Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-K
----------
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 00-1033864
----------
DocuCorp International, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2690838
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5910 North Central Expressway, Suite 800, Dallas, Texas 75206
(Address of principal executive offices) (Zip Code)
(214) 891-6500
(Registrant's telephone number, including area code)
----------
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |_|
As of October 6, 2000, there were 14,917,472 shares of Common Stock, $.01 par
value, of the Registrant outstanding. The aggregate market value on such date of
the voting stock of the Registrant held by non-affiliates was an estimated
$37,499,226 based upon the closing price of $3.91 per share on October 6, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended July 31, 1999 are incorporated by reference in Items 7 and 8
of Part II of this report.
Part III of this Annual Report on Form 10-K incorporates by reference portions
of the Registrant's definitive proxy statement, to be filed with the Securities
and Exchange Commission not later than 120 days after the close of its fiscal
year.
================================================================================
DOCUCORP INTERNATIONAL, INC.
TABLE OF CONTENTS
FORM 10-K
July 31, 2000
Page
----
PART I
Item 1. Business .................................................. 1
Item 2. Properties ................................................ 11
Item 3. Legal Proceedings ......................................... 11
Item 4. Submission of Matters to a Vote of Security Holders ....... 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .................................... 12
Item 6. Selected Consolidated Financial Data ...................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 13
Item 8. Financial Statements and Supplementary Data ............... 13
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ................. 13
PART III
Item 10. Directors and Executive Officers of the Registrant ........ 14
Item 11. Executive Compensation .................................... 14
Item 12. Security Ownership of Certain Beneficial Owners
and Management ......................................... 14
Item 13. Certain Relationships and Related Transactions ............ 14
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ............................................ 15
Signatures ......................................................... II-1
Index to Exhibits .................................................. II-4
PART I
Item 1. Business
General
DocuCorp International, Inc. ("DocuCorp" or the "Company") develops,
markets, and supports a portfolio of Internet and print, enterprise-wide
software products that enable users to acquire, manage, personalize, and present
information. In addition, the Company provides application service provider
("ASP") hosting of Internet-enabled solutions, consulting, application
integration, and training through a 190-person service organization. ASP hosting
is performed using the Company's software and facilities to provide processing,
print, mail, archival, and Internet delivery of documents for customers who
outsource this activity.
The Company was organized in connection with the May 15, 1997 acquisition
of FormMaker Software, Inc. ("FormMaker") by Image Sciences, Inc. ("Image
Sciences") (the "Merger").
DocuCorp software products support leading hardware platforms, operating
systems, printers, and imaging systems. These products are designed to
personalize, produce, and manage documents such as insurance policies, utility
statements, telephone bills, bank and mutual fund statements, invoices, direct
mail correspondence, bills of lading, and other customer-oriented documents. The
Company's ASP offerings include customer statement and bill generation,
electronic bill presentment and payment, insurance policy production, and
electronic document archival. The Company currently has an installed base of
approximately 900 customers. The Company believes it is the leading provider of
information solution software and services for the insurance industry to
customers including Prudential Insurance Company of America, Lumbermans Mutual
Casualty Company, and American International Group (AIG). More than half of the
200 largest North American insurance companies use the Company's software
products and services, including eight of the ten largest life and health
insurance companies and nine of the ten largest property and casualty insurance
companies. The Company believes it has also become a leading provider of
software solutions and services for companies in the utilities industry. Key
utilities customers include Southern Company Services, Inc. and Consolidated
Edison of New York, Inc. The Company also has customers in the financial
services, higher education, telecommunications, and transportation industries,
including American Express Services Europe Limited, The University of Texas,
Nortel Northern Telecom, Inc., and Yellow Services, Inc.
Document Automation Industry
Information is critical to corporations as they endeavor to increase
revenue, improve customer service, and reduce costs. Companies can increase
revenue by using document automation to produce high-volume, one-to-one
documents such as customer statements that cross-sell additional products and
services. Document automation enables companies to provide better customer
service by:
o creating more attractive, easier to read documents,
o increasing accuracy,
o minimizing the time it takes to produce and deliver documents, and
o providing customer service personnel with immediate access to the
electronically archived information.
At the same time, document automation reduces the cost of personnel, printing,
and storage.
Certain trends have accelerated the growth of the document automation
industry. Deregulation of industries such as insurance, utilities, and financial
services has resulted in increased competition and caused participants in such
industries to focus more closely on customer service. This has increased the
demand to create one-to-one documents personalized to each customer with more
visual appeal. Rapid technological advances such as client/server architecture
and the Internet, adoption of Microsoft's WindowsNT, Active-X, and ODBC,
emergence of Sun Microsystems' Solaris and Java, and the evolving XML standard
have expanded the benefits that businesses can derive from document automation.
Additionally, the emergence of call centers has increased the demand for access
to and automation of customer communications. As a result, an increasing number
of companies are employing innovative comprehensive information presentment
processes.
1
The same advances that have enhanced the benefits of document automation,
however, have rendered the development and implementation of document automation
products increasingly complex. As a consequence, businesses are increasingly
outsourcing some of their document automation requirements to skilled and
experienced providers such as the Company.
The Document Life Cycle
The Company believes that the life cycle of a document is divided into
three general phases (creation, publishing, and archival), linked together by
document management software. The Company believes that its expertise in all
phases of the document life cycle constitutes an important competitive
advantage.
Creation
In this phase of the life cycle, documents are rendered in a digital form.
Documents can be created by using word processing software packages or tools
such as Microsoft Word, Elixir, and Corel that have been designed specifically
to facilitate the composition of commonly used documents such as letters and
forms. Today, documents are created by employees throughout an organization from
the central or home office, in branch offices, or in remote locations.
