Item 1. Business
General
DocuCorp International, Inc. ("DocuCorp" or the "Company") develops, markets, and supports a portfolio of Internet and print, enterprise-wide software products that enable users to acquire, manage, personalize, and present information. In addition, the Company provides application service provider ("ASP") hosting of Internet-enabled solutions, consulting, application integration, and training through a 190-person service organization. ASP hosting is performed using the Company's software and facilities to provide processing, print, mail, archival, and Internet delivery of documents for customers who outsource this activity.
The Company was organized in connection with the May 15, 1997 acquisition of FormMaker Software, Inc. ("FormMaker") by Image Sciences, Inc. ("Image Sciences") (the "Merger").
DocuCorp software products support leading hardware platforms, operating systems, printers, and imaging systems. These products are designed to personalize, produce, and manage documents such as insurance policies, utility statements, telephone bills, bank and mutual fund statements, invoices, direct mail correspondence, bills of lading, and other customer-oriented documents. The Company's ASP offerings include customer statement and bill generation, electronic bill presentment and payment, insurance policy production, and electronic document archival. The Company currently has an installed base of approximately 900 customers. The Company believes it is the leading provider of information solution software and services for the insurance industry to customers including Prudential Insurance Company of America, Lumbermans Mutual Casualty Company, and American International Group (AIG). More than half of the 200 largest North American insurance companies use the Company's software products and services, including eight of the ten largest life and health insurance companies and nine of the ten largest property and casualty insurance companies. The Company believes it has also become a leading provider of software solutions and services for companies in the utilities industry. Key utilities customers include Southern Company Services, Inc. and Consolidated Edison of New York, Inc. The Company also has customers in the financial services, higher education, telecommunications, and transportation industries, including American Express Services Europe Limited, The University of Texas, Nortel Northern Telecom, Inc., and Yellow Services, Inc.
Document Automation Industry
Information is critical to corporations as they endeavor to increase revenue, improve customer service, and reduce costs. Companies can increase revenue by using document automation to produce high-volume, one-to-one documents such as customer statements that cross-sell additional products and services. Document automation enables companies to provide better customer service by:
o creating more attractive, easier to read documents,
o increasing accuracy,
o minimizing the time it takes to produce and deliver documents, and
o providing customer service personnel with immediate access to the electronically archived information.
At the same time, document automation reduces the cost of personnel, printing, and storage.
Certain trends have accelerated the growth of the document automation industry. Deregulation of industries such as insurance, utilities, and financial services has resulted in increased competition and caused participants in such industries to focus more closely on customer service. This has increased the demand to create one-to-one documents personalized to each customer with more visual appeal. Rapid technological advances such as client/server architecture and the Internet, adoption of Microsoft's WindowsNT, Active-X, and ODBC, emergence of Sun Microsystems' Solaris and Java, and the evolving XML standard have expanded the benefits that businesses can derive from document automation. Additionally, the emergence of call centers has increased the demand for access to and automation of customer communications. As a result, an increasing number of companies are employing innovative comprehensive information presentment processes.
The same advances that have enhanced the benefits of document automation, however, have rendered the development and implementation of document automation products increasingly complex. As a consequence, businesses are increasingly outsourcing some of their document automation requirements to skilled and experienced providers such as the Company.
The Document Life Cycle
The Company believes that the life cycle of a document is divided into three general phases (creation, publishing, and archival), linked together by document management software. The Company believes that its expertise in all phases of the document life cycle constitutes an important competitive advantage.
Creation
In this phase of the life cycle, documents are rendered in a digital form. Documents can be created by using word processing software packages or tools such as Microsoft Word, Elixir, and Corel that have been designed specifically to facilitate the composition of commonly used documents such as letters and forms. Today, documents are created by employees throughout an organization from the central or home office, in branch offices, or in remote locations.
Alternatively, existing paper documents that were created on a typewriter or other non-electronic source or that came into the organization from third-parties can be input into the organization's computer network by means of scanning devices. Scanning devices convert paper documents into a digitized format. Scanned documents are generally stored and managed separately from documents created by word processors or other internal applications, principally because their formats are different. The Company's products create forms from both of these sources.
Once a document is in digital form, it is then readily available for common applications such as transmission over E-mail, storage on local computers, printing on desktop printers, and distributing via other communication technologies, including the Internet. Documents vary significantly in complexity, ranging from simple letters or forms to multi-page forms, brochures or booklets containing text, charts, and statistical tables requiring sophisticated pagination. The digitized form can also be used for more complex, high-volume publishing applications such as insurance policies and billing statements. The Company's products create or prepare digitized forms that can accept variable data and output to high-speed printers or the Internet.
