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: January 31, 2002 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 [ ]
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, 13,388,052 shares outstanding as of March 1, 2002.
DOCUCORP INTERNATIONAL, INC.
TABLE OF CONTENTS
QUARTERLY REPORT FORM 10-Q
JANUARY 31, 2002
Part I - Financial information
<Table>
<Caption>
Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of January 31, 2002 and July 31, 2001 2
Interim Consolidated Statements of Operations and Comprehensive 3
Income for the three and six months ended January 31, 2002 and 2001
Interim Consolidated Statements of Cash Flows for the six months
ended January 31, 2002 and 2001 4
Notes to Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</Table>
DOCUCORP INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
January 31, July 31,
2002 2001
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 9,457 $ 6,215
Short-term investments 3,982 3,989
Accounts receivable, net of allowance
of $465 and $600, respectively 16,581 16,949
Other current assets 3,381 3,403
---------- ----------
Total current assets 33,401 30,556
Fixed assets, net of accumulated depreciation
of $9,822 and $8,545, respectively 6,474 6,786
Software, net of accumulated amortization
of $14,929 and $13,635, respectively 7,796 7,406
Goodwill, net of accumulated amortization of $4,940 5,846 5,846
Other assets 1,136 1,190
---------- ----------
$ 54,653 $ 51,784
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,969 $ 2,239
Accrued liabilities 4,976 4,891
Deferred revenue 12,742 11,223
Income taxes payable 1,475 912
---------- ----------
Total current liabilities 21,162 19,265
Other long-term liabilities 1,295 1,452
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 43,681 43,899
Treasury stock at cost, 3,154,997 and 2,825,299
shares, respectively (13,680) (12,333)
Retained earnings (accumulated deficit) 1,979 (705)
Foreign currency translation adjustment 50 40
---------- ----------
Total stockholders' equity 32,196 31,067
---------- ----------
$ 54,653 $ 51,784
========== ==========
</Table>
See accompanying notes to interim consolidated financial statements.
2
DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
Three months ended Six months ended
January 31, January 31,
------------------------ -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
REVENUES
ASP hosting $ 5,323 $ 3,329 $ 9,873 $ 6,394
Professional services 5,094 5,077 10,400 9,773
License 3,034 2,443 5,686 5,486
Maintenance and other recurring 4,702 4,064 9,344 8,060
---------- ---------- ---------- ----------
Total revenues 18,153 14,913 35,303 29,713
---------- ---------- ---------- ----------
EXPENSES
ASP hosting 4,365 3,265 8,318 6,288
Professional services 4,199 3,934 8,483 7,754
Product development and support 2,979 2,628 5,691 5,288
Selling, general and administrative 4,204 3,816 8,508 7,686
---------- ---------- ---------- ----------
Total expenses 15,747 13,643 31,000 27,016
---------- ---------- ---------- ----------
Operating income 2,406 1,270 4,303 2,697
Other income (expense), net (97) 147 31 189
---------- ---------- ---------- ----------
Income before income taxes and cumulative
effect of accounting change 2,309 1,417 4,334 2,886
Provision for income taxes 866 660 1,650 1,303
---------- ---------- ---------- ----------
Income before cumulative effect of
accounting change 1,443 757 2,684 1,583
Cumulative effect of accounting change, net of tax 0 0 0 (990)
---------- ---------- ---------- ----------
Net income $ 1,443 $ 757 $ 2,684 $ 593
========== ========== ========== ==========
Other comprehensive income (loss):
Foreign currency translation adjustment 76 (50) 10 43
---------- ---------- ---------- ----------
Comprehensive income, net of tax $ 1,519 $ 707 $ 2,694 $ 636
========== ========== ========== ==========
Weighted average basic shares outstanding 13,443 14,333 13,534 14,646
========== ========== ========== ==========
Basic net income per share:
Income before cumulative effect of
accounting change $ 0.11 $ 0.05 $ 0.20 $ 0.11
Cumulative effect of accounting change 0 0 0 (.07)
---------- ---------- ---------- ----------
Basic net income per share $ 0.11 $ 0.05 $ 0.20 $ 0.04
========== ========== ========== ==========
Weighted average diluted shares outstanding 14,946 15,009 14,661 15,408
========== ========== ========== ==========
Diluted net income per share:
Income before cumulative effect of
accounting change $ 0.10 $ 0.05 $ 0.18 $ 0.10
Cumulative effect of accounting change 0 0 0 (.06)
---------- ---------- ---------- ----------
Diluted net income per share $ 0.10 $ 0.05 $ 0.18 $ 0.04
========== ========== ========== ==========
</Table>
See accompanying notes to interim consolidated financial statements.
