##### 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: October 31, 2004
    
    Commission File Number: 000-23829
 DOCUCORP INTERNATIONAL, INC. 
  Delaware
    
    75-2690838(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    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 [X]  No [  ] 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, 10,870,503 shares outstanding as of December 2, 2004.




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Docucorp International, Inc.
Table of Contents
Quarterly Report on Form 10-Q
October 31, 2004 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of October 31, 2004 and July 31, 2004
    
    
    2Interim Consolidated Statements of Operations and Comprehensive
Income for the three months ended October 31, 2004 and 2003
    
    
    3Interim Consolidated Statements of Cash Flows for the three months
ended October 31, 2004 and 2003
    
    
    4Notes to Interim Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    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 Section 906Certification Pursuant to Section 906




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Docucorp International, Inc. 
 Consolidated Balance Sheets
 (In thousands except share and per share amounts)
(Unaudited)
 October 31,
    
    July 31,2004
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    7,960
    
    
    $
    12,336Accounts receivable, net of allowance
of $438 and $375, respectively
    
    
    18,080
    
    
    
    16,752Current portion of deferred taxes
    
    
    112
    
    
    
    112Income tax receivable
    
    
    817
    
    
    
    817Other current assets
    
    
    2,522
    
    
    
    2,461Total current assets
    
    
    29,491
    
    
    
    32,478Property and equipment, net of accumulated depreciation
of $20,041 and $16,664, respectively
    
    
    12,037
    
    
    
    8,073Software development costs, net of accumulated
amortization of $22,934 and $22,096, respectively
    
    
    12,963
    
    
    
    12,269Goodwill, net of accumulated amortization of $4,940
    
    
    8,440
    
    
    
    5,846Other assets
    
    
    608
    
    
    
    573Total assets
    
    $
    63,539
    
    
    $
    59,239Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    1,587
    
    
    $
    1,473Accrued liabilities:Accrued compensation
    
    
    3,797
    
    
    
    2,104Other
    
    
    2,393
    
    
    
    1,783Income taxes payable
    
    
    991
    
    
    
    158Current portion of capital lease obligations
    
    
    1,210
    
    
    
    626Current portion of long-term debt
    
    
    3,611
    
    
    
    3,550Deferred revenue
    
    
    10,259
    
    
    
    12,038Total current liabilities
    
    
    23,848
    
    
    
    21,732Deferred taxes
    
    
    4,835
    
    
    
    4,835Long-term capital lease obligations
    
    
    2,980
    
    
    
    1,716Long-term debt
    
    
    6,163
    
    
    
    6,804Other long-term liabilities
    
    
    1,349
    
    
    
    1,353Commitments 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
    
    
    47,969
    
    
    
    47,350Treasury stock at cost, 5,735,130 and 6,050,429 shares, respectively
    
    
    (31,882
    )
    
    
    (33,635
    )Retained earnings
    
    
    11,168
    
    
    
    9,821Unearned compensation
    
    
    (2,545
    )
    
    
    (402
    )Foreign currency translation adjustment
    
    
    (512
    )
    
    
    (501
    )Total stockholders equity
    
    
    24,364
    
    
    
    22,799Total liabilities and stockholders equity
    
    $
    63,539
    
    
    $
    59,239
 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 endedOctober 31,2004
    
    2003RevenuesASP hosting
    
    $
    6,050
    
    
    $
    5,757Professional services
    
    
    5,408
    
    
    
    5,143License
    
    
    2,969
    
    
    
    2,667Maintenance
    
    
    5,238
    
    
    
    5,338Total revenues
    
    
    19,665
    
    
    
    18,905Cost of revenuesASP hosting
    
    
    5,037
    
    
    
    4,680Professional services
    
    
    4,179
    
    
    
    4,100License
    
    
    940
    
    
    
    726Maintenance
    
    
    346
    
    
    
    314Total cost of revenues
    
    
    10,502
    
    
    
    9,820Gross profit
    
    
    9,163
    
    
    
    9,085Operating expensesProduct development
    
    
    2,005
    
    
    
    2,061Sales and marketing
    
    
    2,899
    
    
    
    2,835General and administrative
    
    
    1,938
    
    
    
    1,686Total operating expenses
    
    
    6,842
    
    
    
