SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
.............................................
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended April 30, 1997 Commission file number 000-1033864
DocuCorp, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware 74-2690838
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
5910 North Central Expressway
Suite 800
Dallas, TX 75206
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(214) 891-6500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Shares Outstanding Effective
Class May 30, 1997
- ----------------------- ------------
Common Stock Class A, $.01 par value 4,265,401
Common Stock Class B, $.01 per value 4,685,597
1
PART I FINANCIAL INFORMATION PAGE
Item 1 Consolidated Financial Statements:
Statements of Operations................................................3
Balance Sheets..........................................................4
Statements of Cash Flows................................................5
Notes to Interim Financial Statements...................................6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations................8
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K............................12
2
DOCUCORP, INC.
STATEMENTS OF OPERATIONS
UNAUDITED
Three Three Nine Nine
months months months months
ended ended ended ended
April 30 April 30 April 30 April 30
---------- ---------- ---------- ----------
1996 1997 1996 1997
---------- ---------- ---------- ----------
Revenues
Professional services .................... $ 123,800 $ 129,771 $ 434,670 $ 501,427
License .................................. 918,381 1,034,985 2,828,868 3,077,834
Maintenance .............................. 1,473,752 1,669,321 4,300,698 4,879,971
---------- ---------- ---------- ----------
Total revenues .................... 2,515,933 2,834,077 7,564,236 8,459,232
---------- ---------- ---------- ----------
Expenses
Professional services .................... 96,793 127,902 335,094 409,677
Product development and support .......... 966,357 969,799 2,930,142 3,001,115
Selling and marketing .................... 363,160 376,054 1,096,135 1,168,653
General and administrative ............... 388,746 529,004 1,263,181 1,608,295
---------- ---------- ---------- ----------
Total expenses .................... 1,815,056 2,002,759 5,624,552 6,187,740
---------- ---------- ---------- ----------
Operating income .................. 700,877 831,318 1,939,684 2,271,492
Other income, net ........................ 62,930 125,375 164,216 331,114
---------- ---------- ---------- ----------
Income before income taxes ........ 763,807 956,693 2,103,900 2,602,606
Provision for income taxes ............... 279,000 349,000 768,000 950,000
---------- ---------- ---------- ----------
Net income ........................ $ 484,807 $ 607,693 $1,335,900 $1,652,606
========== ========== ========== ==========
Net income per share of common stock ..... $ 0.09 $ 0.11 $ 0.24 $ 0.31
========== ========== ========== ==========
Weighted average number of shares of
common stock and common stock
equivalents used in calculating earnings
per share .............................. 5,602,432 5,415,352 5,602,432 5,415,352
========== ========== ========== ==========
See accompanying notes to interim financial statements
3
DOCUCORP, INC.
BALANCE SHEETS
UNAUDITED
July 31, April 30,
1996 1997
----------- ------------
ASSETS
Current assets
Cash and cash equivalents ...................................... $ 1,909,016 $10,037,204
Short-term investments ......................................... 5,308,806 974,882
Accounts receivable ............................................ 4,105,652 2,567,753
Current portion of deferred taxes .............................. 399,468 348,690
Other current assets ........................................... 187,193 198,103
----------- -----------
Total current assets ................................ 11,910,135 14,126,632
Fixed assets, net of accumulated depreciation ............................ 783,328 758,255
Capitalized software, net of amortization ................................ 1,941,679 1,820,459
Other assets ............................................................. 55,586 13,484
----------- -----------
$14,690,728 $16,718,830
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ............................................... $ 323,044 $ 324,457
Accrued liabilities
Accrued compensation ..................................... 700,050 668,348
Other .................................................... 278,857 349,233
Income taxes payable ........................................... 655,264 406,016
Current portion of obligations under capital lease ............. 45,967 0
Deferred revenue ............................................... 4,267,113 4,694,136
----------- -----------
Total current liabilities ........................... 6,270,295 6,442,190
Deferred taxes ........................................................... 383,070 548,792
Stockholders' equity
Preferred stock - 3,000,000 shares authorized at $.10 par value,
$1.00 liquidation value, 1,963,433 shares issued
and outstanding ............................................ 196,343 196,343
Common stock - 20,000,000 shares authorized at $.01 par
value, 2,335,082 and 2,344,182 shares issued and
outstanding, respectively .................................. 23,351 23,442
Additional paid-in capital ..................................... 1,321,265 1,359,053
Retained earnings .............................................. 6,496,404 8,149,010
----------- -----------
Total stockholders' equity .......................... 8,037,363 9,727,848
----------- -----------
$14,690,728 $16,718,830
=========== ===========
See accompanying notes to interim financial statements
4
DOCUCORP, INC.
STATEMENTS OF CASH FLOWS
UNAUDITED
Nine Nine
months months
ended ended
April 30 April 30
1996 1997
------------- ------------
Cash flows from operating activities
Net income ............................................................. $ 1,335,900 $ 1,652,606
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ................................... 270,707 271,545
Amortization of capitalized software ............................ 633,936 560,282
Stock option compensation expense ............................... 37,590 36,303
Changes in assets and liabilities:
Increase (decrease) in allowance for doubtful accounts ... (30,000) 36,011
(Increase) decrease in accounts receivable ............... 1,318,798 1,501,888
(Increase) decrease in income tax refund receivable ...... 222,033 0
(Increase) decrease in deferred tax assets ............... 36,758 50,778
(Increase) decrease in other assets ...................... (73,824) 31,192
Increase (decrease) in accounts payable .................. (108,807) 1,413
Increase (decrease) in accrued liabilities ............... (251,858) 38,674
Increase (decrease) in income taxes payable .............. (428,210) (249,248)
Increase (decrease) in deferred revenue .................. 109,947 427,023
Increase (decrease) in deferred tax liabilities .......... 234,452 165,722
------------ ------------
Total adjustments ................................. 1,971,522 2,871,583
------------ ------------
Net cash provided by operating activities ......... 3,307,422 4,524,189
------------ ------------
Cash flows from investing activities
(Purchase) sale of short-term investments .............................. (2,290,621) 4,333,924
Purchase of fixed assets ............................................... (255,919) (246,472)
Capitalized software development costs ................................. (404,818) (439,062)
------------ ------------
Net cash (used in) provided by investing activities (2,951,358) 3,648,390
------------ ------------
Cash flows from financing activities
Repayment of subordinated debentures ................................... (1,534,430) 0
Principal payments under capital lease obligations ..................... (41,886) (45,967)
Proceeds from exercise of warrants and options ......................... 32,187 1,576
------------ ------------
Net cash used in financing activities ............. (1,544,129) (44,391)
------------ ------------
Net increase (decrease) in cash and cash equivalents ....................... (1,188,065) 8,128,188
Cash and cash equivalents at beginning of year ............................. 2,289,980 1,909,016
------------ ------------
Cash and cash equivalents at end of period ................................. $ 1,101,915 $ 10,037,204
============ ============
See accompanying notes to interim financial statements
5
DOCUCORP, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
UNAUDITED
Note 1 - Basis of Presentation
DocuCorp, Inc. (the "Company") was organized on January 13, 1997 in connection
with the acquisition of FormMaker Software, Inc. ("FormMaker") by Image
Sciences, Inc. ("Image Sciences"). On May 15, 1997 Common Stock and Preferred
Stock of Image Sciences was exchanged for Common Stock of DocuCorp. For
historical accounting purposes, Image Sciences is considered to be the acquirer
in the Merger and no purchase accounting is required related to the conversion
of Image Sciences Common Stock and Image Sciences Preferred Stock into DocuCorp
Common Stock. With respect to Image Sciences, the Merger into DocuCorp has been
treated as a change in entity, and accordingly the financial statements of Image
Sciences are presented as historical statements of DocuCorp for periods prior to
the Merger of Image Sciences and FormMaker. On May 15, 1997, as described in
Note 3, the Company completed the merger of FormMaker into a wholly-owned
subsidiary of the Company. The Merger will be treated as an acquisition of
FormMaker by Image Sciences; accordingly this transaction will be recorded under
the purchase method of accounting. The Company's business will be conducted
through DocuCorp, Image Sciences, and FormMaker (see also Note 3).
The unaudited financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements, and should be read in conjunction with the audited
financial statements of the Company and Image Sciences for the year ended July
31, 1996, included as part of the Company's Joint Proxy Statement/Prospectus
dated April 18, 1997. In the opinion of management, the accompanying unaudited
financial statements reflect all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the Company's
financial condition at April 30, 1997 and for the three and nine month periods
ended April 30, 1996 and 1997. The interim results presented herein are not
necessarily representative of the results that may be expected for the fiscal
year ended July 31, 1997 or for any future period.
Note 2 - Contingent Liabilities
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position of the Company.
Note 3 - Subsequent Event
On January 15, 1997, Image Sciences entered into an Agreement and Plan of Merger
("the Merger") with FormMaker, pursuant to which the stockholders of Image
Sciences and FormMaker agreed to exchange their shares for common stock of a
newly created company, DocuCorp, Inc. The Merger was completed on May 15, 1997.
