
included in the allocations discussed in the first paragraph above. The Company
incurred no rent expense for the period December 14, 1995 to December 31, 1995.
F-32
<PAGE> 121
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDPLUS, INC.)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
In addition to providing the services and office space noted above, MedPlus
has also from time to time advanced funds to the Company for use in its
operations. At December 31, 1995 and 1996 and September 30, 1997, the Company
had a liability due to MedPlus for the following:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ------
<S> <C> <C> <C>
Operating advances............................................. $ -- $139 $ 562
Services and office space...................................... -- 133 272
Amounts due under Reimbursement Agreement...................... -- -- 248
Accrued interest on the convertible debenture.................. 46 75 97
Tax sharing agreement.......................................... 53 53 53
---- ---- ------
$ 99 $400 $1,232
==== ==== ======
</TABLE>
The average quarterly balance of the payable to MedPlus during the period
of December 14, 1995 to December 31, 1995 and for the year ended December 31,
1996 was $73 and $246, respectively. The average quarterly balance of the
payable to MedPlus excluding amounts due under the Reimbursement Agreement for
the nine months ended September 30, 1997 was $651. MedPlus does not charge the
Company interest on these outstanding balances.
For the period December 14, 1995 and December 31, 1995, the Company
provided consulting services to MedPlus valued at $11. During the course of the
year ended December 31, 1996 and nine months ended September 30, 1997, the
Company provided consulting services to MedPlus valued at $35 and $13,
respectively. Such services were billed to MedPlus at the Company's standard
consulting rates. At December 31, 1995 and 1996 and September 30, 1997, the
Company had a receivable due from MedPlus for the consulting services noted
above of $26 and $6, and $3, respectively, which is included in trade accounts
receivable.
The two key employees of the Company, including the chief operating
officer, were the majority stockholders of Universal and HWB. The chief
operating officer is also a stockholder and director of MedPlus.
MedPlus is also a party to the consulting agreement with Madison described
in note 14(a). Under this agreement, MedPlus has granted Madison a warrant to
purchase 15% of the Company's stock owned by MedPlus as of the date of the
agreement.
16. RETIREMENT SAVINGS AND INVESTMENT PLAN
MedPlus has a Retirement Savings and Investment Plan (401(k) Plan) in which
the Company's employees may participate by contributing specified percentages of
qualified compensation subject to Internal Revenue Service limitations. MedPlus
may make discretionary contributions up to a maximum of 100% of each
participant's contribution. There were no expenses recorded related to this Plan
in 1995, 1996, or 1997.
17. SIGNIFICANT CUSTOMERS
For the period December 14, 1995 to December 31, 1995, IBM and Document
Imaging Solutions ("DIS"), an Ohio based document management software reseller
and integrator, accounted for approximately 67% and 13% of total revenues. These
two customers accounted for 67% of trade accounts receivable at December 31,
1995. For the year ended December 31, 1996, IBM and the Rockwell Space Systems
Division of Rockwell International accounted for approximately 42% and 14% of
total revenues, respectively. These two customers accounted for 35% of trade
accounts receivable while DIS and Optical Technology Group ("OTG"), a Maryland
based document management software reseller and integrator, accounted for 34% of
trade accounts receivable at December 31, 1996. OTG, IBM, and DIS accounted for
approximately 32%, 19%, and 15% of total revenues, respectively, for the nine
months ended September 30, 1997. These customers accounted for 57% of trade
accounts receivable at September 30, 1997.
F-33
<PAGE> 122
INDEPENDENT AUDITORS' REPORT
Stockholders
Universal Document Management Systems, Inc.:
We have audited the accompanying balance sheets of Universal Document
Management Systems, Inc. as of December 13, 1995 and December 31, 1994 and 1993
and the related statements of operations, stockholders' deficit and cash flows
for the period and years then ended. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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.
As discussed in Note 11, our report dated December 29, 1993 on the balance
sheet at November 30, 1993 and report dated February 18, 1995 on the balance
sheet at December 31, 1994 and related statements of operations, stockholders'
deficit, and cash flows for the year then ended, have been restated to reflect
the reclassification of advances under an agreement with IBM Corporation as a
liability and accrual of related interest.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Universal Document
Management Systems, Inc. as of December 13, 1995 and December 31, 1994 and 1993
and the results of its operations and cash flows for the period and years then
ended in conformity with generally accepted accounting principles.
On December 14, 1995, an agreement of merger was signed whereby all the
outstanding common stock of the Company was acquired by MedPlus, Inc.
/s/ Clark, Schaefer, Hackett & Co.
Cincinnati, Ohio
February 15, 1996
F-34
<PAGE> 123
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1993 AND 1994
AND DECEMBER 13, 1995
ASSETS
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Current assets:
Cash.................................................. $ -- $ 8,317 $ 111,989
Accounts receivable:
Trade, net of allowances for doubtful accounts and
sales returns.................................... -- 326,274 104,185
Unbilled........................................... -- -- 24,307
Prepaid expenses...................................... 3,155 5,200 3,563
Deferred income taxes................................. -- -- 51,600
--------- --------- ---------
3,155 339,791 295,644
--------- --------- ---------
Property and equipment:
Computer equipment and fixtures....................... 89,021 105,933 125,021
Less accumulated depreciation......................... 51,490 71,327 91,915
--------- --------- ---------
37,531 34,606 33,106
--------- --------- ---------
Other assets:
Debt issue costs, net................................. -- 25,217 --
Computer software construction costs, net of
amortization....................................... -- 43,024 156,544
Deposits.............................................. 4,553 4,721 4,972
Deferred income taxes................................. -- -- 6,800
--------- --------- ---------
4,553 72,962 168,316
--------- --------- ---------
$ 45,239 $ 447,359 $ 497,066
========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft........................................ $ 21,196 $ -- $ --
Accounts payable...................................... -- 1,950 --
Customer deposits..................................... 21,520 -- 50,000
Notes payable......................................... 10,000 -- --
Convertible debentures................................ -- 400,000 400,000
Accrued expenses:
Interest........................................... 11,005 48,859 106,363
Payroll and payroll taxes.......................... 10,487 -- 61,489
Other expenses..................................... -- 99 53,485
Current portion of obligation under capital lease..... 2,884 3,741 4,748
Current portion of unearned maintenance contract
fees............................................... -- -- 33,329
Accounts payable -- stockholder....................... 11,718 52,850 20,421
--------- --------- ---------
88,810 507,499 729,835
--------- --------- ---------
Other liabilities:
IBM Corporation assistance agreement.................. 200,000 200,000 188,200
Unearned maintenance contract fees, net of current
portion............................................ -- -- 30,391
Obligation under capital lease, net of current
portion............................................ 14,150 10,820 6,423
--------- --------- ---------
214,150 210,820 225,014
--------- --------- ---------
Stockholders' deficit:
Common stock, no par value, 4,500 shares authorized,
3,200, 500 and 500 shares issued and outstanding... 2,100 2,100 2,100
Accumulated deficit................................... (259,821) (273,060) (459,883)
--------- --------- ---------
(257,721) (270,960) (457,783)
--------- --------- ---------
$ 45,239 $ 447,359 $ 497,066
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE> 124
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD ENDED DECEMBER 13, 1995
<TABLE>
<CAPTION>
1993 1994 1995
--------- -------- ---------
<S> <C> <C> <C>
Revenue:
Software licenses...................................... $ 57,123 $248,895 $ 187,739
Training and consulting................................ 28,552 221,014 220,883
Maintenance contracts.................................. 280 1,613 23,336
Custom programming and other fees...................... -- 15,666 19,020
Sales returns and allowances........................... -- -- (3,500)
--------- --------- ---------
85,955 487,188 447,478
--------- --------- ---------
Selling, general and administrative expenses:
Leased labor costs..................................... 226,719 284,035 328,336
Commissions............................................ -- -- 5,380
Promotion and marketing................................ 3,047 55,210 61,486
Travel and entertainment............................... 14,027 25,840 40,457
Convention booth rental................................ 320 4,835 7,961
Telephone.............................................. 5,182 10,497 11,878
Equipment rental....................................... -- 760 1,373
Software licensing costs............................... 820 3,403 557
Repairs and maintenance................................ 1,785 5,440 4,674
Office expenses........................................ 3,930 3,443 6,284
Shipping and postage................................... 1,318 2,247 1,480
Professional fees...................................... 4,453 23,535 61,417
Contributions.......................................... -- 300 --
Taxes.................................................. 585 1,157 1,063
Depreciation and amortization.......................... 15,663 19,837 38,731
Bad debt expense....................................... -- -- 35,322
--------- --------- ---------
277,849 440,539 606,399
--------- --------- ---------
Income (loss) from operations....................... (191,894) 46,649 (158,921)
--------- --------- ---------
Other income (expense):
Interest expense....................................... (16,493) (61,370) (87,924)
Interest income........................................ 1,368 1,482 1,622
--------- --------- ---------
(15,125) (59,888) (86,302)
--------- --------- ---------
Loss before provision for income taxes.............. (207,019) (13,239) (245,223)
Income tax benefit....................................... -- -- (58,400)
--------- --------- ---------
Net loss............................................ $(207,019) $(13,239) $(186,823)
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE> 125
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD ENDED DECEMBER 13, 1995
<TABLE>
<CAPTION>
COMMON STOCK
OUTSTANDING
--------------------------------- TOTAL
STATED ACCUMULATED STOCKHOLDERS'
SHARES VALUE DEFICIT DEFICIT
------ ------ ----------- -------------
<S> <C> <C> <C> <C>
Balance
December 31, 1992.............................. 500 $2,100 $ (52,802) $ (50,702)
Net loss for year ended December 31, 1993...... -- -- (207,019) (207,019)
----- ------ -------- --------
Balance
December 31, 1993.............................. 500 2,100 (259,821) (257,721)
Net loss for year ended December 31, 1994...... -- -- (13,239) (13,239)
----- ------ -------- --------
Balance
December 31, 1994.............................. 500 2,100 (273,060) (270,960)
Effect of six for one common stock split....... 2,500 -- -- --
Issuance of 200 shares of common stock......... 200 -- -- --
Net loss for period ended December 13, 1995.... -- -- (186,823) (186,823)
----- ------ -------- --------
Balance
December 13, 1995.............................. 3,200 $2,100 $(459,883) $(457,783)
===== ====== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE> 126
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD ENDED DECEMBER 13, 1995
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $(207,019) $ (13,239) $(186,823)
Adjustments to reconcile net loss to cash provided
(used) by operating activities:
Depreciation and amortization.................... 15,663 19,837 38,731
Amortization of debt issue costs................. -- 14,783 25,217
Deferred income taxes............................ -- -- (58,400)
Effects of change in operating assets and
liabilities:
Accounts receivable -- trade.................. -- (326,274) 222,089
Accounts receivable -- unbilled............... -- -- (24,307)
Prepaid expenses.............................. (3,155) (2,045) 1,637
Deposits...................................... (4,405) (168) (251)
Accounts payable.............................. -- 1,950 (1,950)
Customer deposits............................. (9,880) (21,520) 50,000
Accrued expenses.............................. 19,359 27,466 172,379
Unearned maintenance contract fees............ -- -- 63,720
--------- --------- ---------
Net cash provided (used) by operating
activities............................... (189,437) (299,210) 302,042
--------- --------- ---------
Cash flows from investing activities:
Computer software construction costs.................. -- (43,024) (131,663)
Purchases of equipment................................ (17,279) (16,912) (19,088)
--------- --------- ---------
Net cash used by investing activities....... (17,279) (59,936) (150,751)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of convertible debentures...... -- 400,000 --
Debt issue costs...................................... -- (40,000) --
Proceeds from IBM assistance agreement................ 76,000 -- --
Payment of IBM assistance agreement................... -- -- (11,800)
Net change in stockholder accounts payable............ 31,114 41,132 (32,429)
Net change in short term note payable................. 10,000 (10,000) --
Net change in cash overdraft.......................... 21,196 (21,196) --
Payment of capitalized lease obligation............... -- (2,473) (3,390)
--------- --------- ---------
Net cash provided (used) by financing
activities............................... 138,310 367,463 (47,619)
--------- --------- ---------
Increase (decrease) in cash............................. (68,406) 8,317 103,672
Cash -- beginning of year............................... 68,406 -- 8,317
--------- --------- ---------
Cash -- end of year..................................... $ -- $ 8,317 $ 111,989
========= ========= =========
Supplemental disclosures:
Income taxes paid during the year..................... $ -- $ -- $ --
========= ========= =========
Interest paid during the year......................... $ 5,488 $ 8,733 $ 5,203
========= ========= =========
</TABLE>
In 1993 a capital lease obligation of $19,756 was incurred when the Company
entered into a lease agreement for a new computer.
See accompanying notes to financial statements.
F-38
<PAGE> 127
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following accounting principles and practices of the Company are set
forth to facilitate the understanding of data presented in the financial
statements.
Organization
The Company designs, develops and markets computer software, selling its
product worldwide to global and regional companies in diversified business
lines. Consulting, training, custom programming, and maintenance contracts are
also offered in conjunction with software sales. A significant portion of
revenues are derived from sales of software licenses and reseller agreements.
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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Concentrations of credit risk
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any losses
in such accounts. Management believes it is not exposed to any significant
credit risk on cash.
Credit is granted to customers based upon management's evaluation and does
not require collateral. The Company maintains allowances for potential credit
losses which management estimates to be adequate in the circumstances.
Allowance for Sales Returns
A reserve has been established for consulting fee adjustments. The reserve
may be reduced against future consulting engagements. Management does not
anticipate customer return of software products in the near term.
Property, equipment and depreciation
Property and equipment is recorded at cost. Depreciation is computed using
accelerated methods over the estimated useful lives of the assets.
Computer software construction costs
Costs related to the construction of computer software are capitalized and
amortized using straight-line methods over the useful lives of such software,
which are estimated to be no more than three years. Amortization of costs begins
upon marketing of completed software.
Revenue recognition
The use of software programs are licensed through the Company's direct
sales force and by specific arrangements with certain vendors and distributors.
Revenue generated from licenses is recognized when the following criteria have
been met: (a) an order for the unconditional license of software has been
received, (b) the Company has delivered the product and performed substantially
all services for which it was committed, (c) the customer is obligated to pay
and (d) collectability is probable.
F-39
<PAGE> 128
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Consulting, training and customer programming fees are billed upon
completion. Historically, consulting, training and programming engagements are
of a short duration with remote risk of loss. Unbilled receivables represent
completed engagements or projects not yet delivered to the customer as of the
balance sheet date. Customer deposits represent advance payments received for
consulting, training, and custom programming engagements which have not yet
begun.
Maintenance contract fees are recorded as unearned revenue and are included
in income over the life of the respective contracts.
Leased labor
The Company has no employees and leases all its labor from an employee
leasing company. Accordingly, all payroll taxes are borne by the leasing
company. All leased labor work from their own residences with no occupancy cost
to the Company.
Income taxes
The Company changed its tax status from an "S" corporation to a "C"
corporation effective January 1, 1994. After this date, the financial statements
provide for the income tax effect of earnings reported. The tax provision
includes taxes currently due and taxes deferred due to generally accepted
accounting principles being used for financial reporting and cash basis
accounting methods being used for income tax reporting and due to a net
operating loss carryforward. Prior to the change in tax status, earnings and
losses were included in the personal tax returns of the stockholders under the
sub chapter "S" provisions and the Company did not record an income tax
provision.
2. ACCOUNTS RECEIVABLE, TRADE
Accounts receivable, trade are reported net of the following allowances at
December 31, 1993, 1994 and December 13, 1995.
<TABLE>
<CAPTION>
1993 1994 1995
---- -------- --------
<S> <C> <C> <C>
Accounts receivable, trade..................... $ -- $326,274 $111,200
Allowance for doubtful accounts................ -- -- (3,515)
Allowance for sales returns.................... -- -- (3,500)
---- -------- --------
$ -- $326,274 $104,185
==== ======== ========
</TABLE>
3. COMPUTER SOFTWARE CONSTRUCTION COSTS
Computer software construction costs are reported net of accumulated
amortization at December 31, 1993, 1994 and December 13, 1995 as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ------- --------
<S> <C> <C> <C>
Computer software construction costs............ $ -- $43,024 $174,687
Accumulated amortization........................ -- -- (18,143)
---- ------- --------
$ -- $43,024 $156,544
==== ======= ========
</TABLE>
Amortization expense of $18,143 has been included in the statement of
operations for the period ended December 13, 1995. Amortization was computed on
an estimated three year life from the release date of the related software.
Management believes it is more likely than not the software related to these
capitalized costs will be marketable for the entire three year period. The net
value of the capitalized costs could be reduced in the near term if the
estimated life of the related software is reduced.
F-40
<PAGE> 129
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DEBT ISSUE COSTS
Financing costs incurred during 1994 of $40,000 are amortized through
December 31, 1995, the maturity date of the related debt. Amortization expense
of $14,783 and $25,217 has been included as interest expense in the statement of
operations for the year ended December 31, 1994 and the period ended December
13, 1995, respectively.
5. CAPITAL LEASES
The Company is the lessee of computer equipment under a capital lease
agreement expiring in 1997 with a cost of $19,756. Depreciation expense on this
equipment was $3,951, $6,322 and $3,793 for the years ended December 31, 1993
and 1994, and for the period ended December 13, 1995, respectively. Net book
value of this equipment was $5,690, $9,483 and $15,805 at December 31, 1993,
1994 and December 13, 1995.
The following is a schedule by periods of future minimum lease payments
under the capital lease together with the present value of the minimum lease
payments as of December 13, 1995.
<TABLE>
<S> <C>
Period Ending December 31,
1996............................................................. $ 7,735
1997............................................................. 6,808
-------
Total future minimum lease payments................................ 14,543
Less amount representing interest.................................. 3,372
-------
Present value of future minimum lease payments..................... 11,171
Less current portion............................................... 4,748
-------
Long-term portion................................................ $ 6,423
=======
</TABLE>
6. NOTES PAYABLE
On December 29, 1993, the Company obtained an unsecured demand note for
$10,000 for short term working capital. The note was paid off in early 1994 with
no interest charge to the Company.
7. CONVERTIBLE DEBENTURES
During the year ended December 31, 1994 the Company issued convertible
debentures totaling $400,000. The debentures are unsecured obligations of the
Company maturing on December 31, 1995, and bear interest at 10% per annum,
payable at maturity. The debentures are convertible into shares of common stock
of the Company at a stated price per share, and may be converted in entirety or
in portion from time to time until maturity.
On December 31, 1995 $100,500 of these debentures were repaid, including
interest at 10%. The remaining $299,500 of debentures to MedPlus, Inc. were
extended indefinitely by the holder. (Note 13)
Interest expense related with these obligations of $24,394 and $42,397 has
been included in the statements of operations for the year ended December 31,
1994 and the period ended December 13, 1995, respectively.
8. RELATED PARTY ACCOUNTS PAYABLE
A stockholder advanced the Company funds throughout the periods to be used
as working capital. Interest of $749, $1,207 and $2,049 was paid on these
advances during the years ended December 31, 1993 and 1994 and the period ended
December 13, 1995. Interest was computed at a rate which approximates the prime
rate during the periods.
F-41
<PAGE> 130
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. IBM CORPORATION ASSISTANCE AGREEMENT
IBM Corporation (IBM) has provided the Company funds under terms of an
assistance agreement. Under this agreement the Company invoiced IBM established
amounts as specified milestones were achieved.
The $200,000 received under the agreement has been recorded as a liability,
with an agreed upon pay back amount of $240,000. Imputed interest of $40,000
under the agreement has been accrued through December 13, 1995. Imputed interest
expense included in the statement of operations for the years ended December 31,
1993 and 1994 and the period ended December 13, 1995 is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Interest expense.............................. $11,005 $13,460 $15,535
======= ======= =======
</TABLE>
These funds are to be repaid through revenue participation whereby IBM
receives: (a) 100% of worldwide gross revenue received with respect to product
for sale or standard licenses, including maintenance fees, of quarterly revenue
between $112,500 and $150,000 or annual revenue of $450,000 to $600,000,
whichever is greater; (b) thereafter 25% of all worldwide gross revenue received
until IBM has recovered $240,000. For periods thereafter ten percent of all IBM
generated worldwide gross revenue received will be paid to IBM as a royalty.
\ 10. INCOME TAXES
The income tax benefit consists entirely of deferred taxes as follows for
the year ended December 31, 1994 and the period ended December 13, 1995:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Deferred taxes, current in nature:
Assets............................................... $ 69,000 $ 81,300
Liabilities.......................................... (69,000) (29,700)
-------- --------
Net deferred tax asset....................... $ -- $ 51,600
======== ========
Deferred taxes, long term in nature:
Assets............................................... $ -- $ 6,800
Liabilities.......................................... -- --
-------- --------
Net deferred tax asset....................... $ -- $ 6,800
======== ========
</TABLE>
The Company has recorded a current deferred tax asset of $12,800 reflecting
the benefit of $56,847 in loss carryforwards, which expire in 2009. Realization
depends on generating sufficient taxable income before expiration of the loss
carryforwards. Although realization is not assured, management believes it is
more likely than not that all of the deferred tax asset will be realized. The
amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced. All net deferred tax assets are based on an
anticipated average tax rate for future taxable income.
11. RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS
The report dated December 29, 1993 on the balance sheet at November 30,
1993 and report dated February 18, 1995 on the balance sheet at December 31,
1994 and related statements of operations, accumulated deficit, and cash flows
for the year then ended have been restated to reflect funds received from IBM
Corporation as a liability rather than revenue.
F-42
<PAGE> 131
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The effect of this restatement has the following effects:
<TABLE>
<CAPTION>
LIABILITY FOR
-----------------------
IBM
STOCKHOLDERS' ASSISTANCE ACCRUED
DEFICIT AGREEMENT INTEREST
------------- ---------- --------
<S> <C> <C> <C>
Balance -- November 30, 1993 as originally
stated.................................. $ (32,279) $ -- $ --
Restatement............................... (209,920) 200,000 9,920
--------- --------- --------
Balance -- November 30, 1993 as
restated................................ $(242,199) $ 200,000 $ 9,920
========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
LIABILITY FOR
-----------------------
NET IBM
INCOME STOCKHOLDERS' ASSISTANCE ACCRUED
(LOSS) DEFICIT AGREEMENT INTEREST
-------- ------------- ---------- --------
<S> <C> <C> <C> <C>
Balance -- December 31, 1994 as
originally stated............ $ 221 $ (48,595) $ -- $ 24,394
Restatement.................... (13,460) (224,465) 200,000 24,465
-------- --------- --------- --------
Balance -- December 31, 1994 as
restated..................... $(13,239) $(273,060) $ 200,000 $ 48,859
======== ========= ========= ========
</TABLE>
12. SALES TO MAJOR CUSTOMERS
During the years ended December 31, 1993 and 1994 and the period ended
December 13, 1995 sales to the two largest customers comprised a significant
percentage of total sales. These sales and percentages are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Major customer sales........................ $23,300 $252,000 $267,600
% of total sales............................ 27% 52% 60%
</TABLE>
Of the above sales the following amounts were included in accounts
receivable trade at December 31, 1994 and 1993 and December 13, 1995:
<TABLE>
<CAPTION>
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Major customer accounts receivable.......... $ -- $230,800 $110,500
% of total accounts receivable.............. -- 71% 76%
</TABLE>
13. TRANSFER OF OWNERSHIP
On December 14, 1995 an agreement of merger was signed whereby all
outstanding common stock of the Company was acquired by Med Plus, Inc. Pursuant
to the transfer agreement employment contracts with key members of the Company
have been executed.
14. ISSUANCE OF ADDITIONAL SHARES
In September 1993, the Company entered into a consulting agreement with an
investment banker. The agreement provided for the performance of consulting
services in exchange for 5% ownership of the Company's stock. The consulting
agreement was terminated in 1994 and in December 1995, the Company issued 200
shares of common stock to the investment banker. These shares were substantially
acquired by MedPlus, Inc.
