1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: April 30, 2000 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 number)
5910 North Central Expressway, Suite 800, Dallas, Texas 75206
-------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(214) 891-6500
-----------------------------------------------------
(Registrant's telephone number including area code)
Not applicable
----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common Stock, $.01
par value, 15,006,404 shares outstanding as of May 31, 2000.
2
DOCUCORP INTERNATIONAL, INC.
TABLE OF CONTENTS
QUARTERLY REPORT FORM 10-Q
APRIL 30, 2000
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of April 30, 2000 and July 31, 1999 2
Interim Consolidated Statements of Operations and Comprehensive
Income for the three and nine months ended April 30, 2000 and 1999 3
Interim Consolidated Statements of Cash Flows for the nine months
ended April 30, 2000 and 1999 4
Notes to Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
3
DOCUCORP INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
April 30, July 31,
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,701 $ 6,459
Short-term investments 7,781 6,914
Accounts receivable, net of allowance
of $533 and $675, respectively 11,692 14,436
Other current assets 2,015 3,004
------------ ------------
Total current assets 26,189 30,813
Fixed assets, net of accumulated depreciation
of $5,837 and $4,584, respectively 6,011 3,570
Software, net of accumulated amortization
of $10,715 and $9,045, respectively 7,371 7,728
Goodwill, net of accumulated amortization
of $3,496 and $2,479, respectively 8,760 9,693
Other assets 758 1,114
------------ ------------
$ 49,089 $ 52,918
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,592 $ 1,692
Accrued liabilities 3,558 4,155
Deferred revenue 8,929 9,089
Other current liabilities 518 364
------------ ------------
Total current liabilities 14,597 15,300
Other long-term liabilities 542 624
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized; 16,593,849 shares issued 166 166
Additional paid-in capital 48,310 47,976
Treasury stock at cost, 1,647,491 and 1,170,275
shares, respectively (8,878) (5,539)
Retained deficit (5,583) (5,547)
Currency translation adjustment (65) 0
Notes receivable from stockholders 0 (62)
------------ ------------
Total stockholders' equity 33,950 36,994
------------ ------------
$ 49,089 $ 52,918
============ ============
See accompanying notes to interim consolidated financial statements.
2
4
DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three months ended Nine months ended
April 30, April 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
REVENUES
Professional services $ 7,363 $ 6,950 $ 20,953 $ 20,206
License 1,801 2,908 5,760 8,454
Maintenance and other recurring 3,851 3,367 11,223 9,787
---------- ---------- ---------- ----------
Total revenues 13,015 13,225 37,936 38,447
---------- ---------- ---------- ----------
EXPENSES
Professional services 6,205 5,492 17,726 15,291
Product development and support 2,535 2,432 7,673 7,149
Selling, general and administrative 3,414 3,400 10,249 10,660
---------- ---------- ---------- ----------
Total expenses 12,154 11,324 35,648 33,100
---------- ---------- ---------- ----------
Operating income 861 1,901 2,288 5,347
Other income, net 143 129 483 472
---------- ---------- ---------- ----------
Income before income taxes 1,004 2,030 2,771 5,819
Provision for income taxes 480 860 1,303 2,508
---------- ---------- ---------- ----------
Net income $ 524 $ 1,170 $ 1,468 $ 3,311
========== ========== ========== ==========
Other comprehensive income:
Foreign currency translation adjustment (65) 0 (65) 0
---------- ---------- ---------- ----------
Comprehensive income $ 459 $ 1,170 $ 1,403 $ 3,311
========== ========== ========== ==========
Net income per share:
Basic $ 0.03 $ 0.07 $ 0.10 $ 0.21
========== ========== ========== ==========
Diluted $ 0.03 $ 0.07 $ 0.09 $ 0.19
========== ========== ========== ==========
Weighted average shares outstanding used
in the net income per share calculations:
Basic 15,217 15,896 15,404 16,141
========== ========== ========== ==========
Diluted 16,912 17,577 17,077 17,739
========== ========== ========== ==========
See accompanying notes to interim consolidated financial statements.