3
DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Six months ended
January 31,
--------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,684 $ 593
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,278 1,081
Amortization of capitalized software 1,294 1,121
Amortization of goodwill 0 554
Provision for doubtful accounts 364 362
Other 12 10
Cumulative effect of accounting change 0 990
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 26 (4,036)
Decrease in other assets 73 186
Decrease in accounts payable (270) (285)
Increase in accrued liabilities 53 534
Increase in deferred revenue 1,524 791
Increase in other liabilities 447 1,254
-------- --------
Total adjustments 4,801 2,562
-------- --------
Net cash provided by operating activities 7,485 3,155
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments (7,952) (1,952)
Sale of short-term investments 7,959 5,832
Purchase of fixed assets (969) (1,488)
Capitalized software development costs (1,684) (1,081)
-------- --------
Net cash provided by (used in) investing activities (2,646) 1,311
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 48 13
Purchase of treasury stock (1,708) (3,808)
Proceeds from stock issued under Employee Stock Purchase Plan 83 65
-------- --------
Net cash used in financing activities (1,577) (3,730)
-------- --------
Effect of exchange rates on cash flows (20) (30)
-------- --------
Net increase in cash and cash equivalents 3,242 706
Cash and cash equivalents at beginning of period 6,215 4,739
-------- --------
Cash and cash equivalents at end of period $ 9,457 $ 5,445
======== ========
</Table>
See accompanying notes to interim consolidated financial statements.
4
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 six month periods ended January 31, 2002 and 2001 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, 2001. 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 six months ended January 31, 2002 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.
5
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 United States.
6
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".
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):
<Table>
<Caption>
Three months ended Six months ended
January 31, January 31,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Shares used in computing basic
net income per share 13,443 14,333 13,534 14,646
Dilutive effect of stock options and warrants 1,503 676 1,127 762
-------- -------- -------- --------
Shares used in computing diluted
net income per share 14,946 15,009 14,661 15,408
======== ======== ======== ========
</Table>
Options to purchase approximately 3,000 and 2.1 million shares of Common Stock
at average exercise prices of $5.91 and $4.13 per share at January 31, 2002 and
2001, 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 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). Adoption of SFAS 142 is required for fiscal years beginning after
December 15, 2001, and earlier adoption is permitted for entities with fiscal
years beginning after March 15, 2001, provided that the first interim financial
statements have not been previously issued. SFAS 142 requires that goodwill and
intangible assets which have indefinite useful lives not be amortized but rather
tested at least annually for impairment. SFAS 142 provides specific guidance for
testing goodwill and intangible assets that will not be amortized for
impairment. The Company adopted SFAS 142 as of August 1, 2001. The Company has
completed its initial, transitional goodwill impairment analysis under SFAS 142
as of August 1, 2001, and no goodwill impairment was deemed to exist. In
accordance with the requirements of SFAS 142, the Company will review goodwill
of its reporting unit for impairment during the third quarter of each year
starting in fiscal 2002. Goodwill will also be reviewed for impairment at other
times during each year when events or changes in circumstances indicate that an
impairment might be present.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). Adoption of SFAS 144 is required
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years, with early adoption encouraged. SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS 121 and related literature and establishes a
single accounting model, based on the framework established in SFAS 121, for
long-lived assets to be disposed of by sale. The Company adopted SFAS 144 as of
August 1,
7
2001. The adoption of SFAS 144 did not have a material impact on the Company's
consolidated financial statements for the three or six months ended January 31,
2002.