Alternatively, existing paper documents that were created on a typewriter
or other non-electronic source or that came into the organization from
third-parties can be input into the organization's computer network by means of
scanning devices. Scanning devices convert paper documents into a digitized
format. Scanned documents are generally stored and managed separately from
documents created by word processors or other internal applications, principally
because their formats are different. The Company's products create forms from
both of these sources.
Once a document is in digital form, it is then readily available for
common applications such as transmission over E-mail, storage on local
computers, printing on desktop printers, and distributing via other
communication technologies, including the Internet. Documents vary significantly
in complexity, ranging from simple letters or forms to multi-page forms,
brochures or booklets containing text, charts, and statistical tables requiring
sophisticated pagination. The digitized form can also be used for more complex,
high-volume publishing applications such as insurance policies and billing
statements. The Company's products create or prepare digitized forms that can
accept variable data and output to high-speed printers or the Internet.
Publishing
In this phase of the life cycle, appropriate digital data and forms are
selected from multiple sources and formats. The information is dynamically
assembled into complex documents. Variable data is integrated through software
to produce individualized documents which are then simultaneously printed or
digitally prepared for customer distribution and archived as corporate assets
for future use. The Company focuses its publishing software products and
services exclusively on these individualized and high-volume publishing
activities. While the basic logistical procedures are generally similar in every
publishing activity, in individualized and high-volume publishing activities,
software is required to coordinate large amounts of variable information such as
customer name, transaction history, and dynamically generated graphs. The
Company has developed software logic that allows its products to attain what it
believes to be one of the highest volume capabilities available in the market
today.
Archival
In the archival phase of the life cycle, the document is stored in either
a digitized or electronic print format for future use. Documents and information
are presented most efficiently through software to storage devices that range in
their sophistication from local computer disk drives to complex computer storage
equipment having varying capacity and data accessing capabilities. The Company
has developed products that enable an organization to automatically index
documents as they enter storage and place the documents in an archived format to
permit expedient retrieval, viewing, and reprint. Furthermore, the Company's
products accept data in both digital and print stream format, and support
leading imaging systems such as FileNET and IBM's Visual Info. The Company's
products also enable accessing these archives from a browser over the Internet.
2
Management Software
Underlying all three phases of the document life cycle is the requirement
to manage the way in which documents and information move within the life cycle
and the corporation. This is currently accomplished within organizations through
various E-mail software products like Lotus cc:Mail, groupware like Lotus Notes
by IBM, network software like Novell NetWare, document management software like
Documentum, and workflow products like FileNET. Externally, organizations are
increasingly using the Internet to transmit such correspondence. To date, these
systems are primarily departmental in nature and are an incomplete way to manage
enterprise-wide documents and publications. The Company currently provides
products for document routing, network and host connectivity, and Internet
access.
Growth Strategy
The Company's strategy for growth consists of the following:
Leveraging Existing Customer Relationships
The Company has an installed base of approximately 900 customers.
Increasingly, the Company's customers are expanding or upgrading their
information solutions, which provides a market for additional products and
services from the Company. Most of the Company's large insurance customers
originally licensed software, but contracted for few services. Since the Company
now has a substantial professional services infrastructure, it anticipates that
the existing customer base could be a significant source of future services
revenues for the Company. Recently introduced and planned products and services
can also be provided to the Company's current customers as follow-on sales.
Entering New Vertical Markets
The Company believes it is the leading provider of document automation
software and services for the insurance industry and has become a leader in the
utilities industry. The Company is targeting vertical market expansion in the
financial services industry. Revenues from the financial services industry
represented approximately 13% of the Company's business in fiscal 2000 compared
to 3% in fiscal 1999. The financial services industry, like insurance and
utilities, has an increasing need for individualized documents to be produced in
very large volumes in order to communicate effectively with their customers.
Expanding Internationally
Approximately 8% of the Company's revenues came from customers outside of
North America in fiscal 2000. DocuCorp plans to expand its international
customer base primarily by cultivating and expanding its international
distribution alliances and through direct sales. During fiscal 2000, the Company
hired a General Manager to direct and grow its European operations. In addition,
the Company opened a new office in London to serve as its European headquarters.
The Company expanded its presence in the European financial services market and
was awarded a significant contract from a major European financial services
company. DocuCorp intends to continue increasing the number of sales and
services professionals domiciled in Europe.
Developing and Enhancing New Technologies
The Company's product development efforts are focused on developing new
products as well as enhancing and broadening its current software product
offerings. New DocuCorp products and solutions will continue to emphasize
state-of-the-art object-oriented technologies, WindowsNT platform development,
and intranet/Internet capabilities and enablement. During fiscal year 2000, the
Company introduced a new family of e-solution software products that speed
business applications to the Internet, by enabling everything from filling out
forms and publishing documents online to managing and viewing documents via the
Internet. During fiscal 2001, the Company's product development efforts will
include development of new Internet products and functionality, integration of
existing products with the Internet to provide access to documents through the
Internet, and further development of systems for use in vertical industries such
as utilities and financial services.
3
Pursuing Acquisitions and Strategic Alliances
The Company intends to pursue acquisitions of other companies or
technologies further expanding the Company's products, services, or market
penetration. In addition, as the Company expands in its targeted vertical
markets, the Company intends to enter into additional strategic alliances for
sales and marketing in such markets. The Company believes that new technical
skills, expanded product functionality, a broader client base, and an expanded
geographic presence may result from these activities.