3
5
DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine months ended
April 30,
------------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,468 $ 3,311
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,253 984
Amortization of capitalized software 1,670 1,451
Amortization of goodwill 1,017 1,017
Decrease in allowance for doubtful accounts (142) (250)
Other 9 9
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 2,970 (1,732)
(Increase) decrease in other assets 1,347 (450)
Decrease in accounts payable (98) (140)
Increase (decrease) in accrued liabilities (578) 1,109
Increase (decrease) in deferred revenue (136) 405
Increase in other liabilities (75) 130
------------ ------------
Total adjustments 7,237 2,533
------------ ------------
Net cash provided by operating activities 8,705 5,844
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments (867) (5,720)
Purchase of fixed assets (3,694) (1,447)
Capitalized software development costs (1,313) (1,173)
------------ ------------
Net cash used in investing activities (5,874) (8,340)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations (20) (58)
Proceeds from exercise of stock options 538 558
Proceeds from repayment of note receivable from stockholders 62 4
Purchase of treasury stock (5,522) (4,835)
Proceeds from stock issued under Employee Stock Purchase Plan 141 190
Other 242 163
------------ ------------
Net cash used in financing activities (4,559) (3,978)
------------ ------------
Effect of exchange rates on cash flows (30) 0
------------ ------------
Net decrease in cash and cash equivalents (1,758) (6,474)
Cash and cash equivalents at beginning of period 6,459 14,440
------------ ------------
Cash and cash equivalents at end of period $ 4,701 $ 7,966
============ ============
See accompanying notes to interim consolidated financial statements.
4
6
DOCUCORP INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of DocuCorp
International, Inc. and its subsidiaries ("DocuCorp" or the "Company") for the
three and nine month periods ended April 30, 2000 and 1999 have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The financial information presented should be read in
conjunction with the Company's annual consolidated financial statements for the
year ended July 31, 1999. The foregoing unaudited interim consolidated financial
statements reflect all adjustments (all of which are of a normal recurring
nature) which are, in the opinion of management, necessary for a fair
presentation of the results of the interim periods. Operating results for the
three and nine months ended April 30, 2000 are not necessarily indicative of the
results to be expected for the year. Certain prior year balances have been
reclassified to conform to current year presentation.
The assets and liabilities of foreign subsidiaries with functional currencies
other than the U.S. dollar are translated into U.S. dollars at the period end
exchange rate. The related translation adjustments are recorded into a separate
component of equity. Revenues and expenses are translated into U.S. dollars
using the average exchange rates prevailing during the period.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income". SFAS 130 established new rules for the reporting and display of
comprehensive income and its components. SFAS 130 requires unrealized gains or
losses on the Company's foreign currency translation adjustments to be included
in other comprehensive income.
NOTE 2 - NET INCOME PER SHARE
The Company's basic and diluted net income per share are computed in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings Per Share".
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 periods indicated (in thousands):
Three months ended Nine months ended
April 30, April 30,
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Shares used in computing basic
net income per share 15,217 15,896 15,404 16,141
Dilutive effect of stock options and warrants 1,695 1,681 1,673 1,598
---------- ---------- ---------- ----------
Shares used in computing diluted
net income per share 16,912 17,577 17,077 17,739
========== ========== ========== ==========
5
7
Options to purchase approximately 42,853 shares of Common Stock at an average
exercise price of $7.54 per share for the three months ended April 30, 1999 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.
NOTE 3 - ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with a review conducted by the Securities and Exchange Commission
("SEC") related to the Company's filing of its Annual Report on Form 10-K for
the year ended July 31, 1998, the Company responded to the SEC regarding
inquiries related to the value ascribed to the technology acquired as in-process
research and development ("in-process R&D") in the May 1997 merger of Image
Sciences, Inc. and FormMaker Software, Inc. ("the Merger"). In connection with
the Merger, the Company recorded in-process R&D charges in the amount of $13.5
million in the fourth quarter of fiscal 1997. The Company understands that the
SEC is engaged in similar discussions with other companies, and is examining the
basis for valuing in-process R&D charges versus the SEC's recent guidance on the
preferred calculation of these charges. The Company has consulted with its
independent accountants and independent appraisers and believes that the
purchase price allocations and related amortization charges stemming from the
Merger were determined in accordance with generally accepted accounting
principles.