Publishing
In this phase of the life cycle, appropriate digital data and forms are selected from multiple sources and formats. The information is dynamically assembled into complex documents. Variable data is integrated through software to produce individualized documents which are then simultaneously printed or digitally prepared for customer distribution and archived as corporate assets for future use. The Company focuses its publishing software products and services exclusively on these individualized and high-volume publishing activities. While the basic logistical procedures are generally similar in every publishing activity, in individualized and high-volume publishing activities, software is required to coordinate large amounts of variable information such as customer name, transaction history, and dynamically generated graphs. The Company has developed software logic that allows its products to attain what it believes to be one of the highest volume capabilities available in the market today.
Archival
In the archival phase of the life cycle, the document is stored in either a digitized or electronic print format for future use. Documents and information are presented most efficiently through software to storage devices that range in their sophistication from local computer disk drives to complex computer storage equipment having varying capacity and data accessing capabilities. The Company has developed products that enable an organization to automatically index documents as they enter storage and place the documents in an archived format to permit expedient retrieval, viewing, and reprint. Furthermore, the Company's products accept data in both digital and print stream format, and support leading imaging systems such as FileNET and IBM's Visual Info. The Company's products also enable accessing these archives from a browser over the Internet.
Management Software
Underlying all three phases of the document life cycle is the requirement to manage the way in which documents and information move within the life cycle and the corporation. This is currently accomplished within organizations through various E-mail software products like Lotus cc:Mail, groupware like Lotus Notes by IBM, network software like Novell NetWare, document management software like Documentum, and workflow products like FileNET. Externally, organizations are increasingly using the Internet to transmit such correspondence. To date, these systems are primarily departmental in nature and are an incomplete way to manage enterprise-wide documents and publications. The Company currently provides products for document routing, network and host connectivity, and Internet access.
Growth Strategy
The Company's strategy for growth consists of the following:
Leveraging Existing Customer Relationships
The Company has an installed base of approximately 900 customers. Increasingly, the Company's customers are expanding or upgrading their information solutions, which provides a market for additional products and services from the Company. Most of the Company's large insurance customers originally licensed software, but contracted for few services. Since the Company now has a substantial professional services infrastructure, it anticipates that the existing customer base could be a significant source of future services revenues for the Company. Recently introduced and planned products and services can also be provided to the Company's current customers as follow-on sales.
Entering New Vertical Markets
The Company believes it is the leading provider of document automation software and services for the insurance industry and has become a leader in the utilities industry. The Company is targeting vertical market expansion in the financial services industry. Revenues from the financial services industry represented approximately 13% of the Company's business in fiscal 2000 compared to 3% in fiscal 1999. The financial services industry, like insurance and utilities, has an increasing need for individualized documents to be produced in very large volumes in order to communicate effectively with their customers.
Expanding Internationally
Approximately 8% of the Company's revenues came from customers outside of North America in fiscal 2000. DocuCorp plans to expand its international customer base primarily by cultivating and expanding its international distribution alliances and through direct sales. During fiscal 2000, the Company hired a General Manager to direct and grow its European operations. In addition, the Company opened a new office in London to serve as its European headquarters. The Company expanded its presence in the European financial services market and was awarded a significant contract from a major European financial services company. DocuCorp intends to continue increasing the number of sales and services professionals domiciled in Europe.
Developing and Enhancing New Technologies
The Company's product development efforts are focused on developing new products as well as enhancing and broadening its current software product offerings. New DocuCorp products and solutions will continue to emphasize state-of-the-art object-oriented technologies, WindowsNT platform development, and intranet/Internet capabilities and enablement. During fiscal year 2000, the Company introduced a new family of e-solution software products that speed business applications to the Internet, by enabling everything from filling out forms and publishing documents online to managing and viewing documents via the Internet. During fiscal 2001, the Company's product development efforts will include development of new Internet products and functionality, integration of existing products with the Internet to provide access to documents through the Internet, and further development of systems for use in vertical industries such as utilities and financial services.
Pursuing Acquisitions and Strategic Alliances
The Company intends to pursue acquisitions of other companies or technologies further expanding the Company's products, services, or market penetration. In addition, as the Company expands in its targeted vertical markets, the Company intends to enter into additional strategic alliances for sales and marketing in such markets. The Company believes that new technical skills, expanded product functionality, a broader client base, and an expanded geographic presence may result from these activities.
