DOCUCORP INTERNATIONAL INC - 10-Q Quarterly Report

Back to GetFilings.com

FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For Quarter Ended: January 31, 2003 Commission File Number: 00-1033864
---------------- ----------

DOCUCORP INTERNATIONAL, INC.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 75-2690838
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)

5910 North Central Expressway, Suite 800, Dallas, Texas 75206
---------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

(214) 891-6500
---------------------------------------------------
(Registrant's telephone number including area code)

Not applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)

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 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, 13,382,916 shares outstanding as of March 3, 2003.

DOCUCORP INTERNATIONAL, INC.
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
JANUARY 31, 2003

DOCUCORP INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)

See accompanying notes to interim consolidated financial statements.

2

DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

See accompanying notes to interim consolidated financial statements.

3

DOCUCORP INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

See accompanying notes to interim consolidated financial statements.

4

DOCUCORP INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements of Docucorp
International, Inc. and its wholly owned subsidiaries ("Docucorp" or the
"Company") for the three and six month periods ended January 31, 2003 and 2002
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 the Company's annual consolidated financial statements
for the year ended July 31, 2002. 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. Operating results for the
three and six months ended January 31, 2003 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.

NOTE 2 - PRINCIPLES OF CONSOLIDATION

The unaudited interim consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.

The accounts of the Company's foreign subsidiary are maintained in its local
currency. The accompanying unaudited interim consolidated financial statements
have been translated and adjusted to reflect U.S. dollars in accordance with
accounting principles generally accepted in the United States.

NOTE 3 - NET INCOME PER SHARE

The Company's basic and diluted net income per share are computed in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). 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 (using the treasury stock method). The
following is a reconciliation of the shares used in computing basic and diluted
net income per share for the periods indicated (in thousands):

5

DOCUCORP INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)

Options to purchase 390,000 and 3,000 shares of Common Stock at average exercise
prices of $8.13 and $5.91 per share at January 31, 2003 and 2002, respectively,
were anti-dilutive and not included in the computation of diluted net income per
share, because the exercise price of the options was greater than the average
market price of the Common Stock for the period.

NOTE 4 - 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," the
Company is 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 the Company's
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
Company does not track operating results by segment below the operating income
line nor does the Company track assets, depreciation and amortization by
segment. Prior period reporting has been restated to conform to the new segment
reporting. The table below presents information about reported segments for the
three and six months ended January 31, 2003 and 2002 (in thousands):

NOTE 5 - FOREIGN SUBSIDIARY INVESTMENT

During the current fiscal year, management of the Company determined that a
portion of the intercompany loan balance to a consolidated foreign subsidiary is
of a long-term investment nature and it will not seek repayment of this portion
of the intercompany loan in the near term. In accordance with Statement of
Financial Accounting Standard No. 52, "Foreign Currency Translation," the
Company recognizes the translation of this long-term investment as a component
of other comprehensive income. The Company recognizes the translation of the
remaining portion of the intercompany loan in other income.

6

DOCUCORP INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)

NOTE 6 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2002, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which changes the
rules for how companies must account for costs associated with exit or disposal
activities. Costs typically associated with exit or disposal activities include
one-time employee termination costs, contract cancellation provisions and
relocation costs. SFAS 146 nullifies Emerging Issues Task Force Issue 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
provisions of the new standard are effective for exit or disposal activities
initiated after December 31, 2002, with early application encouraged. The
Company does not believe that SFAS 146 will have a material impact on its
consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 addresses the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees and also clarifies the
requirements related to the recognition of a liability by a guarantor at the
inception of a guarantee for the obligations the guarantor has undertaken in
issuing that guarantee. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. The disclosure requirements in FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company is a guarantor only under its software product
warranties. Under, FIN 45, product warranties are excluded from the initial
recognition and initial measurement requirements, but are included in the
disclosure requirements. The Company currently provides software product
warranties to its customers. The product warranties provide that the licensed
software shall operate substantially in accordance with the applicable user
documentation for a period typically 90 days from delivery. At January 31, 2003
the Company had no material product warranty liability, as it has historically
not experienced material warranty claims. The Company defers a portion of its
initial license fee to cover maintenance and support over the warranty period
and subsequently recognizes this amount as maintenance revenue over the warranty
period.

