<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1998
--------------
[ ] TRANSITION 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
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DocuCorp International, Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-2690838
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
5910 North Central Expressway, Suite 800, Dallas, Texas 75206
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(Address of principal executive offices) (Zip Code)
(214) 891-6500
-------------------------------------------------
(Registrant's telephone number including area code)
------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Number of shares outstanding
Title of each class: as of April 30, 1998:
Common Stock, $.01 par value 16,380,229
<PAGE>
DOCUCORP INTERNATIONAL, INC.
TABLE OF CONTENTS
FORM 10-Q
APRIL 30, 1998
PART I - FINANCIAL INFORMATION
<TABLE>
Page
----
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of April 30, 1998 and July 31, 1997 2
Interim Consolidated Statements of Operations for the three
and nine months ended April 30, 1998 and 1997 3
Interim Consolidated Statements of Cash Flows for the nine
months ended April 30, 1998 and 1997 4
Notes to Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
<PAGE>
DOCUCORP INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
April 30, July 31,
1998 1997
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,592,699 $ 2,869,458
Accounts receivable, net of allowance
of $1,050,000 and $525,000, respectively 10,319,589 9,010,784
Other current assets 2,140,944 1,438,790
------------ ------------
Total current assets 28,053,232 13,319,032
Fixed assets, net of accumulated depreciation
of $2,956,760 and $1,983,864, respectively 2,864,395 3,087,578
Software, net of accumulated amortization of $6,585,202
and $5,397,344, respectively 8,153,018 7,408,113
Goodwill, net of accumulated amortization of $783,593
and $160,522, respectively 11,695,243 7,544,535
Other assets 945,863 1,338,907
------------ ------------
$ 51,711,751 $ 32,698,165
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,568,760 $ 1,164,012
Accrued liabilities 4,823,078 2,674,499
Deferred revenue 7,897,455 6,778,212
Other current liabilities 245,363 1,057,851
------------ ------------
Total current liabilities 14,534,656 11,674,574
Long-term debt 28,897 8,793,149
Other long-term liabilities 664,808 631,748
Redeemable Class B common stock, 7,000,000 shares
authorized at $.01 par value, 0 and 5,623,229 shares
issued and outstanding at redemption value,
respectively 0 19,118,978
Stockholders' equity (deficit):
Common stock, 50,000,000 shares authorized at $.01 par
value, 16,380,229 and 5,133,353 shares issued and
outstanding, respectively 163,802 51,334
Additional paid-in capital 46,499,885 4,912,649
Retained deficit (10,114,872) (12,413,092)
Notes receivable from stockholders (65,425) (71,175)
------------ ------------
Total stockholders' equity (deficit) 36,483,390 (7,520,284)
------------ ------------
$ 51,711,751 $ 32,698,165
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
Three months ended Nine months ended
April 30, April 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES
Professional services $ 6,010,710 $ 129,771 $ 18,995,851 $ 501,427
License 2,515,007 1,034,985 6,335,350 3,077,834
Maintenance and other recurring 2,779,624 1,669,321 8,023,889 4,879,971
------------ ----------- ------------ -----------
Total revenues 11,305,341 2,834,077 33,355,090 8,459,232
------------ ----------- ------------ -----------
EXPENSES
Professional services 4,505,573 127,902 14,287,790 409,677
Product development and support 2,370,249 969,799 6,363,158 3,001,115
Selling, general and administrative 2,997,211 905,058 8,528,945 2,776,948
------------ ----------- ------------ -----------
Total expenses 9,873,033 2,002,759 29,179,893 6,187,740
------------ ----------- ------------ -----------
Operating income 1,432,308 831,318 4,175,197 2,271,492
Other income (expense), net (58,196) 125,375 (339,977) 331,114
------------ ----------- ------------ -----------
Income before income taxes 1,374,112 956,693 3,835,220 2,602,606
Provision for income taxes 563,000 349,000 1,537,000 950,000
------------ ----------- ------------ -----------
Net income $ 811,112 $ 607,693 $ 2,298,220 $ 1,652,606
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Net income per share:
Basic $ 0.07 $ 0.09 $ 0.20 $ 0.26
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Diluted $ 0.05 $ 0.07 $ 0.17 $ 0.19
