##### 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: April 30, 2006
    
    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)
 5400 LBJ Freeway, Suite 300, Dallas, Texas
    
    75240(Address of principal executive offices)
    
    (Zip Code)
 
 
 þ o
  o þ o
 o þ




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##### 



Docucorp International, Inc.
Table of Contents
Quarterly Report on Form 10-Q
April 30, 2006
  
 PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Consolidated Balance Sheets as of April 30, 2006 and July 31, 2005
    
    2Interim Consolidated Statements of Operations and Comprehensive Income for the three
and nine months ended April 30, 2006 and 2005
    
    3Interim Consolidated Statements of Cash Flows for the nine months
ended April 30, 2006 and 2005
    
    4Notes to Interim Consolidated Financial Statements
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    24Item 4.
    
    Controls and Procedures
    
    25PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    26Item 6.
    
    Exhibits
    
    26Signatures
    
    27Employment AgreementCertification 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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##### Table of Contents



Docucorp International, Inc.
Consolidated Balance Sheets
(In thousands except share and per share amounts)
(Unaudited)
 April 30,
    
    
    July 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    9,915
    
    
    $
    8,381Accounts receivable, net of allowance
of $428 and $293, respectively
    
    
    17,386
    
    
    
    17,132Current portion of deferred taxes
    
    
    170
    
    
    
    170Income tax receivable
    
    
    248
    
    
    
    248Other current assets
    
    
    2,898
    
    
    
    2,559Total current assets
    
    
    30,617
    
    
    
    28,490Property and equipment, net of accumulated depreciation
of $23,142 and $20,122, respectively
    
    
    9,208
    
    
    
    10,261Software development costs, net of accumulated
amortization of $29,051 and $25,909, respectively
    
    
    14,225
    
    
    
    13,687Goodwill
    
    
    9,842
    
    
    
    9,842Identifiable intangibles, net of accumulated amortization
of $248 and $113, respectively
    
    
    772
    
    
    
    907Other assets
    
    
    446
    
    
    
    448Total assets
    
    $
    65,110
    
    
    $
    63,635Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    3,152
    
    
    $
    2,423Accrued liabilities:Accrued compensation
    
    
    3,671
    
    
    
    3,067Other
    
    
    1,354
    
    
    
    1,491Income taxes payable
    
    
    65
    
    
    
    403Current portion of lease obligations
    
    
    1,542
    
    
    
    1,459Current portion of long-term debt
    
    
    3,619
    
    
    
    3,617Deferred revenue
    
    
    12,193
    
    
    
    11,479Total current liabilities
    
    
    25,596
    
    
    
    23,939Deferred taxes
    
    
    5,459
    
    
    
    5,178Long-term lease obligations
    
    
    1,227
    
    
    
    2,303Long-term debt
    
    
    747
    
    
    
    3,462Other long-term liabilities
    
    
    1,467
    
    
    
    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
    
    
    46,006
    
    
    
    48,035Treasury stock at cost, 5,290,557 and 5,458,912 shares, respectively
    
    
    (29,574
    )
    
    
    (30,347
    )Retained earnings
    
    
    14,536
    
    
    
    12,268Unearned compensation
    
    
    0
    
    
    
    (2,100
    )Foreign currency translation adjustment
    
    
    (520
    )
    
    
    (493
    )Total stockholders equity
    
    
    30,614
    
    
    
    27,529Total liabilities and stockholders equity
    
    $
    65,110
    
    
    $
    63,635
 See accompanying notes to interim consolidated financial statements.
 2




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Docucorp International, Inc.
Interim Consolidated Statements of Operations and Comprehensive Income
(In thousands except per share amounts)
(Unaudited)
 Three months ended
    
    
    Nine months endedApril 30,
    
    
    April 30,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenuesASP hosting
    
    $
    8,388
    
    
    $
    6,559
    
    
    $
    25,343
    
    
    $
    20,150Professional services
    
    
    5,902
    
    
    
    5,246
    
    
    
    16,735
    
    
    
