Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 2001
-------------
OR
TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
FOR THE TRANSITIONAL PERIOD FROM ______ TO ______
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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (214) 891-6500
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE 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 8, 2001, THERE WERE 13,523,750 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 $30,837,791 BASED UPON THE CLOSING PRICE OF $3.75 PER SHARE ON OCTOBER
8, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
CERTAIN PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE
FISCAL YEAR ENDED JULY 31, 2001 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, 2001
PART I.
Item 1. Business.................................................................................................2
Item 2. Properties..............................................................................................15
Item 3. Legal Proceedings.......................................................................................15
Item 4. Submission of Matters to a Vote of Security Holders.....................................................15
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................16
Item 6. Selected Consolidated Financial Data....................................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................................18
Item 8. Financial Statements and Supplementary Data.............................................................18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................19
PART III.
Item 10. Directors and Executive Officers of the Registrant.....................................................20
Item 11. Executive Compensation.................................................................................20
Item 12. Security Ownership of Certain Beneficial Owners and Management.........................................20
Item 13. Certain Relationships and Related Transactions.........................................................20
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................................21
Signatures ..................................................................................................... 22
Index to Exhibits................................................................................................26
PART I
ITEM 1. BUSINESS
GENERAL
Docucorp International, Inc. ("Docucorp" or the "Company") develops,
markets and supports a portfolio of enterprise-wide software products that
enable users to acquire, manage, personalize and present information. The
Company provides professional services related to its information software
products including consulting, implementation, integration and training. In
addition, the Company provides application service provider ("ASP") hosting
using its software and facilities to provide processing, print, mail, archival
and Internet delivery of documents for customers who outsource these activities.
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
automate applications that require high-volume acquisition, management,
personalization and presentation of information such as insurance policies,
utility statements, telephone bills, bank and mutual fund statements, invoices,
call center correspondence and electronic bill presentment and payment ("EBPP").
The Company's ASP offerings include customer statement and bill generation,
EBPP, insurance policy production and electronic document archival. The Company
currently has an installed base of more than 1,200 customers. The Company
believes it is the leading provider of solutions that acquire, manage,
personalize and present information for the insurance industry including such
customers as Prudential Insurance Company of America, Aon Service Corporation
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 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 Toronto Hydro-Electric System Limited. 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.
INDUSTRY BACKGROUND
Certain trends have accelerated the need for automating the process of
acquiring, managing, personalizing and presenting information. 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.
2
The same advances that have enhanced the benefits of such process
automation, however, have rendered the development and implementation of
solutions increasingly complex. As a consequence, businesses are increasingly
outsourcing some of their needs to skilled and experienced providers such as the
Company.
Companies today need the right information, at the right time, in the
right place. Information is critical to corporations as they endeavor to
increase revenue, improve customer service and reduce costs. Companies can
increase revenue by leveraging information through personalizing and producing
high-volume, one-to-one documents such as customer statements that cross-sell
additional products and services. Personalization and presentation of
information enables companies to provide better customer service by:
o Presenting information in print and over the Internet in more attractive,
easier to read formats,
o increasing accuracy,
o minimizing the time it takes to produce and deliver information and
o providing customer service personnel with immediate access to the
electronically archived information.
At the same time, automating the process of acquiring, managing,
personalizing and presenting information reduces the cost of personnel, printing
and storage.
GROWTH STRATEGY
The Company's strategy for growth consists of the following:
LEVERAGING EXISTING CUSTOMER RELATIONSHIPS
The Company has an installed base of more than 1,200 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. The majority of Docucorp revenues are generated from
existing customers.
ENTERING NEW VERTICAL MARKETS
The Company believes it is the leading provider of solutions that
acquire, manage, personalize and present information 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 9% of the Company's
business in fiscal 2001. The financial services industry, like insurance and
utilities, has an increasing need for individualized information to be produced
and presented in large volumes in order to communicate effectively with their
customers.
EXPANDING INTERNATIONALLY
Approximately 2% of the Company's revenues came from customers outside
of North America in fiscal 2001. Docucorp plans to expand its European customer
base primarily through direct sales and by cultivating and expanding its
European distribution alliances. During fiscal 2001, the Company hired a new
General Manager of European operations to focus on strategic positioning in
Europe and identify new opportunities for expansion and growth. Docucorp intends
to increase the number of sales and services professionals domiciled in Europe
as international revenues grow.
DEVELOPING AND ENHANCING NEW TECHNOLOGIES
3
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 technologies including XML, JAVA and Microsoft.Net for
Internet-enablement and information exchange. During the fiscal year, the
Company continued to expand its 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 2002, the Company's product development efforts will
include development of new products and functionality, integration of existing
products to provide information exchange through the Internet and further
development of systems for use in vertical industries such as utilities and
financial services.
PURSUING ACQUISITIONS AND STRATEGIC ALLIANCES
The Company has successfully completed three acquisitions since 1997.
Docucorp will continue to evaluate potential acquisitions of other companies or
technologies to further expand its 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
The Company adopted an ASP business model in fiscal 2000 which provides
hosted software applications on a per transaction basis. 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.
ASP revenues increased 45% in fiscal 2001. The Company has two ASP hosting
centers in the United States to meet the demands for capacity as well as 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.
DOCUCORP SOLUTIONS
Docucorp focuses on providing enterprise-wide solutions that acquire,
manage, personalize and present information. The Company markets solutions
primarily to three vertical markets-insurance, utilities and financial services.
Set forth below is a list of representative solutions that the Company provides
to each of the vertical markets that it serves:
INSURANCE SOLUTIONS
INSURANCE POLICY PRODUCTION - Docucorp enables its clients to create, publish,
distribute and archive high volumes of personalized insurance policies, quotes,
endorsements, cancellations and renewals.
CORRESPONDENCE - Using Docucorp solutions, insurance representatives can
electronically access policies and other critical data to verify coverage and
automate and personalize subsequent document packages and correspondence.
4
INTERNET VIEWING AND ENTRY - Docucorp solutions enable insurance agents,
customer service representatives or policyholders to access (and enter) data for
policies, claims forms, applications, invoices, correspondence or other key
documents via the Internet.
ELECTRONIC BILL PRESENTMENT & PAYMENT - Docucorp solutions provide policyholders
the ability to view premium notices and pay premiums online.
FINANCIAL SERVICES SOLUTIONS
CALL CENTER CORRESPONDENCE - Docucorp solutions enable our clients to maximize
the efficiency and profitability of their customer care operations by delivering
personalized messages to customers, and intelligently creating personalized
correspondence quickly from pre-existing text stored in electronic libraries.
CONSOLIDATED CUSTOMER STATEMENTS - Consolidated, easy-to-read,
easy-to-understand, personalized customer statements that once took hours to
create can now be produced in minutes from multiple sources of data using
Docucorp's information automation solutions.
WELCOME KITS - Docucorp solutions provide new banking customers, and those
buying additional products and services from our banking clients, personalized
welcome kits containing everything from welcome letters to deposit slips.
UTILITIES SOLUTIONS
BILL PRINT - With Docucorp solutions, utility companies can cross-market and
consolidate billing for multiple services such as gas, electricity, cable TV,
security and Internet.
ELECTRONIC BILL PRESENTMENT & PAYMENT - Docucorp solutions allow our clients to
give their customers the ability to view and pay their bills online.
CORRESPONDENCE AUTOMATION - With Docucorp applications, customer service
representatives can generate personalized correspondence for every customer
contact.
DOCUCORP SOFTWARE PRODUCTS
The Company offers its enterprise-wide information solutions through a
portfolio of scalable, high-performance software products that address each
phase of the enterprise-wide information process -- acquiring, managing,
personalizing and presenting information. 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 four primary categories.
ACQUIRING INFORMATION
DOCUCREATE products create forms that can be used over and over in
high-volume environments. These software products include editors that create
forms and insert fields for run-time variable data insertion. They also produce
device-independent data streams that can be printed, archived and distributed
over intranets and the Internet. License revenues from the Company's Docucreate
software products accounted for approximately 10%, 14% and 10% of the
5
Company's total license revenues in fiscal 2001, 2000 and 1999, respectively.
Specific products include:
DOCUCREATE WORKSTATION - A Microsoft Windows-based product that includes a
WYSIWYG forms editor, field editors and print drivers necessary to create and
edit both static and dynamic forms that can be output in Xerox Metacode, IBM AFP
and other print data streams.
DOCUCREATE SC (KOFAX) - A Microsoft Windows-based server product that enables
document capture by a Kofax Accent scanner.
DOCUCREATE IC - A server product available for Microsoft NT, Unix/AIX and IBM
MVS platforms that enables graphics images created by a personal computer or
captured by scanner or fax to be incorporated within documents to be printed on
high-speed Xerox and IBM printers, or published to digital formats over
intranets and the Internet.
MANAGING INFORMATION
Documanage software delivers full document management, workflow and
archival to information-intensive companies. License revenues from the Company's
software products that manage and archive information accounted for
approximately 15%, 28% and 28% of the Company's total license revenues in fiscal
2001, 2000 and 1999, respectively. Specific products include:
DOCUMANAGE WORKSTATION - A Microsoft Windows-based viewer that retrieves indexed
documents from the Documanage server and other repositories for viewing,
annotating and routing with viewer support of over 200 image and print stream
formats.
DOCUMANAGE SERVER - Documanage server automatically indexes and stores various
print data streams and imaging system formats and performs document management
and workflow, including check-in/check-out, automated version control,
multi-tier security and annotations. The Documanage Server product runs under
Microsoft NT, AIX and mainframe MVS, and accepts hundreds of image formats, as
well as IBM AFP, Xerox Metacode, Docucorp DCD and line printer data streams.