Expanding ASP Hosting Business
During fiscal 2000, the Company adopted an ASP business model which provides hosted software applications on a per transaction basis. The ASP model was a natural extension of the Company's outsourcing business. The Company's ASP offering allows customers to off-load applications and free up resources to concentrate on their core competencies and strategic projects. The ASP business model provides the Company with a rapidly growing source of recurring revenues. Also during the year, the Company opened a second ASP hosting center in Dallas, Texas which significantly expands its capacity and allows the Company to offer off-site backup and disaster recovery capabilities to its customers. The Company anticipates that ASP hosting services, both in print and delivery over the Internet, will be the fastest growing area of its business.
Products and Services
The Company offers a portfolio of scalable, high-performance document automation software products. The Company also has one of the largest professional services organizations in the industry, and the facilities to provide ASP hosting services using the Company's technology and expertise.
Document Automation Software
The Company offers document automation software products that enable customers to produce high-volume, individualized documents. The Company's software solutions include multi-platform, enterprise-wide processing products addressing each phase of the life cycle of a document. The Company's philosophy of open architecture and support of industry standards enables its customers to select software and hardware from other leading vendors and integrate them with DocuCorp products.
The Company's product lines have been organized into the following five primary categories.
DocuCorp Creation Solutions (DocuCreate)
With DocuCreate, document components (forms, graphs, charts, text) can be created either entirely with the Company's products or more typically by using other leading composition or word processing software, such as Microsoft Word, integrated with DocuCreate. The Company's open architecture supports a broad range of document creation solutions. The DocuCreate products run primarily on personal computers under Microsoft Windows. License revenues from the Company's software products in the Creation Solutions category accounted for approximately 16%, 10%, and 9% of the Company's total license revenues in fiscal 2000, 1999, and 1998, respectively.
DocuCorp Publishing Solutions (DocuMaker)
The DocuMaker products are designed to handle production of large volumes of documents, large numbers of forms, complex document assembly requirements, individualization of each document, multiple recipients with unique requirements, and interfacing with existing databases and application programs. DocuMaker RP has the flexibility to dynamically compose highly-tailored documents, each based on custom publishing rules such as unique pagination. Alternatively, the Company's DocuMaker FP product attains industry leading throughput by utilizing the Company's proprietary software logic encompassing print-ready images to be merged with variable data for high-volume complex documents like complete insurance policies. The DocuMaker products provide forms fill, data merge, document assembly, dynamic formatting and graph generation, centralized and decentralized printing on most leading laser printers, interactive and batch processing and electronic output, and a variety of other features and functions. The DocuMaker products run
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 52% of the Company's total license revenues in fiscal 2000 and 62% in both fiscal 1999 and 1998.
DocuCorp Archival Solutions (DocuSave)
The DocuSave product stores published documents electronically so that they can be viewed, used, and reused throughout the organization. Retrieval features enable immediate access to documents for applications like processing claims, referencing enterprise-wide legal or regulatory documentation, or speeding customer service operations at call centers. DocuSave can be implemented as a stand-alone system or integrated with leading imaging systems such as FileNET. DocuSave viewing software runs under Windows, and DocuSave server software runs on MVS, Microsoft WindowsNT, and UNIX. License revenues from the Company's software products in the Archival Solutions category accounted for approximately 12%, 19%, and 22% of the Company's total license revenues in fiscal 2000, 1999, and 1998, respectively.
DocuCorp Management Solutions (DocuManage)
The DocuManage product provides document management and document routing. As enterprises expand, there is a greater need for control over documents and the ability to move documents across the enterprise. License revenues from the Company's software products in the Management Solutions category accounted for approximately 12%, 9%, and 7% of the Company's total license revenues in fiscal 2000, 1999, and 1998, respectively.
DocuCorp Internet Solutions (e-Solutions)
During fiscal 2000, the Company introduced its new family of e-solution software products. These products make possible, via the Internet, anything from filling out forms and publishing information to managing and viewing documents and delivering and collection of payments. License revenues from the Company's Internet Solutions category accounted for approximately 6% of the Company's total license revenues in fiscal 2000.
As an additional service to its customers, the Company also provides the tools and utility programs to interface, maintain, and develop DocuCorp document automation implementations. The latest object-oriented technologies, including use of Active-X, Java, ODBC, and Visual Basic, make it easier to implement installations and interfaces. The Company has not generated, nor does it anticipate that it will generate, material revenues from these tools and utility programs.
