##### Table of Contents



FORM 10-Q UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended: April 30, 2004
    
    Commission File Number: 000-23829
 DOCUCORP INTERNATIONAL, INC.   Delaware
    
    75-2690838(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
identification number)
 5910 North Central Expressway, Suite 800, Dallas, Texas
    
    75206(Address of principal executive offices)
    
    (Zip Code)
 (214) 891-6500   Not applicable   Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No
[  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [  ]  No
[X] Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date: Common Stock, $.01 par
value, 10,530,593 shares outstanding as of June 11, 2004.




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Docucorp International, Inc.
Table of Contents
Quarterly Report on Form 10-Q
April 30, 2004 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of April 30, 2004 and July 31, 2003
    
    
    2Interim Consolidated Statements of Operations and Comprehensive Income for the
three and nine months ended April 30, 2004 and 2003
    
    
    3Interim Consolidated Statements of Cash Flows for the nine months
ended April 30, 2004 and 2003
    
    
    4Notes to Interim Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 6. Exhibits and Reports on Form 8-K
    
    
    22Signatures
    
    
    23Certification Pursuant to Rule 13a-14(a)Certification Pursuant to Rule 13a-14(a)Certification Pursuant to 18 U.S.C. Section 1350Certification Pursuant to 18 U.S.C. Section 1350




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Docucorp International, Inc. 
 Consolidated Balance Sheets
(In thousands except share and per share amounts)
(Unaudited)
 April 30,
    
    July 31,2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    9,929
    
    
    $
    7,269Accounts receivable, net of allowance
of $711 and $562, respectively
    
    
    17,576
    
    
    
    16,023Current portion of deferred taxes
    
    
    83
    
    
    
    83Income tax receivable
    
    
    0
    
    
    
    1,074Other current assets
    
    
    2,291
    
    
    
    2,956Total current assets
    
    
    29,879
    
    
    
    27,405Fixed assets, net of accumulated depreciation
of $15,802 and $13,359, respectively
    
    
    8,526
    
    
    
    10,031Software development costs, net of accumulated
amortization of $21,316 and $19,286, respectively
    
    
    11,496
    
    
    
    9,567Goodwill, net of accumulated amortization of $4,940
    
    
    5,846
    
    
    
    5,846Other assets
    
    
    613
    
    
    
    591Total assets
    
    $
    56,360
    
    
    $
    53,440Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    1,811
    
    
    $
    1,644Accrued liabilities
    
    
    3,670
    
    
    
    5,038Income taxes payable
    
    
    170
    
    
    
    423Current portion of capital lease obligations
    
    
    614
    
    
    
    582Current portion of long-term debt
    
    
    3,550
    
    
    
    3,550Deferred revenue
    
    
    12,526
    
    
    
    12,482Total current liabilities
    
    
    22,341
    
    
    
    23,719Deferred taxes
    
    
    2,003
    
    
    
    2,003Long-term capital lease obligations
    
    
    1,877
    
    
    
    2,342Long-term debt
    
    
    7,692
    
    
    
    10,354Other long-term liabilities
    
    
    1,452
    
    
    
    1,290Commitments 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
    
    
    47,264
    
    
    
    45,466Treasury stock at cost, 6,108,328 and 6,811,374 shares, respectively
    
    
    (33,957
    )
    
    
    (37,865
    )Retained earnings
    
    
    8,403
    
    
    
    6,266Unearned compensation
    
    
    (418
    )
    
    
    0Foreign currency translation adjustment
    
    
    (463
    )
    
    
    (301
    )Total stockholders equity
    
    
    20,995
    
    
    
    13,732Total liabilities and stockholders equity
    
    $
    56,360
    
    
    $
    53,440
 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
    
    Nine months endedApril 30,
    
    April 30,2004
    
    2003
    
    2004
    
    2003RevenuesASP hosting
    
    $
    5,882
    
    
    $
    6,069
    
    
    $
    17,778
    
    
    $
    17,017Professional services
    
    
    5,485
    
    
    
    6,755
    
    
    
    15,596
    
    
    
    17,956License
    
    
    1,814
    
    
    
    2,268
    
    
    
    7,606
    
    
    
    5,381Maintenance
    
    
    5,329
    
    
    
    4,976
    
    
    
    16,074
    
    
    
    15,223Total revenues
    
    
    18,510
    
    
    
    20,068
    
    
    
    57,054
    
    
    
    55,577Cost of revenuesASP hosting
    
    
    4,909
    
    
    
    5,104
    
    
    
    14,592
    
    
    
    14,405Professional services
    
    
    4,616
    
    
    
    4,914
    
    
    
    12,924
    
    
    
    13,530License
    
    
    868
    
    
    
    841
    
    
    
    2,296
    
    
    
    2,434Maintenance
    
    
    346
    
    
    
    484
    
    
    
    1,023
    
    
    
    1,421Total cost of revenues
    
    
    10,739
    
    
    
    11,343
    
    
    
    30,835
    
    
    
    31,790Gross profit
    
    
    7,771
    
    
    
    8,725
    
    
    
    26,219
    
    
    
    23,787Operating expensesProduct development
    
    
    1,858
    
    
    
    2,031
    
    
    
    6,046
    
    
    
    5,687Sales and marketing
    
    
    2,700
    
    
    
    3,031
    
    
    
    8,339
    
    
    
    8,277General and administrative
    
    
    1,800
    
    
    
    1,598
    
    
    
    5,199
    
    
    
    4,710Total operating expenses
    
    
    6,358
    
    
    
    6,660
    
    
    
    19,584
    
    
    
    18,674Operating income
    
    
    1,413
    
    
    
    2,065
    
    
    
    6,635
    
    
    
    5,113Other income (expense), net
    
    
    (202
    )
    
    
    (71
    )
    
    
    (201
    )
    
    
    86Income before income taxes
    
    
    1,211
    
    
    
    1,994
    
    
    
    6,434
    
    
    
    5,199Provision for income taxes
    
    
    504
    
    
    
    1,023
    
    
    
    2,671
    
    
    
    2,354Net income
    
    $
    707
    
    
    $
    971
    
    
    $
    3,763
    
    
    $
    2,845Other comprehensive income:Foreign currency translation adjustment, net of tax
    
    
    39
    
    
    
    3
    
    
    
    (162
    )
    
    
    (6
    )Comprehensive income
    
    $
    746
    
    
    $
    974
    
    
    $
    3,601
    
    
    $
    2,839Basic net income per share
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.37
    
    
    $
    0.21Weighted average basic shares outstanding
    
    
    10,359
    
    
    
    13,232
    
    
    
    10,050
    
    
    
    13,391Diluted net income per share
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.33
    