F-43
<PAGE> 132
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Applied Software Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Applied
Software Technology, Inc. and subsidiary (the "Company"), as restated, to remove
certain assets and results of operations as discussed in Note 1 as of September
30, 1996 and 1997, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended September 30, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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.
As discussed in Note 1, the Company has signed a letter of intent to be
acquired by an unaffiliated third party. Pursuant to the letter of intent,
certain assets of the Company will not be sold. Accordingly, these financial
statements are not intended to be a complete presentation of the financial
position, results of operations, stockholders' equity (deficit), and cash flows
of the Company but are instead a presentation of the assets to be sold and
liabilities to be assumed, and the related results of operations and cash flows.
As discussed in Note 8, the accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. The Company
experienced a net loss in fiscal 1997, has a net capital deficiency, and is in
violation of certain debt covenants that raise substantial doubt about its
ability to continue as a going concern. The accompanying financial statements do
not include any adjustments that might result from this uncertainty.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the restated financial position of
Applied Software Technology, Inc. and subsidiary at September 30, 1996 and 1997,
and the results of their operations and their cash flows for each of the years
in the three-year period ended September 30, 1997, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
November 14, 1997
Atlanta, Georgia
F-44
<PAGE> 133
APPLIED SOFTWARE TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(RESTATED -- SEE NOTE 1)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 83,338 --
Accounts receivable (note 3):
Trade, less allowance for doubtful accounts of $55,000 and
$65,000 in 1996 and 1997, respectively....................... 1,063,360 1,543,330
Other......................................................... 29,094 17,961
Inventories (note 3)............................................. 254,117 55,877
Prepaid expenses................................................. 99,666 139,949
---------- ----------
Total current assets..................................... 1,529,575 1,757,117
---------- ----------
Property and equipment (note 2).................................... 501,226 486,728
Less accumulated depreciation and amortization................... (326,179) (350,274)
---------- ----------
Net property and equipment............................... 175,047 136,454
---------- ----------
Other assets....................................................... 150 8,359
---------- ----------
$1,704,772 $1,901,930
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit (note 3(a))....................................... $ 344,974 $ 500,000
Bank overdraft................................................... -- 200,356
Current portion of capital leases (note 7)....................... 13,590 15,808
Current installments of note payable to former stockholder (note
4)............................................................ 83,517 92,078
Accounts payable (note 3(b))..................................... 938,362 1,277,682
Accrued expenses and other liabilities........................... 210,646 240,486
Deferred income.................................................. 142,630 226,799
---------- ----------
Total current liabilities................................ 1,733,719 2,553,209
Noncurrent liabilities:
Capital leases, less current portion (note 7).................... 17,684 2,873
Note payable to former stockholder, less current installments
(note 4)...................................................... 141,599 49,521
---------- ----------
Total liabilities........................................ 1,893,002 2,605,603
---------- ----------
Stockholders' deficit -- (notes 3, 4, 5, and 8):
Common stock, $.10 par value, 1,000,000 shares authorized;
371,200 shares issued and 232,000 shares outstanding.......... 37,120 37,120
Additional paid-in capital....................................... 25,217 25,217
Retained earnings................................................ 156,698 (358,745)
---------- ----------
219,035 (296,408)
Less 139,200 shares of treasury stock, at cost................... (407,265) (407,265)
---------- ----------
Total stockholders' deficit.............................. (188,230) (703,673)
Commitments and contingencies (notes 3, 4, 5, 6, and 8)............
---------- ----------
$1,704,772 $1,901,930
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE> 134
APPLIED SOFTWARE TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(RESTATED -- SEE NOTE 1)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1995 1996 1997
----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Hardware........................................... $ 4,166,559 $3,076,918 $3,238,602
Software........................................... 2,818,800 3,463,043 3,207,618
Other.............................................. 1,128,512 1,257,342 1,302,128
---------- ---------- ----------
Total revenues............................. 8,113,871 7,797,303 7,748,348
---------- ---------- ----------
Cost of revenues:
Hardware........................................... 3,247,875 2,546,990 2,741,678
Software........................................... 1,970,603 2,210,549 2,326,287
Other.............................................. 924,904 897,351 919,551
---------- ---------- ----------
Total cost of revenues..................... 6,143,382 5,654,890 5,987,516
---------- ---------- ----------
Gross profit............................... 1,970,489 2,142,413 1,760,832
Selling, general, and administrative expenses........ 1,968,168 1,927,732 2,225,865
Research and development expenses.................... 20,113 -- --
---------- ---------- ----------
Operating income (loss).................... (17,792) 214,681 (465,033)
Other income (expense):
Interest expense................................... (62,089) (51,538) (40,946)
Other income (expense)............................. (6,557) 3,906 3,898
---------- ---------- ----------
Net income (loss).......................... $ (86,438) $ 167,049 (502,081)
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-46
<PAGE> 135
APPLIED SOFTWARE TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(RESTATED -- SEE NOTE 1)
YEARS ENDED SEPTEMBER 30, 1995, AND 1996, AND 1997
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------ PAID-IN RETAINED TREASURY EQUITY
SHARES AMOUNT CAPITAL EARNINGS STOCK (DEFICIT)
-------- ------- ---------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994.... 371,200 37,120 25,217 648,110 (403,265) 307,182
Net loss......................... -- -- -- (86,438) -- (86,438)
Distributions in the form of net
payments related to the
Excluded Assets................ -- -- -- (478,694) -- (478,694)
------- ------- ------ -------- -------- --------
Balance at September 30, 1995.... 371,200 37,120 25,217 82,978 (403,265) (257,950)
Net income....................... -- -- -- 167,049 -- 167,049
Distributions in the form of net
payments related to the
Excluded Assets................ -- -- -- (93,329) -- (93,329)
Additional payment related to
purchase of treasury stock..... -- -- -- -- (4,000) (4,000)
------- ------- ------ -------- -------- --------
Balance at September 30, 1996.... 371,200 37,120 25,217 156,698 (407,265) (188,230)
Net loss......................... -- -- -- (502,081) -- (502,081)
Distributions in the form of net
payments related to the
Excluded Assets (unaudited).... -- -- -- (13,362) -- (13,362)
------- ------- ------ -------- -------- --------
Balance at September 30, 1997.... 371,200 $37,120 $ 25,217 $(358,745) $(407,265) (703,673)
======= ======= ====== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-47
<PAGE> 136
APPLIED SOFTWARE TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(RESTATED -- SEE NOTE 1)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ (86,438) $ 167,049 $(502,081)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 91,583 69,649 62,142
Loss (gain) on sale of property and equipment...... 4,200 -- (3,873)
(Increase) decrease in:
Trade accounts receivable....................... 848,854 332,140 (479,970)
Other accounts receivable....................... 33,843 (3,792) 11,133
Inventories..................................... 22,541 (107,698) 198,240
Prepaid expenses................................ (28,460) (32,701) (40,283)
Other assets.................................... 31,667 24,323 (8,209)
Increase (decrease) in:
Accounts payable................................ (384,337) (273,528) 339,320
Accrued expenses and other liabilities.......... (43,000) (21,927) 29,840
Deferred income................................. (47,479) (44,737) 84,169
--------- --------- ---------
Net cash provided by (used in) operating
activities................................. 442,974 108,778 (309,572)
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of property and equipment............ -- -- 13,962
Purchases of property and equipment..................... (20,797) (75,040) (33,638)
--------- --------- ---------
Net cash (used in) provided by investing activities..... (20,797) (75,040) (19,676)
Cash flows from financing activities:
Principal payments on notes payable to former
stockholder.......................................... (68,710) (75,753) (83,517)
Net borrowings on line of credit........................ 200,000 144,974 155,026
Increase in bank overdraft.............................. -- -- 200,356
Repurchase of common stock.............................. -- (4,000) --
Payments on capital leases.............................. -- (11,911) (12,593)
Distributions in the form of net payments related to the
Excluded Assets...................................... (478,694) (93,329) (13,362)
--------- --------- ---------
Net cash (used in) provided by financing
activities................................. (347,404) (40,019) 245,910
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents................................ 74,773 (6,281) (83,338)
Cash and cash equivalents at beginning of period.......... 14,846 89,619 83,338
--------- --------- ---------
Cash and cash equivalents at end of period................ $ 89,619 $ 83,338 --
========= ========= =========
Cash paid during the period for interest.................. $ 55,487 $ 52,200 $ 43,048
========= ========= =========
Supplemental noncash transactions:
Capital lease obligations incurred for purchase of
equipment............................................ $ -- $ 43,185 $ --
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-48
<PAGE> 137
APPLIED SOFTWARE TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(RESTATED -- SEE NOTE 1)
SEPTEMBER 30, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
During the fiscal year ended September 30, 1997, Applied Software
Technology, Inc. and subsidiary (the "Company") has signed a letter of intent
with Universal Document Management Systems, Inc. ("UDMS") (the "Buyer") under
which, on the contractually designated closing date, the Buyer will acquire
(providing certain conditions have been fulfilled and the merger agreement is
not terminated) all assets and liabilities of the Company, except the Company's
investment in an unconsolidated investee subsidiary and certain capitalized
software development costs (the "Excluded Assets").
The accompanying consolidated financial statements represent the historical
consolidated financial statements of the Company and subsidiary as restated to
remove the Excluded Assets and related results of operations for all periods
presented.
These restated financial statements present the historical financial
position and results of operations for the Company and subsidiary, net of
Excluded Assets of $657,691, $730,507, and $878,540 at September 30, 1995, 1996,
and 1997, respectively, and related net expenses (revenues) of $(726), $20,513,
and $(134,671) for the years ended September 30, 1995, 1996, and 1997,
respectively. The allocation of revenues and expenses to the Excluded Assets was
based on management's identification of the specific revenue and expense
accounts which relate to the Excluded Assets. In the opinion of management, the
allocations of revenues and expenses to the Excluded Assets are reasonable, and
all revenues and expenses related to the Excluded Assets have been properly
excluded from the accompanying consolidated financial statements.
In the presentation of cash flows and stockholders' equity (deficit), any
payments made which were related to the Excluded Assets have been classified as
"Distributions in the form of net payments related to the Excluded Assets."
These consolidated financial statements are not intended to be a complete
presentation of the financial position, results of operations, stockholders'
equity (deficit), and cash flows of the Company, but are instead a presentation
of the assets to be sold and liabilities to be assumed, and the related results
of operations and cash flows.
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.
(b) Description of Business
The Company is primarily involved in the selling of design automation
systems, document management systems, and commercial systems integration to the
manufacturing, corporate engineering, education, design, and consulting markets.
The Company was incorporated under the laws of the State of Georgia during
September 1982. The Company owns a 98% interest in ACADemic LC, a Georgia
limited liability company organized on September 1, 1995 by the Company and its
stockholders. ACADemic LC is in the business of selling design automation
systems to education markets.
F-49
<PAGE> 138
APPLIED SOFTWARE TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Principles of Consolidation
The consolidated financial statements include the accounts (exclusive of
the Excluded Assets) of the Company and ACADemic LC. All significant
intercompany balances and transactions have been eliminated in consolidation.
(d) Revenue Recognition
Revenues from software and computer hardware sales are recognized when the
product is shipped. Revenues from consulting, installation, training, and
support are recognized as the related services are performed.
Deferred income represents advance payments to the Company by customers for
products and services which have not yet been delivered.
(e) Inventories
Inventories consist of computer hardware, component parts, and software
products and are stated at the lower of first-in, first-out (FIFO) cost or
market (net realizable value).
(f) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is provided using the straight-line method over
the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Computer equipment.................................. 5 years
Furniture........................................... 5 years
</TABLE>
(g) Income Taxes
For Federal and state income tax purposes, the stockholders of the Company
have elected that the income of the Company be taxed under the S Corporation
provisions of the Internal Revenue Code. As a result of this election, the
Company has not provided for Federal or state income tax expense as income is
passed through to, and the related income tax liabilities become the individual
responsibility of, the stockholders of the Company.
(h) Research and Development Expenses and Software Development Costs
Research and development costs related to software development that has not
reached technological feasibility are expensed as incurred. Capitalization of
software development costs begins when technological feasibility of the product
or enhancement has been established. The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized software
development costs require considerable judgment by management with respect to
certain external factors, including, but not limited to, anticipated future
revenues, estimated economic life, and changes in software and hardware
technologies.
Capitalized software development costs are amortized using the
straight-line method on a product-by-product basis over a period of five years
beginning when the product is available for general release to customers.
Amortization of capitalized software development costs was approximately
$42,000, $3,000, and $0 for the years ended September 30, 1995, 1996, and 1997,
respectively.
The Company performs a net realizability evaluation of its software
products and recognized a $19,700 write-off of software in 1995 as a result of
the evaluation. This expense is included in the amortization of capitalized
software development costs for the year ended September 30, 1995. No write-offs
due to impairment of net realizable value were required in 1996 or 1997.
F-50
<PAGE> 139
APPLIED SOFTWARE TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(i) Cash Equivalents
The Company considers cash equivalents to include all highly liquid
investments purchased with an original maturity of three months or less.
(j) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of ("SFAS No. 121"), on October 1, 1996. This
Statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. Adoption of SFAS No. 121
did not have a material impact on the Company's financial position or results of
operations.
(2) PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 1996 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Computers and related equipment........................ $323,774 $357,415
Furniture and fixtures................................. 114,215 114,215
Vehicles............................................... 56,945 8,806
Leasehold improvements................................. 6,292 6,292
-------- --------
501,226 486,728
Less accumulated depreciation and amortization......... 326,179 350,274
-------- --------
Net property and equipment........................ $175,047 $136,454
======== ========
</TABLE>
(3) LINE OF CREDIT AND OTHER SHORT-TERM FINANCING
(a) Line of Credit
The Company has available a line of credit agreement with a financial
institution which permits it to borrow up to $500,000. Borrowings under the line
bear interest at the prime rate plus 1%, payable monthly. The line is secured by
accounts receivable and a personal guarantee of the stockholders and at maturity
on January 15, 1997, was renewed until January 15, 1998. At September 30, 1997,
the line of credit had a balance of $500,000.
The Company's line of credit agreement contains restrictive covenants which
include the maintenance of minimum tangible net worth, as defined, and certain
financial ratios. As of September 30, 1997, the Company was not in compliance
with certain of these covenants, and all obligations due under the agreement
have been reported as current liabilities.
(b) Short-Term Financing
The Company has the ability to finance up to $500,000 of its eligible
inventory under a financing agreement. As of September 30, 1997, the terms are
interest-free for the first 30 to 45 days, depending on vendor, and interest is
charged thereafter at the rate of prime plus 6%, plus an administrative fee. The
specific inventory financed is collateral under the financing agreement, and the
liability is personally guaranteed by the
F-51
<PAGE> 140
APPLIED SOFTWARE TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stockholders. Included in accounts payable at September 30, 1996 and 1997 are
liabilities of $108,945 and $12,122, respectively, relating to such inventory
purchases.
The Company's inventory financing agreement contains restrictive covenants
which include the maintenance of minimum tangible net worth, as defined, and
certain financial ratios. As of September 30, 1997, the Company was not in
compliance with certain of these covenants.
(4) NOTE PAYABLE TO FORMER STOCKHOLDER
In January 1994, the Company repurchased as treasury stock 139,200 common
shares for $403,265, representing all of the shares held by a former
stockholder. In connection with the repurchase, the Company also entered into a
two-year noncompete agreement with the former stockholder for $50,000. To
fulfill the agreements, the Company paid $51,765 in cash and issued a note
payable of $401,500. Under the terms of the note, the entire amount of unpaid
principal and interest payments due through the maturity date of the note must
be paid in full in the event of a change in control, as defined.
The note payable to former stockholder is summarized as follows at
September 30:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Subordinated note payable to former stockholder bearing
interest at 10%, payable in ten equal semi-annual
installments of $51,996 on July 13 and January 13
each year through January 13, 1999, secured by
treasury stock of the Company........................ $225,116 $141,599
Less current installments.............................. 83,517 92,078
-------- --------
Note payable to former stockholder, less current
installments...................................... $141,599 $ 49,521
======== ========
</TABLE>
Required principal repayments over the next two fiscal years are as
follows:
<TABLE>
<S> <C>
September 30,
1998............................................................ 92,078
1999............................................................ 49,521
--------
$141,599
========
</TABLE>
(5) STOCKHOLDERS' EQUITY -- STOCKHOLDERS' AGREEMENT
The Company has a stockholders' agreement to which all the stockholders are
a party. This agreement requires a stockholder to offer to sell their stock to
the Company upon retirement, resignation, disability, and certain other
triggering events. The purchase price of the common stock shall be equal to the
total par value of all capital stock issued and outstanding, plus additional
paid-in capital and retained earnings as determined on the most recent year-end
financial statements.
(6) EMPLOYEE BENEFIT PLAN
The Company adopted a 401(k) savings and retirement plan effective January
1, 1992. The plan covers all employees who are 21 years of age or older and are
scheduled to complete 1,000 hours of service during any consecutive 12-month
period. The plan permits eligible employees to make voluntary pretax
contributions of up to 15% of compensation and allows for employer matching and
profit sharing contributions. Employer contributions are discretionary and are
set each year by the Board of Directors. During the years ended September 30,
1995, 1996, and 1997, the Company made no such contributions.
F-52
<PAGE> 141
APPLIED SOFTWARE TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LEASES
The Company is obligated under one capital equipment lease that expires
November 1, 1998.
The Company has entered into noncancelable operating leases covering
certain of its office facilities and vehicles which expire through the years
2000. Rent expense for the years ended September 30, 1995, 1996, and 1997 was
approximately 80,000, $73,000, and $73,000, respectively.
Future net minimum obligations under capital and operating leases are as
follows at September 30, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Year ending September 30:
1998................................................... $16,740 $15,489
1999................................................... 3,605 15,489
2000................................................... -- 5,471
------- -------
Total minimum lease payments...................... 20,345 $36,449
=======
Less amount representing interest................... 1,664
-------
Present value of net minimum capital lease
payments....................................... 18,681
Less current installments of obligations under
capital leases.................................... 15,808
-------
Obligations under capital leases, excluding
current installments........................... $ 2,873
=======
</TABLE>
(8) GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company experienced a net loss in
fiscal 1997, has a net capital deficiency, and is in violation of certain debt
covenants that raise substantial doubt about its ability to continue as a going
concern. The accompanying financial statements do not include any adjustments
that might result from this uncertainty.
F-53
<PAGE> 142
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors:
We have audited the accompanying balance sheets of ACCESS Corporation as of
April 30, 1997 and 1996, and the related statements of operations, of capital
stock and other stockholders' equity and of cash flows for each of the three
years in the period ended April 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the 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 financial statements referred to above present fairly,
in all material respects, the financial position of ACCESS Corporation as of
April 30, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended April 30, 1997, in conformity
with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Cincinnati, Ohio
May 29, 1997
F-54
<PAGE> 143
ACCESS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, SIX MONTHS ENDED
--------------------------- OCTOBER 31,
1996 1997 1997
----------- ----------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 2,071,772 $ 1,404,708 $ 1,896,383
Accounts receivable, less allowance for doubtful
accounts of $189,685 in 1996 and $12,000 in 1997 (Note
2).................................................... 1,890,673 2,151,829 2,183,888
Inventories (Note 2):
Raw materials and purchased parts..................... 64,553 96,673 96,031
Work-in-process....................................... 102,900 56,401 43,856
Finished goods........................................ 21,057 13,551 --
----------- ----------- ------------
Total inventories..................................... 188,510 166,625 139,887
Prepaid expenses...................................... 106,283 135,362 88,533
Deferred income tax, net of valuation allowance of
$300,000 (Note 6)................................... 112,000 112,000 90,709
----------- ----------- ------------
TOTAL CURRENT ASSETS...................................... 4,369,238 3,970,524 4,399,400
EQUIPMENT AND LEASEHOLD IMPROVEMENTS (NOTE 2):
Computer hardware and software.......................... 1,449,310 1,533,592 1,335,051
Machinery and equipment................................. 503,337 503,337 250,883
Office and service equipment............................ 364,492 380,248 360,461
Leasehold improvements.................................. 13,405 13,405 12,030
Tools, dies and fixtures................................ 115,013 97,832 8,946
----------- ----------- ------------
Total................................................. 2,445,557 2,528,414 1,967,371
Less accumulated depreciation........................... 2,187,785 2,289,920 1,760,786
----------- ----------- ------------
Net................................................... 257,772 238,494 206,585
COMPUTER SOFTWARE COSTS, NET OF ACCUMULATED AMORTIZATION
OF $2,299,595 IN 1996 AND $3,368,518 IN 1997............ 1,068,923 -- --
GOODWILL (NOTE 10)........................................ -- 259,691 237,004
DEFERRED INCOME TAX BENEFIT, NET OF VALUATION ALLOWANCE OF
$2,134,000 IN 1996 AND $2,649,018 IN 1997 (NOTE 6)...... 545,700 548,882 548,882
----------- ----------- ------------
Total............................................ $ 6,241,633 $ 5,017,591 $ 5,391,871
=========== =========== ============
LIABILITIES AND CAPITAL STOCK AND OTHER STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................ $ 285,703 $ 291,339 $ 277,480
Accrued salaries, wages and commissions................. 367,282 216,232 171,724
Accrued royalty......................................... 291,192 519,916 1,043,325
Accrued taxes........................................... 22,400 4,198 22,472
Accrued warranty expense................................ -- 11,018 38,096
Other accrued liabilities............................... 49,385 69,206 15,130
Advances from customers................................. 408,460 195,145 282,193
Capital leases.......................................... 19,599 -- --
----------- ----------- ------------
Total current liabilities........................ 1,444,021 1,307,054 1,850,420
PREPAID MAINTENANCE CONTRACTS............................. 609,078 675,245 468,308
MANDATORILY REDEEMABLE CLASS ONE PREFERRED STOCK (NOTE
3)...................................................... 1,500,000 1,500,000 1,500,000
Preferred Dividends -- Accrued.......................... 102,510 -- --
CAPITAL STOCK AND OTHER STOCKHOLDERS' EQUITY (NOTES 2, 4):
Capital Stock:
Common Stock, no par value, authorized 8,000,000
shares; issued and outstanding 4,881,829 in 1996 and
1997................................................ 488,183 488,183 488,183
Additional paid-in capital............................ 10,657,652 10,657,652 10,657,652
Deficit from April 1, 1985............................ (8,544,428) (9,595,160) (9,557,309)
16,270 Common Stock shares in treasury, at cost....... (15,383) (15,383) (15,383)
----------- ----------- ------------
Total capital stock and other stockholders'
equity......................................... 2,586,024 1,535,292 1,573,143
----------- ----------- ------------
Total............................................ $ 6,241,633 $ 5,017,591 $ 5,391,871
=========== =========== ============
</TABLE>
See notes to financial statements.