In December 2002, the FASB issued Statement of Financial Accounting Standard No.
148, "Accounting for Stock Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123" ("SFAS 148"). This statement amends SFAS
No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") to provide
alternative methods of voluntarily transitioning to the fair value based method
of accounting for stock-based employee compensation. SFAS 148 also amends the
disclosure requirements of SFAS 123 to require disclosure of the method used to
account for stock based employee compensation and the effect of the method on
reported results in both annual and interim financial statements. The annual
disclosure provisions will be effective for fiscal years ending after December
15, 2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. The Company intends to adopt the disclosure-only provisions of SFAS 148
for the interim period ending April 30, 2003. The Company does not believe that
SFAS 148 will have a material impact on its consolidated financial statements.

7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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

OVERVIEW

Docucorp International, Inc. ("Docucorp" or the "Company") develops, markets and
supports a portfolio of enterprise-wide software products that enable users to
acquire, manage, personalize and present information. The Company provides
professional services related to its information software products including
consulting, implementation, integration and training. In addition, the Company
provides application service provider ("ASP") hosting using its software and
facilities to provide processing, print, mail, archival and Internet delivery of
documents for customers who outsource these activities.

The Company's software products support leading hardware platforms, operating
systems, printers and imaging systems. These products are designed to
personalize, produce and manage documents such as insurance policies, utility
statements, telephone bills, bank and mutual fund statements, invoices,
correspondence, bills of lading and other customer-oriented documents. The
Company's ASP offerings include customer statement and bill generation,
electronic bill presentment and payment, insurance policy production and
electronic document archival. The Company currently has an installed base of
more than 1,200 customers. More than half of the 200 largest United States
insurance companies use the Company's software products and services, including
the 10 largest life and health insurance companies and nine of the 10 largest
property and casualty insurance companies. Many of the largest North American
utilities companies, major international financial services institutions, and
clients in higher education and the telecommunications industries use the
Company's products and services.

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"), the Company is 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
the Company's 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 Company derives its revenues from ASP hosting fees, professional services
fees, license fees and recurring maintenance fees related to its software
products. ASP hosting revenues consist of fees earned from customers who
outsource the production of customer statements and insurance policies.
Professional services revenues include fees for consulting, implementation and
training services. License revenues are generally derived from perpetual
licenses of software products. Maintenance and other recurring revenues consist
primarily of recurring license fees and annual software maintenance contracts.

8

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accompanying "Management's Discussion and Analysis of Financial Condition
and Results of Operations" are based upon the Company's 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. The Company bases its 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 Company has identified the following critical accounting policies, related
to the significant judgments and estimates, used in the preparation of its
consolidated financial statements:

Revenue recognition

The Company recognizes revenue in accordance with AICPA Statement of Position
97-2, "Software Revenue Recognition" ("SOP 97-2") and Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements." Initial license fees are
recognized when a contract exists, the fee is fixed or determinable, software
delivery has occurred and collection of the receivable is deemed probable.
Revenue from software licenses, which include a cancellation clause, is
recognized upon expiration of the cancellation period. Software licensed with
post-contract customer support includes rights to upgrades, when and if
available, a limited period of telephone support, updates and bug fixes. SOP
97-2, as amended, generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair value of the elements. The Company determines the fair value of
each element in multi-element arrangements based on vendor-specific objective
evidence ("VSOE"). VSOE for each element is based on the price charged when the
same element is sold separately. If evidence of fair value of all undelivered
elements exists but evidence does not exist for one or more delivered elements,
then revenue is recognized using the residual method. Under the residual method,
the fair value of the undelivered elements is deferred and the remaining portion
of the arrangement fee is recognized as revenue. Revenue related to products
still in the testing phase is deferred until formal acceptance of the product by
the purchaser. The Company records deferred revenue for maintenance amounts
invoiced prior to revenue recognition. Revenue allocated to maintenance and
support is recognized ratably over the maintenance term of the agreement.