Expanding ASP Hosting Business
During fiscal 2000, the Company adopted an ASP business model which
provides hosted software applications on a per transaction basis. The ASP model
was a natural extension of the Company's outsourcing business. The Company's ASP
offering allows customers to off-load applications and free up resources to
concentrate on their core competencies and strategic projects. The ASP business
model provides the Company with a rapidly growing source of recurring revenues.
Also during the year, the Company opened a second ASP hosting center in Dallas,
Texas which significantly expands its capacity and allows the Company to offer
off-site backup and disaster recovery capabilities to its customers. The Company
anticipates that ASP hosting services, both in print and delivery over the
Internet, will be the fastest growing area of its business.
Products and Services
The Company offers a portfolio of scalable, high-performance document
automation software products. The Company also has one of the largest
professional services organizations in the industry, and the facilities to
provide ASP hosting services using the Company's technology and expertise.
Document Automation Software
The Company offers document automation software products that enable
customers to produce high-volume, individualized documents. The Company's
software solutions include multi-platform, enterprise-wide processing products
addressing each phase of the life cycle of a document. The Company's philosophy
of open architecture and support of industry standards enables its customers to
select software and hardware from other leading vendors and integrate them with
DocuCorp products.
The Company's product lines have been organized into the following five
primary categories.
DocuCorp Creation Solutions (DocuCreate)
With DocuCreate, document components (forms, graphs, charts, text) can be
created either entirely with the Company's products or more typically by using
other leading composition or word processing software, such as Microsoft Word,
integrated with DocuCreate. The Company's open architecture supports a broad
range of document creation solutions. The DocuCreate products run primarily on
personal computers under Microsoft Windows. License revenues from the Company's
software products in the Creation Solutions category accounted for approximately
16%, 10%, and 9% of the Company's total license revenues in fiscal 2000, 1999,
and 1998, respectively.
DocuCorp Publishing Solutions (DocuMaker)
The DocuMaker products are designed to handle production of large volumes
of documents, large numbers of forms, complex document assembly requirements,
individualization of each document, multiple recipients with unique
requirements, and interfacing with existing databases and application programs.
DocuMaker RP has the flexibility to dynamically compose highly-tailored
documents, each based on custom publishing rules such as unique pagination.
Alternatively, the Company's DocuMaker FP product attains industry leading
throughput by utilizing the Company's proprietary software logic encompassing
print-ready images to be merged with variable data for high-volume complex
documents like complete insurance policies. The DocuMaker products provide forms
fill, data merge, document assembly, dynamic formatting and graph generation,
centralized and decentralized printing on most leading laser printers,
interactive and batch processing and electronic output, and a variety of other
features and functions. The DocuMaker products run
4
on mainframes primarily under MVS, and on client/server platforms under
Microsoft WindowsNT, Microsoft Windows, and UNIX. License revenues from the
Company's software products in the Publishing Solutions category accounted for
approximately 52% of the Company's total license revenues in fiscal 2000 and 62%
in both fiscal 1999 and 1998.
DocuCorp Archival Solutions (DocuSave)
The DocuSave product stores published documents electronically so that
they can be viewed, used, and reused throughout the organization. Retrieval
features enable immediate access to documents for applications like processing
claims, referencing enterprise-wide legal or regulatory documentation, or
speeding customer service operations at call centers. DocuSave can be
implemented as a stand-alone system or integrated with leading imaging systems
such as FileNET. DocuSave viewing software runs under Windows, and DocuSave
server software runs on MVS, Microsoft WindowsNT, and UNIX. License revenues
from the Company's software products in the Archival Solutions category
accounted for approximately 12%, 19%, and 22% of the Company's total license
revenues in fiscal 2000, 1999, and 1998, respectively.
DocuCorp Management Solutions (DocuManage)
The DocuManage product provides document management and document routing.
As enterprises expand, there is a greater need for control over documents and
the ability to move documents across the enterprise. License revenues from the
Company's software products in the Management Solutions category accounted for
approximately 12%, 9%, and 7% of the Company's total license revenues in fiscal
2000, 1999, and 1998, respectively.
DocuCorp Internet Solutions (e-Solutions)
During fiscal 2000, the Company introduced its new family of e-solution
software products. These products make possible, via the Internet, anything from
filling out forms and publishing information to managing and viewing documents
and delivering and collection of payments. License revenues from the Company's
Internet Solutions category accounted for approximately 6% of the Company's
total license revenues in fiscal 2000.
As an additional service to its customers, the Company also provides the
tools and utility programs to interface, maintain, and develop DocuCorp document
automation implementations. The latest object-oriented technologies, including
use of Active-X, Java, ODBC, and Visual Basic, make it easier to implement
installations and interfaces. The Company has not generated, nor does it
anticipate that it will generate, material revenues from these tools and utility
programs.
Professional Services
The Company offers both document automation consulting and ASP hosting
services to its customers. At July 31, 2000, the Company employed approximately
190 professional service personnel, which represents one of the largest services
organizations in the document automation software industry. The Company's
professional services personnel have experience across many industries and
document automation applications.
Consulting
The Company offers a broad range of consulting services related to
document automation. A majority of the Company's professional services
consulting revenues are derived from implementation and integration of the
Company's software products. The Company also derives professional services
consulting revenues from education as well as training services and electronic
document library development. The Company's professional services group works
with clients to develop and define document automation strategies and to provide
a complete package of software implementation services. Training classes are
available to assist clients with implementing technology and applications.
Training offerings are available in standardized and customized formats. A
substantial majority of the Company's consulting services are related to
DocuCorp Publishing Solutions. Consulting services accounted for approximately
36%, 41%, and 38% of the Company's total revenues in fiscal 2000, 1999, and
1998, respectively.