    
    $
    0.20Weighted average diluted shares outstanding
    
    
    11,720
    
    
    
    13,753
    
    
    
    11,328
    
    
    
    14,571
 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)
 Nine months endedApril 30,2004
    
    2003Cash flows from operating activitiesNet income
    
    $
    3,763
    
    
    $
    2,845Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation
    
    
    2,598
    
    
    
    2,399Amortization of capitalized software
    
    
    2,051
    
    
    
    2,448Provision for doubtful accounts
    
    
    399
    
    
    
    238Tax benefit related to stock option exercises
    
    
    1,785
    
    
    
    763Other
    
    
    44
    
    
    
    (17
    )Changes in assets and liabilities:(Increase) decrease in accounts receivable
    
    
    (1,824
    )
    
    
    258Decrease in income tax receivable
    
    
    1,074
    
    
    
    0Decrease in other assets
    
    
    673
    
    
    
    17Increase (decrease) in accounts payable
    
    
    156
    
    
    
    (259
    )Decrease in accrued liabilities
    
    
    (1,410
    )
    
    
    (605
    )Increase (decrease) in income taxes payable
    
    
    (253
    )
    
    
    502Increase (decrease) in deferred revenue
    
    
    (15
    )
    
    
    1,128Increase (decrease) in other liabilities
    
    
    158
    
    
    
    (386
    )Total adjustments
    
    
    5,436
    
    
    
    6,486Net cash provided by operating activities
    
    
    9,199
    
    
    
    9,331Cash flows from investing activitiesPurchase of short-term investments
    
    
    0
    
    
    
    (2,981
    )Proceeds from sale of short-term investments
    
    
    0
    
    
    
    6,970Purchase of fixed assets
    
    
    (1,065
    )
    
    
    (2,587
    )Capitalized software development costs
    
    
    (3,980
    )
    
    
    (2,992
    )Net cash used in investing activities
    
    
    (5,045
    )
    
    
    (1,590
    )Cash flows from financing activitiesPrincipal payments under capital lease obligations
    
    
    (433
    )
    
    
    (182
    )Principal payments under term note
    
    
    (2,662
    )
    
    
    0Proceeds from exercise of stock options and warrants
    
    
    1,737
    
    
    
    1,225Purchase of treasury stock
    
    
    0
    
    
    
    (6,528
    )Proceeds from stock issued under Employee Stock Purchase Plan
    
    
    96
    
    
    
    111Net cash used in financing activities
    
    
    (1,262
    )
    
    
    (5,374
    )Effect of exchange rates on cash flows
    
    
    (232
    )
    
    
    (13
    )Net increase in cash and cash equivalents
    
    
    2,660
    
    
    
    2,354Cash and cash equivalents at beginning of period
    
    
    7,269
    
    
    
    9,733Cash and cash equivalents at end of period
    
    $
    9,929
    
    
    $
    12,087
 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 The accompanying unaudited interim consolidated financial statements of
Docucorp International, Inc. and its wholly owned subsidiaries (Docucorp or
the Company) for the three and nine month periods ended April 30, 2004 and
2003 have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial information
presented should be read in conjunction with our annual consolidated financial
statements for the year ended July 31, 2003. The foregoing unaudited interim
consolidated financial statements reflect all adjustments (all of which are of
a normal recurring nature), which are, in the opinion of management, necessary
for a fair presentation of the results of the interim periods, and include the
accounts of Docucorp and our wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Operating results for the three and nine months ended April 30, 2004 are not
necessarily indicative of the results to be expected for the year. Certain
prior year amounts have been reclassified to conform to the current year
presentation. Revenue recognition We derive our revenues from the sale of software licenses, annual software
maintenance and support agreements, professional services and ASP hosting
services. We recognize revenue in accordance with Statement of Position 97-2,
Software Revenue Recognition and Staff Accounting Bulletin No. 104, Revenue
Recognition (SAB 104). Revenue is recognized when a contract exists, the fee
is fixed or determinable, delivery has occurred and collection of the
receivable is deemed probable. We use the residual method to recognize revenue from the sale of software
licenses that are bundled with maintenance and support. Under the residual
method, the fair value of the undelivered element(s) is deferred and the
remaining value of the contract is recognized as revenue. Fair value of an
element is based on vendor-specific objective evidence (VSOE). VSOE is based
on the price charged when the same element is sold separately. We do not
generally sell software licenses without selling maintenance and support for
the licensed software. Therefore, we have established VSOE only for the
undelivered element(s) included in a multi-element arrangement. Specifically,
VSOE for maintenance and support is based upon prices customers pay to renew
maintenance and support agreements. After expiration of the initial maintenance
term, maintenance and support agreements are renewable on an annual basis and
include rights to upgrades, when and if available, telephone support, updates,
enhancements and bug fixes. Revenue generated from maintenance and support is
recognized ratably over the maintenance term of the agreement. We record
deferred revenue for maintenance amounts invoiced prior to the performance of
the related services. Our standard software license agreements do not provide for rights of software
return and/or conditions of acceptance. However, in the rare case that
acceptance criteria are provided, revenue is deferred and not recognized until
all acceptance provisions are satisfied. Revenue from software licenses, which
include a cancellation clause, is recognized upon expiration of the
cancellation period. Revenue related to products still in the testing phase is
deferred until formal acceptance of the product by the customer. 5




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements(cont.)
(Unaudited) Professional services revenue includes implementation, integration, training
and consulting services related to our software products. The services offered
are not essential to the functionality of the software. Professional services
revenue is generally recognized as the services are performed. Revenue derived from the installation and integration of software packages
under a fixed price contract is recognized on a percentage-of-completion basis
measured by the relationship of hours worked to total estimated contract hours.
We follow this method because reasonably dependable estimates of the revenue
and contract hours applicable to various elements of a contract can be made.
Since the financial reporting of these contracts depends upon estimates, which
are assessed continually during the term of these contracts, recognized revenue
and profit are subject to revisions as the contract progresses to completion.
Revisions in profit estimates are reflected in the period in which the facts
that give rise to the revisions become known. Accordingly, favorable changes in
estimates result in additional revenue recognition and net income, and
unfavorable changes in estimates result in a reduction of recognized revenue
and net income. When estimates indicate that a loss will be incurred on a
contract upon completion, a provision for the expected loss is recorded in the
period in which the loss becomes evident. Revenue from our ASP hosting operations is recognized in accordance with SAB
104, generally on a per transaction basis. ASP hosting agreements are generally
one-to-five years in duration and provide for monthly billing based on
transaction volume or contract minimums, if applicable. Revenue related to the
customers initial set up and implementation is deferred and subsequently
recognized over the expected term of the ASP hosting agreement. Cash equivalents We consider all highly liquid investments purchased with an original maturity
of three months or less to be cash equivalents. Cash equivalents are stated at
cost, which approximates fair market value. Accounts receivable Included in accounts receivable are unbilled amounts, which have been
recognized as revenue under the percentage-of-completion method or upon
execution of the software license contract and shipment of the software, but
prior to contractual payment terms. Allowance for doubtful accounts We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We take into
consideration the current financial condition of the customers, the specific
details of the customer accounts, the age of the outstanding balance and the
current economic environment when assessing the adequacy of the allowance. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances might be
required. Fixed assets, depreciation and amortization Property and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed over the estimated
service lives using the straight-line method. Estimated service lives are as
follows: 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
    