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Weighted average shares outstanding
used in the net income per share
calculation:
Basic 12,382,391 6,479,529 11,308,949 6,474,749
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Diluted 15,022,752 9,195,258 13,629,052 8,635,388
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
SEE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
Nine months ended
April 30,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,298,220 $ 1,652,606
Adjustments to reconcile net income to
net cash provided by operating activities:
Stock option compensation expense 15,698 36,303
Depreciation 1,142,098 271,545
Amortization of capitalized software 1,324,292 560,282
Amortization of goodwill 623,071 0
Tax benefit from utilization of net operating loss 272,000 0
Increase in allowance for doubtful accounts 503,806 36,011
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (1,727,832) 1,501,888
(Increase) decrease in other assets (188,800) 81,970
Increase in accounts payable 326,440 1,413
Increase in accrued liabilities 1,888,919 38,674
Increase in deferred revenue 1,088,579 427,023
Decrease in other liabilities (268,936) (83,526)
------------ ------------
Total adjustments 4,999,335 2,871,583
------------ ------------
Net cash provided by operating activities 7,297,555 4,524,189
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of short-term investments, net 0 4,333,924
Purchase of fixed assets (747,647) (246,472)
Development of software (1,069,197) (439,062)
Net cash acquired from business combination 101,657 0
------------ ------------
Net cash provided by (used in) investing activities (1,715,187) 3,648,390
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt, net (11,877,132) 0
Principal payments under capital lease obligations (323,936) (45,967)
Net proceeds from issuance of stock 18,572,565 0
Proceeds from exercise of stock options 763,626 1,576
Proceeds from repayment of note receivable from stockholders 5,750 0
------------ ------------
Net cash provided by (used in) financing activities 7,140,873 (44,391)
------------ ------------
Net increase in cash and cash equivalents 12,723,241 8,128,188
Cash and cash equivalents at beginning of period 2,869,458 1,909,016
------------ ------------
Cash and cash equivalents at end of period $ 15,592,699 $ 10,037,204
------------ ------------
------------ ------------
</TABLE>
See non-cash activities disclosed in Note 6.
SEE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements include
the accounts of DocuCorp International, Inc. and its subsidiaries
(collectively, the "Company").
The financial information presented should be read in conjunction with the
Company's annual consolidated financial statements for the year ended July
31, 1997. The foregoing unaudited interim consolidated financial statements
reflect all adjustments (all of which are of a normal recurring nature) which
are, in the opinion of management, necessary for a fair presentation of the
results of the interim periods. The results for interim periods are not
necessarily indicative of results to be expected for the year.
NOTE 2 - MERGER OF IMAGE SCIENCES AND FORMMAKER
On January 15, 1997, Image Sciences, Inc. ("Image Sciences") entered into an
Agreement and Plan of Merger (the "Merger") with FormMaker Software, Inc.
("FormMaker"), pursuant to which the stockholders of Image Sciences and
FormMaker agreed to exchange their shares for common stock of the Company.
The Merger was completed on May 15, 1997. Concurrent with the closing of the
Merger, Image Sciences distributed approximately $8,000,000 via (i) a tender
offer to its common stockholders and certain holders of options to purchase
common stock and (ii) a dividend to its preferred stockholder.
The Merger was treated as an acquisition of FormMaker by Image Sciences;
accordingly, the Merger transaction was recorded under the purchase method of
accounting. For historical accounting purposes, Image Sciences is considered
to be the acquiror in the Merger and purchase accounting is not required
related to the conversion of Image Sciences common stock and preferred stock
into Company common stock. The financial statements of Image Sciences are
presented as the historical statements of the Company for periods prior to
the Merger. The excess of the purchase price over the fair value of the net
identifiable assets acquired of $7,705,057 has been recorded as goodwill and
is being amortized on a straight-line basis over ten years.
