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, 2003
-------------
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. [__]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [__] No [ X ]
As of October 10, 2003, there were 9,841,373 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 $64,299,860 based upon the closing price of $7.49 per share on October
10, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended July 31, 2003 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, 2003
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.......................................................16
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.......18
Item 9A. Controls and Procedures....................................................................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 and Related Stockholder
Matter.....................................................................................20
Item 13. Certain Relationships and Related Transactions.............................................20
Item 14. Principal Accounting Fees and Services.....................................................20
PART IV.
Item 15. 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") develops, markets and supports a
portfolio of proprietary information software, application service provider
("ASP") hosting and professional services that enables companies to create,
publish, manage and archive complex, high-volume, individualized information. We
support the entire information lifecycle - from acquisition of the first raw
data point to final delivery of personalized information to the customer.
We were created by the May 15, 1997 acquisition of FormMaker Software, Inc. by
Image Sciences, Inc.
Today, leveraging new Internet-based technology, we are the authority in
providing dynamic solutions for acquiring, managing, personalizing and
presenting information of all kinds - from insurance policies, bills and
statements to e-mail and online transactions.
Servicing the entire enterprise information lifecycle, our comprehensive
offering supports a wide range of in-house and outsourced enterprise
applications, including customer statements and billings, electronic bill
presentment and payment ("EBPP"), insurance policy production, correspondence
automation and call center fulfillment. Our software solutions support leading
hardware platforms, operating systems, printers and imaging systems.
Our ASP hosting service gives customers the flexibility to implement solutions
in-house or completely outsource their information management to our ASP
centers, where our software and facilities are used to provide processing,
print, mail, archival and Internet delivery of documents. Our ASP offerings
include customer statement and bill generation, EBPP, insurance policy
production, disaster recovery and electronic document archival.
Additionally, we provide professional services related to our software
solutions. Our professional services offerings include implementation,
integration, training and consulting services.
Operating primarily in three key markets - insurance, utilities and financial
services - we now help more than 1,200 customers worldwide maximize the value of
their enterprise information, reducing costs, increasing productivity, improving
customer service, building customer loyalty and facilitating new revenue
opportunities.
We believe we are the leading provider of enterprise information solutions for
the insurance industry, including customers such as Prudential Insurance Company
of America, Aon Service Corporation and American International Group (AIG). Our
insurance customer base includes more than half of the 200 largest United States
insurance companies, including nine of the top 10 life and health insurance
companies, nine of the top 10 property and casualty insurance companies and more
than 500 managing general agents (MGAs).
We also believe we have become a leading provider of software solutions and
services for companies in the utilities industry. Key customers include ORCOM
Solutions, Southern Company Services, Inc. and Toronto Hydro-Electric System
Limited.
We have continued to enhance our solutions for the financial services industry,
attracting key clients such as American Express Services Limited, Royal Bank of
Canada and Halifax Cetelem Credit Ltd.
2
Our customer base also extends into the higher education and transportation
industries, including customers such as The University of Texas and Yellow
Services, Inc.
INDUSTRY BACKGROUND
Certain trends have accelerated the need for automating the process of
acquiring, managing, personalizing and presenting enterprise-wide 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 reducing operating costs and maximizing the
functionalities and capabilities available within a software solution.
The current difficult economic environment has prompted customers and prospects
to focus on Return On Investment ("ROI") when making purchasing decisions. In
fact, few companies are buying software or services unless ROI can be proven. We
have succeeded in this difficult economy because we have been able to
successfully demonstrate ROI for our solutions. With our solutions, customers
can turn resource-draining manual processes into electronic workflows that
enable personalized customer communications to be instantly created, stored and
accessed, significantly impacting their company's performance.
Additionally, rapid technological advances in tiered client/server architecture
and the Internet, adoption of Microsoft's WindowsXP and NET, emergence of Sun
Microsystems' Java and J2EE, and the acceptance of evolving XML standards have
expanded the benefits that businesses can derive from document automation.
Process automation and Web-based access and delivery of information enable our
customers to save substantial amounts of time and money.
With our solutions, companies are also able to:
o Reduce time, errors and labor costs associated with manual processes and
input;
o Eliminate hard copy storage costs with electronic archiving;
o Shorten document preparation and reduce duplicate data entry by reusing
electronically captured and stored data;
o Reduce delays and processing time by automating routing and workflow; and
o Speed customer service response time by electronically accessing file
information.
The same advances that have enhanced the benefits of such process automation,
however, have rendered the development and implementation of solutions
increasingly complex. Consequently, businesses are increasingly outsourcing some
of their needs to skilled and experienced companies like ours that provide ASP
hosting services.
Information is critical to corporations as they endeavor to increase revenue,
improve customer service and reduce costs. The emergence of call centers has
also increased the demand for access to and automation of customer
communications. 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
3
o Providing customer service personnel with immediate access to
electronically archived information.
Our customers are finding that personalization of customer communications can be
a powerful tool for increasing customer satisfaction. As a result, an increasing
number of companies are employing innovative comprehensive information
presentment processes.
GROWTH STRATEGY
Our strategy for growth consists of the following:
Leveraging existing customer relationships
- ------------------------------------------
We have an installed base of more than 1,200 customers. Existing customers
expanding or upgrading their information solutions provide us with a market for
additional software solutions and services. The majority of our revenues are
generated from existing customers.
Expansion in vertical markets
- -----------------------------
It is our belief that we are a leading provider of information management
solutions for the insurance and utilities industries. During fiscal year 2003,
we continued our expansion efforts in the financial services industry. Revenues
from the financial services industry represented approximately 8% of our total
revenues in the fiscal year 2003. The financial services industry, like
insurance and utilities, has an increasing need for reducing operating costs, as
well as communicating more effectively with their customers.
Expanding internationally
- -------------------------
Approximately 5% of our revenues came from customers outside of North America in
fiscal 2003. We plan to expand our Europe, Middle East and Africa ("EMEA")
customer base primarily through direct sales and by cultivating and expanding
our European distribution alliances. During fiscal 2003, we entered into a
strategic business alliance with WRDCLogsys, a leading supplier of solutions and
services for public and private sector organizations in Europe. We intend to
continue our efforts in promoting Docucorp solutions internationally through
direct sales and further strategic alliances.
Developing and enhancing new technologies
- -----------------------------------------
Our product development efforts are focused on developing new solutions as well
as enhancing and broadening our current software solutions. New solutions will
continue to emphasize state-of-the-art technologies for Internet-enablement and
information exchange including XML, SOAP, LINUX, Java and Microsoft.Net. During
the current fiscal year, we continued to expand our family of e-solution
software that speeds 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 2004, our product
development efforts will include development of new functionality, integration
of existing solutions to provide information exchange through the Internet and
further development and packaging of applications for use in vertical industries
such as insurance, utilities and financial services.
Pursuing acquisitions and strategic alliances
- ---------------------------------------------
We have successfully completed three acquisitions since 1997. We will continue
to evaluate potential acquisitions of other companies or technologies to further
expand our solutions, services or market penetration. In addition, as we expand
in our targeted vertical markets, we intend to enter into additional sales and
marketing strategic alliances in such markets. In fiscal 2003, we entered into
alliances with Castek, Inc., Oce Printing Systems USA, Inc., Insurance Services
Office, Inc.
4
(ISO), Applied Systems, Inc., The Weiland Financial Group, Inc. and WRDCLogsys.
We believe that new technical skills, expanded software functionality, a broader
client base and an expanded geographic presence may result from these
activities.
Expanding ASP hosting business
- ------------------------------
In fiscal 2000, we adopted an ASP business model, which provides hosted software
applications on a per transaction basis. Our 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 us with a
growing source of recurring revenues. ASP revenues increased 13% in fiscal 2003
as compared to fiscal 2002. We have 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 our customers.
DOCUCORP SOLUTIONS
We focus on providing enterprise-wide solutions that acquire, manage,
personalize and present information. Customers can purchase these solutions by
either licensing our software for in-house installation or by utilizing the
solutions through our ASP centers on a per transaction basis. We market
solutions primarily to three vertical markets: insurance, financial services and
utilities. Set forth below is a list of representative solutions that we provide
to each of these vertical markets:
Insurance solutions
- -------------------
INSURANCE POLICY PRODUCTION - Enables companies to create, publish, distribute
and archive high volumes of personalized insurance policies, quotes,
endorsements, cancellations and renewals.
CORRESPONDENCE - Allows insurance representatives to electronically access
policies and other critical data to verify coverage, automate and personalize
subsequent document packages and correspondence.
INTERNET VIEWING AND ENTRY - Enables 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 - provides policyholders with the ability
to view premium notices and pay premiums online.
Financial services solutions
- ----------------------------
WEALTH MANAGEMENT - Enables financial advisors and customers to electronically
access client data from multiple accounts for review and analysis, while
automating and personalizing subsequent consolidated customer statements and
correspondence.
E-FORMS - Enables financial services companies to establish electronic workflows
for form creation, form fill, routing and distribution for both internal and
customer-facing forms.
INVESTMENT SHOWCASE - Enables financial advisors to electronically acquire and
aggregate customer information from multiple systems across disparate lines of
business to create personalized investment presentations.
FINANCIAL STATEMENTS - Enables financial services companies to produce dynamic,
personalized statements, which reflect customer preferences for content and
format, from numerous data sources for multi-channel distribution, including
print, PDF, fax and e-mail.
5
Utilities solutions
- -------------------
BILL PRINT - Allows utility companies to cross-market and consolidate billing
statements for multiple services such as gas, electricity, cable TV, security
and Internet.
BILLS2GO - A turnkey outsourced billing solution designed around an established
set of standard billing templates, enabling small to medium size utility
companies to produce personalized consolidated bills at an affordable rate.
ELECTRONIC BILL PRESENTMENT & Payment - Enables companies to give their
customers the ability to view and pay their bills online.
DOCUCORP SOFTWARE PRODUCTS
We offer our enterprise-wide information solutions through a portfolio of
scalable, high-performance software applications that address each phase of the
enterprise-wide information process of acquiring, managing, personalizing and
presenting information. Our philosophy of open architecture and support of
industry standards enables our customers to select software and hardware from
other leading vendors and integrate them with Docucorp solutions. Software
licenses accounted for approximately 11%, 17% and 18% of our total revenues in
fiscal 2003, 2002 and 2001, respectively. Revenues related to maintenance and
support agreements accounted for approximately 27% of our total revenues in
fiscal 2003 and 26% in each of fiscal 2002 and 2001. Our software solutions have
been organized into the following four primary categories.
Acquiring Information
- ---------------------
Docucreate products create forms that can be used repeatedly 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 Docucreate software
products accounted for approximately 9% of our total license revenues in fiscal
year 2003 and 10% in each of fiscal 2002 and 2001. 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, AIX and IBM
MVS platforms, which enables graphic images created by a personal computer
or captured by scanner or fax to be incorporated within documents for print
on high-speed Xerox and IBM printers, or to be published in digital formats
over intranets and the Internet.
Managing information
- --------------------
Documanage software delivers full document management and archival to
information-intensive companies. License revenues from our software products
that manage and archive information accounted for approximately 12% of our total
license revenues in fiscal year 2003 and 15% in each of fiscal 2002 and 2001.
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 more than 200 image
and print stream formats.
6
DOCUMANAGE SERVER - Automatically indexes and stores various print data
streams and imaging system formats and performs document management,
including check-in/check-out, automated version control, multi-tier
security and annotations. This 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 information
- -------------------------
DOCUMAKER, DOCUMAKER FP AND DOCUFLEX are powerful, high-volume production
publishers for personalizing and presenting information. The publishing products
perform data merging, content assembly and business rules creation to automate
enterprise-wide production of applications such as insurance policies and
customer statements. They provide device-independent technologies that enable
individualized printing, archiving and delivery via networks and the Web.
License revenues from our software products that personalize information
accounted for approximately 59%, 45% and 55% of our total license revenues in
fiscal year 2003, 2002 and 2001, 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.
DOCUMAKER SERVER - A server-based product for customized, business
rule-intensive publishing applications that require unique documents, such
as insurance policies, customer correspondence, flexible bills and
statements. Documaker runs under Microsoft NT, AIX and mainframe MVS.
DOCUMAKER FP - A server-based product that personalizes and presents
information repeatedly using the same forms in various combinations, such
as insurance policies. Documaker FP runs under Microsoft NT, AIX and
mainframe MVS.
DOCUFLEX - An easy-to-use, powerful publishing engine for dynamically
composing highly personalized booklets, catalogs, contracts and statements.
Docuflex runs under Microsoft NT.
PPS - A Microsoft Windows-based insurance policy software product targeted
for insurance agents.
Presenting information
- ----------------------
With our family of e-solution software products, we 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 our software products that present
information accounted for approximately 16%, 23% and 14% of our total license
revenues in fiscal years 2003, 2002 and 2001, respectively. Specific 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.
7
IPPS - A software product that enables insurance companies and their agents
to assemble policies and view information via the Internet.
PROFESSIONAL SERVICES
We offer a broad range of professional services related to our software
solutions. As of July 31, 2003, we employed approximately 135 professional
service personnel, who represent one of the largest services organizations in
our industry. Our professional services personnel have experience across many
vertical industries and types of information solutions.