5
ASP Hosting
The Company offers ASP hosting which utilizes the Company's software to
provide processing, print, mail, archival, and Internet delivery of documents
for customers who outsource this activity. The Company operates ASP hosting
centers in Atlanta and Dallas which, using data received electronically from
customers, employs high-volume printers and mail handling equipment to produce
insurance policies, utility statements and other customer mailings, and bundles
the output for bulk mailings. ASP hosting accounted for approximately 18%, 12%,
and 18% of the Company's total revenues in fiscal 2000, 1999 and 1998,
respectively.
Product Development
The Company has made and expects to continue to make substantial
investments in research and product development. During fiscal 2000, the Company
introduced a new family of e-solution software products that speed business
applications to the Internet, by enabling everything from filling out forms and
publishing documents online to managing and viewing documents via the Internet.
During fiscal 2001, the Company's product development efforts will include
development of new Internet products and functionality, integration of existing
products with the Internet to provide access to documents through the Internet,
and further development of systems for use in vertical industries such as
utilities and financial services.
The Company has committed substantial resources to product development. As
of July 31, 2000, the Company employed approximately 95 technical personnel
engaged in research and product development. The product development process is
a cooperative effort between customers and the Company. Early review of
functionality specifications, prototypes, and demonstrations allows for the
incorporation of customer suggestions and comments in parallel with management
review of the process internally. DocuCorp has a formal planning process for new
software products as well as software upgrades and maintenance releases to
ensure product quality, timeliness of releases, and meeting or exceeding
customer expectations. In fiscal 2000, 1999, and 1998, the Company's software
development expenditures were approximately $8.1 million, $7.5 million, and $6.7
million, respectively.
Sales and Marketing
General
The Company markets its products through various distribution channels,
including direct sales, marketing alliances, and distributors. Its sales
resources are organized based upon vertical industry markets. At July 31, 2000,
the Company employed approximately 30 direct sales and sales support
representatives who operate from Dallas, Atlanta, and London. Sales
representatives are compensated principally on a commission basis.
The Company markets its products and services primarily through a direct
sales force. Distributor relationships are established in the United States,
Canada, Europe, South Africa, and Asia. The Company's most significant
international distributor relationship is with MYND, formerly Policy Management
Systems Corporation.
The Company intends to increase both its product offerings and vertical
markets served through marketing, sales and distribution, and development
relationships with other companies. Formal and informal marketing and sales
partnerships currently exist with Xerox, Microsoft, ACORD Organization, MYND,
FileNET Corporation, SCT Utility Systems, ORCOM Solutions, CheckFree,
TransPoint, e-PROFILE, and Bowne. These relationships provide sales leads for
the Company's products or provide access to certain technological information
and resources.
The Company's customers generally license the Company's software products
for an upfront license fee. Initial license fees typically range from $75,000 to
$250,000. Most customers also enter into maintenance agreements with the
Company, which typically provide for annual maintenance fees ranging from 15% to
30% of current license fees depending upon the customer group. Customers who
enter into maintenance agreements are entitled to software upgrades, software
problem resolutions, and use of the Company's "Hotline" providing technical
assistance to the software user. The Company generally charges customers for
consulting services on a time and materials basis, although certain service
assignments are performed on a fixed charge basis. ASP hosting services are
charged on a transaction fee basis.
6
Relationship with Third-Party Distributor
FormMaker historically distributed its line of DAP software products to
the insurance industry in North America through an exclusive marketing agreement
with MYND. Prior to the Merger, a substantial portion of the subsidiary's
revenues were generated pursuant to this agreement. Additionally, the subsidiary
granted MYND the exclusive right to market the DAP software in the
property/casualty and life insurance industries. In September 1998, both parties
agreed to terminate the exclusive marketing agreement and enter into a new,
non-exclusive marketing agreement. The new marketing agreement between DocuCorp
and MYND allows MYND to market all of the Company's software products to
insurance and financial services companies worldwide. For the years ended July
31, 2000 and 1999, the Company generated revenues of approximately $2.8 million
and $3.7 million through the MYND relationship, respectively.
Customers
The Company generally markets to large and mid-size organizations that
have a need for integrated solutions for the high-volume production of
individualized documents. Currently, the majority of the Company's revenues are
generated from the insurance industry. Approximately 59% of the Company's total
revenues for the year ended July 31, 2000 were derived from the insurance
industry. Approximately 6% of total revenues for the year ended July 31, 2000
were derived from one customer, Prudential Insurance Company of America. Over
half of the 200 largest North American insurance companies use the Company's
products and services, including eight of the ten largest life and health
insurance companies and nine of the ten largest property and casualty insurance
companies. The Company believes it has the largest installed document automation
customer base in the insurance industry. During fiscal 2000, two utilities
companies in North America licensed the Company's products. Approximately 24% of
the Company's total revenues for the year ended July 31, 2000 were derived from
the utilities industry. In addition to the insurance and utilities industries,
the Company is targeting vertical markets including the financial services,
higher education, telecommunications, and transportation markets, in each of
which industry customers have purchased and installed the Company's software.
During the year ended July 31, 2000, approximately 13% of the Company's total
revenues were derived from the financial services industry. Unlike many other
software vendors, the Company's principal contact at customer organizations is
generally not an MIS or information technology officer, but rather the customer
service or marketing departments that will use the Company's products. As a
result, the Company does not always compete with other technological priorities
being considered by a customer's MIS department.
