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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 00-1033864
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DocuCorp International, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2690838
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5910 North Central Expressway, Suite 800, Dallas, Texas 75206
(Address of principal executive offices) (Zip Code)
(214) 891-6500
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |_|
As of October 6, 2000, there were 14,917,472 shares of Common Stock, $.01 par
value, of the Registrant outstanding. The aggregate market value on such date of
the voting stock of the Registrant held by non-affiliates was an estimated
$37,499,226 based upon the closing price of $3.91 per share on October 6, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference portions
of the Registrant's definitive proxy statement, which was filed with the
Securities and Exchange Commission on October 27, 2000.
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DOCUCORP INTERNATIONAL, INC.
TABLE OF CONTENTS
FORM 10-K/A
July 31, 2000
Page
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PART I
Item 1. Business .................................................. 1
Item 2. Properties ................................................ 11
Item 3. Legal Proceedings ......................................... 11
Item 4. Submission of Matters to a Vote of Security Holders ....... 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .................................... 12
Item 6. Selected Consolidated Financial Data ...................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 13
Item 8. Financial Statements and Supplementary Data ............... 21
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ................. 21
PART III
Item 10. Directors and Executive Officers of the Registrant ........ 22
Item 11. Executive Compensation .................................... 22
Item 12. Security Ownership of Certain Beneficial Owners
and Management ......................................... 22
Item 13. Certain Relationships and Related Transactions ............ 22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ............................................ 23
Signatures ......................................................... 24
Index to Exhibits ..................................................
PART I
Item 1. Business
General
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 was organized in connection with the May 15, 1997 acquisition
of FormMaker Software, Inc. ("FormMaker") by Image Sciences, Inc. ("Image
Sciences") (the "Merger").
DocuCorp software products support leading hardware platforms, operating
systems, printers, and imaging systems. These products are designed to
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. The Company believes it is the leading provider of
information solution software and services for the insurance industry to
customers including Prudential Insurance Company of America, Lumbermans Mutual
Casualty Company, and American International Group (AIG). More than half of the
200 largest North American insurance companies use the Company's software
products and services, including eight of the ten largest life and health
insurance companies and nine of the ten largest property and casualty insurance
companies. The Company believes it has also become a leading provider of
software solutions and services for companies in the utilities industry. Key
utilities customers include Southern Company Services, Inc. and Consolidated
Edison of New York, Inc. The Company also has customers in the financial
services, higher education, telecommunications, and transportation industries,
including American Express Services Europe Limited, The University of Texas,
Nortel Northern Telecom, Inc., and Yellow Services, Inc.
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 need to be restated. In July 2000, 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.
On November 13, 2000, Lovells submitted its report to the audit committee,
which in turn reported to the Board of Directors on its findings and
recommendation regarding such matter.
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. Comparisons of previously reported and restated financial
statement amounts for the period impacted by the restatement are set forth in
Note 13 to the consolidated financial statements included herein.
Document Automation Industry
Information is critical to corporations as they endeavor to increase
revenue, improve customer service, and reduce costs. Companies can increase
revenue by using document automation to produce high-volume, one-to-one
documents such as customer statements that cross-sell additional products and
services. Document automation enables companies to provide better customer
service by:
o creating more attractive, easier to read documents,
o increasing accuracy,
o minimizing the time it takes to produce and deliver documents, and
o providing customer service personnel with immediate access to the
electronically archived information.
At the same time, document automation reduces the cost of personnel, printing,
and storage.
Certain trends have accelerated the growth of the document automation
industry. Deregulation of industries such as insurance, utilities, and financial
services has resulted in increased competition and caused participants in such
industries to focus more closely on customer service. This has increased the
demand to create one-to-one documents personalized to each customer with more
visual appeal. Rapid technological advances such as client/server architecture
and the Internet, adoption of Microsoft's WindowsNT, Active-X, and ODBC,
emergence of Sun Microsystems' Solaris and Java, and the evolving XML standard
have expanded the benefits that businesses can derive from document automation.
Additionally, the emergence of call centers has increased the demand for access
to and automation of customer communications. As a result, an increasing number
of companies are employing innovative comprehensive information presentment
processes.
1
The same advances that have enhanced the benefits of document automation,
however, have rendered the development and implementation of document automation
products increasingly complex. As a consequence, businesses are increasingly
outsourcing some of their document automation requirements to skilled and
experienced providers such as the Company.
The Document Life Cycle
The Company believes that the life cycle of a document is divided into
three general phases (creation, publishing, and archival), linked together by
document management software. The Company believes that its expertise in all
phases of the document life cycle constitutes an important competitive
advantage.
Creation
In this phase of the life cycle, documents are rendered in a digital form.
Documents can be created by using word processing software packages or tools
such as Microsoft Word, Elixir, and Corel that have been designed specifically
to facilitate the composition of commonly used documents such as letters and
forms. Today, documents are created by employees throughout an organization from
the central or home office, in branch offices, or in remote locations.
Alternatively, existing paper documents that were created on a typewriter
or other non-electronic source or that came into the organization from
third-parties can be input into the organization's computer network by means of
scanning devices. Scanning devices convert paper documents into a digitized
format. Scanned documents are generally stored and managed separately from
documents created by word processors or other internal applications, principally
because their formats are different. The Company's products create forms from
both of these sources.
Once a document is in digital form, it is then readily available for
common applications such as transmission over E-mail, storage on local
computers, printing on desktop printers, and distributing via other
communication technologies, including the Internet. Documents vary significantly
in complexity, ranging from simple letters or forms to multi-page forms,
brochures or booklets containing text, charts, and statistical tables requiring
sophisticated pagination. The digitized form can also be used for more complex,
high-volume publishing applications such as insurance policies and billing
statements. The Company's products create or prepare digitized forms that can
accept variable data and output to high-speed printers or the Internet.
Publishing
In this phase of the life cycle, appropriate digital data and forms are
selected from multiple sources and formats. The information is dynamically
assembled into complex documents. Variable data is integrated through software
to produce individualized documents which are then simultaneously printed or
digitally prepared for customer distribution and archived as corporate assets
for future use. The Company focuses its publishing software products and
services exclusively on these individualized and high-volume publishing
activities. While the basic logistical procedures are generally similar in every
publishing activity, in individualized and high-volume publishing activities,
software is required to coordinate large amounts of variable information such as
customer name, transaction history, and dynamically generated graphs. The
Company has developed software logic that allows its products to attain what it
believes to be one of the highest volume capabilities available in the market
today.
Archival
In the archival phase of the life cycle, the document is stored in either
a digitized or electronic print format for future use. Documents and information
are presented most efficiently through software to storage devices that range in
their sophistication from local computer disk drives to complex computer storage
equipment having varying capacity and data accessing capabilities. The Company
has developed products that enable an organization to automatically index
documents as they enter storage and place the documents in an archived format to
permit expedient retrieval, viewing, and reprint. Furthermore, the Company's
products accept data in both digital and print stream format, and support
leading imaging systems such as FileNET and IBM's Visual Info. The Company's
products also enable accessing these archives from a browser over the Internet.
2
Management Software
Underlying all three phases of the document life cycle is the requirement
to manage the way in which documents and information move within the life cycle
and the corporation. This is currently accomplished within organizations through
various E-mail software products like Lotus cc:Mail, groupware like Lotus Notes
by IBM, network software like Novell NetWare, document management software like
Documentum, and workflow products like FileNET. Externally, organizations are
increasingly using the Internet to transmit such correspondence. To date, these
systems are primarily departmental in nature and are an incomplete way to manage
enterprise-wide documents and publications. The Company currently provides
products for document routing, network and host connectivity, and Internet
access.
Growth Strategy
The Company's strategy for growth consists of the following:
Leveraging Existing Customer Relationships
The Company has an installed base of approximately 900 customers.
Increasingly, the Company's customers are expanding or upgrading their
information solutions, which provides a market for additional products and
services from the Company. Most of the Company's large insurance customers
originally licensed software, but contracted for few services. Since the Company
now has a substantial professional services infrastructure, it anticipates that
the existing customer base could be a significant source of future services
revenues for the Company. Recently introduced and planned products and services
can also be provided to the Company's current customers as follow-on sales.
Entering New Vertical Markets
The Company believes it is the leading provider of document automation
software and services for the insurance industry and has become a leader in the
utilities industry. The Company is targeting vertical market expansion in the
financial services industry. Revenues from the financial services industry
represented approximately 11% of the Company's business in fiscal 2000 compared
to 3% in fiscal 1999. The financial services industry, like insurance and
utilities, has an increasing need for individualized documents to be produced in
very large volumes in order to communicate effectively with their customers.
Expanding Internationally
Approximately 6% of the Company's revenues came from customers outside of
North America in fiscal 2000. DocuCorp plans to expand its international
customer base primarily by cultivating and expanding its international
distribution alliances and through direct sales. During fiscal 2000, the Company
opened a new office in London to serve as its European headquarters. The Company
expanded its presence in the European financial services market and was awarded
a contract from a major European financial services company. DocuCorp intends to
continue increasing the number of sales and services professionals domiciled in
Europe.
Developing and Enhancing New Technologies
The Company's product development efforts are focused on developing new
products as well as enhancing and broadening its current software product
offerings. New DocuCorp products and solutions will continue to emphasize
state-of-the-art object-oriented technologies, WindowsNT platform development,
and intranet/Internet capabilities and enablement. During fiscal year 2000, the
Company introduced a new family of e-solution software products that speed
business applications to the Internet, by enabling everything from filling out
forms and publishing documents online to managing and viewing documents via the
Internet. During fiscal 2001, the Company's product development efforts will
include development of new Internet products and functionality, integration of
existing products with the Internet to provide access to documents through the
Internet, and further development of systems for use in vertical industries such
as utilities and financial services.
3
Pursuing Acquisitions and Strategic Alliances
The Company intends to pursue acquisitions of other companies or
technologies further expanding the Company's products, services, or market
penetration. In addition, as the Company expands in its targeted vertical
markets, the Company intends to enter into additional strategic alliances for
sales and marketing in such markets. The Company believes that new technical
skills, expanded product functionality, a broader client base, and an expanded
geographic presence may result from these activities.
Expanding ASP Hosting Business
During fiscal 2000, the Company adopted an ASP business model which
provides hosted software applications on a per transaction basis. The ASP model
was a natural extension of the Company's outsourcing business. The Company's ASP
offering allows customers to off-load applications and free up resources to
concentrate on their core competencies and strategic projects. The ASP business
model provides the Company with a rapidly growing source of recurring revenues.
Also during the year, the Company opened a second ASP hosting center in Dallas,
Texas which significantly expands its capacity and allows the Company to offer
off-site backup and disaster recovery capabilities to its customers. The Company
anticipates that ASP hosting services, both in print and delivery over the
Internet, will be the fastest growing area of its business.
Products and Services
The Company offers a portfolio of scalable, high-performance document
automation software products. The Company also has one of the largest
professional services organizations in the industry, and the facilities to
provide ASP hosting services using the Company's technology and expertise.
Document Automation Software
The Company offers document automation software products that enable
customers to produce high-volume, individualized documents. The Company's
software solutions include multi-platform, enterprise-wide processing products
addressing each phase of the life cycle of a document. The Company's philosophy
of open architecture and support of industry standards enables its customers to
select software and hardware from other leading vendors and integrate them with
DocuCorp products.
The Company's product lines have been organized into the following five
primary categories.
DocuCorp Creation Solutions (DocuCreate)
With DocuCreate, document components (forms, graphs, charts, text) can be
created either entirely with the Company's products or more typically by using
other leading composition or word processing software, such as Microsoft Word,
integrated with DocuCreate. The Company's open architecture supports a broad
range of document creation solutions. The DocuCreate products run primarily on
personal computers under Microsoft Windows. License revenues from the Company's
software products in the Creation Solutions category accounted for approximately
14%, 10%, and 9% of the Company's total license revenues in fiscal 2000, 1999,
and 1998, respectively.
DocuCorp Publishing Solutions (DocuMaker)
The DocuMaker products are designed to handle production of large volumes
of documents, large numbers of forms, complex document assembly requirements,
individualization of each document, multiple recipients with unique
requirements, and interfacing with existing databases and application programs.
DocuMaker RP has the flexibility to dynamically compose highly-tailored
documents, each based on custom publishing rules such as unique pagination.