    6,582Operating income
    
    
    2,321
    
    
    
    2,503Interest expense
    
    
    (151
    )
    
    
    (173
    )Other income (expense), net
    
    
    119
    
    
    
    147Income before income taxes
    
    
    2,289
    
    
    
    2,477Provision for income taxes
    
    
    882
    
    
    
    1,028Net income
    
    $
    1,407
    
    
    $
    1,449Other comprehensive income:Foreign currency translation adjustment, net of tax
    
    
    (11
    )
    
    
    (66
    )Comprehensive income
    
    $
    1,396
    
    
    $
    1,383Basic net income per share
    
    $
    0.13
    
    
    $
    0.15Weighted average basic shares outstanding
    
    
    10,507
    
    
    
    9,826Diluted net income per share
    
    $
    0.12
    
    
    $
    0.13Weighted average diluted shares outstanding
    
    
    11,435
    
    
    
    10,905
 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)
 Three months endedOctober 31,2004
    
    2003Cash flows from operating activitiesNet income
    
    $
    1,407
    
    
    $
    1,449Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation
    
    
    946
    
    
    
    880Amortization of capitalized software
    
    
    838
    
    
    
    627Provision for doubtful accounts
    
    
    92
    
    
    
    67Stock-based compensation expense
    
    
    63
    
    
    
    3Tax benefit related to stock option exercises
    
    
    49
    
    
    
    111Changes in assets and liabilities:Increase in accounts receivable
    
    
    (630
    )
    
    
    (1,447
    )Decrease in other assets
    
    
    177
    
    
    
    514Decrease in accounts payable
    
    
    (1,425
    )
    
    
    (60
    )Increase (decrease) in accrued liabilities
    
    
    1,673
    
    
    
    (910
    )Increase in income taxes payable
    
    
    833
    
    
    
    860Decrease in deferred revenue
    
    
    (1,837
    )
    
    
    (723
    )Increase (decrease) in other liabilities
    
    
    (24
    )
    
    
    131Total adjustments
    
    
    755
    
    
    
    53Net cash provided by operating activities
    
    
    2,162
    
    
    
    1,502Cash flows from investing activitiesPurchase of business
    
    
    (2,481
    )
    
    
    0Purchase of property and equipment
    
    
    (199
    )
    
    
    (420
    )Capitalized software development costs
    
    
    (1,532
    )
    
    
    (1,367
    )Net cash used in investing activities
    
    
    (4,212
    )
    
    
    (1,787
    )Cash flows from financing activitiesPrincipal payments under capital lease obligations
    
    
    (291
    )
    
    
    (143
    )Principal payments under debt obligations
    
    
    (2,073
    )
    
    
    (887
    )Proceeds from exercise of stock options and warrants
    
    
    59
    
    
    
    235Net cash used in financing activities
    
    
    (2,305
    )
    
    
    (795
    )Effect of exchange rates on cash flows
    
    
    (21
    )
    
    
    (87
    )Net decrease in cash and cash equivalents
    
    
    (4,376
    )
    
    
    (1,167
    )Cash and cash equivalents at beginning of period
    
    
    12,336
    
    
    
    7,269Cash and cash equivalents at end of period
    
    $
    7,960
    
    
    $
    6,102
 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) as of October 31, 2004 and July 31, 2004, and for the three
months ended October 31, 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, 2004. 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 months ended
October 31, 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. Professional services 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 Accounts receivable is composed of billed and unbilled accounts. Unbilled
accounts receivable include amounts that 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. 6




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited) Property and equipment, 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: Lesser of usefulLeasehold improvements
    
    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 Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed. The guidance above
requires the capitalization of certain software development costs, which
include salaries and personnel related costs incurred in the development
activities, once technological feasibility of the software has been
established. 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. 7




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited) 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 the VSOE of that maintenance and is recognized over
the term of the maintenance and support agreement. Guarantees In the ordinary course of business, we include standard indemnification
provisions in our customer and distributor agreements. Pursuant to these
agreements, we typically indemnify, hold harmless and reimburse the indemnified
party for those losses suffered or incurred by the indemnified party arising
from any trade secret, 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 October 31, 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 October 31, 2004, we had no material
product warranty liability. 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 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 the adjustments be
accumulated in stockholders equity as part of other comprehensive income. 8