F-55
<PAGE> 144
ACCESS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED APRIL 30, OCTOBER 31,
------------------------------------- -----------------------
1995 1996 1997 1996 1997
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
System Sales...................... $1,274,996 $3,800,795 $ 2,894,566 $1,161,418 $2,803,349
Service........................... 4,766,786 4,903,657 4,034,787 2,041,541 2,639,430
----------- ---------- ---------- ---------- ----------
Total..................... 6,041,782 8,704,452 6,929,353 3,202,959 5,442,779
COST:
System sales, exclusive of
amortization shown separately
below.......................... 729,965 2,052,266 1,633,974 648,426 1,638,240
Service........................... 2,285,363 2,668,424 2,730,175 1,293,079 2,367,849
----------- ---------- ---------- ---------- ----------
Total..................... 3,015,328 4,720,690 4,364,149 1,941,505 4,006,089
GROSS PROFIT BEFORE AMORTIZATION.... 3,026,454 3,983,762 2,565,204 1,261,454 1,436,690
AMORTIZATION OF COMPUTER SOFTWARE
COST (NOTE 1)..................... 673,704 673,704 1,068,922 336,852 --
----------- ---------- ---------- ---------- ----------
GROSS PROFIT........................ 2,352,750 3,310,058 1,496,282 924,602 1,436,690
OPERATING EXPENSES:
Selling, general and
administrative................. 1,528,460 2,433,376 2,368,804 1,101,607 1,395,006
Engineering, research and
development.................... 592,504 611,295 265,129 144,624 --
----------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS)............. 231,786 265,387 (1,137,651) (321,629) 41,684
OTHER INCOME (EXPENSE).............. (17,174) (7,547) 10,018 5,785 (9,048)
INTEREST INCOME (EXPENSE), NET...... (18,542) 52,781 76,901 39,364 26,506
----------- ---------- ---------- ---------- ----------
EARNINGS (LOSS) BEFORE INCOME
TAXES............................. 196,070 310,621 (1,050,732) (276,480) 59,142
INCOME TAXES (NOTE 6)............... 66,700 105,600 -- -- 21,291
----------- ---------- ---------- ---------- ----------
NET EARNINGS (LOSS)................. 129,370 205,021 (1,050,732) (276,480) 37,851
PREFERRED DIVIDEND.................. 64,685 102,510 -- -- --
----------- ---------- ---------- ---------- ----------
INCOME (LOSS) APPLICABLE TO COMMON
SHARES............................ $ 64,685 $ 102,511 $(1,050,732) $ (276,480) $ 37,851
=========== ========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING................ 4,865,559 4,865,559 4,865,559 4,865,559 4,865,559
PER COMMON SHARE AND COMMON SHARE
EQUIVALENT (NOTE 4):
Net earnings (loss)............... $ 0.01 $ 0.02 $ (0.22) $ (0.06) $ 0.01
=========== ========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-56
<PAGE> 145
ACCESS CORPORATION
STATEMENTS OF CAPITAL STOCK AND OTHER STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED OCTOBER
31, 1997
<TABLE>
<CAPTION>
TREASURY COMMON CLASS A COMMON ADDITIONAL RETAINED
------------------ --------------------- ----------------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT)
------- -------- ---------- -------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, April 30, 1994... 16,270 $(15,383) 3,453,257 $345,326 1,428,572 $ 142,857 $10,824,847 $(8,878,819)
Class One Preferred Stock
dividends............... (64,685)
Net earnings.............. 129,370
------ -------- --------- -------- --------- -------- ----------- -----------
BALANCE, April 30, 1995... 16,270 (15,383) 3,453,257 345,326 1,428,572 142,857 10,760,162 (8,749,449)
Class One Preferred Stock
dividends............... (102,510)
Conversion of Class A
Common Stock to Common
Stock................... 1,428,572 142,857 (1,428,572) (142,857)
Net earnings.............. 205,021
------ -------- --------- -------- --------- -------- ----------- -----------
BALANCE, April 30, 1996... 16,270 (15,383) 4,881,829 488,183 -- -- 10,657,652 (8,544,428)
Net loss.................. (1,050,732)
------ -------- --------- -------- --------- -------- ----------- -----------
BALANCE, April 30, 1997... 16,270 $(15,383) 4,881,829 $488,183 -- $ -- $10,657,652 $(9,595,160)
------ -------- --------- -------- --------- -------- ----------- -----------
Net income (unaudited).... 37,851
------ -------- --------- -------- --------- -------- ----------- -----------
BALANCE, October 31, 1997
(unaudited)............. 16,270 $(15,383) 4,881,829 $488,183 -- $ -- $10,657,652 $(9,557,309)
====== ======== ========= ======== ========= ======== =========== ===========
</TABLE>
See notes to financial statements.
F-57
<PAGE> 146
ACCESS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED OCTOBER
YEAR ENDED APRIL 30, 31,
---------------------------------------- ------------------------
1995 1996 1997 1996 1997
----------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)............................... $ 129,370 $ 205,021 $(1,050,732) $ (276,480) $ 37,851
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating
activities:
Amortization.................................... 673,704 673,704 1,068,922 336,852 6,177
Depreciation.................................... 139,819 143,027 131,755 62,788 59,098
Deferred income taxes........................... 66,700 105,600 (3,182) -- 21,292
Loss (gain) on disposal of fixed assets......... 7,028 1,111 (1,357) (2,355) 7,630
Prepaid maintenance contracts................... 100,606 294,324 66,167 (133,114) (206,937)
Change in assets and liabilities:
Accounts receivable........................... (124,211) 162,968 (120,675) (29,298) (32,061)
Inventories................................... 103,163 224,355 74,548 112,477 26,738
Prepaid expenses.............................. 37,672 (37,293) (16,520) (13,386) 46,830
Accounts payable.............................. (62,481) 86,215 5,656 (191,474) (13,859)
Accrued liabilities........................... (54,023) 244,716 (279,702) (121,971) (53,231)
Accrued royalties............................. -- (33,299) 228,724 205,657 523,409
Advances from customers....................... 30,151 (448,994) (213,314) (175,614) 87,048
----------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities.............................. 1,047,498 1,621,455 (109,710) (225,918) 509,985
----------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash received..... -- (148,629) (324,128) -- 16,510
Capital additions................................. (22,779) (166,010) (124,515) (54,333) (34,820)
Proceeds from disposal of fixed assets............ 2,156 6,267 13,397 -- --
----------- ---------- ---------- ---------- ----------
Net cash used in investing activities..... (20,623) (308,372) (435,246) (54,333) (18,310)
----------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on bank line of credit................. (71,807) -- -- -- --
Dividends on Class One Preferred Stock............ -- (64,685) (102,510) (102,509) --
Payments on capital leases........................ (75,081) (60,112) (19,599) (15,398) --
----------- ---------- ---------- ---------- ----------
Net cash used in financing activities..... (146,888) (124,797) (122,109) (117,907) --
----------- ---------- ---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 879,987 1,188,286 (667,065) (398,158) (491,675)
CASH AND CASH EQUIVALENTS, Beginning of year........ 3,500 883,487 2,071,773 2,071,772 1,404,708
----------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, End of year.............. $ 883,487 $2,071,773 $ 1,404,708 $1,673,614 $1,896,383
=========== ========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest............................ $ 31,900 $ 9,400 $ 3,400 $ 2,200 $ 300
Dividends declared but unpaid on Class One
Preferred Stock totaled $64,685 (1995) and
$102,510 (1996).................................
</TABLE>
See notes to financial statements.
F-58
<PAGE> 147
ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1995, 1996 AND 1997
NOTE 1: A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company services hardware and software for its installed base of
customers and third parties. It also markets software for the electronic
storage, control and processing of technical documentation.
Revenue Recognition
Revenues from the sale of new systems are recognized upon shipment. If
there are services performed, revenue is recognized at the time of customer
acceptance.
Revenue from prepaid maintenance agreements is recognized ratably over the
life of the maintenance contracts.
Inventories
Inventories comprised of material, labor, and related overhead expenses are
stated at the lower of cost (first-in, first-out method) or market.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost and depreciated
over their estimated useful lives using the straight-line method. Computer
software purchased for internal use is depreciated over two years or its useful
life, whichever is less.
Computer Software Development Costs
Computer software development costs are recorded in accordance with
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed. Costs incurred up to
the point of establishing technological feasibility are expensed currently.
Costs incurred after establishment of technological feasibility were
capitalized. Amortization of these capitalized costs began in March 1993 when
the products were released to customers and were amortized over a period not to
exceed five years. Amortization expense was $673,704 and $673,704 for fiscal
years 1995 and 1996, respectively.
While the Company continues to maintain and support its AS/400 EDMS
software product, it does not believe that future revenues of this product
reduced by the estimated future costs, including maintenance and support, are
sufficient to absorb the amortization of the software costs previously
capitalized. Therefore, the Company accelerated the amortization of the
remaining unamortized cost. In fiscal year 1997 the Company wrote off $1,068,922
($0.22 per share), which was the total that remained unamortized.
Use of Estimates
The preparation of the 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 amounts could differ from those estimates.
F-59
<PAGE> 148
ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Statement of Cash Flows
Cash and cash equivalents consist of cash on hand, cash on deposit, and
short-term investments with original maturities less than ninety days.
Product Warranties
Under its product warranty policy, the Company has agreed to replace
certain parts or provide remedial service during the designated warranty period.
Costs associated with these programs are determined on the basis of estimated
net future costs.
Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards No.
123 -- Accounting for Stock-Based Compensation in 1997. The standard defines a
fair-value based method of accounting for stock-based compensation but permits
compensation expense to continue to be measured using the intrinsic value-based
method previously used. The Company continues to measure compensation expense
using the intrinsic value-based method.
Goodwill
In April 1997, the Company established Goodwill with the purchase of the
assets of Graphic Systems Technology, Inc. The Company will amortize this cost
over a ten year period.
Interim Financial Information
The financial statements for the six months ended October 31, 1996 and 1997
are unaudited; however, in the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the financial statements for the interim period have been included. The
results for the interim period are not necessarily indicative of the results to
be achieved for the full fiscal year.
NOTE 2: BANK LINE OF CREDIT
The Company's current line of credit agreement ($400,000 as of April 30,
1997) extends through April 7, 1998. Borrowings under the agreement bear
interest at one percent over the prime rate, 8 1/2% at April 30, 1997. Maximum
availability is based upon the levels (as set forth in the loan agreement) of
eligible accounts receivable. To secure any borrowing, the Company has pledged
accounts receivable, inventories, fixed assets, and general intangibles. The
agreement contains restrictive and other covenants which require the Company to
maintain certain levels of indebtedness to net worth, current ratio and cash
flow from operations. It also restricts new borrowings, capital expenditures,
and dividends on its capital stock.
<TABLE>
<CAPTION>
1995 1996 1997
-------- ---- ----
<S> <C> <C> <C>
Maximum borrowings during the year............... $127,354 $-0- $-0-
Average outstanding balance during the year...... $ 27,956 $-0- $-0-
Weighted average interest rate (determined on a
monthly basis)................................. 9.1%
</TABLE>
NOTE 3: MANDATORILY REDEEMABLE PREFERRED STOCK AND NOTES PAYABLE
On October 28, 1991, the Company entered into a Note Purchase Agreement
with Oce N.V. ("Oce"), which provided for borrowing by the Company of up to $1.5
million to fund a major software development project. On August 26, 1992,
$1,000,000 of then outstanding notes were redeemed in exchange for 10,000
F-60
<PAGE> 149
ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
shares of mandatorily redeemable Class One Preferred Stock. In April 1993, the
Company issued to Oce an additional 5,000 shares of mandatorily redeemable Class
One Preferred Stock for $500,000.
The Class One Preferred Stock is divided into three series: 10,000 shares
of 7% Class One Preferred Stock ($1,000,000); 2,500 shares of 9% Class One
Preferred Stock ($250,000), and 2,500 shares of variable rate Class One
Preferred Stock ($250,000). The variable rate Class One Preferred Stock was
issued at the rate of 9%. Dividends on the Class One Preferred Stock for any
fiscal year are cumulative only to the extent of 50% of the Company's net
after-tax earnings, as defined, for such year.
Annually, beginning in 1995, the Company is required to redeem the Class
One Preferred Stock at $100 per share plus accumulated dividends in an amount
equal to a specified portion of after-tax earnings, as defined. Unless dividends
on the Class One Preferred Stock are current, the Company may not declare a
dividend on its common shares or redeem or purchase any of its common shares.
Under the Note Purchase Agreement, Oce agreed to limitations on the voting and
transfer of the Company's stock (including the transfer of such stock to a
voting trust, the trustees of which are four of the Company's directors) and Oce
was released from its obligation under certain circumstances to make a tender
offer for the Company's common stock. As of April 30, 1997, the Company had
authorized and issued a total of 15,000 shares of Class One Preferred Stock. The
Company was not required to and has not redeemed any Class One Preferred Stock
in fiscal year 1997 or previously.
NOTE 4: CAPITAL STOCK
In 1992 the Company entered into a Voting Trust Agreement with Oce. The
Voting Trust Agreement required Oce to place the certificates for 1,904,763
shares of the Company's Common Stock, less 100 shares, into a voting trust. The
trustees of the trust are four directors of the Company. Pursuant to the Voting
Trust Agreement, the shares will be voted for matters related to the election of
directors in the discretion of the voting trustees (except that such shares will
be voted for up to two director nominees designated by Oce) and on all other
matters by Oce pursuant to a proxy to be granted to it by the voting trustees.
The Voting Trust Agreement is irrevocable for a period of ten years and may
be renewed, at the option of Oce, for additional periods of not more than ten
years each. The Voting Trust Agreement will automatically terminate:
- with respect to any such shares sold to a party unrelated to Oce
- upon the closing of any underwritten public offering of Common Stock
which results in not less than $10,000,000 in aggregate sales price of
Common Stock having been sold.
- upon the acquisition by any person of beneficial ownership of as many or
more shares of Common Stock as are owned by Oce.
Further, the Voting Trust Agreement may be terminated by notice by Oce to
the voting trustees at anytime after October 3, 1995.
If the Voting Trust Agreement is terminated by notice or is not renewed on
its tenth anniversary, Oce is required to make a tender offer for any and all of
the shares of Common Stock at a price per share not less than that defined in
the Note Purchase Agreement (Note 3) and calculated using the Company's audited
financial statements. If the calculated price per share is less than zero, Oce
is not required to make a tender offer.
If the Voting Trust Agreement is terminated by notice to the voting
trustees, the tender offer is required not later than six months after the end
of the fiscal year in which the first anniversary of the notice affected the
termination. If the agreement is not renewed, the tender offer is required not
later than six months after the end of that fiscal year end.
F-61
<PAGE> 150
ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Common Shares
Holders of Common Stock, including the voting trustees, have one vote per
share. Actions by a majority of voting trustees constitute the act of the voting
trust. In fiscal year 1996, the Company's Class A Common Stock was converted to
Common Stock.
Earnings Per Share
The earnings (loss) per share computations are based on the weighted
average number of common shares outstanding during the year adjusted for the
effect of common share equivalents where dilutive. Fully diluted earnings (loss)
per share are not presented as the effect of the dilution is less than 3% or is
anti-dilutive for the years 1995 -- 1997. The Company is required to implement
SFAS 128 Earnings Per Share, which was issued February 1997, effective the third
quarter of fiscal 1998. The effect of implementing SFAS 128 is not expected to
be material.
Stock Option Plans
During the year ended April 30, 1994, the Company adopted the 1993
incentive stock option plan covering 500,000 shares of its Common Stock. The
Company also amended the 1983, 1985 and 1991 plans to add provisions providing
that all outstanding stock options will become exercisable upon the occurrence
of a change of control or similar event.
Options may be granted under the 1991 and 1993 plans to officers and key
employees of the Company. Additionally, directors of the Company and other
persons in business relationships with the Company, such as independent
contractors and consultants, may be granted non-qualified options under the 1991
plan. No further options may be granted under the 1983 and 1985 plans. Incentive
stock options may be granted only to Company employees.
The option price under the plans may not be less than the fair market value
of the Common Stock at the date of grant, as determined by the Board of
Directors, which administers the plans. All options granted under the 1985 plan
and any incentive stock options granted under the 1983, 1991 and 1993 plans may
not be exercised prior to one year from date of grant and expire ten years from
the date of grant.
Changes in stock options were as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF SHARES AVERAGE
------------------ EXERCISE
RESERVED GRANTED PRICE
-------- ------- --------
<S> <C> <C> <C>
Balance, April 30, 1995........................... 785,300 362,400 $ .72
Issued.......................................... 350,000 .15
Canceled........................................ (2,400) (2,400) (5.25)
------- ------- ------
Balance, April 30, 1996 & 1997.................... 779,900 710,000 $ .42
</TABLE>
Options Outstanding and Exercisable at April 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ---------------------------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OF OPTIONS EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (MONTHS) PRICE EXERCISABLE PRICE
- ------------------------------------------ ----------- ------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.15 - $.50............................... 575,000 70 $ .28 341,666 $ .38
$.51 - $1.00.............................. 135,000 36 $ 1.00 135,000 $ 1.00
------- --
------ ------- ------
710,000 476,666
</TABLE>
F-62
<PAGE> 151
ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost for the Company's stock options been determined based
on the fair value at the grant dates for awards under the plan consistent with
the method of SFAS 123, the Company's net income (loss) and earnings per share
for 1997 and 1996 would have been the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1996 1997
-------- -----------
<S> <C> <C>
Pro Forma Net Income and Net Income Per Share
Net income (loss)
As reported....................................... $102,511 $(1,050,732)
Pro forma......................................... $ 87,491 $(1,050,732)
-------- -----------
Net income (loss) per share
As reported....................................... $ .02 $ (.22)
Pro forma......................................... $ .02 $ (.22)
-------- -----------
</TABLE>
The fair value of the options was calculated utilizing the Black-Scholes
option-pricing model and the following key assumptions:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Assumptions:
Risk-free interest rate...................................... 6.4 % 6.4 %
Dividend growth.............................................. 0 % 0 %
Volatility................................................... 0 % 0 %
Expected Life (months)....................................... 70 70
</TABLE>
NOTE 5: ENGINEERING, RESEARCH AND DEVELOPMENT
Engineering, research and development costs for the years ended April 30,
1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- -------- --------
<S> <C> <C> <C>
Charged to specific customer orders....... $ 495,887 $380,741 $312,068
Charged directly to engineering, research
and development......................... 592,504 611,295 265,129
---------- -------- --------
Total cost of engineering, research and
development efforts..................... $1,088,391 $922,036 $577,197
========== ======== ========
</TABLE>
NOTE 6: INCOME TAXES
The provision for income taxes (benefit) includes the following:
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- ---------
<S> <C> <C> <C>
Federal:
Deferred............................... $ 66,700 $ 105,600 $(415,682)
Currently payable (Refundable)......... 66,700 164,000 3,182
Tax benefit of net operating loss
carryforward........................... (66,700) (164,000)
Valuation Allowance...................... 412,500
-------- --------- ---------
Total.......................... $ 66,700 $ 105,600 $ 0
======== ========= =========
</TABLE>
Deferred income taxes reflect the net income tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax
F-63
<PAGE> 152
ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
purposes, and (b) net operating loss carryforwards. The income tax effects of
significant items comprising the Company's net deferred income tax asset as of
April 30, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Net operating loss carryforwards
Federal......................................... $ 2,826,600 $ 3,173,700
State........................................... 75,800 217,400
Temporary differences:
Customer Deposits............................... 67,500 -0-
Inventory capitalization........................ 96,400 96,400
Other........................................... 131,100 122,400
----------- -----------
Total............................................. $ 3,197,400 $ 3,609,900
Less Valuation Allowance........................ (2,539,700) (2,949,000)
----------- -----------
Net deferred income tax asset..................... $ 657,700 $ 660,900
=========== ===========
</TABLE>
The amounts and expiration dates for the Company's net operating loss
carryforwards for income tax return purposes are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30 FEDERAL
------------------------------------------------- ----------
<S> <C>
2002............................................. $1,301,400
2004............................................. 2,762,000
2005............................................. 3,027,000
2008............................................. 459,000
2009............................................. 803,000
2012............................................. 982,000
----------
Total.................................. $9,334,400
==========
</TABLE>
NOTE 7: REVENUES TO MAJOR CUSTOMERS
On a continuing basis, no single customer accounts for a significant
percentage of the Company's net sales. However, net revenues to customers in
selected industries as a percent of total revenues are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal Government..................................... 18.4% 10.9% 5.7%
Aerospace.............................................. 18.8% 14.9% 22.0%
Petroleum.............................................. 4.9% 4.5% 9.3%
Computer............................................... 10.5% 10.5% 10.9%
Medical................................................ 7.2% 8.6% 2.9%
Manufacturing.......................................... 12.4% 1.5% 17.4%
Utilities.............................................. 4.6% 33.4% 12.4%
</TABLE>
Accounts receivable from these customers at April 30, 1996 and April 30,
1997 were $1,100,800 and $1,689,800, respectively.
NOTE 8: LEASE COMMITMENTS
The Company leases office facilities and equipment under operating leases.
Rent expense was $223,977 (1995), $244,718 (1996) and $351,259 (1997) of which
$60,281 (1995), $64,313 (1996) and $111,485 (1997), were under short-term
cancelable leases.
F-64
<PAGE> 153
ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of April 30, 1997, minimum annual payments under all non-cancelable
long-term operating lease agreements are: $211,740 (1998), $178,440 (1999), and
$170,950 (2000).
NOTE 9: CIMSOFT ACQUISITION
On July 31, 1995, the Company acquired CimSoft Incorporated, which started
business in June 1995, for $257,500 in a business combination which was
accounted for using the purchase method. The results of operations of the
company include CimSoft from the date of acquisition. Pro forma results of
operations of CimSoft are not material. CimSoft was a distributor of Cimage
software and a Cimage service provider in North America.
NOTE 10: GRAPHIC SYSTEMS TECHNOLOGY ASSET PURCHASE
On April 11, 1997, the Company purchased certain assets of Graphic Systems
Technology, Inc. from Star Bank for $463,000. The Company simultaneously sold
the assets related to the Chameleon product line to Fong Brothers Printing for
$138,900, resulting in a cash purchase price of $324,100. The Company also
incurred liabilities of approximately $130,000. The purchase price was assigned
to the assets purchased and liabilities incurred based on an estimated fair
value, which included goodwill of approximately $259,691, which was recorded as
part of the transaction. The fair value of assets purchased is based on
information currently available and is subject to adjustment as additional
information, principally accounts receivable, is finalized. Pro forma results of
operations of Graphic Systems Technology, Inc. are not meaningful. Graphic
Systems Technology, Inc. was a third party service provider in the prepress
industry.
NOTE 11: SUBSEQUENT EVENT
On May 9, 1997 the Company executed a letter of intent to join Universal
Document Management Systems, Inc. ("UDMS") a Cincinnati-based venture that
intends to acquire and operate companies in the design automation, document
management and technical services fields throughout the United States. The UDMS
venture is contingent upon successful due diligence of nine companies, each of
the nine companies, including ACCESS, reaching binding definitive agreements and
the successful completion of an initial public offering by UDMS.