Revenue derived from the development and installation 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.
The Company follows 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 related to professional services, such as implementation, training and
consulting, is generally recognized as the services are performed. Revenue and
incremental direct costs related to professional services implementation
associated with the Company's ASP hosting operations is deferred during the
implementation phase and subsequently recognized over the term of the ASP
hosting agreement. ASP hosting agreements generally provide that fees are
charged on a per transaction basis.

9

Allowance for doubtful accounts

The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company takes into consideration the current financial condition of its
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 the Company's customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances might be required.

Software development costs

Software development costs are accounted for in accordance with either Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," or with Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The guidance above requires the capitalization of
certain software development costs once technological feasibility is
established. The capitalized costs are then amortized on a straight-line basis
over the estimated product life, or on the ratio of current revenues to total
projected product revenues, whichever is greater. Management periodically
assesses software development costs when events and circumstances indicate a
potential decline in value.

Valuation of long-lived and intangible assets and goodwill

The Company recognizes an impairment charge associated with its long-lived
assets, including property and equipment, goodwill and other intangible assets
whenever it determines 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. The Company performs 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

The Company recognizes deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities. The Company records a valuation allowance to reduce
its deferred income tax assets to the amount that is believed to be realized
under the "more-likely-than-not" recognition criteria. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance, it is possible that
in the future the Company may change its estimate of the amount of the deferred
income tax assets that would "more-likely-than-not" be realized in the future,
resulting in an adjustment to the deferred income tax assets valuation allowance
that could increase or decrease, as applicable, reported net income in the
period such change in estimate was made.

Translation of foreign currency

The Company translates the financial statements of its European subsidiary into
U.S. dollars in accordance with Statement of Financial Accounting Standards No.
52, "Foreign Currency Translation" ("SFAS 52"). Assets and liabilities of the
Company's 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.

10

The Company accounts for unrealized gains or losses on its 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, the Company does not engage in foreign currency hedging activities.

During the current fiscal year, management of the Company determined that a
portion of the intercompany loan balance to a consolidated foreign subsidiary is
of a long-term investment nature and it will not seek repayment of this portion
of the intercompany loan in the near term. In accordance with SFAS 52, the
Company recognizes the translation of this long-term investment as a component
of other comprehensive income. The Company recognizes the translation of the
remaining portion of the intercompany loan in other income.

HISTORICAL OPERATING RESULTS OF THE COMPANY

The following table sets forth selected unaudited interim consolidated
statements of operations data of the Company expressed as a percentage of total
revenues for the periods indicated:

COMPARATIVE ANALYSIS OF QUARTERLY RESULTS FOR THE THREE AND SIX MONTHS ENDED
JANUARY 31, 2003 AND 2002

REVENUES

Total revenues decreased 4% and increased 1% for the three and six months ended
January 31, 2003, respectively. For both the three and six month periods,
increases in ASP hosting revenue, professional services revenue and maintenance
revenue were offset by decreased license revenue. For the three and six months
ended January 31, 2003, ASP hosting revenue increased 8% and 11%, respectively,
due to growth with existing customers and the addition of new customers. For the
three and six months ended January 31, 2003, professional services revenue
increased 6% and 8%, respectively, due primarily to the

11

recovery from the events of September 11, 2001. Maintenance revenue increased
11% and 10% for the three and six months ended January 31, 2003, respectively,
due to maintenance agreements associated with new license sales, annual
maintenance renewals and customers expanding their processing rights for
existing products. License revenues decreased 67% and 45% for the three and six
months ended January 31, 2003, respectively, as a result of a lower volume of
software license contracts as customers are curtailing capital expenditures in
this current difficult economic and geopolitical environment.