Alternatively, the Company's DocuMaker FP product attains industry leading
throughput by utilizing the Company's proprietary software logic encompassing
print-ready images to be merged with variable data for high-volume complex
documents like complete insurance policies. The DocuMaker products provide forms
fill, data merge, document assembly, dynamic formatting and graph generation,
centralized and decentralized printing on most leading laser printers,
interactive and batch processing and electronic output, and a variety of other
features and functions. The DocuMaker products run
4
on mainframes primarily under MVS, and on client/server platforms under
Microsoft WindowsNT, Microsoft Windows, and UNIX. License revenues from the
Company's software products in the Publishing Solutions category accounted for
approximately 50% of the Company's total license revenues in fiscal 2000 and 62%
in both fiscal 1999 and 1998.
DocuCorp Archival Solutions (DocuSave)
The DocuSave product stores published documents electronically so that
they can be viewed, used, and reused throughout the organization. Retrieval
features enable immediate access to documents for applications like processing
claims, referencing enterprise-wide legal or regulatory documentation, or
speeding customer service operations at call centers. DocuSave can be
implemented as a stand-alone system or integrated with leading imaging systems
such as FileNET. DocuSave viewing software runs under Windows, and DocuSave
server software runs on MVS, Microsoft WindowsNT, and UNIX. License revenues
from the Company's software products in the Archival Solutions category
accounted for approximately 14%, 19%, and 22% of the Company's total license
revenues in fiscal 2000, 1999, and 1998, respectively.
DocuCorp Management Solutions (DocuManage)
The DocuManage product provides document management and document routing.
As enterprises expand, there is a greater need for control over documents and
the ability to move documents across the enterprise. License revenues from the
Company's software products in the Management Solutions category accounted for
approximately 14%, 9%, and 7% of the Company's total license revenues in fiscal
2000, 1999, and 1998, respectively.
DocuCorp Internet Solutions (e-Solutions)
During fiscal 2000, the Company introduced its new family of e-solution
software products. These products make possible, via the Internet, anything from
filling out forms and publishing information to managing and viewing documents
and delivering and collection of payments. License revenues from the Company's
Internet Solutions category accounted for approximately 7% of the Company's
total license revenues in fiscal 2000.
As an additional service to its customers, the Company also provides the
tools and utility programs to interface, maintain, and develop DocuCorp document
automation implementations. The latest object-oriented technologies, including
use of Active-X, Java, ODBC, and Visual Basic, make it easier to implement
installations and interfaces. The Company has not generated, nor does it
anticipate that it will generate, material revenues from these tools and utility
programs.
Professional Services
The Company offers both document automation consulting and ASP hosting
services to its customers. At July 31, 2000, the Company employed approximately
190 professional service personnel, which represents one of the largest services
organizations in the document automation software industry. The Company's
professional services personnel have experience across many industries and
document automation applications.
Consulting
The Company offers a broad range of consulting services related to
document automation. A majority of the Company's professional services
consulting revenues are derived from implementation and integration of the
Company's software products. The Company also derives professional services
consulting revenues from education as well as training services and electronic
document library development. The Company's professional services group works
with clients to develop and define document automation strategies and to provide
a complete package of software implementation services. Training classes are
available to assist clients with implementing technology and applications.
Training offerings are available in standardized and customized formats. A
substantial majority of the Company's consulting services are related to
DocuCorp Publishing Solutions. Consulting services accounted for approximately
37%, 41%, and 38% of the Company's total revenues in fiscal 2000, 1999, and
1998, respectively.
5
ASP Hosting
The Company offers ASP hosting which utilizes the Company's software to
provide processing, print, mail, archival, and Internet delivery of documents
for customers who outsource this activity. The Company operates ASP hosting
centers in Atlanta and Dallas which, using data received electronically from
customers, employs high-volume printers and mail handling equipment to produce
insurance policies, utility statements and other customer mailings, and bundles
the output for bulk mailings. ASP hosting accounted for approximately 19%, 12%,
and 18% of the Company's total revenues in fiscal 2000, 1999 and 1998,
respectively.
Product Development
The Company has made and expects to continue to make substantial
investments in research and product development. During fiscal 2000, the Company
introduced a new family of e-solution software products that speed business
applications to the Internet, by enabling everything from filling out forms and
publishing documents online to managing and viewing documents via the Internet.
During fiscal 2001, the Company's product development efforts will include
development of new Internet products and functionality, integration of existing
products with the Internet to provide access to documents through the Internet,
and further development of systems for use in vertical industries such as
utilities and financial services.
The Company has committed substantial resources to product development. As
of July 31, 2000, the Company employed approximately 95 technical personnel
engaged in research and product development. The product development process is
a cooperative effort between customers and the Company. Early review of
functionality specifications, prototypes, and demonstrations allows for the
incorporation of customer suggestions and comments in parallel with management
review of the process internally. DocuCorp has a formal planning process for new
software products as well as software upgrades and maintenance releases to
ensure product quality, timeliness of releases, and meeting or exceeding
customer expectations. In fiscal 2000, 1999, and 1998, the Company's software
development expenditures were approximately $8.1 million, $7.5 million, and $6.7
million, respectively.
Sales and Marketing
General
The Company markets its products through various distribution channels,
including direct sales, marketing alliances, and distributors. Its sales
resources are organized based upon vertical industry markets. At July 31, 2000,
the Company employed approximately 30 direct sales and sales support
representatives who operate from Dallas, Atlanta, and London. Sales
representatives are compensated principally on a commission basis.
The Company markets its products and services primarily through a direct
sales force. Distributor relationships are established in the United States,
Canada, Europe, South Africa, and Asia. The Company's most significant
international distributor relationship is with MYND, formerly Policy Management
Systems Corporation.
The Company intends to increase both its product offerings and vertical
markets served through marketing, sales and distribution, and development
relationships with other companies. Formal and informal marketing and sales
partnerships currently exist with Xerox, Microsoft, ACORD Organization, MYND,
FileNET Corporation, SCT Utility Systems, ORCOM Solutions, CheckFree,
TransPoint, e-PROFILE, and Bowne. These relationships provide sales leads for
the Company's products or provide access to certain technological information
and resources.
The Company's customers generally license the Company's software products
for an upfront license fee. Initial license fees typically range from $75,000 to
$250,000. Most customers also enter into maintenance agreements with the
Company, which typically provide for annual maintenance fees ranging from 15% to
30% of current license fees depending upon the customer group. Customers who
enter into maintenance agreements are entitled to software upgrades, software
problem resolutions, and use of the Company's "Hotline" providing technical
assistance to the software user. The Company generally charges customers for
consulting services on a time and materials basis, although certain service
assignments are performed on a fixed charge basis. ASP hosting services are
charged on a transaction fee basis.
6
Relationship with Third-Party Distributor
FormMaker historically distributed its line of DAP software products to
the insurance industry in North America through an exclusive marketing agreement
with MYND. Prior to the Merger, a substantial portion of the subsidiary's
revenues were generated pursuant to this agreement. Additionally, the subsidiary
granted MYND the exclusive right to market the DAP software in the
property/casualty and life insurance industries. In September 1998, both parties
agreed to terminate the exclusive marketing agreement and enter into a new,
non-exclusive marketing agreement. The new marketing agreement between DocuCorp
and MYND allows MYND to market all of the Company's software products to
insurance and financial services companies worldwide. For the years ended July
31, 2000 and 1999, the Company generated revenues of approximately $2.8 million
and $3.7 million through the MYND relationship, respectively.
Customers
The Company generally markets to large and mid-size organizations that
have a need for integrated solutions for the high-volume production of
individualized documents. Currently, the majority of the Company's revenues are
generated from the insurance industry. Approximately 61% of the Company's total
revenues for the year ended July 31, 2000 were derived from the insurance
industry. Approximately 6% of total revenues for the year ended July 31, 2000
were derived from one customer, Prudential Insurance Company of America. Over
half of the 200 largest North American insurance companies use the Company's
products and services, including eight of the ten largest life and health
insurance companies and nine of the ten largest property and casualty insurance
companies. The Company believes it has the largest installed document automation
customer base in the insurance industry. During fiscal 2000, two utilities
companies in North America licensed the Company's products. Approximately 25% of
the Company's total revenues for the year ended July 31, 2000 were derived from
the utilities industry. In addition to the insurance and utilities industries,
the Company is targeting vertical markets including the financial services,
higher education, telecommunications, and transportation markets, in each of
which industry customers have purchased and installed the Company's software.
During the year ended July 31, 2000, approximately 11% of the Company's total
revenues were derived from the financial services industry. Unlike many other
software vendors, the Company's principal contact at customer organizations is
generally not an MIS or information technology officer, but rather the customer
service or marketing departments that will use the Company's products. As a
result, the Company does not always compete with other technological priorities
being considered by a customer's MIS department.
Set forth below is a representative list of customers of the Company in
the various industries in which the Company markets its products and services:
Insurance
Prudential Insurance Company of America
American International Group (AIG)
Lumbermans Mutual Casualty Company
Utilities
Southern Company Services, Inc.
Consolidated Edison of New York, Inc.
Financial Services
Royal Bank Financial Group
ABN-AMRO Bank N.V.
Higher Education
The University of Texas
San Francisco State University
7
Telecommunications
Polkomtel S.A.
Nortel Northern Telecom, Inc.
Transportation
Yellow Services, Inc.
Wisconsin Department of Transportation
Competition
The market for document automation products and services is intensely
competitive, subject to rapid change, and significantly affected by new product
introductions and other market activities of industry participants. The Company
faces direct and indirect competition from a broad range of competitors, many of
whom have greater financial, technical, and marketing resources than the
Company. The Company's principal competition currently comes from (i) systems
developed in-house by the internal MIS departments of large organizations, (ii)
direct competition from numerous software vendors, including Cincom Systems,
Inc., Document Sciences Corporation (which is majority owned by Xerox
Corporation ("Xerox")), Group 1 Software, Inc., Mobius Management Systems, Inc.,
and Metaview, and (iii) direct competition from numerous outsourcing and ASP
vendors, including Derivion, Xerox XBS, and OTS. The Company believes that the
principal competitive factors in the document automation software market are
product performance and functionality, ease of use, multi-platform offerings,
product and company reputation, quality of customer support and service, and
price. The degree of competition varies significantly with the stage of the
document life cycle being addressed and by vertical market.
The Company may also face competition from new entrants into the document
automation software industry. As the market for document automation software
continues to develop, current or potential competitors with significantly
greater resources than the Company could attempt to enter or increase their
presence in the market either independently or by acquiring or forming strategic
alliances with competitors of the Company or otherwise increase their focus on
the industry. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third-parties
to increase the ability of their products to address the needs of the Company's
current and prospective customers.
Intellectual Property, Trademarks, and Proprietary Rights
The Company relies primarily on a combination of copyright, distribution
software license agreements, trademark and trade secret laws, employee and
third-party nondisclosure agreements, and other methods to safeguard its
software products. Despite these precautions, it may be possible for
unauthorized third-parties to copy certain portions of the Company's products or
obtain and use information the Company regards as proprietary. While the
Company's competitive position may be affected by its ability to protect its
proprietary information, the Company believes that trademark and copyright
protections are not material to the Company's success.
The Company's software products are licensed to end-users on a "right to
use" basis pursuant to license agreements. Certain license provisions protecting
against unauthorized use, copying, transfer, and disclosure of the licensed
program may be unenforceable under the laws of certain jurisdictions and foreign
countries. In addition, the laws of some foreign countries do not protect
proprietary rights to the same extent as do the laws of the United States.
As the number of software products in the industry increases and the
functionality of these products further overlaps, the Company believes that
software programs will increasingly become subject to infringement claims. Third
parties may assert infringement claims against the Company in the future with
respect to current or future products, which could require the Company to enter
into royalty arrangements or result in costly litigation.
The Company also relies on certain software that it licenses from
third-parties, including software that is integrated with internally developed
software and used in its products to perform key functions. These third-party
software licenses may not continue to be available to the Company on
commercially reasonable terms
8
and the related software may not continue to be appropriately supported,
maintained or enhanced by the licensors. The loss of licenses to use, or the
inability of licensors to support, maintain, and enhance, any of such software
could result in increased costs, delays or reductions in product shipments until
equivalent software could be developed or licensed and integrated.
Employees
As of July 31, 2000, the Company had approximately 360 employees, of which
approximately 190 were engaged in professional services, 95 in product
development and customer support, 30 in sales and marketing, and 45 in finance,
administration, human resources, and internal systems support. The Company
believes its future success will depend, in part, on its continued ability to
attract and retain highly qualified personnel in a competitive market for
experienced and talented software engineers and sales and marketing personnel.
None of the Company's employees are represented by a labor union or subject to a
collective bargaining agreement. The Company believes that its employee
relations are good.