Set forth below is a representative list of customers of the Company in
the various industries in which the Company markets its products and services:
Insurance
Prudential Insurance Company of America
American International Group (AIG)
Lumbermans Mutual Casualty Company
Utilities
Southern Company Services, Inc.
Consolidated Edison of New York, Inc.
Financial Services
Royal Bank Financial Group
ABN-AMRO Bank N.V.
Higher Education
The University of Texas
San Francisco State University
7
Telecommunications
Polkomtel S.A.
Nortel Northern Telecom, Inc.
Transportation
Yellow Services, Inc.
Wisconsin Department of Transportation
Competition
The market for document automation products and services is intensely
competitive, subject to rapid change, and significantly affected by new product
introductions and other market activities of industry participants. The Company
faces direct and indirect competition from a broad range of competitors, many of
whom have greater financial, technical, and marketing resources than the
Company. The Company's principal competition currently comes from (i) systems
developed in-house by the internal MIS departments of large organizations, (ii)
direct competition from numerous software vendors, including Cincom Systems,
Inc., Document Sciences Corporation (which is majority owned by Xerox
Corporation ("Xerox")), Group 1 Software, Inc., Mobius Management Systems, Inc.,
and Metaview, and (iii) direct competition from numerous outsourcing and ASP
vendors, including Derivion, Xerox XBS, and OTS. The Company believes that the
principal competitive factors in the document automation software market are
product performance and functionality, ease of use, multi-platform offerings,
product and company reputation, quality of customer support and service, and
price. The degree of competition varies significantly with the stage of the
document life cycle being addressed and by vertical market.
The Company may also face competition from new entrants into the document
automation software industry. As the market for document automation software
continues to develop, current or potential competitors with significantly
greater resources than the Company could attempt to enter or increase their
presence in the market either independently or by acquiring or forming strategic
alliances with competitors of the Company or otherwise increase their focus on
the industry. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third-parties
to increase the ability of their products to address the needs of the Company's
current and prospective customers.
Intellectual Property, Trademarks, and Proprietary Rights
The Company relies primarily on a combination of copyright, distribution
software license agreements, trademark and trade secret laws, employee and
third-party nondisclosure agreements, and other methods to safeguard its
software products. Despite these precautions, it may be possible for
unauthorized third-parties to copy certain portions of the Company's products or
obtain and use information the Company regards as proprietary. While the
Company's competitive position may be affected by its ability to protect its
proprietary information, the Company believes that trademark and copyright
protections are not material to the Company's success.
The Company's software products are licensed to end-users on a "right to
use" basis pursuant to license agreements. Certain license provisions protecting
against unauthorized use, copying, transfer, and disclosure of the licensed
program may be unenforceable under the laws of certain jurisdictions and foreign
countries. In addition, the laws of some foreign countries do not protect
proprietary rights to the same extent as do the laws of the United States.
As the number of software products in the industry increases and the
functionality of these products further overlaps, the Company believes that
software programs will increasingly become subject to infringement claims. Third
parties may assert infringement claims against the Company in the future with
respect to current or future products, which could require the Company to enter
into royalty arrangements or result in costly litigation.
The Company also relies on certain software that it licenses from
third-parties, including software that is integrated with internally developed
software and used in its products to perform key functions. These third-party
software licenses may not continue to be available to the Company on
commercially reasonable terms
8
and the related software may not continue to be appropriately supported,
maintained or enhanced by the licensors. The loss of licenses to use, or the
inability of licensors to support, maintain, and enhance, any of such software
could result in increased costs, delays or reductions in product shipments until
equivalent software could be developed or licensed and integrated.
Employees
As of July 31, 2000, the Company had approximately 360 employees, of which
approximately 190 were engaged in professional services, 95 in product
development and customer support, 30 in sales and marketing, and 45 in finance,
administration, human resources, and internal systems support. The Company
believes its future success will depend, in part, on its continued ability to
attract and retain highly qualified personnel in a competitive market for
experienced and talented software engineers and sales and marketing personnel.
None of the Company's employees are represented by a labor union or subject to a
collective bargaining agreement. The Company believes that its employee
relations are good.
Forward-Looking Statements
This Annual Report on Form 10-K may include certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements, other than statements of historical facts included in this Form
10-K, are forward-looking statements. Such statements are subject to certain
risks and uncertainties, which include but are not limited to those discussed in
the section entitled "Risk Factors." Should one or more of these risks or
uncertainties, among others as set forth in this Form 10-K, materialize, actual
results may vary materially from those estimated, anticipated, or projected.
Although the Company believes that the expectations reflected by such
forward-looking statements are reasonable based on information currently
available to the Company, no assurance can be given that such expectation will
prove to have been correct. Cautionary statements identifying important factors
that could cause actual results to differ materially from the Company's
expectations are set forth in this Form 10-K, including without limitation in
conjunction with the forward-looking statements included in this Form 10-K that
are referred to above. All forward-looking statements included in this Form 10-K
and all subsequent oral forward-looking statements attributable to the Company
or persons acting on its behalf are expressly qualified in their entirety by
these cautionary statements.
Risk Factors
Significant Revenues from Two Industries
Approximately 59% and 71% of the Company's total revenues for the year
ended July 31, 2000 and 1999, respectively, were derived from the insurance
industry. Approximately 6% and 10% of total revenues in fiscal 2000 and 1999,
respectively, were derived from one customer, Prudential Insurance Company of
America. Additionally, approximately 24% and 23% of the Company's total revenues
for the year ended July 31, 2000 and 1999, respectively, were derived from the
utilities industry. The Company's continued financial performance and its future
growth will depend upon its ability to continue to market its products
successfully in the insurance and utilities industries and to enhance and market
technologies for distribution in other markets. This will require the Company to
make substantial product development and distribution channel investments. There
can be no assurance that the Company will be able to continue marketing its
products successfully in the insurance and utilities industries or will be able
to successfully introduce new or existing products in markets other than the
insurance and utilities industries.