F-65
<PAGE> 154
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DTI Technologies, Inc.:
We have audited the accompanying balance sheets of DTI Technologies, Inc.
as of December 31, 1995 and 1996 and September 30, 1997, and the related
statements of operations, stockholder's equity, and cash flows for each of the
years in the three-year period ended December 31, 1996 and the nine months ended
September 30, 1997. 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of DTI Technologies, Inc. as of
December 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1996 and the nine months ended September 30, 1997 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has a net working capital deficiency that
raises substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ KPMG PEAT MARWICK LLP
November 14, 1997
Boston, Massachusetts
F-66
<PAGE> 155
DTI TECHNOLOGIES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
ASSETS (NOTES 4 AND 5)
Current assets:
Cash and cash equivalents.................................. $ 22 $ 111 $ 11
Trade accounts receivable, net of allowance for doubtful
accounts of $18, $65 and $70, respectively.............. 466 1,056 1,639
Other receivables.......................................... 7 17 128
Inventories................................................ 545 552 289
Prepaid expenses and other current assets.................. 32 57 74
Net deferred income tax assets (note 7).................... 85 149 155
------ ------ ------
Total current assets............................... 1,157 1,942 2,296
Property and equipment, net of accumulated amortization and
depreciation (note 2)...................................... 171 361 326
Excess of cost over fair value of net assets acquired, net of
accumulated amortization (note 3).......................... -- 658 606
Other assets................................................. 18 29 32
------ ------ ------
$1,346 $2,990 $ 3,260
====== ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Line of credit (note 4).................................... $ -- $ -- $ 240
Current installments of obligations under consulting
agreement (note 3)...................................... -- 37 40
Current installments of obligations under capital leases
(note 6)................................................ 31 48 45
Current installments of long-term debt (note 5)............ 55 75 353
Accounts payable (note 9).................................. 690 1,497 1,309
Accrued expenses........................................... 247 270 300
Deferred revenue........................................... 15 122 96
------ ------ ------
Total current liabilities.......................... 1,038 2,049 2,383
Obligations under consulting agreement, excluding current
installments (note 3)...................................... -- 523 492
Obligations under capital leases, excluding current
installments (note 6)...................................... 71 48 14
Long-term debt, excluding current installments (note 5)...... 114 342 330
------ ------ ------
Total liabilities.................................. 1,223 2,962 3,219
------ ------ ------
Commitments and contingencies (note 6, 8, and 10)
Stockholder's equity:
Common stock, no par value, authorized, issued and
outstanding 100 shares.................................. 14 14 14
Additional paid-in capital................................. 26 26 26
Retained earnings (accumulated deficit).................... 90 (5) 8
Less: Treasury stock, 50 shares, at cost................... (7) (7) (7)
------ ------ ------
Total stockholder's equity......................... 123 28 41
------ ------ ------
$1,346 $2,990 $ 3,260
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-67
<PAGE> 156
DTI TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ---------------------
1994 1995 1996 1996 1997
------ ------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Systems sales................................ $2,100 $2,721 $5,046 $ 3,304 $6,711
Service, consulting, training and other
revenues.................................. 124 261 705 382 1,025
------ ------ ------ ------- ------
Total revenues....................... 2,224 2,982 5,751 3,686 7,736
------ ------ ------ ------- ------
Costs and expenses:
Cost of revenues............................. 1,305 1,552 3,142 1,980 4,771
Selling and marketing........................ 599 795 903 618 889
General and administrative................... 345 397 1,823 1,081 1,966
------ ------ ------ ------- ------
Total costs and expenses............. 2,249 2,744 5,868 3,679 7,626
------ ------ ------ ------- ------
Operating income (loss).............. (25) 238 (117) 7 110
------ ------ ------ ------- ------
Other income (expense):
Interest expense, net........................ (26) (30) (67) (42) (99)
Other income, net............................ -- 9 65 18 20
------ ------ ------ ------- ------
(26) (21) (2) (24) (79)
------ ------ ------ ------- ------
Income (loss) before income taxes.... (51) 217 (119) (17) 31
Income tax (expense) benefit (note 7).......... 14 (97) 24 -- (18)
------ ------ ------ ------- ------
Net income (loss).............................. $ (37) $ 120 $ (95) $ (17) $ 13
====== ====== ====== ======= ======
</TABLE>
See accompanying notes to financial statements.
F-68
<PAGE> 157
DTI TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
---------------- PAID-IN (ACCUMULATED TREASURY STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT) STOCK EQUITY
------ ------ ---------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994...... 50 $ 14 $ 26 $ 7 $ (7) $ 40
Net loss......................... -- -- -- (37) -- (37)
--
---- ---- ---- ---- ----
Balances at December 31, 1994.... 50 14 26 (30) (7) 3
Net income....................... -- -- -- 120 -- 120
--
---- ---- ---- ---- ----
Balances at December 31, 1995.... 50 14 26 90 (7) 123
Net loss......................... -- -- -- (95) -- (95)
--
---- ---- ---- ---- ----
Balances at December 31, 1996.... 50 14 26 (5) (7) 28
Net income....................... -- -- -- 13 -- 13
--
---- ---- ---- ---- ----
Balances at September 30, 1997... 50 $ 14 $ 26 $ 8 $ (7) $ 41
== ==== ==== ==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-69
<PAGE> 158
DTI TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- --------------------
1994 1995 1996 1996 1997
---- ------ ----- ----------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $(37) $ 120 $ (95) $ (17) $ 13
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.............. 33 44 128 96 158
Provision for loss on doubtful accounts.... -- 12 41 4 5
Changes in operating assets and
liabilities:
Trade accounts receivable............... 151 (199) (60) (16) (588)
Other receivables....................... (7) 46 (1) (26) (111)
Net deferred income tax assets.......... (30) -- (64) -- (6)
Inventories............................. (32) (412) 1,053 997 263
Prepaid expenses and other assets....... (14) (4) (6) (74) (20)
Accounts payable and accrued expenses... 27 502 (780) (802) 242
Deferred revenue........................ 5 -- 53 48 (26)
---- ------ ----- ----- -----
Net cash provided by (used in)
operating activities............... 96 109 269 210 (70)
---- ------ ----- ----- -----
Cash flows from investing activities:
Purchases of property and equipment............. (6) (64) (150) (104) (71)
Cash acquired from purchase of Computersmith,
Inc.......................................... -- -- 81 81 --
---- ------ ----- ----- -----
Net cash used in investing
activities......................... (6) (64) (69) (23) (71)
---- ------ ----- ----- -----
Cash flows from financing activities:
Borrowings under line of credit................. -- -- -- -- 240
Proceeds from issuance of long-term debt........ 50 -- 305 305 --
Principal repayments of long-term debt.......... (93) (52) (355) (342) (134)
Principal payments on capital lease
obligations.................................. (10) (26) (41) (29) (37)
Principal payments of consulting obligation..... -- -- (20) (11) (28)
---- ------ ----- ----- -----
Net cash provided by (used in)
financing activities............... (53) (78) (111) (77) 41
---- ------ ----- ----- -----
Net increase (decrease) in cash and cash
equivalents..................................... 37 (33) 89 110 (100)
Cash and cash equivalents, beginning of period.... 18 55 22 22 111
---- ------ ----- ----- -----
Cash and cash equivalents, end of period.......... $ 55 $ 22 $ 111 $ 132 $ 11
==== ====== ===== ===== =====
Supplemental disclosure of cash flow information:
Cash paid during period for interest............ $ 26 $ 30 $ 71 $ 42 $ 99
==== ====== ===== ===== =====
Cash paid during period for income taxes........ $ 17 $ 9 $ 105 $ 105 $ 6
==== ====== ===== ===== =====
Noncash financing activities:
Conversion of accounts payable to promissory
note......................................... -- -- -- -- 400
==== ====== ===== ===== =====
Capital lease obligation entered into........... $ 41 $ 94 $ 35 $ 35 $ --
==== ====== ===== ===== =====
Cash acquired from purchase of Computersmith, Inc.
(note 3):
Property and equipment acquired................. $ 100
Working capital acquired, net of cash........... 5
Goodwill........................................ 692
Note payable assumed............................ (298)
Consulting agreement obligation incurred........ (580)
-----
Cash acquired................................ $ (81)
-----
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE> 159
DTI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997
(DOLLAR AMOUNTS IN THOUSANDS)
(1) DESCRIPTION OF BUSINESS AND ABILITY TO CONTINUE AS A GOING CONCERN
DTI Technologies, Inc. (the "Company") sells, installs and services CAD-CAM
software systems primarily to the manufacturing industry and educational
institutions. The Company also provides training services and re-sells computer
hardware. The Company's operations are located in Bedford, New Hampshire, with
training facilities located in Massachusetts, New York and Connecticut.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has a net working capital
deficiency that raises substantial doubt about its ability to continue as a
going concern. The accompanying financial statements do not include any
adjustments that might result from this uncertainty.
As disclosed in Note 10 the Company intends to secure working capital
through a merger into another company in connection with that company's proposed
initial public offering of stock. No assurances will be given that the
contemplated offering will be successful.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain 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 reported
periods. Actual results could differ from those estimates.
(b) Revenue Recognition
Revenues from software system sales are recognized when the product is
shipped or upon customer acceptance in instances where the software and computer
hardware is to be installed at the customer location. Revenues from consulting,
training or other services are recognized as the related services are performed.
Revenues from prepaid customer support agreements are recognized ratably
over the life of the support agreement.
(c) Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or less
to be cash equivalents.
(d) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements and equipment held under capital leases are
F-71
<PAGE> 160
DTI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
amortized using the straight-line method over the shorter of the lease term or
estimated useful life of the asset. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Equipment........................................... 3 years
Furniture and fixtures.............................. 7 years
Automobiles......................................... 7 years
Leasehold improvements.............................. 5 years
</TABLE>
(f) Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired is being
amortized on the straight-line method over ten years. The Company assesses the
recoverability of this intangible asset when events indicate that an impairment
has occurred. The amount of the impairment, if any, is measured based on
projected discounted future cash flows using a discount rate reflecting the
Company's average cost of funds. The assessment of the recoverability of the
intangible asset will be impacted if estimated future operating cash flows are
not achieved.
(g) Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(h) Interim Financial Information
The financial statements for the nine months ended September 30, 1996 are
unaudited; however, in the opinion of management, all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of the financial
statements for the interim period have been included. The results for the
interim period are not necessarily indicative of the results to be achieved for
the full fiscal year.
(2) PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1995 1996 1997
----- ----- -------------
<S> <C> <C> <C>
Equipment..................................... $ 329 $ 498 $ 560
Equipment held under capital leases........... 134 169 169
Furniture and fixtures........................ 51 51 56
Automobiles................................... 12 12 12
Leasehold improvements........................ 5 85 89
----- ----- -----
531 815 886
Less: Accumulated depreciation and
amortization................................ (360) (454) (560)
----- ----- -----
$ 171 $ 361 $ 326
===== ===== =====
</TABLE>
Accumulated amortization for equipment under capital leases was $36,000 and
$79,000 at December 31, 1995 and 1996, respectively and $104,000 at September
30, 1997.
F-72
<PAGE> 161
DTI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
Effective July 1, 1996, the Company purchased all of the assets of
Computersmith, Inc. and assumed certain liabilities. Under the terms of the
purchase agreement, the Company entered into a 10-year consulting agreement with
the former owners of Computersmith, Inc. The consulting agreement contains a
covenant not to compete and provides for annual payments of $93,000 per year
including principal and interest at 10.25% per annum. The consulting agreement
was accounted for as consideration for the assets acquired net of the
liabilities assumed. In addition, the Company entered into two-year employment
agreements with the former owners of Computersmith, Inc. The employment
agreements contain covenants not to compete and provide for annual compensation
of $46,000 per year to each of the two former owners. There was no other
consideration paid.
The following summarizes the assets acquired and liabilities assumed (in
thousands):
<TABLE>
<S> <C>
Assets acquired:
Property and equipment.............................................. $100
Working capital..................................................... 86
Excess of cost over fair value of assets............................ 692
----
$878
====
Liabilities assumed:
Note payable........................................................ $298
Consulting agreement obligation..................................... 580
----
$878
====
</TABLE>
Excess of cost over fair value of net assets acquired is comprised of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Excess of cost over fair value of net assets
acquired......................................... $692 $ 692
Less: Accumulated amortization..................... (34) (86)
---- ----
$658 $ 606
==== ====
</TABLE>
(4) REVOLVING LINE OF CREDIT
In August 1996, the Company entered into a $180,000 revolving line of
credit agreement with a bank. In July 1997, the bank increased the line of
credit borrowing limit to $300,000. As of December 31, 1996 and September 30,
1997, $0 and $240,000, respectively, were outstanding under this agreement.
Interest accrues at the prime rate plus 2% (10.5% at September 30, 1997). The
line of credit is secured by substantially all of the Company's assets and by
the personal guarantee of the Company's sole stockholder.
F-73
<PAGE> 162
DTI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------- -------------
1995 1996 1997
---- ---- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Note payable to supplier. Monthly payments of principal
and interest required through November 1998. Interest
at 6.5%............................................... $ -- $ -- $ 322
Note payable to bank. Monthly payments of principal and
interest required through August 2003. Interest at
prime plus 2.25% (10.75% at September 30, 1997). Note
secured by substantially all of the Company's assets
and the personal guarantee of the sole stockholder and
his wife.............................................. -- 300 277
Note payable to bank. Monthly payments of principal and
interest required through August 1999. Interest at
prime plus 2.25% (10.75% at September 30, 1997). Note
secured by substantially all of the Company's assets
and the personal guarantee of the sole stockholder.... 39 30 22
Note payable to bank. Monthly payments of principal and
interest required through May 1999. Interest at prime
plus 2.25% (10.75% at September 30, 1997). Note
secured by substantially all of the Company's assets
and the personal guarantee of the sole stockholder.... 115 87 62
Note payable to bank. Monthly payments of principal and
interest required through September 1996. Interest at
prime plus 2.25%. Note balance paid off during
1996.................................................. 15 -- --
---- ---- -----
169 417 683
Less current installments............................... (55) (75) (353)
---- ---- -----
$114 $342 $ 330
==== ==== =====
</TABLE>
Long-term debt at September 30, 1997 is scheduled to be repaid as follows:
<TABLE>
<S> <C>
Year ended September 30, 1997:
1998................................................ $353
1999................................................ 124
2000................................................ 43
2001................................................ 48
2002................................................ 52
Thereafter.......................................... 63
----
$683
====
</TABLE>
(6) LEASES
The Company is obligated under various capital equipment leases that expire
at various dates during the next four years.
F-74
<PAGE> 163
DTI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has entered into noncancelable operating leases covering its
office facilities and certain equipment which expire through 2002. Rent expense
amounted to $4,000, $137,000 and $182,000 for the years ended December 31, 1994,
1995 and 1996, respectively, and $137,000 and $125,000 for the nine months ended
September 30, 1996 and 1997, respectively.
Future net minimum obligations under capital and operating leases are as
follows at September 30, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Year ending September 30:
1998.................................................... $ 46 $ 145
1999.................................................... 18 107
2000.................................................... -- 74
2001.................................................... -- 50
2002.................................................... -- 22
Thereafter.............................................. -- 9
---- ----
Total minimum lease payments.................... 64 $ 740
====
Less amount representing interest....................... 5
----
Present value of net minimum capital lease
payments........................................ 59
Less current installments of obligations under capital
leases............................................... 45
----
Obligations under capital leases, excluding current
installments.................................... $ 14
====
</TABLE>
(7) INCOME TAXES
Income tax (expense) benefit attributable to income (loss) from operations
was as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
---------------------- SEPTEMBER 30,
1994 1995 1996 1997
---- ---- ---- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal:
Current............................. $(12) $(74) $(31) $ (18)
Deferred............................ 23 -- 49 5
---- ---- ---- ----
11 (74) 18 (13)
---- ---- ---- ----
State and local:
Current............................. (4) (23) (9) (6)
Deferred............................ 7 -- 15 1
---- ---- ---- ----
3 (23) 6 (5)
---- ---- ---- ----
Total tax (expense)
benefit................... $ 14 $(97) $ 24 $ (18)
==== ==== ==== ====
</TABLE>
F-75
<PAGE> 164
DTI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income tax (expense) benefit differs from the amounts computed by applying
the federal statutory rate to pre-tax income (loss) as a result of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, NINE MONTHS ENDED
---------------------- SEPTEMBER 30,
1994 1995 1996 1997
---- ---- ---- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Computed "expected" tax (expense)
benefit............................ $17 $(73) $ 40 $ (11)
State and local income tax (expense)
benefit, net of federal tax
benefit............................ 2 (15) 4 (3)
Nondeductible expenses............... (5) (9) (20) (4)
--- ---- ---- -----
Total tax (expense)
benefit.................. $14 $(97) $ 24 $ (18)
=== ==== ==== =====
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
---- ---- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Accrued expenses.............................. $ 2 $ 4 $ 11
Allowance for doubtful accounts............... 7 26 28
Deferred revenue.............................. -- 25 21
Inventories................................... 79 97 96
--- ---- ----
Total gross deferred tax assets....... 88 152 156
Deferred tax liability:
Property and equipment, due to differences in
depreciation............................... 3 3 1
--- ---- ----
Total gross deferred tax liability.... 3 3 1
--- ---- ----
Net deferred income tax assets.................. $85 $149 $155
=== ==== ====
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. The Company had taxable
income of $40,000, $241,000, and $99,000 for the years ended December 31, 1994,
1995 and 1996, respectively, and $75,000 for the nine months ended September,
30, 1997.
(8) RELATED PARTY TRANSACTIONS
The Company leases office space from the stockholder of the Company. The
lease is for a three-year term expiring in August 1998 and has been classified
as an operating lease (see Note 6). Total rent expense under this lease for the
years ended December 31, 1994, 1995 and 1996 was $0, $15,000 and $35,000,
respectively, and was $26,000 for each of the nine months ended September 30,
1996 and 1997.
(9) SIGNIFICANT SUPPLIER
For the years ended December 31, 1994, 1995 and 1996, one supplier
accounted for approximately 70%, 62% and 49% of total purchases, respectively.
For the nine months ended September 30, 1996 and 1997, this
F-76
<PAGE> 165
DTI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
supplier accounted for 53% and 57% of total purchases, respectively. This
supplier accounted for 79%, 64% and 67% of trade accounts payable at December
31, 1995, 1996 and September 30, 1997, respectively.
(10) MERGER AGREEMENT
In the second quarter of 1997, the Company entered into a letter of intent
with Universal Document Management Systems, Inc. ("UDMS") whereby UDMS will
acquire the outstanding common stock of the Company in conjunction with a
proposed initial public offering of common stock of UDMS.
F-77
<PAGE> 166
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Technical Software, Inc.:
We have audited the accompanying balance sheets of Technical Software, Inc.
as of December 31, 1995 and 1996 and September 30, 1997, and the related
statements of earnings and retained earnings, and cash flows for each of the
years in the three-year period ended December 31, 1996 and for the nine month
period ended September 30, 1997. 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of Technical Software, Inc. as
of December 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1996 and for the nine month period ended September 30, 1997,
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
November 14, 1997
Columbus, Ohio
F-78
<PAGE> 167
TECHNICAL SOFTWARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 304,185 $ 300,633 $ 185,568
Trade accounts receivable............................. 715,627 587,054 725,158
Other receivables..................................... 24,488 19,828 4,615
Inventories........................................... 421,985 246,285 179,854
---------- ---------- -----------
Total current assets.......................... 1,466,285 1,153,800 1,095,195
Property and equipment, net of accumulated
depreciation.......................................... 357,478 344,275 302,893
Other assets............................................ 12,760 12,760 14,473
---------- ---------- -----------
Total assets.................................. $1,836,523 $1,510,835 $ 1,412,561
========== ========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of notes payable to banks............. $ -- $ -- $ 89,481
Revolving lines of credit............................. 320,000 245,000 --
Accounts payable...................................... 557,697 545,345 382,202
Accrued compensation and related benefits............. 132,845 92,676 69,155
Other accrued expenses................................ 41,990 56,943 55,848
Deferred revenue on training and support contracts.... 97,331 129,745 109,305
---------- ---------- -----------
Total current liabilities..................... 1,149,863 1,069,709 705,991
Notes payable to banks, excluding current portion....... -- -- 96,630
---------- ---------- -----------
Total liabilities............................. 1,149,863 1,069,709 802,621
---------- ---------- -----------
Stockholder's equity:
Common stock; no par value; 750 shares authorized; 100
shares issued and outstanding at stated value...... 500 500 500
Retained earnings..................................... 686,160 440,626 609,440
---------- ---------- -----------
Total stockholder's equity.................... 686,660 441,126 609,940
---------- ---------- -----------
Commitments (Note 7 and 9)
Total liabilities and stockholder's equity.... $1,836,523 $1,510,835 $ 1,412,561
========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-79
<PAGE> 168
TECHNICAL SOFTWARE, INC.
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- ------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software and hardware sales..... $4,786,378 $5,426,822 $3,575,230 $2,714,032 $3,188,986
Support revenues................ 543,059 579,438 690,271 560,819 329,329
Commission revenues............. 361,006 450,603 547,869 481,114 463,668
Training revenues............... 717,299 480,897 453,187 368,075 438,667
Installation, consulting and
other revenues............... 343,856 430,771 421,995 317,813 301,053
---------- ---------- ---------- ---------- ----------
Total revenues.......... 6,751,598 7,368,531 5,688,552 4,441,853 4,721,703
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Software and hardware........... 3,009,258 3,159,819 2,161,294 1,592,746 2,169,006
Selling and marketing........... 1,694,267 1,624,503 1,043,695 776,619 699,901
General and administrative...... 2,007,588 2,338,845 2,550,405 1,962,777 1,694,524
---------- ---------- ---------- ---------- ----------
Total costs and
expenses.............. 6,711,113 7,123,167 5,755,394 4,332,142 4,563,431
---------- ---------- ---------- ---------- ----------
Earnings (loss) from
operations............ 40,485 245,364 (66,842) 109,711 158,272
---------- ---------- ---------- ---------- ----------
Other income (expense):
Interest income................. 13,874 17,429 16,404 12,702 12,464
Interest expense................ (17,413) (13,954) (28,333) (19,780) (13,377)
Other, net...................... 51,709 (11,892) 43,237 13,912 11,455
---------- ---------- ---------- ---------- ----------
48,170 (8,417) 31,308 6,834 10,542
---------- ---------- ---------- ---------- ----------
Net earnings (loss)..... 88,655 236,947 (35,534) 116,545 168,814
Distributions paid................ (118,500) (77,000) (210,000) (210,000) --
Retained earnings:
Beginning of period............. 556,058 526,213 686,160 686,160 440,626
---------- ---------- ---------- ---------- ----------
End of period................... $ 526,213 $ 686,160 $ 440,626 $ 592,705 $ 609,440
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-80
<PAGE> 169
TECHNICAL SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- --------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net earnings (loss).............. $ 88,655 $ 236,947 $ (35,534) $ 116,545 $ 168,814
Adjustments to reconcile net
earnings (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization............. 65,014 78,113 80,837 60,040 60,865
Loss (gain) on sale of
property and equipment... -- 19,308 10,498 -- (759)
Gain on sale of investment
securities
available-for-sale....... (50,287) -- (34,110) (12,556) --
Change in operating assets
and liabilities:
Trade accounts
receivable............. (97,990) (172,321) 128,573 262,569 (138,104)
Other receivables........ (76,881) 52,393 4,660 5,241 15,213
Inventories.............. (109,833) (66,998) 175,700 156,786 66,431
Other assets............. (10,179) 11,179 -- -- (1,713)
Accounts payable......... 174,522 (131,186) (12,352) (386,396) (163,143)
Accrued compensation and
related benefits....... 21,566 55,053 (40,169) (53,827) (23,521)
Other accrued expenses... 9,800 14,298 14,953 (3,535) (1,095)
Deferred revenue......... 68,074 29,257 32,414 6,134 (20,440)
--------- --------- --------- ----------- -----------
Net cash provided by
(used in) operating
activities.......... 82,461 126,043 325,470 151,001 (37,452)
--------- --------- --------- ----------- -----------
Cash flows from investing
activities:
Purchases of property and
equipment..................... (110,642) (228,429) (78,132) (74,947) (18,724)
Proceeds from sale of investment
securities
available-for-sale............ 149,037 -- 233,360 101,806 --
Purchases of investment
securities
available-for-sale............ -- -- (199,250) (199,250) --
--------- --------- --------- ----------- -----------
Net cash provided by
(used in) investing
activities.......... 38,395 (228,429) (44,022) (172,391) (18,724)
--------- --------- --------- ----------- -----------
Cash flows from financing
activities:
Proceeds from notes payable to
banks......................... -- -- -- -- 226,498
Repayments on notes payable to
banks......................... -- -- -- -- (40,387)
Net borrowings (repayments) under
revolving lines of credit..... (35,000) 185,000 (75,000) 235,000 (245,000)
Distributions paid............... (118,500) (77,000) (210,000) (210,000) --
--------- --------- --------- ----------- -----------
Net cash provided by
(used in) financing
activities.......... (153,500) 108,000 (285,000) 25,000 (58,889)
--------- --------- --------- ----------- -----------
Increase (decrease) in cash and
cash equivalents................. (32,644) 5,614 (3,552) 3,610 (115,065)
Cash and cash
equivalents -- beginning of
period........................... 331,215 298,571 304,185 304,185 300,633
--------- --------- --------- ----------- -----------
Cash and cash equivalents -- end of
period........................... $ 298,571 $ 304,185 $ 300,633 $ 307,795 $ 185,568
========= ========= ========= ========= =========
Supplemental disclosures of cash
flow information:
Cash paid for interest........... $ 17,413 $ 13,954 $ 28,333 $ 19,780 $ 13,377
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-81
<PAGE> 170
TECHNICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 AND SEPTEMBER 30, 1997
(1) DESCRIPTION OF BUSINESS
Technical Software, Inc. (the Company) provides computer-aided engineering
software, training, support, and consulting services. The Company serves various
customers including manufacturers, architects, consulting engineers and
designers. In addition, the Company works with schools to provide teachers with
the tools to teach computer-aided design.