Professional Services
The Company offers both document automation consulting and ASP hosting services to its customers. At July 31, 2000, the Company employed approximately 190 professional service personnel, which represents one of the largest services organizations in the document automation software industry. The Company's professional services personnel have experience across many industries and document automation applications.
Consulting
The Company offers a broad range of consulting services related to document automation. A majority of the Company's professional services consulting revenues are derived from implementation and integration of the Company's software products. The Company also derives professional services consulting revenues from education as well as training services and electronic document library development. The Company's professional services group works with clients to develop and define document automation strategies and to provide a complete package of software implementation services. Training classes are available to assist clients with implementing technology and applications. Training offerings are available in standardized and customized formats. A substantial majority of the Company's consulting services are related to DocuCorp Publishing Solutions. Consulting services accounted for approximately 36%, 41%, and 38% of the Company's total revenues in fiscal 2000, 1999, and 1998, respectively.
ASP Hosting
The Company offers ASP hosting which utilizes the Company's software to provide processing, print, mail, archival, and Internet delivery of documents for customers who outsource this activity. The Company operates ASP hosting centers in Atlanta and Dallas which, using data received electronically from customers, employs high-volume printers and mail handling equipment to produce insurance policies, utility statements and other customer mailings, and bundles the output for bulk mailings. ASP hosting accounted for approximately 18%, 12%, and 18% of the Company's total revenues in fiscal 2000, 1999 and 1998, respectively.
Product Development
The Company has made and expects to continue to make substantial investments in research and product development. During fiscal 2000, the Company introduced a new family of e-solution software products that speed business applications to the Internet, by enabling everything from filling out forms and publishing documents online to managing and viewing documents via the Internet. During fiscal 2001, the Company's product development efforts will include development of new Internet products and functionality, integration of existing products with the Internet to provide access to documents through the Internet, and further development of systems for use in vertical industries such as utilities and financial services.
The Company has committed substantial resources to product development. As of July 31, 2000, the Company employed approximately 95 technical personnel engaged in research and product development. The product development process is a cooperative effort between customers and the Company. Early review of functionality specifications, prototypes, and demonstrations allows for the incorporation of customer suggestions and comments in parallel with management review of the process internally. DocuCorp has a formal planning process for new software products as well as software upgrades and maintenance releases to ensure product quality, timeliness of releases, and meeting or exceeding customer expectations. In fiscal 2000, 1999, and 1998, the Company's software development expenditures were approximately $8.1 million, $7.5 million, and $6.7 million, respectively.
Sales and Marketing
General
The Company markets its products through various distribution channels, including direct sales, marketing alliances, and distributors. Its sales resources are organized based upon vertical industry markets. At July 31, 2000, the Company employed approximately 30 direct sales and sales support representatives who operate from Dallas, Atlanta, and London. Sales representatives are compensated principally on a commission basis.
The Company markets its products and services primarily through a direct sales force. Distributor relationships are established in the United States, Canada, Europe, South Africa, and Asia. The Company's most significant international distributor relationship is with MYND, formerly Policy Management Systems Corporation.
The Company intends to increase both its product offerings and vertical markets served through marketing, sales and distribution, and development relationships with other companies. Formal and informal marketing and sales partnerships currently exist with Xerox, Microsoft, ACORD Organization, MYND, FileNET Corporation, SCT Utility Systems, ORCOM Solutions, CheckFree, TransPoint, e-PROFILE, and Bowne. These relationships provide sales leads for the Company's products or provide access to certain technological information and resources.
The Company's customers generally license the Company's software products for an upfront license fee. Initial license fees typically range from $75,000 to $250,000. Most customers also enter into maintenance agreements with the Company, which typically provide for annual maintenance fees ranging from 15% to 30% of current license fees depending upon the customer group. Customers who enter into maintenance agreements are entitled to software upgrades, software problem resolutions, and use of the Company's "Hotline" providing technical assistance to the software user. The Company generally charges customers for consulting services on a time and materials basis, although certain service assignments are performed on a fixed charge basis. ASP hosting services are charged on a transaction fee basis.