Depending upon the outcome of any future discussions with the SEC, the Company's
historical reported results could potentially be subject to restatement to
reflect a reduction of the in-process R&D charge. A reduction of the in-process
R&D charge would result in a corresponding increase in the amount of goodwill,
which is being amortized over a ten year period.
6
8
ITEM 2. 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 in this Form 10-Q, are
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which include, but are not limited to, technological advances,
dependence upon the insurance and utilities industries, attraction and retention
of technical employees, fluctuations in operating results, and the other risk
factors and cautionary statements listed from time to time in the Company's
periodic reports filed with the Securities and Exchange Commission. All
forward-looking statements included in this Form 10-Q and all subsequent oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by these cautionary statements.
OVERVIEW
DocuCorp International, Inc. ("DocuCorp" or the "Company") develops, markets,
and supports a portfolio of Internet and print, enterprise-wide document
automation software products that enable users to create, publish, manage, and
archive complex, high-volume, individualized documents. In addition, the Company
provides application service provider ("ASP") hosting of Internet-enabled
document automation solutions, document automation consulting, application
integration, and training through a 195-person service organization. ASP hosting
is performed using the Company's software to provide processing, print, mail,
archival, and Internet delivery of documents for customers who outsource this
activity.
The Company was organized in connection with the May 15, 1997 acquisition of
FormMaker Software, Inc. ("FormMaker") by Image Sciences, Inc. ("Image
Sciences") (the "Merger").
DocuCorp software products support leading hardware platforms, operating
systems, printers, and imaging systems. These products are designed to create,
publish, and store documents such as insurance policies, utility statements,
telephone bills, bank and mutual fund statements, invoices, direct mail
correspondence, bills of lading, and other customer-oriented documents. The
Company's ASP offerings include customer statements and billings, electronic
bill presentment and payment, insurance policy production, and electronic
document archival. The Company currently has an installed base of approximately
900 customers. More than half of the 200 largest insurance companies in the
United States use the Company's software products and services, including seven
of the ten largest life and health insurance companies and nine of the ten
largest property and casualty insurance companies. Many of the largest North
American utilities companies, major international financial services
institutions, and clients in higher education and the telecommunications
industries use the Company's products and services.
The Company derives its revenues from license fees, recurring maintenance fees,
and professional services fees related to its software products. License
revenues are generally derived from perpetual and term licenses of software
products. Maintenance and other recurring revenues consist primarily of
recurring license fees and annual maintenance contracts. Professional services
revenues include fees for consulting, implementation, ASP hosting, and education
services.
7
9
HISTORICAL OPERATING RESULTS OF THE COMPANY
The following table sets forth selected unaudited interim consolidated
statements of operations data of the Company expressed as a percentage of total
revenues for the periods indicated:
Three months ended Nine months ended
April 30, April 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Revenues
Professional services 56% 53% 55% 53%
License 14 22 15 22
Maintenance and other recurring 30 25 30 25
---------- ---------- ---------- ----------
Total revenues 100 100 100 100
---------- ---------- ---------- ----------
Expenses
Professional services 48 42 47 40
Product development and support 19 18 20 18
Selling, general and administrative 26 26 27 28
---------- ---------- ---------- ----------
Total expenses 93 86 94 86
---------- ---------- ---------- ----------
Operating income 7 14 6 14
Other income, net 1 1 1 1
---------- ---------- ---------- ----------
Income before income taxes 8 15 7 15
Provision for income taxes 4 6 3 6
---------- ---------- ---------- ----------
Net income 4% 9% 4% 9%
========== ========== ========== ==========
COMPARATIVE ANALYSIS OF QUARTERLY RESULTS FOR THE THREE AND NINE MONTHS ENDED
APRIL 30, 2000 AND 1999
REVENUES
Total revenues decreased approximately 2% and 1% for the three and nine months
ended April 30, 2000, respectively, due primarily to decreased license revenues
offset by increased maintenance and professional services revenues. For the
three and nine months ended April 30, 2000, license revenues declined
approximately 38% and 32%, respectively, primarily as a result of the impact of
Year 2000. The majority of prospective customers were waiting until the passage
of January 1, 2000 to introduce software into their computing environments and
the Company's sales cycle for license revenues is typically several months.
