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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MarkOne)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- - ACT OF 1934
For the fiscal year ended July 31, 1998 or
|_| TRANSITIONAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transitional period from ______ to ______
Commission File Number 00-1033864
DocuCorp International, Inc.
(Exact name of registrant as specified in its charter)
Delaware 74-2690838
(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)
Registrant's telephone number, including area code (214) 891-6500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered under Section 12(g) of
the Exchange 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. [X]
As of September 30, 1998, there were 16,593,849 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 $47,658,285 based upon the closing price of $4.25 per share on
September 30, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended July 31, 1998 are incorporated by reference in Items 7 and 8
of Part II of this report.
Part III of this Annual Report on Form 10-K incorporates by reference
portions of the Registrant's definitive proxy statement, to be filed with the
Securities and Exchange Commission not later than 120 days after the close of
its fiscal year; provided that if such proxy statement is not filed with the
Commission in such 120-day period, an amendment to this Form 10-K shall be filed
no later than the end of the 120-day period.
DocuCorp International, Inc.
Table of Contents
Form 10-K
July 31, 1998
Part I.
Item 1. Business................................................................................... 2
Item 2. Properties................................................................................. 15
Item 3. Legal Proceedings.......................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders........................................ 16
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................... 17
Item 6. Selected Consolidated Financial Data....................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 19
Item 8. Financial Statements and Supplementary Data................................................ 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 19
Part III.
Item 10. Directors and Executive Officers of the Registrant........................................ 20
Item 11. Executive Compensation.................................................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 20
Item 13. Certain Relationships and Related Transactions............................................ 20
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 21
Signatures ................................................... ..................................... 22
Index to Exhibits................................................................................... 26
Part I
Item 1. Business
General
DocuCorp International, Inc. ("DocuCorp" or the "Company") develops,
markets, and supports a portfolio of open-architecture, enterprise-wide document
automation software products that enable its customers to produce complex,
high-volume, individualized documents. In addition, the Company provides
document automation consulting, systems integration, and document processing and
printing services through a 170-person service organization. Document processing
and printing services utilize the Company's software to provide solutions for
handling high-volume, complex print, finish, and mailing for customers who
outsource this activity.
DocuCorp software products support leading hardware platforms, operating
systems, printers, and imaging systems. These products are designed to create,
publish, and store documents such as insurance policies, utility statements,
telephone bills, bank and mutual fund statements, invoices, direct mail
correspondence, bills of lading, and other customer-oriented documents. The
Company currently has an installed base of approximately 800 customers. The
Company believes it is the leading provider of document automation software and
services for the insurance industry to customers including Prudential Insurance
Company of America, Continental National Assurance (CNA), and American
International Group (AIG). More than half of the 200 largest insurance companies
in North America use the Company's software products and services, including
seven of the ten largest life and health insurance companies and nine of the ten
largest property and casualty insurance companies. The Company believes it has
also become a leading provider of document automation software and services for
companies in the utilities industry, and that most of the recent adoptions of
automated customer billing software were licenses of the Company's products. 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 Royal Bank Financial Group, The University of Texas, Polkomtel S.A.,
and Yellow Technology Services, Inc.
Document Automation Industry
Document automation 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 producing more accurate documents,
o minimizing the time it takes to produce and deliver documents, and
o providing customer service personnel with immediate access to the
electronically archived documents.
At the same time, document automation reduces the cost of personnel, printing,
and storage.
Certain recent trends have accelerated the growth of the document
automation industry. Deregulation of industries such as insurance, utilities,
and financial services has resulted in
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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,
emergence of the WindowsNT operating system, and evolving standards such as
Microsoft's Active-X, Microsoft's ODBC, and Sun Microsystems' Java 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 document automation processes.
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 and workflow 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 and other output devices.
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
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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.
Management and Workflow Software
Underlying all three phases of the document life cycle is the requirement
to manage the way in which documents and data 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. With the purchase of EZPower Systems, Inc. and Maitland Software, Inc.,
the Company has integrated their document management and workflow products into
its product line and significantly expanded the Company's usability in
developing them for the next generation.
Growth Strategy
The Company's strategy for growth consists of the following:
Leveraging Existing Customer Relationships
The Company has an installed base of approximately 800 customers.
Increasingly, the Company's customers are expanding or upgrading their document
automation 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
has substantially expanded its services capacity, it anticipates that the
existing customer base could be a significant source of future services revenue
for the Company. Recently introduced and planned products and services can also
be provided to the Company's current customers as follow-on sales.
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Expanding Professional Services
The Company is expanding its document automation consulting and
applications integration services to assist with new and existing document
automation applications. The Company also is pursuing outsourcing of customers'
document automation operations with on-site Company personnel or through
processing of customers' documents at the Company's Atlanta processing and print
facility.
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, higher education, telecommunications, and transportation
industries, in each of which customers have previously purchased and installed
the Company's software. These industries, like insurance and utilities, have an
increasing need for individualized documents to be produced in very large
volumes in order to communicate effectively with their customers.
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 1999, the
Company expects to introduce new software products utilizing object-oriented
platform independent technology, with migration and upgrade paths for users of
existing products.
Expanding Internationally
Approximately 4% of the Company's revenues came from customers outside of
North America in fiscal 1998. DocuCorp plans to expand its international
customer base primarily by cultivating its international distribution alliance
and through direct sales. The Company also intends to leverage its existing
international customer base, particularly by selling professional services to
customers who previously have licensed software from the Company. In May 1998,
the Company opened a sales and services office in London. DocuCorp intends to
continue increasing the number of sales and services professionals domiciled
internationally.
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.
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
outsource document production using the Company's technology and expertise.
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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 four
primary categories. During calendar 1998, the Company expects to introduce new
software products utilizing object-oriented platform independent technology,
with migration and upgrade paths for users of existing products.
DocuCorp Creation Solutions
With DocuCorp Creation Solutions, 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 DocuCorp Creation Solutions. The Company's
open architecture supports a broad range of document creation solutions.
DocuCorp Creation Solutions run primarily on personal computers under Microsoft
Windows. License revenues from the Company's software products in the Creation
Solutions category accounted for approximately 9% and 8% of the Company's total
license revenues in fiscal 1998 and 1997 (on a pro forma basis), respectively.