Relationship with Third-Party Distributor
FormMaker historically distributed its line of DAP software products to the insurance industry in North America through an exclusive marketing agreement with MYND. Prior to the Merger, a substantial portion of the subsidiary's revenues were generated pursuant to this agreement. Additionally, the subsidiary granted MYND the exclusive right to market the DAP software in the property/casualty and life insurance industries. In September 1998, both parties agreed to terminate the exclusive marketing agreement and enter into a new, non-exclusive marketing agreement. The new marketing agreement between DocuCorp and MYND allows MYND to market all of the Company's software products to insurance and financial services companies worldwide. For the years ended July 31, 2000 and 1999, the Company generated revenues of approximately $2.8 million and $3.7 million through the MYND relationship, respectively.
Customers
The Company generally markets to large and mid-size organizations that have a need for integrated solutions for the high-volume production of individualized documents. Currently, the majority of the Company's revenues are generated from the insurance industry. Approximately 59% of the Company's total revenues for the year ended July 31, 2000 were derived from the insurance industry. Approximately 6% of total revenues for the year ended July 31, 2000 were derived from one customer, Prudential Insurance Company of America. Over half of the 200 largest North American insurance companies use the Company's products and services, including eight of the ten largest life and health insurance companies and nine of the ten largest property and casualty insurance companies. The Company believes it has the largest installed document automation customer base in the insurance industry. During fiscal 2000, two utilities companies in North America licensed the Company's products. Approximately 24% of the Company's total revenues for the year ended July 31, 2000 were derived from the utilities industry. In addition to the insurance and utilities industries, the Company is targeting vertical markets including the financial services, higher education, telecommunications, and transportation markets, in each of which industry customers have purchased and installed the Company's software. During the year ended July 31, 2000, approximately 13% of the Company's total revenues were derived from the financial services industry. Unlike many other software vendors, the Company's principal contact at customer organizations is generally not an MIS or information technology officer, but rather the customer service or marketing departments that will use the Company's products. As a result, the Company does not always compete with other technological priorities being considered by a customer's MIS department.
Set forth below is a representative list of customers of the Company in the various industries in which the Company markets its products and services:
Insurance
Prudential Insurance Company of America American International Group (AIG) Lumbermans Mutual Casualty Company
Utilities
Southern Company Services, Inc. Consolidated Edison of New York, Inc.
Financial Services
Royal Bank Financial Group ABN-AMRO Bank N.V.
Higher Education
The University of Texas San Francisco State University
Telecommunications
Polkomtel S.A. Nortel Northern Telecom, Inc.
Transportation
Yellow Services, Inc. Wisconsin Department of Transportation
Competition
The market for document automation products and services is intensely competitive, subject to rapid change, and significantly affected by new product introductions and other market activities of industry participants. The Company faces direct and indirect competition from a broad range of competitors, many of whom have greater financial, technical, and marketing resources than the Company. The Company's principal competition currently comes from (i) systems developed in-house by the internal MIS departments of large organizations, (ii) direct competition from numerous software vendors, including Cincom Systems, Inc., Document Sciences Corporation (which is majority owned by Xerox Corporation ("Xerox")), Group 1 Software, Inc., Mobius Management Systems, Inc., and Metaview, and (iii) direct competition from numerous outsourcing and ASP vendors, including Derivion, Xerox XBS, and OTS. The Company believes that the principal competitive factors in the document automation software market are product performance and functionality, ease of use, multi-platform offerings, product and company reputation, quality of customer support and service, and price. The degree of competition varies significantly with the stage of the document life cycle being addressed and by vertical market.
The Company may also face competition from new entrants into the document automation software industry. As the market for document automation software continues to develop, current or potential competitors with significantly greater resources than the Company could attempt to enter or increase their presence in the market either independently or by acquiring or forming strategic alliances with competitors of the Company or otherwise increase their focus on the industry. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third-parties to increase the ability of their products to address the needs of the Company's current and prospective customers.
Intellectual Property, Trademarks, and Proprietary Rights
The Company relies primarily on a combination of copyright, distribution software license agreements, trademark and trade secret laws, employee and third-party nondisclosure agreements, and other methods to safeguard its software products. Despite these precautions, it may be possible for unauthorized third-parties to copy certain portions of the Company's products or obtain and use information the Company regards as proprietary. While the Company's competitive position may be affected by its ability to protect its proprietary information, the Company believes that trademark and copyright protections are not material to the Company's success.
The Company's software products are licensed to end-users on a "right to use" basis pursuant to license agreements. Certain license provisions protecting against unauthorized use, copying, transfer, and disclosure of the licensed program may be unenforceable under the laws of certain jurisdictions and foreign countries. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States.
