##### Table of Contents



FORM 10-Q
 UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For Quarter Ended: January 31, 2006
 Commission File Number: 000-23829
 DOCUCORP INTERNATIONAL, INC.
 
  Delaware
    
    75-2690838(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    identification number)
 5400 LBJ Freeway, Suite 300, Dallas, Texas
    
    75240(Address of principal executive offices)
    
    (Zip Code)
  
   
  þ o
  o þ o
 o þ




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##### 



Docucorp International, Inc.
Table of Contents
Quarterly Report on Form 10-Q
January 31, 2006
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of January 31, 2006 and July 31,
2005 `
    
    
    2Interim Consolidated Statements of Operations and Comprehensive
Income for the three and six months ended January 31, 2006 and
2005
    
    
    3Interim Consolidated Statements of Cash Flows for the six months
ended January 31, 2006 and 2005
    
    
    4Notes to Interim Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    24PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25Item 6. Exhibits
    
    
    25Signatures
    
    
    26Certification Pursuant to Rule 13a-14(a)Certification Pursuant to Rule 13a-14(a)Certification Pursuant to 18 U.S.C. Section 1350




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##### Table of Contents



Docucorp International, Inc.
 
 Consolidated Balance Sheets
 (In thousands except share and per share amounts)
 (Unaudited)
 January 31,
    
    
    July 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    11,035
    
    
    $
    8,381Accounts receivable, net of allowance
of $377 and $293, respectively
    
    
    17,350
    
    
    
    17,132Current portion of deferred taxes
    
    
    170
    
    
    
    170Income tax receivable
    
    
    248
    
    
    
    248Other current assets
    
    
    2,368
    
    
    
    2,559Total current assets
    
    
    31,171
    
    
    
    28,490Property and equipment, net of accumulated depreciation
of $22,113 and $20,122, respectively
    
    
    9,506
    
    
    
    10,261Software development costs, net of accumulated
amortization of $28,028 and $25,909, respectively
    
    
    13,983
    
    
    
    13,687Goodwill
    
    
    9,842
    
    
    
    9,842Identifiable intangibles, net of accumulated amortization
of $207 and $113, respectively
    
    
    813
    
    
    
    907Other assets
    
    
    439
    
    
    
    448Total assets
    
    $
    65,754
    
    
    $
    63,635Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    3,506
    
    
    $
    2,423Accrued liabilities:Accrued compensation
    
    
    3,533
    
    
    
    3,067Other
    
    
    1,413
    
    
    
    1,491Income taxes payable
    
    
    287
    
    
    
    403Current portion of lease obligations
    
    
    1,450
    
    
    
    1,459Current portion of long-term debt
    
    
    3,619
    
    
    
    3,617Deferred revenue
    
    
    11,970
    
    
    
    11,479Total current liabilities
    
    
    25,778
    
    
    
    23,939Deferred taxes
    
    
    5,271
    
    
    
    5,178Long-term lease obligations
    
    
    1,555
    
    
    
    2,303Long-term debt
    
    
    1,652
    
    
    
    3,462Other long-term liabilities
    
    
    1,452
    
    
    
    1,224Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value, 1,000,000 shares
authorized; none issued
    
    
    0
    
    
    
    0Common stock, $0.01 par value, 50,000,000 shares
authorized; 16,593,849 shares issued
    
    
    166
    
    
    
    166Additional paid-in capital
    
    
    48,116
    
    
    
    48,035Treasury stock at cost, 5,234,373 and 5,458,912 shares, respectively
    
    
    (29,098
    )
    
    
    (30,347
    )Retained earnings
    
    
    13,991
    
    
    
    12,268Unearned compensation
    
    
    (2,636
    )
    
    
    (2,100
    )Foreign currency translation adjustment
    
    
    (493
    )
    
    
    (493
    )Total stockholders equity
    
    
    30,046
    
    
    
    27,529Total liabilities and stockholders equity
    
    $
    65,754
    
    
    $
    63,635
 See accompanying notes to interim consolidated financial statements.
 2




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Docucorp International, Inc.
 