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS 142
The following table reflects the effect of SFAS 142 on net income before
cumulative effect of accounting change and net income per share before
cumulative effect of accounting change as if SFAS 142 had been in effect for all
periods presented (in thousands except per share amounts):
<Table>
<Caption>
Three months ended Six months ended
January 31, January 31,
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income before cumulative effect of
accounting change $ 1,443 $ 757 $ 2,684 $ 1,583
Goodwill amortization, net of tax 0 220 0 440
---------- ---------- ---------- ----------
Adjusted net income before cumulative effect of
accounting change $ 1,443 $ 977 $ 2,684 $ 2,023
========== ========== ========== ==========
Basic net income per share before
cumulative effect of accounting change:
Reported net income per share before
cumulative effect of accounting $ 0.11 $ 0.05 $ 0.20 $ 0.11
change
Goodwill amortization, net of tax 0 0.02 0 0.03
---------- ---------- ---------- ----------
Adjusted net income per share before
cumulative effect of accounting change $ 0.11 $ 0.07 $ 0.20 $ 0.14
========== ========== ========== ==========
Diluted net income per share before
cumulative effect of accounting change:
Reported net income per share before
cumulative effect of accounting change $ 0.10 $ 0.05 $ 0.18 $ 0.10
Goodwill amortization, net of tax 0 0.01 0 0.03
---------- ---------- ---------- ----------
Adjusted net income per share before
cumulative effect of accounting change $ 0.10 $ 0.06 $ 0.18 $ 0.13
========== ========== ========== ==========
</Table>
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, events of September 11,
2001, dependence upon the insurance and utilities industries, technological
advances, 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 enterprise-wide software products that enable users to
acquire, manage, personalize and present information. The Company provides
professional services related to its information software products including
consulting, implementation, integration and training. In addition, the Company
provides application service provider ("ASP") hosting using its software and
facilities to provide processing, print, mail, archival and Internet delivery of
documents for customers who outsource these activities.
The Company's software products support leading hardware platforms, operating
systems, printers and imaging systems. These products are designed to
personalize, produce and manage documents such as insurance policies, utility
statements, telephone bills, bank and mutual fund statements, invoices, direct
mail correspondence, bills of lading and other customer-oriented documents. The
Company's ASP offerings include customer statement and bill generation,
electronic bill presentment and payment, insurance policy production and
electronic document archival. The Company currently has an installed base of
more than 1,200 customers. More than half of the 200 largest United States
insurance companies use the Company's software products and services, including
the 10 largest life and health insurance companies and nine of the 10 largest
property and casualty insurance companies. Many of the largest North American
utilities companies, major international financial services institutions, and
clients in higher education and the telecommunications industries use the
Company's products and services.
The Company derives its revenues from ASP hosting fees, professional services
fees, license fees and recurring maintenance fees related to its software
products. ASP hosting revenues consist of fees earned from customers who
outsource customer statements and insurance policy production applications.
Professional services revenues include fees for consulting, implementation and
education services. License revenues are generally derived from perpetual
licenses of software products. Maintenance and other recurring revenues consist
primarily of recurring license fees and annual maintenance contracts.
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:
<Table>
<Caption>
Three months ended Six months ended
January 31, January 31,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues
ASP hosting 29% 22% 28% 22%
Professional services 28 34 30 33
License 17 17 16 18
Maintenance and other recurring 26 27 26 27
-------- -------- -------- --------
Total revenues 100 100 100 100
-------- -------- -------- --------
Expenses
ASP hosting 24 22 24 21
Professional services 23 27 24 27
Product development and support 17 17 16 17
Selling, general and administrative 23 26 24 26
-------- -------- -------- --------
Total expenses 87 92 88 91
-------- -------- -------- --------
Operating income 13 8 12 9
Other income, net 0 1 0 1
-------- -------- -------- --------
Income before income taxes 13 9 12 10
Provision for income taxes 5 4 4 5
-------- -------- -------- --------
Net income 8% 5% 8% 5%
======== ======== ======== ========
</Table>
COMPARATIVE ANALYSIS OF QUARTERLY RESULTS FOR THE THREE AND SIX MONTHS ENDED
JANUARY 31, 2002 AND 2001
REVENUES
Total revenues increased approximately 22% and 19% for the three and six months
ended January 31, 2002, respectively, due to increases among all revenue
streams. For the three and six months ended January 31, 2002, ASP hosting
revenues increased 60% and 54%, respectively, due to the Company's focus on
expanding this business and adding several new significant customers. For the
three months ended January 31, 2002, professional services revenues remained
substantially unchanged and increased 6% for the six months ended January 31,
2002. License revenues increased 24% and 4% for the three and six months ended
January 31, 2002, respectively. The increased license revenues is primarily the
result of a higher volume of contracts in the three and six months ended January
31, 2002. Maintenance revenues increased 16% for both the three and six months
ended January 31, 2002 due to an expanding customer base.