DocuCorp Publishing Solutions
DocuCorp Publishing Solutions 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. DocuCorp Publishing Solutions have the flexibility to dynamically
compose highly-tailored documents, each based on custom publishing rules such as
unique pagination. Alternatively, the Company's products attain 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. DocuCorp Publishing Solutions
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. DocuCorp Publishing Solutions run 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 62%
and 63% of the Company's total license revenues in fiscal 1998 and 1997 (on a
pro forma basis), respectively.
DocuCorp Archival Solutions
DocuCorp Archival Solutions store 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. DocuCorp Archival
Solutions can be implemented as stand-alone systems or integrated with leading
imaging systems such as FileNET. DocuCorp Archival viewing software runs under
Windows,
6
and Archival 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 22% and 21% of the Company's total license revenues
in fiscal 1998 and 1997 (on a pro forma basis), respectively.
DocuCorp Management Solutions
DocuCorp Management Solutions currently provide Internet document services,
network and host connectivity, 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 7% and
8% of the Company's total license revenues in fiscal 1998 and 1997 (on a pro
forma basis), respectively.
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 compatibility, 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 applications
integration together with print outsourcing services to its customers. At July
31, 1998, the Company employed approximately 170 professional service personnel,
which represents one of the largest services organization 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.
Educational 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
38% and 36% of the Company's total revenues in fiscal 1998 and 1997 (on a pro
forma basis), respectively.
Print Outsourcing Services
The Company offers document processing and print outsourcing services which
utilize the Company's software to provide solutions for handling high-volume,
complex print, finish, and mailing requirements. The Company operates a print
production center in Atlanta which, using data received electronically from
customers, employs high-volume printers and mail handling equipment to produce
insurance policies, billings and other customer mailings, and bundles the output
for bulk mailings. Print outsourcing accounted for approximately 18% of the
Company's total revenues in both fiscal 1998 and 1997 (on a pro forma basis),
respectively.
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Product Development
The Company has made and expects to continue to make substantial
investments in research and product development. Product development efforts
increased substantially in fiscal 1998 as a result of the Merger. During fiscal
1999, the Company expects to introduce new software products utilizing
object-oriented technology, with migration and upgrade paths for users of
existing products. Other new product development efforts include the 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.
Historically, the Company has made new releases of software available
approximately every 12 months. As of July 31, 1998, the Company employed
approximately 75 technical personnel engaged in 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 1998 and fiscal 1997, the Company's
software development expenditures were approximately $6.7 million, and $3.2
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, 1998,
the Company employed approximately 25 direct sales and support representatives
who operate primarily from Dallas and Atlanta. Sales representatives are
compensated principally on a commission basis.
In the United States, the Company markets its products and services
primarily through a direct sales force. Outside of the United States, the
Company relies primarily on distributor relationships to market its products.
Distributor relationships are established in Canada, Europe, South Africa, and
Asia. The Company's most significant international distributor relationships are
with Continuum (Europe) Limited and Policy Management Systems Corporation
("PMSC"). DocuCorp plans to expand its international customer base by
cultivating international distribution alliances and increasing the number of
its direct sales and services personnel domiciled internationally.
In addition, 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, Andersen Consulting,
Continuum (Europe) Limited, PMSC, FileNET Corporation, American Management
Systems (AMS), SCT Utility Systems, UMS Inc., and Crain-Drummond, Inc. These
relationships provide sales leads for the Company's products and services and
help extend the Company's sales coverage and networking capabilities.
Currently, the Company's DocuFlex product line is licensed to customers on
a product-by-product basis. In contrast, the entire DAP product line is licensed
by customers under one comprehensive software license. Effective November 1,
1998, the Company's current product
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marketing methodology will change from these prior practices. 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 25% of current
license fees. 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. Print outsourcing services are charged on a transaction fee basis.
Relationship with Third-Party Distributor
FormMaker, which was acquired by the Company in connection with the Merger,
historically distributed its line of DAP software products to the insurance
industry in North America through a marketing agreement with PMSC. A substantial
portion of the subsidiary's revenues has historically been generated pursuant to
this agreement. Additionally, the subsidiary granted PMSC the exclusive right to
market the DAP software in the property/casualty and life insurance industries.
Revenues from PMSC under this agreement for the year ended July 31, 1998 and
1997 (on a pro forma basis) were $5.5 million and $10.3 million, respectively.
Subsequent to year end, 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 PMSC allows PMSC to market all of the
Company's software products to insurance and financial services companies
worldwide.
In addition, PMSC terminated its print outsourcing agreement effective May
1998. Revenues from PMSC under the print outsourcing agreement for the year
ended July 31, 1998 and 1997 (on a pro forma basis) were $4.4 million and $5.3
million, respectively. Accordingly, print outsourcing revenues are expected to
decline from fiscal year 1998 levels until the Company is able to replace this
business with new business.
PMSC also had a non-exclusive, perpetual, royalty-free, worldwide license
to use, execute, copy, or license the DAP software (and derivatives thereof) to
third parties. This license was terminated upon execution of the new
non-exclusive marketing agreement.
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 revenue is generated from
the insurance industry. Approximately 73% of the Company's total revenues for
the year ended July 31, 1998 were derived from the insurance industry. Of these
revenues, 13% of total revenues for the year ended July 31, 1998 were derived
from one customer, Prudential Insurance Company of America. Over half of the
largest 200 insurance companies in North America use the Company's products and
services, including seven of the ten largest life and health insurance companies
and nine of the ten largest property and casualty insurance companies. The
Company believes it has the largest installed document automation customer base
in the insurance industry. During fiscal 1998, 15 utility companies in North
America licensed the Company's products. 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. Unlike many other software vendors, the Company's principal
contact at customer organizations is generally not an MIS or
9
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)
Continental National Assurance (CNA)
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
Telecommunications
Polkomtel S.A.