Maintenance revenues increased 14% and 15% for the three and nine months ended
April 30, 2000, respectively, due to an expanding customer base, as well as the
one-time effect of the reinstatement of several previously expired maintenance
contracts. For the three and nine months ended April 30, 2000, professional
services revenues increased 6% and 4%, respectively. Both periods experienced a
decrease in implementation and consulting revenues due largely to the delay of
customers and prospects implementing new projects as the result of Year 2000
concerns. This decrease in implementation and consulting revenues was offset by
a substantial increase in ASP hosting revenues in the utilities market.
Backlog for the Company's products and services of approximately $38.2 million
as of April 30, 2000, of which approximately $21.3 million is scheduled to be
satisfied within one year, is primarily composed of recurring software license
and maintenance revenues for ongoing maintenance and support, software
implementation and consulting services, and ASP hosting services. Software
agreements for recurring license fees generally have non-cancelable terms of up
to five years. Annual maintenance contracts may generally be terminated upon 30
days' notice; however, the Company has not historically experienced
8
10
material cancellations of such contracts. Software implementation and consulting
services backlog is principally performed under time and material agreements, of
which some have cancellation provisions. ASP hosting services agreements
generally provide that fees are charged on a per transaction basis. The
estimated future revenues with respect to software implementation and ASP
hosting services are based on management's estimate of revenues over the
remaining life of the respective contracts.
In September 1998, the Company and Policy Management Systems Corporation
("PMSC") agreed to terminate the exclusive marketing agreement and enter into a
new, non-exclusive marketing agreement. The new marketing agreement between
DocuCorp and PMSC allows PMSC to market all of the Company's software products
to insurance and financial services companies worldwide. The Company generated
revenues of approximately $850,000 and $900,000 for the three months ended April
30, 2000 and 1999, respectively, and approximately $2.6 million and $2.3 million
for the nine months ended April 30, 2000 and 1999, respectively, under the new
agreement.
PROFESSIONAL SERVICES EXPENSE
Professional services expense is composed primarily of personnel expenses
related to both consulting and ASP hosting services. Professional services
expense increased 13% and 16% for the three and nine months ended April 30,
2000, respectively, due primarily to increased personnel costs associated with
the expanded professional services and ASP hosting departments. Additionally,
postage and supplies expense associated with the ASP hosting business increased
approximately $455,000 and $1.7 million for the three and nine months ended
April 30, 2000, respectively, due to the increase in ASP hosting revenues. For
the three months ended April 30, 2000 and 1999, professional services expense
represented 84% and 79% of professional services revenues, respectively. For the
nine months ended April 30, 2000 and 1999, professional services expense
represented 85% and 76% of professional services revenues, respectively. This
increase in cost as a percentage of professional services revenues is mainly due
to lower utilization of consulting personnel as a result of customers
readjusting their focus until after the passage of January 1, 2000, as well as
increased postage and supplies expense associated with the ASP hosting business.
The Company expects professional services expenses to increase as a result of
the opening of a second ASP hosting facility located in Dallas, Texas during
March 2000. In addition, expenses are expected to increase in order to meet
additional resource requirements as professional services activities increase
domestically and internationally.
PRODUCT DEVELOPMENT AND SUPPORT EXPENSE
Product development and support expense consists primarily of research and
development efforts, amortization of capitalized software development costs,
customer support, and other product support costs. For the three and nine months
ended April 30, 2000, product development and support expense increased 4% and
7%, respectively. The majority of the increase is related to additional
personnel expenses for continued development and support efforts of the
Company's products. The Company anticipates continued acceleration of
development efforts, including Internet applications, integration of its
existing product offerings, further development of systems for use in industries
such as utilities and financial services, development of new software products
utilizing object-oriented technology, and continued support of its existing
product lines. Expenditures in this area are expected to increase in relation to
the anticipated growth in revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense remained substantially unchanged for
the three months ended April 30, 2000 and decreased 4% for the nine months ended
April 30, 2000. Incentive compensation decreased as a result of decreased
license revenues, which was offset by increased personnel costs for
international and vertical market expansion. For the nine months ended April 30,
2000, a decrease in third-
9
11
party selling costs associated with the PMSC marketing agreement also
contributed to the decrease in selling, general and administrative expense.