    16,227License
    
    
    2,761
    
    
    
    2,756
    
    
    
    7,287
    
    
    
    7,427Maintenance
    
    
    5,385
    
    
    
    5,218
    
    
    
    16,312
    
    
    
    15,935Total revenues
    
    
    22,436
    
    
    
    19,779
    
    
    
    65,677
    
    
    
    59,739Cost of revenuesASP hosting
    
    
    7,485
    
    
    
    6,092
    
    
    
    22,591
    
    
    
    17,858Professional services
    
    
    4,726
    
    
    
    4,169
    
    
    
    13,114
    
    
    
    12,502License
    
    
    1,184
    
    
    
    1,044
    
    
    
    3,511
    
    
    
    3,002Maintenance
    
    
    329
    
    
    
    393
    
    
    
    1,029
    
    
    
    1,120Total cost of revenues
    
    
    13,724
    
    
    
    11,698
    
    
    
    40,245
    
    
    
    34,482Gross profit
    
    
    8,712
    
    
    
    8,081
    
    
    
    25,432
    
    
    
    25,257Operating expensesProduct development
    
    
    2,284
    
    
    
    2,180
    
    
    
    6,784
    
    
    
    6,404Sales and marketing
    
    
    2,700
    
    
    
    3,040
    
    
    
    7,986
    
    
    
    8,817General and administrative
    
    
    2,108
    
    
    
    2,064
    
    
    
    6,273
    
    
    
    6,065Total operating expenses
    
    
    7,092
    
    
    
    7,284
    
    
    
    21,043
    
    
    
    21,286Income from operations
    
    
    1,620
    
    
    
    797
    
    
    
    4,389
    
    
    
    3,971Interest expense
    
    
    (84
    )
    
    
    (118
    )
    
    
    (295
    )
    
    
    (442
    )Other income, net
    
    
    188
    
    
    
    82
    
    
    
    365
    
    
    
    326Income before income taxes
    
    
    1,724
    
    
    
    761
    
    
    
    4,459
    
    
    
    3,855Provision for income taxes
    
    
    638
    
    
    
    293
    
    
    
    1,650
    
    
    
    1,484Net income
    
    $
    1,086
    
    
    $
    468
    
    
    $
    2,809
    
    
    $
    2,371Other comprehensive income:Foreign currency translation adjustment, net of tax
    
    
    (27
    )
    
    
    (7
    )
    
    
    (27
    )
    
    
    (63
    )Comprehensive income
    
    $
    1,059
    
    
    $
    461
    
    
    $
    2,782
    
    
    $
    2,308Basic net income per share
    
    $
    0.10
    
    
    $
    0.04
    
    
    $
    0.26
    
    
    $
    0.22Weighted average basic shares outstanding
    
    
    10,856
    
    
    
    10,741
    
    
    
    10,910
    
    
    
    10,609Diluted net income per share
    
    $
    0.09
    
    
    $
    0.04
    
    
    $
    0.24
    
    
    $
    0.21Weighted average diluted shares outstanding
    
    
    11,501
    
    
    
    11,621
    
    
    
    11,504
    
    
    
    11,561
 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 30,2006
    
    
    2005Cash flows from operating activitiesNet income
    
    $
    2,809
    
    
    $
    2,371Adjustments to reconcile net income to
net cash provided by operating activities:Stock-based compensation expense
    
    
    510
    
    
    
    252Depreciation and amortization
    
    
    3,193
    
    
    
    3,046Amortization of capitalized software
    
    
    3,142
    
    
    
    2,786Gain on foreign currency
    
    
    (108
    )
    
    
    (144
    )Provision for doubtful accounts
    
    
    122
    
    
    
    260Deferred income taxes
    
    
    260
    
    
    
    0Tax benefit related to stock option exercises
    
    
    (620
    )
    
    
    432Changes in assets and liabilities:Increase in accounts receivable
    
    
    (284
    )
    
    
    (88
    )(Increase) decrease in other assets
    
    
    (323
    )
    