PERSONALIZING AND PRESENTING INFORMATION
DOCUMAKER is the fastest high-volume production publisher for
personalizing and presenting information. Documaker performs data merging,
content assembly and business rules creation to automate enterprise-wide
production of applications such as insurance policies and bill statement
presentment. It provides device-independent technologies that enable
individualized printing, archiving and delivery via networks and the Web.
License revenues from the Company's software products that personalize and
present information accounted for approximately 55%, 50% and 62% of the
Company's total license revenues in fiscal 2001, 2000 and 1999, respectively.
Specific products include:
DOCUMAKER WORKSTATION - A Microsoft Windows-based application that enables
device-independent document production, including automated and dynamic forms
fill, data editing, and WYSIWYG viewing of documents.
6
DOCUMAKER FP - A server based product that personalizes and presents information
repeatedly using the same forms in various combinations, such as insurance
policies.
DOCUMAKER - A server based product for customized, business rule-intensive
publishing applications that require unique documents, such as customer
correspondence, flexible bills and statements. Documaker runs under Microsoft
NT, UNIX, and mainframe MVS.
DOCUFLEX - An easy-to-use, powerful publishing engine ideal for dynamically
composing highly personalized booklets, catalogs, contracts and statements.
Docuflex runs under Microsoft NT and will be generally available by the end of
calendar 2001.
PPS - A Microsoft Windows-based based insurance policy software product targeted
for insurance agents.
INTERNET AND INTERNET-ENABLING
With our new family of e-Solutions software, Docucorp can help
companies speed business applications to the Internet, web-enabling anything
from forms fill and publishing to managing and viewing documents. Solutions are
platform-independent and fully scalable. License revenues from the Company's
Internet software products accounted for approximately 14% and 7% of the
Company's total license revenues in fiscal 2001 and 2000, respectively. Key
products include:
DOCUPRESENTMENT - A software product that bridges the gap between Internet
browsers and legacy systems by enabling the viewing of documents in a variety of
Internet formats, including PDF, HTML and XML.
ELECTRONIC BILL PRESENTMENT & PAYMENT - A software product that allows companies
to deliver and present bills to their customers, and collect payments over the
Internet.
IENTRY - A software product that allows users to select and complete forms
online, creating personalized documents.
IPPS - A software product that enables insurance companies and their agents to
assemble policies and view information via the Internet.
PROFESSIONAL SERVICES
The Company offers a broad range of professional services related to
acquiring, managing, personalizing and presenting information. At July 31, 2001,
the Company employed approximately 150 professional service personnel, which
represents one of the largest services organizations in the industry. The
Company's professional services personnel have experience across many vertical
industries and types of information solutions.
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 revenues from
consulting, training, on-site support and electronic document library
development. The Company's professional services group works with clients to
develop and define enterprise information strategies to meet specific, unique
business needs. Training
7
classes are available to assist clients with implementing and using
applications. Training offerings are available in standardized and customized
formats. A majority of the Company's consulting services are related to Docucorp
solutions that personalize and present information. Consulting services
accounted for approximately 33%, 37% and 40% of the Company's total revenues in
fiscal 2001, 2000 and 1999, respectively.
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 these activities. The Company operates ASP hosting
centers in Atlanta and Dallas. Using data received electronically from
customers, the ASP centers employ high-volume printers and mail handling
equipment to produce insurance policies, utility statements and other customer
mailings, bundle the output for bulk mailings, and host Internet bill
presentation and payment. ASP hosting accounted for approximately 23%, 19% and
13% of the Company's total revenues in fiscal 2001, 2000 and 1999, respectively.
PRODUCT DEVELOPMENT
The Company has made and expects to continue to make substantial
investments in research and product development. During the fiscal year, the
Company continued to expand its 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 information
via the Internet. During fiscal 2002, the Company's product development efforts
will include development of new Internet 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, 2001, the Company employed approximately 105 technical personnel
engaged in research, product development and maintenance activities. 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 2001, 2000 and 1999, the Company's
software development expenditures were approximately $9.1 million, $8.1 million
and $7.5 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, 2001,
the Company employed approximately 40 direct sales and sales support
representatives who operate primarily 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.
8
The Company intends to increase its distribution channels through
marketing, sales and distribution, and development relationships with other
companies. Formal and informal marketing and development partnerships currently
exist with Xerox, Microsoft, Hewlett Packard, ACORD, CSC, FileNET Corporation,
SCT Utility Systems, ORCOM Solutions, CheckFree, BillMatrix, and E-PROFILE.
These relationships provide sales leads for the Company's solutions or provide
access to certain technological information and resources.
The Company's software products are generally licensed on a perpetual
basis for an upfront fee. Initial license fees typically range from $100,000 to
$400,000. Most customers also enter into maintenance agreements with the
Company, which typically provide for annual maintenance fees ranging from 18% 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.
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 information. Currently, the majority of the Company's revenues
are generated from the insurance industry. Approximately 67% of the Company's
total revenues for the year ended July 31, 2001 were derived from the insurance
industry. Approximately 5% of total revenues for the year ended July 31, 2001
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 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 customer base for insurance
policy production in the insurance industry. Approximately 22% of the Company's
total revenues for the year ended July 31, 2001 were derived from the utilities
industry and 9% were derived from the financial services industry. The Company
also has an installed base of customers in the higher education,
telecommunications, transportation, and government markets.
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)
Aon Service Corporation
MetLife Investors Group
UTILITIES
Southern Company Services, Inc.
Toronto Hydro-Electric System Limited
FINANCIAL SERVICES
Royal Bank Financial Group
ABN-AMRO Bank N.V.
HIGHER EDUCATION
9
The University of Texas
San Francisco State University
TRANSPORTATION
Yellow Services, Inc.
Wisconsin Department of Transportation
COMPETITION
The market for acquiring, managing, personalizing and presenting
information 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,
Group 1 Software, Inc., ISIS Information Systems, InSystems Technologies, Inc.,
and Mobius Management Systems, Inc., and (iii) direct competition from numerous
outsourcing and ASP vendors, including Xerox XBS, KPT, Inc., and Output
Technology Solutions. The Company believes that the principal competitive
factors in the information solutions 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 solution being offered and by vertical
market.
The Company may also face competition from new entrants into the
industry. As the market for information solutions 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.
10
As the number of software products in the industry increases and the
functionality of these products further overlaps, the Company believes that
software programs will increasingly become subject to infringement claims. Third
parties may assert infringement claims against the Company in the future with
respect to current or future products, which could require the Company to enter
into royalty arrangements or result in costly litigation.
The Company also relies on certain software that it licenses from
third-parties, including software that is integrated with internally developed
software and used in its products to perform key functions. These third-party
software licenses may not continue to be available to the Company on
commercially reasonable terms and the related software may not continue to be
appropriately supported, maintained or enhanced by the licensors. The loss of
licenses to use, or the inability of licensors to support, maintain, and
enhance, any of such software could result in increased costs, delays or
reductions in product shipments until equivalent software could be developed or
licensed and integrated.
EMPLOYEES
As of July 31, 2001, the Company had approximately 400 employees, of
which approximately 150 were engaged in professional services, 105 in product
development and customer support, 60 in ASP hosting, 40 in sales and marketing,
and 45 in finance, administration, human resources, and internal computer
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
EVENTS OF SEPTEMBER 11, 2001
The September 11, 2001 terrorist attacks on the World Trade Center and
the Pentagon have had a negative effect on the United States economy. In
addition, these attacks have and will result in significant claim payments by
the largest vertical industry that the Company serves, the insurance industry.
Our business is subject to general economic conditions, fluctuations in
11
corporate spending, and the condition of the insurance industry. It is not
possible at this time to determine the short-term or long-term effect of the
attacks, and there can be no assurance that the attacks, or any retaliatory
action, and any response to such action will not continue to adversely affect
the economy and corporate spending in the United States and Europe. Any adverse
effect on the insurance industry or corporate spending could have a material
adverse effect on the Company's results of operations.
12
SIGNIFICANT REVENUES FROM TWO INDUSTRIES
Approximately 67% and 61% of the Company's total revenues for the year
ended July 31, 2001 and 2000, respectively, were derived from the insurance
industry. Approximately 5% and 6% of total revenues in fiscal 2001 and 2000,
respectively, were derived from one customer, Prudential Insurance Company of
America. Additionally, approximately 22% and 25% of the Company's total revenues
for the year ended July 31, 2001 and 2000, 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 information solutions industry has experienced and will continue
to experience rapid technological advances, changes in customer requirements,
and frequent new product introductions and enhancements. Development in both
software technology and hardware capability will require the Company to make
substantial product development investments. Any failure by the Company to
anticipate or respond adequately to technological developments and customer
requirements, or any significant delays in product development or introduction,
could have a material adverse effect on the Company's results of operations.
There can be no assurance that the Company's new products or product
enhancements intended to respond to technological change or evolving customer
requirements will achieve acceptance.
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 information solutions 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. 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, overall budget and spending
priorities, and the economy. 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
13
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. 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.
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.
14
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 24,500 square feet under
a lease which expires on March 31, 2008.
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 is principally leased for product development activities and
occupies approximately 10,000 square feet under a lease which expires December
31, 2003.
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 and is staffed primarily by professional services personnel.
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 2001.
15
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 8, 2001 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 2001:
Fourth quarter $ 4.00 $ 3.02
Third quarter 3.88 1.91
Second quarter 4.63 1.72
First quarter 5.00 3.25
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
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.
