DOCUCORP INTERNATIONAL INC - 10-Q Quarterly Report

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FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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

For Quarter Ended: April 30, 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
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(Address of principal executive offices) (Zip Code)

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

Not applicable
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(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, 9,747,241 shares outstanding as of June 4, 2003.

DOCUCORP INTERNATIONAL, INC.
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
APRIL 30, 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 nine month periods ended April 30, 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 nine months ended April 30, 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.

As of April 30, 2003, the Company completed its annual impairment analysis of
goodwill in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 142 and determined no goodwill impairment exists. Goodwill will be reviewed
for impairment at other times during the year when events or changes in
circumstances indicate that an impairment might be present.

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 - STOCK-BASED COMPENSATION

The Company provides equity incentives to employees and directors by means of
incentive stock options and non-qualified stock options. The Company issues
options from the 1997 Equity Compensation Plan (the "Plan"). The Company
accounts 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 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. The Company has implemented the
disclosure-only provisions of SFAS 123, "Accounting for Stock-Based
Compensation" and SFAS 148, "Accounting for Stock-Based Compensation Transition
and Disclosure." The following table illustrates the pro forma effect on net
income and net income per share as if the Company had applied the fair value
recognition provisions of SFAS 123 (in thousands except per share amounts):

5

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

NOTE 4 - NET INCOME PER SHARE

The Company's basic and diluted net income per share are computed in accordance
with SFAS 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 (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):

As of April 30, 2003, options to purchase approximately 1.2 million shares of
Common Stock at an average exercise price of $5.85 per share 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. At April 30, 2002, there were no anti-dilutive
options to purchase Common Stock.

NOTE 5 - BUSINESS SEGMENTS

As set forth in the criteria of SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company is organized into two
reportable segments: Software and ASP. The Software

6

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

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. The table below presents information about reported segments for the
three and nine months ended April 30, 2003 and 2002 (in thousands):

NOTE 6 - 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 SFAS 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.

NOTE 7 - STOCK REPURCHASE

On June 3, 2003, subsequent to the balance sheet date, the Company repurchased
approximately 3.1 million shares of its Common Stock, along with warrants to
purchase approximately an additional 161,000 shares of its Common Stock, from
Safeguard Scientifics, Inc. ("Safeguard") and a former officer of Safeguard in a
private transaction. The purchase price was $5.95 per share or $18.7 million.
The Company utilized a combination of bank financing and cash on hand to effect
the transaction. The bank financing of approximately $14.2 million bears
interest at a fixed rate of 3.3 percent and is repayable in equal monthly
installments over four years. In connection with the repurchase, the Company
obtained an opinion from an independent valuation and financial advisory firm
stating the transaction was fair, from a financial point of view, to its
stockholders. With the completion of this transaction and since inception of the
stock repurchase program in 1998, the Company has repurchased a total of
approximately 9.4 million shares of its Common Stock at an average cost of $5.37
per share.

7

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

NOTE 8 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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"). The Company adopted the
provisions of FIN 45 during the three months ended April 30, 2003. 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 generally provide that the
licensed software shall operate substantially in accordance with the applicable
user documentation for a period typically 90 days from delivery. At April 30,
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 April 2003, the FASB issued SFAS No. 149, "Amendment to Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. SFAS 149 is effective for contracts entered into or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003. The Company
will adopt the provisions of SFAS 149 for the three months ending July 31, 2003.
The Company does not believe that SFAS 149 will have a material impact on its
consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. Further, SFAS 150 requires certain obligations that a
reporting entity can or must settle by issuing its own equity shares to be
classified as liabilities. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise shall be effective at
the beginning of the first interim period beginning after June 15, 2003. The
Company will adopt the provisions of SFAS 150 for the three months ending July
31, 2003. The Company does not believe that SFAS 150 will have a material impact
on its consolidated financial statements.

8

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 revenues consist primarily of annual
software maintenance contracts.

9

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 Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2") and Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" ("SAB 101"). Revenues are
derived from the sale of software licenses, annual maintenance and support
agreements, professional services and ASP hosting services. Initial software
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. The Company uses 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 elements is
deferred and the remaining portion of the arrangement fee is recognized as
revenue. Fair value of an element is based on vendor-specific objective evidence
("VSOE"). The Company does not generally sell software licenses without selling
maintenance and support for the licensed software. Therefore, the Company has
established VSOE only for the undelivered element(s) included in a multi-element
arrangement. VSOE is based on the price charged when the same element is sold
separately. Specifically, VSOE for maintenance and support is based upon the
price that a customer pays to renew its maintenance and support agreement. 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. The Company records deferred revenue for
maintenance amounts invoiced prior to revenue recognition.

The Company's standard 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.

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

10

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.

