##### 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: October 31, 2005
    
    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
 þ o
 o o




---



Docucorp International, Inc.
Table of Contents
Quarterly Report on Form 10-Q
October 31, 2005
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of October 31, 2005 and July 31, 2005
    
    
    2Interim Consolidated Statements of Operations and Comprehensive Income for the three months ended October 31, 2005 and 2004
    
    
    3Interim Consolidated Statements of Cash Flows for the three months ended October 31, 2005 and 2004
    
    
    4Notes to Interim Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    23Item 6. Exhibits
    
    
    23Signatures
    
    
    24Certification Pursuant to Rule 13a-14(a)Certification Pursuant to Rule 13a-14(a)Certification Pursuant to 18 U.S.C. Section 1350




---



##### Table of Contents



Docucorp International, Inc.
 
 Consolidated Balance Sheets
(In thousands except share and per share amounts)
(Unaudited)
 October 31,
    
    
    July 31,2005
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    9,263
    
    
    $
    8,381Accounts receivable, net of allowance
of $285 and $293, respectively
    
    
    16,081
    
    
    
    17,132Current portion of deferred taxes
    
    
    170
    
    
    
    170Income tax receivable
    
    
    248
    
    
    
    248Other current assets
    
    
    2,409
    
    
    
    2,559Total current assets
    
    
    28,171
    
    
    
    28,490Property and equipment, net of accumulated depreciation
of $21,147 and $20,122, respectively
    
    
    9,608
    
    
    
    10,261Software development costs, net of accumulated
amortization of $26,982 and $25,909, respectively
    
    
    13,886
    
    
    
    13,687Goodwill
    
    
    9,842
    
    
    
    9,842Identifiable intangibles, net of accumulated amortization
of $161 and $113, respectively
    
    
    859
    
    
    
    907Other assets
    
    
    426
    
    
    
    448Total assets
    
    $
    62,792
    
    
    $
    63,635Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    2,824
    
    
    $
    2,423Accrued liabilities:Accrued compensation
    
    
    3,184
    
    
    
    3,067Other
    
    
    1,413
    
    
    
    1,491Income taxes payable
    
    
    101
    
    
    
    403Current portion of lease obligations
    
    
    1,452
    
    
    
    1,459Current portion of long-term debt
    
    
    3,618
    
    
    
    3,617Deferred revenue
    
    
    10,584
    
    
    
    11,479Total current liabilities
    
    
    23,176
    
    
    
    23,939Deferred taxes
    
    
    5,271
    
    
    
    5,178Long-term lease obligations
    
    
    1,924
    
    
    
    2,303Long-term debt
    
    
    2,557
    
    
    
    3,462Other long-term liabilities
    
    
    1,255
    
    
    
    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
    
    
    48,132
    
    
    
    48,035Treasury stock at cost, 5,253,953 and 5,458,912 shares, respectively
    
    
    (29,207
    )
    
    
    (30,347
    )Retained earnings
    
    
    12,814
    
    
    
    12,268Unearned compensation
    
    
    (2,803
    )
    
    
    (2,100
    )Foreign currency translation adjustment
    
    
    (493
    )
    
    
    (493
    )Total stockholders equity
    
    
    28,609
    
    
    
    27,529Total liabilities and stockholders equity
    
    $
    62,792
    
    
    $
    63,635
 See accompanying notes to interim consolidated financial statements.
 2




---



##### Table of Contents



Docucorp International, Inc.
 
 Interim Consolidated Statements of Operations and Comprehensive Income
(In thousands except per share amounts)
(Unaudited)
 Three months endedOctober 31,2005
    
    
    2004RevenuesASP hosting
    
    $
    8,048
    
    
    $
    6,050Professional services
    
    
    5,372
    
    
    
    5,408License
    
    
    2,035
    
    
    
    2,969Maintenance
    
    
    5,363
    
    
    
    5,238Total revenues
    
    
    20,818
    
    
    
    19,665Cost of revenuesASP hosting
    
    
    7,360
    
    
    
    5,037Professional services
    
    
    4,134
    
    
    
    4,179License
    
    
    1,174
    
    
    
    940Maintenance
    
    
    359
    
    
    
    346Total cost of revenues
    
    
    13,027
    
    
    
    10,502Gross profit
    
    
    7,791
    
    
    
    9,163Operating expensesProduct development
    
    
    2,193
    
    
    
    2,005Sales and marketing
    
    
    2,569
    
    
    
    2,899General and administrative
    
    
    2,155
    
    
    
    1,938Total operating expenses
    
    
    6,917
    
    
    
    6,842Operating income
    
    
    874
    
    
    