Backlog for the Company's products and services was approximately $50.5 million
as of January 31, 2003, of which approximately $20.6 million is scheduled to be
satisfied within one year. Backlog is primarily composed of recurring software
license revenue and maintenance revenue for ongoing maintenance and support,
software implementation and consulting services and ASP hosting services.
Software agreements for recurring license fees generally have non-cancelable
terms of up to five years. Maintenance contracts may generally be terminated
upon 30 to 60 days' notice; however, the Company has not historically
experienced material cancellations of such contracts. Software implementation
and consulting services backlog is principally performed under time and material
agreements, of which some have cancellation provisions. ASP hosting agreements
generally have three to seven year terms and provide that fees are charged on a
per transaction basis. The estimated future revenues with respect to software
implementation are based on management's estimate of revenues over the remaining
life of the respective contracts. Estimated future revenues of ASP hosting
services are based on contractual monthly minimums multiplied by the remaining
term of the respective contract.

ASP HOSTING EXPENSE

ASP hosting expense is composed primarily of personnel costs, facility and
equipment related costs, postage and supplies expense related to the Company's
two ASP hosting centers. ASP hosting expense increased 11% and 12% for the three
and six months ended January 31, 2003, respectively, due primarily to increased
personnel and computer costs associated with expanding the business. In
addition, postage expense increased due to an increase in postage rates. For the
three months ended January 31, 2003 and 2002, ASP hosting expense represented
85% and 82% of ASP hosting revenues, respectively. For the six months ended
January 31, 2003 and 2002, ASP hosting expenses represented 85% and 84% of ASP
hosting revenues, respectively. The increase in cost as a percentage of ASP
revenues is a result of increased staffing in systems support and production
services. ASP hosting expense is expected to increase as ASP revenues increase.

PROFESSIONAL SERVICES EXPENSE

Professional services expense is composed primarily of personnel expenses
related to implementation, training and consulting services. Professional
services expense increased 1% and 2% for the three and six months ended January
31, 2003, respectively, due primarily to increased personnel costs and travel
expenses to accommodate increased revenue levels. For the three months ended
January 31, 2003 and 2002, professional services expense represented 78% and 82%
of professional services revenues, respectively. For the six months ended
January 31, 2003 and 2002, professional service expenses represented 77% and 82%
of professional services revenues, respectively. The decrease in costs as a
percentage of professional services revenues is mainly due to greater
utilization of implementation and consulting personnel. The Company expects
professional services expense to increase in order to meet additional resource
requirements as professional services activities increase both in North America
and Europe.

PRODUCT DEVELOPMENT AND SUPPORT EXPENSE

Product development and support expense consists primarily of research and
development efforts, amortization of capitalized software development costs,
customer support and other product support costs. For the three and six months
ended January 31, 2003, product development and support expense

12

increased 6% and 9%, respectively. The increase is related to additional
personnel expenses for continued development and support efforts of the
Company's products and increased amortization of capitalized software
development costs, partially offset by increased software capitalization related
to the development of the Company's products. The Company anticipates continued
increases in development efforts, including Internet applications, integration
of its existing product offerings, further development of packaged applications
for use in industries such as financial services, development of new software
products and continued support of its existing product lines. Expenditures in
this area are expected to increase in relation to the anticipated growth in
software and maintenance revenues.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

Selling, general and administrative expense decreased 4% and 2% for the three
and six months ended January 31, 2003, respectively. The decrease is due
primarily to a decrease in incentive compensation related to software license
sales and continued focus on managing controllable expenses.

OTHER INCOME, NET

Other income, net increased approximately $270,000 and $146,000 for the three
and six months ended January 31, 2003, respectively, largely due to a foreign
currency exchange gain associated with the Company's European subsidiary. For
the three months ended January 31, 2003, the Company incurred a foreign currency
exchange gain of approximately $132,000 as compared to a foreign currency
exchange loss of approximately $141,000 for the three months ended January 31,
2002. For the six months ended January 31, 2003, the Company incurred a foreign
currency exchange rate gain of approximately $106,000 as compared to a foreign
currency exchange rate loss of approximately $83,000 for the six months ended
January 31, 2002.

