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, 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, 13,305,271 shares outstanding as of December 6, 2002.
DOCUCORP INTERNATIONAL, INC.
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
OCTOBER 31, 2002
<Table>
<Caption>
Page
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of October 31, 2002 and July 31, 2002 2
Interim Consolidated Statements of Operations and Comprehensive
Income (Loss) for the three months ended October 31, 2002 and 2001 3
Interim Consolidated Statements of Cash Flows for the three months
ended October 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 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
PART II -- OTHER INFORMATION
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>
OCTOBER 31, July 31,
2002 2002
----------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 7,814 $ 9,733
Short-term investments 4,021 3,989
Accounts receivable, net of allowance
of $620 and $670, respectively 16,374 16,610
Other current assets 2,978 3,078
-------- --------
Total current assets 31,187 33,410
Fixed assets, net of accumulated depreciation
of $11,862 and $11,165, respectively 6,803 6,965
Software, net of accumulated amortization
of $17,030 and $16,265, respectively 8,611 8,391
Goodwill, net of accumulated amortization
of $4,940 and $4,940, respectively 5,846 5,846
Other assets 1,195 1,138
-------- --------
$ 53,642 $ 55,750
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,343 $ 1,489
Accrued liabilities 4,789 5,814
Income taxes payable 734 1,357
Deferred revenue 11,000 11,600
-------- --------
Total current liabilities 17,866 20,260
Other long-term liabilities 2,352 2,426
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 43,799 43,725
Treasury stock at cost, 3,168,078 and 3,190,709
shares, respectively (16,655) (15,758)
Retained earnings 6,416 5,224
Foreign currency translation adjustment (302) (293)
-------- --------
Total stockholders' equity 33,424 33,064
-------- --------
$ 53,642 $ 55,750
======== ========
</Table>
See accompanying notes to interim consolidated financial statements.
2
DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
Three months ended
October 31,
-------------------------
2002 2001
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REVENUES
ASP hosting $ 5,208 $ 4,550
Professional services 5,793 5,306
License 2,100 2,652
Maintenance and other recurring 5,036 4,642
-------- --------
Total revenues 18,137 17,150
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EXPENSES
ASP hosting 4,460 3,953
Professional services 4,377 4,284
Product development and support 3,024 2,712
Selling, general and administrative 4,337 4,304
-------- --------
Total expenses 16,198 15,253
-------- --------
Operating income 1,939 1,897
Other income, net 4 128
-------- --------
Income before income taxes 1,943 2,025
Provision for income taxes 750 784
-------- --------
Net income $ 1,193 $ 1,241
======== ========
Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax (9) (66)
-------- --------
Comprehensive income $ 1,184 $ 1,175
======== ========
Net income per share:
Basic $ 0.09 $ 0.09
======== ========
Diluted $ 0.08 $ 0.09
======== ========
Weighted average shares outstanding used in the net income per share
calculations:
Basic 13,535 13,624
======== ========
Diluted 15,296 14,377
======== ========
</Table>
See accompanying notes to interim consolidated financial statements.
3
DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Three months ended
October 31,
-----------------------
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,193 $ 1,241
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 700 627
Amortization of capitalized software 765 623
Provision for doubtful accounts 66 236
Stock option compensation expense 0 6
Tax benefit related to stock option exercises 763 0
Changes in assets and liabilities:
Decrease in accounts receivable 123 824
(Increase) decrease in other assets 39 (121)
Decrease in accounts payable (146) (863)
Increase (decrease) in accrued liabilities (987) 1,577
Increase (decrease) in income taxes payable (623) 354
Increase (decrease) in deferred revenue (598) 120
Decrease in other liabilities (71) (75)
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Total adjustments 31 3,308
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Net cash provided by operating activities 1,224 4,549
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments (4,012) (3,970)
Sale of short-term investments 3,980 3,989
Purchase of fixed assets (542) (650)
Capitalized software development costs (985) (874)
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Net cash used in investing activities (1,559) (1,505)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 1,141 1
Purchase of treasury stock (2,729) (1,065)
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Net cash used in financing activities (1,588) (1,064)
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Effect of exchange rates on cash flows 4 (83)
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Net increase (decrease) in cash and cash equivalents (1,919) 1,897
Cash and cash equivalents at beginning of period 9,733 6,215
------- -------
Cash and cash equivalents at end of period $ 7,814 $ 8,112
======= =======
</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 wholly owned subsidiaries ("Docucorp" or the
"Company") for the three month periods ended October 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, 2002. 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, 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.