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited) 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. 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. 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. 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 endedOctober 31,2004
    
    2003Shares used in computing basic net income per share
    
    
    10,507
    
    
    
    9,826Dilutive effect of stock options, warrants and restricted stock
    
    
    928
    
    
    
    1,079Shares used in computing diluted net income per share
    
    
    11,435
    
    
    
    10,905
 At October 31, 2004 and 2003, options to purchase 50,000 and 390,000 shares of
Common Stock at average exercise prices of $13.50 and $8.13 per share,
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. 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). In addition, we granted restricted stock
awards outside of the Plan in connection with our recent acquisition. 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 9




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited) provisions of SFAS 123, Accounting for Stock-Based Compensation (SFAS 123)
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 endedOctober 31,2004
    
    2003Net income as reported
    
    $
    1,407
    
    
    $
    1,449Plus, stock-based
compensation expense
included in reported
income, net of tax
    
    
    39
    
    
    
    2Less, stock-based
compensation expense under
fair value based methods,
net of tax
    
    
    (240
    )
    
    
    (238
    )Pro forma net income
    
    $
    1,206
    
    
    $
    1,213Net income per share:As reportedBasic
    
    $
    0.13
    
    
    $
    0.15Diluted
    
    $
    0.12
    
    
    $
    0.13Pro formaBasic
    
    $
    0.11
    
    
    $
    0.12Diluted
    
    $
    0.11
    
    
    $
    0.11
 In August 2004, the Compensation Committee of the Board of Directors granted
112,500 shares of restricted stock to certain executive officers and directors.
Based on the market value of our Common Stock at the date of grant, this
restricted stock grant was valued at approximately $821,000. The restricted
stock vests over five years with 50% and 100% acceleration of cumulative
vesting in the first two years if specific performance goals are attained. The
value of the restricted stock grant is being recognized as compensation expense
ratably over the vesting period. In connection with the acquisition of the assets of Newbridge Corporation,
which include the capital stock of Newbridge Information Services, Inc. and
Matrix Digital Technologies, Inc. (collectively (Newbridge), we entered into
employment agreements with several key employees of Newbridge. As a part of
these agreements, the Compensation Committee of our Board of Directors granted
an aggregate of 175,000 shares of restricted stock to those key Newbridge
employees. Based on the market value of our Common Stock at the date of
acquisition, this restricted stock grant was valued at $1.4 million. The
restricted shares vest over seven years with 33%, 67% and 100% acceleration of
cumulative vesting in the first three years if certain financial performance
goals are achieved by Newbridge. The value of the restricted stock grant is
being recognized as compensation expense ratably over the vesting 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 10




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited) reported amounts of revenues and expenses at the date of the financial
statements. Actual results could differ from those estimates. Certain
accounting policies require higher degrees of judgment than others in their
application. The following accounting policies require significant estimates:
accounts receivable and allowance for doubtful accounts, impairment of
long-lived assets and income taxes. Advertising costs We expense advertising costs as incurred. Royalty costs We incur royalty fees associated with the licensing of certain software
products. These fees vary based upon the terms of the royalty agreement. Note 2 - Acquisition On September 24, 2004, we acquired the assets and assumed certain liabilities
of Newbridge Corporation, which include the capital stock of Newbridge
Information Services, Inc. and Matrix Digital Technologies, Inc. Newbridge is a
leading information services company for the health care market. Newbridge
composes, produces and distributes provider directories, ID cards and policy
kits, as well as provides health care provider information over the Internet.
The purchase price for the Newbridge assets was approximately $2.6 million,
including a 10% holdback, and was funded from cash on hand. Operating results of Newbridge are included in the ASP hosting segment of our
financial statements from the effective date of the acquisition. Our
consolidated balance sheet as of October 31, 2004 reflects the preliminary
allocation of the purchase price to the assets acquired and liabilities assumed
at the date of acquisition. The preliminary allocation includes assets acquired
of approximately $5.9 million, liabilities assumed of approximately $5.9
million and goodwill of approximately $2.6 million. Additional analysis is
being performed with regards to the fair value of acquired assets and
liabilities. As a result, the purchase price allocation and goodwill may be
adjusted in future periods. The acquisition is not considered material to our results of operations;
therefore no pro forma information is presented. Note 3 - 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 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 months ended October
31, 2004 and 2003 (in thousands): 11