As the number of software products in the industry increases and the functionality of these products further overlaps, the Company believes that software programs will increasingly become subject to infringement claims. Third parties may assert infringement claims against the Company in the future with respect to current or future products, which could require the Company to enter into royalty arrangements or result in costly litigation.
The Company also relies on certain software that it licenses from third-parties, including software that is integrated with internally developed software and used in its products to perform key functions. These third-party software licenses may not continue to be available to the Company on commercially reasonable terms
and the related software may not continue to be appropriately supported, maintained or enhanced by the licensors. The loss of licenses to use, or the inability of licensors to support, maintain, and enhance, any of such software could result in increased costs, delays or reductions in product shipments until equivalent software could be developed or licensed and integrated.
Employees
As of July 31, 2000, the Company had approximately 360 employees, of which approximately 190 were engaged in professional services, 95 in product development and customer support, 30 in sales and marketing, and 45 in finance, administration, human resources, and internal systems support. The Company believes its future success will depend, in part, on its continued ability to attract and retain highly qualified personnel in a competitive market for experienced and talented software engineers and sales and marketing personnel. None of the Company's employees are represented by a labor union or subject to a collective bargaining agreement. The Company believes that its employee relations are good.
Forward-Looking Statements
This Annual Report on Form 10-K 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 59% and 71% of the Company's total revenues for the year ended July 31, 2000 and 1999, respectively, were derived from the insurance industry. Approximately 6% and 10% of total revenues in fiscal 2000 and 1999, respectively, were derived from one customer, Prudential Insurance Company of America. Additionally, approximately 24% and 23% of the Company's total revenues for the year ended July 31, 2000 and 1999, respectively, were derived from the utilities industry. The Company's continued financial performance and its future growth will depend upon its ability to continue to market its products successfully in the insurance and utilities industries and to enhance and market technologies for distribution in other markets. This will require the Company to make substantial product development and distribution channel investments. There can be no assurance that the Company will be able to continue marketing its products successfully in the insurance and utilities industries or will be able to successfully introduce new or existing products in markets other than the insurance and utilities industries.
Technological Advances
The document automation industry has experienced and will continue to experience rapid technological advances, changes in customer requirements, and frequent new product introductions and enhancements. Development in both software technology and hardware capability will require the Company to make substantial product development investments. Any failure by the Company to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction, could have a material adverse effect on the Company's results of operations. There can be no
assurance that the Company's new products or product enhancements intended to respond to technological change or evolving customer requirements will achieve acceptance.
Limited Experience in ASP Hosting Business
The Company recently adopted its ASP hosting business model and therefore has limited experience in offering this service. It is uncertain whether the Company's hosting services will achieve sufficient market acceptance for revenues from ASP hosting to materially increase. At the same time, the Company has opened two ASP hosting centers that will commit to a certain level of expenses regardless of whether revenue growth is achieved. As a result, the failure of the Company to increase ASP hosting revenues as anticipated may subject the Company to potential losses relating to this business model.
Attraction and Retention of Technical Employees
The Company believes that its future success will depend in large part upon its ability to attract, retain, and motivate highly skilled employees, particularly technical employees. The employees that are in highest demand are software programmers, software developers, application integrators, and information technology consultants. These employees are likely to remain a limited resource for the foreseeable future. There can be no assurance that the Company will be able to attract and retain sufficient numbers of highly skilled technical employees. The loss of a significant number of the Company's technical employees could have a material adverse effect on the Company.
Competition
The market for the Company's document automation products is intensely competitive. The Company faces competition from a broad range of competitors, many of whom have greater financial, technical, and marketing resources than the Company. The Company's principal competition currently comes from (i) systems developed in-house by the internal MIS departments of large organizations, (ii) direct competition from numerous software vendors, including Cincom Systems, Inc., Document Sciences Corporation, Group 1 Software, Inc., Mobius Management Systems, Inc., and Metaview, and (iii) direct competition form numerous outsourcing and ASP vendors, including Derivion, Xerox XBS, and OTS. There can be no assurance that the Company will be able to compete effectively with such entities.