 Interim Consolidated Statements of Operations and Comprehensive Income
 (In thousands except per share amounts)
 (Unaudited)
 Three months ended
    
    
    Six months endedJanuary 31,
    
    
    January 31,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenuesASP hosting
    
    $
    8,907
    
    
    $
    7,541
    
    
    $
    16,955
    
    
    $
    13,591Professional services
    
    
    5,461
    
    
    
    5,573
    
    
    
    10,833
    
    
    
    10,981License
    
    
    2,491
    
    
    
    1,702
    
    
    
    4,526
    
    
    
    4,671Maintenance
    
    
    5,564
    
    
    
    5,479
    
    
    
    10,927
    
    
    
    10,717Total revenues
    
    
    22,423
    
    
    
    20,295
    
    
    
    43,241
    
    
    
    39,960Cost of revenuesASP hosting
    
    
    7,746
    
    
    
    6,730
    
    
    
    15,106
    
    
    
    11,767Professional services
    
    
    4,254
    
    
    
    4,153
    
    
    
    8,387
    
    
    
    8,332License
    
    
    1,153
    
    
    
    1,017
    
    
    
    2,327
    
    
    
    1,958Maintenance
    
    
    341
    
    
    
    382
    
    
    
    701
    
    
    
    727Total cost of revenues
    
    
    13,494
    
    
    
    12,282
    
    
    
    26,521
    
    
    
    22,784Gross profit
    
    
    8,929
    
    
    
    8,013
    
    
    
    16,720
    
    
    
    17,176Operating expensesProduct development
    
    
    2,306
    
    
    
    2,220
    
    
    
    4,499
    
    
    
    4,224Sales and marketing
    
    
    2,717
    
    
    
    2,878
    
    
    
    5,286
    
    
    
    5,777General and administrative
    
    
    2,011
    
    
    
    2,063
    
    
    
    4,166
    
    
    
    4,002Total operating expenses
    
    
    7,034
    
    
    
    7,161
    
    
    
    13,951
    
    
    
    14,003Income from operations
    
    
    1,895
    
    
    
    852
    
    
    
    2,769
    
    
    
    3,173Interest expense
    
    
    (99
    )
    
    
    (172
    )
    
    
    (211
    )
    
    
    (323
    )Other income, net
    
    
    72
    
    
    
    125
    
    
    
    177
    
    
    
    244Income before income taxes
    
    
    1,868
    
    
    
    805
    
    
    
    2,735
    
    
    
    3,094Provision for income taxes
    
    
    691
    
    
    
    309
    
    
    
    1,012
    
    
    
    1,191Net income
    
    $
    1,177
    
    
    $
    496
    
    
    $
    1,723
    
    
    $
    1,903Other comprehensive income:Foreign currency translation adjustment, net of tax
    
    
    0
    
    
    
    (45
    )
    
    
    0
    
    
    
    (56
    )Comprehensive income
    
    $
    1,177
    
    
    $
    451
    
    
    $
    1,723
    
    
    $
    1,847Basic net income per share
    
    $
    0.11
    
    
    $
    0.05
    
    
    $
    0.16
    
    
    $
    0.18Weighted average basic shares outstanding
    
    
    10,974
    
    
    
    10,580
    
    
    
    10,937
    
    
    
    10,543Diluted net income per share
    
    $
    0.10
    
    
    $
    0.04
    
    
    $
    0.15
    
    
    $
    0.17Weighted average diluted shares outstanding
    
    
    11,506
    
    
    
    11,626
    
    
    
    11,505
    
    
    
    11,531
 See accompanying notes to interim consolidated financial statements.
 3




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Docucorp International, Inc.
 
 Interim Consolidated Statements of Cash Flows
 (In thousands)
 (Unaudited)
 Six months endedJanuary 31,2006
    
    
    2005Cash flows from operating activitiesNet income
    
    $
    1,723
    
    
    $
    1,903Adjustments to reconcile net income to
net cash provided by operating activities:Stock-based compensation expense
    
    
    336
    
    
    
    163Depreciation and amortization
    
    
    2,133
    
    
    
    2,001Amortization of capitalized software
    
    
    2,119
    
    
    
    1,787Gain on foreign currency
    
    
    (13
    )
    
    
    (111
    )Provision for doubtful accounts
    
    
    62
    
    
    
    145Deferred income taxes
    
    
    73
    
    
    
    0Tax benefit related to stock option exercises
    
    
    (110
    )
    
    
    292Changes in assets and liabilities:Increase in accounts receivable
    
    
    (270
    )
    
    
    (1,596
    )Decrease in other assets
    
    
    201
    
    
    
    634Increase (decrease) in accounts payable
    
    
    1,081
    
    
    