Technological Advances
The document automation industry has experienced and will continue to
experience rapid technological advances, changes in customer requirements, and
frequent new product introductions and enhancements. Development in both
software technology and hardware capability will require the Company to make
substantial product development investments. Any failure by the Company to
anticipate or respond adequately to technological developments and customer
requirements, or any significant delays in product development or introduction,
could have a material adverse effect on the Company's results of operations.
There can be no
9
assurance that the Company's new products or product enhancements intended to
respond to technological change or evolving customer requirements will achieve
acceptance.
Limited Experience in ASP Hosting Business
The Company recently adopted its ASP hosting business model and therefore
has limited experience in offering this service. It is uncertain whether the
Company's hosting services will achieve sufficient market acceptance for
revenues from ASP hosting to materially increase. At the same time, the Company
has opened two ASP hosting centers that will commit to a certain level of
expenses regardless of whether revenue growth is achieved. As a result, the
failure of the Company to increase ASP hosting revenues as anticipated may
subject the Company to potential losses relating to this business model.
Attraction and Retention of Technical Employees
The Company believes that its future success will depend in large part
upon its ability to attract, retain, and motivate highly skilled employees,
particularly technical employees. The employees that are in highest demand are
software programmers, software developers, application integrators, and
information technology consultants. These employees are likely to remain a
limited resource for the foreseeable future. There can be no assurance that the
Company will be able to attract and retain sufficient numbers of highly skilled
technical employees. The loss of a significant number of the Company's technical
employees could have a material adverse effect on the Company.
Competition
The market for the Company's document automation products is intensely
competitive. The Company faces competition from a broad range of competitors,
many of whom have greater financial, technical, and marketing resources than the
Company. The Company's principal competition currently comes from (i) systems
developed in-house by the internal MIS departments of large organizations, (ii)
direct competition from numerous software vendors, including Cincom Systems,
Inc., Document Sciences Corporation, Group 1 Software, Inc., Mobius Management
Systems, Inc., and Metaview, and (iii) direct competition form numerous
outsourcing and ASP vendors, including Derivion, Xerox XBS, and OTS. There can
be no assurance that the Company will be able to compete effectively with such
entities.
Fluctuations in Operating Results
The Company has experienced, and may in the future continue to experience,
fluctuations in its quarterly operating results due to the fact that sales
cycles, from initial evaluation to purchase, vary substantially from customer to
customer. Delays in the sales cycle frequently occur as a result of competition,
changes in customer personnel, and overall budget and spending priorities. The
Company has typically operated with little backlog for license revenues because
software products generally are shipped soon after orders are received. As a
result, license revenues in any quarter are substantially dependent on orders
booked and shipped in that quarter. The delay of customer orders for a small
number of licenses could adversely affect the license revenues for a given
fiscal quarter. The Company has historically earned a substantial portion of its
license revenues in the last weeks of any particular quarter, and has
historically experienced its highest license revenues in the fourth quarter of
its fiscal year. The failure to achieve such revenues in accordance with such
trends could have a material adverse effect on the Company's financial results
for each such interim period.
Risk of Software Defects
Complex software products such as those offered by the Company can contain
undetected errors or performance problems. Such defects are most frequently
found during the period immediately following introduction of new products or
enhancements to existing products. The Company's products have from time to time
contained software errors that were discovered after commercial introduction.
There can be no assurance that performance problems or errors will not be
discovered in the Company's products in the future. Any future software defects
discovered after shipment of the Company's products, if material, could result
in loss of revenues, delays in customer acceptance, or potential product
liability.
10
Limited Protection of Intellectual Property Rights
The Company relies on a combination of copyright and trademark laws,
employee and third-party nondisclosure agreements, and other methods to protect
its proprietary rights. Despite these precautions, it may be possible for
unauthorized third-parties to copy certain portions of its products or to obtain
and use information that the Company regards as proprietary. There can be no
assurance that the Company's efforts will provide meaningful protection for its
proprietary technology against others who independently develop or otherwise
acquire substantially equivalent techniques or gain access to, misappropriate,
or disclose the Company's proprietary technology.
Dependence on Key Management Personnel
The Company believes that its continued success depends to a significant
extent upon the efforts and abilities of its senior management. In particular,
the loss of Michael D. Andereck, the Company's President and Chief Executive
Officer, or any of the Company's other executive officers or senior managers
could have a material adverse effect on the Company.
Item 2. Properties
The Company leases approximately 31,500 square feet of office space in
Dallas, Texas for its corporate headquarters, including administrative, sales,
marketing, services, and product development departments. This lease expires
April 30, 2005.
The Company leases approximately 76,000 square feet of office space in
Atlanta, Georgia which is utilized for administrative, sales, services, and
product development departments. The lease for this space expires on December
31, 2002.
The Company leases space for an ASP hosting facility located in Atlanta,
Georgia. This facility occupies approximately 19,000 square feet under a lease
which expires on October 31, 2002, but may be terminated by the Company on
October 31, 2000.
The Company leases space for an ASP hosting facility located in Dallas,
Texas. This facility occupies approximately 28,700 square feet under a lease
which expires on March 31, 2010, but may be terminated by the Company on March
31, 2007.
The Company's staff in Maryland is located in Silver Spring, Maryland.
This facility occupies approximately 10,000 square feet under a lease which
expires December 31, 2001.