Forward-Looking Statements
This Annual Report on Form 10-K/A may include certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements, other than statements of historical facts included in this Form
10-K/A, are forward-looking statements. Such statements are subject to certain
risks and uncertainties, which include but are not limited to those discussed in
the section entitled "Risk Factors." Should one or more of these risks or
uncertainties, among others as set forth in this Form 10-K/A, materialize,
actual results may vary materially from those estimated, anticipated, or
projected. Although the Company believes that the expectations reflected by such
forward-looking statements are reasonable based on information currently
available to the Company, no assurance can be given that such expectation will
prove to have been correct. Cautionary statements identifying important factors
that could cause actual results to differ materially from the Company's
expectations are set forth in this Form 10-K/A, including without limitation in
conjunction with the forward-looking statements included in this Form 10-K/A
that are referred to above. All forward-looking statements included in this Form
10-K/A 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.
Risk Factors
Significant Revenues from Two Industries
Approximately 61% and 71% of the Company's total revenues for the year
ended July 31, 2000 and 1999, respectively, were derived from the insurance
industry. Approximately 6% and 10% of total revenues in fiscal 2000 and 1999,
respectively, were derived from one customer, Prudential Insurance Company of
America. Additionally, approximately 25% and 23% of the Company's total revenues
for the year ended July 31, 2000 and 1999, respectively, were derived from the
utilities industry. The Company's continued financial performance and its future
growth will depend upon its ability to continue to market its products
successfully in the insurance and utilities industries and to enhance and market
technologies for distribution in other markets. This will require the Company to
make substantial product development and distribution channel investments. There
can be no assurance that the Company will be able to continue marketing its
products successfully in the insurance and utilities industries or will be able
to successfully introduce new or existing products in markets other than the
insurance and utilities industries.
Technological Advances
The document automation industry has experienced and will continue to
experience rapid technological advances, changes in customer requirements, and
frequent new product introductions and enhancements. Development in both
software technology and hardware capability will require the Company to make
substantial product development investments. Any failure by the Company to
anticipate or respond adequately to technological developments and customer
requirements, or any significant delays in product development or introduction,
could have a material adverse effect on the Company's results of operations.
There can be no
9
assurance that the Company's new products or product enhancements intended to
respond to technological change or evolving customer requirements will achieve
acceptance.
Limited Experience in ASP Hosting Business
The Company recently adopted its ASP hosting business model and therefore
has limited experience in offering this service. It is uncertain whether the
Company's hosting services will achieve sufficient market acceptance for
revenues from ASP hosting to materially increase. At the same time, the Company
has opened two ASP hosting centers that will commit to a certain level of
expenses regardless of whether revenue growth is achieved. As a result, the
failure of the Company to increase ASP hosting revenues as anticipated may
subject the Company to potential losses relating to this business model.
Attraction and Retention of Technical Employees
The Company believes that its future success will depend in large part
upon its ability to attract, retain, and motivate highly skilled employees,
particularly technical employees. The employees that are in highest demand are
software programmers, software developers, application integrators, and
information technology consultants. These employees are likely to remain a
limited resource for the foreseeable future. There can be no assurance that the
Company will be able to attract and retain sufficient numbers of highly skilled
technical employees. The loss of a significant number of the Company's technical
employees could have a material adverse effect on the Company.
Competition
The market for the Company's document automation products is intensely
competitive. The Company faces competition from a broad range of competitors,
many of whom have greater financial, technical, and marketing resources than the
Company. The Company's principal competition currently comes from (i) systems
developed in-house by the internal MIS departments of large organizations, (ii)
direct competition from numerous software vendors, including Cincom Systems,
Inc., Document Sciences Corporation, Group 1 Software, Inc., Mobius Management
Systems, Inc., and Metaview, and (iii) direct competition form numerous
outsourcing and ASP vendors, including Derivion, Xerox XBS, and OTS. There can
be no assurance that the Company will be able to compete effectively with such
entities.
Fluctuations in Operating Results
The Company has experienced, and may in the future continue to experience,
fluctuations in its quarterly operating results due to the fact that sales
cycles, from initial evaluation to purchase, vary substantially from customer to
customer. Delays in the sales cycle frequently occur as a result of competition,
changes in customer personnel, and overall budget and spending priorities. The
Company has typically operated with little backlog for license revenues because
software products generally are shipped soon after orders are received. As a
result, license revenues in any quarter are substantially dependent on orders
booked and shipped in that quarter. The delay of customer orders for a small
number of licenses could adversely affect the license revenues for a given
fiscal quarter. The Company has historically earned a substantial portion of its
license revenues in the last weeks of any particular quarter, and has
historically experienced its highest license revenues in the fourth quarter of
its fiscal year. The failure to achieve such revenues in accordance with such
trends could have a material adverse effect on the Company's financial results
for each such interim period.
Risk of Software Defects
Complex software products such as those offered by the Company can contain
undetected errors or performance problems. Such defects are most frequently
found during the period immediately following introduction of new products or
enhancements to existing products. The Company's products have from time to time
contained software errors that were discovered after commercial introduction.
There can be no assurance that performance problems or errors will not be
discovered in the Company's products in the future. Any future software defects
discovered after shipment of the Company's products, if material, could result
in loss of revenues, delays in customer acceptance, or potential product
liability.
10
Limited Protection of Intellectual Property Rights
The Company relies on a combination of copyright and trademark laws,
employee and third-party nondisclosure agreements, and other methods to protect
its proprietary rights. Despite these precautions, it may be possible for
unauthorized third-parties to copy certain portions of its products or to obtain
and use information that the Company regards as proprietary. There can be no
assurance that the Company's efforts will provide meaningful protection for its
proprietary technology against others who independently develop or otherwise
acquire substantially equivalent techniques or gain access to, misappropriate,
or disclose the Company's proprietary technology.
Dependence on Key Management Personnel
The Company believes that its continued success depends to a significant
extent upon the efforts and abilities of its senior management. In particular,
the loss of Michael D. Andereck, the Company's President and Chief Executive
Officer, or any of the Company's other executive officers or senior managers
could have a material adverse effect on the Company.
Item 2. Properties
The Company leases approximately 31,500 square feet of office space in
Dallas, Texas for its corporate headquarters, including administrative, sales,
marketing, services, and product development departments. This lease expires
April 30, 2005.
The Company leases approximately 76,000 square feet of office space in
Atlanta, Georgia which is utilized for administrative, sales, services, and
product development departments. The lease for this space expires on December
31, 2002.
The Company leases space for an ASP hosting facility located in Atlanta,
Georgia. This facility occupies approximately 19,000 square feet under a lease
which expires on October 31, 2002, but may be terminated by the Company on
October 31, 2000.
The Company leases space for an ASP hosting facility located in Dallas,
Texas. This facility occupies approximately 28,700 square feet under a lease
which expires on March 31, 2010, but may be terminated by the Company on March
31, 2007.
The Company's staff in Maryland is located in Silver Spring, Maryland.
This facility occupies approximately 10,000 square feet under a lease which
expires December 31, 2001.
The Company's staff in New Hampshire is located in a 5,700 square foot
facility in Bedford, New Hampshire. The lease for this facility expires on
December 31, 2004.
The Company leases space for its European sales and services staff in
London, England. This facility occupies approximately 8,200 square feet under a
lease which expires on September 27, 2013, but may be terminated by the Company
on October 1, 2005.
Office space is also leased in Portland, Maine for product development
activities.
The Company believes that its existing office facilities and additional
space available to it are adequate to meet its requirements, and that in any
event, suitable additional or alternative space adequate to serve the Company's
foreseeable needs will be available on commercially reasonable terms.
Item 3. Legal Proceedings
The Company is involved in various claims and legal actions incidental to
the normal conduct of its business. The Company does not believe that the
ultimate resolution of these actions will have a material adverse effect on the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal 2000.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has traded on the Nasdaq National Market under
the symbol "DOCC" since April 6, 1998. At October 6, 2000 there were
approximately 1,000 holders of record of the Company's Common Stock, although
the Company believes that the number of beneficial owners of its Common Stock is
substantially greater. The table below sets forth for the fiscal quarters
indicated the high and low sales prices for the Company's Common Stock:
High Low
------- --------
Fiscal 2000:
Fourth quarter ........................................ $5.38 $3.28
Third quarter ......................................... 7.97 4.33
Second quarter ........................................ 9.13 4.38
First quarter ......................................... 8.06 3.69
Fiscal 1999:
Fourth quarter ........................................ $5.75 $4.03
Third quarter ......................................... 9.88 4.25
Second quarter ........................................ 6.25 3.88
First quarter ......................................... 6.50 2.25
The Company intends to retain any future earnings for use in its business
and does not intend to pay cash dividends in the foreseeable future. The payment
of future dividends, if any, will be at the discretion of the Company's Board of
Directors and will depend, among other things, upon future earnings, operations,
capital requirements, restrictions in future financing agreements, general
financial condition of the Company, and general business conditions.
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data for the years ended
July 31, 2000, 1999, 1998, 1997, and 1996 have been derived from the audited
financial statements of the Company. The following data should be read in
conjunction with, and are qualified by, reference to the Company's audited
financial statements and the notes thereto, included elsewhere in this Form
10-K/A.
Years ended July 31,
-----------------------------------------------------
2000
As Restated* 1999 1998 1997** 1996
----------- ------- ------- -------- -------
(in thousands except per share amounts)
Statements of Operations Data:
Total revenues ............................... $50,977 $51,926 $45,247 $ 17,503 $11,470
Operating income (loss) ...................... $ 2,802 $ 7,231 $ 5,601 $(17,460) $ 3,416
Income (loss) before income taxes ............ $ 3,414 $ 7,853 $ 5,424 $(17,246) $ 3,656
Net income (loss) ............................ $ 1,529 $ 4,513 $ 3,184 $(16,102) $ 2,321
Cash dividend declared for preferred stock ... -0- -0- -0- $ 2,808 -0-
Net income (loss) per share:
Basic ..................................... $ 0.10 $ 0.28 $ 0.25 $ (2.18) $ 0.37
Diluted ................................... $ 0.09 $ 0.26 $ 0.21 $ (2.18) $ 0.28
Weighted average number of shares outstanding:
Basic ..................................... 15,317 16,001 12,587 7,377 6,202
Diluted ................................... 16,872 17,570 14,865 7,377 8,381
- ----------
* See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 13 to the consolidated financial
statements for a comparison of previously reported and restated financial
statement amounts.
** After Merger-related charges of $21,378. Without such charges operating
income, income before income taxes, net income, net income per share
(diluted), and weighted average number of shares of common stock and
common stock equivalents (diluted) would have been $3,918, $4,132, $2,598,
$0.34, and 7,607, respectively.
12
July 31,
-------------------------------------------------------
2000
As Restated* 1999 1998 1997 1996
------------ ------- ------- ------- -------
(in thousands)
Balance Sheet Data:
Working capital ....................... $13,029 $15,513 $15,988 $ 1,644 $ 5,640
Total assets .......................... $49,010 $52,918 $51,921 $32,698 $14,691
Total debt, including obligations under
capital lease ...................... $ -0- $ 25 $ 87 $ 9,439 $ 46
Redeemable Class B common stock ....... -0- -0- -0- $19,119 -0-
Stockholders' equity (deficit) ........ $33,705 $36,994 $38,433 $(7,520) $ 8,037
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain information contained herein may include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements, other than statements of historical facts included herein, are
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which include, but are not limited to, 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. Should one
or more of these risks or uncertainties, among others as set forth herein,
materialize, actual results may vary materially from those estimated,
anticipated, or projected. Although the Company believes that the expectations
reflected by such forward-looking statements are reasonable based on information
currently available to the Company, no assurance can be given that such
expectations will prove to have been correct. Cautionary statements identifying
important factors that could cause actual results to differ materially from the
Company's expectations are set forth herein. All forward-looking statements
included herein 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 was organized in connection with the May 15, 1997 acquisition
of FormMaker Software, Inc. ("FormMaker") by Image Sciences, Inc. ("Image
Sciences") (the "Merger"). In March 1998, the Company acquired all of the
capital stock of EZPower Systems, Inc. ("EZPower") and Maitland Software, Inc.
("Maitland"), and accordingly, the results of operations for all periods
subsequent to the acquisition date are included in the accompanying consolidated
financial statements.
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
eight 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.
13
The Company derives its revenues from license fees, recurring maintenance
fees, professional services fees, and ASP hosting fees related to its software
products. License revenues are generally derived from perpetual and term
licenses of software products. Maintenance and other recurring revenues consist
primarily of recurring license fees and annual maintenance contracts.