In addition, Image Sciences distributed $8,000,000 concurrent with the closing
of the Merger via (i) a tender offer to its common stockholders and certain
holders of options to purchase common stock, and (ii) a dividend to its
preferred stockholder.
If reflected as if the Merger had been consummated at the beginning of each
fiscal period, the unaudited pro forma combined results of operations of Image
Sciences and FormMaker for the nine months ended April 30, 1996 and 1997 would
have resulted in revenues of $18,376,357 and $28,232,372, respectively, and a
net loss of $843,762 ($0.08 per share) and net income of $1,250,734 ($0.13 per
share), respectively. The unaudited pro forma combined financial results for the
nine months ended April 30, 1996 and 1997 have been derived from the unaudited
financial statements of each of Image Sciences and FormMaker, which in the
opinion of management of Image Sciences and FormMaker, respectively, reflect all
adjustments (consisting only of normal recurring adjustments) that are necessary
for a fair presentation of the results for such periods. The pro forma
information above should be read in conjunction with the pro forma combined
Balance Sheet of the Company as of January 31, 1997, and pro forma combined
Statement of Operations of the Company for the year ended July 31, 1996, and the
six months ended January 31, 1997, included in the Company's Joint Proxy
Statement/Prospectus dated April 18, 1997.
6
The pro forma disclosure above does not give effect to any cost savings that may
result from the Merger. During the periods presented, Image Sciences and
FormMaker were not under common control or management and, as a result, the
selected unaudited pro forma combined financial data is not necessarily
indicative of or comparable to the financial position or operating results that
would have occurred had the Merger occurred as of or at the beginning of the
periods presented or that will occur following the Merger.
The pro forma disclosure above does not give effect to (i) an anticipated charge
for in-process technology, which is non-deductible for tax purposes and which
will be charged to operations as of the date of the Merger, or (ii) compensation
expense related to the repurchase of options to purchase Image Sciences Common
Stock and compensation expense related to the creation of a new measurement date
for outstanding options to purchase Image Sciences Common Stock deemed to be
converted to options to purchase DocuCorp Class B Common Stock at consummation
of the Merger. The anticipated charges described above are currently expected to
amount to $13,500,000 and $5,000,000 (net of the resulting income tax benefit),
respectively. These charges would reduce pro forma combined net income per
common share by $1.36 and $0.50, respectively.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF DOCUCORP, INC.
Certain information contained herein may include forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from those discussed in the forward-looking statements. Potential
risks and uncertainties include market responses to pricing pressures, changes
in product and service mix, results from litigation, the timely development and
acceptance of new products and services, and changes in customer preferences.
Consequently, the actual results realized by the Company could differ materially
from the statements made herein. Readers of this report are cautioned not to
place undue reliance on the forward-looking statements made herein.
Overview
The Company develops, markets, and supports software products designed to
automate the processing of business forms and documents. The Company was
organized on January 13, 1997 in connection with the acquisition of FormMaker by
Image Sciences (see also "Notes to Interim Financial Statements"). Following the
Merger, Image Sciences and FormMaker are wholly-owned subsidiaries of the
Company.
Results of Operations
The following table sets forth selected data of the Company expressed as a
percentage of total revenues for the periods indicated:
Three months ended Nine months ended
April 30, April 30,
(unaudited) (unaudited)
------------- -------------
1996 1997 1996 1997
------------- -------------
Revenues
Professional services ........... 5 % 5 % 6 % 6 %
License ......................... 36 36 37 36
Maintenance ..................... 59 59 57 58
--- --- --- ---
Total revenues ........... 100 100 100 100
Expenses
Professional services ........... 4 5 4 5
Product development and support . 38 34 39 35
Selling and marketing ........... 14 13 14 14
General and administrative ...... 16 19 17 19
--- --- --- ---
Total expenses ........... 72 71 74 73
--- --- --- ---
Operating income ................ 28 29 26 27
Other income, net ............... 2 5 2 4
--- --- --- ---
Income before income taxes 30 34 28 31
Provision for income taxes ...... 11 13 10 11
--- --- --- ---
Net income ............... 19 % 21 % 18 % 20 %
=== === === ===
8
Comparative analysis of quarterly results for the three and nine months
ended April 30, 1997
Revenues
The Company derives its revenues from license fees, recurring maintenance fees,
and professional services related to its software products. License revenues are
generally derived from perpetual licenses of software products. Maintenance
revenues consist primarily of annual maintenance contracts. Professional
services revenues include fees for consulting, contract programming projects,
education services, and a biennial user group conference.
Total revenues increased 13% and 12%, respectively, for the three and nine
months ended April 30, 1997 compared to the corresponding periods of fiscal 1996
due to increases in all revenue types. License revenues increased 13% and 9%,
respectively, for the three and nine month periods due to larger dollar
contracts being executed. As anticipated, maintenance revenues increased 13% for
the three and nine month periods due to an expanding customer base. The 5% and
15% increase in professional services revenues for the three and nine month
periods ended April 30, 1996 and 1997, respectively, is primarily due to an
increase in educational classes offerings.
The Company's backlog consisted primarily of $4,000,000 of revenue for annual
maintenance contracts entitling the end-user to product enhancements and
telephone support as of April 30, 1997. Maintenance contracts may generally be
terminated upon a 30 day notice period; however, the Company has not
historically experienced material cancellations of such contracts.
Professional services expense
Professional services expense consists principally of personnel costs and direct
travel and living costs associated with the Company's consulting, education
services, and contract programming projects. For the three and nine month
periods ended April 30, 1997, professional services expense increased 32% and
22%, respectively, which is a result of increased costs to provide increased
professional services. These costs represented 78% and 99%, respectively, of
professional services revenues for the three months ended April 30, 1996 and
1997, and 77% and 82%, respectively, of professional services revenues for the
nine months ended April 30, 1996 and 1997. The three month increase in cost as a
percentage of revenue is primarily due to utilization of certain staff on
non-billable activity.
Product development and support expense
Product development and support expense did not change significantly for the
three month period ended April 30, 1997, and increased 2% for the nine month
period ended April 30, 1997. Before capitalization and amortization, product
development and support expense increased 4% and 7%, respectively, for the three
and nine month periods ended April 30, 1997, primarily resulting from increased
staffing associated with the Company's continued focus on research activities
and enhancing customer satisfaction.
Selling and marketing expense
Selling and marketing expense increased 4% and 7%, respectively, for the three
and nine month periods ended April 30, 1997 from the comparable prior year
periods. The increase in selling and marketing expense for the three and nine
month periods is primarily the result of increased commissions as a result of
higher commission percentages associated with larger dollar contracts being
executed. This increase was offset by decreases in personnel costs and travel
and living expenses in the three and nine month periods.
General and administrative expense
General and administrative expense increased 36% and 27%, respectively, for the
three and nine month periods ended April 30, 1997. The increased expense for the
fiscal 1997 periods resulted from an increase in profit-based bonuses related to
the Company's current period financial performance and increased legal expenses
due primarily to activity surrounding an outstanding lawsuit. In addition, the
increase for the nine month period is a result of an increase in bad debt
expense. Bad debt expense increased due to writing off uncollectible accounts
and increasing the allowance account.
9
Other income, net
For the three and nine month periods ended April 30, 1997, the 99% and 102%
increase in other income, respectively, was due to increases in interest income
and a significant decrease in interest expense. Interest income increased
primarily as a result of increased cash and short term investments. Interest
expense decreased significantly due to retirement of all outstanding
subordinated debentures in March 1996 and repayment of all outstanding
obligations under capital leases. Interest income will decrease and interest
expense will increase due to the distribution of $8,000,000 in conjunction with
the merger of Image Sciences and FormMaker and due to the assumption of debt and
capitalized leases of FormMaker of approximately $8,100,000 with that
acquisition.
Provision for income taxes
The income tax provision was calculated utilizing Federal income tax rates for
corporations. Effective tax rates for the three and nine month periods ended
April 30, 1996 and 1997 were approximately 36% for each period. These rates
differ from the Federal statutory rate primarily due to state income taxes. The
Company used a portion of its net operating loss carryforwards and outstanding
tax credits to offset its current tax liability for the three and nine month
periods ended April 30, 1996 and 1997.
Net income
Profitability increased 25% and 24%, respectively, for the three and nine month
periods ended April 30, 1997 from the comparable prior year periods. The
increase in profitability for the three and nine month periods was primarily the
result of increasing revenues and containing costs.
Liquidity and capital resources
At April 30, 1997, the Company's principal sources of liquidity consisted of
cash, cash equivalents, and short-term investments aggregating $11,012,086.
Cash and cash equivalents increased $8,128,188 during the nine month period
ended April 30, 1997 due primarily to net income of $1,652,606 and maturities of
short-term investments of $4,333,924. Working capital increased $2,044,602 from
$5,639,840 at July 31, 1996 to $7,684,442 at April 30, 1997, primarily as the
result of profitable operations.