A majority of our professional services consulting revenue is derived from
implementation and integration of our software solutions. We also derive
professional services revenue from consulting and training. Our professional
services group works with clients to develop and define enterprise information
strategies to meet specific business needs. Training classes are available to
assist clients with implementing and using our applications, and training
offerings are available in standardized and customized formats. A majority of
our consulting services are related to Docucorp solutions that personalize
information. Consulting services accounted for approximately 31%, 29% and 33% of
our total revenues in fiscal years 2003, 2002 and 2001, respectively.
ASP HOSTING
We offer ASP hosting services that utilize our software to provide processing,
print, mail, archival and Internet delivery of documents for customers who
outsource these activities. We operate two ASP hosting centers located 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 services accounted for approximately 31%, 28% and 23% of our total
revenues in fiscal years 2003, 2002 and 2001, respectively.
PRODUCT DEVELOPMENT
We have made and expect to continue to make substantial investments in research
and product development. During the fiscal year, our product development efforts
focused on the development of new Internet functionality, integration of Web
capabilities into existing solutions and further development of new applications
for the insurance, utilities and financial services markets.
In August 2002, we announced the Java-based version of iEntry/iPPS. iEntry is an
integral component of our Internet Policy Production System (iPPS), an
Internet-based software solution that enables the review and creation of
insurance policies and documents from remote locations.
In October 2002, we announced Docupresentment 10.2, a new version of our
Web-enabled solution that allows companies to display, present and view
information across the Internet and enterprise. Docupresentment includes
Internet Document Server (IDS), a Web-enabled application server that provides a
platform for bridging back office document processing and management
applications to thin-client users over the Internet.
Additionally, in October 2002, we announced Documaker 10.2, a new version of our
flexible, high-performance publishing solution that enables companies to produce
high volumes of customized information. Documaker's publishing capabilities
range from automating insurance policies for millions of individual recipients
to creating personalized one-on-one documents based on unique publishing rules.
8
Also in October 2002, we announced Unicode support, an international standard
encoding system that provides a unique code for every character in a document,
regardless of the program, language or platform being used. In April 2003, we
announced Transall 10.3 with enhanced support for XML integration and
transformation with traditional data repositories across platform boundaries.
We announced a statement solution for the financial services industry in March
2003. Our statement solution enables financial services companies to produce
dynamic, personalized statements that reflect customer preferences for content
and format. A single statement, which can be published for commercial and retail
customers, can be produced from numerous data sources for multi-channel
distribution, including print, PDF, fax and e-mail.
In June 2003, we introduced an investment showcase solution for the financial
services industry. Our investment showcase solution enables financial services
companies to electronically acquire and aggregate customer information from
multiple systems across disparate lines of business to create personalized
client investment presentations.
The following month we announced an e-forms solution for the financial services
industry. Our e-forms solution enables financial services companies to establish
electronic workflows for form creation, form fill, routing and distribution for
both internal and customer-facing forms.
We have committed substantial resources to product development. As of July 31,
2003, we employed approximately 95 technical personnel engaged in research,
product development and customer support activities. The product development
process is a cooperative effort between our customers and us. Early review of
functionality specifications and demonstrations allows for the incorporation of
customer suggestions and comments in parallel with management review of the
process internally. We have a formal planning process for new software
solutions, as well as software upgrades and maintenance releases, to maximize
software quality, ensure timeliness of releases and meet or exceed our
customers' expectations. In fiscal years 2003, 2002 and 2001, our product
development expenditures were approximately $12.0 million, $11.1 million and
$9.1 million, respectively.
SALES AND MARKETING
We market our software and services primarily through a direct sales force. We
also market our solutions through marketing alliances and distributors. Our
sales resources are organized by the vertical industry markets we serve. As of
July 31, 2003, we employed approximately 35 direct sales and sales support
representatives, who operate primarily from Dallas, Atlanta and London. Sales
representatives are compensated principally on a commission basis. Distributor
relationships are established in the United States, Canada, Europe, South Africa
and Asia.
We intend to increase our distribution channels through marketing, sales and
distribution and development relationships with other companies. Formal and
informal marketing and development partnerships currently exist with Applied
Systems, AscendantOne, ePolicy Solutions, Sanchez e-Profile, Firstlogic, ISO,
Kofax, Oce, Rackley Systems, SAP, Xerox, Microsoft, ACORD, CSC, The Weiland
Financial Group, SCT Utility Systems, ORCOM Solutions, CheckFree and BillMatrix.
These relationships provide sales leads for our solutions or provide access to
certain technological information and resources.
Our software solutions are generally licensed on a perpetual basis for an
up-front fee. Initial software license fees typically range from $100,000 to
$400,000. Most customers also enter into maintenance agreements, which typically
provide for annual maintenance fees ranging from 18% to 30% of current license
fees depending upon the vertical market, size of the customer and license fee.
Customers who enter into maintenance agreements are entitled to software
upgrades, software
9
problem resolutions and use of our "Hotline" support, which provides technical
assistance to the software user. We generally charge customers for professional
services on a time and materials basis, although certain service assignments are
performed on a fixed charge basis. ASP hosting services are charged primarily on
a transaction fee basis.
CUSTOMERS
We generally market 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 our revenues are generated from the
insurance industry. Approximately 67% of our total revenues in fiscal 2003 were
derived from the insurance industry. We believe that we have the largest
installed customer base for insurance policy production in the insurance
industry, with more than half of the 200 largest United States insurance
companies using our software and services, including nine of the 10 largest life
and health insurance companies and nine of the 10 largest property and casualty
insurance companies. Approximately 20% of our total revenues for the year ended
July 31, 2003 were derived from the utilities industry and 8% of our total
revenues were derived from the financial services industry. We also have an
installed base of customers in the higher education, telecommunications,
transportation and government markets.
Set forth below is a representative list of our customers in the various
industries in which we market our software and services:
Insurance
---------
Prudential Insurance Company of America
American International Group (AIG)
Aon Service Corporation
Aegon USA Companies
MetLife Investors Group
Utilities
---------
Southern Company Services, Inc.
Toronto Hydro-Electric System Limited
COBB Electric Membership Corporation
Vectren Utilities Holdings, Inc.
Shell Energy Services Company, L.L.C.
Financial services
------------------
Royal Bank of Canada
ABN-AMRO Bank N.V.
Halifax Cetelem Credit Ltd
Higher education
----------------
The University of Texas
San Francisco State University
Transportation
--------------
Yellow Services, Inc.
Wisconsin Department of Transportation
10
COMPETITION
The market for enterprise information solutions is intensely competitive,
subject to rapid change and significantly affected by new product introductions
and other market activities of industry participants. We face direct and
indirect competition from a broad range of competitors, many of whom have
greater financial, technical and marketing resources than we do. Our 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 Document Sciences Corporation, Group 1 Software,
Inc., ISIS Information Systems, InSystems Technologies, Inc., Metavante, Mobius
Management Systems, Inc. and Exstream Software and (iii) direct competition from
numerous outsourcing and ASP vendors, including Xerox XBS, KPT, Inc. and DST
Output. We believe that the principal competitive factors in the information
solutions software market are technology performance and functionality, ease of
use, multi-platform offerings, reputation, quality of customer support and
service and price. The degree of competition varies significantly by the
solution being offered and the vertical market being served.
We may also face competition from new entrants into the industry. As the market
for information solutions continues to develop, current or potential competitors
who have access to significantly greater resources could attempt to enter or
increase their presence in the market either independently or by acquiring or
forming strategic alliances with our competitors 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
our current and prospective customers.
INTELLECTUAL PROPERTY, TRADEMARKS AND PROPRIETARY RIGHTS
We rely 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 our software solutions.
Despite these precautions, it may be possible for unauthorized third parties to
copy certain portions of our solutions or obtain and use information we regard
as proprietary. While our competitive position may be affected by our ability to
protect our proprietary information, we believe that trademark and copyright
protections are not material to our success.
Our software solutions 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 that the laws of the United States. Generally, we
distribute our software in object format only and do not provide access to the
underlying source code.
As the number of software solutions in the industry increases and the
functionality of these solutions further overlap, we believe that software
programs will increasingly become subject to infringement claims. Third parties
may assert infringement claims against us in the future with respect to current
or future solutions, and in this event could require us to enter into royalty
arrangements or result in costly litigation.
11
We also rely on certain software that we license from third parties, including
software that is integrated with internally developed software and used in our
solutions to perform key functions. These third-party software licenses may not
continue to be available to us 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 software shipments until equivalent software
could be developed or licensed and integrated.
EMPLOYEES
As of July 31, 2003, we had approximately 405 employees, of which approximately
135 were engaged in professional services, 95 in product development and
customer support, 80 in ASP hosting, 45 in sales and marketing and 50 in
finance, administration, human resources and internal computer systems support.
We believe our future success will depend, in part, on our 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 our employees are represented by a labor union or are subject to a
collective bargaining agreement. We believe that our employee relations are
strong.
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 we believe that the expectations reflected by such forward-looking
statements are reasonable based on information currently available to us, 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 our 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 us or persons acting on our behalf
are expressly qualified in their entirety by these cautionary statements.
RISK FACTORS
Social, political and economic risks could adversely affect our business.
- -------------------------------------------------------------------------
Acts of terrorism have caused major instability in the United States and other
financial markets. Armed hostilities or further acts of terrorism would cause
further instability in financial markets and could directly impact our financial
condition and the results of our operations. Our business is subject to general
economic conditions and fluctuation in corporate spending. Any adverse effect on
the economy, depending on the magnitude, could have a material adverse effect on
our operating results. There can be no assurance as to the future effect of
changes in social, political and economic conditions on our business or
financial condition.
We may face difficulties in expanding our operations in international markets.
- ------------------------------------------------------------------------------
The expansion of our existing international operations and entry into additional
international markets requires significant management attention and financial
resources and will place additional
12
burdens on our management, administrative, operational and financial
infrastructure. We have only limited experience in establishing and managing
international operations, and our Europe, Middle East and Africa ("EMEA")
operations have not been profitable to date. We cannot be certain that our
operations in countries outside of North America will produce desired levels of
revenues or profitability. International expansion may negatively effect our
operating results because of numerous factors, including difficulties in
staffing and managing foreign operations; potential losses from foreign currency
fluctuations; seasonal reductions in business activity in Europe; increased
financial accounting and reporting burdens; potential adverse tax consequences;
compliance with a wide variety of complex foreign laws and treaties; reduced
protection for intellectual property rights in some countries and potential
language-specific requirements for software.
Our results of operations are dependent on significant revenues from two
- ------------------------------------------------------------------------
industries.
- -----------
Approximately 67% and 64% of our total revenues for the year ended July 31, 2003
and 2002, respectively, were derived from the insurance industry. Approximately
20% and 21% of our total revenues for the year ended July 31, 2003 and 2002,
respectively, were derived from the utilities industry. Our financial
performance and future growth will depend upon our ability to continue to market
our solutions successfully in the insurance and utilities industries and to
enhance and market technologies for distribution in other markets. We entered
the financial services industry during the fiscal year 2000 and plan to expand
into additional vertical markets in the future. This will require us to make
substantial software development and distribution channel investments. There can
be no assurance that we will be able to continue marketing our solutions
successfully in the insurance and utilities industries or will be able to
successfully introduce new or existing solutions into the financial services
industry or other vertical markets.
Future business acquisitions could adversely affect our results of operations.
- ------------------------------------------------------------------------------
We may make acquisitions in the future. Acquisitions may be difficult to
integrate into our business and would consume significant management and
financial resources. There is no assurance that any acquisition will be
successful or generate a satisfactory return on investment. Future acquisitions
may also involve large one-time write offs, amortization expenses related to
intangible assets and impairment expenses related to goodwill.
We are dependent on meeting the challenges of technological advances in the
- ---------------------------------------------------------------------------
information solutions industry.
- -------------------------------
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 us to make substantial
investments in the development of our solutions. Any failure to anticipate or
respond adequately to technological developments and customer requirements, or
any significant delays in the development or introduction of our solutions,
could have a material adverse effect on our operating results. There can be no
assurance that our new solutions or enhancements, which are intended to respond
to technological change or evolving customer requirements, will achieve
acceptance.
We may face difficulties in attracting and retaining qualified technical
- ------------------------------------------------------------------------
employees.
- ----------
We believe that our future success will depend in large part upon our 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. There can be no assurance that we will be able to attract and
retain sufficient numbers of highly skilled technical employees. The loss of a
significant number of our technical employees could have a material adverse
effect our business.
13
We may not be able to compete favorably in the competitive information solutions
- --------------------------------------------------------------------------------
industry.
- ---------
The market for our information solutions is intensely competitive. We face
competition from a broad range of competitors, many of whom have greater
financial, technical and marketing resources than we do. There can be no
assurance that we will be able to compete effectively with such entities.
Our business is subject to fluctuations in operating results.
- -------------------------------------------------------------
We have experienced, and may in the future continue to experience, fluctuations
in our 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.