    
    77Increase (decrease) in accounts payable
    
    
    718
    
    
    
    (960
    )Increase (decrease) in accrued liabilities
    
    
    443
    
    
    
    (228
    )Increase (decrease) in income taxes payable
    
    
    282
    
    
    
    1,031Increase (decrease) in deferred revenue
    
    
    682
    
    
    
    (867
    )Increase (decrease) in other liabilities
    
    
    240
    
    
    
    (124
    )Total adjustments
    
    
    8,257
    
    
    
    5,473Net cash provided by operating activities
    
    
    11,066
    
    
    
    7,844Cash flows from investing activitiesPurchase of Newbridge
    
    
    0
    
    
    
    (2,482
    )Proceeds from the sale of property and equipment
    
    
    70
    
    
    
    0Purchase of property and equipment
    
    
    (2,066
    )
    
    
    (1,908
    )Capitalized software development costs
    
    
    (3,680
    )
    
    
    (3,987
    )Net cash used in investing activities
    
    
    (5,676
    )
    
    
    (8,377
    )Cash flows from financing activitiesPrincipal payments under capital lease obligations
    
    
    (993
    )
    
    
    (947
    )Principal payments under debt obligations
    
    
    (2,713
    )
    
    
    (3,873
    )Purchase of treasury stock
    
    
    (2,357
    )
    
    
    0Tax benefit related to stock option exercises
    
    
    620
    
    
    
    0Proceeds from exercise of stock options
    
    
    1,496
    
    
    
    871Proceeds from stock issued under Employee Stock Purchase Plan
    
    
    51
    
    
    
    102Net cash used in financing activities
    
    
    (3,896
    )
    
    
    (3,847
    )Effect of exchange rates on cash flows
    
    
    40
    
    
    
    15Net increase (decrease) in cash and cash equivalents
    
    
    1,534
    
    
    
    (4,365
    )Cash and cash equivalents at beginning of period
    
    
    8,381
    
    
    
    12,336Cash and cash equivalents at end of period
    
    $
    9,915
    
    
    $
    7,971
 See accompanying notes to interim consolidated financial statements.
 4




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




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




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




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




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)
 Translation of foreign currencies
   Treasury stock
   Income taxes
  Net income per share
  9




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)
  Three months ended
    
    Nine months endedApril 30,
    
    April 30,2006
    
    2005
    
    2006
    
    2005Shares used in computing basic
net income per share
    
    
    10,856
    
    
    
    10,741
    
    
    
    10,910
    
    
    
    10,609Dilutive effect of stock options
and unvested restricted stock
    
    
    645
    
    
    
    880
    
    
    
    594
    
    
    
    952Shares used in computing diluted
net income per share
    
    
    11,501
    
    
    
    11,621
    
    
    
    11,504
    
    
    
    11,561
  Stock-based compensation
   10




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)
 Three months ended
    
    
    Nine months endedApril 30, 2005
    
    
    April 30, 2005Net income as reported
    
    $
    468
    
    
    $
    2,371Less, stock-based
compensation
expense under
fair value
based methods,
net of tax
benefit of $120
and $358,
respectively
    
    
    (191
    )
    
    
    (573
    )Pro forma net income
    
    $
    277
    
    
    $
    1,798Net income per share:As reportedBasic
    
    $
    0.04
    
    
    $
    0.22Diluted
    
    $
    0.04
    
    
    $
    0.21Pro formaBasic
    
    $
    0.03
    
    
    $
    0.17Diluted
    
    $
    0.02
    
    
    $
    0.16
  Management estimates
  Advertising costs
  Royalty costs
  Recently issued accounting guidance
  11




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)
   Note 2  Business segments
  Three months ended
    
    
    Nine months endedApril 30,
    
    
    April 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Software
    
    $
    14,048
    
    
    $
    13,220
    
    
    $
    40,334
    
    
    $
    39,589ASP hosting
    
    
    8,388
    
    
    
    6,559
    
    
    