    5 years
 Repairs and maintenance are expensed as incurred. Major renewals and
betterments are capitalized and depreciated over the assets remaining
estimated service lives. Upon retirement or sale of an asset, the cost and
accumulated depreciation are removed from the accounts with any resulting gain
or loss included in income. Software development costs Software development costs are accounted for in accordance with either
Statement of Financial Accounting Standards No. 86, Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed, or with AICPA
Statement of Position No. 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. For software to be sold, after the
technological feasibility of the software has been established, material
software development costs, which include salaries and personnel related costs
incurred in the development activities are capitalized. Research and
development costs incurred prior to the establishment of the technological
feasibility of a product are expensed as incurred. The cost of capitalized
software is amortized on a straight-line basis over its estimated useful life,
generally four to six years, or the ratio of current revenues to current and
anticipated revenues from the software, whichever provides the greater
amortization. Goodwill In accordance with Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, we do not
amortize goodwill, but rather test it annually for impairment. Goodwill is
also reviewed for impairment at other times during the year when events or
changes in circumstances indicate that an impairment might be present. Impairment of long-lived assets We have evaluated our long-lived assets for impairment, and will continue to do
so as events or changes in circumstances indicate that the carrying value of
such assets may not be fully recoverable. If facts or circumstances support
the possibility of impairment, we prepare a projection of future operating cash
flows, undiscounted and without interest. If based on this projection we do
not expect to recover our carrying cost, an impairment loss equal to the
difference between the fair value of the asset and its carrying value will be
recognized in operating income. Deferred revenue Deferred revenue relates primarily to maintenance and support agreements that
have been invoiced to customers prior to the performance of the related
services. Maintenance and support services are generally billed annually in
advance for services to be performed over a 12-month period. Maintenance and
support provided under an initial software license contract is recorded as
deferred revenue based on 7




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements(cont.)
(Unaudited) the VSOE of that maintenance and is recognized over the term of the maintenance
and support agreement. Guarantees We enter into standard indemnification agreements in our ordinary course of
business. Pursuant to these agreements, we typically indemnify, hold harmless
and agree to reimburse the indemnified party for those losses suffered or
incurred by the indemnified party arising from any trade secrets, trademark,
copyright, patent or other intellectual property infringement claim by any
third party with respect to our software and services. The term of these
indemnification agreements is generally perpetual any time after execution of
the agreement. The maximum potential amount of future payments that we could
be required to make under these indemnification agreements is unlimited;
however, consequential damages are excluded. Since we have never incurred
costs to defend lawsuits or settle claims related to these indemnification
agreements, we believe the estimated fair value of our obligation under these
agreements is minimal. Accordingly, we have no liabilities recorded for these
agreements as of April 30, 2004. We currently provide software product warranties to our customers. The product
warranties generally provide that the licensed software shall operate
substantially in accordance with the applicable user documentation for a period
typically 90 days from delivery. At April 30, 2004, we had no material product
warranty liability, as we have historically not experienced material warranty
claims. From time to time, in order to manage our customer relationships, we
incur costs outside of our product warranty program. These costs are expensed
as incurred. We have agreements in place with our directors and officers whereby we
indemnify them for certain events or occurrences while the officer or director
is, or was, serving at our request in such capacity. The maximum potential
amount of future payments we could be required to make under these
indemnification agreements is unlimited; however, we have a director and
officer insurance policy that may enable us to recover a portion of any future
amounts paid. Translation of foreign currencies We translate the financial statements of our European subsidiary into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52,
Foreign Currency Translation. Assets and liabilities of our European
subsidiary, whose functional currency is other than the U.S. dollar, are
translated at year-end rates of exchange, and revenues and expenses are
translated at average exchange rates prevailing during the year. Foreign
currency transaction gains and losses are recognized in income as incurred. We account for unrealized gains or losses on our foreign currency translation
adjustments in accordance with Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, which requires the adjustments be
accumulated in stockholders equity as part of other comprehensive income. Treasury stock We account for Treasury Stock using the cost method. Gains on sales of
Treasury Stock are credited to Additional Paid-in Capital (APIC), losses are
charged to APIC to the extent that previous net gains from sales are included
therein, otherwise to Retained Earnings. The cumulative net difference between 8




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements(cont.)
(Unaudited) the average Treasury Stock purchase price per share and the option exercise
price at July 31, 2003 of approximately $2.9 million was reclassified from APIC
to Retained Earnings. Income taxes Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
for the year in which those temporary differences are expected to be recovered
or settled. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts more likely than not to be realized. Stock-based compensation We provide equity incentives to our employees and directors by means of
non-qualified stock options and restricted stock awards issued from the 1997
Equity Compensation Plan (the Plan). We account for stock-based compensation
under the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees and related
Interpretations. For the periods presented, stock-based compensation cost
related to options is not reflected in net income, as all options granted under
the Plan had an exercise price equal to the market value of the underlying
Common Stock on the date of grant. We have implemented the disclosure-only
provisions of SFAS 123, Accounting for Stock-Based Compensation and SFAS 148,
Accounting for Stock-Based Compensation Transition and Disclosure. The
following table illustrates the pro forma effect on net income and net income
per share as if we had applied the fair value recognition provisions of SFAS
123 (in thousands except per share amounts): Three months ended
    
    Nine months endedApril 30,
    
    April 30,2004
    
    2003
    
    2004
    
    2003Net income as reported
    
    $
    707
    
    
    $
    971
    
    
    $
    3,763
    
    
    $
    2,845Stock-based compensation expense,
net of tax
    
    
    (264
    )
    
    
    (202
    )
    
    
    (791
    )
    
    
    (539
    )Pro forma net income
    
    $
    443
    
    
    $
    769
    
    
    $
    2,972
    
    
    $
    2,306Net income per share:As reportedBasic
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.37
    