We have typically operated with little backlog for license revenues because our
software solutions are generally shipped soon after orders are received. As a
result, license revenues in any quarter are substantially dependent on orders
booked and shipped in that quarter. The delay of customer orders for a small
number of licenses could adversely affect the license revenues and profitability
for a given fiscal quarter. We have historically earned a substantial portion of
our 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 our financial results for each such interim period.
Our solutions are subject to the risk of software defects.
- ----------------------------------------------------------
Complex software solutions such as ours can contain undetected errors or
performance problems. Such defects are most frequently found during the period
immediately following introduction of new solutions or enhancements to existing
solutions. Our solutions 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 our solutions in the
future. Any future software defects discovered after shipment of our solutions,
if material, could result in loss of revenues, delays in customer acceptance or
potential product liability.
Our intellectual property rights may not be adequately protected.
- -----------------------------------------------------------------
We rely on a combination of copyright and trademark laws, employee and
third-party nondisclosure agreements and other methods to protect our
proprietary rights. Despite these precautions, it may be possible for
unauthorized third parties to copy certain portions of our solutions or to
obtain and use information that we regard as proprietary. There can be no
assurance that our efforts will provide meaningful protection for our
proprietary technology against others who independently develop or otherwise
acquire substantially equivalent techniques or gain access to, misappropriate or
disclose our proprietary technology.
Our operations are dependent upon key management personnel.
- -----------------------------------------------------------
We believe that our continued success depends to a significant extent upon the
efforts and abilities of our senior management. In particular, the loss of
Michael D. Andereck, our President and Chief Executive Officer, or any of our
other executive officers or senior managers, could have a material adverse
effect on our business.
14
ITEM 2. PROPERTIES
We lease approximately 31,500 square feet of office space in Dallas, Texas for
our corporate headquarters, including administrative, sales, marketing,
professional services, and product development departments. This lease expires
April 30, 2005.
We leased approximately 76,000 square feet of office space in Atlanta, Georgia,
which was utilized for administrative, sales, professional services, and product
development departments. The lease for this space expired on December 31, 2002.
Commencing January 1, 2003, we relocated and lease approximately 80,000 square
feet of office space in Atlanta, Georgia. This new lease will expire on December
31, 2013.
We lease space for our ASP hosting facility located in Atlanta, Georgia. This
facility occupies approximately 24,500 square feet under a lease, which expires
on March 31, 2008.
We lease space for our 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 we may terminate on March 31, 2007.
Our staff in Maryland is located in Silver Spring, Maryland. This facility is
principally used for product development activities and occupies approximately
10,000 square feet under a lease, which expires December 31, 2003.
Our 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.
We lease space for our European sales and services staff near London, England.
This facility occupies approximately 8,200 square feet under a lease, which
expires on September 27, 2013, but we have the right to terminate on October 1,
2005.
Minimal office space is also leased in Portland, Maine for product development
activities.
We believe the existing office facilities and additional space available are
adequate to meet our requirements, and that in any event, suitable additional or
alternative space adequate to serve our foreseeable needs will be available on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in various claims and legal actions
incidental to the normal conduct of our business. Currently, there are no legal
actions for which we are involved.
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 2003.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock has traded on the Nasdaq National Market under the symbol
"DOCC" since April 6, 1998. At October 10, 2003 there were approximately 600
holders of record of our Common Stock, although we believe that the number of
beneficial owners of our Common Stock is substantially greater. The table below
sets forth for the fiscal quarters indicated the high and low sales prices for
our Common Stock:
HIGH LOW
----------------- -----------------
FISCAL 2003:
Fourth quarter $ 7.19 $ 3.59
Third quarter 5.76 3.06
Second quarter 8.84 5.31
First quarter 16.39 6.53
Fiscal 2002:
Fourth quarter $ 13.70 $ 7.30
Third quarter 9.15 5.27
Second quarter 8.45 3.05
First quarter 4.25 3.19
We intend to retain any future earnings for use in our business and do not
intend to pay cash dividends in the foreseeable future. The payment of future
dividends, if any, will be at the discretion of our Board of Directors and will
depend, among other things, upon future earnings, operations, capital
requirements, restrictions in future financing agreements, our general financial
condition and general business conditions.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the years ended July 31,
2003, 2002, 2001, 2000, and 1999 has been derived from our audited financial
statements. The following data should be read in conjunction with, and are
qualified by, reference to our audited financial statements and the notes
thereto, included elsewhere in this Form 10-K.
16
Years ended July 31,
---------------------------------------------------------------
2003 2002** 2001* 2000 1999
----------- ----------- ----------- ----------- -----------
STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Total revenues $ 74,941 $ 72,620 $ 63,203 $ 50,977 $ 51,926
Operating income $ 7,256 $ 9,084 $ 6,797 $ 2,802 $ 7,231
Income before income taxes and
cumulative effect of accounting change $ 7,229 $ 9,865 $ 7,057 $ 3,414 $ 7,853
Income before cumulative effect of
accounting change $ 3,945 $ 5,929 $ 3,472 $ 1,529 $ 4,513
Net income $ 3,945 $ 5,929 $ 2,482 $ 1,529 $ 4,513
Income before cumulative effect of
accounting change per share:
Basic $ 0.31 $ 0.44 $ 0.24 $ 0.10 $ 0.28
Diluted $ 0.28 $ 0.40 $ 0.23 $ 0.09 $ 0.26
Net income per share:
Basic $ 0.31 $ 0.44 $ 0.17 $ 0.10 $ 0.28
Diluted $ 0.28 $ 0.40 $ 0.17 $ 0.09 $ 0.26
Weighted average number of
shares outstanding:
Basic 12,780 13,458 14,293 15,317 16,001
Diluted 13,878 14,883 15,028 16,872 17,570
* We implemented Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101") in the fourth quarter of fiscal 2001. The one-time cumulative effect of applying SAB 101 for all
years prior to fiscal 2001 resulted in a reduction of net income of approximately $990,000 for the year
ended July 31, 2001, or $0.06 per diluted share.
** We adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
("SFAS 142") effective August 1, 2001. SFAS 142 discontinues amortization of goodwill and indefinite
lived intangible assets.
July 31,
---------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA: (IN THOUSANDS)
Working capital $ 3,686 $ 13,150 $ 11,291 $ 13,029 $ 15,513
Total assets $ 53,440 $ 55,750 $ 51,784 $ 49,010 $ 52,918
Total debt, including obligations
under capital lease $ 16,828 $ -0- $ -0- $ -0- $ 25
Stockholders' equity $ 13,732 $ 33,064 $ 31,067 $ 33,705 $ 36,994
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by this item is set forth in Docucorp's 2003 Annual
Report to Stockholders, which information is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We have no derivative financial instruments. We invest our cash and cash
equivalents in investment-grade, highly liquid investments, consisting of money
market instruments and commercial paper. We have a fixed rate debt instrument of
approximately $13.9 million as of July 31, 2003. For further discussion see Note
5 to the consolidated financial statements.
We are exposed to market risk arising from changes in foreign currency exchange
rates as a result of selling our products and services outside the U.S.
(principally Europe). A portion of our sales generated from our 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 our 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, 2003 and 2002, approximately 5% and 6%,
respectively, of our revenues were denominated in British pounds. For the year
ended July 31, 2003 and 2002, approximately 14% and 11%, respectively, of our
operating expenses were denominated in British pounds. Historically, the effect
of fluctuations in currency exchange rates has not had a material impact on our
operations; however, there can be no guarantees that it will not have a material
impact in the future. The exposure to fluctuations in currency exchange rates
will increase as we expand operations outside the U.S.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in Docucorp's 2003 Annual
Report to Stockholders, which information is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
ITEM 9A. CONTROLS AND PROCEDURES
Our management, with participation of our President and Chief Executive Officer
and Senior Vice President, Finance and Administration ("Principal Financial
Officer") evaluated the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this report. Based upon that evaluation,
the President and Chief Executive Officer and the Principal Financial Officer
concluded that our disclosure controls and procedures, as of July 31, 2003, were
designed and are functioning effectively to provide reasonable assurance that
the information required to be disclosed by Docucorp in reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms except as set
forth in the following paragraph.
As described in Notes 4 and 11 to the consolidated financial statements, we
entered into various capital lease arrangements for the rental of computer
equipment at our ASP hosting facilities in December 2002. At the time of
execution, these leases were not reviewed for appropriate financial accounting
classification under Statement of Financial Accounting Standards No. 13,
"Accounting for Leases" ("SFAS 13"). During the preparation of disclosures
related to our Form 10-K for the year ended July 31, 2003, these leases were
analyzed and determined to be capital leases under the provisions of SFAS 13.
Accordingly, these leases have been properly reflected in our balance sheet at
July 31, 2003. To address this control deficiency, management has enhanced
existing procedures related to the timely review and analysis of significant
commitments entered into on behalf of Docucorp.
There has been no other significant change in our internal controls over
financial reporting or in other factors that could significantly affect these
controls that occurred during the period covered by this report.
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 Docucorp 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.
We have adopted a code of ethics that applies to all members of Board of
Directors and employees of Docucorp, including, our Chief Executive Officer,
Principal Financial Officer, Corporate Controller, and or other persons
performing similar functions. Our code of ethics may be viewed at and obtained,
free of charge, from our Internet website: http://www.docucorp.com.
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 AND
RELATED STOCKHOLDER MATTER
Information with respect to security ownership of certain beneficial owners and
management and related stockholder matter 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 related transactions is
set forth in the Proxy Statement under the heading "Certain Relationships and
Related Transactions," which information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information with respect to principal accounting fees and services is set forth
in the Proxy Statement under the heading "Fees Paid to, and Independence of,
Auditors," which information is incorporated herein by reference.
20
PART IV
ITEM 15. 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 Auditors
As of July 31, 2003 and 2002:
o Consolidated Balance Sheets
For the Years Ended July 31, 2003, 2002 and 2001:
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 Auditors on Financial Statement Schedule
o Schedule II - Valuation and Qualifying Accounts
3. Exhibits:
See Exhibit Index beginning on page 27 of this Form 10-K.
(b) Reports on Form 8-K.
On May 21, 2003, we filed a Current Report on Form 8-K announcing our
results of operations for the quarter ended April 30, 2003.
On June 4, 2003, we filed a Current Report on Form 8-K announcing our
repurchase of Common Stock and warrants from Safeguard Scientifics,
Inc. and a former officer of Safeguard Scientifics, Inc.
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 October 29, 2003
- ------------------------------------------ ------------------------
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 October 29, 2003
- ---------------------------------------- ------------------------
Michael D. Andereck
President, Chief Executive Officer and
Director
(Principal Executive Officer)
/s/ John H. Gray Date October 29, 2003
- ---------------------------------------- ------------------------
John H. Gray
Senior Vice President, Finance and
Administration
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Milledge A. Hart, III Date October 29, 2003
- ---------------------------------------- ------------------------
Milledge A. Hart, III
Chairman of the Board
/s/ Anshoo S. Gupta Date October 29, 2003
- ---------------------------------------- ------------------------
Anshoo S. Gupta
Director
/s/ John D. Loewenberg Date October 29, 2003
- ---------------------------------------- ------------------------
John D. Loewenberg
Director
/s/ George F. Raymond Date October 29, 2003
- ---------------------------------------- ------------------------
George F. Raymond
Director
/s/ Arthur R. Spector Date October 29, 2003
- ---------------------------------------- ------------------------
Arthur R. Spector
Director
23
REPORT OF INDEPENDENT AUDITORS 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 October 24, 2003 appearing in the Annual Report to Stockholders of
Docucorp International, Inc. (which report and consolidated financial statements
are incorporated by reference in this Annual Report on Form 10-K) also included
an audit of the financial statement schedule listed in Item 15(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
October 24, 2003
24
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JULY 31, 2003, 2002 AND 2001
SCHEDULE II
Balance at Charged to
Beginning Costs and Deductions Balance at
Description of Period Expenses (a) End of Period
- --------------------------------------------------------------------------------------------
2003
Allowance for doubtful accounts $ 670,000 $ 305,306 $ (413,147) $ 562,159
Amortization of intangibles $ 4,939,641 $ -0- $ -0- $ 4,939,641
Valuation allowance against
deferred tax assets $ 1,940,041 $ 492,525 $ -0- $ 2,432,566
2002
Allowance for doubtful accounts $ 600,000 $ 702,000 $ (632,000) $ 670,000
Amortization of intangibles $ 4,939,641 $ -0- $ -0- $ 4,939,641
Valuation allowance against
deferred tax assets $ 1,725,650 $ 214,391 $ -0- $ 1,940,041
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 $ 562,125 $ -0- $ 1,725,650
(a) Deductions from the allowance for doubtful accounts relate to the utilization of the
valuation and qualifying accounts for specific items for which they were established
in the accounts receivable account.
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.
31.1* Certification pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.
31.2* Certification pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.
32.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
32.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
- -------------
* 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, the economy, 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 our 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 we believe that the expectations reflected by such
forward-looking statements are reasonable based on information currently
available to us, 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 our expectations are set
forth herein. All forward-looking statements included herein and all subsequent
oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary statements.