    25,343
    
    
    
    20,150Total revenues
    
    $
    22,436
    
    
    $
    19,779
    
    
    $
    65,677
    
    
    $
    59,739Software gross profit, net of
product development costs
    
    $
    5,525
    
    
    $
    5,434
    
    
    $
    15,896
    
    
    $
    16,561ASP hosting gross profit
    
    
    903
    
    
    
    467
    
    
    
    2,752
    
    
    
    2,292Sales and marketing
    
    
    (2,700
    )
    
    
    (3,040
    )
    
    
    (7,986
    )
    
    
    (8,817
    )General and administrative
    
    
    (2,108
    )
    
    
    (2,064
    )
    
    
    (6,273
    )
    
    
    (6,065
    )Total operating income
    
    $
    1,620
    
    
    $
    797
    
    
    $
    4,389
    
    
    $
    3,971
 12




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited)
 Note 3  Commitments and contingencies
   13




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




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Critical Accounting Policies and Estimates
  Revenue recognition
   15




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Software development costs
  16




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Allowance for doubtful accounts
  Business combinations
  Valuation of long-lived and intangible assets and goodwill
  Deferred taxes and valuation allowance
  17




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Translation of foreign currency
   Historical Operating Results
  Three months ended
    
    Nine months endedApril 30,
    
    April 30,2006
    
    2005
    
    2006
    
    2005RevenuesASP hosting
    
    
    38
    %
    
    
    33
    %
    
    
    39
    %
    
    
    34
    %Professional services
    
    
    26
    
    
    
    27
    
    
    
    25
    
    
    
    27License
    
    
    12
    
    
    
    14
    
    
    
    11
    
    
    
    12Maintenance
    
    
    24
    
    
    
    26
    
    
    
    25
    
    
    
    27Total revenues
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Cost of revenuesASP hosting
    
    
    33
    
    
    
    31
    
    
    
    34
    
    
    
    30Professional services
    
    
    21
    
    
    
    21
    
    
    
    20
    
    
    
    21License
    
    
    5
    
    
    
    5
    
    
    
    5
    
    
    
    5Maintenance
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    2Total cost of revenues
    
    
    61
    
    
    
    59
    
    
    
    61
    
    
    
    58Gross Profit
    
    
    39
    
    
    
    41
    
    
    
    39
    
    
    
    42Operating expensesProduct development
    
    
    10
    
    
    
    11
    
    
    
    10
    
    
    
    10Sales and marketing
    
    
    12
    
    
    
    15
    
    
    
    12
    
    
    
    15General and administrative
    
    
    10
    
    
    
    11
    
    
    
    10
    
    
    
    10Total operating expenses
    
    
    32
    
    
    
    37
    
    
    
    32
    
    
    
    35Operating income
    
    
    7
    
    
    
    4
    
    
    
    7
    
    
    
    7Interest expense
    
    
    0
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )Other income, net
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    0Income before income taxes
    
    
    8
    
    
    
    4
    
    
    
    7
    
    
    
    6Provision for income taxes
    
    
    3
    
    
    
    2
    
    
    
    3
    
    
    
    2Net income
    
    
    5
    %
    
    
    2
    %
    
    
    4
    %
    
    
    4
    %
 18




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Comparative analysis of results for the three and nine months ended April 30, 2006 and 2005
 Revenues
  Three months ended
    
    
    Nine months endedApril 30,
    
    
    April 30,2006
    
    
    2005
    
    
    % change
    
    
    2006
    
    
    2005
    
    
    % changeASP hosting
    
    $
    8,388
    
    
    $
    6,559
    
    
    
    28
    %
    
    $
    25,343
    
    
    $
    20,150
    
    
    
    26
    %Professional services
    
    
    5,902
    
    
    
    5,246
    
    
    
    13
    
    
    
    16,735
    
    
    
    16,227
    
    
    
    3License
    
    
    2,761
    
    
    
    2,756
    
    
    
    0
    
    
    
    7,287
    
    
    