    2,321Interest expense
    
    
    (113
    )
    
    
    (151
    )Other income, net
    
    
    106
    
    
    
    119Income before income taxes
    
    
    867
    
    
    
    2,289Provision for income taxes
    
    
    321
    
    
    
    882Net income
    
    $
    546
    
    
    $
    1,407Other comprehensive income:Foreign currency translation
adjustment, net of tax
    
    
    (0
    )
    
    
    (11
    )Comprehensive income
    
    $
    546
    
    
    $
    1,396Basic net income per share
    
    $
    0.05
    
    
    $
    0.13Weighted average basic shares outstanding
    
    
    10,900
    
    
    
    10,507Diluted net income per share
    
    $
    0.05
    
    
    $
    0.12Weighted average diluted shares outstanding
    
    
    11,505
    
    
    
    11,435
 See accompanying notes to interim consolidated financial statements.
 3




---



##### Table of Contents



Docucorp International, Inc.
 
 Interim Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 Three months endedOctober 31,2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    546
    
    
    $
    1,407Adjustments to reconcile net income to
net cash provided by operating activities:Stock-based compensation expense
    
    
    169
    
    
    
    63Depreciation and amortization
    
    
    1,067
    
    
    
    946Amortization of capitalized software
    
    
    1,073
    
    
    
    838Gain on foreign currency
    
    
    (23
    )
    
    
    (22
    )Provision for doubtful accounts
    
    
    9
    
    
    
    92Deferred income taxes
    
    
    73
    
    
    
    0Tax benefit related to stock option exercises
    
    
    (93
    )
    
    
    49Changes in assets and liabilities:Decrease (increase) in accounts receivable
    
    
    1,057
    
    
    
    (630
    )Decrease in other assets
    
    
    172
    
    
    
    177Increase (decrease) in accounts payable
    
    
    399
    
    
    
    (1,425
    )Increase in accrued liabilities
    
    
    32
    
    
    
    1,673Increase (decrease) in income taxes payable
    
    
    (209
    )
    
    
    833Decrease in deferred revenue
    
    
    (900
    )
    
    
    (1,837
    )Increase (decrease) in other liabilities
    
    
    30
    
    
    
    (24
    )Total adjustments
    
    
    2,856
    
    
    
    733Net cash provided by operating
activities
    
    
    3,402
    
    
    
    2,140Cash flows from investing activitiesPurchase of Newbridge
    
    
    0
    
    
    
    (2,481
    )Purchase of property and equipment
    
    
    (363
    )
    
    
    (199
    )Capitalized software development costs
    
    
    (1,272
    )
    
    
    (1,532
    )Net cash used in investing activities
    
    
    (1,635
    )
    
    
    (4,212
    )Cash flows from financing activitiesPrincipal payments under capital lease obligations
    
    
    (385
    )
    
    
    (291
    )Principal payments under debt obligations
    
    
    (903
    )
    
    
    (2,073
    )Tax Benefit related to stock option exercises
    
    
    93
    
    
    
    0Proceeds from exercise of stock options
    
    
    292
    
    
    
    59Net cash used in financing activities
    
    
    (903
    )
    
    
    (2,305
    )Effect of exchange rates on cash flows
    
    
    18
    
    
    
    1Net increase (decrease) in cash and cash equivalents
    
    
    882
    
    
    
    (4,376
    )Cash and cash equivalents at beginning of period
    
    
    8,381
    
    
    
    12,336Cash and cash equivalents at end of period
    
    $
    9,263
    
    
    $
    7,960
 See accompanying notes to interim consolidated financial statements.
 4




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)
  Leasehold improvements
    
    Lesser of useful lifeor 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




---



##### Table of Contents



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




---



##### Table of Contents



Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)
   Income taxes
  Net income per share
  Three months endedOctober 31,2005
    
    
    2004Shares used in computing basic net income per share
    
    
    10,900
    
    
    
    10,507Dilutive effect of stock options and unvested restricted stock
    
    
    605
    
    
    
    928Shares used in computing diluted net income per share
    
    
    11,505
    
    
    
    11,435
  9




---



##### Table of Contents



Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)
  Stock-based compensation
   Three months endedOctober 31,2004Net income as reported
    
    $
    1,407Less, stock-based compensation expense
under fair value based methods, net of tax
of $126
    
    
    (201
    )Pro forma net income
    
    $
    1,206Net income per share:As reportedBasic
    
    $
    0.13Diluted
    
    $
    0.12Pro formaBasic
    
    $
    0.11Diluted
    
    $
    0.11
 10




---



##### Table of Contents



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




---



##### Table of Contents



Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)
 Note 2  Business segments
  Three months endedOctober 31,2005
    