The Company's staff in New Hampshire is located in a 5,700 square foot
facility in Bedford, New Hampshire. The lease for this facility expires on
December 31, 2004.
The Company leases space for its European sales and services staff in
London, England. This facility occupies approximately 8,200 square feet under a
lease which expires on September 27, 2013, but may be terminated by the Company
on October 1, 2005.
Office space is also leased in Portland, Maine for product development
activities.
The Company believes that its existing office facilities and additional
space available to it are adequate to meet its requirements, and that in any
event, suitable additional or alternative space adequate to serve the Company's
foreseeable needs will be available on commercially reasonable terms.
Item 3. Legal Proceedings
The Company is involved in various claims and legal actions incidental to
the normal conduct of its business. The Company does not believe that the
ultimate resolution of these actions will have a material adverse effect on the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal 2000.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has traded on the Nasdaq National Market under
the symbol "DOCC" since April 6, 1998. At October 6, 2000 there were
approximately 1,000 holders of record of the Company's Common Stock, although
the Company believes that the number of beneficial owners of its Common Stock is
substantially greater. The table below sets forth for the fiscal quarters
indicated the high and low sales prices for the Company's Common Stock:
High Low
------- --------
Fiscal 2000:
Fourth quarter ........................................ $5.38 $3.28
Third quarter ......................................... 7.97 4.33
Second quarter ........................................ 9.13 4.38
First quarter ......................................... 8.06 3.69
Fiscal 1999:
Fourth quarter ........................................ $5.75 $4.03
Third quarter ......................................... 9.88 4.25
Second quarter ........................................ 6.25 3.88
First quarter ......................................... 6.50 2.25
The Company intends to retain any future earnings for use in its business
and does not intend to pay cash dividends in the foreseeable future. The payment
of future dividends, if any, will be at the discretion of the Company's Board of
Directors and will depend, among other things, upon future earnings, operations,
capital requirements, restrictions in future financing agreements, general
financial condition of the Company, and general business conditions.
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data for the years ended
July 31, 2000, 1999, 1998, 1997, and 1996 have been derived from the audited
financial statements of the Company. The following data should be read in
conjunction with, and are qualified by, reference to the Company's audited
financial statements and the notes thereto, included elsewhere in this Form
10-K.
Years ended July 31,
-----------------------------------------------------
2000 1999 1998 1997* 1996
------- ------- ------- -------- -------
(in thousands except per share amounts)
Statements of Operations Data:
Total revenues ............................... $52,331 $51,926 $45,247 $ 17,503 $11,470
Operating income (loss) ...................... $ 3,977 $ 7,231 $ 5,601 $(17,460) $ 3,416
Net income (loss) before income taxes ........ $ 4,589 $ 7,853 $ 5,424 $(17,246) $ 3,656
Net income (loss) ............................ $ 2,509 $ 4,513 $ 3,184 $(16,102) $ 2,321
Cash dividend declared for preferred stock ... -0- -0- -0- $ 2,808 -0-
Net income (loss) per share:
Basic ..................................... $ 0.16 $ 0.28 $ 0.25 $ (2.18) $ 0.37
Diluted ................................... $ 0.15 $ 0.26 $ 0.21 $ (2.18) $ 0.28
Weighted average number of shares outstanding:
Basic ..................................... 15,317 16,001 12,587 7,377 6,202
Diluted ................................... 16,872 17,570 14,865 7,377 8,381
- ----------
* After Merger-related charges of $21,378. Without such charges operating
income, net income before income taxes, net income, net income per share
(diluted), and weighted average number of shares of common stock and
common stock equivalents (diluted) would have been $3,918, $4,132, $2,598,
$0.34, and 7,607, respectively.
12
July 31,
----------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(in thousands)
Balance Sheet Data:
Working capital ....................... $14,009 $15,513 $15,988 $ 1,644 $ 5,640
Total assets .......................... $50,276 $52,918 $51,921 $32,698 $14,691
Total debt, including obligations under
capital lease ...................... $ -0- $ 25 $ 87 $ 9,439 $ 46
Redeemable Class B common stock ....... -0- -0- -0- $19,119 -0-
Stockholders' equity (deficit) ........ $34,685 $36,994 $38,433 $(7,520) $ 8,037
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this item is set forth in the Company's 2000
Annual Report to Stockholders, which information is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The information required by this item is set forth in the Company's 2000
Annual Report to Stockholders, which information is incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
13
PART III
Part III of this Annual Report on Form 10-K incorporates by reference
portions of the Registrant's definitive proxy statement, to be filed with the
Securities and Exchange Commission not later than 120 days after the close of
its fiscal year; provided that if such proxy statement is not filed with the
Commission in such 120-day period, an amendment to this Form 10-K shall be filed
no later than the end of the 120-day period.
Item 10. Directors and Executive Officers of the Registrant
Information with respect to Directors of the Company will be set forth in
the forthcoming Proxy Statement under the heading "Directors and Executive
Officers," which information is incorporated herein by reference. Information
required by Item 405 of Regulation S-K will be set forth in the forthcoming
Proxy Statement under the heading "Section 16(a) Beneficial Ownership Reporting
Compliance," which information is incorporated herein by reference.
Item 11. Executive Compensation
Information with respect to executive compensation will be set forth in
the Proxy Statement under the heading "Executive Compensation," which
information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial
owners and management will be set forth in the forthcoming Proxy Statement under
the heading "Beneficial Ownership of Common Stock," which information is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and transactions will be
set forth in the forthcoming Proxy Statement, which information is incorporated
herein by reference.
14
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following is a list of the consolidated financial statements which are
included in this Form 10-K or which are incorporated herein by reference.