The Company is an S corporation that was incorporated in the state of Ohio
in 1983. It is headquartered in Cleveland, Ohio.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Unaudited Interim Financial Information
The financial statements for the nine months ended September 30, 1996 are
unaudited; however, in the opinion of management, all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
financial statements for the interim periods have been included. The results for
the interim periods are not necessarily indicative of results to be achieved for
the full fiscal year.
(b) Cash and Cash Equivalents
Cash equivalents of approximately $300,000 at December 31, 1995 and 1996
consist of money market funds and a certificate of deposit with an initial term
of less than three months. Use of the Company's cash equivalents was restricted
under the Company's lines of credit (see Note 4). Cash equivalents of
approximately $100,000 at September 30, 1997 consists of money market funds
whose use is not restricted. Changes in the net unrealized holding gains and
losses are included as a separate component of stockholders equity. For purposes
of the statements of cash flows, the Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
(c) Inventories
Inventories, which consist of purchased software and computer hardware, are
stated at the lower of cost or market, and cost is determined by the first-in,
first-out (FIFO) method.
(d) Investment Securities
The Company classifies its investment securities as available-for-sale and
records them at fair value. At December 31, 1995 and 1996 and September 30,
1997, the Company held no investment securities. Realized gains and losses from
the sale of available-for-sale securities are determined on a specific
identification basis.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation on office equipment
and furniture and fixtures is calculated on the straight-line method over the
estimated useful lives of the assets which range from 5 to 15 years. Leasehold
improvements are amortized on the straight-line method over the shorter of the
lease term or estimated useful life of the asset.
(f) Income Taxes
The Company has elected by consent of its stockholder to be taxed under the
provisions of Subchapter S of the Internal Revenue Code. Under those provisions,
the Company does not pay federal or state income taxes on its taxable income.
Instead, the stockholder is liable for federal and state income taxes on the
F-82
<PAGE> 171
TECHNICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company's taxable income. Accordingly, these financial statements do not contain
a provision for income taxes.
(g) Revenue Recognition
Revenue from software and computer hardware sales is recognized when the
product is shipped or upon customer acceptance in instances where the software
or computer hardware is to be installed at the customer location. The Company
allows its customers to return product for exchange or credit subject to certain
limitations.
Commission revenues are recognized when earned, and revenues from training,
installation, consulting and other services are recognized when the related
services are performed. Revenues from prepaid customer support agreements are
recognized ratably over the life of the support agreement.
(h) Product Rebates and Marketing Funds
Primary suppliers of the Company provide various incentives for promoting
and marketing their product offerings. The funds received are based on the
purchases or sales of the suppliers' products or upon performance of certain
advertising and other market development activities. Rebates are recorded as a
reduction of the cost of software and hardware when received. Marketing funds
are recorded as a reduction of selling and marketing expenses when earned.
(i) Fair Value of Financial Instruments
The fair value of the Company's notes payable are estimated by discounting
the future cash flows of each instrument at rates currently offered to the
Company for similar debt instruments of comparable maturities by the Company's
bankers. The carrying value of the Company's notes payable approximates fair
value.
The carrying value of the Company's other financial instruments
approximates fair value due to the short maturity of those instruments.
(j) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(3) PROPERTY AND EQUIPMENT
Net property and equipment is comprised of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
Office equipment....................... $ 385,773 $ 389,663 $ 408,135
Furniture and fixtures................. 62,667 62,667 62,667
Leasehold improvements................. 48,044 58,797 58,797
--------- --------- ---------
496,484 511,127 529,599
Less accumulated depreciation and
amortization......................... (139,006) (166,852) (226,706)
--------- --------- ---------
$ 357,478 $ 344,275 $ 302,893
========= ========= =========
</TABLE>
F-83
<PAGE> 172
TECHNICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) REVOLVING LINES OF CREDIT
During 1997, the Company established a line of credit with a bank that
enables it to borrow up to $340,000 at 0.5% above prime (9.0% at September 30,
1997). At September 30, 1997, there were no borrowings outstanding on the line
and the Company had borrowing availability under the line of $340,000.
During 1995 and 1996, the Company had two revolving lines of credit with
banks that enabled it to borrow up to $850,000 at interest rates ranging from
1.5% above the banks' short-term investment rate to 0.5% above prime, subject to
certain restrictions and borrowing levels as defined in the agreements. The
weighted-average interest rate charged on both lines of credit at December 31,
1995 and 1996 was 6.6%. The lines of credit, which were secured by the Company's
cash equivalents and guaranteed by the Company's president and stockholder,
matured in 1997.
(5) NOTES PAYABLE
Notes payable at September 30, 1997 consist of the following:
<TABLE>
<S> <C>
Note payable to bank in monthly installments of $6,699, including fixed interest
at 9.22%, through February 15, 2000. ........................................... $173,757
Note payable to bank in monthly installments of $457, including fixed interest at
9.0%, through January 31, 1999; secured by certain equipment of the Company. ... 6,858
Note payable to bank in monthly installments of $300, including variable interest
at 1.0% above prime, through May 9, 1999; secured by certain equipment of the
Company. ....................................................................... 5,496
--------
186,111
Less current portion.............................................................. 89,481
--------
$ 96,630
========
Notes payable at September 30, 1997 are scheduled to be repaid as follows:
Three months ended December 31, 1997.............................................. $ 18,217
Year ended December 31, 1998...................................................... 78,745
Year ended December 31, 1999...................................................... 75,766
Year ended December 31, 2000...................................................... 13,383
--------
Total............................................................................. $186,111
========
</TABLE>
(6) EMPLOYEE RETIREMENT BENEFIT PLAN
The Company has a 401(k) plan that covers all employees having attained six
months of service and being at least 20 1/2 years old, with an annual entry date
on January 1. Employees are eligible to make voluntary contributions to the plan
of up to 15% of their earnings. The Company matches 10% of the employee
contributions. For 1994, 1995 and 1996, the Company's match was $13,733, $11,540
and $16,801, respectively. For the nine month period ended September 30, 1997,
the Company's match was $11,059.
The Plan also has a discretionary flat-dollar contribution which is at the
discretion of the Board of Directors. There were no discretionary flat-dollar
contributions in 1994, 1995 or 1996 and the nine month period ended September
30, 1997.
F-84
<PAGE> 173
TECHNICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) COMMITMENTS
The Company has entered into noncancelable operating leases covering its
office and warehouse facilities and certain equipment. The Company's office and
warehouse facilities lease, which is guaranteed by the Company's president and
stockholder, has an original term expiring February 28, 2003. During July 1997,
the Company exercised a cancellation provision in the lease agreement.
Minimum future annual rental payments under noncancelable operating leases
having original terms in excess of one year are as follows:
<TABLE>
<S> <C>
Three months ended December 31, 1997............... $ 2,297
Year ended December 31, 1998....................... 7,688
Year ended December 31, 1999....................... 4,692
Year ended December 31, 2000....................... 4,692
Year ended December 31, 2001....................... 4,692
Year ended December 31, 2002....................... 1,564
-------
$25,625
=======
</TABLE>
Total rental expense under operating leases approximated $171,000,
$159,000, $170,000 and $128,000 in 1994, 1995, 1996, and the nine months ended
September 30, 1997, respectively.
(8) MAJOR SUPPLIERS AND CUSTOMERS
The Company's business is dependent in large measure upon its relationship
with key suppliers since a substantial portion of the Company's revenue is
derived from the sales of the products of such key suppliers. Approximately 70%,
59%, 50% and 68% of the Company's software and hardware sales for 1994, 1995,
1996 and the nine month period ended September 30, 1997, respectively, were
derived from products supplied by the Company's two largest suppliers. Although
the Company does not anticipate any contractual changes with its suppliers,
termination of or a material change to the Company's agreements with these
suppliers, or an insufficient or interrupted supply of suppliers' products would
have a material adverse effect on the Company's business.
The Company sells its products to a large base of corporate customers
throughout the United States. The concentration of credit risk with respect to
the Company's unsecured trade receivables is considered to be limited because
the Company closely monitors the credit worthiness of its customers. For the
years ended December 31, 1994, 1995 and 1996 and the nine month period ended
September 30, 1997, one customer accounted for approximately 9%, 13%, 10%, and
4% of total revenues, respectively. This customer accounts for 7%, 17%, and 3%
of trade accounts receivable at December 31, 1995 and 1996 and September 30,
1997, respectively.
(9) PROPOSED BUSINESS COMBINATION
On May 5, 1997, the Company entered into letter of intent with Universal
Document Management Systems, Inc. ("UDMS") whereby UDMS will acquire the
outstanding common stock of the Company in conjunction with a proposed initial
public offering of common stock of UDMS. The Company has committed to give a
bonus to certain employees of the Company having an aggregate value of $100,000
upon consummation of the acquisition. Final terms have yet to be determined.
F-85
<PAGE> 174
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Synergis Technologies, Inc.:
We have audited the accompanying balance sheets of Synergis Technologies,
Inc. as of September 30, 1996 and 1997, and the related statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended September 30, 1997. 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of Synergis Technologies, Inc.
as of September 30, 1996 and 1997, and the results of its operations and its
cash flows for each of the years in the three-year period ended September 30,
1997, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
December 4, 1997
Philadelphia, PA
F-86
<PAGE> 175
SYNERGIS TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 282,000 $ 207,000
Trade accounts receivable, net of allowances of $20,000 in 1996
and 1997....................................................... 545,000 1,007,000
Other receivables................................................. 4,000 24,000
Inventories....................................................... 360,000 105,000
Prepaid expenses and other current assets......................... 24,000 27,000
---------- ----------
Total current assets...................................... 1,215,000 1,370,000
Capitalized software development costs, net of accumulated
amortization...................................................... -- 171,000
Property and equipment, net of accumulated depreciation............. 170,000 180,000
Other assets........................................................ 9,000 9,000
---------- ----------
Total assets.............................................. $1,394,000 $1,730,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current installments.............................. $ 19,000 $ 18,000
Accounts payable and accrued expenses............................. 513,000 870,000
Customer deposits................................................. 68,000 77,000
Deferred revenue.................................................. 129,000 61,000
---------- ----------
Total current liabilities........................................... 729,000 1,026,000
Long-term debt, excluding current installments...................... 104,000 81,000
---------- ----------
Total liabilities......................................... 833,000 1,107,000
Commitments and Contingencies (note 7 and 10)
Shareholders' equity:
Common stock, .01 par value, authorized 200,000 shares; 90,000
issued and outstanding at September 30, 1996 and 1997.......... 1,000 1,000
Additional paid-in capital........................................ 39,000 39,000
Retained earnings................................................. 521,000 583,000
---------- ----------
Total shareholders' equity................................ 561,000 623,000
---------- ----------
Total liabilities and shareholders' equity................ $1,394,000 $1,730,000
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-87
<PAGE> 176
SYNERGIS TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Systems, hardware and installation....................... $ 697,000 $ 857,000 $1,230,000
Software................................................. 1,593,000 3,229,000 4,200,000
Service, consulting, and other........................... 899,000 813,000 917,000
---------- ---------- ----------
Total revenues................................... 3,189,000 4,899,000 6,347,000
---------- ---------- ----------
Costs and expenses:
Hardware and software.................................... 2,052,000 3,195,000 4,410,000
Selling and marketing.................................... 383,000 581,000 855,000
Research and development................................. 33,000 237,000 128,000
General and administrative............................... 610,000 729,000 853,000
---------- ---------- ----------
Total costs and expenses................................... 3,078,000 4,742,000 6,246,000
---------- ---------- ----------
Operating income........................................... 111,000 157,000 101,000
---------- ---------- ----------
Other income (expense):
Interest expense, net.................................... (21,000) (8,000) (2,000)
Other, net............................................... 19,000 9,000 7,000
---------- ---------- ----------
(2,000) 1,000 5,000
---------- ---------- ----------
Net income................................................. $ 109,000 $ 158,000 $ 106,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-88
<PAGE> 177
SYNERGIS TECHNOLOGIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balances at September 30, 1994................. 90,000 $1,000 $ 39,000 $334,000 $ 374,000
Dividends...................................... -- -- -- (34,000) (34,000)
Net income..................................... -- -- -- 109,000 109,000
------ ----- ------- -------- --------
Balances at September 30, 1995................. 90,000 1,000 39,000 409,000 449,000
Dividends...................................... -- -- -- (46,000) (46,000)
Net income..................................... -- -- -- 158,000 158,000
------ ----- ------- -------- --------
Balances at September 30, 1996................. 90,000 1,000 39,000 521,000 561,000
Dividends...................................... -- -- -- (44,000) (44,000)
Net income..................................... -- -- -- 106,000 106,000
------ ----- ------- -------- --------
Balances at September 30, 1997................. 90,000 $1,000 $ 39,000 $583,000 $ 623,000
====== ===== ======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-89
<PAGE> 178
SYNERGIS TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 109,000 $ 158,000 $ 106,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 149,000 116,000 114,000
Loss (gain) on disposition of property and
equipment........................................ 4,000 -- (3,000)
Changes in operating assets and liabilities:
Trade accounts receivable........................ 273,000 (273,000) (462,000)
Other receivables................................ (1,000) (3,000) (20,000)
Inventories...................................... (315,000) 76,000 191,000
Prepaid expenses and other assets................ 8,000 (13,000) (3,000)
Accounts payable and accrued
expenses...................................... 189,000 26,000 357,000
Deferred revenue................................. 12,000 52,000 (68,000)
Customer deposits................................ 85,000 (37,000) 9,000
--------- --------- ---------
Net cash provided by operating activities..... 513,000 102,000 221,000
--------- --------- ---------
Cash flows from investing activities:
Capitalized software development costs................ -- -- (181,000)
Purchases of property and equipment................... (50,000) (92,000) (50,000)
Proceeds from sale of property and equipment.......... -- -- 3,000
--------- --------- ---------
Net cash used in investing activities......... (50,000) (92,000) (228,000)
--------- --------- ---------
Cash flows from financing activities:
Repayments under revolving line of credit............. (105,000) -- --
Principal repayments of long-term debt................ (60,000) (15,000) (28,000)
Proceeds from borrowings.............................. -- -- 4,000
Principal payments on capital lease obligations....... (2,000) -- --
Dividends............................................. (34,000) (46,000) (44,000)
--------- --------- ---------
Net cash used in financing activities......... (201,000) (61,000) (68,000)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... 262,000 (51,000) (75,000)
Cash and cash equivalents, beginning of period.......... 71,000 333,000 282,000
--------- --------- ---------
Cash and cash equivalents, end of period................ $ 333,000 $ 282,000 $ 207,000
========= ========= =========
Cash paid during the period for interest................ $ 21,000 $ 12,000 $ 11,000
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-90
<PAGE> 179
SYNERGIS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1997
(1) DESCRIPTION OF BUSINESS
Synergis Technologies, Inc. is a provider of AutoCAD-based integrated
systems and document management software and solutions primarily through
Autodesk software products. The Company also provides maintenance support and
customer training for its installed products.
Synergis is headquartered in Quakertown, PA and has offices and training
centers in Blue Bell and York, PA to supplement its selling efforts primarily to
customers in the Mid-Atlantic region.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect certain 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 reported
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or less
to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market, and cost is
determined by the average cost method which approximates first-in, first-out
(FIFO) method. Vendor rebates are recorded as a reduction in the cost of the
related software products and are allocated to cost of sales when the related
product is sold.
Capitalized Software Development Costs
The Company accounts for software development costs in accordance with the
provisions of Statement of Accounting Standards (SFAS) No. 86, Accounting for
the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed. Costs
incurred in designing and developing computer software products are expensed as
research and development until technological feasibility has been established.
Upon the achievement of technological feasibility, software development costs
are capitalized and subsequently reported at the lower of unamortized cost or
net realizable value.
Annual amortization expense is the greater of the amount computed, using
the ratio of the current year's revenues to the total of current and anticipated
future revenues, or the straight-line method over the remaining economic life of
the software, which does not exceed three years.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line or accelerated method over the estimated useful lives of the
assets. Leasehold improvements and equipment held under
F-91
<PAGE> 180
SYNERGIS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
capital leases are amortized using the straight-line method over the shorter of
the lease term or estimated useful life of the asset. The estimated useful lives
are as follows:
<TABLE>
<S> <C>
Computer equipment.................................. 3 years
Furniture and fixtures.............................. 5 years
Automobiles......................................... 5 years
Equipment held under capital leases................. 5 years
</TABLE>
Income Taxes
The Company has elected by consent of its shareholders to be taxed under
the provisions of Subchapter S for federal and state income tax purposes. Under
those provisions, the Company does not pay corporate income taxes on its taxable
income. Instead, the shareholders are liable for individual income taxes on the
Company's taxable income. Accordingly, these financial statements do not contain
a provision for income taxes.
Revenue Recognition
Revenues from software and computer hardware sales are recognized when the
product is shipped or upon customer acceptance in instances where the software
and computer hardware is to be installed at the customer location. Revenues from
consulting, training or other services are recognized as the related services
are performed.
Revenues from prepaid customer support agreements are deferred and
recognized based upon contractual hour utilization by the customer under the
support agreement. The Company offered hardware maintenance contracts prior to
1995, which were generally for a one-year period with revenue recognized ratably
over the life of the agreement.
Supplemental Cash Flow Information
Inventory of $64,000 and $17,000 on hand at September 30, 1996 and 1995 was
capitalized as computer equipment and peripherals in 1997 and 1996,
respectively. In 1996, the Company acquired assets valued at $15,000 under an
installment purchase agreement.
Product Warranties
The Company does not provide product warranties beyond the warranties
provided by the manufacturers. Accordingly, there is no warranty expense or
reserve reflected in the accompanying financial statements.
Advertising and Marketing Costs
The Company expenses all advertising and marketing costs as incurred. Total
expenses incurred net of supplier co-op advertising credits, were $3,000,
$38,000, and $239,000 for the years ended September 30, 1995, 1996, and 1997,
respectively.
(3) CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Amortization of capitalized software development costs amounted to $25,000,
$25,000, and $10,000 for the years ended September 30, 1995, 1996, and 1997,
respectively. Capitalized costs for a prior product were fully amortized at
September 30, 1996. In January 1997, the Company determined that technological
feasibility had been reached for a document management software project, NFM(3),
and accordingly began capitalizing development costs totaling $181,000 through
July 1997. Amortization commenced in July 1997 when the software was available
for general release.
F-92
<PAGE> 181
SYNERGIS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) PROPERTY AND EQUIPMENT
Net property and equipment is comprised of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Computer equipment..................................... $410,000 $475,000
Furniture and fixtures................................. 149,000 138,000
Automobiles............................................ 29,000 29,000
Leasehold improvements................................. 2,000 22,000
-------- --------
590,000 664,000
Less: accumulated depreciation and amortization........ 420,000 484,000
-------- --------
$170,000 $180,000
======== ========
</TABLE>
(5) LONG-TERM DEBT
The Company has available a $350,000 working capital line of credit bearing
interest at prime plus 1/2% (9% at September 30, 1997), which is renewable
annually and expires on March 1, 1998. The terms of the credit facility provide
that substantially all Company assets are pledged as collateral to secure the
borrowings, and that such borrowings are also personally guaranteed by the
primary shareholder and his spouse. No borrowings were outstanding at September
30, 1997.
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
10% unsecured note payable to principal shareholder, due
September 30, 2002.................................... $110,000 $ 91,000
7.95% transportation equipment note payable in monthly
installments of principal and interest of $465 through
April 1999............................................ 13,000 8,000
-------- --------
123,000 99,000
Less current portion.................................... 19,000 18,000
-------- --------
$104,000 $ 81,000
======== ========
</TABLE>
Interest expense on all debt was $21,000, $12,000, and $11,000 for the
years ended September 30, 1995, 1996, and 1997, respectively, including $17,000,
$12,000, and $10,000 to the Company's principal shareholder. The note to the
principal shareholder is repayable immediately and in full in the event of a
change of control of the Company.
(6) INCOME TAXES
Tax Escrow
The Company has elected to retain a September 30 year end rather than
change to a calendar year end. Pursuant to Internal Revenue Code regulations,
the Company is required to make tax escrow payments in amounts necessary to
compensate for the deferral of income recognition. Escrow payments totaling
$10,000 at September 30, 1997 are classified as deposits and are refundable upon
change to a calendar year end or conversion to a C corporation.
F-93
<PAGE> 182
SYNERGIS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) COMMITMENTS
The Company has entered into noncancelable operating leases covering its
office and training facilities and certain equipment. Rent expense amounted to
$67,000, $73,000, and $108,000 for the years ended September 30, 1995, 1996, and
1997, respectively. Future minimum payments under the leases at September 30,
1997 are as follows:
<TABLE>
<S> <C>
Years ending September 30:
1998............................................ $112,000
1999............................................ 109,000
2000............................................ 109,000
2001............................................ 63,000
2002 and thereafter............................. 13,000
--------
Total minimum lease payments............ $406,000
========
</TABLE>
In connection with one leased training facility, a $17,000 irrevocable
letter of credit has been issued, with a January 31, 1999 expiration date.
The Company has employment agreements with certain members of management.
These agreements contain provisions for salary continuation payments
(aggregating approximately $220,000 at September 30, 1997 if all such employees
are terminated without cause.
(8) SIGNIFICANT CUSTOMERS AND SUPPLIERS
For the years ended September 30, 1995, 1996, and 1997, no customers
accounted for greater than 10% of total revenues.
In 1995, 1996, and 1997, the Company purchased approximately $1,649,000,
$1,616,000, and $1,443,000, respectively, from a principal software supplier,
net of rebates of $53,000 in 1995, $412,000 in 1996, and $44,000 in 1997, of
which $0, $181,000, and $0 remains allocated as a reduction of inventory at
September 30, 1995, 1996 and 1997, respectively. This vendor accounted for
approximately 51% and 82% of accounts payable and accrued expenses at September
30, 1996 and 1997, respectively.
The Company has certain minimum total volume commitments which are required
to be achieved to maintain certain Autodesk dealer authorizations. Furthermore
Autodesk may revoke the Company's certification as a value added reseller with
or without cause upon 30 to 90 days notice.
The Company has entered into a licensing agreement with a software
developer for the use of licensed software in one of its products. Royalty
expense was $3,000, $6,000, and $13,000 for the years ended September 30, 1995,
1996, and 1997, respectively.
(9) EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan for its eligible employees who
have completed 12 months of service. Under the plan, the Company matches 20% of
the employee's first $4,000 contribution. Company contributions amounted to
$9,000, $6,000, and $10,000 for the years ended September 30, 1995, 1996, and
1997, respectively. Any additional contributions to the profit sharing plan are
based solely on the discretion of the Board of Directors. There were no
discretionary profit sharing contributions for the years ended September 30,
1995, 1996, and 1997.
F-94
<PAGE> 183
SYNERGIS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(10) CONTINGENCIES
On May 9, 1997, the Company entered into a letter of intent with Universal
Document Management Systems, Inc.("UDMS") whereby UDMS will acquire the
outstanding common stock of the Company in conjunction with a proposed initial
public offering of common stock of UDMS.
F-95
<PAGE> 184
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Mid-West CAD, Inc.:
We have audited the accompanying balance sheets of Mid-West CAD, Inc. as of
December 31, 1995 and 1996 and September 30, 1997, and the related statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1996 and the nine-month period ended
September 30, 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of Mid-West CAD, Inc. as of
December 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1996 and the nine-month period ended September 30, 1997, in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
November 14, 1997
Kansas City, Missouri
F-96
<PAGE> 185
MID-WEST CAD, INC.