OTHER INCOME, NET
Other income, net remained substantially the same for the three and nine months
ended April 30, 2000 as compared to the prior year period.
PROVISION FOR INCOME TAXES
The effective tax rate for the three months ended April 30, 2000 and 1999 was
approximately 48% and 42%, respectively, and approximately 47% and 43% for the
nine months ended April 30, 2000 and 1999, respectively. These rates differ from
the federal statutory rate due primarily to non-deductible goodwill amortization
related to the Merger and fiscal year 1998 acquisitions of EZPower Systems, Inc.
and Maitland Software, Inc.
NET INCOME
Net income decreased approximately 55% and 56% for the three and nine months
ended April 30, 2000, respectively. The decrease in net income for these periods
is primarily due to the impact of Year 2000 on software license and professional
services revenues and the increase in operating expenses associated with
international, ASP, and vertical market expansion.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT AND RELATED COSTS
Based on the results of an independent third-party appraisal, the Company
recorded charges of $13.5 million in the fourth quarter of fiscal 1997 to
expense in-process research and development ("in-process R&D") costs related to
the acquisition of FormMaker. The aggregate purchase price related to the
Merger, including direct acquisition costs, was approximately $20.4 million
which was allocated to the fair value of the net identifiable assets acquired,
including in-process R&D. Acquired in-process R&D represents the present value
of the estimated future cash flows expected to be generated by FormMaker
in-process R&D. The allocation of $13.5 million to in-process R&D represented
the estimated fair value based on risk-adjusted cash flows related to the
in-process R&D projects. In the opinion of management and independent
third-party appraisers, the development of these projects had not yet reached
technological feasibility and therefore, the in-process R&D had no alternative
future uses. Accordingly, these costs were charged to operations on the closing
date of the Merger.
The value assigned to purchased in-process R&D was determined by estimating the
costs to develop the purchased in-process R&D into commercially viable products,
estimating the resulting net cash flows from the projects, and discounting the
net cash flows to their present value. The revenue projection used to value the
in-process R&D was based on estimates of relevant market sizes and growth
factors, expected trends in technology, and the nature and expected timing of
new product introductions by FormMaker and its competitors.
The estimated revenues for the in-process R&D assumed a compound annual growth
rate of approximately 30% in the four years following introduction, assuming the
successful completion and market acceptance of the major R&D programs. For each
of the acquired in-process R&D efforts, the estimated revenues for the
in-process projects were expected to peak within three to four years of
acquisition and then decline as other new products and technologies are expected
to enter the market.
The rates utilized to discount the net cash flows to their present value were
based on cost of capital calculations. Due to the nature of the forecast and the
risks associated with the projected growth and profitability associated with
FormMaker's in-process R&D, a discount rate of 27% was used to value in-process
R&D, and a discount rate of 20% was used for the existing products and
technology. This discount rate was commensurate with the acquired in-process R&D
projects' stages of development and the
10
12
uncertainties in the economic estimates described above. As of the date of the
Merger, FormMaker had spent approximately $1.3 million on in-process R&D
projects. Subsequent to the date of the Merger, the Company expended
approximately $1.0 million for the completion of the in-process R&D projects
which approximated the expected costs to complete such projects.
Milestones for the in-process R&D projects were also examined as of the date of
the Merger. For each in-process R&D project, Company engineers evaluated the
critical milestones. This included comprehensive analysis of each of the
acquired product lines' in-process R&D to clarify the technological hurdles that
the development team had overcome at the date of the Merger as well as the
hurdles that the engineers faced going forward to complete the remaining
development efforts. From this analysis, the overall significance of tasks
completed versus tasks remaining were assessed. For all categories, a greater
level of significance was associated with completed tasks. This implied that a
greater degree of overall value was attributable to the completed tasks relative
to those indicated by the cost metrics. Based on estimates made by FormMaker's
R&D professionals regarding technical achievements completed as of the date of
the Merger, the milestone percentage was determined to be approximately 75%.
Utilizing this milestone analysis for the in-process R&D valuation resulted in
values for incomplete R&D projects which approximated the $13.5 million
appraisal value.
