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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: October 31,2000 Commission File Number: 00-1033864
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DOCUCORP INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 75-2690838
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
5910 North Central Expressway, Suite 800, Dallas, Texas 75206
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(Address of principal executive offices) (Zip Code)
(214) 891-6500
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(Registrant's telephone number including area code)
Not applicable
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(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
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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, 14,401,723 shares outstanding as of December 4, 2000.
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DOCUCORP INTERNATIONAL, INC.
TABLE OF CONTENTS
QUARTERLY REPORT FORM 10-Q
OCTOBER 31, 2000
PART I - FINANCIAL INFORMATION
Page
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Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of October 31, 2000 and July 31, 2000 2
Interim Consolidated Statements of Operations and Comprehensive
Income for the three months ended October 31, 2000 and 1999 3
Interim Consolidated Statements of Cash Flows for the three months
ended October 31, 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 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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DOCUCORP INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
October 31, July 31,
2000 2000
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ASSETS
Current assets:
Cash and cash equivalents $ 4,106 $ 4,739
Short-term investments 5,832 7,754
Accounts receivable, net of allowance
of $650 and $600, respectively 14,692 12,018
Other current assets 2,990 3,099
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Total current assets 27,620 27,610
Fixed assets, net of accumulated depreciation
of $6,828 and $6,309, respectively 6,131 6,039
Software, net of accumulated amortization of $11,821
and $11,277, respectively 7,224 7,259
Goodwill, net of accumulated amortization of $4,117
and $3,832, respectively 6,669 6,954
Other assets 1,141 1,148
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$ 48,785 $ 49,010
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,768 $ 1,763
Accrued liabilities 4,079 3,626
Deferred revenue 8,126 8,884
Income taxes payable 1,112 308
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Total current liabilities 15,085 14,581
Other long-term liabilities 784 724
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none issued 0 0
Common stock, $.01 par value, 50,000,000 shares
authorized; 16,593,849 shares issued 166 166
Additional paid-in capital 44,606 44,725
Treasury stock at cost, 1,948,361 and 1,508,777
shares, respectively (9,597) (7,923)
Accumulated deficit (2,276) (3,187)
Foreign currency translation adjustment 17 (76)
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Total stockholders' equity 32,916 33,705
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$ 48,785 $ 49,010
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See accompanying notes to interim consolidated financial statements.
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DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three months ended
October 31,
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2000 1999
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REVENUES
ASP hosting $ 2,933 $ 2,225
Professional services 5,173 5,139
License 3,043 1,880
Maintenance and other recurring 3,996 3,739
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Total revenues 15,145 12,983
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EXPENSES
ASP hosting 3,024 1,766
Professional services 4,012 4,125
Product development and support 2,660 2,460
Selling, general and administrative 3,870 3,315
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Total expenses 13,566 11,666
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Operating income 1,579 1,317
Other income, net 42 159
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Income before income taxes 1,621 1,476
Provision for income taxes 710 654
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Net income $ 911 $ 822
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Other comprehensive income:
Foreign currency translation adjustment 93 0
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Comprehensive income, net of tax $ 1,004 $ 822
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Net income per share:
Basic $ 0.06 $ 0.05
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Diluted $ 0.06 $ 0.05
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Weighted average shares outstanding used
in the net income per share calculations:
Basic 14,960 15,512
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Diluted 15,807 17,125
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See accompanying notes to interim consolidated financial statements.
