RESEARCH

July - August 1998 CORPORATE PROFILE

Wordcraft Systems, Inc.

CORPORATE BUSINESS DESCRIPTION
FUNDAMENTAL ANALYSIS
OVERVIEW
CORPORATE INFORMATION
OUR POSITION

CORPORATE BUSINESS DESCRIPTION

Wordcraft Systems, Inc. (WORC.BB) is a multi-national maker and distributor of computer software named HydraFax for the automated office equipment industry. The Company is the industry leader and largest North American supplier of networks fax software, which activates the full capability of Multifunction Fax Machines (MFP) directly from Personal Computers (PCs). It operates on Windows 3.1, 3.11, '95, NT 3.51 and 4.0 and functions in the background. HydraFax, combined with a Multifunction Fax Machine, allows users to send and receive faxes as well as print, scan and edit documents directly to and from their PC workstations. A Multifunction Fax Machine, driven by HydraFax software, thus becomes a convenient and efficient Four-In-One office center. This technology renders redundant scanners, fax modems and, in selected cases, printers and copiers used in office and home office environments. Wordcraft has forged strategic marketing alliances with most major manufacturers of automated office equipment. The fax software products offered by Wordcraft are also distributed or "bundled" under a variety of original equipment manufacturers (OEM) terms and are recommended as a software upgrade by thousands of the manufacturers' dealers and sales staff across North America. HydraFax software drives Class 1 and Class 2 Modems, as well as 90% of all Multifunction Fax Machines on the market today, including: Brother, Konica, Lanier, Mita, Murata, NEC, Omnifax, Panasonic, Pitney Bowes, Ricoh, Sharp, Toshiba and Xerox.

Summary of HydraFax Features

1. HydraFax is a Network independent software and therefore, supports all major network programs on the market today.
2. Send and Receive faxes right at your PC workstation.
3. SAVE MONEY - with HydraFax, transmissions can be up to 300% faster. SAVE MONEY - by scheduling your Long Distance transmissions during off-peak times.
4. Incoming and outgoing faxes can be routed on a network to the intended user.
5. Status of fax jobs is reported automatically.
6. Import an existing data base into HydraFax phone book.
7. Easy mail-merge fax broadcasts via your word processing and/or data base software.
8. Full background operation of HydraFax allows users to continue working on other projects on their PCs.
9. Save fax images in popular graphics formats for exporting to drawing or OCR programs.
10. Multiple fax devices, such as fax machines and fax modems, can easily be shared by all HydraFax network users.
11. Send a "QuickFax" message without using your word processing software.
12. Attach fax documents to user-designed cover pages.
13. Public and Private Fax Phone Books can be generated.
14. Documents can be saved as Fax files for later transmission.
15. Maintain a detailed register of all fax activities.
16. Fax on demand capabilities.
17. Include company Logo and Signature in outgoing faxes.
18. Full True Type Font and Graphics support in Windows.
19. Built in OCR with HydraFax Gold.
20. Annotation or highlighting capabilities when routing faxes to intended receiver.
21. 90 degree rotation of fax.
22. Functions in Windows and DOS (running under Windows 3.1, '95, NT) environment on a network.
23. Add your Fax Machine to the list of your printers for direct printing.
24. Password protected access to HydraFax.

Comprehensive Reception Facilities

Received faxes on a network can be automatically sent to the appropriate user's workstation or can be viewed on screen, annotated or highlighted and routed to the intended receiver.

Support for International Fax Standard

HydraFax follows the latest International Fax Standards, giving the sophisticated user, the latest state of-the-art fax features including: BINARY FILE TRANSFER (BFT), SELECTIVE POLLING, FILE COMPRESSION.

Powerful Sending Options

HydraFax is jam-packed with easy to use options to make fax transmissions, extremely fast (about 300% faster than other software), and therefore very cost effective. HydraFax allows STAND-ALONE or NETWORK PC users to take advantage of their existing documents and data bases: and to distribute this information by fax is as easy as printing.

HydraFax emulates a laser printer, thus your PC faxes will arrive at their destinations with that clean, professional look (and they will never be upside down or crooked). In addition, HydraFax supports the following features:

SUB-ADDRESSING

Depending on the sub-address, HydraFax will route the fax to a specific user or users on a network, relay the incoming fax to another designated number, or even broadcast the fax to a list of fax numbers.

FILE TRANSFER VIA FAX

Depending on the capability of your fax device, HydraFax is able to send files in their original form without converting them to a fax format, thus permitting the recipient to use the files with the required Windows applications.