At the time of the Merger, FormMaker offered a basic portfolio of document
automation processing and imaging software products. FormMaker's product lines
and related services stemmed from its DAP and Multi-user Archival & Retrieval
System ("MARS") technologies.
The acquired in-process R&D value was comprised of several ongoing projects
intended to address the issues of technological advances in the marketplace such
as new client/server architecture, new delivery mechanisms, the Internet,
emergence of the Windows NT operating system, object integration on the desktop,
and new standards such as Microsoft's Active-X, Microsoft's ODBC, and Sun
Microsystems' Java, which were making the development and implementation of new
products increasingly complex. These advances in technology required creating
highly advanced products that could handle substantial increases in demand, as
well as end user requirements for more complex graphics-intensive material. This
led to development efforts which centered around new DAP and MARS technologies
and incorporated innovative new features and a wide array of advanced functions.
FormMaker was addressing industry and technological trends by developing new
delivery mechanisms via the Internet, object integration on the desktop, new DAP
architecture, platform independence, improved workflow functionality, product
compatibility, DAP and MARS integration, and the development of migration and
upgrade paths.
At the Merger date, there were still significant efforts needed to bring the
acquired in-process technologies and projects to fruition. These efforts
principally related to the completion of planning, designing, architecturing,
coding, prototyping, scalability, verification, and testing activities that were
necessary to establish that the proposed technologies would meet their design
specifications. These projects had not yet reached technological feasibility at
the time of the Merger. Management expected to continue to support these efforts
and believed FormMaker had a reasonable chance of successfully completing the
R&D programs. However, there was risk associated with the completion of the
projects and there was no assurance that any would reach either technological or
commercial success. If these projects were not successfully developed, the sales
and profitability of the combined company could have been adversely affected in
future periods.
Subsequent to the Merger, the majority of the original R&D projects were
completed in accordance with FormMaker's plans. The fruition of these projects
resulted in advanced new product technologies represented by the launch of the
Internet Document Server ("IDS") versions 1.0 and 1.3, Bill Print version 1.0
and 1.1, and which fueled the release of two new DAP products.
11
13
The emergence of the IDS products represented the completion of a key
revolutionary technology. This new rules-based transaction processing server,
released in October 1997, allows for the dynamic generation of documents in
industry-standard Adobe PDF format for Web delivery and the ability to archive
documents in a pure "thin-client" fashion. The second phase of ongoing projects
aimed at addressing new Internet functionalities pushed forward the release of
IDS version 1.3 in December 1998, which further addressed new delivery
mechanisms and standards such as Microsoft's Active-X, Microsoft's ODBC, and Sun
Microsystem's Java and represents the completion of the in-process R&D acquired
in the Merger. The Company began recognizing revenue related to IDS products
during fiscal year 1998.
FormMaker's pre-acquisition efforts in developing new printing technologies have
resulted in the release of Bill Print versions 1.0 and 1.1 in October 1997 and
March 1998, respectively, which address the high-volume complex bill and
statement printing needs of the utilities industry.
FormMaker's investments in developing innovative features, new workflow
capabilities, object-oriented desktop integration, multiple language system
communications, improved graphics capabilities and platform and hardware
adaptability proved fruitful in yielding new DAP releases in September 1997 that
could adequately address international markets and open new industries, such as
utilities and financial services.
The release of Bill Print versions 1.0 and 1.1 and the new DAP releases have
contributed to a significant increase in revenues derived from the utilities
market. Revenues in this market increased in excess of 160% in the fiscal year
ended July 31, 1998, as compared to the previous fiscal year, and greater than
29% for the fiscal year ended July 31, 1999, as compared to the corresponding
prior year period. In addition, these releases of in-process R&D have resulted
in recent licenses to the financial services industry.
Most of the in-process R&D projects acquired in the Merger have been completed
on schedule, but minor delays have occurred due to changes in technological and
market requirements for document automation processing and imaging systems.
Although all in-process R&D projects have been completed, no assurance can be
made that the Company's recent releases will be met with market acceptance.