    (1,064
    )Increase in accrued liabilities
    
    
    382
    
    
    
    852Increase (decrease) in income taxes payable
    
    
    (6
    )
    
    
    899Increase (decrease) in deferred revenue
    
    
    487
    
    
    
    (983
    )Increase (decrease) in other liabilities
    
    
    227
    
    
    
    (125
    )Total adjustments
    
    
    6,702
    
    
    
    2,894Net cash provided by operating activities
    
    
    8,425
    
    
    
    4,797Cash flows from investing activitiesPurchase of Newbridge
    
    
    0
    
    
    
    (2,495
    )Proceeds from the sale of property and equipment
    
    
    70
    
    
    
    0Purchase of property and equipment
    
    
    (1,351
    )
    
    
    (911
    )Capitalized software development costs
    
    
    (2,415
    )
    
    
    (2,748
    )Net cash used in investing activities
    
    
    (3,696
    )
    
    
    (6,154
    )Cash flows from financing activitiesPrincipal payments under capital lease obligations
    
    
    (755
    )
    
    
    (557
    )Principal payments under debt obligations
    
    
    (1,808
    )
    
    
    (2,975
    )Tax benefit related to stock option exercises
    
    
    110
    
    
    
    0Proceeds from exercise of stock options
    
    
    317
    
    
    
    338Proceeds from stock issued under Employee Stock Purchase Plan
    
    
    51
    
    
    
    102Net cash used in financing activities
    
    
    (2,085
    )
    
    
    (3,092
    )Effect of exchange rates on cash flows
    
    
    10
    
    
    
    (1
    )Net increase (decrease) in cash and cash equivalents
    
    
    2,654
    
    
    
    (4,450
    )Cash and cash equivalents at beginning of period
    
    
    8,381
    
    
    
    12,336Cash and cash equivalents at end of period
    
    $
    11,035
    
    
    $
    7,886
 See accompanying notes to interim consolidated financial statements.
 4




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Docucorp International, Inc.
 
 Notes to Interim Consolidated Financial Statements
 (Unaudited)
 Note 1  Basis of presentation and summary of significant accounting policies
  Revenue recognition
     5




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)
    Cash equivalents
  Accounts receivable
  Allowance for doubtful accounts
  Property and equipment, depreciation and amortization
 6




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)
  Leasehold improvements
    
    Lesser of useful life or life of leaseComputer equipment
    
    4-5 yearsFurniture and fixtures
    
    5 yearsEquipment under capital leases
    
    Lesser of useful life or life of lease
  Software development costs
  Business combinations and goodwill and intangible assets
   7




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)
  Impairment of long-lived assets
  Deferred revenue
  Guarantees
    Translation of foreign currencies
 8




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)
   Income taxes
  Net income per share
  Three months ended
    
    
    Six months endedJanuary 31,
    
    
    January 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Shares used in computing basic
net income per share
    
    
    10,974
    
    
    
    10,580
    
    
    
    10,937
    
    
    
    10,543Dilutive effect of stock options
and unvested restricted stock
    
    
    532
    
    
    
    1,046
    
    
    
    568
    
    
    
    988Shares used in computing diluted
net income per share
    
    
    11,506
    
    
    
    11,626
    
    
    
    11,505
    
    
    
    11,531
  9




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)
  Stock-based compensation
   Three months ended
    
    
    Six months endedJanuary 31, 2005
    
    
    January 31, 2005Net income as reported
    
    $
    496
    
    
    $
    1,903Less,
stock-based
compensation
expense under
fair value
based methods,
net of tax
benefit of $125
and $252,
respectively
    
    
    (201
    )
    
    
    (402
    )Pro forma net income
    
    $
    295
    
    
    $
    1,501Net income per share:As reportedBasic
    
    $
    0.05
    
    
    $
    0.18Diluted
    
    $
    0.04
    
    
    $
    0.17Pro formaBasic
    
    $
    0.03
    
    
    $
    0.14Diluted
    
    $
    0.03
    
    
    $
    0.13
  10




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)
  Management estimates
  Advertising costs
  Royalty costs
  Recently issued accounting guidance
   Note 2  Business segments
 11




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)
  Three months ended
    
    
    Six months endedJanuary 31,
    
    
    January 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Software
    
    $
    13,516
    
    
    $
    12,754
    
    
    $
    26,286
    
    
    $
    26,369ASP hosting
    
    
    8,907
    
    
    