The following unaudited pro forma information for the three and nine months
ended April 30, 1997 presents a summary of consolidated results of operations
of Image Sciences and FormMaker as if the acquisition had occurred at the
beginning of fiscal 1997. Such unaudited pro forma amounts are not
necessarily indicative of what the actual results might have been had the
Merger occurred at the beginning of fiscal 1997. The unaudited pro forma
amounts exclude non-recurring charges recorded in the year ended July 31,
1997 for acquired in-process technology, compensation charges, and other
Merger-related costs of $13,500,000, $7,649,740, and $228,115, respectively.
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, 1997 APRIL 30, 1997
(UNAUDITED) (UNAUDITED)
------------------ -----------------
<S> <C> <C>
Revenues $9,255,000 $28,016,000
Net income $ 325,000 $ 1,025,000
Net income per share:
Basic $ 0.03 $ 0.10
Diluted $ 0.03 $ 0.08
</TABLE>
5
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3 - NET INCOME PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 simplifies the standards for
computing earnings per share ("EPS") previously found in Accounting
Principles Board No. 15, "Earnings per Share" ("APB 15"), and makes them
comparable to international EPS standards. The provisions and disclosure
requirements for SFAS 128 were required to be adopted for interim and annual
periods ending after December 15, 1997, with restatement of EPS for prior
periods. Accordingly, EPS data for all periods presented has been restated to
reflect the computation of EPS in accordance with the provisions of SFAS 128.
Concurrent with the completion of the Company's initial public offering
("IPO"), all outstanding shares of Class B common stock were converted into
shares of Common Stock on a one-for-one basis (see Note 5). Basic net income
per share has been computed using the weighted average number of common
shares outstanding assuming the conversion of Class B common stock occurred
as of the date of issuance. Diluted net income per share has been computed
using the weighted average number of common shares and dilutive potential
common shares outstanding assuming the conversion of Class B common stock
occurred as of the date of issuance. Due to the adoption of SFAS 128 and the
conversion feature of Class B common stock to Common Stock, which conversion
occurred during the quarter ended April 30, 1998, the historical basic and
diluted calculation will include the conversion of Class B common stock as of
the date of issuance which was previously reported in a pro forma computation.
The following table sets forth the unaudited basic and diluted net income per
share computations for the periods indicated:
<TABLE>
Three months ended Nine months ended
April 30, April 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net income $ 811,112 $ 607,693 $ 2,298,220 $1,652,606
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
BASIC
Weighted average shares outstanding
used in the basic net income per
share calculation 12,382,391 6,479,529 11,308,949 6,474,749
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Basic net income per share $ 0.07 $ 0.09 $ 0.20 $ 0.26
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
DILUTED
Weighted average shares outstanding 12,382,391 6,479,529 11,308,949 6,474,749
Additional weighted average shares
from assumed exercise of dilutive
stock options and warrants, net of
shares to be repurchased with
exercise proceeds 2,640,361 2,715,729 2,320,103 2,160,639
----------- ---------- ----------- ----------
Weighted average shares outstanding
used in the diluted net income per
share calculation 15,022,752 9,195,258 13,629,052 8,635,388
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Diluted net income per share $ 0.05 $ 0.07 $ 0.17 $ 0.19
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>
6
<PAGE>
DOCUCORP INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4 - STOCK SPLIT
In December 1997, the Company approved the declaration of a six-for-five
stock split of the outstanding Common Stock and Class B common stock effected
in the form of a dividend to stockholders of record as of December 9, 1997.
Concurrently, the number of shares of Common Stock the Company is authorized
to issue was increased from 20 million to 50 million shares. The financial
statements have been adjusted retroactively for the six-for-five stock split.
NOTE 5 - INITIAL PUBLIC OFFERING
The Company completed an IPO in the form of a rights offering to Safeguard
Scientifics, Inc. ("Safeguard") stockholders in April 1998. The Company's
Registration Statement on Form S-1 (File No. 333-44427) with respect to the
IPO was declared effective on February 24, 1998. The Company's Common Stock
began trading on the NASDAQ National Market under the symbol DOCC on April 6,
1998. The Company sold 4,000,000 shares of Common Stock at a per share price
of $5.00. Net proceeds to the Company, after deduction of the underwriting
discount and estimated IPO expenses, were approximately $18.5 million.