As of April 30, 1997, the Company has repaid all existing debt. Capital
expenditures have generally not been material. Concurrent with the consummation
of the Merger (see Note 3 of Notes to Interim Financial Statements), the Company
disbursed $8,000,000 of its cash, cash equivalents, and short-term investments
to its common and preferred stockholders. Consequently, subsequent to the
Merger, the Company's working capital and financial resources have been
significantly reduced. The Company intends to fund its future operations through
its cash from operations, renegotiation or replacement of the existing FormMaker
$10,000,000 line of credit, and a $3,000,000 loan from one of its shareholders,
Safeguard Scientifics. The line of credit and subordinated loan have available
funds of approximately $5,400,000 as of April 30, 1997. The $3,000,000 loan is
subordinated to the existing FormMaker line of credit, bears interest at prime
plus 1%, and becomes due upon the earlier of an underwritten initial public
offering yielding proceeds of at least $13,000,000 to the Company or May 15,
2000.
Recently Issued Accounting Statements
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which establishes financial accounting and reporting
standards for stock-based compensation plans. SFAS 123 gives companies the
option to adopt the fair value method for expense recognition of employee stock
options and stock based awards or to continue to account for such items using
the intrinsic value method as outlined under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), with pro forma
disclosures of net income and net income per share as if the fair value method
had been applied. The Company has adopted SFAS 123 effective August 1, 1996 by
electing to continue to apply APB 25 for future stock options and stock based
awards and, accordingly, does not anticipate that SFAS 123 will have a material
impact on its results of operations or financial position. In accordance with
the disclosure provisions of SFAS 123, the Company will initially present the
disclosure required by SFAS 123 in its financial statements as of and for the
periods ending July 31, 1997.
10
In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS 128"), was issued. SFAS 128 specifies the computation,
presentation and disclosure requirements for earnings per share ("EPS") for
entities with publicly held common stock or potential common stock. SFAS 128
simplifies the standards for computing EPS previously found in Accounting
Principals Board Opinion No. 15, "Earnings per Share" ("APB 15"), and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the statement of operations for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. SFAS 128 requires restatement of
all prior-period EPS data presented. The Company will adopt SFAS 128 in its
consolidated financial statements as of and for the year ending July 31, 1998
and, based on current circumstances, does not believe the effect of adoption
will be material.
11
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.13 Loan Agreement, dated May 15, 1997, by and among FormMaker Software,
Inc., Safeguard Scientifics (Delaware), Inc., Technology Leaders II,
L.P. and TL Ventures Third Corp.
11.1 Calculation of Net Income Per Common Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DocuCorp, Inc.
Date: June 16, 1997 /S/ TODD ROGNES
- ----------------------- -------------------------------------------------
Senior Vice President, Finance
(Duly Authorized and Principal Financial Officer)
13
Exhibit 10.13
LOAN AGREEMENT
LOAN AGREEMENT (this "Agreement"), dated May 15, 1997, by and among
FORMMAKER SOFTWARE, INC., a Georgia corporation ("Borrower"), and SAFEGUARD
SCIENTIFICS (DELAWARE), INC., a Delaware corporation ("Safeguard"), TECHNOLOGY
LEADERS II L.P., a Delaware limited partnership ("TL II"), and TL VENTURES THIRD
CORP., a Delaware corporation ("TLV III" and, collectively with Safeguard and TL
II, "Lenders"), against the following background:
BACKGROUND
Borrower has requested that Lenders make a loan to Borrower in the
aggregate principal amount of $3,000,000, and Lenders are willing to make such
loan upon the terms and conditions set forth herein.
NOW, THEREFORE, intending to be legally bound, the parties agree as
follows:
ARTICLE I
THE LOAN
1.1. The Loan. Subject to the terms and conditions hereinafter
provided, Lenders shall lend to Borrower the aggregate principal amount of
$3,000,000, allocated among the Lenders as set forth on Schedule 1.1 and
repayable upon the earlier of (a) the closing of an underwritten initial public
offering of common stock of Borrower (or, after the consummation of the
transactions described in the Joint Proxy Statement (as hereinafter defined),
DocuCorp, Inc.) yielding proceeds (net of underwriting discounts and
commissions) of at least $13,000,000 or (b) the third anniversary of the date of
this Agreement, with interest payable monthly in arrears at the prime rate as
announced from time to time by PNC Bank, N.A. plus 1% (the "Loan").
1.2. The Note; Repayment. The Loan shall be evidenced by a promissory
note or promissory notes from Borrower to Lenders (whether one or more,
collectively, the "Note"), which shall be substantially in the form attached
hereto as Exhibit 1.2. The Loan shall be repaid with interest as provided in the
Note.
ARTICLE II
THE WARRANT
2.1. The Warrant. In connection with the Loan, Borrower shall issue to
Lenders Warrants (the "Warrants") to purchase up to 300,000 shares of Borrower's
common stock, par value $.01 per share, at an exercise price of $3.48 per share,
substantially in the form attached hereto as Exhibit 2.1. The Warrants shall be
allocated among Lenders as set forth on Schedule 1.1.
14
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Borrower hereby makes the following representations and warranties,
which shall be continuing in nature and remain in full force and effect until
the Obligations are satisfied in full:
3.1. Existence and Power. Borrower is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization and has all requisite power and authority to own
and operate its assets and to conduct its business as now or proposed to be
carried on, and is duly qualified, licensed and in good standing to do business
in all jurisdictions where its ownership of property or the nature of its
business requires such qualification or licensing. Borrower has the full power
and authority to execute, deliver and perform this Agreement, the Note and the
Warrants (collectively, the "Loan Documents").
3.2. Authorization and Enforceability. Borrower has been duly
authorized to execute, deliver and perform the Loan Documents by all appropriate
action of its Board of Directors. Each of the Loan Documents, when executed and
delivered by Borrower, will constitute the legal, valid and binding obligation
of Borrower, enforceable in accordance with its respective terms.
3.3. No Defaults or Violations. There does not exist any Event of
Default (as that term is defined in Section 6.1) under this Agreement or any
default or violation by Borrower of or under any of the terms, conditions or
obligations of: (a) its certificate of incorporation or by-laws; (b) any
indenture, mortgage, deed of trust, franchise, permit, contract, agreement or
other instrument to which Borrower is a party or by which it or any of its
properties may be bound except to the extent such violation or default will not
have a material and adverse effect on Borrower or its financial position; or (c)
any law, regulation, ruling, order, injunction, decree, condition or other
requirement applicable to or imposed upon Borrower by any law, or by the action
of any court or other governmental authority or agency except to the extent such
violation or default will not have a material and adverse effect on Borrower or
its financial position; and the execution, delivery and performance of the Loan
Documents will not result in any such default or violation, nor are any
approvals, authorizations, licenses, waivers or consents, governmental (foreign,
federal, state or local) or non-governmental, under the terms of contracts or
otherwise, required to be obtained by Borrower by reason of or in connection
with its execution, delivery and performance of any of the Loan Documents.
ARTICLE IV
COVENANTS
4.1. Affirmative Covenants. Borrower agrees that from the date of
execution of this Agreement until the Obligations are satisfied in full,
Borrower shall (and shall cause each of its majority-owned subsidiaries, if any,
to):
4.1.1. Payments of Taxes and Other Charges. Pay and discharge when due
all indebtedness and all taxes, assessments, charges, levies and other
similar liabilities imposed upon Borrower, its income, profits, properties or
business, except those which currently are being contested in good faith by
appropriate proceedings and for which Borrower shall have set aside adequate
reserves or made other adequate provisions acceptable to Lenders in their
discretion.
15
4.1.2. Maintenance of Existence, Operation and Assets;
Inspection. Do all things necessary to maintain, renew and keep in full force
and effect its organizational existence and all rights, permits and franchises
necessary to enable it to continue its business; conduct business and enter into
transactions only in the ordinary course, consistent with past practice except
to the extent affected by the transactions contemplated by the Joint Proxy
Statement for Image Sciences, Inc. and Borrower dated April 18, 1997 (the "Joint
Proxy Statement"); keep its properties in good operating condition and repair;
make all necessary and proper repairs, renewals, replacements, additions and
improvements thereto; and permit representatives of Lenders to inspect
Borrower's properties and its books and records and to make extracts therefrom
at all reasonable times.
4.1.3. Insurance. Keep its assets insured with responsible
insurance companies against those risks and in such amounts as are commonly
insured against by companies in similar businesses and owning similar assets. At
Lenders' request, Borrower shall have Lenders named as additional insureds on
liability policies. Borrower shall deliver to Lenders such certificates,
endorsements, and other evidence of such insurance as Lenders may request.
4.1.4. Compliance with Laws. Except to the extent such
non-compliance would not have a material adverse effect on Borrower or its
financial position, comply with all laws applicable to Borrower and to the
operation of its business (including, without limitation, any statute, rule or
regulation relating to employment practices and employee benefits and to
environmental, occupational and health standards and controls).