Professional services revenue includes implementation, training and consulting
services related to the Company's software products. The services offered are
not essential to the functionality of the software sold by the Company.
Professional services revenue is generally recognized as the services are
performed.

Revenue from the Company's ASP hosting operations is recognized in accordance
with SAB 101. 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

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.

11

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.

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.

12

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 NINE MONTHS ENDED
APRIL 30, 2003 AND 2002

Revenues

Total revenues increased 9% and 4% for the three and nine months ended April 30,
2003, respectively. For both the three and nine month periods, increased ASP
hosting revenue, professional services revenue and maintenance revenue were
partially offset by decreased license revenue. For the three months ended April
30, 2003, ASP hosting revenue increased approximately $1.0 million, or 20%, due
to the addition of several new customers, which generated approximately $1.1
million in revenue, partially offset by a

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decrease of approximately $107,000 in revenue generated from existing customers.
ASP hosting revenue increased $2.1 million, or 14%, for the nine months ended
April 30, 2003, due to the addition of approximately $1.6 million in revenue
generated from new customers and an increase of approximately $424,000 in
revenue generated from existing customers. For the three and nine months ended
April 30, 2003, professional services revenue increased approximately 29% and
15%, respectively, due primarily to the recognition of approximately $1.3
million in professional services revenue under one large consulting contract
that had previously been deferred. Maintenance revenue increased approximately
4% and 8% for the three and nine months ended April 30, 2003, respectively, due
to maintenance agreements associated with new license sales and customers
expanding their processing rights for existing products. License revenues
decreased approximately 31% and 40% for the three and nine months ended April
30, 2003, respectively, as a result of a lower volume of software license
contracts as companies are curtailing capital expenditures in this current
difficult economic and geopolitical environment.

Backlog for the Company's products and services was approximately $48.3 million
as of April 30, 2003, of which approximately $19.8 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. The estimated future
revenues with respect to software implementation and consulting are based on
management's estimate of revenues over the remaining life of the respective
contracts. ASP hosting agreements generally have one to five year terms and
provide that fees are charged on a per transaction basis. Estimated future
revenues of ASP hosting services are based on contractual monthly minimums
multiplied by the remaining term of the respective contract.

Cost of revenues

Cost of ASP hosting revenue. Cost of ASP hosting revenue is composed primarily
of personnel costs, facility and equipment costs, postage and supplies related
to the Company's two ASP hosting centers. Cost of ASP hosting revenue increased
approximately 26% and 17% for the three and nine months ended April 30, 2003,
respectively, due primarily to increased salaries and personnel related costs,
computer costs and postage expense associated with expanding the business.
Salaries and personnel related costs increased approximately 43% and 37% for the
three and nine months ended April 30, 2003, respectively, as a result of
increased staffing in systems support and production services. Computer costs
increased approximately 17% and 15% for the three and nine months ended April
30, 2003, respectively. Postage expense increased approximately 37% and 17% for
the three and nine month period, respectively, due primarily to an increase in
postage rates. For the three months ended April 30, 2003 and 2002, cost of ASP
hosting revenue represented approximately 85% and 80% of ASP hosting revenues,
respectively. For the nine months ended April 30, 2003 and 2002, cost of ASP
hosting revenue represented approximately 85% and 83% of ASP hosting revenue,
respectively. The increase in cost as a percentage of ASP hosting revenue is
primarily the result of increased staffing in systems support and production
services. Cost of ASP hosting revenue is expected to increase as ASP revenue
increases.

Cost of professional services revenue. Cost of professional services revenue
consists of costs incurred in providing implementation, training and consulting
services. Cost of professional services revenue increased approximately 5% and
3% for the three and nine months ended April 30, 2003, respectively. The
increase is primarily due to the amortization of approximately $472,000 in costs
under one large consulting contract that had previously been deferred, partially
offset by approximately $350,000 of cost

14

in the prior year related to the Company's bi-annual user group conference held
in March 2002. For the three months ended April 30, 2003 and 2002, cost of
professional services revenue represented approximately 73% and 90% of
professional services revenues, respectively. For the nine months ended April
30, 2003 and 2002, cost of professional services revenue represented
approximately 75% and 84% of professional services revenues, respectively. The
decrease in costs as a percentage of professional services revenues is mainly
due to the recognition of previously deferred revenue and related recognition of
deferred costs associated with one large consulting contract. The Company
expects cost of professional services revenue to increase as professional
services revenue increases.

Cost of license revenue. Cost of license revenue represents amortization of
capitalized software development costs. For the three and nine months ended
April 30, 2003, cost of license revenue increased approximately 27% and 25%,
respectively. The increase in amortization is driven by the increase in
capitalized software development costs. In order to gain market share within the
financial services industry, the Company has increased its product development
and packaging efforts to better serve its financial services customers. The
Company anticipates continued development efforts, including Internet
applications, integration of its existing product offerings, further development
of packaged applications for use in industries such as financial services and
development of new software products.