Selling stockholders sold 3,460,000 shares at a per share price of $5.00. The
Company did not receive any proceeds from the sale of shares by the selling
stockholders. Concurrent with the completion of the IPO, the Company used
approximately $6.4 million of the net proceeds to repay (i) approximately
$3.0 million due under the Company's line of credit with NationsBank, N.A.,
(ii) approximately $3.1 million due pursuant to three subordinated notes to
Safeguard, Technology Leaders II, and TL Ventures Third Corp. which were due
in full at the earlier of the closing of a public offering yielding net
proceeds to the Company in excess of $13.0 million or May 15, 2000, and (iii)
approximately $336,000 due to Safeguard pursuant to two notes assumed by the
Company in connection with the Merger.
NOTE 6 - ACQUISITIONS
On March 31, 1998, the Company completed the acquisitions of EZPower Systems,
Inc. ("EZPower") and Maitland Software, Inc. ("Maitland"). EZPower develops,
markets, and supports flexible Internet and client/server solutions for
document management, workflow, and web content management software products.
The Company acquired all of the outstanding capital stock of EZPower in
exchange for 650,000 shares of the Company's Common Stock, repayment of
approximately $2.5 million of EZPower's indebtedness, and payment of certain
contingent cash consideration based on future performance. Maitland has
developed and recently commenced marketing the TRANSIT software product. This
product is 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. The Company issued 170,000 shares
of its Common Stock as consideration for the Maitland acquisition. The
Company has the right to repurchase up to 100,000 of those shares based upon
cumulative licensing and maintenance of the TRANSIT software product for the
42 months ending July 31, 2001. Both acquisitions were recorded under the
purchase method of accounting, and accordingly, the results of operations of
EZPower and Maitland for all periods subsequent to the acquisition date are
included in the unaudited interim consolidated financial statements. The
excess of the purchase price over the fair value of the net identifiable
assets acquired of $4,466,554 and $579,225 related to the acquisitions of
EZPower and Maitland, respectively, has been recorded as goodwill and is
being amortized on a straight-line basis over eight years.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN INFORMATION CONTAINED HEREIN MAY INCLUDE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED,
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL
STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS FORM
10-Q, ARE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES, WHICH INCLUDE BUT ARE NOT LIMITED TO THE RISK OF
COMPETITIVE PRESSURES, FAILURE TO ADEQUATELY RESPOND TO TECHNOLOGICAL
DEVELOPMENTS, LOSS OF SIGNIFICANT CUSTOMERS OR DISTRIBUTORS, AND THE OTHER
RISK FACTORS AND CAUTIONARY STATEMENTS LISTED FROM TIME TO TIME IN THE
COMPANY'S PERIODIC REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
INCLUDING BUT NOT LIMITED TO, THE COMPANY'S REGISTRATION STATEMENT ON FORM
S-1 (REGISTRATION NO. 333-44427). ALL FORWARD-LOOKING STATEMENTS INCLUDED IN
THIS FORM 10-Q AND ALL SUBSEQUENT ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THESE CAUTIONARY STATEMENTS.
OVERVIEW
The Company markets a portfolio of open-architecture, enterprise-wide
document automation software products that enable its customers to create,
publish, manage, and archive complex, high-volume, individualized documents.
The Company also provides document automation consulting, application
integration, and document processing, printing, and mailing services. The
Company has an installed base of more than 700 customers, including many of
the largest insurance, utility, financial services, higher education, and
telecommunications organizations.
The Company was formed in connection with 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 interim 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. 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 and
Maitland. EZPower develops, markets, and supports document management
software products. Maitland has developed the TRANSIT software product which
is 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 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 unaudited interim
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.