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Docucorp International, Inc.
Notes to Interim Consolidated Financial Statements (cont.)
(Unaudited) Three months endedOctober 31,2004
    
    2003Revenues:Software
    
    $
    13,615
    
    
    $
    13,148ASP
    
    
    6,050
    
    
    
    5,757Total revenues
    
    $
    19,665
    
    
    $
    18,905Operating income:Software
    
    $
    6,145
    
    
    $
    5,947ASP
    
    
    1,013
    
    
    
    1,077Sales and marketing
    
    
    (2,899
    )
    
    
    (2,835
    )General and administrative
    
    
    (1,938
    )
    
    
    (1,686
    )Total operating income
    
    $
    2,321
    
    
    $
    2,503
 12




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations Certain information contained herein may include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements, other than statements of historical facts included in this Form
10-Q, are forward-looking statements. Such statements are subject to certain
risks and uncertainties, which include, but are not limited to, the economy,
dependence upon the insurance and utilities industries, technological advances,
attraction and retention of technical employees, affect of business
acquisitions, 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 International, Inc. (Docucorp) develops, markets and supports a
portfolio of proprietary information software, application service provider
(ASP) hosting and professional services that enables companies to create,
publish, manage and archive complex, high-volume, individualized information.
We support the entire information life cycle  from acquisition of the first
raw data point to final delivery of personalized information to the customer. 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, provider
directories, 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, provider
directory generation, disaster recovery and electronic document archival. Operating in four key markets, insurance, utilities, financial services and
health care, we currently have an installed base of more than 1,300 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 health care and 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 transactional fees earned from
customers who outsource the production of customer statements, insurance
policies and provider directories. 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 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. 13




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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 and profits may vary from
quarter to quarter. During the three months ended October 31, 2004, we completed the acquisition of
Newbridge, a leading information services company for the health care market.
Operating results of Newbridge are reflected in our ASP hosting segment from
the date of acquisition, September 24, 2004. In addition to facilitating our
entry into the health care market, we believe that Newbridge will contribute to
our future growth and profitability. License revenue for the three months ended October 31, 2004 increased 11% to
$3.0 million primarily due to two significant license sales in the financial
services market. Over the past year we have made changes to our financial
services sales force and have now seen two consecutive quarters of revenue
growth within this market. For the three months ended October 31, 2004, revenues from our European
subsidiary increased 31% compared to the same period of the prior year and the
European operating loss was reduced. These improved results are still below our
expectation, and European operations continue to be an area requiring
improvement. 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, 2004. 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: 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 14




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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. Professional services 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 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 Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed. 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, 15




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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 the
assets and liabilities. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. It is possible that in the future we may change our estimate of
the amount of the deferred income tax assets that will more likely than not be
realized, which will result in an adjustment to the 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. 16




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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 endedOctober 31,2004
    
    2003RevenuesASP hosting
    
    
    31
    %
    
    
    31
    %Professional services
    
    
    27
    
    
    
    27License
    
    
    15
    
    
    
    14Maintenance
    
    
    27
    
    
    
    28Total revenues
    
    
    100
    
    
    
    100Cost of revenuesASP hosting
    
    
    25
    
    
    
    25Professional services
    
    
    21
    
    
    
    21License
    
    
    5
    
    
    
    4Maintenance
    
    
    2
    
    
    
    2Total cost of revenues
    
    
    53
    
    
    
    52Gross Profit
    
    
    47
    
    
    
    48Operating expensesProduct development
    
    
    10
    
    
    
    11Sales and marketing
    
    
    15
    
    
    
    15General and administrative
    
    
    10
    
    
    
    9Total operating expenses
    
    
    35
    
    
    
    35Operating income
    
    
    12
    
    
    
    13Interest expense
    
    
    (1
    )
    
    
    (1
    )Other income (expense), net
    
    
    1
    
    
    
    1Income before income taxes
    
    
    12
    
    
    
    13Provision for income taxes
    
    
    5
    
    
    