Professional services revenues include fees for consulting, implementation, and
education services. ASP hosting revenues consist of fees earned from customers
who outsource document automation applications.
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 need to be restated. In July 2000, 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.
On November 13, 2000, Lovells submitted its report to the audit committee,
which in turn reported to the Board of Directors on its findings and
recommendation regarding such matter.
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. Comparisons of previously reported and restated financial
statement amounts for the period impacted by the restatement are set forth in
Note 13 to the consolidated financial statements included herein.
Results of Operations
Historical Operating Results of the Company
The following table sets forth for the periods indicated selected
consolidated statements of operations data. The information presented below,
expressed in dollars and as a percentage of total revenues for the periods
indicated, has been derived from the consolidated financial statements of the
Company. The information provided for fiscal year 2000 has been restated. See
"Restatement of Financial Results" above and Note 13 to the consolidated
financial statements appearing elsewhere in this Annual Report on Form 10-K/A.
Years ended July 31,
-------------------------------
2000
(dollars in thousands) As Restated 1999 1998
---------- ------- -------
Revenues
ASP hosting $ 9,642 $ 6,220 $ 8,162
Professional services 19,016 21,120 17,371
License 7,357 11,403 8,885
Maintenance and other recurring 14,962 13,183 10,829
------- ------- -------
Total revenues $50,977 $51,926 $45,247
======= ======= =======
Percentage relationship to total revenues
Revenues
ASP hosting 19% 12% 18%
Professional services 37 41 38
License 15 22 20
Maintenance and other recurring 29 25 24
------- ------- -------
Total revenues 100 100 100
------- ------- -------
Expenses
ASP hosting 16 10 14
Professional services 31 31 28
Product development and support 20 18 18
Selling and marketing 16 16 14
General and administrative 11 11 14
------- ------- -------
Total expenses 94 86 88
------- ------- -------
Operating income 6 14 12
Other income (expense), net 1 1 0
------- ------- -------
Income before income taxes 7 15 12
Provision for income taxes 4 6 5
------- ------- -------
Net income 3% 9% 7%
======= ======= =======
14
Fiscal Year Ended July 31, 2000 (Restated) Compared to Fiscal Year Ended July
31, 1999
Revenues
Total revenues decreased 2% for the year ended July 31, 2000 as compared
to the prior year due primarily to decreased professional services and license
revenues, offset by increased ASP hosting and maintenance revenues. As a result
of Y2K concerns, many customers and prospects delayed licensing and
implementation of software until the passage of January 1, 2000. This led to a
35% decrease in license revenues and a 10% decrease in professional services
revenues. The Company believes, based on activity in the fourth quarter of
fiscal 2000, that Y2K will not have a material impact on future financial
results. ASP hosting revenues increased 55% due to the Company's focus on
expanding this business and adding several new significant customers during
fiscal 2000. Maintenance revenues increased 13% due to an expanding customer
base.
Backlog for the Company's products and services of approximately $39.9
million as of July 31, 2000, of which approximately $22.8 million is scheduled
to be satisfied within one year, is primarily composed of recurring software
license and maintenance revenues for ongoing maintenance and support, software
implementation and consulting services, and ASP hosting services. Software
agreements for recurring license fees generally have non-cancelable terms of up
to five years. Annual maintenance contracts may generally be terminated upon 30
days notice; however, the Company has not historically experienced 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.
FormMaker historically distributed its line of Document Automation
Platform software products to the insurance industry in North America through an
exclusive marketing agreement with MYND, formerly Policy Management Systems
Corporation. In September 1998, both parties agreed to terminate the marketing
agreement and enter into a new, non-exclusive marketing agreement. The new
marketing agreement between the Company and MYND allows MYND to market all of
the Company's software products to insurance and financial services companies
worldwide. The Company generated revenues of approximately $2.8 million and $3.7
million for the years ended July 31, 2000 and 1999, respectively, under the new
agreement.
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 69% for the year ended
July 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 $1.8
million of additional postage and supplies expense related to increased ASP
hosting revenues. For the fiscal years ended July 31, 2000 and 1999, ASP hosting
expense represented 87% and 80% 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 expense to increase as ASP hosting revenues increase.
Professional services expense
Professional services expense is composed primarily of personnel expenses
related to implementation, education, and consulting services. Professional
services expense decreased 2%
15
for the year ended July 31, 2000 due to decreased recruiting and travel costs,
offset by increased personnel costs associated with the expanded professional
services department. For the fiscal years ended July 31, 2000 and 1999,
professional services expense represented 82% and 76% of professional services
revenues, respectively. The increase in cost as a percentage of professional
services revenues is mainly due to lower utilization of consulting personnel as
a result of customers readjusting their focus until after the passage of January
1, 2000. The Company expects professional services expense to increase in order
to meet additional resource requirements as professional services activities
increase domestically and internationally.
Product development and support expense
Product development and support expense consists primarily of research and
development efforts, amortization of capitalized software development costs,
customer support, and other product support costs. For the fiscal year ended
July 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 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 and marketing expense
In fiscal 2000, selling and marketing expense decreased 4% primarily due
to decreased third-party selling costs associated with the MYND marketing
agreement. Incentive compensation also decreased as a result of decreased
license revenues; however, personnel costs increased as a result of
international and vertical market expansion.
General and administrative expense
General and administrative expense remained substantially unchanged for
the year ended July 31, 2000. Legal and accounting fees and bad debt expense
decreased, which was offset by increased personnel costs.
Other income, net
Other income, net decreased approximately $10,000 for the year ended July
31, 2000 due primarily to a decrease in interest income. This decrease was
partially offset by a decrease in the loss on foreign exchange rate for the year
ended July 31, 2000.
Provision for income taxes
The effective tax rate for the years ended July 31, 2000 and 1999, was
approximately 55% and 43%, respectively. These rates differ from the federal
statutory rate due primarily to non-deductible goodwill amortization related to
the Merger and acquisitions of EZPower and Maitland, and the impact of a loss
generated by the Company's European subsidiary. The Company used a portion
of its net operating loss carryforwards and outstanding tax credits to offset
its current tax liability for the years ended July 31, 2000 and 1999.
Net income
Net income decreased 66% for fiscal 2000. The decrease in net income is
primarily due to the impact of Y2K on software license and professional services
revenues and the increase in operating expenses associated with international,
ASP hosting, and vertical market expansion.
16
Fiscal Year Ended July 31, 1999 Compared to Fiscal Year Ended July 31, 1998
Revenues
Total revenues increased 15% for the year ended July 31, 1999 as compared
to the prior year. An increase in large dollar software licenses in the
insurance market was primarily responsible for the 28% increase in license
revenues. Maintenance revenues increased 22% due to an expanding customer base.
For the year ended July 31, 1999, professional services revenues increased 22%
due to increased consulting and implementation services revenues in the
insurance and utilities markets. ASP hosting revenues decreased 24% due to the
approximate $4.4 million decline in ASP hosting revenues resulting from the May
1998 termination of the MYND print outsourcing agreement, partially offset by
increased ASP hosting revenues in the utilities market.
ASP hosting expense
ASP hosting expense is composed primarily of personnel costs,
facility-related costs, postage, and supplies expense related to the Company's
ASP hosting center. ASP hosting expense decreased 23% for the year ended July
31, 1999 due primarily to a decrease in postage and supplies expense associated
with the decrease in ASP hosting revenues. The decrease was partially offset by
increased personnel costs as the Company focused on expanding the ASP hosting
business. For the fiscal years ended July 31, 1999 and 1998, ASP hosting expense
represented 80% and 79% of ASP hosting revenues, respectively.
Professional services expense
Professional services expense is composed primarily of personnel expenses
related to implementation, education, and consulting services. Professional
services expense increased 27% for the year ended July 31, 1999 due to increased
personnel costs as the professional services department expanded both
domestically and internationally. For the fiscal years ended July 31, 1999 and
1998, professional services expense represented 76% and 73% of professional
services revenues, respectively.
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 fiscal year ended
July 31, 1999, product development and support expense increased 14%. The
majority of the increase is related to additional personnel expenses for
continued development and support of the Company's products, including
additional expenses arising from the acquisitions of EZPower and Maitland in
March 1998.
Selling and marketing expense
Selling and marketing expense increased 42% mainly due to additional
personnel expenses incurred as the departments expanded to meet the Company's
needs, and increased incentive compensation as a result of higher revenues. In
addition, the Company concentrated on increasing market awareness through
advertising, trade shows, and market research which increased these
expenditures.
General and administrative expense
In fiscal 1999, general and administrative expense decreased 8%. This is
primarily the result of a decrease in legal fees from fiscal 1998, which
included legal defense and settlement costs related to the resolution of two
litigation matters. The decrease in legal fees was partially
17
offset by an increase in goodwill amortization resulting from the EZPower and
Maitland acquisitions in March 1998, and an increase in staffing levels within
the general and administrative departments.
Other income (expense), net
The significant increase in other income (expense), net was due to a
material amount of interest income generated during the fiscal year ended July
31, 1999 as compared with interest expense incurred during the prior year. As a
result of the receipt of approximately $18.5 million of Initial Public Offering
("IPO") proceeds in April 1998, interest income increased as compared to fiscal
1998 due to higher cash, cash equivalent, and short-term investment balances
maintained by the Company. The Company repaid its debt in April 1998 with
proceeds from the IPO leaving minimal interest expense, which is related to
capital lease obligations.
Provision for income taxes
The effective tax rate for the years ended July 31, 1999 and 1998, was
approximately 43% and 41%, respectively. Goodwill amortization related to the
acquisitions of EZPower and Maitland is non-deductible, which increased the
effective tax rate for the fiscal 1999 period. The majority of goodwill
amortization related to the Merger is also non-deductible. The Company used a
portion of its net operating loss carryforwards and outstanding tax credits to
offset its current tax liability for the years ended July 31, 1999 and 1998.
Net income
Net income increased 42% for fiscal 1999. The increase in net income is
due primarily to increased higher margin license fees, increased consulting
fees, elimination of the MYND generated ASP hosting and consulting revenues, and
increased interest income, partially offset by additional expenses required to
meet the revenue levels.
Acquired In-Process Research and Development and Related Costs
Based on the results of an independent third-party appraisal, the Company
recorded charges of $13.5 million in the fourth quarter of fiscal 1997 to
expense in-process research and development ("in-process R&D") costs related to
the acquisition of FormMaker. The aggregate purchase price related to the
Merger, including direct acquisition costs, was approximately $20.4 million
which was allocated to the fair value of the net identifiable assets acquired,
including in-process R&D. Acquired in-process R&D represents the present value
of the estimated future cash flows expected to be generated by FormMaker
in-process R&D. The allocation of $13.5 million to in-process R&D represented
the estimated fair value based on risk-adjusted cash flows related to the
in-process R&D projects. In the opinion of management and independent
third-party appraisers, the development of these projects had not yet reached
technological feasibility and therefore, the in-process R&D had no alternative
future uses. Accordingly, these costs were charged to operations on the closing
date of the Merger.
The value assigned to purchased in-process R&D was determined by
estimating the costs to develop the purchased in-process R&D into commercially
viable products, estimating the resulting net cash flows from the projects, and
discounting the net cash flows to their present value. The revenue projection
used to value the in-process R&D was based on estimates of relevant market sizes
and growth factors, expected trends in technology, and the nature and expected
timing of new product introductions by FormMaker and its competitors.
The estimated revenues for the in-process R&D assumed a compound annual
growth rate of approximately 30% in the four years following introduction,
assuming the successful completion and market acceptance of the major R&D
programs. For each of the acquired in-
18
process R&D efforts, the estimated revenues for the in-process projects were
expected to peak within three to four years of acquisition and then decline as
other new products and technologies are expected to enter the market.
The rates utilized to discount the net cash flows to their present value
were based on cost of capital calculations. Due to the nature of the forecast
and the risks associated with the projected growth and profitability associated
with FormMaker's in-process R&D, a discount rate of 27% was used to value
in-process R&D, and a discount rate of 20% was used for the existing products
and technology. This discount rate was commensurate with the acquired in-process
R&D projects' stages of development and the uncertainties in the economic
estimates described above. As of the date of the Merger, FormMaker had spent
approximately $1.3 million on in-process R&D projects. Subsequent to the date of
the Merger, the Company expended approximately $1.0 million for the completion
of the in-process R&D projects which approximated the expected costs to complete
such projects.