Airtel
Transportation
Yellow Technology 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 and
(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 M&I Data Services. 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
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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 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, 1998, the Company had approximately 315 employees, of which
approximately 170 were engaged in professional services, 90 in product
development and customer support, 25 in sales and marketing, and 30 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
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This Annual Report on Form 10-K 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, 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, 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, including without limitation in
conjunction with the forward-looking statements included in this Form 10-K that
are referred to above. All forward-looking statements included in this Form 10-K
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 73% of the Company's total revenues for the year ended July
31, 1998 and 70% of the Company's pro forma total revenues for the year ended
July 31, 1997 were derived from the insurance industry. Of these revenues, 13%
and 21% of total revenues in fiscal 1998 and 1997 (on a pro forma basis),
respectively, were derived from one customer, Prudential Insurance Company of
America. Additionally, approximately 20% and 9% of the Company's total revenues
for the year ended July 31, 1998 and 1997 (on a pro forma basis), 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. In addition, there
can be no assurance that the Company will continue to sell products and services
to Prudential Insurance Company of America at historical levels. Any significant
decline in revenues derived from Prudential Insurance Company of America could
have a material adverse effect on the Company's results of operations.
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 assurance that the Company's new products or product
enhancements intended to respond to technological change or evolving customer
requirements will achieve acceptance.
Significant Third-Party Distributor Relationship
12
FormMaker, which was acquired by the Company in connection with the Merger,
historically distributed it line of DAP software products to the insurance
industry in North America through a marketing agreement with PMSC. A substantial
portion of the subsidiary's revenues have historically been generated pursuant
to this agreement. Additionally, the subsidiary granted PMSC the exclusive right
to market the DAP software in the property/casualty and life insurance
industries. Revenues from PMSC under this agreement for the year ended July 31,
1998 and 1997 (on a pro forma basis) were $5.5 million and $10.3 million,
respectively. Subsequent to year end, 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 PMSC allows PMSC to
market all of the Company's software products to insurance and financial
services companies worldwide.
In addition, PMSC has provided notice of termination of a print outsourcing
agreement, effective May 1998. Revenues from PMSC under the print outsourcing
agreement for the year ended July 31, 1998 and 1997 (on a pro forma basis) were
$4.4 million and $5.3 million, respectively. Accordingly, print outsourcing
revenues are expected to decline from fiscal year 1998 levels until the Company
is able to replace this business with new business.
PMSC also had a non-exclusive, perpetual, royalty-free, worldwide license
to use, execute, copy, or license the DAP software (and derivatives thereof) to
third parties. This license was terminated upon execution of the new
non-exclusive marketing agreement.
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.
Year 2000 Compliance
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 software failures. Accordingly, the Company has
been evaluating the impact of the Year 2000 on its product line and services
offerings, as well as its internal systems and hardware. Relative to its product
line, all current versions of the Company's products are designed to be "Year
2000" compliant. Customers using pre-Year 2000 compliant versions of the
Company's software products are entitled to receive upgraded Year 2000 compliant
software as part of their software support agreements with the Company, as long
as the customer support agreements remain in force. The Company is in the
process of determining the extent to which its services implementations are Year
2000 compliant. To the extent the Company is directly involved in resolving any
non-compliant services implementations, generally the customer will be
responsible for the fees associated with such services. Accordingly, the Company
does not currently believe that the effects of any Year 2000 non-compliance in
the Company's installed base of products or services offerings will result in
any material adverse impact on the Company's business or financial condition. No
assurance can be given that the Company will not be exposed to potential claims
resulting from system problems associated with the century change.
13
As to its own internal software systems and hardware, the Company has
identified and is currently reviewing all key areas. The Company believes there
is no significant exposure to the Company related to the Year 2000 issue and
that the majority of identified non-compliant systems are planned to be upgraded
as part of its normal upgrade process within the next 12 months. The cost of
upgrading or replacing other non-compliant hardware and software is not expected
to be material.
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 and
(ii) direct competition from numerous software vendors, including Cincom
Systems, Inc., Document Sciences Corporation (which is majority owned by Xerox),
Group 1 Software, Inc., Mobius Management Systems, Inc., and M&I Data Services.
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.
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
14
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 Single Facility for Certain Services
The Company's print outsourcing operations are performed at its facility in
Atlanta, Georgia. Since the Company only has the capability to perform this
function at a single location, a fire, flood, earthquake, power loss, or other
event affecting the Company's Atlanta processing and print facility could cause
a significant interruption in the Company's operations. There can be no
assurance that the Company's contingency plans in the event of such interruption
will prove to be adequate. Any interruption in the operations at the Company's
Atlanta processing and print facility could have a material adverse effect on
the Company's business, financial condition or results of operations.
Integration of Operating Subsidiaries
The Company completed the Merger in fiscal 1997 and acquisitions of EZPower
and Maitland in March 1998 and subsequently commenced the integration of the
operations, facilities, and management. Substantial integration of their
respective products and services is expected to continue throughout fiscal 1999.
The Company may not be able to successfully complete this integration.
Additionally, the Merger and recent acquisitions could have a material adverse
effect on the Company's relationships with customers, distributors, or
suppliers. The operating history of its subsidiaries on a stand-alone basis
cannot necessarily be regarded as indicative of the Company's prospects on a
consolidated basis. Accordingly, there can be no assurance that the Company will
achieve growth in revenues, or sustain revenues at a level consistent with the
historical results of its subsidiaries on a stand-alone basis.
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 23,000 square feet of office space in
Dallas, Texas for its corporate headquarters, including administrative, sales,
services, and product development departments. This lease expires April 30,
2005, but may be terminated by the Company on May 31, 2000.
The Company leases approximately 55,000 square feet of office space in
Atlanta, Georgia, which is utilized for administrative, sales, marketing,
services, and product development departments. The lease for this space expires
on December 31, 2002.
The Company's print outsourcing facility is also located in Atlanta,
Georgia. This facility occupies approximately 19,000 square feet under a lease
which expires on October 31, 2002.
The Company's staff in New Hampshire is located in a 4,500 square foot
facility in Bedford, New Hampshire. The lease for this facility expires on
December 31, 1999. 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.
15
The Company's facility in Philadelphia, Pennsylvania, which is utilized for
administrative and product development departments occupies approximately 3,800
square feet of office space. This lease expires February 28, 2003.