    5Net income
    
    
    7
    %
    
    
    8
    %
 Comparative analysis of quarterly results for the three months ended October
31, 2004 and 2003 Revenues Total revenues increased 4%, or $760,000, for the three months ended October
31, 2004, due to increases in ASP hosting revenue, professional services
revenue and license revenue, partially offset by a decrease in maintenance
revenue. ASP hosting revenue of $6.1 million increased 5% for the three months
ended October 31, 2004, primarily due to revenue generated by recently acquired
Newbridge, partially offset by a decrease in revenue from existing customers.
For the three months ended October 31, 2004, 17




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professional services revenue increased 5%, or $265,000, due primarily to an
increase in revenue generated from our European operations. For the three
months ended October 31, 2004, license revenue increased 11%, or $302,000, due
primarily to an increase in executed software license agreements in the
financial services market. Maintenance revenue of $5.2 million decreased
$100,000 for the three months ended October 31, 2004, as a result of
consolidation that has occurred within the insurance industry. During the last
twelve months, certain legacy customers consolidated multiple license and
maintenance agreements while up-grading to enterprise-wide versions of our
latest technologies, resulting in less annual maintenance fees for those
customers. Cost of revenues Cost of ASP hosting revenue.Cost of ASP hosting revenue is comprised primarily
of salary and personnel related costs, facility and equipment costs and postage
and supplies expense related to our ASP hosting centers. Cost of ASP hosting
revenue of $5.0 million increased 8% for the three months ended October 31,
2004, primarily due to the operating expenses associated with Newbridge. For
the three months ended October 31, 2004 and 2003, cost of ASP hosting revenue
represented 83% and 81% of ASP hosting revenue, respectively. The increase in
cost as a percentage of ASP revenue is primarily due to the decline in ASP
hosting revenue from existing customers, and the currently lower margins
associated with Newbridge. 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 months ended October 31, 2004, cost of
professional services revenue increased 2%, due primarily to a decrease in
capitalization of development work performed by professional services personnel
related to Policy Xpress, our new pre-packaged product offering for the
insurance industry. For the three months ended October 31, 2004 and 2003, cost
of professional services revenue represented 77% and 80% of professional
services revenues, respectively. The decrease in costs as a percentage of
professional services revenues is primarily due to improved staff utilization
in our European operations. 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 October 31, 2004, cost of license revenue increased
29% to $940,000, primarily due to the addition of amortization expense related
to the Policy Xpress product. For the three months ended October 31, 2004 and
2003, cost of license revenue represented 32% and 27% of license revenue,
respectively. We anticipate cost of license revenue to increase as amortization
of capitalized development costs increase due to new products become generally
available. Cost of maintenance revenue.Cost of maintenance revenue consists of costs
incurred in providing customer telephone and online support. Cost of
maintenance revenue increased 10%, or $32,000, for the three months ended
October 31, 2004, due primarily to an increase in salaries and personnel
related costs and contract labor. For the three months ended October 31, 2004
and 2003, cost of maintenance revenue represented approximately 7% and 6% of
maintenance revenue, respectively. The cost of maintenance revenue is expected
to increase as salaries and personnel related costs increase due to annual
merit raises and extending customer support hours to accommodate certain
international customers. 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 October 18