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.
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). The
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
October 31,
----------------------
2002 2001
---------- --------
Shares used in computing basic net income per share 13,535 13,624
Dilutive effect of stock options and warrants 1,761 753
------ ------
Shares used in computing diluted net income per share 15,296 14,377
====== ======
</Table>
5
DOCUCORP INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
Options to purchase 50,000 and 1.4 million shares of Common Stock at average
exercise prices of $13.50 and $4.41 per share at October 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 -- BUSINESS SEGMENT
As set forth in the criteria of Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information," the
Company is organized into two reportable segments: Software and ASP. The
Software segment consists of initial software license sales, professional
services consulting derived from implementation and integration of the Company's
software products, and continued customer support and maintenance of the
software products. The ASP segment provides processing, print, mail, archival
and Internet delivery of documents for customers who outsource these activities.
Prior period reporting has been restated to conform to the new segment
reporting. The table below presents information about reported segments for the
three months ended October 31, 2002 and 2001 (in thousands):
<Table>
<Caption>
Three months ended
October 31,
---------------------------
2002 2001
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Revenues:
Software $ 12,929 $ 12,600
ASP 5,208 4,550
-------- --------
Total revenues $ 18,137 $ 17,150
======== ========
Operating income:
Software $ 5,528 $ 5,604
ASP 748 597
Selling, general and administrative (4,337) (4,304)
-------- --------
Total operating income $ 1,939 $ 1,897
======== ========
</Table>
NOTE 5 -- FOREIGN SUBSIDIARY INVESTMENT
During the three months ended October 31, 2002, management of the Company
determined that a portion of the intercompany loan balance to a consolidated
foreign subsidiary is of a long-term investment nature and it will not seek
repayment of this portion of the intercompany loan in the near term. In
accordance with Statement of Financial Accounting Standard No. 52, "Foreign
Currency Translation," the Company began recognizing the translation of this
long-term investment as a component of other comprehensive income. The Company
will continue to recognize the translation of the remaining portion of the
intercompany loan in other income.
NOTE 6 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"), which changes the rules for how companies must account for costs
associated with exit or disposal activities. Costs typically associated with
exit or disposal activities include one-time employee termination costs,
contract cancellation provisions and relocation costs. SFAS 146 nullifies EITF
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The provisions of the new standard are effective for exit or
disposal activities initiated after December 31, 2002, with early application
encouraged. The Company does not believe that SFAS 146 will have a material
impact on its consolidated financial statements.
6
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, the economy, 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,
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.
As set forth in the criteria of Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), the Company is organized into two reportable segments: Software
and ASP. The Software segment consists of initial software license sales,
professional services consulting derived from implementation and integration of
the Company's software products and continued customer support and maintenance
of the software products. The ASP segment provides processing, print, mail,
archival and Internet delivery of documents for customers who outsource these
activities.
The 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 the production of customer statements and insurance policies.
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 software maintenance contracts.
7
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying "Management's Discussion and Analysis of Financial Condition
and Results of Operations" are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). The preparation of
these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reported period. The Company bases its estimates and assumptions on
historical experiences and various other factors that are believed to be
reasonable under the circumstances. These estimates and assumptions are
evaluated on an ongoing basis. Actual results may differ from previously
estimated amounts under different assumptions or conditions.
The Company believes the following critical accounting policies, which involve
significant judgments and estimates, are used in the preparation of its
consolidated financial statements:
Revenue recognition
The Company recognizes revenue in accordance with AICPA Statement of Position
97-2, "Software Revenue Recognition" ("SOP 97-2") and Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements." Initial license fees are
recognized when a contract exists, the fee is fixed or determinable, software
delivery has occurred and collection of the receivable is deemed probable.