OVERVIEW
Docucorp International, Inc. ("Docucorp") develops, markets and supports a
portfolio of proprietary information software, application service provider
("ASP") hosting and professional services that enables companies to create,
publish, manage and archive complex, high-volume, individualized information. We
support the entire information life cycle - from acquisition of the first raw
data point to the final delivery of personalized information to the customer.
Our 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, correspondence,
bills of lading and other customer-oriented documents. Our ASP offerings include
customer statement and bill generation, electronic bill presentment and payment,
insurance policy production, disaster recovery and electronic document archival.
We currently have an installed base of more than 1,200 customers. More than half
of the 200 largest United States insurance companies use our software products
and services, including nine of the top 10 life and health insurance companies,
nine of the top 10 property and casualty insurance companies and more than 500
managing general agents (MGAs). Many of the largest North American utilities
companies, major international financial services institutions and clients in
higher education use our products and services.
As set forth in the criteria of Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), we are organized into two reportable segments: Software and ASP.
The Software segment consists of initial software license sales, professional
services consulting derived from implementation and integration of our software
products and continued customer support and maintenance of our software
products. The ASP segment provides processing, print, mail, archival and
Internet delivery of documents for customers who outsource these activities.
We derive our revenues from ASP hosting fees, professional services fees,
software license fees and recurring maintenance fees related to our software
products. ASP hosting revenue consists of fees earned from customers who
outsource the production of customer statements and insurance policies.
Professional services revenue includes fees for implementation, integration,
training and consulting services. License revenue is generally derived from
perpetual licenses of software products. Maintenance revenue consists primarily
of recurring license fees and annual software maintenance and support
agreements.
27
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying "Management's Discussion and Analysis of Financial Condition
and Results of Operations" is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reported period. We base our estimates and assumptions on historical
experiences and various other factors that are believed to be reasonable under
the circumstances. These estimates and assumptions are evaluated on an ongoing
basis. Actual results may differ from previously estimated amounts under
different assumptions or conditions. We believe the following critical
accounting policies, which involve significant judgments and estimates, are used
in the preparation of our consolidated financial statements:
Revenue recognition
- -------------------
We recognize revenue in accordance with Statement of Position 97-2, "Software
Revenue Recognition" ("SOP 97-2"), and Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). Revenues are derived
from the sale of software licenses, annual software maintenance and support
agreements, professional services and ASP hosting services. Revenue is
recognized when a contract exists, the fee is fixed or determinable, delivery
has occurred and collection of the receivable is deemed probable.
We use the residual method to recognize revenue from the sale of software
licenses that are bundled with maintenance and support. Under the residual
method, the fair value of the undelivered element(s) is deferred and the
remaining portion of the arrangement fee is recognized as revenue. Fair value of
an element is based on vendor-specific objective evidence ("VSOE"). VSOE is
based on the price charged when the same element is sold separately. We do not
generally sell software licenses without selling maintenance and support for the
licensed software. Therefore, we have established VSOE only for the undelivered
element(s) included in a multi-element arrangement. Specifically, VSOE for
maintenance and support is based upon the price a customer pays to renew its
maintenance and support agreement. After expiration of the initial maintenance
term, maintenance and support agreements are renewable on an annual basis and
include rights to upgrades, when and if available, telephone support, updates,
enhancements and bug fixes. Revenue generated from maintenance and support is
recognized ratably over the maintenance term of the agreement. We record
deferred revenue for maintenance amounts invoiced prior to the performance of
the related services.
Our standard license agreements do not provide for rights of software return
and/or conditions of acceptance. However, in the rare case that acceptance
criteria are provided, revenue is deferred and not recognized until all
acceptance provisions are satisfied. Revenue from software licenses, which
include a cancellation clause, is recognized upon expiration of the cancellation
period. Revenue related to products still in the testing phase is deferred until
formal acceptance of the product by the customer.
Professional services revenue includes implementation, integration, training and
consulting services related to our software products. The services offered are
not essential to the functionality of the software sold. Professional services
revenue is generally recognized as the services are performed.
Revenue derived from the installation and integration of software packages under
a fixed price contract is recognized on a percentage-of-completion basis
measured by the relationship of hours worked to total estimated contract hours.
We follow this method because reasonably dependable estimates of the revenue and
contract hours applicable to various elements of a contract can be made. Since
the financial reporting of these contracts depends upon estimates, which are
assessed continually during the term of these contracts, recognized revenue and
profit are subject to revisions as the contract progresses to completion.
Revisions in profit estimates are reflected in the period in which the facts
that give rise to the revisions become known. Accordingly, favorable changes in
estimates result in additional revenue recognition and net income, and
unfavorable changes in estimates result in a reduction of recognized revenue and
net income. When
28
estimates indicate that a loss will be incurred on a contract upon completion, a
provision for the expected loss is recorded in the period in which the loss
becomes evident.
Revenue from our ASP hosting operations is recognized in accordance with SAB
101, generally on a per transaction basis. ASP hosting agreements are generally
one-to-five years in duration and provide for monthly billing based on
transaction volume or contract minimums, if applicable. Revenue related to the
customer's initial set up and implementation is deferred and subsequently
recognized over the expected term of the ASP hosting agreement.
Allowance for doubtful accounts
- -------------------------------
We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We take into
consideration the current financial condition of our customers, the specific
details of the customer accounts, the age of the outstanding balance and the
current economic environment when assessing the adequacy of the allowance. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances might be
required.
Software development costs
- --------------------------
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." The guidance above requires the capitalization of
certain software development costs once technological feasibility is
established. The capitalized costs are then amortized on a straight-line basis
over the estimated product life, or on the ratio of current revenues to total
projected product revenues, whichever is greater. Management periodically
assesses the realizability of software development costs when events and
circumstances indicate a potential decline in value.
Valuation of long-lived and intangible assets and goodwill
- ----------------------------------------------------------
We recognize an impairment charge associated with our long-lived assets,
including property and equipment, goodwill and other intangible assets whenever
we determine that recovery of such long-lived asset is not probable. Such
determination is made in accordance with the applicable GAAP requirement
associated with the long-lived asset, and is based upon, among other things,
estimates of the amount of future net cash flows to be generated by the
long-lived asset and estimates of the current fair value of the asset. Adverse
changes in future net cash flows or fair value could result in the inability to
recover the carrying value of the long-lived asset, thereby requiring an
impairment charge to be recognized. We perform an impairment analysis in
accordance with Statement of Financial Accounting Standard No. 142, "Goodwill
and Other Intangible Assets," annually and whenever events and circumstances
indicate that an impairment might be present.
Deferred taxes and valuation allowance
- --------------------------------------
We recognize deferred tax assets and liabilities based on the differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities. We record a valuation allowance to reduce our deferred income tax
assets to the amount that is believed to be realized under the
"more-likely-than-not" recognition criteria. While we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for a valuation allowance, it is possible that in the future
we may change our estimate of the amount of the deferred income tax assets that
would "more-likely-than-not" be realized in the future, resulting in an
adjustment to the deferred income tax assets' valuation allowance that would
either increase or decrease, as applicable, reported net income in the period
such change in estimate was made.
Translation of foreign currency
- -------------------------------
We translate the financial statements of our European subsidiary into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation." Assets and liabilities of our European
subsidiary, whose functional currency is other than the U.S. dollar, are
translated at period-
29
end rates of exchange, and revenues and expenses are translated at average
exchange rates prevailing during the period. Foreign currency transaction gains
and losses are recognized in income as incurred.
We account for unrealized gains or losses on our foreign currency translation
adjustments in accordance with Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," which requires adjustments to be
accumulated in stockholders' equity as part of other comprehensive income.
Currently, we do not engage in foreign currency hedging activities.
30
HISTORICAL OPERATING RESULTS FOR THE YEARS ENDED JULY 31, 2003, 2002 AND 2001
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 our consolidated financial statements (dollars in thousands).
Years ended July 31,
----------------------------------------------------
(dollars in thousands) 2003 2002 2001
--------------- --------------- --------------
REVENUES
ASP hosting $ 22,867 $ 20,221 $ 14,550
Professional services 23,287 21,174 20,857
License 8,412 12,149 11,285
Maintenance 20,375 19,076 16,511
--------------- --------------- --------------
Total revenues $ 74,941 $ 72,620 $ 63,203
=============== =============== ==============
PERCENTAGE RELATIONSHIP TO TOTAL REVENUES
REVENUES
ASP hosting 31 % 28 % 23 %
Professional services 31 29 33
License 11 17 18
Maintenance 27 26 26
--------------- --------------- --------------
Total revenues 100 100 100
--------------- --------------- --------------
COST OF REVENUES
ASP hosting 26 23 21
Professional services 24 24 25
License 4 4 4
Maintenance 2 2 3
--------------- --------------- --------------
Total cost of revenues 56 53 53
--------------- --------------- --------------
Gross profit 44 47 47
--------------- --------------- --------------
Operating expenses
Product development 10 10 10
Sales and marketing 15 15 15
General and administrative 9 9 11
--------------- --------------- --------------
Total operating expenses 34 34 36
--------------- --------------- --------------
Operating income 10 13 11
Other income, net 0 1 1
--------------- --------------- --------------
Income before income taxes and cumulative effect of
accounting change 10 14 12
Provision for income taxes 5 6 6
--------------- --------------- --------------
Income before cumulative effect of
accounting change 5 8 6
Cumulative effect of accounting change,
net of tax 0 0 (2)
--------------- --------------- --------------
Net income 5 % 8 % 4 %
=============== =============== ==============
COMPARATIVE ANALYSIS OF RESULTS FOR THE FISCAL YEAR ENDED JULY 31, 2003 AND 2002
31
Revenues
- --------
Total revenues increased approximately $2.3 million, or 3%, for the year ended
July 31, 2003 due to increased ASP hosting revenue, professional services
revenue and maintenance revenue, partially offset by decreased license revenue.
ASP hosting revenue increased approximately $2.6 million, or 13%, due to the
addition of several new significant customers. Professional services revenue
increased approximately $2.1 million, or 10%, due to new or expanded engagements
with our existing customer base, new customers and higher utilization rates.
Maintenance revenue increased approximately $1.3 million, or 7%, due to
maintenance agreements associated with new license sales, customers expanding
their processing rights for existing products and annual maintenance fee
increases. License revenue decreased approximately $3.7 million, or 31%, due to
a lower volume of software license contracts as companies were curtailing
capital expenditures in a difficult economic and geopolitical environment.
Backlog for our products and services was approximately $46.5 million as of July
31, 2003, of which approximately $20 million is scheduled to be satisfied within
one year. Backlog is primarily composed of recurring software license revenue
and maintenance revenue 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, we have 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. The estimated future revenues with respect to
software implementation and consulting are based on management's estimate of
revenues over the remaining life of the respective contract. ASP hosting
agreements generally have one-to five-year terms and provide that fees are
charged on a per transaction basis. Estimated future revenues of ASP hosting
services are based on contractual monthly minimums multiplied by the remaining
term of the respective contract.
We maintain a non-exclusive marketing agreement with Computer Sciences
Corporation ("CSC"), formerly MYND, which allows CSC to market our software
products to insurance and financial services companies worldwide. Revenue
generated through the CSC relationship was approximately $2.6 million for each
of the years ended July 31, 2003 and 2002 and $2.3 million for the year ended
July 31, 2001.
Cost of revenues
- ----------------
COST OF ASP HOSTING REVENUE. Cost of ASP hosting revenue is composed primarily
of salary and personnel related costs, facility and equipment costs and postage
and supplies expense related to our two ASP hosting centers. Cost of ASP hosting
revenue increased approximately $2.3 million, or 14%, for the year ended July
31, 2003. The increase is due primarily to increased salaries and personnel
related costs, computer costs and postage expense associated with expanding this
business. Salaries and personnel related costs increased approximately $1.2
million, or 34%, for the year ended July 31, 2003 as a result of increased
staffing in systems support and production services as well as increased
employee benefit costs. Computer costs increased approximately $616,000, or 20%,
for the year ended July 31, 2003 due to additional depreciation and maintenance
on equipment purchased during the year. Postage expense increased approximately
$491,000, or 10%, for the year ended July 31, 2003 due primarily to increased
postage rates. For each of the fiscal years ended July 31, 2003 and 2002, cost
of ASP hosting revenue represented approximately 85% of ASP hosting revenue.
Cost of ASP hosting revenue is expected to increase as ASP revenue increases.
COST OF PROFESSIONAL SERVICES REVENUE. Cost of professional services revenue
consists of costs incurred in providing implementation, integration, training
and consulting services. Cost of professional services revenue increased
approximately $388,000, or 2%, for the year ended July 31, 2003. The increase is
due to increased salary and personnel related costs of approximately $362,000.
Salaries and personnel related costs increased due to increased employee benefit
costs and annual merit increases, partially offset by attrition. For the fiscal
years ended July 31, 2003 and 2002, cost of professional services revenue
represented approximately 76% and 82% of professional services revenues,
respectively. The decrease in cost as a percentage of professional services
revenue is mainly due to greater utilization of implementation and
32
consulting personnel. We expect cost of professional services revenue to
increase as professional services revenue increases.