BALANCE SHEETS
DECEMBER 31, 1995, 1996 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------- -------------
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................................... $127,712 $ 47,631 $ 153,268
Trade accounts receivable.............................. 265,131 216,137 231,473
Other receivables...................................... 17,002 25,353 37,566
Income tax receivable.................................. -- 6,748 --
Inventories............................................ 370,309 147,140 144,420
Prepaid expenses and other............................. 3,987 7,668 14,557
-------- -------- ---------
Total current assets........................... 784,141 450,677 581,284
Property and equipment, net of accumulated
depreciation........................................... 104,301 197,090 166,460
Other assets............................................. 10,528 11,577 12,297
-------- -------- ---------
$898,970 $659,344 $ 760,041
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, current installments.................... $ 11,950 $ 14,798 $ 12,275
Accounts payable....................................... 371,350 129,346 238,781
Accrued expenses....................................... 124,326 124,695 74,625
Accrued income taxes payable........................... 18,571 -- 145
Deferred revenue on support contracts.................. 79,576 82,796 98,108
-------- -------- ---------
Total current liabilities...................... 605,773 351,635 423,934
Deferred income taxes.................................... 11,972 22,131 29,640
Notes payable, excluding current installments............ 11,489 16,183 7,143
-------- -------- ---------
Total liabilities.............................. 629,234 389,949 460,717
-------- -------- ---------
Stockholders' equity:
Common stock, $1.00 par value; authorized 30,000
shares, 9,945 issued and outstanding at December 31,
1995 and 1996 and 10,161 at September 30, 1997...... 9,945 9,945 10,161
Additional paid-in capital............................. 32,202 34,149 33,933
Retained earnings...................................... 227,589 225,301 255,230
-------- -------- ---------
Total stockholders' equity..................... 269,736 269,395 299,324
Commitments and contingencies
-------- -------- ---------
$898,970 $659,344 $ 760,041
======== ======== =========
</TABLE>
See accompanying notes to financial statements.
F-97
<PAGE> 186
MID-WEST CAD, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND 1997
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Systems sales...................... $1,153,324 $1,380,233 $1,214,688 $ 854,456 $ 512,758
Software sales..................... 880,408 1,294,005 1,282,148 878,473 1,324,895
Support, consulting and other
revenues........................ 573,359 709,763 868,562 635,480 639,706
---------- ---------- ---------- ---------- ----------
Total revenues............. 2,607,091 3,384,001 3,365,398 2,368,409 2,477,359
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Hardware and software.............. 1,617,674 1,893,032 1,883,029 1,301,342 1,386,223
Other client services.............. 356,585 442,929 514,608 384,203 407,903
Selling and marketing.............. 424,166 726,115 711,566 507,496 450,255
General and administrative......... 230,302 218,557 251,881 186,898 189,698
---------- ---------- ---------- ---------- ----------
Total costs and expenses... 2,628,727 3,280,633 3,361,084 2,379,939 2,434,079
---------- ---------- ---------- ---------- ----------
Operating income (loss).... (21,636) 103,368 4,314 (11,530) 43,280
---------- ---------- ---------- ---------- ----------
Other income (expense), net:
Interest income.................... 797 1,177 876 496 1,048
Interest expense................... (1,019) (1,596) (5,756) (4,929) (1,435)
Gain on sale of equipment.......... 298 2,000 2,472 2,500 --
---------- ---------- ---------- ---------- ----------
Total other income
(expense), net........... 76 1,581 (2,408) (1,933) (387)
---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes.................... (21,560) 104,949 1,906 (13,463) 42,893
Income tax expense (benefit)......... (5,642) 31,613 4,194 (2,423) 12,964
---------- ---------- ---------- ---------- ----------
Net income (loss).......... $ (15,918) $ 73,336 $ (2,288) $ (11,040) $ 29,929
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-98
<PAGE> 187
MID-WEST CAD, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1994................... 9,811 $ 9,811 $ 27,973 $170,171 $ 207,955
Net loss...................................... -- -- -- (15,918) (15,918)
------ ------- -------- -------- ---------
Balances at December 31, 1994................. 9,811 9,811 27,973 154,253 192,037
Issuances of common stock..................... 134 134 2,282 -- 2,416
Compensation expense for employee stock
award....................................... -- -- 1,947 -- 1,947
Net income.................................... -- -- -- 73,336 73,336
------ ------- -------- -------- ---------
Balances at December 31, 1995................. 9,945 9,945 32,202 227,589 269,736
Compensation expense for employee stock
award....................................... -- -- 1,947 -- 1,947
Net loss...................................... -- -- -- (2,288) (2,288)
------ ------- -------- -------- ---------
Balances at December 31, 1996................. 9,945 9,945 34,149 225,301 269,395
Issuances of common stock in connection with
employee stock plan......................... 216 216 (216) -- --
Net income.................................... -- -- -- 29,929 29,929
------ ------- -------- -------- ---------
Balances at September 30, 1997................ 10,161 $10,161 $ 33,933 $255,230 $ 299,324
====== ======= ======== ======== =========
</TABLE>
See accompanying notes to financial statements.
F-99
<PAGE> 188
MID-WEST CAD, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND NINE-MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND 1997
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................... $ (15,918) $ 73,336 $ (2,288) $ (11,040) $ 29,929
Adjustments to reconcile net income
(loss) to net cash from operating
activities:
Depreciation and amortization..... 48,564 44,615 52,047 36,999 43,758
Gain on sale of equipment......... (298) (2,000) (2,472) (2,500) --
Deferred income taxes............. 588 5,293 10,159 7,619 7,509
Compensation expense from issuance
of common stock and employee
stock award.................... -- 4,363 1,947 1,460 --
Increase in cash surrender
value.......................... (993) (1,022) (1,049) (787) (820)
Changes in assets and liabilities:
Trade accounts receivable...... 91,251 26,453 48,994 (101,902) (15,336)
Other receivables.............. (3,865) 16,138 (8,351) (8,733) (12,213)
Inventories.................... 54,262 (228,784) 223,169 (100,145) 2,720
Prepaid expenses and other..... 612 (1,882) (3,681) (6,182) (6,789)
Income taxes receivable
(payable).................... (9,772) 28,343 (25,319) (21,276) 6,893
Accounts payable and accrued
expenses..................... (151,278) 208,706 (241,635) 247,953 59,365
Deferred revenue on support
contracts.................... 1,707 (6,688) 3,220 (2,834) 15,312
--------- --------- --------- --------- --------
Net cash from operating
activities................ 14,860 166,871 54,741 38,632 130,328
--------- --------- --------- --------- --------
Cash flows from investing activities:
Purchases of property and equipment.... (44,242) (66,780) (145,276) (132,143) (13,128)
Proceeds from sales of property and
equipment........................... -- 2,000 2,912 2,912 --
--------- --------- --------- --------- --------
Net cash from investing
activities................ (44,242) (64,780) (142,364) (129,231) (13,128)
--------- --------- --------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt................................ 20,000 16,632 61,666 61,666 --
Principal repayments of long-term
debt................................ (8,371) (8,193) (54,124) (5,863) (11,563)
--------- --------- --------- --------- --------
Net cash from financing
activities................ 11,629 8,439 7,542 55,803 (11,563)
--------- --------- --------- --------- --------
Net increase (decrease) in
cash and cash
equivalents............... (17,753) 110,530 (80,081) (34,796) 105,637
Cash and cash equivalents, beginning of
period................................. 34,935 17,182 127,712 127,712 47,631
--------- --------- --------- --------- --------
Cash and cash equivalents, end of
period................................. $ 17,182 $ 127,712 $ 47,631 $ 92,916 $153,268
========= ========= ========= ========= ========
Cash paid during the period for
interest............................... $ 1,019 $ 1,596 $ 5,756 $ 4,929 $ 1,435
========= ========= ========= ========= ========
Cash paid (received) for income taxes,
net of refunds......................... $ 3,542 $ (1,121) $ 18,125 $ 11,064 $ (1,438)
========= ========= ========= ========= ========
</TABLE>
See accompanying notes to financial statements.
F-100
<PAGE> 189
MID-WEST CAD, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 AND
SEPTEMBER 30, 1996 (UNAUDITED) AND 1997
(1) DESCRIPTION OF BUSINESS
Mid-West CAD, Inc. (the Company) principally purchases and sells
computer-aided design (CAD) system software as well as related component
hardware and parts. The Company is an Autodesk value-added reseller, mainly
serving the state of Missouri and certain areas of Kansas and focusing primarily
upon mid-size companies in the manufacturing and engineering sector. The Company
also provides consulting, training and maintenance support.
(2) INTERIM FINANCIAL STATEMENT PRESENTATION
The financial statements for the nine month period ended September 30, 1996
included herein have been prepared by the Company without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading.
In the opinion of management, the accompanying unaudited financial
statements include all adjustments (consisting of only normal recurring
accruals) necessary to present the results of operations and cash flows for the
nine months ended September 30, 1996. The results of interim periods are not
necessarily indicative of the operating results for the entire year.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect certain 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 reported
period. Actual results could differ from those estimates.
(b) Inventories
Inventories are stated at the lower of cost or market and cost is
determined by the average cost method.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or estimated useful life of the asset. The estimated
useful lives are as follows:
<TABLE>
<S> <C>
Office equipment....................... 5 - 7 years
Furniture and fixtures................. 5 years
Leasehold improvements................. 5 - 10 years
</TABLE>
(d) Income Taxes
The provisions for income taxes are accounted for in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Under the asset and liability method of SFAS No. 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to
F-101
<PAGE> 190
MID-WEST CAD, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, as well as operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
(e) Revenue Recognition
Revenues from software and computer hardware sales are recognized when the
product is shipped. Revenues from consulting, training or other services are
recognized as the related services are performed.
Revenues from customer support agreements are recognized ratably over the
life of the support agreement.
(4) PROPERTY AND EQUIPMENT
Net property and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Office equipment...................... $200,824 $333,902 $ 344,098
Furniture and fixtures................ 47,962 59,181 62,113
Leasehold improvements................ 8,247 8,247 8,247
-------- -------- ---------
257,033 401,330 414,458
Less: Accumulated depreciation and
amortization........................ 152,732 204,240 247,998
-------- -------- ---------
$104,301 $197,090 $ 166,460
======== ======== =========
</TABLE>
F-102
<PAGE> 191
MID-WEST CAD, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) NOTES PAYABLE
A summary of notes payable is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Note payable, secured by certain office
equipment, payable in monthly
installments of $556 principal plus
interest at prime plus 2 1/2% (8.75%
and 9.50% at December 31, 1996 and
1995, respectively) through March
1997.................................. $ 8,889 $ 2,222 $ --
Note payable, secured by certain office
equipment, bearing interest at 7.92%,
payable in monthly installments of
principal and interest of $521 through
July 1998............................. 14,550 9,267 5,022
Note payable, secured by certain office
equipment, bearing interest at 7.50%,
payable in monthly installments of
principal and interest of $674 through
September 1999........................ -- 19,492 14,396
------- ------- -------
Total notes payable........... 23,439 30,981 19,418
Less current installments............... 11,950 14,798 12,275
------- ------- -------
Notes payable, excluding current
installments....................... $11,489 $16,183 $ 7,143
======= ======= =======
</TABLE>
At September 30, 1997, aggregate annual maturities of notes payable are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
-------------------------------------------- -------
<S> <C>
1998........................................ $12,275
1999........................................ 7,143
-------
$19,418
=======
</TABLE>
(6) INCOME TAXES
Income tax expense (benefit) was as follows:
<TABLE>
<CAPTION>
NINE-MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1994 1995 1996 1997
------- ------- ------- 1996 -------
-------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal:
Current................... $(5,730) $19,823 $(4,543) $(8,368) $ 3,955
Deferred.................. 513 4,626 8,856 6,642 6,546
------- ------- ------- ------- -------
(5,217) 24,449 4,313 (1,726) 10,501
------- ------- ------- ------- -------
State and Local:
Current................... (500) 6,497 (1,422) (1,674) 1,500
Deferred.................. 75 667 1,303 977 963
------- ------- ------- ------- -------
(425) 7,164 (119) (697) 2,463
------- ------- ------- ------- -------
$(5,642) $31,613 $ 4,194 $(2,423) $12,964
======= ======= ======= ======= =======
</TABLE>
F-103
<PAGE> 192
MID-WEST CAD, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense (benefit) differs from the amounts computed by applying
the federal statutory rate to pretax income as a result of the following:
<TABLE>
<CAPTION>
NINE-MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -----------------
1994 1995 1996 1997
------- ------- ------ 1996 -------
-------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Computed "expected" tax
expense (benefit).......... $(7,330) $35,683 $ 648 $(4,577) $14,584
State and local taxes (net of
federal income taxes)...... (281) 4,729 393 (460) 1,625
Surtax exemption............. (261) (11,727) (26) (20) (4,682)
Meals and entertainment...... 859 1,073 1,186 890 759
Officer's life insurance..... 1,141 1,188 1,241 931 549
Other........................ 230 667 752 813 129
------- ------- ------- ------- -------
$(5,642) $31,613 $4,194 $(2,423) $12,964
======= ======= ======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Deferred tax liabilities -- property and
equipment............................. $11,972 $22,131 $29,640
======= ======= =======
</TABLE>
(7) COMMITMENTS
The Company has entered into noncancelable operating leases covering its
office facilities and certain equipment. Rent expense amounted to $43,418,
$54,178 and $54,178 for the years ended December 31, 1994, 1995 and 1996,
respectively, and $40,634 for the nine-months ended September 30, 1996 and 1997.
Future minimum payments under the leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
--------------------------------------------
<S> <C>
1998........................................ $ 62,354
1999........................................ 70,872
2000........................................ 79,365
2001........................................ 87,156
--------
Total minimum lease payments................ $299,747
========
</TABLE>
(8) PENSION PLAN
Effective January 1, 1996, the Company established a trusteed, defined
contribution plan covering substantially all employees under which the Company
contributes 25% of employee contributions up to 6% of compensation. The Board of
Directors of the Company also approved a discretionary contribution to the plan
for the year ended December 31, 1996, to be paid in 1997, in the amount of
$21,757. The expense for this plan, including this discretionary contribution,
for the year ended December 31, 1996 was $31,810, and $7,255 and $23,549 for the
nine months ended September 30, 1996 and 1997, respectively.
(9) MERGER AGREEMENT
In May 1997, the Company signed a letter of intent to be acquired by
Universal Document Management Systems, Inc. ("UDMS"), with the business
combination to be consummated simultaneous with UDMS' initial public offering.
F-104
<PAGE> 193
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
CADD Microsystems, Inc.:
We have audited the accompanying balance sheets of CADD Microsystems, Inc.
as of September 30, 1997, and December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity (deficit), and cash flows for the
nine month period ended September 30, 1997 and each of the years in the
three-year period ended December 31, 1996. 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of CADD Microsystems, Inc. as
of September 30, 1997, December 31, 1995 and 1996, and the results of its
operations and its cash flows for the nine month period ended September 30, 1997
and each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
November 21, 1997
McLean, VA
F-105
<PAGE> 194
CADD MICROSYSTEMS, INC.
BALANCE SHEETS
(ALL DOLLARS IN THOUSANDS-EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------ ----- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash....................................................... $ 42 $ 75 $ 84
Trade accounts receivable, net of allowance for doubtful
accounts of $18, $68 and $0 at December 31, 1995 and
1996 and September 30, 1997, respectively............... 499 287 407
Inventories................................................ 385 165 110
Prepaid expenses and other current assets.................. 9 8 10
------ ----- -----
Total current assets............................... 935 535 611
Property and equipment, net of accumulated depreciation and
amortization............................................... 133 200 158
Other........................................................ -- 3 2
------ ----- -----
$1,068 $ 738 $ 771
====== ===== =====
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities:
Current installments of obligations under capital leases... $ 10 $ 43 $ 43
Long-term debt, current installments....................... 50 90 80
Shareholder and officer notes payable...................... 36 -- --
Accounts payable........................................... 651 412 422
Accrued expenses........................................... 89 62 64
Deferred revenue on support contracts...................... 273 58 82
------ ----- -----
Total current liabilities.......................... 1,109 665 691
Obligations under capital leases, excluding current
installments............................................... 18 51 19
Long-term debt, excluding current installments............... 24 150 120
------ ----- -----
Total liabilities.................................. 1,151 866 830
------ ----- -----
Stockholders' (deficit):
Common stock, $.01 par value, 10,000 shares authorized,
issued and outstanding at December 31, 1995 and 1996 and
10,175 shares authorized, issued and outstanding at
September 30, 1997...................................... -- -- --
Additional paid-in capital................................. 14 14 27
Accumulated deficit........................................ (97) (142) (86)
------ ----- -----
Total stockholders' (deficit)...................... (83) (128) (59)
------ ----- -----
Commitments and contingencies................................ $1,068 $ 738 $ 771
====== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-106
<PAGE> 195
CADD MICROSYSTEMS, INC.
STATEMENTS OF OPERATIONS
(ALL DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------------
1994 1995 1996 1996 1997
------ ------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Systems sales........................... $ 205 $ 292 $ 298 $ 211 $ 130
Software sales.......................... 1,972 1,944 1,663 1,237 1,312
Service, consulting, and commission
fees................................. 702 877 1,133 874 843
------ ------ ------ ------ ------
Total revenues....................... 2,879 3,113 3,094 2,322 2,285
------ ------ ------ ------ ------
Costs and expenses:
Hardware, software and service.......... 1,874 1,690 1,925 1,437 1,412
Selling and marketing................... 862 863 632 503 350
General and administrative.............. 414 384 544 407 438
------ ------ ------ ------ ------
Total costs and expenses............. 3,150 2,937 3,101 2,347 2,200
------ ------ ------ ------ ------
Operating income (loss)................... (271) 176 (7) (25) 85
Interest expense, net..................... (17) (31) (38) (24) (29)
------ ------ ------ ------ ------
Net income (loss)......................... $ (288) $ 145 $ (45) $ (49) $ 56
====== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-107
<PAGE> 196
CADD MICROSYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(ALL DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
--------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1994...................... 10,000 $-- $ 14 $ 139 $ 153
Dividend distribution............................ -- -- -- (93) (93)
Net loss......................................... -- -- -- (288) (288)
------ ------ ---- -- ------ ------
Balances at December 31, 1994.................... 10,000 -- 14 (242) (228)
Net income....................................... -- -- -- 145 145
------ ------ ---- -- ------ ------
Balances at December 31, 1995.................... 10,000 -- 14 (97) (83)
Net loss......................................... -- -- -- (45) (45)
------ ------ ---- -- ------ ------
Balances at December 31, 1996.................... 10,000 -- 14 (142) (128)
Issuance of stock to employees................... 175 -- 13 -- 13
Net Income....................................... -- -- -- 56 56
------ ------ ---- -- ------ ------
Balances at September 30, 1997................... 10,175 $-- $ 27 $ (86) $ (59)
====== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-108
<PAGE> 197
CADD MICROSYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(ALL DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ---------------------
1994 1995 1996 1996 1997
----- ----- ----- ----------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $(288) $ 145 $ (45) $ (49) $ 56
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization........ 49 52 59 35 45
Provision for loss on doubtful
accounts.......................... 32 2 13 -- --
Stock compensation................... -- -- -- -- 13
Changes in operating assets and
liabilities:
Trade accounts receivable......... 267 (273) 199 165 (120)
Inventories....................... 5 (302) 220 73 55
Prepaid expenses and other
assets.......................... 6 17 (2) (49) (1)
Accounts payable and accrued
expenses........................ (124) 217 (266) (55) 12
Deferred revenue on support
contracts....................... -- 229 (215) (199) 24
----- ----- ----- -------- -----
Net cash provided by (used in)
operating activities......... (53) 87 (37) (79) 84
----- ----- ----- -------- -----
Cash flows from investing
activities -- Purchases of property and
equipment................................. (70) (8) (29) (14) (3)
----- ----- ----- -------- -----
Cash flows from financing activities:
Borrowings (repayments) of shareholder and
officer notes payable.................. -- 14 (36) (36) --
Proceeds from issuance of long-term
debt................................... 97 -- 240 200 --
Principal payments of long-term debt...... (44) (52) (74) (38) (40)
Principal repayments of capital lease
obligations............................ (3) (7) (31) (23) (32)
Distribution of dividend.................. (93) -- -- -- --
----- ----- ----- -------- -----
Net cash provided by (used in)
financing activities......... (43) (45) 99 103 (72)
----- ----- ----- -------- -----
Net (decrease) increase in cash............. (166) 34 33 10 9
----- ----- ----- -------- -----
Cash, beginning of year..................... 174 8 42 42 75
----- ----- ----- -------- -----
Cash, end of year........................... $ 8 $ 42 $ 75 $ 52 $ 84
===== ===== ===== ======== =====
Supplementary Information:
Cash paid during the period for
interest............................... $ 18 $ 31 $ 38 $ 24 $ 29
===== ===== ===== ======== =====
Non-cash borrowings on capital lease
obligations............................ $ -- $ 33 $ 97 $ 97 $ --
===== ===== ===== ======== =====
</TABLE>
See accompanying notes to financial statements.
F-109
<PAGE> 198
CADD MICROSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS)
(1) DESCRIPTION OF BUSINESS
CADD Microsystems, Inc. (the "Company") was formed in 1985 and is in the
business of providing computer-aided design software and hardware, as well as
integration, training, and consulting for selected applications in the design
and mapping industry. The Company derived approximately 68%, 56% and $58% of its
revenue from the sale of AutoDesk, Inc. software applications and related
commissions in 1995, 1996, and the nine month period ended September 30, 1997,
respectively. The Company's market area is primarily the Washington DC area
including Virginia and Maryland.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect certain 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 reported
period. Actual results could differ from those estimates.
(b) Inventories
Inventories are stated at the lower of cost or market, and cost is
determined by the specific identification method.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements and equipment held under capital leases are amortized
using the straight-line method over the shorter of the lease term or estimated
useful life of the asset. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Office equipment........................ 5 years
Furniture and fixtures.................. 5 - 10 years
Software................................ 5 years
Leasehold improvements.................. Life of Lease
Equipment held under capital leases..... Life of Lease
</TABLE>
(d) Income Taxes
The Company has elected, by consent of its stockholders, to be taxed under
the provisions of Subchapter S of the Internal Revenue Code. Under those
provisions, the Company does not pay corporate income taxes on its taxable
income. Instead, the stockholders are liable for individual income taxes on the
Company's taxable income. Accordingly, these financial statements do not contain
a provision for income taxes.
(e) Revenue Recognition
Revenues from software, commissions and computer hardware sales are
recognized when the product is shipped or upon customer acceptance in instances
where the software and computer hardware is to be installed at the customer
location. Customer training revenues and revenues from time and material type
professional consulting contracts are recognized as the services are provided
and the work performed. Revenues from long-term fixed price professional
consulting contracts are accounted for under the percentage of completion
F-110
<PAGE> 199
CADD MICROSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
method. When estimates of costs, on long-term fixed price contracts indicate a
loss, such a loss is provided for currently.
Revenues from prepaid customer support agreements are recognized ratably
over the life of the support agreement.
(f) Interim Financial Information
The financial statements for the nine months ended September 30, 1996 are
unaudited; however, in the opinion of management, all adjustments necessary for
a fair presentation of the financial statements for the interim period have been
included.
(3) PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------- SEPTEMBER 30,
1995 1996 1997
----- ----- -------------
<S> <C> <C> <C>
Office equipment.............................. $ 256 $ 278 $ 279
Furniture and fixtures........................ 31 33 33
Software...................................... 27 30 32
Leasehold improvements........................ 4 6 6
Equipment held under capital leases........... 34 130 130
----- ----- -------------
352 477 480
Less: Accumulated depreciation and
amortization................................ (219) (277) (322)
----- ----- -------------
$ 133 $ 200 $ 158
===== ===== ==========
</TABLE>
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------- SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
<S> <C> <C> <C>
Credit Agreement:
Line of credit................................ $ -- $ 50 $ 40
Term loan..................................... -- 190 160
8% Term note, $98 face, due April 1996.......... 10 -- --
8% Term note, $50 face, due April 1997.......... 21 -- --
11% Term note, $50 face, due September 1997..... 43 -- --
---- ---- -----
74 240 200
Less: current installments...................... (50) (90) (80)
---- ---- -----
$ 24 $150 $ 120
==== ==== =====
</TABLE>
Credit Agreement
In August 1996, the Company entered into a credit agreement with a
financial institution which provides for (i) a five year term loan in the amount
of approximately $200 with principle and interest payments due monthly, and (ii)
a revolving line of credit due upon demand in an amount of up to $125. The
credit agreement is collateralized by substantially all of the assets of the
Company.