Revenue from software licenses, which include a cancellation clause, is
recognized upon expiration of the cancellation period. Software licensed with
post-contract customer support includes rights to upgrades, when and if
available, a limited period of telephone support, updates and bug fixes. SOP
97-2, as amended, generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair value of the elements. The Company determines the fair value of
each element in multi-element arrangements based on vendor-specific objective
evidence ("VSOE"). VSOE for each element is based on the price charged when the
same element is sold separately. If evidence of fair value of all undelivered
elements exists but evidence does not exist for one or more delivered elements,
then revenue is recognized using the residual method. Under the residual method,
the fair value of the undelivered elements is deferred and the remaining portion
of the arrangement fee is recognized as revenue. Revenue related to products
still in the testing phase is deferred until formal acceptance of the product by
the purchaser. The Company records deferred revenue for maintenance amounts
invoiced prior to revenue recognition. Revenue allocated to maintenance and
support is recognized ratably over the term of the agreement.
Revenue derived from the development and installation of software packages under
a fixed price contract is recognized on a percentage-of-completion basis
measured by the relationship of hours worked to total estimated contract hours.
The Company follows this method because reasonably dependable estimates of the
revenue and contract hours applicable to various elements of a contract can be
made. Since the financial reporting of these contracts depends upon estimates,
which are assessed continually during the term of these contracts, recognized
revenue and profit are subject to revisions as the contract progresses to
completion. Revisions in profit estimates are reflected in the period in which
the facts that give rise to the revisions become known. Accordingly, favorable
changes in estimates result in additional revenue recognition and net income,
and unfavorable changes in estimates result in a reduction of recognized revenue
and net income. When estimates indicate that a loss will be incurred on a
contract upon completion, a provision for the expected loss is recorded in the
period in which the loss becomes evident.
Revenue related to professional services, such as implementation, training and
consulting, is generally recognized as the services are performed. Revenue and
incremental direct costs related to professional services implementation
associated with the Company's ASP hosting operations is deferred during the
implementation phase and subsequently recognized over the term of the ASP
hosting agreement. ASP hosting agreements generally provide that fees are
charged on a per transaction basis.
8
Allowance for doubtful accounts
The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company takes into consideration the current financial condition of its
customers, the specific details of the customer accounts, the age of the
outstanding balance and the current economic environment when assessing the
adequacy of the allowance. If the financial condition of the Company's customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances might be required.
Software development costs
Software development costs are accounted for in accordance with either Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," or with Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The guidance above requires the capitalization of
certain software development costs once technological feasibility is
established. The capitalized costs are then amortized on a straight-line basis
over the estimated product life, or on the ratio of current revenues to total
projected product revenues, whichever is greater.
Valuation of long-lived and intangible assets and goodwill
The Company recognizes an impairment charge associated with its long-lived
assets, including property and equipment, goodwill and other intangible assets
whenever it determines that recovery of such long-lived asset is not probable.
Such determination is made in accordance with the applicable GAAP requirement
associated with the long-lived asset, and is based upon, among other things,
estimates of the amount of future net cash flows to be generated by the
long-lived asset and estimates of the current fair value of the asset. Adverse
changes in future net cash flows or fair value could result in the inability to
recover the carrying value of the long-lived asset, thereby requiring an
impairment charge to be recognized.
Deferred taxes and valuation allowance
The Company recognizes deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities. The Company records a valuation allowance to reduce
its deferred income tax assets to the amount that is believed to be realized
under the "more-likely-than-not" recognition criteria. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance, it is possible that
in the future the Company may change its estimate of the amount of the deferred
income tax assets that would "more-likely-than-not" be realized in the future,
resulting in an adjustment to the deferred income tax assets valuation allowance
that could increase or decrease, as applicable, reported net income in the
period such change in estimate was made.
Translation of foreign currency
The Company translates the financial statements of its European subsidiary into
U.S. dollars in accordance with Statement of Financial Accounting Standards No.
52, "Foreign Currency Translation." Assets and liabilities of the Company's
European subsidiary, whose functional currency is other than the U.S. dollar,
are translated at period-end rates of exchange, and revenues and expenses are
translated at average exchange rates prevailing during the period. Foreign
currency transaction gains and losses are recognized in income as incurred.
The Company accounts for unrealized gains or losses on its foreign currency
translation adjustments in accordance with Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which requires adjustments
to be accumulated in stockholders' equity as part of other comprehensive income.
Currently, the Company does not engage in foreign currency hedging activities.
9
During the three months ended October 31, 2002, management of the Company
determined that a portion of the intercompany loan balance to a consolidated
foreign subsidiary is of a long-term investment nature and it will not seek
repayment of this portion of the intercompany loan in the near term. In
accordance with Statement of Financial Accounting Standard No. 52, "Foreign
Currency Translation," the Company began recognizing the translation of this
long-term investment as a component of other comprehensive income. The Company
will continue to recognize the translation of the remaining portion of the
intercompany loan in other income.