COST OF LICENSE REVENUE. Cost of license revenue represents amortization of
capitalized software development costs. For the year ended July 31, 2003, cost
of license revenue increased approximately $396,000, or 15%. The increase in
amortization is driven by the increase in capitalized software development
costs. In order to gain market share within the financial services industry, we
have increased our product development and packaging efforts to better serve our
financial services customers. We anticipate continued development efforts,
including Internet applications, integration of our existing product offerings,
further development of packaged applications for use in industries such as
financial services and development of new software products.
COST OF MAINTENANCE REVENUE. Cost of maintenance revenue consists of costs
incurred in providing customer telephone and online support. For the year ended
July 31, 2003, cost of maintenance revenue increased approximately $138,000, or
8%, due primarily to an increase in salaries and personnel related costs of
approximately $186,000, or 16%, partially offset by a decrease in incentive
compensation of approximately $65,000. The increase in salaries and personnel
related cost is due to increased employee benefit costs and annual merit
increases. For each of the fiscal years ended July 31, 2003 and 2002, cost of
maintenance revenue represented approximately 9% of maintenance revenue. The
cost of maintenance revenue is expected to increase, but at a slower rate than
the anticipated growth in software license and maintenance revenues as we have
reduced support of our legacy software products and enhanced our ability to
provide online support.
Operating expenses
- ------------------
PRODUCT DEVELOPMENT. Product development expense consists primarily of costs
associated with developing new products prior to establishing technological
feasibility, enhancing existing products, testing software products and
developing product documentation. For the fiscal year ended July 31, 2003,
product development expense increased approximately $321,000, or 4%. The
increase is primarily due to increased salaries and personnel related costs,
partially offset by a decrease in incentive compensation. For the year ended
July 31, 2003, salaries and personnel related costs increased approximately
$807,000, or 10%, for development and support efforts and incentive compensation
decreased approximately $357,000, or 74%, due to stock option compensation
expense recognized during the year ended July 31, 2002.
SALES AND MARKETING. Sales and marketing expense consists primarily of salaries
and personnel related costs, incentive compensation and costs associated with
marketing programs. For the year ended July 31, 2003, sales and marketing
expense increased approximately $564,000, or 5%. This increase is primarily due
to increased salaries and personnel related costs offset by a decrease in
incentive compensation. For the year ended July 31, 2003, salaries and personnel
related costs increased approximately $878,000, or 21%, due to adding additional
practice leaders and sales personnel. Incentive compensation decreased
approximately $449,000, or 16%, for the year ended July 31, 2003 as a result of
decreased software license revenue.
GENERAL AND ADMINISTRATIVE. General and administrative expense consists of costs
for accounting, human resources, legal, information technology and outside
legal, accounting and other services. General and administrative expense for the
year ended July 31, 2003 was relatively consistent with the year ended July 31,
2002.
Other income (expense), net
- ---------------------------
Other income (expense), net decreased approximately $808,000 for the year ended
July 31, 2003 due primarily to fluctuations in foreign currency exchange rates
associated with our European subsidiary and the addition of interest expense on
our term note and capital lease obligations. For the year ended July 31, 2003,
we incurred a foreign currency exchange rate gain of approximately $45,000 as
compared to a foreign currency exchange rate gain of approximately $572,000 for
the year ended July 31, 2002. For the year ended July 31, 2003, interest expense
was approximately $211,000.
33
Provision for income taxes
- --------------------------
The effective tax rate for the years ended July 31, 2003 and 2002 was
approximately 45% and 40%, respectively. The effective rates differ from the
federal statutory rate due primarily to losses generated by our European
subsidiary, for which we do not currently recognize a tax benefit. We used a
portion of our net operating loss carryforwards to offset our current tax
liability for the years ended July 31, 2003 and 2002.
Net income
- ----------
Net income decreased approximately 33% from approximately $5.9 million at July
31, 2002 to approximately $3.9 million at July 31, 2003. The decrease is
primarily due to a lower volume of software license contracts executed in fiscal
year 2003 and a higher consolidated tax rate.
COMPARATIVE ANALYSIS OF RESULTS FOR THE FISCAL YEAR ENDED JULY 31, 2002 AND 2001
Revenues
- --------
Total revenues increased approximately $9.4 million, or 15%, for the year ended
July 31, 2002 due to increases in all revenue categories. ASP hosting revenue
increased approximately $5.7 million, or 39%, due to our focus on expanding this
business and adding several new significant customers. Professional services
revenue increased approximately $317,000, or 2%, and license revenue increased
approximately $864,000, or 8%. The increase in license revenue is primarily
attributable to increased sales and marketing efforts. Maintenance revenue
increased approximately $2.6 million, or 16%, due to maintenance and support
agreements associated with new software license sales, customer upgrades to our
new e-solutions products and customers expanding their processing rights for
existing products.
Cost of revenues
- ----------------
COST OF ASP HOSTING REVENUE. Cost of ASP hosting revenue increased approximately
29% from $13.4 million at July 31,2001 to $17.2 million at July 31, 2002 due
primarily to increased salaries and personnel related costs, computer costs and
postage and supplies expense associated with expanding this business and stock
option compensation expense. Salaries and personnel related costs increased
approximately $829,000, or 30%, as a result of growth in the ASP business.
Computer costs increased approximately $496,000, or 19%, due to the purchase of
additional equipment. Postage expense increased approximately $1.4 million, or
45%, as a result of growth in this business. Supplies expense increased
approximately $352,000, or 12%, primarily due to additional processing volume.
For the fiscal years ended July 31, 2002 and 2001, cost of ASP hosting revenue
represented approximately 85% and 92% of ASP hosting revenue, respectively. The
decrease in cost as a percentage of ASP hosting revenue is mainly due to greater
utilization of capacity in the ASP centers as the related revenues increase.
COST OF PROFESSIONAL SERVICES REVENUE. Cost of professional services revenue
increased approximately $1.3 million, or 8%, for the year ended July 31, 2002
due to an increase in salaries and personnel related costs. For the year ended
July 31, 2002, salaries and personnel related costs increased approximately
$882,000 due to annual merit adjustments and increased employee benefit costs.
For the fiscal years ended July 31, 2002 and 2001, cost of professional services
revenue represented approximately 82% 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 implementation and consulting
personnel.
COST OF LICENSE REVENUE. Cost of license revenue increased approximately
$271,000, or 12%, for the year ended July 31, 2002 due to increased amortization
associated with increased capitalized software development costs.
COST OF MAINTENANCE REVENUE. For the year ended July 31, 2002, cost of
maintenance revenue was approximately $1.7 million, a decrease of approximately
$175,000, or 9%, from the year ended July 31, 2001. The decrease is due
primarily to a reduction in salaries of approximately $75,000.
34
Operating expenses
- ------------------
PRODUCT DEVELOPMENT. For the fiscal year ended July 31, 2002, product
development expense increased approximately $869,000, or 13%. The increase is
primarily due to an increase in salaries and personnel related costs of
approximately $1.2 million, or 18%, for development and support efforts and
stock option compensation expense, partially offset by increased capitalized
software development costs of approximately $1.0 million, or 41%.
SALES AND MARKETING. For the year ended July 31, 2002, sales and marketing
expense increased approximately $1.4 million, or 15%. The increase is due to an
increase of approximately $1.1 million, or 36%, in salaries and personnel
related costs as we expanded our sales force and package applications for
vertical markets.
GENERAL AND ADMINISTRATIVE. General and administrative expense decreased
approximately $411,000, or 6%, for the year ended July 31, 2002. This decrease
is primarily the result of the discontinuation of goodwill amortization due to
the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"), which discontinues amortization of
goodwill and indefinite-lived intangible assets. Goodwill amortization expense
was approximately $1.1 million for the year ended July 31, 2001. There was no
goodwill amortization expense for the year ended July 31, 2002 in accordance
with the adoption of SFAS 142.
Other income, net
- -----------------
Other income, net increased approximately $521,000 for the year ended July 31,
2002 due primarily to foreign exchange rate gains associated with our European
subsidiary and the strengthening British pound, partially offset by a decrease
in interest income. For the year ended July 31, 2002, we incurred a foreign
currency exchange rate gain of approximately $572,000 as compared to a foreign
currency exchange rate loss of approximately $212,000 for the year ended July
31, 2001. Interest income decreased approximately $265,000 for the year ended
July 31, 2002 due to lower interest rates.
Provision for income taxes
- --------------------------
The effective tax rate for the years ended July 31, 2002 and 2001 was
approximately 40% and 51%, respectively. The decrease in the effective tax rate
is related to the adoption of SFAS 142 and improved performance of our European
subsidiary. For fiscal 2001, the effective rate differs from the federal
statutory rate due primarily to non-deductible goodwill amortization related to
the acquisitions completed in 1997 and 1998. Also, our European subsidiary
generated losses in both fiscal 2002 and 2001, which were not deductible against
our U.S. tax liability. We used a portion of our net operating loss
carryforwards to offset our current tax liability for the years ended July 31,
2002 and 2001.
Income before cumulative effect of accounting change
- ----------------------------------------------------
Income before cumulative effect of accounting change increased approximately
$2.5 million, or 71%, for the year ended July 31, 2002. The increase is
primarily due to revenue growth, along with controlled expenses, increased
utilization of capacity in the ASP hosting centers, improved European
operations, elimination of goodwill amortization, increased capitalization of
software development costs and a lower effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2003, our principal sources of liquidity consisted of cash and cash
equivalents of approximately $7.3 million and our revolving credit facility,
which has available borrowings of $5.8 million. Cash and cash equivalents for
the year ended July 31, 2003 decreased approximately $2.4 million from
approximately $9.7 million at July 31, 2002.
35
Cash provided by operating activities was approximately $11.5 million and $14.4
million for the years ended July 31, 2003 and 2002, respectively. In addition to
lower net income for the year ended July 31, 2003, notable changes in the
balance sheet that impacted cash flows from operations include the following:
o Income tax receivable increased approximately $1.1 million due to
overpayment of our estimated federal tax liability during the year.
o Income tax payable decreased approximately $934,000 due primarily to
federal tax payments made during the year ended July 31, 2003.
o Deferred revenue increased approximately $882,000 due to growth in
maintenance revenue from a larger installed customer base receiving ongoing
maintenance and support services.
o Accrued liabilities decreased approximately $1.2 million due to a decrease
in accrued compensation of approximately $421,000 and a decrease in other
accrued liabilities of approximately $818,000. The decrease in accrued
compensation is due primarily to payouts during the year and a decrease in
incentive compensation as a result of lower software license revenue and
profitability. The decrease in other accrued liabilities is due to timing
of payments and fluctuations in other long-term liabilities.
Cash used in investing activities was approximately $3.4 million and $6.4
million for the years ended July 31, 2003 and 2002, respectively. Cash used in
investing activities during the year ended July 31, 2003 related to the purchase
of approximately $3.2 million of fixed assets, approximately $4.2 million in
costs associated with the development of capitalized software and the purchase
of approximately $3.0 million in short-term investments, partially offset by the
maturity of approximately $7.0 million in short-term investments. The
approximate $6.4 million of cash used in investing activities during the year
ended July 31, 2002 related to the purchase of fixed assets of approximately
$2.8 million and approximately $3.6 million of capitalized software development
costs.
Cash used in financing activities was approximately $10.5 million and $4.6
million for the years ended July 31, 2003 and 2002, respectively. Cash used in
financing activities during the year ended July 31, 2003 primarily related to
the purchase of approximately $25.3 million of treasury stock, partially offset
by proceeds of $14.2 million from a term note.
In December 2002, we entered into various capital lease arrangements for the
rental of computer equipment at our ASP hosting facilities in the aggregate
amount of approximately $3.2 million. The lease agreements require monthly
payments of principal and interest of approximately $65,000. For the year ended
July 31, 2003, we made payments in the approximate amount of $453,000 related to
these leases.
On June 3, 2003, we repurchased approximately 3.1 million shares of our Common
Stock along with warrants to purchase approximately an additional 161,000 shares
of Common Stock from Safeguard Scientifics, Inc ("Safeguard") and a former
officer of Safeguard for $5.95 per share. In connection with the repurchase, we
entered into a $14.2 million term note with Comerica Bank-Texas. The term note
bears interest at a fixed annual rate of 3.32% and is repayable in equal monthly
installments over four years.
As of July 31, 2003, we had approximately 6,811,000 shares of treasury stock
outstanding at an average per share cost of $5.56. Since inception of our stock
repurchase program in fiscal 1999, we have repurchased approximately 9,366,000
shares of stock at an average purchase price of $5.37. Our Board of Directors
believes the repurchase program is an appropriate means of increasing
shareholder value.
Working capital was approximately $3.7 million at July 31, 2003, compared with
approximately $13.2 million at July 31, 2002. The decrease in working capital of
approximately $9.5 million is due to a decrease in current assets of
approximately $6.0 million and an increase in current liabilities of
approximately $3.5 million. The decrease in current assets is primarily due to
the cash used to repurchase our Common Stock from Safeguard. The increase in
current liabilities is primarily due to the current portion of our term note,
associated with the repurchase of our Common Stock from Safeguard.