16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the years ended
July 31, 2001, 2000, 1999, 1998, and 1997 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,
-------------------------------------------------------------------
2001* 2000 1999 1998 1997**
------------ ------------- ------------ ------------- -------------
STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Total revenues $63,203 $50,977 $51,926 $ 45,247 $ 17,503
Operating income (loss) $ 6,797 $ 2,802 $ 7,231 $ 5,601 $(17,460)
Income (loss) before income taxes and
cumulative effect of accounting change $ 7,057 $ 3,414 $ 7,853 $ 5,424 $(17,246)
Income before cumulative effect of
accounting change $ 3,472 $ 1,529 $ 4,513 $ 3,184 $(16,102)
Net income (loss) $ 2,482 $ 1,529 $ 4,513 $ 3,184 $(16,102)
Cash dividend declared for preferred stock $ -0- $ -0- $ -0- $ -0- $ 2,808
Income (loss) before cumulative effect of
accounting change per share:
Basic $ 0.24 $ 0.10 $ 0.28 $ 0.25 $ (2.18)
Diluted $ 0.23 $ 0.09 $ 0.26 $ 0.21 $ (2.18)
Net income (loss) per share:
Basic $ 0.17 $ 0.10 $ 0.28 $ 0.25 $ (2.18)
Diluted $ 0.17 $ 0.09 $ 0.26 $ 0.21 $ (2.18)
Weighted average number of shares outstanding:
Basic 14,293 15,317 16,001 12,587 7,377
Diluted 15,028 16,872 17,570 14,865 7,377
* Docucorp implemented Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB101") in the fourth quarter of
fiscal 2001. The one-time cumulative effect of applying SAB101 for all
years prior to fiscal 2001 resulted in a reduction of net income of
$990,000 for the year ended July 31,2001, or $0.06 per diluted share.
Income and diluted income per share before cumulative effect of accounting
change was approximately $3.5 million and $0.23, respectively.
** After Merger-related charges of $21,378. Without such charges operating
income, 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.
17
July 31,
-------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------------------- ------------ ------------ ------------
BALANCE SHEET DATA: (IN THOUSANDS)
Working capital $ 11,291 $ 13,029 $ 15,513 $ 15,988 $ 1,644
Total assets $ 51,784 $ 49,010 $ 52,918 $ 51,921 $ 32,698
Total debt, including obligations
under capital lease $ -0- $ -0- $ 25 $ 87 $ 9,439
Redeemable Class B common stock $ -0- $ -0- $ -0- $ -0- $ 19,119
Stockholders' equity (deficit) $ 31,067 $ 33,705 $ 36,994 $ 38,433 $ (7,520)
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
2001 Annual Report to Stockholders, which information is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company has no derivative financial instruments in its cash and
cash equivalent balances. The Company invests its cash and cash equivalents in
investment-grade, highly liquid investments, consisting of money market
instruments and commercial paper.
The Company is exposed to market risk arising from changes in foreign
currency exchange rates as a result of selling its products and services outside
the U.S. (principally Europe). A portion of the Company's sales generated from
its non-U.S. operations are denominated in currencies other than the U.S.
dollar, principally British pounds. Consequently, the translated U.S. dollar
value of Docucorp's non-U.S. sales and operating results are subject to currency
exchange rate fluctuations which may favorably or unfavorably impact reported
earnings and may affect comparability of period-to-period operating results.
For the year ended July 31, 2001 and 2000, approximately 1% and 3%,
respectively, of the Company's revenues were denominated in British pounds. For
the year ended July 31, 2001 and 2000, approximately 4% and 3%, respectively, of
the Company's operating expenses were denominated in British pounds.
Historically, the effect of fluctuations in currency exchange rates has not had
a material impact on the Company's operations; however, there can be no
guarantees that it will not have a material impact in the future. The Company's
exposure to fluctuations in currency exchange rates will increase as it expands
its operations outside the U.S.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in the Company's
2001 Annual Report to Stockholders, which information is incorporated herein by
reference.
18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
19
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 is set forth in
the 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 is set forth in the 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 is 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 is set forth in the 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 is
set forth in the Proxy Statement, which information is incorporated herein by
reference.
20
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.
1. Financial Statements:
Report of Independent Accountants
As of July 31, 2001 and 2000:
o Consolidated Balance Sheets
For the Years Ended July 31, 2001, 2000, and 1999:
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 Schedule II - Valuation and Qualifying Accounts
3. Exhibits:
See Exhibit Index beginning on page 26 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, 2001.
21
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)
/s/ Michael D. Andereck Date 10/23/01
---------------------------------------- ---------------------------
Michael D. Andereck
President, Chief Executive Officer and
Director
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.
22
SIGNATURES (CONT.)
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.
/s/ Michael d. Andereck Date 10/23/01
------------------------------------------- --------------------------
Michael D. Andereck
President, Chief Executive Officer and
Director
(Principal Executive Officer)
/s/ John H. Gray Date 10/23/01
------------------------------------------- --------------------------
John H. Gray
Senior Vice President, Finance and
Administration
(Principal Financial Officer and Principal
Accounting Officer)
/s/ Milledge A. Hart, III Date 10/23/01
------------------------------------------ --------------------------
Milledge A. Hart, III
Chairman of the Board
/s/ Anshoo S. Gupta Date 10/23/01
------------------------------------------ --------------------------
Anshoo S. Gupta
Director
/s/ John D. Loewenberg Date 10/23/01
------------------------------------------ --------------------------
John D. Loewenberg
Director
/s/ George F. Raymond Date 10/23/01
------------------------------------------ --------------------------
George F. Raymond
Director
/s/ Arthur R. Spector Date 10/23/01
------------------------------------------ --------------------------
Arthur R. Spector
Director
23
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 5, 2001 appearing 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 5, 2001
24
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JULY 31, 2001, 2000, AND 1999
SCHEDULE II
Balance at Charged to
Beginning Costs and Deductions Balance at End
Description of Period Expenses (a)(b) of Period
----------------------------------------------------------------------------------------------------
2001
Allowance for doubtful accounts $ 600,000 $ 803,978 $ (803,978) $ 600,000
Amortization of intangibles $ 3,832,003 $ 1,107,638 $ -0- $ 4,939,641
Valuation allowance against deferred
tax assets $ 1,163,525 $ 561,475 $ -0- $ 1,725,000
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 $ 363,525 $(1,467,387) $ 1,163,525
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
(a) 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.
(b) 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.
25
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)
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.
26
EXHIBIT 13.1
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain information contained herein may include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements, other than statements of historical facts included herein, are
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which include, but are not limited to, technological advances,
dependence upon the insurance and utilities industries, attraction and retention
of technical employees, fluctuations in operating results, and the other risk
factors and cautionary statements listed from time to time in the Company's
periodic reports filed with the Securities and Exchange Commission. Should one
or more of these risks or uncertainties, among others as set forth herein,
materialize, actual results may vary materially from those estimated,
anticipated or projected. Although the Company believes that the expectations
reflected by such forward-looking statements are reasonable based on information
currently available to the Company, no assurance can be given that such
expectations will prove to have been correct. Cautionary statements identifying
important factors that could cause actual results to differ materially from the
Company's expectations are set forth herein. All forward-looking statements
included herein and all subsequent oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements.
OVERVIEW
Docucorp International, Inc. ("Docucorp" or the "Company") develops,
markets and supports a portfolio of enterprise-wide software products that
enable users to acquire, manage, personalize and present information. The
Company provides professional services related to its information software
products including consulting, implementation, integration and training. In
addition, the Company provides application service provider ("ASP") hosting
using its software and facilities to provide processing, print, mail, archival
and Internet delivery of documents for customers who outsource these activities.
The Company's 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
more than 1,200 customers. More than half of the 200 largest North American
insurance companies use the Company's software products and services, including
the 10 largest life and health insurance companies and nine of the 10 largest
property and casualty insurance companies. Many of the largest North American
utilities companies, major international financial services institutions, and
clients in higher education and the telecommunications industries use the
Company's products and services.
The Company derives its revenues from ASP hosting fees, professional
services fees, license fees and recurring maintenance fees related to its
software products. ASP hosting revenues consist of fees earned from customers
who outsource customer statements and insurance policy production applications.
Professional services revenues include fees for consulting, implementation and
education services. License revenues are generally derived from
27
perpetual licenses of software products. Maintenance and other recurring
revenues consist primarily of recurring license fees and annual maintenance
contracts.
RESULTS OF OPERATIONS
HISTORICAL OPERATING RESULTS OF THE COMPANY
The following table sets forth for the periods indicated selected
consolidated statements of operations data. The information presented below,
expressed in dollars and as a percentage of total revenues for the periods
indicated, has been derived from the consolidated financial statements of the
Company.