8
<PAGE>
HISTORICAL OPERATING RESULTS OF THE COMPANY
The following table sets forth selected data of the Company expressed as a
percentage of total revenues for the periods indicated:
<TABLE>
Three months ended Nine months ended
April 30, April 30,
(Unaudited) (Unaudited)
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Professional services 53% 5% 57% 6%
License 22 36 19 36
Maintenance and other recurring 25 59 24 58
---- ---- ---- ----
Total revenues 100 100 100 100
---- ---- ---- ----
EXPENSES
Professional services 40 5 43 5
Product development and support 21 34 19 35
Selling, general and administrative 26 32 26 33
---- ---- ---- ----
Total expenses 87 71 88 73
---- ---- ---- ----
Operating income 13 29 12 27
Other income (expense), net (1) 4 (1) 4
---- ---- ---- ----
Income before income taxes 12 33 11 31
Provision for income taxes 5 12 4 11
---- ---- ---- ----
Net income 7% 21% 7% 20%
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
THREE AND NINE MONTHS ENDED APRIL 30, 1998 COMPARED TO THREE AND NINE MONTHS
ENDED APRIL 30, 1997
REVENUES
The inclusion of FormMaker's results for the three and nine months ended
April 30, 1998 was primarily responsible for the 299% and 294% increase in
total revenues, respectively, from the comparable prior year period.
Professional services revenues increased significantly due to the inclusion
of FormMaker services in the fiscal 1998 periods presented. License revenues
increased 143% and 106% in the three and nine months ended April 30, 1998,
respectively, due to the inclusion of FormMaker's license revenues. For the
three and nine months ended April 30, 1998, maintenance and other recurring
revenues increased 67% and 64%, respectively, as a result of an increased
customer base for DocuFlex and inclusion of FormMaker's customer base for the
Document Automation Platform ("DAP") product line.
Backlog for the Company's products and services of approximately $27.0
million as of April 30, 1998, of which approximately $15.8 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.
9
<PAGE>
The estimated future revenue 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 distributes the line of DAP software products to the insurance
industry in North America through Policy Management Systems Corporation
("PMSC"). A substantial portion of the subsidiary's revenues are generated
from a marketing agreement with PMSC under which the subsidiary has granted
PMSC the exclusive third-party right to market the DAP software products in
the property/casualty and life insurance industries. Pro forma revenues from
PMSC under this agreement for the year ended July 31, 1997, and revenues for
the three and nine months ended April 30, 1998 were approximately $10.3
million, $1.6 million, and $4.8 million, respectively. PMSC can terminate the
marketing agreement by providing 90 days' prior written notice. Unless
terminated at an earlier date, the Company intends to allow the marketing
agreement to expire on December 31, 1999. Upon expiration or termination of
the marketing agreement, the Company will receive no revenues from new
licenses sold through PMSC and maintenance revenues from PMSC-sourced
licensees will be eliminated over a two-year period.
In addition, PMSC has provided notice of termination of a print outsourcing
agreement, effective May 1998. Revenues from PMSC on a pro forma basis under
this agreement for the year ended July 31, 1997, and revenues for the three
and nine months ended April 30, 1998 were approximately $5.3 million, $1.0
million, and $4.0 million, respectively. Although print outsourcing revenues
will experience a short-term decline, the Company does not anticipate any
meaningful reduction in operating income as a result of such termination.
The Company is unable to predict the impact, if any, on the Company's
revenues as a result of its customers being distracted from their document
automation needs as their attention is re-directed, 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 $4.4 and $13.9 million increase for the three and nine months ended April
30, 1998, respectively, from the comparable prior year period, is due to the
inclusion of FormMaker personnel and related expenses. For the three and nine
months ended April 30, 1998, postage and supplies expense of approximately
$689,000 and $3.2 million, respectively, for print outsourcing services also
contributed to the increase. For the three months ended April 30, 1998 and
1997, professional services expense represented 75% and 99% of professional
services revenues, respectively, and 75% and 82% of professional services
revenues for the nine months ended April 30, 1998 and 1997, respectively. The
decrease in cost as a percentage of professional services revenues is
primarily due to economies of scale of the expanded services operations and
improved margins due to a smaller percentage of services business being
generated through third-party distributors. The Company expects professional
services expense to increase, in order to meet additional resource
requirements as professional services revenues increase.
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. For the three and nine months ended
April 30, 1998, product development and support expense increased 144% and
112%, respectively, from the comparable prior year period, largely due to
development efforts related to operations acquired in the Merger. The Company
intends to accelerate development efforts, including the integration of
existing products with the Internet to provide an enterprise-wide Internet
solution, further
10
<PAGE>
development of systems for use in industries such as utility and financial
services, and development of new software products utilizing object-oriented
technology, and with respect to support of its existing product lines.