36
At July 31, 2003, we had a $5.8 million revolving credit facility from Comerica
Bank-Texas which expires on August 31, 2005. The credit facility bears interest
at the bank's prime rate less 100 basis points or LIBOR rate of interest plus
150 basis points, and is collateralized by substantially all of our assets.
Under the credit facility, we are required to maintain certain financial and
non-financial covenants. As of July 31, 2003 there were no borrowings under this
credit facility.
Our liquidity needs are expected to arise primarily from the repayment of debt,
obligations under capital leases, funding the continued development, enhancement
and support of our software offerings and sales and marketing costs associated
with expansion in new vertical and international markets. Although we have no
current commitments or agreements with respect to any acquisition of other
businesses or technologies, a portion of our cash or borrowings under our
revolving credit facility could be used to acquire complementary businesses or
obtain the right to use complementary technologies.
Our liquidity could be negatively impacted by a decrease in demand for our
products, which are subject to rapid technology changes, reduction in capital
expenditures by our customers and intense competition, among other factors.
Operating leases and purchase obligations related to services agreements are our
only off balance sheet arrangements. The following is a schedule of our future
contractual cash obligations as of July 31, 2003 (in thousands):
Less than After
Total 1 year 2 - 3 years 4 - 5 years 5 years
--------------- --------------- --------------- --------------- ---------------
Operating leases $ 26,201 $ 3,306 $ 5,970 $ 5,653 $ 11,272
Capital lease obligations 3,458 783 1,566 1,109 0
Term note 14,829 3,959 7,562 3,308 0
Purchase obligations 312 208 104 0
--------------- --------------- --------------- --------------- ---------------
Total contractual cash
obligations $ 44,800 $ 8,256 $ 15,202 $ 10,070 $ 11,272
=============== =============== =============== =============== ===============
We currently anticipate that existing cash and cash equivalents, together with
cash generated from operations and available borrowings under our credit
facility, will be sufficient to satisfy our operating cash needs for the
foreseeable future.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue
No. 00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. We do
not expect the adoption of EITF Issue No. 00-21 to have a material impact on our
consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), an interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," which addresses the
criteria for consolidation by business enterprises of variable interest
entities. We do not have variable interest entities; therefore, FIN 46 will not
have an impact on our consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment to Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). This statement
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS 133. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. We adopted the provisions of SFAS 149 for the three months ended July 31,
2003. The adoption of SFAS 149 did not have a material impact on our
consolidated financial statements.
37
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"),
which establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. Further, SFAS 150 requires
certain obligations that a reporting entity can or must settle by issuing its
own equity shares to be classified as liabilities. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
shall be effective at the beginning of the first interim period beginning after
June 15, 2003. We adopted the provisions of SFAS 150 for the three months ended
July 31, 2003. The adoption of SFAS 150 did not have a material impact on our
consolidated financial statements.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
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, 2003 and 2002, and the results of their operations and their cash flows
for the years then ended 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 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets in
connection with its adoption of Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets," effective August 1, 2001.
PricewaterhouseCoopers LLP
Dallas, Texas
October 24, 2003
39
DOCUCORP INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
JULY 31, 2003 AND 2002
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------------------------------------------
2003 2002
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,269 $ 9,733
Short-term investments 0 3,989
Accounts receivable, net of allowance
of $562 and $670, respectively 16,023 16,610
Current portion of deferred taxes 83 725
Income tax receivable 1,074 0
Other current assets 2,956 2,353
----------------- -----------------
Total current assets 27,405 33,410
Fixed assets, net of accumulated depreciation
of $13,359 and $11,165, respectively 10,031 6,965
Software, net of accumulated amortization
of $19,286 and $16,265, respectively 9,567 8,391
Goodwill, net of accumulated amortization of $4,940 5,846 5,846
Other assets 591 1,138
----------------- -----------------
Total assets $ 53,440 $ 55,750
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,644 $ 1,489
Accrued liabilities:
Accrued compensation 3,390 3,811
Other 1,648 2,003
Income taxes payable 423 1,357
Current portion of capital lease obligations 582 0
Current portion of long-term debt 3,550 0
Deferred revenue 12,482 11,600
----------------- -----------------
Total current liabilities 23,719 20,260
Deferred taxes 2,003 673
Long-term capital lease obligations 2,342 0
Long-term debt 10,354 0
Other long-term liabilities 1,290 1,753
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; none issued 0 0
Common stock, $0.01 par value, 50,000,000 shares
authorized; 16,593,849 shares issued 166 166
Additional paid-in capital 42,563 43,725
Treasury stock at cost, 6,811,374 and 3,190,709 shares, respectively (37,865) (15,758)
Retained earnings 9,169 5,224
Foreign currency translation adjustment (301) (293)
----------------- -----------------
Total stockholders' equity 13,732 33,064
----------------- -----------------
Total liabilities and stockholders' equity $ 53,440 $ 55,750
================= =================
See accompanying notes to consolidated financial statements.
40
DOCUCORP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
FOR THE YEARS ENDED JULY 31, 2003, 2002 AND 2001
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- ---------------------------------------------------------------------------------------------------------------------
2003 2002 2001
------------- ------------- -------------
REVENUES
ASP hosting $ 22,867 $ 20,221 $ 14,550
Professional services 23,287 21,174 20,857
License 8,412 12,149 11,285
Maintenance 20,375 19,076 16,511
------------- ------------- -------------
Total revenues 74,941 72,620 63,203
------------- ------------- -------------
COST OF REVENUES
ASP hosting 19,526 17,186 13,350
Professional services 17,753 17,365 16,056
License 3,006 2,610 2,339
Maintenance 1,849 1,711 1,886
------------- ------------- -------------
Total cost of revenues 42,134 38,872 33,631
------------- ------------- -------------
Gross profit 32,807 33,748 29,572
------------- ------------- -------------
OPERATING EXPENSES
Product development 7,793 7,472 6,603
Sales and marketing 11,339 10,775 9,344
General and administrative 6,419 6,417 6,828
------------- ------------- -------------
Total operating expenses 25,551 24,664 22,775
------------- ------------- -------------
Operating income 7,256 9,084 6,797
Other income (expense), net (27) 781 260
------------- ------------- -------------
Income before income taxes and cumulative effect
of accounting change 7,229 9,865 7,057
Provision for income taxes 3,284 3,936 3,585
------------- ------------- -------------
Income before cumulative effect of accounting change 3,945 5,929 3,472
Cumulative effect of accounting change, net of tax 0 0 (990)
------------- ------------- -------------
Net income $ 3,945 $ 5,929 $ 2,482
============= ============= =============
Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax (8) (333) 116
------------- ------------- -------------
Comprehensive income $ 3,937 $ 5,596 $ 2,598
============= ============= =============
Basic net income per share:
Income before cumulative effect of accounting change $ 0.31 $ 0.44 $ 0.24
Cumulative effect of accounting change 0 0 (0.07)
------------- ------------- -------------
Basic net income per share $ 0.31 $ 0.44 $ 0.17
============= ============= =============
Weighted average basic shares outstanding 12,780 13,458 14,293
============= ============= =============
Diluted net income per share:
Income before cumulative effect of accounting change $ 0.28 $ 0.40 $ 0.23
Cumulative effect of accounting change 0 0 (0.06)
------------- ------------- -------------
Diluted net income per share $ 0.28 $ 0.40 $ 0.17
============= ============= =============
Weighted average diluted shares outstanding 13,878 14,883 15,028
============= ============= =============
See accompanying notes to consolidated financial statements.
41
DOCUCORP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 2003, 2002 AND 2001
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
2003 2002 2001
------------- ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,945 $ 5,929 $ 2,482
Adjustments to reconcile net income to
net cash provided by operating activities:
Stock option compensation expense 0 536 18
Depreciation 3,357 2,608 2,254
Amortization of capitalized software 3,021 2,630 2,358
Amortization of goodwill 0 0 1,108
Provision for doubtful accounts 305 702 804
Deferred income taxes 1,972 1,152 776
Tax benefit related to stock option exercises 803 469 22
Cumulative effect of accounting change 0 0 990
Other 31 0 0
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 283 (232) (5,768)
(Increase) decrease in income tax receivable (1,074) 0 609
Increase in other assets (45) (73) (268)
Increase (decrease) in accounts payable 152 (755) 483
Increase (decrease) in accrued liabilities (1,225) 641 2,186
Increase (decrease) in income taxes payable (934) 445 604
Increase (decrease) in deferred revenue 871 353 (110)
------------- ------------- ------------
Total adjustments 7,517 8,476 6,066
------------- ------------- ------------
Net cash provided by operating activities 11,462 14,405 8,548
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments (2,981) (13,936) (15,999)
Sale of short-term investments 6,970 13,936 19,764
Purchase of fixed assets (3,170) (2,750) (3,014)
Capitalized software development costs (4,197) (3,615) (2,505)
------------- ------------- ------------
Net cash used in investing activities (3,378) (6,365) (1,754)
------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations (321) 0 0
Principal payments under term note (296) 0 0
Proceeds from term note 14,200 0 0
Purchase of treasury stock (25,285) (6,181) (5,440)
Proceeds from exercise of options and warrants 1,233 1,395 24
Purchase of warrants (274) 0 0
Proceeds from stock issued to employees under Employee
Stock Purchase Plan ("ESPP") 221 182 140
------------- ------------- ------------
Net cash used in financing activities (10,522) (4,604) (5,276)
------------- ------------- ------------
Effect of exchange rates on cash flows (26) 82 (42)
------------- ------------- ------------
Net increase (decrease) in cash and cash equivalents (2,464) 3,518 1,476
Cash and cash equivalents at beginning of year 9,733 6,215 4,739
------------- ------------- ------------
Cash and cash equivalents at end of year $ 7,269 $ 9,733 $ 6,215
============= ============= ============
See non-cash activities disclosed in Notes 1, 5, 6 and 7.
See accompanying notes to consolidated financial statements.
42
DOCUCORP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 2003, 2002 AND 2001
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
- -----------------------------------------------------------------------------------------------------------------------------------
Retained Foreign
Additional earnings currency
Common paid-in Treasury (accumulated translation
Stock capital Stock deficit) adjustment Total
------------- ------------- --------------- --------------- ---------------- -------------
Balance at July 31, 2000 $ 166 $ 44,725 $ (7,923) $ (3,187) $ (76) $ 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
exercises 22 22
Foreign currency translation
adjustment 116 116
Net income 2,482 2,482
------------- ------------- --------------- --------------- ---------------- -------------
Balance at July 31, 2001 166 43,899 (12,333) (705) 40 31,067
Exercise of stock options and
warrants to purchase 567,584
shares of Common Stock (1,156) 2,551 1,395
Purchase of 978,029 shares of
Treasury
Stock (6,181) (6,181)
Issuance of 45,035 shares of Common
Stock to employees under ESPP (23) 205 182
Compensation expense related to
non-qualified stock options 536 536
Tax benefit from stock option
exercises 469 469
Foreign currency translation
adjustment (333) (333)
Net income 5,929 5,929
------------- ------------- --------------- --------------- ---------------- -------------
Balance at July 31, 2002 166 43,725 (15,758) 5,224 (293) 33,064
Exercise of stock options and
warrants to purchase 578,988
shares of Common Stock (1,734) 2,967 1,233
Purchase of 4,239,580 shares of
Treasury
Stock (25,285) (25,285)
Issuance of 39,927 shares of Common
Stock to employees under ESPP 10 211 221
Purchase of 161,242 warrants (274) (274)
Other 33 33
Tax benefit from stock option
exercises 803 803
Foreign currency translation
adjustment (8) (8)
Net income 3,945 3,945
------------- ------------- --------------- --------------- ---------------- -------------
Balance at July 31, 2003 $ 166 $ 42,563 $ (37,865) $ 9,169 $ (301) $ 13,732
============= ============= =============== =============== ================ =============
43
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Docucorp International, Inc. ("Docucorp"), 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 Docucorp
and our wholly owned subsidiaries, Image Sciences, FormMaker, EZPower Systems,
Inc., Maitland Software, Inc. 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. We operate primarily in the United States, Canada and Europe.
We develop, market and support a portfolio of proprietary information software,
application service provider ("ASP") hosting and professional services that
enables companies to create, publish, manage and archive complex, high-volume,
individualized information. We support the entire information lifecycle - from
acquisition of the first raw data point to final delivery of personalized
information to the customer. The majority of our business is currently derived
from companies in the insurance industry.
Revenue recognition
- -------------------
We recognize revenue in accordance with Statement of Position 97-2, "Software
Revenue Recognition" ("SOP 97-2") and Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). Revenues are derived
from the sale of software licenses, annual software maintenance and support
agreements, professional services and ASP hosting services. Revenue is
recognized when a contract exists, the fee is fixed or determinable, software
delivery has occurred and collection of the receivable is deemed probable.