POLLING OPTIONS

HydraFax can hold a variety of documents, (depending on the capability of your fax device) any one of which can be polled by callers with or without a password, thus providing a very powerful Fax on demand system.

PERSONALIZED MAIL-MERGE BROADCASTS

HydraFax working in conjunction with the "mail-merge" feature of a word processing program, provides a powerful personalized mail-merge broadcast tool. This feature may be utilized to broadcast documents such as press releases, general marketing information or anything which is recipient specific. Its capacity is virtually unlimited.

A partial List of Major Companies that use HydraFax Software:

America Online; Kellogg Co.; Kodak; AT&T; Bayer ; Pacific Bell; Bear Stearns & Co.; Bell Atlantic; Prudential Insurance; Boeing; Sanyo; Colgate-Palmolive; Staples, Ltd.; Texas A&M; EXXON Co. (USA); TRW; Ford Motor Co.; Volkswagen of America; Holiday Inn; Walt Disney Records.

On May 18, 1998, WORC announced that it had entered into an agreement to acquire all of the outstanding shares of NEXT CENTURY SYSTEMS, INC. This merger, which is anticipated to be completed within the next 60 days, greatly enhances the Company's earnings potential. Wordcraft Systems, Inc., upon completion of Next Century acquisition, would have worldwide distribution and marketing rights of the proprietary software: SWIM "GIS", SWIM "DESK" AND SWIM "PEN" for a period of ten years.

The Swim software, by utilizing Geographic Information Systems (GIS) technology is used by utility companies for facility mapping. The Swim "Pen" software, utilizing Global Positioning System (GPS) technology provides work order management, field crew dispatch and facility service locations.

SWIM Sewer/Water Infrastructure Management System

1. Provides work order management tools that support both emergency, corrective and preventive maintenance
2. Tracks dispatching of field crews
3. Displays service request and facility locations on a map
4. Reduces number of redundant emergency service dispatches
5. Reduces duplicate work orders
6. Reduces data entry
7. Tracks facility maintenance history
8. Provides analysis tools for decision making in the office and field environment

How Swim Works!

The system begins with a map of the entire water and sewer system, which is made available on the computer screen to anyone connected to the system. Field crews access the system through a very unique field computer that is operated with a hand held plastic pointer on a touch screen.

When the field crew returns at the end of the day, the portable computer plugs into a harness. Information entered into the computer during the day is then transferred to the main office computer, and at the same time the Laptop PC receives the following days' assignments.

The system has the capability of performing the following functions: You may dispatch field crews, assign work, record work performed, schedule preventive maintenance, collect field data, maintain facility information, maintain schematic drawings, identify crew locations, support decision making, and generate reports. To this day, many of these tasks are accomplished, in most major metropolitan utility systems, through antiquated manual procedures. Until now, there has not been a comprehensive system developed that could integrate and feasibly automate these functions.

The SWIM technology is now the ultimate management tool for any utility or company with networks that serve large numbers of consumers within a geographic location. In addition, other companies that could use this system include electric and gas utilities, phone companies, and cable companies. The SWIM technology is commercially available and has been used by the city of San Diego's Water Management Bureau for the past 18 months. Over 200 maintenance trucks in San Diego have the portable computer installed.

Recent Press Releases May 19, Wordcraft To Acquire Next Century Systems, Inc.

IRVINE, Calif., May 19/PRNewswire/- Wordcraft Systems, Inc. today announced that it has recently entered into an agreement to acquire all of the outstanding shares of Next Century Systems, Inc. (NCS), a privately owned company, in exchange for Wordcraft's Common Stock. The Swim "GIS" software allows the user (a utility) to provide facility mapping data and infrastructure maintenance by utilizing Geographic Information Systems (GIS) technology. The Swim "Pen" software provides work order management, field crew dispatch and facility service locations utilizing Global Positioning Systems (GPS) technology. These utility software products will be priced in the low six figures, and will substantially increase efficiency and thus reduce operating expenses for the user. The products operate in Windows NT and UNIX, the most popular platforms in business today.

June 12, U.S. Navy Approves Wordcraft's Software

Wordcraft Systems, Inc. today announced that the U.S. Navy tested and approved the unique fax security features of the company's software and as a result, Pitney Bowes, one of Wordcraft's OEMs, has recently signed an agreement to supply the U.S. Navy with fax machines and the company's "HydraFax" software at its facility in Virginia. The entire order is expected to be delivered in calendar year 1998. The U.S. Navy has a current fax machine installation base of 15,000-20,000 machines nationwide. In addition, Pitney Bowes will now canvass other federal agencies in connection with the implementation of similar fax security systems utilizing the company's" HydraFax" software.