Accordingly, product development and support expenditures are expected to
increase.
Current versions of the Company's products are designed to be "Year 2000"
compliant. The Company is in the process of determining the extent to which
the customized implementations of its software products are Year 2000
compliant, as well as the impact of any non-compliance on the Company and its
customers. The Company does not currently believe that the effects of any
Year 2000 non-compliance in the Company's installed base of software 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.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased 231% and 207% for the
three and nine months ended April 30, 1998, respectively, from the comparable
prior year period. The increase in expense is primarily the result of
inclusion of operations acquired in the Merger, goodwill amortization as a
result of the Merger and acquisitions of EZPower and Maitland, additional bad
debt expense to reserve for potentially uncollectible PMSC-related
receivables, and increased sales commissions. Sales commissions increased due
to additional revenues and a new fiscal 1998 sales compensation plan that has
been expanded to provide compensation on all revenue types.
OTHER INCOME (EXPENSE), NET
Other income (expense), net decreased 146% and 203%, respectively, for the
three and nine months ended April 30, 1998, from the comparable prior year
period, due to a decrease in interest income and a significant increase in
interest expense. Interest income decreased as a result of an $8.0 million
cash distribution to stockholders and certain option holders in connection
with the Merger. Interest expense increased significantly due to the
assumption of debt and capitalized leases in connection with the Merger. As a
result of the receipt of approximately $18.5 million of IPO proceeds in April
1998, interest income is expected to significantly increase. Interest
expense is expected to significantly decrease due to the pay off of the
Company's debt in April 1998.
PROVISION FOR INCOME TAXES
Effective tax rates for the three months ended April 30, 1998 and 1997 were
approximately 41% and 36%, respectively, and 40% and 37%, for the nine months
ended April 30, 1998 and 1997, respectively. The increase in effective tax
rates was due to the non-deductibility of goodwill amortization related to
the Merger and the EZPower and Maitland purchase transactions. The Company
used a portion of its net operating loss carryforwards and outstanding tax
credits to offset its current tax liability for the three and nine months
ended April 30, 1998 and 1997.
NET INCOME
Net income increased 33% and 39%, respectively, for the three and nine months
ended April 30, 1998 from the comparable prior year period. The increase in
net income for these periods was primarily the result of a significant
increase in revenues.
11
<PAGE>
UNAUDITED INTERIM PRO FORMA COMBINED OPERATING RESULTS OF THE COMPANY
The following is a supplemental comparison of the unaudited interim 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 interim consolidated financial
statements of the Company and the interim 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 interim 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.
<TABLE>
Three months ended Nine months ended
April 30, April 30,
---------------------- ----------------------
1998 1997 1998 1997
Actual Pro Forma Actual Pro Forma
-------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES
Professional services $ 6,011 $4,760 $18,996 $14,217
License 2,515 2,050 6,335 6,918
Maintenance and other recurring 2,779 2,445 8,024 6,881
------- ------ ------- -------
Total revenues 11,305 9,255 33,355 28,016
------- ------ ------- -------
EXPENSES
Professional services 4,506 4,011 14,288 11,939
Product development and support 2,370 1,667 6,363 4,898
Selling, general and administrative 2,997 2,921 8,529 8,921
------- ------ ------- -------
Total expenses 9,873 8,599 29,180 25,758
------- ------ ------- -------
Operating income 1,432 656 4,175 2,258
Other expense, net 58 144 340 445
------- ------ ------- -------
Income before income taxes 1,374 512 3,835 1,813
Provision for income taxes 563 187 1,537 788
------- ------ ------- -------
Net income $ 811 $ 325 $ 2,298 $ 1,025
------- ------ ------- -------
------- ------ ------- -------
</TABLE>
12
<PAGE>
<TABLE>
Three months ended Nine months ended
April 30, April 30,
---------------------- ----------------------
1998 1997 1998 1997
Actual Pro Forma Actual Pro Forma
-------- --------- -------- ---------
(AS A PERCENT OF TOTAL REVENUES)
<S> <C> <C> <C> <C>
REVENUES
Professional services 53% 51% 57% 51%
License 22 23 19 25