4.1.5. Financial Reports. Deliver promptly such financial
statements and reports as Lenders may reasonably request including, without
limitation, annual financial statements of Borrower's parent company audited or
reviewed by independent certified public accountants and interim financial
statements prepared by Borrower's management. All such financial data shall be
true, accurate and complete in all material respects and shall be prepared in
accordance with GAAP consistently applied and shall contain such detail as
Lenders may reasonably require.
4.1.6. Additional Reports. Provide prompt notice to Lenders of
the occurrence of any of the following (together with a description of the
action which Borrower proposes to take with respect thereto): (a) any Event of
Default or potential Event of Default hereunder, and (b) any event which is
reasonably expected to result in a material adverse change in Borrower's
business, assets, operations, financial condition or results of operation.
4.2. Negative Covenants. Borrower covenants and agrees that from the
date of execution of this Agreement until the Obligations are satisfied in full,
Borrower shall not (and shall cause each of its majority-owned subsidiaries, if
any, not to), without Lenders' prior written consent:
4.2.1. Guarantees. Guarantee, endorse or become contingently
liable for the obligations of any person or entity, except in connection with
the endorsement and deposit of checks in the ordinary course of business for
collection.
16
4.2.2. Merger; Disposition of Assets. Merge or consolidate
with or into any person or entity or lease, sell, transfer or otherwise dispose
of any material assets, whether now owned or hereafter acquired, other than in
the normal course of business and consistent with past practices or
substantially as described in the Joint Proxy Statement.
4.2.3. Change in Business, Management or Ownership. Make or
permit any material change in the nature of Borrower's business as carried on as
of the date hereof, of its chief executive officer or in its equity ownership,
except as described in the Joint Proxy Statement.
4.2.4. Dividends and Other Distributions. Declare or pay any
dividends on or make any distribution with respect to any class of its capital
stock or equity or ownership interest.
4.2.5. Investments. Purchase or hold beneficially any
stock, other securities or evidence of indebtedness or make any loans or
advances to, or make any investment or acquire any interests in, any other
person or entity.
ARTICLE V
SUBORDINATION
5.1. Payments and Remedies Subordinated. (a) Anything in the Note or
Loan Documents notwithstanding, Lenders agree that Borrower's payment of any of
the liabilities and obligations now existing or hereafter arising under or in
connection with the Loan Documents (the "Subordinated Obligations") is and shall
be expressly subordinate and junior in right of payment to the prior payment in
full of Borrower's liabilities and obligations now existing or hereafter arising
under or in connection with the Credit Agreement dated as of December 20, 1995,
as amended , between Borrower and NationsBank of Georgia, National Association
or any similar agreement hereafter entered into by Borrower in replacement
thereof upon substantially similar terms and conditions (such agreement, the
"Senior Credit Agreement," such lender, the "Senior Lender" and such liabilities
and obligations arising thereunder, the "Senior Obligations") and the
Subordinated Obligations are hereby subordinated as a claim and in right of
enforcement against Borrower and any of the property and assets of Borrower,
whether such claim be in the event of any distribution of the property and
assets of Borrower upon any voluntary or involuntary dissolution, execution,
sale, winding-up, liquidation or reorganization, composition or similar
arrangement, or bankruptcy, insolvency, receivership or other statutory or
common law proceedings or arrangements involving Borrower or any assignment for
the benefit of creditors or any marshaling of the assets or liabilities of
Borrower (a "Reorganization") or otherwise, to the prior payment in full of the
Senior Obligations. In furtherance of the foregoing, Borrower shall not make,
and no Lender shall accept, receive or retain from Borrower any direct or
indirect payment (in cash, property, or securities or by set-off or otherwise)
upon or in respect of the Subordinated Obligations, or in respect of any
acceleration, demand, suit for collection, action or enforcement of any
Subordinated Obligations or in respect of any prepayment, redemption,
retirement, purchase or other acquisition of any Subordinated Obligations, until
all the Senior Obligations have been paid in full, except to the extent any such
payment is expressly permitted under Section 5.5.
17
(b) Unless and until the Senior Obligations shall be paid in
full, and except as provided in Section 5.6, each Lender covenants and agrees
that it shall not, directly or indirectly: (i) exercise or enforce any right of
acceleration, demand or set off against Borrower or the assets or property of
Borrower; (ii) make any claim or commence or initiate any action, lawsuit, case
or proceeding against Borrower or join together or with any creditor in any
action, lawsuit, case or proceeding against Borrower; (iii) exercise any right
of foreclosure pursuant to any lien on the property and assets of Borrower or
exercise any other right or remedy with respect to Borrower or the assets or
property of Borrower; (iv) contact any account debtors of Borrower or otherwise
seek payment from any obligor on any Collateral; or (v) take any other action
that interferes with, is prejudicial to or inconsistent with Senior Lender's
rights and first priority secured position with respect to Borrower or the
assets or property of Borrower including, without limitation, that no Lender
shall take any action that will impede, interfere with, restrict, or restrain
the exercise by Senior Lender of its rights and remedies under the Senior Credit
Agreement or any agreement executed in connection therewith (hereinafter, (i)
through (v) are collectively referred to as "Enforcement Actions"). If any
Lender shall attempt any Enforcement Action, Borrower or Senior Lender may
interpose as a defense or plea the making of this Agreement and Senior Lender
may intervene and interpose such defense in its name or in the name of Borrower
and Borrower or Senior Lender may by virtue of this Agreement restrain the
enforcement thereof in the name of Borrower or Senior Lender.
5.2 Form and Delivery of Subordinated Obligations. In the event of any
Reorganization relating to Borrower or its assets or property, each Lender shall
deliver to Senior Lender or its designee upon request the original Note if
Senior Lender shall at any time determine the delivery thereof to be necessary
to enforce the provisions of this Agreement.
5.3 Distributions in Reorganization. (a) In the event of any
Reorganization relative to Borrower or its properties and assets then all of
Subordinated Obligations, and in any such proceedings any payment or
distribution of any kind or character, whether in cash or property or securities
or otherwise, which may be payable or deliverable in respect of the Subordinated
Obligations shall be first paid or delivered directly to Senior Lender for
application in payment of the Senior Obligations, unless and until all such
Senior Obligations shall have been paid in full.
(b) In the event of any Reorganization relative to Borrower or
its properties and assets, each Lender assigns to Senior Lender all of its right
in the Subordinated Obligations and pursuant hereto Senior Lender shall have the
right to act as such Lender's attorney-in-fact for the purposes specified herein
and such Lender hereby irrevocably appoints Senior Lender and each of its
officers, its true and lawful attorney, and grants to Senior Lender a power of
attorney with full power of substitution, in the name of such Lender or in the
name of Senior Lender, for the use and benefit of Senior Lender, without notice
to such Lender or any of its respective representatives, successors or assigns,
to perform the following acts, at Senior Lender's option, or in connection with
any Reorganization:
(i) To enforce claims comprising the Subordinated
Obligations, either in Senior Lender's own name or in the name of any Lender,
by proof of debt, proof of claim, suit or otherwise;
(ii) To collect any assets of Borrower distributed,
divided or applied by way of dividend or payment, or any securities or the
proceeds of any realization upon the same, to the Senior Obligations until
all of the Senior Obligations (including, without limitation, collection
expenses and all interest accruing on the Senior Obligations after the
commencement of any bankruptcy case) have been paid in full;
18
(iii)To vote and exercise any and all rights with
respect to claims comprising the Subordinated Obligations in any Reorganization
including, without limitation, to support or oppose any cash collateral or
borrowing motion, to support or oppose any motion for relief from stay for
Senior Lender, and to accept or reject any plan of partial or complete
liquidation, reorganization, arrangement, composition or extension; and
(iv) To take generally any action in connection with
any such meeting, case or proceeding that any Lender would be authorized to take
but for this Agreement.
In no event shall Senior Lender be liable to any Lender for (x) any
failure to prove the Subordinated Obligations, to exercise any right with
respect thereto, or to collect any sums payable thereon, or (y) any actions
taken by the Senior Lender which the Senior Lender may take pursuant to this
Section 5.3, except in each case for willful failure or gross negligence as
determined by a court of competent jurisdiction in a final, non-appealable
judgment. The power of attorney granted herein shall be deemed to be coupled
with an interest. Any payments. or distribution of assets of Borrower of any
kind or character, whether in cash, property or securities or otherwise, with
respect to the Subordinated Obligations received by any Lender during any
Reorganization and prior to the payment in full of the Senior Obligations shall
be held by such Lender in trust for and turned over to Senior Lender for
application to the Senior Obligations until all such Senior Obligations shall
have been indefeasibly paid in full.