    7,541
    
    
    
    16,955
    
    
    
    13,591Total revenues
    
    $
    22,423
    
    
    $
    20,295
    
    
    $
    43,241
    
    
    $
    39,960Software gross profit, net of
product development costs
    
    $
    5,462
    
    
    $
    4,982
    
    
    $
    10,372
    
    
    $
    11,128ASP hosting gross profit
    
    
    1,161
    
    
    
    811
    
    
    
    1,849
    
    
    
    1,824Sales and marketing
    
    
    (2,717
    )
    
    
    (2,878
    )
    
    
    (5,286
    )
    
    
    (5,777
    )General and administrative
    
    
    (2,011
    )
    
    
    (2,063
    )
    
    
    (4,166
    )
    
    
    (4,002
    )Total operating income
    
    $
    1,895
    
    
    $
    852
    
    
    $
    2,769
    
    
    $
    3,173
 Note 3
 Commitments and contingencies
   Note 4
 Subsequent event
  12




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)
  13




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Certain information contained herein may include forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. All statements, other than statements of historical facts included in
this Form 10-Q, are forward-looking statements. Such statements are subject to certain risks and
uncertainties, which include, but are not limited to, the economy, dependence upon the insurance
and utilities industries, technological advances, attraction and retention of technical employees,
effect of business acquisitions, fluctuations in operating results and the other risk factors and
cautionary statements included from time to time in the Companys periodic reports filed with the
Securities and Exchange Commission. All forward-looking statements included in this Form 10-Q and
all subsequent oral forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by these cautionary statements.
 Overview
       14




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Critical Accounting Policies and Estimates
  Revenue recognition
   15




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Allowance for doubtful accounts
  Software development costs
  16




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Business combinations
  Valuation of long-lived and intangible assets and goodwill
  Deferred taxes and valuation allowance
  Translation of foreign currency
   17




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Historical Operating Results
  Three months ended
    
    Six months endedJanuary 31,
    
    January 31,2006
    
    2005
    
    2006
    
    2005RevenuesASP hosting
    
    
    40
    %
    
    
    37
    %
    
    
    39
    %
    
    
    34
    %Professional services
    
    
    24
    
    
    
    28
    
    
    
    25
    
    
    
    27License
    
    
    11
    
    
    
    8
    
    
    
    11
    
    
    
    12Maintenance
    
    
    25
    
    
    
    27
    
    
    
    25
    
    
    
    27Total revenues
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Cost of revenuesASP hosting
    
    
    35
    
    
    
    33
    
    
    
    35
    
    
    
    29Professional services
    
    
    19
    
    
    
    21
    
    
    
    19
    
    
    
    21License
    
    
    5
    
    
    
    5
    
    
    
    5
    
    
    
    5Maintenance
    
    
    1
    
    
    
    2
    
    
    
    2
    
    
    
    2Total cost of revenues
    
    
    60
    
    
    
    61
    
    
    
    61
    
    
    
    57Gross Profit
    
    
    40
    
    
    
    39
    
    
    
    39
    
    
    
    43Operating expensesProduct development
    
    
    10
    
    
    
    11
    
    
    
    10
    
    
    
    11Sales and marketing
    
    
    12
    
    
    
    14
    
    
    
    12
    
    
    
    14General and administrative
    
    
    9
    
    
    
    10
    
    
    
    10
    
    
    
    10Total operating expenses
    
    
    31
    
    
    
    35
    
    
    
    32
    
    
    
    35Operating income
    
    
    9
    
    
    
    4
    
    
    
    6
    
    
    
    8Interest expense
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )Other income, net
    
    
    0
    
    
    
    1
    
    
    
    1
    
    
    
    1Income before income taxes
    
    
    8
    
    
    
    4
    
    
    
    6
    
    
    
    8Provision for income taxes
    
    
    3
    
    
    
    2
    
    
    
    2
    
    
    
    3Net income
    
    
    5
    %
    
    
    2
    %
    
    
    4
    %
    
    
    5
    %
 Comparative analysis of results for the three and six months ended January 31, 2006 and 2005
 Revenues
  18




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Three months ended
    
    
    Six months endedJanuary 31,
    
    
    January 31,2006
    
    
    2005
    
    
    % change
    
    
    2006
    
    
    2005
    
    
    % changeASP hosting
    
    $
    8,907
    
    
    $
    7,541
    
    
    