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
October 31,
------------------
2002 2001
------ ------
Revenues
ASP hosting 29% 27%
Professional services 32 31
License 11 15
Maintenance and other recurring 28 27
---- ----
Total revenues 100 100
Expenses
ASP hosting 24 23
Professional services 24 25
Product development and support 17 16
Selling, general and administrative 24 25
---- ----
Total expenses 89 89
---- ----
Operating income 11 11
Other income, net 0 1
---- ----
Income before income taxes 11 12
Provision for income taxes 5 5
---- ----
Net income 6% 7%
==== ====
</Table>
COMPARATIVE ANALYSIS OF QUARTERLY RESULTS FOR THE THREE MONTHS ENDED OCTOBER 31,
2002 AND 2001
REVENUES
Total revenues increased 6% due to an increase in ASP hosting revenues,
professional services revenues and maintenance revenues, partially offset by a
decrease in license revenues. ASP hosting revenues increased 14% due to growth
with existing customers and adding new customers. Professional services revenues
increased 9% due primarily to the recovery from the events of September 11,
2001. Maintenance revenues increased 8% due to maintenance agreements associated
with new license sales and customers expanding their processing rights for
existing products. License revenues decreased 21% for the three months ended
October 31, 2002 as a result of a lower volume of software license contracts as
customers are curtailing capital expenditures in this current difficult economic
environment.
Backlog for the Company's products and services was approximately $50.6 million
as of October 31, 2002, of which approximately $19.8 million is scheduled to be
satisfied within one year. Backlog is
10
primarily composed of recurring software license and maintenance revenues for
ongoing maintenance and support, software implementation and consulting services
and ASP hosting services. Software agreements for recurring license fees
generally have non-cancelable terms of up to five years. Maintenance contracts
may generally be terminated upon 30 to 60 days' notice; however, the Company has
not historically experienced material cancellations of such contracts. Software
implementation and consulting services backlog is principally performed under
time and material agreements, of which some have cancellation provisions. ASP
hosting agreements generally have three to seven year terms and 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 and
equipment related costs, postage and supplies expense related to the Company's
two ASP hosting centers. ASP hosting expense increased 13% for the three months
ended October 31, 2002 due primarily to increased personnel and computer costs
associated with expanding the business. In addition, postage expense increased
due to increase in postage rates. For the three months ended October 31, 2002
and 2001, ASP hosting expense represented 86% and 87% of ASP hosting revenues,
respectively. ASP hosting expense is expected to increase as ASP revenues
increase.
PROFESSIONAL SERVICES EXPENSE
Professional services expense is composed primarily of personnel expenses
related to implementation, education and consulting services. Professional
services expense increased 2% due primarily to increased travel expenses to
accommodate increased revenue levels. For the three months ended October 31,
2002 and 2001, professional services expense represented 76% and 81% of
professional services revenues, respectively. The decrease in costs as a
percentage of professional services revenues is mainly due to greater
utilization of implementation and consulting personnel. The Company expects
professional services expense to increase in order to meet additional resource
requirements as professional services activities increase both in North America
and Europe.
PRODUCT DEVELOPMENT AND SUPPORT EXPENSE
Product development and support expense consists primarily of research and
development efforts, amortization of capitalized software development costs,
customer support and other product support costs. For the three months ended
October 31, 2002, product development and support expense increased 12%. The
increase is related to additional personnel expenses for continued development
and support efforts of the Company's products, partially offset by increased
software capitalization related to the development of the Company's products.
The Company anticipates continued increases in development efforts, including
Internet applications, integration of its existing product offerings, further
development of packaged applications for use in industries such as 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 software and maintenance revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense increased 1%. The increase is due
primarily to additional sales personnel and travel costs as the Company began
expanding its sales force in fiscal 2002, offset by a decrease in incentive
compensation related to software license sales and a decrease in bad debt
expense.
11
OTHER INCOME, NET
Other income, net decreased approximately $124,000 largely due to a foreign
currency exchange loss associated with the Company's European subsidiary and a
decrease in interest income. For the three months ended October 31, 2002, the
Company incurred a foreign currency exchange loss of approximately $49,000 as
compared to a foreign currency exchange gain of approximately $58,000 for the
three months ended October 31, 2001.