Cost of maintenance revenue. Cost of maintenance revenue consists of costs
incurred in providing customer telephone support. For the three and nine months
ended April 30, 2003, cost of maintenance revenue increased approximately 14%
and 15%, respectively, due primarily to an increase in salaries and personnel
related costs. For the three and nine months ended April 30, 2003, salaries and
personnel related costs increased approximately 18% and 19%, respectively. The
cost of maintenance revenue is expected to decrease as the Company has reduced
support of its legacy software products and enhanced its ability to provide
online support.

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. Product development expenses increased
approximately 15% and 6% for the three and nine months ended April 30, 2003,
respectively. The increase is due primarily to increased salaries and personnel
related costs and computer costs. For both the three and nine months ended April
30, 2003, salaries and personnel related costs increased approximately 11% due
primarily to increased development efforts. Computer costs increased
approximately $57,000 and $131,000 for the three and nine months ended April 30,
2003, respectively.

Sales and marketing. Sales and marketing expenses increased approximately 11%
and 4% for the three and nine months ended April 30, 2003. The increase is due
primarily to salaries and personnel related costs as the Company has added
additional sales practice leaders. Salaries and personnel related costs
increased approximately 30% and 23% for the three and nine months ended April
30, 2003, respectively. The increase in salaries and personnel related costs is
partially offset by a decrease in incentive compensation as a result of
decreased software license revenue. Incentive compensation decreased
approximately 6% and 25% for the three and nine months ended April 30, 2003,
respectively.

General and administrative. General and administrative expenses consist of costs
for accounting, human resources, legal, information technology and outside
legal, accounting and other services. General and administrative expense
decreased approximately 3% and 4% for the three and nine months ended

15

April 30, 2003, respectively. The decrease is due primarily to a continued focus
on managing controllable expenses.

Other income, net

Other income, net decreased approximately $241,000 and $94,000 for the three and
nine months ended April 30, 2003, respectively, largely due to a foreign
currency exchange loss associated with the Company's European subsidiary and a
decrease in interest income. For the three months ended April 30, 2003, the
Company incurred a foreign currency exchange loss of approximately $52,000 as
compared to a foreign currency exchange gain of approximately $168,000 for the
three months ended April 30, 2002. For the nine months ended April 30, 2003, the
Company incurred a foreign currency exchange rate gain of approximately $54,000
as compared to a foreign currency exchange rate gain of approximately $86,000
for the nine months ended April 30, 2002. Interest income decreased
approximately $34,000 for the nine months ended April 30, 2003 due to a decrease
in interest rates.

Provision for income taxes

The effective tax rate for the three and nine months ended April 30, 2003 was
approximately 51% and 45%, respectively. The effective tax rate for the three
and nine months ended April 30, 2002 was approximately 41% and 39%,
respectively. The rates differ from the federal statutory rate due to losses
generated by the Company's European subsidiary, for which the Company does not
recognize a tax benefit.

Net income

Net income decreased approximately 37% and 32% for the three and nine months
ended April 30, 2003, respectively. This decrease is primarily due to a lower
volume of software license contracts and a higher tax rate in the three and nine
months ended April 30, 2003.

LIQUIDITY AND CAPITAL RESOURCES

At April 30, 2003, the Company's principal sources of liquidity consisted of
cash and cash equivalents of approximately $12.1 million. Cash and cash
equivalents at April 30, 2003 increased approximately $2.4 million from
approximately $9.7 million at July 31, 2002.

Cash provided by operating activities was approximately $9.1 million and $10.2
million for the nine months ended April 30, 2003 and 2002, respectively. In
addition to lower net income for the nine months ended April 30, 2003, notable
changes in the balance sheet that impacted cash flows from operations include
the following:

o Deferred revenue increased approximately $1.1 million due to
growth in maintenance revenue from a larger installed customer
base receiving ongoing maintenance and support services.

o Accrued liabilities decreased due to a decrease in accrued
compensation of approximately $179,000 and a net decrease in
other accrued liabilities of approximately $449,000. The
decrease in accrued compensation is due primarily to a
decrease in incentive compensation as a result of lower
software license revenue and profitability. The decrease in
other accrued liabilities is due to timing of the Company's
payments.

16

o Income taxes payable increased approximately $519,000 due
primarily to the increase in the Company's effective tax rate
and the timing of the Company's federal income tax payments.

Cash flows used in investing activities was approximately $1.6 million and $4.7
million for the nine months ended April 30, 2003 and 2002, respectively. Cash
used in investing activities during the nine months ended April 30, 2003 was
related to the purchase of approximately $2.6 million of fixed assets,
approximately $3.0 million in costs associated with the development of
capitalized software and the purchase of approximately $3.0 million in
short-term investments, partially offset by the maturity of approximately $7.0
million in short-term investments. The approximate $4.7 million of cash used in
investing activities during the nine months ended April 30, 2002 related to the
purchases of fixed assets of approximately $2.0 million and approximately $2.7
million of capitalized software development costs.