    
    $
    0.21Diluted
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.33
    
    
    $
    0.20Pro formaBasic
    
    $
    0.04
    
    
    $
    0.06
    
    
    $
    0.30
    
    
    $
    0.17Diluted
    
    $
    0.04
    
    
    $
    0.06
    
    
    $
    0.26
    
    
    $
    0.16
 In November 2003, the Compensation Committee of the Board of Directors granted
55,000 shares of restricted stock to certain executives. Based on the market
value of our Common Stock, the restricted stock grant was valued at
approximately $450,000. The restricted stock vests over seven years with
acceleration of cumulative vesting to 25%, 50% and 100% in the first three
years if specific performance 9




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements(cont.)
(Unaudited) goals are attained. Compensation expense related to the restricted stock grant
is being recognized ratably over the vesting period. Net income per share Our basic and diluted net income per share is computed in accordance with
Statement of Financial Accounting Standards No. 128, Earnings Per Share.
Basic net income per share is computed using the weighted average number of
common shares outstanding. Diluted net income per share is computed using the
weighted average number of common shares outstanding and the assumed exercise
of stock options and warrants and restricted stock awards, using the treasury
stock method. The following is a reconciliation of the shares used in
computing basic and diluted net income per share for the periods indicated (in
thousands): Three months ended
    
    Nine months endedApril 30,
    
    April 30,2004
    
    2003
    
    2004
    
    2003Shares used in computing basic
net income per share
    
    
    10,359
    
    
    
    13,232
    
    
    
    10,050
    
    
    
    13,391Dilutive effect of stock options, warrants
and restricted stock
    
    
    1,361
    
    
    
    521
    
    
    
    1,278
    
    
    
    1,180Shares used in computing diluted
net income per share
    
    
    11,720
    
    
    
    13,753
    
    
    
    11,328
    
    
    
    14,571
 Options to purchase 50,000 and 1.2 million shares of Common Stock at average
exercise prices of $13.50 and $5.85 per share at April 30, 2004 and 2003,
respectively, were anti-dilutive and not included in the computation of diluted
net income per share, because the options exercise prices were greater than
the average market price of the Common Stock for the period. Management estimates The preparation of our financial statements, in accordance with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, and disclosure of contingent assets and liabilities
and the reported amounts of revenues and expenses at the date of the financial
statements. Actual results could differ from those estimates. Advertising costs We expense advertising costs as incurred. Note 2  Business segments As set forth in the criteria of Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information, we
are organized into two reportable segments: Software and ASP. The Software
segment consists of initial software license sales, professional services
consulting derived from implementation and integration of our software products
and continued customer 10




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements(cont.)
(Unaudited) support and maintenance of the software products. The ASP segment provides
processing, print, mail, archival and Internet delivery of documents for
customers who outsource these activities. The table below presents information
about reported segments for the three and nine months ended April 30, 2004 and
2003 (in thousands): Three months ended
    
    Nine months endedApril 30,
    
    April 30,2004
    
    2003
    
    2004
    
    2003Revenues:Software
    
    $
    12,628
    
    
    $
    13,999
    
    
    $
    39,276
    
    
    $
    38,560ASP
    
    
    5,882
    
    
    
    6,069
    
    
    
    17,778
    
    
    
    17,017Total revenues
    
    $
    18,510
    
    
    $
    20,068
    
    
    $
    57,054
    
    
    $
    55,577Operating income:Software
    
    $
    4,940
    
    
    $
    5,729
    
    
    $
    16,987
    
    
    $
    15,488ASP
    
    
    973
    
    
    
    965
    
    
    
    3,186
    
    
    
    2,612Sales and marketing
    
    
    (2,700
    )
    
    
    (3,031
    )
    
    
    (8,339
    )
    
    
    (8,277
    )General and administrative
    
    
    (1,800
    )
    
    
    (1,598
    )
    
    
    (5,199
    )
    
    
    (4,710
    )Total operating income
    
    $
    1,413
    
    
    $
    2,065
    
    
    $
    6,635
    
    
    $
    5,113
 Note 3  Recently issued accounting pronouncements In December 2003, the Securities Exchange Commission (SEC) issued Staff
Accounting Bulletin 104, Revenue Recognition (SAB 104). SAB 104 updates
existing Staff Accounting Bulletin Topic 13, Revenue Recognition to be
consistent with current authoritative guidance, primarily Emerging Issues Task
Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. The
adoption of SAB 104 did not have a material impact on our consolidated
financial statements. 11




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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, fluctuations in operating
results and the other risk factors and cautionary statements listed from time
to time in the Companys periodic reports filed with the Securities and
Exchange Commission. 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 Docucorp is a software-driven hybrid company. We have developed core software
technology that can be used as a primary competitive advantage to offer
additional products and services. We are able to leverage our software
applications to offer Application Service Provider (ASP) hosting and
professional services. This business model is designed to create significant
barriers to competition, drive higher margins and generate diverse and
recurring revenue streams. We continue to pursue our long-term strategy to be
the leading provider of software and services that enable companies to create,
publish, manage and archive complex, high-volume, individualized information. Our 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, correspondence,
bills of lading and other customer-oriented documents. Our ASP offerings
include customer statement and bill generation, electronic bill presentment and
payment, insurance policy production, disaster recovery and electronic document
archival. Operating in three key markets, insurance, utilities and financial services, we
currently have an installed base of more than 1,200 customers worldwide. More
than half of the 200 largest United States insurance companies use our software
products and services, including nine of the top 10 life and health insurance
companies, nine of the top 10 property and casualty insurance companies and
more than 500 managing general agents (MGAs). Many of the largest North
American utility companies and major international financial services
institutions use our products and services. We derive our revenues from ASP hosting fees, professional services fees,
software license fees and recurring maintenance fees related to our software
products. ASP hosting revenue consists of fees earned from customers who
outsource the production of customer statements and insurance policies.
Professional services revenue includes fees for implementation, integration,
training and consulting services. Software license revenue is generally derived
from perpetual licenses of software products. Maintenance revenue consists
primarily of recurring license fees and annual software maintenance and support
agreements. As set forth in the criteria of Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information
(SFAS 131), we are organized into two reportable segments: Software and ASP.
The Software segment consists of initial software license sales, professional
services consulting derived from implementation and integration of our software
products and continued customer support and maintenance of the software
products. The ASP segment provides processing, print, mail, archival and
Internet delivery of documents for customers who outsource these activities. 12