PROVISION FOR INCOME TAXES

The effective tax rate for the three and six months ended January 31, 2003 was
approximately 46% and 42%, respectively. The effective tax rate for both the
three and six months ended January 31, 2002 was approximately 38%. The rates
differ from the federal statutory rate due primarily to the Company's European
subsidiary, which has continued to generate losses that are not deductible
against the Company's U.S. tax liability.

NET INCOME

Net income decreased approximately 52% and 30% for the three and six months
ended January 31, 2003, respectively. This decrease is primarily due to a lower
volume of software license contracts in the three and six months ended January
31, 2003.

LIQUIDITY AND CAPITAL RESOURCES

At January 31, 2003, the Company's principal sources of liquidity consisted of
cash of approximately $12.4 million. Cash and cash equivalents for the six
months ended January 31, 2003 increased approximately $2.6 million due primarily
to the maturity of its short-term investments. Cash flows provided by investing
activities of approximately $49,000 were related to the maturity of
approximately $7 million in short-term investments offset by the purchases of
short-term investments and fixed assets and costs associated with the
development of capitalized software. Cash flows used in financing activities of
approximately $2.8 million relates primarily to the purchase of treasury stock,
partially offset by proceeds from the exercise of stock options and warrants. As
of January 31, 2003, the Company had approximately 3,162,000 shares of treasury
stock at an average per share cost of $5.44. Since inception of the Company's
stock repurchase program in fiscal 1999, the Company has repurchased
approximately 5,620,000 shares of stock at an average purchase price of $5.17
per share. The Company's Board of Directors believes the repurchase program is
an appropriate means of increasing shareholder value. The

13

Board of Directors has authorized the Company to repurchase up to an aggregate
of 7,000,000 shares of stock.

Working capital was approximately $11.7 million at January 31, 2003, compared
with approximately $13.1 million at July 31, 2002.

The Company has a $10.0 million revolving credit facility with Comerica Bank -
Texas. 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 the Company's assets. Under the credit
facility, the Company is required to maintain certain financial covenants. As of
January 31, 2003, there were no borrowings under this credit facility.

The Company's liquidity needs are expected to arise primarily from funding the
continued development, enhancement and support of its software offerings,
selling and marketing costs associated with expansion in new vertical and
international markets and purchase of treasury stock under the Company's stock
repurchase program. Although the Company has no current commitments or
agreements with respect to any acquisition of other businesses or technologies,
a portion of the Company's cash could be used to acquire complementary
businesses or obtain the right to use complementary technologies. Operating
leases are the Company's only off balance sheet arrangements.

The Company currently anticipates that existing cash and cash equivalents,
together with cash generated from operations and available borrowings under its
credit facility, will be sufficient to satisfy its operating cash needs for the
foreseeable future.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2002, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which changes the
rules for how companies must account for costs associated with exit or disposal
activities. Costs typically associated with exit or disposal activities include
one-time employee termination costs, contract cancellation provisions and
relocation costs. SFAS 146 nullifies Emerging Issues Task Force Issue 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
provisions of the new standard are effective for exit or disposal activities
initiated after December 31, 2002, with early application encouraged. The
Company does not believe that SFAS 146 will have a material impact on its
consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 addresses the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees and also clarifies the
requirements related to the recognition of a liability by a guarantor at the
inception of a guarantee for the obligations the guarantor has undertaken in
issuing that guarantee. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. The disclosure requirements in FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company is a guarantor only under its software product
warranties. Under, FIN 45, product warranties are excluded from the initial
recognition and initial measurement requirements, but are included in the
disclosure requirements. The Company currently provides software product
warranties to its customers. The product warranties provide that the licensed
software shall operate substantially in accordance with the applicable user
documentation for a period typically 90 days from delivery. At January 31, 2003
the Company had no material product warranty

14

liability, as it has historically not experienced material warranty claims. The
Company defers a portion of its initial license fee to cover maintenance and
support over the warranty period and subsequently recognizes this amount as
maintenance revenue over the warranty period.