Milestones for the in-process R&D projects were also examined as of the
date of the Merger. For each in-process R&D project, Company engineers evaluated
the critical milestones. This included comprehensive analysis of each of the
acquired product lines' in-process R&D to clarify the technological hurdles that
the development team had overcome at the date of the Merger as well as the
hurdles that the engineers faced going forward to complete the remaining
development efforts. From this analysis, the overall significance of tasks
completed versus tasks remaining were assessed. For all categories, a greater
level of significance was associated with completed tasks. This implied that a
greater degree of overall value was attributable to the completed tasks relative
to those indicated by the cost metrics. Based on estimates made by FormMaker's
R&D professionals regarding technical achievements completed as of the date of
the Merger, the milestone percentage was determined to be approximately 75%.
Utilizing this milestone analysis for the in-process R&D valuation resulted in
values for incomplete R&D projects which approximated the $13.5 million
appraisal value.
At the time of the Merger, FormMaker offered a basic portfolio of document
automation processing and imaging software products. FormMaker's product lines
and related services stemmed from its DAP and Multi-user Archival & Retrieval
System ("MARS") technologies.
The acquired in-process R&D value was comprised of several ongoing
projects intended to address the issues of technological advances in the
marketplace such as new client/server architecture, new delivery mechanisms, the
Internet, emergence of the Windows NT operating system, object integration on
the desktop, and new standards such as Microsoft's Active-X, Microsoft's ODBC,
and Sun Microsystems' Java, which were making the development and implementation
of new products increasingly complex. These advances in technology required
creating highly advanced products that could handle substantial increases in
demand, as well as end user requirements for more complex graphics-intensive
material. This led to development efforts which centered around new DAP and MARS
technologies and incorporated innovative new features and a wide array of
advanced functions. FormMaker was addressing industry and technological trends
by developing new delivery mechanisms via the Internet, object integration on
the desktop, new DAP architecture, platform independence, improved workflow
functionality, product compatibility, DAP and MARS integration, and the
development of migration and upgrade paths.
At the Merger date, there were still significant efforts needed to bring
the acquired in-process technologies and projects to fruition. These efforts
principally related to the completion of planning, designing, architecturing,
coding, prototyping, scalability, verification, and testing activities that were
necessary to establish that the proposed technologies would meet their design
19
specifications. These projects had not yet reached technological feasibility at
the time of the Merger. Management expected to continue to support these efforts
and believed FormMaker had a reasonable chance of successfully completing the
R&D programs. However, there was risk associated with the completion of the
projects and there was no assurance that any would reach either technological or
commercial success. If these projects were not successfully developed, the sales
and profitability of the combined company could have been adversely affected in
future periods.
Subsequent to the Merger, the majority of the original R&D projects were
completed in accordance with FormMaker's plans. The fruition of these projects
resulted in advanced new product technologies represented by the launch of the
Internet Document Server ("IDS") versions 1.0 and 1.3, Bill Print version 1.0
and 1.1, which fueled the release of two new DAP products.
The emergence of the IDS products represented the completion of a key
revolutionary technology. This new rules-based transaction processing server,
released in October 1997, allows for the dynamic generation of documents in
industry-standard Adobe PDF format for Web delivery and the ability to archive
documents in a pure "thin-client" fashion. The second phase of ongoing projects
aimed at addressing new Internet functionalities pushed forward the release of
IDS version 1.3 in December 1998, which further addressed new delivery
mechanisms and standards such as Microsoft's Active-X, Microsoft's ODBC, and Sun
Microsystem's Java and represents the completion of the in-process R&D acquired
in the Merger. The Company began recognizing revenue related to IDS products
during fiscal year 1998.
FormMaker's pre-acquisition efforts in developing new printing
technologies have resulted in the release of Bill Print versions 1.0 and 1.1 in
October 1997 and March 1998, respectively, which address the high-volume complex
bill and statement printing needs of the utilities industry.
FormMaker's investments in developing innovative features, new workflow
capabilities, object-oriented desktop integration, multiple language system
communications, improved graphics capabilities and platform and hardware
adaptability proved fruitful in yielding new DAP releases in September 1997 that
could adequately address international markets and open new industries, such as
utilities and financial services.
The release of Bill Print versions 1.0 and 1.1 and the new DAP releases
have contributed to a significant increase in revenues derived from the
utilities market. Revenues in this market increased in excess of 160% in the
fiscal year ended July 31, 1998, as compared to the previous fiscal year, and
greater than 29% and 8% in each of the fiscal years ended July 31, 1999 and
2000, respectively. In addition, these releases of in-process R&D have resulted
in recent licenses to the financial services industry.
Most of the in-process R&D projects acquired in the Merger were completed
on schedule, but minor delays occurred due to changes in technological and
market requirements for document automation processing and imaging systems.
Although all in-process R&D projects have been completed, no assurance can be
made that the Company's recent releases will be met with market acceptance.
As discussed in Note 5 of the notes to consolidated financial statements,
the Company has responded to inquiries by the Securities and Exchange Commission
("SEC") regarding the value ascribed to the technology acquired as in-process
R&D in connection with the Merger. To date, the Company has not received further
inquiries from the SEC. However, depending upon the outcome of any future
discussions with the SEC, the Company's historical reported results could
potentially be subject to restatement to reflect a reduction of the in-process
R&D charge.
20
A reduction of the in-process R&D charge would result in a corresponding
increase in the amount of goodwill, which is being amortized over a ten year
period.
Liquidity and Capital Resources
At July 31, 2000, the Company's principal sources of liquidity consisted
of cash and cash equivalents of approximately $4.7 million and short-term
investments of approximately $7.8 million. Cash and cash equivalents for the
year ended July 31, 2000 decreased approximately $1.7 million due primarily to
the purchase of fixed assets and purchase of treasury stock under the Company's
stock repurchase program, offset by approximately $10.5 million of cash
generated from operations. Cash flows used in investing activities of
approximately $6.8 million were related to the purchase of short-term
investments, development of capitalized software, and purchase of fixed assets.
Specifically, the Company invested approximately $4.2 million in fixed assets
primarily related to the Company's opening of the Dallas ASP center, expanding
the Atlanta facilities, and purchase of ASP hosting equipment. Cash flows used
in financing activities of approximately $5.4 million primarily relates to the
purchase of treasury stock under the Company's stock repurchase program offset
by proceeds from exercise of stock options. As of July 31, 2000, the Company had
approximately 1,509,000 shares of treasury stock outstanding at an average per
share cost of $5.25. Since inception of the Company's stock repurchase program
in fiscal 1999, the Company has repurchased approximately 2,606,000 million
shares of stock at an average purchase price of $5.12. The Company's board of
directors has authorized the Company to repurchase up to an aggregate of
4,000,000 shares of stock
Working capital was approximately $13.0 million at July 31, 2000, compared
with approximately $15.5 million at July 31, 1999.
The Company's $3.5 million revolving credit facility bears interest at the
bank's prime rate less 0.25%, or 9.25% as of July 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 July 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 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.
The Company currently anticipates that existing cash, 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.
Item 8. Financial Statements and Supplementary Data
The information required by this item is set forth herein under the
caption "Financial Statements and Supplementary Data" on pages F-1 through F-16.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
21
PART III
Part III of this Annual Report on Form 10-K/A incorporates by reference
portions of the Registrant's definitive proxy statement, which was filed with
the Securities and Exchange Commission on October 27, 2000.
Item 10. Directors and Executive Officers of the Registrant
Information with respect to Directors of the Company is set forth in the
proxy statement under the heading "Directors and Executive Officers," which
information is incorporated herein by reference. Information required by Item
405 of Regulation S-K is set forth in the proxy statement under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance," which information is
incorporated herein by reference.
Item 11. Executive Compensation
Information with respect to executive compensation is set forth in the
proxy statement under the heading "Executive Compensation," which information is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial
owners and management is set forth in the proxy statement under the heading
"Beneficial Ownership of Common Stock," which information is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and transactions is set
forth in the proxy statement, which information is incorporated herein by
reference.
22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following is a list of the consolidated financial statements which are
included in this Form 10-K/A.
1. Financial Statements:
Report of Independent Accountants
As of July 31, 2000 and 1999:
o Consolidated Balance Sheets
For the Years Ended July 31, 2000, 1999, and 1998:
o Consolidated Statements of Operations and Comprehensive Income
o Consolidated Statements of Cash Flows
o Consolidated Statements of Changes in Stockholders' Equity
o Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
o Report of Independent Accountants on Financial Statement
Schedule
o Valuation and Qualifying Accounts
3. Exhibits:
See Exhibit Index following the Financial Statement Schedule of this
Form 10-K/A.
(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 Company's consolidated financial
statements as of and for the fiscal year ended July 31, 2000.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas.
DOCUCORP INTERNATIONAL, INC.
(Registrant)
By: /s/ Michael D. Andereck
-------------------------------------
Michael D. Andereck
President, Chief Executive Officer
and Director
Date: November 29, 2000
-----------------------------------
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of DocuCorp International,
Inc., hereby severally constitute and appoint Michael D. Andereck, our true and
lawful attorney, with full power to sign for us in our names in the capacities
indicated below, amendments to this report, and generally to do all things in
our names and on our behalf in such capacities to enable DocuCorp International,
Inc. to comply with the provisions of the Securities Exchange Act of 1934, as
amended, and all requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature and Title Date
---------------------------------- ---------
/s/ Michael D. Andereck November 29, 2000
- -------------------------------------------------
Michael D. Andereck
President, Chief Executive Officer and Director
(Principal Executive Officer
and Principal Financial Officer)
/s/ Andrea L. Ungemach November 29, 2000
- -------------------------------------------------
Andrea L. Ungemach
Corporate Controller
(Principal Accounting Officer)
/s/ Milledge A. Hart, III November 29, 2000
- -------------------------------------------------
Milledge A. Hart, III
Chairman of the Board
/s/ Anshoo S. Gupta November 29, 2000
- -------------------------------------------------
Anshoo S. Gupta
Director
/s/ John D. Loewenberg November 29, 2000
- -------------------------------------------------
John D. Loewenberg
Director
/s/ Warren V. Musser November 29, 2000
- -------------------------------------------------
Warren V. Musser
Director
/s/ George F. Raymond November 29, 2000
- -------------------------------------------------
George F. Raymond
Director
/s/ Arthur R. Spector November 29, 2000
- -------------------------------------------------
Arthur R. Spector
Director
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
================================================================================
Report of Independent Accountants
To the Board of Directors and Stockholders
of DOCUCORP INTERNATIONAL, INC.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive income, of
changes in stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of DocuCorp International, Inc. and
its subsidiaries at July 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
2000 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 13 to the consolidated financial statements, the
Company has restated certain amounts in its previously reported consolidated
financial statements for the year ended July 31, 2000.
PricewaterhouseCoopers LLP
Dallas, Texas
September 7, 2000, except for Note 13
which is as of November 28, 2000.
F-1
DocuCorp International, Inc.
Consolidated Balance Sheets
July 31, 2000 and 1999
(in thousands except share and per share amounts)
================================================================================
2000
As Restated
(Note 13) 1999
--------- --------
Assets
Current assets:
Cash and cash equivalents $ 4,739 $ 6,459
Short-term investments 7,754 6,914
Accounts receivable, net of allowance
of $600 and $675, respectively 12,018 14,436
Current portion of deferred taxes 653 469
Income tax refund receivable 609 729
Other current assets 1,837 1,806
-------- --------
Total current assets 27,610 30,813
Fixed assets, net of accumulated depreciation
of $6,309 and $4,584, respectively 6,039 3,570
Software, net of accumulated amortization
of $11,277 and $9,045, respectively 7,259 7,728
Deferred taxes 758 388
Goodwill, net of accumulated amortization
of $3,832 and $2,479, respectively 6,954 9,693
Other assets 390 726
-------- --------
$ 49,010 $ 52,918
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,763 $ 1,692
Accrued liabilities:
Accrued compensation 2,632 2,893
Other 994 1,262
Income taxes payable 308 364
Deferred revenue 8,884 9,089
-------- --------
Total current liabilities 14,581 15,300
Other long-term liabilities 724 624
Commitments and contingencies (Notes 5 and 6)
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 44,725 47,145
Treasury stock at cost, 1,508,777 and 1,170,275
shares, respectively (7,923) (5,539)
Accumulated deficit (3,187) (4,716)
Foreign currency translation adjustment (76) 0
Notes receivable from stockholders 0 (62)
-------- --------
Total stockholders' equity 33,705 36,994
-------- --------
$ 49,010 $ 52,918
======== ========
F-2
See accompanying notes to consolidated financial statements.
DocuCorp International, Inc.