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Our operating results are strongly tied to software license revenue. Software
license sales have a high margin and ultimately drive additional professional
services and maintenance revenues. A large portion of our software license
revenue is generated from a small number of relatively large agreements
executed in the latter half of a quarter. The timing of such large agreements
is often unpredictable and impacted by events beyond our control, therefore
making it difficult to forecast software license revenue effectively. Due to
the nature of our software license sales, revenues may vary from quarter to
quarter. During the three months ended April 30, 2004, software license revenue of $1.8
million was less than the prior year and did not meet our expectations. This
contributed to the decrease in revenue and negatively impacted net income and
earnings per share for the three months ended April 30, 2004. After two
quarters of solid performance, we are disappointed with the operating results
for the three months ended April 30, 2004, but we are pleased to have revenue
growth and an increase in net income and earnings per share for the nine months
ended April 30, 2004. We remain cautiously optimistic in what continues to be
an uncertain business environment. The risks associated with software license
revenue are somewhat offset by our diversified revenue streams and recurring
nature of maintenance and ASP hosting revenues. Revenue generated from our financial services group and our financial results
in European markets continue to be areas for improvement. We have upgraded the
financial services direct sales force and our pipeline has improved. During the
second quarter of fiscal 2004, we had significant European revenues; however,
we were unable to achieve those levels in the recent quarter. During the third
quarter of fiscal 2004, we opened a new sales office in the Benelux region of
Europe in order to reach a new and larger customer base. We have completed the first phase of Policy Xpress, a pre-packaged offering
that provides property and casualty insurance companies with a complete library
of fully implemented industry standard insurance forms. We expect Policy
Xpress to further enhance our leading position in the property and casualty
insurance industry. Our financial position remains strong with approximately $9.9 million of cash
on hand and available borrowings under our credit facility of approximately
$5.8 million. During the nine months ended April 30, 2004, working capital and
our cash balance increased while at the same time our long-term debt balance
decreased. Going forward, business and market uncertainties may affect results. For a
discussion of key factors that could impact results, please refer to the
section entitled Risk Factors in our Annual Report on Form 10-K for the year
ended July 31, 2003. Critical Accounting Policies and Estimates The accompanying Managements Discussion and Analysis of Financial Condition
and Results of Operations is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP). The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reported period. We base our estimates and assumptions on historical
experiences and various other factors that are believed to be reasonable under
the circumstances. These estimates and assumptions are evaluated on an ongoing
basis. Actual results may differ from previously estimated amounts under
different assumptions or conditions. The following critical accounting
policies, which involve significant judgments and estimates, are used in the
preparation of our consolidated financial statements: 13




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Revenue recognition We derive our revenues from the sale of software licenses, annual software
maintenance and support agreements, professional services and ASP hosting
services. We recognize revenue in accordance with Statement of Position 97-2,
Software Revenue Recognition, and Staff Accounting Bulletin No. 104, Revenue
Recognition (SAB 104). Revenue is recognized when a contract exists, the
fee is fixed or determinable, delivery has occurred and collection of the
receivable is deemed probable. We use the residual method to recognize revenue from the sale of software
licenses that are bundled with maintenance and support. Under the residual
method, the fair value of the undelivered element(s) is deferred and the
remaining value of the contract is recognized as revenue. Fair value of an
element is based on vendor-specific objective evidence (VSOE). VSOE is based
on the price charged when the same element is sold separately. We do not
generally sell software licenses without selling maintenance and support for
the licensed software. Therefore, we have established VSOE only for the
undelivered element(s) included in a multi-element arrangement. Specifically,
VSOE for maintenance and support is based upon prices customers pay to renew
maintenance and support agreements. After expiration of the initial maintenance
term, maintenance and support agreements are renewable on an annual basis and
include rights to upgrades, when and if available, telephone support, updates,
enhancements and bug fixes. Revenue generated from maintenance and support is
recognized ratably over the maintenance term of the agreement. We record
deferred revenue for maintenance amounts invoiced prior to the performance of
the related services. Our standard software license agreements do not provide for rights of software
return and/or conditions of acceptance. However, in the rare case that
acceptance criteria are provided, revenue is deferred and not recognized until
all acceptance provisions are satisfied. Revenue from software licenses, which
include a cancellation clause, is recognized upon expiration of the
cancellation period. Revenue related to products still in the testing phase is
deferred until formal acceptance of the product by the customer. Professional services revenue includes implementation, integration, training
and consulting services related to our software products. The services offered
are not essential to the functionality of the software sold. Professional
services revenue is generally recognized as the services are performed. Revenue derived from the installation and integration of software packages
under a fixed price contract is recognized on a percentage-of-completion basis
measured by the relationship of hours worked to total estimated contract hours.
We follow this method because reasonably dependable estimates of the revenue
and contract hours applicable to various elements of a contract can be made.
Since the financial reporting of these contracts depends upon estimates, which
are assessed continually during the term of these contracts, recognized revenue
and profit are subject to revisions as the contract progresses to completion.
Revisions in profit estimates are reflected in the period in which the facts

that give rise to the revisions become known. Accordingly, favorable changes in
estimates result in additional revenue recognition and net income, and
unfavorable changes in estimates result in a reduction of recognized revenue
and net income. When estimates indicate that a loss will be incurred on a
contract upon completion, a provision for the expected loss is recorded in the
period in which the loss becomes evident. Revenue from our ASP hosting operations is recognized in accordance with SAB
104, generally on a per transaction basis. ASP hosting agreements are generally
one-to-five years in duration and provide for monthly billing based on
transaction volume or contract minimums, if applicable. Revenue related to the
customers initial set up and implementation is deferred and subsequently
recognized over the expected term of the ASP hosting agreement. Allowance for doubtful accounts We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We take into
consideration the current financial condition of our 14




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customers, the specific details of the customer accounts, the age of the
outstanding balance and the current economic environment when assessing the
adequacy of the allowance. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances might be required. Software development costs Software development costs are accounted for in accordance with either
Statement of Financial Accounting Standards No. 86, Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed, or with
Statement of Position No. 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. The guidance above requires the
capitalization of certain software development costs once technological
feasibility is established. The capitalized costs are then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
revenues to total projected product revenues, whichever provides the greater
amortization. Management periodically assesses the realizability of software
development costs when events and circumstances indicate a potential decline in
value. Valuation of long-lived and intangible assets and goodwill We recognize an impairment charge associated with our long-lived assets,
including property and equipment, goodwill and other intangible assets whenever
we determine that recovery of such long-lived asset is not probable. Such
determination is made in accordance with the applicable GAAP requirement
associated with the long-lived asset, and is based upon, among other things,
estimates of the amount of future net cash flows to be generated by the
long-lived asset and estimates of the current fair value of the asset. Adverse
changes in future net cash flows or fair value could result in the inability to
recover the carrying value of the long-lived asset, thereby requiring an
impairment charge to be recognized. We perform an impairment analysis in
accordance with Statement of Financial Accounting Standard No. 142, Goodwill
and Other Intangible Assets, annually and whenever events and circumstances
indicate that an impairment might be present. Deferred taxes and valuation allowance We recognize deferred tax assets and liabilities based on the differences
between the financial statement carrying amounts and the tax bases of assets
and liabilities. We record a valuation allowance to reduce our deferred income
tax assets to the amount that is believed to be realized under the
more-likely-than-not recognition criteria. While we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for a valuation allowance, it is possible that in the future
we may change our estimate of the amount of the deferred income tax assets that
would more-likely-than-not be realized in the future, resulting in an
adjustment to the deferred income tax assets valuation allowance that would
either increase or decrease, as applicable, reported net income in the period
such change in estimate was made. Translation of foreign currency We translate the financial statements of our European subsidiary into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52,
Foreign Currency Translation. Assets and liabilities of our European
subsidiary, whose functional currency is other than the U.S. dollar, are
translated at period-end rates of exchange, and revenues and expenses are
translated at average exchange rates prevailing during the period. Foreign
currency transaction gains and losses are recognized in income as incurred. We account for unrealized gains or losses on our foreign currency translation
adjustments in accordance with Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, which requires adjustments to be
accumulated in stockholders equity as part of other comprehensive income.
Currently, we do not engage in foreign currency hedging activities. 15