Years ended July 31,
-----------------------------------------------
(dollars in thousands) 2001 2000 1999
------------- ------------- --------------
REVENUES
ASP hosting $14,550 $10,045 $6,687
Professional services 20,857 18,613 20,653
License 11,285 7,357 11,403
Maintenance and other recurring 16,511 14,962 13,183
------------- ------------- --------------
Total revenues $ 63,203 $ 50,977 $51,926
============= ============= ==============
PERCENTAGE RELATIONSHIP TO TOTAL REVENUES
REVENUES
ASP hosting 23 % 19 % 13 %
Professional services 33 37 40
License 18 15 22
Maintenance and other recurring 26 29 25
------------- ------------- --------------
Total revenues 100 100 100
------------- ------------- --------------
EXPENSES
ASP hosting 21 16 10
Professional services 25 31 31
Product development and support 17 20 18
Selling and marketing 15 16 16
General and administrative 11 11 11
------------- ------------- --------------
Total expenses 89 94 86
------------- ------------- --------------
Operating income 11 6 14
Other income, net 1 1 1
------------- ------------- --------------
Income before income taxes and
cumulative effect of accounting
change 12 7 15
Provision for income taxes 6 4 6
------------- ------------- --------------
Income before cumulative effect of
accounting change 6 3 9
Cumulative effect of accounting
change, net of tax (2) 0 0
------------- ------------- --------------
Net income 4 % 3 % 9 %
============= ============= ==============
28
FISCAL YEAR ENDED JULY 31, 2001 COMPARED TO FISCAL YEAR ENDED JULY 31, 2000
REVENUES
Total revenues increased 24% for the year ended July 31, 2001 as compared
to the prior year due to increases in all revenue streams. ASP hosting revenues
increased 45% due to the Company's focus on expanding this business and adding
several new significant customers. Professional services revenues increased 12%
and license revenues increased 53%. Both of these increases are a result of
changes in the Company's sales and marketing departments as well as customers no
longer focusing on Y2K concerns as they were in fiscal 2000. The increase in
professional services revenues would have been 13% excluding the net impact of
deferring professional services implementation revenues due to the
implementation of Staff Accounting Bulletin No. 101 ("SAB 101"). Maintenance
revenues increased 10% due to an expanding customer base.
Backlog for the Company's products and services of approximately $48.3
million as of July 31, 2001, of which approximately $22.7 million is scheduled
to be satisfied within one year, is primarily composed of recurring software
license and maintenance revenues for ongoing maintenance and support, software
implementation and consulting services, and ASP hosting services. Software
agreements for recurring license fees generally have non-cancelable terms of up
to five years. Maintenance contracts may generally be terminated upon 30 to 60
days notice; however, the Company has not historically experienced material
cancellations of such contracts. Software implementation and consulting services
backlog is principally performed under time and material agreements, of which
some have cancellation provisions. ASP hosting agreements generally provide that
fees are charged on a per transaction basis. The estimated future revenues with
respect to software implementation and ASP hosting services are based on
management's estimate of revenues over the remaining life of the respective
contracts.
Docucorp maintains a non-exclusive marketing agreement with MYND,
formerly Policy Management Systems Corporation, which allows MYND to market the
Company's software products to insurance and financial services companies
worldwide. For the years ended July 31, 2001, 2000 and 1999, the Company
generated revenues of approximately $2.3 million, $2.8 million and $3.7 million,
respectively, through the MYND relationship.
ASP HOSTING EXPENSE
ASP hosting expense is composed primarily of personnel costs,
facility-related costs, postage and supplies expense related to the Company's
two ASP hosting centers. ASP hosting expense increased 59% for the year ended
July 31, 2001 due primarily to personnel, facility and computer costs associated
with opening a second ASP hosting facility in Dallas, Texas in March 2000. ASP
hosting expense also increased as a result of approximately $2.0 million of
additional postage and supplies expense related to increased ASP hosting
revenues. For the fiscal years ended July 31, 2001 and 2000, ASP hosting expense
represented 92% and 84% of ASP hosting revenues, respectively. The increase in
cost as a percentage of revenues is mainly due to additional costs incurred with
expanding the Company's ASP hosting capacity by opening the second facility. ASP
hosting expense is expected to increase based on customer and market
requirements.
PROFESSIONAL SERVICES EXPENSE
Professional services expense is composed primarily of personnel expenses
related to implementation, education and consulting services. Professional
services expense increased 2% for the year ended July 31, 2001 due to increased
personnel costs associated with the expanded professional services department,
offset by the decrease to professional services expense related
29
to the net impact of deferring certain personnel costs due to the implementation
of SAB 101 for fiscal 2001. Excluding the impact of SAB 101, professional
services expense increased 5% for the year ended July 31, 2001. For the fiscal
years ended July 31, 2001 and 2000, professional services expense represented
77% and 84% of professional services revenues, respectively. The decrease in
cost as a percentage of professional services revenues is mainly due to higher
utilization of implementation and consulting personnel. The Company expects
professional services expense to increase in order to meet additional resource
requirements as professional services activities increase both in North America
and Europe.
PRODUCT DEVELOPMENT AND SUPPORT EXPENSE
Product development and support expense consists primarily of research
and development efforts, amortization of capitalized software development costs,
customer support and other product support costs. For the fiscal year ended July
31, 2001, product development and support expense increased 6%. The majority of
the increase is related to additional personnel expenses for continued
development and support efforts, partially offset by increased software
capitalization related to the development of the Company's products. The Company
anticipates continued increases in development efforts, including Internet
applications, integration of its existing product offerings, further development
of systems for use in industries such as utilities and financial services,
development of new software products, and continued support of its existing
product lines. Expenditures in this area are expected to increase in relation to
the anticipated growth in revenues.
SELLING AND MARKETING EXPENSE
In fiscal 2001, selling and marketing expense increased 15%. This
increase is primarily due to increased incentive compensation as a result of the
increase in all revenue streams.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense increased 18% for the year ended July
31, 2001. This increase is primarily due to increased personnel costs as the
result of hiring new personnel to meet administrative needs as well as an
increase in the Company's provision for doubtful accounts. These increases were
partially offset by a decrease in goodwill amortization, resulting from the
release of the valuation allowance against deferred taxes at July 31, 2000.
OTHER INCOME, NET
Other income, net decreased 58% for the year ended July 31, 2001 due to a
decrease in interest income and foreign exchange rate losses associated with the
Company's European subsidiary.
PROVISION FOR INCOME TAXES
The effective tax rate for the years ended July 31, 2001 and 2000 was
approximately 51% and 55%, respectively. These rates differ from the federal
statutory rate due primarily to non-deductible goodwill amortization related to
the Merger and acquisitions of EZPower Systems, Inc. and Maitland Software, Inc.
Also, the Company's European subsidiary generated losses in both fiscal 2001 and
2000 which were not deductible against the Company's U.S. tax liability. The
Company used a portion of its net operating loss carryforwards to offset its
current tax liability for the years ended July 31, 2001 and 2000.
30
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Income before cumulative effect of accounting change increased 127% for
fiscal 2001. The increase is primarily due to revenue growth, along with
controlled expenses including increased efficiency in the ASP hosting facilities
and increased utilization of professional services personnel.
FISCAL YEAR ENDED JULY 31, 2000 COMPARED TO FISCAL YEAR ENDED JULY 31, 1999
REVENUES
Total revenues decreased 2% for the year ended July 31, 2000 as compared
to the prior year due primarily to decreased professional services and license
revenues, offset by increased ASP hosting and maintenance revenues. As a result
of Y2K concerns, many customers and prospects delayed licensing and
implementation of software until the passage of January 1, 2000. This led to a
35% decrease in license revenues and a 10% decrease in professional services
revenues. ASP hosting revenues increased 50% due to the Company's focus on
expanding this business and adding several new significant customers during
fiscal 2000. Maintenance revenues increased 13% due to an expanding customer
base.
ASP HOSTING EXPENSE
ASP hosting expense is composed primarily of personnel costs,
facility-related costs, postage and supplies expense related to the Company's
two ASP hosting centers. ASP hosting expense increased 69% for the year ended
July 31, 2000 due primarily to personnel, facility and computer costs associated
with opening a second ASP hosting facility in Dallas, Texas in March 2000. ASP
hosting expense also increased as a result of approximately $1.8 million of
additional postage and supplies expense related to increased ASP hosting
revenues. For the fiscal years ended July 31, 2000 and 1999, ASP hosting expense
represented 84% and 74% of ASP hosting revenues, respectively. The increase in
cost as a percentage of revenues is mainly due to additional costs incurred with
expanding the Company's ASP hosting capacity.
PROFESSIONAL SERVICES EXPENSE
Professional services expense is composed primarily of personnel expenses
related to implementation, education and consulting services. Professional
services expense decreased 2% for the year ended July 31, 2000 due to decreased
recruiting and travel costs, offset by increased personnel costs associated with
the expanded professional services department. For the fiscal years ended July
31, 2000 and 1999, professional services expense represented 84% and 77% of
professional services revenues, respectively. The increase in cost as a
percentage of professional services revenues is mainly due to lower utilization
of consulting personnel as a result of the overall uncertainty and spending
hesitancy associated with Y2K.
PRODUCT DEVELOPMENT AND SUPPORT EXPENSE
Product development and support expense consists primarily of research
and development efforts, amortization of capitalized software development costs,
customer support and other product support costs. For the fiscal year ended July
31, 2000, product development and support expense increased 8%. The majority of
the increase is related to additional personnel expenses for continued
development and support of the Company's products.
SELLING AND MARKETING EXPENSE
In fiscal 2000, selling and marketing expense decreased 4% primarily due
to decreased third-party selling costs associated with the MYND marketing
agreement. Incentive
31
compensation also decreased as a result of decreased license revenues; however,
personnel costs increased as a result of European and vertical market expansion.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense remained substantially unchanged for
the year ended July 31, 2000. Legal and accounting fees and bad debt expense
decreased, which was offset by increased personnel costs.
OTHER INCOME, NET
Other income, net decreased approximately $10,000 for the year ended July
31, 2000 due primarily to a decrease in interest income. This decrease was
partially offset by a decrease in the loss on foreign exchange rate for the year
ended July 31, 2000.