5.4 Effect of Provisions. The provisions hereof as to subordination are
solely for the purpose of defining the relative rights of the holder of Senior
Obligations, on the one hand, and Lenders, on the other hand, and none of such
provisions shall impair, as between Borrower and Senior Lender and Lenders, the
obligations of Borrower to pay to Senior Lender the Senior Obligations and to
pay to Lenders the Subordinated Obligations, in accordance with the terms
thereof except as otherwise expressly provided herein.
5.5 Permitted Payments. (a) So long as no event of default shall have
occurred and is continuing under the Senior Credit Agreement, or will occur as a
result of making such payment, or would have occurred but for the passage of
time or giving of notice or both, or will have occurred after giving effect to
any payment or distribution which otherwise would be permitted hereby, Borrower
may pay, or cause to be paid to Lenders: scheduled payments of interest and
principal in accordance with the terms of the Note in effect on the date hereof
(but not any principal, interest, fees or charges payable upon the acceleration
thereof by reason of an Event of Default hereunder) ("Permitted Payments").
Permitted Payments expressly permitted by the foregoing provisions of this
Section 5.5(a) may be retained by Lenders, free from the subordination
provisions hereof, unless on or before the business day after the expiration of
a period of sixty (60) days following receipt by Lender of such Permitted
Payment Senior Lender shall provide notice to Lenders that at the time such
Permitted Payment was made, an event of default had occurred and was continuing
under the Senior Credit Agreement or would have occurred but for the passage of
time or giving of notice or both, or did occur after giving effect to such
payment.
19
(b) If an event of default shall have occurred and is
continuing under the Senior Credit Agreement, or would have occurred but for the
passage of time or giving of notice or both, or will have occurred after giving
effect to any payment which otherwise would be permitted hereby, the obligation
of Borrower to make any Permitted Payment shall be postponed for a period
commencing on the day on which the Permitted Payment would have been due and
payable and ending on the first business day following the thirtieth (30th) day
thereafter on which no such event of default is then continuing or would be
continuing after giving effect to such Permitted Payment.
5.6 Subordinated Note Payment Default. Notwithstanding the provisions
of Section 5.1(b) hereof, in the event of default in the payment of the
principal or interest due on the Note which default continues without cure for a
period of 180 days after notice by Lender to Borrower and Senior Lender of such
payment default, Lenders may sue upon, obtain a judgment or take other
Enforcement Actions permitted by law to collect such overdue payments on the
Note; provided, however, that all amounts realized by Lender as a result of such
actions shall be paid over to Senior Lender as provided in Section 5.3 and 5.7
and provided, however, that no Enforcement Action of any kind shall be taken by
Lenders and any pending Enforcement Action shall cease once Senior Lender shall
have accelerated the Senior Obligations or the Senior Obligations shall have
otherwise become immediately due and payable
5.7. Agreement to Hold in Trust. If any Lender shall receive any
payment or distribution of assets of Borrower of any kind or character, whether
in cash, property or securities, or by set-off or otherwise, on account of the
Subordinated Obligations which payment or distribution is required by the terms
hereof to be made to Senior Lender or is otherwise in violation of the terms of
this Agreement, it shall hold such payment or distribution in trust for the
benefit of Senior Lender and shall immediately pay or transfer the same over to
Senior Lender for application in payment of the Senior Obligations.
5.8. Amendment Requiring Senior Lender Consent. Without Senior Lender's
prior written consent, neither this Agreement nor any of the Notes may be
amended or otherwise modified in any way so as to (i) shorten the maturity date
of such Subordinated Obligations, (ii) provide for scheduled payment of
principal of such Subordinated Obligations, or (iii) increase the rate at which
interest is payable on such Subordinated Obligations. Further no provision of
this Article V may be amended or otherwise modified without the prior written
consent of Senior Lender.
5.9. Paid in Full. As used in this Article V, the terms "paid in full,"
"payment in full" and words of similar import when used with respect to Senior
Obligations shall mean the indefeasible payment in full in cash or cash
equivalents of the Senior Obligations.
ARTICLE VI
DEFAULT
6.1. Events of Default. The occurrence of an event of default as
defined in the Note or any of the other Loan Documents shall constitute an
"Event of Default" hereunder.
20
ARTICLE VII
DISPUTE RESOLUTION
7.1. Resolution of Disputes.
7.1.1. Good-Faith Negotiations.(a)Good-FaithNegotiations" If
any dispute arises under this Agreement or any of the other Loan Documents that
is not settled promptly in the ordinary course of business, the parties shall
seek to resolve any such dispute between them, first, by negotiating promptly
with each other in good faith in face-to-face negotiations. These face-to-face
negotiations shall be conducted by the respective designated senior management
representative of each party. If the parties are unable to resolve the dispute
between them through these face-to-face negotiations, within 20 business days
(or such period as the parties shall otherwise agree) following the date of
notification (the "Notice Date") by one party to the other(s) of the existence
of such dispute, then any such disputes shall be resolved in the following
manner.
7.1.2. Mediation. The parties shall endeavor to resolve any
dispute arising out of or relating to this Agreement by mediation under the CPR
Mediation Procedures for Business Disputes. Unless otherwise agreed, the parties
will select a mediator from the CPR Panels of Neutrals and shall notify CPR to
initiate the selection process.
7.1.3. Resolution of Disputes.(b)ResolutionofDisputes"
(a) Any action, suit or proceeding where the amount in controversy as to at
least one party, exclusive of interest and costs, exceeds $1,000,000 ("Summary
Proceeding"), arising out of or relating to this Agreement, any of the other
Loan Documents or the breach, termination or validity thereof which has not been
resolved by mediation as provided herein within 90 days of the Notice Date,
shall be litigated exclusively in the Superior Court of the State of Delaware
(the "Delaware Superior Court") as a summary proceeding pursuant to Rules
124-131 of the Delaware Superior Court, or any successor rules (the "Summary
Proceeding Rules"). Each of the parties hereto hereby irrevocably and
unconditionally (A) submits to the jurisdiction of the Delaware Superior Court
for any Summary Proceeding, (B) agrees not to commence any Summary Proceeding
except in the Delaware Superior Court, (C) waives, and agrees not to plead or to
make, any objection to the venue of any Summary Proceeding in the Delaware
Superior Court, (D) waives, and agrees not to plead or to make any claim that
any Summary Proceeding brought in the Delaware Superior Court has been brought
in an improper or otherwise inconvenient forum, (E) waives, and agrees not to
plead or to make, any claim that the Delaware Superior Court lacks personal
jurisdiction over it, (F) waives its right to remove any Summary Proceeding to
the federal courts except where such courts are vested with sole and exclusive
jurisdiction by statute, and (G) understands and agrees that it shall not seek a
jury trial or punitive damages in any Summary Proceeding based upon or arising
out of or otherwise related to this Agreement or any of the other Loan Documents
or the breach, termination or validity thereof, and waives any and all rights to
any such jury trial or to seek punitive damages.
(b) In the event any action, suit or proceeding where the amount in
controversy as to at least one party, exclusive of interest and costs, does not
exceed $1,000,000 (a "Proceeding"), arising out of or relating to this
Agreement, any of the Loan Documents or the breach, termination or validity
thereof, is brought, the parties to such Proceeding agree to make application to
the Delaware Superior Court to proceed under the Summary Proceeding Rules. Until
such time as such application is rejected, such Proceeding shall be treated as a
Summary Proceeding and all of the foregoing provisions of this Section relating
to Summary Proceedings shall apply to such Proceeding.
21
(c) If a Summary Proceeding is not available to resolve any dispute
hereunder, the controversy or claim shall be settled by arbitration conducted on
a confidential basis, under the U.S. Arbitration Act, if applicable, and the
then current Commercial Arbitration Rules of the American Arbitration
Association (the "Association") strictly in accordance with the terms of this
Agreement and the substantive law of the State of Delaware including law in
respect of any statute of limitations. The arbitration shall be conducted at the
Association's regional office located closest to Lender's principal place of
business by a single arbitrator. The arbitrator is not empowered to award
damages in excess of compensating damages and each party hereby irrevocably
waives any right to recover such damages with respect to any such dispute.
Judgment upon the arbitrator's aware may be entered and enforced in any court of
competent jurisdiction.
7.2. Equitable Remedies. Neither party shall be precluded hereby from
securing equitable remedies in courts of any jurisdiction including, but not
limited to, temporary restraining orders and preliminary injunctions, to protect
its rights and interests, but such shall not be sought as a means to avoid or
stay any of the provisions of this Article VII.
7.3. Performance Pending Resolution. Each party shall be required to
continue to perform its respective obligations under the Loan Documents pending
final resolution of any Dispute, unless to do so would be impossible or
impracticable under the circumstances.
ARTICLE VIII
MISCELLANEOUS
8.1. Expenses. Borrower shall pay to Lenders, on demand, all costs and
expenses incurred by Lenders in defending or prosecuting any actions,
arbitrations or proceedings arising out of or relating to the Loan Documents
including, without limitation, reasonable fees and expenses of counsel.