In December 2002, the FASB issued Statement of Financial Accounting Standard No.
148, "Accounting for Stock Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123" ("SFAS 148"). This statement amends SFAS
No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") to provide
alternative methods of voluntarily transitioning to the fair value based method
of accounting for stock-based employee compensation. SFAS 148 also amends the
disclosure requirements of SFAS 123 to require disclosure of the method used to
account for stock based employee compensation and the effect of the method on
reported results in both annual and interim financial statements. The annual
disclosure provisions will be effective for fiscal years ending after December
15, 2002. The interim disclosure provisions are effective for financials reports
containing financial statements for interim periods beginning after December 15,
2002. The Company intends to adopt the disclosure-only provisions of SFAS 148
for the interim period ending April 30, 2003. The Company does not believe that
SFAS 148 will have a material impact on its consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has no derivative financial instruments in its cash and cash
equivalent balances. The Company invests its cash and cash equivalents in
investment grade, highly liquid investments, consisting of money market
instruments and commercial paper.

The Company is exposed to market risk arising from changes in foreign currency
exchange rates as a result of selling its products and services outside the U.S.
(principally Europe). A portion of the Company's sales generated from its
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 and operating results 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 January 31, 2003 and 2002, approximately 5% and 6%,
respectively, of the Company's revenues were denominated in British pounds. For
both the three months ended January 31, 2003 and 2002, approximately 9% of the
Company's operating expenses were denominated in British pounds. For the six
months ended January 31, 2003 and 2002, approximately 6% and 7%, respectively,
of the Company's revenues and 8% and 9%, respectively, of the Company's
operating expenses were denominated in British pounds. Historically, the effect
of fluctuations in currency exchange rates has not had a material impact on the
Company's operations; however, there can be no guarantees that it will not have
a material impact in the future. The Company's exposure to fluctuations in
currency exchange rates will increase as it expands its operations outside the
U.S.

ITEM 4. CONTROLS AND PROCEDURES

Based on an evaluation of the Company's disclosure controls and procedures (as
defined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934) as of a date within 90 days of the filing date of this quarterly report,
the Company's Chief Executive Officer and Senior Vice President, Finance and
Administration (Principal Financial Officer) have concluded that the disclosure
controls and procedures are effective. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of evaluation. There were no significant
deficiencies or material weaknesses; therefore, no corrective actions were
taken.

15

PART II - OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its Annual Meeting of Stockholders on December 10, 2002. At
this meeting, the stockholders voted in favor of electing as directors the six
nominees named in the Proxy Statement dated October 29, 2002. Also at this
meeting, the stockholders voted in favor of amending the 1997 Equity
Compensation Plan to increase the number of shares of Common Stock issuable upon
exercise of stock options under the plan from 3,150,000 to 3,800,000 shares and
electing PricewaterhouseCoopers LLP as its independent auditors for the 2003
fiscal year. The number of votes cast for each item was as follows:

I. Amendment to 1997 Equity Compensation Plan

II. Election of PricewaterhouseCoopers LLP as Independent Auditors

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

99.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.

99.2 - 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.

No reports on Form 8-K were filed during the three and six months
ended January 31, 2003.

16

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 March 17, 2003
- ------------------------------------- --------------
Michael D. Andereck
President and Chief Executive Officer

17

CERTIFICATIONS

I, Michael D. Andereck, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Docucorp
International, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of Docucorp International, Inc. as of and for the periods presented
in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within the
entities, particularly during the period in which this quarterly report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's Board of Directors;

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal control; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation including any
corrective actions with regard to significant deficiencies and material
weaknesses.

/s/ Michael D. Andereck
- -------------------------------------
Michael D. Andereck
President and Chief Executive Officer
March 17, 2003

I, John H. Gray, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Docucorp
International, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of Docucorp International, Inc. as of and for the periods presented
in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within the
entities, particularly during the period in which this quarterly report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's Board of Directors;

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal control; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation including any
corrective actions with regard to significant deficiencies and material
weaknesses.

/s/ John H. Gray
- ----------------------------------
John H. Gray
Senior Vice President, Finance and
Administration
(Principal Financial Officer)
March 17, 2003

EXHIBIT INDEX