Separately, the company's revenue for the seven month period ending Sept. 30, 1997, was up 38% for the same period last year. Earnings rose to $60,991, or approximately $0.005 per share for the period. The company credited the results to the completion of OEM arrangements with Konica, Danka, Dex and Omnifax, (manufacturers of automated office equipment), during the 1st and 2nd quarters of 1997. The company also opened a regional sales office in Chicago, IL, in addition to its existing sales office in Atlanta, GA.

Wordcraft anticipates strong operating results for the calendar year of 1998 and expects to open at least two additional regional sales offices in 1998.

July 1, Konica Launches Its Unique Intranet Fax With Hydrafax Software

Wordcraft Systems, Inc., today announced that commencing June 1, 1998, Konica Business Technologies has marketed itsmultifunction fax machine model 7410 and 9635 with the HydraFax software. The Konica 7410 will feature its unique INTRANet Fax capability, which eliminates all telephone costs associated with faxing within any corporation using a wide area network (WAN).

A recent Gallop Poll revealed that just over 50% of all faxes sent by Fortune 1000 companies are sent within the organization. As a result, a corporation implementing INTRANet Fax will reduce its fax telephone costs by over 50%. In addition, INTRANet Fax allows a user to route a document from fax to any PC or printer on the WAN, or to any PC over the Internet.

In a separate announcement, the company released its fiscal 1998 year-end financial results. For the fiscal year ending February 28, 1998 revenue rose to $975,378, up 26% for the same period last year, Earnings rose to $127,519, or approximately $0.01 per share for the period, up from a loss of ($136,974) or ($0.01 ) per share for the previous year. The company credited the results to the completion of OEM arrangements with Konica, Danka, Dex and Omnifax, manufacturers of automated office equipment and improved software sales via Panasonic and Pitney Bowes. Wordcraft Systems, Inc. also expects to open two additional regional sales offices in the U.S. in addition to its existing sales offices in Chicago, IL and Atlanta, GA.

FUNDAMENTAL ANALYSIS

Upon review of Box A, it is easy to conclude that based upon the guidance by management and the current share price of 30¢, if WORC achieves these levels of growth and profitability, its share price could easily increase by 10 fold. As presented by management WORC will grow by over 20x between fiscal 99 and fiscal 02, while earnings are projected to skyrocket by 4800% from actual levels reached and released for fiscal 98. The potential most definitely exists, but obviously risks should not be overlooked. One has to be impressed with the recent OEM agreements with such names as Danka, Konica and Omnifax for the HydraFax software product.

Research firm "CAP Ventures" estimates that by the year 2000 one in five office machines purchased will be an all-in-one product. The market for MFD (multifunctional devices - print, scan, fax and copy in one machine) is extremely viable - sales will grow from $3 billion in 97 to $6.5 billion ending 2000.

The merger between WORC and Next Century would yield remarkable growth potential considering that there are over 4000 water utility companies in the U.S. alone with a combined total software market potential in excess of $600 million.

The main question for investors to answer: how do we value such an obscure mini micro with limited financial backing, which does not file formally with the SEC, but has the potential to grow dramatically during the next few years and could even be considered a juicy acquisition itself? At present WORC trades at 9x estimate 99E, while 1.6x estimate 00E. If we rewarded WORC a PE of 15x because the potential for meaningful revenue and earnings growth exists and since the technology that they are marketing is somewhat cutting edge, then a share price for fiscal 99 equals 50¢, while for fiscal 00 our share price explodes to $2.85 or 850% gain in 18 months. We cannot fathom expanding the PE above this level because WORC is not seasoned enough (low book value, limited cash, does not report with the SEC, and needs to raise ample working capital).

If WORC can deliver and management guidance equals or is above estimated value, it is quite obvious that the multiple will expand accordingly.

Fundamental Analysis II

The overall potential that exists for multifunctional peripheral devices will grow considerably as the prices for such products continue to decline. Multifunctional peripherals combine one or more activities such as fax, copying, printing and scanning. See graph 1 for anticipated sale growth during the next 2 1/2 years. It is quite evident that HydraFax software solution will be a player in this information niche!