PROVISION FOR INCOME TAXES
The effective tax rate for the years ended July 31, 2000 and 1999, was
approximately 55% and 43%, respectively. These rates differ from the federal
statutory rate due primarily to non-deductible goodwill amortization related to
the Merger and acquisitions of EZPower and Maitland, and the impact of a loss
generated by the Company's European subsidiary that commenced operations in
fiscal 2000. The Company used a portion of its net operating loss carryforwards
and outstanding tax credits to offset its current tax liability for the years
ended July 31, 2000 and 1999.
NET INCOME
Net income decreased 66% for fiscal 2000. The decrease in net income is
primarily due to the impact of Y2K on software license and professional services
revenues and the increase in operating expenses associated with European, ASP
hosting and vertical market expansion.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2001, the Company's principal sources of liquidity consisted
of cash and cash equivalents of approximately $6.2 million and short-term
investments of approximately $4.0 million. Cash and cash equivalents for the
year ended July 31, 2001 increased approximately $1.5 million due mainly to cash
generated from operations of approximately $8.5 million offset primarily by the
purchase of treasury stock under the Company's stock repurchase program. Cash
flows used in investing activities of approximately $1.8 million were related to
the development of capitalized software and purchase of fixed assets, offset by
the sale of short-term investments. Specifically, the Company invested
approximately $3.0 million in fixed assets primarily related to expanding the
Atlanta facilities and purchase of ASP hosting equipment. Cash flows used in
financing activities of approximately $5.3 million primarily relates to the
purchase of treasury stock under the Company's stock repurchase program offset
by proceeds from the employee stock purchase plan. As of July 31, 2001, the
Company had approximately 2,825,000 shares of treasury stock outstanding at an
average per share cost of $4.37. Since inception of the Company's stock
repurchase program in fiscal 1999, the Company has repurchased approximately
4,149,000 shares of stock at an average purchase price of $4.53. The Company's
board of directors believes the repurchase program is an appropriate means of
increasing shareholder value. Accordingly, the board of directors authorized the
Company to repurchase up to an aggregate of 5,000,000 shares of stock.
Working capital was approximately $11.3 million at July 31, 2001,
compared with approximately $13.0 million at July 31, 2000.
32
The Company's $3.5 million revolving credit facility bears interest at
the bank's prime rate less 0.25%, or 6.5% as of July 31, 2001, and has been
renewed and extended to November 2001. Under the credit facility, the Company is
required to maintain certain financial covenants. As of July 31, 2001 there were
no borrowings under this credit facility. The Company is in negotiations and
expects to renew or replace its existing credit facility by its maturity of
November 30, 2001.
The Company's liquidity needs are expected to arise primarily from
funding the continued development, enhancement and support of its software
offerings, selling and marketing costs associated principally with expansion in
new vertical and international markets, and purchase of treasury stock under the
Company's stock repurchase program. Although the Company has no current
commitments or agreements with respect to any acquisition of other businesses or
technologies, a portion of the Company's cash could be used to acquire
complementary businesses or obtain the right to use complementary technologies.
The Company currently anticipates that existing cash, short-term
investments, its existing credit facility, and cash generated from operations
will be sufficient to satisfy its operating cash needs for the foreseeable
future.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of DOCUCORP INTERNATIONAL, INC.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive income, of
changes in stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Docucorp International, Inc. and
its subsidiaries at July 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
2001 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for its professional services
implementation revenues in connection with its adoption of Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements" effective August 1,
2000.
PricewaterhouseCoopers LLP
Dallas, Texas
September 5, 2001
34
DOCUCORP INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
JULY 31, 2001 AND 2000
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
2001 2000
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 6,215 $ 4,739
Short-term investments 3,989 7,754
Accounts receivable, net of allowance
of $600 16,949 12,018
Current portion of deferred taxes 645 653
Income tax refund receivable 0 609
Other current assets 2,758 1,837
----------- ----------
Total current assets 30,556 27,610
Fixed assets, net of accumulated depreciation
of $8,545 and $6,309, respectively 6,786 6,039
Software, net of accumulated amortization
of $13,635 and $11,277, respectively 7,406 7,259
Deferred taxes 559 758
Goodwill, net of accumulated amortization
of $4,940 and $3,832, respectively 5,846 6,954
Other assets 631 390
----------- ----------
$ 51,784 $ 49,010
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 2,239 $ 1,763
Accrued liabilities:
Accrued compensation 3,678 2,632
Other 1,213 994
Income taxes payable 912 308
Deferred revenue 11,223 8,884
----------- ----------
Total current liabilities 19,265 14,581
Other long-term liabilities 1,452 724
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none issued 0 0
Common stock, $.01 par value, 50,000,000 shares
authorized; 16,593,849 shares issued 166 166
Additional paid-in capital 43,899 44,725
Treasury stock at cost, 2,825,299 and 1,508,777
shares, respectively (12,333) (7,923)
Accumulated deficit (705) (3,187)
Foreign currency translation adjustment 40 (76)
----------- ----------
Total stockholders' equity 31,067 33,705
----------- ----------
$ 51,784 $ 49,010
=========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
35
DOCUCORP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
FOR THE YEARS ENDED JULY 31, 2001, 2000, AND 1999
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
------------------------------------------------------------------------------------------------------------------
2001 2000 1999
------------ ----------- -----------
REVENUES
ASP hosting $ 14,550 $ 10,045 $ 6,687
Professional services 20,857 18,613 20,653
License 11,285 7,357 11,403
Maintenance and other recurring 16,511 14,962 13,183
------------ ----------- -----------
Total revenues 63,203 50,977 51,926
------------ ----------- -----------
EXPENSES
ASP hosting 13,350 8,391 4,955
Professional services 16,056 15,674 16,003
Product development and support 10,828 10,224 9,492
Selling and marketing 9,344 8,096 8,437
General and administrative 6,828 5,790 5,808
------------ ----------- -----------
Total expenses 56,406 48,175 44,695
------------ ----------- -----------
Operating income 6,797 2,802 7,231
Other income, net 260 612 622
------------ ----------- -----------
Income before income taxes and cumulative
effect of accounting change 7,057 3,414 7,853
Provision for income taxes 3,585 1,885 3,340
------------ ----------- -----------
Income before cumulative effect of
accounting change 3,472 1,529 4,513
Cumulative effect of accounting change, net of tax (990) 0 0
------------ ----------- -----------
Net income $ 2,482 $ 1,529 $ 4,513
============ =========== ===========
Other comprehensive income:
Foreign currency translation adjustment, net of tax 116 (76) 0
------------ ----------- -----------
Comprehensive income $ 2,598 $ 1,453 $ 4,513
============ =========== ===========
Weighted average basic shares outstanding 14,293 15,317 16,001
============ =========== ===========
Basic net income per share:
Income before cumulative effect of accounting change $ 0.24 $ 0.10 $ 0.28
Cumulative effect of accounting change (0.07) 0 0
------------ ----------- -----------
Basic net income per share $ 0.17 $ 0.10 $ 0.28
============ =========== ===========
Weighted average diluted shares outstanding 15,028 16,872 17,570
============ =========== ===========
Diluted net income per share:
Income before cumulative effect of accounting change $ 0.23 $ 0.09 $ 0.26
Cumulative effect of accounting change (0.06) 0 0
------------ ----------- -----------
Diluted net income per share $ 0.17 $ 0.09 $ 0.26
============ =========== ===========
36
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
DOCUCORP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 2001, 2000, AND 1999
(IN THOUSANDS)
-----------------------------------------------------------------------------------------------------------------------
2001 2000 1999
------------ ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,482 $ 1,529 $4,513
Adjustments to reconcile net income to
net cash provided by operating activities:
Stock option compensation expense 18 18 12
Depreciation 2,254 1,725 1,326
Amortization of capitalized software 2,358 2,232 1,998
Amortization of goodwill 1,108 1,353 1,352
Provision for doubtful accounts 804 327 446
Deferred income taxes 776 913 283
Tax benefit related to stock option exercises 22 501 192
Cumulative effect of accounting change 990 0 0
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (5,768) 2,067 (2,956)
(Increase) decrease in income tax refund receivable 609 120 (23)
(Increase) decrease in other assets (268) 295 (961)
Increase (decrease) in accounts payable 483 81 (81)
Increase (decrease) in accrued liabilities 2,186 (427) 1,803
Increase (decrease) in income taxes payable 604 (56) 140
Increase (decrease) in deferred revenue (110) (189) 613
------------ ------------- ------------
Total adjustments 6,066 8,960 4,144
------------ ------------- ------------
Net cash provided by operating activities 8,548 10,489 8,657
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments (15,999) (17,513) (8,867)
Sale of short-term investments 19,764 16,673 1,953
Purchase of fixed assets (3,014) (4,201) (1,916)
Capitalized software development costs (2,505) (1,763) (1,590)
------------ ------------- ------------
Net cash used in investing activities (1,754) (6,804) (10,420)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations 0 (21) (62)
Purchase of treasury stock (5,440) (6,270) (7,076)
Proceeds from exercise of options and warrants 24 618 569
Proceeds from repayment of note receivable from stockholder 0 62 3
Proceeds from stock issued to employees under Employee
Stock Purchase Plan ("ESPP") 140 247 348
------------ ------------- ------------
Net cash used in financing activities (5,276) (5,364) (6,218)
------------ ------------- ------------
Effect of exchange rates on cash flows (42) (41) 0
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents 1,476 (1,720) (7,981)
Cash and cash equivalents at beginning of year 4,739 6,459 14,440
------------ ------------- ------------
Cash and cash equivalents at end of year $6,215 $4,739 $6,459
============ ============= ============
See non-cash activities disclosed in Notes 6 and 7.