Backlog for the Company's products and services of approximately $49.7 million
as of January 31, 2002, of which approximately $22.9 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
to 60 days notice; however, the Company has not historically experienced
material cancellations of such contracts. Software implementation and consulting
services backlog is
10
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.
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 34% and 32%, respectively, for the three
and six months ended January 31, 2002 due to increased personnel, computer,
postage and supplies expense associated with expanding this business. For the
three months ended January 31, 2002 and 2001, ASP hosting expense represented
82% and 98% of ASP hosting revenues, respectively. For the six months ended
January 31, 2002 and 2001, ASP hosting expense represented 84% and 98% of ASP
hosting revenues, respectively. The decrease in cost as a percentage of revenues
is mainly due to greater utilization of capacity in the ASP centers as the
revenues increase. ASP hosting expense is expected to increase based on customer
and market requirements.
PROFESSIONAL SERVICES EXPENSE
Professional services expense is composed primarily of personnel expenses
related to implementation, education, and consulting services. Professional
services expense increased 7% and 9% for the three and six months ended January
31, 2002, respectively, due primarily to increased personnel costs and travel
expenses associated with the increased professional services revenues. For the
three months ended January 31, 2002 and 2001, professional services expense
represented 82% and 77% of professional services revenues, respectively. For the
six months ended January 31, 2002 and 2001, professional services expense
represented 82% and 79% of professional services revenues, respectively. The
Company expects professional services expense to increase in order to meet
additional resource requirements as professional services activities increase in
both North America and Europe.
PRODUCT DEVELOPMENT AND SUPPORT EXPENSE
Product development and support expense consists primarily of research and
development efforts, amortization of capitalized software development costs,
customer support, and other product support costs. For the three and six months
ended January 31, 2002, product development and support expense increase 13% and
8%, respectively. Both periods included increased personnel costs for continued
development and support efforts, offset by an increase in software
capitalization related to the development of the Company's products. The Company
anticipates continued increases in development efforts, including Internet
applications, integration of its existing product offerings, further development
of systems for use in industries such as utilities and financial services,
development of new software products, and continued support of its existing
product lines. Expenditures in this area are expected to increase in relation to
the anticipated growth in revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense increased 10% and 11% for the three
and six months ended January 31, 2002, respectively. This increase is primarily
due to additional sales and marketing personnel costs as the Company focuses on
expanding its sales force. This increase was partially offset by 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
assets.
11
OTHER INCOME, NET
Other income, net decreased approximately 166% and 84% for the three and six
months ended January 31, 2002, respectively. This decrease is primarily the
result of foreign exchange rate losses associated with the Company's European
subsidiary and lower interest rates earned on invested funds.
PROVISION FOR INCOME TAXES
The effective tax rate for both the three and six months ended January 31, 2002
was approximately 38%. The effective tax rate for the three and six months ended
January 31, 2001 was approximately 47% and 45%, respectively. The decrease in
the effective tax rate is related to the adoption of SFAS 142 and the improved
performance of the Company's European subsidiary.
NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Net income before cumulative effect of accounting change increased approximately
91% and 69% for the three and six months ended January 31, 2002, respectively.
This increase is primarily due to revenue growth with controlled expenses,
increased utilization of capacity in the ASP hosting centers, improved European
operations, elimination of goodwill amortization and the decrease in the
effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2002, the Company's principal sources of liquidity consisted of
cash of approximately $9.4 million and short-term investments of approximately
$4.0 million. Cash and cash equivalents for the six months ended January 31,
2002 increased approximately $3.2 million. The increase in cash and cash
equivalents is due to approximately $7.5 million cash generated from operations
offset by approximately $2.7 million cash used in investing activities and $1.6
million cash used in financing activities. Cash flows used in investing
activities were primarily related to the purchase of fixed assets and
development of capitalized software. Cash flows used in financing activities
primarily relates to the purchase of treasury stock under the Company's stock
repurchase program. As of January 31, 2002, the Company had repurchased
approximately 4,564,000 shares of its Common Stock at an average per share cost
of $4.49. The Company's board of directors believes the repurchase program is an
appropriate means of increasing shareholder value. Accordingly, the board of
directors previously authorized the Company to repurchase up to an aggregate of
6,000,000 shares of stock.
Working capital was approximately $12.2 million at January 31, 2002, compared
with approximately $11.3 million at July 31, 2001.