Consolidated Statements of Operations and
Comprehensive Income
For the Years Ended July 31, 2000, 1999, and 1998
(in thousands except per share amounts)
================================================================================
2000
As Restated
(Note 13) 1999 1998
--------- -------- --------
Revenues
ASP hosting $ 9,642 $ 6,220 $ 8,162
Professional services 19,016 21,120 17,371
License 7,357 11,403 8,885
Maintenance and other recurring 14,962 13,183 10,829
-------- -------- --------
Total revenues 50,977 51,926 45,247
-------- -------- --------
Expenses
ASP hosting 8,391 4,955 6,437
Professional services 15,674 16,003 12,595
Product development and support 10,224 9,492 8,318
Selling and marketing 8,096 8,437 5,955
General and administrative 5,790 5,808 6,341
-------- -------- --------
Total expenses 48,175 44,695 39,646
-------- -------- --------
Operating income 2,802 7,231 5,601
Other income (expense), net 612 622 (177)
-------- -------- --------
Income before income taxes 3,414 7,853 5,424
Provision for income taxes 1,885 3,340 2,240
-------- -------- --------
Net income $ 1,529 $ 4,513 $ 3,184
======== ======== ========
Other comprehensive income:
Foreign currency translation adjustment, net of tax (76) 0 0
-------- -------- --------
Comprehensive income $ 1,453 $ 4,513 $ 3,184
======== ======== ========
Net income per share:
Basic $ .10 $ .28 $ .25
======== ======== ========
Diluted $ .09 $ .26 $ .21
======== ======== ========
Weighted average shares outstanding used in the net
income per share calculation:
Basic 15,317 16,001 12,587
======== ======== ========
Diluted 16,872 17,570 14,865
======== ======== ========
F-3
See accompanying notes to consolidated financial statements.
DocuCorp International, Inc.
Consolidated Statements of Cash Flows
For the Years Ended July 31, 2000, 1999, and 1998
(in thousands)
================================================================================
2000
As Restated
(Note 13) 1999 1998
--------- -------- --------
Cash flows from operating activities
Net income $ 1,529 $ 4,513 $ 3,184
Adjustments to reconcile net income to
net cash provided by operating activities:
Stock option compensation expense 18 12 20
Depreciation 1,725 1,326 1,274
Amortization of capitalized software 2,232 1,998 1,787
Amortization of goodwill 1,353 1,352 966
Deferred income taxes 913 283 972
Tax benefit related to stock option exercises 501 192 531
Increase (decrease) in allowance for doubtful accounts (65) (275) 404
Changes in assets and liabilities, net of effects
from acquisitions:
(Increase) decrease in accounts receivable 2,459 (2,235) (3,234)
(Increase) decrease in income tax refund receivable 120 (23) (202)
(Increase) decrease in other assets 295 (961) (665)
Increase (decrease) in accounts payable 81 (81) 508
Increase (decrease) in accrued liabilities (427) 1,803 (615)
Increase (decrease) in income taxes payable (56) 140 (188)
Increase (decrease) in deferred revenue (189) 613 1,667
-------- -------- --------
Total adjustments 8,960 4,144 3,225
-------- -------- --------
Net cash provided by operating activities 10,489 8,657 6,409
-------- -------- --------
Cash flows from investing activities
Purchase of short-term investments, net (840) (6,914) 0
Purchase of fixed assets (4,201) (1,916) (995)
Capitalized software development costs (1,763) (1,590) (1,515)
Net cash acquired in business combinations 0 0 31
-------- -------- --------
Net cash used in investing activities (6,804) (10,420) (2,479)
-------- -------- --------
Cash flows from financing activities
Repayment of debt 0 0 (11,877)
Principal payments under capital lease obligations (21) (62) (401)
Purchase of treasury stock (6,270) (7,076) 0
Proceeds from exercise of options 618 569 1,056
Net proceeds from issuance of stock 0 0 18,589
Proceeds from repayment of note receivable from stockholder 62 3 6
Proceeds from stock issued to employees under Employee
Stock Purchase Plan ("ESPP") 247 348 268
-------- -------- --------
Net cash provided by (used in) financing activities (5,364) (6,218) 7,641
-------- -------- --------
Effect of exchange rates on cash flows (41) 0 0
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (1,720) (7,981) 11,571
Cash and cash equivalents at beginning of year 6,459 14,440 2,869
-------- -------- --------
Cash and cash equivalents at end of year $ 4,739 $ 6,459 $ 14,440
======== ======== ========
See non-cash activities disclosed in Note 12.
F-4
See accompanying notes to consolidated financial statements.
DocuCorp International, Inc.
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended July 31, 2000, 1999, and 1998
(in thousands except share amounts)
================================================================================
Additional Currency
Common Paid-in Treasury Accummulated Translation Notes
Stock Capital Stock Deficit Adjustment Receivable Total
--------- --------- --------- --------- ----------- --------- --------
Balance at July 31, 1997 $ 51 $ 4,913 $ 0 $ (12,413) $ 0 $ (71) $ (7,520)
Exercise of stock options to purchase
885,993 shares of Common Stock 9 1,047 1,056
Conversion of 5,623,229 shares of
Class B common stock to Common Stock 56 19,063 19,119
Issuance of 4,000,000 shares of Common
Stock in initial public offering 40 18,549 18,589
Repayment of note receivable from
stockholder 6 6
Stock issued for acquisitions 8 3,172 3,180
Issuance of 62,982 shares of Common
Stock to employees under ESPP 1 267 268
Compensation expense related to
non-qualified stock options 20 20
Tax benefit from stock option
exercises 531 531
Net income 3,184 3,184
--------- --------- --------- --------- --------- --------- --------
Balance at July 31, 1998 165 47,562 0 (9,229) 0 (65) 38,433
Exercise of stock options to purchase
338,571 shares of Common Stock 1 (564) 1,132 569
Purchase of 1,522,526 shares of
Treasury Stock (7,076) (7,076)
Repayment of note receivable from
stockholder 3 3
Issuance of 81,968 shares of Common
Stock to employees under ESPP (57) 405 348
Compensation expense related to
non-qualified stock options 12 12
Tax benefit from stock option exercises 192 192
Net income 4,513 4,513
--------- --------- --------- --------- --------- --------- --------
Balance at July 31, 1999 166 47,145 (5,539) (4,716) 0 (62) $ 36,994
Exercise of stock options and warrants to
purchase 671,324 shares of Common Stock (2,859) 3,477 618
Purchase of 1,083,906 shares of Treasury
Stock (6,270) (6,270)
Repayment of note receivable from
stockholder 62 62
Issuance of 74,080 shares of Common
Stock to employees under ESPP (162) 409 247
Compensation expense related to
non-qualified stock options 18 18
Tax benefit from stock option exercises 501 501
Cancellation of call feature 82 82
Foreign currency translation adjustment (76) (76)
Net income As Restated (Note 13) 1,529 1,529
--------- --------- --------- --------- --------- --------- --------
Balance at July 31, 2000 $ 166 $ 44,725 $ (7,923) $ (3,187) $ (76) $ 0 $ 33,705
========= ========= ========= ========= ========= ========= ========
F-5
See accompanying notes to consolidated financial statements.
Note 1 - Organization and Summary of Significant Accounting Policies
DocuCorp International, Inc. ("DocuCorp" or the "Company"), a Delaware
corporation, was organized on January 13, 1997 in connection with the
acquisition of FormMaker Software, Inc. ("FormMaker") by Image Sciences, Inc.
("Image Sciences") (the "Merger"). The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries, Image Sciences, FormMaker, EZPower Systems, Inc. ("EZPower"),
Maitland Software, Inc. ("Maitland"), and DocuCorp Europe Ltd. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
The Company's business includes developing, marketing, and supporting computer
software designed to automate the process of generating, storing, managing, and
distributing business documents. The Company also provides application service
provider ("ASP") hosting of Internet-enabled solutions, consulting, application
integration, and training. The majority of the Company's business is currently
derived from companies in the insurance industry.
Revenue recognition
Revenue from licensing of standard software is recognized upon shipment of the
software. Revenue from software licenses which include a cancellation clause is
recognized upon expiration of the cancellation period. Revenue derived from the
development and installation of software packages under long-term contracts is
recognized on a percentage-of-completion basis measured by the relationship of
hours worked to total estimated contract hours. Revenue related to products
still in the testing phase is deferred until formal acceptance of the product by
the purchaser. Anticipated losses, if any, on uncompleted contracts are
recognized in the period in which such losses are determined.
Revenue from maintenance contracts, and maintenance revenue that is packaged
with license fees, is recognized ratably over the term of the agreements. The
Company records deferred revenue for maintenance amounts invoiced prior to
revenue recognition. Revenue related to professional services, such as training
and consulting, and ASP hosting is recognized as the services are performed.
Cash equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash equivalents are
stated at cost, which approximates fair market value.
Short-term investments
The Company has the intent and ability to hold short-term investments to
maturity; consequently, such investments are carried at cost, which approximates
fair market value. At July 31, 2000, the Company held short-term investments
which totaled approximately $7.8 million. Interest income from such investments
was approximately $406,000, $244,000, and $0 in 2000, 1999, and 1998,
respectively.
Accounts receivable
Included in accounts receivable at July 31, 2000 and 1999 are unbilled amounts
of approximately $1.7 million and $2.5 million, respectively. Such amounts have
been recognized as revenue under the percentage-of-completion method or upon
execution of the contract and shipment of the software, but prior to contractual
payment terms.
Fair value of financial instruments
The Company's financial instruments consist primarily of cash, cash equivalents,
short-term investments, accounts receivable, accounts payable, and accrued
liabilities. The current carrying amount of these instruments approximates fair
market value due to the relatively short period of time to maturity for these
instruments.
F-6
Fixed assets, depreciation, and amortization
Property and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed over the estimated
service lives using the straight-line method. Amortization of assets recorded
under capital leases is included in depreciation expense. Estimated service
lives are as follows:
Computer equipment 4-5 years
Furniture and fixtures 5 years
Leasehold improvements life of lease
Leased equipment under capital leases 3-5 years
Repairs and maintenance are expensed as incurred. Major renewals and betterments
are capitalized and depreciated over the assets' remaining estimated service
lives. Upon retirement or sale of an asset, the cost and accumulated
depreciation are removed from the accounts with any resulting gain or loss
included in income.
Software
Software development costs are accounted for in accordance with either Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed," or with Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." After the technological feasibility of the software
has been established, material software development costs which include salaries
and related payroll costs incurred in the development activities are
capitalized. Research and development costs incurred prior to the establishment
of the technological feasibility of a product are expensed as incurred. The cost
of capitalized software is amortized on a straight-line basis over its estimated
useful life, generally four to six years, or the ratio of current revenues to
current and anticipated revenues from the software, whichever provides the
greater amortization. During 2000, 1999, and 1998, the Company charged to
expense approximately $6.3 million, $5.9 million, and $5.2 million,
respectively, for research and development costs incurred prior to the
establishment of the technological feasibility of products. Such expense is
included in product development and support on the Consolidated Statements of
Operations and Comprehensive Income.
Goodwill
Goodwill is amortized on a straight-line basis over eight to ten years. The
carrying value of goodwill is evaluated periodically in relation to the
operating performance and anticipated future undiscounted net cash flows of the
related business. In the event that assets are found to be carried at amounts
which are in excess of estimated gross future cash flows, the intangible assets
are adjusted for impairment to a level commensurate with a discounted cash flow
analysis of the underlying assets.
Impairment of long-lived assets
The Company has adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets and Assets to be Disposed
of." Under the provisions of this statement, the Company has evaluated its
long-lived assets for financial impairment, and will continue to do so as events
or changes in circumstances indicate that the carrying value of such assets may
not be fully recoverable.
F-7
Translation of foreign currencies
Assets and liabilities of foreign subsidiaries whose functional currency is
other than the U.S. dollar are translated at year-end rates of exchange and
revenues and expenses are translated at average exchange rates prevailing during
the year. Foreign currency transaction gains and losses are recognized in income
as incurred.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income",
which established new rules for the reporting and display of comprehensive
income and it components. SFAS 130 requires unrealized gains or losses on the
Company's foreign currency translation adjustments to be accumulated in
stockholders' equity as part of other comprehensive income.
Income taxes
Income taxes are presented pursuant to Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 uses an
asset and liability approach to account for income taxes. In the event
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities result in deferred tax assets, an evaluation of
the probability of being able to realize the future benefits indicated by such
assets is required. A valuation allowance is provided for the deferred tax
assets when there is sufficient uncertainty regarding the Company's ability to
recognize the benefits of these assets in future years.