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Historical Operating Results The following table sets forth selected unaudited interim consolidated
statements of operations data expressed as a percentage of total revenues for
the periods indicated: Three months ended
    
    Nine months endedApril 30,
    
    April 30,2004
    
    2003
    
    2004
    
    2003RevenuesASP hosting
    
    
    32
    %
    
    
    30
    %
    
    
    31
    %
    
    
    31
    %Professional services
    
    
    29
    
    
    
    34
    
    
    
    28
    
    
    
    32License
    
    
    10
    
    
    
    11
    
    
    
    13
    
    
    
    10Maintenance
    
    
    29
    
    
    
    25
    
    
    
    28
    
    
    
    27Total revenues
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Cost of revenuesASP hosting
    
    
    26
    
    
    
    25
    
    
    
    26
    
    
    
    26Professional services
    
    
    25
    
    
    
    25
    
    
    
    22
    
    
    
    24License
    
    
    5
    
    
    
    4
    
    
    
    4
    
    
    
    4Maintenance
    
    
    2
    
    
    
    3
    
    
    
    2
    
    
    
    3Total cost of revenues
    
    
    58
    
    
    
    57
    
    
    
    54
    
    
    
    57Gross Profit
    
    
    42
    
    
    
    43
    
    
    
    46
    
    
    
    43Operating expensesProduct development
    
    
    10
    
    
    
    10
    
    
    
    10
    
    
    
    10Sales and marketing
    
    
    14
    
    
    
    15
    
    
    
    15
    
    
    
    15General and administrative
    
    
    10
    
    
    
    8
    
    
    
    9
    
    
    
    9Total operating expenses
    
    
    34
    
    
    
    33
    
    
    
    34
    
    
    
    34Operating income
    
    
    8
    
    
    
    10
    
    
    
    12
    
    
    
    9Other income (expense), net
    
    
    (1
    )
    
    
    0
    
    
    
    0
    
    
    
    0Income before income taxes
    
    
    7
    
    
    
    10
    
    
    
    12
    
    
    
    9Provision for income taxes
    
    
    3
    
    
    
    5
    
    
    
    5
    
    
    
    4Net income
    
    
    4
    %
    
    
    5
    %
    
    
    7
    %
    
    
    5
    %
 Comparative analysis of quarterly results for the three and nine months ended
April 30, 2004 and 2003 Revenues Total revenues decreased approximately 8%, or $1.6 million, for the three
months ended April 30, 2004, due to decreases in ASP hosting revenue,
professional services revenue and license revenue partially offset by an
increase in maintenance revenue. ASP hosting revenue of $5.9 million decreased
approximately 3% for the three months ended April 30, 2004, primarily due to
reduced revenue related to two significant customers whose business is winding
down during the current fiscal year. For the three months ended April 30,
2004, professional services revenue decreased approximately 19%, or $1.3
million, due primarily to the recognition of $1.3 million in previously
deferred revenue during the prior year related to one large consulting
contract. For the three months ended April 30, 2004, license revenue 16




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decreased approximately 20%, or $454,000, due to fewer executed software
license agreements. Maintenance revenue of $5.3 million increased approximately
7% for the three months ended April 30, 2004, due to maintenance agreements
associated with new license sales and increased rates for existing maintenance
agreements. For the nine months ended April 30, 2004, total revenues increased
approximately 3%, or $1.5 million, due to an increase in ASP hosting revenue,
license revenue and maintenance revenue, partially offset by a decrease in
professional services revenue. ASP hosting revenue increased approximately 4%
to $17.8 million for the nine months ended April 30, 2004, primarily due to
revenue generated from new customers. License revenue of $7.6 million increased
approximately 41% for the nine months ended April 30, 2004, as a result of
better execution by our sales force in the first half of fiscal 2004 and a more
stable economic and geopolitical environment. Maintenance revenue increased
approximately 6%, or $851,000, for the nine months ended April 30, 2004, due to
maintenance agreements associated with new license sales and increased rates
for existing maintenance agreements. For the nine months ended April 30, 2004,
professional services revenue decreased approximately 13% or $2.4 million due
primarily to the recognition of $1.3 million in the prior year of previously
deferred revenue related to one large consulting contract and professional
services personnel working on non-billable capitalized projects in the current
year. Backlog for our products and services was approximately $51.8 million as of
April 30, 2004, of which approximately $26 million is scheduled to be satisfied
within one year. Backlog is primarily composed of recurring software license
revenue and maintenance revenue for ongoing maintenance and support, software
implementation and consulting services and ASP hosting services. Software
agreements for recurring license fees generally have non-cancelable terms of up
to five years. Maintenance contracts may generally be terminated upon 30 to 60
days notice; however, we have not historically experienced material
cancellations of such contracts. Software implementation and consulting
services backlog is principally performed under time and material agreements,
of which some have cancellation provisions. The estimated future revenues with
respect to software implementation and consulting services are based on
managements estimate of revenues over the remaining life of the respective
contracts. ASP hosting agreements generally have one-to-five year terms and
provide that fees are charged on a per transaction basis. Estimated future
revenues with respect to ASP hosting services are based on contractual monthly
minimums multiplied by the remaining term of the respective contract. Cost of revenues Cost of ASP hosting revenue.Cost of ASP hosting revenue is composed primarily
of salary and personnel related costs, facility and equipment costs and postage
and supplies expense related to our two ASP hosting centers. Cost of ASP
hosting revenue of $4.9 million decreased approximately 4% for the three months
ended April 30, 2004, primarily due to a decrease in consumable expenses. For
the nine months ended April 30, 2004, cost of ASP hosting revenue increased
approximately 1% to $14.6 million. For the three months ended April 30, 2004
and 2003, cost of ASP hosting revenue represented approximately 83% and 84% of
ASP hosting revenue, respectively. For the nine months ended April 30, 2004
and 2003, cost of ASP hosting revenue represented approximately 82% and 85% of
ASP hosting revenue, respectively. The decrease in cost as a percentage of ASP
revenue is primarily due to the mix of ASP revenues and lower levels of
consumable expenses. Cost of ASP hosting revenue is expected to increase as ASP
hosting revenue increases. Cost of professional services revenue.Cost of professional services revenue
consists of costs incurred in providing implementation, integration, training
and consulting services. For the three and nine months ended April 30, 2004,
cost of professional services revenue decreased approximately 6% and 4%,
respectively. This decrease is due primarily to an increase in capitalization
of development work performed by professional services personnel related to a
new pre-packaged product offering for the 17