On January 31, 2002, the Company secured a $10.0 million revolving credit
facility from Comerica Bank-Texas. 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 the Company's assets.
Under the credit facility, the Company is required to maintain certain financial
covenants. As of January 31, 2002 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.
12
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
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".
Adoption of SFAS 142 is required for fiscal years beginning after December 15,
2001, and earlier adoption is permitted for entities with fiscal years beginning
after March 15, 2001, provided that the first interim financial statements have
not been previously issued. SFAS 142 requires that goodwill and intangible
assets which have indefinite useful lives not be amortized but rather tested at
least annually for impairment. SFAS 142 provides specific guidance for testing
goodwill and intangible assets that will not be amortized for impairment. The
Company adopted SFAS 142 as of August 1, 2001. The Company has completed its
initial, transitional goodwill impairment analysis under SFAS 142 as of August
1, 2001, and no goodwill impairment was deemed to exist. In accordance with the
requirements of SFAS 142, the Company will review goodwill of its reporting unit
for impairment during the third quarter of each year starting in fiscal 2002.
Goodwill will also be reviewed for impairment at other times during each year
when events or changes in circumstances indicate that an impairment might be
present.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). Adoption of SFAS 144 is required
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years, with early adoption encouraged. SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS 121 and related literature and establishes a
single accounting model, based on the framework established in SFAS 121, for
long-lived assets to be disposed of by sale. The Company adopted SFAS 144 as of
August 1, 2001. The adoption of SFAS 144 did not have a material impact on the
Company's consolidated financial statements for the three or six months ended
January 31, 2002.
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.
The Company is exposed to market risk arising from changes in foreign currency
exchange rates as a result of selling its products and services outside the U.S.
(principally Europe). A portion of the Company's sales generated from its
non-U.S. operations are denominated in currencies other than the U.S. dollar,
principally British pounds. Consequently, the translated U.S. dollar value of
Docucorp's non-U.S. sales and operating results are subject to currency exchange
rate fluctuations which may favorably or unfavorably impact reported earnings
and may affect comparability of period-to-period operating results.
For both the three months ended January 31, 2002 and 2001, approximately 1% of
the Company's revenues and 2% and 5%, respectively, of the Company's operating
expenses were denominated in British pounds. For the six months ended January
31, 2002 and 2001, approximately 5% and 1%, respectively, of the Company's
revenues and 4% and 5%, respectively, of the Company's operating expenses were
denominated in British pounds. Historically, the effect of fluctuations in
currency exchange rates has not had a material impact on the Company's
operations; however, there can be no guarantees that it will not have a material
impact in the future. The Company's exposure to fluctuations in currency
exchange rates will increase as it expands its international operations.
13
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on December 11, 2001. At
this meeting, the stockholders voted in favor of electing as directors the six
nominees named in the Proxy Statement dated October 26, 2001. Also at this
meeting, the stockholders voted in favor of amending the 1997 Equity
Compensation Plan to increase the number of shares of Common Stock issuable upon
exercise of stock options under the plan from 2,500,000 to 3,150,000 shares and
electing PricewaterhouseCoopers LLP as its independent auditors for the 2002
fiscal year. The number of votes cast for each item was as follows:
I. Election of Directors
<Table>
<Caption>
For Against Withheld
---------- ---------- ------------
Milledge A. Hart, III 12,892,055 3,900 383,903
Michael D. Andereck 12,889,682 6,273 383,903
Anshoo S. Gupta 12,891,395 4,560 383,903
John D. Loewenberg 12,892,035 3,920 383,903
George F. Raymond 12,891,935 4,020 383,903
Arthur R. Spector 12,892,135 3,820 383,903
II Amendment to 1997 Equity Compensation Plan
11,944,021 1,296,687 39,150
III Election of PricewaterhouseCoopers LLP as Independent Auditors
13,247,116 15,973 16,769
</Table>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10. Credit Agreement between Docucorp International, Inc. and
Comerica Bank -- Texas
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed by the Registrant
during the three months ended January 31, 2002.
14
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/ John H. Gray Date March 18, 2002
- -------------------------------------- --------------
Senior Vice President, Finance
(Duly Authorized Officer and Principal
Financial Officer)
15
INDEX TO EXHIBITS
NUMBER DESCRIPTION
- ------ -----------
10. Credit Agreement between Docucorp International, Inc. and
Comerica Bank -- Texas