Office space is also leased in London, England for its European sales and
services functions, California for a sales office, and 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
On March 4, 1998, PMSC brought a lawsuit in the United States District
Court, District of South Carolina, against the Company and its FormMaker
subsidiary. The lawsuit alleged that FormMaker had breached the marketing
agreement pursuant to which PMSC distributes FormMaker's software products to
the insurance industry. The lawsuit further alleged that the Company had engaged
in unfair trade practices and tortuous interference with PMSC's contractual
relations, breach of contract and other forms of alleged misconduct relating to
PMSC's contract with FormMaker. PMSC sought unspecified damages, including
punitive damages, and to enjoin certain marketing of the DAP product by the
Company and FormMaker. The Company believed PMSC's claims were without merit and
continued to vigorously contest such claims. On April 14, 1998, the Company and
FormMaker filed an answer and counterclaim which denied the allegations and
stated claims for breach of contract, breach of implied covenant of good faith
and fair dealing, usurpation and misuse of trade secrets, and tortuous
interference with contact relations. On September 18, 1998, the parties
concluded settlement discussions and signed a Mutual Release of Claims and a new
ten (10) year OEM Agreement for the non-exclusive marketing of DocuCorp products
in the insurance and financial industries.
The Company believes that the resolution of such claims has not had a
material adverse effect on its financial condition or results of operations. At
this date, the Company is not a party to any other legal proceedings.
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 1998.
16
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 September 30, 1998, there were
approximately 1,300 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 1998
Fourth quarter $ 9.94 $ 5.00
Third quarter (from April 6, 1998) 10.75 9.25
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.
17
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data for the years ended July
31, 1998, 1997, 1996, 1995, and 1994 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.
Years ended July 31,
------------------------------------------------------------------
1998 1997* 1996 1995 1994
---- ----- ---- ---- ----
Statements of Operations Data: (in thousands, except per share amounts)
Total revenues $ 45,247 $ 17,503 $ 11,470 $ 10,814 $ 10,874
Operating income (loss) $ 5,602 $(17,460) $ 3,416 $ 3,158 $ 3,546
Net income (loss) before income taxes $ 5,424 $(17,246) $ 3,656 $ 3,186 $ 3,399
Net income (loss) $ 3,184 $(16,102) $ 2,321 $ 2,003 $ 2,169
Cash dividend declared for preferred stock -0- $ 2,808 -0- -0- -0-
Net income (loss) per share:
Basic $ 0.25 $ (2.18) $ 0.37 $ 0.35 $ 0.41
Diluted $ 0.21 $ (2.18) $ 0.28 $ 0.25 $ 0.27
Weighted average number of shares outstanding:
Basic 12,587 7,377 6,202 5,674 5,301
Diluted 14,865 7,377 8,381 8,165 8,114
* After Merger-related charges of $21,378. Without such charges operating
income, net 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, $.34,
and 7,607, respectively.
July 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Balance Sheet Data: (in thousands)
Working capital $ 15,998 $ 1,644 $ 5,640 $ 4,049 $ 1,930
Total assets $ 51,921 $ 32,698 $ 14,691 $ 13,145 $ 11,572
Total debt, including obligations
under capital lease $ 87 $ 9,439 $ 46 $ 1,637 $ 1,987
Redeemable Class B common stock -0- $ 19,119 -0- -0- -0-
Stockholders' equity (deficit) $ 38,433 $ (7,520) $ 8,037 $ 5,606 $ 3,545
18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this item is set forth in the Company's 1998
Annual Report to Stockholders, which information is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The information required by this item is set forth in the Company's 1998
Annual Report to Stockholders, which information is incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
19
Part III
Part III of this Annual Report on Form 10-K incorporates by reference portions
of the Registrant's definitive proxy statement, to be filed with the Securities
and Exchange Commission not later than 120 days after the close of its fiscal
year; provided that if such proxy statement is not filed with the Commission in
such 120-day period, an amendment to this Form 10-K shall be filed no later than
the end of the 120-day period.
Item 10. Directors and Executive Officers of the Registrant
Information with respect to Directors of the Company will be set forth in
the forthcoming Proxy Statement under the heading "Directors and Executive
Officers," which information is incorporated herein by reference or in an
amendment to this Form 10-K. Information required by Item 405 of Regulation S-K
will be set forth in the forthcoming 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 will be set forth in the
Proxy Statement under the heading "Executive Compensation," which information is
incorporated herein by reference, or in an amendment to this Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial owners
and management will be set forth in the forthcoming Proxy Statement under the
heading "Beneficial Ownership of Common Stock," which information is
incorporated herein by reference, or in an amendment to this Form 10-K.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and transactions will be
set forth in the forthcoming Proxy Statement, which information is incorporated
herein by reference, or in an amendment to this Form 10-K.
20
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 or which are incorporated herein by reference.
1. Financial Statements (incorporated herein by reference):
Report of Independent Accountants
As of July 31, 1998 and 1997:
o Consolidated Balance Sheets
For the Years Ended July 31, 1998, 1997, and 1996:
o Consolidated Statements of Operations
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 beginning on page 26 of this Form 10-K.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
July 31, 1998.
21
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.
DocuCorp International, Inc.
- ---------------------------------------
(Registrant)
/s/ Michael D. Andereck Date October 29, 1998
- --------------------------------------- -----------------
Michael D. Andereck
President, Chief Executive Officer and
Director
22
SIGNATURES (cont.)
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.
/s/ Michael D. Andereck Date October 29, 1998
- --------------------------------------- ------------------
Michael D. Andereck
President, Chief Executive Officer and
Director
(Principal Executive Officer)
/s/ Todd A. Rognes Date October 29, 1998
- --------------------------------------- ------------------
Todd A. Rognes
Senior Vice President, Finance
(Principal Financial Officer)
/s/ Milledge A. Hart, III Date October 29, 1998
- --------------------------------------- ------------------
Milledge A. Hart, III
Director and Chairman of the Board
/s/ Anshoo S. Gupta Date October 29, 1998
- --------------------------------------- ------------------
Anshoo S. Gupta
Director
/s/ John D. Loewenberg Date October 29, 1998
- --------------------------------------- ------------------
John D. Loewenberg
Director
/s/ Warren V. Musser Date October 29, 1998
- --------------------------------------- ------------------
Warren V. Musser
Director
/s/ George F. Raymond Date October 29, 1998
- --------------------------------------- ------------------
George F. Raymond
Director
/s/ Arthur R. Spector Date October 29, 1998
- --------------------------------------- ------------------
Arthur R. Spector
Director
23
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors and Stockholders
of DocuCorp International, Inc.