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DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three months ended
October 31,
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2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 911 $ 822
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 518 335
Amortization of capitalized software 544 541
Amortization of goodwill 285 339
Provision for doubtful accounts 123 28
Stock option compensation expense 5 0
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (2,639) 655
Decrease in other assets 108 1,263
Increase (decrease) in accounts payable 9 (202)
Increase (decrease) in accrued liabilities 309 (441)
Decrease in deferred revenue (745) (965)
Increase in other liabilities 967 111
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Total adjustments (516) 1,664
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Net cash provided by operating activities 395 2,486
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CASH FLOWS FROM INVESTING ACTIVITIES
(Purchase) sale of short-term investments, net 1,922 (884)
Purchase of fixed assets (617) (1,847)
Capitalized software development costs (509) (437)
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Net cash provided by (used in) investing activities 796 (3,168)
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CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations 0 (10)
Proceeds from exercise of stock options 14 285
Proceeds from repayment of note receivable from stockholder 0 42
Purchase of treasury stock (1,812) (186)
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Net cash provided by (used in) financing activities (1,798) 131
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Effect of exchange rates on cash flows (26) 0
Net decrease in cash and cash equivalents (633) (551)
Cash and cash equivalents at beginning of period 4,739 6,459
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Cash and cash equivalents at end of period $ 4,106 $ 5,908
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See accompanying notes to interim consolidated financial statements.
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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 month periods ended October 31, 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, 2000. 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 months ended October 31, 2000 are not necessarily indicative of the
results to be expected for the year. Certain prior year amounts have been
reclassified to conform to the current year presentation.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The unaudited interim consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accounts of the Company's foreign subsidiary are maintained in its local
currency. The accompanying unaudited interim consolidated financial statements
have been translated and adjusted to reflect U.S. dollars in accordance with
accounting principles generally accepted in the U.S.
NOTE 3 - NET INCOME PER SHARE
The Company's basic and diluted net income per share are computed in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). Basic net income per share is computed using the weighted average
number of common shares outstanding. Diluted net income per share is computed
using the weighted average number of common shares outstanding and the assumed
exercise of stock options and warrants (using the treasury stock method).
Following is a reconciliation of the shares used in computing basic and diluted
net income per share for the periods indicated (in thousands):
Three months ended
October 31,
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2000 1999
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Shares used in computing basic net income per share 14,960 15,512
Dilutive effect of stock options and warrants 847 1,613
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Shares used in computing diluted net income per share 15,807 17,125
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DOCUCORP INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
Options to purchase approximately 1,164,000 and 43,000 shares of Common Stock at
average exercise prices of $4.59 and $7.54 per share at October 31, 2000 and
1999, respectively, were anti-dilutive and not included in the computation of
diluted net income per share, because the options' exercise price was greater
than the average market price of the Common Stock for the period.
NOTE 4 - RESTATEMENT OF FINANCIAL RESULTS
As publicly announced on November 13, 2000, it was determined that the
consolidated results reported in the Company's Form 10-K as of and for the
fiscal year ended July 31, 2000 would be restated. In July 2000, the Company's
fourth fiscal quarter, the Company recognized revenue from a purported amendment
of an existing software license agreement for one of the Company's European
customers. The amendment was improperly represented by the Company's European
subsidiary as having been in effect on July 31, 2000. The Company's audit
committee immediately commenced an internal investigation relating to the
software license agreement. The audit committee retained the law firm of Lovells
to assist in the investigation. As a result of the investigation, it was
determined that certain assets, liabilities, revenues, and net income were
overstated at the Company's European subsidiary. Accordingly, consolidated
results of the Company as of and for the fiscal year ended July 31, 2000 were
impacted. The Company filed Form 10-K/A on November 28, 2000 amending and
restating the previous Form 10-K.
For the year ended July 31, 2000, the previously reported financial statements
included an overstatement of net revenues of approximately $1.4 million and an
overstatement of net income of approximately $980,000, or $0.06 per diluted
share.
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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 software
products that enable users to acquire, manage, personalize, and present
information. In addition, the Company provides application service provider
("ASP") hosting of Internet-enabled solutions, consulting, application
integration, and training through a 190-person service organization. ASP hosting
is performed using the Company's software and facilities to provide processing,
print, mail, archival, and Internet delivery of documents for customers who
outsource this activity.
The Company's software products support leading hardware platforms, operating
systems, printers, and imaging systems. These products are designed to
personalize, produce, and manage documents such as insurance policies, utility
statements, telephone bills, bank and mutual fund statements, invoices, direct
mail correspondence, bills of lading, and other customer-oriented documents. The
Company's ASP offerings include customer statement and bill generation,
electronic bill presentment and payment, insurance policy production, and
electronic document archival. The Company currently has an installed base of
approximately 900 customers. More than half of the 200 largest North American
insurance companies use the Company's software products and services, including
nine 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 ASP hosting fees, professional services
fees, license fees, and recurring maintenance fees related to its software
products. ASP hosting revenues consist of fees earned from customers who
outsource document automation applications. Professional services revenues
include fees for consulting, implementation, and education services. 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.