8.2. Amendments, Indulgences, Etc. No amendment or waiver of any
provision of this Agreement nor consent to any departure by Borrower herefrom
shall in any event be effective unless the same shall be in writing and signed
by Lenders, and then such amendment, waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given. No
failure or delay on the part of any Lender in the exercise of any right, power,
or remedy under this Agreement or any of the other Loan Documents shall under
any circumstances constitute or be deemed to be a waiver thereof, or prevent the
exercise thereof in that or any other instance.
8.3. Notices. All notices given hereunder shall be in writing and
deemed validly given (a) three (3) business days after sent, postage prepaid, by
certified mail, return receipt requested, (b) one (1) business day after sent,
charges paid by the sender, by Federal Express Next Day Delivery or other
guaranteed delivery service, (c) when confirmation of transmission by facsimile
during normal business hours is received, or (d) when delivered by hand, upon
delivery, in each case to the intended recipient at its address shown below or
to such other address, or in care of such other person, as either party shall
hereafter specify to the other from time to time by due notice:
22
If to Borrower:
FormMaker Software, Inc.
2300 Windy Ridge Parkway
Suite 400 North
Atlanta, GA 30339
Attention: President
Fax No.: 770-859-9900
If to Lenders:
Safeguard Scientifics (Delaware), Inc.
103 Springer Building
3411 Silverside Road
P.O. Box 7048
Wilmington, DE 19803
Attention: President
Fax No.: 302-478-3667
Technology Leaders II L.P.
TL Ventures Third Corp.
c/o Technology Leaders Management, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Attention: President
Fax No.: 610-975-9330
8.4. Interpretation. Except as otherwise indicated, all agreements
defined herein refer to the same as from time to time amended or supplemented or
the terms thereof waived or modified in accordance herewith and therewith. Any
provision hereof found to be illegal, invalid or unenforceable for any reason
whatsoever shall not affect the legality, validity or enforceability of the
remainder hereof. In this Agreement, in the computation of a period of time from
a specified date to a later specified date, the word "from" means "from and
including" and the words "to" and "until" each means "to but excluding." Unless
otherwise expressly provided, the word "including" does not limit the preceding
words or terms.
8.5. Entire Agreement. This Agreement, and all agreements and
instruments to be delivered by the parties pursuant hereto or in connection
herewith, represent the entire understanding of the parties with respect to the
subject matter hereof, and supersede all other prior and contemporaneous
agreements and understandings, both written and oral, between the parties with
respect to the subject matter hereof.
23
8.6. Governing Law. This Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and assigns,
and construed and interpreted according to the laws of the State of Delaware.
8.7. Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have executed or caused to be executed
this Agreement as of the day and year first above written.
FORMMAKER SOFTWARE, INC.
By: /S/ ROBERT L. MORRIS
------------------------------------
Title: Senior Vice President
SAFEGUARD SCIENTIFICS
(DELAWARE), INC.
By: /S/ GERALD M. WILK
------------------------------------
Title: Senior Vice President
TECHNOLOGY LEADERS II L.P.
By: Technology Leaders II Management L.P.,
its general partner
By: Technology Leaders Management, Inc.,
its general partner
By: /S/ MARK J. DENINO
------------------------------------
Title: Managing Director
TL VENTURES THIRD CORP.
By: /S/ ROBERT E. KEITH, JR.
------------------------------------
Title: President
24
SCHEDULES AND EXHIBITS
Exhibit 1.2 Note
Exhibit 2.1 Warrant
Schedule 1.1 Allocations
25
TERM NOTE
$1,970,792 May 15, 1997
FOR VALUE RECEIVED, FORMMAKER SOFTWARE, INC., a Georgia corporation
("Borrower"), having an office at 2300 Windy Ridge Parkway, Suite 400 North,
Atlanta, Georgia 30339, does hereby unconditionally promise to pay to the order
of SAFEGUARD SCIENTIFICS (DELAWARE), INC., a Delaware corporation ("Lender"), at
Lender's office located at 103 Springer Building, 3411 Silverside Road, P.O. Box
7048, Wilmington, Delaware 19803, or at such other place as Lender may from time
to time designate in writing, in lawful money of the United States, the
principal sum of ONE MILLION NINE HUNDRED SEVENTY THOUSAND SEVEN HUNDRED
NINETY-TWO DOLLARS ($1,970,792), with interest, all as provided below.
1. Rate of Interest. Interest on the principal amount outstanding under
this promissory note (this "Note") shall accrue at an annual rate equal to the
announced prime rate of PNC Bank, N.A. (the "Prime Rate") plus 1%. Such interest
rate shall be changed when and as the Prime Rate changes. Interest payable
hereunder shall be calculated for actual days elapsed on the basis of a 360-day
year.
Notwithstanding anything in this Note, the interest rate charged hereon
shall not exceed the maximum rate allowable by applicable law. If any stated
interest rate herein exceeds the maximum allowable rate, then the interest rate
shall be reduced to the maximum allowable rate, and any excess payment of
interest made by Borrower at any time shall be applied to the unpaid balance of
any outstanding principal of this Note.
2. Payment of Interest and Principal. Interest shall be due and payable
commencing on June 30, 1997, and continuing on the last day of each calendar
quarter thereafter until the earlier of (a) the closing of an underwritten
initial public offering of common stock of Borrower (or, after consummation of
the transactions contemplated by the Joint Proxy Statement for Image Sciences,
Inc. and Borrower dated April 18, 1997, DocuCorp., Inc.) yielding proceeds (net
of underwriting discounts and commissions) of at least $13,000,000 or (b) the
third anniversary of the date of this Agreement (the "Maturity Date"), on which
date all outstanding principal and accrued interest shall be due and payable in
full. This Note may be prepaid in whole or in part at any time or from time to
time without prepayment penalty or premium.
3. Other Loan Documents; Subordination. This Note is issued in
connection with, and subject to the provisions of, that certain loan agreement,
dated the date hereof, by and among Borrower, Lender and certain other lenders
named therein (the "Loan Agreement")(collectively with this Note and all other
agreements executed in connection herewith, the "Loan Documents"), and shall be
subordinate in right of payment to certain senior indebtedness to the extent
provided in the Loan Agreement.
26
4. Method and Application of Payments. All amounts payable hereunder
shall be paid by Borrower in immediately available and freely transferable funds
at the place designated by Lender to Borrower for such payment. All payments
made on this Note (including, without limitation, prepayments) shall be applied
to fees and expenses (including attorneys' fees), accrued interest and principal
in any order Lender may choose, in its sole discretion.
5. Events of Default. Each of following events shall constitute an
event of default (an "Event of Default") hereunder:
a. If Borrower shall fail to pay when due any interest or
principal or any other sum payable to Lender hereunder and such failure shall
continue unremedied for five (5) days after written notice.
b. If any representation or warranty made by Borrower to
Lenders in any statement, certificate or other document in connection with the
Loan Documents including, but not limited to, the Loan Documents now or in the
future securing the obligations of Borrower to Lenders, is false, erroneous or
misleading in any material respect.
c. If Borrower shall default in the performance of any other
agreement or covenant with Lenders contained in the Loan Documents including,
but not limited to, the Loan Documents now or in the future securing the
obligations of Borrower to Lenders, and such default shall continue uncured for
ten (10) days after written notice thereof to Borrower given by any Lender (or,
if such default cannot reasonably be cured within such ten (10) day period and
Borrower is proceeding to cure with reasonable diligence, such period of time as
shall be reasonably necessary to cure such default, but in no event more than
thirty (30) days).
d. If Borrower shall become insolvent, bankrupt or shall
generally fail to pay its debts as such debts become due; or if Borrower shall
admit in writing its inability to pay its debts; or if Borrower shall suffer a
receiver or trustee for it or substantially all of its property to be appointed
and not dismissed within thirty (30) days thereof; or if Borrower makes a
general assignment for the benefit of creditors; or if proceedings under any law
related to bankruptcy or insolvency or the reorganization or the release of
debtors are instituted against Borrower and are not dismissed or stayed within
sixty (60) days; or if a receiver or trustee for Borrower or substantially all
of its property shall be appointed without Borrower's consent and such receiver
or trustee shall not be discharged within sixty (60) days; or if proceedings
relating to Borrower under any law related to bankruptcy or insolvency or the
reorganization or the release of debtors are instituted or commenced by
Borrower.
e. If any final unappealable judgment, writ, warrant of
attachment or execution or similar process which calls for payment or presents
liability in excess of $100,000 individually, or $500,000 in the aggregate, (not
covered by insurance) shall be rendered or issued against or levied against
Borrower or Borrower's property and such process shall not be paid, waived,
stayed, vacated, discharged, settled, satisfied or fully bonded within ten (10)
days after its issuance or levy.