Maintenance and other recurring 25 26 24 24
-------- --------- -------- ---------
Total revenues 100 100 100 100
-------- --------- -------- ---------
EXPENSES
Professional services 40 43 43 43
Product development and support 21 18 19 17
Selling, general and administrative 26 31 26 32
-------- --------- -------- ---------
Total expenses 87 92 88 92
-------- --------- -------- ---------
Operating income 13 8 12 8
Other expense, net 1 2 1 2
-------- --------- -------- ---------
Income before income taxes 12 6 11 6
Provision for income taxes 5 2 4 2
-------- --------- -------- ---------
Net income 7% 4% 7% 4%
-------- --------- -------- ---------
-------- --------- -------- ---------
</TABLE>
THREE AND NINE MONTHS ENDED APRIL 30, 1998 COMPARED TO THREE AND NINE MONTHS
ENDED APRIL 30, 1997 (ON A PRO FORMA BASIS)
REVENUES
Total revenues for the three and nine months ended April 30, 1998 increased
22% and 19%, respectively, compared to pro forma total revenues for the
comparable prior year periods. Professional services revenues increased
primarily due to several print outsourcing contracts and penetration into the
utility industry during fiscal 1998. License revenues increased 23% in the
three months ended April 30, 1998 primarily due to the execution of one large
contract in the insurance industry. License revenues decreased 8% for the
nine months ended April 30, 1998 due to a decrease in license revenues
generated through PMSC, which was partially offset by an increase in license
revenues from the utility and insurance industries. Maintenance and other
recurring revenues increased 14% and 17%, respectively, in the three and nine
months ended April 30, 1998 due to an increase in the Company's installed
base of customers.
PROFESSIONAL SERVICES EXPENSE
Professional services expense increased 12% and 20% for the three and nine
months ended April 30, 1998, respectively, compared to pro forma expense for
the prior year periods. The majority of the increase is due to additional
costs, mainly personnel, travel, and direct costs related to the print
outsourcing business, associated with the increase in professional services
revenues. Professional services expense, on a pro forma basis, represented
84% of the pro forma professional services revenues for the three and nine
months ended April 30, 1997, and 75% for the three and nine months ended
April 30, 1998, respectively. The decrease in cost as a percentage of pro
forma professional services revenues was primarily due to economies of scale
of the expanded operations and the generation of a smaller percentage of
business through third-party distributors.
13
<PAGE>
PRODUCT DEVELOPMENT AND SUPPORT EXPENSE
For the three and nine months ended April 30, 1998, product development and
support expense increased 42% and 30%, respectively, from the pro forma
expense of the prior year periods. As a percent of pro forma revenues,
product development and support expense increased from 18% to 21% for the
three months ended April 30, 1998 and increased from 17% to 19% for the nine
months ended April 30, 1998. The combined companies continued to commit
significant resources to development efforts, including the integration of
existing products with the Internet to provide an enterprise-wide Internet
solution, further development of systems for use in industries such as
utility and financial services, and development of new software products
utilizing object-oriented technology.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
For the three months ended April 30, 1998, selling, general and
administrative expense increased 3% compared to pro forma expense of the
prior year period, mainly due to an increase in bad debt expense as the
Company increased the allowance for doubtful accounts to reserve for
potentially uncollectible PMSC-related receivables. For the nine months ended
April 30, 1998, this expense decreased 4% mainly as a result of the
elimination of certain financial and executive level personnel as a result of
the Merger, partially offset by an increase in bad debt expense. As a
percentage of pro forma revenues, selling, general, and administrative
expense decreased from 32% to 27% for the three months ended April 30, 1998,
and from 32% to 26% for the nine months ended April 30, 1998.
PROVISION FOR INCOME TAXES
Effective tax rates for the three and nine months ended April 30, 1998 were
41% and 40%, respectively, and pro forma effective tax rates were 37% and 43%
for the three and nine months ended April 30, 1997, respectively. These rates
differ from the federal statutory rate primarily because a portion of
goodwill amortization is not deductible for federal income tax purposes.