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insurance industry. For the three months ended April 30, 2004 and 2003, cost
of professional services revenue represented approximately 84% and 73% of
professional services revenues, respectively. For the nine months ended April
30, 2004 and 2003, cost of professional services revenue represented
approximately 83% and 75%, respectively. The increase in costs as a percentage
of professional services revenues is primarily due to expenses incurred during
the quarter to host our bi-annual user group conference and the recognition of
previously deferred revenue and related recognition of deferred costs in the
prior year associated with one large consulting contract. We expect cost of
professional services revenue to increase as professional services revenue
increases. Cost of license revenue.Cost of license revenue includes amortization of
capitalized software development costs and royalties paid to third parties.
For the three months ended April 30, 2004, cost of license revenue increased
approximately 3% to $868,000 primarily due to the addition of royalty expense
related to the licensing of our Policy Xpress product. Cost of license revenue
decreased approximately 6% to $2.3 million for the nine months ended April 30,
2004, primarily due to a decrease in amortization of merger-related capitalized
software costs that were fully amortized as of July 31, 2003. We anticipate
cost of license revenue to increase as we continued to capitalize development
efforts and expect royalty expense to increase due to the future software
license sales of Policy Xpress. Cost of maintenance revenue.Cost of maintenance revenue consists of costs
incurred in providing customer telephone and online support. Cost of
maintenance revenue decreased approximately 28% for each of the three and nine
months ended April 30, 2004, due primarily to a decrease in salaries and
personnel related costs. For the three and nine months ended April 30, 2004,
salaries and personnel related costs decreased approximately $97,000 and
$268,000 respectively, due to a reduction in staffing late in fiscal 2003 as a
result of continued departmental automation and a lower demand for support of
our mature legacy products. For the three months ended April 30, 2004 and 2003,
cost of maintenance revenue represented approximately 6% and 10% of maintenance
revenue, respectively. For the nine months ended April 30, 2004 and 2003, cost
of maintenance revenue represented approximately 6% and 9% of maintenance
revenue, respectively. The cost of maintenance revenue is expected to increase,
but at a slower rate than the anticipated growth in software license and
maintenance revenues. Operating expenses Product development.Product development expense consists primarily of costs
associated with developing new products prior to establishing technological
feasibility, enhancing existing products, testing software products and
developing product documentation. For the three months ended April 30, 2004,
product development expense decreased 9% to $1.9 million primarily due to an
increase in capitalization of software development costs. Product development
expense increased approximately 6%, or $359,000, for the nine months ended
April 30, 2004, primarily due to an increase in contract labor as we have more
contract employees working on development projects. Sales and marketing. Sales and marketing expense consists primarily of salaries
and personnel related costs, incentive compensation and costs associated with
marketing programs. For the three months ended April 30, 2004, sales and
marketing expense decreased approximately $331,000, or 11%, primarily due to
decreased incentive compensation as a result of lower software license revenue.
Sales and marketing expense for the nine months ended April 30, 2004 remained
relatively consistent with the prior year. General and administrative. General and administrative expense consists of
costs for accounting, human resources, legal, information technology and
outside legal, accounting and other services. General and administrative
expense increased approximately 13% and 10%, for the three and nine months
ended April 30, 2004, respectively. This increase is due to an increase in
legal and professional fees and bad debt expense. 18




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Other income (expense), net Other income (expense), net decreased $131,000 for the three months ended April
30, 2004, primarily due to the addition of interest expense of approximately
$100,000 on our term note. For the nine months ended April 30, 2004, other
income (expense), net decreased $287,000 primarily due to the addition of
$403,000 of interest expense on our term note and capital leases, partially
offset by gains on foreign currency exchange rates. For the nine months ended
April 30, 2004, we incurred a foreign currency exchange rate gain of
approximately $215,000 as compared to a foreign currency exchange rate gain of
approximately $55,000 for the nine months ended April 30, 2003. Provision for income taxes The effective tax rate for both the three and nine months ended April 30, 2004
was approximately 42%. The effective tax rate for the three and nine months
ended April 30, 2003 was approximately 51% and 45%, respectively. The rates
differ from the federal statutory rate due primarily to losses generated by our
European subsidiary, for which we do not currently recognize a tax benefit. The
decrease in the effective rate from the prior year is primarily due to the
improved performance of our European subsidiary. Net income Net income decreased approximately 27% to $707,000 for the three months ended
April 30, 2004, primarily due to the reduction in professional services and
software license revenue. For the nine months ended April 30, 2004, net income
increased approximately 32% to $3.8 million primarily due to the increase in
software license revenue in the first half of fiscal 2004. Liquidity and Capital Resources At April 30, 2004, our principal sources of liquidity consisted of cash and
cash equivalents of approximately $9.9 million and our revolving credit
facility, which has available borrowings of $5.8 million. Cash and cash
equivalents for the nine months ended April 30, 2004, increased approximately
$2.6 million from approximately $7.3 million at July 31, 2003. Cash provided by operating activities was approximately $9.2 million and $9.3
million for the nine months ended April 30, 2004 and 2003, respectively. In
addition to greater net income for the nine months ended April 30, 2004 and
additional tax benefit related to stock option exercises, notable changes in
the balance sheet that impacted cash flows from operations include the
following:  
    
    Accounts receivable increased approximately $1.6 million due
primarily to a longer collection cycle.
    
    Income tax receivable decreased approximately $1.0 million as the
receivable was utilized to offset current year federal income tax
payments.
    