We use the residual method to recognize revenue from the sale of software
licenses that are bundled with maintenance and support. Under the residual
method, the fair value of the undelivered element(s) is deferred and the
remaining portion of the arrangement fee is recognized as revenue. Fair value of
an element is based on vendor-specific objective evidence ("VSOE"). VSOE is
based on the price charged when the same element is sold separately. We do not
generally sell software licenses without selling maintenance and support for the
licensed software. Therefore, we have established VSOE only for the undelivered
element(s) included in a multi-element arrangement. Specifically, VSOE for
maintenance and support is based upon the price a customer pays to renew its
maintenance and support agreement. After expiration of the initial maintenance
term, maintenance and support agreements are renewable on an annual basis and
include rights to upgrades, when and if available, telephone support, updates,
enhancements and bug fixes. Revenue generated from maintenance and support is
recognized ratably over the maintenance term of the agreement. We record
deferred revenue for maintenance amounts invoiced prior to the performance of
the related services.
Our standard license agreements do not provide for rights of software return
and/or conditions of acceptance. However, in the rare case that acceptance
criteria are provided, revenue is deferred and not recognized until all
acceptance provisions are satisfied. Revenue from software licenses, which
include a cancellation clause, is recognized upon expiration of the cancellation
period. Revenue related to products still in the testing phase is deferred until
formal acceptance of the product by the customer.
Professional services revenue includes implementation, integration, training and
consulting services related to our software products. The services offered are
not essential to the functionality of the software. Professional services
revenue is generally recognized as the services are performed.
Revenue derived from the installation and integration of software packages under
a fixed price contract is recognized on a percentage-of-completion basis
measured by the relationship of hours worked to total estimated contract hours.
We follow this method because reasonably dependable estimates of the revenue and
contract hours applicable to various elements of a contract can be made. Since
the financial reporting of these contracts depends upon estimates, which are
assessed continually during the term of these contracts, recognized revenue and
profit are subject to revisions as the contract progresses to completion.
Revisions in
44
profit estimates are reflected in the period in which the facts that give rise
to the revisions become known. Accordingly, favorable changes in estimates
result in additional revenue recognition and net income, and unfavorable changes
in estimates result in a reduction of recognized revenue and net income. When
estimates indicate that a loss will be incurred on a contract upon completion, a
provision for the expected loss is recorded in the period in which the loss
becomes evident.
Revenue from our ASP hosting operations is recognized in accordance with SAB
101, generally on a per transaction basis. ASP hosting agreements are generally
one-to-five years in duration and provide for monthly billing based on
transaction volume or contract minimums, if applicable. Revenue related to the
customer's initial set up and implementation is deferred and subsequently
recognized over the expected term of the ASP hosting agreement.
Cash equivalents
- ----------------
We consider 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
- ----------------------
We have 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, 2002, we held short-term investments, which totaled
approximately $4.0 million. Interest income from such investments was
approximately $148,000, $209,000 and $474,000 for the years ended July 31, 2003,
2002 and 2001, respectively.
Accounts receivable
- -------------------
Included in accounts receivable at July 31, 2003 and 2002 are unbilled amounts
of approximately $3.1 million and $2.2 million, respectively. Such amounts have
been recognized as revenue under the percentage-of-completion method or upon
execution of the software license contract and shipment of the software, but
prior to contractual payment terms.
Allowance for doubtful accounts
- -------------------------------
We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We take into
consideration the current financial condition of the customers, the specific
details of the customer accounts, the age of the outstanding balance and the
current economic environment when assessing the adequacy of the allowance. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances might be
required.
Fair value of financial instruments
- -----------------------------------
Our 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. The fair market value of our capital lease obligations approximate
their carrying values based upon current market rates of interest. The fair
value of our term note was approximately $13.7 million at July 31, 2003, based
on current market interest rates.
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. Currently, we do not
hold derivative instruments or engage in hedging activities.
Fixed assets, depreciation and amortization
- -------------------------------------------
45
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 was approximately $379,000 for the year ended July 31, 2003
and is included in depreciation expense. Estimated service lives are as follows:
Lesser of useful life
Leasehold improvements or life of lease
Computer equipment 4-5 years
Furniture and fixtures 5 years
Equipment under capital leases 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 AICPA Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." For software to be sold, after the technological
feasibility of the software has been established, material software development
costs, which include salaries and personnel related 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.
Goodwill
- --------
Through July 31, 2001, goodwill was amortized on a straight-line basis over a
period of eight to 10 years. In accordance with the adoption of Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), effective August 1, 2001,
we no longer amortize goodwill, but rather test it annually for impairment.
Goodwill is also reviewed for impairment at other times during each year when
events or changes in circumstances indicate that an impairment might be present.
Goodwill amortization expense was approximately $1.1 million for the year ended
July 31, 2001. There was no goodwill amortization expense for the years ended
July 31, 2003 and 2002 in accordance with the adoption of SFAS 142.
Impairment of long-lived assets
- -------------------------------
We have evaluated our long-lived assets for impairment, and 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, we prepare a projection of future operating cash
flows, undiscounted and without interest. If based on this projection we do not
expect to recover our 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.
Deferred revenue
- ----------------
Deferred revenue relates primarily to maintenance and support agreements that
have been invoiced to customers prior to the performance of the related
services. Maintenance and support services are generally billed annually in
advance for services to be performed over a 12-month period. Maintenance
provided
46
under an initial software license contract is recorded as deferred
revenue based on the VSOE of that maintenance and is recognized over the term of
the maintenance agreement.
Guarantees
- ----------
We enter into standard indemnification agreements in our ordinary course of
business. Pursuant to these agreements, we typically indemnify, hold harmless
and agree to reimburse the indemnified party for those losses suffered or
incurred by the indemnified party arising from any trade secrets, trademark,
copyright, patent or other intellectual property infringement claim by any third
party with respect to our software and services. The term of these
indemnification agreements is generally perpetual any time after execution of
the agreement. The maximum potential amount of future payments that we could be
required to make under these indemnification agreements is unlimited. Since we
have never incurred costs to defend lawsuits or settle claims related to these
indemnification agreements, we believe the estimated fair value of our
obligation under these agreements is minimal. Accordingly, we have no
liabilities recorded for these agreements as of July 31, 2003.
We currently provide software product warranties to our customers. The product
warranties generally provide that the licensed software shall operate
substantially in accordance with the applicable user documentation for a period
typically 90 days from delivery. At July 31, 2003 we had no material product
warranty liability, as we have historically not experienced material warranty
claims.
We have agreements in place with our directors and officers whereby we indemnify
them for certain events or occurrences while the officer or director is, or was,
serving at our request in such capacity. The maximum potential amount of future
payments we could be required to make under these indemnification agreements is
unlimited; however, we have a director and officer insurance policy that may
enable us to recover a portion of any future amounts paid.
Translation of foreign currencies
- ---------------------------------
We translate the financial statements of our European subsidiary into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation" ("SFAS 52"). Assets and liabilities of our
European 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.
We account for unrealized gains or losses on our 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.
During the year ended July 31, 2003, we determined that a portion of the
intercompany loan balance to a consolidated foreign subsidiary is of a long-term
investment nature and we will not seek repayment of this portion of the
intercompany loan in the near term. In accordance with SFAS 52, we recognize the
translation of this long-term investment as a component of other comprehensive
income. We recognize the translation of the remaining portion of the
intercompany loan in other income.
Income taxes
- ------------
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
for the year in which those temporary differences are expected to be recovered
or settled. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts more likely than not to be realized.
47
Net income per share
- --------------------
Our basic and diluted net income per share are computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share." 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):
2003 2002 2001
------------ ------------ ------------
Shares used in computing basic
net income per share 12,780 13,458 14,293
Dilutive effect of stock options and
warrants 1,098 1,425 735
------------ ------------ ------------
Shares used in computing diluted
net income per share 13,878 14,883 15,028
============ ============ ============
At July 31, 2003, options to purchase approximately 393,000 shares of Common
Stock at an average exercise price of $8.11 per share 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. At July 31, 2002, there were no anti-dilutive options to
purchase Common Stock. At July 31, 2001, there were approximately 1,412,000
anti-dilutive options to purchase Common Stock at an average exercise price of
$4.41 per share. Subsequent to year end, we issued options to purchase
approximately 285,000 shares of Common Stock at an average exercise price of
$6.44 per share that would have been anti-dilutive at July 31, 2003.
Stock-based compensation
- ------------------------
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. SFAS 148 also amends
the disclosure requirements of Statement of Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 148 requires
prominent disclosure in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. We adopted the disclosure requirements of SFAS
148 effective for the quarter ended April 30, 2003.
We account 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
Involving Stock-Based Compensation, an Interpretation of APB Opinion No. 25."
Under APB 25, compensation cost is generally not recognized for fixed stock
options in which the exercise price is not less than the market price on the
grant date. Compensation cost was not significant in either of the years ended
July 31, 2003 and 2001. For the year ended July 31, 2002, we recognized
approximately $536,000 in compensation cost in accordance with APB 25 for stock
options settled with cash. Had compensation cost for our stock-based
compensation plans been determined under the fair value method of SFAS 123, our
net income and net income per share would have been reduced to the pro forma
amounts indicated below (in thousands except per share amounts):
48
2003 2002 2001
-------------- --------------- --------------
Net income:
As reported $ 3,945 $ 5,929 $ 2,482
Pro forma $ 3,031 $ 5,238 $ 1,613
Net income per share:
As reported
Basic $ 0.31 $ 0.44 $ 0.17
Diluted $ 0.28 $ 0.40 $ 0.17
Pro forma
Basic $ 0.24 $ 0.38 $ 0.11
Diluted $ 0.22 $ 0.35 $ 0.11
The weighted average fair value of options granted during the years ended July
31, 2003, 2002 and 2001 was $4.27, $2.02 and $2.01 per option, respectively. The
fair value of our stock-based awards to employees was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2003, 2002 and 2001, respectively: risk-free
interest rates of 2.86%, 3.97% and 5.63%; no expected dividend yields; expected
lives of 4.50 years, and volatility of 75.6%, 72.7% and 70.54%. 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.
Management estimates
- --------------------
The preparation of our 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.
Advertising costs
- -----------------
We expense advertising costs as incurred. Advertising expenses for the years
ended July 31, 2003, 2002 and 2001 were approximately $1.0 million, $1.5 million
and $949,000, respectively.
Recently issued accounting pronouncements
- -----------------------------------------
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue
No. 00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. We do
not expect the adoption of EITF Issue No. 00-21 to have a material impact on our
consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), an interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements,"
49
which addresses the criteria for consolidation by business enterprises of
variable interest entities. We do not have variable interest entities;
therefore, FIN 46 will not have an impact on our consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment to Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). This statement
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS 133. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. We adopted the provisions of SFAS 149 during the three months ended July
31, 2003. The adoption of SFAS 149 did not have a material impact on our
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"),
which establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. Further, SFAS 150 requires
certain obligations that a reporting entity can or must settle by issuing its
own equity shares to be classified as liabilities. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
shall be effective at the beginning of the first interim period beginning after
June 15, 2003. We adopted the provisions of SFAS 150 during the three months
ended July 31, 2003. The adoption of SFAS 150 did not have a material impact on
our 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, we changed our method of accounting for professional services
implementation revenues and related expenses associated with our ASP hosting
operations to be recognized in earnings over the expected term of the ASP
hosting agreements, typically one to five 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." We 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 $0.06 per diluted share. The cumulative effect of SAB 101 results from
deferral of professional services implementation revenues and related expenses
associated with our ASP hosting operations. During the year ended July 31, 2001,
we recognized approximately $1.6 million of revenue, which was included as a
component of the cumulative effect of accounting change.
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 more than one year beyond the date of the balance sheet
are 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, 2003 and 2002 are as follows (in thousands):
2003 2002
--------------- ---------------
Computer equipment $ 15,624 $ 13,969
Furniture and fixtures 3,079 2,425
Leasehold improvements 1,443 1,736
Equipment under capital lease 3,244 0
--------------- ---------------
23,390 18,130
Less accumulated depreciation (13,359) (11,165)
--------------- ---------------
$ 10,031 $ 6,965
=============== ===============
50
NOTE 4 - COMMITMENTS AND CONTINGENCIES
In December 2002, we entered into various capital lease arrangements for the
rental of computer equipment at our ASP hosting facilities in the aggregate
amount of approximately $3.2 million. The lease agreements require monthly
payments of principal and interest of approximately $65,000. As of July 31,
2002, we had no capital lease obligations.
Equipment leases and our 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 each of the years ended July 31, 2003 and 2002 was
approximately $5.0 million and $4.7 million for the year ended July 31, 2001.
Generally, our leases provide for renewals for various periods at stipulated
rates.
Future minimum lease obligations on leases in effect at July 31, 2003 are as
follows (in thousands):
Capital Operating
leases leases
-------------- ---------------
2004 $ 777 $ 3,306
2005 777 3,160
2006 777 2,810
2007 777 2,859
2008 325 2,794
Thereafter 0 11,272
-------------- ---------------
Minimum lease payments 3,433 26,201
-------------- ---------------
Less interest (509) 0
-------------- ---------------
$ 2,924 $ 26,201
============== ===============
From time to time, we are involved in various claims and legal actions
incidental to the normal conduct of our business. Currently, there are no legal
actions for which we are involved.