Another interesting aspect of HydraFax that should not be overlooked concerns the Internet. At present some 44 million fax pages were sent via the Internet (according to Dataquest). By 2000 that number is expected to increase to 5.6 billion pages. Internet faxing could save you time and money. Internet faxing's appeal is speed and lower phone costs. Time spent faxing is less because multiple faxes can be sent from your PC to a server and routed from there. Upon review of the July 1, 1998 press release (see included press release), investors should easily conclude that WORC has developed software that is currently being deployed in brand name multifunction fax machines. See graph #2, which indicates just how deep rooted faxing remains in our current business environment.

From Box C we have fundamentally compared multifunction solution software and peripheral technology companies. JTFX and AVTC are obviously more seasoned as well as more well established than WORC and, of course, because of this have PE est. at a much higher PE estimate than WORC. Near term WORC may only deserve this modest valuation, but as growth and earnings accelerate, WORC should easily command a PE more in line with its peers. An investor contemplating an investment in WORC needs, in our opinion, an 18-month investment objective in order to achieve a sizeable return for the current inherent risk. From Box A, earning estimates for 00 are estimated at .19. If WORC can achieve or exceed these numbers, it is quite evident to us that its PE multiple will expand dramatically. Again, if WORC were to trade at 28x, then its share price could approach $5.32 - almost 20x the current share price. Please keep this in mind: this earnings/share also includes the pending acquisition of Next Century, an industrial segment that is equally as exciting as MFS and MFP.

Market cap is very attractive when one compares WORC to its peers - see Box C.

Fundamental Analysis III

Upon review of Box B, which includes a PE comparison of management software companies and upon completion of Next Century, WORC will most definitely fall into this category. Obviously, all of the peers listed are much larger, seasoned and more established. Our main purpose is to show how success is rewarded by ever-expanding PE. WORC, in our opinion, has the products, but like many unseasoned mini-micro caps must overcome the usual financial constraints and listing requirements. WORC, in our opinion, cannot be thought as a fundamentally undervalued investment, but instead, as an emerging technology company that has unlimited upside potential during the next 18 months if growth hurdles can be overcome.

OVERVIEW

Why WORC deserves a serious consideration for mini-micro cap investors.

1. Multifunctional devices will grow from $3 billion to over $6 billion by the year 00 - bodes well for WORC because of HydraFax software solution - Very Bullish. 1A. MFP software market is projected at $447 million in 1998, escalating to in excess of $802 million by 2001 - Bullish. 2. Faxing over the internet anticipated to escalate from current 44 million pages to over 5.6 billion pages by 00 - Very Bullish. 3. Upon completion of Next Century acquisition, WORC will have total software market potential in the U.S. in excess of $600 million for its state-of-art utility software - Very Bullish. 4. HydraFax is currently in use by many Fortune 100 companies - Very Bullish. 5. U.S. Navy approves WORC's unique fax security features - potential exists for installation of software into 15 - 20K machines nationwide. 6. During the next 18 months revenue growth is estimated to expand by over 12x and earnings by 19x over fiscal 98 - Very Bullish. 7. Wordcraft Systems, Inc. selling for a fraction of its peers; namely JTFX and AVTC - Very Bullish. 8. Computer software and services, according to Value-Line, as a group, has a high ranking for timeliness. Annual share-earnings gains point to above average stock price appreciation - Bullish. 9. WORC needs additional working capital and is currently non-reporting with the SEC - Mildly Bearish (Management anticipates SEC filing by year's end). 10. Possible buy-out candidate - Bullish. 11. We would like to see a faster ramping-up of revenue and earnings in order for WORC to support higher valuation near-term - Neutral.

INVESTOR SUITABILITY

Geared towards seasoned mini-micro cap investor types who are risk tolerant towards investments that are less seasoned, sport share price volatility, have limited research and limited funding sources. Upside potential during next 18 months could approach 20x if corporate goals are reached. Considering current share price of .30 - downside, of course, is limited, while superb upside potential exists.

For a diverse mini-micro cap portfolio, WORC offers a proven player in MFS explosion and the emerging utility software arena.

CORPORATE INFORMATION

Year end -February 28
Fully diluted shares outstanding as of July 5, 1998 - 13.8 million
Free trading shares - 2.8 million
Shareholders - 500
Book value as of July 5, 1998 - 10¢
LTD -500K as of February 1998
Not fully reporting with SEC
Employees - 10
Estimated revenues & net income/sh for fiscal 99 - $4.9 mil/.033
Estimated PE valuation for fiscal 99 - 9x
Estimated revenue & net income/sh for fiscal 00 -$12.6 mil/.19
Estimated PE valuation for fiscal 00 - 1.6x
Dividend - 0
Legal - none
Growth rate estimate for current fiscal year over last 400%

Our Position