Fluctuations in Operating Results
The Company has experienced, and may in the future continue to experience, fluctuations in its quarterly operating results due to the fact that sales cycles, from initial evaluation to purchase, vary substantially from customer to customer. Delays in the sales cycle frequently occur as a result of competition, changes in customer personnel, and overall budget and spending priorities. The Company has typically operated with little backlog for license revenues because software products generally are shipped soon after orders are received. As a result, license revenues in any quarter are substantially dependent on orders booked and shipped in that quarter. The delay of customer orders for a small number of licenses could adversely affect the license revenues for a given fiscal quarter. The Company has historically earned a substantial portion of its license revenues in the last weeks of any particular quarter, and has historically experienced its highest license revenues in the fourth quarter of its fiscal year. The failure to achieve such revenues in accordance with such trends could have a material adverse effect on the Company's financial results for each such interim period.
Risk of Software Defects
Complex software products such as those offered by the Company can contain undetected errors or performance problems. Such defects are most frequently found during the period immediately following introduction of new products or enhancements to existing products. The Company's products have from time to time contained software errors that were discovered after commercial introduction. There can be no assurance that performance problems or errors will not be discovered in the Company's products in the future. Any future software defects discovered after shipment of the Company's products, if material, could result in loss of revenues, delays in customer acceptance, or potential product liability.
Limited Protection of Intellectual Property Rights
The Company relies on a combination of copyright and trademark laws, employee and third-party nondisclosure agreements, and other methods to protect its proprietary rights. Despite these precautions, it may be possible for unauthorized third-parties to copy certain portions of its products or to obtain and use information that the Company regards as proprietary. There can be no assurance that the Company's efforts will provide meaningful protection for its proprietary technology against others who independently develop or otherwise acquire substantially equivalent techniques or gain access to, misappropriate, or disclose the Company's proprietary technology.
Dependence on Key Management Personnel
The Company believes that its continued success depends to a significant extent upon the efforts and abilities of its senior management. In particular, the loss of Michael D. Andereck, the Company's President and Chief Executive Officer, or any of the Company's other executive officers or senior managers could have a material adverse effect on the Company.
Item 2.
Item 2. Properties
The Company leases approximately 31,500 square feet of office space in Dallas, Texas for its corporate headquarters, including administrative, sales, marketing, services, and product development departments. This lease expires April 30, 2005.
The Company leases approximately 76,000 square feet of office space in Atlanta, Georgia which is utilized for administrative, sales, services, and product development departments. The lease for this space expires on December 31, 2002.
The Company leases space for an ASP hosting facility located in Atlanta, Georgia. This facility occupies approximately 19,000 square feet under a lease which expires on October 31, 2002, but may be terminated by the Company on October 31, 2000.
The Company leases space for an ASP hosting facility located in Dallas, Texas. This facility occupies approximately 28,700 square feet under a lease which expires on March 31, 2010, but may be terminated by the Company on March 31, 2007.
The Company's staff in Maryland is located in Silver Spring, Maryland. This facility occupies approximately 10,000 square feet under a lease which expires December 31, 2001.
The Company's staff in New Hampshire is located in a 5,700 square foot facility in Bedford, New Hampshire. The lease for this facility expires on December 31, 2004.
The Company leases space for its European sales and services staff in London, England. This facility occupies approximately 8,200 square feet under a lease which expires on September 27, 2013, but may be terminated by the Company on October 1, 2005.
Office space is also leased in Portland, Maine for product development activities.
The Company believes that its existing office facilities and additional space available to it are adequate to meet its requirements, and that in any event, suitable additional or alternative space adequate to serve the Company's foreseeable needs will be available on commercially reasonable terms.
Item 3.
Item 3. Legal Proceedings
The Company is involved in various claims and legal actions incidental to the normal conduct of its business. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of fiscal 2000.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has traded on the Nasdaq National Market under the symbol "DOCC" since April 6, 1998. At October 6, 2000 there were approximately 1,000 holders of record of the Company's Common Stock, although the Company believes that the number of beneficial owners of its Common Stock is substantially greater. The table below sets forth for the fiscal quarters indicated the high and low sales prices for the Company's Common Stock:
High Low ------- -------- Fiscal 2000: Fourth quarter ........................................ $5.38 $3.28 Third quarter ......................................... 7.97 4.33 Second quarter ........................................ 9.13 4.38 First quarter ......................................... 8.06 3.69
Fiscal 1999: Fourth quarter ........................................ $5.75 $4.03 Third quarter ......................................... 9.88 4.25 Second quarter ........................................ 6.25 3.88 First quarter ......................................... 6.50 2.25
The Company intends to retain any future earnings for use in its business and does not intend to pay cash dividends in the foreseeable future. The payment of future dividends, if any, will be at the discretion of the Company's Board of Directors and will depend, among other things, upon future earnings, operations, capital requirements, restrictions in future financing agreements, general financial condition of the Company, and general business conditions.