37
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
DOCUCORP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 2001, 2000, AND 1999
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
-----------------------------------------------------------------------------------------------------------------------
Foreign
Additional Currency
Common Paid-in Treasury Accumulated Translation Notes
Stock Capital Stock Deficit Adjustment Receivable Total
----------- ------------ ------------ ------------- ----------- ------------ -----------
Balance at July 31, 1998 $ 165 $ 47,562 $ 0 $ (9,229) $ 0 $ (65) $ 38,433
Exercise of stock options to purchase
338,571 shares of Common Stock 1 (564) 1,132 569
Purchase of 1,522,526 shares of
Treasury
Stock (7,076) (7,076)
Repayment of note receivable from
stockholder 3 3
Issuance of 81,968 shares of Common
Stock to employees under ESPP (57) 405 348
Compensation expense related to
non-qualified stock options 12 12
Tax benefit from stock option 192 192
exercises
Net income 4,513 4,513
----------- ------------ ------------ ------------- ----------- ------------ -----------
Balance at July 31, 1999 166 47,145 (5,539) (4,716) 0 (62) 36,994
Exercise of stock options and
warrants to
Purchase 671,324 shares of Common
Stock (2,859) 3,477 618
Purchase of 1,083,906 shares of
Treasury
Stock (6,270) (6,270)
Repayment of note receivable from
stockholder 62 62
Issuance of 74,080 shares of Common
Stock to employees under ESPP (162) 409 247
Compensation expense related to
non-qualified stock options 18 18
Tax benefit from stock option 501 501
exercises
Cancellation of call feature 82 82
Foreign currency translation (76) (76)
adjustment
Net income 1,529 1,529
----------- ------------ ------------ ------------- ----------- ------------ -----------
Balance at July 31, 2000 166 44,725 (7,923) (3,187) (76) 0 $ 33,705
Exercise of stock options and
warrants to
purchase 144,319 shares of Common
Stock (639) 663 24
Purchase of 1,542,320 shares of
Treasury
Stock (5,440) (5,440)
Issuance of 81,479 shares of Common
Stock to employees under ESPP (227) 367 140
Compensation expense related to
non-qualified stock options 18 18
Tax benefit from stock option 22 22
exercises
Foreign currency translation 116 116
adjustment
Net income 2,482 2,482
----------- ------------ ------------ ------------- ----------- ------------ -----------
Balance at July 31, 2001 $ 166 $ 43,899 $ (12,333) $ (705) $ 40 $ 0 $ 31,067
=========== ============ ============ ============= =========== ============ ===========
38
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Docucorp International, Inc. ("Docucorp" or the "Company"), a Delaware
corporation, was organized on January 13, 1997 in connection with the
acquisition of FormMaker Software, Inc. ("FormMaker") by Image Sciences, Inc.
("Image Sciences") (the "Merger"). The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries, Image Sciences, FormMaker, EZPower Systems, Inc. ("EZPower"),
Maitland Software, Inc. ("Maitland") and Docucorp Europe Ltd. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
The Company's business includes developing, marketing and supporting computer
software designed to automate the process of acquiring, managing, personalizing
and presenting information. The Company also provides application service
provider ("ASP") hosting of Internet-enabled solutions, consulting, application
integration and training. The majority of the Company's business is currently
derived from companies in the insurance industry.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with AICPA Statement of Position
97-2, "Software Revenue Recognition" and Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). Initial license fees
are recognized when a contract exists, the fee is fixed or determinable,
software delivery has occurred and collection of the receivable is deemed
probable. Revenue from software licenses which include a cancellation clause is
recognized upon expiration of the cancellation period. Revenue derived from the
development and installation of software packages under long-term contracts is
recognized on a percentage-of-completion basis measured by the relationship of
hours worked to total estimated contract hours. Revenue related to products
still in the testing phase is deferred until formal acceptance of the product by
the purchaser. Anticipated losses, if any, on uncompleted contracts are
recognized in the period in which such losses are determined.
Revenue from maintenance contracts, and maintenance revenue that is packaged
with license fees, is recognized ratably over the term of the agreements. The
Company records deferred revenue for maintenance amounts invoiced prior to
revenue recognition. Revenue related to professional services, such as training
and consulting, and ASP hosting is generally recognized as the services are
performed. Revenue related to professional services implementation associated
with the Company's ASP hosting operations is deferred during the implementation
phase and subsequently recognized over the term of the ASP hosting agreement.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash equivalents are
stated at cost, which approximates fair market value.
SHORT-TERM INVESTMENTS
The Company has the intent and ability to hold short-term investments to
maturity; consequently, such investments are carried at cost, which approximates
fair market value. At July 31, 2001, the Company held short-term investments
which totaled approximately $4.0 million. Interest income from such investments
was approximately $474,000, $406,000 and $244,000 in 2001, 2000 and 1999,
respectively.
ACCOUNTS RECEIVABLE
Included in accounts receivable at July 31, 2001 and 2000 are unbilled amounts
of approximately $2.8 million and $1.7 million, respectively. Such amounts have
been recognized as revenue under the percentage-of-completion method or upon
execution of the contract and shipment of the software, but prior to contractual
payment terms.
39
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, cash equivalents,
short-term investments, accounts receivable, accounts payable and accrued
liabilities. The current carrying amount of these instruments approximates fair
market value due to the relatively short period of time to maturity for these
instruments.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), requires all derivative
instruments be recorded on the balance sheet at fair value. The Company adopted
SFAS 133 during the first quarter of fiscal 2001. The adoption of this statement
had no impact on the Company's consolidated financial statements for the year
ended July 31, 2001 as the Company does not currently hold derivative
instruments or engage in hedging activities.
FIXED ASSETS, DEPRECIATION AND AMORTIZATION
Property and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed over the estimated
service lives using the straight-line method. Amortization of assets recorded
under capital leases is included in depreciation expense. Estimated service
lives are as follows:
Computer equipment 4-5 years
Furniture and fixtures 5 years
Leasehold improvements life of lease
Leased equipment under capital leases 3-5 years
Repairs and maintenance are expensed as incurred. Major renewals and betterments
are capitalized and depreciated over the assets' remaining estimated service
lives. Upon retirement or sale of an asset, the cost and accumulated
depreciation are removed from the accounts with any resulting gain or loss
included in income.
SOFTWARE
Software development costs are accounted for in accordance with either Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," or with Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." After the technological feasibility of the software
has been established, material software development costs which include salaries
and related payroll costs incurred in the development activities are
capitalized. Research and development costs incurred prior to the establishment
of the technological feasibility of a product are expensed as incurred. The cost
of capitalized software is amortized on a straight-line basis over its estimated
useful life, generally four to six years, or the ratio of current revenues to
current and anticipated revenues from the software, whichever provides the
greater amortization. During 2001, 2000 and 1999, the Company charged to expense
approximately $6.6 million, $6.3 million and $5.9 million, respectively, for
research and development costs incurred prior to the establishment of the
technological feasibility of products. Such expense is included in product
development and support on the Consolidated Statements of Operations and
Comprehensive Income.
GOODWILL
Goodwill is amortized on a straight-line basis over eight to 10 years. The
carrying value of goodwill is evaluated periodically in relation to the
operating performance and anticipated future undiscounted net cash flows of the
related business. In the event that assets are found to be carried at amounts
which are in excess of estimated gross future cash flows, the intangible assets
are adjusted for impairment to a level commensurate with a discounted cash flow
analysis of the underlying assets.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are evaluated in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Assets to be Disposed of" ("SFAS 121"). Under the provisions of this
statement, the Company has evaluated its long-lived assets for financial
impairment, and
40
will continue to do so as events or changes in circumstances indicate that the
carrying value of such assets may not be fully recoverable. If facts or
circumstances support the possibility of impairment, the Company will prepare a
projection of future operating cash flows, undiscounted and without interest. If
based on this projection, the Company does not expect to recover its carrying
cost, an impairment loss equal to the difference between the fair value of the
asset and its carrying value will be recognized in operating income.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of the Company's foreign subsidiary, whose functional
currency is other than the U.S. dollar, are translated at year-end rates of
exchange, and revenues and expenses are translated at average exchange rates
prevailing during the year. Foreign currency transaction gains and losses are
recognized in income as incurred.
The Company accounts for unrealized gains or losses on its foreign currency
translation adjustments in accordance with Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which requires the
adjustments be accumulated in stockholders' equity as part of other
comprehensive income.
INCOME TAXES
Income taxes are presented pursuant to Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 uses an
asset and liability approach to account for income taxes. In the event
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities result in deferred tax assets, an evaluation of
the probability of being able to realize the future benefits indicated by such
assets is required. A valuation allowance is provided for the deferred tax
assets when there is sufficient uncertainty regarding the Company's ability to
recognize the benefits of these assets in future years.
NET INCOME PER SHARE
The Company's basic and diluted net income per share are computed in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). Basic net income per share is computed using the weighted average
number of common shares outstanding. Diluted net income per share is computed
using the weighted average number of common shares outstanding and the assumed
exercise of stock options and warrants (using the treasury stock method).
Following is a reconciliation of the shares used in computing basic and diluted
net income per share for the fiscal years indicated (in thousands):
2001 2000 1999
------------ ------------ ------------
Shares used in computing basic
net income per share 14,293 15,317 16,001
Dilutive effect of stock options and
warrants 735 1,555 1,569
------------ ------------ ------------
Shares used in computing diluted
net income per share 15,028 16,872 17,570
============ ============ ============
Options to purchase 1,412,000, 843,000 and 246,000 shares of Common Stock at
average exercise prices of $4.41, $4.79 and $5.44 per share at July 31, 2001,
2000 and 1999, respectively, were anti-dilutive and not included in the
computation of diluted net income per share, because the options' exercise price
was greater than the average market price of the Common Stock for the period.