    18
    %
    
    $
    16,955
    
    
    $
    13,591
    
    
    
    25
    %Professional services
    
    
    5,461
    
    
    
    5,573
    
    
    
    (2
    )
    
    
    10,833
    
    
    
    10,981
    
    
    
    (1
    )License
    
    
    2,491
    
    
    
    1,702
    
    
    
    46
    
    
    
    4,526
    
    
    
    4,671
    
    
    
    (3
    )Maintenance
    
    
    5,563
    
    
    
    5,479
    
    
    
    2
    
    
    
    10,927
    
    
    
    10,717
    
    
    
    2Total revenues
    
    $
    22,423
    
    
    $
    20,295
    
    
    
    10
    %
    
    $
    43,241
    
    
    $
    39,960
    
    
    
    8
    %
  Cost of revenues
  Three months ended
    
    
    Six months endedJanuary 31,
    
    
    January 31,2006
    
    
    2005
    
    
    % change
    
    
    2006
    
    
    2005
    
    
    % changeASP hosting
    
    $
    7,746
    
    
    $
    6,730
    
    
    
    15
    %
    
    $
    15,106
    
    
    $
    11,767
    
    
    
    28
    %Professional services
    
    
    4,254
    
    
    
    4,153
    
    
    
    2
    
    
    
    8,387
    
    
    
    8,332
    
    
    
    1License
    
    
    1,153
    
    
    
    1,017
    
    
    
    13
    
    
    
    2,327
    
    
    
    1,958
    
    
    
    19Maintenance
    
    
    341
    
    
    
    382
    
    
    
    (11
    )
    
    
    701
    
    
    
    727
    
    
    
    (4
    )Total cost of revenues
    
    $
    13,494
    
    
    $
    12,282
    
    
    
    10
    %
    
    $
    26,521
    
    
    $
    22,784
    
    
    
    16
    %
 Cost of ASP hosting revenue.
 Cost of professional services revenue.
 19




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Cost of license revenue.
 Cost of maintenance revenue.
 Operating expenses
  Three months ended
    
    
    Six months endedJanuary 31,
    
    
    January 31,2006
    
    
    2005
    
    
    % change
    
    
    2006
    
    
    2005
    
    
    % changeProduct development
    
    $
    2,306
    
    
    $
    2,220
    
    
    
    4
    %
    
    $
    4,499
    
    
    $
    4,224
    
    
    
    7
    %Sales and marketing
    
    
    2,717
    
    
    
    2,878
    
    
    
    (6
    )
    
    
    5,286
    
    
    
    5,777
    
    
    
    (8
    )General and administrative
    
    
    2,011
    
    
    
    2,063
    
    
    
    (3
    )
    
    
    4,166
    
    
    
    4,002
    
    
    
    4Total operating expenses
    
    $
    7,034
    
    
    $
    7,161
    
    
    
    (2
    )%
    
    $
    13,951
    
    
    $
    14,003
    
    
    
    0
    %
 Product development.
 Sales and marketing
 General and administrative
 20




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##### Table of Contents



Interest expense
  Other income, net
  Provision for income taxes
    Liquidity and Capital Resources
   21




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##### Table of Contents



22




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##### Table of Contents



Recently issued accounting guidance
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
    23




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures
  Internal control over financial reporting
  24




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
   For
    
    Against
    
    WithheldMilledge A. Hart, III
    
    
    9,980,457
    
    
    
    1,624
    
    
    
    443,746Michael D. Andereck
    
    
    9,981,221
    
    
    
    860
    
    
    
    443,746Anshoo S. Gupta
    
    
    9,977,721
    
    
    
    4,360
    
    
    
    443,746John D. Loewenberg
    
    
    9,980,681
    
    
    
    1,400
    
    
    
    443,746George F. Raymond
    
    
    9,951,049
    
    
    
    31,032
    
    
    
    443,746Arthur R. Spector
    
    
    9,977,197
    
    
    
    4,884
    
    
    
    443,746
 
 Item 6. Exhibits
 31.1 
    
    Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.
 31.2 
    
    Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.
 32.1 
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes  Oxley Act of 2002.
 25




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##### Table of Contents



SIGNATURES
  Docucorp International, Inc.
 /s/ Michael D. Andereck
    
    
    
    Date March 10, 2006Michael D. Andereck
President and Chief Executive Officer
 26