F-111
<PAGE> 200
CADD MICROSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The term loan bears interest of prime plus 2.25%, adjusted annually.
Borrowings under the line of credit bear interest of prime plus 1.50%, adjusted
daily. At September 30, 1997, the interest rates on the term loan and the line
of credit were 10.8% and 10.0%, respectively. At September 30, 1997,
approximately $85 of the line of credit was unused and available. The Company
obtained a waiver from the financial institution effective September 30, 1997
for non-compliance with covenants concerning the maintenance of certain ratios,
as defined by the credit agreement.
Term Notes
During 1995, the Company's long-term debt consisted of term notes bearing
interest of between 8% and 11% with various maturity dates. The outstanding
amounts of these notes were paid in full with the proceeds of the credit
agreement.
At September 30, scheduled maturities of long-term debt for the next five
years are as follows:
<TABLE>
<S> <C>
1998......................................... $ 80
1999......................................... 40
2000......................................... 40
2001......................................... 40
----
Total maturities........................ $200
====
</TABLE>
(5) OBLIGATIONS UNDER CAPITAL LEASES
At September 30, the future minimum lease payments under capital leases are
as follows:
<TABLE>
<S> <C>
1998......................................... $ 48
1999......................................... 24
2000 and thereafter.......................... --
----
Total minimum lease payments................. 72
Less: Amounts representing interest and
executory costs............................ (10)
----
Net present value............................ 62
Less: current installments................... (43)
----
$ 19
====
</TABLE>
(6) RELATED PARTY TRANSACTIONS
Shareholder and Officer Notes Payable
The Company periodically receives short-term loans from certain officers
and shareholders. These borrowings are due upon demand and are non-interest
bearing. During 1996 and 1995, such borrowings totaled $173 and $70,
respectively. At December 31, 1995, outstanding shareholder and officer notes
payable totaled approximately $36.
Related Party Lease
The Company leases certain office space from a principle shareholder under
an agreement which expires in April 2000. Rent expense under the lease totaled
$43 in 1996 and 1995, respectively, and $32 as of September 30, 1997.
F-112
<PAGE> 201
CADD MICROSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) STOCK COMPENSATION
During 1997 the Company issued 175 shares of common stock to senior
management for prior services. The shares are fully vested and resulted in
compensation expense of approximately $13. The value of the shares were
estimated based on the estimated fair value of the Company on the date of
issuance.
(8) COMMITMENTS
The Company has entered into noncancelable operating leases covering its
office facilities and certain equipment. Rent expense amounted to $91, $90 and
$66 for the years ended December 31, 1995 and 1996, and nine month period ended
September 30, 1997, respectively. At September 30, 1997, future minimum payments
under the leases are as follows:
<TABLE>
<S> <C>
1997......................................... $ 21
1998......................................... 43
1999......................................... 43
2000......................................... 14
2001 and thereafter.......................... --
----
Total minimum lease payments................. $121
====
</TABLE>
The Company is required by certain debt covenants to maintain an average
balance of $30,000 in one of its bank accounts.
(9) ACQUISITION
In May 1997, the Company signed a letter of intent to be acquired by a
company, with the business combination to be consummated simultaneously with the
acquiring company's initial public offering.
F-113
<PAGE> 202
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Devtron, Russell Inc.:
We have audited the accompanying balance sheets of Devtron, Russell Inc. as
of September 30, 1996 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 1997. 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of Devtron, Russell Inc. as of
September 30, 1996 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended September 30, 1997,
in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
November 12, 1997
Detroit, Michigan
F-114
<PAGE> 203
DEVTRON, RUSSELL INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 2 2,734
Trade accounts receivable, net....................................... 216,481 249,067
Inventories.......................................................... 239,963 212,684
Prepaid expenses and other current assets............................ 3,802 4,596
Deferred tax asset (note 6).......................................... 14,719 --
Refundable income taxes.............................................. -- 16,298
-------- --------
Total current assets......................................... 474,967 485,379
Property and equipment, net of accumulated depreciation (note 3)....... 61,434 93,720
-------- --------
$536,401 $579,099
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit (note 4).................................... -- 65,000
Long-term debt, current installments (note 5)........................ 17,125 17,961
Accounts payable..................................................... 281,746 182,018
Accrued expenses..................................................... 24,351 21,292
Income tax payable (note 6).......................................... 27,540 --
Deferred revenue on support contracts................................ 4,730 10,866
-------- --------
Total current liabilities.................................... 355,492 297,137
Long-term debt, excluding current installments......................... 71,522 64,295
-------- --------
Total liabilities............................................ 427,014 361,432
-------- --------
Stockholders' equity:
Common stock, no par value, authorized 50,000 shares; 2,000 shares
issued and outstanding at September 30, 1996 and 1997............. 2,000 2,000
Retained earnings.................................................... 107,387 215,667
-------- --------
Total stockholders' equity................................... 109,387 217,667
Commitments (note 8)...................................................
-------- --------
$536,401 $579,099
======== ========
</TABLE>
See accompanying notes to financial statements.
F-115
<PAGE> 204
DEVTRON, RUSSELL INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Systems sales...................................... $ 726,630 $1,361,739 $1,688,343
Software sales..................................... 755,850 1,220,146 1,002,094
Service, consulting, and other revenues............ 139,697 199,647 267,422
---------- ---------- ----------
Total revenues............................. 1,622,177 2,781,532 2,957,859
Costs and expenses:
Hardware........................................... 646,046 1,097,916 1,349,638
Software........................................... 489,761 912,183 726,728
Selling, general and administrative................ 462,921 630,154 732,280
---------- ---------- ----------
Total costs and expenses................... 1,598,728 2,640,253 2,808,646
---------- ---------- ----------
Operating income..................................... 23,449 141,279 149,213
---------- ---------- ----------
Other (income) expense, net:
Interest........................................... 9,370 10,341 12,012
Other income....................................... (3,824) (102) (1,500)
---------- ---------- ----------
5,546 10,239 10,512
---------- ---------- ----------
Income before income taxes................. 17,903 131,040 138,701
Income taxes (note 6)................................ -- (20,388) (30,421)
---------- ---------- ----------
Net income................................. $ 17,903 $ 110,652 $ 108,280
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-116
<PAGE> 205
DEVTRON, RUSSELL INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ --------- -------------
<S> <C> <C> <C> <C>
Balances at October 1, 1994....................... 2,000 $2,000 $ (21,168) $ (19,168)
Net income........................................ -- -- 17,903 17,903
----- ------ --------- ---------
Balances at September 30, 1995.................... 2,000 2,000 (3,265) (1,265)
Net income........................................ -- -- 110,652 110,652
----- ------ --------- ---------
Balances at September 30, 1996.................... 2,000 2,000 107,387 109,387
Net income........................................ -- -- 108,280 108,280
----- ------ --------- ---------
Balances at September 30, 1997.................... 2,000 $2,000 $ 215,667 $ 217,667
===== ====== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-117
<PAGE> 206
DEVTRON, RUSSELL INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 17,903 $ 110,652 $ 108,280
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization......................... 18,900 18,186 35,176
Gain on sale of property and equipment................ 3,400 -- --
Changes in operating assets and liabilities:
Trade accounts receivable.......................... (168,783) 1,447 (32,586)
Inventories........................................ (70,397) (109,958) 27,279
Prepaid expenses and other assets.................. (1,394) (11,269) 13,925
Refundable income taxes............................ -- -- (16,298)
Accounts payable and accrued expenses.............. 118,991 42,949 (102,787)
Deferred revenue on support contracts.............. (37) 1,679 6,136
Income tax payable................................. 3,567 23,973 (27,540)
--------- --------- ---------
Net cash provided by (used in) operating
activities.................................... (77,850) 77,659 11,585
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment........................ (20,265) (26,772) (67,461)
Proceeds from sales of property and equipment.............. 3,400 -- --
--------- --------- ---------
Net cash used in investing activities............ (16,865) (26,772) (67,461)
--------- --------- ---------
Cash flows from financing activities:
Net borrowings (repayment) on line of credit............... 2,000 (2,000) 65,000
Proceeds from issuance of long-term debt................... 79,528 19,514 16,000
Principal repayments of long-term debt..................... (48,513) (24,919) (17,092)
Loan advance to shareholder................................ -- -- (5,300)
Increase (decrease) in bank overdrafts..................... 43,480 (43,480) --
--------- --------- ---------
Net cash provided by (used in) financing
activities.................................... 76,495 (50,885) 58,608
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents......... (18,220) 2 2,732
Cash, beginning of period.................................... 18,220 -- 2
--------- --------- ---------
Cash, end of period.......................................... $ -- $ 2 $ 2,734
========= ========= =========
Cash paid during the period for interest..................... $ 9,379 $ 10,341 $ 12,011
========= ========= =========
Cash paid during the period for income taxes................. $ -- $ 7,567 $ 59,540
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-118
<PAGE> 207
DEVTRON, RUSSELL INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1996 AND 1997
(1) DESCRIPTION OF BUSINESS
Devtron, Russell Inc. (the "Company") began operations in 1969 as a
software/hardware distributor and service provider. The Company's major supplier
is Autodesk, from which Devtron purchases its main product, Auto CAD, a CAD/CAM
software applicable for use in the engineering field. The Company also sells
various other design-related software and hardware products, as well as provides
customer support, including training and, more recently, maintenance to a wide
customer base (250-mile radius) in the mid-Michigan area. Devtron is
headquartered in Gladwin, Michigan, and has satellite offices in Grand Rapids
and Traverse City.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect certain 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 reported
period. Actual results could differ from those estimates.
(b) Inventories
Inventories are stated at the lower of cost or market, and cost is
determined by the first-in, first-out (FIFO) method. Inventory consists
primarily of hardware and pre-packaged software.
(c) Building and Equipment
Building and equipment are stated at cost. Depreciation is computed over
the useful lives of the assets using accelerated methods. The estimated useful
lives are as follows:
<TABLE>
<S> <C>
Office equipment and fixtures.................... 5 - 7 years
Vehicles......................................... 5 years
Building improvements............................ 39 years
Building......................................... 31.5 years
</TABLE>
(d) Income Taxes
The provisions for income taxes are accounted for in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, as well as
operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.
(e) Revenue Recognition
Revenue from software and computer hardware sales are recognized when the
product is shipped, or upon customer acceptance in instances where the software
and computer hardware is to be installed at the customer location. Revenues from
consulting, training, or other services are recognized as the related services
are performed.
Revenues from prepaid customer support agreements and hardware support are
recognized ratably over the life of the support agreement.
F-119
<PAGE> 208
DEVTRON, RUSSELL INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) PROPERTY AND EQUIPMENT
Net property and equipment is comprised of the following at September 30:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Buildings............................................ $ 53,342 $ 53,342
Equipment............................................ 157,215 200,374
Vehicles............................................. 67,837 86,528
Building improvements................................ 177 5,788
--------- ---------
278,571 346,032
Less: Accumulated depreciation....................... (217,137) (252,312)
--------- ---------
$ 61,434 $ 93,720
========= =========
</TABLE>
(4) REVOLVING LINE OF CREDIT
The Company has a $75,000 line of credit which bears interest at the prime
rate plus 1.5 percent per annum (10 percent at September 30, 1997) and is
secured by all assets of the Company. The Company has borrowed $0 and $65,000 as
of September 30, 1996 and 1997, respectively.
(5) LONG-TERM DEBT
Long-term debt consists of the following at September 30:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Note payable -- variable-rate mortgage (10% at September
30, 1997), due in monthly installments of $746.14,
including interest, with remaining unpaid balance of
principal and accrued interest due May 1, 1998, secured
by a building.......................................... $57,807 $53,393
8.7% secured note payable in monthly installments of
$479.47, including interest, maturing on October 13,
1999, secured by a vehicle............................. 15,581 10,961
10.75% secured note payable in monthly installments of
$361.42, including interest, maturing on May 26, 1998,
secured by a vehicle................................... 9,959 6,224
11.5% secured note payable in monthly installments of
$527, including interest, maturing November 1999,
secured by a vehicle................................... -- 11,678
Loans from shareholder, interest term 10%, unsecured,
with no specific repayment term (note 7)............... 5,300 --
------- -------
Total long-term debt........................... 88,647 82,256
Less current installments................................ 17,125 17,961
------- -------
Long-term debt, excluding current
installments................................. $71,522 $64,295
======= =======
</TABLE>
The aggregate maturities of long-term debt for each of the five years
subsequent to September 30, 1997, are as follows: 1998, $67,530; 1999, $13,740;
2000, $986; 2001, $0; thereafter, $0.
F-120
<PAGE> 209
DEVTRON, RUSSELL INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES
Income tax expense (benefit) for the years ended September 30, 1995, 1996
and 1997, consists of the following:
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Current...................................... $ 3,567 $ 31,540 $15,702
Deferred..................................... (3,567) (11,152) 14,719
------- -------- -------
$ -- $ 20,388 $30,421
======= ======== =======
</TABLE>
Income tax expense differs from the amounts computed by applying the
federal statutory rate of 34 percent to income before income taxes for the years
ended September 30, 1995, 1996 and 1997, as a result of the following:
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Computed expected tax expense............... $ 6,087 $ 44,554 $ 47,158
Change in valuation allowance............... (2,808) (6,557) --
Change in effective rate for deferred tax
assets.................................... -- (6,750) (5,300)
Meals and entertainment..................... 284 476 313
Impact of lower tax brackets................ (3,563) (11,335) (11,750)
------- -------- --------
$ -- $ 20,388 $ 30,421
======= ======== ========
</TABLE>
The significant components of deferred income tax benefit attributable to
income from operations for the years ended September 30, 1995, 1996 and 1997,
were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Deferred tax expense (benefit), exclusive of
the effects of other component listed
below...................................... $ (759) $ (4,595) $14,719
Decrease in the beginning-of-the-year balance
of the valuation allowance for deferred
taxes...................................... (2,808) (6,557) --
------- -------- -------
$(3,567) $(11,152) $14,719
======= ======== =======
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
asset at September 30, 1996, were attributable to expenses accrued for books not
for tax.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. SFAS No. 109 requires
that a valuation allowance be recorded against tax assets which are not likely
to be realized.
(7) RELATED PARTY TRANSACTIONS
In November 1993, the Company borrowed funds from the president/shareholder
in the amount of $16,500 at a stated rate of interest of 10 percent with no
formal repayment schedule. The principal balance at September 30, 1996 and 1997
is $5,300 and $-0-, respectively.
(8) COMMITMENTS
The Company has entered into noncancelable operating leases covering its
office facilities and certain equipment. Rent expense amounted to $8,798,
$10,564 and $12,728 for the years ended September 30, 1995,
F-121
<PAGE> 210
DEVTRON, RUSSELL INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1996 and 1997, respectively. Future minimum payments under the leases as of
September 30, 1997, were as follows:
<TABLE>
<S> <C>
1998............................................... $ 5,139
1999............................................... 5,139
2000............................................... 5,139
2001............................................... 4,568
2002 and thereafter................................ 3,387
------
Total minimum lease payments............. $23,372
======
</TABLE>
(9) SIGNIFICANT CUSTOMER
For the years ended September 30, 1996 and 1997, one customer, HMS
represented more than 10 percent of total revenues. HMS accounted for 18 percent
and 22 percent of trade accounts receivable at September 30, 1996 and 1997,
respectively. Additionally, a majority of the Company's sales are comprised of
products from one major supplier, Autodesk. The Company is licensed to sell
these products within a 250 mile radius (in the State of Michigan). Accordingly,
sales are concentrated among customers in this region.
(11) MERGER AGREEMENT
In the second quarter of 1997, the Company signed a letter of intent to be
acquired by a company, with the business combination to be consummated
simultaneously with the acquiring company's initial public offering.
F-122
<PAGE> 211
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Computers for Design, Inc.:
We have audited the accompanying balance sheets of Computers for Design,
Inc. as of December 31, 1995 and 1996 and September 30, 1997 and the related
statements of operations, stockholders' deficit and cash flows for each of the
years in the three-year period ended December 31, 1996 and the nine months ended
September 30, 1997. 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of Computers for Design, Inc.
as of December 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1996 and the nine months ended September 30, 1997, in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
November 14, 1997
Denver, Colorado
F-123
<PAGE> 212
COMPUTERS FOR DESIGN, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................. $ 4,068 $ 505 $ 2,201
Trade accounts receivable, net of allowance for
doubtful accounts of $2,000........................ 153,858 158,044 182,214
Inventories........................................... 89,571 18,076 3,836
Commissions receivable................................ 33,553 62,985 84,426
Current portion of note receivable -- related party... 28,312 -- --
Prepaid expenses and other............................ 2,746 10,104 7,591
-------- -------- --------
Total current assets.......................... 312,108 249,714 280,268
-------- -------- --------
Note receivable -- related party, net of current
portion............................................ 22,732 22,732 22,732
Equipment, net of accumulated depreciation............ 42,643 51,069 41,835
Restricted cash....................................... -- 7,512 4,003
Other assets.......................................... 4,391 4,392 4,392
-------- -------- --------
Total assets.................................. $381,874 $335,419 $ 353,230
======== ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving line of credit.............................. $150,000 $150,000 $ 80,000
Obligation under capital leases....................... -- 6,588 8,289
Accounts payable...................................... 283,747 149,807 231,287
Accrued expenses and other liabilities................ 38,254 41,092 36,976
Notes payable to shareholder.......................... -- 12,500 57,440
Income taxes payable.................................. -- 2,856 3,600
Advance payments from customers....................... -- 38,311 --
Deferred income taxes................................. -- 3,000 4,210
-------- -------- --------
Total current liabilities..................... 472,001 404,154 421,802
Stockholders' deficit:
Common stock, $.01 par value, 10,000 shares
authorized, 10,000, 9,375 and 8,125 shares
outstanding at December 31, 1995 and 1996 and
September 30, 1997................................. 100 94 81
Additional paid-in capital............................ 16,663 4,169 --
Note receivable from common stock issuance............ (16,763) (16,763) (11,174)
Accumulated deficit................................... (90,127) (56,235) (57,479)
-------- -------- --------
Total stockholders' deficit................... (90,127) (68,735) (68,572)
-------- -------- --------
Commitments
Total liabilities and stockholders' deficit... $381,874 $335,419 $ 353,230
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-124
<PAGE> 213
COMPUTERS FOR DESIGN, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- ---------------------------------
1994 1995 1996 1996 1997
---------- --------- ---------- ----------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Hardware sales........ $ 630,227 $ 683,238 $ 630,485 $ 600,278 $ 114,306
Software sales........ 916,767 1,085,107 1,070,797 770,431 990,126
Service, consulting,
and other.......... 379,449 289,329 440,501 347,482 357,490
---------- ---------- ---------- ---------- ----------
Total
revenue..... 1,926,443 2,057,674 2,141,783 1,718,191 1,461,922
Costs and expenses:
Hardware sales........ 520,108 514,294 540,514 497,960 102,089
Software sales........ 672,077 792,521 709,986 512,725 743,823
Selling and
marketing.......... 164,872 204,789 248,154 181,383 168,721
Service, consulting
and other costs.... 117,328 72,169 98,115 68,253 54,305
General and
administrative..... 434,226 488,054 497,002 374,166 354,879
---------- ---------- ---------- ---------- ----------
Total costs
and
expenses.... 1,908,611 2,071,827 2,093,771 1,634,487 1,423,817
---------- ---------- ---------- ---------- ----------
Operating
income
(loss)...... 17,832 (14,153) 48,012 83,704 38,105
---------- ---------- ---------- ---------- ----------
Other income (expense),
net:
Interest expense...... (10,649) (14,374) (12,331) (8,733) (10,160)
Other, net............ 11,943 4,646 4,067 3,554 (228)
---------- ---------- ---------- ---------- ----------
1,294 (9,728) (8,264) (5,179) (10,388)
---------- ---------- ---------- ---------- ----------
Income (loss)
before income
taxes............ 19,126 (23,881) 39,748 78,525 27,717
Income tax expense:
Current............... (3,061) -- (2,856) (11,407) (3,600)
Deferred.............. -- -- (3,000) (2,250) (1,210)
---------- ---------- ---------- ---------- ----------
(3,061) -- (5,856) (13,657) (4,810)
---------- ---------- ---------- ---------- ----------
Net income
(loss)........... $ 16,065 $ (23,881) $ 33,892 $ 64,868 $ 22,907
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-125
<PAGE> 214
COMPUTERS FOR DESIGN, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL NOTE RECEIVABLE TOTAL
--------------- PAID-IN FROM COMMON ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK ISSUANCE DEFICIT DEFICIT
------ ------ ---------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994...... 10,000 $100 $ 16,663 $ (16,763) $ (82,311) $ (82,311)
Net income....................... -- -- -- -- 16,065 16,065
------ ---- --------- --------- --------- ---------
Balances at December 31, 1994.... 10,000 100 16,663 $ (16,763) (66,246) (66,246)
Net loss......................... -- -- -- -- (23,881) (23,881)
------ ---- --------- --------- --------- ---------
Balances at December 31, 1995.... 10,000 100 16,663 $ (16,763) (90,127) (90,127)
Purchase and retirement of
treasury stock................. (625) (6) (12,494) -- -- (12,500)
Net income....................... -- -- -- -- 33,892 33,892
------ ---- --------- --------- --------- ---------
Balances at December 31, 1996.... 9,375 94 4,169 $ (16,763) (56,235) (68,735)
Purchase and retirement of
treasury stock................. (1,250) (13) (4,169) -- (24,151) (28,333)
Forgiveness of note receivable... -- -- -- 5,589 -- 5,589
Net income....................... -- -- -- -- 22,907 22,907
------ ---- --------- --------- --------- ---------
Balances at September 30, 1997... 8,125 $ 81 $ -- $ (11,174) $ (57,479) $ (68,572)
====== ==== ========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-126
<PAGE> 215
COMPUTERS FOR DESIGN, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
1994 1995 1996 1996 1997
-------- -------- --------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income(loss)........................ $ 16,065 $(23,881) $ 33,892 $ 64,868 $ 22,907
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization...... 17,982 21,150 25,371 17,503 21,521
Services charged against note
receivable from related
parties......................... -- -- 5,581 5,581 --
Forgiveness of note receivable..... -- -- -- -- 5,589
Deferred income tax expense........ -- -- 3,000 2,250 1,210
Loss (gain) on sale of equipment... 2,057 (779) -- -- --
Changes in operating assets and
liabilities:
Trade accounts receivable....... (76,496) 143,203 (4,186) (7,214) (24,170)
Inventories..................... 5,037 (82,845) 71,495 32,487 14,240
Commissions receivable.......... (19,865) (13,688) (29,432) (24,905) (21,441)
Prepaid expenses and other...... 156 (225) (7,359) (1,719) 2,513
Accounts payable................ 87,773 28,260 (133,940) (85,549) 81,480
Accrued expenses and other
liabilities................... 26,740 (11,842) 2,838 5,589 (4,116)
Income taxes payable............ 3,061 (3,061) 2,856 11,462 744
Advance payments from
customers..................... (17,242) (23,786) 38,311 -- (38,311)
-------- -------- --------- -------- --------
Net cash provided by operating
activities................. 45,268 32,506 8,427 20,353 62,166
-------- -------- --------- -------- --------
Cash flows from investing activities:
Advances to related parties............. -- (51,044) -- -- --
Payments on note receivable from related
parties.............................. -- -- 22,731 22,731 --
Purchase of equipment................... (16,052) (30,782) (22,297) (16,210) (2,459)
Proceeds from sale of equipment......... -- 4,925 -- -- --
Restricted cash escrow account.......... -- -- (7,512) -- 3,509
-------- -------- --------- -------- --------
Net cash provided (used) by
investing activities....... (16,052) (76,901) (7,078) 6,521 1,050
-------- -------- --------- -------- --------
Cash flows from financing activities:
Borrowings under revolving line of
credit............................... 115,748 34,252 275,000 250,000 110,000
Repayments under revolving line of
credit............................... (126,450) -- (275,000) (250,000) (180,000)
Borrowings from shareholders............ -- 12,500 -- 50,000
Repayment of note payable to
shareholder.......................... -- -- -- -- (5,060)
Repayments of capital lease
obligations.......................... (1,542) (5,285) (4,912) (3,689) (8,127)
Purchase and retirement of treasury
stock................................ -- -- (12,500) -- (28,333)
-------- -------- --------- -------- --------
Net cash provided (used) by
financing activities....... (12,244) 28,967 (4,912) (3,689) (61,520)
-------- -------- --------- -------- --------
Net increase (decrease) in cash........... 16,972 (15,428) (3,563) 23,185 1,696
Cash, beginning of period................. 2,524 19,496 4,068 4,068 505
-------- -------- --------- -------- --------
Cash, end of period....................... $ 19,496 $ 4,068 $ 505 $ 27,253 $ 2,201
======== ======== ========= ======== ========
Supplemental disclosure:
Cash paid for interest.................. $ 10,001 $ 13,226 $ 13,859 $ 7,118 $ 11,156
======== ======== ========= ======== ========
Cash paid for income taxes.............. $ -- $ 3,061 $ -- $ -- $ 2,955
======== ======== ========= ======== ========
Equipment acquired through capital lease
obligation........................... $ -- $ -- $ 11,900 $ 11,500 $ 9,540
======== ======== ========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-127
<PAGE> 216
COMPUTERS FOR DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 AND SEPTEMBER 30, 1997
(1) DESCRIPTION OF BUSINESS
Computers for Design, Inc. (the Company) sells computer equipment, and
software, and provides technical training and support for computer aided
drafting and design systems, principally to the government and commercial
industries. The Company's operations are primarily in Colorado, New Mexico and
the western portion of the United States.