    7,427
    
    
    
    (2
    )Maintenance
    
    
    5,385
    
    
    
    5,218
    
    
    
    3
    
    
    
    16,312
    
    
    
    15,935
    
    
    
    2Total revenues
    
    $
    22,436
    
    
    $
    19,779
    
    
    
    13
    %
    
    $
    65,677
    
    
    $
    59,739
    
    
    
    10
    %
  Cost of revenues
  Three months ended
    
    
    Nine months endedApril 30,
    
    
    April 30,2006
    
    
    2005
    
    
    % change
    
    
    2006
    
    
    2005
    
    
    % changeASP hosting
    
    $
    7,485
    
    
    $
    6,092
    
    
    
    23
    %
    
    $
    22,591
    
    
    $
    17,858
    
    
    
    27
    %Professional services
    
    
    4,726
    
    
    
    4,169
    
    
    
    13
    
    
    
    13,114
    
    
    
    12,502
    
    
    
    5License
    
    
    1,184
    
    
    
    1,044
    
    
    
    13
    
    
    
    3,511
    
    
    
    3,002
    
    
    
    17Maintenance
    
    
    329
    
    
    
    393
    
    
    
    (16
    )
    
    
    1,029
    
    
    
    1,120
    
    
    
    (8
    )Total cost of revenues
    
    $
    13,724
    
    
    $
    11,698
    
    
    
    17
    %
    
    $
    40,245
    
    
    $
    34,482
    
    
    
    17
    %
 Cost of ASP hosting revenue.
 19




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##### Table of Contents



Cost of professional services revenue.
 Cost of license revenue.
 Cost of maintenance revenue.
 20




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Operating expenses
  Three months ended
    
    
    Nine months endedApril 30,
    
    
    April 30,2006
    
    
    2005
    
    
    % change
    
    
    2006
    
    
    2005
    
    
    % changeProduct development
    
    $
    2,284
    
    
    $
    2,180
    
    
    
    5
    %
    
    $
    6,784
    
    
    $
    6,404
    
    
    
    6
    %Sales and marketing
    
    
    2,700
    
    
    
    3,040
    
    
    
    (11
    )
    
    
    7,986
    
    
    
    8,817
    
    
    
    (9
    )General and administrative
    
    
    2,108
    
    
    
    2,064
    
    
    
    2
    
    
    
    6,273
    
    
    
    6,065
    
    
    
    3Total operating expenses
    
    $
    7,092
    
    
    $
    7,284
    
    
    
    (3
    )%
    
    $
    21,043
    
    
    $
    21,286
    
    
    
    (1
    )%
 Product development.
 Sales and marketing
 General and administrative
 Interest expense
  Other income, net
  Provision for income taxes
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Liquidity and Capital Resources
      22




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23




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Recently issued accounting guidance
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
    24




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



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total number
    
    Maximumof shares
    
    number ofpurchased as
    
    shares that mayTotal number
    
    Average
    
    part of publicly
    
    yet be purchasedof shares
    
    price paid
    
    announced
    
    under thePeriod
    
    purchased
    
    per share
    
    program
    
    programFebruary 1, 2006 - February 28,
2006 (1)
    
    
    392,841
    
    
    $
    6.00
    
    
    
    392,841March 1, 2006 to April 30, 2006 (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000Total
    
    
    392,841
    
    
    $
    6.00
    
    
    
    392,841
    
    
    
    1,000,000
 
 (1)
    
    On February 14, 2006 repurchased 392,841 common shares for $2.4 million.(2)
    
    Announced March 23, 2006 authorization of repurchase up to one million common shares of
stock. 
 Item 6. Exhibits
 10.1
    
    
    
    Employment Agreement between J. Robert Gary and the Registrant dated May
1, 2006.31.1
    
    
    
    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.
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SIGNATURES
  Docucorp International, Inc.

     (Registrant)/s/ Michael D. Andereck

Michael D. Andereck
President and Chief Executive Officer
    
    Date
    
    June 8, 2006
 27