Subsequent to year end, the Company issued options to purchase 575,000 shares of
Common Stock at an average exercise price of $3.35 per share that would have had
a dilutive effect on net income per share at July 31, 2001.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and its various interpretations, including Financial
Accounting Standards Board Interpretation No. 44, "Accounting for Certain
Transactions, Including Stock-Based Compensation." Under APB 25, compensation
cost is generally not recognized for
41
fixed stock options in which the exercise price is not less than the market
price on the grant date. Compensation cost recognized by the Company in
accordance with APB 25 has not been significant in any of the past three years.
MANAGEMENT ESTIMATES
The preparation of the Company's financial statements, in accordance with
accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses at the date of the
financial statements. Actual results could differ from those estimates during
the reported periods.
ADVERTISING COSTS
The Company's policy for advertising costs is to expense such costs as incurred.
Advertising expenses for 2001, 2000 and 1999 were approximately $949,000, $1.1
million and $995,000, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"),
which requires the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. The Company does not believe the
prospective adoption of SFAS 141 will have a material impact on its consolidated
financial statements.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). Adoption of SFAS 142 is required for fiscal years beginning after
December 15, 2001, and earlier adoption is permitted for entities with fiscal
years beginning after March 15, 2001, provided that the first interim financial
statements have not been previously issued. SFAS 142 requires that goodwill and
intangible assets which have indefinite useful lives not be amortized but rather
tested at least annually for impairment. SFAS 142 provides specific guidance for
testing goodwill and intangible assets that will not be amortized for
impairment. The Company will adopt SFAS 142 as of the first quarter of its
fiscal year ending July 31, 2002; accordingly, the Company will not amortize
goodwill beginning August 1, 2001. The Company has performed an initial
impairment analysis and determined that there is no impairment on the carrying
value of goodwill. Goodwill amortization expense during the year ended July 31,
2001 was approximately $1.1 million.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). Adoption of SFAS 144 is required
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years, with early adoption encouraged. SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS 121 and related literature and establishes a
single accounting model, based on the framework established in SFAS 121, for
long-lived assets to be disposed of by sale. The Company will adopt SFAS 144 in
the first quarter of fiscal 2002. The Company does not believe that the adoption
of SFAS 144 will have a material impact on its consolidated financial
statements.
NOTE 2 - CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In December 1999, the Securities and Exchange Commission issued SAB 101 that
provides guidance on the measurement and timing of revenue recognition in
financial statements of public companies. Following the guidance provided by SAB
101, the Company changed its method of accounting for professional services
implementation revenues and related expenses associated with its ASP hosting
operations to be recognized in earnings over the expected term of the ASP
hosting agreements, typically three years. A change in revenue recognition as a
result of SAB 101 is treated as a change in accounting principle and governed by
APB Opinion No. 20, "Accounting Changes." The Company implemented SAB 101 in the
fourth quarter of fiscal 2001, retroactive to August 1, 2000. The one-time
cumulative effect of applying SAB 101 for all years prior to fiscal 2001
resulted in a reduction of net income of $990,000 for the year ended July 31,
2001, or
42
$0.06 per diluted share. The cumulative effect of SAB 101 results from deferral
of professional services implementation revenues and related expenses associated
with the Company's ASP hosting operations. During the year ended July 31, 2001,
the Company recognized approximately $1.6 million of revenue which was included
as a component of the cumulative effect of accounting change. Pro forma
unaudited information for the years ended July 31, 2000 and 1999, assuming the
new accounting principle had been applied retroactively, is as follows (in
thousands except per share amounts):
2000 1999
---------- ---------
Net income:
As reported $ 1,529 $ 4,513
Pro forma $ 739 $ 4,365
Basic net income per share:
As reported $ 0.10 $ 0.28
Pro forma $ 0.05 $ 0.27
Diluted net income per share:
As reported $ 0.09 $ 0.26
Pro forma $ 0.04 $ 0.25
Revenues and related direct incremental expenses deferred as the result of
implementing SAB 101 have been included in the Consolidated Balance Sheets under
the captions DEFERRED REVENUE and OTHER CURRENT ASSETS for those amounts which
are expected to be amortized during the next fiscal year. Amounts which are
expected to be amortized after July 31, 2002 have been included in the
Consolidated Balance Sheets under the captions OTHER LONG-TERM LIABILITIES and
OTHER ASSETS.
NOTE 3 - FIXED ASSETS
Fixed asset balances at July 31, 2001 and 2000 are as follows (in thousands):
2001 2000
------------- -------------
Computer equipment $ 11,707 $ 9,487
Furniture and fixtures 2,193 1,875
Leasehold improvements 1,431 986
------------- -------------
15,331 12,348
Less accumulated depreciation (8,545) (6,309)
------------- -------------
$ 6,786 $ 6,039
============= =============
NOTE 4 - LEASE COMMITMENTS
As of July 31, 2001 and 2000, the Company had no capital lease obligations.
Equipment leases and the Company's obligation under leases for office space are
treated as operating leases and the rentals are expensed as incurred. Rent
expense on these operating leases for the years ended July 31, 2001, 2000 and
1999 totaled approximately $4.7 million, $3.9 million and $2.9 million,
respectively. Generally, the Company's leases provide for renewals for various
periods at stipulated rates.
43
Future minimum lease obligations on leases in effect at July 31, 2001 are as
follows (in thousands):
Operating
Leases
-------------
2002 $ 3,004
2003 1,977
2004 1,214
2005 1,023
2006 629
Thereafter 2,880
-------------
Minimum lease payments $ 10,727
=============
Subsequent to July 31, 2001, the Company executed a 10-year facility lease
agreement, commencing January 2003, to relocate its Atlanta office.
44
NOTE 5 - REVOLVING CREDIT FACILITY
The Company's $3.5 million revolving credit facility bears interest at the
bank's prime rate less 0.25%, or 6.5% as of July 31, 2001, and has been renewed
and extended to November 2001. Under the credit facility, the Company is
required to maintain certain financial covenants. As of July 31, 2001 there were
no borrowings under this credit facility. The Company is in negotiations and
expects to renew or replace its existing credit facility by its maturity of
November 30, 2001.
NOTE 6 - STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has authorized 1,000,000 shares of preferred stock which the board
of directors of the Company may issue with such preferences and rights as it may
designate. As of July 31, 2001 and 2000, there were no issued or outstanding
shares of preferred stock.
EMPLOYEE STOCK PURCHASE PLAN
During the year ended July 31, 1998, the Company adopted the Employee Stock
Purchase Plan which allows eligible employees to purchase Company Common Stock
at a 15% discount of market value. An aggregate of 600,000 shares of Common
Stock have been reserved for issuance upon purchases pursuant to the stock
purchase plan. At July 31, 2001 and 2000, the Company has issued approximately
301,000 and 219,000 shares under the plan, respectively.
STOCK OPTIONS
The Company provides equity incentives to employees and directors by means of
incentive stock options and non-qualified stock options which historically have
been provided under various stock option plans. The Company now issues options
from the 1997 Equity Compensation Plan. Stock options generally vest over a
period of three to five years. The Company may grant non-qualified stock options
at an option price per share determined by the board of directors. Under this
plan, the Company has reserved 2,500,000 shares for issuance as of July 31,
2001. Options generally expire 10 years from the date of grant. Activity under
all plans is summarized as follows (in thousands except per share amounts):
Shares Under
Outstanding Options
----------------------------------------
Weighted
Outstanding Average
Options Exercise Price
------------------ -------------------
Balances at July 31, 1998 2,564 $ 1.91
Granted 557 4.60
Exercised (340) 1.67
Expired (69) 3.38
------------------ -------------------
Balances at July 31, 1999 2,712 $ 1.96
Granted 648 4.41
Exercised (582) 1.01
Expired (293) 4.51
------------------ -------------------
Balances at July 31, 2000 2,485 $ 3.06
Granted 788 3.34
Exercised (74) 0.32
Expired (121) 4.30
------------------ -------------------
Balances at July 31, 2001 3,078 $ 3.15
================== ===================
45
The following table summarizes information about employee stock options
outstanding at July 31, 2001 (in thousands except per share amounts):
Options Outstanding Options Exercisable
Weighted
Weighted Average Weighted
Average Weighted Remaining Average Weighted
Range of Exercise Number Average Contractual Number Average
Prices Outstanding Exercise Price Life Exercisable Exercise Price
$0.01 to $0.87 655 $0.43 3.17 655 $0.43
$2.59 to $3.40 979 $3.14 7.19 591 $3.79
$3.52 to $5.91 1,444 $4.39 8.17 632 $4.51
STOCK-BASED COMPENSATION
Pursuant to Statement of Financial Accounts Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), the Company is required to report pro
forma information regarding net income and net income per share for awards
granted or modified in fiscal years 1996 and thereafter as if the Company had
accounted for its stock-based awards to employees under the fair value method of
SFAS 123. The weighted average fair value of options granted during fiscal 2001,
2000 and 1999 was $2.01, $2.38 and $1.84 per option, respectively. The fair
value of the Company's stock-based awards to employees was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2001, 2000 and 1999, respectively: risk-free
interest rates of 5.63%, 6.21% and 4.96%; no expected dividend yields; expected
lives of 4.50, 4.50 and 3.50 years; and volatility of 70.54%, 60% and 46.11%.