    Accrued liabilities decreased $1.4 million due to the timing of
payments related to payroll. Cash used in investing activities was approximately $5.0 million and $1.6
million for the nine months ended April 30, 2004 and 2003, respectively. Cash
used in investing activities during the nine months ended April 30, 2004,
related to the purchase of approximately $1.1 million of fixed assets and
approximately $4.0 million in costs associated with the development of
capitalized software. The approximate $1.6 million of cash used in investing
activities during the nine months ended April 30, 2003, related to the purchase
of fixed assets of approximately $2.6 million and approximately $3.0 million of
capitalized software development costs, partially offset by net proceeds from
the sale of short term investments of approximately $4.0 million. 19




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Cash used in financing activities was approximately $1.3 million and $5.4
million for the nine months ended April 30, 2004 and 2003, respectively. Cash
used in financing activities during the nine months ended April 30, 2004,
primarily related to principal payments under our term note of approximately
$2.7 million and payments under our capital lease obligation of approximately
$433,000, partially offset by proceeds from exercise of stock options of
approximately $1.7 million. The approximate $5.4 million cash used in financing
activities during the nine months ended April 30, 2003, related to the purchase
of treasury stock of approximately $6.5 million, partially offset by proceeds
from the exercise of stock options of approximately $1.2 million. As of April 30, 2004, we held approximately 6,100,000 shares of treasury stock
at an average per share cost of $5.56. Since inception of our stock repurchase
program in fiscal 1999, we have repurchased approximately 9,366,000 shares of
stock at an average purchase price of $5.37. Our Board of Directors believes
the repurchase program is an appropriate means of increasing shareholder value. Working capital was approximately $7.5 million at April 30, 2004, compared with
approximately $3.7 million at July 31, 2003. The increase in working capital of
approximately $3.8 million is due to an increase in current assets of
approximately $2.4 million and a decrease in current liabilities of
approximately $1.4 million. The increase in current assets is primarily due to
the increase in cash and accounts receivable. The decrease in current
liabilities is primarily due to the timing of payments related to accrued
liabilities. In December 2002, we entered into various capital lease arrangements for the
rental of computer equipment at our ASP hosting facilities. The lease
agreements require monthly payments of principal and interest of approximately
$65,000 and expire in December 2007. In June 2003, we entered into a $14.2 million term note with Comerica
Bank-Texas. The term note bears interest at a fixed annual rate of 3.32% and
is repayable in equal monthly installments over four years. At April 30, 2004,
the outstanding balance on our term note was approximately $11.2 million, of
which $3.6 million is due within one year. At April 30, 2004, we had a $5.8 million revolving credit facility from
Comerica Bank-Texas, which expires on August 31, 2005. The credit facility
bears interest at the banks prime rate less 100 basis points or LIBOR rate of
interest plus 150 basis points, and is collateralized by substantially all of
our assets. As of April 30, 2004 there were no borrowings under this credit
facility. Under our term note and credit facility, we are required to maintain
certain financial and non-financial covenants. At April 30, 2004, we were in
compliance with all covenants. Our liquidity needs are expected to arise primarily from the repayment of debt,
obligations under capital leases, funding the continued development,
enhancement and support of our software offerings and sales and marketing costs
associated with expansion in new vertical and international markets. Although
we have no current commitments or agreements with respect to any acquisition of
other businesses or technologies, a portion of our cash or borrowings under our
revolving credit facility could be used to acquire complementary businesses or
obtain the right to use complementary technologies. Our liquidity could be negatively impacted by a decrease in demand for our
products, which are subject to rapid technology changes, reduction in capital
expenditures by our customers and intense competition, among other factors.
Operating leases and purchase obligations related to services agreements are
our only off balance sheet arrangements. 20




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We currently anticipate that existing cash and cash equivalents, together with
cash generated from operations and available borrowings under our credit
facility, will be sufficient to satisfy our operating cash needs for the
foreseeable future. Recently Issued Accounting Pronouncements In December 2003, the Securities Exchange Commission (SEC) issued Staff
Accounting Bulletin 104, Revenue Recognition (SAB 104). SAB 104 updates
existing Staff Accounting Bulletin Topic 13, Revenue Recognition to be
consistent with current authoritative guidance, primarily Emerging Issues Task
Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. The
adoption of SAB 104 did not have a material impact on our consolidated
financial statements. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk We have no derivative financial instruments. We invest our cash and cash
equivalents in investment grade, highly liquid investments, consisting of money
market instruments and commercial paper. We have a fixed rate debt instrument
of approximately $11.2 million as of April 30, 2004. We are exposed to market risk arising from changes in foreign currency exchange
rates as a result of selling our products and services outside the U.S.
(principally Europe). A portion of our sales generated from our non-U.S.
operations are denominated in currencies other than the U.S. dollar,
principally British pounds. Consequently, the translated U.S. dollar value of
Docucorps non-U.S. sales, operating results and cash flows are subject to
currency exchange rate fluctuations, which may favorably or unfavorably impact
reported earnings and may affect comparability of period-to-period operating
results. For the three months ended April 30, 2004 and 2003, approximately 6% and 4%,
respectively, of our revenues were denominated in British pounds. For the
three months ended April 30, 2004 and 2003, approximately 16% and 14%,
respectively, of our operating expenses were denominated in British pounds.
For the nine months ended April 30, 2004 and 2003, approximately 6% and 5%,
respectively, of our revenues and 14% and 15%, respectively, of our operating
expenses were denominated in British pounds. Historically, the effect of
fluctuations in currency exchange rates has not had a material impact on our
operations; however, there can be no guarantees that it will not have a
material impact in the future. The exposure to fluctuations in currency
exchange rates will increase as we expand our operations outside the U.S. 
 Item 4. Controls and Procedures Our management, with participation of our President and Chief Executive Officer
and Senior Vice President, Finance and Administration (Principal Financial
Officer) evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rule 12a-15(e) of the Securities Exchange Act of 1934) as of the
end of the period covered by this report. Based upon that evaluation, the
President and Chief Executive Officer and Principal Financial Officer concluded
that our disclosure controls and procedures, as of April 30, 2004, were
designed and are functioning effectively to provide reasonable assurance that
the information required to be disclosed by Docucorp in reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms. There were no
significant changes in our internal controls or in other factors that could
significantly affect these controls that occurred during the period covered by
this report. 21




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PART II - OTHER INFORMATION 
 Item 1. Legal Proceedings We are occasionally involved in legal proceedings and other claims arising out
of our operations in the normal course of business. No such current claims are
expected, individually or in the aggregate, to have a material adverse effect
on our consolidated financial statements. 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    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. 32.2  Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes 
Oxley Act of 2002.  (b)
    
    Reports on Form 8-K. On February 24, 2004, the Company filed a Current Report on Form
8-K announcing its results of operations for the three and six
months ended January 31, 2004. 22




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. Docucorp International, Inc.
     (Registrant)/s/ Michael D. Andereck

Michael D. Andereck
    
    Date June 14, 2004President and Chief Executive Officer
 23