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"). Concurrent with the completion of the Company's Initial Public
Offering ("IPO"), all outstanding shares of Class B common stock were converted
into shares of Common Stock on a one-for-one basis. Both basic and diluted net
income per share have been computed assuming the conversion of Class B common
stock occurred as of the date of original issuance. Basic net income per share
is computed using the weighted average number of common shares outstanding.
Diluted net income per share is computed using the weighted average number of
common shares outstanding and the assumed exercise of stock options and warrants
(using the treasury stock method). Following is a reconciliation of the shares
used in computing basic and diluted net income per share for the fiscal years
indicated (in thousands):
2000 1999 1998
------ ------ ------
Shares used in computing basic
net income per share 15,317 16,001 12,587
Dilutive effect of stock options and
warrants 1,555 1,569 2,278
------ ------ ------
Shares used in computing diluted
net income per share 16,872 17,570 14,865
====== ====== ======
Options to purchase 843,000, 246,000, and 69,289 shares of Common Stock at
average exercise prices of $4.79, $5.44, and $5.82 per share at July 31, 2000,
1999, and 1998, 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.
Stock-based compensation
The Company accounts for stock-based employee compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and its various interpretations, including Financial
Accounting Standards Board Interpretation No. 44, "Accounting for Certain
Transactions, Including Stock-Based Compensation." Under APB 25, compensation
cost is generally not recognized for fixed stock options in which the exercise
price
F-8
is not less than the market price on the grant date. Compensation cost
recognized by the Company in accordance with APB 25 has not been significant in
any of the past three years.
Management estimates
The preparation of the Company's financial statements, in accordance with
accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses at the date of the
financial statements. Actual results could differ from those estimates during
the reported periods.
Advertising costs
The Company's policy for advertising costs is to expense such costs as incurred.
Advertising expenses for 2000, 1999, and 1998 were approximately $1.1 million,
$995,000, and $324,000, respectively.
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"), 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. This
statement, as amended, is effective for fiscal quarters of fiscal years
beginning after June 15, 2000; accordingly, the Company will adopt SFAS 133 in
the first quarter of fiscal 2001. The impact on the Company, if any, will be
dependent upon the extent to which the Company is a party to derivative
contracts or hedging activities covered by SFAS 133 at the time of adoption.
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 is required to adopt SAB 101 no later than 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.
Note 2 - Fixed assets
Fixed asset balances at July 31, 2000 and 1999 are as follows (in thousands):
2000 1999
-------- --------
Computer equipment $ 9,487 $ 6,409
Furniture and fixtures 1,875 1,439
Leasehold improvements 986 306
-------- --------
12,348 8,154
Less accumulated depreciation (6,309) (4,584)
-------- --------
$ 6,039 $ 3,570
======== ========
Note 3 - Initial Public Offering
The Company completed an IPO in the form of a rights offering to Safeguard
Scientifics, Inc. ("Safeguard") stockholders in April 1998. The Company's
Registration Statement on Form S-1 (File No. 333-44427) with respect to the IPO
was declared effective on February 24, 1998. The Company's Common Stock began
trading on the Nasdaq National Market under the symbol
F-9
DOCC on April 6, 1998. The Company sold 4,000,000 shares of Common Stock at a
per share price of $5.00. Net proceeds to the Company, after deduction of the
underwriting discount and IPO expenses, were approximately $18.5 million.
Selling stockholders sold 3,460,000 shares at a per share price of $5.00. The
Company did not receive any proceeds from the sale of shares by the selling
stockholders.
Note 4 - Acquisitions
On March 31, 1998, the Company completed the acquisitions of EZPower and
Maitland. The Company acquired all of the outstanding capital stock of EZPower
in exchange for 650,000 shares of the Company's Common Stock, repayment of
approximately $2.5 million of EZPower's indebtedness, approximately $800,000 of
certain other liabilities, and potential payment of certain contingent cash
consideration based on future performance. The Company issued 170,000 shares of
its Common Stock as consideration for the Maitland acquisition. The Company had
the right to repurchase up to 100,000 of those shares based upon cumulative
licensing and maintenance of the Maitland software product through the period
ending July 31, 2001. In August 1999, the Company waived its repurchase rights.
Both acquisitions were recorded under the purchase method of accounting, and
accordingly, the results of operations of EZPower and Maitland for all periods
subsequent to the acquisition date are included in the consolidated financial
statements. The aggregate purchase prices, including direct acquisition costs,
were approximately $5.9 million and $605,000 which have been allocated to the
fair value of net identifiable assets in the acquisitions of EZPower and
Maitland, respectively. The excess of the purchase price over the fair value of
the net identifiable assets acquired of approximately $4.8 million and $583,000
related to the acquisitions of EZPower and Maitland, respectively, has been
recorded as goodwill and is being amortized on a straight-line basis over eight
years.
Note 5 - Acquired In-Process Research and Development
In connection with a review conducted by the SEC related to the Company's filing
of its Annual Report on Form 10-K for the year ended July 31, 1998, the Company
responded to the SEC regarding inquiries related to the value ascribed to the
technology acquired as in-process research and development ("in-process R&D") in
the May 1997 Merger. In connection with the Merger, the Company recorded
in-process R&D charges in the amount of $13.5 million in the fourth quarter of
fiscal 1997. The Company understands that the SEC is engaged in similar
discussions with other companies, and has examined the basis for valuing
in-process R&D charges versus the SEC's most recent guidance on the preferred
calculation of these charges. The Company has consulted with its independent
accountants and independent appraisers and believes that the purchase price
allocations and related amortization charges stemming from the acquisition were
determined in accordance with generally accepted accounting principles.
Depending upon the outcome of any future discussions with the SEC, the Company's
historical reported results could potentially be subject to restatement to
reflect a reduction of the in-process R&D charge. A reduction of the in-process
R&D charge would result in a corresponding increase in the amount of goodwill,
which is being amortized over a ten year period.
F-10
Note 6 - Lease Commitments
The Company leases computer and office equipment under noncancelable leases
which are classified as capital leases and included in fixed assets at July 31,
2000 and 1999 as follows (in thousands)
2000 1999
------ ------
Computer equipment $ 498 $ 498
Office equipment 326 326
------ ------
824 824
Less accumulated depreciation (824) (660)
------ ------
$ 0 $ 164
====== ======
Capital lease obligations of approximately $26,000 were paid during the year
ended July 31, 2000. As of July 31, 2000, there were no remaining capital lease
obligations.
Certain other equipment leases and the Company's obligation under leases for
office space are treated as operating leases and the rentals are expensed as
incurred. Rent expense on these operating leases for the years ended July 31,
2000, 1999, and 1998 totaled approximately $3.9 million, $2.9 million, and $2.6
million, respectively. Generally, the Company's leases provide for renewals for
various periods at stipulated rates.
Future minimum lease obligations on leases in effect at July 31, 2000 are as
follows (in thousands):
Operating
Leases
-------------
2001 $ 2,817
2002 2,748
2003 1,641
2004 909
2005 794
Thereafter 2,918
-------------
Minimum lease payments $ 11,827
============
Note 7 - Revolving Credit Facility
The Company's $3.5 million revolving credit facility bears interest at the
bank's prime rate less 0.25%, or 9.25% as of July 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 July 31, 2000 there were
no borrowings under this credit facility.
Note 8 - Stockholders' Equity
Preferred stock
The Company has authorized 1,000,000 shares of preferred stock which the board
of directors of the Company may issue with such preferences and rights as it may
designate. As of July 31, 2000 and 1999, there were no issued or outstanding
shares of preferred stock.
Employee Stock Purchase Plan
During the year ended July 31, 1998, the Company adopted the Employee Stock
Purchase Plan which allows eligible employees to purchase Company Common Stock
at a 15% discount of
F-11
market value. An aggregate of 600,000 shares of Common Stock have been reserved
for issuance upon purchases pursuant to the stock purchase plan. At July 31,
2000 and 1999, the Company has issued approximately 219,000 and 145,000 shares
under the plan, respectively.
Stock options
The Company provides equity incentives to employees and directors by means of
incentive stock options and non-qualified stock options which historically have
been provided under various stock option plans. The Company now issues options
from the 1997 Equity Compensation Plan. Stock options generally vest over a
period of three to five years. The Company may grant non-qualified stock options
at an option price per share determined by the board of directors. Under this
plan, the Company has reserved 1,730,000 shares for issuance as of July 31,
2000. Options generally expire ten years from the date of grant. Activity under
all plans is summarized as follows (in thousands except per share amounts):
Shares Under
Outstanding Options
----------------------------------
Weighted
Outstanding Average
Options Exercise Price
----------- --------------
Balances at July 31, 1997 2,970 $ 1.40
Granted 767 3.72
Exercised (886) 1.19
Expired (287) 3.34
----------- -------------
Balances at July 31, 1998 2,564 $ 1.91
Granted 557 4.60
Exercised (340) 1.67
Expired (69) 3.38
----------- -------------
Balances at July 31, 1999 2,712 $ 1.96
Granted 648 4.41
Exercised (582) 1.01
Expired (293) 4.51
----------- -------------
Balances at July 31, 2000 2,485 $ 3.06
=========== =============
The following table summarizes information about employee stock options
outstanding at July 31, 2000 (in thousands except per share amounts):
Options Outstanding Options Exercisable
Weighted
Weighted Average Weighted
Range of Exercise Average Remaining Number Average
Prices Number Outstanding Exercise Price Contractual Life Exercisable Exercise Price
$0.01 to $0.87 731 $0.42 3.97 728 $0.42
$3.40 to $4.73 1,550 $4.04 8.07 734 $3.81
$5.00 to $5.91 204 $5.15 8.28 90 $5.07
F-12
Stock-based compensation
Pursuant to Statement of Financial Accounts Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), the Company is required to report pro
forma information regarding net income and net income per share for awards
granted or modified in fiscal years 1996 and thereafter as if the Company had
accounted for its stock-based awards to employees under the fair value method of
SFAS 123. The weighted average fair value of options granted during fiscal 2000,
1999, and 1998 was $2.38, $1.84, and $0.59 per option, respectively. The fair
value of the Company's stock-based awards to employees was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2000, 1999 and 1998, respectively: risk-free
interest rates of 6.21%, 4.96%, and 5.76%; no expected dividend yields; expected
lives of 4.50, 3.50, and 3.00 years; and volatility of 60%, 46.11%, and 0%. The
Black-Scholes model was not developed for use in valuing employee stock options,
but was developed for use in estimating the fair value of traded options that
have no vesting restrictions and are fully transferable. In addition, it
requires the use of subjective assumptions including expectations of future
dividends and stock price volatility. Such assumptions are only used for making
the required fair value estimate and should not be considered as indicators of
future dividend policy or stock price appreciation. Because changes in the
subjective assumptions can materially affect the fair value estimate, and
because employee stock options have characteristics significantly different from
those of traded options, the use of the Black-Scholes option-pricing model may
not provide a reliable estimate of the fair value of employee stock options.
For pro forma purposes, the estimated fair value of the Company's stock-based
awards to employees is amortized over the options' vesting period. Such pro
forma impact on net income and net income per share is not necessarily
indicative of future effects on net income or net income per share. The
Company's pro forma information for the years ended July 31 is as follows (in
thousands except per share amounts):
2000
As Restated 1999 1998
----------- --------- ---------
Net income:
As reported $ 1,529 $ 4,513 $ 3,184
Pro forma $ 942 $ 3,972 $ 2,872
Net income per share:
As reported
Basic $ 0.10 $ 0.28 $ 0.25
Diluted $ 0.09 $ 0.26 $ 0.21
Pro forma
Basic $ 0.06 $ 0.25 $ 0.23
Diluted $ 0.06 $ 0.23 $ 0.19
Warrants
In connection with the Merger, the Company assumed warrants with a seven-year
term held by stockholders and a director of FormMaker to purchase Common Stock.
Additional warrants with a three-year term were issued by FormMaker to
stockholders immediately prior to the Merger in connection with $3.0 million of
subordinated notes. All of the above warrants were converted into warrants to
purchase approximately 627,000 shares of Common Stock based on the Merger
exchange ratios.
F-13
The following warrants are outstanding as of July 31, 2000 (in thousands except
per share amounts):
Exercise
Price
Warrants Per Share
-------- ---------
Warrants to Safeguard,
Technology Leaders II, L.P., And Technology
Leaders II Offshore C.V 258 $ 0.03
Warrants to a director of the Company 123 $ 3.40
Warrants to Safeguard, Technology
Leaders II, L.P., and TL Venture Third Corp. 246 $ 4.25
-----
Total 627
=====
During fiscal 2000, warrants to purchase an aggregate of 732,000 shares of
Common Stock with an exercise price per share of $4.17 were exchanged in a
cashless exercise for 89,382 shares of Common Stock.