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##### Table of Contents



31, 2004, product development expense decreased 3% to $2.0 million, primarily
due to an increase in capitalization of software development costs, partially
offset by an increase in salaries and personnel related costs. 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 October 31, 2004, sales and
marketing expense increased $64,000, or 2%, primarily due to an increase in
salaries and personnel related costs. 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 15% to $1.9 million for the three months ended October 31,
2004, primarily due to costs associated with the Newbridge acquisition and an
increase in outside accounting, tax and director fees. Interest expense For the three months ended October 31, 2004, interest expense decreased
$22,000, primarily due to principal payments made on our outstanding bank debt
over the past twelve months. Other income (expense), net Other income (expense), net decreased $28,000 for the three months ended
October 31, 2004, primarily due to a decrease in gains on foreign currency of
$54,000, partially offset by an increase in interest income of $26,000. Provision for income taxes The effective tax rate for the three months ended October 31, 2004 and 2003 was
38.5% and 41.5%, 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 3%, or $42,000, to $1.4 million for the three months ended
October 31, 2004. Liquidity and Capital Resources At October 31, 2004, our principal sources of liquidity consisted of cash and
cash equivalents of $8.0 million and our revolving credit facility, which had
available borrowings of $10 million. Cash and cash equivalents for the three
months ended October 31, 2004, decreased $4.3 million from $12.3 million at
July 31, 2004, primarily as a result of the Newbridge acquisition. Cash provided by operating activities was $2.2 million and $1.5 million for the
three months ended October 31, 2004 and 2003, respectively. Significant changes
in assets and liabilities for the three months ended October 31, 2004 that
impacted cash flow from operations include the decrease in deferred revenue and
accounts payable of $1.8 million and $1.4 million, respectively, and the
increase in accrued liabilities of $1.7 million. During the three months ended October 31, 2004 and 2003, cash used in investing
activities was $4.2 million and $1.8 million, respectively. For the three
months ended October 31, 2004, we used $2.5 million for the purchases of
Newbridge, net of cash received. Cash used for the purchase of property and
equipment was $199,000 and $420,000 for the three months ended October 31, 2004
and 2003, 19




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##### Table of Contents



respectively. Cash used in the investment of capitalized software development
costs was $1.5 million and $1.4 million for the three months ended October 31,
2004 and 2003, respectively. Cash used in financing activities was $2.3 million and $795,000 for the three
months ended October 31, 2004 and 2003, respectively. Cash used in financing
activities during the three months ended October 31, 2004, primarily related to
principal payments made under the assumed debt obligations of Newbridge of $1.2
million, payments under our bank note of $887,000 and payments under capital
lease obligations of $291,000. The $795,000 of cash used in financing
activities during the three months ended October 31, 2003, related to the
payments made under our bank note of $887,000 and capital lease obligations of
$143,000, partially offset by proceeds received from the exercise of stock
options of $235,000. As of October 31, 2004, we held approximately 5,735,000 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 $5.6 million at October 31, 2004, compared with $10.7
million at July 31, 2004. The decrease in working capital of $5.1 million is
primarily due to cash expenditures aggregating approximately $4.5 million to
purchase Newbridge and make payments on their outstanding and past due
liabilities and debt obligations. In June 2003, we entered into a $14.2 million term note with Comerica Bank.
The bank note bears interest at a fixed annual rate of 3.32% and is repayable
in equal monthly installments over four years. At October 31, 2004, the
outstanding balance on our bank note was $9.5 million, of which $3.6 million is
due within one year. At October 31, 2004, we had a $10.0 million revolving credit facility from
Comerica Bank, which expires on August 31, 2006. 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 October 31, 2004, there were no borrowings under this credit
facility. Under our bank note and credit facility, we are required to maintain
certain financial and non-financial 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. 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. 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. 20




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##### Table of Contents



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 $9.5 million as of October 31, 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 October 31, 2004 and 2003, 7% and 5%, respectively,
of our revenues were denominated in British pounds. For both the three months
ended October 31, 2004 and 2003, 13% of our operating expenses were denominated
in British pounds. Historically, transactional gains and losses from 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. The evaluation included the subsidiary, Newbridge, which we acquired on
September 24, 2004. Since the acquisition of Newbridge, we have focused on
analyzing and implementing changes in their procedures and controls to
determine their effectiveness and to make them consistent with, and integrate
them into, our disclosure controls and procedures. We continue to analyze
Newbridges procedures and controls and expect to make additional changes in
those procedures and controls in the future. We performed additional procedures
to review Newbridges accounting records and substantiate the financial
information of Newbridge included in 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 October 31, 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. However, we
are continuing to analyze, and expect to make changes in, the controls and
procedures in place at Newbridge, our recently acquired subsidiary. 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 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 September 7, 2004, the Company filed a Current Report on Form
8-K announcing its results of operations for the year ended July
31, 2004. On September 27, 2004, the Company filed a Current Report on Form
8-K announcing the material definitive agreement to acquire the
assets of Newbridge Corporation. On October 8, 2004, the Company filed a Current Report on Form 8-K
announcing the execution of the Third Amendment to Credit Agreement
with Comerica Bank. 22




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##### Table of Contents



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
    
    Date      December 8, 2004Michael D. AndereckPresident and Chief Executive Officer
 23