Our audit of the consolidated financial statements referred to in our
report dated September 9, 1998 appearing in the 1998 Annual Report to
Stockholders of DocuCorp International, Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the Financial Statement Schedule listed in
Schedule II of this Form 10-K. 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.
PricewaterhouseCoopers LLP
Dallas, Texas
September 9, 1998
24
Valuation and Qualifying Accounts
Years ended July 31, 1998, 1997, and 1996
Schedule II
Additions
---------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
(a) (a)(b)(c)
- --------------------------------------------------------------------------------------------------------------------------
1998
Allowance for doubtful accounts $ 525,000 $ 734,550 $ (309,550) $0 $ 950,000
Valuation allowance against deferred
tax assets $ 1,392,817 $ 1,848,786 $ (892,819) $0 $ 2,348,784
1997
Allowance for doubtful accounts $ 350,000 $ 363,556 $ (188,556) $0 $ 525,000
Valuation allowance against deferred
tax assets $ -0- $ 1,392,817 $ -0- $0 $ 1,392,817
1996
Allowance for doubtful accounts $ 325,000 $ 350,131 $ (325,131) $0 $ 350,000
(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 carry forwards.
25
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)
10.1 Cooperative Marketing Agreement between Image Sciences Inc. and
Xerox Corporation August 16, 1994. (filed as exhibit 10.1 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).
11.1* Statement regarding Computation of Per Share Earnings.
13.1* 1998 Annual Report to Stockholders. (for EDGAR filing purposes only)
21.1* Subsidiaries of the Registrant.
23.1* Consent of PricewaterhouseCoopers LLP, Independent Accountants
27.1* Financial Data Schedule. (for EDGAR filing purposes only)
- ----------
* Filed herewith.
26
EXHIBIT 11.1
DocuCorp International, Inc.
Computation of Earnings per Share
For the Years Ended July 31, 1998, 1997, and 1996
1998 1997 1996
---------------- --------------- ----------------
NET INCOME (LOSS) PER SHARE:
BASIC
Net income (loss) $ 3,184,327 $(16,101,787) $ 2,321,280
================ =============== ================
Weighted average shares outstanding used in the
net income (loss) per share calculation 12,587,473 7,377,271 6,201,684
================ =============== ================
Basic net income (loss) per share $ 0.25 $ (2.18) $ 0.37
================ =============== ================
DILUTED
Net income (loss) $ 3,184,327 $(16,101,787) $ 2,321,280
================ =============== ================
Weighted average shares outstanding 12,587,473 7,377,271 6,201,684
Additional weighted average shares from assumed
exercise of dilutive stock options and warrants, net of
shares to be repurchased with exercise
proceeds 2,277,098 -0- 2,179,486
---------------- --------------- ----------------
Weighted average shares outstanding used in the
net income (loss) per share calculation 14,864,571 7,377,271 8,381,170
================ =============== ================
Diluted net income (loss) per share $ 0.21 (2.18) $ 0.28
================ =============== ================
Due to the adoption of SFAS 128 and the conversion feature of Class B common
stock into Common Stock, which conversion occurred on April 9, 1998, the
historical basic and diluted calculations include the effect of conversion of
Class B common stock as of the date of original issuance, which were previously
reported in pro forma computations prior to conversion.
27
EXHIBIT 13.1
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, timely development and
acceptance of new products and services, dependence upon the insurance industry,
integration of operating subsidiaries, reliance on a major client relationship,
and fluctuations in operating results. 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 develops, markets, and supports a portfolio of open-architecture,
enterprise-wide document automation software products that enable its customers
to produce complex, high-volume, individualized documents. In addition, the
Company provides document automation consulting, systems integration, and
document processing and printing services through a 170-person service
organization. Document processing and printing services utilize the Company's
software to provide solutions for handling high-volume, complex print, finish,
and mailing for customers who outsource this activity.
DocuCorp was formed in connection with the acquisition of FormMaker
Software, Inc. ("FormMaker") by Image Sciences, Inc. ("Image Sciences") (the
"Merger"). The Merger was treated as an acquisition of FormMaker by Image
Sciences, and accordingly, the Merger transaction was recorded under the
purchase method of accounting. The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries.
Consolidated results of FormMaker and its subsidiary are included from the
effective date of the Merger, May 15, 1997. As described in the footnotes to the
consolidated financial statements, the Company incurred one-time charges
aggregating $21.4 million during fiscal 1997 in connection with the Merger,
primarily related to acquired in-process technology and compensation charges
related to the repurchase and remeasurement of certain employee stock options.
Due to the lack of comparability of the results of operations for periods prior
to and subsequent to the Merger, supplemental analysis of unaudited pro forma
combined statements of operations information of the Company has been included
in the accompanying analysis.
In March 1998, the Company acquired all of the capital stock of EZPower
Systems, Inc. ("EZPower") and Maitland Software, Inc. ("Maitland"). EZPower
develops, markets, and supports document management software products. Maitland
has developed a data acquisition and transformation program which allows users
the ability to more easily interface existing applications and databases with
document printing and publishing software. Both of these
28
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 accompanying consolidated
financial statements. The inclusion of the operating results of EZPower and
Maitland from the acquisition date is not material to the overall operations of
the Company; therefore, the historical results have been excluded from the
supplemental analysis of unaudited pro forma combined statements of operations
information of the Company in the accompanying analysis.
The Company derives its revenues from license fees, recurring maintenance
fees, and professional services fees related to its software products. License
revenues are generally derived from perpetual and term licenses of software
products. Maintenance and other recurring revenues consist primarily of
recurring license fees and annual maintenance contracts. Professional services
revenues include fees for consulting, implementation, print outsourcing,
contract programming, and education services.