As discussed in Note 3 of the notes to the unaudited interim consolidated
financial statements, the Company has responded to inquiries by the Securities
and Exchange Commission ("SEC") regarding the value ascribed to the technology
acquired as in-process R&D in connection with the Merger. To date, the Company
has not received further inquiries from the SEC. However, depending upon the
outcome of any future discussions with the SEC, the Company's historical
reported results could potentially be subject to restatement to reflect a
reduction of the in-process R&D charge. A reduction of the in-process R&D charge
would result in a corresponding increase in the amount of goodwill, which is
being amortized over a ten year period.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2000, the Company's principal sources of liquidity consisted of
cash of approximately $4.7 million and short-term investments of approximately
$7.8 million. Cash and cash equivalents for the nine months ended April 30, 2000
decreased approximately $1.8 million due mainly to the purchase of fixed assets
and repurchase of treasury stock, offset by approximately $8.7 million cash
generated from operations. Cash flows used in investing activities of
approximately $5.9 million was related to the purchase of short-term
investments, purchase of fixed assets, and development of capitalized software.
Specifically, the Company invested approximately $3.7 million in fixed assets
related to the Company's expansion of the Dallas and Atlanta facilities and
purchase of ASP hosting equipment. Cash flows used in financing activities of
approximately $4.6 million primarily relates to the repurchase of treasury stock
under the Company's stock repurchase program offset by proceeds from exercise of
stock options. As of
12
14
April 30, 2000, the Company had repurchased approximately 2,440,000 shares of
its Common Stock at an average per share cost of $5.16.
Working capital was approximately $11.6 million at April 30, 2000, compared with
approximately $15.5 million at July 31, 1999.
The Company's $3.5 million revolving credit facility bears interest at the
bank's prime rate less 0.25%, or 8.75% as of April 30, 2000, and has been
renewed and extended to November 2001. Under the credit facility, the Company is
required to maintain certain financial covenants. As of April 30, 2000 there
were no borrowings under this credit facility.
The Company's liquidity needs are expected to arise primarily from funding the
continued development, enhancement, and support of its software offerings,
selling and marketing costs associated principally with continued entry into new
vertical and international markets, and repurchase of treasury stock under the
Company's stock repurchase program. Although the Company has no current
commitments or agreements with respect to any acquisition of other businesses or
technologies, a portion of the Company's cash could be used to acquire
complementary businesses or obtain the right to use complementary technologies.
The Company currently anticipates that existing cash and short-term investment
balances, its existing credit facility, and cash generated from operations will
be sufficient to satisfy its operating cash needs for the foreseeable future.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective August 1, 1999, the Company adopted Statement of Position No. 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions" ("SOP 98-9") and Statement of Position No. 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
The adoption of SOP 98-9 and SOP 98-1 did not have a material effect on the
Company's financial position or results of operations during the nine months
ended April 30, 2000.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulleting No. 101, "Revenue Recognition in Financial Statements," ("SAB 101"),
which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements filed with the Securities and Exchange
Commission. SAB 101 outlines the basic criteria that must be met to recognize
revenue and provides guidance for disclosures related to revenue recognition
policies. The Company is required to adopt SAB 101 no later than the first
quarter of fiscal year ending July 31, 2001. The Company is in the process of
assessing the impact of adopting SAB 101.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no derivative financial instruments in its cash and cash
equivalent balances. The Company invests its cash and cash equivalents in
investment-grade, highly liquid investments, consisting of money market
instruments and commercial paper.
For the nine months ended April 30, 2000, approximately 6% of the Company's
revenues and 5% of the Company's operating expenses were denominated in British
pounds. Historically, the effect of fluctuations in currency exchange rates has
not had a material impact on the Company's operations. The Company's exposure to
fluctuations in currency exchange rates will increase as it expands its
international operations.
13
15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27. Financial Data Schedule (for EDGAR filing purposes only).
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed by the Registrant
during the three months ended April 30, 2000.
14
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DocuCorp International, Inc.
- --------------------------------------------
(Registrant)
/s/ Michael D. Andereck Date June 14, 2000
- -------------------------------------------- -------------
Senior Vice President, Finance
(Duly Authorized Officer and Principal Financial Officer)
15
17
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule (for EDGAR filing purposes only).