1. Financial Statements (incorporated herein by reference):
Report of Independent Accountants
As of July 31, 2000 and 1999:
o Consolidated Balance Sheets
For the Years Ended July 31, 2000, 1999, and 1998:
o Consolidated Statements of Operations and Comprehensive Income
o Consolidated Statements of Cash Flows
o Consolidated Statements of Changes in Stockholders' Equity
o Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
o Report of Independent Accountants on Financial Statement
Schedule
o Valuation and Qualifying Accounts
3. Exhibits:
See Exhibit Index beginning on page 25 of this Form 10-K.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended July 31, 2000.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Dallas,
State of Texas.
DOCUCORP INTERNATIONAL, INC.
(Registrant)
By: /s/ Michael D. Andereck
-------------------------------------
Michael D. Andereck
President, Chief Executive Officer
and Director
Date: October 27, 2000
-----------------------------------
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of DocuCorp International,
Inc., hereby severally constitute and appoint Michael D. Andereck, our true and
lawful attorney, with full power to sign for us in our names in the capacities
indicated below, amendments to this report, and generally to do all things in
our names and on our behalf in such capacities to enable DocuCorp International,
Inc. to comply with the provisions of the Securities Exchange Act of 1934, as
amended, and all requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature and Title Date
---------------------------------- ---------
/s/ Michael D. Andereck October 27, 2000
- -------------------------------------------------
Michael D. Andereck
President, Chief Executive Officer and Director
(Principal Executive Officer
and Principal Financial Officer)
/s/ Andrea L. Ungemach October 27, 2000
- -------------------------------------------------
Andrea L. Ungemach
Corporate Controller
(Principal Accounting Officer)
/s/ Milledge A. Hart, III October 27, 2000
- -------------------------------------------------
Milledge A. Hart, III
Chairman of the Board
/s/ Anshoo S. Gupta October 27, 2000
- -------------------------------------------------
Anshoo S. Gupta
Director
/s/ John D. Loewenberg October 27, 2000
- -------------------------------------------------
John D. Loewenberg
Director
/s/ Warren V. Musser October 27, 2000
- -------------------------------------------------
Warren V. Musser
Director
/s/ George F. Raymond October 27, 2000
- -------------------------------------------------
George F. Raymond
Director
/s/ Arthur R. Spector October 27, 2000
- -------------------------------------------------
Arthur R. Spector
Director
II-1
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors and Stockholders
of DocuCorp International, Inc.
Our audits of the consolidated financial statements referred to in our
report dated September 7, 2000 appearing in the 2000 Annual Report to
Stockholders of DocuCorp International, Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the Financial Statement Schedule listed in Item
14(a) 2 of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
September 7, 2000
II-2
Valuation and Qualifying Accounts
Years ended July 31, 2000, 1999, and 1998
Schedule II
Balance at Charged to Balance at
Beginning Costs and Deductions End of
Description of Period Expenses(a) (a)(b)(c) Period
----------- ----------- ----------- ----------- -----------
2000
Allowance for doubtful accounts ............... $ 675,000 $ 327,230 $ (402,230) $ 600,000
Amortization of Intangibles ................... $ 2,478,780 $ 1,353,223 $ -0- $ 3,832,003
Valuation allowance against deferred tax assets $ 2,267,387 $ -0- $(1,467,387) $ 800,000
1999
Allowance for doubtful accounts ............... $ 950,000 $ 446,330 $ (721,330) $ 675,000
Amortization of Intangibles ................... $ 1,126,924 $ 1,351,856 $ -0- $ 2,478,780
Valuation allowance against deferred tax assets $ 2,348,784 $ -0- $ (81,397) $ 2,267,387
1998
Allowance for doubtful accounts ............... $ 525,000 $ 734,550 $ (309,550) $ 950,000
Amortization of Intangibles ................... $ 160,522 $ 966,402 $ -0- $ 1,126,924
Valuation allowance against deferred tax assets $ 1,392,817 $ 1,848,786 $ (892,819) $ 2,348,784
- ----------
(a) Such amounts include balances assumed in the acquisition of FormMaker,
EZPower, and Maitland. See Notes to Consolidated Financial Statements for
further discussion.
(b) Such amounts relate to the utilization of the valuation and qualifying
accounts for specific items for which they were established in the
accounts receivable accounts.
(c) Such amounts relate to the tax benefit from utilization of net operating
loss and reduction of the valuation allowance based on management's
assessment of the likelihood of realizability of the loss carryforwards.
II-3
INDEX TO EXHIBITS
Exhibit No. Description
3.1 Certificate of Incorporation. (filed as exhibit 3.1 to the
Company's Registration Statement on Form S-4 No. 333-22225 and
incorporated herein by reference)
3.2 Bylaws. (filed as exhibit 3.2 to the Company's Registration
Statement on Form S-4 No. 333-22225 and incorporated herein by
reference)
10.2 Employment Agreement between Michael D. Andereck and the
Registrant dated January 15, 1997. (filed as exhibit 10.2 to the
Company's Registration Statement on Form S-4 No. 333-22225 and
incorporated herein by reference)
10.3 1997 Equity Compensation Plan. (filed as exhibit 10.3 to the
Company's 1997 Annual Report on Form 10-K and incorporated herein
by reference).
13.1* 2000 Annual Report to Stockholders.
21.1* Subsidiaries of the Registrant.
23.1* Consent of PricewaterhouseCoopers LLP, Independent Accountants.
27.1* Financial Data Schedule. (for EDGAR filing purposes only)
- ----------
* Filed herewith.
II-4