NET INCOME
For the three and nine months ended April 30, 1998, net income increased 150%
and 124%, respectively, compared to prior year pro forma net income due to
the increase in revenue, partially offset with an increase in expense.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1998, the Company's principal sources of liquidity consisted of
cash and cash equivalents of $15.6 million. The Company completed an IPO in
the form of a rights offering to 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.
There were no borrowings under the Company's $10.0 million revolving credit
facility at April 30, 1998.
Cash and cash equivalents for the nine months ended April 30, 1998 increased
$12.7 million due primarily to the receipt of IPO proceeds offset by
repayment of outstanding debt. Cash flows provided by operating activities
were $7.3 million as the result of profitable operations and various other
cash and non-cash operating activities. Cash flows from investing activities
used $1.7 million in cash primarily for development of software and purchase
of fixed assets. Cash flows from financing activities provided $7.1 million
as the result of the receipt of IPO proceeds which were partially offset by
repayment of debt.
14
<PAGE>
Working capital was $13.5 million at April 30, 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. The 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 April 30, 1998. The remaining
$6.5 million bears interest at the bank's prime rate of 8.50% as of April 30,
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 $3.5
million portion of the credit facility is due and payable in March 1999. At
April 30, 1998, there were no borrowings under this credit facility.
The Company's liquidity needs will 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 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 at least twelve
months.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1997, the FASB issued pronouncements relating to the presentation and
disclosure of information related to the Company's capital structure,
comprehensive income and segment data. The Company is required to adopt the
provisions relating to capital structure for the year ending July 31, 1998,
if applicable, and the provisions of the other pronouncements, if applicable,
for the year ending July 31, 1999. The adoption of these pronouncements will
not have an impact on the Company's financial position and results of
operations but may change the presentation of certain of the Company's
financial statements and related notes and data thereto.
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2")
that supersedes Statement of Position No. 91-1, "Software Revenue
Recognition". SOP 97-2 is effective for transactions entered into in fiscal
years beginning after December 15, 1997. The Company believes the adoption of
this statement will not have a material effect on the Company's financial
position or results of operations.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On March 31, 1998, the Company closed the acquisition of the
capital stock of EZPower and Maitland. The Company issued an
aggregate of 650,000 shares of its Common Stock as partial
consideration for the EZPower acquisition. The Company issued
170,000 shares of its Common Stock as consideration for the
Maitland acquisition, although the Company has the right to
repurchase up to 100,000 of those shares based upon cumulative
licensing and maintenance revenues of Maitland's software product
for the 42 months ending July 31, 2001. The issuance of the
Company's shares of Common Stock was exempt from registration
under the Securities Act of 1933 pursuant to Section 4(2)
thereof.
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27. Financial Data Schedule (for EDGAR filing purposes only).
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed by the Registrant during
the three months ended April 30, 1998.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DocuCorp International, Inc.
- -------------------------------------
(Registrant)
/s/ Todd Rognes Date: June 15, 1998
- ------------------------------------- --------------------
Senior Vice President, Finance
(Duly Authorized Officer and Principal Financial Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> APR-30-1998
<CASH> 15,592,699
<SECURITIES> 0
<RECEIVABLES> 11,369,589
<ALLOWANCES> 1,050,000
<INVENTORY> 0
<CURRENT-ASSETS> 28,053,232
<PP&E> 5,821,155
<DEPRECIATION> 2,956,760
<TOTAL-ASSETS> 51,711,751
<CURRENT-LIABILITIES> 14,534,656
<BONDS> 0
0
0
<COMMON> 163,802
<OTHER-SE> 36,319,588
<TOTAL-LIABILITY-AND-EQUITY> 51,711,751
<SALES> 14,359,239
<TOTAL-REVENUES> 33,355,090
<CGS> 6,363,158
<TOTAL-COSTS> 29,179,893
<OTHER-EXPENSES> 339,977
<LOSS-PROVISION> 503,806
<INTEREST-EXPENSE> 425,061
<INCOME-PRETAX> 3,835,220
<INCOME-TAX> 1,537,000
<INCOME-CONTINUING> 2,298,220
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,298,220
<EPS-PRIMARY> .20
<EPS-DILUTED> .17
</TABLE>