Results of Operations
Historical Operating Results of the Company
The following table sets forth selected consolidated statements of
operations data of the Company expressed as a percentage of total revenues for
the periods indicated:
Years ended July 31,
----------------------
1998 1997
--------- -----------
Revenues
Professional services 56% 35%
License 20 23
Maintenance and other recurring 24 42
--------- -----------
Total revenues 100 100
--------- -----------
Expenses
Professional services 42 23
Product development and support 18 28
Selling and marketing 14 13
General and administrative 14 14
Merger-related charges 0 122
--------- -----------
Total expenses 88 200
--------- -----------
Operating income (loss) 12 (100)
Other income (expense), net 0 1
--------- -----------
Income (loss) before income taxes 12 (99)
Provision (benefit) for income taxes 5 (7)
========= ===========
Net income (loss) 7% (92)%
========= ===========
Fiscal Year Ended July 31, 1998 Compared to Fiscal Year Ended July 31, 1997
Revenues
The inclusion of a full year of FormMaker's results for the fiscal year
ended July 31, 1998 was primarily responsible for the 159% increase in total
revenues. Professional services revenues increased significantly and license
revenues increased 117% due to inclusion of FormMaker's results in the fiscal
year ended July 31, 1998. Maintenance and other recurring revenues
29
increased 49% as a result of inclusion of FormMaker's maintenance revenues and
an increased customer base.
Backlog for the Company's products and services of approximately $28.5
million as of July 31, 1998, of which approximately $16.2 million is scheduled
to be satisfied within one year, is primarily comprised of recurring software
license and maintenance revenues for ongoing maintenance and support, software
implementation and consulting services, and print outsourcing 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. Print outsourcing services agreements
generally provide that fees are charged on a per transaction basis. The
estimated future revenues with respect to software implementation and print
outsourcing services are based on management's estimate of revenues over the
remaining life of the respective contracts.
FormMaker, which was acquired by the Company in connection with the Merger,
historically distributed its line of DAP software products to the insurance
industry in North America through an exclusive marketing agreement with Policy
Management Systems Corporation ("PMSC"). Revenues from PMSC under this agreement
for the year ended July 31, 1998 and 1997 (on a pro forma basis) were
approximately $5.5 million and $10.3 million, respectively. Subsequent to year
end, both parties agreed to terminate the marketing agreement and enter into a
new non-exclusive marketing agreement. The new marketing agreement between
DocuCorp and PMSC allows PMSC to market all of the Company's software products
to insurance and financial services companies worldwide
In addition, PMSC terminated its print outsourcing agreement effective May
1998. Revenues from PMSC under this agreement for the year ended July 31, 1998
and 1997 (on a pro forma basis) were approximately $4.4 million and $5.3
million, respectively. Accordingly, print outsourcing revenues are expected to
decline from fiscal year 1998 levels until the Company is able to replace this
business with new business.
Although the Company is not aware of any material adverse effects on its
business, the Company is unable to predict the impact, if any, on its revenues
as a result of its customers being distracted from their document automation
needs as their attention is redirected, or customer resources are diverted, to
becoming Year 2000 compliant.
Professional services expense
Professional services expense is composed primarily of personnel expenses
related to both consulting and print outsourcing services. The majority of the
$15.0 million increase is due to the inclusion of FormMaker personnel and
related expenses during the entire fiscal year ended July 31, 1998. Postage and
supplies expense of approximately $4.0 million for print outsourcing services,
compared with $1.0 million in the prior year, also contributed to the increase.
For the fiscal years ended July 31, 1998 and 1997, professional services expense
represented 75% and 65% of professional services revenues, respectively. The
increase in cost as a percentage of professional services revenues is mainly due
to higher profit margins earned under a short-term print outsourcing agreement
in fiscal 1997. The Company expects professional services expenses to increase
in order to meet additional resource requirements as professional services
activities increase domestically and internationally.
30
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, 1998, product development and support expense increased 68% compared to
the corresponding prior year period, largely due to development efforts related
to the Company's DAP product line, which was acquired in the Merger. The Company
anticipates continued acceleration of development efforts, including the
integration of existing products with the Internet to provide an enterprise-wide
Internet solution, integration of its newly acquired document management and
workflow solutions with its existing offerings, further development of systems
for use in industries such as utilities and financial services, development of
new software products utilizing object-oriented technology, and continued
support of its existing product lines. Accordingly, expenditures in this area
are expected to increase in relation to the anticipated growth in revenues.
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 software failures. Accordingly, the Company has
been evaluating the impact of the Year 2000 on its product line and services
offerings, as well as its internal systems and hardware. Relative to its product
line, all current versions of the Company's products are designed to be "Year
2000" compliant. Customers using pre-Year 2000 compliant versions of the
Company's software products are entitled to receive upgraded Year 2000 compliant
software as part of their software support agreements with the Company, as long
as the customer support agreements remain in force. The Company is in the
process of determining the extent to which its services implementations are Year
2000 compliant. To the extent the Company is directly involved in resolving any
non-compliant services implementations, generally the customer will be
responsible for the fees associated with such services. Accordingly, the Company
does not currently believe that the effects of any Year 2000 non-compliance in
the Company's installed base of products or services offerings will result in
any material adverse impact on the Company's business or financial condition. No
assurance can be given that the Company will not be exposed to potential claims
resulting from system problems associated with the century change.
As to its own internal software systems and hardware, the Company has
identified and is currently reviewing all key areas. The Company believes there
is no significant exposure to the Company related to the Year 2000 issue and
that the majority of identified non-compliant systems are planned to be upgraded
as part of its normal upgrade process within the next 12 months. The cost of
upgrading or replacing other non-compliant hardware and software is not expected
to be material.
Selling and marketing expense
Selling and marketing expense increased 165% primarily as the result of
inclusion of operations acquired in the Merger and increased commissions. Sales
commissions increased due to increased revenues and a new fiscal 1998 sales
compensation plan that was expanded to provide compensation on all revenue
types. The Company also focused on advertising, marketing, and participating in
trade shows to increase market awareness, which increased these types of
expenditures.
General and administrative expense
In fiscal 1998, general and administrative expense increased 166%. The
increased expense resulted from inclusion of operations acquired in the Merger,
goodwill amortization as a
31
result of the Merger and recent acquisitions, and legal defense and settlement
costs related to the resolution of two outstanding litigation matters.
Other income (expense), net
The 183% decrease in other income (expense), net was due to a decrease in
interest income and a significant increase in interest expense. Interest income
decreased due to an $8.0 million distribution to stockholders and option holders
concurrent with the Merger in May 1997. Interest expense was significantly
higher in fiscal 1998 due to the assumption of debt and capitalized leases in
connection with the Merger and acquisitions. As a result of the receipt of
approximately $18.5 million of Initial Public Offering ("IPO") proceeds in April
1998, interest income increased in the fourth quarter of fiscal 1998 and is
expected to continue to increase due to significant cash and cash equivalent
balances. Interest expense is expected to significantly decrease due to the
repayment of the Company's debt in April 1998.