27
6. Remedies. Upon the occurrence of any Event of Default, (a) interest
shall automatically and without notice begin to accrue on the outstanding
balance of this Note at the Prime Rate plus 3%, (b) the entire unpaid principal
amount of this Note and all unpaid interest accrued thereon shall, at the sole
option of Lender upon notice to Borrower, become immediately due and payable,
(c) Lender shall have the right to offset all amounts owed by Borrower hereunder
against any amounts owed by Lender in any capacity to Borrower, whether or not
due, and (d) Lender shall thereupon have the immediate right to exercise from
time to time all rights and remedies available to Lender under the Loan
Documents or now or hereafter available at law or in equity.
7. Miscellaneous. Except as expressly set forth herein, Borrower hereby
waives presentment, demand, protest and notice of dishonor and protest, and also
waives all other exemptions; and agrees that extension or extensions of the time
of payment of this Note or any installment or part thereof may be made before,
at or after maturity by agreement by Lender. Borrower shall pay to Lender, upon
demand, all costs and expenses that may be incurred by Lender in connection with
the enforcement of this Note including, without limitation, fees and expenses of
Lender's counsel. Notices required to be given hereunder shall be given in
accordance with the provisions of the Loan Agreement, as amended from time to
time. Any failure by Lender to exercise any right hereunder shall not be
construed as a waiver of the right to exercise the same or any other right at
any time. No amendment to or modification of this Note shall be binding upon
Lender unless in writing and signed by it. Any provision hereof found to be
illegal, invalid or unenforceable for any reason whatsoever shall not affect the
legality, validity or enforceability of the remainder hereof. This Note shall
apply to and bind the successors of Borrower and shall inure to the benefit of
Lender, its successors and assigns; provided, however, that Borrower may not
assign its rights and obligations under this Note without the express prior
written consent of Lender. This Note shall be governed by and interpreted in
accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, Borrower, by its duly authorized officer intending
to be legally bound hereby, has duly executed this Note as of the date first
written above.
FORMMAKER SOFTWARE, INC.
By: /S/ ROBERT L. MORRIS
----------------------------------------
Name: Robert L. Morris
Title: Senior Vice President
28
TERM NOTE
$573,578 May 15, 1997
FOR VALUE RECEIVED, FORMMAKER SOFTWARE, INC., a Georgia corporation
("Borrower"), having an office at 2300 Windy Ridge Parkway, Suite 400 North,
Atlanta, Georgia 30339, does hereby unconditionally promise to pay to the order
of TECHNOLOGY LEADERS II L.P., a Delaware limited partnership ("Lender"), at
Lender's office located at 800 The Safeguard Building, 435 Devon Park Drive,
Wayne, Pennsylvania 19087, or at such other place as Lender may from time to
time designate in writing, in lawful money of the United States, the principal
sum of FIVE HUNDRED SEVENTY THREE THOUSAND FIVE HUNDRED SEVENTY-EIGHT DOLLARS
($573,578), with interest, all as provided below.
1. Rate of Interest. Interest on the principal amount outstanding under
this promissory note (this "Note") shall accrue at an annual rate equal to the
announced prime rate of PNC Bank, N.A. (the "Prime Rate") plus 1%. Such interest
rate shall be changed when and as the Prime Rate changes. Interest payable
hereunder shall be calculated for actual days elapsed on the basis of a 360-day
year.
Notwithstanding anything in this Note, the interest rate charged hereon
shall not exceed the maximum rate allowable by applicable law. If any stated
interest rate herein exceeds the maximum allowable rate, then the interest rate
shall be reduced to the maximum allowable rate, and any excess payment of
interest made by Borrower at any time shall be applied to the unpaid balance of
any outstanding principal of this Note.
2. Payment of Interest and Principal. Interest shall be due and payable
commencing on June 30, 1997, and continuing on the last day of each calendar
quarter thereafter until the earlier of (a) the closing of an underwritten
initial public offering of common stock of Borrower (or, after consummation of
the transactions contemplated by the Joint Proxy Statement for Image Sciences,
Inc. and Borrower dated April 18, 1997, DocuCorp., Inc.) yielding proceeds (net
of underwriting discounts and commissions) of at least $13,000,000 or (b) the
third anniversary of the date of this Agreement (the "Maturity Date"), on which
date all outstanding principal and accrued interest shall be due and payable in
full. This Note may be prepaid in whole or in part at any time or from time to
time without prepayment penalty or premium.
3. Other Loan Documents; Subordination. This Note is issued in
connection with, and subject to the provisions of, that certain loan agreement,
dated the date hereof, by and among Borrower, Lender and certain other lenders
named therein (the "Loan Agreement")(collectively with this Note and all other
agreements executed in connection herewith, the "Loan Documents"), and shall be
subordinate in right of payment to certain senior indebtedness to the extent
provided in the Loan Agreement.
29
4. Method and Application of Payments. All amounts payable hereunder
shall be paid by Borrower in immediately available and freely transferable funds
at the place designated by Lender to Borrower for such payment. All payments
made on this Note (including, without limitation, prepayments) shall be applied
to fees and expenses (including attorneys' fees), accrued interest and principal
in any order Lender may choose, in its sole discretion.
5. Events of Default. Each of following events shall constitute an
event of default (an "Event of Default") hereunder:
a. If Borrower shall fail to pay when due any interest or
principal or any other sum payable to Lender hereunder and such failure shall
continue unremedied for five (5) days after written notice.
b. If any representation or warranty made by Borrower to
Lenders in any statement, certificate or other document in connection with the
Loan Documents including, but not limited to, the Loan Documents now or in the
future securing the obligations of Borrower to Lenders, is false, erroneous or
misleading in any material respect.
c. If Borrower shall default in the performance of any other
agreement or covenant with Lenders contained in the Loan Documents including,
but not limited to, the Loan Documents now or in the future securing the
obligations of Borrower to Lenders, and such default shall continue uncured for
ten (10) days after written notice thereof to Borrower given by any Lender (or,
if such default cannot reasonably be cured within such ten (10) day period and
Borrower is proceeding to cure with reasonable diligence, such period of time as
shall be reasonably necessary to cure such default, but in no event more than
thirty (30) days).
d. If Borrower shall become insolvent, bankrupt or shall
generally fail to pay its debts as such debts become due; or if Borrower shall
admit in writing its inability to pay its debts; or if Borrower shall suffer a
receiver or trustee for it or substantially all of its property to be appointed
and not dismissed within thirty (30) days thereof; or if Borrower makes a
general assignment for the benefit of creditors; or if proceedings under any law
related to bankruptcy or insolvency or the reorganization or the release of
debtors are instituted against Borrower and are not dismissed or stayed within
sixty (60) days; or if a receiver or trustee for Borrower or substantially all
of its property shall be appointed without Borrower's consent and such receiver
or trustee shall not be discharged within sixty (60) days; or if proceedings
relating to Borrower under any law related to bankruptcy or insolvency or the
reorganization or the release of debtors are instituted or commenced by
Borrower.
e. If any final unappealable judgment, writ, warrant of
attachment or execution or similar process which calls for payment or presents
liability in excess of $100,000 individually, or $500,000 in the aggregate, (not
covered by insurance) shall be rendered or issued against or levied against
Borrower or Borrower's property and such process shall not be paid, waived,
stayed, vacated, discharged, settled, satisfied or fully bonded within ten (10)
days after its issuance or levy.
30
6. Remedies. Upon the occurrence of any Event of Default, (a) interest
shall automatically and without notice begin to accrue on the outstanding
balance of this Note at the Prime Rate plus 3%, (b) the entire unpaid principal
amount of this Note and all unpaid interest accrued thereon shall, at the sole
option of Lender upon notice to Borrower, become immediately due and payable,
(c) Lender shall have the right to offset all amounts owed by Borrower hereunder
against any amounts owed by Lender in any capacity to Borrower, whether or not
due, and (d) Lender shall thereupon have the immediate right to exercise from
time to time all rights and remedies available to Lender under the Loan
Documents or now or hereafter available at law or in equity.
7. Miscellaneous. Except as expressly set forth herein, Borrower hereby
waives presentment, demand, protest and notice of dishonor and protest, and also
waives all other exemptions; and agrees that extension or extensions of the time
of payment of this Note or any installment or part thereof may be made before,
at or after maturity by agreement by Lender. Borrower shall pay to Lender, upon
demand, all costs and expenses that may be incurred by Lender in connection with
the enforcement of this Note including, without limitation, fees and expenses of
Lender's counsel. Notices required to be given hereunder shall be given in
accordance with the provisions of the Loan Agreement, as amended from time to
time. Any failure by Lender to exercise any right hereunder shall not be
construed as a waiver of the right to exercise the same or any other right at
any time. No amendment to or modification of this Note shall be binding upon
Lender unless in writing and signed by it. Any provision hereof found to be
illegal, invalid or unenforceable for any reason whatsoever shall not affect the
legality, validity or enforceability of the remainder hereof. This Note shall
apply to and bind the successors of Borrower and shall inure to the benefit of
Lender, its successors and assigns; provided, however, that Borrower may not
assign its rights and obligations under this Note without the express prior
written consent of Lender. This Note shall be governed by and interpreted in
accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, Borrower, by its duly authorized officer intending
to be legally bound hereby, has duly executed this Note as of the date first
written above.