RESTATEMENT OF FINANCIAL RESULTS
As publicly announced on November 13, 2000, it was determined that the
consolidated results reported in the Company's Form 10-K as of and for the
fiscal year ended July 31, 2000 would be restated. In July 2000, the Company's
fourth fiscal quarter, the Company recognized revenue from a purported amendment
of an existing software license agreement for one of the Company's European
customers. The amendment was improperly represented by the Company's European
subsidiary as having been in effect on July 31, 2000. The Company's audit
committee immediately commenced an internal investigation relating to the
software license agreement. The audit committee retained the law firm of
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Lovells to assist in the investigation. As a result of the investigation, it was
determined that certain assets, liabilities, revenues, and net income were
overstated at the Company's European subsidiary. Accordingly, consolidated
results of the Company as of and for the fiscal year ended July 31, 2000 were
impacted. The Company filed Form 10-K/A on November 28, 2000 amending and
restating the previous Form 10-K.
For the year ended July 31, 2000, the previously reported financial statements
included an overstatement of net revenues of approximately $1.4 million and an
overstatement of net income of approximately $980,000, or $0.06 per diluted
share.
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
October 31,
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2000 1999
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Revenues
ASP hosting 19% 17%
Professional services 34 40
License 20 14
Maintenance and other recurring 27 29
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Total revenues 100 100
Expenses
ASP hosting 20 14
Professional services 26 31
Product development and support 18 19
Selling, general and administrative 25 26
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Total expenses 89 90
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Operating income 11 10
Other income, net 0 1
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Income before income taxes 11 11
Provision for income taxes 5 5
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Net income 6% 6%
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COMPARATIVE ANALYSIS OF QUARTERLY RESULTS FOR THE THREE MONTHS ENDED OCTOBER 31,
2000 AND 1999
REVENUES
The Company experienced revenue growth among all revenue streams. Total revenues
increased 17% due to a substantial increase in ASP hosting and license revenues.
ASP hosting revenues increased 32% due to the Company's focus on expanding this
business and adding several new significant customers. License revenues
increased 62% primarily because customers are no longer focused on Y2K as they
were for the three months ended October 31, 1999. Maintenance revenues increased
7% due to an expanding customer base.
Backlog for the Company's products and services of approximately $35.5 million
as of October 31, 2000, of which approximately $19.3 million is scheduled to be
satisfied within one year, is primarily composed of recurring software license
fees and maintenance revenues for ongoing maintenance and support, software
implementation and consulting services, and ASP hosting services. Software
agreements for
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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 material cancellations of
such contracts. Software implementation and consulting services backlog is
principally performed under time and material agreements of which some have
cancellation provisions. ASP hosting agreements generally provide that fees are
charged on a per transaction basis. The estimated future revenues with respect
to software implementation and ASP hosting services are based on management's
estimate of revenues over the remaining life of the respective contracts.
ASP HOSTING EXPENSE
ASP hosting expense is composed primarily of personnel costs, facility-related
costs, postage, and supplies expense related to the Company's two ASP hosting
centers. ASP hosting expense increased 71% for the three months ended October
31, 2000 due primarily to personnel, facility, and computer costs associated
with opening a second ASP hosting facility in Dallas, Texas in March 2000. ASP
hosting expense also increased as a result of approximately $409,000 of
additional postage and supplies expense related to increased ASP hosting
revenues. For the three months ended October 31, 2000 and 1999, ASP hosting
expense represented 103% and 79% of ASP hosting revenues, respectively. The
increase in cost as a percentage of revenues is mainly due to additional costs
incurred with expanding the Company's ASP hosting capacity. The Company expects
ASP hosting revenues will increase at a greater rate than the associated
expenses.