Provision for income taxes
The effective tax rate for the year ended July 31, 1998 was approximately
41%. The majority of goodwill amortization related to the Merger and recent
acquisitions is non-deductible, which increased the effective tax rate for
fiscal 1998. The tax benefit related to the net loss for the fiscal year ended
July 31, 1997 was approximately 7% due to the non-deductibility, for tax
purposes, of the in-process technology charge associated with the Merger. The
Company used a portion of its net operating loss carryforwards and outstanding
tax credits to offset its current tax liability for the fiscal year ended July
31, 1998.
Net income
Net income increased significantly due to increased revenue, inclusion of
FormMaker's results for a full year, and economies of scale achieved with the
combined companies. During fiscal year 1997, the Company incurred non-recurring
Merger-related charges of $21.4 million.
Fiscal Year Ended July 31, 1997 Compared to Fiscal Year Ended July 31, 1996
Revenues
Total revenues increased 53% due primarily to the inclusion of FormMaker's
results subsequent to the Merger. Professional services revenues increased 651%
principally due to the implementation of print outsourcing operations acquired
in the Merger. During the fourth quarter, license revenues significantly
declined which caused an overall 15% decrease in annual license revenues as
compared to the previous year. The Company believes this decline is attributable
to the impact of the Merger on customer buying decisions which may have been
delayed pending the integration of Image Sciences and FormMaker's product
strategies. Maintenance and other recurring revenues increased 24% due to the
inclusion of FormMaker's recurring maintenance revenues since the Merger and an
increased customer base.
Professional services expense
The majority of the increase in professional services expense is due to the
inclusion of FormMaker personnel associated with both the professional and print
outsourcing services areas subsequent to the date of the Merger. Print
outsourcing services incurred approximately $1.0 million in direct postage and
supplies expense which further contributed to the increase. Costs for
professional services expense represented 65% and 80% of professional services
revenue for fiscal 1997 and 1996, respectively. The decrease in cost as a
percentage of professional services revenue is primarily due to the inclusion of
costs related to the Company's biennial user group
32
conference in 1996, higher profit margins earned under a short-term print
outsourcing agreement in 1997, and economies of scale of the significantly
expanded services operations.
33
Product development and support expense
Product development and support expense consists primarily of research and
development efforts, amortization of capitalized software costs, customer
support, and other product support costs. Product development and support
expense increased by 12% in fiscal 1997. Before capitalization and amortization,
product development and support expense increased 22% primarily as a result of
the development efforts related to operations acquired in the Merger and the
addition of significant resources focused on research activities to expand the
Company's product offerings.
Selling and marketing expense
Selling and marketing expense increased 35% primarily as a result of
inclusion of operations acquired in the Merger and increased commissions. Sales
commissions associated with increased sales increased principally as a result of
commissions on professional services contracts executed subsequent to the date
of the Merger.
General and administrative expense
General and administrative expense increased 80% due primarily to inclusion
of operations acquired in the Merger, profit-based performance bonuses, and
costs associated with the Merger. Profit-based performance bonuses increased due
to achievement of performance and financial goals.
Merger-related charges
Non-recurring Merger-related charges aggregating $21.4 million consist of
acquired in-process technology, compensation charges, and other Merger-related
charges. Acquired in-process technology of $13.5 million was charged to expense
on the closing date of the Merger. Merger-related compensation and other related
charges of approximately $7.9 million relate to the repurchase of stock options
and the creation of a new measurement date for outstanding options converted to
options to purchase Class B common stock.
Other income (expense), net
Other income (expense), net decreased 11% due primarily to increased
interest expense charges. Interest income increased 15% due to significant cash,
cash equivalents, and short-term investments held by the Company until $8.0
million was distributed in cash to stockholders and option holders concurrent
with the Merger. Interest expense increased 82% because of debt assumed in the
Merger.
Provision for income taxes (benefit)
The Company recorded a tax benefit of 7% related to its net loss for the
year ended July 31, 1997. The Company's effective tax rate for the year ended
July 31, 1996 was approximately 37%. The 1997 effective tax rate differs from
the 1996 effective tax rate due primarily to the in-process technology charge
which was not deductible for tax purposes.
Net income (loss)
Non-recurring Merger-related charges of approximately $21.4 million
resulted in a net loss of $16.1 million in 1997. Excluding Merger-related
charges, income before taxes increased 13% from 1996 primarily as a result of
increased revenues.
Unaudited Pro Forma Combined Operating Results of the Company
34
The following is a supplemental comparison of the unaudited pro forma
combined operating results of the Company assuming the acquisition of FormMaker
occurred on August 1, 1996. The supplemental 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 and the consolidated financial statements of FormMaker. For periods
prior to May 15, 1997 the Company, Image Sciences, and FormMaker were not under
common control or management and, as a result, the selected unaudited pro forma
combined financial information is not necessarily indicative of or comparable to
the operating results that would have occurred had the Merger occurred as of or
at the beginning of the period presented or that will occur in the future.