NOTE 5 - DEBT
At July 31, 2003, we had a $5.8 million revolving credit facility with Comerica
Bank-Texas which expires on August 31, 2005. The credit facility bears interest
at the bank's prime rate less 100 basis points or LIBOR rate of interest plus
150 basis points. As of July 31, 2003, there were no borrowings under this
credit facility.
On June 3, 2003, we repurchased approximately 3.1 million shares of our Common
Stock along with warrants to purchase approximately an additional 161,000 shares
of our Common Stock from Safeguard Scientifics, Inc. ("Safeguard") and a former
officer of Safeguard for $5.95 per share. In connection with the repurchase, we
entered into a $14.2 million term note with Comerica Bank-Texas. The term note
bears interest at a fixed annual rate of 3.32% and is repayable in equal monthly
installments over four years. The outstanding balance of the term note at July
31, 2003 was approximately $13.9 million. For the year ended July 31, 2003, we
made cash payments for interest on our term note and capital lease obligations
in the aggregate amount of approximately $151,000.
Under the credit facility and term note, we are required to maintain certain
financial and non-financial covenants. At July 31, 2003, we were in compliance
with all financial and non-financial covenants. The credit facility and term
note are collateralized by substantially all of our assets.
51
Long-term debt consists of the following at July 31, 2003 (in thousands):
2003
---------------
Term note with bank $ 13,904
Less current portion of debt 3,550
---------------
$ 10,354
===============
NOTE 6 - STOCKHOLDERS' EQUITY
Preferred stock
- ---------------
We have authorized 1,000,000 shares of Preferred Stock, which our Board of
Directors may issue with such preferences and rights as it may designate. As of
July 31, 2003 and 2002, there were no issued or outstanding shares of Preferred
Stock.
Employee stock purchase plan
- ----------------------------
During the year ended July 31, 1998, we adopted the Employee Stock Purchase
Plan, which allows eligible employees to purchase our Common Stock at a 15%
discount of market value. An aggregate of 600,000 shares of Common Stock has
been reserved for issuance upon purchases pursuant to the stock purchase plan.
At July 31, 2003 and 2002, we have issued approximately 386,000 and 346,000
shares under the plan, respectively.
52
Stock options
- -------------
We provide 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. We now issue options from the 1997
Equity Compensation Plan. Stock options generally vest over a period of three to
five years. We may grant non-qualified stock options at an option price per
share determined by the Board of Directors; however, the option price per share
shall be equal to or greater than the fair market value on the date of grant.
Under this plan, we have reserved 3,800,000 shares for issuance as of July 31,
2003. 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
------------------ -------------------
Balance at July 31, 2000 2,485 $ 3.06
Granted 788 3.34
Exercised (74) 0.32
Expired (121) 4.30
------------------ -------------------
Balance at July 31, 2001 3,078 $ 3.15
Granted 650 3.38
Exercised (444) 2.41
Expired (60) 2.69
------------------ -------------------
Balance at July 31, 2002 3,224 $ 3.30
Granted 590 7.07
Exercised (347) 2.98
Expired (35) 3.62
------------------ -------------------
Balance at July 31, 2003 3,432 $ 3.97
================== ===================
53
The following table summarizes information about employee stock options
outstanding at July 31, 2003 (in thousands except per share amounts):
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------------
Weighted
average
Weighted remaining Weighted
Range of exercise Number average contractual Number average
prices outstanding exercise price life exercisable exercise price
- ----------------------------------------------------------------------------------------------------------------
$0.01 to $0.87 396 $0.60 1.82 396 $0.60
$2.59 to $3.97 1,782 $3.42 6.85 1,102 $3.44
$4.25 to $5.91 864 $4.79 6.68 638 $4.76
$7.34 340 $7.34 9.25 68 $7.34
$13.50 50 $13.50 9.00 13 $13.50
Warrants
- --------
In connection with the Merger, we 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.
There were no warrants outstanding as of July 31, 2003. During the year ended
July 31, 2003, warrants to purchase approximately 188,000 shares of Common Stock
were exercised with an exercise price per share of $0.03. In connection with the
repurchase of our Common Stock from Safeguard in June 2003, we purchased
warrants representing approximately 161,000 shares of Common Stock with an
exercise price per share of $4.25. During the year ended July 31, 2002, warrants
to purchase an aggregate of approximately 84,000 shares of Common Stock with an
exercise price per share of $4.25 were exchanged in a cashless exercise for
approximately 25,000 shares of Common Stock. Additionally, in fiscal 2002, we
purchased warrants for approximately 123,000 shares of Common Stock with an
exercise price of $3.40. During the year ended July 31, 2001, warrants to
purchase an aggregate of approximately 71,000 shares of Common Stock with an
exercise price per share of $0.03 were exchanged in a cashless exercise for
approximately 70,000 shares of Common Stock.
54
Note 7 - Income taxes
- ---------------------
The provision for income taxes charged to operations was as follows (in
thousands):
2003 2002 2001
---------------- ----------------- -----------------
Current tax expense:
U.S. federal $ 1,136 $ 2,451 $ 2,461
State, local and foreign 176 333 348
---------------- ----------------- -----------------
Total current 1,312 2,784 2,809
---------------- ----------------- -----------------
Deferred tax expense:
U.S. federal 1,837 1,073 723
State, local and foreign 135 79 53
---------------- ----------------- -----------------
Total deferred 1,972 1,152 776
---------------- ----------------- -----------------
Total provision $ 3,284 $ 3,936 $ 3,585
================ ================= =================
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):
2003 2002 2001
---------------- ----------------- -----------------
Statutory U.S. tax expense $ 2,451 $ 3,353 $ 2,400
Increase (decrease) in rates resulting from:
Nondeductible items:
Goodwill 0 0 256
Other 48 54 46
State and local taxes (net) 207 272 264
Valuation allowance 493 215 562
Other 85 42 57
---------------- ----------------- -----------------
Provision for income taxes $ 3,284 $ 3,936 $ 3,585
================ ================= =================
55
Deferred tax assets (liabilities) are composed of the following at July 31 (in
thousands):
2003 2002 2001
--------------- --------------- ---------------
Gross deferred tax assets:
Deferred revenue $ 374 $ 653 $ 579
Loss carryforwards 3,561 3,520 3,754
Tax credit carryforwards 235 235 235
Accounts receivable allowance 185 214 386
Deferred lease costs 270 55 154
Compensation expense related to stock
options 263 346 487
Other 304 806 792
--------------- --------------- ---------------
5,192 5,829 6,387
--------------- --------------- ---------------
Gross deferred tax liabilities:
Capitalized software (3,690) (3,226) (2,865)
Other (989) (611) (593)
--------------- --------------- ---------------
(4,679) (3,837) (3,458)
--------------- --------------- ---------------
Net 513 1,992 2,929
Less valuation allowance (2,433) (1,940) (1,725)
--------------- --------------- ---------------
Net deferred tax asset (liability) $ (1,920) $ 52 $ 1,204
=============== =============== ===============
At July 31, 2003, we had net operating loss carryforwards for federal income tax
purposes of approximately $5.3 million that generally expire in the years ending
2011 through 2018. We also had a foreign net operating loss carryforward of
approximately $5.4 million. A valuation allowance against the entire foreign net
operating loss carryforward has been established as the realizability of this
asset is uncertain.
At July 31, 2003, 2002 and 2001, $800,000 of the valuation allowance is related
to deferred tax assets for which subsequently recognized tax benefits, if any,
will be allocated to reduce goodwill.
We have approximately $235,000 of general business tax credit carryforwards. Our
tax credit carryforwards generally expire in the years ending 2009 through 2013.
Due to ownership changes, a portion of our net operating loss and tax credit
carryforwards are subject to an annual cumulative limitation. Approximately $1.2
million of carryforwards may be utilized in any one year.
We made estimated and regular income tax payments of approximately $2.5 million,
$1.9 million and $1.7 million during the years ended July 31, 2003, 2002 and
2001, respectively.
NOTE 8 - RETIREMENT PLAN
We maintain a discretionary defined contribution 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 us as determined by our Board of Directors. Currently,
we match an amount not to exceed 50% of the first 6% of the employee's
compensation contributed as an elective deferral. Our matching contributions for
the years ended July 31, 2003, 2002 and 2001 were approximately $681,000,
$614,000 and $431,000, respectively.
56
NOTE 9 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
As set forth in the criteria of Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), we are organized into two reportable segments: Software and ASP.
The Software segment consists of initial software license sales, professional
services consulting derived from implementation and integration of our software
products and continued customer support and maintenance of the software
products. The ASP segment provides processing, print, mail, archival and
Internet delivery of documents for customers who outsource these activities.
The accounting policies of the segments are the same as those described in Note
1. Sales between segments are insignificant. Corporate expenses related to our
corporate offices are allocated to the segments. Other general and
administrative expenses are not allocated to the segments.
We report information regarding operating segments on the basis used internally
by management to evaluate segment performance. Segments are based on products
and services provided. Management evaluates performance based on revenues and
operating income. We do not track operating results by segment below the
operating income line nor do we track assets, depreciation and amortization by
segment.
The table below presents information about reported segments for the years ended
July 31 (in thousands):
2003 2002 2001
--------------- -------------- ---------------
Revenues:
Software $ 52,074 $ 52,399 $ 48,653
ASP 22,867 20,221 14,550
--------------- -------------- ---------------
Total revenues $ 74,941 $ 72,620 $ 63,203
=============== ============== ===============
Operating income:
Software $ 21,673 $ 23,241 $ 21,769
ASP 3,341 3,035 1,200
Sales and marketing (11,339) (10,775) (9,344)
General and administrative (6,419) (6,417) (6,828)
--------------- -------------- ---------------
Consolidated operating income $ 7,256 $ 9,084 $ 6,797
=============== ============== ===============
Revenue is based on the country in which the sales originated (i.e., where the
legal subsidiary is domiciled). We have two geographic areas including North
America and Europe, Middle East and Africa, ("EMEA"). Long-lived assets consist
of net property plant and equipment, goodwill, capitalized software development
costs and other intangibles. The following table presents sales and long-lived
asset information by geographic area as of and for the years ended July 31 (in
thousands):
57
2003 2002 2001
--------------- --------------- ---------------
Revenues:
North America $ 71,009 $ 68,153 $ 62,124
EMEA 3,932 4,467 1,079
--------------- --------------- ---------------
Total revenues $ 74,941 $ 72,620 $ 63,203
=============== =============== ===============
Long - lived assets:
North America $ 25,477 $ 21,685 $ 20,199
EMEA 558 655 470
--------------- --------------- ---------------
Total long - lived assets $ 26,035 $ 22,340 $ 20,669
=============== =============== ===============
NOTE 10 - MAJOR CUSTOMERS AND RELATED PARTY TRANSACTIONS
For the years ended July 31, 2003, 2002 and 2001, no customer accounted for
greater than 10% of our total revenues.
Through December 31, 2002, one of the members of our Board of Directors served
as President of the Production Systems Group at Xerox Corporation ("Xerox").
During the period August 1, 2002 through December 31, 2002, we paid Xerox
approximately $875,000 for expenses related to various services agreements for
the right to use equipment and associated maintenance. For both the years ended
July 31, 2002 and 2001, we paid Xerox approximately $2.1 million. At July 31,
2002, accounts payable to Xerox was approximately $1,000. During the period
August 1, 2002 through December 31, 2002 we recognized revenue from Xerox of
approximately $128,000 related to the license of our products, maintenance fees
and professional services consulting. For the years ended July 31, 2002 and
2001, we recognized revenue from Xerox of approximately $605,000 and $632,000,
respectively. At July 31, 2002, accounts receivable from Xerox was approximately
$253,000. Additionally, in December 2002, we entered into various capital lease
arrangements with Xerox for the rental of computer equipment at our ASP hosting
facilities in the aggregate amount of approximately $3.2 million.
58
NOTE 11 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------- ------------------- ------------------ -------------------
(in thousands except per share amounts)
2003:
Total revenues $ 18,137 $ 17,373 $ 20,068 $ 19,363
Gross profit 8,105 6,956 8,725 9,021
Operating income 1,939 1,108 2,066 2,143
Net income 1,193 681 971 1,100
Net income per share:
Basic $ 0.09 $ 0.05 $ 0.07 $ 0.10
Diluted $ 0.08 $ 0.05 $ 0.07 $ 0.09
2002:
Total revenues $ 17,150 $ 18,152 $ 18,380 $ 18,938
Gross profit 7,892 8,514 8,552 8,790
Operating income 1,897 2,405 2,407 2,375
Net income 1,241 1,443 1,551 1,694
Net income per share:
Basic $ 0.09 $ 0.11 $ 0.12 $ 0.13
Diluted $ 0.09 $ 0.10 $ 0.10 $ 0.11
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.
As described in Note 4 to the consolidated financial statements, we entered into
various lease arrangements in December 2002 that were recorded as operating
leases. During the fourth quarter, these leases were analyzed and determined to
be capital leases. The overall impact to our consolidated financial statements
as of and for the periods ended January 31, 2003 and April 30, 2003 was not
material. The second and third quarter financial information stated above
reflects capitalization of the lease arrangements. The impact reduced net income
by approximately $6,000 in the second quarter and $13,000 in the third quarter,
and had no impact to the reported net income per share amounts.
59