PROFESSIONAL SERVICES EXPENSE
Professional services expense is composed primarily of personnel expenses
related to implementation, education, and consulting services. Professional
services expense decreased 3% due primarily to decreased personnel costs as a
result of attrition which occurred during fiscal 2000. For the three months
ended October 31, 2000 and 1999, professional services expense represented 78%
and 80% of professional services revenues, respectively. The decrease in cost as
a percentage of professional services revenues is mainly due to higher
utilization of consulting personnel. The Company expects professional services
expenses to increase as professional services activities and revenues 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 months ended
October 31, 2000, product development and support expense increased 8%. The
majority of the increase is related to additional personnel expenses for
continued development and support 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, 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 increased 17% primarily due to
expanding the sales and marketing staff and an increase in incentive
compensation as a result of increased revenues.
OTHER INCOME, NET
Other income, net decreased 74% largely due to an increase in the loss on
foreign exchange rate associated with the Company's European subsidiary.
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PROVISION FOR INCOME TAXES
The effective tax rates for both the three month periods ended October 31, 2000
and 1999 were approximately 44%. These rates differ from the federal statutory
rate due primarily to non-deductible goodwill amortization related to the Merger
and acquisitions of EZPower System, Inc. and Maitland Software, Inc.
NET INCOME
Net income increased 11% for the three months ended October 31, 2000. This
increase is primarily due to increased high margin software license revenues,
partially offset by additional expenses associated with expanding ASP hosting
capacity and expanding the sales and marketing organization.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2000, the Company's principal sources of liquidity consisted of
cash of approximately $4.1 million and short-term investments of approximately
$5.8 million. Cash and cash equivalents for the three months ended October 31,
2000 decreased approximately $633,000 due primarily to the purchase of fixed
assets and purchase of treasury stock under the Company's stock repurchase
program, offset by the sale of short-term investments. Cash flows provided by
investing activities of approximately $796,000 were related to the sale of
short-term investments partially offset by the purchase of fixed assets and
costs associated with the development of capitalized software. Cash flows used
in financing activities of approximately $1.8 million relate to the purchase of
treasury stock. As of October 31, 2000, the Company had approximately 1,948,000
shares of treasury stock at an average per share cost of $4.93. Since inception
of the Company's stock repurchase program in fiscal 1999, the Company has
repurchased approximately 3,073,000 shares of stock at an average purchase price
of $4.93.
Working capital was approximately $12.5 million at October 31, 2000, compared
with approximately $13.0 million at July 31, 2000.
The Company's $3.5 million revolving credit facility bears interest at the
bank's prime rate less 0.25% (9.25% as of October 31, 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 October 31, 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 purchase of treasury stock under the
Company's stock repurchase program. Although the Company has no current
commitments or agreements with respect to any acquisition of other businesses or
technologies, a portion of the Company's cash could be used to acquire
complementary businesses or obtain the right to use complementary technologies.
The Company currently anticipates that existing cash and short-term investments,
its existing credit facility, and cash generated from operations will be
sufficient to satisfy its operating cash needs for the foreseeable future.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"),
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which requires all derivative instruments be recorded on the balance sheet at
fair value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, depending
on the type of hedge transaction. During the first quarter of fiscal 2001, the
Company adopted SFAS 133. The adoption of this statement had no impact on the
Company's unaudited interim consolidated financial statements for the three
months ended October 31, 2000 as the Company does not currently hold derivative
instruments or engage in hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 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 ("SEC"). 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 plans to adopt SAB 101 during the fourth
quarter of the 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
investments-grade, highly liquid investments, consisting of money market
instruments and commercial paper.
For the three months ended October 31, 2000, approximately 1% 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.
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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.
A report on Form 8-K was filed with the Securities and
Exchange Commission on November 17, 2000 to report, pursuant
to Item 5 thereof, the restatement of the Company's
consolidated financial statements as of and for the fiscal
year ended July 31, 2000.
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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.
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(Registrant)
/s/ Michael D. Andereck Date December 15, 2000
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President and Chief Executive Officer
(Duly Authorized Officer and
Principal Financial Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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27 Financial Data Schedule