Years ended July 31,
-------------------------------
1998 1997
Actual Pro Forma
-------------- -------------
Revenues (In thousands)
Professional services $ 25,533 $ 20,828
License 8,885 8,153
Maintenance and other recurring 10,829 9,435
-------------- -------------
Total revenues 45,247 38,416
-------------- -------------
Expenses
Professional services 19,033 16,547
Product development and support 8,318 6,836
Selling, general and administrative 12,294 11,450
-------------- -------------
Total expenses 39,645 34,833
-------------- -------------
Operating income 5,602 3,583
Other income (expense), net (178) (690)
-------------- -------------
Income before income taxes 5,424 2,893
Provision for income taxes 2,240 1,179
-------------- -------------
Net income $ 3,184 $ 1,714
============== =============
Years ended July 31,
-----------------------------
1998 1997
Actual Pro Forma
-------------- -------------
Revenues
(As a percent of total revenues)
Professional services 56% 54%
License 20 21
Maintenance and other recurring 24 25
-------------- -------------
Total revenues 100 100
-------------- -------------
Expenses
Professional services 42 43
Product development and support 18 18
Selling, general and administrative 28 30
-------------- -------------
Total expenses 88 91
-------------- -------------
Operating income 12 9
Other income (expense), net 0 (2)
-------------- -------------
Income before income taxes 12 7
Provision for income taxes 5 3
-------------- -------------
Net income 7% 4%
============== =============
35
Fiscal Year Ended July 31, 1998 Compared to Fiscal Year Ended July 31, 1997 (on
a Pro Forma Basis)
Revenues
Revenues for the fiscal year ended July 31, 1998 increased 18% compared to
pro forma total revenues for the prior year period due primarily to a 23%
increase in professional services revenues. Professional services revenues
increased due to significant increases in consulting and implementation services
to the insurance and utilities industries and increases in the print outsourcing
business during fiscal 1998. In May 1998, PMSC terminated its print outsourcing
agreement; accordingly, print outsourcing revenues are expected to decline from
fiscal year 1998 levels until the Company is able to replace this business with
new business. License revenues increased 9% in the fiscal year ended July 31,
1998 due primarily to increases in license revenues to the utilities industry.
Maintenance and other recurring revenues increased 15% in the fiscal year ended
July 31, 1998 due to an expanded number of customers utilizing the combined
companies' product offerings.
Professional services expense
Professional services expense increased 15% for the fiscal year ended July
31, 1998 compared to pro forma expense for the prior year period due primarily
to increased staffing and related costs as the professional services
organizations were expanded. Professional services expense represented 75% and
79% of professional services revenues for the years ended July 31, 1998 and 1997
(on a pro forma basis), respectively. The decrease in cost as a percentage of
professional services revenues is due primarily to replacement of lower margin
third-party revenues with more profitable direct business and efficiencies
achieved from the Merger.
Product development and support expense
Product development and support expense increased 22% for the fiscal year
ended July 31, 1998 as compared to pro forma expense for the prior year period
as the Company continued to develop new technologies, including integration of
the EZPower and Maitland products with its existing product offerings, as well
as enhance and update its existing product offerings. As a percentage of total
revenues, product development and support expense was 18% for both the years
ended July 31, 1998 and 1997 (on a pro forma basis).
Selling, general and administrative expense
Selling, general and administrative expense increased 7% for the fiscal
year ended July 31, 1998 as compared to pro forma expense for the prior year
period. As a percentage of total revenues, these expenses decreased to 28% for
the year ended July 31, 1998 from 30% for the year ended July 31, 1997 (on a pro
forma basis) as a result of increased economies of scale from higher revenues
and the impact of combined operations. The Company attributes the aggregate
increase primarily to selling costs related to the increase in revenues, as well
as legal defense and settlement costs incurred in fiscal 1998.
Other income (expense), net
Other income (expense), net decreased 74% for the fiscal year ended July
31, 1998 compared to pro forma other income (expense), net for the prior year
period due primarily to the repayment of the Company's outstanding dept in April
1998 with the receipt of IPO proceeds. Interest income increased during the
fourth quarter of fiscal 1998 as a result of the significant cash and cash
equivalent balances.
36
Provision for income taxes
The effective tax rates for both the years ended July 31, 1998 and 1997 (on
a pro forma basis) were approximately 41%. These rates differ from the federal
statutory rate due primarily to non-deductible goodwill amortization related to
the Merger and recent acquisitions.
Net income
Net income increased by approximately $1.5 million for the fiscal year
ended July 31, 1998 as compared to pro forma net income for the prior year
period due primarily to an 18% increase in revenues, partially offset by a 14%
increase in operating expenses.
Liquidity and Capital Resources
At July 31, 1998, the Company's principal sources of liquidity consisted of
cash and cash equivalents of $14.4 million. The Company completed an IPO in the
form of a rights offering to Safeguard Scientifics, Inc. ("Safeguard")
stockholders in April 1998. Net proceeds to the Company from this offering,
after deduction of the underwriting discount and IPO expenses, were
approximately $18.5 million.
Cash and cash equivalents for the fiscal year ended July 31, 1998 increased
$11.6 million due primarily to the receipt of IPO proceeds offset by repayment
of outstanding debt. Cash flows provided by operating activities were $5.9
million as the result of profitable operations and various other cash and
non-cash operating activities. Cash flows from investing activities used $2.5
million in cash primarily for development of capitalized software and purchase
of fixed assets. Cash flows from financing activities provided $8.2 million as
the result of the receipt of IPO proceeds which were partially offset by
repayment of $11.9 million of debt.
Working capital was $16.0 million at July 31, 1998, compared with $1.6
million at July 31, 1997. The increase in working capital is primarily due to
the receipt of IPO proceeds in April 1998.
In connection with the Merger, the Company assumed a $10.0 million
revolving credit facility from FormMaker. This credit facility was renegotiated
in September 1997. Under the new agreement, $3.5 million bears interest at the
bank's prime rate less 0.25%, or 8.25% as of July 31, 1998. The remaining $6.5
million bears interest at the bank's prime rate, or 8.50% as of July 31, 1998,
and is collateralized by substantially all of the Company's assets.
Approximately $6.5 million of the credit facility may be converted in September
1998 into a term loan provided the Company has given the bank thirty days'
written notice and is not in default. The principal balance of the term loan is
payable in twenty-four monthly installments. The Company does not anticipate
converting the $6.5 million portion of the credit facility into a term loan. The
$3.5 million portion of the credit facility is due and payable in March 1999.
Under the credit facility, the Company is required to maintain certain financial
covenants. As of July 31, 1998 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,
and the selling and marketing costs associated principally with continued entry
into new vertical and international
37
markets. The Company's business is not capital-intensive and capital
expenditures in any given year are ordinarily not significant.
The Company currently anticipates that amounts available from the IPO
proceeds, its existing credit facility, and cash generated from operations will
be sufficient to satisfy its operating cash needs for the foreseeable future.
38
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, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of DocuCorp International, Inc. and its subsidiaries at July 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended July 31, 1998, in conformity with generally
accepted accounting principles. 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 generally accepted auditing
standards 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 our audits
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
September 9, 1998
39
DocuCorp International, Inc.
Consolidated Balance Sheets
July 31, 1998 and 1997
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