In 1995 and 1994, the Company was a majority owned subsidiary of McFall
Konkel & Kimball Consulting Engineers, Inc. (MKK). During 1996 and 1997, MKK's
ownership interest was reduced to less than 50% (see note 6).
In May 1997, the Company entered into an agreement with Universal Document
Management Systems, Inc. ("UDMS") whereby UDMS will acquire the outstanding
common stock of the Company in conjunction with a proposed initial public
offering of common stock of UDMS.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect certain 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.
(b) Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
(c) Equipment
Equipment is stated at cost. Depreciation is computed using the
straight-line method for software and the double declining method for other
equipment over the estimated useful lives of the assets which are as follows:
<TABLE>
<S> <C>
Office equipment................................. 5 - 7 years
Furniture and fixtures........................... 5 years
Software......................................... 3 years
Equipment held under capital leases.............. 5 years
</TABLE>
(d) Income Taxes
The Company filed separate income tax returns in 1996, 1995 and 1994 and
will file a separate return in 1997. Income taxes are accounted for in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS No.
109), Accounting for Income Taxes. Under the asset and liability method of SFAS
No. 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as well as net operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.
The Company utilizes the modified accrual method of accounting for income
tax purposes, whereby sales and purchases of inventory to be sold are reported
using the accrual method and all other items are reported using the cash method.
F-128
<PAGE> 217
COMPUTERS FOR DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(e) Revenue Recognition
Revenue from software and computer hardware sales are recognized when the
product is shipped or upon customer acceptance in instances where the software
and computer hardware is to be installed at the customer location. Revenue from
consulting, training or other services are recognized as the related services
are performed.
Revenue from prepaid customer support agreements are recognized ratably
over the term of the agreement.
(f) Interim Financial Information
The financial statements for the nine months ended September 30, 1996 are
unaudited; however, in the opinion of management, all adjustments necessary for
a fair presentation of the financial statements for the interim period have been
included.
(3) EQUIPMENT
Equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
Office furniture and equipment......... $ 18,827 $ 22,187 $ 22,360
Computer equipment..................... 98,483 119,573 113,183
Software............................... 27,338 33,357 27,712
Equipment held under capital leases.... 8,572 11,900 21,040
--------- --------- ---------
153,220 187,017 184,295
Less accumulated depreciation and
amortization......................... (110,577) (135,948) (142,460)
--------- --------- ---------
Net equipment................ $ 42,643 $ 51,069 $ 41,835
========= ========= =========
</TABLE>
(4) DEBT
The Company has a revolving line of credit with a bank which provides for
maximum borrowings of $150,000 (limited to 70% of eligible receivables, as
defined), is due June 1, 1998, with interest payable monthly at 1% over the
prime rate (9 1/4% as of September 30, 1997), and collateralized by accounts
receivable, inventory, equipment and a general assignment of all of the
Company's assets. MKK is the guarantor on the revolving line of credit. MKK can
reduce its maximum guarantee on the revolving line of credit by one-third on May
31, 1997, May 31, 1998 and May 31, 1999. Due to certain circumstances, the
revolving line of credit was not reduced to $100,000 until July 1997.
In July 1997, certain shareholders made loans to the Company totaling
$50,000, which bear interest at 5.9% and are due January 2003. At September 30,
1997, $47,350 was outstanding under these shareholder notes.
F-129
<PAGE> 218
COMPUTERS FOR DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) INCOME TAXES
Income tax expense differs from the amounts computed by applying the
Federal graduated statutory tax rates to pre-tax income (loss) as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ----------------------
1994 1995 1996 1996 1997
------ ------- ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Computed "expected" tax expense
(benefit)....................... $2,869 $(3,582) $5,962 $14,631 $4,157
Change in valuation allowance for
deferred tax assets............. -- 3,343 -- -- 1,300
Other, net, including state income
taxes........................... (192) -- (106) (974) (647)
------ ------- ------ ------- ------
Actual income tax
expense............... $3,061 $ -- $5,856 $13,657 $4,810
====== ======= ====== ======= ======
</TABLE>
The Company's deferred tax liability is comprised of net temporary
differences relating to the use of the modified accrual method of accounting for
income tax purposes, as described in note 1.
As of December 31, 1996, the Company has a net operating loss carryforward
for income tax purposes of approximately $8,200, which expires in various
amounts through 2002. The Company has recorded a valuation allowance equal to
the deferred tax asset relating to the net operating loss carryforward. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible.
(6) STOCKHOLDERS' AGREEMENT AND TRANSACTIONS WITH RELATED PARTIES
Common stock issued at inception of the Company in 1988 was recorded at the
historical cost basis of assets contributed to the Company of $16,763. At
inception, MKK owned 75% of the outstanding common stock. The remaining 25% of
the common stock outstanding was owned by an officer of the Company.
In June 1996, MKK sold 3,750 shares of common stock to various officers of
the Company, thereby reducing its ownership from 75% to 40%.
In addition, in June 1996, the Company and certain employees entered into
an agreement to purchase 7,500 shares of common stock from MKK. Under the terms
of the agreement, the Company and these employees guaranteed the purchase of
3,750 shares of common stock, and employees were to purchase the remaining 3,750
shares. Actual employee purchases for the year ended December 31, 1996 totaled
3,125 shares. The Company's president loaned the Company $12,500 for the
purchase of the remaining 625 shares, and such shares were purchased by the
Company in 1996. The note bears interest at the prime rate plus 2% (10 1/4% as
of December 31, 1996) and is due on demand. At September 30, 1997, $10,090 was
outstanding under this note.
The agreement also provides that the remaining 3,750 shares shall be
purchased by the Company in increments of 1,250 shares over a three year period.
Required payments total $85,000, payable in three equal annual installments of
$28,333 due May 31, 1997, May 31, 1998 and May 31, 1999. In addition, the
Company shall forgive an unsecured note receivable from MKK totaling $16,763
over the three-year period. During the nine months ended September 30, 1997,
1,250 common shares were purchased for $28,333 and retired, and a portion of the
note receivable in the amount of $5,589 was forgiven. The Company also agreed to
place $2,350 per month into a "sinking fund escrow account" beginning in June
1996 to provide for the required payments. At December 31, 1996 and September
30, 1997, the escrow account totaled $7,512 and $4,003, respectively. If
F-130
<PAGE> 219
COMPUTERS FOR DESIGN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the Company defaults under its line of credit (see note 4), the escrow account
must be applied to repay any outstanding balance on the line of credit.
During 1995, the Company advanced funds to TMA Guild, LLC, (TMA) a company
in which the Company's president and 25% shareholder owned a 50% interest. The
Company's president sold the interest in TMA in May 1996. The loan is evidenced
by an unsecured promissory note dated March 1, 1996, payable through 2000 and
bearing interest at 1 1/2% above the prime rate (9 3/4% at December 31, 1996).
In May 1996, TMA repaid $22,731 and $5,581 of services rendered by TMA were
charged against the balance of the note. The remaining balance of the note
receivable of $22,732 was assumed by the Company's president in 1996.
(7) COMMITMENTS
The Company has entered into noncancelable operating leases for its office
facilities and certain equipment. Rent expense amounted to $48,261, $52,234 and
$56,206 for the years ended December 31, 1994, 1995 and 1996, respectively and
was approximately $54,391 for the nine months ended September 30, 1997. Future
minimum payments under the leases are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997............................................ $ 19,442
1998............................................ 77,766
1999............................................ 80,751
2000............................................ 81,739
2001............................................ 12,774
--------
Total minimum lease payments............ $272,472
========
</TABLE>
(8) EMPLOYEE BENEFIT PLAN
In January 1997, the Company adopted a defined contribution 401(k) Profit
Sharing Plan (the Plan) under section 401(k) of the Internal Revenue Code which
is available to full time employees who meet the Plan's eligibility
requirements. Employees may contribute up to the maximum limits allowed by the
Internal Revenue Code. The Company may make discretionary employer matching
contributions to the Plan.
F-131
<PAGE> 220
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING SHAREHOLDER, ANY OF THE UNDERWRITERS, OR ANY OTHER
PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER
TO BUY, ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED, NOR DOES
IT CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, ANY SHARES
OF COMMON STOCK OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Forward-Looking Statements............ 14
The Company........................... 15
Use of Proceeds....................... 18
Dividend Policy....................... 20
Capitalization........................ 21
Dilution.............................. 22
Unaudited Selected Pro Forma Combined
Financial Data...................... 23
Management's Discussion and Analysis
of Pro Forma Financial Condition and
Pro Forma Results of Operations..... 29
Selected Financial Data of the
Founding Companies.................. 36
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 41
Business.............................. 61
Management............................ 71
Certain Transactions.................. 75
Principal and Selling Shareholders.... 80
Description of Capital Stock.......... 81
Shares Eligible for Future Sale....... 82
Underwriting.......................... 84
Legal Matters......................... 85
Experts............................... 85
Additional Information................ 86
Index to Financial Statements......... F-1
</TABLE>
------------------------
Until , 1998 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Company's Common Stock offered hereby,
whether or not participating in this distribution, may be required to deliver a
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as Underwriters and with respect to their unsold
allotments or subscriptions.
- ------------------------------------------------------
======================================================
- ------------------------------------------------------
2,600,000 SHARES
LOGO
SYNERGIS TECHNOLOGIES, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
THE ROBINSON-HUMPHREY
COMPANY
MCDONALD & COMPANY
SECURITIES, INC.
, 1998
======================================================
<PAGE> 221
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13 -- OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized summary of expenses the Company estimates it
will incur in connection with the issuance and distribution of the Common Stock
being registered, other than underwriting discounts and commissions:
<TABLE>
<CAPTION>
EXPENSE AMOUNT
------------------------------------------------------------------------- ----------
<S> <C>
SEC Registration Fee..................................................... $ 11,779
NASD Fee................................................................. $ 4,387
American Stock Exchange Fee..............................................
Printing.................................................................
Legal Fees and Expenses..................................................
Accounting Fees and Expenses.............................................
Miscellaneous............................................................
----------
Total.................................................................... $1,500,000*
==========
</TABLE>
- ---------------
* Estimated
ITEM 14 -- INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Code of Regulations provides that each person who is made a
party to, or is otherwise involved in, any action, suit or proceeding, by reason
of the fact that he is or was a director or officer of the Company, or is or was
serving at the request of the Company as a director, officer, trustee, employee
or agent of another entity, shall be indemnified and held harmless by the
Company to the fullest extent authorized by the Ohio General Corporation Law
(the "OGCL") against all expenses, liability and loss, including attorneys'
fees. The OGCL permits indemnification in non-shareholder derivative actions for
expenses, judgments, fines and settlement amounts, if the director or officer
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe this conduct was
unlawful. In a shareholder derivative action, the OGCL permits indemnification
for expenses only, if the director or officer acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company, unless the director or officer has been adjudged to be liable for
negligence or misconduct in the performance of his duties. The intent of the
Company's Code of Regulations is to make indemnification for directors and
officers mandatory rather than permissive. In addition, the Code of Regulations
requires the Company to pay a director's or officer's expenses incurred in
defending any such proceeding, in advance of the proceeding's final disposition,
provided that the director or officer delivers to the Company an undertaking to
repay all advanced amounts if it is ultimately determined that he is not
entitled to be indemnified under Ohio law. To the extent that an officer or
director is successful on the merits in any proceeding, Ohio law mandates
indemnification for expenses, including attorneys' fees. The Code of Regulations
also provides a procedure whereby a director or officer denied indemnification
may bring an action against the Company to recover the amount of his
indemnification claim, and the burden of proving that the director or officer
did not meet the applicable standard of conduct described in the OGCL is placed
on the Company. The Company's Code of Regulations also provides that the Company
may maintain insurance, at its expense, to protect itself and any director,
officer, employee or agent of the Company against any expense, liability or
loss, whether or not the Company would have the power to indemnify such person
against such expense, liability or loss under the OGCL.
The Company currently maintains directors and officers liability insurance.
ITEM 15 -- RECENT SALES OF UNREGISTERED SECURITIES
The following information has been adjusted to reflect the 8,451.59-for-1
split effective , 1998.
II-1
<PAGE> 222
On August 1, 1997, the Company granted options to certain employees of the
Company under its 1997 Long-Term Incentive Plan. These grants were exempt
pursuant to (LOGO) 4(2) of the 1933 Act. The aggregate number of shares subject
to these options is 141,000, and each employee to whom options were granted can
exercise his options at an exercise price of $9.60 per share.
On February 19, 1997, the Company issued warrants to Terry L. Theye,
Chairman of the Board, President and Chief Executive Officer, to purchase up to
42,258 shares at a purchase price of $3.27 per share, and to Norma Skoog,
nominee for director, to purchase up to 35,590 shares at a purchase price equal
to the per share initial public offering price. Additionally, on July 7, 1997,
the Company issued a warrant to Thomas R. McLean, Senior Vice President of
Business Development and Marketing, to purchase up to 4,226 shares at a purchase
price of $2.37 per share. The issuance of each of these warrants was exempt
pursuant to (LOGO) 4(2) of the 1933 Act.
Simultaneous with the closing of the Offering, the Company will issue
863,841 shares to shareholders of the Founding Companies in connection with the
Acquisitions. Each of the shares to be issued in connection with the
Acquisitions is valued at an amount equal to the per share initial public
offering price. The Company is offering shares in connection with the
Acquisitions to less than 35 non-accredited investors in reliance on the
exemption from registration provided under Regulation D, Rule 506 of the 1933
Act.
ITEM 16 -- EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are hereby filed as part of the Registration
Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement**
3.1 Form of Amended and Restated Articles of Incorporation**
3.2 Form of Amended and Restated Code of Regulations**
5.1 Opinion of Dinsmore & Shohl LLP*
10.1 Asset Purchase Agreement with ACCESS Corporation**
10.2 Agreement and Plan of Merger and Reorganization with DTI Technologies, Inc.**
10.3 Agreement and Plan of Merger and Reorganization with Applied Software Technology,
Inc.**
10.4 Agreement and Plan of Merger and Reorganization with Technical Software, Inc.**
10.5 Agreement and Plan of Merger and Reorganization with Synergis Technologies, Inc.**
10.6 Agreement and Plan of Merger and Reorganization with CADD Microsystems, Inc.**
10.7 Agreement and Plan of Merger and Reorganization with Mid-West CAD, Inc.**
10.8 Agreement and Plan of Merger and Reorganization with Devtron, Russell Inc.**
10.9 Agreement and Plan of Merger and Reorganization with Computers for Design, Inc.**
10.10 Form of Registration Rights Agreement**
10.11 Employment Agreement between Company and Terry L. Theye**
10.12 Employment Agreement between Company and Thomas R. McLean**
10.13 Employment Agreement between Company and Scott D. Watkins**
10.14 Employment Agreement between Company and Daniel B. Dolan**
10.15 Employment Agreement between Company and Bonnie L. Johnson**
10.16 Employment Agreement between Company and Jeffrey A. Pakrosnis**
10.17 Employment Agreement between Company and Michael D. Theye**
10.18 1997 Long-Term Incentive Plan**
10.19 Common Stock Warrant dated February 19, 1997 issued by UDMS to Terry L. Theye**
10.20 Common Stock Warrant dated February 19, 1997 issued by UDMS to Norma Skoog**
10.21 Reimbursement Agreement dated May 28, 1997 between MedPlus and UDMS**
10.22 Reseller's Software License Agreement dated August 28, 1997 between MedPlus and
UDMS**
10.23 $299,500 Convertible Debenture dated June, 1994 issued by UDMS to MedPlus**
10.24 Amendment to Stock Purchase Agreement, dated August 12, 1997 between MedPlus and
the prior shareholders of HWB, Inc.**
10.25 Letter agreement between Autodesk, Inc. and the Company, dated September 25,
1997**
10.26 Agreement between MedPlus and Terry L. Theye, dated July 10, 1997, providing for
payment of a $500,000 bonus**
</TABLE>
II-2
<PAGE> 223
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------------------------------------------------------------------
<C> <S>
10.27 Agreement between UDMS and Norma Skoog, dated September 1, 1997, providing for
payment of a $60,000 bonus**
10.28 Common Stock Warrent dated July 7, 1997 issued by UDMS to Thomas R. McLean**
10.29 Amendment to Agreement and Plan of Merger and Reorganization with Synergis
Technologies, Inc.*
11.1 Computation of Per Share Earnings**
23.1 Consent of KPMG Peat Marwick LLP with regard to Universal Document Management
Systems, Inc.
23.2 Consent of Clark, Schaefer, Hackett & Co. with regard to Universal Document
Management Systems, Inc.
23.3 Consent of KPMG Peat Marwick LLP with regard to DTI Technologies, Inc.
23.4 Consent of Deloitte & Touche LLP with regard to ACCESS Corporation
23.5 Consent of KPMG Peat Marwick LLP with regard to Applied Software Technology, Inc.
23.6 Consent of KPMG Peat Marwick LLP with regard to Technical Software, Inc.
23.7 Consent of KPMG Peat Marwick LLP with regard to Synergis Technologies, Inc.
23.8 Consent of KPMG Peat Marwick LLP with regard to Mid-West CAD, Inc.
23.9 Consent of KPMG Peat Marwick LLP with regard to CADD Microsystems, Inc.
23.10 Consent of KPMG Peat Marwick LLP with regard to Devtron, Russell Inc.
23.11 Consent of KPMG Peat Marwick LLP with regard to Computers for Design, Inc.
23.12 Consent of Dinsmore & Shohl LLP*
24.1 Power of Attorney (Contained on signature page)**
99.3 Consent of Norma Skoog to be named as director**
99.4 Consent of Daniel B. Dolan to be named as director*
99.5 Consent of William G. Kagler to be named as director*
99.6 Consent of James B. Koons to be named as director*
99.7 Consent of Dennis J. Sullivan, Jr. to be named as director*
</TABLE>
- ---------------
* To be provided by amendment.
** Previously provided.
(b) Financial Statement Schedules.
None
ITEM 17 -- UNDERTAKINGS
*(f) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
*(h) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, 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.
*(i) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or
II-3
<PAGE> 224
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, 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 in the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
- ---------------
* Paragraph references correspond to those of Regulation S-K, Item 512.
II-4
<PAGE> 225
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Cincinnati,
State of Ohio, on January 9, 1998.
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
By /s/ TERRY L. THEYE
----------------------------------------------
Terry L. Theye, Chairman of the Board,
President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Terry L. Theye, Jeffrey A.
Pakrosnis and Charles F. Hertlein, Jr., and each of them, jointly and severally,
as his or her true and lawful attorneys-in-fact and agents, each with full power
of substitution, and each with power to act alone, to sign and execute on behalf
of the undersigned any amendment or amendments to this Registration Statement on
Form S-1, and to perform any acts necessary to be done in order to file such
amendment with exhibits thereto and other documents in connection therewith with
the Securities and Exchange Commission, and each of the undersigned does hereby
ratify and confirm all that said attorneys-in-fact and agents, or their
substitutes, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ ----------------
<C> <S> <C>
/s/ TERRY L. THEYE Chairman of the Board, January 9, 1998
- --------------------------------------------- President and Chief
Terry L. Theye Executive Officer (Principal
Executive Officer)
/s/ JEFFREY A. PAKROSNIS Vice President and Chief January 9, 1998
- --------------------------------------------- Financial Officer (Principal
Jeffrey A. Pakrosnis Financial and Accounting
Officer)
</TABLE>
II-5
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use of our report dated November 22, 1997, relating to the
balance sheets of Universal Document Management Systems, Inc. as of December 31,
1995 and 1996, and September 30, 1997 and the related statements of operations,
stockholder's equity, and cash flows for the period from December 14, 1995 to
December 31, 1995 and the year ended December 31, 1996 and the nine months ended
September 30, 1997, included herein and to the reference to our firm under the
heading "Experts" in the Prospectus.
Our report dated November 22, 1997, contains an explanatory paragraph that
states that the Company has suffered recurring losses from operations which
raise substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/KPMG Peat Marwick LLP
Cincinnati, Ohio
January 8, 1998
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use of our report dated February 15, 1996, relating to the
balance sheets of Universal Document Management Systems, Inc. as of December 31,
1993 and 1994 and December 13, 1995, and the related statements of operations,
stockholder's deficit, and cash flows for the years ended December 31, 1993 and
1994 and for the period from January 1, 1995 to December 13, 1995, included
herein and to the reference to our firm under the heading "Experts" in the
Prospectus.
/s/ CLARK, SCHAEFER, HACKETT & CO.
Cincinnati, Ohio
January 9, 1998
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
DTI Technologies, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
Our report contains an explanatory paragraph that states that the Company has a
net working capital deficiency that raises substantial doubt about its ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/KPMG Peat Marwick LLP
Boston, Massachusetts
January 8, 1998
<PAGE> 1
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Applied Software Technology, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
Our report contains an explanatory paragraph that states that the Company has
experienced a net loss in fiscal 1997, has a net capital deficiency, and is in
violation of certain debt covenants which raises substantial doubt about its
ability to continue as a going concern. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/KPMG Peat Marwick LLP
Atlanta, Georgia
January 8, 1998
<PAGE> 1
EXHIBIT 23.6
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Technical Software, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
/s/KPMG Peat Marwick LLP
Columbus, Ohio
January 8, 1998
<PAGE> 1
EXHIBIT 23.7
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Synergis Technologies, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
/s/KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
January 8, 1998
<PAGE> 1
EXHIBIT 23.8
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Mid-West CAD, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
/s/KPMG Peat Marwick LLP
Kansas City, Missouri
January 8, 1998
<PAGE> 1
EXHIBIT 23.9
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
CADD Microsystems, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
/s/KPMG Peat Marwick LLP
McLean, Virginia
January 8, 1998
<PAGE> 1
EXHIBIT 23.10
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Devtron, Russell Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
/s/KPMG Peat Marwick LLP
Detroit, Michigan
January 8, 1998
<PAGE> 1
EXHIBIT 23.11
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Computers for Design, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
/s/KPMG Peat Marwick LLP
Denver, Colorado
January 8, 1998