Item 6.
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data for the years ended July 31, 2000, 1999, 1998, 1997, and 1996 have been derived from the audited financial statements of the Company. The following data should be read in conjunction with, and are qualified by, reference to the Company's audited financial statements and the notes thereto, included elsewhere in this Form 10-K.
- ---------- * 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, $0.34, and 7,607, respectively.
Item 7.
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 2000 Annual Report to Stockholders, which information is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data
The information required by this item is set forth in the Company's 2000 Annual Report to Stockholders, which information is incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
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.
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. 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.
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.
Item 12.
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.
Item 13.
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.
PART IV
Item 14.
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, 2000 and 1999:
o Consolidated Balance Sheets
For the Years Ended July 31, 2000, 1999, and 1998:
o Consolidated Statements of Operations and Comprehensive Income
o Consolidated Statements of Cash Flows
o Consolidated Statements of Changes in Stockholders' Equity
o Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
o Report of Independent Accountants on Financial Statement Schedule
o Valuation and Qualifying Accounts
3. Exhibits:
See Exhibit Index beginning on page 25 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, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas.
DOCUCORP INTERNATIONAL, INC. (Registrant)
By: /s/ Michael D. Andereck ------------------------------------- Michael D. Andereck President, Chief Executive Officer and Director
Date: October 27, 2000 -----------------------------------
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of DocuCorp International, Inc., hereby severally constitute and appoint Michael D. Andereck, our true and lawful attorney, with full power to sign for us in our names in the capacities indicated below, amendments to this report, and generally to do all things in our names and on our behalf in such capacities to enable DocuCorp International, Inc. to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature and Title Date ---------------------------------- ---------
/s/ Michael D. Andereck October 27, 2000 - ------------------------------------------------- Michael D. Andereck President, Chief Executive Officer and Director (Principal Executive Officer and Principal Financial Officer)
/s/ Andrea L. Ungemach October 27, 2000 - ------------------------------------------------- Andrea L. Ungemach Corporate Controller (Principal Accounting Officer)
/s/ Milledge A. Hart, III October 27, 2000 - ------------------------------------------------- Milledge A. Hart, III Chairman of the Board
/s/ Anshoo S. Gupta October 27, 2000 - ------------------------------------------------- Anshoo S. Gupta Director
/s/ John D. Loewenberg October 27, 2000 - ------------------------------------------------- John D. Loewenberg Director
/s/ Warren V. Musser October 27, 2000 - ------------------------------------------------- Warren V. Musser Director
/s/ George F. Raymond October 27, 2000 - ------------------------------------------------- George F. Raymond Director
/s/ Arthur R. Spector October 27, 2000 - ------------------------------------------------- Arthur R. Spector Director
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Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors and Stockholders of DocuCorp International, Inc.
Our audits of the consolidated financial statements referred to in our report dated September 7, 2000 appearing in the 2000 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 Item 14(a) 2 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 7, 2000
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Valuation and Qualifying Accounts Years ended July 31, 2000, 1999, and 1998 Schedule II
- ---------- (a) Such amounts include balances assumed in the acquisition of FormMaker, EZPower, and Maitland. See Notes to Consolidated Financial Statements for further discussion.
(b) Such amounts relate to the utilization of the valuation and qualifying accounts for specific items for which they were established in the accounts receivable accounts.
(c) Such amounts relate to the tax benefit from utilization of net operating loss and reduction of the valuation allowance based on management's assessment of the likelihood of realizability of the loss carryforwards.
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INDEX TO EXHIBITS
Exhibit No. Description
3.1 Certificate of Incorporation. (filed as exhibit 3.1 to the Company's Registration Statement on Form S-4 No. 333-22225 and incorporated herein by reference)
3.2 Bylaws. (filed as exhibit 3.2 to the Company's Registration Statement on Form S-4 No. 333-22225 and incorporated herein by reference)
10.2 Employment Agreement between Michael D. Andereck and the Registrant dated January 15, 1997. (filed as exhibit 10.2 to the Company's Registration Statement on Form S-4 No. 333-22225 and incorporated herein by reference)
10.3 1997 Equity Compensation Plan. (filed as exhibit 10.3 to the Company's 1997 Annual Report on Form 10-K and incorporated herein by reference).
13.1* 2000 Annual Report to Stockholders.
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.
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