The Black-Scholes model was not developed for use in valuing employee stock
options, but was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In
addition, it requires the use of subjective assumptions including expectations
of future dividends and stock price volatility. Such assumptions are only used
for making the required fair value estimate and should not be considered as
indicators of future dividend policy or stock price appreciation. Because
changes in the subjective assumptions can materially affect the fair value
estimate, and because employee stock options have characteristics significantly
different from those of traded options, the use of the Black-Scholes
option-pricing model may not provide a reliable estimate of the fair value of
employee stock options.
For pro forma purposes, the estimated fair value of the Company's stock-based
awards to employees is amortized over the options' vesting period. Such pro
forma impact on net income and net income per share is not necessarily
indicative of future effects on net income or net income per share. The
Company's pro forma information for the years ended July 31 is as follows (in
thousands except per share amounts):
46
2001 2000 1999
--------------- -------------- ---------------
Net income:
As reported $ 2,482 $ 1,529 $ 4,513
Pro forma $ 1,613 $ 942 $ 3,972
Net income per share:
As reported
Basic $ 0.17 $ 0.10 $ 0.28
Diluted $ 0.17 $ 0.09 $ 0.26
Pro forma
Basic $ 0.11 $ 0.06 $ 0.25
Diluted $ 0.11 $ 0.06 $ 0.23
WARRANTS
In connection with the Merger, the Company assumed warrants with a seven-year
term held by stockholders and a director of FormMaker to purchase Common Stock.
Additional warrants with a three-year term were issued by FormMaker to
stockholders immediately prior to the Merger in connection with $3.0 million of
subordinated notes. All of the above warrants, exercisable at the date of
issuance, were converted into warrants to purchase approximately 627,000 shares
of Common Stock based on the Merger exchange ratios.
The following warrants are outstanding as of July 31, 2001 (in thousands except
per share amounts):
Exercise Price
Warrants Per Share
------------ ----------------
Warrants to Safeguard,
Technology Leaders II, L.P. and Technology
Leaders II Offshore C.V. 188 $ 0.03
Warrants to a director of the Company 123 $ 3.40
Warrants to Safeguard, Technology
Leaders II, L.P. and TL Venture Third Corp. 246 $ 4.25
------------
Total 557
============
During fiscal 2001, warrants to purchase an aggregate of 70,620 shares of Common
Stock with an exercise price per share of $0.03 were exchanged in a cashless
exercise for 70,025 shares of Common Stock. During fiscal 2000, warrants to
purchase an aggregate of 732,000 shares of Common Stock with an exercise price
per share of $4.17 were exchanged in a cashless exercise for 89,382 shares of
Common Stock.
47
NOTE 7 - INCOME TAXES
The provision for income taxes charged to operations was as follows (in
thousands):
2001 2000 1999
---------------- ----------------- ---------------
Current tax expense:
U.S. federal $ 2,461 $ 809 $ 2,727
State, local and foreign 348 163 330
---------------- ----------------- ---------------
Total current 2,809 972 3,057
---------------- ----------------- ---------------
Deferred tax expense:
U.S. federal 723 852 265
State, local and foreign 53 61 18
---------------- ----------------- ---------------
Total deferred 776 913 283
---------------- ----------------- ---------------
Total provision $ 3,585 $ 1,885 $ 3,340
================ ================= ===============
The provision for income taxes differs from the amount of income taxes
determined by applying the applicable U.S. statutory federal income tax rate to
pre-tax income as a result of the following differences (in thousands):
2001 2000 1999
------------- ------------- -------------
Statutory U.S. tax rates $ 2,400 $ 1,161 $ 2,670
Increase (decrease) in rates resulting from:
Nondeductible items:
Goodwill 256 336 335
Other 46 33 51
State, local and foreign taxes (net) 264 148 230
Valuation allowance 562 364 0
Other 57 (157) 54
------------- ------------- -------------
Effective tax rates $ 3,585 $ 1,885 $ 3,340
============= ============= =============
48
Deferred tax assets (liabilities) are composed of the following at July 31 (in
thousands):
2001 2000 1999
------------- ------------- -------------
Gross deferred tax assets:
Deferred revenue $ 579 $ 96 $ 84
Loss carryforwards 3,754 3,644 3,833
Tax credit carryforwards 235 235 235
Accounts receivable allowance 386 305 246
Deferred lease costs 154 173 217
Compensation expense related to stock
options 487 533 994
Other 792 728 682
------------- ------------- -------------
6,387 5,714 6,291
------------- ------------- -------------
Gross deferred tax liabilities:
Capitalized software (2,865) (2,832) (2,852)
Other (593) (307) (315)
------------- ------------- -------------
(3,458) (3,139) (3,167)
------------- ------------- -------------
Net 2,929 2,575 3,124
Less valuation allowance (1,725) (1,164) (2,267)
------------- ------------- -------------
Net deferred tax asset $ 1,204 $ 1,411 $ 857
============= ============= =============
At July 31, 2001, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $7.8 million that generally expire in the
years ending 2007 through 2017. The Company also had a foreign net operating
loss carryforward of approximately $3.0 million. A valuation allowance against
the entire foreign net operating loss carryforward has been established as the
realizability of this asset is uncertain.
During fiscal 2000, the Company released the valuation allowance in the amount
of $1,467,000 based on management's assessment of the likelihood of
realizability of the Company's loss carryforwards. In accordance with SFAS 109,
the reduction of the valuation allowance was recorded as a decrease in goodwill
related to the Merger and the acquisition of EZPower. Included in the remaining
valuation allowance is approximately $800,000 at July 31, 2001 and 2000, and
approximately $2.2 million at July 31, 1999 for deferred tax assets for which
subsequently recognized tax benefits, if any, will be allocated to reduce
goodwill.
The Company has approximately $235,000 of general business credit carryforwards.
The Company's tax credit carryforwards generally expire in the years ending 2007
through 2011.
Due to ownership changes, a portion of the Company's net operating loss and tax
credit carryforwards are subject to an annual cumulative limitation with respect
to the amounts which may be utilized in any one year of approximately $1.2
million.
NOTE 8 - RETIREMENT PLAN
The Company maintains a discretionary defined contribution plan [401(k) plan],
as defined by the United States Internal Revenue Code, which allows participants
to contribute a percentage of their compensation. The plan also allows for a
discretionary matching contribution by the Company as determined by the
Company's board of directors. The Company's matching contributions for the years
ended July 31, 2001, 2000 and 1999 were approximately $431,000, $490,000 and
$340,000, respectively.
49
NOTE 9 - MAJOR CUSTOMERS AND RELATED-PARTY TRANSACTIONS
At July 31, 2001 and 2000, Safeguard owned approximately 23% and 20%,
respectively, of the Company's fully diluted outstanding Common Stock.
Technology Leaders II, L.P., Technology Leaders II Offshore C.V. and TL Ventures
Third Corp. owned approximately 8% of the Company's fully diluted outstanding
Common Stock at July 31, 2001 and 2000.
Docucorp maintains a non-exclusive marketing agreement with MYND which allows
MYND to market the Company's software products to insurance and financial
services companies worldwide. For the years ended July 31, 2001, 2000 and 1999,
the Company generated revenues of approximately $2.3 million, $2.8 million and
$3.7 million through the MYND relationship, respectively.
For the years ended July 31, 2001 and 2000, no customer accounted for greater
than 10% of the Company's total revenues. For the year ended July 31, 1999, one
customer accounted for greater than 10% of the Company's total revenues.
NOTE 10 - SUPPLEMENTAL DATA TO STATEMENT OF CASH FLOWS
The Company made estimated and regular income tax payments of approximately $1.7
million, $1.3 million and $2.6 million during the years ended July 31, 2001,
2000 and 1999, respectively.
NOTE 11 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
As discussed in Note 2, the Company implemented SAB 101 in the fourth quarter of
fiscal 2001. Revised amounts are the result of the Company retroactively
implementing SAB 101 to August 1, 2000.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------- -------------------- ------------------ -------------------
(in thousands except per share amounts)
2001:
Total revenues
As reported $ 15,145 $ 14,933 $ 16,012 $ 17,383
Revised 14,800 14,913 16,107
Total expenses
As reported 13,566 13,747 14,270 15,238
Revised 13,373 13,643 14,152
Operating income
As reported 1,579 1,186 1,742 2,145
Revised 1,426 1,270 1,956
Income before cumulative
effect of accounting change
As reported 911 713 825 963
Revised 826 757 926
Net income (loss)
As reported 911 713 825 963
Revised (164) 757 926
Basic net income (loss) per share:
Before cumulative effect of
accounting change
As reported $ 0.06 $ 0.05 $ 0.06 $ 0.07
Revised $ 0.06 $ 0.06 $ 0.08
Net income (loss)
As reported $ 0.06 $ 0.05 $ 0.06 $ 0.07
Revised $ (0.01) $ 0.06 $ 0.08
Diluted net income (loss) per share:
Before cumulative effect of
accounting change
As reported $ 0.06 $ 0.05 $ 0.06 $ 0.07
Revised $ 0.05 $ 0.05 $ 0.07
50
Net income (loss)
As reported $ 0.06 $ 0.05 $ 0.06 $ 0.07
Revised $ (0.01) $ 0.05 $ 0.07
2000:
Total revenues $ 12,983 $ 11,938 $ 13,015 $ 13,041
Total expenses 11,666 11,829 12,154 12,526
Operating income 1,317 109 861 515
Net income 822 122 524 61
Net income per share:
Basic $ 0.05 $ 0.01 $ 0.03 $ 0.01
Diluted $ 0.05 $ 0.01 $ 0.03 $ 0.01
Net income per share calculations for each period are based on the weighted
average number of shares outstanding in each period; therefore, the sum of the
net income per share amounts for the quarters does not necessarily equal the
year-to-date net income per share amounts.
51