FORMMAKER SOFTWARE, INC.
By: /S/ ROBERT L. MORRIS
----------------------------------------
Name: Robert L. Morris
Title: Senior Vice President
31
TERM NOTE
$455,630 May 15, 1997
FOR VALUE RECEIVED, FORMMAKER SOFTWARE, INC., a Georgia corporation
("Borrower"), having an office at 2300 Windy Ridge Parkway, Suite 400 North,
Atlanta, Georgia 30339, does hereby unconditionally promise to pay to the order
of TL VENTURES THIRD CORP., a Delaware corporation ("Lender"), at Lender's
office located at 800 The Safeguard Building, 435 Devon Park Drive, Wayne,
Pennsylvania 19087, or at such other place as Lender may from time to time
designate in writing, in lawful money of the United States, the principal sum of
FOUR HUNDRED FIFTY-FIVE THOUSAND SIX HUNDRED THIRTY DOLLARS ($455,630), with
interest, all as provided below.
1. Rate of Interest. Interest on the principal amount outstanding under
this promissory note (this "Note") shall accrue at an annual rate equal to the
announced prime rate of PNC Bank, N.A. (the "Prime Rate") plus 1%. Such interest
rate shall be changed when and as the Prime Rate changes. Interest payable
hereunder shall be calculated for actual days elapsed on the basis of a 360-day
year.
Notwithstanding anything in this Note, the interest rate charged hereon
shall not exceed the maximum rate allowable by applicable law. If any stated
interest rate herein exceeds the maximum allowable rate, then the interest rate
shall be reduced to the maximum allowable rate, and any excess payment of
interest made by Borrower at any time shall be applied to the unpaid balance of
any outstanding principal of this Note.
2. Payment of Interest and Principal. Interest shall be due and payable
commencing on June 30, 1997, and continuing on the last day of each calendar
quarter thereafter until the earlier of (a) the closing of an underwritten
initial public offering of common stock of Borrower (or, after consummation of
the transactions contemplated by the Joint Proxy Statement for Image Sciences,
Inc. and Borrower dated April 18, 1997, DocuCorp., Inc.) yielding proceeds (net
of underwriting discounts and commissions) of at least $13,000,000 or (b) the
third anniversary of the date of this Agreement (the "Maturity Date"), on which
date all outstanding principal and accrued interest shall be due and payable in
full. This Note may be prepaid in whole or in part at any time or from time to
time without prepayment penalty or premium.
3. Other Loan Documents; Subordination. This Note is issued in
connection with, and subject to the provisions of, that certain loan agreement,
dated the date hereof, by and among Borrower, Lender and certain other lenders
named therein (the "Loan Agreement")(collectively with this Note and all other
agreements executed in connection herewith, the "Loan Documents"), and shall be
subordinate in right of payment to certain senior indebtedness to the extent
provided in the Loan Agreement.
32
4. Method and Application of Payments. All amounts payable hereunder
shall be paid by Borrower in immediately available and freely transferable funds
at the place designated by Lender to Borrower for such payment. All payments
made on this Note (including, without limitation, prepayments) shall be applied
to fees and expenses (including attorneys' fees), accrued interest and principal
in any order Lender may choose, in its sole discretion.
5. Events of Default. Each of following events shall constitute an
event of default (an "Event of Default") hereunder:
a. If Borrower shall fail to pay when due any interest or
principal or any other sum payable to Lender hereunder and such failure shall
continue unremedied for five (5) days after written notice.
b. If any representation or warranty made by Borrower to
Lenders in any statement, certificate or other document in connection with the
Loan Documents including, but not limited to, the Loan Documents now or in the
future securing the obligations of Borrower to Lenders, is false, erroneous or
misleading in any material respect.
c. If Borrower shall default in the performance of any other
agreement or covenant with Lenders contained in the Loan Documents including,
but not limited to, the Loan Documents now or in the future securing the
obligations of Borrower to Lenders, and such default shall continue uncured for
ten (10) days after written notice thereof to Borrower given by any Lender (or,
if such default cannot reasonably be cured within such ten (10) day period and
Borrower is proceeding to cure with reasonable diligence, such period of time as
shall be reasonably necessary to cure such default, but in no event more than
thirty (30) days).
d. If Borrower shall become insolvent, bankrupt or shall
generally fail to pay its debts as such debts become due; or if Borrower shall
admit in writing its inability to pay its debts; or if Borrower shall suffer a
receiver or trustee for it or substantially all of its property to be appointed
and not dismissed within thirty (30) days thereof; or if Borrower makes a
general assignment for the benefit of creditors; or if proceedings under any law
related to bankruptcy or insolvency or the reorganization or the release of
debtors are instituted against Borrower and are not dismissed or stayed within
sixty (60) days; or if a receiver or trustee for Borrower or substantially all
of its property shall be appointed without Borrower's consent and such receiver
or trustee shall not be discharged within sixty (60) days; or if proceedings
relating to Borrower under any law related to bankruptcy or insolvency or the
reorganization or the release of debtors are instituted or commenced by
Borrower.
e. If any final unappealable judgment, writ, warrant of
attachment or execution or similar process which calls for payment or presents
liability in excess of $100,000 individually, or $500,000 in the aggregate, (not
covered by insurance) shall be rendered or issued against or levied against
Borrower or Borrower's property and such process shall not be paid, waived,
stayed, vacated, discharged, settled, satisfied or fully bonded within ten (10)
days after its issuance or levy.
33
6. Remedies. Upon the occurrence of any Event of Default, (a) interest
shall automatically and without notice begin to accrue on the outstanding
balance of this Note at the Prime Rate plus 3%, (b) the entire unpaid principal
amount of this Note and all unpaid interest accrued thereon shall, at the sole
option of Lender upon notice to Borrower, become immediately due and payable,
(c) Lender shall have the right to offset all amounts owed by Borrower hereunder
against any amounts owed by Lender in any capacity to Borrower, whether or not
due, and (d) Lender shall thereupon have the immediate right to exercise from
time to time all rights and remedies available to Lender under the Loan
Documents or now or hereafter available at law or in equity.
7. Miscellaneous. Except as expressly set forth herein, Borrower hereby
waives presentment, demand, protest and notice of dishonor and protest, and also
waives all other exemptions; and agrees that extension or extensions of the time
of payment of this Note or any installment or part thereof may be made before,
at or after maturity by agreement by Lender. Borrower shall pay to Lender, upon
demand, all costs and expenses that may be incurred by Lender in connection with
the enforcement of this Note including, without limitation, fees and expenses of
Lender's counsel. Notices required to be given hereunder shall be given in
accordance with the provisions of the Loan Agreement, as amended from time to
time. Any failure by Lender to exercise any right hereunder shall not be
construed as a waiver of the right to exercise the same or any other right at
any time. No amendment to or modification of this Note shall be binding upon
Lender unless in writing and signed by it. Any provision hereof found to be
illegal, invalid or unenforceable for any reason whatsoever shall not affect the
legality, validity or enforceability of the remainder hereof. This Note shall
apply to and bind the successors of Borrower and shall inure to the benefit of
Lender, its successors and assigns; provided, however, that Borrower may not
assign its rights and obligations under this Note without the express prior
written consent of Lender. This Note shall be governed by and interpreted in
accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, Borrower, by its duly authorized officer intending
to be legally bound hereby, has duly executed this Note as of the date first
written above.
FORMMAKER SOFTWARE, INC.
By: /S/ ROBERT L. MORRIS
----------------------------------------
Name: Robert L. Morris
Title: Senior Vice President
34
Schedule 1.1
Principal Amount No. of Shares
Lender ..................................................... of Loan Covered by Warrants
Safeguard Scientifics (Delaware), Inc. ..................... $1,970,792 197,079
Technology Leaders II L.P. ................................. 573,578 57,358
TL Ventures Third Corp. .................................... 455,630 45,563
---------- ----------
$3,000,000 300,000
35
Exhibit 11.1
DOCUCORP, INC.
COMPUTATION OF EARNINGS PER SHARE
UNAUDITED
Three Three Nine Nine
months months months months
ended ended ended ended
April 30 April 30 April 30 April 30
1996 1997 1996 1997
---------- ---------- ---------- ----------
Net earnings ............................... $ 484,807 $ 607,693 $1,335,900 $1,652,606
========== ========== ========== ==========
Weighted average common shares outstanding . 4,245,015 4,307,615 4,245,015 4,307,615
Weighted average common share equivalents:
Options ............................. 1,357,417 1,107,737 1,357,417 1,107,737
---------- ---------- ---------- ----------
Weighted average number of common shares and
common share equivalents outstanding 5,602,432 5,415,352 5,602,432 5,415,352
========== ========== ========== ==========
Earnings per common share ........... $ 0.09 $ 0.11 $ 0.24 $ 0.31
========== ========== ========== ==========
36