PROVISION FOR INCOME TAXES
The effective tax rate for three months ended October 31, 2002 and 2001 was
approximately 39%. The rates differ from the federal statutory rate due
primarily to the Company's European subsidiary, which has generated losses that
are not deductible against the Company's U.S. tax liability.
NET INCOME
Net income decreased approximately $48,000 for the three months ended October
31, 2002. This decrease is primarily due to a lower volume of software license
contracts in the three months ended October 31, 2002 and fluctuations in foreign
currency exchange rates.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2002, the Company's principal sources of liquidity consisted of
cash of approximately $7.8 million and short-term investments of approximately
$4.0 million. Cash and cash equivalents for the three months ended October 31,
2002 decreased approximately $1.9 million due primarily to the purchase of
treasury stock under the Company's stock repurchase program and the development
of capitalized software. Cash flows used in investing activities of
approximately $1.6 million were related to the purchase of fixed assets and the
costs associated with the development of capitalized software. Cash flows used
in financing activities of approximately $1.6 million relates primarily to the
purchase of treasury stock, partially offset by proceeds from the exercise of
stock options. As of October 31, 2002, the Company had approximately 3,168,000
shares of treasury stock at an average per share cost of $5.34. Since inception
of the Company's stock repurchase program in fiscal 1999, the Company has
repurchased approximately 5,420,000 shares of stock at an average purchase price
of $5.11 per share. The Company's Board of Directors believes the repurchase
program is an appropriate means of increasing shareholder value. The Board of
Directors has authorized the Company to repurchase up to an aggregate of
6,000,000 shares of stock.
Working capital was approximately $13.3 million at October 31, 2002, compared
with approximately $13.1 million at July 31, 2002.
The Company has a $10.0 million revolving credit facility with 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
October 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 with expansion in new vertical and
international markets and purchase of treasury stock under the Company's stock
repurchase program. Although the Company has no current commitments or
agreements with respect to any acquisition of other businesses or technologies,
a portion of the Company's cash could be used to acquire complementary
businesses or obtain the right to use complementary technologies. Operating
leases are the Company's only off balance sheet arrangements.
12
The Company currently anticipates that existing cash and short-term investments
and cash generated from operations will be sufficient to satisfy its operating
cash needs for the foreseeable future.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"), which changes the rules for how companies must account for costs
associated with exit or disposal activities. Costs typically associated with
exit or disposal activities include one-time employee termination costs,
contract cancellation provisions and relocation costs. SFAS 146 nullifies EITF
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The provisions of the new standard are effective for exit or
disposal activities initiated after December 31, 2002, with early application
encouraged. The Company does not believe that SFAS 146 will have a material
impact on its consolidated financial statements.
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 the three months ended October 31, 2002 and 2001, approximately 6% and 5%,
respectively, of the Company's revenues were denominated in British pounds. For
the three months ended October 31, 2002 and 2001, approximately 8% 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 operations outside the U.S.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation of the Company's disclosure controls and procedures (as
defined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934) as of a date within 90 days of the filing date of this quarterly report,
the Company's Chief Executive Officer and Senior Vice President, Finance and
Administration (Principal Financial Officer) have concluded that the disclosure
controls and procedures are effective. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of evaluation. There were no significant
deficiencies or material weaknesses; therefore, no corrective actions were
taken.
13
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 -- Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
99.2 -- Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three months
ended October 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/ Michael D. Andereck Date December 16, 2002
- ------------------------------------------ ----------------------
Michael D. Andereck
President and Chief Executive Officer
15
CERTIFICATIONS
I, Michael D. Andereck, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Docucorp
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Docucorp International, Inc. as of and for, the periods
presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within the
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's Board of Directors;
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal control; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Michael D. Andereck
- -------------------------------------------
Michael D. Andereck
President and Chief Executive Officer
December 16, 2002
I, John H. Gray, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Docucorp
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Docucorp International, Inc. as of and for, the periods
presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within the
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's Board of Directors;
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal control; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ John H. Gray
- ------------------------------------------
John H. Gray
Senior Vice President, Finance and
Administration
(Principal Financial Officer)
December 16, 2002
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
99.1 -- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 -- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
</Table>