Cash flows used in financing activities was approximately $5.2 million and $3.1
million for the nine months ended April 30, 2003 and 2002, respectively. Cash
used in financing activities in both periods presented relates to the purchase
of treasury stock, partially offset by proceeds from the exercise of stock
options and warrants and the issuance of stock under the Employee Stock Purchase
Plan. In addition, the exercise of non-qualified stock options generated a
non-cash tax benefit of approximately $763,000. As of April 30, 2003, the
Company had approximately 3,698,000 shares of treasury stock at an average per
share cost of $5.25. Since inception of the Company's stock repurchase program
in fiscal 1999 through April 30, 2003, the Company has repurchased approximately
6,194,000 shares of stock at an average purchase price of $5.09 per share. The
Company's Board of Directors believes the repurchase program is an appropriate
means of increasing shareholder value.

Subsequent to April 30, 2003, the Company repurchased approximately 3.1 million
shares of its Common Stock from Safeguard Scientifics, Inc. ("Safeguard") and a
former officer of Safeguard for $5.95 per share. Since inception of the
Company's stock repurchase program, including the purchase of stock from
Safeguard, the Company has repurchased approximately 9.4 million shares of
Common Stock at an average price of $5.37 per share.

Working capital was approximately $10.5 million at April 30, 2003, compared with
approximately $13.2 million at July 31, 2002. The decrease of approximately $2.7
million in working capital is due to a decrease in current assets of
approximately $1.9 million and an increase in current liabilities of
approximately $764,000. The decrease in current assets is primarily due to a net
decrease in cash and short-term investments from approximately $13.7 million at
July 31, 2002 to approximately $12.1 million at April 30, 2003, as the Company
utilized cash to purchase its Common Stock. The increase in current liabilities
is primarily due to an increase of approximately $1.1 million in deferred
revenue due to growth in maintenance revenue from a larger installed customer
base receiving ongoing maintenance and support services.

At April 30, 2003, the Company had 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 April 30, 2003, there were no borrowings under this credit
facility.

Subsequent to April 30, 2003, and in connection with the repurchase of the
Company's Common Stock and warrants on June 3, 2003, the Company amended its
revolving credit facility and entered into a $14.2 million term note. The
borrowing potential available under the revolving credit facility was reduced
from $10.0 million to $5.8 million and expires on August 31, 2005. As of June 4,
2003, there were no

17

borrowings under the revolving credit facility. The term note bears interest at
a fixed rate of 3.3% and is repayable in equal monthly installments over four
years.

The Company's liquidity needs are expected to arise primarily from the repayment
of debt, 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.

The Company's liquidity could be negatively impacted by a decrease in demand for
its products, which are subject to rapid technology changes, reductions in
capital expenditures by its customers and intense competition, among other
factors. 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 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"). The Company adopted the
provisions of FIN 45 during the three months ended April 30, 2003. 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 generally provide that the
licensed software shall operate substantially in accordance with the applicable
user documentation for a period typically 90 days from delivery. At April 30,
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 April 2003, the FASB issued SFAS No. 149, "Amendment to Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. SFAS 149 is effective for contracts entered into or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003. The Company
will adopt the provisions of SFAS 149 for the three months ending July 31, 2003.
The Company does not believe that SFAS 149 will have a material impact on its
consolidated financial statements.

18

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. Further, SFAS 150 requires certain obligations that a
reporting entity can or must settle by issuing its own equity shares to be
classified as liabilities. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise shall be effective at
the beginning of the first interim period beginning after June 15, 2003. The
Company will adopt the provisions of SFAS 150 for the three months ending July
31, 2003. The Company does not believe that SFAS 150 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 April 30, 2003 and 2002, approximately 4% and 6%,
respectively, of the Company's revenues, 4% and 8%, respectively, of the
Company's cost of revenues and 14% and 8%, respectively, of the Company's
operating expenses were denominated in British pounds. For the nine months ended
April 30, 2003 and 2002, approximately 5% and 6%, respectively, of the Company's
revenues, 4% and 3%, respectively of the Company's cost of revenues and 15% and
11%, 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.

19

PART II - OTHER INFORMATION

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.

On February 19, 2003, the Company filed a Current Report on
Form 8-K announcing its results of operations for the quarter
ended January 31, 2003.

20

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/ John H. Gray Date: June 16, 2003
- ------------------------------------ -----------------------------
John H. Gray
Senior Vice President, Finance and
Administration
(Principal Financial Officer)

21

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
June 16, 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)
June 16, 2003