Note 9 - Income Taxes
The provision for income taxes charged to operations was as follows (in
thousands):
2000
As Restated 1999 1998
------- ------- -------
Current tax expense:
U.S. federal $ 809 $ 2,727 $ 1,004
State, local, and foreign 163 330 264
------- ------- -------
Total current 972 3,057 1,268
------- ------- -------
Deferred tax expense:
U.S. federal 852 265 1,056
State, local, and foreign 61 18 (84)
------- ------- -------
Total deferred 913 283 972
------- ------- -------
Total provision $ 1,885 $ 3,340 $ 2,240
======= ======= =======
The provision for income taxes differs from the amount of income taxes
determined by applying the applicable U.S. statutory federal income tax rate to
pre-tax income as a result of the following differences (in thousands):
2000
As Restated 1999 1998
------- ------- -------
Statutory U.S. tax rates $ 1,161 $ 2,670 $ 1,899
Increase (decrease) in rates resulting from:
Nondeductible items:
Goodwill 336 335 204
Other 33 51 70
State, local, and foreign taxes (net) 148 230 58
Valuation allowance 364 0 0
Other (157) 54 9
------- ------- -------
Effective tax rates $ 1,885 $ 3,340 $ 2,240
======= ======= =======
F-14
Deferred tax assets (liabilities) are composed of the following at July 31 (in
thousands):
2000
As Restated 1999 1998
------- ------- -------
Gross deferred tax assets:
Deferred revenue $ 96 $ 84 $ 7
Loss carryforwards 3,644 3,833 4,209
Tax credit carryforwards 235 235 331
Accounts receivable allowance 305 246 347
Deferred lease costs 173 217 232
Compensation expense related to stock
options 533 994 1,155
Other 728 682 303
------- ------- -------
5,714 6,291 6,584
------- ------- -------
Gross deferred tax liabilities:
Capitalized software (2,832) (2,852) (2,965)
Other (307) (315) (130)
------- ------- -------
(3,139) (3,167) (3,095)
------- ------- -------
Net 2,575 3,124 3,489
Less valuation allowance (1,164) (2,267) (2,349)
------- ------- -------
Net deferred tax asset $ 1,411 $ 857 $ 1,140
======= ======= =======
At July 31, 2000, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $9.0 million that generally expire in the
years ending 2007 through 2017. The Company also had a foreign net operating
loss carryforward of approximately $1.2 million. A valuation allowance against
the entire foreign net operating loss carryforward has been established as the
realizability of this asset is uncertain.
During fiscal 2000 and 1998, the Company released the valuation allowance in the
amount of $1,467,000 and $893,000, respectively, based on management's
assessment of the likelihood of realizability of the Company's loss
carryforwards. In accordance with SFAS 109, the reduction of the valuation
allowance was recorded as a decrease in goodwill related to the Merger and the
acquisition of EZPower. Included in the remaining valuation allowance is
approximately $264,000 at July 31, 2000 and $1.7 million at July 31, 1999 and
1998 for deferred tax assets for which subsequently recognized tax benefits, if
any, will be allocated to reduce goodwill.
The Company has approximately $235,000 of general business credit carryforwards.
The tax credit carryforwards generally expire in the years ending 2007 through
2011.
Due to ownership changes, a portion of the Company's net operating loss and tax
credit carryforwards are subject to an annual cumulative limitation with respect
to the amounts which may be utilized in any one year of approximately $1.2
million.
The Company made estimated and regular income tax payments of approximately $1.3
million, $2.6 million, and $525,000 during the years ended July 31, 2000, 1999,
and 1998, respectively.
Note 10 - Retirement Plan
The Company maintains a discretionary defined contribution plan (401(k) plan),
as defined by the United States Internal Revenue Code, which allows participants
to contribute a percentage of their compensation. The plan also allows for a
discretionary matching contribution by the Company as determined by the
Company's board of directors. The Company's matching contributions for the years
ended July 31, 2000, 1999, and 1998 were approximately $490,000, $340,000, and
$140,000, respectively.
F-15
Note 11 - Major Customers and Related-Party Transactions
At July 31, 2000 and 1999, Safeguard owned approximately 20% of the Company's
fully diluted outstanding Common Stock. Technology Leaders II, L.P., Technology
Leaders II Offshore C.V., and TL Ventures Third Corp. owned approximately 7% and
5% of the Company's fully diluted outstanding Common Stock at July 31, 2000 and
1999, respectively.
FormMaker historically distributed its line of Document Automation Platform
software products to the insurance industry in North America through an
exclusive marketing agreement with MYND. Revenues from MYND under this agreement
for the year ended July 31, 1998 were approximately $5.5 million. In September
1998, both parties agreed to terminate the marketing agreement and enter into a
new, non-exclusive marketing agreement. The new marketing agreement between the
Company and MYND allows MYND to market all of the Company's software products to
insurance and financial services companies worldwide. For the years ended July
31, 2000 and 1999, the Company generated revenues of approximately $2.8 million
and $3.7 million, respectively, through the MYND relationship.
In May 1998, the MYND print outsourcing agreement was terminated. The Company
received no ASP hosting revenues from Mynd in fiscal years 2000 or 1999;
however, revenues from under the agreement for the year ended July 31, 1998 were
approximately $4.4 million.
For the year ended July 31, 1999, one customer accounted for approximately 10%
of the Company's total revenues.
Note 12 - Supplemental Data to Statement of Cash Flows
The Company made estimated and regular income tax payments of approximately $1.3
million, $2.6 million, and $525,000 during the years ended July 31, 2000, 1999,
and 1998, respectively.
In fiscal 1998, the Company delivered 820,000 shares of its Common Stock valued
at approximately $3.2 million in connection with the acquisitions of EZPower and
Maitland. Additionally, the Company assumed liabilities totaling approximately
$3.3 million in connection with the acquisitions (see Note 4).
Note 13 - Restatement
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 need to be restated. In July 2000, 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.
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 approxmately $980,000, or $0.06 per diluted
share. A comparison of previously reported and restated financial statement
amounts follow:
Consolidated Balance Sheets
As of July 31 2000 2000
(in thousands) As Previously As
Reported Restated
------------- --------
Assets
Accounts receivable, net of allowance
of $600 and $675, respectively $13,469 $12,018
======= =======
Income tax refund receivable $ 424 $ 609
======= =======
Total assets $50,276 $49,010
======= =======
Liabilities and stockholders' equity
Accrued compensation $ 2,811 $ 2,632
======= =======
Income taxes payable $ 318 $ 308
======= =======
Deferred revenue $ 8,981 $ 8,884
======= =======
Accumulated Deficit $(5,366) $(3,187)
======= =======
Total liabilities and stockholders' equity $50,276 $49,010
======= =======
Consolidated Statements of Operations and Comprehensive
Income
For the years ended July 31 2000 2000
(in thousands except per share amounts) As Previously As
Reported Restated
------------- --------
Revenues
License $ 8,711 $ 7,357
======= =======
Total revenues $52,331 $50,977
======= =======
Expenses
Selling and marketing $ 8,275 $ 8,096
======= =======
Total expenses $48,354 $48,175
======= =======
Operating Income $ 3,977 $ 2,802
======= =======
Income before income taxes $ 4,589 $ 3,414
======= =======
Provision for income taxes $ 2,080 $ 1,885
======= =======
Net income $ 2,509 $ 1,529
======= =======
Net income per share:
Basic $ .16 $ .10
======= =======
Diluted $ .15 $ .09
======= =======
Note 14 - Quarterly Financial Information (Unaudited)
Fourth
Quarter Fourth
First Second Third As Previously Quarter
Quarter Quarter Quarter Reported As Restated
------- ------- ------- -------- -----------
(in thousands except per share amounts)
2000:
Total revenues $12,983 $11,938 $13,015 $14,395 $13,041
Total expenses 11,666 11,829 12,154 12,705 12,526
Operating income 1,317 109 861 1,690 515
Net income 822 122 524 1,041 61
Net income per share:
Basic $ 0.05 $ 0.01 $ 0.03 $ 0.07 $ 0.01
Diluted 0.05 $ 0.01 $ 0.03 $ 0.06 $ 0.01
1999:
Total revenues $12,210 $13,012 $13,225 $13,479
Total expenses 10,602 11,174 11,324 11,595
Operating income 1,608 1,838 1,901 1,884
Net income 1,019 1,122 1,170 1,202
Net income per share:
Basic $ 0.06 $ 0.07 $ 0.07 $ 0.08
Diluted $ 0.06 $ 0.06 $ 0.07 $ 0.07
Net income per share calculations for each period are based on the weighted
average number of shares outstanding in each period; therefore, the sum of the
net income per share amounts for the quarters does not necessarily equal the
year-to-date net income per share amounts. See Note 13 for a discussion of the
restatement of the amounts shown in the fourth quarter.
F-16
Schedule II
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors of DocuCorp International, Inc.
Our audits of the consolidated financial statements referred to in our
report dated September 7, 2000, except for Note 13 which is as of November 28,
2000, appearing in this Annual Report on Form 10-K/A also included an audit of
the financial statement schedule listed in Item 14(a) 2 of this Form 10-K/A. In
our opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
As discussed in Note 13 to the consolidated financial statements, the
Company has restated certain amounts in its previously reported consolidated
financial statements for the year ended July 31, 2000.
PricewaterhouseCoopers LLP
Dallas, Texas
September 7, 2000, except for Note 13
which is as of November 28, 2000
II-1
Valuation and Qualifying Accounts
Years ended July 31, 2000, 1999, and 1998
Schedule II
Balance at Charged to Balance at
Beginning Costs and Deductions End of
Description of Period Expenses(a) (a)(b)(c) Period
----------- ----------- ----------- ----------- -----------
2000 As Restated*
Allowance for doubtful accounts ............... $ 675,000 $ 327,230 $ (402,230) $ 600,000
Amortization of Intangibles ................... $ 2,478,780 $ 1,353,223 $ -0- $ 3,832,003
Valuation allowance against deferred tax assets $ 2,267,387 $ 363,525 $(1,467,387) $ 1,163,525
1999
Allowance for doubtful accounts ............... $ 950,000 $ 446,330 $ (721,330) $ 675,000
Amortization of Intangibles ................... $ 1,126,924 $ 1,351,856 $ -0- $ 2,478,780
Valuation allowance against deferred tax assets $ 2,348,784 $ -0- $ (81,397) $ 2,267,387
1998
Allowance for doubtful accounts ............... $ 525,000 $ 734,550 $ (309,550) $ 950,000
Amortization of Intangibles ................... $ 160,522 $ 966,402 $ -0- $ 1,126,924
Valuation allowance against deferred tax assets $ 1,392,817 $ 1,848,786 $ (892,819) $ 2,348,784
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(a) Such amounts include balances assumed in the acquisition of FormMaker,
EZPower, and Maitland. See Notes to Consolidated Financial Statements for
further discussion.
(b) Such amounts relate to the utilization of the valuation and qualifying
accounts for specific items for which they were established in the
accounts receivable accounts.
(c) Such amounts relate to the tax benefit from utilization of net operating
loss and reduction of the valuation allowance based on management's
assessment of the likelihood of realizability of the loss carryforwards.
* See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 13 to the consolidated financial
statements for a comparison of previously reported and restated financial
statement amounts.
II-2
INDEX TO EXHIBITS
Exhibit No. Description
3.1 Certificate of Incorporation. (filed as exhibit 3.1 to the
Company's Registration Statement on Form S-4 No. 333-22225 and
incorporated herein by reference)
3.2 Bylaws. (filed as exhibit 3.2 to the Company's Registration
Statement on Form S-4 No. 333-22225 and incorporated herein by
reference)
10.2 Employment Agreement between Michael D. Andereck and the
Registrant dated January 15, 1997. (filed as exhibit 10.2 to the
Company's Registration Statement on Form S-4 No. 333-22225 and
incorporated herein by reference)
10.3 1997 Equity Compensation Plan. (filed as exhibit 10.3 to the
Company's 1997 Annual Report on Form 10-K and incorporated herein
by reference).
21.1* Subsidiaries of the Registrant.
23.1* Consent of PricewaterhouseCoopers LLP, Independent Accountants.
27.1* Financial Data Schedule. (for EDGAR filing purposes only)
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* Filed herewith.