    
    2004Revenues:Software
    
    $
    12,770
    
    
    $
    13,615ASP hosting
    
    
    8,048
    
    
    
    6,050Total revenues
    
    $
    20,818
    
    
    $
    19,665Software gross profit, net of product development costs
    
    $
    4,910
    
    
    $
    6,145ASP gross profit
    
    
    688
    
    
    
    1,013Sales and marketing
    
    
    (2,569
    )
    
    
    (2,899
    )General and administrative
    
    
    (2,155
    )
    
    
    (1,938
    )Consolidated operating income
    
    $
    874
    
    
    $
    2,321
 Note 3  Commitments and contingencies
   12




---



##### Table of Contents



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
      13




---



##### Table of Contents



Critical Accounting Policies and Estimates
  Revenue recognition
   14




---



##### Table of Contents



Allowance for doubtful accounts
  Software development costs
  15




---



##### Table of Contents



Business combinations
  Valuation of long-lived and intangible assets and goodwill
  Deferred taxes and valuation allowance
  Translation of foreign currency
  16




---



##### Table of Contents



Historical Operating Results
  Three months endedOctober 31,2005
    
    
    2004RevenuesASP hosting
    
    $
    8,048
    
    
    $
    6,050Professional services
    
    
    5,372
    
    
    
    5,408License
    
    
    2,035
    
    
    
    2,969Maintenance
    
    
    5,363
    
    
    
    5,238Total revenues
    
    
    20,818
    
    
    
    19,665Cost of revenuesASP hosting
    
    
    7,360
    
    
    
    5,037Professional services
    
    
    4,134
    
    
    
    4,179License
    
    
    1,174
    
    
    
    940Maintenance
    
    
    359
    
    
    
    346Total cost of revenues
    
    
    13,027
    
    
    
    10,502Gross profit
    
    
    7,791
    
    
    
    9,163Operating expensesProduct development
    
    
    2,193
    
    
    
    2,005Sales and marketing
    
    
    2,569
    
    
    
    2,899General and administrative
    
    
    2,155
    
    
    
    1,938Total operating expenses
    
    
    6,917
    
    
    
    6,842Operating income
    
    
    874
    
    
    
    2,321Interest expense
    
    
    (113
    )
    
    
    (151
    )Other income, net
    
    
    106
    
    
    
    119Income before income taxes
    
    
    867
    
    
    
    2,289Provision for income taxes
    
    
    321
    
    
    
    882Net income
    
    $
    546
    
    
    $
    1,407
 17




---



##### Table of Contents



Three months endedOctober 31,2005
    
    
    2004RevenuesASP hosting
    
    
    38
    %
    
    
    31
    %Professional services
    
    
    26
    
    
    
    27License
    
    
    10
    
    
    
    15Maintenance
    
    
    26
    
    
    
    27Total revenues
    
    
    100
    
    
    
    100Cost of revenuesASP hosting
    
    
    35
    
    
    
    25Professional services
    
    
    20
    
    
    
    21License
    
    
    6
    
    
    
    5Maintenance
    
    
    2
    
    
    
    2Total cost of revenues
    
    
    63
    
    
    
    53Gross Profit
    
    
    37
    
    
    
    47Operating expensesProduct development
    
    
    11
    
    
    
    10Sales and marketing
    
    
    12
    
    
    
    15General and administrative
    
    
    10
    
    
    
    10Total operating expenses
    
    
    33
    
    
    
    35Operating income
    
    
    4
    
    
    
    12Interest expense
    
    
    (1
    )
    
    
    (1
    )Other income, net
    
    
    1
    
    
    
    1Income before income taxes
    
    
    4
    
    
    
    12Provision for income taxes
    
    
    1
    
    
    
    5Net income
    
    
    3
    %
    
    
    7
    %
 Comparative analysis of quarterly results for the three months ended October 31, 2005 and 2004
 Revenues
  18




---



##### Table of Contents



Cost of revenues
 Cost of ASP hosting revenue.
 Cost of professional services revenue.
 Cost of license revenue.
 Cost of maintenance revenue.
 Operating expenses
 Product development.
 Sales and marketing
 19




---



##### Table of Contents



General and administrative
 Interest expense
  Other income, net
  Provision for income taxes
    Net income
  Liquidity and Capital Resources
  20




---



##### Table of Contents



21




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
 Item 4. Controls and Procedures
  22




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 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.
 23




---



##### Table of Contents



SIGNATURES
  Docucorp International, Inc.(Registrant)/s/ Michael D. Andereck
    
    Date December 7, 2005Michael D. AndereckPresident and Chief Executive Officer
 24